NVIDIA 2009 Annual Report Download - page 54

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 overall estimated exposure. Our accounts receivable are highly concentrated and make us vulnerable to
adverse changes in our customers' businesses, and to downturns in the industry and the worldwide economy. For example, one
customer accounted for approximately 18% of our accounts receivable balance at January 25, 2009, and we continue to work directly
with more foreign customers and it may be difficult to collect accounts receivable from them. 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. This risk is heightened during
periods when economic conditions worsen, such as the current period when the worldwide economy is experiencing a downturn. The
current financial turmoil affecting the banking system and financial markets and the possibility that financial institutions may
consolidate or go out of business have resulted in a tightening in the credit markets, a low level of liquidity in many financial markets,
and extreme volatility in fixed income, credit, currency and equity markets. There could be a number of follow-on effects from the
credit crisis on our business, including inability of customers, including channel partners, to obtain credit to finance purchases of our
products and/or customer, insolvencies and failure of financial institutions, which may negatively impact our financial 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, 2009.
As of January 25, 2009, our allowance for doubtful accounts receivable was $1.1 million and our gross accounts receivable
balance was $336.8 million. Of the $336.8 million, $94.5 million was covered by credit insurance and $5.3 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. 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 a percentage of our gross accounts
receivable balance, our allowance for doubtful accounts receivable has ranged between 0.1% and 0.3% during fiscal years 2009
and 2008, respectively. As of January 25, 2009, our allowance for doubtful accounts receivable represented the high end of this range,
at 0.3% of our gross accounts receivable balance.
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.
For example, during the fourth quarter of fiscal year 2009, we recorded new inventory write-downs of approximately $50.0 million,
which was approximately five to ten times higher than the level of inventory reserves we recorded during the first three quarters of
fiscal year 2009, reflecting a significant decline in our forecasted future demand for the related products. This increased level of
inventory reserves had a negative impact on our gross margin and our results of operations. If actual market conditions are more
favorable, we may have higher gross margins when products are sold, however, 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. As of January 25, 2009, our inventory reserve was $86.9 million. As a percentage of our gross inventory balance, our
inventory reserve has ranged between 7.8% and 13.9% during fiscal years 2009 and 2008. As of January 25, 2009, our inventory
reserve represented the high end of this range at 13.9% of our gross inventory balance.
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Source: NVIDIA CORP, 10-K, March 13, 2009 Powered by Morningstar® Document Research℠