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.
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.
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.expense. 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 or incremental operating expense 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.
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.
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 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 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. We record a change to earnings when a decline in fair value is significantly below cost basis and judged to be other-than-temporary, or have other indicators of impairments. If the fair value of an available-for-sale debt instrument is less than its amortized cost basis, an other-than-temporary impairment is triggered in circumstances where (1) we intend to sell the instrument, (2) it is more likely than not that we will be required to sell the instrument before recovery of its amortized cost basis, or (3) we do not expect to recover the entire amortized cost basis of the instrument (that is, a credit loss exists). 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 not more likely than not that we will 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 into the amount that is credit related and the amount due to all other factors. The credit loss component is recognized in earnings.
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, including labor and overhead associated with such purchases, final test yield fallout, inventory provisions and shipping costs. We write down our inventory for estimated amounts related to lower of cost or market, obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand, future product purchase commitments, estimated manufacturing yield levels and market conditions. Inventory reserves once established are not reversed until the related inventory has been sold or scrapped.
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.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Adoption of New Accounting Pronouncements
On January 28, 2008, we adopted Statement of Financial Accounting Standards No. 157, or SFAS No. 157, Fair Value Measurements Business Combinations. . SFAS No. 157 for all financial assets and financial liabilities recognized or disclosed at fair value in the financial statements. SFAS No. 157 establishes a framework for measuring fair value and expands disclosures about fair value measurements. The changes to current practice resulting from the application of 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. The adoption of SFAS No. 157 for financial assets and liabilities did not have a significant impact on our consolidated financial statements, and the resulting fair values calculated under SFAS No. 157 after adoption were not significantly different than the fair values that would have been calculated under previous guidance. Please refer to Note 16 of these Notes to the Condensed Consolidated Financial Statements for further details on our fair value measurements.
Additionally, in February 2008,In December 2007, 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.
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.
In June 2007, the FASB ratified Emerging Issues Task Force Issue No. 07-3, or EITF 07-3, Accounting for Nonrefundable Advance Payments for Goods or Services to Be Used in Future Research and Development Activities. EITF 07-3 requires non-refundable advance payments for goods and services to be used in future research and development activities to be recorded as an asset and the payments to be expensed when the research and development activities are performed. We adopted the provisions of EITF 07-3 beginning with our fiscal quarter ended April 27, 2008. The adoption of EITF 07-3 did not have any impact on our consolidated financial position, results of operations and cash flows.
Recently Issued Accounting Pronouncements
In December 2007, the FASB, issued Statement of Financial Accounting Standards No. 141 (revised 2007), or SFAS No. 141(R), Business CombinationsCombinations.. Under SFAS No. 141(R), an entity is required to recognize the assets acquired, liabilities assumed, contractual contingencies, and contingent consideration at their fair value on the acquisition date. It further requires that acquisition-related costs be recognized separately from the acquisition and expensed as incurred,incurred; that restructuring costs generally be expensed in periods subsequent to the acquisition date,date; and that changes in accounting for deferred tax asset valuation allowances and acquired income tax uncertainties after the measurement period impact income tax expense.be recognized as a component of the provision for taxes. In addition, acquired in-process research and development or IPR&D, is measured at fair value, capitalized as an indefinite-life intangible asset and amortized overtested for impairment pursuant to Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, or SFAS No. 142. We adopted SFAS No. 141(R) in the first quarter of fiscal year 2010 and will apply this new accounting standard to any future business combinations.
In April 2009, the FASB issued FASB Staff Position No. 141R-1 Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies, or FSP 141R-1. FSP 141R-1 amends the provisions in SFAS No. 141(R) for the initial recognition and measurement, subsequent measurement and accounting, and disclosures for assets and liabilities arising from contingencies in business combinations. FSP 141R-1 eliminates the distinction between contractual and non-contractual contingencies, including the initial recognition and measurement criteria in SFAS No. 141(R) and instead carries forward most of the provisions in SFAS No. 141 for acquired contingencies. FSP 141R-1 is effective for contingent assets and contingent liabilities acquired in business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. We adopted FSP 141R-1 in the first quarter of fiscal year 2010 and will apply this new accounting standard to any future business combinations.
Life of Intangible Assets. In April 2008, the FASB issued FSP No. 142-3, Determination of the Useful Life of Intangible Assets, or FSP 142-3, which amends the factors considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142. FSP 142-3 requires a consistent approach between the useful life of a recognized intangible asset under SFAS No. 142 and the period of expected cash flows used to measure the fair value of an asset under SFAS No. 141(R). The FSP also requires enhanced disclosures when an intangible asset’s expected future cash flows are affected by an entity’s intent and/or ability to renew or extend the arrangement. FSP 142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008 and is applied prospectively. We adopted FSP 142-3 in the first quarter of fiscal year 2010. The adoption of FSP 142-3 did not have a material impact on our consolidated financial position, results of operations or cash flows.
Fair Value of Financial Instruments. In April 2009, the FASB issued FSP No. FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments, or FSP 107-1 and APB 28-1, which require disclosure in the body or in the accompanying notes of the Company’s summarized financial information for interim reporting periods and in its estimated useful life.financial statements for annual reporting periods of the fair value of all financial instruments for which it is practicable to estimate that value, whether recognized or not in the statement of financial position, as required by Statement of Financial Accounting Standards No. 107, Disclosures about Fair Value of Financial Instruments. We arewere required to adopt FSP FAS 107-1 and APB 28-1 in the provisionssecond quarter of fiscal year 2010. The adoption of FSP FAS 107-1 and APB 28-1 did not have a material impact on our consolidated financial position, results of operations or cash flows.
Other-Than-Temporary Impairment. In April 2009, the FASB issued FSP No. FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments, or FSP No. 115-2 and FAS No. 124-2, which clarify the interaction of the factors that should be considered when determining whether a debt security is other than temporarily impaired. We were required to adopt FSP No. 115-2 and FAS No. 124-2 in the second quarter of fiscal year 2010. The adoption of FSP No. 115-2 and FAS No. 124-2 did not have a material impact on our consolidated financial position, results of operations or cash flows.
Fair Value Considering Volume and Level of Activity. In April 2009, the FASB issued FSP No. FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly, or FSP 157-4, which clarifies the interaction of the factors that should be considered when evaluating whether there has been a significant decrease in the volume and level of activity for an asset or liability when compared with normal market activity for the asset or liability (or similar assets or liabilities). If there has been a significant decrease in the volume and level of activity for the asset or liability, further analysis of the transactions or quoted prices is required, and a significant adjustment to the transactions or quoted prices may be necessary to estimate fair value. We were required to adopt FSP No. 157-4 in the second quarter of fiscal year 2010. The adoption of FSP No. 157-4 did not have a material impact on our consolidated financial position, results of operations or cash flows.
Subsequent Events. In May 2009, the FASB issued Statement of Financial Accounting Standards No. 165, Subsequent Events, or SFAS No. 141(R) beginning165, which provides authoritative accounting literature for a topic that was previously addressed only in the auditing literature. The guidance in SFAS No. 165 largely is similar to the current guidance in the auditing literature with oursome exceptions that are not intended to result in significant changes in practice. We adopted SFAS No. 165 in the second quarter of fiscal quarter ending April 26, 2009.year 2010. Please refer to Note 1 of these Notes to the Condensed Consolidated Financial Statements for the related disclosure. The adoption of SFAS No. 141(R)165 did not have a material impact on our consolidated financial statements.
Recently Issued Accounting Pronouncements
Variable Interest Entities. In June 2009, the FASB issued Statement of Financial Accounting Standards No. 167, Amendments to FASBInterpretation No. 46(R), or SFAS No. 167. SFAS No. 167 amends the evaluation criteria to identify the primary beneficiary of a variable interest entity provided by FIN 46(R). Additionally, SFAS No. 167 requires ongoing reassessments of whether an enterprise is expectedthe primary beneficiary of the variable interest entity. SFAS No. 167 will be effective for interim and annual reporting periods beginning after November 15, 2009. We do not believe the adoption of SFAS No. 167 will have a material impact on our consolidated financial position, results of operations or cash flows.
In June 2009, the FASB issued Statement of Financial Accounting Standards No. 168, The FASB Accounting Standard Codification and the Hierarchy of the Generally Accepted Accounting Principles — a replacement of SFAS No. 162 (SFAS 168), or SFAS No. 168, to changebecome the source of authoritative U.S. generally accepted accounting principles, or GAAP, recognized by the FASB to be applied by nongovernmental entities. SFAS No. 168 is effective for financial statements issued for interim and annual periods ending after September 15, 2009. We do not believe the adoption of SFAS 168 will have a material impact on our accounting treatment for business combinations on a prospective basis beginning in the period it is adopted.consolidated financial statements.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note 2 – Net Income (Loss) Per Share
Basic net income per share is computed using the weighted average number of common shares outstanding during the period. Diluted net income per share is computed using the weighted average number of common and dilutive common equivalent shares outstanding during the period, using the treasury stock method. Under the treasury stock method, the effect of stock options outstanding is not included in the computation of diluted net income per share for periods when their effect is anti-dilutive. The following is a reconciliation of the numerators and denominators of the basic and diluted net income (loss) per share computations for the periods presented:
| | | Three Months Ended | | | Six Months Ended | |
| | | July 26, 2009 | | | July 27, 2008 | | | July 26, 2009 | | | July 27, 2008 | |
| | | (In thousands, except per share data) | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| Denominator: | | | | | | | | | | | | | | | | |
Denominator for basic net income per share, weighted average shares | | | | | | | | | | | | | | | | |
| Effect of dilutive securities : | | | | | | | | | | | | | | | | |
Stock options outstanding | | | | | | | | | | | | | | | | |
Denominator for diluted net income (loss) per share, weighted average shares | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Basic net income (loss) per share | | | | | | | | | | | | | | | | |
Diluted net income (loss) per share | | | | | | | | | | | | | | | | |
All of our outstanding stock options and restricted stock units were anti-dilutive during the three and six months ended July 26, 2009 and excluded from the computation of diluted earnings per share due to the net loss for the three and six months ended July 26, 2009.
All of our outstanding stock options were anti-dilutive during the three months ended July 27, 2008 and excluded from the computation of diluted earnings per share due to the net loss for the three months ended July 27, 2008. Diluted net income per share does not include the effect of anti-dilutive common equivalent shares from stock options outstanding of 33.1 million for the six months ended July 27, 2008.
Note 3 – Stock Option Purchase
In March 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 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 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 condensed consolidated statement of operations for the six months ended July 26, 2009 includes stock-based compensation charges related to the stock option purchase (in thousands):
| | | | |
| | | | |
Sales, general and administrative | | | | |
| | | | |
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.
Note 24 - 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, which establishes accounting for stock-based awards exchanged for employee services. Accordingly,We measure stock-based compensation expense is measured at the grant date of the related equity awards, based on the fair value of the awards, and is recognized asrecognize the expense using the straight-line attribution method over the requisite employee service period. We elected to adoptestimate the modified prospective application method beginning January 30, 2006 as provided by SFAS No. 123(R). We recognize stock-based compensation expense using the straight-line attribution method. We estimate thefair 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
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Equity Incentive Plans
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. The description of the key features of the NVIDIA Corporation 2007 Equity Incentive Plan, or the 2007 Plan, PortalPlayer, Inc. 1999 Stock Option Plan, or 1999 Plan, and 1998 Employee Stock Purchase Plan, may be read in conjunction with the audited financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended January 25, 2009.
Options granted to new employees that started before the beginning of fiscal year 2010 generally vest ratably quarterly over a three-year period. In 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. Beginning in fiscal year 2010, options granted to new employees and to existing employees in recognition of performance 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 six years from the date of grant.
In general, RSUs are subject to the recipient’s continuing service to NVIDIA. RSUs 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.
In addition to the stock-based compensation expense related to our cash tender offer to purchase certain employee stock options as described in Note 3 – Stock Option Purchase, our condensed consolidated statements of operations include stock-based compensation expense, net of amounts capitalized as inventory, as follows:
| | | Three Months Ended | | | Six Months Ended | |
| | | July 26, 2009 | | | July 27, 2008 | | | July 26, 2009 | | | July 27, 2008 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Sales, general and administrative | | | | | | | | | | | | | | | | |
| | | Three Months Ended | | | Six Months Ended | |
| | | July 27, 2008 | | | July 29, 2007 | | | July 27, 2008 | | | July 29, 2007 | |
| | | | | | | | | | | | | | | | |
| Research and development | | $ | 24,226 | | | $ | 16,421 | | | $ | 48,760 | | | $ | 38,821 | |
Sales, general and administrative | | | | | | | | | | | | | | | | |
During the three and six months ended July 27, 2008, we granted approximately 0.9 million and 9.7 million stock options, respectively, with an estimated total grant-date fair value of $8.4 million and $95.4 million, respectively, and a per option weighted average grant-date fair value of $9.07 and $9.88, respectively. We did not grant any RSUs during the three months and six months ended July 27, 2008. Of 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 was $1.4 million and $15.7 million, respectively, for the three and six months ended July 27, 2008, respectively.
During the three and six months ended July 29, 2007, we granted approximately 1.4 million and 8.6 million stock options, respectively, with an estimated total grant-date fair value of $13.7 million and $69.8 million, respectively, and a per option weighted average grant-date fair value of $10.35 and $8.15, respectively. Of the estimated total grant-date fair value, we estimated that the stock-based compensation expense related to the awards that are not expected to vest was $2.6 million and $13.5 million for the three and six months ended July 29, 2007, respectively.2008.
As of July 27, 200826, 2009 and July 29, 2007,27, 2008, the aggregate amount of unearned stock-based compensation expense related to our stock optionsequity awards was $223.9$114.8 million and $175.0$223.9 million, respectively, adjusted for estimated forfeitures. We willAs of July 26, 2009 and July 27, 2008, we expect to recognize the unearned stock-based compensation expense related to stock options over an estimated weighted average amortization period of 2.0 years and 1.8 years, and 2.0 years, respectively. As of July 26, 2009, we expect to recognize the unearned stock-based compensation expense related to RSUs over an estimated weighted average amortization period of 2.7 years. As of July 27, 2008, we did not grant any RSUs.
Valuation Assumptions
We determined thatOur calculation of the usefair value of stock option awards uses implied volatility is expected torather than historical volatility as we expect that implied volatility will be more reflective of market conditions and therefore, can reasonably be expected to bethus a better indicator of our expected volatility than historical volatility. We also segregatedsegregate options into groups forof employees with relatively homogeneous exercise behavior in order to calculate the best estimate of fair value using the binomial valuation model. As such, the expected term assumption used in calculating the estimated fair value of our stock-based compensationstock option awards using the binomial model is based on detailed historical data about employees' exercise behavior, vesting schedules, and death and disability probabilities. Our management believes the resulting binomial calculation provides a more refinedreasonable estimate of the fair value of our employee stock options. For our employee stock purchase plan we continue to use the Black-Scholes model.
SFAS No. 123(R) also requiresWe estimate forfeitures to be estimated at the time of grant and revised,revise the estimates for 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 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The fair value of stock options granted during the first half of fiscal years 2009 and 2008, respectively, 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:
Stock Options
| | | Three Months Ended | | | Six Months Ended | |
| | | July 27,26, 2008
| | | July 29,
20072009
| | | July 27, 2008 | | | July 29,26, 20072009
| |
| | | July 27, 2008 | |
| Stock Options | | | (Using a binomial model) | |
| | | | | | | | | | | | | | | | |
| | | | |
Risk free interest rate | | | | | | | 5.0 | | | | | |
| | | 4.6% - 5.0 | % |
| | | | | | | | | | | | | | | | |
Dividend Yield | | | - | | | | - | | | | - | | | | - | |
Employee Stock Purchase Plan
| | Three Months Ended | | | Six Months Ended | |
| | July 27,
2008
| | | July 29,
2007
| | | July 27,
2008
| | | July 29,
2007
| |
| | | (Using a Black-Scholes model)
| |
Expected life (in years)Dividend Yield
| | | | | | | | | | | | | | | | |
Risk free interest rate | | | - | | | | - | | | | 1.6% - 1.8 | % | | | 3.5% - 5.2 | % |
| | | | | | | | | | | | | | | | |
Dividend Yield | | | - | | | | - | | | | - | | | | - | |
| | | Three Months Ended | | | Six Months Ended | |
| | | July 26, 2009 | | | July 27, 2008 | | | July 26, 2009 | | | July 27, 2008 | |
| Employee Stock Purchase Plan | | | (Using a Black-Scholes model) | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
There were no grants madeshares issued under the Employee Stock Purchase Planemployee stock purchase plan during the three months ended July 27, 200826, 2009 and July 29, 2007.
Equity Incentive Plans
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. 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.
The description of the key features of the Nvidia Corporation 2007 Equity Incentive Plan, or the 2007 Plan, PortalPlayer, Inc. 1999 Stock Option Plan, or 1999 Plan, and 1998 Employee Stock Purchase Plan, may be read in conjunction with the audited financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended January 27, 2008.
Equity Award Activity
The following summarizes the transactionsstock option and RSU activities under our equity incentive plans:
| | | Options Outstanding | | | Weighted Average Exercise Price | |
| | | | | | |
Balances, January 25, 2009 | | | 97,454 | | | $ | 13.83 | |
| | | 5,352 | | | $ | 9.94 | |
| | | (5,680 | ) | | $ | 4.36 | |
| | | (902 | ) | | $ | 12.82 | |
Cancellations related to stock options purchase (1) | | | (28,532 | ) | | $ | 23.35 | |
| | | 67,692 | | | $ | 10.32 | |
| | | Options Available for Grant | | | Options Outstanding | | | Weighted Average Exercise Price Per Share | |
Balances, January 27, 2008 | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | RSUs | | | Weighted Average Grant-date fair value | |
| Restricted Stock Units | | (In thousands) | | | (Per Share) | |
Balances, January 25, 2009 | | | - | | | $ | - | |
| | | 4,803 | | | $ | 10.17 | |
| | | - | | | $ | - | |
| | | (50 | ) | | $ | 10.15 | |
| | | 4,753 | | | $ | 10.17 | |
| | | | | | | | | |
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The following summarizes the stock options and RSUs, or equity awards, available for grant under our equity incentive plans (in thousands):
Balances, January 25, 2009 | | | | |
| | | | |
| | | | |
| | | | |
Cancellations related to stock option purchase (1) | | | | |
| | | | |
| | | | |
| | | | |
| | | | |
(1) Please refer to Note 3 of these condensed consolidated financial statements for further discussion related to our stock option purchase in March 2009.
Note 35 – Income Taxes
We recognized income tax expense (benefit) of ($25.7)1.8) million and $28.1($25.7) million for the three months ended July 26, 2009 and July 27, 2008, and July 29, 2007, respectively, and $10.5($25.3) million and $49.6$10.5 million for the six months ended July 27, 200826, 2009 and July 29, 2007,27, 2008, respectively. Income tax expense (benefit) as a percentage of income before taxes, or our effective tax rate, was (17.5%(1.7%) and 14.0%(17.5%) for the three months ended July 26, 2009 and July 27, 2008, and July 29, 2007, respectively, and 15.9%(7.6%) and 14.0%15.9% for the six months ended July 26, 2009 and July 27, 2008, respectively.
The expected tax benefit derived from our loss before tax for the first six months of fiscal year 2010 at the United States federal statutory tax rate of 35% differs from our actual effective tax rate of (7.6%) due primarily to permanent tax differences related to stock-based compensation and July 29, 2007, respectively. losses recognized in tax jurisdictions where no tax benefit has been recognized, partially offset by the U.S. tax benefit of the federal research tax credit. Further, our annual projected effective tax rate of (3.9%) differs from our actual effective tax rate of (7.6%) primarily due to a one-time discrete item related to our stock option purchase completed in March 2009.
Our effective tax rate on income before tax for the first half of fiscal year 2009 is lower than the United States federal statutory rate of 35% due primarily to income earned in jurisdictions where that tax rate is lower than the United States Federal Statutory rate of 35.0% due primarily to income earned in lowerfederal statutory tax jurisdictions and U.S. tax benefit of the federal research tax credits available in the respective periods.rate.
Our effective tax rates for the first half of fiscal year 2009 increased to 15.9% from 14.0% during the first half of fiscal year 2008 primarily due to the expiration of the federal research tax credit in fiscal year 2009. In addition, during the three months ended July 27, 2008, we increased our estimate of the annual effective tax rate for fiscal year 2009 from 17.0% to 22.8%. The increase in our effective income tax rate was a result of the impact of non-deductible tax items to our annual effective tax rate caused by the change in our outlook for the financial results of fiscal year 2009. This increase in our estimated annual effective tax rate was offset in the second quarter primarily by a favorable impact from the expiration of statues of limitations in certain non-U.S jurisdictions, resulting in an effective tax rate for the first half of fiscal year 2009 of 15.9%.
During the three months ended July 27, 2008, the Internal Revenue Service closed its review of our U.S. federal income tax returns for fiscal year 2004 through 2006 with no material changes to our income tax returns as filed. However, due to net operating losses generated in those and other tax years, we remain subject to future examination of our U.S. federal income tax returns beginning in fiscal year 2002 through fiscal year 2008. For the six months ended July 27, 2008,26, 2009, there have been no other material changes to our tax years that remain subject to examination by major tax jurisdictions. Additionally, there have been no material changes to our unrecognized tax benefits and any related interest or penalties from our fiscal year ended January 27, 2008.25, 2009.
While we believe that we have adequately provided for all uncertain 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-relatedtax related matters to be recorded in the future may change as revised estimates are made or the underlying matters are settled or otherwise resolved with the respective tax authorities. As of July 27, 2008,26, 2009, we do not believe that our estimates, as otherwise provided for, on such tax positions will significantly increase or decrease within the next twelve months.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note 4 – 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 per share for periods when their effect is anti-dilutive. The following is a reconciliation of the numerators and denominators of the basic and diluted net income (loss) per share computations for the periods presented:
| | | Three Months Ended | | | Six Months Ended | |
| | | July 27, 2008 | | | July 29, 2007 | | | July 27, 2008 | | | July 29, 2007 | |
| | | (In thousands, except per share data) | |
| | | | | | | | | | | | |
| Net income (loss) | | $ | (120,929 | ) | | $ | 172,732 | | | $ | 55,876 | | | $ | 304,991 | |
| | | | | | | | | | | | | | | | |
| Denominator for basic net income per share, weighted average shares | | | 555,417 | | | | 547,305 | | | | 555,531 | | | | 544,275 | |
Effect of dilutive securities: | | | | | | | | | | | | | | | | |
| Stock options outstanding | | | - | | | | 56,525 | | | | 36,650 | | | | 56,682 | |
| Denominator for diluted net income (loss) per share, weighted average shares | | | 555,417 | | | | 603,830 | | | | 592,181 | | | | 600,957 | |
| Net income per share: | | | | | | | | | | | | | | | | |
Basic net income (loss) per share | | | | | | | | | | | | | | | | |
Diluted net income (loss) per share | | | | | | | | | | | | | | | | |
Diluted net income (loss) per share for the three and six months ended July 27, 2008 does not include the effect of anti-dilutive common equivalent shares from stock options outstanding of 61.6 million and 33.1 million, respectively. Diluted net income per share for three and six months ended July 29, 2007 does not include the effect of anti-dilutive common equivalent shares from stock options outstanding of 5.1 million and 16.8 million, respectively.
