Netgear 2013 Annual Report Download - page 25

Table of Contents
the business segments, as compared to the other segments. We believe that our service provider business unit may be particularly susceptible to this risk
relative to our other two business units, due to its higher dependence on a limited number of customers and the potential impact of losing one or more
significant customers. Accordingly, the performance of a business unit may be adversely affected by the allocation of goodwill.
We are subject to, and must remain in compliance with, numerous laws and governmental regulations concerning the manufacturing, use,
distribution and sale of our products, as well as any such future laws and regulations. Some of our customers also require that we comply with
their own unique requirements relating to these matters. Any failure to comply with such laws, regulations and requirements, and any
associated unanticipated costs, may adversely affect our business, financial condition and results of operations.
We manufacture and sell products which contain electronic components, and such components may contain materials that are subject to
government regulation in both the locations that we manufacture and assemble our products, as well as the locations where we sell our products. For
example, certain regulations limit the use of lead in electronic components. To our knowledge, we maintain compliance with all applicable current
government regulations concerning the materials utilized in our products, for all the locations in which we operate. Since we operate on a global basis,
this is a complex process which requires continual monitoring of regulations and an ongoing compliance process to ensure that we and our suppliers are
in compliance with all existing regulations. There are areas where new regulations have been enacted which could increase our cost of the components
that we utilize or require us to expend additional resources to ensure compliance. For example, the SEC passed final rules in August 2012 regarding
investigation and disclosure of the use of certain “conflict minerals”
in our products. These rules apply to our business, and we are expending significant
resources to ensure compliance. If there is an unanticipated new regulation which significantly impacts our use of various components or requires more
expensive components, that regulation would have a material adverse impact on our business, financial condition and results of operations.
One area which has a large number of regulations is the environmental compliance. Management of environmental pollution and climate change
has produced significant legislative and regulatory efforts on a global basis, and we believe this will continue both in scope and the number of countries
participating. These changes could directly increase the cost of energy which may have an impact on the way we manufacture products or utilize energy
to produce our products. In addition, any new regulations or laws in the environmental area might increase the cost of raw materials we use in our
products. Environmental regulations require us to reduce product energy usage, monitor and exclude an expanding list of restricted substances and to
participate in required recover and recycling of our products. While future changes in regulations are certain, we are currently unable to predict how any
such changes will impact us and if such impacts will be material to our business. If there is a new law or regulation that significantly increases our costs
of manufacturing or causes us to significantly alter the way that we manufacture our products, this would have a material adverse effect on our business,
financial condition and results of operations.
Our selling and distribution practices are also regulated in large part by U.S. federal and state as well as foreign antitrust and competition laws and
regulations. In general, the objective of these laws is to promote and maintain free competition by prohibiting certain forms of conduct that tend to
restrict production, raise prices, or otherwise control the market for goods or services to the detriment of consumers of those goods and services.
Potentially prohibited activities under these laws may include unilateral conduct, or conduct undertaken as the result of an agreement with one or more
of our suppliers, competitors, or customers. The potential for liability under these laws can be difficult to predict as it often depends on a finding that the
challenged conduct resulted in harm to competition, such as higher prices, restricted supply, or a reduction in the quality or variety of products available
to consumers. We utilize a number of different distribution channels to deliver our products to the end consumer, and regularly enter agreements with
resellers of our products at various levels in the distribution chain that could be subject to scrutiny under these laws in the event of private litigation or
an investigation by a governmental competition authority. In addition, many of our products are sold to consumers via the Internet. Many of the
competition-
related laws that govern these Internet sales were adopted prior to the advent of the Internet, and, as a result, do not contemplate or address
the unique issues raised by online sales. New interpretations of existing laws and regulations, whether by courts or by the state, federal, or foreign
governmental authorities charged with the enforcement of those laws and regulations, may also impact our business in ways we are currently unable to
predict. Any failure on our part or on the part of our employees, agents, distributors or other business partners to comply with the laws and regulations
governing competition can result in negative publicity and diversion of management time and effort and may subject us to significant litigation liabilities
and other penalties.
In addition to government regulations, many of our customers require us to comply with their own requirements regarding manufacturing, health
and safety matters, corporate social responsibility, employee treatment, anti-
corruption, use of materials and environmental concerns. Some customers
may require us to periodically report on compliance with their unique requirements, and some customers reserve the right to audit our business for
compliance. We are increasingly subject to requests for compliance with these customer requirements. For example, there has been significant focus
from our customers as well as the press regarding corporate social responsibility policies. We regularly audit our manufacturers; however, any
deficiencies in compliance by our
22