UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________
FORM 10-K
| [x] | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| | For the fiscal year ended January 25, 200930, 2011 |
OR
| [_] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number: 0-23985
NVIDIA CORPORATION
(Exact name of registrant as specified in its charter)
| Delaware | 94-3177549 |
| (State or other jurisdiction of | (I.R.S. Employer |
| Incorporation or Organization) | Identification No.) |
2701 San Tomas Expressway
Santa Clara, California 95050
(408) 486-2000
(Address, including zip code, and telephone number, including area code, of principal executive offices)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Name of each exchange on which registered |
| Common Stock, $0.001 par value per share | The NASDAQ Global Select Market |
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes x No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes o No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. xo
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer”,filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer x Accelerated filer o
Large accelerated filer x | Accelerated filer o |
Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes o No x
The aggregate market value of the voting stock held by non-affiliates of the registrant as of July 27, 2008August 1, 2010 was approximately $6.1$5.0 billion (based on the closing sales price of the registrant’s common stock as reported by the NASDAQ Global Select Market, on July 25, 2008)30, 2010). This calculation excludes approximately 26,237,50926,130,043 shares held by directors and executive officers of the registrant. This calculation does not exclude shares held by such organizations whose ownership exceeds 5% of the registrant’s outstanding common stock that have represented to the registrant that they are registered investment advisers or investment companies registered under section 8 of the Investment Company Act of 1940.
The number of shares of common stock outstanding as of March 6, 200910, 2011 was 542,453,547.591.4 million.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s Proxy Statement for its 20092011 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission by April 6, 20092011 are incorporated by reference.
NVIDIA CORPORATION
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Forward-Looking Statements
This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are subject to the “safe harbor” created by those sections. Forward-looking statements are based on our management’s beliefs and assumptions and on information currently available to our management. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “could,” “goal,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “project,” “predict,” “potential” and similar expressions intended to identify forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors, which may cause our actual results, performance, time frames or achievements to be materially different from any future results, performance, time frames or achievements expressed or implied by the forward-looking statements. We discuss many of these risks, uncertainties and other factors in this Annual Report on Form 10-K in greater detail under the heading “Risk Factors.” Given these risks, uncertainties and other factors, you should not place undue reliance on these forward-looking statements. Also, these forward-looking statements represent our estimates and assumptions only as of the date of this filing. You should read this Annual Report on Form 10-K completely and with the understanding that our actual future results may be materially different from what we expect. We hereby qualify our forward-looking statements by these cautionary statements. Except as required by law, we assume no obligation to update these forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.
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.
© 2011 NVIDIA GeForce, SLI, Hybrid SLI, GoForce, Quadro,Corporation. All rights reserved. NVIDIA, Quadro, NVIDIA nForce, Tesla, Tegra, CUDA, NVIDIA APX, PhysX, Ageia, Mental Images, and the NVIDIA logo, 3D Vision, CUDA, GeForce, NVIDIA Fermi, Quadro Tesla and Tegra are our trademarks and/or registered trademarks of NVIDIA Corporation in the United StatesU.S. and other countries that are used in this document. We may also refer to trademarks of other corporations and organizations in this document.
Our Company
NVIDIA Corporation isinvented the worldwide leadergraphics processing unit, or GPU, in 1999. Since then, we have strived to set new standards in visual computing technologies and the inventor of the graphic processing unit, or the GPU, a high-performance processor which generates realistic,with interactive graphics available on workstations, personal computers, game consoles,devices ranging from tablets and smart phones to notebooks and workstations. Our expertise in programmable GPUs and computer-systems technology has led to breakthroughs in parallel processing which make supercomputing less expensive and widely accessible. We are strategically investing in three major areas – visual computing, high performance computing and mobile devices. Our products are designed to generate realistic, interactive graphics on consumer and professional computing devices.computing. We serve the entertainment and consumervisual computing market with our consumer GeForce graphics products theand professional design and visualization market with our Quadro graphics products,products; the high-performancehigh performance computing market with our Tesla computing solutions products,products; and the handheldmobile computing market with our Tegra computer-on-a-chipsystem-on-chip products.
We have three primary financial reporting segments – GPU, Professional Solutions Business, or PSB and Consumer Products Business, or CPB. During fiscal years 2010 and 2009, we operated and reported four major product-line operating segments: the GPU business, the professional solutions business, or PSB, the media and communications processor, or MCP business, and the consumer products business, or CPB. However, during the first quarter of fiscal year 2011, we began reporting internally the results of our former MCP segment along with the results of our GPU segment to reflect the way we manage the GPU business.
Our GPU business is comprised primarily of our GeForce discrete and chipset products thatwhich support desktop and notebook personal computers, or PCs, plus memory products. Our PSB is comprised of our Quadro professional workstation products and other professional graphics products, including our NVIDIA Tesla high-performance computing products. Our MCP business is comprised of nForce core logic and motherboard GPU, or mGPU products. Our CPB is comprised of our Tegra and GoForce mobile brands and products thatwhich support netbooks, personal navigation devices, or PNDs, handheldtablets, smartphones, personal media players, or PMPs, personal digital assistants, or PDAs, cellular phonesinternet television, automotive navigation, and other handheldsimilar devices. CPB also includes license, royalty, other revenue and associated costs related to video game consoles and other digital consumer electronics devices. Original equipment manufacturers, or OEMs, original design manufacturers, or ODMs, add-in-card manufacturers, system builders and consumer electronics companies worldwide utilize our processors as a core component of their entertainment, business and professional solutions.
We were incorporated in California in April 1993 and reincorporated in Delaware in April 1998. Our headquarter facilities are in Santa Clara, California. Our Internetweb address is www.nvidia.com. The contents of our website are not a part of this Form 10-K.
GPU Business
Our GPU business is comprised primarily of our GeForce discrete and chipset products that support desktop and notebook PCs, plus memory products. Our GPU business is focused on Microsoft Windows and Apple PC platforms. GeForce GPUs power PCs made by or distributed by most PC OEMs in the world for desktop PCs, notebook PCs, and PCs loaded with Windows Media Center and other media extenders such as the Apple TV. GPUs enhance the user experience for playing video games, editing photos, viewing and editing videos and high-definition, or HD, movies. GPUs also enable the rich visual user interfaces of the Windows Vista and Apple OS X operating systems. The combination of the programmable Unified Shader GPU with Microsoft Corporation’s, or Microsoft’s, DirectX 10 high-level shading language is known as DirectX 10 GPUs. Combined with the ability to directly access the GPU via the new Windows Vista applications from Microsoft Office to Web 2.0, applications can now incorporate improved quality through 3D effects.
We believe we are in an era where visual computing is becoming increasingly important to consumers and other end users of our products. Our strategy is to promote ourthe GeForce brand as one of the most important processors throughdue to its technology leadership, increasing programmability, and greatimpressive content experience.experience it enables. In fiscal year 2009,2011, our strategy was to extend our architectural and technology advantage with our GeForce GPUs.
The GeForce GTX 280 and 260 GPU products that we launched during During fiscal year 2009 represent2011, we took the second-generationcomputational capabilities of our unifiedGPUs to a new level with the launch of our Fermi architecture. Based on a comparison betweenFermi GPUs are designed to excel at tessellation, the key feature of DirectX 11, and to allow game developers to increase the level of physics realism via our PhysX API. Our flagship product for the desktop, the GeForce GTX 280 and480, was followed by a complete line-up of 400-series GPUs. Later in the GeForce 8800 Ultra in a variety of benchmarks and resolutions, the GeForce GTX 280 and 260year, we refreshed them with our 500-series GPUs, deliver 50 percent more gaming performance over the GeForce 8800 Ultra GPU. Other significant product launches during fiscal year 2009 included the GeForce 9600 GT, which provides more than doublesignificantly increased the performance of our GeForce 8600 GTS product; the GeForce 9800 GX2, which provides a new dual GPU board featuring Quad Scalable Link Interface, or SLI, technology; and the GeForce 9800 GTX, which is a flexible GPU that supports both two-way and three-way SLI technology.
products they replaced while fitting into similar power envelopes. We also launched 400M- and 500M- series GPUs for notebooks, along with our Optimus technology, which switches invisibly between discrete GPU and integrated graphics controller depending on the user’s activities. By doing so, NVIDIA Optimus provides notebook users with the battery life of integrated graphics, but with the gaming performance of a discrete graphics processor. PC manufacturers also are expected to launch hundreds of new PCs that use these new 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 environmentspaired 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 the mainstream segment, while the GeForce G110M is 35 percent faster than our previous mainstream GPU.Intel’s Sandy Bridge CPUs.
InDuring fiscal year 2009,2011, we completedalso announced our acquisition of Ageia Technologies, Inc.,plans to develop a custom central processing unit, or Ageia, an industry leader in gaming physics technology. Ageia's PhysX software is widely adopted in several PhysX-based gamesCPU, that are shipping or in development on Sony Playstation 3, Microsoft Xbox 360, Nintendo Wii, and gaming PCs. We believe thatwill use the combination of the GPU and physics engine brands result 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. Electronic Arts, THQ and 2K Games, a publishing label of Take-Two Interactive Software, have licensed PhysX technology as a development platform whichARM instruction set. These CPU cores will be availableintegrated into future generation GPUs for PCs, servers, and supercomputers. These CPU cores will be integrated into future generation processors for PCs, servers, and supercomputers. PC manufacturers also are expected to launch hundreds of new PCs that use by eachNVIDIA® GeForce GPUs paired with the new generation of the companies’ studios worldwide.Intel Corporation’s Sandy Bridge CPUs.
Our share During fiscal year 2011, we also began shipments of the standalone desktop GPU category decreased from 64%GeForce 320M chipset to 63% in fiscal year 2009, accordingApple for incorporation into their latest 13-inch MacBook notebooks. The 320M delivers up to an 80% performance increase over 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.previous GeForce 9400M GPU.
Professional Solutions Business
Our PSB is comprised of our Quadro professional workstation products and other professional graphics products, including our Tesla high-performance computing products. Our Quadro brand products are designed to deliver the highest possible level of graphics performance and application compatibility for the professional industry. The Quadro family consists of the Quadro Plex Visual Computing System, or VCS, Quadro FX, Quadro CX and the Quadro Night Vision Systems, or NVS, professional workstation processors. Quadro products are recognized by many as the standard for professional graphics solutions needed to solve many of the world’s most complex visual computing challenges in the manufacturing, entertainment, medical, science, and aerospace industries. NVIDIA Quadro products are fully certified by several software developers for professional workstation applications and are designed to deliver the graphics performance and precision required by professional applications.
We believe thatThere has been in recent years have experienced an increasing level of global adoption forof the computer-aided design approach of product creation. 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.
During fiscal year 2009, we launched several new2011, our Quadro solutions. These includedbusiness benefitted from the Quadro FX 3600M Professional, which is among the highest performing notebook GPUs, and the Quadro Plex D Series, a dedicated desk side VCS system that, alternatively, can be configured using two Quadro Plex D systems for a 3U configuration that fits a standard 19” rack environment. At the SIGGRAPH 2008 conference, the Quadro Plex D2 system set a new milestone in computer graphics by demonstrating the world’s first real-time fully-interactive ray tracer. We also launched five new Quadro FX notebook GPUs that spanned from ultra-high performance to ultra mobility, as well as the Quadro CX, the industry’s first accelerator for Adobe’s Creative Suite 4, or Adobe CS4, content creation software. Adobe CS4 software has added optimization to take advantagestrength of GPU technology. The Quadro CX is specifically designed to enhance the performance of the Adobe CS4 product line and to give creative professionals the ultimate performance and productivity.
During fiscal year 2009, we also we launched the Tesla C1060 computing processor and the Tesla S1070 computing system, which is among the first teraflop processors and has a 1U system demonstrating up to four teraflops of performance. 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 CUDA parallel processingFermi architecture can accelerate compute-intensive applications by significant multiples over that of a central processing unit, or 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. There are currently over 25,000 developers around the world using CUDA. 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. Over 100 universities around the world now teach parallel programming with CUDA and many PC OEMs now offer high performance computing solutions with Tesla for use by customers around the world, including Motorola, Chevron, GE Health Care and even General Mills, the consumer products company. Researchers use CUDA to accelerate their time-to-discovery, and popular off-the-shelf software packages are now CUDA accelerated.
MCP Business
Our MCP business is comprised of nForce core logic and GeForce mGPU products. Our nForce and GeForce mGPU families of products address the core logic market. Core logic is the computer’s “central nervous system,” controlling and directing high speed data between the central processing unit, or CPU, the GPU, storage, and networks. High quality, long-term reliability, and top performance are key customer demands of core logic suppliers.
During fiscal year 2008, we announced a new technology named Hybrid SLI. This technology combines the multi-GPU technology with a powerful and energy-efficient engine. When GeForce add-in graphics cards are connected to GeForce mGPUs, Hybrid SLI kicks in, combining their processing power to deliver an improved experience. The technology is application aware so, depending on the processing demands of each application running on the host PC, the discrete GPU may be completely shut down in order to save power.
During fiscal year 2009, we shipped Hybrid SLI DX10 mGPUs – the GeForce 8000 GPU series. The GeForce 8000 GPU series includes GeForce Boost Hybrid SLI technology, which is designed to double performance when paired with a GeForce 8 series desktop GPU. We also extended the reach of SLI technology into the performance category with the launch of the Quadro 2000 midrange GPU and the Quadro 600 entry-level GPU. These professional graphics solutions put the computational and visualization benefits of our NVIDIA nForce 790i Ultra SLI MCP,Fermi architecture within reach of all engineers, designers and animators, with the Quadro 2000 delivering significantly higher performance compared to leading computer aided design, or CAD applications and the Quadro 600 positioned at a highly rated overclockable platform for Intel Corporation, or Intel, processors.competitive price/performance point.
During fiscal year 2009,2011, demand for our workstation products continued to recover, fueled by demand from enterprise customers and new growth markets like video editing. During SIGRRAPH 2010, we launched the GeForce 9M series of notebookintroduced new Quadro GPU products based on our Fermi architecture and 3D Vision Pro, a new 3D stereoscopic solution that empowers engineers, designers, architects and computational chemists who work with complex 3D designs to experience a rich, reliable 3D viewing for large scale visualization environments. The new Quadro GPUs deliver performance that enables improved performance in notebooks with Hybrid SLI technologyis up to five times faster for 3D applications and PhysX technology.up to eight times faster for computational simulation than our previous Quadro generation products. We also launched SLIannounced that a range of NVIDIA Quadro professional graphics solutions are certified by Adobe Systems Incorporated for Intel Broomfield CPU platforms. When pairedAdobe Creative Suite 5 software, which provides real-time video editing and effects processing of Adobe Premiere Pro CS5.
Our Tesla supercomputing business continued to make progress with key project wins not only in our core market segments, but also with traction in a number of new focus areas. A notable achievement this fiscal year was the nForce 200 SLI MCP, Intel’s Bloomfield CPUunveiling of the Tianhe-1A supercomputer at HPC 2010 China. The system uses more than 7,000 Tesla M2050 GPUs, is three-times more energy efficient than an equivalent CPU-only system and Tylersburg core logic chipset will deliver NVIDIA three-way SLI technology withtakes up to a 2.8 times performance boost over single graphics card platforms.half as much floor space.
In fiscal year 2009, we 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 the fourth quarter of 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.
Our MCP strategy is to bring the benefits of GeForce GPUs to the most price sensitive categories while creating exciting platform architectures like SLI, Hybrid SLI, and Enthusiast System Architecture, or ESA. ESA is a standard for system information protocol that links a PC system’s various critical components – such as fan, power supply, smart chassis, GPUs, and motherboards. It enables a unified architecture for applications and users to control and optimize the performance of their system. SLI, Hybrid SLI, and ESA are examples of how we create architectures that advance the capabilities of the PC.
Consumer Products Business
Our CPB is comprised of our Tegra and GoForce mobile brands and products that support netbooks,smartphones, smartbooks, tablets, personal media players, or PMPs, PDAs, cellular phonesinternet television, automotive navigation, and other handheldsimilar devices. This businessCPB also includes license, royalty, other revenue and associated costs related to video game consoles and other digital consumer electronics devices.
We believeOur mobile strategy is to create a system-on-a-chip that mobile devices like phones, music players, and portable navigation devices will increasingly become multi-function, multi-tasking, PCs. As such, we anticipate the architecture of these devices will increasingly become more consumer PC-like and be capable of delivering all theenables entertainment and web experiences that end users currently enjoy on a PC, but in a form-factor that fits nicely in their hands. Our mobile strategy is to create a computer-on-a-chip that enables this experience.PC. NVIDIA Tegra and GoForce mobile products implement design techniques, both inside the chips and at the system level, which result in high performance and long battery life. These technologies enhance visual display capabilities, improve connectivity, and minimize chip and system-level power consumption. NVIDIA Tegra and GoForce products can be found primarily in multimedia cellular phones and other handheld devices.
During fiscal year 2009,2011, we launchedcontinued to see promising signs in our Tegra business, helped by the NVIDIAwidespread consumer adoption of the Android operating system. Tegra APX 2500 computer-on-a-chip. The NVIDIA Tegra APX 2500 is a computer-on-a-chip designedshipment volumes began to meet the growing multimedia demands of today's mobile phone and entertainment user 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 unleash Android, an open mobile phone software stack, with the NVIDIA Tegra series of ‘computer-on-a-chip’ processors. The NVIDIA Tegra APX 2600 and 2500 enable a compelling user interface and high-definition video playback for a low-power, visually rich experience, and we expect that these products will be key to building next-generation Microsoft Windows Mobile, Windows CE, and Android-based devices, including smartphones, PNDs, and PMPs.
Additionally, we also launched the NVIDIA Tegra 600 and 650 products, which are small, advanced, highly-integrated visual computer-on-a-chip products. These products, which represent a single-chip heterogeneous computer architecture designed for low-power mobile computing devices, feature enhanced multimedia functionality—including high definition, or HD, 1080p video and advanced 3D technology—and deliver many times the power efficiency of competing products on a broad range of connected devices.
Additionally,ramp up late in the fourth quarter of fiscal year 2009,2011 and we expect the momentum to continue into the first quarter of fiscal year 2012, fueled by the production release of Android-based smartphone and tablet products. During fiscal year 2011, we had multiple Tegra 2 design wins in both tablets and smartphones. Our customers including Acer Inc., Dell Inc., LG Electronics Inc. and Motorola Solutions, Inc. announced a number of products incorporating the Tegra 2 mobile processor. We also introduced GeForce 3D Vision, a high-definition 3D stereo solutiondemonstrated our next-generation mobile processor, the world’s first quad-core mobile processor, at Mobile World Congress.
During fiscal year 2011, we announced that Volkswagen AG and Audi AG will use our next-generation Tegra starting in 2012. In addition to this, we announced that BMW will use our GPUs for infotainment systems in next-generation cars worldwide. Tesla™ Motors will also incorporate Tegra processors to power the home. 3D Vision is a combination of high-tech wireless glasses, a high-power infrared emitterinfotainment, navigation and advanced software that transforms hundreds of PC games into full stereoscopic 3D.instrument cluster in its Roadster Model S.
Our Strategy
We are committed to bringing the best experience to the end user through our innovative hardware and software offerings. We design our products to enable our PC OEMs, ODMs, system builders, motherboardcustomers in the visual computing, high-performance computing and add-in board manufacturers, and cellular phone and consumer electronics OEMs,mobile computing markets to build products that deliver state-of-the-art features and capabilities, performance, compatibility and power efficiency while maintaining competitive pricing and profitability. Our business strategy leverages our ability to design and develop programmable GPUs, system I/O processors, system-on-chip processors, application programming interfaces for multiple operating systems, and application programming tools and middle-ware to provide our customers with platforms that allow superior performance and utility beyond the base capability. We believe that by developing 3D graphics, HD, videohardware and media communications solutionssoftware platforms that provide superior performance and address the key requirements of each of the product categories we serve, we will raise the capability of each system and further accelerate the adoption of HD digital media platforms and devices throughout these segments.its adoption. We combine scalable architectural technology with mass market economies-of-scale to deliver a complete family of products that span from professional workstations, to consumer PCs to multimedia-rich cellular phones.tablets and smartphones.
Our objective is to be the leading supplier of performanceprogrammable, high-performance GPUs MCPs and computer-on-a-chip productsultra-low power mobile system-on-a-chip products. A fundamental strategy is to actively recruit the industry’s best 3D graphics and HD video, microprocessor, networking and communications engineers, and we believe that support netbooks, PNDs, PDAs, PMPs, cellular phoneswe have assembled an exceptionally experienced and other handheld devices.talented engineering team. Our current focus is on the desktop PC, professional workstation, notebook PC, high-performance computing, and application processor multimedia-rich cellular phone and video game console product lines, and we plan to expand into other product lines. Our strategy to achieve this objective includes the following key elements:
Build Award-Winning, Architecturally-Compatible 3D Graphics, HD Video, Media Communications and Ultra-Low Power Product Families for the PC, Handheld and Digital Entertainment Platforms. Our strategy is to achieve market segment leadership in these platforms by providing award-winning performance at every price point. By developing 3D graphics, HD video and media communications solutions that provide superior performance and address the key requirements of these platforms, we believe that we will accelerate the adoption of 3D graphics and rich digital media.
Target Leading OEMs, ODMs and System Builders. Our strategy is to enable our leading PC, handheld and consumer electronics OEMs, ODMs and major system builder customers to differentiate their products in a highly competitive marketplace by using our products. We believe that design wins with these industry leaders provide market validation of our products, increase brand awareness and enhance our ability to penetrate additional leading customer accounts. In addition, we believe that close relationships with OEMs, ODMs and major system builders will allow us to better anticipate and address customer needs with future generations of our products.
Sustain Technology and Product Leadership in Visual Computing. We believe that ongoing investment in research and development in 3D Graphicsgraphics and HD Video,image processing is critical to the development and Media Communicationsenhancement of innovative products and Ultra-Low Power.technologies. We are focused on using our advanced engineering capabilities to accelerate the quality and performance of 3D graphics, HD video, media communicationsimage processing, and ultra-low power processing in PCscomputational graphics to raise and handheld devices. A fundamental aspect of our strategy is to actively recruitchange the best 3D graphicsuser experience for both consumer entertainment and HD video, networking and communications engineers in the industry, and we believe that we have assembled an exceptionally experienced and talented engineering team.professional visualization applications. Our research and development strategy is to focus on concurrently developing multiple generations of GPUs, including GPUs for high-performance computing, MCPs and mobile and consumer products that support netbooks, PNDs, PMPs, PDAs, cellular phones and other handheld devices using independent design teams. As we have in the past, we intend to use this strategy to achieve new levels of graphics, networking and communications features and performance and ultra-low power designs, enabling our customers to achieve superior performance in their products.
Increase Market Share. We believe that substantial market share will be important to achieving success. We intend to achieve a leading share of the market in areas in which we don't have a leading market share, and maintain a leading share of the market in areas in which we do have the lead, by devoting substantial resources to building families of products for a wide range of applications that offer significant improvement in performance over existing products.
UseRevolutionize High Performance Computing with CUDA and Tesla. Tesla is a family of GPU computing products that delivers processing capabilities for high-performance computing applications. NVIDIA CUDA is a general purpose parallel computing architecture that leverages the parallel compute engine in NVIDIA GPUs to solve many complex computational problems in a fraction of the time required on a CPU. Our ExpertiseCUDA parallel processing architecture can accelerate compute-intensive applications by significant multiples over that of a CPU alone. We are working with developers around the world who have adopted and written application programs for the CUDA architecture using various high-level programming languages, which can then be run at significant execution speeds on a CUDA-enabled GPU. With CUDA, we are able to speed up general purpose compute-intensive applications as we do for 3D graphics processing. Developers are able to speed-up algorithms in Digital Multimediaareas ranging from nano molecular dynamics to image processing, medical image reconstruction and derivatives modeling for financial risk analysis. We are also working with universities around the world that teach parallel programming with CUDA as well as with many PC OEMs that offer high performance computing solutions with Tesla for use by their customers around the world. Researchers also use CUDA to accelerate their time-to-discovery, and many popular off-the-shelf software packages are now CUDA accelerated..
Advance Mobile Computing with Best-in-Class Ultra-Low Power System-On-Chip Processors. We believe the synergy created by the combination of 3D graphics, HD video and the Internet will fundamentally change the way people work, learn, communicate and play. We believe that our expertise in HD graphics and system architecture positions us to help drive this transformation. We are using our expertise in the processing and transmission of high-bandwidth digital media to develop products designed to address the requirements of high-bandwidth concurrent multimedia. By developing 3D graphics, HD video and media communications solutions that provide superior performance and address the key requirements of these platforms, we believe that we will accelerate the adoption of next generation smart phones and tablets.
Use ourOur Intellectual Property and Resources to Enter into License and Development Contracts. From time to time, we expect to enter into license and royalty arrangements that willmay require significant customization of our intellectual property components. 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 example, in fiscal year 2006, we entered into an agreement with Sony Computer Entertainment, Inc., or 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.
Revolutionize computing with CUDA and Tesla. Tesla is a family of GPU computing products that delivers processing capabilities for high-performance computing applications, and marks our entry into the high-performance computing industry. NVIDIA CUDA is a general purpose parallel computing architecture that leverages the parallel compute engine in NVIDIA GPUs to solve many complex computational problems in a fraction of the time required on a CPU. We believe we are in an era of GPU computing, where our CUDA parallel processing architecture can accelerate compute-intensive applications by significant multiples over that of a CPU alone. We are working with developers around the world to adopt and write application programs for the CUDA architecture using C, one of the most widely used high-level programming languages, which can then be run at great execution speeds 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. We are also working with universities around the world who now teach parallel programming with CUDA and we are also working with many PC OEMs who now offer high performance computing solutions with Tesla for use by their customers around the world. Researchers also use CUDA to accelerate their time-to-discovery, and popular off-the-shelf software packages are now CUDA accelerated.
Sales and Marketing
Our worldwide sales and marketing strategy is a key part ofto our objective to become the leading supplier of performanceprogrammable, high-performance GPUs MCPs, and applications processors that support netbooks, PNDs, PMPs, PDAs, cellular phones and other handheld devices.ultra-low power mobile system-on-a-chip products. Our sales and marketing teams work closely with each industry’s respective OEMs, ODMs, system builders, motherboard manufacturers, add-in board manufacturers and industry trendsetters, collectively referred to as our Channel, to define product features, performance, price and timing of new products. Members of our sales team have a high level of technical expertise and product and industry knowledge to support the competitive and complex design win process. We also employ a highly skilled team of application engineers to assist our Channel in designing, testing and qualifying system designs that incorporate our products. We believe that the depth and quality of our design support are keys to improving our Channel’s time-to-market, maintaining a high level of customer satisfaction within our Channel and fostering relationships that encourage customers to use the next generation of our products.
In the GPU and MCP segments we serve that purchase our GPUs, the sales process involves achieving key design wins with leading OEMs and major system builders and supporting the product design into high volume production with key ODMs, motherboard manufacturers and add-in board manufacturers. These design wins in turn influence the retail and system builder channel that is serviced by add-in board and motherboard manufacturers. Our distribution strategy is to work with a number of leading independent contract equipment manufacturers, or CEMs, ODMs, motherboard manufacturers, add-in board manufacturers and distributors, each of which have relationships with a broad range of major OEMs and/or strong brand name recognition in the retail channel. In the CPB segment that we serve, the sales process primarily involves achieving key design wins directly with the leading handheld OEMs and supporting the product design into high-volume production. Currently, we sell a significant portion of our processors directly to distributors, CEMs, ODMs, motherboard manufacturers and add-in board manufacturers, which then sell boards and systems with our products to leading OEMs, retail outlets and to a large number of system builders.
Although as a result of our Channel strategy, a small number of our customers represent the majority of our revenue, their end customers include a large number of OEMs and system builders throughout the world. As a result of our Channel strategy, our sales are focused on a small number of customers. Sales to our largest customer, Hewlett-Packard Company,Quanta Computer Incorporated, accounted for 11%12% of our total revenue for fiscal year 2009.2011.
To encourage software title developers and publishers to develop games optimized for platforms utilizing our products, we seek to establish and maintain strong relationships in the software development community. Engineering and marketing personnel interact with and visit key software developers to promote and discuss our products, as well as to ascertain product requirements and solve technical problems. Our developer program makes certain that our products are available to developers prior to volume availability in order to encourage the development of software titles that are optimized for our products.
Backlog
Our sales are primarily made pursuant to standard purchase orders. The quantity of products purchased by our customers as well as our shipment schedules are subject to revisions that reflect changes in both the customers’ requirements and in manufacturing availability. The semiconductor industry is characterized by short lead time orders and quick delivery schedules. In light of industry practice and experience, we believe that only a small portion of our backlog is non-cancelable and that the dollar amount associated with the non-cancelable portion is not significant. Consequently, we do not believe that a backlog as of any particular date is indicative of future results.
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. Historically, we have seen stronger revenue in the second half of our fiscal year than in the first half of our fiscal year, primarily due to back-to-school and holiday demand. ThisWhile we anticipate that this historical seasonal trend did not occur in fiscal year 2009. Revenuewill resume, there can be no assurance of this trend. For example, revenue in the second half of fiscal year 2009 declined2011 decreased by 33% when5% compared to revenue fromwith the first half of fiscal year 2009. The current recessionary economic environment has created substantial uncertainty2011 primarily due to weakness in our business. There can be no assurance that the historical seasonal trend will resumeend consumer markets, while revenue in the future.second half of fiscal year 2010 grew by 31% compared with the first half of fiscal year 2010.
Manufacturing
Fabless Manufacturing Strategy
We do not directly manufacture semiconductor wafers used for our products. Instead, we utilize what is known as a fabless manufacturing strategy for all of our product-line operating segments whereby we employ world-class suppliers for all phases of the manufacturing process, including wafer fabrication, assembly, testing and packaging. This strategy uses the expertise of industry-leading suppliers that are certified by the International Organization for Standardization, or ISO, in such areas as fabrication, assembly, quality control and assurance, reliability and testing. In addition, this strategy allows us to avoid many of the significant costs and risks associated with owning and operating manufacturing operations. Our suppliers are also responsible for procurement of most of the raw materials used in the production of our products. As a result, we can focus our resources on product design, additional quality assurance, marketing and customer support.
We utilize industry-leading suppliers, such as Taiwan Semiconductor Manufacturing Corporation,Company Limited, or TSMC, and United Microelectronics Corporation, or UMC, Chartered Semiconductor Manufacturing, or Chartered, Semiconductor Manufacturing International Corporation, or SMIC, and Austria Micro Systems, or AMS to produce our semiconductor wafers. We then utilize independent subcontractors, such as Advanced Semiconductor Engineering, or ASE,Inc., Amkor Technology, or Amkor, JSI Logistics Ltd., or JSI, King Yuan Electronics Co., Ltd, or KYEC,Ltd., Siliconware Precision Industries Company Ltd., or SPIL, and STATS ChipPAC Incorporated or ChipPAC, to perform assembly, testing and packaging of most of our products. We purchase substrates from Nanya Technology Corporation, IbidenCo., Ltd. and Unimicron Technology Corporation.
We typically receive semiconductor products from our subcontractors, perform incoming quality assurance and then ship the semiconductors to CEMs, distributors, motherboard and add-in board manufacturer customers from our third-party warehouse in Hong Kong. Generally, these manufacturers assemble and test the boards based on our design kit and test specifications, and then ship the products to retailers, system builders or OEMs as motherboard and add-in board solutions.
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.
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 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.
Inventory and Working Capital
Our management focuses considerable attention on managing our inventories and other working-capital-related items. We manage inventories by communicating with our customers and then using our industry experience to forecast demand on a product-by-product basis. We then place manufacturing orders for our products that are based on forecasted demand. The quantity of products actually purchased by our customers as well as shipment schedules are subject to revisions that reflect changes in both the customers’ requirements and in manufacturing availability. We generally maintain substantial inventories of our products because the semiconductor industry is characterized by short lead time orders and quick delivery schedules.
Our existing cash and marketable securities balances increased by 44% at the end of fiscal year 2011 compared with the end of fiscal year 2010. We believe that our existing cashthese balances and our anticipated cash flows from operations will be sufficient to meet our operating, acquisition and capital requirements for at least the next twelve 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.
Research and Development
We believe that the continued introduction of new and enhanced products designed to deliver leading 3D graphics, HD video, audio, ultra-low power communications, storage,consumption, and secure networking performance and featuressystem-on-chip architectures is essential to our future success. Our research and development strategy is to focus on concurrently developing multiple generations of GPUs, MCPsincluding GPUs for high-performance computing, and ourmobile and consumer products that support netbooks, PNDs, PMPs, PDAs, cellular phones or other handheld devices using independent design teams. Our research and development efforts are performed within specialized groups consisting of software engineering, hardware engineering, very large scale integration design engineering, process engineering, architecture and algorithms. These groups act as a pipeline designed to allow the efficient simultaneous development of multiple generations of products.
A critical component of our product development effort is our partnerships with leaders in the computer aided design, or CAD industry. We invest significant resources in the development of 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 market 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 OEM and other manufacturers.
