UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

For the quarterly period ended October 30, 2016

OR

Commission file number: 0-23985

(Exact name of registrant as specified in its charter)

2701 San Tomas Expressway

Santa Clara, California 95050

(408) 486-2000

(Address, including zip code, and telephone number,

including area code, of principal executive offices)

N/A

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of "large accelerated filer", "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No x

The number of shares of common stock, $0.001 par value, outstanding as of  November 18, 2016 , was  539 million .

NVIDIA CORPORATION

FORM 10-Q

FOR THE QUARTER ENDED October 30, 2016

TABLE OF CONTENTS

WHERE YOU CAN FIND MORE INFORMATION

Investors and others should note that we announce material financial information to our investors using our investor relations website, press releases, SEC filings and public conference calls and webcasts. We also use the following social media channels as a means of disclosing information about the company, our products, our planned financial and other announcements and attendance at upcoming investor and industry conferences, and other matters and for complying with our disclosure obligations under Regulation FD:

NVIDIA Twitter Account ( https://twitter.com/NVIDIA )

NVIDIA Blog ( http://blogs.nvidia.com/ )   

NVIDIA Facebook Page ( https://www.facebook.com/NVIDIA )   

NVIDIA LinkedIn Page ( http://www.linkedin.com/company/nvidia?trk=hb_tab_compy_id_3608 )

In addition, investors and others can follow us on Flipboard, YouTube and Instagram.

The information we post through these social media channels may be deemed material. Accordingly, investors should monitor these accounts and the blog, in addition to following our press releases, SEC filings and public conference calls and webcasts. This list may be updated from time to time. The information we post through these channels is not a part of this quarterly report on Form 10-Q. These channels may be updated from time to time on NVIDIA's investor relations website.

PART I. FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS (UNAUDITED)

NVIDIA CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In millions, except per share data)

(Unaudited)

See accompanying Notes to Condensed Consolidated Financial Statements.

NVIDIA CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In millions)

(Unaudited)

See accompanying Notes to Condensed Consolidated Financial Statements.

NVIDIA CORPORATION AND SUBSIDIARIES 

CONDENSED CONSOLIDATED BALANCE SHEETS

(In millions)

(Unaudited)

See accompanying Notes to Condensed Consolidated Financial Statements.

NVIDIA CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

(Unaudited)

See accompanying Notes to Condensed Consolidated Financial Statements.

Note 1 - Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America, or U.S. GAAP, for interim financial information and with the instructions to Form 10-Q and Article 10 of Securities and Exchange Commission, or SEC, Regulation S-X. The January 31, 2016 consolidated balance sheet was derived from our audited consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended January 31, 2016 , as filed with the SEC, but does not include all disclosures required by U.S. GAAP. In the opinion of management, all adjustments, consisting only of normal recurring adjustments except as otherwise noted, considered necessary for a fair statement of results of operations and financial position have been included. The results for the interim periods presented are not necessarily indicative of the results expected for any future period. The following information should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended January 31, 2016 .

Significant Accounting Policies

For a description of significant accounting policies, see Note 1, Organization and Summary of Significant Accounting Policies, of the Notes to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended January 31, 2016 . There have been no material changes to our significant accounting policies since the filing of the Annual Report on Form 10-K.

Fiscal Year

We operate on a 52- or 53-week year, ending on the last Sunday in January. Fiscal year 2017 is a 52-week year and fiscal year 2016 was a 53-week year. The third quarter of fiscal years 2017 and 2016 were both 13-week quarters.

Reclassifications

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

Principles of Consolidation

Our condensed consolidated financial statements include the accounts of NVIDIA Corporation and our wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. On an on-going basis, we evaluate our estimates, including those related to revenue recognition, cash equivalents and marketable securities, accounts receivable, inventories, income taxes, goodwill, stock-based compensation, litigation, investigation and settlement costs, restructuring and other charges, and other contingencies. These estimates are based on historical facts and various other assumptions that we believe are reasonable.

