NVIDIA Corporation
NVIDIA CORP (Form: 10-Q, Received: 11/19/2013 16:31:36)


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

FORM 10-Q

[x]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 27, 2013
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  November 15, 2013 , was  568,535,613 .




NVIDIA CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED October 27, 2013


TABLE OF CONTENTS

 
 
Page
 
 
 
 
 
Financial Statements (Unaudited)
 
 
 
 
 
a) Condensed Consolidated Statements of Income for the three and nine months ended October 27, 2013 and October 28, 2012
 
 
 
 
b) Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended October 27, 2013 and October 28, 2012
 
 
 
 
c) Condensed Consolidated Balance Sheets as of October 27, 2013 and January 27, 2013
 
 
 
 
d) Condensed Consolidated Statements of Cash Flows for the nine months ended October 27, 2013 and October 28, 2012
 
 
 
 
e) Notes to Condensed Consolidated Financial Statements
 
 
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
 
 
Quantitative and Qualitative Disclosures About Market Risk
 
 
 
Controls and Procedures
 
 
 
 
 
 
 
 
Legal Proceedings
 
 
 
Risk Factors
 
 
 
Unregistered Sales of Equity Securities and Use of Proceeds
 
 
 
Exhibits
 
 
 
 

WHERE YOU CAN FIND MORE INFORMATION
 
Investors and others should note that we announce material financial information to our investors using our investor relations website, press releases, SEC filings and public conference calls and webcasts. We intend to also use the following social media channels as a means of disclosing information about the company, our services and other matters and for complying with our disclosure obligations under Regulation FD:
 
NVIDIA Company Blog ( http://blogs.nvidia.com/
 
NVIDIA Facebook Page ( https://www.facebook.com/NVIDIA
 
NVIDIA Twitter Account ( https://twitter.com/NVIDIA )
 
NVIDIA LinkedIn Page ( http://www.linkedin.com/company/nvidia?trk=hb_tab_compy_id_3608 )
              
The information we post through these social media channels may be deemed material. Accordingly, investors should monitor these accounts and the blog, in addition to following our press releases, SEC filings and public conference calls and webcasts. This list may be updated from time to time. The information we post through these channels is not a part of this quarterly report on Form 10-Q. These channels may be updated from time to time on NVIDIA's investor relations website.


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
 
Nine Months Ended
 
October 27,
 
October 28,
 
October 27,
 
October 28,
 
2013
 
2012
 
2013
 
2012
 
 
 
 
 
 
 
 
Revenue
$
1,053,967

 
$
1,204,110

 
$
2,985,944

 
$
3,173,257

Cost of revenue
469,552

 
567,452

 
1,337,423

 
1,532,516

Gross profit
584,415

 
636,658

 
1,648,521

 
1,640,741

Operating expenses
 
 
 
 
 
 
 
Research and development
340,294

 
284,180

 
999,193

 
849,275

Sales, general and administrative
103,133

 
100,261

 
320,025

 
326,800

Total operating expenses
443,427

 
384,441

 
1,319,218

 
1,176,075

Income from operations
140,988

 
252,217

 
329,303

 
464,666

Interest income
4,022

 
4,701

 
12,963

 
15,215

Other expense, net
(3,526
)
 
(3,290
)
 
(900
)
 
(3,950
)
Income before income tax expense
141,484

 
253,628

 
341,366

 
475,931

Income tax expense
22,750

 
44,548

 
48,293

 
87,368

Net income
$
118,734

 
$
209,080

 
$
293,073

 
$
388,563

 
 
 
 
 
 
 
 
Basic net income per share
$
0.20

 
$
0.34

 
$
0.49

 
$
0.63

Shares used in basic per share computation
580,870

 
622,352

 
594,363

 
619,043

 
 
 
 
 
 
 
 
Diluted net income per share
$
0.20

 
$
0.33

 
$
0.49

 
$
0.62

Shares used in diluted per share computation
588,752

 
628,845

 
600,108

 
625,973

 
 
 
 
 
 
 
 
Cash dividends declared and paid per common share
$
0.075

 
$

 
$
0.225

 
$



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
 
Nine Months Ended
 
October 27,
 
October 28,
 
October 27,
 
October 28,
 
2013
 
2012
 
2013
 
2012
 
 
Net income
$
118,734

 
$
209,080

 
$
293,073

 
$
388,563

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Net change in unrealized gains (losses) on available-for-sale securities, net of tax benefit (expense) of ($126) and ($47) for the three and nine months ended October 27, 2013, respectively, and $95 and ($148) for the corresponding periods of fiscal 2013, respectivel y
8

 
(269
)
 
(2,978
)
 
497

Reclassification adjustments for net realized gains on available-for-sale securities included in net income, net of tax effects of $24 and $615 for the three and nine months ended October 27, 2013, respectively, and $16 and $135 for the corresponding periods of fiscal 2013, respectively
(43
)
 
(31
)
 
(1,141
)
 
(251
)
Other comprehensive income (loss)
$
(35
)
 
$
(300
)
 
$
(4,119
)
 
$
246

Total comprehensive income
$
118,699

 
$
208,780

 
$
288,954

 
$
388,809



See accompanying Notes to Condensed Consolidated Financial Statements.


4



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

 
October 27,
 
January 27,
 
2013
 
2013
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
562,084

 
$
732,786

Marketable securities
2,470,870

 
2,995,097

Accounts receivable, net
447,631

 
454,252

Inventories
380,319

 
412,467

Prepaid expenses and other
81,701

 
76,920

Deferred income taxes
107,236

 
103,736

Total current assets
4,049,841

 
4,775,258

Property and equipment, net
595,418

 
576,144

Goodwill
643,179

 
641,030

Intangible assets, net
320,589

 
312,332

Other assets
102,346

 
107,481

Total assets
$
5,711,373

 
$
6,412,245

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
333,283

 
$
356,428

Accrued liabilities and other
652,644

 
619,795

Total current liabilities
985,927

 
976,223

Other long-term liabilities
387,784

 
589,321

Capital lease obligations, long-term
17,015

 
18,998

Commitments and contingencies - see Note 11

 

Stockholders’ equity:
 
 
 
Preferred stock

 

Common stock
732

 
720

Additional paid-in capital
3,407,889

 
3,193,623

Treasury stock, at cost
(2,499,990
)
 
(1,622,709
)
Accumulated other comprehensive income
5,862

 
9,981

Retained earnings
3,406,154

 
3,246,088

Total stockholders' equity
4,320,647

 
4,827,703

Total liabilities and stockholders' equity
$
5,711,373

 
$
6,412,245


See accompanying Notes to Condensed Consolidated Financial Statements.