We substantially increased our engineering and technical resources in fiscal year 2009, andAs of January 30, 2011, we had 3,7724,161 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.development. During fiscal years 2009, 20082011, 2010 and 2007,2009, we incurred research and development expendituresexpense of $848.8 million, $908.9 million and $855.9 million, $691.6 million and $553.5 million, respectively.
Competition
The market for GPUs, MCPs, and computer-on-a-chipour products that support netbooks, PNDs, PMPs, PDAs, cellular phones or other handheld devices 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, software support, conformity to industry standard Application Programming Interfaces, or APIs, manufacturing capabilities, processor pricing, 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 and at competitive prices. 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.
A significant source of competition iscomes from companies that provide or intend to provide GPU, MCP,GPUs and computer-on-a-chip products that support netbooks, PNDs, PMPs, PDAs, cellular phones or other handheld devices.mobile and consumer products. 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, 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 MCPschipsets that incorporate 3D graphics functionality as part of their existing solutions, such as Advanced Micro Devices, or AMD, Intel, Matrox Electronics Systems Ltd., SIS,Silicon Integrated Systems, and VIA;VIA Technologies, Inc.; |
· | suppliers of computer-on-a-chipsystem-on-a-chip products that support netbooks, PNDs,tablets, smartphones, PMPs, PDAs, cellular phones orinternet television, automotive navigation and other handheldsimilar devices, such as AMD, ARM Holdings plc, Broadcom Corporation, Freescale Semiconductor Inc., Fujitsu Limited, Imagination Technologies Ltd., ARM Holdings plc,Intel, Marvell Technology Group Ltd, or Marvell,Ltd., NEC Corporation, Qualcomm Incorporated, Renesas Technology Corp., Samsung Seiko-Epson,Electronics Co. Ltd., Seiko Epson Corporation, STMicroelectronics, Texas Instruments Incorporated, and Toshiba America Electronic Components, Inc.; and |
· | supplierslicensors of computer-on-a-chip products for handheld and embedded devices that incorporate multimedia processing as part of their existing solutionsgraphics technologies such as Broadcom, Texas Instruments Inc., Qualcomm Incorporated, Marvell, Freescale Semiconductor Inc., Renesas Technology, Samsung,ARM Holdings plc, and ST Microelectronics.Imagination Technologies Group plc. |
If and to the extent we offer products in new markets, we may face competition from existing competitors as well as from companies with which we currently do not compete. 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 or same package, as evidenced by AMD’s announcement of its Fusion processor project.processors and Intel’s announcement of its family of CPUs codenamed Sandy Bridge. If AMD and Intel continue to pursue platform solutions and integrated CPUs, we may not be able to successfully compete and our business would be negatively impacted.
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.
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 currently issued patents have expiration dates from April 10, 20095th, 2011 to October 1, 2028.January 29, 2031. We have numerous patents issued, allowed and pending in the United States and in foreign jurisdictions. Our patents and pending patent applications primarily relate to our products and the technology used in connection with our products. We also rely on international treaties, 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 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.jurisdictions; and |
| · | the commercial significance of our operations and our competitors’ operations in particular countries and regions;regions. |
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. We have licensed technology from third parties for incorporation in some of our products and for defensive reasons, and expect to continue to enter into such license agreements. These licenses may result in royalty payments to third parties, the cross licensing of technology by us or payment of other consideration. If these arrangements are not concluded on commercially reasonable terms, our business could suffer.
Employees
As of January 25, 200930, 2011 we had 5,4206,029 employees, 3,7724,161 of whom were engaged in research and development and 1,6481,868 of whom were engaged in sales, marketing, operations and administrative positions. None of our employees are covered by collective bargaining agreements, and weWe 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 oflast several fiscal year 2008,years, we reorganized our operating segments. We now report financial information forhave operated and reported four major product-line operating segments to our CODM: the GPU business, whichthe PSB, the MCP business, and the CPB. However, during the first quarter of fiscal year 2011, we began reporting internally the results of our former MCP segment along with the results of our GPU segment to reflect the way we manage the GPU business. Comparative periods presented reflect this change.
Our GPU business is comprised primarily of our GeForce discrete and chipset products thatwhich support desktop and notebook personal computers, or PCs, plus memory products; theproducts. Our PSB which is comprised of our NVIDIA Quadro professional workstation products and other professional graphics products, including our NVIDIA Tesla high-performance computing products; the MCP business which is comprised of NVIDIA nForce core logic and motherboard GPU products; and ourproducts. Our CPB which is comprised of our Tegra and GoForce mobile brands and products thatwhich support netbooks, PNDs,tablets, smartphones, PMPs, PDAs, cellular phonesinternet television, automotive navigation, and other handheldsimilar devices. CPB also includes license, royalty, other revenue and associated costs related to video game consoles and other digital consumer electronics devices. In addition to these operating segments, we have theOEMs, ODMs, add-in-card manufacturers, system builders and consumer electronics companies worldwide utilize our processors as a core component of their entertainment, business and professional solutions.
The “All Other” category that includes human resources, legal, finance, general administrationnon-recurring charges and corporate marketing expenses, which total $346.1 million, $266.2 million and $239.6 million for fiscal years 2009, 2008 and 2007, respectively,benefits that we do not allocate to our other operating segments as these expensesitems are not included in the segment operating performance measures evaluated by our CODM. “All Other”During the year ended January 30, 2011, we entered into a new six-year cross licensing agreement with Intel and also includesmutually agreed to settle all outstanding legal disputes. For accounting purposes, the results of operations of other miscellaneous reporting segments that are neither individually reportable, nor aggregated with another operating segment. Revenue in the “All Other” category is primarily derived from sales of components. Certain prior period amounts have been revised to conformfair valued benefit prescribed to the presentationsettlement portion was $57.0 million and was considered a non-recurring benefit for the fiscal year 2011. Please refer to Note 4 of these Notes to the Consolidated Financial Statements in Part IV, Item 15 of this Form 10-K for further discussion regarding the patent cross license agreement with Intel. Non-recurring charges related to our current fiscal year.cash tender offer to purchase certain employee stock options were $140.2 million for the year ended January 31, 2010. 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 discussion regarding the cash tender offer. During the year ended January 25, 2009, we recorded a non- recurring charge of $26.9 million for restructuring and other charges associated with the termination of a development contract related to a new campus construction project we had put on hold. Please refer to Note 6 of the Notes to the Consolidated Financial Statements in Part IV, Item 15 of this Form 10-K for further discussion regarding the restructuring and other charges.
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 1617 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 February 27, 2009:28, 2011:
| Name | | Age | | Position |
| | 45 | | President, Chief Executive Officer and Director |
| | 53 | | Executive Vice President and Chief Financial Officer |
| | 54 | | Executive Vice President, Worldwide Sales |
| | 53 | | Executive Vice President, General Counsel and Secretary |
| | 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.
David L. White joined NVIDIA in February 2009 as Executive Vice President and Chief Financial Officer. From August 2004 to February 2009, Mr. White served as the Executive Vice President of Finance and Chief Financial Officer of Sanmina-SCI Corporation, a 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 2003 to 2004, Mr. White was Senior Vice President and Chief Financial Officer of Asyst Technologies, Inc., a provider of integrated hardware and software automation solutions that enhance semiconductor and flat-panel display manufacturing productivity. Mr. White served as President and 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. White holds a B.S. degree from Brigham Young University and an M.B.A. from the University of Washington.
Ajay K. Puri joined NVIDIA in December 2005 as Senior Vice President, Worldwide 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, a Senior Vice President in December 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.
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 on it or connected to it is not a part of this 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 involves 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 Business, Industry and IndustryPartners
Global economic conditions Our business results could be adversely affected if the identification and development of new products is delayed or unsuccessful.
In order to maintain or improve our financial results, we will need to continue to identify and develop new products and enhancements to our existing products in a timely and cost-effective manner. The process of developing new products and services and enhancing existing products and services is highly complex, costly and uncertain, and any failure by us to anticipate customers’ changing needs and emerging technology trends could significantly harm our market. We must make long-term investments and commit significant resources before knowing whether our predictions will accurately reflect customer demand for our new products and technologies. It is possible that our development efforts will not be successful and that our new technologies will not result in meaningful revenues. Even if we introduce new and enhanced products to the market, we may not be able to achieve market acceptance of them in a timely manner.
Our ability to successfully develop and deliver new products will depend on various factors, including our ability to:
| · | Effectively identify and capitalize upon opportunities in new markets; |
| · | Timely complete and introduce new products and technologies; |
| · | Transition our semiconductor products to increasingly smaller line width geometries; and |
| · | Obtain sufficient foundry capacity and packaging materials. |
We occasionally have experienced delays in completing the development and introduction of new products and product enhancements, and we could experience delays in the future. In addition, in the past, we have been unable to successfully manage product transitions from older to newer products resulting in obsolete inventory. Our failure to successfully develop and introduce new products and technologies or identify new uses for existing or future products, could result in rapidly declining average selling prices, reduced demand for our products adversely impactedor loss of market share any of which could harm our competitive position and cause our revenue, gross margin and overall financial results to suffer.
If we are unable to achieve market acceptance and design wins for our products and technologies, our results of operations and competitive position will be harmed.
The success of our business depends to a significant extent on our ability to achieve market acceptance of our new products and enhancements to our existing products and identify and enter new markets. The market for our product and technologies 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. If we do not successfully achieve or maintain market acceptance for our products and enhancements or identify and enter new markets, our ability to compete and maintain or increase revenues will suffer.
Additionally, there can be no assurance that the industry will continue to demand new products with improved standards, features or performance. If our customers, original equipment manufacturers, or OEMs, original design manufacturers, or ODMs, add-in-card and suppliersmotherboard manufacturers, system builders and harmedconsumer 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 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.
We believe achieving design wins, which entails having our existing and future products chosen for hardware components or subassemblies designed by OEMs, or ODMs, add-in board and motherboard manufacturers is an integral part of 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 our customers’ new system configurations. This requires that we:
| · | 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 |
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 systems until at least the next design configuration. Therefore, we endeavor to develop close relationships with our OEMs and ODMs, in an attempt to better anticipate and address customer needs in new products so that 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. 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.
If we are unable to compete in the markets for our products, our financial results will be adversely impacted.
The market for our products, specifically the GPU and mobile and consumer markets are extremely competitive, and we expect competition to intensify as current competitors expand their product offerings, industry standards continue to evolve and others realize the market potential of mobile and consumer products and services. Our current competitors include the following, some of which have greater financial, technical and management resources than us:
| · | suppliers of GPUs, including chipsets, that incorporate 3D graphics functionality as part of their existing solutions, such as Advanced Micro Devices Inc., or AMD, Intel Corporation, or Intel, Matrox Electronics Systems Ltd., Silicon Integrated Systems, or SIS, and VIA Technologies, Inc.; |
| · | suppliers of system-on-a-chip products that support tablets, netbooks, PNDs, PMPs, PDAs, cellular phones, handheld devices or embedded devices such as AMD, Broadcom Corporation, Freescale Semiconductor, Inc., Fujitsu Limited, Imagination Technologies Ltd., Intel, Marvell Technology Group Ltd., NEC Corporation, Qualcomm Incorporated, Renesas Technology Corp., Samsung Electronics Co., Ltd., Seiko Epson Corporation, STMicroelectronics, Texas Instruments Incorporated, and Toshiba America Electronic Components, Inc.; and |
| · | licensors of graphics technologies such as ARM Holdings plc, and Imagination Technologies Group plc. |
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. Furthermore, competitors with greater financial resources may be able to offer lower prices than us, or they may offer additional products, services or other incentives that we may not be able to match. In addition, many of our competitors operate and maintain their own fabrication facilities and have longer operating histories, greater name recognition, larger customer bases, and greater sales, marketing and distribution resources than we do.
Our ability to compete will depend on, among other factors, our ability to:
| · | continue to keep pace with technological developments; |
| · | develop and introduce new products, services, technologies and enhancements on a timely basis; |
| · | become a preferred partner for operating system platforms, such as Android and Windows Mobile; |
| · | transition our semiconductor products to increasingly smaller line width geometries; |
| · | obtain sufficient foundry capacity and packaging materials; and |
| · | succeed in significant foreign markets, such as China and India. |
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.
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 is also shipping a platform solution. Additionally, Intel and AMD have each announced its intention to integrate a central processing unit, or CPU, and a GPU on the same chip, as evidenced by AMD’s announcement of its Fusion processor project and Intel’s introduction of Sandy Bridge products. 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 new consumer products and technologies which incorporate our products do not achieve market acceptance, our business could be negatively impacted.
The success of our business also depends on market acceptance of new consumer products and technologies, such as smartphones, smartbooks, tablets and other similar consumer electronics devices, which contain our products. As markets for these new consumer products emerge, we may encounter new sources of competition as well as customers who have different requirements than those in the PC business. If market acceptance of such products and technologies is not attained, our ability to compete and maintain or increase revenues will be adversely affected.
Our ability to be successful in emerging consumer product markets depends in part on our ability to cultivate new industry relationships in these market segments. As the number and variety of Internet-connected devices increase, we will need to improve the functionality of our products to succeed in these new markets, which may require significant time and resources on our part to design our products which could negatively impact our business.
We sell our products to a small number of customers and our business could suffer if we lose any of these customers.
We receive a significant amount of our revenue from a limited number of customers. Aggregate sales to customers in excess of 10% of total revenue for fiscal year 2011, was 12% from one customer. Aggregate sales to customers in excess of 10% were approximately 12% of our total revenue from one customer for fiscal year 2010. Sales to our largest customers have fluctuated significantly from period to period primarily due to the timing and number of design wins with each customer, as well as the continued diversification of our customer base as we expand into new markets, and will likely continue to fluctuate dramatically in the future. Our operating results in the foreseeable future will continue to depend on sales to a relatively small number of customers, as well as the ability of these customers to sell products that incorporate our products. In the future, these customers may decide not to purchase our products at all, purchase fewer products than they did in the past, or alter their purchasing patterns in some other way, particularly because:
| · | substantially all of our sales are made on a purchase order basis, which permits our customers to cancel, change or delay product purchase commitments with little or no notice to us and without penalty; |
| · | our customers may develop their own solutions; |
| · | our customers may purchase products from our competitors; or |
| · | our customers may discontinue sales or lose market share in the markets for which they purchase our products. |
The loss of any of our large customers or a significant reduction in sales we make to them would likely harm our financial condition and results of operations.
If we fail to appropriately scale our operations in response to changes in demand for our existing products or to the demand for new products requested by our customers, our business and profitability could be materially and adversely affected.
To achieve our business objectives, it may be necessary from time to time for us to expand or contract our operations. In the future, we may not be able to scale our workforce and operations in a sufficiently timely manner to respond effectively to changes in demand for our existing products or to the demand for new products requested by our customers. In that event, we may be unable to meet competitive challenges or exploit potential market opportunities, and our current or future business could be materially and adversely affected. Conversely, if we expand our operations and workforce too rapidly in anticipation of increased demand for our products, and such demand does not materialize at the pace at which we expected, the rate of increase in our costs and operating expenses may exceed the rate of increase in our revenue, which would adversely affect our results of operations. In addition, if such demand does not materialize at the pace which we expect, we may be required to scale down our business through expense and headcount reductions as well as facility consolidations or closures that could result in restructuring charges that would materially and adversely affect our results of operations. Because many of our expenses are fixed in the short-term or are incurred in advance of anticipated sales, we may not be able to decrease our expenses in a timely manner to offset any decrease in customer demand. If customer demand does not increase as anticipated, our profitability could be adversely affected due to our higher expense levels.
Our past growth has placed, and any future long-term growth is expected to continue to place, a significant strain on our management personnel, systems and resources. To implement our current business and product plans, we will need to continue to expand, train, manage and motivate our workforce. All of these endeavors require substantial management effort. If we are unable to effectively manage our expanding operations, we may be unable to scale our business quickly enough to meet competitive challenges or exploit potential market opportunities, or conversely, we may scale our business too quickly and the rate of increase in our costs and expenses may exceed the rate of increase in our revenue, either of which would materially and adversely affect our results of operations.
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 business.
We do not manufacture the silicon 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 Company Limited, or TSMC, to manufacture our semiconductor wafers using their fabrication equipment and techniques. A substantial portion of our wafers are supplied by TSMC. 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 at any time 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 meet customer demand due to reduced or eliminated deliveries or have to increase the prices of our products, 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 and achieve initial production could be over a year, we do not have an alternative source of supply for our products. In addition, the time and effort to qualify a new foundry would result in additional expense, diversion of resources, and could result in 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 competitive pricing to respond to customer demand.
If our third-party foundries are not able to transition to new manufacturing process technologies or develop, obtain or successfully implement high quality, leading-edge process technologies our operating results and gross margin could be adversely affected.
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, 55 nanometer and 40 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 processes in order to have ample capacity for all of their customers and to develop the processes 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. 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 cannot be certain that our third-party foundries will be able to develop, obtain or successfully implement high quality, leading-edge process technologies needed to manufacturer our products profitably or on a timely basis or that our competitors (including those that own their own manufacturing facilities) will not develop such high quality, leading-edge process technologies earlier. If our third party-foundries experience manufacturing inefficiencies, we may fail to achieve acceptable yields or experience product delivery delays. If our third-party foundries fall behind our competitors (including those that own their own manufacturing facilities), the development and customer demand for our products and the use of our products could be negatively impacted. Additionally, we cannot be certain that our third-party foundries will manufacture our products at a price that is competitive to what our competitors pay. If our third-party foundries do not charge us a competitive price, our operating results and gross margin will be negatively impacted.
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 potentially 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.
Global economic conditions may adversely affect our business and financial results.
Our operations and performance depend significantly on worldwide economic conditions. Uncertainty about current global economic conditions poses a continuing risk to 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 include conditions in the residential real estate and mortgage markets, expectations for inflation, labor and healthcare costs, access to credit, consumer confidence, and other macroeconomic factors affecting consumer and business spending behavior. These and other economic factors have reduced demand for our products in the past and could further harm our business, financial condition and 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 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. 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 ahas experienced severe downturn, which has harmeddownturns that have, and may continue toin the future harm our business and financial results.
Our business is directly affected by market conditions in the highly cyclical semiconductor industry, which is currently experiencing a severe downturn.industry. The semiconductor industry has been adversely affected by many factors, including the current global downturn, ongoing efforts by our customers to reduce 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 business, operating results and financial condition. If our actions to reduce our operating expenses to sufficiently offset these factors during this downturnwhen they occur are unsuccessful, our operating results will suffer.
Our failure to estimate customer demand properly could adversely affect our financial results.
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 may build inventories for anticipated periods of growth which do not occur or may build inventory anticipating demand for a product that does not materialize. 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:
| · | changes in business and economic conditions, including downturns in the semiconductor industry and/or overall economy; |
| · | changes in consumer confidence caused by changes in market conditions, including changes in the credit market, expectations for inflation, and energy prices; |
| · | 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. |
Any inability to sell products to which we have devoted resources could harm our business. In addition, cancellation or deferral of customer purchase orders could result in our holding excess inventory, 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 able to reduce our inventory purchase commitments in a timely manner in response to customer cancellations or deferrals. 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.
Conversely, if we underestimate our customers’ demand for our products, our third party manufacturing partners may not have adequate lead-time or capacity to increase production for us meaning that we 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 fulfill our customers’ orders on a timely basis, or at all, could damage our customer relationships, result in lost revenue, cause a loss in market share, impact our customer relationships or damage our reputation, any of which could adversely impact our business.
Because our gross margin for any period depends on a number of factors, our failure to forecast changes in any of these factors could adversely affect our gross 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. |
If we do not correctly forecast the impact of any of the relevant factors on our business, there may not be any actions we can take or we may not be able to take any possible actions 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.
Our revenue may fluctuate while our operating expenses are relatively fixed, which makes our results difficult to predict and could cause our results to fall short of expectations.
Demand for many of our revenue components fluctuatefluctuates and areis difficult to predict, and our operating expenses are relatively fixed and largely independent of revenue. Therefore, it is difficult for us to accurately forecast revenue and profits or losses in any particular period. Our operating expenses, which are comprised of research and development expenses and sales, general and administrative expenses represented 33% and restructuring and other charges, represented 36%, 25% and 28%38% of our total revenue for fiscal years 2009, 20082011 and 2007,2010 respectively. 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 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.quarter. 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 will be negatively impacted.
In September 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. In addition, in response to the current economic environment, we have commenced several cost reduction measures which are designed to reduce our operating 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 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 not necessarily indicative of results to be expected for a subsequent quarter or 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 difficulties in collecting accounts receivable, including from foreign customers, could harm our operating results and financial condition.
Our failureaccounts receivable are highly concentrated and make us vulnerable to estimate customer demand properlyadverse changes in our customers’ businesses, and to downturns in the industry and the worldwide economy. We recorded approximately 17% of our accounts receivable balance from two customers at January 30, 2011.
Difficulties in collecting accounts receivable could materially and adversely affect our financial results.
condition and results of operations. These difficulties are heightened during periods when economic conditions worsen. We manufacturecontinue 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 productscustomers to make required payments. This allowance consists of an amount identified for specific customers and an amount based on forecastsoverall estimated exposure. If the financial condition of customer demandour customers were to deteriorate, resulting in orderan impairment in their ability to have shorter shipment lead times and quicker delivery schedules for our customers. As a result,make payments, additional allowances may be required, we may 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, ourbe required to defer revenue recognition on sales to affected customers, and our supplierswe may be required to accurately forecast future product demand trends. In forecasting demand, we make multiple assumptionspay higher credit insurance premiums, 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. |
Any inability to sell products to which we have devoted resources could harm our business. In addition, cancellation or deferral of customer purchase orders could result in our holding excess inventory, which could adversely affect our gross margin and restrictoperating 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 abilityfinancial results.
We obtain credit insurance over the purchasing credit extended to fund operations. Additionally, because we often sellcertain customers. As a substantial portionresult of our products in the last monthtightening of each quarter,the credit markets, we may not be able to reduceacquire credit insurance on the credit we extend to these customers or in amounts that we deem sufficient. While we have procedures to monitor and limit exposure to credit risk on our inventory purchase commitments in a timely manner in response to customer cancellationsaccounts receivable, there can be no assurance such procedures will effectively limit our credit risk or deferrals. 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,avoid losses, which could negatively impactharm our financial results.
Conversely, if we underestimate our customers’ demand for our products, our third party manufacturing partners may not have adequate lead-timecondition or capacity to increase production for us meaning that we 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 fulfill our customers’ orders on a timely basis, or at all, could damage our customer relationships, result in lost revenue, cause a loss in market share, impact our customer relationships or damage our reputation, any of which could adversely impact our business.operating results.
Because our gross margin for any period depends on a number of factors, our failure to forecast changes in any of these factors could adversely affect our gross 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 decreased from 41.0% from the third quarter of fiscal year 2009. If we do not correctly forecast the impact of any of the relevant factors on our business, there may not be any actions we can take or we may not be able to take any possible actions in time to counteract any negative impact on our gross margin. Additionally, during fiscal year 2009, the revenue and gross margins from our sale of desktop products decreased primarily due to a decline in the Standalone Desktop market segment as reported in the December 2008 PC Graphics Report from Mercury Research. This decline was 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. If the overall shift in the demand from the consumer continues to shift towards lower priced products, it will have an adverse 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 may not be able to attract and retain qualified employees which 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 technology 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 addition, we rely on stock-based awards as a 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.
We are dependent on third parties for assembly, testing and packaging of our products, which reduce our control over the delivery schedule, product quantity or product quality.
Our products are assembled, tested and packaged by independent subcontractors, such as Advanced Semiconductor Engineering, Inc., Amkor Technology, JSI Logistics, Ltd., King Yuan Electronics Co., Siliconware Precision Industries Co. Ltd., and ChipPAC. As a result, we do not directly control our product delivery schedules, product quantity, or product quality. All of these subcontractors assemble, test and package 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 to find a replacement subcontractor we could experience significant delays in shipments of our products, product shortages, a decrease in the quality of our products, or an increase in product cost. 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 and revenue to decline.
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 are dependent on the personal computer market and its rate of growth in the future may have a negative impact on our business.
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 personal computer, or 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. 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 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,During fiscal years 2011, 2010 and 2009, we recorded a $196.0net warranty charges of $466.4 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 used in certain versions of our previous generation media and communications processor, or MCP and GPU products shipped after July 2008 and 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.configurations. Please refer tosee 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 withfurther information regarding this litigation.product defect.
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. Our engineering and technical resources included 4,161full-time employees as of January 30, 2011, 3,940 employees as of January 31, 2010 and 3,772 employees as of January 25, 2009, respectively. Research and development expenditures were $848.8 million, $908.9 million and $855.9 million for the fiscal years 2011, 2010 and 2009, respectively. Research and development expenses included stock-based compensation expense of $57.9 million, $151.8 million and $98.0 million for the fiscal years 2011, 2010 and 2009, respectively. Also included in research and development expense for fiscal year 2010 is stock-based compensation of $90.5 million related to the purchase of certain outstanding options that were tendered in March 2009. 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 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, 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.
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.States and other Americas. We generated 87%83%, 89%84% and 86%87% of our revenue for fiscal years 2009, 20082011, 2010 and 2007,2009, respectively, from sales to customers outside the United States and other Americas. As of January 25, 2009,30, 2011, we hadhave offices in fifteen16 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 Conditions outside the control of our products do not continue toindependent subcontractors and manufacturers may impact their business operations and thereby adversely interrupt our manufacturing and sales processes.
The economic, market, social, and political situations in countries where certain independent subcontractors and manufacturers are located are unpredictable, can be adopted by the desktop PC, notebook PC, workstation, high-performance computing, netbook, personal media player, or PMP, personal digital assistant, or PDA, cellular handheld device,volatile, and video game console markets or if the demand for new and innovative products in these markets decreases,can have a significant impact on our business because we may be unable to obtain or distribute product in a timely manner. Market and operating results would suffer.
Our success depends in part upon continued broad adoption of our processors for 3D graphicspolitical conditions, including currency fluctuation, terrorism, political strife, war, labor disruption, and multimedia in desktop PC, notebook PC, workstation, high-performance computing, netbooks, PMPs, PDAs, cellular 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,other factors, including climate change, natural or man-made disasters, adverse changes in pricing of dynamic random-access memory devicestax laws, tariff, import or export quotas, power and other changeswater shortages, or interruption in the total system cost of add-in boards, as well as byair transportation, in areas where our independent subcontractors and manufacturers are located could also have a 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 approximately 75%, 79% and 77% of our revenue during fiscal years 2009, 2008 and 2007, 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 desktop 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 negativelynegative impact on 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 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.capabilities. 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 successfully 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 rapidly declining average selling prices, reduced demand for our products or loss of market share any of which could cause our revenue, gross margin and 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 believe achieving design wins, which entails having our existing and future products chosen for hardware components or subassemblies designed by OEMs, ODMs, add-in board and motherboard manufacturers, is an integral part of 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 our customers’ new system configurations. This requires that we:
· | 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. |
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 systems until at least the next design configuration. Therefore, we endeavor to develop close relationships with our OEMs and ODMs, in an attempt to better anticipate and address customer needs in new products so that 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,because we rely heavily 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 ceasesTSMC 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 ofproduce a significant portion of our outstanding options to significantly exceed the current trading price ofsilicon wafers, earthquakes, typhoons or other natural disasters in Taiwan and Asia could limit our common stock, thus lessening the effectiveness of these stock-based awards. We may not continue to successfully attractwafer supply and retain key personnel which wouldthereby harm our business.business, financial condition, and operational results.
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
Our investment portfolio may become impaired by deterioration of the market values of our portfolio investments and in interest rates.capital markets.
We account for ourOur cash equivalent and short-term investment instruments in accordance with Statementportfolio as 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 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 realized in our Consolidated Statements of Operations due to changes in interest rates unless such securities are sold prior to 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 principally30, 2011 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. We follow an established investment policy and set of guidelines, designed to preserve principal, minimize risk, monitor and help mitigate our exposure to interest rate and credit risk. The policy sets forth credit quality standards and limits our exposure to any one issuer, as well as our maximum exposure to various asset classes, variety of financial instruments, consisting principally of cash and cash equivalents, commercial paper, mortgage-backed securities issued by Government-sponsored enterprises, money market funds and debt securities of corporations, municipalities and the United States government and its agencies.
Should financial market conditions worsen in the future, investments in some financial instruments may pose risks arising from market liquidity and credit concerns. In addition, any deterioration of the capital markets could cause our other income and expense to vary from expectations. As of January 25, 2009,30, 2011, we did not have any investments in auction-rate preferred securities. As of January 25, 2009,had no material impairment charges associated with our investments in government agencies and government sponsored enterprises represented approximately 71% of our totalshort-term 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 whatalthough we believe is an other than temporaryour current investment portfolio has very little risk of material impairment, ofwe cannot predict future market conditions or market liquidity, or credit availability, and can provide no assurance that 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 Partners and Customers
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 business.
We do not manufacture the silicon 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 wafers 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 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 meet customer demand due to reduced or eliminated deliveries or have to increase the prices of our products, 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, 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 additional 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 productsportfolio will depend on reliable relationships with the third-party manufacturers we use to ensure adequate product supply and 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 potentially 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 third 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 subcontractors, such as Advanced Semiconductor Engineering, Inc., Amkor Technology, JSI Logistics, Ltd., King Yuan Electronics Co., Siliconware Precision Industries Co. Ltd., and ChipPAC. As a result, we do not directly control our product delivery schedules, product quantity, or product quality. All of these subcontractors assemble, test and package 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 to find a replacement subcontractor we could experience significant delays in shipments of our products, product shortages, a decrease in the quality of our products, or an increase in product cost. 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 and revenue to decline.
Failure to transition to new manufacturing process technologies could adversely affect our 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.materially unimpaired.
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.
Risks 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 ofyears 2011, 2010 and 2009 we recorded a $196.0cumulative net warranty charges of $475.9 million, chargeof which $466.4 million has been charged against cost of revenue, to cover anticipated customer warranty, repair, return, replacement and other associated costs arising from a weak die/packaging material set used in certain versions of our previous generation MCP and GPU products shipped after July 2008 and used in notebook systems.configurations. 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, testingTesting suggests a weak material set of die/package combination, system thermal management designs, and customer use patterns are contributing factors.factors for these failures. We continue to engage in discussionshave worked with our supply chain regarding reimbursementcustomers to usdevelop and have made available for some or alldownload a software driver to cause the system fan to begin operation at the powering up of the costs wesystem and reduce the thermal stress on these chips. We have incurredalso recommended to our customers that they consider changing the thermal management of the products in their notebook system designs. We intend to fully support our customers in their repair and may incur inreplacement of these impacted products that fail, and their other efforts to mitigate 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. 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.
In September, October and November 2008, several putative securities 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 GPUs and cards. In October 2008, the DOJ formally notified us that the DOJ investigation had been closed. No specific allegations were made against NVIDIA during the investigation.
Several putative civil complaints were filed against us by direct and indirect purchasers of GPUs, asserting federal 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. The indirect purchasers’ consolidated amended complaint also asserts a variety of state law antitrust, unfair competition and consumer protection claims on the same allegations, as well as a common law claim for unjust enrichment.
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, if 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 business. 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 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 matters relating to the Board of Director’s 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.
In August 2006, we announced that the Audit Committee of our 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 conclusion that incorrect measurement dates were used for financial accounting purposes for stock option grants in certain prior periods. As a result, we recorded additional non-cash stock-based compensation expense, and related tax effects, related to stock option grants. Ten derivative complaints were filed in state and federal court pertaining to allegations relating to stock option grants. In September 2008, we entered into Memoranda of Understanding regarding the settlement of the stockholder 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 board of directors or executive officers. While we expect the courts to approve the settlement agreements, there can be no assurance that they will approved. If the settlement agreements are not approved we may be required to pay damages or penalties or have other remedies imposed on us that could harm our business.
We are a party to other litigation, including patent litigation, which, if determined adversely to us, could adversely affect our cash flow and financial results.
We are a party to other litigation as both a defendant and as a plaintiff. For example, we are engaged in litigation with Intel Corporation, Rambus CorporationInc. and with various parties related to our acquisition of 3dfx in 2001. Please refer to Note 1213 of thethese 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 any litigation to which we are a party will be resolved in our favor. Any claim that is successfully decided against us may cause us to pay substantial damages, including punitive damages, and other related fees.fees or prevent us from selling or importing certain of our products. Regardless of whether 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.
Changes in United States tax legislation regarding our foreign earnings could materially impact our business.
Currently, a majority of our revenue is generated from customers located outside the United States, and a significant portion of our assets, including employees, are located outside the United States. United States income taxes and foreign withholding taxes have not been provided on undistributed earnings for certain non-United States subsidiaries, because such earnings are intended to be indefinitely reinvested in the operations of those subsidiaries. Throughout the period of President Obama’s administration and as recently as on February 14, 2011 with the release of the administration’s fiscal year 2012 budget, the White House has proposed various international tax legislation, some of which, if enacted into law would substantially reduce our ability to defer United States taxes on such indefinitely reinvested non-United States earnings, eliminate certain tax deductions until foreign earnings are repatriated to the United States and/or otherwise cause the total tax cost of U.S. multinational corporations to increase. If these or similar proposals are constituted into legislation in the current or future year(s), they could have a negative impact on our financial position and results of operations.
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.
