| · | suppliers of application processorscomputer-on-a-chip products for handheld and embedded devices that incorporate multimedia processing as part of their existing solutions such as Broadcom, Texas Instruments Inc., Qualcomm Incorporated, Marvell, Freescale Semiconductor Inc., Renesas Technology, Samsung, and ST Microelectronics. |
We expect substantial competition from both Intel’s publicized focus on moving toand AMD’s strategy of selling platform solutions, dominated by Intel products, such as whenthe success Intel achieved success with its Centrino platform solution. In addition to its current Centrino notebookAMD has also announced a platform initiative, and its announced upcoming desktop initiative branded as VIIV,solution. Additionally, we expect that Intel is now focused on developing and selling platform solutions for allAMD will extend this strategy to other segments, including professional workstationsthe possibility of successfully integrating a central processing unit, or CPU, and servers.a GPU on the same chip, as evidenced by AMD’s announcement of its Fusion processor project. If AMD has also begun to focus on selling platform solutions. Ifand Intel and AMD continue to pursue these initiatives,platform solutions, we may not be able to successfully compete in these segments.and our business would be negatively impacted.
If and to the extent we offer products outside of the consumer and enterprise PC, notebook, workstation, PDA, cellular phone, and video game consolein new markets, we may face competition from some of our existing competitors as well as from companies with which we currently do not compete. For example, in the case of our CPB, our Tegra and GoForce products primarily compete in architecture used in multimedia cellular phones and handheld devices. We believe that mobile devices like phones, music players, and portable navigation devices will increasingly become more consumer PC-like and be capable of delivering all the entertainment and web experiences in a handheld device. We cannot accurately predict if we will compete successfully in any of the new markets we may enter. If we are unable to compete in our current and anyor new markets, demand for our products could decrease which could cause our revenue to decline and our financial results willto suffer.
Our GPU and MCP products are currently used with both Intel and AMD processors. In February 2009, Intel filed suit against us, related to a patent license agreement that we signed with Intel in 2004. Intel seeks an order from the court declaring that the license does not extend to a new Intel processor architecture and enjoining us from stating that we have licensing rights for this architecture. If Intel successfully obtains such a court order, we could be unable to sell our MCP products for use with these Intel processors and our competitive position would be harmed. In addition, in order to continue to sell MCP products for use with these Intel processors we could be required to negotiate a new license agreement with Intel and we may not be able to do so on reasonable terms, if at all.
Patents and Proprietary Rights
We rely primarily on a combination of patents, trademarks, trade secrets, employee and third-party nondisclosure agreements and licensing arrangements to protect our intellectual property in the United States and internationally. Our issued patents have expiration dates from September 4, 2007April 10, 2009 to December 8, 2024.October 1, 2028. We have numerous patents issued, allowed and pending in the United States and in foreign countries.jurisdictions. Our patents and pending patent applications primarily relate to our products and the technology used by us in connection with our products. We also rely on international treaties, and organizations and foreign laws to protect our intellectual property. The laws of certain foreign countries in which our products are or may be manufactured or sold, including various countries in Asia, may not protect our products or intellectual property rights to the same extent as the laws of the United States. This makes the possibility of piracy of our technology and products more likely. We continuously assess whether and where to seek formal protection for particular innovations and technologies based on such factors as: the commercial significance of our operations and our competitors’ operations in particular countries and regions; the location in which our products are manufactured; our strategic technology or product directions in different countries; and the degree to which intellectual property laws exist and are meaningfully enforced in different jurisdictions.
| · | the location in which our products are manufactured; |
| · | our strategic technology or product directions in different countries; and |
| · | the degree to which intellectual property laws exist and are meaningfully enforced in different jurisdictions. |
| · | the commercial significance of our operations and our competitors’ operations in particular countries and regions; |
Employees
Employees
As of January 28, 200725, 2009 we had 4,0835,420 employees, 2,6683,772 of whom were engaged in research and development and 1,4151,648 of whom were engaged in sales, marketing, operations and administrative positions. None of our employees are covered by collective bargaining agreements, and we believe our relationships with our employees are good.
Financial Information by Business Segment and Geographic Data
Our Chief Executive Officer, who is considered to be our chief operating decision maker, or CODM, reviews financial information presented on an operating segment basis for purposes of making operating decisions and assessing financial performance. During the first quarter of fiscal 2006,year 2008, we reorganized our operating segments to bring all major product groups in line with our strategy to position ourselves as the worldwide leader in programmable graphics processor technologies.segments. We now report financial information for four product-line operating segments to our CODM: the GPU Businessbusiness, which is composedcomprised primarily of our GeForce products that support desktop PCs,and notebook PCs, plus memory products; the PSB which is comprised of our NVIDIA Quadro professional workstationsworkstation products and other GPU-basedprofessional graphics products, including our NVIDIA Tesla high-performance computing products; the MCP Businessbusiness which is composedcomprised of NVIDIA nForce products that operate as a single-chip or chipset that provide system functions, such as high speed storagecore logic and network communications,motherboard GPU products; and perform these operations independently from the host CPU; our Handheld GPU BusinessCPB, which is composedcomprised of our Tegra and GoForce mobile brands and products that support handheldnetbooks, PNDs, PMPs, PDAs, cellular phones and other handheld devices;devices. CPB also includes license, royalty, other revenue and our Consumer Electronics Business is concentrated in products that supportassociated costs related to video game consoles and other digital consumer electronics devices and is composed of revenue from our contractual arrangements with SCE to jointly develop a custom GPU for SCE’s PlayStation3, revenue from sales of our Xbox-related products, revenue from our license agreement with Microsoft relating to the successor product to their initial Xbox gaming console, the Xbox360, and related devices, and digital media processor products.devices. In addition to these operating segments, we have the “All Other” category that includes human resources, legal, finance, general administration and corporate marketing expenses, which total $242.3$346.1 million, $131.6$266.2 million and $118.0$239.6 million for fiscal years 2007, 20062009, 2008 and 2005,2007, respectively, that we do not allocate to our other operating segments.segments as these expenses are not included in the segment operating performance measures evaluated by our CODM. “All Other” also includes the results of operations of other miscellaneous operatingreporting segments that are neither individually reportable, nor aggregated with another operating segment. Revenue in the “All Other” category is primarily derived from sales of memory.components. Certain prior period amounts have been restatedrevised to conform to the presentation of our current fiscal quarter.year.
Our CODM does not review any information regarding total assets on an operating segment basis. Operating segments do not record intersegment revenue, and, accordingly, there is none to be reported. The accounting policies for segment reporting are the same as for NVIDIA as a whole. The information included in Note 1416 of the Notes to the Consolidated Financial Statements in Part IV, Item 15 of this Form 10-K, including financial information by business segment and revenue and long-lived assets by geographic region, is hereby incorporated by reference.
Executive Officers of the Registrant
The following sets forth certain information regarding our executive officers, their ages and their positions as of January 28, 2007:February 27, 2009:
Name | Age
| Age | | Position |
| Jen-Hsun Huang | 43 | 45 | | President, Chief Executive Officer and Director |
Marvin D. BurkettDavid L. White* | 64 | 53 | | Executive Vice President and Chief Financial Officer |
| Ajay K. Puri | 52 | Senior54 | | Executive Vice President, Worldwide Sales |
| David M. Shannon | 51 | Senior53 | | Executive Vice President, General Counsel and Secretary |
| Debora Shoquist | | 54 | | Executive Vice President, Operations |
* On February 27, 2009, we announced that David L. White was appointed as our Executive Vice President and Chief Financial Officer, succeeding Marvin Burkett, whose decision to retire was disclosed in March 2008.
Jen-Hsun Huang co-founded NVIDIA in April 1993 and has served as its President, Chief Executive Officer and a member of the Board of Directors since its inception. From 1985 to 1993, Mr. Huang was employed at LSI Logic Corporation, a computer chip manufacturer, where he held a variety of positions, most recently as Director of Coreware, the business unit responsible for LSI’s “system-on-a-chip” strategy. From 1983 to 1985, Mr. Huang was a microprocessor designer for Advanced Micro Devices, Inc., a semiconductor company. Mr. Huang holds a B.S.E.E. degree from Oregon State University and an M.S.E.E. degree from Stanford University.
Marvin D. Burkett David White joined NVIDIA in February 2009 as Executive Vice President and Chief Financial Officer in September 2002.Officer. From August 2004 to February 2000 until joining NVIDIA,2009, Mr. Burkett was a financial consultant andWhite served as the Executive Vice President of Finance and Chief Financial Officer of Arcot Systems,Sanmina-SCI Corporation, a security software company.global provider of customized, integrated electronics manufacturing services to original equipment manufacturers in the communications, enterprise computing and medical industries and various other end markets. From 19982003 to 1999,2004, Mr. BurkettWhite was the ExecutiveSenior Vice President and Chief Financial Officer of Packard Bell NEC.Asyst Technologies, Inc., a provider of integrated hardware and software automation solutions that enhance semiconductor and flat-panel display manufacturing productivity. Mr. Burkett also previously spent 26 years at Advanced Micro Devices, Inc. where he held a variety of positions including Chief Financial Officer, Senior ViceWhite served as President and Corporate Controller.Chief Executive Officer of Candescent Technologies Corporation, a developer of field emission display technology for next-generation thin flat-panel displays, and held various other positions, from 1995 to 2002. Mr. BurkettWhite holds a B.S. degree from Brigham Young University and an M.B.A. degrees from the University of Arizona.Washington.
Ajay K. Puri joined NVIDIA in December 2005 as Senior Vice President, Worldwide Sales.Sales and became Executive Vice President, Worldwide Sales in January 2009. Prior to NVIDIA, he held positions in sales, marketing, and general management over a 22-year career at Sun Microsystems, Inc. Mr. Puri previously held marketing, management consulting, and product development positions at Hewlett-Packard Company, Booz Allen Hamilton Inc., and Texas Instruments Incorporated. Mr. Puri holds an M.B.A. degree from Harvard University, an M.S.E.E. degree from the California Institute of Technology and a B.S.E.E. degree from the University of Minnesota.
David M. Shannon joined NVIDIA in August 2002 as Vice President and General Counsel. Mr. Shannon became Secretary of NVIDIA in April 2005, and a Senior Vice President in December 2005.2005 and an Executive Vice President in January 2009. From 1993 to 2002, Mr. Shannon held various counsel positions at Intel, including the most recent position of Vice President and Assistant General Counsel. Mr. Shannon also practiced for eight years in the law firm of Gibson Dunn and Crutcher, focusing on complex commercial and high-technology related litigation. Mr. Shannon holds B.A. and J.D. degrees from Pepperdine University.
Available Information Debora Shoquist joined NVIDIA in September 2007 as Senior Vice President of Operations and became Executive Vice President of Operations in January 2009. From 2004 to 2007, Ms. Shoquist served as Senior Vice President of Operations at JDS Uniphase Corporation, a provider of communications test and measurement solutions and optical products for the telecommunications industry. From 2002 to 2004, she served as Senior Vice President and General Manager of the Electro-Optics business at Coherent, Inc., a manufacturer of commercial and scientific laser equipment. Her experience includes her role at Quantum Corporation as the President of the Personal Computer Hard Disk Drive Division. Her experience also includes senior roles at Hewlett-Packard Corporation. She holds a B.S degree in Electrical Engineering from Kansas State University and a B.S. degree in Biology from Santa Clara University.
Available Information
Our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and, if applicable, amendments to those reports filed or furnished pursuant to Section 13(a) of the Securities Exchange Act of 1934, or the Exchange Act, are available free of charge on or through our Internet web site, http://www.nvidia.com, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission, or the SEC. Our web site and the information contained therein ason it or connected theretoto it is not intended to be incorporated intoa part of this Annual Report on Form 10-K.
In evaluating NVIDIA and our business, the following factors should be considered in addition to the other information in this Annual Report on Form 10-K. Before you buy our common stock, you should know that making such an investment involvedinvolves some risks including, but not limited to, the risks described below. Additionally, any one of the following risks could seriously harm our business, financial condition and results of operations, which could cause our stock price to decline. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations.
Risks Related to Our OperationsBusiness and Industry
Global economic conditions have reduced demand for our products, adversely impacted our customers and suppliers and harmed our business.
The matters relating Our operations and performance depend significantly on worldwide economic conditions. Uncertainty about current global economic conditions poses a continuing risk to the Audit Committee of the Board of Directors, or the Board, review of our historical stock option granting practices and the restatement of our consolidated financial statements have resulted in litigation, which could harm our financial results.
On August 10, 2006, NVIDIA announced that the Audit Committee of the Board, with the assistance of outside legal counsel, was conducting a review of our stock option practices covering the time from NVIDIA’s initial public offering in 1999, our fiscal year 2000, through June 2006. The Audit Committee reached the conclusion that incorrect measurement dates were used for financial accounting purposes for stock option grants in certain prior periods. As a result, NVIDIA recorded additional non-cash stock-based compensation expense, and related tax effects, related to stock option grants.
The Audit Committee’s review of NVIDIA’s stock option practices identified a number of occasions on which the measurement date used for financial accounting and reporting purposes for stock options granted to certain of our employees was different from the actual grant date. To correct these accounting errors, we amended our Annual Report on Form 10-K for the year ended January 29, 2006 and our Quarterly Report on Form 10-Q for the three months ended April 30, 2006, to restate the consolidated financial statements contained in those reports.
This review of our historical stock option granting practices required us to incur substantial expenses for legal, accounting, tax and other professional services, diverted our management’s attention from our business as consumers and businesses have postponed spending in response to tighter credit, negative financial news and/or declines in income or asset values, which have reduced the demand for our products. Other factors that could depress demand for our products in the future could adversely affect our business, financial condition, results of operations and cash flows.
Our historical stock option granting practices and the restatement of our prior financial statements have exposed us to greater risks associated with litigation and regulatory proceedings. Ten derivative complaints have been filed in state and federal court pertaining to allegations relating to stock option grants. We cannot assure you that these or future similar complaints, or any future litigation or regulatory action will resultinclude conditions in the same conclusions reached by the Audit Committee. The conductresidential real estate and resolution of these matters will be time consuming, expensivemortgage markets, labor and healthcare costs, access to credit, consumer confidence, and other macroeconomic factors affecting consumer spending behavior. These and other economic factors have reduced demand for our products and could distract our management’s attention from the conduct of our business which could negatively impact our business.
We voluntarily contacted the SEC regarding the Audit Committee’s review and, as of the date of the filing of this Form 10-K, the SEC is continuing the inquiry of our historical stock option grant practices it began in late August 2006. In October 2006, we met with the SEC and provided it with a review of the status of the Audit Committee’s review and in November 2006 we voluntarily provided the SEC with further documents. We plan to continue to cooperate with the SEC in its inquiry.
While we believe that we have made appropriate judgments in concluding the correct measurement dates for option grants, the SEC may disagree with the manner in which we have accounted for and reported, or not reported, the financial impact of past option grant measurement date errors, and there is a risk that its inquiry could lead to circumstances in which we may have to further restate our prior financial statements, amend prior filings made with the SEC, or otherwise take other actions not currently contemplated. Any such circumstance could also lead to future delays in filing our SEC reports. Furthermore, if we are subject to adverse findings in any of these matters, we could be required to pay damages or penalties or have other remedies imposed upon us which could harm our business, financial condition resultsand operating results.
The current financial turmoil affecting the banking system and financial markets and the possibility that financial institutions may consolidate or go out of operationsbusiness have resulted in a tightening in the credit markets, a low level of liquidity in many financial markets, and cash flows.
Because our gross margin for any period depends onextreme volatility in fixed income, credit, currency and equity markets. There could be a number of follow-on effects from the credit crisis on our business, including insolvency of key suppliers resulting in product delays; inability of customers, including channel partners, to obtain credit to finance purchases of our products and/or customer, including channel partner, insolvencies; and failure of financial institutions, which may negatively impact our treasury operations. Other income and expense could also vary materially from expectations depending on gains or losses realized on the sale or exchange of financial instruments; impairment charges related to debt securities as well as equity and other investments; interest rates; and cash, cash equivalent and marketable securities balances. For example, during fiscal year 2009, we recorded impairment charges of $5.6 million related to our money market investment in the Reserve International Liquidity Fund, Ltd., or the International Reserve Fund. The current volatility in the financial markets and overall economic uncertainty increases the risk that the actual amounts realized in the future on our financial instruments could differ significantly from the fair values currently assigned to them.
Our business is cyclical in nature and is currently experiencing a severe downturn, which has harmed and may continue to harm our financial results.
Our business is directly affected by market conditions in the highly cyclical semiconductor industry, which is currently experiencing a severe downturn. The semiconductor industry has been adversely affected by many factors, including the current global downturn, ongoing efforts by our failurecustomers to forecast any change in suchreduce their spending, diminished product demand, increased inventory levels, lower average selling prices, uncertainty regarding long-term growth rates and underlying financial health and increased competition. These factors, could, among other things, limit our ability to maintain or increase our sales or recognize revenue and in turn adversely affect our gross margin.
We continuebusiness, operating results and financial condition. If our actions to pursue improved gross margin. Our gross margin for any period depends on a number ofreduce our operating expenses to sufficiently offset these factors such as:
· | the mix of our products sold; |
· | average selling prices; |
· | introduction of new products; |
· | unexpected pricing actions by our competitors; |
· | the cost of product components; and |
· | the yield of wafers produced by the foundries that manufacture our products. |
If we incorrectly forecast the impact of any of the aforementioned factors onduring this downturn are unsuccessful, our business, we may be unable to take action in time to counteract any negative impact on our gross margin. In addition, if we are unable to meet our gross margin target for any period or the target set by analysts, the trading price of our common stock may decline.
We are dependent on key personnel and the loss of these employees could negatively impact our business.operating results will suffer.
Our performance is substantially dependent on the performance ofrevenue may fluctuate while our executive officers and key employees. None ofoperating expenses are relatively fixed, which makes our executive officers or employees is bound by an employment agreement, meaning our relationships with our executive officers and employees are at will. We do not have “key person” life insurance policies on any of our employees. The loss of the services of any of our executive officers, technical personnel or other key employees, particularly Jen-Hsun Huang, our President and Chief Executive Officer, would harm our business. Our success will depend on our abilityresults difficult to identify, hire, train and retain highly qualified technical and managerial personnel. Our failure to attract and retain the necessary technical and managerial personnel would harm our business. The integration of new executives or personnel could disrupt our ongoing operations.
Failure to achieve expected manufacturing yields for existing and/or new products could reduce our gross marginpredict and could adversely affectcause our abilityresults to compete effectively.fall short of expectations.
Semiconductor manufacturing yields are a function both of product design, which is developed largely by us, and process technology, which typically is proprietary to the manufacturer. Since low yields may result from either design or process technology failures, yield problems may not be effectively determined or resolved until an actual product exists that can be analyzed and tested to identify process sensitivities relating to the design rules that are used. As a result, yield problems may not be identified until well into the production process. Resolution of yield problems requires cooperation by and communication between us and the manufacturer.
Because Demand for many of our potentially limited accessrevenue components fluctuate and are difficult to wafer fabrication capacity from our manufacturers, any decrease in manufacturing yields could result in an increase in our per unit costs and force us to allocate our available product supply among our customers. This could potentially harm customer relationships, our reputation, our revenuepredict, and our gross profit. Our wafer manufacturers may be unable to achieve or maintain acceptable manufacturing yields in the future. Our inability to achieve planned yields from our wafer manufacturers could reduce our gross margin. We also face the risk of product recalls or product returns resulting from design or manufacturing defects that are not discovered during the manufacturing and testing process. A significant number of product returns due to a defect or recall could damage our reputation, result in our customers working with our competitors, and could adversely impact our financial results.
To stay competitive we may have to invest more resources in research and development than anticipated, which could increase our operating expenses and negatively impact our operating results.
If new competitors, technological advances by existing competitors or other competitive factors require us to invest significantly greater resources than anticipated in our research and development efforts, our operating expenses would increase. We have increased our engineering and technical resources and had 2,668 full-time employees engaged in research and development as of January 28, 2007, 1,654 full-time employees as of January 29, 2006 and 1,231 full-time employees as of January 30, 2005. Research and development expenditures were $553.5 million, $357.1 million and $348.2 million for fiscal 2007, 2006, and 2005, respectively. Research and development expenses for fiscal 2007 included $70.1 million related to non-cash stock-based compensation, net of associated payroll taxes, which we began to record in the first quarter of fiscal 2007 as a result of our adoption of SFAS No. 123(R). If we are required to invest significantly greater resources than anticipated in research and development efforts without an increase in revenue, our operating results could decline. In order to remain competitive, we anticipate that we will continue to devote substantial resources to research and development, and we expect these expenses to increase in absolute dollars in the foreseeable future due to the increased complexity and the greater number of products under development as well as hiring additional employees. Research and development expenses are likely to fluctuate from time to time to the extent we make periodic incremental investments in research and development and these investments may be independent of our level of revenue.
Our operating expenses are relatively fixed and we may not be ablelargely independent of revenue. Therefore, it is difficult for us to reduce operating expenses quicklyaccurately forecast revenue and profits or losses in response to any revenue shortfalls.
particular period. Our operating expenses, which are comprised of research and development expenses, and sales, general and administrative expenses and restructuring and other charges, represented 27.6%36%, 24.1%25% and 27.5%28% of our total revenue duringfor fiscal years ended2009, 2008 and 2007, 2006 and 2005, respectively. Operating expenses for fiscal 2007 included $108.5 million related to non-cash stock-based compensation, net of associated payroll taxes, which we began to record in fiscal 2007 as a result of our adoption of SFAS No. 123(R). Since we often recognize a substantial portion of our revenue in the last month of each quarter, we may not be able to adjust our operating expenses in a timely manner in response to any unanticipated revenue shortfalls.shortfalls in any quarter as was the case in the fourth quarter of fiscal year 2009. Our operating expenses, which are comprised of research and development expenses and sales, general and administrative expenses and restructuring and other charges, represented 66% of our total revenue for the fourth quarter of fiscal year 2009. Further, some of our operating expenses, like stock-based compensation expense can only be adjusted over a longer period of time and cannot be reduced during a quarter. If we are unable to reduce operating expenses quickly in response to any revenue shortfalls, our financial results wouldwill be negatively impacted.
Failure In September 2008, we announced a workforce reduction to transition to new manufacturing process technologies could adversely affect our operating results and gross margin.
Our strategy is to utilize the most advanced manufacturing process technology appropriateallow for our products and available from commercial third-party foundries. Use of advanced processes may have greater risk of initial yield problems and higher product cost. Manufacturing process technologies are subject to rapid change and require significant expenditures for research and development. We continuously evaluate the benefits of migrating to smaller geometry process technologiescontinued investment in order to improve performance and reduce costs. We currently use 0.15 micron, 0.14 micron, 0.13 micron, 0.11 micron, 90 nanometer and 65 nanometer process technologies for our families of GPUs, MCPs, Handheld GPUs and application processors.
We have experienced difficulty in migrating to new manufacturing processesstrategic growth areas, which was completed in the past and, consequently, have suffered reduced yields, delays in product deliveries and increased expense levels. We may face similar difficulties, delays and expenses as we continue to transition our products to smaller geometry processes. Moreover, we are dependent on our relationships with our third-party manufacturers to migrate to smaller geometry processes successfully. Additionally, we compete with companies that own their own manufacturing facilities. These competitors may be able to move to a new statethird quarter of the art manufacturing process more quickly than our manufacturing partners. If our suppliers fall behind our competitors in the manufacturing processes, the development and customer demand for our products and the use of our products could be negatively impacted. The inability by us or our third-party manufacturers to effectively and efficiently transition to new manufacturing process technologies may adversely affect our operating results and our gross margin.
Our failure to estimate customer demand properly may result in excess or obsolete inventory or, conversely, may result in inadequate inventory levels, either of which could adversely affect our financial results.
Our inventory purchases are based upon future demand forecasts or orders from our customers, which may not accurately predict the quantity or type of our products that our customers will want in the future or ultimately end up purchasing. In forecasting demand, we must make multiple assumptions any of which may prove to be incorrect. Situations that may result in excess or obsolete inventory, which could result in write-downs of the value of our inventory and/or a reduction in average selling prices, and where our gross margin could be adversely affected include:
· | if there were a sudden and significant decrease in demand for our products; |
· | if there were a higher incidence of inventory obsolescence because of rapidly changing technology and customer requirements; |
· | if we fail to estimate customer demand properly for our older products as our newer products are introduced; or |
· | if our competition were to take unexpected competitive pricing actions. |
Conversely, if we underestimate our customers’ demand for either our older or newer products, we may have inadequate manufacturing capability and may not be able to obtain sufficient inventory to fill our customers’ orders on a timely basis. Even if we are able to increase production levels to meet customer demand, we may not be able to do so in a cost effective or timely manner. Inability to fill our customers’ orders on a timely basis could damage our customer relationships, result in lost revenue, cause a loss in market share or damage our reputation.
Because we order materials in advance of anticipated customer demand our ability to reduce our inventory purchase commitments quickly in response to any revenue shortfalls is limited.
Substantially all of our sales are made on the basis of purchase orders rather than long-term agreements.fiscal year 2009. As a result, we may commit resourceseliminated approximately 360 positions worldwide, or about 6.5% of our global workforce. During fiscal year 2009, expenses associated with the workforce reduction, which were comprised primarily of severance and benefits payments to these employees, totaled $8.0 million. We anticipate that the expected decrease in operating expenses from this action will be offset by continued investment in strategic growth areas. In addition, in response to the production of products without having received advance purchase commitments from customers. We may build inventories during periods of anticipated growth which does not occur. Any inability to sell products to whichcurrent economic environment, we have devoted significant resources could harm our business. In addition, cancellation or deferral of product orders could result in our holding excess inventory,commenced several cost reduction measures which could adversely affect our gross margin and restrict our ability to fund operations. Additionally, because we often sell a substantial portion of our products in the last month of each quarter, we may not be ableare designed to reduce our inventory purchase commitments in a timely manner in responseoperating expenses and will continue to any revenue shortfalls. We could be subject to excess or obsolete inventories and be required to take corresponding inventory write-downs if growth slows or does not materialize or if we incorrectly forecast product demand, which could negatively impact our gross margin and financial results.
Our operating results are unpredictable and may fluctuate, and if our operating results are below the expectations of securities analysts or investors, the trading price of our stock could decline.
Many of our revenue components fluctuate and are difficult to predict, andfocus on reducing our operating expenses during fiscal year 2010. Please refer to the discussion in Note 19 to the Notes to the Consolidated Financial Statements in Part IV, Item 15 of this Form 10-K for the potential impact of the tender offer on operating expenses during the first quarter of fiscal year 2010.
Any one or more of the risks discussed in this Annual Report on Form 10-K or other factors could prevent us from achieving our expected future revenue or net income. Accordingly, we believe that period-to-period comparisons of our results of operations should not be relied upon as an indication of future performance. Similarly, the results of any quarterly or full fiscal year period are largely independentnot necessarily indicative of revenue in any particular period. It is, therefore, difficultresults to be expected for us to accurately forecast revenue and profitsa subsequent quarter or losses.a full fiscal year. As a result, it is possible that in some quarters our operating results could be below the expectations of securities analysts or investors, which could cause the trading price of our common stock to decline. We believe that our quarterly and annual results of operations may continue to be affected by a variety of factors that could harm our revenue, gross profit and results of operations.
Any one or more of the factors discussed in this Form 10-K or other factors could prevent us from achieving our expected future revenue or net income. Accordingly, we believe that period-to-period comparisons of our results of operations should not be relied upon as an indication of future performance. In addition, the results of any quarterly or full fiscal year period are not necessarily indicative of results to be expected for a subsequent quarter or a full fiscal year.
Risks Related Our failure to Our Productsestimate customer demand properly could adversely affect our financial results.
If We manufacture our products based on forecasts of customer demand in order to have shorter shipment lead times and quicker delivery schedules for our customers. As a result, we are unablemay build inventories for anticipated periods of growth which do not occur or may build inventory anticipating demand for a product that does not materialize. The current negative worldwide economic conditions and market instability makes it increasingly difficult for us, our customers and our suppliers to achieve design wins,accurately forecast future product demand trends. In forecasting demand, we make multiple assumptions any of which may prove to be incorrect. Situations that may result in excess or obsolete inventory include:
| · | if there were a sudden and significant decrease in demand for our products; |
| · | if there were a higher incidence of inventory obsolescence because of rapidly changing technology and customer requirements; |
| · | if we fail to estimate customer demand properly for our older products as our newer products are introduced; or |
| · | if our competition were to take unexpected competitive pricing actions. |
adopted byable to reduce our target marketsinventory purchase commitments in a timely manner in response to customer cancellations or customers either ofdeferrals. We could be subject to excess or obsolete inventories and be required to take corresponding inventory write-downs and/or a reduction in average selling prices if growth slows or does not materialize, or if we incorrectly forecast product demand, which could negatively impact our financial results.
The future success of Conversely, if we underestimate our business depends to a significant extent on our ability to develop new competitive productscustomers’ demand for our target markets and customers. We believe achieving design wins, which entails havingproducts, our existing and future products chosen for hardware components or subassemblies designed by PC OEMs, ODMs, and add-in board and motherboard manufacturers, will aid our future success. Our OEM, ODM, and add-in board and motherboard manufacturers’ customers typically introduce new system configurations as often as twice per year, typically based on spring and fall design cycles or in connection with trade shows. Accordingly, when our customers are making their design decisions, our existing products must have competitive performance levels or we must timely introduce new products in order to be included in new system configurations. This requires that we do the following:
· | anticipate the features and functionality that customers and consumers will demand; |
· | incorporate those features and functionalities into products that meet the exacting design requirements of OEMs, ODMs, and add-in board and motherboard manufacturers; |
· | price our products competitively; and |
· | introduce products to the market within the limited design cycle for OEMs, ODMs, and add-in board and motherboard manufacturers. |
If OEMs, ODMs, and add-in board and motherboard manufacturers do not include our products in their systems, they will typically not use our products in their design systems until at least the next design configuration. Therefore, we endeavor to develop close relationships with our OEMs and ODMs in an attempt to allow us to better anticipate and address customer needs in new products so that our products will achieve design wins.
Our ability to achieve design wins also depends in part on our ability to identify and be compliant with evolving industry standards. Unanticipated changes in industry standards could render our products incompatible with products developed by major hardware manufacturers and software developers, including AMD, Intel and Microsoft. Such changes would require us to invest significant time and resources to redesign our products to be compliant with relevant standards. If our products are not in compliance with prevailing industry standards for a significant period of time, our ability to achieve design wins could suffer. If we are unable to achieve new design wins for existing or new customers, we may lose market share and our operating results would be negatively impacted.
Achievement of design winsthird party manufacturing partners may not result in the success of our products and could result in a loss of market share.
The process of being qualifiedhave adequate lead-time or capacity to increase production for inclusion in an OEM or ODM product can be lengthy and could cause us to miss a cycle in the demand of end-users for a particular product feature, which also could result in a loss of market share and harm our business. Even if we do have design wins for OEM and ODM products,meaning that we may not be able to successfully develop or introduce new products inobtain sufficient volumes within the appropriate timeinventory to fill our customers’ orders on a timely basis. Even if we are able to increase production levels to meet the OEM, ODM, add-in board and motherboard manufacturers’ design cycles as well as other market demand. Additionally, even if we achieve a significant number of design wins, there can be no assurance that our OEM and ODM customers will actually take the design to production or that the design will be commercially successful. Furthermore, there may be changes in the timing of product orders due to unexpected delays in the introduction of our customers’ products that could negatively impact the success of our products. Any of these factors could result in a loss of market share and could negatively impact our financial results.
Our business results could be adversely affected if our product development efforts are unsuccessful.
We have in the past experienced delays in the development of some new products. Any delay in the future or failure of our GPUs or other processors to meet or exceed specifications of competitive products could materially harm our business. The success of our new product introductions will depend on many factors, including the following:
· | proper new product definition; |
· | timely completion and introduction of new product designs; |
· | the ability of third-party manufacturers to effectively manufacture our new products in a timely manner; |
· | dependence on third-party subcontractors for assembly, testing and packaging of our products and in meeting product delivery schedules and maintaining product quality; |
· | the quality of new products; |
· | differentiation of new products from those of our competitors; |
· | market acceptance of our products and our customers' products; and |
· | availability of adequate quantity and configurations of various types of memory products. |
A critical component of our product development effort is our partnerships with leaders in the CAD industry. We have invested significant resources to develop relationships with industry leaders, including Cadence Design Systems, Inc. and Synopsys, Inc., often assisting these companies in the product definition of their new products. We believe that forming these relationships and utilizing next-generation development tools to design, simulate and verify our products will help us remain at the forefront of the 3D graphics, communications and networking segments and develop products that utilize leading-edge technology on a rapid basis. We believe this approach assists us in meeting the new design schedules of PC OEMs and other manufacturers. If these relationships are not successful,customer demand, we may not be able to develop new productsdo so in a cost effective or timely manner, whichmanner. Inability to fulfill our customers’ orders on a timely basis, or at all, could damage our customer relationships, result in lost revenue, cause a loss ofin market share, a decrease in revenue and a negative impact on our operating results. Our failure to successfully develop, introducecustomer relationships or achieve market acceptance for new processors would harmdamage our business.
Our failure to identify new market or product opportunities, or develop new products could harm our business.
As our GPUs or other processors develop and competition increases, we anticipate that product life cycles at the high end will remain short and average selling prices will decline. In particular, we expect average selling prices and gross margins for our processors to decline as each product matures and as unit volume increases. As a result, we will need to introduce new products and enhancements to existing products to maintain or improve overall average selling prices and gross margins. In order for our processors to achieve high volumes, leading PC OEMs, ODMs, and add-in board and motherboard manufacturers must select our processor for design into their products, and then successfully complete the designs of their products and sell them. We may be unable to successfully identify new product opportunities or to develop and bring to market new products in a timely fashion. In addition, we cannot guarantee that new products we develop will be selected for design into PC OEMs’, ODMs’, and add-in board and motherboard manufacturers’ products, that any new designs will be successfully completed, or that any new products will be sold.
As the complexity of our products and the manufacturing process for our products increases, there is an increasing risk that we will experience problems with the performance of our products and that there will be delays in the development, introduction or volume shipment of our products. We may experience difficulties related to the production of current or future products or other factors that may delay the introduction or volume sale of new products we develop. In addition, we may be unable to successfully manage the production transition risks with respect to future products. Failure to achieve any of the foregoing with respect to future products or product enhancements could result in rapidly declining average selling prices, reduced margins and reduced demand for products or loss of market share. In addition, technologies developed by others may render our processors non-competitive or obsolete or result in our holding excess inventory,reputation, any of which would harmcould adversely impact our business.
We could suffer Because our gross margin for any period depends on a lossnumber of market share iffactors, our products contain significant defects.
Products as complex as those we offer may contain defects or experience failures when introduced or when new versions or enhancements to existing products are released. We have in the past discovered defects and incompatibilities with customers’ hardware in some of our products and may experience delays or loss of revenue to correct any defects or incompatibilities in the future. Errors in new products or releases after commencement of commercial shipments could result in failure to achieve market acceptance or lossforecast changes in any of design wins. Our products typically go through only one verification cycle prior to beginning volume production and distribution. As a result, our products may contain defects or flaws that are undetected prior to volume production and distribution. If these defects or flaws exist and are not detected prior to volume production and distribution, we may be required to reimburse customers for costs to repair or replace the affected products in the field. We may also be required to incur additional research and development costs to find and correct the defect, which could divert the attention of our management and engineers from the development of new products. These costs could be significant andfactors could adversely affect our businessgross margin.
We are focused on improving our gross margin. Our gross margin for any period depends on a number of factors, including:
| · | the mix of our products sold; |
| · | average selling prices; |
| · | introduction of new products; |
| · | unexpected pricing actions by our competitors; |
| · | the cost of product components; and |
| · | the yield of wafers produced by the foundries that manufacture our products. |
During the fourth quarter of fiscal year 2009, our gross margin declined to 29.4% as compared to 45.7% during the fourth quarter of fiscal year 2008 and operating results. We may also suffer a lossdecreased from 41.0% from the third quarter of reputation, lossfiscal year 2009. If we do not correctly forecast the impact of revenues and/or a loss in our market share, any of which could materially harmthe relevant factors on our financial results.
Risks Related to Our Partners and Customers
Webusiness, there may not be any actions we can take or we may not be able to realizetake any possible actions in time to counteract any negative impact on our gross margin. Additionally, during fiscal year 2009, the potential financial or strategic benefitsrevenue and gross margins from our sale of business acquisitions, which could hurt our abilitydesktop products decreased primarily due to grow our business, develop new products or sell our products.
Ina decline in the past we have acquired and investedStandalone Desktop market segment as reported in other businesses that offered products, services and technologies that we believed would help expand or enhance our existing products and services or help expand our distribution channels. We may enter into future acquisitions of, or investments in, businesses, in order to complement or expand our current businesses or enter into a new business market. For example, in February 2006 we completed the acquisition of ULi, in March 2006 we completed the acquisition of HybridDecember 2008 PC Graphics and in January 2007 we completed the acquisition of PortalPlayer. If we do consider other acquisitions, a strategic alliance or a joint venture, the negotiations could divert management’s attention as well as other resources. For any previous or future acquisition or investment, including the acquisitions of ULi, Hybrid Graphics and PortalPlayer, the following risks could impair our ability to grow our business and develop new products, and ultimately, could impair our ability to sell our products, which could negatively impact our growth or our financial results:
· | difficulty in combining the technology, products, operations or workforce of the acquired business with our business; |
· | difficulty in operating in a new or multiple new locations; |
· | disruption of our ongoing businesses; |
· | disruption of the ongoing business of the company we acquire; |
· | difficulty in realizing the potential financial or strategic benefits of the transaction; |
· | difficulty in maintaining uniform standards, controls, procedures and policies; |
· | disruption of or delays in ongoing research and development efforts; |
· | diversion of capital and other resources; |
· | assumption of liabilities; |
· | diversion of resources and unanticipated expenses resulting from litigation arising from potential or actual business acquisitions or investments; |
· | difficulties in entering into new markets in which we have limited or no experience and where competitors in such markets have stronger positions; and |
· | impairment of relationships with employees and customers, or the loss of any of our key employees or of our target’s key employees, as a result of the integration of new businesses and management personnel. |
In addition, the consideration for any future acquisition could be paid in cash, shares of our common stock, the issuance of convertible debt securities orReport from Mercury Research. This decline was driven by a combination of cash, convertible debtmarket migration from desktop PCs towards notebook PCs and common stock. If we pay all or a portionan overall market shift in the mix of the purchase price in cash, our cash reserves would be reduced. We paid for the acquisitions of Hybrid Graphics, ULi and PortalPlayer with primarily cash.products towards lower priced products. If the consideration is paid with shares of our common stock, or convertible debentures,overall shift in the holdings of our existing stockholders would be diluted. We cannot forecastdemand from the number, timing or size of future acquisitions, or the effect that any such acquisitions mightconsumer continues to shift towards lower priced products, it will have an adverse impact on our operations or financial results.
We depend on foundries and independent contractors to manufacture our products and these third parties may not be able to satisfy our manufacturing requirements, which would harm our business.
We do not manufacture the semiconductor wafers used for our products and do not own or operate a wafer fabrication facility. Our products require wafers manufactured with state-of-the-art fabrication equipment and techniques so we utilize industry-leading suppliers to produce our semiconductor wafers. We depend on these suppliers to allocate to us a portion of their manufacturing capacity sufficient to meet our needs, to produce products of acceptable quality and at acceptable manufacturing yields, and to deliver those products to us on a timely basis at acceptable prices. Currently, one foundry manufactures the majority of our products. These manufacturers may be unable to meet our near-term or long-term manufacturing or pricing requirements. We obtain manufacturing services on a purchase order basis. The foundries we use have no obligation to provide us with any specified minimum quantities of product. These suppliers, including the fabrication facility that produces a majority of our products, fabricate wafers for other companies, including some of our competitors, and could choose to prioritize capacity for other users, reduce or eliminate deliveries to us, or increase the prices that they charge us on short notice. Ifgross margin. In addition, if we are unable to meet customer demand due to reduced or eliminated deliveries, we could lose sales to customers, which would negatively impact our revenue and our reputation. Because the lead-time needed to establish a strategic relationship with a new manufacturing partner could be several quarters, there is no readily available alternative source of supplygross margin target for any specific product. In addition,period or the time and effort to qualify a new foundry could result in additional expense, diversiontarget set by analysts, the trading price of resources or lost sales any of which would negatively impact our financial results. We believe that long-term market acceptance for our products will depend on reliable relationships with third-party manufacturers wecommon stock may use to ensure adequate product supply and competitive pricing so that we are able to respond to customer demand.decline.
We are dependent on third parties for assembly, testing and packaging of our products, which reduces our control over the delivery and quantity of our products.
Our processors are assembled, tested and packaged by independent subcontractors, such as ASE, Amkor, KYEC, SPIL, and ChipPAC. We do not have long-term agreements with any of these subcontractors. As a result of our dependence on third-party subcontractors for assembly, testing and packaging of our products, we do not directly control product delivery schedules or product quality. Demand for qualified independent subcontractors to assemble and test products is high. If demand for these subcontractors exceeds the number of qualified subcontractors, we may experience capacity constraints, which could result in product shortages, a decrease in the quality of our products or an increase in product cost. Any of our subcontractors may decide to prioritize the orders of one of our competitors over our orders. Any product shortages or quality assurance problems could increase the costs of manufacture, assembly or testing of our products, which could cause our gross margin to decline. Due to the amount of time typically required to qualify assemblers and testers, we could experience significant delays in the shipment of our products if we are required to find alternative third parties to assemble, test or package our products or components. Any such delays could result in a loss of reputation or a decrease in sales to our customers.
There can be no assurance that the PlayStation3 will achieve long term commercial success.
In April 2005, we finalized our definitive agreement with SCE to jointly develop a custom GPU for SCE’s PlayStation3. Our collaboration with SCE includes license fees and royalties for the PlayStation3 and all derivatives, including next-generation digital consumer electronics devices. In addition, we are licensing software development tools for creating shaders and advanced graphics capabilities to SCE. During fiscal 2007, we recognized $92.9 million of revenue from our contractual arrangements with SCE. There can be no assurance that the PlayStation3 will achieve long term commercial success, given the intense competition in the game console market. If we do not receive royalties as we anticipate, our revenue and gross margin may be adversely affected.
As we continue to work directly with more foreign customers, any difficulties in collecting accounts receivable could harm our operating results and financial condition.
Our accounts receivable are highly concentrated and make us vulnerable to adverse changes in our customers' businesses and to downturns in the economy and the industry. In addition, difficulties in collecting accounts receivable or the loss of any significant customer could materially and adversely affect our financial condition and results of operations. We continue to work directly with more foreign customers and it may be difficult to collect accounts receivable from them. We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. This allowance consists of an amount identified for specific customers and an amount based on overall estimated exposure. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required, we may be required to defer revenue recognition on sales to affected customers and we may be required to pay higher credit insurance premiums, which could adversely affect our operating results. We may have to record additional reserves or write-offs and/or defer revenue on certain sales transactions in the future, which could negatively impact our financial results.
We rely on third-party vendors to supply software development tools to us for the development of our new products and we may be unable to obtain the tools necessary to develop or enhance new or existing products.
When we design and develop new products or product enhancements, we rely on third-party software development tools to assist us in the design, simulation and verification of new products or enhancements to existing products. Although we currently are not dependent on any one vendor for the supply of these tools, some or all of these tools may not be readily available in the future. Additionally, the software development tools available at the time that we are designing, simulating or verifying a product may not be sophisticated enough or technologically advanced enough for our purposes. For example, we have experienced delays in the introduction of products in the past as a result of the inability of then available software development tools to fully simulate the complex features and functionalities of our products. Therefore, the design requirements necessary to meet consumer demands for more features and greater functionality from our processors in the future may exceed the capabilities of the software development tools that are available to us. If the software development tools we use become unavailable or fail to produce designs that meet consumer demands, we may miss design cycles or lose design wins either of which could result in a loss of market share, a decrease in revenue or negatively impact our operating results.
We sell our products to a small number of customers and our business could suffer by the loss of any of these customers.
We have only a limited number of customers and our sales are highly concentrated. Sales to one significant customer accounted for approximately 12% of our total revenue during fiscal 2007. Sales to two significant customers during fiscal 2006 accounted for approximately 26% of our total revenue. In addition, one customer has historically comprised a significant portion of our Handheld GPU business revenue. Although a small number of our other customers represents the majority of our revenue, their end customers include a large number of OEMs and system integrators throughout the world who, in many cases, specify the graphics supplier. Our sales process involves achieving key design wins with leading PC OEMs and major system builders and supporting the product design into high volume production with key CEMs, ODMs, add-in board and motherboard manufacturers. These design wins in turn influence the retail and system builder channel that is serviced by CEMs, ODMs, add-in board and motherboard manufacturers. Our distribution strategy is to work with a small number of leading independent CEMs, ODMs, add-in board and motherboard manufacturers, and distributors, each of which has relationships with a broad range of system builders and leading PC OEMs. If we were to lose sales to our PC OEMs, CEMs, ODMs, add-in board and motherboard manufacturers and were unable to replace the lost sales with sales to different customers, or if they were to significantly reduce the number of products they order from us, our revenue may not reach or exceed the expected level in any period, which could harm our financial condition and our results of operations.
Risks Related to Our Competition
As Intel and AMD continue to pursue platform solutions, we may not be able to successfully compete and our business would be negatively impacted.
We expect substantial competition from both Intel’s and AMD’s strategy of selling platform solutions, such as the success Intel achieved with its Centrino platform solution. In addition to the Centrino notebook platform solution, Intel has announced a desktop initiative branded as VIIV. Shortly after its acquisition of ATI, AMD also announced a platform solution. Such platform solutions do not require a discrete GPU from a third-party supplier such as NVIDIA. Prior to its acquisition of ATI, AMD did not sell their own GPUs but instead relied on companies such as ATI or NVIDIA to supply graphics technology. If AMD and Intel continue to pursue platform solutions in desktop and notebook PCs, we may be unable to sell GPUs to either company. Additionally, we expect that Intel and AMD will extend this strategy to other segments including professional workstations and servers. To the extent Intel and AMD are successful with the platform strategy, they would no longer need our discrete GPU solutions which would negatively impact our business.
The market for GPU, MCP, Handheld GPUs and application processors is highly competitive and we may be unable to compete.
The market for GPUs, MCPs and Handheld GPUs is intensely competitive and is characterized by rapid technological change, evolving industry standards and declining average selling prices. We believe that the principal competitive factors in this market are performance, breadth of product offerings, access to customers and distribution channels, backward-forward software support, conformity to industry standard application programming interfaces, manufacturing capabilities, price of processors and total system costs of add-in boards and motherboards. We believe that our ability to remain competitive will depend on how well we are able to anticipate the features and functions that customers will demand and whether we are able to deliver consistent volumes of our products at acceptable levels of quality. We expect competition to increase both from existing competitors and new market entrants with products that may be less costly than ours, or may provide better performance or additional features not provided by our products, which could harm our business.
For example, we are the largest supplier of AMD 64 chipsets with 53% segment share. NVIDIA nForce MCP unit shipments for AMD64-based CPUs increased over 113% calendar year-over-calendar year, based on the Mercury Research Fourth Quarter 2006 PC Processor Forecast Report. Decline in demand in the AMD segment would harm our business.
An additional significant source of competition is from companies that provide or intend to provide GPU, MCP, and Handheld GPU solutions. Some of our competitors may have or be able to obtain greater marketing, financial, distribution and manufacturing resources than we do and may be more able to adapt to customer or technological changes. Our current competitors include the following:
· | suppliers of discrete MCPs that incorporate a combination of networking, audio, communications and input/output, or I/O, functionality as part of their existing solutions, such as AMD, Broadcom, SIS, VIA, and Intel; |
· | suppliers of GPUs, including MCPs that incorporate 3D graphics functionality as part of their existing solutions, such as AMD, Intel, Matrox Electronics Systems Ltd., XGI Technology, Inc., SIS and VIA; |
· | suppliers of GPUs or GPU intellectual property for handheld and embedded devices that incorporate advanced graphics functionality as part of their existing solutions, such as AMD, Broadcom, Fujitsu Limited, Imagination Technologies Ltd., ARM Holdings plc, Marvell, NEC Corporation, Qualcomm Incorporated, Renesas Technology, Seiko-Epson, Texas Instruments Incorporated, and Toshiba America, Inc.; and |
· | suppliers of application processors for handheld and embedded devices that incorporate multimedia processing as part of their existing solutions such as Broadcom, Texas Instruments Inc., Qualcomm Incorporated, Marvell, Freescale Semiconductor Inc., Samsung and ST Microelectronics. |
If and to the extent we offer products outside of the consumer and enterprise PC, notebook, workstation, PDA, cellular phone, and video game console markets, we may face competition from some of our existing competitors as well as from companies with which we currently do not compete. We cannot accurately predict if we will compete successfully in any new markets we may enter. If we are unable to compete in our current or new markets, our financial results will suffer.
Risks Related to Market Conditions
We are subject to risks associated with international operations which may harm our business.
Our semiconductor wafers are manufactured, assembled, tested and packaged by third-parties located outside of the United States. Additionally, we generated 83.6% of our revenue for fiscal 2007 and 84.0% of our revenue for fiscal 2006 from sales to customers outside the United States and other Americas. The manufacture, assembly, test and packaging of our products outside of the United States, operation of offices outside of the United States, and sales to customers outside of the United States and other Americas subjects us to a number of risks associated with conducting business outside of the United States and other Americas, including, but not limited to:
· | international economic and political conditions; |
· | unexpected changes in, or impositions of, legislative or regulatory requirements; |
· | labor issues in foreign countries; |
· | cultural differences in the conduct of business; |
· | inadequate local infrastructure; |
· | delays resulting from difficulty in obtaining export licenses for certain technology, tariffs, quotas and other trade barriers and restrictions; |
· | difficulty in collecting accounts receivable; |
· | fluctuations in currency exchange rates; |
· | impact of currency exchange rate fluctuations on the price of our products to our customers, or on the supplies that we buy; |
· | imposition of additional taxes and penalties; |
· | different legal standards with respect to protection of intellectual property; |
· | the burdens of complying with a variety of foreign laws; and |
· | other factors beyond our control, including terrorism, civil unrest, war and diseases such as severe acute respiratory syndrome and the Avian flu. |
If sales to any of our customers outside of the United States and other Americas are delayed or cancelled because of any of the above factors, our revenue may be negatively impacted.
We have offices outside of the United States, including offices in Taiwan, Japan, Korea, China, Hong Kong, India, France, Russia, Germany, Finland and England. During fiscal 2007, we added 934 international employees to our international operations. As a result of our acquisition of PortalPlayer, we acquired land and a building under construction in Hyderabad, India. Our operations in our international locations are subject to many of the risks contained in the above list. We intend to continue to expand our operations and expect to open other international offices. Difficulties with our international operations, including finding appropriate staffing and office space, may divert management’s attention and other resources any of which could negatively impact our operating results.
We are dependent on the PCpersonal computer market and theits rate of its growth has and may in the future may have a negative impact on our business.
We derive the majority of our revenue from the sale of products for use in the desktop PC and notebook PC markets, including professional workstations. We expect to continue to derive mostthe majority of our revenue from the sale or license of products for use in the desktop personal computer, or PC, and notebook PC markets, in the next several years.including professional workstations. A reduction in sales of PCs, or a reduction in the growth rate of PC sales, willmay reduce demand for our products. Moreover,These changes in demand could be large and sudden. During fiscal year 2009, sales of our desktop GPU products decreased by approximately 29% compared to fiscal year 2008. These decreases were primarily due to the Standalone Desktop GPU market segment decline as reported in the PC Graphics December 2008 Report from Mercury Research. Since PC manufacturers often build inventories during periods of anticipated growth, they may be left with excess inventories if growth slows or if they incorrectly forecast product transitions. In these cases, PC manufacturers may abruptly suspend substantially all purchases of additional inventory from suppliers like us until their excess inventory has been absorbed, which would have a negative impact on our business.financial results.
If we are unable to compete in the markets for our products, our financial results could be adversely impacted.
The market for GPUs, MCPs, and computer-on-a-chip products that support netbooks, PNDs, PMPs, PDAs, cellular phones or other handheld devices is intensely competitive and is characterized by rapid technological change, new product introductions, evolving industry standards and declining average selling prices. We believe that the principal competitive factors in this market are performance, breadth of product offerings, access to customers and distribution channels, software support, conformity to industry standard Application Programming Interface, or APIs, manufacturing capabilities, price of processors, and total system costs. We believe that our ability to remain competitive will depend on how well we are able to anticipate the features and functions that customers will demand and whether we are able to deliver consistent volumes of our products at acceptable levels of quality. We expect competition to increase from both existing competitors and new market entrants with products that may be less costly than ours, or may provide better performance or additional features not provided by our products. In addition, it is possible that new competitors or alliances among competitors could emerge and acquire significant market share. We believe other factors impacting our ability to compete are:
| · | product bundling by competitors with multiple product lines; |
| · | breadth and frequency of product offerings; |
| · | access to customers and distribution channels; |
| · | backward-forward software support; |
| · | conformity to industry standard application programming interfaces; and |
| · | manufacturing capabilities. |
A significant source of competition is from companies that provide or intend to provide GPU, MCP, and computer-on-a-chip products that support netbooks, PNDs, PMPs, PDAs, cellular phones or other handheld devices. Some of our competitors may have greater marketing, financial, distribution and manufacturing resources than we do and may be more able to adapt to customer or technological changes. Currently, Intel Corporation, or Intel, which has greater resources than we do, is working on a multi-core architecture code-named Larrabee, which may compete with our products in various markets. Intel may also release an enthusiast level discrete GPU based on the Larrabee architecture. Additionally, in fiscal year 2009, Intel also introduced the Intel Atom processor which is designed for lower cost PCs. Intel may also release a second generation of Atom chips by 2010 which is expected to have an improved battery life. The Intel Atom processor may compete with our products that support netbooks, PDAs, cellular phones and other handheld devices.
Our current competitors include the following:
| · | suppliers of discrete MCPs that incorporate a combination of networking, audio, communications and input/output, or I/O, functionality as part of their existing solutions, such as AMD, Broadcom Corporation, or Broadcom, Silicon Integrated Systems, Inc., or SIS, VIA Technologies, Inc., or VIA, and Intel; |
| · | suppliers of GPUs, including MCPs that incorporate 3D graphics functionality as part of their existing solutions, such as AMD, Intel, Matrox Electronics Systems Ltd., SIS, and VIA; |
| · | suppliers of computer-on-a-chip products that support netbooks, PNDs, PMPs, PDAs, cellular phones or other handheld devices such as AMD, Broadcom, Fujitsu Limited, Imagination Technologies Ltd., ARM Holdings plc, Marvell Technology Group Ltd, or Marvell, NEC Corporation, Qualcomm Incorporated, Renesas Technology, Samsung, Seiko-Epson, Texas Instruments Incorporated, and Toshiba America, Inc.; and |
| · | suppliers of computer-on-a-chip products for handheld and embedded devices that incorporate multimedia processing as part of their existing solutions such as Broadcom, Texas Instruments Inc., Qualcomm Incorporated, Marvell, Freescale Semiconductor Inc., Renesas Technology, Samsung, and ST Microelectronics. |
If and to the extent we offer products in new markets, we may face competition from some of our existing competitors as well as from companies with which we currently do not compete. For example, in the case of our CPB, our Tegra and GoForce products primarily compete in architecture used in multimedia cellular phones and handheld devices. We believe that mobile devices like phones, music players, and portable navigation devices will increasingly become more consumer PC-like and be capable of delivering all the entertainment and web experiences in a handheld device. We cannot accurately predict if we will compete successfully in any of the new markets we may enter. If we are unable to compete in our current or new markets, demand for our products could decrease which could cause our revenue to decline and our financial results to suffer.
Our GPU and MCP products are currently used with both Intel and AMD processors. In February 2009, Intel filed suit against us, related to a patent license agreement that we signed with Intel in 2004. Intel seeks an order from the court declaring that the license does not extend to a new Intel processor architecture and enjoining us from stating that we have licensing rights for this architecture. If Intel successfully obtains such a court order, we could be unable to sell our MCP products for use with these Intel processors and our competitive position would be harmed. In addition, in order to continue to sell MCP products for use with these Intel processors we could be required to negotiate a new license agreement with Intel and we may not be able to do so on reasonable terms, if at all.
As Intel and AMD continue to pursue platform solutions, we may not be able to successfully compete and our business would be negatively impacted.
We expect substantial competition from both Intel’s and AMD’s strategy of selling platform solutions, such as the success Intel achieved with its Centrino platform solution. AMD has also announced a platform solution. Additionally, we expect that Intel and AMD will extend this strategy to other segments, including the possibility of successfully integrating a central processing unit, or CPU, and a GPU on the same chip, as evidenced by AMD’s announcement of its Fusion processor project. If AMD and Intel continue to pursue platform solutions, we may not be able to successfully compete and our business would be negatively impacted.
If our products contain significant defects our financial results could be negatively impacted, our reputation could be damaged and we could lose market share.
Our products are complex and may contain defects or experience failures due to any number of issues in design, fabrication, packaging, materials and/or use within a system. If any of our products or technologies contains a defect, compatibility issue or other error, we may have to invest additional research and development efforts to find and correct the issue. Such efforts could divert our engineers’ attention from the development of new products and technologies and could increase our operating costs and reduce our gross margin. In addition, an error or defect in new products or releases or related software drivers after commencement of commercial shipments could result in failure to achieve market acceptance or loss of design wins. Also, we may be required to reimburse customers, including our customers’ costs to repair or replace products in the field. A product recall or a significant number of product returns could be expensive, damage our reputation, could result in the shifting of business to our competitors and could result in litigation against us. Costs associated with correcting defects, errors, bugs or other issues could be significant and could materially harm our financial results. For example, in July 2008, we recorded a $196.0 million charge against cost of revenue to cover anticipated customer warranty, repair, return, replacement and other associated costs arising from a weak die/packaging material set in certain versions of our previous generation media and communications processor, or MCP, and GPU products used in notebook systems. In September, October and November 2008, several putative class action lawsuits were filed against us, asserting various claims related to the impacted MCP and GPU products. Please refer to the risk entitled “We are subject to litigation arising from alleged defects in our previous generation MCP and GPU products, which if determined adversely to us, could harm our business” for the risk associated with this litigation.
We are subject to risks associated with international operations which may harm our business.
We conduct our business worldwide. Our semiconductor wafers are manufactured, assembled, tested and packaged by third-parties located outside of the United States. We generated 87%, 89% and 86% of our revenue for fiscal years 2009, 2008 and 2007, respectively, from sales to customers outside the United States and other Americas. As of January 25, 2009, we had offices in fifteen countries outside of the United States. The manufacture, assembly, test and packaging of our products outside of the United States, operation of offices outside of the United States, and sales to customers internationally subjects us to a number of risks, including:
| · | international economic and political conditions, such as political tensions between countries in which we do business; |
| · | unexpected changes in, or impositions of, legislative or regulatory requirements; |
| · | complying with a variety of foreign laws; |
| · | differing legal standards with respect to protection of intellectual property and employment practices; |
| · | cultural differences in the conduct of business; |
| · | inadequate local infrastructure that could result in business disruptions; |
| · | exporting or importing issues related to export or import restrictions, tariffs, quotas and other trade barriers and restrictions; |
| · | financial risks such as longer payment cycles, difficulty in collecting accounts receivable and fluctuations in currency exchange rates; |
| · | imposition of additional taxes and penalties; and |
| · | other factors beyond our control such as terrorism, civil unrest, war and diseases such as severe acute respiratory syndrome and the Avian flu. |
If sales to any of our customers outside of the United States and other Americas are delayed or cancelled because of any of the above factors, our revenue may be negatively impacted.
Our international operations in Australia, China, Finland, France, Germany, Hong Kong, India, Japan, Korea, Russia, Singapore, Sweden, Switzerland, Taiwan, and the United Kingdom are subject to many of the above listed risks. Difficulties with our international operations, including finding appropriate staffing and office space, may divert management’s attention and other resources any of which could negatively impact our operating results.
The economic conditions in our primary overseas markets, particularly in Asia, may negatively impact the demand for our products abroad. All of our international sales to date have been denominated in United States dollars. Accordingly, an increase in the value of the United States dollar relative to foreign currencies could make our products less competitive in international markets or require us to assume the risk of denominating certain sales in foreign currencies. We anticipate that these factors will impact our business to a greater degree as we further expand our international business activities.
If our products do not continue to be adopted by the consumer and enterprise desktop PC, notebook PC, workstation, high-performance computing, netbook, personal media player, or PMP, personal digital assistant, or PDA, cellular phone,handheld device, and video game console markets or if the demand in these markets for new and innovative products in these markets decreases, our business and operating results would suffer.
Our success depends in part upon continued broad adoption of our processors for 3D graphics and multimedia in consumer and enterprisedesktop PC, notebook PC, workstation, PDA,high-performance computing, netbooks, PMPs, PDAs, cellular phone,handheld devices, and video game console applications. The market for processors has been characterized by unpredictable and sometimes rapid shifts in the popularity of products, often caused by the publication of competitive industry benchmark results, changes in pricing of dynamic random-access memory devices and other changes in the total system cost of add-in boards, as well as by severe price competition and by frequent new technology and product introductions. Broad market acceptance is difficult to achieve and such market acceptance, if achieved, is difficult to sustain due to intense competition and frequent new technology and product introductions. Our GPU and MCP businesses together comprised over 86.5%approximately 75%, 79% and 77% of our revenue during fiscal years 2009, 2008 and 2007, revenue.respectively. As such, our financial results would suffer if for any reason our current or future GPUs or MCPs do not continue to achieve widespread adoption by the PC market. If we are unable to complete the timely development of new products or if we were unable to successfully and cost-effectively manufacture and deliver products that meet the requirements of the consumer and enterprisedesktop PC, notebook PC, workstation, high-performance computing, netbook, PMP, PDA, cellular phone, and video game console markets, we may experience a decrease in revenue which could negatively impact our operating results.
Additionally, there can be no assurance that the industry will continue to demand new products with improved standards, features or performance. If our customers, OEMs, ODMs, add-in-card and motherboard manufacturers, system builders and consumer electronics companies, do not continue to design products that require more advanced or efficient processors and/or the market does not continue to demand new products with increased performance, features, functionality or standards, sales of our products could decline.decline and the markets for our products could shrink. Decreased sales of our products for these markets could negatively impact our revenue and our financial results.
Our business results could be adversely affected if the identification and development of new products or entry into or development of a new market is delayed or unsuccessful.
In order to maintain or improve our financial results, we will need to continue to identify and develop new products as well as identify and enter new markets. As our GPUs and other processors develop and competition increases, we anticipate that product life cycles at the high end will remain short and average selling prices will decline. In particular, average selling prices and gross margins for our GPUs and other processors could decline as each product matures and as unit volume increases. As a result, we will need to introduce new products and enhancements to existing products to maintain or improve overall average selling prices, our gross margin and our financial results. We believe the success of our new product introductions will depend on many factors outlined elsewhere in these risk factors as well as the following:
| · | market demand for new products and enhancements to existing products; |
| · | timely completion and introduction of new product designs and new opportunities for existing products; |
| · | seamless transitions from an older product to a new product; |
| · | differentiation of our new products from those of our competitors; |
| · | delays in volume shipments of our products; |
| · | market acceptance of our products instead of our customers' products; and |
| · | availability of adequate quantity and configurations of various types of memory products. |
In the past, we have experienced delays in the development and adoption of new products and have been unable to successfully manage product transitions from older to newer products resulting in obsolete inventory.
To be successful, we must also enter new markets or develop new uses for our future or existing products. We cannot accurately predict if our current or existing products or technologies will be successful in the new opportunities or markets that we identify for them or that we will compete successfully in any new markets we may enter. For example, we have developed products and other technology in order for certain general-purpose computing operations to be performed on a GPU rather than a CPU. This general purpose computing, which is often referred to as GP computing, was a new use for the GPU which had been entirely used for graphics rendering. During fiscal year 2008, we introduced our NVIDIA Tesla family of products, which was our entry into the high-performance computing industry, a new market for us. We also offer our CUDA software development solution, which is a C language programming environment for GPUs, that allows parallel computing on the GPU by using standard C language to create programs that process large quantities of data in parallel. Some of our competitors, including Intel, are now developing their own solutions for the discrete graphics and computing markets. Our failure to comply with any applicable environmental regulationssuccessfully develop, introduce or achieve market acceptance for new GPUs, other products or other technologies or to enter into new markets or identify new uses for existing or future products, could result in a rangerapidly declining average selling prices, reduced demand for our products or loss of consequences, including fines, suspensionmarket share any of production, excess inventory, sales limitations,which could cause our revenue, gross margin and criminal and civil liabilities.overall financial results to suffer.
If we are unable to achieve design wins, our products may not be adopted by our target markets or customers either of which could negatively impact our financial results.
The success of our business depends to a significant extent on our ability to develop new competitive products for our target markets and customers. We may be subject to various state, federalbelieve achieving design wins, which entails having our existing and international lawsfuture products chosen for hardware components or subassemblies designed by OEMs, ODMs, add-in board and regulations governing the environment, including restricting the presencemotherboard manufacturers, is an integral part of certain substances in electronic productsour future success. Our OEM, ODM, and making producers of those products financially responsible for the collection, treatment, recyclingadd-in board and disposal of those products. The European Union Directivemotherboard manufacturers’ customers typically introduce new system configurations as often as twice per year, typically based on Restriction of Hazardous Substances Directive,spring and fall design cycles or RoHS Directive, is European legislation that restricts the use of a number of substances, including lead, and other hazardous substances in electrical and electronic equipment in the market in the European Union which became effective on July 1, 2006. Similarly, the State of California has adopted certain restrictions, which go into effect in 2007, that restrict the use of certain materials in electronic products, which are intended to harmonize with the RoHS directive and other states are contemplating similar legislation. China has adopted similar legislation to the RoHS directive which began to go into effect on March 1, 2007.
