UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
________________
FORM
10-K
[x] ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For
the fiscal year ended January 29, 2006
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)
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Delaware
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94-3177549
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(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)
Securities
registered pursuant to Section 12(b) of the Act:
None
Securities
registered pursuant to Section 12(g) of the Act:
Common
stock, $.001 par value per share
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act. Yes x
No
o
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes o
No
x
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days. Yes x
No
o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not
be contained, to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. x
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one): x
Large
accelerated filer o
Accelerated
filer o
Non-accelerated
filer
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).
Yes
o
No
x
The
aggregate market value of the voting stock held by non-affiliates of the
registrant as of July 29, 2005 was approximately $4,226,770,945 (based on the
closing sales price of the registrant’s common stock on July 29, 2005). Shares
of common stock held by each current executive officer and director and by
each
person who is known by the registrant to own 5% or more of the outstanding
common stock have been excluded from this computation in that such persons
may
be deemed to be affiliates of the registrant. Share ownership information of
certain persons known by the registrant to own greater than 5% of the
outstanding common stock for purposes of the preceding calculation is based
solely on information on Schedule 13G filed with the Commission and is as of
July 29, 2005. This determination of affiliate status is not a conclusive
determination for other purposes.
The
number of shares of common stock outstanding as of March 3, 2006 was
174,485,396.
DOCUMENTS
INCORPORATED BY REFERENCE
The
Registrant has incorporated by reference portions of its Proxy Statement for
its
2006 Annual Meeting of Stockholders to be filed with the Securities and Exchange
Commission by May 29, 2006.
NVIDIA
CORPORATION
TABLE
OF CONTENTS
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Page
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PART
I
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Item
1.
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Business
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1
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Item
1A.
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Risk
Factors
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12
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Item
1B.
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Unresolved
Staff Comments
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27
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Item
2.
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Properties
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27
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Item
3.
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Legal
Proceedings
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28
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Item
4.
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Submission
of Matters to a Vote of Security Holders
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29
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PART
II
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Item
5.
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Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
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29
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Item
6.
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Selected
Financial Data
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31
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Item
7.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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33
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Item
7A.
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Quantitative
and Qualitative Disclosures about Market Risk
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50
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Item
8.
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Consolidated
Financial Statements and Supplementary Data
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51
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Item
9.
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Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
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51
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Item
9A.
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Controls
and Procedures
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51
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Item
9B.
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Other
Information
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52
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PART
III
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Item
10.
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Directors
and Executive Officers of the Registrant
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52
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Item
11.
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Executive
Compensation
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53
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Item
12.
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
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53
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Item
13.
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Certain
Relationships and Related Transactions
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53
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Item
14.
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Principal
Accounting Fees and Services
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53
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PART
IV
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Item
15.
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Exhibits,
Financial Statement Schedules
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54
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Signatures
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95
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PART
I
ITEM
1. BUSINESS
Forward-Looking
Statements
When
used in this Annual Report on Form 10-K, the words “believes,” “plans,”
“estimates,” “anticipates,” “expects,” “intends,” “allows,” “can,” “will” and
similar expressions are intended to identify forward-looking statements.
These
are statements that relate to future periods and include statements including,
but not limited to, our corporate strategy, our anticipated growth and areas
of
growth, our fastest growing businesses, factors contributing to growth,
international expansion, the features, benefits, capabilities, performance,
production and availability of our technology and products, focus on development
of cost effective architectures, development of new products, demand for
graphics processors in new product areas, product life cycles, average selling
prices, the importance of design wins, employees, ability to attract and
retain
qualified personnel, market share, research and development, backlog,
seasonality, gross margin, revenue, sources of revenue and revenue mix,
expenditures and expenditure mix, including capital expenditures, areas of
increased expenditures, cash flow and cash balances, liquidity, uses of cash,
investments of our cash and marketable securities, tax rates, quarterly and
annual results of operations, foreign currency risk strategy, critical
accounting policies, the impact of recent accounting pronouncements,
inventories, our relationship with and the development of a graphics processing
unit, or GPU, for Sony Computer Entertainment and the royalties to that GPU,
HD
and Blu-ray video, use of our products by Apple Computer, Inc., Windows Vista,
the importance and benefits of strategic relationships, customer demand,
our
reliance on a limited number of customers, platform innovations and solutions,
stock option grants and our employee stock purchase plan, expensing of stock
based compensation, our stock repurchase program, our competitors,
expectations regarding competition, our competitive position, factors affecting
competition, payment of dividends, sufficiency of our facilities, our
intellectual property and intellectual property strategy, litigation and
settlement of litigation, internal control over financial reporting, and
compliance with environmental laws and regulations. Forward-looking statements
are subject to risks and uncertainties that could cause actual results to
differ
materially from those projected. These risks and uncertainties include, but
are
not limited to, delays in the development or release of new products, delays
in
volume production of our products, loss of market share for our GPU Business,
changes in customer demands, slower than anticipated adoption of new technology,
slower than anticipated growth of new markets, delays in the release of Windows
Vista, changes to Windows Vista before its commercial release, our inability
to
compete in new markets, the write-down or write-off of inventory, reduction
in
demand for or market acceptance of our products or technologies, manufacturing
defects, software bugs, competitive pricing pressure, release of new products
by
our competitors, disruptions in our strategic relationships such as with
our key
suppliers, insufficient manufacturing availability, reliance on third parties
to
manufacture and test our products, fluctuations in general economic conditions,
international and political conditions, the loss of an important customer,
our
ability to safeguard our intellectual property, developments in and expenses
related to litigation, developments in litigation settlements and the matters
set forth in this Annual Report on Form 10-K. These forward-looking statements
speak only as of the date hereof. We expressly disclaim any obligation or
undertaking to release publicly any updates or revisions to any forward-looking
statements contained herein to reflect any change in our expectations with
regard thereto or any change in events, conditions or circumstances on which
any
such statement is based.
In
the sections of this Report entitled “Item 1. Business”, “Item 1A. Risk
Factors”, “Item 5. Market for Registrant’s Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities”, “Item 6. Selected Financial
Data”, and “Item 7. Management’s Discussion and Analysis of Financial Condition
and Results of Operations” all references to “NVIDIA,” “we,” “us,” “our” or the
“Company” mean NVIDIA Corporation and its subsidiaries, except where it is made
clear that the term means only the parent company.
NVIDIA,
GeForce, SLI, GoForce, NVIDIA Quadro, NVIDIA nForce, TurboCache, PureVideo
and
the NVIDIA logo are our trademarks or registered trademarks in the United
States
and other countries that are used in this document. We may also refer to
trademarks of other corporations and organizations in this
document.
1
Overview
Our
Company
NVIDIA
Corporation is the worldwide leader in programmable graphics processor
technologies. Our products enhance the end-user experience on consumer and
professional computing devices. We have four major product-line operating
segments: graphics processing units, or GPUs, media and communications
processors, or MCPs, Handheld GPUs, and Consumer Electronics. Our GPU Business
is composed of products that support desktop personal computers, or PCs,
notebook PCs and professional workstations; our MCP Business is composed of
NVIDIA nForce products that operate as a single-chip or chipset that can
off-load system functions, such as audio processing and network communications,
and perform these operations independently from the host central processing
unit, or CPU; our Handheld GPU Business is composed of products that support
handheld personal digital assistants, cellular phones and other handheld
devices; and our Consumer Electronics Business is concentrated in products
that
support video game consoles and other digital consumer electronics devices
and
is composed of our contractual arrangements with Sony Computer Entertainment,
or
SCE, to jointly develop a custom GPU incorporating our next-generation GeForce
GPU and SCE’s system solutions in SCE’s PlayStation3, sales of our Xbox-related
products, revenue from our license agreement with Microsoft Corporation, or
Microsoft, relating to the successor product to their initial Xbox gaming
console, the Xbox360, and related devices, and digital media processor
products. We
were
incorporated in California in April 1993 and reincorporated in Delaware in
April
1998. Our headquarter facilities are in Santa Clara, California. Our Internet
address is www.nvidia.com.
Original
equipment manufacturers, or OEMs, original design manufacturers, or ODMs,
add-in-card manufacturers, system builders and consumer electronics companies
worldwide utilize NVIDIA digital media processors as a core component of their
entertainment and business solutions. Our award-winning GPUs deliver superior
performance and crisp visual quality for PC-based applications such as
manufacturing, science, e-business, entertainment and education. Our
critically-acclaimed MCPs perform highly demanding multimedia processing for
secure broadband connectivity, communications and breakthrough audio functions.
Our handheld GPUs deliver an advanced visual experience by accelerating graphics
and video applications while implementing design techniques that result in
high
performance and low power consumption.
Our
Business
GPU
Business
The
combination of the programmable GPU with Microsoft’s, DirectX 9.0 high-level
shading language is known as DirectX 9.0 GPUs. The flexibility and power of
DirectX 9 GPUs can enhance high-definition, or HD, digital video, image
processing and editing for digital photographs, as well as bring a “cinematic
look” to computer graphics. Technology and market leadership in this generation
of GPUs continues to be a key element of our corporate strategy. The successful
production launch of our GeForce 6800 and 6600 GPU series in fiscal 2005 led
to
our increase in market share from 21% to 67% of the Performance DirectX
9.0-compatible graphics controller segment, according to the
Mercury Research Fourth Quarter 2003 and 2004 PC Graphics Reports,
respectively.
In
fiscal 2006, our strategy was to extend our architectural and technology
advantage by leading the industry with our second-generation GPU to support
DirectX 9 Shader Model 3.0 - the GeForce 7800 GPU. By successfully extending
our
leadership position in the performance segment with the production release
of
the GeForce 7800 in June 2005, we grew our market share from 67% to 79%,
according to the
Mercury Research Fourth Quarter 2004 and 2005 PC Graphics Reports,
respectively.
In
January 2006, we launched and initiated sales of the GeForce 7300 GPU, our
first
mainstream version of the GeForce 7 Series. The GeForce 6 and 7 Series desktop
and notebook GPUs are designed to be compatible with Microsoft’s next generation
operating system, Microsoft Windows Vista, or Vista, which is scheduled to
be
released in the second half of calendar 2006. Vista is expected to mark a
dramatic improvement in the way the Windows operating system takes advantage
of
the PC’s GPU to provide a positive user experience.
The
NVIDIA Quadro brand has become the benchmark of performance and compatibility
for the professional industry. During fiscal 2006, the growth in our
Quadro professional workstation products was a reflection of the digital
revolution sweeping nearly every industry, from industrial design, to industrial
styling, to film, to HD broadcast, to medical imaging and many more. In the
future, we expect the growth of our professional workstation products to be
influenced by the demand for HD content creation, HD video editing and HD
broadcast.
2
MCP
Business
The
NVIDIA nForce family of products represents our MCPs for Advanced Micro Devices,
Inc., or AMD, and Intel Corporation, or Intel,-based desktop, notebook,
professional workstations and servers. Our strategy for MCPs aligns with what
we
anticipate will drive growth such as multi-core, ever-increasing-speed
networking and storage technologies, and integration of complex features such
as
virtualization, security processing, network processing and more. The In-Stat
Trendy Chipset for the x86 Processor Report projects strong growth for PC
chipsets through the end of this decade: from $7.6 billion in 2006 to over
$10
billion in 2009. In
September 2005, we introduced our first integrated graphics core logic solutions
in more than two years, the GeForce 6100 Series GPU and NVIDIA nForce 400 Series
MCP. We offer the industry’s first and only integrated core logic to feature
DirectX 9.0 and Shader Model 3.0 technology. We
also
offer PureVideo technology, a HD video processor designed to deliver a home
theater-quality movie watching experience on PCs and media centers. NVIDIA
is
now the third largest core logic supplier in the world, according to
the
Mercury Research Fourth Quarter 2005 PC Graphics Report.
We are
the largest supplier of AMD 64 chipsets with 38% segment share. NVIDIA nForce
MCP unit shipments for AMD64-based CPUs increased over 510% year-over year,
based on the
Mercury Research Fourth Quarter 2005 PC Processor Forecast Report.
Handheld
GPU Business
Our
strategy in our Handheld GPU Business is to lead innovation and capitalize
on
the emergence of the cellular phone as a versatile consumer lifestyle
device. The
hallmark of every device
in the
NVIDIA GoForce product family is to provide a high-performance, visually rich
multimedia experience on cellular phones and handheld devices. These products
deliver an advanced visual experience by accelerating graphics and video
applications, and supporting the most demanded features and capabilities.
GoForce handheld GPUs implement innovative design techniques, both inside the
chips and at the system level, which result in high performance and long battery
life. These technologies enhance visual display capabilities, improve
connectivity, and minimize chip and system-level power consumption. GoForce
products can be found in advanced multimedia cellular phones, PDAs, and other
handheld devices.
Consumer
Electronics Business
Our
Consumer Electronics Business is composed of our contractual arrangements
with SCE to jointly develop a custom GPU incorporating our next-generation
GeForce GPU and SCE’s system solutions in SCE’s PlayStation3, sales of our
Xbox-related products, revenue from our license agreement with Microsoft
relating to the successor product to their initial Xbox gaming console, the
Xbox360, and related devices, and digital media processor products. During
the first quarter of fiscal 2006, Microsoft indicated that it would not order
any more Xbox-related products from us after our second fiscal quarter. As
a
result, the second quarter of fiscal 2006 was the last quarter during which
we
recognized revenue from the sale of our Xbox-related products to Microsoft.
Our
Products
We
have
four major product groups: GPUs, MCPs, Handheld GPUs, and Consumer Electronics.
Each of our product lines is designed to provide the advanced processing of
a
combination of graphics, HD video, audio, communications, network security
and
storage. Our products are designed to support and deliver the maximum
performance for the most current standards as determined by each industry
segment, and to provide a comprehensive set of features that enhance the overall
operation and compatibility of each platform they support.
GPUs. Our
GPU
products support desktop PCs, notebook PCs and professional workstations. We
have three major families of GPUs: GeForce, Go and NVIDIA Quadro.
GeForce.
The
GeForce family represents our desktop GPUs and includes the GeForce7, GeForce
6,
GeForce FX and GeForce4 families. In March 2005, we introduced two new GeForce
6
GPUs: a 512MB version of the GeForce 6800 Ultra designed for the enthusiast
segment, and a new lower-cost AGP version of the GeForce 6200 GPU, designed
to
bring DirectX 9.0 Shader Model 3.0 technology to the mainstream segment. Our
most advanced GPU family is the
3
GeForce
7
series. In June 2005, we launched and shipped our second generation Shader
Model
3.0 GPU, the GeForce 7800 GTX, which is designed to address the high-end
enthusiast desktop PC segment. In August 2005, we launched and shipped our
second GeForce 7 GPU, the GeForce 7800 GT, which is designed to address the
high-end performance desktop PC segment. In November 2005, we introduced and
shipped the GeForce 7800 GTX 512 GPU, which contains over 302 million
transistors and is the industry’s only mainstream GPU to incorporate 64-bit high
dynamic range, or HDR. The GeForce 7800 class of GPUs is designed for the
enthusiast consumer segment. In November 2005, we introduced the GeForce 6800
GS
GPU, which is designed for the mainstream segment. In January 2006, we launched
and shipped the GeForce 7300 GS and GeForce 7300 LE GPUs, our first mainstream
versions of the GeForce 7 Series. The GeForce 6600 and GeForce 6200, the GeForce
FX 5200 and GeForce4 currently deliver a balance of performance and features
for
the mainstream desktop PC segments.
GeForce
Go and NVIDIA Quadro Go.
The
GeForce Go and NVIDIA Quadro Go families represent our notebook GPUs and include
the GeForce 7 Go, GeForce 6 Go, GeForce FX Go, GeForce4 Go, and NVIDIA QuadroFX
Go GPUs. These GPUs are designed to deliver desktop graphics performance and
features for multiple notebook configurations from desktop replacements,
multimedia notebooks and thin-and-lights to notebook workstations. The GeForce
Go products are designed to serve the needs of both professional and consumer
users. The NVIDIA Quadro Go products are designed to serve the needs of
workstation professionals in the area of product design and digital content
creation. In February 2005, we introduced the GeForce Go 6600 and GeForce Go
6800 Ultra notebook GPUs, both of which are designed specifically to deliver
advanced multimedia functionality without sacrificing portability. In September
2005, we launched and shipped the new GeForce Go 7800 GTX, the flagship of
the
NVIDIA notebook GPU product line. In January 2006, we introduced a complete
family of notebook GPUs - the GeForce Go 7800, GeForce Go 7600 and GeForce
Go
7400 - all based on our second generation Shader Model 3.0 architecture and
designed to deliver cutting-edge 3D, HD home theatre-quality video and advanced
power management to the notebook segment.
NVIDIA
Quadro. The
NVIDIA Quadro branded products are designed to be robust, high-performance
professional workstation solutions that are available for high-end, mid-range,
entry-level and multi-display product lines. The NVIDIA Quadro family, which
consists of the NVIDIA Quadro FX, NVIDIA Quadro4 and the NVIDIA Quadro NVS
professional workstation processors are designed to meet the needs of a number
of workstation applications such as industrial product design, digital content
creation, non-linear video editing, scientific and medical visualization,
general purpose business and financial trading. NVIDIA Quadro products are
fully
certified by several software developers for professional workstation
applications, and are designed to deliver the graphics performance and precision
required by professional applications. In July 2005, we introduced two new
NVIDIA Quadro GPUs, the NVIDIA Quadro FX 4500 and the NVIDIA Quadro FX 3450,
which are designed for the high-end and mainstream professional segments,
respectively. Both products support our Scalable Link Interface, or SLI,
technology. In October 2005, we announced that we are the exclusive provider
of
all graphics cards for the first peripheral component interconnect, or PCI,
Express platform from Apple Computer, Inc., or Apple. In addition, the first
ever Apple Power Mac will incorporate our Quadro Professional-class
GPU.
MCPs.
Our
MCP
product family, known as NVIDIA nForce, supports desktop PCs, notebook PCs,
professional workstations and servers.
NVIDIA
nForce. The
NVIDIA nForce family represents our MCPs for AMD and Intel-based desktop PCs,
notebook PCs, professional workstations and servers and includes the NVIDIA
nForce2, NVIDIA nForce3, NVIDIA nForce4, NVIDIA nForce Professional, GeForce
6100 Series GPUs and NVIDIA nForce 400 Series MCP motherboard solutions. We
define an MCP as a single-chip or chipset that can off-load system functions,
such as audio processing and network communications, and perform these
operations independently from the host CPU. The NVIDIA nForce2 integrates a
comprehensive set of multimedia capabilities, such as two-dimensional, or 2D,
three-dimensional, or 3D, digital video disc, or DVD, HD television, or HDTV,
Dolby Digital audio playback and fast broadband and networking communications.
The NVIDIA nForce2 family is designed to be compatible with AMD’s Sempron
microprocessors. The NVIDIA nForce3 and NVIDIA nForce4 families are single-chip
MCPs, designed to be compatible with AMD64 and Opteron 64-bit CPUs. The NVIDIA
nForce3 products are designed to complement 64-bit CPUs
4
and
deliver innovative technologies for networking, storage and system performance.
NVIDIA nForce4 products are designed to provide a combination of SLI technology
and PCI Express support for Intel and AMD64 and Opteron-based platforms. In
April 2005, we announced the availability of our NVIDIA nForce4 SLI Intel
Edition MCP for Intel-based platforms. This line of core-logic solutions
incorporates a host of new and innovative features that had never before been
available on the Intel platform and extended the NVIDIA nForce brand into new
segments. In June 2005, we made our SLI technology available to users in the
mainstream segment with the release of our GeForce 6600 GPU. In August 2005,
we
announced that the NVIDIA nForce4 SLI X16 Intel Edition technology featured
in
the Dell Dimension XPS 600 desktop PC was immediately available. In September
2005, we introduced our first motherboard graphics solutions in more than two
years, the GeForce 6100 Series GPU and NVIDIA nForce 400 Series MCP. We offer
the industry’s first and only integrated core logic to feature DirectX 9.0 and
Shader Model 3.0 technology. In January 2006, we announced two new MCPs for
the
Intel platform, the NVIDIA nForce4 SLI XE and NVIDIA nForce4 Ultra, both of
which provide the system-builder and do-it-yourself communities with two new
lower cost discrete motherboard solutions for Intel PC platforms.
Handheld
GPUs.
Our
Handheld GPU product family, known as GoForce, supports handheld personal
digital assistants, or PDAs, and multimedia cellular phones.
GoForce.
The
GoForce family represents our handheld GPUs for a wide range of multimedia
cellular phones and handheld devices. The GoForce 2100 and GoForce 2150 GPUs
are
two of the first handheld GPUs to offer hardware acceleration engines for 2D
graphics to manufacturers that support liquid crystal display, or LCD, screen
resolutions up to 320 x 240 pixels. The GoForce 3000 and GoForce 4000 offer
a
host of advanced features for cellular phones and PDAs, including support for
up
to 3-megapixel image capture, accelerated graphics for gaming, and motion Joint
Photographic Experts Group, or JPEG, capture and playback. Our
GoForce 4000, GoForce 4500 and GoForce 4800 handheld GPUs are the first to
provide programmable 3D shaders, along with high-quality multi-megapixel still
image and video processing in a single-chip package. Using dedicated hardware
accelerator engines, the GoForce family delivers high performance multimedia
applications and drives high-resolution displays, while extending handheld
battery life through a variety of unique power management techniques. In the
third quarter of fiscal 2006, Motorola Inc. and Sony Ericsson Mobile
Communications AB launched Third Generation, or 3G, models of their RAZR and
Walkman portable phones, respectively, that are both powered by our GoForce
GPUs.
Consumer
Electronics. Our
Consumer Electronics product group is concentrated in products that support
video game consoles and other digital consumer electronics devices.
Playstation3.
In April
2005, we finalized our definitive agreement with SCE to jointly develop a custom
GPU incorporating our next-generation GeForce GPU and SCE’s system solutions in
SCE’s PlayStation3. In addition, we are licensing software development
tools for creating shaders and advanced graphics capabilities to SCE. We
have successfully reached many development milestones and we believe that we
are
on target to achieve the goals set by SCE under this agreement.
Xbox.
Our
Xbox
platform processor supported Microsoft’s initial Xbox video game
console. The
Xbox
platform processor featured dual-processing architecture, which included our
GPU
designed specifically for the Xbox, or XGPU, and our MCP to power the Xbox’s
graphics, audio and networking capabilities. We also have a license
agreement with Microsoft relating to the successor product to their initial
Xbox
gaming console, the Xbox360, and related devices. During the first quarter
of
fiscal 2006, Microsoft indicated that it would not order any more Xbox-related
products from us after our second fiscal quarter. As a result, the second
quarter of fiscal 2006 was the last quarter during which we recognized revenue
from the sale of our Xbox-related products to Microsoft.
Our
Strategy
We
design
our GPUs, MCPs and handheld GPUs to enable our PC OEMs, ODMs, system builders,
motherboard and add-in board manufacturers, and cellular phone and consumer
electronics OEMs, to build award-winning products by delivering state-of-the-art
features, performance, compatibility and power efficiency while maintaining
competitive pricing and profitability. We believe that by developing 3D
graphics, HD video and media communications solutions that provide superior
performance and address the key requirements of each of the product segments
we
serve, we will accelerate the adoption of HD digital media platforms and devices
throughout these segments. We combine scalable architectural technology with
mass market economies-of-scale to deliver a complete family of products that
spans professional workstations, to consumer PCs, to mulitmedia-rich cellular
phones.
5
Our
objective is to be the leading supplier of performance GPUs, MCPs and handheld
GPUs. Our current focus is on the desktop PC, professional workstation, notebook
PC, servers, mulitmedia-rich cellular phones and video game console product
lines, and we plan to expand into other product lines. Our strategy to achieve
this objective includes the following key elements:
Build
Award-Winning, Architecturally-Compatible 3D Graphics, HD Video, Media
Communications and Low Power Product Families for the PC, Handheld and Digital
Entertainment Platforms. Our
strategy is to achieve market share leadership in these platforms by providing
award-winning performance at every price point. By developing 3D graphics,
HD
video and media communications solutions that provide superior performance
and
address the key requirements of these platforms, we believe that we will
accelerate the adoption of 3D graphics and rich digital media.
Target
Leading OEMs, ODMs and System Builders. Our
strategy is to enable our leading PC, handheld and consumer electronics OEMs,
ODMs and major system builder customers to differentiate their products in
a
highly competitive marketplace by using our digital media processors. We believe
that design wins with these industry leaders provide market validation of our
products, increase brand awareness and enhance our ability to penetrate
additional leading customer accounts. In addition, we believe that close
relationships with OEMs and ODMs will allow us to better anticipate and address
customer needs with future generations of our products.
Sustain
Technology and Product Leadership in 3D Graphics and HD Video, and Media
Communications and Low Power. We
are focused on using our advanced engineering capabilities to accelerate the
quality and performance of 3D graphics, HD video, media communications and
low
power processing in PCs and handheld devices. A fundamental aspect of our
strategy is to actively recruit the best 3D graphics and HD video, networking
and communications engineers in the industry, and we believe that we have
assembled an exceptionally experienced and talented engineering team. Our
research and development strategy is to focus on concurrently developing
multiple generations of GPUs, MCPs and handheld GPUs using independent design
teams. As we have in the past, we intend to use this strategy to achieve new
levels of graphics, networking and communications features and performance
and
low power designs, enabling our customers to achieve award-winning performance
in their products.
Increase
Market Share. We
believe that substantial market share will be important to achieving success.
We
intend to achieve a leading share of the market by devoting substantial
resources to building award-winning families of products for a wide range of
applications.
Use
Our Expertise in Digital Multimedia. We
believe the synergy created by the combination of 3D graphics, HD video and
the
Internet will fundamentally change the way people work, learn, communicate
and
play. We believe that our expertise in HD graphics and system architecture
positions us to help drive this transformation. We are using our expertise
in
the processing and transmission of high-bandwidth digital media to develop
products designed to address the requirements of high-bandwidth concurrent
multimedia.
Use
our Intellectual Property and Resources to Enter into License and Development
Contracts. During
fiscal 2006, we entered into license arrangements that require significant
customization of our intellectual property components and we anticipate that
we
will enter into additional agreements during fiscal 2007. For
license arrangements that require significant customization of our intellectual
property components, we generally recognize this license revenue using the
percentage-of-completion method of accounting over the period that services
are
performed. For
example, in April 2005, we finalized our definitive agreement with SCE to
jointly develop a custom GPU incorporating our next-generation GeForce GPU
and
SCE’s system solutions in SCE’s PlayStation3. Our collaboration with SCE
includes license fees and royalties for the PlayStation3 and all derivatives,
including next-generation digital consumer electronics devices. In
addition, we are licensing software development tools for creating shaders
and
advanced graphics capabilities to SCE.
6
Sales
and Marketing
Our
worldwide sales and marketing strategy is a key part of our objective to become
the leading supplier of performance GPUs, MCPs, and handheld GPUs for PCs,
handheld devices and consumer electronics platforms. Our sales and marketing
teams work closely with each industry’s respective OEMs, ODMs, system
integrators, motherboard manufacturers, add-in board manufacturers and industry
trendsetters, collectively our channel, to define product features, performance,
price and timing of new products. Members of our sales team have a high level
of
technical expertise and product and industry knowledge to support a competitive
and complex design win process. We also employ a highly skilled team of
application engineers to assist the channel in designing, testing and qualifying
system designs that incorporate our products. We believe that the depth and
quality of our design support are key to improving the channel’s time-to-market,
maintaining a high level of customer satisfaction within the channel and
fostering relationships that encourage customers to use the next generation
of
our products.
In
the
GPU, MCP, and handheld GPU segments we serve, the sales process involves
achieving key design wins with leading OEMs and major system integrators and
supporting the product design into high volume production with key ODMs,
motherboard manufacturers and add-in board manufacturers. These design wins
in
turn influence the retail and system integrator channel that is serviced by
add-in board and motherboard manufacturers. Our distribution strategy is to
work
with a number of leading independent contract equipment manufacturers, or CEMs,
ODMs, motherboard manufacturers, add-in board manufacturers and distributors
each of which has relationships with a broad range of major OEMs and/or strong
brand name recognition in the retail channel. In the handheld GPU segments
we
serve, the sales process primarily involves achieving key design wins directly
with the leading handheld OEMs and supporting the product design into
high-volume production. Currently, we sell a significant portion of our digital
media processors directly to distributors, CEMs, ODMs, motherboard manufacturers
and add-in board manufacturers, which then sell boards and systems with our
products to leading OEMs, retail outlets and to a large number of system
integrators. Although a small number of our customers represent the majority
of
our revenue, their end customers include a large number of OEMs and system
integrators throughout the world.
As
a
result of our channel strategy, our sales are focused on a small number of
customers. Sales to Edom Technology Co., Ltd., or Edom, accounted for 14% and
sales to Asustek Computer Inc., or Asustek, accounted for 12% of our total
revenue for fiscal 2006. Edom is an independent distributor and Asustek is
a
CEM.
To
encourage software title developers and publishers to develop games optimized
for platforms utilizing our products, we seek to establish and maintain strong
relationships in the software development community. Engineering and marketing
personnel interact with and visit key software developers to promote and discuss
our products, as well as to ascertain product requirements and solve technical
problems. Our developer program makes products available to developers prior
to
volume availability in order to encourage the development of software titles
that are optimized for our products.
Backlog
Our
sales
are primarily made pursuant to standard purchase orders. The quantity of
products purchased by our customers as well as shipment schedules are subject
to
revisions that reflect changes in both the customers’ requirements and in
manufacturing availability. The semiconductor industry is characterized by
short
lead time orders and quick delivery schedules. In light of industry practice
and
experience, we believe that only a small portion of our backlog is
non-cancelable and that the dollar amount associated with the non-cancelable
portion is not significant. We do not believe that a backlog as of any
particular date is indicative of future results.
Seasonality
Our
industry is largely focused on the consumer products market. Due to the
seasonality in this market, we typically expect to see stronger revenue
performance in the second half of the calendar year related to the
back-to-school and holiday seasons.
7
Manufacturing
We
do not
directly manufacture semiconductor wafers used for our products. Instead we
utilize what is known as a “fabless” manufacturing strategy for all product-line
operating segments whereby we employ world-class suppliers for all phases of
the
manufacturing process, including wafer fabrication, assembly, testing and
packaging. This strategy uses the expertise of industry-leading suppliers that
are certified by the International Organization for Standardization, or ISO,
in
such areas as fabrication, assembly, quality control and assurance, reliability
and testing. In addition, this strategy allows us to avoid many of the
significant costs and risks associated with owning and operating manufacturing
operations. Our suppliers are also responsible for procurement of most of the
raw materials used in the production of our products. As a result, we can focus
our resources on product design, additional quality assurance, marketing and
customer support.
We
utilize industry-leading suppliers, such as Chartered Semiconductor
Manufacturing, or Chartered, Semiconductor Manufacturing International
Corporation, or SMIC, Taiwan Semiconductor Manufacturing Corporation, or TSMC,
and United Microelectronics Corporation, or UMC, to produce our semiconductor
wafers. We then utilize independent subcontractors, such as Advanced
Semiconductor Engineering, or ASE, Amkor Technology, King Yuan Electronics
Co.,
LTD, or KYEC, Siliconware Precision Industries Company Ltd., or SPIL, and STATS
ChipPAC Incorporated to perform assembly, testing and packaging of most of
our
products.
We
typically receive semiconductor products from our subcontractors, perform
incoming quality assurance and then ship them to CEMs, distributors, motherboard
and add-in board manufacturer customers from our third-party warehouse in Hong
Kong. Generally, these manufacturers assemble and test the boards based on
our
design kit and test specifications, and then ship the products to retailers,
system integrators or OEMs as motherboard and add-in board solutions.
Inventory
and Working Capital
Our management focuses considerable attention on managing our inventories and
other working-capital-related items. We manage inventories by communicating
with
our customers and then using our industry experience to forecast demand on
a
product-by-product basis. We then place manufacturing orders for our products
that are based on this forecasted demand. The quantity of products actually
purchased by our customers as well as shipment schedules are subject to
revisions that reflect changes in both the customers’ requirements and in
manufacturing availability. We generally maintain substantial inventories of
our
products because the semiconductor industry is characterized by short lead
time
orders and quick delivery schedules.
Research
and Development
We
believe that the continued introduction of new and enhanced products designed
to
deliver leading 3D graphics, HD video, audio, low power communications, storage,
and secure networking performance and features is essential to our future
success. Our research and development strategy is to focus on concurrently
developing multiple generations of GPUs, MCPs and Handheld GPUs using
independent design teams. Our research and development efforts are performed
within specialized groups consisting of software engineering, hardware
engineering, very large scale integration design engineering, process
engineering, architecture and algorithms. These groups act as a pipeline
designed to allow the efficient simultaneous development of multiple generations
of products.
A
critical component of our product development effort is our partnerships with
leaders in the computer aided design, or CAD, industry. We invest significant
resources in the development of relationships with industry leaders, including
Cadence Design Systems, Inc., and Synopsys, Inc., often assisting these
companies in the product definition of their new products. We believe that
forming these relationships and utilizing next-generation development tools
to
design, simulate and verify our products will help us remain at the forefront
of
the 3D graphics market and develop products that utilize leading-edge technology
on a rapid basis. We believe this approach assists us in meeting the new design
schedules of PC OEM and other manufacturers.
8
We
have
substantially increased our engineering and technical resources from fiscal
2005, and have 1,654 full-time employees engaged in research and development
as
of January 29, 2006, compared to 1,231 employees as of January 30, 2005. During
fiscal 2006, 2005 and 2004, we incurred research and development expenditures
of
$352.1 million, $335.1 million and $270.0 million, respectively.
Competition
The
market for GPUs, MCPs and handheld GPUs is intensely competitive and is
characterized by rapid technological change, evolving industry standards and
declining average selling prices. We believe that the principal competitive
factors in this market are performance, breadth of product offerings, access
to
customers and distribution channels, backward-forward software support,
conformity to industry standard application programming interfaces, or APIs,
manufacturing capabilities, price of processors and total system costs of add-in
boards or motherboards. We believe that our ability to remain competitive will
depend on how well we are able to anticipate the features and functions that
customers will demand and whether we are able to deliver consistent volumes
of
our products at acceptable levels of quality. We expect competition to increase
both from existing competitors and new market entrants with products that may
be
less costly than ours, or may provide better performance or additional features
not provided by our products. In addition, it is possible that new competitors
or alliances among competitors could emerge and acquire significant market
share.
An
additional significant source of competition is from companies that provide
or
intend to provide GPU, MCP, and Handheld GPU solutions. Some of our competitors
may have greater marketing, financial, distribution and manufacturing resources
than we do and may be more able to adapt to customer or technological changes.
Our current competitors include the following:
| · |
suppliers
of discrete MCPs that incorporate a combination of networking, audio,
communications and input/output, or I/O, functionality as part of
their
existing solutions, such as ATI Technologies, Inc., or ATI, Broadcom
Corporation, or Broadcom, and
Intel;
|
| · |
suppliers
of GPUs, including MCPs that incorporate 3D graphics functionality
as part
of their existing solutions, such as ATI, Intel, Matrox Electronics
Systems Ltd., Silicon Integrated Systems, Inc., VIA Technologies,
Inc.,
and XGI Technology Inc.; and
|
| · |
suppliers
of GPUs or GPU intellectual property for handheld and embedded devices
that incorporate advanced graphics functionality as part of their
existing
solutions, such as ATI, Bitboys, Broadcom, Fujitsu Limited, Imagination
Technologies Ltd., NEC Corporation, Qualcomm Incorporated, Renesas
Technology Corp., Seiko-Epson, Texas Instruments Incorporated, and
Toshiba
America, Inc.
|
We
expect
substantial competition from Intel’s publicized focus on moving to selling
platform solutions dominated by Intel products, such as when Intel achieved
success with its Centrino platform solution. In addition to its current Centrino
notebook platform initiative, and its announced upcoming desktop initiative
branded as VIIV, we expect that Intel is now focused on developing and selling
platform solutions for all segments including professional workstations and
servers. If Intel continues to pursue these initiatives, we may not be able
to
successfully compete in these segments.
If
and to
the extent we offer products outside of the consumer and enterprise PC,
notebook, workstation, PDA, cellular phone, and video game console markets,
we
may face competition from some of our existing competitors as well as from
companies with which we currently do not compete. We cannot accurately predict
if we will compete successfully in any new markets we may enter. If we are
unable to compete in our current and any new markets, our financial results
will
suffer.
Patents
and Proprietary Rights
We
rely
primarily on a combination of patents, trademarks, trade secrets, employee
and
third-party nondisclosure agreements and licensing arrangements to protect
our
intellectual property in the United States and internationally. Our issued
patents have expiration dates from September 4, 2007 to September 2, 2024.
We
have numerous patents issued and pending in the United States and in foreign
countries. Our patents and pending patent
9
applications
relate to technology used by us in connection with our products, including
our
digital media processors. We also rely on international treaties and
organizations and foreign laws to protect our intellectual property. We
continuously assess whether and where to seek formal protection for particular
innovations and technologies based on such factors as: the commercial
significance of our operations and our competitors’ operations in particular
countries and regions; the location in which our products are manufactured;
our
strategic technology or product directions in different countries; and the
degree to which intellectual property laws exist and are meaningfully enforced
in different jurisdictions.
Our
pending patent applications and any future applications may not be approved.
In
addition, any issued patents may not provide us with competitive advantages
or
may be challenged by third parties. The enforcement of patents by others may
harm our ability to conduct our business. Others may independently develop
substantially equivalent intellectual property or otherwise gain access to
our
trade secrets or intellectual property. Our failure to effectively protect
our
intellectual property could harm our business. We have licensed technology
from
third parties for incorporation in our digital media processors, and expect
to
continue to enter into license agreements for future products. These licenses
may result in royalty payments to third parties, the cross licensing of
technology by us or payment of other consideration. If these arrangements are
not concluded on commercially reasonable terms, our business could suffer.
Employees
As
of
January 29, 2006 we had 2,737 employees, 1,654 of whom were engaged in research
and development and 1,083 of whom were engaged in sales, marketing, operations
and administrative positions. None of our employees are covered by collective
bargaining agreements, and we believe our relationships with our employees
are
good.
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.
During the first quarter of fiscal 2006, we reorganized our operating segments
to bring all major product groups in line with our strategy to position
ourselves as the worldwide leader in programmable graphics processor
technologies. We now report financial information for four product-line
operating segments to our CODM: the GPU Business is composed of products that
support desktop PCs, notebook PCs and professional workstations; the MCP
Business is composed of NVIDIA nForce products that operate as a single-chip
or
chipset that can off-load system functions, such as audio processing and network
communications, and perform these operations independently from the host CPU;
our Handheld GPU Business is composed of products that support handheld personal
digital assistants, cellular phones and other handheld devices; and our Consumer
Electronics Business is concentrated in products that support video game
consoles and other digital consumer electronics devices and is composed of
revenue from our contractual arrangements with SCE to jointly develop a custom
GPU incorporating our next-generation GeForce GPU and SCE’s system solutions in
SCE’s PlayStation3, revenue from sales of our Xbox-related
products, revenue from our license agreement with Microsoft relating to the
successor product to their initial Xbox gaming console, the Xbox360, and related
devices, and digital media processor products. In addition to these operating
segments, we have the “All Other” category that includes human resources, legal,
finance, general administration and corporate marketing expenses, which total
$121.2 million and $101.5 million for fiscal 2006 and 2005, respectively, that
we do not allocate to our other operating segments. “All Other” also includes
the results of operations of other miscellaneous operating segments that are
neither individually reportable, nor aggregated with another operating segment.
Revenue in the “All Other” category is primarily derived from sales of
memory. All prior period amounts have been restated to reflect our new
reporting structure.
Our
CODM
does not review any information regarding total assets on an operating segment
basis. Operating segments do not record intersegment revenue, and, accordingly,
there is none to be reported. The accounting policies for segment
reporting are the same as for NVIDIA as a whole. The information included
in Note 15 of the Notes to Consolidated Financial Statements is hereby
incorporated by reference.
10
Executive
Officers of the Registrant
The
following sets forth certain information regarding our executive officers,
their
ages and their positions as of January 29, 2006:
|
Name
|
Age
|
Position
|
||
|
Jen-Hsun
Huang
|
42
|
President,
Chief Executive Officer and Director
|
||
|
Marvin
D. Burkett
|
63
|
Chief
Financial Officer
|
||
|
Ajay
K. Puri
|
51
|
Senior
Vice President, Worldwide Sales
|
||
|
Jeffrey
D. Fisher
|
47
|
Senior
Vice President, GPU Business Unit
|
||
|
David
M. Shannon
|
50
|
Senior
Vice President, General Counsel and Secretary
|
||
|
Daniel
F. Vivoli
|
45
|
Senior
Vice President, Marketing
|
Jen-Hsun
Huang co-founded
NVIDIA in April 1993 and has served as its President, Chief Executive Officer
and a member of the Board of Directors since its inception. From 1985 to 1993,
Mr. Huang was employed at LSI Logic Corporation, a computer chip manufacturer,
where he held a variety of positions, most recently as Director of Coreware,
the
business unit responsible for LSI’s “system-on-a-chip” strategy. From 1983 to
1985, Mr. Huang was a microprocessor designer for Advanced Micro Devices, a
semiconductor company. Mr. Huang holds a B.S.E.E. degree from Oregon State
University and an M.S.E.E. degree from Stanford University.
Marvin
D. Burkett joined
NVIDIA as Chief Financial Officer in September 2002. From February 2000 until
joining NVIDIA, Mr. Burkett was a financial consultant and served as Chief
Financial Officer of Arcot Systems, a security software company. From 1998
to 1999, Mr. Burkett was the Executive Vice President and Chief Financial
Officer of Packard Bell NEC. Mr. Burkett also previously spent 26 years at
Advanced Micro Devices, Inc., or AMD, where he held a variety of positions
including Chief Financial Officer, Senior Vice President and Corporate
Controller. Mr. Burkett holds B.S. and M.B.A. degrees from the University of
Arizona.
Ajay
K. Puri
joined
NVIDIA in December 2005 as Senior Vice President, Worldwide Sales. Prior to
NVIDIA, he held positions in sales, marketing, and general management over
a
22-year career at Sun Microsystems, Inc. Mr. Puri previously held marketing,
management consulting, and product development positions at Hewlett-Packard
Development Company, L.P., Booz Allen Hamilton Inc., and Texas Instruments
Incorporated. Mr. Puri holds an M.B.A. from Harvard University, an M.S.E.E.
degree from Caltech, and a B.S.E.E. degree from the University of
Minnesota.
Jeffrey
D. Fisher joined
in
July 1994 and served as the Executive Vice President, Worldwide Sales of NVIDIA
until December 2005, when he became Senior Vice President of the GPU Business
Unit. He has over 20 years of sales and marketing experience in the
semiconductor industry. Mr. Fisher holds a B.S.E.E. degree from Purdue
University and an M.B.A. degree from Santa Clara University.
David
M. Shannon joined
NVIDIA in August 2002 as Vice President and General Counsel. Mr. Shannon became
Secretary of NVIDIA in April 2005 and a Senior Vice President in December 2005.
From 1993 to 2002, Mr. Shannon held various counsel positions at Intel,
including the most recent position of Vice President and Assistant General
Counsel. Mr. Shannon also practiced for eight years in the law firm of
Gibson Dunn and Crutcher, focusing on complex commercial and high-technology
related litigation. Mr. Shannon holds B.A. and J.D. degrees from Pepperdine
University.
Daniel
F. Vivoli became
the Senior Vice President, Marketing in December 2005. Mr. Vivoli served as
Executive Vice President of Marketing from December 1997 to December 2005.
From
1988 to December 1997, Mr. Vivoli held management positions, most recently
as Vice President of Product Marketing, at Silicon Graphics, Inc., a computing
technology company. From 1983 to 1988, Mr. Vivoli held various marketing
positions at Hewlett-Packard Company. Mr. Vivoli holds a B.S.E.E. degree
from the University of Illinois at Champaign-Urbana.
11
Available
Information
Our
Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports
on
Form 8-K and, if applicable, amendments to those reports filed or furnished
pursuant to Section 13(a) of the Exchange Act are available free of charge
on or
through our Internet website, http://www.nvidia.com, as soon as reasonably
practicable after we electronically file such material with, or furnish it
to,
the Securities and Exchange Commission. Our website and the information
contained therein as connected thereto is not intended to be incorporated into
the Annual Report on Form 10-K.
ITEM
1A. RISK FACTORS
In
evaluating NVIDIA and our business, the following factors
should be considered in addition to the other information in this Annual Report
on Form 10-K. Any one of the following risks could seriously harm our
business, financial condition and results of operations, which could cause
our
stock price to decline. Additional risks and uncertainties not presently known
to us or that we currently deem immaterial may also impair our business
operations.
Risks
Related to Our Operations
Because
our gross margin for any period depends on a number of factors, our failure
to
forecast any change in such factors could adversely affect our gross
margin.
We
continue to pursue measures in an effort to improve our gross margin. Our
gross margin for any period depends on a number of factors, including the mix
of
our products sold, average selling prices, introduction of new products, sales
discounts, unexpected pricing actions by our competitors, the cost of product
components, and the yield of wafers produced by the foundries that manufacture
our products. If we incorrectly forecast the impact of the aforementioned
factors on our business, we may be unable to take action in time to counteract
any negative impact on our gross margin. In addition, if we are unable to
meet our gross margin target for any period or the target set by analysts,
the
trading price of our common stock may decline.
Our
failure to estimate customer demand properly may result in excess or obsolete
inventory or, conversely, may result in inadequate inventory levels, either
of
which could adversely affect our financial results.
Our
inventory purchases are based upon future demand forecasts, which may not
accurately predict the quantity or type of our products that our customers
will
want in the future. In forecasting demand, we must make multiple assumptions
any
of which may prove to be incorrect. Situations that may result in excess or
obsolete inventory, which could result in write-downs of the value of our
inventory and/or a forced reduction in average selling prices, and where our
gross margin could be adversely affected include:
| · |
if
there were a sudden and significant decrease in demand for our products;
|
| · |
if
there were a higher incidence of inventory obsolescence because of
rapidly
changing technology and customer requirements;
|
| · |
if
we fail to estimate customer demand properly for our older products
as our
newer products are introduced; or
|
| · |
if
our competition were to take unexpected competitive pricing actions.
|
Conversely,
if we underestimate our customers’ demand for either our older or newer
products, we may have inadequate manufacturing capability and may not be able
to
obtain sufficient inventory to fill our customers’ orders on a timely basis,
which could affect our revenue results. Even if we are able to increase
production levels to meet customer demand, we may not be able to do so in a
cost
effective manner. Inability to fill our customers' orders on a timely basis
could damage our customer relationships, result in lost revenue, cause a loss
in
market share or damage our reputation.
12
Because
we order materials in advance of anticipated customer demand our ability to
reduce our inventory purchase commitments quickly in response to any revenue
shortfalls is limited.
Substantially
all of our sales are made on the basis of purchase orders rather than long-term
agreements. As a result, we may commit resources to the production of products
without having received advance purchase commitments from customers. Any
inability to sell products to which we have devoted significant resources could
harm our business. In addition, cancellation or deferral of product orders
could
result in our holding excess inventory, which could adversely affect our gross
margin and restrict our ability to fund operations. We may build inventories
during periods of anticipated growth. Additionally, because we often sell a
substantial portion of our products in the last month of each quarter and,
therefore, we recognize a substantial portion of our revenue in the last month
of each quarter, we may not be able to reduce our inventory purchase commitments
in a timely manner in response to any revenue shortfalls. We could be subject
to
excess or obsolete inventories and be required to take corresponding inventory
write-downs if growth slows or if we incorrectly forecast product demand, which
could negatively impact our gross margin and financial results.
We
are dependent on key personnel and the loss of these employees could negatively
impact our business.
Our
performance is substantially dependent on the performance of our executive
officers and key employees. None of our executive officers or employees is
bound
by an employment agreement, meaning our relationships with our executive
officers and employees are at will. We do not have “key person” life insurance
policies on any of our employees. The loss of the services of any of our
executive officers, technical personnel or other key employees, particularly
Jen-Hsun Huang, our President and Chief Executive Officer, would harm our
business. Our success will depend on our ability to identify, hire, train and
retain highly qualified technical and managerial personnel. Our failure to
attract and retain the necessary technical and managerial personnel would harm
our business. The integration of new executives or personnel could disrupt
our
ongoing operations.
Failure
to achieve expected manufacturing yields for existing and/or new products would
reduce our gross margin and could adversely affect our ability to compete
effectively.
Semiconductor
manufacturing yields are a function both of product design, which is developed
largely by us, and process technology, which typically is proprietary to the
manufacturer. Since low yields may result from either design or process
technology failures, yield problems may not be effectively determined or
resolved until an actual product exists that can be analyzed and tested to
identify process sensitivities relating to the design rules that are used.
As a
result, yield problems may not be identified until well into the production
process. Resolution of yield problems requires cooperation by and communication
between us and the manufacturer.
Because
of our potentially limited access to wafer fabrication capacity from our
manufacturers, any decrease in manufacturing yields could result in an increase
in our per unit costs and force us to allocate our available product supply
among our customers. This could potentially harm customer relationships, our
reputation, our revenue and our gross profit. Our wafer manufacturers may be
unable to achieve or maintain acceptable manufacturing yields in the future.
Our
inability to achieve planned yields from our wafer manufacturers would reduce
our gross margin. We also face the risk of product recalls or product returns
resulting from design or manufacturing defects that are not discovered during
the manufacturing and testing process. A significant number of product returns
due to a defect or recall could damage our reputation and result in our
customers working with our competitors.
To
stay competitive, we may have to invest more resources in research and
development than anticipated, which could increase our operating expenses and
negatively impact our operating results.
If
new competitors, technological advances by existing competitors or other
competitive factors require us to invest significantly greater resources than
anticipated in research and development efforts, our operating expenses would
increase. We have substantially increased our engineering and technical
resources and have 1,654 full-time employees engaged in research and development
as of January 29, 2006, 1,231 employees as of January 30, 2005 and 1,057
employees as of January 25, 2004. Research and development expenditures were
$352.1 million, $335.1 million, and $270.0 million for fiscal 2006, 2005 and
2004, respectively. If we are required to invest significantly greater
13
resources
than anticipated in research and development efforts without an increase in
revenue, our operating results would decline. In order to remain competitive,
we
anticipate that we will continue to devote substantial resources to research
and
development, and we expect these expenses to increase in absolute dollars in
the
foreseeable future due to the increased complexity and the greater number of
products under development as well as hiring additional employees. Research
and
development expenses are likely to fluctuate from time to time to the extent
we
make periodic incremental investments in research and development and these
investments may be independent of our level of revenue.
Our
operating expenses are relatively fixed and we may have limited ability to
reduce operating expenses quickly in response to any revenue shortfalls.
Our
operating expenses, which are comprised of research and development expenses
and
sales, general and administrative expenses, represented 24.0% and 26.7% of
our
total revenue during fiscal 2006 and 2005, respectively. Operating expenses
included litigation settlement costs of $14.2 million in fiscal 2006. Since
we
often recognize a substantial portion of our revenue in the last month of each
quarter, we may not be able to adjust our operating expenses in a timely manner
in response to any revenue shortfalls. If we are unable to reduce operating
expenses quickly in response to any revenue shortfalls, our financial results
would be negatively impacted.
Failure
to transition to new manufacturing process technologies could adversely affect
our operating results and gross margin.
Our
strategy is to utilize the most advanced manufacturing process technology
appropriate for our products and available from commercial third-party
foundries. Use of advanced processes may have greater risk of initial yield
problems and higher product cost. Manufacturing process technologies are subject
to rapid change and require significant expenditures for research and
development. We continuously evaluate the benefits of migrating to smaller
geometry process technologies in order to improve performance and reduce costs.
We currently use 0.15 micron, 0.14 micron, 0.13 micron, 0.11 micron, and 90
nanometer process technologies for our families of GPUs, MCPs and Handheld
GPUs.
We
have
experienced difficulty in migrating to new manufacturing processes in the past
and, consequently, have suffered reduced yields, delays in product deliveries
and increased expense levels. We may face similar difficulties, delays and
expenses as we continue to transition our products to smaller geometry
processes. Moreover, we are dependent on our relationships with our third-party
manufacturers to migrate to smaller geometry processes successfully. The
inability by us or our third-party manufacturers to effectively and efficiently
transition to new manufacturing process technologies may adversely affect our
operating results and our gross margin.
Our
operating results are unpredictable and may fluctuate, and if our operating
results are below the expectations of securities analysts or investors, the
trading price of our stock could decline.
Many
of
our revenue components fluctuate and are difficult to predict, and our operating
expenses are largely independent of revenue in any particular period. It is,
therefore, difficult for us to accurately forecast revenue and profits or
losses. As a result, it is possible that in some quarters our operating results
could be below the expectations of securities analysts or investors, which
could
cause the trading price of our common stock to decline, perhaps substantially.
We believe that our quarterly and annual results of operations may continue
to
be affected by a variety of factors that could harm our revenue, gross profit
and results of operations.
Any
one or more of the factors discussed in this Annual Report on Form 10-K or
other
factors could prevent us from achieving our expected future revenue or net
income. Accordingly, we believe that period-to-period comparisons of our results
of operations should not be relied upon as an indication of future performance.
In addition, the results of any quarterly or full fiscal year period are not
necessarily indicative of results to be expected for a subsequent quarter or
a
full fiscal year.
14
Risks
Related to Our Products
If
we are unable to achieve design wins, our products may not be adopted by our
target markets and customers either of which could negatively impact our
financial results.
The
future success of our business depends to a significant extent on our ability
to
develop new competitive products for our target markets and customers. We
believe achieving design wins, which entails having our existing and future
products chosen for hardware components or subassemblies designed by PC OEMs,
ODMs, and add-in board and motherboard manufacturers, will aid our future
success. Our OEM, ODM, and add-in board and motherboard manufacturers’ customers
typically introduce new system configurations as often as twice per year,
typically based on spring and fall design cycles. Accordingly, when our
customers are making their design decisions, our existing products must have
competitive performance levels or we must timely introduce new products in
order
to be included in new system configurations. This requires that we do the
following:
| · |
anticipate
the features and functionality that customers and consumers will
demand;
|
| · |
incorporate
those features and functionalities into products that meet the exacting
design requirements of OEMs, ODMs, and add-in board and motherboard
manufacturers;
|
| · |
price
our products competitively; and
|
| · |
introduce
products to the market within the limited design cycle for OEMs,
ODMs, and
add-in board and motherboard manufacturers.
|
If
OEMs,
ODMs, and add-in board and motherboard manufacturers do not include our products
in their systems, they will typically not use our products in their design
systems until at least the next design configuration. Therefore, we endeavor
to
develop close relationships with our OEMs and ODMs in an attempt to allow us
to
better anticipate and address customer needs in new products so that our
products will achieve design wins.
Our
ability to achieve design wins also depends in part on our ability to identify
and ensure compliance with evolving industry standards. Unanticipated changes
in
industry standards could render our products incompatible with products
developed by major hardware manufacturers and software developers, including
AMD, Intel and Microsoft. Such changes would require us to invest significant
time and resources to redesign our products to ensure compliance with relevant
standards. If our products are not in compliance with prevailing industry
standards for a significant period of time, our ability to achieve design wins
could suffer. If we are unable to achieve new design wins for existing or new
customers, we may lose market share and our operating results would be
negatively impacted.
Achievement
of design wins may not result in the success of our products and could result
in
a loss of market share.
The
process of being qualified for inclusion in an OEM product can be lengthy and
could cause us to miss a cycle in the demand of end users for a particular
product feature, which also could result in a loss of market share and harm
our
business. Even if we do have design wins for OEM and ODM products, we may not
be
able to successfully develop or introduce new products in sufficient volumes
within the appropriate time to meet both the OEM, ODM, add-in board and
motherboard manufacturers’ design cycles as well as other market demand.
Additionally, even if we achieve a significant number of design wins, there
can
be no assurance that our OEM and ODM customers will actually take the design
to
production or that the design will be commercially successful. Furthermore,
there may be changes in the timing of product orders due to unexpected delays
in
the introduction of our customers’ products that could negatively impact the
success of our products. Any of these factors could result in a loss of market
share and could negatively impact our financial results.
Our
business results could be adversely affected if our product development efforts
are unsuccessful.
We
have in the past experienced delays in the development of some new products.
Any
delay in the future or failure of our GPUs or other processors to meet or exceed
specifications of competitive products could materially harm our business.
The
success of our new product introductions will depend on many factors, including
the following:
15
| · |
proper new
product definition;
|
| · |
timely
completion and introduction of new product designs;
|
| · |
the
ability of third-party manufacturers to effectively manufacture our
new
products in a timely manner;
|
| · |
dependence
on third-party subcontractors for assembly, testing and packaging
of our
products and in meeting product delivery schedules and maintaining
product
quality;
|
| · |
the
quality of any new products;
|
| · |
differentiation
of new products from those of our competitors;
|
| · |
market
acceptance of our products and our customers' products; and
|
| · |
availability
of adequate quantity and configurations of various types of memory
products.
|
A
critical component of our product development effort is our partnerships with
leaders in the computer aided design, or CAD, industry. We have invested
significant resources to develop relationships with industry leaders, including
Cadence Design Systems, Inc. and Synopsys, Inc., often assisting these companies
in the product definition of their new products. We believe that forming these
relationships and utilizing next-generation development tools to design,
simulate and verify our products will help us remain at the forefront of the
3D
graphics, communications and networking segments and develop products that
utilize leading-edge technology on a rapid basis. We believe this approach
assists us in meeting the new design schedules of PC OEMs and other
manufacturers. If these relationships are not successful, we may not be able
to
develop new products in a timely manner, which could result in a loss of market
share, a decrease in revenue and a negative impact on our operating results.
Our
failure to successfully develop, introduce or achieve market acceptance for
new
processors would harm our business.
Our
failure to identify new market or product opportunities or develop new products
could harm our business.
As
our
GPUs or other processors develop and competition increases, we anticipate that
product life cycles at the high end will remain short and average selling prices
will decline. In particular, we expect average selling prices and gross margins
for our processors to decline as each product matures and as unit volume
increases. As a result, we will need to introduce new products and enhancements
to existing products to maintain or improve overall average selling prices
and
gross margins. In order for our processors to achieve high volumes, leading
PC
OEMs, ODMs, and add-in board and motherboard manufacturers must select our
processor for design into their products, and then successfully complete the
designs of their products and sell them. We may be unable to successfully
identify new product opportunities or to develop and bring to market new
products in a timely fashion. In addition, we cannot guarantee that new products
we develop will be selected for design into PC OEMs’, ODMs’, and add-in board
and motherboard manufacturers’ products, that any new designs will be
successfully completed or that any new products will be sold.
As
the
complexity of our products and the manufacturing process for our products
increases, there is an increasing risk that we will experience problems with
the
performance of our products and that there will be delays in the development,
introduction or volume shipment of our products. We may experience difficulties
related to the production of current or future products or other factors that
may delay the introduction or volume sale of new products we develop. In
addition, we may be unable to successfully manage the production transition
risks with respect to future products. Failure to achieve any of the foregoing
with respect to future products or product enhancements could result in rapidly
declining average selling prices, reduced margins and reduced demand for
products or loss of market share. In addition, technologies developed by others
may render our processors non-competitive or obsolete or result in our holding
excess inventory, any of which would harm our business.
We
could suffer a loss of market share if our products contain significant defects.
Products
as complex as those we offer may contain defects or experience failures when
introduced or when new versions or enhancements to existing products are
released. We have in the past discovered defects and incompatibilities with
customers’ hardware in some of our products and may experience delays or loss of
revenue to correct any defects or incompatibilities in the future. Errors in
new
products or releases after commencement of
16
commercial
shipments could result in failure to achieve market acceptance or loss of design
wins. Our products typically go through only one verification cycle prior to
beginning volume production and distribution. As a result, our products may
contain defects or flaws that are undetected prior to volume production and
distribution. If these defects or flaws exist and are not detected prior to
volume production and distribution, we may be required to reimburse customers
for costs to repair or replace the affected products in the field. We may also
be required to incur additional research and development costs to find and
correct the defect, which could divert the attention of our management and
engineers from the development of new products. These costs could be significant
and could adversely affect our business and operating results. We may also
suffer a loss of reputation and/or a loss in our market share, either of which
could materially harm our financial results.
Risks
Related to Our Partners and Customers
There
can be no assurance that the PlayStation3 will achieve long term commercial
success.
In
April
2005, we finalized our definitive agreement with SCE to jointly develop a custom
GPU incorporating our next-generation GeForce GPU and SCE’s system solutions in
SCE’s PlayStation3. Our collaboration with SCE includes license fees and
royalties for the PlayStation3 and all derivatives, including next-generation
digital consumer electronics devices. In addition, we are licensing
software development tools for creating shaders and advanced graphics
capabilities to SCE. During fiscal 2006, we recognized $49.0 million of
revenue from our contractual arrangements with SCE to jointly develop a custom
GPU incorporating our next-generation GeForce GPU and SCE’s system solutions in
SCE’s PlayStation3. Depending on the ultimate success of this next-generation
platform, we expect to generate, starting in fiscal 2007, revenue ranging from
$50 million to $100 million annually from license fees and royalties over the
next five years, with the possibility of additional royalties for several years
thereafter. There can be no assurance that the PlayStation3 will achieve long
term commercial success, given the intense competition in the game console
market. Additionally, we do not have control over the launch date or
pricing of the Playstation3. As such, we do not have control over when we will
receive royalties. If we do not receive royalties as we anticipate, our revenue
and gross margin may be adversely affected.
We
may not be able to realize the potential financial or strategic benefits of
business acquisitions, which could hurt our ability to grow our business,
develop new products or sell our products.
In
the
past we have acquired and invested in other businesses that offered products,
services and technologies that we believed would help expand or enhance our
products and services or help expand our distribution channels. We may enter
into future acquisitions of, or investments in, businesses, in order to
complement or expand our current businesses or enter into a new business market.
For example, in
February
2006 we completed the acquisition of ULi Electronics, Inc., or ULi, a leading
developer of core logic technology, for approximately $53 million paid in cash.
If
we do
consider an acquisition, strategic alliance or joint venture, the negotiations
could divert management’s attention as well as other resources. For any previous
or future acquisition or investment, including ULi, the following risks could
impair our ability to grow our business and develop new products, and
ultimately, could impair our ability to sell our products, which could
negatively impact our growth or our financial results:
| · |
difficulty
in combining the technology, products, operations or workforce of
the
acquired business with our
business;
|
| · |
disruption
of our ongoing businesses:
|
| · |
difficulty
in realizing the potential financial or strategic benefits of the
transaction;
|
| · |
diversion
of management’s attention from our
business;
|
| · |
difficulty
in maintaining uniform standards, controls, procedures and
policies;
|
| · |
disruption
of or delays in ongoing research and development
efforts;
|
| · |
diversion
of capital and other resources;
|
| · |
assumption
of liabilities;
|
| · |
diversion
of resources and unanticipated expenses resulting from litigation
arising from potential or actual business acquisitions or
investments;
|
| · |
difficulties
in entering into new markets in which we have limited or no experience
and
where competitors in such markets have stronger positions; and
|
| · |
impairment
of relationships with employees and customers, or the loss of any
of our
key employees or of our target’s key employees, as a result of the
integration of new businesses and management personnel.
|
17
In
addition, the consideration for any future acquisition could be paid in cash,
shares of our common stock, the issuance of convertible debt securities or
a
combination of cash, convertible debt and common stock. If we pay all or a
portion of the purchase price in cash, our cash reserves would be reduced.
If
the consideration is paid with shares of our common stock, or convertible
debentures, the holdings of our existing stockholders would be diluted. We
cannot forecast the number, timing or size of future acquisitions, or the effect
that any such acquisitions might have on our operations or financial
results.
We
sell our products to a small number of customers and our business could suffer
by the loss of any of these customers.
We
have
only a limited number of customers and our sales are highly concentrated. Sales
to our two largest customers accounted for approximately 26%, 31%, and 36%
of
our revenue during fiscal 2006, 2005 and 2004, respectively. During the first
quarter of fiscal 2006, Microsoft indicated that it would not order any more
Xbox-related products from us after our second fiscal quarter. As a result,
the
second quarter of fiscal 2006 was the last quarter during which we recognized
revenue from the sale of our Xbox-related products to Microsoft. Although a
small number of our other customers represents the majority of our revenue,
their end customers include a large number of OEMs and system integrators
throughout the world who, in many cases, specify the graphics supplier. Our
sales process involves achieving key design wins with leading PC OEMs and major
system builders and supporting the product design into high volume production
with key CEMs, ODMs, motherboard and add-in board manufacturers. These design
wins in turn influence the retail and system builder channel that is serviced
by
CEMs, ODMs, motherboard and add-in board manufacturers. Our distribution
strategy is to work with a small number of leading independent CEMs, ODMs,
motherboard manufacturers, add-in board manufacturers and distributors, each
of
which has relationships with a broad range of system builders and leading PC
OEMs. If we were to lose sales to our PC OEMs, CEMs, ODMs, motherboard and
add-in board manufacturers and were unable to replace the lost sales with sales
to different customers, or if they were to significantly reduce the number
of
products they order from us, our revenue may not reach or exceed the expected
level in any period, which could harm our financial condition and our results
of
operations.
We
depend on foundries and independent contractors to manufacture our products
and
these third parties may not be able to satisfy our manufacturing requirements,
which would harm our business.
We
do not
manufacture the semiconductor wafers used for our products and do not own or
operate a wafer fabrication facility. Our products require wafers manufactured
with state-of-the-art fabrication equipment and techniques. We utilize
industry-leading suppliers, such as Chartered, SMIC, TSMC, and UMC to produce
our semiconductor wafers and utilize independent subcontractors to perform
assembly, testing and packaging. We depend on these suppliers to allocate to
us
a portion of their manufacturing capacity sufficient to meet our needs, to
produce products of acceptable quality and at acceptable manufacturing yields,
and to deliver those products to us on a timely basis at acceptable prices.
These manufacturers may be unable to meet our near-term or long-term
manufacturing or pricing requirements. We obtain manufacturing services on
a
purchase order basis. The foundries we use have no obligation to provide us
with
any specified minimum quantities of product. Suppliers, such as Chartered,
SMIC,
TSMC, and UMC, fabricate wafers for other companies, including some of our
competitors, and could choose to prioritize capacity for other users, reduce
or
eliminate deliveries to us, or increase the prices that they charge us on short
notice. If we are unable to meet customer demand due to reduced or eliminated
deliveries, we could lose sales to customers, which would negatively impact
our
revenue and our reputation. Because the lead-time needed to establish a
strategic relationship with a new manufacturing partner could be several
quarters, there is no readily available alternative source of supply for any
specific product. In addition, the time and effort to qualify a new foundry
could result in additional expense, diversion of resources or lost sales any
of
which would negatively impact our financial results. We believe that long-term
market acceptance for our products will depend on reliable relationships with
third-party manufacturers we may use to ensure adequate product supply and
competitive pricing so that we are able to respond to customer demand.
18
We
are dependent on third parties located outside of the United States for
assembly, testing and packaging of our products, which reduces our control
over
the delivery and quantity of our products.
Our
processors are assembled and tested by independent subcontractors, such as
ASE,
Amkor Technology Inc., KYEC, SPIL, and STATS ChipPAC Incorporated, all of which
are located outside of the United States. We do not have long-term agreements
with any of these subcontractors. As a result of our dependence on third-party
subcontractors for assembly, testing and packaging of our products, we do not
directly control product delivery schedules or product quality. Demand for
qualified independent subcontractors to assemble and test products is high.
If demand for these subcontractors exceeds the number of qualified
subcontractors, we may experience capacity constraints, which could result
in
product shortages, a decrease in the quality of our products or an increase
in
product cost. Any of our subcontractors may decide to prioritize the orders
of
one of our competitors over our orders. Any product shortages, quality assurance
problems or political instability outside of the United States could increase
the costs of manufacture, assembly or testing of our products, which could
cause
our gross margin to decline. Due to the amount of time typically required to
qualify assemblers and testers, we could experience significant delays in the
shipment of our products if we are required to find alternative third parties
to
assemble or test our products or components. Any such delays could result in
a
loss of reputation or a decrease in sales to our customers.
We
rely on third-party vendors to supply software development tools to us for
the
development of our new products and we may be unable to obtain the tools
necessary to develop these products.
In
the
design and development of new products and product enhancements, we rely on
third-party software development tools. While we currently are not dependent
on
any one vendor for the supply of these tools, some or all of these tools may
not
be readily available in the future. For example, we have experienced delays
in
the introduction of products in the past as a result of the inability of then
available software development tools to fully simulate the complex features
and
functionalities of our products. The design requirements necessary to meet
consumer demands for more features and greater functionality from processors
in
the future may exceed the capabilities of the software development tools that
are available to us. If the software development tools we use become unavailable
or fail to produce designs that meet consumer demands, our business could
suffer.
Difficulties
in collecting accounts receivable could result in significant charges against
income and the deferral of revenue recognition from sales to affected customers,
which could harm our operating results and financial condition.
Our
accounts receivable are highly concentrated and make us vulnerable to adverse
changes in our customers' businesses and to downturns in the economy and the
industry. In addition, difficulties in collecting accounts receivable or the
loss of any significant customer could materially and adversely affect our
financial condition and results of operations. We continue to work directly
with
more foreign customers and it may be difficult to collect accounts receivable
from them. We maintain an allowance for doubtful accounts for estimated losses
resulting from the inability of our customers to make required payments. This
allowance consists of an amount identified for specific customers and an amount
based on overall estimated exposure. In addition, we purchase credit insurance
on selected customers’ accounts receivable balances in an effort to further
mitigate our exposure for such losses. If the financial condition of our
customers were to deteriorate, resulting in an impairment of their ability
to
make payments, additional allowances may be required, we may be required to
defer revenue recognition on sales to affected customers and we may be required
to pay higher credit insurance premiums, which could adversely affect our
operating results. We may have to record additional reserves or write-offs
and/or defer revenue on certain sales transactions in the future, which could
negatively impact our financial results.
19
Risks
Related to Our Competition
The
market for GPU, MCP, and Handheld GPUs is highly competitive and we may be
unable to compete.
The
market for GPUs, MCPs and Handheld GPUs is intensely competitive and is
characterized by rapid technological change, evolving industry standards and
declining average selling prices. We believe that the principal competitive
factors in this market are performance, breadth of product offerings, access
to
customers and distribution channels, backward-forward software support,
conformity to industry standard APIs, manufacturing capabilities, price of
processors and total system costs of add-in boards and motherboards. We believe
that our ability to remain competitive will depend on how well we are able
to
anticipate the features and functions that customers will demand and whether
we
are able to deliver consistent volumes of our products at acceptable levels
of
quality. We expect competition to increase both from existing competitors and
new market entrants with products that may be less costly than ours, or may
provide better performance or additional features not provided by our products,
which could harm our business.
An
additional significant source of competition is from companies that provide
or
intend to provide GPU, MCP, and Handheld GPU solutions. Some of our competitors
may have or be able to obtain greater marketing, financial, distribution and
manufacturing resources than we do and may be more able to adapt to customer
or
technological changes. Our current competitors include the following:
| · |
suppliers
of discrete MCPs that incorporate a combination of networking, audio,
communications and input/output, or I/O, functionality as part of
their
existing solutions, such as ATI Technologies, Inc., or ATI, Broadcom
Corporation, or Broadcom, and
Intel;
|
| · |
suppliers
of GPUs, including MCPs that incorporate 3D graphics functionality
as part
of their existing solutions, such as ATI, Intel, Matrox Electronics
Systems Ltd., Silicon Integrated Systems, Inc., VIA Technologies,
Inc.,
and XGI Technology Inc.; and
|
| · |
suppliers
of GPUs or GPU intellectual property for handheld and embedded devices
that incorporate advanced graphics functionality as part of their
existing
solutions, such as ATI, Bitboys, Broadcom, Fujitsu Limited, Imagination
Technologies Ltd., NEC Corporation, Qualcomm Incorporated, Renesas
Technology Corp., Seiko-Epson, Texas Instruments Incorporated, and
Toshiba
America, Inc.
|
If
and to
the extent we offer products outside of the consumer and enterprise PC,
notebook, workstation, PDA, cellular phone, and video game console markets,
we
may face competition from some of our existing competitors as well as from
companies with which we currently do not compete. We cannot accurately predict
if we will compete successfully in any new markets we may enter. If we are
unable to compete in our current and any new markets, our financial results
will
suffer.
As
Intel continues to pursue platform solutions, we may not be able to successfully
compete.
We
expect
substantial competition from Intel’s publicized focus on moving to selling
platform solutions dominated by Intel products, such as when Intel achieved
success with its Centrino platform solution. In addition to its current Centrino
notebook platform initiative, and its announced upcoming desktop initiative
branded as VIIV, we expect that Intel is now focused on developing and selling
platform solutions for all segments including professional workstations and
servers. If Intel continues to pursue these initiatives, we may not be able
to
successfully compete in these segments.
Risks
Related to Market Conditions
We
are subject to risks associated with international operations which may harm
our
business.
A
significant portion of our semiconductor wafers are manufactured, assembled,
tested and packaged by third-parties located outside of the United States.
Additionally, we generated 84%, 76% and 75% of our total revenue from sales
to
customers outside of the United States and other Americas for fiscal 2006,
2005
and 2004, respectively. The manufacture, assembly, test and packaging of our
products outside of the United States and sales to these
20
customers
outside of the United States and other Americas subjects us to a number of
risks
associated with conducting business outside of the United States and other
Americas, including, but not limited to:
| · |
international
economic and political conditions;
|
| · |
unexpected
changes in, or impositions of, legislative or regulatory requirements;
|
| · |
labor
issues in foreign countries;
|
| · |
cultural
differences in the conduct of business;
|
| · |
inadequate
local infrastructure;
|
| · |
delays
resulting from difficulty in obtaining export licenses for certain
technology, tariffs, quotas and other trade barriers and
restrictions;
|
| · |
transportation
delays;
|
| · |
longer
payment cycles;
|
| · |
difficulty
in collecting accounts receivable;
|
| · |
fluctuations
in currency exchange rates;
|
| · |
imposition
of additional taxes and penalties;
|
| · |
different
legal standards with respect to protection of intellectual property;
|
| · |
the
burdens of complying with a variety of foreign laws; and
|
| · |
other
factors beyond our control, including terrorism, civil unrest, war
and
diseases such as severe acute respiratory syndrome and the Avian
flu.
|
If
sales
to any of our customers outside of the United States and other Americas are
delayed or cancelled because of any of the above factors, our revenue may be
negatively impacted.
We
have
offices outside of the United States, including offices in Taiwan, Japan, Korea,
China, Hong Kong, India, France, Russia, Germany and England. During fiscal
2006, we substantially increased our international employee resources from
242
employees as of January 30, 2005 to 615 full-time employees as of January 29,
2006. On
February 20, 2006, we completed the acquisition of ULi, a leading developer
of
core logic technology, which added approximately $18 to $22 employees to our
international operations.
Our
operations in our international locations are subject to many of the risks
contained in the above list. We intend to continue to expand our international
operations and to open other international offices. Difficulties with our
international operations, including finding appropriate staffing and office
space, may divert management’s attention and other resources any of which could
negatively impact our operating results.
Currently,
all of our arrangements with third-party manufacturers and subcontractors
provide for pricing and payment in United States dollars as are sales to our
customers located outside of the United States and other Americas. Increases
in
the value of the United States’ dollar relative to other currencies would make
our products more expensive, which would negatively impact our ability to
compete. Conversely, decreases in the value of the United States’ dollar
relative to other currencies could result in our suppliers raising their prices
in order to continue doing business with us. To date, we have not engaged in
any
currency hedging activities, although we may do so in the future. Fluctuations
in currency exchange rates could harm our business in the future.
We
are dependent on the PC market and the rate of its growth has and may in the
future have a negative impact on our business.
We
derive
the majority of our revenue from the sale of products for use in the desktop
PC
and notebook PC markets, including professional workstations. We expect to
continue to derive most of our revenue from the sale or license of products
for
use in the desktop PC and notebook PC markets in the next several years. A
reduction in sales of PCs, or a reduction in the growth rate of PC sales, will
reduce demand for our products. Moreover, changes in demand could be large
and
sudden. Since PC manufacturers often build inventories during periods of
anticipated growth, they may be left with excess inventories if growth slows
or
if they incorrectly forecast product transitions. In these cases, PC
manufacturers may abruptly suspend substantially all purchases of additional
inventory from suppliers like us until the excess inventory has been absorbed,
which would have a negative impact on our business.
21
If
our products do not continue to be accepted by the
consumer and enterprise PC, notebook, workstation, PDA, cellular phone, and
video game console markets
or if the demand in these markets for new and innovative products decreases,
our
business and operating results would suffer.
Our
success depends in part upon continued broad adoption of our processors for
3D
graphics in consumer
and enterprise PC, notebook, workstation, PDA, cellular phone, and video game
console applications.
The market for processors has been characterized by unpredictable and sometimes
rapid shifts in the popularity of products, often caused by the publication
of
competitive industry benchmark results, changes in pricing of dynamic
random-access memory devices and other changes in the total system cost of
add-in boards, as well as by severe price competition and by frequent new
technology and product introductions. Only a small number of products have
achieved broad market acceptance and such market acceptance, if achieved, is
difficult to sustain due to intense competition and frequent new technology
and
product introductions. Since the GPU Business is our core business, our
financial results would suffer if for any reason our current or future GPUs
do
not continue to achieve widespread acceptance in the PC market. If we are unable
to complete the timely development of products or if we were unable to
successfully and cost-effectively manufacture and deliver products that meet
the
requirements of the consumer and enterprise PC, notebook, and workstation
markets, we may experience a decrease in revenue which could negatively impact
our operating results. Additionally, there can be no assurance that the industry
will continue to demand new products with improved standards, features or
performance. If our customers and the market do not continue to demand new
products with increased performance, features, functionality or standards,
sales
of our products could decline.
Our
failure to comply with any applicable environmental regulations could result
in
a range of consequences, including fines, suspension of production, excess
inventory, sales limitations, and criminal and civil liabilities.
We
may be
subject to various state, federal and international laws and regulations
governing the environment, including restricting the presence of certain
substances in electronic products and making producers of those products
financially responsible for the collection, treatment, recycling and disposal
of
those products. For example, the semiconductor industry is moving towards
becoming compliant with the Restriction of Hazardous Substances Directive,
or
RoHS Directive, which will become effective in July 2006. The RoHS Directive
is
European legislation that restricts the use of a number of substances, including
lead. Similarly, the State of California has adopted certain restrictions,
which
go into effect in 2007, that restrict the use of certain materials in electronic
products, that are intended to harmonize with the RoHS directive and other
states are contemplating similar legislation. China has promulgated use
restrictions on the same substances as the RoHS directive, but has not yet
defined either the scope of the affected products or an effective date of any
such restrictions.
Also,
we
could face significant costs and liabilities in connection with the Waste
Electrical and Electronic Equipment Directive, or WEEE. The WEEE directs members
of the European Union to enact laws, regulations, and administrative provisions
to ensure that producers of electric and electronic equipment are financially
responsible for the collection, recycling, treatment and environmentally
responsible disposal of certain products sold into the market after August
15,
2005 and from products in use prior to that date that are being replaced. We
continue to evaluate the impact of specific registration and compliance
activities required by WEEE.
It
is
possible that unanticipated supply shortages, delays or excess non-compliant
inventory may occur as a result of such regulations. Failure to comply with
any applicable environmental regulations could result in a range of consequences
including fines, suspension of production, excess inventory, sales limitations,
and criminal and civil liabilities.
Hostilities
involving the United States and/or terrorist attacks could harm our business.
The
financial, political, economic and other uncertainties following the terrorist
attacks on the United States in 2001 led to a weakening of the global
economy. Similar terrorist acts and/or the threat of future outbreak or
continued escalation of hostilities involving the United States and Iraq or
other countries could adversely affect the growth rate of our revenue and have
an adverse effect on our business, financial condition or results of operations.
In addition, any escalation in these events or similar future events may disrupt
our operations or those of our customers, distributors and suppliers, which
could also adversely affect our business, financial condition or results of
operations.
22
Our
business is cyclical in nature and an industry downturn could harm our financial
results.
Our
business is directly affected by market conditions in the highly cyclical
semiconductor industry, including alternating periods of overcapacity and
capacity constraints, variations in manufacturing costs and yields, significant
expenditures for capital equipment and product development and rapid
technological change. If we are unable to respond to changes in our industry,
which can be unpredictable and rapid, in an efficient and timely manner, our
operating results could suffer. In particular, from time to time, the
semiconductor industry has experienced significant and sometimes prolonged
downturns characterized by diminished product demand and accelerated erosion
of
average selling prices. If we cannot take appropriate actions such as reducing
our manufacturing or operating costs to sufficiently offset declines in demand
during a downturn, our revenue and earnings will suffer.
Political
instability in Taiwan and in The People’s Republic of China or elsewhere could
harm our business.
Because
of our reliance on foundries and independent contractors located in Taiwan
and
The People’s Republic of China, and because we have offices in these locations,
our business may be harmed by political instability in Taiwan, including the
worsening of the strained relations between The People’s Republic of China and
Taiwan. Also if relations between the United States and The People’s Republic of
China are strained due to foreign relations events. If any of our suppliers
experienced a substantial disruption in their operations, as a result of a
natural disaster, political unrest, economic instability, acts of terrorism
or
war, equipment failure or other cause, it could harm our business.
We
are exposed to fluctuations in the market values of our portfolio investments
and in interest rates.
We
invest
in a variety of financial instruments, consisting principally of investments
in
commercial paper, money market funds and highly liquid debt securities of
corporations, municipalities and the United States government and its agencies.
These investments are denominated in United States dollars.
We
account for our investment instruments in accordance with SFAS No. 115. All
of
the cash equivalents and marketable securities are treated as
“available-for-sale” under SFAS No. 115. Investments in both fixed rate and
floating rate interest earning instruments carry a degree of interest rate
risk.
Fixed rate debt securities may have their market value adversely impacted due
to
a rise in interest rates, while floating rate securities may produce less income
than expected if interest rates fall. Due in part to these factors, our future
investment income may fall short of expectations due to changes in interest
rates or if the decline in fair value of our publicly traded equity investments
is judged to be other-than-temporary. We may suffer losses in principal if
forced to sell securities that decline in market value due to changes in
interest rates. However, because our debt securities are classified as
“available-for-sale,” no gains or losses are recognized due to changes in
interest rates unless such securities are sold prior to maturity.
Risks
Related to Government Action, Regulatory Action, Intellectual Property, and
Litigation
Expensing
employee stock options in future periods will materially and aversely affect
our
reported operating results and could adversely affect our competitive position
as well.
Since
inception, we have used stock options and our employee stock purchase program
as
fundamental components of our compensation packages. To date we generally have
not recognized compensation cost for employee stock options or shares sold
pursuant to our employee stock purchase program. We believe that these
incentives directly motivate our employees and, through the use of vesting,
encourage our employees to remain with us. In December 2004, the FASB issued
SFAS No. 123(R), Share-Based
Payment,
which
requires the measurement and recognition of compensation expense for all
stock-based compensation payments. In April 2005, the SEC delayed the effective
date of SFAS No. 123(R), which is now effective for annual periods that begin
after June 15, 2005. SFAS No. 123(R) requires that we record compensation
expense for stock options and our employee stock purchase plan
23
using
the
fair value of those awards. Expensing these incentives in future periods will
materially and adversely affect our reported operating results as the
stock-based compensation expense would be charged directly against our reported
earnings. We anticipate that our stock-based compensation expense will be
approximately $18 to $22 million for the first quarter of fiscal 2007 and we
are
unsure how the market will react to this adverse affect on our operating
results, which could impact our stock price.
To
the
extent that SFAS No. 123(R) makes it more expensive to grant stock options
or to
continue to have an employee stock purchase program, we may decide to incur
increased cash compensation costs. In addition, actions that we may take to
reduce stock-based compensation expense that may be more severe than any actions
our competitors may implement may make it difficult to attract, retain and
motivate employees, which could adversely affect our competitive position as
well as our business and operating results.
We
are currently involved in patent litigation, which, if not resolved favorably,
could require us to pay damages.
We
are
currently involved in patent litigation. On October 19, 2004, Opti Incorporated,
or Opti, filed a complaint for patent infringement against us in the United
States District Court for the Eastern District of Texas. Opti asserts that
unspecified NVIDIA chipsets infringe five United States patents held by Opti.
Opti seeks unspecified damages for our alleged conduct, attorneys fees and
triple damages because of our alleged willful infringement of these patents.
NVIDIA filed a response to this complaint in December 2004. After a case
management conference in July 2005, discovery began and a trial date has now
been set for July 2006. A court mandated mediation was held in January 2006
and
did not resolve the matter. We believe the claims asserted against us are
without merit and we will continue to defend ourselves vigorously.
In
August
2004, a Texas limited partnership named American Video Graphics, LP, or AVG,
filed three separate complaints for patent infringement against various
corporate defendants, not including NVIDIA, in the United States District Court
for the Eastern District of Texas. AVG initially asserted that each of the
approximately thirty defendants sells products that infringe one or more of
seven separate patents that AVG claims relate generally to graphics processing
functionality. In November 2004, NVIDIA sought and was granted permission to
intervene in two of the three pending AVG lawsuits. Our complaint in
intervention alleged that both of the patents in suit were invalid and that,
to
the extent AVG’s claims target NVIDIA products, the asserted patents were not
infringed.
On
December 19, 2005, AVG and substantially all of the named defendants and
intervenors, including NVIDIA, settled all of pending claims; the only surviving
claims will relate solely to two non-settling defendants. As part of the
settlement, the defendants and intervenors paid an undisclosed aggregate amount
to AVG. In exchange, all pending claims between the settling parties were
dismissed with prejudice, and AVG granted to all settling parties a full release
of all claims for past damages and a full license for all future sales of
accused products under all of AVG’s patents, including the patents in suit. In
addition, as part of the settlement, all settling defendants and intervenors
fully and finally waived any claims for indemnification they may have had
against any other settling party.
Our
defenses against Opti may be unsuccessful. If this case goes forward, or if
other patent litigation matters involving us arise, we expect that they will
result in additional legal and other costs, such as those costs associated
with
the AVG suit, regardless of the outcome, which could be
substantial.
Our
industry is characterized by vigorous protection and pursuit of intellectual
property rights and positions which could result in significant
expense.
The
semiconductor industry is characterized by vigorous protection and pursuit
of
intellectual property rights and positions, which have resulted in protracted
and expensive litigation. The graphics processor industry, in particular, has
been recently characterized by the aggressive pursuit of intellectual property
positions, and we expect our competitors and others will continue to
aggressively pursue intellectual property positions. The technology that we
use
to design and develop our products and that is incorporated into our products
may be subject to claims that it infringes the patents or intellectual property
rights of others. Our success is dependent on our ability to
24
develop
new products without infringing or misappropriating the intellectual property
rights of others or by licensing the intellectual property of third parties.
As
such, we have licensed technology from third parties for incorporation into
our
products, and expect to continue to enter into license agreements with third
parties for future products. These licenses may result in royalty payments
to
third parties, the cross licensing of technology by us or payment of other
consideration. If these arrangements are not concluded on commercially
reasonable terms, or at all, our competitive position and our business could
suffer.
Our
ability to compete will be harmed if we are unable to adequately protect our
intellectual property.
We
rely
primarily on a combination of patents, trademarks, trade secrets, employee
and
third-party nondisclosure agreements and licensing arrangements to protect
our
intellectual property in the United States and internationally. We have numerous
patents issued, allowed and pending in the United States and in foreign
countries. Our patents and pending patent applications relate to technology
used
by us in connection with our products, including our processors. We also rely
on
international treaties and organizations and foreign laws to protect our
intellectual property. The laws of certain foreign countries in which our
products are or may be manufactured or sold, including various countries in
Asia, may not protect our products or intellectual property rights to the same
extent as by the laws of the United States. This makes the possibility of piracy
of our technology and products more likely. We continuously assess whether
and
where to seek formal protection for particular innovations and technologies
based on such factors as the:
| · |
commercial
significance of our operations and our competitors’ operations in
particular countries and regions;
|
| · |
location
in which our products are manufactured;
|
| · |
our
strategic technology or product directions in different countries;
and
|
| · |
degree
to which intellectual property laws exist and are meaningfully enforced
in
different jurisdictions.
|
Our
pending patent applications and any future applications may not be approved.
In
addition, any issued patents may not provide us with competitive advantages
or
may be challenged by third parties. The enforcement of patents by others may
harm our ability to conduct our business. Others may independently develop
substantially equivalent intellectual property or otherwise gain access to
our
trade secrets or intellectual property. Our failure to effectively protect
our
intellectual property could harm our business.
Litigation
to defend against alleged infringement of intellectual property rights or to
enforce our intellectual property rights and the outcome of such litigation
could result in substantial costs to us.
From
time
to time we receive notices or are included in legal actions alleging that we
have infringed patents or other intellectual property rights owned by third
parties. We expect that, as the number of issued hardware and software patents
increases, and as competition in our product lines intensifies, the volume
of
intellectual property infringement claims may increase. We may become involved
in future lawsuits or other legal proceedings alleging patent infringement
or
other intellectual property rights violations by us or by our customers that
we
have agreed to indemnify them for certain claims of infringement arising out
of
the sale of our products to these customers. In addition, litigation or other
legal proceedings may be necessary to:
| · |
assert
claims of infringement;
|
| · |
enforce
our patents
|
| · |
protect
our trade secrets or know-how; or
|
| · |
determine
the enforceability, scope and validity of the propriety rights of
others.
|
If
infringement claims are made against us, we may seek licenses under the
claimants’ patents or other intellectual property rights. In addition, we or an
indemnified customer may be required to obtain a license to a third parties’
patents or intellectual property. However, licenses may not be offered to us
at
all or on terms acceptable to us, particularly by competitors. If we fail to
obtain a license from a third party for technology that we use or that is used
in one of our products used by an indemnified customer, we could be subject
to
substantial liabilities or have to suspend or discontinue the manufacture and
sale of one or more of our products either of which could reduce our revenue
and
harm our business. Furthermore, the indemnification of a customer may increase
our operating expenses which could negatively impact our operating
results.
25
Alternatively,
we may initiate claims or litigation against third parties for infringement
of
our proprietary rights or to establish the validity of our proprietary rights,
which could be costly. If we have to initiate a claim, our operating expenses
may increase which could negatively impact our operating results. Additionally,
if one of our patents is invalidated or found to be unenforceable, we would
be
unable to license the patent which could result in a loss of
revenue.
Regardless
of the outcome, litigation or negotiations involving intellectual property
rights can be very costly and can divert management’s attention from other
matters. We may be unsuccessful in defending or pursuing these lawsuits or
claims. An unfavorable ruling could include significant damages, invalidation
of
a patent or family of patents, indemnification of customers, payment of lost
profits, or, when it has been sought, injunctive relief.
Our
operating results may be adversely affected if we are subject to unexpected
tax
liabilities.
We
are
subject to taxation by a number of taxing authorities both in the United States
and throughout the world. Tax rates vary among the jurisdictions in which we
operate. Significant judgment is required in determining our provision for
our
income taxes as there are many transactions and calculations where the ultimate
tax determination is uncertain. Although we believe our tax estimates are
reasonable, any of the below could cause our effective tax rate to be materially
different than that which is reflected in historical income tax provisions
and
accruals:
| · |
the
jurisdictions in which profits are determined to be earned and taxed;
|
| · |
adjustments
to estimated taxes upon finalization of various tax returns;
|
| · |
changes
in available tax credits;
|
| · |
changes
in share-based compensation expense;
|
| · |
changes
in tax laws, the interpretation of tax laws either in the United
States or
abroad or the issuance of new interpretative accounting guidance
related
to uncertain transactions and calculations where the tax treatment
was
previously uncertain; and
|
| · |
the
resolution of issues arising from tax audits with various tax
authorities.
|
Should
additional taxes be assessed as a result of any of the above, our operating
results could be adversely affected.
While
we believe that we currently have adequate internal control over financial
reporting, we are exposed to risks from legislation requiring companies to
evaluate those internal controls.
Section 404
of the Sarbanes-Oxley Act of 2002 requires our management to report on, and
our
independent registered public accounting firm to attest to, the effectiveness
of
our internal control structure and procedures for financial reporting. We have
an ongoing program to perform the system and process evaluation and testing
necessary to comply with these requirements. This legislation is relatively
new
and neither companies nor accounting firms have significant experience in
complying with its requirements. As a result, we have incurred, and expect
to
continue to incur increased expense and to devote additional management
resources to Section 404 compliance. In the event that our chief executive
officer, chief financial officer or our independent registered public accounting
firm determine that our internal control over financial reporting is not
effective as defined under Section 404, investor perceptions of us may be
adversely affected and could cause a decline in the market price of our stock.
Risks
Related to our Common Stock
Our
stock price may continue to experience significant short-term fluctuations.
The
trading price of our common stock has fluctuated greatly. These price
fluctuations have been rapid and severe. We believe that our quarterly and
annual results of operations may continue to be affected by a variety of
26
factors
that could harm our revenue, gross profit and results of operations, any of
which could impact our stock price. Additionally, the price of our common stock
may continue to fluctuate greatly in the future due to factors that are
non-company specific, such as the decline in the United States and/or
international economies, acts of terror against the United States, war or due
to
a variety of company specific factors, including quarter to quarter variations
in our operating results, shortfalls in revenue, gross margin or earnings from
levels expected by securities analysts and the other factors discussed in these
risk factors.
Provisions
in our certificate of incorporation, our bylaws and our agreement with Microsoft
could delay or prevent a change in control.
Our
certificate of incorporation and bylaws contain provisions that could make
it
more difficult for a third party to acquire a majority of our outstanding voting
stock. These provisions include the following:
| · |
the
ability of the board of directors to create and issue preferred stock
without prior stockholder
approval;
|
| · |
the
prohibition of stockholder action by written consent;
|
| · |
a
classified board of directors; and
|
| · |
advance
notice requirements for director nominations and stockholder proposals.
|
On
March
5, 2000, we entered into an agreement with Microsoft in which we agreed to
develop and sell graphics chips and to license certain technology to Microsoft
and its licensees for use in the Xbox. Under the agreement, if an individual
or
corporation makes an offer to purchase shares equal to or greater than 30%
of
the outstanding shares of our common stock, Microsoft may have first and last
rights of refusal to purchase the stock. The Microsoft provision and the other
factors listed above could also delay or prevent a change in control of NVIDIA.
ITEM
1B. UNRESOLVED STAFF COMMENTS
None.
ITEM
2. PROPERTIES
Our
headquarters complex is located on a leased site in Santa Clara, California
and
is comprised of five buildings. Additionally, we lease three other buildings
in
Santa Clara with one used as warehouse space and the other two used as lab
space. Outside of Santa Clara, we lease space in Austin and Houston, Texas;
Berkeley, California; Beaverton, Oregon; Bedford, Massachusetts; Bellevue,
Washington; Chandler, Arizona; Durham, North Carolina; Greenville, South
Carolina; Fort Collins, Colorado; and Redmond, Washington. These facilities
are
used as design centers and/or sales and administrative offices.
Outside
of the United States, we lease space in Taipei and Hsin Chu, Taiwan; Tokyo,
Japan; Seoul, Korea; Beijing, Shanghai, and Shenzhen, China; Wanchai, and
Shatin, New Territories, Hong Kong; Bangalore, and Pune, India; Paris, France;
Moscow, Russia; Munich and Wurselen, Germany; and Theale, England. These
facilities are used primarily to support our customers and operations and as
sales and administrative offices. The office lease spaces in Wurselen, Germany,
Shenzhen, China and Bangalore and Pune, India are used primarily as design
centers.
We
believe that we currently have sufficient facilities to conduct our operations
for the next twelve months, although we expect to lease additional facilities
throughout the world as our business requires. For additional information
regarding obligations under leases, see Note 11 to the Consolidated Financial
Statements under the subheading “Lease Obligations,” which information is hereby
incorporated by reference.
27
ITEM
3. LEGAL PROCEEDINGS
3dfx
On
December 15, 2000, NVIDIA Corporation and one of our indirect subsidiaries
entered into an agreement to purchase certain graphics chip assets from 3dfx.
The 3dfx asset purchase closed on April 18, 2001.
In
May
2002, we were served with a California state court complaint filed by the
landlord of 3dfx’s San Jose, California commercial real estate lease. In
December 2002, we were served with a California state court complaint filed
by
the landlord of 3dfx’s Austin, Texas commercial real estate lease. The
landlords’ complaints both assert claims for, among other things, interference
with contract, successor liability and fraudulent transfer and seek to recover,
among other things, amounts owed on their leases with 3dfx in the aggregate
amount of approximately $10 million. In October 2002, 3dfx filed for Chapter
11
bankruptcy protection in the United States Bankruptcy Court for the Northern
District of California. The landlords’ actions were subsequently removed to the
United States Bankruptcy Court for the Northern District of California and
consolidated with a complaint filed by the Trustee in the 3dfx bankruptcy
case
for purposes of discovery. Upon motion by NVIDIA in 2005, the District Court
withdrew the reference to the Bankruptcy Court and the landlord actions were
removed to the United States District Court for the Northern District of
California. On November 10, 2005, the District Court granted NVIDIA's motion
to
dismiss the landlords’ respective amended complaints and allowed the landlords
to have until February 4, 2006 to amend their complaints. The landlords’ refiled
claims against NVIDIA in early February 2006, and NVIDIA again requested
the
District Court to dismiss all such claims made by the landlords. A hearing
on
NVIDIA’s new motions to dismiss is set for hearing on April 17, 2006. Discovery
is stayed pending this hearing and no trial date has been set in these actions.
We believe the claims asserted against us by the landlords are without merit
and
we will continue to defend ourselves vigorously.
In
March
2003, we were served with a complaint filed by the Trustee appointed by the
Bankruptcy Court to represent the interests of the 3dfx bankruptcy estate.
The
Trustee’s complaint asserts claims for, among other things, successor liability
and fraudulent transfer and seeks additional payments from us. On October
13, 2005, the Court held a hearing on the Trustee’s motion for summary
adjudication. On December 23, 2005, the Court issued its ruling denying the
Trustee's Motion for Summary Adjudication in all material respects and holding
that NVIDIA is prevented from disputing that the value of the 3dfx
transaction to NVIDIA was less than $108.0 million. The Court
expressly denied the Trustee's request to find that the value of the 3dfx assets
conveyed to NVIDIA were at least $108.0 million. In early November 2005, after
many months of mediation, NVIDIA and the Official Committee of Unsecured
Creditors, or the Creditors’ Committee, reached a conditional settlement of the
Trustee’s claims against NVIDIA. This conditional
settlement, presented as the centerpiece of a proposed Plan of Liquidation
in the bankruptcy case, is subject to a confirmation process
through a vote of creditors and the review and approval of the Bankruptcy
Court after notice and hearing. The
scope
and schedule for that confirmation process has yet to be determined,
but we
expect
that hearing to now occur sometime in the next few months. The Trustee has
advised that he intends to object to the settlement. The settlement with the
Creditors’ Committee calls for a payment of approximately $30.6 million to the
3dfx estate. Under the settlement, $5.6 million relates to various
administrative expenses and Trustee fees, and $25.0 million relates to the
satisfaction of debts and liabilities owed to the general unsecured creditors
of
3dfx. As such, 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
Bankruptcy Court, over objection of the Creditors’ Committee and NVIDIA, has
ordered the discovery portion of the litigation to proceed while the settlement
is pending approval through the confirmation process. However, no trial date
has
been set in the Trustee's action. In addition, following the Trustee’s filing of
a Form 8-K on behalf of 3dfx, in which the Trustee disclosed the terms of the
proposed settlement agreement between NVIDIA and the Creditor’s Committee,
certain shareholders of 3dfx filed a petition with the Bankruptcy Court to
appoint an official committee to represent the claimed interest’s of 3dfx
shareholders. That petition was granted and an Equity Holder’s Committee was
appointed. Counsel for the Equity Holder’s Committee has announced an intention
to file a competing Plan of Reorganization or Liquidation in the Trustee’s
case.
28
Opti
Incorporated
On
October 19, 2004, Opti Incorporated, or Opti, filed a complaint for patent
infringement against NVIDIA in the United States District Court for the Eastern
District of Texas. Opti asserts that unspecified NVIDIA chipsets infringe five
U.S. patents held by Opti. Opti seeks unspecified damages for our alleged
conduct, attorneys’ fees and triple damages for alleged willful infringement by
NVIDIA. NVIDIA filed a response to this complaint in December 2004. A case
management conference was held in July 2005 where a trial date was set for
July
2006. A court mandated mediation was held in January 2006 and did not resolve
the matter. Discovery continues, as well as preparation for the Markman hearing
on claim construction. The Markman hearing is scheduled for April 13, 2006.
We
believe the claims asserted against us are without merit and we will continue
to
defend ourselves vigorously. We
do not
have sufficient information to determine whether a loss is probable. As such,
we
have not recorded any liability in our consolidated financial statements for
such, if any, loss.
American
Video Graphics
In
August
2004, a Texas limited partnership named American Video Graphics, LP, or AVG,
filed three separate complaints for patent infringement against various
corporate defendants, not including NVIDIA, in the United States District Court
for the Eastern District of Texas. AVG initially asserted that each of the
approximately thirty defendants sells products that infringe one or more of
seven separate patents that AVG claims relate generally to graphics processing
functionality. In November 2004, NVIDIA sought and was granted permission to
intervene in two of the three pending AVG lawsuits. Our complaint in
intervention alleged that both of the patents in suit were invalid and that,
to
the extent AVG’s claims target NVIDIA products, the asserted patents were not
infringed.
On
December 19, 2005, AVG and substantially all of the named defendants and
intervenors, including NVIDIA, settled all of pending claims; the only surviving
claims will relate solely to two non-settling defendants. As part of the
settlement, the defendants and intervenors paid an undisclosed aggregate amount
to AVG. In exchange, all pending claims between the settling parties were
dismissed with prejudice, and AVG granted to all settling parties a full release
of all claims for past damages and a full license for all future sales of
accused products under all of AVG’s patents, including the patents in suit. In
addition, as part of the settlement, all settling defendants and intervenors
fully and finally waived any claims for indemnification they may have had
against any other settling party.
We
are
subject to other legal proceedings, but we do not believe that the ultimate
outcome of any of these proceedings will have a material adverse effect on
our
financial position or overall trends in results of operations. However, if
an
unfavorable ruling were to occur in any specific period, there exists the
possibility of a material adverse impact on the results of operations of that
period.
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No
matters were submitted to a vote of our security holders during the fourth
quarter of fiscal 2006.
PART
II
ITEM
5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
Our
common stock is traded on the Nasdaq National Market under the symbol NVDA.
Public trading of our common stock began on January 22, 1999. Prior to that,
there was no public market for our common stock. As of March 3, 2006, we had
approximately 434 registered stockholders, not including those shares held
in
street or nominee name.
29
The
following table sets forth for the periods indicated the high and low sales
price for our common stock as quoted on the Nasdaq National Market:
|
|
High
|
Low
|
|
|
Year
ended January 28, 2007
|
|
|
|
|
First
Quarter (through March 3, 2006)
|
$50.72
|
$42.87
|
|
|
|
|
|
|
|
Year
ended January 29, 2006
|
|
|
|
|
Fourth
Quarter
|
$46.76
|
$32.55
|
|
|
Third
Quarter
|
$35.95
|
$27.04
|
|
|
Second
Quarter
|
$29.39
|
$21.52
|
|
|
First
Quarter
|
$29.60
|
$20.92
|
|
|
|
|
|
|
|
Year
ended January 30, 2005
|
|
|
|
|
Fourth
Quarter
|
$24.96
|
$13.14
|
|
|
Third
Quarter
|
$15.89
|
$9.30
|
|
|
Second
Quarter
|
$24.11
|
$14.40
|
|
|
First
Quarter
|
$27.35
|
$20.63
|
Dividend
Policy
We
have
never paid and do not expect to pay cash dividends for the foreseeable future.
Issuer
Purchases of Equity Securities
On
August
9, 2004 we announced that our Board of Directors, or the Board, had authorized
a
stock repurchase program to repurchase shares of our common stock, subject
to
certain specifications, up to an aggregate maximum amount of $300.0 million.
As
part of our share repurchase program, we have entered into and we may continue
to enter into structured share repurchase transactions with financial
institutions. These agreements generally require that we make an up-front
payment in exchange for the right to receive a fixed number of shares of our
common stock upon execution of the agreement, and a potential incremental number
of shares of our common stock, within a pre-determined range, at the end of
the
term of the agreement. During the fourth quarter of fiscal 2006, we repurchased
1.3 million shares of our common stock for $50.0 million under a structured
share repurchase transaction, which we recorded on the trade date of the
transaction. Through the end of the fourth quarter of fiscal 2006, we have
repurchased 8.5 million shares under our stock repurchase program for a total
cost of $213.2 million. During the first quarter of fiscal 2007, we entered
into
a structured share repurchase transaction to repurchase shares of our common
stock for $50.0 million that we expect to settle prior to the end of our first
fiscal quarter.
On
March
6, 2006, we announced that our Board had approved an increase in our
existing stock repurchase program. We announced a $400 million increase to
the
original stock repurchase program we had announced in August 2004. As a result
of this increase, the amount of common stock the Board of Directors has
authorized to be repurchased has now been increased to a total of $700 million.
The repurchases will be made from time to time in the open market, in privately
negotiated transactions, or in structured stock repurchase transactions, in
compliance with the Securities and Exchange Commission Rule 10b-18, subject
to
market conditions, applicable legal requirements, and other factors. The program
does not obligate NVIDIA to acquire any particular amount of common stock and
the program may be suspended at any time at our discretion.
30
|
Period
|
|
Total
Number of Shares Purchased
|
|
Average
Price Paid per Share
|
|
Total
Number of Shares Purchased as Part of Publicly Announced Plans or
Programs
|
|
Approximate
Dollar Value of Shares that May Yet Be Purchased Under the Plans
or
Programs (1)
|
|
||||
|
October
31, 2005 through November 27, 2005
|
|
|
-
|
|
|
$
-
|
|
|
-
|
|
$
|
136,846,554
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November
28, 2005 through December 25, 2005
|
|
|
-
|
|
|
$
-
|
|
|
-
|
|
$
|
136,846,554
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
26, 2005 through January 29, 2006
|
|
|
1,355,260
(3)
|
|
|
$36.89
|
|
|
1,355,260
(3)
|
|
$
|
86,846,554
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Total
|
|
|
1,355,260
|
|
|
$36.89
(2)
|
|
|
1,355,260
|
|
|
|
|
(1)
We
have an ongoing authorization from the Board, subject to certain specifications,
to repurchase shares of our common stock up to an aggregate maximum amount
of
$700.0 million on the open market, in negotiated transactions or through
structured stock repurchase agreements through August 2007.
(2)
Represents weighted average price paid per share during the fourth quarter
of
fiscal 2006.
(3)
As
part of our share repurchase program, we have entered into and we may continue
to enter into structured share repurchase transactions with financial
institutions. During the fourth quarter of fiscal 2006, we repurchased 1.3
million shares of our common stock for $50.0 million under a structured share
repurchase transaction. This transaction required that we make an up-front
payment.
ITEM
6. SELECTED FINANCIAL DATA
The
following selected financial data should be read in conjunction with our
financial statements and the notes thereto, and with Item 7, “Management’s
Discussion and Analysis of Financial Condition and Results of Operations.” The
consolidated statement of income data for the years ended January 29, 2006,
January 30, 2005, and January 25, 2004 and the consolidated balance sheet data
as of January 29, 2006 and January 30, 2005 have been derived from and should
be
read in conjunction with our audited consolidated financial statements and
the
notes thereto included elsewhere in this Annual Report on Form 10-K. The
consolidated statement of income data for the years ended January 26, 2003
and
January 27, 2002 is derived from audited consolidated financial statements
and
the notes thereto which are not included in this Annual Report on Form 10-K.
The
consolidated balance sheet data as of January 25, 2004, January 26, 2003, and
January 27, 2002 is derived from audited consolidated financial statements
and
the notes thereto which are not included in this Annual Report on Form
10-K.
31
|
|
|
Year
Ended
|
|
|||||||||||||
|
|
|
January
29,
|
|
January
30,
|
|
January
25,
|
|
January
26,
|
|
January
27,
|
|
|||||
|
|
|
2006
(A)
|
2005
|
2004
(B, C)
|
2003
(D, E)
|
2002
(F, G)
|
|
|||||||||
|
|
|
(in
thousands, except per share data)
|
|
|||||||||||||
|
Consolidated
Statement of Income Data:
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Revenue
|
|
$
|
2,375,687
|
|
$
|
2,010,033
|
|
$
|
1,822,945
|
|
$
|
1,909,447
|
|
$
|
1,369,471
|
|
|
Gross
profit
|
|
$
|
910,795
|
|
$
|
649,486
|
|
$
|
528,878
|
|
$
|
576,012
|
|
$
|
519,238
|
|
|
Income
from operations
|
|
$
|
340,097
|
|
$
|
113,593
|
|
$
|
90,157
|
|
$
|
143,986
|
|
$
|
241,732
|
|
|
Income
before income tax expense
|
|
$
|
360,221
|
|
$
|
125,445
|
|
$
|
86,673
|
|
$
|
150,557
|
|
$
|
252,749
|
|
|
Income
tax expense
|
|
$
|
57,635
|
|
$
|
25,089
|
|
$
|
12,254
|
|
$
|
59,758
|
|
$
|
75,825
|
|
|
Net
income
|
|
$
|
302,586
|
|
$
|
100,356
|
|
$
|
74,419
|
|
$
|
90,799
|
|
$
|
176,924
|
|
|
Basic
net income per share
|
|
$
|
1.78
|
|
$
|
0.60
|
|
$
|
0.46
|
|
$
|
0.59
|
|
$
|
1.24
|
|
|
Diluted
net income per share
|
|
$
|
1.65
|
|
$
|
0.57
|
|
$
|
0.43
|
|
$
|
0.54
|
|
$
|
1.03
|
|
|
Shares
used in basic per share computation
|
|
|
169,690
|
|
|
166,062
|
|
|
160,924
|
|
|
153,513
|
|
|
143,015
|
|
|
Shares
used in diluted per share computation
|
|
|
182,951
|
|
|
176,558
|
|
|
172,707
|
|
|
168,393
|
|
|
171,074
|
|
|
|
|
January
29,
|
|
January
30,
|
|
January
25,
|
|
January
26,
|
|
January
27,
|
|
|||||
|
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
2002
|
|
|||||
|
|
|
(in
thousands)
|
|
|||||||||||||
|
Consolidated
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Cash,
cash equivalents and marketable securities
|
|
$
|
950,174
|
|
$
|
670,045
|
|
$
|
604,043
|
|
$
|
1,028,413
|
|
$
|
791,377
|
|
|
Total
assets
|
|
$
|
1,915,299
|
|
$
|
1,628,536
|
|
$
|
1,399,344
|
|
$
|
1,617,015
|
|
$
|
1,503,174
|
|
|
Capital
lease obligations, less current portion
|
|
$
|
--
|
|
$
|
--
|
|
$
|
856
|
|
$
|
4,880
|
|
$
|
5,861
|
|
|
Deferred
revenue
|
|
$
|
217
|
|
$
|
11,500
|
|
$
|
--
|
|
$
|
--
|
|
$
|
70,193
|
|
|
Non-current
deferred income tax liabilities
|
|
$
|
8,260
|
|
$
|
20,754
|
|
$
|
8,609
|
|
$
|
--
|
|
$
|
--
|
|
|
Other
long-term debt
|
|
$
|
--
|
|
$
|
--
|
|
$
|
--
|
|
$
|
300,000
|
|
$
|
300,000
|
|
|
Long-term
liabilities
|
|
$
|
10,624
|
|
$
|
8,358
|
|
$
|
4,582
|
|
$
|
--
|
|
$
|
--
|
|
|
Total
stockholders’ equity
|
|
$
|
1,457,756
|
|
$
|
1,178,268
|
|
$
|
1,051,185
|
|
$
|
932,687
|
|
$
|
763,819
|
|
|
Cash
dividends declared per common share
|
|
$
|
--
|
|
$
|
--
|
|
$
|
--
|
|
$
|
--
|
|
$
|
--
|
|
(A)
Fiscal 2006 included a charge of $14.2 million related to settlement costs
associated with two litigation matters, 3dfx and AVG.
(B)
Fiscal 2004 included a charge of $3.5 million related to the write-off of
acquired research and development expense from the purchase of MediaQ, Inc.
that
had not yet reached technological feasibility and has no alternative future
use.
(C)
Fiscal 2004 included a charge of $13.1 million in connection with our
convertible subordinated debenture redemption.
(D)
Fiscal 2003 included $40.4 million in additional revenue related to our
settlement of our arbitration with Microsoft regarding Xbox
pricing.
(E)
Fiscal 2003 included a charge for stock option exchange expenses of $61.8
million related to personnel associated with cost of revenue (for manufacturing
personnel), research and development and sales, general and administrative
of
$6.2 million, $35.4 million and $20.2 million, respectively.
(F)
Fiscal 2002 included $10.0 million of acquisition charges attributable to
expenses related to our acquisition of assets from 3dfx.
(G)
Fiscal 2002 included a charge of $3.7 million related to our relocation from
our
previous headquarters.
32
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The
following discussion and analysis of our financial condition and results of
operations should be read in conjunction with “Item 1A. Risk Factors”, “Item 6.
Selected Financial Data”, our Consolidated Financial Statements and related
Notes thereto, as well as other cautionary statements and risks described
elsewhere in this Annual Report on Form 10-K, before deciding to purchase,
hold
or sell shares of our common stock.
Overview
Our
Company
NVIDIA
Corporation is the worldwide leader in programmable graphics processor
technologies. Our products enhance the end-user experience on consumer and
professional computing devices. We have four major product-line operating
segments: graphics processing units, or GPUs, media and communications
processors, or MCPs, Handheld GPUs, and Consumer Electronics. Our GPU Business
is composed of products that support desktop personal computers, or PCs,
notebook PCs and professional workstations; our MCP Business is composed of
NVIDIA nForce products that operate as a single-chip or chipset that can
off-load system functions, such as audio processing and network communications,
and perform these operations independently from the host central processing
unit, or CPU; our Handheld GPU Business is composed of products that support
handheld personal digital assistants, cellular phones and other handheld
devices; and the Consumer Electronics Business is concentrated in products
that
support video game consoles and other digital consumer electronics devices
and
is composed of our contractual arrangements with Sony Computer Entertainment,
or
SCE, to jointly develop a custom GPU incorporating our next-generation GeForce
GPU and SCE’s system solutions in SCE’s PlayStation3, sales of our Xbox-related
products, revenue from our license agreement with Microsoft relating to the
successor product to their initial Xbox gaming console, the Xbox360, and related
devices, and digital media processor products.
Fiscal
2006 Developments, Future Objectives and Challenges
As
we
entered fiscal 2006, we had launched the GeForce 6 Series, nForce 4 MCP, and
Scalable Link Interface, or SLI, technology, with positive market reception.
Our
primary objective during the year was to strengthen the technology leadership
position of our GPU and MCP businesses, extend the reach of SLI technology
with
a broad range of compatible products, applications and games for enthusiasts,
improve gross margin beyond historical levels, and build new products and market
initiatives that would be the platform for our continued growth.
GPU
Business
In
February 2005, we announced the GeForce Go 6600, a mobile GPU designed
specifically to deliver advanced multimedia functionality without sacrificing
portability. Also in February 2005, we introduced the GeForce Go 6800
Ultra mobile GPU.
In
March
2005, we introduced two new GeForce 6 GPUs: a 512MB version of the GeForce
6800
Ultra GPU designed for the enthusiast segment, and a new lower-cost AGP version
of the GeForce 6200 GPU, designed to bring DirectX 9.0 Shader Model 3.0
technology to the mainstream segment.
In
June
2005, we launched and shipped our second generation Shader Model 3.0 GPU, the
GeForce 7800 GTX, which is designed to address the high-end enthusiast desktop
PC segment. In August 2005, we launched and shipped our second GeForce 7 GPU,
the GeForce 7800 GT, which is designed to address the high-end performance
desktop PC segment.
In
June
2005, we made our SLI technology available to users in the mainstream segment
with the release of our GeForce 6600.
33
In
July
2005, we introduced two new NVIDIA Quadro GPUs, the NVIDIA Quadro FX 4500 and
the NVIDIA Quadro FX 3450, which are designed for the high-end and mainstream
professional segments, respectively. Both products support our SLI
technology.
In
September 2005, we launched and shipped the new NVIDIA GeForce Go 7800 GTX,
the
flagship of the NVIDIA notebook GPU product line.
In
October 2005, we announced that we will be the exclusive provider of all
graphics cards offered on the first peripheral component interconnect, or PCI,
express platform from Apple Computer, Inc., or Apple. In addition, the first
ever Apple Power Mac will incorporate our NVIDIA Quadro professional-class
GPU.
In
November 2005, we introduced and shipped the NVIDIA GeForce 7800 GTX 512 GPU,
which contains over 302 million transistors and is the industry’s only
mainstream GPU to incorporate 64-bit HDR. We also announced the immediate
availability of the NVIDIA GeForce 6800 GS GPU, which is designed for the
mainstream segment.
In
January 2006, we shipped the GeForce 7300 GS, our first mainstream version
of
the GeForce 7 series. We also introduced three new notebook GPUs - the GeForce
Go 7800, GeForce Go 7600 and GeForce Go 7400 - all based on our second
generation Shader Model 3.0 architecture and designed to deliver cutting-edge
3D, high-definition, or HD, home theatre-quality video and advanced power
management to the notebook market.
The
combination of our GeForce 7 and GeForce 6 series of GPUs and our SLI technology
has created a new class of gaming PCs and professional workstations. SLI
technology takes advantage of the increased bandwidth of the PCI Express bus
architecture to allow two NVIDIA-based graphics cards to operate in a single
PC
or professional workstation. More
than
3 million motherboards incorporating SLI technology and 9 million GPUs
incorporating SLI technology have shipped to date.
In
the
upcoming fiscal year, we expect additional growth in our GPU Business. We
believe that sales of our desktop GPU products will be increased by share gains
from our anticipated position in the market, Microsoft Windows Vista, or Vista,
the introduction of HD and Blu-ray video. We expect to extend our technology
and
performance leadership. The GeForce 7 and GeForce 6 series of desktop and
notebook GPUs are designed to be compatible with Vista, which is scheduled
to be
released in the second half of calendar 2006. We believe that in the upcoming
year there will be increased demand for HD video, and that Sony PlayStation3
will be a key driver of demand for HD and Blu-ray video. We expect HD and
Blu-ray video to promote increased demand for the video processing
capabilities of our next generation GPUs.
MCP
Business
In
April
2005, we announced the availability of our NVIDIA nForce4 SLI Intel Corporation,
or Intel, Edition MCP for Intel platforms. This line of core-logic
solutions incorporates a host of new and innovative features that have never
before been available on the Intel platform and extends the NVIDIA nForce brand
into new segments. In addition, during the first quarter of fiscal 2006,
we shipped the NVIDIA nForce Professional MCP in its first enterprise server
platform.
In
August
2005, we announced that the NVIDIA nForce4 SLI X16 Intel Edition technology
featured in the Dell Dimension XPS 600 desktop PC was immediately
available.
In
September 2005, we introduced and shipped the NVIDIA nForce 400 MCP and GeForce
6100 integrated GPU family. This represents the first integrated GPU solution
to
support DirectX 9.0 Shader Model 3.0 technology. We expect this integrated
solution to be an important new growth factor for our GPU and MCP
businesses.
In
December 2005, we announced our intent to acquire ULi Electronics, Inc., or
ULi,
one of the PC industry’s most highly regarded core logic developers.
On
February 20, 2006, we completed the acquisition of ULi. The
acquisition represents our ongoing investment in ULi’s platform solution
strategy and is expected to strengthen our sales, marketing, and customer
engineering presence in Taiwan and China.
34
In
January 2006, we shipped the NVIDIA nForce 4 SLI XE and NVIDIA nForce4 Ultra
Intel MCPs. These products represent our first discrete chipsets targeted at
mainstream Intel-based motherboards.
Our
NVIDIA nForce product line has achieved record revenue for six consecutive
quarters. We believe that Advanced Micro Devices’ transition to K8, our
extension into new segments, and our entry into the Intel market with our first
ever mainstream Intel nForce4 MCPs will make our MCP Business one of our fastest
growing businesses. Furthermore, we believe that our ability to simultaneously
innovate using our GPU, MCP, and software knowledge base will allow us to make
additional platform innovations in the future.
Handheld
GPU Business
Our
strategy in the Handheld GPU Business is to lead innovation and capitalize
on
the emergence of the mobile phone as a versatile consumer lifestyle
device. Our initial focus was on 3G cellular phones. Through the
first half of fiscal 2006, our Handheld GPU Business was heavily concentrated
at
one original equipment manufacturer, or OEM, and its products did not achieve
the anticipated level of commercial success. However, during the third
quarter of fiscal 2006, Motorola Inc. and Sony Ericsson Mobile Communications
AB
launched 3G models of their RAZR and Walkman portable phones, respectively,
that
are both powered by our GoForce GPUs.
Our
GoForce handheld GPUs are now shipping in the new Motorola 3G RAZR V3X and
the
new Sony Ericsson Walkman phones. Our strategy is to build a new class
of low power GPUs for multimedia rich devices like 3G cell phones, smart
phones, and portable media players. We believe that there will be an increase
in
demand for mobile video products that deliver compelling and tangible
improvements to the overall end user experience of these new services, and
we
believe that we are well positioned to increase our share of the handheld
segment in the upcoming year.
Consumer
Electronics Business
In
April
2005, we finalized our definitive agreement with SCE to jointly develop a custom
GPU incorporating our next-generation GeForce GPU and SCE’s system solutions in
SCE’s PlayStation3. Our collaboration with SCE includes license fees and
royalties for the PlayStation3 and all derivatives, including next-generation
digital consumer electronics devices. In addition, we are licensing
software development tools for creating shaders and advanced graphics
capabilities to SCE. During fiscal 2006, we recognized $49.0 million of
revenue from our contractual arrangements with SCE to jointly develop a custom
GPU incorporating our next-generation GeForce GPU and SCE’s system solutions in
SCE’s PlayStation3. Depending on the ultimate success of this next-generation
platform, we expect to generate, starting in fiscal 2007, revenue ranging from
$50 million to $100 million annually from license fees and royalties over the
next five years with the possibility of additional royalties for several years
thereafter. We have successfully reached many development milestones and we
believe that we are on target to achieve the goals set by SCE.
During
the first quarter of fiscal 2006, Microsoft indicated that it would not order
any more Xbox-related products from us after our second fiscal quarter. As
a
result, the second quarter of fiscal 2006 was the last quarter during which
we
recognized revenue from the sale of our Xbox-related products to Microsoft.
Gross
Margin Improvement
We
continue to remain intensely focused on improving our gross margin. Beginning
in
fiscal 2005, we implemented profit improvement initiatives across our company
which were designed to improve business and operational processes. During the
fourth quarter of fiscal 2006, our gross margin was 40.2%, which represents
an
increase of 600 basis points from our gross margin of 34.2% for the fourth
quarter of fiscal 2005. Our gross margin was 38.3% for fiscal 2006, which
represents an increase of 600 basis points from our gross margin of 32.3% for
fiscal 2005. We believe that we can continue to improve our gross margin during
fiscal 2007.
35
Share-Based
Payment
Since
inception, we have used stock options and our employee stock purchase program
as
fundamental components of our employee compensation packages. To date we
generally have not recognized compensation cost for employee stock options
or
shares sold pursuant to our employee stock purchase program. We believe that
these incentives directly motivate our employees and, through the use of
vesting, encourage our employees to remain with us. In December 2004, the
Financial Accounting Standards Board, or FASB, issued Statement of Financial
Accounting Standards No. 123(R), or SFAS No. 123(R), Share-Based
Payment,
which
requires the measurement and recognition of compensation expense for all
stock-based compensation payments. In April 2005, the SEC delayed the effective
date of SFAS No. 123(R), which is now effective for annual periods that begin
after June 15, 2005. In March 2005, the SEC issued Staff Accounting Bulletin
No.
107, or SAB No. 107, which includes interpretive guidance for the initial
implementation of SFAS No. 123(R). SFAS No. 123(R) allows for either prospective
recognition of compensation expense or retrospective recognition. We intend
to
adopt SFAS No. 123(R) using the modified prospective method, which requires
the
application of the accounting standard as of January 30, 2006, the first day
of
our fiscal 2007. Expensing these incentives in future periods will materially
and adversely affect our reported operating results as the stock-based
compensation expense would be charged directly against our reported earnings.
We
anticipate that our stock-based compensation expense will be approximately
$18
to $22 million for the first quarter of fiscal 2007 and we are unsure how the
market will react to this adverse affect on our operating results, which could
impact our stock price.
To
the
extent that SFAS No. 123(R) makes it more expensive to grant stock options
or to
continue to have an employee stock purchase program, we may decide to incur
increased cash compensation costs. In addition, actions that we may take to
reduce stock-based compensation expense that may be more severe than any actions
our competitors may implement may make it difficult to attract, retain and
motivate employees, which could adversely affect our competitive position as
well as our business and operating results.
Repatriation
Legislation
The
American Jobs Creation Act of 2004, or Act, was signed into law on October
22,
2004. The Act provided a temporary incentive for United States multinational
corporations to repatriate accumulated income earned outside the United States
at a federal effective tax rate of 5.25%. In the fourth quarter of fiscal 2006,
we repatriated $420 million in foreign earnings under the Act. The net tax
effect of this distribution was minimal because the current tax cost at a 5.25%
tax rate was offset by the benefit attributable to reducing our deferred tax
liability for taxes on earnings previously provided at the statutory rate of
35%.
Subsequent
Events
ULI
Electronics, Inc. On
February 20, 2006, we completed the acquisition of ULi Electronics, Inc., a
leading developer of core logic technology, for approximately $53 million paid
in cash.
Stock
Split. On
March 6, 2006, we issued a press release announcing that our
Board of Directors approved a two-for-one stock split of our outstanding shares
of common stock to be effected in the form of a 100% stock dividend. The
stock split will be effective on or about Thursday, April 6, 2006 for
stockholders of record at the close of business on Friday, March 17, 2006 and
will entitle each stockholder to receive one additional share for every
outstanding share of common stock held. Upon the completion of the stock split,
NVIDIA will have approximately 360 million shares of common stock
outstanding.
Stock
Repurchase. On
March
6, 2006, we also announced that our Board of Directors approved an increase
in our existing stock repurchase program. We announced a $400 million
increase to the original stock repurchase program we had announced in August
2004. As a result of this increase, the amount of common stock the Board of
Directors has authorized to be repurchased has now been increased to a total
of
$700 million. The repurchases will be made from time to time in the open market,
in privately negotiated transactions, or in structured stock repurchase
transactions, in compliance with the Securities and Exchange Commission Rule
10b-18, subject to market conditions, applicable legal requirements, and other
factors. The program does not obligate NVIDIA to acquire any particular amount
of common stock and the program may be suspended at any time at our discretion.
36
Critical
Accounting Policies and Estimates
Management’s
discussion and analysis of financial condition and results of operations are
based upon our consolidated financial statements, which have been prepared
in
accordance with accounting principles generally accepted in the United States.
The preparation of these financial statements requires us to make estimates
and
judgments that affect the reported amounts of assets, liabilities, revenue,
cost
of revenue, expenses and related disclosure of contingencies. On an on-going
basis, we evaluate our estimates, including those related to revenue
recognition, accounts receivable, inventories, income taxes, and goodwill.
We
base our estimates on historical experience and on various other assumptions
that are believed to be reasonable under the circumstances, the results of
which
form the basis for making judgments about the carrying values of assets and
liabilities.
We
believe the following critical accounting policies affect our significant
judgments and estimates used in the preparation of our consolidated financial
statements. Our management has discussed the development and selection of these
critical accounting policies and estimates with the audit committee of our
board
of directors and the audit committee has reviewed our disclosures relating
to
our critical accounting policies and estimates in this report.
Revenue
Recognition
Product
Revenue
We
recognize revenue from product sales when persuasive evidence of an arrangement
exists, the product has been delivered, the price is fixed and determinable
and
collection is reasonably assured. For most sales, we use a binding purchase
order and in certain cases we use a contractual agreement as evidence of an
arrangement. We consider delivery to occur upon shipment provided title and
risk
of loss have passed to the customer. At the point of sale, we assess whether
the
arrangement fee is fixed and determinable and whether collection is reasonably
assured. If we determine that collection of a fee is not reasonably assured,
we
defer the fee and recognize revenue at the time collection becomes reasonably
assured, which is generally upon receipt of cash.
Our
policy on sales to distributors is to defer recognition of revenue and related
cost of revenue until the distributors resell the product.
We
record
estimated reductions to revenue for customer programs at the time revenue is
recognized. Our customer programs primarily involve rebates, which are designed
to serve as sales incentives to resellers of our products in various target
markets. We account for rebates in accordance with Emerging Issues Task Force
Issue 01-9, or EITF 01-9, Accounting
for Consideration Given by a Vendor to a Customer (Including a Reseller of
the
Vendor’s Products)
and, as
such, we accrue for 100% of the potential rebates and do not apply a breakage
factor. Unclaimed rebates, which historically have not been significant, are
reversed to revenue upon expiration of the rebate. Rebates typically expire
six
months from the date of the original sale.
Our
customer programs also include marketing development funds, or MDFs. We account
for MDFs as either a reduction of revenue or an operating expense in accordance
with EITF 01-9. MDFs represent monies paid to retailers, system builders, OEMs,
distributors and add-in card partners that are earmarked for market segment
development and expansion and typically are designed to support our partners’
activities while also promoting NVIDIA products. If market conditions decline,
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.
37
License
and Development Revenue
For
license arrangements that require significant customization of our intellectual
property components, we generally recognize this license revenue using the
percentage-of-completion method of accounting over the period that services
are
performed. For all license and service arrangements accounted for under the
percentage-of-completion method, we determine progress to completion based
on
actual direct labor hours incurred to date as a percentage of the estimated
total direct labor hours required to complete the project. We periodically
evaluate the actual status of each project to ensure that the estimates to
complete each contract remain accurate. A provision for estimated losses on
contracts is made in the period in which the loss becomes probable and can
be
reasonably estimated. To date, we have not recorded any such losses. 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.
Accounts
Receivable
We
maintain an allowance for doubtful accounts receivable for estimated losses
resulting from the inability of our customers to make required payments.
Management determines this allowance, which consists of an amount identified
for
specific customer issues as well as an amount based on general estimated
exposure. Our overall estimated exposure excludes significant amounts that
are
covered by credit insurance and letters of credit. If the financial condition
of
our customers, the financial institutions providing letters of credit, or our
credit insurance carrier were to deteriorate, resulting in an impairment of
their ability to make payments, additional allowances may be required that
could
adversely affect our operating results. Furthermore, there can be no assurance
that we will be able to obtain credit insurance in the future. Our current
credit insurance agreement expires on December 31, 2007.
As
of
January 29, 2006, our allowance for doubtful accounts receivable was $0.6
million and our gross accounts receivable balance was $330.4 million. Of the
$330.4 million, $76.1 million was covered by credit insurance and $36.6 million
was covered by letters of credit. If the financial condition of our customers
were to deteriorate, resulting in an impairment of their ability to make
payments, additional allowances may be required and we may have to record
additional reserves or write-offs on certain sales transactions in the future.
As a percentage of our gross accounts receivable balance, our allowance for
doubtful accounts receivable has ranged between 0.2% and 0.8% during fiscal
2005
and 2006. Factors impacting the allowance include the level of gross
receivables, the financial condition of our customers and the extent to which
balances are covered by credit insurance or letters of credit. As of January
29,
2006, our allowance for doubtful accounts receivable represented 0.2% of our
gross accounts receivable balance. If our allowance for doubtful accounts
receivable would have been recorded at 0.8% of our gross accounts receivable
balance, then our allowance for doubtful accounts receivable balance at January
29, 2006 would have been approximately $2.6 million, rather than the actual
balance of $0.6 million.
Inventories
Inventory
cost is computed on an adjusted standard basis (which approximates actual cost
on an average or first-in, first-out basis). We write down our inventory for
estimated lower of cost or market, obsolescence or unmarketable inventory equal
to the difference between the cost of inventory and the estimated market value
based upon assumptions about future demand, future product purchase commitments,
estimated manufacturing yield levels and market conditions. If actual market
conditions are less favorable than those projected by management, or if our
future product purchase commitments to our suppliers exceed our forecasted
future demand for such products, additional future inventory write-downs may
be
required that could adversely affect our operating results. If actual market
conditions are more favorable, we may have higher gross margins when products
are sold. Sales to date of such products have not had a significant impact
on
our gross margin. As of January 29, 2006, our inventory reserve was $48.3
million. As a percentage of our gross inventory balance, our inventory reserve
has ranged between 8.8% and 15.9% during fiscal 2005 and 2006. As of January
29,
2006, our inventory reserve represented 15.9% of our gross inventory balance.
Inventory reserves once established are not reversed until the related inventory
has been sold or scrapped.
38
Income
Taxes
Statement
of Financial Accounting Standards No. 109, or SFAS No. 109, Accounting
for Income Taxes,
establishes financial accounting and reporting standards for the effect of
income taxes. In accordance with SFAS No. 109, we recognize federal, state
and
foreign current tax liabilities or assets based on our estimate of taxes payable
or refundable in the current fiscal year by tax jurisdiction. We also recognize
federal, state and foreign deferred tax assets or liabilities, as appropriate,
for our estimate of future tax effects attributable to temporary differences
and
carryforwards; and we record a valuation allowance to reduce any deferred tax
assets by the amount of any tax benefits that, based on available evidence
and
judgment, are not expected to be realized.
Our
calculation of current and deferred tax assets and liabilities is based on
certain estimates and judgments and involves dealing with uncertainties in
the
application of complex tax laws. Our estimates of current and deferred tax
assets and liabilities may change based, in part, on added certainty or finality
to an anticipated outcome, changes in accounting standards or tax laws in the
United States, or foreign jurisdictions where we operate, or changes in other
facts or circumstances. In addition, we recognize liabilities for potential
United States and foreign income tax contingencies based on our estimate of
whether, and the extent to which, additional taxes may be due. If we determine
that payment of these amounts is unnecessary or if the recorded tax liability
is
less than our current assessment, we may be required to recognize an income
tax
benefit or additional income tax expense in our financial statements,
accordingly.
As
of
January 29, 2006, we had a valuation allowance of $230.7 million. Of the total
valuation allowance, $182.2 million is attributable to certain net operating
loss and tax credit carryforwards resulting from the exercise of employee stock
options. The tax benefit of these net operating loss and tax credit
carryforwards, if and when realized, will be accounted for as a credit to
stockholders' equity. Of the remaining valuation allowance at January 29, 2006,
$19.5 million relates to federal and state tax attributes acquired in certain
acquisitions for which realization of the related deferred tax assets was
determined not likely to be realized due, in part, to potential utilization
limitations as a result of ownership changes; and $29.0 million relates to
certain state deferred tax assets that management determined not likely to
be
realized due, in part, to projections of future taxable income. To the extent
realization of the deferred tax assets related to certain acquisitions becomes
probable, recognition of these tax benefits would first reduce goodwill to
zero,
then reduce other non-current intangible assets related to the acquisition
to
zero with any remaining benefit reported as a reduction to income tax expense.
To the extent realization of the deferred tax assets related to certain state
tax benefits becomes probable, we would recognize an income tax benefit in
the
period such asset is more likely than not to be realized.
Goodwill
Our
impairment review process compares the fair value of the reporting unit in
which the goodwill resides to its carrying value. For the purposes of
completing our Statement of Financial Accounting Standards No. 142, or SFAS
No. 142, Goodwill
and Other Intangible Assets,
impairment test, we performed our analysis on a reporting unit
basis. We utilize a two-step approach to testing goodwill for impairment.
The first step tests for possible impairment by applying a fair value-based
test. In
computing fair value of our reporting units, we use estimates of future
revenues, costs and cash flows from such units. The
second step, if necessary, measures the amount of such an impairment by applying
fair value-based tests to individual assets and liabilities. We elected to
perform our annual goodwill impairment review during the fourth quarter of
each
fiscal year. We completed our most recent annual impairment test during the
fourth quarter of fiscal 2006 and concluded that there was no impairment.
However, future events or circumstances may result in a charge to earnings
in
future periods due to the potential for a write-down of goodwill in connection
with such tests.
39
Results
of Operations
The
following table sets forth, for the periods indicated, certain items in our
consolidated statements of income expressed as a percentage of
revenue.
|
|
Year
Ended
|
||||
|
|
January
29,
|
January
30,
|
January
25,
|
||
|
|
2006
|
2005
|
2004
|
||
|
Revenue
|
100.0%
|
100.0%
|
100.0%
|
||
|
Cost
of revenue
|
61.7
|
67.7
|
71.0
|
||
|
Gross
profit
|
38.3
|
32.3
|
29.0
|
||
|
Operating
expenses:
|
|
|
|
||
|
Research
and development
|
14.8
|
16.7
|
14.8
|
||
|
Sales,
general and administrative
|
8.6
|
10.0
|
9.1
|
||
|
In-process
research and development
|
--
|
--
|
0.2
|
||
|
Settlement
costs
|
0.6
|
--
|
--
|
||
|
Total
operating expenses
|
24.0
|
26.7
|
24.1
|
||
|
Income
from operations
|
14.3
|
5.6
|
4.9
|
||
|
Interest
and other income, net
|
0.8
|
0.6
|
0.5
|
||
|
Convertible
debenture redemption expense
|
--
|
--
|
(0.7)
|
||
|
Income
before income tax expense
|
15.1
|
6.2
|
4.7
|
||
|
Income
tax expense
|
2.4
|
1.2
|
0.6
|
||
|
Net
income
|
12.7%
|
5.0%
|
4.1%
|
||
Fiscal
Years Ended January 29, 2006, January 30, 2005, and January 25, 2004.
Revenue
During
the first quarter of fiscal 2006, we reorganized our operating segments to
bring
all major product groups in line with our strategy to position ourselves as
the
worldwide leader in programmable graphics processor technologies. We now report
financial information for four product-line operating segments to our Chief
Executive Officer, who is considered to be our chief operating decision maker,
or CODM, as follows: the GPU Business, the MCP Business, the Handheld GPU
Business, and the Consumer Electronics Business. Revenue in the “All Other”
category is primarily derived from sales of memory. Please refer to Note
15 of the Notes to Consolidated Financial Statements for further
information.
Fiscal
2005 was a 53-week year, compared to fiscal 2006 and 2004 which were 52-week
years, and we believe that this extra week may have had a positive impact on
our
revenue in fiscal 2005. However, we are not able to quantify the effect of
the
slightly longer year on our revenue.
Fiscal
Year 2006 vs. Fiscal Year 2005
Revenue
was $2.4 billion for fiscal 2006, compared to $2.0 billion for fiscal 2005,
which represents an increase of 18.2%. A discussion of our revenue results
for
each of our operating segments is as follows:
GPU
Business.
GPU
Business revenue increased by 22.6% to $1.7 billion for fiscal 2006 compared
to
$1.4 billion for fiscal 2005. The increase was the result of increased sales
of
our GeForce 6 and GeForce 7 families of desktop GPUs that serve the high-end
GPU
segment, offset by a slight decline in sales of our mainstream GPU products.
In
addition, sales of our NVIDIA Quadro professional workstation products and
notebook products continued to improve due to an increased mix of GeForce
6-based and GeForce 7-based products, which resulted in an increase in average
selling prices.
MCP
Business.
MCP
Business revenue was $352.3 million for fiscal 2006, compared to $175.7 million
for fiscal 2005, which represents an increase of 100.6%. The overall
increase in MCP Business revenue is primarily due to increased sales of NVIDIA
nForce4 products, which we began selling during the fourth quarter of fiscal
2005, and an increase in average selling prices. The overall increase was offset
by a decrease in sales of NVIDIA nForce3 and NVIDIA nForce2
products.
40
Handheld
GPU Business.
Handheld GPU Business revenue was $58.7 million for fiscal 2006, compared to
$45.9 million for fiscal 2005, which represents an increase of 27.9%. The
overall increase in Handheld GPU Business revenue is due to an increase in
average selling prices of high-end feature phone products and revenue recognized
as a result of a development contract.
Consumer
Electronics Business.
Consumer Electronics Business revenue was $170.2 million for fiscal 2006,
compared to $260.0 million for fiscal 2005, which represents a decrease of
34.5%. The decrease in our Consumer Electronics Business is a result of
decreased and discontinued sales of our Xbox-related products to Microsoft,
partially offset by revenue recognized from our contractual arrangement with
SCE. During the first quarter of fiscal 2006, Microsoft indicated that it would
not order any more Xbox-related products from us after our second fiscal
quarter. As a result, the second quarter of fiscal 2006 was the last quarter
during which we recognized revenue from the sale of our Xbox-related products
to
Microsoft. During fiscal 2006, we recognized $49.0 million of revenue from
our
contractual arrangements with SCE to jointly develop a custom GPU incorporating
our next-generation GeForce GPU and SCE’s system solutions in SCE’s
PlayStation3. No such revenue was recognized during our fiscal 2005 as our
definitive agreement with SCE was not executed until the first quarter of fiscal
2006.
Fiscal
Year 2005 vs. Fiscal Year 2004
Revenue
was $2.0 billion in fiscal 2005, compared to $1.8 billion in fiscal 2004, which
represented an increase of 10.3%. Fiscal 2005 was a 53-week year, compared
to
fiscal 2004 which was a 52-week year.
GPU
Business.
GPU
Business revenue increased by 7.1% to $1.4 billion for fiscal 2005 compared
to
$1.3 billion for fiscal 2004. The increase was primarily the result of increased
sales of our NVIDIA Quadro professional workstation products in fiscal 2005,
which was due to unit sales volume increases, and an increase in average selling
prices as a result of increased board sales. Notebook GPU sales increased in
fiscal 2005 as a result of sales of our GeForce FX Go notebook GPU products
outpacing the decline in our older notebook GPU product lines during the period.
Sales of desktop products increased in fiscal 2005 as a result of a significant
increase in sales of our high-end desktop products, offset by a slight decrease
in mainstream desktop products. High-end desktop sales increased in fiscal
2005
primarily due to unit volume increases primarily related to our GeForce 6800
and
6600 products. The decrease in mainstream desktop sales in fiscal 2005 was
mainly due to competitive pricing in the mainstream segment offset by the ramp
of product sales of our GeForce 6200 with TurboCache technology during the
fourth quarter of fiscal 2005.
MCP
Business.
MCP
Business revenue increased by 8.1% to $175.7 million for fiscal 2005 compared
to
$162.4 million for fiscal 2004. The increase in MCP Business revenue is due
to
increased sales of NVIDIA nForce3 and NVIDIA nForce4 products. NVIDIA nForce4
products began selling during the fourth quarter of fiscal 2005. This increase
was offset by a decrease in sales of NVIDIA nForce2 products.
Handheld
GPU Business.
Handheld GPU Business revenue increased by 409.7% to $45.9 million for fiscal
2005 compared to $9.0 million for fiscal 2004. The increase in handheld GPU
sales in fiscal 2005 was primarily due to our acquisition of MediaQ, Inc. in
the
third quarter of fiscal 2004, which represented our initial entry into the
handheld segment and to sales of our GoForce 4000 product.
Consumer
Electronics Business.
Consumer Electronics Business revenue decreased by 7.2% to $260.0 million for
fiscal 2005 compared to $280.1 million for fiscal 2004. The decrease in our
Consumer Electronics Business is due to unit sales volume increases offset
by a
lower average sales price. Sales of our Xbox products historically fluctuated
based on the timing of orders from Microsoft.
41
Concentration
of Revenue
Revenue
from sales to customers outside of the United States and other Americas
accounted for 84%, 76% and 75% of total revenue for fiscal 2006, 2005 and 2004,
respectively. Revenue by geographic region is allocated to individual countries
based on the location to which the products are initially billed even if the
foreign CEMs’, add-in board and motherboard manufacturers’ revenue is
attributable to end customers in a different location. The increase in the
percentage of revenue from sales to customers outside of the United States
and
other Americas for fiscal 2006 as compared to fiscal 2005 and for fiscal 2005
as
compared to fiscal 2004 is primarily due to decreased sales of XGPUs and MCPs
used in the Microsoft Xbox product, which were billed to Microsoft in the United
States.
Sales
to
our two largest customers accounted for approximately 26%, 31%, and 36% of
our
revenue during fiscal 2006, 2005 and 2004, respectively.
Gross
Profit
Gross
profit consists of total revenue, net of allowances, less cost of revenue.
Cost
of revenue consists primarily of the cost of semiconductors purchased from
subcontractors, including wafer fabrication, assembly, testing and packaging,
manufacturing support costs, including labor and overhead associated with such
purchases, final test yield fallout, inventory provisions and shipping
costs. Cost of revenue also includes development costs for license and
service arrangements. Gross margin is the percentage of gross profit to revenue.
Our gross margin can vary in any period depending on the mix of types of
products sold. Our
gross
margin was 38.3%, 32.3% and 29.0% for fiscal 2006, 2005 and 2004. A discussion
of our gross margin results for each of our operating segments is as
follows:
Fiscal
Year 2006 vs. Fiscal Year 2005
GPU
Business.
The
gross margin of our GPU Business increased during fiscal 2006 as compared to
fiscal 2005, primarily due to the sale of our GeForce 7 series GPUs and
increased sales of our GeForce 6 series GPUs, which collectively now account
for
approximately 78% of our GPU Business revenue. Our GeForce 7 and our
GeForce 6 series GPUs generally have higher gross margins than our GeForce
FX
series GPUs which comprised 53% of our
42
fiscal
2005 GPU Business revenue. In addition, average selling prices from our notebook
GeForce 7 and GeForce 6 series GPU products increased as a larger percentage
of
our total notebook revenue during fiscal 2006 as compared to fiscal
2005.
MCP
Business.
The
gross margin of our MCP Business increased during fiscal 2006 as compared to
fiscal 2005, primarily due to the increase in revenue from sales of our NVIDIA
nForce3 and NVIDIA nForce4 products, which to date have experienced higher
gross
margins than previous generations of NVIDIA nForce products.
Handheld
GPU Business.
The
gross margin of our Handheld GPU Business increased during fiscal 2006 as
compared to fiscal 2005, primarily due to the inventory write-off of certain
handheld products in the third quarter of fiscal 2005.
Consumer
Electronics Business.
The
gross margin of our Consumer Electronics Business increased during fiscal 2006
as compared to fiscal 2005, primarily due to the reduction of die costs for
Xbox-related products, and the recognition of revenue from our contractual
arrangements with SCE to jointly develop a custom GPU incorporating our
next-generation GeForce GPU and SCE’s system solutions in SCE’s
PlayStation3.
Fiscal
Year 2005 vs. Fiscal Year 2004
GPU
Business.
The
gross margin of our GPU Business increased during fiscal 2005 as compared to
fiscal 2004. Our GeForce FX series of GPU products experienced lower gross
margins than previous series of GeForce GPU products, such as the GeForce 4
series. Company-wide efforts were made to drive down cost and improve gross
margin and, as a result, during fiscal 2005, we were able to improve our gross
margin. In addition, in fiscal 2005, we realized increased sales of our
performance GeForce FX desktop GPU products and began shipping our GeForce
6
series GPUs, which are among our highest gross margin products. Finally, revenue
from our NVIDIA Quadro professional
workstation products, which typically provide the highest gross margins of
any
of our products, increased as a percentage of our total revenue during fiscal
2005. This increase in our mix of revenue toward higher-margin products led
to a
positive impact on our overall gross margin.
MCP
Business.
The
gross margin of our MCP Business increased during the fiscal 2005 as compared
fiscal 2004 primarily due to the increase in revenue from sales of our NVIDIA
nForce3 and NVIDIA nForce4 products, which to date have experienced higher
gross
margins than our previous generations of NVIDIA nForce products.
Handheld
GPU Business.
The
gross margin of our Handheld GPU Business decreased during fiscal 2005 as
compared to fiscal 2004 primarily due to the inventory write-off of certain
handheld products in the third quarter of fiscal 2004.
Consumer
Electronics Business.
The
gross margin of our Consumer Electronics Business decreased during fiscal 2005
as compared to fiscal 2004 primarily due to the pricing settlement with
Microsoft that we announced on February 6, 2003 that related to sales of our
Xbox related processors. In addition, during fiscal 2005 we realized a lower
average sales price on our sales of Xbox processors.
Consolidated
Gross Margin
The
improvement in our gross margin reflects our continuing focus on delivering
cost
effective product architectures, enhancing business processes and delivering
profitable growth. We expect gross margin to improve by approximately 0.5%
to 1.0% during the first quarter of fiscal 2007.
Operating
Expenses
Research
and Development
|
|
|
Year
Ended
|
|
|
|
|
|
Year
Ended
|
|
|
|
|
|
||||||||||||
|
|
|
Jan.
29,
|
|
Jan.
30,
|
|
$
|
|
%
|
|
Jan.
30,
|
|
Jan.
25,
|
|
$
|
|
%
|
|
||||||||
|
|
|
2006
|
|
2005
|
|
Change
|
|
Change
|
|
2005
|
|
2004
|
|
Change
|
|
Change
|
|
||||||||
|
|
|
(in
thousands)
|
|
||||||||||||||||||||||
|
Research
and Development:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
|
Salaries
and benefits
|
|
$
|
206.0
|
|
$
|
173.6
|
|
$
|
32.4
|
|
|
19
|
%
|
$
|
173.6
|
|
$
|
137.6
|
|
$
|
36.0
|
|
|
26
|
%
|
|
Computer
software and lab equipment
|
|
|
46.4
|
|
|
41.1
|
|
|
5.3
|
|
|
13
|
%
|
|
41.1
|
|
|
36.9
|
|
|
4.2
|
|
|
11
|
%
|
|
New
product development
|
|
|
28.6
|
|
|
29.0
|
|
|
(0.4
|
)
|
|
(1
|
)%
|
|
29.0
|
|
|
18.6
|
|
|
10.4
|
|
|
56
|
%
|
|
Facility
expense
|
|
|
32.0
|
|
|
31.4
|
|
|
0.6
|
|
|
2
|
%
|
|
31.4
|
|
|
28.3
|
|
|
3.1
|
|
|
11
|
%
|
|
Depreciation
and amortization
|
|
|
58.2
|
|
|
56.1
|
|
|
2.1
|
|
|
4
|
%
|
|
56.1
|
|
|
44.6
|
|
|
11.5
|
|
|
26
|
%
|
|
License
and development project costs
|
|
|
(28.9
|
)
|
|
(2.0
|
)
|
|
(26.9
|
)
|
|
(1,345
|
)%
|
|
(2.0
|
)
|
|
--
|
|
|
(2.0
|
)
|
|
--
|
|
|
Other
|
|
|
9.8
|
|
|
5.9
|
|
|
3.9
|
|
|
66
|
%
|
|
5.9
|
|
|
4.0
|
|
|
1.9
|
|
|
48
|
%
|
|
Total
|
|
$
|
352.1
|
|
$
|
335.1
|
|
$
|
17.0
|
|
|
5
|
%
|
$
|
335.1
|
|
$
|
270.0
|
|
$
|
65.1
|
|
|
24
|
%
|
|
Research
and development as a percentage of net revenue
|
|
|
15
|
%
|
|
17
|
%
|
|
|
|
|
|
17
|
%
|
|
15
|
%
|
|
|
|
|
||||
Research
and development expenses increased by $17.0 million, or 5%, from fiscal 2005
to
fiscal 2006 primarily due to a $32.4 million increase in salaries and benefits
related to 423 additional personnel and a $5.3 million increase in computer
software and equipment primarily due to increased allocation of information
technology expenses. Other expenses increased $3.9 million primarily due to
travel and other employee related expenses associated with the
43
expansion
of our international sites. Depreciation and amortization increased $2.1 million
due to increased purchases of hardware and software equipment and facilities
increased $0.6 million due to increased facilities expense allocation, both
of
which were based on the growth in headcount. These increases were offset by
an
increase of $26.9 million in license and development project costs, primarily
related to increased development costs related to our collaboration with SCE
and
other engineering costs related to a different development contract. As a
portion of our personnel who usually devote their time to research and
development efforts have been focusing their efforts on these development
projects, the costs associated with these individuals are not charged to
research and development, but were charged to cost of revenue in our
consolidated statements of income, or were capitalized on our consolidated
balance sheets and will be recognized as cost of revenue, on a percentage of
completion basis.
Research
and development expenses increased by $65.1 million, or 24%, from fiscal 2004
to
fiscal 2005 primarily due to a $36.0 million increase in salaries and benefits
related to 174 additional personnel and a $10.4 million increase in new product
development costs related to an overall increase in the number of product
tape-outs and in prototype materials. Depreciation and amortization increased
$11.5 million due to emulation hardware and software programs that were
purchased during fiscal 2004, resulting in a full year of depreciation in fiscal
2005 compared to a partial year of depreciation in fiscal 2004. Computer
software and equipment increased $4.2 million primarily due to increased
allocation of information technology expenses and facilities increased $3.1
million due to increased facilities expense allocation, both of which were
based
on the growth in headcount. Other expenses increased $1.9 million primarily
due
to travel and other employee related expenses associated with the expansion
of
our international sites. These increases were offset by an increase of $2.0
million in license and development project costs related to our collaboration
with SCE that are classified as cost of revenue in our consolidated statements
of income, or were capitalized on our consolidated balance sheets and will
be
recognized on a percentage of completion basis. Our collaboration with SCE
was
not in effect during fiscal 2004.
We
anticipate that we will continue to devote substantial resources to research
and
development, and we expect these expenses to increase in absolute dollars in
the
foreseeable future due to the increased complexity and the greater number of
products under development. Research and development expenses are likely to
fluctuate from time to time to the extent we make periodic incremental
investments in research and development and these investments may be independent
of our level of revenue.
Sales,
General and Administrative
|
|
|
Year
Ended
|
|
|
|
|
|
Year
Ended
|
|
|
|
|
|
||||||||||||
|
|
|
Jan.
29,
|
|
Jan.
30,
|
|
$
|
|
%
|
|
Jan.
30,
|
|
Jan.
25,
|
|
$
|
|
%
|
|
||||||||
|
|
|
2006
|
|
2005
|
|
Change
|
|
Change
|
|
2005
|
|
2004
|
|
Change
|
|
Change
|
|
||||||||
|
|
|
(in
thousands)
|
|
||||||||||||||||||||||
|
Sales,
General and Administrative:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
|
Salaries
and benefits
|
|
$
|
108.5
|
|
$
|
94.7
|
|
$
|
13.8
|
|
|
15
|
%
|
$
|
94.7
|
|
$
|
76.3
|
|
$
|
18.4
|
|
|
24
|
%
|
|
Advertising
and promotions
|
|
|
49.4
|
|
|
66.6
|
|
|
(17.2
|
)
|
|
(26
|
)%
|
|
66.6
|
|
|
47.2
|
|
|
19.4
|
|
|
41
|
%
|
|
Legal
and accounting fees
|
|
|
18.7
|
|
|
12.6
|
|
|
6.1
|
|
|
48
|
%
|
|
12.6
|
|
|
12.6
|
|
|
--
|
|
|
--
|
|
|
Facility
expense
|
|
|
12.5
|
|
|
9.6
|
|
|
2.9
|
|
|
30
|
%
|
|
9.6
|
|
|
8.3
|
|
|
1.3
|
|
|
16
|
%
|
|
Depreciation
and amortization
|
|
|
8.5
|
|
|
13.0
|
|
|
(4.5
|
)
|
|
(35
|
)%
|
|
13.0
|
|
|
14.6
|
|
|
(1.6
|
)
|
|
(11
|
)%
|
|
Other
|
|
|
6.8
|
|
|
4.3
|
|
|
2.5
|
|
|
58
|
%
|
|
4.3
|
|
|
6.2
|
|
|
(1.9
|
)
|
|
(31
|
)%
|
|
Total
|
|
$
|
204.4
|
|
$
|
200.8
|
|
$
|
3.6
|
|
|
2
|
%
|
$
|
200.8
|
|
$
|
165.2
|
|
$
|
35.6
|
|
|
22
|
%
|
|
Sales,
general and administrative as a percentage of net revenue
|
|
|
9
|
%
|
|
10
|
%
|
|
|
|
|
|
10
|
%
|
|
9
|
%
|
|
|
|
|
||||
Sales,
general and administrative expenses increased $3.6 million, or 2%, from fiscal
2005 to fiscal 2006 primarily due to a $13.8 million increase in salaries and
benefits related to 122 additional personnel and a $6.1 million increase
44
in
legal
expenses primarily due to certain insurance reimbursements that we received
during fiscal 2005 that reduced this expense, and increased litigation activity
during fiscal 2006 related to 3dfx Interactive, Inc., or 3dfx, and American
Video Graphics, or AVG. In addition there were increases of $2.9 million in
facility expense due primarily to the expansion of our international sites
and
$2.5 million in other general and administrative expenses, offset by a reduction
in bad debt expense. These increases were offset by a $17.2 million decrease
in
advertising and promotion costs, primarily associated with a reduction in
certain marketing programs, tradeshow expenses, new product launches and
customer samples, other marketing costs, travel related and employee recruitment
expenses, and by a $4.5 million decrease in depreciation and amortization.
Sales,
general and administrative expenses increased $35.6 million, or 22%, from fiscal
2004 to fiscal 2005 primarily due to an $18.4 million increase in salaries
and
benefits related to 88 additional personnel and a $19.4 million increase in
advertising and promotion costs for tradeshows and new product launches and
other marketing costs, including travel and customer samples. These increases
were offset by a decrease of $1.9 million in other expenses during the period,
including a reduction in bad debt expense.
Operating
Expenses
We
anticipate that our operating expenses will increase in the first quarter of
fiscal 2007. In addition to the headcount additions that we plan to make, we
will be adding the operating costs related to the acquisition of ULi, which
closed on February 20, 2006. We expect that these factors will result in an
increase in operating expenses in the first quarter of fiscal 2007, as compared
to the fourth quarter of fiscal 2006. In addition, the first quarter of fiscal
2007 will be the first time that we include stock-based employee compensation
expense under Statement of Financial Accounting Standards No. 123(R), or SFAS
No. 123(R), Share-Based
Payment
in our
results. We anticipate that our stock-based compensation expense will be
approximately $18 to $22 million for the first quarter of fiscal 2007.
In-process
research and development
In
connection with our acquisition of MediaQ in August 2003, we wrote-off $3.5
million of in-process research and development expense, or IPR&D, that had
not yet reached technological feasibility and had no alternative future use.