Note 56 - 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, or SFAS No. 115. All of ourthe cash equivalents and marketable securities are treatedclassified as “available-for-sale” under SFAS No. 115. Cash equivalents consistsecurities. Investments in both fixed rate instruments and floating rate interest earning instruments carry a degree of financial instruments whichinterest 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 readily convertible into cash and have original maturitiesforced 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 three monthsoperations due to changes in interest rates unless such securities are sold prior to maturity or less at the time of acquisition. Marketable securities consist primarily of highly liquid investments with a maturity of greater than three months when purchased and some equity investments. We classify our marketable securities at the date of acquisitionunless declines in the available-for-sale category as our intention ismarket values are determined to convert them into cash for operations.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. Any unrealized losses which are considered to be other-than-temporary impairments are recorded in the other expense section
We performed an impairment review of our consolidated statements of operations. Realized gain (loss) on the sale of marketable securities is determined using the specific-identification method. Net realized gain (loss) for the three and six months ended July 27, 2008 was ($0.1) million and $1.2 million, respectively. Net realized gains for the three and six months ended July 29, 2007 were not significant. The unrealized gain (loss)investment portfolio as of July 27, 2008 and July 29, 2007 was ($0.5) million and $1.8 million, respectively. Please refer to Note 16 of these Notes to the Condensed Consolidated Financial Statements for further details26, 2009. Based on our fair value measurements.quarterly impairment review and having considered the guidance in the relevant accounting literature, we did not record any other than temporary impairment charges during the first half of fiscal years 2010 and 2009. 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 July 26, 2009.
The following is a summary of cash equivalents and marketable securities at July 26, 2009 and January 25, 2009:
| | | July 26, 2009 | |
| | | Amortized Cost | | | Unrealized Gain | | | Unrealized Loss | | | Estimated Fair Value | |
| | | (In thousands) | |
Debt securities of United States government agencies | | | | | | | | | | | | | | | | |
Debt securities issued by United States Treasury | | | | | | | | | | | | | | | | |
Corporate debt securities | | | | | | | | | | | | | | | | |
Mortgage backed securities issued by United States government-sponsored enterprises | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | January 25, 2009 | |
| | | Amortized Cost | | | Unrealized Gain | | | Unrealized Loss | | | Estimated Fair Value | |
| | | (In thousands) | |
Debt securities of United States government agencies | | | | | | | | | | | | | | | | |
Corporate debt securities | | | | | | | | | | | | | | | | |
Mortgage backed securities issued by United States government-sponsored enterprises | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Debt securities issued by United States Treasury | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note 6 - 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 considerationNet realized gains 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 to represent 3dfx’s bankruptcy estate. The Trustee’s complaint asserts claims for, among other things, successor liabilitythree and fraudulent transfer and seeks additional payments from us. On October 13, 2005, the Bankruptcy Court held a hearing on the Trustee’s motion for summary adjudication. On December 23, 2005, the Bankruptcy Court denied the Trustee’s Motion for Summary Adjudication in all material respects and held that NVIDIA may not dispute that the value of the 3dfx transaction was less than $108.0 million. The Bankruptcy Court denied the Trustee’s request to find that the value of the 3dfx assets conveyed to NVIDIA was at least $108.0 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 NVIDIA. This conditional settlement was subject to a confirmation process through a vote of creditors and the review and approval of the Bankruptcy Court after notice and hearing. 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. However, the conditional settlement never progressed substantially through the confirmation process.
On December 21, 2005, the Bankruptcy Court determined that it would schedule trial of one portion of the Trustee’s case against NVIDIA. On January 2, 2007, NVIDIA exercised its right to terminate 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? At the conclusion of the evidence, the Bankruptcy Court asked the parties to submit post-trial briefing. That briefing was completed 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 with respect to each of the questions to be tried. The Bankruptcy Court concluded that "the creditors of 3dfx were not injured by the Transaction." This decision does not entirely dispose of the Trustee's action, however; still pending are the Trustee's claims for successor liability and intentional fraudulent conveyance. On May 12, 2008, the Trustee filed a motion for leave to pursue an interlocutory appeal, but thereafter withdrew the motion. NVIDIA has filed a motion for summary judgment on all causes of action in order to convert the Memorandum Decision After Trial to a final judgment. That motion is scheduled to be heard on August 28, 2008.
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 12 of these Notes to Condensed Consolidated Financial Statements for further information regarding this litigation.
| | | Fair Market Value | | | Straight-Line Amortization Period | |
| | | (In thousands) | | | (Years) | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note 7 – 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. Mental Images’ Mental Ray product is considered by many to be the most pervasive ray tracing renderer in the industry. 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. The allocation of the purchase price for the Mental Images and Ageia acquisitions have been prepared on a preliminary basis and reasonable changes are expected as additional information becomes available.
As of July 27, 2008, 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 | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Acquisition related costs | | | | | | | | |
| | | | | | | | |
Total liabilities assumed | | | | | | | | |
Purchase price allocation | | | | | | | | |
| | | Mental Images | | | Ageia | |
| | (Straight-line depreciation/amortization period) |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
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 these acquisitions have not been presented because the effects of the acquisitions, individually or in the aggregate, were not material to our results.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note 8 - Goodwill
The carrying amount of goodwill is as follows:
| | | July 27, 2008 | | | January 27, 2008 | |
| | | (In thousands) | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
During the six months ended July 27, 2008, goodwill increased by $17.026, 2009, were $0.2 million due to our acquisition of Ageia on February 10, 2008. This increase in goodwill was offset by a decrease of $4.8and $1.0 million, for Mental Images related to the reassessment of estimates made during the preliminary purchase price allocation.
Note 9 - Amortizable Intangible Assets
We are currently amortizing our intangible assets with definitive lives over periods ranging from one to seven years, primarily on a straight-line basis. The components of our amortizable intangible assets are as follows:
| | | July 27, 2008 | | | January 27, 2008 | |
| | | Gross Carrying Amount | | | Accumulated Amortization | | | Net Carrying Amount | | | Gross Carrying Amount | | | Accumulated Amortization | | | Net Carrying Amount | |
(In thousands) | |
| | $ | 112,263 | | | $ | (28,128 | ) | | $ | 84,135 | | | $ | 94,970 | | | $ | (32,630 | ) | | $ | 62,340 | |
Acquired intellectual property | | | 75,880 | | | | (26,242 | ) | | | 49,638 | | | | 77,900 | | | | (41,030 | ) | | | 36,870 | |
| | | 17,183 | | | | (5,808 | ) | | | 11,375 | | | | 35,348 | | | | (27,632 | ) | | | 7,716 | |
| | | - | | | | - | | | | - | | | | 1,494 | | | | (1,494 | ) | | | - | |
| | $ | 205,326 | | | $ | (60,178 | ) | | $ | 145,148 | | | $ | 209,712 | | | $ | (102,786 | ) | | $ | 106,926 | |
The increase in the net carrying amount of technology licenses as of July 27, 2008 when compared to January 27, 2008, is primarily related to approximately $26.7 million of net cash outflows under a confidential patent licensing arrangement entered into during fiscal year 2007, offset by amortization for the six months ended July 27, 2008. 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 the first quarter of fiscal year 2009, offset by amortization for the six months ended July 27, 2008. Please refer to Note 7 of these Notes to Condensed Consolidated Financial Statements for further information. The decrease in the gross carrying amounts of the intangible assets as of July 27, 2008 when compared to January 27, 2008 is primarily due to the write-off of fully amortized intangible assets.
Amortization expense associated with intangible assetsrespectively. Net realized gains (losses) for the three and six months ended July 27, 2008 was $7.5were $(0.1) million and $15.0$1.2 million, respectively. Amortization expense associated with intangible assets for
As of July 26, 2009, we held a money market investment in the three and six months ended July 29, 2007Reserve International Liquidity Fund, Ltd., or the International Reserve Fund, which was valued at $22.0 million, net of $5.6 million of other than temporary impairment charges that we recorded during fiscal year 2009. The International Reserve Fund was reclassified out of cash and $12.6 million, respectively. Future amortization expense relatedcash equivalents in our Condensed Consolidated Balance Sheet as of July 26, 2009 due to the net carrying amounthalting of intangible assets atredemption requests in September 2008 by the International Reserve Fund. The $22.0 million value of our holdings in the International Reserve Fund as of July 27, 2008 is estimated to be $18.726, 2009 reflects an initial investment of $130.0 million, forreduced by $102.4 million that we received from the remainderInternational Reserve Fund during the first six months of fiscal year 2010 and the $5.6 million other than temporary impairment charge we recorded against the value of this investment during fiscal year 2009 $28.5as a result of credit loss. The $102.4 million we received was our portion of a payout of approximately 79% of the total assets of the International Reserve Fund. All of the underlying securities held by the International Reserve Fund are scheduled to mature by October 2009. We expect to receive the proceeds from our remaining investment in fiscal 2010, $23.7the International Reserve Fund, excluding some or all of the $5.6 million impairment charges, after all the securities have matured. However, redemptions from the International Reserve Fund are currently subject to pending litigation, which could cause further delay in fiscal 2011, $22.0 million in fiscal 2012, $17.4 million in fiscal 2013, $13.3 million in fiscal 2014 and $21.5 million in fiscal years subsequentreceipt of fiscal 2014.our funds.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note 7 – Fair Value of Cash Equivalents and Marketable Securities
We measure our cash equivalents and marketable securities at fair value. The fair values of our financial assets and liabilities are determined using quoted market prices of identical assets or quoted market prices of similar assets from active markets. Level 1 valuations are obtained from real-time quotes for transactions in active exchange markets involving identical assets. Level 2 valuations are obtained from quoted market prices in active markets involving similar assets. Level 3 valuations are based on unobservable inputs to the valuation methodology and include our own data about assumptions market participants would use in pricing the asset or liability based on the best information available under the circumstances.
Financial assets and liabilities measured at fair value are summarized below:
| | | Fair value measurement at reporting date using | |
| | | | | | Quoted Prices in Active Markets for Identical Assets | | | Significant Other Observable Inputs | | | High Level of Judgment | |
| | | July 26, 2009 | | | (Level 1) | | | (Level 2) | | | (Level 3) | |
| | | (In thousands) | |
Debt securities issued by US Government agencies (1) | | | | | | $ | | | | $ | | | $ | | | |
Debt securities issued by United States Treasury (2) | | | | | | | | | | | | | | | | |
Corporate debt securities (3) | | | | | | | | | | | | | | | | |
Mortgage-backed securities issued by Government-sponsored entities (4) | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Asset-backed Securities (4) | | | | | | | | | | | | | | | | |
Total cash equivalents and marketable securities | | | | | | | | | | | | | | | | |
| (1) | Includes $111,740 in Cash Equivalents and $326,478 in Marketable Securities on the Condensed Consolidated Balance Sheet. |
| (2) | Includes $120,080 in Cash Equivalents and $166,108 in Marketable Securities on the Condensed Consolidated Balance Sheet. |
| (3) | Includes $10,998 in Cash Equivalents and $255,635 in Marketable Securities on the Condensed Consolidated Balance Sheet. |
| (4) | Included in Marketable Securities on the Condensed Consolidated Balance Sheet. |
| (5) | Includes $120,954 in Cash Equivalents and $21,964 in Marketable Securities on the Condensed Consolidated Balance Sheet. |
For our money market funds that were held by the International Reserve Fund at July 26, 2009, we assessed the fair value of the money market funds by considering the underlying securities held by the International Reserve Fund. As the International Reserve Fund has halted redemption requests and is currently believed to be holding all of their securities until maturity, we valued the underlying securities held by the International Reserve Fund at their maturity value using an income approach. Certain of the debt securities held by the International Reserve Fund were issued by companies that had filed for bankruptcy during fiscal year 2009 and, as such, our valuation of those securities was zero. The net result was that, during the third quarter of fiscal year 2009, we estimated the fair value of the International Reserve Fund’s investments to be 95.7% of their last-known value and we recorded an other than temporary impairment charge of $5.6 million as a result of credit loss. The $22.0 million value of our holdings in the International Reserve Fund as of July 26, 2009 reflects an initial investment of $130.0 million, reduced by $102.4 million that we received from the International Reserve Fund during the first six months of fiscal year 2010 and the $5.6 million other than temporary impairment charge we recorded against the value of this investment during fiscal year 2009 as a result of credit loss. Due to the inherent subjectivity and the significant judgment involved in the valuation of our holdings of International Reserve Fund, we have classified these securities under the Level 3 fair value hierarchy.
Reconciliation of financial assets measured at fair value on a recurring basis using significant unobservable inputs, or Level 3 inputs (in thousands):
Balance, beginning of period, January 25, 2009 | | | | |
| | | | |
Other than temporary impairment | | | | |
| | | | |
Balance, end of period, July 26, 2009 | | | | |
| | | | | |
Total financial assets at fair value classified within Level 3 were 0.7% of total assets on our Condensed Consolidated Balance Sheet as of July 26, 2009.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note 8 - 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.
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 asserted claims for, among other things, successor liability and fraudulent transfer and sought additional payments from us. In early November 2005, 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 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 12 of these Notes to Condensed Consolidated Financial Statements for further information regarding this litigation.
| | | Fair Market Value | | | Straight-Line Amortization Period | |
| | | (In thousands) | | | (Years) | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note 9 - Intangible Assets
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 not be reliably determined, using a straight-line amortization method. The components of our amortizable intangible assets are as follows:
| | July 26, 2009 | | January 25, 2009 | |
| | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | |
| | (In thousands) | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Acquired intellectual property | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Amortization expense associated with intangible assets for the three and six months ended July 26, 2009 was $7.9 million and $16.2 million, respectively. Amortization expense associated with intangible assets for the three and six months ended July 27, 2008 was $7.5 million and $15.0 million, respectively. Future amortization expense related to the net carrying amount of intangible assets at July 26, 2009 is estimated to be $15.6 million for the remainder of fiscal year 2010, $27.6 million in fiscal year 2011, $25.2 million in fiscal year 2012, $18.9 million in fiscal year 2013, $14.4 million in fiscal year 2014, and a total of $34.0 million in fiscal year 2015 and fiscal years subsequent of fiscal year 2015.
Note 10 - Balance Sheet Components
Certain balance sheet components are as follows:
| | | July 26, 2009 | | | January 25, 2009 | |
| Inventories: | | (In thousands) | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | July 27, 2008 | | | January 27, 2008 | |
| | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
At July 27, 2008,26, 2009, we had outstanding inventory purchase obligations totaling approximately $615.6$492 million.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
| | | July 26, 2009 | | | January 25, 2009 | |
| Prepaid and Other Current Assets: | | (In thousands) | |
| | | | | | | | |
Prepaid maintenance contracts | | | | | | | | |
| | | | | | | | |
Total prepaid and other current assets | | | | | | | | |
| | | July 27, 2008 | | | January 27, 2008 | | | Estimated Useful Life |
| | | (In thousands) | | | (Years) |
| Property and Equipment: | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Office furniture and equipment | | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | | |
Accumulated depreciation and amortization | | | | | | | | ) | | |
Total property and equipment, net | | | | | | | | | | |
| | | July 26, 2009 | | | January 25, 2009 | |
| Accrued Liabilities: | | (In thousands) | |
Accrued customer programs (1) | | | | | | | | |
| | | | | | | | |
Accrued payroll and related expenses | | | | | | | | |
Accrued legal settlement (3) | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Total accrued liabilities and other | | | | | | | | |
During the six months ended July 27, 2008, we wrote-off $113.1 million of fully depreciated property and equipment, including $68.8 million of software and licenses.
(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) Construction in process represents assets that are not in service as of the balance sheet date.
| | | July 27, 2008 | | | January 27, 2008 | |
| | | |
Accrued customer programs (1) | | | | | | | | |
| | | | | | | | |
Accrued payroll and related expenses | | | | | | | | |
Accrued costs related to purchase of property | | | | | | | | |
Accrued legal settlement (3) | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Total accrued liabilities | | | | | | | | |
(1) Please refer to Note 1 of these Notes to Condensed 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 11 of these Notes to Condensed Consolidated Financial Statements for discussion regarding the warranty accrual.
(3) Please refer to Note 12 of these Notes to Condensed Consolidated Financial Statements for discussion regarding the 3dfx litigation.
| | | July 26, 2009 | | | January 25, 2009 | |
| Other Long-term Liabilities: | | (In thousands) | |
Deferred income tax liability | | | | | | | | |
Income taxes payable, long term | | | | | | | | |
Asset retirement obligation | | | | | | | | |
Other long-term liabilities | | | | | | | | |
Total other long-term liabilities | | | | | | | | |
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
| | | July 27, 2008 | | | January 27, 2008 | |
| Other Long-term Liabilities: | | (In thousands) | |
Deferred income tax liability | | | | | | | | |
Income taxes payable, long term | | | | | | | | |
Asset retirement obligation | | | | | | | | |
Other long-term liabilities | | | | | | | | |
Total other long-term liabilities | | | | | | | | |
Note 11 - Guarantees
FASB Interpretation No. 45, or FIN 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, requires that upon issuance of a guarantee, the guarantor must recognize a liability for the fair value of the obligation it assumes under that guarantee. In addition, FIN 45 requires disclosures about the guarantees that an entity has issued, including a tabular reconciliation of the changes of the entity’s product warranty liabilities.
Product Defect
Our products are complex and may contain defects or experience failures due to any number of issues in design, fabrication, packaging, materials and/or use within a system. If any of our products or technologies contains a defect, compatibility issue or other error, we may have to invest additional research and development efforts to find and correct the issue. Such efforts could divert our management’s and engineers’ attention from the development of new products and technologies and could increase our operating costs and reduce our gross margin. In addition, an error or defect in new products or releases or related software drivers after commencement of commercial shipments could result in failure to achieve market acceptance or loss of design wins. Also, we may be required to reimburse customers, including for customers’ costs to repair or replace the products in the field, 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.
During ourthe second quarter of fiscal quarter ended July 27, 2008,year 2010, we recorded a $196.0an additional net warranty charge of $120.0 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. AllThis charge included an additional accrual of $164.5 million for related estimated costs, offset by reimbursements from insurance carriers of $44.5 million that we recorded during the second quarter of fiscal year 2010. In July 2008, we recorded a $196.0 million charge against cost of revenue for the purpose of supporting the product repair costs of our newly manufactured productsaffected customers around the world. Although the number of units that we estimate will be impacted by this issue remains consistent with our initial estimates in July 2008, the overall cost of remediation and allrepair of impacted systems has been higher than originally anticipated. The weak die/packaging material combination is not used in any of our products that are currently shipping in volume have a different material set that we believe is more robust.production.
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 with certainty 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. During the second quarter of fiscal year 2010, we recorded $44.5 million in related insurance reimbursements which partially offset the additional warranty charge of $164.5 million included in cost of revenue. Additionally, we received $8.0 million in reimbursements from insurance providers in fiscal year 2009. However, there can be no assurance that we will recover any suchadditional 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.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
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 the three and six months ended July 27, 200826, 2009 and July 29, 200727, 2008 are as follows:
| | | Three Months Ended | | Six Months Ended | | | Three Months Ended | | Six Months Ended | |
| | | July 27, 2008 | | July 29, 2007 | | July 27, 2008 | | July 29, 2007 | | | July 26, 2009 | | | July 27, 2008 | | July 26, 2009 | | July 27, 2008 | |
| | | (In thousands) | | | (In thousands) | |
Balance at beginning of period | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Additions (1),(4) | | 203,743 | | | 8,468 | | | | 213,293 | | | 13,448 | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Balance at end of period (3) | | $ | | | $ | | | $ | | | $ | | | | | | | | | | | | | | | | | | |
(1) Includes $7,173 and $16,039$164,450 for the three and six months ended July 27, 2008, respectively26, 2009 and $8,281 and $13,027 for the three and six months ended July 29, 2007, respectively, towards allowances 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 $7,922 and $16,804 for the three and six months ended July 27, 2008, respectively and $6,837 and $10,712 for the three and six months ended July 29, 2007, respectively, written off against the allowance for sales returns.
(3) Includes $17,960 and $16,792 at July 27, 2008 and July 29, 2007, respectively, relating to allowance for sales returns.
(4) Includes $195,954 for the three and six months ended July 27, 2008 for incremental repair and replacement costs from a weak die/packaging material set.
(5)(2) Includes $15,830$48,796 and $79,971 for the three and six months ended July 27, 200826, 2009 in deductions towardspayments related to the 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 Condensed Consolidated Financial Statements for such indemnifications.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note 12 - Commitments and Contingencies
3dfx
On December 15, 2000, NVIDIA Corporation and one of our indirect subsidiaries entered into an Asset Purchase Agreement, or APA, to purchase certain graphics chip assets from 3dfx which3dfx. The transaction closed on April 18, 2001. That acquisition, and 3dfx’s October 2002 bankruptcy filing, led to four lawsuits against NVIDIA: two brought by 3dfx’s former landlords, one by 3dfx’s bankruptcy trustee and the fourth by a committee of 3dfx’s equity security holders in the bankruptcy estate.
Landlord Lawsuits.
In May 2002, we were served with a California state court complaint filed by the landlord of 3dfx’s San Jose, California commercial real estate lease, 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.Corporation, or CarrAmerica. The landlords’ complaintslandlords both asserted claims for, among other things, interference with contract, successor liability and fraudulent transfer. The landlords’landlords sought to recover money damages including amounts owed on their leases with 3dfx in the aggregate amount of approximately $15 million. In October 2002,million, representing amounts then owed on the 3dfx filed for Chapter 11 bankruptcy protection in the United States Bankruptcy Court for the Northern District of California. In January 2003, the landlords’ actionsleases. 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 of discovery, with a complaint filed against NVIDIAan action brought by the Trustee in the 3dfx bankruptcy case. Upon motion by NVIDIA intrustee.
In 2005, the U.S. District Court for the Northern District of California withdrew the reference to the Bankruptcy Court for the landlords’ actions, which were removed to the United States District Court for the Northern District of California. The Trustee’s lawsuit remained in the Bankruptcy Court. Onand on November 10, 2005, the District Court granted our motion to dismiss theboth landlords’ respective amended complaints and allowed the landlords until February 4, 2006 to amend their complaints. The landlords re-filed claims against NVIDIAfiled amended complaints in early February 2006, and NVIDIA again filed motions requesting the District Court to dismiss those claims. On September 29, 2006, the District Court dismissed the CarrAmerica action in its entirety and without leave to amend. The District Court found, among other things, that CarrAmerica lacked standing to bring the lawsuit and that standing rests exclusively with the bankruptcy Trustee. On October 27, 2006, CarrAmerica filed a notice of appeal from that order. On December 15, 2006, the District Court also dismissed the Carlyle action in its entirety, finding that Carlyle also lacked standing to pursue its claims, and that certain claims were substantively unmeritorious. Carlyleentirety. Both landlords filed a noticetimely notices of appeal from that order on January 9, 2007. Both landlords’ appeals are pending beforethose orders.
On July 17, 2008, the United States Court of Appeals for the Ninth Circuit and briefing on both appeals has been consolidated. NVIDIA has filed motions to recover its litigation costs and attorneys fees against both Carlyle and CarrAmerica. The District Court has postponed consideration of those motions until after the appeals are resolved. On July 17, 2008, the Ninth Circuit held oral argument on the landlords' appeals,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 matter now awaitsCourt’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 court'sCarrAmerica 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. On April 2, 2009, Carlyle filed a petition for a writ of certiorari in the United States Supreme Court, seeking review of the Court of Appeals decision. We filed an opposition to that petition on June 8, 2009.
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. The parties subsequently filed a stipulation requesting that the District Court vacate the May 18, 2009 Case Management Conference date and other deadlines until after Bankruptcy Court rendered its decision. At a hearing on May 13, 2009, the Bankruptcy Court ruled that the Trustee had not abandoned any claims against us, and denied the Trustee's Notice of Intention to Compromise Controversy with Carlyle Fortran Trust without prejudice. Carlyle has filed a motion in the District Court for leave to file an interlocutory appeal from the order denying the Notice. We filed an opposition to that motion.
On July 7, 2009, the parties attended a Case Management Conference in the District Court for both the CarrAmerica and the Carlyle cases. On July 8, 2009, the District Court issued an order requiring that CarrAmerica file an amended complaint on or before August 10, 2009. CarrAmerica filed its amended complaint on August 10, 2009, alleging claims for interference with contractual relations, fraud, conspiracy, and tort of another. The District Court has set a hearing date of November 9, 2009, for any motion to dismiss CarrAmerica’s amended complaint and for Carlyle’s motion for leave to file an interlocutory appeal, and set a further case management conference for that date. We continue to believe that there is no merit to Carlyle or CarrAmerica’s remaining claims.
Trustee Lawsuit.
In March 2003, we were served with a complaint filed by the Trustee appointed by the Bankruptcy Court to represent 3dfx’s bankruptcy estate.estate served his complaint on NVIDIA. The Trustee’s complaint asserts claims for, among other things, successor liability and fraudulent transfer and seeks additional payments from us. The Trustee’s fraudulent transfer theory alleged that NVIDIA had failed to pay reasonably equivalent value for 3dfx’s assets, and sought recovery of the difference between the $70 million paid and the alleged fair value, which the Trustee estimated to exceed $50 million. The Trustee’s successor liability theory alleged NVIDIA was effectively 3dfx’s legal successor and was therefore responsible for all of 3dfx’s unpaid liabilities. This action was consolidated for pretrial purposes with the landlord cases, as noted above.
On October 13, 2005, the Bankruptcy Court held a hearing onheard the Trustee’s motion for summary adjudication. Onadjudication, and on December 23, 2005, the Bankruptcy Court denied the Trustee’s Motion for Summary Adjudicationthat motion in all material respects and held that NVIDIA may not dispute that the value of the 3dfx transaction was less than $108.0$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 $108.0$108 million.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
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 after notice and hearing.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, 2005,2006, the Bankruptcy Court determined that it would schedulescheduled a trial offor one portion of the Trustee’s case against NVIDIA. On January 2, 2007, NVIDIA exercised its right to terminateterminated the settlement agreement on grounds that the Bankruptcy 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?; (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?; (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? At the conclusion of the evidence, the Bankruptcy Court asked theThe parties to submitcompleted post-trial briefing. That briefing was completed 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 with respect to each of the questions to be tried. The Bankruptcy Courtand evidence and concluded that "the“the creditors of 3dfx were not injured by the Transaction."” This decision doesdid not entirely dispose of the Trustee'sTrustee’s action, however; still pending arehowever, as the Trustee'sTrustee’s claims for successor liability and intentional fraudulent conveyance.conveyance were still pending. On May 12,June 19, 2008, the Trustee filed a motion for leave to pursue an interlocutory appeal, but thereafter withdrew the motion. NVIDIA has filed a motion for summary judgment on all causes of action in order 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 scheduled to be heardpending. The District Court’s hearing on August 28, 2008.the Trustee’s appeal was held on June 10, 2009.
While the conditional settlement reached in November 2005 never progressed through the confirmation process, the Trustee’s case still remains pending appeal. As such, we have not reversed the accrual of $30.6 million – $5.6 million as a charge to settlement costs and $25.0 million as additional purchase price for 3dfx – that we recorded during the three months ended October 30, 2005, pending resolution of the appeal of the Trustee’s case. We do not believe the resolution of this matter will have a material impact on our results of operations or financial position.
The Equity Committee Lawsuit.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
On December 8, 2005, the Trustee filed a Form 8-K on behalf of 3dfx, in which the Trustee discloseddisclosing the terms of the conditional settlement agreement between NVIDIA and the Creditor’s Committee. Thereafter, certain 3dfx shareholders of 3dfx filed a petition with the Bankruptcy Court to appoint an official committee to represent the claimed interests of 3dfx shareholders. ThatThe court granted that petition was granted and appointed an Equity Securities Holders’ Committee, was appointed. Since that appointment,or the Equity Holders’Committee. The Equity Committee hasthereafter sought and obtained an order granting it standing to bring suit against NVIDIA, for the benefit of the bankruptcy estate, to compel NVIDIA to pay the stock consideration then unpaid from the APA, and filed aits own competing plan of reorganization/liquidation. The Equity Holders’ Committee’s plan assumes that 3dfx can raise additional equity capital that would be used to retire all of 3dfx’s debts. The Equity Holders’ Committee contends that the commitment by an investordebts, and thus to trigger NVIDIA’s obligation to pay six million shares of stock consideration specified in equity capital is sufficient to trigger NVIDIA's obligations under the APA to pay the stock consideration.APA. NVIDIA contends, among other things, that such a commitment is not sufficient and that its obligation to pay the stock consideration hashad long before been extinguished. By virtue of stock splits sinceOn May 1, 2006, the execution of the APA, the stock consideration would now total six million shares of NVIDIA common stock. The Equity Holders’ Committee filed a motion with the Bankruptcy Court seeking an order giving it standingits lawsuit for declaratory relief to bring a lawsuitcompel NVIDIA to obtainpay the stock consideration. Over our objection, the Bankruptcy Court granted that motion on May 1, 2006 and the Equity Holders’ Committee filed its Complaint for Declaratory Relief against NVIDIA that same day. NVIDIA moved to dismiss the Complaint for Declaratory Relief, and the Bankruptcy Court granted that motion with leave to amend. The Equity Committee thereafter amended its complaint, and NVIDIA moved to dismiss that amended complaint as well. At a hearing on December 21, 2006, the Bankruptcy Court granted the motion as to one of the Equity Holders’ Committee’s claims, and denied it as to the others.
However, the Bankruptcy Court also ruled that NVIDIA would only be required to answer the first three causes of action by which the Equity Holders’ Committee seeks a determination that the APA was not terminated before 3dfx filed for bankruptcy protection, that the 3dfx bankruptcy estate still holds some rights in the APA, and that 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 Holders' Committee filed a motion for summary judgment on its first three causes of action. A hearing is scheduled on that motion for October 24, 2008. The next status conference is scheduled for August 28, 2008. In addition, the Equity Holders' Committee filed a motion seeking Bankruptcy Court approval of investor protections for Harbinger Capital Partners Master Fund I, Ltd., an equity investment firmfund that has 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.
Proceedings, SEC inquiry and lawsuits related to our historical stock option granting practices
In JuneAfter the Bankruptcy Court denied our motion to dismiss on September 6, 2006, the AuditEquity 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 BoardEquity 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, or the AuditEquity Committee’s lawsuit did not progress substantially in 2007. On July 31, 2008, the Equity Committee beganfiled a reviewmotion for summary judgment on its first three causes of our stock option practices basedaction. On September 15, 2008, NVIDIA filed a cross-motion for summary judgment. On October 24, 2008, the Court held a hearing on the results ofparties’ 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 internal review voluntarily undertaken by management. The Audit Committee, withOrder to that effect on January 30, 2009. On February 27, 2009, 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 offeringBankruptcy Court entered judgment 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 have been consolidated and plaintiffs filed a consolidated complaint on April 23, 2007. Plaintiffs in the Delaware action filed an Amended Shareholder Derivative Complaint on February 12, 2008. Plaintiffs in the federal action submitted a Second Amended Consolidated Verified Shareholders Derivative Complaint on March 18, 2008. 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. We intend to take all appropriate action in response to these complaints. Between May 14, 2007 and May 17, 2007, we filed several motions to dismiss or to stay the federal, Delaware and Santa Clara actions. The Delaware motions were superseded when the Delaware plaintiffs filed the Amended Shareholder Derivative Complaint on February 28, 2008. The federal motions were superseded when the federal plaintiffs submitted the Second Amended Consolidated Verified Shareholders Derivative Complaint on March 18, 2008. We have not yet responded to either of these Complaints. The Santa Clara motion to stay was denied without prejudice and the parties are currently engaged in discovery-related proceedings.
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 behalffavor of NVIDIA. The Special LitigationEquity Committee has made substantial progress in completingwaived its work, but has not yet issued a report.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
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 relatedright to GPUs and cards. No specific allegations have been made against us. We are cooperating with the DOJ in its investigation.
As of May 13, 2008, 55 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 Aprilappeal by stipulation entered on February 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 GPUs2009, 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. Discoveryjudgment is underway and 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. The Court excluded from the direct purchaser class business entities that purchased graphics products from NVIDIA or ATI for resale. The case will continue on behalf of the class of direct purchasers certified by the Court as well as for the several individual indirect purchasers suing on their own behalf. The Court also instructed the parties to give written notice of the class certification order to all non-certified direct purchasers, who will then have thirty days from the notice to move to intervene in this action. The Court's ruling on class certification is subject to interim appeal at the discretion of the United States Court of Appeals for the Ninth Circuit. We believe the allegations in the complaints are without merit and intend to vigorously defend the cases.now final.
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 been consolidated into a single proceeding in the Northern District of California. On April 13, 2009, the Court issued an order staying motion practice and allowing only document discovery to proceed. On August 5, 2009, the Court entered an order setting a case management conference for February 12, 2010.
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 seeks an exclusion order barring the importation of products that allegedly infringe the now five Rambus patents. The ITC has instituted the investigation and a trial is currently scheduled to begin October 13, 2009. NVIDIA intends to pursue its offensive and defensive cases vigorously.vigorously in both actions.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Product Defect Litigation and Securities Cases
In September, October and November 2008, several putative consumer class action lawsuits were filed against us, asserting various claims arising from a weak die/packaging material set in certain versions of our previous generation MCP and GPU products used in notebook systems. Most of the lawsuits were filed in Federal Court in the Northern District of California, but three were filed in state court in California, in Federal Court in New York, and in Federal Court in Texas. Those three actions have since been removed or transferred to the United States District Court for the Northern District of California, San Jose Division, where all of the actions now are currently pending. The various lawsuits are titled Nakash v. NVIDIA Corp., Feinstein v. NVIDIA Corp., Inicom Networks, Inc. v. NVIDIA Corp. and Dell, Inc. and Hewlett Packard, Olivos v. NVIDIA Corp., Dell, Inc. and Hewlett Packard, Sielicki v. NVIDIA Corp. and Dell, Inc., Cormier v. NVIDIA Corp., National Business Officers Association, Inc. v. NVIDIA Corp., and West v. NVIDIA Corp. The First Amended Complaint was filed on October 27, 2008, which no longer asserted claims against Dell, Inc. The various complaints assert claims for, among other things, breach of warranty, violations of the Consumer Legal Remedies Act, Business & Professions Code sections 17200 and 17500 and other consumer protection statutes under the laws of various jurisdictions, unjust enrichment, and strict liability.
The District Court has entered orders deeming all of the above cases related under the relevant local rules. On December 11, 2008, NVIDIA filed a motion to consolidate all of the aforementioned consumer class action cases. On February 26, 2009, the District Court consolidated the cases, as well as two other cases pending against Hewlett-Packard, under the caption “The NVIDIA GPU Litigation” and 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 May 14, 2009, the District Court entered a case schedule order, which set a September 28, 2009 hearing date for an anticipated motion to dismiss, a December 7, 2009 hearing date for anticipated class certification motion, and a July 12, 2010 fact discovery deadline. The District Court subsequently entered an order resetting the hearing date for an anticipated motion to dismiss for October 19, 2009, based on a stipulation of the parties.
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. On October 30, 2008, the Actions were consolidated under the caption In re NVIDIA Corporation Securities Litigation, Civil Action No. 08-CV-04260-JW (HRL). Lead Plaintiffs and Lead Plaintiffs’ Counsel were appointed on December 23, 2008. On February 6, 2009, co-Lead Plaintiff filed a Writ of Mandamus with the Ninth Circuit Court of Appeals challenging the designation of co-Lead Plaintiffs’ Counsel. On February 19, 2009, co-Lead Plaintiff filed with the District Court, a motion to stay the District Court proceedings pending resolution of the Writ of Mandamus by the Ninth Circuit. On February 24, 2009, Judge Ware granted the stay. The Writ is still pending in the Court of Appeals, and oral argument is scheduled for September 1, 2009. We intend to take all appropriate action with respect to the above cases.
Intel Corporation
On February 17, 2009, Intel Corporation filed suit against NVIDIA Corporation, seeking declaratory and injunctive relief relating to a licensing agreement that the parties signed in 2004. The lawsuit was filed in Delaware Chancery Court. Intel seeks an order from the Court declaring that the license does not extend to certain future NVIDIA chipset products, and enjoining NVIDIA from stating that it has licensing rights for these products. The lawsuit seeks no damages from NVIDIA. If Intel successfully obtains such a court order, we could be unable to sell our MCP products for use with certain Intel processors and our competitive position would be harmed.
On March 23, 2009, we filed our 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. Our counterclaims seek an order declaring that NVIDIA has the right to sell certain chipset products with Intel's processors under the 2004 licensing agreement, and enjoining Intel from interfering with NVIDIA's licensing rights. In addition, the counterclaims seek a finding that Intel has materially breached its obligations under the 2004 licensing agreement, and requests various remedies for that breach, including termination of Intel's cross licensing rights. On April 16, 2009, Intel filed its answer to our counterclaims.
Discovery is proceeding and trial is scheduled to commence before Vice Chancellor Strine on August 23, 2010. NVIDIA disputes Intel’s claims and intends to vigorously defend these claims, as well as pursue its counterclaims.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note 13 - Stockholders’ Equity
Stock Repurchase Program
During fiscal year 2005, we announced that our Board of Directors, or Board, had authorized a stock repurchase program to repurchase shares of our common stock, subject to certain specifications, up to an aggregate maximum amount of $300 million. During fiscal year 2007, the Board further approved an increase of $400 million to the original stock repurchase program. In fiscal year 2008, we announced a stock repurchase program under which we may purchase up to an additional $1.0 billion of our common stock over a three year period through May 2010. On August 12, 2008, we announced that our Board further authorized an additional increase of $1.0 billion to the stock repurchase program. As a result of these increases, we have an ongoing authorization from the Board, subject to certain specifications, to repurchase shares of our common stock up to an aggregate maximum amount of $2.7 billion through May 2010.
The repurchases will be made from time to time in the open market, in privately negotiated transactions, or in structured stock repurchase programs, and may be made in one or more larger repurchases, in compliance with the Securities Exchange Act of 1934 or the Exchange Act, Rule 10b-18, subject to market conditions, applicable legal requirements, and other factors. The program does not obligate usNVIDIA 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 and six months ended July 26, 2009, we did not enter into any structured share repurchase transactions or otherwise purchase any shares of our common stock. Through July 27, 2008,26, 2009, we hadhave repurchased 68.0an aggregate of 90.9 million shares under our stock repurchase program for a total cost of $1.16$1.46 billion. During the three months endedAs of July 27, 2008,26, 2009, we did not enter into any structured shareare authorized, subject to certain specifications, to repurchase transactions.shares of our common stock up to an additional amount of $1.24 billion through May 2010.
Please refer to Note 3 and Note 4 of the Notes to Condensed Consolidated Financial Statements for further information regarding stock-based compensation related to our March 2009 stock option purchase and related to equity awards granted under our equity incentive programs.
Convertible Preferred Stock
As of July 27, 200826, 2009 and January 27, 2008,25, 2009, there were no shares of preferred stock outstanding.
Common Stock
At the Annual Meeting of Stockholders held on June 19, 2008, the stockholders approved an increase in our authorized number of shares of common stock to 2,000,000,000. The par value of common stock remains unchanged at $0.001 per share.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note 14 - Comprehensive Income (Loss)
Comprehensive income (loss) consists of net income (loss) and other comprehensive income or loss.(loss). Other comprehensive income or loss components include unrealized gains or losses on available-for-sale securities, net of tax. The components of comprehensive income, (loss), net of tax, were as follows:
| | | Three Months Ended | | Six Months Ended | | | Three Months Ended | | | Six Months Ended | |
| | | July 27, 2008 | | July 29, 2007 | | July 27, 2008 | | July 29, 2007 | | | July 26, 2009 | | | July 27, 2008 | | | July 27, 2009 | | July 27, 2008 | |
| | | (In thousands) | | | (In thousands) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net change in unrealized gains (losses) on available-for-sale securities, net of tax | | (2,545 | ) | | 320 | | (8,176 | ) | | 241 | | | | | | | | | | | |
Reclassification adjustments for net realized gains (losses) on available-for-sale securities included in net income (loss), net of tax | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total comprehensive income (loss) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note 15 - 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.
We report financial information for four operating segments to our CODM: the GPU business, which is comprised primarily of our GeForce products that support desktop and notebook personal computers, or PCs, plus memory products; the professional solutions business, or 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 media and communications processor, or MCP, business which is comprised of NVIDIA nForce core logic and motherboard GPU products; and our consumer products business, or CPB, which is comprised of our GoForce and APXTegra mobile brands and products that support handheld personal media players, or PMPs, personal digital assistants, or PDAs, cellular phones and other handheld 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 the “All Other” category that includes human resources, legal, finance, general administration, and corporate marketing expenses and charges related to the stock option purchase, all of which total $56.8 million and $256.2 million, respectively, for three and six months ended July 26, 2009, and total $80.8 million and $62.9 million for second quarter of fiscal years 2009 and 2008, respectively, and total $156.9 million, and $130.8 millionrespectively, for the first half of fiscal years 2009three and six months ended July 27, 2008, respectively, that we do not allocate to our other operating segments as these expenses are not included in the segment operating performance measures evaluated by our CODM. “All Other” also includes the results of operations of other miscellaneous 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.
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 Corporation as a whole.
| | | GPU | | | PSB | | | MCP | | | CPB | | | All Other | | | Consolidated | |
| | | (In thousands) | |
| Three Months Ended July 26, 2009: | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Depreciation and amortization expense | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended July 27, 2008: | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Depreciation and amortization expense | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Six Months Ended July 26, 2009: | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Depreciation and amortization expense | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Six Months Ended July 27, 2008: | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Depreciation and amortization expense | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
| | | GPU | | | PSB | | | MCP | | | CPB | | | All Other | | | Consolidated | | |
| | | (In thousands) | |
| Three Months Ended July 27, 2008: | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| Depreciation and amortization expense | | $ | 13,826 | | | $ | 5,241 | | | $ | 7,756 | | | $ | 4,600 | | | $ | 14,440 | | | $ | 45,863 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended July 29, 2007: | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| Depreciation and amortization expense | | $ | 8,932 | | | $ | 1,960 | | | $ | 6,844 | | | $ | 5,004 | | | $ | 9,710 | | | $ | 32,450 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended July 27, 2008: | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| Depreciation and amortization expense | | $ | 26,540 | | | $ | 9,866 | | | $ | 15,426 | | | $ | 9,518 | | | $ | 26,081 | | | $ | 87,431 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended July 29, 2007: | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| Depreciation and amortization expense | | $ | 17,217 | | | $ | 4,147 | | | $ | 13,437 | | | $ | 11,099 | | | $ | 18,872 | | | $ | 64,772 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
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:
| | | Three Months Ended | | Six Months Ended | | | Three Months Ended | | | Six Months Ended | |
| | | July 27, 2008 | | July 29, 2007 | | July 27, 2008 | | July 29, 2007 | | | July 26, 2009 | | | July 27, 2008 | | | July 26, 2009 | | | July 27, 2008 | |
| | | (In thousands) | | | (In thousands) | |
| Revenue: | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Taiwan | | $ | 272,078 | | $ | 316,974 | | $ | 663,706 | | $ | 589,957 | | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| Europe | | 81,519 | | 89,318 | | 213,473 | | 170,868 | | |
| | | | | | | | | | | | | | | | | | |
| Other Americas | | | 21,349 | | | 20,149 | | | 22,044 | | | 59,959 | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Total revenue | | $ | 892,676 | | $ | 935,253 | | $ | 2,046,064 | | $ | 1,779,533 | | | | | | | | | | | | | | | | | |
Revenue from significant customers, those representing approximately 10% or more of total revenue aggregated approximately 12% of our total revenue from one customer for the respective periods, is summarized as follows:three and six months ended July 26, 2009. Revenue from significant customers, those representing 10% or more of total revenue aggregated approximately 13% and 21% of our total revenue from one customer and two customers for the three and six months ended July 27, 2008.
| | | Three Months Ended | | | Six Months Ended | |
| | | July 27, 2008 | | | July 29, 2007 | | | July 27, 2008 | | | July 29, 2007 | |
| Revenue: | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Accounts receivable from significant customers, those representing approximately 10% or more of total trade accounts receivable for the respective periods, is summarized as follows:
| | | July 27, 2008 | | | January 27, 2008 | |
| | | | | | | |
| | | | | | | |
Note 16 – Fair Value of Cash Equivalents and Marketable Securities
We measure our cash equivalents and marketable securities at fair value. Our financial assets and liabilities are determined using market prices from both active markets, or Level 1, and less active markets, or Level 2. Level 1 valuations are obtained from real-time quotes for transactions in active exchange markets involving identical assets. Level 2 valuations are obtained from readily-available pricing sources for identical instruments in less active markets. All of our cash equivalents and marketable securities valuations are classified as Level 1 or Level 2 because we value those using quoted market prices or alternative pricing sources and models utilizing market observable inputs.
As of July 27, 2008, we did not have any assets or liabilities without observable market values, or Level 3 assets, that would require a high level of judgment to determine fair value.
Financial assets and liabilities measured at fair value are summarized below:
| | | | | | Fair value measurement at reporting date using | |
| | | | | | Quoted Prices in Active Markets for Identical Assets | | | Significant Other Observable Inputs | |
| | | July 27, 2008 | | | (Level 1) | | | (Level 2) | |
| | | (In thousands) | |
Asset-backed Securities (1) | | | | | | | | | | | | |
| | | | | | | | | | | | |
Corporate debt securities (3) | | | | | | | | | | | | |
Debt securities issued by United States Treasury (1) | | | | | | | | | | | | |
Other Debt securities issued by U.S. Government agencies (4) | | | | | | | | | | | | |
Mortgage-backed securities issued by Government-sponsored entities (1) | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
(1) Included in Marketable securities on the Condensed Consolidated Balance Sheet.
(2) Includes $377,412 in Cash and cash equivalents and $20,092 in Marketable securities on the Condensed Consolidated Balance Sheet.
(3) Includes $4,318 in Cash and cash equivalents and $275,743 in Marketable securities on the Condensed Consolidated Balance Sheet.
(4) Includes $42,915 in Cash and cash equivalents and $391,984 in Marketable securities on the Condensed Consolidated Balance Sheet.
(5) Included in Cash and cash equivalents on the Condensed Consolidated Balance Sheet.
