We operate on a 52 or 53-week year, ending on the last Sunday in January. Fiscal year 20102011 is a 53-week52-week year, compared to fiscal year 20092010, which was a 52-week53-week year. The secondfirst quarter of fiscal years 20102011 and 20092010 are both 13-week quarters.

Certain prior fiscal year balances have been reclassified to conform to the current fiscal year presentation.

Our condensed consolidated financial statements include the accounts of NVIDIA Corporation and its wholly owned subsidiaries. All material intercompany balances and transactions have been eliminated in consolidation.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. On an on-going basis, we evaluate our estimates, including those related to revenue recognition, cash equivalents and marketable securities, accounts receivable, inventories, income taxes, goodwill, stock-based compensation, warranty liabilities, litigation, investigation and settlement costs and other contingencies. These estimates are based on historical facts and variousvario us other assumptions that we believe are reasonable.  

We recognize revenue from product sales when persuasive evidence of an arrangement exists, the product has been delivered, the price is fixed or 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 orand 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 resellers of our products in various target markets. We accrue for 100% of the potential rebates and do not apply a breakage factor. We recognize a liability for these rebates at the later of the date at which we record the related revenue or the date at which we offer the rebate. Rebates typically expire six months from the date of the original sale, unless we reasonably believe that the customer intends to claim the rebate. Unclaimed rebates are reversed to revenue upon expiration of the rebate.revenue. 

   Our customer programs also include marketing development funds, or MDFs. We account for MDFs as either a reduction of revenue or an operating expense. MDFs represent monies paid to retailers, system builders, original equipment manufacturers, or OEMs, distributors and add-in card partners that are earmarked for market segment development and expansion and typically are designed to support our partners’ activities while also promoting NVIDIA products. Depending on market conditions, we may take actions to increase amounts offered under customer programs, possibly resulting in an incremental reduction of revenue 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 over the period that services are performed. For all license and service arrangements, 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.  

In MarchDuring the three months ended April 26, 2009, we completed a cash tender offer for certain employee stock options. The tender offer applied to outstanding stock options held by employees with an exercise price equal to or greater than $17.50 per share. None of the non-employee members of our Board of Directors or our officers who file reports under Section 16(a) of the Securities Exchange Act of 1934, as amended, or the Securities Exchange Act, were eligible to participate in the tender offer. All eligible options with exercise prices equal to or greater than $17.50 per share but less than $28.00 per share were eligible to receive a cash payment of $3.00 per option in exchange for the cancellation of the eligible option. All eligible options with exercise prices equal to or greater than $28.00 per share were eligible to receive a cash payment of $2.00 per option in exchange for the cancellation of the eligible option.

Our condensed consolidated statement of operations for the sixthree months ended JulyApril 26, 2009 includes stock-based compensation charges related to the stock option purchase (in thousands):

  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.

We measure stock-based compensation expense at the grant date of the related equity awards, based on the fair value of the awards, and recognize the expense using the straight-line attribution method over the requisite employee service period.period adjusted for estimated forfeitures. We estimate the fair value of employee stock options on the date of grant using a binomial model and we use the closing trading price of our common stock on the date of grant as the fair value of awards of restricted stock units, or RSUs. We calculate the fair value of our employee stock purchase plan using the Black-Scholes model.

In addition to the stock-based compensation expense related to our cash tender offer to purchase certain employee stock options as described in Note 32 – Stock Option Purchase, our condensed consolidated statements of operations include stock-based compensation expense, net of amounts capitalized as inventory, as follows:

During the three and six months ended JulyMay 2, 2010 and April 26, 2009, we granted approximately 0.52.4 million and 5.44.9 million stock options, respectively, with an estimated total grant-date fair value of $1.8$17.6 million and $28.8$27.0 million, respectively, and a per option weighted average grant-date fair value of $4.50$7.47 and $5.38,$5.45, respectively. During the three and six months ended JulyMay 2, 2010 and April 26, 2009, we granted approximately 0.22.7 million and 4.84.6 million RSUs, with an estimated total grant-date fair value of $2.4$48.5 million and $48.8$46.4 million, respectively, and a per RSU weighted average grant-date fair value of $10.07$17.94 and $10.17, respectively.

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 $0.3$12.2 million and $5.0$11.8 million respectively, for the three and six months ended JulyMay 2, 2010 and April 26, 2009.

We recognized income tax expense (benefit) of ($1.8)$13.1 million and ($25.7)23.5) million for the three months ended JulyMay 2, 2010 and April 26, 2009, and July 27, 2008, respectively, and ($25.3) million and $10.5 million for the six months ended July 26, 2009 and July 27, 2008, respectively.  Income tax expense (benefit) as a percentage of income before taxes, or our effective tax rate, was (1.7%)8.7% and (17.5%(10.5%) for the three months ended JulyMay 2, 2010 and April 26, 2009, and July 27, 2008, respectively, and (7.6%) and 15.9%respectively.