In
accordance with SFAS No. 2, Accounting
for Research and Development Costs,
as
clarified by FIN 4, Applicability
of SFAS No. 2 to Business Combinations Accounted for by the Purchase Method
an
interpretation of SFAS No. 2, amounts
assigned to IPR&D meeting the above-stated criteria must be charged to
expense as part of the allocation of the purchase price.
Settlement
Costs
Settlement
costs were $14.2 million for fiscal 2006. The settlement costs are
associated with two litigation matters, 3dfx and AVG. AVG is settled. The
3dfx matter is not finally settled and is subject to judicial review and the
completion of appropriate procedures and documents. However, based on the
potential settlement in this case, we have concluded that a loss is probable
and
that we can reasonably estimate the amount of loss. Please refer to Note
11 of the Notes to Consolidated Financial Statements for further
information.
Interest
Income and Interest Expense
Interest
income consists of interest earned on cash, cash equivalents and marketable
securities. Interest income increased from $11.4 million to $20.7 million from
fiscal 2005 to fiscal 2006 primarily due to the result of higher average
balances of cash, cash equivalents and marketable securities and higher interest
rates in fiscal 2006 when compared to fiscal 2005. Interest income decreased
from $18.6 million to $11.4 million from fiscal 2004 to fiscal 2005 primarily
due to the result of lower overall balances of cash, cash equivalents and
marketable securities and due to lower market interest rates.
Interest
expense primarily consists of interest incurred as a result of capital lease
obligations and, prior to the redemption in October 2003, interest on the
convertible subordinated debentures, or the Notes. Interest expense decreased
from $12.0 million to $0.2 million from fiscal 2004 to fiscal 2005. The decrease
was primarily due to the redemption of the Notes.
45
Other
Income (Expense), net
Other
income and expense primarily consists of realized gains and losses on the sale
of marketable securities. Other income decreased by $1.1 million
from fiscal 2005 to fiscal 2006 primarily due to the liquidation of
marketable securities during fiscal 2006 in order to obtain the cash needed
for
the repatriation of certain foreign earnings under the American Jobs Creation
Act of 2004. Other income decreased by $2.4 million from fiscal 2004 to
fiscal 2005 primarily due to $2.5 million of realized gains on the sale of
marketable securities during fiscal 2004 as a result of our liquidation of
a
significant portion of our marketable securities portfolio in order to obtain
the cash required to redeem the Notes in October 2003. This decrease was offset
by a $1.0 million realized gain during fiscal 2005 related to the receipt of
cash and marketable securities as part of an investment exchange.
Income
Taxes
We
recognized income tax expense of $57.6 million, $25.1 million, and $12.3 million
in fiscal 2006, 2005 and 2004, respectively. Income tax expense as a percentage
of income before taxes, or our annual effective tax rate, was 16.0% in fiscal
2006, 20.0% in fiscal 2005, and 14.1% in fiscal 2004.
The
difference in the effective tax rates amongst the three years is primarily
attributable to changes in our geographic mix of income subject to tax.
Please
refer to Note 13 of the Notes to Consolidated Financial Statements for further
information regarding the components of our income tax expense.
Convertible
Debenture Redemption Expense
On
October 24, 2003, we fully redeemed the Notes. The aggregate principal amount
of
the Notes outstanding was $300.0 million, which included $18.6 million of Notes
that we had purchased in the open market during the three months ended October
26, 2003. The redemption price was equal to approximately 102.7% of the
outstanding principal amount of the Notes, plus accrued and unpaid interest
up
to, but excluding, the redemption date. In connection with the redemption of
the
Notes, we recorded a one-time charge in fiscal 2004 of approximately $13.1
million, which included a $7.6 million redemption premium and $5.5 million
of
unamortized issuance costs.
Liquidity
and Capital Resources
As
of
January 29, 2006, we had $950.2 million in cash, cash equivalents and marketable
securities, an increase of $280.1 million from the end of fiscal 2005.
As
of
January 30, 2005, we had $670.0 million in cash, cash equivalents and marketable
securities, an increase of $66.0 million from the end of fiscal 2004.
Our
portfolio of cash equivalents and marketable securities is managed by several
financial institutions. Our investment policy requires the purchase of top-tier
investment grade securities, the diversification of asset type and certain
limits on our portfolio duration.
Operating
activities generated cash of $446.4 million, $132.2 million, and $49.7 million
during fiscal 2006, 2005, and 2004, respectively. The increase in cash flows
from operating activities in fiscal 2006 when compared to fiscal 2005 was
primarily related to the $202.2 million increase in net income and changes
in
operating assets and liabilities. On our consolidated balance sheet, accrued
liabilities increased $77.2 million primarily due to the recording of income
taxes payable for fiscal 2006, the increase in accruals related to customer
programs and the recording of $30.6 million in relation to 3dfx, of which $25.0
million was recorded as an adjustment to goodwill. Accounts payable decreased
$58.8 million and inventories decreased $60.7 million primarily as a result
of
significant reductions in older products, offset by an increase in new products.
Accounts receivable increased $21.9 million primarily due to increased sales
and
improved linearity of sales, and cash collections during the fourth quarter
of
fiscal 2006 as compared to the fourth quarter of fiscal 2005. The
increase in cash flows from operating activities in fiscal 2005 when compared
to
fiscal 2004 was primarily related to the $25.9 million increase in net income
and changes in operating assets and liabilities. On our consolidated balance
sheet, accrued liabilities increased $37.3 million
46
primarily
due to an increase in rebates payable, which resulted from increased OEM
business. Accounts payable increased $52.9 million primarily due to purchases
from subcontract manufacturers for inventory. Offsetting these increases, our
accounts receivable increased $99.6 million primarily due to increased sales
during the fourth quarter of fiscal 2005 as compared to the fourth quarter
of
fiscal 2004.
Investing
activities have consisted primarily of purchases and sales of marketable
securities, and purchases of property and equipment, which include leasehold
improvements for our facilities, and intangible assets. Investing activities
used cash of $41.8 million and $152.0 million during fiscal 2006 and 2005,
respectively. Net cash used by investing activities during fiscal 2006 was
primarily due to $79.6 million for capital expenditures primarily attributable
to purchases of new research and development equipment, hardware equipment,
technology licenses, software, intangible assets and leasehold improvements
at
our headquarters facility in Santa Clara, California and at our international
sites. In addition, we used cash of $12.1 million to acquire certain assets
of a
private company and $9.7 million related to investments we made during fiscal
2006 in non-affiliated companies. These uses of cash were offset by $59.6
million of net proceeds from sales of marketable securities. Investing
activities used cash of $152.0 million and provided cash of $88.0 million during
fiscal 2005 and 2004, respectively. Net cash used by investing activities during
fiscal 2005 was primarily due to $84.7 million of net purchases of marketable
securities. In addition, we used $67.3 million for capital expenditures
primarily attributable to purchases of leasehold improvements for our new data
center at our headquarters campus, new research and development emulation
equipment, technology licenses, software and intangible assets. We
expect
to spend approximately $80 million to $100 million for capital expenditures
during fiscal 2007, primarily for purchases of software licenses, emulation
equipment, computers and engineering workstations. In addition, we may continue
to use cash in connection with the acquisition of new businesses or assets.
Financing
activities used cash of $61.4 million during fiscal 2006 compared to cash
provided of $13.8 million during fiscal 2005. Cash used in fiscal 2006 primarily
resulted from $188.5 million related to our stock repurchase program, offset
by
$127.5 million of common stock issued under employee stock plans. In fiscal
2005, the cash provided was primarily from $42.5 million of common stock issued
under employee stock plans, offset by $24.6 million related to our stock
repurchase program. Financing
activities provided cash of $13.8 million during fiscal 2005 compared to cash
used of $270.3 million during fiscal 2004. Cash provided in fiscal 2005
primarily resulted from $42.5 million of common stock issued under employee
stock plans, offset by $24.6 million related to our stock repurchase program.
In
fiscal 2004, the cash used was primarily due to the $300.0 million redemption
of
the Notes, which included $18.6 million of Notes that we had purchased during
the three months ended October 26, 2003.
Stock
Repurchase Program
On
August
9, 2004 we announced that our Board of Directors, or the Board, had authorized
a
stock repurchase program to repurchase shares of our common stock, subject
to
certain specifications, up to an aggregate maximum amount of $300.0 million.
As
part of our share repurchase program, we have entered into and we may continue
to enter into structured share repurchase transactions with financial
institutions. These agreements generally require that we make an up-front
payment in exchange for the right to receive a fixed number of shares of our
common stock upon execution of the agreement, and a potential incremental number
of shares of our common stock, within a pre-determined range, at the end of
the
term of the agreement. During the fourth quarter of fiscal 2006, we repurchased
1.3 million shares of our common stock for $50.0 million under a structured
share repurchase transaction, which we recorded on the trade date of the
transaction. Through the end of the fourth quarter of fiscal 2006, we have
repurchased 8.5 million shares under our stock repurchase program for a total
cost of $213.2 million. During the first quarter of fiscal 2007, we entered
into
a structured share repurchase transaction to repurchase shares of our common
stock for $50.0 million that we expect to settle prior to the end of our first
fiscal quarter.
On
March
6, 2006, we announced that our Board of Directors had approved an increase
in our existing stock repurchase program. We announced a $400 million
increase to the original stock repurchase program we had announced in August
2004. As a result of this increase, the amount of common stock the Board of
Directors has authorized to be repurchased has now been increased to a total
of
$700 million. The repurchases will be made from time to time in the open market,
in privately negotiated transactions, or in structured stock repurchase
transactions, in compliance with the Securities and Exchange Commission Rule
10b-18, subject to market conditions, applicable legal requirements, and other
factors. The program does not obligate NVIDIA to acquire any particular amount
of common stock and the program may be suspended at any time at our discretion.
47
Operating
Capital and Capital Expenditure Requirements
We
believe that our existing cash balances and anticipated cash flows from
operations will be sufficient to meet our operating, acquisition and capital
requirements for at least the next 12 months. However, there is no assurance
that we will not need to raise additional equity or debt financing within this
time frame. Additional financing may not be available on favorable terms or
at
all and may be dilutive to our then-current stockholders. We also may require
additional capital for other purposes not presently contemplated. If we are
unable to obtain sufficient capital, we could be required to curtail capital
equipment purchases or research and development expenditures, which could harm
our business. Factors that could affect our cash used or generated from
operations and, as a result, our need to seek additional borrowings or capital
include:
· decreased
demand and market acceptance for our products and/or our customers’ products;
· inability
to successfully develop and produce in volume production our next-generation
products;
· competitive
pressures resulting in lower than expected average selling prices;
and
· new
product announcements or product introductions by our competitors.
For
additional factors see “Item 1A. Risk Factors - Risks Related to Our Operations
- Our operating results are unpredictable and may fluctuate, and if our
operating results are below the expectations of securities analysts or
investors, our stock price could decline.”
Shelf
Registration Statement
In
December 2003, we filed a Form S-3 with the SEC under its "shelf" registration
process. This shelf registration was declared effective by the SEC on March
25,
2004. Under this shelf registration statement, we may sell common stock,
preferred stock, debt securities, warrants, stock purchase contracts and/or
stock purchase units in one or more offerings up to a total dollar amount of
$500.0 million. Unless otherwise indicated in the applicable prospectus
supplement, we intend to use the proceeds for working capital and general
corporate purposes.
3dfx
Asset Purchase
The
3dfx
asset purchase closed on April 18, 2001. Under the terms of the Asset Purchase
Agreement, the cash consideration due at the closing was $70.0 million, less
$15.0 million that was loaned to 3dfx pursuant to a Credit Agreement dated
December 15, 2000. The Asset Purchase Agreement also provided, subject to the
other provisions thereof, that if 3dfx properly certified that all its debts
and
other liabilities had been provided for, then we would have been obligated
to
pay 3dfx two million shares of NVIDIA common stock. If 3dfx could not make
such
a certification, but instead properly certified that its debts and liabilities
could be satisfied for less than $25.0 million, then 3dfx could have elected
to
receive a cash payment equal to the amount of such debts and liabilities and
a
reduced number of shares of our common stock, with such reduction calculated
by
dividing the cash payment by $25.00 per share. If 3dfx could not certify that
all of its debts and liabilities had been provided for, or could not be
satisfied, for less than $25.0 million, we would not be obligated under the
agreement to pay any additional consideration for the assets. In October 2002,
3dfx filed for Chapter 11 bankruptcy protection in the United States Bankruptcy
Court for the Northern District of California. In March 2003, we were served
with a complaint filed by the Trustee appointed by the Bankruptcy Court which
sought, among other things, payments from us as additional purchase price
related to our purchase of certain assets of 3dfx. In early November 2005,
after
many months of mediation, NVIDIA and the Official Committee of Unsecured
Creditors of 3dfx reached a conditional settlement of the Trustee’s claims
against NVIDIA. This conditional settlement, which will be subject to the review
and approval of the Bankruptcy Court, calls for a payment of approximately
$30.6
million to the 3dfx estate. Under the settlement, $5.6 million relates to
various administrative expenses and Trustee fees, and $25.0 million relates
to
the satisfaction of debts and liabilities owed to the general unsecured
creditors of 3dfx. As such, during the three months 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. Please refer to Note 11 of the Notes to
Consolidated Financial Statements for further information regarding this
litigation.
48
Contractual
Obligations
The
following summarizes our contractual obligations that are not on our balance
sheet as of January 29, 2006 and the effect such obligations are expected to
have on our liquidity and cash flow in future periods:
|
Contractual
Obligations
|
|
Total
|
|
Within
1 Year
|
|
2-3
Years
|
|
4-5
Years
|
|
After
5 Years
|
|
|||||
|
|
|
(in
thousands)
|
|
|||||||||||||
|
Operating
leases
|
|
$
|
172,483
|
|
$
|
29,557
|
|
$
|
57,717
|
$
|
55,606
|
|
$
|
29,603
|
|
|
|
Purchase
obligations (1)
|
|
|
401,571
|
|
|
401,571
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
Total
contractual obligations
|
|
$
|
574,054
|
|
$
|
431,128
|
|
$
|
57,717
|
|
$
|
55,606
|
|
$
|
29,603
|
|
(1)
Represents our inventory purchase commitments as of January 29,
2006.
Off-Balance
Sheet Arrangements
We
have
no material off-balance sheet arrangements as defined in Regulation S-K
303(a)(4)(ii).
Recently
Issued Accounting Pronouncements
In
December 2004, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards No. 123(R), or SFAS No. 123(R),
Share-Based
Payment,
which
requires the measurement and recognition of compensation expense for all
stock-based compensation payments. In April 2005, the SEC delayed the effective
date of SFAS No. 123(R), which is now effective for annual periods that begin
after June 15, 2005. In March 2005, the SEC issued Staff Accounting Bulletin
No.
107, or SAB No. 107, which includes interpretive guidance for the initial
implementation of SFAS No. 123(R). SFAS No. 123(R) allows for either prospective
recognition of compensation expense or retrospective recognition. We intend
to
adopt SFAS No. 123(R) using the modified prospective method, which requires
the
application of the accounting standard as of January 30, 2006, the first day
of
our fiscal 2007. Expensing these incentives in future periods will materially
and adversely affect our reported operating results as the stock-based
compensation expense would be charged directly against our reported earnings.
We
anticipate that our stock-based compensation expense will be approximately
$18
to $22 million for the first quarter of fiscal 2007 and we are unsure how the
market will react to this adverse affect on our operating results, which could
impact our stock price.
During
the first quarter of fiscal 2006, we transitioned from a Black-Scholes model
to
a binomial model for calculating the estimated fair value of new stock-based
compensation awards granted under our stock option plans. As a result of recent
regulatory guidance, including SAB No. 107, and in anticipation of the impending
effective date of SFAS No. 123(R), we reevaluated the assumptions we use to
estimate the value of employee stock options and shares issued under our
employee stock purchase plan, beginning with stock options granted and shares
issued under our employee stock purchase plan in our first quarter of fiscal
2006. We determined that the use of implied volatility is expected to be more
reflective of market conditions and, therefore, can reasonably be expected
to be
a better indicator of expected volatility than historical volatility.
Additionally, in the first quarter of fiscal 2006, we began segregating options
into groups for employees with relatively homogeneous exercise behavior in
order
to make full use of the capabilities of the binomial valuation model. As such,
the expected term is based on detailed historical data about employees' exercise
behavior, vesting schedules, and death and disability probabilities. We believe
the resulting binomial calculation provides a more refined estimate of the
fair
value of our employee stock options. For our employee stock purchase plan,
we
decided to continue to use the Black-Scholes model to calculate the estimated
fair value.
In
June 2005, the FASB issued SFAS No. 154, or SFAS No. 154, Accounting
Changes and Error Corrections, a replacement of APB Opinion No. 20 and FASB
Statement No. 3.
SFAS
No. 154 applies to all voluntary changes
49
in
accounting principle, and changes the requirements for accounting for and
reporting of a change in accounting principle. We will adopt SFAS 154
during the first quarter of fiscal 2007. We do not expect the adoption of SFAS
No. 154 to have a material impact on our consolidated financial position,
results of operations or cash flows.
In
June
2005, the FASB ratified the Emerging Issues Task Force’s, or EITF’s, Issue
No. 05-06, or EITF No. 05-06, Determining
the Amortization Period for Leasehold Improvements.
EITF
No. 05-06 provides that the amortization period used for leasehold improvements
acquired in a business combination or purchased after the inception of a lease
be the shorter of (a) the useful life of the assets or (b) a term that
includes required lease periods and renewals that are reasonably assured upon
the acquisition or the purchase. The provisions of EITF No. 05-06 are effective
on a prospective basis for leasehold improvements purchased or acquired. We
adopted EITF No. 05-06 during the second quarter of fiscal 2006 and it did
not
have a material impact on our consolidated financial position, results of
operations or cash flows.
In
November 2005, the FASB issued Staff Position, or FSP, FAS115-1/124-1,
The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments,
which
addresses the determination as to when an investment is considered impaired,
whether that impairment is other than temporary, and the measurement of an
impairment loss. This FSP also includes accounting considerations
subsequent to the recognition of an other-than-temporary impairment and requires
certain disclosures about unrealized losses that have not been recognized as
other-than-temporary impairments. The guidance in this FSP amends SFAS
No. 115, Accounting
for Certain Investments in Debt and Equity Securities,
and
SFAS No. 124, Accounting
for Certain Investments Held by Not-for-Profit Organizations,
and APB
Opinion No. 18, The
Equity Method of Accounting for Investments in Common Stock. We
will adopt this FSP during the first quarter of fiscal 2007. We do not
believe the adoption of this FSP will have
a
material impact on our consolidated financial position, results of operations
or
cash flows.
In
November 2005, the FASB issued FSP FAS123(R)-3, Transition
Election to Accounting for the Tax Effects of Share-Based Payment Awards.
This
FSP
requires an entity to follow either the transition guidance for the
additional-paid-in-capital pool as prescribed in SFAS No. 123(R),
Share-Based
Payment,
or the
alternative transition method as described in the FSP. An entity that adopts
SFAS No. 123(R) using the modified prospective application may make a
one-time election to adopt the transition method described in this FSP. An
entity may take up to one year from the later of its initial adoption of SFAS
No. 123(R) or the effective date of this FSP to evaluate its available
transition alternatives and make its one-time election. This FSP became
effective in November 2005. We are currently evaluating the impact that the
adoption of this FSP could have on our consolidated
financial position, results of operations or cash flows.
ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest
Rate Risk
We
invest
in a variety of financial instruments, consisting principally of investments
in
commercial paper, money market funds and highly liquid debt securities of
corporations, municipalities and the United States government and its agencies.
These investments are denominated in United States dollars.
We
account for our investment instruments in accordance with Statement of Financial
Accounting Standards No. 115, or SFAS No. 115, Accounting
for Certain Investments in Debt and Equity Securities.
All of
the cash equivalents and marketable securities are treated as
“available-for-sale” under SFAS No. 115. Investments in both fixed rate and
floating rate interest earning instruments carry a degree of interest rate
risk.
Fixed rate securities may have their market value adversely impacted due to
a
rise in interest rates, while floating rate securities may produce less income
than expected if interest rates fall. Due in part to these factors, our future
investment income may fall short of expectations due to changes in interest
rates or we may suffer losses in principal if we are forced to sell securities
that decline in market value due to changes in interest rates. However, because
we classify our debt securities as “available-for-sale”, no gains or losses are
recognized due to changes in interest rates unless such securities are sold
prior to maturity or declines in fair value are determined to be other than
temporary. These securities are reported at fair value with the related
unrealized gains and losses included in accumulated other comprehensive income,
a component of stockholders’ equity, net of tax.
50
As
of
January 29, 2006, we performed a sensitivity analysis on our floating and fixed
rate financial investments. According to our analysis, parallel shifts in the
yield curve of both +/- 0.5% would result in changes in fair market values
for
these investments of approximately $2.6 million.
Exchange
Rate Risk
We
consider our direct exposure to foreign exchange rate fluctuations to be
minimal. Currently, sales and arrangements with third-party manufacturers
provide for pricing and payment in United States dollars, and, therefore, are
not subject to exchange rate fluctuations. Increases in the value of the United
States’ dollar relative to other currencies would make our products more
expensive, which could negatively impact our ability to compete. Conversely,
decreases in the value of the United States’ dollar relative to other currencies
could result in our suppliers raising their prices in order to continue doing
business with us. To date, we have not engaged in any currency hedging
activities, although we may do so in the future. Fluctuations in currency
exchange rates could harm our business in the future.
ITEM
8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA
The
information required by this item is set forth in our Consolidated Financial
Statements and Notes thereto included in this Annual Report on Form
10-K.
ITEM
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Not
applicable.
ITEM
9A. CONTROLS AND PROCEDURES
Disclosure
Controls and Procedures
Based
on
their evaluation as of January 29, 2006, our management, including our Chief
Executive Officer and Chief Financial Officer, have concluded that our
disclosure controls and procedures (as defined in Rule 13a-15(e) under the
Securities Exchange Act of 1934, or the Exchange Act) were effective to ensure
that the material information required to be disclosed by us in this Annual
Report on Form 10-K was recorded, processed, summarized and reported within
the
time periods specified in the Securities and Exchange Commission’s rules and
instructions for Form 10-K.
Management’s
Annual Report on Internal Control Over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Exchange Act
Rule 13a-15(f). Under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer,
we conducted an evaluation of the effectiveness of our internal control over
financial reporting as of January 29, 2006 based on the criteria set forth
in
Internal
Control - Integrated Framework issued
by
the Committee of Sponsoring Organizations of the Treadway Commission. Based
on
our evaluation under the criteria set forth in Internal
Control — Integrated Framework,
our
management concluded that our internal control over financial reporting was
effective as of January 29, 2006.
Our
management’s assessment of the effectiveness of our internal control over
financial reporting as of January 29, 2006 has been audited by
PricewaterhouseCoopers LLP, an independent registered public accounting firm,
as
stated in their report which is included herein.
51
Changes
in Internal Control Over Financial Reporting
There
were no changes in our internal controls over financial reporting during our
last fiscal quarter that have materially affected, or are reasonably likely
to
materially affect, our internal control over financial reporting.
Inherent
Limitations on Effectiveness of Controls
Our
management, including our Chief Executive Officer and Chief Financial Officer,
does not expect that our disclosure controls and procedures or our internal
controls, will prevent all error and all fraud. A control system, no matter
how
well conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of the control system are met. Further, the design
of a control system must reflect the fact that there are resource constraints,
and the benefits of controls must be considered relative to their costs. Because
of the inherent limitations in all control systems, no evaluation of controls
can provide absolute assurance that all control issues and instances of fraud,
if any, within NVIDIA have been detected.
ITEM
9B. OTHER INFORMATION
None.
PART
III
ITEM
10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Identification
of Directors
Reference
is made to the information regarding directors appearing under the heading
“Election of Directors” in our 2006 Proxy Statement, which information is hereby
incorporated by reference.
Identification
of Executive Officers
Reference
is made to the information regarding executive officers appearing under the
heading “Executive Officers of the Registrant” in Part I of this Annual Report
on Form 10-K, which information is hereby incorporated by reference.
Identification
of Audit Committee and Financial Expert
Reference
is made to the information regarding directors appearing under the heading
“Report of the Audit Committee of the Board of Directors” in our 2006 Proxy
Statement, which information is hereby incorporated by reference.
Material
Changes to Procedures for Recommending Directors
Reference
is made to the information regarding directors appearing under the heading
“Election of Directors” in our 2006 Proxy Statement, which information is hereby
incorporated by reference.
Compliance
with Section 16(a) of the Exchange Act
Reference
is made to the information appearing under the heading “Section 16(a) Beneficial
Ownership Reporting Compliance” in our 2006 Proxy Statement, which information
is hereby incorporated by reference.
52
Code
of Ethics
Reference
is made to the information appearing under the heading “Code of Ethics” in our
2006 Proxy Statement, which information is hereby incorporated by reference.
The
full text of our “Worldwide Code of Ethics” and “Financial Team Code of Ethics”
are published on our Investor Relations web site, under Corporate Governance,
at
www.nvidia.com.
ITEM
11. EXECUTIVE COMPENSATION
Reference
is made to the information appearing under the heading “Executive Compensation”
in our 2006 Proxy Statement, which information is hereby incorporated by
reference.
ITEM
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
Ownership
of NVIDIA Securities
Reference
is made to the information appearing in our 2006 Proxy Statement under the
heading “Security Ownership of Certain Beneficial Owners and Management”, which
information is hereby incorporated by reference.
Equity
Compensation Plan Information
Information
regarding our equity compensation plans, including both stockholder approved
plans and non-stockholder approved plans, will be contained in our definitive
Proxy Statement with respect to our Annual Meeting of Stockholders under
the
caption "Compensation-Equity Compensation Plan Information," and is incorporated
by reference into this report.
ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Reference
is made to the information appearing in our 2006 Proxy Statement under the
heading “Certain Transactions,” which information is hereby incorporated by
reference.
ITEM
14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Reference
is made to the information appearing in our 2006 Proxy Statement, which
information is hereby incorporated by reference.
53
PART
IV
ITEM
15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
|
|
|
|
Page
|
|
|
|
|
|
|
(a)
|
1.
|
Consolidated
Financial Statements
|
|
|
|
|
Report
of Independent Registered Public Accounting Firm, PricewaterhouseCoopers
LLP
|
55
|
|
|
|
Report
of Independent Registered Public Accounting Firm, KPMG LLP
|
57
|
|
|
|
Consolidated
Balance Sheets as of January 29, 2006 and January 30, 2005
|
58
|
|
|
|
Consolidated
Statements of Income for the years ended January 29, 2006, January
30,
2005, and January 25, 2004
|
59
|
|
|
|
Consolidated
Statements of Stockholders’ Equity and Comprehensive Income for the years
ended January 29, 2006, January 30, 2005, and January 25,
2004
|
60
|
|
|
|
Consolidated
Statements of Cash Flows for the years January 29, 2006, January
30, 2005,
and January 25, 2004
|
61
|
|
|
|
Notes
to Consolidated Financial Statements
|
63
|
|
|
|
|
|
|
(a)
|
2.
|
Financial
Statement Schedules
|
|
|
|
|
Schedule
II Valuation and Qualifying Accounts
|
92
|
|
|
|
|
|
|
(a)
|
3.
|
Exhibits
|
93
|
|
|
|
The
exhibits listed in the accompanying index to exhibits are filed or
incorporated by reference as a part of this Annual Report on Form
10-K.
|
54
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Stockholders and Board of Directors
NVIDIA
Corporation:
We
have
completed integrated audits of NVIDIA Corporation’s fiscal 2006 and 2005
consolidated financial statements and of its internal control over financial
reporting as of January 29, 2006 in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Our opinions, based on
our
audits, are presented below.
Consolidated
financial statements and financial statement schedule
In
our
opinion, the consolidated financial statements listed in the index appearing
under Item 15(a)(1) present fairly, in all material respects, the financial
position of NVIDIA Corporation and its subsidiaries at January 29, 2006 and
January 30, 2005 and the results of their operations and their cash flows for
each of the two years in the period ended January 29, 2006 in conformity with
accounting principles generally accepted in the United States of America. In
addition, in our opinion, the financial statement schedule listed in the index
appearing under Item 15(a)(2) presents fairly, in all material respects, the
information set forth therein as of January 29, 2006 and January 30, 2005 and
for each of the two years in the period ended January 29, 2006 when read in
conjunction with the related consolidated financial statements. These financial
statements and the financial statement schedule are the responsibility of the
Company’s management. Our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit of financial statements
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
Internal
control over financial reporting
Also,
in
our opinion, management’s assessment, included in Management’s Annual Report on
Internal Control over Financial Reporting appearing under Item 9A, that the
Company maintained effective internal control over financial reporting as of
January 29, 2006 based on criteria established in Internal
Control - Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO),
is fairly stated, in all material respects, based on those criteria.
Furthermore, in our opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of January 29, 2006,
based on criteria established in Internal
Control - Integrated Framework
issued
by the COSO. The Company’s management is responsible for maintaining effective
internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our responsibility
is to express opinions on management’s assessment and on the effectiveness of
the Company’s internal control over financial reporting based on our audit. We
conducted our audit of internal control over financial reporting in accordance
with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial
reporting was maintained in all material respects. An audit of internal control
over financial reporting includes obtaining an understanding of internal control
over financial reporting, evaluating management’s assessment, testing and
evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we consider necessary in the circumstances.
We believe that our audit provides a reasonable basis for our opinions.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (i) pertain
to the maintenance of records that, in reasonable detail,
55
accurately
and fairly reflect the transactions and dispositions of the assets of the
company; (ii) provide reasonable assurance that transactions are recorded
as necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures
of
the company are being made only in accordance with authorizations of management
and directors of the company; and (iii) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use,
or
disposition of the company’s assets that could have a material effect on the
financial statements.
Because
of its inherent limitations, internal control over financial reporting may
not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
/s/
PricewaterhouseCoopers LLP
San
Jose,
California
March
16,
2006
56
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The
Board
of Directors and Stockholders
NVIDIA
Corporation:
We
have
audited the accompanying consolidated statements of income, stockholders’ equity
and comprehensive income, and cash flows of NVIDIA Corporation and subsidiaries
(the “Company”) for the year ended January 25, 2004. In connection with our
audits of the consolidated financial statements, we have also audited the
financial statement schedule for the year ended January 25, 2004 as listed
in
the index of Item 15. These consolidated financial statements and financial
statement schedule are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audit.
We
conducted our audit in
accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit
to
obtain reasonable assurance about whether the financial statements are free
of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In
our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the results of operations and the cash flows of NVIDIA
Corporation and subsidiaries for the year ended January 25, 2004 in conformity
with U.S. generally accepted accounting principles. Also, in our opinion, the
related financial statement schedule, when considered in relation to the
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
/s/
KPMG LLP
Mountain
View, California
February
12, 2004
57
NVIDIA
CORPORATION AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
(In
thousands, except share and per share data)
|
|
|
January
29,
|
|
January
30,
|
|
||
|
|
|
2006
|
|
2005
|
|
||
|
ASSETS
|
|
|
|
|
|
||
|
Current
assets:
|
|
|
|
|
|
||
|
Cash
and cash equivalents
|
|
$
|
551,756
|
|
$
|
208,512
|
|
|
Marketable
securities
|
|
|
398,418
|
|
|
461,533
|
|
|
Accounts
receivable, less allowances of $10,837 and $13,153 in 2006 and 2005,
respectively
|
|
|
318,186
|
|
|
296,279
|
|
|
Inventories
|
|
|
254,792
|
|
|
315,518
|
|
|
Prepaid
expenses and other current assets
|
|
|
24,387
|
|
|
19,819
|
|
|
Deferred
income taxes
|
|
|
1,393
|
|
|
3,265
|
|
|
Total
current assets
|
|
|
1,548,932
|
|
|
1,304,926
|
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
178,152
|
|
|
178,955
|
|
|
Deposits
and other assets
|
|
|
27,477
|
|
|
9,034
|
|
|
Goodwill
|
|
|
145,317
|
|
|
108,107
|
|
|
Intangible
assets, net
|
|
|
15,421
|
|
|
27,514
|
|
|
|
|
$
|
1,915,299
|
|
$
|
1,628,536
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
179,395
|
|
$
|
238,223
|
|
|
Accrued
liabilities
|
|
|
259,264
|
|
|
182,077
|
|
|
Current
portion of capital lease obligations
|
|
|
--
|
|
|
856
|
|
|
Total
current liabilities
|
|
|
438,659
|
|
|
421,156
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
income tax liabilities
|
|
|
8,260
|
|
|
20,754
|
|
|
Other
long-term liabilities
|
|
|
10,624
|
|
|
8,358
|
|
|
Commitments
and contingencies - see Note 11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
|
Preferred
stock, $.001 par value; 2,000,000 shares authorized; none
issued
|
--
|
--
|
|||||
|
Common
stock, $.001 par value; 1,000,000,000 shares authorized;
179,963,979
shares issued and 171,477,456 outstanding in 2006; and
169,173,898
shares issued and 167,089,545 outstanding in 2005
|
|
|
180
|
|
|
169
|
|
|
Additional
paid-in capital
|
|
|
798,251
|
|
|
636,618
|
|
|
Deferred
compensation
|
|
|
(1,676
|
)
|
|
(2,926
|
)
|
|
Treasury
stock
|
|
|
(212,142
|
)
|
|
(24,644
|
)
|
|
Accumulated
other comprehensive loss, net
|
|
|
(1,957
|
)
|
|
(3,463
|
)
|
|
Retained
earnings
|
|
|
875,100
|
|
|
572,514
|
|
|
Total
stockholders' equity
|
|
1,457,756
|
|
1,178,268
|
|
||
|
|
|
$
|
1,915,299
|
|
$
|
1,628,536
|
|
See
accompanying notes to consolidated financial statements.
58
NVIDIA
CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF INCOME
(In
thousands, except per share data)
|
|
|
Year
Ended
|
|
Year
Ended
|
|
Year
Ended
|
|
|||
|
|
|
January
29,
|
|
January
30,
|
|
January
25,
|
|
|||
|
|
|
2006
|
|
2005
|
|
2004
|
|
|||
|
|
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|||
|
Revenue
|
|
$
|
2,375,687
|
|
$
|
2,010,033
|
|
$
|
1,822,945
|
|
|
Cost
of revenue
|
|
|
1,464,892
|
|
|
1,360,547
|
|
|
1,294,067
|
|
|
Gross
profit
|
|
|
910,795
|
|
|
649,486
|
|
|
528,878
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development
|
|
|
352,099
|
|
|
335,104
|
|
|
269,972
|
|
|
Sales,
general and administrative
|
|
|
204,441
|
|
|
200,789
|
|
|
165,249
|
|
|
In-process
research and development
|
|
|
--
|
|
|
--
|
|
|
3,500
|
|
|
Settlement
costs
|
|
|
14,158
|
|
|
--
|
|
|
--
|
|
|
Total
operating expenses
|
|
|
570,698
|
|
|
535,893
|
|
|
438,721
|
|
|
Income
from operations
|
|
|
340,097
|
|
|
113,593
|
|
|
90,157
|
|
|
Interest
income
|
|
|
20,698
|
|
|
11,422
|
|
|
18,561
|
|
|
Interest
expense
|
|
|
(72
|
)
|
|
(164
|
)
|
|
(12,010
|
)
|
|
Other
income (expense), net
|
|
|
(502
|
)
|
|
594
|
|
|
3,033
|
|
|
Convertible
debenture redemption expense
|
|
|
--
|
|
|
--
|
|
|
(13,068
|
)
|
|
Income
before income tax expense
|
|
|
360,221
|
|
|
125,445
|
|
|
86,673
|
|
|
Income
tax expense
|
|
|
57,635
|
|
|
25,089
|
|
|
12,254
|
|
|
Net
income
|
|
$
|
302,586
|
|
$
|
100,356
|
|
$
|
74,419
|
|
|
Basic
net income per share
|
|
$
|
1.78
|
|
$
|
0.60
|
|
$
|
0.46
|
|
|
Diluted
net income per share
|
|
$
|
1.65
|
|
$
|
0.57
|
|
$
|
0.43
|
|
|
Shares
used in basic per share computation
|
|
|
169,690
|
|
|
166,062
|
|
|
160,924
|
|
|
Shares
used in diluted per share computation
|
|
|
182,951
|
|
|
176,558
|
|
|
172,707
|
|
See
accompanying notes to consolidated financial statements.
59
NVIDIA
CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
AND
COMPREHENSIVE
INCOME
(In
thousands, except share data)
|
|
|
Common
Stock
|
|
Additional
Paid
in
|
|
Deferred
|
|
Treasury
|
|
Accumulated
Other Comprehensive
|
|
Retained
|
|
Total
Stockholders’
|
|
Total
Comprehensive
|
|
|||||||||||
|
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Compenation
|
|
Stock
|
|
Income
(Loss)
|
|
Earnings
|
|
Equity
|
|
Income
|
|
|||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
|
Balances,
January 26, 2003
|
|
|
157,790,022
|
|
$
|
158
|
|
$
|
531,186
|
|
$
|
(156
|
)
|
$
|
--
|
|
$
|
3,760
|
|
$
|
397,739
|
|
$
|
932,687
|
|
$
|
94,451
|
|
|
Issuance
of common stock from stock plans
|
|
|
6,355,765
|
|
|
6
|
|
|
37,667
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
37,673
|
|
|
|
|
|
Tax
benefit from stock plans
|
|
|
--
|
|
|
--
|
|
|
8,488
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
8,488
|
|
|
|
|
|
Deferred
compensation
|
|
|
--
|
|
|
--
|
|
|
6,140
|
|
|
(5,984
|
)
|
|
--
|
|
|
--
|
|
|
--
|
|
|
156
|
|
|
|
|
|
Amortization
of deferred compensation
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
672
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
672
|
|
|
|
|
|
Unrealized
loss, net of $1,940 tax effect
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
(383
|
)
|
|
--
|
|
|
(383
|
)
|
|
(383
|
)
|
|
Reclassification
adjustment for net gains included in net income, net of $632 tax
effect
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
(2,527
|
)
|
|
--
|
|
|
(2,527
|
)
|
|
(2,527
|
)
|
|
Net
income
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
74,419
|
|
|
74,419
|
|
|
74,419
|
|
|
Balances,
January 25, 2004
|
|
|
164,145,787
|
|
|
164
|
|
|
583,481
|
|
|
(5,468
|
)
|
|
--
|
|
|
850
|
|
|
472,158
|
|
|
1,051,185
|
|
|
71,509
|
|
|
Issuance
of common stock from stock plans
|
|
|
5,028,111
|
|
|
5
|
|
|
42,497
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
42,502
|
|
|
|
|
|
Stock
repurchase
|
|
|
(2,084,353
|
)
|
|
--
|
|
|
--
|
|
|
--
|
|
|
(24,644
|
)
|
|
--
|
|
|
--
|
|
|
(24,644
|
)
|
|
|
|
|
Tax
benefit from stock plans
|
|
|
--
|
|
|
--
|
|
|
11,845
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
11,845
|
|
|
|
|
|
Reversal
of deferred compensation
|
|
|
--
|
|
|
--
|
|
|
(1,205
|
)
|
|
1,205
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
|
|
|
Amortization
of deferred compensation
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
1,337
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
1,337
|
|
|
|
|
|
Unrealized
loss, net of $1,470 tax effect
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
(4,468
|
)
|
|
--
|
|
|
(4,468
|
)
|
|
(4,468
|
)
|
|
Reclassification
adjustment for net losses included in net income, net of ($38) tax
effect
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
155
|
|
|
--
|
|
|
155
|
|
|
155
|
|
|
Net
income
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
100,356
|
|
|
100,356
|
|
|
100,356
|
|
|
Balances,
January 30, 2005
|
|
|
167,089,545
|
|
|
169
|
|
|
636,618
|
|
|
(2,926
|
)
|
|
(24,644
|
)
|
|
(3,463
|
)
|
|
572,514
|
|
|
1,178,268
|
|
|
96,043
|
|
|
Issuance
of common stock from stock plans
|
|
|
10,831,746
|
|
|
11
|
|
|
127,486
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
127,497
|
|
|
|
|
|
Stock
repurchase
|
|
|
(6,402,170
|
)
|
|
--
|
|
|
--
|
|
|
--
|
|
|
(188,509
|
)
|
|
--
|
|
|
--
|
|
|
(188,509
|
)
|
|
|
|
|
Tax
benefit from stock plans
|
|
|
--
|
|
|
--
|
|
|
34,821
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
34,821
|
|
|
|
|
|
Cancellation
of shares
|
|
|
(41,665
|
)
|
|
--
|
|
|
(520
|
)
|
|
--
|
|
|
1,011
|
|
|
--
|
|
|
--
|
|
|
491
|
|
|
|
|
|
Reversal
of deferred compensation
|
|
|
--
|
|
|
--
|
|
|
(154
|
)
|
|
154
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
|
|
|
Amortization
of deferred compensation
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
1,096
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
1,096
|
|
|
|
|
|
Unrealized
loss, net of $845 tax effect
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
(120
|
)
|
|
--
|
|
|
(120
|
)
|
|
(120
|
)
|
|
Reclassification
adjustment for net losses included in net income, net of ($407) tax
effect
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
1,626
|
|
|
--
|
|
|
1,626
|
|
1,626
|
||
|
Net
income
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
302,586
|
|
|
302,586
|
|
|
302,586
|
|
|
Balances,
January 29, 2006
|
|
|
171,477,456
|
|
$
|
180
|
|
$
|
798,251
|
|
$
|
(1,676
|
)
|
$
|
(212,142
|
)
|
$
|
(1,957
|
)
|
$
|
875,100
|
|
$
|
1,457,756
|
|
$
|
304,092
|
|
See
accompanying notes to consolidated financial statements.
60
NVIDIA
CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(In
thousands)
|
|
|
Year
Ended
|
|
Year
Ended
|
|
Year
Ended
|
|
|||
|
|
|
January
29,
|
|
January
30,
|
|
January
25,
|
|
|||
|
|
|
2006
|
|
2005
|
|
2004
|
|
|||
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|||
|
Net
income
|
|
$
|
302,586
|
|
$
|
100,356
|
|
$
|
74,419
|
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|||
|
In-process
research and development
|
|
|
--
|
|
|
--
|
|
|
3,500
|
|
|
Non-cash
realized gain on investment exchange
|
|
|
(96
|
)
|
|
(533
|
)
|
|
--
|
|
|
Depreciation
and amortization
|
|
|
97,977
|
|
|
102,597
|
|
|
82,016
|
|
|
Net
loss on retirements of property and equipment
|
|
|
1,005
|
|
|
412
|
|
|
--
|
|
|
Write-off
of convertible debenture issuance costs
|
|
|
--
|
|
|
--
|
|
|
5,485
|
|
|
Deferred
income taxes
|
|
|
(10,622
|
)
|
|
12,141
|
|
|
55,135
|
|
|
Stock-based
compensation
|
|
|
1,096
|
|
|
1,337
|
|
|
672
|
|
|
Bad
debt expense (benefit)
|
|
|
(492
|
)
|
|
(844
|
)
|
|
731
|
|
|
Tax
benefit from employee stock plans
|
|
|
34,821
|
|
|
11,845
|
|
|
8,488
|
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|||
|
Accounts
receivable
|
|
|
(21,415
|
)
|
|
(110,312
|
)
|
|
(88,222
|
)
|
|
Inventories
|
|
|
60,726
|
|
|
(81,280
|
)
|
|
(85,126
|
)
|
|
Prepaid
expenses and other current assets
|
|
|
(4,568
|
)
|
|
(5,569
|
)
|
|
(2,698
|
)
|
|
Deposits
and other assets
|
|
|
(8,073
|
)
|
|
(1,458
|
)
|
|
(3,482
|
)
|
|
Accounts
payable
|
|
|
(58,828
|
)
|
|
52,941
|
|
|
43,506
|
|
|
Accrued
liabilities
|
|
|
52,291
|
|
|
50,567
|
|
|
(44,746
|
)
|
|
Net
cash provided by operating activities
|
|
|
446,408
|
|
|
132,200
|
|
|
49,678
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|||
|
Purchases
of marketable securities
|
|
|
(338,058
|
)
|
|
(313,760
|
)
|
|
(734,642
|
)
|
|
Sales
and maturities of marketable securities
|
|
|
397,686
|
|
|
229,068
|
|
|
1,021,590
|
|
|
Acquisition
of businesses
|
|
|
(12,131
|
)
|
|
--
|
|
|
(71,303
|
)
|
|
Purchases
of property and equipment and intangible assets
|
|
|
(79,600
|
)
|
|
(67,261
|
)
|
|
(127,604
|
)
|
|
Investments
in non-affiliates
|
|
|
(9,684
|
)
|
|
--
|
|
|
--
|
|
|
Net
cash provided by (used in) investing activities
|
|
|
(41,787
|
)
|
|
(151,953
|
)
|
|
88,041
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|||
|
Redemption
of convertible debenture
|
|
|
--
|
|
|
--
|
|
|
(300,000
|
)
|
|
Common
stock issued under employee stock plans
|
|
|
127,497
|
|
|
42,502
|
|
|
37,757
|
|
|
Stock
repurchase
|
|
|
(188,509
|
)
|
|
(24,644
|
)
|
|
--
|
|
|
Principal
payments on capital leases
|
|
|
(856
|
)
|
|
(4,015
|
)
|
|
(8,048
|
)
|
|
Retirement
of common stock
|
|
|
491
|
|
|
--
|
|
|
--
|
|
|
Net
cash provided by (used in) financing activities
|
|
|
(61,377
|
)
|
|
13,843
|
|
|
(270,291
|
)
|
|
Change
in cash and cash equivalents
|
|
|
343,244
|
|
|
(5,910
|
)
|
|
(132,572
|
)
|
|
Cash
and cash equivalents at beginning of period
|
|
|
208,512
|
|
|
214,422
|
|
|
346,994
|
|
|
Cash
and cash equivalents at end of period
|
|
$
|
551,756
|
|
$
|
208,512
|
|
$
|
214,422
|
|
|
|
|
|
|
|
|
|
|
|||
|
Supplemental
disclosures of cash flow information:
|
|
|
|
|
|
|
|
|||
|
Cash
paid for interest
|
|
$
|
12
|
|
$
|
163
|
|
$
|
15,167
|
|
|
Cash
paid (refund) for income taxes, net
|
|
$
|
3,368
|
|
$
|
763
|
|
$
|
(211
|
)
|
61
NVIDIA
CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS - (Continued)
(In
thousands)
|
Other
non-cash activities:
|
|
|
|
|
|
|
|
|||
|
Acquisition
of business - goodwill adjustment
|
|
$
|
25,765
|
$
|
1,091
|
$
|
--
|
|
||
|
Assets
recorded under capital lease arrangements
|
|
$
|
--
|
|
$
|
--
|
|
$
|
2,528
|
|
|
Application
of customer advance to accounts receivable
|
|
$
|
--
|
$
|
11,508
|
$
|
46,866
|
|||
|
Marketable
security received from investment exchange
|
|
$
|
96
|
|
$
|
688
|
|
$
|
--
|
|
|
Asset
retirement obligation
|
|
$
|
1,835
|
|
$
|
4,483
|
|
$
|
--
|
|
|
Unrealized
gains/losses from marketable securities
|
|
$
|
1,068
|
$
|
5,745
|
$
|
4,850
|
|
||
|
Deferred
stock-based compensation
|
|
$
|
154
|
$
|
1,205
|
$
|
6,140
|
|
||
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to consolidated financial statements.
62
NVIDIA
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
1 - Organization and Summary of Significant Accounting
Policies
Our
Company
NVIDIA
Corporation is the worldwide leader in programmable graphics processor
technologies. Our products enhance the end-user experience on consumer and
professional computing devices. We have four major product-line operating
segments: graphics processing units, or GPUs, media and communications
processors, or MCPs, Handheld GPUs, and Consumer Electronics. Our GPU Business
is composed of products that support desktop personal computers, or PCs,
notebook PCs and professional workstations; our MCP Business is composed of
NVIDIA nForce products that operate as a single-chip or chipset that can
off-load system functions, such as audio processing and network communications,
and perform these operations independently from the host central processing
unit, or CPU; our Handheld GPU Business is composed of products that support
handheld personal digital assistants, cellular phones and other handheld
devices; and our Consumer Electronics Business is concentrated in products
that
support video game consoles and other digital consumer electronics devices
and
is composed of our contractual arrangements with Sony Computer Entertainment,
or
SCE, to jointly develop a custom GPU incorporating our next-generation GeForce
GPU and SCE’s system solutions in SCE’s PlayStation3, sales of our Xbox-related
products, revenue from our license agreement with Microsoft relating to the
successor product to their initial Xbox gaming console, the Xbox360, and related
devices, and digital media processor products. We
were
incorporated in California in April 1993 and reincorporated in Delaware in
April
1998. Our headquarter facilities are in Santa Clara, California.
Fiscal
year
We
operate on a 52 or 53-week year, ending on the Sunday nearest January 31. Fiscal
2006 and 2004 were 52-week years, compared to fiscal 2005 which was a
53-week year.
Reclassifications
Certain
prior fiscal year balances were reclassified to conform to the current fiscal
year presentation.
Principles
of Consolidation
Our
consolidated financial statements include the accounts of NVIDIA Corporation
and
its wholly owned subsidiaries. All material intercompany balances and
transactions have been eliminated in consolidation.
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities
and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates. On an on-going basis,
we evaluate our estimates, including those related to revenue recognition,
accounts receivable, inventories, income taxes and contingencies. These
estimates are based on historical facts and various other assumptions that
we
believe are reasonable.
Cash
and Cash Equivalents
We
consider all highly liquid investments purchased with an original maturity
of
three months or less at the time of purchase to be cash equivalents. As of
January 29, 2006, our cash and cash equivalents were $551.8 million, which
includes $256.6 million invested in money market funds.
63
NVIDIA
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Marketable
Securities
We
account for our investment instruments in accordance with Statement of Financial
Accounting Standards No. 115, or SFAS No. 115, Accounting
for Certain Investments in Debt and Equity Securities.
All of
our cash equivalents and marketable securities are treated as
“available-for-sale” under SFAS No. 115. Cash equivalents consist of financial
instruments which are readily convertible into cash and have original maturities
of three months or less at the time of acquisition. Marketable securities
consist primarily of highly liquid investments with a maturity of greater than
three months when purchased and some equity investments. We classify our
marketable securities at the date of acquisition in the available-for-sale
category as our intention is to convert them into cash for operations. These
securities are reported at fair value with the related unrealized gains and
losses included in accumulated other comprehensive income (loss), a component
of
stockholders’ equity, net of tax. We follow the guidance provided by Emerging
Issues Task Force Issue No. 03-01, The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments,
in
order to assess whether our investments with unrealized loss positions are
other
than temporarily impaired. Realized gains and losses on the sale of marketable
securities are determined using the specific-identification method.
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
for estimated amounts related to lower of cost or market, obsolescence or
unmarketable inventory equal to the difference between the cost of inventory
and
the estimated market value based upon assumptions about future demand, future
product purchase commitments, estimated manufacturing yield levels and market
conditions. If actual market conditions are less favorable than those projected
by management, or if our future product purchase commitments to our suppliers
exceed our forecasted future demand for such products, additional future
inventory write-downs may be required that could adversely affect our operating
results. If actual market conditions are more favorable, we may have higher
gross margins when products are sold. Sales to date of such products have not
had a significant impact on our gross margin. Inventory reserves once
established are not reversed until the related inventory has been sold or
scrapped.
Property
and Equipment
Property
and equipment are stated at cost. Depreciation is computed using the
straight-line method based on estimated useful lives, generally three to five
years. Depreciation expense includes the amortization of assets recorded under
capital leases. Leasehold improvements and assets recorded under capital leases
are amortized over the shorter of the lease term or the estimated useful life
of
the asset.
Debt
Financing Costs
In
connection with the issuance of the convertible subordinated debentures, see
Note 11, we incurred certain direct issuance costs from third parties who
performed services that assisted in the closing of the transaction. These
issuance costs were included in our consolidated balance sheets under “deposits
and other assets” and were amortized on a straight line basis over the term of
the financing. On October 24, 2003, we fully redeemed the Notes. In connection
with the redemption, we recorded a $13.1 million charge in fiscal 2004, which
included the write-off of $5.5 million of unamortized issuance
costs.
64
NVIDIA
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Advertising
Expenses
We
expense advertising costs in the period in which they are incurred. Advertising
expenses for fiscal 2006, 2005, and 2004 were $9.2 million, $15.2 million,
and
$11.3 million, respectively.
Revenue
Recognition
Product
Revenue
We
recognize revenue from product sales when persuasive evidence of an arrangement
exists, the product has been delivered, the price is fixed and determinable
and
collection is reasonably assured. For most sales, we use a binding purchase
order and in certain cases we use a contractual agreement as evidence of an
arrangement. We consider delivery to occur upon shipment provided title and
risk
of loss have passed to the customer based on the shipping terms. At the point
of
sale, we assess whether the arrangement fee is fixed and determinable and
whether collection is reasonably assured. If we determine that collection of
a
fee is not reasonably assured, we defer the fee and recognize revenue at the
time collection becomes reasonably assured, which is generally upon receipt
of
cash.
Our
policy on sales to distributors is to defer recognition of revenue and related
cost of revenue until the distributors resell the product.
We
record
estimated reductions to revenue for customer programs at the time revenue is
recognized. Our customer programs primarily involve rebates, which are designed
to serve as sales incentives to resellers of our products in various target
markets. We account for rebates in accordance with Emerging Issues Task Force
Issue 01-9, or EITF 01-9, Accounting
for Consideration Given by a Vendor to a Customer (Including a Reseller of
the
Vendor’s Products)
and, as
such, we accrue for 100% of the potential rebates and do not apply a breakage
factor. Unclaimed rebates, which historically have not been significant, are
reversed to revenue upon expiration of the rebate. Rebates typically expire
six
months from the date of the original sale.
Our
customer programs also include marketing development funds, or MDFs. We account
for MDFs as either a reduction of revenue or an operating expense in accordance
with EITF 01-9. MDFs represent monies paid to retailers, system builders,
original equipment manufacturers, or OEMs, distributors and add-in card partners
that are earmarked for market segment development and expansion and typically
are designed to support our partners’ activities while also promoting NVIDIA
products. If market conditions decline, we may take actions to increase amounts
offered under customer programs, possibly resulting in an incremental reduction
of revenue at the time such programs are offered.
We
also
record a reduction to revenue by establishing a sales return allowance for
estimated product returns at the time revenue is recognized, based primarily
on
historical return rates. However, if product returns for a particular fiscal
period exceed historical return rates we may determine that additional sales
return allowances are required to properly reflect our estimated exposure for
product returns.
License
and Development Revenue
For
license arrangements that require significant customization of our intellectual
property components, we generally recognize this license revenue using the
percentage-of-completion method of accounting over the period that services
are
performed. For all license and service arrangements accounted for under the
percentage-of-completion method, we determine progress to completion based
on
actual direct labor hours incurred to date as a percentage of the estimated
total direct labor hours required to complete the project. We periodically
evaluate the actual status of each project to ensure that the estimates to
complete each contract remain accurate. A provision for estimated losses on
contracts is made in the period in which the loss becomes probable and can
be
reasonably estimated. To date, we have not recorded any such losses. Costs
incurred in advance of revenue recognized are
65
NVIDIA
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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.
Concentration
of Credit Risk
Financial
instruments that potentially subject us to concentrations of credit risk consist
primarily of cash equivalents, marketable securities and trade accounts
receivable. Our investment policy requires the purchase of top-tier investment
grade securities, the diversification of asset type and certain limits on our
portfolio duration. All marketable securities are held in our name, managed
by
several investment managers and held by one major financial institution under
a
custodial arrangement. One customer accounted for approximately 11% of our
accounts receivable balance at January 29, 2006. We perform ongoing credit
evaluations of our customers’ financial condition and maintain an allowance for
potential credit losses. This allowance consists of an amount identified for
specific customers and an amount based on overall estimated exposure. Our
overall estimated exposure excludes amounts covered by credit insurance and
letters of credit.
Impairment
of Long-Lived Assets
In
accordance with Statement of Financial Accounting Standards No. 144, or
SFAS No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets, long-lived
assets, such as property and equipment and intangible assets subject to
amortization, are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to estimated undiscounted future
cash flows expected to be generated by the asset. If the carrying amount of
an
asset exceeds its estimated future cash flows, an impairment charge is
recognized for the amount by which the carrying amount of the asset exceeds
the
fair value of the asset. Fair value is determined based on the estimated
discounted future cash flows expected to be generated by the asset. Assets
and
liabilities to be disposed of would be separately presented in the consolidated
balance sheet and the assets would be reported at the lower of the carrying
amount or fair value less costs to sell, and would no longer be depreciated.
Rent
Expense
We
recognize rent expense on a straight-line basis over the lease period and have
accrued for rent expense incurred, but not paid.
Accounting
for Asset Retirement Obligations
In
fiscal
2004, we adopted Statement of Financial Accounting Standards No. 143, or SFAS
No. 143, Accounting
for Asset Retirement Obligations,
which
addresses financial accounting and reporting for obligations associated with
the
retirement of tangible long-lived assets and the associated asset retirement
costs. SFAS No. 143 applies to legal obligations associated with the retirement
of long-lived assets that result from the acquisition, construction, development
and/or normal use of the assets. SFAS No. 143 requires that the fair value
of a
liability for an asset retirement obligation be recognized in the period in
which it is incurred if a reasonable estimate of fair value can be made. The
fair value of the liability is added to the carrying amount of the associated
asset and this additional carrying amount is depreciated over the life of the
asset. During fiscal 2005, we completed leasehold improvements at our
headquarters facility in Santa Clara, California and recorded a liability of
$4.5 million to return the property to its original condition upon lease
termination in fiscal year 2013. During
fiscal 2006, we continued the expansion of our international facilities, and
completed leasehold improvements at our international sites. As a result, we
recorded an additional liability of $2.0 million, of which $0.2 million relates
to accretion expense, to return the properties at these sites to their original
condition upon lease termination.
66
NVIDIA
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Income
Taxes
Statement
of Financial Accounting Standards No. 109, or SFAS No. 109, Accounting
for Income Taxes,
establishes financial accounting and reporting standards for the effect of
income taxes. In accordance with SFAS No. 109, we recognize federal, state
and
foreign current tax liabilities or assets based on our estimate of taxes payable
or refundable in the current fiscal year by tax jurisdiction. We also recognize
federal, state and foreign deferred tax assets or liabilities, as appropriate,
for our estimate of future tax effects attributable to temporary differences
and
carryforwards; and we record a valuation allowance to reduce any deferred tax
assets by the amount of any tax benefits that, based on available evidence
and
judgment, are not expected to be realized.
Our
calculation of current and deferred tax assets and liabilities is based on
certain estimates and judgments and involves dealing with uncertainties in
the
application of complex tax laws. Our estimates of current and deferred tax
assets and liabilities may change based, in part, on added certainty or finality
to an anticipated outcome, changes in accounting standards or tax laws in the
United States, or foreign jurisdictions where we operate, or changes in other
facts or circumstances. In addition, we recognize liabilities for potential
United States and foreign income tax contingencies based on our estimate of
whether, and the extent to which, additional taxes may be due. If we determine
that payment of these amounts is unnecessary or if the recorded tax liability
is
less than our current assessment, we may be required to recognize an income
tax
benefit or additional income tax expense in our financial statements,
accordingly.
Fair
Value of Financial Instruments
The
carrying value of cash, cash equivalents, accounts receivable, accounts payable
and accrued liabilities approximate their fair values due to their relatively
short maturities as of January 29, 2006 and January 30, 2005. Marketable
securities are comprised of available-for-sale securities that are reported
at
fair value with the related unrealized gains and losses included in accumulated
other comprehensive income (loss), a component of stockholders’ equity, net of
tax. Fair value of the marketable securities is determined based on quoted
market prices.
Foreign
Currency Translation
We
use
the United States dollar as our functional currency for all of our subsidiaries.
Foreign currency monetary assets and liabilities are remeasured into United
States dollars at end-of-period exchange rates. Non-monetary assets and
liabilities, including inventories, prepaid expenses and other current assets,
property and equipment, deposits and other assets and equity, are remeasured
at
historical exchange rates. Revenue and expenses are remeasured at average
exchange rates in effect during each period, except for those expenses related
to the previously noted balance sheet amounts, which are remeasured at
historical exchange rates. Gains or losses from foreign currency remeasurement
are included in “Other income (expense), net” and to date have not been
significant.
Comprehensive
Income
Comprehensive
income consists of net income and other comprehensive income or loss. Other
comprehensive income or loss components include unrealized gains or losses
on
available-for-sale securities, net of tax.
Goodwill
We
account for goodwill in accordance with Statement of Financial Accounting
Standards No. 142, or SFAS No. 142, Goodwill
and Other Intangible Assets.
As
required by SFAS No. 142, we discontinued amortizing the
67
NVIDIA
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
remaining
balances of goodwill as of the beginning of fiscal 2003. All remaining and
future acquired goodwill will be subject to our annual impairment test during
our fourth quarter of our fiscal year, or earlier if indicators of potential
impairment exist, using a fair value-based approach. Our impairment review
process compares the fair value of the reporting unit in which the goodwill
resides to its carrying value. For the purposes of completing our SFAS
No. 142 impairment
test, we performed our analysis on a reporting unit
basis. We utilize a two-step approach to testing goodwill for
impairment. The first step tests for possible impairment by applying a fair
value-based test. In computing fair value of our reporting units, we use
estimates of future revenues, costs and cash flows from such units. The second
step, if necessary, measures the amount of such an impairment by applying fair
value-based tests to individual assets and liabilities. We elected to perform
our annual goodwill impairment review during the fourth quarter of each fiscal
year. We completed our most recent annual impairment test during the fourth
quarter of fiscal 2006 and concluded that there was no impairment. However,
future events or circumstances may result in a charge to earnings due to the
potential for a write-down of goodwill in connection with such
tests.
Stock-Based
Compensation
Statement
of Financial Accounting Standards No. 148, or SFAS No. 148, Accounting
for Stock-Based Compensation - Transition and Disclosure,
amends
the disclosure requirements of Statement of Financial Accounting Standards
No.
123, or SFAS No. 123, Accounting
for Stock-Based Compensation, to
require more prominent disclosures in both annual and interim financial
statements regarding the method of accounting for stock-based compensation
and
the effect of the method used on reported results.
We
use
the intrinsic value method, as prescribed by Accounting Principles Board Opinion
No. 25,
Accounting for Stock Issued to Employees,
to
account for our stock-based employee compensation plans. As such, compensation
expense is recorded if on the date of grant the current fair value per share
of
the underlying stock exceeds the exercise price per share. We recognize
compensation cost for awards with pro rata vesting on a straight-line basis.
Compensation cost for our stock-based compensation plans as determined
consistent with Statement of Financial Accounting Standards No. 123,
Accounting
for Stock-Based Compensation,
would
have decreased net income in the periods presented to the pro forma amounts
indicated below:
|
|
|
Year
Ended
|
|
Year
Ended
|
|
Year
Ended
|
|
|||
|
|
|
January
29,
|
|
January
30,
|
|
January
25,
|
|
|||
|
|
|
2006
|
|
2005
|
|
2004
|
|
|||
|
|
|
(In
thousands, except per share data)
|
|
|||||||
|
Net
income, as reported
|
|
$
|
302,586
|
|
$
|
100,356
|
|
$
|
74,419
|
|
|
Add:
Stock-based employee compensation expense
included
in reported net income, net of related tax effects
|
|
|
920
|
|
|
1,070
|
|
|
537
|
|
|
Deduct:
Stock-based employee compensation expense
determined
under fair value-based method for all awards,
net
of related tax effects
|
|
|
(79,862
|
)
|
|
(87,071
|
)
|
|
(74,513
|
)
|
|
Pro
forma net income
|
|
$
|
223,644
|
|
$
|
14,355
|
|
$
|
443
|
|
|
Basic
net income per share - as reported
|
|
$
|
1.78
|
|
$
|
0.60
|
|
$
|
0.46
|
|
|
Basic
net income per share - pro forma
|
|
$
|
1.32
|
|
$
|
0.09
|
|
$
|
0.00
|
|
|
Diluted
net income per share - as reported
|
|
$
|
1.65
|
|
$
|
0.57
|
|
$
|
0.43
|
|
|
Diluted
net income per share - pro forma
|
|
$
|
1.22
|
|
$
|
0.08
|
|
$
|
0.00
|
|
During
the first quarter of fiscal 2006, we transitioned from a Black-Scholes model
to
a binomial model for calculating the estimated fair value of new stock-based
compensation awards granted under our stock option plans. As a result of
recent regulatory guidance, including SEC Staff Accounting Bulletin No. 107,
or
SAB No. 107, and in anticipation of the impending effective date of Financial
Accounting Standards Board, or FASB, Statement of Financial Accounting Standards
No. 123(R), or SFAS No. 123(R), Share-Based
Payment,
we
reevaluated the assumptions we use to estimate the value of employee stock
options and shares issued under our employee stock
68
NVIDIA
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
purchase
plan, beginning with stock options granted and shares issued under our employee
stock purchase plan in our first quarter of fiscal 2006. We determined
that the use of implied volatility is expected to be more reflective of market
conditions and, therefore, can reasonably be expected to be a better indicator
of expected volatility than historical volatility. Additionally, in the first
quarter of fiscal 2006, we began segregating options into groups for employees
with relatively homogeneous exercise behavior in order to make full use of
the
capabilities of the binomial valuation model. As such, the expected term
is based on detailed historical data about employees' exercise behavior, vesting
schedules, and death and disability probabilities. We believe the
resulting binomial calculation provides a more refined estimate of the fair
value of our employee stock options. For our employee stock purchase plan,
we
decided to continue to use the Black-Scholes model to calculate the estimated
fair value.
For
the
purpose of the pro forma calculation, the fair value of stock options granted
under our stock option plans and the fair value of shares issued under our
employee stock purchase plan have been estimated with the following
assumptions:
|
Stock
Options
|
|||||
|
|
Year
Ended
|
Year
Ended
|
Year
Ended
|
||
|
|
January
29,
|
January
30,
|
January
25,
|
||
|
2006
|
2005
|
2004
|
|||
|
|
(Using
a binomial model)
|
(Using
the Black-Scholes model)
|
(Using
the Black-Scholes model)
|
||
|
Weighted
average expected life of stock options (in years)
|
3.6
- 5.1
|
4.0
|
4.0
|
||
|
Risk
free interest rate
|
4.0%
- 4.4%
|
3.0%
|
2.4%
|
||
|
Volatility
|
34%
- 48%
|
75%
- 80%
|
80%
|
||
|
Dividend
yield
|
--
|
--
|
--
|
||
|
Employee
Stock Purchase Plan
|
|||||
|
|
Year
Ended
|
Year
Ended
|
Year
Ended
|
||
|
|
January
29,
|
January
30,
|
January
25,
|
||
|
2006
|
2005
|
2004
|
|||
|
|
(Using
the Black-Scholes model)
|
(Using
the Black-Scholes model)
|
(Using
the Black-Scholes model)
|
||
|
Weighted
average expected life of stock options (in years)
|
0.5
- 2.0
|
0.5
- 2.0
|
0.5
-1.0
|
||
|
Risk
free interest rate
|
0.9%
- 3.7%
|
1.1%
- 2.1%
|
1.6%
- 2.4%
|
||
|
Volatility
|
30%
- 45%
|
80%
|
88%
|
||
|
Dividend
yield
|
--
|
--
|
--
|
||
For
the
purpose of the pro forma calculation, the weighted average per share fair value
of options granted during fiscal 2006, 2005 and 2004 was approximately $10.87,
$14.10, and $9.43, respectively. For the purpose of the pro forma calculation,
the weighted average fair value of shares purchased under the employee stock
purchase plan during fiscal 2006, 2005 and 2004 was approximately $3.44, $5.28,
and $3.76, respectively.
Net
Income Per Share
Basic
net
income per share is computed using the weighted average number of common shares
outstanding during the period. Diluted net income per share is computed using
the weighted average number of common and dilutive common equivalent shares
outstanding during the period, using the treasury stock method. Under the
treasury stock method, the effect of stock options outstanding is not included
in the computation of diluted net income per share for periods when their effect
is anti-dilutive. The following is a reconciliation of the numerators and
denominators of the basic and diluted net income per share computations for
the
periods presented:
69
NVIDIA
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
|
|
|
Year
Ended
|
|
Year
Ended
|
|
Year
Ended
|
|
|||
|
|
|
January
29,
|
|
January
30,
|
|
January
25,
|
|
|||
|
|
|
2006
|
|
2005
|
|
2004
|
|
|||
|
|
|
(In
thousands, except per share data)
|
|
|||||||
|
Numerator:
|
|
|
|
|
|
|
|
|||
|
Numerator
for basic and diluted net income per share
|
|
$
|
302,586
|
|
$
|
100,356
|
|
$
|
74,419
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
for basic net income per share, weighted average shares
|
|
|
169,690
|
|
|
166,062
|
|
|
160,924
|
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
Stock
options outstanding
|
|
|
13,261
|
|
|
10,496
|
|
|
11,783
|
|
|
Denominator
for diluted net income per share, weighted average shares
|
|
|
182,951
|
|
|
176,558
|
|
|
172,707
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per share:
|
|
|
|
|
|
|
|
|
|
|
|
Basic
net income per share
|
|
$
|
1.78
|
|
$
|
0.60
|
|
$
|
0.46
|
|
|
Diluted
net income per share
|
|
$
|
1.65
|
|
$
|
0.57
|
|
$
|
0.43
|
|
Diluted
net income per share does not include the effect of the following anti-dilutive
common equivalent shares of stock options outstanding of 5.8 million, 13.7
million, and 7.9 million for the fiscal 2006, 2005 and 2004, respectively.
The
weighted average price of stock options excluded from the computation of diluted
earnings per share was $35.58, $27.86, and $29.63 for fiscal 2006, 2005 and
2004, respectively.
Recently
Issued Accounting Pronouncements
In
December 2004, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards No. 123(R), or SFAS No. 123(R),
Share-Based
Payment,
which
requires the measurement and recognition of compensation expense for all
stock-based compensation payments. In April 2005, the SEC delayed the effective
date of SFAS No. 123(R), which is now effective for annual periods that begin
after June 15, 2005. In March 2005, the SEC issued Staff Accounting Bulletin
No.
107, or SAB No. 107, which includes interpretive guidance for the initial
implementation of SFAS No. 123(R). SFAS No. 123(R) allows for either prospective
recognition of compensation expense or retrospective recognition. We intend
to
adopt SFAS No. 123(R) using the modified prospective method, which requires
the
application of the accounting standard as of January 30, 2006, the first day
of
our fiscal 2007. Expensing these incentives in future periods will materially
and adversely affect our reported operating results as the stock-based
compensation expense would be charged directly against our reported earnings.
We
anticipate that our stock-based compensation expense will be approximately
$18
to $22 million for the first quarter of fiscal 2007 and we are unsure how the
market will react to this adverse affect on our operating results, which could
impact our stock price. However, had we adopted SFAS No. 123(R) in prior
periods, the magnitude of the impact of that standard would have approximated
the impact of Statement of Financial Accounting Standards No. 123, Accounting
for Stock-Based Compensation, assuming
the application of the Black-Scholes model as described in the disclosure of
pro
forma net income (loss) and pro forma net income (loss) per share in Note 1
of
the Notes to Consolidated Financial Statements under the subheading “Stock-Based
Compensation.” SFAS No. 123(R) also requires the benefits of tax deductions
in excess of recognized compensation cost to be reported as a financing cash
flow, rather than as an operating cash flow as required under current
literature.
In
June 2005, the FASB issued SFAS No. 154, or SFAS No. 154, Accounting
Changes and Error Corrections, a replacement of APB Opinion No. 20 and FASB
Statement No. 3.
SFAS
No. 154 applies to all voluntary changes in accounting principle, and changes
the requirements for accounting for and reporting of a change in accounting
principle. We will adopt SFAS 154 during the first quarter of fiscal 2007.
We do not expect the adoption of SFAS No. 154 to have a material impact on
our
consolidated financial position, results of operations or cash flows.
70
NVIDIA
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
In
June
2005, the FASB ratified the Emerging Issues Task Force’s, or EITF’s, Issue No.
05-06, or EITF No. 05-06, Determining the Amortization Period for Leasehold
Improvements. EITF No. 05-06 provides that the amortization period used for
leasehold improvements acquired in a business combination or purchased after
the
inception of a lease be the shorter of (a) the useful life of the assets
or (b)
a term that includes required lease periods and renewals that are reasonably
assured upon the acquisition or the purchase. The provisions of EITF No.
05-06
are effective on a prospective basis for leasehold improvements purchased
or
acquired. We adopted EITF No. 05-06 during the second quarter of fiscal 2006
and
it did not have a material impact on our consolidated financial position,
results of operations or cash flows.
In
November 2005, the FASB issued Staff Position, or FSP, FAS115-1/124-1, The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments, which addresses the determination as to when an investment is
considered impaired, whether that impairment is other than temporary, and
the
measurement of an impairment loss. This FSP also includes accounting
considerations subsequent to the recognition of an other-than-temporary
impairment and requires certain disclosures about unrealized losses that
have
not been recognized as other-than-temporary impairments. The guidance in
this
FSP amends SFAS No. 115, Accounting for Certain Investments in Debt and Equity
Securities, and SFAS No. 124, Accounting for Certain Investments Held by
Not-for-Profit Organizations, and APB Opinion No. 18, The Equity Method of
Accounting for Investments in Common Stock. This FSP is effective for reporting
periods beginning after December 15, 2005. We do not believe the adoption
of
this FSP will have a material impact on our consolidated financial position,
results of operations or cash flows.
In
November 2005, the FASB issued FSP FAS123(R)-3, Transition Election to
Accounting for the Tax Effects of Share-Based Payment Awards. This FSP requires
an entity to follow either the transition guidance for the
additional-paid-in-capital pool as prescribed in SFAS No. 123(R), Share-Based
Payment, or the alternative transition method as described in the FSP. An
entity
that adopts SFAS No. 123(R) using the modified prospective application may
make
a one-time election to adopt the transition method described in this FSP.
An
entity may take up to one year from the later of its initial adoption of
SFAS
No. 123(R) or the effective date of this FSP to evaluate its available
transition alternatives and make its one-time election. This FSP became
effective in November 2005. We continue to evaluate the impact that the adoption
of this FSP could have on our consolidated financial position, results of
operations or cash flows.
Note
2 - Acquisition of MediaQ, Inc.
On
August
19, 2003, we completed the acquisition of MediaQ, Inc., or MediaQ, a leading
provider of graphics and multimedia technology for wireless mobile devices.
Our
primary reasons for the acquisition of MediaQ, Inc. were to accelerate our
entry
into the handheld devices market, use MediaQ’s two-dimensional, or 2D, and low
power capabilities, allowing us to continue to focus on three-dimensional,
or
3D, and advanced video efforts, use existing MediaQ channel and design wins,
and
enhance MediaQ’s PDA business through our existing OEM and original design
manufacturer channels.
The
aggregate purchase price consisted of cash consideration of approximately $71.3
million, including $1.3 million of direct acquisition costs and $3.5 million
of
in-process research and development, or IPR&D, The amount of the IPR&D
represents the value assigned to research and development projects of MediaQ
that had commenced but had not yet reached technological feasibility and had
no
alternative future use. In accordance with SFAS No. 2, Accounting
for Research and Development Costs,
as
clarified by FIN 4, Applicability
of FASB Statement No. 2 to Business Combinations Accounted for by the Purchase
Method an interpretation of FASB Statement No. 2,
amounts
assigned to IPR&D meeting the above-stated criteria were charged to expense
as part of the allocation of the purchase price.
The
pro
forma results of operations have not been presented for the acquisition of
MediaQ because the effect of this acquisition was not considered
material.
71
NVIDIA
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note
3 - 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. The 3dfx asset purchase was accounted for under the purchase
method of accounting and closed on April 18, 2001. Under the terms of the Asset
Purchase Agreement, the cash consideration due at the closing was $70.0 million,
less $15.0 million that was loaned to 3dfx pursuant to a Credit Agreement dated
December 15, 2000. The Asset Purchase Agreement also provided, subject to the
other provisions thereof, that if 3dfx properly certified that all its debts
and
other liabilities had been provided for, then we
would
have been obligated to pay 3dfx two million shares of NVIDIA common stock.
If
3dfx could not make such a certification, but instead properly certified that
its debts and liabilities could be satisfied for less than $25.0 million, then
3dfx could have elected to receive a cash payment equal to the amount of such
debts and liabilities and a reduced number of shares of our common stock, with
such reduction calculated by dividing the cash payment by $25.00 per share.
If
3dfx could not certify that all of its debts and liabilities had been provided
for, or could not be satisfied for less than $25.0 million, we would not be
obligated under the agreement to pay any additional consideration for the
assets.
In
October 2002, 3dfx filed for Chapter 11 bankruptcy protection in the United
States Bankruptcy Court for the Northern District of California. In March 2003,
we were served with a complaint filed by the Trustee appointed by the Bankruptcy
Court which sought, among other things, payments from us as additional purchase
price related to our purchase of certain assets of 3dfx. In early November
2005,
after many months of mediation, NVIDIA and the Official Committee of Unsecured
Creditors of 3dfx reached a conditional settlement of the Trustee’s claims
against NVIDIA. This conditional settlement, which will be subject to the review
and approval of the Bankruptcy Court, calls for a payment of approximately
$30.6
million to the 3dfx estate. Under the settlement, $5.6 million relates to
various administrative expenses and Trustee fees, and $25.0 million relates
to
the satisfaction of debts and liabilities owed to the general unsecured
creditors of 3dfx. As such, during the three months 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. Please see Note 11 for further information
regarding this litigation.
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.
|
|
|
Fair
Market Value
|
|
Straight-Line
Amortization Period
|
|
||
|
|
|
(In
thousands)
|
|
(Years)
|
|
||
|
|
|
|
|
|
|
||
|
Property
and equipment
|
|
$
|
2,433
|
|
|
1-2
|
|
|
Trademarks
|
|
|
11,310
|
|
|
5
|
|
|
Goodwill
|
|
|
85,418
|
|
|
--
|
|
|
Total
|
|
$
|
99,161
|
|
|
|
|
The
final
allocation of the purchase price of the 3dfx assets is contingent upon the
amount of and circumstances surrounding additional consideration, if any, that
we may pay related to the 3dfx asset purchase.
72
NVIDIA
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note
4 - Goodwill
The
carrying amount of goodwill is as follows:
|
|
|
January
29,
|
|
January
30,
|
|
January
25,
|
|
|||
|
|
|
2006
|
|
2005
|
|
2004
|
|
|||
|
|
|
(In
thousands)
|
|
|||||||
|
3dfx
|
|
$
|
75,326
|
|
$
|
50,326
|
|
$
|
50,326
|
|
|
MediaQ
|
|
|
52,913
|
|
|
52,913
|
|
|
53,695
|
|
|
Other
|
|
|
17,078
|
|
|
4,868
|
|
|
4,888
|
|
|
Total
goodwill
|
|
$
|
145,317
|
|
$
|
108,107
|
|
$
|
108,909
|
|
During
the fourth quarter of fiscal 2006, we recorded $12.2 million as goodwill for
the
acquisition of a small international company. The acquisition was accounted
for
under the purchase method of accounting and closed on December 30, 2005. During
the third quarter of fiscal 2006, we recorded $25.0 million as goodwill related
to the purchase of certain assets of 3dfx. Please refer to Note 3 of the Notes
to Consolidated Financial Statements for further information. In fiscal
2005, the amount allocated to MediaQ goodwill was adjusted to $52,913 as a
result of additional information that became available. This information was
primarily related to liabilities that were less than originally estimated at
the
time of acquisition.
During
fiscal 2005, in conjunction with the reorganization of our business reporting
units, we reassigned goodwill to our reporting units using a relative fair
value allocation approach. In computing fair value of our reporting units,
we
use estimates of future revenues, costs and cash flows from such units. The
amount of goodwill allocated to our GPU, MCP, Handheld GPU, Consumer
Electronics, and All Other segments as of January 29, 2006, was $99.3 million,
$15.1 million, $12.7 million, $11.9 million, and $6.3 million,
respectively. Please refer to Note 15 of the Notes to Consolidated
Financial Statements for further segment information.
Note
5 - Amortizable Intangible Assets
We
are
currently amortizing our intangible assets with definitive lives over periods
ranging from 1 to 5 years on a straight-line basis. The components of our
amortizable intangible assets are as follows:
|
|
|
January
29, 2006
|
|
January
30, 2005
|
|
||||||||||||||
|
|
|
Gross
Carrying Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying Amount
|
|
Gross
Carrying Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying Amount
|
|
||||||
|
|
|
(In
thousands)
|
|
||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Technology
licenses
|
|
$
|
21,586
|
|
$
|
(13,595
|
)
|
$
|
7,991
|
|
$
|
17,236
|
|
$
|
(9,841
|
)
|
$
|
7,395
|
|
|
Patents
|
|
|
23,750
|
|
|
(19,911
|
)
|
|
3,839
|
|
|
23,260
|
|
|
(15,400
|
)
|
|
7,860
|
|
|
Acquired
intellectual property
|
|
|
27,086
|
|
|
(24,516
|
)
|
|
2,570
|
|
|
27,086
|
|
|
(18,578
|
)
|
|
8,508
|
|
|
Trademarks
|
|
|
11,310
|
|
|
(10,807
|
)
|
|
503
|
|
|
11,310
|
|
|
(8,544
|
)
|
|
2,766
|
|
|
Other
|
|
|
1,494
|
|
|
(976
|
)
|
|
518
|
|
|
1,494
|
|
|
(509
|
)
|
|
985
|
|
|
Total
intangible assets
|
|
$
|
85,226
|
|
$
|
(69,805
|
)
|
$
|
15,421
|
|
$
|
80,386
|
|
$
|
(52,872
|
)
|
$
|
27,514
|
|
Amortization
expense associated with intangible assets for fiscal 2006, 2005 and
2004 was $16.9 million, $19.7 million, and $16.2
million, respectively. Future amortization expense for the net carrying
amount of intangible assets at January 29, 2006 is estimated to be $10.5 million
in fiscal 2007, $4.3 million in fiscal 2008, and $0.6 million in fiscal 2009
and
thereafter.
73
NVIDIA
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note
6 - Marketable Securities
We
account for our investment instruments in accordance with Statement of Financial
Accounting Standards No. 115, or SFAS No. 115, Accounting
for Certain Investments in Debt and Equity Securities.
All of
our cash equivalents and marketable securities are treated as
“available-for-sale” under SFAS No. 115. Cash equivalents consist of financial
instruments which are readily convertible into cash and have original maturities
of three months or less at the time of acquisition. Marketable securities
consist primarily of highly liquid investments with a maturity of greater than
three months when purchased and some equity investments. We classify our
marketable securities at the date of acquisition in the available-for-sale
category as our intention is to convert them into cash for operations. These
securities are reported at fair value with the related unrealized gains and
losses included in accumulated other comprehensive income (loss), a component
of
stockholders’ equity, net of tax. Realized gains and losses on the sale of
marketable securities are determined using the specific-identification method.
Net realized losses for fiscal 2006 and 2005 were $2.8 million and $0.4 million,
respectively. Net realized gains for fiscal 2004 were $2.9 million.
The
following is a summary of cash equivalents and marketable securities at January
29, 2006 and January 30, 2005:
|
|
|
January
29, 2006
|
|
||||||||||
|
|
|
Amortized
Cost
|
|
Unrealized
Gain
|
|
Unrealized
(Loss)
|
|
Estimated
Fair Value
|
|
||||
|
|
|
(In
thousands)
|
|
||||||||||
|
Asset-backed
securities
|
|
$
|
224,649
|
$
|
1
|
$
|
(983
|
)
|
$ |
223,667
|
|
||
|
Commercial
paper
|
|
|
138,091
|
|
|
13
|
|
|
(7
|
)
|
|
138,097
|
|
|
Obligations
of the United States government & its agencies
|
|
|
72,753
|
8
|
(834
|
)
|
71,927
|
|
|||||
|
United
States corporate notes, bonds and obligations
|
|
|
179,930
|
5
|
(1,467
|
)
|
178,468
|
|
|||||
|
Money
market
|
|
|
256,593
|
|
|
--
|
|
|
--
|
|
|
256,593
|
|
|
Total
|
|
$
|
872,016
|
|
$
|
27
|
|
$
|
(3,291
|
)
|
$
|
868,752
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Classified
as:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
equivalents
|
|
|
|
|
|
|
|
|
|
|
$
|
470,334
|
|
|
Marketable
securities
|
|
|
|
|
|
|
|
|
|
|
|
398,418
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
$
|
868,752
|
|
74
NVIDIA
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
|
|
|
January
30, 2005
|
|
||||||||||
|
|
|
Amortized
Cost
|
|
Unrealized
Gain
|
|
Unrealized
(Loss)
|
|
Estimated
Fair Value
|
|
||||
|
|
|
(In
thousands)
|
|
||||||||||
|
Publicly
traded equity securities
|
|
$
|
687
|
|
$
|
220
|
|
$
|
--
|
|
$
|
907
|
|
|
Asset-backed
securities
|
|
|
177,771
|
|
|
1
|
|
|
(1,786
|
)
|
|
175,986
|
|
|
Commercial
paper
|
|
|
7,854
|
|
|
--
|
|
|
--
|
|
|
7,854
|
|
|
Obligations
of the United States government & its agencies
|
|
|
104,768
|
|
|
--
|
|
|
(895
|
)
|
|
103,873
|
|
|
United
States corporate notes, bonds and obligations
|
|
|
182,688
|
|
|
6
|
|
|
(1,874
|
)
|
|
180,820
|
|
|
Money
market
|
|
|
164,377
|
|
|
--
|
|
|
--
|
|
|
164,377
|
|
|
Total
|
|
$
|
638,145
|
|
$
|
227
|
|
$
|
(4,555
|
)
|
$
|
633,817
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Classified
as:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
equivalents
|
|
|
|
|
|
|
|
|
|
|
$
|
172,284
|
|
|
Marketable
securities
|
|
|
|
|
|
|
|
|
|
|
|
461,533
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
$
|
633,817
|
|
The
following table provides the breakdown of the investments with unrealized losses
at January 29, 2006:
|
|
|
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)
|
|
||||||||||||||||
|
Asset-backed
securities
|
|
$
|
78,286
|
$
|
(334
|
)
|
$
|
48,293
|
|
$
|
(649
|
)
|
$
|
126,579
|
|
$
|
(983
|
)
|
|
|
Commercial
paper
|
|
|
19,600
|
(7
|
)
|
|
--
|
|
|
--
|
|
|
19,600
|
|
|
(7
|
)
|
||
|
Obligations
of the United States government & its agencies
|
|
|
39,032
|
(434
|
)
|
|
22,851
|
|
|
(400
|
)
|
|
61,883
|
|
|
(834
|
)
|
||
|
United
States corporate notes, bonds and obligations
|
|
|
139,842
|
(485
|
)
|
|
64,593
|
|
|
(982
|
)
|
|
204,435
|
|
|
(1,467
|
)
|
||
|
Money
market
|
|
|
--
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
||
|
Total
|
|
$
|
276,760
|
$
|
(1,260
|
)
|
$
|
135,737
|
|
$
|
(2,031
|
)
|
$
|
412,497
|
|
$
|
(3,291
|
)
|
|
As
of
January 29, 2006, we had 143 investments that were in an unrealized loss
position with an average unrealized loss duration of less 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 January 29, 2006 are temporary in nature. We review
our
investments to identify and evaluate investments that have indications of
possible impairment. Factors considered in determining whether a loss is
temporary include the length of time and extent to which fair value has been
less than the cost basis, the financial condition and near-term prospects of
the
investee, and our intent and ability to hold the investment for a period of
time
sufficient to allow for any anticipated recovery in market value. Our investment
policy requires the purchase of top-tier investment grade securities, the
diversification of asset type and certain limits on our portfolio duration.
The
amortized cost and estimated fair value of cash equivalents and marketable
securities classified as available-for-sale at January 29, 2006 and January
30,
2005 by contractual maturity are shown below.
All
of
our marketable securities are debt instruments with the exception of $0.9
million of publicly traded equity securities at January 30,
2005.
75
NVIDIA
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
|
|
|
January
29, 2006
|
|
January
30, 2005
|
|
||||||||
|
|
|
Amortized
Cost
|
|
Estimated
Fair Value
|
|
Amortized
Cost
|
|
Estimated
Fair Value
|
|
||||
|
|
|
(In
thousands)
|
|
||||||||||
|
Less
than one year
|
|
$
|
491,259
|
$ |
491,246
|
|
$
|
198,242
|
|
$
|
197,844
|
|
|
|
Due
in 1 - 5 years
|
|
|
364,065
|
361,047
|
|
|
416,085
|
|
|
412,141
|
|
||
|
Due
in 6-7 years
|
|
|
16,692
|
16,459
|
|
|
23,132
|
|
|
22,925
|
|
||
|
Total
|
|
$
|
872,016
|
$ |
868,752
|
|
$
|
637,459
|
|
$
|
632,910
|
|
|
Note
7 - Balance Sheet Components
Certain
balance sheet components are as follows:
|
|
|
January
29,
|
|
January
30,
|
|
||
|
|
|
2006
|
|
2005
|
|
||
|
Inventories:
|
|
(In
thousands)
|
|
||||
|
Raw
materials
|
|
$
|
25,743
|
|
$
|
23,225
|
|
|
Work
in-process
|
|
|
107,847
|
|
|
130,211
|
|
|
Finished
goods
|
|
|
121,202
|
|
|
162,082
|
|
|
Total
inventories
|
|
$
|
254,792
|
|
$
|
315,518
|
|
The
significant decrease in work-in-process and finished goods was
the
result of significant reductions in older products, offset by an increase in
new
products.
|
|
|
January
29,
|
|
January
30,
|
|
||
|
|
2006
|
|
2005
|
|
|||
|
Deposits
and other assets:
|
|
(In
thousands)
|
|
||||
|
Investments
in non-affiliates
|
|
$
|
11,684
|
|
$
|
2,000
|
|
|
Long-term
prepayments
|
|
|
7,504
|
|
|
2,594
|
|
|
Other
|
|
|
8,289
|
|
|
4,440
|
|
|
Total
deposits and other assets
|
|
$
|
27,477
|
|
$
|
9,034
|
|
The
$9.7
million increase in investments in non-affiliates is related to cost method
investments in two private companies.
|
January
29, 2006
|
January
30, 2005
|
Estimated
Useful
Life
|
|
|||||||
|
Property
and Equipment:
|
|
(In
thousands)
|
|
(Years)
|
|
|||||
|
Software
|
|
$
|
153,618
|
|
$
|
125,310
|
|
|
3
-
5
|
|
|
Test
equipment
|
|
|
88,468
|
|
|
86,883
|
|
|
3
|
|
|
Computer
equipment
|
|
|
106,061
|
|
|
82,428
|
|
|
3
|
|
|
Leasehold
improvements
|
|
|
88,376
|
|
|
79,160
|
|
|
(A)
|
|
|
Construction
in process
|
|
|
2,260
|
|
|
3,264
|
|
|
(B)
|
|
|
Office
furniture and equipment
|
|
|
21,618
|
|
|
18,777
|
|
|
5
|
|
|
|
|
|
460,401
|
|
|
395,822
|
|
|
|
|
|
Accumulated
depreciation and amortization
|
|
|
(282,249
|
)
|
|
(216,867
|
)
|
|
|
|
|
Total
property and equipment, net
|
|
$
|
178,152
|
|
$
|
178,955
|
|
|
|
|
(A)
Leasehold improvements are amortized based on the lesser of either the asset’s
estimated useful life or the remaining lease term.
(B)
Construction in process represents assets that had not been in service as of
the
balance sheet date.
76
NVIDIA
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Depreciation
expense for fiscal 2006, 2005, and 2004 was $76.4 million, $71.3 million, and
$59.3 million, respectively. Assets recorded under capital leases included
in
property and equipment were $17.1 million and $19.3 million as of January 29,
2006 and January 30, 2005, respectively. Related accumulated amortization was
$17.1 million and $17.8 million as of January 29, 2006 and January 30, 2005,
respectively. Amortization expense for fiscal 2006, 2005, and 2004 related
to
capital leases was $1.2 million, $3.8 million, and $5.4 million,
respectively.
|
|
|
January
29,
|
|
January
30,
|
|
||
|
|
|
2006
|
|
2005
|
|
||
|
Accrued
Liabilities:
|
|
(In
thousands)
|
|
||||
|
Accrued
customer programs
|
|
$
|
90,056
|
|
$
|
83,013
|
|
|
Deferred
revenue
|
|
|
217
|
|
|
11,500
|
|
|
Customer
advances
|
|
|
1,556
|
|
|
1,457
|
|
|
Taxes
payable
|
|
|
58,355
|
|
|
28,826
|
|
|
Accrued
payroll and related expenses
|
|
|
53,080
|
|
|
37,016
|
|
|
Deferred
rent
|
|
|
11,879
|
|
|
10,844
|
|
|
Accrued
legal settlement
|
|
|
30,600
|
|
|
--
|
|
|
Other
|
|
|
13,521
|
|
|
9,421
|
|
|
Total
accrued liabilities
|
|
$
|
259,264
|
|
$
|
182,077
|
|
|
|
|
January
29,
|
|
January
30,
|
|
||
|
|
|
2006
|
|
2005
|
|
||
|
Other
Long-term Liabilities:
|
|
(In
thousands)
|
|
||||
|
Asset
retirement obligation
|
|
$
|
6,440
|
|
$
|
4,483
|
|
|
Other
long-term liabilities
|
|
|
4,184
|
|
|
3,875
|
|
|
Total
other long-term liabilities
|
|
$
|
10,624
|
|
$
|
8,358
|
|
Note
8 - Guarantees
FASB
Interpretation No. 45, or FIN 45, Guarantor’s
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others,
requires
that upon issuance of a guarantee, the guarantor must recognize a liability
for
the fair value of the obligation it assumes under that guarantee. In addition,
FIN 45 requires disclosures about the guarantees that an entity has issued,
including a tabular reconciliation of the changes of the entity’s product
warranty liabilities.
We
record
a reduction to revenue for estimated product returns at the time revenue is
recognized primarily based on historical return rates. The reductions to revenue
for estimated product returns for fiscal 2006, 2005 and 2004 are as
follows:
77
NVIDIA
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
|
Description
|
|
Balance
at Beginning of Period
|
|
Additions
(1)
|
|
Deductions
(2)
|
|
Balance
at End of Period
|
|
||||
|
|
|
(In
thousands)
|
|
||||||||||
|
Year
ended January 29, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for sales returns
|
|
$
|
11,687
|
|
$
|
35,127
|
|
$
|
(36,575
|
)
|
$
|
10,239
|
|
|
Year
ended January 30, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for sales returns
|
|
$
|
9,421
|
|
$
|
22,463
|
|
$
|
(20,197
|
)
|
$
|
11,687
|
|
|
Year
ended January 25, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for sales returns
|
|
$
|
13,228
|
|
$
|
23,796
|
|
$
|
(27,603
|
)
|
$
|
9,421
|
|
(1)
Allowances for sales returns are charged as a reduction to revenue.
(2)
Represents amounts written off against the allowance for sales
returns.
In
connection with certain agreements that we have executed in the past, we have
at
times provided indemnities to cover the indemnified party for matters such
as
tax, product and employee liabilities. We have also on occasion included
intellectual property indemnification provisions in our technology related
agreements with third parties. Maximum potential future payments cannot be
estimated because many of these agreements do not have a maximum stated
liability. As such, we have not recorded any liability in our consolidated
financial statements for such indemnifications.
Note
9 - Stockholders’ Equity
Stock
Repurchase Program
On
August
9, 2004 we announced that our Board of Directors, or the Board, had authorized
a
stock repurchase program to repurchase shares of our common stock, subject
to
certain specifications, up to an aggregate maximum amount of $300.0 million.
As
part of our share repurchase program, we have entered into and we may continue
to enter into structured share repurchase transactions with financial
institutions. These agreements generally require that we make an up-front
payment in exchange for the right to receive a fixed number of shares of our
common stock upon execution of the agreement, and a potential incremental number
of shares of our common stock, within a pre-determined range, at the end of
the
term of the agreement. During the fourth quarter of fiscal 2006, we repurchased
1.3 million shares of our common stock for $50.0 million under a structured
share repurchase transaction, which we recorded on the trade date of the
transaction. Through the end of the fourth quarter of fiscal 2006, we have
repurchased 8.5 million shares under our stock repurchase program for a total
cost of $213.2 million. During the first quarter of fiscal 2007, we entered
into
a structured share repurchase transaction to repurchase shares of our common
stock for $50.0 million that we expect to settle prior to the end of our first
fiscal quarter.
On
March
6, 2006, we announced that our Board of Directors had approved an increase
in our existing stock repurchase program. We announced a $400 million
increase to the original stock repurchase program we had announced in August
2004. As a result of this increase, the amount of common stock the Board of
Directors has authorized to be repurchased has now been increased to a total
of
$700 million. The repurchases will be made from time to time in the open market,
in privately negotiated transactions, or in structured stock repurchase
transactions, in compliance with the Securities and Exchange Commission Rule
10b-18, subject to market conditions, applicable legal requirements, and other
factors. The program does not obligate NVIDIA to acquire any particular amount
of common stock and the program may be suspended at any time at our discretion.
78
NVIDIA
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Convertible
Preferred Stock
As
of
January 29, 2006, there were no shares of preferred stock outstanding.
2000
Nonstatutory Equity Incentive Plan
On
August
1, 2000, our Board of Directors approved the 2000 Nonstatutory Equity Incentive
Plan, or the 2000 Plan, to provide for the issuance of our common stock to
employees and affiliates who are not directors, officers or 10% stockholders.
The 2000 Plan provides for the issuance of nonstatutory stock options, stock
bonuses and restricted stock purchase rights. Option grants issued under the
2000 plan generally expire in six to 10 years. The Compensation Committee
appointed by the Board of Directors has the authority to amend the 2000 Plan
and
to determine the option term, exercise price and vesting period of each grant.
Initial option grants generally vest ratably over a four-year period, with
25%
becoming vested approximately one year from the date of grant and the remaining
75%
vesting on a quarterly basis over the next three years. Subsequent option grants
generally vest quarterly over a three-year period. There were a total of
21,939,202 shares authorized for issuance and 10,595,890 shares available for
future issuance under the 2000 Plan as of January 29, 2006.
1998
Equity Incentive Plan
The
Equity Incentive Plan, or the 1998 Plan, was adopted by our Board of Directors
on February 17, 1998 and was approved by our stockholders on April 6, 1998
as an amendment and restatement of our then existing Equity Incentive Plan
which
had been adopted on May 21, 1993. The 1998 Plan provides for the issuance of
our
common stock to directors, employees and consultants. The 1998 Plan was
subsequently amended on March 7, 2006. The 1998 Plan provides for the issuance
of stock bonuses, restricted stock purchase rights, incentive stock options
or
nonstatutory stock options. There were a total of 110,094,385 shares authorized
for issuance and 5,059,598 shares available for future issuance under the 1998
Plan as of January 29, 2006.
Pursuant
to the 1998 Plan, the exercise price for incentive stock options is at least
100% of the fair market value on the date of grant or for employees owning
in
excess of 10% of the voting power of all classes of stock, 110% of the fair
market value on the date of grant. For nonstatutory stock options, the exercise
price is no less than 85% of the fair market value on the date of grant.
Option
grants issued under the 1998 Plan generally expire in six to ten years. Vesting
periods are determined by the Board of Directors or the Compensation Committee
of the Board of Directors. Initial option grants made after February 10, 2004
under the 1998 Plan generally vest ratably each quarter over a three year
period. Subsequent option grants are generally granted for performance and
generally vest quarterly over a three year period.
1998
Non-Employee Directors’ Stock Option Plan
In
February 1998, our Board of Directors adopted the 1998 Non-Employee Directors’
Stock Option Plan, or the Directors Plan, to provide for the automatic grant
of
non-qualified options to purchase shares of our common stock to our directors
who are not employees or consultants of us or of an affiliate of us.
In
July
2000, the Board of Directors amended the 1998 Plan to incorporate the automatic
grant provisions of the Directors’ Plan into the 1998 Plan. Future automatic
grants to non-employee directors will be made according to the terms of the
Directors’ Plan, but will be made out of the 1998 Plan until such time as shares
may become available for issuance under the amended Directors’ Plan. In May
2002, the Directors’ Plan was amended further to reduce the number of shares
granted to our non-employee directors. The altered automatic grant provisions
of
the Directors’ Plan are also incorporated into the 1998 Plan. The terms of the
amended Directors’ Plan are described below.
79
NVIDIA
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Under
the
amended Directors Plan, each non-employee director who is elected or appointed
to our Board of Directors for the first time is automatically granted an option
to purchase 75,000 shares, which vests quarterly over a three-year period,
or
Initial Grant. Previously, such a director was entitled to a grant of 200,000
shares, vesting monthly over a four-year period.
Under
the
amended Directors Plan, on August 1, 2002, each non-employee director was
automatically granted an option to purchase 75,000 shares, which will vest
33%
on the first anniversary of the grant date, with the remaining 66% vesting
quarterly over the second and third years after the date of grant, provided
that
the director has attended at least 75% of the meetings during the year following
the date of the grant, or 2002 Grants. Previously, such a director was entitled
to an annual grant of 80,000 shares, vesting 100% on the first anniversary
of
the date of the grant.
On
August
1, 2003 and on each August 1 thereafter, each non-employee director will be
automatically granted an option to purchase 25,000 shares, or Annual Grant.
These Annual Grants will begin vesting on the second anniversary of the date
of
the grant and vest quarterly during the next year. The Annual Grants will be
fully vested on the third anniversary of the date of the grant, provided that
the director has attended at least 75% of the meetings during the year following
the date of the grant.
On
August
1, 2002 and each August 1 of each year thereafter, each non-employee director
who is a member of a committee of the Board of Directors will automatically
be
granted an option to purchase 5,000 shares, or Committee Grant. The Committee
Grants vest in full on the first anniversary of the date of the grant, provided
that the director has attended at least 75% of the meetings during the year
following the date of the grant. Previously, such a director was entitled to
a
grant of 20,000 shares, vesting in full on the first anniversary of the date
of
the grant. Directors who were members of two committees, Messrs. Cox, Gaither
and Jones, waived their grant of an additional 5,000 shares for being a member
of a second committee in fiscal 2004, 2005 and 2006.
If
a
non-employee director fails to attend at least 75% of the regularly scheduled
meetings during the year following the grant of an option, rather than vesting
as described previously, the 2002 Grants and Committee Grants will vest annually
over four years following the date of grant at the rate of 10% per year for
the
first three years and 70% for the fourth year, and the Annual Grants will vest
30% upon the three-year anniversary of the grant date and 70% for the fourth
year, such that in each case the entire option will become fully vested on
the
four-year anniversary of the date of the grant. For the 2002 Grants, Annual
Grants and Committee Grants, if the person has not been serving on the Board
of
Directors or committee since a prior year’s annual meeting, the number of shares
granted will be reduced pro rata for each full quarter prior to the date of
grant during which such person did not serve in such capacity.
The
Compensation Committee administers the amended Directors Plan. A total of
1,200,000 shares have been authorized and issued under the amended Directors
Plan of which none is available for future issuance as of January 29, 2006.
As
described above, future grants to non-employee directors will be made out of
the
1998 Plan.
Employee
Stock Purchase Plan
In
February 1998, our Board of Directors approved the 1998 Employee Stock Purchase
Plan, or the Purchase Plan. In June 1999, the Purchase Plan was amended to
increase the number of shares reserved for issuance automatically each year
at
the end of our fiscal year for the next 10 years (commencing at the end of
fiscal 2000 and ending 10 years later in 2009) by an amount equal to 2% of
the
outstanding shares on each such date, including on an as-if-converted basis
preferred stock and convertible notes, and outstanding options and warrants,
calculated using the treasury stock method; provided that the maximum number
of
shares of common stock available for issuance from the Purchase Plan could
not
exceed 26,000,000 shares. There are a total of 26,000,000 shares authorized
for
issuance. At January 29, 2006, 7,531,781 shares have been issued under the
Purchase Plan and 18,468,219 shares are available for future issuance.
80
NVIDIA
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The
Purchase Plan is intended to qualify as an “employee stock purchase plan” under
Section 423 of the Internal Revenue Code. Under the Purchase Plan, the Board
has
authorized participation by eligible employees, including officers, in periodic
offerings following the adoption of the Purchase Plan. Under the Purchase Plan,
separate offering periods shall be no longer than 27 months. Under the current
offering adopted pursuant to the Purchase Plan, each offering period is 24
months, which is divided into four purchase periods of 6 months.
Employees
are eligible to participate if they are employed by us or an affiliate of us
as
designated by the Board. Employees who participate in an offering may have
up to
10% of their earnings withheld pursuant to the Purchase Plan up to certain
limitations and applied on specified dates determined by the Board to the
purchase of shares of common stock. The Board may increase this percentage
at
its discretion, up to 15%. The price of common stock purchased under the
Purchase Plan will be equal to the lower of the fair market value of the common
stock on the commencement date of each offering period and the purchase date
of
each offering period at 85% at the fair market value of the common stock on
the
relevant purchase date. Employees may end their participation in the Purchase
Plan at any time during the offering period, and participation ends
automatically on termination of employment with us and in each case their
contributions are refunded.
The following summarizes the transactions under the 1998 Plan, 2000 Plan and Directors Plan:
|
|
|
Options
Available
for Grant
|
|
Options
Outstanding
|
|
Weighted
Average Price Per Share
|
|
|||
|
Balances,
January 26, 2003
|
|
|
31,985,579
|
|
|
35,635,704
|
|
$
|
12.93
|
|
|
Authorized
|
|
|
8,796,156
|
|
|
--
|
|
|
--
|
|
|
Granted
|
|
|
(12,680,144
|
)
|
|
12,675,144
|
|
|
14.77
|
|
|
Exercised
|
|
|
--
|
|
|
(4,688,703
|
)
|
|
5.17
|
|
|
Cancelled
|
|
|
855,440
|
|
|
(855,440
|
)
|
|
19.26
|
|
|
Balances,
January 25, 2004
|
|
|
28,957,031
|
|
|
42,766,705
|
|
$
|
14.20
|
|
|
Authorized
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
Granted
|
|
|
(8,514,926
|
)
|
|
8,514,926
|
|
|
23.48
|
|
|
Exercised
|
|
|
--
|
|
|
(3,051,875
|
)
|
|
8.29
|
|
|
Cancelled
|
|
|
2,069,599
|
|
|
(2,069,599
|
)
|
|
18.82
|
|
|
Balances,
January 30, 2005
|
|
|
22,511,704
|
|
|
46,160,157
|
|
$
|
16.10
|
|
|
Authorized
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
Granted
|
|
|
(8,208,893
|
)
|
|
8,208,893
|
|
|
27.73
|
|
|
Exercised
|
|
|
--
|
|
|
(9,037,133
|
)
|
|
11.89
|
|
|
Cancelled
|
|
|
1,352,677
|
|
|
(1,352,677
|
)
|
|
20.57
|
|
|
Balances,
January 29, 2006
|
|
|
15,655,488
|
|
|
43,979,240
|
|
$
|
19.00
|
|
81
NVIDIA
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The
following table summarizes information about stock options outstanding as of
January 29, 2006:
|
|
|
Options
Outstanding
|
|
Options
Exercisable
|
|
|||||||||||
|
Range
of Exercise Prices
|
|
Number
Outstanding
|
|
Weighted
Average Remaining Contractual
Life
|
|
Weighted
Average Exercise Price
|
|
Number
Exercisable
|
|
Weighted
Average Exercise Price
|
|
|||||
|
$0.09
- 0.09
|
|
|
2,000
|
|
|
0.9
|
|
$
|
0.09
|
|
|
2,000
|
|
$
|
0.09
|
|
|
0.33
- 0.33
|
|
|
112,300
|
|
|
1.6
|
|
$
|
0.33
|
|
|
112,300
|
|
$
|
0.33
|
|
|
0.66
- 0.79
|
|
|
327,710
|
|
|
1.8
|
|
$
|
0.74
|
|
|
327,710
|
|
$
|
0.74
|
|
|
1.38
- 1.93
|
|
|
3,128,914
|
|
|
2.2
|
|
$
|
1.75
|
|
|
3,128,914
|
|
$
|
1.75
|
|
|
2.21
- 2.25
|
|
|
170,250
|
|
|
2.6
|
|
$
|
2.25
|
|
|
170,250
|
|
$
|
2.25
|
|
|
4.09
- 5.88
|
|
|
2,387,233
|
|
|
3.5
|
|
$
|
4.73
|
|
|
2,385,911
|
|
$
|
4.73
|
|
|
7.65
- 11.07
|
|
|
3,673,508
|
|
|
5.0
|
|
$
|
9.54
|
|
|
3,251,830
|
|
$
|
9.62
|
|
|
11.51
- 17.18
|
|
|
10,083,542
|
|
|
4.0
|
|
$
|
14.49
|
|
|
6,076,088
|
|
$
|
14.67
|
|
|
17.53
- 26.25
|
|
|
15,871,324
|
|
|
4.7
|
|
$
|
23.02
|
|
|
6,350,213
|
|
$
|
20.85
|
|
|
26.38
- 39.54
|
|
|
7,597,959
|
|
|
5.3
|
|
$
|
32.15
|
|
|
3,625,484
|
|
$
|
31.93
|
|
|
42.98
- 53.61
|
|
|
624,000
|
|
|
5.6
|
|
$
|
43.35
|
|
|
623,750
|
|
$
|
43.35
|
|
|
65.47
- 65.47
|
|
|
500
|
|
|
6.0
|
|
$
|
65.47
|
|
|
500
|
|
$
|
65.47
|
|
|
$0.09
- $65.47
|
|
|
43,979,240
|
|
|
4.4
|
|
$
|
19.00
|
|
|
26,054,950
|
|
$
|
15.86
|
|
Note
10 - Retirement Plan
We
have a
401(k) Retirement Plan, or the Plan, covering substantially all of our United
States employees. Under the Plan, participating employees may defer up to 100
percent of their pre-tax earnings, subject to the Internal Revenue Service
annual contribution limits. We do not make employer contributions to the Plan.
Note
11 - Financial Arrangements, Commitments and Contingencies
Inventory
Purchase Obligations
At
January 29, 2006, we had outstanding inventory purchase obligations totaling
$401.6 million.
Convertible
Subordinated Debentures
In
October 2000, we sold $300.0 million 4¾% convertible subordinated debentures, or
the Notes, due October 15, 2007 in a public offering. Proceeds from the offering
were approximately $290.8 million after deducting underwriting discounts,
commissions and offering expenses. Issuance costs related to the offering
totaled $9.2 million and were amortized to interest expense over the term of
the
Notes. Interest on the Notes accrued at the rate of 4¾% per annum and was
payable semiannually in arrears on April 15 and October 15 of each year,
commencing April 15, 2001. Interest expense, excluding the amortization of
issuance costs, related to the Notes for fiscal 2004 was $10.4 million. The
Notes were redeemable at our option on or after October 20, 2003 and were also
convertible at the option of the holder at any time prior to the close of
business on the maturity date, unless previously redeemed or repurchased, into
shares of common stock at a conversion price of $46.36 per share, subject to
adjustment in certain circumstances.
On
October 24, 2003, we fully redeemed the Notes. The aggregate principal amount
of
the Notes outstanding was $300.0 million, which included $18.6 million of Notes
that we had purchased in the open market during the three months ended October
26, 2003. The redemption price was equal to approximately 102.7% of the
outstanding principal amount of the Notes, plus accrued and unpaid interest
up
to, but excluding, the redemption date. In
82
NVIDIA
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
connection
with the redemption of the Notes, we recorded a charge in our consolidated
statement of income approximately $13.1 million, which included a $7.6 million
redemption premium and $5.5 million for the write-off of unamortized issuance
costs.
Lease
Obligations
Our
headquarters complex is located on a leased site in Santa Clara, California
and
is comprised of five buildings. The related leases expire in 2012 and each
includes two seven-year renewals at our option. Future minimum lease payments
under these operating leases total $152.8 million over the remaining terms
of
the leases, including predetermined rent escalations, and are included in the
future minimum lease payment schedule below.
In
addition to the commitment of our headquarters, we have other domestic and
international office facilities under operating leases expiring through fiscal
2013. Future minimum lease payments under our noncancelable operating leases
as
of January 29, 2006, are as follows:
|
|
|
Operating
|
|
|
Year
ending January:
|
|
(In
thousands)
|
|
|
2007
|
|
$
|
29,557
|
|
2008
|
|
|
29,321
|
|
2009
|
|
|
28,396
|
|
2010
|
|
|
27,794
|
|
2011
|
|
|
27,812
|
|
2012
and thereafter
|
|
|
29,603
|
|
Total
|
|
$
|
172,483
|
Rent
expense for the years ended January 29, 2006, January 30, 2005, and January
25,
2004 was $29.5 million, $28.0 million, and $26.4 million, respectively.
The
following is an analysis of the property and equipment under capital leases
by
major classes:
|
|
|
January
29,
|
|
January
30,
|
|
||
|
|
|
2006
|
|
2005
|
|
||
|
|
|
(In
thousands)
|
|
||||
|
Property
and Equipment:
|
|
|
|
|
|
||
|
Software
and other
|
|
$
|
629
|
|
$
|
634
|
|
|
Test
equipment
|
|
|
6,895
|
|
|
9,125
|
|
|
Computer
equipment
|
|
|
4,331
|
|
|
4,331
|
|
|
Leasehold
improvements
|
|
|
4
|
|
|
--
|
|
|
Office
furniture and equipment
|
|
|
5,232
|
|
|
5,232
|
|
|
|
|
$
|
17,091
|
|
$
|
19,322
|
|
|
Accumulated
depreciation and amortization
|
|
|
(17,091
|
)
|
|
(17,835
|
)
|
|
Total
property and equipment, net
|
|
$
|
--
|
|
$
|
1,487
|
|
Litigation
3dfx
On
December 15, 2000, NVIDIA Corporation and one of our indirect subsidiaries
entered into an agreement to purchase certain graphics chip assets from 3dfx.
The 3dfx asset purchase closed on April 18, 2001.
83
NVIDIA
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
In
May
2002, we were served with a California state court complaint filed by the
landlord of 3dfx’s San Jose, California commercial real estate lease. In
December 2002, we were served with a California state court complaint filed
by
the landlord of 3dfx’s Austin, Texas commercial real estate lease. The
landlords’ complaints both assert claims for, among other things, interference
with contract, successor liability and fraudulent transfer and seek to recover,
among other things, amounts owed on their leases with 3dfx in the aggregate
amount of approximately $10 million. In October 2002, 3dfx filed for Chapter
11
bankruptcy protection in the United States Bankruptcy Court for the Northern
District of California. The landlords’ actions were subsequently removed to the
United States Bankruptcy Court for the Northern District of California and
consolidated with a complaint filed by the Trustee in the 3dfx bankruptcy case
for purposes of discovery. Upon motion by NVIDIA in 2005, the District Court
withdrew the reference to the Bankruptcy Court and the landlord actions were
removed to the United States District Court for the Northern District of
California. On November 10, 2005, the District Court granted NVIDIA's
motion to dismiss the landlords’ respective amended complaints and allowed the
landlords to have until February 4, 2006 to amend their complaints. The
landlords’ refiled claims against NVIDIA in early February 2006, and NVIDIA
again requested the District Court to dismiss all such claims made by the
landlords. A hearing on NVIDIA’s new motions to dismiss is set for hearing on
April 17, 2006. Discovery is stayed pending this hearing and no trial date
has
been set in these actions. We believe the claims asserted against us by
the landlords are without merit and we will continue to defend ourselves
vigorously.
In
March
2003, we were served with a complaint filed by the Trustee appointed by the
Bankruptcy Court to represent the interests of the 3dfx bankruptcy estate.
The
Trustee’s complaint asserts claims for, among other things, successor liability
and fraudulent transfer and seeks additional payments from us. On October
13, 2005, the Court held a hearing on the Trustee’s motion for summary
adjudication. On December 23, 2005, the Court issued its ruling denying the
Trustee's Motion for Summary Adjudication in all material respects and holding
that NVIDIA is prevented from disputing that the value of the 3dfx
transaction to NVIDIA was less than $108.0 million. The Court
expressly denied the Trustee's request to find that the value of the 3dfx assets
conveyed to NVIDIA were at least $108.0 million. In early November 2005, after
many months of mediation, NVIDIA and the Official Committee of Unsecured
Creditors, or the Creditors’ Committee, reached a conditional settlement of the
Trustee’s claims against NVIDIA. This conditional
settlement, presented as the centerpiece of a proposed Plan of Liquidation
in the bankruptcy case, is subject to a confirmation process
through a vote of creditors and the review and approval of the Bankruptcy
Court after notice and hearing. The
scope
and schedule for that confirmation process has yet to be determined,
but we
expect
that hearing to now occur sometime in the next few months. The Trustee has
advised that he intends to object to the settlement. The settlement with the
Creditors’ Committee calls for a payment of approximately $30.6 million to the
3dfx estate. Under the settlement, $5.6 million relates to various
administrative expenses and Trustee fees, and $25.0 million relates to the
satisfaction of debts and liabilities owed to the general unsecured creditors
of
3dfx. As such, 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
Bankruptcy Court, over objection of the Creditors’ Committee and NVIDIA, has
ordered the discovery portion of the litigation to proceed while the settlement
is pending approval through the confirmation process. However, no trial date
has
been set in the Trustee's action. In addition, following the Trustee’s filing of
a Form 8-K on behalf of 3dfx, in which the Trustee disclosed the terms of the
proposed settlement agreement between NVIDIA and the Creditor’s Committee,
certain shareholders of 3dfx filed a petition with the Bankruptcy Court to
appoint an official committee to represent the claimed interest’s of 3dfx
shareholders. That petition was granted and an Equity Holder’s Committee was
appointed. Counsel for the Equity Holder’s Committee has announced an intention
to file a competing Plan of Reorganization or Liquidation in the Trustee’s
case.
Opti
Incorporated
On
October 19, 2004, Opti Incorporated, or Opti, filed a complaint for patent
infringement against NVIDIA in the United States District Court for the Eastern
District of Texas. Opti asserts that unspecified NVIDIA chipsets infringe five
U.S. patents held by Opti. Opti seeks unspecified damages for our alleged
conduct, attorneys’ fees and triple damages for alleged willful infringement by
NVIDIA. NVIDIA filed a response to this complaint in December 2004. A case
management conference was held in July 2005 where a trial date was set for
July
2006. A court
84
NVIDIA
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
mandated
mediation was held in January 2006 and did not resolve the matter. Discovery
continues, as well as preparation for the Markman hearing on claim construction.
The Markman hearing is scheduled for April 13, 2006. We believe the claims
asserted against us are without merit and we will continue to defend ourselves
vigorously. We do not have sufficient information to determine whether a loss
is
probable. As such, we have not recorded any liability in our consolidated
financial statements for such, if any, loss.
American
Video Graphics
In
August
2004, a Texas limited partnership named American Video Graphics, LP, or AVG,
filed three separate complaints for patent infringement against various
corporate defendants, not including NVIDIA, in the United States District Court
for the Eastern District of Texas. AVG initially asserted that each of the
approximately thirty defendants sells products that infringe one or more of
seven separate patents that AVG claims relate generally to graphics processing
functionality. In November 2004, NVIDIA sought and was granted permission to
intervene in two of the three pending AVG lawsuits. Our complaint in
intervention alleged that both of the patents in suit were invalid and that,
to
the extent AVG’s claims target NVIDIA products, the asserted patents were not
infringed.
On
December 19, 2005, AVG and substantially all of the named defendants and
intervenors, including NVIDIA, settled all of pending claims; the only surviving
claims will relate solely to two non-settling defendants. As part of the
settlement, the defendants and intervenors paid an undisclosed aggregate amount
to AVG. In exchange, all pending claims between the settling parties were
dismissed with prejudice, and AVG granted to all settling parties a full release
of all claims for past damages and a full license for all future sales of
accused products under all of AVG’s patents, including the patents in suit. In
addition, as part of the settlement, all settling defendants and intervenors
fully and finally waived any claims for indemnification they may have had
against any other settling party.
We
are
subject to other legal proceedings, but we do not believe that the ultimate
outcome of any of these proceedings will have a material adverse effect on
our
financial position or overall trends in results of operations. However, if
an
unfavorable ruling were to occur in any specific period, there exists the
possibility of a material adverse impact on the results of operations of that
period.
Note
12 - Settlement Costs
Settlement
costs were $14.2 million for fiscal 2006. The settlement costs are
associated with two litigation matters, 3dfx and AVG. AVG is settled. The
3dfx matter is not finally settled and is subject to judicial review and the
completion of appropriate procedures and documents. However, based on the
potential settlement in this case, we have concluded that a loss is probable
and
that we can reasonably estimate the amount of loss. Please refer to Note
11 of the Notes to Consolidated Financial Statements for further
information.
85
NVIDIA
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note
13 - Income Taxes
The
provision for income taxes applicable to income before income taxes consists
of
the following:
|
|
|
Year
Ended
|
|
Year
Ended
|
|
Year
Ended
|
|
|||
|
|
|
January
29,
|
|
January
30,
|
|
January
25,
|
|
|||
|
|
|
2006
|
|
2005
|
|
2004
|
|
|||
|
|
|
(In
thousands)
|
|
|||||||
|
Current:
|
|
|
|
|
|
|
|
|||
|
Federal
|
|
$
|
22,050
|
|
$
|
--
|
|
$
|
--
|
|
|
State
|
|
|
375
|
|
|
355
|
|
|
221
|
|
|
Foreign
|
|
|
11,012
|
|
|
8,826
|
|
(51,590
|
)
|
|
|
Total
current
|
|
|
33,437
|
|
|
9,181
|
|
(51,369
|
)
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(10,622)
|
|
|
4,683
|
|
|
19,861
|
|
|
State
|
|
|
--
|
|
(620
|
)
|
|
35,274
|
|
|
|
Foreign
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
Total
deferred
|
|
|
(10,622)
|
|
|
4,063
|
|
|
55,135
|
|
|
Charge
in lieu of taxes attributable to employer stock option
plans
|
|
|
34,820
|
|
|
11,845
|
|
|
8,488
|
|
|
Provision
for income taxes
|
|
$
|
57,635
|
|
$
|
25,089
|
|
$
|
12,254
|
|
Income
before income taxes consists of the following:
|
Year
Ended
|
Year
Ended
|
Year
Ended
|
||||||||
|
January
29,
|
January
30,
|
January
25,
|
||||||||
|
2006
|
2005
|
2004
|
||||||||
|
(In
thousands)
|
||||||||||
|
Domestic
|
|
$
|
54,955
|
|
$
|
9,556
|
$
|
(17,816
|
)
|
|
|
Foreign
|
|
|
305,266
|
|
|
115,889
|
|
|
104,489
|
|
|
|
|
$
|
360,221
|
|
$
|
125,445
|
|
$
|
86,673
|
|
The
provision for income taxes differs from the amount computed by applying the
federal statutory income tax rate of 35% to income before income taxes as
follows:
|
|
|
Year
Ended
|
|
Year
Ended
|
|
Year
Ended
|
|
|||
|
|
|
January
29,
|
|
January
30,
|
|
January
25,
|
|
|||
|
|
|
2006
|
|
2005
|
|
2004
|
|
|||
|
|
|
(In
thousands)
|
|
|||||||
|
Tax
expense computed at Federal Statutory Rate
|
|
$
|
126,077
|
|
$
|
43,906
|
|
$
|
30,336
|
|
|
State
income taxes (benefit), net of federal tax effect
|
|
|
861
|
|
|
230
|
|
|
544
|
|
|
Foreign
tax rate differential
|
|
|
(57,286)
|
|
(8,462
|
)
|
|
(11,671
|
)
|
|
|
Research
and experimental credit
|
|
|
(12,210)
|
|
(10,710
|
)
|
|
(5,230
|
)
|
|
|
In-process
research and development
|
|
|
--
|
|
|
--
|
|
|
1,225
|
|
|
Change
in estimates
|
|
|
--
|
|
|
--
|
|
(36,766
|
)
|
|
|
Increase
in beginning of year valuation allowance
|
|
|
--
|
|
|
--
|
|
|
33,599
|
|
|
Other
|
|
|
193
|
|
|
125
|
|
|
217
|
|
|
Provision
for income taxes
|
|
$
|
57,635
|
|
$
|
25,089
|
|
$
|
12,254
|
|
86
NVIDIA
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The
tax
effect of temporary differences that gives rise to significant portions of
the
deferred tax assets and liabilities are presented below:
|
|
|
January
29,
|
|
January
30,
|
|
||
|
|
|
2006
|
|
2005
|
|
||
|
Deferred
tax assets:
|
|
(In
thousands)
|
|
||||
|
Net
operating loss carryforwards
|
|
$
|
138,541
|
|
$
|
101,238
|
|
|
Accruals
and reserves, not currently deductible for tax purposes
|
|
|
12,438
|
|
|
13,373
|
|
|
Property,
equipment and intangible assets
|
|
|
16,928
|
|
|
17,182
|
|
|
Research
and other tax credit carryforwards
|
|
|
146,089
|
|
|
113,856
|
|
|
Gross
deferred tax assets
|
|
|
313,996
|
|
|
245,649
|
|
|
Less
valuation allowance
|
|
|
(230,707)
|
|
(190,563
|
)
|
|
|
Net
deferred tax assets
|
|
|
83,289
|
|
|
55,086
|
|
|
Deferred
tax liabilities:
|
|
|
|
|
|
|
|
|
Unremitted
earnings of foreign subsidiaries
|
|
|
(90,156)
|
|
(72,575
|
)
|
|
|
Net
deferred tax liability
|
|
$
|
(6,867)
|
$
|
(17,489
|
)
|
|
Income
tax expense as a percentage of income before taxes, or our annual effective
tax
rate, was 16.0% in fiscal 2006, 20.0% in fiscal 2005, and 14.1% in fiscal 2004.
The change in the rate was primarily a result of changes in our geographic
mix of income subject to tax. As
of
January 29, 2006, we had a valuation allowance of $230.7 million. Of the total
valuation allowance, $182.2 million is attributable to certain net operating
loss and tax credit carryforwards resulting from the exercise of employee stock
options. The tax benefit of these net operating loss and tax credit
carryforwards, if and when realized, would be accounted for as a credit to
stockholders' equity. Of the remaining valuation allowance as of January 29,
2006, $19.5 million relates to federal and state tax attributes acquired in
certain acquisitions for which realization of the related deferred tax assets
was determined not likely to be realized due, in part, to potential utilization
limitations as a result of stock ownership changes, and $29.0 million relates
to
certain state deferred tax assets that management determined not likely to
be
realized due, in part, to projections of future taxable income. To the extent
realization of the deferred tax assets related to certain acquisitions becomes
probable, recognition of these acquired tax benefits would first reduce goodwill
to zero, then reduce other non-current intangible assets related to the
acquisition to zero with any remaining benefit reported as a reduction to income
tax expense. To the extent realization of the deferred tax assets related to
certain state tax benefits becomes probable, we would recognize an income tax
benefit in the period such asset is more likely than not to be realized.
As
of
January 29, 2006, we had a federal net operating loss carryforward of
approximately $374.1 million and cumulative state net operating loss
carryforwards of approximately $180.1 million. The federal net operating loss
carryforward will expire beginning in fiscal 2012 and the state net operating
loss carryforwards will begin to expire in fiscal 2007 according to the rules
of
each particular state. As of January 29, 2006, we had federal research and
experimentation tax credit carryforwards of approximately $92.1 million that
will begin to expire in fiscal 2008. The research and experimentation tax credit
carryforward attributable to states is approximately $78.2 million, of which
approximately $75.3 million is attributable to the State of California and
may
be carried over indefinitely, and approximately $2.9 million is attributable
to
various other states and will expire beginning in fiscal 2016 according to
the
rules of each particular state. We have other California state tax credit
carryforwards of approximately $4.9 million that will begin to expire in fiscal
2007. Utilization of net operating losses and tax credit carryforwards may
be
subject to limitations due to ownership changes and other limitations provided
by the Internal Revenue Code and similar state provisions. If such a limitation
applies, the net operating loss and tax credit carryforwards may expire before
full utilization.
The
American Jobs Creation Act of 2004, or Act, was signed into law on October
22,
2004. The Act provided a temporary incentive for United States multinational
corporations to repatriate accumulated income earned outside the United States
at a federal effective tax rate of 5.25%. In the fourth quarter of fiscal 2006,
we repatriated $420 million in foreign earnings under the Act. The net tax
effect of this distribution was minimal because the current tax cost at a 5.25%
tax rate was offset by the benefit attributable to reducing our deferred tax
liability for taxes on earnings previously provided at the statutory rate of
35%.
87
NVIDIA
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note
14 - Microsoft Agreement
On
March
5, 2000, we entered into an agreement with Microsoft Corporation, or the
Microsoft Agreement, in which we agreed, under certain terms and conditions,
to
develop and sell processors for use in the Xbox video game console. Under the
Microsoft Agreement, in the event that an individual or corporation makes an
offer to purchase shares equal to or greater than 30% of the outstanding shares
of our common stock, Microsoft may have first and last rights of refusal to
purchase the stock.
Note
15 - Segment Information
Our
Chief
Executive Officer, who is considered to be our chief operating decision maker,
or CODM, reviews financial information presented on an operating segment
basis
for purposes of making operating decisions and assessing financial performance.
During the first quarter of fiscal 2006, we reorganized our operating segments
to bring all major product groups in line with our strategy to position
ourselves as the worldwide leader in programmable graphics processor
technologies. We now report financial information for four product-line
operating segments to our CODM: the GPU Business is composed of products
that
support desktop PCs, notebook PCs and professional workstations; the MCP
Business is composed of NVIDIA nForce products that operate as a single-chip
or
chipset that can off-load system functions, such as audio processing and
network
communications, and perform these operations independently from the host
central
processing unit, or CPU; our Handheld GPU Business is composed of products
that
support handheld personal digital assistants, cellular phones and other handheld
devices; and our Consumer Electronics Business is concentrated in products
that
support video game consoles and other digital consumer electronics devices
and
is composed of revenue from our contractual arrangements with SCE to jointly
develop a custom GPU incorporating our next-generation GeForce GPU and SCE’s
system solutions in SCE’s PlayStation3, revenue from sales of our Xbox-related
products, revenue from our license agreement with Microsoft relating to the
successor product to their initial Xbox gaming console, the Xbox360, and
related
devices, and digital media processor products. In addition to these operating
segments, we have the “All Other” category that includes human resources, legal,
finance, general administration and corporate marketing expenses, which total
$121.2 million and $101.5 million for fiscal 2006 and 2005, respectively,
that
we do not allocate to our other operating segments. “All Other” also includes
the results of operations of other miscellaneous operating segments that
are
neither individually reportable, nor aggregated with another operating segment.
Revenue in the “All Other” category is primarily derived from sales of memory.
All prior period amounts have been restated to reflect our new reporting
structure.
Our
CODM
does not review any information regarding total assets on an operating segment
basis. Operating segments do not record intersegment revenue, and, accordingly,
there is none to be reported. The accounting policies for segment
reporting are the same as for NVIDIA as a whole.
For
periods prior to the first quarter of fiscal 2005, product-line operating
segment information other than revenue was impracticable to obtain primarily
due
to changes in our enterprise resource system structure that we implemented
during the first quarter of fiscal 2005.
88
NVIDIA
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
|
|
|
GPU
|
|
MCP
|
|
Handheld
GPU
|
|
CE
|
|
All
Other
|
|
Consolidated
|
|
||||||
|
|
|
(In
thousands)
|
|
||||||||||||||||
|
Twelve
Months Ended January
29, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Revenue
|
|
$
|
1,654,397
|
|
$
|
352,319
|
|
$
|
58,745
|
|
$
|
170,222
|
|
$
|
140,004
|
|
$
|
2,375,687
|
|
|
Depreciation
and amortization expense
|
|
$
|
33,080
|
|
$
|
12,092
|
|
$
|
12,480
|
|
$
|
1,552
|
|
$
|
30,817
|
|
$
|
90,021
|
|
|
Operating
income (loss)
|
|
$
|
370,636
|
|
$
|
32,865
|
|
$
|
(34,922
|
)
|
$
|
83,881
|
|
$
|
(112,363
|
)
|
$
|
340,097
|
|
|
Twelve
Months Ended January 30, 2005:
|
|
|
|||||||||||||||||
|
Revenue
|
|
$
|
1,348,968
|
|
$
|
175,663
|
|
$
|
45,921
|
|
$
|
259,968
|
|
$
|
179,513
|
|
$
|
2,010,033
|
|
|
Depreciation
and amortization expense
|
|
$
|
32,849
|
|
$
|
12,824
|
|
$
|
11,620
|
|
$
|
880
|
|
$
|
32,643
|
|
$
|
90,816
|
|
|
Operating
income (loss)
|
|
$
|
178,597
|
|
$
|
(39,912
|
)
|
$
|
(37,532
|
)
|
$
|
107,901
|
|
$
|
(95,461
|
)
|
$
|
113,593
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Twelve
Months Ended January 25, 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Revenue
|
|
$
|
1,259,802
|
|
$
|
162,435
|
|
$
|
9,009
|
|
$
|
280,134
|
|
$
|
111,565
|
|
$
|
1,822,945
|
|
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:
|
|
|
Year
Ended
|
|
Year
Ended
|
|
Year
Ended
|
|
|||
|
|
|
January
29,
|
|
January
30,
|
|
January
25,
|
|
|||
|
|
|
2006
|
|
2005
|
|
2004
|
|
|||
|
|
|
(In
thousands)
|
|
|||||||
|
Revenue:
|
|
|
|
|||||||
|
United
States
|
|
$
|
340,598
|
|
$
|
473,721
|
|
$
|
444,510
|
|
|
Other
Americas
|
|
|
38,572
|
|
|
11,045
|
|
|
6,359
|
|
|
China
|
|
|
401,612
|
|
|
269,306
|
|
|
280,975
|
|
|
Taiwan
|
|
|
1,131,784
|
|
|
883,346
|
|
|
834,511
|
|
|
Other
Asia Pacific
|
|
|
250,844
|
|
|
169,888
|
|
|
149,843
|
|
|
Europe
|
|
|
212,277
|
|
|
202,727
|
|
|
106,747
|
|
|
Total
revenue
|
|
$
|
2,375,687
|
|
$
|
2,010,033
|
|
$
|
1,822,945
|
|
|
|
|
January
29,
|
|
January
30,
|
|
||
|
|
|
2006
|
|
2005
|
|
||
|
|
|
(In
thousands)
|
|
||||
|
Long-lived
assets
|
|
|
|
||||
|
United
States
|
|
$
|
161,505
|
|
$
|
169,872
|
|
|
Other
Americas
|
|
|
609
|
|
|
--
|
|
|
China
|
|
|
4,443
|
|
|
1,030
|
|
|
Taiwan
|
|
|
1,020
|
|
|
951
|
|
|
Other
Asia Pacific
|
|
|
7,670
|
|
|
3,123
|
|
|
Europe
|
|
|
2,905
|
|
|
3,979
|
|
|
Total
long-lived assets
|
|
$
|
178,152
|
|
$
|
178,955
|
|
89
NVIDIA
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Revenue
from significant customers, those representing approximately 10% or more of
total revenue for the respective periods, is summarized as follows:
|
|
Year
Ended
|
Year
Ended
|
Year
Ended
|
||
|
|
January
29,
|
January
30,
|
January
25,
|
||
|
|
2006
|
2005
|
2004
|
||
|
Revenue:
|
|
|
|
||
|
Customer
A
|
8%
|
9%
|
12%
|
||
|
Customer
B
|
5%
|
13%
|
15%
|
||
|
Customer
C
|
6%
|
8%
|
12%
|
||
|
Customer
D
|
14%
|
18%
|
21%
|
||
|
Customer
E
|
12%
|
7%
|
9%
|
Accounts
receivable from significant customers, those representing approximately 10%
or
more of total accounts receivable for the respective periods, is summarized
as
follows:
|
|
January
29,
|
January
30,
|
|
|
|
2006
|
2005
|
|
|
Accounts
Receivable:
|
|
|
|
|
Customer
A
|
8%
|
13%
|
|
|
Customer
B
|
8%
|
14%
|
|
|
Customer
C
|
11%
|
--%
|
Note
16 - Quarterly Summary (Unaudited)
|
|
|
Fiscal
2006
Quarters
Ended
|
|
|||||||||||
|
|
|
Jan.
29, 2006
|
|
Oct.
30, 2005
|
|
July
31, 2005
|
|
May
1, 2005
|
|
|||||
|
|
|
(In
thousands, except per share data)
|
|
|||||||||||
|
Statement
of Operations Data:
|
|
|
|
|
|
|
|
|
|
|||||
|
Revenue
|
|
$
|
633,614
|
|
$
|
583,415
|
|
$
|
574,812
|
|
$
|
583,846
|
|
|
|
Cost
of revenue
|
|
$
|
378,674
|
|
$
|
355,247
|
|
$
|
357,278
|
|
$
|
373,693
|
|
|
|
Gross
profit
|
|
$
|
254,940
|
|
$
|
228,168
|
|
$
|
217,534
|
|
$
|
210,153
|
|
|
|
Net
income
|
|
$
|
98,052
|
|
$
|
65,253
|
|
$
|
74,837
|
|
$
|
64,444
|
|
|
|
Basic
net income per share
|
|
$
|
0.57
|
|
$
|
0.38
|
|
$
|
0.44
|
|
$
|
0.38
|
|
|
|
Diluted
net income per share
|
|
$
|
0.53
|
|
$
|
0.36
|
|
$
|
0.41
|
|
$
|
0.36
|
|
|
|
|
|
Fiscal
2005
Quarters
Ended
|
|
|||||||||||
|
|
|
Jan.
30, 2005
|
|
Oct.
24, 2004
|
|
July
25, 2004
|
|
April
25, 2004
|
|
|||||
|
|
|
(In
thousands, except per share data)
|
|
|||||||||||
|
Statement
of Operations Data:
|
|
|
|
|
|
|
|
|
|
|||||
|
Revenue
|
|
$
|
566,476
|
|
$
|
515,591
|
|
$
|
456,061
|
|
$
|
471,905
|
|
|
|
Cost
of revenue
|
|
$
|
372,661
|
|
$
|
348,849
|
|
$
|
315,968
|
|
$
|
323,069
|
|
|
|
Gross
profit
|
|
$
|
193,815
|
|
$
|
166,742
|
|
$
|
140,093
|
|
$
|
148,836
|
|
|
|
Net
income
|
|
$
|
48,009
|
|
$
|
25,879
|
|
$
|
5,119
|
|
$
|
21,349
|
|
|
|
Basic
net income per share
|
|
$
|
0.29
|
|
$
|
0.16
|
|
$
|
0.03
|
|
$
|
0.13
|
|
|
|
Diluted
net income per share
|
|
$
|
0.27
|
|
$
|
0.15
|
|
$
|
0.03
|
|
$
|
0.12
|
|
|
90
NVIDIA
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note
17 - Subsequent Events
ULI
Electronics, Inc. On
February 20, 2006, we completed the acquisition of ULi Electronics, Inc., a
leading developer of core logic technology, for approximately $53 million paid
in cash.
Stock
Split. On
March 6, 2006, we issued a press release announcing that our
Board of Directors approved a two-for-one stock split of our outstanding shares
of common stock to be effected in the form of a 100% stock dividend. The
stock split will be effective on or about Thursday, April 6, 2006 for
stockholders of record at the close of business on Friday, March 17, 2006 and
will entitle each stockholder to receive one additional share for every
outstanding share of common stock held. Upon the completion of the stock split,
NVIDIA will have approximately 360 million shares of common stock outstanding.
Had the stock split been given retroactive effect in our consolidated statements
of income, the basic net income per share would have been $0.89, $0.30, and
$0.23, and the diluted net income per share would have been $0.83, $0.28, and
$0.22, for fiscal 2006, 2005, and 2004, respectively, on an unaudited basis.
Stock
Repurchase. On
March
6, 2006, we also announced that our Board of Directors approved an increase
in our existing stock repurchase program. We announced a $400 million
increase to the original stock repurchase program we had announced in August
2004. As a result of this increase, the amount of common stock the Board of
Directors has authorized to be repurchased has now been increased to a total
of
$700 million. The repurchases will be made from time to time in the open market,
in privately negotiated transactions, or in structured stock repurchase
transactions, in compliance with the Securities and Exchange Commission Rule
10b-18, subject to market conditions, applicable legal requirements, and other
factors. The program does not obligate NVIDIA to acquire any particular amount
of common stock and the program may be suspended at any time at our discretion.
91
NVIDIA
CORPORATION AND SUBSIDIARIES
SCHEDULE
II - VALUATION AND QUALIFYING ACCOUNTS
|
|
Balance
at Beginning of Period
|
|
Additions
(3)
|
|
Deductions
|
|
Balance
at End of
Period
|
|
|||||
|
|
|
(In
thousands)
|
|
||||||||||
|
Year
ended January 29, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for sales returns and allowances
|
|
$
|
11,687
|
|
$
|
35,127
|
|
$
|
(36,575)
(1
|
)
|
$
|
10,239
|
|
|
Allowance
for doubtful accounts
|
|
$
|
1,466
|
|
$
|
(492
|
)
|
$
|
(376)
(2
|
)
|
$
|
598
|
|
|
Year
ended January 30, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for sales returns and allowances
|
|
$
|
9,421
|
|
$
|
22,463
|
|
$
|
(20,197)
(1
|
)
|
$
|
11,687
|
|
|
Allowance
for doubtful accounts
|
|
$
|
2,310
|
|
$
|
(844
|
)
|
$
|
--
|
$
|
1,466
|
|
|
|
Year
ended January 25, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for sales returns and allowances
|
|
$
|
13,228
|
|
$
|
23,796
|
|
$
|
(27,603)
(1
|
)
|
$
|
9,421
|
|
|
Allowance
for doubtful accounts
|
|
$
|
4,240
|
|
$
|
731
|
|
$
|
(2,661)
(2
|
)
|
$
|
2,310
|
|
(1)
Represents amounts written off against the allowance for sales
returns.
(2)
Represents uncollectible accounts written off against the allowance for doubtful
accounts.
(3)
Allowances for sales returns are charged as a reduction to revenue. Allowances
for doubtful accounts are charged to expenses.
92
|
EXHIBIT
INDEX
|
||||||
|
Exhibit
No.
|
Exhibit
Description
|
Form
|
File
Number
|
Exhibit
|
Filing
Date
|
Filed
Herewith
|
|
|
|
|
|
|
|
|
|
2.1
|
Asset
Purchase Agreement, dated as of December 15, 2000, by and among
NVIDIA
Corporation, NVIDIA US Investment Company and 3dfx Interactive,
Inc.
|
10-K
|
0-23985
|
2.1
|
4/27/01
|
|
|
3.1
|
Amended
and Restated Certificate of Incorporation
|
S-8
|
333-74905
|
4.1
|
3/23/99
|
|
|
3.2
|
Certificate
of Amendment of Amended and Restated Certificate of
Incorporation
|
10-Q
|
0-23985
|
3.4
|
9/10/02
|
|
|
3.3
|
Bylaws
of NVIDIA Corporation, Amended and Restated as of March 7,
2006
|
*
|
||||
|
4.1
|
Reference
is made to Exhibits 3.1, 3.2 and 3.3
|
|
|
|
|
|
|
4.2
|
Specimen
Stock Certificate
|
S-1
|
333-47495
|
4.2
|
4/24/98
|
|
|
4.3
|
Second
Amended and Restated Investors’ Rights Agreement, dated August 19, 1997
between the Company and the parties indicated thereto and First
Amendment
to Second Amended and Restated Investors’ Rights Agreement, dated July 22,
1998
|
S-1
|
333-47495
|
4.3
|
11/20/98
|
|
|
4.4
|
Second
Amendment to Second Amended and Restated Investors’ Rights Agreement,
dated April 12, 1999
|
10-Q
|
0-23985
|
4.4
|
6/15/99
|
|
|
10.1
|
Form
of Indemnity Agreement between NVIDIA Corporation and each of its
directors and officers
|
8-K
|
0-23985
|
|
3/7/06
|
|
|
10.2+
|
1998
Equity Incentive Plan, as amended
|
8-K
|
0-23985
|
10.2
|
3/13/06
|
|
|
10.3+
|
1998
Equity Incentive Plan ISO, as amended
|
10-Q
|
0-23985
|
10.5
|
11/22/04
|
|
|
10.4+
|
1998
Equity Incentive Plan NSO, as amended
|
10-Q
|
0-23985
|
10.6
|
11/22/04
|
|
|
10.5+
|
Certificate
of Stock Option Grant
|
10-Q
|
0-23985
|
10.7
|
11/22/04
|
|
|
10.6+
|
1998
Employee Stock Purchase Plan, as amended
|
S-8
|
333-51520
|
99.4
|
12/8/00
|
|
|
10.7+
|
Form
of Employee Stock Purchase Plan Offering, as amended
|
S-8
|
333-100010
|
99.5
|
9/23/02
|
|
|
10.8+
|
Form
of Employee Stock Purchase Plan Offering, as amended - International
Employees
|
S-8
|
333-100010
|
99.6
|
9/23/02
|
|
|
10.9+
|
1998
Non-Employee Directors’ Stock Option Plan, as amended
|
10-Q/A
|
0-23985
|
10.7
|
7/03/02
|
|
93
|
EXHIBIT
INDEX
|
||||||
|
(CONTINUED)
|
||||||
|
Exhibit
No.
|
Exhibit
Description
|
Form
|
File
Number
|
Exhibit
|
Filing
Date
|
Filed Herewith |
|
10.10+
|
1998
Non-Employee Directors’ Stock Option Plan (Annual Grant - Board Service),
as amended
|
10-Q
|
0-23985
|
10.1
|
11/22/04
|
|
|
10.11+
|
1998
Non-Employee Directors’ Stock Option Plan (Committee Grant - Committee
Service), as amended
|
10-Q
|
0-23985
|
10.2
|
11/22/04
|
|
|
10.12+
|
1998
Non-Employee Directors’ Stock Option Plan (Initial Grant)
|
10-Q
|
0-23985
|
10.3
|
11/22/04
|
|
|
10.13+
|
2000
Nonstatutory Equity Incentive Plan, as amended
|
10-K
|
0-23985
|
10.11
|
4/25/03
|
|
|
10.14
|
Lease
dated April 4, 2000 between NVIDIA Corporation and Sobrato Interests
III
for Building A
|
S-3/A
#1
|
333-33560
|
10.1
|
4/20/00
|
|
|
10.15
|
Lease
dated April 4, 2000 between NVIDIA Corporation and Sobrato Interests
III
for Building B
|
S-3/A
#1
|
333-33560
|
10.2
|
4/20/00
|
|
|
10.16
|
Lease
dated April 4, 2000 between NVIDIA Corporation and Sobrato Interests
III
for Building C
|
S-3/A
#1
|
333-33560
|
10.3
|
4/20/00
|
|
|
10.17
|
Lease
dated April 4, 2000 between NVIDIA Corporation and Sobrato Interests
III
for Building D
|
S-3/A
#1
|
333-33560
|
10.4
|
4/20/00
|
|
|
10.18+
|
NVIDIA
Corporation Fiscal Year 2006 Variable Compensation Plan
|
8-K
|
0-23985
|
10.1
|
5/13/06
|
|
|
21.1
|
List
of Registrant’s Subsidiaries
|
|
|
|
|
*
|
|
23.1
|
Consent
of PricewaterhouseCoopers LLP
|
|
|
|
|
*
|
|
23.2
|
Consent
of KPMG LLP
|
|
|
|
|
*
|
|
24.1
|
Power
of Attorney (included in signature page)
|
|
|
|
|
*
|
|
31.1
|
Rule 13a-14(a) Certification
of Chief Executive Office
|
|
|
|
|
*
|
|
31.2
|
Rule 13a-14(a) Certification
of the Chief Financial Officer
|
|
|
|
|
*
|
|
32.1#
|
Statement
of the Chief Executive Officer under Rule 13a - 14(b) (18 U.S.C
Section 1350)
|
|
|
|
|
*
|
|
32.2#
|
Statement
of the Chief Financial Officer under Rule 13a - 14(b) (18 U.S.C
Section 1350)
|
|
|
|
|
*
|
+
Management contract, compensatory plan or arrangement.
#
In
accordance with Item 601(b)(32)(ii) of Regulation S-K and SEC Release Nos.
33-8238 and 34-47986, Final Rule: Management’s Reports on Internal Control Over
Financial Reporting and Certification of Disclosure in Exchange Act Periodic
Reports, the certifications furnished in Exhibits 32.1 and 32.2 hereto are
deemed to accompany this Form 10-K and will not be deemed “filed” for
purpose of Section 18 of the Exchange Act. Such certifications will not be
deemed to be incorporated by reference into any filing under the Securities
Act
or the Exchange Act, except to the extent that the registrant specifically
incorporates it by reference.
Copies
of
above exhibits not contained herein are available to any stockholder upon
written request to: Investor Relations: NVIDIA Corporation, 2701 San Tomas
Expressway, Santa Clara, CA 95050.
94
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf
by
the undersigned, thereunto duly authorized, on March 16,
2006.
NVIDIA
Corporation
By
/s/
JEN-HSUN HUANG
Jen-Hsun
Huang
President and Chief Executive Officer
POWER
OF ATTORNEY
KNOW
ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Jen-Hsun Huang and Marvin D. Burkett, and each or
any
one of them, his true and lawful attorney-in-fact and agent, with full power
of
substitution and resubstitution, for him and in his name, place and stead,
in
any and all capacities, to sign any and all amendments (including posting
effective amendments) to this report, and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-facts and agents, and
each
of them, full power and authority to do and perform each and every act and
thing
requisite and necessary to be done in connection therewith, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of them, or their
or his substitutes or substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has
been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
|
Signature
|
Title
|
Date
|
||
|
|
|
|
||
|
|
President,
Chief Executive Officer
|
|
||
|
/s/
JEN-HSUN HUANG
|
and
Director (Principal Executive
|
|
||
|
Jen-Hsun
Huang
|
Officer)
|
March
16, 2006
|
||
|
|
|
|
||
|
|
|
|
||
|
/s/
MARVIN D. BURKETT
|
Chief
Financial Officer (Principal
|
|
||
|
Marvin
D. Burkett
|
Financial
and Accounting Officer)
|
March
16, 2006
|
||
|
|
|
|
||
|
|
|
|
||
|
/s/
TENCH COXE
|
|
|
||
|
Tench
Coxe
|
Director
|
March
16, 2006
|
||
|
|
|
|
||
|
|
|
|
||
|
/s/
STEVEN CHU
|
|
|
||
|
Steven
Chu
|
Director
|
March
13, 2006
|
95
|
Signature
|
Title
|
Date
|
||
|
/s/
JAMES C. GAITHER
|
|
|
||
|
James
C. Gaither
|
Director
|
March
16, 2006
|
||
|
|
|
|
||
|
|
|
|
||
|
/s/
HARVEY C. JONES
|
|
March
13, 2006
|
||
|
Harvey
C. Jones
|
Director
|
|
||
|
|
||||
|
|
|
|
||
|
/s/
MARK L. PERRY
|
|
|
||
|
Mark
L. Perry
|
Director
|
March
16, 2006
|
||
|
|
|
|
||
|
|
|
|
||
|
/s/
WILLIAM J. MILLER
|
|
|
||
|
William
J. Miller
|
Director
|
March
16, 2006
|
||
|
|
|
|
||
|
|
|
|
||
|
/s/
A. BROOKE SEAWELL
|
|
|
||
|
A.
Brooke Seawell
|
Director
|
March 16,
2006
|
||
|
|
|
|
||
|
|
|
|
||
|
|
|
|||
|
Mark
A. Stevens
|
Director
|
|||
|
|
|
96
|
EXHIBIT
INDEX
|
||||||
|
Exhibit
No.
|
Exhibit
Description
|
Form
|
File
Number
|
Exhibit
|
Filing
Date
|
Filed
Herewith
|
|
|
|
|
|
|
|
|
|
2.1
|
Asset
Purchase Agreement, dated as of December 15, 2000, by and among
NVIDIA
Corporation, NVIDIA US Investment Company and 3dfx Interactive,
Inc.
|
10-K
|
0-23985
|
2.1
|
4/27/01
|
|
|
3.1
|
Amended
and Restated Certificate of Incorporation
|
S-8
|
333-74905
|
4.1
|
3/23/99
|
|
|
3.2
|
Certificate
of Amendment of Amended and Restated Certificate of
Incorporation
|
10-Q
|
0-23985
|
3.4
|
9/10/02
|
|
|
3.3
|
Bylaws
of NVIDIA Corporation, Amended and Restated as of March 7,
2006
|
*
|
||||
|
4.1
|
Reference
is made to Exhibits 3.1, 3.2 and 3.3
|
|
|
|
|
|
|
4.2
|
Specimen
Stock Certificate
|
S-1
|
333-47495
|
4.2
|
4/24/98
|
|
|
4.3
|
Second
Amended and Restated Investors’ Rights Agreement, dated August 19, 1997
between the Company and the parties indicated thereto and First
Amendment
to Second Amended and Restated Investors’ Rights Agreement, dated July 22,
1998
|
S-1
|
333-47495
|
4.3
|
11/20/98
|
|
|
4.4
|
Second
Amendment to Second Amended and Restated Investors’ Rights Agreement,
dated April 12, 1999
|
10-Q
|
0-23985
|
4.4
|
6/15/99
|
|
|
10.1
|
Form
of Indemnity Agreement between NVIDIA Corporation and each of its
directors and officers
|
8-K
|
0-23985
|
|
3/7/06
|
|
|
10.2+
|
1998
Equity Incentive Plan, as amended
|
8-K
|
0-23985
|
10.2
|
3/13/06
|
|
|
10.3+
|
1998
Equity Incentive Plan ISO, as amended
|
10-Q
|
0-23985
|
10.5
|
11/22/04
|
|
|
10.4+
|
1998
Equity Incentive Plan NSO, as amended
|
10-Q
|
0-23985
|
10.6
|
11/22/04
|
|
|
10.5+
|
Certificate
of Stock Option Grant
|
10-Q
|
0-23985
|
10.7
|
11/22/04
|
|
|
10.6+
|
1998
Employee Stock Purchase Plan, as amended
|
S-8
|
333-51520
|
99.4
|
12/8/00
|
|
|
10.7+
|
Form
of Employee Stock Purchase Plan Offering, as amended
|
S-8
|
333-100010
|
99.5
|
9/23/02
|
|
|
10.8+
|
Form
of Employee Stock Purchase Plan Offering, as amended - International
Employees
|
S-8
|
333-100010
|
99.6
|
9/23/02
|
|
|
10.9+
|
1998
Non-Employee Directors’ Stock Option Plan, as amended
|
10-Q/A
|
0-23985
|
10.7
|
7/03/02
|
|
93
|
EXHIBIT
INDEX
|
||||||
|
(CONTINUED)
|
||||||
|
Exhibit
No.
|
Exhibit
Description
|
Form
|
File
Number
|
Exhibit
|
Filing
Date
|
Filed Herewith |
|
10.10+
|
1998
Non-Employee Directors’ Stock Option Plan (Annual Grant - Board Service),
as amended
|
10-Q
|
0-23985
|
10.1
|
11/22/04
|
|
|
10.11+
|
1998
Non-Employee Directors’ Stock Option Plan (Committee Grant - Committee
Service), as amended
|
10-Q
|
0-23985
|
10.2
|
11/22/04
|
|
|
10.12+
|
1998
Non-Employee Directors’ Stock Option Plan (Initial Grant)
|
10-Q
|
0-23985
|
10.3
|
11/22/04
|
|
|
10.13+
|
2000
Nonstatutory Equity Incentive Plan, as amended
|
10-K
|
0-23985
|
10.11
|
4/25/03
|
|
|
10.14
|
Lease
dated April 4, 2000 between NVIDIA Corporation and Sobrato Interests
III
for Building A
|
S-3/A
#1
|
333-33560
|
10.1
|
4/20/00
|
|
|
10.15
|
Lease
dated April 4, 2000 between NVIDIA Corporation and Sobrato Interests
III
for Building B
|
S-3/A
#1
|
333-33560
|
10.2
|
4/20/00
|
|
|
10.16
|
Lease
dated April 4, 2000 between NVIDIA Corporation and Sobrato Interests
III
for Building C
|
S-3/A
#1
|
333-33560
|
10.3
|
4/20/00
|
|
|
10.17
|
Lease
dated April 4, 2000 between NVIDIA Corporation and Sobrato Interests
III
for Building D
|
S-3/A
#1
|
333-33560
|
10.4
|
4/20/00
|
|
|
10.18+
|
NVIDIA
Corporation Fiscal Year 2006 Variable Compensation Plan
|
8-K
|
0-23985
|
10.1
|
5/13/06
|
|
|
21.1
|
List
of Registrant’s Subsidiaries
|
|
|
|
|
*
|
|
23.1
|
Consent
of PricewaterhouseCoopers LLP
|
|
|
|
|
*
|
|
23.2
|
Consent
of KPMG LLP
|
|
|
|
|
*
|
|
24.1
|
Power
of Attorney (included in signature page)
|
|
|
|
|
*
|
|
31.1
|
Rule 13a-14(a) Certification
of Chief Executive Office
|
|
|
|
|
*
|
|
31.2
|
Rule 13a-14(a) Certification
of the Chief Financial Officer
|
|
|
|
|
*
|
|
32.1#
|
Statement
of the Chief Executive Officer under Rule 13a - 14(b) (18 U.S.C
Section 1350)
|
|
|
|
|
*
|
|
32.2#
|
Statement
of the Chief Financial Officer under Rule 13a - 14(b) (18 U.S.C
Section 1350)
|
|
|
|
|
*
|
+
Management contract, compensatory plan or arrangement.
#
In
accordance with Item 601(b)(32)(ii) of Regulation S-K and SEC Release Nos.
33-8238 and 34-47986, Final Rule: Management’s Reports on Internal Control Over
Financial Reporting and Certification of Disclosure in Exchange Act Periodic
Reports, the certifications furnished in Exhibits 32.1 and 32.2 hereto are
deemed to accompany this Form 10-K and will not be deemed “filed” for
purpose of Section 18 of the Exchange Act. Such certifications will not be
deemed to be incorporated by reference into any filing under the Securities
Act
or the Exchange Act, except to the extent that the registrant specifically
incorporates it by reference.
Copies
of
above exhibits not contained herein are available to any stockholder upon
written request to: Investor Relations: NVIDIA Corporation, 2701 San Tomas
Expressway, Santa Clara, CA 95050.