NVIDIA 2008 Annual Report Download - page 62

On April 30, 2008, the Bankruptcy Court issued its Memorandum Decision After Trial, in which it provided a detailed summary of the trial proceedings and
the parties' contentions and evidence and concluded that "the creditors of 3dfx were not injured by the Transaction." This decision did not entirely dispose of the
Trustee's action, however, as the Trustee's claims for successor liability and intentional fraudulent conveyance were still pending. On June 19, 2008, NVIDIA filed
a motion for summary judgment to convert the Memorandum Decision After Trial to a final judgment. That motion was granted in its entirety and judgment was
entered in NVIDIA
’ s favor on September 11, 2008. The Trustee filed a Notice of Appeal from that judgment on September 22, 2008, and on September 25, 2008,
NVIDIA exercised its election to have the appeal heard by the United States District Court, where the appeal is pending.
While the conditional settlement reached in November 2005 never progressed through the confirmation process, the Trustee
’ s case still remains pending
appeal. As such, we have not reversed the accrual of $30.6 million
- $5.6 million as a charge to settlement costs and $25.0 million as additional purchase price for
3dfx – that we recorded during the three months ended October 30, 2005, pending resolution of the appeal of the Trustee ’ s case. We do not believe the resolution
of this matter will have a material impact on our results of operations or financial position.
Please refer to Note 12 of the Notes to the Consolidated Financial Statements in Part IV, Item 15 of this Form 10
- K for further information regarding this
litigation.
Product Defect
Our products are complex and may contain defects or experience failures due to any number of issues in design, fabrication, packaging, materials and/or use
within a system. If any of our products or technologies contains a defect, compatibility issue or other error, we may have to invest additional research and
development efforts to find and correct the issue. Such efforts could divert our management
’ s and engineers ’ attention from the development of new products
and technologies and could increase our operating costs and reduce our gross margin. In addition, an error or defect in new products or releases or related
software drivers after commencement of commercial shipments could result in failure to achieve market acceptance or loss of design wins. Also, we may be
required to reimburse customers, including for customers
’ costs to repair or replace the products in the field. A product recall or a significant number of product
returns could be expensive, damage our reputation and could result in the shifting of business to our competitors. Costs associated with correcting defects, errors,
bugs or other issues could be significant and could materially harm our financial results.
In July 2008, we recorded a $196.0 million charge against cost of revenue to cover anticipated customer warranty, repair, return, replacement and other
associated costs arising from a weak die/packaging material set in certain versions of our previous generation MCP and GPU products used in notebook systems.
All of our newly manufactured products and all of our products that are currently shipping in volume have a different material set that we believe is more robust.
The previous generation MCP and GPU products that are impacted were included in a number of notebook products that were shipped and sold in
significant quantities. Certain notebook configurations of these MCP and GPU products are failing in the field at higher than normal rates. While we have not been
able to determine a root cause for these failures, testing suggests a weak material set of die/package combination, system thermal management designs, and
customer use patterns are contributing factors. We have worked with our customers to develop and have made available for download a software driver to cause
the system fan to begin operation at the powering up of the system and reduce the thermal stress on these chips. We have also recommended to our customers
that they consider changing the thermal management of the MCP and GPU products in their notebook system designs. We intend to fully support our customers
in their repair and replacement of these impacted MCP and GPU products that fail, and their other efforts to mitigate the consequences of these failures.
We continue to engage in discussions with our supply chain regarding reimbursement to us for some or all of the costs we have incurred and may incur in
the future relating to the weak material set. We also continue to seek to access our insurance coverage, which provided us with $8.0 million in related
reimbursement during fiscal year 2009. However, there can be no assurance that we will recover any additional reimbursement. We continue to not see any
abnormal failure rates in any systems using NVIDIA products other than certain notebook configurations. However, we are continuing to test and otherwise
investigate other products. There can be no assurance that we will not discover defects in other MCP or GPU products.
Determining the amount of the $196.0 million charge related to this issue required management to make estimates and judgments based on historical
experience, test data and various other assumptions including estimated field failure rates that we believe to be reasonable under the circumstances. The results of
these judgments formed the basis for our estimate of the total charge to cover anticipated customer warranty, repair, return and replacement and other associated
costs. However, if actual repair, return, replacement and other associated costs and/or actual field failure rates exceed our estimates, we may be required to record
additional reserves, which would increase our cost of revenue and materially harm our financial results.
In September, October and November 2008, several putative class action lawsuits were filed against us, asserting various claims related to the impacted MCP
and GPU products. Please refer to Note 12 of the Notes to the Consolidated Financial Statements in Part IV, Item 15 of this Form 10
- K for further information
regarding this litigation.
59