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NVIDIA 10-Q 2009

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32.1
  5. Ex-32.2
  6. Ex-32.2
q310form10q.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________

FORM 10-Q

[x]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended October 25, 2009

OR

[_]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 0-23985



NVIDIA CORPORATION
(Exact name of registrant as specified in its charter)
 
Delaware
94-3177549
(State or Other Jurisdiction of
(I.R.S. Employer
Incorporation or Organization)
Identification No.)

2701 San Tomas Expressway
Santa Clara, California 95050
(408) 486-2000
(Address, including zip code, and telephone number,
including area code, of principal executive offices)

N/A
(Former name, former address and former fiscal year if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
        Large accelerated filer x                                                                                        
Accelerated filer o                            
        Non-accelerated filer o (Do not check if a smaller reporting company)
Smaller reporting company o
                               
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No x
 
        The number of shares of common stock, $0.001 par value, outstanding as of November 16, 2009 was 554.9 million.



 

 


NVIDIA CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED OCTOBER 25, 2009


TABLE OF CONTENTS

     
Page
 
 
 
     
 
Item 1.
 
     
 
 
   
3
 
 
 
   
4
 
 
 
   
5
 
 
 
   
6
 
 
Item 2.
 
   
28
 
 
Item 3.
 
   
42
 
 
Item 4.
 
   
43
 
 
 
       
 
Item 1.
 
   
44
 
 
Item 1A.
 
   
44
 
 
Item 2.
 
   
61
 
 
Item 3.
 
   
61
 
 
Item 4.
 
   
61
 
 
Item 5.
 
   
61
 
 
Item 6.
 
   
62
 
 
     
63
 

 
 
 
 
 
2

 



PART I. FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS (UNAUDITED)

NVIDIA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(In thousands, except per share data)

 
   
Three Months Ended
   
Nine Months Ended
 
   
October 25,
2009
   
October 26,
2008
   
October 25,
2009
   
October 26,
2008
 
Revenue 
 
903,206
   
$
 897,655
   
$
2,343,957
   
$
2,943,719
 
Cost of revenue
   
511,423
     
529,812
     
1,605,755
     
1,911,116
 
        Gross profit
   
391,783
     
367,843
     
738,202
     
1,032,603
 
Operating expenses
                               
       Research and development
   
197,948
     
212,360
     
692,600
     
644,100
 
               Sales, general and administrative
   
85,990
     
90,349
     
278,829
     
275,782
 
               Restructuring charges
   
-
     
8,338
     
-
     
8,338
 
        Total operating expenses
   
283,938
     
311,047
     
971,429
     
928,220
 
Income (loss) from operations
   
107,845
     
56,796
     
(233,227
   
104,383
 
         Interest income
   
5,444
     
9,447
     
17,347
     
35,851
 
         Other income (expense), net
   
(3,082
)
   
(5,240
)
   
(5,835
)
   
(12,813
)
Income (loss) before income tax expense
   
110,207
     
61,003
     
(221,715
   
127,421
 
                Income tax expense (benefit)
   
2,630
     
(745
   
(22,652
)
   
9,797
 
Net income (loss)
 
$
107,577
   
$
61,748
   
$
(199,063
 
$
117,624
 
                                 
Basic net income (loss) per share
 
$
0.20
   
$
0.11
   
$
(0.36
 
$
0.21
 
        Weighted average shares used in basic per share computation
   
551,283
     
543,807
     
546,737
     
551,623
 
Diluted net income (loss) per share
 
$
0.19
   
$
0.11
   
$
(0.36
 
$
0.20
 
        Weighted average shares used in diluted per share computation
   
574,381
     
564,536
     
546,737
     
590,490
 
 


See accompanying Notes to Condensed Consolidated Financial Statements

 
 
 
 
 
 
3

 




NVIDIA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(In thousands)

   
October 25, 2009
   
January 25, 2009
 
Current assets:
           
 Cash and cash equivalents
 
$
614,490
   
$
417,688
 
 Marketable securities
   
1,019,589
     
837,702
 
 Accounts receivable, net
   
397,820
     
318,435
 
     Inventories
   
277,643
     
537,834
 
 Prepaid expenses and other
   
31,669
     
39,794
 
 Deferred income taxes
   
16,505
     
16,505
 
Total current assets
   
2,357,716
     
2,167,958
 
Property and equipment, net
   
565,296
     
625,798
 
Goodwill
   
369,844
     
369,844
 
Intangible assets, net
   
127,817
     
147,101
 
Deposits and other assets
   
42,901
     
40,026
 
Total assets
 
$
3,463,574
   
$
3,350,727
 
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Current liabilities:
               
 Accounts payable
 
$
321,530
   
$
218,864
 
 Accrued liabilities and other
   
567,276
     
559,727
 
Total current liabilities
   
888,806
     
778,591
 
Other long-term liabilities
   
126,373
     
151,850
 
Capital lease obligations, long term
   
24,760
     
25,634
 
Commitments and contingencies - see Note 13
               
Stockholders’ equity:
               
  Preferred stock
   
-
     
-
 
 Common stock
   
646
     
629
 
 Additional paid-in capital
   
2,111,506
     
1,889,257
 
 Treasury stock, at cost
   
(1,463,268
)
   
(1,463,268
)
 Accumulated other comprehensive income
   
9,645
     
3,865
 
 Retained earnings
   
1,765,106
     
1,964,169
 
Total stockholders' equity
   
2,423,635
     
2,394,652
 
Total liabilities and stockholders' equity
 
$
3,463,574
   
$
3,350,727
 
 
See accompanying Notes to Condensed Consolidated Financial Statements.