5



NVIDIA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)  
 
Nine Months Ended
 
October 27,
 
October 28,
 
2013
 
2012
Cash flows from operating activities:
 
 
 
Net income
$
293,073

 
$
388,563

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
184,310

 
167,834

Stock-based compensation expense
100,091

 
100,893

Deferred income taxes
7,914

 
42,684

Excess tax benefits from stock-based compensation
(23,743
)
 
(25,646
)
Other
11,311

 
39,978

Changes in operating assets and liabilities, net of effect of acquisition:
 
 
 
Accounts receivable
7,806

 
(109,008
)
Inventories
32,178

 
(88,378
)
Prepaid expenses and other current assets
(4,687
)
 
(16,786
)
Other assets
7,585

 
4,784

Accounts payable
(38,376
)
 
49,099

Accrued liabilities and other long-term liabilities
(143,028
)
 
(180,854
)
Net cash provided by operating activities
434,434

 
373,163

Cash flows from investing activities:
 
 
 
Purchases of marketable securities
(1,420,471
)
 
(1,729,307
)
Proceeds from sale of marketable securities
1,475,403

 
635,733

Proceeds from maturities of marketable securities
447,134

 
626,434

Purchases of property and equipment and intangible assets
(188,812
)
 
(135,551
)
Acquisition of business
(17,145
)
 

Other
(2,450
)
 
135

Net cash provided by (used in) investing activities
293,659

 
(602,556
)
Cash flows from financing activities:
 
 
 
Proceeds from issuance of common stock under employee stock plans
64,749

 
62,781

Excess tax benefits from stock-based compensation
23,743

 
25,646

Payments for repurchases of common stock
(850,000
)
 

Dividends paid
(133,007
)
 

Other
(4,280
)
 
(1,522
)
Net cash provided by (used in) financing activities
(898,795
)
 
86,905

Change in cash and cash equivalents
(170,702
)
 
(142,488
)
Cash and cash equivalents at beginning of period
732,786

 
667,876

Cash and cash equivalents at end of period
$
562,084

 
$
525,388

Supplemental disclosures of cash flow information: 
 
 
 
Cash paid (received) for income taxes, net
$
8,454

 
$
(40,442
)
Cash paid for interest on capital lease obligations
$
1,915

 
$
2,189

Other non-cash activities:
 
 
 
Assets acquired by assuming related liabilities
$
28,963

 
$
43,792

Change in unrealized gains (losses) from marketable securities
$
(4,119
)
 
$
246


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 27, 2013 .  

Fiscal Year
 
We operate on a 52- or 53-week year, ending on the last Sunday in January.  Fiscal year 2014 and fiscal year 2013 are both 52-week years. The third quarters of fiscal years 2014 and 2013 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 inter-company balances and transactions have been eliminated in consolidation.

Reclassifications

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

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 of the related receivable 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. 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.
 

7

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



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.

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 the related 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. Excess, 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 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)




Net Income Per Share

Basic net income per share is computed using the weighted average number of common shares outstanding during the period. Diluted net income per share is computed using the weighted average number of common and potentially dilutive shares outstanding during the period, using the treasury stock method. Under the treasury stock method, the effect of equity awards outstanding is not included in the computation of diluted net income per share for periods when their effect is anti-dilutive.
 
Adoption of New and Recently Issued Accounting Pronouncements

In July 2013, the Financial Accounting Standards Board, or FASB, issued guidance regarding the presentation of unrecognized tax benefits when a net operating loss carryforward, similar tax loss, or tax credit carryforward exists. The new guidance requires that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward when settlement in this manner is available under the tax law. This guidance is effective on a prospective basis for financial statements issued for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2013. Retrospective and early adoption is permitted. We expect to adopt this guidance in our interim and annual periods beginning January 27, 2014. We do not believe the adoption of this guidance will have a material impact on our consolidated financial statements.

In February 2013, the FASB issued updated guidance requiring entities to report the effect of significant reclassifications to accumulated other comprehensive income on the respective line items in net income. These reclassifications are reported, only if U.S. GAAP requires the entire amount to be reclassified to net income. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety from accumulated other comprehensive income to net income in the same reporting period, an entity is required to cross-reference other disclosures required under U.S. GAAP that provide additional detail about those amounts. We adopted this guidance in our interim period ended April 28, 2013. The adoption of this guidance did not impact our financial statements, as the guidance is related to disclosure only, and we have not had significant reclassifications out of accumulated other comprehensive income.

Note 2 - Stock-Based Compensation
 
We measure stock-based compensation expense based on the estimated fair value of equity awards at the grant date, and recognize the expense using a straight-line attribution method over the requisite employee service period. We estimate the fair value of employee stock options on the date of grant using a binomial model and we use the closing trading price of our common stock on the date of grant, minus a dividend yield discount, as the fair value of awards of restricted stock units, or RSUs.  We estimate the fair value of shares to be issued under our employee stock purchase plan using the Black-Scholes model at the commencement of an offering period in March and September of each year.  Stock-based compensation for our employee stock purchase plan is expensed using an accelerated amortization model.
Our condensed consolidated statements of income include stock-based compensation expense, net of amounts capitalized as inventory, as follows:
 
Three Months Ended
 
Nine Months Ended
 
October 27,
2013
 
October 28,
2012
 
October 27,
2013
 
October 28,
2012
 
(In thousands)
 
(In thousands)
Cost of revenue
$
3,090

 
$
2,489

 
$
7,911

 
$
7,664

Research and development
20,902

 
20,056

 
61,392

 
60,148

Sales, general and administrative
10,307

 
10,524

 
30,788

 
33,081

Total
$
34,299

 
$
33,069

 
$
100,091

 
$
100,893


9

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



During the three and nine months ended October 27, 2013 , we granted approximately 2.8 million and 6.0 million stock options, with an estimated total grant-date fair value of $10.8 million and $20.9 million and a weighted average grant-date fair value of $3.90 and $3.46 per option, respectively. During the three and nine months ended October 27, 2013 , we granted approximately 4.9 million and 10.4 million RSUs with an estimated total grant-date fair value of $73.8 million and $140.1 million and a weighted average grant-date fair value of $15.15 and $13.44 per RSU, respectively.  
During the three and nine months ended October 28, 2012 , we granted approximately 3.2 million and 6.8 million stock options, with an estimated total grant-date fair value of $17.9 million and $37.2 million and a weighted average grant-date fair value of $5.54 and $5.45 per option, respectively. During the three and nine months ended October 28, 2012 , we granted approximately 3.5 million and 7.5 million RSUs, with an estimated total grant-date fair value of $48.2 million and $104.7 million and a weighted average grant-date fair value of $13.72 and $13.99 per RSU, respectively.
Of the estimated total grant-date fair value, we estimated that the stock-based compensation expense related to the equity awards that were not expected to vest was $15.1 million and $28.8 million for the three and nine months ended October 27, 2013 , respectively, and $11.8 million and $25.4 million for the three and nine months ended October 28, 2012 , respectively. As of October 27, 2013 and January 27, 2013 , the aggregate amount of unearned stock-based compensation expense related to our equity awards was $265.3 million and $208.7 million , respectively, adjusted for estimated forfeitures.  As of October 27, 2013 and January 27, 2013 , we expected to recognize the unearned stock-based compensation expense related to stock options over an estimated weighted average amortization period of 2.7 years. As of October 27, 2013 and January 27, 2013 , we expected to recognize the unearned stock-based compensation expense related to RSUs over an estimated weighted average amortization period of 3.0 years and 2.7 years, respectively.
Valuation Assumptions  
We determine the fair value of stock option awards on the date of grant using an option-pricing model that is affected by our stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, weighted average expected term, risk-free interest rate, expected stock price volatility, dividend yield, actual and projected employee stock option exercise behaviors, vesting schedules and death and disability probabilities. We 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. The expected life of employee stock options is a derived output of our valuation model and is impacted by the underlying assumptions of our company. The risk-free interest rate assumption is based upon observed interest rates on Treasury bills appropriate for the term of our employee stock options. Our management has determined that the use of implied volatility is expected to be more reflective of market conditions and, therefore, can reasonably be expected to be a better indicator of our expected volatility than historical volatility. Dividend yield is based on history and expectation of dividend payouts. Our RSU awards are not eligible for cash dividends prior to vesting; therefore, the fair value of RSUs is discounted by the dividend yield.
Prior to the initial declaration of a quarterly cash dividend on November 8, 2012, the fair value of our equity awards was based on an expected dividend yield of 0% reflecting our prior history in which we had not paid and did not expect to pay cash dividends on our common stock. For awards granted on or subsequent to November 8, 2012, we use the dividend yield at grant date based on the per share dividends declared during the most recent quarter.
Additionally, for employee stock option and RSU awards, we estimate forfeitures annually and revise the estimates of forfeiture in subsequent periods if actual forfeitures differ from those estimates. Forfeitures are estimated based on historical experience. If factors change and we employ different assumptions in the application of accounting standards in future periods, the compensation expense that we record under these accounting standards may differ significantly from what we have recorded in the current period.