Our effective tax rate on income before tax for the sixthree months ended July 26, 2009May 2, 2010 was lower than the United States federal statutory rate of 35% due primarily to income earned in jurisdictions where the tax rate is lower than the United States federal statutory tax rate.  Further, our annual projected effective tax rate as of the first quarter of fiscal year 2011 of 15.4% differs from our effective tax rate for the three months ended May 2, 2010 of 8.7% due to favorable discrete events in the quarter primarily attributable to the expiration of statutes of limitations in certain non-U.S. jurisdictions for which we had not previously recognized related tax benefits.  The U.S. federal research tax credit expired on December 31, 2009.  We will recognize the tax benefit of the U.S. federal research tax credit if and July 27, 2008, respectively.when reenacted into law.

The expected tax benefit derived from our loss before tax for the first sixthree 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%(10.5%) due primarily to permanent tax differences related to stock-based compensation, andincluding with respect to our stock option purchase completed in the first quarter of 2010, 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.

For the sixthree months ended July 26, 2009,May 2, 2010, there have been no 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 25, 2009.31, 2010, other than the recognition of tax benefits related to the expiration of statutes of limitations in certain non-U.S. jurisdictions in the three months ended May 2, 2010.

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 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 26, 2009,May 2, 2010, 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.

All of theour cash equivalents and marketable securities are classified as “available-for-sale” securities. Investments in both fixed rate instruments and floating rate interest earning instruments carry a degree of interest rate risk. Fixed rate debt securities may have their market value adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future investment income may fall short of expectations due to changes in interest rates or if the decline in fair value of our publicly traded debt or equity investments is judged to be other-than-temporary. We may suffer losses in principal if we are forced to sell securities that decline in market value due to changes in interest rates. However, because any debt securities we hold are classified as “available-for-sale,” no gains or losses are realized in our statement of operations due to changes in interest rates unless such securities are sold prior to maturity or unless declines in market values are determined to be other-than-temporary.  These securities are reported at fair value with the related unrealized gains and losses included in accumulated other comprehensive income, a component of stockholders’ equity, net of tax.

We performed an impairment review of our investment portfolio as of July 26, 2009.May 2, 2010. 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 first halfthree months of fiscal years 2010 and 2009.year 2011.  We concluded that our investments were appropriately valued and that no additional other than temporary impairment charges were necessary on our portfolio of available for sale investments as of July 26, 2009.

Net realized gains were not significant for the three and six months ended JulyMay 2, 2010 and April 26, 2009, were $0.22009.  As of May 2, 2010, we had a net unrealized gain of $11.1 million, and $1.0which was comprised of gross unrealized gains of $11.4 million, respectively. Net realizedoffset by $0.3 million of gross unrealized losses.  As of January 31, 2010, we had a net unrealized gain of $12.6 million, which was comprised of gross unrealized gains (losses) for the three and six months ended July 27, 2008 were $(0.1)of $12.7 million, and $1.2offset by $0.1 million respectively.of gross unrealized losses.

As of July 26, 2009,May 2, 2010, we held a money market investment in the Reserve International Liquidity Fund, Ltd., or the International Reserve Fund, which was valued at $22.0$13.0 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 cash 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$13.0 million value of our holdings in the International Reserve Fund as of July 26, 2009May 2, 2010 reflects an initial investment of $130.0 million, reduced by $102.4$111.4 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 investmentinve stment during fiscal year 2009 as a result of credit loss. The $102.4$111.4 million we received was our portion of a payout of approximately 79%85.6% of the total assets of the International Reserve Fund. All of the underlying securities held by the International Reserve Fund are scheduled to maturehad matured by October 2009. We expect to ultimately 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.charges. However, redemptions from the International Reserve Fund are currently subject to pending litigation, which could cause further delay in receipt of our funds.

We measure our cash equivalents and marketable securities at fair value. The fair values of our financial assets and liabilities are determined using quoted market prices of identical assets or quoted market prices of similar assets from active markets.  Our Level 1 valuations areassets consist of our money market fund deposits.  We classify securities within Level 1 assets when the fair value is obtained from real-timereal time quotes for transactions in active exchange markets involving identical assets.  Our available-for- sale securities are classified as having Level 2 valuationsinputs.  Our Level 2 assets are obtained from quotedvalued utilizing a market approach where the market prices in active markets involvingof similar assets.assets are provided by a variety of independent industry standard data providers to our investment custodian.  There were no signif icant transfers between Levels 1 and 2 assets for the three months ended May 2, 2010.  Level 3 valuationsassets are based on unobservable inputs to the valuation methodology and include our own data about assumptions market participants would use in pricing the asset or liability based on the best information available under the circumstances.

Financial assets and liabilities measured at fair value are summarized below: