Netgear 2013 Annual Report Download - page 65

Table of Contents NETGEAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Short-term investments are also comprised of marketable securities related to deferred compensation under the Company’
s Deferred Compensation
Plan. Mutual funds are the only investments allowed in the Company's Deferred Compensation Plan and the investments are held in a grantor trust
formed by the Company. The Company has classified these investments as trading securities as the grantor trust actively manages the asset allocation to
match the participants’
notional fund allocations. These securities are recorded at fair market value with unrealized gains and losses included in other
income (expense), net.
Certain risks and uncertainties
The Company's products are concentrated in the networking industry, which is characterized by rapid technological advances, changes in customer
requirements and evolving regulatory requirements and industry standards. The success of the Company depends on management's ability to anticipate
and/or to respond quickly and adequately to technological developments in its industry, changes in customer requirements, or changes in regulatory
requirements or industry standards. Any significant delays in the development or introduction of products could have a material adverse effect on the
Company's business and operating results.
The Company relies on a limited number of third parties to manufacture all of its products. If any of the Company's third-
party manufacturers
cannot or will not manufacture its products in required volumes, on a cost-
effective basis, in a timely manner, or at all, the Company will have to secure
additional manufacturing capacity. Any interruption or delay in manufacturing could have a material adverse effect on the Company's business and
operating results.
Derivative financial instruments
The Company uses foreign currency forward contracts to manage the exposures to foreign exchange risk related to expected future cash flows on
certain forecasted revenue, costs of revenue, operating expenses, and on certain existing assets and liabilities. Foreign currency forward contracts
generally mature within five
months of inception. Under its foreign currency risk management strategy, the Company utilizes derivative instruments to
reduce the impact of currency exchange rate movements on the Company's operating results by offsetting gains and losses on the forward contracts with
increases or decreases in foreign currency transactions. The company does not use derivative financial instruments for speculative purposes.
The Company accounts for its derivative instruments as either assets or liabilities and records them at fair value. Derivatives that are not defined as
hedges in the authoritative guidance for derivatives and hedging must be adjusted to fair value through earnings. For derivative instruments that hedge
the exposure to variability in expected future cash flows that are designated as cash flow hedges, the effective portion of the gain or loss on the
derivative instrument is reported as a component of cumulative other comprehensive income in stockholders' equity and reclassified into earnings in the
same period or periods during which the hedged transaction affects earnings. The ineffective portion of the gain or loss on the derivative instrument is
recognized in current earnings. To receive hedge accounting treatment, cash flow hedges must be highly effective in offsetting changes to expected
future cash flows on hedged transactions. For derivatives designated as cash flow hedges, changes in the time value are excluded from the assessment of
hedge effectiveness and are recognized in earnings.
Concentration of credit risk
Financial instruments that potentially subject the Company to a concentration of credit risk consist of cash and cash equivalents, short-
term
investments and accounts receivable. The Company believes that there is minimal credit risk associated with the investment of its cash and cash
equivalents and short-
term investments, due to the restrictions placed on the type of investment that can be entered into under the Company's investment
policy. The Company's short-term investments consist of investment-
grade securities, and the Company's cash and investments are held and managed by
recognized financial institutions.
The Company's customers are primarily distributors as well as retailers and broadband service providers who sell or distribute the products to a
large group of end-
users. The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of the Company's
customers to make required payments. The Company regularly performs credit evaluations of the Company's customers' financial condition and
considers factors such as historical experience, credit quality, age of the accounts receivable balances, geographic or country-
specific risks and current
economic conditions that may affect customers' ability to pay, and, generally, requires no collateral from its customers. The Company secures credit
insurance for certain customers in international and domestic markets.
As of December 31, 2013 and 2012, Best Buy, Inc. represented 21% and 22% of the Company's total accounts receivable respectively.
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