UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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[x] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended October 30, 201629, 2017
OR
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[_] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number: 0-23985
NVIDIA CORPORATION
(Exact name of registrant as specified in its charter)
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Delaware | 94-3177549 |
(State or Other Jurisdiction of | (I.R.S. Employer |
Incorporation or Organization) | Identification No.) |
27012788 San Tomas Expressway
Santa Clara, California 9505095051
(408) 486-2000
(Address, including zip code, and telephone number,
including area code, of principal executive offices)
N/A2701 San Tomas Expressway, Santa Clara, CA, 95050
(Former name, former address and former fiscal year if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer”, “accelerated filer” and, “smaller reporting company”, and "emerging growth company" in Rule 12b-2 of the Exchange Act.
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Large accelerated filer x | Accelerated filer o |
Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company o | Emerging growth company o |
| | (Do not check if a smaller reporting company)
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No x
The number of shares of common stock, $0.001 par value, outstanding as of November 18, 2016,17, 2017, was 539606 million.
NVIDIA CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED October 30, 201629, 2017
TABLE OF CONTENTS
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| Financial Statements (Unaudited) | |
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| a) Condensed Consolidated Statements of Income for the three and nine months ended October 30, 201629, 2017 and October 25, 201530, 2016 | |
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| b) Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended October 30, 201629, 2017 and October 25, 201530, 2016 | |
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| c) Condensed Consolidated Balance Sheets as of October 30, 201629, 2017 and January 31, 201629, 2017 | |
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| d) Condensed Consolidated Statements of Cash Flows for the nine months ended October 30, 201629, 2017 and October 25, 201530, 2016 | |
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| e) Notes to Condensed Consolidated Financial Statements | |
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| Management’s Discussion and Analysis of Financial Condition and Results of Operations | |
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| Quantitative and Qualitative Disclosures About Market Risk | |
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| Controls and Procedures | |
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| Legal Proceedings | |
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| Risk Factors | |
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| Unregistered Sales of Equity Securities and Use of Proceeds | |
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| Exhibits | |
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WHERE YOU CAN FIND MORE INFORMATION
Investors and others should note that we announce material financial information to our investors using our investor relations website, press releases, SEC filings and public conference calls and webcasts. We also use the following social media channels as a means of disclosing information about the company, our products, our planned financial and other announcements and attendance at upcoming investor and industry conferences, and other matters and for complying with our disclosure obligations under Regulation FD:
NVIDIA Twitter Account (https:(https://twitter.com/NVIDIA)NVIDIA)
NVIDIA Company Blog (http:(http://blogs.nvidia.com/)
NVIDIA Facebook Page (https:(https://www.facebook.com/NVIDIA) NVIDIA)
NVIDIA LinkedIn Page (http:(http://www.linkedin.com/company/nvidia?trk=hb_tab_compy_id_3608)nvidia)
In addition, investors and others can follow ususe the Pulse news reader to subscribe to the NVIDIA Daily News feed and can view NVIDIA videos on Flipboard, YouTube and Instagram.YouTube.
The information we post through these social media channels may be deemed material. Accordingly, investors should monitor these accounts and the blog, in addition to following our press releases, SEC filings and public conference calls and webcasts. This list may be updated from time to time. The information we post through these channels is not a part of this quarterly report on Form 10-Q. These channels may be updated from time to time on NVIDIA's investor relations website.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
NVIDIA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In millions, except per share data)
(Unaudited)
| | | Three Months Ended | | Nine Months Ended | Three Months Ended | | Nine Months Ended |
| October 30, | | October 25, | | October 30, | | October 25, | October 29, | | October 30, | | October 29, | | October 30, |
| 2016 | | 2015 | | 2016 | | 2015 | 2017 | | 2016 | | 2017 | | 2016 |
| | | | | | | | | | | | | | |
Revenue | $ | 2,004 |
| | $ | 1,305 |
| | $ | 4,737 |
| | $ | 3,609 |
| $ | 2,636 |
| | $ | 2,004 |
| | $ | 6,803 |
| | $ | 4,737 |
|
Cost of revenue | 821 |
| | 571 |
| | 1,977 |
| | 1,589 |
| 1,067 |
| | 821 |
| | 2,782 |
| | 1,977 |
|
Gross profit | 1,183 |
| | 734 |
| | 2,760 |
| | 2,020 |
| 1,569 |
| | 1,183 |
| | 4,021 |
| | 2,760 |
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Operating expenses | |
| | | | | | | |
| | | | | | |
Research and development | 373 |
| | 329 |
| | 1,069 |
| | 987 |
| 462 |
| | 373 |
| | 1,290 |
| | 1,069 |
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Sales, general and administrative | 171 |
| | 152 |
| | 487 |
| | 441 |
| 212 |
| | 171 |
| | 594 |
| | 487 |
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Restructuring and other charges | — |
| | 8 |
| | 3 |
| | 97 |
| — |
| | — |
| | — |
| | 3 |
|
Total operating expenses | 544 |
| | 489 |
| | 1,559 |
| | 1,525 |
| 674 |
| | 544 |
| | 1,884 |
| | 1,559 |
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Income from operations | 639 |
| | 245 |
| | 1,201 |
| | 495 |
| 895 |
| | 639 |
| | 2,137 |
| | 1,201 |
|
Interest income | 14 |
| | 9 |
| | 37 |
| | 28 |
| 17 |
| | 14 |
| | 48 |
| | 37 |
|
Interest expense | (16 | ) | | (12 | ) | | (39 | ) | | (35 | ) | (15 | ) | | (16 | ) | | (46 | ) | | (39 | ) |
Other income (expense), net | (16 | ) | | 3 |
| | (19 | ) | | 1 |
| |
Income before income tax expense (benefit) | 621 |
| | 245 |
| | 1,180 |
| | 489 |
| |
Income tax expense (benefit) | 79 |
| | (1 | ) | | 168 |
| | 83 |
| |
Other, net | | (1 | ) | | (16 | ) | | (22 | ) | | (19 | ) |
Total other income (expense) | | 1 |
| | (18 | ) | | (20 | ) | | (21 | ) |
Income before income tax expense | | 896 |
| | 621 |
| | 2,117 |
| | 1,180 |
|
Income tax expense | | 58 |
| | 79 |
| | 189 |
| | 168 |
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Net income | $ | 542 |
| | $ | 246 |
| | $ | 1,012 |
| | $ | 406 |
| $ | 838 |
| | $ | 542 |
| | $ | 1,928 |
| | $ | 1,012 |
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| | | | | | | | | | | | | | |
Net income per share: | | | | | | | | | | | | | | |
Basic | $ | 1.01 |
| | $ | 0.45 |
| | $ | 1.89 |
| | $ | 0.75 |
| $ | 1.39 |
| | $ | 1.01 |
| | $ | 3.23 |
| | $ | 1.89 |
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Diluted | $ | 0.83 |
| | $ | 0.44 |
| | $ | 1.59 |
| | $ | 0.72 |
| $ | 1.33 |
| | $ | 0.83 |
| | $ | 3.05 |
| | $ | 1.59 |
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Weighted average shares used in per share computation: |
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Basic | 538 |
| | 542 |
| | 536 |
| | 544 |
| 603 |
| | 538 |
| | 597 |
| | 536 |
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Diluted | 653 |
| | 565 |
| | 636 |
| | 563 |
| 628 |
| | 653 |
| | 633 |
| | 636 |
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Cash dividends declared and paid per common share | $ | 0.1150 |
| | $ | 0.0975 |
| | $ | 0.3450 |
| | $ | 0.2800 |
| $ | 0.140 |
| | $ | 0.115 |
| | $ | 0.420 |
| | $ | 0.345 |
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See accompanying Notes to Condensed Consolidated Financial Statements.
NVIDIA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
(Unaudited)
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| October 30, | | October 25, | | October 30, | | October 25, |
| 2016 | | 2015 | | 2016 | | 2015 |
| | | | | |
Net income | $ | 542 |
| | $ | 246 |
| | $ | 1,012 |
| | $ | 406 |
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Other comprehensive loss, net of tax: | | | | | | | |
Available-for-sale securities: | | | | | | | |
Net unrealized gain (loss) on available-for-sale securities | (10 | ) | | 3 |
| | 1 |
| | (2 | ) |
Reclassification adjustments for net realized gain (loss) on available-for-sale securities included in net income | — |
| | — |
| | 1 |
| | (1 | ) |
Net change in unrealized gain (loss) on available-for-sale securities | (10 | ) | | 3 |
| | 2 |
| | (3 | ) |
Cash flow hedges: | | |
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| | | | |
Net change in unrealized gain (loss) on cash flow hedges | 2 |
| | (3 | ) | | (3 | ) | | (3 | ) |
Other comprehensive loss, net of tax | (8 | ) | | — |
| | (1 | ) | | (6 | ) |
Total comprehensive income | $ | 534 |
| | $ | 246 |
| | $ | 1,011 |
| | $ | 400 |
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| Three Months Ended | | Nine Months Ended |
| October 29, | | October 30, | | October 29, | | October 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
| | | | | |
Net income | $ | 838 |
| | $ | 542 |
| | $ | 1,928 |
| | $ | 1,012 |
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Other comprehensive income (loss), net of tax | | | | | | | |
Available-for-sale securities: | | | | | | | |
Net unrealized gain (loss) | (3 | ) | | (10 | ) | | 2 |
| | 1 |
|
Reclassification adjustments for net realized gain (loss) included in net income | 1 |
| | — |
| | 1 |
| | 1 |
|
Net change in unrealized gain (loss) | (2 | ) | | (10 | ) | | 3 |
| | 2 |
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Cash flow hedges: | | | | | | | |
Net unrealized gain (loss) | (1 | ) | | 2 |
| | (3 | ) | | (3 | ) |
Reclassification adjustments for net realized gain (loss) included in net income | 1 |
| | — |
| | 3 |
| | — |
|
Net change in unrealized gain (loss) | — |
| | 2 |
| | — |
| | (3 | ) |
Other comprehensive income (loss), net of tax | (2 | ) | | (8 | ) | | 3 |
| | (1 | ) |
Total comprehensive income | $ | 836 |
| | $ | 534 |
| | $ | 1,931 |
| | $ | 1,011 |
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See accompanying Notes to Condensed Consolidated Financial Statements.
NVIDIA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions)
(Unaudited)
| | | October 30, | | January 31, | October 29, | | January 29, |
| 2016 | | 2016 | 2017 | | 2017 |
ASSETS | | | | | | |
Current assets: | | | | | | |
Cash and cash equivalents | $ | 1,940 |
| | $ | 596 |
| $ | 2,802 |
| | $ | 1,766 |
|
Marketable securities | 4,731 |
| | 4,441 |
| 3,518 |
| | 5,032 |
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Accounts receivable, net | 833 |
| | 505 |
| 1,167 |
| | 826 |
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Inventories | 679 |
| | 418 |
| 857 |
| | 794 |
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Prepaid expenses and other current assets | 124 |
| | 93 |
| 135 |
| | 118 |
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Total current assets | 8,307 |
| | 6,053 |
| 8,479 |
| | 8,536 |
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Property and equipment, net | 503 |
| | 466 |
| 600 |
| | 521 |
|
Goodwill | 618 |
| | 618 |
| 618 |
| | 618 |
|
Intangible assets, net | 120 |
| | 166 |
| 63 |
| | 104 |
|
Other assets | 64 |
| | 67 |
| 70 |
| | 62 |
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Total assets | $ | 9,612 |
| | $ | 7,370 |
| $ | 9,830 |
| | $ | 9,841 |
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| | | | | | |
LIABILITIES, CONVERTIBLE DEBT CONVERSION OBLIGATION AND SHAREHOLDERS’ EQUITY | | | | | | |
Current liabilities: | | | | | | |
Accounts payable | $ | 523 |
| | $ | 296 |
| $ | 511 |
| | $ | 485 |
|
Accrued and other current liabilities | 507 |
| | 642 |
| 493 |
| | 507 |
|
Convertible debt, short-term | 1,011 |
| | 1,413 |
| |
Convertible short-term debt | | 23 |
| | 796 |
|
Total current liabilities | 2,041 |
| | 2,351 |
| 1,027 |
| | 1,788 |
|
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Long-term debt | 1,982 |
| | — |
| 1,985 |
| | 1,983 |
|
Other long-term liabilities | 213 |
| | 453 |
| 464 |
| | 271 |
|
Capital lease obligations, long-term | 7 |
| | 10 |
| 1 |
| | 6 |
|
Total liabilities | 4,243 |
| | 2,814 |
| 3,477 |
| | 4,048 |
|
Commitments and contingencies - see Note 12 |
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| |
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|
Convertible debt conversion obligation | 45 |
| | 87 |
| 1 |
| | 31 |
|
Shareholders’ equity: | | | | | | |
Preferred stock | — |
| | — |
| — |
| | — |
|
Common stock | 1 |
| | 1 |
| 1 |
| | 1 |
|
Additional paid-in capital | 4,581 |
| | 4,170 |
| 5,219 |
| | 4,708 |
|
Treasury stock, at cost | (4,783 | ) | | (4,048 | ) | (6,614 | ) | | (5,039 | ) |
Accumulated other comprehensive loss | (4 | ) | | (4 | ) | (14 | ) | | (16 | ) |
Retained earnings | 5,529 |
| | 4,350 |
| 7,760 |
| | 6,108 |
|
Total shareholders' equity | 5,324 |
| | 4,469 |
| 6,352 |
| | 5,762 |
|
Total liabilities, convertible debt conversion obligation and shareholders' equity | $ | 9,612 |
| | $ | 7,370 |
| $ | 9,830 |
| | $ | 9,841 |
|
See accompanying Notes to Condensed Consolidated Financial Statements.
NVIDIA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
| | | Nine Months Ended | Nine Months Ended |
| October 30, | | October 25, | October 29, | | October 30, |
| 2016 | | 2015 | 2017 | | 2016 |
Cash flows from operating activities: | | | | | | |
Net income | $ | 1,012 |
| | $ | 406 |
| $ | 1,928 |
| | $ | 1,012 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
| |
|
| |
|
Depreciation and amortization | 140 |
| | 151 |
| 145 |
| | 140 |
|
Stock-based compensation expense | 176 |
| | 145 |
| 265 |
| | 176 |
|
Deferred income taxes | 146 |
| | 107 |
| 158 |
| | 146 |
|
Amortization of debt discount | 20 |
| | 22 |
| 3 |
| | 20 |
|
Loss on early debt conversions | 15 |
| | — |
| 19 |
| | 15 |
|
Net gain on sale and disposal of long-lived assets and investments | (2 | ) | | (7 | ) | |
Restructuring and other charges | — |
| | 37 |
| |
Net loss (gain) on sale and disposal of long-lived assets and investments | | 1 |
| | (2 | ) |
Other | 8 |
| | 11 |
| 11 |
| | 8 |
|
Changes in operating assets and liabilities: | | | | | | |
Accounts receivable | (328 | ) | | (63 | ) | (342 | ) | | (328 | ) |
Inventories | (261 | ) | | 59 |
| (61 | ) | | (261 | ) |
Prepaid expenses and other assets | (28 | ) | | (25 | ) | (26 | ) | | (28 | ) |
Accounts payable | 218 |
| | 7 |
| 27 |
| | 218 |
|
Accrued and other current liabilities | (136 | ) | | (41 | ) | (15 | ) | | (136 | ) |
Other long-term liabilities | (29 | ) | | (145 | ) | 31 |
| | (29 | ) |
Net cash provided by operating activities | 951 |
| | 664 |
| 2,144 |
| | 951 |
|
Cash flows from investing activities: | | | | | | |
Proceeds from sales of marketable securities | 1,239 |
| | 1,651 |
| 802 |
| | 1,239 |
|
Proceeds from maturities of marketable securities | 712 |
| | 872 |
| 739 |
| | 712 |
|
Proceeds from sale of long-lived assets and investments | 6 |
| | 7 |
| — |
| | 6 |
|
Purchases of marketable securities | (2,249 | ) | | (2,669 | ) | (36 | ) | | (2,249 | ) |
Purchases of property and equipment and intangible assets | (125 | ) | | (71 | ) | (177 | ) | | (125 | ) |
Reimbursement of headquarters building development costs from banks | — |
| | 24 |
| |
Other | (3 | ) | | (1 | ) | |
Net cash used in investing activities | (420 | ) | | (187 | ) | |
Investment in non-affiliates | | (26 | ) | | (3 | ) |
Net cash provided by (used in) investing activities | | 1,302 |
| | (420 | ) |
Cash flows from financing activities: | | | | | | |
Proceeds from issuance of debt | 1,988 |
| | — |
| — |
| | 1,988 |
|
Payments related to repurchases of common stock | (509 | ) | | (452 | ) | (909 | ) | | (509 | ) |
Repayment of convertible debt | (444 | ) | | — |
| |
Repayment of Convertible Notes | | (803 | ) | | (444 | ) |
Dividends paid | (185 | ) | | (152 | ) | (250 | ) | | (185 | ) |
Net proceeds (payments) related to employee stock plans | (29 | ) | | 99 |
| |
Payments for debt issuance costs | (4 | ) | | — |
| |
Payments under capital lease obligations | (3 | ) | | (3 | ) | |
Proceeds related to employee stock plans | | 132 |
| | 148 |
|
Payments related to tax on restricted stock units | | (577 | ) | | (177 | ) |
Other | (1 | ) | | 5 |
| (3 | ) | | (8 | ) |
Net cash provided by (used in) financing activities | 813 |
| | (503 | ) | (2,410 | ) | | 813 |
|
Change in cash and cash equivalents | 1,344 |
| | (26 | ) | 1,036 |
| | 1,344 |
|
Cash and cash equivalents at beginning of period | 596 |
| | 497 |
| 1,766 |
| | 596 |
|
Cash and cash equivalents at end of period | $ | 1,940 |
| | $ | 471 |
| $ | 2,802 |
| | $ | 1,940 |
|
| | | | | | |
Other non-cash activity: | | | | |
Other non-cash investing activity: | | | | |
Assets acquired by assuming related liabilities | $ | 25 |
| | $ | — |
| $ | 20 |
| | $ | 25 |
|
See accompanying Notes to Condensed Consolidated Financial Statements.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America, or U.S. GAAP, for interim financial information and with the instructions to Form 10-Q and Article 10 of Securities and Exchange Commission, or SEC, Regulation S-X. The January 31, 201629, 2017 consolidated balance sheet was derived from our audited consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended January 31, 2016,29, 2017, as filed with the SEC, but does not include all disclosures required by U.S. GAAP. In the opinion of management, all adjustments, consisting only of normal recurring adjustments except as otherwise noted, considered necessary for a fair statement of results of operations and financial position have been included. The results for the interim periods presented are not necessarily indicative of the results expected for any future period. The following information should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended January 31, 2016.29, 2017.
Significant Accounting Policies
For a description of significant accounting policies, see Note 1, Organization and Summary of Significant Accounting Policies, of the Notes to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended January 31, 2016.29, 2017. There have been no material changes to our significant accounting policies since the filing of the Annual Report on Form 10-K.
Fiscal Year
We operate on a 52- or 53-week year, ending on the last Sunday in January. Fiscal yearyears 2018 and 2017 is aare both 52-week year and fiscal year 2016 was a 53-week year.years. The third quarter of fiscal years 20172018 and 20162017 were both 13-week quarters.
Reclassifications
Certain prior fiscal year balances have been reclassified to conform to the current fiscal year presentation.
Principles of Consolidation
Our condensed consolidated financial statements include the accounts of NVIDIA Corporation and our wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. On an on-going basis, we evaluate our estimates, including those related to revenue recognition, cash equivalents and marketable securities, accounts receivable, inventories, income taxes, goodwill, stock-based compensation, litigation, investigation and settlement costs, restructuring and other charges, and other contingencies. These estimates are based on historical facts and various other assumptions that we believe are reasonable.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Adoption of New and Recently Issued Accounting Pronouncements
Recently Adopted Accounting Pronouncement
In MarchOctober 2016, the Financial Accounting Standards Board, or FASB, issued an accounting standards update which simplifies certain aspectsrequires the recognition of stock-based compensation accounting. Amongincome tax consequences of an intra-entity transfer of an asset, other elements, the new guidance eliminates additional paid in capital, or APIC, pools and requires excess tax benefits and tax deficiencies to be recorded in the income statementthan inventory, when the awards vest or are settled. In addition, cash flows related to excess tax benefits will no longer be separately classified as a financing activity apart from other income tax cash flows. The new standard is effective for us beginning in our first quarter of fiscal year 2018 with early adoption permitted.transfer occurs. We elected to early adopt this new guidance in the thirdfirst quarter of fiscal year 2017,2018, which required us to reflect any adjustments as of February 1, 2016.
