Netgear 2012 Annual Report Download - page 63

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.
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, 2012 and 2011, Best Buy, Inc. represented greater than 10% of the Company's total accounts receivable.
The Company is exposed to credit loss in the event of nonperformance by counterparties to the foreign currency forward contracts used to
mitigate the effect of foreign currency exchange rate changes. The Company believes the counterparties for its outstanding contracts are large,
financially sound institutions and thus, the Company does not anticipate nonperformance by these counterparties. However, given the recent,
unprecedented turbulence in the financial markets, the failure of additional counterparties is possible.
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