 

 
 
 
 
 
 
4

 
 
 

NVIDIA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands) 
 
Nine Months Ended
 
   
October 25,
2009
   
October 26,
2008
 
Cash flows from operating activities:
           
Net income (loss)
$
(199,063
)
 
$
117,624
 
Adjustments to reconcile net income to net cash provided by operating activities:
             
     Stock-based compensation expense related to stock option purchase
 
135,735
     
-
 
     Depreciation and amortization
 
148,750
     
136,968
 
     Stock-based compensation expense
 
82,471
     
120,873
 
     Payments under patent licensing arrangement
 
(616
)
   
      (21,502
)
     Impairment charge on investments
 
-
     
9,891
 
     Deferred income taxes
 
(25,773
)
   
1,568
 
     Other
 
4,470
     
1,899
 
Changes in operating assets and liabilities, net of effects of acquisitions:
             
     Accounts receivable
 
(79,749
)
   
59,276
 
     Inventories
 
257,729
     
(165,154
)
     Prepaid expenses and other current assets
 
8,125
     
11,205
 
     Deposits and other assets
 
(2,657
)
   
(2,030
)
     Accounts payable
 
96,588
     
(114,292
)
     Accrued liabilities and other long-term liabilities
 
(7,448
)
   
112,879
 
                 Net cash provided by operating activities
 
418,562
     
269,205
 
Cash flows from investing activities:
             
     Proceeds from sales and maturities of marketable securities
 
624,295
     
1,131,147
 
     Purchases of marketable securities
 
(804,610
)
   
(917,987
)
     Purchases of property and equipment and intangible assets
 
(55,026
)
   
(364,695
)
     Acquisition of businesses, net of cash and cash equivalents
 
-
     
(27,948
 
     Other
 
(218
)
   
1,468
 
                 Net cash used in investing activities
 
(235,559
)
   
(178,015
)
Cash flows from financing activities:
             
     Payments related to stock option purchase
 
(78,075
)
   
-
 
     Payments related to repurchases of common stock
 
-
     
(423,636
)
     Proceeds from issuance of common stock under employee stock plans
 
92,192
     
66,730
 
     Other
 
(318
)
   
-
 
                 Net cash provided by (used in) financing activities
 
13,799
     
(356,906
)
Change in cash and cash equivalents
 
196,802
     
(265,716
Cash and cash equivalents at beginning of period
 
417,688
     
726,969
 
Cash and cash equivalents at end of period
$
614,490
   
$
461,253
 
               
Supplemental disclosures of cash flow information:
             
     Cash paid for income taxes, net
$
2,611
   
$
6,679
 
     Cash paid for interest on capital lease obligations
$
2,453
   
$
-
 
               
Other non-cash activities:
             
     Assets acquired by assuming related liabilities
$
13,596
   
$
33,330
 
     Change in unrealized gains (losses) from marketable securities
$
5,780
   
$
(14,886
)

See accompanying Notes to Condensed Consolidated Financial Statements.



 
 
 
 
 
5

 
 
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 fiscal year ended January 25, 2009. 

Fiscal year
 
We operate on a 52 or 53-week year, ending on the last Sunday in January. Fiscal year 2010 is a 53-week year, compared to fiscal year 2009 which was a 52-week year. The third quarter of fiscal years 2010 and 2009 are both 13-week quarters.

Reclassifications
 
Certain prior fiscal year balances have been reclassified to conform to the current fiscal year presentation.
 
Principles of Consolidation
 
Our condensed consolidated financial statements include the accounts of NVIDIA Corporation and 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, cash equivalents and marketable securities, accounts receivable, inventories, income taxes, goodwill, stock-based compensation, warranty liabilities, litigation, investigation and settlement costs and other contingencies. These estimates are based on historical facts and various other assumptions that we believe are reasonable.  

Subsequent Events

We have evaluated subsequent events through the time of filing of our Quarterly Report on Form 10-Q for the quarter ended October 25, 2009 with the SEC on November 19, 2009.

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 or determinable, and collection is reasonably assured. For most sales, we use a binding purchase order and in certain cases we use a contractual agreement as evidence of an arrangement. We consider delivery to occur upon shipment provided title and risk of loss have passed to the customer based on the shipping terms. At the point of sale, we assess whether the arrangement fee is fixed or 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.

 
 
 
6

 

NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
 


Our customer programs primarily involve rebates, which are designed to serve as sales incentives to resellers of our products in various target markets. We accrue for 100% of the potential rebates and do not apply a breakage factor. We recognize a liability for these rebates at the later of the date at which we record the related revenue or the date at which we offer the rebate. Rebates typically expire six months from the date of the original sale, unless we reasonably believe that the customer intends to claim the rebate. Unclaimed rebates are reversed to revenue.

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

We also record a reduction to revenue by establishing a sales return allowance for estimated product returns at the time revenue is recognized, based primarily on historical return rates. However, if product returns for a particular fiscal period exceed historical return rates we may determine that additional sales return allowances are required to properly reflect our estimated exposure for product returns.
 
 License and Development Revenue
 
 For license arrangements that require significant customization of our intellectual property components, we generally recognize this license revenue over the period that services are performed. For all license and service arrangements, we determine progress to completion based on actual direct labor hours incurred to date as a percentage of the estimated total direct labor hours required to complete the project. We periodically evaluate the actual status of each project to ensure that the estimates to complete each contract remain accurate. A provision for estimated losses on contracts is made in the period in which the loss becomes probable and can be reasonably estimated. Costs incurred in advance of revenue recognized are recorded as deferred costs on uncompleted contracts. If the amount billed exceeds the amount of revenue recognized, the excess amount is recorded as deferred revenue. Revenue recognized in any period is dependent on our progress toward completion of projects in progress. Significant management judgment and discretion are used to estimate total direct labor hours. Any changes in or deviations from these estimates could have a material effect on the amount of revenue we recognize in any period.

Marketable Securities
 
Cash equivalents consist of financial instruments which are readily convertible into cash and have original maturities of three months or less at the time of acquisition. Marketable securities consist primarily of highly liquid investments with maturities of greater than three months when purchased.  We generally classify our marketable securities at the date of acquisition as available-for-sale. These securities are reported at fair value with the related unrealized gains and losses included in accumulated other comprehensive income (loss), a component of stockholders’ equity, net of tax.  Any unrealized losses which are considered to be other-than-temporary impairments are recorded in the other income (expense) section of our consolidated statements of operations.  Realized gains (losses) on the sale of marketable securities are determined using the specific-identification method and recorded in the other income (expense) section of our consolidated statements of operations.  

    All of our available-for-sale investments are subject to a periodic impairment review. We record a charge to earnings when a decline in fair value is significantly below cost basis and judged to be other-than-temporary, or have other indicators of impairments. If the fair value of an available-for-sale debt instrument is less than its amortized cost basis, an other-than-temporary impairment is triggered in circumstances where (1) we intend to sell the instrument, (2) it is more likely than not that we will be required to sell the instrument before recovery of its amortized cost basis, or (3) we do not expect to recover the entire amortized cost basis of the instrument (that is, a credit loss exists). If we intend to sell or it is more likely than not that we will be required to sell the available-for-sale debt instrument before recovery of its amortized cost basis, we recognize an other-than-temporary impairment in earnings equal to the entire difference between the debt instruments’ amortized cost basis and its fair value. For available-for-sale debt instruments that are considered other-than-temporarily impaired due to the existence of a credit loss, if we do not intend to sell and it is not more likely than not that we will be required to sell the instrument before recovery of its remaining amortized cost basis (amortized cost basis less any current-period credit loss), we separate the amount of the impairment into the amount that is credit related and the amount due to all other factors. The credit loss component is recognized in earnings.


 
 
 
7

 

NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
 



Inventories
 
Inventory cost is computed on an adjusted standard basis, which approximates actual cost on an average or first-in, first-out basis. Inventory costs consist primarily of the cost of semiconductors purchased from subcontractors, including wafer fabrication, assembly, testing and packaging, manufacturing support, including labor and overhead associated with such purchases, final test yield fallout, inventory provisions and shipping costs. We write down our inventory for estimated amounts related to lower of cost or market, obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand, future product purchase commitments, estimated manufacturing yield levels and market conditions. Inventory reserves once established are not reversed until the related inventory has been sold or scrapped.

 Product Warranties
 
We generally offer limited warranty to end-users that ranges from one to three years for products in order to repair or replace products for any manufacturing defects or hardware component failures. Cost of revenue includes the estimated cost of product warranties that are calculated at the point of revenue recognition. Under limited circumstances, we may offer an extended limited warranty to customers for certain products. We also accrue for known warranty and indemnification issues if a loss is probable and can be reasonably estimated.

 Adoption of New Accounting Pronouncements
 
         Business Combinations. In the first quarter of fiscal year 2010, we adopted new accounting guidance issued by the Financial Accounting Standards Board, or FASB, for business combinations. Under this guidance, an entity is required to recognize 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; that restructuring costs generally be expensed in periods subsequent to the acquisition date; and that changes in accounting for deferred tax asset valuation allowances and acquired income tax uncertainties after the measurement period, including changes related to acquired tax assets and income tax uncertainties from acquisitions that occurred prior to the date of adoption, be recognized as a component of the provision for taxes. In addition, acquired in-process research and development is measured at fair value, capitalized as an indefinite-life intangible asset and tested for impairment during the development period. Subsequent to the development period the carrying value, if any, of acquired in-process development will be considered a definite-life intangible asset and amortized over its estimated useful life. The new accounting guidance also establishes disclosure requirements to enable users to evaluate the nature and financial effects of the business combination. We will apply this new accounting guidance to any future business combinations.
 
        In the first quarter of fiscal year 2010, we also adopted new accounting guidance issued by the FASB for assets acquired and liabilities assumed in a business combination that arise from contingencies. The new guidance amends the provisions previously issued by the FASB related to the initial recognition and measurement, subsequent measurement and accounting and disclosures for assets and liabilities arising from contingencies in business combinations. The new guidance eliminates the distinction between contractual and non-contractual contingencies, including the initial recognition and measurement. We will apply this new accounting guidance to any future business combinations.

Life of Intangible Assets. During the first quarter of fiscal year 2010, we adopted new accounting guidance issued by the FASB for the determination of the useful life of intangible assets. The new guidance amends the factors that should be considered in developing the renewal or extension assumptions used to determine the useful life of a recognized intangible asset. The new guidance also requires expanded disclosure regarding the determination of intangible asset useful lives. The adoption of this accounting guidance did not have a material impact on our consolidated financial position, results of operations or cash flows.

Fair Value of Financial Instruments and Other-Than-Temporary Impairment. During the second quarter of fiscal year 2010, we adopted three related sets of accounting guidance issued by the FASB. The accounting guidance sets forth rules related to determining the fair value of financial assets and financial liabilities when the activity levels have significantly decreased in relation to the normal market, guidance related to the determination of other-than-temporary impairments to include the intent and ability of the holder as an indicator in the determination of whether an other-than-temporary impairment exists and interim disclosure requirements for the fair value of financial instruments. The adoption of these three sets of accounting guidance did not have a material impact on our consolidated financial position, results of operations or cash flows.

Subsequent Events. During the second quarter of fiscal year 2010, we adopted new accounting guidance issued by the FASB related to subsequent events. The new requirement establishes the accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. It requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date, that is, whether that date represents the date the financial statements were issued or were available to be issued. Please refer to Note 1 of these Notes to Condensed Consolidated Financial Statements for the related disclosure. The adoption of this accounting guidance did not have a material impact on our consolidated financial position, results of operations or cash flows.

Accounting Standards Codification. During the third quarter of fiscal year 2010, we adopted the new Accounting Standards Codification, or ASC, issued by the FASB. The ASC has become the source of authoritative accounting principles generally accepted in the United States, or U.S. GAAP, recognized by the FASB to be applied by nongovernmental entities. The ASC is not intended to change or alter existing U.S. GAAP. The adoption of the ASC did not have a material impact on our consolidated financial position, results of operations or cash flows.


 
 
 
8

 

NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
 

 
Recently Issued Accounting Pronouncements

Variable Interest Entities. In June 2009, the FASB issued new accounting guidance which amends the evaluation criteria to identify the primary beneficiary of a variable interest entity, or VIE, and requires ongoing reassessment of whether an enterprise is the primary beneficiary of the VIE. The new guidance significantly changes the consolidation rules for VIEs including the consolidation of common structures, such as joint ventures, equity method investments and collaboration arrangements. The guidance is applicable to all new and existing VIEs. The provisions of this new accounting guidance is effective for interim and annual reporting periods ending after November 15, 2009 and will become effective for us beginning in the fourth quarter of fiscal year 2010. We are currently evaluating the impact of this accounting guidance on our consolidated financial statements.
 
Revenue Recognition. In September 2009, the FASB issued new accounting guidance related to the revenue recognition of multiple element arrangements. The new guidance states that if vendor specific objective evidence or third party evidence for deliverables in an arrangement cannot be determined, companies will be required to develop a best estimate of the selling price to separate deliverables and allocate arrangement consideration using the relative selling price method. The accounting guidance will be applied prospectively and will become effective during the first quarter of fiscal year 2011. Early adoption is allowed. We are currently evaluating the impact of this accounting guidance on our consolidated financial statements.
 
   In September 2009, the FASB issued new accounting guidance related to certain revenue arrangements that include software elements. Previously, companies that sold tangible products with “more than incidental” software were required to apply software revenue recognition guidance. This guidance often delayed revenue recognition for the delivery of the tangible product. Under the new guidance, tangible products that have software components that are “essential to the functionality” of the tangible product will be excluded from the software revenue recognition guidance. The new guidance will include factors to help companies determine what is “essential to the functionality.” Software-enabled products will now be subject to other revenue guidance and will likely follow the guidance for multiple deliverable arrangements issued by the FASB in September 2009. The new guidance is to be applied on a prospective basis for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with earlier application permitted. If a company elects earlier application and the first reporting period of adoption is not the first reporting period in the company’s fiscal year, the guidance must be applied through retrospective application from the beginning of the company’s fiscal year and the company must disclose the effect of the change to those previously reported periods. We do not believe the adoption of this accounting guidance will have a material impact on our consolidated financial statements.

Note 2 – Net Income (Loss) Per Share

Basic net income per share is computed using the weighted average number of common shares outstanding during the period. Diluted net income per share is computed using the weighted average number of common and dilutive common equivalent shares outstanding during the period, using the treasury stock method. Under the treasury stock method, the effect of stock options and restricted stock units, or RSUs, outstanding is not included in the computation of diluted net income per share for periods when their effect is anti-dilutive. The following is a reconciliation of the numerators and denominators of the basic and diluted net income (loss) per share computations for the periods presented:

   
Three Months Ended
   
Nine Months Ended
 
   
October 25,
2009
   
October 26,
2008
   
October 25,
2009
   
October 26,
2008
 
   
(In thousands, except per share data)
 
Numerator:
                       
           Net income (loss)
 
$
107,577
   
$
61,748
   
$
(199,063
 
$
117,624
 
Denominator:
                               
           Denominator for basic net income per share, weighted average shares
   
551,283
     
543,807
     
546,737
     
551,623
 
           Effect of dilutive securities:
                               
           Stock options outstanding
   
23,098
     
20,729
     
-
     
38,867
 
           Denominator for diluted net income (loss) per share, weighted average shares
   
574,381
     
564,536
     
546,737
     
590,490
 
Net income per share:
                               
Basic net income (loss) per share
 
$
0.20
   
$
0.11
   
$
(0.36
)
 
$
0.21
 
Diluted net income (loss) per share
 
$
0.19
   
$
0.11
   
$
(0.36
)
 
$
0.20
 

Diluted net income per share for the three months ended October 25, 2009 does not include the effect of anti-dilutive common equivalent shares from stock options and RSUs of 20.3 million.  All of our outstanding stock options and RSUs were anti-dilutive during the nine months ended October 25, 2009 and excluded from the computation of diluted earnings per share due to the net loss for the nine months ended October 25, 2009.

Diluted net income per share for the three and nine months ended October 26, 2008 does not include the effect of anti-dilutive common equivalent shares from stock options outstanding of 58.8 million and 45.2 million, respectively.  
 

 
 
 
9

 

NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
 


 
Note 3 – Restructuring Charges
 
On September 18, 2008, we announced a workforce reduction to allow for continued investment in strategic growth areas, which was completed in the third quarter of fiscal year 2009. As a result, we eliminated approximately 360 positions worldwide, or about 6.5% of our global workforce.  During the third quarter of fiscal year 2009, expenses associated with the workforce reduction, which were comprised primarily of severance and benefits payments to these employees, totaled $8.3 million.

       The following table provides a summary of the restructuring activities and related liabilities recorded in accrued liabilities in our Condensed Consolidated Balance Sheet (in thousands):
 
Balance at January 27, 2008
 
$
-
 
Charges
   
8,338
 
Cash payments
   
(7,241
)
Non-cash charges
   
(330
)
Balance at October 26, 2008
 
$
767
 
Charges
   
(382
Cash payments
   
(199
)
Balance at January 25, 2009
 
$
186
 
Cash payments
   
(186
)
Balance at October 25, 2009
 
$
-
 

Note 4 – Stock Option Purchase

In March 2009, we completed a cash tender offer for certain employee stock options. The tender offer applied to outstanding stock options held by employees with an exercise price equal to or greater than $17.50 per share. None of the non-employee members of our Board of Directors or our officers who file reports under Section 16(a) of the Securities Exchange Act of 1934 were eligible to participate in the tender offer. All eligible options with exercise prices equal to or greater than $17.50 per share but less than $28.00 per share were eligible to receive a cash payment of $3.00 per option in exchange for the cancellation of the eligible option. All eligible options with exercise prices equal to or greater than $28.00 per share were eligible to receive a cash payment of $2.00 per option in exchange for the cancellation of the eligible option.
 
Our condensed consolidated statement of operations for the nine months ended October 25, 2009 includes stock-based compensation charges related to the stock option purchase (in thousands):
 
Cost of revenue
 
$
11,412
 
Research and development
   
90,456
 
Sales, general and administrative
   
38,373
 
Total
 
$
140,241
 

A total of 28.5 million options were tendered under the offer for an aggregate cash purchase price of $78.1 million, which was paid in exchange for the cancellation of the eligible options.  As a result of the tender offer, we incurred a charge of $140.2 million consisting of $124.1 million related to the remaining unamortized stock based compensation expense associated with the unvested portion of the options tendered in the offer, $11.6 million related to stock-based compensation expense resulting from amounts paid in excess of the fair value of the underlying options, plus $4.5 million related to associated payroll taxes, professional fees and other costs.
 

 
 
 
10

 

NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
 


Note 5 - Stock-Based Compensation

We measure stock-based compensation expense at the grant date of the related equity awards, based on the fair value of the awards, and recognize the expense using the straight-line attribution method over the requisite employee service period. We estimate the fair value of employee stock options on the date of grant using a binomial model and we use the closing trading price of our common stock on the date of grant as the fair value of awards of RSUs. We calculate the fair value of our employee stock purchase plan using the Black-Scholes model.
 
Equity Incentive Plans
 
We consider equity compensation to be long-term compensation and an integral component of our efforts to attract and retain exceptional executives, senior management and world-class employees. In March 2009, we introduced RSUs as a form of equity compensation to all employees. Currently, we grant stock options and RSUs under our equity incentive plans.  The description of the key features of the NVIDIA Corporation 2007 Equity Incentive Plan, or the 2007 Plan, PortalPlayer, Inc. 1999 Stock Option Plan, or 1999 Plan, and 1998 Employee Stock Purchase Plan, may be read in conjunction with the audited financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended January 25, 2009.

Options granted to new employees that started before the beginning of fiscal year 2010 generally vest ratably quarterly over a three-year period. In addition, options granted prior to the beginning of fiscal year 2010 to existing employees in recognition of performance generally vest as to 25% of the shares two years and three months after the date of grant and as to the remaining 75% of the shares subject to the option in equal quarterly installments over a nine month period. Beginning in fiscal year 2010, options granted to new employees and to existing employees in recognition of performance generally vest as to 33.36% of the shares one year after the date of grant and as to the remaining 66.64% of the shares subject to the option in equal quarterly installments over the remaining period. Options granted under the 2007 Plan generally expire six years from the date of grant.

 In general, RSUs are subject to the recipient’s continuing service to NVIDIA. RSUs vest over three years at the rate of 33.36% on pre-determined dates that are close to the anniversary of the grant date and vest ratably on a semi-annual basis thereafter.

In addition to the stock-based compensation expense related to our cash tender offer to purchase certain employee stock options as described in Note 4 – Stock Option Purchase, our condensed consolidated statements of operations include stock-based compensation expense, net of amounts capitalized as inventory, as follows:
 
   
Three Months Ended
   
Nine Months Ended
 
   
October 25,
2009
   
October 26,
2008
   
October 25,
2009
   
October 26,
2008
 
Cost of revenue
 
$
2,650
   
$
3,558
   
$
9,708
   
$
10,027
 
Research and development
 
$
12,853
   
$
22,740
   
$
47,391
   
$
71,500
 
Sales, general and administrative
 
$
7,479
   
$
12,086
   
$
25,372
   
$
39,346
 

During the three and nine months ended October 25, 2009, we granted approximately 2.2 million and 7.6 million stock options, respectively, with an estimated total grant-date fair value of $14.9 million and $43.7 million, respectively, and a per option weighted average grant-date fair value of $6.59 and $5.75, respectively.  During the three and nine months ended October 25, 2009, we granted approximately 2.7 million and 7.5 million RSUs, with an estimated total grant-date fair value of $41.9 million and $90.7 million, respectively, and a per RSU weighted average grant-date fair value of $15.76 and $12.16 respectively.  Of the estimated total grant-date fair value, we estimated that the stock-based compensation expense related to the equity awards that are not expected to vest was $10.2 million and $24.2 million, respectively, for the three and nine months ended October 25, 2009.

During the three and nine months ended October 26, 2008, we granted approximately 7.7 million and 17.4 million stock options, respectively, with an estimated total grant-date fair value of $45.7 million and $141.1 million, respectively, and a per option weighted average grant-date fair value of $5.93 and $8.13, respectively.  We did not grant any RSUs during the three months and nine months ended October 26, 2008.  Of the estimated total grant-date fair value, we estimated that the stock-based compensation expense related to the equity awards that are not expected to vest was $7.5 million and $23.3 million, respectively, for the three and nine months ended October 26, 2008.

 
 
 
 
11

 

NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
 

 
 
As of October 25, 2009 and October 26, 2008, the aggregate amount of unearned stock-based compensation expense related to our equity awards was $142.9 million and $226.8 million, respectively, adjusted for estimated forfeitures.  As of October 25, 2009 and October 26, 2008, we expect to recognize the unearned stock-based compensation expense related to stock options over an estimated weighted average amortization period of 2.0 years and 1.9 years, respectively. As of October 25, 2009, we expect to recognize the unearned stock-based compensation expense related to RSUs over an estimated weighted average amortization period of 2.6 years.  During the nine months ended October 26, 2008, we did not grant any RSUs.

Valuation Assumptions

Our calculation of the fair value of stock option awards uses implied volatility rather than historical volatility as we expect that implied volatility will be more reflective of market conditions and thus a better indicator of our expected volatility than historical volatility. We also segregate options into groups of employees with relatively homogeneous exercise behavior in order to calculate the best estimate of fair value using the binomial valuation model.  As such, the expected term assumption used in calculating the estimated fair value of our stock option awards using the binomial model is based on detailed historical data about employees' exercise behavior, vesting schedules, and death and disability probabilities.  Our management believes the resulting binomial calculation provides a reasonable estimate of the fair value of our employee stock options.

We estimate forfeitures at the time of grant and revise the estimates for forfeiture, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures are estimated based on historical experience. If factors change and we employ different assumptions in future periods, the compensation expense that we record may differ significantly from what we have recorded in the current period.


The fair value of stock options granted under our stock option plans and shares issued under our employee stock purchase plan have been estimated at the date of grant with the following assumptions:

   
Three Months Ended
   
Nine Months Ended
 
   
October 25,
2009
   
October 26,
2008
   
October 25,
2009
   
October 26,
2008
 
Stock Options
   
(Using a binomial model)
 
Expected life (in years)
   
3.9-5.7
     
3.6 -5.8
     
3.8-5.8
     
3.6-5.8
 
Risk free interest rate
   
2.5%-2.8
%
   
2.7% - 3.4
%
   
1.8%-2.8
%
   
2.6% - 3.7
%
Volatility
   
48%-49
%
   
61% - 105
%
   
48%-72%
%
   
52% - 105
%
Dividend Yield
   
-
     
-
     
-
     
-
 

   
Three Months Ended
   
Nine Months Ended
 
   
October 25,
2009
   
October 26,
2008
   
October 25,
2009
   
October 26,
2008
 
Employee Stock Purchase Plan
   
(Using a Black-Scholes model)
 
Expected life (in years)
   
0.5-2.0
     
0.5-2.0
     
0.5-2.0
     
0.5 - 2.0
 
Risk free interest rate
   
0.2% - 0.9
%    
2.0%-2.4
%
   
0.2% - 1.0
%    
1.6%-2.4
%
Volatility
   
53
%    
62
   
53%-73
%
   
62%-68
%
Dividend Yield
   
-
     
-
     
-
        -  

 
 
 
 
12

 

NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
 

 
Equity Award Activity

The following summarizes the stock option and RSU activities under our equity incentive plans: 

   
Options Outstanding
   
Weighted Average Exercise Price
 
Stock Options
 
(In thousands)
   
(Per Share)
 
Balances, January 25, 2009
    97,454     $ 13.83  
 Granted
    7,611     $ 11.70  
 Exercised
    (10,393 )   $ 5.03  
 Cancelled
    (1,000 )   $ 12.94  
 Cancellations related to stock options purchase (1)
    (28,532 )   $ 23.35  
Balances, October 25, 2009
    65,140     $ 10.84  
(1) Please refer to Note 4 of these condensed consolidated financial statements for further discussion related to our stock option purchase in March 2009.
 
   
RSUs
   
Weighted Average Grant-date fair value
 
 Restricted Stock Units
 
(In thousands)
   
(Per Share)
 
Balances, January 25, 2009
    -     $ -  
 Awarded
    7,470     $ 12.16  
 Vested
    (2 )   $ 11.65  
 Forfeited
    (103 )   $ 10.66  
Balances, October 25, 2009
    7,365     $ 12.18  
 
The following summarizes the stock options and RSUs, or equity awards, available for grant under our equity incentive plans (in thousands):
 
Balances, January 25, 2009
   
29,501
 
Stock options:
       
 Granted
   
(7,611
)
         Cancelled
   
1,000
 
 Cancellations related to stock option purchase (1)
   
         28,532
 
Restricted Stock Units:
       
 Granted
   
(7,470
)
         Cancelled
   
              103
 
Balances, October 25, 2009
   
         44,055
 
          (1) Please refer to Note 4 of these condensed consolidated financial statements for further discussion related to our stock option purchase in March 2009.
 

 
 
 
13

 

NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
 


Note 6 – Income Taxes

We recognized income tax expense (benefit) of $2.6 million and ($0.7) million for the three months ended October 25, 2009 and October 26, 2008, respectively, and ($22.7) million and $9.8 million for the nine months ended October 25, 2009 and October 26, 2008, respectively.  Income tax expense (benefit) as a percentage of income before taxes, or our effective tax rate, was 2.4% and (1.2%) for the three months ended October 25, 2009 and October 26, 2008, respectively, and 10.2% and 7.7% for the nine months ended October 25, 2009 and October 26, 2008, respectively.

The expected tax benefit derived from our loss before tax for the first nine months of fiscal year 2010 at the United States federal statutory tax rate of 35% differs from our actual effective tax rate of 10.2% due primarily to permanent tax differences related to stock-based compensation and losses recognized in tax jurisdictions where no tax benefit has been recognized, partially offset by the U.S. tax benefit of the federal research tax credit.  Our actual effective tax rate was also impacted by discrete events in the first nine months of fiscal year 2010, primarily related to our stock option purchase completed in March 2009 and the favorable impact from the expiration of statutes of limitations in certain non-U.S. jurisdictions.

Our effective tax rate on income before tax for the first nine months of fiscal year 2009 was lower than the United States federal statutory rate of 35% due primarily to income earned in jurisdictions where that tax rate is lower than the United States federal statutory tax rate; and by discrete events primarily related to the favorable impact from the expiration of statutes of limitations in certain non-U.S. jurisdictions and the reinstatement of the of the U.S. federal research tax credit signed into law on October 3, 2008 under the Emergency Economic Stabilization Act of 2008 and was retroactive to January 1, 2008.

For the nine months ended October 25, 2009, there have been no material changes to our tax years that remain subject to examination by major tax jurisdictions.  Additionally, there have been no material changes to our unrecognized tax benefits and any related interest or penalties from our fiscal year ended January 25, 2009.

While we believe that we have adequately provided for all uncertain tax positions, amounts asserted by tax authorities could be greater or less than our accrued position. Accordingly, our provisions on federal, state and foreign tax related matters to be recorded in the future may change as revised estimates are made or the underlying matters are settled or otherwise resolved with the respective tax authorities. As of October 25, 2009, we do not believe that our estimates, as otherwise provided for, on such tax positions will significantly increase or decrease within the next twelve months.



 
 
 
14

 

NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
 


Note 7 - Marketable Securities
 
All of the cash equivalents and marketable securities are classified as “available-for-sale” securities. Investments in both fixed rate instruments and floating rate interest earning instruments carry a degree of interest rate risk. Fixed rate debt securities may have their market value adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future investment income may fall short of expectations due to changes in interest rates or if the decline in fair value of our publicly traded debt or equity investments is judged to be other-than-temporary. We may suffer losses in principal if we are forced to sell securities that decline in market value due to changes in interest rates. However, because any debt securities we hold are classified as “available-for-sale,” no gains or losses are realized in our statement of operations due to changes in interest rates unless such securities are sold prior to maturity or unless declines in market values are determined to be other-than-temporary.  These securities are reported at fair value with the related unrealized gains and losses included in accumulated other comprehensive income, a component of stockholders’ equity, net of tax.

We performed an impairment review of our investment portfolio as of October 25, 2009. Based on our quarterly impairment review and having considered the guidance in the relevant accounting literature, we did not record any other than temporary impairment charges during the first nine months of fiscal year 2010.  We concluded that our investments were appropriately valued and that no additional other than temporary impairment charges were necessary on our portfolio of available for sale investments as of October 25, 2009.

The following is a summary of cash equivalents and marketable securities at October 25, 2009 and January 25, 2009:
 
   
October 25, 2009
 
   
Amortized
Cost
   
Unrealized
Gain
   
Unrealized
Loss
   
Estimated
Fair Value
 
   
(In thousands)
 
Debt securities of United States government agencies
 
$
454,834
   
$
4,018
   
$
(15
)
 
$
458,837
 
Debt securities issued by United States Treasury
   
294,942
     
790
     
(35
)
   
295,697
 
Corporate debt securities
   
350,977
     
3,105
     
(88
)
   
353,994
 
Mortgage backed securities issued by United States government-sponsored enterprises
   
161,707
     
2,364
     
(73
)
   
163,998
 
Money market funds
   
211,592
     
-
     
-
     
211,592
 
Asset-backed securities
   
4,455
     
86
     
                 -
     
4,541
 
Total
 
$
1,478,507
   
$
10,363
   
$
(211
)
 
$
1,488,659
 
Classified as:
                               
Cash equivalents
                         
$
469,070
 
Marketable securities
                           
1,019,589
 
 Total
                         
$
1,488,659
 
 
   
January 25, 2009
 
   
Amortized
Cost
   
Unrealized
Gain
   
Unrealized
Loss
   
Estimated
Fair Value
 
   
(In thousands)
 
Debt securities of United States government agencies
 
$
313,319
   
$
4,815
   
$
(13
)
 
$
318,121
 
Corporate debt securities
   
252,265
     
680
     
(1,771
)
   
251,174
 
Mortgage backed securities issued by United States government-sponsored enterprises
   
162,243
     
361
     
(1,405
)
   
161,199
 
Money market funds
   
139,046
     
-
     
-
     
139,046
 
Debt securities issued by United States Treasury
   
110,402
     
1,870
     
-
     
112,272
 
Asset-backed securities
   
39,014
     
71
     
(227
)
   
38,858
 
Total
 
$
1,016,289
   
$
7,797
   
$
(3,416
)
 
$
1,020,670
 
Classified as:
                               
Cash equivalents
                         
$
182,968
 
Marketable securities
                           
837,702
 
 Total
                         
$
1,020,670
 
 

 
 
 
15

 

NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
 


    The amortized cost and estimated fair value of cash equivalents and marketable securities which are primarily debt instruments, are classified as available-for-sale at October 25, 2009 and January 25, 2009 and are shown below by contractual maturity.
 
   
October 25, 2009
   
January 25, 2009
 
   
Amortized
Cost
   
Estimated
Fair Value
   
Amortized
Cost
   
Estimated
Fair Value
 
   
(In thousands)
 
Less than one year
 
$
778,687
     $
782,241
   
$
484,869
   
$
484,616
 
Due in 1 - 5 years
   
623,876
     
629,780
     
369,177
     
374,855
 
Mortgage-backed securities issued by government-sponsored enterprises not due at a single maturity date
   
75,944
     
76,638
     
162,243
     
161,199
 
 Total
 
$
1,478,507
     $
1,488,659
   
$
1,016,289
   
$
1,020,670
 

Net realized gains for the three and nine months ended October 25, 2009, were $0.5 million and $1.5 million, respectively. Net realized gains for the three and nine months ended October 26, 2008 were $0.9 million and $2.1 million, respectively. As of October 25, 2009, we had a net unrealized gains of $10.2 million, which was comprised of gross unrealized gains of $10.4 million, offset by $(0.2) million of gross unrealized (losses).  As of January 25, 2009, we had a net unrealized gain of $4.4 million, which was comprised of gross unrealized gains of $7.8 million, offset by $(3.4) million of gross unrealized (losses).   

As of October 25, 2009, we held a money market investment in the Reserve International Liquidity Fund, Ltd., or the International Reserve Fund, which was valued at $22.0 million, net of $5.6 million of other than temporary impairment charges that we recorded during fiscal year 2009. The International Reserve Fund was reclassified out of cash and cash equivalents in our Condensed Consolidated Balance Sheet as of October 25, 2009 due to the halting of redemption requests in September 2008 by the International Reserve Fund. The $22.0 million value of our holdings in the International Reserve Fund as of October 25, 2009 reflects an initial investment of $130.0 million, reduced by $102.4 million that we received from the International Reserve Fund during the first nine months of fiscal year 2010 and the $5.6 million other than temporary impairment charge we recorded against the value of this investment during fiscal year 2009 as a result of credit loss. The $102.4 million we received was our portion of a payout of approximately 79% of the total assets of the International Reserve Fund. All of the underlying securities held by the International Reserve Fund were scheduled to have matured by October 2009. We expect to ultimately receive the proceeds from our remaining investment in the International Reserve Fund, excluding some or all of the $5.6 million impairment charges. However, redemptions from the International Reserve Fund are currently subject to pending litigation, which could cause further delay in receipt of our funds.

Note 8– Fair Value of Cash Equivalents and Marketable Securities

We measure our cash equivalents and marketable securities at fair value. The fair values of our financial assets and liabilities are determined using quoted market prices of identical assets or quoted market prices of similar assets from active markets. Level 1 valuations are obtained from real-time quotes for transactions in active exchange markets involving identical assets. Level 2 valuations are obtained from quoted market prices in active markets involving similar assets. Level 3 valuations are based on unobservable inputs to the valuation methodology and include our own data about assumptions market participants would use in pricing the asset or liability based on the best information available under the circumstances.


 
 
 
16

 

NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
 



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

   
Fair value measurement at reporting date using
 
         
Quoted Prices in Active Markets for Identical Assets
   
Significant Other Observable Inputs
   
High Level of Judgment
 
   
October 25, 2009
   
(Level 1)
   
(Level 2)
   
(Level 3)
 
   
(In thousands)
 
Debt securities issued by US Government agencies (1)
 
$
458,837
    $
-
    $
458,837
    $
-
 
Debt securities issued by United States Treasury (2)
   
295,697
     
                 -
     
295,697
     
                 -
 
Corporate debt securities (3)
   
353,994
     
                 -
     
353,994
     
                 -
 
Mortgage-backed securities issued by Government-sponsored entities (4)
   
163,998
     
                 -
     
163,998
     
                 -
 
Money market funds (5)
   
211,592
     
     189,628
     
-
     
       21,964
 
Asset-backed Securities (4)
   
4,541
     
-
     
4,541
     
-
 
Total cash equivalents and marketable securities
 
$
1,488,659
   
$
189,628
   
$
1,277,067
   
$
21,964
 
 
(1)  
Includes $121,648 in Cash Equivalents and $337,189 in Marketable Securities on the Condensed Consolidated Balance Sheet.
(2)  
Includes $124,690 in Cash Equivalents and $171,007 in Marketable Securities on the Condensed Consolidated Balance Sheet.
(3)  
Includes $33,104 in Cash Equivalents and $320,890 in Marketable Securities on the Condensed Consolidated Balance Sheet.
(4)  
Included in Marketable Securities on the Condensed Consolidated Balance Sheet.
(5)  
Includes $189,628 in Cash Equivalents and $21,964 in Marketable Securities on the Condensed Consolidated Balance Sheet.    

For our money market funds that were held by the International Reserve Fund at October 25, 2009, we assessed the fair value of the money market funds by considering the underlying securities held by the International Reserve Fund. As the International Reserve Fund has halted redemption requests and is currently believed to be holding all of their securities until maturity, we valued the underlying securities held by the International Reserve Fund at their maturity value using an income approach. Certain of the debt securities held by the International Reserve Fund were issued by companies that had filed for bankruptcy during fiscal year 2009 and, as such, our valuation of those securities was zero. The net result was that, during the third quarter of fiscal year 2009, we estimated the fair value of the International Reserve Fund’s investments to be 95.7% of their last-known value and we recorded an other than temporary impairment charge of $5.6 million as a result of credit loss. The $22.0 million value of our holdings in the International Reserve Fund as of October 25, 2009 reflects an initial investment of $130.0 million, reduced by $102.4 million that we received from the International Reserve Fund during the first nine months of fiscal year 2010 and the $5.6 million other than temporary impairment charge we recorded against the value of this investment during fiscal year 2009 as a result of credit loss. Due to the inherent subjectivity and the significant judgment involved in the valuation of our holdings of International Reserve Fund, we have classified these securities under the Level 3 fair value hierarchy.

Reconciliation of financial assets measured at fair value on a recurring basis using significant unobservable inputs, or Level 3 inputs (in thousands):

Balance, beginning of period, January 25, 2009
 
$
124,400
 
Transfer into Level 3
   
  -
 
Other than temporary impairment
   
  -
 
Redemption of funds
   
(102,436
)
Balance, end of period, October 25, 2009
 
$
21,964
 
 
Total financial assets at fair value classified within Level 3 were 0.6% of total assets on our Condensed Consolidated Balance Sheet as of October 25, 2009.


 
 
 
17

 

NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
 



Note 9 - 3dfx

During fiscal year 2002, we completed the purchase of certain assets from 3dfx Interactive, Inc., or 3dfx, for an aggregate purchase price of approximately $74.2 million. On December 15, 2000, NVIDIA Corporation and one of our indirect subsidiaries entered into an Asset Purchase Agreement, or the APA, which closed on April 18, 2001, to purchase certain graphics chip assets from 3dfx.
 
In October 2002, 3dfx filed for Chapter 11 bankruptcy protection in the United States Bankruptcy Court for the Northern District of California. In March 2003, the Trustee appointed by the Bankruptcy Court to represent 3dfx’s bankruptcy estate served his complaint on NVIDIA.  The Trustee’s complaint asserted claims for, among other things, successor liability and fraudulent transfer and sought additional payments from us.   In early November 2005, NVIDIA and the Official Committee of Unsecured Creditors, or the Creditors’ Committee, agreed to a Plan of Liquidation of 3dfx, which included a conditional settlement of the Trustee’s claims against us. This conditional settlement was subject to a confirmation process through a vote of creditors and the review and approval of the Bankruptcy Court. The conditional settlement called for a payment by NVIDIA of approximately $30.6 million to the 3dfx estate. Under the settlement, $5.6 million related to various administrative expenses and Trustee fees, and $25.0 million related to the satisfaction of debts and liabilities owed to the general unsecured creditors of 3dfx. Accordingly, during the three month period ended October 30, 2005, we recorded $5.6 million as a charge to settlement costs and $25.0 million as additional purchase price for 3dfx.  The Trustee advised that he intended to object to the settlement. 
 
The conditional settlement reached in November 2005 never progressed through the confirmation process and the Trustee’s case still remains pending appeal.  As such, we have not reversed the accrual of $30.6 million - $5.6 million as a charge to settlement costs and $25.0 million as additional purchase price for 3dfx – that we recorded during the three months ended October 30, 2005, pending resolution of the appeal of the Trustee’s case. We do not believe the resolution of this matter will have a material impact on our results of operations or financial position. 
       
The 3dfx asset purchase price of $95.0 million and $4.2 million of direct transaction costs were allocated based on fair values presented below. The final allocation of the purchase price of the 3dfx assets is contingent upon the outcome of all of the 3dfx litigation. Please refer to Note 13 of these Notes to Condensed Consolidated Financial Statements for further information regarding this litigation. 

  
 
Fair Market Value
   
Straight-Line Amortization Period
 
   
(In thousands)
   
(Years)
 
Property and equipment
 
$
2,433
     
1-2
 
Trademarks
   
11,310
     
5
 
Goodwill
   
85,418
     
-
 
 Total
 
$
99,161
         

Note 10 - Intangible Assets
 
We currently amortize our intangible assets with definitive lives over periods ranging from one to ten years using a method that reflects the pattern in which the economic benefits of the intangible asset are consumed or otherwise used up or, if that pattern cannot be reliably determined, using a straight-line amortization method. The components of our amortizable intangible assets are as follows: 
 
 
October 25, 2009
 
January 25, 2009
 
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net Carrying
Amount
 
 
(In thousands)
 
Technology licenses
 
$
134,869
   
$
(44,876
)
 
$
89,993
   
$
130,654
   
$
(34,610
)
 
$
96,044
 
Acquired intellectual property
   
75,340
     
(46,316
)
   
29,024
     
75,340
     
(35,200
)
   
40,140
 
Patents
   
19,188
     
(10,388
)
   
8,800
     
18,588
     
(7,671
)
   
10,917
 
Total intangible assets
 
$
229,397
   
$
(101,580
)
 
$
127,817
   
$
224,582
   
$
(77,481
)
 
$
147,101
 

Amortization expense associated with intangible assets for the three and nine months ended October 25, 2009 was $7.9 million and $24.1 million, respectively.  Amortization expense associated with intangible assets for the three and nine months ended October 26, 2008 was $8.7 million and $23.7 million, respectively. Future amortization expense related to the net carrying amount of intangible assets at October 25, 2009 is estimated to be $7.7 million for the remainder of fiscal year 2010, $27.8 million in fiscal year 2011, $25.4 million in fiscal year 2012, $19.0 million in fiscal year 2013, $14.6 million in fiscal year 2014, and a total of $33.3 million in fiscal year 2015 and fiscal years subsequent of fiscal year 2015.
 

 
 
 
18

 

NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
 


 
Certain balance sheet components are as follows:
 
   
October 25,
2009
   
January 25,
2009
 
Inventories:
 
(In thousands)
 
 Raw materials
 
$
59,567
   
$
122,024
 
 Work in-process
   
74,163
     
38,747
 
 Finished goods
   
143,913
     
377,063
 
   Total inventories
 
$
277,643
   
$
537,834
 

At October 25, 2009, we had outstanding inventory purchase obligations totaling approximately $624 million.

   
October 25,
2009
   
January 25,
2009
 
Prepaid Expenses and Other Current Assets:
 
(In thousands)
 
Prepaid maintenance contracts
 
$
10,680
   
$
11,268
 
           Prepaid insurance
   
4,538
     
5,400
 
           Prepaid taxes
   
3,571
     
3,571
 
Prepaid rent
   
3,312
     
3,254
 
 Other
   
9,568
     
16,301
 
   Total prepaid expenses and other
 
$
31,669
   
$
39,794
 

  
 
October 25,
2009
   
January 25,
2009
 
Accrued Liabilities:
 
(In thousands)
 
 Accrued customer programs (1)
 
$
268,657
   
$
239,797
 
 Warranty accrual (2)
   
158,527
     
150,629
 
 Accrued payroll and related expenses
   
54,777
     
82,449
 
 Accrued legal settlement (3)
   
30.600
     
30,600
 
 Deferred rent
   
10,897
     
11,643
 
 Deferred revenue
   
4,212
     
3,774
 
 Other
   
39,606
     
40,835
 
        Total accrued liabilities and other