Adoption of New and Recently Issued Accounting Pronouncements

Recently Adopted Accounting Pronouncement

In March 2016, the Financial Accounting Standards Board, or FASB, issued an accounting standards update which simplifies certain aspects of stock-based compensation accounting. Among other elements, the new guidance eliminates additional paid in capital, or APIC, pools and requires excess tax benefits and tax deficiencies to be recorded in the income statement when the awards vest or are settled. In addition, cash flows related to excess tax benefits will no longer be separately classified as a financing activity apart from other income tax cash flows. The new standard is effective for us beginning in our first quarter of fiscal year 2018 with early adoption permitted. We elected to early adopt this new guidance in the third quarter of fiscal year 2017, which required us to reflect any adjustments as of February 1, 2016.

Early adoption of this guidance resulted in the following:

We elected not to change our policy on accounting for forfeitures, although the new guidance provides an option for us to account for forfeitures as they occur, and thus continued to estimate forfeitures expected to occur to determine the amount of compensation cost to be recognized in each period.

The adoption of this new guidance impacted our previously reported quarterly results for fiscal year 2017 as follows:

Recent Accounting Pronouncements Not Yet Adopted

In October 2016, the FASB issued an accounting standards update that requires the recognition of income tax consequences for intra-entity transfers of assets other than inventory when the transfer occurs. The update will be effective for us beginning in our first quarter of fiscal year 2019, with early adoption permitted. The adoption of this accounting guidance is not currently expected to have a material impact on our consolidated financial statements.

In August 2016, the FASB issued an accounting standards update that clarifies how companies present and classify certain cash receipts and cash payments in the statement of cash flows. The update will be effective for us beginning in our first quarter of fiscal year 2019, with early adoption permitted. The adoption of this accounting guidance is not expected to have a material impact on our consolidated financial statements.

In February 2016, the FASB issued an accounting standards update regarding the accounting for leases by which we will begin recognizing lease assets and liabilities on the balance sheet for leases with a lease term of more than 12 months. The update will require additional disclosures regarding key information about leasing arrangements. Under existing guidance, operating leases are not recorded as lease assets and lease liabilities on the balance sheet. The update will be effective for us beginning in our first quarter of fiscal year 2020, with early adoption permitted. We are currently evaluating the impact of the adoption of this accounting guidance on our consolidated financial statements. However, we expect the adoption of this accounting guidance to result in an increase in lease assets and a corresponding increase in lease liabilities on our Condensed Consolidated Balance Sheets.

The FASB issued an accounting standards update that creates a single source of revenue guidance under U.S. GAAP for all companies, in all industries, effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. The new standard will be effective for us beginning in our first quarter of fiscal year 2019, although we are permitted to adopt the standard one year earlier. We will adopt this guidance either by using a full retrospective approach for all periods presented in the period of adoption, or a modified retrospective approach. We are currently evaluating the impact of this accounting guidance on our consolidated financial statements and have not yet determined which transition method we will apply.

Note 2 - Stock-Based Compensation

Our stock-based compensation expense is associated with stock options, restricted stock units, or RSUs, performance stock units that are based on our corporate financial performance targets, or PSUs, performance stock units that are based on market conditions, or market-based PSUs, and our employee stock purchase plan, or ESPP.

Our Condensed Consolidated Statements of Income include stock-based compensation expense, net of amounts capitalized as inventory, as follows:

Equity Award Activity

The following is a summary of our equity award transactions under our equity incentive plans:

Of the total fair value of equity awards granted during the three and nine months ended October 30, 2016, the stock-based compensation expense related to equity awards that are not expected to vest was  $72 million  and  $89 million , respectively. Of the total fair value of equity awards granted during the three and nine months ended October 30, 2015, the stock-based compensation expense related to equity awards that are not expected to vest was  $34 million  and  $43 million , respectively.

The following summarizes the aggregate unearned stock-based compensation expense and estimated weighted average amortization period as of October 30, 2016 and January 31, 2016 :

Note 3 – Net Income Per Share

The following is a reconciliation of the numerator and denominator of the basic and diluted net income per share computations for the periods presented:

The 1.00% Convertible Senior Notes, or the Convertible Notes, are included in the calculation of diluted net income per share. The Convertible Notes have a dilutive impact on net income per share if our average stock price for the reporting period exceeds the adjusted conversion price of $20.0780 per share. The Warrants outstanding are included in the calculation of diluted net income per share. The Warrants have a dilutive impact on net income per share if our average stock price for the quarter exceeds the adjusted strike price of $27.0281 per share. For the three and nine months ended October 30, 2016 , our average stock price was $63.83 and $47.82 , respectively, which exceeded both the adjusted conversion price and the adjusted strike price, causing the Convertible Notes and the Warrants to have a dilutive impact for these periods.

The denominator for diluted net income per share does not include any effect from the convertible note hedge transactions, or the Note Hedges, that we entered into concurrently with the issuance of the Convertible Notes, as its effect would be anti-dilutive. In the event of conversion of the Convertible Notes, the shares delivered to us under the Note Hedges will offset the dilutive effect of the shares that we would issue under the Convertible Notes. Please refer to Note 11 of these Notes to Condensed Consolidated Financial Statements for additional discussion regarding the Convertible Notes.

Note 4 – Income Taxes

We recognized income tax expense of $79 million and $168 million for the three and nine months ended October 30, 2016 , respectively, and  $83 million  for the nine months ended October 25, 2015 . We recognized income tax benefit of  $1 million  for the three months ended October 25, 2015 . Income tax expense as a percentage of income before income tax was 12.8% and 14.2% for the three and nine months ended October 30, 2016 , respectively, and 16.9%  for the nine months ended October 25, 2015 . Income tax benefit as a percentage of income before income tax was 0.5% for the three months ended October 25, 2015 . Our income tax expense includes $42 million and $62 million of tax benefit for the three and nine months ended October 30, 2016, respectively, from the early adoption of an accounting standard related to stock-based compensation. Please refer to Note 1 of these Notes to Condensed Consolidated Financial Statements for further information.

The increase in our effective tax rate in the three months ended October 30, 2016 compared to the same period in the prior fiscal year was primarily due to the absence of the tax benefit related to the restructuring associated with the wind-down of our Icera operations. The decrease in our effective tax rate in the nine months ended October 30, 2016 compared to the same period in the prior fiscal year was primarily due to the favorable benefit of the U.S. federal research tax credit, which was permanently enacted in the fourth quarter of fiscal year 2016, and our early adoption of an accounting standard, partially offset by the absence of the Icera restructuring tax benefit and an increase in the amount of our earnings subject to U.S. tax.

Our effective tax rate for the nine months ended October 30, 2016 of 14.2% was lower than the U.S. federal statutory rate of 35% due primarily to income earned in jurisdictions where the tax rate is lower than the U.S. federal statutory tax rate, the benefit of the U.S. federal research tax credit, as well as tax benefits recognized in the period in which they occur for early adoption of an accounting standard and expiration of statutes of limitations in certain non-U.S. jurisdictions.

For the nine months ended October 30, 2016 , there have been no material changes to our tax years that remain subject to examination by major tax jurisdictions. Additionally, there have been no material changes to our unrecognized tax benefits and any related interest or penalties since the fiscal year ended January 31, 2016 , other than the closure of our state income tax position in the three months ended July 31, 2016 and the aforementioned recognition of tax benefits upon the expiration of statutes of limitations in certain non-U.S. jurisdictions in the nine months ended October 30, 2016 .

While we believe that we have adequately provided for all uncertain tax positions, or tax positions where we believe it is not more-likely-than-not that the position will be sustained upon review, amounts asserted by tax authorities could be greater or less than our accrued position. Accordingly, our provisions on federal, state and foreign tax related matters to be recorded in the future may change as revised estimates are made or the underlying matters are settled or otherwise resolved with the respective tax authorities. As of October 30, 2016 , we do not believe that our estimates, as otherwise provided for, on such tax positions will significantly increase or decrease within the next twelve months.

Note 5 - Marketable Securities

All of our cash equivalents and marketable securities are classified as "available-for-sale" securities. These securities are reported at fair value with the related unrealized gains and losses included in accumulated other comprehensive income (loss), a component of shareholders' equity, net of tax, and net realized gains and losses recorded in other income and expense, net, on the Condensed Consolidated Statements of Income.

We performed an impairment review of our investment portfolio as of October 30, 2016 . Based on our quarterly impairment review, we concluded that our investments were appropriately valued and that no other-than-temporary impairment charges were necessary on our portfolio of available-for-sale investments as of October 30, 2016 .

The following is a summary of cash equivalents and marketable securities as of October 30, 2016 and January 31, 2016 : 

The following table provides the breakdown of the investments with unrealized losses as of October 30, 2016 : 

The gross unrealized losses as of October 30, 2016 related to fixed income securities due to changes in interest rates and are temporary in nature. We have the intent and ability to hold our investments with impairment indicators until maturity.

The amortized cost and estimated fair value of cash equivalents and marketable securities, which are primarily debt instruments, are classified as available-for-sale as of October 30, 2016 and January 31, 2016 and are shown below by contractual maturity:  

Net realized gains and losses were not significant for the three and nine months ended October 30, 2016 and October 25, 2015 .

Note 6 – Fair Value of Financial Assets and Liabilities

We measure our cash equivalents, marketable securities, and interest rate swap at fair value using quoted market prices of identical assets or similar assets from active markets. We review the fair value hierarchy classification on a quarterly basis. There were no significant transfers between Levels 1 and 2 assets or liabilities for the three months ended October 30, 2016 , and we did not have any investments or liabilities classified as Level 3 as of October 30, 2016 .

Note 7 - Amortizable Intangible Assets

The components of our amortizable intangible assets are as follows:

Amortization expense associated with intangible assets was $18 million and $53 million for the three and nine months ended October 30, 2016 , respectively, and $18 million and $56 million for the three and nine months ended October 25, 2015 , respectively. Future amortization expense related to the net carrying amount of intangible assets as of October 30, 2016 is estimated to be $16 million for the remainder of fiscal year 2017, $54 million in fiscal year 2018 , $26 million in fiscal year 2019 , $16 million in fiscal year 2020 , $7 million in fiscal year 2021 and a total of  $1 million  in fiscal year 2022 and beyond.

Note 8 - Balance Sheet Components

Certain balance sheet components are as follows:

As of October 30, 2016 , we had outstanding inventory purchase obligations totaling $908 million .

Note 9 - Derivative Financial Instruments

In August 2015 we entered into an interest rate swap for a portion of the operating lease financing arrangement for our new headquarters building that entitles us to pay amounts based on a fixed interest rate in exchange for receipt of amounts based on variable interest rates. The objective of this interest rate swap is to mitigate variability in the benchmark interest rate on the first $200 million of existing operating lease financing payments. This interest rate swap is designated as a cash flow hedge, will have settlements beginning in the second quarter of fiscal year 2019, and will terminate in the fourth quarter of fiscal year 2023. Gains or losses on this swap are recorded in accumulated other comprehensive income or loss and will subsequently be recorded in earnings at the point when the related operating lease financing expense begins to affect earnings or if ineffectiveness of the swap should occur.

During the three and nine months ended October 30, 2016 , we entered into foreign currency forward contracts with a total U.S. dollar equivalent notional value of $64 million and $160 million , respectively, to mitigate the impact of foreign currency exchange rate movements on our operating expenses. We designate these contracts as cash flow hedges and assess the effectiveness of the hedge relationships on a spot to spot basis. Gains or losses on the contracts are recorded in accumulated other comprehensive income or loss and reclassified to operating expense when the related operating expenses are recognized in earnings or ineffectiveness should occur. The fair value of the contracts as of October 30, 2016 was not significant.

During the three and nine months ended October 30, 2016 , we also entered into foreign currency forward contracts with a total U.S. dollar equivalent notional value of $54 million and $67 million , respectively, to mitigate the impact of foreign currency movements on monetary assets and liabilities that are denominated in currencies other than our reporting currency. These foreign currency forward contracts were not designated for hedge accounting treatment. Therefore, the change in fair value of these contracts is recorded as a component of other income or expense, net, and offsets the change in fair value of the foreign currency denominated monetary assets and liabilities, which is also recorded in other income or expense, net.

Under the master netting agreements with the respective counterparties to our foreign currency forward contracts, we are allowed to net settle transactions with the same counterparty, subject to applicable requirements. However, we present our derivative assets and liabilities at their gross fair values on our Condensed Consolidated Balance Sheets. We are not required to pledge, and are not entitled to receive, cash collateral related to these derivative instruments.

As of  October 30, 2016 , the maturities of the designated foreign currency forward contracts were three months or less.

We formally assess, both at inception and on an ongoing basis, whether derivative financial instruments designated for hedge accounting treatment are highly effective. For the three and nine months ended October 30, 2016 , all derivative financial instruments designated for hedge accounting treatment were determined to be highly effective and there were no gains or losses associated with ineffectiveness.