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 jurisdictions. Our patents and pending patent applications primarily relate to our products and the technology used in connection with our products. We also rely on international treaties, 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 DOJDepartment of Justice 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.
InDuring fiscal year 2009, we used approximately $183.8 million of our cash to purchasepurchased 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 limited experience in the ownership and management of real property and are subject to the risks of owning real property, including:
| · | the possibility of environmental contamination and the costs associated with fixingmitigating any environmental problems; |
| · | adverse changes in the value of these properties, due to interest rate changes, changes in the neighborhoodmarket 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. |
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 optionequity incentive 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 remain 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 weWe record compensation expense for stock options, restricted stock units and our employee stock purchase plan using the fair value of those awards.awards in accordance with generally accepted accounting principles in United States of America, or U.S. GAAP. Stock-based compensation expense resulting from our compliance with SFAS No. 123(R), was $100.4 million, $107.1 million and $162.7 million $133.4 million and $116.7 million for the fiscal years 2011, 2010 and 2009, 2008 and 2007, respectively, related to on-going vesting of equity awards, which negatively impacted our operating results. Additionally, on February 11,in March 2009, we announced that our Board of Directors approvedcompleted a cash tender offer forto purchase certain employee stock options. The tender offer commenced on February 11, 2009 and expired at 12:00 midnight (Pacific Time) on March 11, 2009. AsA total of January 25, 2009, there were approximately 33.128.5 million options eligible to participate in the tender offer. If all these options were tendered and accepted inunder the offer thefor an aggregate cash purchase price of $78.1 million, in exchange for these options would be approximately $92.0 million.the cancellation of the eligible options. As a result of the tender offer, we may incurincurred a non-recurring charge of up to approximately $150.0$140.2 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-basedstock 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. We believe that SFAS No. 123(R)expensing employee equity compensation will continue to negatively impact our operating results.
To the extent that SFAS No. 123(R)expensing employee equity compensation makes it more expensive to grant stock options and restricted stock units 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 well as our business and operating results.
We may be required to record a charge to earnings if our goodwill or amortizable intangible assets become impaired, which could negatively impact our operating results.
Under accounting principles generally accepted in the United States,U.S. GAAP, 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 from acquisitions 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 stock price continues to be volatile and investors may suffer losses.
Our stock has at times experienced substantial price volatility as a result of variations between our actual 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 1213 of thethese Notes to the 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. 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.
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,Although our management systems are designed to maintain compliance, we are subject to the European Union Directive on Restriction of Hazardous Substances Directive,cannot assure you that we have been or RoHS Directive, that restricts the use of a number of substances, including lead,will be at all times in complete compliance with such laws 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,regulations. If we violate 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. Failurefail to comply with any applicable environmental regulations could result inof them, a range of consequences could result, including costs, fines, suspension of production, excess inventory,import/export restrictions, sales limitations, criminal and civil liabilities or other sanctions. We could also be held liable for any and all consequences arising out of exposure to hazardous materials used, stored, released, disposed of by us or located at, under or emanating from our facilities or other environmental or natural resource damage.
Environmental laws are complex, change frequently and have tended to become more stringent over time. For example, the European Union and China are two among a growing number of jurisdictions that have enacted in recent years restrictions on the use of lead, among other chemicals, in electronic products. These regulations affect semiconductor packaging. There is a risk that the cost, quality and manufacturing yields of lead-free products may be less favorable compared to lead-based products or that the transition to lead-free products may produce sudden changes in demand, which may result in excess inventory.
There is also a movement to improve the transparency and accountability concerning the supply of minerals coming from the conflict zones of the Democratic Republic of Congo. New U.S. legislation includes disclosure requirements regarding the use of “conflict” minerals mined from the Democratic Republic of Congo and adjoining countries and procedures regarding a manufacturer’s efforts to prevent the sourcing of such “conflict” minerals. The implementation of these requirements could impact our ability to conduct businessaffect the sourcing and availability of minerals used in the countriesmanufacture of semiconductor devices. As a result, there may only be a limited pool of suppliers who provide conflict free metals, and we cannot assure you that we will be able to obtain products in sufficient quantities or states that have adopted these types of regulations.at competitive prices. Also, since our supply chain is complex, we may face reputational challenges with our customers and other stockholders if we are unable to sufficiently verify the origins for all metals used in our products.
Future environmental legal requirements may become more stringent or costly and our compliance costs and potential liabilities arising from past and future releases of, or exposure to, hazardous substances may harm our business and our reputation.
While we believe that we have adequate internal control over financial reporting, if we 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 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 test companies’ internal controls remains subject to some 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 that material weakness 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 generally accepted accounting principles in the United States.U.S GAAP. 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. Additionally, changes in existing accounting rules or practices, including the possible conversion to unified international accounting standards, could have a significant adverse effect on our results of operations or the manner in which we conduct our business.
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 our 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.Not applicable.
Our headquarters complex is located in 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.million. 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 seveneight other leased buildings with foursix used primarily as office buildings, one used primarily as warehouse space, and the other tworemaining 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; Beaverton, and Portland, Oregon; Bedford and Marion, Massachusetts; Bellevue and Bothell, Washington; Madison, Alabama; Durham, North Carolina; Greenville, South Carolina; Salt Lake City, Utah; St. Louis, Missouri; and Fort Collins and Boulder, Colorado.Colorado; and Charlottesville, VA. These facilities are used as design centers and/or sales and administrative offices.
Outside of the United States, we lease space in Hsin ChuHsinChu City, Taiwan; Tokyo, Japan; Seoul, Korea; Beijing, and Shanghai, China; Wanchai, and Shatin, New Territories, Hong Kong; Mumbai, India; Paris,Courbevoie, France; Moscow, Russia; Berlin and Munich, Germany; Helsinki, Finland; Theale and 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. We also lease spaces in Wurselen,Wuerselen, Germany; Shenzhen, China; Neihu,Taipei City, Taiwan; and Bangalore and Pune, India, which are used primarily as design centers. Additionally, we own buildings in Hyderabad, India and Shanghai, China which are being used primarily as 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 1213 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 and one of our indirect subsidiaries entered into an Asset Purchase Agreement, or APA, to purchase certain graphics chip assets from 3dfx. The transaction closed on April 18, 2001. That acquisition, and 3dfx's3dfx’s October 2002 bankruptcy filing, led to four lawsuits against NVIDIA: two brought by 3dfx's3dfx’s former landlords, one by 3dfx's3dfx’s bankruptcy trustee and the fourth by a committee of 3dfx's3dfx’s equity security holders in the bankruptcy estate. As of the date of the filing of this Annual Report on Form 10-K, the two landlord cases have been settled with payments from the landlords to NVIDIA, and the equity security holders lawsuit was dismissed with prejudice and no appeal was filed. Accordingly, only the bankruptcy trustee suit remains outstanding as more fully explained below.
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, 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, CarrAmerica Realty Corporation, or CarrAmerica. The landlords both asserted claims for, among other things, interference with contract, successor liability and fraudulent transfer. The landlords sought to recover damages in the aggregate amount of approximately $15 million, representing amounts then owed on the 3dfx leases. The cases were later removed to the United States Bankruptcy Court for the Northern District of California when 3dfx filed its bankruptcy petition and consolidated for pretrial purposes with an action brought by the bankruptcy trustee.
In 2005, the U.S. District Court for the Northern District of California withdrew the reference to the Bankruptcy Court for the landlords’ actions, and on November 10, 2005, granted our motion to dismiss both landlords’ complaints. The landlords filed amended complaints in early February 2006, and NVIDIA again filed motions to dismiss those claims. On September 29, 2006, the District Court dismissed the CarrAmerica action in its entirety and without leave to amend. 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. 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 CarrAmerica had standing to pursue claims 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 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, the Trustee appointed by the Bankruptcy Court to represent 3dfx’s bankruptcy estate served hisa complaint on NVIDIA. The Trustee’s complaint assertsNVIDIA asserting claims for, among other things, successor liability and fraudulent transfer and seeksseeking additional payments from us. The Trustee'sTrustee’s fraudulent transfer theory alleged that NVIDIA had failed to pay reasonably equivalent value for 3dfx's3dfx’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'sTrustee’s successor liability theory alleged NVIDIA was effectively 3dfx's3dfx’s legal successor and therefore was therefore responsible for all of 3dfx's3dfx’s unpaid liabilities. This action was consolidated for pretrial purposes with the landlord cases, as noted above.
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 find that the value of the 3dfx assets conveyed to NVIDIA was at least $108 million.
In early November 2005, after several months of mediation, NVIDIA and the Official Committee of Unsecured Creditors, or the Creditors’ Committee, agreed to a Plan of Liquidation of 3dfx, which included a conditional settlement of the Trustee’s claims against us. This conditional settlement was subject to a confirmation process through a vote of creditors and the review and approval of the Bankruptcy Court. The conditional settlement 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. The Trustee advised that he intended to object to the settlement. The conditional settlement never progressed substantially through the confirmation process.
On December 21, 2006, the Bankruptcy Court scheduled a trial for one portion of the Trustee’s case against NVIDIA. On January 2, 2007, NVIDIA terminated the settlement agreement on grounds that the Bankruptcy 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'sTrustee’s constructive fraudulent transfer claims against NVIDIA. Specifically, the Bankruptcy Court tried four questions: (1) what did 3dfx transfer to NVIDIA in the APA?;APA; (2) of what was transferred, what qualifies as "property"“property” subject to the Bankruptcy Court'sCourt’s avoidance powers under the Uniform Fraudulent Transfer Act and relevant bankruptcy code provisions?;provisions; (3) what is the fair market value of the "property"“property” identified in answer to question (2)?; and (4) was the $70 million that NVIDIA paid "reasonably equivalent"“reasonably equivalent” to the fair market value of that property?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'parties’ contentions and evidence and concluded that "the“the creditors of 3dfx were not injured by the Transaction."” This decision did not entirely dispose of the Trustee'sTrustee’s action, however, as the Trustee'sTrustee’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.
The District Court’s hearing on the Trustee’s appeal was held on June 10, 2009. On December 20, 2010, the District Court whereissued an Order affirming the appeal is pending.Bankruptcy Court’s entry of summary judgment in NVIDIA’s favor. On January 19, 2011, the Trustee filed a Notice of Appeal to the United States Court of Appeals for the Ninth Circuit.
While the conditional settlement reached in November 2005 never progressed through the confirmation process, the Trustee’s case still remains pending on appeal. As such,Accordingly, 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 Equity Committee Lawsuit
On December 8, 2005, the Trustee filed a Form 8-K on behalf of 3dfx, disclosing the terms of the conditional settlement agreement between NVIDIA and the Creditor’s Committee. Thereafter, certain 3dfx shareholders filed a petition with the Bankruptcy Court to appoint an official committee to represent the claimed interests of 3dfx shareholders. The court granted that petition and appointed an Equity Securities Holders’ Committee, or the Equity Committee. The Equity Committee thereafter 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 its own competing plan of reorganization/liquidation. The Equity Committee’s plan assumes that 3dfx can raise additional equity capital that would be used to retire all of 3dfx’s debts, and thus to trigger NVIDIA's obligation to pay six million shares of stock consideration specified in the APA. NVIDIA contends, among other things, that such a commitment is not sufficient and that its obligation to pay the stock consideration had long before been extinguished. On May 1, 2006, the Equity Committee filed its lawsuit for declaratory relief to compel NVIDIA to pay the stock consideration. In addition, the Equity Committee filed a motion seeking 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 approved the proposed protections.
After the Bankruptcy Court denied our motion to dismiss on September 6, 2006, the Equity Committee again amended its complaint, and NVIDIA moved to dismiss that amended complaint as well. On December 21, 2006, the Bankruptcy Court granted the motion as to one of the Equity 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 Committee seeks determinations that (1) the APA was not terminated before 3dfx filed for bankruptcy protection, (2) the 3dfx bankruptcy estate still holds some rights in the APA, and (3) the APA is capable of being assumed by the bankruptcy estate.
Because of the trial of the Trustee's fraudulent transfer claims against NVIDIA, the Equity Committee's lawsuit did not progress substantially in 2007. On July 31, 2008, the Equity Committee filed a motion for summary judgment on its first three causes of action. On September 15, 2008, NVIDIA filed a cross-motion for summary 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 effect 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, 2009, and the judgment is now final.
Proceedings, SEC inquiry and lawsuits related to our historical stock option granting practices
In June 2006, the Audit Committee of the Board of NVIDIA ("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 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. Rambus Inc.
We voluntarily contacted the SEC regarding the Audit Committee’s review. In late August 2006, the SEC initiated an inquiry related to our historical stock option grant practices. In October 2006, we met with the SEC and provided it with a review of the status of the Audit Committee’s review. In November 2006, we voluntarily provided the SEC with additional documents. We continued to cooperate with the SEC throughout 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. The California Superior Court cases were subsequently consolidated 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. Plaintiffs in these actions allege claims for, among other things, breach of fiduciary duty, unjust enrichment, insider selling, abuse of control, gross mismanagement, waste, and constructive fraud. 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. 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.
On August 5, 2007, our Board authorized the formation of a Special Litigation Committee to investigate, 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 derivative actions concerning our historical stock option granting practices. On November 10, 2008, the definitive settlement agreements were concurrently filed in the Chancery Court of Delaware and the United States District Court for the 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 board of directors or executive officers. The terms of the settlement agreements include, among other things, the agreement by the 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 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 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 Delaware Chancery Court and, on the same date, the Court entered a Final Order and Judgment, which approved the requested attorneys' fees and dismissed the Delaware action with prejudice. The final approval hearing in the Northern District of California is scheduled for 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 GPUs and cards. On October 10, 2008, the DOJ formally notified us that the DOJ investigation has been closed. No specific allegations were made against NVIDIA during the investigation.
As of January 25, 2009, over 50 civil complaints have been filed against us. The majority of the complaints were filed in the Northern District of California, several were filed in the Central District of California, and other cases were filed in several other Federal district courts. On 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 purport to assert federal 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. The indirect purchasers’ consolidated amended complaint also asserts a variety of state law antitrust, unfair competition and consumer protection claims on the same allegations, as well as a common law 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, ordered 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 certification 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 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 those 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 injunctive relief. The lawsuit was filed in 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 actionproceeding in the San Francisco division of the Northern District of California. On April 13, 2009, the Court issued an order staying motion practice and allowing only certain document discovery to proceed. On February 11, 2011, the Court lifted the stay and ordered that discovery on other issues may now proceed. A case management conference in the case pending in the Northern District of California is currently scheduled for March 30, 2009. June 3, 2011.
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 of nine Rambus patents against NVIDIA and 14 other respondents with the U.S. International Trade Commission, or ITC. Rambus has subsequently withdrawn four of the nine patents at issue. The complaint seekssought an exclusion order barring the importation of products that allegedly infringe ninethe now five Rambus patents. The ITC has instituted the investigation.investigation and a hearing was held October 13-20, 2009. The Administrative Law Judge issued an Initial Determination on January 22, 2010, which found the asserted claims of two patents in one patent family infringed but invalid, and the asserted claims of three patents in a separate patent family, valid, infringed and enforceable. This decision was reviewed by the ITC. The ITC issued a Final Decision on July 26, 2010. In its Final Decision, the ITC found that NVIDIA infringed three related patents and issued a limited exclusion order prohibiting import of certain NVIDIA products. NVIDIA is appealing certain aspects of the ruling that were unfavorable to NVIDIA. Rambus is also appealing certain aspects of the ruling that were unfavorable to Rambus.
NVIDIA also sought reexamination of the patents asserted in the ITC, as well as other patents, in the United States Patent and Trademark Office, or USPTO. Proceedings are underway with respect to all challenged patents. With respect to the claims asserted in the ITC, the USPTO has issued a preliminary ruling invalidating many of the claims. The USPTO has issued Right to Appeal Notices for the three patents found by the administrative law judge to be valid, enforceable and infringed. In the Right to Appeal Notices, the USPTO Examiner has cancelled all asserted claims of one of the patents and allowed the asserted claims on the other two patents. Rambus and NVIDIA are both seeking review of the USPTO Examiner's adverse findings. NVIDIA intends to pursue its offensive and defensive cases vigorously.vigorously in both actions.
Rambus has also been subject to an investigation in the European Union. NVIDIA was not a party to that investigation, but has recently sought to intervene in the appeal of the investigation. As a result of Rambus’ commitments to resolve that investigation, for a period of five years from the date of the resolution, Rambus must now provide a license to memory controller manufacturers, sellers, and/or companies that integrate memory controllers into other products. The license terms are set forth in a license made available on Rambus’ website, or the Required Rambus License. On August 12, 2010, we entered into the Required Rambus License. Pursuant to the agreement, Rambus charges a royalty of (i) one percent of the net sales price per unit for certain memory controllers and (ii) two percent of the net sales price per unit for certain other memory controllers, provided that the maximum average net sales price per unit for these royalty bearing products shall be deemed not to exceed a maximum of $20. The agreement has a term until December 9, 2014. However, NVIDIA may terminate the agreement on or after August 12, 2011 with thirty 30 days prior written notice to Rambus.
On December 1, 2010, Rambus filed a new lawsuit against NVIDIA and several other companies alleging six claims for patent infringement. This lawsuit is pending in the Northern District of California and seeks damages, enhanced damages and injunctive relief. On the same day, Rambus filed a complaint with the ITC alleging that NVIDIA and several other companies violated 19 U.S.C. Section 1337 based on a claim of patent infringement of three Rambus patents. Rambus seeks exclusion of certain NVIDIA products from importation into the United States. The Northern District of California has stayed the case pending resolution of the ITC investigation. The asserted patents are related to each other, and the three patents in the ITC complaint are also at issue in the lawsuit pending in the Northern District of California. Many of the patents at issue in the new lawsuits are also being challenged in Rambus’ other disputes with NVIDIA. NVIDIA intends to vigorously defend these new lawsuits.
Product Defect Litigation and Securities Cases
Product Defect Litigation
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.configurations. 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.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 to consolidate all of the aforementioned consumer class action cases. The District Court held a case management conference for the above cases on February 23, 2009. On February 26, 2009, the District Court consolidated the cases, as well as two other cases pending against Hewlett-Packard,Hewlett Packard, under the caption “The NVIDIA GPU Litigation” and ordered the plaintiffs to file lead counsel motions by March 2, 2009. On March 2, 2009, several of the parties filed motions for appointment of lead counsel and briefs addressing certain related issues. On April 10, 2009, the District Court appointed Milberg LLP lead counsel. On May 6, 2009, the plaintiffs filed an Amended Consolidated Complaint, alleging claims for violations of California Business and Professions Code Section 17200, Breach of Implied Warranty under California Civil Code Section 1792, Breach of the Implied Warranty of Merchantability under the laws of 27 other states, Breach of Warranty under the Magnuson-Moss Warranty Act, Unjust Enrichment, violations of the New Jersey Consumer Fraud Act, Strict Liability and Negligence, and violation of California’s Consumer Legal Remedies Act.
On August 19, 2009, we filed a motion to dismiss the Amended Consolidated Complaint, and the Court heard arguments on that motion on October 19, 2009. On November 19, 2009, the Court issued an order dismissing with prejudice plaintiffs causes of action for Breach of the Implied Warranty under the laws of 27 other states and unjust enrichment, dismissing with leave to amend plaintiffs’ causes of action for Breach of Implied Warranty under California Civil Code Section 1792 and Breach of Warranty under the Magnuson-Moss Warranty Act, and denying NVIDIA’s motion to dismiss as to the other causes of action. The Court gave plaintiffs until December 14, 2009 to file an amended complaint. On December 14, 2009, plaintiffs filed a Second Amended Consolidated Complaint, asserting claims for violations of California Business and Professions Code Section 17200, Breach of Implied Warranty under California Civil Code Section 1792, Breach of Warranty under the Magnuson-Moss Warranty Act, violations of the New Jersey Consumer Fraud Act, Strict Liability and Negligence, and violation of California’s Consumer Legal Remedies Act. The Second Amended Complaint seeks unspecified damages. On January 19, 2010, we filed a motion to dismiss the Breach of Implied Warranty under California Civil Code Section 1792, Breach of Warranty under the Magnuson-Moss Warranty Act, and California’s Consumer Legal Remedies Act claims in the Second Amended Consolidated Complaint. In addition, on April 1, 2010, Plaintiffs filed a motion to certify a class consisting of all people who purchased computers containing certain of our MCP and GPU products. On May 3, 2010, we filed an opposition to Plaintiffs’ motion for class certification. A hearing on appointmentboth motions was held on June 14, 2010. On July 16, 2010, the parties filed a stipulation with the District Court advising that, following mediation, they had reached a settlement in principle in The NVIDIA GPU Litigation. The settlement in principle was subject to certain approvals, including final approval by the court. As a result of lead counselthe settlement in principle, and the other estimated settlement and offsetting insurance reimbursements, NVIDIA recorded a net charge of $12.7 million to sales, general and administrative expense during the second quarter of fiscal year 2011. In addition, a portion of the $181.2 million of additional charges we recorded against cost of revenue related to the weak die/packaging set during the second quarter of fiscal year 2011 relates to estimated additional repair and replacement costs related to the implementation of these settlements. On August 12, 2010, the parties executed a Stipulation and Agreement of Settlement and Release. On September 15, 2010, the Court issued an order granting preliminary approval of the settlement and providing for notice to the potential class members. The Final Approval Hearing was held on December 20, 2010, and on that same day the Court approved the settlement and entered Final Judgment over several objections. In January 2011, several objectors filed Notices of Appeal of the Final Judgment to the United States Court of Appeals for the Ninth Circuit.
On February 28, 2011, a group of purported class members filed a motion with the District Court purporting to seek enforcement of the settlement. The Motion claimed that NVIDIA was not properly complying with its obligations under the settlement in connection with the remedies provided to purchasers of Hewlett-Packard computers included in the settlement. On March 4, 2011, NVIDIA and Class Counsel at Milberg LLP filed oppositions to the Motion. A hearing is scheduled for March
23, 2009. The District Court also ordered that a consolidated amended complaint be filed on or before May 6, 2009.
28, 2011.
Securities Cases
In September 2008, three putative securities class actions, or the Actions, were filed in the United 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.Act. 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'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'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 inOn November 5, 2009, the Court of Appeals. We intendAppeals issued an opinion reversing the District Court’s appointment of one of the lead plaintiffs’ counsel, and remanding the matter for further proceedings. On December 8, 2009, the District Court appointed Milberg LLP and Kahn Swick & Foti, LLC as co-lead counsel. On January 22, 2010, Plaintiffs filed a Consolidated Amended Class Action Complaint for Violations of the Federal Securities Laws, asserting claims for violations of Section 10(b), Rule 10b-5 and Section 20(a) of the Exchange Act. The consolidated complaint sought unspecified compensatory damages. We filed a motion to take all appropriate actiondismiss the consolidated complaint in March 2010 and a hearing was held on June 24, 2010 before Judge Seeborg. On October 19, 2010, Judge Seeborg granted our motion to dismiss with respectleave to the above cases.amend. On December 2, 2010, co-Lead Plaintiffs filed a Second Consolidated Amended Complaint and NVIDIA filed a motion to dismiss on February 14,2011.
Intel Corporation
Litigation
On February 17, 2009, Intel Corporation filed suit against NVIDIA, Corporation, seeking declaratory and injunctive relief relating to a licensinglicense agreement that the parties signed in 2004. The lawsuit was filed in Delaware Chancery Court. Intel seekssought 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 licensinglicense rights for these products. The lawsuit seekssought no damages from NVIDIA. If Intel successfully obtains such a court
On March 23, 2009, NVIDIA filed its answer to Intel’s complaint and also asserted counterclaims for declaratory relief, injunctive relief, breach of contract, and breach of the implied covenant of good faith and fair dealing. NVIDIA’s counterclaims sought an order we could be unabledeclaring that NVIDIA has the right to sell certain chipset products with Intel’s processors under the 2004 license agreement, and enjoining Intel from interfering with our MCPlicense rights. In addition, the counterclaims sought a finding that Intel had materially breached its obligations under a prior license agreement, and requested various remedies for that breach, including termination of Intel’s cross licensing rights and damages. On April 16, 2009, Intel filed its answer to our counterclaims.
As described below, on January 10, 2011, NVIDIA and Intel entered into a patent cross license agreement. Pursuant to this patent cross license agreement, NVIDIA and Intel also agreed to dismiss the Delaware litigation, and each party gave the other a general release for all claims that it might have against the other, known or unknown, based on the actions of either party on or before the date of the settlement. By stipulation of the parties, the Delaware Chancery Court dismissed the lawsuit with prejudice on January 12, 2011.
Patent Cross License Agreement
On January 10, 2011, we entered into a new six-year patent cross licensing agreement, or the License Agreement, with Intel. Under the License Agreement, Intel has granted to NVIDIA and its qualified subsidiaries, and NVIDIA has granted to Intel and Intel’s qualified subsidiaries, a non-exclusive, non-transferable, worldwide license, without the right to sublicense to all patents that are either owned or controlled by the parties at any time that have a first filing date on or before March 31, 2017, to make, have made (subject to certain limitations), use, sell, offer to sell, import and otherwise dispose of certain semiconductor- and electronic-related products for useanywhere in the world. NVIDIA’s rights to Intel’s patents have certain specified limitations, including but not limited to, NVIDIA was not granted a license to: (1) certain microprocessors, defined in the License Agreement as “Intel Processors” or “Intel Compatible Processors;” (2) certain chipsets that connect to Intel Processors; or (3) certain flash memory products. In connection with the License Agreement, NVIDIA and Intel processorsmutually agreed to settle all outstanding legal disputes. Under the License Agreement, Intel will pay NVIDIA an aggregate amount of $1.5 billion, payable in annual installments, as follows: a $300 million payment on each of January 18, 2011, January 13, 2012 and our competitive position would be harmed. NVIDIA’s response to the Intel complaint is currently dueJanuary 15, 2013 and a $200 million payment on March 23, 2009. NVIDIA disputes Intel’s positionseach of January 15, 2014, 2015 and intends to vigorously defend the case.2016.
No matters were submitted to a vote of our security holders during the fourth quarter of fiscal year 2009.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
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 10, 2009,2011, we had approximately460 426 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:
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| Fiscal year ending January 31, 2010 | | | | | | |
First Quarter (through March 10, 2009) | | | | | | | | |
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| Fiscal year ended January 25, 2009 | | | | | | |
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Fiscal year ended January 27, 2008 | | | | | | | | |
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(1) Reflects a three-for-two stock split effective on September 10, 2007.
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| Fiscal year ending January 29, 2012 | | | | | | |
First Quarter (through March 10, 2011) | | | 26.17 | | | | 17.90 | |
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Dividend Policy
We have never paid and do not expect to pay cash dividends for the foreseeable future.
Issuer Purchases of Equity Securities
During fiscal year 2005, we announced that our Our Board of Directors or Board, hadhas 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,us, subject to certain specifications, to repurchase shares of our common stock up to an aggregate maximum amount of $2.7 billion through May 2010.
2013. 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 Rule 10b-18 of 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, weWe did not enter into any structured share repurchase transactions or otherwise purchase any shares of our common stock. Duringstock 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.2011. Through fiscal year 2009,January 30, 2011, 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, 2009,30, 2011, 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. 2013.
Additionally, during fiscal year 2009,2011, we granted approximately 17.95.8 million stock options and 7.1 million restricted stock units, or RSUs, under the 2007 Equity Incentive Plan. Please refer to Note 23 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 related to our March 2009 stock option purchase and stock optionsrelated to equity awards granted under our equity incentive program.programs.
Stock Performance Graphs
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 25, 2009.30, 2011. The graph assumes that $100 was invested on January 25, 200429, 2006 in our common stock or on January 31, 200429, 2006 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.
| | | 1/25/2004 | | | 1/30/2005 | | | 1/29/2006 | | | 1/28/2007 | | | 1/27/2008 | | | 1/25/2009 | |
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*$100 invested on January 25, 2004 in stock or index, including reinvestment of dividends. Indexes calculated on month-end basis.
| | | 1/29/2006 | | | 1/28/2007 | | | 1/27/2008 | | | 1/25/2009 | | | 1/31/2010 | | | 1/30/2011 | |
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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, 2009.30, 2011. 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 | |
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*$100 invested on January 21, 1999 in stock or December 31, 1998, in index, including reinvestment of dividends. Indexes calculated on month-end basis.| | | 1/21/99 | | | 1/30/00 | | | 1/28/01 | | | 1/27/02 | | | 1/26/03 | | | 1/25/04 | | | 1/30/05 | | | 1/29/06 | | | 1/28/07 | | | 1/27/08 | | | 1/25/09 | | | 1/31/10 | | | 1/30/11 | |
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| NVIDIA Corporation | | $ | 100.00 | | | $ | 311.46 | | | $ | 846.88 | | | $ | 2,182.33 | | | $ | 339.00 | | | $ | 769.67 | | | $ | 762.67 | | | $ | 1,541.67 | | | $ | 2,098.00 | | | $ | 2,495.00 | | | $ | 771.00 | | | $ | 1,539.00 | | | $ | 2,376.00 | |
| S&P 500 | | $ | 100.00 | | | $ | 114.96 | | | $ | 113.93 | | | $ | 95.53 | | | $ | 73.54 | | | $ | 98.97 | | | $ | 105.13 | | | $ | 116.05 | | | $ | 132.89 | | | $ | 129.82 | | | $ | 79.67 | | | $ | 106.07 | | | $ | 129.61 | |
| S&P Semiconductors | | $ | 100.00 | | | $ | 180.33 | | | $ | 145.17 | | | $ | 112.96 | | | $ | 50.00 | | | $ | 99.52 | | | $ | 74.79 | | | $ | 86.48 | | | $ | 81.43 | | | $ | 75.88 | | | $ | 45.49 | | | $ | 71.41 | | | $ | 93.19 | |
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 statements of operations data for the years ended January 25, 2009,30, 2011, January 27, 200831, 2010 and January 28, 200725, 2009, and the consolidated balance sheet data as of January 25, 200930, 2011 and January 27, 200831, 2010 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 operations data forWe operate on a 52 or 53-week year, ending on the years ended January 29, 2006 and January 30, 2005 and the consolidated balance sheet data for the year ended January 28, 2007, January 29, 2006 and January 30, 2005 are derived from audited consolidated financial statements and the notes thereto which are not includedlast Sunday in this Annual Report on Form 10-K.
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| | | 2009 (B) | | 2008 (C) | | 2007 (C,D) | | 2006 (E) | | 2005 | |
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(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)January. Fiscal years 2011, 2009, 2008 and 2007 includewere 52-week years, while fiscal year 2010 was 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.53-week year.
(D) Fiscal year 2007 included a charge of $17.5 million associated with a confidential patent licensing arrangement.
(E) Fiscal year 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. | | | Year Ended | |
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| | | January 30, | | January 31, | | January 25, | | January 27, | | January 28, | |
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| (A) | Reflects a three-for-two stock-split effective September 10, 2007 and a two-for-one stock-split effective April 6, 2006. |
| (B) | We recorded a net warranty charge of $193.9 million, $94.0 million and $188.0 million, during fiscal years 2011, 2010 and 2009, respectively, which reduced income from operations to cover anticipated customer warranty, repair, return, replacement and other costs arising from a weak die/packaging material set used in certain versions of our previous generation MCP and GPU products shipped after July 2008 and used in notebook configurations. |
| (C) | On January 10, 2011, we entered into a new six-year cross licensing agreement with Intel and also mutually agreed to settle all outstanding legal disputes. For accounting purposes, the fair valued benefit prescribed to the settlement portion was $57.0 million, which was recorded within income from operations in fiscal year 2011. |
| (D) | Fiscal year 2010 includes impact of charge for a tender offer to purchase an aggregate of 28.5 million outstanding stock options for a total cash payment of $78.1 million. As a result of the tender offer the Company incurred a charge of $140.2 million, consisting of the remaining unamortized stock-based compensation expenses associated with the unvested portion of the options tendered in the offer, stock-based compensation expense resulting from amounts paid in excess of the fair value of the underlying options, plus associated payroll taxes and professional fees. |
| (E) | Fiscal year 2009 includes a $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. |
| (F) | 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. |
| (G) | Fiscal year 2007 included a charge of $17.5 million associated with a confidential patent licensing arrangement. |
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
Our Company
Our Company
NVIDIA Corporation isinvented the worldwide leadergraphics processing unit, or GPU, in 1999. Since then, we have strived to set new standards in visual computing technologies and the inventor of the graphic processing unit, or the GPU, a high-performance processor which generates realistic,with interactive graphics available on workstations, personal computers, game consoles,devices ranging from tablets and smart phones to notebooks and workstations. Our expertise in programmable GPUs and computer-systems technology has led to breakthroughs in parallel processing which make supercomputing inexpensive and widely accessible. We are strategically investing in three major areas – visual computing, high performance computing and mobile devices. Our products are designed to generate realistic, interactive graphics on consumer and professional computing devices.computing. We serve the entertainment and consumervisual computing market with our consumer GeForce graphics products theand professional design and visualization market with our Quadro graphics products,products; the high-performancehigh performance computing market with our Tesla computing solutions products,products; and the handheldmobile computing market with our Tegra computer-on-a-chipsystem-on-chip products.
We have three primary financial reporting segments – GPU, Professional Solutions Business, or PSB and Consumer Products Business, or CPB. During fiscal years 2010 and 2009, we operated and reported four major product-line operating segments: the GPU business, the professional solutionsPSB business, or PSB, the media and communications processor, or MCP, business, and the consumer products business, or CPB.CPB business. However, during the first quarter of fiscal year 2011, we began reporting internally the results of our former MCP segment along with the results of our GPU segment to reflect the way we manage the GPU business. Comparative periods presented reflect this change.
Our GPU business is comprised primarily of our GeForce discrete and chipset products thatwhich support desktop and notebook personal computers, or PCs, plus memory products. Our PSB is comprised of our NVIDIA Quadro professional workstation products and other professional graphics products, including our NVIDIA Tesla high-performance computing products. Our MCP business is comprised of NVIDIA nForce core logic and motherboard GPU, or mGPU products. Our CPB is comprised of our Tegra and GoForce mobile brands and products thatwhich support netbooks, personal navigation devices, or PNDs, handheldtablets, smartphones, personal media players, or PMPs, personal digital assistants, or PDAs, cellular phonesinternet television, automotive navigation, and other handheldsimilar devices. CPB also includes license, royalty, other revenue and associated costs related to video game consoles and other digital consumer electronics devices. Original equipment manufacturers, or OEMs, original design manufacturers, or ODMs, add-in-card manufacturers, system builders and consumer electronics companies worldwide utilize our processors as a core component of their entertainment, business and professional solutions.
We were incorporated in California in April 1993 and reincorporated in Delaware in April 1998. Our headquarter facilities are in Santa Clara, California. Our Internetweb address is www.nvidia.com. The contents of our website are not a part of this Form 10-K.
Recent Developments, Future Objectives and Challenges
GPU Business
During fiscal year 2011, we took the computational capabilities of our GPUs to a new level with the launch of our Fermi architecture. Fermi GPUs are designed to excel at tessellation, the key feature of DirectX 11, and to allow game developers to increase the level of physics realism via our PhysX API. Our flagship product for the desktop, the GeForce GTX 480, was followed by a complete line-up of 400-series GPUs. Later in the year, we refreshed them with our 500-series GPUs, which significantly increased the performance of the products they replaced while fitting into similar power envelopes. We also launched 400M- and 500M-series GPUs for notebooks, along with our Optimus technology, which switches invisibly between discrete GPU and integrated graphics controller depending on the user’s activities. By doing so, NVIDIA Optimus provides notebook users with the battery life of integrated graphics, but with the gaming performance of a discrete graphics processor. PC manufacturers also are expected to launch hundreds of new PCs that use these new GeForce GPUs paired with Intel Corporation’s Sandy Bridge CPUs.
Our GPU business is comprised primarily of our GeForce products that support desktop and notebook PCs, plus memory products. During fiscal year 2009,2011, we launched several newalso announced our plans to develop a custom central processing unit, or CPU, that will use the ARM instruction set. These CPU cores will be integrated into future generation GPUs in the GeForce family, including the GeForce 9600 GT, the GeForce 9800 GX2,for PCs, servers, 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.supercomputers.
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.
Professional Solutions Business
During fiscal year 2009,2011, our revenueQuadro business benefitted from Desktopthe strength of our Fermi architecture with the launch of the Quadro 2000 midrange GPU products declined approximately 29% comparedand the Quadro 600 entry-level GPU. These professional graphics solutions put the computational and visualization benefits of our Fermi architecture within reach of all engineers, designers and animators, with the Quadro 2000 delivering significantly higher performance across leading CAD applications and the Quadro 600 positioned at a competitive price/performance point. The new Quadro GPUs deliver performance that is up to five times faster for 3D applications and up to eight times faster for computational simulation than our previous Quadro generation products.
Our Tesla supercomputing business continued to make progress with key project wins not only in our core market segments, but also with traction in a number of new focus areas.
Consumer Products Business
During 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 that2011, 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 declinesaw promising signs 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 contributedTegra business, helped by adoption to the decline. As such, we noted that unit sales of our Notebook GPU products increased over 10% during fiscal year 2009 when comparedAndroid operating system. Tegra shipment volumes began to fiscal year 2008. However, the overall global economic recessionary climate contributed to a significant declineramp up late in the demand for total graphics during the fourth quarter of fiscal year 2009. If consumer preferences towards notebook PCs,2011 and away from desktop PCs,we expect the momentum to continue or escalate, we may see further declines in salesinto the first quarter of our Desktop GPU products. In addition, if the global economic climate does not recover during fiscal year 2010, or deteriorates further,2012, fueled by the production release of Android-based smartphone and tablet products. During the fiscal year 2011, we may see consumer preferences move towards lower-priced notebook PCs, which may negatively impact saleshad multiple Tegra 2 design wins in both tablets and smartphones. Our customers, including Acer Inc., Dell Inc., LG Electronics Inc. and Motorola Solutions, Inc., announced a number of products incorporating the Tegra 2 mobile processor. We also demonstrated our Notebook PC products.next-generation mobile processor, the world’s first quad-core mobile processor, at Mobile World Congress.
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 2009,2011, we launched several new Quadro solutions, includingannounced that Volkswagen AG and AUDI AG will use our next-generation Tegra starting in 2012. In addition, we announced that BMW Group will use our GPUs for infotainment systems in next-generation cars worldwide. Tesla Motors will also incorporate Tegra processors to power the Quadro FX 3600M Professional,infotainment, navigation 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.instrument cluster in its Roadster Model S.
Patent Cross License Agreement
During fiscal year 2009, On January 10, 2011, we also launched the Tesla C1060 computing processor and the Tesla S1070 computing system. Tesla isentered into a new familysix-year patent cross licensing agreement, or the License Agreement, with Intel. Under the License Agreement, Intel has granted to NVIDIA and its qualified subsidiaries, and NVIDIA has granted to Intel and Intel’s qualified subsidiaries, a non-exclusive, non-transferable, worldwide license, without the right to sublicense to all patents that are either owned or controlled by the parties at any time that have a first filing date on or before March 31, 2017, to make, have made (subject to certain limitations), use, sell, offer to sell, import and otherwise dispose of GPU computingcertain semiconductor- and electronic-related products anywhere in the world. NVIDIA’s rights to Intel’s patents have certain specified limitations, including but not limited to, NVIDIA was not granted a license to: (1) certain microprocessors, defined in the License Agreement as “Intel Processors” or “Intel Compatible Processors;” (2) certain chipsets that delivers processing capabilities for high-performance computing applications,connect to Intel Processors; or (3) certain flash memory products. In connection with the License Agreement, NVIDIA and marks our entry intoIntel mutually agreed to settle all outstanding legal disputes. Under the high-performance computing industry. License Agreement, Intel will pay NVIDIA an aggregate amount of $1.5 billion, payable in annual installments, as follows: a $300 million payment on each of January 18, 2011, January 13, 2012 and January 15, 2013 and a $200 million payment on each of January 15, 2014, 2015 and 2016.
The Tesla family also consistsLicense Agreement between NVIDIA and Intel includes multiple elements. As a result, we determined each element of the C870 GPU computing processor, the D870 Deskside SupercomputerLicense Agreement, their fair value 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 fractionwhen they should be recognized. The elements 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, weLicense Agreement are able to speed up general purpose compute-intensive applications like we doaccounted 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.follows:
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.
| 1. | Legal settlement: In connection with the License Agreement, both parties agreed to settle all outstanding legal disputes. The fair value allocated to the settlement of $57.0 million was recorded in the fourth quarter of fiscal year 2011, as a benefit to operating expense. |
| 2.. | License to Intel: We will recognize $1,583.0 million in total, or $66.0 million per quarter, as revenue over the term of the agreement of six years, the period over which Intel will have access to newly filed NVIDIA patents. We will commence recognition of the license revenue in April 2011 when our performance obligation under the agreement begins. Consideration received in advance of the performance period will be classified as deferred revenue. |
| 3. | License from Intel: We recognized $140.0 million as an intangible asset upon execution of the agreement. Amortization of $5.0 million per quarter will be charged to cost of sales over the seven year estimated useful life of the technology beginning in April 2011. |
Please refer to Note 4 of the Notes to the Consolidated Financial Statements in Part IV, Item 15 of this Form 10-K for further information regarding this cross license and the settlement.
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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.field, which could cause our revenue to decline. 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,During the second quarter of fiscal year 2011, we recorded a $196.0 millionan additional charge against cost of revenue to cover anticipatedthe estimated remaining 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. Allconfigurations. The net charge amounted to $193.9 million, of our newly manufactured products and allwhich $181.2 million was charged against cost of our products thatrevenue. The extra remediation costs are currently shipping in volume have a different material setprimarily due to additional platforms from late failing systems that we believe is more robust.had not previously considered to be at risk. Included in the charge are the estimated costs of implementing a settlement reached during the second quarter of fiscal year 2011 with the plaintiffs of a putative consumer class action lawsuit related to this same matter and the other estimated consumer class action settlement. As a result of this settlement, the other related estimated settlement, and offsetting insurance reimbursements, we recorded a net charge of $12.7 million to sales, general and administrative expense during the second quarter of fiscal year 2011. Together with the $282.0 million net charge we had previously recorded for related estimated costs, this brings the total cumulative net charge to $475.9 million, of which $466.4 million has been charged against cost of revenue and the remainder has been charged to sales, general and administrative expenses.
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, testingTesting suggests a weak material set of die/package combination, system thermal management designs, and customer use patterns are contributing factors.factors for these failures. 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. The weak die/packaging material combination is not used in any of our products that are currently in production.
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 securities class action lawsuits were filed against us, asserting various claims related to the impacted MCP and GPU products. Please refer to Note 1213 of the Notes to the Consolidated Financial Statements in Part IV, Item 15 of this Form 10-K for further information regarding this litigation.litigation and the settlement.
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.Tender Offer
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. Historically, we have seen stronger revenue in the second half of our fiscal year than in the first half of our fiscal year, primarily due to back-to-school and holiday demand. This seasonal trend did not occur in fiscal year 2009. Revenue in the second halfquarter 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
Tender Offer
On February 11, 2009,2010, 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, as amended, 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 allA total 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 eligible28.5 million 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 inunder the offer thefor an aggregate cash purchase price of $78.1 million, which was paid in exchange for these options would be approximately $92.0 million.the cancellation of the eligible options. As a result of the tender offer, we may incurincurred 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 ofduring fiscal year 2010 and represents stock-based compensation expense,of $140.2 million consisting of $124.1 million related to the remaining unamortized stock-basedstock based compensation expense associated with the unvested portion of the eligible options tendered in the offer, $11.6 million related to stock-based compensation expense resulting from amounts paid in excess of the fair value of the underlying options, if any, plus $4.5 million related to associated payroll taxes, professional fees and professional fees.other costs.
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.
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.U.S. GAAP. 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 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 andor 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 andor 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.product, as the level of returns cannot be reasonably estimated.
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 purchasersresellers of our products.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. We recognize a liability for these rebates at the later of the date at which we record the related revenue or the date at which we offer the rebate. 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.revenue.
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.depending on the nature of the program. 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 ourNVIDIA products. Depending on market conditions, 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. 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.
Royalty revenue is recognized related to the distribution or sale of products that use our technologies under license agreements with third parties. We recognize royalty revenue upon receipt of a confirmation of earned royalties and when collectability is reasonably assured from the applicable licensee.
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 overall estimated exposure. Our accounts receivable are highly concentrated and make us vulnerable to adverse changes in our customers'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 significant downturn. The current financial turmoil affectingthat affected the banking system and financial markets and increased the possibilityrisk that financial institutions maymighty consolidate or go out of business have resulted in a tightening in the credit markets, a lowlower than normal 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 thethis type of 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 maycould negatively impact our financial results. Furthermore, there can be no assurance that we will be able to continue to obtain credit insurance in the future. Our current credit insurance agreement expires on December 31, 2009.
As of January 25, 2009,30, 2011, our allowance for doubtful accounts receivable was $1.1$0.8 million and our gross accounts receivable balance was $336.8$386.5 million. Of the $336.8$386.5 million, $94.5$86.0 million was covered by credit insurance and $5.3$4.4 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. 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. We have incurred cumulative bad debts of $0.5 million over the last three fiscal years. As a percentageresult of our gross accounts receivable balance,low bad debt experience, our allowance for doubtful accounts receivable has ranged between 0.1%0.2% and 0.3% during fiscal years 20092011 and 2008,2010, respectively. As of January 25, 2009,30, 2011, our allowance for doubtful accounts receivable represented the high end of this range, at 0.3%0.2% of our gross accounts receivable balance.
Inventories
Inventory cost is computed on an adjusted standard basis;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 estimatedto the lower of cost or estimated market obsolescencevalue. Obsolete or unmarketable inventory equal to the difference between the cost of inventory and the estimated market valueis completely written off 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, 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. If actual market conditions are more favorable than expected and we sell products that we have previously written down, our reported gross margin would be favorably impacted.
As of January 25, 2009,30, 2011, our inventory reserve was $86.9$152.0 million. As a percentage of our gross inventory balance, our inventory reserve has ranged between 7.8%15.0% and 13.9%30.6% during fiscal years 20092011 and 2008.2010. As of January 25, 2009,30, 2011, our inventory reserve represented the high end of this range at 13.9%30.6% of our gross inventory balance.
Warranty Liabilities
Warranty Liabilities
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. 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,During fiscal year 2011, we recorded a $196.0 millionan additional charge against cost of revenue to cover anticipatedthe estimated remaining 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.configurations. The MCP and GPU productsnet charge amounted to $193.9 million, of which $181.2 million was charged against cost of revenue. The extra remediation costs are primarily due to additional platforms from late failing systems 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 failingwe had not previously considered to be at risk. Included in the field at higher than normal rates. Whilecharge are the estimated costs of implementing a settlement reached during fiscal year 2011 with the plaintiffs of a putative consumer class action lawsuit related to this same matter and another related estimated consumer class action settlement. As a result of this settlement, the other estimated settlement, and offsetting insurance reimbursements, we have notrecorded a net charge of $12.7 million to sales, general and administrative expense during fiscal year 2011. Together with the $282.0 million net charge we had previously recorded for related estimated costs, this brings the total cumulative net charge to $475.9 million, of which $466.4 million has been ablecharged against cost of revenue and the remainder has been charged to determine a root cause for these failures, testing suggests a weak material set of die/package combination, system thermal management designs,sales, general 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.administrative.
Determining the amount of the $196.0 million chargewarranty charges 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.
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, weWe 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 permanentlyindefinitely 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 25, 2009,30, 2011, we had a valuation allowance of $92.5 million. Of the total valuation allowance, $5.3$148.0 million relatesrelated to state tax attributes acquired inand 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 $87.2 million relates to state and foreign deferred tax assets that management determined are not likely to be realized due, in part, to projections of future taxable income.income and potential utilization limitations of tax attributes acquired as a result of stock ownership changes. To the extent realization of the deferred tax assets related to certain acquisitions becomes more-likely-than-not, recognition of these acquiredwe would recognize such deferred tax benefits would be reportedasset as a reduction to income tax expense in accordance with the recent 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 more-likely-than-not.occurred.
In accordance with Statement of Financial Accounting Standards No. 123(R), or SFAS No. 123(R), Share Based Payment, ourOur deferred tax assets do not include the excess tax benefit related to stock-based compensation that are a component of our federal and state net operating loss and research tax credit carryforwards in the amount of $588.7$565.2 million as of January 25, 2009.30, 2011. Consistent with prior years, the excess tax benefit reflected in our net operating loss and research tax credit carryforwards 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 autilize the 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.
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 weWe 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 is 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.expense. Please refer to Note 1314 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,goodwill 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 impairment by applying fair value-based tests to individual assets and liabilities. 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.
During the fourth quarter of fiscal year 2011, our market capitalization increased over 60% when compared to the same period in fiscal year 2010. We completed our most recent annual impairment test during the fourth quarter of fiscal year 20092011 and concluded that there was no impairment.impairment as the fair value of our reporting units exceeded their carrying value. This assessment iswas based upon a discounted cash flow analysis, analysis of market comparables, where appropriate, 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, determiningDetermining 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.
Our estimates of cash flows were based upon, among other things, certain assumptions about expected future operating performance, such as revenue growth rates, operating margins, risk-adjusted discount rates, and future economic and market conditions. 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 increases the risk of differences between the projected and actual performance. The long-term financial forecast representsforecasts that we utilize represent the best estimate that we have at this time and we believe that its underlying assumptions are reasonable. However,Significant differences between our estimates and actual performance in the near-term and longer-termcash flows could be materially different from these forecasts,affect our future financial results, which could impact our future estimates of the fair value of some or all of our reporting units. Determining the fair value of our reporting units also requires us to use judgment in the selection of appropriate market comparables, if there are any, and maythe amount of weight to ascribe to fair value measurements that are based on the market approach.
Any significant reductions in the actual amount of cash flows realized by our reporting units, reductions in the value of market comparables, or reductions in our market capitalization could impact future estimates of the fair value of our reporting units. Such events could ultimately result in a charge to our earnings in future periods due to the potential for a write-down of the goodwill in connectionassociated with such tests.some or all of our reporting units.
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 valueCash 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 maturities of greater than three months when purchased. We generally classify our marketable securities at the date of acquisition as available- for- sale. These securities are reported at fair value with the related unrealized gains and losses included in relatively short periodsaccumulated other comprehensive income (loss), a component of time. Statementstockholder’s equity, net of Financial Accounting Standards No. 157, or SFAS No. 157, Fair Value Measurements, establishes three levelstax. Any unrealized losses which are considered to be other-than-temporary impairments are recorded in the other income (expense) section of inputs that may be used to measure fair value.our consolidated statements of operations. Realized gains (losses) on the sale of marketable securities are determined using the specific-identification method and recorded in the other income (expense) section of our consolidated statements of operations. Please refer to Note 1718 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. Our Level 1 valuations areassets consist of our money market funds. We classify securities within Level 1 assets when the fair value is obtained from real-timereal time quotes for transactions in active exchange markets involving identical assets. Our available-for- sale securities are classified as having Level 2 valuationsinputs. Our Level 2 assets are obtained from quotedvalued utilizing a market approach where the market prices in active markets involvingof similar assets. Level 3 valuationsassets are based on unobservable inputsprovided by a variety of independent industry standard data providers 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 mostinvestment custodian. Most of our cash equivalents and marketable securities are valued based on Level 2 inputs,inputs. As of January 30, 2011, we collected the valuationbalance of our holdings ofinvestment in the Reserve International Liquidity Fund, Ltd., or International Reserve Fund, arethat was classified as a Level 3 input due to the inherent subjectivity and the significant judgment involved in its valuation. Total financial assets at fair valueAs such, we do not have any investment classified withinas Level 3 were 3.7% of total assets on our Consolidated Balance Sheet as of January 25, 2009.30, 2011.
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 consideredWe record a charge to be impairedearnings when a decline in fair value is significantly below cost basis and judged to be other-than-temporary, whenor have other indicators of impairments. If the resulting fair value of an available-for-sale debt instrument is significantly belowless than its amortized cost basis, and/oran other-than - temporary impairment is triggered in circumstances where (1) we intend to sell the significant decline has lasted for an extended period of time. The evaluationinstrument, (2) it is more likely than not that we usewill be required to determine whethersell the instrument before recovery of its amortized cost basis, or (3) a marketable securitycredit loss exists where we do not expect to recover the entire amortized cost basis of the instrument. If we intend to sell or it is impaired is based onmore likely than not that we will be required to sell the specific facts and circumstances present at the timeavailable-for-sale debt instrument before recovery of assessment, which include the consideration of general market conditions, the duration and extent to which fair value is belowits amortized cost and our intent and ability to holdbasis, we recognize an investment for a sufficient period of time to allow for recoveryother-than- temporary impairment in value. We also consider specific adverse conditions relatedearnings equal to the financial healthentire difference between the debt instruments’ amortized cost basis and its fair value. For available-for-sale debt instruments that are considered other-than-temporarily impaired due to the existence of a credit loss, if we do not intend to sell 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. Investmentsit is more likely than not that we identify as having an indicatorwill be required to sell the instrument before recovery of its remaining amortized cost basis (amortized cost basis less any current-period credit loss), we separate the amount of the impairment are subjectinto the amount that is credit related and the amount due to further analysis to determine if the investmentall other factors. The credit loss component is other than temporarily impaired,recognized 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.earnings.
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, Our stock-based compensation cost for equity awards 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 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 fair value of employee stock options on the date of grant using a binomial model.model and we use the closing trading price of our common stock on the date of grant as the fair value of awards of restricted stock units, or RSUs. 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 has determined that the use of implied volatility is expected to be more reflective of market conditions and, therefore, couldcan 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 binomial model, we estimated the fair value of the stock options granted under our stock option plans have been estimated using the following assumptions during the fiscal year ended January 25, 2009:30, 2011:
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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 25, 2009:
Weighted average expected life of stock options (in years)
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SFAS No. 123(R) Accounting standards also requiresrequire 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 our historical experience. If factors change and we employ different assumptions in the application of SFAS No. 123(R)accounting standards in future periods, the compensation expense that we record under SFAS No. 123(R)these accounting standards may differ significantly from what we have recorded in the current period.
Our stock-based compensation expense for employee stock purchase plan is recognized using an accelerated amortization method. We used the Black-Scholes model to estimate the fair value of shares issued under our employee stock purchase plan during the fiscal year ended January 30, 2011, using the following assumptions:
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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 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.U.S.GAAP. 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 operations expressed as a percentage of revenue.
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Fiscal Years Ended January 25, 2009,30, 2011, January 27, 200831, 2010 and January 28, 200725, 2009
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, PSB, MCP business, and CPB. Revenue in the "All Other" category is primarily derived from sales of components. Please refer to Note 16 of our Notes to the Consolidated Financial Statements in Part IV, Item 15 of this Form 10-K for further information.
Fiscal Year 20092011 vs. Fiscal Year 20082010
Revenue was $3.42$3.54 billion for the fiscal year 2011 and $3.33 billion for fiscal year 2009, compared to $4.10 billion for fiscal year 2008, which represents a decrease2010, an increase of 16%7%. For the first quarter of fiscal 2010,year 2012, we expect revenue to remain flat or improve slightly when comparedgrow by six to eight percent from the fourth quarter of fiscal year 2009.2011. A discussion of our revenue results for each of our operating segments is as follows:
GPU Business.Business. GPU businessBusiness revenue decreased by 24% to $1.91 billion for fiscal year 2009, compared5% 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, in2011 compared to $2.66 billion for fiscal year 2009 when compared to fiscal year 2008. These decreases were2010. The decrease was 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 an 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 MCP products as we continued to phase out our high-endchipset product line. Also sales of mainstream desktop GPU products. Salesdecreased as a result of lower unit shipments driven by weakness in our end customer markets related to unstable economic conditions and increased competition in the lower-end market segments. Offsetting these declines were increases in sales of our notebook GPU, high-end desktop GPU and memory products. The growth in sales of notebook GPU products was driven by a continuing shift in the market demand towards notebook PCs from desktop PCs as reported in the December 2010 PC Graphics Report from Mercury Research. The growth in memory sales and high-end desktop GPU products was driven primarily by the launch of our new generation of GPUs with Fermi architecture.
PSB. PSB revenue increased by 60% to $818.6 million for the fiscal year 2011 as compared to $510.0 million for fiscal year 2010. Both the average selling price, or ASP, and unit shipments of professional workstation products increased approximately 3%due to the recovery of corporate spending following the economic recession that began during fiscal year 2009. In addition, we saw strong growth in our Tesla products from the prior year as our high performance computing line gained traction fueled by the Fermi architecture release.
CPB. CPB revenue increased by 27% to $197.6 million for fiscal year 2011 as compared to $156.0 million for fiscal year 2010. This increase in CPB revenue was primarily driven by sales growth from ramp up in our Tegra 2 products, offset by decreases in embedded product revenues primarily related to the entertainment markets. Revenue from development arrangements and royalties from game console-related products increased slightly in fiscal year 20092011 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 2009.2010.
PSB.Fiscal Year 2010 vs. Fiscal Year 2009 PSB revenue increased by 18% to $693.4 million
Revenue was $3.33 billion for the fiscal year 2010 and $3.42 billion 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 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 our 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 combination 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 license 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 achievement of a unit-based milestone in our agreement with SCE.
Fiscal Year 2008 vs. Fiscal Year 2007
Revenue was $4.10 billion for fiscal year 2008, compared to $3.07 billion for fiscal year 2007, which represents an increase of 34%3%. A discussion of our revenue results for each of our operating segments is as follows:
GPU Business. GPU businessBusiness revenue increased by 47%3% to $2.52$2.66 billion infor fiscal year 2008,2010 compared to $1.71$2.59 billion infor fiscal year 2007. This improvement2009. The increase was primarily due to increaseddriven by sales of our desktop GPU products and notebook GPUION products. SalesThis was offset by a decrease in sales of our desktop GPU productsnotebook GPUs, driven primarily by a combination of a decline in unit demand and a decline in ASP as a result of increased by approximately 38%competition in the marketplace and due to share losses we experienced within the notebook segment, during calendar year 2009 compared to fiscalcalendar year 2007, primarily due to growth of the Standalone Desktop market2008 as reported in the December 2007November PC Graphics 2009 Report from Mercury Research. Our leadership position in the Standalone Desktop market was driven by our GeForce 8-based products. Sales of our notebook GPU products increased by approximately 114% compared to fiscal year 2007. Notebook GPU revenue growth was primarily due to share 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 shipments of products used in notebook PC design wins related to Intel’s Santa Rosa platform used in notebooks.
PSB. PSB revenue increaseddecreased by 29%26% to $588.4$510.2 million infor the fiscal year 2008,2010 as compared to $454.7$693.4 million infor fiscal year 2007. Our professional workstation product sales increased due to an overall increase in2009. Both the ASPs and 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 decreased, primarily due to GeForce 8-based products.the relatively slow recovery of corporate spending following the economic recession that began during fiscal year 2009.
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 decline in sales of our AMD-based platform products and sales of products related to our acquisition of ULi Electronics, Inc. in February 2006.
CPB. CPB revenue increased by 8%15% to $251.1$156.0 million infor fiscal year 2008,2010 as compared to $233.2$136.3 million infor fiscal year 2007. The overall2009. This increase in CPB revenue iswas primarily due to increased royaltiesdriven by sales growth from Sony Computer Entertainment, or SCE, butour embedded products for the automotive and entertainment markets, and was partially offset by decreasesa decrease in revenue from our cell phone products and our contractual development arrangements with SCE.and royalties from game console-related products in the comparative periods.
Concentration of Revenue
Concentration of Revenue
We generated 87%83%, 89%84% and 86%87% of our total revenue for fiscal years 2009, 20082011, 2010 and 2007,2009, respectively, from sales to customers outside the United States and other 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.
Revenue from significant customers, those representing approximately 10% or more of total revenue for the respective periods,dates, is summarized as follows:
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Gross Profit and Gross Margin
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, service arrangements and service arrangements.stock-based compensation related to personnel associated with manufacturing.
Gross margin is the percentage of gross profit to revenue. Our gross margin was 34.3%39.8%, 45.6%35.4% and 42.4%34.3% for fiscal years 2009, 20082011, 2010 and 2007,2009, respectively. Our gross margin is significantly impacted by the mix of products we sell. Product mix is often difficult to estimate with accuracy. Therefore, if we experiencesell and can vary in any period depending on that 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 may be negatively impacted.mix.
We will continue to focus onOur strategy for improving our gross margin relies upon delivering competitive product offerings that allow us to maintain our market leadership position and expand our addressable markets, lowering our product costs by delivering cost effectiveintroducing product architectures enhancing business processesthat take advantage of smaller process geometries and delivering profitable growth.improving our product mix. We expect gross margin to be in the range of 48.5% to 49.5% during the first quarter of fiscal year 2012.
A discussion of our gross margin results for each of our operating segments is as follows:
Fiscal Year 20092011 vs. Fiscal Year 20082010
Our gross margin declinedincreased to 34.3%39.8% in fiscal year 20092011 from 45.6%35.4% for fiscal year 2008.2010. The improvement in gross margin forwas driven primarily due to increased unit sales, mix and better ASPs of our high-end desktop GPU, notebook GPU and workstation products. Cost efficiencies and pricing decisions also helped margin improve in the current fiscal year. Additionally, fiscal year 2009 includes the impact of a $196.02010 included $11.4 million charge againstrelated to the Company’s tender offer to purchase certain stock options for personnel related to manufacturing which resulted in an adverse impact on gross margins that did not occur in fiscal year 2011.
Offsetting these favorable impacts, we recorded a net charge to cost of revenue in the amount of $181.2 million in fiscal year 2011 compared to cover anticipated customer warranty, repair, return, replacement and associated costs arising from$95.9 million in fiscal year 2010 related to a weak die/packagingpacking material set that was used 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 ourchips. Our gross margin was favorably impacted by sales of products that were previously written down and sales of such items improved gross margin by approximately 1.9% and 1.6% in fiscal years 2011 and 2010, respectively. Offsetting these releases are provisions for new inventory reserves. The net effect to gross margin from inventory reserves and sales of items previously written down was a 3.0% unfavorable impact in fiscal year 2009. Additionally, inventory reserves taken during2011 and a 0.2% favorable impact in 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.2010.
GPU Business. The gross margin of our GPU business decreasedBusiness remained comparable during fiscal year 2009 as compared to2011 and fiscal year 2008. This decrease was2010. While higher inventory reserves due to a charge against costfuture demand concerns in the first half of revenue to cover anticipated customerfiscal year 2011 and additional warranty repair, return, replacement and associated costsaccruals 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 ofreduced gross margin for fiscal year 2009,2011 when compared to fiscal year 2010, this was more than offset by higher unit sales, mix 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 shiftASPs in the mix of products towards lower priced products.high-end desktop and notebook product lines.
PSB. The gross margin of our PSB increased slightlyremained flat during fiscal year 20092011 as compared to fiscal year 2008. This increase was primarily2010. Improvements in gross margin as a result of better ASPs and shipment volumes in our Quadro product line were offset by higher inventory reserves recorded in fiscal year 2011, when compared to fiscal year 2010. Tesla gross margin improved due to increasedbetter production efficiencies was driven by lower product cost and higher unit sales, of our GeForce 9-based NVIDIA Quadro products, which 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.while ASPs remained stable.
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 20092011 as compared to fiscal year 2008.2010. This increase was primarily due to changesa result of better ASPs and higher unit shipment of our Tegra products as well as slightly better revenue from higher margin products and services, including development arrangements and royalties from game console-related products, 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.comparative periods.
Fiscal Year 20082010 vs. Fiscal Year 20072009
Our gross margin increased to 35.4% in fiscal year 2010 from 34.3% for fiscal year 2009. The improvement in gross margin was driven primarily by improved yields of our 55nm products, transition to 40nm products, as well as other manufacturing cost reductions, and more favorable product mix, particularly with increased sales of higher margin MCP products. Furthermore, during the first quarter of fiscal year 2010 our gross margin benefited from the sell-through of inventory that had previously been written down in the fourth quarter of fiscal year 2009. This did not have a significant impact on our gross margin for the remaining quarters in fiscal year 2010. Offsetting these improvements, we recorded a charge to cost of revenue, net of insurance reimbursement in the amount of $95.9 million in fiscal year 2010 compared to $189.3 million in fiscal year 2009 related to weak die/packing material set that was used in certain versions of our previous generation chips.
GPU Business. The gross margin of our GPU business increased during fiscal year 20082010 as compared to fiscal year 2007.2009. This increase was primarily duedriven by a shift in MCP product mix toward higher margin Intel-based and AMD-based platform products. We also recorded greater benefits to increased salescost of revenue for insurance reimbursement received and a reduction in the warranty charge arising from a weak die/packing material set in certain versions of our GeForce 8-series GPUs, which began selling in the third quarterprevious generation products as compared to prior year. Additionally, improving yields of fiscal year 2007. Our GeForce 8-series GPUs generally have higher gross margins than our previous generations of GPUs. Additionally, the more favorable costs of memory purchases55nm products, a transition to 40nm products, and other manufacturing cost reductions achieved during fiscal year 2008, positively impacted2010 contributed to improvements in gross margin. Offsetting these improvements were lower ASPs in our gross margin.mainstream desktop GPU products as well as in our notebook GPU products that we believe were driven by pricing pressures in the marketplace over the comparable period.
PSB. The gross margin of our PSB increaseddecreased during fiscal year 20082010 as compared to fiscal year 2007.2009. 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 increased during fiscal year 2008 as compared to fiscal year 2007. This increasedecrease was primarily due to a shiftdecline in product mix towards Intel-based platform products, which began to ramp up shipments afterASPs caused primarily by pricing pressure resulting from the third quarterrelatively slow recovery of corporate spending during fiscal year 2007, and inventory reserves2010 following the economic recession that we recorded as a charge to cost of revenuebegan during 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.2009.
CPB. The gross margin of our CPB decreased during fiscal year 20082010 as compared to fiscal year 2007.2009. This decrease was primarily due to a drop in gross profit realizedresult of declining revenue from sales of our high-end feature cellular phonehigher margin products and other handheld devices. However, increasedservices, including development arrangements and royalties from SCE during fiscal year 2008, offsetgame console-related products, in the decreases.comparative periods.
Operating Expenses
| | | Year Ended | | Year Ended | | | Year Ended | | Year Ended | |
| | | January 25, 2009 | | January 27, 2008 | | $ Change | | % Change | | January 27, 2008 | | January 28, 2007 | | $ Change | | % Change | | | January 30, 2011 | | January 31, 2010 | | | $ Change | | % Change | | January 31, 2010 | | | January 25, 2009 | | | $ Change | | % Change | |
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Research and Development
Fiscal Year 20092011 vs. Fiscal Year 20082010
Research and development expenses were $855.9decreased by $60.1 million, and $691.6 millionor 7%. The majority of the decrease was caused by stock-based compensation charges recorded during fiscal years 2009year 2010 of $90.5 million related to a tender offer that closed in March 2009. Depreciation and 2008, respectively,amortization decreased by $8.9 million due to assets being fully depreciated. These decreases were partially offset by an increase in compensation and benefits of $23.5 million primarily due to growth in headcount and an increase of $164.3$7.6 million for development expenses.
Fiscal Year 2010 vs. Fiscal Year 2009
Research and development expenses increased by $53.0 million, or 24%6%. The majority of the increase was primarily duecaused by stock-based compensation charges recorded during fiscal year 2010 of $90.5 million related to increasea tender offer that closed in salariesMarch 2009, offset by a reduction in ongoing stock-based compensation expense of $36.7 million resulting from the cancellation of stock options pursuant to the tender offer. Compensation and benefits by approximately $64.9 million primarily as a result of the net addition of approximately 500 personnel in departments related to research and development functions, offsetincreased by lower expenses during fiscal year 2009 related$11.9 million due to our variable compensation programs when compared to fiscal year 2008. Stock-based compensationadditional new hires and depreciation and amortization expense increased by $21.4$4.2 million primarily because of the impact of new hire and semi-annual stock awards granted subsequent to the third quarter of fiscal year 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 the first quarter of fiscal year 2009. Development expenses increased by $18.8 million primarily due to increaseproperty and equipment purchases. Additionally, our cost reduction initiatives across several discretionary spending areas resulted 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.
Fiscal Year 2008 vs. Fiscal Year 2007
Research and development expenses were $691.6 million and $553.5 million during fiscal years 2008 and 2007, respectively, an increase of $138.1 million, or 25%. The increase is primarily related to an increase in salaries and benefits by approximately $95.3 million as a result of personnel growth in departments related to research and development functions by approximately 600 additional personnel in fiscal year 2008. 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. Facilities expenses anddecreased expenses related to computer software and equipment also increased as a result of the personnel growth.
In order to remain competitive, we anticipate that we will continue to devote substantial resources to research$7.7 million, travel and development. Researchentertainment of $5.4 million, employee related expenses of $3.5 million, 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.$2.8 million.
Sales, General and Administrative
Fiscal Year 20092011 vs. Fiscal Year 20082010
Sales, general and administrative expenses were $362.2decreased by $5.5 million, and $341.3 millionor 1%. The majority of the decrease was caused by stock-based compensation charges recorded during fiscal years 2009year 2010 of $38.3 million related to a tender offer that closed in March 2009. Professional fees decreased by $10.6 million due to decreased legal service charges. Depreciation and 2008, respectively,amortization decreased by $4.2 million due to assets being fully depreciated. Offsetting these decreases was an increase in compensation and benefits of $20.9$28.1 million or 6%. Outside professional feesprimarily attributable to growth in headcount. We had increases across discretionary spending areas such as $5.7 million for marketing, $3.2 million for contract labor, and $2.9 million for travel and entertainment to meet the increasing opportunities of our business as the economy recovers. Our expenses also increased by $17.5$15.0 million primarily duerelated to increased legal fees pertaining to ongoing litigation mattersthe settlement of the NVIDIA GPU Litigation case described in Note 1213 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 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 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 20082010 vs. Fiscal Year 20072009
Sales, general and administrative expenses were $341.3increased by $4.8 million, and $293.5 millionor 1%. The majority of the increase was caused by stock-based compensation charges recorded during fiscal years 2008 and 2007, respectively, an increaseyear 2010 of $47.8$38.3 million or 16%.related to a tender offer that closed in March 2009, offset by a reduction in ongoing stock-based compensation expense of $19.1 million resulting from the cancellation of stock options pursuant to the tender offer. The increase is primarily due towas also driven by an increase in salariescompensation and benefits by approximately $31.4$8.4 million due to additional new hires and professional fees by $11.3 million due to legal service charges. Offsetting these increases, our cost reduction initiatives across several discretionary spending areas resulted in decreased expenses related to the growth in personnel by approximately 180 additional personnel. Additionally, salariesadvertising and benefitspromotions of $9.3 million, employee related expenses also increased due to the increase in our variable compensation expense as a result of our financial performance for fiscal year 2008. Advertising$8.0 million, contract labor of $6.6 million, computer software 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 expansionequipment of our facilities worldwide to support additional personnel resulted in increases in our facilities expenses, stock-based compensation expense 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 operating 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 this Form 10-K for the potential impact of the tender offer on operating expenses during the first quarter of fiscal year 2010.
In-process research and development
In connection with our acquisition of Mental Images in November 2007 and PortalPlayer in January 2007, we wrote-off $4.0$6.5 million, and $13.4 million during fiscal years 2008 and 2007, respectively,marketing 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.$5.4 million.
Restructuring Charges and Other
On September 18, 2008, During fiscal year 2009, 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.areas. 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 in 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. There were no restructuring related charges in fiscal years 2011 or 2010.
Legal Settlement
On January 10, 2011, we entered into a new six-year cross licensing agreement with Intel and also mutually agreed to settle all outstanding legal disputes. The fair valued benefit prescribed to the legal settlement portion was $57.0 million and was recorded in the fourth quarter of fiscal year 2011.
Interest Income and Interest Expense
Interest income, net of interest expense consists of interest earned on cash, cash equivalents and marketable securities. Interest income decreased to $42.9$15.9 million in fiscal year 2009,2011, from $64.3$19.8 million in fiscal year 2008,2010 primarily due to the result of lower average balances of cash, cash equivalents and marketable securities andinterest rates on our investments. Interest income decreased to $19.8 million in fiscal year 2010 from $42.5 million in fiscal year 2009 primarily due to lower interest rates in fiscal year 20092010 compared to fiscal year 2008. Interest income increased to $64.3 million in fiscal year 2008 from $41.8 million in fiscal year 2007 primarily2009 and due to the result of higher average balances of cash, cash equivalents and marketable securities and higher interest ratesexpense recorded on a capital lease in fiscal year 2008 compared to fiscal year 2007.2010.
Other Income (Expense), net
Other income and expense primarily consists of realized gains and losses on the sale of marketable securities and foreign currency translation. Other (expense), net of other income (expense) was $(14.7)($0.5) million, ($3.1) million, and $0.8$(14.7) million in fiscal years 2011, 2010, and 2009, and 2008, respectively, a decrease of $15.5 million. This decreaserespectively. The fluctuation between these years 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;Fund that resulted in a charge of $5.6 million in fiscal year 2009, which was partially recovered in fiscal year 2011 for a gain of $3.0 million resulting from the final disbursement of this fund. Fiscal year 2009 also included other charges related to other than temporary impairment of $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 havehad filed for bankruptcy as of January 25, 2009.bankruptcy. Please refer to Note 1718 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 during fiscal year 2008 compared to fiscal year 2007 is primarily due to approximately $2.0 million of realized gains on sale of an investment offset by an increase in foreign currency transaction losses in fiscal year 2008.
Income Taxes
We recognized income tax expense (benefit) of $(12.9)$18.0 million, $103.7$(14.3) million, and $46.4$(12.9) million during fiscal years 2009, 20082011, 2010 and 2007,2009, respectively. Income tax expense (benefit) as a percentage of income (loss) before taxes, or our annual effective tax rate, was (30.0) %6.7% in fiscal year 2009, 11.5%2011, 17.4% in fiscal year 20082010, and 9.4%30.0% in fiscal year 2007.2009.
The difference in theOur effective tax rates amongstrate on income or loss before tax for the threefiscal years was primarily a resultlower than the United States federal statutory rate of changes35% due to income or loss earned in our geographic mixjurisdictions where the tax rate is lower than the United States federal statutory tax rate of income subject to tax, with35%, favorable recognition in these fiscal years of the additional impact of theU.S. federal research tax credit and the expiration of statues of limitations in certain non-U.S. jurisdictions for which we had not previously recognized in fiscal year 2009 relative to the loss before taxes in such fiscal year.related tax benefits.
Please refer to Note 1314 of thethese Notes to the Consolidated Financial Statements in Part IV, Item 15 of this Form 10-K for further information regarding the components of our income tax expense. additional information.
Liquidity and Capital Resources
| | January 25, 2009 | | January 27, 2008 | | January 30, 2011 | | January 31, 2010 | |
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| | Year Ended | |
| | January 30, | | January 31, | | January 25, | |
| | 2011 | | 2010 | | 2009 | |
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Net cash provided by operating activities | | | | | | | | | | | | |
Net cash used in investing activities | | $ | | | | $ | | | | $ | | |
Net cash (used) provided by financing activities | | $ | | | | $ | | | | $ | | |
| | Year Ended | |
| | January 25, | | January 27, | | January 28, | |
| | 2009 | | 2008 | | 2007 | |
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As of January 25, 2009,30, 2011, we had $1.26$2.49 billion in cash, cash equivalents and marketable securities, a decreasean increase of $554.1$762.4 million from the end of fiscal year 2008.2010. 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 types and includes certain limits on our portfolio duration.
Operating activities
Operating activities generated cash of $249.4$675.8 million, $1.27 billion$487.8 million and $572.7$249.4 million during fiscal years 2011, 2010 and 2009, 2008respectively.
The cash provided by operating activities increased in fiscal year 2011 when compared to fiscal year 2010 was primarily due to an increase in our net income and 2007, respectively. favorable changes in operating assets and liabilities compared to fiscal year 2010. For example, accounts receivable decreased due to improved sales linearity and stronger collections during the year, while accrued and other liabilities increased primarily due to an additional net charge for incremental repair and replacement costs from a weak die/packaging material set. Please refer to Note12 of the Notes to the Consolidated Financial Statements in Part IV, Item 15 of this Form 10-K for further discussion. During fiscal year 2011, non-cash charges to earnings included stock-based compensation of $100.4 million and depreciation and amortization of $186.9 million.
The cash provided by operating activities in fiscal year 2010 increased when compared to fiscal year 2009 was primarily due to changes in operating assets and liabilities, including increases in accounts payable resulting from the timing of payments to vendors and a decrease in inventory resulting from an increase in inventory turnover. Additionally, while we experienced a net loss in fiscal year 2010 of $68.0 million, versus a net loss of $30.0 million in fiscal year 2009, non-cash charges to earnings included stock-based compensation of $242.8 million and depreciation and amortization of $196.7 million.
The cash provided by operating activities decreased in fiscal year 2009 due to a decrease in our net income compared to fiscal year 2008 plus the impact of non-cash charges to earnings and deferred 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 of $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 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 year 2008 when compared to fiscal year 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 $116.7 million of stock-based compensation expense recorded upon adoption of SFAS No. 123(R) in fiscal year 2007 and changes in operating assets and liabilities in fiscal years 2007 and 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 $209.4$649.7 million, $761.3$519.3 million and $526.4$209.4 million during fiscal years 2011, 2010 and 2009, 2008respectively.
Investing activities for fiscal year 2011 used cash of $649.7 million towards the purchase of marketable securities, net of proceeds from sales of marketable securities. Additionally, we used $97.9 million towards capital expenditures in fiscal year 2011. Capital expenditures included purchase of new research and 2007, respectively. 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 fiscal year 2010 used cash of $441.5 million towards the purchase of marketable securities, net of proceeds from sales of marketable securities. Additionally, we used $77.6 million towards capital expenditures in fiscal year 2010. Capital expenditures included purchase of 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 fiscal year 2009 providedused cash of $226.7 million from the net proceeds from sales of marketable securities and used $27.9 million in connection with our acquisition of Ageia. Investing activities also includedAgeia and $407.7 million cash used fortowards 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 also 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. This cash outflow is offset by $226.7 million of cash from the net proceeds from sales of marketable securities.
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 included $401.8 million used for our acquisitions of PortalPlayer, ULi and Hybrid Graphics. Additionally, net cash used in investing activities included capital expenditures of $130.8 million attributable to new research and development equipment, hardware equipment, technology licenses, software, intangible assets and leasehold improvements at our various facilities.
Financing activities
Financing activities provided cash of $192.0 million and $61.1 million during fiscal years 2011 and 2010 respectively, and used cash of $349.3 million $326.3 million and $53.6 million during fiscal years 2009, 2008year 2009.
Net cash provided by financing activities in fiscal year 2011 was primarily due to cash proceeds of $177.3 million from common stock issued under our employee stock plans, and 2007, respectively. a non-cash tax benefit of $15.3 million for the gross windfall related to employee stock based compensation.
Net cash provided by financing activities in fiscal year 2010 was primarily due to cash proceeds of $138.0 million from common stock issued under our employee stock plans, offset by $78.1 million used for the purchase of outstanding stock options related to a tender offer that closed in March 2009. Please refer to Note14 of the Notes to the Consolidated Financial Statements in Part IV, Item 15 of this Form 10-K for further discussion regarding the cash tender offer.
Net cash used by financing activities in fiscal year 2009 was primarily due to $423.6 million used in our stock repurchase program, offset by cash proceeds of $73.5 million from common stock issued under our employee stock plans.
Net cash used by financing activities in fiscal year 2008 was primarily due to $552.5 million used in our stock repurchase program, offset by cash proceeds of $226.0 million from common stock issued under our employee stock plans.
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, 2009,30, 2011, 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, 200930, 2011 and January 27, 2008,31, 2010, we had $1.26$2.49 billion and $1.81$1.73 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, 2009,30, 2011, we were in compliance with our investment policy. As of January 25, 2009,30, 2011, our investments in government agencies and government sponsored enterprises represented approximately 71%51% of our total investment portfolio, while the financial sector which has been negatively impacted by recent market liquidity conditions, accounted for approximately 17%34% of our total investment portfolio. Substantially allAll of our investments are with A/A2 or better rated securities with the substantial majority of the securities rated AA-/Aa3 or better. securities.
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.30, 2011. Based on our quarterly impairment review, we concluded that our investments were appropriately valued 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,did not record any impairment during fiscal year 2011. During fiscal year 2009, we recorded other than temporary impairment charges of $9.9 million during fiscal year 2009.million.. These charges includeincluded $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;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 havehad filed for bankruptcybankruptcy. In the fourth quarter of fiscal year 2011 we recovered $3.1 million of the other than temporary impairment charge previously recorded. This was recorded as of January 25, 2009.other income in fiscal year 2011. Please refer to Note 1718 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, were $1.5 million, $1.8 million and $2.1 million for fiscal year 2011, 2010 and 2009 was $2.1 million. Net realized gains (losses) for fiscal years 2008 and 2007 were not material.respectively. As of January 25, 2009,30, 2011, we had a net unrealized gain of $4.4$10.5 million, which was comprised of gross unrealized gains of $7.8$11.0 million, offset by $3.4$0.5 million of gross unrealized losses. As of January 27, 2008,31, 2010, we had a net unrealized gain of $10.7$12.6 million, which was comprised of gross unrealized gains of $11.1$12.7 million, offset by $0.4$0.1 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'customers’ businesses, and to downturns in the industry and the worldwide economy. One customerTwo customers accounted for approximately 18%17% of our accounts receivable balance at January 25, 2009.30, 2011. 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.
Patent Cross License Agreement
On January 10, 2011, we entered into a new six-year patent cross licensing agreement, or the License Agreement, with Intel. Under the License Agreement, Intel has granted to NVIDIA and its qualified subsidiaries, and NVIDIA has granted to Intel and Intel’s qualified subsidiaries, a non-exclusive, non-transferable, worldwide license, without the right to sublicense to all patents that are either owned or controlled by the parties at any time that have a first filing date on or before March 31, 2017, to make, have made (subject to certain limitations), use, sell, offer to sell, import and otherwise dispose of certain semiconductor- and electronic-related products anywhere in the world. NVIDIA’s rights to Intel’s patents have certain specified limitations, including but not limited to, NVIDIA was not granted a license to: (1) certain microprocessors, defined in the License Agreement as “Intel Processors” or “Intel Compatible Processors;” (2) certain chipsets that connect to Intel Processors; or (3) certain flash memory products. In connection with the License Agreement, NVIDIA and Intel mutually agreed to settle all outstanding legal disputes. Under the License Agreement, Intel will pay NVIDIA an aggregate amount of $1.5 billion, payable in annual installments, as follows: a $300 million payment on each of January 18, 2011, January 13, 2012 and January 15, 2013 and a $200 million payment on each of January 15, 2014, 2015 and 2016. Please refer to Note 4 of the Notes to the Consolidated Financial Statements in Part IV, Item 15 of this Form 10-K for further information regarding this cross license and the settlement.
Cash Tender Offer
On February 11, 2009, we announced thatDuring fiscal year 2010, 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.was completed during the first quarter of fiscal year 2010. 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.tender offer. All eligible options with exercise prices lessequal to or greater than $28.00$17.50 per share but not less than $17.50$28.00 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 equal to or 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.
A total of 28.5 million options were tendered under the offer for an aggregate cash purchase price of $78.1 million, which was paid in exchange for the cancellation of the eligible options. As a result of the tender offer, we incurred a charge of $140.2 million consisting of $124.1 million related to the remaining unamortized stock based compensation expense associated with the unvested portion of the options tendered in the offer, $11.6 million related to stock-based compensation expense resulting from amounts paid in excess of the fair value of the underlying options, plus $4.5 million related to associated payroll taxes, professional fees and other costs.
Please refer to Note 192 of the Notes to the Consolidated Financial Statements in Part IV, Item 15 of this Form 10-K for further discussion regarding the cash tender offer for certain employee stock options that our Board of Directors approved in February 2009.offer.
Stock Repurchase Program
During fiscal year 2005, we announced that our Our Board of Directors or Board, hadhas 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,us, subject to certain specifications, to repurchase shares of our common stock up to an aggregate maximum amount of $2.7 billion through May 2010.
2013. 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 Rule 10b-18 of 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
We did not enter into any structured share repurchase transactions or otherwise purchase any shares of our common stock. Duringstock 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.ended January 30, 2011. Through fiscal year 2009,January 30, 2011, 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, 2009,30, 2011, 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 2010.2013.
Operating Capital and Capital Expenditure Requirements.
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 twelve 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; |
· 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; |
· inability to successfully develop and produce in volume production our next-generation products;· | competitive pressures resulting in lower than expected average selling prices; and |
· competitive pressures resulting in lower than expected average selling prices; and· | new product announcements or product introductions by our competitors. |
· new product announcements or product introductions by our competitors.
We expect to spend approximately $200$150.0 million to $250$200.0 million for capital expenditures during fiscal year 2010,2012, primarily for property development, leasehold improvements, 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.
For additional factors see “Item 1A. Risk Factors - Risks Related to Our Business, Industry and IndustryPartners - Our revenue may fluctuate while our operating expenses are relatively fixed, which makes our results difficult to predict and could cause our results to fall short of expectations.”
3dfx Asset Purchase
On December 15, 2000, NVIDIA Corporation and one of our indirect subsidiaries entered into an Asset Purchase Agreement, or APA, which closed on April 18, 2001, to purchase certain graphics chip assets from 3dfx. Under the terms of the 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 one 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 several months of mediation, NVIDIA and the Official Committee of Unsecured Creditors, or the Creditors’ Committee, agreed to a Plan of Liquidation of 3dfx, which included a conditional settlement of the Trustee’s claims against us. This conditional settlement was subject to a confirmation process through a vote of creditors and the review and approval of the Bankruptcy Court. The conditional settlement 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. The Trustee advised that he intended to object to the settlement. The conditional settlement never progressed substantially through the confirmation process.
On December 21, 2006, the Bankruptcy Court scheduled a trial for one portion of the Trustee’s case against NVIDIA. On January 2, 2007, NVIDIA terminated the settlement agreement on grounds that the Bankruptcy 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.
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.
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.field, which could cause our revenue to decline. 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,
During the second quarter of fiscal year 2011, we recorded a $196.0 millionan additional charge against cost of revenue to cover anticipatedthe estimated remaining 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. Allconfigurations. The net charge amounted to $193.9 million, of our newly manufactured products and allwhich $181.2 million was charged against cost of our products thatrevenue. The extra remediation costs are currently shipping in volume have a different material setprimarily due to additional platforms from late failing systems that we believe is more robust.had not previously considered to be at risk. Included in the charge are the estimated costs of implementing a settlement reached during the second quarter of fiscal year 2011 with the plaintiffs of a putative consumer class action lawsuit related to this same matter and the other estimated consumer class action settlement. As a result of this settlement, the other related estimated settlement, and offsetting insurance reimbursements, we recorded a net charge of $12.7 million to sales, general and administrative expense during the second quarter of fiscal year 2011. Together with the $282.0 million net charge we had previously recorded for related estimated costs, this brings the total cumulative net charge to $475.9 million, of which $466.4 million has been charged against cost of revenue and the remainder has been charged to sales, general and administrative.
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, testingTesting suggests a weak material set of die/package combination, system thermal management designs, and customer use patterns are contributing factors.factors for these failures. 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. The weak die/packaging material combination is not used in any of our products that are currently in production.
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 securities class action lawsuits were filed against us, asserting various claims related to the impacted MCP and GPU products. Please refer to Note 1213 of the Notes to the Consolidated Financial Statements in Part IV, Item 15 of this Form 10-K for further information regarding this litigation.
litigation and the settlement.
Contractual Obligations
The following table summarizes our contractual obligations as of January 25, 2009:30, 2011:
| Contractual Obligations | | Total | | Within 1 Year | | 2-3 Years | | 4-5 Years | | After 5 Years | | All Other | | | Total | | Within 1 Year | | 2-3 Years | | 4-5 Years | | After 5 Years | | All Other | |
| | | (In thousands) | | | (In thousands) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
FIN 48 liability and interest (2) | | | | | | | | | | | | | | |
Uncertain tax positions, interest and penalties (2) | | | | | | | | | | | | | | |
Capital purchase obligations | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total contractual obligations | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(1) Represents our inventory purchase commitments as of January 25, 2009.| (1) | Represents our inventory purchase commitments as of January 30, 2011. |
(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.| (2) | Represents unrecognized tax benefits of $132.2 million which consists of $46.4 million recorded in non-current income taxes payable and $74.6 million reflected as a reduction to the related deferred tax assets, and the related interest and penalties on the non-current income tax payable of $11.2 million as of January 30, 2011. We are unable to reasonably estimate the timing of any potential tax liability or interest/penalty payments in individual years due to uncertainties in the underlying income tax positions and the timing of the effective settlement of such tax positions. |
Off-Balance Sheet Arrangements
As of January 25, 2009,30, 2011, 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
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 recently issued accounting pronouncements.
Investment and Interest Rate Risk
As of January 25, 200930, 2011 and January 27, 2008,31, 2010, we had $1.26$2.49 billion and $1.81$1.73 billion, respectively, in cash, cash equivalents and marketable securities. 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, 2009,30, 2011, 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.“available-for-sale.” 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 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. However, because any debt securities we hold are classified as “available-for-sale,” no gains or losses are realized in our Consolidated Statements of Operations due to changes in interest rates unless such securities are sold prior to maturity or unless declines in value 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 (loss), a component of stockholders’ equity, net of tax.
As of January 25, 2009,30, 2011, 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 $4.4$11.7 million.
The current financial turmoil affectingthat affected the banking system and financial markets and increased the possibility that financial institutions maymight 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 volatilityVolatility 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, 2009,30, 2011, our investments in government agencies and government sponsored enterprises represented approximately 71%51% of our total investment portfolio, while the financial sector accounted for approximately 17%34% of our total investment portfolio. Of the financial sector investments, over half are guaranteed by the U.S. government. 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.securities. If the fair value of our investments in these sectors was to decline by 2%-5%, it would result in changes inthe fair market values forof these investments would decline by approximately $25-$37-$6393 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 2011, 2010 and 2009 2008 and 2007 was $2.0$2.4 million, $1.7$0.9 million and $0.5$2.0 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. 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, 2009.30, 2011.
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.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
Controls and Procedures
Disclosure Controls and Procedures
Based on their evaluation as of January 25, 2009,30, 2011, our management, including our Chief Executive Officer and Chief Financial Officer, has concluded that our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934)1934, as amended, or the Exchange Act) were effective.effective to provide reasonable assurance.
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 25, 200930, 2011 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 25, 2009.30, 2011.
The effectiveness of our internal control over financial reporting as of January 25, 200930, 2011 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in its report which is included herein.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal controlscontrol 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.
ITEM 10.10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Identification of Directors
Reference is made to the information regarding directors appearing under the heading “Proposal 1 - Election of Directors” in our 20092011 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 20092011 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 20092011 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 20092011 Proxy Statement, which information is hereby incorporated by reference.
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 20092011 Proxy Statement, which information is hereby incorporated by reference. The full text of our “Worldwide Code of Conduct”“Code” and “Financial Team Code of Conduct”Code” are published on the Investor Relations portion of our web site, under Corporate Governance, at www.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 incorporate by reference from the sections entitled “Executive Compensation”, “Compensation Committee Interlocks and Insider Participation”, “Director Compensation” and “Compensation Committee Report” in our 20092011 Proxy Statement.
ITEM 12.12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
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 20092011 Proxy Statement.
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 20092011 Proxy Statement under the caption "Equity”Equity Compensation Plan Information,"” and is incorporated by reference 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 20092011 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 20092011 Proxy Statement.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULE
| | | | Page |
| (a) | 1. | Consolidated Financial Statements | |
| | | | |
| | | | 66 |
| | | |
| | | 67 |
| | | |
| | | 68 |
| | | |
| | | 6957 |
| | | | |
| | | | 58 |
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| | | 59 |
| | | |
| | | 60 |
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| | | 7061 |
| | | | |
| | | | 7162 |
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| (a) | 2. | Financial Statement Schedule | |
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| | | | 10993 |
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| (a) | 3. | Exhibits | |
| | | |
| | | | 11394 |
| | | | |
To the Stockholders and Board of Directors of NvidiaNVIDIA Corporation:
In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1) present fairly, in all material respects, the financial position of NVIDIA Corporation and its subsidiaries at January 25, 200930, 2011 and January 27, 2008,31, 2010, and the results of their operations and their cash flows for each of the three years in the period ended January 25, 200930, 2011 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. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of January 25, 2009,30, 2011, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible 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 in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included 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. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits 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 13, 2009
16, 2011
| | Year Ended | | | | | | | | | | |
| | | January 25, 2009 | | January 27, 2008 | | January 28, 2007 | | | January 30, 2011 | | January 31, 2010 | | January 25, 2009 | |
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| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
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) | | | | | | | | |
Weighted average shares used in basic per share computation | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
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) | | | | | | | | |
| | | | | | | | | |
Weighted average shares used in diluted per share computation | | | | | | | | | | | |
(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.
| | | January 30, 2011 | | | January 31, 2010 | |
| ASSETS | | | | | | |
| | | | | | |
Cash and cash equivalents | | | | | | | | |
| | | | | | | | |
Accounts receivable, less allowances of $15,839 and $16,330 in 2011 and 2010, 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 13 | | | | | | | | |
| | | | | | | | |
Preferred stock, $.001 par value; 2,000,000 shares authorized; none issued | | | | | | | | |
Common stock, $.001 par value; 2,000,000,000 shares authorized; 680,598,737 shares issued and 588,555,701 outstanding in 2011; and 652,391,708 shares issued and 561,465,851 outstanding in 2010 | | | | | | | | |
Additional paid-in capital | | | | | | | | |
Treasury stock, at cost (92,043,036 shares in 2011 and 90,925,857 shares in 2010) | | | | | | | | |
Accumulated other comprehensive income | | | | | | | | |
| | | | | | | | |
Total stockholders' equity | | | | | | | | |
Total liabilities and stockholders' equity | | | | | | | | |
| | | 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.
| | | Common Stock Outstanding Shares Amount | | | Additional Paid-in Capital | | | Treasury Stock | | | Accumulated Other Comprehensive Income(Loss) | | | Retained Earnings | | | Total Stockholders' Equity | |
Balances, January 27, 2008 | | | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | |
Comprehensive Income (Loss): | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Unrealized loss, net of $2054 tax effect | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Reclassification adjustment for net realized gains included in net income, net of $135 tax effect | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Issuance of common stock from stock plans | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Tax benefit from stock-based compensation | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balances, January 25, 2009 | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Comprehensive Income (Loss): | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Unrealized gain, net of $484 tax effect | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Reclassification adjustment for net realized gains included in net income, net of $598 tax effect | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Issuance of common stock from stock plans | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Tax benefit from stock-based compensation | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Charges related to stock option purchase-tender offer | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balances, January 31, 2010 | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Comprehensive Income (Loss): | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Unrealized loss, net of $306 tax effect | | | - | | | | - | | | | - | | | | - | | | | | | | | - | | | | | |
Reclassification adjustment for net realized gains included in net income, net of $528 tax effect | | | - | | | | - | | | | - | | | | - | | | | | | | | - | | | | | |
| | | - | | | | - | | | | - | | | | - | | | | - | | | | | | | | | |
Total Comprehensive Income | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | | |
Issuance of common stock from stock plans | | | | | | | | | | | | | | | - | | | | - | | | | - | | | | | |
| | | | | | | - | | | | - | | | | | | | | - | | | | - | | | | | |
Tax benefit from stock-based compensation | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balances, January 30, 2011 | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | 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.
| | | Year ended | |
| | | January 30, 2011 | | | January 31, 2010 | | | January 25, 2009 | |
| Cash flows from operating activities: | | | | | | | | | |
| | | | | | | | | | | | |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | | | | | | | | | | |
Stock-based compensation expense related to stock option purchase | | | | | | | | | | | | |
Stock-based compensation expense | | | | | | | | | | | | |
Depreciation and amortization | | | | | | | | | | | | |
Impairment charge on investments | | | | | | | | | | | | |
| | | | | | | | | | | | |
Payments under patent licensing arrangement | | | | | | | | | | | | |
Tax benefit from stock based compensation | | | | | | | | | | | | |
| | | | | | | | | | | | |
Changes in operating assets and liabilities, net of effects of acquisitions: | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Prepaid expenses and other current assets | | | | | | | | | | | | |
Deposits and other assets | | | | | | | | | | | | |
| | | | | | | | | | | | |
Accrued liabilities and other long-term liabilities | | | | | | | | | | | | |
Net cash provided by operating activities | | | | | | | | | | | | |
Cash flows from investing activities: | | | | | | | | | | | | |
Purchases of marketable securities | | | | | | | | | | | | |
Proceeds from sales and maturities of marketable securities | | | | | | | | | | | | |
Purchases of property and equipment and intangible assets | | | | | | | | | | | | |
Acquisition of businesses, net of cash and cash equivalents | | | | | | | | | | | | |
| | | | | | | | | | | | |
Net cash used in investing activities | | | | | | | | | | | | |
Cash flows from financing activities: | | | | | | | | | | | | |
Payments related to stock option purchase | | | | | | | | | | | | |
Payments related to repurchases of common stock | | | | | | | | | | | | |
Proceeds from issuance of common stock under employee stock plans | | | | | | | | | | | | |
Tax benefit from stock based compensation | | | | | | | | | | | | |
| | | | | | | | | | | | |
Net cash provided by (used in) financing activities | | | | | | | | | | | | |
Change in cash and cash equivalents | | | | | | | | | | | | |
Cash and cash equivalents at beginning of period | | | | | | | | | | | | |
Cash and cash equivalents at end of period | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Supplemental disclosures of cash flow information: | | | | | | | | | | | | |
Cash paid for income taxes, net | | | | | | | | | | | | |
Cash paid for interest on capital lease obligations | | | | | | | | | | | | |
| | | 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 | | | Year Ended | |
| | | January 25, 2009 | | January 27, 2008 | | January 28, 2007 | | | January 30, 2011 | | January 31, 2010 | | January 25, 2009 | |
| | | | | | | | | | | | | | |
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
Our Company
NVIDIA Corporation is the worldwide leader in visual computing technologies and the inventor ofinvented the graphics processing unit, or GPU. Our products are designedGPU, in 1999. Since then, we have strived to generate realistic,set new standards in visual computing with interactive graphics available on devices ranging from tablets and smart phones to notebooks and workstations. Our expertise in programmable GPUs and computer-systems technology has led to breakthroughs in parallel processing which make supercomputing inexpensive and widely accessible. We are strategically investing in three major areas – visual computing, high performance computing and mobile computing. We serve the visual computing market with our consumer GeForce graphics products and professional Quadro graphics products; the high performance computing devices.market with our Tesla computing solutions products; and the mobile computing market with our Tegra system-on-chip products.
We have three financial reporting segments – GPU, Professional Solutions Business, or PSB and Consumer Products Business, or CPB. During fiscal years 2010 and 2009, we operated and reported four major product-line operating segments: the graphics processing unit, or GPU business, the professional solutionsPSB business, or PSB, the media and communications processor, or MCP, business, and the consumer products business, or CPB.CPB business. However, during the first quarter of fiscal year 2011, we began reporting internally the results of our former MCP segment along with the results of our GPU segment to reflect the way we manage the GPU business. Comparative periods presented reflect this change.
Our GPU business is comprised primarily of our GeForce discrete and chipset products thatwhich support desktop and notebook personal computers, or PCs, plus memory products. Our PSB is comprised of our NVIDIA Quadro professional workstation products and other professional graphics products, including our NVIDIA Tesla high-performance computing products. Our MCP business is comprised of NVIDIA nForce core logic and motherboard GPU products. Our CPB is comprised of our Tegra and GoForce mobile brands and products thatwhich support handheldtablets, smartphones, personal media players, or PMPs, personal digital assistants, or PDAs, cellular phonesinternet television, automotive navigation, and other handheldsimilar devices. CPB also includes license, royalty, other revenue and associated costs related to video game consoles and other digital consumer electronics devices. Original equipment manufacturers, or OEMs, original design manufacturers, or ODMs, add-in-card manufacturers, system builders and consumer electronics companies worldwide utilize our processors as a core component of their entertainment, business and professional solutions.
We were incorporated in California in April 1993 and reincorporated in Delaware in April 1998. Our headquarter facilities are in Santa Clara, California. Our Internetweb address is www.nvidia.com. The contents of our website are not a part of these Notes to the consolidated financial statements.this Form 10-K.
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 Year
We operate on a 52 or 53-week year, ending on the last Sunday in January. Fiscal yearsyear 2011 was a 52-week year while fiscal year 2010 was 53- week year and 2009 2008 and 2007 werewas a 52-week years.year.
Stock Splits
In 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-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, or U.S.GAAP, 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
Product Revenue
We recognize revenue from product sales when persuasive evidence of an arrangement exists, the product has been delivered, the price is fixed andor 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 andor 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.product, as the level of returns cannot be reasonably estimated.
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. We recognize a liability for these rebates at the later of the date at which we record the related revenue or the date at which we offer the rebate. 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.revenue.
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.depending on the nature of the program. 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. Depending on market conditions, 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. 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.
Royalty revenue is recognized related to the distribution or sale of products that use our technologies under license agreements with third parties. We recognize royalty revenue upon receipt a confirmation of earned royalties and when collectability is reasonably assured from the applicable licensee.
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 2011, 2010 and 2009 2008were $9.5 million, $16.3 million and 2007 were $28.5 million, $11.4 million and $14.8 million, respectively.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Rent Expense
We recognize rent expense on a straight-line basis over the lease period and accrue for rent expense incurred, but not paid.
Product Warranties
We generally offer limited warranty to end-users that ranges 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 We measure stock-based compensation expense at the grant date of the related equity awards, based on the estimated fair value of the awards, and we recognize that compensation asthe expense using the straight-line attribution method over the requisite employee service period, which is typically the vesting period of each award.period. We elected to adopt the modified prospective application method provided by SFAS No. 123(R). Our estimates ofestimate the fair valuesvalue of employee stock options are calculatedon the date of grant using a binomial model and we use the closing trading price of our common stock on the date of grant as the fair value of awards of restricted stock units, or RSUs. We calculate the fair value of our employee stock purchase plan using the Black-Scholes model. Our stock based compensation for employee stock purchase plan is expensed using an accelerated amortization 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.U.S.GAAP. 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 such as property and equipment, 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 impact of net foreign currency transaction loss included in determining net income (loss) for fiscal years 2011, 2010 and 2009 2008 and 2007 was $2.0$2.4 million, $1.7$0.9 million and $0.5$2.0 million, 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
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 Statesnon-U.S. subsidiaries to the extent that such earnings are considered to be permanentlyindefinitely 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 As of January 29, 2007,30, 2011, 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 positionshad a valuation allowance of $148.0 million related to state and certain foreign deferred tax assets that management determined are not likely to be realized due, in part, to projections of future taxable income taxes subjectand potential utilization limitations of tax attributes acquired as a result of stock ownership changes. To the extent realization of the deferred tax assets becomes more-likely-than-not, we would recognize such deferred tax asset as an income tax benefit during the period the realization occurred.
Our deferred tax assets do not include the excess tax benefit related to SFAS No. 109. Under FIN 48stock-based compensation that are a component of our federal and state net operating loss and research tax credit carryforwards in the amount of $565.2 million as of January 30, 2011. Consistent with prior years, the excess tax benefit reflected in our net operating loss and research tax credit carryforwards 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 utilize the 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.
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 is 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.expense. Please refer to Note 1314 of these Notes to the Consolidated Financial Statements for additional information.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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 that 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 25, 200930, 2011 and January 27, 2008,31, 2010, our cash and cash equivalents were $417.7$665.4 million and $727.0$447.2 million, respectively, which includes $14.6include $132.6 million and $218.1$81.4 million invested in money market funds for fiscal year 20092011 and fiscal year 2008,2010, 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 maturitymaturities of greater than three months when purchased. We generally 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.available-for-sale. 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. Any unrealized losses which are considered to be other-than-temporary impairments are recorded in the other income (expense) section of our consolidated statements of operations. Realized gains (losses) on the sale of marketable securities are determined using the specific-identification 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 consideredWe record a charge to be impairedearnings when a decline in fair value is significantly below cost basis and judged to be other-than-temporary, whenor have other indicators of impairments. If the resulting fair value of an available-for-sale debt instrument is significantly belowless than its amortized cost basis, and/oran other-than-temporary impairment is triggered in circumstances where (1) we intend to sell the significant decline has lasted for an extended period of time. The evaluationinstrument, (2) it is more likely than not that we usewill be required to determine whethersell the instrument before recovery of its amortized cost basis, or (3) a marketable securitycredit loss exists where we do not expect to recover the entire amortized cost basis of the instrument. If we intend to sell or it is more likely than not that we will be required to sell the available-for-sale debt instrument before recovery of its amortized cost basis, we recognize an other-than-temporary impairment in earnings equal to the entire difference between the debt instruments’ amortized cost basis and its fair value. For available-for-sale debt instruments that are considered other-than-temporarily impaired due to the existence of a credit loss, if we do not intend to sell and it is based onnot more likely than not that we will be required to sell the specific factsinstrument before recovery of its remaining amortized cost basis (amortized cost basis less any current-period credit loss), we separate the amount of the impairment into the amount that is credit related and circumstances present at the time of assessment, which include the consideration of general market conditions, the duration and extentamount due to which fair valueall other factors. The credit loss component is below cost, and our intent and ability to hold an investment for a sufficient period of time to allow for recoveryrecognized in value. We also consider specific adverse conditionsearnings while loss related to all other factors is recorded as other comprehensive income (loss).
We performed an impairment review of our investment portfolio as of January 30, 2011. Based on our impairment review and having considered the financial healthguidance 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 thatthe relevant accounting literature, we identify as having an indicator of impairment are subject to further analysis to determine if the investment isdid not record any other than temporarily impaired, in which case we write down the investment to its estimated fair value.temporary impairment charges during fiscal year 2011. We concluded that our investments were appropriately valued and that no additional other than temporary impairment charges were necessary on our portfolio of available for sale investments as of January 30, 2011.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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, 200930, 2011 and January 27, 2008.31, 2010. 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%11% of our accounts receivable balance from one customer at January 27, 2008.30, 2011 and approximately 20% of our accounts receivable balance from two customers at January 31, 2010. 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 the lower of cost or estimated market obsolescencevalue. Obsolete or unmarketable inventory equal to the difference between the cost of inventory and the estimated market valueis completely written off 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. If actual market conditions are more favorable than expected and we sell products that we have previously written down, our reported gross margin would be favorably impacted.
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 ofare 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 the 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 testingtest goodwill for impairment. The first step tests for possible impairment by applying a fair value-based test. Our impairment review process compares the estimated fair value of the reporting unit in which the goodwill resides to its carrying value. 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.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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 the intangible asset are consumed or otherwise used up or, if that pattern can notcannot be reliably determined, using a straight-line amortization method.
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 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, or asset group may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset, or asset group to estimated undiscounted future cash flows expected to be generated by the asset.asset, or asset group. If the carrying amount of an asset or asset group exceeds its estimated future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset or asset group exceeds the fair value of the asset.asset or asset group. Fair value is determined based on the estimated discounted future cash flows expected to be generated by the asset.asset or asset group. 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.
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. 143The accounting guidance 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. 143assets and 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 2009As of January 30, 2011 and 2008, we recordedJanuary 31, 2010, our asset retirement obligations to return the leasehold improvements to their original condition upon lease termination at our headquarters facility in Santa Clara, California and certain laboratories at our international locations. As of January 25, 2009 and January 27, 2008, our net asset retirement obligationslocations were $9.5$9.7 million and $6.5$10.6 million, respectively.
Adoption of New Accounting Pronouncements
On January 28, 2008,Variable Interest Entities
During the first quarter of fiscal year 2011, we adopted Statementnew accounting guidance which amends the evaluation criteria to identify the primary beneficiary of Financial Accounting Standards No. 157,a variable interest entity, or SFAS No. 157, Fair Value MeasurementsVIE, and requires ongoing reassessment of whether an enterprise is the primary beneficiary of the VIE. The new guidance changes the consolidation rules for all financial assetsVIEs, including the consolidation of common structures, such as joint ventures, equity method investments and liabilities. SFAS No. 157 appliescollaboration arrangements. The guidance is applicable to all financial assetsnew 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 SFAS No. 157 relate to the definition of fair value, the methods used to measure fair value, and the expanded disclosures about fair value measurements.existing VIEs. The adoption of SFAS No. 157 for financial assets and liabilitiesthis new accounting guidance 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 after November 15, 2008. We do not believe the adoption of FSP No. 157-2 will have a material impact on our consolidated financial position, results of operations and cash flows.or financial condition.
In October 2008, the FASB issued Staff Position No. FAS 157-3, or FSP No. 157-3, Determining theImproving Disclosures About Fair Value Measurements
During the first quarter of a Financial Asset Whenfiscal year 2011, we adopted new accounting guidance which requires additional disclosures about items transferring into and out of levels 1 and 2 in the Market for That Asset Is Not Active. FSP No. 157-3 clarifiesfair value hierarchy; adding separate disclosures about purchases, sales, issuances, and settlements relative to level 3 measurements; and clarifying, among other things, the applicationexisting fair value disclosures about the level of SFAS No. 157 in a market that is not active, and addresses application issues such as the use of internal assumptions when relevant observable data does not exist, the use of observable 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. 157-3disaggregation. This new guidance is effective for allinterim and annual reporting periods presented in accordance with SFAS No. 157.beginning after December 15, 2009, except for the requirement to provide level 3 activity of purchases, sales, issuances, and settlements on a gross basis, which is effective for fiscal years beginning after December 15, 2010. The adoption of FSP No. 157-3 did not have a significant impact on our consolidated financial statements,this new accounting guidance impacts only disclosure requirements 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.
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 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.position, results of operations or financial condition.
Revenue Recognition
In June 2007,September 2009, the Financial Accounting Standards Board, or FASB, issued new accounting guidance related to the revenue recognition of multiple element arrangements. The new guidance states that if vendor specific objective evidence or third party evidence for deliverables in an arrangement cannot be determined, companies will be required to develop a best estimate of the selling price to separate deliverables and allocate arrangement consideration using the relative selling price method. In addition, the FASB ratified Emerging Issues Task Force Issue No. 07-3, or EITF 07-3, Accountingalso issued new accounting guidance related to certain revenue arrangements that include software elements. Previously, companies that sold tangible products with “more than incidental” software were required to apply software revenue recognition guidance. This guidance often delayed revenue recognition for Nonrefundable Advance Paymentsthe delivery of the tangible product. Under the new guidance, tangible products that have software components that are “essential to the functionality” of the tangible product will be excluded from the software revenue recognition guidance. The new guidance includes factors to help companies determine what is ��essential to the functionality.” Software-enabled products will now be subject to other revenue guidance and will follow the guidance for Goods or Servicesmultiple deliverable arrangements issued by the FASB in September 2009 as described above.
We elected 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 andearly adopt this accounting guidance at the payments to be expensed whenbeginning of the research and development activities are performed.first quarter of fiscal year 2011 on a prospective basis. 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 anya significant change in units of accounting, allocation methodology, or timing of revenue recognition. As a result, the adoption of these accounting standards did not have a material impact on our consolidated financial position, results of operations and cash flows.or financial condition.
Recently Issued Accounting Pronouncements
During the fiscal year ended January 30, 2011, there was no recent issuance of accounting pronouncements as compared to those described in the Annual Report on Form 10-K for the fiscal year ended January 31, 2010, that are of significance, or have potential material significance to us.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Recently Issued Accounting Pronouncements
Note 2 – Stock Option Purchase
In December 2007,During the FASB issued Statementthree months ended April 26, 2009, we completed a cash tender offer for certain employee stock options. 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 Financial Accounting Standards No. 141 (revised 2007),the non-employee members of our Board of Directors or SFAS No. 141(R), Business Combinations. Under SFAS No. 141(R),our officers who file reports under Section 16(a) of the Securities Exchange Act of 1934, as amended, or the Securities Exchange Act, were eligible to participate in the tender offer. All eligible options with exercise prices equal to or greater than $17.50 per share but less than $28.00 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 equal to or 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.
Our consolidated statement of operations for fiscal year 2010 includes stock-based compensation charges related to the stock option purchase (in thousands):
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Sales, general and administrative | | | | |
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A total of 28.5 million options were tendered under the offer for an entity is requiredaggregate cash purchase price of $78.1 million, which was paid in exchange for the cancellation of the eligible options. As a result of the tender offer, we incurred a charge of $140.2 million consisting of $124.1 million related to recognize the assets acquired, liabilities assumed, contractual contingencies, and contingent consideration at theirremaining unamortized stock based compensation expense associated with the unvested portion of the options tendered in the offer, $11.6 million related to stock-based compensation expense resulting from amounts paid in excess of the fair value onof the acquisition date. It further requires that acquisition-related costs be recognized separately from the acquisitionunderlying options, plus $4.5 million related to associated payroll taxes, professional fees 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. 141(R) beginning with our fiscal quarter ending April 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.other costs.
In April 2008, the 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 the adoption of FSP No. 142-3 will have on our consolidated financial position, results of operations and cash flows.
Note 23 - Stock-Based Compensation
The statement of operations includesWe measure stock-based compensation expense at the grant date of the related equity awards, based on the estimated fair value of the awards, and recognize the expense using the straight-line attribution method over the requisite employee service period adjusted for estimated forfeitures. We estimate the fair value of employee stock options on the date of grant using a binomial model and we use the closing trading price of our common stock on the date of grant as the fair value of awards of restricted stock units, or RSUs. We calculate the fair value of our employee stock purchase plan using the Black-Scholes model. Our stock based compensation for our employee stock purchase plan is expensed using an accelerated amortization model.
In addition to the stock-based compensation expense related to our cash tender offer to purchase certain employee stock options as described in Note 2 – Stock Option Purchase, our consolidated statements of operations include stock-based compensation expense, net of amounts capitalized as inventory, as follows:
| | Year Ended | |
| | January 25, | | January 27, | | January 28, | |
| | 2009 | | 2008 | | 2007 | |
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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. Previously reported amounts have not been restated.
Our adoption of SFAS No. 123(R) resulted in a cumulative benefit from the accounting change of $0.7 million 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.
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 income by $102.7 million for the year ended January 28, 2007.
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), 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 by 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, cash used from operations and cash provided by financing activities was $0.2 million each.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Subsequent to the adoption of SFAS No. 123(R)| | Year Ended | |
| | January 30 | | January 31, | | January 25, | |
| | 2011 | | 2010 | | 2009 | |
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As of January 25, 200930, 2011 and January 27, 2008,31, 2010, the aggregate amount of unearned stock-based compensation expense related to our stock optionsequity awards was $193.8$147.1 million and $233.6$125.3 million, respectively, adjusted for estimated forfeitures, whichforfeitures. As of January 30, 2011 and January 31, 2010, we willexpect to recognize the unearned stock-based compensation expense related to stock options over an estimated weighted average amortization period of 1.821.7 years and 2.081.8 years, respectively. As of January 30, 2011, and January 31, 2010 we expect to recognize the unearned stock-based compensation expense related to RSUs over an estimated weighted average amortization period of 2.4 years and 2.3 years.
Stock-based compensation capitalized in inventories resulted in a benefitcharge of $2.0$0.7 million and a charge of $0.3$2.5 million in cost of revenue during the fiscal years ended January 25, 200930, 2011 and January 27, 2008,31, 2010, respectively.
During fiscal years 2009, 20082011, 2010 and 2007,2009, we granted approximately 17.95.8 million, 17.27.7 million and 17.9 million stock options, respectively, with estimated total grant-date fair values of $143.6$34.4 million, $207.4$44.2 million and $138.4$143.6 million, respectively, and weighted average grant-date fair values of $8.03, $11.98$5.89, $5.74 and $7.85$8.03 per option, respectively. During fiscal year 2011, we granted approximately 7.1 million RSUs, with estimated total grant-date fair values of $96.7 million and weighted average grant-date fair value of $13.61. During fiscal year 2010 we granted approximately 7.7 million RSUs, with estimated total grant-date fair values of $94.1 million and weighted average grant-date fair value of $12.26.
Of these amounts,the estimated total grant-date fair value, we estimated that the stock-based compensation expense related to the equity awards that are not expected to vest for fiscal years 2011, 2010 and 2009 2008was $23.5 million, $25.7 million and 2007 was $23.8 million, $40.0 million and $26.7 million, respectively.
Valuation Assumptions
We utilize a binomial model for calculating the estimated fair value of new stock-based compensation awards granted under our stock option plans. We have determined that the use of implied volatility is expected to be reflective of market conditions and, therefore, can be expected to be a reasonable indicator of our expected volatility. We also segregate options into groups of 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 reasonable estimate of the fair value of our employee stock options. For our employee stock purchase plan we continue to use the Black-Scholes model.
SFAS No. 123(R) requires We estimate forfeitures to be estimated at the time of grant and revised,revise the estimates of forfeiture, 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.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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 with the following assumptions:
| | | Year Ended | |
| | | January 25,30, 20092011
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| | | January 28,25, 20072009
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| Stock Options | | (Using a binomial model) | |
Weighted average expected life of stock options (in years) | | | | | | | | | | | | �� |
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| | | January 25,30, 2009 2011
| | | January 31, 2010 | | | January 27,25, 2008
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20072009
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| Employee Stock Purchase Plan | | (Using the Black-Scholes model) | |
Weighted average expected life of stock options (in years) | | | | | | | | | | | | |
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NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Equity Incentive Program
We consider equity compensation to be long-term compensation and an integral component of our efforts to attract and retain exceptional executives, senior management and world-class employees. In March 2009, we introduced RSUs as a form of equity compensation to all employees. Currently, we grant stock options and RSUs under our equity incentive plans. 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, or the Prior 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 or the Prior Plans. Currently, we grant stock options and RSUs under our equity incentive plans. As of January 25, 2009, 29.5 million30, 2011, 33,732,068 shares were available for future issuance under the 2007 Plan.
Options granted to new employees that started before the beginning of fiscal year 2010 generally vest ratably quarterly over a three-year period. GrantsIn addition, options granted prior to the beginning of fiscal year 2010 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. Options granted to new employees and to existing employees in recognition of performance with a vesting commencement date in fiscal year 2010 generally vest as to 33.36% of the shares one year after the date of grant and as to the remaining 66.64% of the shares subject to the option in equal quarterly installments over the remaining period. Options granted under the 2007 Plan generally expire in six years from the date of grant.
In general, RSUs are subject to the recipient’s continuing service to NVIDIA. RSUs with a vesting commencement date in fiscal year 2010 vest over three years at the rate of 33.36% on pre-determined dates that are close to the anniversary of the grant date and vest ratably on a semi-annual basis thereafter.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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. 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 was 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 was 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.
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 year 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 78,000,000 shares authorized for issuance. At January 25, 2009, 33,395,69930, 2011, 46,002,673 shares had been issued under the Purchase Plan and 44,604,30131,997,327 shares were 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 6six 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 years 2009, 20082011, 2010 and 2007,2009, employees purchased approximately 6.7 million, 5.9 million, and 3.0 million 2.1 million and 5.7 million shares, respectively, with weighted-average prices of $12.79, $14.29$6.59, $6.76, and $4.28$12.79 per share, respectively, and grant-date fair values of $5.90, $5.48$4.06, $4.60 and $2.43$5.90 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.
The following summarizes the transactions under our equity incentive plans:
| | | Options Available for Grant | | | Options Outstanding | | | Weighted Average Exercise Price Per Share | |
Balances, January 29, 2006 | | | | | | | | | | | | |
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Balances, January 28, 2007 | | | | | | | | | | | | |
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Balances, January 27, 2008 | | | | | | | | | | | | |
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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 vestedstock option and expected to vest and options exercisable as of January 25, 2009:RSU transactions under our equity incentive plans:
| Weighted Average Remaining Contractual Term | | Aggregate Intrinsic Value (1)
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Options vested and expected to vest (2)
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| | | Options Available for Grant | | Options Outstanding | | Weighted Average Exercise Price Per Share | | Weighted Average Remaining Contractual Life | | | Aggregate Intrinsic Value (1) |
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Balances, January 27, 2008 | | | | | | | | | | | | | |
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Balances, January 25, 2009 | | | | | | | | | | | | | |
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Cancellations related to stock options purchase (2) | | | | | | | | | | | | | |
Balances, January 31, 2010 | | | | | | | | | | | | | |
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Balances, January 30, 2011 | | | | | | | | | | | | | |
Exercisable at January 30, 2011 | | | | | | | | | | | | | |
Vested and Expected to Vest after January 30, 2011 | | | | | | | | | | | | | |
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(1) The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value for in-the-money options at January 25, 2009,30, 2011, based on the $7.71$23.76 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 25, 200930, 2011 was 19.742.7 million shares and 19.227.8 million shares, respectively.
(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 25, 2009:
| | | | | 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 | |
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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 25, 2009.
Please refer to Note 192 of these Notes to the Consolidated Financial Statements for further discussion regarding the cash tender offer for certain employee stock options that our Board of Directors approved in February 2009.
The total intrinsic value of options exercised was $139.1 million, $140.3 million and $84.9 million for fiscal years 2011, 2010 and 2009, respectively. The total fair value of options vested was $60.7 million, $37.0 million and $117.0 million for fiscal years 2011, 2010 and 2009, respectively.
| | | RSUs | | | Weighted Average Grant-date fair value | | Weighted Average Remaining Contractual Life |
| Restricted Stock Units: | | | | | | | |
| Balances, January 25, 2009 | | | - | | | $ | - | | |
| Awarded | | | 7,672,899 | | | $ | 12.26 | | |
| Vested | | | (2,400 | ) | | $ | 12.40 | | |
| Forfeited | | | (181,987 | ) | | $ | 11.37 | | |
Balances, January 31, 2010 | | | 7,488,512 | | | $ | 12.28 | | |
| | | 7,104,693 | | | $ | 13.61 | | |
| | | (3,215,633 | ) | | $ | 11.74 | | |
| | | (765,658 | ) | | $ | 13.76 | | |
Balances, January 30, 2011 | | | 10,611,914 | | | $ | 13.23 | | |
Expected to Vest after January 30, 2011 | | | 8,593,484 | | | $ | 13.24 | | |
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 4- Patent Cross License Agreement
On January 10, 2011, we entered into a new six-year patent cross licensing agreement, or the License Agreement, with Intel. Under the License Agreement, Intel has granted to NVIDIA and its qualified subsidiaries, and NVIDIA has granted to Intel and Intel’s qualified subsidiaries, a non-exclusive, non-transferable, worldwide license, without the right to sublicense to all patents that are either owned or controlled by the parties at any time that have a first filing date on or before March 31, 2017, to make, have made (subject to certain limitations), use, sell, offer to sell, import and otherwise dispose of certain semiconductor- and electronic-related products anywhere in the world. NVIDIA’s rights to Intel’s patents have certain specified limitations, including but not limited to, NVIDIA was not granted a license to: (1) certain microprocessors, defined in the License Agreement as “Intel Processors” or “Intel Compatible Processors;” (2) certain chipsets that connect to Intel Processors; or (3) certain flash memory products. In connection with the License Agreement, NVIDIA and Intel mutually agreed to settle all outstanding legal disputes. Under the License Agreement, Intel will pay NVIDIA an aggregate amount of $1.5 billion, payable in annual installments, as follows: a $300 million payment on each of January 18, 2011, January 13, 2012 and January 15, 2013 and a $200 million payment on each of January 15, 2014, 2015 and 2016.
Accounting for the Agreement
The License Agreement between NVIDIA and Intel includes multiple elements. As a result, we determined each element of the License Agreement, their fair value and when they should be recognized. We allocated the total consideration, comprising of the cash payments from Intel and the estimated fair value of the license we received from Intel, to the legal settlement and the license to Intel based on the estimated relative fair value of these elements as follows:
| | (in thousands) | |
| | | |
| Legal settlement | | $ | 57,000 | |
| License to Intel | | | 1,583,000 | |
| License from Intel | | | (140,000 | ) |
| Total cash consideration | | $ | 1,500,000 | |
The elements of the License Agreement are accounted for as follows:
| 1. | Legal settlement: In connection with the License Agreement, both parties agreed to settle all outstanding legal disputes. The fair value allocated to the settlement of $57.0 million was recorded in the fourth quarter of fiscal year 2011, as a benefit to operating expense. |
| 2.. | License to Intel: We will recognize $1,583.0 million in total, or $66.0 million per quarter, as revenue over the term of the agreement of six years, the period over which Intel will have access to newly filed NVIDIA patents. We will commence recognition of the license revenue in April 2011 when our performance obligation under the agreement begins. Consideration received in advance of the performance period will be classified as deferred revenue. |
| 3. | License from Intel: We recognized $140.0 million as an intangible asset upon execution of the agreement. Amortization of $5.0 million per quarter will be charged to cost of sales over the seven year estimated useful life of the technology beginning in April 2011. |
Fair Value Determination
In determining the estimated fair value of the elements of the License Agreement, we assumed the highest and best use of each element from a market participant perspective. The inputs and assumptions used in our valuation included projected revenue, royalty rates, discount rates, useful lives and income tax rates, among others. The development of a number of these inputs and assumptions in the model required a significant amount of management judgment and is based upon a number of factors, including the selection of industry comparables, royalty rates, market growth rates and other relevant factors. Changes in any number of these assumptions may have had a substantial impact on the estimated fair value of each element. These inputs and assumptions represent management’s best estimate at the time of the transaction.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 5 – 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 30, 2011 | | | January 31, 2010 | | | January 25, 2009 | |
| | | (In thousands, except per share data) | |
| | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Denominator for basic net income (loss) per share, weighted average shares | | | | | | | | | | | | |
Effect of dilutive securities: | | | | | | | | | | | | |
Equity Awards 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 | | | | | | | | | | | | |
Diluted net income per share for 2011 did not include the effect of anti-dilutive common equivalent shares from 24.6 million outstanding stock options and RSUs, respectively. All of our outstanding stock options were anti-dilutive during fiscal year 2010 and 2009 and excluded from the computation of diluted earnings per share due to the net loss for fiscal years 2010 and 2009.
Note 36 – Restructuring Charges and Other
On In 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 bewas paid duringby the firstthird 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 4 – 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.7 - 3dfx
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 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 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 APA 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 one 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 APA 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, the Trustee appointed by the Bankruptcy Court to represent 3dfx’s bankruptcy estate served his complaint on NVIDIA. The Trustee’s complaint assertsasserted claims for, among other things, successor liability and fraudulent transfer and seekssought additional payments from us. 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 find that the value of the 3dfx assets conveyed to NVIDIA was at least $108 million. In early November 2005, after several months of mediation, NVIDIA and the Official Committee of Unsecured Creditors, or the Creditors’ Committee, agreed to a Plan of Liquidation of 3dfx, which included a conditional settlement of the Trustee’s claims against us. This conditional settlement was subject to a confirmation process through a vote of creditors and the review and approval of the Bankruptcy Court. The conditional settlement 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. The Trustee advised that he intended to object to the settlement. The conditional settlement never progressed substantially through the confirmation process.
On December 21, 2006, the Bankruptcy Court scheduled a trial for one portion of the Trustee’s case against NVIDIA. On January 2, 2007, NVIDIA terminated the settlement agreement on grounds that the Bankruptcy 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. 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 and 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 refer to Note 12Note12 of thesethe Notes to the Consolidated Financial Statements for further informationdiscussion regarding this litigation.
| | | Fair Market Value | | Straight-Line Amortization Period | | | Fair Market Value | | Straight-Line Amortization Period | |
| | | (In thousands) | | (Years) | | | (In thousands) | | (Years) | |
| | | | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | | | | | |
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NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 6 – Business Combinations
On February 10, 2008, we acquired Ageia Technologies, Inc., or Ageia, an industry leader in gaming physics technology. The combination of the graphics processing unit, or GPU, and physics engine brands is expected to enhance the visual experience of the gaming world. The aggregate purchase price consisted of total consideration of approximately $29.7 million.
On November 30, 2007, we completed our acquisition of Mental Images, Inc., or Mental Images, an industry leader in photorealistic rendering technology. The aggregate purchase price consisted of total consideration of approximately $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.
We allocated the purchase price of each of these acquisitions to tangible assets, liabilities and identifiable intangible assets acquired, as well as 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 made by management. Purchased intangibles are amortized on a straight-line basis over their respective useful lives.
As of January 25, 2009, the estimated fair values of the purchase price allocated to assets we acquired and liabilities we assumed on the respective acquisition dates were as follows:
| | | Mental Images | | Ageia | |
| Fair Market Values | | (In thousands) | |
Cash and cash equivalents | | | | | | | |
| | | | | | | |
| | | | | | | |
Prepaid and other current assets | | | | | | | |
| | | | | | | |
In-process research and development | | | | | | | |
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Acquisition related costs | | | | | | | |
| | | | | | | |
Total liabilities assumed | | | | | | | |
Purchase price allocation | | | | | | | |
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
| | | Mental Images | | | Ageia | |
| | (Straight-line depreciation/amortization period) |
| | | | | | | |
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| | | | | | | |
The amount of the IPR&D represents the value assigned to research and development projects of Mental 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 our 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 78 - Goodwill
The carrying amount of goodwill is as follows:
| | | January 25, 2009 | | | January 27, 2008 | |
| | | (In thousands) | |
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During fiscal year 2009, goodwill increased by $15.8 million, primarily due to $19.2 million of goodwill associated with our acquisition of Ageia on February 10, 2008. This increase in goodwill was offset by a decrease of $3.8 million for Mental Images related to the reassessment of estimates made during the preliminary purchase price allocation.| | | January 30, 2011 | | | January 31, 2010 | |
| | | (In thousands) | |
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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 20092011 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 graphics processing unit, or GPU, business, the professional solutions business, or PSB, MCP and the consumer products business, or CPB segments as of January 25, 2009,30, 2011 and January 31, 2010 was $86.9$133.1 million, $95.1 million, $46.2 million and $141.6 million, respectively. As of January 27, 2008, the amount of goodwill allocated to our GPU, PSB, MCP and CPB segments, was $67.8 million, $99.0 million, $46.3 million and $141.0 million, respectively. Please refer to Note 16Note17 of thesethe Notes to the Consolidated Financial Statements for further segment information.discussion regarding segments.
Note 8 -9 - Amortizable Intangible Assets
The components of our amortizable intangible assets are as follows:
| | January 30, 2011 | | January 31, 2010 |
| | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Weighted Average Useful Life | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Weighted Average Useful Life |
| | | (In thousands) | | (In years) | | | (In thousands) | (In years) |
| | | | | | | | | | | | | | | | | | | | | | |
Acquired intellectual property | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
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| | 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 |
| | | | | | | | | |
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Acquired intellectual property | | | | | | | | | | | | | | | | | | | | | | | |
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The increase in the gross carrying amount of technology licenses as of January 25, 2009 when compared to January 27, 2008 is primarily related to approximately $21.8 million of net cash outflows during fiscal year 2009 under a confidential patent licensing arrangement that we originally entered into during fiscal year 2007 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 2011, 2010 and 2009 2008 and 2007 was $32.6$30.0 million, $24.5$31.9 million and $19.8$32.6 million, respectively. Future amortization expense for the net carrying amount of intangible assets at January 25, 200930, 2011 is estimated to be $30.9 million in fiscal year 2010, $27.2 million in fiscal year 2011, $24.6$53.8 million in fiscal year 2012, $18.6$46.6 million in fiscal year 2013, $14.1million$42.1 million in fiscal year 2014, $42.0 million in fiscal year 2015, $39.9 million in fiscal year 2016 and $31.7$64.3 million in fiscal years subsequent to fiscal year 2014.2016 until fully amortized.
Note 10 - Marketable Securities
All of the cash equivalents and marketable securities are classified as “available-for-sale” securities. Investments in both fixed rate instruments 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.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 9 - - 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. Our investment policy requires the purchase of top-tier investment grade securities, the diversification of asset type and 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. The following is a summary of cash equivalents and marketable securities at January 25, 200930, 2011 and January 27, 2008:31, 2010:
| | | January 25, 2009 | | | January 30, 2011 | |
| | | Amortized Cost | | Unrealized Gain | | Unrealized Loss | | Estimated Fair Value | | | Amortized Cost | | Unrealized Gain | | Unrealized Loss | | Estimated Fair Value | |
| | | (In thousands) | | | (In thousands) | |
Debt securities of United States government agencies | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Corporate debt securities | | | | | | | | | | | | | | | | | | | | |
Mortgage backed securities issued by United States government-sponsored enterprises | | | | | | | | | | | | | | | | | | | | |
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Debt securities issued by United States Treasury | | | | | | | | | | | | | | | | | | | | | | | |
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| | 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)| | | January 31, 2010 | |
| | | 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 | | | | | | | | | | | | | | | | |
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Debt securities issued by United States Treasury | | | | | | | | | | | | | | | | |
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The following table provides the breakdown of the investments with unrealized losses at January 25, 2009:30, 2011:
| | | Less than 12 months | | 12 months or greater | | Total | | | Less than 12 months | | | 12 months or greater | | | Total | |
| | | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses | | | Fair Value | | Gross Unrealized Losses | | | Fair Value | | Gross Unrealized Losses | | | Fair Value | | Gross Unrealized Losses | |
| | | (In thousands) | | | (In thousands) | |
Corporate debt securities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Mortgage backed securities issued by United States government-sponsored enterprises | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Debt securities of United States government agencies | | | | | | | | | | | | | | | | |
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Debt securities of United States Treasury | | | | | | | | | | | | | | | | | | | | | |
Debt securities issued by United States government agencies | | | | | | | | | | | | | | | | | | | | | | |
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We performed an impairment review of our investment portfolio as of January 25, 2009.30, 2011. Factors considerconsidered included 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. Based on our quarterly impairment review and having considered the guidance in the relevant accounting literature, we did not record any other-than-temporary impairment charges during fiscal year 2011. We concluded that our investments were appropriately valued and that no other than temporary impairment charges were necessary on our portfolio of available for sale investments as of January 30, 2011.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
As of January 25, 200930, 2011, we had fifty seven9 investments that were in an unrealized loss position with total unrealized losslosses amounting to $0.09 million and with a 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 25, 200930, 2011 are temporary in nature. 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 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 bankruptcy as of January 25, 2009. Please refer to Note 17 of these Notes to the Consolidated Financial Statements for further details. We concluded that our investments were appropriately valued and that, except for the $9.9 million impairment charges recognized during fiscal year 2009, 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, were $1.5 million, $1.8 million and $2.1 million for fiscal year 2011 2010, and 2009 was $2.1 million. Net realized gains (losses) for fiscal years 2008 and 2007 were not material.respectively. As of January 25, 2009,30, 2011, we had a net unrealized gain of $4.4$10.5 million, which was comprised of gross unrealized gains of $7.8$11.0 million, offset by $3.4$0.5 million of gross unrealized losses. As of January 27, 2008,31, 2010, we had a net unrealized gain of $10.7$12.6 million, which was comprised of gross unrealized gains of $11.1$12.7 million, offset by $0.4$0.1 million of gross unrealized losses. 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 25, 200930, 2011 and January 27, 200831, 2010 and are shown below by contractual maturity.
| | | January 30, 2011 | | | January 31, 2010 | |
| | | Amortized Cost | | | Estimated Fair Value | | | Amortized Cost | | | Estimated Fair Value | |
| | | (In thousands) | |
| | | | | | $ | | | | | | | | | | |
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Mortgage-backed securities issued by government-sponsored enterprises not due at a single maturity date | | | | | | | | | | | | | | | | |
| | | | | | $ | | | | | | | | | | |
| | | January 25, 2009 | | | January 27, 2008 | |
| | | Amortized Cost | | | Estimated Fair Value | | | Amortized Cost | | | Estimated Fair Value | |
| | | (In thousands) | |
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Mortgage-backed securities issued by government-sponsored enterprises not due at a single maturity date | | | | | | | | | | | | | | | | |
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Note 1011 - Balance Sheet Components
Certain balance sheet components are as follows:
| | | January 25, 2009 | | January 27, 2008 | | | January 30, 2011 | | January 31, 2010 | |
| Inventories: | | (In thousands) | | | (In thousands) | |
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| | | | January 25, 2009 | | | January 27, 2008 | | | Estimated Useful Life |
| | | (In thousands) | | (Years) |
| Property and Equipment: | | | | | | | |
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Office furniture and equipment | | | | | | | | | |
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Accumulated depreciation and amortization | | | | | | | | | |
Total property and equipment, net | | | | | | | | | |
The increase in property and equipment, net, at January 25, 2009 compared to January 27, 2008, includes the purchase of a property that is comprised of approximately 25 acres of land and 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 30, 2011 | | | January 31, 2010 | | Estimated Useful Life |
| | | (In thousands) | | (Years) |
| Property and Equipment: | | | | | | | |
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Office furniture and equipment | | | | | | | | | |
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Accumulated depreciation and amortization | | | | | | | | | |
Total property and equipment, net | | | | | | | | | |
(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.
Depreciation expense for fiscal years 2011, 2010 and 2009 2008 and 2007 was $152.4$157.0 million, $111.0$164.8 million and $88.0$152.4 million, respectively.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
| | | January 25, 2009 | | | January 27, 2008 | |
| Prepaid Expenses and Other | | (In thousands) | |
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Total prepaid expenses and other | | | | | | | | |
| | | January 30, 2011 | | | January 31, 2010 | |
| Prepaid Expenses and Other | | (In thousands) | |
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Total prepaid expenses and other | | | | | | | | |
| | | January 25, 2009 | | January 27, 2008 | | | January 30, 2011 | | January 31, 2010 | |
| Deposits and Other Assets | | (In thousands) | | | (In thousands) | |
Prepaid maintenance, long term | | | | | | | | | | | | | | |
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Investment in non-affiliates | | | | | | | | | | |
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Total deposits and other assets | | | | | | | | | | | | | | |
| | | January 25, 2009 | | | January 27, 2008 | |
| Accrued Liabilities: | | (In thousands) | |
Accrued customer programs (1) | | | | | | | | |
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Accrued payroll and related expenses | | | | | | | | |
Accrued legal settlement (3) | | | | | | | | |
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Total accrued liabilities and other | | | | | | | | |
The decrease in accrued payroll and related expenses as of as of January 25, 2009 when compared to January 27, 2008 primarily relates to decreases in accrued bonus and variable compensation accruals in fiscal year 2009.| | | January 30, 2011 | | | January 31, 2010 | |
| Accrued Liabilities: | | (In thousands) | |
Accrued customer programs (1) | | | | | | | | |
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Accrued payroll and related expenses | | | | | | | | |
Accrued legal settlement (3) | | | | | | | | |
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Taxes payable, short term | | | | | | | | |
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Total accrued liabilities and other | | | | | | | | |
(1) Please refer to Note 1 of thesethe Notes to these Consolidated Financial Statements for discussion regarding the nature of accrued customer programs and their accounting treatment related to our revenue recognition policies and estimates.
(2) Please refer to Note 1112 of thesethe Notes to these Consolidated Financial Statements for discussion regarding the warranty accrual.
(3) Please refer to Note 1213 of thesethe Notes to these Consolidated Financial Statements for discussion regarding the 3dfx litigation.
| | | January 30, 2011 | | | January 31, 2010 | |
| Other Long Term Liabilities: | | (In thousands) | |
Deferred income tax liability | | | | | | | | |
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Asset retirement obligations | | | | | | | | |
Deferred revenue from Intel Cross License Agreement (1) | | | | | | | | |
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Total other long-term liabilities | | | | | | | | |
| | | January 25, 2009 | | | January 27, 2008 | |
| Other Long Term Liabilities: | | (In thousands) | |
Deferred income tax liability | | | | | | | | |
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Asset retirement obligations | | | | | | | | |
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Total other long-term liabilities | | | | | | | | |
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 1112 - Guarantees
FASB Interpretation No. 45, or FIN 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, U.S. GAAP, 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 45U.S. GAAP 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.field, which could cause our revenue to decline. 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,During the second quarter of fiscal year 2011, we recorded a $196.0 millionan additional charge against cost of revenue to cover anticipatedthe estimated remaining 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 graphics processing unit, or GPU, products used in notebook systems. Allconfigurations. The net charge amounted to $193.9 million, of our newly manufactured products and allwhich $181.2 million was charged against cost of our products thatrevenue. The extra remediation costs are currently shipping in volume have a different material setprimarily due to additional platforms from late failing systems that we believe is more robust.had not previously considered to be at risk. Included in the charge are the estimated costs of implementing a settlement reached during the second quarter of fiscal year 2011 with the plaintiffs of a putative consumer class action lawsuit related to this same matter and another related estimated consumer class action settlement. As a result of this settlement, the other estimated settlement, and offsetting insurance reimbursements, we recorded a net charge of $12.7 million to sales, general and administrative expense during the second quarter of fiscal year 2011. Together with the $282.0 million net charge we had previously recorded for related estimated costs, this brings the total cumulative net charge to $475.9 million, of which $466.4 million has been charged against cost of revenue and the remainder has been charged to sales, general and administrative.
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, testingTesting suggests a weak material set of die/package combination, system thermal management designs, and customer use patterns are contributing factors.factors for these failures. 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 The weak die/packaging 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 tocombination is not see any abnormal failure ratesused in any systems using NVIDIAof our products other than certain notebook configurations. However, wethat are continuing to test and otherwise investigate other products. There can be no assurance that we will not discover defectscurrently in other MCP or GPU products.production.
In September, October and November 2008, several putative securities class action lawsuits were filed against us, asserting various claims related to the impacted MCP and GPU products. Please refer to Note 1213 of these Notes to thesethe Consolidated Financial Statements for further information regarding this litigation.litigation and the settlement.
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. 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. 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 2009, 20082011, 2010 and 20072009 are as follows:
| | | January 25, 2009 | | January 27, 2008 | | January 28, 2007 | | | January 30, 2011 | | January 31, 2010 | | January 25, 2009 | |
| | (In thousands) | | (In thousands) | |
Balance at beginning of period | | | | | | | | | | | | | | | | | | | | |
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Balance at end of period (3) | | | | | | | | | | | | | | | | | | | | |
(1) Includes $27.9$186.2 million, $25.5$164.5 million and $37.0 million, respectively, for fiscal years 2009, 2008 and 2007, towards allowance for sales returns estimated at the time revenue is recognized primarily based on historical return rates and is charged as a reduction to revenue.
(2) Includes $29.2 million, $21.3 million and $32.8 million, respectively, for fiscal years 2009, 2008 and 2007, written off against allowance 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 yearyears 2011, 2010 and 2009, respectively, for incremental repair and replacement costs from a weak die/packaging material set, offset by $6.7set.
(2) Includes $149.8 million, $196.0 million and $37.5 million for fiscal yearyears 2011, 2010 and 2009, respectively, in payments 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 Statements for such indemnifications. 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.
Note 1213 - Financial Arrangements, Commitments and Contingencies
Inventory Purchase Obligations
At January 25, 200930, 2011 and January 27, 2008,31, 2010, we had outstanding inventory purchase obligations totaling $290.7$546.4 million and $651.6$462.0 million, respectively.
Capital Purchase Obligations
At January 25, 200930, 2011 and January 27, 2008,31, 2010, we had outstanding capital purchase obligations totaling $20.3$31.8 million and $11.8$25.2 million, respectively.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Lease Obligations
Our headquarters complex is located in Santa Clara, California and is comprised of elevenincludes eight buildings that are a combination of owned and leased properties. The lease agreements for fivefour of the seveneight leased properties expire in fiscal year 20132020 and include two seven-yearfour five-year renewals at our option; one leased property expires in fiscal year 2013 with an option to extend for one year; one leased property expires in fiscal year 2012 with an option to extend for three years; one year;lease property expires in fiscal year 2020 with two five year renewals at our option and the remaining leased building expires in fiscal year 2015 with onean option to extend for seventhree years. Future minimum lease payments under theserelated to headquarter operating leases total $92.3$121.4 million over the remaining terms of the leases, including predetermined rent escalations, and are included in the future minimum lease payment schedule below.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
In addition to the commitment of our headquarters, we have other domestic and international office facilities under operating leases expiring through fiscal year 2018. Future minimum lease payments under our non-cancelable operating leases as of January 25, 2009,30, 2011, are as follows:
| | | Future Minimum Lease Obligations | | | Future Minimum Lease Obligations | |
| | | (In thousands) | | | (In thousands) | |
| Year ending January: | | | | | | |
| | | | | |
| | | | | |
| | | | | | $ | 46,329 | |
| | | | | | | 27,898 | |
| | | | | | | 23,071 | |
| | | | | |
| | | | 18,949 | |
| | | | 15,166 | |
| | | | 45,753 | |
| | | | | | $ | 177,166 | |
Rent expense for the years ended January 30, 2011, January 31, 2010 and January 25, 2009 January 27, 2008 and January 28, 2007 was $43.0$40.7 million, $38.2$46.2 million and $32.6$43.0 million, respectively.
In additionCapital lease reflect building and office equipment lease obligations. The building lease relates to these operating leases, we have a capital lease for aour data center located near our headquarters complex in Santa Clara, California. Future minimum lease payments under thisthe building capital lease total $48.0$39.5 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 | | | Future Capital Lease Obligations | |
| | | (In thousands) | | | (In thousands) | |
| Year ending January: | | | | | | |
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| �� | | | | | | | |
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Present Value of minimum lease payments | | | | | | | | |
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NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Litigation
3dfx
On December 15, 2000, NVIDIA and one of our indirect subsidiaries entered into an Asset Purchase Agreement, or APA, to purchase certain graphics chip assets from 3dfx. The transaction closed on April 18, 2001. That acquisition, and 3dfx's3dfx’s October 2002 bankruptcy filing, led to four lawsuits against NVIDIA: two brought by 3dfx's3dfx’s former landlords, one by 3dfx's3dfx’s bankruptcy trustee and the fourth by a committee of 3dfx's3dfx’s equity security holders in the bankruptcy estate.
Landlord Lawsuits
In May 2002, we were served As of the date of the filing of this Annual Report on Form 10-K, the two landlord cases have been settled with a California state court complaint filed bypayments from the landlord of 3dfx’s San Jose, California commercial real estate lease, Carlyle Fortran Trust, or Carlyle. In December 2002, we were servedlandlords to NVIDIA, and the equity security holders lawsuit was dismissed with a California state court complaint filed by the landlord of 3dfx’s Austin, Texas commercial real estate lease, CarrAmerica Realty Corporation, or CarrAmerica. The landlords both asserted claims for, among other things, interference with contract, successor liabilityprejudice and fraudulent transfer. The landlords sought to recover damages in the aggregate amount of approximately $15 million, representing amounts then owed on the 3dfx leases. The cases were later removed to the United States Bankruptcy Court for the Northern District of California when 3dfx filed its bankruptcy petition and consolidated for pretrial purposes with an action brought byno appeal was filed. Accordingly, only the bankruptcy trustee.
In 2005, the U.S. District Court for the Northern District of California withdrew the reference to the Bankruptcy Court for the landlords’ actions, and on November 10, 2005, granted our motion to dismiss both landlords’ complaints. The landlords filed amended complaints in early February 2006, and NVIDIA again filed motions to dismiss those claims. On September 29, 2006, the District Court dismissed the CarrAmerica action in its entirety and without leave to amend. 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. 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 CarrAmerica had standing to pursue claims 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 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 Lawsuittrustee suit remains outstanding as more fully explained below.
In March 2003, the Trustee appointed by the Bankruptcy Court to represent 3dfx’s bankruptcy estate served hisa complaint on NVIDIA. The Trustee’s complaint assertsNVIDIA asserting claims for, among other things, successor liability and fraudulent transfer and seeksseeking additional payments from us. The Trustee'sTrustee’s fraudulent transfer theory alleged that NVIDIA had failed to pay reasonably equivalent value for 3dfx's3dfx’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'sTrustee’s successor liability theory alleged NVIDIA was effectively 3dfx's3dfx’s legal successor and therefore was therefore responsible for all of 3dfx's3dfx’s unpaid liabilities. This action was consolidated for pretrial purposes with the landlord cases, as noted above.
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 find that the value of the 3dfx assets conveyed to NVIDIA was at least $108 million.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
In early November 2005, after several months of mediation, NVIDIA and the Official Committee of Unsecured Creditors, or the Creditors’ Committee, agreed to a Plan of Liquidation of 3dfx, which included a conditional settlement of the Trustee’s claims against us. This conditional settlement was subject to a confirmation process through a vote of creditors and the review and approval of the Bankruptcy Court. The conditional settlement 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. The Trustee advised that he intended to object to the settlement. The conditional settlement never progressed substantially through the confirmation process.
On December 21, 2006, the Bankruptcy Court scheduled a trial for one portion of the Trustee’s case against NVIDIA. On January 2, 2007, NVIDIA terminated the settlement agreement on grounds that the Bankruptcy 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'sTrustee’s constructive fraudulent transfer claims against NVIDIA. Specifically, the Bankruptcy Court tried four questions: (1) what did 3dfx transfer to NVIDIA in the APA?;APA; (2) of what was transferred, what qualifies as "property"“property” subject to the Bankruptcy Court'sCourt’s avoidance powers under the Uniform Fraudulent Transfer Act and relevant bankruptcy code provisions?;provisions; (3) what is the fair market value of the "property"“property” identified in answer to question (2)?; and (4) was the $70 million that NVIDIA paid "reasonably equivalent"“reasonably equivalent” to the fair market value of that property?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'parties’ contentions and evidence and concluded that "the“the creditors of 3dfx were not injured by the Transaction."” This decision did not entirely dispose of the Trustee'sTrustee’s action, however, as the Trustee'sTrustee’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.Court.
The District Court’s hearing on the Trustee’s appeal was held on June 10, 2009. On December 20, 2010, the District Court issued an Order affirming the Bankruptcy Court’s entry of summary judgment in NVIDIA’s favor. On January 19, 2011, the Trustee filed a Notice of Appeal to the United States Court of Appeals for the Ninth Circuit.
While the conditional settlement reached in November 2005 never progressed through the confirmation process, the Trustee’s case still remains pending on appeal. As such,Accordingly, 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 Equity Committee Lawsuit
On December 8, 2005, the Trustee filed a Form 8-K on behalf of 3dfx, disclosing the terms of the conditional settlement agreement between NVIDIA and the Creditor’s Committee. Thereafter, certain 3dfx shareholders filed a petition with the Bankruptcy Court to appoint an official committee to represent the claimed interests of 3dfx shareholders. The court granted that petition and appointed an Equity Securities Holders’ Committee, or the Equity Committee. The Equity Committee thereafter 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 its own competing plan of reorganization/liquidation. The Equity Committee’s plan assumes that 3dfx can raise additional equity capital that would be used to retire all of 3dfx’s debts, and thus to trigger NVIDIA's obligation to pay six million shares of stock consideration specified in the APA. NVIDIA contends, among other things, that such a commitment is not sufficient and that its obligation to pay the stock consideration had long before been extinguished. On May 1, 2006, the Equity Committee filed its lawsuit for declaratory relief to compel NVIDIA to pay the stock consideration. In addition, the Equity Committee filed a motion seeking 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 approved the proposed protections.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
After the Bankruptcy Court denied our motion to dismiss on September 6, 2006, the Equity Committee again amended its complaint, and NVIDIA moved to dismiss that amended complaint as well. On December 21, 2006, the Bankruptcy Court granted the motion as to one of the Equity 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 Committee seeks determinations that (1) the APA was not terminated before 3dfx filed for bankruptcy protection, (2) the 3dfx bankruptcy estate still holds some rights in the APA, and (3) the APA is capable of being assumed by the bankruptcy estate.
Because of the trial of the Trustee's fraudulent transfer claims against NVIDIA, the Equity Committee's lawsuit did not progress substantially in 2007. On July 31, 2008, the Equity Committee filed a motion for summary judgment on its first three causes of action. On September 15, 2008, NVIDIA filed a cross-motion for summary 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 effect 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, 2009, and the judgment is now final.
Proceedings, SEC inquiry and lawsuits related to our historical stock option granting practices
In June 2006, the Audit Committee of the Board of NVIDIA ("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 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. In late August 2006, the SEC initiated an inquiry related to our historical stock option grant practices. In October 2006, we met with the SEC and provided it with a review of the status of the Audit Committee’s review. In November 2006, we voluntarily provided the SEC with additional documents. We continued to cooperate with the SEC throughout 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. The California Superior Court cases were subsequently consolidated 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. Plaintiffs in these actions allege claims for, among other things, breach of fiduciary duty, unjust enrichment, insider selling, abuse of control, gross mismanagement, waste, and constructive fraud. 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. 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.
On August 5, 2007, our Board authorized the formation of a Special Litigation Committee to investigate, 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.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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 derivative actions concerning our historical stock option granting practices. On November 10, 2008, the definitive settlement agreements were concurrently filed in the Chancery Court of Delaware and the United States District Court for the 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 board of directors or executive officers. The terms of the settlement agreements include, among other things, the agreement by the 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 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 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 Delaware Chancery Court and, on the same date, the Court entered a Final Order and Judgment, which approved the requested attorneys' fees and dismissed the Delaware action with prejudice. The final approval hearing in the Northern District of California is scheduled for 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 GPUs and cards. On October 10, 2008, the DOJ formally notified us that the DOJ investigation has been closed. No specific allegations were made against NVIDIA during the investigation.
As of January 25, 2009, over 50 civil complaints have been filed against us. The majority of the complaints were filed in the Northern District of California, several were filed in the Central District of California, and other cases were filed in several other Federal district courts. On 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 purport to assert federal 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,Rambus Inc., or AMD, as a result of its acquisition of ATI. The indirect purchasers’ consolidated amended complaint also asserts a variety of state law antitrust, unfair competition and consumer protection claims on the same allegations, as well as a common law 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, ordered 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 certification 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 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 those 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 injunctive relief. The lawsuit was filed in 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 actionproceeding in the San Francisco division of the Northern District of California. On April 13, 2009, the Court issued an order staying motion practice and allowing only certain document discovery to proceed. On February 11, 2011, the Court lifted the stay and ordered that discovery on other issues may now proceed. A case management conference in the case pending in the Northern District of California is currently scheduled for March 30, 2009.June 3, 2011.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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 of nine Rambus patents against NVIDIA and 14 other respondents with the U.S. International Trade Commission, or ITC. Rambus has subsequently withdrawn four of the nine patents at issue. The complaint seekssought an exclusion order barring the importation of products that allegedly infringe ninethe now five Rambus patents. The ITC has instituted the investigation.investigation and a hearing was held on October 13-20, 2009. The Administrative Law Judge issued an Initial Determination on January 22, 2010, which found the asserted claims of two patents in one patent family infringed but invalid, and the asserted claims of three patents in a separate patent family, valid, infringed and enforceable. This decision was reviewed by the ITC. The ITC issued a Final Decision on July 26, 2010. In its Final Decision, the ITC found that NVIDIA infringed three related patents and issued a limited exclusion order prohibiting import of certain NVIDIA products. NVIDIA is appealing certain aspects of the ruling that were unfavorable to NVIDIA. Rambus is also appealing certain aspects of the ruling that were unfavorable to Rambus.
NVIDIA also sought reexamination of the patents asserted in the ITC, as well as other patents, in the United States Patent and Trademark Office, or USPTO. Proceedings are underway with respect to all challenged patents. With respect to the claims asserted in the ITC, the USPTO has issued a preliminary ruling invalidating many of the claims. The USPTO has issued "Right to Appeal Notices" for the three patents found by the administrative law judge to be valid, enforceable and infringed. In the Right to Appeal Notices, the USPTO Examiner has cancelled all asserted claims of one of the patents and allowed the asserted claims on the other two patents. Rambus and NVIDIA are both seeking review of the USPTO Examiner's adverse findings. NVIDIA intends to pursue its offensive and defensive cases vigorously.vigorously in both actions.
Rambus has also been subject to an investigation in the European Union. NVIDIA was not a party to that investigation, but has recently sought to intervene in the appeal of the investigation. As a result of Rambus’ commitments to resolve that investigation, for a period of five years from the date of the resolution, Rambus must now provide a license to memory controller manufacturers, sellers and/or companies that integrate memory controllers into other products. The license terms are set forth in a license made available on Rambus’ website, or the Required Rambus License. On August 12, 2010, we entered into the Required Rambus License. Pursuant to the agreement, Rambus charges a royalty of (i) one percent of the net sales price per unit for certain memory controllers and (ii) two percent of the net sales price per unit for certain other memory controllers, provided that the maximum average net sales price per unit for these royalty bearing products shall be deemed not to exceed a maximum of $20. The agreement has a term until December 9, 2014. However, NVIDIA may terminate the agreement on or after August 12, 2011 with thirty 30 days prior written notice to Rambus.
On December 1, 2010, Rambus filed a new lawsuit against NVIDIA and several other companies alleging six claims for patent infringement. This lawsuit is pending in the Northern District of California and seeks damages, enhanced damages and injunctive relief. On the same day, Rambus filed a complaint with the ITC alleging that NVIDIA and several other companies violated 19 U.S.C. Section 1337 based on a claim of patent infringement of three Rambus patents. Rambus seeks exclusion of certain NVIDIA products from importation into the United States. The Northern District of California has stayed the case pending resolution of the ITC investigation. The asserted patents are related to each other, and the three patents in the ITC complaint are also at issue in the lawsuit pending in the Northern District of California. Many of the patents at issue in the new lawsuits are also being challenged in Rambus’ other disputes with NVIDIA. NVIDIA intends to vigorously defend these new lawsuits.
Product Defect Litigation and Securities Cases
Product Defect Litigation
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.configurations. 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.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.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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 to consolidate all of the aforementioned consumer class action cases. The District Court held a case management conference for the above cases on February 23, 2009. On February 26, 2009, the District Court consolidated the cases, as well as two other cases pending against Hewlett-Packard,Hewlett Packard, under the caption “The NVIDIA GPU Litigation” and ordered the plaintiffs to file lead counsel motions by March 2, 2009. On March 2, 2009, several of the parties filed motions for appointment of lead counsel and briefs addressing certain related issues. On April 10, 2009, the District Court appointed Milberg LLP lead counsel. On May 6, 2009, the plaintiffs filed an Amended Consolidated Complaint, alleging claims for violations of California Business and Professions Code Section 17200, Breach of Implied Warranty under California Civil Code Section 1792, Breach of the Implied Warranty of Merchantability under the laws of 27 other states, Breach of Warranty under the Magnuson-Moss Warranty Act, Unjust Enrichment, violations of the New Jersey Consumer Fraud Act, Strict Liability and Negligence, and violation of California’s Consumer Legal Remedies Act.
On August 19, 2009, we filed a motion to dismiss the Amended Consolidated Complaint, and the Court heard arguments on that motion on October 19, 2009. On November 19, 2009, the Court issued an order dismissing with prejudice plaintiffs causes of action for Breach of the Implied Warranty under the laws of 27 other states and unjust enrichment, dismissing with leave to amend plaintiffs’ causes of action for Breach of Implied Warranty under California Civil Code Section 1792 and Breach of Warranty under the Magnuson-Moss Warranty Act, and denying NVIDIA’s motion to dismiss as to the other causes of action. The Court gave plaintiffs until December 14, 2009 to file an amended complaint. On December 14, 2009, plaintiffs filed a Second Amended Consolidated Complaint, asserting claims for violations of California Business and Professions Code Section 17200, Breach of Implied Warranty under California Civil Code Section 1792, Breach of Warranty under the Magnuson-Moss Warranty Act, violations of the New Jersey Consumer Fraud Act, Strict Liability and Negligence, and violation of California’s Consumer Legal Remedies Act. The Second Amended Complaint seeks unspecified damages. On January 19, 2010, we filed a motion to dismiss the Breach of Implied Warranty under California Civil Code Section 1792, Breach of Warranty under the Magnuson-Moss Warranty Act, and California’s Consumer Legal Remedies Act claims in the Second Amended Consolidated Complaint. In addition, on April 1, 2010, Plaintiffs filed a motion to certify a class consisting of all people who purchased computers containing certain of our MCP and GPU products. On May 3, 2010, we filed an opposition to Plaintiffs’ motion for class certification. A hearing on appointmentboth motions was held on June 14, 2010. On July 16, 2010, the parties filed a stipulation with the District Court advising that, following mediation they had reached a settlement in principle in The NVIDIA GPU Litigation. The settlement in principle was subject to certain approvals, including final approval by the court. As a result of lead counselthe settlement in principle, and the other estimated settlement, and offsetting insurance reimbursements, NVIDIA recorded a net charge of $12.7 million to sales, general and administrative expense during the second quarter of fiscal year 2011. In addition, a portion of the $181.2 million of additional charges we recorded against cost of revenue related to the weak die/packaging set during the second quarter of fiscal year 2011, relates to estimated additional repair and replacement costs related to the implementation of these settlements. On August 12, 2010, the parties executed a Stipulation and Agreement of Settlement and Release. On September 15, 2010, the Court issued an order granting preliminary approval of the settlement and providing for notice to the potential class members. The Final Approval Hearing was held on December 20, 2010, and on that same day the Court approved the settlement and entered Final Judgment over several objections. In January 2011, several objectors filed Notices of Appeal of the Final Judgment to the United States Court of Appeals for the Ninth Circuit.
On February 28, 2011, a group of purported class members filed a motion with the District Court purporting to seek enforcement of the settlement. The Motion claimed that NVIDIA was not properly complying with its obligations under the settlement in connection with the remedies provided to purchasers of Hewlett-Packard computers included in the settlement. On March 4, 2011, NVIDIA and Class Counsel at Milberg LLP filed oppositions to the Motion. A hearing is scheduled for March 23, 2009. The District Court also ordered that a consolidated amended complaint be filed on or before May 6, 2009.28, 2011.
Securities Cases
In September 2008, three putative securities class actions, or the Actions, were filed in the United 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.Act. 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'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'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 inOn November 5, 2009, the Court of Appeals. Appeals issued an opinion reversing the District Court’s appointment of one of the lead plaintiffs’ counsel, and remanding the matter for further proceedings. On December 8, 2009, the District Court appointed Milberg LLP and Kahn Swick & Foti, LLC as co-lead counsel. On January 22, 2010, Plaintiffs filed a Consolidated Amended Class Action Complaint for Violations of the Federal Securities Laws, asserting claims for violations of Section 10(b), Rule 10b-5, and Section 20(a) of the Exchange Act. The consolidated complaint sought unspecified compensatory damages. We intendfiled a motion to take all appropriate actiondismiss the consolidated complaint in March 2010 and a hearing was held on June 24, 2010 before Judge Seeborg. On October 19, 2010, Judge Seeborg granted our motion to dismiss with respectleave to the above cases.amend. On December 2, 2010, co-Lead Plaintiffs filed a Second Consolidated Amended Complaint and NVIDIA filed a motion to dimiss on February 14, 2011.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Intel Corporation
Litigation
On February 17, 2009, Intel Corporation filed suit against NVIDIA, Corporation, seeking declaratory and injunctive relief relating to a licensinglicense agreement that the parties signed in 2004. The lawsuit was filed in Delaware Chancery Court. Intel seekssought 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 licensinglicense rights for these products. The lawsuit seekssought no damages from NVIDIA. If Intel successfully obtains such a court
On March 23, 2009, NVIDIA filed its answer to Intel’s complaint and also asserted counterclaims for declaratory relief, injunctive relief, breach of contract and breach of the implied covenant of good faith and fair dealing. NVIDIA’s counterclaims sought an order we could be unabledeclaring that NVIDIA has the right to sell certain chipset products with Intel’s processors under the 2004 license agreement, and enjoining Intel from interfering with our MCPlicense rights. In addition, the counterclaims sought a finding that Intel had materially breached its obligations under a prior license agreement, and requested various remedies for that breach, including termination of Intel’s cross licensing rights and damages. On April 16, 2009, Intel filed its answer to our counterclaims.
As described below, on January 10, 2011, NVIDIA and Intel entered into a patent cross license agreement. Pursuant to this patent cross license agreement, NVIDIA and Intel also agreed to dismiss the Delaware litigation, and each party gave the other a general release for all claims that it might have against the other, known or unknown, based on the actions of either party on or before the date of the settlement. By stipulation of the parties, the Delaware Chancery Court dismissed the lawsuit with prejudice on January 12, 2011.
Patent Cross License Agreement
On January 10, 2011, we entered into a new six-year patent cross licensing agreement, or the License Agreement, with Intel. Under the License Agreement, Intel has granted to NVIDIA and its qualified subsidiaries, and NVIDIA has granted to Intel and Intel’s qualified subsidiaries, a non-exclusive, non-transferable, worldwide license, without the right to sublicense to all patents that are either owned or controlled by the parties at any time that have a first filing date on or before March 31, 2017, to make, have made (subject to certain limitations), use, sell, offer to sell, import and otherwise dispose of certain semiconductor- and electronic-related products anywhere in the world. NVIDIA’s rights to Intel’s patents have certain specified limitations, including but not limited to, NVIDIA was not granted a license to: (1) certain microprocessors, defined in the License Agreement as “Intel Processors” or “Intel Compatible Processors;” (2) certain chipsets that connect to Intel Processors; or (3) certain flash memory products. In connection with the License Agreement, NVIDIA and Intel mutually agreed to settle all outstanding legal disputes. Under the License Agreement, Intel will pay NVIDIA an aggregate amount of $1.5 billion, payable in annual installments, as follows: a $300 million payment on each of January 18, 2011, January 13, 2012 and January 15, 2013 and a $200 million payment on each of January 15, 2014, 2015 and 2016.