EarlyJanuary 30, 2017. Upon adoption of this guidance, resulted in the following:
We recorded excess tax benefits within income tax expense, rather than in APIC, of $12 million, $8 million and $42 million for the first, second and third quarters of fiscal year 2017, respectively.
Wewe recorded a cumulative-effect adjustment as of February 1, 2016the first day of fiscal year 2018 to increasedecrease retained earnings by $353$28 million, with a corresponding increasedecrease to deferred tax assets, to recognize the net operating loss and federal research tax credit carryforwards attributable to excess tax benefits on stock-based compensationprepaid taxes that had not been previously recognized in APIC.
The excessincome tax benefits are now included in net operating cash rather than net financing cash in our Condensed Consolidated Statements of Cash Flows. We elected to apply this change in presentation prospectively and thus prior periods have not been adjusted.
We elected not to change our policy on accounting for forfeitures, although the new guidance provides an option for us to account for forfeitures as they occur, and thus continued to estimate forfeitures expected to occur to determine the amount of compensation cost to be recognized in each period.
The adoption of this new guidance impacted our previously reported quarterly results for fiscal year 2017 as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| July 31, 2016 | | May 1, 2016 | | July 31, 2016 |
| As reported | | As adjusted | | As reported | | As adjusted | | As reported | | As adjusted |
| (In millions, except per share data) |
Condensed Consolidated Statements of Income: | | | | | | | | | | | |
Income tax expense | $ | 64 |
| | $ | 56 |
| | $ | 45 |
| | $ | 33 |
| | $ | 109 |
| | $ | 89 |
|
Net income | $ | 253 |
| | $ | 261 |
| | $ | 196 |
| | $ | 208 |
| | $ | 449 |
| | $ | 469 |
|
Basic net income per share | $ | 0.47 |
| | $ | 0.49 |
| | $ | 0.36 |
| | $ | 0.39 |
| | $ | 0.84 |
| | $ | 0.88 |
|
Diluted net income per share | $ | 0.40 |
| | $ | 0.41 |
| | $ | 0.33 |
| | $ | 0.35 |
| | $ | 0.73 |
| | $ | 0.76 |
|
Weighted average shares used in diluted net income per share computation | 631 |
| | 634 |
| | 597 |
| | 599 |
| | 617 |
| | 620 |
|
| | | | | | | | | | | |
Condensed Consolidated Statements of Cash Flows: | | | | | | | | |
|
| |
|
|
Net cash provided by operating activities | $ | 184 |
| | $ | 201 |
| | $ | 309 |
| | $ | 318 |
| | $ | 493 |
| | $ | 519 |
|
Net cash used in financing activities | $ | (35 | ) | | $ | (52 | ) | | $ | (534 | ) | | $ | (545 | ) | | $ | (570 | ) | | $ | (597 | ) |
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
expense.
Recent Accounting Pronouncements Not Yet Adopted
In OctoberJanuary 2016, the FASB issued an accounting standards update that requiresto amend certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. Most prominent among the recognitionamendments is the requirement for changes in the fair value of our equity investments, with certain exceptions, to be recognized through net income tax consequences for intra-entity transfers of assetsrather than other than inventory when the transfer occurs.comprehensive income. The update will be effective for us beginning in our first quarter of fiscal year 2019, with early2019. While we are still finalizing our analysis to quantify the adoption permitted. The adoptionimpact of this accounting guidance isthe provisions of the new standard, we do not currently expected to have a material impact on our consolidated financial statements.
In August 2016, the FASB issued an accounting standards update that clarifies how companies present and classify certain cash receipts and cash payments in the statement of cash flows. The update will be effective for us beginning in our first quarter of fiscal year 2019, with early adoption permitted. The adoption of this accounting guidance is not expectedexpect it to have a material impact on our consolidated financial statements.
In February 2016, the FASB issued an accounting standards update regarding the accounting for leases by which we will begin recognizing lease assets and liabilities on the balance sheet for leases with a lease term of more than 12 months. The update will require additional disclosures regarding key information about leasing arrangements. Under existing guidance, operating leases are not recorded as lease assets and lease liabilities on the balance sheet. The update will be effective for us beginning in our first quarter of fiscal year 2020, with early adoption permitted. We are currently evaluating the impact of the adoption of this accounting guidance on our consolidated financial statements. However, we expect the adoption of this accounting guidance to result in an increase in lease assets and a corresponding increase in lease liabilities on our Condensed Consolidated Balance Sheets.
The FASB issued an accounting standards update that creates a single source of revenue guidance under U.S. GAAP for all companies, in all industries, effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. The new standard will be effective for usindustries. We expect to adopt this guidance beginning in our first quarter of fiscal year 2019 although we are permitted to adoptusing the standard one year earlier. We will adopt this guidance either by using a full retrospective approach for all periods presented in the period of adoption, or a modified retrospective approach. WeGiven the scope of work required to implement the recognition and disclosure requirements under the new guidance, we have made progress in and continue to assess changes in policies, processes, systems and controls necessary to meet the additional requirements of the guidance. While we are currently evaluatingstill finalizing our analysis to quantify the adoption impact of this accounting guidancethe provisions of the new standard, we do not expect it to have a material impact on our consolidated financial statements and have not yet determined which transition method we will apply.statements.
Note 2 - Stock-Based Compensation
Our stock-based compensation expense is associated with stock options, restricted stock units, or RSUs, performance stock units that are based on our corporate financial performance targets, or PSUs, performance stock units that are based on market conditions, or market-based PSUs, and our employee stock purchase plan, or ESPP.
Our Condensed Consolidated Statements of Income include stock-based compensation expense, net of amounts capitalized as inventory, as follows:
| | | Three Months Ended | | Nine Months Ended | Three Months Ended | | Nine Months Ended |
| October 30, 2016 | | October 25, 2015 | | October 30, 2016 | | October 25, 2015 | October 29, 2017 | | October 30, 2016 | | October 29, 2017 | | October 30, 2016 |
| (In millions) | (In millions) |
Cost of revenue | $ | 2 |
| | $ | 4 |
| | $ | 10 |
| | $ | 10 |
| $ | 6 |
| | $ | 2 |
| | $ | 14 |
| | $ | 10 |
|
Research and development | 36 |
| | 28 |
| | 95 |
| | 82 |
| 61 |
| | 36 |
| | 146 |
| | 95 |
|
Sales, general and administrative | 27 |
| | 19 |
| | 71 |
| | 53 |
| 40 |
| | 27 |
| | 105 |
| | 71 |
|
Total | $ | 65 |
| | $ | 51 |
| | $ | 176 |
| | $ | 145 |
| $ | 107 |
| | $ | 65 |
| | $ | 265 |
| | $ | 176 |
|
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Equity Award Activity
The following is a summary of our equity award transactions under our equity incentive plans:
|
| | | | | | | | | | | | | |
| RSUs, PSUs and Market-based PSUs Outstanding | | Options Outstanding |
| Number of Shares | | Weighted Average Grant-Date Fair Value Per Share | | Number of Shares | | Weighted Average Exercise Price Per Share |
| (In millions, except per share data) |
Balances, January 31, 2016 | 26 |
| | $ | 19.12 |
| | 13 |
| | $ | 14.49 |
|
Granted (1) (2) | 11 |
| | $ | 48.88 |
| | — |
| | $ | — |
|
Exercised | — |
| | $ | — |
| | (4 | ) | | $ | 14.44 |
|
Vested restricted stock | (9 | ) | | $ | 17.84 |
| | — |
| | $ | — |
|
Canceled and forfeited | (1 | ) | | $ | 21.58 |
| | — |
| | $ | — |
|
Balances, October 30, 2016 | 27 |
| | $ | 31.76 |
| | 9 |
| | $ | 14.52 |
|
|
| | | | | | | | | | | | | |
| RSUs, PSUs, and Market-based PSUs Outstanding | | Options Outstanding |
| Number of Shares | | Weighted Average Grant-Date Fair Value Per Share | | Number of Shares | | Weighted Average Exercise Price Per Share |
| (In millions, except per share data) |
Balances, January 29, 2017 | 27 |
| | $ | 32.84 |
| | 7 |
| | $ | 14.47 |
|
Granted (1) (2) | 6 |
| | $ | 142.34 |
| | — |
| | $ | — |
|
Exercised | — |
| | $ | — |
| | (2 | ) | | $ | 14.46 |
|
Vested | (10 | ) | | $ | 26.88 |
| | — |
| | $ | — |
|
Balances, October 29, 2017 | 23 |
| | $ | 64.42 |
| | 5 |
| | $ | 14.47 |
|
| |
(1) | Includes PSUs that will be issued and eligible to vest if the corporate financial performance maximum target level for fiscal year 20172018 is achieved. Depending on the actual level of achievement of the corporate performance target at the end of fiscal year 2017,2018, the PSUs issued could range from 0be up to 20.6 million shares. |
| |
(2) | Includes market-based PSUs that will be issued and eligible to vest if the maximum target for total shareholder return, or TSR, over the 3-year measurement period is achieved. Depending on the ranking of our TSR compared to the respective TSRs of the companies comprising the Standard & Poor’s 500 Index during a 3-year measurementthat period, the market-based PSUs issued could range from 0be up to 0.30.1 million shares. |
Of the total fair value of equity awards granted during the threethird quarter and first nine months ended October 30, 2016,of fiscal year 2018, we estimated that the stock-based compensation expense related to equity awards that are not expected to vest was $105 million and $144 million, respectively. Of the total fair value of equity awards granted during the third quarter and first nine months of fiscal year 2017, we estimated that the stock-based compensation expense related to equity awards that are not expected to vest was $72 million and $89 million, respectively. Of the total fair value of equity awards granted during the three and nine months ended October 30, 2015, the stock-based compensation expense related to equity awards that are not expected to vest was $34 million and $43 million, respectively.
The following summarizes the aggregate unearned stock-based compensation expense and estimated weighted average amortization period as of October 30, 201629, 2017 and January 31, 2016:29, 2017:
| | | October 30, | | January 31, | October 29, | | January 29, |
| 2016 | | 2016 | 2017 | | 2017 |
| (In millions) | (In millions) |
Aggregate unearned stock-based compensation expense | $ | 662 |
| | $ | 381 |
| $ | 1,153 |
| | $ | 627 |
|
| | | | | | |
Estimated weighted average amortization period | (In years) | |
Estimated weighted average remaining amortization period | | (In years) |
Stock options | 0.7 |
| | 1.1 |
| — |
| | 0.5 |
|
RSUs, PSUs and market-based PSUs | 2.8 |
| | 2.7 |
| |
RSUs, PSUs, and market-based PSUs | | 2.5 |
| | 2.6 |
|
ESPP | 0.6 |
| | 0.7 |
| 0.7 |
| | 0.6 |
|
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note 3 – Net Income Per Share
The following is a reconciliation of the numerator and denominator of the basic and diluted net income per share computations for the periods presented:
| | | Three Months Ended | | Nine Months Ended | Three Months Ended | | Nine Months Ended |
| October 30, | | October 25, | | October 30, | | October 25, | October 29, | | October 30, | | October 29, | | October 30, |
| 2016 | | 2015 | | 2016 | | 2015 | 2017 | | 2016 | | 2017 | | 2016 |
| (In millions, except per share data) | (In millions, except per share data) |
Numerator: | | | | | | | | | | | | | | |
Net income | $ | 542 |
| | $ | 246 |
| | $ | 1,012 |
| | $ | 406 |
| $ | 838 |
| | $ | 542 |
| | $ | 1,928 |
| | $ | 1,012 |
|
Denominator: | | | | | | | | | | | | | | |
Basic weighted average shares | 538 |
| | 542 |
| | 536 |
| | 544 |
| 603 |
| | 538 |
| | 597 |
| | 536 |
|
Dilutive impact of outstanding securities: | | | | | | | | | | | | | | |
Equity awards outstanding | 27 |
| | 13 |
| | 25 |
| | 13 |
| |
1% Convertible Senior Notes | 45 |
| | 10 |
| | 42 |
| | 6 |
| |
Warrants issued with the 1% Convertible Senior Notes | 43 |
| | — |
| | 33 |
| | — |
| |
Equity awards | | 23 |
| | 27 |
| | 24 |
| | 25 |
|
1.00% Convertible Senior Notes | | 2 |
| | 45 |
| | 7 |
| | 42 |
|
Warrants issued with the 1.00% Convertible Senior Notes | | — |
| | 43 |
| | 5 |
| | 33 |
|
Diluted weighted average shares | 653 |
| | 565 |
| | 636 |
| | 563 |
| 628 |
| | 653 |
| | 633 |
| | 636 |
|
Net income per share: | | | | | | | | | | | | | | |
Basic (1) | $ | 1.01 |
| | $ | 0.45 |
| | $ | 1.89 |
| | $ | 0.75 |
| $ | 1.39 |
| | $ | 1.01 |
| | $ | 3.23 |
| | $ | 1.89 |
|
Diluted (2) | $ | 0.83 |
| | $ | 0.44 |
| | $ | 1.59 |
| | $ | 0.72 |
| $ | 1.33 |
| | $ | 0.83 |
| | $ | 3.05 |
| | $ | 1.59 |
|
Equity awards excluded from diluted net income per share because their effect would have been anti-dilutive | 7 |
| | 9 |
| | 9 |
| | 13 |
| 3 |
| | 7 |
| | 4 |
| | 9 |
|
| |
(1) | Calculated as net income divided by basic weighted average shares. |
| |
(2) | Calculated as net income divided by diluted weighted average shares. |
The 1.00% Convertible Senior Notes, or the Convertible Notes, are included in the calculation of diluted net income per share. The Convertible Notes have a dilutive impact on net income per share if our average stock price for the reporting period exceeds the adjusted conversion price of $20.0780$20.0410 per share. The warrants associated with our Convertible Notes, or the Warrants, outstanding are also included in the calculation of diluted net income per share. The Warrants have a dilutive impact on net income per share if our average stock price for the quarter exceeds the adjusted strike price of $27.0281 per share.
For the threethird quarter and first nine months ended October 30, 2016,of fiscal year 2018, our average stock price was $63.83$176.20 and $47.82,$142.18, respectively, which exceeded both the adjusted conversion price, and the adjusted strike price, causing the Convertible Notes and the Warrants to have a dilutive impact for these periods. Our average stock price for the first nine months of fiscal year 2018 also exceeded the adjusted strike price, causing the Warrants to have a dilutive impact. All outstanding Warrants were terminated by the second quarter of fiscal year 2018.
The denominator for diluted net income per share does not include any effect from the convertible note hedge transactions, or the Note Hedges, that we entered into concurrently with the issuance of the Convertible Notes, as itsthis effect would be anti-dilutive. In the event of conversion of the Convertible Notes, the shares delivered to us under the Note Hedges will offset the dilutive effect of the shares that we would issue under the Convertible Notes.
Please refer to Note 11 of these Notes to Condensed Consolidated Financial Statements for additional discussion regarding the Convertible Notes.Notes, Note Hedges, and Warrants.
Note 4 – Income Taxes
We recognized income tax expense of $58 million and $189 million for the third quarter and first nine months of fiscal year 2018, respectively, and $79 million and $168 million for the third quarter and first nine months of fiscal year 2017, respectively.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note 4 – Income Taxes
We recognized income tax expense of $79 million and $168 million for the three and nine months ended October 30, 2016, respectively, and $83 million for the nine months ended October 25, 2015. We recognized income tax benefit of $1 million for the three months ended October 25, 2015. Income tax expense as a percentage of income before income tax for the third quarter and first nine months of fiscal year 2018 was 6.5% and 8.9%, respectively, and 12.8% and 14.2% for the threethird quarter and first nine months ended October 30, 2016, respectively, and 16.9% for the nine months ended October 25, 2015. Income tax benefit as a percentage of income before income tax was 0.5% for the three months ended October 25, 2015. Our income tax expense includes $42 million and $62 million of tax benefit for the three and nine months ended October 30, 2016, respectively, from the early adoption of an accounting standard related to stock-based compensation. Please refer to Note 1 of these Notes to Condensed Consolidated Financial Statements for further information.fiscal year 2017, respectively.
The increase in our effective tax rate in the three months ended October 30, 2016 compared to the same period in the prior fiscal year was primarily due to the absence of the tax benefit related to the restructuring associated with the wind-down of our Icera operations. The decrease in our effective tax rate infor the third quarter and first nine months ended October 30, 2016of fiscal year 2018 as compared to the same periodperiods in the prior fiscal year was primarily duereflects the recognition of greater tax benefits related to the favorable benefit of the U.S. federal research tax credit, which was permanently enacted in the fourth quarter of fiscal year 2016,stock-based compensation and our early adoption of an accounting standard, partially offset by the absence of the Icera restructuring tax benefit and an increasea proportional decrease in the amount of our earnings subject to U.S.United States tax.
Our effective tax raterates for the first nine months ended October 30, 2016 of fiscal years 2018 and 2017 of 8.9% and 14.2% was, respectively, were lower than the U.S. federal statutory rate of 35% due primarily to income earned in jurisdictions where the tax rate is lower than the U.S. federal statutory tax rate, tax benefits related to stock-based compensation, and the benefit of the U.S. federal research tax credit, as well as tax benefits recognized in the period in which they occur for early adoption of an accounting standard and expiration of statutes of limitations in certain non-U.S. jurisdictions.credit.
For the first nine months ended October 30, 2016,of fiscal year 2018, 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 since the fiscal year ended January 31, 2016, other than the closure of our state income tax position in the three months ended July 31, 2016 and the aforementioned recognition of tax benefits upon the expiration of statutes of limitations in certain non-U.S. jurisdictions in the nine months ended October 30, 2016.29, 2017.
While we believe that we have adequately provided for all uncertain tax positions, or tax positions where we believe it is not more-likely-than-not that the position will be sustained upon review, 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 October 30, 2016,29, 2017, 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 5 - Marketable Securities
All of our cash equivalents and marketable securities are classified as “available-for-sale” securities. These securities are reported at fair value with the related unrealized gains and losses included in accumulated other comprehensive income (loss), a component of shareholders’ equity, net of tax, and net realized gains and losses recorded in total other income and expense, net,(expense) on the Condensed Consolidated Statements of Income.
We performed an impairment review of our investment portfolio as of October 30, 2016.29, 2017. Based on our quarterly impairment review, 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 October 30, 2016.29, 2017.
The following is a summary of cash equivalents and marketable securities as of October 30, 201629, 2017 and January 31, 2016:29, 2017:
| | | | | | | | | | | | October 29, 2017 |
| October 30, 2016 | Amortized Cost | | Unrealized Gain | | Unrealized Loss | | Estimated Fair Value | | Reported as |
| Amortized Cost | | Unrealized Gain | | Unrealized Loss | | Estimated Fair Value | | Cash Equivalents | | Marketable Securities |
| (In millions) | (In millions) |
Corporate debt securities | $ | 2,239 |
| | $ | 2 |
| | $ | (2 | ) | | $ | 2,239 |
| $ | 1,515 |
| | $ | — |
| | $ | (5 | ) | | $ | 1,510 |
| | $ | — |
| | $ | 1,510 |
|
Debt securities of United States government agencies | 1,152 |
| | 1 |
| | (1 | ) | | 1,152 |
| 907 |
| | — |
| | (5 | ) | | 902 |
| | — |
| | 902 |
|
Debt securities issued by United States Treasury | 770 |
| | 1 |
| | (1 | ) | | 770 |
| |
Money market funds | 542 |
| | — |
| | — |
| | 542 |
| |
Debt securities issued by the United States Treasury | | 638 |
| | — |
| | (3 | ) | | 635 |
| | — |
| | 635 |
|
Asset-backed securities | 436 |
| | 1 |
| | — |
| | 437 |
| 289 |
| | — |
| | (1 | ) | | 288 |
| | — |
| | 288 |
|
Mortgage-backed securities issued by United States government-sponsored enterprises | 162 |
| | 2 |
| | (1 | ) | | 163 |
| 140 |
| | 2 |
| | (1 | ) | | 141 |
| | — |
| | 141 |
|
Foreign government bonds | 68 |
| | — |
| | — |
| | 68 |
| 42 |
| | — |
| | — |
| | 42 |
| | — |
| | 42 |
|
Money market funds | | 2,609 |
| | — |
| | — |
| | 2,609 |
| | 2,609 |
| | — |
|
Total | $ | 5,369 |
| | $ | 7 |
| | $ | (5 | ) | | $ | 5,371 |
| $ | 6,140 |
| | $ | 2 |
| | $ | (15 | ) | | $ | 6,127 |
| | $ | 2,609 |
| | $ | 3,518 |
|
Classified as: |
|
| |
|
| |
|
| |
|
| |
Cash equivalents | |
| | |
| | |
| | $ | 640 |
| |
Marketable securities | |
| | |
| | |
| | 4,731 |
| |
Total | |
| | |
| | |
| | $ | 5,371 |
| |
| | | | | | | | | | | | January 29, 2017 |
| January 31, 2016 | Amortized Cost | | Unrealized Gain | | Unrealized Loss | | Estimated Fair Value | | Reported as |
| Amortized Cost | | Unrealized Gain | | Unrealized Loss | | Estimated Fair Value | | Cash Equivalents | | Marketable Securities |
| (In millions) | (In millions) |
Corporate debt securities | $ | 1,903 |
| | $ | 1 |
| | $ | (3 | ) | | $ | 1,901 |
| $ | 2,397 |
| | $ | 1 |
| | $ | (10 | ) | | $ | 2,388 |
| | $ | 33 |
| | $ | 2,355 |
|
Debt securities of United States government agencies | 1,170 |
| | 1 |
| | (1 | ) | | 1,170 |
| 1,193 |
| | — |
| | (5 | ) | | 1,188 |
| | 27 |
| | 1,161 |
|
Debt securities issued by United States Treasury | 800 |
| | 1 |
| | — |
| | 801 |
| |
Debt securities issued by the United States Treasury | | 852 |
| | — |
| | (2 | ) | | 850 |
| | 55 |
| | 795 |
|
Asset-backed securities | 435 |
| | — |
| | — |
| | 435 |
| 490 |
| | — |
| | (1 | ) | | 489 |
| | — |
| | 489 |
|
Mortgage-backed securities issued by United States government-sponsored enterprises | 229 |
| | 3 |
| | (1 | ) | | 231 |
| 161 |
| | 2 |
| | (1 | ) | | 162 |
| | — |
| | 162 |
|
Foreign government bonds | 92 |
| | — |
| | — |
| | 92 |
| 70 |
| | — |
| | — |
| | 70 |
| | — |
| | 70 |
|
Money market funds | 43 |
| | — |
| | — |
| | 43 |
| 321 |
| | — |
| | — |
| | 321 |
| | 321 |
| | — |
|
Total | $ | 4,672 |
| | $ | 6 |
| | $ | (5 | ) | | $ | 4,673 |
| $ | 5,484 |
| | $ | 3 |
| | $ | (19 | ) | | $ | 5,468 |
| | $ | 436 |
| | $ | 5,032 |
|
Classified as: |
| |
| |
| |
| |
Cash equivalents | | | | | | | $ | 232 |
| |
Marketable securities | | | | | | | 4,441 |
| |
Total | | | | | | | $ | 4,673 |
| |
The following table provides the breakdown of the investments with unrealized losses as of October 30, 2016:29, 2017, aggregated by investment category and length of time that individual securities have been in a continuous loss position:
| | | Less than 12 months | | 12 months or greater | | Total | Less than 12 Months | | 12 Months or Greater | | Total |
| Estimated Fair Value | | Gross Unrealized Losses | | Estimated Fair Value | | Gross Unrealized Losses | | Estimated Fair Value | | Gross Unrealized Losses | Estimated Fair Value | | Gross Unrealized Losses | | Estimated Fair Value | | Gross Unrealized Losses | | Estimated Fair Value | | Gross Unrealized Losses |
| (In millions) | (In millions) |
Corporate debt securities | $ | 977 |
| | $ | (2 | ) | | $ | 58 |
| | $ | — |
| | $ | 1,035 |
| | $ | (2 | ) | $ | 867 |
| | $ | (3 | ) | | $ | 407 |
| | $ | (2 | ) | | $ | 1,274 |
| | $ | (5 | ) |
Debt securities issued by United States government agencies | 536 |
| | (1 | ) | | 27 |
| | — |
| | 563 |
| | (1 | ) | 666 |
| | (3 | ) | | 236 |
| | (2 | ) | | 902 |
| | (5 | ) |
Debt securities issued by the US Treasury | 197 |
| | (1 | ) | | — |
| | — |
| | 197 |
| | (1 | ) | |
Debt securities issued by the United States Treasury | | 509 |
| | (2 | ) | | 126 |
| | (1 | ) | | 635 |
| | (3 | ) |
Asset-backed securities | | 233 |
| | (1 | ) | | 44 |
| | — |
| | 277 |
| | (1 | ) |
Mortgage-backed securities issued by United States government-sponsored enterprises | 43 |
| | — |
| | 36 |
| | (1 | ) | | 79 |
| | (1 | ) | 26 |
| | — |
| | 36 |
| | (1 | ) | | 62 |
| | (1 | ) |
| $ | 1,753 |
| | $ | (4 | ) | | $ | 121 |
| | $ | (1 | ) | | $ | 1,874 |
| | $ | (5 | ) | $ | 2,301 |
| | $ | (9 | ) | | $ | 849 |
| | $ | (6 | ) | | $ | 3,150 |
| | $ | (15 | ) |
The gross unrealized losses as of October 30, 2016 related to fixed income securities were due to changes in interest rates andrates. We have determined that the gross unrealized losses on investment securities as of October 29, 2017 are temporary in nature. WeCurrently, we have the intent and ability to hold our investments with impairment indicators until maturity. Net realized gains and losses were not significant for the third quarter and first nine months of fiscal years 2018 and 2017.
The amortized cost and estimated fair value of cash equivalents and marketable securities, which are primarily debt instruments, are classified as available-for-sale as of October 30, 201629, 2017 and January 31, 201629, 2017 and are shown below by contractual maturity:
|
| | | | | | | | | | | | | | | |
| October 30, 2016 | | January 31, 2016 |
| Amortized Cost | | Estimated Fair Value | | Amortized Cost | | Estimated Fair Value |
| (In millions) |
Less than 1 year | $ | 2,346 |
| | $ | 2,347 |
| | $ | 1,619 |
| | $ | 1,619 |
|
Due in 1 - 5 years | 2,967 |
| | 2,968 |
| | 3,019 |
| | 3,020 |
|
Mortgage-backed securities issued by United States government-sponsored enterprises not due at a single maturity date | 56 |
| | 56 |
| | 34 |
| | 34 |
|
Total | $ | 5,369 |
| | $ | 5,371 |
| | $ | 4,672 |
| | $ | 4,673 |
|
Net realized gains and losses were not significant for the three and nine months ended October 30, 2016 and October 25, 2015.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited) |
| | | | | | | | | | | | | | | |
| October 29, 2017 | | January 29, 2017 |
| Amortized Cost | | Estimated Fair Value | | Amortized Cost | | Estimated Fair Value |
| (In millions) |
Less than 1 year | $ | 4,074 |
| | $ | 4,072 |
| | $ | 2,209 |
| | $ | 2,209 |
|
Due in 1 - 5 years | 2,024 |
| | 2,013 |
| | 3,210 |
| | 3,194 |
|
Mortgage-backed securities issued by United States government-sponsored enterprises not due at a single maturity date | 42 |
| | 42 |
| | 65 |
| | 65 |
|
Total | $ | 6,140 |
| | $ | 6,127 |
| | $ | 5,484 |
| | $ | 5,468 |
|
Note 6 – Fair Value of Financial Assets and Liabilities
We measureThe fair values of our cash equivalents, marketable securities,financial assets and interest rate swap at fair valueliabilities are determined using quoted market prices of identical assets or quoted market prices of similar assets from active markets. We review the fair value hierarchy classification on a quarterly basis. There were no significant transfers between Levels 1 and 2 assets or liabilities for the three months ended October 30, 2016, and wethird quarter of fiscal year 2018. We did not have any investments or liabilities classified as Level 3 as of October 30, 2016.29, 2017.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
|
| | | | | | | | | |
| | Estimated Fair Value at |
| Pricing Category | | October 30, 2016 | | January 31, 2016 |
| | | (In millions) |
Assets | | | | | |
Cash equivalents and marketable securities: | | | | | |
Corporate debt securities (1) | Level 2 | | $ | 2,239 |
| | $ | 1,901 |
|
Debt securities of United States government agencies (2) | Level 2 | | $ | 1,152 |
| | $ | 1,170 |
|
Debt securities issued by United States Treasury (3) | Level 2 | | $ | 770 |
| | $ | 801 |
|
Money market funds (4) | Level 1 | | $ | 542 |
| | $ | 43 |
|
Asset-backed securities (5) | Level 2 | | $ | 437 |
| | $ | 435 |
|
Mortgage-backed securities issued by United States government-sponsored enterprises (5) | Level 2 | | $ | 163 |
| | $ | 231 |
|
Foreign government bonds (5) | Level 2 | | $ | 68 |
| | $ | 92 |
|
| | | | | |
| | | | | |
Liabilities | | | | | |
Current liabilities: | | | | | |
1.00% Convertible Senior Notes (6) | Level 2 | | $ | 3,725 |
| | $ | 2,273 |
|
Other noncurrent liabilities: | | | | | |
2.20% Notes Due 2021 (6) | Level 2 | | $ | 997 |
| | $ | — |
|
3.20% Notes Due 2026 (6) | Level 2 | | $ | 997 |
| | $ | — |
|
Interest rate swap (7) | Level 2 | | $ | 9 |
| | $ | 7 |
|
|
| | | | | | | | | |
| | Fair Value at |
| Pricing Category | | October 29, 2017 | | January 29, 2017 |
| | | (In millions) |
Assets | | | | | |
Cash equivalents and marketable securities: | | | |
Corporate debt securities | Level 2 | | $ | 1,510 |
| | $ | 2,388 |
|
Debt securities of United States government agencies | Level 2 | | $ | 902 |
| | $ | 1,188 |
|
Debt securities issued by the United States Treasury | Level 2 | | $ | 635 |
| | $ | 850 |
|
Asset-backed securities | Level 2 | | $ | 288 |
| | $ | 489 |
|
Mortgage-backed securities issued by United States government-sponsored enterprises | Level 2 | | $ | 141 |
| | $ | 162 |
|
Foreign government bonds | Level 2 | | $ | 42 |
| | $ | 70 |
|
Money market funds | Level 1 | | $ | 2,609 |
| | $ | 321 |
|
| | | | | |
Liabilities | | | | | |
Current liability: | | | | | |
1.00% Convertible Senior Notes (1) | Level 2 | | $ | 245 |
| | $ | 4,474 |
|
Other noncurrent liabilities: | | | | | |
2.20% Notes Due 2021 (1) | Level 2 | | $ | 996 |
| | $ | 975 |
|
3.20% Notes Due 2026 (1) | Level 2 | | $ | 1,007 |
| | $ | 961 |
|
Interest rate swap (2) | Level 2 | | $ | 3 |
| | $ | 2 |
|
| |
(1) | Included $35 million and $51 million in cash equivalents as of October 30, 2016 and January 31, 2016, respectively, and $2.20 billion and $1.85 billion in marketable securities as of October 30, 2016 and January 31, 2016, respectively, on the Condensed Consolidated Balance Sheets. |
| |
(2) | Included $38 million and $90 million in cash equivalents as of October 30, 2016 and January 31, 2016, respectively, and $1.11 billion and $1.08 billion in marketable securities as of October 30, 2016 and January 31, 2016, respectively, on the Condensed Consolidated Balance Sheets. |
| |
(3) | Included $25 million in cash equivalents as of October 30, 2016 and $745 million and $801 million in marketable securities as of October 30, 2016 and January 31, 2016, respectively, on the Condensed Consolidated Balance Sheets. |
| |
(4) | Reported in cash equivalents on the Condensed Consolidated Balance Sheets. |
| |
(5) | Reported in marketable securities on the Condensed Consolidated Balance Sheets. |
| |
(6) | The remaining 1.00% Convertible Senior Notes, 2.20% Notes Due 2021, and 3.20% Notes Due 2026 are carried on our Condensed Consolidated Balance Sheets at their original issuance value, net of unamortized debt discount and issuance costs, and are not marked to fair value each period. See Note 11 of these Notes to Condensed Consolidated Financial Statements for additional information. |
| |
(7)(2) | Please refer to Note 9 of these Notes to Condensed Consolidated Financial Statements for a discussion regarding our interest rate swap. |
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note 7 - Amortizable Intangible Assets
The components of our amortizable intangible assets are as follows:
| | | October 30, 2016 | | January 31, 2016 | October 29, 2017 | | January 29, 2017 |
| Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
| (In millions) | (In millions) |
Acquisition-related intangible assets | $ | 193 |
| | $ | (163 | ) | | $ | 30 |
| | $ | 193 |
| | $ | (152 | ) | | $ | 41 |
| $ | 193 |
| | $ | (178 | ) | | $ | 15 |
| | $ | 193 |
| | $ | (167 | ) | | $ | 26 |
|
Patents and licensed technology | 469 |
| | (379 | ) | | 90 |
| | 462 |
| | (337 | ) | | 125 |
| 469 |
| | (421 | ) | | 48 |
| | 468 |
| | (390 | ) | | 78 |
|
Total intangible assets | $ | 662 |
| | $ | (542 | ) | | $ | 120 |
| | $ | 655 |
| | $ | (489 | ) | | $ | 166 |
| $ | 662 |
| | $ | (599 | ) | | $ | 63 |
| | $ | 661 |
| | $ | (557 | ) | | $ | 104 |
|
Amortization expense associated with intangible assets was $13 million and $42 million for the third quarter and first nine months of fiscal year 2018, respectively, and $18 million and $53 million for the threethird quarter and first nine months ended October 30, 2016, respectively, and $18 million and $56 million for the three and nine months ended October 25, 2015,of fiscal year 2017, respectively. Future amortization expense related to the net carrying amount of intangible assets as of October 30, 201629, 2017 is estimated to be $16$12 million for the remainder of fiscal year 2017, $54 million in fiscal year 2018, $26 million in fiscal year 2019, $16 million in fiscal year 2020, $7$8 million in fiscal year 2021, and a total of $1 million in fiscal year 2022 and beyond.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note 8 - Balance Sheet Components
Certain balance sheet components are as follows:
| | | October 30, | | January 31, | October 29, | | January 29, |
| 2016 | | 2016 | 2017 | | 2017 |
Inventories: | (In millions) | (In millions) |
Raw materials | $ | 203 |
| | $ | 105 |
| $ | 219 |
| | $ | 252 |
|
Work in-process | 203 |
| | 103 |
| 235 |
| | 176 |
|
Finished goods | 273 |
| | 210 |
| 403 |
| | 366 |
|
Total inventories | $ | 679 |
| | $ | 418 |
| $ | 857 |
| | $ | 794 |
|
As of October 30, 2016,29, 2017, we had outstanding inventory purchase obligations totaling $908 million.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
$1.16 billion.
| | | October 30, | | January 31, | October 29, | | January 29, |
| 2016 | | 2016 | 2017 | | 2017 |
Accrued and Other Current Liabilities: | (In millions) | (In millions) |
Customer related liabilities (1) | $ | 175 |
| | $ | 160 |
| $ | 177 |
| | $ | 197 |
|
Deferred revenue | 170 |
| | 322 |
| |
Accrued payroll and related expenses | 79 |
| | 79 |
| 153 |
| | 137 |
|
Accrued restructuring and other charges (2) | 13 |
| | 23 |
| |
Deferred revenue (2) | | 65 |
| | 85 |
|
Warranty accrual (3) | | 18 |
| | 8 |
|
Accrued royalties | | 16 |
| | 7 |
|
Professional service fees | 13 |
| | 23 |
| 13 |
| | 13 |
|
Coupon interest on notes | 12 |
| | 3 |
| |
Income taxes payable | 9 |
| | 2 |
| |
Warranty accrual (3) | 8 |
| | 11 |
| |
Taxes payable | | 11 |
| | 4 |
|
Accrued restructuring and other charges (4) | | 8 |
| | 13 |
|
Coupon interest on debt obligations | | 7 |
| | 21 |
|
Leases payable | | 5 |
| | 4 |
|
Contributions payable | 4 |
| | 3 |
| 4 |
| | 4 |
|
Leases payable | 4 |
| | 4 |
| |
Accrued royalties | 4 |
| | 1 |
| |
Other | 16 |
| | 11 |
| 16 |
| | 14 |
|
Total accrued and other current liabilities | $ | 507 |
| | $ | 642 |
| $ | 493 |
| | $ | 507 |
|
| |
(1) | Customer related liabilities include accrued customer programs, such as rebates and marketing development funds. |
| |
(2) | Please referDeferred revenue primarily includes customer advances and deferrals related to Note 15 of these Notes to Condensed Consolidated Financial Statements for a discussion regarding restructuringlicense and other charges. service arrangements. |
| |
(3) | Please refer to Note 10 of these Notes to Condensed Consolidated Financial Statements for a discussion regarding warranties. |
|
| | | | | | | |
| October 30, | | January 31, |
| 2016 | | 2016 |
Other Long-Term Liabilities: | (In millions) |
Deferred income tax liability (1) | $ | 88 |
| | $ | 301 |
|
Income taxes payable | 85 |
| | 78 |
|
Contributions payable | 13 |
| | 13 |
|
Interest rate swap (2) | 9 |
| | 7 |
|
Deferred revenue (3) | 2 |
| | 44 |
|
Other | 16 |
| | 10 |
|
Total other long-term liabilities | $ | 213 |
| | $ | 453 |
|
| |
(1) | Please refer to the “Recently Adopted Accounting Pronouncement” section of Note 1 of these Notes to Condensed Consolidated Financial Statements for a discussion regarding the impact of a recently adopted accounting pronouncement on deferred taxes. |
| |
(2)(4) | Please refer to Note 915 of these Notes to Condensed Consolidated Financial Statements for a discussion regarding our interest rate swap.restructuring and other charges. |
| |
(3) | Deferred revenue under our patent cross licensing agreement with Intel Corporation is now located in short term deferred revenue as less than twelve months remains on the agreement. |
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
|
| | | | | | | |
| October 29, | | January 29, |
| 2017 | | 2017 |
Other Long-Term Liabilities: | (In millions) |
Deferred income tax liability | $ | 295 |
| | $ | 141 |
|
Income tax payable | 116 |
| | 96 |
|
Contributions payable | 12 |
| | 9 |
|
Employee benefits liability | 11 |
| | 10 |
|
Deferred revenue | 10 |
| | 4 |
|
Deferred rent | 8 |
| | 6 |
|
Licenses payable | 7 |
| | 1 |
|
Other | 5 |
| | 4 |
|
Total other long-term liabilities | $ | 464 |
| | $ | 271 |
|
Note 9 - Derivative Financial Instruments
In August 2015fiscal year 2016, we entered into an interest rate swap for a portion of the operating lease financing arrangement for our new headquarters building that entitles usSanta Clara campus building. In November 2017, subsequent to pay amounts based on a fixed interest rate in exchange for receiptthe end of amounts based on variable interest rates. The objective of this interest rate swap is to mitigate variability in the benchmark interest rate on the first $200 million of existing operating lease financing payments. This interest rate swap is designated as a cash flow hedge, will have settlements beginning in the secondthird quarter of fiscal year 2019,2018, we exercised the option to terminate the operating lease financing arrangement and will terminate inpurchase the property, which we expect to occur during the fourth quarter of fiscal year 2023. Gains or losses on this2018. As a result, the interest rate swap are recordedwould also terminate, which we expect to result in accumulated other comprehensive income oran immaterial loss and will subsequently be recorded in earnings at the point when the related operating lease financing expense begins to affect earnings or if ineffectiveness of the swap should occur.upon termination.
During the three and nine months ended October 30, 2016, we enteredWe enter into foreign currency forward contracts with a total U.S. dollar equivalent notional value of $64 million and $160 million, respectively, to mitigate the impact of foreign currency exchange rate movements on our operating expenses. We designate these contracts as cash flow hedges and assess the effectiveness of the hedge relationships on a spot to spot basis. Gains or losses on the contracts are recorded in accumulated other comprehensive income or loss(loss) and reclassified to operating expense when the related operating expenses are recognized in earnings or ineffectiveness should occur. The fair value of the contracts was not significant as of October 30, 2016 was not significant.29, 2017 and January 29, 2017.
During the three and nine months ended October 30, 2016, weWe also enteredenter into foreign currency forward contracts with a total U.S. dollar equivalent notional value of $54 million and $67 million, respectively, to mitigate the impact of foreign currency movements on monetary assets and liabilities that are denominated in currencies other than our reporting currency. These foreign currency forward contracts were not designated for hedge accounting treatment. Therefore, the change in fair value of these contracts is recorded as a component of total other income or expense, net,(expense) and offsets the change in fair value of the foreign currency denominated monetary assets and liabilities, which is also recorded in total other income or expense, net.(expense).
The table below presents the notional value of our foreign currency forward contracts as of October 29, 2017 and January 29, 2017:
|
| | | | | | | |
| October 29, 2017 | | January 29, 2017 |
| (In millions) |
Designated as cash flow hedges | $ | 93 |
| | $ | 67 |
|
Not designated for hedge accounting | $ | 74 |
| | $ | 32 |
|
Under the master netting agreements with the respective counterparties to our foreign currency forward contracts, we are allowed to net settle transactions with the same counterparty, subject to applicable requirements. However, we present our derivative assets and liabilities at their gross fair values on our Condensed Consolidated Balance Sheets. We are not required to pledge, and are not entitled to receive, cash collateral related to these derivative instruments.
As of October 30, 2016,29, 2017, the maturities of the designated foreign currency forward contracts were three months or less. We expect to realize all gains and losses deferred into accumulated other comprehensive income (loss) related to foreign currency forward contracts within the next twelve months.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
We formally assess, both at inception and on an ongoing basis, whether derivative financial instruments designated for hedge accounting treatment are highly effective. For the threethird quarter and first nine months ended October 30, 2016,of fiscal years 2018 and 2017, all derivative financial instruments designated for hedge accounting treatment were determined to be highly effective and there were no gains or losses associated with ineffectiveness.
During the three and nine months ended October 30, 2016, we recognized aThe net change in unrealized gains (losses) on derivative financial instruments designated for hedge accounting treatment was not significant for the third quarter and first nine months of $2 millionfiscal years 2018 and $(3) million, respectively, net of tax, in other comprehensive income.2017.
We expect to realize all gains and losses deferred into accumulated other comprehensive income or loss related to foreign currency forward contracts within the next twelve months. However, we do not expect to reclassify any amount from accumulated other comprehensive income or loss into earnings related to the interest rate swap as the underlying operating lease financing payments for our new headquarters building will not start within the next twelve months.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note 10 - Guarantees
U.S. GAAP requires that upon issuance of a guarantee, the guarantor must recognize a liability for the fair value of the obligation it assumes under that guarantee. In addition, U.S. GAAP requires disclosures about the guarantees that an entity has issued, including a tabular reconciliation of the changes of the entity’s product warranty liabilities.
Accrual for 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. 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.
On July 31, 2015, we announced a voluntary recall and replacement of our SHIELD 8-inch tablets that were sold between July 2014 and July 2015. We have determined that the battery in these tablets can overheat, posing a fire hazard. The recall does not affect any other NVIDIA products. During the twelve months ended January 31, 2016, we recorded a $26 million charge against cost of revenue to cover anticipated customer warranty, repair, return, replacement and other associated costs.
The estimated product returns and estimated product warranty liabilities as of and for the nine and twelve months ended October 30, 201629, 2017 and January 31, 201629, 2017 were as follows:
| | | October 30, | | January 31, | October 29, | | January 29, |
| 2016 | | 2016 | 2017 | | 2017 |
| (In millions) | (In millions) |
Balance at beginning of period | $ | 11 |
| | $ | 8 |
| $ | 8 |
| | $ | 11 |
|
Additions | 1 |
| | 27 |
| 13 |
| | 2 |
|
Deductions | (5 | ) | | (24 | ) | (3 | ) | | (5 | ) |
Balance at end of period | $ | 7 |
| | $ | 11 |
| $ | 18 |
| | $ | 8 |
|
In connection with certain agreements that we have entered into in the past, we have provided indemnities to cover the indemnified party for matters such as tax, product, and employee liabilities. We have 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. We have not recorded any liability in our Condensed Consolidated Financial Statements for such indemnifications.
Note 11 - Debt
Convertible Debt
1.00% Convertible Senior Notes Due 2018
During the third quarter of fiscal year 2018, we paid cash to settle an aggregate of $62 million in principal amount of the Convertible Notes and had $24 million in principal amount outstanding as of October 29, 2017. We also issued 3 million shares of our common stock for the excess conversion value and recognized a loss of $1 million on early conversions of the Convertible Notes. Based on the closing price of our common stock of $201.86 on the last trading day of the third quarter of fiscal year 2018, the if-converted value of the remaining outstanding Convertible Notes as of October 29, 2017 exceeded their principal amount by approximately $217 million. As of October 29, 2017, the conversion rate was 49.8977 shares of common stock per $1,000 principal amount of the Convertible Notes after adjusting for dividend increases (equivalent to an adjusted conversion price of $20.0410 per share of common stock).
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note 11 - Debt
Convertible Debt
1.00 % Convertible Senior Notes DueThrough the third quarter of fiscal year 2018,
On December 2, 2013, we issued $1.50settled an aggregate of $1.48 billion of 1.00% convertible senior notes, or the Convertible Notes, due 2018. The Convertible Notes are unsecured, unsubordinated obligations of the Company, which pay interest in cash semi-annually at a rate of 1.00% per annum. The Convertible Notes will mature on December 1, 2018 unless repurchased or converted prior to such date. The Convertible Notes were initially convertible at a rate of 49.5958 shares of common stock per $1,000 principal amount of the Convertible Notes (equivalent toNotes. Subsequently, we received additional conversion notices for an initial conversion priceaggregate of $20.1630 per share of common stock). The conversion rate and conversion price are adjusted upon the occurrence of certain events, including our cash dividends or distributions exceeding $0.085 per share. Accordingly, as of October 30, 2016, the conversion rate has been adjusted to 49.8058 shares of common stock per $1,000$8 million in principal amount of the Convertible Notes. Settlements of these conversion requests are expected to be completed in the fourth quarter of fiscal year 2018. The actual number of shares issuable upon conversion will be determined based upon the terms of the Convertible Notes, (equivalentand we expect to receive an adjusted conversion priceequal number of $20.0780 per shareshares of our common stock) for dividend increases.stock under the terms of the Note Hedges.
Holders may convert all or any portion of their Convertible Notes at their option at any time prior to August 1, 2018 under certain circumstances, determined on a quarterly basis. All outstanding Convertible Notes are convertible at the holders’ option through January 28, 2018.
We separately accounted for the liability and equity components of the Convertible Notes at issuance, andsince our conversion obligation in excess of the value assigned to the debtaggregate principal could be fully or partially settled in cash. The liability component was assigned by estimating the estimated fair value as of the issuance date, of a similar debt without the conversion feature. The difference between the net cash proceeds and this estimated fair value represented the valueliability component was assigned toas the equity component and was recorded as a debt discount. The debt discount is amortized using the effective interest method from the origination date through its stated contractual maturity date.
component. The initial debtliability component of the Convertible Notes was valued at $1.35 billion based onand the contractual cash flows discounted at an appropriate market rate for a non-convertible debt at the date of issuance, which was determined to be 3.15%. The initial carrying value of the permanent equity component reportedrecorded in additional paid-in-capital was valued at $126 million and recorded as a debt discount.million. This amount,equity component, together with the $23 million purchaser's discount to the par value of the Convertible Notes, represented the totalinitial aggregate unamortized debt discount of $148 million we recorded at the time of issuance of the Convertible Notes.million. The aggregate debt discount is amortized as interest expense over the contractual term of the Convertible Notes using the effective interest method usingand an interest rate of 3.15%.
As of October 29, 2017, the carrying value of the Convertible Notes was classified as a current liability and the difference between the principal amount and the carrying value of the Convertible Notes was classified as convertible debt conversion obligation in the mezzanine equity section of our Condensed Consolidated Balance Sheet.
The following table presents the carrying value of the Convertible Notes:
| | | October 30, | | January 31, | October 29, | | January 29, |
| 2016 | | 2016 | 2017 | | 2017 |
| (In millions) | (In millions) |
1.00% Convertible Senior Notes Due 2018 | $ | 1,056 |
| | $ | 1,500 |
| |
1.00% Convertible Senior Notes | | $ | 24 |
| | $ | 827 |
|
Unamortized debt discount (1) | (45 | ) | | (87 | ) | (1 | ) | | (31 | ) |
Net carrying amount | $ | 1,011 |
| | $ | 1,413 |
| $ | 23 |
| | $ | 796 |
|
(1) As of October 30, 2016,29, 2017, the remaining period over which the unamortized debt discount will be amortized is 2.11.1 years.
The following table presents interest expense for the contractual interest and the accretion of debt discount and issuance costs related to the Convertible Notes:
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | October 30, | | October 25, | | October 30, | | October 25, |
| | 2016 | | 2015 | | 2016 | | 2015 |
| | (In millions) |
Contractual coupon interest expense | | $ | 3 |
| | $ | 4 |
| | $ | 10 |
| | $ | 11 |
|
Amortization of debt discount and issuance costs | | 5 |
| | 7 |
| | 20 |
| | 22 |
|
Total interest expense related to Convertible Notes | | $ | 8 |
| | $ | 11 |
| | $ | 30 |
| | $ | 33 |
|
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Holders may convert all or any portion of their Convertible Notes at their option at any time prior to August 1, 2018 only under the following circumstances: (1) during any fiscal quarter, if the last reported sale price of the common stock for at least 20 trading days during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding fiscal quarter is greater than or equal to 130% of the conversion price on each applicable trading day; (2) during the five business day period after any five consecutive trading day period (the measurement period) in which the trading price per $1,000 principal amount of notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of our common stock and the conversion rate on each such trading day; or (3) upon the occurrence of specified corporate events. On or after August 1, 2018 to the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert all or any portion of their Convertible Notes regardless of the foregoing conditions.
The Convertible Notes first became convertible as of February 1, 2016. As of October 30, 2016, the Convertible Notes continued to be convertible at the holders’ option through January 29, 2017 as the price of our common stock was greater than or equal to 130% of the conversion price for at least 20 trading days during the 30 consecutive trading days ending on the last trading day of our fiscal quarter ended October 30, 2016. As such, the $1,011 million carrying value of the Convertible Notes continued to be classified as a current liability and the $45 million difference between the principal amount and the carrying value of the Convertible Notes continued to be classified as convertible debt conversion obligation in the mezzanine equity section of our Condensed Consolidated Balance Sheet, and will remain there for as long as the Convertible Notes are convertible. The determination of whether or not the Convertible Notes are convertible must continue to be performed on a quarterly basis. Consequently, the Convertible Notes may be reclassified as long-term debt and the convertible debt conversion obligation may be reclassified within shareholders' equity if the conversion threshold is not met in future quarters.
Upon conversion of the Convertible Notes, we will pay cash up to the aggregate principal amount of the Convertible Notes. We may pay or deliver cash, shares of our common stock or a combination of cash and shares of our common stock, at our election, in respect of the remainder, if any, of our conversion obligation in excess of the aggregate principal amount of the Convertible Notes being converted. Based on the closing price of our common stock on October 28, 2016 (the last trading day of the third quarter of fiscal year 2017) of $70.56, the if-converted value of our Convertible Notes exceeded their principal amount by approximately $2.66 billion.
During both the three and nine months ended October 30, 2016, we paid cash to settle $444 million in principal amount, issued 15 million shares of our common stock with respect to the conversion obligation in excess of the principal amount, and recognized a loss of $15 million on early conversions, of the Convertible Notes. Further, we received additional conversion notices for an aggregate of $229 million in principal amount of the Convertible Notes during the third quarter of fiscal year 2017. Settlements of these conversion requests are expected to be completed in the fourth quarter of fiscal year 2017.
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | October 29, | | October 30, | | October 29, | | October 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| | (In millions) |
Contractual coupon interest expense | | $ | — |
| | $ | 3 |
| | $ | — |
| | $ | 10 |
|
Amortization of debt discount | | — |
| | 5 |
| | 2 |
| | 20 |
|
Total interest expense related to Convertible Notes | | $ | — |
| | $ | 8 |
| | $ | 2 |
| | $ | 30 |
|
Note Hedges and Warrants
Concurrently with the issuance of the Convertible Notes, we entered into a convertible note hedge transaction, or the Note Hedges, with a strike price equal toHedges. During the initial conversion pricethird quarter of the Convertible Notes, or $20.1630 per share. Adjusting for dividends paid through October 30, 2016, the strike price of the Note Hedges has been adjusted to $20.0780 per share. The Note Hedges allow us to receive shares of our common stock and/or cash related to the excess conversion value that we would deliver and/or pay, respectively, to the holders of the Convertible Notes upon conversion. Through October 30, 2016,fiscal year 2018, we had received 153 million shares of our common stock from the exercise of a portion of the Note Hedges related to the settlement of an aggregate of $444$62 million in principal amount of the Convertible Notes. Subsequently, we expect to receive additional shares of our common stock related to at least an additional $8 million in principal amount that is expected to settle during the fourth quarter of fiscal year 2018.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
In addition, concurrent with the offering of the Convertible Notes and the purchase of the Note Hedges, we entered into a separate warrant transaction, ortransaction. All outstanding Warrants were terminated by the Warrants, with an initial strike price to the holderssecond quarter of the Warrants of $27.1425 per share. Under the terms of the Warrants, the strike price is adjusted upon the occurrence of certain events, including our cash dividends or distributions that deviate from $0.085 per share. Accordingly, as of October 30, 2016, the strike price was adjusted to $27.0281 per share, reflecting adjustments for our dividend increases made to that date. The Warrants are net share settled and cover, subject to customary anti-dilution adjustments, 75 million shares of our common stock. As of October 30, 2016, the Warrants had not been exercised and remained outstanding. The value of the Warrants was initially recorded in equity and continues to be classified as equity.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
fiscal year 2018.
Long-Term Debt
2.20% Notes Due 2021 and 3.20% Notes Due 2026
On September 16, 2016,In the third quarter of fiscal year 2017, we issued $1.00 billion of the 2.20% notes due September 16,Notes Due 2021, and $1.00 billion of the 3.20% notes due September 16,Notes Due 2026, (collectively,or collectively, the Notes).Notes. Interest on the Notes is payable onin March 16 and September 16 of each year, beginning onin March 16, 2017. Upon 30 days' notice to holders of the Notes, we may redeem the Notes for cash prior to maturity, at redemption prices that include accrued and unpaid interest, if any, and a make-whole premium. However, no make-whole premium will be paid for redemptions of the 2.20% Notes Due 2021 on or after August 16, 2021, or for redemptions of the 3.20% Notes Due 2026 on or after June 16, 2026. The net proceeds from the Notes were $1.98 billion, after deducting debt discount and issuance costs.
The Notes are our unsecured senior obligations and rank equally in right of payment with all of our existing and future unsecured and unsubordinated indebtedness. The Notes are structurally subordinated to the liabilities of our subsidiaries and are effectively subordinated to any secured indebtedness to the extent of the value of the assets securing such indebtedness. All existing and future liabilities of our subsidiaries will be effectively senior to the Notes.
The net proceeds from the Notes were $1.99 billion, after deducting debt discount and issuance costs. We intend to use the net proceeds from the Notes to prefund the repayment of the principal amount of our Convertible Notes and for general corporate purposes such as dividend payments or share repurchases.
The carrying value of our long-term debt and the associated interest rates were as follows:
| | | | Expected Remaining Term (years) | | Effective Interest Rate | | October 30, 2016 | | Expected Remaining Term (years) | | Effective Interest Rate | | October 29, 2017 | | January 29, 2017 |
| | (In millions) | | (In millions) |
2.20% Notes Due 2021 | | 4.9 | | 2.38% | | $ | 1,000 |
| | 3.9 | | 2.38% | | $ | 1,000 |
| | $ | 1,000 |
|
3.20% Notes Due 2026 | | 9.9 | | 3.31% | | 1,000 |
| | 8.9 | | 3.31% | | 1,000 |
| | 1,000 |
|
Unamortized debt discount and issuance costs | | (18 | ) | | (15 | ) | | (17 | ) |
Net carrying amount | | $ | 1,982 |
| | $ | 1,985 |
| | $ | 1,983 |
|
Revolving Credit Facility
On October 7, 2016, we entered into a credit agreement, or the Credit Agreement, under which we may borrow, repay and re-borrow amounts from time to time, up to $575 million, for working capital and other general corporate purposes. The commitments under the Credit Agreement are available for a 5-year period ending on October 7, 2021, on which all outstanding obligations would be due and payable. The Credit Agreement also permits us to obtain additional revolving loan commitments up to $425 million, subject to certain conditions. As of October 30, 2016, we had not borrowed any amounts under the Credit Agreement.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note 12 - Commitments and Contingencies
Operating Lease Financing Arrangement
In November 2017, subsequent to the end of the third quarter of fiscal year 2016,2018, we beganexercised the option to construct aterminate the off-balance sheet, build-to-suit operating lease financing arrangement related to our new headquarters building in Santa Clara California, which is currently targeted for completion incampus building. In the fourth quarter of fiscal year 2018. We are financing this construction under an off-balance sheet, build-to-suit operating lease arrangement. As a part of this arrangement,2018, we leasedexpect to refinance and purchase the real property we own where the building will be constructed under a 99 year ground lease to a syndicate of banks and concurrently leased back the building under a real property lease.for approximately $350 million.
Under the real property lease, we pay rent, taxes, maintenance costs, utilities, insurance and other property related costs. The lease has an initial 7.5 year term expiring on December 19, 2022, consisting of an approximately 2.5 year construction period followed by a 5 year lease term. We have the option to renew this lease for up to three additional 5 year periods, subject to approval by the banks.Litigation
We will oversee the construction of the headquarters building. The banks have committed to fund up to $380 million of costs relating to construction. Advances will be made periodically to reimburse us for construction costs we incur. Once construction is complete, the lease balance will remain static at the completed cost for the remaining duration of the lease term. During construction, accrued interest will be capitalized into the lease balance. Following construction, we will pay rent in the form of interest. We have guaranteed the obligations under the lease held by our subsidiary.
During the term of the lease, we may elect to purchase the headquarters building for the amount of the banks’ investment in the building and any accrued but unpaid rent. At the end of the lease term, we may elect to buy the building for the outstanding balance on the maturity date or arrange for the cash sale of the building to an unaffiliated third party. The aggregate guarantee made by us under the lease is no more than 87.5% of the costs incurred in connection with the construction of the building. However, under certain default circumstances, the lease guarantee may be 100% of the banks’ investment in the building plus any and all accrued but unpaid interest and all other rent due and payable under the operative agreements.
The operative agreements are subject to customary default provisions, including, for example, those relating to payment and performance defaults, and events of bankruptcy. We are also subject to financial covenants including a covenant to maintain a maximum total leverage ratio not to exceed 3.0 to 1.0 and a minimum interest coverage ratio in excess of 3.5 to 1.0 during the term. If certain events of default occur and are continuing under the operative agreements, the banks may accelerate repayment of their investment under the lease.
Patent Infringement Cases
In September 2014, NVIDIA filed complaints against Qualcomm, Inc. and various Samsung entities in both the United States International Trade Commission, or ITC, and the United States District Court for the District of Delaware alleging infringement of certain patents relating to graphics processing. In November 2014, Samsung filed complaints against NVIDIA in the ITC and the United States District Court for the Eastern District of Virginia, alleging that NVIDIA infringed certain patents.
NVIDIA and Samsung, and NVIDIA and Qualcomm, also challenged the validity of certain of each other’s patents through inter partes review before the United States Patent and Trademark Office.Polaris Innovations Limited
On April 28,May 16, 2016, NVIDIAPolaris Innovations Limited, or Polaris, a non-practicing entity and Samsung entered a binding memorandumwholly-owned subsidiary of understanding which resolved all existing intellectual property disputes between the parties, and requires the immediate dismissal of all pending litigation between them. As a result of this agreement, on May 5, 2016, SamsungQuarterhill Inc. (formerly WiLAN Inc.), filed a Stipulation of Dismissalcomplaint in the United States District Court for the EasternWestern District of Virginia.Texas alleging that NVIDIA has infringed and is continuing to infringe six U.S. patents relating to the control of dynamic random-access memory (DRAM). The complaint seeks unspecified monetary damages, enhanced damages, interest, fees, expenses, and costs against NVIDIA. On May 11,September 14, 2016, NVIDIA voluntarily dismissed itsanswered the Polaris Complaint and asserted various defenses including non-infringement and invalidity of the six Polaris patents.
On December 5, 2016, the Texas Court granted NVIDIA’s motion to transfer and ordered the case transferred to the Northern District of California. The California Court has not set a trial date.
On December 7, 2016, NVIDIA filed a petition tofor inter partes review with the United States CourtPatent and Trademark Office (USPTO) challenging the validity of Appeals for the Federal Circuit to review the ITC’s decisionU.S. Patent No. 7,886,122, which is asserted by Polaris in Investigation No. 337-TA-932.that California district court litigation. On May 12,December 19, 2016, NVIDIA voluntarily dismissed its Complaint in the United States District Court for the District of Delaware. On May 19, 2016, Samsung filed a Corrected Joint Motion to Terminate Investigation No. 337-TA-941. On June 16, 2016, the ITC granted the joint motion and terminated the ITC investigation. The parties have also moved to dismiss all pendingan inter partes reviews. Also as partreview request with the USPTO challenging the validity of this agreement, NVIDIA and Samsung each received a license to a small number of patents of the other, but no portfolio license was granted nor was any compensation paid by either party. On June 28, 2016, NVIDIA and Samsung executed a settlement agreement based on the April 28, 2016 memorandum of understanding.
U.S.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NVIDIA’s dismissalsPatent No. 7,124,325, another patent asserted by Polaris. On May 5, 2017, NVIDIA filed an inter partes review request with the USPTO challenging the validity of U.S. Patent No. 8,161,344, another patent asserted by Polaris. On May 30, 2017, NVIDIA filed an inter partes review request with the USPTO challenging the validity of U.S. Patent No. 6,532,505, another patent asserted by Polaris. On June 22, 2017, the USPTO instituted inter partes review of U.S Patent No. 7,886,122. On June 23, 2017, the USPTO denied institution of inter partes review of U.S. Patent No. 7,124,325. On July 25, 2017, NVIDIA filed inter partes requests with the USPTO challenging the validity of U.S. Patent No. 8,207,976, another patent asserted by Polaris. Also on May 11, 2016July 25, 2017, NVIDIA filed inter partes requests with the USPTO for U.S. Patent No. 8,161,344 challenging the validity of further claims and May 12, 2016 also terminated its claims against Qualcomm.an additional inter partes request for U.S. Patent No. 7,124,325. All of the patents that Polaris has asserted in the U.S. litigation are now subject to requests for inter partes review, with institution decisions forthcoming.
InOn May 9, 2017, NVIDIA filed a Motion to Stay the California action pending final resolution of the inter partes review of U.S. Patents Nos. 7,886,122; 7,124,325; and 8,161,344. On June 15, 2017, the Motion to Stay was granted. The action has now been stayed until December 2015, Advanced Silicon Technologies LLC14, 2017 pending the institution of the inter partes review of these patents.
On December 30, 2016, NVIDIA received notice that Polaris had filed complaintsa complaint for patent infringement in the ITC and the United States District Court for the District of Delaware allegingGermany. The German case alleges infringement of certain patents relatingEuropean Patent No. EP1428225 and German Patent Nos. DE 10223167 and DE 1020066043668. On July 14, 2017, NVIDIA filed defenses to graphics processing and memory management. NVIDIA and Advanced Silicon Technologies resolved this litigation on April 22, 2016 and NVIDIA agreedthe infringement allegations including non-infringement with respect to license the patents asserted and other patents owned and controlled by Advanced Silicon Technologies and certain of its affiliates. On April 27, 2016, NVIDIA and Advanced Silicon Technologies jointly moved to terminate the investigation as to NVIDIA. The Office of Unfair Import Investigations supported the motion, and noneeach of the other parties opposed it. three asserted patents. An oral hearing has been scheduled for February 21, 2019.
On May 10, 2016,March 31, 2017, the Administrative Law Judge issued an Initial Determination grantingGerman Patent Court acknowledged receipt of nullity actions filed by NVIDIA challenging the joint request to terminate the investigation as to NVIDIA.validity of EP1428225 and DE 1020066043668. On June 1, 2016,12, 2017, NVIDIA was notified that the ITC issuednullity actions against EP1428225 and DE 1020066043668 were served on Polaris and that Polaris has filed a Notice determiningformal response opposing each nullity complaint. On July 14, 2017, the German Patent Court acknowledged receipt of a nullity action filed by NVIDIA challenging the validity of DE 10223167. On September 13, 2017, NVIDIA was notified that the nullity action against DE10223167 was served on Polaris. Polaris has not yet responded to review the Administrative Law Judge’s determination, thereby finalizing termination of the investigation as to NVIDIA. Pursuant to the license agreement, $10 million was recorded as a charge to cost of revenue during the three months ended May 1, 2016.this action.
Accounting for Loss Contingencies
While there can be no assurance of favorable outcomes, we believe the claims made by the other party in the above ongoing matters are without merit and we intend to vigorously defend the actions. As of October 29, 2017, we have not recorded any accrual for contingent liabilities associated with the legal proceedings described above based on our belief that liabilities, while possible, are not probable. Further, any possible range of loss in these matters cannot be reasonably estimated at this time. We are engaged in other legal actions not described above arising in the ordinary course of its business and, while there can be no assurance of favorable outcomes, we believe that the ultimate outcome of these actions will not have a material adverse effect on our operating results, liquidity or financial position.
Note 13 - Shareholders’ Equity
Capital Return Program
Beginning August 2004, our Board of Directors authorized us, subject to certain specifications, to repurchase shares of our common stock. On November 7, 2016, the Board authorized an additional $2.00 billion under our repurchase program and extended it through December 2020.
In March 2016, we entered into an accelerated share repurchase, or ASR, agreement with an investment bank, under which we made an upfront payment of $500 million to purchase shares of our common stock and received an initial delivery of 12 million shares. The shares delivered resulted in a reduction, on the delivery date, of the outstanding shares used to calculate the weighted-average common shares outstanding for basic and diluted earnings per share. The ASR agreement was settled in July 2016 with a cash payment of $9 million to the investment bank. As a result, a total of 12 million shares were repurchased under the ASR transaction for $509 million, or an average price of $42.06 per share.
During the threethird quarter and first nine months ended October 30, 2016,of fiscal year 2018, we repurchased a total of 1 million shares and 6 million shares, respectively, for $151 million and $909 million, respectively. During the third quarter and first nine months of fiscal year 2018, we also paid $61 million and $185 million, respectively, inmade cash dividendsdividend payments to our shareholders equivalent to $0.1150 per share. As a result, we returned $61of $84 million and $694$250 million, to shareholders during the three and nine months ended October 30, 2016, respectively, in the form of share repurchases and dividend payments.respectively.
Through October 30, 2016,29, 2017, we have repurchased an aggregate of 243251 million shares under our share repurchase program for a total cost of $4.36 billion.$5.50 billion since the inception of the program. All shares delivered from these repurchases have been placed into treasury stock. As of November 7, 2016,October 29, 2017, we were authorized, subject to certain specifications, to repurchase additional shares of our common stock up to $2.96$1.82 billion through December 2020.
We intend to return $1.00 billion to our shareholders in fiscal yearIn November 2017, through a combination of share repurchases and cash dividends. For fiscal year 2018, we intend to return $1.25 billion to our shareholders through ongoing quarterly cash dividends and share repurchases. We also declared an increase in our quarterly cash dividend to $0.14$0.15 per share from $0.1150$0.14 per share, to be paid with our next quarterly cash dividend on December 19, 2016,15, 2017, to all shareholders of record on November 28, 2016.24, 2017.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Convertible Preferred Stock
As of October 30, 201629, 2017 and January 31, 2016,29, 2017, there were no shares of preferred stock outstanding.
Common Stock
We are authorized to issue up to 2.00 billion shares of our common stock at $0.001 per share par value.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note 14 - 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. Our operating segments are equivalent to our reportable segments.
We report our business in two primary reportable segments - the GPU business and the Tegra Processor business - based on a unifiedsingle underlying graphics architecture.
Our GPU product brands are aimed at specialized markets including GeForce for gamers; Quadro for designers; Tesla and DGX for researchers andAI data scientists focused on artificial intelligence and big-data analytics;big data researchers; and GRID for cloud-based visual computing users. Our Tegra brand integrates an entire computer onto a single chip, incorporatingand incorporates GPUs and multi-core CPUs aimed at onlineto drive supercomputing for mobile gaming and entertainment devices, as well as autonomous robots, drones and cars.
We have a single unifying architecture for our GPU and Tegra Processors. This architecture unification leverages our visual computing expertise by charging the operating expenses of certain core engineering functions to the GPU business, while charging the Tegra Processor business for the incremental cost of the teams working directly for that business. In instances where the operating expenses of certain functions benefit both reportable segments, our CODM assigns 100% of those expenses to the reportable segment that benefits the most.
The “All Other” category presented below represents the revenue and expenses that our CODM does not assign to either the GPU business or the Tegra Processor business for purposes of making operating decisions or assessing financial performance. The revenue includes primarily patent licensing revenue and the expenses include stock-based compensation expense, corporate infrastructureunallocated cost of revenue and support costs,operating expenses, acquisition-related costs, restructuring and other charges, contributions, product warranty charge, legal settlement costs, and other non-recurring charges and benefits that our CODM deems to be enterprise in nature.
Our CODM does not review any information regarding total assets on a reportable segment basis. Reportable segments do not record intersegment revenue, and, accordingly, there is none to be reported. The accounting policies for segment reporting are the same as for NVIDIA as a whole. The table below presents details of our reportable segments and the “All Other” category.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
| | | GPU | | Tegra Processor | | All Other | | Consolidated | GPU | | Tegra Processor | | All Other | | Consolidated |
| | (In millions) |
Three Months Ended October 29, 2017 | | | | | | | | |
Revenue | | $ | 2,217 |
| | $ | 419 |
| | $ | — |
| | $ | 2,636 |
|
Depreciation and amortization expense | | $ | 32 |
| | $ | 9 |
| | $ | 9 |
| | $ | 50 |
|
Operating income (loss) | | $ | 978 |
| | $ | 88 |
| | $ | (171 | ) | | $ | 895 |
|
| (In millions) | | | | | | | |
Three Months Ended October 30, 2016 | | | | | | | | |
| | |
| | |
| | |
|
Revenue | $ | 1,697 |
| | $ | 241 |
| | $ | 66 |
| | $ | 2,004 |
| $ | 1,697 |
| | $ | 241 |
| | $ | 66 |
| | $ | 2,004 |
|
Depreciation and amortization expense | $ | 30 |
| | $ | 8 |
| | $ | 10 |
| | $ | 48 |
| $ | 30 |
| | $ | 8 |
| | $ | 10 |
| | $ | 48 |
|
Operating income (loss) | $ | 678 |
| | $ | 17 |
| | $ | (56 | ) | | $ | 639 |
| $ | 678 |
| | $ | 17 |
| | $ | (56 | ) | | $ | 639 |
|
| | | | | | | | | | | | | | |
Three Months Ended October 25, 2015 | |
| | |
| | |
| | |
| |
Nine Months Ended October 29, 2017 | | | | | | | | |
Revenue | $ | 1,110 |
| | $ | 129 |
| | $ | 66 |
| | $ | 1,305 |
| $ | 5,676 |
| | $ | 1,084 |
| | $ | 43 |
| | $ | 6,803 |
|
Depreciation and amortization expense | $ | 26 |
| | $ | 11 |
| | $ | 11 |
| | $ | 48 |
| $ | 88 |
| | $ | 27 |
| | $ | 30 |
| | $ | 145 |
|
Operating income (loss) | $ | 367 |
| | $ | (65 | ) | | $ | (57 | ) | | $ | 245 |
| $ | 2,342 |
| | $ | 206 |
| | $ | (411 | ) | | $ | 2,137 |
|
| | | | | | | | | | | | | | |
Nine Months Ended October 30, 2016 | | | | | | | | | | | | | | |
Revenue | $ | 3,972 |
| | $ | 567 |
| | $ | 198 |
| | $ | 4,737 |
| $ | 3,972 |
| | $ | 567 |
| | $ | 198 |
| | $ | 4,737 |
|
Depreciation and amortization expense | $ | 87 |
| | $ | 22 |
| | $ | 31 |
| | $ | 140 |
| $ | 87 |
| | $ | 22 |
| | $ | 31 |
| | $ | 140 |
|
Operating income (loss) | $ | 1,405 |
| | $ | (35 | ) | | $ | (169 | ) | | $ | 1,201 |
| $ | 1,405 |
| | $ | (35 | ) | | $ | (169 | ) | | $ | 1,201 |
|
| | | | | | | | |
Nine Months Ended October 25, 2015 | | | | | | | | |
Revenue | $ | 3,009 |
| | $ | 402 |
| | $ | 198 |
| | $ | 3,609 |
| |
Depreciation and amortization expense | $ | 81 |
| | $ | 36 |
| | $ | 34 |
| | $ | 151 |
| |
Operating income (loss) | $ | 917 |
| | $ | (164 | ) | | $ | (258 | ) | | $ | 495 |
| |
| | | Three Months Ended | | Nine Months Ended | Three Months Ended | | Nine Months Ended |
| October 30, 2016 | | October 25, 2015 | | October 30, 2016 | | October 25, 2015 | October 29, 2017 | | October 30, 2016 | | October 29, 2017 | | October 30, 2016 |
| (In millions) | (In millions) |
Reconciling items included in "All Other" category: | | | | | | | | | | | | | | |
Unallocated revenue | $ | 66 |
| | $ | 66 |
| | $ | 198 |
| | $ | 198 |
| $ | — |
| | $ | 66 |
| | $ | 43 |
| | $ | 198 |
|
Stock-based compensation expense | (65 | ) | | (51 | ) | | (176 | ) | | (145 | ) | (107 | ) | | (65 | ) | | (265 | ) | | (176 | ) |
Unallocated cost of revenue and operating expenses | (53 | ) | | (60 | ) | | (156 | ) | | (181 | ) | (61 | ) | | (53 | ) | | (176 | ) | | (156 | ) |
Acquisition-related costs | (4 | ) | | (4 | ) | | (12 | ) | | (18 | ) | (3 | ) | | (4 | ) | | (11 | ) | | (12 | ) |
Restructuring and other charges | — |
| | (8 | ) | | (3 | ) | | (97 | ) | — |
| | — |
| | — |
| | (3 | ) |
Contributions | — |
| | — |
| | (4 | ) | | — |
| — |
| | — |
| | (2 | ) | | (4 | ) |
Product warranty charge | — |
| | — |
| | — |
| | (15 | ) | |
Legal settlement costs | — |
| | — |
| | (16 | ) | | — |
| — |
| | — |
| | — |
| | (16 | ) |
Total | $ | (56 | ) | | $ | (57 | ) | | $ | (169 | ) | | $ | (258 | ) | $ | (171 | ) | | $ | (56 | ) | | $ | (411 | ) | | $ | (169 | ) |
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
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 table summarizes information pertaining to our revenue from customers based on the invoicing address in differentby geographic regions:
| | | Three Months Ended | | Nine Months Ended | Three Months Ended | | Nine Months Ended |
| October 30, | | October 25, | | October 30, | | October 25, | October 29, | | October 30, | | October 29, | | October 30, |
| 2016 | | 2015 | | 2016 | | 2015 | 2017 | | 2016 | | 2017 | | 2016 |
| (In millions) | (In millions) |
Revenue: | | | | | | | | | | | | | | |
Taiwan | $ | 747 |
| | $ | 515 |
| | $ | 1,696 |
| | $ | 1,348 |
| $ | 864 |
| | $ | 747 |
| | $ | 2,140 |
| | $ | 1,696 |
|
Other Asia Pacific | | 612 |
| | 309 |
| | 1,409 |
| | 660 |
|
China | 341 |
| | 229 |
| | 845 |
| | 583 |
| 515 |
| | 341 |
| | 1,325 |
| | 845 |
|
Other Asia Pacific | 309 |
| | 181 |
| | 660 |
| | 554 |
| |
United States | 282 |
| | 156 |
| | 682 |
| | 474 |
| 263 |
| | 282 |
| | 894 |
| | 682 |
|
Other Americas | | 187 |
| | 154 |
| | 480 |
| | 360 |
|
Europe | 171 |
| | 116 |
| | 494 |
| | 341 |
| 195 |
| | 171 |
| | 555 |
| | 494 |
|
Other Americas | 154 |
| | 108 |
| | 360 |
| | 309 |
| |
Total revenue | $ | 2,004 |
| | $ | 1,305 |
| | $ | 4,737 |
| | $ | 3,609 |
| $ | 2,636 |
| | $ | 2,004 |
| | $ | 6,803 |
| | $ | 4,737 |
|
The following table summarizes information pertaining to our revenue by each of the specialized markets we serve:
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| October 30, | | October 25, | | October 30, | | October 25, |
| 2016 | | 2015 | | 2016 | | 2015 |
| (In millions) |
Revenue: | | | | | | | |
Gaming | $ | 1,244 |
| | $ | 761 |
| | $ | 2,712 |
| | $ | 2,008 |
|
Professional Visualization | 207 |
| | 190 |
| | 610 |
| | 547 |
|
Datacenter | 240 |
| | 82 |
| | 534 |
| | 242 |
|
Automotive | 127 |
| | 79 |
| | 359 |
| | 227 |
|
OEM & IP | 186 |
| | 193 |
| | 522 |
| | 585 |
|
Total revenue | $ | 2,004 |
| | $ | 1,305 |
| | $ | 4,737 |
| | $ | 3,609 |
|
Revenue from significant customers, those representing 10% or more of total revenue for the respective dates, is summarized as follows:
|
| | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| October 30, | | October 25, | | October 30, | | October 25, |
| 2016 | | 2015 | | 2016 | | 2015 |
Revenue: | | | | | | | |
Customer A | 13 | % | | 10 | % | | 12 | % | | 11 | % |
Revenue from Customer A was attributable to the GPU business.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| October 29, | | October 30, | | October 29, | | October 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
| (In millions) |
Revenue: | | | | | | | |
Gaming | $ | 1,561 |
| | $ | 1,244 |
| | $ | 3,774 |
| | $ | 2,712 |
|
Professional Visualization | 239 |
| | 207 |
| | 679 |
| | 610 |
|
Datacenter | 501 |
| | 240 |
| | 1,326 |
| | 534 |
|
Automotive | 144 |
| | 127 |
| | 426 |
| | 359 |
|
OEM & IP | 191 |
| | 186 |
| | 598 |
| | 522 |
|
Total revenue | $ | 2,636 |
| | $ | 2,004 |
| | $ | 6,803 |
| | $ | 4,737 |
|
Accounts receivable from significant customers, those representing 10% or more of total accounts receivable for the respective periods, is summarized as follows:
|
| | | | | | |
| | October 30, | | January 31, |
| | 2016 | | 2016 |
Accounts Receivable: | | | | |
Customer B | | 18 | % | | 21 | % |
Customer C | | 12 | % | | 3 | % |
|
| | | | | | |
| | October 29, | | January 29, |
| | 2017 | | 2017 |
Accounts Receivable: | | | | |
Customer A | | 17 | % | | 19 | % |
Note 15 - Restructuring and Other Charges
In the second quarter of fiscal year 2016, we began the wind-down of our Icera operations. Our operating expenses for the nine months ended October 30, 2016 included $3 million of restructuring and other charges. No restructuring charges were recorded during the threethird quarter and first nine months ended October 30, 2016.of fiscal year 2018.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The following table provides a summary of the restructuring activities and related liabilities recorded in accrued liabilities on our Condensed Consolidated Balance Sheets as of October 30, 2016 (in millions):29, 2017 and January 29, 2017:
|
| | | |
Balance as of January 31, 2016 | $ | 23 |
|
Restructuring and other charges | 3 |
|
Cash payments | (14 | ) |
Non-cash adjustments | 1 |
|
Balance as of October 30, 2016 | $ | 13 |
|
|
| | | | | | | |
| October 29, | | January 29, |
| 2017 | | 2017 |
| (In millions) |
Balance at beginning of period | $ | 13 |
| | $ | 23 |
|
Restructuring and other charges | — |
| | 3 |
|
Cash payments | (5 | ) | | (13 | ) |
Balance at end of period | $ | 8 |
| | $ | 13 |
|
The majority of the remaining balance of $13$8 million as of October 30, 201629, 2017 is expected to be paid during fiscal year 2018.the next twelve months.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
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 heading “Risk Factors.” Given these risks, uncertainties and other factors, you should not place undue reliance on these forward-looking statements. Also, these forward-looking statements represent our estimates and assumptions only as of the date of this filing. You should read this 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 assume no obligation to update these forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.
All references to “NVIDIA,” “we,” “us,” “our” or the “Company” mean NVIDIA Corporation and ourits subsidiaries, except where it is made clear that the term means only the parent company.
NVIDIA, the NVIDIA logo, GeForce, Quadro, Tegra, Tesla, Ansel, GeForce NOW, Icera, Iray,Jetson, NVIDIA DGX-1,DGX, NVIDIA DRIVE, NVIDIA DesignWorks,GameWorks, NVIDIA GRID, NVIDIA SHIELD, NVIDIA TensorRT,Holodeck, NVIDIA VRWorks, OptiX, Pascal and PascalTensorRT are trademarks and/or registered trademarks of NVIDIA Corporation in the United States and other countries. MAXQ® is the registered trademark of Maxim Integrated Products, Inc. Other company and product names may be trademarks of the respective companies with which they are associated.
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 31, 201629, 2017 and “Item 1A. Risk Factors” of this Quarterly Report on Form 10-Q and 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 or sell shares of our common stock.
Overview
Our Company and Our Businesses
Starting with a focus on PC graphics, NVIDIA isinvented the world leaderGPU to solve some of the most complex problems in visual computing.computer science. We have extended our emphasis in recent years to the revolutionary field of AI. NVIDIA has transformed into a specialized platform company that targets four largedelivers value to its customers through PC, mobile and cloud architectures. Vertical integration enables us to bring together hardware, system software, programmable algorithms, libraries, systems and services to create unique value for the markets - Gaming, Professional Visualization, Datacenter and Automotive - wherewe serve. We specialize in markets in which GPU-based visual computing is essential and valued.accelerated computing platforms can provide enhanced throughput for applications.
Our two reportable segments - GPU and Tegra Processor - are based on a single underlying graphics architecture. From our proprietary processors, we have created specialized platforms that addresstarget the four large markets where our visual computing expertise is critically important. We are focused on delivering value through PC, mobilecritical: Gaming, Professional Visualization, Datacenter, and cloud architectures. Our vertical integration enables us to bring together hardware, system software, programmable algorithms, systems and services to create unique value for the markets we serve.Automotive.
Our GPU product brands are aimed at specialized markets including GeForce for gamers; Quadro for designers; Tesla and DGX for researchers andAI data scientists focused on artificial intelligence and big-data analytics;big data researchers; and GRID for cloud-based visual computing users. Our Tegra brand integrates an entire computer onto a single chip, incorporatingand incorporates GPUs and multi-core CPUs aimed at onlineto drive supercomputing for mobile gaming and entertainment devices, as well as autonomous robots, drones and cars.
Headquartered in Santa Clara, California, NVIDIA was incorporated in California in April 1993 and reincorporated in Delaware in April 1998.
Recent Developments, Future Objectives and Challenges
Third Quarter of Fiscal Year 20172018 Summary
| | | Three Months Ended | | | | | Three Months Ended | | | | |
| October 30, 2016 | | July 31, 2016 | | October 25, 2015 | | Q/Q | | Y/Y | October 29, 2017 | | July 30, 2017 | | October 30, 2016 | | Q/Q | | Y/Y |
| (In millions, except per share data) | ($ in millions, except per share data) | | | | |
Revenue | $ | 2,004 |
| | $ | 1,428 |
| | $ | 1,305 |
| | 40 | % | | 54 | % | $ | 2,636 |
| | $ | 2,230 |
| | $ | 2,004 |
| | 18 | % | | 32 | % |
Gross margin | 59.0 | % | | 57.9 | % | | 56.3 | % | | 110 bps |
| | 270 bps |
| 59.5 | % | | 58.4 | % | | 59.0 | % | | 110 bps |
| | 50 bps |
|
Operating expenses | $ | 544 |
| | $ | 509 |
| | $ | 489 |
| | 7 | % | | 11 | % | $ | 674 |
| | $ | 614 |
| | $ | 544 |
| | 10 | % | | 24 | % |
Income from operations | $ | 639 |
| | $ | 317 |
| | $ | 245 |
| | 102 | % | | 161 | % | $ | 895 |
| | $ | 688 |
| | $ | 639 |
| | 30 | % | | 40 | % |
Net income | $ | 542 |
| | $ | 261 |
| | $ | 246 |
| | 108 | % | | 120 | % | $ | 838 |
| | $ | 583 |
| | $ | 542 |
| | 44 | % | | 55 | % |
Net income per diluted share | $ | 0.83 |
| | $ | 0.41 |
| | $ | 0.44 |
| | 102 | % | | 89 | % | $ | 1.33 |
| | $ | 0.92 |
| | $ | 0.83 |
| | 45 | % | | 60 | % |
Revenue for the third quarter of fiscal year 20172018 increased 54%32% year over year and 40% sequentially to $2.00 billion.18% sequentially. Growth from a year ago was driven by GPUs for gaming, datacenter, and professional visualization, and automotive systems. as well as Tegra processors.
GPU business revenue was $1.70$2.22 billion, up 53%31% from a year earlier and up 42%17% sequentially, with strength across all platforms, including gaming, datacenter, and professional visualization. GeForce GPU gaming revenue of $1.56 billion was led by growth in GeForce gaming GPUs and datacenter. GeForce gaming GPU revenue was fueled bycontinued strong adoption of our recent Pascal architecture.Pascal-based GeForce GTX gaming platforms. Datacenter revenue (including Tesla, NVIDIA GRID and NVIDIA DGX-1)DGX) was $240$501 million, up 193%109% year on year and up 20% sequentially, reflecting shipments of our Volta GPU architecture. Datacenter growth was fueled by strong demand by hyperscale and cloud customers for deep learning training and accelerated GPU computing, as well as demand for HPC, DGX AI supercomputing, and GRID virtualization platforms. Professional visualization revenue grew 15% year over year and 2% sequentially to $239 million, led by high-end mobile platforms.
Tegra processor business revenue was $419 million, up 74% from a year ago and up 26% sequentially. Tegra processor business revenue includes system-on-a-chip (SOCs) modules for the Nintendo Switch gaming console and development services. Also included was automotive revenue of $144 million, which was up 13% from a year earlier and up 59% sequentially. This reflects strong demand for deep learning and high performance computing, Tesla and GRID for cloud and virtualized computing, and initial DGX-1 sales. Tegra business revenue, which included gaming development1% sequentially, incorporating infotainment modules, production DRIVE PX platforms, and services, was $241 million, up 87%development agreements for self-driving cars.
Revenue from aour patent license agreement with Intel concluded in the first quarter of fiscal year earlier and up 45% sequentially. Also included was automotive revenue of $127 million, primarily from infotainment modules, which was up 61% from a year earlier and up 7% sequentially.2018.
Gross margin for the third quarter of fiscal year 20172018 was 59.0%59.5%, reflectingincreasing from the strength ofprior year and the previous quarter due to strong growth in datacenter revenue and the mix within our GeForce gaming GPUs, the success of our platform approach and strong demand for deep learning.GPUs.
Operating expenses for the third quarter of fiscal year 20172018 were $544$674 million, up 11%24% from a year earlier and up 7% sequentially. This reflects10% sequentially, reflecting increased headcount and related costs for our growth initiatives as well as investments in sales- gaming, artificial intelligence, and marketing.autonomous driving.
Income from operations for the third quarter of fiscal year 20172018 was $639$895 million, up 161%40% from a year earlier and up 102%30% sequentially. Net income and net income per diluted share for the third quarter of fiscal year 20172018 were $542$838 million and $0.83,$1.33, respectively, up 120%55% and 89%60%, respectively, from a year earlier, fueled by strong revenue growth and improved gross and operating margins. In the third quarter of fiscal 2017, we adopted a new accounting standard related to the simplification of certain aspects of stock-based compensation accounting. This accounting standard requires adjustments to be reflected beginning in fiscal year 2017, including all fiscal quarters within the year. Please refer to Note 1 of the Notes to Condensed Consolidated Financial Statements for further discussion.
During the first nine months of fiscal year 2017,2018, we paid $509returned to shareholders $909 million forin share repurchases and $185$250 million in cash dividends. As a result, we have returned an aggregate of $694 million to shareholders in the first nine months of fiscal year 2017. For fiscal year 2018, we intend to return $1.25 billion to shareholders through ongoing quarterly cash dividends and share repurchases. Our boardFor fiscal year 2019, we also intend to return $1.25 billion to shareholders through ongoing quarterly cash dividends and share repurchases. In November 2017, we declared an increase in our quarterly cash dividend to $0.15 per share from $0.14 per share, to be paid with our next quarterly cash dividend on December 15, 2017, to all shareholders of directors has authorized an additional $2.00 billion under our stock repurchase program for a total of $2.96 billion available through the end of December 2020.record on November 24, 2017.
Cash, cash equivalents and marketable securities were $6.67$6.32 billion as of October 30, 2016,29, 2017, compared with $4.88$5.88 billion at the end of the prior quarter. The sequential increase was primarily related to cash received from our issuancethe increase in operating income, as well as strong collections of $1.00 billion of the 2.20% Notes Due 2021 and $1.00 billion of the 3.20% Notes Due 2026 (collectively, the Notes) during the third quarter of fiscal year 2017.outstanding accounts receivable.
GPU Business
During the third quarter of fiscal year 2017,2018, we expanded our line of Pascal GPUs with NVIDIAreleased the GeForce GTX 10501070 Ti GPU and GTX 1050 Tiannounced collaborations to bring NVIDIA GameWorks technology to top fall games, including PlayerUnknown’s Battlegrounds, FINAL FANTASY XV, Shadow of War, and we introduced GeForce GTX 1080, 1070 and 1060 for notebooks.Destiny 2. For our datacenter platform, we held GPU Technology Conferences in Beijing, Munich, Tel Aviv, Taipei and Washington, announced that Alibaba, Baidu and Tencent will adopt NVIDIA Volta GPUs for accelerating AI, and that Oracle had added NVIDIA Tesla P100 GPU accelerators to Oracle Cloud. We also launched the NVIDIA GPU Cloud container registry to accelerate deep learning for developers, announced that Huawei, Inspur and Lenovo will use the NVIDIA Volta HGX architecture to build AI systems for datacenters, shared news that Dell EMC, Hewlett Packard Enterprise, IBM and Supermicro had unveiled servers based on NVIDIA Tesla P40V100 GPU accelerators, and P4 GPUs andlaunched the NVIDIA TensorRT deep learning inferencing framework; began shipping3 AI inference acceleration platform. For our professional visualization platform, we opened early access to NVIDIA Holodeck, and launched the DGX-1 AI supercomputer to research organizations, universities, and multinationals.
Quadro Virtual Data Center Workstation.
During the second quarter of fiscal year 2017,2018, we began shipping our Pascal architecture withintroduced Max-Q, a set ofdesign approach to make gaming GPUs: GeForce GTX 1080, 1070, 1060,laptops thinner, quieter, and TITAN X, and released our first game, NVIDIA VR Funhouse.faster. For our datacenter platform, we introduced theannounced and began shipping NVIDIA Tesla M10 for virtualizing enterprise applications, introduced Tesla P100V100 GPU accelerators, delivering substantial performancethe first GPU based on the new Volta architecture; unveiled a new lineup of NVIDIA DGX AI supercomputers; and value compared with CPU-based systems, and unveiled our Inception Program, which provides access todisclosed that the world’s 13 most energy-efficient supercomputers on the Green 500 list run on NVIDIA technology and expertise to support the growth of startups in deep learning and data science.Tesla accelerators. For our professional virtualizationvisualization platform, we unveiled Quadro P6000 to power advanced workstations, enabling designers to complete complex designsintroduced Project Holodeck, a photorealistic, collaborative VR environment; launched external GPU support for creative professionals; and refreshedreleased the NVIDIA DesignWorksOptix 5.0 and NVIDIA VRWorks with new updates and360 Video software development kits.
During the first quarter of fiscal year 2017,2018, we launchedannounced GeForce GTX 1080 Ti and GTX 1070, based onTITAN Xp for our new NVIDIA Pascal architecture, expanded the NVIDIA VRWorks software development kit, and introduced NVIDIA Ansel, an in-game photography tool. We also unveiled thegaming platform. For our datacenter platform, we announced with Microsoft that it is bringing NVIDIA Tesla P100 GPU, based onand P40 GPUs to the Pascal architecture,Azure cloud; announced that NVIDIA Tesla accelerators designed for datacenter AI capabilities were added to Google Cloud, Tencent Cloud, IBM Cloud, and revealedBaidu Cloud; announced that the Tokyo Institute of Technology will use NVIDIA’s accelerated computing platform in their AI supercomputer, TSUBAME3.0; announced that Fujitsu is using 24 NVIDIA DGX-1 AI systems to build a new AI supercomputer for the RIKEN research center in Japan; announced together with Facebook the Caffe2 deep learning framework and Big Basin servers with Tesla P100 GPUs; and announced plans to train 100,000 developers this year through the NVIDIA DGX-1 supercomputer in a box, a purpose-built system for deep learning. In addition, we launched the 24GB Quadro M6000, the Quadro M2000, new NVIDIA Iray physically-based rendering solutions for the professional visualization markets, and unveiled Iray VR, which creates interactive, photorealistic virtual 3D worlds.Deep Learning Institute.
Tegra Processor Business
During the third quarter of fiscal year 2017,2018, we announced NVIDIA DRIVE PX Pegasus, an auto-grade AI computer designed to enable driverless robotaxis without steering wheels, pedals or mirrors, we added Alibaba and Huawei as partners for the NVIDIA Metropolis AI Smart Cities platform, and we announced that we are collaborating with China’s JD.com’s X lab to use NVIDIA gaming technology will power the Nintendo Switch home gaming system. We also announcedJetson to create autonomous machines that our NVIDIA DRIVE PX 2 platform will power a new AutoPilot system in all of Tesla Motors’ factory produced vehicles – the Model S, Model Xbring AI to logistics and upcoming Model 3.delivery.
During the second quarter of fiscal year 2017,2018, we initiated collaborative researchannounced that Toyota selected NVIDIA DRIVE PX for its next-generation autonomous cars; Volvo and Autoliv selected DRIVE PX for self-driving cars targeted to hit the market by 2021; ZF and HELLA, two leading automotive suppliers, announced a system based on DRIVE PX to deliver the highest NCAP safety ratings for cars; and Baidu announced that its Project Apollo open-source self-driving platform for the China market will use DRIVE PX. We also introduced the NVIDIA Isaac robot simulator for training intelligent machines in advanced self-driving technology with New York University’s pioneeringsimulated real-world conditions before deployment; and announced the NVIDIA Metropolis platform, used by more than 50 partners to make cities safer and smarter by applying deep learning team.to surveillance video streams.
During the first quarter of fiscal year 2017,2018, we expandedannounced with Bosch, one of the world’s largest auto suppliers, plans to create a new Bosch-branded AI self-driving car computer. We also announced a collaboration with PACCAR, one of the world's largest truck makers with brands including Peterbilt, Kenworth and DAF, to develop solutions for autonomous trucks. We also announced NVIDIA SHIELD platform’s gaming content available for streaming from GeForce NOW. We introduced the HD MappingJetson TX2, a high-performance, low-power computer platform for self-driving cars,delivering AI at the edge, with deep learning and announced that NVIDIA DRIVE PX 2 will power all vehicles in ROBORACE, a new autonomous car-racing circuit expected to debut later this year.computer vision capabilities for robots, drones and smart cameras.
Financial Information by Business Segment and Geographic Data
Our Chief Executive Officer, who is considered to be our chief operating decision maker, or CODM, reviews financial information presented on an operating segment basis for purposes of making operating decisions and assessing financial performance. Our operating segments are equivalent to our reportable segments.
We report our business in two primary reportable segments - the GPU business and the Tegra Processor business - based on a unified underlying graphics architecture.
Our GPU product brands are aimed at specialized markets including GeForce for gamers; Quadro for designers; Tesla for researchers and data scientists focused on artificial intelligence and big-data analytics; and GRID for cloud-based visual computing users.
We have a single unifying architecture for our GPU and Tegra Processors. This architecture unification leverages our visual computing expertise by charging the operating expenses of certain core engineering functions to the GPU business, while charging the Tegra Processor business for the incremental cost of the teams working directly for that business. In instances where the operating expenses of certain functions benefit both reportable segments, our CODM assigns 100% of those expenses to the reportable segment that benefits the most.
The “All Other” category presented below represents the revenue and expenses that our CODM does not assign to either the GPU business or the Tegra Processor business for purposes of making operating decisions or assessing financial performance. The revenue includes primarily patent licensing revenue and the expenses include stock-based compensation expense, corporate infrastructure and support costs, acquisition-related costs, restructuring and other charges, contributions, product warranty charge, legal settlement costs, and other non-recurring charges and benefits that our CODM deems to be enterprise in nature.
Please refer to Note 14 of the Notes to Condensed Consolidated Financial Statements for further disclosure regarding segment information.
Results of Operations
The following table sets forth, for the periods indicated, certain items in our Condensed Consolidated Statements of Income expressed as a percentage of revenue.
| | | Three Months Ended | | Nine Months Ended | Three Months Ended | | Nine Months Ended |
| October 30, 2016 | | October 25, 2015 | | October 30, 2016 | | October 25, 2015 | October 29, 2017 | | October 30, 2016 | | October 29, 2017 | | October 30, 2016 |
Revenue | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % |
Cost of revenue | 41.0 |
| | 43.7 |
| | 41.7 |
| | 44.0 |
| 40.5 |
| | 41.0 |
| | 40.9 |
| | 41.7 |
|
Gross profit | 59.0 |
| | 56.3 |
| | 58.3 |
| | 56.0 |
| 59.5 |
| | 59.0 |
| | 59.1 |
| | 58.3 |
|
Operating expenses | | | | | | | | | | | | | | |
Research and development | 18.6 |
| | 25.2 |
| | 22.6 |
| | 27.3 |
| 17.5 |
| | 18.6 |
| | 19.0 |
| | 22.6 |
|
Sales, general and administrative | 8.5 |
| | 11.6 |
| | 10.3 |
| | 12.2 |
| 8.0 |
| | 8.5 |
| | 8.7 |
| | 10.3 |
|
Restructuring and other charges | — |
| | 0.6 |
| | 0.1 |
| | 2.7 |
| — |
| | — |
| | — |
| | 0.1 |
|
Total operating expenses | 27.1 |
| | 37.4 |
| | 33.0 |
| | 42.2 |
| 25.5 |
| | 27.1 |
| | 27.7 |
| | 33.0 |
|
Income from operations | 31.9 |
| | 18.9 |
| | 25.3 |
| | 13.8 |
| 34.0 |
| | 31.9 |
| | 31.4 |
| | 25.3 |
|
Interest income | 0.7 |
| | 0.7 |
| | 0.8 |
| | 0.8 |
| 0.6 |
| | 0.7 |
| | 0.7 |
| | 0.8 |
|
Interest expense | (0.8 | ) | | (0.9 | ) | | (0.8 | ) | | (1.0 | ) | (0.6 | ) | | (0.8 | ) | | (0.7 | ) | | (0.8 | ) |
Other income (expense), net | (0.8 | ) | | 0.2 |
| | (0.4 | ) | | — |
| |
Income before income tax expense (benefit) | 31.0 |
| | 18.9 |
| | 24.9 |
| | 13.6 |
| |
Income tax expense (benefit) | 3.9 |
| | (0.1 | ) | | 3.5 |
| | 2.3 |
| |
Other, net | | — |
| | (0.8 | ) | | (0.3 | ) | | (0.4 | ) |
Total other income (expense) | | — |
| | (0.9 | ) | | (0.3 | ) | | (0.4 | ) |
Income before income tax expense | | 34.0 |
| | 31.0 |
| | 31.1 |
| | 24.9 |
|
Income tax expense | | 2.2 |
| | 3.9 |
| | 2.8 |
| | 3.5 |
|
Net income | 27.1 | % | | 19.0 | % | | 21.4 | % | | 11.3 | % | 31.8 | % | | 27.1 | % | | 28.3 | % | | 21.4 | % |
Revenue
NVIDIA’s products and services are built for three computing platforms - PC, Datacenter/Cloud, and Mobile. For the first nine months of fiscal years 2017 and 2016, approximately 73% and 77% of our revenue, respectively, was associated with the PC computing platform, of which GPUs for the gaming and professional visualization markets comprised approximately 92% and 87%, respectively, while PC OEM represented approximately 8% and 13%, respectively.Revenue
Revenue by Reportable Segments
| | | Three Months Ended | | Nine Months Ended | Three Months Ended | | Nine Months Ended |
| October 30, 2016 | | October 25, 2015 | | $ Change | | % Change | | October 30, 2016 | | October 25, 2015 | | $ Change | | % Change | October 29, 2017 | | October 30, 2016 | | $ Change | | % Change | | October 29, 2017 | | October 30, 2016 | | $ Change | | % Change |
| (In millions) | ($ in millions) |
GPU | $ | 1,697 |
| | $ | 1,110 |
| | $ | 587 |
| | 53 | % | | $ | 3,972 |
| | $ | 3,009 |
| | $ | 963 |
| | 32 | % | $ | 2,217 |
| | $ | 1,697 |
| | $ | 520 |
| | 31 | % | | $ | 5,676 |
| | $ | 3,972 |
| | $ | 1,704 |
| | 43 | % |
Tegra Processor | 241 |
| | 129 |
| | 112 |
| | 87 | % | | 567 |
| | 402 |
| | 165 |
| | 41 | % | 419 |
| | 241 |
| | 178 |
| | 74 | % | | 1,084 |
| | 567 |
| | 517 |
| | 91 | % |
All Other | 66 |
| | 66 |
| | — |
| | — | % | | 198 |
| | 198 |
| | — |
| | — | % | — |
| | 66 |
| | (66 | ) | | (100 | )% | | 43 |
| | 198 |
| | (155 | ) | | (78 | )% |
Total | $ | 2,004 |
| | $ | 1,305 |
| | $ | 699 |
| | 54 | % | | $ | 4,737 |
| | $ | 3,609 |
| | $ | 1,128 |
| | 31 | % | $ | 2,636 |
| | $ | 2,004 |
| | $ | 632 |
| | 32 | % | | $ | 6,803 |
| | $ | 4,737 |
| | $ | 2,066 |
| | 44 | % |
GPU Business. GPU business revenue increased by 53%31% for the third quarter of fiscal year 20172018 compared to the third quarter of fiscal year 2016.2017. This increase was due primarily to increased revenue from sales of high-end GeForce GPU products for gaming, which increased 59%over 10%, reflecting a combination of continued strength in PC gaming and strong demand for our recent Pascal-based GPU products. Datacenter revenue, including Tesla, GRID and DGX-1,DGX, increased 193%109%, reflecting strong demand from hyperscale and cloud customers for deep learning training Teslaand accelerated GPU computing, as well as demand for high performance computing, DGX AI supercomputing and GRID for cloud and virtualized computing, and initial DGX-1 sales.virtualization platforms. Revenue from Quadro GPUs for professional visualization increased 9%15% due primarily to higher sales in both high-end desktop and overall mobile workstation products. Our PC OEM revenue increased by over 90% due primarily to strong demand for GPU products targeted for use in cryptocurrency mining.
GPU business revenue increased by 43% in the first nine months of fiscal year 2018 compared to the first nine months of fiscal year 2017. This increase was due primarily to increased revenue from sales of GeForce GPU products for gaming, which increased over 20%, reflecting continued strong demand for our Pascal-based GPU products. Datacenter revenue, including Tesla, GRID and DGX, increased over 140%, reflecting strong demand from hyperscale and cloud customers for deep learning training and accelerated GPU computing, as well as demand for high performance computing, DGX AI supercomputing and GRID virtualization platforms. Revenue from Quadro GPUs for professional visualization increased over 10% due primarily to higher sales in both desktop and mobile workstation products. Revenue from GeForce GPU products for mainstream PC OEMs declined compared to last year.
GPU business revenue increased by 32% in the first nine months of fiscal year 2017 compared to the first nine months of fiscal year 2016. This increase wasover 90% due primarily to increased revenue from sales of high-end GeForce GPU products for gaming, which increased 36%, reflecting a combination of continued strength in PC gaming and strong demand for our recent Pascal-based GPU products. Datacenter revenue, including Tesla and NVIDIA GRID and DGX-1, increased 120%, reflecting strong demand for deep learning training, Tesla and GRID for cloud and virtualized computing, and initial DGX-1 sales. Revenue from Quadro GPUs for professional visualization increased 11% due primarily to higher sales in both desktop and mobile workstation products. Revenue from GeForce GPU products targeted for mainstream PC OEMs declined compared to last year.use in cryptocurrency mining.
Tegra Processor Business. Tegra Processor business revenue increased by 87%74% for the third quarter of fiscal year 20172018 compared to the third quarter of fiscal year 2016.2017. This was driven by an increase of 61%over 240% in sales of Tegra products serving automotive systems and an increase inrevenue from gaming development platforms and services, compared to last year.and an increase of 13% in automotive revenue, primarily from infotainment modules, DRIVE PX platforms and development agreements for self-driving cars.
Tegra Processor business revenue increased by 41%91% in the first nine months of fiscal year 20172018 compared to the first nine months of fiscal year 2016.2017. This was driven by an increase of 58%over 420% in salesrevenue from gaming development platforms and services, and an increase of Tegra products servingover 15% in automotive systems compared to last year.revenue, primarily from infotainment modules, DRIVE PX platforms and development agreements for self-driving cars.
All Other. We recognized $66 millionOur patent license agreement with Intel concluded in revenue during the thirdfirst quarter of both fiscal years 2017 and 2016 and $198 million in revenue duringyear 2018. For the first nine months of both fiscal years 2017 and 2016,year 2018, we recognized related revenue of $43 million, down from $198 million for the patent cross licensing arrangement with Intel.first nine months of fiscal year 2017.
Concentration of Revenue
Revenue from sales to customers outside of the United States and Other Americas accounted for 83% and 80% of total revenue for the third quarter and first nine months of fiscal year 2018, respectively. Revenue from sales to customers outside of the United States and Other Americas accounted for 78%of total revenue for both the third quarter and the first nine months of fiscal year 2017. Revenue from sales to customers outside of the United States and Other Americas accounted for 80% of total revenue for the third quarter of fiscal year 2016 and 78% of total revenue for the first nine months of fiscal year 2016. Revenue by geographic region is allocated to individual countries based on the location to which the products are initially billed even if the revenue is attributable to end customers in a different location.
Revenue from significant customers, those representing 10% or more of total revenue for the respective dates, is summarized as follows:
|
| | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| October 30, 2016 | | October 25, 2015 | | October 30, 2016 | | October 25, 2015 |
Revenue: | | | | | | | |
Customer A | 13 | % | | 10 | % | | 12 | % | | 11 | % |
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, board and device costs, manufacturing support costs, including labor and overhead associated with such purchases, final test yield fallout, inventory and warranty provisions and shipping costs. Cost of revenue also includes development costs for license and service arrangements and stock-based compensation related to personnel associated with operations. Gross margin is the percentage of gross profit to revenue.
Our overall gross margin was 59.0% and 56.3%increased to 59.5% for the third quarter of fiscal yearsyear 2018 from 59.0% for the third quarter of fiscal year 2017, and 2016, respectively, and 58.3%and 56.0%increased to 59.1% for the first nine months of fiscal year 2017 and 2016, respectively.2018 from 58.3% for the first nine months of fiscal year 2017. These increases were driven primarily by product mixdue to the growth in our GPU business revenue from our Datacenter platforms and increased sales of GeForce GTX products for gaming. These increases were partially offset by lower gross margins in our Tegra business.the absence of licensing revenue from Intel.
Charges to cost of sales for inventory provisionsInventory provision costs totaled $13$14 million and $40$13 million for the third quarter of fiscal years 20172018 and 2016,2017, respectively, unfavorably impacting our gross margin by 0.7%0.5% and 3.1%0.7%, respectively. Sales of inventory that was previously written-off or written-down totaled $19$6 million and $6$19 million for the third quarter of fiscal years 20172018 and 2016,2017, respectively, favorably impacting our gross margin by 0.9%0.2% and 0.5%0.9%, respectively. As a result, the overall net effect on our gross margin from charges to cost of sales for inventory provisionsprovision costs and sales of items previously written-off or written-down was a 0.2% favorable impactnominal for the third quarter of fiscal year 2017years 2018 and a 2.6% unfavorable impact for the third quarter of fiscal year 2016.2017.
Charges to cost of sales for inventory provisionsInventory provision costs totaled $40$30 million and $71$40 million for the first nine months of fiscal years 20172018 and 2016,2017, respectively, unfavorably impacting our gross margin by 0.9%0.4% and 2.0%0.9%, respectively. Sales of inventory that was previously written-off or written-down totaled $39$29 million and $26$39 million for the first nine months of fiscal years 20172018 and 2016,2017, respectively, favorably impacting our gross margin by 0.8%0.4% and 0.7%0.8%, respectively. As a result, the overall net effect on our gross margin from charges to cost of sales for inventory provisionsprovision costs and sales of items previously written-off or written-down was a 0.1% unfavorable impactnominal for the first nine months of fiscal year 2017years 2018 and a 1.3% unfavorable impact for the first nine months of fiscal year 2016.2017.
A discussion of our gross margin results for each of our reportable segments is as follows:
GPU Business. The gross margin of our GPU business increased during the third quarter and first nine months of fiscal year 20172018 compared to the third quarter and first nine months of fiscal year 2016.2017. GPU margins increased primarily due to strong sales of our GeForce GTX gaming products and revenue growth in Datacenter driven by strong demand for Tesla products by hyperscale and cloud customers for deep learning training and high performanceaccelerated GPU computing, DGX AI supercomputing and the strength of our GeForce gaming GPUs.GRID virtualization platforms.
Tegra Processor Business. The gross margin of our Tegra Processor business increased during the third quarter and first nine months of fiscal year 20172018 compared to the third quarter and first nine months of fiscal year 2016.2017. The increase in Tegra margins was primarily due to the inventory provisions we recorded during the third quarter of fiscal year 2016 related primarily to older generation Tegra productsrevenue growth in gaming development platforms and the warranty charge we recorded during the first nine months of fiscal year 2016 associated with the SHIELD tablet product recall.automotive.
Operating Expenses
| | | Three Months Ended | | Nine Months Ended | Three Months Ended | | Nine Months Ended |
| October 30, 2016 | | October 25, 2015 | | $ Change | | % Change | | October 30, 2016 | | October 30, 2015 | | $ Change | | % Change | October 29, 2017 | | October 30, 2016 | | $ Change | | % Change | | October 29, 2017 | | October 30, 2016 | | $ Change | | % Change |
| (In millions) | ($ in millions) |
Research and development expenses | $ | 373 |
| | $ | 329 |
| | $ | 44 |
| | 13 | % | | $ | 1,069 |
| | $ | 987 |
| | $ | 82 |
| | 8 | % | $ | 462 |
| | $ | 373 |
| | $ | 89 |
| | 24 | % | | $ | 1,290 |
| | $ | 1,069 |
| | $ | 221 |
| | 21 | % |
Sales, general and administrative expenses | 171 |
| | 152 |
| | 19 |
| | 13 | % | | 487 |
| | 441 |
| | 46 |
| | 10 | % | 212 |
| | 171 |
| | 41 |
| | 24 | % | | 594 |
| | 487 |
| | 107 |
| | 22 | % |
Restructuring and other charges | — |
| | 8 |
| | (8 | ) | | (100 | )% | | 3 |
| | 97 |
| | (94 | ) | | (97 | )% | — |
| | — |
| | — |
| | — | % | | — |
| | 3 |
| | (3 | ) | | (100 | )% |
Total operating expenses | $ | 544 |
| | $ | 489 |
| | $ | 55 |
| | 11 | % | | $ | 1,559 |
| | $ | 1,525 |
| | $ | 34 |
| | 2 | % | $ | 674 |
| | $ | 544 |
| | $ | 130 |
| | 24 | % | | $ | 1,884 |
| | $ | 1,559 |
| | $ | 325 |
| | 21 | % |
Research and development expenses as a percentage of net revenue | 19 | % | | 25 | % | | |
| | |
| | 23 | % | | 27 | % | | | | | 18 | % | | 19 | % | | |
| | |
| | 19 | % | | 23 | % | | | | |
Sales, general and administrative expenses as a percentage of net revenue | 9 | % | | 12 | % | | |
| | |
| | 10 | % | | 12 | % | | | | | 8 | % | | 9 | % | | |
| | |
| | 9 | % | | 10 | % | | | | |
Restructuring and other charges as a percentage of net revenue | — | % | | 1 | % | | | | | | — | % | | 3 | % | | | | | — | % | | — | % | | | | | | — | % | | — | % | | | | |
Research and Development
Research and development expenses increased by 13%24% and 21% during the third quarter and first nine months of fiscal year 20172018, respectively, compared to the third quarter of fiscal year 2016. Compensation and benefits increased by $38 million primarily driven by employee additions and an increase in related compensation and benefit costs, including stock-based compensation expense.
Research and development expenses increased by 8% during the first nine months of fiscal year 2017, compared to the first nine months of fiscal year 2016. Compensation and benefits increased by $68 milliondriven primarily driven by employee additions and an increaseincreases in relatedemployee compensation and benefitother related costs, including stock-based compensation expense.
Sales, General and Administrative
Sales, general and administrative expenses increased by 13%24% during the third quarter of fiscal year 20172018 compared to the third quarter of fiscal year 2016. Compensation and benefits increased by $28 million2017, driven primarily driven by employee additions and an increaseincreases in relatedemployee compensation and benefitother related costs, including stock-based compensation expense. Offsetting this increase was a decrease in outside professional fees of $16 million resulting from the resolution of our intellectual property disputes with Samsung and Qualcomm.
Sales, general and administrative expenses increased by 10%22% during the first nine months of fiscal year 20172018 compared to the first nine months of fiscal year 2016. Compensation and benefits increased by $65 million2017, driven primarily driven by employee additions and an increaseincreases in relatedemployee compensation and benefitother related costs, including stock-based compensation expense. Marketing expense increased by $10 million mainly due to the introduction of our new Pascal family of GPUs. Offsetting these increases was a decrease in outside professional fees of $42$11 million resulting from the resolution of our intellectual property disputes with Samsung and Qualcomm.
Restructuring and Other Charges
In the second quarter of fiscal year 2016, we began the wind-down of our Icera operations. Our operating expenses for the nine months ended July 31, 2016 included $3 million of restructuring and other charges. No restructuring charges were recorded during the third quarter and first nine months of fiscal year 2017.2018. Please refer to Note 15 of the Notes to Condensed Consolidated Financial Statements for further discussion.
Total Other Income (Expense)
Interest Income and Interest Expense
Interest income consists of interest earned on cash, cash equivalents and marketable securities. Interest expense is primarily comprised of coupon interest and debt discount amortization related to the 1.00% Convertible Senior Notes due in 2018, or the Convertible Notes, issued in December 2013 and the Notes issued in September 2016.
Interest income was $14$17 million and $9$14 million during the third quarter of fiscal years 20172018 and 2016,2017, respectively, and $37$48 million and $28$37 million during the first nine months of fiscal years 20172018 and 2016,2017, respectively. The increase in interest income was primarily due to higher average cash balances invested in interest bearing securities, as well as higher purchased yields.
Interest expense was $16 million and $12 million during the third quarter of fiscal years 2017 and 2016, respectively, and $39 million and $35 million during the first nine months of fiscal years 2017 and 2016, respectively, consistingis primarily comprised of coupon interest and debt discount amortization related to the 2.20% Notes Due 2021 and 3.20% Notes Due 2026 issued in September 2016, and the Convertible Notes issued in December 20132013. Interest expense was $15 million and $16 million during the Notes issued in September 2016.third quarter of fiscal years 2018 and 2017, respectively, and $46 million and $39 million during the first nine months of fiscal years 2018 and 2017, respectively.
Other, Income (Expense), Net
Other, income (expense), net, consists primarily of realized gains and losses from the sale of marketable securities, sales or impairments of investments in non-affiliated companies, losses on early debt conversions of the Convertible Notes, and the impact of changes in foreign currency rates. Other, expense, net, was not significant during the third quarter of fiscal year 2018. Other, net, was an expense of $22 million during the first nine months of fiscal year 2018, consisting primarily of $19 million of losses recognized from early conversions of the Convertible Notes. Other, net, was an expense of $16 million and $19 million during the third quarter and first nine months of fiscal year 2017, consisting primarily of $15 million of losses recognized from early conversions of the Convertible Notes. Other income (expense), net, was not significantNotes during the third quarter orof fiscal year 2017.
Income Taxes
We recognized income tax expense of $58 million and $189 million for the third quarter and first nine months of fiscal year 2016.
Income Taxes
We recognized income tax expense of2018, respectively, and $79 million and $168 million for the third quarter and first nine months of fiscal year 2017, respectively, and $83 million for the first nine months of fiscal year 2016. We recognized income tax benefit of $1 million for the third quarter of fiscal year 2016.respectively. Income tax expense as a percentage of income before income tax was 6.5% and 8.9% for the third quarter and first nine months of fiscal year 2018, respectively, and 12.8% and 14.2% for the third quarter and first nine months of fiscal year 2017, respectively, and was 16.9% for the first nine months of fiscal year 2016. Incomerespectively.
The decrease in our effective tax
benefit as a percentage of income before income tax was 0.5% for the third quarter of fiscal year 2016. Our income tax expense includes $42 million and $62 million of tax benefit forrate in the third quarter and first nine months of fiscal year
2017, respectively, from the early adoption of an accounting standard related to stock-based compensation. Please refer to Note 1 of the Notes to Condensed Consolidated Financial Statements for further information.
The increase in our effective tax rate in the third quarter of fiscal year 20172018 as compared to the same periodperiods in the prior fiscal year was primarily due toreflects the absencerecognition of thegreater tax benefitbenefits related to the restructuring associated with the wind-down of our Icera operations. Thestock-based compensation and a proportional decrease in our effective tax rate in the first nine months of fiscal year 2017 compared to the same period in the prior fiscal year was primarily due to the favorable benefit of the U.S. federal research tax credit, which was permanently enacted in the fourth quarter of fiscal year 2016, and early adoption of an accounting standard, partially offset by the absence of the Icera restructuring tax benefit and an increase in the amount of our earnings subject to U.S.United States tax.
Our effective tax rate for the first nine months of fiscal year 2017 of 14.2% was lower than the U.S. federal statutory rate of 35% due primarily to income earned in jurisdictions where the tax rate is lower than the U.S. federal statutory tax rate, the benefit of the U.S. federal research tax credit, as well as tax benefits recognized in the period in which they occur for early adoption of an accounting standard and expiration of statutes of limitations in certain non-U.S. jurisdictions.
Please refer to Note 4 of the Notes to Condensed Consolidated Financial Statements for further information.
Liquidity and Capital Resources
| | | October 30, 2016 | | January 31, 2016 | October 29, 2017 | | January 29, 2017 |
| (In millions) | (In millions) |
Cash and cash equivalents | $ | 1,940 |
| | $ | 596 |
| $ | 2,802 |
| | $ | 1,766 |
|
Marketable securities | 4,731 |
| | 4,441 |
| 3,518 |
| | 5,032 |
|
Cash, cash equivalents and marketable securities | $ | 6,671 |
| | $ | 5,037 |
| $ | 6,320 |
| | $ | 6,798 |
|
| | | Nine Months Ended | Nine Months Ended |
| October 30, 2016 | | October 25, 2015 | October 29, 2017 | | October 30, 2016 |
| (In millions) | (In millions) |
Net cash provided by operating activities | $ | 951 |
| | $ | 664 |
| $ | 2,144 |
| | $ | 951 |
|
Net cash used in investing activities | $ | (420 | ) | | $ | (187 | ) | |
Net cash provided by (used in) investing activities | | $ | 1,302 |
| | $ | (420 | ) |
Net cash provided by (used in) financing activities | $ | 813 |
| | $ | (503 | ) | $ | (2,410 | ) | | $ | 813 |
|
As of October 30, 2016,29, 2017, we had $6.67$6.32 billion in cash, cash equivalents and marketable securities, an increasea decrease of $1.63 billion$478 million from the end of fiscal year 2016.2017. Our portfolio of cash equivalents and marketable securities is managed on our behalf by several financial institutions. Our portfolio managers are required to follow our investment policy, which requires the purchase of high grade investment securities, the diversification of asset types, and certain limits on our portfolio duration.
Cash provided by operating activities increased in the first nine months of fiscal year 20172018 compared to the first nine months of fiscal year 2016,2017, primarily due to higher net income resulting from revenue growing at a faster rate than operating expenses and gross margin improvements.changes in working capital.
Cash usedprovided by investing activities increased in the first nine months of fiscal year 20172018 compared to the first nine months of fiscal year 2016, primarily due to higher purchases of marketable securities and property and equipment and intangible assets than proceeds from sales and maturities of marketable securities.
Cash was provided by financing activities in the first nine months of fiscal year 2017, primarily due to the $2.00 billionlower purchases of Notes we issued in the third quarter of fiscal year 2017, partially offset by $444 million of repayments of convertible debt and $694 million of share repurchases and dividend payments. marketable securities.
Cash was used in financing activities increased in the first nine months of fiscal year 2016,2018 compared to the first nine months of fiscal year 2017, primarily due to $604 millioncash provided in the first nine months of fiscal year 2017 from the issuance of $2.00 billion of Notes as well as higher repayments of Convertible Notes, higher payments toward share repurchases and dividend payments.
tax payments related to employee stock plans in the first nine months of fiscal year 2018.
Liquidity
Our primary sourcesources of liquidity isare our cash and cash equivalents, our marketable securities, and the cash generated by our operations. Our investment portfolio consists principally of cash and cash equivalents, corporate debt securities, debt securities of United States government agencies, debt securities issued by United States Treasury, asset-backed securities, mortgage-backed securities issued by United States government-sponsored enterprises, foreign government bonds and money market funds. These investments are denominated in United States dollars. As of October 30, 2016, we did not have any investments in auction-rate preferred securities.
Please refer to Note 5 of the Notes to Condensed Consolidated Financial Statements for additional information.
As of October 30, 201629, 2017 and January 31, 2016,29, 2017, we had $6.67$6.32 billion and $5.04$6.80 billion, respectively, in cash, cash equivalents and marketable securities. Our marketable securities consist principally of debt securities of corporations and United States government and its agencies, asset-backed securities, mortgage-backed securities issued by government-sponsored enterprises, money market funds and foreign government bonds. These investments are denominated in United States dollars. Our investment policy requires the purchase of high grade investment securities and the diversification of asset types and includes certain limits on our portfolio duration, as specified in our investment policy guidelines. These guidelines also limit the amount of credit exposure to any one issue, issuer or type of instrument. As of October 30, 2016,29, 2017, we were in compliance with our investment policy. As of October 30, 2016,29, 2017, our investments in government agencies and government-sponsored enterprises represented 39%27% of our total investment portfolio, while the financial sector accounted for 25%15% of our total investment portfolio. All of our investments are in A/A3 or better rated securities.
Please refer to Note 5 of the Notes to Condensed Consolidated Financial Statements for additional information.
Our cash balances are held in numerous locations throughout the world, including substantial amounts held outside of the United States. Most of the amounts held outside the United States may be repatriated to the United States. However, if we repatriate foreign earnings for cash requirements in the United States, we would incur U.S. federal income tax at a rate of 35% less utilization of any net operating loss carryforwards, and further offset by any applicable research and foreign tax credits, plus any state income taxes on such income. Repatriation of some foreign balances may be restricted by local laws.
Capital Return to Shareholders
Dividend payments and any share repurchases must be made from cash held in the United States. In the third quarter and first nine months of fiscal year 2017, we made total cash dividend payments of $61 million and $185 million, respectively, and repurchased $509 million of our common stock in the first nine months of fiscal year 2017, utilizing a significant amount of our U.S. cash balance previously taxed as of October 30, 2016. We did not enter into any structured share repurchase transactions during the third quarter of fiscal year 2017.
Convertible Notes
On December 2, 2013, we issued $1.50 billion of Convertible Notes and concurrently entered into separate note hedge and warrant transactions. The Convertible Notes will mature on December 1, 2018 unless repurchased or converted prior to such date. The Convertible Notes were convertible during the first nine months of fiscal year 2017 and are currently convertible at the holders’ option in the fourth quarter of fiscal year 2017. During the third quarter of fiscal year 2017, we paid cash to settle $444 million in principal amount, issued 15 million shares of our common stock with respect to the conversion obligation in excess of the principal amount, and recognized a loss of $15 million on early conversions, of the Convertible Notes. We have received additional conversion notices for an aggregate of $229 million in principal amount of the Convertible Notes during the third quarter of fiscal year 2017. Settlements of these conversion requests are expected to be completed in the fourth quarter of fiscal year 2017.
Given the current price of our common stock, we expect to receive additional notices of early conversion, which could require us to use a substantial amount of our cash in the United States to settle. Please refer to Note 11 of the Notes to the Condensed Consolidated Financial Statements for further information.
2.20% Notes Due 2021 and 3.20% Notes Due 2026
On September 16, 2016, we issued $1.00 billion of the 2.20% Notes Due 2021 and $1.00 billion of the 3.20% Notes Due 2026. The net proceeds from the Notes were $1.98 billion, after deducting debt discounts and issuance costs. We intend to use the net proceeds from the Notes to prefund the repayment of the principal amount of our Convertible Notes and for general corporate purposes such as dividend payments or share repurchases.
Revolving Credit Facility
On October 7, 2016, we entered into a Credit Agreement under which we may borrow, repay and re-borrow amounts from time to time, up to $575 million, for working capital and other general corporate purposes. The commitments under the Credit Agreement are available for a 5-year period ending on October 7, 2021, on which date all outstanding obligations would be due and payable. The Credit Agreement also permits us to obtain additional revolving loan commitments and/or commitments to issue letters of credit of up to $425 million, subject to certain conditions. As of October 30, 2016, we had not borrowed any amounts under the Credit Agreement.
Capital Return to Shareholders
In March 2016, we entered into an accelerated share repurchase, or ASR, agreement with an investment bank, under which we made an upfront payment of $500 million to purchase shares of our common stock and received an initial delivery of 12 million shares. The shares delivered resulted in a reduction, on the delivery date, of the outstanding shares used to calculate the weighted-average common shares outstanding for basic and diluted earnings per share. The ASR agreement was settled in July 2016 with a cash payment of $9 million to the investment bank. As a result, a total of 12 million shares were repurchased under the ASR transaction for $509 million, or an average price of $42.06 per share.
During the third quarter and first nine months of fiscal year 2017,2018, we repurchased a total of 1 million shares and 6 million shares, respectively, for $151 million and $909 million, respectively. During the third quarter and first nine months of fiscal year 2018, we also paid $61 million and $185 million, respectively, inmade cash dividendsdividend payments to our shareholders equivalent to $0.1150 per share. As a result, we returned $61of $84 million and $694$250 million, to shareholders during the three and nine months ended October 30, 2016, respectively, in the form of share repurchases and dividend payments.respectively.
We intend to return $1.00$1.25 billion to our shareholders in fiscal year 20172018 through a combination of share repurchases and cash dividends. For fiscal year 2018,In November 2017, we intend to return $1.25 billion to our shareholders through ongoing quarterly cash dividends and share repurchases. On November 7, 2016, the Board authorized an additional $2.00 billion under our repurchase program and extended it through December 2020. We also declared an increase in our quarterly cash dividend to $0.1400$0.15 per share from $0.1150$0.14 per share, to be paid with our next quarterly cash dividend on December 19, 2016,15, 2017, to all shareholders of record on November 28, 2016.24, 2017. For fiscal year 2019, we also intend to return $1.25 billion to shareholders through ongoing quarterly cash dividends and share repurchases.
Our cash dividend program and the payment of future cash dividends under that program are subject to continued capital availability and our Board's continuing determination that the dividend program and the declaration of dividends thereunder are in the best interests of our shareholders andshareholders.
Convertible Notes
As of October 29, 2017, we had $24 million of Convertible Notes outstanding, of which $8 million are expected to be settled in compliance with all laws and agreementsthe fourth quarter of NVIDIA applicablefiscal year 2018. Please refer to Note 11 of the Notes to the declaration and payment of cash dividends.Condensed Consolidated Financial Statements for further discussion.
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 requirements for at least the next twelve months.
Off-Balance Sheet Arrangements
During fiscal year 2016, we began to construct a new headquarters building in Santa Clara, California, which is currently targeted for completion inIn the fourth quarter of fiscal year 2018. We are financing this construction under an off-balance sheet, build-to-suit2018, we plan to refinance the operating lease arrangement. The banks have committedfinancing arrangement related to fund up to $380 million of costs relating to construction. Once construction is complete, the lease balance will remain static at the completed cost for the remaining duration of the lease term. During construction, accrued interest will be capitalized into the lease balance. Following construction, we will pay rent in the form of interest. The lease has an initial 7.5 year term expiring on December 19, 2022, consisting of an approximately 2.5 year construction period followed by a 5 year lease term. We have the option to renew this lease for up to three additional 5 year periods, subject to approval by the banks. During the term of the lease, we may elect toour new Santa Clara campus building and purchase the headquarters buildingproperty for the amount of the banks’ investment in the building and any accrued but unpaid rent. At the end of the lease term, we may elect to buy the building for the outstanding balance on the maturity date or arrange for the cash sale of the building to an unaffiliated third party. The aggregate guarantee made by us under the lease is no more than 87.5% of the costs incurred in connection with the construction of the building.approximately $350 million. Please refer to Note 12 of the Notes to Condensed Consolidated Financial Statements for a discussion regarding our operating lease financing arrangement.
Contractual Obligations
As of October 30, 2016,29, 2017, we had outstanding inventory purchase obligations totaling $908 million.$1.16 billion. Except as described above with respect to the Convertible Notes and the Notes, and the plan to purchase our Santa Clara campus building, 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 31, 2016.29, 2017.
Please see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources” in our Annual Report on Form 10-K for the fiscal year ended January 31, 201629, 2017 for a description of our contractual obligations.
Adoption of New and Recently Issued Accounting Pronouncements
Please see Note 1 of the Notes to Condensed Consolidated Financial Statements for a discussion of adoption of new and recently issued accounting pronouncements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Investment and Interest Rate Risk
Financial market risks related to investment and interest rate risk are described in our 20162017 Annual Report on Form 10-K. As of October 30, 2016,29, 2017, there have been no material changes to the financial market risks described as of January 31, 2016.29, 2017.
Foreign Exchange Rate Risk
During the first nine months of fiscal year 2017, we entered into foreign currency forward contracts to mitigate theThe impact of foreign currency transactions related to foreign exchange rate movementsrisk is described in our 2017 Annual Report on our operating expenses. We designate these contracts as cash flow hedges and assess the effectivenessForm 10-K. As of the hedge relationships on a spotOctober 29, 2017, there have been no material changes to spot basis. Gains or losses on the contracts are recorded in accumulated other comprehensive income or loss, and then reclassified to operating expense when the related operating expenses are recognized in earnings or ineffectiveness should occur.
During the second and third quarters of fiscal year 2017, we also entered into foreign currency forward contracts to mitigate the impact of foreign currency movements on monetary assets and liabilities that are denominated in currencies other than our reporting currency. The change in fair value of these contracts is recorded as a component of other income or expense, net, and offsets the change in fair value of the foreign currency denominated monetary assets and liabilities, which is also recorded in other income or expense, net.exchange rate risks described as of January 29, 2017.
Please see Note 9 of the Notes to Condensed Consolidated Financial Statements for additional information.
ITEM 4. CONTROLS AND PROCEDURES
Controls and Procedures
Disclosure Controls and Procedures
Based on their evaluation as of October 30, 201629, 2017, our management, including our Chief Executive Officer and Chief Financial Officer, has concluded that our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended) were effective to provide reasonable assurance.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during the third quarter of fiscal year 20172018 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.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.Please see Part I, Item 1, Note 12 of the Notes to Condensed Consolidated Financial Statements for a discussion of significant developments in our legal proceedings since January 29, 2017. Please also see Item 3, “Legal Proceedings” in our Annual Report on Form 10-K for the fiscal year ended January 29, 2017 for a prior discussion of our legal proceedings.
ITEM 1A. RISK FACTORS
Please refer to the description of the risk factors associated with our business previously disclosed in Item 1A of our Annual Report on Form 10-K for the fiscal year ended January 31, 2016.29, 2017. There have been no material changes from the risk factors previously described under Item 1A of our Annual Report on Form 10-K for the fiscal year ended January 31, 2016 with the exception of the risks identified below.29, 2017.
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 in Item 1A of our Annual Report on Form 10-K for the fiscal year ended January 31, 2016 and any additional risks set forth below.29, 2017. Additionally, any one of those risks could harm our business, financial condition and results of operations, which could cause our stock price to decline. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations.
We have a substantial amount of indebtedness which could adversely affect our financial position and prevent us from implementing our strategy or fulfilling our contractual obligations.
In December 2013, we issued $1.50 billion of Convertible Notes. In September 2016, we issued $1.00 billion of the 2.20% Notes Due 2021 and $1.00 billion of the 3.20% Notes Due 2026. In October 2016, we also established a revolving credit facility under which we may borrow, repay and re-borrow amounts from time to time, up to $575 million. We may obtain additional revolving loan commitments up to $425 million. While the facility is currently undrawn, we may use the proceeds of any future borrowings for working capital and other general corporate purposes. Our indebtedness may limit our ability to use our cash flow or borrow additional funds for working capital, capital expenditures, acquisitions and general corporate and other purposes.
Additionally, our obligation to make payments related to the Convertible Notes when converted or due, or related to the Notes when due, could impact our cash balance and limit our ability to use our cash for our capital return program and our other liquidity needs, including working capital, capital expenditures, acquisitions, investments and other general corporate purposes.
The warrants associated with our Convertible Notes, or the Warrants, dilute our net income per share and the exercise of the Warrants would dilute the ownership interest of our existing shareholders.
When the average trading price of our common stock for a fiscal quarter exceeds the adjusted strike price of the Warrants, the number of diluted weighted average shares used in our net income per share calculation increases, which dilutes our net income per share. For example, our average trading price for the second and third quarters of fiscal year 2017 was $46.57 and $63.83, respectively, which contributed approximately 31 million and 43 million weighted average shares, respectively, to our net income per share calculation.
The Warrants will be deemed to be automatically exercised on certain dates between March 2019 and June 2019, unless the Warrant holder notifies us otherwise. Any issuance by us of shares upon exercise or any other settlement of the Warrants may dilute the ownership interest of our existing shareholders.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Purchases of Equity Securities
Beginning August 2004, our Board of Directors authorized us, subject to certain specifications, to repurchase shares of our common stock. OnIn November 7, 2016, the Board authorized an additional $2.00 billion under our repurchase program and extended it through December 2020.
Through October 30, 2016,29, 2017, we have repurchased an aggregate of 243251 million shares under our share repurchase program for a total cost of $4.36 billion.$5.50 billion since the inception of the program. All shares delivered from these repurchases have been placed into treasury stock. As of November 7, 2016,October 29, 2017, we were authorized, subject to certain specifications, to repurchase additional shares of our common stock up to $2.96$1.82 billion through December 2020. We intend to return $1.00$1.25 billion to our shareholders in fiscal year 20172018 through a combination of share repurchases and cash dividends. For fiscal year 2018,2019, we also intend to return $1.25 billion to our shareholders through ongoing quarterly cash dividends and share repurchases.
The repurchases willcan be made in the open market, in privately negotiated transactions, or in structured share repurchase programs, and maycan be made in one or more larger repurchases, in compliance with Rule 10b-18 of the Securities Exchange Act of 1934, as amended, 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.
The following table presents details of our share repurchase transactions during the third quarter of fiscal year 2018:
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Period | | Total Number of Shares Purchased (In millions) | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Program (In millions) | | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Program (In billions) |
July 31, 2017 - August 27, 2017 | | — | | $ | — |
| | — | | $ | 1.97 |
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August 28, 2017 - September 24, 2017 | | 1 | | $ | 180.56 |
| | 1 | | $ | 1.82 |
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September 25, 2017 - October 29, 2017
| | — | | $ | — |
| | — | | $ | 1.82 |
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Total | | 1 | | | | 1 | | |
Transactions Related to our Convertible Notes and Note Hedges
During the third quarter of fiscal year 2017,2018, we issued an aggregate of 153 million shares of our common stock upon settlement of Convertible Notes submitted for conversion. In connection with these conversions, we exercised a portion of our Note Hedges to acquire shares of our common stock. The counterparty to the Note Hedges may be deemed an “affiliated purchaser” and may have purchased the shares of our common stock deliverable to us upon this exercise of our option.
During the fourth quarter of fiscal year 2017,2018, we expect to settle at least an aggregate of $229$8 million in principal amount, and issue shares of our common stock for the excess conversion value, related to the Convertible Notes that were submitted for conversion. The actual number of shares issuable upon conversion will be determined based upon the terms of the Convertible Notes. WeNotes, and we expect to receive an equal number of shares of our common stock under the terms of the Note Hedges. Please refer to Note 11 of the Notes to Condensed Consolidated Financial Statements for further discussion regarding the Convertible Notes and the Note Hedges.
Restricted Stock Unit Share Withholding
We also withhold common stock shares associated with net share settlements to cover tax withholding obligations upon the vesting of restricted stock unit awards under our equity incentive program. During the first nine months of fiscal year 2017,2018, we withheld approximately 54 million shares at a total cost of $176$577 million through net share settlements. Please refer to Note 2 of the Notes to Condensed Consolidated Financial Statements for further discussion regarding our equity incentive plans.
ITEM 6. EXHIBITS
EXHIBIT INDEX
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Exhibit No. | | Exhibit Description | | Schedule /Form | | File Number | | Exhibit | | Filing Date |
4.1 | | Indenture, dated as of September 16, 2016, by and between NVIDIA Corporation and Wells Fargo Bank, National Association, as Trustee | | 8-K | | 000-23985 | | 4.1 | | September 16, 2016 |
4.2 | | Officers’ Certificate, dated as of September 16, 2016 | | 8-K | | 000-23985 | | 4.2 | | September 16, 2016 |
4.3 | | Form of 2021 Note | | 8-K | | 000-23985 | | 4.2 (Annex A) | | September 16, 2016 |
4.4 | | Form of 2026 Note | | 8-K | | 000-23985 | | 4.2 (Annex B) | | September 16, 2016 |
10.1* | | Second Amendment to Participation Agreement dated September 9, 2016 among NVIDIA Land Development, LLC, Wachovia Service Corporation, and Wells Fargo Bank, N.A., and a syndicate of other institutions | |
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10.2 | | Credit Agreement, dated as of October 7, 2016 by and among NVIDIA Corporation, Wells Fargo Bank, National Association, as administrative agent, and the lenders party thereto | | 8-K | | 000-23985 | | 1.1 | | October 13, 2016 |
31.1* | | Certification of Chief Executive Officer as required by Rule 13a-14(a) of the Securities Exchange Act of 1934 | |
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31.2* | | Certification of Chief Financial Officer as required by Rule 13a-14(a) of the Securities Exchange Act of 1934 | |
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32.1#* | | Certification of Chief Executive Officer as required by Rule 13a-14(b) of the Securities Exchange Act of 1934 | |
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32.2#* | | Certification of Chief Financial Officer as required by Rule 13a-14(b) of the Securities Exchange Act of 1934 | |
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101.INS* | | XBRL Instance Document | |
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101.SCH* | | XBRL Taxonomy Extension Schema Document | |
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101.CAL* | | XBRL Taxonomy Extension Calculation Linkbase Document | |
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101.LAB* | | XBRL Taxonomy Extension Labels Linkbase Document | |
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101.PRE* | | XBRL Taxonomy Extension Presentation Linkbase Document | |
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Exhibit No. | | Exhibit Description | | Schedule /Form | | File Number | | Exhibit | | Filing Date |
31.1* | | | | | | | | | | |
31.2* | | | | | | | | | | |
32.1#* | | | | | | | | | | |
32.2#* | | | | | | | | | | |
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.
Copies of above exhibits not contained herein are available to any shareholder upon written request to:
Investor Relations: NVIDIA Corporation, 27012788 San Tomas Expressway, Santa Clara, CA 95050.95051.
SIGNATURE
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: November 22, 201621, 2017
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| NVIDIA Corporation |
By: | /s/ Colette M. Kress | |
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| Colette M. Kress |
| Executive Vice President and Chief Financial Officer (Duly Authorized Officer and Principal Financial Officer) |
EXHIBIT INDEX
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Exhibit No. | | Exhibit Description | | Schedule /Form | | File Number | | Exhibit | | Filing Date |
4.1 | | Indenture, dated as of September 16, 2016, by and between NVIDIA Corporation and Wells Fargo Bank, National Association, as Trustee | | 8-K | | 000-23985 | | 4.1 | | September 16, 2016 |
4.2 | | Officers’ Certificate, dated as of September 16, 2016 | | 8-K | | 000-23985 | | 4.2 | | September 16, 2016 |
4.3 | | Form of 2021 Note | | 8-K | | 000-23985 | | 4.2 (Annex A) | | September 16, 2016 |
4.4 | | Form of 2026 Note | | 8-K | | 000-23985 | | 4.2 (Annex B) | | September 16, 2016 |
10.1* | | Second Amendment to Participation Agreement dated September 9, 2016 among NVIDIA Land Development, LLC, Wachovia Service Corporation, and Wells Fargo Bank, N.A., and a syndicate of other institutions | |
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10.2 | | Credit Agreement, dated as of October 7, 2016 by and among NVIDIA Corporation, Wells Fargo Bank, National Association, as administrative agent, and the lenders party thereto | | 8-K | | 000-23985 | | 1.1 | | October 13, 2016 |
31.1* | | Certification of Chief Executive Officer as required by Rule 13a-14(a) of the Securities Exchange Act of 1934 | |
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31.2* | | Certification of Chief Financial Officer as required by Rule 13a-14(a) of the Securities Exchange Act of 1934 | |
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32.1#* | | Certification of Chief Executive Officer as required by Rule 13a-14(b) of the Securities Exchange Act of 1934 | |
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32.2#* | | Certification of Chief Financial Officer as required by Rule 13a-14(b) of the Securities Exchange Act of 1934 | |
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101.INS* | | XBRL Instance Document | |
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101.SCH* | | XBRL Taxonomy Extension Schema Document | |
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101.CAL* | | XBRL Taxonomy Extension Calculation Linkbase Document | |
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101.LAB* | | XBRL Taxonomy Extension Labels Linkbase Document | |
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101.PRE* | | XBRL Taxonomy Extension Presentation Linkbase Document | |
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* 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.
Copies of above exhibits not contained herein are available to any shareholder upon written request to:
Investor Relations: NVIDIA Corporation, 2701 San Tomas Expressway, Santa Clara, CA 95050.