NVIDIA Corporation
NVIDIA CORP (Form: 10-Q, Received: 08/22/2012 16:41:21)


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 July 29, 2012
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 Q 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 Q 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
                               
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No Q

The number of shares of common stock, $0.001 par value, outstanding as of  August 17, 2012 , was  619,476,242 .




NVIDIA CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED July 29, 2012


TABLE OF CONTENTS

 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2



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)

 
Three Months Ended
 
Six Months Ended
 
July 29,
 
July 31,
 
July 29,
 
July 31,
 
2012
 
2011
 
2012
 
2011
 
 
 
 
 
 
 
 
Revenue
$
1,044,270

 
$
1,016,517

 
$
1,969,147

 
$
1,978,556

Cost of revenue
503,551

 
491,233

 
965,064

 
968,769

Gross profit
540,719

 
525,284

 
1,004,083

 
1,009,787

Operating expenses
 
 
 
 
 
 
 
Research and development
281,193

 
247,721

 
565,095

 
479,245

Sales, general and administrative
119,903

 
103,533

 
226,539

 
201,650

Total operating expenses
401,096

 
351,254

 
791,634

 
680,895

Income from operations
139,623

 
174,030

 
212,449

 
328,892

Interest income
5,316

 
5,266

 
10,514

 
10,579

Other income (expense), net
269

 
(1,749
)
 
(660
)
 
(5,439
)
Income before income tax expense
145,208

 
177,547

 
222,303

 
334,032

Income tax expense
26,162

 
25,974

 
42,820

 
47,240

Net income
$
119,046

 
$
151,573

 
$
179,483

 
$
286,792

 
 
 
 
 
 
 
 
Basic net income per share
$
0.19

 
$
0.25

 
$
0.29

 
$
0.48

Shares used in basic per share computation
618,996

 
601,340

 
617,388

 
598,077

 
 
 
 
 
 
 
 
Diluted net income per share
$
0.19

 
$
0.25

 
$
0.29

 
$
0.47

Shares used in diluted per share computation
623,143

 
613,934

 
623,397

 
615,552



See accompanying Notes to Condensed Consolidated Financial Statements.


3


NVIDIA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
(In thousands)

 
Three Months Ended
 
Six Months Ended
 
July 29,
 
July 31,
 
July 29,
 
July 31,
 
2012
 
2011
 
2012
 
2011
 
 
Net income
$
119,046

 
$
151,573

 
$
179,483

 
$
286,792

Net change in unrealized gains on available-for-sale securities
1,111

 
3,871

 
1,009

 
5,079

Less: reclassification adjustments for net realized gains on available-for-sale securities included in net income
(208
)
 
(320
)
 
(340
)
 
(401
)
Income tax expense related to net unrealized and net realized gains on available-for-sale securities
(191
)
 
(238
)
 
(124
)
 
(515
)
Other comprehensive income, net of tax
$
712

 
$
3,313

 
$
545

 
$
4,163

Total comprehensive income
$
119,758

 
$
154,886

 
$
180,028

 
$
290,955



See accompanying Notes to Condensed Consolidated Financial Statements.


4




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

 
July 29,
 
January 29,
 
2012
 
2012
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
499,618

 
$
667,876

Marketable securities
2,778,482

 
2,461,700

Accounts receivable, net
445,312

 
336,143

Inventories
387,185

 
340,297

Prepaid expenses and other
53,323

 
49,411

Deferred income taxes
49,931

 
49,931

Total current assets
4,213,851

 
3,905,358

Property and equipment, net
574,056

 
560,072

Goodwill
641,030

 
641,030

Intangible assets, net
346,938

 
326,136

Other assets
116,006

 
120,332

Total assets
$
5,891,881

 
$
5,552,928

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
417,250

 
$
335,072

Accrued liabilities and other
604,710

 
594,886

Total current liabilities
1,021,960

 
929,958

Other long-term liabilities
396,019

 
455,807

Capital lease obligations, long-term
20,237

 
21,439

Commitments and contingencies - see Note 12

 

Stockholders’ equity:
 
 
 
Preferred stock

 

Common stock
713

 
700

Additional paid-in capital
3,040,979

 
2,900,896

Treasury stock, at cost
(1,509,087
)
 
(1,496,904
)
Accumulated other comprehensive income
11,159

 
10,614

Retained earnings
2,909,901

 
2,730,418

Total stockholders' equity
4,453,665

 
4,145,724

Total liabilities and stockholders' equity
$
5,891,881

 
$
5,552,928


See accompanying Notes to Condensed Consolidated Financial Statements.




5



NVIDIA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
 
 
Six Months Ended
 
July 29,
 
July 31,
 
2012
 
2011
Cash flows from operating activities:
 
 
 
Net income
$
179,483

 
$
286,792

Adjustments to reconcile net income to net cash provided by (used in) operating activities:
 
 
 
Depreciation and amortization
110,686

 
99,923

Stock-based compensation expense
67,824

 
67,689

Deferred income taxes
13,791

 
20,082

Excess tax benefits from stock-based compensation
(18,154
)
 
(25,021
)
Other
32,496

 
10,695

Changes in operating assets and liabilities, net of effect of acquisition:
 
 
 
Accounts receivable
(109,218
)
 
(57,511
)
Inventories
(46,834
)
 
(2,169
)
Prepaid expenses and other current assets
(3,912
)
 
2,255

Other assets
494

 
(992
)
Accounts payable
65,646

 
(8,366
)
Accrued liabilities and other long-term liabilities
(100,624
)
 
(139,156
)
Net cash provided by operating activities
191,678

 
254,221

Cash flows from investing activities:
 
 
 
Purchases of marketable securities
(1,247,664
)
 
(711,674
)
Proceeds from sales and maturities of marketable securities
918,856

 
591,242

Purchases of property and equipment and intangible assets
(90,867
)
 
(54,518
)
Acquisition of businesses, net of cash acquired

 
(348,884
)
Other
(82
)
 
(1,890
)
Net cash used in investing activities
(419,757
)
 
(525,724
)
Cash flows from financing activities:
 
 
 
Proceeds from issuance of common stock under employee stock plans
42,678

 
124,785

Payments under capital lease obligations
(1,011
)
 
(731
)
Excess tax benefits from stock-based compensation
18,154

 
25,021

Payment of notes payable assumed from acquisition

 
(10,319
)
Net cash provided by financing activities
59,821

 
138,756

Change in cash and cash equivalents
(168,258
)
 
(132,747
)
Cash and cash equivalents at beginning of period
667,876

 
665,361

Cash and cash equivalents at end of period
$
499,618

 
$
532,614

Supplemental disclosures of cash flow information: 
 
 
 
Cash paid (received) for income taxes, net
$
(43,149
)
 
$
2,854

Cash paid for interest on capital lease obligations
$
1,474

 
$
1,510

Other non-cash activities:
 
 
 
Assets acquired by assuming related liabilities
$
54,230

 
$
13,673

Change in unrealized gains from marketable securities
$
545

 
$
4,163


See accompanying Notes to Condensed Consolidated Financial Statements.

6

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



Note 1 - Summary of Significant Accounting Policies
 
Basis of Presentation
 
The accompanying unaudited condensed consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America, or U.S. GAAP, for interim financial information and with the instructions to Form 10-Q and Article 10 of Securities and Exchange Commission, or SEC, Regulation S-X. 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 29, 2012 .  

Fiscal Year
 
We operate on a 52- or 53-week year, ending on the last Sunday in January.  Fiscal year 2013 and fiscal year 2012 are both 52-week years. The second quarters of fiscal years 2013 and 2012 are both 13-week quarters.

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 U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. On an on-going basis, we evaluate our estimates, including those related to revenue recognition, cash equivalents and marketable securities, accounts receivable, inventories, income taxes, goodwill, stock-based compensation, 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.  

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, as the level of returns cannot be reasonably estimated. 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.


7

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



Our customer programs also include marketing development funds, or MDFs. We account for MDFs as either a reduction of revenue or an operating expense, depending on the nature of the program. MDFs represent monies paid to retailers, system builders, original equipment manufacturers, 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 over the period that services are performed. For most 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.
 
For license arrangements that do not require significant customization but where we are obligated to provide further deliverables over the term of the license agreement, we record revenue over the life of the license term, with consideration received in advance of the performance period classified as deferred revenue.

Royalty revenue is recognized related to the distribution or sale of products that use our technologies under license agreements with third parties.  We recognize royalty revenue upon receipt of a confirmation of earned royalties and when collectability is reasonably assured from the applicable licensee.
 
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 costs, including labor and overhead associated with such purchases, final test yield fallout, inventory provisions and shipping costs. We write down our inventory to the lower of cost or estimated market value. Obsolete or unmarketable inventory is completely written off based upon assumptions about future demand, future product purchase commitments, estimated manufacturing yield levels and market conditions.  If actual market conditions are less favorable than those projected by management, or if our current inventory or our future product purchase commitments to our suppliers exceed our forecasted future demand for such products, additional future inventory write-downs may be required that could adversely affect our operating results. Inventory reserves once established are not reversed until the related inventory has been sold or scrapped.  If actual market conditions are more favorable than expected and we sell products that we have previously written down, our reported gross margin would be favorably impacted.

8

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




  Adoption of New and Recently Issued Accounting Pronouncements

In July 2012, the Financial Accounting Standards Board issued an amended standard to simplify how entities test indefinite-lived intangible assets for impairment which improve consistency in impairment testing requirements among long-lived asset categories. These amended standards permit an assessment of qualitative factors to determine whether it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying value. For assets for which this assessment concludes it is more likely than not that the fair value is more than its carrying value, these amended standards eliminate the requirement to perform quantitative impairment testing as outlined in the previously issued standards. These amended standards are effective for us in the fiscal years beginning after September 15, 2012, with early adoption permitted. We do not expect these new standards to significantly impact our consolidated condensed financial statements.
In the first quarter of fiscal year 2013, we adopted an amended standard that increases the prominence of items reported in other comprehensive income. This amended standard eliminates the option to present components of other comprehensive income as part of the statement of changes in stockholders' equity and requires that all changes in stockholders' equity-except investments by, and distributions to, owners-be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The adoption of this amended standard impacted the presentation of other comprehensive income, as we have elected to present two separate but consecutive statements, but did not have an impact on our financial position or results of operations.


9

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



Note 2 - 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 adjusted for estimated forfeitures. We estimate the fair value of employee stock options on the date of grant using a binomial model and use the closing trading price of our common stock on the date of grant as the fair value of awards of restricted stock units, or RSUs. We calculate the fair value of our employee stock purchase plan using the Black-Scholes model.

Our consolidated statements of operations include stock-based compensation expense, net of amounts capitalized as inventory, as follows:
 
Three Months Ended
 
Six Months Ended
 
July 29,
2012
 
July 31,
2011
 
July 29,
2012
 
July 31,
2011
 
(In thousands)
 
(In thousands)
Cost of revenue
$
2,649

 
$
2,748

 
$
5,175

 
$
5,225

Research and development
18,885

 
21,697

 
40,092

 
40,286

Sales, general and administrative
10,721

 
11,505

 
22,557

 
22,178

Total
$
32,255

 
$
35,950

 
$
67,824

 
$
67,689


During the three and six months ended July 29, 2012 , we granted approximately 0.7 million and 3.6 million stock options, with an estimated total grant-date fair value of $3.1 million and $19.3 million and a weighted average grant-date fair value of $4.80 and $5.16 per option, respectively. During the three and six months ended July 29, 2012 , we granted approximately 0.7 million and 4.0 million RSUs, with an estimated total grant-date fair value of $8.3 million and $56.5 million and a weighted average grant-date fair value of $12.37 and $14.23 per RSU, respectively.  

During the three and six months ended July 31, 2011 , we granted approximately 0.4 million and 3.3 million stock options, with an estimated total grant-date fair value of $3.0 million and $29.7 million and a weighted average grant-date fair value of $7.11 and $8.97 per option, respectively.  During the three and six months ended July 31, 2011 , we granted approximately 0.5 million and 3.7 million RSUs, with an estimated total grant-date fair value of $8.3 million and $67.9 million and a weighted average grant-date fair value of $17.95 and $18.15 per RSU, respectively.  


10

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



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 $2.1 million and $13.6 million for the three and six months ended July 29, 2012 , respectively, and $2.0 million and $17.5 million for the three and six months ended July 31, 2011 , respectively. As of July 29, 2012 and July 31, 2011 , the aggregate amount of unearned stock-based compensation expense related to our equity awards was $197.4 million and $177.9 million , respectively, adjusted for estimated forfeitures.  As of July 29, 2012 and July 31, 2011 , we expect to recognize the unearned stock-based compensation expense related to stock options over an estimated weighted average amortization period of 2.6 years and 2.2 years, respectively. As of July 29, 2012 and July 31, 2011 , we expect to recognize the unearned stock-based compensation expense related to RSUs over an estimated weighted average amortization period of 2.6 years and 2.5 years, respectively.

Valuation Assumptions
 
We utilize a binomial model for calculating the estimated fair value of new stock-based compensation awards granted under our equity incentive plans.  We have determined that the use of implied volatility is expected to be reflective of market conditions and, therefore, can be expected to be a reasonable indicator of our expected 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-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 reasonable estimate of the fair value of our employee stock options. For our employee stock purchase plan, we continue to use the Black-Scholes model.   

We estimate forfeitures annually and revise the estimates of forfeiture, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures are estimated based on historical experience.
 
The fair value of stock options granted under our equity incentive 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
 
Six Months Ended
 
July 29,
2012
 
July 31,
2011
 
July 29,
2012
 
July 31,
2011
Stock Options
(Using a binomial model)
Expected life (in years)
3.1-4.8

 
3.6-4.7

 
3.1-4.8

 
3.6-5.4

Risk free interest rate
1.5%-1.9%

 
2.9%-3.2%

 
1.5%-2.3%

 
2.9%-3.8%

Volatility
43%-48%

 
46%-49%

 
43%-48%

 
46%-61%

Dividend yield

 

 

 


 
Three Months Ended
 
Six Months Ended
 
July 29,
2012
 
July 31,
2011
 
July 29,
2012
 
July 31,
2011
Employee Stock Purchase Plan
(Using a Black-Scholes model)
Expected life (in years)

 

 
0.5-2.0

 
0.5-2.0

Risk free interest rate

 

 
0.1%-0.3%

 
0.2%-0.7%

Volatility

 

 
44
%
 
57
%
Dividend yield

 

 

 


11

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



 
Equity Award Activity
 
The following summarizes the stock option and RSU activity under our equity incentive plans: 
 
Options Outstanding
 
Weighted Average Exercise Price
Stock Options
(In thousands)
 
(Per share)
Balances, January 29, 2012
33,329

 
$
14.44

Granted
3,603

 
$
14.14

Exercised
(2,727
)
 
$
9.13

Cancelled
(1,878
)
 
$
16.94

Balances, July 29, 2012
32,327

 
$
14.71

 
 
RSUs
Outstanding
 
Weighted Average Grant-Date Fair Value
Restricted Stock Units
(In thousands)
 
(Per share)
Balances, January 29, 2012
13,638

 
$
15.10

Granted
3,974

 
$
14.23

Vested
(2,470
)
 
$
14.14

Cancelled
(364
)
 
$
15.51

Balances, July 29, 2012
14,778

 
$
15.01

 

12

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



Note 3 – Net Income Per Share

The following is a reconciliation of the numerator and denominator of the basic and diluted net income per share computations for the periods presented: 
 
 
Three Months Ended
 
Six Months Ended
 
July 29,
 
July 31,
 
July 29,
 
July 31,
 
2012
 
2011
 
2012
 
2011
 
(In thousands, except per share data)
Numerator:
 
 
 
 
 
 
 
Net income
$
119,046

 
$
151,573

 
$
179,483

 
$
286,792

Denominator:
 

 
 

 
 

 
 

Denominator for basic net income per share, weighted average shares
618,996

 
601,340

 
617,388

 
598,077

Effect of dilutive securities:
 

 
 

 
 

 
 

Equity awards outstanding
4,147

 
12,594

 
6,009

 
17,475

Denominator for diluted net income per share, weighted average shares
623,143

 
613,934

 
623,397

 
615,552

Net income per share:
 

 
 

 
 

 
 

Basic net income per share
$
0.19

 
$
0.25

 
$
0.29

 
$
0.48

Diluted net income per share
$
0.19

 
$
0.25

 
$
0.29

 
$
0.47

Potentially dilutive securities excluded from income per diluted share because their effect would have been anti-dilutive
27,121

 
13,547

 
24,882

 
14,345




13

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



Note 4 – Income Taxes

 We recognized income tax expense of $26.2 million and $42.8 million for the three and six months ended July 29, 2012, respectively, and $26.0 million and $47.2 million for the three and six months ended July 31, 2011, respectively.  Income tax expense as a percentage of income before taxes, or our effective tax rate, was 18.0% and 19.3% for the three and six months ended July 29, 2012, respectively, and 14.6% and 14.1% for the three and six months ended July 31, 2011, respectively. The increase in our effective tax rate in fiscal year 2013 was primarily related to the expiration of the U.S. federal research tax credit on December 31, 2011, which provided no tax benefit for the three and six months ended July 29, 2012.
Our effective tax rate on income before tax for the first six months of fiscal year 2013 of 19.3% was lower than the United States federal statutory rate of 35% due primarily to income earned in jurisdictions where the tax rate is lower than the United States federal statutory tax.  
Our effective tax rate on income before tax for the first six months of fiscal year 2012 of 14.1% was lower than the United States federal statutory rate of 35% due primarily to income earned in jurisdictions where the tax rate is lower than the United States federal statutory tax and the benefit of the U.S. federal research tax credit.

As of July 29, 2012, we recorded an increase of unrecognized tax benefits of approximately $51.8 million , which is primarily related to an income tax position with respect to an acquired tax attribute. The $51.8 million of unrecognized tax benefits recorded in the six months ended July 29, 2012 consists of $49.8 million recorded in non-current income tax payable and $2.0 million reflected as a reduction to the related deferred tax assets. Additionally, we recorded a decrease in the uncertain tax benefits related to the expiration of statutes of limitations in certain non-U.S. jurisdictions in the six months ended July 29, 2012 of approximately $4.7 million .  There have been no other significant changes to our unrecognized tax benefits, related interest or penalties from our fiscal year ended January 29, 2012.  For the six months ended July 29, 2012, there have been no material changes to our tax years that remain subject to examination by major tax jurisdictions.   
While we believe that we have adequately provided for all uncertain tax positions, amounts asserted by tax authorities could be greater or less than our accrued position. Accordingly, our provisions on federal, state and foreign tax related matters to be recorded in the future may change as revised estimates are made or the underlying matters are settled or otherwise resolved with the respective tax authorities. As of July 29, 2012, 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 5 - Marketable Securities
 
All of our cash equivalents and marketable securities are classified as “available-for-sale” securities. These securities are reported at fair value with the related unrealized gains and losses included in accumulated other comprehensive income, a component of stockholders’ equity, net of tax.

We performed an impairment review of our investment portfolio as of July 29, 2012 . Based on our quarterly impairment review and having considered the guidance in the relevant accounting literature, we concluded that our investments were appropriately valued and that no other than temporary impairment charges were necessary on our portfolio as of July 29, 2012 . The following is a summary of cash equivalents and marketable securities at July 29, 2012 and January 29, 2012
 
July 29, 2012
 
Amortized
Cost
 
Unrealized
Gain
 
Unrealized
Loss
 
Estimated
Fair Value
 
(In thousands)
Debt securities of United States government agencies
$
788,140

 
$
1,370

 
$
(77
)
 
$
789,433

Corporate debt securities
1,209,149

 
3,706

 
(71
)
 
1,212,784

Mortgage backed securities issued by United States government-sponsored enterprises
176,563

 
6,121

 
(54
)
 
182,630

Money market funds
70,110

 

 

 
70,110

Debt securities issued by United States Treasury
630,696

 
1,350

 
(164
)
 
631,882

Total
$
2,874,658

 
$
12,547

 
$
(366
)
 
$
2,886,839

Classified as:
 

 
 

 
 

 
 

Cash equivalents
 

 
 

 
 

 
$
108,357

Marketable securities
 

 
 

 
 

 
2,778,482

Total
 

 
 

 
 

 
$
2,886,839


 
 
January 29, 2012
 
Amortized
Cost
 
Unrealized
Gain
 
Unrealized
Loss
 
Estimated
Fair Value
 
(In thousands)
Debt securities of United States government agencies
$
769,300

 
$
1,605

 
$
(151
)
 
$
770,754

Corporate debt securities
1,114,439

 
3,268

 
(260
)
 
1,117,447

Mortgage backed securities issued by United States government-sponsored enterprises
156,668

 
4,964

 
(73
)
 
161,559

Money market funds
290,732

 

 

 
290,732

Debt securities issued by United States Treasury
533,616

 
2,161

 
(3
)
 
535,774

Total
$
2,864,755

 
$
11,998

 
$
(487
)
 
$
2,876,266

Classified as:
 
 
 
 
 
 
 
Cash equivalents
 
 
 
 
 
 
$
414,566

Marketable securities
 
 
 
 
 
 
2,461,700

Total
 
 
 
 
 
 
$
2,876,266

 
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 July 29, 2012 and January 29, 2012 and are shown below by contractual maturity.  

 
July 29, 2012
 
January 29, 2012
 
Amortized
Cost
 
Estimated
Fair Value
 
Amortized
Cost
 
Estimated
Fair Value
 
(In thousands)
Less than one year
$
1,201,750

 
$
1,203,585

 
$
1,705,916

 
$
1,708,154

Due in 1 - 5 years
1,481,638

 
1,487,704

 
1,047,956

 
1,053,265

Mortgage-backed securities issued by government-sponsored enterprises not due at a single maturity date
191,270

 
195,550

 
110,883

 
114,847

Total
$
2,874,658

 
$
2,886,839

 
$
2,864,755

 
$
2,876,266

 
Net realized gains for the three and six months ended July 29, 2012 were $0.2 million and $0.3 million , respectively. Net realized gains for the three and six months ended July 31, 2011 were $0.3 million and $0.4 million , respectively.

15

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




Note 6 – 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.  Our Level 1 assets consist of our money market fund deposits. We classify securities within Level 1 assets when the fair value is obtained from real time quotes for transactions in active exchange markets involving identical assets.  Our available-for-sale securities are classified as having Level 2 inputs.  Our Level 2 assets are valued utilizing a market approach where the market prices of similar assets are provided by a variety of independent industry standard data providers to our investment custodian.  There were no significant transfers between Levels 1 and 2 assets for the three and six months ended July 29, 2012 .

Financial assets and liabilities measured at fair value are summarized below:
 
 
Fair Value Measurement at Reporting Date Using
 
 
 
Quoted Prices 
in Active Markets for Identical Assets
 
Significant Other Observable Inputs
 
July 29, 2012
 
(Level 1)
 
(Level 2)
 
(In thousands)
Debt securities issued by United States government agencies (1)
$
789,433

 
$

 
$
789,433

Debt securities issued by United States Treasury (1)
631,882

 

 
631,882

Corporate debt securities (2)
1,212,784

 

 
1,212,784

Mortgage-backed securities issued by government-sponsored entities (1)
182,630

 

 
182,630

Money market funds (3)
70,110

 
70,110

 

Total cash equivalents and marketable securities
$
2,886,839

 
$
70,110

 
$
2,816,729

 
(1)
Included in Marketable Securities on the Condensed Consolidated Balance Sheet.

(2)  
Includes $38.2 million in Cash Equivalents and $1,174.6 million in Marketable Securities on the Condensed Consolidated Balance Sheet.

(3)
Included in Cash Equivalents on the Condensed Consolidated Balance Sheet.    
 

16

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



Note 7 - 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. 

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 the Condensed Consolidated Financial Statements for further information regarding this litigation. 
  
Fair Market Value
 
Straight-Line Amortization Period
 
(In thousands)
 
(In years)
Property and equipment
$
2,433

 
1-2

Trademarks
11,310

 
5

Goodwill
85,418

 

Total
$
99,161

 
 



17

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



Note 8 - Business Combinations

On June 10, 2011, we completed the acquisition of Icera, Inc. by acquiring all issued and outstanding preferred and common shares in exchange for cash. Icera develops baseband processors for 3G and 4G cellular phones and tablets.  In addition to leveraging on the existing Icera business, the objective of the acquisition is to accelerate and enhance the combination of our application processor with Icera’s baseband processor for use in mobile devices such as smartphones and tablets.

Total consideration to acquire Icera was $352.2 million in cash. All existing Icera equity based incentive plans were terminated upon the completion of the acquisition.  In connection with the acquisition of Icera, we established a retention program in the aggregate amount of approximately $68.0 million to be paid out to Icera employees over a period of four years.

The fair values of the assets acquired and liabilities assumed by major class in the acquisition of Icera were recognized as follows (in thousands):
Cash
$
3,315

Accounts receivable
13,740

Inventory
13,510

Prepaid and other current assets
1,972

Deferred tax assets
13,036

Property, plant and equipment
3,649

Goodwill
271,186

Intangible assets
97,515

Other assets
591

Total assets acquired
418,514

 
 
Accounts payable
(6,026
)
Accrued liabilities
(38,735
)
Notes payable
(10,319
)
Income taxes payable
(4,558
)
Deferred income tax liabilities
(6,677
)
Net assets acquired
$
352,199


The goodwill of $271.2 million  arising from the acquisition is primarily attributed to the assembled workforce of Icera and premium paid over net assets acquired.  Goodwill recognized is not expected to be deductible for tax purposes. We have determined that goodwill from the acquisition of Icera should be allocated to our Consumer Products Business, or CPB, operating segment.   In addition, revenue contribution from Icera was not significant for the three and six months ended July 29, 2012.


18

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



The acquisition-related intangible assets assumed from the acquisition of Icera were recognized as follows based upon their fair values as of June 10, 2011:
 
Intangible Assets
 
Fair Value
 
Weighted-Average
Estimated Useful Lives
 
 
(In thousands)
 
(In years)
Technology
 
$
58,300

 
7.4

In-process technology
 
$
20,200

 
indefinite

Customer relationships
 
$
18,200

 
6.8

 
Technology

Technology consists of core technology and existing technology. Core technology represents a series of processes and trade secrets that are used in Icera’s products and form a major part of the architecture of both the current products and planned future releases of current products. We used a profit allocation method to value the core technology of Icera, based on market royalties for similar fundamental technologies. The profit allocation method estimates the cost savings that accrue to the owner of an intangible asset that would otherwise be payable on revenues earned through the use of the asset. The royalty rate we used was based on an analysis of empirical, market-derived royalty rates for guideline intangible assets. Revenue was projected over the expected remaining useful life of the core technology and then the market-derived royalty rate was applied to estimate the royalty savings.

Existing technology is specific to certain products acquired that have also passed technological feasibility. We used an income approach to value Icera’s existing technology. Using this approach, we calculated the estimated fair value using expected future cash flows from specific products discounted to their net present values at an appropriate risk-adjusted rate of return.

 
In-Process Technology

 
In-process technology, or IPR&D, represents the fair values of incomplete Icera research and development projects that had not reached technological feasibility as of the date of acquisition. In the future, the fair value of each project at the acquisition date will be either amortized or impaired depending on whether the projects are completed or abandoned.  

The fair value of the IPR&D was determined using the income approach. Under the income approach, the expected future cash flows from each project under development were estimated and discounted to their net present values at an appropriate risk-adjusted rate of return. Significant factors considered in the calculation of the rate of return were the weighted average cost of capital, the return on assets, as well as the risks inherent in the development process, including the likelihood of achieving technological success and market acceptance. Each project was analyzed to determine the unique technological innovations, the existence and reliance on core technology, the existence of any alternative future use or current technological feasibility, and the complexity, cost and time to complete the remaining development. Future cash flows for each project were estimated based on forecasted revenue and costs, taking into account the expected product life cycles, market penetration and growth rates.

Customer Relationships
 
Customer relationships represent the fair value of projected cash flows that will be derived from the sale of products to Icera’s existing customers based on existing, in-process, and future versions of the underlying technology.


19

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



Note 9 - Intangible Assets
 
The components of our amortizable intangible assets are as follows:

 
July 29, 2012
 
January 29, 2012
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated Amortization
 
Net Carrying
Amount
 
(In thousands)
Acquisition-related intangible assets
$
172,039

 
$
(87,659
)
 
$
84,380

 
$
172,039

 
$
(79,261
)
 
$
92,778

Patents and licensed technology
406,954

 
(144,396
)
 
262,558

 
352,386

 
(119,028
)
 
233,358

Total intangible assets
$
578,993

 
$
(232,055
)
 
$
346,938

 
$
524,425

 
$
(198,289
)
 
$
326,136


The increase in gross carrying amount of intangible assets is primarily due to an agreement entered into during the first quarter of fiscal year 2013 to acquire a patent portfolio for our CPB operating segment.

Amortization expense associated with intangible assets for the three and six months ended July 29, 2012 was $17.2 million and $ 33.8 million , respectively. Amortization expense associated with intangible assets for the three and six months ended July 31, 2011 was $15.6 million and $26.5 million , respectively. Amortization expense increased compared to the prior year primarily due to the addition of a patent portfolio and acquisition-related intangible assets from the Icera acquisition completed on June 10, 2011. Please refer to Note 8 of these Notes to Condensed Consolidated Financial Statements for further information regarding the Icera business combination. Future amortization expense related to the net carrying amount of intangible assets at July 29, 2012 is estimated to be $34.4 million for the remainder of fiscal year 2013, $66.5 million in fiscal year 2014 , $66.4 million in fiscal year 2015 , $60.9 million in fiscal year 2016 , $50.4 million in fiscal year 2017 and a total of $68.3 million in fiscal year 2018 and fiscal years subsequent to fiscal year 2018 .


20

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




Note 10 - Balance Sheet Components
 
Certain balance sheet components are as follows:
 
July 29,
 
January 29,
 
2012
 
2012
Inventories:
(In thousands)
Raw materials
$
87,117

 
$
84,927

Work in-process
82,339

 
62,934

Finished goods
217,729

 
192,436

Total inventories
$
387,185

 
$
340,297


At July 29, 2012 , we had outstanding inventory purchase obligations totaling approximately $ 669.9 million .

 
July 29,
 
January 29,
 
2012
 
2012
Prepaid Expenses and Other:
(In thousands)
Prepaid maintenance
$
18,107

 
$
12,965

Prepaid insurance
3,263

 
3,502

Prepaid taxes
10,069

 
10,069

Prepaid rent
2,635

 
3,410

Other
19,249

 
19,465

Total prepaid expenses and other
$
53,323

 
$
49,411

 

21

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



 
July 29,
 
January 29,
 
2012
 
2012
Accrued Liabilities:
(In thousands)
Deferred revenue
$
273,182

 
$
270,649

Accrued customer programs (1)
149,074

 
143,972

Warranty accrual (2)
16,537

 
18,406

Accrued payroll and related expenses
94,350

 
88,879

Accrued legal settlement (3)
30,600

 
30,600

Taxes payable, short-term
10,165

 
6,941

Other
30,802

 
35,439

Total accrued liabilities and other
$
604,710

 
$
594,886

      
(1)  Please refer to Note 1 of these Notes to Condensed Consolidated Financial Statements for discussion regarding the nature of accrued customer programs and their accounting treatment related to our revenue recognition policies and estimates.
(2)  Please refer to Note 11 of these Notes to Condensed Consolidated Financial Statements for discussion regarding the warranty accrual.
(3)  Please refer to Note 12 of these Notes to Condensed Consolidated Financial Statements for discussion regarding the 3dfx litigation.
 
 
July 29,
 
January 29,
 
2012
 
2012
Other Long-Term Liabilities:
(In thousands)
Deferred income tax liability
$
143,165

 
$
133,288

Income taxes payable, long-term
108,588

 
63,007

Asset retirement obligation
10,337

 
10,199

Deferred revenue
68,172

 
200,370

Other long-term liabilities
65,757

 
48,943

Total other long-term liabilities
$
396,019

 
$
455,807



22

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




Note 11 - Guarantees
 
U.S. GAAP requires that upon issuance of a guarantee, the guarantor must recognize a liability for the fair value of the obligation it assumes under that guarantee. In addition, U.S. GAAP requires disclosures about the guarantees that an entity has issued, including a tabular reconciliation of the changes of the entity’s product warranty liabilities.
  
Accrual for Product Warranty Liabilities
We record a reduction to revenue for estimated product returns at the time revenue is recognized primarily based on historical return rates. Cost of revenue includes the estimated cost of product warranties.  Under limited circumstances, we may offer an extended limited warranty to customers for certain products.  Additionally, we accrue for known warranty and indemnification issues if a loss is probable and can be reasonably estimated. The estimated product warranty liabilities for the three and six months ended July 29, 2012 and July 31, 2011 were as follows: 
 
Three Months Ended
 
Six Months Ended
 
July 29,
 
July 31,
 
July 29,
 
July 31,
 
2012
 
2011
 
2012
 
2011
 
(In thousands)
Balance at beginning of period (1)
$
17,070

 
$
80,724

 
$
18,406

 
$
107,896

Additions
1,678

 
1,578

 
3,357

 
2,984

Deductions (2)
(2,211
)
 
(28,484
)
 
(5,226
)
 
(57,062
)
Balance at end of period 
$
16,537

 
$
53,818

 
$
16,537

 
$
53,818

 
(1) Includes $11.6 million and $13.2 million for the three and six months ended July 29, 2012, respectively, and $76.4 million  and  $103.7 million  for the three and six months ended July 31, 2011, respectively, related to warranty accrual associated with incremental repair and replacement costs from a weak die/packaging material set. 

(2) Includes $0.7 million and $1.9 million for the three and six months ended July 29, 2012 , respectively, and $16.7 million and $23.4 million for the three and six months ended July 31, 2011 , respectively, in payments related to the warranty accrual associated with incremental repair and replacement costs from a weak die/packaging material set.
 
In connection with certain agreements that we have executed in the past, we have at times provided indemnities to cover the indemnified party for matters such as tax, product and employee liabilities. We have also on occasion included intellectual property indemnification provisions in our technology related agreements with third parties. Maximum potential future payments cannot be estimated because many of these agreements do not have a maximum stated liability. As such, we have not recorded any liability in our Condensed Consolidated Financial Statements for such indemnifications.
 

23

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



Note 12 - Commitments and Contingencies

3dfx
On December 15, 2000, NVIDIA and one of our indirect subsidiaries entered into an Asset Purchase Agreement, or APA, to purchase certain graphics chip assets from 3dfx.  The transaction closed on April 18, 2001.  That acquisition, and 3dfx's October 2002 bankruptcy filing, led to four lawsuits against NVIDIA: two brought by 3dfx's former landlords, one by 3dfx's bankruptcy trustee and the fourth by a committee of 3dfx's equity security holders in the bankruptcy estate.  The two landlord cases have been settled with payments from the landlords to NVIDIA, and the equity security holders lawsuit was dismissed with prejudice and no appeal was filed.  Accordingly, only the bankruptcy trustee suit remains outstanding as more fully explained below.  
In March 2003, the Trustee appointed by the Bankruptcy Court to represent 3dfx's bankruptcy estate served a complaint on NVIDIA asserting claims for, among other things, successor liability and fraudulent transfer and seeking additional payments from us.  The Trustee's fraudulent transfer theory alleged that NVIDIA had failed to pay reasonably equivalent value for 3dfx's assets, and sought recovery of the difference between the $70.0 million paid and the alleged fair value, which the Trustee estimated to exceed $50.0 million .  The Trustee's successor liability theory alleged NVIDIA was effectively 3dfx's legal successor and therefore was responsible for all of 3dfx's unpaid liabilities.   
On October 13, 2005, the Bankruptcy Court heard the Trustee's motion for summary adjudication, and on December 23, 2005, denied that motion 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. 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, 2006, the Bankruptcy Court scheduled a trial for one portion of the Trustee's case against NVIDIA. On January 2, 2007, NVIDIA terminated 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 $70.0 million that NVIDIA paid “reasonably equivalent” to the fair market value of that property. The parties completed post-trial briefing 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 and evidence and concluded that “the creditors of 3dfx were not injured by the Transaction.”  This decision did not entirely dispose of the Trustee's action, however, as the Trustee's claims for successor liability and intentional fraudulent conveyance were still pending.  On June 19, 2008, NVIDIA filed a motion for summary judgment to convert the Memorandum Decision After Trial to a final judgment.  That motion was granted in its entirety and judgment was entered in NVIDIA's favor on September 11, 2008.  The Trustee filed a Notice of Appeal from that judgment on September 22, 2008, and on September 25, 2008, NVIDIA exercised its election to have the appeal heard by the United States District Court.    
The District Court's hearing on the Trustee's appeal was held on June 10, 2009. On December 20, 2010, the District Court issued an Order affirming the Bankruptcy Court's entry of summary judgment in NVIDIA's favor. On January 19, 2011, the Trustee filed a Notice of Appeal to the United States Court of Appeals for the Ninth Circuit.

24

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




While the conditional settlement reached in November 2005 never progressed through the confirmation process, the Trustee's case still remains pending on appeal.  Accordingly, 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. 
Product Defect Litigation and Securities Cases
Product Defect Litigation
In September, October and November 2008, several putative consumer class action lawsuits were filed against us, asserting various claims arising from a weak die/packaging material set in certain versions of our previous generation products used in notebook configurations.   On February 26, 2009, the various lawsuits were consolidated in the United States District Court for the Northern District of California, San Jose Division, under the caption “The NVIDIA GPU Litigation.” On March 2, 2009, several of the parties filed motions for appointment of lead counsel and briefs addressing certain related issues.  On April 10, 2009, the District Court appointed Milberg LLP lead counsel.  On May 6, 2009, the plaintiffs filed an Amended Consolidated Complaint, alleging claims for violations of California Business and Professions Code Section 17200, Breach of Implied Warranty under California Civil Code Section 1792, Breach of the Implied Warranty of Merchantability under the laws of 27 other states, Breach of Warranty under the Magnuson-Moss Warranty Act, Unjust Enrichment, violations of the New Jersey Consumer Fraud Act, Strict Liability and Negligence, and violation of California's Consumer Legal Remedies Act.
After extensive motion practice and litigation, plaintiffs on December 14, 2009 filed a Second Amended Consolidated Complaint seeking unspecified damages and asserting claims for violations of California Business and Professions Code Section 17200, Breach of Implied Warranty under California Civil Code Section 1792, Breach of Warranty under the Magnuson-Moss Warranty Act, violations of the New Jersey Consumer Fraud Act, Strict Liability and Negligence, and violation of California's Consumer Legal Remedies Act.    
On July 16, 2010, the parties filed a stipulation with the District Court advising that, following mediation they had reached a settlement in principle in The NVIDIA GPU Litigation.  The settlement in principle was subject to certain approvals, including final approval by the court.  As a result of the settlement in principle, and the other estimated settlement, and offsetting insurance reimbursements, NVIDIA recorded a net charge of $12.7 million to sales, general and administrative expense during the second quarter of fiscal year 2011.  In addition, a portion of the $181.2 million of additional charges we recorded against cost of revenue related to the weak die/packaging set during the second quarter of fiscal year 2011, relates to estimated additional repair and replacement costs related to the implementation of these settlements. On August 12, 2010, the parties executed a Stipulation and Agreement of Settlement and Release. On September 15, 2010, the Court issued an order granting preliminary approval of the settlement and providing for notice to the potential class members. The Final Approval Hearing was held on December 20, 2010, and on that same day the Court approved the settlement and entered Final Judgment over several objections. In January 2011, several objectors filed Notices of Appeal of the Final Judgment to the United States Court of Appeals for the Ninth Circuit.
On July 22, 2011, a putative class action titled Granfield v. NVIDIA Corp. was filed in federal court in Massachusetts asserting claims for breach of implied warranties arising out of the weak die/packaging material set, on behalf of a class of consumers alleged to not be covered by the settlement approved by the California court in The NVIDIA GPU Litigation.  On November 3, 2011 the action was transferred to the Northern District of California, San Francisco Division, based upon stipulation of the parties.  On December 30, 2011, Plaintiff filed a First Amended Complaint asserting claims for violation of California Consumers Legal Remedies Act and Unfair Competition Law.  On March 19, 2012, Plaintiff filed a Second Amended Complaint asserting claims for California Consumers Legal Remedies Act and Unfair Competition Law violations, Breach of Implied Warranty, and violations of the Massachusetts consumer protection statutes. NVIDIA filed a motion to dismiss the Second Amended Complaint on April 12, 2012.
On July 12, 2012, the District Court dismissed six of the seven asserted causes of action with prejudice, allowing only one cause of action for violation of the Massachusetts consumer protection statute to continue, and instructed Plaintiff to file an amended complaint consistent with its Order. On August 15, 2012, Plaintiff indicated that he would not be filing an amended complaint.



25

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



Securities Cases
In September 2008, three putative securities class actions, or the Actions, were filed in the United States District Court for the Northern District of California arising out of our announcements on July 2, 2008, that we would take a charge against cost of revenue to cover anticipated costs and expenses arising from a weak die/packaging material set in certain versions of our previous generation MCP and GPU products and that we were revising financial guidance for our second quarter of fiscal year 2009. The Actions purport to be brought on behalf of purchasers of NVIDIA stock and assert claims for violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, or the Securities Exchange Act. On October 30, 2008, the Actions were consolidated under the caption In re NVIDIA Corporation Securities Litigation, Civil Action No. 08-CV-04260-JW (HRL). Lead Plaintiffs and Lead Plaintiffs' Counsel were appointed on December 23, 2008. On February 6, 2009, co-Lead Plaintiff filed a Writ of Mandamus with the Ninth Circuit Court of Appeals challenging the designation of co-Lead Plaintiffs' Counsel. On February 19, 2009, co-Lead Plaintiff filed with the District Court, a motion to stay the District Court proceedings pending resolution of the Writ of Mandamus by the Ninth Circuit. On February 24, 2009, Judge Ware granted the stay. On November 5, 2009, the Court of Appeals issued an opinion reversing the District Court's appointment of one of the lead plaintiffs' counsel, and remanding the matter for further proceedings.   On December 8, 2009, the District Court appointed Milberg LLP and Kahn Swick & Foti, LLC as co-lead counsel.  
On January 22, 2010, Plaintiffs filed a Consolidated Amended Class Action Complaint for Violations of the Federal Securities Laws, asserting claims for violations of Section 10(b), Rule 10b-5, and Section 20(a) of the Securities Exchange Act.  The consolidated complaint sought unspecified compensatory damages.  We filed a motion to dismiss the consolidated complaint in March 2010 and a hearing was held on June 24, 2010 before Judge Seeborg. On October 19, 2010, Judge Seeborg granted our motion to dismiss with leave to amend. On December 2, 2010, co-Lead Plaintiffs filed a Second Consolidated Amended Complaint.  We moved to dismiss the Second Consolidated Amended Complaint on February 14, 2011. Following oral argument, on October 12, 2011, Judge Seeborg granted our motion to dismiss without leave to amend, and on November 8, 2011, Plaintiffs filed a Notice of Appeal to the Ninth Circuit. The appeal has been fully briefed, but the Ninth Circuit has not yet set a hearing date.
Accounting for Loss Contingencies
While there can be no assurance of favorable outcomes, we believe the claims made by other parties in the above ongoing matters are without merit and we intend to vigorously defend the actions. With the exception of the 3dfx and product defect litigation cases, we have not recorded any accrual for contingent liabilities associated with the legal proceedings described above based on our belief that liabilities, while possible, are not probable. Further, any possible range of loss in these matters cannot be reasonably estimated at this time. We are engaged in other legal actions not described above arising in the ordinary course of its business and, while there can be no assurance of favorable outcomes, we believe that the ultimate outcome of these actions will not have a material adverse effect on our operating results, liquidity or financial position.



26

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



Note 13 - Stockholders’ Equity
 
Stock Repurchase Program
 
Our Board of Directors has authorized us, subject to certain specifications, to repurchase shares of our common stock up to an aggregate maximum amount of $2.7 billion through May 2013. 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 Rule 10b-18 of the Securities Exchange Act of 1934, as amended, subject to market conditions, applicable legal requirements, and other factors. The program does not obligate NVIDIA to acquire any particular amount of common stock and the program may be suspended at any time at our discretion. As part of our share repurchase program, we have entered into, and we may continue to enter into, structured share repurchase transactions with financial institutions. These agreements generally require that we make an up-front payment in exchange for the right to receive a fixed number of shares of our common stock upon execution of the agreement, and a potential incremental number of shares of our common stock, within a pre-determined range, at the end of the term of the agreement.
  
We did not enter into any structured share repurchase transactions or otherwise purchase any shares of our common stock during the three and six months ended July 29, 2012 . Through July 29, 2012 , we have repurchased an aggregate of 90.9 million shares under our stock repurchase program for a total cost of $1.46 billion .  As of July 29, 2012 , we are authorized, subject to certain specifications, to repurchase shares of our common stock up to $1.24 billion through May 2013. 
 
Convertible Preferred Stock
 
As of July 29, 2012 and January 29, 2012 , there were no shares of preferred stock outstanding.
 
Common Stock
 
We are authorized to issue up to 2,000,000,000 shares of our common stock at $0.001 per share par value.
      

27

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



Note 14 - Segment Information
 
Our Chief Executive Officer, who is considered to be our chief operating decision maker, or CODM, reviews financial information presented on an operating segment basis for purposes of making operating decisions and assessing financial performance. We report financial information for three operating segments to our CODM: Graphics Processing Unit, or GPU, Business; Professional Solutions Business, or PSB; and Consumer Products Business, or CPB. The GPU business is comprised of our desktop, notebook, memory and chipset products. Our GPU business also includes license revenue in connection with our patent cross license agreement with Intel. The PSB includes Quadro workstation graphics and Tesla high-performance computing products. The CPB is comprised of Tegra based smartphone and tablet products as well as Icera baseband processors and radio frequency transceivers. Our CPB also includes embedded products for entertainment and automotive devices as well as license and royalty revenue associated with game consoles.
In addition to these operating segments, we also have an “All Other” category that includes non-recurring charges and benefits which we do not allocate to our operating segments as these items are not included in the segment operating performance measures evaluated by our CODM. On June 12, 2012, we pledged a charitable contribution of $25.0 million to Stanford Hospital and Clinics, payable over a ten year period. The charitable contribution was recorded at its net present value of $20.1 million and is considered a non-recurring charge for the three and six months ended July 29, 2012. There were no non-recurring charges or benefits for the three and six months ended July 31, 2011 .     

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
 
CPB
 
All Other
 
Consolidated
 
(In thousands)
Three Months Ended July 29, 2012
 
 
 
 
 
 
 
 
 
Revenue
$
668,298

 
$
196,326

 
$
179,646

 
$

 
$
1,044,270

Depreciation and amortization expense
$
32,554

 
$
4,446

 
$
19,195

 
$

 
$
56,195

Operating income (loss)
$
162,644

 
$
86,838

 
$
(89,732
)
 
$
(20,127
)
 
$
139,623

Three Months Ended July 31, 2011
 

 
 

 
 

 
 

 
 

Revenue
$
638,544

 
$
210,289

 
$
167,684

 
$

 
$
1,016,517

Depreciation and amortization expense
$
30,663

 
$
5,869

 
$
15,628

 
$

 
$
52,160

Operating income (loss)
$
139,708

 
$
69,863

 
$
(35,541
)
 
$

 
$
174,030

Six Months Ended July 29, 2012
 

 
 

 
 

 
 

 
 

Revenue
$
1,248,019

 
$
408,970

 
$
312,158

 
$

 
$
1,969,147

Depreciation and amortization expense
$
64,130

 
$
8,831

 
$
37,725

 
$

 
$
110,686

Operating income (loss)
$
241,592

 
$
182,625

 
$
(191,641
)
 
$
(20,127
)
 
$
212,449

Six Months Ended July 31, 2011
 

 
 

 
 

 
 

 
 

Revenue
$
1,276,133

 
$
412,130

 
$
290,293

 
$

 
$
1,978,556

Depreciation and amortization expense
$
59,691

 
$
11,987

 
$
28,245

 
$

 
$
99,923

Operating income (loss)
$
259,990

 
$
139,748

 
$
(70,846
)
 
$

 
$
328,892



28

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



Revenue by geographic region is allocated to individual countries based on the location to which the products are initially billed even if our customers’ revenue is attributable to end customers that are located in a different location. The following tables summarize information pertaining to our revenue from customers based on invoicing address in different geographic regions:
 
Three Months Ended
 
Six Months Ended
 
July 29,
 
July 31,
 
July 29,
 
July 31,
 
2012
 
2011
 
2012
 
2011
 
(In thousands)
Revenue:
 
 
 
 
 
 
 
China
$
196,687

 
$
232,732

 
$
375,297

 
$
522,216

Taiwan
340,144

 
281,609

 
616,463

 
564,546

Other Asia Pacific
212,367

 
205,524

 
391,044

 
338,111

United States
154,814

 
153,171

 
300,756

 
262,489

Other Americas
81,260

 
68,224

 
157,082

 
143,354

Europe
58,998

 
75,257

 
128,505

 
147,840

Total revenue
$
1,044,270

 
$
1,016,517

 
$
1,969,147

 
$
1,978,556


Revenue from significant customers, those representing 10% or more of total revenue, was approximately 12% and 11% of our total revenue from one customer for the three and six months ended July 29, 2012 , respectively. Revenue from significant customers, those representing 10% or more of total revenue, was approximately 11% of our total revenue from one customer for the three and six months ended July 31, 2011 .

Accounts receivable from significant customers, those representing 10% or more of total accounts receivable, was approximately 16% of our accounts receivable balance from one customer at July 29, 2012 and approximately 20% of our accounts receivable balance from one customer at January 29, 2012 .


29



ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements
 
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are subject to the “safe harbor” created by those sections. Forward-looking statements are based on our management’s beliefs and assumptions and on information currently available to our management. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “could,” “goal,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “project,” “predict,” “potential” and similar expressions intended to identify forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors, which may cause our actual results, performance, time frames or achievements to be materially different from any future results, performance, time frames or achievements expressed or implied by the forward-looking statements. We discuss many of these risks, uncertainties and other factors in this Quarterly Report on Form 10-Q in greater detail under the heading “Risk Factors.” Given these risks, uncertainties and other factors, you should not place undue reliance on these forward-looking statements. Also, these forward-looking statements represent our estimates and assumptions only as of the date of this filing. You should read this Quarterly Report on Form 10-Q completely and with the understanding that our actual future results may be materially different from what we expect. We hereby qualify our forward-looking statements by these cautionary statements. Except as required by law, we assume no obligation to update these forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.
 
All references to “NVIDIA,” “we,” “us,” “our” or the “Company” mean NVIDIA Corporation and its subsidiaries, except where it is made clear that the term means only the parent company.
      
NVIDIA, the NVIDIA logo, GeForce, Icera, Kepler, Quadro, Tegra, and Tesla are trademarks and/or registered trademarks of NVIDIA Corporation in the United States and other countries. Other company and product names may be trademarks of the respective companies with which they are associated.
 
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with “Item 6. Selected Financial Data” of our Annual Report on Form 10-K for the fiscal year ended January 29, 2012 and “Item 1A. Risk Factors” of this Quarterly Report on Form 10-Q and our Condensed Consolidated Financial Statements and related Notes thereto, as well as other cautionary statements and risks described elsewhere in this Quarterly Report on Form 10-Q, before deciding to purchase, hold or sell shares of our common stock.

Overview
 
Our Company

NVIDIA is known to millions around the world for creating the graphics chips used in personal computers, or PCs, that bring games and home movies to life. With the invention of the graphics processing unit, or GPU, we introduced the world to the power of computer graphics. Today, we reach well beyond PC graphics. Our energy-efficient processors power a broad range of products, from smartphones to supercomputers. Our mobile processors are used in cell phones, tablets and auto infotainment systems. PC gamers rely on our GPUs to enjoy visually immersive worlds. Designers use GPUs to create visual effects in movies and create everything from golf clubs to jumbo jets. Researchers utilize GPUs to push the frontiers of science with high-performance computing. NVIDIA has nearly 5,000 patents granted and pending worldwide.

NVIDIA solutions are based on two important technologies: the GPU and the mobile processor. Both are highly complex chips, designed by NVIDIA engineers, and manufactured for us by a third party chip foundry. GPUs are the engines of visual computing, the science and art of using computers to understand, create and enhance images. One of the most complex processors ever created, the most advanced GPUs contain billions of transistors. We have three GPU product brands: GeForce, which creates realistic visual experiences for gamers; Quadro, the standard in visual computing for designers and digital artists; and Tesla, which accelerates applications for scientists and researchers.

Mobile processors incorporate central processing unit, or CPU, and GPU technologies to deliver an entire computer system on a single chip, or system-on-chip. Modern mobile processors possess significant computing capabilities yet consume one hundred times less energy than a typical PC. Tegra is our mobile processor and is built for applications ranging from smartphones, tablets and notebook PCs to televisions and cars. We believe energy-efficient mobile computing will transform how computers are used in our lives.

30




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 second quarter of fiscal year 2013, original equipment manufacturers announced more Kepler-based notebooks. Noteworthy among them were new notebooks from Acer, Apple, Asus, Dell, HP, Lenovo, Samsung and Sony. During the first quarter of fiscal year 2013, we had refreshed our notebook GPUs with the launch of the GeForce 600M series. Acer's Aspire Timeline M3, which incorporates the GeForce 600M, is the first Ultrabook with an NVIDIA GPU.

During the first quarter of fiscal year 2013, we launched our new Kepler GPU architecture. Our first Kepler products to be launched were the GeForce GTX 670 and GeForce GTX 680, which are faster, smaller and more power efficient than our previous architecture. We also introduced our third GeForce Kepler product, the GeForce GTX 690, which uses two Kepler GPUs to further enhance performance.

Professional Solutions Business
During the second quarter of fiscal year 2013, we introduced the Tesla K10 and K20 GPU for use in high performance computing applications, including seismic processing, life sciences and video processing. Further, we announced that the space research organization in India was utilizing their Supercomputer for Aerospace with GPU Architecture, or SAGA, system to improve the design and analysis of new and existing satellite launch vehicles.

Consumer Products Business
During the second quarter of fiscal year 2013, Google announced that our Tegra 3 would power its Nexus 7 tablet. Nexus is the first device to run Jelly Bean, the latest version of the Android operating system. Also, Microsoft announced that a Tegra processor would be powering the Windows RT Surface tablet. Further, Fujitsu's Arrows X, a quad-core LTE smartphone powered by Tegra 3, began shipping into Japan in the second quarter of fiscal year 2013.

Tegra processors also began shipping in the 17-inch touchscreen infotainment and navigation system in Tesla Motors' new Model S.

During the first quarter of fiscal year 2013, the first Tegra 3 phone, the HTC One X, was launched. Other noteworthy phone wins announced at Mobile World Congress in March 2012 include ZTE, the first Tegra plus Icera phone, Fujitsu, LG and K-Touch.
   
Financial Information by Business Segment and Geographic Data

Our Chief Executive Officer, who is considered to be our chief operating decision maker, or CODM, reviews financial information presented on an operating segment basis for purposes of making operating decisions and assessing financial performance. We report financial information for three operating segments to our CODM: Graphics Processing Unit, or GPU, Business; Professional Solutions Business, or PSB; and Consumer Products Business, or CPB. The GPU business is comprised of our desktop, notebook, memory and chipset products. Our GPU business also includes license revenue in connection with our patent cross license agreement with Intel. The PSB includes Quadro workstation graphics and Tesla high-performance computing products. The CPB is comprised of Tegra based smartphone and tablet products as well as Icera baseband processors and radio frequency transceivers. Our CPB also includes embedded products for entertainment and automotive devices as well as license and royalty revenue associated with game consoles.

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In addition to these operating segments, we also have an “All Other” category that includes non-recurring charges and benefits which we do not allocate to our operating segments as these items are not included in the segment operating performance measures evaluated by our CODM. On June 12, 2012, we pledged a charitable contribution of $25.0 million to Stanford Hospital and Clinics, payable over a ten year period. The charitable contribution was recorded at its net present value of $20.1 million and is considered a non-recurring charge for the second quarter and first half of fiscal year 2013. There were no non-recurring charges or benefits for the second quarter and first half of fiscal 2012.  Please refer to Note 14 of the Notes to the Condensed Consolidated Financial Statements for further disclosure regarding segment information.

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.

Results of Operations
 
The following table sets forth, for the periods indicated, certain items in our condensed consolidated statements of operations expressed as a percentage of revenue.

 
Three Months Ended
 
 
Six Months Ended
 
 
July 29,
2012
 
 
July 31,
2011
 
 
July 29,
2012
 
 
July 31,
2011
 
Revenue
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%
Cost of revenue
48.2
 
 
48.3
 
 
49.0
 
 
49.0
 
Gross profit
51.8
 
 
51.7
 
 
51.0
 
 
51.0
 
Operating expenses
 
 
 
 
 
 
 
 
 
 
 
Research and development
26.9
 
 
24.4
 
 
28.7
 
 
24.2
 
Sales, general and administrative
11.5
 
 
10.2
 
 
11.5
 
 
10.2
 
Total operating expenses
38.4
 
 
34.6
 
 
40.2
 
 
34.4
 
Operating income
13.4
 
 
17.1
 
 
10.8
 
 
16.6
 
Interest and other income, net
0.5
 
 
0.3
 
 
0.5
 
 
0.3
 
Income before income tax
13.9
 
 
17.4
 
 
11.3
 
 
16.9
 
Income tax expense
2.5
 
 
2.6
 
 
2.2
 
 
2.4
 
Net income
11.4
%
 
14.8
%
 
9.1
%
 
14.5
%

Three and six months ended July 29, 2012 and July 31, 2011

Revenue

Revenue was $1.04 billion for our second quarter of fiscal year 2013 , compared to $1.02 billion for our second quarter of fiscal year 2012 , which represents an increase of approximately 2.7% .  A discussion of our revenue results for each of our operating segments is as follows:

GPU Business . GPU business revenue increased by approximately 4.7% to $668.3 million in the second quarter of fiscal year 2013 , compared to $638.5 million for the second quarter of fiscal year 2012 .  GPU revenues increased due to richer product mix driven by sales of our high-end desktop 28 nanometer Kepler products, offset slightly by a decrease of mainstream desktop sales. Notebook revenues increased as a result of strong design wins based on Intel's Ivy Bridge platform. Memory sales also increased as a result of strength in high-end desktop products. Offsetting these increases were decreases in revenues from our media and communications processors, or MCPs, as these chipsets approach their end of life.   
  
GPU business revenue decreased by approximately 2.2% to $1.25 billion for the first half of fiscal year 2013 , compared to $1.28 billion for the first half of fiscal year 2012 . The decrease is attributable mainly to the decline in revenues from our MCP chipsets as these products approach their end of life, as well as a decline in mainstream desktop sales. Offsetting these decreases were increases in high-end desktop revenues driven primarily from sales of our 28 nanometer Kepler products. Notebook revenues also increased as a result of strong design wins based on Intel's Ivy Bridge platform. Additionally, the first half of fiscal year 2013 included the full impact of six months of revenue from the cross licensing arrangement with Intel, while the first half of fiscal year 2012 only included four months of the corresponding revenue.

32




PSB . PSB revenue decreased by approximately 6.6% to $196.3 million in the second quarter of fiscal year 2013 , compared to $210.3 million in the second quarter of fiscal year 2012 , and decreased by 0.8% to $409.0 million for the first half of fiscal year 2013 , compared to $412.1 million for the first half of fiscal year 2012 . We believe these decreases were mainly caused by a softening of workstation demand in European markets, driven by weak economic conditions there.
 
CPB. CPB revenue increased by approximately 7.1% to $179.6 million in the second quarter of fiscal year 2013 , compared to $167.7 million for the second quarter of fiscal year 2012 .  This increase was primarily due to strength of our Tegra business which increased as a result of higher sales of our Tegra 3 smartphone and tablet devices as we transitioned from the previous generation Tegra 2 products. Offsetting this increase were decreases in license and royalty revenue associated with game consoles and a decrease in revenue from embedded entertainment products.

CPB revenue increased by approximately 7.5% to $312.2 million for the first half of fiscal year 2013 , compared to $290.3 million for the first half of fiscal year 2012 . The main drivers for the increase were higher sales of our embedded products for entertainment and automotive devices and higher sales of our Tegra products. Embedded entertainment revenues increased primarily by customer refreshes of entertainment systems. Offsetting this increase was a decrease in license revenue associated with game consoles.

Concentration of Revenue 
 
Revenue from sales to customers outside of the United States and Other Americas accounted for 77% and 78% of total revenue for the second quarter of fiscal years 2013 and 2012 , respectively, and were 77% and 80% of total revenue for the first half of fiscal 2013 and 2012 , respectively.  Revenue by geographic region is allocated to individual countries based on the location to which the products are initially billed even if the revenue is attributable to end customers in a different location.
 
Revenue from significant customers, those representing 10% or more of total revenue, was approximately 12% and 11% of our total revenue from one customer for the three and six months ended July 29, 2012 , respectively. Revenue from significant customers, those representing 10% or more of total revenue, was approximately 11% of our total revenue from one customer for the three and six months ended July 31, 2011 .

Gross Profit and Gross Margin
  
Gross profit consists of total revenue, net of allowances, less cost of revenue. Cost of revenue consists primarily of the cost of semiconductors purchased from subcontractors, including wafer fabrication, assembly, testing and packaging, manufacturing support costs, including labor and overhead associated with such purchases, final test yield fallout, inventory and warranty provisions and shipping costs. Cost of revenue also includes development costs for license, service arrangements and stock-based compensation related to personnel associated with manufacturing.
 
Gross margin is the percentage of gross profit to revenue. Our gross margin can vary in any period depending on the mix of types of products sold. Our gross margin is significantly impacted by the mix of products we sell. Product mix is often difficult to estimate with accuracy.  Therefore, if we experience product transition challenges, if we achieve significant revenue growth in our lower margin product lines, or if we are unable to earn as much revenue as we expect from higher margin product lines, our gross margin may be negatively impacted.

Our overall gross margin was 51.8% and 51.7% for the second quarter of fiscal years 2013 and 2012 , respectively, and 51.0% for the first half of both fiscal years 2013 and 2012 .
    
We expect our gross margin for the third quarter of fiscal year 2013 to be relatively consistent with the second quarter of fiscal year 2013 . We intend to continue to work to improve our gross margin by, among other things, focusing on delivering cost effective product architectures and enhancing our business processes. 


33



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 increased in the second quarter of fiscal year 2013 from the second quarter of fiscal year 2012.  GPU margins increased primarily due to an increase in unit volume of our high-end 28 nanometer Kepler-based desktop and notebook products which contributed to a richer overall mix toward high-end GPU product sales. The gross margin of our GPU business increased slightly between the first half of fiscal year 2013 and first half of fiscal year 2012, also due primarily to a richer product mix favoring more volume of our high-end desktop and notebook products based on our 28 nanometer Kepler technology. Additionally, we recognized a full six months of revenue from the cross licensing arrangement with Intel in first half of fiscal year 2013 as compared to four months of such revenue for the first half of fiscal year 2012, which also contributed to the gross margin improvement.
 
PSB . The gross margin of our PSB improved in the second quarter of fiscal year 2013 when compared to second quarter of fiscal year 2012 as well as in the first half of fiscal year 2013 when compared to the first half of fiscal year 2012, due primarily to a richer product mix within the Quadro and Tesla product lines.     
 
CPB . The gross margin of our CPB decreased in the second quarter of fiscal year 2013 from the second quarter of fiscal year 2012 as well as in the first half of fiscal year 2013 when compared to the first half of fiscal year 2012.  Gross margin for our mobile products decreased on account of a shift in product mix from tablet to smartphones sales when compared to the same periods in the prior year.
 
Operating Expenses
 
 
Three Months Ended
 
 
Six Months Ended
 
 
July 29,
2012
 
July 31,
2011
 
$
Change
 
%
Change
 
 
July 29,
2012
 
 
July 31,
2011
 
$
Change
 
%
Change
 
 
($ in millions)
 
 
 
 
($ in millions)
 
 
 
Research and development expenses
$
281.2

 
$
247.7

 
$
33.5

 
13.5
%
 
$
565.1

 
 
$
479.2

 
$
85.9

 
17.9
%
Sales, general and administrative expenses
119.9

 
103.5

 
16.4

 
15.8
%
 
226.5

 
 
201.7

 
24.8

 
12.3
%
Total operating expenses
$
401.1

 
$
351.2

 
$
49.9

 
14.2
%
 
$
791.6

 
 
$
680.9

 
$
110.7

 
16.3
%
Research and development as a percentage of net revenue
26.9

%
24.4

%
 

 
 
 
 
28.7

%
 
24.2

%
 

 
 
 
Sales, general and administrative as a percentage of net revenue
11.5

%
10.2

%
 

 
 
 
 
11.5

%
 
10.2

%
 

 
 
 

Research and Development
 
Research and development expenses were $281.2 million and $247.7 million during the second quarter of fiscal years 2013 and 2012 , respectively, an increase of $33.5 million , or 13.5% .  Compensation and benefits increased by $22.9 million, which was primarily driven by growth in headcount. Development cost increased by $2.7 million due to higher engineering consumption as a result of continued testing of our recently launched Kepler products on 28 nanometer technology. Depreciation and amortization increased by $2.5 million primarily due to a full quarter's amortization of intangibles associated with our acquisition of Icera Inc. in the second quarter of fiscal year 2013 when compared to the second quarter of fiscal year 2012, as well as purchases of additional hardware.

 

34



Research and development expenses were $565.1 million and $479.2 million in the first half of fiscal years 2013 and 2012 , respectively, an increase of $85.9 million , or 17.9% . Compensation and benefits increased by $53.3 million and computer software and equipment expense increased by $2.3 million, both of which were primarily driven by growth in headcount. Development cost increased by $7.1 million primarily as a result of development costs associated with the ramp up and launch of our Kepler 28 nanometer technology products. Depreciation and amortization increased by $7.4 million primarily due to amortization of intangibles associated with our acquisition of Icera, as well as purchases of additional hardware and licenses.

Sales, General and Administrative
 
Sales, general and administrative expenses were $119.9 million and $103.5 million during the second quarter of fiscal years 2013 and 2012 , respectively, an increase of $16.4 million , or 15.8% . The increase was primarily attributable to the $20.1 million expense for the net present value of a charitable contribution. Also contributing to the increase was an increase of $4.3 million in compensation and benefits, primarily driven by growth in headcount. These increases were offset by a $2.6 million decrease in transaction services costs associated with the acquisition of Icera in the prior fiscal year.

Sales, general and administrative expenses were $226.5 million and $201.7 million for the first half of fiscal years 2013 and 2012 , respectively, an increase of $24.8 million , or 12.3% . The increase was primarily attributable to the $20.1 million expense for the net present value of a charitable contribution. Also contributing to the increase was $11.3 million of compensation and benefits, primarily driven by growth in headcount. These increases were offset by a $3.8 million decrease in transaction services costs associated with the acquisition of Icera in the prior fiscal year.

We expect operating expenses to decrease in the third quarter of fiscal year 2013 . During the second quarter of fiscal year 2013, our operating expenses included a charitable contribution which we do not expect to repeat in the third quarter of fiscal year 2013.

Interest Income
 
Interest income consists of interest earned on cash, cash equivalents and marketable securities. Interest income was $5.3 million in both of the second quarters of fiscal years 2013 and 2012 . Interest income was $10.5 million and $10.6 million for the first half of fiscal years 2013 and 2012 , respectively, a decrease of $0.1 million , primarily due to lower yields on investments. 
 
Other Income (Expense), net
 
Other income (expense) primarily consists of realized gains and losses on the sale of marketable securities and foreign currency translation.  Other income (expense) was $0.3 million in the second quarter of fiscal year 2013 compared to $(1.7) million in the second quarter of fiscal year 2012 , an increase in income of $2.0 million. Other income (expense) was $(0.7) million and $(5.4) million for the first half of fiscal years 2013 and 2012 , respectively, a decrease in expense of $4.7 million . These changes were primarily driven by an increase in foreign currency gains in the second quarter and first half of fiscal year 2013, when compared to second quarter and first half of fiscal year 2012.
 
Income Taxes

We recognized income tax expense of $26.2 million and $42.8 million for the second quarter and first half of fiscal year 2013, respectively, and $26.0 million and $47.2 million for the second quarter and first half of fiscal year 2012, respectively.  Income tax expense as a percentage of income before taxes, or our effective tax rate, was 18.0% and 19.3% for the second quarter and first half of fiscal year 2013, respectively, and 14.6% and 14.1% for the second quarter and first half of fiscal year 2012, respectively. The increase in our effective tax rate in fiscal year 2013 was primarily related to the expiration of the U.S. federal research tax credit on December 31, 2011, which provided no tax benefit for the second quarter and first half of fiscal year 2013.
     Our effective tax rate on income before tax for the first half of fiscal year 2013 of 19.3% was lower than the United States federal statutory rate of 35% due primarily to income earned in jurisdictions where the tax rate is lower than the United States federal statutory tax.  

     Our effective tax rate on income before tax for the first half of fiscal year 2012 of 14.1% was lower than the United States federal statutory rate of 35% due primarily to income earned in jurisdictions where the tax rate is lower than the United States federal statutory tax and the benefit of the U.S. federal research tax credit.  
 
       

35



We expect our effective tax rate in the third quarter of fiscal year 2013 to be approximately 20%, plus or minus one percentage point, excluding any discrete tax events that may occur during the third quarter, which, if realized, may increase or decrease our third quarter tax rate.

Please refer to Note 4 of the Notes to Condensed Consolidated Financial Statements for further information regarding the components of our income tax expense. 

36



Liquidity and Capital Resources  
 
As of July 29, 2012
 
As of January 29, 2012
 
(In millions)
Cash and cash equivalents
$
499.6

 
$
667.9

Marketable securities
2,778.5

 
2,461.7

Cash, cash equivalents, and marketable securities
$
3,278.1

 
$
3,129.6


 
Six Months Ended
 
July 29,
 
July 31,
 
2012
 
2011
 
(In millions)
Net cash provided by operating activities
$
191.7

 
$
254.2

Net cash used in investing activities
$
(419.8
)
 
$
(525.7
)
Net cash provided by financing activities
$
59.8

 
$
138.8

 
As of July 29, 2012 , we had $3.28 billion in cash, cash equivalents and marketable securities, an increase of $148.5 million from $3.13 billion as of January 29, 2012. Our portfolio of cash equivalents and marketable securities is managed on our behalf by several financial institutions which are required to follow our investment policy, which requires the purchase of top-tier investment grade securities and the diversification of asset type and includes certain limits on our portfolio duration.
 
Operating activities

Operating activities provided cash of $191.7 million and $254.2 million during the first half of fiscal years 2013 and 2012, respectively. The decrease in cash provided by operating activities in the first half of fiscal year 2013 was primarily due to a decrease in our net income, offset by an increase in accounts payable driven by a ramp in inventory during the first half of fiscal year 2013.

Investing activities

Investing activities consisted primarily of purchases and sales of marketable securities and purchases of property and equipment, which include leasehold improvements for our facilities and intangible assets. Investing activities used cash of $419.8 million and $525.7 million during the first half of fiscal years 2013 and 2012 , respectively. The decrease in cash used for investing activities was primarily due to the absence of acquisition activity during the first half of fiscal year 2013. This was offset by an increase in net purchases, sales and maturities of our available for sale investments.

Financing activities

Financing activities provided cash of $59.8 million and $138.8 million during the first half of fiscal years 2013 and 2012 , respectively.  Net cash provided by financing activities decreased in the first half of fiscal year 2013 when compared to the first half of fiscal year 2012, primarily due to a decrease of proceeds from the issuance of common stock under our employee stock purchase plan and from the exercise of stock options.
      
Liquidity

Our primary source of liquidity is cash generated by our operations. Our investment portfolio consists of cash and cash equivalents, commercial paper, mortgage-backed securities issued by government-sponsored enterprises, equity securities, money market funds and debt securities of corporations, municipalities and the United States government and its agencies. These investments are denominated in United States dollars. As of July 29, 2012 , we did not have any investments in auction-rate preferred securities.


37



All of our cash equivalents and marketable securities are treated as “available-for-sale”. 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 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.

As of July 29, 2012 and January 29, 2012 , we had $3.28 billion and $3.13 billion, respectively, in cash, cash equivalents and marketable securities. Our investment policy requires the purchase of top-tier investment grade securities and the diversification of asset types and includes certain limits on our portfolio duration, as specified in our investment policy guidelines. These guidelines also limit the amount of credit exposure to any one issue, issuer or type of instrument. As of July 29, 2012 , we were in compliance with our investment policy.  As of July 29, 2012 , our investments in government agencies and government sponsored enterprises represented approximately 56% of our total investment portfolio, while the financial sector accounted for approximately 22% of our total investment portfolio. Of the financial sector investments, 16% are guaranteed by the U.S. government. All of our investments are with A/A2 or better rated securities.

We performed an impairment review of our investment portfolio as of July 29, 2012 . Based on our quarterly impairment review, we concluded that our investments were appropriately valued and did not record any impairment during the second quarter of fiscal year 2013 .

Net realized gains for the second quarter and the first half of fiscal year 2013 were $0.2 million and $0.3 million , respectively.  Net realized gains for the second quarter and the first half of fiscal year 2012 were $0.3 million and $0.4 million , respectively. As of July 29, 2012 , we had a net unrealized gain of $12.1 million, which was comprised of gross unrealized gains of $12.5 million , offset by gross unrealized losses of $0.4 million . As of January 29, 2012 , we had a net unrealized gain of $11.5 million , which was comprised of gross unrealized gains of $12.0 million , offset by $0.5 million of gross unrealized losses.    
 
Our accounts receivable are highly concentrated and make us vulnerable to adverse changes in our customers’ businesses, and to downturns in the industry and the worldwide economy.  One customer accounted for approximately 16% of our accounts receivable balance at July 29, 2012 . While we strive to limit our exposure to uncollectible accounts receivable using a combination of credit insurance and letters of credit, difficulties in collecting accounts receivable could materially and adversely affect our financial condition and results of operations. These difficulties are heightened during periods when economic conditions worsen. We continue to work directly with more foreign customers and it may be difficult to collect accounts receivable from them. We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. This allowance consists of an amount identified for specific customers and an amount based on overall estimated exposure. If the 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.    
 
Stock Repurchase Program

Our Board of Directors has authorized us, subject to certain specifications, to repurchase shares of our common stock up to an aggregate maximum amount of $2.7 billion through May 2013. 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 Rule 10b-18 of the Securities Exchange Act of 1934, as amended, subject to market conditions, applicable legal requirements, and other factors. The program does