UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
________________
FORM
10-Q
[x]
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QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For the quarterly period ended
April 27, 2008
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OR
[_]
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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Commission
file number: 0-23985
NVIDIA
CORPORATION
(Exact
name of registrant as specified in its charter)
Delaware
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94-3177549
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(State
or Other Jurisdiction of
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(I.R.S.
Employer
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Incorporation
or Organization)
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Identification
No.)
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2701
San Tomas Expressway
Santa
Clara, California 95050
(408)
486-2000
(Address,
including zip code, and telephone number,
including
area code, of principal executive offices)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes x No o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definitions of “large accelerated filer”, “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.:
Large accelerated
filer x |
Accelerated filer
o |
Non-accelerated
filer o (Do
not check if a smaller reporting company) |
Smaller reporting
company o |
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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 registrant's common stock, $0.001 par value, outstanding as
of May 15, 2008 was 554,733,685.
NVIDIA
CORPORATION
FORM
10-Q
FOR
THE QUARTER ENDED APRIL 27, 2008
TABLE
OF CONTENTS
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Page
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PART
I :
FINANCIAL INFORMATION
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Item
1.
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Financial
Statements (Unaudited)
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3
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a)
Condensed
Consolidated Statements of Income for the three months ended April 27,
2008 and April 29, 2007
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3
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b)
Condensed
Consolidated Balance Sheets as of April
27, 2008
and January 27, 2008
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4
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c)
Condensed
Consolidated Statements of Cash Flows for the three months ended
April
27, 2008 and April 29, 2007
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5
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d)
Notes
to Condensed
Consolidated
Financial Statements
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6
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Item
2.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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24
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Item
3.
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Quantitative
and Qualitative Disclosures about Market Risk
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34
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Item
4.
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Controls
and Procedures
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35
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PART
II :
OTHER INFORMATION
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Item
1.
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Legal
Proceedings
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36
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Item
1A.
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Risk
Factors
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36
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Item
2.
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Unregistered
Sales of Equity Securities and Use of Proceeds
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49
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Item
3.
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Defaults
upon Senior Securities
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50
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Item
4.
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Submission
of Matters to a Vote of Security Holders
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50
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Item
5.
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Other
Information
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50
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Item
6.
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Exhibits
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51
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Signatures
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52
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PART I.
FINANCIAL INFORMATION
ITEM
1. FINANCIAL STATEMENTS (UNAUDITED)
NVIDIA
CORPORATION AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(In
thousands, except per share data)
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Three
Months Ended
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April 27,
2008
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April
29,
2007
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Sales,
general and administrative
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Income
before income tax expense
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Shares
used in basic per share computation (1)
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Shares
used in diluted per share computation (1)
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(1) Reflects
a three-for-two stock split effective on September 10, 2007.
See
accompanying Notes to Condensed Consolidated Financial Statements
NVIDIA
CORPORATION AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(In
thousands)
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April
27,
2008
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January
27,
2008
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ASSETS
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Cash
and cash equivalents
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Prepaid
expenses and other
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Property
and equipment, net
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Deposits
and other assets
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LIABILITIES
AND STOCKHOLDERS’ EQUITY
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Total
current liabilities
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Other
long-term liabilities
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Commitments
and contingencies - see Note 12
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Additional
paid-in capital
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Accumulated
other comprehensive income
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Total
stockholders' equity
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Total
liabilities and stockholders' equity
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See
accompanying Notes to Condensed Consolidated Financial Statements.
NVIDIA
CORPORATION AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In
thousands)
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Three
Months Ended
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April
27,
2008
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April 29,
2007
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Cash
flows from operating activities:
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Adjustments
to reconcile net income to net cash provided by operating
activities:
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Stock-based
compensation expense related to employees
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Depreciation
and amortization
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Payments
under patent licensing arrangement
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) |
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Changes
in operating assets and liabilities, net of effects of
acquisitions:
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) |
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Prepaid
expenses and other current assets
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) |
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Deposits
and other assets
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) |
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) |
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Accrued
liabilities and other long-term liabilities
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Net
cash provided by operating activities
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Cash
flows from investing activities:
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Purchases
of marketable securities
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Proceeds
from sales and maturities of marketable securities
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Purchases
of property and equipment and intangible assets
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Acquisition
of businesses, net of cash and cash equivalents
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) |
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Net
cash used in investing activities
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Cash
flows from financing activities:
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Payments
for stock repurchases
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Proceeds
from issuance of common stock under employee stock
plans
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Net
cash used in financing activities
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Change
in cash and cash equivalents
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Cash
and cash equivalents at beginning of period
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Cash
and cash equivalents at end of period
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Supplemental
disclosures of cash flow information:
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Cash
paid for income taxes, net
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Other
non-cash activities:
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Unrealized
losses from marketable securities
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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 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. 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 financial statements and notes thereto
included in our Annual Report on Form 10-K for the year ended January 27,
2008.
Fiscal
year
We
operate on a 52 or 53-week year, ending on the last Sunday in January. The first
quarters in fiscal years 2009 and 2008 were both 13-week
quarters.
Stock
Split
In August
2007, our Board of Directors, or the Board, approved a three-for-two stock
split of our outstanding shares of common stock on Monday, August 20, 2007 to be
effected in the form of a stock dividend. The stock split was effective on
Monday, September 10, 2007 and entitled each stockholder of record on
August 20, 2007 to receive one additional share for every two outstanding shares
of common stock held and cash in lieu of fractional shares. All share and
per-share numbers contained herein have been retroactively adjusted to reflect
this stock split.
Reclassifications
Certain
prior fiscal year balances have been reclassified to conform to the current
fiscal year presentation.
Principles
of Consolidation
Our
consolidated financial statements include the accounts of NVIDIA Corporation and
its wholly owned subsidiaries. All material intercompany balances and
transactions have been eliminated in consolidation.
Use
of Estimates
The preparation of financial statements
in conformity with accounting principles generally accepted in the United States
of America 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, accounts receivable, inventories, income
taxes, goodwill, stock-based compensation and 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)
Revenue
Recognition
Product
Revenue
We
recognize revenue from product sales when persuasive evidence of an arrangement
exists, the product has been delivered, the price is fixed and determinable, and
collection is reasonably assured. For most sales, we use a binding purchase
order and in certain cases we use a contractual agreement as evidence of an
arrangement. We consider delivery to occur upon shipment provided title and risk
of loss have passed to the customer based on the shipping terms. At the point of
sale, we assess whether the arrangement fee is fixed and determinable and
whether collection is reasonably assured. If we determine that collection of a
fee is not reasonably assured, we defer the fee and recognize revenue at the
time collection becomes reasonably assured, which is generally upon receipt of
payment.
Our
policy on sales to certain distributors, with rights of return, is to defer
recognition of revenue and related cost of revenue until the distributors resell
the product.
We record
estimated reductions to revenue for customer programs at the time revenue is
recognized. Our customer programs primarily involve rebates, which are designed
to serve as sales incentives to resellers of our products in various target
markets. We account for rebates in accordance with Emerging Issues Task Force
Issue 01-9, or EITF 01-09, Accounting for Consideration Given
by a Vendor to a Customer (Including a Reseller of the Vendor’s Products)
and, as such, we accrue for 100% of the potential rebates and do not apply a
breakage factor. Rebates typically expire six months from the date of the
original sale, unless we reasonably believe that the customer intends to claim
the rebate. Unclaimed rebates are reversed to revenue upon expiration of the
rebate.
Our
customer programs also include marketing development funds, or MDFs. We account
for MDFs as either a reduction of revenue or an operating expense in accordance
with EITF 01-09. MDFs represent monies paid to retailers, system builders,
original equipment manufacturers, or OEMs, distributors and add-in card partners
that are earmarked for market segment development and expansion and typically
are designed to support our partners’ activities while also promoting NVIDIA
products. Depending on market conditions, we may take actions to increase
amounts offered under customer programs, possibly resulting in an incremental
reduction of revenue at the time such programs are offered.
We also
record a reduction to revenue by establishing a sales return allowance for
estimated product returns at the time revenue is recognized, based primarily on
historical return rates. However, if product returns for a particular fiscal
period exceed historical return rates we may determine that additional sales
return allowances are required to properly reflect our estimated exposure for
product returns.
License and Development
Revenue
For
license arrangements that require significant customization of our intellectual
property components, we generally recognize this license revenue using the
percentage-of-completion method of accounting over the period that services are
performed. For all license and service arrangements accounted for under the
percentage-of-completion method, we determine progress to completion based on
actual direct labor hours incurred to date as a percentage of the estimated
total direct labor hours required to complete the project. We periodically
evaluate the actual status of each project to ensure that the estimates to
complete each contract remain accurate. A provision for estimated losses on
contracts is made in the period in which the loss becomes probable and can be
reasonably estimated. Costs incurred in advance of revenue recognized are
recorded as deferred costs on uncompleted contracts. If the amount billed
exceeds the amount of revenue recognized, the excess amount is recorded as
deferred revenue. Revenue recognized in any period is dependent on our progress
toward completion of projects in progress. Significant management judgment and
discretion are used to estimate total direct labor hours. Any changes in or
deviations from these estimates could have a material effect on the amount of
revenue we recognize in any period.
NVIDIA
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Adoption
of New Accounting Pronouncements
On
January 28, 2008, we adopted Statement of Financial Accounting Standards No.
157, or SFAS No. 157, Fair
Value Measurements. SFAS No. 157 for all financial assets and financial
liabilities recognized or disclosed at fair value in the financial statements.
SFAS No. 157 establishes a framework for measuring fair value and expands
disclosures about fair value measurements. The changes to current practice
resulting from the application of SFAS No. 157 relate to the definition of fair
value, the methods used to measure fair value, and the expanded disclosures
about fair value measurements. The adoption of SFAS No. 157 for
financial assets and liabilities did not have a significant impact on our
consolidated financial statements, and the resulting fair values calculated
under SFAS No. 157 after adoption were not significantly different than the
fair values that would have been calculated under previous guidance. Please
refer to Note 16 of these Notes to the Condensed Consolidated Financial
Statements for further details on our fair value measurements.
Additionally,
in February 2008, the FASB issued FASB Staff Position No. FAS 157-2,
or FSP No. 157-2, Effective
Date of FASB Statement No. 157, to partially defer FASB Statement
No. 157, Fair Value Measurements. FSP No. 157-2 defers the
effective date of FAS 157 for non-financial assets and non-financial
liabilities, except those that are recognized or disclosed at fair value in the
financial statements on a recurring basis (at least annually), to fiscal years,
and interim periods within those fiscal years, beginning after November 15,
2008. We do not believe the adoption of FSP 157-2 will have a material
impact on our consolidated financial position, results of operations and cash
flows.
On
January 28, 2008, we adopted the Financial Accounting Standards Board, or FASB
issued Statement of Financial Accounting Standards No. 159, or SFAS
No. 159, The Fair Value
Option for Financial Assets and Financial Liabilities. SFAS No. 159
permits companies to choose to measure certain financial instruments and certain
other items at fair value using an instrument-by-instrument election. The
standard requires that unrealized gains and losses on items for which the fair
value option has been elected be reported in earnings. Under SFAS No. 159, we
did not elect the fair value option for any of our assets and liabilities. The
adoption of SFAS No. 159 did not have an impact on our consolidated
financial statements.
In
June 2007, the FASB ratified Emerging Issues Task Force Issue
No. 07-3, or EITF 07-3, Accounting for Nonrefundable Advance
Payments for Goods or Services to Be Used in Future Research and Development
Activities. EITF 07-3 requires non-refundable advance payments for goods
and services to be used in future research and development activities to be
recorded as an asset and the payments to be expensed when the research and
development activities are performed. We adopted the provisions of EITF 07-3
beginning with our fiscal quarter ended April 27, 2008. The adoption of EITF
07-3 did not have any impact on our consolidated financial position, results of
operations and cash flows.
Recently
Issued Accounting Pronouncements
In December 2007, the FASB issued
Statement of Financial Accounting Standards No. 141 (revised 2007), or
SFAS No. 141(R), Business
Combinations. Under SFAS No. 141(R), an entity is required to
recognize the assets acquired, liabilities assumed, contractual contingencies,
and contingent consideration at their fair value on the acquisition date. It
further requires that acquisition-related costs be recognized separately from
the acquisition and expensed as incurred, restructuring costs generally be
expensed in periods subsequent to the acquisition date, and changes in
accounting for deferred tax asset valuation allowances and acquired income tax
uncertainties after the measurement period impact income tax expense. In
addition, acquired in-process research and development, or IPR&D, is
capitalized as an intangible asset and amortized over its estimated useful
life. We are required to adopt the provisions of SFAS No. 141(R)
beginning with our fiscal quarter ending April 26, 2009. The adoption
of SFAS No. 141(R) is expected to change our accounting treatment for
business combinations on a prospective basis beginning in the period it is
adopted.
NVIDIA
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note
2 - Stock-Based Compensation
Effective January 30, 2006, we adopted
the provisions of Statement of Financial Accounting Standards No. 123(R), or
SFAS No. 123(R), Share-based Payment, which
establishes accounting for stock-based awards exchanged for employee services.
Accordingly, stock-based compensation expense is measured at grant date, based
on the fair value of the awards, and is recognized as expense over the requisite
employee service period. We elected to adopt the modified prospective
application method beginning January 30, 2006 as provided by SFAS No. 123(R). We
recognize stock-based compensation expense using the straight-line attribution
method. We estimate the value of employee stock options on the date of grant
using a binomial model.
Our condensed consolidated income
statements include stock-based compensation expense, net of amounts
capitalized as inventory, as follows:
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Three
Months Ended
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April
27,
2008
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April
29,
2007
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Sales,
general and administrative
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During
the three months ended April 27, 2008 and April 29, 2007, we granted
approximately 8.7 million and 7.2 million stock options, respectively, with an
estimated total grant-date fair value of $87.0 million and $56.1 million,
respectively, and a per option weighted average grant-date fair value of $9.97
and $7.75, respectively. Of the estimated total grant-date fair value, we
estimated that the stock-based compensation expense related to the awards that
are not expected to vest was $17.0 million and $10.5 million for the three
months ended April 27, 2008 and April 29, 2007, respectively.
As of
April 27, 2008 and April 29, 2007, the aggregate amount of unearned stock-based
compensation expense related to our stock options was $272.9 million and $185.3
million, respectively, adjusted for estimated forfeitures. We will
recognize the unearned stock-based compensation expense related to stock options
over an estimated weighted average amortization period of 2.2 years and 2.1
years, respectively.
Valuation
Assumptions
We
determined that the use of implied volatility is expected to be more reflective
of market conditions and, therefore, can reasonably be expected to be a better
indicator of our expected volatility than historical volatility. We also
segregated options into groups for employees with relatively homogeneous
exercise behavior in order to calculate the best estimate of fair value using
the binomial valuation model. As such, the expected term assumption used
in calculating the estimated fair value of our stock-based compensation awards
using the binomial model is based on detailed historical data about employees'
exercise behavior, vesting schedules, and death and disability
probabilities. Our management believes the resulting binomial calculation
provides a more refined estimate of the fair value of our employee stock
options. For our employee stock purchase plan we continue to use the
Black-Scholes model.
SFAS No.
123(R) also requires forfeitures to be estimated at the time of grant and
revised, if necessary, in subsequent periods if actual forfeitures differ from
those estimates. Forfeitures are estimated based on historical experience. If
factors change and we employ different assumptions in the application of SFAS
No. 123(R) in future periods, the compensation expense that we record under SFAS
No. 123(R) may differ significantly from what we have recorded in the current
period.
The fair
value of stock options granted during the first quarters of fiscal years 2009
and 2008, respectively, under our stock option plans and shares issued under our
employee stock purchase plan have been estimated at the date of grant with the
following assumptions:
|
|
Three
Months Ended
|
|
|
|
April 27,
2008
|
|
April 29,
2007
|
|
Stock
Options |
|
|
(Using a binomial model) |
|
Weighted
average expected life of stock options (in years)
|
|
|
|
|
|
|
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|
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|
|
|
|
|
|
|
Three
Months Ended
|
|
|
|
April 27,
2008
|
|
April 29,
2007
|
|
Employee
Stock Purchase Plan |
|
|
(Using a Black-Scholes model) |
|
Weighted
average expected life of stock options (in years)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
|
|
Equity
Incentive Plans
We
consider equity compensation to be long-term compensation and an integral
component of our efforts to attract and retain exceptional executives, senior
management and world-class employees. We believe that properly structured equity
compensation aligns the long-term interests of stockholders and employees by
creating a strong, direct link between employee compensation and stock
appreciation, as stock options are only valuable to our employees if the value
of our common stock increases after the date of grant.
The description of the key features of
the Nvidia Corporation 2007 Equity Incentive Plan, or the 2007 Plan,
PortalPlayer, Inc. 1999 Stock Option Plan, or 1999 Plan, and 1998 Employee Stock
Purchase Plan, may be read in conjunction with the audited financial statements
and notes thereto included in our Annual Report on Form 10-K for the year ended
January 27, 2008.
The
following summarizes the transactions under our equity incentive
plans:
|
|
Options
Available for Grant
|
|
|
Options
Outstanding
|
|
|
Weighted
Average Exercise Price Per Share
|
|
Balances,
January 27, 2008
|
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NVIDIA
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note
3 – Income Taxes
Income
tax expense as a percentage of income before taxes, or our effective tax rate,
was 17% for the three months ended April 27, 2008, and 14% for the three months
ended April 29, 2007. Our effective tax rate is lower than the U.S.
federal statutory tax rate of 35% primarily on account of foreign earnings being
taxed in foreign jurisdictions at rates below the U.S. statutory tax
rate. The increase in our effective tax rate to 17% as of April 27,
2008 from 14% at April 29, 2007 was primarily due to the expiration of the
federal research tax credit.
In
accordance with FASB Interpretation No. 48, “Accounting for Uncertainty in Income
Taxes-An Interpretation of SFAS No. 109,” or FIN 48, we classify
unrecognized tax benefits under the current liabilities section of the Condensed
Consolidated Balance Sheet, or as a reduction of the amount of a net operation
loss carryforward or amount refundable, to the extent that we anticipate payment
or receipt of cash for income taxes within one year. Likewise, the
amount is classified under the long-term liability section of the Condensed
Consolidated Balance Sheet if we anticipate payment or receipt of cash for
income taxes during a period beyond a year.
For the
three months ended April 27, 2008, our unrecognized tax benefits increased by
$5.2 million. If recognized, $4.5 million of the $5.2 million would impact
our effective tax rate, and $0.7 million of the $5.2 million would
increase our gross deferred tax assets, which would likely require a full
valuation allowance. As a result, at April 27, 2008, we had
$83.0 million of unrecognized tax benefits. If recognized, $63.0 million of the
$83.0 million would impact our effective tax rate, $6.9 million of the $83.0
million would be an adjustment to goodwill as it relates to pre-acquisition
unrecognized tax benefits, and $13.1 million of the $83.0 million would
increase our gross deferred tax assets, which would likely require a full
valuation allowance.
We
recognize interest and penalties related to unrecognized tax benefits as a
component of income tax expense. As of April 27,
2008 and January 27, 2008, we had accrued $12.1 million and $11.2
million, respectively, for the payment of interest and penalties related to
unrecognized tax benefits, which is not included as a component of our
unrecognized tax benefits.
While we
believe that we have adequately provided for all tax positions, amounts asserted
by tax authorities could be greater or less than our accrued position.
Accordingly, our provisions on federal, state and foreign tax-related matters to
be recorded in the future may change as revised estimates are made or the
underlying matters are settled or otherwise resolved. As of April 27, 2008, we
do not believe that our estimates, as otherwise provided for, on such tax
positions will significantly increase or decrease within the next twelve
months.
We are
subject to taxation by a number of taxing authorities both in the United States
and throughout the world. As of April 27, 2008, the material tax jurisdictions
that are subject to examination include the United States, Hong Kong, Taiwan,
China, India and Germany and include our fiscal years 2002 through
2008. As of April 27, 2008, the material tax jurisdictions for which
we are currently under examination include the U.S. for federal tax purposes for
fiscal years 2004 through 2006, Taiwan for fiscal year 2003 and 2004, India for
fiscal years equivalent 2005 and 2006, and Germany for fiscal year equivalent
2006.
NVIDIA
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note
4 – Net Income Per Share
Basic net
income per share is computed using the weighted average number of common shares
outstanding during the period. Diluted net income per share is computed using
the weighted average number of common and dilutive common equivalent shares
outstanding during the period, using the treasury stock method. Under the
treasury stock method, the effect of stock options outstanding is not included
in the computation of diluted net income per share for periods when their effect
is anti-dilutive. The following is a reconciliation of the numerators and
denominators of the basic and diluted net income per share computations for the
periods presented:
|
|
Three
Months Ended
|
|
|
|
April
27,
2008
|
|
|
April
29,
2007
|
|
|
|
(In
thousands, except per share data)
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
176,805
|
|
|
$
|
132,259
|
|
|
|
|
|
|
|
|
|
|
Denominator
for basic net income per share, weighted average shares
|
|
|
555,673
|
|
|
|
541,247
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
Stock
options outstanding
|
|
|
36,316
|
|
|
|
57,052
|
|
Denominator
for diluted net income per share, weighted average shares
|
|
|
591,989
|
|
|
|
598,299
|
|
|
|
|
|
|
|
|
|
|
Net
income per share:
|
|
|
|
|
|
|
|
|
Basic
net income per share
|
|
|
|
|
|
|
|
|
Diluted
net income per share
|
|
|
|
|
|
|
|
|
Diluted
net income per share does not include the effect of anti-dilutive common
equivalent shares from stock options outstanding of 32.3 million and 19.2
million as of April 27, 2008 and April 29, 2007, respectively.
Note
5 - Marketable Securities
We
account for our investment instruments in accordance with Statement of Financial
Accounting Standards No. 115, or SFAS No. 115, Accounting for Certain Investments
in Debt and Equity Securities. All of our cash equivalents and marketable
securities are treated as “available-for-sale” under SFAS No. 115. Cash
equivalents consist of financial instruments which are readily convertible into
cash and have original maturities of three months or less at the time of
acquisition. Marketable securities consist primarily of highly liquid
investments with a maturity of greater than three months when purchased and some
equity investments. We classify our marketable securities at the date of
acquisition in the available-for-sale category as our intention is to convert
them into cash for operations. These securities are reported at fair value with
the related unrealized gains and losses included in accumulated other
comprehensive income (loss), a component of stockholders’ equity, net of
tax. Any unrealized losses which are considered to be
other-than-temporary impairment, would be recorded in the other expense section
of our consolidated statements of income. As of April 27, 2008, we
did not recognize any such other-than-temporary impairment on our securities.
Realized gains and losses on the sale of marketable securities are determined
using the specific-identification method. Net realized gains for the three
months ended April 27, 2008 and April 29, 2007 were $1.3 million and $0.1
million, respectively. The unrealized gains for the three months ended
April 27, 2008 and April 29, 2007 were $2.5 million and $1.5 million,
respectively. Refer to Note 16 of these Notes to the Condensed Consolidated
Financial Statements for further details on our fair value
measurements.
Note
6 - 3dfx
During
fiscal year 2002, we completed the purchase of certain assets from 3dfx
Interactive, Inc., or 3dfx, for an aggregate purchase price of approximately
$74.2 million. On December 15, 2000, NVIDIA Corporation and one of our indirect
subsidiaries entered into an Asset Purchase Agreement, or the APA, which closed
on April 18, 2001, to purchase certain graphics chip assets from 3dfx. Under the
terms of the APA, the cash consideration due at the closing was $70.0 million,
less $15.0 million that was loaned to 3dfx pursuant to a Credit Agreement dated
December 15, 2000. The APA also provided, subject to the other provisions
thereof, that if 3dfx properly certified that all its debts and other
liabilities had been provided for, then we would have been obligated to pay 3dfx
one million shares, which due to subsequent stock splits now totals six million
shares, of NVIDIA common stock. If 3dfx could not make such a certification, but
instead properly certified that its debts and liabilities could be satisfied for
less than $25.0 million, then 3dfx could have elected to receive a cash payment
equal to the amount of such debts and liabilities and a reduced number of shares
of our common stock, with such reduction calculated by dividing the cash payment
by $25.00 per share. If 3dfx could not certify that all of its debts and
liabilities had been provided for, or could not be satisfied, for less than
$25.0 million, we would not be obligated under the APA to pay any additional
consideration for the assets.
In
October 2002, 3dfx filed for Chapter 11 bankruptcy protection in the United
States Bankruptcy Court for the Northern District of California. In March 2003,
we were served with a complaint filed by the Trustee appointed by the Bankruptcy
Court to represent 3dfx’s bankruptcy estate. The Trustee’s complaint asserts
claims for, among other things, successor liability and fraudulent transfer and
seeks additional payments from us. On October 13, 2005, the Bankruptcy Court
held a hearing on the Trustee’s motion for summary adjudication. On December 23,
2005, the Bankruptcy Court denied the Trustee’s Motion for Summary Adjudication
in all material respects and held that NVIDIA may not dispute that the value of
the 3dfx transaction was less than $108.0 million. The Bankruptcy Court denied
the Trustee’s request to find that the value of the 3dfx assets conveyed to
NVIDIA was at least $108.0 million. In early November 2005, after several months
of mediation, NVIDIA and the Official Committee of Unsecured Creditors, or the
Creditors’ Committee, agreed to a Plan of Liquidation of 3dfx, which included a
conditional settlement of the Trustee’s claims against NVIDIA. This conditional
settlement was subject to a confirmation process through a vote of creditors and
the review and approval of the Bankruptcy Court after notice and hearing. The
conditional settlement called for a payment by NVIDIA of approximately $30.6
million to the 3dfx estate. Under the settlement, $5.6 million related to
various administrative expenses and Trustee fees, and $25.0 million related to
the satisfaction of debts and liabilities owed to the general unsecured
creditors of 3dfx. Accordingly, during the three month period ended October 30,
2005, we recorded $5.6 million as a charge to settlement costs and $25.0 million
as additional purchase price for 3dfx. The Trustee advised that he
intended to object to the settlement. However, the conditional settlement never
progressed substantially through the confirmation process.
On
December 21, 2005, the Bankruptcy Court determined that it would schedule trial
of one portion of the Trustee’s case against NVIDIA. On January 2, 2007, NVIDIA
exercised its right to terminate the settlement agreement on grounds that the
Bankruptcy Court had failed to proceed toward confirmation of the Creditors’
Committee’s plan. A non-jury trial began on March 21, 2007 on valuation issues
in the Trustee's constructive fraudulent transfer claims against NVIDIA.
Specifically, the Bankruptcy Court tried four questions: (1) what did 3dfx
transfer to NVIDIA in the APA?; (2) of what was transferred, what qualifies as
"property" subject to the Bankruptcy Court's avoidance powers under the Uniform
Fraudulent Transfer Act and relevant bankruptcy code provisions?; (3) what is
the fair market value of the "property" identified in answer to question (2)?;
and (4) was the $70 million that NVIDIA paid "reasonably equivalent" to the fair
market value of that property? At the conclusion of the evidence, the Bankruptcy
Court asked the parties to submit post-trial briefing. That briefing was
completed on May 25, 2007. On April 30, 2008, the Bankruptcy Court
issued its Memorandum Decision After Trial, in which it provided a detailed
summary of the trial proceedings and the parties' contentions with respect to
each of the questions to be tried. The Bankruptcy Court concluded
that "the creditors of 3dfx were not injured by the Transaction."
This decision does not entirely dispose of the Trustee's action, however; still
pending are the Trustee's claims for successor liability and intentional
fraudulent conveyance. On May 12, 2008, the Trustee filed a
motion for leave to pursue an interlocutory appeal.
The
3dfx asset purchase price of $95.0 million and $4.2 million of direct
transaction costs were allocated based on fair values presented below. The final
allocation of the purchase price of the 3dfx assets is contingent upon the
outcome of all of the 3dfx litigation. Please refer to Note 12 of these Notes to
Condensed Consolidated Financial Statements for further information regarding
this litigation.
|
|
Fair
Market Value
|
|
|
Straight-Line
Amortization Period
|
|
|
|
(In
thousands)
|
|
|
(Years)
|
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|
NVIDIA
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note
7 – Business Combinations
On
February 10, 2008, we acquired Ageia Technologies, Inc., or Ageia, an industry
leader in gaming physics technology. The combination of the graphics processing
unit, or GPU, and physics engine brands is expected to enhance the visual
experience of the gaming world. The aggregate purchase price consisted of total
consideration of approximately $29.7 million.
On
November 30, 2007, we completed our acquisition of Mental Images, Inc., or
Mental Images, an industry leader in photorealistic rendering technology. Mental
Images’ Mental Ray product is considered by many to be the most pervasive ray
tracing renderer in the industry. The aggregate purchase price consisted of
total consideration of approximately $88.3 million. The total consideration also
includes approximately $7.8 million which reflects an initial investment we made
in Mental Images in prior periods.
We
allocated the purchase price of each of these acquisitions to tangible assets,
liabilities and identifiable intangible assets acquired, as well as IPR&D,
if identified, based on their estimated fair values. The excess of purchase
price over the aggregate fair values was recorded as goodwill. The fair value
assigned to identifiable intangible assets acquired was based on estimates and
assumptions made by management. Purchased intangibles are amortized on a
straight-line basis over their respective useful lives. The allocation of
the purchase price for the Mental Images and Ageia acquisitions have been
prepared on a preliminary basis and reasonable changes are expected as
additional information becomes available.
As of
April 27, 2008, the estimated fair values of the purchase price allocated to
assets we acquired and liabilities we assumed on the respective acquisition
dates were as follows:
|
|
Mental
Images
|
|
|
Ageia
|
|
Fair
Market Values
|
|
(In
thousands) |
|
Cash
and cash equivalents
|
|
|
|
|
|
|
|
|
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|
|
Prepaid
and other current assets
|
|
|
|
|
|
|
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|
|
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|
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|
|
|
|
In-process
research and development
|
|
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Acquisition
related costs
|
|
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Total
liabilities assumed
|
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Mental
Images
|
|
|
Ageia
|
|
|
|
(Straight-line
depreciation/amortization period)
|
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NVIDIA
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The
amount of the IPR&D represents the value assigned to research and
development projects of Mental Images that had commenced but had not yet reached
technological feasibility at the time of the acquisition and for which we had no
alternative future use. In accordance with Statement of Financial Accounting
Standards No. 2, or SFAS No. 2, Accounting for Research and
Development Costs, as clarified by FASB issued Interpretation No. 4, or
FIN 4, Applicability of FASB
Statement No. 2 to Business Combinations Accounted for by the Purchase Method an
interpretation of FASB Statement No. 2, amounts assigned to IPR&D
meeting the above-stated criteria were charged to research and development
expenses as part of the allocation of the purchase price.
The pro
forma results of operations for these acquisitions have not been presented
because the effects of the acquisitions, individually or in the aggregate, were
not material to our results.
Note
8 - Goodwill
The
carrying amount of goodwill is as follows:
|
|
April 27,
2008
|
|
|
January 27,
2008
|
|
|
|
(In
thousands)
|
|
|
|
|
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During the first quarter of fiscal year
2009, the amount of goodwill increased by $17.0 million primarily due to our
acquisition of Ageia on February 10, 2008.
Note
9 - Amortizable Intangible Assets
We are
currently amortizing our intangible assets with definitive lives over periods
ranging from one to five years, primarily on a straight-line basis. The
components of our amortizable intangible assets are as follows:
|
April
27, 2008
|
|
|
January 27, 2008
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net Carrying
Amount
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net Carrying
Amount
|
|
|
(In
thousands)
|
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Acquired
intellectual property
|
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The
increase in the net carrying amount of technology licenses as of April 27, 2008
when compared to January 27, 2008, is primarily related to approximately $5.0
million of net cash outflows under a confidential patent licensing arrangement
entered into during fiscal year 2007, offset by amortization for the
quarter. Additionally, the increase in net carrying value of acquired
intellectual property of $16.3 million is primarily related to intangible assets
that resulted from our acquisition of Ageia during the first quarter of fiscal
year 2009. Please refer to Note 7 of these Notes to Condensed
Consolidated Financial Statements for further information. The
decrease in the gross carrying amounts of the intangible assets as of April 27,
2008 when compared to January 27, 2008 is due to the write off of fully
amortized intangible assets.
NVIDIA
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Amortization
expense associated with intangible assets was $7.5 million and $7.0 million for
the three months ended April 27, 2008 and April 29, 2007,
respectively. Future amortization expense related to the net carrying
amount of intangible assets at April 27, 2008 is estimated to be $23.5 million
for the remainder of fiscal 2009, $27.4 million in fiscal 2010, $22.7 million in
fiscal 2011, $21.0 million in fiscal 2012, $16.8 million in fiscal 2013, and a
total of $13.6 million in fiscal 2014 and fiscal years subsequent of fiscal
2014.
Note
10 - Balance Sheet Components
Certain
balance sheet components are as follows:
|
|
April 27,
2008
|
|
|
January 27,
2008
|
|
Inventories:
|
|
(In
thousands)
|
|
|
|
|
|
|
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At April
27, 2008, we had outstanding inventory purchase obligations totaling
approximately $654.3 million.
|
|
April 27,
2008
|
|
|
January 27,
2008
|
|
Accrued
Liabilities:
|
|
(In
thousands) |
|
Accrued
customer programs (1)
|
|
|
|
|
|
|
|
|
Accrued
payroll and related expenses
|
|
|
|
|
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|
Accrued
legal settlement (2)
|
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|
|
Total accrued
liabilities
|
|
|
|
|
|
|
|
|
(1) Please refer to Note 1
of these Notes to Condensed Consolidated Financial Statements for discussion
regarding the nature of accrued customer programs and their accounting treatment
related to our revenue recognition policies and estimates.
(2) Please refer to Note 12
of these Notes to Condensed Consolidated Financial Statements for discussion
regarding the 3dfx litigation.
|
|
April 27,
2008
|
|
|
January 27,
2008
|
|
Other
Long-term Liabilities:
|
|
(In
thousands)
|
|
Deferred
income tax liability
|
|
|
|
|
|
|
|
|
Income
taxes payable, long term
|
|
|
|
|
|
|
|
|
Asset
retirement obligation
|
|
|
|
|
|
|
|
|
Other
long-term liabilities
|
|
|
|
|
|
|
|
|
Total other long-term
liabilities
|
|
|
|
|
|
|
|
|
NVIDIA
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note
11 - Guarantees
FASB Interpretation No. 45, or FIN
45, Guarantor’s Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others, requires that upon issuance of a guarantee, the
guarantor must recognize a liability for the fair value of the obligation it
assumes under that guarantee. In addition, FIN 45 requires disclosures about the
guarantees that an entity has issued, including a tabular reconciliation of the
changes of the entity’s product warranty liabilities.
We
record a reduction to revenue for estimated product returns at the time revenue
is recognized primarily based on historical return rates. The estimated product
returns and estimated product warranty liabilities for the three months ended
April 27, 2008 and April 29, 2007 are as follows:
|
|
April
27,
2008
|
|
|
April
29,
2007
|
|
|
|
|
|
Balance at
beginning of period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
end of period (3)
|
|
|
|
|
|
|
|
|
|
(1)
Includes $8,865 and $4,746 for the three months ended April
27, 2008 and April 29, 2007, respectively, towards allowances for sales
returns estimated at the time revenue is recognized primarily based on
historical return rates and is charged as a reduction to
revenue.
(2) Includes
$8,882 and $3,875 for the three months ended April 27, 2008 and April 29,
2007, respectively, written off against the allowance for sales
returns.
(3) Includes
$18,708 and $15,348 at April 27, 2008 and April 29, 2007, respectively,
relating to allowance for sales
returns.
|
In
connection with certain agreements that we have executed in the past, we have at
times provided indemnities to cover the indemnified party for matters such as
tax, product and employee liabilities. We have also on occasion included
intellectual property indemnification provisions in our technology related
agreements with third parties. Maximum potential future payments cannot be
estimated because many of these agreements do not have a maximum stated
liability. As such, we have not recorded any liability in our Condensed
Consolidated Financial Statements for such indemnifications.
NVIDIA
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note
12 - Commitments and Contingencies
3dfx
On December 15, 2000, NVIDIA
Corporation and one of our indirect subsidiaries entered into an Asset Purchase
Agreement, or APA, to purchase certain graphics chip assets from 3dfx which
closed on April 18, 2001.
In
May 2002, we were served with a California state court complaint filed by the
landlord of 3dfx’s San Jose, California commercial real estate lease, Carlyle
Fortran Trust, or Carlyle. In December 2002, we were served with a California
state court complaint filed by the landlord of 3dfx’s Austin, Texas commercial
real estate lease, CarrAmerica Realty Corporation. The landlords’ complaints
both asserted claims for, among other things, interference with contract,
successor liability and fraudulent transfer. The landlords’ sought to recover
money damages, including amounts owed on their leases with 3dfx in the aggregate
amount of approximately $15 million. In October 2002, 3dfx filed for Chapter 11
bankruptcy protection in the United States Bankruptcy Court for the Northern
District of California. In January 2003, the landlords’ actions were removed to
the United States Bankruptcy Court for the Northern District of California and
consolidated, for purposes of discovery, with a complaint filed against NVIDIA
by the Trustee in the 3dfx bankruptcy case. Upon motion by NVIDIA in 2005, the
District Court withdrew the reference to the Bankruptcy Court for the landlords’
actions, which were removed to the United States District Court for the Northern
District of California. The Trustee’s lawsuit remained in the Bankruptcy
Court. On November 10, 2005, the District Court granted our motion to
dismiss the landlords’ respective amended complaints and allowed the landlords
until February 4, 2006 to amend their complaints. The landlords re-filed claims
against NVIDIA in early February 2006, and NVIDIA again filed motions requesting
the District Court to dismiss those claims. On September 29, 2006, the District
Court dismissed the CarrAmerica action in its entirety and without leave to
amend. The District Court found, among other things, that CarrAmerica lacked
standing to bring the lawsuit and that standing rests exclusively with the
bankruptcy Trustee. On October 27, 2006, CarrAmerica filed a notice of appeal
from that order. On December 15, 2006, the District Court also dismissed the
Carlyle action in its entirety, finding that Carlyle also lacked standing to
pursue its claims, and that certain claims were substantively
unmeritorious. Carlyle filed a notice of appeal from that order on
January 9, 2007. Both landlords’ appeals are pending before the
United States Court of Appeals for the Ninth Circuit, and briefing on both
appeals has been consolidated. NVIDIA has filed motions to recover its
litigation costs and attorneys fees against both Carlyle and CarrAmerica. The
District Court has postponed consideration of those motions until after the
appeals are resolved.
In March
2003, we were served with a complaint filed by the Trustee appointed by the
Bankruptcy Court to represent 3dfx’s bankruptcy estate. The Trustee’s complaint
asserts claims for, among other things, successor liability and fraudulent
transfer and seeks additional payments from us. On October 13, 2005, the
Bankruptcy Court held a hearing on the Trustee’s motion for summary
adjudication. On December 23, 2005, the Bankruptcy Court denied the Trustee’s
Motion for Summary Adjudication in all material respects and held that NVIDIA
may not dispute that the value of the 3dfx transaction was less than $108.0
million. The Bankruptcy Court denied the Trustee’s request to find that the
value of the 3dfx assets conveyed to NVIDIA was at least $108.0 million. In
early November 2005, after several months of mediation, NVIDIA and the Official
Committee of Unsecured Creditors, or the Creditors’ Committee, agreed to a Plan
of Liquidation of 3dfx, which included a conditional settlement of the Trustee’s
claims against us. This conditional settlement was subject to a confirmation
process through a vote of creditors and the review and approval of the
Bankruptcy Court after notice and hearing. The conditional settlement called for
a payment by NVIDIA of approximately $30.6 million to the 3dfx estate. Under the
settlement, $5.6 million related to various administrative expenses and Trustee
fees, and $25.0 million related to the satisfaction of debts and liabilities
owed to the general unsecured creditors of 3dfx. Accordingly, during the three
month period ended October 30, 2005, we recorded $5.6 million as a charge to
settlement costs and $25.0 million as additional purchase price for
3dfx. The Trustee advised that he intended to object to the
settlement. The conditional settlement never progressed substantially through
the confirmation process.
On
December 21, 2005, the Bankruptcy Court determined that it would schedule trial
of one portion of the Trustee’s case against NVIDIA. On January 2, 2007, NVIDIA
exercised its right to terminate the settlement agreement on grounds that the
Bankruptcy Court had failed to proceed toward confirmation of the Creditors’
Committee’s plan. A non-jury trial began on March 21, 2007 on valuation issues
in the Trustee's constructive fraudulent transfer claims against NVIDIA.
Specifically, the Bankruptcy Court tried four questions: (1) what did 3dfx
transfer to NVIDIA in the APA?; (2) of what was transferred, what qualifies as
"property" subject to the Bankruptcy Court's avoidance powers under the Uniform
Fraudulent Transfer Act and relevant bankruptcy code provisions?; (3) what is
the fair market value of the "property" identified in answer to question (2)?;
and (4) was the $70 million that NVIDIA paid "reasonably equivalent" to the fair
market value of that property? At the conclusion of the evidence, the Bankruptcy
Court asked the parties to submit post-trial briefing. That briefing was
completed on May 25, 2007. On April 30, 2008, the Bankruptcy Court
issued its Memorandum Decision After Trial, in which it provided a detailed
summary of the trial proceedings and the parties' contentions with respect to
each of the questions to be tried. The Bankruptcy Court concluded
that "the creditors of 3dfx were not injured by the Transaction."
This decision does not entirely dispose of the Trustee's action, however; still
pending are the Trustee's claims for successor liability and intentional
fraudulent conveyance. On May 12, 2008, the Trustee filed a
motion for leave to pursue an interlocutory appeal.
On
December 8, 2005, the Trustee filed a Form 8-K on behalf of 3dfx, in which the
Trustee disclosed the terms of the conditional settlement agreement between
NVIDIA and the Creditor’s Committee. Thereafter, certain shareholders of 3dfx
filed a petition with the Bankruptcy Court to appoint an official committee to
represent the claimed interests of 3dfx shareholders. That petition was granted
and an Equity Holders’ Committee was appointed. Since that appointment, the
Equity Holders’ Committee has filed a competing plan of
reorganization/liquidation. The Equity Holders’ Committee’s plan assumes that
3dfx can raise additional equity capital that would be used to retire all of
3dfx’s debts. The Equity Holders’ Committee contends that the commitment by an
investor to pay in equity capital is sufficient to trigger NVIDIA's obligations
under the APA to pay the stock consideration. NVIDIA contends, among
other things, that such a commitment is not sufficient and that its obligation
to pay the stock consideration has been extinguished. By virtue of stock splits
since the execution of the APA, the stock consideration would now total six
million shares of NVIDIA common stock. The Equity Holders’ Committee filed a
motion with the Bankruptcy Court seeking an order giving it standing to bring a
lawsuit to obtain the stock consideration. Over our objection, the Bankruptcy
Court granted that motion on May 1, 2006 and the Equity Holders’ Committee filed
its Complaint for Declaratory Relief against NVIDIA that same day. NVIDIA moved
to dismiss the Complaint for Declaratory Relief, and the Bankruptcy Court
granted that motion with leave to amend. The Equity Committee thereafter amended
its complaint, and NVIDIA moved to dismiss that amended complaint as well. At a
hearing on December 21, 2006, the Bankruptcy Court granted the motion as to one
of the Equity Holders’ Committee’s claims, and denied it as to the others.
However, the Bankruptcy Court also ruled that NVIDIA would only be required to
answer the first three causes of action by which the Equity Holders’ Committee
seeks a determination that the APA was not terminated before 3dfx filed for
bankruptcy protection, that the 3dfx bankruptcy estate still holds some rights
in the APA, and that the APA is capable of being assumed by the bankruptcy
estate. Because of the trial of the Trustee's fraudulent transfer
claims against NVIDIA, the Equity Committee's lawsuit has not progressed
substantially in 2007. The next status conference is not scheduled
until August 28, 2008. In addition, the Equity Holders Committee filed a motion
seeking Bankruptcy Court approval of investor protections for Harbinger Capital
Partners Master Fund I, Ltd., an equity investment firm that has conditionally
agreed to pay no more than $51.5 million for preferred stock in 3dfx. The
hearing on that motion was held on January 18, 2007, and the Bankruptcy Court
approved the proposed protections.
Proceedings,
SEC inquiry and lawsuits related to our historical stock option granting
practices
In June
2006, the Audit Committee of the Board of NVIDIA, or the Audit Committee, began
a review of our stock option practices based on the results of an internal
review voluntarily undertaken by management. The Audit Committee, with the
assistance of outside legal counsel, completed its review on November 13, 2006
when the Audit Committee reported its findings to our full Board. The review
covered option grants to all employees, directors and consultants for all grant
dates during the period from our initial public offering in January 1999 through
June 2006. Based on the findings of the Audit Committee and our internal review,
we identified a number of occasions on which we used an incorrect measurement
date for financial accounting and reporting purposes.
We
voluntarily contacted the SEC regarding the Audit Committee’s
review. In late August 2006, the SEC initiated an inquiry related to
our historical stock option grant practices. In October 2006, we met with the
SEC and provided it with a review of the status of the Audit Committee’s review.
In November 2006, we voluntarily provided the SEC with additional documents. We
continued to cooperate with the SEC throughout its inquiry. On
October 26, 2007, the SEC formally notified us that the SEC's investigation
concerning our historical stock option granting practices had been terminated
and that no enforcement action was recommended.
Concurrently
with our internal review and the SEC’s inquiry, since September 29, 2006, ten
derivative cases have been filed in state and federal courts asserting claims
concerning errors related to our historical stock option granting practices and
associated accounting for stock-based compensation expense. These complaints
have been filed in various courts, including the California Superior Court,
Santa Clara County, the United States District Court for the Northern
District of California, and the Court of Chancery of the State of Delaware in
and for New Castle County. The California Superior Court cases have been
consolidated and plaintiffs filed a consolidated complaint on April 23, 2007.
Plaintiffs in the Delaware action filed an Amended Shareholder Derivative
Complaint on February 12, 2008. Plaintiffs in the federal action submitted a
Second Amended Consolidated Verified Shareholders Derivative Complaint on March
18, 2008. All of the cases purport to be brought derivatively on behalf of
NVIDIA against members of our Board and several of our current and former
officers and directors. Plaintiffs in these actions allege claims for, among
other things, breach of fiduciary duty, unjust enrichment, insider selling,
abuse of control, gross mismanagement, waste, and constructive fraud. The
Northern District of California action also alleges violations of federal
provisions, including Sections 10(b) and 14(a) of the Securities Exchange Act of
1934. The plaintiffs seek to recover for NVIDIA, among other things, damages in
an unspecified amount, rescission, punitive damages, treble damages for insider
selling, and fees and costs. Plaintiffs also seek an accounting, a constructive
trust and other equitable relief. We intend to take all appropriate action in
response to these complaints. Between May 14, 2007 and May 17, 2007, we filed
several motions to dismiss or to stay the federal, Delaware and Santa Clara
actions. The Delaware motions were superseded when the Delaware plaintiffs filed
the Amended Shareholder Derivative Complaint on February 28, 2008. The federal
motions were superseded when the federal plaintiffs submitted the Second Amended
Consolidated Verified Shareholders Derivative Complaint on March 18, 2008. We
have not yet responded to either of these Complaints. The Santa Clara
motion to stay was denied without prejudice and the parties are currently
engaged in discovery-related proceedings.
On August 5, 2007, our Board authorized
the formation of a Special Litigation Committee to investigate, evaluate, and
make a determination as to how NVIDIA should proceed with respect to the claims
and allegations asserted in the underlying derivative cases brought on behalf of
NVIDIA. Currently, the Special Litigation Committee is continuing its
work.
Department
of Justice Subpoena and Investigation, and Civil Cases
On
November 29, 2006, we received a subpoena from the San Francisco Office of the
Antitrust Division of the United States Department of Justice, or DOJ, in
connection with the DOJ's investigation into potential antitrust violations
related to GPUs and cards. No specific allegations have been made against us. We
are cooperating with the DOJ in its investigation.
As of May
13, 2008, 55 civil complaints have been filed against us. The majority of the
complaints were filed in the Northern District of California, several were filed
in the Central District of California, and other cases were filed in several
other Federal district courts. On April 18, 2007, the Judicial Panel
on Multidistrict Litigation transferred the actions currently pending outside of
the Northern District of California to the Northern District of California for
coordination of pretrial proceedings before the Honorable William H.
Alsup. By agreement of the parties, Judge Alsup will retain
jurisdiction over the consolidated cases through trial or other
resolution.
In the
consolidated proceedings, two groups of plaintiffs (one representing all direct
purchasers of GPUs and the other representing all indirect purchasers) filed
consolidated, amended class-action complaints. These complaints purport to
assert federal antitrust claims based on alleged price fixing, market
allocation, and other alleged anti-competitive agreements between us and ATI
Technologies, Inc., or ATI, and Advanced Micro Devices, Inc., or AMD, as a
result of its acquisition of ATI. The indirect purchasers’
consolidated amended complaint also asserts a variety of state law antitrust,
unfair competition and consumer protection claims on the same allegations, as
well as a common law claim for unjust enrichment.
Plaintiffs
filed their first consolidated complaints on June 14, 2007. On July
16, 2007, we moved to dismiss those complaints. The motions to
dismiss were heard by Judge Alsup on September 20, 2007. The Court
subsequently granted and denied the motions in part, and gave the
plaintiffs leave to move to amend the complaints. On November 7,
2007, the Court granted plaintiffs’ motion to file amended complaints, ordered
defendants to answer the complaints, lifted a previously entered stay on
discovery, and set a trial date for January 12, 2009. Discovery is
underway and Plaintiffs filed motions for class certification on April 24,
2008. Our oppositions to the motions were filed on May 20, 2008. We
believe the allegations in the complaints are without merit and intend to
vigorously defend the cases.
Product
Defect Contingencies
Our
products are complex and may contain defects or experience failures due to any
number of issues in design, fabrication, packaging, materials and / or use
within a system. If any of our products or technologies contains a defect,
compatibility issue or other error, we may have to invest additional research
and development efforts to find and correct the issue. Such efforts
could divert our management’s and engineers’ attention from the development of
new products and technologies and could increase our operating costs and reduce
our gross margin. In addition, an error or defect in new products or releases or
related software drivers after commencement of commercial shipments could result
in failure to achieve market acceptance or loss of design wins. Also, we may be
required to reimburse customers, including for customers’ costs to repair or
replace the products in the field, which could cause our revenue to decline. A
product recall or a significant number of product returns could be expensive,
damage our reputation and could result in the shifting of business to our
competitors. Costs associated with correcting defects, errors, bugs or other
issues could be significant and could materially harm our financial
results.
During
the first quarter of fiscal year 2009, one of our customers asserted claims for
incremental repair and replacement costs related to an alleged die/packaging
material set defect in one of our notebook MCP products. This product was
included in a significant number of the customer’s notebook products that have
been sold to end users, and has also been shipped to other of our customers in
significant quantities. We are evaluating the potential scope of this situation,
including the nature and cause of the alleged defect and the merits of the
customer’s claim, and to what extent the alleged defect might occur with other
of our products. We are currently unable to estimate the amount of
costs that may be incurred by us beyond the normal product warranty accrual that
we have taken related to this claim and the alleged defect and, therefore, we
have not recorded any additional related costs or a liability in our Condensed
Consolidated Financial statements as of, and for the three months ended, April
27, 2008.
NVIDIA
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note
13 - Stockholders’ Equity
Stock
Repurchase Program
During
fiscal year 2005, we announced that our Board had authorized a stock repurchase
program to repurchase shares of our common stock, subject to certain
specifications, up to an aggregate maximum amount of $300
million. During fiscal year 2007, the Board further approved an
increase of $400 million to the original stock repurchase program. In fiscal
year 2008, we announced a stock repurchase program under which we may
purchase up to an additional $1.0 billion of our common stock over a three year
period through May 2010. As a result of these increases, we have an ongoing
authorization from the Board, subject to certain specifications, to repurchase
shares of our common stock up to an aggregate maximum amount of $1.7
billion.
The repurchases will be made from time
to time in the open market, in privately negotiated transactions, or in
structured stock repurchase programs, and may be made in one or more larger
repurchases, in compliance with the Securities Exchange Act of 1934, or the
Exchange Act, Rule 10b-18, subject to market conditions, applicable legal
requirements, and other factors. The program does not obligate NVIDIA to acquire
any particular amount of common stock and the program may be suspended at any
time at our discretion. As part of our share repurchase program, we have
entered into, and we may continue to enter into, structured share repurchase
transactions with financial institutions. These agreements generally require
that we make an up-front payment in exchange for the right to receive a fixed
number of shares of our common stock upon execution of the agreement, and a
potential incremental number of shares of our common stock, within a
pre-determined range, at the end of the term of the agreement.
Through
April 27, 2008, we had repurchased 68.0 million shares under our stock
repurchase program for a total cost of $1.16 billion. During the first
fiscal quarter ended April 27, 2008, we entered into a structured share
repurchase transaction to repurchase 6.3 million shares for $123.9 million which
we recorded on the trade date of the transaction.
Convertible
Preferred Stock
As of
April 27, 2008 and January 27, 2008, there were no shares of preferred
stock outstanding.
Note
14 - Comprehensive Income
Comprehensive
income consists of net income and other comprehensive income or loss. Other
comprehensive income or loss components include unrealized gains or losses on
available-for-sale securities, net of tax. The components of comprehensive
income, net of tax, were as follows:
|
|
Three
Months Ended
|
|
|
|
April
27,
2008
|
|
|
April
29,
2007
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
Net
change in unrealized gains on available-for-sale securities, net of
tax
|
|
|
(5,631
|
)
|
|
|
(79
|
)
|
Reclassification
adjustments for net realized gains on available-for-sale securities
included in net income, net of tax
|
|
|
|
|
|
|
|
|
Total
comprehensive income
|
|
|
|
|
|
|
|
|
NVIDIA
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note
15 - Segment Information
Our Chief
Executive Officer, who is considered to be our chief operating decision maker,
or CODM, reviews financial information presented on an operating segment
basis for purposes of making operating decisions and assessing financial
performance.
We report
financial information for four operating segments to our CODM: the GPU business,
which is comprised primarily of our GeForce products that support desktop and
notebook personal computers, or PCs, plus memory products; the professional
solutions business, or PSB, which is comprised of our NVIDIA Quadro professional
workstation products and other professional graphics products, including our
NVIDIA Tesla high-performance computing products; the media and
communications processor, or MCP, business which is comprised of NVIDIA nForce
core logic and motherboard GPU products; and our consumer products business, or
CPB, which is comprised of our CPB is comprised of our GoForce and APX mobile
brands and products that support handheld personal media players, or PMPs,
personal digital assistants, or PDAs, cellular phones and other handheld
devices. CPB also includes license, royalty, other revenue and
associated costs related to video game consoles and other digital consumer
electronics devices.
In
addition to these operating segments, we have the “All Other” category that
includes human resources, legal, finance, general administration and corporate
marketing expenses, which total $76.2 million and $68.0 million for the three
months ended April 27, 2008 and April 29, 2007, respectively, that we do not
allocate to our other operating segments as these expenses are not included in
the segment operating performance measures evaluated by our CODM. “All Other”
also includes the results of operations of other miscellaneous reporting
segments that are neither individually reportable, nor aggregated with another
operating segment. Revenue in the “All Other” category is primarily derived from
sales of components.
Our CODM does not review any
information regarding total assets on an operating segment basis. Operating
segments do not record intersegment revenue, and, accordingly, there is none to
be reported. The accounting policies for segment reporting are the same as
for NVIDIA as a whole.
|
|
GPU
|
|
|
PSB
|
|
|
MCP
|
|
|
CPB
|
|
|
All
Other
|
|
|
Consolidated
|
|
|
|
(In
thousands)
|
|
Three
Months Ended April 27, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended April 29, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
by geographic region is allocated to individual countries based on the location
to which the products are initially billed even if our customers’ revenue is
attributable to end customers that are located in a different location. The
following tables summarize information pertaining to our revenue from customers
based on invoicing address in different geographic regions:
|
|
Three
Months Ended
|
|
|
|
April
27,
2008
|
|
|
April
29,
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
from significant customers, those representing approximately 10% or more of
total revenue for the respective periods is summarized as follows:
|
|
Three
Months Ended
|
|
|
|
April 27,
2008
|
|
|
April 29,
2007
|
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
11
|
% |
|
|
9
|
% |
NVIDIA
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Accounts
receivable from significant customers, those representing approximately 10% or
more of total trade accounts receivable for the respective periods, is
summarized as follows:
|
|
April 27,
2008
|
|
|
January 27,
2008
|
|
Accounts
Receivable: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note
16 – Fair Value of Cash Equivalents and Marketable Securities
We
measure our cash equivalents and marketable securities at fair value. Our
financial assets and liabilities are determined using market prices from both
active markets, or Level 1, and less active markets, or Level 2. Level 1
valuations are obtained from real-time quotes for transactions in active
exchange markets involving identical assets. Level 2 valuations are
obtained from readily-available pricing sources for identical instruments in
less active markets. All of our cash equivalents and marketable securities
valuations are classified as Level 1 or Level 2 because we value them using
quoted market prices or alternative pricing sources and models utilizing market
observable inputs.
As of
April 27, 2008, we did not have any assets or liabilities without observable
market values, or Level 3 assets, that would require a high level of
judgment to determine fair value.
Financial assets and
liabilities measured at fair value are summarized below:
|
|
|
|
|
Fair
value measurement at reporting date using
|
|
|
|
|
|
|
Quoted Prices in
Active Markets for Identical Assets
|
|
|
Significant
Other Observable Inputs
|
|
|
|
April
27, 2008
|
|
|
(Level
1)
|
|
|
(Level
2)
|
|
|
|
(In
thousands)
|
|
Asset-backed
Securities (1)
|
|
$
|
88,255
|
|
|
$
|
-
|
|
|
$
|
88,255
|
|
Commercial
paper (2)
|
|
|
250,365
|
|
|
|
-
|
|
|
|
250,365
|
|
Corporate
debt securities (3)
|
|
|
274,273
|
|
|
|
-
|
|
|
|
274,273
|
|
Debt
securities issued by United States Treasury (1)
|
|
|
33,487
|
|
|
|
-
|
|
|
|
33,487
|
|
Other
Debt securities issued by US Government agencies (4)
|
|
|
297,993
|
|
|
|
-
|
|
|
|
297,993
|
|
Mortgage-backed
securities issued by Government-sponsored entities (1)
|
|
|
70,172
|
|
|
|
-
|
|
|
|
70,172
|
|
Money
market funds (5)
|
|
|
304,774
|
|
|
|
304,774
|
|
|
|
-
|
|
Equity
securities (1)
|
|
|
3,357
|
|
|
|
-
|
|
|
|
3,357
|
|
Total
assets
|
|
$
|
1,322,676
|
|
|
$
|
304,774
|
|
|
$
|
1,017,902
|
|
(1)
|
Included
in Marketable Securities on the Condensed Consolidated Balance
Sheet.
|
(2)
|
Includes
$177,410 in Cash and cash equivalents and $72,955 in Marketable Securities
on the Condensed Consolidated Balance
Sheet.
|
(3)
|
Includes
$1,520 in Cash and cash equivalents and $272,753 in Marketable Securities
on the Condensed Consolidated Balance
Sheet.
|
(4)
|
Includes
$20,640 in Cash and cash equivalents and $277,353 in Marketable Securities
on the Condensed Consolidated Balance
Sheet.
|
(5)
|
Included
in Cash and cash equivalents on the Condensed Consolidated Balance
Sheet.
|
ITEM
2. MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Forward-Looking
Statements
When
used in this Quarterly Report on Form 10-Q, the words “believes,” “plans,”
“estimates,” “anticipates,” “expects,” “intends,” “allows,” “can,” “will” and
similar expressions are intended to identify forward-looking statements. These
statements relate to future periods and include, but are not limited to,
statements as to: the
features, benefits, capabilities, performance, impact and production of our
products and technologies; product defects and the impact of product defects;
causes of product defects; our reliance on third parties to manufacture,
assemble and test our products; reliance on a limited number of customers and
suppliers; new product lines; design wins; our market position; our competition,
sources of competition and our competitive position; the importance of our
strategic relationships; average selling prices; enhanced visual experiences;
seasonality; customer demand; our continued growth and factors contributing to
our growth; our international operations; our ability to attract and retain
qualified personnel; our inventory; acquisitions and investments; stock options;
the impact of stock-based compensation expense; our financial results; mix and
sources of revenue; capital and operating expenditures; our cash flow and cash
balances; uses of cash; liquidity; our investment portfolio and marketable
securities; our exchange rate risk; our stock repurchase program; our
internal control over financial reporting; our disclosure controls and
procedures; recent accounting pronouncements; our intellectual property;
compliance with environmental laws and regulations; litigation arising from our
historical stock option grant practices and financial restatements; the
Department of Justice subpoena and investigation; and litigation
matters. Forward-looking statements are subject to risks and
uncertainties that could cause actual results to differ materially from those
projected. These risks and uncertainties include, but are not limited
to, the risks discussed below as well as difficulties associated with:
conducting international operations; slower than anticipated growth; forecasting
customer demand; product defects; software or manufacturing defects; defects in
product design or materials used to manufacture a product; disruptions in our
relationships with our partners and suppliers; supply constraints; unanticipated
decreases in average selling prices; increased sales of lower margin products;
difficulty in collecting accounts receivable; international and political
conditions; changes in international laws; fluctuations in the global credit
market; declines in global economic conditions; fixed operating expenses; our
inability to decrease inventory purchase commitments; difficulties in entering
new markets; slower than expected development of a new market; inventory
write-downs; the impact of competitive pricing pressures; fluctuations in
investments and the securities market; failure to achieve design wins; changes
in customers’ purchasing behaviors; the concentration of sales of our products
to a limited number of customers; decreases in demand for our products; delays
in the development of new products by us or our partners; delays in volume
production of our products; developments in and expenses related to litigation;
our inability to realize the benefits of acquisitions; the outcome of litigation
or regulatory actions; and the matters set forth under Part II, Item 1A. - Risk
Factors. These forward-looking statements speak only as of the date hereof.
Except as required by law, we expressly disclaim any obligation or undertaking
to release publicly any updates or revisions to any forward-looking statements
contained herein to reflect any change in our expectations with regard thereto
or any change in events, conditions or circumstances on which any such statement
is based.
All
references to “NVIDIA,” “we,” “us,” “our” or the “Company” mean NVIDIA
Corporation and its subsidiaries, except where it is made clear that the term
means only the parent company.
NVIDIA, GeForce, SLI, Hybrid SLI,
GoForce, NVIDIA Quadro, Quadro, NVIDIA nForce, Tesla, NVIDIA APX,
PhysX, Ageia, Mental Images, and the NVIDIA logo are our trademarks and/or
registered trademarks in the United States and other countries that are used in
this document. We may also refer to trademarks of other corporations and
organizations in this document.
The
following discussion and analysis of our financial condition and results of
operations should be read in conjunction with Part II, “Item 1A. Risk Factors”,
“Item 6. Selected Financial Data”, our Condensed Consolidated Financial
Statements and related Notes thereto, as well as other cautionary statements and
risks described elsewhere in this Quarterly Report on Form 10-Q, before deciding
to purchase, hold or sell shares of our common stock.
Overview
Our Company
NVIDIA Corporation is the worldwide
leader in visual computing technologies and the inventor of the graphic
processing unit, or the GPU. Our products are designed to generate realistic,
interactive graphics on consumer and professional computing devices. We serve
the entertainment and consumer market with our GeForce products, the
professional design and visualization market with our Quadro products, and the
high-performance computing market with our Tesla products. We have four major
product-line operating segments: the GPU Business, the professional solutions
business, or PSB, the media and communications processor, or MCP, business, and
the consumer products business, or CPB.
Our GPU business is comprised primarily
of our GeForce products that support desktop and notebook personal computers, or
PCs, plus memory products. Our PSB is comprised of our NVIDIA Quadro
professional workstation products and other professional graphics products,
including our NVIDIA Tesla high-performance computing products. Our MCP business
is comprised of NVIDIA nForce core logic and motherboard GPU, or mGPU products.
Our CPB is comprised of our GoForce and APX mobile brands and products that
support handheld personal media players, or PMPs, personal digital assistants,
or PDAs, cellular phones and other handheld devices. CPB also includes license,
royalty, other revenue and associated costs related to video game consoles and
other digital consumer electronics devices. Original equipment
manufacturers, or OEMs, original design manufacturers, or ODMs, add-in-card
manufacturers, system builders and consumer electronics companies worldwide
utilize NVIDIA processors as a core component of their entertainment, business
and professional solutions.
We were incorporated in California in
April 1993 and reincorporated in Delaware in April 1998. Our headquarter
facilities are in Santa Clara, California. Our Internet address is www.nvidia.com. The
contents of our website are not a part of this Form 10-Q.
Recent
Developments, Future Objectives and Challenges
GPU
Business
During
the first quarter of fiscal year 2009, we launched several new GPUs in the
GeForce family. The product launches included the GeForce 9600 GT, which
provides more than double the performance of our previous GeForce 8600 GTS; the
GeForce 9800 GX2, which provides a new dual GPU board featuring Quad SLI
technology; GeForce 9800 GTX, which is a flexible GPU that supports both
two-way and three-way Scalable Link Interface, or SLI
technology. Additionally, we also launched the GeForce 8800 GT, which
is the first after-market consumer graphics card for the Mac Pro and is sold
directly by us.
On
February 10, 2008, we completed our acquisition of Ageia Technologies, Inc., or
Ageia, an industry leader in gaming physics technology. Ageia's PhysX software
is widely adopted in several PhysX-based games that are shipping or in
development on Sony Playstation 3, Microsoft XBOX 360, Nintendo Wii, and gaming
PCs. We believe that the combination of the GPU and physics engine
brands will result in an enhanced visual experience for the gaming
world.
During
the first quarter of fiscal year 2009, we gained market share in the standalone
desktop, standalone notebook, and integrated notebook graphics categories when
compared to first quarter of fiscal year 2008 as reported in the 2008 PC
Graphics Report from Mercury Research.
Professional
Solutions Business
During
the first quarter of fiscal year 2009, we launched the Quadro FX 3600M
Professional which is among the highest performance notebook GPUs.
MCP
Business
During
the first quarter of fiscal year 2009, we shipped Hybrid SLI DX10 motherboard
GPUs – the GeForce 8000 GPU series. The GeForce 8000 GPU series
includes GeForce Boost Hybrid SLI technology, which is designed to double
performance when paired with a GeForce 8 desktop GPU. Additionally,
we also launched the NVIDIA nForce 790i Ultra SLI MCP which is among the
industry’s highly rated overclockable platform for Intel
processors.
Consumer
Products Business
During the first quarter of fiscal year
2009, we launched the NVIDIA APX 2500 application processor. The APX
2500 is a computer-on-a-chip designed to meet the growing multimedia demands of
today's mobile phone and entertainment user. We believe that the
mobile application processor is an area where we can add a significant amount of
value and we also believe it represents a revenue growth
opportunity.
Seasonality
Our
industry is largely focused on the consumer products market. Due to
seasonality in this market, we typically expect to see stronger revenue
performance in the second half of the calendar year related to the
back-to-school and holiday seasons.
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 a operating segment
basis for purposes of making operating decisions and assessing financial
performance.
We report
financial information for four operating segments to our CODM: the GPU business,
which is comprised primarily of our GeForce products that support desktop and
notebook PCs, plus memory products; the PSB which is comprised of our NVIDIA
Quadro professional workstation products and other professional graphics
products, including our NVIDIA Tesla high-performance computing products;
the MCP business which is comprised of NVIDIA nForce core logic and motherboard
GPU products; and our CPB, which is comprised of our CPB is comprised of our
GoForce and APX mobile brands and products that support handheld PMPs, PDAs,
cellular phones and other handheld devices. CPB also includes
license, royalty, other revenue and associated costs related to video game
consoles and other digital consumer electronics devices.
In
addition to these operating segments, we have the “All Other” category that
includes human resources, legal, finance, general administration and corporate
marketing expenses, which total $76.2 million and $68.0 million for the three
months ended April 27, 2008 and April 29, 2007, respectively, that we do not
allocate to our other operating segments as these expenses are not included in
the segment operating performance measures evaluated by our CODM. “All Other”
also includes the results of operations of other miscellaneous reporting
segments that are neither individually reportable, nor aggregated with another
operating segment. Revenue in the “All Other” category is primarily derived from
sales of components.
Results
of Operations
The following table sets forth, for the
periods indicated, certain items in our consolidated statements of income
expressed as a percentage of revenue.
|
|
Three
Months Ended
|
|
|
|
April 27,
2008
|
|
|
April
29,
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales,
general and administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
and other income, net
|
|
|
|
|
|
|
|
Income
before income tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Quarter of Fiscal Years 2009 and 2008
Revenue
Revenue
was $1.15 billion for the first quarter of fiscal year 2009, compared to
$844.3 million for the first quarter of fiscal year 2008, which represents an
increase of 37%. For the second quarter of fiscal 2009, we
expect a seasonal decline associated with the PC business, although overall, we
believe our market and competitive positions continue to be strong. A
discussion of our revenue results for each of our operating segments is as
follows:
GPU Business. GPU Business
revenue increased by 45% to $701.5 million in the first quarter of fiscal year
2009, compared to $483.5 million for the first quarter of fiscal year 2008. This
improvement was primarily due to increased sales of our desktop GPU products and
notebook GPU products. Sales of our desktop GPU products increased by
approximately 44% compared to the first quarter of fiscal year 2008, primarily
due to growth of the Standalone Desktop market as reported in the 2008 PC
Graphics Report from Mercury Research. Our leadership position in the
Standalone Desktop market was driven by our GeForce 8-based products and our new
generation of GeForce 9-based products. Sales of our notebook GPU
products increased by approximately 99% compared to the first quarter of fiscal
year 2008. Notebook GPU revenue growth was primarily due to share
gains in the Standalone Notebook category as reported in the 2008 PC Graphics
Report from Mercury Research. Our share gains in the Standalone
Notebook category were primarily a result of shipments of products used in
notebook PC design wins related to Intel’s Santa Rosa platform.
PSB. PSB revenue increased by
44% to $203.4 million in the first quarter of fiscal year
2009, compared to $140.9 million for the first quarter of fiscal year
2008. Our professional workstation product sales increased due to an
overall increase in shipments of boards and chips. This increase in
shipments was primarily driven by strong shipments of NVIDIA Quadro professional
workstation GeForce 8-based products.
MCP Business. MCP Business
revenue increased by 31% to $195.1 million in the first quarter of fiscal
year 2009, compared to $148.8 million for the first quarter of fiscal year 2008.
The increase resulted from an increase in sales of both our Intel-based and
AMD-based platform products as compared to the first quarter of fiscal year
2008.
CPB. CPB revenue
decreased by 37% to $42.5 million in the first quarter of fiscal year 2009,
compared to $67.2 million for the first quarter of fiscal year 2008. The
overall decrease in CPB revenue is primarily driven by a combination of
decreases in revenue from our cell phone products, our contractual development
arrangements with Sony Computer Entertainment, or SCE, and a drop in royalties
from SCE as they transition the PlayStation3 to a new process node.
Concentration of
Revenue
Revenue
from sales to customers outside of the United States and other Americas
accounted for 92% and 83% of total revenue for the first quarter of fiscal years
2009 and 2008, respectively. Revenue by geographic region is
allocated to individual countries based on the location to which the products
are initially billed even if the foreign contract equipment manufacturers, or
CEMs’, add-in board and motherboard manufacturers’ revenue is attributable to
end customers in a different location.
Sales to
our significant customers accounted for approximately 11% of our total revenue
from one customer during the first quarter of fiscal year 2009. In
the first quarter of fiscal year 2008, there were no sales to any customer in
excess of 10% of our total revenue.
Gross
Profit
Gross
profit consists of total revenue, net of allowances, less cost of revenue. Cost
of revenue consists primarily of the cost of semiconductors purchased from
subcontractors, including wafer fabrication, assembly, testing and packaging,
manufacturing support costs, including labor and overhead associated with such
purchases, final test yield fallout, inventory provisions and shipping
costs. Cost of revenue also includes development costs for license and
service arrangements.
Gross
margin is the percentage of gross profit to revenue. Our gross margin can vary
in any period depending on the mix of types of products sold. Our gross margin
was 44.6% and 45.0% for the first quarter of fiscal year 2009 and 2008,
respectively. The decline primarily reflects product transition
challenges in our GPU business.
Our gross
margin is significantly impacted by the mix of products we sell. Product mix is
often difficult to estimate with accuracy. Therefore, if we
experience product transition challenges, if we achieve significant revenue
growth in our lower margin product lines, or if we are unable to earn as much
revenue as we expect from higher margin product lines, our gross margin may be
negatively impacted. We expect gross margin to increase during the second
quarter of fiscal year 2009 as compared to the first quarter of fiscal year
2009. A discussion of our gross margin results for each of our operating
segments is as follows:
GPU Business. The gross
margin of our GPU Business decreased for the first quarter of fiscal year 2009
as compared to the first quarter of fiscal year 2008. This decrease
was primarily due to product transition challenges associated with the
transition from our previous generation of GeForce 8-series GPUs to ramp-up
shipments of our new generation of GeForce 9-series GPUs.
PSB. The gross margin of our
PSB increased for the first quarter of fiscal year 2009 as compared to the first
quarter of fiscal year 2008. This increase was primarily due to
increased sales of our GeForce 8-based NVIDIA Quadro products, which began
selling in the fourth quarter of fiscal year 2007 and generally have higher
gross margins than our previous generations of NVIDIA Quadro
products.
MCP Business. The gross
margin of our MCP Business decreased for the first quarter of fiscal year 2009
as compared to the first quarter of fiscal year 2008. This decrease
was primarily due to a shift in product mix toward increased shipments of lower
margin Intel-based and AMD-based platform products.
CPB. The gross margin of our
CPB decreased for the first quarter of fiscal year 2009 as compared to the first
quarter of fiscal year 2008. This decrease was due to a combination
of declines including a decrease in gross profit realized from sales of our
products for high-end feature cellular phones and other handheld devices as well
as a drop in royalties from SCE as they transition the PlayStation3 to a new
process node.
Operating
Expenses
|
|
Three
Months Ended
|
|
|
|
|
|
|
|
|
April
27,
2008
|
|
|
April
29,
2007
|
|
|
$
Change
|
|
%
Change
|
|
|
|
(In
millions)
|
|
|
|
Research
and development expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales,
general and administrative expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development as a percentage of net revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales,
general and administrative as a percentage of net
revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and Development
Research and development expenses were
$218.8 million and $158.3 million during the first quarters of fiscal years 2009
and 2008, respectively, an increase of $60.5 million, or 38%. The
increase is primarily related to an increase in salaries and benefits, and
stock-based compensation by approximately $29.1 million as a result of personnel
growth in departments related to research and development functions by
approximately 1,000 additional personnel due to new hires and our acquisitions
of Mental Images and Ageia, as compared to the first quarter of fiscal year
2008. Development expenses increased by $8.1 million primarily as a
result of increased in prototype materials and engineering consumption due to
higher volume of activity related to the product ramps in the current
year. Other increases in research and development expenses are
related to increased expenses related to facilities, depreciation and
amortization and computer software and equipment as a result of the
personnel growth.
We anticipate that we will continue to
devote substantial resources to research and development, and we expect these
expenses to increase in absolute dollars in the foreseeable future due to the
increased complexity and the greater number of products under development.
Research and development expenses are likely to fluctuate from time to time to
the extent we make periodic incremental investments in research and development
and these investments may be independent of our level of revenue.
Sales,
General and Administrative
Sales,
general and administrative expenses were $93.1 million and $80.6 million
during the first quarters of fiscal years 2009 and 2008, respectively, an
increase of $12.5 million, or 16%. Labor related and employee
expenses and stock-based compensation increased by approximately $7.1 million as
a result of personnel growth. Outside professional fees increased by
$4.4 million primarily due to an increase in legal expenses incurred pertaining
to the Department of Justice investigation and other litigation. Marketing
expenses increased by $3.1 million, primarily due to expenses related to a
worldwide sales conference and other marketing related activities.
We expect
operating expenses to remain flat or increase slightly in the second quarter of
fiscal year 2009 compared to the first quarter of fiscal year 2009.
Interest
Income
Interest
income consists of interest earned on cash, cash equivalents and marketable
securities. Interest income increased to $14.3 million in first quarter of
fiscal year 2009, from $13.2 million in first quarter of fiscal year 2008,
primarily due to the result of higher average balances of cash, cash equivalents
and marketable securities even though the interest rates in the first quarter of
fiscal year 2009 were significantly lower when compared to the first quarter of
fiscal year 2008.
Other
Expense, net
Other
expense, net increased by $3.6 million from $0.7 million in first quarter of
fiscal year 2008 to $4.3 million in first quarter of fiscal year 2009. The
increased expense is primarily due to the impact of the continuing weakness of
the U.S. Dollar on our foreign currency denominated liabilities, which resulted
in foreign exchange losses in the quarter.
Income
Taxes
We
recognized income tax expense of $36.2 million and $21.5 million in the first
quarters of fiscal years 2009 and 2008, respectively. Income tax
expense as a percentage of income before taxes, or our annual effective tax
rate, was 17% and 14% in the first quarters of fiscal years 2009 and 2008,
respectively.
Our
effective tax rate is lower than the U.S. federal statutory tax rate of 35%
primarily on account of foreign earnings being taxed in foreign jurisdictions at
rates below the U.S. statutory tax rate. The increase in our
effective tax rate to 17% as of April 27, 2008 from 14% at April 29, 2007 was
primarily due to the expiration of the federal research tax credit.
Please
refer to Note 3 of the Notes to Condensed Consolidated Financial Statements for
further information regarding the components of our income tax
expense.
Liquidity
and Capital Resources
|
As
of
April
27, 2008
|
|
As
of
January
27, 2008
|
|
|
(In
millions)
|
|
Cash
and cash equivalents
|
|
$ |
803.3 |
|
|
$ |
727.0 |
|
|
|
|
818.3 |
|
|
|
1,082.5 |
|
Cash,
cash equivalents, and marketable securities
|
|
$ |
1,621.6 |
|
|
$ |
1,809.5 |
|
|
Three
Months Ended
|
|
|
April
27,
|
|
April
29,
|
|
|
2008
|
|
2007
|
|
|
|
|
|
Net
cash provided by operating activities
|
|
|
|
|
|
|
|
|
Net
cash used in investing activities
|
|
|
|
|
|
|
|
|
Net
cash used in financing activities
|
|
|
|
|
|
|
|
|
As of April 27, 2008, we had $1.62
billion in cash, cash equivalents and marketable securities, a decrease of
$187.8 million from $1.81 billion at the end of fiscal year 2008. Our
portfolio of cash equivalents and marketable securities is managed by several
financial institutions. Our investment policy requires the purchase of top-tier
investment grade securities, the diversification of asset type and includes
certain limits on our portfolio duration.
Operating
activities
Operating
activities generated cash of $145.2 million and $295.2 million during the first
quarters of fiscal years 2009 and 2008, respectively. While our net income plus
the impact of non-cash charges to earnings and deferred income taxes increased
during the comparable periods, the changes in operating assets and liabilities
resulted in a net decrease in cash flow from operations. The changes
in operating assets and liabilities, resulted from the timing of payments to
vendors and an increase in inventories. Additionally, we made
payments of $5.0 million and $11.3 million during the first quarters of fiscal
years 2009 and 2008, respectively, towards a confidential patent licensing
arrangement that we entered into during fiscal year
2007.
Investing
activities
Investing
activities have consisted primarily of purchases and sales of marketable
securities, acquisitions of businesses and purchases of property and equipment,
which include the purchase of property, leasehold improvements for our
facilities and intangible assets. Investing activities provided cash of $24.5
million and used cash of $79.8 million during the first quarters of fiscal years
2009 and 2008, respectively. Investing activities for the first
quarter of fiscal year 2009 used cash of approximately $150.0 million for a
property that includes approximately 25 acres of land and ten commercial
buildings in Santa Clara, California, to facilitate the growth of our
business. Capital expenditures also included new research and
development equipment, testing equipment to support our increased production
requirements, technology licenses, software, intangible assets and leasehold
improvements at our headquarters and international
offices. Additionally, we acquired Ageia during the first quarter of
fiscal year 2009. The cash inflow from maturities of marketable
securities provided cash of $545.8 million which offset the expenditures
described above to provide a positive cash flow from investing
activity.
We expect
to spend approximately $150 million to $200 million for capital expenditures
during the remainder of fiscal year 2009, primarily for property development,
leasehold improvements, software licenses, emulation equipment, computers and
engineering workstations. In addition, we may continue to use cash in
connection with the acquisition of new businesses or assets.
Financing
activities
Financing
activities used cash of $93.4 million and $80.9 million during the first
quarters of fiscal years 2009 and 2008, respectively. Net cash used
by financing activities in the first quarter of fiscal year 2009 was primarily
due to $123.9 million paid towards our stock repurchase program, offset by cash
proceeds of $30.5 million from common stock issued under our employee stock
plans.
Liquidity
Cash
generated by operations is used as our primary source of
liquidity. Our investment portfolio consisted of cash and cash
equivalents, asset-backed securities, commercial paper, mortgage-backed
securities issued by Government-sponsored enterprises, equity securities, money
market funds and highly liquid debt securities of corporations, municipalities
and the United States government and its agencies. As of April 27,
2008, we did not have any investments in auction-rate preferred securities.
These investments are denominated in United States dollars.
We
account for our investment instruments in accordance with Statement of Financial
Accounting Standards No. 115, or SFAS No. 115, Accounting for Certain Investments
in Debt and Equity Securities. All of the cash equivalents and marketable
securities are treated as “available-for-sale” under SFAS No. 115. Investments
in both fixed rate and floating rate interest earning instruments carry a degree
of interest rate risk. Fixed rate debt securities may have their market value
adversely impacted due to a rise in interest rates, while floating rate
securities may produce less income than expected if interest rates fall. Due in
part to these factors, our future investment income may fall short of
expectations due to changes in interest rates or if the decline in fair value of
our publicly traded debt or equity investments is judged to be
other-than-temporary. We may suffer losses in principal if we are forced to sell
securities that decline in market value due to changes in interest rates.
However, because any debt securities we hold are classified as
“available-for-sale,” no gains or losses are realized in our condensed
consolidated statements of income due to changes in interest rates
unless such securities are sold prior to maturity or unless declines in market
values are determined to be other-than-temporary. These securities
are reported at fair value with the related unrealized gains and losses included
in accumulated other comprehensive income, a component of stockholders’ equity,
net of tax.
At April
27, 2008 and January 27, 2008, we had $1.62 billion and $1.81 billion,
respectively, in cash, cash equivalents and marketable
securities. Our investment policy requires the purchase of top-tier
investment grade securities, the diversification of asset type 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 April 27, 2008, we were in
compliance with our investment policy. As of April 27, 2008, our
investments in the financial sector and government agencies accounted for
approximately 34% and 22%, respectively, of our total investment
portfolio. Substantially all of our investments are with A/A2 or
better rated securities with the substantial majority of the securities rated
AA-/Aa3 or better. As of April 27, 2008, $872.6 million of our
portfolio had a maturity of less than a year, and a substantial majority of our
remaining investments have remaining maturities of three years or
less. In the first quarter of fiscal year 2009, we did not recognize
any other-than-temporary impairments on our portfolio of available-for-sale
investments.
Recent
U.S. sub-prime mortgage defaults have had a significant impact across various
sectors of the financial markets, causing global credit and liquidity issues.
The short-term funding markets experienced issues during the third and fourth
quarter of calendar 2007, leading to liquidity disruption in the market. If the
global credit market continues to deteriorate, our investment portfolio may be
impacted and we could determine some of our investments are impaired, which
could adversely impact our financial results.
Stock
Repurchase Program
During
fiscal year 2005, we announced that our Board, had authorized a stock repurchase
program to repurchase shares of our common stock, subject to certain
specifications, up to an aggregate maximum amount of $300
million. During fiscal year 2007, the Board further approved an
increase of $400 million to the original stock repurchase program. In fiscal
year 2008, we announced that our Board authorized an additional stock repurchase
program under which we may purchase up to an additional $1.0 billion of our
common stock over a three year period through May 2010. As a result of these
increases, we have an ongoing authorization from the Board, subject to certain
specifications, to repurchase shares of our common stock up to an aggregate
maximum amount of $1.7 billion.
The repurchases will be made from time
to time in the open market, in privately negotiated transactions, or in
structured stock repurchase programs, and may be made in one or more larger
repurchases, in compliance with the Exchange Act Rule 10b-18, subject to market
conditions, applicable legal requirements, and other factors. The program does
not obligate NVIDIA to acquire any particular amount of common stock and the
program may be suspended at any time at our discretion. As part of our
share repurchase program, we have entered into, and we may continue to enter
into, structured share repurchase transactions with financial institutions.
These agreements generally require that we make an up-front payment in exchange
for the right to receive a fixed number of shares of our common stock upon
execution of the agreement, and a potential incremental number of shares of our
common stock, within a pre-determined range, at the end of the term of the
agreement.
During
the first fiscal quarter ended April 27, 2008, we entered into a structured
share repurchase transaction to repurchase 6.3 million shares for $123.9 million
which we recorded on the trade date of the transaction. Through April
27, 2008, we had repurchased 68.0 million shares under our stock repurchase
program for a total cost of $1.16 billion.
Operating
Capital and Capital Expenditure Requirements
We
believe that our existing cash balances and anticipated cash flows from
operations will be sufficient to meet our operating, acquisition and capital
requirements for at least the next 12 months. However, there is no assurance
that we will not need to raise additional equity or debt financing within this
time frame. Additional financing may not be available on favorable terms or at
all and may be dilutive to our then-current stockholders. We also may require
additional capital for other purposes not presently contemplated. If we are
unable to obtain sufficient capital, we could be required to curtail capital
equipment purchases or research and development expenditures, which could harm
our business. Factors that could affect our cash used or generated from
operations and, as a result, our need to seek additional borrowings or capital
include:
·
|
decreased
demand and market acceptance for our products and/or our customers’
products;
|
·
|
inability
to successfully develop and produce in volume production our
next-generation products;
|
·
|
competitive
pressures resulting in lower than expected average selling prices;
and
|
·
|
new
product announcements or product introductions by our
competitors.
|
We may
continue to use cash in connection with the acquisition of new businesses or
assets and capital expenditures related to our property purchases.
For
additional factors see “Item 1A. Risk Factors - Risks Related to Our Business
and Products - Our operating results are unpredictable and may fluctuate, and if
our operating results are below the expectations of securities analysts or
investors, the trading price of our stock could decline.”
3dfx
Asset Purchase
On December 15, 2000, NVIDIA
Corporation and one of our indirect subsidiaries entered into an Asset Purchase
Agreement, or APA, which closed on April 18, 2001, to purchase certain graphics
chip assets from 3dfx. Under the terms of the APA, the cash consideration due at
the closing was $70.0 million, less $15.0 million that was loaned to 3dfx
pursuant to a Credit Agreement dated December 15, 2000. The Asset Purchase
Agreement also provided, subject to the other provisions thereof, that if 3dfx
properly certified that all its debts and other liabilities had been provided
for, then we would have been obligated to pay 3dfx one million shares, which due
to subsequent stock splits now totals six million shares, of NVIDIA common
stock. If 3dfx could not make such a certification, but instead properly
certified that its debts and liabilities could be satisfied for less than $25.0
million, then 3dfx could have elected to receive a cash payment equal to the
amount of such debts and liabilities and a reduced number of shares of our
common stock, with such reduction calculated by dividing the cash payment by
$25.00 per share. If 3dfx could not certify that all of its debts and
liabilities had been provided for, or could not be satisfied, for less than
$25.0 million, we would not be obligated under the agreement to pay any
additional consideration for the assets.
In October 2002, 3dfx filed for Chapter
11 bankruptcy protection in the United States Bankruptcy Court for the Northern
District of California. In March 2003, we were served with a complaint filed by
the Trustee appointed by the Bankruptcy Court which sought, among other things,
payments from us as additional purchase price related to our purchase of certain
assets of 3dfx. In early November 2005, after several months of mediation,
NVIDIA and the Official Committee of Unsecured Creditors, or the Creditors’
Committee, agreed to a Plan of Liquidation of 3dfx, which included a conditional
settlement of the Trustee’s claims against us. This conditional settlement was
subject to a confirmation process through a vote of creditors and the review and
approval of the Bankruptcy Court after notice and hearing. The conditional
settlement called for a payment by NVIDIA of approximately $30.6 million to the
3dfx estate. Under the settlement, $5.6 million related to various
administrative expenses and Trustee fees, and $25.0 million related to the
satisfaction of debts and liabilities owed to the general unsecured creditors of
3dfx. Accordingly, during the three month period ended October 30, 2005, we
recorded $5.6 million as a charge to settlement costs and $25.0 million as
additional purchase price for 3dfx. The Trustee advised that he
intended to object to the settlement. However, the conditional settlement never
progressed substantially through the confirmation process.
On
December 21, 2005, the Bankruptcy Court determined that it would schedule trial
of one portion of the Trustee’s case against NVIDIA. On January 2, 2007, NVIDIA
exercised its right to terminate the settlement agreement on grounds that the
Bankruptcy Court had failed to proceed toward confirmation of the Creditors’
Committee’s plan. A non-jury trial began on March 21, 2007 on valuation issues
in the Trustee's constructive fraudulent transfer claims against NVIDIA.
Specifically, the Bankruptcy Court tried four questions: (1) what did 3dfx
transfer to NVIDIA in the APA?; (2) of what was transferred, what qualifies as
"property" subject to the Bankruptcy Court's avoidance powers under the Uniform
Fraudulent Transfer Act and relevant bankruptcy code provisions?; (3) what is
the fair market value of the "property" identified in answer to question (2)?;
and (4) was the $70 million that NVIDIA paid "reasonably equivalent" to the fair
market value of that property? At the conclusion of the evidence, the Bankruptcy
Court asked the parties to submit post-trial briefing. That briefing was
completed on May 25, 2007. On April 30, 2008, the Bankruptcy Court
issued its Memorandum Decision After Trial, in which it provided a detailed
summary of the trial proceedings and the parties' contentions with respect to
each of the questions to be tried. The Bankruptcy Court concluded
that "the creditors of 3dfx were not injured by the Transaction."
This decision does not entirely dispose of the Trustee's action, however; still
pending are the Trustee's claims for successor liability and intentional
fraudulent conveyance. On May 12, 2008, the Trustee filed a
motion for leave to pursue an interlocutory appeal.
Please refer to Note
12 of the Notes to Condensed Consolidated Financial Statements for further
information regarding this litigation.
Product
Defect Contingencies
Our
products are complex and may contain defects or experience failures due to any
number of issues in design, fabrication, packaging, materials and / or use
within a system. If any of our products or technologies contains a defect,
compatibility issue or other error, we may have to invest additional research
and development efforts to find and correct the issue. Such efforts
could divert our management’s and engineers’ attention from the development of
new products and technologies and could increase our operating costs and reduce
our gross margin. In addition, an error or defect in new products or releases or
related software drivers after commencement of commercial shipments could result
in failure to achieve market acceptance or loss of design wins. Also, we may be
required to reimburse customers, including for customers’ costs to repair or
replace the products in the field, which could cause our revenue to decline. A
product recall or a significant number of product returns could be expensive,
damage our reputation and could result in the shifting of business to our
competitors. Costs associated with correcting defects, errors, bugs or other
issues could be significant and could materially harm our financial
results.
During
the first quarter of fiscal year 2009, one of our customers asserted claims for
incremental repair and replacement costs related to an alleged die/packaging
material set defect in one of our notebook MCP products. This product was
included in a significant number of the customer’s notebook products that have
been sold to end users, and has also been shipped to other of our customers in
significant quantities. We are evaluating the potential scope of this situation,
including the nature and cause of the alleged defect and the merits of the
customer’s claim, and to what extent the alleged defect might occur with other
of our products. We are currently unable to estimate the amount of
costs that may be incurred by us beyond the normal product warranty accrual that
we have taken related to this claim and the alleged defect and, therefore, we
have not recorded any additional related costs or a liability in our Condensed
Consolidated Financial statements as of, and for the three months ended, April
27, 2008.
Contractual
Obligations
At April
27, 2008, we had outstanding inventory purchase obligations and capital purchase
obligations totaling approximately $654.3 million and $44.1 million,
respectively. There were no other material changes in our contractual
obligations from those disclosed in our Annual Report on Form 10-K for the year
ended January 27, 2008. Please see Item 7, “Management’s Discussion and Analysis
of Financial Condition and Results of Operations - Liquidity and Capital
Resources” in our Form 10-K for a description of our contractual
obligations.
Off-Balance Sheet
Arrangements
As
of April 27, 2008, we had no material off-balance sheet arrangements as defined
in Regulation S-K 303(a)(4)(ii).
Adoption
of New Accounting Pronouncements
On
January 28, 2008, we adopted Statement of Financial Accounting Standards No.
157, or SFAS No. 157, Fair
Value Measurements. SFAS No. 157 for all financial assets and financial
liabilities recognized or disclosed at fair value in the financial statements.
SFAS No. 157 establishes a framework for measuring fair value and expands
disclosures about fair value measurements. The changes to current practice
resulting from the application of SFAS No. 157 relate to the definition of fair
value, the methods used to measure fair value, and the expanded disclosures
about fair value measurements. The adoption of SFAS No. 157 for
financial assets and liabilities did not have a significant impact on our
consolidated financial statements, and the resulting fair values calculated
under SFAS No. 157 after adoption were not significantly different than the
fair values that would have been calculated under previous guidance. Please
refer to Note 16 of these Notes to the Condensed Consolidated Financial
Statements for further details on our fair value measurements.
Additionally,
in February 2008, the FASB issued FASB Staff Position No. FAS 157-2,
or FSP No. 157-2, Effective
Date of FASB Statement No. 157, to partially defer FASB Statement
No. 157, Fair Value Measurements. FSP No. 157-2 defers the
effective date of FAS 157 for non-financial assets and non-financial
liabilities, except those that are recognized or disclosed at fair value in the
financial statements on a recurring basis (at least annually), to fiscal years,
and interim periods within those fiscal years, beginning after November 15,
2008. We do not believe the adoption of FSP 157-2 will have a material
impact on our consolidated financial position, results of operations and cash
flows.
On
January 28, 2008, we adopted the Financial Accounting Standards Board, or FASB
issued Statement of Financial Accounting Standards No. 159, or SFAS
No. 159, The Fair Value
Option for Financial Assets and Financial Liabilities. SFAS No. 159
permits companies to choose to measure certain financial instruments and certain
other items at fair value using an instrument-by-instrument election. The
standard requires that unrealized gains and losses on items for which the fair
value option has been elected be reported in earnings. Under SFAS No. 159, we
did not elect the fair value option for any of our assets and liabilities. The
adoption of SFAS No. 159 did not have an impact on our consolidated
financial statements.
In
June 2007, the FASB ratified Emerging Issues Task Force Issue
No. 07-3, or EITF 07-3, Accounting for Nonrefundable Advance
Payments for Goods or Services to Be Used in Future Research and Development
Activities. EITF 07-3 requires non-refundable advance payments for goods
and services to be used in future research and development activities to be
recorded as an asset and the payments to be expensed when the research and
development activities are performed. We adopted the provisions of EITF 07-3
beginning with our fiscal quarter ended April 27, 2008. The adoption of EITF
07-3 did not have any impact on our consolidated financial position, results of
operations and cash flows.
Recently
Issued Accounting Pronouncements
In December 2007, the FASB issued
Statement of Financial Accounting Standards No. 141 (revised 2007), or
SFAS No. 141(R), Business
Combinations. Under SFAS No. 141(R), an entity is required to
recognize the assets acquired, liabilities assumed, contractual contingencies,
and contingent consideration at their fair value on the acquisition date. It
further requires that acquisition-related costs be recognized separately from
the acquisition and expensed as incurred, restructuring costs generally be
expensed in periods subsequent to the acquisition date, and changes in
accounting for deferred tax asset valuation allowances and acquired income tax
uncertainties after the measurement period impact income tax expense. In
addition, acquired in-process research and development, or IPR&D, is
capitalized as an intangible asset and amortized over its estimated useful
life. We are required to adopt the provisions of SFAS No. 141(R)
beginning with our fiscal quarter ending April 26, 2009. The adoption
of SFAS No. 141(R) is expected to change our accounting treatment for
business combinations on a prospective basis beginning in the period it is
adopted.
ITEM
3. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Investment
and Interest Rate Risk
At April
27, 2008 and January 27, 2008, we had $ 1.62 billion and $1.81 billion,
respectively, in cash, cash equivalents and marketable securities. We
invest in a variety of financial instruments, consisting principally of cash and
cash equivalents, asset-backed securities, commercial paper, mortgage-backed
securities issued by Government-sponsored enterprises, equity securities, money
market funds and highly liquid debt securities of corporations, municipalities
and the United States government and its agencies. As of April 27, 2008, we
did not have any investments in auction-rate preferred securities. Our
investments are denominated in United States dollars.
We
account for our investment instruments in accordance with Statement of Financial
Accounting Standards No. 115, or SFAS No. 115, Accounting for Certain Investments
in Debt and Equity Securities. All of the cash equivalents and marketable
securities are treated as “available-for-sale” under SFAS No. 115. Investments
in both fixed rate and floating rate interest earning instruments carry a degree
of interest rate risk. Fixed rate securities may have their market value
adversely impacted due to a rise in interest rates, while floating rate
securities may produce less income than expected if interest rates fall. Due in
part to these factors, our future investment income may fall short of
expectations due to changes in interest rates or if the decline in fair value of
our publicly traded debt or equity investments is judged to be
other-than-temporary. We may suffer losses in principal if we are forced to sell
securities that decline in securities market value due to changes in interest
rates. However, because any debt securities we hold are classified as
“available-for-sale,” no gains or losses are realized in our condensed
consolidated statements of income due to changes in interest rates unless
such securities are sold prior to maturity or unless declines in value are
determined to be other-than-temporary. These securities are reported at
fair value with the related unrealized gains and losses included in accumulated
other comprehensive income, a component of stockholders’ equity, net of
tax.
As of April 27, 2008, we performed a
sensitivity analysis on our floating and fixed rate financial investments.
According to our analysis, parallel shifts in the yield curve of both +/- 0.5%
would result in changes in fair market values for these investments of
approximately $3.6 million.
Recent U.S. sub-prime mortgage defaults
have had a significant impact across various sectors of the financial markets,
causing global credit and liquidity issues. The short-term funding markets
experienced issues during the third and fourth quarter of calendar 2007, leading
to liquidity disruption in the market. If the global credit market continues to
deteriorate, our investment portfolio may be impacted and we could determine
some of our investments are impaired, which could adversely impact our financial
results. Our investments in the financial sector and government
agencies accounted for approximately 34% and 22%, respectively, of our total
investment portfolio. If the fair value of our investments in these sectors was
to decline by 2%-5%, it would result in changes in fair market values for these
investments by approximately $15-$37 million.
Exchange
Rate Risk
We
consider our direct exposure to foreign exchange rate fluctuations to be
minimal. Currently, sales and arrangements with third-party
manufacturers provide for pricing and payment in United States dollars, and,
therefore, are not subject to exchange rate fluctuations. Increases in the value
of the United States’ dollar relative to other currencies would make our
products more expensive, which could negatively impact our ability to compete.
Conversely, decreases in the value of the United States’ dollar relative to
other currencies could result in our suppliers raising their prices in order to
continue doing business with us. Fluctuations in currency exchange rates could
harm our business in the future. The aggregate exchange loss included in
determining net income was $4.2 million and $0.6 million during the first
quarter of fiscal years 2009 and 2008, respectively.
We may
enter into certain transactions such as forward contracts which are designed to
reduce the future potential impact resulting from changes in foreign currency
exchange rates. There were no forward exchange contracts outstanding at
April 27, 2008.
ITEM
4. CONTROLS AND PROCEDURES
Controls
and Procedures
Disclosure
Controls and Procedures
Based on
their evaluation as of April 27, 2008, our management, including our Chief
Executive Officer and Chief Financial Officer, have concluded that our
disclosure controls and procedures as defined in Rule 13a-15(e) and Rule
15d-15(e) under the Securities Exchange Act of 1934, or the Exchange Act, were
effective.
Changes
in Internal Control Over Financial Reporting
There
were no changes in our internal controls over financial reporting during our
fiscal quarter ended April 27, 2008 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
ITEM
1. LEGAL PROCEEDINGS
Please
see Part I, Item 1, Note 12 of the Notes to Condensed Consolidated
Financial Statements for a discussion of our legal
proceedings.
ITEM
1A. RISK FACTORS
A
description of the risk factors associated with our business is set forth below.
This description includes any material changes to and supersedes the description
of risk factors associated with our business previously disclosed in Part I,
Item 1A. “Risk Factors” of our Annual Report on Form 10-K for the fiscal year
ended January 27, 2008.
Risks
Related to Competition
If
we are unable to compete in the markets for our products, our financial results
could be adversely impacted.
The
markets for our products are highly competitive and are characterized by rapid
technological change, new product introductions, evolving industry standards,
and declining average selling prices. We believe that our ability to remain
competitive will depend on how well we are able to anticipate the features and
functions that customers will demand from our products and whether we are able
to deliver consistent volumes of our products at acceptable prices and quality
levels. We believe other factors impacting our ability to compete
are:
· product
performance;
· product
bundling by competitors with multiple product lines;
· breadth
and frequency of product offerings;
· access
to customers and distribution channels;
· backward-forward
software support;
· conformity
to industry standard application programming interfaces; and
· manufacturing
capabilities.
We expect
competition to increase both from existing competitors and new market entrants
with products that may be less costly than ours, or may provide better
performance or additional features not provided by our products, any of which
could harm our business. Some of these competitors may have or be able to
obtain greater marketing, financial, distribution and manufacturing resources
than we do and may be better able to adapt to customer or technological changes.
Currently, Intel, which has greater resources than we do, is working on a
multi-core architecture code-named Larrabee, which may compete with our products
in various markets. Intel may also release an enthusiast level
discrete graphics processing unit, or GPU, based on the Larrabee architecture.
In order to compete, we may have to invest substantial amounts in research and
development without assurance that our products will be superior to those of our
competitors or that the products will achieve market acceptance.
An
additional significant source of competition comes from companies that provide
or intend to provide competing product solutions. For example, we are the
largest supplier of AMD 64 chipsets with 61% segment share in the first quarter
of calendar year 2008, as reported in the 2008 First Quarter PC Processor and
Chipset report from Mercury Research. Decline in demand for our chipsets in the
AMD segment as a result of the offerings of a new or existing competitor could
materially impact our financial results.
Our
current competitors include the following:
·
suppliers of discrete media and communication processors, or MCPs, that
incorporate a combination of networking, audio, communications and input/output
functionality as part of their existing solutions, such as AMD,
Broadcom,
Silicon Integrated Systems Corporation, or SIS, VIA Technologies, Inc., or VIA,
and Intel;
·
suppliers of GPUs, including MCPs that incorporate 3D graphics functionality as
part of their existing solutions, such as AMD, Intel, Matrox Electronics Systems
Ltd., SIS and VIA;
· suppliers
of GPUs or GPU intellectual property for handheld and digital consumer
electronics devices that incorporate advanced graphics functionality as part of
their existing solutions, such as AMD, Broadcom, Fujitsu Limited, Imagination
Technologies Ltd., ARM Holdings plc, Marvell Technology Group Ltd., or Marvell,
NEC Corporation, Qualcomm Incorporated, or Qualcomm, Renesas Technology,
Seiko-Epson, Texas Instruments Incorporated, and Toshiba America, Inc.;
and
· suppliers
of application processors for handheld and digital consumer electronics devices
that incorporate multimedia processing as part of their existing solutions such
as Broadcom, Texas Instruments Inc., Qualcomm, Marvell, Freescale Semiconductor
Inc., Samsung and ST Microelectronics.
If and to
the extent we offer products in new markets, we may face competition from some
of our existing competitors as well as from companies with which we currently do
not compete. We cannot accurately predict if we will compete successfully in any
new markets we may enter. If we are unable to compete in our current or new
markets, demand for our products could decrease which could cause our revenue to
decline and our financial results to suffer.
As
Intel and AMD continue to pursue platform solutions, we may not be able to
successfully compete and our business would be negatively impacted.
We expect
substantial competition from both Intel’s and AMD’s strategy of selling platform
solutions, such as the success Intel achieved with its Centrino platform
solution. AMD has also announced a platform solution. Additionally, we
expect that Intel and AMD will extend this strategy to other segments, including
the possibility of successfully integrating a central processing unit, or CPU,
and a GPU on the same chip, as evidenced by AMD’s announcement of its Fusion
processor project. If AMD and Intel continue to pursue platform solutions, we
may not be able to successfully compete and our business would be negatively
impacted.
Risks
Related to Our Partners and Customers
We
depend on foundries to manufacture our products and these third parties may not
be able to satisfy our manufacturing requirements, which would harm our
business.
We do
not manufacture the silicon wafers used for our products and do not own or
operate a wafer fabrication facility. Instead, industry-leading
foundries manufacture our semiconductor wafers using their state-of-the-art
fabrication equipment and techniques. The foundries, which have limited
capacity, also manufacture products for other semiconductor companies, including
some of our competitors. Since we do not have long-term commitment
contracts with any of the foundries, they do not have an obligation to provide
us with any minimum quantity of product at any time or at any set price, except
as may be provided in a specific purchase order. Most of our
products are only manufactured by one foundry at a time. In times of
high demand, the foundries could choose to prioritize their capacity for other
companies, reduce or eliminate deliveries to us, or increase the prices that
they charge us. If we are unable to meet customer demand due to
reduced or eliminated deliveries or have to increase the prices of our products,
we could lose sales to customers, which would negatively impact our revenue and
our reputation.
Because
the lead-time needed to establish a strategic relationship with a new
manufacturing partner could be several quarters, we do not have an alternative
source of supply for our products. In addition, the time and effort to qualify a
new foundry could result in additional expense, diversion of resources, or lost
sales any of which would negatively impact our financial results. We believe
that long-term market acceptance for our products will depend on reliable
relationships with the third-party manufacturers we use to ensure adequate
product supply and competitive pricing to respond to customer
demand.
Failure
to achieve expected manufacturing yields for our products could negatively
impact our financial results and damage our reputation.
Manufacturing
yields for our products are a function of product design, which is developed
largely by us, and process technology, which typically is proprietary to the
manufacturer. Low yields may result from either product design or process
technology failure. We do not know a yield problem exists until our
design is manufactured. When a yield issue is identified, the product
is analyzed and tested to determine the cause. As a result, yield problems may
not be identified until well into the production process. Resolution of yield
problems requires cooperation by and communication between us and the
manufacturer. Because of our potentially limited access to wafer foundry
capacity, decreases in manufacturing yields could result in an increase in our
costs and force us to allocate our available product supply among our customers.
Lower than expected yields could potentially harm customer relationships, our
reputation and our financial results.
We
are dependent on third parties for assembly, testing and packaging of our
products, which reduces our control over the delivery schedule, product quantity
or product quality.
Our
products are assembled, tested and packaged by independent subcontractors, such
as Advanced Semiconductor Engineering, Inc., Amkor Technology, JSI Logistics,
Ltd., King Yuan Electronics Co., Siliconware Precision Industries Co. Ltd., and
ChipPAC. As a result, we do not directly control our product delivery schedules,
product quantity, or product quality. All of these subcontractors
assemble, test and package products for other companies, including some of our
competitors. Since we do not have long-term agreements with our
subcontractors, when demand for subcontractors to assemble, test or package
products is high, our subcontractors may decide to prioritize the orders of
other customers over our orders. Since the time required to qualify a
different subcontractor to assemble, test or package our products can be
lengthy, if we have to find a replacement subcontractor we could experience
significant delays in shipments of our products, product shortages, a decrease
in the quality of our products, or an increase in product cost. Any product
shortages or quality assurance problems could increase the costs of manufacture,
assembly or testing of our products, which could cause our gross margin and
revenue to decline.
Failure
to transition to new manufacturing process technologies could adversely affect
our operating results and gross margin.
We use
the most advanced manufacturing process technology appropriate for our products
that is available from our third-party foundries. As a result, we continuously
evaluate the benefits of migrating our products to smaller geometry process
technologies in order to improve performance and reduce costs. We believe this
strategy will help us remain competitive. Our current product
families are manufactured using 0.15 micron, 0.14 micron, 0.13 micron, 0.11
micron, 90 nanometer and 65 nanometer process
technologies. Manufacturing process technologies are subject to
rapid change and require significant expenditures for research and development,
which could negatively impact our operating expenses and gross
margin.
We have
experienced difficulty in migrating to new manufacturing processes in the past
and, consequently, have suffered reduced yields, delays in product deliveries
and increased expense levels. We may face similar difficulties, delays and
expenses as we continue to transition our new products to smaller geometry
processes. Moreover, we are dependent on our third-party manufacturers to
migrate to smaller geometry processes successfully. Some of our competitors own
their manufacturing facilities and may be able to move to a new state of the art
manufacturing process more quickly than our manufacturing
partners. For example, Intel released a 45 nanometer chip for
desktop computers which it is manufacturing in its foundries. If our
suppliers fall behind our competitors in manufacturing processes, the
development and customer demand for our products and the use of our products
could be negatively impacted. The inability by us or our third-party
manufacturers to effectively and efficiently transition to new manufacturing
process technologies may adversely affect our operating results and our gross
margin.
We
rely on third-party vendors to supply software development tools to us for the
development of our new products and we may be unable to obtain the tools
necessary to develop or enhance new or existing products.
We rely
on third-party software development tools to assist us in the design, simulation
and verification of new products or product enhancements. To bring new products
or product enhancements to market in a timely manner, or at all, we need
software development tools that are sophisticated enough or technologically
advanced enough to complete our design, simulations and
verifications. In the past, we have experienced delays in the
introduction of products as a result of the inability of then available software
development tools to fully simulate the complex features and functionalities of
our products. In the future, the design requirements necessary to meet consumer
demands for more features and greater functionality from our products may exceed
the capabilities of available software development
tools. Unavailability of software development tools may result in our
missing design cycles or losing design wins either of which could result in a
loss of market share or negatively impact our operating results.
Because
of the importance of software development tools to the development and
enhancement of our products, a critical component of our product development
efforts is our partnerships with leaders in the computer-aided design industry,
including Cadence Design Systems, Inc. and Synopsys, Inc. We have invested
significant resources to develop relationships with these industry leaders and
have often assisted them in the definition of their new products. We believe
that forming these relationships and utilizing next-generation development tools
to design, simulate and verify our products will help us remain at the forefront
of the 3D graphics, communications and networking segments and develop products
that utilize leading-edge technology on a rapid basis. If these relationships
are not successful, we may be unable to develop new products or product
enhancements in a timely manner, which could result in a loss of market share, a
decrease in revenue or negatively impact our operating results.
We sell our products to a small
number of customers and our business could suffer if we lose any of these
customers.
We have a
limited number of customers and our sales are highly
concentrated. Sales to a significant customer represented
approximately 11% of our total revenue during the first quarter of fiscal year
2009. There were no significant customers during first quarter of
fiscal year 2008. Although a small number of our other customers
represents the majority of our revenue, their end customers include a large
number of original equipment manufacturers, or OEMs, and system integrators
throughout the world who, in many cases, specify the graphics supplier. Our
sales process involves achieving key design wins with leading personal computer,
or PC, OEMs and major system builders and supporting the product design into
high volume production with key contract equipment manufacturers, or CEMs,
original design manufacturers, or ODMs, add-in board and motherboard
manufacturers. These design wins in turn influence the retail and system builder
channel that is serviced by CEMs, ODMs, add-in board and motherboard
manufacturers. Our distribution strategy is to work with a small number of
leading independent CEMs, ODMs, add-in board and motherboard manufacturers, and
distributors, each of which has relationships with a broad range of system
builders and leading PC OEMs. If we were to lose sales to our PC OEMs, CEMs,
ODMs, add-in board manufacturers and motherboard manufacturers and were unable
to replace the lost sales with sales to different customers, they were to
significantly reduce the number of products they order from us, or we were
unable to collect accounts receivable from them, our revenue may not reach or
exceed the expected level in any period, which could harm our financial
condition and our results of operations.
Any difficulties
in collecting accounts receivable, including from foreign customers, could harm
our operating results and financial condition.
Our
accounts receivable are highly concentrated and make us vulnerable to adverse
changes in our customers' businesses, and to downturns in the industry and the
worldwide economy. Three customers accounted for approximately 32%
and 27% of our accounts receivable balance at April 27, 2008 and
January 27, 2008, respectively.
Difficulties
in collecting accounts receivable or the loss of any significant customer could
materially and adversely affect our financial condition and results of
operations. We continue to work directly with more foreign customers and it may
be difficult to collect accounts receivable from them. We maintain an allowance
for doubtful accounts for estimated losses resulting from the inability of our
customers to make required payments. This allowance consists of an amount
identified for specific customers and an amount based on overall estimated
exposure. If the financial condition of our customers were to deteriorate,
resulting in an impairment in their ability to make payments, additional
allowances may be required, we may be required to defer revenue recognition on
sales to affected customers, and we may be required to pay higher credit
insurance premiums, any of which could adversely affect our operating results.
In the future, we may have to record additional reserves or write-offs and/or
defer revenue on certain sales transactions which could negatively impact our
financial results.
Risks
Related to Our Business and Products
If
our products contain significant defects our financial results could be
negatively impacted, our reputation could be damaged and we could lose market
share.
Our
products are complex and may contain defects or experience failures when first
introduced or when we release new versions or enhancements. Such defects or
failures could be due to any number of issues in design fabrication, packaging,
materials and/or use within a system. Past products have and future
products or enhancements may contain defects, errors or bugs. Our products
typically only go through one verification cycle prior to volume production and
distribution. As a result, our products may contain undetected defects or
flaws prior to volume production and distribution. If any of our
products or technologies contains a defect, compatibility issue or other error,
we may have to invest additional research and development efforts to find and
correct the issue. Such efforts could divert our management’s and
engineers’ attention from the development of new products and technologies and
could increase our operating costs and decrease our gross
margin. Additionally, an error or defect in new products or releases or
related software drivers after commencement of commercial shipments could result
in failure to achieve market acceptance or loss of design wins. Also, we
may be required to reimburse customers, including for their costs to repair or
replace the products in the field, which could cause our revenue to
decline. A product recall or a significant number of product returns could
be expensive, damage our reputation, and could result in the shifting of
business to our competitors. Product liability claims brought against
us, even if unsuccessful, would likely be time consuming and costly to
defend. Costs associated with finding and correcting defects, errors, bugs
or other issues could be significant and could materially harm our financial
results and have other adverse results.
During
the first quarter of fiscal year 2009, one of our customers asserted claims for
incremental repair and replacement costs related to an alleged die/packaging
material set defect in one of our notebook MCP products. This product was
included in a significant number of the customer’s notebook products that have
been sold to end users, and has also been shipped to other of our customers in
significant quantities. We are evaluating the potential scope of this situation,
including the nature and cause of the alleged defect and the merits of the
customer’s claim, and to what extent the alleged defect might occur with other
of our products. We are currently unable to estimate the amount of
costs that may be incurred by us beyond the normal product warranty accrual that
we have taken related to this claim and the alleged defect and, therefore, we
have not recorded any additional related costs or a liability in our Condensed
Consolidated Financial statements as of, and for the three months ended, April
27, 2008.
Our
failure to estimate customer demand properly could adversely affect our
financial results.
Our
inventory purchases are based upon future demand forecasts or orders from our
customers and may not accurately predict the quantity or type of products that
our customers will want or will ultimately purchase. In forecasting demand, we
make multiple assumptions any of which may prove to be incorrect. Situations
that may result in excess or obsolete inventory, which could result in
write-downs of the value of our inventory and/or a reduction in average selling
prices, and where our gross margin could be adversely affected
include:
· if there were a sudden and
significant decrease in demand for our products;
·
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if
there were a higher incidence of inventory obsolescence because of rapidly
changing technology and
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· if
we fail to estimate customer demand properly for our older products as our newer
products are introduced; or
· if our competition were to take
unexpected competitive pricing actions.
Conversely,
if we underestimate our customers’ demand for our products, our third party
manufacturing partners may not have adequate capacity to increase production for
us meaning that we may not be able to obtain sufficient inventory to fill our
customers’ orders on a timely basis. Even if we are able to increase production
levels to meet customer demand, we may not be able to do so in a cost effective
or timely manner. Inability to fulfill our customers’ orders on a timely basis,
or at all, could damage our customer relationships, result in lost revenue,
cause a loss in market share, impact our customer relationships or damage our
reputation, any of which could adversely impact our business.
Because
we order products or materials in advance of anticipated customer demand our
ability to reduce our inventory purchase commitments quickly in response to
lower than expected demand is limited.
We
manufacture our products based on forecasts of customer demand in order to have
shorter shipment lead times for our customers. As a result, we may
build inventories for anticipated periods of growth which do not occur or may
build inventory anticipating demand for a product that does not
materialize. Any inability to sell products to which we have devoted
resources could harm our business. In addition, cancellation or deferral of
customer purchase orders could result in our holding excess inventory, which
could adversely affect our gross margin and restrict our ability to fund
operations. Additionally, because we often sell a substantial portion of our
products in the last month of each quarter, we may not be able to reduce our
inventory purchase commitments in a timely manner in response to customer
cancellations or deferrals. We could be subject to excess or obsolete
inventories and be required to take corresponding inventory write-downs if
growth slows or does not materialize or if we incorrectly forecast product
demand, which could negatively impact our financial
results.
Our
business results could be adversely affected if our product development efforts
are unsuccessful.
In the
past, we have experienced delays in the development of new products. Any delay
or failure of our GPUs, our other products, or other technologies to meet or
exceed specifications of our customers or competitive products could materially
harm our business if customers do not buy our products. The success of our new
product introductions will depend on many factors, including the
following:
· proper
new product definition;
· timely
completion and introduction of new product designs;
· availability
of next-generation software development tools to design, simulate and verify our
products;
.
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our
dependence on third-parties to effectively manufacture, assemble, test and
package our new products in a
timely
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manner
while maintaining product quality;
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· differentiation
of new products from those of our competitors;
· market
acceptance of our products and our customers' products; and
· availability
of adequate quantity and configurations of various types of memory
products.
Our
failure to successfully develop, introduce or achieve market acceptance for new
processors or other technologies could impact our revenue, gross margin and
other financial results.
Our
failure to identify new market or product opportunities or to develop new
products could harm our business.
As our
GPUs and other processors develop and competition increases, we anticipate that
product life cycles at the high end will remain short and average selling prices
will decline. In particular, we expect average selling prices and gross margins
for our processors to decline as each product matures and as unit volume
increases. As a result, we will need to introduce new products and enhancements
to existing products to maintain or improve overall average selling prices and
our gross margin. In order for our processors to achieve high volumes, leading
PC OEMs, ODMs, and add-in board and motherboard manufacturers must select our
processors for design into their products, and then successfully complete the
designs of their products and sell them. We may be unable to successfully
identify new product opportunities or to develop and bring to market new
products in a timely fashion. Additionally, we cannot guarantee that new
products we develop will be selected for design into PC OEMs’, ODMs’, or add-in
board and motherboard manufacturers’ products, that any new designs will be
successfully completed, or that any new products will be sold.
As the
complexity of our products and the manufacturing process for our products
increases, there is an increasing risk that we will experience problems with the
performance of our products and that there will be delays in the development,
introduction or volume shipment of our products. We may experience difficulties
related to the production of current or future products or other factors that
may delay the introduction or volume sale of new products we develop. In
addition, we may be unable to successfully manage the production transition
risks with respect to future products. Failure to achieve any of the foregoing
with respect to future products or product enhancements could result in rapidly
declining average selling prices, reduced margins and reduced demand for
products or loss of market share. In addition, products or technologies
developed by others may render our processors non-competitive or obsolete or
result in our holding excess inventory, which would harm our
business.
If
we are unable to achieve design wins, our products may not be adopted by our
target markets or customers either of which could negatively impact our
financial results.
The
success of our business depends to a significant extent on our ability to
develop new competitive products for our target markets and customers. We
believe achieving design wins, which entails having our existing and future
products chosen for hardware components or subassemblies designed by OEMs, ODMs,
add-in board and motherboard manufacturers, are an integral part of our future
success. Our OEM, ODM, and add-in board and motherboard manufacturers’ customers
typically introduce new system configurations as often as twice per year,
typically based on spring and fall design cycles or in connection with trade
shows. Accordingly, when our customers are making their design decisions, our
existing products must have competitive performance levels or we must timely
introduce new products in order to be included in our customers’ new system
configurations. This requires that we:
· anticipate
the features and functionality that customers and consumers will demand;
· incorporate
those features and functionalities into products that meet the exacting design
requirements of our
customers;
· price
our products competitively; and
· introduce
products to the market within our customers’ limited design cycles.
If OEMs,
ODMs, and add-in board and motherboard manufacturers do not include our products
in their systems, they will typically not use our products in their systems
until at least the next design configuration. Therefore, we endeavor to develop
close relationships with our OEMs and ODMs, in an attempt to better anticipate
and address customer needs in new products so that we will achieve design
wins.
Our
ability to achieve design wins also depends in part on our ability to identify
and be compliant with evolving industry standards. Unanticipated changes in
industry standards could render our products incompatible with products
developed by major hardware manufacturers and software developers like AMD,
Intel and Microsoft. If our products are not in compliance with
prevailing industry standards, we may not be designed into our customers’
product designs. However, to be compliant with changes to industry
standards, we may have to invest significant time and resources to redesign our
products which could negatively impact our gross margin or operating results. If
we are unable to achieve new design wins for existing or new customers, we may
lose market share and our operating results would be negatively
impacted.
We
may have to invest more resources in research and development than anticipated,
which could increase our operating expenses and negatively impact our operating
results.
If new
competitors, technological advances by existing competitors, our entry into new
markets, or other competitive factors require us to invest significantly greater
resources than anticipated in our research and development efforts, our
operating expenses would increase. We have increased our engineering and
technical resources and had 3,683 and 2,657 full-time employees engaged in
research and development as of April 27, 2008 and April 29, 2007,
respectively. Research and development expenditures were $218.8
million and $158.3 million for the first quarter of fiscal years 2009 and 2008,
respectively. Research and development expenses included non-cash
stock-based compensation expense of $24.5 million and $22.4 million in the first
quarters of fiscal years 2009 and 2008, respectively, which we began to record
in the first quarter of fiscal year 2007 as a result of our adoption of SFAS No.
123(R). If we are required to invest significantly greater resources than
anticipated in research and development efforts without an increase in revenue,
our operating results could decline. Research and development expenses are
likely to fluctuate from time to time to the extent we make periodic incremental
investments in research and development and these investments may be independent
of our level of revenue which could negatively impact our financial results. In
order to remain competitive, which may include entering new markets, we
anticipate that we will continue to devote substantial resources to research and
development, and we expect these expenses to increase in absolute dollars in the
foreseeable future due to the increased complexity and the greater number of
products under development as well as hiring additional employees.
Because
our gross margin for any period depends on a number of factors, our failure to
forecast changes in any of these factors could adversely affect our gross
margin.
We
continue to pursue improved gross margin. Our gross margin for any period
depends on a number of factors, including:
· the
mix of our products sold;
· average
selling prices;
· introduction
of new products;
· product
transitions;
· sales
discounts;
· unexpected
pricing actions by our competitors;
· the
cost of product components; and
· the
yield of wafers produced by the foundries that manufacture our
products.
If we do
not correctly forecast the impact of any of the relevant factors on our
business, we may not be able to take action in time to counteract any negative
impact on our gross margin. In addition, if we are unable to meet our gross
margin target for any period or the target set by analysts, the trading price of
our common stock may decline.
We
may not be able to realize the potential financial or strategic benefits of
business acquisitions or strategic investments, which could hurt our ability to
grow our business, develop new products or sell our products.
We
have acquired and invested in other businesses that offered products, services
and technologies that we believe will help expand or enhance our existing
products and business. We may enter into future acquisitions of, or investments
in, businesses, in order to complement or expand our current businesses or enter
into a new business market. Negotiations associated with an acquisition or
strategic investment could divert management’s attention and other company
resources. Any of the following risks associated with past or future
acquisitions or investments could impair our ability to grow our business,
develop new products, our ability to sell our products, and ultimately could
have a negative impact on our growth or our financial results:
· difficulty
in combining the technology, products, operations or workforce of the acquired
business with our business;
· difficulty
in operating in a new or multiple new locations;
· disruption
of our ongoing businesses or the ongoing business of the company we invest in or
acquire;
· difficulty
in realizing the potential financial or strategic benefits of the
transaction;
· difficulty
in maintaining uniform standards, controls, procedures and
policies;
· disruption
of or delays in ongoing research and development efforts;
· diversion
of capital and other resources;
· assumption
of liabilities;
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· diversion of
resources and unanticipated expenses resulting from litigation
arising from potential or actual business acquisitions or
investments;
|
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· difficulties in
entering into new markets in which we have limited or no experience and
where competitors in such markets have stronger positions;
and
|
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·
impairment of relationships with employees and customers, or the loss of
any of our key employees or customers of our target's key employees or
customers, as a result of our acquisition or
investment
|
In
addition, the consideration for any future acquisition could be paid in cash,
shares of our common stock, the issuance of convertible debt securities or a
combination of cash, convertible debt and common stock. If we make an investment
in cash or use cash to pay for all or a portion of an acquisition, our cash
reserves would be reduced which could negatively impact the growth of our
business or our ability to develop new products. However, if we pay the
consideration with shares of common stock, or convertible debentures, the
holdings of our existing stockholders would be diluted. We cannot forecast the
number, timing or size of future strategic investments or acquisitions, or the
effect that any such investments or acquisitions might have on our operations or
financial results.
We
are dependent on key employees and the loss of any of these employees could
negatively impact our business.
Our
future success and ability to compete is substantially dependent on our ability
to identify, hire, train and retain highly qualified key
personnel. The market for key employees in the semiconductor industry
can be competitive. None of our key employees is bound by an
employment agreement, meaning our relationships with all of our key employees
are at will. For instance, Marvin D. Burkett, Chief Financial Officer, or
CFO, informed us on March 21, 2008 of his intention to retire. Mr.
Burkett is expected to remain as CFO while a search is conducted to find his
replacement, and he may continue in some capacity with us thereafter. We have
commenced the process to recruit a new CFO. The loss of the services
of Mr. Burkett or any of our other key employees without an adequate
replacement or our inability to hire new employees as needed could delay our
product development efforts, harm our ability to sell our products or otherwise
negatively impact our business.
Our
operating expenses are relatively fixed and we may not be able to reduce
operating expenses quickly in response to any revenue shortfalls.
Our
operating expenses, which are comprised of research and development expenses and
sales, general and administrative expenses, represented 27% and 28% of our total
revenue during the first quarters of fiscal years 2009 and 2008,
respectively. Operating expenses included non-cash stock-based
compensation expense of $39.0 million and $34.6 million in the first quarters of
fiscal years 2009 and 2008, respectively, which we began to record in the first
quarter of fiscal year 2007 as a result of our adoption of Statement of
Financial Accounting Standards No. 123(R), or SFAS No. 123(R), Share-Based Payment. Since we
often recognize a substantial portion of our revenue in the last month of each
quarter, we may not be able to adjust our operating expenses in a timely manner
in response to any unanticipated revenue shortfalls. Further, some of our
operating expenses, like non-cash stock-based compensation expense can only be
adjusted over a longer period of time and cannot be reduced during a
quarter. If we are unable to reduce operating expenses quickly in
response to any revenue shortfalls, our financial results would be negatively
impacted.
Expensing
employee stock options materially and adversely affects our reported operating
results and could also adversely affect our competitive position.
Since
inception, we have used stock options and our employee stock purchase program as
fundamental components of our compensation packages. We believe that these
incentives directly motivate our employees and, through the use of vesting,
encourage our employees to remain with us. As a result of adjustments
arising from our restatement related to stock option grant dates, our operating
results for fiscal years prior to fiscal year 2007 contain recorded amounts of
non-cash stock-based compensation expense. For our fiscal years 2000 through
2006, this non-cash stock-based compensation expense was calculated using
primarily the intrinsic value-based method under Accounting Principles Board
Opinion No. 25, or APB 25, Accounting for Stock Issued to
Employees and related interpretations.
In
December 2004, the FASB issued SFAS No. 123(R) which requires the
measurement and recognition of compensation expense for all stock-based
compensation payments. SFAS No. 123(R) requires that we record
compensation expense for stock options and our employee stock purchase plan
using the fair value of those awards. During the first quarter of fiscal years
2009 and 2008 we recorded $42.1 million and $37.4 million, respectively, related
to non-cash stock-based compensation, resulting from our compliance with SFAS
No. 123(R), which negatively impacted our operating results. We believe that
SFAS No. 123(R) will continue to negatively impact our operating
results.
To the
extent that SFAS No. 123(R) makes it more expensive to grant stock options or to
continue to have an employee stock purchase program, we may decide to incur
increased cash compensation costs. In addition, actions that we may take to
reduce stock-based compensation expense that may be more severe than any actions
our competitors may implement and may make it difficult to attract retain and
motivate employees, which could adversely affect our competitive position as
well as our business and operating results.
We
may be required to record a charge to earnings if our goodwill or amortizable
intangible assets become impaired, which could negatively impact our operating
results.
Under
accounting principles generally accepted in the United States, we review our
amortizable intangible assets and goodwill for impairment when events or changes
in circumstances indicate the carrying value may not be recoverable. Goodwill is
tested for impairment at least annually. The carrying value of our goodwill or
amortizable assets may not be recoverable due to factors such as a decline in
stock price and market capitalization, reduced estimates of future cash flows
and slower growth rates in our industry or in any of our business units.
Estimates of future cash flows are based on an updated long-term financial
outlook of our operations. However, actual performance in the near-term or
long-term could be materially different from these forecasts, which could impact
future estimates. For example, if one of our business units does not meet its
near-term and longer-term forecasts, the goodwill assigned to the business unit
could be impaired. We may be required to record a charge to earnings in our
financial statements during a period in which an impairment of our goodwill or
amortizable intangible assets is determined to exist, which may negatively
impact our results of operations.
Our
operating results are unpredictable and may fluctuate, and if our operating
results are below the expectations of securities analysts or investors, the
trading price of our stock could decline.
Many of
our revenue components fluctuate and are difficult to predict, and our operating
expenses are largely independent of revenue. Therefore, it is difficult for us
to accurately forecast revenue and profits or losses in any particular
period.
Any one
or more of the risks discussed in this Quarterly Report on Form 10-Q or other
factors could prevent us from achieving our expected future revenue or net
income. Accordingly, we believe that period-to-period comparisons of our results
of operations should not be relied upon as an indication of future performance.
Similarly, the results of any quarterly or full fiscal year period are not
necessarily indicative of results to be expected for a subsequent quarter or a
full fiscal year.
As a
result, it is possible that in some quarters our operating results could be
below the expectations of securities analysts or investors, which could cause
the trading price of our common stock to decline. We believe that our quarterly
and annual results of operations may continue to be affected by a variety of
factors that could harm our revenue, gross profit and results of
operations.
Risks
related to Market Conditions
We
are exposed to fluctuations in the market values of our portfolio investments
and in interest rates.
At
April 27, 2008 and January 27, 2008, we had $1.62 billion and $1.81 billion,
respectively, in cash, cash equivalents and marketable securities. We
invest in a variety of financial instruments, consisting principally of cash and
cash equivalents, asset-backed securities, commercial paper, mortgage-backed
securities issued by Government-sponsored enterprises, equity securities, money
market funds and highly liquid debt securities of corporations, municipalities
and the United States government and its agencies. As of April 27, 2008, we
did not have any investments in auction-rate preferred securities. All of our
investments are denominated in United States dollars.
We
account for our investment instruments in accordance with Statement of Financial
Accounting Standards No. 115, or SFAS No. 115, Accounting for Certain Investments
in Debt and Equity Securities. All of our cash equivalents and marketable
securities are treated as “available-for-sale” under SFAS No. 115. Investments
in both fixed rate and floating rate interest earning instruments carry a degree
of interest rate risk. Fixed rate debt securities may have their market value
adversely impacted due to a rise in interest rates, while floating rate
securities may produce less income than expected if interest rates fall. Due in
part to these factors, our future investment income may fall short of
expectations due to changes in interest rates or if the decline in fair value of
our publicly traded debt or equity investments is judged to be
other-than-temporary. We may suffer losses in principal if we are forced to sell
securities that decline in market value due to changes in interest rates.
However, because any debt securities we hold are classified as
“available-for-sale,” no gains or losses are realized in our condensed
consolidated statements of income due to changes in interest rates unless such
securities are sold prior to maturity or unless declines in value are determined
to be other-than-temporary. These securities are reported at fair value
with the related unrealized gains and losses included in accumulated other
comprehensive income, a component of stockholders’ equity, net of
tax.
Recent
U.S. sub-prime mortgage defaults have had a significant impact across various
sectors of the financial markets, causing global credit and liquidity issues.
The short-term funding markets experienced issues during the third and fourth
quarter of calendar 2007, leading to liquidity disruption in the market. If the
global credit market continues to deteriorate, our investment portfolio may be
impacted and we could determine some of our investments are impaired, which
could adversely impact our financial results. As of April 27, 2008, our
investments in the financial sector and government agencies accounted for
approximately 34% and 22%, respectively, of our total investment portfolio. If
the fair value of our investments in these sectors was to decline by 2%-5%, it
would result in changes in fair market values for these investments by
approximately $15-$37 million.
We
are subject to risks associated with international operations which may harm our
business.
We
conduct our business worldwide. Our semiconductor wafers are
manufactured, assembled, tested and packaged by third-parties located outside of
the United States. We generated 92% and 83% of total revenues for the first
quarter of fiscal years 2009 and 2008, respectively, from sales to customers
outside the United States and other Americas. As of April 27, 2008, we had
offices in thirteen countries outside of the United States. The
manufacture, assembly, test and packaging of our products outside of the United
States, operation of offices outside of the United States, and sales to
customers internationally subjects us to a number of risks,
including:
|
·
|
international
economic and political conditions, such as political tensions between
countries in which we do business;
|
· unexpected
changes in, or impositions of, legislative or regulatory requirements;
· complying
with a variety of foreign laws;
· differing
legal standards with respect to protection of intellectual property and
employment practices;
· cultural
differences in the conduct of business;
· inadequate
local infrastructure that could result in business
disruptions;
|
·
|
exporting
or importing issues related to export or import restrictions, tariffs,
quotas and other trade barriers and
restrictions;
|
|
·
|
financial
risks such as longer payment cycles, difficulty in collecting accounts
receivable and fluctuations in currency exchange
rates;
|
· imposition
of additional taxes and penalties; and
|
·
|
other
factors beyond our control such as terrorism, civil unrest, war and
diseases such as severe acute respiratory syndrome and the Avian flu.
|
If sales
to any of our customers outside of the United States and other Americas are
delayed or cancelled because of any of the above factors, our revenue may be
negatively impacted.
Our
international operations in Australia, Taiwan, Japan, Korea, China, Hong Kong,
India, France, Finland, Germany, Russia, Switzerland and the United Kingdom are
subject to many of the above listed risks. We intend to continue to expand our
existing operations and expect to open other international offices. Difficulties
with our international operations, including finding appropriate staffing and
office space, may divert management’s attention and other resources any of which
could negatively impact our operating results.
The
economic conditions in our primary overseas markets, particularly in Asia, may
negatively impact the demand for our products abroad. All of our international
sales to date have been denominated in United States dollars. Accordingly,
an increase in the value of the United States dollar relative to foreign
currencies could make our products less competitive in international markets or
require us to assume the risk of denominating certain sales in foreign
currencies. We anticipate that these factors will impact our business to a
greater degree as we further expand our international business
activities.
If
our products do not continue to be adopted by the desktop PC, notebook PC,
workstation, high-performance computing, personal media players, or PMPs,
personal digital assistants, or PDAs, cellular handheld devices, and video game
console markets or if the demand for new and innovative products in these
markets decreases, our business and operating results would suffer.
Our
success depends in part upon continued broad adoption of our processors for 3D
graphics and multimedia in desktop PC, notebook PC, workstation,
high-performance computing, PMPs, PDAs, cellular handheld devices, and video
game console applications. The market for processors has been characterized by
unpredictable and sometimes rapid shifts in the popularity of products, often
caused by the publication of competitive industry benchmark results, changes in
pricing of dynamic random-access memory devices and other changes in the total
system cost of add-in boards, as well as by severe price competition and by
frequent new technology and product introductions. Broad market acceptance is
difficult to achieve and such market acceptance, if achieved, is difficult to
sustain due to intense competition and frequent new technology and product
introductions. Our GPU and MCP businesses together comprised of approximately
78% and 75% of our total revenue for the first quarters of fiscal years 2009 and
2008, respectively. As such, our financial results would suffer if for any
reason our current or future GPUs or MCPs do not continue to achieve widespread
adoption by the PC market. If we are unable to complete the timely development
of new products or if we were unable to successfully and cost-effectively
manufacture and deliver products that meet the requirements of the desktop PC,
notebook PC, workstation, high-performance computing, PMP, PDA, cellular phone,
and video game console markets, we may experience a decrease in revenue which
could negatively impact our operating results.
Additionally,
there can be no assurance that the industry will continue to demand new products
with improved standards, features or performance. If our customers, OEMs, ODMs,
add-in-card and motherboard manufacturers, system builders and consumer
electronics companies, do not continue to design products that require more
advanced or efficient processors and/or the market does not continue to demand
new products with increased performance, features, functionality or standards,
sales of our products could decline. Decreased sales of our products for these
markets could negatively impact our revenue and our financial
results.
We
are dependent on the PC market and its rate of growth in the future may have a
negative impact on our business.
We derive
and expect to continue to derive the majority of our revenue from the sale
or license of products for use in the desktop PC and notebook PC markets,
including professional workstations. A reduction in sales of PCs, or a reduction
in the growth rate of PC sales, may reduce demand for our products. These
changes in demand could be large and sudden. Since PC manufacturers often build
inventories during periods of anticipated growth, they may be left with excess
inventories if growth slows or if they incorrectly forecast product transitions.
In these cases, PC manufacturers may abruptly suspend substantially all
purchases of additional inventory from suppliers like us until their excess
inventory has been absorbed, which would have a negative impact on our financial
results.
Our
business is cyclical in nature and an industry downturn could harm our financial
results.
Our
business is directly affected by market conditions in the highly cyclical
semiconductor industry, including alternating periods of overcapacity and
capacity constraints, variations in manufacturing costs and yields, significant
expenditures for capital equipment and product development, and rapid
technological change. If we are unable to respond to changes in our industry,
which can be unpredictable and rapid, in an efficient and timely manner, our
operating results could suffer. In particular, from time to time, the
semiconductor industry has experienced significant and sometimes prolonged
downturns characterized by diminished product demand, increased inventory levels
and accelerated erosion of average selling prices. If we cannot take appropriate
actions such as reducing our manufacturing or operating costs to sufficiently
offset declines in demand, increased inventories, or decreased selling prices
during a downturn, our revenue and operating results will suffer.
Risks
Related to Regulatory and other Legal Matters
The
United States Department of Justice’s pending investigation into the market
for graphics processors and the ongoing civil actions could adversely affect our
business.
On
November 29, 2006, we received a subpoena from the San Francisco Office of the
Antitrust Division of the United States Department of Justice, or DOJ, in
connection with the DOJ's investigation into potential antitrust violations
related to GPUs and cards. No specific allegations have been made against us. We
are cooperating with the DOJ in its investigation.
As of May
13, 2008, 55 civil complaints have been filed against us. The majority of the
complaints were filed in the Northern District of California, several were filed
in the Central District of California, and other cases were filed in several
other Federal district courts. On April 18, 2007, the Judicial Panel
on Multidistrict Litigation transferred the actions currently pending outside of
the Northern District of California to the Northern District of California for
coordination of pretrial proceedings before the Honorable William H.
Alsup. By agreement of the parties, Judge Alsup will retain
jurisdiction over the consolidated cases through trial or other
resolution.
In the
consolidated proceedings, two groups of plaintiffs (one representing all direct
purchasers of graphic processing units, or GPUs, and the other representing all
indirect purchasers) filed consolidated, amended class-action complaints. These
complaints purport to assert federal antitrust claims based on alleged price
fixing, market allocation, and other alleged anti-competitive agreements between
us and ATI Technologies, Inc., or ATI and AMD, as a result of its acquisition of
ATI. The indirect purchasers’ consolidated amended complaint also
asserts a variety of state law antitrust, unfair competition and consumer
protection claims on the same allegations, as well as a common law claim for
unjust enrichment.
Plaintiffs
filed their first consolidated complaints on June 14, 2007. On July
16, 2007, we moved to dismiss those complaints. The motions to
dismiss were heard by Judge Alsup on September 20, 2007. The Court
subsequently granted and denied the motions in part, and gave the
plaintiffs leave to move to amend the complaints. On November 7,
2007, the Court granted plaintiffs’ motion to file amended complaints, ordered
defendants to answer the complaints, lifted a previously entered stay on
discovery, and set a trial date for January 12, 2009. Discovery is
underway and Plaintiffs filed motions for class certification on April 24,
2008. Our oppositions to the motions were filed on May 20, 2008. We
believe the allegations in the complaints are without merit and intend to
vigorously defend the cases. Costs of defense and any damages
resulting from a ruling against us or a settlement of the litigation could
adversely affect our business.
The
matters relating to the Board’s review of our historical stock option granting
practices and the restatement of our consolidated financial statements have
resulted in litigation, which could harm our financial results.
On August
10, 2006, we announced that the Audit Committee of our Board, with the
assistance of outside legal counsel, was conducting a review of our stock option
practices covering the time from our initial public offering in 1999, our fiscal
year 2000, through June 2006. The Audit Committee reached the conclusion that
incorrect measurement dates were used for financial accounting purposes for
stock option grants in certain prior periods. As a result, we recorded
additional non-cash stock-based compensation expense, and related tax effects,
related to stock option grants.
The Audit
Committee’s review of our historic stock option practices identified a number of
occasions on which the measurement date used for financial accounting and
reporting purposes for stock options granted to certain of our employees was
different from the actual grant date. To correct these accounting errors, we
amended our Annual Report on Form 10-K for the year ended January 29, 2006 and
our Quarterly Report on Form 10-Q for the three months ended April 30, 2006 to
restate the consolidated financial statements contained in those
reports. This review of our historical stock option granting
practices and subsequent restatement required us to incur substantial expenses
for legal, accounting, tax and other professional services and diverted our
management’s attention from our business.
Additionally,
the review and the resulting restatement of our prior financial statements have
exposed us to greater risks associated with litigation. Ten derivative
complaints have been filed in state and federal court pertaining to allegations
relating to stock option grants. We cannot assure you that these or future
similar complaints, or any future litigation or regulatory action will result in
the same conclusions reached by the Audit Committee. On August 5, 2007, our
Board authorized the formation of a Special Litigation Committee to investigate,
evaluate, and make a determination as to how we should proceed with respect to
the claims and allegations asserted in the underlying derivative cases brought
on behalf of NVIDIA. Currently, the Special Litigation Committee’s
review is ongoing. The conduct and resolution of these matters will
be time consuming, expensive and could distract our management’s attention from
the conduct of our business. Furthermore, if we are subject to
adverse rulings, we could be required to pay damages or penalties or have other
remedies imposed upon us which could harm our business, financial condition,
results of operations and cash flows.
Our
ability to compete will be harmed if we are unable to adequately protect our
intellectual property.
We rely
primarily on a combination of patents, trademarks, trade secrets, employee and
third-party nondisclosure agreements, and licensing arrangements to protect our
intellectual property in the United States and internationally. We have numerous
patents issued, allowed and pending in the United States and in foreign
jurisdictions. Our patents and pending patent applications primarily relate to
our products and the technology used in connection with our products. We also
rely on international treaties, organizations and foreign laws to protect our
intellectual property. The laws of certain foreign countries in which our
products are or may be manufactured or sold, including various countries in
Asia, may not protect our products or intellectual property rights to the same
extent as the laws of the United States. This makes the possibility of piracy of
our technology and products more likely. We continuously assess whether and
where to seek formal protection for particular innovations and technologies
based on such factors as:
|
·
the commercial significance of our operations and our competitors’
operations in particular countries and
regions;
|
· the
location in which our products are manufactured;
· our
strategic technology or product directions in different countries; and
· the
degree to which intellectual property laws exist and are meaningfully enforced
in different jurisdictions.
Our
pending patent applications and any future applications may not be approved. In
addition, any issued patents may not provide us with competitive advantages or
may be challenged by third parties. The enforcement of patents by others may
harm our ability to conduct our business. Others may independently develop
substantially equivalent intellectual property or otherwise gain access to our
trade secrets or intellectual property. Our failure to effectively protect our
intellectual property could harm our business.
Litigation
to defend against alleged infringement of intellectual property rights or to
enforce our intellectual property rights and the outcome of such litigation
could result in substantial costs to us.
We expect
that as the number of issued hardware and software patents increases and as
competition intensifies, the volume of intellectual property infringement claims
and lawsuits may increase. We may become involved in lawsuits or other legal
proceedings alleging patent infringement or other intellectual property rights
violations by us or by our customers that we have agreed to indemnify them for
certain claims of infringement. An unfavorable ruling could include significant
damages, invalidation of a patent or family of patents, indemnification of
customers, payment of lost profits, or, when it has been sought, injunctive
relief.
In
addition, we may need to commence litigation or other legal proceedings in order
to:
· assert
claims of infringement of our intellectual property;
· enforce
our patents;
· protect
our trade secrets or know-how; or
· determine
the enforceability, scope and validity of the propriety rights of
others.
If we
have to initiate litigation in order to protect our intellectual property, our
operating expenses may increase which could negatively impact our operating
results. Our failure to effectively protect our intellectual property could harm
our business.
If
infringement claims are made against us or our products are found to
infringe a third parties’ patent or intellectual property, we or one of our
indemnified customers may have to seek a license to the third parties’ patent or
other intellectual property rights. However, we may not be able to obtain
licenses at all or on terms acceptable to us particularly from our competitors.
If we or one of our indemnified customers is unable to obtain a license from a
third party for technology that we use or that is used in one of our products,
we could be subject to substantial liabilities or have to suspend or discontinue
the manufacture and sale of one or more of our products. We may also
have to make royalty or other payments, or cross license our technology. If
these arrangements are not concluded on commercially reasonable terms, our
business could be negatively impacted. Furthermore, the indemnification of a
customer may increase our operating expenses which could negatively impact our
operating results.
We
are a party to litigation, which, if determined adversely to us, could adversely
affect our cash flow and financial results.
We are a
party to litigation. There can be no assurance that any litigation to which we
are a party will be resolved in our favor. Any claim that is successfully
asserted against us may cause us to pay substantial damages, including punitive
damages, and other related fees. Regardless of whether lawsuits are resolved in
our favor or if we are the plaintiff or the defendant in the litigation, any
lawsuits to which we are a party will likely be expensive and time consuming to
defend or resolve. Such lawsuits could also harm our relationships with existing
customers and result in the diversion of management’s time and attention away
from business operations, which could harm our business. Costs of defense and
any damages resulting from litigation, a ruling against us, or a settlement of
the litigation could adversely affect our cash flow and financial
results.
Our
operating results may be adversely affected if we are subject to unexpected tax
liabilities.
We are
subject to taxation by a number of taxing authorities both in the United States
and throughout the world. Tax rates vary among the jurisdictions in which we
operate. Significant judgment is required in determining our provision for our
income taxes as there are many transactions and calculations where the ultimate
tax determination is uncertain. Although we believe our tax estimates are
reasonable, any of the below could cause our effective tax rate to be materially
different than that which is reflected in historical income tax provisions and
accruals:
· the
jurisdictions in which profits are determined to be earned and
taxed;
· adjustments
to estimated taxes upon finalization of various tax returns;
· changes
in available tax credits;
· changes
in share-based compensation expense;
|
· changes
in tax laws, the interpretation of tax laws either in the United States or
abroad or the issuance of new
interpretative
|
|
accounting guidance related to uncertain transactions and calculations
where the tax treatment was previously uncertain; and
|
·
the resolution of issues arising from tax audits with various tax
authorities.
Should
additional taxes be assessed as a result of any of the above, our operating
results could be adversely affected. In addition, our future effective tax rate
could be adversely affected by changes in the mix of earnings in countries with
differing statutory tax rates, changes in tax laws or changes in the
interpretation of tax laws.
Our
failure to comply with any applicable environmental regulations could result in
a range of consequences, including fines, suspension of production, excess
inventory, sales limitations, and criminal and civil liabilities.
We are
subject to various state, federal and international laws and regulations
governing the environment, including restricting the presence of certain
substances in electronic products and making producers of those products
financially responsible for the collection, treatment, recycling and disposal of
those products. For example, we are subject to the European Union Directive on
Restriction of Hazardous Substances Directive, or RoHS Directive, that restricts
the use of a number of substances, including lead, and other hazardous
substances in electrical and electronic equipment in the market in the European
Union. We could face significant costs and liabilities in
connection with the European Union Directive on Waste Electrical and Electronic
Equipment, or WEEE. The WEEE directs members of the European Union to enact
laws, regulations, and administrative provisions to ensure that producers of
electric and electronic equipment are financially responsible for the
collection, recycling, treatment and environmentally responsible disposal of
certain products sold into the market after August 15, 2005.
It is
possible that unanticipated supply shortages, delays or excess non-compliant
inventory may occur as a result of the RoHS Directive, WEEE, and other
domestic or international environmental regulations. Failure to comply with any
applicable environmental regulations could result in a range of consequences
including costs, fines, suspension of production, excess inventory, sales
limitations, criminal and civil liabilities and could impact our ability to
conduct business in the countries or states that have adopted these types of
regulations.
While we believe that we have
adequate internal control over financial reporting, if we or our independent
registered public accounting firm determines that we do not, our reputation may
be adversely affected and our stock price may decline.
Section 404
of the Sarbanes-Oxley Act of 2002 requires our management to report on, and our
independent registered public accounting firm to audit the effectiveness of our
internal control structure and procedures for financial reporting. We have an
ongoing program to perform the system and process evaluation and testing
necessary to comply with these requirements. However, the manner in which
companies and their independent public accounting firms apply these requirements
and testing companies’ internal controls, remains subject to some judgment. To
date, we have incurred, and we expect to continue to incur increased expense and
to devote additional management resources to Section 404 compliance.
Despite our efforts, if we identify a material weakness in our internal
controls, there can be no assurance that we will be able to remediate that
material weakness in a timely manner, or that we will be able to maintain all of
the controls necessary to determine that our internal control over financial
reporting is effective. In the event that our chief executive officer, chief
financial officer or our independent registered public accounting firm determine
that our internal control over financial reporting is not effective as defined
under Section 404, investor perceptions of us may be adversely affected and
could cause a decline in the market price of our stock.
Changes in financial accounting
standards or interpretations of existing standards could affect our reported
results of operations.
We prepare our consolidated financial
statements in conformity with generally accepted accounting principles in the
United States. These principles are constantly subject to review and
interpretation by the Securities and Exchange Commission, or, SEC, and various
bodies formed to interpret and create appropriate accounting principles. A
change in these principles can have a significant effect on our reported results
and may even retroactively affect previously reported transactions.
Provisions in our certificate of
incorporation, our bylaws and our agreement with Microsoft could delay or
prevent a change in control.
Our
certificate of incorporation and bylaws contain provisions that could make it
more difficult for a third party to acquire a majority of our outstanding voting
stock. These provisions include the following:
· the
ability of our Board to create and issue preferred stock without prior
stockholder approval;
· the
prohibition of stockholder action by written consent;
·
a classified Board; and
· advance
notice requirements for director nominations and stockholder
proposals.
On March
5, 2000, we entered into an agreement with Microsoft in which we agreed to
develop and sell graphics chips and to license certain technology to Microsoft
and its licensees for use in the Xbox. Under the agreement, if an individual or
corporation makes an offer to purchase shares equal to or greater than 30% of
the outstanding shares of our common stock, Microsoft may have first and last
rights of refusal to purchase the stock. The Microsoft provision and the other
factors listed above could also delay or prevent a change in control of
NVIDIA.
ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Purchases of Equity
Securities
During fiscal year 2005, we announced
that our Board had authorized a stock repurchase program to repurchase shares of
our common stock, subject to certain specifications, up to an aggregate maximum
amount of $300 million. During fiscal year 2007, the Board further
approved an increase of $400 million to the original stock repurchase program.
In fiscal year 2008, we announced a stock repurchase program under which we
may purchase up to an additional $1.0 billion of our common stock over a three
year period through May 2010. As a result of these increases, we have an ongoing
authorization from the Board, subject to certain specifications, to repurchase
shares of our common stock up to an aggregate maximum amount of $1.7
billion.
The repurchases will be made from time
to time in the open market, in privately negotiated transactions, or in
structured stock repurchase programs, and may be made in one or more larger
repurchases, in compliance with the Securities Exchange Act of 1934, or the
Exchange Act, Rule 10b-18, subject to market conditions, applicable legal
requirements, and other factors. The program does not obligate NVIDIA to acquire
any particular amount of common stock and the program may be suspended at any
time at our discretion. As part of our share repurchase program, we have
entered into, and we may continue to enter into, structured share repurchase
transactions with financial institutions. These agreements generally require
that we make an up-front payment in exchange for the right to receive a fixed
number of shares of our common stock upon execution of the agreement, and a
potential incremental number of shares of our common stock, within a
pre-determined range, at the end of the term of the agreement.
During
the three months ended April 27, 2008, we entered into a structured share
repurchase transaction to repurchase 6.3 million shares for $123.9 million which
we recorded on the trade date of the transaction. Through April 27, 2008,
we had repurchased 68.0 million shares under our stock repurchase program for a
total cost of $1.16 billion.
Period:
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Total
Number of Shares Purchased
|
|
Average Price Paid per Share
(2)
|
|
|
Total Number of Shares
Purchased as Part of Publicly Announced Plans of Programs
(3)
|
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Approximate
Dollar Value of Shares that May Yet Be Purchased Under the Plans or
Programs (1)
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January
28, 2008 through February 24, 2008
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February
24, 2008 through March 30, 2008
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March
31, 2008 through April 27, 2008
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(1) On
August 9, 2004, we announced that our Board had authorized a stock
repurchase program to repurchase shares of our common stock, subject to certain
specifications, up to an aggregate maximum amount of $300.0 million. On
March 6, 2006, we announced that the Board had approved a $400.0
million increase to the original stock repurchase program. Subsequently, on May
21, 2007, we announced a stock repurchase program under which we may purchase up
to an additional $1.0 billion of our common stock over a three year period
through May 2010. As a result of these increases, we have an ongoing
authorization from the Board, subject to certain specifications, to repurchase
shares of our common stock up to an aggregate maximum amount of $1.7 billion on
the open market, in negotiated transactions or through structured stock
repurchase agreements that may be made in one or more larger
repurchases.
(2) Represents weighted
average price paid per share during the quarter ended April 27,
2008.
(3) As
part of our share repurchase program, we have entered into and we may continue
to enter into structured share repurchase transactions with financial
institutions. During the three months ended April 27, 2008, we entered into a
structured share repurchase transaction to repurchase 6.3 million shares for
$123.9 million, which we recorded on the trade date of the
transaction.
ITEM
3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A
VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of
our security holders during the first quarter of fiscal year 2009.
ITEM
5. OTHER INFORMATION
None.
ITEM
6. EXHIBITS
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Incorporated
by Reference
|
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Exhibit
No.
|
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Exhibit
Description
|
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Schedule/Form
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File
Number
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Exhibit
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Filing
Date
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10.1
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+ |
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Fiscal
Year 2009 Variable Compensation Plan
|
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Form
8-K
|
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0-23985 |
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10.1 |
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4/21/2008
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10.2
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*+ |
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NVIDIA
Corporation 1998 Employee Stock Purchase Plan, as amended and
restated
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10.3
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* |
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Amended
and Restated Agreement of Purchase and Sale by and between Harvest-Granite
San Tomas LLC and Harvest 2400, LLC dated January 31, 2008
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31.1
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* |
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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
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* |
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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#
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* |
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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#
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* |
|
Certification
of Chief Financial Officer as required by Rule 13a-14(b) of the Securities
Exchange Act of 1934
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|
|
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|
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* Filed
Herewith
+
Management contract or compensatory plan or arrangement
# In
accordance with Item 601(b)(32)(ii) of Regulation S-K and SEC Release
Nos. 33-8238 and 34-47986, Final Rule: Management’s Reports on Internal Control
Over Financial Reporting and Certification of Disclosure in Exchange Act
Periodic Reports, the certifications furnished in Exhibits 32.1 and 32.2 hereto
are deemed to accompany this Quarterly Report on Form 10-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.
SIGNATURES
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:
May 22, 2008
|
|
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NVIDIA
Corporation |
By:
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/s/
MARVIN D. BURKETT
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|
Marvin
D. Burkett
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|
(Duly
Authorized Officer and Principal Financial and Accounting
Officer)
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EXHIBIT INDEX
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Incorporated
by Reference
|
|
Exhibit
No.
|
|
Exhibit
Description
|
|
Schedule/Form
|
|
File
Number
|
|
|
Exhibit
|
|
Filing
Date
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|
10.1
|
+ |
|
Fiscal
Year 2009 Variable Compensation Plan
|
|
Form
8-K
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|
|
0-23985 |
|
|
|
10.1 |
|
4/21/2008
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|
10.2
|
*+ |
|
NVIDIA
Corporation 1998 Employee Stock Purchase Plan, as amended and
restated
|
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10.3
|
* |
|
Amended
and Restated Agreement of Purchase and Sale by and between Harvest-Granite
San Tomas LLC and Harvest 2400, LLC dated January 31, 2008
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|
|
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|
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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|
|
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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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|
|
|
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|
|
|
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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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32.2#
|
* |
|
Certification
of Chief Financial Officer as required by Rule 13a-14(b) of the Securities
Exchange Act of 1934
|
|
|
|
|
|
|
|
|
|
|
|
* Filed
Herewith
+
Management contract or compensatory plan or arrangement
# In
accordance with Item 601(b)(32)(ii) of Regulation S-K and SEC Release
Nos. 33-8238 and 34-47986, Final Rule: Management’s Reports on Internal Control
Over Financial Reporting and Certification of Disclosure in Exchange Act
Periodic Reports, the certifications furnished in Exhibits 32.1 and 32.2 hereto
are deemed to accompany this Quarterly Report on Form 10-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.