ITEM 2.2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements:Statements
When used This Quarterly Report on Form 10-Q 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 Quarterly Report on Form 10-Q in greater detail under the words “believes,heading “Risk Factors.” “plans,” “estimates,” “anticipates,” “expects,” “intends,” “allows,” “can,” “will”Given these risks, uncertainties and similar expressions are intended to identifyother factors, you should not place undue reliance on these forward-looking statements. These statements relate to future periods and include, but are not limited to, statements as to: the features, benefits, capabilities, performance, impact and production of our products and technologies; product, manufacturing, design or software defects and the impact of such defects; defects in materials used to manufacture a product; causes of product defects; our reliance on third parties to manufacture, assemble and test our products; reliance on a limited number of customers and suppliers; new products or markets; design wins; our market position; our competition, sources of competition and our competitive position; our strategic relationships; average selling prices; seasonality; customer demand; growth; our international operations; our ability to attract and retain qualified personnel; our inventory; acquisitions and investments; stock options; the impact of stock-based compensation expense; our financial results; our tax positions; mix and sources of revenue; capital and operating expenditures; our cash; liquidity; our investment portfolio and marketable securities; our exchange rate risk; our stock repurchase program; our internal control over financial reporting; our disclosure controls and procedures; recent accounting pronouncements; our intellectual property; compliance with environmental laws and regulations; ongoing and potential litigation; and the Department of Justice subpoena and investigation. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected. These risks and uncertainties include, but are not limited to, the risks discussed below as well as difficulties associated with: fluctuations in general economic conditions in the United States and worldwide; difficulties in entering new markets; slower than expected development of a new market; conducting international operations; slower than anticipated growth; forecasting customer demand; product, manufacturing, software and design defects; defects in product design or materials used to manufacture a product; supply constraints; the impact of competitive pricing pressures; unanticipated decreases in average selling prices; increased sales of lower margin products; international and political conditions; changes in international laws; fluctuations in the global credit market; fixed operating expenses; our inventory levels; fluctuations in investments and the securities market; changes in customers’ purchasing behaviors; the concentration of sales of our products to a limited number of customers; decreases in demand for our products; delays in the development of new products by us or our partners; delays in volume production of our products; developments in and expenses related to litigation or regulatory actions; our inability to realize the benefits of acquisitions; and the matters set forth under Part II, Item 1A. - Risk Factors. TheseAlso, these forward-looking statements speakrepresent our estimates and assumptions only as of the date hereof.of this filing. You should read this Quarterly Report on Form 10-Q 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 expressly disclaim anyassume no obligation or undertaking to release publicly any updates or revisions to anyupdate these forward-looking statements contained hereinpublicly, or to reflect any changeupdate the reasons actual results could differ materially from those anticipated in our expectations with regard thereto or any changethese forward-looking statements, even if new information becomes available in events, conditions or circumstances on which any such statement is based.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.
NVIDIA, GeForce, SLI, Hybrid SLI, GoForce, Quadro, NVIDIA Quadro Plex, NVIDIA nForce, CUDA, Tesla, Tegra, CUDA, NVIDIA APX, PhysX, Ageia, Mental Images,ION, Tegra, and the NVIDIA logo are our trademarks and/or registered trademarks in the United States and other countries that are used in this document. We may also refer to trademarks of other corporations and organizations in this document.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with “Item 6. Selected Financial Data” of our Annual Report on Form 10-K for the fiscal year ended January 27, 200825, 2009 and Part II, “Item 1A. Risk Factors”, of our Condensed Consolidated Financial Statements and related Notes thereto, as well as other cautionary statements and risks described elsewhere in this Quarterly Report on Form 10-Q, before deciding to purchase, hold or sell shares of our common stock.
Overview
Our Company
NVIDIA Corporation is the worldwide leader in visual computing technologies and the inventor of the graphicgraphics processing unit, or the GPU. Our products are designed to generate realistic, interactive graphics on consumerworkstations, personal computers, game consoles and professional computingmobile devices. We serve the entertainment and consumer market with our GeForce products, the professional design and visualization market with our Quadro products, and the high-performance computing market with our Tesla products. We have 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.
Our GPU business is comprised primarily of our GeForce products that 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 GoForce and APXTegra mobile brands and products that support handheld personal media players, or PMPs, personal digital assistants, or PDAs, cellular phones and other handheld 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 ourNVIDIA 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 Internet address is www.nvidia.com. The contents of our website are not a part of this Form 10-Q.
Recent Developments, Future Objectives and Challenges
GPU Business
During the first halfsecond quarter of fiscal year 2009,2010, we launched several newdelivered our first 40nm GPUs in the GeForce family. The product launches included the GeForce 9600 GT, which provides more than double the performance of our previous GeForce 8600 GTS; the GeForce 9800 GX2, which provides a new dual GPU board featuring Quad SLI technology; and the GeForce 9800 GTX, which is a flexible GPU that supports both two-way and three-way Scalable Link Interface, or SLI, technology. Additionally, we also launched the GeForce 8800 GT, which is the first after-market consumer graphics card for the Mac Pro and is sold directly by us.to customers.
On February 10, 2008,Microsoft’s Direct Compute is a new GPU Computing application programming interface, or API, that runs on our current Compute Unified Device Architecture, or CUDA. Direct Compute allows developers to harness the parallel computing power of our GPUs to create compelling computing applications in consumer and professional markets. As part of the Direct Compute presentation at the Game Developer Conference (GDC) in March 2009, we completeddemonstrated three such applications running on a GeForce GTX 280 GPU. We support languages and API’s that enable developers to access the parallel processing power of the GPU. In addition to Direct Compute and our acquisitionCUDA C extensions, there are other programming models available including OpenCL. During the first quarter of Ageia Technologies, Inc., or Ageia, anfiscal year 2010, we released our OpenCL driver and software development kit to developers participating in our OpenCL software Early Access Program.
In addition to graphics leadership, we are focusing on leading the industry leader in gamingwith physics technology. Ageia'sprocessing and evangelizing the benefits of utilizing the GPU for parallel computing. Our PhysX softwareengine and library is widely adopted in several PhysX-based gamesnow available for PCs, game consoles and smart phones. Game developers can utilize PhysX to create environments using physics simulations that are shipping or in development on Sony Playstation 3, Microsoft Xbox 360, Nintendo Wii,dynamic, realistic and gaming PCs. We believe that the combinationinteractive. PhysX has been adopted by many of the GPUvideo game industry’s top companies.
Professional Solutions Business
Corporate demand, which comprises a substantial percentage of the demand for professional workstation products, has not shown any significant signs of economic recovery. This appears to reflect ongoing constrained corporate budgets and physics engine brands will result in an enhanced visual experience forredeployment and/or upgrade activity of older equipment by customers. Workstation product revenue currently comprises a significant portion of our total PSB revenue. Therefore, until corporate demand recovers, we expect this trend to continue to have a negative impact on our overall Company gross profit and gross margin, as the gaming world.gross margin experienced by our PSB is generally higher than our overall Company gross margin.
During the second quarter of fiscal year 2009,2010, we launched the GeForce GTX 280our Quadro Plex SVS. Scalable visual computing is a platform for professionals who interact with 3D models and 260 GPUs. These products represent the second-generationanalyze large volumes of our unified architecture. Based on a comparison between the GeForce GTX 280 and the GeForce 8800 Ultra in a variety of benchmarks and resolutions, the GeForce GTX 280 and 260 GPUs deliver 50 percent more gaming performance over our previous GeForce 8800 Ultra GPU. We also launched the GeForce 9800 GTX+, GeForce 9800 GT, and GeForce 9500 GT GPUs that provide support for our PhysX physics engine and CUDA parallel processing across a wide range of price segments.
Professional Solutions Business
During the first half of fiscal year 2009, we launched thedata. For Quadro, FX 3600M Professional, which is among the highest performing notebook GPUs.
In the second quarter of fiscal year 2009, we launched the Tesla C1060 computing processor and the S1070 computing system, which is among the first teraflop processors and has a 1U system with up to four teraflops of performance.
MCP Business
During the first half of 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. Additionally, we also launched the NVIDIA nForce 790i Ultra SLI MCP, which is oneOptiX ray tracing engine, part of the industry’s highly rated overclockable platforma suite of application acceleration engines for Intel processors.software developers. This suite also includes engines for managing 3D data and scenes, scaling performance across multiple GPUs and real-time modeling of hyper-realistic physical and environmental effects.
During the second quarter of fiscal year 2010, we also announced that AMBER, one of the most popular molecular dynamics codes, was now accelerated by CUDA. AMBER is used by researchers in academia and pharmaceutical companies to research new drugs. Accelerated by CUDA, AMBER now runs up to 50 times faster on a GPU than on a CPU.
Commencing in the second quarter of fiscal year 2010, HP and Supermicro began carrying our Tesla computing solution products , joining a global list of OEMs, including Cray, Dell, HP Lenovo, SGI and Sun.
During the first quarter of fiscal year 2010, five new consumer applications were launched that are accelerated by the CUDA architecture on our GPUs – Super LoiloScope Mars, for video editing, ArcSoft SimHD, for DVD image enhancement, Nero Move It and Cyberlink MediaShow Espresso, for video format conversion, and Motion DSP vReveal, for real-time video quality enhancement. We recently collaborated with a leading Chinese geophysical services provider to unveil the launch of a new Tesla-based hardware and seismic software suite that accelerates the performance of complex seismic data computation for oil and gas companies in China.
During the first quarter of fiscal year 2010, we also collaborated with the investment banking division of a leading European financial institution to replace their CPU cores with a smaller cluster consisting of CPU servers and two Tesla GPU-based S1070 systems, which require significantly less power. Factoring the acceleration in processing times achieved using Tesla GPUs, the division is using almost 200 times less electricity than before.
MCP Business
We are currently focused on energizing the PC market by transforming Intel PCs into a premium experience typically found in higher priced laptops and desktops. Our strategy is to combine the ION mGPU found in new desktop and notebook PCs with the Intel Celeron, Core 2 Duo, or Atom CPUs. These combinations create a platform that enables a premium PC experience in a small form factor – enabling netbooks and all-in-one PCs to play rich media content and popular games in high definition, or HD.
At Computex 2009, our ION platform was awarded the Best Choice award. Of the 21 ION-related design wins we announced at Computex 2009, we launchedare already shipping nine of them, and we expect the GeForce 9M seriesremaining 12 designs to ship in the third quarter of notebook GPUs that enables improved performance in notebooksfiscal year 2010. We have announced five more design wins since Computex. Additionally, along with Hybrid SLI technology and PhysX technology. We also launched SLIAdobe Systems Incorporated, or Adobe, we announced GPU acceleration for Intel Broomfield CPU platforms. When paired with the nForce 200 SLI MCP, Intel’s Bloomfield CPU and Tylersburg core logic chipset will deliver NVIDIA three-way SLI technology with upFlash player, bringing Internet video to a 2.8 times performance boost over traditional single graphics card platforms.
Consumer Products Businessnew class of low-power PCs and Internet devices.
During the first half of fiscal year 2009,2010, we launchedsaw signs of increased demand for our products designed for the NVIDIA APX 2500 application processor.mainstream AMD integrated desktop market as well as for our ION products and other products that are designed for the Intel-based integrated notebook market.
During the first quarter of fiscal year 2010, we collaborated with Acer to introduce the Acer AspireRevo. The APX 2500Acer AspireRevo is no larger than a typical hardcover book, but has a fully capable desktop with advanced graphics and several multimedia features.
Consumer Products Business
During the first quarter of fiscal year 2010, we demonstrated the Tegra 600 Series computer-on-a-chip designed to meetthat enables an always-on, always-connected HD netbook that can go days between battery charges. During the growing multimedia demandssecond quarter of today's mobile phone and entertainment user. We believefiscal year 2010, it was revealed that the mobile application processor is an area where we can add a significant amount of valueMicrosoft’s new Zune HD product would be based on Tegra and we also believe it represents a revenue growth opportunity.have started ramping up volume shipments of Tegra.
Warranty Accrual
During the second quarter of fiscal year 2009, we launched the Tegra 600 and 650 that represent a single-chip heterogeneous computer architecture designed for low-power mobile computing devices.
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, 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.
During our fiscal quarter ended July 27, 2008,2010, we recorded a $196.0an additional net warranty charge of $120.0 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. AllThis charge included an additional accrual of $164.5 million for related estimated costs, offset by reimbursements from insurance carriers of $44.5 million that we recorded during the second quarter of fiscal year 2010. In July 2008, we recorded a $196.0 million charge against cost of revenue for the purpose of supporting the product repair costs of our newly manufactured productsaffected customers around the world. Although the number of units that we estimate will be impacted by this issue remains consistent with our initial estimates in July 2008, the overall cost of remediation and allrepair of impacted systems has been higher than originally anticipated. The weak die/packaging material combination is not used in any of our products that are currently shipping in volume have a different material set that we believe is more robust.production.
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 with certainty 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. During the second quarter of fiscal year 2010, we recorded $44.5 million in related insurance reimbursements which partially offset the additional warranty charge of $164.5 million included in cost of revenue. Additionally, we received $8.0 million in reimbursements from insurance providers in fiscal year 2009. However, there can be no assurance that we will recover any suchadditional 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.
Dependence on PC MarketIn September, October and November 2008, several putative class action lawsuits were filed against us, asserting various claims related to the impacted MCP and GPU products. Please refer to Note 12 of the Notes to the Condensed Consolidated Financial Statements this Form 10-Q for further information regarding this litigation.
Stock Option Purchase
In March 2009, we completed a cash tender offer for certain employee stock options. We deriveuse equity to promote employee retention and expectprovide an incentive vehicle valued by employees that is also aligned to continuestockholder interest. However, our stock price had declined significantly during fiscal 2009, and all of the eligible options were “out-of-the-money” (i.e., had exercise prices above our then-current common stock price). Therefore, we provided an incentive to deriveemployees with an opportunity to obtain a cash payment for their eligible options, while reducing our existing overhang and potential stockholder dilution from such 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 the majoritynon-employee members of our revenue fromBoard of Directors or our officers who file reports under Section 16(a) of the sale or licenseSecurities Exchange Act of products for use1934, including our former Chief Financial Officer, Marvin D. Burkett, were eligible to participate in the desktop PC and notebook PC markets, including professional workstations.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. A reductiontotal of 28.5 million options were tendered under the offer for an aggregate cash purchase price of $78.1 million, which was paid in salesexchange for the cancellation of PCs, orthe eligible options. As a reductionresult of the tender offer, we incurred a charge of $140.2 million consisting of the remaining unamortized stock based compensation expense associated with the unvested portion of the options tendered in the growth rate of PC sales, may reduce demand for our products. These changesoffer, stock-based compensation expense resulting from amounts paid in demand could be large and sudden. During the second quarter of fiscal year 2009, sales of our desktop GPU products decreased by approximately 25% compared to the second quarter of fiscal year 2008. These decreases were primarily due to the Standalone Desktop GPU market segment decline as reported in the latest PC Graphics 2008 Report from Mercury Research. Since PC manufacturers often build inventories during periods of anticipated growth, they may be left with excess inventories if growth slows or if they incorrectly forecast product transitions. In these cases, PC manufacturers may abruptly suspend substantially all purchases of additional inventory from suppliers like us until their excess inventory has been absorbed, which would have a negative impact on our financial results.
Seasonality
Our industry is largely focused on the consumer products market. Due to seasonality in this market, we typically expect to see stronger revenue performance in the second half of the calendar year relatedfair value of the underlying options, plus associated payroll taxes and professional fees. The stock option purchase charge of $140.2 million relates to back-to-schoolpersonnel associated with cost of revenue (for manufacturing personnel), research and holiday seasons.development, and sales, general and administrative of $11.4 million, $90.5 million, and $38.3 million, respectively.
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 ana operating segment basis for purposes of making operating decisions and assessing financial performance.
We report financial information for four operating segments to our CODM: the GPU business, which is comprised primarily of our GeForce products that support desktop and notebook personal computers, or PCs, plus memory products; the 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 mGPUmotherboard GPU products; and our CPB, which is comprised of our GoForce and APXTegra mobile brands and products that support handheld PMPs, PDAs, cellular phones and other handheld 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 the “All Other” category that includes human resources, legal, finance, general administration, and corporate marketing expenses and charges related to the stock option purchase, all of which total $56.8 million and $256.2 million, respectively, for three and six months ended July 26, 2009, and total $80.8 million and $62.9 million for second quarter of fiscal years 2009 and 2008, respectively, and total $156.9 million, and $130.8 millionrespectively, for the first half of fiscal years 2009three and six months ended July 27, 2008, respectively, that we do not allocate to our other operating segments as these expenses are not included in the segment operating performance measures evaluated by our CODM. “All Other” also includes the results of operations of other miscellaneous 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.
Results of Operations
The following table sets forth, for the periods indicated, certain items in our condensed consolidated statements of operations expressed as a percentage of revenue.
| | | Three Months Ended | | | Six Months Ended | | | Three Months Ended | | | Six Months Ended | |
| | | July 27, 2008 | | | July 29, 2007 | | | July 27, 2008 | | | July 29, 2007 | | | July 26, 2009 | | | July 27, 2008 | | | July 26, 2009 | | | July 27, 2008 | |
| | | | | | | | | | | | | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % |
| Cost of revenue | | | 83.2 | | 54.7 | | 67.5 | | 54.8 | | | | 79.8 | | | | 83.2 | | | | 76.0 | | | | 67.5 | |
| Gross profit | | 16.8 | | 45.3 | | 32.5 | | 45.2 | | | | 20.2 | | | | 16.8 | | | | 24.0 | | | | 32.5 | |
| | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Research and development | | 23.9 | | 16.9 | | 21.1 | | 17.8 | | | | 24.8 | | | | 23.9 | | | | 34.3 | | | | 21.1 | |
Sales, general and administrative | | | | | | | | | | | | | 9.5 | | | | 10.4 | | | | 13.4 | | | | 9.1 | |
| | | | | | | | | | | | | 34.3 | | | | 34.3 | | | | 47.7 | | | | 30.2 | |
| | | | | | | | | | | | | (14.1 | ) | | | (17.5 | ) | | | (23.7 | ) | | | 2.3 | |
| Interest and other income, net | | | 1.0 | | | 1.7 | | 0.9 | | 1.6 | | | | 0.4 | | | | 1.0 | | | | 0.6 | | | | 0.9 | |
| Income (loss) before income tax expense (benefit) | | (16.5 | ) | | 21.4 | | 3.2 | | 19.9 | | | | (13.7 | ) | | | (16.5 | ) | | | (23.1 | ) | | | 3.2 | |
Income tax expense (benefit) | | | | | | | | | | | | | | (0.2 | ) | | | (2.9 | ) | | | (1.8 | ) | | | 0.5 | |
| Net income (loss) | | | (13.6 | )% | | 18.4 | % | | 2.7 | % | | 17.1 | % | | | (13.5 | )% | | | (13.6 | )% | | | (21.3 | )% | | | 2.7 | % |
Three and six months ended July 27, 200826, 2009 and July 29, 200727, 2008
Revenue
Revenue was $776.5 million for our second quarter of fiscal year 2010, compared to $892.7 million for our second quarter of fiscal year 2009, compared to $935.3 million for our second quarter of fiscal year 2008, which represents a decrease of 5%13%. Revenue was $1.44 billion for the first half of fiscal year 2010 and $2.05 billion for the first half of fiscal year 2009, and $1.78 billion for the first half of fiscal year 2008, which represented an increasea decrease of 15%30%. We expect revenue to grow slightlyincrease during the third quarter of fiscal year 20092010 as compared to the second quarter of fiscal year 2009.2010. A discussion of our revenue results for each of our operating segments is as follows:
GPU Business. GPU Business revenue decreased by 13%26% to $503.5$372.4 million in the second quarter of fiscal year 2009,2010, compared to $579.0$503.5 million for the second quarter of fiscal year 2008.2009. This decrease was primarily due toresulted from decreased sales of our desktop GPU and memory products offset by increased sales of our notebook GPU products. Sales of our desktop GPU products decreased approximately 9% in second quarter of fiscal year 2010 when compared to second quarter of fiscal year 2009. The decline in the sale of desktop GPU products was primarily driven by increased pricing pressures in the marketplace for our mainstream products due to the recessionary conditions in the economy. This decrease was partially offset by a slight increase in the volume of shipments and memoryan improvement in the average selling prices, or ASPs, of our high-end desktop GPU products. Sales of our notebook GPU products decreased by approximately 25% and 61%, respectively,57% compared to the second quarter of fiscal year 2008. These decreases were primarily due to a decline in the Standalone Desktop market segment as reported in the latest PC Graphics 2008 Report from Mercury Research.2009. This decline was primarily driven by negative macro-economic outlooka combination of the decline in unit demand and a shift in the mix of desktop GPU sales towards lower priced products. In addition, the average sales price, or ASP, of our GeForce 9-based products and our prior generation products declined and we experienced lower shipments of our prior generation products as we transitioned to our GeForce 9-based and GeForce 200-based products. Sales of our NVIDIA notebook GPU products increased by approximately 43% comparedASPs due to the second quarter of fiscal year 2008. This notebook GPU revenue increase was primarily due to growth of the general marketrecessionary conditions in the Standalone Notebook segmenteconomy as reportedwell as increased competition in the latest PC Graphics 2008 Report from Mercury Research. Our share position continued to hold in the Standalone Notebook segment primarily as a result of shipments of products used in notebook PC design wins related to Intel’s Santa Rosa platform.marketplace.
GPU Business revenue increaseddecreased by 13%40% to $727.3 million for the first half of fiscal year 2010 compared to $1.20 billion for the first half of fiscal year 2009 compared to $1.06 billion for the first half of fiscal year 2008.2009. The increasedecrease was primarily the result of increaseddecreased sales across our desktop and notebook GPU product categories. Sales of our desktop GPU products increaseddecreased approximately 7%33% and sales of our notebook GPU products increaseddecreased by approximately 65%54% as compared to the first half of fiscal year 2008. This increase was2009. These decreases were primarily due to share losses in the Standalone Notebook segment, partially offset by share gains in the Standalone Desktop and the Standalone Notebook segments during the first half of fiscal year 20092010 compared to fiscal year 20082009 as reported in the latestAugust PC Graphics 20082009 Report from Mercury Research. Our share gainsAlthough, we continue to maintain our leadership position in the Standalone Desktop segment, were primarily driven by the leadership positionsales of our GeForce 8-baseddesktop GPU products decreased as a result of the overall decline in unit demand and GeForce 9-basedthe pricing pressures in the marketplace for our mainstream products duringdue to the first quarter of fiscal year 2009.recessionary conditions in the economy. Our share gainslosses in the Standalone Notebook segment were primarily as a result of continued shipmentsincreased competition in the marketplace, which drove pricing pressure that negatively impacted the ASPs of products used inour notebook PC design wins related to Intel’s Santa Rosa platform.GPU products.
PSB. PSB revenue increaseddecreased by 41%35% to $179.7$116.6 million in the second quarter of fiscal year 2009,2010, compared to $127.3$179.7 million for the second quarter of fiscal year 2008.2009. PSB revenue increaseddecreased by 43%42% to $222.8 million for the first half of fiscal year 2010 as compared to $383.1 million for the first half of fiscal year 2009 as compared to $268.2 million for2010. Both the first half of fiscal year 2008. Our NVIDIA professional workstation product sales increased due to an overall increase inASPs and unit shipments of boards and chips as compared to the second quarter and first half of fiscal year 2008. This increase was primarily driven by strong demand and our transition from the previous generations of NVIDIA Quadro professional workstation products decreased, primarily due to GeForce 8-basedthe decline in corporate spending as a result of the recessionary conditions in the economy. This appears to reflect ongoing constrained corporate budgets and GeForce 9-based products.redeployment and/or upgrade activity of older equipment by customers.
MCP Business. MCP Business revenue increased by 4%42% to $166.8$237.4 million in the second quarter of fiscal year 2009,2010, compared to $161.1$166.8 million for the second quarter of fiscal year 2008.2009. The increase resulted from an increase in the sale of our Intel-based platform products of approximately 234% offset by a decrease in sales of our AMD-based platform products of approximately 12% as compared to the second quarter of fiscal year 2009. The increase in product sales for PCs with Intel CPUs was driven by sales of our ION products. The decrease in AMD platform products is driven by our share loss in this platform as AMD continues to market their own product line in place of ours.
MCP Business revenue increased by 17% to $423.9 million for the first half of fiscal year 2010 as compared to $361.9 million for first half of fiscal year 2009. The increase was a result of growth of approximately 300%136% increase in sales of our Intel-based platform products offset by a decline of approximately 15%decrease in the sales of our AMD-based platform products as compared to the second quarter of fiscal year 2008.
MCP Business revenue increased by 17% to $361.9 million for the first half of fiscal year 2009 as compared to $309.8 million for first half of fiscal year 2008. The increase was a result of approximately 140% increase in sales of our Intel-based platform products while sales of our AMD-based platform products remained flat24% as compared to the first half of fiscal year 2008.2009. The increase in Intel-based product sales was driven by sales of our ION products. The decrease in AMD-based platform products is driven by our share loss in this platform as AMD continues to market their own product line in place of ours.
CPB. CPB revenue decreasedincreased by 44%33% to $46.2 million in the second quarter of fiscal year 2010, compared to $34.6 million for the second quarter of fiscal year 2009, compared to $62.2 million for the second quarter2009. The overall increase in CPB revenue is primarily driven by an increase in sales of fiscal year 2008.our embedded products. CPB revenue decreased by 40%25% to $58.0 million for the first half of fiscal year 2010 as compared to $77.1 million for the first half of fiscal year 2009 as compared to $129.4 million for the first half of fiscal year 2008.2009. The declineoverall decrease in CPB revenue is primarily driven by a combination of a decreasedecreases in revenue from our cell phone products, a decreasedecreases in revenue from ourcertain contractual development arrangements with Sony Computer Entertainment, or SCE, and a drop in royalties from SCE as they transitiongame console related products in the PlayStation3 to a new process node.comparative periods.
Concentration of Revenue
Revenue from sales to customers outside of the United States and other Americas accounted for 89%86% and 90%89% of total revenue for the second quarter of fiscal years 20092010 and 2008,2009, respectively, and 91%84% and 87%91% for the first half of fiscal years 20092010 and 2008,2009, respectively. 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,manufacturers’, add-in board and motherboard manufacturers’ revenue is attributable to end customers in a different location.
In the second quarterRevenue from significant customers, those representing 10% or more of fiscal years 2009 and 2008, sales to one significant customer, in excess of 10%total revenue aggregated approximately 12% of our total revenue accountedfrom one customer for the second quarter and first half of fiscal year 2010. Revenue from significant customers, those representing 10% or more of total revenue, aggregated approximately 13% and 12%, respectively, of our total revenue. Aggregate sales to our two largest customers accounted for approximately 21% and approximately 16% of our total revenue from one customer and two customers for the second quarter and first half of fiscal yearsyear 2009, and 2008, respectively.
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 can vary in any period depending on a variety of factors including the mix of types of products sold. 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 experience product transition or competitive challenges, if we achieve significant revenue growth in our lower margin product lines, or if we are unable to earn as much revenue as we expect from higher margin product lines, our gross margin may be negatively impacted.
Our overall gross margin was 16.8%20.2% and 45.3%16.8% for the second quarter of fiscal yearsyear 2010 and 2009, and 2008, respectively. The declineimprovement in gross margin for the second quarter of fiscal year 2010 when compared to the second quarter of fiscal year 2009 reflects awas driven primarily by the improvement in gross margins for our MCP products and an increase in the mix of revenue from our MCP products relative to our total revenue, an increase in sales of higher margin embedded products in our CPB and the impact of the decrease in warranty charges from $196.0 million in the second quarter of fiscal year 2009 to $120.0 million in the second quarter of fiscal year 2010. During the second quarter of fiscal year 2010, we recorded an additional net warranty charge of $120.0 million against cost of revenue to cover anticipated customer warranty, repair, return, replacement and associatedother costs arising from a weak die/packaging material set in certain versions of our previous generation MCP and GPU products used in notebook systems, as well assystems. This charge included an additional accrual of $164.5 million for related estimated costs, offset by reimbursements from insurance carriers of $44.5 million that we recorded during the impactsecond quarter of average sales price regressionfiscal year 2010. In the second quarter of fiscal year 2009, we experienced inrecorded a $196.0 million charge against cost of revenue for the purpose of supporting the estimated product repair costs of our desktop GPU products as a result of increased competition.affected customers around the world.
We will continue to focus on improving our gross margin by delivering cost effective product architectures, enhancing business processes and delivering profitable growth. As such, we expect gross margin to increase during the third quarter of fiscal year 2009. 2010 as compared to the second quarter of fiscal year 2010.
A discussion of our gross margin results for each of our operating segments is as follows:
GPU Business. The gross margin of our GPU Business decreased during the second quarter of fiscal year 20092010 as compared to the second quarter of fiscal year 2008,2009, as well as during the first half of fiscal year 20082010 as compared to the first half of fiscal year 2007. This decrease was2009. These decreases were primarily due to ASP regressionthe impact of our GeForce 9-based and previous generations of desktop products and a chargethe warranty charges against cost of revenue to cover anticipated customer warranty, repair, return, replacement and associated costs arising from a weak die/packaging material set in certain versions of our previous generation GPU products used in notebook systems. We also experienced ASP regression in our mainstream desktop GPU products as well as in our notebook GPU products that we believe were driven by pricing pressures in the marketplace as a result of recessionary conditions in the economy as well as increased competition. These factors were further exacerbated in the first quarter of fiscal year 2010 as a result of losses we incurred selling certain older, transitioning products. These decreases in gross margins were only partially offset by a net benefit arising from a sell-through of inventory during the first half of fiscal year 2010 that had previously been written down in the fourth quarter of 2009.
PSB. The gross margin of our PSB increaseddecreased slightly during the second quarter of fiscal year 20092010 as compared to the second quarter fiscal year 2008,2009, as well as during the first half of fiscal year 20092010 as compared to the first half of fiscal year 2008. This increase was2009. These decreases were primarily due to increased salesa decline in ASPs caused primarily by pricing pressure from an overall decline in corporate spending as a result of our GeForce 9-based NVIDIA Quadro products, which began sellingthe recessionary conditions 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.economy.
MCP Business. The gross margin of our MCP Business decreasedincreased during the second quarter of fiscal year 20092010 as compared to the second quarter fiscal year 2008,2009, as well as during the first half of fiscal year 20092010 as compared to the first half of fiscal year 2008. This decrease was2009. These increases were primarily duedriven by a reduction in the warranty charge against cost of revenue to cover anticipated customer warranty, repair, return, replacement and associatedother costs arising from a weak die/packaging material set in certain versions of our previous generation MCP products used in notebook systems.our previous generation MCP products recorded during the second quarter of fiscal year 2009. Additionally, gross margins improved due to a shift in product mix toward increased shipments of higher margin Intel-based and AMD-based platform products.
CPB. The gross margin of our CPB increased during the second quarter of fiscal year 20092010 as compared to the second quarter fiscal year 2008,2009, as well as during the first half of fiscal year 20092010 as compared to the first half of fiscal year 2008. This2009. These increases were a result of an increase was primarily due to changes in the product mix insales of 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.embedded products.
Operating Expenses
| | | Three Months Ended | | Six Months Ended | | Three Months Ended | | Six Months Ended | |
| | | July 27, 2008 | | July 29, 2007 | | $ Change | | % Change | | July 27, 2008 | | July 29, 2007 | | $ Change | | % Change | | July 26, 2009 | | July 27, 2008 | | $ Change | | | % Change | | July 26, 2009 | | July 27, 2008 | | $ Change | | | % Change | |
| | | (in millions) | | (in millions) | | (in millions) | | | | (in millions) | | | |
Research and development expenses | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Sales, general and administrative expenses | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Research and development as a percentage of net revenue | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Sales, general and administrative as a percentage of net revenue | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Research and Development
Research and development expenses were $212.9$192.9 million and $158.0$212.9 million during the second quarter of fiscal yearsyear 2010 and 2009, and 2008, respectively, an increasea decrease of $54.9$20.0 million, or 35%9%. The increase is primarilyOver half of the decrease, or $11.0 million, was attributable to reductions in stock-based compensation related to an increasea decrease in salaries and benefits by approximately $20.8 millionon-going vesting of equity awards due to the cancellation of stock options as a result of the additionpurchase of approximately 1,000 personnelcertain outstanding options that were tendered in departmentsMarch 2009. Additionally, our cost reduction initiatives across several discretionary spending areas resulted in decreased expenses related to computer software and equipment by $2.4 million, travel and entertainment by $2.1 million, development expenses by $1.5 million, and employee related expenses by $1.3 million. These decreases were offset by a $1.9 million increase in depreciation and amortization driven by property and equipment purchases made in the prior year.
Research and development expenses were $494.7 million and $431.7 million in the first half of fiscal years 2010 and 2009, respectively, an increase of $63.0 million, or 15%. During the first half of fiscal year 2010, research and development functions,expenses included stock-based compensation of $90.5 million related to the purchase of certain outstanding options that were tendered in March 2009. The increase in research and development was also driven by an increase in depreciation and amortization by $4.4 million due to property and equipment purchases made in the prior year. These increases were offset by lower expensesreductions in stock-based compensation related to a decrease in on-going vesting of equity awards during the first half of fiscal year 2010 by $14.2 million primarily due to the cancellation of stock options as a result of the purchase of certain outstanding options that were tendered in March 2009. Additionally, our cost reduction initiatives across several discretionary spending areas resulted in decreased expenses related to development expenses by $5.6 million, computer software and equipment by $5.5 million, travel and entertainment by $4.5 million, and employee related expenses by $2.0 million.
Sales, General and Administrative
Sales, general and administrative expenses were $73.9 million and $92.4 million during the second quarters of fiscal years 2010 and 2009, respectively, a decrease of $18.5 million, or 20%. This decrease was primarily attributable to a $5.5 million decrease in stock-based compensation related to a decrease in on-going vesting of equity awards primarily due to the cancellation of stock options as a result of the purchase of certain outstanding options that were tendered in March 2009. Additionally, our cost reduction initiatives across several discretionary spending areas resulted in decreased expenses related to employee related expenses by $3.2 million, computer software and equipment by $2.4 million, professional fees by $2.4 million, travel and entertainment by $1.9 million, and marketing by $1.7 million.
Sales, general and administrative expenses were $192.8 million and $185.5 million for the first half of fiscal years 2010 and 2009, respectively, an increase of $7.3 million, or 4%. During the first half of fiscal year 2010, sales, general and administrative expenses included stock-based compensation of $38.3 million related to the purchase of certain outstanding options that were tendered in March 2009. The increase in sales, general and administrative expenses was also driven by an increase in depreciation and amortization by $3.6 million due to property and equipment purchases made in the prior year and professional fees by $2.8 million due to higher litigation volume. These increases were offset by reductions in stock-based compensation related to a decrease in on-going vesting of equity awards during the first half of fiscal year 2010 by $9.4 million primarily due to the cancellation of stock options as a result of the purchase of certain outstanding options that were tendered in March 2009. Additionally, our cost reduction initiatives across several discretionary spending areas resulted in decreased expenses related to computer software and equipment by $5.2 million, employee related expenses by $5.0 million, travel and entertainment by $4.4 million, marketing by $3.7 million and other fees $1.7 million.
We expect operating expenses to increase in the third quarter of fiscal year 2009 related to our variable compensation programs when2010 compared to the second quarter of fiscal year 2008. Development expenses increased by $6.8 million primarily as a result of increased prototype materials and engineering consumption due to a higher volume of activity related to new product introductions in the current fiscal year. Stock-based compensation expense increased by $7.8 million primarily because of the impact of stock awards granted subsequent to the first half of fiscal year 2008 for new hire and semi-annual grants, offset by a reduction in expense related to older stock awards2010. We anticipate 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. Other increases in research and development expenses are primarily related to costs that were driven by personnel growth, including depreciation and amortization, facilities, and computer software and equipment.
Research and development expenses were $431.7 million and $316.3 million in the first half of fiscal years 2009 and 2008, respectively, an increase of $115.4 million, or 36%. The increase is primarily related to an increase in salaries and benefits by approximately $47.9 million as a result of the addition of approximately 1,000 personnel in departments related to research and development functions, offset by lower expenses during the first half of fiscal year 2009 related to our variable compensation programs when compared to the first half of fiscal year 2008. Development expenses increased by $14.9 million primarily as a result of increased prototype materials and engineering consumption due to a higher volume of activity related to new product introductions in the current fiscal year. Stock-based compensation expense increased by $9.9 million primarily because of the impact of stock awards granted subsequent to the first half of fiscal year 2008 for new hire and semi-annual grants, offset by a reduction in expense related to older stock awards that became fully vested and for which the related expense had been almost fully amortized by the end of the first quarter of fiscal year 2009. 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.
While we will continue to monitor our allocation ofdevote substantial resources to research and development we expect these expensesin order to increase in absolute dollars in the foreseeable future due to the increased complexity and greater number of products under development.remain competitive. Research and development expenses are likely to fluctuate from time to time to the extent we make periodic incremental investments in research and development and these investments may be independent of our level of revenue.
Sales, General and Administrative
Sales, general and administrative expenses were $92.4 million and $81.2 million during the second quarter of fiscal years 2009 and 2008, respectively, an increase of $11.2 million, or 14%. Labor and related expenses decreased despite marginal headcount growth of approximately 30 personnel, primarily due to lower expenses during the second quarter of fiscal year 2009 related to our variable compensation programs when compared to the second quarter of fiscal year 2008. Outside professional fees increased by $4.8 million primarily due to increased fees pertaining to licensing arrangements and legal expenses. Marketing and advertising expenses increased by $4.4 million, primarily due to increased advertising campaign related activities, trade shows and samples distributed in the current quarter. Depreciation and amortization expense increased by $4.6 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 $2.5 million primarily due to stock awards granted subsequent to the first half of fiscal year 2008 for new hire and semi-annual grants, offset by a reduction in expense related to older stock awards that became fully vested and for which the related expense had been almost fully amortized by the end of the first quarter of fiscal year 2009.
Sales, general and administrative expenses were $185.5 million and $161.8 million for the first half of fiscal years 2009 and 2008, respectively, an increase of $23.7 million, or 15%. Labor and related expenses increased marginally due to growth in headcount by approximately 70 personnel; however, the increase was offset by lower expenses during the first half of fiscal year 2009 related to our variable compensation programs when compared to the first half of fiscal year 2008. Stock-based compensation expense increased by $4.7 million primarily due to the impact of stock awards granted subsequent to the first half of fiscal year 2008 for new hire and semi-annual grants, offset by a reduction in expense related to older stock awards that became fully vested and for which the related expense had been almost fully amortized by the end of the first quarter of fiscal year 2009. Outside professional fees increased by $9.2 million, primarily due to legal fees related to the 3dfx Interactive, Inc., or 3dfx, and Department of Justice matters described in Note 12 of the Notes to Condensed Consolidated Financial Statements. Marketing and advertising expenses increased by $7.4 million, primarily due to expenses related to a worldwide sales conference, increased advertising campaign costs and other marketing related activities.
We expect operating expenses to increase slightly in the third quarter of fiscal year 2009 compared to the second quarter of fiscal year 2009.
Interest Income
Interest income consists of interest earned on cash, cash equivalents and marketable securities. Interest income was $12.1$5.8 million and $15.6$12.1 million in the second quarter of fiscal years 20092010 and 2008,2009, respectively, a decrease of $3.5$6.3 million. Interest income was $26.4$11.9 million and $28.8$26.4 million for the first half of fiscal yearyears 2010 and 2009, and fiscal year 2008, respectively, a decrease of $2.4$14.5 million. These decreases were primarily a result of the fall indue to lower interest rates in the second quarter and first half of fiscal year 2010 when compared to the second quarter and first half of fiscal year 2009. Additionally, our relatively loweraverage balances forof cash, cash equivalents and marketable securities duringwere lower in the second quarter and first half of fiscal year 2010 when compared to the second quarter and first half of fiscal year 2009.
Other Income (Expense), net
Net other expenses decreased by $0.5 million in the second quarter of fiscal year 2010 when compared to the second quarter of fiscal year 2009. Net other expenses decreased by $4.8 million in the first half of fiscal year 20092010 when compared to the first half of fiscal year 2008.2009. In fiscal year 2009, other expense was higher, primarily due to the impact of the weakness of the U.S. Dollar on our foreign currency denominated liabilities, which resulted in foreign exchange losses. During the second quarter of fiscal year 2010, the fluctuations in the U.S. Dollar did not result in material foreign exchange losses.
Income Taxes
We recognized income tax expense (benefit) of ($25.7)1.8) million and $28.1($25.7) million for the second quarter of fiscal year 20092010 and 2008,2009, respectively, and $10.5($25.3) million and $49.6$10.5 million for the first half of fiscal year 20092010 and 2008,2009, respectively. Income tax expense (benefit) as a percentage of income before taxes, or our effective tax rate, was (17.5%(1.7%) and 14.0%(17.5%) for the second quarter of fiscal year 20092010 and 2008,2009, respectively, and 15.9%(7.6%) and 14.0%15.9% for the first half of fiscal year 2010 and 2009, and 2008, respectively. Our
The expected tax benefit derived from our loss before tax for the first half of fiscal year 2010 at the United States federal statutory tax rate of 35% differs from our actual effective tax rate is lower than the United States Federal Statutory rate of 35.0%(7.6%) due primarily to income earnedpermanent tax differences related to stock-based compensation and losses recognized in lower tax jurisdictions andwhere no tax benefit has been recognized, partially offset by the U.S. tax benefit of the federal research tax credits available in the respective periods.
Ourcredit. Further, our annual projected effective tax rates for the first halfrate of fiscal year 2009 increased to 15.9%(3.9%) differs from 14.0% during the first halfour actual effective tax rate of fiscal year 2008(7.6%) primarily due to the expirationa one-time discrete item related to our stock option purchase completed in March 2009.
Please refer to Note 5 of the federal research tax credit in fiscal year 2009. In addition, duringNotes to Condensed Consolidated Financial Statements for further information regarding the second quartercomponents of fiscal year 2009, we increased our estimate of the annual effective tax rate for fiscal year 2009 from 17.0% to 22.8%. The increase in our effective income tax rate was a result ofexpense. For the impact of non-deductiblethe potential changes in U.S. tax itemslegislation to our annual effectivefinancial position, see “Item 1A. Risk Factors - Risks Related to Regulatory, Legal, Our Common Stock and Other Matters - Changes in U.S. tax rate caused by the change inlegislation regarding our outlook for the financial results of fiscal year 2009. This increase inforeign earnings could materially impact our estimated annual effective tax rate was offset in the second quarter of fiscal year 2009, primarily by a favorable impact from the expiration of statues of limitations in certain non-U.S jurisdictions, resulting in an effective tax rate for the first half of fiscal year 2009 of 15.9%.
Liquidity and Capital Resources
| | As of July 27, 2008 | | As of January 27, 2008 | | As of July 26, 2009 | | As of January 25, 2009 | |
| | (In millions) | | (In millions) | |
Cash and cash equivalents | | | | | | | | | $ | 523.8 | | | $ | 417.7 | |
| | | | | | | | | | 942.3 | | | | 837.7 | |
Cash, cash equivalents, and marketable securities | | | | | | | | | $ | 1,466.1 | | | $ | 1,255.4 | |
| | Six Months Ended | | Six Months Ended | |
| | July 27, | | July 29, | | July 26, | | | July 27, | |
| | 2008 | | 2007 | | 2009 | | | 2008 | |
| | | (In millions) | | | (In millions) | |
Net cash provided by operating activities | | | | | | | | | $ | 277.2 | | | $ | 226.2 | |
Net cash used in investing activities | | | | | | | | | | $ | (140.1 | ) | | $ | (150.1 | ) |
Net cash used in financing activities | | | | | | | | | | $ | (31.1 | ) | | $ | (83.9 | ) |
As of July 27, 2008,26, 2009, we had $1.66$1.47 billion in cash, cash equivalents and marketable securities, a decreasean increase of $152.2$210.7 million from $1.81$1.26 billion at the end of fiscal year 2008.2009. 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 type and includes certain limits on our portfolio duration.
Operating activities
Operating activities generated cash of $226.2$277.2 million and $616.9$226.2 million during the first half of fiscal years 20092010 and 2008,2009, respectively. Our net income (loss) plus the impact of non-cash charges to earnings such as depreciation, amortization, stock-based compensation and charges related to the stock option purchase and deferred income taxes decreased during the comparable periods.periods due to the net loss in the second fiscal quarter of 2010. Additionally, the changes in our operating assets and liabilities, resulted in a net decrease in cash flow from operations. The changes in operating assetswhich were driven by reduced spending and liabilities resulted from the timing of payments to vendors, and anresulted in a net increase in inventories. our cash flow from operations during the first half of fiscal year 2010 when compared to the first half of fiscal year 2009. In particular, the reduction in our inventories was a result of rescheduling actions that were implemented in response to our high inventory levels at the end of the fourth quarter of fiscal year 2009 as well as a result of the increase in revenue for the second quarter of fiscal year 2010.
Investing activities
Investing activities have consisted primarily of purchases and sales of marketable securities, acquisitions of businesses and purchases of property and equipment, which includes purchasesinclude the purchase of property, leasehold improvements for our facilities and intangible assets. Investing activities used cash of $150.1$140.1 million and $128.2$150.1 million during the first half of fiscal years 2010 and 2009, and 2008, respectively. Investing activities for the first half of fiscal year 2009 used cash of approximately $150.0 million for a property that includes approximately 25 acres of land and ten commercial buildings in Santa Clara, California. Capital expenditures also included new research and development equipment, testing equipment to support our increased production requirements, technology licenses, software, intangible assets and leasehold improvements at our campus and international offices. Additionally, we acquired Ageia during the first quarter of fiscal year 2009. The cash inflow from maturities of marketable securities provided cash of $131.8 million, which partially offset the expenditures described above.
We expect to spend approximately $100$50 million to $150$75 million for capital expenditures that are typical to our business during the remainder of fiscal year 2009,2010, primarily for property development, leasehold improvements, software licenses, emulation equipment, computers and engineering workstations. We are also currently in the process of planning to construct a new campus in Santa Clara, California. If we move forward with these plans, we may be required to fund significant construction costs using our cash, cash equivalents and marketable securities. While we expect that we will have sufficient balances of cash, cash equivalents and marketable securities available for this purpose, there is no assurance that we will not need to raise additional debt financing in order to fund this project. Such additional financing, if required, may not be available on favorable terms, or at all. In addition, we may continue to use cash in connection with the acquisition of new businesses or assets.
Financing activities
Financing activities used cash of $83.9$31.1 million and $118.3$83.9 million during the first half of fiscal years 20092010 and 2008,2009, respectively. Net cash used by financing activities in the first half of fiscal year 20092010 was primarily due to $123.9$78.1 million paid towards ourthe purchase of stock repurchase program,options tendered in March 2009, offset by cash proceeds of $40.0$47.1 million from common stock issued under our employee stock plans. During the first half of fiscal year 2008,2010, we did not repurchase our common stock and during the first half of fiscal year 2009, we used $249.4$123.9 million towardsto repurchase our stock repurchase program, while we received cash proceeds of $131.1 million from common stock issued under our employee stock plans.stock.
Liquidity
Cash generated by operations is used as ourOur primary source of liquidity.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-sponsoredgovernment-sponsored enterprises, equity securities, money market funds and highly liquid debt securities of corporations, municipalities and the United States government and its agencies. These investments are denominated in United States dollars. As of July 27, 2008,26, 2009, we did not have any investments in auction-rate preferred securities. These 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 treatedclassified as “available-for-sale” under SFAS No. 115.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.
AtAs of July 27, 200826, 2009 and January 27, 2008,25, 2009, we had $1.66$1.47 billion and $1.81$1.26 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 typetypes 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 July 27, 2008,26, 2009, we were in compliance with our investment policy. As of July 27, 2008,26, 2009, our investments in government agencies and government sponsored enterprises represented approximately 68% of our cash equivalents and marketable securities, while the financial sector, and government agencieswhich has been negatively impacted by recent market liquidity conditions, accounted for approximately 36% and 30%, respectively,14% of our total investment portfolio.cash equivalents and marketable securities. Substantially all of our investments are with A/A2 or better rated securities with the substantial majority of the securities rated AA-/Aa3 or better.
We performed an impairment review of our investment portfolio as of July 26, 2009. 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 the second quarters of fiscal years 2010 and 2009. Please refer to Note 6 and Note 7 of the Notes to Condensed Consolidated Financial Statements for further details. 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 July 26, 2009.
Net realized gains for the three and six months ended July 26, 2009, were $0.2 million and $1.0 million, respectively. Net realized gains (losses) for the three and six months ended July 27, 2008 were $(0.1) million and $1.2 million, respectively. As of July 27, 2008, $892.626, 2009, we had a net unrealized gain of $9.2 million, which was comprised of gross unrealized gains of $9.7 million, offset by $(0.5) million of our portfoliogross unrealized (losses). As of January 25, 2009, we had a maturitynet unrealized gain of less$4.4 million, which was comprised of gross unrealized gains of $7.8 million, offset by $(3.4) million of gross unrealized (losses).
As of July 26, 2009, we held a money market investment in the Reserve International Liquidity Fund, Ltd., or the International Reserve Fund, which was valued at $22.0 million, net of $5.6 million of other than atemporary impairment charges that we recorded during fiscal year 2009. The International Reserve Fund was reclassified out of cash and a substantial majoritycash equivalents in our Condensed Consolidated Balance Sheet as of July 26, 2009 due to the halting of redemption requests in September 2008 by the International Reserve Fund. The $22.0 million value of our remaining investments have remaining maturitiesholdings in the International Reserve Fund as of three years or less.
Recent U.S. sub-prime mortgage defaults have hadJuly 26, 2009 reflects an initial investment of $130.0 million, reduced by $102.4 million that we received from the International Reserve Fund during the first six months of fiscal year 2010 and the $5.6 million other than temporary impairment charge we recorded against the value of this investment during fiscal year 2009 as a significant impact across various sectorsresult of credit loss. The $102.4 million we received was our portion of a payout of approximately 79% of the financial markets, causing global credit and liquidity issues. The short-term funding markets experienced issues sincetotal assets of the third and fourth quarterInternational Reserve Fund. All of calendar 2007, leadingthe underlying securities held by the International Reserve Fund are scheduled to liquidity disruptionmature by October 2009. We expect to receive the proceeds from our remaining investment in the market.International Reserve Fund, excluding some or all of the $5.6 million impairment charges, after all the securities have matured. However, redemptions from the International Reserve Fund are currently subject to pending litigation, which could cause further delay in receipt of our funds.
Our accounts receivable are highly concentrated and make us vulnerable to adverse changes in our customers' businesses, and to downturns in the industry and the worldwide economy. One customer accounted for approximately 12% of our accounts receivable balance at July 26, 2009. While we strive to limit our exposure to uncollectible accounts receivable using a combination of credit insurance and letters of credit, difficulties in collecting accounts receivable could materially and adversely affect our financial condition and results of operations. These difficulties are heightened during periods when economic conditions worsen. We continue to work directly with more foreign customers and it may be difficult to collect accounts receivable from them. We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. This allowance consists of an amount identified for specific customers and an amount based on overall estimated exposure. If the global credit market continuesfinancial condition of our customers were to deteriorate, our investment portfolioresulting in an impairment in their ability to make payments, additional allowances may be impactedrequired, we may be required to defer revenue recognition on sales to affected customers, and we could determine somemay be required to pay higher credit insurance premiums, any of our investments are impaired, 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.
Stock Repurchase Program
During fiscal year 2005, we announced that our Board of Directors, or the Board, had authorized a stock repurchase program to repurchase shares of our common stock, subject to certain specifications, up to an aggregate maximum amount of $300 million. During fiscal year 2007, the Board further approved an increase of $400 million to the original stock repurchase program. In fiscal year 2008, we announced a stock repurchase program under which we may purchase up to an additional $1.0 billion of our common stock over a three year period through May 2010. On August 12, 2008, we announced that our Board further authorized an additional increase of $1.0 billion to the stock repurchase program. As a result of these increases, we have an ongoing authorization from the Board, subject to certain specifications, to repurchase shares of our common stock up to an aggregate maximum amount of $2.7 billion through May 2010.
The repurchases will be made from time to time in the open market, in privately negotiated transactions, or in structured stock repurchase programs, and may be made in one or more larger repurchases, in compliance with the Exchange Act Rule 10b-18, subject to market conditions, applicable legal requirements, and other factors. The program does not obligate usNVIDIA 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 first halfsecond quarter of fiscal year 2009,2010, we entereddid not enter into aany structured share repurchase transaction to repurchase 6.3 milliontransactions or otherwise purchase any shares for $123.9 million which we recorded on the trade date of the transaction.our common stock. Through July 27, 2008,26, 2009, we hadhave repurchased 68.0an aggregate of 90.9 million shares under our stock repurchase program for a total cost of $1.16$1.46 billion. During the third quarterAs of fiscal yearJuly 26, 2009, we expectare authorized, subject to use cash in connection with thecertain specifications, to repurchase of shares under our stock repurchase program.
Common Stock
At the Annual Meeting of Stockholders held on June 19, 2008, the stockholders approved an increase in our authorized number of shares of our common stock up to 2,000,000,000. The par valuean additional amount of common stock remains unchanged at $0.001 per share.
$1.24 billion through May 2010.
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 12twelve months. However, there is no assurance that we will not need to raise additional equity or debt financing within this time frame. Additional financing may not be available on favorable terms or at all and may be dilutive to our then-current stockholders. We also may require additional capital for other purposes not presently contemplated. If we are unable to obtain sufficient capital, we could be required to curtail capital equipment purchases or research and development expenditures, which could harm our business. Factors that could affect our cash used or generated from operations and, as a result, our need to seek additional borrowings or capital include:
· | decreased demand and market acceptance for our products and/or our customers’ products; |
· | inability to successfully develop and produce in volume production our next-generation products; |
· | competitive pressures resulting in lower than expected average selling prices; and |
· | new product announcements or product introductions by our competitors. |
We expect to spend approximately $50 million to $75 million for capital expenditures during the remainder of fiscal year 2010, primarily for 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 and capital expenditures related to our property purchases or property development activities. We are currently in the process of planning to construct a new campus in Santa Clara, California. If we move forward with these plans, we may be required to fund significant construction costs using our cash, cash equivalents and marketable securities. While we expect that we will have sufficient balances of cash, cash equivalents and marketable securities available for this purpose, there is no assurance that we will not need to raise additional debt financing in order to fund this project. Such additional financing may not be available on favorable terms, or at all.
assets.
For additional factors that could impact our liquidity, please refer tosee “Item 1A. Risk Factors - Risks Related to Our Business and Products”Industry - Our operating results are unpredictable andrevenue may fluctuate and ifwhile our operating expenses are relatively fixed, which makes our results are below the expectationsdifficult to predict and could cause our results to fall short of securities analysts or investors, the trading price of our stock could decline.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 AgreementAPA also provided, subject to the other provisions thereof, that if 3dfx properly certified that all its debts and other liabilities had been provided for, then we would have been obligated to pay 3dfx 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 after notice and hearing.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. However, the
The conditional settlement reached in November 2005 never progressed substantially through the confirmation process.
On December 21,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 Bankruptcy Court determined that it would schedule trial of one portionappeal of the Trustee’s case against NVIDIA. On January 2, 2007, NVIDIA exercised its right to terminatecase. We do not believe the settlement agreementresolution of this matter will have a material impact on grounds that the Bankruptcy Court had failed to proceed toward confirmationour results 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? At the conclusion of the evidence, the Bankruptcy Court asked the parties to submit post-trial briefing. That briefing was completed 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 with respect to each of the questions to be tried. The Bankruptcy Court concluded that "the creditors of 3dfx were not injured by the Transaction." This decision does not entirely dispose of the Trustee's action, however; still pending are the Trustee's claims for successor liability and intentional fraudulent conveyance. On May 12, 2008, the Trustee filed a motion for leave to pursue an interlocutory appeal, but thereafter withdrew the motion. NVIDIA has filed a motion for summary judgment on all causes of action in order to convert the Memorandum Decision After Trial to a final judgment. That motion is scheduled to be heard on August 28, 2008.operations or financial position.
Please refer to Note 12 of the Notes to Condensed Consolidated Financial Statements 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, which could cause our revenue to decline.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.
During ourthe second quarter of fiscal quarter ended July 27, 2008,year 2010, we recorded a $196.0an additional net warranty charge of $120.0 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. AllThis charge included an additional accrual of $164.5 million for related estimated costs, offset by reimbursements from insurance carriers of $44.5 million that we recorded during the second quarter of fiscal year 2010. In July 2008, we recorded a $196.0 million charge against cost of revenue for the purpose of supporting the product repair costs of our newly manufactured productsaffected customers around the world. Although the number of units that we estimate will be impacted by this issue remains consistent with our initial estimates in July 2008, the overall cost of remediation and allrepair of impacted systems has been higher than originally anticipated. The weak die/packaging material combination is not used in any of our products that are currently shipping in volume have a different material set that we believe is more robust.production.
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 with certainty 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. During the second quarter of fiscal year 2010, we recorded $44.5 million in related insurance reimbursements which partially offset the additional warranty charge of $164.5 million included in cost of revenue. Additionally, we received $8.0 million in reimbursements from insurance providers in fiscal year 2009. However, there can be no assurance that we will recover any suchadditional 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 products.
Determining the amount of the charge related to this issue required management to make estimates and judgments based on historical experience, test data and various other assumptions including estimated field failure rates that we believe to be reasonable under the circumstances. The results of these judgments formed the basis for our estimate of the total charge to cover anticipated customer warranty, repair, return and replacement and other associated costs. However, if actual repair, return, replacement and other associated costs and/or actual field failure rates exceed our estimates, we may be required to record additional reserves, which would increase our cost of revenue and materially harm our financial results.
In September, October and November 2008, several putative class action lawsuits were filed against us, asserting various claims related to the impacted MCP orand GPU products. Please refer to Note 12 of the Notes to the Condensed Consolidated Financial Statements this Form 10-Q for further information regarding this litigation.
Contractual Obligations
At July 27, 2008,26, 2009, we had outstanding inventory purchase obligations and capital purchase obligations totaling approximately $615.6 million and $46.0 million, respectively.$492 million. There were no other material changes in our contractual obligations from those disclosed in our Annual Report on Form 10-K for the fiscal year ended January 27, 2008.25, 2009. Please see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources” in our Form 10-K for a description of our contractual obligations.
Off-Balance Sheet Arrangements
As of July 27, 2008,26, 2009, we had no material off-balance sheet arrangements as defined in Regulation S-K 303(a)(4)(ii).
Adoption of New Accounting Pronouncements
Please see Note 1 of the Notes to Condensed Consolidated Financial Statements for a discussion of adoption of new accounting pronouncements.
Recently Issued Accounting Pronouncements
Please see Note 1 of the Notes to Condensed Consolidated Financial Statements for a discussion of recently issued accounting pronouncements.
Adoption of New Accounting Pronouncements
On January 28, 2008, we adopted Statement of Financial Accounting Standards No. 157, or SFAS No. 157, Fair Value Measurements. SFAS No. 157 for all financial assets and financial liabilities recognized or disclosed at fair value in the financial statements. SFAS No. 157 establishes a framework for measuring fair value and expands disclosures about fair value measurements. The changes to current practice resulting from the application of 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. The adoption of SFAS No. 157 for financial assets and liabilities did not have a significant impact on our consolidated financial statements, and the resulting fair values calculated under SFAS No. 157 after adoption were not significantly different than the fair values that would have been calculated under previous guidance. Please refer to Note 16 of these Notes to the Condensed 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.
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.
In June 2007, the FASB ratified Emerging Issues Task Force Issue No. 07-3, or EITF 07-3, Accounting for Nonrefundable Advance Payments for Goods or Services to Be Used in Future Research and Development Activities. EITF 07-3 requires non-refundable advance payments for goods and services to be used in future research and development activities to be recorded as an asset and the payments to be expensed when the research and development activities are performed. We adopted the provisions of EITF 07-3 beginning with our fiscal quarter ended April 27, 2008. The adoption of EITF 07-3 did not have any impact on our consolidated financial position, results of operations and cash flows.
Recently Issued Accounting Pronouncements
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141 (revised 2007), or SFAS No. 141(R), Business Combinations. Under SFAS No. 141(R), an entity is required to recognize the assets acquired, liabilities assumed, contractual contingencies, and contingent consideration at their fair value on the acquisition date. It further requires that acquisition-related costs be recognized separately from the acquisition and expensed as incurred, restructuring costs generally be expensed in periods subsequent to the acquisition date, and changes in accounting for deferred tax asset valuation allowances and acquired income tax uncertainties after the measurement period impact income tax expense. In addition, acquired in-process research and development 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Investment and Interest Rate Risk
AtAs of July 27, 200826, 2009 and January 27, 2008,25, 2009, we had $1.66$1.47 billion and $1.81$1.26 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 highly liquid debt securities of corporations, municipalities and the United States government and its agencies. As of July 27, 2008,26, 2009, we did not have any investments in auction-rate preferred securities. Our investments are denominated in United States dollars.
We account for our investment instruments in accordance with Statement of Financial Accounting Standards No. 115, or SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. All of the cash equivalents and marketable securities are treatedclassified as “available-for-sale” under SFAS No. 115.securities. Investments in both fixed rate instruments 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 condensed consolidated statementsCondensed Consolidated Statements of incomeOperations 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 July 27, 2008,26, 2009, we performed a sensitivity analysis on our floating and fixed rate financial investments. According to our analysis, parallel shifts in the yield curve of both plus or minus 0.5% would result in changes in fair market values for these investments of approximately $4.6$7.1 million.
Recent U.S. sub-prime mortgage defaultsThe current financial turmoil affecting the banking system and financial markets and the possibility that financial institutions may consolidate or go out of business have hadresulted in a significanttightening 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 across various sectorsour treasury operations. Other income and expense could also vary materially from expectations depending on gains or losses realized on the sale or exchange of financial instruments; impairment charges related to debt securities as well as equity and other investments; interest rates; and cash, cash equivalent and marketable securities balances. The current volatility in the financial markets causing global credit and liquidity issues. The short-term funding markets experienced issues sinceoverall economic uncertainty increases the third and fourth quarter of calendar 2007, leading to liquidity disruptionrisk that the actual amounts realized in the market. Iffuture on our financial instruments could differ significantly from the global credit market continuesfair values currently assigned to deteriorate,them. As of July 26, 2009, our investment portfolio may be impactedinvestments in government agencies and we could determine somegovernment sponsored enterprises represented approximately 68% of our total cash equivalents and marketable securities, while the financial sector accounted for approximately 14% of our total cash equivalents and marketable securities. Substantially all of our investments are impaired, which could adversely impact our financial results. Our investments inwith A/A2 or better rated securities with the financial sector and government agencies accounted for approximately 36% and 30%, respectively,substantial majority of our total investment portfolio.the securities rated AA-/Aa3 or better. If the fair value of our investments in these sectors was to decline by 2%-5%, it would result in changes in fair market values for these investments by approximately $20-$21-$4953 million.
Exchange Rate Risk
We consider our direct exposure to foreign exchange rate fluctuations to be minimal. 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. Gains or losses from foreign currency remeasurement are included in “Other income (expense), net” in our Condensed Consolidated Financial Statements and to date have not been significant. During the second quarter of fiscal years 2010 and 2009, the aggregate exchange loss included in determining net loss was $1.4 million and $0.9 million, respectively. During the first half of fiscal years 2010 and 2009, the aggregate exchange loss included in determining net income (loss) was $1.6 million and $5.1 million, respectively. 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. During the second quarter of fiscal years 2009 and 2008, the aggregate exchange loss included in determining net income (loss) was $0.9 million and $0.1 million, respectively. During the first half of fiscal years 2009 and 2008, the aggregate exchange loss included in determining net income was $5.1 million and $0.7 million, respectively.
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 July 27, 2008.26, 2009.
Controls and Procedures
Disclosure Controls and Procedures
Based on their evaluation as of July 27, 2008,26, 2009, our management, including our Chief Executive Officer and Chief Financial Officer, have concluded that our disclosure controls and procedures as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Securities Exchange Act of 1934 or the Exchange Act, were effective.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal controls over financial reporting during our fiscal quarter ended July 27, 200826, 2009 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.
Please see Part I, Item 1, Note 12 of the Notes to Condensed Consolidated Financial Statements for a discussion of our legal proceedings.
A descriptionIn evaluating NVIDIA and our business, the following factors should be considered in addition to the other information in this Quarterly Report on Form 10-Q. 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 risk factors associated withfollowing risks could seriously harm our business, is set forth below. This description includes any material changesfinancial condition and results of operations, which could cause our stock price to decline. Additional risks and supersedes the description of risk factors associated withuncertainties not presently known to us or that we currently deem immaterial may also impair our business previously disclosedoperations.
Risks Related to Our Business and Industry
Global economic conditions have reduced demand for our products, adversely impacted our customers and suppliers and harmed our business.
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 Part II, “Item 1A. Risk Factors”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, 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 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. The current volatility in the financial markets and overall economic uncertainty increases the risk that the actual amounts realized in the future on our financial instruments could differ significantly from the fair values currently assigned to them.
Our business is cyclical in nature and is currently experiencing a severe downturn, which has harmed and may continue to harm our financial results.
Our business is directly affected by market conditions in the highly cyclical semiconductor industry, which is currently experiencing a severe downturn. The semiconductor industry has been adversely affected by many factors, including the current global downturn, ongoing efforts by our 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 downturn are unsuccessful, our operating results will suffer.
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 fluctuates and is 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, sales, general and administrative expenses, represented 34% of our total revenue for each of the second quarters of fiscal years 2010 and 2009, respectively, and 48% and 30% of our total revenue for the first half of fiscal years 2010 and 2009, 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. 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 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 the third quarter of fiscal year 2010. Please refer to the discussion in Note 3 to the Notes to the Condensed Consolidated Financial Statements for the impact of the tender offer related to the stock option purchase on operating expenses during the first half of fiscal year 2010.
Any one or more of the risks discussed in this Quarterly Report on Form 10-Q 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 fiscal quarter ended April 27, 2008.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.
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. The current negative worldwide economic conditions and market instability makes it increasingly difficult for us, our customers and our suppliers to accurately forecast future product demand trends. In forecasting demand, we make multiple assumptions any of which may prove to be incorrect. Situations that may result in excess or obsolete inventory include:
| · | if there were a sudden and significant decrease in demand for our products; |
| · | if there were a higher incidence of inventory obsolescence because of rapidly changing technology and customer requirements; |
| · | if we fail to estimate customer demand properly for our older products as our newer products are introduced; or |
| · | if our competition were to take unexpected competitive pricing actions. |
Risks RelatedAny inability to Competitionsell 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; |
| · | product transitions; |
| · | sales discounts; |
| · | 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. For example, the gross margin of our GPU Business decreased during the second quarter of fiscal year 2010 as compared to the second quarter of fiscal year 2009. This decrease was primarily due to the impact of the warranty charges against cost of revenue to cover anticipated customer warranty, repair, return, replacement and associated costs arising from a weak die/packaging material set in certain versions of our previous generation GPU products used in notebook systems. We also experienced ASP regression in our mainstream desktop GPU products as well as in our notebook GPU products that we believe were driven by pricing pressures in the marketplace as a result of recessionary conditions in the economy as well as increased competition. 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.
If we are unable to sell our MCP products for use with certain Intel processors, we may not be able to successfully compete and our business would be negatively impacted.
Our MCP products are currently used with both Intel and AMD processors. Our revenue from MCP products represented 31% or our total revenue for the second quarter of fiscal year 2010, an increase from 19% of our total revenue for the second quarter of fiscal 2009. 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 and financial results would be adversely impacted. 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.
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, during the second quarter of fiscal year 2010, we recorded an additional net warranty charge of $120.0 million against cost of revenue to cover anticipated customer warranty, repair, return, replacement and other costs arising from a weak die/packaging material set in certain versions of our previous generation MCP and GPU products used in notebook systems. In July 2008, we recorded a $196.0 million charge against cost of revenue for the purpose of supporting the product repair costs of our affected customers around the world. In September, October and November 2008, several putative class action lawsuits were filed against us, asserting various claims related to the impacted MCP and GPU products. Please refer to the risk entitled “We are subject to litigation arising from alleged defects in our previous generation MCP and GPU products, which if determined adversely to us, could harm our business” for the risk associated with this litigation.
If we are unable to compete in the markets for our products, our financial results could be adversely impacted.
The marketsmarket for ourGPUs, MCPs, and computer-on-a-chip products are highlythat support netbooks, PNDs, PMPs, PDAs, cellular phones or other handheld devices is intensely competitive and areis 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 from our products and whether we are able to deliver consistent volumes of our products at acceptable priceslevels of quality. We expect competition to increase from both existing competitors and quality levels.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 performance; |
· | 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. |
We expectA significant source of competition to increase both from existing competitors and new market entrants with products that may be less costly than ours, may provide better performance or additional features not provided by our products, oris from companies that provide or intend to provide competing product solutions. Any of these sources of competition could harm our business. For example, we were the largest supplier of AMD 64 chipsets with 60% segment share in the second quarter of calendar year 2008, as reported in the 2008 Second Quarter PC ProcessorGPU, MCP, and Chipset report from Mercury Research. Decline in demand for our chipsets in the AMD segment for any reason including competition from existing competitorscomputer-on-a-chip products that support netbooks, PNDs, PMPs, PDAs, cellular phones or new market entrants could materially impact our financial results.
other handheld devices. Some of our competitors may have or be able to obtain greater marketing, financial, distribution and manufacturing resources than we do and may be bettermore 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 is reported to combine the graphics processing capabilities of a graphics processing unit, or GPU, with an x86 architecture and is expected tomay 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 targeting the gaming market as well as other industries that demand high-performance graphics and computingdesigned 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 Larrabee, both of which are important markets for us. In order to compete, we may have to invest substantial amounts in research and development without assurance that our products will be superior to those of our competitors or that our products will achieve market acceptance.support netbooks, PDAs, cellular phones and other handheld devices.
Our current competitors include the following:
· | suppliers of discrete media and communication processors, or MCPs that incorporate a combination of networking, audio, communications and input/output, or I/O, functionality as part of their existing solutions, such as Advanced Micro Devices, Inc., or AMD, Broadcom Corporation, or Broadcom, Silicon Integrated Systems, Corporation,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 Technologies, Inc.; VIA; |
· | suppliers of GPUscomputer-on-a-chip products that support netbooks, PNDs, PMPs, PDAs, cellular phones or GPU intellectual property forother handheld and digital consumer electronics devices that incorporate advanced graphics functionality as part of their existing solutions, such as AMD, Broadcom, Fujitsu Limited, Imagination Technologies Ltd., ARM Holdings plc, Marvell Technology Group Ltd.,Ltd, or Marvell, NEC Corporation, Qualcomm Incorporated, or Qualcomm, Renesas Technology, Samsung, Seiko-Epson, Texas Instruments Incorporated, or Texas Instruments, and Toshiba America, Inc.; and |
· | suppliers of application processorscomputer-on-a-chip products for handheld and digital consumer electronicsembedded 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.
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 second quarter of fiscal year 2010, sales of our desktop GPU products decreased by approximately 9% compared to the second quarter of fiscal year 2009. This decrease was primarily driven by increased pricing pressures in the marketplace for our mainstream products due to the recessionary conditions in the economy. Additionally, sales of our notebook GPU products also decreased by approximately 57% compared to the second quarter of fiscal year 2009 primarily driven by a combination of the decline in unit demand and in the ASPs due to the recessionary conditions in the economy as well as increased competition in the marketplace. 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.
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 do not continue to be adopted by our target markets or if the demand for new and innovative products in our target markets decreases, our business and operating results would suffer.
Our success depends in part upon continued broad adoption of our processors for 3D graphics and multimedia in 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, changes in pricing of dynamic random-access memory devices and other changes in the total system cost of add-in boards, as well as by severe price competition and by frequent new technology and product introductions. Broad market acceptance is difficult to achieve and such market acceptance, if achieved, is difficult to sustain due to intense competition and frequent new technology and product introductions. Our GPU and MCP businesses together comprised approximately 79% and 75% of our revenue for the second quarter of fiscal years 2010 and 2009, respectively, and 80% and 77% of our revenue during the first half of fiscal years 2010 and 2009, 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 negatively impact our operating results.
Additionally, there can be no assurance that the industry will continue to demand new products with improved standards, features or performance. If our customers, OEMs, ODMs, add-in-card and motherboard manufacturers, system builders and consumer electronics companies, do not continue to design products that require more advanced or efficient processors and/or the market does not continue to demand new products with increased performance, features, functionality or standards, sales of our products could decline 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 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 and other Americas. We generated 86% and 89% of our revenue for the second quarter of fiscal years 2010 and 2009, respectively, and 84% and 91% of our revenue for the first half of fiscal years 2010 and 2009, respectively, from sales to customers outside the United States and other Americas. As of July 26, 2009, we had offices in fifteen countries outside of the United States. The manufacture, assembly, test and packaging of our products outside of the United States, operation of offices outside of the United States, and sales to customers internationally subjects us to a number of risks, including:
· | international economic and political conditions, such as political tensions between countries in which we do business; |
· | unexpected changes in, or impositions of, legislative or regulatory requirements; |
· | complying with a variety of foreign laws; |
· | differing legal standards with respect to protection of intellectual property and employment practices; |
· | cultural differences in the conduct of business; |
· | inadequate local infrastructure that could result in business disruptions; |
· | exporting or importing issues related to export or import restrictions, tariffs, quotas and other trade barriers and restrictions; |
· | financial risks such as longer payment cycles, difficulty in collecting accounts receivable and fluctuations in currency exchange rates; |
· | imposition of additional taxes and penalties; and |
· | other factors beyond our control such as terrorism, civil unrest, war and diseases such as severe acute respiratory syndrome and the Avian flu. |
If sales to any of our customers outside of the United States and other Americas are delayed or cancelled because of any of the above factors, our revenue may be negatively impacted.
Our international operations in Australia, China, Finland, France, Germany, Hong Kong, India, Japan, Korea, Russia, Singapore, Sweden, Switzerland, Taiwan, and the United Kingdom are subject to many of the above listed risks. Difficulties with our international operations, including finding appropriate staffing and office space, may divert management’s attention and other resources any of which could negatively impact our operating results.
The economic conditions in our primary overseas markets, particularly in Asia, may negatively impact the demand for our products abroad. All of our international sales to date have been denominated in United States dollars. Accordingly, an increase in the value of the United States dollar relative to foreign currencies could make our products less competitive in international markets or require us to assume the risk of denominating certain sales in foreign currencies. We anticipate that these factors will impact our business to a greater degree as we further expand our international business activities.
Our business results could be adversely affected if the identification and development of new products or entry into or development of a new market is delayed or unsuccessful.
In order to maintain or improve our financial results, we will need to continue to identify and develop new products as well as identify and enter new markets. As our GPUs and other processors develop and competition increases, we anticipate that product life cycles at the high end will remain short and average selling prices will decline. In particular, average selling prices and gross margins for our GPUs and other processors could decline as each product matures and as unit volume increases. As a result, we will need to introduce new products and enhancements to existing products to maintain or improve overall average selling prices, our gross margin and our financial results. We believe the success of our new product introductions will depend on many factors outlined elsewhere in these risk factors as well as the following:
· | market demand for new products and enhancements to existing products; |
· | timely completion and introduction of new product designs and new opportunities for existing products; |
· | seamless transitions from an older product to a new product; |
· | differentiation of our new products from those of our competitors; |
· | delays in volume shipments of our products; |
· | market acceptance of our products instead of our customers' products; and |
· | availability of adequate quantity and configurations of various types of memory products. |
In the past, we have experienced delays in the development and adoption of new products and have been unable to successfully manage product transitions from older to newer products resulting in obsolete inventory.
To be successful, we must also enter new markets or develop new uses for our future or existing products. We cannot accurately predict if our current or existing products or technologies will be successful in the new opportunities or markets that we identify for them or that we will compete successfully in any new markets we may enter. For example, we have developed products and other technology in order for certain general-purpose computing operations to be performed on a GPU rather than a CPU. This general purpose computing, which is often referred to as GP computing, was a new use for the GPU which had been entirely used for graphics rendering. During fiscal year 2008, we introduced our NVIDIA Tesla family of products, which was our entry into the high-performance computing industry, a new market for us. We also offer our CUDA software development solution, which is a C language programming environment for GPUs, that allows parallel computing on the GPU by using standard C language to create programs that process large quantities of data in parallel. Some of our competitors, including Intel, are now developing their own solutions for the discrete graphics and computing markets. Our failure to 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. Our engineering and technical resources include 3,856 and 3,876 full-time employees engaged in research and development as of July 26, 2009 and July 27, 2008, respectively. Research and development expenditures were $192.9 million and $212.9 million for the second quarter of fiscal years 2010 and 2009, respectively and $494.7 million and $431.7 million for the first half of fiscal years 2010 and 2009, respectively. Research and development expenses included non-cash stock-based compensation expense of $13.3 million and $24.2 million for the second quarter of fiscal years 2010 and 2009, respectively and $34.5 million and $48.8 million for the first half of fiscal years 2010 and 2009, 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 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 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 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 September 2008, we reduced our global workforce by approximately 6.5% as part of our efforts to allow continued investment in strategic growth areas. This reduction in our workforce may impair our ability to recruit and retain qualified employees of our workforce as a result of a perceived risk of future workforce reductions. Employees, whether or not directly affected by the reduction, may also seek future employment with our business partners, customers or competitors. In addition, we rely on stock-based awards as one means for recruiting, motivating and retaining highly skilled talent. If the value of such stock awards does not appreciate as measured by the performance of the price of our common stock or if our share-based compensation otherwise ceases to be viewed as a valuable benefit, our ability to attract, retain, and motivate employees could be weakened, which could harm our results of operations.
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. |
In addition, the consideration for any future acquisition could be paid in cash, shares of our common stock, the issuance of convertible debt securities or a combination of cash, convertible debt and common stock. If we make an investment in cash or use cash to pay for all or a portion of an acquisition, our cash reserves would be reduced which could negatively impact the growth of our business or our ability to develop new products. However, if we pay the consideration with shares of common stock, or convertible debentures, the holdings of our existing stockholders would be diluted. The significant decline in the trading price of our common stock would make the dilution to our stockholders more extreme and could negatively impact our ability to pay the consideration with shares of common stock or convertible debentures. We cannot forecast the number, timing or size of future strategic investments or acquisitions, or the effect that any such investments or acquisitions might have on our operations or financial results.
We are exposed to credit risk, fluctuations in the market values of our portfolio investments and in interest rates.
All of our cash equivalents and marketable securities are treated 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 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 July 26, 2009 and January 25, 2009, we had $1.47 billion and $1.26 billion, respectively, in cash, cash equivalents and marketable securities. Given the global nature of our business, we have invested both domestically and internationally. All of our investments are denominated in United States dollars. We invest in a variety of financial instruments, consisting principally of cash and cash equivalents, asset-backed securities, commercial paper, mortgage-backed securities issued by Government-sponsored enterprises, equity securities, money market funds and debt securities of corporations, municipalities and the United States government and its agencies. As of July 26, 2009, we did not have any investments in auction-rate preferred securities. As of July 26, 2009, our investments in government agencies and government sponsored enterprises represented approximately 68% of our total cash equivalents and marketable securities, while the financial sector accounted for approximately 14% of our total cash equivalents and marketable securities.
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 $5.6 million related to what we believe is an other than temporary impairment as a result of credit loss from our investment in the money market funds held by the International Reserve Fund during the third quarter of fiscal year 2009. Please refer to Notes 6 and 7 of these Notes to Condensed Consolidated Financial Statements for further details. As of July 26, 2009, we held a money market investment in the International Reserve Fund, which was valued at $22.0 million, net of $5.6 million of other than temporary impairment charges that we recorded during fiscal year 2009, was reclassified out of cash and cash equivalents in our Condensed Consolidated Balance Sheet due to the halting of redemption requests in September 2008 by the International Reserve Fund. The $22.0 million value of our holdings in the International Reserve Fund as of July 26, 2009 reflects an initial investment of $130.0 million, reduced by $102.4 million that we received from the International Reserve Fund during the first six months of fiscal year 2010 and the $5.6 million other than temporary impairment charge we recorded against the value of this investment during fiscal year 2009. The $102.4 million we received was our portion of a payout of approximately 79% of the total assets of the International Reserve Fund. All of the underlying securities held by the International Reserve Fund are scheduled to mature by October 2009. We expect to receive the proceeds from our remaining investment in the International Reserve Fund, excluding some or all of the $5.6 million impairment charges, after all the securities 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.
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 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.
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, 55 nanometer and 5540 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 releasedin October 2008, AMD and the Advanced Technology Investment Company, a 45 nanometer chip for desktop computers which it istechnology investment company backed by the government of Abu Dhabi, announced the establishment of a U.S. headquartered semiconductor manufacturing in its foundries.company that will manufacture AMD’s advance processors. If our suppliers fall behind our competitors in manufacturing processes, the development and customer demand for our products and the use of our products could be negatively impacted. If we are forced to use larger geometric processes in manufacturing a product than our competition, our gross margin may be reduced. The inability by us or our third-party manufacturers to effectively and efficiently transition to new manufacturing process technologies may adversely affect our operating results and our gross margin.
We rely on third-party vendors to supply software development tools to us for the development of our new products and we may be unable to obtain the tools necessary to develop or enhance new or existing products.
We rely on third-party software development tools to assist us in the design, simulation and verification of new products or product enhancements. To bring new products or product enhancements to market in a timely manner, or at all, we need software development tools that are sophisticated enough or technologically advanced enough to complete our design, simulations and verifications. In the past, we have experienced delays in the introduction of products as a result of the inability of then available software development tools to fully simulate the complex features and functionalities of our products. In the future, the design requirements necessary to meet consumer demands for more features and greater functionality from our products may exceed the capabilities of available software development tools. Unavailability of software development tools may result in our missing design cycles or losing design wins, either of which could result in a loss of market share or negatively impact our operating results.
Because of the importance of software development tools to the development and enhancement of our products, a critical component of our product development efforts is our partnerships with leaders in the computer-aided design industry, including Cadence Design Systems, Inc. and Synopsys, Inc. We have invested significant resources to develop relationships with these industry leaders and have often assisted them in the definition of their new products. We believe that forming these relationships and utilizing next-generation development tools to design, simulate and verify our products will help us remain at the forefront of the 3D graphics, communications and networking segments and develop products that utilize leading-edge technology on a rapid basis. If these relationships are not successful, we may be unable to develop new products or product enhancements in a timely manner, which could result in a loss of market share, a decrease in revenue or negatively impact our operating results.
We sell our products to a small number of customers and our business could suffer if we lose any of these customers.
We have a limited number of customers and our sales are highly concentrated. Sales to aRevenue from significant customer with revenue in excesscustomers, those representing 10% or more of 10% of our total revenue representedaggregated approximately 13% and 12% of our total revenue duringfrom one customer for the second quarter and first half of fiscal years 2009year 2010. Revenue from significant customers, those representing 10% or more of total revenue aggregated approximately 13% and 2008, respectively. Aggregate sales to our two largest customers accounted for approximately 21% and 16% of our total revenue from one customer and two customers for the second quarter and first half of fiscal yearsyear 2009, and 2008, 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 personal computer, or 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. One customer accounted forAccounts receivable from significant customers, those representing 10% or more of total accounts receivable aggregated approximately 11% and 12% of our accounts receivable balance from one customer at July 27, 200826, 2009 and approximately 38% of our accounts receivable balance from three customers at January 27, 2008, respectively.25, 2009.
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.
We obtain credit insurance over the purchasing credit extended to certain customers. As a result of the tightening of the credit markets, we may not be able to acquire 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 accounts receivables, there can be no assurance such procedures will effectively limit our credit risk or avoid losses, which could harm our financial condition or operating results.
Conditions outside the control of our independent 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 volatile, and can have a significant impact on our business because we may be unable to obtain or distribute product in a timely manner. Market and political conditions, including currency fluctuation, terrorism, political strife, war, labor disruption, and other factors, including natural or man-made disasters, adverse changes in tax laws, tariff, import or export quotas, power and water shortages, or interruption in air transportation, in areas where our independent subcontractors and manufacturers are located also could have a severe negative impact on our operating capabilities. For example, because we rely heavily on TSMC to produce a significant portion of our silicon wafers, earthquakes, typhoons or other natural disasters in Taiwan and Asia could limit our wafer supply and thereby harm our business, financial condition, and operational results. Risks Related to Regulatory, Legal, Our BusinessCommon Stock and ProductsOther Matters
If We are subject to litigation arising from alleged defects in our previous generation MCP and GPU products, contain significant defects our financial resultswhich if determined adversely to us, 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 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, 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.business.
During ourthe second quarter of fiscal quarter ended July 27, 2008,year 2010, we recorded a $196.0an additional net warranty charge of $120.0 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. AllIn July 2008, we recorded a $196.0 million charge against cost of revenue for the purpose of supporting the product repair costs 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.
affected customers around the world. 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 with certainty 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.coverage, which provided us with $44.5 million in related insurance reimbursements which partially offset the additional warranty charge included in cost of revenue. Additionally, we received $8.0 million in reimbursements from insurance providers in fiscal year 2009. However, there can be no assurance that we will recover any suchadditional 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.
Our failureIn September, October and November 2008, several putative class action lawsuits were filed against us, asserting various claims related to estimate customer demand properlythe 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.
Our inventory purchases
We are based upon future demand forecastsa 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 Corporation and with various parties related to our acquisition of 3dfx in 2001. Please refer to Note 12 of the Notes to Condensed Consolidated Financial Statements 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. Regardless of whether lawsuits are resolved in our favor or orders fromif 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 mayresult 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 U.S. 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 substantial portion of our assets, including employees, are located outside the United States. United States income taxes and foreign withholding taxes have not accurately predictbeen provided on undistributed earnings for certain non-United States subsidiaries, because such earnings are intended to be permanently reinvested in the quantityoperations of those subsidiaries. President Obama’s administration has recently announced initiatives that would substantially reduce our ability to defer U.S. taxes including, repealing the deferral of U.S. taxation of foreign earnings, eliminating utilization of or type of products thatsubstantially reducing our customers will want or will ultimately purchase. In forecasting demand, we make multiple assumptionsability to claim foreign tax credits, and eliminating various tax deductions until foreign earnings are repatriated to the United States. If any of which may provethese proposals are constituted into legislation, they could have a negative impact on our financial position and results of operations.
Litigation to be incorrect. Situations that may result in excessdefend against alleged infringement of intellectual property rights or obsolete inventory, whichto enforce our intellectual property rights and the outcome of such litigation could result in write-downssubstantial costs to us.
We expect that as the number of issued hardware and software patents increases and as competition intensifies, the valuevolume 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 inventory and/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 a reductionfamily of patents, indemnification of customers, payment of lost profits, or, when it has been sought, injunctive relief.
In addition, in average selling prices, and where our gross margin could be adversely affected include:the future, we may need to commence litigation or other legal proceedings in order to:
· | if there were a sudden and significant decrease in demand forassert claims of infringement of our products;intellectual property; |
· | if there were a higher incidence of inventory obsolescence because of rapidly changing technology and customer requirements;enforce our patents; |
· | if we fail to estimate customer demand properly forprotect our older products as our newer products are introduced;trade secrets or know-how; or |
· | if our competition were to take unexpected competitive pricing actions.determine the enforceability, scope and validity of the propriety rights of others. |
If we underestimatehave to initiate litigation in order to protect our customers’ demand forintellectual 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 party manufacturing partners may not have adequate capacity to increase production for us meaning thatparties’ patent or other intellectual property rights. However, 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, orlicenses at all could damageor on terms acceptable to us particularly from our customer relationships, resultcompetitors. 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 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 we order products or materials in advance of anticipated customer demand, our ability to reduce our inventory purchase commitments quickly in response to lower than expected demand is limited.
We manufacture our products based on forecasts of customer demand in order to have shorter shipment lead times 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. 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 portionone 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 excesssubstantial liabilities or obsolete inventorieshave 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 required to take corresponding inventory write-downs if growth slows or does not materialize, or if we incorrectly forecast product demand,negatively impacted. Furthermore, the indemnification of a customer may increase our operating expenses which could negatively impact our financialoperating results.
Our business results couldability to compete will be adversely affectedharmed 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 identificationUnited States and developmentinternationally. 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 newcertain foreign countries in which our products are or may be manufactured or sold, including various countries in Asia, may not protect our products or entry into or developmentintellectual property rights to the same extent as the laws 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 believeUnited States. This makes the successpossibility of piracy of our new product introductions will dependtechnology and products more likely. We continuously assess whether and where to seek formal protection for particular innovations and technologies based on manysuch factors outlined elsewhere in these risk factors as well as the following:as:
· | market demand for new products the commercial significance of our operations and enhancements to existing products;our competitors’ operations in particular countries and regions; |
· | timely completion and introduction of new product designs and new opportunities for existing products; the location in which our products are manufactured; |
· | seamless transitions from an older our strategic technology or product to a new product; |
·
| differentiation of our new products from those of our competitors; |
·
| delaysdirections in volume shipments of our products; |
·
| market acceptance of our products instead of our customers' products; and |
·
| availability of adequate quantity and configurations of various types of memory products. |
In the past, we have experienced delays in the development and adoption of new products and have been unable to successfully manage product transitions from older to newer products resulting in obsolete inventory.
To be successful, we must also enter new markets or develop new uses for our future or existing products. We cannot accurately predict if our current or existing products or technologies will be successful in the new opportunities or markets that we identify for them or that we will compete successfully in any new markets we may enter. For example, we have developed products and other technology in order for certain general-purpose computing operations to be performed on a GPU rather than a CPU. This general purpose computing, which is often referred to as GP computing, was a new use for the GPU which had been entirely used for graphics rendering. During our 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, are 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 have increased our engineering and technical resources and had 3,876 and 2,865 full-time employees engaged in research and development as of July 27, 2008 and July 29, 2007, respectively. Research and development expenditures were $212.9 and $158.0 million for the second quarter of fiscal years 2009 and 2008, respectively and $431.7 million and $316.3 million for the first half of fiscal years 2009 and 2008, respectively. Research and development expenses included non-cash stock-based compensation expense of $24.2 million and $16.4 million for the second quarter of fiscal years 2009 and 2008, respectively and $48.8 million and $38.8 million for the first half of fiscal years 2009 and 2008, 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 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.
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; |
·
| product transitions; |
·
| sales discounts; |
·
| unexpected pricing actions by our competitors; |
·
| the cost of product components;different countries; and |
· | the yield of wafers produced by the foundries that manufacture our products.degree to which intellectual property laws exist and are meaningfully enforced in different jurisdictions. |
DuringOur 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 second quarterpast, we have been subject to government investigations and inquiries from regulatory agencies such as the Department 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. 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.
During fiscal year 2009, our gross margin declined significantly to 16.8% as compared to 45.3% during the second quarterwe purchased real property in Santa Clara, California that includes approximately 25 acres of fiscal year 2008land and 44.6% during the first quarter of fiscal year 2009. The declineten commercial buildings. We also own real property in gross margin for the second quarter of fiscal year 2009 reflects a $196.0 million charge against cost of revenue to cover anticipated customer warranty, repair, return, replacementChina and associated costs arising from a weak die/packaging material set in certain versions of our previous generation MCP and GPU products used in notebook systems, as well as the impact of average sales price regression we experienced in our desktop GPU products as a result of increased competition. 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.
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.
India. We have acquiredlimited experience in the ownership and invested in other businesses that offered products, servicesmanagement of real property and technologies that we believe will help expand or enhance our existing products and business. We may enter into future acquisitionsare subject to the risks 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:owning real property, including:
· | difficulty in combining the technology, products, operations or workforcepossibility of environmental contamination and the acquired businesscosts associated with our business;mitigating any environmental problems; |
· | difficultyadverse changes in operatingthe value of these properties, due to interest rate changes, changes in a newthe market in which the property is located, or multiple new locations;other factors; |
· | disruptionthe risk of our ongoing businesses or the ongoing business of the companyloss if we invest in or acquire;decide to sell and are not able to recover all capitalized costs; |
· | difficulty in realizing increased cash commitments for the potential financial or strategic benefitspossible construction of the transaction;a campus; |
· | difficultythe possible need for structural improvements in maintaining uniform standards, controls, proceduresorder to comply with zoning, seismic and policies;other legal or regulatory requirements; |
· | disruption of increased operating expenses for the buildings or delays in ongoing research and development efforts;the property or both; |
· | diversion of capital and other resources; |
·
| assumption of liabilities; |
·
| diversion of resources and unanticipated expenses resulting from litigation arising from potentialpossible disputes with third parties, such as neighboring owners or actual business acquisitionsothers, related to the buildings or investments; |
·
| difficulties in entering into new markets in which we have limitedthe property or no experience and where competitors in such markets have stronger positions;both; and |
· | impairmentthe risk of relationships with employees and customers,financial loss in excess of amounts covered by insurance, or uninsured risks, such as the loss of any of our key employees or customers of our target’s key employees or customers,caused by damage to the buildings as a result of our acquisitionearthquakes, floods and or investment.other natural disasters. |
In addition, the consideration for any future acquisition could be paid in cash, shares of our common stock, the issuance of convertible debt securities or a combination of cash, convertible debt and common stock. If we make an investment in cash or use cash to pay for all or a portion of an acquisition, our cash reserves would be reduced which could negatively impact the growth of our business or our ability to develop new products. However, if we pay the consideration with shares of common stock, or convertible debentures, the holdings of our existing stockholders would be diluted. We cannot forecast the number, timing or size of future strategic investments or acquisitions, or the effect that any such investments or acquisitions might have on our operations or financial results.
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. For instance, Marvin D. Burkett, Chief Financial Officer, or CFO, informed us on March 21, 2008 of his intention to retire. Mr. Burkett is expected to remain as CFO while a search is conducted to find his replacement, and he may continue in some capacity with us thereafter. We are in the process of recruiting a new CFO. The loss of the services of Mr. Burkett or 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.
Our operating expenses are relatively fixed and we may not be able to reduce operating expenses quickly in response to any revenue shortfalls.
Our operating expenses, which are comprised of research and development expenses and sales, general and administrative expenses, represented 34% and 26% of our total revenue for the second quarter of fiscal years 2009 and 2008, respectively and 30% and 27% for the first half of fiscal years 2009 and 2008, respectively. Operating expenses included stock-based compensation expense of $37.0 million and $26.8 million for the second quarter of fiscal years 2009 and 2008, respectively and $76.0 million and $61.4 million for the first half of fiscal years 2009 and 2008, 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 in the case of the second quarter of fiscal year 2009. Further, some of our operating expenses, like non-cash 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 would be negatively impacted.
Expensing employee equity compensation materially and adversely affects our reported 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. As a result of adjustments arising from our restatement related to stock option grant dates, our operating results for fiscal years prior to fiscal year 2007 contain recorded amounts of non-cash stock-based compensation expense. For our fiscal years 2000 through 2006, this non-cash stock-based compensation expense was calculated using primarily the intrinsic value-based method under Accounting Principles Board Opinion No. 25, or APB 25, Accounting for Stock Issued to Employees and related interpretations.
In December 2004, the FASB issued SFAS No. 123(R) which requires the measurement and recognition of compensation expense for all stock-based compensation payments. SFAS No. 123(R) requires that 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 US GAAP. Stock-based compensation expense resulting from our compliance with SFAS No. 123(R), includedwas $25.4 million and $40.4 million and $29.5 million forrelated to on-going vesting of equity awards during the second quarterquarters of fiscal years 20092010 and 2008,2009, respectively, and $82.5$59.5 and $66.9$82.5 million for the first half of fiscal years 20092010 and 2008,2009, respectively, which negatively impacted our operating results. Additionally, in March 2009, we completed a cash tender offer for to purchase certain employee stock options. A total of 28.5 million options were tendered under the offer for an aggregate cash purchase price of $78.1 million, 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 the remaining unamortized stock based compensation expense 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. 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, we review our amortizable intangible assets and goodwill for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. Goodwill is tested for impairment at least annually. The carrying value of our goodwill or amortizable assets may not be recoverable due to factors such as a decline in stock price and market capitalization, reduced estimates of future cash flows and slower growth rates in our industry or in any of our business units. 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 operatingstock 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, are unpredictableannouncements by us and may fluctuate,our competitors, or uncertainty about current global economic conditions. The stock market as a whole also has experienced extreme price and if our operating results are belowvolume fluctuations that have affected the expectations of securities analysts or investors, the tradingmarket price of our stock could decline.many technology companies in ways that may have been unrelated to these companies’ operating performance.
Many 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 revenue components fluctuateprevious generation MCP and are difficult to predict,GPU products and that we were revising financial guidance for our operating expenses are largely independentsecond fiscal quarter of revenue. Therefore, it is difficult for us to accurately forecast revenue and profits or losses in any particular period.
Any one or more of the risks discussed in this Quarterly Report on Form 10-Q 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 cause2009, 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 decline. We believe that our quarterly and annual resultsthis announcement. Please refer to Note 12 of operations may continuethe Notes to be affected by a variety of factors that could harm our revenue, gross profit and results of operations.
Risks related to Market Conditions
We are exposed to fluctuations in the market values of our portfolio investments and in interest rates.
At July 27, 2008 and January 27, 2008, we had $1.66 billion and $1.81 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 highly liquid debt securities of corporations, municipalities and the United States government and its agencies. As of July 27, 2008, we did not have any investments in auction-rate preferred securities. All of our investments are denominated in United States dollars.
We accountCondensed Consolidated Financial Statements 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. 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.further information regarding these lawsuits. 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 condensed consolidated statements of income 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, a component of stockholders’ equity, net of tax.
Recent U.S. sub-prime mortgage defaults have had a significant impact across various sectors of the financial markets, causing global credit and liquidity issues. The short-term funding markets experienced issues since the third and fourth quarter of calendar 2007, leading to liquidity disruption in the market. If the global credit market continues to deteriorate, our investment portfolio may be impacted and we could determine some of our investments are impaired, which could adversely impact our financial results. As of July 27, 2008, our investments in the financial sector and government agencies accounted for approximately 36% and 30%, respectively, of our total investment portfolio. If the fair value of our investments in these sectors was to decline by 2%-5%, it would result in changes in fair market values for these investments by approximately $20-$49 million.
We are subject to risks associated with international operations which may harm our business.
We conduct our business worldwide. Our semiconductor wafers are manufactured, assembled, tested and packaged by third-parties located outside of the United States. We generated 89% and 90% of our revenue for the second quarter of fiscal years 2009 and 2008, respectively, and 91% and 87% of our revenue for the first half of fiscal years 2009 and 2008, respectively, from sales to customers outside the United States and other Americas. As of July 27, 2008, we had offices in thirteen 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, Taiwan, Japan, Korea, China, Hong Kong, India, France, Finland, Germany, Russia, Switzerland and the United Kingdom are subject to many of the above listed risks. Difficulties with our international operations, including finding appropriate staffing and office space, may divert management’s attention and other resources any of which could negatively impact our operating results.
The economic conditions in our primary overseas markets, particularly in Asia, may negatively impact the demand for our products abroad. All of our international sales to date have been denominated in United States dollars. Accordingly, an increase in the value of the United States dollar relative to foreign currencies could make our products less competitive in international markets or require us to assume the risk of denominating certain sales in foreign currencies. We anticipate that these factors will impact our business to a greater degree as we further expand our international business activities.
If our products do not continue to be adopted by the desktop PC, notebook PC, workstation, high-performance computing, personal media players, or PMPs, personal digital assistants, or PDAs, cellular handheld devices, and video game console markets or if the demand for new and innovative products in these markets decreases, our business and operating results would suffer.
Our success depends in part upon continued broad adoption of our processors for 3D graphics and multimedia in desktop PC, notebook PC, workstation, high-performance computing, 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, changes in pricing of dynamic random-access memory devices and other changes in the total system cost of add-in boards, as well as by severe price competition and by frequent new technology and product introductions. Broad market acceptance is difficult to achieve and such market acceptance, if achieved, is difficult to sustain due to intense competition and frequent new technology and product introductions. Our GPU and MCP businesses together comprised approximately 75% and 79% of our revenue for the second quarter of fiscal years 2009 and 2008, respectively, and 77% of our revenue during the first half of fiscal years 2009 and 2008, 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, PMP, PDA, cellular phone, and video game console markets, we may experience a decrease in revenue which could negatively impact our operating results.
Additionally, there can be no assurance that the industry will continue to demand new products with improved standards, features or performance. If our customers, OEMs, ODMs, add-in-card and motherboard manufacturers, system builders and consumer electronics companies, do not continue to design products that require more advanced or efficient processors and/or the market does not continue to demand new products with increased performance, features, functionality or standards, sales of our products could decline 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 are dependent on the PC 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 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 the second quarter of fiscal year 2009, sales of our desktop GPU products decreased by approximately 25% compared to the second quarter of fiscal year 2008. These decreases were primarily due to the Standalone Desktop GPU market segment decline as reported in the latest PC Graphics 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.
Our business is cyclical in nature and an industry downturn could harm our financial results.
Our business is directly affected by market conditions in the highly cyclical semiconductor industry, including alternating periods of overcapacity and capacity constraints, variations in manufacturing costs and yields, significant expenditures for capital equipment and product development, and rapid technological change. If we are unable to respond to changes in our industry, which can be unpredictable and rapid, in an efficient and timely manner, our operating results could suffer. In particular, from time to time, the semiconductor industry has experienced significant and sometimes prolonged downturns characterized by diminished product demand, increased inventory levels and accelerated erosion of average selling prices. If we cannot take appropriate actions such as reducing our manufacturing or operating expenses to sufficiently offset declines in demand, increased inventories, or decreased selling prices during a downturn, our revenue and operating results will suffer.
Risks Related to Regulatory, Legal and Other Matters
The United States Department of Justice’s pending investigation into the market for graphics processors and the ongoing civil actions could adversely affect our business.
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. No specific allegations have been made against us. We are cooperating with the DOJ in its investigation.
As of May 13, 2008, 55 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. Discovery is underway and 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. The Court excluded from the direct purchaser class business entities that purchased graphics products from NVIDIA or ATI for resale. The case will continue on behalf of the class of direct purchasers certified by the Court as well as for the several individual indirect purchasers suing on their own behalf. The Court also instructed the parties to give written notice of the class certification order to all non-certified direct purchasers, who will then have thirty days from the date of the notice to move to intervene in this action. The Court's ruling on class certification is subject to interim appeal at the discretion of the United States Court of Appeals for the Ninth Circuit. While we believe the allegations in the complaints are without merit and intend to vigorously defend the cases, the costs of defense and any damages resulting from a ruling against us or a settlement of the litigation could adversely affect our business.
The matters relating to the Board’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.
On August 10, 2006, we announced that the Audit Committee of our Board, with the assistance of outside legal counsel, was conducting a reviewvolatility of our stock option practices coveringprice, we may be 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.
The Audit Committee’s reviewtarget of our historic stock option practices identified a number of occasions on which the measurement date used for financial accounting and reporting purposes for stock options granted to certain of our employees was different from the actual grant date. To correct these accounting errors, we amended our Annual Report on Form 10-K for the year ended January 29, 2006 and our Quarterly Report on Form 10-Q for the three months ended April 30, 2006 to restate the consolidated financial statements contained in those reports. This review of our historical stock option granting practices and subsequent restatement required us to incur substantial expenses for legal, accounting, tax and other professional services and diverted our management’s attention from our business.
Additionally, the review and the resulting restatement of our prior financial statements have exposed us to greater risks associated with litigation. Ten derivative complaints have been filed in state and federal court pertaining to allegations relating to stock option grants. We cannot assure you that these or future similar complaints, or any futuresecurities litigation or regulatory action will result in the same conclusions reached by the Audit Committee. On August 5, 2007, our Board authorized the formation of a Special Litigation Committee to investigate, evaluate, and make a determination as to how we should proceed with respect to the claims and allegations asserted in the underlying derivative cases brought on behalf of NVIDIA. Currently, the Special Litigation Committee’s review is ongoing. The conduct and resolution of these matters will be time consuming, expensive and could distract our management’s attention from the conduct of our business. Furthermore, if we are subject to adverse rulings, we could be required to pay damages or penalties or have other remedies imposed upon us which could harm our business, financial condition, results of operations and cash flows.
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.
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 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 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, we may need to commence litigation or other legal proceedings in order to:
·
| assert claims of infringement of our intellectual property; |
·
| enforce our patents; |
·
| 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.
We are a party to litigation, including patent litigation, which, if determined adversely to us, could adversely affect our cash flow and financial results.
We are a party to litigation as both a defendant and as a plaintiff. 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 asserted against us may cause us to pay substantial damages, including punitive damages, and other related fees. 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.future. 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. CostsIn addition, the costs of defense and any damages resulting from litigation, a ruling against us, or a settlement of the litigation could adversely affect our cash flow and financial results.
We are subject to the risks of owning real property.
In the first half of fiscal year 2009, we used approximately $150.0 million of our cash to purchase real property in Santa Clara, California that includes approximately 25 acres of land and ten commercial buildings. We also own real property in China and India. We have 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 fixing any environmental problems; |
·
| adverse changes in the value of these properties, due to interest rate changes, changes in the neighborhood in which the property is located, or other factors; |
·
| 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. |
We may need to raise additional capital to fund the construction of our new campus, which may not be available on favorable terms, or at all.
Currently, we are in the process of planning to construct a new campus in Santa Clara, California. If we move forward with our plans, we will spend a significant amount for materials and related construction costs. If we are unable to control our construction related expenses or costs or such costs are higher than we anticipate, we may not have sufficient balances of cash, cash equivalents and marketable securities to fund our operations. As a result, we may need to raise additional financing. Such additional financing may not be available on favorable terms, or at all. Use of our available funds may also prevent us from making other necessary investments in our business such as in research and development of new products.
Our operating results may be adversely affected if we are subject to unexpected tax liabilities.
We are subject to taxation by a number of taxing authorities both in the United States and throughout the world. Tax rates vary among the jurisdictions in which we operate. Significant judgment is required in determining our provision for our income taxes as there are many transactions and calculations where the ultimate tax determination is uncertain. Although we believe our tax estimates are reasonable, any of the below could cause our effective tax rate to be materially different than that which is reflected in historical income tax provisions and accruals:
· | the jurisdictions in which profits are determined to be earned and taxed; |
· | adjustments to estimated taxes upon finalization of various tax returns; |
· | changes in available tax credits; |
· | changes in share-based compensation expense; |
· | changes in tax laws, the interpretation of tax laws either in the United States or abroad or the issuance of new interpretative accounting guidance related to uncertain transactions and calculations where the tax treatment was previously uncertain; and |
· | the resolution of issues arising from tax audits with various tax authorities. |
Should additional taxes be assessed as a result of any of the above, our operating results could be adversely affected. In addition, our future effective tax rate could be adversely affected by changes in the mix of earnings in countries with differing statutory tax rates, changes in tax laws or changes in the interpretation of tax laws.
Our failure to comply with any applicable environmental regulations could result in a range of consequences, including fines, suspension of production, excess inventory, sales limitations, and criminal and civil liabilities.
We are subject to various state, federal and international laws and regulations governing the environment, including restricting the presence of certain substances in electronic products and making producers of those products financially responsible for the collection, treatment, recycling and disposal of those products. For example, we are subject to the European Union Directive on Restriction of Hazardous Substances Directive, or RoHS Directive, that restricts the use of a number of substances, including lead, and other hazardous substances in electrical and electronic equipment in the market in the European Union. We could face significant costs and liabilities in connection with the European Union Directive on Waste Electrical and Electronic Equipment, or WEEE. The WEEE directs members of the European Union to enact laws, regulations, and administrative provisions to ensure that producers of electric and electronic equipment are financially responsible for the collection, recycling, treatment and environmentally responsible disposal of certain products sold into the market after August 15, 2005.
It is possible that unanticipated supply shortages, delays or excess non-compliant inventory may occur as a result of the RoHS Directive, WEEE, and other domestic or international environmental regulations. Failure to comply with any applicable environmental regulations could result in a range of consequences including costs, fines, suspension of production, excess inventory, sales limitations, criminal and civil liabilities and could impact our ability to conduct business in the countries or states that have adopted these types of regulations.
While we believe that we 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 testingtest 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. These principles are constantly subject to review and interpretation by the Securities and Exchange CommissionSEC 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.
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 agreementagreement 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.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Purchases of Equity Securities
During fiscal year 2005, we announced that our Board of Directors, or Board, had authorized a stock repurchase program to repurchase shares of our common stock, subject to certain specifications, up to an aggregate maximum amount of $300 million. During fiscal year 2007, the Board further approved an increase of $400 million to the original stock repurchase program. In fiscal year 2008, we announced a stock repurchase program under which we may purchase up to an additional $1.0 billion of our common stock over a three year period through May 2010. On August 12, 2008, we announced that our Board further authorized an additional increase of $1.0 billion to the stock repurchase program. As a result of these increases, we have an ongoing authorization from the Board, subject to certain specifications, to repurchase shares of our common stock up to an aggregate maximum amount of $2.7 billion through May 2010.
The repurchases will be made from time to time in the open market, in privately negotiated transactions, or in structured stock repurchase programs, and may be made in one or more larger repurchases, in compliance with the Securities Exchange Act of 1934 or the Exchange Act, Rule 10b-18, subject to market conditions, applicable legal requirements, and other factors. The program does not obligate NVIDIA to acquire any particular amount of common stock and the program may be suspended at any time at our discretion. As part of our share repurchase program, we have entered into, and we may continue to enter into, structured share repurchase transactions with financial institutions. These agreements generally require that we make an up-front payment in exchange for the right to receive a fixed number of shares of our common stock upon execution of the agreement, and a potential incremental number of shares of our common stock, within a pre-determined range, at the end of the term of the agreement.agreement
During the first half of fiscal year 2010, we did not enter into any structured share repurchase transactions or otherwise purchase any shares of our common stock. Through July 27, 2008,fiscal year 2010, we hadhave repurchased 68.0an aggregate of 90.9 million shares under our stock repurchase program for a total cost of $1.16$1.46 billion. During the three months endedAs of July 27, 2008,26, 2009, we did not enter into any structured shareare authorized, subject to certain specifications, to repurchase transactions.shares of our common stock up to an additional amount of $1.24 billion through May 2010.
Additionally, during fiscal year 2010, we granted approximately 5.4 million stock options and 4.8 million restricted stock units under the 2007 Equity Incentive Plan. In March 2009, we completed a cash tender offer for 28.5 million options held by our employees. Please refer to Note 3 and Note 4 of the Notes to Condensed Consolidated Financial Statements for further information regarding stock-based compensation related to our March 2009 stock option purchase and related to equity awards granted under our equity incentive programs.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Stockholders held on June 19, 2008May 20, 2009 the following proposals were adopted by the margin indicated. Proxies for the Annual Meeting were solicited pursuant to Section 14(a) of the Securities Exchange Act of 1934 and there was no solicitation in opposition of management’s solicitation.
| 1. | The election of three (3) directors to serve for a three-year term until the 20112012 Annual Meeting of Stockholders. The results of the voting were as follows: |
| a. | Steven ChuTench Coxe | |
| | Number of shares For | 487,245,948303,967,398 |
| | Number of shares AgainstWithheld | 4,972,489 |
| Number of shares Abstain | 4,012,543159,793,189 |
| b. | Harvey C. JonesMark L. Perry | |
| | Number of shares For | 479,745,136304,552,781 |
| | Number of shares AgainstWithheld | 12,460,467 |
| Number of shares Abstain | 4,025,376159,207,806 |
| c. | William J. MillerMark A. Stevens | |
| | Number of shares For | 474,938,642269,532,546 |
| | Number of shares AgainstWithheld | 17,017,103 |
| Number of shares Abstain | 4,275,235194,228,041 |
The other directors whose term of office as a director continued after the Annual Meeting of Stockholders are Tench Coxe, James C. Gaither, Jen-Hsun Huang, Mark L. PerryHarvey C. Jones, William J. Miller and A. Brooke Seawell.
| 2. | The approval of the amendment to the NVIDIA Corporation Amended and Restated Certificate of Incorporation. The results of the voting were as follows: |
Number of shares voted For | 402,773,505 |
Number of shares voted Against | 89,092,095 |
Number of shares Abstaining | 4,365,380 |
Number of Broker Non-Votes | 0 |
3. | The ratification of the appointment of PricewaterhouseCoopers LLP as our independent registered accounting firm for our fiscal year ending January 25, 2009.31, 2010. The results of the voting were as follows: |
| Number of shares voted For | 488,656,413462,171,997 |
| Number of shares voted Against | 3,637,4391,001,120 |
| Number of shares Abstaining | 3,937,128587,470 |
| Number of Broker Non-Votes | 0- |
None.
EXHIBIT INDEX
| | | | | | | Incorporated by Reference |
| Exhibit No. | | Exhibit Description | | Schedule/Form | | File Number | | | Exhibit | | Filing Date |
| | | | | | | | | | | | | | |
| | 3.1 | *10.1* | | Certificate of Amendment of Amended2007 Equity Incentive Plan – Non-Statutory Stock Option (Annual Grant - Board and Restated Certificate of Incorporation | Committee Service) | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | 31.1 | *31.1* | | Certification of Chief Executive Officer as required by Rule 13a-14(a) of the Securities Exchange Act of 1934 | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | 31.2 | *31.2* | | Certification of Chief Financial Officer as required by Rule 13a-14(a) of the Securities Exchange Act of 1934 | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | 32.1# | *32.1#* | | Certification of Chief Executive Officer as required by Rule 13a-14(b) of the Securities Exchange Act of 1934 | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | 32.2# | *32.2#* | | Certification of Chief Financial Officer as required by Rule 13a-14(b) of the Securities Exchange Act of 1934 | | | | | | | | | | | |
* Filed Herewith
# 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-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 the requirements 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.
Date: August 21, 2008 | |
| NVIDIA Corporation |
By: | /s/ MARVIN D. BURKETT |
| Marvin D. Burkett |
| (Duly Authorized Officer and Principal Financial and Accounting Officer) |
EXHIBIT INDEX
| | | | | | Incorporated by Reference |
| Exhibit No. | | Exhibit Description | | Schedule/Form | | File Number | | | Exhibit | | Filing Date |
| | | | | | | | | | | | | |
| 3.1 | * | | Certificate of Amendment of Amended and Restated Certificate of Incorporation | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | 31.1 | *101.INS*+ | | Certification of Chief Executive Officer as required by Rule 13a-14(a) of the Securities Exchange Act of 1934 | XBRL Instance Document | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | 31.2 | *101.SCH*+ | | Certification of Chief Financial Officer as required by Rule 13a-14(a) of the Securities Exchange Act of 1934 | XBRL Taxonomy Extension Schema Document | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | 32.1# | *101.CAL*+ | | Certification of Chief Executive Officer as required by Rule 13a-14(b) of the Securities Exchange Act of 1934 | XBRL Taxonomy Extension Calculation Linkbase Document | | | | | | | | | | |
| | | | | | | | | | | | | | |
| 101.LAB*+ | | XBRL Taxonomy Extension Labels Linkbase Document | | | | | | | | | | |
| | 32.2# | * | | Certification of Chief Financial Officer as required by Rule 13a-14(b) of the Securities Exchange Act of 1934 | | | | | | | | | | |
| 101.PRE*+ | | XBRL Taxonomy Extension Presentation Linkbase Document | | | | | | | | | | |
* Filed Herewith
# 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-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. Users of this data are advised that, pursuant to Rule 406T, these interactive data files are deemed not filed and otherwise are not subject to liability.
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 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.
| Date: August 20, 2009 | |
| NVIDIA Corporation |
By: | /s/ DAVID L. WHITE | |
| David L. White |
| (Duly Authorized Officer and Principal Financial and Accounting Officer) |
EXHIBIT INDEX
| | | | | Incorporated by Reference |
| Exhibit No. | | Exhibit Description | | Schedule/Form | | File Number | | | Exhibit | | Filing Date |
| | | | | | | | | | |
| 10.1* | | 2007 Equity Incentive Plan – Non-Statutory Stock Option (Annual Grant - Board and Committee Service) | | | | | | | | | | |
| | | | | | | | | | | | | |
| 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.LAB*+ | | XBRL Taxonomy Extension Labels Linkbase Document | | | | | | | | | | |
| | | | | | | | | | | | | |
| 101.PRE*+ | | XBRL Taxonomy Extension Presentation Linkbase Document | | | | | | | | | | |
* Filed Herewith
# 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-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. Users of this data are advised that, pursuant to Rule 406T, these interactive data files are deemed not filed and otherwise are not subject to liability.
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.