10

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



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
 
Nine Months Ended
 
October 27,
2013
 
October 28,
2012
 
October 27,
2013
 
October 28,
2012
Stock Options
(Using a binomial model)
Expected life (in years)
3.3-3.5
 
4.3-4.9

 
2.4-3.5
 
3.1-4.9

Risk-free interest rate
2.6%-3.0%
 
1.7%-1.8%

 
1.8%-3.0%
 
1.5% - 2.3%

Volatility
30%-32%
 
45%-49%

 
30%-37%
 
43% - 49%

Dividend yield
1.9%-2.0%
 

 
1.9%-2.4%
 

 
Three Months Ended
 
Nine Months Ended
 
October 27,
2013
 
October 28,
2012
 
October 27,
2013
 
October 28,
2012
Employee Stock Purchase Plan
(Using a Black-Scholes model)
Expected life (in years)
0.5-2.0

 
0.5-2.0

 
0.5 - 2.0
 
0.5 - 2.0

Risk-free interest rate
0.1%-0.4%

 
0.1%-0.2%

 
0.1%-0.4%
 
0.1% - 0.3%

Volatility
32
%
 
47
%
 
32%-37%
 
44%-47%

Dividend yield
2.0
%
 

 
2.0%-2.4%
 

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 27, 2013
32,995

 
$
14.66

Granted
6,049

 
$
14.29

Exercised
(2,557
)
 
$
10.15

Cancelled
(3,358
)
 
$
22.14

Balances, October 27, 2013
33,129

 
$
14.18

 
RSUs Outstanding
 
Weighted Average Grant-Date Fair Value
Restricted Stock Units
(In thousands)
 
(Per share)
Balances, January 27, 2013
15,159

 
$
14.46

Granted
10,427

 
$
13.44

Vested
(5,891
)
 
$
14.80

Cancelled
(921
)
 
$
13.87

Balances, October 27, 2013
18,774

 
$
13.82


11

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



Note 3 – Net Income Per Share

The following is a reconciliation of the numerator and denominator of the basic and diluted net income per share computations for the periods presented: 
 
Three Months Ended
 
Nine Months Ended
 
October 27,
 
October 28,
 
October 27,
 
October 28,
 
2013
 
2012
 
2013
 
2012
 
(In thousands, except per share data)
Numerator:
 
 
 
 
 
 
 
Net income
$
118,734

 
$
209,080

 
$
293,073

 
$
388,563

Denominator:
 

 
 

 
 

 
 

Denominator for basic net income per share, weighted average shares
580,870

 
622,352

 
594,363

 
619,043

Effect of dilutive securities:
 

 
 

 
 

 
 

Equity awards outstanding
7,882

 
6,493

 
5,745

 
6,930

Denominator for diluted net income per share, weighted average shares
588,752

 
628,845

 
600,108

 
625,973

Net income per share:
 

 
 

 
 

 
 

Basic net income per share
$
0.20

 
$
0.34

 
$
0.49

 
$
0.63

Diluted net income per share
$
0.20

 
$
0.33

 
$
0.49

 
$
0.62

Potentially dilutive securities excluded from income per diluted share because their effect would have been anti-dilutive
21,870

 
27,555

 
27,351

 
31,697



12

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




Note 4 – Income Taxes

We recognized income tax expense of $22.8 million and $48.3 million for the three and nine months ended October 27, 2013, respectively, and $44.5 million and $87.4 million for the three and nine months ended October 28, 2012, respectively. Income tax expense as a percentage of income before taxes, or our effective tax rate, was 16.1% and 14.2% for the three and nine months ended October 27, 2013, respectively, and 17.6% and 18.4% for the three and nine months ended October 28, 2012, respectively.
 
The decrease in our effective tax rate compared to the prior year was primarily due to the benefit of the U.S. federal research tax credit which was re-enacted on January 2, 2013, or the fourth quarter of our fiscal year 2013, under the American Taxpayer Relief Act. The U.S. research tax credit was expired during the third quarter of fiscal year 2013. During the fourth quarter of fiscal year 2013, the credit was reenacted retroactively from December 31, 2011 through to December 31, 2013, with the entire benefit for all previous quarters required to be recognized in the fourth quarter. As a result, the third quarter of fiscal year 2013 reflects no tax benefit for the research tax credit and the third quarter of fiscal year 2014 includes the annualized benefit of a research tax credit (for the 11 months the law is in effect).

Our effective tax rate on income before tax for the first nine months of fiscal year 2014 of 14.2% and fiscal year 2013 of 18.4% were 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 for fiscal year 2014 due to the benefit of the U.S. federal research tax credit.

For the nine months ended October 27, 2013, there have been no material changes to our tax years that remain subject to examination by major tax jurisdictions. Additionally, there have been no other material changes to our unrecognized tax benefits and any related interest or penalties from our fiscal year ended January 27, 2013, other than the recognition of tax benefits related to the expiration of statute of limitation in certain non-U.S. jurisdictions in the nine months ended October 27, 2013.

While we believe that we have adequately provided for all uncertain tax positions, or tax positions where it is believed not more-likely-than-not that the position will be sustained upon examination, amounts asserted by tax authorities could be greater or less than our accrued position. Accordingly, our provisions on federal, state and foreign tax related matters to be recorded in the future may change as revised estimates are made or the underlying matters are settled or otherwise resolved with the respective tax authorities. As of October 27, 2013, 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.


13

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, and net realized gains and losses recorded in other expense, net, on the Condensed Consolidated Statement of Income.

We performed an impairment review of our investment portfolio as of October 27, 2013 . 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 October 27, 2013 .

The following is a summary of cash equivalents and marketable securities at October 27, 2013 and January 27, 2013
 
October 27, 2013
 
Amortized
Cost
 
Unrealized
Gain
 
Unrealized
Loss
 
Estimated
Fair Value
 
(In thousands)
Corporate debt securities
$
1,099,456

 
$
2,020

 
$
(545
)
 
$
1,100,931

Debt securities of United States government agencies
726,382

 
798

 
(184
)
 
726,996

Debt securities issued by United States Treasury
441,075

 
561

 
(108
)
 
441,528

Mortgage backed securities issued by United States government-sponsored enterprises
190,993

 
4,129

 
(522
)
 
194,600

Asset-backed securities
60,886

 
6

 
(16
)
 
60,876

Money market funds
56,697

 

 

 
56,697

Total
$
2,575,489

 
$
7,514

 
$
(1,375
)
 
$
2,581,628

Classified as:
 

 
 

 
 

 
 

Cash equivalents
 

 
 

 
 

 
$
110,758

Marketable securities
 

 
 

 
 

 
2,470,870

Total
 

 
 

 
 

 
$
2,581,628

 
January 27, 2013
 
Amortized
Cost
 
Unrealized
Gain
 
Unrealized
Loss
 
Estimated
Fair Value
 
(In thousands)
Corporate debt securities
$
1,255,297

 
$
3,175

 
$
(542
)
 
$
1,257,930

Debt securities of United States government agencies
867,087

 
1,199

 
(139
)
 
868,147

Debt securities issued by United States Treasury
785,228

 
1,102

 
(105
)
 
786,225

Mortgage backed securities issued by United States government-sponsored enterprises
183,034

 
6,194

 
(57
)
 
189,171

Asset-backed securities

 

 

 

Money market funds
195,790

 

 

 
195,790

Total
$
3,286,436

 
$
11,670

 
$
(843
)
 
$
3,297,263

Classified as:
 
 
 
 
 
 
 
Cash equivalents
 
 
 
 
 
 
$
302,166

Marketable securities
 
 
 
 
 
 
2,995,097

Total
 
 
 
 
 
 
$
3,297,263

 
The estimated fair value of cash equivalents and marketable securities was $2.58 billion and $3.30 billion at October 27, 2013 and January 27, 2013 , respectively, a decrease of $715.6 million . This decrease was primarily due to the liquidation of a portion of our investment portfolio to fund the accelerated share repurchase transaction of $750 million that we entered into on May 14, 2013.

The following table provides the breakdown of the investments with unrealized losses at October 27, 2013
 
Less than 12 months
 
12 months or greater
 
Total
 
Fair Value
 
Gross
Unrealized
Losses
 
Fair Value
 
Gross
Unrealized
Losses
 
Fair Value
 
Gross
Unrealized
Losses
 
(In thousands)
Corporate debt securities
$
403,313

 
$
(16
)
 
$
697,618

 
$
(529
)
 
$
1,100,931

 
$
(545
)
Debt securities of United States government agencies
288,163

 
(5
)
 
438,833

 
(179
)
 
726,996

 
(184
)
Debt securities issued by United States Treasury
87,221

 
(42
)
 
354,307

 
(66
)
 
441,528

 
(108
)
Mortgage backed securities issued by United States government-sponsored enterprises
3,460

 

 
191,140

 
(522
)
 
194,600

 
(522
)
Asset-backed securities
10,709

 
(16
)
 
50,167

 

 
60,876

 
(16
)
Total
$
792,866

 
$
(79
)
 
$
1,732,065

 
$
(1,296
)
 
$
2,524,931

 
$
(1,375
)

As of  October 27, 2013 , we had  7 investments that were in an unrealized loss position with a duration of less than one year and 9 investments that were in an unrealized loss position with a duration of greater than one year. The gross unrealized losses related to fixed income securities were due to changes in interest rates. We have determined that the gross unrealized losses on investment securities at  October 27, 2013  are temporary in nature. Currently, we have the intent and ability to hold our investments with impairment indicators until maturity.

The amortized cost and estimated fair value of cash equivalents and marketable securities which are primarily debt instruments are classified as available-for-sale at October 27, 2013 and January 27, 2013 and are shown below by contractual maturity.  

 
October 27, 2013
 
January 27, 2013
 
Amortized
Cost
 
Estimated
Fair Value
 
Amortized
Cost
 
Estimated
Fair Value
 
(In thousands)
Less than 1 year
$
848,672

 
$
849,564

 
$
1,397,350

 
$
1,399,304

Due in 1 - 5 years
1,628,882

 
1,632,651

 
1,777,785

 
1,783,103

Mortgage-backed securities issued by government-sponsored enterprises not due at a single maturity date
97,935

 
99,413

 
111,301

 
114,856

Total
$
2,575,489

 
$
2,581,628

 
$
3,286,436

 
$
3,297,263

 
Net realized gains for the three and nine months ended October 27, 2013 were $0.1 million and $1.8 million , respectively. Net realized gains for the three and nine months ended October 28, 2012 were $0.1 million and $0.4 million , respectively.


14

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 nine months ended October 27, 2013 .

Financial assets and liabilities measured at fair value are summarized below:
 
 
 
 
Fair Value Measurement as of October 27, 2013 Using
 
 
 
Quoted Prices 
in Active Markets for Identical Assets
 
Significant Other Observable Inputs
 
October 27, 2013
 
(Level 1)
 
(Level 2)
 
(In thousands)
Corporate debt securities (1)
$
1,100,931

 
$

 
$
1,100,931

Debt securities issued by United States government agencies (2)
726,996

 

 
726,996

Debt securities issued by United States Treasury (2)
441,528

 

 
441,528

Asset-backed securities (2)
60,876

 

 
60,876

Mortgage-backed securities issued by government-sponsored enterprises (2)
194,600

 

 
194,600

Money market funds (3)
56,697

 
56,697

 

Total cash equivalents and marketable securities
$
2,581,628

 
$
56,697

 
$
2,524,931

 
(1)
Includes $54.1 million in Cash Equivalents and $1.05 billion in Marketable Securities on the Condensed Consolidated Balance Sheet.
(2)  
Included in Marketable Securities on the Condensed Consolidated Balance Sheet.
(3)
Included in Cash Equivalents on the Condensed Consolidated Balance Sheet.     

15

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 11 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

 
 



16

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



Note 8 - Intangible Assets
 
The components of our amortizable intangible assets are as follows:
 
October 27, 2013
 
January 27, 2013
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated Amortization
 
Net Carrying
Amount
 
(In thousands)
Acquisition-related intangible assets
$
189,239

 
$
(109,196
)
 
$
80,043

 
$
172,039

 
$
(96,389
)
 
$
75,650

Patents and licensed technology
453,654

 
(213,108
)
 
240,546

 
407,002

 
(170,320
)
 
236,682

Total intangible assets
$
642,893

 
$
(322,304
)
 
$
320,589

 
$
579,041

 
$
(266,709
)
 
$
312,332


The increase in gross carrying amount of intangible assets is primarily due to new purchases of licenses to technology and patents and an asset acquisition that closed during the nine months ended October 27, 2013 .

Amortization expense associated with intangible assets for the three and nine months ended October 27, 2013 was $19.6 million and $55.6 million , respectively. Amortization expense associated with intangible assets for the three and nine months ended October 28, 2012 was $17.3 million and $51.1 million , respectively. Amortization expense increased compared to the prior year primarily due to the addition of licensed technology, a patent portfolio, and the purchase of certain assets of a business. Future amortization expense related to the net carrying amount of intangible assets at October 27, 2013 is estimated to be $26.0 million for the remainder of fiscal year 2014, $81.4 million in fiscal year 2015 , $71.2 million in fiscal year 2016 , $57.9 million in fiscal year 2017 , $47.9 million in fiscal year 2018 and a total of $36.2 million in fiscal year 2019 and fiscal years subsequent to fiscal year 2019 .

17

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




Note 9 - Balance Sheet Components
 
Certain balance sheet components are as follows:
 
October 27,
 
January 27,
 
2013
 
2013
Inventories:
(In thousands)
Raw materials
$
138,205

 
$
157,990

Work in-process
77,834

 
67,352

Finished goods
164,280

 
187,125

Total inventories
$
380,319

 
$
412,467


At October 27, 2013 , we had outstanding inventory purchase obligations totaling approximately $ 383.7 million .
 
October 27,
 
January 27,
 
2013
 
2013
Prepaid Expenses and Other:
(In thousands)
Prepaid maintenance
$
17,705

 
$
18,013

Prepaid taxes
15,626

 
9,785

Assets held for sale (1)
7,547

 

Testing materials
7,282

 
7,219

Other
33,541

 
41,903

Total prepaid expenses and other
$
81,701

 
$
76,920


(1)  As of October 27, 2013 , $7.5 million of net properties, plant and equipment held for sale are recorded within “Prepaid Expenses and Other” on the Condensed Consolidated Balance Sheet. This asset is associated with an office building at an international location that is expected to be sold within the next twelve months.
 
October 27,
 
January 27,
 
2013
 
2013
Accrued Liabilities and Other:
(In thousands)
Deferred revenue, short-term
$
282,658

 
$
273,605

Accrued customer programs (1)
164,667

 
163,406

Warranty accrual (2)
15,962

 
14,874

Accrued payroll and related expenses
94,984

 
98,977

Accrued legal settlement (3)
30,600

 
30,600

Taxes payable, short-term
8,349

 
3,173

Other
55,424

 
35,160

Total accrued liabilities and other
$
652,644

 
$
619,795

      
(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 10 of these Notes to Condensed Consolidated Financial Statements for discussion regarding the warranty accrual.
(3)  Please refer to Note 11 of these Notes to Condensed Consolidated Financial Statements for discussion regarding the 3dfx litigation. 

18

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



 
October 27,
 
January 27,
 
2013
 
2013
Other Long-Term Liabilities:
(In thousands)
Deferred income tax liability
$
204,364

 
$
192,950

Income taxes payable, long-term
117,112

 
115,267

Asset retirement obligation
10,959

 
10,165

Deferred revenue, long-term (1)
38,255

 
236,152

Other long-term liabilities
17,094

 
34,787

Total other long-term liabilities
$
387,784

 
$
589,321


(1) Represents annual consideration received in advance of our performance obligation under our patent cross licensing agreement with Intel entered into in January 2011. The decrease in deferred revenue, long-term, is a result of revenue recognized during the nine months ended October 27, 2013.

Note 10 - Guarantees
 
U.S. GAAP requires that upon issuance of a guarantee, the guarantor must recognize a liability for the fair value of the obligation it assumes under that guarantee. In addition, U.S. GAAP requires disclosures about the guarantees that an entity has issued, including a tabular reconciliation of the changes of the entity’s product warranty liabilities.
  
Accrual for Product Warranty Liabilities
We record a reduction to revenue for estimated product returns at the time revenue is recognized primarily based on historical return rates. Cost of revenue includes the estimated cost of product warranties.  Under limited circumstances, we may offer an extended limited warranty to customers for certain products.  Additionally, we accrue for known warranty and indemnification issues if a loss is probable and can be reasonably estimated. The estimated product warranty liabilities for the three and nine months ended October 27, 2013 and October 28, 2012 were as follows: 
 
Three Months Ended
 
Nine Months Ended
 
October 27,
 
October 28,
 
October 27,
 
October 28,
 
2013
 
2012
 
2013
 
2012
 
(In thousands)
Balance at beginning of period (1)
$
17,474

 
$
16,537

 
$
14,874

 
$
18,406

Additions
1,143

 
1,358

 
6,043

 
4,715

Deductions (2)
(2,655
)
 
(2,848
)
 
(4,955
)
 
(8,074
)
Balance at end of period 
$
15,962

 
$
15,047

 
$
15,962

 
$
15,047

 
(1) Includes $9.1 million and $9.6 million for the three and nine months ended October 27, 2013 , respectively, and $10.9 million and $13.2 million for the three and nine months ended October 28, 2012 , respectively, related to warranty accrual associated with incremental repair and replacement costs from a weak die/packaging material set. 

(2) Payments related to the warranty accrual associated with incremental repair and replacement costs from a weak die/packaging material set were $1.3 million and $1.8 million for the three and nine months ended October 27, 2013 respectively, and $1.1 million and $3.0 million for the three and nine months ended October 28, 2012 , respectively.
 
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. 


19

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



Note 11 - 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.

20

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



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. The appeal remains pending.
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. The Ninth Circuit heard oral argument on August 13, 2013, and affirmed the District Court’s decision to approve the settlement on August 22, 2013. This case is now over.

21

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, and a hearing is currently scheduled for January 14, 2014.
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.

22

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



Note 12 - Stockholders’ Equity
 
Stock Repurchase Program  
As of October 27, 2013, our Board of Directors' had authorized us, subject to certain specifications, to repurchase shares of our common stock up to an aggregate maximum amount of $2.7 billion through December 2014. On November 4, 2013, our Board extended the program through January 2016 and authorized an additional $1.0 billion under the repurchase program. Please refer to Note 14 of these Notes to Condensed Consolidated Financial Statements for a discussion regarding this subsequent event.
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, 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.
As part of the repurchase program, on May 14, 2013, we executed a $750.0 million accelerated share repurchase, or ASR, agreement with Goldman, Sachs & Co.that was completed on October 22, 2013. Under the ASR, we repurchased 51.5 million shares in aggregate at an average price of $14.56 per share, of which 36.9 million shares were delivered in the second quarter of fiscal year 2014 and 14.6 million shares were delivered in the third quarter of fiscal year 2014.  The shares delivered resulted in a reduction, on the delivery date, of the outstanding shares used to calculate the weighted-average common shares outstanding for basic and diluted earnings per share. As of October 27, 2013, shares delivered from the ASR have been placed into treasury stock.
Through October 27, 2013 , we have received an aggregate of 159.0 million shares under our stock repurchase program for a total cost of $2.41 billion .  As of October 27, 2013 , we were authorized, subject to certain specifications, to repurchase additional shares of our common stock up to $285.7 million which subsequently increased to $1.29 billion on November 4, 2013 as a result of our Board of Directors' authorization of an additional $1.0 billion under our repurchase program and an extension of the program through January 2016. Please refer to Note 14 of these Notes to Condensed Consolidated Financial Statements for a discussion regarding this subsequent event.
Convertible Preferred Stock
There are 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.

23

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



Note 13 - Segment Information
 
Our Chief Executive Officer, who is considered to be our chief operating decision maker, or CODM, reviews financial information presented on an operating segment basis for purposes of making operating decisions and assessing financial performance. Our operating segments are equivalent to our reportable segments. During the last several years, we have operated and reported three reporting segments to our CODM: the GPU business, the Professional Solutions business, and the Consumer Products business. However, during the fourth quarter of fiscal year 2013, we began reporting two segments to reflect the way we are now managing our businesses internally which is based on whether the underlying products leverage our GPU or our Tegra Processor technologies. Comparative periods presented reflect this change.

Our GPU business leverages our GPU technology across multiple end markets. It now consists of four primary product lines, including GeForce for desktop and notebook PCs and Macs; Quadro for professional workstations; Tesla for high-performance servers and workstations; and NVIDIA GRID for server graphics solutions. It also includes other related products, licenses and revenue supporting the GPU business, such as memory products. Our Tegra Processor business comprises product lines primarily based on our Tegra system-on-a-chip and modem processor technologies. This includes Tegra for smartphones and tablets for both Android and Windows RT-based devices; automotive computers, including infotainment and navigation systems; and gaming devices such as SHIELD. It also includes other related products, licenses, and revenue supporting the Tegra Processor business such as Icera baseband processors and RF transceivers, embedded products, and licenses and other revenue associated with game consoles.    
In addition to the two reporting segments discussed above, the “All Other” category represents unallocated revenue and expenses, of which the revenue primarily relates to licensing revenue from our patent cross licensing agreement with Intel Corporation. Revenue related to this agreement is recognized ratably over the term of our agreement and is not actively managed. This category also includes corporate operating expenses that we do not allocate to our other reporting segments as such expenses are not directly related to the function or operations of our reporting segments. These expenses include certain corporate infrastructure and support costs that are deemed to be enterprise in nature. Additionally, we do not allocate stock-based compensation, amortization of acquisition-related intangible assets, other acquisition-related costs or credits and non-recurring expenses and benefits. The table below presents details of our reportable segments and the “All Other” category.
Our CODM does not review any information regarding total assets on a reporting segment basis. Reporting 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.


24

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



 
GPU
 
Tegra Processor
 
All Other
 
Consolidated
 
(In thousands)
Three Months Ended October 27, 2013
 
 
 
 
 
 
 
Revenue
$
876,833

 
$
111,134

 
$
66,000

 
$
1,053,967

Depreciation and amortization expense
$
33,439

 
$
17,714

 
$
11,573

 
$
62,726

Operating income (loss)
$
286,905

 
$
(132,856
)
 
$
(13,061
)
 
$
140,988

 
 
 
 
 
 
 
 
Three Months Ended October 28, 2012
 

 
 

 
 

 
 

Revenue
$
894,209

 
$
243,901

 
$
66,000

 
$
1,204,110

Depreciation and amortization expense
$
32,375

 
$
14,087

 
$
10,686

 
$
57,148

Operating income (loss)
$
264,087

 
$
1,276

 
$
(13,146
)
 
$
252,217

 
 
 
 
 
 
 
 
Nine Months Ended October 27, 2013
 

 
 

 
 

 
 

Revenue
$
2,521,058

 
$
266,886

 
$
198,000

 
$
2,985,944

Depreciation and amortization expense
$
95,990

 
$
56,067

 
$
32,253

 
$
184,310

Operating income (loss)
$
781,778

 
$
(407,694
)
 
$
(44,781
)
 
$
329,303

 
 
 
 
 
 
 
 
Nine Months Ended October 28, 2012
 

 
 

 
 

 
 

Revenue
$
2,419,198

 
$
556,059

 
$
198,000

 
$
3,173,257

Depreciation and amortization expense
$
94,833

 
$
41,204

 
$
31,797

 
$
167,834

Operating income (loss)
$
633,594

 
$
(106,588
)
 
$
(62,340
)
 
$
464,666


 
Three Months Ended
 
Nine Months Ended
 
October 27,
2013
 
October 28,
2012
 
October 27,
2013
 
October 28,
2012
 
(In thousands)
Reconciling items included in "All Other" category :
 
 
 
 
 
 
Revenue not allocated to reporting segments
$
66,000

 
$
66,000

 
$
198,000

 
$
198,000

Unallocated corporate operating expenses and other expenses
(37,950
)
 
(37,009
)
 
(115,763
)
 
(111,880
)
Stock-based compensation
(34,299
)
 
(33,069
)
 
(100,091
)
 
(100,893
)
Amortization of acquisition-related intangibles
(4,906
)
 
(4,402
)
 
(12,801
)
 
(12,809
)
Other acquisition-related (costs) credits
329

 
(4,666
)
 
(9,601
)
 
(14,631
)
Other non-recurring expenses (1)
(2,235
)
 

 
(4,525
)
 
(20,127
)
Total
$
(13,061
)
 
$
(13,146
)
 
$
(44,781
)
 
$
(62,340
)

(1) For the nine months ended October 28, 2012, we recorded a non-recurring charge of $20.1 million . This charge represents the net present value of a $25.0 million charitable contribution pledged to Stanford Hospital and Clinics on June 12, 2012 and is payable over a ten year period.

25

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
 
Nine Months Ended
 
October 27,
 
October 28,
 
October 27,
 
October 28,
 
2013
 
2012
 
2013
 
2012
 
(In thousands)
Revenue:
 
 
 
 
 
 
 
Taiwan
$
319,018

 
$
403,769

 
$
927,903

 
$
1,020,232

China
206,374

 
205,636

 
565,504

 
580,934

United States
195,529

 
257,551

 
545,303

 
557,561

Other Asia Pacific
174,691

 
192,814

 
507,065

 
583,858

Other Americas
79,382

 
81,463

 
220,920

 
239,291

Europe
78,973

 
62,877

 
219,249

 
191,381

Total revenue
$
1,053,967

 
$
1,204,110

 
$
2,985,944

 
$
3,173,257


Revenue from significant customers, those representing 10% or more of total revenue, was approximately 11% of our total revenue from one customer and approximately 21% of our total revenue from two customers for the three and nine months ended October 27, 2013 , respectively. Revenue from significant customers, those representing 10% or more of total revenue, was approximately 14% and 12% , respectively, of our total revenue from one customer for the three and nine months ended October 28, 2012 .

Accounts receivable from significant customers, those representing 10% or more of total accounts receivable, was approximately 36% of our accounts receivable balance from two customers at October 27, 2013 and approximately 40% of our accounts receivable balance from three customers at January 27, 2013 .

Note 14 - Subsequent Event
 
On November 4, 2013, our Board of Directors' authorized an additional $1.0 billion under our share repurchase program and extended the program through January 2016.

On November 7, 2013, we announced a 13% increase in our quarterly cash dividend to $0.085 per share, or $0.34 per share on an annual basis from $0.075 per share, or $0.30 per share on an annual basis. We also declared to pay our next quarterly cash dividend on December 13, 2013, to all stockholders of record on November 21, 2013.
    


26



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, NVIDIA GRID, GTX, ICERA, Kepler, Quadro, SHIELD, Tegra, Tesla, NVIDIA Titan, and vGPU 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 27, 2013 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 a visual computing company, connecting people through the powerful medium of computer graphics. In a world increasingly filled with visual displays, our graphics technologies let our customers interact with the world of digital ideas, information and entertainment with an efficiency that no other communication medium can provide. Visualization transcends cultural and language boundaries and enhances the quality of life whether the setting is work or pleasure and the task is mission critical or for entertainment.

       

27



We have long been known to millions around the world for creating the graphics chips used in PCs that bring video games to life. With our invention of the GPU, we introduced the world to the power of programmable shading, which defines modern computer graphics. Today, we reach well beyond PC graphics and games. Our energy-efficient processors are at the heart of products ranging from mobile devices to supercomputers. PC gamers choose our GPUs by name to enjoy immersive fantasy worlds. Our Tegra processors power smartphones, tablets and automobile infotainment systems. Professional designers use our GPUs to create visual effects in movies and design everything from audio headsets to commercial aircraft. And supercomputers take advantage of the massively parallel processing capabilities of our GPUs to accelerate a wide range of important applications, from simulations of viruses at the molecular level, to modern weather forecasting and global oil exploration.

NVIDIA's research and development in visual computing has yielded more than 6,400 patents granted or pending worldwide, and including ones covering inventions essential to modern computing.

Our businesses are based on two important technologies: the GPU and the Tegra processor. GPUs, each with billions of transistors, are the engine of visual computing and among the world's most complex processors. We have GPU product brands designed for specific users and applications: GeForce for gamers; Quadro for designers; Tesla for researchers; and GRID VGX for cloud-based server graphics modules. We recently announced the NVIDIA GRID visual computing appliance, a fully integrated system with GRID VGX graphics modules that run NVIDIA's proprietary system software. GRID is a first-of-its-kind device, designed to serve graphics-intensive applications from the cloud simultaneously to a large number of concurrent users.

The Tegra processor is a system-on-a-chip, or SOC, integrating an entire computer on a single chip. Tegra processors incorporate multi-core GPUs and CPUs together with audio, video and input/output capabilities. They can also be integrated with baseband processors for phone and data communication. Unlike power-inefficient processors built for PCs, our Tegra SOC conserves power while delivering state-of-the-art graphics and multimedia processing. Tegra runs devices like smartphones, tablets and PCs; it can also be embedded into smart devices, such as televisions, monitors, set-top boxes, gaming devices and cars. We recently shipped SHIELD, the first Android device designed for gaming. SHIELD features our Tegra 4 processor, contains proprietary NVIDIA-developed software and system technologies and leverages our deep partnerships with game developers all over the world.

Headquartered in Santa Clara, California, we were incorporated in California in April 1993 and reincorporated in Delaware in April 1998. Our Internet address is www.nvidia.com . The contents of our website are not a part of this Quarterly Report on Form 10-Q.

Recent Developments, Future Objectives and Challenges

GPU Business

On November 7, 2013 we announced our new high-end Kepler-based gaming GPU - the GeForce GTX 780 Ti. During the third quarter of fiscal year 2014, we initiated shipments of our most powerful workstation graphics card - the Quadro K6000. In addition, we also introduced G-SYNC technology that enables synchronization between the GPU and the display to help eliminate on-screen lag and announced that VMware Horizon View supports NVIDIA GRID technology.
 
During the second quarter of fiscal year 2014, we launched a new family of high-end Kepler-based gaming GPUs - the GeForce GTX 760, GeForce GTX 770 and GeForce GTX 780, announced an IP licensing initiative designed to bring our GPU technology to new markets and generate revenue from markets previously inaccessible to us, and announced that Citrix's XenDesktop 7 has now fully integrated our GRID vGPU technology to share GPUs across virtual machines.

During the first quarter of fiscal year 2014, we shipped GeForce GTX Titan for gamers, launched GRID VCA - the industry's first visual computing appliance that enables businesses to deploy cloud-based, GPU-accelerated applications through any Windows, Linux or Mac client on their network, and shipped four new professional graphics products under our Quadro K Series - extending our Kepler technology into the workstation market.

Tegra Processor Business

During the third quarter of fiscal year 2014, we started shipping NVIDIA SHIELD, an open-platform gaming and entertainment portable, that enables gamers to play Android games or stream games from a PC with a GeForce processor. We also extended our reach in the mobile devices market with the first shipments of Tegra 4 devices - including Xiaomi's Mi3 smartphone in China and Tegra Note, a complete tablet platform.


28



During the second quarter of fiscal year 2014, we demonstrated the capabilities of the Kepler-based GPU in Project Logan, our next-generation mobile processor, prepared to release NVIDIA SHIELD, that began shipping on July 31, 2013, and demonstrated Tegra 4i making phone calls on AT&T's network.

During the first quarter of fiscal year 2014, we announced our first fully integrated 4G LTE mobile processor - Tegra 4i.

Stock Repurchase and Cash Dividends

In fiscal year 2014, we plan to return in excess of $1.0 billion to our shareholders, in the form of share repurchases and quarterly dividend payments. During the second quarter of fiscal 2014, we executed an accelerated share repurchase agreement to repurchase $750.0 million worth of shares of our common stock.  We received an aggregate of 51.5 million shares under this repurchase agreement of which 36.9 million shares were delivered in the second quarter and 14.6 million shares were delivered in the third quarter of fiscal year 2014.  Please refer to Note 12 of the Notes to the Condensed Consolidated Financial Statements for further disclosure regarding this accelerated share repurchase agreement.  

During the first nine months of fiscal year 2014, we have returned $983.0 million to shareholders, including $850.0 million in share repurchases and $133.0 million in dividend payments. On November 4, 2013, our Board extended the repurchase program through January 2016 and authorized an additional $1.0 billion under the repurchase program, increasing the amount of remaining repurchase authorization to $1.29 billion. In addition, on November 7, 2013, we announced a 13% increase in our quarterly cash dividend from $0.075 per share to $0.085 per share and our intent to return $1.0 billion in capital to our shareholders in fiscal year 2015 through a combination of stock repurchases and quarterly dividend payments.
 
Financial Information by Business Segment and Geographic Data
Our Chief Executive Officer, who is considered to be our chief operating decision maker, or CODM, reviews financial information presented on an operating segment basis for purposes of making operating decisions and assessing financial performance. Our operating segments are equivalent to our reportable segments. During the last several years, we have operated and reported three reporting segments to our CODM: the GPU business, the Professional Solutions business, and the Consumer Products business. However, during the fourth quarter of fiscal year 2013, we began reporting two segments to reflect the way we are now managing our businesses internally which is based on whether the underlying products leverage our GPU or our Tegra Processor technologies. Comparative periods presented reflect this change.

Our GPU business leverages our GPU technology across multiple end markets. It now consists of four primary product lines, including GeForce for desktop and notebook PCs and Macs; Quadro for professional workstations; Tesla for high-performance servers and workstations; and NVIDIA GRID for server graphics solutions. It also includes other related products, licenses and revenue supporting the GPU business, such as memory products. Our Tegra Processor business comprises product lines primarily based on our Tegra SOC and modem processor technologies. This includes Tegra for smartphones and tablets for both Android and Windows RT-based devices; automotive computers, including infotainment and navigation systems; and gaming devices such as SHIELD. It also includes other related products, licenses, and revenue supporting the Tegra Processor business such as Icera baseband processors and RF transceivers, embedded products, and licenses and other revenue associated with game consoles.    
In addition to the two reporting segments discussed above, the “All Other” category represents unallocated revenue and expenses, of which the revenue primarily relates to licensing revenue from our patent cross licensing agreement with Intel Corporation. Revenue related to this agreement is recognized ratably over the term of our agreement and is not actively managed. This category also includes corporate operating expenses that we do not allocate to our other reporting segments as such expenses are not directly related to the function or operations of our reporting segments. These expenses include certain corporate infrastructure and support costs that are deemed to be enterprise in nature. Additionally, we do not allocate stock-based compensation, amortization of acquisition-related intangible assets, other acquisition-related costs or credits, and non-recurring expenses and benefits.
Our CODM does not review any information regarding total assets on a reporting segment basis. Reporting 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. Please refer to Note 13 of the Notes to the Condensed Consolidated Financial Statements for further disclosure regarding segment information.

29




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
 
 
Nine Months Ended
 
 
October 27,
2013
 
 
October 28,
2012
 
 
October 27,
2013
 
 
October 28,
2012
 
Revenue
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%
Cost of revenue
44.6
 
 
47.1
 
 
44.8
 
 
48.3
 
Gross profit
55.4
 
 
52.9
 
 
55.2
 
 
51.7
 
Operating expenses
 
 
 
 
 
 
 
 
 
 
 
Research and development
32.3
 
 
23.6
 
 
33.5
 
 
26.8
 
Sales, general and administrative
9.8
 
 
8.3
 
 
10.7
 
 
10.3
 
Total operating expenses
42.1
 
 
31.9
 
 
44.2
 
 
37.1
 
Operating income
13.3
 
 
21.0
 
 
11.0
 
 
14.6
 
Interest and other income, net
 
 
0.1
 
 
0.4
 
 
0.4
 
Income before income tax
13.3
 
 
21.1
 
 
11.4
 
 
15.0
 
Income tax expense
2.2
 
 
3.7
 
 
1.6
 
 
2.8
 
Net income
11.1
%
 
17.4
%
 
9.8
%
 
12.2
%

   
Three and nine months ended October 27, 2013 and October 28, 2012

Revenue

Revenue was $1,054.0 million for the third quarter of fiscal year 2014 , compared to $1,204.1 million for the third quarter of fiscal year 2013 , which represents a decrease of approximately 12.5% .  Revenue for the first nine months of fiscal year 2014 was $2,985.9 million , compared to $3,173.3 million for the first nine months of fiscal year 2013 , which represents a decrease of approximately 5.9% .  A discussion of our revenue results for each of our operating segments is as follows:

GPU Business . GPU business revenue decreased by approximately 1.9% to $876.8 million in the third quarter of fiscal year 2014 , compared to $894.2 million for the third quarter of fiscal year 2013 due to lower revenue for desktop and notebook GPU products, offset by higher revenue largely attributable to Quadro products. Desktop GPU revenue was lower compared to revenue in the prior year quarter, which was particularly strong due to sales of our high-end Kepler-based GPU products following previous supply constraint issues, and due to price repositioning of our high-end GPU products in the third quarter of fiscal year 2014. Our notebook GPU revenue declined as unit volumes of our mainstream GPU products decreased. Revenue from high-end notebook GPU products had strong growth in both unit volume and average selling prices. The increase in Quadro revenue resulted from continued strong demand for our Kepler-based Quadro products.

GPU business revenue increased by approximately 4.2% to $2,521.1 million in the first nine months of fiscal year 2014 , compared to $2,419.2 million for the first nine months of fiscal year 2013 . This increase was primarily as a result of higher Quadro and Tesla revenue as we ramped up sales of our Kepler-based Quadro products in fiscal year 2014 and as accelerated computing continues to gain momentum. In addition, while desktop and notebook GPU product revenue was approximately flat in the first nine months of fiscal year 2014 compared to the first nine months of fiscal year 2013, each of these product lines experienced increased sales volume in high-end products, offset by decreased sales volume in mainstream products.
  

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Tegra Processor Business. Tegra Processor business revenue decreased by approximately 54.4% to $111.1 million in the third quarter of fiscal year 2014 , compared to $243.9 million for the third quarter of fiscal year 2013 . This decrease is largely related to lower volume shipments of Tegra 4-based devices as compared to Tegra 3-based devices in the prior year. It also reflects lower revenue associated with the sale of embedded products and lower license and royalty revenue associated with game consoles, offset by increased revenue from automotive products.

Tegra Processor business revenue decreased by approximately 52.0% to $266.9 million in the first nine months of fiscal year 2014 , compared to $556.1 million for the first nine months of fiscal year 2013 . These decreases were anticipated and were primarily due to lower volume shipments of Tegra 4-based devices as compared to Tegra 3-based devices in the prior year. The decrease also reflects lower revenue from the sale of embedded products and lower license and royalty revenue associated with game consoles, partially offset by continued increases in revenue from automotive products.

All Other. We recognized $66.0 million and $198.0 million in revenue from the patent cross licensing arrangement with Intel during the third quarter of fiscal years 2014 and 2013 and first nine months of fiscal years 2014 and 2013, respectively.  

Concentration of Revenue 
 
Revenue from sales to customers outside of the United States and Other Americas accounted for 74% of total revenue for both the third quarter and first nine months of fiscal year 2014 and 72% and 75% , respectively, of total revenue for the third quarter and first nine months of fiscal year 2013 . 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 11% of our total revenue from one customer for the third quarter and aggregated approximately 21% of our total revenue from two customers for first nine months of fiscal year 2014. Revenue from significant customers was approximately 14% and 12% , respectively, of our total revenue from one customer for the third quarter and first nine months of fiscal year 2013.

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, which 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 55.4% and 52.9% for the third quarter of fiscal years 2014 and 2013 , respectively and 55.2% and 51.7% for the first nine months of fiscal years 2014 and 2013, respectively.    

Charges to cost of sales for inventory provisions totaled $9.6 million and $33.7 million for the third quarter and for the first nine months of fiscal year 2014, unfavorably impacting our gross margin by 0.9% and 1.1%, respectively. Charges to cost of sales for inventory provisions totaled $22.5 million and $56.8 million for the third quarter and for the first nine months of fiscal year 2013, unfavorably impacting our gross margin by 1.9% and 1.8%, respectively.

Sales of inventory that was previously written-off or written-down totaled $7.7 million for the third quarter, and $38.6 million for the first nine months, of fiscal year 2014, favorably impacting our gross margin by 0.7% and 1.3%, respectively. Sales of inventory that was previously written-off or written-down totaled $10.8 million for the third quarter, and $42.8 million for the first nine months, of fiscal year 2013, favorably impacting our gross margin by 0.9% and 1.3%, respectively.


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As a result, the overall net effect on our gross margin from charges to cost of sales for inventory provisions and sales of items previously written-off or written-down was a 0.2% unfavorable impact for the third quarter, and a 0.2% favorable impact for the first nine months, of fiscal year 2014, and a 1.0% and 0.4% unfavorable impact for the third quarter and for the first nine months of fiscal year 2013, respectively.

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 third quarter and first nine months of fiscal year 2014 from the third quarter and first nine months of fiscal year 2013, respectively.  GPU margins increased primarily due to an increase in unit volume of our high-end Kepler-based GeForce desktop and notebook GPU products, which contributed to a richer overall mix of product sales. Additionally, the volume increase of Kepler-based Quadro and Tesla products also contributed to a richer mix of GPU sales.
   
  Tegra Processor Business . The gross margin of our Tegra Processor business decreased in the third quarter and first nine months of fiscal year 2014 when compared with the third quarter and first nine months of fiscal year 2013, respectively. Tegra Processor gross margin decreased primarily due to lower gross margins across most product categories. In addition, gross margins were negatively impacted as license and royalty revenue associated with game consoles also declined when compared to the same periods in the prior year.

Operating Expenses  
 
Three Months Ended
 
Nine Months Ended
 
 
October 27,
2013
 
October 28,
2012
 
$
Change
 
%
Change
 
October 27,
2013
 
October 28,
2012
 
$
Change
 
%
Change
 
 
(In millions)
 
 
 
($ in millions)
 
 
 
Research and development expenses
$
340.3

 
$
284.2

 
$
56.1

 
19.7
%
$
999.2

 
$
849.3

 
$
149.9

 
17.7

%
Sales, general and administrative expenses
103.1

 
100.3

 
2.9

 
2.9
%
320.0

 
326.8

 
(6.8
)
 
(2.1
)
%
Total operating expenses
$
443.4

 
$
384.4

 
$
59.0

 
15.3
%
$
1,319.2

 
$
1,176.1

 
$
143.1

 
12.2

%
Research and development as a percentage of net revenue
32.3

%
23.6

%
 

 
 
 
33.5

%
26.8

%
 

 
 

 
Sales, general and administrative as a percentage of net revenue
9.8

%
8.3

%
 

 
 
 
10.7

%
10.3

%
 

 
 

 

Research and Development
 
Research and development expenses were $340.3 million and $284.2 million during the third quarter of fiscal years 2014 and 2013 , respectively, an increase of $56.1 million , or 19.7 %.  This increase was primarily due to an increase in compensation and benefits of $26.1 million, or 17%, an increase in development expenses of $6.5 million, primarily related to bring-up costs to support our next generation Tegra and GPU products,  a $12.1 million increase in facilities and IT support expense, and a $6.2 million increase in depreciation and amortization expense.

Research and development expenses were $999.2 million and $849.3 million during the first nine months of fiscal years 2014 and 2013 , respectively, an increase of $149.9 million , or 17.7% .  This increase was primarily due to an increase in compensation and benefits of $79.0 million, or 17%, an increase in  development expenses of $18.8 million, primarily related to bring-up costs to support our next generation Tegra and GPU products,  a $30.8 million increase in facilities and IT support expense, and a $14.1 million increase in depreciation and amortization expense.



32



Sales, General and Administrative
 
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