During the three and nine months ended October 30, 2016 , we recognized a net change in unrealized gains (losses) on derivative financial instruments designated for hedge accounting treatment of $2 million and $(3) million , respectively, net of tax, in other comprehensive income.

We expect to realize all gains and losses deferred into accumulated other comprehensive income or loss related to foreign currency forward contracts within the next twelve months. However, we do not expect to reclassify any amount from accumulated other comprehensive income or loss into earnings related to the interest rate swap as the underlying operating lease financing payments for our new headquarters building will not start within the next twelve months.

Note 10 - Guarantees

U.S. GAAP requires that upon issuance of a guarantee, the guarantor must recognize a liability for the fair value of the obligation it assumes under that guarantee. In addition, U.S. GAAP requires disclosures about the guarantees that an entity has issued, including a tabular reconciliation of the changes of the entity's product warranty liabilities.

Accrual for Product Warranty Liabilities

We record a reduction to revenue for estimated product returns at the time revenue is recognized primarily based on historical return rates. Cost of revenue includes the estimated cost of product warranties. Under limited circumstances, we may offer an extended limited warranty to customers for certain products. Additionally, we accrue for known warranty and indemnification issues if a loss is probable and can be reasonably estimated.

On July 31, 2015, we announced a voluntary recall and replacement of our SHIELD 8-inch tablets that were sold between July 2014 and July 2015. We have determined that the battery in these tablets can overheat, posing a fire hazard. The recall does not affect any other NVIDIA products. During the twelve months ended January 31, 2016, we recorded a $26 million charge against cost of revenue to cover anticipated customer warranty, repair, return, replacement and other associated costs.

The estimated product returns and estimated product warranty liabilities as of and for the nine and twelve months ended October 30, 2016 and January 31, 2016 were as follows: 

In connection with certain agreements that we have entered into in the past, we have provided indemnities to cover the indemnified party for matters such as tax, product, and employee liabilities. We have 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. We have not recorded any liability in our Condensed Consolidated Financial Statements for such indemnifications.

Note 11 - Debt

Convertible Debt

1.00 % Convertible Senior Notes Due 2018

On December 2, 2013, we issued $1.50 billion of 1.00% convertible senior notes, or the Convertible Notes, due 2018. The Convertible Notes are unsecured, unsubordinated obligations of the Company, which pay interest in cash semi-annually at a rate of  1.00% per annum. The Convertible Notes will mature on December 1, 2018 unless repurchased or converted prior to such date. The Convertible Notes were initially convertible at a rate of 49.5958 shares of common stock per $1,000 principal amount of the Convertible Notes (equivalent to an initial conversion price of $20.1630 per share of common stock). The conversion rate and conversion price are adjusted upon the occurrence of certain events, including our cash dividends or distributions exceeding $0.085 per share. Accordingly, as of October 30, 2016 , the conversion rate has been adjusted to 49.8058 shares of common stock per $1,000 principal amount of the Convertible Notes (equivalent to an adjusted conversion price of $20.0780 per share of common stock) for dividend increases.

We separately accounted for the liability and equity components of the Convertible Notes at issuance and the value assigned to the debt component was the estimated fair value, as of the issuance date, of a similar debt without the conversion feature. The difference between the net cash proceeds and this estimated fair value represented the value assigned to the equity component and was recorded as a debt discount. The debt discount is amortized using the effective interest method from the origination date through its stated contractual maturity date.

The initial debt component of the Convertible Notes was valued at $1.35 billion based on the contractual cash flows discounted at an appropriate market rate for a non-convertible debt at the date of issuance, which was determined to be  3.15% . The initial carrying value of the permanent equity component reported in additional paid-in-capital was valued at $126 million and recorded as a debt discount. This amount, together with the $23 million purchaser's discount to the par value of the Convertible Notes, represented the total unamortized debt discount of $148 million we recorded at the time of issuance of the Convertible Notes. The aggregate debt discount is amortized as interest expense over the contractual term of the Convertible Notes using the effective interest method using an interest rate of 3.15% .

The following table presents the carrying value of the Convertible Notes:

(1) As of  October 30, 2016 , the remaining period over which the unamortized debt discount will be amortized is  2.1 years.

The following table presents interest expense for the contractual interest and the accretion of debt discount and issuance costs related to the Convertible Notes: