NVIDIA 2010 Annual Report Download - page 115

NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 12 - 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.
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, which could cause our
revenue to decline. 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.
During fiscal year 2010, we recorded an additional net warranty charge of $95.8 million against cost of revenue to cover
anticipated customer warranty, repair, return, replacement and other costs arising from a weak die/packaging material set in certain
versions of our previous generation products used in notebook systems. This charge included an additional accrual of $164.4 million
for related estimated costs, offset by reimbursements from insurance carriers of $68.6 million that we recorded against cost of revenue
during fiscal year 2010. During fiscal year 2009, we recorded a net warranty charge of $189.3 million charge against cost of revenue
for the purpose of supporting the product repair costs of our affected customers around the world. This charge included an accrual of
$196.0 million for related estimated costs, offset by reimbursements from insurance carriers of $6.7 million that we recorded against
cost of revenue during fiscal year 2009. Although the number of units that we estimate will be impacted by this issue remains
consistent with our initial estimates in July 2008, the overall cost of remediation and repair of impacted systems has been higher than
originally anticipated. The weak die/packaging material combination is not used in any of our products that are currently in
production.
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 products are failing in the field at higher than
normal rates. While we have not been able to determine with certainty 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 products in their notebook system designs. We intend to fully support our
customers in their repair and replacement of these impacted products that fail, and their other efforts to mitigate the consequences of
these failures.
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 13 of these Notes to the Consolidated Financial Statements for
further information regarding this litigation.
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Source: NVIDIA CORP, 10-K, March 18, 2010 Powered by Morningstar® Document Research℠