Netgear 2008 Annual Report Download - page 22

Table of Contents
to deliver products on time would be materially adversely affected and result in delayed or lost revenue as well as customer imposed penalties. In
addition, if increases in fuel prices occur, our transportation costs would likely increase. Moreover, the cost of shipping our products by air
freight is greater than other methods. From time to time in the past, we have shipped products using air freight to meet unexpected spikes in
demand, shifts in demand between product categories or to bring new product introductions to market quickly. If we rely more heavily upon air
freight to deliver our products, our overall shipping costs will increase. A prolonged transportation disruption or a significant increase in the cost
of freight could severely disrupt our business and harm our operating results.
We rely on a limited number of wholesale distributors for most of our sales, and if they refuse to pay our requested prices or reduce
their level of purchases, our net revenue could decline.
We sell a substantial portion of our products through wholesale distributors, including Ingram Micro, Inc. and Tech Data Corporation.
During the year ended December 31, 2008, sales to Ingram Micro and its affiliates accounted for 14% of our net revenue and sales to Tech Data
and its affiliates accounted for 11% of our net revenue. We expect that a significant portion of our net revenue will continue to come from sales
to a small number of wholesale distributors for the foreseeable future. In addition, because our accounts receivable are concentrated with a small
group of purchasers, the failure of any of them to pay on a timely basis, or at all, would reduce our cash flow. We generally have no minimum
purchase commitments or long-term contracts with any of these distributors. These purchasers could decide at any time to discontinue, decrease
or delay their purchases of our products. In addition, the prices that they pay for our products are subject to negotiation and could change at any
time. If any of our major wholesale distributors reduce their level of purchases or refuse to pay the prices that we set for our products, our net
revenue and operating results could be harmed. If our wholesale distributors increase the size of their product orders without sufficient lead-time
for us to process the order, our ability to fulfill product demands would be compromised.
If our goodwill or amortizable intangible assets become impaired we may be required to record a significant charge to earnings.
Under generally accepted accounting principles, we review our amortizable intangible assets for impairment when events or changes in
circumstances indicate the carrying value may not be recoverable. Goodwill is required to be tested for impairment at least annually. Factors that
may be considered when determining if the carrying value of our goodwill or amortizable intangible assets may not be recoverable include a
significant decline in our expected future cash flows or a sustained, significant decline in our stock price and market capitalization.
As a result of our acquisitions, we have significant goodwill and amortizable intangible assets recorded on our balance sheet. In addition,
significant negative industry or economic trends, such as those that have occurred in the last six months, including reduced estimates of future
cash flows or disruptions to our business could indicate that goodwill or amortizable intangible assets might be impaired. If, in any period like
the fourth quarter of 2008, our stock price decreases to the point where our market capitalization is less than our book value, this too could
indicate a potential impairment and we may be required to record an impairment charge in that period. In the fourth quarter of 2008, we recorded
an impairment charge of $458,000 for the net carrying value of certain intangible assets acquired in connection with the Company’s 2006
acquisition of Skipjam Corp. due to the departure of a key employee responsible for managing the asset group as well as recent economic
conditions. In conducting our annual impairment test for goodwill during the fourth quarter of 2008, our fair value exceeded the carrying value
of our net assets by approximately 12%. As such, no goodwill impairment loss was recorded.
Our valuation methodology for assessing impairment requires management to make judgments and assumptions based on projections of
future operating performance. We operate in highly competitive environments and projections of future operating results and cash flows may
vary significantly from actual
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