Also, we could face significant costs and liabilities in connection with the European Union Directive on Waste Electrical and Electronic Equipment,trade shows. Accordingly, when our customers are making their design decisions, our existing products must have competitive performance levels or WEEE. The WEEE directs members of the European Unionwe must timely introduce new products in order to enact laws, regulations, and administrative provisions to ensurebe included in our customers’ new system configurations. This requires that producers of electric and electronic equipment are financially responsible for the collection, recycling, treatment and environmentally responsible disposal of certain products sold into the market after August 15, 2005. Implementation in certain European Union member states has been delayed into 2007. Similar legislation has been or may be enacted in other jurisdictions, including the United States, Canada, Mexico, China and Japan, the cumulative impact of which could be significant. We continue to evaluate the impact of specific registration and compliance activities required by WEEE.
we:
It is possible| · | anticipate the features and functionality that customers and consumers will demand; |
| · | incorporate those features and functionalities into products that meet the exacting design requirements of our customers; |
| · | price our products competitively; and |
| · | introduce products to the market within our customers’ limited design cycles. |
unanticipated supply shortages, delays or excess non-compliant inventory may occur as a result of such regulations. Failure to comply with any applicable environmental regulations could result in a range of consequences including costs, fines, suspension of production, excess inventory, sales limitations, criminal and civil liabilities and could impact our ability to conduct business in the countries that have adopted these types of regulations.we will achieve design wins. Our ability to achieve design wins also depends in part on our ability to identify and be compliant with evolving industry standards. Unanticipated changes in industry standards could render our products incompatible with products developed by major hardware manufacturers and software developers like AMD, Intel and Microsoft Corporation, or Microsoft. If our products are not in compliance with prevailing industry standards, we may not be designed into our customers’ product designs. However, to be compliant with changes to industry standards, we may have to invest significant time and resources to redesign our products which could negatively impact our gross margin or operating results. If we are unable to achieve new design wins for existing or new customers, we may lose market share and our operating results would be negatively impacted.
We may have to invest more resources in research and development than anticipated, which could increase our operating expenses and negatively impact our operating results.
If new competitors, technological advances by existing competitors, our entry into new markets, or other competitive factors require us to invest significantly greater resources than anticipated in our research and development efforts, our operating expenses would increase. We had 3,772 full-time employees engaged in research and development as of January 25, 2009, compared to 3,255 employees as of January 27, 2008 and 2,668 employees as of January 28, 2007, respectively. Research and development expenditures were $855.9 million, $691.6 million and $553.5 million, for fiscal years 2009, 2008 and 2007, respectively. Research and development expenses included stock-based compensation expense of $98.0 million, $76.6 million and $70.1 million for fiscal years 2009, 2008 and 2007, respectively. If we are required to invest significantly greater resources than anticipated in research and development efforts without a corresponding increase in revenue, our operating results could further decline. Research and development expenses are likely to fluctuate from time to time to the extent we make periodic incremental investments in research and development and these investments may be independent of our level of revenue which could negatively impact our financial results. In order to remain competitive, we anticipate that we will continue to devote substantial resources to research and development.
We are dependent on key employees and the loss of any of these employees could negatively impact our business.
Our future success and ability to compete is substantially dependent on our ability to identify, hire, train and retain highly qualified key personnel. The market for key employees in the semiconductor industry can be competitive. None of our key employees is bound by an employment agreement, meaning our relationships with all of our key employees are at will. The loss of the services of any of our other key employees without an adequate replacement or our inability to hire new employees as needed could delay our product development efforts, harm our ability to sell our products or otherwise negatively impact our business.
In September 2008, we reduced our global workforce by approximately 6.5% as part of our efforts to allow continued investment in strategic growth areas. This reduction in our workforce may impair our ability to recruit and retain qualified employees of our workforce as a result of a perceived risk of future workforce reductions. Employees, whether or not directly affected by the reduction, may also seek future employment with our business partners, customers or competitors. In addition, we rely on stock-based awards as one means for recruiting, motivating and retaining highly skilled talent. If the value of such stock awards does not appreciate as measured by the performance of the price of our common stock or if our share-based compensation otherwise ceases to be viewed as a valuable benefit, our ability to attract, retain, and motivate employees could be weakened, which could harm our results of operations. The significant decline in the trading price of our common stock has resulted in the exercise price of a significant portion of our outstanding options to significantly exceed the current trading price of our common stock, thus lessening the effectiveness of these stock-based awards. We may not continue to successfully attract and retain key personnel which would harm our business.
We may not be able to realize the potential financial or strategic benefits of business acquisitions or strategic investments, which could hurt our ability to grow our business, develop new products or sell our products.
We have acquired and invested in other businesses that offered products, services and technologies that we believe will help expand or enhance our existing products and business. We may enter into future acquisitions of, or investments in, businesses, in order to complement or expand our current businesses or enter into a new business market. Negotiations associated with an acquisition or strategic investment could divert management’s attention and other company resources. Any of the following risks associated with past or future acquisitions or investments could impair our ability to grow our business, develop new products, our ability to sell our products, and ultimately could have a negative impact on our growth or our financial results:
| · | difficulty in combining the technology, products, operations or workforce of the acquired business with our business; |
| · | difficulty in operating in a new or multiple new locations; |
| · | disruption of our ongoing businesses or the ongoing business of the company we invest in or acquire; |
| · | difficulty in realizing the potential financial or strategic benefits of the transaction; |
| · | difficulty in maintaining uniform standards, controls, procedures and policies; |
| · | disruption of or delays in ongoing research and development efforts; |
| · | diversion of capital and other resources; |
| · | assumption of liabilities; |
| · | diversion of resources and unanticipated expenses resulting from litigation arising from potential or actual business acquisitions or investments; |
| · | difficulties in entering into new markets in which we have limited or no experience and where competitors in such markets have stronger positions; and |
| · | impairment of relationships with employees and customers, or the loss of any of our key employees or customers our target’s key employees or customers, as a result of our acquisition or investment. |
We are exposed to credit risk, fluctuations in the market values of our portfolio investments and in interest rates.
At the end of fiscal 2007, we had $1.12 billion in cash, cash equivalents and marketable securities. We invest our cash in a variety of financial instruments, consisting principally of investments in commercial paper, money market funds and highly liquid debt securities of corporations, municipalities and the United States government and its agencies. These investments are denominated in U.S. dollars.
We account for our investment instruments in accordance with Statement of Financial Accounting Standards No. 115, or SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. All of the cash equivalents and marketable securities are treated as “available-for-sale” under SFAS No. 115. Investments in both fixed rate and floating rate interest earning instruments carry a degree of interest rate risk. Fixed rate debt securities may have their market value adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future investment income may fall short of expectations due to changes in interest rates or if the decline in fair value of our publicly traded debt or equity investments is judged to be other-than-temporary. We may suffer losses in principal if we are forced to sell securities that decline in securities market value due to changes in interest rates. Future declines in the market values of our cash, cash equivalents and marketable securities could have a material adverse effect on our financial condition and operating results. However, because any debt securities we hold are classified as “available-for-sale,” no gains or losses are recognizedrealized in our Consolidated Statements of Operations due to changes in interest rates unless such securities are sold prior to maturity.maturity or unless declines in value are determined to be other-than-temporary.
At January 25, 2009 and January 27, 2008, we had $1.26 billion and $1.81 billion, respectively, in cash, cash equivalents and marketable securities. Given the global nature of our business, we have invested both domestically and internationally. All of our investments are denominated in United States dollars. We invest in a variety of financial instruments, consisting principally of cash and cash equivalents, asset-backed securities, commercial paper, mortgage-backed securities issued by Government-sponsored enterprises, equity securities, money market funds and debt securities of corporations, municipalities and the United States government and its agencies. As of January 25, 2009, we did not have any investments in auction-rate preferred securities. As of January 25, 2009, our investments in government agencies and government sponsored enterprises represented approximately 71% of our total investment portfolio, while the financial sector accounted for approximately 17% of our total investment portfolio.
The current volatility in the financial markets and overall economic uncertainty increases the risk that the actual amounts realized in the future on our financial instruments could differ significantly from the fair values currently assigned to them. Other income and expense could also vary materially from expectations depending on gains or losses realized on the sale or exchange of financial instruments; impairment charges related to debt securities as well as equity and other investments; interest rates; and cash, cash equivalent and marketable securities balances. For instance, we recorded other than temporary impairment charges of $9.9 million during fiscal year 2009. These charges include $5.6 million related to what we believe is an other than temporary impairment of our investment in the money market funds held by the Reserve International Liquidity Fund, Ltd., or International Reserve Fund; $2.5 million related to a decline in the value of publicly traded equity securities and $1.8 million related to debt securities held by us that were issued by companies that have filed for bankruptcy as of January 25, 2009. Please refer to Note 17 of these Notes to the Consolidated Financial Statements in Part IV, Item 15 of this Form 10-K for further details. Subsequent to year-end, on January 30, 2009, we received $84.4 million from the International Reserve Fund. This was our portion of a payout of approximately 65% of the total assets of the Fund. Each shareholder’s percentage of this distribution was determined by dividing the shareholder’s total unfunded redeemed shares by the aggregate unfunded redeemed shares of the Fund, which was then used to calculate the shareholder’s pro rata portion of this distribution. We expect to receive the proceeds of our remaining investment in the International Reserve Fund, excluding the $5.6 million that we have recorded as an other than temporary impairment, by no later than October 2009, when all of the underlying securities held by the International Reserve Fund are scheduled to have matured. However, redemptions from the International Reserve Fund are currently subject to pending litigation, which could cause further delay in receipt of our funds. In addition, we may determine that further impairment of our investment in the International Reserve Fund may be necessary.
Risks Related to Our business is cyclical in naturePartners and an industry downturn couldCustomers
We depend on foundries to manufacture our products and these third parties may not be able to satisfy our manufacturing requirements, which would harm our financial results.business.
Our business is directly affected by market conditions in We do not manufacture the highly cyclicalsilicon wafers used for our products and do not own or operate a wafer fabrication facility. Instead, we are dependent on industry-leading foundries, such as Taiwan Semiconductor Manufacturing Corporation, or TSMC, to manufacture our semiconductor industry, including alternating periods of overcapacity and capacity constraints, variations in manufacturing costs and yields, significant expenditures for capitalwafers using their state-of-the-art fabrication equipment and techniques. The foundries, which have limited capacity, also manufacture products for other semiconductor companies, including some of our competitors. Since we do not have long-term commitment contracts with any of these foundries, they do not have an obligation to provide us with any minimum quantity of product development and rapid technological change.at any time or at any set price, except as may be provided in a specific purchase order. Most of our products are only manufactured by one foundry at a time. In times of high demand, the foundries could choose to prioritize their capacity for other companies, reduce or eliminate deliveries to us, or increase the prices that they charge us. If we are unable to respondmeet customer demand due to changes inreduced or eliminated deliveries or have to increase the prices of our industry,products, we could lose sales to customers, which can be unpredictable and rapid, in an efficient and timely manner, our operating results could suffer. In particular, from time to time, the semiconductor industry has experienced significant and sometimes prolonged downturns characterized by diminished product demand and accelerated erosion of average selling prices. If we cannot take appropriate actions such as reducing our manufacturing or operating costs to sufficiently offset declines in demand during a downturn,would negatively impact our revenue and earnings will suffer.our reputation.
Political instability Because the lead-time needed to establish a strategic relationship with a new manufacturing partner could be several quarters, we do not have an alternative source of supply for our products. In addition, the time and effort to qualify a new foundry could result in Taiwanadditional expense, diversion of resources, or lost sales, any of which would negatively impact our financial results. We believe that long-term market acceptance for our products will depend on reliable relationships with the third-party manufacturers we use to ensure adequate product supply and in The People’s Republic of China or elsewhere could harm our business.competitive pricing to respond to customer demand.
Failure to achieve expected manufacturing yields for our products could negatively impact our financial results and damage our reputation.
Manufacturing yields for our products are a function of product design, which is developed largely by us, and process technology, which typically is proprietary to the manufacturer. Low yields may result from either product design or process technology failure. We do not know a yield problem exists until our design is manufactured. When a yield issue is identified, the product is analyzed and tested to determine the cause. As a result, yield problems may not be identified until well into the production process. Resolution of yield problems requires cooperation by, and communication between, us and the manufacturer. Because of our reliancepotentially limited access to wafer foundry capacity, decreases in manufacturing yields could result in an increase in our costs and force us to allocate our available product supply among our customers. Lower than expected yields could potentially harm customer relationships, our reputation and our financial results.
We are dependent on foundriesthird parties for assembly, testing and packaging of our products, which reduces our control over the delivery schedule, product quantity or product quality.
Our products are assembled, tested and packaged by independent contractors located in Taiwansubcontractors, such as Advanced Semiconductor Engineering, Inc., Amkor Technology, JSI Logistics, Ltd., King Yuan Electronics Co., Siliconware Precision Industries Co. Ltd., and The People’s RepublicChipPAC. As a result, we do not directly control our product delivery schedules, product quantity, or product quality. All of China,these subcontractors assemble, test and becausepackage products for other companies, including some of our competitors. Since we do not have long-term agreements with our subcontractors, when demand for subcontractors to assemble, test or package products is high, our subcontractors may decide to prioritize the orders of other customers over our orders. Since the time required to qualify a different subcontractor to assemble, test or package our products can be lengthy, if we have officesto find a replacement subcontractor we could experience significant delays in these locations,shipments of our business may be harmed by political instabilityproducts, product shortages, a decrease in Taiwan, including the worseningquality of our products, or an increase in product cost. Any product shortages or quality assurance problems could increase the strained relations between The People’s Republiccosts of Chinamanufacture, assembly or testing of our products, which could cause our gross margin and Taiwan.revenue to decline.
Risks Related Failure to Government Action, Regulatory Action, Intellectual Property, and Litigation
The pending investigation by the United States Department of Justice regarding investigation into the market for Graphics Processorstransition to new manufacturing process technologies could adversely affect our business.operating results and gross margin.
We use the most advanced manufacturing process technology appropriate for our products that is available from our third-party foundries. As a result, we continuously evaluate the benefits of migrating our products to smaller geometry process technologies in order to improve performance and reduce costs. We believe this strategy will help us remain competitive. Our current product families are manufactured using 0.15 micron, 0.14 micron, 0.13 micron, 0.11 micron, 90 nanometer, 65 nanometer and 55 nanometer process technologies. Manufacturing process technologies are subject to rapid change and require significant expenditures for research and development, which could negatively impact our operating expenses and gross margin.
We have experienced difficulty in migrating to new manufacturing processes in the past and, consequently, have suffered reduced yields, delays in product deliveries and increased expense levels. We may face similar difficulties, delays and expenses as we continue to transition our new products to smaller geometry processes. Moreover, we are dependent on our third-party manufacturers to invest sufficient funds in new manufacturing techniques in order to have ample capacity for all of their customers and to develop the techniques in a timely manner. Our product cycles may also depend on our third-party manufacturers migrating to smaller geometry processes successfully and in time for us to meet our customer demands. Some of our competitors own their manufacturing facilities and may be able to move to a new state of the art manufacturing process more quickly or more successfully than our manufacturing partners. For example, Intel has released a 45 nanometer chip for desktop computers which it is manufacturing in its foundries. In addition, in October 2008, AMD and the Advanced Technology Investment Company, a technology investment company backed by the government of Abu Dhabi, announced the establishment of a U.S. headquartered semiconductor manufacturing company that will manufacture AMD’s advance processors. If our suppliers fall behind our competitors in manufacturing processes, the development and customer demand for our products and the use of our products could be negatively impacted. If we are forced to use larger geometric processes in manufacturing a product than our competition, our gross margin may be reduced. The inability by us or our third-party manufacturers to effectively and efficiently transition to new manufacturing process technologies may adversely affect our operating results and our gross margin.
We rely on third-party vendors to supply software development tools to us for the development of our new products and we may be unable to obtain the tools necessary to develop or enhance new or existing products.
We rely on third-party software development tools to assist us in the design, simulation and verification of new products or product enhancements. To bring new products or product enhancements to market in a timely manner, or at all, we need software development tools that are sophisticated enough or technologically advanced enough to complete our design, simulations and verifications. In the past, we have experienced delays in the introduction of products as a result of the inability of then available software development tools to fully simulate the complex features and functionalities of our products. In the future, the design requirements necessary to meet consumer demands for more features and greater functionality from our products may exceed the capabilities of available software development tools. Unavailability of software development tools may result in our missing design cycles or losing design wins, either of which could result in a loss of market share or negatively impact our operating results.
Because of the importance of software development tools to the development and enhancement of our products, a critical component of our product development efforts is our partnerships with leaders in the computer-aided design industry, including Cadence Design Systems, Inc. and Synopsys, Inc. We have invested significant resources to develop relationships with these industry leaders and have often assisted them in the definition of their new products. We believe that forming these relationships and utilizing next-generation development tools to design, simulate and verify our products will help us remain at the forefront of the 3D graphics, communications and networking segments and develop products that utilize leading-edge technology on a rapid basis. If these relationships are not successful, we may be unable to develop new products or product enhancements in a timely manner, which could result in a loss of market share, a decrease in revenue or negatively impact our operating results.
We sell our products to a small number of customers and our business could suffer if we lose any of these customers.
We have a limited number of customers and our sales are highly concentrated. For fiscal years 2009, 2008 and 2007, aggregate sales to customers in excess of 10% of our total revenue accounted for approximately 11% of total revenue from one customer and approximately 10% and 12% of our total revenue from another customer, respectively. Although a small number of our other customers represent the majority of our revenue, their end customers include a large number of original equipment manufacturers, or OEMs, and system integrators throughout the world who, in many cases, specify the graphics supplier. Our sales process involves achieving key design wins with leading PC, OEMs and major system builders and supporting the product design into high volume production with key contract equipment manufacturers, or CEMs, original design manufacturers, or ODMs, add-in board and motherboard manufacturers. These design wins in turn influence the retail and system builder channel that is serviced by CEMs, ODMs, add-in board and motherboard manufacturers. Our distribution strategy is to work with a small number of leading independent CEMs, ODMs, add-in board and motherboard manufacturers, and distributors, each of which has relationships with a broad range of system builders and leading PC OEMs. If we were to lose sales to our PC OEMs, CEMs, ODMs, add-in board manufacturers and motherboard manufacturers and were unable to replace the lost sales with sales to different customers, if they were to significantly reduce the number of products they order from us, or if we were unable to collect accounts receivable from them, our revenue may not reach or exceed the expected level in any period, which could harm our financial condition and our results of operations.
Any difficulties in collecting accounts receivable, including from foreign customers, could harm our operating results and financial condition.
Our accounts receivable are highly concentrated and make us vulnerable to adverse changes in our customers' businesses, and to downturns in the industry and the worldwide economy. Accounts receivable from significant customers, those representing 10% or more of total accounts receivable aggregated approximately 38% of our accounts receivable balance from three customers at January 25, 2009 and approximately 12% of our accounts receivable balance from one customer at January 27, 2008.
Difficulties in collecting accounts receivable could materially and adversely affect our financial condition and results of operations. These difficulties are heightened during periods when economic conditions worsen. We continue to work directly with more foreign customers and it may be difficult to collect accounts receivable from them. We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. This allowance consists of an amount identified for specific customers and an amount based on overall estimated exposure. If the financial condition of our customers were to deteriorate, resulting in an impairment in their ability to make payments, additional allowances may be required, we may be required to defer revenue recognition on sales to affected customers, and we may be required to pay higher credit insurance premiums, any of which could adversely affect our operating results. In the future, we may have to record additional reserves or write-offs and/or defer revenue on certain sales transactions which could negatively impact our financial results.
OnRisks Related to Regulatory, Legal, Our Common Stock and Other Matters
We are subject to litigation arising from alleged defects in our previous generation MCP and GPU products, which if determined adversely to us, could harm our business.
During the second fiscal quarter of 2009, we recorded a $196.0 million charge against cost of revenue to cover anticipated customer warranty, repair, return, replacement and other associated costs arising from a weak die/packaging material set in certain versions of our previous generation MCP and GPU products used in notebook systems. The previous generation MCP and GPU products that are impacted were included in a number of notebook products that were shipped and sold in significant quantities. Certain notebook configurations of these MCP and GPU products are failing in the field at higher than normal rates. While we have not been able to determine a root cause for these failures, testing suggests a weak material set of die/package combination, system thermal management designs, and customer use patterns are contributing factors. We continue to engage in discussions with our supply chain regarding reimbursement to us for some or all of the costs we have incurred and may incur in the future relating to the weak material set. We also continue to seek to access our insurance coverage, which provided us with $8 million in related reimbursement during fiscal year 2009. However, there can be no assurance that we will recover any additional reimbursement. We continue to not see any abnormal failure rates in any systems using NVIDIA products other than certain notebook configurations. However, we are continuing to test and otherwise investigate other products. There can be no assurance that we will not discover defects in other MCP or GPU products.
In September, October and November 29,2008, several putative class action lawsuits were filed against us, asserting various claims related to the impacted MCP and GPU products. Such lawsuits could result in the diversion of management’s time and attention away from business operations, which could harm our business. In addition, the costs of defense and any damages resulting from this litigation, a ruling against us, or a settlement of the litigation could adversely affect our cash flow and financial results.
The ongoing civil actions or any new actions relating to the market for GPUs could adversely affect our business.
In November 2006, we received a subpoena from the San Francisco Office of the Antitrust Division of the United States Department of Justice, or DOJ, in connection with the DOJ's investigation into potential antitrust violations related to graphics processing unitsGPUs and cards. In October 2008, the DOJ formally notified us that the DOJ investigation had been closed. No specific allegations have beenwere made against us. We plan to cooperate withNVIDIA during the DOJ in its investigation. As of March 14, 2007, 42
Several putative civil complaints have beenwere filed against us. The majority are pending in the Northern Districtus by direct and indirect purchasers of California, a number are pending in the Central District of California, and other cases are pending in several other Federal district courts. Although the complaints differ, they generally purport to assertGPUs, asserting federal and state antitrust claims based on alleged price fixing, market allocation, and other alleged anti-competitive agreements between us and ATI Technologies, ULC., or ATI, and Advanced Micro Devices, Inc., or AMD, as a result of its acquisition of ATI Technologies, Inc., or ATI. Many of the casesThe indirect purchasers’ consolidated amended complaint also assertasserts a variety of state law antitrust, unfair competition orand consumer protection claims on the same allegations, and some cases assert unjust enrichment or otheras well as a common law claims. The complaints are putative class actions alleging classes of direct and/or indirect purchasers of our graphic processing units and cards. The plaintiffs in a few of the Northern District of California actions have filed a motion with the Judicial Panel on Multidistrict Litigation asking that all pending and subsequent cases be consolidated in one courtclaim for all pre-trial discovery and motion practice. A hearing on this motion is set for March 29, 2007. We believe the allegations in the complaints are without merit and intend to vigorously defend the cases.unjust enrichment.
Expensing employee stock options materially In September 2008, we executed a settlement agreement, or the Agreement, in connection with the claims of the certified class of direct purchaser plaintiffs. The Agreement is subject to court approval and, aversely affectsif approved, would dispose of all claims and appeals raised by the certified class in the complaints against NVIDIA. In addition, in September 2008, we reached a settlement agreement with the remaining individual indirect purchaser plaintiffs that provides for a dismissal of all claims and appeals related to the complaints raised by the individual indirect purchaser plaintiffs. This settlement is not subject to the approval of the court. While we expect the courts to approve the settlement agreement with the direct purchasers, there can be no assurance that it will approved. If the settlement agreement is not approved we may be required to pay damages or penalties or have other remedies imposed on us that could harm our reported operating resultsbusiness. In addition, additional parties may bring claims against us relating to the potential antitrust violations related to GPUs and cards. If additional claims are brought against us, such lawsuits could alsoresult in the diversion of management’s time and attention away from business operations, which could harm our business. In addition, the costs of defense and any damages resulting from this litigation, a ruling against us, or a settlement of the litigation could adversely affect our competitive position.cash flow and financial results.
Since inception, we have used stock options and our employee stock purchase program as fundamental components The matters relating to the Board of Director’s review of our compensation packages. We believehistorical stock option granting practices and the restatement of our consolidated financial statements have resulted in litigation, which could harm our financial results.
In August 2006, we announced that these incentives directly motivatethe Audit Committee of our employees and,Board, with the assistance of outside legal counsel, was conducting a review of our stock option practices covering the time from our initial public offering in 1999, our fiscal year 2000, through June 2006. The Audit Committee reached the use of vesting, encourage our employees to remain with us.conclusion that incorrect measurement dates were used for financial accounting purposes for stock option grants in certain prior periods. As a result, of adjustments arising from our restatementwe recorded additional non-cash stock-based compensation expense, and related tax effects, related to stock option grant dates, our operating results for fiscal years priorgrants. Ten derivative complaints were filed in state and federal court pertaining to fiscal 2007 contain recorded amountsallegations relating to stock option grants. In September 2008, we entered into Memoranda of stock-based compensation expense. For our fiscal 2000 through 2006, this stock-based compensation expense was calculated using primarilyUnderstanding regarding the intrinsic value-based method under Accounting Principles Board Opinion No. 25, or APB 25, Accounting for Stock Issued to Employees and related interpretations.
In December 2004, the Financial Accounting Standards Board, or FASB, issued SFAS No. 123(R) which requires the measurement and recognition of compensation expense for all stock-based compensation payments. SFAS No. 123(R) requires that we record compensation expense for stock options and our employee stock purchase plan using the fair value of those awards. During fiscal 2007, we recorded $116.7 million, related to stock-based compensation, netsettlement of the associated payroll tax impact resulting fromstockholder derivative lawsuits. In November 2008, the definitive settlement agreements were concurrently filed in the Chancery Court of Delaware and the United States District Court Northern District of California and are subject to approval by both such courts. The settlement agreements do not contain any admission of wrongdoing or fault on the part of NVIDIA, our restatement, which negatively impacted our operating results. We believeboard of directors or executive officers. While we expect the courts to approve the settlement agreements, there can be no assurance that SFAS No. 123(R)they will continue to negatively impact our operating results.
Toapproved. If the extent that SFAS No. 123(R) makes it more expensive to grant stock options or to continue to have an employee stock purchase program,settlement agreements are not approved we may decidebe required to incur increased cash compensation costs. In addition, actionspay damages or penalties or have other remedies imposed on us that we may take to reduce stock-based compensation expense that may be more severe than any actionscould harm our competitors may implement may make it difficult to attract, retain and motivate employees, which could adversely affect our competitive position as well as our business and operating results.business.
We are a party to other litigation, including patent litigation, which, if determined adversely to us, could harmadversely affect our businesscash flow and financial condition.results.
We are a party to litigation.other litigation as both a defendant and as a plaintiff. For example, we are engaged in litigation with Intel Corporation, Rambus Corporation and with various parties related to our acquisition of 3dfx in 2001. Please refer to Note 12 of the Notes to the Consolidated Financial Statements in Part IV, Item 15 of this Form 10-K for further detail on these lawsuits. There can be no assurance that actions that have been brought against us or any brought by uslitigation to which we are a party will be resolved in our favor. Any claim that is successfully asserteddecided against us may cause us to pay substantial damages, including punitive damages, and other related fees. Regardless of whether these lawsuits are resolved in our favor or if we are the plaintiff or the defendant in the litigation, any lawsuits to which we are a party will likely be expensive and time consuming to defend or resolve. Such lawsuits could also harm our relationships with existing customers and result in the diversion of management’s time and attention away from business operations, which could harm our business. Costs of defense and any damages resulting from litigation, a ruling against us, or a settlement of the litigation could adversely affect our cash flow and financial results.
Litigation to defend against alleged infringement of intellectual property rights or to enforce our intellectual property rights and the outcome of such litigation could result in substantial costs to us.
We expect that as the number of issued hardware and software patents increases and as competition intensifies, the volume of intellectual property infringement claims and lawsuits may increase. We may in the future become involved in lawsuits or other legal proceedings alleging patent infringement or other intellectual property rights violations by us or by our customers that we have agreed to indemnify them for certain claims of infringement.
An unfavorable ruling in any such intellectual property related litigation could include significant damages, invalidation of a patent or family of patents, indemnification of customers, payment of lost profits, or, when it has been sought, injunctive relief.
In addition, in the future, we may need to commence litigation or other legal proceedings in order to:
| · | assert claims of infringement of our intellectual property; |
| · | protect our trade secrets or know-how; or |
| · | determine the enforceability, scope and validity of the propriety rights of others. |
If we have to initiate litigation in order to protect our intellectual property, our operating expenses may increase which could negatively impact our operating results. Our failure to effectively protect our intellectual property could harm our business.
If infringement claims are made against us or our products are found to infringe a third parties’ patent or intellectual property, we or one of our indemnified customers may have to seek a license to the third parties’ patent or other intellectual property rights. However, we may not be able to obtain licenses at all or on terms acceptable to us particularly from our competitors. If we or one of our indemnified customers is unable to obtain a license from a third party for technology that we use or that is used in one of our products, we could be subject to substantial liabilities or have to suspend or discontinue the manufacture and sale of one or more of our products. We may also have to make royalty or other payments, or cross license our technology. If these arrangements are not concluded on commercially reasonable terms, our business could be negatively impacted. Furthermore, the indemnification of a customer may increase our operating expenses which could negatively impact our operating results.
Our ability to compete will be harmed if we are unable to adequately protect our intellectual property.
We rely primarily on a combination of patents, trademarks, trade secrets, employee and third-party nondisclosure agreements, and licensing arrangements to protect our intellectual property in the United States and internationally. We have numerous patents issued, allowed and pending in the United States and in foreign countries.jurisdictions. Our patents and pending patent applications primarily relate to our products and the technology used by us in connection with our products. We also rely on international treaties, and organizations and foreign laws to protect our intellectual property. The laws of certain foreign countries in which our products are or may be manufactured or sold, including various countries in Asia, may not protect our products or intellectual property rights to the same extent as the laws of the United States. This makes the possibility of piracy of our technology and products more likely. We continuously assess whether and where to seek formal protection for particular innovations and technologies based on such factors as:
| · | the commercial significance of our operations and our competitors’ operations in particular countries and regions; |
| · | the location in which our products are manufactured; |
| · | our strategic technology or product directions in different countries; and |
| · | the degree to which intellectual property laws exist and are meaningfully enforced in different jurisdictions. |
Our pending patent applications and any future applications may not be approved. In addition, any issued patents may not provide us with competitive advantages or may be challenged by third parties. The enforcement of patents by others may harm our ability to conduct our business. Others may independently develop substantially equivalent intellectual property or otherwise gain access to our trade secrets or intellectual property. Our failure to effectively protect our intellectual property could harm our business.
Government investigations and inquiries from regulatory agencies could lead to enforcement actions, fines or other penalties and could result in litigation against us.
In the past, we have been subject to government investigations and inquiries from regulatory agencies such as the DOJ and the SEC. We may be subject to government investigations and receive additional inquiries from regulatory agencies in the future, which may lead to enforcement actions, fines or other penalties.
In addition, litigation has often been brought against a company in connection with the announcement of a government investigation or inquiry from a regulatory agency. For example, following the announcement of the DOJ investigation, several putative civil complaints were filed against us. In addition, following our Audit Committee’s investigation and the SEC’s investigation concerning our historical stock option granting practices, ten derivative complaints were filed in state and federal court pertaining to allegations relating to stock option grants. Please refer to Note 12 of the Notes to Consolidated Financial Statements in Part IV, Item 15 of this Form 10-K for further information regarding these lawsuits. Such lawsuits could result in the diversion of management’s time and attention away from business operations, which could harm our business. In addition, the costs of defense and any damages resulting from litigation, a ruling against us, or a settlement of the litigation could adversely affect our cash flow and financial results.
We are subject to the risks of owning real property.
In fiscal year 2009, we used approximately $183.8 million of our cash to purchase real property in Santa Clara, California that includes approximately 25 acres of land and ten commercial buildings. We also own real property in China and India. We have licensed technology from third parties for incorporationlimited experience in our digital media processorsthe ownership and for defensive reasons,management of real property and expectare subject to continue to enter into such license agreements. These licenses may result in royalty payments to third parties, the cross licensingrisks of technology by us or payment of other consideration. If these arrangements are not concluded on commercially reasonable terms, our business could suffer.owning real property, including:
| · | the possibility of environmental contamination and the costs associated with fixing any environmental problems; |
| · | adverse changes in the value of these properties, due to interest rate changes, changes in the neighborhood in which the property is located, or other factors; |
| · | the risk of loss if we decide to sell and are not able to recover all capitalized costs; |
| · | increased cash commitments for the possible construction of a campus; |
| · | the possible need for structural improvements in order to comply with zoning, seismic and other legal or regulatory requirements; |
| · | increased operating expenses for the buildings or the property or both; |
| · | possible disputes with third parties, such as neighboring owners or others, related to the buildings or the property or both; and |
| · | the risk of financial loss in excess of amounts covered by insurance, or uninsured risks, such as the loss caused by damage to the buildings as a result of earthquakes, floods and or other natural disasters. |
Litigation Expensing employee equity compensation adversely affects our operating results and could also adversely affect our competitive position.
Since inception, we have used equity through our stock option plans and our employee stock purchase program as a fundamental component of our compensation packages. We believe that these programs directly motivate our employees and, through the use of vesting, encourage our employees to defend against alleged infringement of intellectual property rights or to enforce our intellectual property rights and the outcome of such litigation could result in substantial costs toremain with us.
In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123(R), or SFAS No. 123(R), Share-based Payment, which requires the measurement and recognition of compensation expense for all stock-based compensation payments. SFAS No. 123(R) requires that we record compensation expense for stock options and our employee stock purchase plan using the fair value of those awards. Stock-based compensation expense resulting from our compliance with SFAS No. 123(R), was $162.7 million, $133.4 million and $116.7 million for fiscal years 2009, 2008 and 2007, respectively, which negatively impacted our operating results. Additionally, on February 11, 2009, we announced that our Board of Directors approved a cash tender offer for certain employee stock options. The tender offer commenced on February 11, 2009 and expired at 12:00 midnight (Pacific Time) on March 11, 2009. As of January 25, 2009, there were approximately 33.1 million options eligible to participate in the tender offer. If all these options were tendered and accepted in the offer, the aggregate cash purchase price for these options would be approximately $92.0 million. As a result of the tender offer, we may incur a non-recurring charge of up to approximately $150.0 million if all of the unvested eligible options are tendered. This charge would be reflected in our financial results for the first fiscal quarter of fiscal year 2010 and represents stock-based compensation expense, consisting of the remaining unamortized stock-based compensation expense associated with the unvested portion of the eligible options tendered in the offer, stock-based compensation expense resulting from amounts paid in excess of the fair value of the underlying options, if any, plus associated payroll taxes and professional fees. We expect that asare currently tallying information on the number of issued hardwareoptions tendered under the offer to determine the actual aggregate cash to be paid in exchange for the cancellation of the eligible options and software patents increasesthe non-recurring charge to be incurred pertaining to the unvested eligible options that have been tendered. We believe that SFAS No. 123(R) will continue to negatively impact our operating results.
To the extent that SFAS No. 123(R) makes it more expensive to grant stock options or to continue to have an employee stock purchase program, we may decide to incur increased cash compensation costs. In addition, actions that we may take to reduce stock-based compensation expense that may be more severe than any actions our competitors may implement and may make it difficult to attract retain and motivate employees, which could adversely affect our competitive position as competition intensifies, the volume of intellectual property infringement claimswell as our business and lawsuits may increase.operating results.
We may be required to record a charge to earnings if our goodwill or amortizable intangible assets become involved in lawsuits or other legal proceedings alleging patent infringement or other intellectual property rights violations by us or by our customers that we have agreed to indemnify them for certain claims of infringement arising out of the sale of our products to these customers. An unfavorable ruling could include significant damages, invalidation of a patent or family of patents, indemnification of customers, payment of lost profits, or, when it has been sought, injunctive relief.
In addition, we may need to commence litigation or other legal proceedings in order to:
· | assert claims of infringement of our intellectual property; |
· | protect our trade secrets or know-how; or |
· | determine the enforceability, scope and validity of the propriety rights of others. |
If we have to initiate litigation in order to protect our intellectual property, our operating expenses may increaseimpaired, which could negatively impact our operating results.
Under accounting principles generally accepted in the United States, we review our amortizable intangible assets and goodwill for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. Goodwill is tested for impairment at least annually. The carrying value of our goodwill or amortizable assets may not be recoverable due to factors such as a decline in stock price and market capitalization, reduced estimates of future cash flows and slower growth rates in our industry or in any of our business units. For example, during the twelve months ended January 25, 2009, our market capitalization declined from approximately $14 billion to approximately $4 billion. Estimates of future cash flows are based on an updated long-term financial outlook of our operations. However, actual performance in the near-term or long-term could be materially different from these forecasts, which could impact future estimates. For example, if one of our business units does not meet its near-term and longer-term forecasts, the goodwill assigned to the business unit could be impaired. We may be required to record a charge to earnings in our financial statements during a period in which an impairment of our goodwill or amortizable intangible assets is determined to exist, which may negatively impact our results of operations.
Our failurestock price continues to effectively protectbe volatile and investors may suffer losses.
Our stock has at times experienced substantial price volatility as a result of variations between our intellectual propertyactual and anticipated financial results, announcements by us and our competitors, or uncertainty about current global economic conditions. The stock market as a whole also has experienced extreme price and volume fluctuations that have affected the market price of many technology companies in ways that may have been unrelated to these companies’ operating performance.
In the past, securities class action litigation has often been brought against a company following periods of volatility in the market price of its securities. For example, following our announcement in July 2008 that we would take a charge against cost of revenue to cover anticipated costs and expenses arising from a weak die/packaging material set in certain versions of our previous generation MCP and GPU products and that we were revising financial guidance for our second fiscal quarter of 2009, the trading price of our common stock declined. In September, October and November 2008, several putative class action lawsuits were filed against us relating to this announcement. Please refer to Note 12 of the Notes to Consolidated Financial Statements in Part IV, Item 15 of this Form 10-K for further information regarding these lawsuits. Due to changes in the potential volatility of our stock price, we may be the target of securities litigation in the future. Such lawsuits could result in the diversion of management’s time and attention away from business operations, which could harm our business.
If infringement claims are made In addition, the costs of defense and any damages resulting from litigation, a ruling against us, or we are found to infringe a third parties’ patent, we may seek licenses undersettlement of the third parties’ patents or other intellectual property rights. In addition, an indemnified customer may be required to obtain a license to a third parties’ patents or intellectual property. However, licenses may not be offered to us at all or on terms acceptable to us, particularly by competitors. If we fail to obtain a license from a third party for technology that we use or that is used in one oflitigation could adversely affect our products used by an indemnified customer, we could be subject to substantial liabilities or have to suspend or discontinue the manufacturecash flow and sale of one or more of our products either of which could reduce our revenue and harm our business. Furthermore, the indemnification of a customer may increase our operating expenses which could negatively impact our operatingfinancial results.
Our operating results may be adversely affected if we are subject to unexpected tax liabilities.
We are subject to taxation by a number of taxing authorities both in the United States and throughout the world. Tax rates vary among the jurisdictions in which we operate. Significant judgment is required in determining our provision for our income taxes as there are many transactions and calculations where the ultimate tax determination is uncertain. Although we believe our tax estimates are reasonable, any of the below could cause our effective tax rate to be materially different than that which is reflected in historical income tax provisions and accruals:
| · | the jurisdictions in which profits are determined to be earned and taxed; |
| · | adjustments to estimated taxes upon finalization of various tax returns; |
| · | changes in available tax credits; |
| · | changes in share-based compensation expense; |
| · | changes in tax laws, the interpretation of tax laws either in the United States or abroad or the issuance of new interpretative accounting guidance related to uncertain transactions and calculations where the tax treatment was previously uncertain; and |
| · | the resolution of issues arising from tax audits with various tax authorities. |
Should additional taxes be assessed as a result of any of the above, our operating results could be adversely affected. In addition, our future effective tax rate could be adversely affected by changes in the mix of earnings in countries with differing statutory tax rates, changes in tax laws or changes in the interpretation of tax laws.
Our failure to comply with any applicable environmental regulations could result in a range of consequences, including fines, suspension of production, excess inventory, sales limitations, and criminal and civil liabilities.
We are subject to various state, federal and international laws and regulations governing the environment, including restricting the presence of certain substances in electronic products and making producers of those products financially responsible for the collection, treatment, recycling and disposal of those products. For example, we are subject to the European Union Directive on Restriction of Hazardous Substances Directive, or RoHS Directive, that restricts the use of a number of substances, including lead, and other hazardous substances in electrical and electronic equipment in the market in the European Union. We could face significant costs and liabilities in connection with the European Union Directive on Waste Electrical and Electronic Equipment, or WEEE. The WEEE directs members of the European Union to enact laws, regulations, and administrative provisions to ensure that producers of electric and electronic equipment are financially responsible for the collection, recycling, treatment and environmentally responsible disposal of certain products sold into the market after August 15, 2005.
It is possible that unanticipated supply shortages, delays or excess non-compliant inventory may occur as a result of the RoHS Directive, WEEE, and other domestic or international environmental regulations. Failure to comply with any applicable environmental regulations could result in a range of consequences including costs, fines, suspension of production, excess inventory, sales limitations, criminal and civil liabilities and could impact our ability to conduct business in the countries or states that have adopted these types of regulations.
While we believe that we currently have adequate internal control over financial reporting, if we are exposed to risks from legislation requiring companies to evaluate those internal controls.or our independent registered public accounting firm determines that we do not, our reputation may be adversely affected and our stock price may decline.
Section 404 of the Sarbanes-Oxley Act of 2002 requires our management to report on, and our independent registered public accounting firm to attest to,audit, the effectiveness of our internal control structure and procedures for financial reporting. We have an ongoing program to perform the system and process evaluation and testing necessary to comply with these requirements. However, the manner in which companies and their independent public accounting firms apply these requirements and testingtest companies’ internal controls remains subject to some uncertainty.judgment. To date, we have incurred, and we expect to continue to incur, increased expense and to devote additional management resources to Section 404 compliance. Despite our efforts, if we identify a material weakness in our internal controls, there can be no assurance that we will be able to remediate suchthat material weakness identified in a timely manner, or that we will be able to maintain all of the controls necessary to determine that our internal control over financial reporting is effective. In the event that our chief executive officer, chief financial officer or our independent registered public accounting firm determine that our internal control over financial reporting is not effective as defined under Section 404, investor perceptions of us may be adversely affected and could cause a decline in the market price of our stock.
Changes in financial accounting standards or interpretations of existing standards could affect our reported results of operations.
We prepare our consolidated financial statements in conformity with United States generally accepted accounting principles.principles in the United States. These principles are constantly subject to review and interpretation by the SEC and various bodies formed to interpret and create appropriate accounting principles. A change in these principles can have a significant effect on our reported results and may even retroactively affect previously reported transactions.
Risks Related to our Common Stock
Provisions in our certificate of incorporation, our bylaws and our agreement with Microsoft could delay or prevent a change in control.
Our certificate of incorporation and bylaws contain provisions that could make it more difficult for a third party to acquire a majority of our outstanding voting stock. These provisions include the following:
| · | the ability of theour Board to create and issue preferred stock without prior stockholder approval; |
| · | the prohibition of stockholder action by written consent; |
| · | a classified Board; and |
| · | advance notice requirements for director nominations and stockholder proposals. |
On March 5, 2000, we entered into an agreement with Microsoft in which we agreed to develop and sell graphics chips and to license certain technology to Microsoft and its licensees for use in the Xbox. Under the agreement, if an individual or corporation makes an offer to purchase shares equal to or greater than 30% of the outstanding shares of our common stock, Microsoft may have first and last rights of refusal to purchase the stock. The Microsoft provision and the other factors listed above could also delay or prevent a change in control of NVIDIA.
None.
Our headquarters complex is located on a leased sitein Santa Clara, California. During fiscal year 2009, we purchased property that includes approximately 25 acres of land and ten commercial buildings in Santa Clara, California for approximately $194.8 million of which we occupy four buildings, sublease two buildings, and four are unoccupied. Our original plans for the purchased property included constructing a new campus on the site. We are currently re-evaluating those plans. Additionally, our corporate campus is comprised of six buildings. Additionally, we lease threeseven other leased buildings in Santa Clara with four used primarily as office buildings, one used as warehouse space, and the other two used primarily as lab space. We also entered into a lease for data center space in Santa Clara in fiscal year 2009.
Outside of Santa Clara, we lease space in Marina Del Rey, San Jose and San Francisco, California; Austin and Houston, Texas; Berkeley, California; Beaverton and Portland, Oregon; Bedford, Massachusetts; Bellevue and Kirkland,Bothell, Washington; Madison, Alabama; Charlotte and Durham, North Carolina; Greenville, South Carolina; Salt Lake City, Utah; St. Louis, Missouri; and Fort Collins and Boulder, Colorado. These facilities are used as design centers and/or sales and administrative offices.
Outside of the United States, we lease space in Taipei and Neihu inHsin Chu City, Taiwan; Tokyo, Japan; Seoul, Korea; Beijing Shanghai, and Shenzhen,Shanghai, China; Wanchai, and Shatin, New Territories, Hong Kong; Bangalore, Hyderabad and Pune,Mumbai, India; Paris, France; Moscow, Russia; MunichBerlin and Wurselen,Munich, Germany; Helsinki, FinlandFinland; Theale and Theale, England.London, United Kingdom; Melbourne, Australia; Singapore; Uppsala, Sweden; and Zurich, Switzerland. These facilities are used primarily to support our customers and operations and as sales and administrative offices. The officeWe also lease spaces in Wurselen, Germany,Germany; Shenzhen, ChinaChina; Neihu, Taiwan; and Bangalore and Pune, and Hyderabad, India, which are used primarily as design centers. Additionally, as a result of our acquisition of PortalPlayer, we acquired a building under constructionown buildings in Hyderabad, India and Shanghai, China which will beare being used primarily as a design center.research and development centers.
We believe that we currently have sufficient facilities to conduct our operations for the next twelve months, although we expect to lease additional facilities throughout the world as our business requires. For additional information regarding obligations under leases, see Note 12 of the Notes to the Consolidated Financial Statements in Part IV, Item 15 of this Form 10-K under the subheading “Lease Obligations,” which information is hereby incorporated by reference.
3dfx
On December 15, 2000, NVIDIA Corporation and one of our indirect subsidiaries entered into an agreementAsset Purchase Agreement, or APA, to purchase certain graphics chip assets from 3dfx Interactive, Inc., or 3dfx, which3dfx. The transaction closed on April 18, 2001. That acquisition, and 3dfx's October 2002 bankruptcy filing, led to four lawsuits against NVIDIA: two brought by 3dfx's former landlords, one by 3dfx's bankruptcy trustee and the fourth by a committee of 3dfx's equity security holders in the bankruptcy estate.
Landlord Lawsuits
In May 2002, we were served with a California state court complaint filed by the landlord of 3dfx’s San Jose, California commercial real estate lease, CarrAmerica.Carlyle Fortran Trust, or Carlyle. In December 2002, we were served with a California state court complaint filed by the landlord of 3dfx’s Austin, Texas commercial real estate lease, Carlyle Fortran Trust.CarrAmerica Realty Corporation, or CarrAmerica. The landlords’ complaintslandlords both asserted claims for, among other things, interference with contract, successor liability and fraudulent transfer and seektransfer. The landlords sought to recover among other things, amounts owed on their leases with 3dfxdamages in the aggregate amount of approximately $15 million. In October 2002,million, representing amounts then owed on the 3dfx filed for chapter 11 bankruptcy protection in the United States Bankruptcy Court for the Northern District of California.leases. The landlords’ actionscases were subsequentlylater removed to the United States Bankruptcy Court for the Northern District of California when 3dfx filed its bankruptcy petition and consolidated for pretrial purposes of discovery, with a complaint filedan action brought by the Trustee in the 3dfx bankruptcy case. Upon motion by NVIDIA intrustee.
In 2005, the U.S. District Court for the Northern District of California withdrew the reference to the Bankruptcy Court and the landlord actions were removed to the United States District Court for the Northern District of California. Onlandlords’ actions, and on November 10, 2005, the District Court granted our motion to dismiss theboth landlords’ respective amended complaints and allowed the landlords to have until February 4, 2006 to amend their complaints. The landlords re-filed claims against NVIDIAfiled amended complaints in early February 2006, and NVIDIA again filed motions requesting the District Court to dismiss all suchthose claims. The District Court took both motions under submission. On September 29, 2006, the courtDistrict Court dismissed the CarrAmerica action in its entirety and without leave to amend. The court found, among other things, that CarrAmerica lacks standing to bring the lawsuit and that such standing belongs exclusively to the bankruptcy trustee. On October 27, 2006, CarrAmerica filed a notice of appeal from that order. On December 15, 2006, the District Court also dismissed the Carlyle action in its entirety. Both landlords filed timely notices of appeal from those orders.
On July 17, 2008, the United States Court of Appeals for the Ninth Circuit held oral argument on the landlords' appeals. On November 25, 2008, the Court of Appeals issued its opinion affirming the dismissal of Carlyle’s complaint in its entirety, findingentirety. The Court of Appeals also affirmed the dismissal of most of CarrAmerica’s complaint, but reversed the District Court’s dismissal of CarrAmerica’s claims for interference with contractual relations and fraud. On December 8, 2008, Carlyle filed a Request for Rehearing En Banc, which CarrAmerica joined. That same day, Carlyle also filed a Motion for Clarification of the Court’s Opinion. On January 22, 2009, the Court of Appeals denied the Request for Rehearing En Banc, but clarified its opinion affirming dismissal of the claims by stating that Carlyle lackedCarrAmerica had standing to pursue someclaims for interference with contractual relations, fraud, conspiracy and tort of another, and remanding Carlyle’s case with instructions that the District Court evaluate whether the Trustee had abandoned any claims, which Carlyle might have standing to pursue.
The District Court held a status conference in the CarrAmerica and Carlyle cases on March 9, 2009. That same day, 3dfx’s bankruptcy Trustee filed in the bankruptcy court a Notice of Trustee’s Intention to Compromise Controversy with Carlyle Fortran Trust. According to that Notice, the Trustee would abandon any claims it has against us for intentional interference with contract, negligent interference with prospective economic advantage, aiding and abetting breach of fiduciary duty, declaratory relief, unfair business practices and tort of another, in exchange for which Carlyle will withdraw irrevocably its claims,Proof of Claim against the 3dfx bankruptcy estate and that certain other claims were substantively unmeritorious. NVIDIA has filed motionswaive any further right of distribution from the estate. In light of the Trustee’s notice, the District Court ordered the parties to recover its litigation costs and attorneys fees against bothseek a hearing on the Notice on or before April 24, 2009, ordered Carlyle and Carr. Those motions are currently scheduledCarrAmerica to file amended complaints by May 10, 2009, and set a further Case Management Conference for hearing in early April, 2007.May 18, 2009. We continue to believe that there is no merit to Carlyle or CarrAmerica’s remaining claims.
Trustee Lawsuit
In March 2003, we were served with a complaint filed by the Trustee appointed by the Bankruptcy Court to represent the interests of the 3dfx3dfx’s bankruptcy estate.estate served his complaint on NVIDIA. The Trustee’s complaint asserts claims for, among other things, successor liability and fraudulent transfer and seeks additional payments from us. The Trustee's fraudulent transfer theory alleged that NVIDIA had failed to pay reasonably equivalent value for 3dfx's assets, and sought recovery of the difference between the $70 million paid and the alleged fair value, which the Trustee estimated to exceed $50 million. The Trustee's successor liability theory alleged NVIDIA was effectively 3dfx's legal successor and was therefore responsible for all of 3dfx's unpaid liabilities. This action was consolidated for pretrial purposes with the landlord cases, as noted above.
On October 13, 2005, the Bankruptcy Court held a hearing onheard the Trustee’s motion for summary adjudication. Onadjudication, and on December 23, 2005, the Court issued its ruling denying the Trustee’s Motion for Summary Adjudicationdenied that motion in all material respects and holdingheld that NVIDIA is prevented from disputingmay not dispute that the value of the 3dfx transaction to NVIDIA was less than $108.0$108 million. The Bankruptcy Court expressly denied the Trustee’s request to find that the value of the 3dfx assets conveyed to NVIDIA werewas at least $108.0$108 million.
In early November 2005, after manyseveral months of mediation, NVIDIA and the Official Committee of Unsecured Creditors, or the Creditors’ Committee, reachedagreed to a Plan of Liquidation of 3dfx, which included a conditional settlement of the Trustee’s claims against NVIDIA.us. This conditional settlement presented as the centerpiece of a proposed Plan of Liquidation in the bankruptcy case, was subject to a confirmation process through a vote of creditors and the review and approval of the Bankruptcy Court after notice and hearing.Court. The Trustee advised that he intended to object to theconditional settlement which would have called for a payment by NVIDIA of approximately $30.6 million to the 3dfx estate. Under the settlement, $5.6 million related to various administrative expenses and Trustee fees, and $25.0 million related to the satisfaction of debts and liabilities owed to the general unsecured creditors of 3dfx. Accordingly, during the three month period ended October 30, 2005, we recorded $5.6 million as a charge to settlement costs and $25.0 million as additional purchase price for 3dfx.
However, The Trustee advised that he intended to object to the settlement. The conditional settlement never progressed substantially through the confirmation process.
On December 21, 2005,2006, the Bankruptcy Court determined that it would schedulescheduled a trial offor one portion of the Trustee’s case against NVIDIA. On January 2, 2007, NVIDIA exercised its right to terminateterminated the settlement agreement on grounds that the bankruptcy courtBankruptcy Court had failed to proceed toward confirmation of the Creditors’ Committee’s plan. A non-jury trial began on March 21, 2007 on valuation issues in the Trustee's constructive fraudulent transfer claims against NVIDIA. Specifically, the Bankruptcy Court tried four questions: (1) what did 3dfx transfer to NVIDIA in the APA?; (2) of what was transferred, what qualifies as "property" subject to the Bankruptcy Court's avoidance powers under the Uniform Fraudulent Transfer Act and relevant bankruptcy code provisions?; (3) what is the fair market value of the "property" identified in answer to question (2)?; and (4) was the $70 million that NVIDIA paid "reasonably equivalent" to the fair market value of that property? The parties completed post-trial briefing on May 25, 2007.
In addition, while On April 30, 2008, the Bankruptcy Court issued its Memorandum Decision After Trial, in which it provided a detailed summary of the trial proceedings and the parties' contentions and evidence and concluded that "the creditors of 3dfx were not injured by the Transaction." This decision did not entirely dispose of the Trustee's action, however, as the Trustee's claims for successor liability and intentional fraudulent conveyance were still pending. On June 19, 2008, NVIDIA filed a motion for summary judgment to convert the Memorandum Decision After Trial to a final judgment. That motion was granted in its entirety and judgment was entered in NVIDIA’s favor on September 11, 2008. The Trustee filed a Notice of Appeal from that judgment on September 22, 2008, and on September 25, 2008, NVIDIA exercised its election to have the appeal heard by the United States District Court, where the appeal is pending.
While the conditional settlement agreement was awaitingreached in November 2005 never progressed through the confirmation process, the Bankruptcy Court, over objectionTrustee’s case still remains pending appeal. As such, we have not reversed the accrual of $30.6 million - $5.6 million as a charge to settlement costs and $25.0 million as additional purchase price for 3dfx – that we recorded during the three months ended October 30, 2005, pending resolution of the Creditors’ Committee and NVIDIA, ordered the discovery portionappeal of the Trustee’s litigation to proceed. The expert discovery was completed, butcase. We do not believe the Bankruptcy Court also ruledresolution of this matter will have a material impact on a Trustee discovery motion allowing additional discoveryour results of NVIDIA. Because that order would have required NVIDIA to disclose privileged attorney-client communications, NVIDIA asked the District Court to review that order and to stay its execution while the District Court’s review is pending. The District Court did issue the requested stay order on August 3, 2006. Oral argument on that matter was held on November 15, 2006, and the District Court reversed the Bankruptcy Court’s order by order of its own dated December 15, 2006. The District Court permitted certain limited additional discovery, but concluded that on the record before it, there was no basis to set aside the attorney-client privilege.operations or financial position.
Following The Equity Committee Lawsuit
On December 8, 2005, the Trustee’s filing ofTrustee filed a Form 8-K on behalf of 3dfx, in which the Trustee discloseddisclosing the terms of the proposedconditional settlement agreement between NVIDIA and the Creditor’s Committee,Committee. Thereafter, certain 3dfx shareholders of 3dfx filed a petition with the Bankruptcy Court to appoint an official committee to represent the claimed interests of 3dfx shareholders. ThatThe court granted that petition was granted and appointed an Equity HoldersSecurities Holders’ Committee, was appointed. Since that appointment,or the Equity HoldersCommittee. The Equity Committee hasthereafter sought and obtained an order granting it standing to bring suit against NVIDIA, for the benefit of the bankruptcy estate, to compel NVIDIA to pay the stock consideration then unpaid from the APA, and filed aits own competing plan of reorganization/liquidation. The Equity HoldersCommittee’s plan assumes that 3dfx can raise additional equity capital that would be used to retire all of 3dfx’s debts. Upondebts, and thus to trigger NVIDIA's obligation to pay six million shares of stock consideration specified in the payment ofAPA. NVIDIA contends, among other things, that debt, the Equity Holders Committee contendssuch a commitment is not sufficient and that NVIDIA would be obligedits obligation to pay the stock consideration providedhad long before been extinguished. On May 1, 2006, the Equity Committee filed its lawsuit for in the asset purchase agreement. By virtue of stock splits since the execution of the asset purchase agreement,declaratory relief to compel NVIDIA to pay the stock consideration would now total four million shares of our common stock. Theconsideration. In addition, the Equity Holders’ Committee filed a motion withseeking Bankruptcy Court approval of investor protections for Harbinger Capital Partners Master Fund I, Ltd., an equity investment fund that conditionally agreed to pay no more than $51.5 million for preferred stock in 3dfx. The hearing on that motion was held on January 18, 2007, and the Bankruptcy Court for an order giving it standing to bring that lawsuit to enforceapproved the Asset Purchase Agreement. Over our objection,proposed protections.
After the Bankruptcy Court granted thatdenied our motion to dismiss on May 1,September 6, 2006, and the Equity Holders’ Committee filed its Complaint for Declaratory Relief against NVIDIA that same day. NVIDIA moved to dismiss the Complaint for Declaratory Relief, and the Bankruptcy court granted that motion with leave to amend. The Equity Committee thereafteragain amended its complaint, and NVIDIA moved to dismiss that amended complaint as well. At the hearing onOn December 21, 2006, the Bankruptcy Court granted the motion as to one of the Equity Holders’ Committee’s claims, and denied it as to the others. However, the Bankruptcy Court also ruled that NVIDIA would only be required to answer the first three causes of action by which the Equity Holders’ Committee seeks a determinationdeterminations that (1) the Asset Purchase AgreementAPA was not terminated before 3dfx filed for bankruptcy protection, that(2) the 3dfx bankruptcy estate still holds some rights in the Asset Purchase Agreement,APA, and that(3) the agreementAPA is capable of being assumed by the bankruptcy estate. In addition,
Because of the trial of the Trustee's fraudulent transfer claims against NVIDIA, the Equity HoldersCommittee's lawsuit did not progress substantially in 2007. On July 31, 2008, the Equity Committee filed a motion seeking Bankruptcy court approvalfor summary judgment on its first three causes of investor protectionsaction. On September 15, 2008, NVIDIA filed a cross-motion for Harbinger Capital Partners Master Fund I, Ltd., an equity investment firm that has conditionally agreed to pay no more than $51.5 million for preferred stock in 3dfx. Thesummary judgment. On October 24, 2008, the Court held a hearing on the parties’ cross-motions for summary judgment. On January 6, 2009, the Bankruptcy Court issued a Memorandum Decision granting NVIDIA’s motion and denying the Equity Committee’s motion, and entered an Order to that motion was heldeffect on January 30, 2009. On February 27, 2009, the Bankruptcy Court entered judgment in favor of NVIDIA. The Equity Committee has waived its right to appeal by stipulation entered on February 18, 2007,2009, and the court approved the proposed protections. Beginning on March 21, 2007, NVIDIA and the Trustee are scheduled to try the question of the value of the assets 3dfx conveyed to NVIDIA and, in particular, whether the price NVIDIA paid for those assets was reasonably equivalent to the value of the assets 3dfx sold to NVIDIA.judgment is now final.
Lawsuits Proceedings, SEC inquiry and lawsuits related to our historical stock option granting practices and SEC inquiry
In June 2006, the Audit Committee of the Board of NVIDIA or the ("Audit Committee,Committee"), began a review of our stock option practices based on the results of an internal review voluntarily undertaken by management. The Audit Committee, with the assistance of outside legal counsel, completed its review on November 13, 2006 when the Audit Committee reported its findings to our full Board. The review covered option grants to all employees, directors and consultants for all grant dates during the period from our initial public offering in January 1999 through June 2006. Based on the findings of the Audit Committee and our internal review, we identified a number of occasions on which we used an incorrect measurement date for financial accounting and reporting purposes.
We voluntarily contacted the SEC regarding the Audit Committee’s review and, as of the date of the filing of this Form 10-K,review. In late August 2006, the SEC is continuing theinitiated an inquiry ofrelated to our historical stock option grant practices it began in late August 2006.practices. In October 2006, we met with the SEC and provided it with a review of the status of the Audit Committee’s review and inreview. In November 2006, we voluntarily provided the SEC with furtheradditional documents. We continuecontinued to cooperate with the SEC inthroughout its inquiry. On October 26, 2007, the SEC formally notified us that the SEC's investigation concerning our historical stock option granting practices had been terminated and that no enforcement action was recommended.
Concurrently with our internal review and the SEC’s inquiry, since September 29, 2006, ten derivative cases have been filed in state and federal courts asserting claims concerning errors related to our historical stock option granting practices and associated accounting for stock-based compensation expense. These complaints have been filed in various courts, including the California Superior Court, Santa Clara County, the United States District Court for the Northern District of California, and the Court of Chancery of the State of Delaware in and for New Castle County. Plaintiffs filed a consolidated complaint in the United States District Court for the Northern District of California on February 28, 2007. The California Superior Court cases have beenwere subsequently consolidated and plaintiffs are scheduled to file a consolidated complaint on or before March 22, 2007.as were the cases pending in the Northern District of California. All of the cases purport to be brought derivatively on behalf of NVIDIA against members of our Board and several of our current and former officers and directors. AllPlaintiffs in these actions allege in substantially similar fashion claims for, among other things, breach of fiduciary duty, unjust enrichment, insider selling, abuse of control, gross mismanagement, waste, and constructive fraud, andfraud. The Northern District of California action also alleges violations of federal provisions, including Sections 10(b) and 14(a) of the Securities Exchange Act of 1934, or the Exchange Act.1934. The plaintiffs seek to recover for NVIDIA, among other things, damages in an unspecified amount, rescission, punitive damages, treble damages for insider selling, and fees and costs. Plaintiffs also seek an accounting, a constructive trust and other equitable relief.
We intend On August 5, 2007, our Board authorized the formation of a Special Litigation Committee to takeinvestigate, evaluate, and make a determination as to how NVIDIA should proceed with respect to the claims and allegations asserted in the underlying derivative cases brought on behalf of NVIDIA. The Special Litigation Committee has made substantial progress in completing its work, but has not yet issued a report.
Between June 2007 and September 2008 the parties to the actions engaged in settlement discussions, including four mediation sessions before the Honorable Edward Infante (Ret.). On September 22, 2008, we disclosed that we had entered into Memoranda of Understanding regarding the settlement of all appropriate actionderivative actions concerning our historical stock option granting practices. On November 10, 2008, the definitive settlement agreements were concurrently filed in response to these complaints.
Opti Incorporated
On October 19, 2004, Opti Incorporated, or Opti, filed a complaint for patent infringement against NVIDIA inthe Chancery Court of Delaware and the United States District Court for the EasternNorthern District of Texas. In its complaint, Opti asserted that unspecifiedCalifornia and are subject to approval by both such courts. The settlement agreements do not contain any admission of wrongdoing or fault on the part of NVIDIA, chipsets infringe five United States patents heldour board of directors or executive officers. The terms of the settlement agreements include, among other things, the agreement by Opti. Opti sought unspecified damages forthe board of directors to continue and to implement certain corporate governance changes; acknowledgement of the prior amendment of certain options through re-pricings and limitations of the relevant exercise periods; an agreement by Jen-Hsun Huang, our alleged conduct,president and chief executive officer, to amend additional options to increase the aggregate exercise price of such options by $3.5 million or to cancel options with an intrinsic value of $3.5 million; an $8.0 million cash payment by our insurance carrier to NVIDIA; and an agreement to not object to attorneys’ fees to be paid by NVIDIA to plaintiffs’ counsel of no more than $7.25 million, if approved by the courts. On January 24, 2009, a Notice of Pendency and triple damages for alleged willful infringement by NVIDIA. In April 2006,Settlement of Shareholder Derivative Actions was mailed to shareholders of record and posted on www.nvidia.com. On March 11, 2009, a final settlement hearing was held in the DistrictDelaware Chancery Court issuedand, on the same date, the Court entered a Markman ruling adopting Opti's proposed construction on 13 ofFinal Order and Judgment, which approved the 15 terms at issuerequested attorneys' fees and Opti dropped fromdismissed the lawsuit two of the five United States patents that Opti alleged NVIDIA infringes, and elected to pursue the three remaining patents at trial.
In August 2006, Opti and NVIDIA settled this litigation. Under that settlement, NVIDIA was obligated to pay to Opti $11.0 million dollars for past and present licenses to the patents in suit and NVIDIA agreed to make additional quarterly payments to Opti should NVIDIA use certain patented technology after January 31, 2007. The case has now been dismissedDelaware action with prejudice. The agreements with Opti callfinal approval hearing in the Northern District of California is scheduled for us to pay $11.0 million in exchange for Opti’s dismissal of its lawsuit against us and for certain patent license rights. Of this $11.0 million, we recorded $8.0 million as a patent-related intangible asset and $3.0 million as a charge to cost of revenue.March 17, 2009.
Department of Justice Subpoena and Investigation, and Civil Cases
On November 29, 2006, we received a subpoena from the San Francisco Office of the Antitrust Division of the United States Department of Justice, or DOJ, in connection with the DOJ's investigation into potential antitrust violations related to graphics processing unitsGPUs and cards. On October 10, 2008, the DOJ formally notified us that the DOJ investigation has been closed. No specific allegations have beenwere made against us. We plan to cooperate withNVIDIA during the DOJ in its investigation.
As of March 14, 2007, 42January 25, 2009, over 50 civil complaints have been filed against us. The majority are pendingof the complaints were filed in the Northern District of California, a number are pendingseveral were filed in the Central District of California, and other cases are pendingwere filed in several other Federal district courts. AlthoughOn April 18, 2007, the Judicial Panel on Multidistrict Litigation transferred the actions currently pending outside of the Northern District of California to the Northern District of California for coordination of pretrial proceedings before the Honorable William H. Alsup. By agreement of the parties, Judge Alsup will retain jurisdiction over the consolidated cases through trial or other resolution.
In the consolidated proceedings, two groups of plaintiffs (one putatively representing all direct purchasers of GPUs and the other putatively representing all indirect purchasers) filed consolidated, amended class-action complaints. These complaints differ, they generally purport to assert federal and state antitrust claims based on alleged price fixing, market allocation, and other alleged anti-competitive agreements between us and ATI Technologies, ULC., or ATI, and Advanced Micro Devices, Inc., or AMD, as a result of its acquisition of ATI Technologies, Inc., or ATI. Many of the casesThe indirect purchasers’ consolidated amended complaint also assertasserts a variety of state law antitrust, unfair competition orand consumer protection claims on the same allegations, and some cases assert unjust enrichment or otheras well as a common law claims.claim for unjust enrichment.
Plaintiffs filed their first consolidated complaints on June 14, 2007. On July 16, 2007, we moved to dismiss those complaints. The motions to dismiss were heard by Judge Alsup on September 20, 2007. The court subsequently granted and denied the motions in part, and gave the plaintiffs leave to move to amend the complaints. On November 7, 2007, the court granted plaintiffs’ motion to file amended complaints, are putativeordered defendants to answer the complaints, lifted a previously entered stay on discovery, and set a trial date for January 12, 2009. Plaintiffs filed motions for class actions alleging classescertification on April 24, 2008. We filed oppositions to the motions on May 20, 2008. On July 18, 2008, the court ruled on Plaintiffs’ class certification motions. The court denied class certification for the proposed class of indirect purchasers. The court granted in part class certification for the direct purchasers but limited the direct purchaser class to individual purchasers that acquired graphics processing cards products directly from NVIDIA or ATI from their websites between December 4, 2002 and November 7, 2007.
On September 16, 2008, we executed a settlement agreement, or the Agreement, in connection with the claims of the certified class of direct and/purchaser plaintiffs approved by the court. Pursuant to the Agreement, NVIDIA has paid $850,000 into a $1.7 million fund to be made available for payments to the certified class. We are not obligated under the Agreement to pay plaintiffs’ attorneys’ fees, costs, or make any other payments in connection with the settlement other than the payment of $850,000. The Agreement is subject to court approval and, if approved, would dispose of all claims and appeals raised by the certified class in the complaints against NVIDIA. A final settlement approval hearing is scheduled for March 26, 2009. Because the Court certified a class consisting only of a narrow group of direct purchasers, the Agreement does not resolve any claims that other direct purchasers may assert. In addition, on September 9, 2008, we reached a settlement agreement with the remaining individual indirect purchaser plaintiffs pursuant to which NVIDIA paid $112,500 in exchange for a dismissal of all claims and appeals related to the complaints raised by the individual indirect purchaser plaintiffs. This settlement is not subject to the approval of the court. Pursuant to the settlement, the individual indirect purchaser plaintiffs in the complaints have dismissed their claims and withdrawn their appeal of the class certification ruling. Because the Court did not certify a class of indirect purchasers, this settlement agreement resolves only the claims of our graphic processing unitsthose indirect purchasers that were named in the various actions.
Rambus Corporation
On July 10, 2008, Rambus Corporation, or Rambus, filed suit against NVIDIA Corporation, asserting patent infringement of 17 patents claimed to be owned by Rambus. Rambus seeks damages, enhanced damages and cards.injunctive relief. The plaintiffslawsuit was filed in a few of the Northern District of California in San Jose, California. On July 11, 2008, NVIDIA filed suit against Rambus in the Middle District of North Carolina asserting numerous claims, including antitrust and other claims. NVIDIA seeks damages, enhanced damages and injunctive relief. Rambus has since dropped two patents from its lawsuit in the Northern District of California. The two cases have recently been consolidated into a single action in the Northern District of California. A case management conference in the case pending in the Northern District of California is scheduled for March 30, 2009. On November 6, 2008, Rambus filed a complaint alleging a violation of 19 U.S.C. Section 1337 based on a claim of patent infringement against NVIDIA and 14 other respondents with the U.S. International Trade Commission, or ITC. The complaint seeks an exclusion order barring the importation of products that allegedly infringe nine Rambus patents. The ITC has instituted the investigation. NVIDIA intends to pursue its offensive and defensive cases vigorously.
Product Defect Litigation and Securities Cases
In September, October and November 2008, several putative consumer class action lawsuits were filed against us, asserting various claims arising from a weak die/packaging material set in certain versions of our previous generation MCP and GPU products used in notebook systems. Most of the lawsuits were filed in Federal Court in the Northern District of California, but three were filed in state court in California, in Federal Court in New York, and in Federal Court in Texas. Those three actions have since been removed or transferred to the United States District Court for the Northern District of California, San Jose Division, where all of the actions now are currently pending. The various lawsuits are titled Nakash v. NVIDIA Corp., Feinstein v. NVIDIA Corp., Inicom Networks, Inc. v. NVIDIA Corp. and Dell, Inc. and Hewlett Packard, Olivos v. NVIDIA Corp., Dell, Inc. and Hewlett Packard, Sielicki v. NVIDIA Corp. and Dell, Inc., Cormier v. NVIDIA Corp., National Business Officers Association, Inc. v. NVIDIA Corp., and West v. NVIDIA Corp. The First Amended Complaint was filed on October 27, 2008, which no longer asserted claims against Dell, Inc. The various complaints assert claims for, among other things, breach of warranty, violations of the Consumer Legal Remedies Act, Business & Professions Code sections 17200 and 17500 and other consumer protection statutes under the laws of various jurisdictions, unjust enrichment, and strict liability.
The District Court has entered orders deeming all of the above cases related under the relevant local rules. On December 11, 2008, NVIDIA filed a motion withto consolidate all of the Judicial Panelaforementioned consumer class action cases. The District Court held a case management conference for the above cases on Multidistrict Litigation asking that allFebruary 23, 2009. On February 26, 2009, the District Court consolidated the cases, as well as two other cases pending against Hewlett-Packard, under the caption “The NVIDIA GPU Litigation” and subsequent cases be consolidated in one courtordered the plaintiffs to file lead counsel motions by March 2, 2009. On March 2, 2009, several of the parties filed motions for all pre-trial discoveryappointment of lead counsel and motion practice.briefs addressing certain related issues. A hearing on this motionappointment of lead counsel is setscheduled for March 29, 2007. We believe23, 2009. The District Court also ordered that a consolidated amended complaint be filed on or before May 6, 2009.
In September 2008, three putative securities class actions, or the allegationsActions, were filed in the complaints are without meritUnited States District Court for the Northern District of California arising out of our announcements on July 2, 2008, that we would take a charge against cost of revenue to cover anticipated costs and expenses arising from a weak die/packaging material set in certain versions of our previous generation MCP and GPU products and that we were revising financial guidance for our second quarter of fiscal year 2009. The Actions purport to be brought on behalf of purchasers of NVIDIA stock and assert claims for violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended. On October 30, 2008, the Actions were consolidated under the caption In re NVIDIA Corporation Securities Litigation, Civil Action No. 08-CV-04260-JW (HRL). Lead Plaintiffs and Lead Plaintiffs' Counsel were appointed on December 23, 2008. On February 6, 2009, co-Lead Plaintiff filed a Writ of Mandamus with the Ninth Circuit Court of Appeals challenging the designation of co-Lead Plaintiffs' Counsel. On February 19, 2009, co-Lead Plaintiff filed with the District Court, a motion to stay the District Court proceedings pending resolution of the Writ of Mandamus by the Ninth Circuit. On February 24, 2009, Judge Ware granted the stay. The Writ is still pending in the Court of Appeals. We intend to take all appropriate action with respect to the above cases.
Intel Corporation
On February 17, 2009, Intel Corporation filed suit against NVIDIA Corporation, seeking declaratory and injunctive relief relating to a licensing agreement that the parties signed in 2004. The lawsuit was filed in Delaware Chancery Court. Intel seeks an order from the Court declaring that the license does not extend to certain future NVIDIA chipset products, and enjoining NVIDIA from stating that it has licensing rights for these products. The lawsuit seeks no damages from NVIDIA. If Intel successfully obtains such a court order, we could be unable to sell our MCP products for use with Intel processors and our competitive position would be harmed. NVIDIA’s response to the Intel complaint is currently due on March 23, 2009. NVIDIA disputes Intel’s positions and intends to vigorously defend the cases.case.
No matters were submitted to a vote of our security holders during the fourth quarter of fiscal 2007.
year 2009.
Our common stock is traded on the NASDAQ Global Select Market under the symbol NVDA. Public trading of our common stock began on January 22, 1999. Prior to that, there was no public market for our common stock. As of March 2, 2007,10, 2009, we had approximately 461 460 registered stockholders, not including those shares held in street or nominee name. The following table sets forth for the periods indicated the high and low sales price for our common stock as quoted on the NASDAQ Global Select Market:
| | | High | | Low | |
Fiscal year ending January 27, 2008 | | | | | | | |
| First Quarter (through March 2, 2007) | | $ | 34.91 | | $ | 29.71 | |
| | | | | | | | |
Fiscal year ended January 28, 2007 | | | | | | | |
| Fourth Quarter | | $ | 38.96 | | $ | 30.90 | |
| Third Quarter | | $ | 34.59 | | $ | 20.85 | |
| Second Quarter | | $ | 31.88 | | $ | 17.17 | |
First Quarter (1) | | $ | 30.84 | | $ | 21.44 | |
| | | | | | | | |
Fiscal year ended January 29, 2006 | | | | | | | |
Fourth Quarter (1) | | $ | 23.38 | | $ | 16.28 | |
Third Quarter (1) | | $ | 17.98 | | $ | 13.52 | |
Second Quarter (1) | | $ | 14.70 | | $ | 10.76 | |
First Quarter (1) | | $ | 14.80 | | $ | 10.46 | |
| | | High | | | Low | |
| Fiscal year ending January 31, 2010 | | | | | | |
First Quarter (through March 10, 2009) | | | | | | | | |
| | | | | | | |
| Fiscal year ended January 25, 2009 | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | | |
Fiscal year ended January 27, 2008 | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
(1)Reflects a two-for-onethree-for-two stock split effective on April 6, 2006.September 10, 2007.
Dividend Policy
We have never paid and do not expect to pay cash dividends for the foreseeable future.
Equity Compensation Plan Information
Information regarding our equity compensation plans, including both stockholder approved plans and non-stockholder approved plans, will be contained in our definitive Proxy Statement with respect to our Annual Meeting of Stockholders under the caption "Equity Compensation Plan Information," and is incorporated by reference into this report.
Issuer Purchases of Equity Securities
On August 9, 2004 During fiscal year 2005, we announced that our Board of Directors, or Board, had authorized a stock repurchase program to repurchase shares of our common stock, subject to certain specifications, up to an aggregate maximum amount of $300 million. Subsequently, on March 6, 2006,During fiscal year 2007, the Board further approved an increase of $400 million to the original stock repurchase program. In fiscal year 2008, we announced a stock repurchase program under which we may purchase up to an additional $1.0 billion of our common stock over a three year period through May 2010. On August 12, 2008, we announced that our Board had approved a $400 millionfurther authorized an additional increase of $1.0 billion to the original stock repurchase program. As a result of this increase,these increases, we have an ongoing authorization from the Board, subject to certain specifications, to repurchase shares of our common stock up to an aggregate maximum amount of common stock the Board has authorized to be repurchased has now been increased to a total of $700 million.$2.7 billion through May 2010.
The repurchases will be made from time to time in the open market, in privately negotiated transactions, or in structured stock repurchase programs, and may be made in one or more larger repurchases, in compliance with the Securities Exchange Act of 1934, or the Exchange Act, Rule 10b-18, subject to market conditions, applicable legal requirements, and other factors. The program does not obligate NVIDIA to acquire any particular amount of common stock and the program may be suspended at any time at our discretion.
As part of our share repurchase program, we have entered into, and we may continue to enter into, structured share repurchase transactions with financial institutions. These agreements generally require that we make an up-front payment in exchange for the right to receive a fixed number of shares of our common stock upon execution of the agreement, and a potential incremental number of shares of our common stock, within a pre-determined range, at the end of the term of the agreement.
During the three months ended January 25, 2009, we did not enter into any structured share repurchase transactions or otherwise purchase any shares of our common stock. During fiscal year 2009, we entered into structured share repurchase transactions to repurchase 29.3 million shares for $423.6 million, which we recorded on the trade date of the transactions. Through the end of fiscal 2007,year 2009, we have repurchased 27.3an aggregate of 90.9 million shares under our stock repurchase program for a total cost of $488.1 million. During the first quarter$1.46 billion. As of fiscal 2008,January 25, 2009, we entered into a structured share repurchase transaction to repurchase shares of our common stock for $125.0 million that we expect to settle prior to the end of our first fiscal quarter.
Period | | Total Number of Shares Purchased | | | | Average Price Paid per Share | | | | Total Number of Shares Purchased as Part of Publicly Announced Plans of Programs | | | | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (1) | |
| October 30, 2006 - November 26, 2006 | | | - | | | | | $ | - | | | | | | - | | | | | | 311,869,417 | |
| November 27, 2006 - December 24, 2006 | | | - | | | | | $ | - | | | | | | - | | | | | | 311,869,417 | |
| December 25, 2006 - January 28, 2007 | | | 2,868,123 | | | (3) | | $ | 34.87 | | | (2) | | | 2,868,123 | | | (3) | | | 211,869,417 | |
| Total | | | 2,868,123 | | | | | $ | 34.87 | | | | | | 2,868,123 | | | | | | | |
(1) We have an ongoing authorization from the Board,are authorized, subject to certain specifications, to repurchase shares of our common stock up to an aggregate maximumadditional amount of $700 million on the open market, in negotiated transactions or$1.24 billion through structured stock repurchase agreements through August 2007.
(2) Represents weighted average price paid per share during the fourth quarter of fiscal 2007.
(3) As part of our share repurchase program, we have entered into and we may continue to enter into structured share repurchase transactions with financial institutions. During the fourth quarter of fiscal 2007, we repurchased 2.9 million shares of our common stock for $100 million under a structured share repurchase transaction. This transaction required that we make an up-front payment.May 2010.
Additionally, during fiscal year 2009, we granted approximately 17.9 million stock options under the 2007 Equity Incentive Plan. Please refer to Note 2 of the Notes to the Consolidated Financial Statements in Part IV, Item 15 of this Form 10-K for further information regarding stock-based compensation and stock options granted under our equity incentive program.
Stock Performance GraphGraphs
The following graph compares the cumulative total stockholder return for our common stock, the S & P 500 Index and the S & P 500 Semiconductors Index for the five years ended January 28, 2007.25, 2009. The graph assumes that $100 was invested on January 25, 20022004 in our common stock or on January 31, 20022004 in each of the S & P 500 Index and the S & P Semiconductors Index. Total return assumes reinvestment of dividends in each of the indices indicated. We have never paid cash dividends on our common stock. Our results are calculated on fiscal year-end basis and each of the S & P 500 Index and the S & P Semiconductors Index are calculated on month-end basis. Total return is based on historical results and is not intended to indicate future performance.
| | | 1/25/2002 | | 1/24/2003 | | 1/25/2004 | | 1/30/2005 | | 1/29/2006 | | 1/28/2007 | |
| NVIDIA Corporation | | $ | 100 | | $ | 15.53 | | $ | 35.27 | | $ | 34.95 | | $ | 70.64 | | $ | 96.14 | |
| S & P 500 | | $ | 100 | | $ | 76.98 | | $ | 103.6 | | $ | 110.05 | | $ | 121.47 | | $ | 139.11 | |
| S & P Semiconductors | | $ | 100 | | $ | 44.26 | | $ | 88.1 | | $ | 66.21 | | $ | 76.56 | | $ | 72.09 | |
| | | 1/25/2004 | | | 1/30/2005 | | | 1/29/2006 | | | 1/28/2007 | | | 1/27/2008 | | | 1/25/2009 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
29*$100 invested on January 25, 2004 in stock or index, including reinvestment of dividends. Indexes calculated on month-end basis.
The following graph compares the cumulative total stockholder return for our common stock, the S & P 500 Index and the S & P 500 Semiconductors Index for the period commencing with our initial public offering through the year ended January 25, 2009. The graph assumes that $100 was invested at our initial public offering on January 21, 1999 in our common stock or on December 31, 1998 in each of the S & P 500 Index and the S & P Semiconductors Index. Total return assumes reinvestment of dividends in each of the indices indicated. We have never paid cash dividends on our common stock. Our results are calculated on fiscal year-end basis and each of the S & P 500 Index and the S & P Semiconductors Index are calculated on month-end basis. Total return is based on historical results and is not intended to indicate future performance.
| | | 1/21/1999 | | | 1/31/1999 | | | 1/30/2000 | | | 1/28/2001 | | | 1/27/2002 | | | 1/24/2003 | | | 1/25/2004 | | | 1/30/2005 | | | 1/29/2006 | | | 1/28/2007 | | | 1/27/2008 | | | 1/25/2009 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
*$100 invested on January 21, 1999 in stock or December 31, 1998, in index, including reinvestment of dividends. Indexes calculated on month-end basis.
The following selected financial data should be read in conjunction with our financial statements and the notes thereto, and with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The consolidated statementstatements of incomeoperations data for the years ended January 28, 2007,25, 2009, January 29, 2006,27, 2008 and January 30, 200528, 2007 and the consolidated balance sheet data as of January 28, 200725, 2009 and January 29, 200627, 2008 have been derived from and should be read in conjunction with our audited consolidated financial statements and the notes thereto included elsewhere in this Annual Report on Form 10-K. The consolidated statement of incomeoperations data for the years ended January 29, 2006 and January 30, 2005 and the consolidated balance sheet data for the year ended January 25, 200428, 2007, January 29, 2006 and the consolidated balance sheet data as of January 30, 2005 are derived from audited consolidated financial statements and the notes thereto which are not included in this Annual Report on Form 10-K. The consolidated statement of income data for the year ended January 26, 2003 and the consolidated balance sheet data as of January 25, 2004 and January 26, 2003 are derived from unaudited consolidated financial statements which are not included in this Annual Report on Form 10-K.
| | | Year Ended | |
| | | January 28, | | January 29, | | January 30, | | January 25, | | January 26, | |
| | | 2007 (B, C) | | 2006 (D) | | 2005 | | 2004 (E, F) | | 2003 (G, H) | |
| | | (In thousands, except per share data) | |
Consolidated Statement of Income Data: | | | | | | | | | | | |
| Revenue | | $ | 3,068,771 | | $ | 2,375,687 | | $ | 2,010,033 | | $ | 1,822,945 | | $ | 1,909,447 | |
| Income from operations | | $ | 453,452 | | $ | 336,664 | | $ | 95,176 | | $ | 49,788 | | $ | 82,201 | |
| Net income | | $ | 448,834 | | $ | 301,176 | | $ | 88,615 | | $ | 48,630 | | $ | 50,901 | |
| Basic net income per share | | $ | 1.27 | | $ | 0.89 | | $ | 0.27 | | $ | 0.15 | | $ | 0.17 | |
| Diluted net income per share | | $ | 1.15 | | $ | 0.82 | | $ | 0.25 | | $ | 0.14 | | $ | 0.15 | |
| Shares used in basic per share computation (A) | | | 352,404 | | | 339,380 | | | 332,124 | | | 321,848 | | | 307,026 | |
| Shares used in diluted per share computation (A) | | | 391,504 | | | 365,704 | | | 351,624 | | | 344,108 | | | 331,654 | |
| | | Year Ended | |
| | | January 25, | | January 27, | | January 28, | | January 29, | | January 30, | |
| | | 2009 (B) | | 2008 (C) | | 2007 (C,D) | | 2006 (E) | | 2005 | |
| | | (In thousands, except per share data) | |
| Consolidated Statement of Operations Data: | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Income (loss) from operations | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Basic net income (loss) per share | | | | ) | | | | | | | | | | | | |
Diluted net income (loss) per share | | | | | | | | | | | | | | | | |
Shares used in basic per share computation (A) | | | | | | | | | | | | | | | | |
Shares used in diluted per share computation (A) | | | | | | | | | | | | | | | | |
| | | January 28, | | January 29, | | January 30, | | January 25, | | January 26, | |
| | | 2007 | | 2006 | | 2005 | | 2004 | | 2003 | |
| | | (In thousands) | |
Consolidated Balance Sheet Data: | | | | | | | | | | | |
| Cash, cash equivalents and marketable securities | | $ | 1,117,850 | | $ | 950,174 | | $ | 670,045 | | $ | 604,043 | | $ | 1,028,413 | |
| Total assets | | $ | 2,675,263 | | $ | 1,954,687 | | $ | 1,663,551 | | $ | 1,452,040 | | $ | 1,658,035 | |
| Capital lease obligations, less current portion | | $ | -- | | $ | -- | | $ | -- | | $ | 856 | | $ | 4,880 | |
| Other long-term debt | | $ | -- | | $ | -- | | $ | -- | | $ | -- | | $ | 300,000 | |
| Total stockholders’ equity | | $ | 2,006,919 | | $ | 1,495,992 | | $ | 1,221,091 | | $ | 1,089,493 | | $ | 960,933 | |
| Cash dividends declared per common share | | $ | -- | | $ | -- | | $ | -- | | $ | -- | | $ | -- | |
| | | January 25, | | January 27, | | January 28, | | January 29, | | January 30, | |
| | | 2009 | | 2008 | | 2007 | | 2006 | | 2005 | |
| | | (In thousands) | |
| Consolidated Balance Sheet Data: | | | | | | | | | | | |
Cash, cash equivalents and marketable securities | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Capital lease obligations, less current portion | | | | | | | | | | | | | | | | |
Total stockholders’ equity | | | | | | | | | | | | | | | | |
Cash dividends declared per common share | | | | | | | | | | | | | | | | |
(A) Reflects a three-for-two stock-split effective September 10, 2007 and a two-for-one stock-split effective April 6, 2006.
(B) Fiscal year 2009 includes $196.0 million for a warranty charge against cost of revenue arising from a weak die/packaging material set; a benefit of $8.0 million received from an insurance provider as reimbursement for some of the claims towards the warranty cost arising from a weak die/packaging material set; $18.9 million for a non-recurring charge resulting from the termination of a development contract related to a new campus construction project we have put on hold and $8.0 million for restructuring charges.
(C) Fiscal years 2008 and 2007 include a charge of $4.0 million and $13.4 million towards in-process research and development expense related to our purchase of Mental Images Inc. and PortalPlayer Inc., respectively, that had not yet reached technological feasibility and have no alternative future use.
(D) Fiscal year 2007 included a charge of $17.5 million associated with a confidential patent licensing arrangement.
(C)(E) Fiscal 2007 included a charge of $13.4 million related to the write-off of acquired research and development expense from our purchase of PortalPlayer that had not yet reached technological feasibility and has no alternative future use.
(D) Fiscalyear 2006 included a charge of $14.2 million related to settlement costs associated with two litigation matters, 3dfx and American Video Graphics, LP, or AVG.
(E) Fiscal 2004 included a charge of $3.5 million related to the write-off of acquired research and development expense from our purchase of MediaQ, Inc., or MediaQ that had not yet reached technological feasibility and has no alternative future use.
(F) Fiscal 2004 included a charge of $13.1 million in connection with our convertible subordinated debenture redemption.
(G) Fiscal 2003 included $40.4 million in additional revenue related to our settlement of our arbitration with Microsoft regarding Xbox pricing.
(H) Fiscal 2003 included a charge for stock option exchange expenses of $61.8 million related to personnel associated with cost of revenue, for manufacturing personnel, research and development and sales, general and administrative of $6.2 million, $35.4 million and $20.2 million, respectively.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with “Item 1A. Risk Factors”, “Item 6. Selected Financial Data”, our Consolidated Financial Statements and related Notes thereto, as well as other cautionary statements and risks described elsewhere in this Annual Report on Form 10-K, before deciding to purchase, hold or sell shares of our common stock.
Overview
Overview
Our Company
NVIDIA Corporation is the worldwide leader in programmablevisual computing technologies and the inventor of the graphic processing unit, or the GPU, a high-performance processor which generates realistic, interactive graphics processor technologies.on workstations, personal computers, game consoles, and mobile devices. Our products are designed to enhance the end-user experiencegenerate realistic, interactive graphics on consumer and professional computing devices. We serve the entertainment and consumer market with our GeForce graphics products, the professional design and visualization market with our Quadro graphics products, the high-performance computing market with our Tesla computing solutions products, and the handheld computing market with our Tegra computer-on-a-chip products. We have four major product-line operating segments: the graphics processing units,GPU business, the professional solutions business, or GPU Business,PSB, the media and communications processors,processor, or MCP, Business, Handheld GPU Business,business, and Consumer Electronics Business.the consumer products business, or CPB.
Our GPU Businessbusiness is composedcomprised primarily of our GeForce products that support desktop and notebook personal computers, or PCs, notebook PCs,plus memory products. Our PSB is comprised of our NVIDIA Quadro professional workstationsworkstation products and other GPU-based products;professional graphics products, including our NVIDIA Tesla high-performance computing products. Our MCP Businessbusiness is composedcomprised of NVIDIA nForce products that operate as a single-chipcore logic and motherboard GPU, or chipset that provide system functions, such as high speed storagemGPU products. Our CPB is comprised of our Tegra and network communications,GoForce mobile brands and perform these operations independently from the host central processing unit, or CPU; our Handheld GPU Business is composed of products that support netbooks, personal navigation devices, or PNDs, handheld personal media players, or PMPs, personal digital assistants, or PDAs, cellular phones and other handheld devices;devices. CPB also includes license, royalty, other revenue and our Consumer Electronics Business is concentrated in products that supportassociated costs related to video game consoles and other digital consumer electronics devices and is composed of our contractual arrangements with Sony Computer Entertainment, or SCE, to jointly develop a custom GPU for SCE’s PlayStation3, sales of our Xbox-related products, revenue from our license agreement with Microsoft Corporation, or Microsoft, relating to the successor product to their initial Xbox gaming console, the Xbox360, and related devices.
Original equipment manufacturers, or OEMs, original design manufacturers, or ODMs, add-in-card manufacturers, system builders and consumer electronics companies worldwide utilize NVIDIAour processors as a core component of their entertainment, business and businessprofessional solutions. Our GPUs are designed to deliver superior performance and crisp visual quality for PC-based applications such as manufacturing, science, e-business, entertainment and education. Our MCPs perform highly demanding multimedia processing for secure broadband connectivity, communications and storage. Our handheld GPUs deliver an advanced visual experience by accelerating graphics and video applications while implementing design techniques that result in high performance and relatively low power consumption.
We were incorporated in California in April 1993 and reincorporated in Delaware in April 1998. Our headquarter facilities are in Santa Clara, California. Our Internet address is www.nvidia.comwww.nvidia.com. The contents of our website are not a part of this Form 10-K.
Recent Developments, Future Objectives and Challenges
Seasonality GPU Business
Our GPU business is comprised primarily of our GeForce products that support desktop and notebook PCs, plus memory products. During fiscal year 2009, we launched several new GPUs in the GeForce family, including the GeForce 9600 GT, the GeForce 9800 GX2, and the GeForce 9800 GTX. We also launched the GeForce GTX 280 and 260 GPU products, which represent the second generation of our unified architecture and, based on a variety of benchmarks and resolutions, deliver approximately 50 percent more gaming performance than our GeForce 8800 Ultra GPU. We also launched the GeForce GTX 295 and GeForce GTX 285 which were designed based on Compute Unified Device Architecture, or CUDA, technology. The GeForce GTX 295 is among the world’s fastest dual GPU solutions featuring the power of two GeForce GTX 200 GPUs on a single card. The GeForce GTX 285 is among the world’s most powerful single GPU solution and works efficiently in complex DirectX 10 environments with extreme HD resolutions. We also shipped notebook products from the GeForce 100M Series, which includes the GeForce G105M and the GeForce G110M to meet the performance demands of today’s visual computing applications. The GeForce G105M is over 55 percent faster than our previous product in its segment, while the GeForce G110M is 35 percent faster than our previous mainstream GPU.
In fiscal year 2009, we completed our acquisition of Ageia Technologies, Inc., or Ageia, an industry leader in gaming physics technology. We believe that the combination of the GPU and physics engine brands results in an enhanced visual experience for the gaming world. Subsequent to our acquisition of Ageia, we launched the GeForce 9800 GTX+, GeForce 9800 GT, and GeForce 9500 GT GPUs, which provide support for our PhysX physics engine and CUDA parallel processing across a wide range of price segments.
Our share of the standalone desktop GPU category decreased from 64% to 63% in fiscal year 2009, according to the December 2007 and December 2008 PC Graphics Report from Mercury Research, respectively. Our share of the standalone notebook category decreased from 75% to 63%, according to the December 2007 and December 2008 PC Graphics Report from Mercury Research, respectively, due to increased competition in the marketplace. During fiscal year 2009, our revenue from Desktop GPU products declined approximately 29% compared to fiscal year 2008. This decline was driven primarily as a result of a decline of over 20% in the number of units of Desktop GPU products that we sold, while average selling prices of our Desktop GPU products were flat to slightly lower in fiscal year 2009 when compared to fiscal year 2008. We believe that some portion of the decline in our Desktop GPU unit sales reflects a shift in consumer preference towards notebook PCs and away from desktop PCs, and that the overall global economic recessionary climate also contributed to the decline. As such, we noted that unit sales of our Notebook GPU products increased over 10% during fiscal year 2009 when compared to fiscal year 2008. However, the overall global economic recessionary climate contributed to a significant decline in the demand for total graphics during the fourth quarter of fiscal year 2009. If consumer preferences towards notebook PCs, and away from desktop PCs, continue or escalate, we may see further declines in sales of our Desktop GPU products. In addition, if the global economic climate does not recover during fiscal year 2010, or deteriorates further, we may see consumer preferences move towards lower-priced notebook PCs, which may negatively impact sales of our Notebook PC products.
Professional Solutions Business
Our PSB is comprised of our Quadro professional workstation products and other professional graphics products, including our NVIDIA Tesla high-performance computing products. During fiscal year 2009, we launched several new Quadro solutions, including the Quadro FX 3600M Professional, and the Quadro Plex D Series, a dedicated desk side Visual Computing System, or VCS, system that also can be configured (using two Quadro Plex D systems) for a 3U configuration. We also launched five new Quadro FX notebook GPUs that spanned from ultra-high performance to ultra mobility, as well as the Quadro CX accelerator for Adobe’s Creative Suite 4, or Adobe CS4, content creation software.
During fiscal year 2009, we also launched the Tesla C1060 computing processor and the Tesla S1070 computing system. Tesla is a new family of GPU computing products that delivers processing capabilities for high-performance computing applications, and marks our entry into the high-performance computing industry. The Tesla family also consists of the C870 GPU computing processor, the D870 Deskside Supercomputer and the S870 1U Computing Server. We believe we are in an era of GPU computing, where our Compute Unified Device Architecture, or CUDA, parallel processing architecture can accelerate compute-intensive applications by significant multiples over that of a CPU alone. NVIDIA CUDA is a general purpose parallel computing architecture that leverages the parallel compute engine in our graphics processing units to solve many complex computational problems in a fraction of the time required on a CPU. In order to program using the CUDA architecture, developers can, today, use C, one of the most widely used high-level programming languages, which can then be run at great performance on a CUDA enabled processor. We expect other languages to be supported in the future, including FORTRAN and C++. With CUDA, we are able to speed up general purpose compute-intensive applications like we do for 3D graphics processing. Developers are able to speed-up algorithms in areas ranging from nano molecular dynamics to image processing, medical image reconstruction and derivatives modeling for financial risk analysis. Many PC OEMs now offer high performance computing solutions with Tesla for use by customers around the world. Researchers use CUDA to accelerate their time-to-discovery, and popular off-the-shelf software packages are now CUDA accelerated.
We have achieved a leading position in the professional graphics category by providing innovative GPU technology, software, and tools that integrate the capabilities of our GPU with a broad array of visualization products.
MCP Business
Our MCP business is comprised of NVIDIA nForce core logic and NVIDIA GeForce mGPU products. Our NVIDIA nForce and GeForce mGPU families of products address the core logic market. During fiscal year 2008, we announced a new technology named Hybrid SLI, which combines a powerful yet energy-efficient engine with our multi-GPU SLI technology. During fiscal year 2009, we shipped Hybrid SLI DirectX 10, or DX10, mGPUs – the GeForce 8000 GPU series. We also extended the reach of SLI technology into the performance category with the launch of our overclockable NVIDIA nForce 790i Ultra SLI MCP for Intel processors.We also launched SLI for Intel Broomfield CPU platforms.
In fiscal year 2009, we also launched the GeForce 9400M mGPU along with Apple, Inc., or Apple, for their new lineup of Mac notebooks. The GeForce 9400M integrates three complex chips – the northbridge, the input-output network processor, and the GeForce GPU into a single chip and, as a result, significantly improves performance over Intel integrated graphics. Apple’s MacBook and MacBook Air notebook computers come standard with the GeForce 9400M. Apple’s MacBook Pro notebook computer comes standard with the hybrid combination of two GeForce GPUs - a GeForce 9400M for maximum battery life and a GeForce 9600M GT for high performance mode. We also launched the GeForce 9400 and 9300 mGPUs for Intel desktop PCs. These new mGPUs set a new price/performance standard for integrated graphics by combining the power of three different chips into one highly compact and efficient GPU.
Additionally, in fiscal year 2009, we announced the NVIDIA Ion Platform, which combines the GeForce 9400 GPU with the Intel Atom CPU. The combination enables netbooks, small form factor and all-in-one PCs to play rich media and popular games in high definition.
Consumer Products Business
Our CPB is comprised of our Tegra and GoForce mobile brands and products that support netbooks, PMPs, PDAs, cellular phones and other handheld devices. This business also includes license, royalty, other revenue and associated costs related to video game consoles and other digital consumer electronics devices.
During fiscal year 2009, we launched the NVIDIA Tegra APX 2500 computer-on-a-chip. In February 2009, we announced the NVIDIA Tegra APX 2600 computer-on-a-chip and that we have worked closely with Google Inc., or Google, and the Open Handset Alliance to utilize Android, an open mobile phone software stack, with the NVIDIA Tegra series. During fiscal year 2009, we also launched the NVIDIA Tegra 600 and 650 products, which are small, advanced, highly-integrated visual computer-on-a-chip products. These products feature enhanced multimedia functionality and deliver many times the power efficiency of competing products.
We also introduced GeForce 3D Vision, a high-definition 3D stereo solution for the home. 3D Vision is a combination of high-tech wireless glasses, a high-power infrared emitter and advanced software that transforms hundreds of PC games into full stereoscopic 3D.
Restructuring Charges
On September 18, 2008, we announced a workforce reduction to allow for continued investment in strategic growth areas, which was completed in the third quarter of fiscal year 2009. As a result, we eliminated approximately 360 positions worldwide, or about 6.5% of our global workforce. During fiscal year 2009, expenses associated with the workforce reduction, which were comprised primarily of severance and benefits payments to these employees, totaled $8.0 million. We anticipate that the expected decrease in operating expenses from this action will be offset by continued investment in strategic growth areas.
Product Defect
Our products are complex and may contain defects or experience failures due to any number of issues in design, fabrication, packaging, materials and/or use within a system. If any of our products or technologies contains a defect, compatibility issue or other error, we may have to invest additional research and development efforts to find and correct the issue. Such efforts could divert our management’s and engineers’ attention from the development of new products and technologies and could increase our operating costs and reduce our gross margin. In addition, an error or defect in new products or releases or related software drivers after commencement of commercial shipments could result in failure to achieve market acceptance or loss of design wins. Also, we may be required to reimburse customers, including for customers’ costs to repair or replace the products in the field. A product recall or a significant number of product returns could be expensive, damage our reputation and could result in the shifting of business to our competitors. Costs associated with correcting defects, errors, bugs or other issues could be significant and could materially harm our financial results.
In July 2008, we recorded a $196.0 million charge against cost of revenue to cover anticipated customer warranty, repair, return, replacement and other associated costs arising from a weak die/packaging material set in certain versions of our previous generation MCP and GPU products used in notebook systems. All of our newly manufactured products and all of our products that are currently shipping in volume have a different material set that we believe is more robust.
The previous generation MCP and GPU products that are impacted were included in a number of notebook products that were shipped and sold in significant quantities. Certain notebook configurations of these MCP and GPU products are failing in the field at higher than normal rates. While we have not been able to determine a root cause for these failures, testing suggests a weak material set of die/package combination, system thermal management designs, and customer use patterns are contributing factors. We have worked with our customers to develop and have made available for download a software driver to cause the system fan to begin operation at the powering up of the system and reduce the thermal stress on these chips. We have also recommended to our customers that they consider changing the thermal management of the MCP and GPU products in their notebook system designs. We intend to fully support our customers in their repair and replacement of these impacted MCP and GPU products that fail, and their other efforts to mitigate the consequences of these failures.
We continue to engage in discussions with our supply chain regarding reimbursement to us for some or all of the costs we have incurred and may incur in the future relating to the weak material set. We also continue to seek to access our insurance coverage, which provided us with $8.0 million in related reimbursement during fiscal year 2009. However, there can be no assurance that we will recover any additional reimbursement. We continue to not see any abnormal failure rates in any systems using NVIDIA products other than certain notebook configurations. However, we are continuing to test and otherwise investigate other products. There can be no assurance that we will not discover defects in other MCP or GPU products.
In September, October and November 2008, several putative class action lawsuits were filed against us, asserting various claims related to the impacted MCP and GPU products. Please refer to Note 12 of the Notes to the Consolidated Financial Statements in Part IV, Item 15 of this Form 10-K for further information regarding this litigation.
Common Stock
At the Annual Meeting of Stockholders held on June 19, 2008, our stockholders approved an increase in our authorized number of shares of common stock to 2,000,000,000. The par value of our common stock remained unchanged at $0.001 per share.
Dependence on PC market
We derive and expect to continue to derive the majority of our revenue from the sale or license of products for use in the desktop PC and notebook PC markets, including professional workstations. A reduction in sales of PCs, or a reduction in the growth rate of PC sales, may reduce demand for our products. Changes in demand for our products could be large and sudden. During fiscal year 2009, sales of our desktop GPU products decreased approximately 29% compared to fiscal year 2008. These decreases were primarily due to the Standalone Desktop and Standalone Notebook GPU market segment decline as reported in the PC Graphics December 2008 Report from Mercury Research. Since PC manufacturers often build inventories during periods of anticipated growth, they may be left with excess inventories if growth slows or if they incorrectly forecast product transitions. In these cases, PC manufacturers may abruptly suspend substantially all purchases of additional inventory from suppliers like us until their excess inventory has been absorbed, which would have a negative impact on our financial results.
Seasonality
Our industry is largely focused on the consumer products market. Due to the seasonality in this market,Historically, we typically expect to seehave seen stronger revenue performance in the second half of our fiscal year than in the calendarfirst half of our fiscal year, relatedprimarily due to the back-to-school and holiday seasons.demand. This seasonal trend did not occur in fiscal year 2009. Revenue in the second half of fiscal year 2009 declined by 33% when compared to revenue from the first half of fiscal year 2009. The current recessionary economic environment has created substantial uncertainty in our business. There can be no assurance that the historical seasonal trend will resume in the future.
Subsequent Event
Fiscal 2007 Developments, Future Objectives Tender Offer
On February 11, 2009, we announced that our Board of Directors approved a cash tender offer for certain employee stock options. The tender offer commenced on February 11, 2009 and Challengesexpired at 12:00 midnight (Pacific Time) on March 11, 2009. The tender offer applied to outstanding stock options held by employees with an exercise price equal to or greater than $17.50 per share. None of the non-employee members of our Board of Directors or our officers who file reports under Section 16(a) of the Securities Exchange Act of 1934, including our former Chief Financial Officer, Marvin D. Burkett, were eligible to participate in the Offer. All eligible options with exercise prices less than $28.00 per share, but not less than $17.50 per share were eligible to receive a cash payment of $3.00 per option in exchange for the cancellation of the eligible option. All eligible options with exercise prices greater than $28.00 per share were eligible to receive a cash payment of $2.00 per option in exchange for the cancellation of the eligible option.
GPU Business
The combinationWe use equity to promote employee retention and provide an incentive vehicle valued by employees that is also aligned to stockholder interest. However, our stock price has declined significantly over the past year, and all of our GeForce 6, GeForce 7eligible options are “out-of-the-money” (i.e., have exercise prices above our stock price). Therefore, we provided an incentive to employees with an opportunity to obtain cash payment for their eligible options. Also, the tender offer is expected to increase the number of shares available for issuance under our 2007 Equity Incentive Plan to the extent eligible options were tendered in this tender offer. The tender offer is also expected to reduce the potential dilution to our stockholders that is represented by outstanding stock options, which become additional outstanding shares of our common stock upon exercise.
As of January 25, 2009, there were approximately 33.1 million options eligible to participate in the tender offer. If all these options were tendered and GeForce 8 series of GPUs and our Scalable Link Interface, or SLI, technology has createdaccepted in the offer, the aggregate cash purchase price for these options would be approximately $92.0 million. As a new class of gaming PCs and professional workstations. SLI technology takes advantageresult of the increased bandwidthtender offer, we may incur a non-recurring charge of up to approximately $150.0 million if all of the peripheral component interconnect, or PCI, Express bus architecture to allow up to four NVIDIA-based graphics cards to operateunvested eligible options are tendered. This charge would be reflected in a single PC or up to two NVIDIA-based graphics cards to operate in a notebook PC or professional workstation.
Duringour financial results for the first fiscal quarter of fiscal 2007, we shipped eight new GeForce 7 series GPUs for desktopyear 2010 and notebook PCs, expandingrepresents stock-based compensation expense, consisting of the offeringremaining unamortized stock-based compensation expense associated with the unvested portion of productsthe eligible options tendered in the GeForce 7 GPU family. In March 2006, we shipped our first Quad SLI systemoffer, stock-based compensation expense resulting from amounts paid in excess of the fair value of the underlying options, if any, plus associated payroll taxes and professional fees.
We are currently tallying information on the number of options tendered under the offer to determine the actual aggregate cash to be paid in exchange for desktop PCs, enabling the usecancellation of four GPUs per system. We also shipped the GeForce Go 7800 GTX notebook GPU featuring SLI technology for notebook PCs.eligible options and the non-recurring charge to be incurred pertaining to the unvested eligible options that have been tendered.
During the second quarter of fiscal 2007, our NVIDIA GeForce Go notebook GPU product line achieved record revenue for the second consecutive quarter. In addition, our NVIDIA Quadro professional product line increased its revenue 27% from the second quarter of fiscal 2006. We transitioned from our NVIDIA GeForce 6600 to the NVIDIA GeForce 7600, which delivers almost a 100% performance increase at the same price point.
During the third quarter of fiscal 2007, we continued to experience growth in sales of our GeForce 7 series products, primarily in the mainstream and performance segments. Our NVIDIA GeForce Go notebook GPU product line achieved record revenue for the third consecutive quarter, primarily through increased sales in the notebook standalone GPU segment.
In June 2006, we shipped the GeForce 7950 GX2, which provides 2500x1600 resolution. This is the resolution of cinematic film, and brings the 16:9 panoramic experience of cinema to gaming. We also announced PureVideo High-Definition, or HD technology, a combination of hardware acceleration from an NVIDIA GPU, high definition movie player integration and High-Bandwidth Digital Content Protection, or HDCP, feature support, to enable manufacturers and consumers to build PCs that can play High-Definition Digital Video Disc, or HD DVD or Blu-ray movies.
In August 2006, we introduced the NVIDIA Quadro Plex 1000, the world's first dedicated Visual Computing System. The NVIDIA Quadro Plex 1000 offers scalability in a desktop or dense 3U rackmount configuration for professional applications such as those powering multiple streams of 4K high-definition video, 3D styling and design, scientific and medical visualization, oil and gas exploration, or visual simulation and training.
In November 2006, we introduced our GeForce 8 series GPUs, which is based on a unified shader architecture. Instead of separate vertex and pixel shading processors, the GeForce 8800 has 128 stream processors, operating at 1.35GHz, that can process either vertex or pixel shader programs. GeForce 8800 is also the world’s first DX10 GPU. DX10 is a new Application Programming Interface, or API, for Microsoft Windows Vista, or Vista, and includes many new features. We also announced Compute Unified Device Architecture, or CUDA, a new mode of operation on GPUs where the computational power of the GPU can be utilized for computation-intensive applications.
During the fourth quarter of fiscal 2007, we extended our leadership share position in the notebook GPU segment to 58% share, according to the Mercury Research Fourth Quarter 2006 PC Graphics Report. Notebook GPU revenue grew over 120% year-over-year. Additionally, the NVIDIA Quadro professional product line achieved record revenue with a 24% revenue increase from the fourth quarter fiscal 2006.
MCP Business
In February 2006, we completed our acquisition of ULi Electronics, Inc., or ULi, a core logic developer for the PC industry. This acquisition represents our ongoing investment in our platform solution strategy and has strengthened our sales, marketing, and customer engineering presence in Taiwan and China.
In March 2006, we shipped our first integrated graphics processor, or IGP, core-logic solution for Advanced Micro Devices, Inc., or AMD, based notebook PCs - the GeForce Go 6100 GPU and NVIDIA nForce Go 430 MCP. This core logic solution is the industry’s first high-definition IGP to provide hardware accelerated H.264 high-definition video playback.
In May 2006, we shipped our NVIDIA nForce 590 SLI, a high-performance motherboard solution for x86 PC platforms, including those based on socket AM2 processors by AMD. The NVIDIA nForce 590 SLI can utilize the power of up to four NVIDIA GeForce GPUs for HD gaming.
In June 2006, we introduced the NVIDIA nForce 590 SLI for Intel Core2 Duo and Core 2 Extreme CPUs.
In November 2006, we introduced our new NVIDIA nForce 680i SLI MCPs, which deliver performance for Intel Corporation, or Intel, CPUs and are designed specifically for enthusiasts with features such as SLI, Dual Net Gigabit Ethernet, and MediaShield RAID. The introduction of our NVIDIA nForce 680i SLI MCPs extends our nForce products for Intel Corporation, or Intel’s, CPUs with a performance platform for Intel’s Core2 Duo and new Core 2 Quad CPUs.
During the fourth quarter of fiscal 2007, the NVIDIA nForce MCP product line achieved record revenue for its tenth consecutive quarter. NVIDIA nForce MCP revenue grew 16% sequentially from the third quarter fiscal 2007 and 89% year-over-year. Our MCP growth was driven in part by increased adoption of our NVIDIA nForce notebook solutions by large PC manufacturers.
For fiscal 2008, our key growth objectives for our MCP Business are to deliver new motherboard products for the Intel CPU segment and maintain our leadership positions on AMD platforms. We believe that Intel-based consumers will demand NVIDIA-branded graphics and system performance.
Handheld GPU Business
In March 2006, NVIDIA and Intel announced a collaboration to bring a 3D gaming and multimedia platform to handheld devices. The collaboration combines the NVIDIA GoForce family of handheld GPUs with Intel processors to deliver a development platform to content developers.
Our GoForce handheld GPUs ship in the Motorola 3G RAZR V3X, SLVR L6i, SLVR L7i, MOTORAZR Maxx, and Sony Ericsson Walkman phones. Our newest handheld GPU, the NVIDIA GoForce 5500 GPU, has been designed into Digital Video Broadcast - Handheld, or DVB-H, phones in North America, Europe, and Integrated Services Digital Broadcasting - Terrestrial, or ISDB-T, in Japan.
In March 2006, we acquired Hybrid Graphics Ltd., or Hybrid Graphics, a developer of embedded 2D and 3D graphics software for handheld devices.
In June 2006, we launched our MobileMedia Platform for handheld devices running Windows Mobile 5.0. The MobileMedia Platform is a development kit, containing both software and hardware components, that enables handheld manufacturers to design and release digital media-rich devices with Windows Mobile 5.0.
In January 2007, we completed our acquisition of PortalPlayer, Inc., or PortalPlayer. Until recently, our Handheld GPU strategy has been to focus on establishing ourselves in the market as the leader of multimedia technology by leveraging our expertise in graphics, video, and image processing. With the acquisition of PortalPlayer’s expertise in building low power application processors for personal media players, or PMPs, we are now focused on delivering Systems-On-A-Chip, or SOCs, that combine our application processors and GPUs. We expect SOCs such as these to power next generation smart phone and PMP devices.
Consumer Electronics Business
We record license revenue from our initial agreement with SCE to jointly develop a custom GPU for SCE’s PlayStation 3 computer entertainment system, as well as from certain additional agreements with them. In addition, we record royalty revenue from SCE based on per unit sales of the PlayStation 3, which was launched by SCE in November 2006.
Gross Margin Improvement
We continue to remain focused on improving our gross margin. Beginning in fiscal 2005, we implemented profit improvement initiatives across our company which were designed to improve business and operational processes. During fiscal 2007, our gross margin was 42.4%, which represents an increase of over 410 basis points from our gross margin of 38.3% for fiscal 2006. Our gross margin was 38.3% for fiscal 2006, which represents an increase of 610 basis points from our gross margin of 32.2% for fiscal 2005. We will continue to focus on improving our gross margin during fiscal 2008.
Restatement
On November 29, 2006, we restated our previously-issued financial statements for fiscal years 2004 through 2006, and for the first quarter of fiscal 2007, together with selected financial statement items for earlier years, to correct errors related to accounting for stock-based compensation expense. In June 2006, the Audit Committee of the Board of NVIDIA, or the Audit Committee, began a review of our stock option practices based on the results of an internal review voluntarily undertaken by management. The Audit Committee, with the assistance of outside legal counsel, completed its review on November 13, 2006 when the Audit Committee reported its findings to our Board of Directors, or the Board. The review covered option grants to all employees, directors and consultants for all grant dates during the period from our initial public offering in January 1999 through June 2006. Based on the findings of the Audit Committee and our internal review, we identified a number of occasions on which we used an incorrect measurement date for financial accounting and reporting purposes. These errors resulted primarily from our use during our fiscal years 2000, 2001 and 2002, of certain date selection methods discussed below which resulted in employees receiving options with stated exercise prices lower than the market prices as measured based upon the actual grant dates. We ceased using such practices beginning in our fiscal year 2003. The Audit Committee found that, beginning in our fiscal year 2003, we improved our stock option grant processes and have generally granted and priced our employee stock options in an objective and consistent manner since that time. However, for one Company-wide annual stock option grant we made in fiscal 2004, we did not finalize the number of options allocated to each employee as of the stated grant date in May 2003, which resulted in stock-based compensation charges due to the change in the measurement date to the date the grants were finalized. The Audit Committee’s review did not identify any additional stock-based compensation charges from measurement date issues subsequent to that fiscal 2004 grant.
As a result of the measurement date errors identified from the Audit Committee’s review, through January 29, 2006, we recorded aggregate non-cash stock-based compensation charges of $127.4 million, net of related tax effects. The errors resulted in after-tax charges of $1.4 million and $11.7 million for our fiscal years 2006 and 2005, respectively. Additionally, the cumulative effect of the related after-tax charges for periods prior to our fiscal year ended January 30, 2005 was $114.2 million. These additional stock-based compensation expense charges were non-cash and had no impact on our reported revenue, cash, cash equivalents or marketable securities for each of the restated periods. These charges were based primarily on Accounting Principles Board Opinion No. 25, or APB No. 25, Accounting for Stock Issued to Employees (intrinsic value-based) charges and associated payroll taxes of $199.6 million on a pre-tax basis, which were amortized over the vesting term of the stock options in accordance with Financial Accounting Standards Board Interpretation No. 28, or FIN 28, Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans. We amortized a substantial portion of these charges to expense during our fiscal years 2000 to 2006.
The types of errors we identified generally fell into the following categories:
Improper Measurement Dates for Company-Wide Annual or Retention Stock Option Grants. We determined that, in connection with certain annual or retention stock option grants that we made to employees during our fiscal years 2000, 2001, 2002, 2003 and 2004, the final number of shares that an individual employee was entitled to receive was not determined and/or the proper approval of the related stock option grant had not been given until after the stated grant date. Therefore, the measurement date for such options for accounting purposes was actually subsequent to the stated grant date, resulting in new measurement dates for the related options.
Improper Measurement Dates for Stock Option Grants during Fiscal Years 2001 and 2002. In connection with stock option grants that we made to newly-hired employees (and, to a much lesser degree, retention grants to existing employees) during fiscal years 2001 and 2002, our practice was to grant stock options with an exercise price based upon the lowest closing price of our common stock in the last few days of the month of hire or the last few days of any subsequent month in the quarter of hire. The selection of the grant date of the related option grants would be made at the end of the fiscal quarter and was based on achieving the lowest exercise price for the affected employees. As a result of these practices, the measurement date for such options for accounting purposes was actually subsequent to the stated grant date, resulting in new measurement dates for the related options.
Improper Measurement Dates for Stock Option Grants during Fiscal Year 2000. In connection with certain stock option grants to newly-hired employees (and, to a much lesser degree, retention grants to existing employees) during a portion of fiscal year 2000, our practice was to delay the selection of the related grant dates until the end of a two-month period in the fiscal quarter during which the employees who received the grants began their employment with NVIDIA. As a result of this practice, the exercise price of the related option grants was not determined until subsequent to the stated grant date. We also determined that, during fiscal year 2000, we generally set the grant date and exercise price of employee option grants for new hires and promotions at the lowest price of the last few business days of the month of their hire or promotion (or of the following month in certain two-month periods that were chosen for an indeterminate reason). As a result of these practices, the measurement date for such options for accounting purposes was actually subsequent to the stated grant date, resulting in new measurement dates for the related options. In addition, we also determined that the exercise price or the number of options to be granted had not been determined, or the proper approval had not been given, for various other miscellaneous option grants during fiscal year 2000 until after the stated grant date - resulting in new measurement dates for accounting purposes for the related options.
Other Issues Identified. We also identified instances where stock option grants did not comply with applicable terms and conditions of the stock plans from which the grants were issued. For example, two grants were made to officers of NVIDIA by the chief executive officer under delegated authority; however, under the terms of the applicable plan, the option grant should have been made by our Board or the Compensation Committee. There were also instances where (1) option grants were made to a small group of employees who joined NVIDIA pursuant to a business combination, and to a few other employees in certain instances, with stated exercise prices below the fair market value of our common stock on the actual measurement date of the related grants; and (2) option grants were made to a few individuals who were contractors rather than employees, without recording the appropriate accounting charges. In addition, the Audit Committee did not find any evidence that these violations were committed for improper purposes.
The following table reconciles share-based compensation previously recorded, the impact of these errors, by type, to the total restated share-based compensation for all periods impacted:
| | | Three Months Ended | | For the Fiscal Years Ended | | | | Total Compensation | |
| | | April 30, 2006 | | 2006 | | 2005 | | 2004 | | 2003 | | 2002 | | 2001 | | 2000 | | Expense | |
| | | (In thousands) | | | |
| Restatement adjustments: | | | | | | | | | | | | | | | | | | | |
| Improper measurement dates for company-wide annual or retention stock option grants | | $ | 1,860 | | $ | 5,719 | | $ | 17,468 | | $ | 31,387 | | $ | 27,051 | | $ | 21,390 | | $ | 9,230 | | $ | 1,177 | | $ | 115,282 | |
| Improper measurement dates for stock option grants during fiscal years 2001 and 2002 | | | 115 | | | 233 | | | 2,039 | | | 6,239 | | | 32,082 | | | 23,079 | | | 6,454 | | | - | | | 70,241 | |
| Improper measurement dates for stock option grants during fiscal year 2000 | | | (1,738 | ) | | (3,163 | ) | | (1,608 | ) | | 1,398 | | | 2,612 | | | 5,781 | | | 4,230 | | | 726 | | | 8,238 | |
| Other issues identified | | | (1,061 | ) | | 644 | | | 518 | | | 1,345 | | | 40 | | | 2,750 | | | 699 | | | 39 | | | 4,974 | |
| Additional compensation expense | | | (824 | ) | | 3,433 | | | 18,417 | | | 40,369 | | | 61,785 | | | 53,000 | | | 20,613 | | | 1,942 | | | 198,735 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Tax related effects | | | 140 | | | (2,023 | ) | | (6,676 | ) | | (14,580 | ) | | (21,887 | ) | | (18,477 | ) | | (7,824 | ) | | (723 | ) | | (72,050 | ) |
| Impact of restatement adjustments on income (loss) before change in accounting principle | | | (684 | ) | | 1,410 | | | 11,741 | | | 25,789 | | | 39,898 | | | 34,523 | | | 12,789 | | | 1,219 | | | 126,685 | |
| Cumulative effect of change in accounting principle, net of tax | | | (704 | ) | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | (704 | ) |
| Impact of restatement adjustments on net income (loss) | | $ | (1,388 | ) | $ | 1,410 | | $ | 11,741 | | $ | 25,789 | | $ | 39,898 | | $ | 34,523 | | $ | 12,789 | | $ | 1,219 | | $ | 125,981 | |
| Reconciliation: | | | | | | | | | | | | | | | | | | | |
| Stock-based compensation, as originally recorded | | $ | 23,049 | | $ | 1,096 | | $ | 1,337 | | $ | 672 | | $ | (156 | ) | $ | 6 | | $ | 112 | | $ | 662 | | $ | 26,778 | |
| Restatement adjustments: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Additional compensation expense | | | (824 | ) | | 3,433 | | | 18,417 | | | 40,369 | | | 61,785 | | | 53,000 | | | 20,613 | | | 1,942 | | | 198,735 | |
| Stock-based compensation, as restated | | $ | 22,225 | | $ | 4,529 | | $ | 19,754 | | $ | 41,041 | | $ | 61,629 | | $ | 53,006 | | $ | 20,725 | | $ | 2,604 | | $ | 225,513 | |
Critical Accounting Policies and Estimates
Management’s discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue, cost of revenue, expenses and related disclosure of contingencies. On an on-going basis, we evaluate our estimates, including those related to revenue recognition, cash equivalents and marketable securities, accounts receivable, inventories, income taxes, goodwill, stock-based compensation, warranty liabilities, litigation, investigation and goodwill.settlement costs and other contingencies. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities.
We believe the following critical accounting policies affect our significant judgments and estimates used in the preparation of our consolidated financial statements. Our management has discussed the development and selection of these critical accounting policies and estimates with the Audit Committee of our Board of Directors, or Board. The Audit Committee has reviewed our disclosures relating to our critical accounting policies and estimates in this Annual Report on Form 10-K.
Revenue Recognition
Product Revenue
We recognize revenue from product sales when persuasive evidence of an arrangement exists, the product has been delivered, the price is fixed and determinable, and collection is reasonably assured. For most sales, we use a binding purchase order and in certain cases we use a contractual agreement as evidence of an arrangement. We consider delivery to occur upon shipment provided title and risk of loss have passed to the customer.customer based on the shipping terms. At the point of sale, we assess whether the arrangement fee is fixed and determinable and whether collection is reasonably assured. If we determine that collection of a fee is not reasonably assured, we defer the fee and recognize revenue at the time collection becomes reasonably assured, which is generally upon receipt of payment.
Our policy on sales to certain distributors, with rights of return, is to defer recognition of revenue and related cost of revenue until the distributors resell the product.
We record estimated reductions to revenue for customer programs at the time revenue is recognized. Our customer programs primarily involve rebates, which are designed to serve as sales incentives to resellerspurchasers of our products in various target markets.products. We account for rebates in accordance with Emerging Issues Task Force Issue 01-9, or EITF 01-9, 01-09, Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s Products) and, as such, we accrue for 100% of the potential rebates and do not apply a breakage factor. Rebates typically expire six months from the date of the original sale, unless we reasonably believe that the customer intends to claim the rebate. Unclaimed rebates are reversed to revenue upon expiration of the rebate.
Our customer programs also include marketing development funds, or MDFs. We account for MDFs as either a reduction of revenue or an operating expense in accordance with EITF 01-9.01-09. MDFs represent monies paid to retailers, system builders, OEMs,original equipment manufacturers, distributors and add-in card partners that are earmarked for market segment development and expansion and typically are designed to support our partners’ activities while also promoting NVIDIAour products. IfDepending on market conditions, decline, we may take actions to increase amounts offered under customer programs, possibly resulting in an incremental reduction of revenue at the time such programs are offered.
We also record a reduction to revenue by establishing a sales return allowance for estimated product returns at the time revenue is recognized, based primarily on historical return rates. However, if product returns for a particular fiscal period exceed historical return rates we may determine that additional sales return allowances are required to properly reflect our estimated exposure for product returns.
License and Development Revenue
For license arrangements that require significant customization of our intellectual property components, we generally recognize this license revenue using the percentage-of-completion method of accounting over the period that services are performed. For all license and service arrangements accounted for under the percentage-of-completion method, we determine progress to completion based on actual direct labor hours incurred to date as a percentage of the estimated total direct labor hours required to complete the project. We periodically evaluate the actual status of each project to ensure that the estimates to complete each contract remain accurate. A provision for estimated losses on contracts is made in the period in which the loss becomes probable and can be reasonably estimated. To date, we have not recorded any such losses. Costs incurred in advance of revenue recognized are recorded as deferred costs on uncompleted contracts. If the amount billed exceeds the amount of revenue recognized, the excess amount is recorded as deferred revenue. Revenue recognized in any period is dependent on our progress toward completion of projects in progress. Significant management judgment and discretion are used to estimate total direct labor hours. Any changes in or deviations from these estimates could have a material effect on the amount of revenue we recognize in any period.
Accounts Receivable
We maintain an allowance for doubtful accounts receivable for estimated losses resulting from the inability of our customers to make required payments. Management determines this allowance, which consists of an amount identified for specific customer issues as well as an amount based on generaloverall estimated exposure. Our accounts receivable are highly concentrated and make us vulnerable to adverse changes in our customers' businesses, and to downturns in the industry and the worldwide economy. For example, one customer accounted for approximately 18% of our accounts receivable balance at January 25, 2009, and we continue to work directly with more foreign customers and it may be difficult to collect accounts receivable from them. Our overall estimated exposure excludes significant amounts that are covered by credit insurance and letters of credit. If the financial condition of our customers, the financial institutions providing letters of credit, or our credit insurance carrier were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required that could adversely affect our operating results. This risk is heightened during periods when economic conditions worsen, such as the current period when the worldwide economy is experiencing a downturn. The current financial turmoil affecting the banking system and financial markets and the possibility that financial institutions may consolidate or go out of business have resulted in a tightening in the credit markets, a low level of liquidity in many financial markets, and extreme volatility in fixed income, credit, currency and equity markets. There could be a number of follow-on effects from the credit crisis on our business, including inability of customers, including channel partners, to obtain credit to finance purchases of our products and/or customer, insolvencies and failure of financial institutions, which may negatively impact our financial results. Furthermore, there can be no assurance that we will be able to obtain credit insurance in the future. Our current credit insurance agreement expires on December 31, 2007.2009.
As of January 28, 2007,25, 2009, our allowance for doubtful accounts receivable was $1.3$1.1 million and our gross accounts receivable balance was $534.4$336.8 million. Of the $534.4$336.8 million, $150.3$94.5 million was covered by credit insurance and $19.8$5.3 million was covered by letters of credit. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required and we may have to record additional reserves or write-offs on certain sales transactions in the future. As a percentage of our gross accounts receivable balance, our allowance for doubtful accounts receivable has ranged between 0.2% and 0.4% during fiscal years 2007 and 2006. Factors impacting the allowance include the level of gross receivables, the financial condition of our customers and the extent to which balances are covered by credit insurance or letters of credit. As a percentage of our gross accounts receivable balance, our allowance for doubtful accounts receivable has ranged between 0.1% and 0.3% during fiscal years 2009 and 2008, respectively. As of January 28, 2007,25, 2009, our allowance for doubtful accounts receivable represented 0.2%the high end of this range, at 0.3% of our gross accounts receivable balance. If our allowance for doubtful accounts receivable balance had been recorded at the high end of the range, at 0.4% of our gross receivable balance, then our allowance for doubtful accounts receivable balance at January 28, 2007, would have been approximately $2.4 million, rather than the actual balance of $1.3 million.
Inventories
Inventories
Inventory cost is computed on an adjusted standard basis; which approximates actual cost on an average or first-in, first-out basis. We write down our inventory for estimated lower of cost or market, obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand, future product purchase commitments, estimated manufacturing yield levels and market conditions. If actual market conditions are less favorable than those projected by management, or if our future product purchase commitments to our suppliers exceed our forecasted future demand for such products, additional future inventory write-downs may be required that could adversely affect our operating results. For example, during the fourth quarter of fiscal year 2009, we recorded new inventory write-downs of approximately $50.0 million, which was approximately five to ten times higher than the level of inventory reserves we recorded during the first three quarters of fiscal year 2009, reflecting a significant decline in our forecasted future demand for the related products. This increased level of inventory reserves had a negative impact on our gross margin and our results of operations. If actual market conditions are more favorable, we may have higher gross margins when products are sold. Salessold, however, sales to date of such products have not had a significant impact on our gross margin. Inventory reserves once established are not reversed until the related inventory has been sold or scrapped. As of January 28, 2007,25, 2009, our inventory reserve was $39.7$86.9 million. As a percentage of our gross inventory balance, our inventory reserve has ranged between 8.9%7.8% and 15.9%13.9% during fiscal years 20072009 and 2006.2008. As of January 28, 2007,25, 2009, our inventory reserve represented 10.1%the high end of this range at 13.9% of our gross inventory balance. If our inventory reserve balance had been recorded
Warranty Liabilities
Cost of revenue includes the estimated cost of product warranties that are calculated at the high endpoint of revenue recognition. Under limited circumstances, we may offer an extended limited warranty to customers for certain products. Our products are complex and may contain defects or experience failures due to any number of issues in design, fabrication, packaging, materials and/or use within a system. If any of our products or technologies contains a defect, compatibility issue or other error, we may have to invest additional research and development efforts to find and correct the issue. Such efforts could divert our management’s and engineers’ attention from the development of new products and technologies and could increase our operating costs and reduce our gross margin. In addition, an error or defect in new products or releases or related software drivers after commencement of commercial shipments could result in failure to achieve market acceptance or loss of design wins. Also, we may be required to reimburse customers, including our customers’ costs to repair or replace products in the field. A product recall or a significant number of product returns could be expensive, damage our reputation and could result in the shifting of business to our competitors. Costs associated with correcting defects, errors, bugs or other issues could be significant and could materially harm our financial results.
In July 2008, we recorded a $196.0 million charge against cost of revenue to cover anticipated customer warranty, repair, return, replacement and other associated costs arising from a weak die/packaging material set in certain versions of our previous generation MCP and GPU products used in notebook systems. The MCP and GPU products that are impacted were included in a number of notebook products that were shipped and sold in significant quantities. Certain notebook configurations of these MCP and GPU products are failing in the field at higher than normal rates. While we have not been able to determine a root cause for these failures, testing suggests a weak material set of die/package combination, system thermal management designs, and customer use patterns are contributing factors. We intend to fully support our customers in their repair and replacement of these impacted MCP and GPU products that fail, and their other efforts to mitigate the consequences of these failures. We continue to not see any abnormal failure rates in any systems using NVIDIA products other than certain notebook configurations. However, we are continuing to test and otherwise investigate other products. There can be no assurance that we will not discover defects in other MCP or GPU products.
Determining the amount of the range, at 15.9%$196.0 million charge related to this issue required management to make estimates and judgments based on historical experience, test data and various other assumptions including estimated field failure rates that we believe to be reasonable under the circumstances. The results of these judgments formed the basis for our gross inventory balance, thenestimate of the total charge to cover anticipated customer warranty, repair, return and replacement and other associated costs. However, if actual repair, return, replacement and other associated costs and/or actual field failure rates exceed our inventory reserve balance at January 28, 2007,estimates, we may be required to record additional reserves, which would have been approximately $62.8 million, rather than the actual balanceincrease our cost of $39.7 million. Inventory reserves once established are not reversed until the related inventory has been sold or scrapped.revenue and materially harm our financial results.
Income Taxes
Statement of Financial Accounting Standards No. 109, or SFAS No. 109, Accounting for Income Taxes, establishes financial accounting and reporting standards for the effect of income taxes. In accordance with SFAS No. 109, we recognize federal, state and foreign current tax liabilities or assets based on our estimate of taxes payable or refundable in the current fiscal year by tax jurisdiction. We also recognize federal, state and foreign deferred tax assets or liabilities, as appropriate, for our estimate of future tax effects attributable to temporary differences and carryforwards; and we record a valuation allowance to reduce any deferred tax assets by the amount of any tax benefits that, based on available evidence and judgment, are not expected to be realized.
United States income tax has not been provided on earnings of our non-U.S. subsidiaries to the extent that such earnings are considered to be permanently reinvested.
Our calculation of current and deferred tax assets and liabilities is based on certain estimates and judgments and involves dealing with uncertainties in the application of complex tax laws. Our estimates of current and deferred tax assets and liabilities may change based, in part, on added certainty or finality to an anticipated outcome, changes in accounting standards or tax laws in the United States, or foreign jurisdictions where we operate, or changes in other facts or circumstances. In addition, we recognize liabilities for potential United States and foreign income tax contingencies based on our estimate of whether, and the extent to which, additional taxes may be due. If we determine that payment of these amounts is unnecessary or if the recorded tax liability is less than our current assessment, we may be required to recognize an income tax benefit or additional income tax expense in our financial statements, accordingly.
As of January 28, 2007,25, 2009, we had a valuation allowance of $68.6$92.5 million. Of the total valuation allowance, $3.7$5.3 million relates to state tax attributes acquired in certain acquisitions for which realization of the related deferred tax assets was determined not likely to be realized due, in part, to potential utilization limitations as a result of stock ownership changes, and $64.9$87.2 million relates to state and foreign deferred tax assets that management determined not likely to be realized due, in part, to projections of future taxable income. To the extent realization of the deferred tax assets related to certain acquisitions becomes probable,more-likely-than-not, recognition of these acquired tax benefits would first reduce goodwill to zero, then reduce other non-current intangible assets related to the acquisition to zero with any remaining benefitbe reported as a reduction to income tax expense. Toexpense in accordance with the extentrecent accounting pronouncement, Statement of Financial Accounting Standards No. 141(R), or SFAS No. 141(R), Business Combinations, issued by the FASB in December 2007. We would also recognize an income tax benefit during the period that the realization of the deferred tax assets related to state or foreign tax benefits of $87.2 million becomes probable, we would recognize an income tax benefit in the period such asset is more likely than not to be realized.more-likely-than-not.
As of January 28, 2007, In accordance with the adoption of Statement of Financial Accounting Standards No. 123(R), or SFAS No. 123(R), Share Based Payment, we have derecognized bothour deferred tax assets fordo not include the excess of tax benefit related to stock-based compensation reflected inthat are a component of our federal and state net operating loss and research tax credit carryforwards andin the offsetting valuation allowance.amount of $588.7 million as of January 25, 2009. Consistent with prior years, the excess tax benefit reflected in our net operating loss and research tax credit carryforwards in the amount of $344.9 million as of January 28, 2007, will be accounted for as a credit to stockholders’ equity, if and when realized. In determining if and when excess tax benefits have been realized, we have elected to do so on a “with-and-without”with-and-without approach with respect to such excess tax benefits. We have also elected to ignore the indirect tax effects of stock-based compensation deductions for financial and accounting reporting purposes, and specifically to recognize the full effect of the research tax credit in income from continuing operations.
Goodwill On January 29, 2007, we adopted FASB Interpretation No. 48, or FIN 48, Accounting for Uncertainty in Income Taxes, issued in July 2006. FIN 48 applies to all tax positions related to income taxes subject to SFAS No. 109. Under FIN 48 we recognize the benefit from a tax position only if it is more-likely-than-not that the position would be sustained upon audit based solely on the technical merits of the tax position. The cumulative effect of adoption of FIN 48 did not result in a material adjustment to our tax liability for unrecognized income tax benefits. Our policy to include interest and penalties related to unrecognized tax benefits as a component of income tax expense did not change as a result of implementing the FIN 48. Please refer to Note 13 of these Notes to the Consolidated Financial Statements in Part IV, Item 15 of this Form 10-K for additional information.
Goodwill
Our impairment review process compares the fair value of the reporting unit in which the goodwill resides to its carrying value. We determined that our reporting units are equivalent to our operating segments or components of an operating segment for the purposes of completing our Statement of Financial Accounting Standards No. 142, or SFAS No. 142, Goodwill and Other Intangible Assets, impairment test. We utilize a two-step approach to testing goodwill for impairment. The first step tests for possible impairment by applying a fair value-based test. In computing fair value of our reporting units, we use estimates of future revenues, costs and cash flows from such units. The second step, if necessary, measures the amount of such an impairment by applying fair value-based tests to individual assets and liabilities. We electedGoodwill is subject to perform our annual goodwill impairment reviewtest during the fourth quarter of eachour fiscal year.year, or earlier if indicators of potential impairment exist, using a fair value-based approach. We completed our most recent annual impairment test during the fourth quarter of fiscal 2007year 2009 and concluded that there was no impairment. This assessment is based upon a discounted cash flow analysis and analysis of our market capitalization. The estimate of cash flow is based upon, among other things, certain assumptions about expected future operating performance such as revenue growth rates and operating margins used to calculate projected future cash flows, risk-adjusted discount rates, future economic and market conditions, and determination of appropriate market comparables. Our estimates of discounted cash flows may differ from actual cash flows due to, among other things, economic conditions, changes to our business model or changes in operating performance. Additionally, certain estimates of discounted cash flows involve businesses with limited financial history and developing revenue models, which increase the risk of differences between the projected and actual performance. Significant differences between these estimates and actual cash flows could materially affect our future financial results. These factors increase the risk of differences between projected and actual performance that could impact future estimates of fair value of all reporting units. In addition, determining the number of reporting units and the fair value of a reporting unit requires us to make judgments and involves the use of significant estimates and assumptions. We also make judgments and assumptions in allocating assets and liabilities to each of our reporting units. We base our fair value estimates on assumptions we believe to be reasonable but that are unpredictable and inherently uncertain. The long-term financial forecast represents the best estimate that we have at this time and we believe that its underlying assumptions are reasonable. However, actual performance in the near-term and longer-term could be materially different from these forecasts, which could impact future events or circumstancesestimates of fair value of our reporting units and may result in a charge to earnings in future periods due to the potential for a write-down of goodwill in connection with such tests.
Stock-based Compensation Cash Equivalents and Marketable Securities
Fair Value
In the current market environment, the assessment of the fair value of debt instruments can be difficult and subjective. The volume of trading activity of certain debt instruments has declined, and the rapid changes occurring in today’s financial markets can lead to changes in the fair value of financial instruments in relatively short periods of time. Statement of Financial Accounting Standards No. 157, or SFAS No. 157, Fair Value Measurements, establishes three levels of inputs that may be used to measure fair value. Please refer to Note 17 of the Notes to the Consolidated Financial Statements in Part IV, Item 15 of this Form 10-K. We measure our cash equivalents and marketable securities at fair value. The fair values of our financial assets and liabilities are determined using quoted market prices of identical assets or quoted market prices of similar assets from active markets. Level 1 valuations are obtained from real-time quotes for transactions in active exchange markets involving identical assets. Level 2 valuations are obtained from quoted market prices in active markets involving similar assets. Level 3 valuations are based on unobservable inputs to the valuation methodology and include our own data about assumptions market participants would use in pricing the asset or liability based on the best information available under the circumstances. Each level of input has different levels of subjectivity and difficulty involved in determining fair value. While most of our cash equivalents and marketable securities are valued based on Level 2 inputs, the valuation of our holdings of the Reserve International Liquidity Fund, Ltd., or International Reserve Fund are classified as a Level 3 input due to the inherent subjectivity and the significant judgment involved in its valuation. Total financial assets at fair value classified within Level 3 were 3.7% of total assets on our Consolidated Balance Sheet as of January 25, 2009.
Other Than Temporary Impairment
We account for our investment instruments in accordance with Statement of Financial Accounting Standards No. 115, or SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. All of our cash equivalents and marketable securities are treated as “available-for-sale” under SFAS No. 115. All of our available-for-sale investments are subject to a periodic impairment review. Investments are considered to be impaired when a decline in fair value is judged to be other-than-temporary when the resulting fair value is significantly below cost basis and/or the significant decline has lasted for an extended period of time. The evaluation that we use to determine whether a marketable security is impaired is based on the specific facts and circumstances present at the time of assessment, which include the consideration of general market conditions, the duration and extent to which fair value is below cost, and our intent and ability to hold an investment for a sufficient period of time to allow for recovery in value. We also consider specific adverse conditions related to the financial health of and business outlook for an investee, including industry and sector performance, changes in technology, operational and financing cash flow factors, and changes in an investee’s credit rating. Investments that we identify as having an indicator of impairment are subject to further analysis to determine if the investment is other than temporarily impaired, in which case we write down the investment to its estimated fair value. During fiscal year 2009, we recorded other than temporary impairment charges of $9.9 million. These charges include $5.6 million related to what we believe is an other than temporary impairment of our investment in the money market funds held by the International Reserve Fund; $2.5 million related to a decline in the value of publicly traded equity securities and $1.8 million related to debt securities held by us that were issued by companies that have filed for bankruptcy as of January 25, 2009.
Stock-based Compensation
Effective January 30, 2006, we adopted the provisions of SFAS No. 123(R), which establishes accounting for stock-based awards exchanged for employee services. Accordingly, stock-based compensation cost is measured at grant date, based on the fair value of the awards, and is recognized as expense over the requisite employee service period. Stock-based compensation expense recognized during fiscal years 2009, 2008 and 2007 was $162.7 million, $133.4 million and $116.7 million, respectively, which consisted of stock-based compensation expense related to stock options and our employee stock purchase plan. Please refer to Note 2 of the Notes to the Consolidated Financial Statements in Part IV, Item 15 of this Form 10-K for further information.
We elected to adopt the modified prospective application method beginning January 30, 2006 as provided by SFAS No. 123(R)., beginning January 30, 2006. We recognize stock-based compensation expense using the straight-line attribution method. We estimate the value of employee stock options on the date of grant using a lattice-binomialbinomial model. Prior to the adoption of SFAS No. 123(R), we recorded stock-based compensation expense equal to the amount that would have been recognized if the fair value method was used, for the purpose of the pro forma financial information provided in accordance with Statement of Financial Accounting Standards No. 123, or SFAS No. 123, Accounting for Stock-Based Compensation, as amended by SFAS No. 148, Accounting for Stock-Based Compensation - Transition and Disclosures.
At the beginning of fiscal 2006, we transitioned from a Black-Scholes model to a binomial model for calculating the estimated fair value of new stock-based compensation awards granted under our stock option plans. The determination of fair value of share-based payment awards on the date of grant using an option-pricing model is affected by our stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, the expected stock price volatility over the term of the awards, actual and projected employee stock option exercise behaviors, vesting schedules, death and disability probabilities, expected volatility and risk-free interest. Our management determined that the use of implied volatility is expected to be more reflective of market conditions and, therefore, could reasonably be expected to be a better indicator of our expected volatility than historical volatility. The risk-free interest rate assumption is based upon observed interest rates appropriate for the term of our employee stock options. The dividend yield assumption is based on the history and expectation of dividend payouts. We began segregating options into groups for employees with relatively homogeneous exercise behavior in order to calculate the best estimate of fair value using the binomial valuation model.
Using the lattice-binomialbinomial model, the fair value of the stock options granted under our stock option plans have been estimated using the following assumptions during the year ended January 28, 2007:25, 2009:
Weighted average expected life of stock options (in years) | | | | |
| | | 4.7% | |
| | | 39% | |
| | | — | |
For our employee stock purchase plan we continue to use the Black-Scholes model. The fair value of the shares issued under the employee stock purchase plan has been estimated using the following assumptions during year ended January 28, 2007:25, 2009:
Weighted average expected life of stock options (in years) | | | | |
| | | | |
| | | 30% | |
| | | — | |
SFAS No. 123(R) also requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures were estimated based on historical experience. If factors change and we employ different assumptions in the application of SFAS No. 123(R) in future periods, the compensation expense that we record under SFAS No. 123(R) may differ significantly from what we have recorded in the current period.
Litigation, Investigation and Settlement Costs
From time to time, we are involved in legal actions and/or investigations by regulatory bodies. We are aggressively defending our current litigation matters.matters for which we are responsible. However, there are many uncertainties associated with any litigation or investigations, and we cannot be certain that these actions or other third-party claims against us will be resolved without costly litigation, fines and/or substantial settlement payments. If that occurs, our business, financial condition and results of operations could be materially and adversely affected. If information becomes available that causes us to determine that a loss in any of our pending litigation, investigations or settlements is probable, and we can reasonably estimate the loss associated with such events, we will record the loss in accordance with accounting principles generally accepted in the United States. However, the actual liability in any such litigation or investigations may be materially different from our estimates, which could require us to record additional costs.
Results of Operations
The following table sets forth, for the periods indicated, certain items in our consolidated statements of incomeoperations expressed as a percentage of revenue.
| | | Year Ended | |
| | | January 28, 2007 | | January 29, 2006 | | January 30, 2005 | |
| Revenue | | | 100.0 | % | | 100.0 | % | | 100.0 | % |
| Cost of revenue | | | 57.6 | | | 61.7 | | | 67.8 | |
| Gross profit | | | 42.4 | | | 38.3 | | | 32.2 | |
| Operating expenses: | | | | | | | | | | |
| Research and development | | | 18.0 | | | 15.0 | | | 17.3 | |
| Sales, general and administrative | | | 9.6 | | | 8.5 | | | 10.2 | |
| Settlement costs | | | - | | | 0.6 | | | - | |
| Total operating expenses | | | 27.6 | | | 24.1 | | | 27.5 | |
| Income from operations | | | 14.8 | | | 14.2 | | | 4.7 | |
| Interest and other income, net | | | 1.3 | | | 0.8 | | | 0.6 | |
| Income before income tax expense | | | 16.1 | | | 15.0 | | | 5.3 | |
| Income tax expense | | | 1.5 | | | 2.3 | | | 0.9 | |
| Net income | | | 14.6 | % | | 12.7 | % | | 4.4 | % |
| | | Year Ended | |
| | | January 25, 2009 | | January 27, 2008 | | January 28, 2007 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Sales, general and administrative | | | | | | | | |
Restructuring charges and other | | | | | | | | |
| | | | | | | | |
Income (loss) from operations | | | | | | | | |
Interest and other income, net | | | | | | | | |
Income (loss) before income taxes | | | | | | | | |
Income tax expense (benefit) | | | | | | | | |
| | | | | | | | |
Fiscal Years Ended January 28, 2007,25, 2009, January 29, 2006,27, 2008 and January 30, 2005.28, 2007
Revenue
Revenue
We report financial information for four major product-line operating segments to our Chief Executive Officer, who is considered to be our chief operating decision maker, as follows: the GPU Business, thebusiness, PSB, MCP Business, the Handheld GPU Business,business, and the Consumer Electronics Business.CPB. Revenue in the "All Other" category is primarily derived from sales of memory devices.components. Please refer to Note 1416 of our Notes to the Consolidated Financial Statements in Part IV, Item 15 of this Form 10-K for further information.
Fiscal 2005Year 2009 vs. Fiscal Year 2008
Revenue was $3.42 billion for fiscal year 2009, compared to $4.10 billion for fiscal year 2008, which represents a 53-weekdecrease of 16%. For the first quarter of fiscal 2010, we expect revenue to remain flat or improve slightly when compared to the fourth quarter of fiscal year 2009. A discussion of our revenue results for each of our operating segments is as follows:
GPU Business. GPU business revenue decreased by 24% to $1.91 billion for fiscal year 2009, compared to $2.52 billion for fiscal year 2008. This decrease resulted from decreased sales of our desktop GPU and memory products, offset by increased sales of our notebook GPU products. Sales of our desktop GPU and memory products decreased approximately 29% and 59%, respectively, in fiscal year 2009 when compared to fiscal years 2007year 2008. These decreases were primarily due to a decline in the Standalone Desktop market segment as reported in the December 2008 PC Graphics Report from Mercury Research, driven by a combination of market migration from desktop PCs towards notebook PCs and 2006an overall market shift in the mix of products towards lower priced products. This overall market decline translated into a decline of over 20% in the number of units of desktop GPU products that we sold in fiscal year 2009 compared to fiscal year 2008. The decline in desktop GPU revenue also reflects the impact of a slight average sales price regression in our products and a decline in our share position during the middle portion of fiscal year 2009 as a result of increased competition. Memory sales declined as a result of a decline in sales of our high-end desktop GPU products. Sales of our notebook GPU products increased approximately 3% in fiscal year 2009 when compared to fiscal year 2008, due to higher unit sales aided by a market move toward notebook PCs over desktop PCs, offset by a slight decline in average selling prices. Additionally, the overall global economic recessionary climate contributed to a significant decline in the demand for total graphics during the fourth quarter of fiscal year 2009.
PSB. PSB revenue increased by 18% to $693.4 million for fiscal year 2009, compared to $588.4 million for fiscal year 2008. Our NVIDIA professional workstation product sales increased due to an overall unit increase of approximately 15% in shipments of boards and chips as compared to fiscal year 2008, due to strong demand and our transition from previous generations of NVIDIA Quadro professional workstation products to GeForce 8-based and GeForce 9-based products. Sales of NVIDIA Quadro CX for Adobe’s CS4 software, which were 52-week years,we launched in the third quarter of fiscal year 2009, also contributed towards the increase in sales in fiscal year 2009.
MCP Business. MCP business revenue decreased by 8% to $655.6 million for fiscal year 2009, compared to $710.4 million for fiscal year 2008. This decrease was due to a decline of approximately 32% in sales of our AMD-based platform products resulting from increased competition in AMD-based products, offset by an increase of approximately 120% in sales of our Intel-based platform products. The increase in Intel-based product sales was driven by sales of our GeForce 9400M mGPU, which we launched in October 2008 along with Apple Inc., or Apple, for their new lineup of Mac notebooks, and we believe that this extra week may have hadour new GeForce 9400 and 9300 mGPUs for Intel desktop PCs.
CPB. CPB revenue decreased by 46% to $136.3 million for fiscal year 2009, compared to $251.1 million for fiscal year 2008. The decline in CPB revenue is primarily driven by a positive impact oncombination of a decrease in revenue from our cell phone products and a decrease in revenue from Sony Computer Entertainment, or SCE. The decrease in revenue from our cell phone products resulted from our shift from marketing and developing legacy products to achieving design wins and marketing our newer Tegra products. The decrease in our revenue from SCE resulted from a decline in fiscal 2005. However, we are not ablelicense revenue and a decline in royalty revenue that was caused by a lower number of units shipped as well as by a step-down in the per unit royalty rate during the year due to quantify the effectachievement of the slightly longer year ona unit-based milestone in our fiscal 2005 revenue.agreement with SCE.
Fiscal Year 2008 vs. Fiscal Year 2007 vs. Fiscal Year 2006
Revenue was $4.10 billion for fiscal year 2008, compared to $3.07 billion for fiscal year 2007, compared to $2.38 billion for fiscal 2006, which represents an increase of 29.2%34%. A discussion of our revenue results for each of our operating segments is as follows:
GPU Business. GPU Businessbusiness revenue increased by 20.3%47% to $1.99$2.52 billion forin fiscal 2007,year 2008, compared to $1.66$1.71 billion forin fiscal 2006. The increaseyear 2007. This improvement was a result ofprimarily due to increased sales of our desktop GPU products and notebook products and our NVIDIA professional workstationGPU products. The increase in salesSales of our desktop GPU products increased by approximately 38% compared to fiscal year 2007, primarily due to growth of the Standalone Desktop market as reported in the December 2007 PC Graphics Report from Mercury Research. Our leadership position in the Standalone Desktop market was leddriven by our GeForce 7-based and GeForce 8-based products that serve the high-end segment.products. Sales of our NVIDIA notebook GPU products improvedincreased by approximately 114% compared to fiscal year 2007. Notebook GPU revenue growth was primarily due to an increased mixshare gains in the Standalone Notebook category as reported in the December 2007 PC Graphics Report from Mercury Research. Our share gains in the Standalone Notebook category were primarily a result of GeForce 7-basedshipments of products shipping forused in notebook PC design wins based onrelated to Intel’s Napa platform. This increaseSanta Rosa platform used in sales was slightly offsetnotebooks.
PSB. PSB revenue increased by a decrease29% to $588.4 million in average selling prices.fiscal year 2008, compared to $454.7 million in fiscal year 2007. Our NVIDIA professional workstation product sales increased due to an overall increase in unit shipments of boards and chips. This increase in shipments was primarily driven by our transition from previous generations of NVIDIA Quadro professional workstation products to GeForce 8-based products.
MCP Business. MCP business revenue increased by 7% to $710.4 million in fiscal year 2008, compared to $661.5 million in fiscal year 2007. The increase resulted from an approximate 225% increase in sales of our Intel-based platform products as compared to fiscal year 2007. We began ramping up shipments of our Intel-based platform products after the third quarter of fiscal year 2007. This increase was offset by a slight decreasedecline in average selling prices.
MCP Business. MCP Business revenue was $661.5 million for fiscal 2007, compared to $352.3 million for fiscal 2006, which represents an increase of 87.8%. The overall increase in MCP business revenue is primarily due to sales of newer NVIDIA nForce4 products, NVIDIA nForce5 products, integratedour AMD-based desktopplatform products and integrated Intel-based desktopsales of products which began shipping after the second quarter of fiscal 2007. In addition, revenue also increased as a result ofrelated to our acquisition of ULi Electronics, Inc. in February 2006.
Handheld GPU Business CPB.. Handheld GPU Business CPB revenue was $108.5increased by 8% to $251.1 million forin fiscal 2007,year 2008, compared to $58.7$233.2 million forin fiscal 2006, which represents an increase of 84.7%.year 2007. The overall increase in Handheld GPU Business revenue is due to an increase in unit sales of high-end feature cellular phone and PDA products.
Consumer Electronics Business. Consumer Electronics Business revenue was $96.3 million for fiscal 2007, compared to $167.4 million for fiscal 2006, which represents a decrease of 42.5%. This decrease is a result of discontinued sales of our Xbox-related products to Microsoft, partially offset by revenue recognized from our contractual development arrangements. We recognized revenue from the sale of our Xbox-related products to Microsoft for the last time during the second quarter of fiscal 2006. During fiscal 2007, we recognized $92.9 million of revenue from our contractual arrangements with SCE for its PlayStation3, compared to $49.0 million of revenue recognized during fiscal 2006.
For the first quarter of fiscal 2008, we expect a seasonal decline associated with the PC business. Although we believe our market and competitive position in each of our business units continues to be strong, there are no significant industry growth drivers to offset seasonality. Microsoft’s next generation operating system, Microsoft Windows Vista, or Vista, has shipped. We believe that Vista is the first operating system to present, as a standard, the power of the GPU to all applications and that, in the future, a significant percentage of PCs will have Vista. With Vista, DX10, and HD/Blu-ray DVD as the technologies for PCs for the coming year, we believe that 3D graphics will become a central part of the computing experience and that the GPU will be more important than ever. However, to date we have not seen a significant impact from the launch of Vista.
Fiscal Year 2006 vs. Fiscal Year 2005
Revenue was $2.38 billion for fiscal 2006, compared to $2.01 billion for fiscal 2005, which represents an increase of 18.2%. A discussion of our revenue results for each of our operating segments is as follows:
GPU Business. GPU Business revenue increased by 22.9% to $1.66 billion for fiscal 2006 compared to $1.35 billion for fiscal 2005. The increase was the result of increased sales of our GeForce 6 and GeForce 7 families of desktop GPUs that serve the high-end GPU segment, offset by a slight decline in sales of our mainstream GPU products. In addition, sales of our NVIDIA Quadro professional workstation products and notebook products continued to improve due to an increased mix of GeForce 6-based and GeForce 7-based products, which resulted in an increase in average selling prices.
MCP Business. MCP Business revenue was $352.3 million for fiscal 2006, compared to $175.7 million for fiscal 2005, which represents an increase of 100.6%. The overall increase in MCP BusinessCPB revenue is primarily due to increased sales of NVIDIA nForce4 products, which we began selling during the fourth quarter of fiscal 2005, and an increase in average selling prices. The overall increaseroyalties from Sony Computer Entertainment, or SCE, but was offset by a decreasedecreases in sales of NVIDIA nForce3revenue from our cell phone products and NVIDIA nForce2 products.our contractual development arrangements with SCE.
Handheld GPU Business. Handheld GPU Business revenue was $58.7 million for fiscal 2006, compared to $45.9 million for fiscal 2005, which represents an increase Concentration of 27.9%. The overall increase in Handheld GPU Business revenue is due to an increase in average selling prices of high-end feature phone products and revenue recognized as a result of a development contract.Revenue
Consumer Electronics Business. Consumer Electronics Business We generated 87%, 89% and 86% of our total revenue was $167.4 million for fiscal 2006, compared to $260.0 million for fiscal 2005, which represents a decrease of 35.6%. The decrease in our Consumer Electronics Business is a result of decreasedyears 2009, 2008 and discontinued sales of our Xbox-related products to Microsoft, partially offset by revenue recognized from our contractual arrangement with SCE. During the first quarter of fiscal 2006, Microsoft indicated that it would not order any more Xbox-related products from us after our second fiscal quarter. As a result, we recognized revenue from the sale of our Xbox-related products to Microsoft for the last time during the second quarter of fiscal 2006. During fiscal 2006, we recognized $49.0 million of revenue from our contractual arrangements with SCE to jointly develop a custom GPU for SCE’s PlayStation3. No such revenue was recognized during our fiscal 2005 as our definitive agreement with SCE was not executed until the first quarter of fiscal 2006.
Concentration of Revenue
Revenue2007, respectively, from sales to customers outside of the United States and other Americas accounted for 83.6%, 84.0% and 75.9% of total revenue for fiscal 2007, 2006, and 2005, respectively.Americas. Revenue by geographic region is allocated to individual countries based on the location to which the products are initially billed even if the foreign contract equipment manufacturers, or CEMs’, add-in board and motherboard manufacturers’ revenue is attributable to end customers in a different location. The increase in
Revenue from significant customers, those representing approximately 10% or more of total revenue for the percentage of revenue from sales to customers outside of the United States and other Americas for fiscal 2006respective periods, is summarized as compared to fiscal 2005 was primarily due to discontinued sales of XGPUs and MCPs used in the Microsoft Xbox product during fiscal 2006, which were billed to Microsoft in the United States.follows:
| | | Year Ended | |
| | | January 25, 2009 | | | January 27, 2008 | | | January 28, 2007 | |
| Revenue: | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Sales to our significant customers accounted for approximately 12% of our total revenue from one customer during fiscal year 2007, 26% of our total revenue from two customers during fiscal year 2006,Gross Profit and 31% of our total revenue from two customers during fiscal year 2005.Gross Margin
Gross Profit
Gross profit consists of total revenue, net of allowances, less cost of revenue. Cost of revenue consists primarily of the cost of semiconductors purchased from subcontractors, including wafer fabrication, assembly, testing and packaging, manufacturing support costs, including labor and overhead associated with such purchases, final test yield fallout, inventory and warranty provisions, and shipping costs. Cost of revenue also includes development costs for license and service arrangements.
Gross margin is the percentage of gross profit to revenue. Our gross margin can vary in any period depending onwas 34.3%, 45.6% and 42.4% for fiscal years 2009, 2008 and 2007, respectively. Our gross margin is significantly impacted by the mix of types of products sold. Ourwe sell. Product mix is often difficult to estimate with accuracy. Therefore, if we experience product transition or competitive challenges, if we achieve significant revenue growth in our lower margin product lines, or if we are unable to earn as much revenue as we expect from higher margin product lines, our gross margin was 42.4%, 38.3%,may be negatively impacted.
We will continue to focus on improving our gross margin by delivering cost effective product architectures, enhancing business processes and 32.2% for fiscal years 2007, 2006 and 2005, respectively.delivering profitable growth. A discussion of our gross margin results for each of our operating segments is as follows:
Fiscal Year 20072009 vs. Fiscal Year 20062008
Our gross margin declined to 34.3% in fiscal year 2009 from 45.6% for fiscal year 2008. The gross margin for fiscal year 2009 includes the impact of a $196.0 million charge against cost of revenue to cover anticipated customer warranty, repair, return, replacement and associated costs arising from a weak die/packaging material set in certain versions of our previous generation MCP and GPU products used in notebook systems offset by allocated insurance claim proceeds of $6.7 million from an insurance provider. This warranty charge had an adverse impact of approximately 6.0% on our gross margin for fiscal year 2009. Additionally, inventory reserves taken during fiscal year 2009 were approximately $50.0 million higher compared to fiscal year 2008, reflecting a significant decline in our forecasted future demand for the related products and having a negative impact on our gross margin.
GPU Business. The gross margin of our GPU Business increasedbusiness decreased during fiscal 2007year 2009 as compared to fiscal 2006,year 2008. This decrease was due to a charge against cost of revenue to cover anticipated customer warranty, repair, return, replacement and associated costs arising from a weak die/packaging material set in certain versions of our previous generation GPU products used in notebook systems, the negative impact of inventory reserves taken during the fourth quarter of fiscal year 2009, and average sales price regression in our GeForce 9-based and previous generations of desktop products resulting from increased competition. The average sales price regression was also driven by a combination of market migration from desktop PCs towards notebook PCs and an overall market shift in the mix of products towards lower priced products.
PSB. The gross margin of our PSB increased slightly during fiscal year 2009 as compared to fiscal year 2008. This increase was primarily due to the sale of our GeForce 8 series GPUs and increased sales of our GeForce 7 series GPUs,9-based NVIDIA Quadro products, which collectively accounted for approximately 70%began selling in the fourth quarter of fiscal year 2008, and GeForce 8-based NVIDIA Quadro products, which generally have higher gross margins than our previous generations of NVIDIA Quadro products.
MCP Business. The gross margin of our MCP business decreased during fiscal year 2009 as compared to fiscal year 2008, due to decline in the margins of our AMD and Intel-based products. During fiscal year 2009, gross margins declined primarily due to a charge against cost of revenue to cover anticipated customer warranty, repair, return, replacement and associated costs arising from a weak die/packaging material set in certain versions of our previous generation MCP products used in notebook systems.
CPB. The gross margin of our CPB increased during fiscal year 2009 as compared to fiscal year 2008. This increase was primarily due to changes in the product mix in our CPB product lines. We experienced greater revenue decline in our lower margin cell phone and other handheld devices product lines as compared to higher margin SCE transactions in the current year.
Fiscal Year 2008 vs. Fiscal Year 2007
GPU Business. The gross margin of our GPU Business revenue.business increased during fiscal year 2008 as compared to fiscal year 2007. This increase was primarily due to increased sales of our GeForce 8-series GPUs, which began selling in the third quarter of fiscal year 2007. Our GeForce 8 and our GeForce 7 series8-series GPUs generally have higher gross margins than our previous generations of GPUs. Additionally, the more favorable costs of memory purchases during fiscal year 2008, positively impacted our gross margin.
PSB. The gross margin of our PSB increased during fiscal year 2008 as compared to fiscal year 2007. This increase was primarily due to increased sales of our GeForce 8-based NVIDIA Quadro products, which began selling in the fourth quarter of fiscal year 2007 and generally have higher gross margins than our previous generations of NVIDIA Quadro products.
MCP Business. The gross margin of our MCP Business decreasedbusiness increased during fiscal 2007year 2008 as compared to fiscal 2006,year 2007. This increase was primarily due to a shift in product mix to higher volumes of integrated AMD-based desktoptowards Intel-based platform products, which have experienced lower gross margins than our discrete MCP products,began to ramp up shipments after the third quarter of fiscal year 2007, and inventory reserves that we recorded as a charge to cost of revenue that primarilyduring the first quarter of fiscal year 2007 of approximately $4.1 million related to certain NVIDIA nForce purchase commitments that we believed had exceeded future demand.
Handheld GPU Business CPB. The gross margin of our Handheld GPU Business increasedCPB decreased during fiscal 2007year 2008 as compared to fiscal 2006,year 2007. This decrease was primarily due to an increasea drop in unitgross profit realized from sales of our high-end feature cellular phone and PDA products which generally have higher gross margins than our previous Handheld GPU products.other handheld devices. However, increased royalties from SCE during fiscal year 2008, offset the decreases.
Operating Expenses
| | | Year Ended | | | Year Ended | |
| | | January 25, 2009 | | January 27, 2008 | | | $ Change | | | % Change | | | January 27, 2008 | | | January 28, 2007 | | | $ Change | | | % Change | |
| | | (In millions) | | | | | | | (In millions) | | | | | |
Research and development expenses | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Sales, general and administrative expenses | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Restructuring charges and other | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Research and development as a percentage of net revenue | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Sales, general and administrative as a percentage of net revenue | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Research and Development
Consumer Electronics BusinessFiscal Year 2009 vs. Fiscal Year 2008
Research and development expenses were $855.9 million and $691.6 million during fiscal years 2009 and 2008, respectively, an increase of $164.3 million, or 24%. The gross marginincrease was primarily due to increase in salaries and benefits by approximately $64.9 million primarily as a result of our Consumer Electronics Business increasedthe net addition of approximately 500 personnel in departments related to research and development functions, offset by lower expenses during fiscal 2007 asyear 2009 related to our variable compensation programs when compared to fiscal 2006,year 2008. Stock-based compensation expense increased by $21.4 million primarily duebecause of the impact of new hire and semi-annual stock awards granted subsequent to license and royalty revenue from our contractual development arrangements that have higher gross margins compared to the gross margin of Xbox products shipped in fiscal 2006.
Fiscal Year 2006 vs. Fiscal Year 2005
GPU Business. The gross margin of our GPU Business increased during fiscal 2006 as compared to fiscal 2005, primarily due to the sale of our GeForce 7 series GPUs and increased sales of our GeForce 6 series GPUs, which collectively accounted for approximately 78% of our fiscal 2006 GPU Business revenue. Our GeForce 7 and our GeForce 6 series GPUs generally have higher gross margins than our GeForce FX series GPUs which comprised 53% of our fiscal 2005 GPU Business revenue. In addition, average selling prices from our notebook GeForce 7 and GeForce 6 series GPU products increased as a larger percentage of our total notebook revenue during fiscal 2006 as compared to fiscal 2005.
MCP Business. The gross margin of our MCP Business increased during fiscal 2006 as compared to fiscal 2005, primarily due to the increase in revenue from sales of our NVIDIA nForce3 and NVIDIA nForce4 products, which to date have experienced higher gross margins than previous generations of NVIDIA nForce products.
Handheld GPU Business. The gross margin of our Handheld GPU Business increased during fiscal 2006 as compared to fiscal 2005, primarily due to the inventory write-off of certain handheld products in the third quarter of fiscal 2005.
Consumer Electronics Business. The gross marginyear 2008, offset by a reduction in expense related to older stock awards that were almost fully vested and for which the related expense had been almost fully amortized by the end of our Consumer Electronics Business increased during fiscal 2006 as compared to fiscal 2005, primarily due to the reduction of die costs for Xbox-related products, and the recognition of revenue from our contractual arrangements with SCE to jointly develop a custom GPU for SCE’s PlayStation3.
Consolidated Gross Margin
The improvement in our gross margin reflects our continuing focus on delivering cost effective product architectures, enhancing business processes and delivering profitable growth. We expect gross margin to remain flat or improve slightly during the first quarter of fiscal 2008.
Operating Expensesyear 2009. Development expenses increased by $18.8 million primarily due to increase in expenses related to engineering services, prototype materials and internal board requests. Other increases in research and development expenses are primarily related to costs that were driven by personnel growth, including depreciation and amortization, facilities, and computer software and equipment.
Research and Development Fiscal Year 2008 vs. Fiscal Year 2007
| | | Year Ended | | | | | | Year Ended | | | | | |
| | | Jan. 28, 2007 | | Jan. 29, 2006 | | $ Change | | % Change | | Jan. 29, 2006 | | Jan. 30, 2005 | | $ Change | | % Change | |
| | | (In millions) | | | | (In millions) | | | |
Research and Development: | | | | | | | | | | | | | | | | | |
| Salaries and benefits | | $ | 280.3 | | $ | 205.1 | | $ | 75.2 | | | 37 | % | $ | 205.1 | | $ | 172.6 | | $ | 32.5 | | | 19 | % |
Stock-based compensation (1) | | | 70.1 | | | 5.9 | | | 64.2 | | | 1,088 | % | | 5.9 | | | 14.1 | | | (8.2 | ) | | (58 | )% |
| Depreciation and amortization | | | 59.8 | | | 58.2 | | | 1.6 | | | 3 | % | | 58.2 | | | 56.1 | | | 2.1 | | | 4 | % |
| Computer software and lab equipment | | | 57.6 | | | 46.4 | | | 11.2 | | | 24 | % | | 46.4 | | | 41.1 | | | 5.3 | | | 13 | % |
| Facility expense | | | 38.4 | | | 32.0 | | | 6.4 | | | 20 | % | | 32.0 | | | 31.4 | | | 0.6 | | | 2 | % |
| New product development | | | 35.7 | | | 28.6 | | | 7.1 | | | 25 | % | | 28.6 | | | 29.0 | | | (0.4 | ) | | (1 | )% |
| In-process research and development | | | 14.0 | | | - | | | 14.0 | | | - | | | - | | | - | | | - | | | - | |
| License and development project costs | | | (18.4 | ) | | (28.9 | ) | | 10.5 | | | 36 | % | | (28.9 | ) | | (2.0 | ) | | (26.9 | ) | | (1,345 | )% |
| Other | | | 16.0 | | | 9.8 | | | 6.2 | | | 63 | % | | 9.8 | | | 5.9 | | | 3.9 | | | 66 | % |
| Total | | $ | 553.5 | | $ | 357.1 | | $ | 196.4 | | | 55 | % | $ | 357.1 | | $ | 348.2 | | $ | 8.9 | | | 3 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Research and development as a percentage of net revenue | | | 18 | % | | 15 | % | | | | | | | | 15 | % | | 17 | % | | | | | | |
(1)Stock-based compensation includes charges/credits relating to payroll taxes accrued for as part of the restatement.
Research and development expenses increased by $196.4were $691.6 million and $553.5 million during fiscal years 2008 and 2007, respectively, an increase of $138.1 million, or 55%, from fiscal 200625%. The increase is primarily related to fiscal 2007 primarily due to a $75.2 millionan increase in salaries and benefits related to 1,014 additional personnel and a $64.2 million increase in stock-based compensation due to our adoption of SFAS No. 123(R) during the first quarter of fiscal 2007. In-process research and development expense, or IPR&D, increased by $14.0approximately $95.3 million as a result of our acquisitions of PortalPlayerpersonnel growth in departments related to research and Hybrid Graphics duringdevelopment functions by approximately 600 additional personnel in fiscal 2007. Depreciationyear 2008. Additionally, salaries and amortizationbenefits expenses also increased $1.6 million due to emulation hardware and software programs that were purchased during fiscal 2006, resultingthe increase in a full year of depreciation in fiscal 2007 compared to a partial year of depreciation in fiscal 2006. Computer software and equipment increased $11.2 million primarily due to increased allocation of information technology expenses and facilities increased $6.4 million due to increased facilitiesour variable compensation expense allocation, both of which were based on the growth in headcount. New product development increased by $7.1 million as a result of costsour financial performance for fiscal year 2008. Facilities expenses and expenses related to an overall increase in the number of product tape-outs and in prototype materials. License and development project costs decreased by $10.5 million primarily due to the inversed impact of decreased development costs related to our collaboration with SCE and other engineering costs related to a different development contract. Certain of our personnel who usually devote their time to research and development efforts have spent time working on these development projects. The cost associated with the time these individuals spend working on development projects is allocated from research and development to cost of revenue or is capitalized on our balance sheet. During fiscal 2007, less time was spent working on development projects so less cost was allocated to cost of revenue or capitalized and, therefore, more cost remained in research and development. Other expenses increased $6.2 million primarily due to travel and other employee related expenses associated with the expansion of our international sites including our acquisitions of ULi and Hybrid Graphics.
Research and development expenses increased by $8.9 million, or 3%, from fiscal 2005 to fiscal 2006 primarily due to a $32.5 million increase in salaries and benefits related to 423 additional personnel and a $5.3 million increase in computer software and equipment primarily due toalso increased allocationas a result of information technology expenses. Depreciation and amortization increased $2.1 million due to increased purchases of hardware and software equipment and facilities increased $0.6 million due to increased facilities expense allocation, both of which were based on the growth in headcount. Other expenses increased $3.9 million primarily due to travel and other employee related expenses associated with the expansion of our international sites. These increases were offset by a decrease in stock-based compensation expense of $8.2 million and an increase of $26.9 million in license and development project costs, primarily related to increased development costs related to our collaboration with SCE and other engineering costs related to a different development contract. Certain of our personnel who usually devote their time to research and development efforts have spent time working on these development projects. The cost associated with the time these individuals spend working on development projects is allocated from research and development to cost of revenue or is capitalized on our balance sheet. During fiscal 2006, more time was spent working on development projects so more cost was allocated to cost of revenue or capitalized and, therefore, less cost remained in research and development.growth.
We In order to remain competitive, we anticipate that we will continue to devote substantial resources to research and development, and we expect these expenses to increase in absolute dollars in the foreseeable future due to the increased complexity and the greater number of products under development. Research and development expenses are likely to fluctuate from time to time to the extent we make periodic incremental investments in research and development and these investments may be independent of our level of revenue.
Sales, General and Administrative
| | | Year Ended | | | | | | Year Ended | | | | | |
| | | Jan. 28, 2007 | | Jan. 29, 2006 | | $ Change | | % Change | | Jan. 29, 2006 | | Jan. 30, 2005 | | $ Change | | % Change | |
| | | (In millions) | | | | (In millions) | | | |
Sales, General and Administrative: | | | | | | | | | | | | | | | | | |
| Salaries and benefits | | $ | 139.0 | | $ | 108.3 | | $ | 30.7 | | | 28 | % | $ | 108.3 | | $ | 94.4 | | $ | 13.9 | | | 15 | % |
| Advertising and promotions | | | 63.5 | | | 49.4 | | | 14.1 | | | 29 | % | | 49.4 | | | 66.6 | | | (17.2 | ) | | (26 | )% |
Stock-based compensation (1) | | | 38.5 | | | (2.2 | ) | | 40.7 | | | 1,850 | % | | (2.2 | ) | | 3.7 | | | (5.9 | ) | | (159 | )% |
| Legal and accounting fees | | | 25.9 | | | 18.7 | | | 7.2 | | | 39 | % | | 18.7 | | | 12.6 | | | 6.1 | | | 48 | % |
| Facility expense | | | 14.0 | | | 12.5 | | | 1.5 | | | 12 | % | | 12.5 | | | 9.6 | | | 2.9 | | | 30 | % |
| Depreciation and amortization | | | 8.6 | | | 8.5 | | | 0.1 | | | 1 | % | | 8.5 | | | 13.0 | | | (4.5 | ) | | (35 | )% |
| Other | | | 4.0 | | | 6.9 | | | (2.9 | ) | | (42 | )% | | 6.9 | | | 4.3 | | | 2.6 | | | 60 | % |
| Total | | $ | 293.5 | | $ | 202.1 | | $ | 91.4 | | | 45 | % | $ | 202.1 | | $ | 204.2 | | $ | (2.1 | ) | | (1 | )% |
| Sales, general and administrative as a percentage of net revenue | | | 10 | % | | 9 | % | | | | | | | | 9 | % | | 10 | % | | | | | | |
(1)Stock-based compensation includes charges/credits relating to payroll taxes accrued for as part of the restatement.
Sales, General and Administrative
Fiscal Year 2009 vs. Fiscal Year 2008
Sales, general and administrative expenses increased $91.4were $362.2 million and $341.3 million during fiscal years 2009 and 2008, respectively, an increase of $20.9 million, or 45%, from fiscal 2006 to fiscal 20076%. Outside professional fees increased by $17.5 million primarily due to increased legal fees pertaining to ongoing litigation matters described in Note 12 of the Notes to the Consolidated Financial Statements in Part IV, Item 15 of this Form 10-K. Marketing and advertising expenses increased by $22.3 million, primarily due to increased advertising campaign related activities and trade shows in the current year. Depreciation and amortization expense increased by $15.4 million primarily due to amortization of intangible assets acquired from our acquisitions of Mental Images and Ageia, and from increased capital expenditures. Stock-based compensation expense increased by $6.9 million primarily due to the impact of new hire and semi-annual stock awards granted subsequent to the third quarter of fiscal year 2008, offset by a $40.7reduction in expense related to older stock awards that were almost fully vested and for which the related expense had been almost fully amortized by the end of the first quarter of fiscal year 2009. Headcount related to personnel in departments related to sales, general and administrative functions remained relatively flat year-over-year, but labor and related expenses decreased by $13.9 million due to lower expenses during fiscal year 2009 related to our variable compensation programs when compared to fiscal year 2008.
Fiscal Year 2008 vs. Fiscal Year 2007
Sales, general and administrative expenses were $341.3 million and $293.5 million during fiscal years 2008 and 2007, respectively, an increase of $47.8 million, or 16%. The increase is primarily due to an increase in salaries and benefits by approximately $31.4 million related to the growth in personnel by approximately 180 additional personnel. Additionally, salaries and benefits expenses also increased due to the increase in our variable compensation expense as a result of our financial performance for fiscal year 2008. Advertising and promotion expenses increased by $4.2 million primarily due to costs incurred for sponsorships and increased advertising campaign costs. The increase in personnel during the year and the expansion of our facilities worldwide to support additional personnel resulted in increases in our facilities expenses, stock-based compensation resulting fromexpense and depreciation and amortization expenses.
In response to the current economic environment, we have commenced several cost reduction measures which are designed to reduce our adoptionoperating expenses and will continue to focus on reducing our operating expenses during fiscal year 2010. Please refer to the discussion in Note 19 to the Notes to the Consolidated Financial Statements in Part IV, Item 15 of SFAS No. 123(R)this Form 10-K for the potential impact of the tender offer on operating expenses during the first quarter of fiscal 2007 and a $30.7 million increase in salaries and benefits related to 201 additional personnel. Legal and accounting fees increased by $7.2 million primarily due to our internal review of historical stock option granting practices and the restatement of prior year financial results. Advertising and promotions increased by $14.1 million due to travel and other employee costs associated with our international expansion. These increases were offset by a decrease of $2.9 million in other expenses related to reimbursement from collection settlements.2010.
Sales, general and administrative expenses decreased $2.1 million, or 1%, from fiscal 2005 to fiscal 2006 primarily due to a a $17.2 million decrease in advertising and promotion costs, primarily associated with a reduction in certain marketing programs, tradeshow expenses, new product launches and customer samples, other marketing costs, travel related and employee recruitment expenses. In addition, stock-based compensation expense decreased by $5.9 million and depreciation and amortization decreased by $4.5 million. These decreases were offset by a $13.9 million increase in salaries and benefits related to 122 additional personnel and a $6.1 million increase in legal expenses primarily due to certain insurance reimbursements that we received during fiscal 2005 that reduced this expense, and increased litigation activity during fiscal 2006 related to 3dfx Interactive, Inc., or 3dfx, and American Video Graphics, LP, or AVG. In addition there were increases of $2.9 million in facility expense due primarily to the expansion of our international sites and $2.6 million in other general and administrative expenses, offset by a reduction in bad debt expense.
Operating Expenses
We anticipate that our operating expenses will be relatively flat in the first quarter of fiscal 2008. We believe that even with the additional expense from our acquisition of PortalPlayer, we may be able to keep operating expenses flat as we focus on expense controls and restrict headcount additions in the first quarter of fiscal 2008 as compared to the fourth quarter of fiscal 2007.
In-process research and development
In connection with our acquisition of Hybrid GraphicsMental Images in March 2006November 2007 and PortalPlayer in January 2007, we wrote-off $0.6$4.0 million and $13.4 million during fiscal years 2008 and 2007, respectively, of in-process research and development, or IPR&D, that had not yet reached technological feasibility and had no alternative future use. In accordance with SFAS No. 2, Accounting for Research and Development Costs, as clarified by FIN 4, Applicability of SFAS No. 2 to Business Combinations Accounted for by the Purchase Method an interpretation of SFAS No. 2, amounts assigned to IPR&D meeting the above-stated criteria must be charged to expense as part of the allocation of the purchase price.
Settlement Costs Restructuring Charges and Other
On September 18, 2008, we announced a workforce reduction to allow for continued investment in strategic growth areas, which was completed in the third quarter of fiscal year 2009. As a result, we eliminated approximately 360 positions worldwide, or about 6.5% of our global workforce. During fiscal year 2009, expenses associated with the workforce reduction, which were comprised primarily of severance and benefits payments to these employees, totaled $8.0 million. We anticipate that the expected decrease in operating expenses from this action will be offset by continued investment in strategic growth areas.
Restructuring and other expenses also included a non-recurring charge of $18.9 million associated with the termination of a development contract related to a new campus construction project that has been put on hold.
Settlement costs were $14.2 million for fiscal 2006. The settlement costs are associated with two litigation matters, 3dfx and AVG. AVG is settled. For further information about the 3dfx matter, please refer to Note 12 of the Notes to Consolidated Financial Statements.
Interest Income and Interest Expense
Interest income consists of interest earned on cash, cash equivalents and marketable securities. Interest income decreased to $42.9 million in fiscal year 2009, from $64.3 million in fiscal year 2008, primarily due to the result of lower average balances of cash, cash equivalents and marketable securities and lower interest rates in fiscal year 2009 compared to fiscal year 2008. Interest income increased from $20.7to $64.3 million toin fiscal year 2008 from $41.8 million fromin fiscal 2006 to fiscalyear 2007 primarily due to the result of higher average balances of cash, cash equivalents and marketable securities and higher interest rates in fiscal 2007 whenyear 2008 compared to fiscal 2006. Interest income increased from $11.4 million to $20.7 million from fiscal 2005 to fiscal 2006 primarily due to the result of higher average balances of cash, cash equivalents and marketable securities and higher interest rates in fiscal 2006 when compared to fiscal 2005.year 2007.
Other Income (Expense), net
Other income and expense primarily consists of realized gains and losses on the sale of marketable securities. Theresecurities and foreign currency translation. Other income (expense) was $(14.7) million and $0.8 million in fiscal years 2009 and 2008, respectively, a decrease of $15.5 million. This decrease was primarily due to other than temporary impairment charges of $9.9 million that we recorded during fiscal year 2009. These charges include $5.6 million related to what we believe is an other than temporary impairment of our investment in the money market funds held by the Reserve International Liquidity Fund, Ltd., or International Reserve Fund; $2.5 million related to a decline in the value of publicly traded equity securities and $1.8 million related to debt securities held by us that were no significant changesissued by companies that have filed for bankruptcy as of January 25, 2009. Please refer to Note 17 of the Notes to the Consolidated Financial Statements in Part IV, Item 15 of this Form 10-K for further discussion. Other income (expense) was $0.8 million and $(0.8) million for fiscal years 2008 and 2007, respectively, an increase of $1.5 million. The increase in other income fromduring fiscal 2006year 2008 compared to fiscal 2007. However, other income decreased by $1.1 million from fiscal 2005 to fiscal 2006year 2007 is primarily due to the liquidationapproximately $2.0 million of marketable securities duringrealized gains on sale of an investment offset by an increase in foreign currency transaction losses in fiscal 2006 in order to obtain the cash needed for the repatriation of certain foreign earnings under the American Jobs Creation Act of 2004.year 2008.
Income Taxes
We recognized income tax expense (benefit) of $46.4$(12.9) million, $55.6$103.7 million and $18.4$46.4 million during fiscal years 2007, 20062009, 2008 and 2005,2007, respectively. Income tax expense (benefit) as a percentage of income (loss) before taxes, or our annual effective tax rate, was (30.0) % in fiscal year 2009, 11.5% in fiscal year 2008 and 9.4% in fiscal 2007, 15.6% in fiscal 2006, and 17.2% in fiscal 2005.year 2007.
The difference in the effective tax rates amongst the three years was primarily a result of changes in our geographic mix of income subject to tax, with the additional change in mix in fiscal 2007 due to certain stock-based compensation expensed for financial accounting purposes under SFAS No. 123(R) and an increase inimpact of the federal research tax credit benefitrecognized in fiscal 2007.year 2009 relative to the loss before taxes in such fiscal year.
Please refer to Note 13 of the Notes to Consolidated Financial Statements for further information regarding the components of our income tax expense.
Liquidity and Capital Resources
| | | As of January 28, 2007 | | As of January 29, 2006 | |
| | | (In millions) | |
| Cash and cash equivalents | | $ | 544.4 | | $ | 551.8 | |
| Marketable securities | | | 573.4 | | | 398.4 | |
| Cash, cash equivalents, and marketable securities | | $ | 1,117.8 | | $ | 950.2 | |
| | January 25, 2009 | | January 27, 2008 | |
| | (In millions) | |
Cash and cash equivalents | | | | | | | | |
| | | | | | | | |
Cash, cash equivalents, and marketable securities | | | | | | | | |
| | | Year Ended | |
| | | January 28, | | January 29, | | January 30, | |
| | | 2007 | | 2006 | | 2005 | |
| | | (in millions) | |
| Net cash provided by operating activities | | $ | 587.1 | | $ | 446.4 | | $ | 132.2 | |
| Net cash used in investing activities | | | (540.8 | ) | | (41.8 | ) | | (152.0 | ) |
| Net cash provided by (used in) financing activities | | | (53.6 | ) | | (61.4 | ) | | 13.8 | |
| | Year Ended | |
| | January 25, | | January 27, | | January 28, | |
| | 2009 | | 2008 | | 2007 | |
| | (In millions) | |
Net cash provided by operating activities | | | | | | | | | | | | |
Net cash used in investing activities | | | | | | | | | | | | |
Net cash used in financing activities | | | | | | | | | | | | |
As of January 28, 2007,25, 2009, we had $1.12$1.26 billion in cash, cash equivalents and marketable securities, an increasea decrease of $167.6$554.1 million from the end of fiscal 2006.year 2008. Our portfolio of cash equivalents and marketable securities is managed by several financial institutions. Our investment policy requires the purchase of top-tier investment grade securities, the diversification of asset typetypes and includes certain limits on our portfolio duration.
Operating activities
Operating activities generated cash of $587.1$249.4 million, $446.4 million,$1.27 billion and $132.2$572.7 million during fiscal years 2007, 20062009, 2008 and 2005,2007, respectively. The annual cash provided by operating activities decreased in amounts greater thanfiscal year 2009 due to a decrease in our net income is due primarilycompared to fiscal year 2008 plus the impact of non-cash charges to earnings and the tax benefit on the exercise of stock options. Non-cashdeferred income taxes. During fiscal year 2009, non-cash charges to earnings included stock-based compensation of $162.7 million and depreciation and amortization on our long-term assets. Upon adoptionassets of SFAS No. 123(R)$185.0 million. Additionally, operating cash flows for fiscal year 2009 also declined due to changes in operating assets and liabilities, including the timing of payments to vendors and a decrease in inventory turnover. Additionally, we incurred $21.8 million in net cash outflows in fiscal 2007, non-cash charges to earnings included $116.7 million of stock-based compensation expense and related deferred income tax impact.year 2009 towards a confidential patent licensing agreement that we entered into in fiscal year 2007.
The increase in cash flows from operating activities in fiscal 2006year 2008 when compared to fiscal 2005year 2007 was primarily due to an increase in our net income during the comparable periods plus the impact of non-cash charges to earnings. During fiscal year 2008, non-cash charges to earnings included stock-based compensation of $133.4 million and depreciation and amortization on our long-term assets of $133.2 million. Additionally, operating cash flows for fiscal year 2008 also improved due to changes in operating assets and liabilities, including the timing of payments to vendors and an improvement in inventory turnover. These increases were offset by approximately $57.3 million in net cash outflows towards a confidential patent licensing agreement that we entered into in fiscal year 2007.
The increase in cash flows from operating activities in fiscal year 2007 when compared to fiscal year 2006 was primarily due to an increase in our net income during the comparable periods plus the impact of non-cash charges to earnings. Additionally, the increase is related to the $212.6$116.7 million increaseof stock-based compensation expense recorded upon adoption of SFAS No. 123(R) in net incomefiscal year 2007 and changes in operating assets and liabilities. On our consolidated balance sheet, accrued liabilities increased $77.2 million fromin fiscal 2005 to fiscal 2006 primarily due to the recording of income taxes payable for fiscal 2006, the increase in accruals related to customer programsyears 2007 and the recording of $30.6 million in relation to 3dfx, of which $25.0 million was recorded as an adjustment to goodwill. Accounts payable decreased $58.8 million and inventories decreased $60.9 million from fiscal 2005 to fiscal 2006 primarily as a result of significant reductions in older products, offset by an increase in new products. Accounts receivable increased $21.9 million primarily due to increased sales and improved linearity of sales, and cash collections during the fourth quarter of fiscal 2006 as compared to the fourth quarter of fiscal 2005.2006.
Investing activities
Investing activities have consisted primarily of purchases and sales of marketable securities, acquisition of businesses and purchases of property and equipment, which include leasehold improvements for our facilities and intangible assets. Investing activities used cash of $540.8$209.4 million, $41.8$761.3 million and $152.0$526.4 million during fiscal years 2009, 2008 and 2007, 2006respectively. Investing activities for fiscal year 2009 provided cash of $226.7 million from the net proceeds from sales of marketable securities and 2005, respectively. Netused $27.9 million in connection with our acquisition of Ageia. Investing activities also included $407.7 million cash used byfor capital expenditures, as we built additional facilities to accommodate our growing employee headcount, new research and development equipment, testing equipment to support our increased production requirements, technology licenses, software, intangible assets and leasehold improvements at our facilities in various international locations. Investing activities for capital expenditures in fiscal year 2009 included payment of approximately $183.8 million for purchase of a property in Santa Clara, California, that includes approximately 25 acres of land and ten commercial buildings. Our original plans for the purchased property included constructing a new campus on the site. We are currently re-evaluating those plans.
Investing activities for fiscal year 2008 used cash of $496.4 million towards the net purchases of marketable securities, resulting from the need to invest the additional amounts of cash we received from operating activities, and $75.5 million for our acquisition of Mental Images. Investing activities for fiscal 2008 also included $187.7 million of capital expenditures. Capital expenditures included purchase of property in anticipation of building additional facilities to accommodate our growing employee headcount, new research and development equipment, testing equipment to support our increased production requirements, technology licenses, software, intangible assets and leasehold improvements at our facilities in various international locations.
In fiscal year 2007, net cash used in investing activities during fiscal 2007 was primarily due toincluded $401.8 million of cash used for our acquisitions of PortalPlayer, ULi and Hybrid Graphics during the fiscal year.Graphics. Additionally, net cash used in investing activities included capital expenditures of $145.3$130.8 million attributable to purchases of new research and development equipment, hardware equipment, technology licenses, software, intangible assets and leasehold improvements at our various facilities. These uses of cash were offset by $6.2 million of net proceeds from sales of marketable securities. Net cash used by investing
Financing activities during fiscal 2006 was primarily due to $79.6 million for capital expenditures primarily attributable to purchases of new research and development equipment, hardware equipment, technology licenses, software, intangible assets and leasehold improvements at our headquarters facility in Santa Clara, California and at our international sites. In addition, we used cash of $12.1 million for our acquisition of a private company and $9.7 million for the investments we made during fiscal 2006 in non-affiliated companies. These uses of cash were offset by $59.6 million of net proceeds from sales of marketable securities. Net cash used by investing activities during fiscal 2005 was primarily due to $84.7 million of net purchases of marketable securities. In addition, we used $67.3 million for capital expenditures primarily attributable to purchases of leasehold improvements for our new data center at our headquarters campus, new research and development emulation equipment, technology licenses, software and intangible assets. We expect to spend approximately $120 million to $140 million for capital expenditures during fiscal 2008, primarily for purchases of software licenses, emulation equipment, computers and engineering workstations. In addition, we may continue to use cash in connection with the acquisition of new businesses or assets.
Financing activities used cash of $53.6$349.3 million, $61.4$326.3 million and provided cash of $13.8$53.6 million during fiscal years 2007, 20062009, 2008 and fiscal 2005,2007, respectively. Net cash used by financing activities in fiscal 2007year 2009 was primarily due to $275.0$423.6 million paid towardsused in our stock repurchase program, offset by cash proceeds of $221.2$73.5 million from common stock issued under our employee stock plans. Cash
Net cash used by financing activities in fiscal 2006 resultedyear 2008 was primarily from $188.5due to $552.5 million related toused in our stock repurchase program, offset by $127.5cash proceeds of $226.0 million offrom common stock issued under our employee stock plans.
Stock Repurchase Program During fiscal year 2007, net cash used by financing activities towards payments under our stock repurchase program was $275.0 million. These uses of cash in financing activities were offset by cash proceeds from common stock issued under our employee stock plans of $221.2 million for fiscal year 2007.
Liquidity
Our primary source of liquidity is cash generated by our operations. Our investment portfolio consisted of cash and cash equivalents, asset-backed securities, commercial paper, mortgage-backed securities issued by government-sponsored enterprises, equity securities, money market funds and debt securities of corporations, municipalities and the United States government and its agencies. These investments are denominated in United States dollars. As of January 25, 2009, we did not have any investments in auction-rate preferred securities.
We account for our investment instruments in accordance with Statement of Financial Accounting Standards No. 115, or SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. All of the cash equivalents and marketable securities are treated as “available-for-sale” under SFAS No. 115. Investments in both fixed rate and floating rate interest earning instruments carry a degree of interest rate risk. Fixed rate debt securities may have their market value adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future investment income may fall short of expectations due to changes in interest rates or if the decline in fair value of our publicly traded debt or equity investments is judged to be other-than-temporary. We may suffer losses in principal if we are forced to sell securities that decline in market value due to changes in interest rates. However, because any debt securities we hold are classified as “available-for-sale,” no gains or losses are realized in our statement of operations due to changes in interest rates unless such securities are sold prior to maturity or unless declines in market values are determined to be other-than-temporary. These securities are reported at fair value with the related unrealized gains and losses included in accumulated other comprehensive income, a component of stockholders’ equity, net of tax.
As of January 25, 2009 and January 27, 2008, we had $1.26 billion and $1.81 billion, respectively, in cash, cash equivalents and marketable securities. Our investment policy requires the purchase of top-tier investment grade securities, the diversification of asset types and includes certain limits on our portfolio duration, as specified in our investment policy guidelines. These guidelines also limit the amount of credit exposure to any one issue, issuer or type of instrument. As of January 25, 2009, we were in compliance with our investment policy. As of January 25, 2009, our investments in government agencies and government sponsored enterprises represented approximately 71% of our total investment portfolio, while the financial sector, which has been negatively impacted by recent market liquidity conditions, accounted for approximately 17% of our total investment portfolio. Substantially all of our investments are with A/A2 or better rated securities with the substantial majority of the securities rated AA-/Aa3 or better.
We performed an impairment review of our investment portfolio as of January 25, 2009. Currently, we have the intent and ability to hold our investments with impairment indicators until maturity. Based on our quarterly impairment review and having considered the guidance in Statement of Financial Accounting Standards Staff Position No. 115-1, or FSP No. 115-1, A Guide to the Implementation of Statement 115 on Accounting for Certain Investments in Debt and Equity Securities, we recorded other than temporary impairment charges of $9.9 million during fiscal year 2009. These charges include $5.6 million related to what we believe is an other than temporary impairment of our investment in the money market funds held by the Reserve International Liquidity Fund, Ltd., or International Reserve Fund; $2.5 million related to a decline in the value of publicly traded equity securities and $1.8 million related to debt securities held by us that were issued by companies that have filed for bankruptcy as of January 25, 2009. Please refer to Note 17 of the Notes to the Consolidated Financial Statements in Part IV, Item 15 of this Form 10-K for further details. We concluded that our investments were appropriately valued and that except for the $9.9 million impairment charges recognized in the year, no other than temporary impairment charges were necessary on our portfolio of available for sale investments as of January 25, 2009.
Net realized gains (losses), excluding any impairment charges, for fiscal year 2009 was $2.1 million. Net realized gains (losses) for fiscal years 2008 and 2007 were not material. As of January 25, 2009, we had a net unrealized gain of $4.4 million, which was comprised of gross unrealized gains of $7.8 million, offset by $3.4 million of gross unrealized losses. As of January 27, 2008, we had a net unrealized gain of $10.7 million, which was comprised of gross unrealized gains of $11.1 million, offset by $0.4 million of gross unrealized losses.
As of January 25, 2009, our money market investment in the International Reserve Fund, which was valued at $124.4 million, net of other than temporary impairment charges, was classified as marketable securities in our Consolidated Balance Sheet due to the halting of redemption requests in September 2008 by the International Reserve Fund. Subsequent to year-end, on January 30, 2009, we received $84.4 million from the International Reserve Fund. This was our portion of a payout of approximately 65% of the total assets of the Fund. Each shareholder’s percentage of this distribution was determined by dividing the shareholder’s total unfunded redeemed shares by the aggregate unfunded redeemed shares of the Fund, which was then used to calculate the shareholder’s pro rata portion of this distribution. We expect to receive the proceeds of our remaining investment in the International Reserve Fund, excluding the $5.6 million that we have recorded as an other than temporary impairment, by no later than October 2009, when all of the underlying securities held by the International Reserve Fund are scheduled to have matured. However, redemptions from the International Reserve Fund are currently subject to pending litigation, which could cause further delay in receipt of our funds.
Our accounts receivable are highly concentrated and make us vulnerable to adverse changes in our customers' businesses, and to downturns in the industry and the worldwide economy. One customer accounted for approximately 18% of our accounts receivable balance at January 25, 2009. While we strive to limit our exposure to uncollectible accounts receivable using a combination of credit insurance and letters of credit, difficulties in collecting accounts receivable could materially and adversely affect our financial condition and results of operations. These difficulties are heightened during periods when economic conditions worsen. We continue to work directly with more foreign customers and it may be difficult to collect accounts receivable from them. We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. This allowance consists of an amount identified for specific customers and an amount based on overall estimated exposure. If the financial condition of our customers were to deteriorate, resulting in an impairment in their ability to make payments, additional allowances may be required, we may be required to defer revenue recognition on sales to affected customers, and we may be required to pay higher credit insurance premiums, any of which could adversely affect our operating results. In the future, we may have to record additional reserves or write-offs and/or defer revenue on certain sales transactions which could negatively impact our financial results.
Cash Tender Offer
On August 9, 2004February 11, 2009, we announced that our Board of Directors approved a cash tender offer for certain employee stock options. The tender offer commenced on February 11, 2009 and expired at 12:00 midnight (Pacific Time) on March 11, 2009. The tender offer applied to outstanding stock options held by employees with an exercise price equal to or greater than $17.50 per share. None of the non-employee members of our Board of Directors or our officers who file reports under Section 16(a) of the Securities Exchange Act of 1934, including our former Chief Financial Officer, Marvin D. Burkett, were eligible to participate in the Offer. All eligible options with exercise prices less than $28.00 per share, but not less than $17.50 per share were eligible to receive a cash payment of $3.00 per option in exchange for the cancellation of the eligible option. All eligible options with exercise prices greater than $28.00 per share were eligible to receive a cash payment of $2.00 per option in exchange for the cancellation of the eligible option. Please refer to Note 19 for further discussion regarding the cash tender offer for certain employee stock options that our Board of Directors approved in February 2009.
Stock Repurchase Program
During fiscal year 2005, we announced that our Board of Directors, or Board, had authorized a stock repurchase program to repurchase shares of our common stock, subject to certain specifications, up to an aggregate maximum amount of $300 million. Subsequently, on March 6, 2006,During fiscal year 2007, the Board further approved an increase of $400 million to the original stock repurchase program. In fiscal year 2008, we announced a stock repurchase program under which we may purchase up to an additional $1.0 billion of our common stock over a three year period through May 2010. On August 12, 2008, we announced that our Board had approved a $400 millionfurther authorized an additional increase of $1.0 billion to the original stock repurchase program. As a result of this increase,these increases, we have an ongoing authorization from the Board, subject to certain specifications, to repurchase shares of our common stock up to an aggregate maximum amount of common stock the Board has authorized to be repurchased has now been increased to a total of $700 million.$2.7 billion through May 2010.
The repurchases will be made from time to time in the open market, in privately negotiated transactions, or in structured stock repurchase programs, and may be made in one or more larger repurchases, in compliance with the Securities Exchange Act of 1934, or the Exchange Act, Rule 10b-18, subject to market conditions, applicable legal requirements, and other factors. The program does not obligate NVIDIA to acquire any particular amount of common stock and the program may be suspended at any time at our discretion.
As part of our share repurchase program, we have entered into, and we may continue to enter into, structured share repurchase transactions with financial institutions. These agreements generally require that we make an up-front payment in exchange for the right to receive a fixed number of shares of our common stock upon execution of the agreement, and a potential incremental number of shares of our common stock, within a pre-determined range, at the end of the term of the agreement.
During fiscal 2007,the three months ended January 25, 2009, we repurchased 10.3 milliondid not enter into any structured share repurchase transactions or otherwise purchase any shares of our common stock for $275.0 million understock. During fiscal year 2009, we entered into structured share repurchase transactions to repurchase 29.3 million shares for $423.6 million, which we recorded on the trade date of the transaction.transactions. Through the end of fiscal 2007,year 2009, we have repurchased 27.3an aggregate of 90.9 million shares under our stock repurchase program for a total cost of $488.1 million. During the first quarter$1.46 billion. As of fiscal 2008,January 25, 2009, we entered into a structured share repurchase transactionare authorized, subject to certain specifications, to repurchase shares of our common stock for $125.0 million that we expectup to settle prior to the endan additional amount of our first fiscal quarter.$1.24 billion through May 2010.
Operating Capital and Capital Expenditure RequirementsRequirements.
We believe that our existing cash balances and anticipated cash flows from operations will be sufficient to meet our operating, acquisition and capital requirements for at least the next 12twelve months. However, there is no assurance that we will not need to raise additional equity or debt financing within this time frame. Additional financing may not be available on favorable terms or at all and may be dilutive to our then-current stockholders. We also may require additional capital for other purposes not presently contemplated. If we are unable to obtain sufficient capital, we could be required to curtail capital equipment purchases or research and development expenditures, which could harm our business. Factors that could affect our cash used or generated from operations and, as a result, our need to seek additional borrowings or capital include:
| · | decreased demand and market acceptance for our products and/or our customers’ products; |
| · | inability to successfully develop and produce in volume production our next-generation products; |
| · | competitive pressures resulting in lower than expected average selling prices; and |
| · | new product announcements or product introductions by our competitors. |
·decreased demand and market acceptance for our products and/or our customers’ products;
·inability to successfully develop and produce in volume production our next-generation products;
·competitive pressures resulting in lower than expected average selling prices; and
·new product announcements or product introductions by our competitors.
For additional factors see “Item 1A. Risk Factors - Risks Related to Our OperationsBusiness and Industry - Our operating results are unpredictable andrevenue may fluctuate and ifwhile our operating expenses are relatively fixed, which makes our results are below the expectationsdifficult to predict and could cause our results to fall short of securities analysts or investors, our stock price could decline.expectations.”
3dfx Asset Purchase
On December 15, 2000, NVIDIA Corporation and one of our indirect subsidiaries entered into an agreement,Asset Purchase Agreement, or APA, which closed on April 18, 2001, to purchase certain graphics chip assets from 3dfx. Under the terms of the Asset Purchase Agreement,APA, the cash consideration due at the closing was $70.0 million, less $15.0 million that was loaned to 3dfx pursuant to a Credit Agreement dated December 15, 2000. The Asset Purchase Agreement also provided, subject to the other provisions thereof, that if 3dfx properly certified that all its debts and other liabilities had been provided for, then we would have been obligated to pay 3dfx twoone million shares, which due to subsequent stock splits now totals six million shares, of NVIDIA common stock. If 3dfx could not make such a certification, but instead properly certified that its debts and liabilities could be satisfied for less than $25.0 million, then 3dfx could have elected to receive a cash payment equal to the amount of such debts and liabilities and a reduced number of shares of our common stock, with such reduction calculated by dividing the cash payment by $25.00 per share. If 3dfx could not certify that all of its debts and liabilities had been provided for, or could not be satisfied, for less than $25.0 million, we would not be obligated under the agreement to pay any additional consideration for the assets.
In October 2002, 3dfx filed for Chapter 11 bankruptcy protection in the United States Bankruptcy Court for the Northern District of California. In March 2003, we were served with a complaint filed by the Trustee appointed by the Bankruptcy Court which sought, among other things, payments from us as additional purchase price related to our purchase of certain assets of 3dfx. In early November 2005, after manyseveral months of mediation, NVIDIA and the Official Committee of Unsecured Creditors, or the Creditors’ Committee, reachedagreed to a Plan of Liquidation of 3dfx, which included a conditional settlement of the Trustee’s claims against NVIDIA.us. This conditional settlement presented as the centerpiece of a proposed Plan of Liquidation in the bankruptcy case, was subject to a confirmation process through a vote of creditors and the review and approval of the Bankruptcy Court after notice and hearing.Court. The Trustee advised that he intended to object to theconditional settlement which would have called for a payment by NVIDIA of approximately $30.6 million to the 3dfx estate. Under the settlement, $5.6 million related to various administrative expenses and Trustee fees, and $25.0 million related to the satisfaction of debts and liabilities owed to the general unsecured creditors of 3dfx. Accordingly, during the three month period ended October 30, 2005, we recorded $5.6 million as a charge to settlement costs and $25.0 million as additional purchase price for 3dfx.
However, The Trustee advised that he intended to object to the settlement. The conditional settlement never progressed substantially through the confirmation process.
On December 21, 2005,2006, the Bankruptcy Court determined that it would schedulescheduled a trial offor one portion of the Trustee’s case against NVIDIA. On January 2, 2007, NVIDIA exercised its right to terminateterminated the settlement agreement on grounds that the bankruptcy courtBankruptcy Court had failed to proceed toward confirmation of the Creditors’ Committee’s plan. BeginningA non-jury trial began on March 21, 2007 on valuation issues in the Trustee's constructive fraudulent transfer claims against NVIDIA. Specifically, the Bankruptcy Court tried four questions: (1) what did 3dfx transfer to NVIDIA in the APA?; (2) of what was transferred, what qualifies as "property" subject to the Bankruptcy Court's avoidance powers under the Uniform Fraudulent Transfer Act and relevant bankruptcy code provisions?; (3) what is the Trustee are scheduled to try the question of thefair market value of the assets 3dfx conveyed"property" identified in answer to NVIDIAquestion (2)?; and in particular, whether(4) was the price$70 million that NVIDIA paid for those assets was reasonably equivalent"reasonably equivalent" to the fair market value of the assets 3dfx sold to NVIDIA.that property? The parties completed post-trial briefing on May 25, 2007.
On April 30, 2008, the Bankruptcy Court issued its Memorandum Decision After Trial, in which it provided a detailed summary of the trial proceedings and the parties' contentions and evidence and concluded that "the creditors of 3dfx were not injured by the Transaction." This decision did not entirely dispose of the Trustee's action, however, as the Trustee's claims for successor liability and intentional fraudulent conveyance were still pending. On June 19, 2008, NVIDIA filed a motion for summary judgment to convert the Memorandum Decision After Trial to a final judgment. That motion was granted in its entirety and judgment was entered in NVIDIA’s favor on September 11, 2008. The Trustee filed a Notice of Appeal from that judgment on September 22, 2008, and on September 25, 2008, NVIDIA exercised its election to have the appeal heard by the United States District Court, where the appeal is pending.
While the conditional settlement reached in November 2005 never progressed through the confirmation process, the Trustee’s case still remains pending appeal. As such, we have not reversed the accrual of $30.6 million - $5.6 million as a charge to settlement costs and $25.0 million as additional purchase price for 3dfx – that we recorded during the three months ended October 30, 2005, pending resolution of the appeal of the Trustee’s case. We do not believe the resolution of this matter will have a material impact on our results of operations or financial position.
Please refer to Note 12 of the Notes to the Consolidated Financial Statements in Part IV, Item 15 of this Form 10-K for further information regarding this litigation.
Contractual Obligations Product Defect
Our products are complex and may contain defects or experience failures due to any number of issues in design, fabrication, packaging, materials and/or use within a system. If any of our products or technologies contains a defect, compatibility issue or other error, we may have to invest additional research and development efforts to find and correct the issue. Such efforts could divert our management’s and engineers’ attention from the development of new products and technologies and could increase our operating costs and reduce our gross margin. In addition, an error or defect in new products or releases or related software drivers after commencement of commercial shipments could result in failure to achieve market acceptance or loss of design wins. Also, we may be required to reimburse customers, including for customers’ costs to repair or replace the products in the field. A product recall or a significant number of product returns could be expensive, damage our reputation and could result in the shifting of business to our competitors. Costs associated with correcting defects, errors, bugs or other issues could be significant and could materially harm our financial results.
In July 2008, we recorded a $196.0 million charge against cost of revenue to cover anticipated customer warranty, repair, return, replacement and other associated costs arising from a weak die/packaging material set in certain versions of our previous generation MCP and GPU products used in notebook systems. All of our newly manufactured products and all of our products that are currently shipping in volume have a different material set that we believe is more robust.
The previous generation MCP and GPU products that are impacted were included in a number of notebook products that were shipped and sold in significant quantities. Certain notebook configurations of these MCP and GPU products are failing in the field at higher than normal rates. While we have not been able to determine a root cause for these failures, testing suggests a weak material set of die/package combination, system thermal management designs, and customer use patterns are contributing factors. We have worked with our customers to develop and have made available for download a software driver to cause the system fan to begin operation at the powering up of the system and reduce the thermal stress on these chips. We have also recommended to our customers that they consider changing the thermal management of the MCP and GPU products in their notebook system designs. We intend to fully support our customers in their repair and replacement of these impacted MCP and GPU products that fail, and their other efforts to mitigate the consequences of these failures.
We continue to engage in discussions with our supply chain regarding reimbursement to us for some or all of the costs we have incurred and may incur in the future relating to the weak material set. We also continue to seek to access our insurance coverage, which provided us with $8.0 million in related reimbursement during fiscal year 2009. However, there can be no assurance that we will recover any additional reimbursement. We continue to not see any abnormal failure rates in any systems using NVIDIA products other than certain notebook configurations. However, we are continuing to test and otherwise investigate other products. There can be no assurance that we will not discover defects in other MCP or GPU products.
Determining the amount of the $196.0 million charge related to this issue required management to make estimates and judgments based on historical experience, test data and various other assumptions including estimated field failure rates that we believe to be reasonable under the circumstances. The results of these judgments formed the basis for our estimate of the total charge to cover anticipated customer warranty, repair, return and replacement and other associated costs. However, if actual repair, return, replacement and other associated costs and/or actual field failure rates exceed our estimates, we may be required to record additional reserves, which would increase our cost of revenue and materially harm our financial results.
In September, October and November 2008, several putative class action lawsuits were filed against us, asserting various claims related to the impacted MCP and GPU products. Please refer to Note 12 of the Notes to the Consolidated Financial Statements in Part IV, Item 15 of this Form 10-K for further information regarding this litigation.
Contractual Obligations
The following table summarizes our contractual obligations that are not on our balance sheet as of January 28, 2007 and the effect such obligations are expected to have on our liquidity and cash flow in future periods:25, 2009:
Contractual Obligations | | Total | | Within 1 Year | | 2-3 Years | | 4-5 Years | | After 5 Years | |
| | | (In thousands) | |
| Operating leases | | $ | 167,765 | | $ | 33,890 | | $ | 65,432 | | $ | 61,998 | | $ | 6,445 | |
Purchase obligations (1) | | | 364,486 | | | 364,486 | | | -- | | | -- | | | -- | |
| Capital purchase obligations | | | 4,829 | | | 4,829 | | | | | | | | | | |
| Total contractual obligations | | $ | 537,080 | | $ | 403,205 | | $ | 65,432 | | $ | 61,998 | | $ | 6,445 | |
| Contractual Obligations | | Total | | | Within 1 Year | | | 2-3 Years | | | 4-5 Years | | | After 5 Years | | | All Other | |
| | | (In thousands) | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
FIN 48 liability and interest (2) | | | | | | | | | | | | | | | | | | | | | | | | |
Capital purchase obligations | | | | | | | | | | | | | | | | | | | | | | | | |
Total contractual obligations | | | | | | | | | | | | | | | | | | | | | | | | |
(1)Represents our inventory purchase commitments as of January 28, 2007.25, 2009.
(2) Represents our FIN 48 liability and FIN 48 net interest/penalty payable for $95.3 million and $11.8 million, respectively, as of January 25, 2009. We are unable to reasonably estimate the timing of FIN 48 liability and interest/penalty payments in individual years due to uncertainties in the timing of the effective settlement of tax positions.
During the fiscal year 2007, we entered into a confidential patent licensing arrangement. Our commitment for future license payments under this arrangement could range from $97.0 million to $110.0 million over a ten year period; however, the net outlay under this arrangement may be reduced by the occurrence of certain events covered by the arrangement. Off-Balance Sheet Arrangements
Off-Balance Sheet Arrangements
As of January 28, 2007,25, 2009, we had no material off-balance sheet arrangements as defined in Regulation S-K 303(a)(4)(ii).
Adoption of New Accounting Pronouncements
Please see Note 1 of the Notes to the Consolidated Financial Statements in Part IV, Item 15 of this Form 10-K for a discussion of adoption of new accounting pronouncements.
Recently Issued Accounting Pronouncements
In July 2006, the Financial Accounting Standards Board, or FASB, issued Interpretation No. 48, or FIN 48, Accounting for Uncertainty in Income Taxes. FIN 48 applies to all tax positions related to income taxes subject to FASB Statement 109, Accounting for Income Taxes. Under FIN 48 a company would recognize the benefit from a tax position only if it is more-likely-than-not that the position would be sustained upon audit based solely on the technical merits Please see Note 1 of the tax position. FIN 48 clarifies how a company would measure the income tax benefits from the tax positions that are recognized, provides guidance asNotes to the timingConsolidated Financial Statements in Part IV, Item 15 of the derecognitionthis Form 10-K for a discussion of previously recognized tax benefits, and describes the methods for classifying and disclosing the liabilities within the financial statements for any unrecognized tax benefits. FIN 48 also addresses when a company should record interest and penalties related to tax positions and how the interest and penalties may be classified within the financial statements. Any differences between tax liability amounts recognized in the statements of operations as a result of adoption of FIN 48 would be accounted for as a cumulative effect adjustment to the beginning balance of retained earnings. FIN 48 is effective for fiscal years beginning after December 15, 2006. The provisions of FIN 48 will be effective as of first quarter of fiscal 2008. We believe that the cumulative effect of adoption of FIN 48 will not result in any material change to the beginning balance of our retained earnings.recently issued accounting pronouncements.
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, or SFAS No. 157, Fair Value Measurements. SFAS No. 157 establishes a framework for measuring fair value and expands disclosures about fair value measurements. The changes to current practice resulting from the application of this Statement relate to the definition of fair value, the methods used to measure fair value, and the expanded disclosures about fair value measurements. We are required to adopt the provisions of SFAS No. 157 beginning with our fiscal quarter ending April 29, 2007. We do not believe the adoption of SFAS No. 157 will have a material impact on our consolidated financial position, results of operations or cash flows.
In September 2006, the SEC issued Staff Accounting Bulletin No. 108, or SAB No. 108, Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements, which provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement. We adopted the provisions of SAB No. 108 in our fiscal year 2007. The adoption of SAB No. 108 did not have a material impact on our consolidated financial position, results of operations or cash flows.
In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, or SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. SFAS No. 159 permits companies to choose to measure certain financial instruments and certain other items at fair value. The standard requires that unrealized gains and losses on items for which the fair value option has been elected be reported in earnings. We are required to adopt the provisions of SFAS No. 159 beginning with our fiscal quarter ending April 27, 2008, although earlier adoption is permitted. We are currently evaluating the impact that SFAS No. 159 will have on our consolidated financial position, results of operations or cash flows.
Investment and Interest Rate Risk
As of January 25, 2009 and January 27, 2008, we had $1.26 billion and $1.81 billion, respectively, in cash, cash equivalents and marketable securities. We invest in a variety of financial instruments, consisting principally of investments incash and cash equivalents, asset-backed securities, commercial paper, mortgage-backed securities issued by Government-sponsored enterprises, equity securities, money market funds and highly liquid debt securities of corporations, municipalities and the United States government and its agencies. TheseAs of January 25, 2009, we did not have any investments in auction-rate preferred securities. Our investments are denominated in United States dollars.
We account for our investment instruments in accordance with Statement of Financial Accounting Standards No. 115, or SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. All of the cash equivalents and marketable securities are treated as “available-for-sale” under SFAS No. 115. Investments in both fixed rate and floating rate interest earning instruments carry a degree of interest rate risk. Fixed rate securities may have their market value adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future investment income may fall short of expectations due to changes in interest rates or weif the decline in fair value of our publicly traded debt or equity investments is judged to be other-than-temporary. We may suffer losses in principal if we are forced to sell securities that decline in securities market value due to changes in interest rates. However, because we classify ourany debt securities we hold are classified as “available-for-sale”,“available-for-sale,” no gains or losses are recognizedrealized in our Consolidated Statements of Operations due to changes in interest rates unless such securities are sold prior to maturity or unless declines in fair value are determined to be other than temporary.other-than-temporary. These securities are reported at fair value with the related unrealized gains and losses included in accumulated other comprehensive income (loss), a component of stockholders’ equity, net of tax.
As of January 28, 2007,25, 2009, we performed a sensitivity analysis on our floating and fixed rate financial investments. According to our analysis, parallel shifts in the yield curve of both +/-plus or minus 0.5% would result in changes in fair market values for these investments of approximately $3.0$4.4 million.
Exchange Rate Risk
The current financial turmoil affecting the banking system and financial markets and the possibility that financial institutions may consolidate or go out of business have resulted in a tightening in the credit markets, a low level of liquidity in many financial markets, and extreme volatility in fixed income, credit, currency and equity markets. There could be a number of follow-on effects from the credit crisis on our business, including insolvency of key suppliers resulting in product delays; inability of customers, including channel partners, to obtain credit to finance purchases of our products and/or customer, including channel partner, insolvencies; and failure of financial institutions, which may negatively impact our treasury operations. Other income and expense could also vary materially from expectations depending on gains or losses realized on the sale or exchange of financial instruments; impairment charges related to debt securities as well as equity and other investments; interest rates; and cash, cash equivalent and marketable securities balances. The current volatility in the financial markets and overall economic uncertainty increases the risk that the actual amounts realized in the future on our financial instruments could differ significantly from the fair values currently assigned to them. For instance, we recorded other than temporary impairment charges of $9.9 million during fiscal year 2009. These charges include $5.6 million related to what we believe is an other than temporary impairment of our investment in the money market funds held by the Reserve International Liquidity Fund, Ltd., or International Reserve Fund; $2.5 million related to a decline in the value of publicly traded equity securities and $1.8 million related to debt securities held by us that were issued by companies that have filed for bankruptcy as of January 25, 2009. Please refer to Note 17 of the Notes to the Consolidated Financial Statements in Part IV, Item 15 of this Form 10-K for further details. As of January 25, 2009, our investments in government agencies and government sponsored enterprises represented approximately 71% of our total investment portfolio, while the financial sector accounted for approximately 17% of our total investment portfolio. Substantially all of our investments are with A/A2 or better rated securities with the substantial majority of the securities rated AA-/Aa3 or better. If the fair value of our investments in these sectors was to decline by 2%-5%, it would result in changes in fair market values for these investments by approximately $25-$63 million.
Exchange Rate Risk
We consider our direct exposure to foreign exchange rate fluctuations to be minimal. Gains or losses from foreign currency remeasurement are included in “Other income (expense), net” in our Consolidated Financial Statements and to date have not been significant. The impact of foreign currency transaction loss included in determining net income (loss) for fiscal years 2009, 2008 and 2007 was $2.0 million, $1.7 million and $0.5 million, respectively. Currently, sales and arrangements with third-party manufacturers provide for pricing and payment in United States dollars, and, therefore, are not subject to exchange rate fluctuations. Increases in the value of the United States’ dollar relative to other currencies would make our products more expensive, which could negatively impact our ability to compete. Conversely, decreases in the value of the United States’ dollar relative to other currencies could result in our suppliers raising their prices in order to continue doing business with us. To date, we have not engaged in any currency hedging activities, although we may do so in the future. Fluctuations in currency exchange rates could harm our business in the future.
We may enter into certain transactions such as forward contracts which are designed to reduce the future potential impact resulting from changes in foreign currency exchange rates. There were no forward exchange contracts outstanding at January 25, 2009.
The information required by this Item is set forth in our Consolidated Financial Statements and Notes thereto included in this Annual Report on Form 10-K.
Not applicable.
Controls and Procedures
Disclosure Controls and Procedures
Based on their evaluation as of January 28, 2007,25, 2009, our management, including our Chief Executive Officer and Chief Financial Officer, havehas concluded that our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act)Act of 1934) were effective.
Management’s Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of January 28, 200725, 2009 based on the criteria set forth in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the criteria set forth in Internal Control — Integrated Framework, our management concluded that our internal control over financial reporting was effective as of January 28, 2007.25, 2009.
Our management’s assessment of the The effectiveness of our internal control over financial reporting as of January 28, 200725, 2009 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in theirits report which is included herein.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal controls over financial reporting during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls, will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within NVIDIA have been detected.
None.
Identification of Directors
Reference is made to the information regarding directors appearing under the heading “Proposal 1-1 - Election of Directors” in our 20072009 Proxy Statement, which information is hereby incorporated by reference.
Identification of Executive Officers
Reference is made to the information regarding executive officers appearing under the heading “Executive Officers of the Registrant” in Part I of this Annual Report on Form 10-K, which information is hereby incorporated by reference.
Identification of Audit Committee and Financial Expert
Reference is made to the information regarding directors appearing under the heading “Report of the Audit Committee of the Board of Directors” and “Information about the Board of Directors and Corporate Governance” in our 20072009 Proxy Statement, which information is hereby incorporated by reference.
Material Changes to Procedures for Recommending Directors
Reference is made to the information regarding directors appearing under the heading “Information about the Board of Directors and Corporate Governance” in our 20072009 Proxy Statement, which information is hereby incorporated by reference.
Compliance with Section 16(a) of the Exchange Act
Reference is made to the information appearing under the heading “Section 16(a) Beneficial Ownership Reporting Compliance” in our 20072009 Proxy Statement, which information is hereby incorporated by reference.
Code of Conduct
Code of Conduct
Reference is made to the information appearing under the heading “Information about the Board of Directors and Corporate Governance - Code of Conduct” in our 20072009 Proxy Statement, which information is hereby incorporated by reference. The full text of our “Worldwide Code of Conduct” and “Financial Team Code of Conduct” are published on the Investor Relations portion of our web site, under Corporate Governance, at www.nvidia.comwww.nvidia.com. The contents of our website are not a part of this Annual Report on Form 10-K.
The information required by this item is hereby incorporatedincorporate by reference from the sectionsections entitled “Executive Compensation”, “Compensation Committee Interlocks and Insider Participation”, “Director Compensation” and “Compensation Committee Report” in our 20072009 Proxy Statement.
Ownership of NVIDIA Securities
The information required by this item is hereby incorporated by reference from the section entitled “Security Ownership of Certain Beneficial Owners and Management” in our 20072009 Proxy Statement.
Equity Compensation Plan Information
Information concerningregarding our equity compensation plans, including both stockholder approved plans and non-stockholder approved plans, will be contained in our 2009 Proxy Statement under the caption "Equity Compensation Plan Information," and is hereby incorporated by reference from the section entitled “Equity Compensation Plan Information” in our 2007 Proxy Statement.into this Annual Report on Form 10-K.
The information required by this item is hereby incorporated by reference from the sections entitled “Transactions with Related Persons”, “Review of Transactions with Related Persons” and “Information about the Board of Directors and Corporate Governance - Independence of the Members of the Board of Directors” in our 20072009 Proxy Statement.
The information required by this item is hereby incorporated by reference from the section entitled “Fees Billed by the Independent Registered Public Accounting Firm” in our 20072009 Proxy Statement.
Tothe Stockholders and Board of Directors
NVIDIA of Nvidia Corporation:
We have completed integrated audits of NVIDIA Corporation’s consolidated financial statements and of its internal control over financial reporting as of January 28, 2007, in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.
Consolidated financial statements and financial statement schedule
In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(2)(1) present fairly, in all material respects, the financial position of NVIDIA Corporation and its subsidiaries at January 28, 200725, 2009 and January 29, 2006,27, 2008, and the results of their operations and their cash flows for each of the three years in the period ended January 28, 200725, 2009 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2)presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. TheseAlso in our opinion, the Company maintained, in all material respects, effective internal control over financial statements and financial statement schedules arereporting as of January 25, 2009, based on criteria established in Internal Control - Integrated Framework issued by the responsibilityCommittee of Sponsoring Organizations of the Company’s management. Our responsibilityTreadway Commission (COSO). The Company's management is to express an opinion onresponsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management's Annual Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company's internal control over financial reporting based on our integrated audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the auditaudits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An auditmisstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements includesincluded examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 2 of the Notes to Consolidated Financial Statements, the Company changed the manner in which it accounts for stock-based compensation in fiscal 2007.
Internal control over financial reporting
Also, in our opinion, management’s assessment, included in Management’s Annual Report on Internal Control over Financial Reportingappearing under Item 9A, that the Company maintained effective internal control over financial reporting as of January 28, 2007 based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of January 28, 2007, based on criteria established in Internal Control - Integrated Framework issued by the COSO. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management’s assessment and on the effectiveness of the Company’s internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includesincluded obtaining an understanding of internal control over financial reporting, evaluating management’s assessment,assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control andbased on the assessed risk. Our audits also included performing such other procedures as we considerconsidered necessary in the circumstances. We believe that our audit providesaudits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
San Jose, CA
March 15, 200713, 2009
CONSOLIDATED STATEMENTS OF INCOMEOPERATIONS
(In thousands, except per share data)
| | | Year Ended January 28, 2007 | | Year Ended January 29, 2006 | | Year Ended January 30, 2005 | |
| Revenue | | $ | 3,068,771 | | $ | 2,375,687 | | $ | 2,010,033 | |
| Cost of revenue | | | 1,768,322 | | | 1,465,654 | | | 1,362,478 | |
| Gross profit | | | 1,300,449 | | | 910,033 | | | 647,555 | |
| Operating expenses: | | | | | | | | | | |
| Research and development | | | 553,467 | | | 357,123 | | | 348,220 | |
| Sales, general and administrative | | | 293,530 | | | 202,088 | | | 204,159 | |
| Settlement costs | | | - | | | 14,158 | | | — | |
| Total operating expenses | | | 846,997 | | | 573,369 | | | 552,379 | |
| Income from operations | | | 453,452 | | | 336,664 | | | 95,176 | |
| Interest income | | | 41,820 | | | 20,698 | | | 11,422 | |
| Interest expense | | | (21 | ) | | (72 | ) | | (164 | ) |
| Other income (expense), net | | | (771 | ) | | (502 | ) | | 594 | |
| Income before income tax expense | | | 494,480 | | | 356,788 | | | 107,028 | |
| Income tax expense | | | 46,350 | | | 55,612 | | | 18,413 | |
| Income before change in accounting principle | | | 448,130 | | | 301,176 | | | 88,615 | |
| Cumulative effect of change in accounting principle, net of tax | | | 704 | | | - | | | - | |
| Net income | | $ | 448,834 | | $ | 301,176 | | $ | 88,615 | |
| | | | | | | | | | | |
| Basic income per share | | | | | | | | | | |
| Income before change in accounting principle | | $ | 1.27 | | $ | 0.89 | | $ | 0.27 | |
| Cumulative effect of change in accounting principle | | | - | | | - | | | - | |
| Basic net income per share | | $ | 1.27 | | $ | 0.89 | | $ | 0.27 | |
| | | | | | | | | | | |
Shares used in basic per share computation (1) | | | 352,404 | | | 339,380 | | | 332,124 | |
| | | | | | | | | | | |
| Diluted income per share: | | | | | | | | | | |
| Income before change in accounting principle | | $ | 1.15 | | $ | 0.82 | | $ | 0.25 | |
| Cumulative effect of change in accounting principle | | | - | | | - | | | - | |
| Diluted net income per share | | $ | 1.15 | | $ | 0.82 | | $ | 0.25 | |
| | | | | | | | | | | |
Shares used in diluted per share computation (1) | | | 391,504 | | | 365,704 | | | 351,624 | |
| | | | | | | | | | | |
| | Year Ended | |
| | | January 25, 2009 | | | January 27, 2008 | | | January 28, 2007 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Sales, general and administrative | | | | | | | | | | | | |
Restructuring charges and other | | | | | | | | | | | | |
| | | | | | | | | | | | |
Income (loss) from operations | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Other income (expense), net | | | | | | | | | | | | |
Income (loss) before income tax | | | | | | | | | | | | |
Income tax expense (benefit) | | | | | | | | | | | | |
Income (loss) before change in accounting principle | | | | | | | | | | | | |
Cumulative effect of change in accounting principle, net of tax | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | |
Basic income (loss) per share: | | | | | | | | | | | | |
Income (loss) before change in accounting principle | | | | | | | | | | | | |
Cumulative effect of change in accounting principle | | | | | | | | | | | | |
Basic net income (loss) per share | | | | | | | | | | | | |
Shares used in basic per share computation (1) | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Diluted income (loss) per share: | | | | | | | | | | | | |
Income (loss) before change in accounting principle | | | | | | | | | | | | |
Cumulative effect of change in accounting principle | | | | | | | | | | | | |
Diluted net income (loss) per share | | | | | | | | | | | | |
Shares used in diluted per share computation (1) | | | | | | | | | | | | |
| | | | | | | | | | | | | |
(1)Reflects a two-for-onethree-for-two stock split effective on April 6, 2006.
See accompanying notes to consolidated financial statements.
CONSOLIDATED BALANCE SHEETS
(In thousands, except shareSeptember 10, 2007 and per share data)
| | | January 28, 2007 | | January 29, 2006 | |
ASSETS | | | | | |
| Current assets: | | | | | |
| Cash and cash equivalents | | $ | 544,414 | | $ | 551,756 | |
| Marketable securities | | | 573,436 | | | 398,418 | |
| Accounts receivable, less allowances of $15,749 and $10,837 in 2007 and 2006, respectively | | | 518,680 | | | 318,186 | |
| Inventories | | | 354,680 | | | 254,870 | |
| Prepaid expenses and other current assets | | | 31,141 | | | 24,387 | |
| Deferred income taxes | | | 9,419 | | | 2,682 | |
| Total current assets | | | 2,031,770 | | | 1,550,299 | |
| Property and equipment, net | | | 260,828 | | | 178,152 | |
| Goodwill | | | 301,425 | | | 145,317 | |
| Intangible assets, net | | | 45,511 | | | 15,421 | |
| Deposits and other assets | | | 28,349 | | | 27,477 | |
| Deferred income taxes | | | 7,380 | | | 38,021 | |
| | | $ | 2,675,263 | | $ | 1,954,687 | |
| | | | | | | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | |
| Current liabilities: | | | | | | | |
| Accounts payable | | $ | 272,075 | | $ | 179,395 | |
| Accrued liabilities | | | 366,732 | | | 259,264 | |
| Total current liabilities | | | 638,807 | | | 438,659 | |
| Other long-term liabilities | | | 29,537 | | | 20,036 | |
| Commitments and contingencies - see Note 12 | | | | | | | |
| Stockholders’ equity: | | | | | | | |
| Preferred stock, $.001 par value; 2,000,000 shares authorized; none issued | | | — | | | — | |
Common stock, $.001 par value; 1,000,000,000 shares authorized; 388,308,979 shares issued and 360,988,504 outstanding in 2007; and 359,927,958 shares issued and 342,954,912 outstanding in 2006 (1) | | | 388 | | | 360 | |
| Additional paid-in capital | | | 1,295,650 | | | 965,604 | |
| Deferred compensation | | | - | | | (3,604 | ) |
| Treasury stock, at cost (27,227,145 shares in 2007 and 16,889,716 shares in 2006) | | | (487,120 | ) | | (212,142 | ) |
| Accumulated other comprehensive income (loss), net | | | 1,436 | | | (1,957 | ) |
| Retained earnings | | | 1,196,565 | | | 747,731 | |
| Total stockholders' equity | | | 2,006,919 | | | 1,495,992 | |
| | | $ | 2,675,263 | | $ | 1,954,687 | |
| | | | | | | | |
(1)Reflects a two-for-one stock split effective on April 6, 2006.
See accompanying notes to the consolidated financial statements.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITYBALANCE SHEETS
AND COMPREHENSIVE INCOME
(In thousands, except share and per share data)
| | | Common Stock | | Additional Paid-in Capital (1) | | | Deferred Compensation | | Treasury Stock | | Accumulated Other Comprehensive Income (Loss) | | Retained Earnings | | Total Stockholders’ Equity | | Total Comprehensive Income | |
| | | Outstanding Shares (1) | | Amount | | | | | | | | |
Balances, January 25, 2004 | | | 328,291,574 | | $ | 328 | | $ | 770,278 | | $ | (39,903 | ) | $ | — | | $ | 850 | | $ | 357,940 | | $ | 1,089,493 | | $ | 45,720 | |
| Issuance of common stock from stock plans | | | 10,056,222 | | | 10 | | | 42,492 | | | — | | | — | | | — | | | — | | | 42,502 | | | | |
| Stock repurchase | | | (4,168,706 | ) | | — | | | — | | | — | | | (24,644 | ) | | — | | | — | | | (24,644 | ) | | | |
| Tax benefit from stock-based compensation | | | — | | | — | | | 8,616 | | | — | | | — | | | — | | | — | | | 8,616 | | | | |
| Reversal of deferred compensation | | | — | | | — | | | (5,359 | ) | | 5,359 | | | — | | | — | | | — | | | — | | | | |
| Amortization of deferred compensation | | | — | | | — | | | (145 | ) | | 20,967 | | | — | | | — | | | — | | | 20,822 | | | | |
| Unrealized loss, net of $1,470 tax effect | | | — | | | — | | | — | | | — | | | — | | | (4,468 | ) | | — | | | (4,468 | ) | | (4,468 | ) |
| Reclassification adjustment for net losses included in net income, net of ($38) tax effect | | | — | | | — | | | — | | | — | | | — | | | 155 | | | — | | | 155 | | | 155 | |
| Net income | | | — | | | — | | | — | | | — | | | — | | | — | | | 88,615 | | | 88,615 | | | 88,615 | |
| Balances, January 30, 2005 | | | 334,179,090 | | | 338 | | | 815,882 | | | (13,577 | ) | | (24,644 | ) | | (3,463 | ) | | 446,555 | | | 1,221,091 | | | 84,302 | |
| Issuance of common stock from stock plans | | | 21,663,492 | | | 22 | | | 127,475 | | | — | | | — | | | — | | | — | | | 127,497 | | | | |
| Stock repurchase | | | (12,804,340 | ) | | — | | | — | | | — | | | (188,509 | ) | | — | | | — | | | (188,509 | ) | | | |
| Tax benefit from stock-based compensation | | | — | | | — | | | 24,868 | | | — | | | — | | | — | | | — | | | 24,868 | | | | |
| Cancellation of shares | | | (83,330 | ) | | — | | | (520 | ) | | — | | | 1,011 | | | — | | | — | | | 491 | | | | |
| Reversal of deferred compensation | | | — | | | — | | | (2,101 | ) | | 2,101 | | | — | | | — | | | — | | | — | | | | |
| Amortization of deferred compensation | | | — | | | — | | | — | | | 7,872 | | | — | | | — | | | — | | | 7,872 | | | | |
| Unrealized loss, net of $845 tax effect | | | — | | | — | | | — | | | — | | | — | | | (120 | ) | | — | | | (120 | ) | | (120 | ) |
| Reclassification adjustment for net losses included in net income, net of ($407) tax effect | | | — | | | — | | | — | | | — | | | — | | | 1,626 | | | — | | | 1,626 | | | 1,626 | |
| Net income | | | — | | | — | | | — | | | — | | | — | | | — | | | 301,176 | | | 301,176 | | | 301,176 | |
| Balances, January 29, 2006 | | | 342,954,912 | | | 360 | | | 965,604 | | | (3,604 | ) | | (212,142 | ) | | (1,957 | ) | | 747,731 | | | 1,495,992 | | | 302,682 | |
| Issuance of common stock from stock plans | | | 28,381,021 | | | 28 | | | 221,132 | | | — | | | — | | | — | | | — | | | 221,160 | | | | |
| Stock repurchase | | | (10,337,429 | ) | | — | | | — | | | — | | | (274,978 | ) | | — | | | — | | | (274,978 | ) | | | |
| Tax deficit from stock-based compensation | | | — | | | — | | | (8,482 | ) | | — | | | — | | | — | | | — | | | (8,482 | ) | | | |
| Reversal of deferred compensation | | | — | | | — | | | (3,604 | ) | | 3,604 | | | — | | | — | | | — | | | — | | | | |
| Stock-based compensation expense related to acquisitions | | | — | | | — | | | 2,914 | | | — | | | — | | | — | | | — | | | 2,914 | | | | |
| Stock-based compensation related to employees | | | — | | | — | | | 118,790 | | | — | | | — | | | — | | | — | | | 118,790 | | | | |
| Unrealized gain, net of $1,223 tax effect | | | — | | | — | | | — | | | — | | | — | | | 3,509 | | | — | | | 3,509 | | | 3,509 | |
| Reclassification adjustment for net gains included in net income, net of $78 tax effect | | | — | | | — | | | — | | | — | | | — | | | (116 | ) | | — | | | (116 | ) | | (116 | ) |
| Impact of change in accounting principle, net of ($379) tax effect | | | — | | | — | | | (704 | ) | | — | | | — | | | — | | | — | | | (704 | ) | | | |
| Net income | | | — | | | — | | | — | | | — | | | — | | | — | | | 448,834 | | | 448,834 | | | 448,834 | |
| Balances, January 28, 2007 | | | 360,988,504 | | $ | 388 | | $ | 1,295,650 | | $ | - | | $ | (487,120 | ) | $ | 1,436 | | $ | 1,196,565 | | $ | 2,006,919 | | $ | 452,227 | |
(1)Reflects a two-for-one stock split effective on April 6, 2006.
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
| | | Year Ended | |
| | | January 28, 2007 | | January 29, 2006 | | January 30, 2005 | |
| Cash flows from operating activities: | | | | | | | |
| Net income | | $ | 448,834 | | $ | 301,176 | | $ | 88,615 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | |
| Cumulative effect of change in accounting principle | | | (704 | ) | | — | | | — | |
| Bad debt expense (benefit) | | | 205 | | | (492 | ) | | (844 | ) |
| In-process research and development | | | 14,002 | | | — | | | — | |
| Depreciation and amortization | | | 107,562 | | | 97,977 | | | 102,597 | |
| Stock-based compensation expense related to employees | | | 116,735 | | | 7,872 | | | 20,822 | |
| Gross tax benefit from stock-based compensation | | | (188 | ) | | — | | | — | |
| Tax benefit (deficit) from stock-based compensation | | | (8,482 | ) | | 24,868 | | | 8,616 | |
| Deferred income taxes | | | 41,766 | | | (2,691 | ) | | 8,694 | |
| Net loss on retirements of property and equipment | | | 251 | | | 1,005 | | | 412 | |
| Non-cash realized gain on investment exchange | | | — | | | (96 | ) | | (533 | ) |
| Changes in operating assets and liabilities: | | | | | | | | | | |
| Accounts receivable | | | (175,261 | ) | | (21,415 | ) | | (110,312 | ) |
| Inventories | | | (91,395 | ) | | 60,916 | | | (80,906 | ) |
| Prepaid expenses and other current assets | | | (5,294 | ) | | (4,568 | ) | | (5,569 | ) |
| Deposits and other assets | | | 7,314 | | | (8,073 | ) | | (1,458 | ) |
| Accounts payable | | | 38,613 | | | (58,828 | ) | | 52,941 | |
| Accrued liabilities and other long-term liabilities | | | 93,153 | | | 48,757 | | | 49,125 | |
| Net cash provided by operating activities | | | 587,111 | | | 446,408 | | | 132,200 | |
| Cash flows from investing activities: | | | | | | | | | | |
| Purchases of marketable securities | | | (220,834 | ) | | (338,058 | ) | | (313,760 | ) |
| Proceeds from sales and maturities of marketable securities | | | 227,067 | | | 397,686 | | | 229,068 | |
| Acquisition of businesses, net of cash and cash equivalents | | | (401,800 | ) | | (12,131 | ) | | — | |
| Purchases of property and equipment and intangible assets | | | (145,256 | ) | | (79,600 | ) | | (67,261 | ) |
| Investments in affiliates | | | | | | (9,684 | ) | | - | |
| Net cash used in investing activities | | | (540,823 | ) | | (41,787 | ) | | (151,953 | ) |
| Cash flows from financing activities: | | | | | | | | | | |
| Proceeds from issuance of common stock under employee stock plans | | | 221,160 | | | 127,497 | | | 42,502 | |
| Payments for stock repurchases | | | (274,978 | ) | | (188,509 | ) | | (24,644 | ) |
| Gross tax benefit from stock-based compensation | | | 188 | | | — | | | — | |
| Other | | | — | | | (365 | ) | | (4,015 | ) |
| Net cash provided by (used in) financing activities | | | (53,630 | ) | | (61,377 | ) | | 13,843 | |
| Change in cash and cash equivalents | | | (7,342 | ) | | 343,244 | | | (5,910 | ) |
| Cash and cash equivalents at beginning of period | | | 551,756 | | | 208,512 | | | 214,422 | |
| Cash and cash equivalents at end of period | | $ | 544,414 | | $ | 551,756 | | $ | 208,512 | |
| | | | | | | | | | | |
| Supplemental disclosures of cash flow information: | | | | | | | | | | |
| Cash paid for interest | | $ | — | | $ | 12 | | $ | 163 | |
| Cash paid for income taxes, net | | $ | 26,628 | | $ | 3,368 | | $ | 763 | |
| | | January 25, 2009 | | | January 27, 2008 | |
| ASSETS | | | | | | |
| | | | | | |
Cash and cash equivalents | | | | | | | | |
| | | | | | | | |
Accounts receivable, less allowances of $18,399 and $19,693 in 2009 and 2008, respectively | | | | | | | | |
| | | | | | | | |
Prepaid expenses and other | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Property and equipment, net | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Deposits and other assets | | | | | | | | |
| | | | | | | | |
| | | | | | | | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Accrued liabilities and other | | | | | | | | |
Total current liabilities | | | | | | | | |
Other long-term liabilities | | | | | | | | |
Capital lease obligations, long term | | | | | | | | |
Commitments and contingencies - see Note 12 | | | | | | | | |
| | | | | | | | |
Preferred stock, $.001 par value; 2,000,000 shares authorized; none issued | | | | | | | | |
Common stock, $.001 par value; 2,000,000,000 shares authorized; 629,386,584 shares issued and 538,460,766 outstanding in 2009; and 618,701,483 shares issued and 557,102,588 outstanding in 2008, respectively | | | | | | | | |
Additional paid-in capital | | | | | | | | |
Treasury stock, at cost (90,925,818 shares in 2009 and 61,598,895 shares in 2008) | | | | | | | | |
Accumulated other comprehensive income | | | | | | | | |
| | | | | | | | |
Total stockholders' equity | | | | | | | | |
Total liabilities and stockholders' equity | | | | | | | | |
| | | | | | | | | |
See accompanying notes to the consolidated financial statements.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
AND COMPREHENSIVE INCOME (LOSS)
(In thousands, except share data)
| | | | Common Stock | | | | | | | | | | | | | | | | | | | | |
| | | | Outstanding Shares (1) | Amount (1) | | | Additional Paid-in Capital (1) | | | Deferred Compensation | | | Treasury Stock | | | Accumulated Other Comprehensive Income(Loss) | | | Retained Earnings | | | Total Stockholders' Equity | | | Total Comprehensive Income | |
| Balances, January 29, 2006 | | | 514,432,368 | | | $ | 540 | | | $ | 965,424 | | | $ | (3,604 | ) | | $ | (212,142 | ) | | $ | (1,957 | ) | | $ | 747,731 | | | $ | 1,495,992 | | | $ | 302,682 | |
| Issuance of common stock from stock plans | | | 42,571,532 | | | | 43 | | | | 221,117 | | | | - | | | | - | | | | - | | | | - | | | | 221,160 | | | | | |
| Stock repurchase | | | (15,506,144 | ) | | | - | | | | - | | | | - | | | | (274,978 | ) | | | - | | | | - | | | | (274,978 | ) | | | | |
| Tax deficit from stock-based compensation | | | - | | | | - | | | | (8,482 | ) | | | - | | | | - | | | | - | | | | - | | | | (8,482 | ) | | | | |
| Reversal of deferred compensation upon adoption of SFAS No. 123(R) | | | - | | | | - | | | | (3,604 | ) | | | 3,604 | | | | - | | | | - | | | | - | | | | - | | | | | |
| Stock-based compensation expense related to acquisitions | | | - | | | | - | | | | 2,914 | | | | - | | | | - | | | | - | | | | - | | | | 2,914 | | | | | |
| Stock-based compensation related to employees | | | - | | | | - | | | | 118,790 | | | | - | | | | - | | | | - | | | | - | | | | 118,790 | | | | | |
| Unrealized gain, net of $1,223 tax effect | | | - | | | | - | | | | - | | | | - | | | | - | | | | 3,509 | | | | - | | | | 3,509 | | | | 3,509 | |
| Reclassification adjustment for net realized gains included in net income, net of $78 tax effect | | | - | | | | - | | | | - | | | | - | | | | - | | | | (116 | ) | | | - | | | | (116 | ) | | | (116 | ) |
| Impact of change in accounting principle, net of ($379) tax effect | | | - | | | | - | | | | (704 | ) | | | - | | | | - | | | | - | | | | - | | | | (704 | ) | | | | |
| Net Income | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 448,834 | | | | 448,834 | | | | 448,834 | |
| Balances, January 28, 2007 | | | 541,497,756 | | | | 583 | | | | 1,295,455 | | | | - | | | | (487,120 | ) | | | 1,436 | | | | 1,196,565 | | | | 2,006,919 | | | | 452,227 | |
| Issuance of common stock from stock plans | | | 36,238,014 | | | | 36 | | | | 225,933 | | | | - | | | | - | | | | - | | | | - | | | | 225,969 | | | | | |
| Stock repurchase | | | (20,633,182 | ) | | | - | | | | - | | | | - | | | | (552,512 | ) | | | - | | | | - | | | | (552,512 | ) | | | | |
| Tax benefit from stock-based compensation | | | - | | | | - | | | | 220 | | | | - | | | | - | | | | - | | | | - | | | | 220 | | | | | |
| Stock-based compensation related to employees | | | - | | | | - | | | | 133,073 | | | | - | | | | - | | | | - | | | | - | | | | 133,073 | | | | | |
| Unrealized gain, net of $2,860 tax effect | | | - | | | | - | | | | - | | | | - | | | | - | | | | 6,703 | | | | - | | | | 6,703 | | | | 6,703 | |
| Reclassification adjustment for net realized gains included in net income, net of $4 tax effect | | | - | | | | - | | | | - | | | | - | | | | - | | | | (105 | ) | | | - | | | | (105 ) | | | | (105 | ) |
| Net Income | | | - | | | | - | | | | - | | | | - | | | | | | | | - | | | | 797,645 | | | | 797,645 | | | | 797,645 | |
| Balances, January 27, 2008 | | | 557,102,588 | | | | 619 | | | | 1,654,681 | | | | - | | | | (1,039,632 | ) | | | 8,034 | | | | 1,994,210 | | | | 2,617,912 | | | | 804,243 | |
| Issuance of common stock from stock plans | | | 10,685,101 | | | | 10 | | | | 73,537 | | | | - | | | | - | | | | - | | | | - | | | | 73,547 | | | | | |
| Stock repurchase | | | (29,326,923 | ) | | | - | | | | - | | | | - | | | | (423,636 | ) | | | - | | | | - | | | | (423,636 | ) | | | | |
| Tax deficit from stock-based compensation | | | - | | | | - | | | | (2,946 | ) | | | - | | | | - | | | | - | | | | - | | | | (2,946 | ) | | | | |
| Stock-based compensation related to employees | | | - | | | | - | | | | 163,985 | | | | - | | | | - | | | | - | | | | - | | | | 163,985 | | | | | |
| Unrealized loss, net of $2,054 tax effect | | | - | | | | - | | | | - | | | | - | | | | - | | | | (3,920 | ) | | | - | | | | (3,920 | ) | | | (3,920 | ) |
| Reclassification adjustment for net realized gains included in net income, net of $135 tax effect | | | - | | | | - | | | | - | | | | - | | | | - | | | | (249 | ) | | | - | | | | (249 | ) | | | (249 | ) |
| Net Loss | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (30,041 | ) | | | (30,041 ) | | | | (30,041 | ) |
| Balances, January 25, 2009 | | | 538,460,766 | | | $ | 629 | | | $ | 1,889,257 | | | $ | - | | | $ | (1,463,268 | ) | | $ | 3,865 | | | $ | 1,964,169 | | | $ | 2,394,652 | | | $ | (34,210 | ) |
| (1) | Reflects a three-for-two stock split effective on September 10, 2007 and a two-for-one stock split effective on April 6, 2006. |
See accompanying notes to the consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
(In thousands)
| | | Year Ended | |
| | | January 28, 2007 | | January 29, 2006 | | January 30, 2005 | |
| Other non-cash activities: | | | | | | | |
| Unrealized gains/losses from marketable securities | | $ | 4,492 | | $ | 1,068 | | $ | 5,745 | |
| Deferred stock-based compensation | | $ | 3,604 | | $ | (2,101 | ) | $ | (5,359 | ) |
| Acquisition of business - goodwill adjustment | | $ | 17,862 | | $ | 25,765 | | $ | 1,091 | |
| Assets acquired by assuming related liabilities | | $ | 37,251 | | $ | — | | $ | — | |
| Acquisition of business - stock option conversion | | $ | 2,914 | | $ | — | | $ | — | |
| Application of customer advance to accounts receivable | | $ | — | | $ | — | | $ | 11,508 | |
| Marketable security received from investment exchange | | $ | — | | $ | 96 | | $ | 688 | |
| Asset retirement obligation | | $ | — | | $ | 1,835 | | $ | 4,483 | |
| | | Year ended | |
| | | January 25, 2009 | | | January 27, 2008 | | | January 28, 2007 | |
Cash flows from operating activities: | | | | | | | | | |
| | $ | (30,041 | ) | | $ | 797,645 | | | $ | 448,834 | |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | | | | | | | | | | |
Stock-based compensation expense related to employees | | | 162,706 | | | | 133,365 | | | | 116,735 | |
Depreciation and amortization | | | 185,023 | | | | 133,192 | | | | 107,562 | |
Impairment charge on investments | | | 9,891 | | | | - | | | | - | |
| | | (23,277 | ) | | | 89,516 | | | | 41,766 | |
Payments under patent licensing arrangement | | | (21,797 | ) | | | (57,255 | ) | | | (14,430 | ) |
In-process research and development expenses | | | - | | | | 4,000 | | | | 14,002 | |
Tax benefit (deficit) from stock-based compensation | | | (2,946 | ) | | | 220 | | | | (8,482 | ) |
Cumulative effect of change in accounting principle | | | - | | | | - | | | | (704 | ) |
| | | 3,134 | | | | (436 | ) | | | 268 | |
Changes in operating assets and liabilities, net of effects of acquisitions: | | | | | | | | | | | | |
| | | 348,873 | | | | (146,055 | ) | | | (175,261 | ) |
| | | (177,295 | ) | | | (3,690 | ) | | | (91,395 | ) |
Prepaid expenses and other current assets | | | 21,528 | | | | (6,293 | ) | | | (5,294 | ) |
Deposits and other assets | | | (2,108 | ) | | | (13,914 | ) | | | 7,314 | |
| | | (283,207 | ) | | | 216,875 | | | | 38,613 | |
Accrued liabilities and other long-term liabilities | | | 58,876 | | | | 123,026 | | | | 93,153 | |
Net cash provided by operating activities | | | 249,360 | | | | 1,270,196 | | | | 572,681 | |
Cash flows from investing activities: | | | | | | | | | | | | |
Purchases of marketable securities | | | (999,953 | ) | | | (1,250,248 | ) | | | (220,834 | ) |
Proceeds from sales and maturities of marketable securities | | | 1,226,646 | | | | 753,839 | | | | 227,067 | |
Purchases of property and equipment and intangible assets | | | (407,670 | ) | | | (187,745 | ) | | | (130,826 | ) |
Acquisition of businesses, net of cash and cash equivalents | | | (27,948 | ) | | | (75,542 | ) | | | (401,800 | ) |
| | | (442 | ) | | | (1,622 | ) | | | - | |
Net cash used in investing activities | | | (209,367 | ) | | | (761,318 | ) | | | (526,393 | ) |
Cash flows from financing activities: | | | | | | | | | | | | |
Payments for stock repurchases | | | (423,636 | ) | | | (552,512 | ) | | | (274,978 | ) |
Proceeds from issuance of common stock under employee stock plans | | | 73,547 | | | | 225,969 | | | | 221,160 | |
| | | 815 | | | | 220 | | | | 188 | |
Net cash used in financing activities | | | (349,274 | ) | | | (326,323 | ) | | | (53,630 | ) |
Change in cash and cash equivalents | | | (309,281 | ) | | | 182,555 | | | | (7,342 | ) |
Cash and cash equivalents at beginning of period | | | 726,969 | | | | 544,414 | | | | 551,756 | |
Cash and cash equivalents at end of period | | $ | 417,688 | | | $ | 726,969 | | | $ | 544,414 | |
| | | | | | | | | | | | | |
Supplemental disclosures of cash flow information: | | | | | | | | | | | | |
Cash paid for income taxes, net | | $ | 7,620 | | | $ | 2,328 | | | $ | 26,628 | |
| | | Year Ended | |
| | | January 25, 2009 | | | January 27, 2008 | | | January 28, 2007 | |
| | | | | | | | | |
Change in unrealized gains (losses) from marketable securities | | | | | | | | | | | | |
Assets acquired by assuming related liabilities | | | | | | | | | | | | |
Acquisition of business - goodwill adjustment | | | | | | | | | | | | |
Deferred stock-based compensation | | | | | | | | | | | | |
Acquisition of business - stock option conversion | | | | | | | | | | | | |
See accompanying notes to the consolidated financial statements.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Organization and Summary of Significant Accounting Policies
Our Company
NVIDIA Corporation is the worldwide leader in programmablevisual computing technologies and the inventor of the graphics processor technologies.processing unit, or GPU. Our products are designed to enhance the end-user experiencegenerate realistic, interactive graphics on consumer and professional computing devices. We have four major product-line operating segments: the graphics processing units,unit, or GPUs,GPU, business, the professional solutions business, or PSB, the media and communications processors,processor, or MCPs, Handheld GPUs,MCP, business, and Consumer Electronics.the consumer products business, or CPB. Our GPU Businessbusiness is composedcomprised primarily of our GeForce products that support desktop and notebook personal computers, or PCs, notebook PCs,plus memory products. Our PSB is comprised of our NVIDIA Quadro professional workstationsworkstation products and other GPU-based products;professional graphics products, including our NVIDIA Tesla high-performance computing products. Our MCP Businessbusiness is composedcomprised of NVIDIA nForce products that operate as a single-chip or chipset that provide system functions, such as high speed storagecore logic and network communications,motherboard GPU products. Our CPB is comprised of our Tegra and perform these operations independently from the host central processing unit, or CPU; our Handheld GPU Business is composed ofGoForce mobile brands and products that support handheld personal media players, or PMPs, personal digital assistants, or PDAs, cellular phones and other handheld devices;devices. CPB also includes license, royalty, other revenue and our Consumer Electronics Business is concentrated in products that supportassociated costs related to video game consoles and other digital consumer electronics devices and is composed of our contractual arrangements with Sony Computer Entertainment, or SCE, to jointly develop a custom GPU for SCE’s PlayStation3, sales of our Xbox-related products, revenue from our license agreement with Microsoft relating to the successor product to their initial Xbox gaming console, the Xbox360, and related devices. We were incorporated in California in April 1993 and reincorporated in Delaware in April 1998. Our headquarter facilities are in Santa Clara, California. Our Internet address is www.nvidia.com. The contents of our website are not a part of these Notes to the consolidated financial statements.
All references to “NVIDIA,” “we,” “us,” “our” or the “Company” mean NVIDIA Corporation and its subsidiaries, except where it is made clear that the term means only the parent company.
Fiscal yearYear
We operate on a 52 or 53-week year, ending on the last Sunday nearest January 31.in January. Fiscal years 20072009, 2008 and 20062007 were 52-week years, compared to fiscal 2005 which was a 53-week year.years.
Stock SplitSplits
In March 2006,August 2007, our Board of Directors, or the Board, approved a three-for-two stock split of our outstanding shares of common stock on Monday, August 20, 2007 to be effected in the form of a stock dividend. The stock split was effective on Monday, September 10, 2007 and entitled each stockholder of record on August 20, 2007 to receive one additional share for every two outstanding shares of common stock held and cash in lieu of fractional shares. All share and per-share numbers contained herein have been retroactively adjusted to reflect this stock split.
In March 2006, our Board approved a two-for-one stock split of our outstanding shares of common stock to be effected in the form of a 100% stock dividend. The stock split was effective on Thursday, April 6, 2006 for stockholders of record at the close of business on Friday, March 17, 2006. All share and per-share numbers contained herein have been retroactively adjusted to reflect this stock split.
Reclassifications
Certain prior fiscal year balances have been reclassified to conform to the current fiscal year presentation.
Principles of Consolidation
Our consolidated financial statements include the accounts of NVIDIA Corporation and its wholly ownedwholly-owned subsidiaries. All material intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. On an on-going basis, we evaluate our estimates, including those related to revenue recognition, cash equivalents and marketable securities, accounts receivable, inventories, income taxes, goodwill, stock-based compensation, warranty liabilities, litigation, investigation and settlement costs and other contingencies. These estimates are based on historical facts and various other assumptions that we believe are reasonable.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Revenue Recognition
(Continued)Product Revenue
Revenue Recognition
Product Revenue
We recognize revenue from product sales when persuasive evidence of an arrangement exists, the product has been delivered, the price is fixed and determinable, and collection is reasonably assured. For most sales, we use a binding purchase order and in certain cases we use a contractual agreement as evidence of an arrangement. We consider delivery to occur upon shipment provided title and risk of loss have passed to the customer based on the shipping terms. At the point of sale, we assess whether the arrangement fee is fixed and determinable and whether collection is reasonably assured. If we determine that collection of a fee is not reasonably assured, we defer the fee and recognize revenue at the time collection becomes reasonably assured, which is generally upon receipt of payment.
Our policy on sales to certain distributors, with rights of return, is to defer recognition of revenue and related cost of revenue until the distributors resell the product.
We record estimated reductions to revenue for customer programs at the time revenue is recognized. Our customer programs primarily involve rebates, which are designed to serve as sales incentives to resellers of our products in various target markets. We account for rebates in accordance with Emerging Issues Task Force Issue 01-9, or EITF 01-09, Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s Products) and, as such, we accrue for 100% of the potential rebates and do not apply a breakage factor. Rebates typically expire six months from the date of the original sale, unless we reasonably believe that the customer intends to claim the rebate. Unclaimed rebates are reversed to revenue upon expiration of the rebate,rebate.
Our customer programs also include marketing development funds, or MDFs. We account for MDFs as either a reduction of revenue or an operating expense in accordance with EITF 01-09. MDFs represent monies paid to retailers, system builders, original equipment manufacturers, or OEMs, distributors and add-in card partners that are earmarked for market segment development and expansion and typically are designed to support our partners’ activities while also promoting NVIDIA products. IfDepending on market conditions, decline, we may take actions to increase amounts offered under customer programs, possibly resulting in an incremental reduction of revenue at the time such programs are offered.
We also record a reduction to revenue by establishing a sales return allowance for estimated product returns at the time revenue is recognized, based primarily on historical return rates. However, if product returns for a particular fiscal period exceed historical return rates we may determine that additional sales return allowances are required to properly reflect our estimated exposure for product returns.
License and Development Revenue
For license arrangements that require significant customization of our intellectual property components, we generally recognize this license revenue using the percentage-of-completion method of accounting over the period that services are performed. For all license and service arrangements accounted for under the percentage-of-completion method, we determine progress to completion based on actual direct labor hours incurred to date as a percentage of the estimated total direct labor hours required to complete the project. We periodically evaluate the actual status of each project to ensure that the estimates to complete each contract remain accurate. A provision for estimated losses on contracts is made in the period in which the loss becomes probable and can be reasonably estimated. To date, we have not recorded any such losses. Costs incurred in advance of revenue recognized are recorded as deferred costs on uncompleted contracts. If the amount billed exceeds the amount of revenue recognized, the excess amount is recorded as deferred revenue. Revenue recognized in any period is dependent on our progress toward completion of projects in progress. Significant management judgment and discretion are used to estimate total direct labor hours. Any changes in or deviations from these estimates could have a material effect on the amount of revenue we recognize in any period.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Advertising Expenses
We expense advertising costs in the period in which they are incurred. Advertising expenses for fiscal years 2009, 2008 and 2007 2006, and 2005 were $14.8$28.5 million, $9.2$11.4 million and $15.2$14.8 million, respectively.
Rent Expense
We recognize rent expense on a straight-line basis over the lease period and have accruedaccrue for rent expense incurred, but not paid.
Product Warranties
We generally offer limited warranty to end-users that rangeranges from one to three years for products in order to repair or replace products for any manufacturing defects or hardware component failures. Cost of revenue includes the estimated cost of product warranties that are calculated at the point of revenue recognition. Under limited circumstances, we may offer an extended limited warranty to customers for certain products. We also accrue for known warranty and indemnification issues if a loss is probable and can be reasonably estimated.
Stock-based Compensation
Effective January 30, 2006, we adopted the provisions of Statement of Financial Accounting Standards No. 123(R), or SFAS No. 123(R), Share-Based Payment. SFAS No. 123(R) establishes accounting for stock-based awards exchanged for employee services. Accordingly, we measure stock-based compensation at grant date, based on the fair value of the awards, and we recognize that compensation as expense using the straight-line attribution method over the requisite employee service period, which is typically the vesting period of each award. We elected to adopt the modified prospective application method provided by SFAS No. 123(R). Our estimates of the fair values of employee stock options are calculated using a binomial model.
Litigation, Investigation and Settlement Costs
From time to time, we are involved in legal actions and/or investigations by regulatory bodies. We are aggressively defending our current litigation matters for which we are responsible. However, there are many uncertainties associated with any litigation or investigation, and we cannot be certain that these actions or other third-party claims against us will be resolved without costly litigation, fines and/or substantial settlement payments. If that occurs, our business, financial condition and results of operations could be materially and adversely affected. If information becomes available that causes us to determine that a loss in any of our pending litigation, investigations or settlements is probable, and we can reasonably estimate the loss associated with such events, we will record the loss in accordance with accounting principles generally accepted in the United States. However, the actual liability in any such litigation or investigations may be materially different from our estimates, which could require us to record additional costs.
Foreign Currency Translation
We use the United States dollar as our functional currency for all of our subsidiaries. Foreign currency monetary assets and liabilities are remeasured into United States dollars at end-of-period exchange rates. Non-monetary assets and liabilities including inventories, prepaid expenses and other current assets,such as property and equipment, deposits and other assets and equity, are remeasured at historical exchange rates. Revenue and expenses are remeasured at average exchange rates in effect during each period, except for those expenses related to the previously noted balance sheet amounts, which are remeasured at historical exchange rates. Gains or losses from foreign currency remeasurement are included in “Other income (expense), net” in our Consolidated Financial Statements and to date have not been significant.
The aggregate exchange gain (loss)impact of foreign currency transaction loss included in determining net income (loss) for fiscal years 2009, 2008 and 2007 was $(0.5)$2.0 million, in fiscal 2007, $0.01$1.7 million in fiscal 2006 and $0.04$0.5 million, in fiscal 2005.respectively.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Income Taxes
Statement of Financial Accounting Standards No. 109, or SFAS No. 109, Accounting for Income Taxes, establishes financial accounting and reporting standards for the effect of income taxes. In accordance with SFAS No. 109, we recognize federal, state and foreign current tax liabilities or assets based on our estimate of taxes payable or refundable in the current fiscal year by tax jurisdiction. We also recognize federal, state and foreign deferred tax assets or liabilities, as appropriate, for our estimate of future tax effects attributable to temporary differences and carryforwards; and we record a valuation allowance to reduce any deferred tax assets by the amount of any tax benefits that, based on available evidence and judgment, are not expected to be realized.
United States income tax has not been provided on earnings of our non-United States subsidiaries to the extent that such earnings are considered to be permanently reinvested.
Our calculation of current and deferred tax assets and liabilities is based on certain estimates and judgments and involves dealing with uncertainties in the application of complex tax laws. Our estimates of current and deferred tax assets and liabilities may change based, in part, on added certainty or finality to an anticipated outcome, changes in accounting standards or tax laws in the United States or foreign jurisdictions where we operate, or changes in other facts or circumstances. In addition, we recognize liabilities for potential United States and foreign income tax contingencies based on our estimate of whether, and the extent to which, additional taxes may be due. If we determine that payment of these amounts is unnecessary or if the recorded tax liability is less than our current assessment, we may be required to recognize an income tax benefit or additional income tax expense in our financial statements, accordingly.
On January 29, 2007, we adopted FASB Interpretation No. 48, or FIN 48, Accounting for Uncertainty in Income Taxes, issued in July 2006. FIN 48 applies to all tax positions related to income taxes subject to SFAS No. 109. Under FIN 48 we recognize the benefit from a tax position only if it is more-likely-than-not that the position would be sustained upon audit based solely on the technical merits of the tax position. The cumulative effect of adoption of FIN 48 did not result in a material adjustment to our tax liability for unrecognized income tax benefits. Our policy to include interest and penalties related to unrecognized tax benefits as a component of income tax expense did not change as a result of implementing the FIN 48. Please refer to Note 13 of these Notes to the Consolidated Financial Statements for additional information.
Comprehensive Income (Loss)
Comprehensive income (loss) consists of net income (loss) and other comprehensive income or loss. Other comprehensive income or loss components include unrealized gains or losses on available-for-sale securities, net of tax.
Net Income (Loss) Per Share
Basic net income (loss) per share is computed using the weighted average number of common shares outstanding during the period. Diluted net income (loss) per share is computed using the weighted average number of common and dilutive common equivalent shares outstanding during the period, using the treasury stock method. Under the treasury stock method, the effect of stock options outstanding is not included in the computation of diluted net income (loss) per share for periods when their effect is anti-dilutive.
Cash and Cash Equivalents
We consider all highly liquid investments purchased withthat are readily convertible into cash and have an original maturity of three months or less at the time of purchase to be cash equivalents. As of January 28, 2007,25, 2009 and January 27, 2008, our cash and cash equivalents were $544.4$417.7 million and $727.0 million, which includes $467.2$14.6 million and $218.1 million invested in money market funds.funds for fiscal year 2009 and fiscal year 2008, respectively.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Marketable Securities
We account for our investment instruments in accordance with Statement of Financial Accounting Standards No. 115, or SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. All of our cash equivalents and marketable securities are treated as “available-for-sale” under SFAS No. 115. Cash equivalents consist of financial instruments which are readily convertible into cash and have original maturities of three months or less at the time of acquisition. Marketable securities consist primarily of highly liquid investments with a maturity of greater than three months when purchased and some equity investments.purchased. We classify our marketable securities at the date of acquisition in the available-for-sale category as our intention is to convert them into cash for operations. These securities are reported at fair value with the related unrealized gains and losses included in accumulated other comprehensive income (loss), a component of stockholders’ equity, net of tax. We followAny unrealized losses which are considered to be other-than-temporary impairments are recorded in the guidance provided by Emerging Issues Task Force Issue No. 03-01, The Meaningother income (expense) section of Other-Than-Temporary Impairment and Its Application to Certain Investments, in order to assess whether our investments with unrealized loss positions are other than temporarily impaired.consolidated statements of operations. Realized gains and losses(losses) on the sale of marketable securities are determined using the specific-identification method.method and recorded in the other income (expense) section of our consolidated statements of operations.
All of our available-for-sale investments are subject to a periodic impairment review. Investments are considered to be impaired when a decline in fair value is judged to be other-than-temporary when the resulting fair value is significantly below cost basis and/or the significant decline has lasted for an extended period of time. The evaluation that we use to determine whether a marketable security is impaired is based on the specific facts and circumstances present at the time of assessment, which include the consideration of general market conditions, the duration and extent to which fair value is below cost, and our intent and ability to hold an investment for a sufficient period of time to allow for recovery in value. We also consider specific adverse conditions related to the financial health of and business outlook for an investee, including industry and sector performance, changes in technology, operational and financing cash flow factors, and changes in an investee’s credit rating. Investments that we identify as having an indicator of impairment are subject to further analysis to determine if the investment is other than temporarily impaired, in which case we write down the investment to its estimated fair value.
Fair Value of Financial Instruments
The carrying value of cash, cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate their fair values due to their relatively short maturities as of January 25, 2009 and January 27, 2008. Marketable securities are comprised of available-for-sale securities that are reported at fair value with the related unrealized gains and losses included in accumulated other comprehensive income (loss), a component of stockholders’ equity, net of tax. Fair value of the marketable securities is determined based on quoted market prices.
Concentration of Credit Risk
Financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash equivalents, marketable securities and accounts receivable. Our investment policy requires the purchase of top-tier investment grade securities, the diversification of asset type and includes certain limits on our portfolio duration. All marketable securities are held in our name, managed by several investment managers and held by one major financial institution under a custodial arrangement. Accounts receivable from significant customers, those representing 10% or more of total accounts receivable aggregated approximately 38% of our accounts receivable balance from three customers at January 25, 2009 and approximately 12% of our accounts receivable balance from one customer at January 27, 2008. We perform ongoing credit evaluations of our customers’ financial condition and maintain an allowance for potential credit losses. This allowance consists of an amount identified for specific customers and an amount based on overall estimated exposure. Our overall estimated exposure excludes amounts covered by credit insurance and letters of credit.
Accounts Receivable
We maintain an allowance for doubtful accounts receivable for estimated losses resulting from the inability of our customers to make required payments. We determine this allowance, which consists of an amount identified for specific customer issues as well as an amount based on overall estimated exposure. Factors impacting the allowance include the level of gross receivables, the financial condition of our customers and the extent to which balances are covered by credit insurance or letters of credit.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Inventories
Inventory cost is computed on an adjusted standard basis, which approximates actual cost on an average or first-in, first-out basis. Inventory costs consist primarily of the cost of semiconductors purchased from subcontractors, including wafer fabrication, assembly, testing and packaging, manufacturing support costs, including labor and overhead associated with such purchases, final test yield fallout, inventory provisions and shipping costs. We write down our inventory for estimated amounts related to lower of cost or market, obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand, future product purchase commitments, estimated manufacturing yield levels and market conditions. If actual market conditions are less favorable than those projected by management, or if our future product purchase commitments to our suppliers exceed our forecasted future demand for such products, additional future inventory write-downs may be required that could adversely affect our operating results. If actual market conditions are more favorable, we may have higher gross margins when products are sold. Sales to date of such products have not had a significant impact on our gross margin. Inventory reserves once established are not reversed until the related inventory has been sold or scrapped.
Property and Equipment
Property and equipment are stated at cost. Depreciation of property and equipment is computed using the straight-line method based on the estimated useful lives of the assets, generally three to five years. The estimated useful lives of our buildings have estimated useful lives of up to twenty-five years. Depreciation expense includes the amortization of assets recorded under capital leases. Leasehold improvements and assets recorded under capital leases are amortized over the shorter of the lease term or the estimated useful life of the asset.
Goodwill
We account for goodwill in accordance with Statement of Financial Accounting Standards No. 142, or SFAS No. 142, Goodwill and Other Intangible Assets. Goodwill is subject to our annual impairment test during ourthe fourth quarter of our fiscal year, or earlier if indicators of potential impairment exist, using a fair value-based approach. Our impairment review process compares the fair value of the reporting unit in which the goodwill resides to its carrying value. For the purposes of completing our SFAS No. 142 impairment test, we perform our analysis on a reporting unit basis. We utilize a two-step approach to testing goodwill for impairment. The first step tests for possible impairment by applying a fair value-based test. In computing fair value of our reporting units, we use estimates of future revenues, costs and cash flows from such units. The second step, if necessary, measures the amount of such impairment by applying fair value-based tests to individual assets and liabilities. We elected to perform our annual goodwill impairment review during the fourth quarter of each fiscal year. We completed our most recent annual impairment test during the fourth quarter of fiscal 2007 and concluded that there was no impairment. However, future events or circumstances may result in a charge to earnings due to the potential for a write-down of goodwill in connection with such tests.
Concentration Intangible Assets
Intangible assets primarily represent rights acquired under technology licenses, patents, acquired intellectual property, trademarks and customer relationships. We currently amortize our intangible assets with definitive lives over periods ranging from one to ten years using a method that reflects the pattern in which the economic benefits of Credit Riskthe intangible asset are consumed or otherwise used up or, if that pattern can not be reliably determined, using a straight-line amortization method.
Financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash equivalents, marketable securities and trade accounts receivable. Our investment policy requires the purchase of top-tier investment grade securities, the diversification of asset type and certain limits on our portfolio duration. All marketable securities are held in our name, managed by several investment managers and held by one major financial institution under a custodial arrangement. One customer accounted for approximately 18% of our accounts receivable balance at January 28, 2007. We perform ongoing credit evaluations of our customers’ financial condition and maintain an allowance for potential credit losses. This allowance consists of an amount identified for specific customers and an amount based on overall estimated exposure. Our overall estimated exposure excludes amounts covered by credit insurance and letters of credit.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Impairment of Long-Lived Assets
In accordance with Statement of Financial Accounting Standards No. 144, or SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, long-lived assets, such as property and equipment and intangible assets subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds the fair value of the asset. Fair value is determined based on the estimated discounted future cash flows expected to be generated by the asset. Assets and liabilities to be disposed of would be separately presented in the consolidated balance sheet and the assets would be reported at the lower of the carrying amount or fair value less costs to sell, and would no longer be depreciated.
Fair Value of Financial Instruments
The carrying value of cash, cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate their fair values due to their relatively short maturities as of January 28, 2007 and January 29, 2006. Marketable securities are comprised of available-for-sale securities that are reported at fair value with the related unrealized gains and losses included in accumulated other comprehensive income (loss), a component of stockholders’ equity, net of tax. Fair value of the marketable securities is determined based on quoted market prices.76
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Accounting for Asset Retirement Obligations
We account for asset retirement obligations in accordance with Statement of Financial Accounting Standards No. 143, or SFAS No. 143, Accounting for Asset Retirement Obligations, which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS No. 143 applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and/or normal use of the assets. SFAS No. 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The fair value of the liability is added to the carrying amount of the associated asset and this additional carrying amount is depreciated over the life of the asset. During fiscal years 20062009 and 2007,2008, we recorded asset retirement obligations to return the leasehold improvements to their original condition upon lease termination at our headquarters facility in Santa Clara, California and our leasehold improvementscertain laboratories at our international sites. Atlocations. As of January 28, 200725, 2009 and January 29, 2006,27, 2008, our net asset retirement obligations were $6.4$9.5 million and $6.5 million, respectively.
Income Taxes
Statement Adoption of FinancialNew Accounting Standards No. 109, or SFAS No. 109, Accounting for Income Taxes, establishes financial accounting and reporting standards for the effect of income taxes. In accordance with SFAS No. 109, we recognize federal, state and foreign current tax liabilities or assets based on our estimate of taxes payable or refundable in the current fiscal year by tax jurisdiction. We also recognize federal, state and foreign deferred tax assets or liabilities, as appropriate, for our estimate of future tax effects attributable to temporary differences and carryforwards; and we record a valuation allowance to reduce any deferred tax assets by the amount of any tax benefits that, based on available evidence and judgment, are not expected to be realized.
United States income tax has not been provided on earnings of our non-United States subsidiaries to the extent that such earnings are considered to be permanently reinvested.
Our calculation of current and deferred tax assets and liabilities is based on certain estimates and judgments and involves dealing with uncertainties in the application of complex tax laws. Our estimates of current and deferred tax assets and liabilities may change based, in part, on added certainty or finality to an anticipated outcome, changes in accounting standards or tax laws in the United States or foreign jurisdictions where we operate, or changes in other facts or circumstances. In addition, we recognize liabilities for potential United States and foreign income tax contingencies based on our estimate of whether, and the extent to which, additional taxes may be due. If we determine that payment of these amounts is unnecessary or if the recorded tax liability is less than our current assessment, we may be required to recognize an income tax benefit or additional income tax expense in our financial statements, accordingly.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Litigation, Investigation and Settlement Costs
From time to time, we are involved in legal actions and/or investigations by regulatory bodies. We are aggressively defending our current litigation matters. However, there are many uncertainties associated with any litigation or investigation, and we cannot be certain that these actions or other third-party claims against us will be resolved without costly litigation, fines and/or substantial settlement payments. If that occurs, our business, financial condition and results of operations could be materially and adversely affected. If information becomes available that causes us to determine that a loss in any of our pending litigation, investigations or settlements is probable, and we can reasonably estimate the loss associated with such events, we will record the loss in accordance with accounting principles generally accepted in the United States. However, the actual liability in any such litigation or investigations may be materially different from our estimates, which could require us to record additional costs.Pronouncements
Comprehensive Income
Comprehensive income consists of net income and other comprehensive income or loss. Other comprehensive income or loss components include unrealized gains or losses on available-for-sale securities, net of tax.
Net Income Per Share
Basic net income per share is computed using the weighted average number of common shares outstanding during the period. Diluted net income per share is computed using the weighted average number of common and dilutive common equivalent shares outstanding during the period, using the treasury stock method. Under the treasury stock method, the effect of stock options outstanding is not included in the computation of diluted net income per share for periods when their effect is anti-dilutive. The following is a reconciliation of the numerators and denominators of the basic and diluted net income per share computations for the periods presented:
| | | Year Ended | |
| | | January 28, 2007 | | January 29, 2006 | | January 30, 2005 | |
| | | (In thousands, except per share data) | |
| Numerator: | | | | | | | |
| Net income | | $ | 448,834 | | $ | 301,176 | | $ | 88,615 | |
| Denominator: | | | | | | | | | | |
| Denominator for basic net income per share, weighted average shares | | | 352,404 | | | 339,380 | | | 332,124 | |
| Effect of dilutive securities: | | | | | | | | | | |
| Stock options outstanding | | | 39,100 | | | 26,324 | | | 19,500 | |
| Denominator for diluted net income per share, weighted average shares | | | 391,504 | | | 365,704 | | | 351,624 | |
| | | | | | | | | | | |
| Net income per share: | | | | | | | | | | |
| Basic net income per share | | $ | 1.27 | | $ | 0.89 | | $ | 0.27 | |
| Diluted net income per share | | $ | 1.15 | | $ | 0.82 | | $ | 0.25 | |
Diluted net income per share does not include the effect of anti-dilutive common equivalent shares from stock options outstanding of 8.9 million, 11.6 million and 27.4 million for fiscal years 2007, 2006 and 2005, respectively. The weighted average exercise price of stock options excluded from the computation of diluted earnings per share was $30.14, $17.79 and $13.93 for fiscal years 2007, 2006 and 2005, respectively.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Recently Issued Accounting Pronouncements
In July 2006, the Financial Accounting Standards Board, or FASB, issued Interpretation No. 48, or FIN 48, Accounting for Uncertainty in Income Taxes. FIN 48 applies to all tax positions related to income taxes subject to FASB Statement 109, Accounting for Income Taxes. Under FIN 48 a company would recognize the benefit from a tax position only if it is more-likely-than-not that the position would be sustained upon audit based solely on the technical merits of the tax position. FIN 48 clarifies how a company would measure the income tax benefits from the tax positions that are recognized, provides guidance as to the timing of the derecognition of previously recognized tax benefits, and describes the methods for classifying and disclosing the liabilities within the financial statements for any unrecognized tax benefits. FIN 48 also addresses when a company should record interest and penalties related to tax positions and how the interest and penalties may be classified within the financial statements. Any differences between tax liability amounts recognized in the statements of operations as a result of adoption of FIN 48 would be accounted for as a cumulative effect adjustment to the beginning balance of retained earnings. FIN 48 is effective for fiscal years beginning after December 15, 2006. The provisions of FIN 48 will be effective as of first quarter of fiscal 2008. We believe that the cumulative effect of adoption of FIN 48 will not result in any material change to the beginning balance of our retained earnings.
In September 2006, the FASB issued On January 28, 2008, we adopted Statement of Financial Accounting Standards No. 157, or SFAS No. 157, Fair Value Measurements. for all financial assets and liabilities. SFAS No. 157 applies to all financial assets and financial liabilities recognized or disclosed at fair value in the financial statements. SFAS No. 157 establishes a framework for measuring fair value and expands disclosures about fair value measurements. The changes to current practice resulting from the application of this StatementSFAS No. 157 relate to the definition of fair value, the methods used to measure fair value, and the expanded disclosures about fair value measurements. We are required to adopt the provisionsThe adoption of SFAS No. 157 for financial assets and liabilities did not have a significant impact on our consolidated financial statements, and the resulting fair values calculated under SFAS No. 157 after adoption were not significantly different than the fair values that would have been calculated under previous guidance. Please refer to Note 17 of these Notes to the Consolidated Financial Statements for further details on our fair value measurements.
Additionally, in February 2008, the Financial Accounting Standards Board, or FASB, issued FASB Staff Position No. FAS 157-2, or FSP No. 157-2, Effective Date of FASB Statement No. 157, to partially defer FASB Statement No. 157, Fair Value Measurements. FSP No. 157-2 defers the effective date of SFAS No. 157 for non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), to fiscal years, and interim periods within those fiscal years, beginning with our fiscal quarter ending April 29, 2007.after November 15, 2008. We do not believe the adoption of SFASFSP No. 157157-2 will have a material impact on our consolidated financial position, results of operations orand cash flows.
In September 2006,October 2008, the Securities and Exchange Commission, or SEC,FASB issued Staff Accounting BulletinPosition No. 108,FAS 157-3, or SABFSP No. 108, 157-3, ConsideringDetermining the EffectsFair Value of Prior Year Misstatementsa Financial Asset When Quantifying Misstatementsthe Market for That Asset Is Not Active. FSP No. 157-3 clarifies the application of SFAS No. 157 in Current Year Financial Statements, which provides interpretive guidance on howa market that is not active, and addresses application issues such as the effectsuse of internal assumptions when relevant observable data does not exist, the carryover or reversaluse of prior year misstatements should be consideredobservable market information when the market is not active, and the use of market quotes when assessing the relevance of observable and unobservable data. FSP No. 157-3 is effective for all periods presented in quantifying a current year misstatement. We adopted the provisions of SABaccordance with SFAS No. 108 in our fiscal year 2007.157. The adoption of SABFSP No. 108157-3 did not have a materialsignificant impact on our consolidated financial position, results of operations or cash flows.statements, and the resulting fair values calculated under SFAS No. 157 after adoption were not significantly different than the fair values that would have been calculated under previous guidance.
In February 2007, the FASB issued On January 28, 2008, we adopted Statement of Financial Accounting Standards No. 159, or SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities.. SFAS No. 159 permits companies to choose to measure certain financial instruments and certain other items at fair value.value using an instrument-by-instrument election. The standard requires that unrealized gains and losses on items for which the fair value option has been elected be reported in earnings. Under SFAS No. 159, we did not elect the fair value option for any of our assets and liabilities. The adoption of SFAS No. 159 did not have an impact on our consolidated financial statements.
In June 2007, the FASB ratified Emerging Issues Task Force Issue No. 07-3, or EITF 07-3, Accounting for Nonrefundable Advance Payments for Goods or Services to Be Used in Future Research and Development Activities. EITF 07-3 requires non-refundable advance payments for goods and services to be used in future research and development activities to be recorded as an asset and the payments to be expensed when the research and development activities are performed. We adopted the provisions of EITF 07-3 beginning with our fiscal quarter ended April 27, 2008. The adoption of EITF 07-3 did not have any impact on our consolidated financial position, results of operations and cash flows.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Recently Issued Accounting Pronouncements
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141 (revised 2007), or SFAS No. 141(R), Business Combinations. Under SFAS No. 141(R), an entity is required to recognize the assets acquired, liabilities assumed, contractual contingencies, and contingent consideration at their fair value on the acquisition date. It further requires that acquisition-related costs be recognized separately from the acquisition and expensed as incurred, restructuring costs generally be expensed in periods subsequent to the acquisition date, and changes in accounting for deferred tax asset valuation allowances and acquired income tax uncertainties after the measurement period impact income tax expense. In addition, acquired in-process research and development, or IPR&D, is capitalized as an intangible asset and amortized over its estimated useful life. We are required to adopt the provisions of SFAS No. 159141(R) beginning with our fiscal quarter ending April 27,26, 2009. The adoption of SFAS No. 141(R) is expected to change our accounting treatment for business combinations on a prospective basis beginning in the period it is adopted.
In April 2008, although earlierthe FASB issued FASB Staff Position No. FAS No.142-3, or FSP No. 142-3, Determination of Useful Life of Intangible Assets. FSP No. 142-3 amends the factors that should be considered in developing the renewal or extension assumptions used to determine the useful life of a recognized intangible asset under Statement of Financial Accounting Standards No. 142, or SFAS No. 142, Goodwill and Other Intangible Assets. FSP No. 142-3 also requires expanded disclosure regarding the determination of intangible asset useful lives. FSP No. 142-3 is effective for fiscal years beginning after December 15, 2008. Earlier adoption is not permitted. We are currently evaluating the potential impact that SFASthe adoption of FSP No. 159142-3 will have on our consolidated financial position, results of operations orand cash flows.
Note 2 - Stock-Based Compensation
Effective January 30, 2006, we adopted the provisions The statement of Statement of Financial Accounting Standards No. 123(R), or SFAS No. 123(R), Share-Based Payment. SFAS No. 123(R) establishes accounting for stock-based awards exchanged for employee services. Accordingly,operations includes stock-based compensation cost is measured at grant date, based onexpense and the fair valueamortization of the awards, and is recognizedamounts capitalized as expense over the requisite employee service period.
Prior to the adoption of SFAS No. 123(R)
Prior to the adoption of SFAS No. 123(R), we applied Accounting Principles Board Opinion No. 25, or APB No. 25, Accounting for Stock Issued to Employees, and related interpretations to account for our stock-based employee compensation plans. As such, compensation expense was recorded if on the date of grant the current fair value per share of the underlying stock exceeded the exercise price per share. We provided the disclosures required under Statement of Financial Accounting Standards No. 123, or SFAS No. 123, Accounting for Stock-Based Compensation,inventory, as amended by SFAS No. 148, Accounting for Stock-Based Compensation - Transition and Disclosures, in our periodic reports.follows:
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)| | Year Ended | |
| | January 25, | | January 27, | | January 28, | |
| | 2009 | | 2008 | | 2007 | |
| | (In thousands) | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Sales, general and administrative | | | | | | | | | | | | |
| | | | | | | | | | | | |
The pro forma information required under SFAS No. 123(R) for periods prior to fiscal 2007 as if we had applied the fair value recognition provisions of SFAS No. 123 to awards granted under our equity incentive plans was as follows for the periods presented:
| | | Year Ended | |
| | | January 29, 2006 | | January 30, 2005 | |
| | | (In thousands, except per share data) | |
| Net income, as reported | | $ | 301,176 | | $ | 88,615 | |
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects | | | 6,644 | | | 17,241 | |
Deduct: Stock-based employee compensation expense determined under fair value-based method for all awards, net of related tax effects | | | (90,405 | ) | | (108,430 | ) |
| Pro forma net income (loss) | | $ | 217,415 | | $ | (2,574 | ) |
| | | | | | | | |
| Basic net income per share - as reported | | $ | 0.89 | | $ | 0.27 | |
| Basic net income (loss) per share - pro forma | | $ | 0.64 | | $ | (0.01 | ) |
| Diluted net income per share - as reported | | $ | 0.82 | | $ | 0.25 | |
| Diluted net income (loss) per share - pro forma | | $ | 0.60 | | $ | (0.01 | ) |
Impact of the adoption of SFAS No. 123(R)
We elected to adopt the modified prospective application method beginning January 30, 2006 as provided by SFAS No. 123(R). Accordingly, during fiscal year 2007, we recorded stock-based compensation expense for awards granted prior to, but not yet vested, as of January 29, 2006, equal to the amount that would have been recognized if the fair value method required for pro forma disclosure under SFAS No. 123 had been in effect for expense recognition purposes, adjusted for estimated forfeitures. For options granted in fiscal 2007, we measured compensation expense under the provisions of SFAS No. 123(R). We recognized stock-based compensation expense using the straight-line attribution method. Previously reported amounts have not been restated. The effect of stock-based compensation expense, net of associated payroll taxes, for the year ended January 28, 2007 on net income was as follows:
| | | Year Ended | |
| | | January 28, 2007 | |
| | | (In thousands) | |
| Stock-based compensation expense by type of award: | | | |
| Employee stock options | | $ | 108,654 | |
| Employee stock purchase plan | | | 9,717 | |
| Amount capitalized as inventory | | | (1,636 | ) |
| Total stock-based compensation | | | 116,735 | |
| Tax effect of stock-based compensation | | | (13,995 | ) |
| Net effect on net income | | $ | 102,740 | |
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Cumulative Effect of Change in Accounting Principle
The Our adoption of SFAS No. 123(R) resulted in a cumulative benefit from the accounting change of $0.7 million for the three months ended April 30, 2006,during fiscal year 2007, which reflects the net cumulative impact of estimating forfeitures in the determination of period expense by reversing the previously recognized cumulative compensation expense related to those forfeitures, rather than recording forfeitures when they occur as previously permitted.
The income statement includes Stock-based compensation expense that would have been recorded under APB No. 25 during the year ended January 28, 2007 was approximately $3.0 million. Upon our adoption of SFAS No. 123(R), at January 30, 2006, we reclassified the unearned stock-based compensation expense balance of approximately $3.6 million that would have been recorded under APB No. 25 to additional paid-in capital in our Consolidated Balance Sheet. The adoption of SFAS No. 123(R) reduced our basic and diluted earnings per share by $0.19 and $0.17, respectively, and reduced our net of associated payroll taxes, and amounts capitalized as inventory, as follows:income by $102.7 million for the year ended January 28, 2007.
| | | | Year Ended | |
| | | | January 28, | | January 29, | | January 30, | |
| | | | 2007 | | 2006 | | 2005 | |
| | | | (In thousands) | |
| Cost of revenue | | | $ | 8,200 | | $ | 829 | | $ | 1,998 | |
| Research and development | | | | 70,077 | | | 5,943 | | | 14,074 | |
| Sales, general and administrative | | | | 38,458 | | | (2,243) | | | 3,682 | |
| Total | | | $ | 116,735 | | $ | 4,529 | | $ | 19,754 | |
Prior to adopting SFAS No. 123(R), we presented all tax benefits resulting from the exercise of stock options as operating cash flows in our Consolidated Statement of Cash Flows. However, as required by our adoption of SFAS No. 123(R) during the twelve months ended January 28,, since fiscal year 2007, we began classifying cash flows resulting from gross tax benefits as a part of cash flows from financing activities. Gross tax benefits are realized tax benefits from tax deductions for exercised options in excess of cumulative compensation cost for those instruments recognized in our consolidated financial statements. The effect of this change in classification on our Consolidated Statement of Cash Flows resulted in cash used from operations of $0.9 million and $0.2 million and cash provided fromby financing activities of $0.9 million and $0.2 million for the years ended January 25, 2009 and January 27, 2008, respectively. During year ended January 28, 2007.2007, cash used from operations and cash provided by financing activities was $0.2 million each.
As of January 29, 2006, we had unearned stock-based compensation related to stock options of $167.9 million before the impact of estimated forfeitures. In our pro forma footnote disclosures priorNVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Subsequent to the adoption of SFAS No. 123(R), we accounted for forfeitures upon occurrence. SFAS No. 123(R) requires forfeitures to be estimated at the time of grant and revised if necessary in subsequent periods if actual forfeitures differ from those estimates. Accordingly, as
As of January 30, 2006, we estimated that stock-based compensation expense for25, 2009 and January 27, 2008, the awards that are not expected to vest was $32.4 million, and, therefore, theaggregate amount of unearned stock-based compensation expense related to our stock options was $193.8 million and $233.6 million, respectively, adjusted to $135.5 million afterfor estimated forfeitures.forfeitures, which we will recognize over an estimated weighted average amortization period of 1.82 and 2.08 years, respectively.
During Stock-based compensation capitalized in inventories resulted in a benefit of $2.0 million and a charge of $0.3 million in cost of revenue during the twelve monthsyears ended January 28,25, 2009 and January 27, 2008, respectively.
During fiscal years 2009, 2008 and 2007, we granted approximately 11.917.9 million, 17.2 million and 17.9 million stock options, respectively, with an estimated total grant-date fair valuevalues of $143.6 million, $207.4 million and $138.4 million, respectively, and a weighted average grant-date fair valuevalues of $11.78$8.03, $11.98 and $7.85 per option.option, respectively. Of this amount,these amounts, we estimated that the stock-based compensation expense related to the awards that are not expected to vest for fiscal years 2009, 2008 and 2007 was $23.8 million, $40.0 million and $26.7 million.million, respectively.
As of January 28, 2007, the aggregate amount of unearned stock-based compensation expense related to our stock options was $167.6 million, adjusted for estimated forfeitures, which we will recognize over an estimated weighted average amortization period of 2.0 years. Valuation Assumptions
Approximately $1.6 million of stock-based compensation was capitalized as inventory for the twelve months ending January 28, 2007.
Stock-based compensation expense that would have been recorded under APB No. 25 during the twelve months ended January 28, 2007 was approximately $3.0 million. Upon our adoption of SFAS No. 123(R), we reclassified the unearned stock-based compensation expense balance of approximately $3.6 million that would have been recorded under APB No. 25 to additional paid-in capital in our Consolidated Balance Sheet. The adoption of SFAS No. 123(R) reduced our basic and diluted earnings per share by $0.28 and $0.25, respectively, for the year ended January 28, 2007.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Valuation Assumptions
At the beginning of fiscal 2006, we transitioned from a Black-Scholes model toWe utilize a binomial model for calculating the estimated fair value of new stock-based compensation awards granted under our stock option plans. As a result of regulatory guidance, including SEC Staff Accounting Bulletin No. 107, or SAB No. 107, Share-Based Payment, and in anticipation of the impending effective date of SFAS No. 123(R), we reevaluated the assumptions we used to estimate the value of employee stock options and shares issued under our employee stock purchase plan, beginning with stock options granted and shares issued under our employee stock purchase plan in the first quarter of fiscal 2006. At that time, our management alsoWe have determined that the use of implied volatility is expected to be more reflective of market conditions and, therefore, could reasonablycan be expected to be a betterreasonable indicator of our expected volatility than historical volatility.
Additionally, in the first quarter of fiscal 2006, we began segregating We also segregate options into groups forof employees with relatively homogeneous exercise behavior in order to calculate the best estimate of fair value using the binomial valuation model. As such, the expected term assumption used in calculating the estimated fair value of our stock-based compensation awards using the binomial model is based on detailed historical data about employees' exercise behavior, vesting schedules, and death and disability probabilities. Our management believes the resulting binomial calculation provides a more refinedreasonable estimate of the fair value of our employee stock options. For our employee stock purchase plan we continuedcontinue to use the Black-Scholes model.
SFAS No. 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures are estimated based on historical experience. If factors change and we employ different assumptions in the application of SFAS No. 123(R) in future periods, the compensation expense that we record under SFAS No. 123(R) may differ significantly from what we have recorded in the current period.
The fair value of stock options granted under our stock option plans and shares issued under our employee stock purchase plan have been estimated at the date of grant using a straight-line attribution method with the following assumptions:
| | | Stock Options
Year Ended | |
| | | Year EndedJanuary 25,
January 28, 20072009
| | | Year EndedJanuary 27,
January 29, 20062008
| | | Year EndedJanuary 28,
January 30, 20052007
| |
| Stock Options | | (Using a binomial model)
| | (Using a
binomial
model)
| | (Using the
Black-Scholes
model)
model) | |
Weighted average expected life of stock options (in years) | | | | | | 3.6 | | | | 4.0 | | |
| | | 4.7% | | | 4.0% - 4.4 | % | | 3.0 | % |
Volatility | | | 39% | | | 34% - 48 | % | | 75% - 80 | % |
Dividend yield | | | — | |
| | | — | | | | | | | | | |
| | | | | | | | | | | | |
| | | Employee Stock Purchase Plan
|
| | | Year Ended January 28, 2007
| | | Year Ended
January 29, 2006
| | | Year Ended
January 30, 2005
| |
| | | | (Using the January 25,
Black-Scholes
model)2009
| | | (Using theJanuary 27,
Black-Scholes
model)2008
| | | (Using theJanuary 28,
Black-Scholes
model)2007
| |
| Employee Stock Purchase Plan | | (Using the Black-Scholes model) | |
Weighted average expected life of stock options (in years) | | | | | | | | | | | | |
| | | | | | 0.9% - 3.7 | % | | 1.1% - 2.1 | % |
Volatility | | | 30% | | | 30% - 45 | % | | 80 | % |
Dividend yield | | | — | |
| | | — | | | | | | | | | |
| | | | | | | | | | | | |
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Equity Incentive Program
Overview. We consider equity compensation to be long termlong-term compensation and an integral component of our efforts to attract and retain exceptional executives, senior management and world-class employees. We believe that properly structured equity compensation aligns the long-term interests of stockholders and employees by creating a strong, direct link between employee compensation and stock appreciation, as stock options are only valuable to our employees if the value of our common stock increases after the date of grant.
2007 Equity Incentive Plan
At the Annual Meeting of Stockholders held on June 21, 2007, our stockholders approved the NVIDIA Corporation 2007 Equity Incentive Plan, or the 2007 Plan.
The 2007 Plan authorizes the issuance of incentive stock options, nonstatutory stock options, restricted stock, restricted stock unit, stock appreciation rights, performance stock awards, performance cash awards, and other stock-based awards to employees, directors and consultants. Only our employees may receive incentive stock options. The 2007 Plan succeeds our 1998 Equity Incentive Plan, our 1998 Non-Employee Directors’ Stock Option Plan, our 2000 Nonstatutory Equity Incentive Plan, and the PortalPlayer, Inc. 2004 Stock Incentive Plan,
We assumed the PortalPlayer, Inc. 2004 stock incentive plan, or the 2004Prior Plans. All options and stock awards granted under the Prior Plans shall remain subject to the terms of the Prior Plans with respect to which they were originally granted. Up to 101,845,177 shares which, due to the subsequent stock split now totals 152,767,766 shares, of our common stock may be issued pursuant to stock awards granted under the 2007 Plan and all related outstanding options in connection with our acquisition of PortalPlayer, Inc., or PortalPlayer, on January 5, 2007. The 2004 Plan was adopted by the PortalPlayer stockholders in 2004 and asPrior Plans. As of January 28, 2007, 1,017,64425, 2009, 29.5 million shares of NVIDIA common stock were authorizedavailable for future issuance under the 20042007 Plan. In addition, any shares subject to outstanding options under the PortalPlayer 1999 stock option plan that expire unexercised or any unvested shares that are forfeited will be available for issuance under the 2004 Plan. The number of shares authorized for issuance under the 2004 Plan will be increased on January 1 from 2007 through 2009 by 460,033 shares and on January 1 from 2010 through 2014 by 276,000 or a number of shares determined by the Board.
Each option we assumed Options granted to new employees generally vest ratably quarterly over a three-year period. Grants to existing employees in connection with our acquisitionrecognition of PortalPlayer has been converted into the right to purchase that number of shares of NVIDIA common stock determined by multiplying the number of shares of PortalPlayer common stock underlying such option by 0.3601 and then rounding down to the nearest whole number of shares. The exercise price per share for each assumed option has been similarly adjusted by dividing the exercise price by 0.3601 and then rounding up to the nearest whole cent. Vesting schedules and expiration dates for the assumed options did not change.
Under the 2004 Plan, optionsperformance generally vest as to 25% of the shares one yeartwo years and three months after the date of grant and as to 1/48ththe remaining 75% of the shares eachsubject to the option in equal quarterly installments over a nine month thereafter andperiod. Options granted under the 2007 Plan generally expire tenin six years from the date of grant.
Unless terminated sooner, the 2007 Plan is scheduled to terminate on April 23, 2017. Our Board may suspend or terminate the 2007 Plan at any time. No awards may be granted under the 2007 Plan while the 2007 Plan is suspended or after it is terminated. The Board may also amend the 2007 Plan at any time. However, if legal, regulatory or listing requirements require stockholder approval, the amendment will not go into effect until the stockholders have approved the amendment.
PortalPlayer, Inc. 1999 Stock Option Plan
We assumed options issued under the PortalPlayer, Inc. 1999 Stock Option Plan, or the 1999 Plan, when we completed our acquisition of PortalPlayer on January 5, 2007. The 1999 Plan was terminated upon completion of PortalPlayer’s initial public offering of common stock in calendar 2004. No shares of common stock are available for issuance under the 1999 Plan other than to satisfy exercises of stock options granted under the 1999 Plan prior to its termination and any shares that become available for issuance as a result of expiration or cancellation of an option that was issued pursuant to the 1999 Plan shall become available for issuance under the 2004 Plan. Previously authorized yet unissued shares under the 1999 Plan were cancelled upon completion of PortalPlayer’s initial public offering.
Each option we assumed in connection with our acquisition of PortalPlayer has beenwas converted into the right to purchase that number of shares of NVIDIA common stock determined by multiplying the number of shares of PortalPlayer common stock underlying such option by 0.3601 and then rounding down to the nearest whole number of shares. The exercise price per share for each assumed option has beenwas similarly adjusted by dividing the exercise price by 0.3601 and then rounding up to the nearest whole cent. Vesting schedules and expiration dates did not change.
Under the 1999 Plan, incentive stock options were granted at a price that was not less than 100% of the fair market value of PortalPlayer’s common stock, as determined by its board of directors, on the date of grant. Non-statutory stock options were granted at a price that was not less than 85% of the fair market value of PortalPlayer’s common stock, as determined by its board of directors, on the date of grant.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Generally, options granted under the 1999 Plan are exercisable for a period of ten years from the date of grant, and shares vest at a rate of 25% on the first anniversary of the grant date of the option, and an additional 1/48th of the shares upon completion of each succeeding full month of continuous employment thereafter.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
2000 Nonstatutory Equity Incentive Plan
On August 1, 2000, our Board approved the 2000 Nonstatutory Equity Incentive Plan, or the 2000 Plan, to provide for the issuance of our common stock to employees and affiliates who are not directors, executive officers or 10% stockholders. The 2000 Plan provides for the issuance of nonstatutory stock options, stock bonuses, restricted stock purchase rights, restricted stock unit awards and stock appreciation rights. Options granted under the 2000 plan generally expire in six to 10 years from the date of grant. The Compensation Committee appointed by the Board, or the Compensation Committee, has the authority to amend the 2000 Plan and to determine the option term, exercise price and vesting period of each grant. Options granted to new employees prior to February 10, 2004, generally vest ratably over a four-year period, with 25% becoming vested approximately one year from the date of grant and the remaining 75% vesting on a quarterly basis over the next three years. From February 10, 2004, initial options granted to new employees generally vest ratably quarterly over a three-year period. Grants to existing employees in recognition of performance generally vest as to 25% of the shares two years and three months after the date of grant and as to the remaining 75% of the shares subject to the option in equal quarterly installments over a nine month period. We amended our 2000 Plan in October 2006 to add the ability to issue restricted stock unit awards and stock appreciation rights and make certain other modifications. There were a total of 21,939,202 shares authorized for issuance and 18,776,119 shares available for future issuance under the 2000 Plan as of January 28, 2007.
1998 Equity Incentive Plan
The 1998 Equity Incentive Plan, or the 1998 Plan, was adopted by our Board on February 17, 1998 and was approved by our stockholders on April 6, 1998 as an amendment and restatement of our then existing Equity Incentive Plan which had been adopted on May 21, 1993. The 1998 Plan provides for the issuance of our common stock to directors, employees and consultants. The 1998 Plan provides for the issuance of stock bonuses, restricted stock purchase rights, incentive stock options or nonstatutory stock options. There were a total of 110,094,385 shares authorized for issuance and 2,570,982 shares available for future issuance under the 1998 Plan as of January 28, 2007.
Pursuant to the 1998 Plan, the exercise price for incentive stock options is at least 100% of the fair market value on the date of grant or for employees owning in excess of 10% of the voting power of all classes of stock, 110% of the fair market value on the date of grant. For nonstatutory stock options, the exercise price must be no less than 85% of the fair market value on the date of grant.
Option grants issued under the 1998 Plan generally expire in six to ten years from the date of grant. Vesting periods are determined by the Board or the Compensation Committee. Initial option grants to new employees made after February 10, 2004 under the 1998 Plan generally vest ratably quarterly over a three year period. Subsequent option grants generally vest up to 25% of the shares two years and three months after the date of grant and as to the remaining 75% of the shares subject to the option in quarterly installments over a nine month period.
1998 Non-Employee Directors’ Stock Option Plan
In February 1998, our Board adopted the 1998 Non-Employee Directors’ Stock Option Plan, or the Directors’ Plan, to provide for the automatic grant of non-qualified options to purchase shares of our common stock to our directors who are not employees or consultants of us or of an affiliate of us.
In July 2000, the Board amended the 1998 Plan to incorporate the automatic grant provisions of the Directors’ Plan into the 1998 Plan. Future automatic grants to non-employee directors will be made according to the terms of the Directors’ Plan, but will be made out of the 1998 Plan until such time as shares may become available for issuance under the amended Directors’ Plan. In May 2002, and subsequently in March 2006, the Directors’ Plan was amended further to reduce the number of shares granted to our non-employee directors. The altered automatic grant provisions of the Directors’ Plan are also incorporated into the 1998 Plan. The terms of the amended Directors’ Plan are described below.
Under the amended Directors’ Plan, each non-employee director who is elected or appointed to our Board for the first time is automatically granted an option to purchase 90,000 shares, which vests quarterly over a three-year period, or Initial Grant.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
On August 1 each year, each non-employee director is automatically granted an option to purchase 30,000 shares, or Annual Grant. These Annual Grants will begin vesting on the second anniversary of the date of the grant and vest quarterly during the next year. The Annual Grants will be fully vested on the third anniversary of the date of the grant, provided that the director attended at least 75% of the meetings during the year following the date of the grant.
On August 1 of each year, each non-employee director who is a member of a committee of the Board, except for the Nominating and Corporate Governance Committee, will automatically be granted an option to purchase 10,000 shares, or the Committee Grant. The Committee Grants vests in full on the first anniversary of the date of the grant, provided that the director has attended at least 75% of the meetings during the year following the date of the grant. Directors who were members of two committees, Messrs. Cox, Gaither and Jones, waived their grant of an additional 10,000 shares for being a member of a second committee in fiscal 2005 and 2006.
If a non-employee director fails to attend at least 75% of the regularly scheduled meetings during the year following the grant of an option, rather than vesting as described previously, the Committee Grants will vest annually over four years following the date of grant at the rate of 10% per year for the first three years and 70% for the fourth year, and the Annual Grants will vest 30% upon the three-year anniversary of the grant date and 70% for the fourth year, such that in each case the entire option will become fully vested on the four-year anniversary of the date of the grant. For Annual Grants and Committee Grants, if the person has not been serving on the Board or committee since a prior year’s annual meeting, the number of shares granted will be reduced pro rata for each full quarter prior to the date of grant during which such person did not serve in such capacity.
The Compensation Committee administers the amended Directors’ Plan. A total of 1,200,000 shares have been authorized and issued under the amended Directors’ Plan of which none is available for future issuance as of January 28, 2007. As described above, future grants to non-employee directors will be made out of the 1998 Plan.
1998 Employee Stock Purchase Plan
In February 1998, our Board approved the 1998 Employee Stock Purchase Plan, or the Purchase Plan. In June 1999, the Purchase Plan was amended to increase the number of shares reserved for issuance automatically each year at the end of our fiscal year for the next 10 years (commencing at the end of fiscal 2000 and ending 10 years later in 2009) by an amount equal to 2% of the outstanding shares on each such date, including on an as-if-converted basis preferred stock and convertible notes, and outstanding options and warrants, calculated using the treasury stock method; provided that the maximum number of shares of common stock available for issuance from the Purchase Plan could not exceed 52,000,000 shares which, due to subsequent stock-splits, is now 78,000,0000 shares. The number of shares will no longer be increased annually as we reached the maximum permissible number of shares at the end of fiscal year 2006. There are a total of 52,000,00078,000,000 shares authorized for issuance. At January 28, 2007, 18,857,69025, 2009, 33,395,699 shares havehad been issued under the Purchase Plan and 33,142,31044,604,301 shares arewere available for future issuance.
The Purchase Plan is intended to qualify as an “employee stock purchase plan” under Section 423 of the Internal Revenue Code. Under the Purchase Plan, the Board has authorized participation by eligible employees, including officers, in periodic offerings following the adoption of the Purchase Plan. Under the Purchase Plan, separate offering periods shall be no longer than 27 months. Under the current offering adopted pursuant to the Purchase Plan, each offering period is 24 months, which is divided into four purchase periods of 6 months.
Employees are eligible to participate if they are employed by us or an affiliate of us as designated by the Board. Employees who participate in an offering may have up to 10% of their earnings withheld pursuant to the Purchase Plan up to certain limitations and applied on specified dates determined by the Board to the purchase of shares of common stock. The Board may increase this percentage at its discretion, up to 15%. The price of common stock purchased under the Purchase Plan will be equal to the lower of the fair market value of the common stock on the commencement date of each offering period and the purchase date of each offering period at 85% at the fair market value of the common stock on the relevant purchase date. During fiscal 2007, 2006years 2009, 2008 and 2005,2007, employees purchased approximately 3.83.0 million, 3.62.1 million and 4.05.7 million shares with weighted-average prices of $6.42, $5.59,$12.79, $14.29 and $4.36$4.28 per share, respectively, and grant-date fair values of $3.64, $1.70,$5.90, $5.48 and $1.57$2.43 per share, respectively. Employees may end their participation in the Purchase Plan at any time during the offering period, and participation ends automatically on termination of employment with us and in each case their contributions are refunded.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The following summarizes the transactions under the 1998 Plan, 2000 Plan, 1999 Plan, 2004 Plan and Directors’ Plan:our equity incentive plans:
| | Options Available for Grant | | Options Outstanding | | Weighted Average Exercise Price Per Share | | | Options Available for Grant | | Options Outstanding | | Weighted Average Exercise Price Per Share | |
| Balances, January 25, 2004 | | 57,914,062 | | 85,533,410 | | $ | 7.10 | | |
| Authorized | | - | | - | | - | | |
| Granted | | (17,029,852 | ) | | 17,029,852 | | 11.74 | | |
| Exercised | | - | | (6,103,750 | ) | | 4.10 | | |
| Cancelled | | 4,139,198 | | | (4,139,198 | ) | | 9.41 | | |
| Balances, January 30, 2005 | | 45,023,408 | | 92,320,314 | | $ | 8.05 | | |
| Authorized | | - | | - | | | | |
| Granted | | (16,417,786 | ) | | 16,417,786 | | 13.87 | | |
| Exercised | | - | | (18,074,266 | ) | | 5.95 | | |
| Cancelled | | 2,705,354 | | | (2,705,354 | ) | | 10.29 | | |
| Balances, January 29, 2006 | | 31,310,976 | | 87,958,480 | | $ | 9.50 | | | | | | | | | |
| Authorized | | 1,091,383 | | - | | - | | | | | | | | | |
| Granted and assumed | | (12,539,612 | ) | | 12,539,612 | | 29.60 | | | | | | | | | | |
| Exercised | | - | | (24,585,893 | ) | | 8.01 | | | | | | | | | | |
| Cancelled | | 1,917,537 | | | (1,917,537 | ) | | 13.42 | | | | | | | | | | | | |
| Balances, January 28, 2007 | | 21,780,284 | | | 73,994,662 | | $ | 13.29 | | | | | | | | | |
| | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | | | |
Balances, January 27, 2008 | | | | | | | | | |
| | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | | | |
Balances, January 25, 2009 | | | | | | | | | | | |
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The total intrinsic value of options exercised was $84.9 million, $757.5 million and $530.7 million for fiscal years 2009, 2008 and 2007, respectively. The total fair value of options vested was $117.0 million, $102.8 million and $100.9 million for fiscal years 2009, 2008 and 2007, respectively.
The following table summarizes the options outstanding, options vested and expected to vest and options exercisable as of January 28, 2007:25, 2009:
| | | Options Outstanding | | Weighted Average Exercise Price Per Share | | Weighted Average Remaining Contractual Term (in years) | | Aggregate Intrinsic Value(1) | |
| Options outstanding | | | 73,994,662 | | $ | 13.29 | | | 3.77 | | $ | 1,363,448,818 | |
| Options vested and expected to vest | | | 66,365,198 | | $ | 12.40 | | | 3.70 | | $ | 1,282,391,307 | |
| Options exercisable | | | 42,212,234 | | $ | 9.30 | | | 3.25 | | $ | 943,461,713 | |
| Weighted Average Remaining Contractual Term | | Aggregate Intrinsic Value (1) |
| | | $ | |
Options vested and expected to vest (2) | | | $ | |
| | | $ | |
(1) The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value for in-the-money options at January 28, 2007,25, 2009, based on the $31.47$7.71 closing stock price of our common stock on the NASDAQ Global Select Market, which would have been received by the option holders had all in-the-money option holders exercised their options as of that date. The total number of in-the-money options outstanding and exercisable as of January 28, 200725, 2009 was 72.219.7 million shares and 41.919.2 million shares, respectively.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)(2) Options vested and expected to vest include 93.7 million options with a weighted average exercise price of $13.59 per share.
The following table summarizes information about stock options outstanding as of January 28, 2007:25, 2009:
| | | | | | | | | | | | |
| | | Options Outstanding | | Options Exercisable | |
Range of Exercise Prices | | Number Outstanding | | Weighted Average Remaining Contractual Life | | Weighted Average Exercise Price | | Number Exercisable | | Weighted Average Exercise Price | |
| $0.16 - $0.17 | | | 105,000 | | | 0.6 | | $ | 0.16 | | | 105,000 | | $ | 0.16 | |
| 0.33 - 0.40 | | | 290,537 | | | 0.9 | | $ | 0.38 | | | 290,537 | | $ | 0.38 | |
| 0.69 - 0.97 | | | 3,740,783 | | | 1.3 | | $ | 0.87 | | | 3,740,783 | | $ | 0.87 | |
| 1.13 - 1.25 | | | 112,327 | | | 2.8 | | $ | 1.15 | | | 97,409 | | $ | 1.13 | |
| 2.05 - 2.94 | | | 3,006,036 | | | 2.5 | | $ | 2.35 | | | 3,004,052 | | $ | 2.35 | |
| 3.83 - 5.54 | | | 4,970,417 | | | 3.6 | | $ | 4.70 | | | 4,830,338 | | $ | 4.73 | |
| 5.76 - 8.59 | | | 13,470,438 | | | 3.0 | | $ | 7.27 | | | 10,562,463 | | $ | 7.30 | |
| 8.77 - 13.13 | | | 23,143,952 | | | 3.7 | | $ | 11.76 | | | 11,881,607 | | $ | 11.40 | |
| 13.19 - 19.77 | | | 11,958,889 | | | 4.4 | | $ | 16.30 | | | 5,980,184 | | $ | 16.29 | |
| 20.63 - 30.90 | | | 11,498,508 | | | 5.3 | | $ | 27.10 | | | 1,449,430 | | $ | 22.73 | |
| 31.97 - 46.94 | | | 1,380,007 | | | 6.1 | | $ | 37.06 | | | 123,646 | | $ | 44.65 | |
| 48.99 - 73.01 | | | 251,356 | | | 7.2 | | $ | 61.62 | | | 111,935 | | $ | 60.50 | |
| 73.87 - 86.40 | | | 65,361 | | | 6.2 | | $ | 79.04 | | | 33,799 | | $ | 79.75 | |
| 312.42 - 312.42 | | | 200 | | | 1.0 | | $ | 312.42 | | | 200 | | $ | 312.42 | |
| 1,249.66 and above | | | 851 | | | 3.0 | | $ | 1,324.55 | | | 851 | | $ | 1,324.55 | |
| | | | 73,994,662 | | | 3.8 | | $ | 13.29 | | | 42,212,234 | | $ | 9.30 | |
| | | | | Options Outstanding | | Options Exercisable | |
| | Range of Exercise Prices | | | Number Outstanding | | Weighted Average Remaining Contractual Life (Years) | | Weighted Average Exercise Price | | Number Exercisable | | Weighted Average Exercise Price | |
| | $ | 0.01 - $5.00 | | | | | | | | | | | | | | | |
| | | 5.01 - 7.50 | | | | | | | | | | | | | | | |
| | | 7.51 - 10.00 | | | | | | | | | | | | | | | |
| | | 10.01 - 15.00 | | | | | | | | | | | | | | | |
| | | 15.01 - 20.00 | | | | | | | | | | | | | | | |
| | | 20.01 - 50.00 | | | | | | | | | | | | | | | |
| | | 50.00 and above | | | | 25,887 | | 6.7 | | $ | 64.05 | | 25,887 | | $ | 67.12 | |
| | | | | | | | | | | | | | | | | | |
| | Year Ended
| |
| | January 28, 2007
| |
Total intrinsic value of options exercised | | $ | 530.7 million | |
Total cash received from employees as a result of employee stock option exercises | | $ | 196.2 million | |
We settle employee stock option exercises with newly issued common shares. We do not have any equity instruments outstanding other than the options described above as of January 28, 2007.25, 2009.
Please refer to Note 19 for further discussion regarding the cash tender offer for certain employee stock options that our Board of Directors approved in February 2009.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 3 – Restructuring Charges and Other
(Continued) On September 18, 2008, we announced a workforce reduction to allow for continued investment in strategic growth areas, which was completed in the third quarter of fiscal year 2009. As a result, we eliminated approximately 360 positions worldwide, or about 6.5% of our global workforce. During fiscal year 2009, expenses associated with the workforce reduction, which were comprised primarily of severance and benefits payments to these employees, totaled $8.0 million. The remaining accrual of $0.2 million as of January 25, 2009 relates to severance and benefits payments, which are expected to be paid during the first quarter of fiscal year 2010.
The following table provides a summary of the restructuring activities and related liabilities recorded in accrued liabilities in our Consolidated Balance Sheet as of January 25, 2009:
| Accrued Restructuring Charges : | | (In thousands) | |
Balance at January 27, 2008 | | | | |
| | | | |
| | | | |
| | | | |
Balance at January 25, 2009 | | | | |
Restructuring and other expenses for fiscal year 2009 also included a non-recurring charge of $18.9 million associated with the termination of a development contract related to a new campus construction project that has been put on hold.
Note 3 - 3dfx4 – Net Income (Loss) Per Share
The following is a reconciliation of the numerators and denominators of the basic and diluted net income (loss) per share computations for the periods presented:
| | | Year Ended | |
| | | January 25, 2009 | | | January 27, 2008 | | | January 28, 2007 | |
| | | (In thousands, except per share data) | |
| | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Denominator for basic net income (loss) per share, weighted average shares | | | | | | | | | | | | |
Effect of dilutive securities: | | | | | | | | | | | | |
Stock options outstanding | | | | | | | | | | | | |
Denominator for diluted net income (loss) per share, weighted average shares | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Net income (loss) per share: | | | | | | | | | | | | |
Basic net income (loss) per share | | | | | | | | | | | | |
Diluted net income (loss) per share | | | | | | | | | | | | |
All of our outstanding stock options were anti-dilutive during fiscal year 2009 and excluded from the computation of diluted earnings per share due to the net loss for fiscal year 2009. Diluted net income (loss) per share does not include the effect of anti-dilutive common equivalent shares from stock options outstanding of 11.9 million and 13.4 million for fiscal years 2008 and 2007, respectively. The weighted average exercise price of stock options excluded from the computation of diluted earnings per share was $32.05 and $20.09 for fiscal years 2008 and 2007, respectively.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 5 - 3dfx
During fiscal year 2002, we completed the purchase of certain assets from 3dfx Interactive, Inc., or 3dfx, for an aggregate purchase price of approximately $74.2 million. On December 15, 2000, NVIDIA Corporation and one of our indirect subsidiaries entered into an agreement,Asset Purchase Agreement, or the APA, which closed on April 18, 2001, to purchase certain graphics chip assets from 3dfx. Under the terms of the Asset Purchase Agreement,APA, the cash consideration due at the closing was $70.0 million, less $15.0 million that was loaned to 3dfx pursuant to a Credit Agreement dated December 15, 2000. The Asset Purchase AgreementAPA also provided, subject to the other provisions thereof, that if 3dfx properly certified that all its debts and other liabilities had been provided for, then we would have been obligated to pay 3dfx twoone million shares, which due to subsequent stock splits now totals six million shares, of NVIDIA common stock. If 3dfx could not make such a certification, but instead properly certified that its debts and liabilities could be satisfied for less than $25.0 million, then 3dfx could have elected to receive a cash payment equal to the amount of such debts and liabilities and a reduced number of shares of our common stock, with such reduction calculated by dividing the cash payment by $25.00 per share. If 3dfx could not certify that all of its debts and liabilities had been provided for, or could not be satisfied, for less than $25.0 million, we would not be obligated under the agreementAPA to pay any additional consideration for the assets.
In October 2002, 3dfx filed for Chapter 11 bankruptcy protection in the United States Bankruptcy Court for the Northern District of California. In March 2003, we were served with a complaint filed by the Trustee appointed by the Bankruptcy Court which sought,to represent 3dfx’s bankruptcy estate served his complaint on NVIDIA. The Trustee’s complaint asserts claims for, among other things, successor liability and fraudulent transfer and seeks additional payments from us as additional purchase price relatedus. On October 13, 2005, the Bankruptcy Court heard the Trustee’s motion for summary adjudication, and on December 23, 2005, denied that motion in all material respects and held that NVIDIA may not dispute that the value of the 3dfx transaction was less than $108 million. The Bankruptcy Court denied the Trustee’s request to our purchasefind that the value of certainthe 3dfx assets of 3dfx.conveyed to NVIDIA was at least $108 million. In early November 2005, after manyseveral months of mediation, NVIDIA and the Official Committee of Unsecured Creditors, or the Creditors’ Committee, reachedagreed to a Plan of Liquidation of 3dfx, which included a conditional settlement of the Trustee’s claims against NVIDIA.us. This conditional settlement presented as the centerpiece of a proposed Plan of Liquidation in the bankruptcy case, was subject to a confirmation process through a vote of creditors and the review and approval of the Bankruptcy Court after notice and hearing.Court. The Trustee advised that he intended to object to theconditional settlement which would have called for a payment by NVIDIA of approximately $30.6 million to the 3dfx estate. Under the settlement, $5.6 million related to various administrative expenses and Trustee fees, and $25.0 million related to the satisfaction of debts and liabilities owed to the general unsecured creditors of 3dfx. Accordingly, during the three month period ended October 30, 2005, we recorded $5.6 million as a charge to settlement costs and $25.0 million as additional purchase price for 3dfx.
However, The Trustee advised that he intended to object to the settlement. The conditional settlement never progressed substantially through the confirmation process.
On December 21, 2005,2006, the Bankruptcy Court determined that it would schedulescheduled a trial offor one portion of the Trustee’s case against NVIDIA. On January 2, 2007, NVIDIA exercised its right to terminateterminated the settlement agreement on grounds that the bankruptcy courtBankruptcy Court had failed to proceed toward confirmation of the Creditors’ Committee’s plan. BeginningA non-jury trial began on March 21, 2007 on valuation issues in the Trustee's constructive fraudulent transfer claims against NVIDIA. Specifically, the Bankruptcy Court tried four questions: (1) what did 3dfx transfer to NVIDIA in the APA?; (2) of what was transferred, what qualifies as "property" subject to the Bankruptcy Court's avoidance powers under the Uniform Fraudulent Transfer Act and relevant bankruptcy code provisions?; (3) what is the Trustee are scheduled to try the question of thefair market value of the assets 3dfx conveyed"property" identified in answer to NVIDIAquestion (2)?; and in particular, whether(4) was the price$70 million that NVIDIA paid for those assets was reasonably equivalent"reasonably equivalent" to the fair market value of that property? The parties completed post-trial briefing on May 25, 2007. On April 30, 2008, the assetsBankruptcy Court issued its Memorandum Decision After Trial, in which it provided a detailed summary of the trial proceedings and the parties' contentions and evidence and concluded that "the creditors of 3dfx soldwere not injured by the Transaction." This decision did not entirely dispose of the Trustee's action, however, as the Trustee's claims for successor liability and intentional fraudulent conveyance were still pending. On June 19, 2008, NVIDIA filed a motion for summary judgment to NVIDIA.convert the Memorandum Decision After Trial to a final judgment. That motion was granted in its entirety and judgment was entered in NVIDIA’s favor on September 11, 2008. The Trustee filed a Notice of Appeal from that judgment on September 22, 2008, and on September 25, 2008, NVIDIA exercised its election to have the appeal heard by the United States District Court, where the appeal is pending.
While the conditional settlement reached in November 2005 never progressed through the confirmation process, the Trustee’s case still remains pending appeal. As such, we have not reversed the accrual of $30.6 million - $5.6 million as a charge to settlement costs and $25.0 million as additional purchase price for 3dfx – that we recorded during the three months ended October 30, 2005, pending resolution of the appeal of the Trustee’s case. We do not believe the resolution of this matter will have a material impact on our results of operations or financial position.
The 3dfx asset purchase price of $95.0 million and $4.2 million of direct transaction costs were allocated based on fair values presented below. The final allocation of the purchase price of the 3dfx assets is contingent upon the outcome of all of the 3dfx litigation. Please seerefer to Note 12 of these Notes to the Consolidated Financial Statements for further information regarding this litigation.
| | | Fair Market Value | | | Straight-Line Amortization Period | |
| | | (In thousands) | | | (Years) | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 4 -6 – Business Combinations
On February 20, 2006,10, 2008, we completed our acquisition of ULi Electronics,acquired Ageia Technologies, Inc., or ULi, a core logic developer forAgeia, an industry leader in gaming physics technology. The combination of the personal computer,graphics processing unit, or PC, industry. The acquisition represents our ongoing investment in our platform solution strategyGPU, and has strengthened our sales, marketing, and customer engineering presence in Taiwan and China.physics engine brands is expected to enhance the visual experience of the gaming world. The aggregate purchase price consisted of cashtotal consideration of approximately $53.1$29.7 million.
On March 29, 2006,November 30, 2007, we completed our acquisition of Hybrid Graphics Ltd.Mental Images, Inc., or Hybrid Graphics, a developer of embedded 2D and 3D graphics software for handheld devices.Mental Images, an industry leader in photorealistic rendering technology. The aggregate purchase price consisted of cashtotal consideration of approximately $36.7$88.3 million. The total consideration also includes approximately $7.8 million which reflects an initial investment we made in Mental Images in prior periods and $5.6 million primarily towards guaranteed payments subsequent to completion of our acquisition.
On January 5, 2007, we completed our acquisition of PortalPlayer, a leading supplier of semiconductors, firmware, and software for personal media players, or PMPs, and secondary display-enabled computers. We believe that the acquisition will accelerate our ongoing investment in our handheld product strategy. Pursuant to the terms of the acquisition, we paid cash consideration of approximately $344.9 million in exchange for common stock in PortalPlayer and recognized an additional purchase price of $2.9 million, the value of approximately 658,000 options of NVIDIA common stock issued upon conversion of outstanding PortalPlayer stock options.
We allocated the purchase price of each of these acquisitions to tangible assets, liabilities and identifiable intangible assets acquired, as well as in-process research and development, or IPR&D, if identified, based on their estimated fair values. The excess of purchase price over the aggregate fair values was recorded as goodwill. The fair value assigned to identifiable intangible assets acquired was based on estimates and assumptions determinedmade by management. Purchased intangibles are amortized on a straight-line basis over their respective useful lives. The allocation
As of January 25, 2009, the estimated fair values of the purchase price has been prepared on a preliminary basis and reasonable changes are expected as additional information becomes available.
The following is a summary of estimated fair values of theallocated to assets we acquired and liabilities we assumed on the respective acquisition dates were as of January 28, 2007 for acquisitions we completed in fiscal 2007: follows:
| | | Mental Images | | Ageia | |
| Fair Market Values | | (In thousands) | |
Cash and cash equivalents | | | | | | | |
| | | | | | | |
| | | | | | | |
Prepaid and other current assets | | | | | | | |
| | | | | | | |
In-process research and development | | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Acquisition related costs | | | | | | | |
| | | | | | | |
Total liabilities assumed | | | | | | | |
Purchase price allocation | | | | | | | |
| | | ULi | | Hybrid Graphics | | PortalPlayer | |
| | | (In thousands) | |
Fair Market Values | | | | | | | |
| Cash and cash equivalents | | $ | 21,551 | | $ | 1,180 | | $ | 10,174 | |
| Marketable Securities | | | - | | | - | | | 176,492 | |
| Accounts receivable | | | 8,148 | | | 808 | | | 16,480 | |
| Inventories | | | 4,896 | | | - | | | 1,883 | |
| Other assets | | | 935 | | | 73 | | | 12,945 | |
| Property and equipment | | | 1,010 | | | 134 | | | 9,755 | |
| In-process research and development | | | - | | | 602 | | | 13,400 | |
| Goodwill | | | 31,051 | | | 27,906 | | | 114,816 | |
| Intangible assets: | | | | | | | | | | |
| Existing technology | | | 2,490 | | | 5,179 | | | 8,900 | |
| Customer relationships | | | 653 | | | 2,650 | | | 2,700 | |
| Trademark | | | - | | | 482 | | | - | |
| Non-compete agreements | | | - | | | 72 | | | - | |
| Total assets acquired | | | 70,734 | | | 39,086 | | | 367,545 | |
| Current liabilities | | | (16,878 | ) | | (1,373 | ) | | (12,139 | ) |
| Acquisition related costs | | | (781 | ) | | (740 | ) | | (7,516 | ) |
| Long-term liabilities | | | - | | | (301 | ) | | (46 | ) |
| Total liabilities assumed | | | (17,659 | ) | | (2,414 | ) | | (19,701 | ) |
| Net assets acquired | | $ | 53,075 | | $ | 36,672 | | $ | 347,844 | |
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
| | | ULi
| Mental Images | | Hybrid Graphics
| | PortalPlayer
Ageia | |
| | | (Straight-line depreciation / depreciation/amortization periodperiod) |
| | | | | | | |
Property and equipment | | | 4 - 49 months | | | 1 month - 36 months | | | 3 months - 60 months | |
| | | | | | | | | | |
| | | 3 | | | 3 | |
| | | 3 | |
Customer relationships | | | 3 | |
| | | 3 | | | 3 years | |
| | | - | | | 3 | | | - | |
Non-compete agreements | | | - | | | 3 years | | | - | |
The amount of the IPR&D represents the value assigned to research and development projects of Hybrid Graphics and PortalPlayerMental Images that had commenced but had not yet reached technological feasibility at the time of the acquisition and for which we had no alternative future use. In accordance with Statement of Financial Accounting Standards No. 2, or SFAS No. 2, Accounting for Research and Development Costs, as clarified by FASB issued Interpretation No. 4, or FIN 4, Applicability of FASB Statement No. 2 to Business Combinations Accounted for by the Purchase Method an interpretation of FASB Statement No. 2, amounts assigned to IPR&D meeting the above-stated criteria were charged to research and development expenses as part of the allocation of the purchase price.
The pro forma results of operations for theseour acquisitions during fiscal years 2009 and 2008 have not been presented because the effects of the acquisitions, individually or in the aggregate, were not material to our results.
Note 57 - Goodwill
The carrying amount of goodwill is as follows:
| | | January 28, 2007 | | January 29, 2006 | | | January 25, 2009 | | January 27, 2008 | |
| | | (In thousands) | | | (In thousands) | |
| | | | | | | | |
| 3dfx | | $ | 75,326 | | $ | 75,326 | | | | | | |
| | | | | | |
| MediaQ | | | 35,342 | | | 52,913 | | | | | | |
| ULi | | | 31,051 | | | — | | | | | | |
| Hybrid Graphics | | | 27,906 | | | — | | | | | | |
| PortalPlayer | | | 114,816 | | | — | | |
| | | | | | |
| Other | | | 16,984 | | | 17,078 | | | | | | | | |
| Total goodwill | | $ | 301,425 | | $ | 145,317 | | | | | | | | |
During fiscal 2007, we recorded $31.1year 2009, goodwill increased by $15.8 million, $27.9primarily due to $19.2 million and $114.8 million asof goodwill related to our acquisitions accounted for under the purchase method of accounting of ULi, Hybrid Graphics and PortalPlayer, respectively. Please refer to Note 4 of the Notes to Consolidated Financial Statements for further information. In addition, during fiscal 2007, the amount allocated to MediaQ Inc., or MediaQ, goodwill was adjusted to $35.3 million as a result of the reversal of the valuation allowance of deferred tax assets related toassociated with our acquisition of MediaQ.
During fiscal 2006, we recorded $12.2Ageia on February 10, 2008. This increase in goodwill was offset by a decrease of $3.8 million as goodwill for the acquisition of a small international company accounted for under the purchase method of accounting. In addition, during fiscal 2006, we recorded $25.0 million as goodwillMental Images related to the reassessment of estimates made during the preliminary purchase of certain assets of 3dfx. Please refer to Note 3 of the Notes to Consolidated Financial Statements for further information.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)price allocation.
Goodwill is subject to our annual impairment test during the fourth quarter of our fiscal year, or earlier if indicators of potential impairment exist, using a fair value-based approach. We completed our most recent annual impairment test during the fourth quarter of fiscal year 2009 and concluded that there was no impairment. In computing fair value of our reporting units, we use estimates of future revenues, costs and cash flows from such units. This assessment is based upon a discounted cash flow analysis and analysis of our market capitalization. The estimate of cash flow is based upon, among other things, certain assumptions about expected future operating performance such as revenue growth rates and operating margins used to calculate projected future cash flows, risk-adjusted discount rates, future economic and market conditions, and determination of appropriate market comparables. Our estimates of discounted cash flows may differ from actual cash flows due to, among other things, economic conditions, changes to our business model or changes in operating performance. Additionally, certain estimates of discounted cash flows involve businesses with limited financial history and developing revenue models, which increase the risk of differences between the projected and actual performance. Significant differences between these estimates and actual cash flows could materially affect our future financial results. These factors increase the risk of differences between projected and actual performance that could impact future estimates of fair value of all reporting units. In addition, determining the number of reporting units and the fair value of a reporting unit requires us to make judgments and involves the use of significant estimates and assumptions. We also make judgments and assumptions in allocating assets and liabilities to each of our reporting units. We base our fair value estimates on assumptions we believe to be reasonable but that are unpredictable and inherently uncertain. The long-term financial forecast represents the best estimate that we have at this time and we believe that its underlying assumptions are reasonable. However, actual performance in the near-term and longer-term could be materially different from these forecasts, which could impact future estimates of fair value of our reporting units and may result in a charge to earnings in future periods due to the potential for a write-down of goodwill in connection with such tests.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The amount of goodwill allocated to our GPU, PSB, MCP Handheld GPU, Consumer Electronics, and All OtherCPB segments as of January 28, 2007,25, 2009, was $99.3$86.9 million, $95.1 million, $46.2 million $137.7 million, $11.9 million, and $6.3$141.6 million, respectively. As of January 29, 2006,27, 2008, the amount of goodwill allocated to our GPU, PSB, MCP Handheld GPU, Consumer Electronics, and All OtherCPB segments, was $99.3$67.8 million, $15.1$99.0 million, $12.7 million, $11.9$46.3 million and $6.3$141.0 million, respectively. Please refer to Note 1416 of thethese Notes to the Consolidated Financial Statements for further segment information.
Note 68 - - Amortizable Intangible Assets
We are currently amortizing our intangible assets with definitive lives over periods ranging from 1 to 5 years on a straight-line basis. The components of our amortizable intangible assets are as follows:
| | | January 28, 2007 | | January 29, 2006 | |
| | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | |
| | | (In thousands) | |
| Technology licenses | | $ | 37,516 | | $ | (20,480 | ) | $ | 17,036 | | $ | 21,586 | | $ | (13,595 | ) | $ | 7,991 | |
| Patents | | | 34,623 | | | (24,569 | ) | | 10,054 | | | 23,750 | | | (19,911 | ) | | 3,839 | |
| Acquired intellectual property | | | 50,212 | | | (31,894 | ) | | 18,318 | | | 27,086 | | | (24,516 | ) | | 2,570 | |
| Trademarks | | | 11,310 | | | (11,310 | ) | | - | | | 11,310 | | | (10,807 | ) | | 503 | |
| Other | | | 1,494 | | | (1,391 | ) | | 103 | | | 1,494 | | | (976 | ) | | 518 | |
| Total intangible assets | | $ | 135,155 | | $ | (89,644 | ) | $ | 45,511 | | $ | 85,226 | | $ | (69,805 | ) | $ | 15,421 | |
| | January 25, 2009 | | January 27, 2008 |
| | Gross Carrying Amount | | | Accumulated Amortization | | | Net Carrying Amount | | Weighted Average Useful Life | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Weighted Average Useful Life |
| | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
Acquired intellectual property | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
The increase in the gross carrying amount of acquired intellectual property as of January 28, 2007 as compared to January 29, 2006 is primarily related to $3.1 million, $8.4 million and $11.6 million of intangible assets that resulted from our acquisitions of ULi, Hybrid Graphics and PortalPlayer, respectively, during fiscal 2007. Please refer to Note 4 of our Notes to Consolidated Financial Statements for further information. In addition, the $10.9 million increase in the gross carrying amount of patents is related primarily to patents licensed from Opti Incorporated, or Opti, for $8.0 million as a result of the license and settlement agreements described in Note 12 of our Notes to Consolidated Financial Statements.
During fiscal 2007, we entered into a confidential patent licensing arrangement. As part of this arrangement, we recorded a charge of $16.0 million to the cost of revenue category in our statement of income related to past usage of certain patents subject to the arrangement. Our commitment for future license payments under this arrangement could range from $97.0 million to $110.0 million over a ten year period; however, the net outlay under this arrangement may be reduced by the occurrence of certain events covered by the arrangement. The increase in the gross carrying amount of technology licenses as of January 28, 200725, 2009 when compared to January 29, 200627, 2008 is primarily related to approximately $14.4$21.8 million committed by usof net cash outflows during fiscal year 2009 under a confidential patent licensing arrangement that we originally entered into during fiscal year 2007 under this arrangement.and $25.0 million towards the purchase of a non-exclusive license related to advanced power management and other computing technologies that we entered into during fiscal year 2009. These increases were offset by amortization for fiscal year 2009. Additionally, the increase in the net carrying value of acquired intellectual property is primarily related to the intangible assets that resulted from our acquisition of Ageia during fiscal year 2009, offset by amortization for fiscal year 2009. Please refer to Note 6 of these Notes to the Consolidated Financial Statements for further information. During fiscal year 2009, the increase in the gross carrying amount of the intangible assets was offset by the write-off of fully amortized intangible assets that are no longer in use.
Amortization expense associated with intangible assets for fiscal years 2009, 2008 and 2007 2006 and 2005 was $19.8$32.6 million, $16.9$24.5 million and $19.7$19.8 million, respectively. Future amortization expense for the net carrying amount of intangible assets at January 28, 200725, 2009 is estimated to be, $17.1$30.9 million in fiscal 2008, $11.1year 2010, $27.2 million in fiscal 2009, $6.9year 2011, $24.6 million in fiscal 2010, $2.8year 2012, $18.6 million in fiscal 2011, $2.0year 2013, $14.1million in fiscal year 2014 and $31.7 million in fiscal 2012, and $5.6 million inyears subsequent to fiscal 2013 and thereafter.year 2014.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 79 - - Marketable Securities
We account for our investment instruments in accordance with Statement of Financial Accounting Standards No. 115, or SFAS No. 115, Accounting for Certain Investments in Debt and Equity SecuritiesSecurities.. All of our cash equivalents and marketable securities are treated as “available-for-sale” under SFAS No. 115. Cash equivalents consistOur investment policy requires the purchase of financial instruments which are readily convertible into cashtop-tier investment grade securities, the diversification of asset type and have original maturitiescertain limits on our portfolio duration, as specified in our investment policy guidelines. These guidelines also limit the amount of three monthscredit exposure to any one issue, issuer or less at the timetype of acquisition. Marketable securities consist primarily of highly liquid investments with a maturity of greater than three months when purchased and some equity investments. We classify our marketable securities at the date of acquisition in the available-for-sale category as our intention is to convert them into cash for operations. These securities are reported at fair value with the related unrealized gains and losses included in accumulated other comprehensive income (loss), a component of stockholders’ equity, net of tax. Realized gains and losses on the sale of marketable securities are determined using the specific-identification method. Net realized losses for fiscal years 2007 and 2006 were $0.2 million and $2.8 million, respectively.
instrument. The following is a summary of cash equivalents and marketable securities at January 28, 200725, 2009 and January 29, 2006:
| | | January 28, 2007 | |
| | | Amortized Cost | | Unrealized Gain | | Unrealized Loss | | Estimated Fair Value | |
| | | (In thousands) | |
| Asset-backed securities | | $ | 153,471 | | $ | 92 | | $ | (450 | ) | $ | 153,113 | |
| Commercial paper | | | 113,576 | | | | | | (2 | ) | | 113,574 | |
| Obligations of the United States government & its agencies | | | 59,729 | | | | | | (627 | ) | | 59,102 | |
| United States corporate notes, bonds and obligations | | | 277,641 | | | 26 | | | (1,099 | ) | | 276,568 | |
| Equity Securities | | | 2,491 | | | 3,338 | | | | | | 5,829 | |
| Money market | | | 467,198 | | | — | | | — | | | 467,198 | |
| Total | | $ | 1,074,106 | | $ | 3,456 | | $ | (2,178 | ) | $ | 1,075,384 | |
| Classified as: | | | | | | | | | | | | | |
| Cash equivalents | | | | | | | | | | | $ | 501,948 | |
| Marketable securities | | | | | | | | | | | | 573,436 | |
| Total | | | | | | | | | | | $ | 1,075,384 | |
| | | January 29, 2006 | |
| | | Amortized Cost | | Unrealized Gain | | Unrealized Loss | | Estimated Fair Value | |
| | | (In thousands) | |
| Asset-backed securities | | $ | 224,649 | | $ | 1 | | $ | (983 | ) | $ | 223,667 | |
| Commercial paper | | | 138,091 | | | 13 | | | (7 | ) | | 138,097 | |
| Obligations of the United States government & its agencies | | | 72,753 | | | 8 | | | (834 | ) | | 71,927 | |
| United States corporate notes, bonds and obligations | | | 179,930 | | | 5 | | | (1,467 | ) | | 178,468 | |
| Money market | | | 256,593 | | | — | | | — | | | 256,593 | |
| Total | | $ | 872,016 | | $ | 27 | | $ | (3,291 | ) | $ | 868,752 | |
| Classified as: | | | | | | | | | | | | | |
| Cash equivalents | | | | | | | | | | | $ | 470,334 | |
| Marketable securities | | | | | | | | | | | | 398,418 | |
| Total | | | | | | | | | | | $ | 868,752 | |
| | | January 25, 2009 | |
| | | Amortized Cost | | | Unrealized Gain | | | Unrealized Loss | | | Estimated Fair Value | |
| | | (In thousands) | |
Debt securities of United States government agencies | | | | | | | | | | | | | | | | |
Corporate debt securities | | | | | | | | | | | | | | | | |
Mortgage backed securities issued by United States government-sponsored enterprises | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Debt securities issued by United States Treasury | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | January 27, 2008 |
| | Amortized Cost | | | Unrealized Gain | | | Unrealized Loss | | | Estimated Fair Value |
| | (In thousands) |
| | $ | 513,887 | | | $ | 31 | | $ | (2 | ) | | $ | 513,916 | |
Debt securities of United States government agencies | | | 363,434 | | | | 4,365 | | | (69 | ) | | | 367,730 | |
Corporate debt securities | | | 361,452 | | | | 2,844 | | | (281 | ) | | | 364,015 | |
| | | 218,055 | | | | - | | | - | | | | 218,055 | |
| | | 110,287 | | | | 1,232 | | | (11 | ) | | | 111,508 | |
Mortgage backed securities issued by United States government-sponsored enterprises | | | 69,620 | | | | 769 | | | (5 | ) | | | 70,384 | |
Debt securities issued by United States Treasury | | | 29,327 | | | | 256 | | | - | | | | 29,583 | |
| | | 2,491 | | | | 1,613 | | | - | | | | 4,104 | |
| | $ | 1,668,553 | | | $ | 11,110 | | $ | (368 | ) | | $ | 1,679,295 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | $ | 596,786 | |
| | | | | | | | | | | | | | 1,082,509 | |
| | | | | | | | | | | | | $ | 1,679,295 | |
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The following table provides the breakdown of the investments with unrealized losses at January 28, 2007:25, 2009:
| | | Less than 12 months | | 12 months or greater | | Total | |
| | | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses | |
| | | (In thousands) | |
| Asset-backed securities | | $ | 56,663 | | $ | (144 | ) | $ | 64,872 | | $ | (307 | ) | $ | 121,535 | | $ | (451 | ) |
| Commercial paper | | | 37,528 | | | (2 | ) | | — | | | — | | | 37,528 | | | (2 | ) |
| Obligations of the United States government & its agencies | | | 28,058 | | | (217 | ) | | 31,044 | | | (410 | ) | | 59,102 | | | (627 | ) |
| United States corporate notes, bonds and obligations | | | 103,118 | | | (318 | ) | | 110,700 | | | (780 | ) | | 213,818 | | | (1,098 | ) |
| Total | | $ | 225,367 | | $ | (681 | ) | $ | 206,616 | | $ | (1,497 | ) | $ | 431,983 | | $ | (2,178 | ) |
| | | Less than 12 months | | | 12 months or greater | | | Total | |
| | | Fair Value | | | Gross Unrealized Losses | | | Fair Value | | | Gross Unrealized Losses | | | Fair Value | | | Gross Unrealized Losses | |
| | | (In thousands) | |
Corporate debt securities | | | | | | | | | | | | | | | | | | | | | | | | |
Mortgage backed securities issued by United States government-sponsored enterprises | | | | | | | | | | | | | | | | | | | | | | | | |
Debt securities of United States government agencies | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
We performed an impairment review of our investment portfolio as of January 25, 2009. Factors consider general market conditions, the duration and extent to which fair value is below cost, and our intent and ability to hold an investment for a sufficient period of time to allow for recovery in value. We also consider specific adverse conditions related to the financial health of and business outlook for an investee, including industry and sector performance, changes in technology, operational and financing cash flow factors, and changes in an investee’s credit rating. Investments that we identify as having an indicator of impairment are subject to further analysis to determine if the investment was other than temporarily impaired.
As of January 28, 2007,25, 2009 we had 87fifty seven investments that were in an unrealized loss position with an average unrealized loss duration of less than one year. The gross unrealized losses related to fixed income securities were due to changes in interest rates. We have determined that the gross unrealized losses on investment securities at January 28, 200725, 2009 are temporary in nature. We review our investments to identify and evaluate investments thatCurrently, we 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 less than the cost basis, the financial condition and near-term prospects of the investee, and our intent and ability to hold our investments with impairment indicators until maturity. Based on our quarterly impairment review and having considered the guidance in Statement of Financial Accounting Standards Staff Position No. 115-1, or FSP No. 115-1, A Guide to the Implementation of Statement 115 on Accounting for Certain Investments in Debt and Equity Securities, we recorded other than temporary impairment charges of $9.9 million during the year ended January 25, 2009. These charges include $5.6 million related to what we believe is an other than temporary impairment of our investment in the money market funds held by the Reserve International Liquidity Fund, Ltd., or International Reserve Fund; $2.5 million related to a decline in the value of publicly traded equity securities and $1.8 million related to debt securities held by us that were issued by companies that have filed for a periodbankruptcy as of time sufficientJanuary 25, 2009. Please refer to allowNote 17 of these Notes to the Consolidated Financial Statements for any anticipated recovery in market value. Our investment policy requiresfurther details. We concluded that our investments were appropriately valued and that, except for the purchase of top-tier investment grade securities, the diversification of asset type and certain limits$9.9 million impairment charges recognized during fiscal year 2009, no other than temporary impairment charges were necessary on our portfolio duration.of available for sale investments as of January 25, 2009.
Net realized gains (losses), excluding any impairment charges, for fiscal year 2009 was $2.1 million. Net realized gains (losses) for fiscal years 2008 and 2007 were not material. As of January 25, 2009, we had a net unrealized gain of $4.4 million, which was comprised of gross unrealized gains of $7.8 million, offset by $3.4 million of gross unrealized losses. As of January 27, 2008, we had a net unrealized gain of $10.7 million, which was comprised of gross unrealized gains of $11.1 million, offset by $0.4 million of gross unrealized losses.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The amortized cost and estimated fair value of cash equivalents and marketable securities which are primarily debt instruments, are classified as available-for-sale at January 28, 200725, 2009 and January 29, 200627, 2008 and are shown below by contractual maturity are shown below.
All of our marketable securities are debt instruments with the exception of $5.8 million of publicly traded equity securities at January 28, 2007.
| | | January 28, 2007 | | January 29, 2006 | |
| | | Amortized Cost | | Estimated Fair Value | | Amortized Cost | | Estimated Fair Value | |
| | | (In thousands) | |
| Less than one year | | $ | 810,754 | | $ | 810,081 | | $ | 491,259 | | $ | 491,246 | |
| Due in 1 - 5 years | | | 257,623 | | | 256,274 | | | 364,065 | | | 361,047 | |
| Due in 6-7 years | | | 3,238 | | | 3,201 | | | 16,692 | | | 16,459 | |
| Total | | $ | 1,071,615 | | $ | 1,069,556 | | $ | 872,016 | | $ | 868,752 | |
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)| | | January 25, 2009 | | | January 27, 2008 | |
| | | Amortized Cost | | | Estimated Fair Value | | | Amortized Cost | | | Estimated Fair Value | |
| | | (In thousands) | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Mortgage-backed securities issued by government-sponsored enterprises not due at a single maturity date | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Note 810 - Balance Sheet Components
Certain balance sheet components are as follows:
| | | January 28, 2007 | | January 29, 2006 | |
| | | (In thousands) | |
Inventories: | | | | | | | |
| Raw materials | | $ | 56,261 | | $ | 25,743 | |
| Work in-process | | | 111,058 | | | 107,847 | |
| Finished goods | | | 187,361 | | | 121,280 | |
| Total inventories | | $ | 354,680 | | $ | 254,870 | �� |
| | | January 25, 2009 | | | January 27, 2008 | |
| Inventories: | | (In thousands) | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | January 25, 2009 | | | January 27, 2008 | | | Estimated Useful Life |
| | | (In thousands) | | (Years) |
| Property and Equipment: | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Office furniture and equipment | | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | | |
Accumulated depreciation and amortization | | | | | | | | | |
Total property and equipment, net | | | | | | | | | |
The significant increase in finished goods inventories primarily relatesproperty and equipment, net, at January 25, 2009 compared to our build-upJanuary 27, 2008, includes the purchase of inventory levelsa property that is comprised of severalapproximately 25 acres of our MCPland and memory products to meet forecasted sales demand.ten commercial buildings in Santa Clara, California, for approximately $194.8 million. During fiscal year 2009, the increase in the gross carrying amount of the property and equipment was offset by the write-off of fully depreciated assets that were no longer in use.
| | | January 28, 2007 | | January 29, 2006 | |
| | | (In thousands) | |
Deposits and other assets: | | | | | |
| Investments in non-affiliates | | $ | 11,684 | | $ | 11,684 | |
| Long-term prepayments | | | 8,245 | | | 7,504 | |
| Other | | | 8,420 | | | 8,289 | |
| Total deposits and other assets | | $ | 28,349 | | $ | 27,477 | |
| | | January 28, 2007 | | January 29, 2006 | | Estimated Useful Life | |
| | | (In thousands) | | (Years) | |
Property and Equipment: | | | | | | | |
| Land | | $ | 1,230 | | $ | - | | | (A | ) |
| Software and licenses | | | 195,556 | | | 153,618 | | | 3 - 5 | |
| Test equipment | | | 135,607 | | | 88,468 | | | 3 | |
| Computer equipment | | | 113,538 | | | 106,061 | | | 3 | |
| Office furniture and equipment | | | 24,203 | | | 21,618 | | | 5 | |
| Leasehold improvements | | | 92,784 | | | 88,376 | | | (B | ) |
| Construction in process | | | 6,580 | | | 2,260 | | | (C | ) |
| | | | 569,498 | | | 460,401 | | | | |
| Accumulated depreciation and amortization | | | (308,670 | ) | | (282,249 | ) | | | |
| Total property and equipment, net | | $ | 260,828 | | $ | 178,152 | | | | |
(A) Land is a non-depreciable asset.
(B) Leasehold improvements are amortized based on the lesser of either the asset’s estimated useful life or the remaining lease term.
(C) Capital leases are amortized based on the lesser of either the asset’s estimated useful life or the remaining lease term.
(D) Construction in process represents assets that are not in service as of the balance sheet date.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Depreciation expense for fiscal years 2009, 2008 and 2007 2006was $152.4 million, $111.0 million and 2005 was $88.0 million, $76.4 million, and $71.3 million, respectively. Assets recorded under capital leases included in property and equipment were $17.1 million as of January 28, 2007 and January 29, 2006. Related accumulated amortization was $17.1 million as of January 28, 2007 and January 29, 2006. Amortization expense for fiscal 2006 and 2005 related to capital leases was $1.2 million, and $3.8 million, respectively. As of January 28, 2007, all assets recorded under capital leases have been fully amortized.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
| | | January 28, 2007 | | January 29, 2006 | |
| | | (In thousands) | |
Accrued Liabilities: | | | | | |
| Accrued customer programs | | $ | 181,182 | | $ | 90,056 | |
| Deferred revenue | | | 1,180 | | | 217 | |
| Customer advances | | | 239 | | | 1,556 | |
| Taxes payable | | | 37,903 | | | 58,355 | |
| Accrued payroll and related expenses | | | 81,352 | | | 53,080 | |
| Deferred rent | | | 12,551 | | | 11,879 | |
| Accrued legal settlement | | | 30,600 | | | 30,600 | |
| Other | | | 21,725 | | | 13,521 | |
| Total accrued liabilities | | $ | 366,732 | | $ | 259,264 | |
| | | January 25, 2009 | | | January 27, 2008 | |
| Prepaid Expenses and Other | | (In thousands) | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Total prepaid expenses and other | | | | | | | | |
| | | January 25, 2009 | | | January 27, 2008 | |
| Deposits and Other Assets | | (In thousands) | |
Prepaid maintenance, long term | | | | | | | | |
| | | | | | | | |
Investment in non-affiliates | | | | | | | | |
| | | | | | | | |
Total deposits and other assets | | | | | | | | |
| | | January 25, 2009 | | | January 27, 2008 | |
| Accrued Liabilities: | | (In thousands) | |
Accrued customer programs (1) | | | | | | | | |
| | | | | | | | |
Accrued payroll and related expenses | | | | | | | | |
Accrued legal settlement (3) | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Total accrued liabilities and other | | | | | | | | |
The increase in accrued customer programs as of January 28, 2007 when compared to January 29, 2006 primarily relates to an increase in rebates payable to OEMs as a result of our increased sales to OEMs during fiscal 2007 when compared to fiscal 2006. The increasedecrease in accrued payroll and related expenses as of as of January 28, 200725, 2009 when compared to January 29, 200627, 2008 primarily relates to the significant increasedecreases in the number of employees duringaccrued bonus and variable compensation accruals in fiscal 2007.year 2009.
| | | January 28, 2007 | | January 29, 2006 | |
| | | (In thousands) | |
Other Long-term Liabilities: | | | | | |
| Asset retirement obligation | | $ | 6,362 | | $ | 6,440 | |
| Accrued payroll taxes related to stock options | | | 8,995 | | | 9,412 | |
| Other long-term liabilities | | | 14,180 | | | 4,184 | |
| Total other long-term liabilities | | $ | 29,537 | | $ | 20,036 | |
(2) Please refer to Note 11 of these Notes to these Consolidated Financial Statements for discussion regarding the warranty accrual.
(3) Please refer to Note 12 of these Notes to these Consolidated Financial Statements for discussion regarding the 3dfx litigation.
| | | January 25, 2009 | | | January 27, 2008 | |
| Other Long Term Liabilities: | | (In thousands) | |
Deferred income tax liability | | | | | | | | |
| | | | | | | | |
Asset retirement obligations | | | | | | | | |
| | | | | | | | |
Total other long-term liabilities | | | | | | | | |
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 11 - Guarantees
Note 9 - Guarantees
FASB Interpretation No. 45, or FIN 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, requires that upon issuance of a guarantee, the guarantor must recognize a liability for the fair value of the obligation it assumes under that guarantee. In addition, FIN 45 requires disclosures about the guarantees that an entity has issued, including a tabular reconciliation of the changes of the entity’s product warranty liabilities.
Product Defect
Our products are complex and may contain defects or experience failures due to any number of issues in design, fabrication, packaging, materials and/or use within a system. If any of our products or technologies contains a defect, compatibility issue or other error, we may have to invest additional research and development efforts to find and correct the issue. Such efforts could divert our management’s and engineers’ attention from the development of new products and technologies and could increase our operating costs and reduce our gross margin. In addition, an error or defect in new products or releases or related software drivers after commencement of commercial shipments could result in failure to achieve market acceptance or loss of design wins. Also, we may be required to reimburse customers, including for customers’ costs to repair or replace the products in the field. A product recall or a significant number of product returns could be expensive, damage our reputation and could result in the shifting of business to our competitors. Costs associated with correcting defects, errors, bugs or other issues could be significant and could materially harm our financial results.
In July 2008, we recorded a $196.0 million charge against cost of revenue to cover anticipated customer warranty, repair, return, replacement and other associated costs arising from a weak die/packaging material set in certain versions of our previous generation media and communications processor, or MCP, and GPU products used in notebook systems. All of our newly manufactured products and all of our products that are currently shipping in volume have a different material set that we believe is more robust.
The previous generation MCP and GPU products that are impacted were included in a number of notebook products that were shipped and sold in significant quantities. Certain notebook configurations of these MCP and GPU products are failing in the field at higher than normal rates. While we have not been able to determine a root cause for these failures, testing suggests a weak material set of die/package combination, system thermal management designs, and customer use patterns are contributing factors. We have worked with our customers to develop and have made available for download a software driver to cause the system fan to begin operation at the powering up of the system and reduce the thermal stress on these chips. We have also recommended to our customers that they consider changing the thermal management of the MCP and GPU products in their notebook system designs. We intend to fully support our customers in their repair and replacement of these impacted MCP and GPU products that fail, and their other efforts to mitigate the consequences of these failures.
We continue to engage in discussions with our supply chain regarding reimbursement to us for some or all of the costs we have incurred and may incur in the future relating to the weak material set. We also continue to seek to access our insurance coverage, which provided us with $8.0 million in related reimbursement during fiscal year 2009. However, there can be no assurance that we will recover any additional reimbursement. We continue to not see any abnormal failure rates in any systems using NVIDIA products other than certain notebook configurations. However, we are continuing to test and otherwise investigate other products. There can be no assurance that we will not discover defects in other MCP or GPU products.
In September, October and November 2008, several putative class action lawsuits were filed against us, asserting various claims related to the impacted MCP and GPU products. Please refer to Note 12 of these Notes to these Consolidated Financial Statements for further information regarding this litigation.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Accrual for estimated product returns and product warranty liabilities
We record a reduction to revenue for estimated product returns at the time revenue is recognized primarily based on historical return rates. The reductionsCost of revenue includes the estimated cost of product warranties that are calculated at the point of revenue recognition. Under limited circumstances, we may offer an extended limited warranty to revenuecustomers for certain products. Additionally, we accrue for known warranty and indemnification issues if a loss is probable and can be reasonably estimated. The estimated product returns and estimated product warranty liabilities for fiscal years 2007, 20062009, 2008 and 20052007 are as follows:
| | | January 25, 2009 | | | January 27, 2008 | | | January 28, 2007 | |
| | (In thousands) | |
Balance at beginning of period | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Balance at end of period (3) | | | | | | | | | | | | |
Description | | Balance at Beginning of Period | | Additions (1) | | Deductions (2) | | Balance at End of Period | |
| | | (In thousands) | |
| | | | | | | | | | | | | | |
| Year ended January 28, 2007 Allowance for sales returns | | $ | 10,239 | | $ | 37,033 | | $ | (32,795 | ) | $ | 14,477 | |
| | | | | | | | | | | | | | |
| Year ended January 29, 2006 Allowance for sales returns | | $ | 11,687 | | $ | 35,127 | | $ | (36,575 | ) | $ | 10,239 | |
| | | | | | | | | | | | | | |
| Year ended January 30, 2005 Allowance for sales returns | | $ | 9,421 | | $ | 22,463 | | $ | (20,197 | ) | $ | 11,687 | |
(1)Allowances Includes $27.9 million, $25.5 million and $37.0 million, respectively, for fiscal years 2009, 2008 and 2007, towards allowance for sales returns areestimated at the time revenue is recognized primarily based on historical return rates and is charged as a reduction to revenue.
(2)Represents amounts Includes $29.2 million, $21.3 million and $32.8 million, respectively, for fiscal years 2009, 2008 and 2007, written off against theallowance for sales returns.
(3) Includes $17.3 million, $18.7 million and $14.5 million, respectively, as of January 25, 2009, January 27, 2008 and January 28, 2007 relating to allowance for sales returns.
(4) Includes $196.0 million for fiscal year 2009 for incremental repair and replacement costs from a weak die/packaging material set, offset by $6.7 million for fiscal year 2009 related to the reimbursement of claims received from an insurance provider that were allocated to cost of revenue.
(5) Includes $43.6 million for fiscal year 2009 in deductions towards warranty accrual associated with incremental repair and replacement costs from a weak die/packaging material set.
In connection with certain agreements that we have executed in the past, we have at times provided indemnities to cover the indemnified party for matters such as tax, product and employee liabilities. We have also on occasion included intellectual property indemnification provisions in our technology related agreements with third parties. Maximum potential future payments cannot be estimated because many of these agreements do not have a maximum stated liability. As such, we have not recorded any liability in our consolidated financial statementsConsolidated Financial Statements for such indemnifications.
FASB Interpretation No. 45, or FIN 45, Note 10 - Stockholders’ EquityGuarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, requires that upon issuance of a guarantee, the guarantor must recognize a liability for the fair value of the obligation it assumes under that guarantee. In addition, FIN 45 requires disclosures about the guarantees that an entity has issued, including a tabular reconciliation of the changes of the entity’s product warranty liabilities.
Stock Repurchase Program
On August 9, 2004 we announced that our Board had authorized a stock repurchase program to repurchase shares of our common stock, subject to certain specifications, up to an aggregate maximum amount of $300 million. Subsequently, on March 6, 2006, we announced that our Board had approved a $400 million increase to the original stock repurchase program. As a result of this increase, the amount of common stock the Board has authorized to be repurchased has now been increased to a total of $700 million. The repurchases will be made from time to time in the open market, in privately negotiated transactions, or in structured stock repurchase programs, in compliance with the Securities Exchange Act of 1934, or the Exchange Act, Rule 10b-18, subject to market conditions, applicable legal requirements, and other factors. The program does not obligate NVIDIA to acquire any particular amount of common stock and the program may be suspended at any time at our discretion.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
As part of our share repurchase program, we have entered into and we may continue to enter into structured share repurchase transactions with financial institutions. These agreements generally require that we make an up-front payment in exchange for the right to receive a fixed number of shares of our common stock upon execution of the agreement, and a potential incremental number of shares of our common stock, within a pre-determined range, at the end of the term of the agreement. During fiscal 2007, we repurchased 10.3 million shares of our common stock for $275.0 million under structured share repurchase transactions, which we recorded on the trade date of the transaction. Through the end of fiscal 2007, we have repurchased 27.3 million shares under our stock repurchase program for a total cost of $488.1 million. During the first quarter of fiscal 2008, we entered into a structured share repurchase transaction to repurchase shares of our common stock for $125.0 million that we expect to settle prior to the end of our first fiscal quarter.
Convertible Preferred Stock
As of January 28, 2007 and January 29, 2006, there were no shares of preferred stock outstanding.
Note 11 - 401(k) Retirement Plan
We have a 401(k) Retirement Plan, or the 401(k) Plan, covering substantially all of our United States employees. Under the Plan, participating employees may defer up to 100% of their pre-tax earnings, subject to the Internal Revenue Service annual contribution limits. We do not make employer contributions to the 401(k) Plan.
Note 12 - Financial Arrangements, Commitments and Contingencies
Inventory Purchase Obligations
At January 28, 2007,25, 2009 and January 27, 2008, we had outstanding inventory purchase obligations totaling $364.5 million.$290.7 million and $651.6 million, respectively.
Capital Purchase Obligations
At January 28, 2007,25, 2009 and January 27, 2008, we had outstanding capital purchase obligations totaling $4.8 million.$20.3 million and $11.8 million, respectively.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Lease Obligations
Our headquarters complex is located on a leased site in Santa Clara, California and is comprised of six buildings. eleven buildings that are a combination of owned and leased properties. The related leaseslease agreements for five of the seven leased properties expire in fiscal year 2013 and include two seven-year renewals at our option; one leased property expires in fiscal year 2012 with an option for five buildings and a three-year renewal optionto extend for one year; and the remaining leased building. expires in fiscal year 2015 with one option to extend for seven years. Future minimum lease payments under these operating leases total $130.0$92.3 million over the remaining terms of the leases, including predetermined rent escalations, and are included in the future minimum lease payment schedule below.
In addition to the commitment of our headquarters, we have other domestic and international office facilities under operating leases expiring through fiscal 2015.year 2018. Future minimum lease payments under our noncancelablenon-cancelable operating leases as of January 28, 2007,25, 2009, are as follows:
| | | Future Minimum Lease Obligations | |
| | | (In thousands) | |
Year ending January: | | | |
| 2008 | | $ | 33,890 | |
| 2009 | | | 33,480 | |
| 2010 | | | 31,952 | |
| 2011 | | | 31,549 | |
| 2012 | | | 30,449 | |
| 2013 and thereafter | | | 6,445 | |
| Total | | $ | 167,765 | |
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)| | | Future Minimum Lease Obligations | |
| | | (In thousands) | |
| Year ending January: | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
Rent expense for the years ended January 25, 2009, January 27, 2008 and January 28, 2007 January 29, 2006 and January 30, 2005 was $32.6$43.0 million, $29.5$38.2 million and $28.0$32.6 million, respectively.
Litigation In addition to these operating leases, we have a capital lease for a data center located near our headquarters complex in Santa Clara, California. Future minimum lease payments under this capital lease total $48.0 million over the remaining lease term, including predetermined rent escalations, and are included in the future minimum lease payment schedule below:
| | | Future Capital Lease Obligations | |
| | | (In thousands) | |
| Year ending January: | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| �� | | | |
| | | | |
| | | | |
Present Value of minimum lease payments | | | | |
| | | | | |
| | | | |
| | | | |
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Litigation
3dfx
On December 15, 2000, NVIDIA Corporation and one of our indirect subsidiaries entered into an agreementAsset Purchase Agreement, or APA, to purchase certain graphics chip assets from 3dfx which3dfx. The transaction closed on April 18, 2001. That acquisition, and 3dfx's October 2002 bankruptcy filing, led to four lawsuits against NVIDIA: two brought by 3dfx's former landlords, one by 3dfx's bankruptcy trustee and the fourth by a committee of 3dfx's equity security holders in the bankruptcy estate.
Landlord Lawsuits
In May 2002, we were served with a California state court complaint filed by the landlord of 3dfx’s San Jose, California commercial real estate lease, CarrAmerica.Carlyle Fortran Trust, or Carlyle. In December 2002, we were served with a California state court complaint filed by the landlord of 3dfx’s Austin, Texas commercial real estate lease, Carlyle Fortran Trust.CarrAmerica Realty Corporation, or CarrAmerica. The landlords’ complaintslandlords both asserted claims for, among other things, interference with contract, successor liability and fraudulent transfer and seektransfer. The landlords sought to recover among other things, amounts owed on their leases with 3dfxdamages in the aggregate amount of approximately $15 million. In October 2002,million, representing amounts then owed on the 3dfx filed for chapter 11 bankruptcy protection in the United States Bankruptcy Court for the Northern District of California.leases. The landlords’ actionscases were subsequentlylater removed to the United States Bankruptcy Court for the Northern District of California when 3dfx filed its bankruptcy petition and consolidated for pretrial purposes of discovery, with a complaint filedan action brought by the Trustee in the 3dfx bankruptcy case. Upon motion by NVIDIA intrustee.
In 2005, the U.S. District Court for the Northern District of California withdrew the reference to the Bankruptcy Court and the landlord actions were removed to the United States District Court for the Northern District of California. Onlandlords’ actions, and on November 10, 2005, the District Court granted our motion to dismiss theboth landlords’ respective amended complaints and allowed the landlords to have until February 4, 2006 to amend their complaints. The landlords re-filed claims against NVIDIAfiled amended complaints in early February 2006, and NVIDIA again filed motions requesting the District Court to dismiss all suchthose claims. The District Court took both motions under submission. On September 29, 2006, the courtDistrict Court dismissed the CarrAmerica action in its entirety and without leave to amend. The court found, among other things, that CarrAmerica lacks standing to bring the lawsuit and that such standing belongs exclusively to the bankruptcy trustee. On October 27, 2006, CarrAmerica filed a notice of appeal from that order. On December 15, 2006, the District Court also dismissed the Carlyle action in its entirety. Both landlords filed timely notices of appeal from those orders.
On July 17, 2008, the United States Court of Appeals for the Ninth Circuit held oral argument on the landlords' appeals. On November 25, 2008, the Court of Appeals issued its opinion affirming the dismissal of Carlyle’s complaint in its entirety, findingentirety. The Court of Appeals also affirmed the dismissal of most of CarrAmerica’s complaint, but reversed the District Court’s dismissal of CarrAmerica’s claims for interference with contractual relations and fraud. On December 8, 2008, Carlyle filed a Request for Rehearing En Banc, which CarrAmerica joined. That same day, Carlyle also filed a Motion for Clarification of the Court’s Opinion. On January 22, 2009, the Court of Appeals denied the Request for Rehearing En Banc, but clarified its opinion affirming dismissal of the claims by stating that Carlyle lackedCarrAmerica had standing to pursue someclaims for interference with contractual relations, fraud, conspiracy and tort of itsanother, and remanding Carlyle’s case with instructions that the District Court evaluate whether the Trustee had abandoned any claims, and that certain other claims were substantively unmeritorious. NVIDIA has filed motionswhich Carlyle might have standing to recover its litigation costs and attorneys fees against both Carlyle and Carr. Those motions are currently scheduled for hearing in early April, 2007.pursue.
The District Court held a status conference in the CarrAmerica and Carlyle cases on March 9, 2009. That same day, 3dfx’s bankruptcy Trustee filed in the bankruptcy court a Notice of Trustee’s Intention to Compromise Controversy with Carlyle Fortran Trust. According to that Notice, the Trustee would abandon any claims it has against us for intentional interference with contract, negligent interference with prospective economic advantage, aiding and abetting breach of fiduciary duty, declaratory relief, unfair business practices and tort of another, in exchange for which Carlyle will withdraw irrevocably its Proof of Claim against the 3dfx bankruptcy estate and waive any further right of distribution from the estate. In light of the Trustee’s notice, the District Court ordered the parties to seek a hearing on the Notice on or before April 24, 2009, ordered Carlyle and CarrAmerica to file amended complaints by May 10, 2009, and set a further Case Management Conference for May 18, 2009. We continue to believe that there is no merit to Carlyle or CarrAmerica’s remaining claims.
Trustee Lawsuit
In March 2003, we were served with a complaint filed by the Trustee appointed by the Bankruptcy Court to represent the interests of the 3dfx3dfx’s bankruptcy estate.estate served his complaint on NVIDIA. The Trustee’s complaint asserts claims for, among other things, successor liability and fraudulent transfer and seeks additional payments from us. The Trustee's fraudulent transfer theory alleged that NVIDIA had failed to pay reasonably equivalent value for 3dfx's assets, and sought recovery of the difference between the $70 million paid and the alleged fair value, which the Trustee estimated to exceed $50 million. The Trustee's successor liability theory alleged NVIDIA was effectively 3dfx's legal successor and was therefore responsible for all of 3dfx's unpaid liabilities. This action was consolidated for pretrial purposes with the landlord cases, as noted above.
On October 13, 2005, the Bankruptcy Court held a hearing onheard the Trustee’s motion for summary adjudication. Onadjudication, and on December 23, 2005, the Court issued its ruling denying the Trustee’s Motion for Summary Adjudicationdenied that motion in all material respects and holdingheld that NVIDIA is prevented from disputingmay not dispute that the value of the 3dfx transaction to NVIDIA was less than $108.0$108 million. The Bankruptcy Court expressly denied the Trustee’s request to find that the value of the 3dfx assets conveyed to NVIDIA werewas at least $108.0$108 million.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
In early November 2005, after manyseveral months of mediation, NVIDIA and the Official Committee of Unsecured Creditors, or the Creditors’ Committee, reachedagreed to a Plan of Liquidation of 3dfx, which included a conditional settlement of the Trustee’s claims against NVIDIA.us. This conditional settlement presented as the centerpiece of a proposed Plan of Liquidation in the bankruptcy case, was subject to a confirmation process through a vote of creditors and the review and approval of the Bankruptcy Court after notice and hearing.Court. The Trustee advised that he intended to object to theconditional settlement which would have called for a payment by NVIDIA of approximately $30.6 million to the 3dfx estate. Under the settlement, $5.6 million related to various administrative expenses and Trustee fees, and $25.0 million related to the satisfaction of debts and liabilities owed to the general unsecured creditors of 3dfx. Accordingly, during the three month period ended October 30, 2005, we recorded $5.6 million as a charge to settlement costs and $25.0 million as additional purchase price for 3dfx.
However, The Trustee advised that he intended to object to the settlement. The conditional settlement never progressed substantially through the confirmation process.
On December 21, 2005,2006, the Bankruptcy Court determined that it would schedulescheduled a trial offor one portion of the Trustee’s case against NVIDIA. On January 2, 2007, NVIDIA exercised its right to terminateterminated the settlement agreement on grounds that the bankruptcy courtBankruptcy Court had failed to proceed toward confirmation of the Creditors’ Committee’s plan. A non-jury trial began on March 21, 2007 on valuation issues in the Trustee's constructive fraudulent transfer claims against NVIDIA. Specifically, the Bankruptcy Court tried four questions: (1) what did 3dfx transfer to NVIDIA in the APA?; (2) of what was transferred, what qualifies as "property" subject to the Bankruptcy Court's avoidance powers under the Uniform Fraudulent Transfer Act and relevant bankruptcy code provisions?; (3) what is the fair market value of the "property" identified in answer to question (2)?; and (4) was the $70 million that NVIDIA paid "reasonably equivalent" to the fair market value of that property? The parties completed post-trial briefing on May 25, 2007.
85 On April 30, 2008, the Bankruptcy Court issued its Memorandum Decision After Trial, in which it provided a detailed summary of the trial proceedings and the parties' contentions and evidence and concluded that "the creditors of 3dfx were not injured by the Transaction." This decision did not entirely dispose of the Trustee's action, however, as the Trustee's claims for successor liability and intentional fraudulent conveyance were still pending. On June 19, 2008, NVIDIA filed a motion for summary judgment to convert the Memorandum Decision After Trial to a final judgment. That motion was granted in its entirety and judgment was entered in NVIDIA’s favor on September 11, 2008. The Trustee filed a Notice of Appeal from that judgment on September 22, 2008, and on September 25, 2008, NVIDIA exercised its election to have the appeal heard by the United States District Court, where the appeal is pending.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
In addition, while While the conditional settlement agreement was awaitingreached in November 2005 never progressed through the confirmation process, the Bankruptcy Court, over objectionTrustee’s case still remains pending appeal. As such, we have not reversed the accrual of $30.6 million - $5.6 million as a charge to settlement costs and $25.0 million as additional purchase price for 3dfx – that we recorded during the three months ended October 30, 2005, pending resolution of the Creditors’ Committee and NVIDIA, ordered the discovery portionappeal of the Trustee’s litigation to proceed.case. We do not believe the resolution of this matter will have a material impact on our results of operations or financial position.
The expert discovery was completed, but the Bankruptcy Court also ruled on a Trustee discovery motion allowing additional discovery of NVIDIA. Because that order would have required NVIDIA to disclose privileged attorney-client communications, NVIDIA asked the District Court to review that order and to stay its execution while the District Court’s review is pending. The District Court did issue the requested stay order on August 3, 2006. Oral argument on that matter was held on November 15, 2006, and the District Court reversed the Bankruptcy Court’s order by order of its own dated December 15, 2006. The District Court permitted certain limited additional discovery, but concluded that on the record before it, there was no basis to set aside the attorney-client privilege.Equity Committee Lawsuit
Following On December 8, 2005, the Trustee’s filing ofTrustee filed a Form 8-K on behalf of 3dfx, in which the Trustee discloseddisclosing the terms of the proposedconditional settlement agreement between NVIDIA and the Creditor’s Committee,Committee. Thereafter, certain 3dfx shareholders of 3dfx filed a petition with the Bankruptcy Court to appoint an official committee to represent the claimed interests of 3dfx shareholders. ThatThe court granted that petition was granted and appointed an Equity HoldersSecurities Holders’ Committee, was appointed. Since that appointment,or the Equity HoldersCommittee. The Equity Committee hasthereafter sought and obtained an order granting it standing to bring suit against NVIDIA, for the benefit of the bankruptcy estate, to compel NVIDIA to pay the stock consideration then unpaid from the APA, and filed aits own competing plan of reorganization/liquidation. The Equity HoldersCommittee’s plan assumes that 3dfx can raise additional equity capital that would be used to retire all of 3dfx’s debts. Upondebts, and thus to trigger NVIDIA's obligation to pay six million shares of stock consideration specified in the payment ofAPA. NVIDIA contends, among other things, that debt, the Equity Holders Committee contendssuch a commitment is not sufficient and that NVIDIA would be obligedits obligation to pay the stock consideration providedhad long before been extinguished. On May 1, 2006, the Equity Committee filed its lawsuit for in the asset purchase agreement. By virtue of stock splits since the execution of the asset purchase agreement,declaratory relief to compel NVIDIA to pay the stock consideration would now total four million shares of our common stock. Theconsideration. In addition, the Equity Holders’ Committee filed a motion withseeking Bankruptcy Court approval of investor protections for Harbinger Capital Partners Master Fund I, Ltd., an equity investment fund that conditionally agreed to pay no more than $51.5 million for preferred stock in 3dfx. The hearing on that motion was held on January 18, 2007, and the Bankruptcy Court for an order giving it standing to bring that lawsuit to enforceapproved the Asset Purchase Agreement. Over our objection,proposed protections.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
After the Bankruptcy Court granted thatdenied our motion to dismiss on May 1,September 6, 2006, and the Equity Holders’ Committee filed its Complaint for Declaratory Relief against NVIDIA that same day. NVIDIA moved to dismiss the Complaint for Declaratory Relief, and the Bankruptcy court granted that motion with leave to amend. The Equity Committee thereafteragain amended its complaint, and NVIDIA moved to dismiss that amended complaint as well. At the hearing onOn December 21, 2006, the Bankruptcy Court granted the motion as to one of the Equity Holders’ Committee’s claims, and denied it as to the others. However, the Bankruptcy Court also ruled that NVIDIA would only be required to answer the first three causes of action by which the Equity Holders’ Committee seeks a determinationdeterminations that (1) the Asset Purchase AgreementAPA was not terminated before 3dfx filed for bankruptcy protection, that(2) the 3dfx bankruptcy estate still holds some rights in the Asset Purchase Agreement,APA, and that(3) the agreementAPA is capable of being assumed by the bankruptcy estate. In addition,
Because of the trial of the Trustee's fraudulent transfer claims against NVIDIA, the Equity HoldersCommittee's lawsuit did not progress substantially in 2007. On July 31, 2008, the Equity Committee filed a motion seeking Bankruptcy court approvalfor summary judgment on its first three causes of investor protectionsaction. On September 15, 2008, NVIDIA filed a cross-motion for Harbinger Capital Partners Master Fund I, Ltd., an equity investment firm that has conditionally agreed to pay no more than $51.5 million for preferred stock in 3dfx. Thesummary judgment. On October 24, 2008, the Court held a hearing on the parties’ cross-motions for summary judgment. On January 6, 2009, the Bankruptcy Court issued a Memorandum Decision granting NVIDIA’s motion and denying the Equity Committee’s motion, and entered an Order to that motion was heldeffect on January 30, 2009. On February 27, 2009, the Bankruptcy Court entered judgment in favor of NVIDIA. The Equity Committee has waived its right to appeal by stipulation entered on February 18, 2007,2009, and the court approved the proposed protections. Beginning on March 21, 2007, NVIDIA and the Trustee are scheduled to try the question of the value of the assets 3dfx conveyed to NVIDIA and, in particular, whether the price NVIDIA paid for those assets was reasonably equivalent to the value of the assets 3dfx sold to NVIDIA.judgment is now final.
Lawsuits Proceedings, SEC inquiry and lawsuits related to our historical stock option granting practices and SEC inquiry
In June 2006, the Audit Committee of the Board of NVIDIA or the ("Audit Committee,Committee"), began a review of our stock option practices based on the results of an internal review voluntarily undertaken by management. The Audit Committee, with the assistance of outside legal counsel, completed its review on November 13, 2006 when the Audit Committee reported its findings to our full Board. The review covered option grants to all employees, directors and consultants for all grant dates during the period from our initial public offering in January 1999 through June 2006. Based on the findings of the Audit Committee and our internal review, we identified a number of occasions on which we used an incorrect measurement date for financial accounting and reporting purposes.
We voluntarily contacted the SEC regarding the Audit Committee’s review and, as of the date of the filing of this Form 10-K,review. In late August 2006, the SEC is continuing theinitiated an inquiry ofrelated to our historical stock option grant practices it began in late August 2006.practices. In October 2006, we met with the SEC and provided it with a review of the status of the Audit Committee’s review and inreview. In November 2006, we voluntarily provided the SEC with furtheradditional documents. We continuecontinued to cooperate with the SEC inthroughout its inquiry. On October 26, 2007, the SEC formally notified us that the SEC's investigation concerning our historical stock option granting practices had been terminated and that no enforcement action was recommended.
Concurrently with our internal review and the SEC’s inquiry, since September 29, 2006, ten derivative cases have been filed in state and federal courts asserting claims concerning errors related to our historical stock option granting practices and associated accounting for stock-based compensation expense. These complaints have been filed in various courts, including the California Superior Court, Santa Clara County, the United States District Court for the Northern District of California, and the Court of Chancery of the State of Delaware in and for New Castle County. Plaintiffs filed a consolidated complaint in the United States District Court for the Northern District of California on February 28, 2007. The California Superior Court cases have beenwere subsequently consolidated and plaintiffs are scheduled to file a consolidated complaint on or before March 22, 2007.as were the cases pending in the Northern District of California. All of the cases purport to be brought derivatively on behalf of NVIDIA against members of our Board and several of our current and former officers and directors. AllPlaintiffs in these actions allege in substantially similar fashion claims for, among other things, breach of fiduciary duty, unjust enrichment, insider selling, abuse of control, gross mismanagement, waste, and constructive fraud, andfraud. The Northern District of California action also alleges violations of federal provisions, including Sections 10(b) and 14(a) of the Securities Exchange Act of 1934, or the Exchange Act.1934. The plaintiffs seek to recover for NVIDIA, among other things, damages in an unspecified amount, rescission, punitive damages, treble damages for insider selling, and fees and costs. Plaintiffs also seek an accounting, a constructive trust and other equitable relief.We intend
On August 5, 2007, our Board authorized the formation of a Special Litigation Committee to take all appropriate actioninvestigate, evaluate, and make a determination as to how NVIDIA should proceed with respect to the claims and allegations asserted in response to these complaints.the underlying derivative cases brought on behalf of NVIDIA. The Special Litigation Committee has made substantial progress in completing its work, but has not yet issued a report.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Opti
Between June 2007 and September 2008 the parties to the actions engaged in settlement discussions, including four mediation sessions before the Honorable Edward Infante (Ret.). On October 19, 2004 OptiSeptember 22, 2008, we disclosed that we had entered into Memoranda of Understanding regarding the settlement of all derivative actions concerning our historical stock option granting practices. On November 10, 2008, the definitive settlement agreements were concurrently filed a complaint for patent infringement against NVIDIA in the Chancery Court of Delaware and the United States District Court for the EasternNorthern District of Texas. In its complaint, Opti asserted that unspecifiedCalifornia and are subject to approval by both such courts. The settlement agreements do not contain any admission of wrongdoing or fault on the part of NVIDIA, chipsets infringe five United States patents heldour board of directors or executive officers. The terms of the settlement agreements include, among other things, the agreement by Opti. Opti sought unspecified damages forthe board of directors to continue and to implement certain corporate governance changes; acknowledgement of the prior amendment of certain options through re-pricings and limitations of the relevant exercise periods; an agreement by Jen-Hsun Huang, our alleged conduct,president and chief executive officer, to amend additional options to increase the aggregate exercise price of such options by $3.5 million or to cancel options with an intrinsic value of $3.5 million; an $8.0 million cash payment by our insurance carrier to NVIDIA; and an agreement to not object to attorneys’ fees to be paid by NVIDIA to plaintiffs’ counsel of no more than $7.25 million, if approved by the courts. On January 24, 2009, a Notice of Pendency and triple damages for alleged willful infringement by NVIDIA. In April 2006,Settlement of Shareholder Derivative Actions was mailed to shareholders of record and posted on www.nvidia.com. On March 11, 2009, a final settlement hearing was held in the DistrictDelaware Chancery Court issuedand, on the same date, the Court entered a Markman ruling adopting Opti's proposed construction on 13 ofFinal Order and Judgment, which approved the 15 terms at issuerequested attorneys' fees and Opti dropped fromdismissed the lawsuit two of the five United States patents that Opti alleged NVIDIA infringes, and elected to pursue the three remaining patents at trial.
In August 2006, Opti and NVIDIA settled this litigation. Under that settlement, NVIDIA was obligated to pay to Opti $11.0 million dollars for past and present licenses to the patents in suit and NVIDIA agreed to make additional quarterly payments to Opti should NVIDIA use certain patented technology after January 31, 2007. The case has now been dismissedDelaware action with prejudice. The agreements with Opti callfinal approval hearing in the Northern District of California is scheduled for us to pay $11.0 million in exchange for Opti’s dismissal of its lawsuit against us and for certain patent license rights. Of this $11.0 million, we recorded $8.0 million as a patent-related intangible asset and $3.0 million as a charge to cost of revenue.March 17, 2009.
Department of Justice Subpoena and Investigation, and Civil Cases
On November 29, 2006, we received a subpoena from the San Francisco Office of the Antitrust Division of the United States Department of Justice, or DOJ, in connection with the DOJ's investigation into potential antitrust violations related to graphics processing unitsGPUs and cards. On October 10, 2008, the DOJ formally notified us that the DOJ investigation has been closed. No specific allegations have beenwere made against us. We plan to cooperate withNVIDIA during the DOJ in its investigation.
As of March 14, 2007, 42January 25, 2009, over 50 civil complaints have been filed against us. The majority are pendingof the complaints were filed in the Northern District of California, a number are pendingseveral were filed in the Central District of California, and other cases are pendingwere filed in several other Federal district courts. AlthoughOn April 18, 2007, the Judicial Panel on Multidistrict Litigation transferred the actions currently pending outside of the Northern District of California to the Northern District of California for coordination of pretrial proceedings before the Honorable William H. Alsup. By agreement of the parties, Judge Alsup will retain jurisdiction over the consolidated cases through trial or other resolution.
In the consolidated proceedings, two groups of plaintiffs (one putatively representing all direct purchasers of GPUs and the other putatively representing all indirect purchasers) filed consolidated, amended class-action complaints. These complaints differ, they generally purport to assert federal and state antitrust claims based on alleged price fixing, market allocation, and other alleged anti-competitive agreements between us and ATI Technologies, ULC., or ATI, and Advanced Micro Devices, Inc., or AMD, as a result of its acquisition of ATI Technologies, Inc., or ATI. Many of the casesThe indirect purchasers’ consolidated amended complaint also assertasserts a variety of state law antitrust, unfair competition orand consumer protection claims on the same allegations, and some cases assert unjust enrichment or otheras well as a common law claims.claim for unjust enrichment.
Plaintiffs filed their first consolidated complaints on June 14, 2007. On July 16, 2007, we moved to dismiss those complaints. The motions to dismiss were heard by Judge Alsup on September 20, 2007. The court subsequently granted and denied the motions in part, and gave the plaintiffs leave to move to amend the complaints. On November 7, 2007, the court granted plaintiffs’ motion to file amended complaints, are putativeordered defendants to answer the complaints, lifted a previously entered stay on discovery, and set a trial date for January 12, 2009. Plaintiffs filed motions for class actions alleging classescertification on April 24, 2008. We filed oppositions to the motions on May 20, 2008. On July 18, 2008, the court ruled on Plaintiffs’ class certification motions. The court denied class certification for the proposed class of indirect purchasers. The court granted in part class certification for the direct purchasers but limited the direct purchaser class to individual purchasers that acquired graphics processing cards products directly from NVIDIA or ATI from their websites between December 4, 2002 and November 7, 2007.
On September 16, 2008, we executed a settlement agreement, or the Agreement, in connection with the claims of the certified class of direct and/purchaser plaintiffs approved by the court. Pursuant to the Agreement, NVIDIA has paid $850,000 into a $1.7 million fund to be made available for payments to the certified class. We are not obligated under the Agreement to pay plaintiffs’ attorneys’ fees, costs, or make any other payments in connection with the settlement other than the payment of $850,000. The Agreement is subject to court approval and, if approved, would dispose of all claims and appeals raised by the certified class in the complaints against NVIDIA. A final settlement approval hearing is scheduled for March 26, 2009. Because the Court certified a class consisting only of a narrow group of direct purchasers, the Agreement does not resolve any claims that other direct purchasers may assert. In addition, on September 9, 2008, we reached a settlement agreement with the remaining individual indirect purchaser plaintiffs pursuant to which NVIDIA paid $112,500 in exchange for a dismissal of all claims and appeals related to the complaints raised by the individual indirect purchaser plaintiffs. This settlement is not subject to the approval of the court. Pursuant to the settlement, the individual indirect purchaser plaintiffs in the complaints have dismissed their claims and withdrawn their appeal of the class certification ruling. Because the Court did not certify a class of indirect purchasers, this settlement agreement resolves only the claims of our graphic processing unitsthose indirect purchasers that were named in the various actions.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Rambus Corporation
On July 10, 2008, Rambus Corporation, or Rambus, filed suit against NVIDIA Corporation, asserting patent infringement of 17 patents claimed to be owned by Rambus. Rambus seeks damages, enhanced damages and cards.injunctive relief. The plaintiffslawsuit was filed in a few of the Northern District of California in San Jose, California. On July 11, 2008, NVIDIA filed suit against Rambus in the Middle District of North Carolina asserting numerous claims, including antitrust and other claims. NVIDIA seeks damages, enhanced damages and injunctive relief. Rambus has since dropped two patents from its lawsuit in the Northern District of California. The two cases have recently been consolidated into a single action in the Northern District of California. A case management conference in the case pending in the Northern District of California is scheduled for March 30, 2009. On November 6, 2008, Rambus filed a complaint alleging a violation of 19 U.S.C. Section 1337 based on a claim of patent infringement against NVIDIA and 14 other respondents with the U.S. International Trade Commission, or ITC. The complaint seeks an exclusion order barring the importation of products that allegedly infringe nine Rambus patents. The ITC has instituted the investigation. NVIDIA intends to pursue its offensive and defensive cases vigorously.
Product Defect Litigation and Securities Cases
In September, October and November 2008, several putative consumer class action lawsuits were filed against us, asserting various claims arising from a weak die/packaging material set in certain versions of our previous generation MCP and GPU products used in notebook systems. Most of the lawsuits were filed in Federal Court in the Northern District of California, but three were filed in state court in California, in Federal Court in New York, and in Federal Court in Texas. Those three actions have since been removed or transferred to the United States District Court for the Northern District of California, San Jose Division, where all of the actions now are currently pending. The various lawsuits are titled Nakash v. NVIDIA Corp., Feinstein v. NVIDIA Corp., Inicom Networks, Inc. v. NVIDIA Corp. and Dell, Inc. and Hewlett Packard, Olivos v. NVIDIA Corp., Dell, Inc. and Hewlett Packard, Sielicki v. NVIDIA Corp. and Dell, Inc., Cormier v. NVIDIA Corp., National Business Officers Association, Inc. v. NVIDIA Corp., and West v. NVIDIA Corp. The First Amended Complaint was filed on October 27, 2008, which no longer asserted claims against Dell, Inc. The various complaints assert claims for, among other things, breach of warranty, violations of the Consumer Legal Remedies Act, Business & Professions Code sections 17200 and 17500 and other consumer protection statutes under the laws of various jurisdictions, unjust enrichment, and strict liability.
The District Court has entered orders deeming all of the above cases related under the relevant local rules. On December 11, 2008, NVIDIA filed a motion withto consolidate all of the Judicial Panelaforementioned consumer class action cases. The District Court held a case management conference for the above cases on Multidistrict Litigation asking that allFebruary 23, 2009. On February 26, 2009, the District Court consolidated the cases, as well as two other cases pending against Hewlett-Packard, under the caption “The NVIDIA GPU Litigation” and subsequent cases be consolidated in one courtordered the plaintiffs to file lead counsel motions by March 2, 2009. On March 2, 2009, several of the parties filed motions for all pre-trial discoveryappointment of lead counsel and motion practice.briefs addressing certain related issues. A hearing on this motionappointment of lead counsel is setscheduled for March 29, 2007. We believe23, 2009. The District Court also ordered that a consolidated amended complaint be filed on or before May 6, 2009.
In September 2008, three putative securities class actions, or the allegationsActions, were filed in the complaints are without meritUnited States District Court for the Northern District of California arising out of our announcements on July 2, 2008, that we would take a charge against cost of revenue to cover anticipated costs and expenses arising from a weak die/packaging material set in certain versions of our previous generation MCP and GPU products and that we were revising financial guidance for our second quarter of fiscal year 2009. The Actions purport to be brought on behalf of purchasers of NVIDIA stock and assert claims for violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended. On October 30, 2008, the Actions were consolidated under the caption In re NVIDIA Corporation Securities Litigation, Civil Action No. 08-CV-04260-JW (HRL). Lead Plaintiffs and Lead Plaintiffs' Counsel were appointed on December 23, 2008. On February 6, 2009, co-Lead Plaintiff filed a Writ of Mandamus with the Ninth Circuit Court of Appeals challenging the designation of co-Lead Plaintiffs' Counsel. On February 19, 2009, co-Lead Plaintiff filed with the District Court, a motion to stay the District Court proceedings pending resolution of the Writ of Mandamus by the Ninth Circuit. On February 24, 2009, Judge Ware granted the stay. The Writ is still pending in the Court of Appeals. We intend to take all appropriate action with respect to the above cases.
Intel Corporation
On February 17, 2009, Intel Corporation filed suit against NVIDIA Corporation, seeking declaratory and injunctive relief relating to a licensing agreement that the parties signed in 2004. The lawsuit was filed in Delaware Chancery Court. Intel seeks an order from the Court declaring that the license does not extend to certain future NVIDIA chipset products, and enjoining NVIDIA from stating that it has licensing rights for these products. The lawsuit seeks no damages from NVIDIA. If Intel successfully obtains such a court order, we could be unable to sell our MCP products for use with Intel processors and our competitive position would be harmed. NVIDIA’s response to the Intel complaint is currently due on March 23, 2009. NVIDIA disputes Intel’s positions and intends to vigorously defend the cases.case.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 13 - Income Taxes
The provision for income taxestax expense (benefit) applicable to income before income taxes consists of the following:
| | | Year Ended | |
| | | January 28, 2007 | | January 29, 2006 | | January 30, 2005 | |
| | | (In thousands) | |
| Current: | | | | | | | |
| Federal | | $ | (17 | ) | $ | 22,050 | | $ | — | |
| State | | | (2,401 | ) | | 375 | | | 355 | |
| Foreign | | | 6,758 | | | 11,012 | | | 8,826 | |
| Total current | | | 4,340 | | | 33,437 | | | 9,181 | |
| Deferred: | | | | | | | | | | |
| Federal | | | 41,721 | | | (2,692 | ) | | 1,237 | |
| State | | | — | | | — | | | (620 | ) |
| Total deferred | | | 41,721 | | | (2,692 | ) | | 617 | |
| Charge in lieu of taxes attributable to employer stock option plans | | | 289 | | | 24,867 | | | 8,615 | |
| Provision for income taxes | | $ | 46,350 | | $ | 55,612 | | $ | 18,413 | |
NVIDIA CORPORATION AND SUBSIDIARIES| | | Year Ended | |
| | | January 25, 2009 | | | January 27, 2008 | | | January 28, 2007 | |
| | | (In thousands) | |
| Current income taxes: | | | | | | | | | |
| | | | ) | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | ) | | | | | | | | |
| | | — | | | | | | | | | |
| | | | ) | | | | | | | | |
| | | | ) | | | | | | | | |
Charge in lieu of taxes attributable to employer stock option plans | | | | | | | | | | | | |
Income tax expense (benefit) | | | | ) | | | | | | | | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Income (loss) before income taxes consists of the following:
| | | Year Ended | | | Year Ended | |
| | | January 28, 2007 | | January 29, 2006 | | January 30, 2005 | | | January 25, 2009 | | January 27, 2008 | | January 28, 2007 | |
| | | (In thousands) | | | (In thousands) | |
| Domestic | | $ | (19,617 | ) | $ | 52,112 | | $ | (7,537 | ) | | | | ) | | | | | | | |
| Foreign | | | 514,097 | | | 304,676 | | | 114,565 | | | | | | | | | | | |
| | | $ | 494,480 | | $ | 356,788 | | $ | 107,028 | | | | | ) | | | | | | | |
The provision for income taxestax expense (benefit) differs from the amount computed by applying the federal statutory income tax rate of 35% to income (loss) before income taxes as follows:
| | | Year Ended | |
| | | January 28, 2007 | | January 29, 2006 | | January 30, 2005 | |
| | | (In thousands) | |
| Tax expense computed at federal statutory rate | | $ | 173,068 | | $ | 124,876 | | $ | 37,460 | |
| State income taxes, net of federal tax effect | | | (1,372 | ) | | 847 | | | 219 | |
| Foreign tax rate differential | | | (97,390 | ) | | (57,286 | ) | | (8,462 | ) |
| Research tax credit | | | (35,359 | ) | | (13,175 | ) | | (10,935 | ) |
| In-process research and development | | | 4,690 | | | — | | | — | |
| Stock-based compensation | | | 3,564 | | | — | | | — | |
| Other | �� | | (851 | ) | | 350 | | | 131 | |
| Provision for income taxes | | $ | 46,350 | | $ | 55,612 | | $ | 18,413 | |
| | | Year Ended | |
| | | January 25, 2009 | | | January 27, 2008 | | | January 28, 2007 | |
| | | (In thousands) | |
Tax expense computed at federal statutory rate | | | | ) | | | | | | | | |
State income taxes, net of federal tax effect | | | | | | | | | | | | |
Foreign tax rate differential | | | | | | | | | | | | |
| | | | ) | | | | | | | | |
In-process research and development | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | ) | | | | | | | | |
Income tax expense (benefit) | | | | ) | | | | | | | | |
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The tax effect of temporary differences that gives rise to significant portions of the deferred tax assets and liabilities are presented below:
| | | January 28, 2007 | | January 29, 2006 | |
| | | (In thousands) | |
Deferred tax assets: | | | |
| Net operating loss carryforwards | | $ | 23,272 | | $ | 134,385 | |
| Accruals and reserves, not currently deductible for tax purposes | | | 17,702 | | | 16,109 | |
| Property, equipment and intangible assets | | | 16,436 | | | 16,928 | |
| Research and other tax credit carryforwards | | | 145,393 | | | 146,089 | |
| Stock-based compensation | | | 31,835 | | | 45,924 | |
| Gross deferred tax assets | | | 234,638 | | | 359,435 | |
| Less valuation allowance | | | (68,563 | ) | | (233,016 | ) |
| Deferred tax assets | | | 166,075 | | | 126,419 | |
Deferred tax liabilities: | | | | | | | |
| Unremitted earnings of foreign subsidiaries | | | (149,276 | ) | | (85,716 | ) |
Net deferred tax asset | | $ | 16,799 | | $ | 40,703 | |
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)| | | January 25, 2009 | | | January 27, 2008 | |
| | | (In thousands) | |
| Deferred tax assets: | | | |
Net operating loss carryforwards | | | | | | | | |
Accruals and reserves, not currently deductible for tax purposes | | | | | | | | |
Property, equipment and intangible assets | | | | | | | | |
Research and other tax credit carryforwards | | | | | | | | |
| | | | | | | | |
Gross deferred tax assets | | | | | | | | |
Less: valuation allowance | | | | ) | | | | |
Total deferred tax assets | | | | | | | | |
Deferred tax liabilities: | | | | | | | | |
Unremitted earnings of foreign subsidiaries | | | | ) | | | | |
Net deferred tax asset (liability) | | | | ) | | | | |
Income tax expense (benefit) as a percentage of income (loss) before taxes, or our annual effective tax rate, was (30.0%), 11.5% and 9.4% in fiscalfor the years ended January 25, 2009, January 27, 2008 and January 28, 2007, 15.6% in fiscal 2006, and 17.2% in fiscal 2005.respectively. The difference in the effective tax rates amongst the three years was primarily a result of changes in our geographic mix of income subject to tax, with the additional change in mix in fiscal 2007 due to certain stock-based compensation expensed for financial accounting purposes under SFAS No. 123(R), and an increase inimpact of the amount offederal research tax credit benefitrecognized in fiscal 2007.year 2009 relative to the loss before taxes in such fiscal year.
As of January 28, 2007,25, 2009, we had a valuation allowance of $68.6$92.5 million. Of the total valuation allowance, $3.7$5.3 million relates to state tax attributes acquired in certain acquisitions for which realization of the related deferred tax assets was determined not likely to be realized due, in part, to potential utilization limitations as a result of stock ownership changes, and $64.9$87.2 million relates to state and foreign deferred tax assets that management determined not likely to be realized due, in part, to projections of future taxable income. To the extent realization of the deferred tax assets related to certain acquisitions becomes probable,more-likely-than-not, recognition of these acquired tax benefits would first reduce goodwill to zero, then reduce other non-current intangible assets related to the acquisition to zero with any remaining benefitbe reported as a reduction to income tax expense. Toexpense in accordance with the extentrecent accounting pronouncement, Statement of Financial Accounting Standards No. 141(R), or SFAS No. 141(R), Business Combinations, issued by the FASB in December 2007. We would also recognize an income tax benefit during the period that the realization of the deferred tax assets related to state or foreign tax benefits of $87.2 million becomes probable, we would recognize an income tax benefit in the period such asset is more likely than not to be realized.more-likely-than-not.
AsIn accordance with Statement of January 28, 2007, with the adoption ofFinancial Accounting Standards No. 123(R), or SFAS No. 123(R), we have derecognized bothShare Based Payment, our deferred tax assets fordo not include the excess of tax benefit related to stock-based compensation reflected inthat are a component of our federal and state net operating loss and research tax credit carryforwards andin the offsetting valuation allowance.amount of $588.7 million as of January 25, 2009. Consistent with prior years, the excess tax benefit reflected in our net operating loss and research tax credit carryforwards in the amount of $344.9 million as of January 28, 2007, will be accounted for as a credit to stockholders’ equity, if and when realized. In determining if and when excess tax benefits have been realized, we have elected to do so on a “with-and-without”with-and-without approach with respect to such excess tax benefits. We have also elected to ignore the indirect tax effects of stock-based compensation deductions for financial and accounting reporting purposes, and specifically to recognize the full effect of the research tax credit in income from continuing operations.
As of January 28 2007,25, 2009, we had a federal net operating loss carryforward of approximately $770.5 million and$1.16 billion, cumulative state net operating loss carryforwards of approximately $584.1$791.6 million, and a foreign net operating loss carryforward of $25.3 million. The federal net operating loss carryforward will expire beginning in fiscal 2012, and the state net operating loss carryforwards will begin to expire in fiscal 2008 according to2010 in accordance with the rules of each particular state.state, and the foreign net operating loss carryforward may be carried forward indefinitely. As of January 28, 200725, 2009, we had federal research tax credit carryforwards of approximately $129.0$223.0 million that will begin to expire in fiscal 2008.2010. We have other federal tax credit carryforwards of approximately $1.2$1.9 million that will begin to expire in fiscal 2011. The research tax credit carryforwards attributable to states is approximately $125.6in the amount of $212.3 million, of which approximately $121.3$204.8 million is attributable to the State of California and may be carried over indefinitely, and approximately $4.3$7.5 million is attributable to various other states and will expire beginning in fiscal 20162010 according to the rules of each particular state. We have other California state tax credit carryforwards of approximately $4.8$7.0 million that will begin to expire in fiscal 2009.2010. Utilization of federal and state net operating losses and tax credit carryforwards may be subject to limitations due to ownership changes and other limitations provided by the Internal Revenue Code and similar state provisions. Utilization of the foreign net operating loss may be limited due to a change in business in connection with an ownership change. If any such a limitation applies,limitations apply, the federal, states, or foreign net operating loss and tax credit carryforwards, as applicable, may expire or be denied before full utilization.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
As of January 28, 2007,25, 2009, United States federal and state income taxes have not been provided on approximately $304.0$823.6 million of undistributed earnings of non-United States subsidiaries as such earnings are considered to be permanently reinvested.
The Company has a tax holiday in effect for its business operations in India which will terminate in March 2010. This tax holiday provides for a lower rate of taxation on certain classes of income based on various thresholds of investment and employment in such jurisdiction. For fiscal year 2009, the tax savings of this holiday was approximately $0.9 million with no material per-share impact.
On January 29, 2007, we adopted FASB Interpretation No. 48, or FIN 48, Accounting for Uncertainty in Income Taxes. The cumulative effect of adoption of FIN 48 did not result in a material adjustment to our tax liability for unrecognized income tax benefits. As of January 25, 2009, we had $95.3 million of unrecognized tax benefits, all of which would affect our effective tax rate if recognized. However, included in the unrecognized tax benefits that would affect our effective tax rate if recognized of $95.3 million is $19.7 million related to state income tax that, if recognized, would be in the form of a carryforward deferred tax asset that would likely attract a full valuation allowance. The $95.3 million of unrecognized tax benefits as of January 25, 2009 consists of $37.4 million recorded in non-current income taxes payable and $57.9 million reflected as a reduction to the related deferred tax assets.
A reconciliation of unrecognized tax benefits is as follows:
| | | January 25, 2009 | | | January 27, 2008 | |
| | (In thousands) | |
Balance at beginning of period | | $ | 77,791 | | | $ | 57,544 | |
Increases in tax positions for prior years | | | 6,297 | | | | 3,900 | |
Decreases in tax positions for prior years | | | (272 | ) | | | (433 | ) |
Increases in tax positions for current year | | | 13,622 | | | | 21,716 | |
| | | (181 | ) | | | (2,445 | ) |
Lapse in statute of limitations | | | (1,938 | ) | | | (2,491 | ) |
| | $ | 95,319 | | | $ | 77,791 | |
We have historically classified certain unrecognized tax benefits as income taxes payable, which was included within the current liabilities section of our Consolidated Balance Sheet. As a result of our adoption of FIN 48, we now classify an unrecognized tax benefit as a current liability, or as a reduction of the amount of a net operating loss carryforward or amount refundable, to the extent that we anticipate payment or receipt of cash for income taxes within one year. Likewise, the amount is classified as a long-term liability if we anticipate payment or receipt of cash for income taxes during a period beyond a year.
Our policy to include interest and penalties related to unrecognized tax benefits as a component of income tax expense did not change as a result of implementing FIN 48. As of January 25, 2009 and January 27, 2008, we had accrued $11.8 million and $11.2 million, respectively, for the payment of interest and penalties related to unrecognized tax benefits, which is not included as a component of our unrecognized tax benefits. As of January 25, 2009, non-current income taxes payable of $49.2 million consists of unrecognized tax benefits of $37.4 million and the related interest and penalties of $11.8 million.
While we believe that we have adequately provided for all tax positions, amounts asserted by tax authorities could be greater or less than our accrued position. Accordingly, our provisions on federal, state and foreign tax-related matters to be recorded in the future may change as revised estimates are made or the underlying matters are settled or otherwise resolved. As of January 25, 2009, we do not believe that our estimates, as otherwise provided for, on such tax positions will significantly increase or decrease within the next twelve months.
We are subject to taxation by a number of taxing authorities both in the United States and throughout the world. As of January 25, 2009, the material tax jurisdictions that are subject to examination include the United States, Hong Kong, Taiwan, China, India, and Germany and include our fiscal years 2003 through 2009. As of January 25, 2009, the material tax jurisdictions for which we are currently under examination include India for fiscal years 2003 through 2007 and Germany for fiscal years 2004 through 2006.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 14 - Segment InformationStockholders’ Equity
Stock Repurchase Program
During fiscal year 2005, we announced that our Board of Directors, or Board, had authorized a stock repurchase program to repurchase shares of our common stock, subject to certain specifications, up to an aggregate maximum amount of $300 million. During fiscal year 2007, the Board further approved an increase of $400 million to the original stock repurchase program. In fiscal year 2008, we announced a stock repurchase program under which we may purchase up to an additional $1.0 billion of our common stock over a three year period through May 2010. On August 12, 2008, we announced that our Board further authorized an additional increase of $1.0 billion to the stock repurchase program. As a result of these increases, we have an ongoing authorization from the Board, subject to certain specifications, to repurchase shares of our common stock up to an aggregate maximum amount of $2.7 billion through May 2010.
The repurchases will be made from time to time in the open market, in privately negotiated transactions, or in structured stock repurchase programs, and may be made in one or more larger repurchases, in compliance with the Securities Exchange Act of 1934, or the Exchange Act, Rule 10b-18, subject to market conditions, applicable legal requirements, and other factors. The program does not obligate NVIDIA to acquire any particular amount of common stock and the program may be suspended at any time at our discretion. As part of our share repurchase program, we have entered into, and we may continue to enter into, structured share repurchase transactions with financial institutions. These agreements generally require that we make an up-front payment in exchange for the right to receive a fixed number of shares of our common stock upon execution of the agreement, and a potential incremental number of shares of our common stock, within a pre-determined range, at the end of the term of the agreement.
During the three months ended January 25, 2009, we did not enter into any structured share repurchase transactions or otherwise purchase any shares of our common stock. During fiscal year 2009, we entered into structured share repurchase transactions to repurchase 29.3 million shares for $423.6 million, which we recorded on the trade date of the transactions. Through fiscal year 2009, we have repurchased an aggregate of 90.9 million shares under our stock repurchase program for a total cost of $1.46 billion. As of January 25, 2009, we are authorized, subject to certain specifications, to repurchase shares of our common stock up to an additional amount of $1.24 billion through May 2010.
Please refer to Note 2 of these Notes to the Consolidated Financial Statements in Part IV, Item 15 of this Form 10-K for further information regarding stock-based compensation and stock options granted under equity incentive programs.
Convertible Preferred Stock
As of January 25, 2009 and January 27, 2008, there were no shares of preferred stock outstanding.
Common Stock
At the Annual Meeting of Stockholders held on June 19, 2008, our stockholders approved an increase in our authorized number of shares of common stock to 2,000,000,000. The par value of our common stock remained unchanged at $0.001 per share.
Please refer to Note 19 for further discussion regarding the cash tender offer for certain employee stock options that our Board of Directors approved in February 2009.
Note 15 - Employee Retirement Plans
We have a 401(k) Retirement Plan, or the 401(k) Plan, covering substantially all of our United States employees. Under the Plan, participating employees may defer up to 100% of their pre-tax earnings, subject to the Internal Revenue Service annual contribution limits. Some of our non-US subsidiaries have defined benefit and defined contributions plans as required by local statutory requirements. Our costs under these plans have not been material.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 16 - Segment Information
Our Chief Executive Officer, who is considered to be our chief operating decision maker, or CODM, reviews financial information presented on an operating segment basis for purposes of making operating decisions and assessing financial performance.
During the first quarter of fiscal 2006,year 2008, we reorganized our operating segments to bring all major product groups in line with our strategy to position ourselves as the worldwide leader in programmable graphics processor technologies.segments. We now report financial information for four product-line operating segments to our CODM: the GPU Businessbusiness, which is composedcomprised primarily of our GeForce products that support desktop PCs,and notebook PCs, plus memory products; the PSB which is comprised of our NVIDIA Quadro professional workstationsworkstation products and other GPU-basedprofessional graphics products, including our NVIDIA Tesla high-performance computing products; the MCP Businessbusiness which is composedcomprised of NVIDIA nForce products that operate as a single-chip or chipset that provide system functions, such as high speed processingcore logic and network communications,motherboard GPU products; and perform these operations independently from the host CPU; our Handheld GPU BusinessCPB, which is composedcomprised of our CPB is comprised of our Tegra and GoForce mobile brands and products that support netbooks, personal navigation devices, or PNDs, handheld personal media players, or PMPs, personal digital assistants, or PDAs, cellular phones and other handheld devices;devices. CPB also includes license, royalty, other revenue and our Consumer Electronics Business is concentrated in products that supportassociated costs related to video game consoles and other digital consumer electronics devices and is composed of revenue from our contractual arrangements with SCE to jointly develop a custom GPU for SCE’s PlayStation3, revenue from sales of our Xbox-related products, revenue from our license agreement with Microsoft Corporation, or Microsoft, relating to the successor product to their initial Xbox gaming console, the Xbox360, and related devices, and digital media processor products. devices.
In addition to these operating segments, we have the “All Other” category that includes human resources, legal, finance, general administration and corporate marketing expenses, which total $242.3$346.1 million, $131.6$266.2 million and $118.0$239.6 million for fiscal years 2007, 20062009, 2008 and 2005,2007, respectively, that we do not allocate to our other operating segments.segments as these expenses are not included in the segment operating performance measures evaluated by our CODM. “All Other” also includes the results of operations of other miscellaneous operatingreporting segments that are neither individually reportable, nor aggregated with another operating segment. Revenue in the “All Other” category is primarily derived from sales of memory.components. Certain prior period amounts have been restatedrevised to conform to the presentation of our current fiscal quarter.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)year.
Our CODM does not review any information regarding total assets on an operating segment basis. Operating segments do not record intersegment revenue, and, accordingly, there is none to be reported. The accounting policies for segment reporting are the same as for NVIDIA as a whole.
| | | GPU | | MCP | | Handheld GPU | | Consumer Electronics | | All Other | | Consolidated | |
| | | (In thousands) | |
Twelve Months Ended January 28, 2007: | | | | | | | | | | | | | |
| Revenue | | $ | 1,994,334 | | $ | 661,483 | | $ | 108,496 | | $ | 96,314 | | $ | 208,144 | | $ | 3,068,771 | |
| Depreciation and amortization expense | | $ | 35,785 | | $ | 20,751 | | $ | 17,322 | | $ | 176 | | $ | 33,798 | | $ | 107,832 | |
| Operating income (loss) | | $ | 583,873 | | $ | 77,952 | | $ | (41,399 | ) | $ | 84,327 | | $ | (251,301 | ) | $ | 453,452 | |
Twelve Months Ended January 29, 2006: | | | | | | | | | | | | | | | | | | | |
| Revenue | | $ | 1,657,221 | | $ | 352,319 | | $ | 58,745 | | $ | 167,398 | | $ | 140,004 | | $ | 2,375,687 | |
| Depreciation and amortization expense | | $ | 33,080 | | $ | 12,092 | | $ | 12,480 | | $ | 1,552 | | $ | 30,817 | | $ | 90,021 | |
| Operating income (loss) | | $ | 359,821 | | $ | 32,865 | | $ | (34,922 | ) | $ | 94,696 | | $ | (115,796 | ) | $ | 336,664 | |
Twelve Months Ended January 30, 2005: | | | | | | | | | | | | | | | | | | | |
| Revenue | | $ | 1,348,968 | | $ | 175,663 | | $ | 45,921 | | $ | 259,968 | | $ | 179,513 | | $ | 2,010,033 | |
| Depreciation and amortization expense | | $ | 32,849 | | $ | 12,824 | | $ | 11,620 | | $ | 880 | | $ | 32,643 | | $ | 90,816 | |
| Operating income (loss) | | $ | 178,597 | | $ | (39,912 | ) | $ | (37,532 | ) | $ | 107,901 | | $ | (113,878 | ) | $ | 95,176 | |
| | | GPU | | | PSB | | | MCP | | | CPB | | | All Other | | | Consolidated | |
| | | (In thousands) | |
| Year Ended January 25, 2009: | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Depreciation and amortization expense | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended January 27, 2008: | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Depreciation and amortization expense | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Year Ended January 28, 2007: | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Depreciation and amortization expense | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Revenue by geographic region is allocated to individual countries based on the location to which the products are initially billed even if our customers’ revenue is attributable to end customers that are located in a different location. The following tables summarize information pertaining to our revenue from customers based on invoicing address in different geographic regions:
| | | Year Ended | |
| | | January 28, 2007 | | January 29, 2006 | | January 30, 2005 | |
| | | (In thousands) | |
Revenue: | | | | | | | |
| United States | | $ | 332,268 | | $ | 340,598 | | $ | 473,721 | |
| Other Americas | | | 171,851 | | | 38,572 | | | 11,045 | |
| China | | | 659,711 | | | 401,612 | | | 269,306 | |
| Taiwan | | | 1,118,989 | | | 1,131,784 | | | 883,346 | |
| Other Asia Pacific | | | 483,872 | | | 250,844 | | | 169,888 | |
| Europe | | | 302,080 | | | 212,277 | | | 202,727 | |
| Total revenue | | $ | 3,068,771 | | $ | 2,375,687 | | $ | 2,010,033 | |
| | | Year Ended | |
| | | January 25, 2009 | | | January 27, 2008 | | | January 28, 2007 | |
| Revenue: | | (In thousands) | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
The following table presents summarized information for long-lived assets by geographic region. Long lived assets consist of property and equipment and deposits and other assets and exclude goodwill and intangible assets.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
| | | January 28, 2007 | | January 29, 2006 | | |
| | | (In thousands) | | | January 25, 2009 | | January 27, 2008 | |
Long-lived assets: | | | | | | | (In thousands) | |
| United States | | $ | 241,795 | | $ | 177,568 | | | | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| Other Americas | | | 20,197 | | | 9,957 | | | | | | | | |
| China | | | 5,589 | | | 4,645 | | |
| Taiwan | | | 3,278 | | | 1,185 | | |
| India | | | 13,263 | | | 7,332 | | |
| Other Asia Pacific | | | 1,822 | | | 1,905 | | |
| Europe | | | 3,233 | | | 3,037 | | |
| Total long-lived assets | | $ | 289,177 | | $ | 205,629 | | | | | | | | |
Revenue from significant customers, those representing approximately 10% or more of total revenue for the respective dates, is summarized as follows:
| | | Year Ended | |
| | | January 28, 2007 | | January 29, 2006 | | January 30, 2005 | |
Revenue: | | | | | | | |
| Customer A | | | 12 | % | | 12 | % | | 7 | % |
| Customer B | | | 5 | % | | 14 | % | | 18 | % |
| Customer C | | | - | % | | 5 | % | | 13 | % |
| | | Year Ended | |
| | | January 25, 2009 | | January 27, 2008 | | January 28, 2007 | |
| Revenue: | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Accounts receivable from significant customers, those representing approximately 10% or more of total accounts receivable for the respective periods, is summarized as follows:
| | | January 28, 2007 | | January 29, 2006 | |
Accounts Receivable: | | | | | |
| Customer A | | | 18 | % | | 8 | % |
| Customer B | | | 5 | % | | 11 | % |
Note 15 - Settlement Costs
Settlement costs were $14.2 million for fiscal 2006. The settlement costs are associated with two litigation matters, 3dfx and American Video Graphics, LP, or AVG. AVG is settled. For further information about the 3dfx matter, please refer to Note 12 of the Notes to Consolidated Financial Statements.
| | | January 25, 2009 | | January 27, 2008 | |
| Accounts Receivable: | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 17 – Fair Value of Cash Equivalents and Marketable Securities
We measure our cash equivalents and marketable securities at fair value. The fair values of our financial assets and liabilities are determined using quoted market prices of identical assets or quoted market prices of similar assets from active markets. Level 1 valuations are obtained from real-time quotes for transactions in active exchange markets involving identical assets. Level 2 valuations are obtained from quoted market prices in active markets involving similar assets. Level 3 valuations are based on unobservable inputs to the valuation methodology and include our own data about assumptions market participants would use in pricing the asset or liability based on the best information available under the circumstances.
Financial assets and liabilities measured at fair value are summarized below:
| | | | Fair value measurement at reporting date using | |
| | | | | | Quoted Prices in Active Markets for Identical Assets | | Significant Other Observable Inputs | | | High Level of Judgment | |
| | | January 25, 2009 | | | (Level 1) | | | (Level 2) | | | (Level 3) | |
| | | | (In thousands) | |
Other debt securities issued by U.S. Government agencies (4) | | | | | | | | | | | | | | |
Corporate debt securities (3) | | | | | | | | | | | | | | |
Mortgage-backed securities issued by Government-sponsored entities (1) | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Debt securities issued by United States Treasury (1) | | | | | | | | | | | | | | |
Asset-backed securities (1) | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
(1) Included in Marketable securities on the Consolidated Balance Sheet.
(2) Included in Cash and cash equivalents on the Consolidated Balance Sheet.
(3) Includes $38,091 in Cash and cash equivalents and $213,083 in Marketable securities on the Consolidated Balance Sheet.
(4) Includes $73,233 in Cash and cash equivalents and $244,888 in Marketable securities on the Consolidated Balance Sheet.
(5) Includes $14,646 in Cash and cash equivalents and $124,400 in Marketable securities on the Consolidated Balance Sheet.
For our money market funds that were held by the International Reserve Fund at January 25, 2009, we assessed the fair value of the money market funds by considering the underlying securities held by the International Reserve Fund. As the International Reserve Fund has halted redemption requests and is currently believed to be holding all of their securities until maturity, we valued the underlying securities held by the International Reserve Fund at their maturity value using an income approach. Certain of the debt securities held by the International Reserve Fund were issued by companies that have filed for bankruptcy as of January 25, 2009 and, as such, our valuation of those securities was zero. The net result was that, as of January 25, 2009, we estimated the fair value of the International Reserve Fund’s investments to be 95.7% of their last-known value prior to January 25, 2009. Based on this assessment, we recorded an other than temporary impairment charge of $5.6 million during fiscal year 2009. Due to the inherent subjectivity and the significant judgment involved in the valuation of our holdings of International Reserve Fund, we have classified these securities under the Level 3 fair value hierarchy.
As of January 25, 2009, our money market investment in the International Reserve Fund, which was valued at $124.4 million, net of other than temporary impairment charges, was classified as marketable securities in our Consolidated Balance Sheet due to the halting of redemption requests in September 2008 by the International Reserve Fund.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Subsequent to year-end, on January 30, 2009, we received $84.4 million from the International Reserve Fund. This was our portion of a payout of approximately 65% of the total assets of the Fund. Each shareholder’s percentage of this distribution was determined by dividing the shareholder’s total unfunded redeemed shares by the aggregate unfunded redeemed shares of the Fund, which was then used to calculate the shareholder’s pro rata portion of this distribution. We expect to receive the proceeds of our remaining investment in the International Reserve Fund, excluding the $5.6 million that we have recorded as an other than temporary impairment, by no later than October 2009, when all of the underlying securities held by the International Reserve Fund are scheduled to have matured. However, redemptions from the International Reserve Fund are currently subject to pending litigation, which could cause further delay in receipt of our funds.
(Continued)Reconciliation of financial assets measured at fair value on a recurring basis using significant unobservable inputs, or Level 3 inputs:
| | | Year ended January 25, 2009 | |
| | | | |
Balance, beginning of period | | | | |
| | | | |
Other than temporary impairment | | | | |
| | | | |
| | | | | |
Total financial assets at fair value classified within Level 3 were 3.7% of total assets on our Consolidated Balance Sheet as of January 25, 2009.
Note 1618 - - Quarterly Summary (Unaudited)
The following table sets forth our unaudited consolidated financial, for the last eight fiscal quarters ended January 28, 2007.25, 2009.
| | | Fiscal Year 2009 Quarters Ended | |
| | | January 25, 2009 (A,B) | | | October 26, 2008 (C, D) | | | July 27, 2008 (E) | | | April 27, 2008 | |
| | | (In thousands, except per share data) | |
| Statement of Operations Data: | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Basic net income (loss) per share | | | | | | | | | | | | | | | | |
Diluted net income (loss) per share | | | | | | | | | | | | | | | | |
| | | Fiscal 2007 Quarters Ended | |
| | | Jan. 28, 2007 (B) | | Oct. 29, 2006 (C) | July 30, 2006 | | April 30, 2006 | |
| | | (In thousands, except per share data) | |
Statement of Operations Data: | | | | | | | | | |
| Revenue | | $ | 878,873 | | $ | 820,572 | | $ | 687,519 | | $ | 681,807 | |
| Cost of revenue | | $ | 493,167 | | $ | 486,630 | | $ | 395,391 | | $ | 393,134 | |
| Gross profit | | $ | 385,706 | | $ | 333,942 | | $ | 292,128 | | $ | 288,673 | |
| Income before change in accounting principle | | $ | 163,506 | | $ | 106,511 | | $ | 86,753 | | $ | 91,360 | |
| Net income | | $ | 163,506 | | $ | 106,511 | | $ | 86,753 | | $ | 92,064 | |
Basic income per share before change in accounting principle (A) | | $ | 0.46 | | $ | 0.30 | | $ | 0.25 | | $ | 0.26 | |
Basic net income per share (A) | | $ | 0.46 | | $ | 0.30 | | $ | 0.25 | | $ | 0.26 | |
Diluted income per share before change in accounting principle (A) | | $ | 0.41 | | $ | 0.27 | | $ | 0.22 | | $ | 0.23 | |
Diluted net income per share (A) | | $ | 0.41 | | $ | 0.27 | | $ | 0.22 | | $ | 0.24 | |
| | Fiscal 2006 Quarters Ended | | | Fiscal Year 2008 Quarters Ended | |
| | | Jan. 29, 2006 | | Oct. 29, 2005 (D) | | July 30, 2005 | | April 30, 2005 | | | January 27, 2008 (F) | | October 28, 2007 | | July 29, 2007 | | April 29, 2007 | |
| | | (In thousands, except per share data) | | | (In thousands, except per share data) | |
Statement of Operations Data: | | | | | | | | | | | | | | | | | | |
| Revenue | | $ | 633,614 | | $ | 583,415 | | $ | 574,812 | | $ | 583,846 | | | | | | | | | | | | | | |
| Cost of revenue | | $ | 378,812 | | $ | 355,420 | | $ | 357,437 | | $ | 373,985 | | | | | | | | | | | | | | |
| Gross profit | | $ | 254,802 | | $ | 227,995 | | $ | 217,375 | | $ | 209,861 | | | | | | | | | | | | | | |
| Net income | | $ | 97,374 | | $ | 64,447 | | $ | 73,833 | | $ | 65,522 | | | | | | | | | | | | | | |
Basic net income per share (A) | | $ | 0.28 | | $ | 0.19 | | $ | 0.22 | | $ | 0.19 | | | | | | | | | | | | | | |
Diluted net income per share (A) | | $ | 0.26 | | $ | 0.18 | | $ | 0.20 | | $ | 0.18 | | | | | | | | | | | | | | |
(A) ReflectsIncluded $18.9 million for a two-for-one stock-split effective April 6, 2006. non-recurring charge related to a termination of development contract related to a new campus construction project we have put on hold.
(B) Included $8.0 million benefit from an insurance provider as reimbursement for some claims against us towards the cost arising from a weak die/packaging material set.
(C) Included $4.5 million charge towards non-recurring charge related to a royalty dispute.
(D) Included $8.3 million towards restructuring charges.
(E) Included $196.0 million warranty charge against cost of revenue arising from a weak die/packaging material set.
(F) Included a charge of $13.4$4.0 million related to the write-off of acquired research and development expense from our purchaseacquisitions of PortalPlayer that had not yet reached technological feasibility and has no alternative future use.
(C) Included a charge of $17.5 million associated with a confidential patent licensing arrangement.
(D) Included a charge of $14.2 million related to settlement costs associated with two litigation matters, 3dfx and AVG. Mental Images in fiscal year 2008.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 19 - Subsequent Event
Tender Offer
On February 11, 2009, we announced that our Board of Directors approved a cash tender offer for certain employee stock options. The tender offer commenced on February 11, 2009 and expired at 12:00 midnight (Pacific Time) on March 11, 2009. The tender offer applied to outstanding stock options held by employees with an exercise price equal to or greater than $17.50 per share. None of the non-employee members of our Board of Directors or our officers who file reports under Section 16(a) of the Securities Exchange Act of 1934, including our former Chief Financial Officer, Marvin D. Burkett, were eligible to participate in the Offer. All eligible options with exercise prices less than $28.00 per share, but not less than $17.50 per share were eligible to receive a cash payment of $3.00 per option in exchange for the cancellation of the eligible option. All eligible options with exercise prices greater than $28.00 per share were eligible to receive a cash payment of $2.00 per option in exchange for the cancellation of the eligible option.
We use equity to promote employee retention and provide an incentive vehicle valued by employees that is also aligned to stockholder interest. However, our stock price has declined significantly over the past year, and all of our eligible options are “out-of-the-money” (i.e., have exercise prices above our stock price). Therefore, we provided an incentive to employees with an opportunity to obtain cash payment for their eligible options. Also, the tender offer is expected to increase the number of shares available for issuance under our 2007 Equity Incentive Plan to the extent eligible options were tendered in this tender offer. The tender offer is also expected to reduce the potential dilution to our stockholders that is represented by outstanding stock options, which become additional outstanding shares of our common stock upon exercise.
As of January 25, 2009, there were approximately 33.1 million options eligible to participate in the tender offer. If all these options were tendered and accepted in the offer, the aggregate cash purchase price for these options would be approximately $92.0 million. As a result of the tender offer, we may incur a non-recurring charge of up to approximately $150.0 million if all of the unvested eligible options are tendered. This charge would be reflected in our financial results for the first fiscal quarter of fiscal year 2010 and represents stock-based compensation expense, consisting of the remaining unamortized stock-based compensation expense associated with the unvested portion of the eligible options tendered in the offer, stock-based compensation expense resulting from amounts paid in excess of the fair value of the underlying options, if any, plus associated payroll taxes and professional fees.
We are currently tallying information on the number of options tendered under the offer to determine the actual aggregate cash to be paid in exchange for the cancellation of the eligible options and the non-recurring charge to be incurred pertaining to the unvested eligible options that have been tendered.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Description | | Balance at Beginning of Period | | Additions (3) | | Deductions (2) | | Balance at End of Period | |
| | | (In thousands) | |
| Year ended January 28, 2007 | | | | | | | | | |
| Allowance for sales returns and allowances | | $ | 10,239 | | $ | 37,033 | | $ | (32,795) | (1) | $ | 14,477 | |
| Allowance for doubtful accounts | | $ | 598 | | $ | 676 | (4) | $ | (3) | (2) | $ | 1,271 | |
| | | | | | | | | | | | | | |
| Year ended January 29, 2006 | | | | | | | | | | | | | |
| Allowance for sales returns and allowances | | $ | 11,687 | | $ | 35,127 | | $ | (36,575) | (1) | $ | 10,239 | |
| Allowance for doubtful accounts | | $ | 1,466 | | $ | (492 | ) | $ | (376) | (2) | $ | 598 | |
| | | | | | | | | | | | | | |
| Year ended January 30, 2005 | | | | | | | | | | | | | |
| Allowance for sales returns and allowances | | $ | 9,421 | | $ | 22,463 | | $ | (20,197) | (1) | $ | 11,687 | |
| Allowance for doubtful accounts | | $ | 2,310 | | $ | (844 | ) | $ | — | | $ | 1,466 | |
| | Balance at | | | | | | | |
| | | | |
Year ended January 25, 2009 | | | | | | | | | |
Deferred tax valuation allowance | | | | | | | | | | | | | | | | |
Allowance for doubtful accounts | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Year ended January 27, 2008 | | | | | | | | | |
Deferred tax valuation allowance | | | | | | | | | | | | | | | | |
Allowance for doubtful accounts | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Year ended January 28, 2007 | | | | | | | | | | | | | | | | |
Deferred tax valuation allowance | | | | | | | | | | | | | | | | |
Allowance for doubtful accounts | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
(1)Represents amounts written off against the allowanceAllowances for sales returns.doubtful accounts are charged to expenses.
(2)Represents uncollectible accounts written off against the allowance for doubtful accounts.
(3)Allowances for sales returns are charged as a reduction to revenue. Allowances for doubtful accounts are charged to expenses.
(4) Additions to allowance for doubtful accounts includes $471$0.5 million related to our acquisitions of ULi Electronics, Inc., Hybrid Graphics Ltd. and PortalPlayer, Inc.
(4) Represents change in valuation allowance primarily related to state deferred tax assets that management has determined not likely to be realized due, in part, to projections of future state taxable income.
(5) Represents derecognition of the valuation allowance related to the derecognition of deferred tax assets for the excess tax benefits from stock-based compensation not yet realized as of January 28, 2007.
| | | | | Incorporated by Reference | | |
| Exhibit No. | | Exhibit Description | | Schedule/Form | | | File Number | | | Exhibit | | Filing Date |
| | 2.1 | | Agreement and Plan of Merger by and among NVIDIA Corporation, Partridge Acquisition, Inc. and PortalPlayer, Inc. dated 11/6/06 | | | 8-K | | | | 0-23985 | | | | 2.1 | | 11/9/2006 |
| | 3.1 | | Amended and Restated Certificate of Incorporation | | | S-8 | | | | 333-74905 | | | | 4.1 | | 3/23/1999 |
| | 3.2 | | Certificate of Amendment of Amended and Restated Certificate of Incorporation | | | 10-Q | | | | 0-23985 | | | | 3.1 | | 8/21/2008 |
| | 3.3 | | Bylaws of NVIDIA Corporation, Amended and Restated as of February 12, 2009 | | | 8-K | | | | 0-23985 | | | | 3.1 | | 2/19/2009 |
| | 4.1 | | Reference is made to Exhibits 3.1, 3.2 and 3.3 | | | | | | | | | | | | | |
| | 4.2 | | Specimen Stock Certificate | | | S-1/A | | | | 333-47495 | | | | 4.2 | | 4/24/1998 |
| | 10.1 | | Form of Indemnity Agreement between NVIDIA Corporation and each of its directors and officers | | | 8-K | | | | 0-23985 | | | | 10.1 | | 3/7/2006 |
| | 10.2 | + | 1998 Equity Incentive Plan, as amended | | | 8-K | | | | 0-23985 | | | | 10.2 | | 3/13/2006 |
| | 10.3 | + | 1998 Equity Incentive Plan ISO, as amended | | | 10-Q | | | | 0-23985 | | | | 10.5 | | 11/22/2004 |
| | 10.4 | + | 1998 Equity Incentive Plan NSO, as amended | | | 10-Q | | | | 0-23985 | | | | 10.6 | | 11/22/2004 |
| | 10.5 | + | Certificate of Stock Option Grant | | | 10-Q | | | | 0-23985 | | | | 10.7 | | 11/22/2004 |
| | 10.6 | + | 1998 Non-Employee Directors’ Stock Option Plan, as amended | | | 8-K | | | | 0-23985 | | | | 10.1 | | 4/3/2006 |
| | 10.7 | + | 1998 Non-Employee Directors’ Stock Option Plan (Annual Grant - Board Service), as amended | | | 10-Q | | | | 0-23985 | | | | 10.1 | | 11/22/2004 |
| | 10.8 | + | 1998 Non-Employee Directors’ Stock Option Plan (Committee Grant - Committee Service), as amended | | | 10-Q | | | | 0-23985 | | | | 10.2 | | 11/22/2004 |
| | 10.9 | + | 1998 Non-Employee Directors’ Stock Option Plan (Initial Grant) | | | 10-Q | | | | 0-23985 | | | | 10.3 | | 11/22/2004 |
| | 10.10 | + | 1998 Employee Stock Purchase Plan, as amended and restated | | | 10-Q | | | | 0-23985 | | | | 10.2 | | 5/22/2008 |
| | 10.11 | + | 2000 Nonstatutory Equity Incentive Plan, as amended | | | SC TO-1 | | | | 005-56649 | | | | 99 | (d)(1)(A) | 11/29/2006 |
| | 10.12 | + | 2000 NonStatutory Equity Incentive Plan NSO | | | SC TO-1 | | | | 005-56649 | | | | 99.1 | (d)(1)(B) | 11/29/2006 |
| | 10.13 | + | PortalPlayer, Inc. 1999 Stock Option Plan and Form of Agreements thereunder | | | S-8 | | | | 333-140021 | | | | 99.1 | | 1/16/2007 |
| | 10.14 | + | PortalPlayer, Inc. Amended and Restated 2004 Stock Incentive Plan | | | S-8 | | | | 333-140021 | | | | 99.2 | | 1/16/2007 |
| | 10.15 | + | 2007 Equity Incentive Plan | | | 8-K | | | | 0-23985 | | | | 10.1 | | 6/27/2007 |
| | 10.16 | + | 2007 Equity Incentive Plan - Non Statutory Stock Option (Annual Grant - Board Service) | | | 10-Q | | | | 0-23985 | | | | 10.2 | | 8/22/2007 |
| | 10.17 | + | 2007 Equity Incentive Plan - Non Statutory Stock Option (Annual Grant - Committee Service) | | | 10-Q | | | | 0-23985 | | | | 10.3 | | 8/22/2007 |
| | 10.18 | + | 2007 Equity Incentive Plan - Non Statutory Stock Option (Initial Grant) | | | 10-Q | | | | 0-23985 | | | | 10.4 | | 8/22/2007 |
| | | Incorporated by Reference |
Exhibit No. | Exhibit Description | Schedule/Form | File Number | Exhibit | Filing Date |
| | | | | | |
| 2.1 | Agreement and Plan of Merger by and among NVIDIA Corporation, Partridge Acquisition, Inc. and PortalPlayer, Inc. dated 11/6/06 | 8-K | 0-23985 | 2.1 | 11/9/2006 |
| | | | | | |
| 3.1 | Amended and Restated Certificate of Incorporation | S-8 | 333-74905 | 4.1 | 3/23/1999 |
| | | | | | |
| 3.2 | Certificate of Amendment of Amended and Restated Certificate of Incorporation | 10-Q | 0-23985 | 3.4 | 9/10/2002 |
| | | | | | |
| 3.3 | Bylaws of NVIDIA Corporation, Amended and Restated as of March 7, 2006 | 10-K | 0-23985 | 3.3 | 3/16/2006 |
| | | | | | |
| 4.1 | Reference is made to Exhibits 3.1, 3.2 and 3.3 | | | | |
| | | | | | |
| 4.2 | Specimen Stock Certificate | S-1/A | 333-47495 | 4.2 | 4/24/1998 |
| | | | | | |
| 10.1 | Form of Indemnity Agreement between NVIDIA Corporation and each of its directors and officers | 8-K | 0-23985 | 10.1 | 3/7/2006 |
| | | | | | |
| 10.2+ | 1998 Equity Incentive Plan, as amended | 8-K | 0-23985 | 10.2 | 3/13/2006 |
| | | | | | |
| 10.3+ | 1998 Equity Incentive Plan ISO, as amended | 10-Q | 0-23985 | 10.5 | 11/22/2004 |
| | | | | | |
| 10.4+ | 1998 Equity Incentive Plan NSO, as amended | 10-Q | 0-23985 | 10.6 | 11/22/2004 |
| | | | | | |
| 10.5+ | Certificate of Stock Option Grant | 10-Q | 0-23985 | 10.7 | 11/22/2004 |
| | | | | | |
| 10.6+ | 1998 Employee Stock Purchase Plan Offering, as amended | S-8 | 333-51520 | 99.4 | 12/8/2000 |
| | | | | | |
| 10.7+ | Form of Employee Stock Purchase Plan Offering, as amended | S-8 | 333-100010 | 99.5 | 9/23/2002 |
| | | | | | |
| 10.8+ | Form of Employee Stock Purchase Plan Offering, as amended - International Employees | S-8 | 333-100010 | 99.6 | 9/23/2002 |
| | | | | | |
| 10.9+ | 1998 Non-Employee Directors’ Stock Option Plan, as amended | 8-K | 0-23985 | 10.1 | 4/3/2006 |
| | | | | | |
| 10.10+ | 1998 Non-Employee Directors’ Stock Option Plan (Annual Grant - Board Service), as amended | 10-Q | 0-23985 | 10.1 | 11/22/2004 |
| | | | | | |
| 10.11+ | 1998 Non-Employee Directors’ Stock Option Plan (Committee Grant - Committee Service), as amended | 10-Q | 0-23985 | 10.2 | 11/22/2004 |
| | | | | | |
| 10.12+ | 1998 Non-Employee Directors’ Stock Option Plan (Initial Grant) | 10-Q | 0-23985 | 10.3 | 11/22/2004 |
| | | | | | |
| 10.13+ | 2000 Nonstatutory Equity Incentive Plan, as amended | SC TO-1 | 005-56649 | 99(d)(1)(A) | 11/29/2006 |
| | | | | | |
| 10.14 | Lease dated April 4, 2000 between NVIDIA Corporation and Sobrato Interests III for Building A | S-3/A | 333-33560 | 10.1 | 4/20/2000 |
| | | | | | |
| 10.15 | Lease dated April 4, 2000 between NVIDIA Corporation and Sobrato Interests III for Building B | S-3/A | 333-33560 | 10.2 | 4/20/2000 |
EXHIBIT INDEX
(Continued)
| | | Incorporated by Reference |
Exhibit No. | Exhibit Description | Schedule /Form | File Number | Exhibit | Filing Date |
| | | | | | |
| 10.16 | Lease dated April 4, 2000 between NVIDIA Corporation and Sobrato Interests III for Building C | S-3/A | 333-33560 | 10.3 | 4/20/2000 |
| | | | | | |
| 10.17 | Lease dated April 4, 2000 between NVIDIA Corporation and Sobrato Interests III for Building D | S-3/A | 333-33560 | 10.4 | 4/20/2000 |
| | | | | | |
| 10.18+ | NVIDIA Corporation Fiscal Year 2007 Variable Compensation Plan | 8-K | 0-23985 | 10.2 | 4/3/2006 |
| | | | | | |
| 10.19+ | NVIDIA Corporation 2000 NonStatutory Equity Incentive Plan NSO | SC TO-1 | 005-56649 | 99.1(d)(1)(B) | 11/29/2006 |
| | | | | | |
| 10.20+ | PortalPlayer, Inc. 1999 Stock Option Plan and Form of Agreements thereunder | S-8 | 333-140021 | 99.1 | 1/16/2007 |
| | | | | | |
| 10.21+ | PortalPlayer, Inc. Amended and Restated 2004 Stock Incentive Plan | S-8 | 333-140021 | 99.2 | 1/16/2007 |
| | | | | | |
| 21.1* | List of Registrant’s Subsidiaries | | | | |
| | | | | | |
| 23.1* | Consent of PricewaterhouseCoopers LLP | | | | |
| | | | | | |
| 24.1* | Power of Attorney (included in signature page) | | | | |
| | | | | | |
| 31.1* | Certification of Chief Executive Officer as required by Rule 13a-14(a) of the Securities Exchange Act of 1934 | | | | |
| | | | | | |
| 31.2* | Certification of Chief Financial Officer as required by Rule 13a-14(a) of the Securities Exchange Act of 1934 | | | | |
| | | | | | |
| 32.1#* | Certification of Chief Executive Officer as required by Rule 13a-14(b) of the Securities Exchange Act of 1934 | | | | |
| | | | | | |
| 32.2#* | Certification of Chief Financial Officer as required by Rule 13a-14(b) of the Securities Exchange Act of 1934 | | | | |
EXHIBIT INDEX
(Continued)
| | | | | Incorporated by Reference | | |
| Exhibit No. | | Exhibit Description | | Schedule/Form | | | File Number | | | Exhibit | | Filing Date |
| | 10.19 | + | 2007 Equity Incentive Plan - Non Statutory Stock Option | | | 10-Q | | | | 0-23985 | | | | 10.5 | | 8/22/2007 |
| | 10.20 | + | 2007 Equity Incentive Plan - Incentive Stock Option | | | 10-Q | | | | 0-23985 | | | | 10.6 | | 8/22/2007 |
| | 10.21 | + | 2007 Equity Incentive Plan – Restricted Stock Unit Grant Notice and Restricted Stock Unit Purchase Agreement | | | 8-K | | | | 0-23985 | | | | 10.1 | | 2/11/2009 |
| | 10.22 | + | Fiscal Year 2008 Variable Compensation Plan | | | 8-K | | | | 0-23985 | | | | 10.1 | | 4/5/2007 |
| | 10.23 | + | Fiscal Year 2009 Variable Compensation Plan | | | 8-K | | | | 0-23985 | | | | 10.1 | | 4/21/2008 |
| | 10.24 | | Lease dated April 4, 2000 between NVIDIA Corporation and Sobrato Interests III for Building A | | | S-3/A | | | | 333-33560 | | | | 10.1 | | 4/20/2000 |
| | 10.25 | | Lease dated April 4, 2000 between NVIDIA Corporation and Sobrato Interests III for Building B | | | S-3/A | | | | 333-33560 | | | | 10.2 | | 4/20/2000 |
| | 10.26 | | Lease dated April 4, 2000 between NVIDIA Corporation and Sobrato Interests III for Building C | | | S-3/A | | | | 333-33560 | | | | 10.3 | | 4/20/2000 |
| | 10.27 | | Lease dated April 4, 2000 between NVIDIA Corporation and Sobrato Interests III for Building D | | | S-3/A | | | | 333-33560 | | | | 10.4 | | 4/20/2000 |
| | 10.28 | | Amended and Restated Agreement of Purchase and Sale by and between Harvest-Granite San Tomas LLC and Harvest 2400, LLC dated January 31, 2008 | | | 10-Q | | | | 0-23985 | | | | 10.3 | | 5/22/2008 |
| | 10.29 | + | Offer Letter, dated January 28, 2009, with David White | | | 8-K | | | | 0-23985 | | | | 10.1 | | 2/27/2009 |
| | 21.1 | * | List of Registrant’s Subsidiaries | | | | | | | | | | | | | |
| | 23.1 | * | Consent of PricewaterhouseCoopers LLP | | | | | | | | | | | | | |
| | 24.1 | * | Power of Attorney (included in signature page) | | | | | | | | | | | |
| | 31.1 | * | Certification of Chief Executive Officer as required by Rule 13a-14(a) of the Securities Exchange Act of 1934 | | | | | | | | | | | |
| | 31.2 | * | Certification of Chief Financial Officer as required by Rule 13a-14(a) of the Securities Exchange Act of 1934 | | | | | | | | | | | |
| | 32.1# | * | Certification of Chief Executive Officer as required by Rule 13a-14(b) of the Securities Exchange Act of 1934 | | | | | | | | | | | |
| | 32.2# | * | Certification of Chief Financial Officer as required by Rule 13a-14(b) of the Securities Exchange Act of 1934 | | | | | | | | | | | |
* Filed herewith
+ Management contract or compensatory plan or arrangement.
# In accordance with Item 601(b)(32)(ii) of Regulation S-K and SEC Release Nos. 33-8238 and 34-47986, Final Rule: Management’s Reports on Internal Control Over Financial Reporting and Certification of Disclosure in Exchange Act Periodic Reports, the certifications furnished in Exhibits 32.1 and 32.2 hereto are deemed to accompany this Form 10-K and will not be deemed “filed” for purpose of Section 18 of the Exchange Act. Such certifications will not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference.
Copies of above exhibits not contained herein are available to any stockholder upon written request to: Investor Relations: NVIDIA Corporation, 2701 San Tomas Expressway, Santa Clara, CA 95050.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 15, 2007.13, 2009.
| | |
| NVIDIA Corporation |
| By: | /s/ JEN-HSUN HUANG /s/ Jen-Hsun Huang |
| | Jen-Hsun Huang |
| | President and Chief Executive Officer |
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Jen-Hsun Huang and Marvin D. Burkett,David L. White, and each or any one of them, his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments (including posting effective amendments) to this report, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-facts and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his substitutes or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature | Title | Date |
/s/ JEN-HSUN HUANG Jen-Hsun Huang
| President, Chief Executive Officer and Director (Principal Executive Officer) | March 15, 200713, 2009 |
Jen-Hsun Huang | | |
/s/ MARVIN D. BURKETT Marvin D. Burkett
DAVID L. WHITE | Chief Financial Officer (Principal (Principal Financial and Accounting Officer)
| March 15, 200713, 2009 |
| David L. White | | |
/s/ TENCH COXE Tench Coxe
| Director | March 15, 200713, 2009 |
Tench Coxe | | |
/s/ STEVEN CHU Steven Chu
MARK STEVENS | Director | March 14, 200713, 2009 |
| Mark Stevens | | |
/s/ JAMES C. GAITHER James C. Gaither
| Director | March 13, 20072009 |
| James C. Gaither | | |
/s/ HARVEY C. JONES | Director | March 13, 2009 |
Harvey C. Jones | Director | March 12, 2007 |
| | |
/s/ MARK L. PERRY Mark L. Perry
| Director | March 15, 200713, 2009 |
| Mark L. Perry | | |
/s/ WILLIAM J. MILLER William J. Miller
| Director | March 15, 200713, 2009 |
| William J. Miller | | |
/s/ A. BROOKE SEAWELL A. Brooke Seawell
| Director | March 15, 200713, 2009 |
EXHIBIT INDEX
| | | | Incorporated by Reference | | |
| Exhibit No. | | Exhibit Description | | Schedule/Form | | | File Number | | | Exhibit | | Filing Date |
| | 2.1 | | Agreement and Plan of Merger by and among NVIDIA Corporation, Partridge Acquisition, Inc. and PortalPlayer, Inc. dated 11/6/06 | | | 8-K | | | | 0-23985 | | | | 2.1 | | 11/9/2006 |
| | 3.1 | | Amended and Restated Certificate of Incorporation | | | S-8 | | | | 333-74905 | | | | 4.1 | | 3/23/1999 |
| | 3.2 | | Certificate of Amendment of Amended and Restated Certificate of Incorporation | | | 10-Q | | | | 0-23985 | | | | 3.1 | | 8/21/2008 |
| | 3.3 | | Bylaws of NVIDIA Corporation, Amended and Restated as of February 12, 2009 | | | 8-K | | | | 0-23985 | | | | 3.1 | | 2/19/2009 |
| | 4.1 | | Reference is made to Exhibits 3.1, 3.2 and 3.3 | | | | | | | | | | | | | |
| | 4.2 | | Specimen Stock Certificate | | | S-1/A | | | | 333-47495 | | | | 4.2 | | 4/24/1998 |
| | 10.1 | | Form of Indemnity Agreement between NVIDIA Corporation and each of its directors and officers | | | 8-K | | | | 0-23985 | | | | 10.1 | | 3/7/2006 |
| | 10.2 | + | 1998 Equity Incentive Plan, as amended | | | 8-K | | | | 0-23985 | | | | 10.2 | | 3/13/2006 |
| | 10.3 | + | 1998 Equity Incentive Plan ISO, as amended | | | 10-Q | | | | 0-23985 | | | | 10.5 | | 11/22/2004 |
| | 10.4 | + | 1998 Equity Incentive Plan NSO, as amended | | | 10-Q | | | | 0-23985 | | | | 10.6 | | 11/22/2004 |
| | 10.5 | + | Certificate of Stock Option Grant | | | 10-Q | | | | 0-23985 | | | | 10.7 | | 11/22/2004 |
| | 10.6 | + | 1998 Non-Employee Directors’ Stock Option Plan, as amended | | | 8-K | | | | 0-23985 | | | | 10.1 | | 4/3/2006 |
| | 10.7 | + | 1998 Non-Employee Directors’ Stock Option Plan (Annual Grant - Board Service), as amended | | | 10-Q | | | | 0-23985 | | | | 10.1 | | 11/22/2004 |
| | 10.8 | + | 1998 Non-Employee Directors’ Stock Option Plan (Committee Grant - Committee Service), as amended | | | 10-Q | | | | 0-23985 | | | | 10.2 | | 11/22/2004 |
| | 10.9 | + | 1998 Non-Employee Directors’ Stock Option Plan (Initial Grant) | | | 10-Q | | | | 0-23985 | | | | 10.3 | | 11/22/2004 |
| | 10.10 | + | 1998 Employee Stock Purchase Plan, as amended and restated | | | 10-Q | | | | 0-23985 | | | | 10.2 | | 5/22/2008 |
| | 10.11 | + | 2000 Nonstatutory Equity Incentive Plan, as amended | | | SC TO-1 | | | | 005-56649 | | | | 99 | (d)(1)(A) | 11/29/2006 |
| | 10.12 | + | 2000 NonStatutory Equity Incentive Plan NSO | | | SC TO-1 | | | | 005-56649 | | | | 99.1 | (d)(1)(B) | 11/29/2006 |
| | 10.13 | + | PortalPlayer, Inc. 1999 Stock Option Plan and Form of Agreements thereunder | | | S-8 | | | | 333-140021 | | | | 99.1 | | 1/16/2007 |
| | 10.14 | + | PortalPlayer, Inc. Amended and Restated 2004 Stock Incentive Plan | | | S-8 | | | | 333-140021 | | | | 99.2 | | 1/16/2007 |
| | 10.15 | + | 2007 Equity Incentive Plan | | | 8-K | | | | 0-23985 | | | | 10.1 | | 6/27/2007 |
| | 10.16 | + | 2007 Equity Incentive Plan - Non Statutory Stock Option (Annual Grant - Board Service) | | | 10-Q | | | | 0-23985 | | | | 10.2 | | 8/22/2007 |
| | 10.17 | + | 2007 Equity Incentive Plan - Non Statutory Stock Option (Annual Grant - Committee Service) | | | 10-Q | | | | 0-23985 | | | | 10.3 | | 8/22/2007 |
| | 10.18 | + | 2007 Equity Incentive Plan - Non Statutory Stock Option (Initial Grant) | | | 10-Q | | | | 0-23985 | | | | 10.4 | | 8/22/2007 |
EXHIBIT INDEX
(Continued)
| | | | Incorporated by Reference | | |
| Exhibit No. | | Exhibit Description | | Schedule/Form | | | File Number | | | Exhibit | | Filing Date |
| | 10.19 | + | 2007 Equity Incentive Plan - Non Statutory Stock Option | | | 10-Q | | | | 0-23985 | | | | 10.5 | | 8/22/2007 |
| | 10.20 | + | 2007 Equity Incentive Plan - Incentive Stock Option | | | 10-Q | | | | 0-23985 | | | | 10.6 | | 8/22/2007 |
| | 10.21 | + | 2007 Equity Incentive Plan – Restricted Stock Unit Grant Notice and Restricted Stock Unit Purchase Agreement | | | 8-K | | | | 0-23985 | | | | 10.1 | | 2/11/2009 |
| | 10.22 | + | Fiscal Year 2008 Variable Compensation Plan | | | 8-K | | | | 0-23985 | | | | 10.1 | | 4/5/2007 |
| | 10.23 | + | Fiscal Year 2009 Variable Compensation Plan | | | 8-K | | | | 0-23985 | | | | 10.1 | | 4/21/2008 |
| | 10.24 | | Lease dated April 4, 2000 between NVIDIA Corporation and Sobrato Interests III for Building A | | | S-3/A | | | | 333-33560 | | | | 10.1 | | 4/20/2000 |
| | 10.25 | | Lease dated April 4, 2000 between NVIDIA Corporation and Sobrato Interests III for Building B | | | S-3/A | | | | 333-33560 | | | | 10.2 | | 4/20/2000 |
| | 10.26 | | Lease dated April 4, 2000 between NVIDIA Corporation and Sobrato Interests III for Building C | | | S-3/A | | | | 333-33560 | | | | 10.3 | | 4/20/2000 |
| | 10.27 | | Lease dated April 4, 2000 between NVIDIA Corporation and Sobrato Interests III for Building D | | | S-3/A | | | | 333-33560 | | | | 10.4 | | 4/20/2000 |
| | 10.28 | | Amended and Restated Agreement of Purchase and Sale by and between Harvest-Granite San Tomas LLC and Harvest 2400, LLC dated January 31, 2008 | | | 10-Q | | | | 0-23985 | | | | 10.3 | | 5/22/2008 |
| | 10.29 | + | Offer Letter, dated January 28, 2009, with David White | | | 8-K | | | | 0-23985 | | | | 10.1 | | 2/27/2009 |
| | 21.1 | * | List of Registrant’s Subsidiaries | | | | | | | | | | | | | |
| | 23.1 | * | Consent of PricewaterhouseCoopers LLP | | | | | | | | | | | | | |
| | 24.1 | * | Power of Attorney (included in signature page) | | | | | | | | | | | | | |
| | 31.1 | * | Certification of Chief Executive Officer as required by Rule 13a-14(a) of the Securities Exchange Act of 1934 | | | | | | | | | | | | | |
| | 31.2 | * | Certification of Chief Financial Officer as required by Rule 13a-14(a) of the Securities Exchange Act of 1934 | | | | | | | | | | | | | |
| | 32.1# | * | Certification of Chief Executive Officer as required by Rule 13a-14(b) of the Securities Exchange Act of 1934 | | | | | | | | | | | | | |
| | 32.2# | * | Certification of Chief Financial Officer as required by Rule 13a-14(b) of the Securities Exchange Act of 1934 | | | | | | | | | | | | | |
| | | Incorporated by Reference |
Exhibit No. | Exhibit Description | Schedule/Form | File Number | Exhibit | Filing Date |
| | | | | | |
| 2.1 | Agreement and Plan of Merger by and among NVIDIA Corporation, Partridge Acquisition, Inc. and PortalPlayer, Inc. dated 11/6/06 | 8-K | 0-23985 | 2.1 | 11/9/2006 |
| | | | | | |
| 3.1 | Amended and Restated Certificate of Incorporation | S-8 | 333-74905 | 4.1 | 3/23/1999 |
| | | | | | |
| 3.2 | Certificate of Amendment of Amended and Restated Certificate of Incorporation | 10-Q | 0-23985 | 3.4 | 9/10/2002 |
| | | | | | |
| 3.3 | Bylaws of NVIDIA Corporation, Amended and Restated as of March 7, 2006 | 10-K | 0-23985 | 3.3 | 3/16/2006 |
| | | | | | |
| 4.1 | Reference is made to Exhibits 3.1, 3.2 and 3.3 | | | | |
| | | | | | |
| 4.2 | Specimen Stock Certificate | S-1/A | 333-47495 | 4.2 | 4/24/1998 |
| | | | | | |
| 10.1 | Form of Indemnity Agreement between NVIDIA Corporation and each of its directors and officers | 8-K | 0-23985 | 10.1 | 3/7/2006 |
| | | | | | |
| 10.2+ | 1998 Equity Incentive Plan, as amended | 8-K | 0-23985 | 10.2 | 3/13/2006 |
| | | | | | |
| 10.3+ | 1998 Equity Incentive Plan ISO, as amended | 10-Q | 0-23985 | 10.5 | 11/22/2004 |
| | | | | | |
| 10.4+ | 1998 Equity Incentive Plan NSO, as amended | 10-Q | 0-23985 | 10.6 | 11/22/2004 |
| | | | | | |
| 10.5+ | Certificate of Stock Option Grant | 10-Q | 0-23985 | 10.7 | 11/22/2004 |
| | | | | | |
| 10.6+ | 1998 Employee Stock Purchase Plan Offering, as amended | S-8 | 333-51520 | 99.4 | 12/8/2000 |
| | | | | | |
| 10.7+ | Form of Employee Stock Purchase Plan Offering, as amended | S-8 | 333-100010 | 99.5 | 9/23/2002 |
| | | | | | |
| 10.8+ | Form of Employee Stock Purchase Plan Offering, as amended - International Employees | S-8 | 333-100010 | 99.6 | 9/23/2002 |
| | | | | | |
| 10.9+ | 1998 Non-Employee Directors’ Stock Option Plan, as amended | 8-K | 0-23985 | 10.1 | 4/3/2006 |
| | | | | | |
| 10.10+ | 1998 Non-Employee Directors’ Stock Option Plan (Annual Grant - Board Service), as amended | 10-Q | 0-23985 | 10.1 | 11/22/2004 |
| | | | | | |
| 10.11+ | 1998 Non-Employee Directors’ Stock Option Plan (Committee Grant - Committee Service), as amended | 10-Q | 0-23985 | 10.2 | 11/22/2004 |
| | | | | | |
| 10.12+ | 1998 Non-Employee Directors’ Stock Option Plan (Initial Grant) | 10-Q | 0-23985 | 10.3 | 11/22/2004 |
| | | | | | |
| 10.13+ | 2000 Nonstatutory Equity Incentive Plan, as amended | SC TO-1 | 005-56649 | 99(d)(1)(A) | 11/29/2006 |
| | | | | | |
| 10.14 | Lease dated April 4, 2000 between NVIDIA Corporation and Sobrato Interests III for Building A | S-3/A | 333-33560 | 10.1 | 4/20/2000 |
| | | | | | |
| 10.15 | Lease dated April 4, 2000 between NVIDIA Corporation and Sobrato Interests III for Building B | S-3/A | 333-33560 | 10.2 | 4/20/2000 |
EXHIBIT INDEX
(Continued)
| | | Incorporated by Reference |
Exhibit No. | Exhibit Description | Schedule /Form | File Number | Exhibit | Filing Date |
| | | | | | |
| 10.16 | Lease dated April 4, 2000 between NVIDIA Corporation and Sobrato Interests III for Building C | S-3/A | 333-33560 | 10.3 | 4/20/2000 |
| | | | | | |
| 10.17 | Lease dated April 4, 2000 between NVIDIA Corporation and Sobrato Interests III for Building D | S-3/A | 333-33560 | 10.4 | 4/20/2000 |
| | | | | | |
| 10.18+ | NVIDIA Corporation Fiscal Year 2007 Variable Compensation Plan | 8-K | 0-23985 | 10.2 | 4/3/2006 |
| | | | | | |
| 10.19+ | NVIDIA Corporation 2000 NonStatutory Equity Incentive Plan NSO | SC TO-1 | 005-56649 | 99.1(d)(1)(B) | 11/29/2006 |
| | | | | | |
| 10.20+ | PortalPlayer, Inc. 1999 Stock Option Plan and Form of Agreements thereunder | S-8 | 333-140021 | 99.1 | 1/16/2007 |
| | | | | | |
| 10.21+ | PortalPlayer, Inc. Amended and Restated 2004 Stock Incentive Plan | S-8 | 333-140021 | 99.2 | 1/16/2007 |
| | | | | | |
| 21.1* | List of Registrant’s Subsidiaries | | | | |
| | | | | | |
| 23.1* | Consent of PricewaterhouseCoopers LLP | | | | |
| | | | | | |
| 24.1* | Power of Attorney (included in signature page) | | | | |
| | | | | | |
| 31.1* | Certification of Chief Executive Officer as required by Rule 13a-14(a) of the Securities Exchange Act of 1934 | | | | |
| | | | | | |
| 31.2* | Certification of Chief Financial Officer as required by Rule 13a-14(a) of the Securities Exchange Act of 1934 | | | | |
| | | | | | |
| 32.1#* | Certification of Chief Executive Officer as required by Rule 13a-14(b) of the Securities Exchange Act of 1934 | | | | |
| | | | | | |
| 32.2#* | Certification of Chief Financial Officer as required by Rule 13a-14(b) of the Securities Exchange Act of 1934 | | | | |
* Filed herewith
+ Management contract or compensatory plan or arrangement.
# In accordance with Item 601(b)(32)(ii) of Regulation S-K and SEC Release Nos. 33-8238 and 34-47986, Final Rule: Management’s Reports on Internal Control Over Financial Reporting and Certification of Disclosure in Exchange Act Periodic Reports, the certifications furnished in Exhibits 32.1 and 32.2 hereto are deemed to accompany this Form 10-K and will not be deemed “filed” for purpose of Section 18 of the Exchange Act. Such certifications will not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference.
Copies of above exhibits not contained herein are available to any stockholder upon written request to: Investor Relations: NVIDIA Corporation, 2701 San Tomas Expressway, Santa Clara, CA 95050.