Accounting for use with Intel processorsloss contingencies
While there can be no assurance of favorable outcomes, we believe the claims made by other parties in the above ongoing matters are without merit 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 intendswe intend to vigorously defend the case.actions. With the exception of the 3dfx and product defect litigation cases, we have not recorded any accrual for contingent liabilities associated with the legal proceedings described above based on our belief that liabilities, while possible, are not probable. Further, any possible range of loss in these matters cannot be reasonably estimated at this time. We are engaged in other legal actions not described above arising in the ordinary course of its business and, while there can be no assurance of favorable outcomes, we believe that the ultimate outcome of these actions will not have a material adverse effect on our operating results, liquidity or financial position.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 1314 - Income Taxes
The income tax expense (benefit) applicable to income before income taxes consists of the following:
| | | Year Ended | | | Year Ended | |
| | | January 25, 2009 | | January 27, 2008 | | January 28, 2007 | | | January 30, 2011 | | January 31, 2010 | | January 25, 2009 | |
| | | (In thousands) | | | (In thousands) | |
| Current income taxes: | | | | | | | | | | | | | | |
| | | | ) | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | ) | | | | | | | | | | | | | |
| | — | | | | | | | | | | | | | | | |
| | | | ) | | | | | | | | | | | | | | | | | | |
| | | ) | | | | | | | | | | | | | | |
Charge in lieu of taxes attributable to employer stock option plans | | | | | | | | | | | | | | | | | | | | |
Income tax expense (benefit) | | | | ) | | | | | | | | | | | | | | | | | | | |
Income (loss) before income taxes consists of the following:
| | | Year Ended | | | Year Ended | |
| | | January 25, 2009 | | January 27, 2008 | | January 28, 2007 | | | January 30, 2011 | | January 31, 2010 | | January 25, 2009 | |
| | | (In thousands) | | | (In thousands) | |
| | | | ) | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | ) | | | | | | | | | | | | | | | | | | | |
The income tax 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 | | | Year Ended | |
| | | January 25, 2009 | | January 27, 2008 | | January 28, 2007 | | | January 30, 2011 | | January 31, 2010 | | January 25, 2009 | |
| | | (In thousands) | | | (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 THE 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 25, 2009 | | January 27, 2008 | | | January 30, 2011 | | January 31, 2010 | |
| | | (In thousands) | | | (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) | | | | ) | | | | | | | | | | | | |
We recognized income tax expense (benefit) of $18.0 million, $(14.3) million, and $(12.9) million during fiscal years 2011, 2010 and 2009, respectively. Income tax expense (benefit) as a percentage of income (loss) before taxes, or our annual effective tax rate, was (30.0%), 11.5%6.7% in fiscal year 2011, 17.4% in fiscal year 2010 and 9.4%30.0% in fiscal year 2009.
Our effective tax rate on income or loss before tax for the years ended January 25, 2009, January 27, 2008 and January 28, 2007, respectively. The difference in the effective tax rates amongst the threefiscal years was primarily a resultlower than the United States federal statutory rate of changes35% due to income or loss earned in our geographic mixjurisdictions where the tax rate is lower than the United States federal statutory tax rate of income subject to tax, with35%, favorable recognition in these fiscal years of the additional impact of theU.S. federal research tax credit and the expiration of statues of limitations in certain non-U.S. jurisdictions for which we had not previously recognized in fiscal year 2009 relative to the loss before taxes in such fiscal year.related tax benefits.
As of January 25, 2009,30, 2011, we had a valuation allowance of $92.5 million. Of the total valuation allowance, $5.3$148.0 million relatesrelated to state tax attributes acquired inand 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 $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.income and potential utilization limitations of tax attributes acquired as a result of stock ownership changes. To the extent realization of the deferred tax assets related to certain acquisitions becomes more-likely-than-not, recognition of these acquiredwe would recognize such deferred tax benefits would be reportedasset as a reduction to income tax expense in accordance with the recent 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 more-likely-than-not.occurred.
In accordance with Statement of Financial Accounting Standards No. 123(R), or SFAS No. 123(R), Share Based Payment, our Our deferred tax assets do not include the excess tax benefit related to stock-based compensation that are a component of our federal and state net operating loss and research tax credit carryforwards in the amount of $588.7$565.2 million as of January 25, 2009.30, 2011. Consistent with prior years, the excess tax benefit reflected in our net operating loss and research tax credit carryforwards 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 autilize the 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 25, 2009,30, 2011, we had a federal net operating loss carryforward of $1.16$1.24 billion, cumulativecombined state net operating loss carryforwards of $791.6$862.8 million, and acombined foreign net operating loss carryforwardcarryforwards of $25.3$68 million. The federal net operating loss carryforwardcarryforwards will expire beginning in fiscal 2012,year 2021 and the state net operating loss carryforwards will begin to expire in fiscal 2010year 2012 in accordance with the rules of each particular state, and thestate. The foreign net operating loss carryforwardcarryforwards, of which $61.7 million is attributable to Germany, may be carried forward indefinitely.indefinitely, and the remaining amount of $6.3 million relates to other foreign jurisdictions that begin to expire in fiscal year 2012. As of January 25, 2009,30, 2011, we had federal research tax credit carryforwards of $223.0$284.1 million that will begin to expire in fiscal 2010.year 2018. We have other federal tax credit carryforwards of $1.9$1.3 million that will begin to expire in fiscal 2011.year 2012. The research tax credit carryforwards attributable to states is in the amount of $212.3$269.9 million, of which $204.8$260.3 million is attributable to the State of California and may be carried over indefinitely, and $7.5$9.6 million is attributable to various other states and will expire beginning in fiscal 2010year 2012 according to the rules of each particular state. We have other state tax credit carryforwards of $7.0$4.3 million that will begin to expire in fiscal 2010.year 2012 and other foreign tax credit carryforwards of $2.9 million that will begin to expire in fiscal year 2013. Our tax attributes, net operating loss and tax credit carryforwards, remain subject to audit and may be adjusted for changes or modification in tax laws, other authoritative interpretations thereof, or other facts and circumstances. Utilization of federal, state, and stateforeign net operating losses and tax credit carryforwards may also be subject to limitations due to ownership changes and other limitations provided by the Internal Revenue Code and similar state provisions. Utilization of theand foreign net operating loss may be limited due to a change in business in connection with an ownership change.tax provisions. If any such limitations apply, the federal, states, or foreign net operating loss and tax credit carryforwards, as applicable, may expire or be denied before utilization.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
As of January 25, 2009,30, 2011, United States federal and state income taxes have not been provided on approximately $823.6$904.3 million of undistributed earnings of non-United States subsidiaries as such earnings are considered to be permanentlyindefinitely reinvested. We have not provided the amount of unrecognized deferred tax liabilities for temporary differences related to investments in our foreign subsidiaries as the determination of such amount is not practicable.
The Company has a tax holiday in effect for its business operations in India which will terminate in March 2010.2011. 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. Forjurisdiction.For fiscal yearyears 2009 through 2011, the aggregate tax savings of this holiday was approximately $0.9$2.8 million with no material per-share impact.impact in these years or approximately $0.9 million per year..
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, 2009,30, 2011, we had $95.3$121.0 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$121.0 million is $19.7$26.6 million and $0.2 million related to state and foreign income tax, respectively, 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$121.0 million of unrecognized tax benefits as of January 25, 200930, 2011 consists of $37.4$46.4 million recorded in non-current income taxes payable and $57.9$74.6 million reflected as a reduction to the related deferred tax assets.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
A reconciliation of unrecognized tax benefits is as follows:
| | | January 25, 2009 | | | January 27, 2008 | | | January 30, 2011 | | January 31, 2010 | | January 25, 2009 | |
| | (In thousands) | | (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 is 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.expense. As of January 25, 200930, 2011 and January 27, 2008,31, 2010, and January 25, 2009, we had accrued $11.8$11.2 million, $11.2 million, and $11.2$11.8 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, 2009,30, 2011, non-current income taxes payable of $49.2$57.6 million consists of unrecognized tax benefits of $37.4$46.4 million and the related interest and penalties of $11.8$11.2 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, 2009,30, 2011, 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, 2009,30, 2011, 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 20032004 through 2009.2011. As of January 25, 2009,30, 2011, the material tax jurisdictionsjurisdiction 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)2007.
Note 1415 - Stockholders’ Equity
Stock Repurchase Program
During fiscal year 2005, we announced that our Our Board of Directors or Board, hadhas 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,us, subject to certain specifications, to repurchase shares of our common stock up to an aggregate maximum amount of $2.7 billion through May 2010.
2013. 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 Rule 10b-18 of 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, weWe 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 onstock during the trade date of the transactions.twelve months ended January 30, 2011. Through fiscal year 2009,January 30, 2011, 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, 2009,30, 2011, 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 2010.2013.
Apart from our Board authorized stock repurchases, we withhold common stock shares associated with net share settlements to cover tax withholding obligations upon the vesting of restricted stock unit awards under our equity incentive program. During the twelve months ending January 30, 2011, we withheld approximately 1.1 million shares at a total cost of $16.1 million through net share settlements. Please refer to Note 23 of thesethe Notes to the Consolidated Financial Statements in Part IV, Item 15 of this Form 10-K for further informationdiscussion regarding stock-based compensation and stock options granted underour equity incentive programs.plans.
Convertible Preferred Stock
Convertible Preferred Stock
As of January 25, 200930, 2011 and January 27, 2008,31, 2010, 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 192 of these Notes to the Consolidated Financial Statements for further discussion regarding the cash tender offer for certain employee stock options that our Board of Directors approvedcompleted in FebruaryMarch 2009.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 1516 - 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 1617 - 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 oflast several fiscal year 2008,years, we reorganized our operating segments. We now report financial information forhave operated and reported four major product-line operating segments to our CODM: the GPU business, whichthe PSB, the MCP business, and the CPB. However, during the first quarter of fiscal year 2011, we began reporting internally the results of our former MCP segment along with the results of our GPU segment to reflect the way we manage the GPU business. Comparative periods presented reflect this change.
Our GPU business is comprised primarily of our GeForce discrete and chipset products thatwhich support desktop and notebook personal computers, or PCs, plus memory products; theproducts. Our PSB which is comprised of our NVIDIA Quadro professional workstation products and other professional graphics products, including our NVIDIA Tesla high-performance computing products; the MCP business which is comprised of NVIDIA nForce core logic and motherboard GPU products; and our CPB, which is comprised of ourproducts. Our CPB is comprised of our Tegra and GoForce mobile brands and products thatwhich support netbooks, personal navigation devices, or PNDs, handheldtablets, smartphones, personal media players, or PMPs, personal digital assistants, or PDAs, cellular phonesinternet television, automotive navigation, and other handheldsimilar devices. CPB also includes license, royalty, other revenue and associated costs related to video game consoles and other digital consumer electronics devices. Original equipment manufacturers, or OEMs, original design manufacturers, or ODMs, add-in-card manufacturers, system builders and consumer electronics companies worldwide utilize our processors as a core component of their entertainment, business and professional solutions.
In addition to these operating segments, we have the The “All Other” category that includes human resources, legal, finance, general administrationnon-recurring charges and corporate marketing expenses, which total $346.1 million, $266.2 million and $239.6 million for fiscal years 2009, 2008 and 2007, respectively,benefits that we do not allocate to our other operating segments as these expensesitems are not included in the segment operating performance measures evaluated by our CODM. “All Other”During the year ended January 30, 2011, we entered into a new six-year cross licensing agreement with Intel and also includesmutually agreed to settle all outstanding legal disputes. For accounting purposes, the results of operations of other miscellaneous reporting segments that are neither individually reportable, nor aggregated with another operating segment. Revenue in the “All Other” category is primarily derived from sales of components. Certain prior period amounts have been revised to conformfair valued benefit prescribed to the presentationsettlement portion was $57.0 million and was considered a non-recurring benefit for the fiscal year 2011. Please refer to Note 4 of the Notes to the Consolidated Financial Statements for further discussion regarding the patent cross license agreement with Intel. Non-recurring charges related to our current fiscal year.cash tender offer to purchase certain employee stock options were $140.2 million for the year ended January 31, 2010. Please refer to Note 2 of the Notes to the Consolidated Financial Statements for further discussion regarding the cash tender offer. During the year ended January 25, 2009, we recorded a non- recurring charge of $26.9 million for restructuring and other charges associated with the termination of a development contract related to a new campus construction project we had put on hold. Please refer to Note 6 of the Notes to the Consolidated Financial Statements for further discussion regarding the restructuring and other charges.
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 | | | 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)| | | GPU | | | PSB | | | CPB | | | All Other | | | Consolidated | |
| Year Ended January 30, 2011: | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Depreciation and amortization expense | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Year Ended January 31, 2010: | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Depreciation and amortization expense | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Year Ended January 25, 2009: | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Depreciation and amortization expense | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
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 | | | Year Ended | |
| | | January 25, 2009 | | January 27, 2008 | | January 28, 2007 | | | January 30, 2011 | | January 31, 2010 | | January 25, 2009 | |
| Revenue: | | (In thousands) | | | (In thousands) | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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.
| | | January 25, 2009 | | January 27, 2008 | | | January 30, 2011 | | January 31, 2010 | |
| Long-lived assets: | | (In thousands) | | | (In thousands) | |
| | | | | | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | |
| | | | | | | | | | | | | | |
Revenue from significant customers, those representing 10% or more of total revenue for the respective dates, is summarized as follows:
| | | Year Ended | |
| | | January 30, 2011 | | January 31, 2010 | | January 25, 2009 | |
| Revenue: | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | Year Ended | |
| | | January 25, 2009 | | January 27, 2008 | | January 28, 2007 | |
| Revenue: | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Accounts receivable from significant customers, those representing 10% or more of total accounts receivable for the respective periods, is summarized as follows:
| | | January 25, 2009 | | January 27, 2008 | |
| Accounts Receivable: | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Continued)| | | January 30, 2011 | | January 31, 2010 | |
| Accounts Receivable: | | | | | |
| | | | | | |
| | | | | | |
Note 1718 – 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. Our Level 1 valuations areassets consist of our money market funds. We classify securities within Level 1 assets when the fair value is obtained from real-timereal time quotes for transactions in active exchange markets involving identical assets. Our available-for- sale securities are classified as having Level 2 valuationsinputs. Our Level 2 assets are obtained from quotedvalued utilizing a market approach where the market prices in active markets involvingof similar assets.assets are provided by a variety of independent industry standard data providers to our investment custodian. There were no significant transfers between Levels 1 and 2 assets for the year ended January 30, 2011. Level 3 valuationsassets 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.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Financial assets and liabilities measured at fair value are summarized below:
| | | | Fair value measurement at reporting date using | | | | Fair value measurement at reporting date using | |
| | | | | Quoted Prices in Active Markets for Identical Assets | | Significant Other Observable Inputs | | High Level of Judgment | | | | Quoted Prices in Active Markets for Identical Assets | | Significant Other Observable Inputs | |
| | | January 25, 2009 | | (Level 1) | | (Level 2) | | (Level 3) | | January 30, 2011 | | (Level 1) | | (Level 2) | |
| | | (In thousands) | | | | | | | | |
Other debt securities issued by U.S. Government agencies (4) | | | | | | | | | | | | | | |
Debt securities issued by U.S. Government agencies (1) | | | | | | - | | | | |
Corporate debt securities (3)(2) | | | | | | | | | | | | | | - | | | |
Mortgage-backed securities issued by Government-sponsored entities (1)(3) | | | | | | | | | | | | | | - | | | |
Money market funds (5)(4) | | | | | | | | | | | | | | | | - | |
| | | | | | | | | | | |
Debt securities issued by United States Treasury (1) | | | | | | | | | | | |
Asset-backed securities (1) | | | | | | | | | | | | | | |
Debt securities issued by United States Treasury (5) | | | | | | - | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
(1) IncludedIncludes $70.9 million in Cash Equivalents and $461.7 million in Marketable securitiesSecurities on the Consolidated Balance Sheet.
(2) IncludedIncludes $107.1 million in Cash Equivalents and cash equivalents$821.3 million in Marketable Securities on the Consolidated Balance Sheet.
(3) Includes $38,091 in Cash and cash equivalents and $213,083Included in Marketable securitiesSecurities on the Consolidated Balance Sheet.
(4) Includes $73,233Included in Cash and cash equivalents and $244,888 in Marketable securitiesEquivalents on the Consolidated Balance Sheet.
(5) Includes $14,646$40.2 million in Cash Equivalents and cash equivalents and $124,400$396.8 million in Marketable securitiesSecurities on the Consolidated Balance Sheet.
For ourDuring fiscal year 2011, we recovered $3.1 million of the other than temporary impairment charge previously recorded, for the International Reserve Fund. The money market funds that were held byinvestment in the International Reserve Fund, was valued at $13.0 million as of January 25, 2009,31, 2010, after a $5.6 million other than temporary impairment charge that we recorded during fiscal year 2009. We had previously, 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 the International Reserve Fund, we have previously, classified these securities under the Level 3 fair value hierarchy.
As a result of January 25, 2009,the final payout of our money market investmentinvested portion, we received $16.1 million in the International Reserve Fund, which was valued at $124.4 million, netfourth quarter 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 thatfiscal year 2011. Consequently, 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.classified under Level 3.
Reconciliation of financial assets measured at fair value on a recurring basis using significant unobservable inputs, or Level 3 inputs:inputs (in thousands):
Balance, beginning of period, January 31, 2010 | | | | |
| | | | |
Other than temporary impairment | | | | |
| | | | |
Gain recorded in other income | | | | |
Balance, end of period, January 30, 2011 | | | | |
| | | 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 18 - - Quarterly Summary (Unaudited)
The following table sets forth our unaudited consolidated financial, for the last eight fiscal quarters ended January 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 Year 2008 Quarters Ended | |
| | | January 27, 2008 (F) | | | October 28, 2007 | | | July 29, 2007 | | | April 29, 2007 | |
| | | (In thousands, except per share data) | |
| Statement of Operations Data: | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Basic net income per share | | | | | | | | | | | | | | | | |
Diluted net income per share | | | | | | | | | | | | | | | | |
(A) Included $18.9 million for a 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 $4.0 million related to the write-off of acquired research and development expense from our acquisitions of 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.Quarterly Summary (Unaudited)
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 The following table sets forth our unaudited consolidated financial results, for the firstlast eight 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.quarters:
| | | Fiscal Year 2011 Quarters Ended | |
| | | January 30, 2011 (A) | | | October 31, 2010 | | | August 1, 2010 (B, C, D) | | | May 2, 2010 | |
| | | (In thousands, except per share data) | |
Statement of Operations Data: | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Basic net income (loss) per share | | | | | | | | | | | | | | | | |
Diluted net income (loss) per share | | | | | | | | | | | | | | | | |
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.| | | Fiscal Year 2010 Quarters Ended | |
| | | January 31, 2010 | | | October 25, 2009 (E) | | | July 26, 2009 (F, G) | | | April 26, 2009 (H) | |
| | | (In thousands, except per share data) | |
Statement of Operations Data: | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Basic net income (loss) per share | | | | | | | | | | | | | | | | |
Diluted net income (loss) per share | | | | | | | | | | | | | | | | |
| (A) | Included $57.0 million benefit, as a result of the Company and Intel entering into a new six-year cross licensing agreement. Both parties also agreed to settle all outstanding legal disputes. Please refer to Note 13 of these Notes to Consolidated Financial Statements for details. |
| (B) | Included $13.4 million benefit from an insurance provider as reimbursement for some claims against us towards the cost arising from a weak die/packaging material set. Portions of the reimbursement are allocated to cost of revenue ($11.1 million) and legal expense ($2.3 million). |
| (C) | Included $192.3 million warranty charge against cost of revenue arising from a weak die/packaging material set. |
| (D) | Included $15.0 million charge related to a class action lawsuit settlement. Please refer to Note 13 of these Notes to Consolidated Financial Statements for details. |
| (E) | Included $25.1 million benefit from an insurance provider as reimbursement for some claims against us towards the cost arising from a weak die/packaging material set. Portions of the reimbursement are allocated to cost of revenue ($24.1 million) and legal expense ($1.0 million). |
| (F) | Included $164.5 million warranty charge against cost of revenue arising from a weak die/packaging material set. |
| (G) | Included $45.4 million benefit from an insurance provider as reimbursement for some claims against us towards the cost arising from a weak die/packaging material set. Portions of the reimbursement are allocated to cost of revenue ($44.5 million) and legal expense ($0.9 million). |
| (H) | Included non-recurring charges of $140.2 million for the stock option purchase completed in March 2009 related to personnel associated with cost of revenue, research and development and sales, general and administrative of $11.4 million, $90.5 million, and $38.3 million, respectively. |
| | Balance at | | | | | | | | | Balance at Beginning of Period | | Additions | | Deductions | | Balance at End of Period | |
| | | | | | (In thousands) | |
Year ended January 30, 2011 | | | | | | | | | | |
Allowance for doubtful accounts | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Deferred tax valuation allowance | | | | | | | | | | | | | | | |
| | | | | | | | | | | |
Year ended January 31, 2010 | | | | | | | | | | |
Allowance for doubtful accounts | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Deferred tax valuation allowance | | | | | | | | | | | | | | | |
| | | | | | | | | | | |
Year ended January 25, 2009 | | | | | | | | | | | | | | | | | | |
Allowance for doubtful accounts | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
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) Allowances for doubtful accounts are charged to expenses.
(2) Represents uncollectible accounts written off against the allowance for doubtful accounts.sales returns estimated at the time revenue is recognized primarily based on historical return rates and is charged as a reduction to revenue.
(3) Additions to allowance for doubtful accounts includes $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.
(4) Represents uncollectible accounts written off against the allowance for doubtful accounts.
(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.sales returns written off.
| | | | | 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 | | | 3.1 | | 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 | | | 10-Q | | | | 0-23985 | | | 10.15 | | 12/7/2010 | | | | | | |
| | 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 – Board Service) | | | 10-Q | | | 0-23985 | | 10.4 | | 8/22/2007 | | |
| | 10.19+ | | 2007 Equity Incentive Plan – Non-Statutory Stock Option (Annual Grant - Board Service) | | | 10-Q | | | 0-23985 | | 10.1 | | | | 8/20/2009 | | |
| | 10.20+ | | 2007 Equity Incentive Plan - Non Statutory Stock Option | | | 8-K | | | 0-23985 | | 10.20 | | | | 9/13/2010 | | |
| | 10.21+ | | 2007 Equity Incentive Plan - Incentive Stock Option | | | 8-K | | | 0-23985 | | 10.21 | | | | 9/13/2010 | | |
| | 10.22+ | | 2007 Equity Incentive Plan – Restricted Stock Unit Grant Notice and Restricted Stock Unit Purchase Agreement | | | 10-Q | | | 0-23985 | | 10.22 | | | | 12/07/2010 | | |
| | 10.23+ | | Fiscal Year 2011 Variable Compensation Plan | | | 8-K | | | 0-23985 | | 10.1 | | | | 5/5/2010 | | |
| | 10.24+ | | Fiscal Year 2010 Variable Compensation Plan | | | 8-K | | | 0-23985 | | 10.1 | | | | 4/8/2009 | | |
| | 10.25+ | | David L. White Offer Letter, dated January 28, 2009 | | | 8-K | | | 0-23985 | | 10.1 | | | | 2/27/2009 | | |
| | 10.26 | | 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 | | |
| | 10.27 | | 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 | | |
| | 10.28 | | 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 | | |
| | 10.29 | | 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 | | |
| | 10.31+ | | Fiscal Year 2011 Variable Compensation Plan (as amended September 7, 2010) | | | 10-Q | | | 0-23985 | | 10.31 | | | | 12/7/2010 | | |
| | | | | | | | | | | | | | | | | | | |
| | 10.32 | | Memory Controller Patent License Agreement Between Rambus Inc. and NVIDIA Corporation, dated August 12, 2010 | | | 10-Q | | | 0-23985 | | 10.32 | | | | 12/7/2010 | | |
| | | | | | | | | | | | | | | | | | | |
| | 10.33 | | Second Amendment to Lease, dated August 18, 2010 between NVIDIA Corporation and Sobrato Interests III for Building A | | | 10-Q | | | 0-23985 | | 10.33 | | | | 12/7/2010 | | |
| | | | | | | | | | | | | | | | | | | |
| | 10.34 | | Third Amendment to Lease, dated August 18, 2010, between NVIDIA Corporation and Sobrato Interests III for Building B | | | 10-Q | | | 0-23985 | | 10.34 | | | | 12/7/2010 | | |
| | | | | | | | | | | | | | | | | | | |
| | 10.35 | | Third Amendment to Lease, dated August 18, 2010, between NVIDIA Corporation and Sobrato Interests III for Building C | | | 10-Q | | | 0-23985 | | 10.35 | | | | 12/7/2010 | | |
| | | | | | | | | | | | | | | | | | | |
| | 10.36 | | Second Amendment to Lease, dated August 18, 2010, between NVIDIA Corporation and Sobrato Interests III for Building D | | | 10-Q | | | 0-23985 | | 10.36 | | | | 12/7/2010 | | |
| | 10.37 10.38 | | Patent Cross License Agreement dated as of January 10, 2011, between NVIDIA Corporation and Intel Corporation Tranisition and Consulting Agreement, dated March 15, 2011, between David L.White and NVIDIA Corporation | | | 8-K 8-K | | | 0-23985 0-23985 | | 10.1 10.1 | | | | 01/10/2011 03/15/2011 | | |
| | | | | | | | | | | | | | | | | |
| | 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 | |
| | 101.INS*± | | XBRL Instance Document | | | | |
| | 101.SCH*± | | XBRL Taxonomy Extension Schema Document | | | | |
| | 101.CAL*± | | XBRL Taxonomy Extension Calculation Linkbase Document | | | | |
| | 101.DEF*± | | XBRL Taxonomy Extension Definition Linkbase Document | | | | |
| | 101.LAB*± | | XBRL Taxonomy Extension Labels Linkbase Document | | | | |
| | 101.PRE*± | | XBRL Taxonomy Extension Presentation Linkbase Document | | | | |
EXHIBIT INDEX
(Continued) * Filed Herewith
| | | | | 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 Quarterly Report on Form 10-K10-Q 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.
± Pursuant to applicable securities laws and regulations, the Company is deemed to have complied with the reporting obligation relating to the submission of interactive data files in such exhibits and is not subject to liability under any anti-fraud provisions of the federal securities laws as long as the Company has made a good faith attempt to comply with the submission requirements and promptly amends the interactive data files after becoming aware that the interactive data files fails to comply with the submission requirements. These interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act, are deemed not filed for purposes of section 18 of the Exchange Act and otherwise are not subject to liability under these sections.
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 13, 2009.16, 2011.
| | |
| NVIDIA Corporation |
| By: | /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 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 | President, Chief Executive Officer and Director (Principal Executive Officer) | March 13, 200916, 2011 |
Jen-Hsun Huang | | |
/s/ DAVID L. WHITE | Executive Vice President and Chief Financial Officer (Principal(Principal Financial and Accounting Officer)
| March 13, 200916, 2011 |
| David L. White | | |
| /s/ TENCH COXE | Director | March 13, 200916, 2011 |
Tench Coxe | | |
| /s/ MARK STEVENS | Director | March 13, 200916, 2011 |
| Mark Stevens | | |
| /s/ JAMES C. GAITHER | Director | March 13, 200916, 2011 |
| James C. Gaither | | |
| /s/ HARVEY C. JONES | Director | March 13, 200916, 2011 |
Harvey C. Jones | | |
| /s/ MARK L. PERRY | Director | March 13, 200916, 2011 |
| Mark L. Perry | | |
| /s/ WILLIAM J. MILLER | Director | March 13, 200916, 2011 |
| William J. Miller | | |
| /s/ A. BROOKE SEAWELL | Director | March 13, 200916, 2011 |
A. Brooke Seawell
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 | | | 10-Q | | | | 0-23985 | | | 10.15 | | 12/7/2010 | | | | | | |
| | 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 – Board Service) | | | 10-Q | | | 0-23985 | | 10.4 | | 8/22/2007 | | |
| | 10.19+ | | 2007 Equity Incentive Plan – Non-Statutory Stock Option (Annual Grant - Board Service) | | | 10-Q | | | 0-23985 | | 10.1 | | | | 8/20/2009 | | |
| | 10.20+ | | 2007 Equity Incentive Plan - Non Statutory Stock Option | | | 8-K | | | 0-23985 | | 10.20 | | | | 9/13/2010 | | |
| | 10.21+ | | 2007 Equity Incentive Plan - Incentive Stock Option | | | 8-K | | | 0-23985 | | 10.21 | | | | 9/13/2010 | | |
| | 10.22+ | | 2007 Equity Incentive Plan – Restricted Stock Unit Grant Notice and Restricted Stock Unit Purchase Agreement | | | 10-Q | | | 0-23985 | | 10.22 | | | | 12/07/2010 | | |
| | 10.23+ | | Fiscal Year 2011 Variable Compensation Plan | | | 8-K | | | 0-23985 | | 10.1 | | | | 5/5/2010 | | |
| | 10.24+ | | Fiscal Year 2010 Variable Compensation Plan | | | 8-K | | | 0-23985 | | 10.1 | | | | 4/8/2009 | | |
| | 10.25+ | | David L. White Offer Letter, dated January 28, 2009 | | | 8-K | | | 0-23985 | | 10.1 | | | | 2/27/2009 | | |
| | 10.26 | | 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 | | |
| | 10.27 | | 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 | | |
| | 10.28 | | 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 | | |
| | 10.29 | | 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 | | |
| | 10.31+ | | Fiscal Year 2011 Variable Compensation Plan (as amended September 7, 2010) | | | 10-Q | | | 0-23985 | | 10.31 | | | | 12/7/2010 | | |
| | | | | | | | | | | | | | | | | | | |
| | 10.32 | | Memory Controller Patent License Agreement Between Rambus Inc. and NVIDIA Corporation, dated August 12, 2010 | | | 10-Q | | | 0-23985 | | 10.32 | | | | 12/7/2010 | | |
| | | | | | | | | | | | | | | | | | | |
| | 10.33 | | Second Amendment to Lease, dated August 18, 2010 between NVIDIA Corporation and Sobrato Interests III for Building A | | | 10-Q | | | 0-23985 | | 10.33 | | | | 12/7/2010 | | |
| | | | | | | | | | | | | | | | | | | |
| | 10.34 | | Third Amendment to Lease, dated August 18, 2010, between NVIDIA Corporation and Sobrato Interests III for Building B | | | 10-Q | | | 0-23985 | | 10.34 | | | | 12/7/2010 | | |
| | | | | | | | | | | | | | | | | | | |
| | 10.35 | | Third Amendment to Lease, dated August 18, 2010, between NVIDIA Corporation and Sobrato Interests III for Building C | | | 10-Q | | | 0-23985 | | 10.35 | | | | 12/7/2010 | | |
| | | | | | | | | | | | | | | | | | | |
| | 10.36 | | Second Amendment to Lease, dated August 18, 2010, between NVIDIA Corporation and Sobrato Interests III for Building D | | | 10-Q | | | 0-23985 | | 10.36 | | | | 12/7/2010 | | |
| | 10.37 10.38 | | Patent Cross License Agreement dated as of January 10, 2011, between NVIDIA Corporation and Intel Corporation Tranisition and Consulting Agreement, dated March 15, 2011, between David L.White and NVIDIA Corporation | | | 8-K 8-K | | | 0-23985 0-23985 | | 10.1 10.1 | | | | 01/10/2011 03/15/2011 | | |
| | | | | | | | | | | | | | | | | |
| | 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 | |
| | 101.INS*± | | XBRL Instance Document | | | | |
| | 101.SCH*± | | XBRL Taxonomy Extension Schema Document | | | | |
| | 101.CAL*± | | XBRL Taxonomy Extension Calculation Linkbase Document | | | | |
| | 101.DEF*± | | XBRL Taxonomy Extension Definition Linkbase Document | | | | |
| | 101.LAB*± | | XBRL Taxonomy Extension Labels Linkbase Document | | | | |
| | 101.PRE*± | | XBRL Taxonomy Extension Presentation Linkbase Document | | | | |
| | | | 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 | | | | | | | | | | | | | |
* Filed herewithHerewith
+ 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 Quarterly Report on Form 10-K10-Q 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.
± Pursuant to applicable securities laws and regulations, the Company is deemed to have complied with the reporting obligation relating to the submission of interactive data files in such exhibits and is not subject to liability under any anti-fraud provisions of the federal securities laws as long as the Company has made a good faith attempt to comply with the submission requirements and promptly amends the interactive data files after becoming aware that the interactive data files fails to comply with the submission requirements. These interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act, are deemed not filed for purposes of section 18 of the Exchange Act and otherwise are not subject to liability under these sections.
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.
