Netgear 2006 Annual Report Download - page 51

Table of Contents
NETGEAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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.
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 high
quality financial institutions which manage the Company’s investments, and the restrictions placed on the type of
investment that can be entered into under the Company’s investment policy.
The Company’s customers are primarily distributors as well as retailers and broadband service providers who
sell 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, and geographic or country-
specific risks
and economic conditions that may affect customers’ ability to pay, and, generally, requires no collateral from its
customers.
The following table summarizes the percentage of the Company’s total accounts receivable represented by
customers with balances in excess of 10% of its total accounts receivable as of December 31, 2005 and 2006.
Fair value of financial instruments
The carrying amounts of the Company’s financial instruments, including cash and cash equivalents, accounts
receivable, prepaid expenses, accounts payable, accrued employee compensation and other accrued liabilities
approximate their fair values due to their short maturities. See Note 3 for disclosures regarding the fair value of the
Company’s short-term investments.
Inventories
Inventories consist primarily of finished goods which are valued at the lower of cost or market, with cost being
determined using the first-in, first-out method. The Company writes down its inventories based on estimated excess
and obsolete inventories determined primarily by future demand forecasts. At the point of loss recognition, a new,
47
December 31,
2005
2006
Ingram Micro, Inc.
21
%
12
%
Tech Data Corporation
15
%
12
%
Best Buy Co., Inc.
17
%
15
%