NETGEAR
Annual Report 2015

Plain-text annual report

NETGEAR, INC FORM 10-K (Annual Report) Filed 02/19/16 for the Period Ending 12/31/15 Address Telephone CIK 350 EAST PLUMERIA DRIVE SAN JOSE, CA 95134 4089078000 0001122904 Symbol NTGR SIC Code 3661 - Telephone and Telegraph Apparatus Industry Communications Services Sector Fiscal Year Services 12/31 http://www.edgar-online.com © Copyright 2016, EDGAR Online, Inc. All Rights Reserved. Distribution and use of this document restricted under EDGAR Online, Inc. Terms of Use. Table of ContentsUNITED STATES SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549_______________Form 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the fiscal year ended December 31, 2015 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the transition period from toCommission file number 000-50350_______________NETGEAR, Inc.(Exact name of registrant as specified in its charter)Delaware77-0419172(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.) 350 East Plumeria Drive,95134San Jose, California(Zip Code)(Address of principal executive offices) Registrant's telephone number, including area code(408) 907-8000Securities registered pursuant to Section 12(b) of the Act:Title of each class Name of each exchange on which registeredCommon Stock, par value $0.001 The NASDAQ Stock Market LLC (NASDAQ Global Select Market)Securities registered pursuant to 12(g) of the Act: NoneIndicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ No o Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months(or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and postedpursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge,in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company. See definitions of “largeaccelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):Large Accelerated filer o Accelerated filer þNon-Accelerated filer o Smaller reporting company oIndicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act.) Yes o No þ The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant as of June 28, 2015 was approximately $401.9 million. Such aggregatemarket value was computed by reference to the closing price of the common stock as reported on the Nasdaq Global Select Market on June 26, 2015 (the last business day of the Registrant'smost recently completed fiscal second quarter). Shares of common stock held by each executive officer and director and each entity that owns 5% or more of the outstanding common stock havebeen excluded in that such persons may be deemed to be affiliates. The determination of affiliate status is not necessarily a conclusive determination for other purposes.The number of outstanding shares of the registrant's Common Stock, $0.001 par value, was 32,418,414 shares as of February 12, 2016.DOCUMENTS INCORPORATED BY REFERENCEPortions of the Proxy Statement for the Registrant's 2016 Annual Meeting of Stockholders are incorporated by reference in Part III of this Form 10-K.Table of ContentsTABLE OF CONTENTS PART IItem 1.Business1Item 1A.Risk Factors10Item 1B.Unresolved Staff Comments31Item 2.Properties31Item 3.Legal Proceedings31Item 4.Mine Safety Disclosures31PART IIItem 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities32Item 6.Selected Financial Data35Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations37Item 7A.Quantitative and Qualitative Disclosures About Market Risk53Item 8.Financial Statements and Supplementary Data55Item 9.Changes in and Disagreements With Accountants on Accounting and Financial Disclosure100Item 9A.Controls and Procedures100Item 9B.Other Information100PART IIIItem 10.Directors, Executive Officers and Corporate Governance100Item 11.Executive Compensation101Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters101Item 13.Certain Relationships and Related Transactions, and Director Independence101Item 14.Principal Accounting Fees and Services101PART IVItem 15.Exhibits, Financial Statement Schedules102Signatures 103Index to Exhibits 105Table of ContentsPART IThis Annual Report on Form 10-K (“Form 10-K”), including Management’s Discussion and Analysis of Financial Condition and Results of Operations inPart II, Item 7 below, includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of theSecurities Exchange Act of 1934, as amended (the “Exchange Act”). All statements other than statements of historical facts contained in this Form 10-K, includingstatements regarding our future financial position, business strategy and plans and objectives of management for future operations, are forward-looking statements.The words “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “should,” “plan,” “expect” and similar expressions, as they relate to us, areintended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about futureevents and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. These forward-lookingstatements are subject to a number of risks, uncertainties and assumptions described in “Risk Factors” in Part I, Item 1A below, and elsewhere in this Form 10-K,including, among other things: the future growth of the commercial business, retail, and broadband service provider markets; speed of adoption of wirelessnetworking worldwide; our business strategies and development plans; our successful introduction of new products and technologies; future operating expensesand financing requirements; and competition and competitive factors in the commercial business, retail, and broadband service provider markets. In light of theserisks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this Form 10-K may not occur and actual results could differmaterially from those anticipated or implied in the forward-looking statements. All forward-looking statements in this Form 10-K are based on informationavailable to us as of the date hereof and we assume no obligation to update any such forward-looking statements. The following discussion should be read inconjunction with our consolidated financial statements and the accompanying notes contained in this Form 10-K.Item 1. BusinessGeneralWe are a global networking company that delivers innovative products to consumers, businesses and service providers. Our business is managed in threespecific business units: retail, commercial, and service provider. The retail business unit consists of high performance, dependable and easy-to-use homenetworking, home video security, storage and digital media products. The commercial business unit consists of business networking, storage and security solutionsthat bring enterprise class functionality down to small and medium-sized businesses at an affordable price. The service provider business unit consists of made-to-order and retail-proven whole home networking hardware and software solutions as well as 4G LTE hotspots sold to service providers for sale to their subscribers.We are organized into the following three geographic territories: Americas; Europe, Middle-East and Africa ("EMEA") and Asia Pacific ("APAC"). For furtherdetail, refer to Note 12, Segment Information, Operations by Geographic Area and Customer Concentration , in Notes to Consolidated Financial Statements inItem 8 of Part II of this Annual Report on Form 10-K.We were incorporated in Delaware on January 8, 1996. Our principal executive offices are located at 350 East Plumeria Drive, San Jose, California 95134,and our telephone number at that location is (408) 907-8000. Our website address is www.netgear.com.In the years ended December 31, 2015 , 2014 , and 2013 , we generated net revenue of $1.30 billion , $1.39 billion , and $1.37 billion , respectively.MarketsOur mission is to be the innovative leader in connecting the world to the Internet. This includes our goal of being the leading provider of innovativenetworking products to the consumer, business, and service provider markets. A number of factors are driving today's demand for networking products within thesemarkets. As the number of Internet connected devices, such as smart phones, laptops, tablets, and Smart Home and Internet-of-thing devices increase, networks -especially WiFi networks - are being deployed more broadly in order to share information and resources among users and devices. This information and resourcesharing occurs internally, through a local area network, or externally, via the Internet. To take advantage of complex applications, advanced communicationcapabilities and rich multimedia content, users are upgrading their Internet connections by deploying high-speed broadband access technologies. Users also seekthe convenience and flexibility of operating their laptops, smart phones, tablets and related computing devices while accessing their content in a more mobile, orwireless, manner. In addition, market demand for Smart Home and Internet connected products has increased significantly, where users seek to connect theirtelevisions, game consoles, HD streaming players, security cameras, thermostats, smoke detectors, etc. to the Internet. As a result, the speed, coverage range, andreliability of the in home WiFi network has become a higher priority among households.1Table of ContentsConsumers, businesses and service providers demand a complete set of wired and wireless networking and broadband products that are tailored to theirspecific needs and budgets, while incorporating the latest networking technologies. These users require the continual introduction of new and refined products andoften lack extensive IT resources and technical knowledge. Therefore, they demand 'plug-and-play' or easy-to-install and use products that require little or nomaintenance, and customer service and support. We believe that these users also prefer the convenience of obtaining a networking solution from a single companywith whom they are familiar; as these users expand their networks, they tend to be loyal purchasers of that brand. In addition, purchasing decisions of users in thesemarkets are also driven by the affordability of networking products. To provide reliable, easy-to-use products at an attractive price, we believe a successful suppliermust have a company-wide focus on the unique requirements of these markets, operational discipline and cost-efficient infrastructure and processes that allow forefficient product development, manufacturing and distribution.Sales ChannelsWe sell our products through multiple sales channels worldwide, including traditional retailers, online retailers, wholesale distributors, direct market resellers("DMRs"), value-added resellers ("VARs"), and broadband service providers.Wholesale Distribution. Our distribution channel supplies our products to retailers, e-commerce resellers, DMRs, VARs and broadband service providers. Wesell directly to our distributors, the largest of which are Ingram Micro, Inc., D&H Distributing Company and Tech Data Corporation.Retailers. Our retail channel primarily supplies products that are sold into the consumer market. We sell directly to, or enter into consignment arrangementswith, a number of our traditional and online retailers. The remaining traditional retailers, as well as our online retailers, are fulfilled through wholesale distributors.We work directly with our retail channels on market development activities, such as co-advertising, on-line promotions and video demonstrations, instant rebateprograms, event sponsorship and sales associate training. Our largest retailers include Best Buy Co., Inc., Amazon.com, Inc. and their affiliates.DMRs and VARs. We sell into the commercial business marketplace through an extensive network of DMRs and VARs. Our DMRs include companies suchas CDW and Insight. VARs include our network of registered NETGEAR Solution Partners, and resellers that are not registered in our NETGEAR Solution Partnerprogram. DMRs and VARs may receive sales incentives, marketing support and other program benefits from us. Our DMRs and VARs generally purchase ourproducts through our wholesale distributors.Broadband Service Providers. We also supply our products directly to broadband service providers in the United States and internationally providing cable,DSL and 4G LTE broadband. Service providers supply our products to their business and home subscribers. Our largest broadband service providers includeVirgin Media Limited and AT&T.The largest portion of our net revenues was derived from Americas sales in the year ended December 31, 2015 . Americas sales as a percentage of netrevenue increased from 55.3% in the year ended December 31, 2014 to 61.4% in the year ended December 31, 2015 . We have continuously committed resourcesto our international operations and sales channels. Accordingly, we are subject to a number of risks related to international operations such as macroeconomic andmicroeconomic conditions, geopolitical instability, preference for locally branded products, exchange rate fluctuations, increased difficulty in managing inventory,challenges of staffing and managing foreign operations, the effect of international sales on our tax structure, and changes in local tax laws. See Note 12, SegmentInformation, Operations by Geographic Area and Customer Concentration , in Notes to Consolidated Financial Statements in Item 8 of Part II of this AnnualReport on Form 10-K, for further discussion of net revenue by geographic region.Best Buy Co., Inc. and Affiliates accounted for 15% of our net revenue for the year ended December 31, 2015 . None of our customers accounted for 10% ormore of our net revenue for the years ended December 31, 2014 and 2013 . See Note 12, Segment Information, Operations by Geographic Area and CustomerConcentration , in Notes to Consolidated Financial Statements in Item 8 of Part II of this Annual Report on Form 10-K, for further details on customerconcentrations.Product OfferingsOur product line consists of devices that create and extend wired and wireless networks as well as devices that provide a special function and attach to thenetwork, such as network attached storage, IP security cameras and home automation devices and services. These products are available in multiple configurationsto address the needs of our customers in each geographic region in which our products are sold.Commercial business networking. These products are sold primarily in our commercial business unit and include:2Table of Contents•Ethernet switches, which are multiple port devices used to network computing devices and peripherals via Ethernet wiring;•Wireless controllers and access points, which are devices used to manage and control multiple WiFi base stations on a campus or a facility providingWiFi connections to smart phones, tablets, laptops and other computing devices;•Internet security appliances, which provide Internet access through capabilities such as anti-virus and anti-spam; and•Unified storage, which delivers file and block based data into a single shared storage system, meeting the demands of small enterprises, education,hospitality and health markets through an easy-to-use interface for managing multiple storage protocols.Broadband access. Broadband access is a high speed transmission via coaxial cable, phone lines, fiber, or cellular mediums using technologies such asDOCSIS 3.x, xDSL, FTTx or 4G LTE, to connect to the Internet over public broadband networks. We develop networking products that enable connections tothese broadband networks that are sold primarily via brick and mortar retail, e-commerce, and service provider channels and include:•Broadband modems, which are devices that convert the broadband signals into Ethernet data that feeds Internet into homes and offices. We providemodems that connect to DOCSIS 3.x, xDSL, FTTx, and 4G LTE;•WiFi Gateways, which are WiFi routers with an integrated broadband modem, for broadband Internet access;•WiFi Hotspots, which create mobile WiFi Internet access that utilizes 3G and 4G LTE data networks for use on the go, and at home in place of traditionalwired broadband, Internet access.Smart Home/ Internet-of-Things Connectivity and Products. Products that create and extend wired and WiFi networks in homes and small businesses toconnect devices to Internet as well as devices that provide remote, secure monitoring of homes and businesses. These connectivity and Smart Home products aresold primarily via brick and mortar retail, e-commerce, and service provider channels and include:•WiFi routers, which create a local area network (LAN) for home or office computer, mobile and Smart Home devices to connect and share a broadbandInternet connection;•WiFi range extenders, which extend the range of an existing WiFi network to eliminate WiFi dead spots;•Powerline adapters and bridges, which extend wired and WiFi Internet connections to any AC outlet using existing electrical wiring;•Remote video security systems, which provide WiFi video and audio monitoring and recordings, accessible by smart phones, tablets or PCs and MACs;•WiFi network adapters, which enable computing devices to be connected to the network via WiFi.We design our products to meet the specific needs of the consumer, business and service provider markets, tailoring various elements of the softwareinterface, the product design, including component specification, physical characteristics such as casing, design and coloration, and specific user interface featuresto meet the needs of these markets. We also leverage many of our technological developments, high volume manufacturing, technical support and engineeringinfrastructure across our markets to maximize business efficiencies.Our products that target the business market are generally designed with an industrial appearance, including metal cases and, for some product categories, theability to mount the product within standard data networking racks. These products typically include higher port counts, higher data transfer rates and otherperformance characteristics designed to meet the needs of a commercial business user. For example, we offer data transfer rates up to ten gigabits per second forour business products to meet the higher capacity requirements of business users. Some of these products are also designed to support transmission modes such asfiber optic cabling, which is common in more sophisticated business environments. Security requirements within our products for commercial business broadbandaccess include firewall, virtual private network and content threat management capabilities that allow for secure interactions between remote offices and businessheadquarter locations over the Internet. Our connectivity product offerings for the commercial business market include enhanced security and remoteconfigurability often required in a3Table of Contentsbusiness setting. Our ReadyNAS ® family of network attached storage products implements redundant array of independent disks data protection, enablingbusinesses to store and protect critical data easily, efficiently and intelligently.Our vision for the home network is about intelligently controlling and monitoring all devices connected to the home network at all times, thus creating aSmart Home. Our focus is to continue to introduce new products into growth areas that form the basis of Smart Homes, such as: the fastest WiFi standards withbroadest coverage via latest technology (802.11ac) WiFi routers and repeaters; home network storage products with an easy to use user interface and remote cloudaccess, higher capacity and resilience; high speed DOCSIS 3.0, xDSL and fiber gateways with more integrated functions; 4G LTE gateways and AirCard hotspots;and home security cameras and automation devices such as our Arlo Smart Home security cameras. We continue to announce and introduce new products in thesegrowth markets.Our vision for the commercial network is about increased effectiveness and efficiency of the hybrid cloud access network. We believe small and medium-sized enterprises will continue to move into cloud-based applications, such as: Salesforce.com, Ring Central, LifeSize video conferencing, SuccessFactors,Workday, and others. In addition, we believe these enterprises will move into utility-like on demand computing power supplied by third party data centers. Also,increasingly more enterprises are enabling the BYOD (bring your own device) environment allowing smart phones, tablets, and netbooks to be the businesscomputing devices of choice. These trends will place a greater demand on commercial networks. To meet this demand we are introducing next generationcommercial products in rapid pace, such as: Power over Ethernet (PoE) switches, 10 gigabit Ethernet switches, high capacity local and remote unified storage,small to medium capacity campus wireless LAN, and security appliances.CompetitionThe consumer, business and service provider markets are intensely competitive and subject to rapid technological change. We expect competition to continueto intensify. Our principal competitors include:•within the consumer markets, companies such as Apple, ASUS, Belkin/Linksys, Devolo, D-Link, Google, Logitech, Nest Labs (owned by Google),Samsung, Swann, Synology, TP Link, and Western Digital;•within the business markets, companies such as Allied Telesys, Barracuda, Buffalo, Cisco Systems, Dell, D-Link, Fortinet, Hewlett-Packard, Huawei,QNAP Systems, Seagate Technology, Synology, Ubiquity, WatchGuard and Western Digital; and•within the service provider markets, companies such as Actiontec, Arcadyan, ARRIS, AVM, Compal Broadband, D-Link, Hitron, Huawei, NovatelWireless, Sagem, Scientific Atlanta (a Cisco Systems company), Sercomm, SMC Networks, TechniColor, TP-Link, Ubee, ZTE and ZyXEL.Our potential competitors include other consumer electronics vendors, including LG Electronics, Microsoft, Panasonic, Sony, Toshiba and Vizio, who couldintegrate networking and streaming capabilities into their line of products, such as televisions, set top boxes and gaming consoles, and our channel customers whomay decide to offer self-branded networking products. We also face competition from service providers who bundle a free networking device with their broadbandservice offering, which would reduce our sales if we are not the supplier of choice to those service providers. In the service provider space, we also face significantand increased competition from original design manufacturers ("ODMs") and contract manufacturers ("CMs") who are selling and attempting to sell their productsdirectly to service providers around the world.Many of our existing and potential competitors have longer operating histories, greater name recognition and substantially greater financial, technical, sales,marketing and other resources. As a result, they may have more advanced technology, larger distribution channels, stronger brand names, better customer serviceand access to more customers than we do. For example, Hewlett-Packard has significant brand name recognition and has an advertising presence substantiallygreater than ours. Similarly, Cisco Systems is well recognized as a leader in providing networking products to businesses and has substantially greater financialresources than we do. Several of our competitors, such as TP-Link, offer a range of products that directly compete with most of our product offerings. Several ofour other competitors primarily compete in a more limited manner. For example, Hewlett-Packard sells networking products primarily targeted at larger businessesor enterprises. However, the competitive environment in which we operate changes rapidly. Other companies with significant resources could also become directcompetitors, either through acquiring a competitor or through internal efforts.We believe that the principal competitive factors in the consumer, business and service provider markets for networking products include product breadth,size and scope of the sales channel, brand name, timeliness of new product introductions, product availability, performance, features, functionality and reliability,price, ease-of-installation, maintenance and use, and customer service and support. We believe our products are competitive in these markets based on thesefactors.4Table of ContentsTo remain competitive, we must invest significant resources in developing new products and enhancing our current products while continuing to expand oursales channels and maintaining customer satisfaction worldwide.Research and DevelopmentAs of December 31, 2015 , we had 337 employees engaged in research and development. Our success depends on our ability to develop products that meetchanging user needs and to anticipate and proactively respond to evolving technology in a timely and cost-effective manner. Accordingly, we have madeinvestments in our research and development department in order to effectively evaluate new third-party technologies, develop new in-house technologies, anddevelop and test new products. Our research and development employees work closely with our technology and manufacturing partners to bring our products tomarket in a timely, high quality and cost-efficient manner.We identify, qualify or self-develop new technologies, and we work closely with our various technology suppliers and manufacturing partners to developproducts using one or more of the development methodologies described below.ODM. Under the ODM methodology, we define the product concept and specification and recommend the technology selection. We then coordinate with ourtechnology suppliers while they develop the product meeting our specification. On certain new products, one or more subsystems of the design can be done in-house and then integrated with the remaining design pieces from the ODM. Once prototypes are completed, we work with our partners to complete the debuggingand systems integration and testing. After completion of the final tests, agency approvals and product documentation, the product is released for production.In-House Development. Under the in-house development model, one or more subsystems of the product are designed and developed utilizing the NETGEARengineering team. Under this model, some of the primary technology is developed in-house. We then work closely with either an ODM, a CM or a JointDevelopment Manufacturer ("JDM") to complete the development of the entire design, perform the necessary testing, and obtain regulatory approvals before theproduct is released for production.OEM. Under the original equipment manufacturer ("OEM"), methodology, which we use for a limited number of products, we define the productspecification and then purchase the product from OEM suppliers that have existing products fitting our design requirements. In some cases, once a technologysupplier's product is selected, we work with the OEM supplier to complete the cosmetic changes to fit into our mechanical and packaging design, as well as ourdocumentation and graphical user interface ("GUI") standard. The OEM supplier completes regulatory approvals on our behalf. When all design verification andregulatory testing is completed, the product is released for production.Our internal research and development efforts focus on developing and improving the usability, reliability, functionality, cost and performance of ourproducts.ManufacturingOur primary manufacturers are Hon Hai Precision Industry Co., Ltd., (more commonly known as Foxconn Corporation), Delta Networks Incorporated, andPegatron Corporation, all of which are headquartered in Taiwan. We also use Flex (also known as FLEXTRONICS) with headquarters in Singapore and the UnitedStates and Sky Light Industrial Ltd. which is headquartered in Hong Kong. The actual manufacturing of our products occurs primarily in mainland China andVietnam, with pilot and low-volume manufacturing in Taiwan on a select basis. We distribute our manufacturing among these key suppliers to avoid excessiveconcentration with a single supplier. However there was an increase in supplier concentration in 2015. Because substantially all of our manufacturing occurs inmainland China and Vietnam, any disruptions from natural disasters, health epidemics and political, social and economic instability would affect the ability of ourmanufacturers to manufacture our products. In addition, our manufacturers in China have continued to increase our costs of production, particularly in the recentyears. These increased costs have affected our margins and ability to lower prices for our products to stay competitive. If our manufacturers or warehousingfacilities are disrupted or destroyed, we would have no other readily available alternatives for manufacturing our products and our business would be significantlyimpacted. In addition to their responsibility for the manufacturing of our products, our manufacturers purchase all necessary parts and materials to producecomplete, finished goods. To maintain quality standards for our suppliers, we have established our own product quality organization based in Hong Kong andmainland China. They are responsible for auditing and inspecting process and product quality on the premises of our ODMs, CMs, OEMs and JDMs.We obtain several key components from limited or sole sources. For example, many of the semiconductors and metamaterials used in our products aredesigned for use in our products and are obtained from sole source suppliers on a purchase order basis. In addition, some components that are used in all ourproducts are obtained from limited sources. These components include connector jacks, plastic casings and physical layer transceivers. We also obtain switchingfabric semiconductors, which are used in our Ethernet switches and Internet gateway products, wireless local area network chipsets which are used in all of ourwireless5Table of Contentsproducts and mobile network chipsets which are used in our wireless gateways and hotspots from a limited number of suppliers. Our third party manufacturersgenerally purchase these components on our behalf on a purchase order basis. If these sources fail to satisfy our supply requirements, our ability to meet scheduledproduct deliveries would be harmed and we may lose sales and experience increased component costs.We currently outsource warehousing and distribution logistics to four main third-party providers who are responsible for warehousing, distribution logisticsand order fulfillment. In addition, these parties are also responsible for some configuration and re-packaging of our products including bundling components toform kits, inserting appropriate documentation, disk drive configuration, and adding power adapters. APL Logistics Americas, Ltd. in City of Industry, Californiaserves the Americas region, Kerry Logistics Ltd. in Hong Kong serves the Asia Pacific region, DSV Solutions B.V. Netherlands serves the EMEA region, andAgility Logistics Pty Ltd. in Matraville, NSW, Australia serves Australia and New Zealand.Sales and MarketingAs of December 31, 2015 , we had 339 employees engaged in sales, marketing, and technical support. We work directly with our customers on marketdevelopment activities, such as co-advertising, online promotions and video demonstrations, event sponsorship and sales associate training. We also participate inmajor industry trade shows and marketing events. Our marketing department is comprised of our channel marketing, product marketing and corporate marketinggroups.Our channel marketing team focuses on working with the sales teams to maximize our participation in channel partner marketing activities and merchandiseour products both online and in store.Our product marketing group focuses on product strategy, product development roadmaps, the new product introduction process, product lifecyclemanagement, demand assessment and competitive analysis. The group works closely with our sales and research and development groups to align our productdevelopment roadmap to meet customer technology demands from a strategic perspective. The group also ensures that product development activities, productlaunches, and ongoing demand and supply planning occur in a well-managed, timely basis in coordination with our development, manufacturing, and sales groups,as well as our ODM, OEM and sales channel partners.Our corporate marketing group is responsible for defining and building our corporate brand and supporting the business units with creative and marketingstrategies and tactics. The group focuses on defining our brand promise and marketing messages on a worldwide basis. This group is also responsible for drivingthe social media and online marketing strategy, public relations and email marketing programs, events, and corporate websites worldwide, as well as creativeproduction for all product categories.We conduct most of our international sales and marketing operations through wholly-owned subsidiaries, which operate via sales and marketing subsidiariesand branch offices worldwide.Customer SupportWe design our products with “plug-and-play” ease of use. We respond globally to customer questions through a variety of venues including phone, chat andemail. Customers can also get self-help service through the comprehensive knowledgebase and the user forum on our website. Customer support is providedthrough a combination of a limited number of permanent employees and use of subcontracted, out-sourced resources. Our permanent employees design ourtechnical support database and are responsible for training and managing our outsourced sub-contractors. They also handle escalations from the outsourcedresources. We utilize the information gained from customers by our customer support organization to enhance our product offerings, including further simplifyingthe installation process.Intellectual PropertyWe believe that our continued success will depend primarily on the technical expertise, speed of technology implementation, creative skills and managementabilities of our officers and key employees, plus ownership of a limited but important set of copyrights, trademarks, trade secrets and patents. We primarily rely ona combination of copyright, trademark and trade secret and patent laws, nondisclosure agreements with employees, consultants and suppliers and other contractualprovisions to establish, maintain and protect our proprietary rights. We hold approximately 145 issued United States patents that expire between years 2016 and2033 and 75 foreign patents that expire between 2016 and 2033. In addition, we currently have approximately 100 pending United States and foreign patentapplications related to technology and products offered by us. We also rely on third-party licensors for patented hardware and software license rights in technologythat are incorporated into and are necessary for the operation and functionality of our products. Our success will depend in part on our continued ability to haveaccess to these technologies.6Table of ContentsWe have trade secret rights for our products, consisting mainly of product design, technical product documentation and software. We also own, or haveapplied for registration of trademarks, in connection with our products in the United States and internationally, including NETGEAR, AirCard, AirCard Enabled,Aircard Watcher, Watcher, Watcher and Wireless Expert, Around Town, NETGEAR Green, the NETGEAR Green logo, Everybody’s Connecting, Arlo, Arlo Q,Arlo logo, The Next Wave of WiFi, Orbi, Skyler, Genie, Genie+, the Genie logo, ReadyShare, Neo TV, the Neo TV logo, NETGEAR Stora, the NETGEAR Storalogo, ProSafe, RangeMax, ReadyNAS, ReadyDrop, ReadyData, ReadyCloud, ReadyDLNA, ReadyRecover, Smart Wizard, ProSecure, the ProSecure logo,Push2TV, Streampro, Ultraline, Proline, Centria, My Media, Nighthawk, Nighthawk x4, Nighthawk x6, NETGEAR Trek, Overdrive, Overdrive 3G/4G MobileHotspot logo, Zing Mobile Hotspot, Mingle, Vue, VueZone, Ufast, and X-RAID.We have registered a number of Internet domain names that we use for electronic interaction with our customers including dissemination of productinformation, marketing programs, product registration, sales activities, and other commercial uses.Seasonal BusinessWe have historically experienced increased net sales in our third and fourth fiscal quarters as compared to other quarters in our fiscal year due to seasonaldemand of consumer markets related to the beginning of the school year and the holiday season. However, because of irregular and significant purchases fromcustomers in other markets, such as the service provider market, this pattern has not been consistent. As such, any pattern should not be considered a reliableindicator of our future net sales or financial performance.BacklogWe believe the actual amount of order backlog at any particular time is not a meaningful indication of our future business. Our backlog consists of productsfor which customer purchase orders have been received and that are scheduled or in the process of being scheduled for shipment. While we expect to fulfill theorder backlog within the current year, most orders are subject to rescheduling or cancellation with little or no penalties. Because of the possibility of customerchanges in product scheduling or order cancellation, our backlog as of any particular date may not be an indicator of net sales for any subsequent period.Accordingly, backlog should not be considered a reliable indicator of our ability to achieve any particular level of revenue or financial performance.Environmental LawsOur products and manufacturing process are subject to numerous governmental regulations, which cover both the use of various materials as well asenvironmental concerns. Environmental issues such as pollution and climate change have had significant legislative and regulatory efforts on a global basis, andthere are expected to be additional changes to the regulations in these areas. These changes could directly increase the cost of energy, which may have an impacton the way we manufacture products or utilize energy to produce our products. In addition, any new regulations or laws in the environmental area might increasethe cost of raw materials we use in our products and the cost of compliance. Other regulations in the environmental area may require us to continue to monitor andensure proper disposal or recycling of our products. To the best of our knowledge, we maintain compliance with all current government regulations concerning ourproduction processes for all locations in which we operate. Since we operate on a global basis, this is also a complex process that requires continual monitoring ofregulations and an ongoing compliance process to ensure that we and our suppliers are in compliance with all existing regulations.EmployeesAs of December 31, 2015 , we had 963 full-time employees, with 339 in sales, marketing and technical support, 337 in research and development, 132 inoperations, and 155 in finance, information systems and administration. We also utilize a number of temporary staff to supplement our workforce. We have neverhad a work stoppage among our employees and no personnel are represented under collective bargaining agreements.7Table of ContentsLong-lived assetsLong-lived assets include purchased intangibles, goodwill and property and equipment. Our property and equipment are located in the following geographiclocations (in thousands): As of December 31, 2015 December 31, 2014 December 31, 2013United States (U.S.)$9,832 $12,453 $10,273Canada3,586 4,375 2,132Americas (excluding U.S. and Canada)— — 28EMEA468 657 914China6,562 10,786 11,905APAC (excluding China)1,936 1,423 1,942 $22,384 $29,694 $27,194Available InformationOur Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to reports filed pursuant to Sections13(a) and 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), are filed with the Securities Exchange Commission (the "SEC"). Weare subject to the informational requirements of the Exchange Act and file or furnish reports, proxy statements, and other information with the SEC. You may readand copy our reports, proxy statements and other information filed by us at the SEC's Public Reference Room located at 100 F Street, N.E., Washington, D.C.20549. Please call the SEC at 1-800-SEC-0330 for further information about the Public Reference Room. Our filings are also available to the public over theInternet at the SEC's website at http://www.sec.gov.Our website provides a link to our SEC filings, which are available free of charge on the same day such filings are made. The specific location on the websitewhere these reports can be found is http://investor.netgear.com/sec.cfm. Our website also provides a link to Section 16 filings which are available free of charge onthe same day as such filings are made. Information contained on these websites is not a part of this Annual Report on Form 10-K.Executive Officers of the RegistrantThe following table sets forth the names, ages and positions of our executive officers as of February 5, 2016.NameAgePositionPatrick C.S. Lo59Chairman and Chief Executive OfficerChristine M. Gorjanc59Chief Financial OfficerPatrick J. Collins III44Senior Vice President of Smart Home ProductsMichael F. Falcon59Senior Vice President of Worldwide Operations and SupportDavid J. Henry43Senior Vice President of Home NetworkingAndrew W. Kim45Senior Vice President of Corporate Development, General Counsel and Corporate SecretaryJohn P. McHugh55Senior Vice President and General Manager of Commercial Business UnitMark G. Merrill61Chief Technology OfficerTamesa T. Rogers42Senior Vice President, Human ResourcesMichael A. Werdann47Senior Vice President of Worldwide SalesPatrick C.S. Lo is our co-founder and has served as our Chairman and Chief Executive Officer since March 2002. He has also served as interim generalmanager of our retail business unit since the first quarter of 2014 and has served as interim general manager of our service provider business unit since the firstquarter of 2015. Patrick founded NETGEAR with Mark G. Merrill with the singular vision of providing the appliances to enable everyone in the world to connectto the high speed Internet for information, communication, business transactions, education, and entertainment. From 1983 until 1995, Mr. Lo worked at Hewlett-Packard Company, where he served in various management positions in sales, technical support, product management, and marketing in the U.S. and Asia. Mr. Lowas named the Ernst & Young National Technology Entrepreneur of the Year in 2006. Mr. Lo received a B.S. degree in electrical engineering from BrownUniversity.8Table of ContentsChristine M. Gorjanc has served as our Chief Financial Officer since January 2008, Chief Accounting Officer from December 2006 to January 2008 andVice President, Finance from November 2005 to December 2006. From September 1996 through November 2005, Ms. Gorjanc served as Vice President,Controller, Treasurer and Assistant Secretary for Aspect Communications Corporation, a provider of workforce and customer management solutions. FromOctober 1988 through September 1996, Ms. Gorjanc served as the Manager of Tax for Tandem Computers, Inc., a provider of fault-tolerant computer systems.Prior to that, Ms. Gorjanc served in management positions at Xidex Corporation, a manufacturer of storage devices, and spent eight years in public accounting witha number of accounting firms. Ms. Gorjanc holds a B.A. in Accounting (with honors) from the University of Texas at El Paso and a M.S. in Taxation from GoldenGate University.Patrick J. Collins III h as served as our Senior Vice President of Smart Home Products since January 2016. He has been with NETGEAR since June 2008,most recently serving as our Vice President of Home Automation Products from March 2014 to January 2016, Chief Information Officer from November 2012 toMarch 2014, and Vice President of Information Technology from October 2010 to November 2012. Prior to NETGEAR, Mr. Collins held leadership positions inthe consulting services groups of Oracle Corporation and Computer Sciences Corporation. Mr. Collins received a B.S. degree in Computer Information Systemsfrom Alvernia University.Michael F. Falcon has served as our Senior Vice President of Worldwide Operations and Support since January 2009, Senior Vice President of Operationsfrom March 2006 to January 2009, and Vice President of Operations from November 2002 to March 2006. Prior to joining us, Mr. Falcon was at QuantumCorporation, where he served as Vice President of Operations and Supply Chain Management from September 1999 to November 2002, Meridian Data (acquiredby Quantum Corporation), where he served as Vice President of Operations from April 1999 to September 1999, and Silicon Valley Group, where he served asDirector of Operations, Strategic Planning and Supply Chain Management from February 1989 to April 1999. Prior to February 1989, Mr. Falcon served inmanagement positions at SCI Systems, an electronics manufacturer, Xerox Imaging Systems, a provider of scanning and text recognition solutions, andPlantronics, Inc., a provider of lightweight communication headsets. Mr. Falcon received a B.A. degree in Economics with honors from the University ofCalifornia, Santa Cruz and has completed coursework in the M.B.A. program at Santa Clara University.David J. Henry has served as our Senior Vice President of Home Networking since January 2016. He has worldwide responsibility for both ProductMarketing and Engineering of our home networking products, encompassing product strategy, development and delivery. He has been with NETGEAR since July2004, most recently serving as our Vice President of Product Management of our Retail Business Unit from March 2011 to January 2016 and as our SeniorDirector of Product Marketing from October 2010 to March 2011. Prior to NETGEAR, Mr. Henry was a senior product manager for the high technology verticalapplication at Siebel Systems (acquired by Oracle Corporation). His professional experience also includes business process and information technology consultingwith Deloitte Consulting. Mr. Henry received a B.S. degree in Electrical Engineering, with an emphasis on Signal Processing, from the University of Washingtonand an M.B.A. from the Stanford Graduate School of Business.Andrew W. Kim has served as our Senior Vice President of Corporate Development, General Counsel and Corporate Secretary since July 2013, VicePresident, Legal and Corporate Development and Corporate Secretary from October 2008 until July 2013, and as our Associate General Counsel from March 2008to October 2008. Prior to joining NETGEAR, Mr. Kim served as Special Counsel in the Corporate and Securities Department of Wilson Sonsini Goodrich &Rosati, a private law firm, where he represented public and private technology companies in a wide range of matters, including mergers and acquisitions, debt andequity financing arrangements, securities law compliance and corporate governance from 2000 to 2003 and 2006 to 2008. In between his two terms at WilsonSonsini Goodrich & Rosati, Mr. Kim served as Partner in the Business and Finance Department of the law firm Schwartz Cooper Chartered in Chicago, Illinois,and was an Adjunct Professor of Entrepreneurship at the Illinois Institute of Technology. Mr. Kim holds a J.D. from Cornell Law School, and received a B.A.degree in history from Yale University.John P. McHugh serves as our Senior Vice President and General Manager of the Commercial Business Unit, overseeing the development and delivery of theindustry’s premiere line of networking and storage solutions for SMB customers. Prior to joining us in July 2013, Mr. McHugh led the commercial networkingbusiness units at both Nortel and Hewlett-Packard. During his career, Mr. McHugh has held leadership roles in R&D, Marketing and Manufacturing, as well ashaving over 12 years of experience in General Management. Mr. McHugh holds a BS degree in Electrical Engineering and in Computer Science from Rose-Hulman Institute of Technology.Mark G. Merrill is our co-founder and currently serves as our Chief Technology Officer. In this role, Mr. Merrill continues to guide the emerging marketefforts and work closely with the RF engineering team to ensure technical leadership of our wireless networking products. Previously, Mr. Merrill served as ourSenior Vice President of Advanced Engineering from May 2013 to January 2015 and as our Chief Technology Officer from January 2003 to April 2013. FromSeptember 1999 to January 2003, he9Table of Contentsserved as Vice President of Engineering and served as Director of Engineering from September 1995 to September 1999. Mr. Merrill received both a B.S. degreeand an M.S. degree in Electrical Engineering from Stanford University.Tamesa T. Rogers has served as our Senior Vice President, Human Resources since July 2013, Vice President, Human Resources from January 2009 to July2013, Director, Worldwide Human Resources from September 2006 to January 2009 and as our Senior Human Resources Manager from December 2003 toSeptember 2006. From March 2000 to December 2003, Ms. Rogers worked at TriNet Employer Group, a professional employer organization, as a HumanResources Manager, providing HR consulting to technology companies throughout Silicon Valley. Prior to TriNet, Ms. Rogers served in various human resourcesfunctions in several Northern California companies. Ms. Rogers received a B.A. in Communication Studies from the University of California, Santa Barbara andan M.S. in Counseling from California State University, Hayward.Michael A. Werdann has served as our Senior Vice President of Worldwide Sales since October 2015, Worldwide Senior Vice President of Sales forConsumer Products from March 2015 to October 2015 and Vice President of Americas Sales from December 2003 to March 2015. Since joining us in 1998,Mr. Werdann has served as our United States Director of Sales, E-Commerce and DMR from December 2002 to December 2003 and as our Eastern Regional SalesDirector from October 1998 to December 2002. Prior to joining us, Mr. Werdann worked for three years at Iomega Corporation, a computer hardware company, asa Sales Director for the value added reseller sector. Mr. Werdann holds a B.S. Degree in Communications from Seton Hall University.Item 1A.Risk FactorsInvesting in our common stock involves a high degree of risk. The risks described below are not exhaustive of the risks that might affect our business. Otherrisks, including those we currently deem immaterial, may also impact our business. Any of the following risks could materially adversely affect our businessoperations, results of operations and financial condition and could result in a significant decline in our stock price. Before deciding to purchase, hold or sell ourcommon stock, you should carefully consider the risks described in this section. This section should be read in conjunction with the consolidated financialstatements and accompanying notes thereto, and Management's Discussion and Analysis of Financial Condition and Results of Operations included in this AnnualReport on Form 10-K.We expect our operating results to fluctuate on a quarterly and annual basis, which could cause our stock price to fluctuate or decline.Our operating results are difficult to predict and may fluctuate substantially from quarter-to-quarter or year-to-year for a variety of reasons, many of whichare beyond our control. If our actual results were to fall below our estimates or the expectations of public market analysts or investors, our quarterly and annualresults would be negatively impacted and the price of our stock could decline. Other factors that could affect our quarterly and annual operating results includethose listed in the risk factors section of this report and others such as:•changes in the pricing policies of or the introduction of new products by us or our competitors;•slow or negative growth in the networking product, personal computer, Internet infrastructure, Smart Home, home electronics and related technologymarkets, as well as decreased demand for Internet access;•seasonal shifts in end market demand for our products, particularly in our retail business;•foreign currency exchange rate fluctuations in the jurisdictions where we transact sales and expenditures in local currency;•operational disruptions, such as transportation delays or failure of our order processing system, particularly if they occur at the end of a fiscal quarter;•delays in the introduction of new products by us or market acceptance of these products;•shift in overall product mix sales from higher to lower margin products, or from one business unit to another, that would adversely impact our margins;•delay or failure of our service provider customers to purchase at the volumes that they forecast;10Table of Contents•changes in or consolidation of our sales channels and wholesale distributor relationships or failure to manage our sales channel inventory andwarehousing requirements;•delay or failure to fulfill orders for our products on a timely basis;•unanticipated increase in costs, including air freight, associated with shipping and delivery of our products;•disruptions or delays related to our financial and enterprise resource planning systems;•our inability to accurately forecast product demand, particularly from our service provider sales channel, resulting in increased inventory exposure;•component supply constraints from our vendors;•the inability to maintain stable operations by our suppliers and other parties with which we have commercial relationships;•unfavorable level of inventory and turns;•allowance for bad debts exposure with our existing customers and new customers, particularly as we expand into new international markets;•unanticipated shift or decline in profit by geographical region that would adversely impact our tax rate;•geopolitical disruption leading to delay or even stoppage of our operations in manufacturing, transportation, technical support and research anddevelopment;•terms of our contracts with customers or suppliers that cause us to incur additional expenses or assume additional liabilities;•an increase in price protection claims, redemptions of marketing rebates, product warranty and stock rotation returns or allowance for doubtfulaccounts;•litigation involving alleged patent infringement;•epidemic or widespread product failure, or unanticipated safety issues, in one or more of our products;•challenges associated with integrating acquisitions that we make, or with realizing value from our strategic investments in other companies;•failure to effectively manage our third party customer support partners, which may result in customer complaints and/or harm to the NETGEAR brand;•our inability to monitor and ensure compliance with our anti-corruption compliance program and domestic and international anti-corruption laws andregulations, whether in relation to our employees or with our suppliers or customers;•labor unrest at facilities managed by our third-party manufacturers;•our failure to implement and maintain the appropriate internal controls over financial reporting which may result in restatements of our financialstatements; and•any changes in accounting rules.As a result, period-to-period comparisons of our operating results may not be meaningful, and you should not rely on them as an indication of our futureperformance.11Table of ContentsOur stock price may be volatile and your investment in our common stock could suffer a decline in value.There has been significant volatility in the market price and trading volume of securities of technology and other companies, which may be unrelated to thefinancial performance of these companies. These broad market fluctuations may negatively affect the market price of our common stock.Some specific factors that may have a significant effect on our common stock market price include:•actual or anticipated fluctuations in our operating results or our competitors' operating results;•actual or anticipated changes in the growth rate of the general networking sector, our growth rates or our competitors' growth rates;•conditions in the financial markets in general or changes in general economic conditions, including government efforts to stabilize currencies;•interest rate or currency exchange rate fluctuations;•our ability to forecast or report accurate financial results; and•changes in stock market analyst recommendations regarding our common stock, other comparable companies or our industry generally.If we fail to continue to introduce or acquire new products that achieve broad market acceptance on a timely basis, we will not be able to competeeffectively and we will be unable to increase or maintain net revenue and gross margins.We operate in a highly competitive, quickly changing environment, and our future success depends on our ability to develop or acquire, and introduce newproducts that achieve broad market acceptance. Our future success will depend in large part upon our ability to identify demand trends in the commercial business,retail, and service provider markets and quickly develop or acquire, and manufacture and sell products that satisfy these demands in a cost effective manner. Inorder to differentiate our products from our competitors' products, we must continue to increase our focus and capital investment in research and development,including software development. For example, we have committed a substantial amount of resources to the development, manufacture and sale of our new ArloSmart Home camera products and to introducing additional and improved models in this line. If these products do not continue to achieve widespread marketacceptance, or if we are unsuccessful in capitalizing on other Smart Home market opportunities, our future growth may be slowed and our financial results couldbe harmed. Successfully predicting demand trends is difficult, and it is very difficult to predict the effect introducing a new product will have on existing productsales. We will also need to respond effectively to new product announcements by our competitors by quickly introducing competitive products.In addition, we have acquired companies and technologies in the past and as a result, have introduced new product lines in new markets. We may not be ableto successfully manage integration of the new product lines with our existing products. Selling new product lines in new markets will require our management tolearn different strategies in order to be successful. We may be unsuccessful in launching a newly acquired product line in new markets which requires managementof new suppliers, potential new customers and new business models. Our management may not have the experience of selling in these new markets and we maynot be able to grow our business as planned. For example, in April 2013, we completed the acquisition of the AirCard product line from Sierra Wireless. Similarly,we acquired certain technology and intellectual property in connection with our acquisition of AVAAK, Inc. in July 2012 that has been key to the development ofour Arlo Smart Home camera products. If we are unable to effectively and successfully further develop these new product lines, we may not be able to increase ormaintain our sales and our gross margins may be adversely affected.We have experienced delays and quality issues in releasing new products in the past, which resulted in lower quarterly net revenue than expected. In addition,we have experienced, and may in the future experience, product introductions that fall short of our projected rates of market adoption. Online Internet reviews ofour products are increasingly becoming a significant factor in the success of our new product launches, especially in the retail business unit. If we are unable toquickly respond to negative reviews, including end user reviews posted on various prominent online retailers, our ability to sell these products will be harmed. Anyfuture delays in product development and introduction, or product introductions that do not meet broad market acceptance, or unsuccessful launches of newproduct lines could result in:•loss of or delay in revenue and loss of market share;12Table of Contents•negative publicity and damage to our reputation and brand;•a decline in the average selling price of our products;•adverse reactions in our sales channels, such as reduced shelf space, reduced online product visibility, or loss of sales channel; and•increased levels of product returns.Throughout the past few years, we have significantly increased the rate of our new product introductions. If we cannot sustain that pace of productintroductions, either through rapid innovation or acquisition of new products or product lines, we may not be able to maintain or increase the market share of ourproducts. In addition, if we are unable to successfully introduce or acquire new products with higher gross margins, our net revenue and overall gross marginwould likely decline.If we fail to overcome the challenges associated with managing our broadband service provider sales channel, our net revenue and gross profit will benegatively impacted.We sell a substantial portion of our products through broadband service providers worldwide. Our service provider business unit accounted for a significantportion of our growth in recent years and became a larger proportion of our business, especially after our acquisition of the Sierra Wireless AirCard business.However, the service provider business is challenging and exceptionally competitive. In the first quarter of 2015, we undertook a reorganization of our serviceprovider business unit to reduce the cost structure of the unit and supporting functions in order to match a reduced revenue outlook. In the first quarter of 2016, wetook additional steps to re-size the cost structure of this unit and to redeploy certain resources internally to focus on other initiatives. These reorganization effortsalso sought to concentrate our resources on long-term and profitable accounts. The reorganization may not be successful in meeting these goals or the otherchallenges posed by the service provider channel. Difficulties and challenges in selling to service providers include a longer sales cycle, more stringent producttesting and validation requirements, a higher level of customization demands, requirements that suppliers take on a larger share of the risk with respect tocontractual business terms, competition from established suppliers, pricing pressure resulting in lower gross margins, and irregular and unpredictable orderinghabits. For example, rigorous service provider certification processes may delay our sale of new products, or our products ultimately may fail these tests. In eitherevent, we may lose some or all of the amounts we expended in trying to obtain business from the service provider, as well as lose the business opportunityaltogether. In addition, even if we have a product which a service provider customer may wish to purchase, we may choose not to supply products to the potentialservice provider customer if the contract requirements, such as service level requirements, penalties, and liability provisions, are too onerous. Accordingly, ourbusiness may be harmed and our revenues may be reduced. We have, in exceptional limited circumstances, while still in contract negotiations, shipped products inadvance of and subject to agreement on a definitive contract. We do not record revenue from these shipments until a definitive contract exists. There is risk that wedo not ultimately close and sign a definitive contract. If this occurs, the timing of revenue recognition is uncertain and our business would be harmed. In addition,we often commence building custom-made products prior to execution of a contract in order to meet the customer's contemplated launch dates and requirements.Service provider products are generally custom-made for a specific customer and may not be salable to other customers or in other channels. If we have pre-builtcustom-made products but do not come to agreement on a definitive contract, we may be forced to scrap the custom-made products or re-work them at substantialcost and our business would be harmed.Further, successful engagements with service provider customers requires a constant analysis of technology trends. If we are unable to anticipate technologytrends and service provider customer product needs, and to allocate research and development resources to the right projects, we may not be successful incontinuing to sell products to service provider customers. In addition, because our service provider customers command significant resources, including forsoftware support, and demand extremely competitive pricing, certain ODMs have declined to develop service provider products on an ODM basis. Accordingly, asour ODMs increasingly limit development of our service provider products, our service provider business will be harmed if we cannot replace this capability withalternative ODMs or in-house development.Orders from service providers generally tend to be large but sporadic, which causes our revenues from them to fluctuate and challenges our ability toaccurately forecast demand from them. In particular, managing inventory and production of our products for our service provider customers is a challenge. Manyof our service provider customers have irregular purchasing requirements. These customers may decide to cancel orders for customized products specific to thatcustomer, and we may not be able to reconfigure and sell those products in other channels. These cancellations could lead to substantial write-offs. In addition,these customers may issue unforecasted orders for products which we may not be able to produce in a timely manner and as such, we may not be able to accept anddeliver on such unforecasted orders. In certain cases, we may commit to fixed-price, long term13Table of Contentspurchase orders, with such orders priced in foreign currencies which could lose value over time in the event of adverse changes in foreign exchange rates. Even ifwe are selected as a supplier, typically a service provider will also designate a second source supplier, which over time will reduce the aggregate orders that wereceive from that service provider. Further, as the technology underlying our products deployed by broadband service providers matures and more competitorsoffer alternative products with similar technology, we anticipate competing in an extremely price sensitive market and our margins may be affected. If we areunable to introduce new products with sufficiently advanced technology to attract service provider interest in a timely manner, our service provider customers maythen require us to lower our prices, or they may choose to purchase products from our competitors. If this occurs, our business would be harmed and our revenueswould be reduced.If we were to lose a service provider customer for any reason, we may experience a material and immediate reduction in forecasted revenue that may cause usto be below our net revenue and operating margin expectations for a particular period of time and therefore adversely affect our stock price. For example, many ofour competitors in the service provider space aggressively price their products in order to gain market share. We may not be able to match the lower prices offeredby our competitors. Many of the service provider customers will seek to purchase from the lowest cost provider, notwithstanding that our products may be higherquality or that our products were previously validated for use on their proprietary network. Accordingly, we may lose customers who have lower, more aggressivepricing and our revenues may be reduced. These particular challenges are a significant reason for the reduced service provider business unit revenue outlook thatwe announced in the first quarter of 2015 and that we further reduced in the first quarter of 2016. In addition, service providers may choose to prioritize theimplementation of other technologies or the roll out of other services than home networking. Weakness in orders from this industry could have a material adverseeffect on our business, operating results, and financial condition. We have seen slowdowns in capital expenditures by certain of our service provider customers inthe past, and believe there may be potential for similar slowdowns in the future. Any slowdown in the general economy, over supply, consolidation among serviceproviders, regulatory developments and constraint on capital expenditures could result in reduced demand from service providers and therefore adversely affect oursales to them. If we do not successfully overcome these challenges, we will not be able to profitably manage our service provider sales channel and our financialresults will be harmed.We rely on a limited number of traditional and online retailers, wholesale distributors and service provider customers for a substantial portion of oursales, and our net revenue could decline if they refuse to pay our requested prices or reduce their level of purchases or if there is significant consolidationin our customer base which results in fewer customers for our products.We sell a substantial portion of our products through traditional and online retailers, including Best Buy Co., Inc., Amazon.com, Inc. and their affiliates,wholesale distributors, including Ingram Micro, Inc. and Tech Data Corporation, and service providers, including Virgin Media Limited and AT&T. We expectthat a significant portion of our net revenue will continue to come from sales to a small number of customers for the foreseeable future. In addition, because ouraccounts receivable are often 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 cashflow. We are also exposed to increased credit risk if any one of these limited numbers of customers fails or becomes insolvent. We generally have no minimumpurchase commitments or long-term contracts with any of these customers. These purchasers could decide at any time to discontinue, decrease or delay theirpurchases of our products. If our customers increase the size of their product orders without sufficient lead-time for us to process the order, our ability to fulfillproduct demands would be compromised. These customers have a variety of suppliers to choose from and therefore can make substantial demands on us, includingdemands on product pricing and on contractual terms, which often results in the allocation of risk to us as the supplier. Accordingly, the prices that they pay for ourproducts are subject to negotiation and could change at any time. Our ability to maintain strong relationships with our principal customers is essential to our futureperformance. If any of our major customers reduce their level of purchases or refuse to pay the prices that we set for our products, our net revenue and operatingresults could be harmed. Our traditional retail customers have faced increased and significant competition from online retailers, and some of these traditional retailcustomers have increasingly become a smaller portion of our business. If key retail customers continue to reduce their level of purchases, our business could beharmed.Additionally, consolidation among our customer base may allow certain customers to command increased leverage in negotiating prices and other terms ofsale, which could adversely affect our profitability. In addition, if, as a result of increased leverage, customer pressures require us to reduce our pricing such thatour gross margins are diminished, we could decide not to sell our products to a particular customer, which could result in a decrease in our revenue. Consolidationamong our customer base may also lead to reduced demand for our products, elimination of sales opportunities, replacement of our products with those of ourcompetitors and cancellations of orders, each of which would harm our operating results. For example, in February 2015, one of our large retail customers, Staples,announced a proposed acquisition of another large retail customer, Office Depot. If such transaction was approved and completed, it may provide the combinedcompany with increased negotiating power, and it is uncertain how it may impact the aggregate quantities of our products purchased in the future. Consolidationamong our service provider customers worldwide may also make it more difficult to grow our service provider business, given the fierce competition14Table of Contentsfor the already limited number of service providers worldwide and the long sales cycles to close deals. For example, in June 2013, Liberty Global, a serviceprovider with operations worldwide, completed its acquisition of Virgin Media Limited, one of our significant customers. Because we have not conducted businesswith Liberty Global in the past, Virgin Media has been directed by Liberty Global to develop relationships and business with other Liberty Global vendors, manyof which are our competitors. In addition, in the first half of 2015, Charter Communications announced agreements to acquire Time Warner Cable and BrightHouse Networks. Recently, FNAC, a major retail chain in France, has announced the acquisition of Darty, a major retail reseller of ours. If consolidation amongour customer base becomes more prevalent, our operating results may be harmed.We depend on large, recurring purchases from certain significant customers, and a loss, cancellation or delay in purchases by these customers couldnegatively affect our revenue.The loss of recurring orders from any of our more significant customers could cause our revenue and profitability to suffer. Our ability to attract newcustomers will depend on a variety of factors, including the cost-effectiveness, reliability, scalability, breadth and depth of our products. In addition, a change inthe mix of our customers, or a change in the mix of direct and indirect sales, could adversely affect our revenue and gross margins.Although our financial performance may depend on large, recurring orders from certain customers and resellers, we do not generally have bindingcommitments from them. For example:•our reseller agreements generally do not require substantial minimum purchases;•our customers can stop purchasing and our resellers can stop marketing our products at any time; and•our reseller agreements generally are not exclusive.Further, our revenue may be impacted by significant one-time purchases which are not contemplated to be repeatable. While such purchases are reflected inour financial statements, we do not rely on and do not forecast for continued significant one-time purchases. As a result, lack of repeatable one-time purchases willadversely affect our revenue.Because our expenses are based on our revenue forecasts, a substantial reduction or delay in sales of our products to, or unexpected returns from, customersand resellers, or the loss of any significant customer or reseller, could harm or otherwise have a negative impact to our operating results. Although our largestcustomers may vary from period to period, we anticipate that our operating results for any given period will continue to depend on large orders from a smallnumber of customers.Some of our competitors have substantially greater resources than we do, and to be competitive we may be required to lower our prices or increase oursales and marketing expenses, which could result in reduced margins and loss of market share.We compete in a rapidly evolving and fiercely competitive market, and we expect competition to continue to be intense, including price competition. Ourprincipal competitors in the home market for networking and Smart Home devices include Apple, ASUS, Belkin/Linksys, Devolo, D-Link, Google, Logitech, NestLabs (owned by Google), Samsung, Swann, Synology, TP Link, and Western Digital. Our principal competitors in the commercial business market include AlliedTelesys, Barracuda, Buffalo, Cisco Systems, Dell, D-Link, Fortinet, Hewlett-Packard, Huawei, QNAP Systems, Seagate Technology, Synology, Ubiquity,WatchGuard and Western Digital. Our principal competitors in the broadband service provider market include Actiontec, Arcadyan, ARRIS, AVM, CompalBroadband, D-Link, Hitron, Huawei, Novatel Wireless, Sagem, Scientific Atlanta (a Cisco Systems company), Sercomm, SMC Networks, TechniColor, TP-Link,Ubee, ZTE and ZyXEL. Other competitors include numerous local vendors such as Xiomi in China, and Buffalo in Japan. In addition, these local vendors maytarget markets outside of their local regions and may increasingly compete with us in other regions worldwide. Our potential competitors also include otherconsumer electronics vendors, including LG Electronics, Microsoft, Panasonic, Sony, Toshiba and Vizio, who could integrate networking and streamingcapabilities into their line of products, such as televisions, set top boxes and gaming consoles, and our channel customers who may decide to offer self-brandednetworking products. We also face competition from service providers who may bundle a free networking device with their broadband service offering, whichwould reduce our sales if we are not the supplier of choice to those service providers. In the service provider space, we are also facing significant and increasedcompetition from original design manufacturers, or ODMs, and contract manufacturers who are selling and attempting to sell their products directly to serviceproviders around the world.Many of our existing and potential competitors have longer operating histories, greater name recognition and substantially greater financial, technical, sales,marketing and other resources. These competitors may, among other things, undertake more extensive marketing campaigns, adopt more aggressive pricingpolicies, obtain more favorable pricing from suppliers and15Table of Contentsmanufacturers, and exert more influence on sales channels than we can. In addition, certain competitors may have different business models, such as integratedmanufacturing capabilities, that may allow them to achieve cost savings and to compete on the basis of price. Other competitors may have fewer resources, butmay be more nimble in developing new or disruptive technology or in entering new markets. We anticipate that current and potential competitors will alsointensify their efforts to penetrate our target markets. For example, price competition is intense in our industry in certain geographical regions and productcategories. Many of our competitors in the service provider and retail spaces price their products significantly below our product costs in order to gain marketshare. Average sales prices have declined in the past and may again decline in the future. These competitors may have more advanced technology, more extensivedistribution channels, stronger brand names, greater access to shelf space in retail locations, bigger promotional budgets and larger customer bases than we do. Inaddition, many of these competitors leverage a broader product portfolio and offer lower pricing as part of a more comprehensive end-to-end solution which wemay not have. These companies could devote more capital resources to develop, manufacture and market competing products than we could. Our competitors mayalso acquire other companies in the market and leverage combined resources to gain market share. For example, in March 2013, Belkin completed its acquisition ofthe Linksys division from Cisco. Belkin and Linksys are two of our significant competitors. The combined company may have synergies which increaseopportunities for Belkin to gain market share, especially in North America. If any of these companies are successful in competing against us, our sales coulddecline, our margins could be negatively impacted and we could lose market share, any of which could seriously harm our business and results of operations.If we do not effectively manage our sales channel inventory and product mix, we may incur costs associated with excess inventory, or lose sales fromhaving too few products.If we are unable to properly monitor, control and manage our sales channel inventory and maintain an appropriate level and mix of products with ourwholesale distributors and within our sales channels, we may incur increased and unexpected costs associated with this inventory. We generally allow wholesaledistributors and traditional retailers to return a limited amount of our products in exchange for other products. Under our price protection policy, if we reduce thelist price of a product, we are often required to issue a credit in an amount equal to the reduction for each of the products held in inventory by our wholesaledistributors and retailers. If our wholesale distributors and retailers are unable to sell their inventory in a timely manner, we might lower the price of the products,or these parties may exchange the products for newer products. Also, during the transition from an existing product to a new replacement product, we mustaccurately predict the demand for the existing and the new product. For example, in the first quarter of 2013, while transitioning from our existing ReadyNASproduct line to our new line of ReadyNAS products, we were not able to execute on the launch of the new product. This led to our inability to have sufficientquantities of the existing line of ReadyNAS products as we had ramped down supply anticipating the transition, which adversely affected our profitability for thequarter.We determine production levels based on our forecasts of demand for our products. Actual demand for our products depends on many factors, which makes itdifficult to forecast. We have experienced differences between our actual and our forecasted demand in the past and expect differences to arise in the future. If weimproperly forecast demand for our products we could end up with too many products and be unable to sell the excess inventory in a timely manner, if at all, or,alternatively we could end up with too few products and not be able to satisfy demand. This problem is exacerbated because we attempt to closely match inventorylevels with product demand leaving limited margin for error. If these events occur, we could incur increased expenses associated with writing off excessive orobsolete inventory, lose sales, incur penalties for late delivery or have to ship products by air freight to meet immediate demand incurring incremental freight costsabove the sea freight costs, a preferred method, and suffering a corresponding decline in gross margins.16Table of ContentsWe are exposed to adverse currency exchange rate fluctuations in jurisdictions where we transact in local currency, which could harm our financialresults and cash flows.Because a significant portion of our business is conducted outside the United States, we face exposure to adverse movements in foreign currency exchangerates. These exposures may change over time as business practices evolve, and they could have a material adverse impact on our results of operations, financialposition and cash flows. Although a portion of our international sales are currently invoiced in United States dollars, we have implemented and continue toimplement for certain countries and customers both invoicing and payment in foreign currencies. Our primary exposure to movements in foreign currencyexchange rates relates to non-U.S. dollar denominated sales in Europe, Japan and Australia as well as our global operations, and non-U.S. dollar denominatedoperating expenses and certain assets and liabilities. In addition, weaknesses in foreign currencies for U.S. dollar denominated sales could adversely affect demandfor our products. Conversely, a strengthening in foreign currencies against the U.S. dollar could increase foreign currency denominated costs. As a result we mayattempt to renegotiate pricing of existing contracts or request payment to be made in U.S. dollars. We cannot be sure that our customers would agree to renegotiatealong these lines. This could result in customers eventually terminating contracts with us or in our decision to terminate certain contracts, which would adverselyaffect our sales.We hedge our exposure to fluctuations in foreign currency exchange rates as a response to the risk of changes in the value of foreign currency-denominatedassets and liabilities. We may enter into foreign currency forward contracts or other instruments, the majority of which mature within approximately five months.Our foreign currency forward contracts reduce, but do not eliminate, the impact of currency exchange rate movements. For example, we do not execute forwardcontracts in all currencies in which we conduct business. In addition, we hedge to reduce the impact of volatile exchange rates on net revenue, gross profit andoperating profit for limited periods of time. However, the use of these hedging activities may only offset a portion of the adverse financial effect resulting fromunfavorable movements in foreign exchange rates.We obtain several key components from limited or sole sources, and if these sources fail to satisfy our supply requirements or we are unable to properlymanage our supply requirements with our third-party manufacturers, we may lose sales and experience increased component costs.Any shortage or delay in the supply of key product components would harm our ability to meet scheduled product deliveries. Many of the semiconductorsused in our products are specifically designed for use in our products and are obtained from sole source suppliers on a purchase order basis. In addition, somecomponents that are used in all our products are obtained from limited sources. These components include connector jacks, plastic casings and physical layertransceivers. We also obtain switching fabric semiconductors, which are used in our Ethernet switches and Internet gateway products, and wireless local areanetwork chipsets, which are used in all of our wireless products, from a limited number of suppliers. Semiconductor suppliers have experienced and continue toexperience component shortages themselves, such as with substrates used in manufacturing chipsets, which in turn adversely impact our ability to procuresemiconductors from them. Our third-party manufacturers generally purchase these components on our behalf on a purchase order basis, and we do not have anycontractual commitments or guaranteed supply arrangements with our suppliers. If demand for a specific component increases, we may not be able to obtain anadequate number of that component in a timely manner. In addition, if worldwide demand for the components increases significantly, the availability of thesecomponents could be limited. Further, our suppliers may experience financial or other difficulties as a result of uncertain and weak worldwide economicconditions. Other factors which may affect our suppliers' ability to supply components to us include internal management or reorganizational issues, such as roll-out of new equipment which may delay or disrupt supply of previously forecasted components. It could be difficult, costly and time consuming to obtainalternative sources for these components, or to change product designs to make use of alternative components. In addition, difficulties in transitioning from anexisting supplier to a new supplier could create delays in component availability that would have a significant impact on our ability to fulfill orders for ourproducts.We provide our third-party manufacturers with a rolling forecast of demand, which they use to determine our material and component requirements. Leadtimes for ordering materials and components vary significantly and depend on various factors, such as the specific supplier, contract terms and demand and supplyfor a component at a given time. Some of our components have long lead times, such as wireless local area network chipsets, switching fabric chips, physical layertransceivers, connector jacks and metal and plastic enclosures. If our forecasts are not timely provided or are less than our actual requirements, our third-partymanufacturers may be unable to manufacture products in a timely manner. For example, in the first quarter of 2013, our third-party manufacturers were not able tomanufacture sufficient quantities of our new line of ReadyNAS products in order to meet demand, adversely affecting our profitability for the quarter. If ourforecasts are too high, our third-party manufacturers will be unable to use the components they have purchased on our behalf. The cost of the components used inour products tends to drop rapidly as volumes increase and the technologies mature. Therefore, if our third-party manufacturers are unable to promptly usecomponents purchased on our behalf, our cost of producing products may be higher than our competitors due to an oversupply17Table of Contentsof higher-priced components. Moreover, if they are unable to use components ordered at our direction, we will need to reimburse them for any losses they incur.If we are unable to obtain a sufficient supply of components, or if we experience any interruption in the supply of components, our product shipments couldbe reduced or delayed or our cost of obtaining these components may increase. Component shortages and delays affect our ability to meet scheduled productdeliveries, damage our brand and reputation in the market, and cause us to lose sales and market share. For example, component shortages and disruptions insupply in the past have limited our ability to supply all the worldwide demand for our products, and our revenue was affected. In addition, at times sole suppliers ofhighly specialized components have provided components that were either defective or did not meet the criteria required by our customers, resulting in delays, lostrevenue opportunities and potentially substantial write-offs.Another example relates to the record flooding in Thailand in the third quarter of 2011. Many major manufacturers of hard disk drives and their componentsuppliers maintain significant operations in Thailand in areas affected by the flooding. These include most, if not all, of our direct and indirect suppliers of harddisk drives for our ReadyNAS product line. All of our major direct and indirect suppliers of hard disk drives informed us that our supply chain would beconstrained for an indefinite amount of time, in some cases up to six months. Some therefore declared a force majeure event and have stated that, in addition to andbecause of the supply constraints, pricing for hard disk drives would increase significantly until they were able to stabilize the situation. As a result, weexperienced increased prices in the cost of hard disk drives and ceased accepting any additional orders containing ReadyNAS products with hard disk drives at thencurrent prices and all shipments of ReadyNAS products with hard disk drives were placed on hold. In addition, all sales and marketing promotions involvingReadyNAS products were terminated temporarily. Further, we declared the existence of a force majeure event under our contracts with certaincustomers. Accordingly, our business was harmed. Certain events or natural disasters that occur in the future may harm our business as well.The average selling prices of our products typically decrease rapidly over the sales cycle of the product, which may negatively affect our net revenue andgross margins.Our products typically experience price erosion, a fairly rapid reduction in the average unit selling prices over their respective sales cycles. In order to sellproducts that have a falling average unit selling price and maintain margins at the same time, we need to continually reduce product and manufacturing costs. Tomanage manufacturing costs, we must collaborate with our third-party manufacturers to engineer the most cost-effective design for our products. In addition, wemust carefully manage the price paid for components used in our products. We must also successfully manage our freight and inventory costs to reduce overallproduct costs. We also need to continually introduce new products with higher sales prices and gross margins in order to maintain our overall gross margins. If weare unable to manage the cost of older products or successfully introduce new products with higher gross margins, our net revenue and overall gross margin wouldlikely decline.We depend substantially on our sales channels, and our failure to maintain and expand our sales channels would result in lower sales and reduced netrevenue.To maintain and grow our market share, net revenue and brand, we must maintain and expand our sales channels. Our sales channels consist of traditionalretailers, online retailers, DMRs, VARs, and broadband service providers. Some of these entities purchase our products through our wholesale distributorcustomers. We generally have no minimum purchase commitments or long-term contracts with any of these third parties.Traditional retailers have limited shelf space and promotional budgets, and competition is intense for these resources. If the networking sector does notexperience sufficient growth, retailers may choose to allocate more shelf space to other consumer product sectors. A competitor with more extensive product linesand stronger brand identity may have greater bargaining power with these retailers. Any reduction in available shelf space or increased competition for such shelfspace would require us to increase our marketing expenditures simply to maintain current levels of retail shelf space, which would harm our operating margin. Ourtraditional retail customers have faced increased and significant competition from online retailers. If we cannot effectively manage our business amongst our onlinecustomers and traditional retail customers, our business would be harmed. The recent trend in the consolidation of online retailers and DMR channels has resultedin intensified competition for preferred product placement, such as product placement on an online retailer's Internet home page. Expanding our presence in theVAR channel may be difficult and expensive. We compete with established companies that have longer operating histories and longstanding relationships withVARs that we would find highly desirable as sales channel partners. In addition, our efforts to realign or consolidate our sales channels may cause temporarydisruptions in our product sales and revenue, and these changes may not result in the expected longer-term benefits.We also sell products to broadband service providers. Competition for selling to broadband service providers is fierce and intense. Penetrating serviceprovider accounts typically involves a long sales cycle and the challenge of displacing incumbent18Table of Contentssuppliers with established relationships and field-deployed products. If we are unable to maintain and expand our sales channels, our growth would be limited andour business would be harmed.We must also continuously monitor and evaluate emerging sales channels. If we fail to establish a presence in an important developing sales channel, ourbusiness could be harmed.If we lose the services of our Chairman and Chief Executive Officer, Patrick C.S. Lo, or our other key personnel, we may not be able to execute ourbusiness strategy effectively.Our future success depends in large part upon the continued services of our key technical, sales, marketing, finance and senior management personnel. Inparticular, the services of Patrick C.S. Lo, our Chairman and Chief Executive Officer, who has led our company since its inception, are very important to ourbusiness. We do not maintain any key person life insurance policies. Our business model requires extremely skilled and experienced senior management who areable to withstand the rigorous requirements and expectations of our business. Our success depends on senior management being able to execute at a very highlevel. The loss of any of our senior management or other key research, development, sales or marketing personnel, particularly if lost to competitors, could harmour ability to implement our business strategy and respond to the rapidly changing needs of our business. While we have adopted an emergency succession plan forthe short term, we have not formally adopted a long term succession plan. As a result, if we suffer the loss of services of any key executive, our long term businessresults may be harmed. While we believe that we have mitigated some of the business execution and business continuity risk with our reorganization into threebusiness units, the loss of any key personnel would still be disruptive and harm our business, especially given that our business is leanly staffed and relies on theexpertise and high performance of our key personnel. In addition, because we do not have a formal long term succession plan, we may not be able to have theproper personnel in place to effectively execute our long term business strategy if Mr. Lo or other key personnel retire, resign or are otherwise terminated.System security risks, data protection breaches and cyber-attacks could disrupt our internal operations, information technology systems, products orservices, and any such disruption could reduce our expected revenue, increase our expenses, damage our reputation and adversely affect our stock price.Maintaining the security of our computer information systems and communication systems is a critical issue for us and our customers. Hackers may developand deploy viruses, worms and other malicious software programs that are designed to attack our products and systems, including our internal network, or those ofour vendors or customers. Additionally, outside parties may attempt to fraudulently induce our employees or users of our products to disclose sensitive informationin order to gain access to our information technology systems, our data or our customers' data. We have established a crisis management plan and businesscontinuity program. While we regularly test the plan and the program, there can be no assurance that the plan and program can withstand an actual or seriousdisruption in our business, including a data protection breach or cyber-attack. While we have established infrastructure and geographic redundancy for our criticalsystems, our ability to utilize these redundant systems requires further testing and we cannot be assured that such systems are fully functional. For example, muchof our order fulfillment process is automated and the order information is stored on our servers. A significant business interruption could result in losses ordamages and harm our business. If our computer systems and servers go down at the end of a fiscal quarter, our ability to recognize revenue may be delayed untilwe are able to utilize back-up systems and continue to process and ship our orders. This could cause our stock price to decline significantly.We devote considerable resources to network security, data encryption and other security measures to protect our systems and data, but these securitymeasures cannot provide absolute security. Potential breaches of our security measures and the accidental loss, inadvertent disclosure or unapproved disseminationof proprietary information or sensitive or confidential data about us, our employees or our customers, including the potential loss or disclosure of such informationor data as a result of hacking, fraud, trickery or other forms of deception, could expose us, our customers or the individuals affected to a risk of loss or misuse ofthis information, result in litigation and potential liability for us, damage our brand and reputation or otherwise harm our business. In addition, the cost andoperational consequences of implementing further data protection measures could be significant.Our products and services may contain unknown security vulnerabilities. For example, the firmware and software that we or our manufacturing partners haveinstalled on our products may be susceptible to hacking or misuse. In addition, we offer a comprehensive online cloud monitoring service paired with our ArloSmart Home cameras. If hackers compromise this cloud service, or if customer confidential information is accessed without authorization, our business will beharmed. Operating an online cloud service is a relatively new business for us and we may not have the expertise to properly manage risks related to data securityand systems security. We rely on third-party providers for a number of critical aspects of our cloud services and customer support, including web hosting services,billing and payment processing, and consequently we do not maintain direct control over the security of the associated systems. If we or our third-party providersare unable to successfully prevent breaches of security relating to our products, services or customer private information, including customer videos and customerpersonal identification19Table of Contentsinformation, our management would need to spend increasing amounts of time and effort in this area, we would incur substantial expenses, and our business wouldbe harmed.Changes in tax rates, adverse changes in tax laws or exposure to additional income tax liabilities could affect our future profitability.Factors that could materially affect our future effective tax rates include but are not limited to:•changes in the regulatory environment;•changes in accounting and tax standards or practices;•changes in the composition of operating income by tax jurisdiction; and•our operating results before taxes.We are subject to income taxes in the United States and numerous foreign jurisdictions. Our effective tax rate has fluctuated in the past and may fluctuate inthe future. Future effective tax rates could be affected by changes in the composition of earnings in countries with differing tax rates, changes in deferred tax assetsand liabilities, or changes in tax laws. Numerous foreign jurisdictions have been influenced by studies performed by the OECD (Organization of EconomicCooperation and Development) and are increasingly active in evaluating changes to their tax laws. In July 2013 the OECD, which represents a coalition of membercountries, issued an action plan containing 15 comprehensive actions intended to address tax base erosion and jurisdictional profit shifting (BEPS). The OECDissued its final recommendations on these measures in May, 2015. Many countries have increased the volume of tax audits they conduct. Further they continue toevaluate and modify their tax laws in light of BEPS. Changes in tax laws could affect the distribution of our earnings, result in double taxation and adversely affectour results.We have been under examination by the Italian Tax Authority (ITA) for the 2004 through 2012 tax years. The ITA examination included an audit of income,gross receipts and value-added taxes. Currently, we are in litigation with the ITA for the 2004 through 2010 years. On December 28, 2015, we received taxassessments for the 2011 and 2012 tax years and we intend to appeal this assessment with the Italian tax court. If we are unsuccessful in defending our taxpositions, our profitability will be reduced. Additionally, we are under examination in Germany for the 2009 through 2013 tax years for corporate income, tradeand valued-added taxes.We are also subject to examination by the Internal Revenue Service, or IRS, and other tax authorities, including state revenue agencies and other foreigngovernments. While we regularly assess the likelihood of favorable or unfavorable outcomes resulting from examinations by the IRS and other tax authorities todetermine the adequacy of our provision for income taxes, there can be no assurance that the actual outcome resulting from these examinations will not materiallyadversely affect our financial condition and operating results. Additionally, the IRS and several foreign tax authorities have increasingly focused attention onintercompany transfer pricing with respect to sales of products and services and the use of intangibles. Tax authorities could disagree with our intercompanycharges, cross-jurisdictional transfer pricing or other matters and assess additional taxes. If we do not prevail in any such disagreements, our profitability may beaffected.We must comply with indirect tax laws in multiple foreign jurisdictions. Audits of our compliance with these rules may result in additional liabilities fortax, interest and penalties related to our international operations which would reduce our profitability.Our international operations are routinely subject to audit by tax authorities in various countries. Many countries have indirect tax systems where the sale andpurchase of goods and services are subject to tax based on the transaction value. These taxes are commonly referred to as value-added tax (VAT) or goods andservices tax (GST). Failure to comply with these systems can result in the assessment of additional tax, interest and penalties. While we believe we are incompliance with local laws, there is no assurance that foreign tax authorities agree with our reporting positions and upon audit may assess us additional tax, interestand penalties. If this occurs and we cannot successfully defend our position, our profitability will be reduced.Our sales and operations in international markets expose us to operational, financial and regulatory risks.International sales comprise a significant amount of our overall net revenue. International sales were 40% of overall net revenue in fiscal year 2015 and 46%in fiscal year 2014. We continue to be committed to growing our international sales and while we have committed resources to expanding our internationaloperations and sales channels, these efforts may not be successful. International operations are subject to a number of other risks, including:20Table of Contents•exchange rate fluctuations;•political and economic instability, international terrorism and anti-American sentiment, particularly in emerging markets;•potential for violations of anti-corruption laws and regulations, such as those related to bribery and fraud;•preference for locally branded products, and laws and business practices favoring local competition;•increased difficulty in managing inventory;•delayed revenue recognition;•less effective protection of intellectual property;•stringent consumer protection and product compliance regulations, including but not limited to the Restriction of Hazardous Substances directive, theWaste Electrical and Electronic Equipment directive and the European Ecodesign directive, or EuP, that are costly to comply with and may vary fromcountry to country;•difficulties and costs of staffing and managing foreign operations;•business difficulties, including potential bankruptcy or liquidation, of any of our worldwide third party logistics providers; and•changes in local tax laws or changes in the enforcement, application or interpretation of such laws.While we believe we generally have good relations with our employees, employees in certain jurisdictions have rights which give them certain collectiverights. If management must expend significant resources and effort to address and comply with these rights, our business may be harmed. We are also required tocomply with local environmental legislation and our customers rely on this compliance in order to sell our products. If our customers do not agree with ourinterpretations and requirements of new legislation, they may cease to order our products and our revenue would be harmed.If our products contain defects or errors, we could incur significant unexpected expenses, experience product returns and lost sales, experience productrecalls, suffer damage to our brand and reputation, and be subject to product liability or other claims.Our products are complex and may contain defects, errors or failures, particularly when first introduced or when new versions are released. The industrystandards upon which many of our products are based are also complex, experience change over time and may be interpreted in different manners. Some errors anddefects may be discovered only after a product has been installed and used by the end-user.In addition, epidemic failure clauses are found in certain of our customer contracts, especially contracts with service providers. If invoked, these clauses mayentitle the customer to return for replacement or obtain credits for products and inventory, as well as assess liquidated damage penalties and terminate an existingcontract and cancel future or then current purchase orders. In such instances, we may also be obligated to cover significant costs incurred by the customerassociated with the consequences of such epidemic failure, including freight and transportation required for product replacement and out-of-pocket costs for truckrolls to end user sites to collect the defective products. Costs or payments we make in connection with an epidemic failure may materially adversely affect ourresults of operations and financial condition. If our products contain defects or errors, or are found to be noncompliant with industry standards, we couldexperience decreased sales and increased product returns, loss of customers and market share, and increased service, warranty and insurance costs. In addition,defects in, or misuse of, certain of our products could cause safety concerns, including the risk of property damage or personal injury. If any of these eventsoccurred, our reputation and brand could be damaged, and we could face product liability or other claims regarding our products, resulting in unexpected expensesand adversely impacting our operating results. For instance, if a third party were able to successfully overcome the security measures in our products, such a personor entity could misappropriate customer data, third party data stored by our customers and other information, including intellectual property. In addition, theoperations of our end-user customers may be interrupted. If that happens, affected end-users or others may file actions against us alleging product liability, tort, orbreach of warranty claims.21Table of ContentsGlobal economic conditions could materially adversely affect our revenue and results of operations.Our business has been and may continue to be affected by a number of factors that are beyond our control, such as general geopolitical, economic andbusiness conditions, conditions in the financial markets, and changes in the overall demand for networking and Smart Home products. A severe and/or prolongedeconomic downturn could adversely affect our customers' financial condition and the levels of business activity of our customers. Weakness in, and uncertaintyabout, global economic conditions may cause businesses to postpone spending in response to tighter credit, negative financial news and/or declines in income orasset values, which could have a material negative effect on the demand for networking products. In the recent past, slow economic growth throughout various regions worldwide, especially in Europe, presented significant challenges to our business. Forexample, we believe that decreased demand in Europe adversely impacted our net revenue in all three of our business units beginning in fiscal 2013. In addition,current economic challenges in China, including any global economic ramifications of these challenges, may continue to put negative pressure on global economicconditions. If conditions in the global economy, including Europe, China, Australia and the United States, or other key vertical or geographic markets remainuncertain or deteriorate further, such conditions could have a material adverse impact on our business, operating results and financial condition. If we are unable tosuccessfully anticipate changing economic and political conditions, we may be unable to effectively plan for and respond to those changes, which could materiallyadversely affect our business and results of operations.In addition, the economic problems affecting the financial markets and the uncertainty in global economic conditions resulted in a number of adverse effectsincluding a low level of liquidity in many financial markets, extreme volatility in credit, equity, currency and fixed income markets, instability in the stock marketand high unemployment. For example, the challenges faced by the European Union to stabilize some of its member economies, such as Greece, Portugal, Spain,Hungary and even Italy, have had international implications affecting the stability of global financial markets and hindering economies worldwide. Many membernations in the European Union have been addressing the issues with controversial austerity measures. Should the European Union monetary policy measures beinsufficient to restore confidence and stability to the financial markets, the recovery of the global economy, including the U.S. and European Union economieswhere we have a significant presence, could be hindered or reversed, which could have a material adverse effect on us. There could also be a number of otherfollow-on effects from these economic developments and negative economic trends on our business, including the inability of customers to obtain credit to financepurchases of our products; customer insolvencies; decreased customer confidence to make purchasing decisions; decreased customer demand; and decreasedcustomer ability to pay their trade obligations.We depend on a limited number of third-party manufacturers for substantially all of our manufacturing needs. If these third-party manufacturersexperience any delay, disruption or quality control problems in their operations, we could lose market share and our brand may suffer.All of our products are manufactured, assembled, tested and generally packaged by a limited number of third-party manufacturers, including original designmanufacturers, or ODMs, and original equipment manufacturers, as well as contract manufacturers. In most cases, we rely on these manufacturers to procurecomponents and, in some cases, subcontract engineering work. Some of our products are manufactured by a single manufacturer. For example, we currently rely ona single manufacturer for our Arlo Smart Home cameras. We do not have any long-term contracts with any of our third-party manufacturers. Some of these third-party manufacturers produce products for our competitors. Due to changing economic conditions, the viability of some of these third-party manufacturers may beat risk. Our ODMs are increasingly refusing to work with us on certain projects, such as projects for manufacturing products for our service provider customers.Because our service provider customers command significant resources, including for software support, and demand extremely competitive pricing, our ODMs arestarting to refuse to engage on service provider terms. The loss of the services of any of our primary third-party manufacturers could cause a significant disruptionin operations and delays in product shipments. Qualifying a new manufacturer and commencing volume production is expensive and time consuming. Ensuringthat a contract manufacturer is qualified to manufacture our products to our standards is time consuming. In addition, there is no assurance that a contractmanufacturer can scale its production of our products at the volumes and in the quality that we require. If a contract manufacturer is unable to do these things, wemay have to move production for the products to a new or existing third party manufacturer which would take significant effort and our business may be harmed.In addition, as we contemplate moving manufacturing into different jurisdictions, we will be subject to additional significant challenges in ensuring that quality,processes and costs, among other issues, are consistent with our expectations. For example, while we expect our manufacturers to be responsible for penaltiesassessed on us because of excessive failures of the products, there is no assurance that we will be able to collect such reimbursements from these manufacturers,which causes us to take on additional risk for potential failures of our products.Our reliance on third-party manufacturers also exposes us to the following risks over which we have limited control:•unexpected increases in manufacturing and repair costs;22Table of Contents•inability to control the quality and reliability of finished products;•inability to control delivery schedules;•potential liability for expenses incurred by third-party manufacturers in reliance on our forecasts that later prove to be inaccurate;•potential lack of adequate capacity to manufacture all or a part of the products we require; and•potential labor unrest affecting the ability of the third-party manufacturers to produce our products.All of our products must satisfy safety and regulatory standards and some of our products must also receive government certifications. Our third partymanufacturers are primarily responsible for obtaining most regulatory approvals for our products. If our third party manufacturers fail to obtain timely domestic orforeign regulatory approvals or certificates, we would be unable to sell our products and our sales and profitability could be reduced, our relationships with oursales channel could be harmed, and our reputation and brand would suffer.Specifically, substantially all of our manufacturing occurs in the Asia Pacific region and any disruptions from natural disasters, health epidemics andpolitical, social and economic instability would affect the ability of our third party manufacturers to manufacture our products. In addition, our third partymanufacturers in China have continued to increase our costs of production, particularly in the past couple of years. If these costs continue to increase, it may affectour margins and ability to lower prices for our products to stay competitive. Labor unrest in China may also affect our third party manufacturers as workers maystrike and cause production delays. If our third party manufacturers fail to maintain good relations with their employees or contractors, and production andmanufacturing of our products is affected, then we may be subject to shortages of products and quality of products delivered may be affected. Further, if ourmanufacturers or warehousing facilities are disrupted or destroyed, we would have no other readily available alternatives for manufacturing our products and ourbusiness would be significantly harmed.As we continue to work with more third party manufacturers on a contract manufacturing basis, we are also exposed to additional risks not inherent in atypical ODM arrangement. Such risks may include our inability to properly source and qualify components for the products, lack of software expertise resulting inincreased software defects, and lack of resources to properly monitor the manufacturing process. In our typical ODM arrangement, our ODMs are generallyresponsible for sourcing the components of the products and warranting that the products will work against a product's specification, including any softwarespecifications. In a contract manufacturing arrangement, we would take on much more, if not all, of the responsibility around these areas. If we are unable toproperly manage these risks, our products may be more susceptible to defects and our business would be harmed.We have been and will be investing increased additional in-house resources on software research and development, which could disrupt our ongoingbusiness and present distinct risks from our historically hardware-centric business.We plan to continue to evolve our historically hardware-centric business model towards a model that includes more sophisticated software offerings. As such,we will further evolve the focus of our organization towards the delivery of more integrated hardware and software solutions for our customers. While we haveinvested in software development in the past, we will be expending additional resources in this area in the future. Such endeavors may involve significant risks anduncertainties, including distraction of management from current operations, insufficient revenue to offset liabilities assumed and expenses associated with thestrategy, inadequate return on capital, and unidentified issues not discovered in our due diligence. Software development is inherently risky for a company such asours with a historically hardware-centric business model, and accordingly, our efforts in software development may not be successful. Any increased investment insoftware research and development may materially adversely affect our financial condition and operating results.We may spend a proportionately greater amount on software research and development in the future. If we cannot proportionately decrease our cost structurein response to competitive price pressures, our gross margin and, therefore, our profitability could be adversely affected. In addition, if our software solutions,pricing and other factors are not sufficiently competitive, or if there is an adverse reaction to our product decisions, we may lose market share in certain areas,which could adversely affect our revenue and prospects.Software research and development is complex. We must make long-term investments, develop or obtain appropriate intellectual property and commitsignificant resources before knowing whether our predictions will accurately reflect customer demand for our products and services. We must accurately forecastmixes of software solutions and configurations that meet23Table of Contentscustomer requirements, and we may not succeed at doing so within a given product's life cycle or at all. Any delay in the development, production or marketing ofa new software solution could result in us not being among the first to market, which could further harm our competitive position. In addition, our regular testingand quality control efforts may not be effective in controlling or detecting all quality issues and defects. We may be unable to determine the cause, find anappropriate solution or offer a temporary fix to address defects. Finding solutions to quality issues or defects can be expensive and may result in additionalwarranty, replacement and other costs, adversely affecting our profits. If new or existing customers have difficulty with our software solutions or are dissatisfiedwith our services, our operating margins could be adversely affected, and we could face possible claims if we fail to meet our customers' expectations. In addition,quality issues can impair our relationships with new or existing customers and adversely affect our brand and reputation, which could adversely affect ouroperating results.If our goodwill or intangible assets become impaired we may be required to record a significant charge to earnings.Under generally accepted accounting principles, we review our intangible assets for impairment when events or changes in circumstances indicate thecarrying value may not be recoverable. Goodwill is required to be tested for impairment at least annually. Factors that may be considered when determining if thecarrying value of our goodwill or intangible assets may not be recoverable include a significant decline in our expected future cash flows or a sustained, significantdecline in our stock price and market capitalization.As a result of our acquisitions, we have significant goodwill and intangible assets recorded on our balance sheet. In addition, significant negative industry oreconomic trends, such as those that have occurred as a result of the recent economic downturn, including reduced estimates of future cash flows or disruptions toour business could indicate that goodwill or intangible assets might be impaired. If, in any period our stock price decreases to the point where our marketcapitalization 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. Ourvaluation methodology for assessing impairment requires management to make judgments and assumptions based on projections of future operating performance.The estimates used to calculate the fair value of a reporting unit change from year to year based on operating results and market conditions. Changes in theseestimates and assumptions could materially affect the determination of fair value and goodwill impairment for each reporting unit. We operate in highlycompetitive environments and projections of future operating results and cash flows may vary significantly from actual results. As a result, we may incursubstantial impairment charges to earnings in our financial statements should an impairment of our goodwill or intangible assets be determined resulting in anadverse impact on our results of operations. For example, in the fourth fiscal quarter of 2014, we completed our annual impairment test of goodwill and determinedthat the full carrying value of goodwill allocated to the service provider business unit of $74.2 million was impaired, and as a result a corresponding charge wasreflected in the fourth quarter of 2014.As part of growing our business, we have made and expect to continue to make acquisitions. If we fail to successfully select, execute or integrate ouracquisitions, then our business and operating results could be harmed and our stock price could decline.From time to time, we will undertake acquisitions to add new product lines and technologies, gain new sales channels or enter into new sales territories. Forexample, in June 2012 and June 2013 we acquired select assets of two separate engineering operations in India to enhance our wireless product offerings in ourcommercial business unit. Additionally in July 2012, we closed the acquisition of privately held AVAAK, Inc., creators of the VueZone® home security camerasystem, and in April 2013, we closed the acquisition of the AirCard business of Sierra Wireless, Inc. The AirCard acquisition represents our largest acquisition,both in terms of consideration and headcount. Acquisitions involve numerous risks and challenges, including but not limited to the following•integrating the companies, assets, systems, products, sales channels and personnel that we acquire;•higher than anticipated acquisition and integration costs and expenses;•reliance on third parties to provide transition services for a period of time after closing to ensure an orderly transition of the business;•growing or maintaining revenues to justify the purchase price and the increased expenses associated with acquisitions;•entering into territories or markets with which we have limited or no prior experience;•establishing or maintaining business relationships with customers, vendors and suppliers who may be new to us;•overcoming the employee, customer, vendor and supplier turnover that may occur as a result of the acquisition;24Table of Contents•disruption of, and demands on, our ongoing business as a result of integration activities including diversion of management's time and attention fromrunning the day to day operations of our business;•inability to implement uniform standards, disclosure controls and procedures, internal controls over financial reporting and other procedures andpolicies in a timely manner;•inability to realize the anticipated benefits of or successfully integrate with our existing business the businesses, products, technologies or personnelthat we acquire; and•potential post-closing disputes.As part of undertaking an acquisition, we may also significantly revise our capital structure or operational budget, such as issuing common stock that woulddilute the ownership percentage of our stockholders, assuming liabilities or debt, utilizing a substantial portion of our cash resources to pay for the acquisition orsignificantly increasing operating expenses. Our acquisitions have resulted and may in the future result in charges being taken in an individual quarter as well asfuture periods, which results in variability in our quarterly earnings. In addition, our effective tax rate in any particular quarter may also be impacted byacquisitions. Following the closing of an acquisition, we may also have disputes with the seller regarding contractual requirements and covenants. Any suchdisputes may be time consuming and distract management from other aspects of our business. In addition, if we continue to increase the pace or size ofacquisitions, as we have done since mid-2012, we will have to expend significant management time and effort into the transactions and the integrations and wemay not have the proper human resources bandwidth to ensure successful integrations and accordingly, our business could be harmed.As part of the terms of acquisition, we may commit to pay additional contingent consideration if certain revenue or other performance milestones are met. Weare required to evaluate the fair value of such commitments at each reporting date and adjust the amount recorded if there are changes to the fair value.We cannot ensure that we will be successful in selecting, executing and integrating acquisitions. Failure to manage and successfully integrate acquisitionscould materially harm our business and operating results. In addition, if stock market analysts or our stockholders do not support or believe in the value of theacquisitions that we choose to undertake, our stock price may decline.We are subject to, and must remain in compliance with, numerous laws and governmental regulations concerning the manufacturing, use, distributionand 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 uniquerequirements relating to these matters. Any failure to comply with such laws, regulations and requirements, and any associated unanticipated costs, mayadversely 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 governmentregulation in both the locations that we manufacture and assemble our products, as well as the locations where we sell our products. For example, certainregulations limit the use of lead in electronic components. To our knowledge, we maintain compliance with all applicable current government regulationsconcerning 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 whichrequires 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 additionalresources to ensure compliance. For example, the SEC passed final rules in August 2012 regarding investigation and disclosure of the use of certain “conflictminerals” in our products. These rules apply to our business, and we are expending significant resources to ensure compliance. The implementation of theserequirements by government regulators and our partners and/or customers could adversely affect the sourcing, availability, and pricing of minerals used in themanufacture of certain components used in our products. In addition, the supply-chain due diligence investigation required by the conflict minerals rules willrequire expenditures of resources and management attention regardless of the results of the investigation. If there is an unanticipated new regulation whichsignificantly 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 hasproduced 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 laws25Table of Contentsin 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 inregulations 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 anew law or regulation that significantly increases our costs of manufacturing or causes us to significantly alter the way that we manufacture our products, thiswould 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 andregulations. In general, the objective of these laws is to promote and maintain free competition by prohibiting certain forms of conduct that tend to restrictproduction, raise prices, or otherwise control the market for goods or services to the detriment of consumers of those goods and services. Potentially prohibitedactivities under these laws may include unilateral conduct, or conduct undertaken as the result of an agreement with one or more of our suppliers, competitors, orcustomers. 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 tocompetition, such as higher prices, restricted supply, or a reduction in the quality or variety of products available to consumers. We utilize a number of differentdistribution channels to deliver our products to the end consumer, and regularly enter agreements with resellers of our products at various levels in the distributionchain 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 adventof 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 ourbusiness 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 tocomply with the laws and regulations governing competition can result in negative publicity and diversion of management time and effort and may subject us tosignificant 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 safetymatters, corporate social responsibility, employee treatment, anti-corruption, use of materials and environmental concerns. Some customers may require us toperiodically report on compliance with their unique requirements, and some customers reserve the right to audit our business for compliance. We are increasinglysubject to requests for compliance with these customer requirements. For example, there has been significant focus from our customers as well as the pressregarding corporate social responsibility policies. We regularly audit our manufacturers; however, any deficiencies in compliance by our manufacturers may harmour business and our brand. In addition, we may not have the resources to maintain compliance with these customer requirements and failure to comply may resultin decreased sales to these customers, which may have a material adverse effect on our business, financial condition and results of operations.We are currently involved in numerous litigation matters and may in the future become involved in additional litigation, including litigation regardingintellectual property rights, which could be costly and subject us to significant liability.The networking industry is characterized by the existence of a large number of patents and frequent claims and related litigation regarding infringement ofpatents, trade secrets and other intellectual property rights. In particular, leading companies in the data communications markets, some of which are ourcompetitors, have extensive patent portfolios with respect to networking technology. From time to time, third parties, including these leading companies, haveasserted and may continue to assert exclusive patent, copyright, trademark and other intellectual property rights against us demanding license or royalty paymentsor seeking payment for damages, injunctive relief and other available legal remedies through litigation. These also include third-party non-practicing entities whoclaim to own patents or other intellectual property that cover industry standards that our products comply with. If we are unable to resolve these matters or obtainlicenses on acceptable or commercially reasonable terms, we could be sued or we may be forced to initiate litigation to protect our rights. The cost of any necessarylicenses could significantly harm our business, operating results and financial condition. We may also choose to join defensive patent aggregation services in orderto prevent or settle litigation against such non-practicing entities and avoid the associated significant costs and uncertainties of litigation. These patent aggregationservices may obtain, or have previously obtained, licenses for the alleged patent infringement claims against us and other patent assets that could be usedoffensively against us. The costs of such defensive patent aggregation services, while potentially lower than the costs of litigation, may be significant as well. Atany time, any of these non-practicing entities, or any other third-party could initiate litigation against us, or we may be forced to initiate litigation against them,which could divert management attention, be costly to defend or prosecute, prevent us from using or selling the challenged technology, require us to design aroundthe challenged technology and cause the price of our stock to decline. In addition, third parties, some of whom are potential competitors, have initiated and maycontinue to initiate litigation against our manufacturers, suppliers, members of our sales channels or our service provider customers or even end user customers,alleging infringement of their proprietary rights with respect to existing or future products. In the event successful claims of infringement are brought by thirdparties, and we are unable to obtain licenses or independently develop alternative technology on a timely basis, we may be subject26Table of Contentsto indemnification obligations, be unable to offer competitive products, or be subject to increased expenses. Finally, consumer class-action lawsuits related to themarketing and performance of our home networking products have been asserted and may in the future be asserted against us. For additional information regardingcertain of the lawsuits in which we are involved, see the information set forth under Note 9, Commitments and Contingencies, in notes to the consolidated financialstatements in Item 8 of Part II of this Annual Report on Form 10-K. If we do not resolve these claims on a favorable basis, our business, operating results andfinancial condition could be significantly harmed.We are required to evaluate our internal controls under Section 404 of the Sarbanes-Oxley Act of 2002 and any adverse results from such evaluation,including restatements of our issued financial statements, could impact investor confidence in the reliability of our internal controls over financialreporting.Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we are required to furnish a report by our management on our internal control over financialreporting. Such report must contain among other matters, an assessment of the effectiveness of our internal control over financial reporting as of the end of ourfiscal year, including a statement as to whether or not our internal control over financial reporting is effective. This assessment must include disclosure of anymaterial weaknesses in our internal control over financial reporting identified by management. From time to time, we conduct internal investigations as a result ofwhistleblower complaints. In some instances, the whistleblower complaint may implicate potential areas of weakness in our internal controls. Although all knownmaterial weaknesses have been remediated, we cannot be certain that the measures we have taken ensure that restatements will not occur in the future. Execution ofrestatements create a significant strain on our internal resources and could cause delays in our filing of quarterly or annual financial results, increase our costs andcause management distraction. Restatements may also significantly affect our stock price in an adverse manner.Continued performance of the system and process documentation and evaluation needed to comply with Section 404 is both costly and challenging. Duringthis process, if our management identifies one or more material weaknesses in our internal control over financial reporting, we will be unable to assert such internalcontrol is effective. If we are unable to assert that our internal control over financial reporting is effective as of the end of a fiscal year or if our independentregistered public accounting firm is unable to express an opinion on the effectiveness of our internal control over financial reporting, we could lose investorconfidence in the accuracy and completeness of our financial reports, which may have an adverse effect on our stock price.The marketability of our AirCard products may suffer if wireless telecommunications operators do not deliver acceptable wireless services.The success of the AirCard product line depends, in part, on the capacity, affordability, reliability and prevalence of wireless data networks provided bywireless telecommunications operators and on which our AirCard products operate. Currently, various wireless telecommunications operators, either individuallyor jointly with us, sell our products in connection with the sale of their wireless data services to their customers. Growth in demand for wireless data access may belimited if, for example, wireless telecommunications operators cease or materially curtail operations, fail to offer services that customers consider valuable atacceptable prices, fail to maintain sufficient capacity to meet demand for wireless data access, delay the expansion of their wireless networks and services, fail tooffer and maintain reliable wireless network services or fail to market their services effectively.In addition, the future growth of our AirCard product line depends on the successful deployment of next generation wireless data networks provided by thirdparties, including those networks for which we are currently developing products. If these next generation networks are not deployed or widely accepted, or ifdeployment is delayed, there will be no market for the AirCard products we are developing to operate on these networks. If any of these events occurs, or if for anyother reason the demand for wireless data access fails to grow, sales of our products will decline or remain stagnant and our business could be harmed.If disruptions in our transportation network occur or our shipping costs substantially increase, we may be unable to sell or timely deliver our products,and our operating expenses could increase.We are highly dependent upon the transportation systems we use to ship our products, including surface and air freight. Our attempts to closely match ourinventory levels to our product demand intensify the need for our transportation systems to function effectively and without delay. On a quarterly basis, ourshipping volume also tends to steadily increase as the quarter progresses, which means that any disruption in our transportation network in the latter half of aquarter will likely have a more material effect on our business than at the beginning of a quarter.The transportation network is subject to disruption or congestion from a variety of causes, including labor disputes or port strikes, acts of war or terrorism,natural disasters and congestion resulting from higher shipping volumes. For example, in June 2013, a ship carrying containers of our products among its cargosank, and the shipment was lost. Although covered by insurance, this loss led to delays in delivery and our receipt of payment. Labor disputes among freightcarriers and at ports of entry are27Table of Contentscommon, particularly in Europe, and we expect labor unrest and its effects on shipping our products to be a continuing challenge for us. A port worker strike, workslow-down or other transportation disruption in Long Beach, California, where we have a significant distribution center, could significantly disrupt our business.For example, a series of work stoppages and slow-downs arising from labor disputes at the Long Beach port and other West Coast ports, particularly in the firstquarter of 2015, negatively impacted our ability to timely deliver certain product shipments to the United States and resulted in additional transportation expense.Our international freight is regularly subjected to inspection by governmental entities. If our delivery times increase unexpectedly for these or any other reasons,our ability to deliver products on time would be materially adversely affected and result in delayed or lost revenue as well as customer imposed penalties. Inaddition, if increases in fuel prices occur, our transportation costs would likely increase. Moreover, the cost of shipping our products by air freight is greater thanother methods. From time to time in the past, we have shipped products using extensive air freight to meet unexpected spikes in demand, shifts in demand betweenproduct categories, to bring new product introductions to market quickly and to timely ship products previously ordered. If we rely more heavily upon air freight todeliver our products, our overall shipping costs will increase. A prolonged transportation disruption or a significant increase in the cost of freight could severelydisrupt our business and harm our operating results.We are exposed to the credit risk of some of our customers and to credit exposures in weakened markets, which could result in material losses.A substantial portion of our sales are on an open credit basis, with typical payment terms of 30 to 60 days in the United States and, because of local customsor conditions, longer in some markets outside the United States. We monitor individual customer financial viability in granting such open credit arrangements, seekto limit such open credit to amounts we believe the customers can pay, and maintain reserves we believe are adequate to cover exposure for doubtful accounts.In the past, there have been bankruptcies amongst our customer base, and certain of our customers’ businesses face financial challenges that put them at riskof future bankruptcies. For example, our customer RadioShack Corp. filed for Chapter 11 bankruptcy protection in 2015. Although any resulting loss has not beenmaterial to date, future losses, if incurred, could harm our business and have a material adverse effect on our operating results and financial condition. To thedegree that turmoil in the credit markets makes it more difficult for some customers to obtain financing, our customers' ability to pay could be adversely impacted,which in turn could have a material adverse impact on our business, operating results, and financial condition.We have expanded our operations and infrastructure, which may strain our operations and increase our operating expenses.We have expanded our operations and are pursuing market opportunities both domestically and internationally in order to grow our sales. As a result of theacquisition of the AirCard business of Sierra Wireless in 2013, we added two new locations with over 80 personnel housed at each site, one in Carlsbad, California,and one in Richmond, British Columbia. This expansion required enhancements to our existing management information systems, and operational and financialcontrols. In addition, if we continue to grow, our expenditures will likely be significantly higher than our historical costs. We may not be able to install adequatecontrols in an efficient and timely manner as our business grows, and our current systems may not be adequate to support our future operations. The difficultiesassociated with installing and implementing new systems, procedures and controls may place a significant burden on our management, operational and financialresources. In addition, if we grow internationally, we will have to expand and enhance our communications infrastructure. If we fail to continue to improve ourmanagement information systems, procedures and financial controls or encounter unexpected difficulties during expansion and reorganization, our business couldbe harmed.For example, we have invested, and will continue to invest, significant capital and human resources in the design and enhancement of our financial andenterprise resource planning systems, which may be disruptive to our underlying business. We depend on these systems in order to timely and accurately processand report key components of our results of operations, financial position and cash flows. If the systems fail to operate appropriately or we experience anydisruptions or delays in enhancing their functionality to meet current business requirements, our ability to fulfill customer orders, bill and track our customers,fulfill contractual obligations, accurately report our financials and otherwise run our business could be adversely affected. Even if we do not encounter theseadverse effects, the enhancement of systems may be much more costly than we anticipated. If we are unable to continue to enhance our information technologysystems as planned, our financial position, results of operations and cash flows could be negatively impacted.We invest in companies for both strategic and financial reasons, but may not realize a return on our investments.We have made, and continue to seek to make, investments in companies around the world to further our strategic objectives and support our key businessinitiatives. These investments may include equity or debt instruments of public or private companies, and may be non-marketable at the time of our initialinvestment. We do not restrict the types of companies in which we seek to invest. These companies may range from early-stage companies that are often stilldefining their strategic direction to more mature28Table of Contentscompanies with established revenue streams and business models. If any company in which we invest fails, we could lose all or part of our investment in thatcompany. If we determine that an other-than-temporary decline in the fair value exists for an equity or debt investment in a public or private company in which wehave invested, we will have to write down the investment to its fair value and recognize the related write-down as an investment loss. The performance of any ofthese investments could result in significant impairment charges and gains (losses) on other equity investments. We must also analyze accounting and legal issueswhen making these investments. If we do not structure these investments properly, we may be subject to certain adverse accounting issues, such as potentialconsolidation of financial results. Furthermore, if the strategic objectives of an investment have been achieved, or if the investment or business diverges from our strategic objectives, we mayseek to dispose of the investment. Our non-marketable equity investments in private companies are not liquid, and we may not be able to dispose of theseinvestments on favorable terms or at all. The occurrence of any of these events could harm our results. Gains or losses from equity securities could vary fromexpectations depending on gains or losses realized on the sale or exchange of securities and impairment charges related to debt instruments as well as equity andother investments.We rely upon third parties for technology that is critical to our products, and if we are unable to continue to use this technology and future technology,our ability to develop, sell, maintain and support technologically innovative products would be limited.We rely on third parties to obtain non-exclusive patented hardware and software license rights in technologies that are incorporated into and necessary for theoperation and functionality of most of our products. In these cases, because the intellectual property we license is available from third parties, barriers to entry intocertain markets may be lower for potential or existing competitors than if we owned exclusive rights to the technology that we license and use. Moreover, if acompetitor or potential competitor enters into an exclusive arrangement with any of our key third-party technology providers, or if any of these providersunilaterally decide not to do business with us for any reason, our ability to develop and sell products containing that technology would be severely limited. If weare shipping products that contain third-party technology that we subsequently lose the right to license, then we will not be able to continue to offer or supportthose products. In addition, these licenses often require royalty payments or other consideration to the third party licensor. Our success will depend, in part, on ourcontinued ability to access these technologies, and we do not know whether these third-party technologies will continue to be licensed to us on commerciallyacceptable terms, if at all. If we are unable to license the necessary technology, we may be forced to acquire or develop alternative technology of lower quality orperformance standards, which would limit and delay our ability to offer new or competitive products and increase our costs of production. As a result, our margins,market share, and operating results could be significantly harmed.We also utilize third-party software development companies to develop, customize, maintain and support software that is incorporated into our products. Ifthese companies fail to timely deliver or continuously maintain and support the software, as we require of them, we may experience delays in releasing newproducts or difficulties with supporting existing products and customers. In addition, if these third-party licensors fail or experience instability, then we may beunable to continue to sell products that incorporate the licensed technologies in addition to being unable to continue to maintain and support these products. We dorequire escrow arrangements with respect to certain third-party software which entitle us to certain limited rights to the source code, in the event of certain failuresby the third party, in order to maintain and support such software. However, there is no guarantee that we would be able to understand and use the source code, aswe may not have the expertise to do so. We are increasingly exposed to these risks as we continue to develop and market more products containing third-partysoftware, such as our TV connectivity, security and network attached storage products.If we are unable to secure and protect our intellectual property rights, our ability to compete could be harmed.We rely upon third parties for a substantial portion of the intellectual property that we use in our products. At the same time, we rely on a combination ofcopyright, trademark, patent and trade secret laws, nondisclosure agreements with employees, consultants and suppliers and other contractual provisions toestablish, maintain and protect our intellectual property rights. Despite efforts to protect our intellectual property, unauthorized third parties may attempt to designaround, copy aspects of our product design or obtain and use technology or other intellectual property associated with our products. For example, one of ourprimary intellectual property assets is the NETGEAR name, trademark and logo. We may be unable to stop third parties from adopting similar names, trademarksand logos, particularly in those international markets where our intellectual property rights may be less protected. Furthermore, our competitors may independentlydevelop similar technology or design around our intellectual property. Our inability to secure and protect our intellectual property rights could significantly harmour brand and business, operating results and financial condition.29Table of ContentsGovernmental regulations of imports or exports affecting Internet security could affect our net revenue.Any additional governmental regulation of imports or exports or failure to obtain required export approval of our encryption technologies could adverselyaffect our international and domestic sales. The United States and various foreign governments have imposed controls, export license requirements, and restrictionson the import or export of some technologies, particularly encryption technology. In addition, from time to time, governmental agencies have proposed additionalregulation of encryption technology, such as requiring the escrow and governmental recovery of private encryption keys. In response to terrorist activity,governments could enact additional regulation or restriction on the use, import, or export of encryption technology. This additional regulation of encryptiontechnology could delay or prevent the acceptance and use of encryption products and public networks for secure communications, resulting in decreased demandfor our products and services. In addition, some foreign competitors are subject to less stringent controls on exporting their encryption technologies. As a result,they may be able to compete more effectively than we can in the United States and the international Internet security market.We are exposed to credit risk and fluctuations in the market values of our investment portfolio.Although we have not recognized any material losses on our cash equivalents and short-term investments, future declines in their market values could have amaterial adverse effect on our financial condition and operating results. Given the global nature of our business, we have investments with both domestic andinternational financial institutions. Accordingly, we face exposure to fluctuations in interest rates, which may limit our investment income. If these financialinstitutions default on their obligations or their credit ratings are negatively impacted by liquidity issues, credit deterioration or losses, financial results, or otherfactors, the value of our cash equivalents and short-term investments could decline and result in a material impairment, which could have a material adverse effecton our financial condition and operating results.Political events, war, terrorism, public health issues, natural disasters and other circumstances could materially adversely affect us.Our corporate headquarters are located in Northern California and one of our warehouses is located in Southern California, both of which are regions knownfor seismic activity. Substantially all of our critical enterprise-wide information technology systems, including our main servers, are currently housed in colocationfacilities in Mesa, Arizona. While our critical information technology systems are located at colocation facilities in a different geographic region in the UnitedStates, our headquarters and warehouses remain susceptible to seismic activity so long as they are located in California. In addition, substantially all of ourmanufacturing occurs in two geographically concentrated areas in mainland China, where disruptions from natural disasters, health epidemics and political, socialand economic instability may affect the region. If our manufacturers or warehousing facilities are disrupted or destroyed, we would be unable to distribute ourproducts on a timely basis, which could harm our business.In addition, war, terrorism, geopolitical uncertainties, public health issues, and other business interruptions have caused and could cause damage or disruptionto international commerce and the global economy, and thus could have a strong negative effect on us, our suppliers, logistics providers, manufacturing vendorsand customers. Our business operations are subject to interruption by natural disasters, fire, power shortages, terrorist attacks, and other hostile acts, labor disputes,public health issues, and other events beyond our control. For example, labor disputes at manufacturing facilities in China occurred in 2010 and have led toworkers going on strike. The recent trend of labor unrest could materially affect our third-party manufacturers' abilities to manufacture our products. In addition, allof our major direct and indirect suppliers of hard disk drives have been affected by record flooding in Thailand in the third fiscal quarter of 2011, and theyinformed us that our supply chain would be constrained for an indefinite amount of time, up to six months in some cases. Some therefore declared a force majeureevent and have stated that, in addition to and because of the supply constraints, pricing for hard disk drives would increase significantly until they were able tostabilize the situation. As a result, we experienced increased prices in the cost of hard disk drives and ceased accepting any orders containing ReadyNAS productswith hard disk drives. In addition, all sales and marketing promotions involving ReadyNAS products were terminated temporarily. Further, we declared theexistence of a force majeure event under our contracts with certain customers. Accordingly, our business was harmed. Furthermore, earthquakes and resultantnuclear threats and tsunamis in Japan in March 2011 caused some disruption to our supply of raw materials and components for our products and impacted ouroperating results in Japan.Such events could decrease demand for our products, make it difficult or impossible for us to make and deliver products to our customers or to receivecomponents from our suppliers, and create delays and inefficiencies in our supply chain. Should major public health issues, including pandemics, arise, we couldbe negatively affected by more stringent employee travel restrictions, additional limitations in freight services, governmental actions limiting the movement ofproducts between regions, delays in production ramps of new products, and disruptions in the operations of our manufacturing vendors and component suppliers.30Table of ContentsItem 1B.Unresolved Staff CommentsNone.Item 2.PropertiesOur principal administrative, sales, marketing and research and development facilities currently occupy approximately 142,700 square feet in an officecomplex in San Jose, California, under a lease that expires in September 2025.Our international headquarters occupy approximately 10,000 square feet in an office complex in Cork, Ireland, under a lease that expires in January 2027.Our international sales personnel are based out of local sales offices or home offices in Austria, Australia, Belgium, Canada, China, Denmark, France, Germany,Hong Kong, India, Ireland, Italy, Japan, Korea, Poland, Russia, Singapore, Spain, Sweden, Switzerland, the Netherlands, the United Arab Emirates, and the UnitedKingdom. We also have operations personnel using a leased facility in Hong Kong and Suzhou and utilizes the Guangzhou branch office in conjunction with anoffice in Tangxia. We also maintain research and development facilities in Carlsbad (US), Beijing and Nanjing (China), Richmond B.C. (Canada), and in Taipei(Taiwan). From time to time we consider various alternatives related to our long-term facilities needs. While we believe our existing facilities provide suitablespace for our operations and are adequate to meet our immediate needs, it may be necessary to lease additional space to accommodate future growth. We haveinvested in internal capacity and strategic relationships with outside manufacturing vendors as needed to meet anticipated demand for our products.We use third parties to provide warehousing services to us, consisting of facilities in Southern California, Australia, Hong Kong and the Netherlands.Item 3.Legal ProceedingsThe information set forth under the heading "Litigation and Other Legal Matters" in Note 9, Commitments and Contingencies , in Notes to ConsolidatedFinancial Statements in Item 8 of Part II of this Annual Report on Form 10-K, is incorporated herein by reference. For additional discussion of certain risksassociated with legal proceedings, see Item 1A, Risk Factors .Item 4.Mine Safety DisclosuresNot applicable.31Table of ContentsPART IIItem 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity SecuritiesMarket InformationOur common stock is publicly traded on the Nasdaq Global Select Market ("Nasdaq") under the symbol "NTGR". The following table sets forth for the indicatedperiods the high and low intraday sales prices for our common stock on the Nasdaq. Such information reflects interdealer prices, without retail markup, markdownor commission, and may not represent actual transactions.Fiscal Year Ended December 31, 2015HighLowFirst Quarter$36.34$29.81Second Quarter34.2529.20Third Quarter34.9628.12Fourth Quarter45.7628.52Fiscal Year Ended December 31, 2014HighLowFirst Quarter$36.27$30.16Second Quarter35.7531.20Third Quarter35.4030.80Fourth Quarter36.7029.7032Table of ContentsCompany PerformanceNotwithstanding any statement to the contrary in any of our previous or future filings with the SEC, the following information relating to the price performanceof our common stock shall not be deemed “filed” with the SEC or “soliciting material” under the Exchange Act and shall not be incorporated by reference intoany such filings.The following graph shows a comparison from December 31, 2010 through December 31, 2015 of cumulative total return for our common stock, the NasdaqComposite Index and the Nasdaq Computer Index. Such returns are based on historical results and are not intended to suggest future performance. Data for theNasdaq Composite Index and the Nasdaq Computer Index assume reinvestment of dividends. We have never paid dividends on our common stock and have nopresent plans to do so.Holders of Common StockOn February 16, 2016, there were 22 stockholders of record.The number of record holders is based upon the actual number of holders registered on our books at such date and does not include holders of shares in“street names” or persons, partnerships, associations, corporations or other entities identified in security position listings maintained by depository trust companies.Dividend PolicyWe have never declared or paid cash dividends on our capital stock. We do not anticipate paying cash dividends in the foreseeable future.33Table of ContentsRepurchase of Equity Securities by the CompanyPeriod Total Number ofShares Purchased (2) Average Price Paid per Share Total Number of Shares Purchasedas Part of Publicly AnnouncedPlans or Programs (1) Maximum Number of Shares thatMay Yet Be Purchased Under thePlans or ProgramsSeptember 28, 2015 - October 25, 2015 399,825 $31.69 394,272 2,229,695October 26, 2015 - November 22, 2015 746 $41.40 — 2,229,695November 23, 2015 - December 31, 2015 1,755 $43.32 — 2,229,695Total 402,326 $31.76 394,272 (1)On October 21, 2008, October 17, 2014 and July 21, 2015, the Company’s Board of Directors authorized management to repurchase up to 6.0 million, 3.0 million and 3.0 million shares ofthe Company’s outstanding common stock, respectively, which, at the time of authorization, were incremental to the remaining shares under the share repurchase programs. Under theauthorizations, the Company may repurchase shares of its common stock, depending on market conditions, in the open market or through privately negotiated transactions. The timing andactual number of shares subject to repurchase are at the discretion of management and are contingent on a number of factors, such as levels of cash generation from operations, cashrequirements for acquisitions and the price of the Company’s common stock. During the three months ended December 31, 2015, we repurchased and retired, reported based on trade date,approximately 0.4 million shares of common stock at a cost of $12.5 million under this authorization.(2)During the three months ended December 31, 2015, we repurchased and retired, as reported on trade date, approximately 8,000 shares of common stock at a cost of $0.3 million to helpfacilitate tax withholding for RSUs.Refer to Note 10, Stockholders' Equity , of the Notes to Consolidated Financial Statements in this Annual Report on Form 10-K for more information regarding ourstock repurchase programs.Recent Sales of Unregistered SecuritiesNone.34Table of ContentsItem 6.Selected Financial DataThe following selected consolidated financial data are qualified in their entirety, and should be read in conjunction with, the consolidated financial statementsand related notes thereto, and “Management's Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this Form 10-K.We derived the selected consolidated statement of operations data for the years ended December 31, 2015 , 2014 and 2013 and the selected consolidated balancesheet data as of December 31, 2015 and 2014 from our audited consolidated financial statements appearing elsewhere in this Form 10-K. We derived the selectedconsolidated statement of operations data for the years ended December 31, 2012 and 2011 and the selected consolidated balance sheet data as of December 31,2013 , 2012 and 2011 from our audited consolidated financial statements, which are not included in this Form 10-K. Historical results are not necessarily indicativeof results to be expected for future periods.Consolidated Statement of Operations Data: Year Ended December 31, 2015 (1) 2014 (1) 2013 (1) 2012 2011 (In thousands, except per share data)Net revenue $1,300,695 $1,393,515 $1,369,633 $1,271,921 $1,181,018Cost of revenue (3) 933,016 995,597 976,018 888,368 811,572Gross profit 367,679 397,918 393,615 383,553 369,446Operating expenses: Research and development (3) 86,499 90,902 85,168 61,066 48,699Sales and marketing (3) 146,794 157,017 153,804 149,766 154,562General and administrative (3) 45,313 46,552 48,915 45,027 39,423Restructuring and other charges 6,398 2,209 5,335 1,190 2,094Litigation reserves, net (2,682) (1,011) 5,354 390 (201)Goodwill impairment charges — 74,196 — — —Intangibles impairment charges — — 2,000 — —Total operating expenses 282,322 369,865 300,576 257,439 244,577Income from operations 85,357 28,053 93,039 126,114 124,869Interest income 295 253 400 498 477Other income (expense), net (88) 2,455 (457) 2,670 (1,136)Income before income taxes 85,564 30,761 92,982 129,282 124,210Provision for income taxes 36,980 21,973 37,765 42,743 32,842Net income $48,584 $8,788 $55,217 $86,539 $91,368Net income per share: Basic (2) $1.47 $0.25 $1.44 $2.27 $2.46Diluted (2) $1.44 $0.24 $1.42 $2.23 $2.41(1)Includes the impact of AirCard acquisition that occurred in April 2013. Refer to Note 2 Business Acquisitions in Notes to Consolidated Financial Statements in Item 8 of Part II of thisAnnual Report on Form 10-K.(2)Information regarding calculation of per share data is described in Note 6, Net Income Per Share , in Notes to Consolidated Financial Statements in Item 8 of Part II of this Annual Reporton Form 10-K.35Table of Contents(3)Stock-based compensation expense was allocated as follows: Year Ended December 31, 2015 2014 2013 2012 2011 (In thousands)Cost of revenue $1,566 $2,037 $1,577 $1,347 $999Research and development 3,451 4,916 3,943 2,787 2,476Sales and marketing 5,022 6,168 5,379 4,751 5,136General and administrative 6,786 6,893 6,563 5,487 5,151Consolidated Balance Sheet Data: As of December 31, 2015 2014 2013 2012 2011 (In thousands)Cash, cash equivalents and short-term investments $278,266 $257,129 $248,154 $376,877 $353,695Working capital $505,371 $518,849 $500,028 $603,279 $525,268Total assets $1,050,569 $1,048,687 $1,093,930 $1,034,569 $971,370Total current liabilities $315,772 $304,116 $300,083 $260,930 $308,961Total non-current liabilities $26,087 $23,006 $20,064 $19,028 $23,652Total stockholders' equity $708,710 $721,565 $773,783 $754,611 $638,757 36Table of ContentsItem 7.Management’s Discussion and Analysis of Financial Condition and Results of OperationsYou should read the following discussion of our financial condition and results of operations together with the audited consolidated financial statements andnotes to the financial statements included elsewhere in this Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties.The forward-looking statements are not historical facts, but rather are based on current expectations, estimates, assumptions and projections about our industry,business and future financial results. Our actual results could differ materially from the results contemplated by these forward-looking statements due to a numberof factors, including those discussed under “Risk Factors” in Part I, Item 1A above.Business and Executive OverviewWe are a global networking company that delivers innovative products to consumers, businesses and service providers. Our products are built on a variety ofproven technologies such as wireless (WiFi and LTE), Ethernet and powerline, with a focus on reliability and ease-of-use. Our product line consists of wired andwireless devices that enable networking, broadband access and network connectivity. These products are available in multiple configurations to address the needsof our end-users in each geographic region in which our products are sold.We operate in three specific business segments: retail, commercial, and service provider. We believe this structure enables us to better focus our efforts onour core customer segments and allows us to be more nimble and opportunistic as a company overall. Each business unit contains leadership focused on theproduct development efforts, both from a product marketing and engineering standpoint, to service the unique needs of these customer segments. The retailbusiness unit is focused on individual consumers and consists of high performance, dependable and easy-to-use home networking, home video security, storageand digital media products. The commercial business unit is focused on small and medium-sized businesses and consists of business networking, storage andsecurity solutions that bring enterprise class functionality at an affordable price. The service provider business unit is focused on the service provider market andconsists of made-to-order and retail-proven whole home networking hardware and software solutions, as well as 4G LTE hotspots sold to service providers for saleto their subscribers. We conduct business across three geographic regions: Americas; Europe, Middle-East and Africa (“EMEA”) and Asia Pacific (“APAC”).The retail, commercial business, and broadband service provider markets are intensely competitive and subject to rapid technological change. We believe thatthe principal competitive factors in the retail, commercial, and service provider markets for networking products include product breadth, size and scope of thesales channel, brand name, timeliness of new product introductions, product availability, performance, features, functionality and reliability, ease-of-installation,maintenance and use, and customer service and support. To remain competitive, we believe we must continue to aggressively invest resources in developing newproducts and enhancing our current products while continuing to expand our channels and maintaining customer satisfaction worldwide.We sell our networking products through multiple sales channels worldwide, including traditional retailers, online retailers, wholesale distributors, directmarket resellers (“DMRs”), value-added resellers (“VARs”), and broadband service providers. Our retail channel includes traditional retail locations domesticallyand internationally, such as Best Buy, Costco, Fry’s Electronics, Staples, Target, Wal-Mart, Argos (U.K.), Dixons (U.K.), PC World (U.K.), MediaMarkt (Europe),Darty (France), JB HiFi (Australia), Elkjop (Norway) and Sunning and Guomei (China). Online retailers include Amazon.com worldwide, Newegg.com (US),JD.com and Alibaba (China), as well as NBB.com (Germany) and Coolblue.com (Netherlands). Our DMRs include CDW Corporation, Insight Corporation and PCConnection in domestic markets and Misco throughout Europe. In addition, we also sell our products through broadband service providers, such as multiple systemoperators (“MSOs”), xDSL, and other broadband technology operators domestically and internationally. Some of these retailers and broadband service providerspurchase directly from us, while others are fulfilled through wholesale distributors around the world. A substantial portion of our net revenue to date has beenderived from a limited number of wholesale distributors and retailers. We expect that these wholesale distributors and retailers will continue to contribute asignificant percentage of our net revenue for the foreseeable future.We experienced a decline in net revenue of 6.7% during the year ended December 31, 2015 , driven primarily by a reduction in service provider net revenue,partially offset by an increase in retail net revenue. As previously announced, during the first quarter of 2015 we began to execute on our plans to resize our serviceprovider business for higher profitability by focusing on higher margin products and accounts while reducing the cost structure of the service provider business unitand supporting functions to better align with the reduced revenue plan. These efforts continued through the third quarter of 2015. We made further restructuringefforts in January 2016 to this business unit. Retail net revenue increased compared to the prior year, due primarily to an increase in gross shipments of our homesecurity camera , broadband gateways and home wireless products. In addition, the increase in retail net revenue is due to increasing average selling prices, mainlydriven by our Nighthawk and Arlo product lines. We continue to see strong demand for our retail products, including the Nighthawk series and recently introducedArlo Smart Home37Table of Contentscameras. Commercial net revenue decreased compared to the prior year due primarily to a reduction in gross shipments of network storage, wireless products andswitches driven by a difficult small business climate in Europe caused by weakening foreign currencies compared to the U.S. dollar. On a geographic basis, netrevenue increased in the Americas, offset by declines experienced in EMEA and APAC. The increase in the Americas driven primarily by an increase in grossshipments of our home security camera, home wireless and broadband gateways products, partially offset by a decrease in gross shipments of our mobile andmultimedia products. The decline in EMEA was driven primarily by a reduction in gross shipments of broadband gateways, home wireless products and switches,partially offset by an increase in gross shipments of home security camera products. The decline in APAC was driven primarily by a reduction in gross shipmentsof mobile, home wireless, network storage products and switches, partially offset by an increase in gross shipments of our home security camera and broadbandgateway products. Similar to EMEA, APAC net revenue was constrained by weakening foreign currencies compared to the U.S. dollar.Looking forward, we expect growth in our retail business unit mainly driven by gaining additional market share for cable gateway, WiFi high end router andextender products, and home security camera products, and by entering new product category in the Smart Home market. We expect growth in our commercialbusiness unit driven by the sales of our 11 ac WLAN products and web-managed PoE and 10Gig switches. We expect our service provider business unit revenue tofurther decline in 2016 as we continue to remain focused on improving profitability. We also expect to incur restructuring charges of between $1.5 million and $2.5million during the first fiscal quarter of 2016, as part of a plan to realign and redeploy our resources to maximize our efforts in product lines of the service providerbusiness unit and supporting functions to match the reduced revenue outlook and to concentrate resources on long-term and profitable accounts.Critical Accounting Policies and EstimatesOur consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America andpursuant to the rules and regulations of the U.S. Securities and Exchange Commission ("SEC"). The preparation of these financial statements requires managementto make assumptions, judgments and estimates that can have a significant impact on the reported amounts of assets, liabilities, revenues and expenses. We base ourestimates on historical experience and on various other assumptions believed to be applicable and reasonable under the circumstances. Actual results could differsignificantly from these estimates. These estimates may change as new events occur, as additional information is obtained and as our operating environmentchanges. On a regular basis we evaluate our assumptions, judgments and estimates and make changes accordingly. We also discuss our critical accountingestimates with the Audit Committee of the Board of Directors. Note 1, The Company and Summary of Significant Accounting Policies , of the Notes toConsolidated Financial Statements of this Annual Report on Form 10-K describes the significant accounting policies used in the preparation of the consolidatedfinancial statements. We have listed below our critical accounting policies that we believe to have the greatest potential impact on our consolidated financialstatements. Historically, our assumptions, judgments and estimates relative to our critical accounting policies have not differed materially from actual results.Revenue RecognitionRevenue from product sales is generally recognized at the time the product is shipped provided that persuasive evidence of an arrangement exists, title andrisk of loss has transferred to the customer, the selling price is fixed or determinable and collection of the related receivable is reasonably assured. Currently, forsome of our customers, title passes to the customer upon delivery to the port or country of destination, upon their receipt of the product, or upon the customer'sresale of the product. At the end of each fiscal quarter, we estimate and defer revenue related to product where title has not transferred. The revenue continues to bedeferred until such time that title passes to the customer. We assess collectability based on a number of factors, including general economic and market conditions,past transaction history with the customer, and the creditworthiness of the customer. If we determine that collection is not reasonably assured, then revenue isdeferred until receipt of the payment from the customer.We have product offerings with multiple elements. Our multiple-element product offerings include networking hardware with embedded software, varioussoftware subscription services, and support, which are considered separate units of accounting. In general, the networking hardware with embedded software isdelivered up front, while the subscription services and support are delivered over the subscription and support period. We allocate revenue to the softwaredeliverables and the non-software deliverables (including software deliverables which function together with hardware deliverables to provide the product'sessential functionality) based upon their relative selling price. Revenue allocated to each unit of accounting is then recognized when persuasive evidence of anarrangement exists, title and risk of loss has transferred to the customer, the selling price is fixed or determinable and collection of the related receivable isreasonably assured.When applying the relative selling price method, we determine the selling price for each deliverable using vendor-specific objective evidence ("VSOE") offair value of the deliverable, or when VSOE of fair value is unavailable, its best estimate of selling price (“ESP”), as we have determined it is unable to establishthird-party evidence of selling price for the deliverables. In determining38Table of ContentsVSOE, we require that a substantial majority of the selling prices for a deliverable sold on a stand-alone basis fall within a reasonably narrow pricing range,generally evidenced by approximately 80% of such historical stand-alone transactions falling within +/-15% of the median price. We determine ESP for adeliverable by considering multiple factors including, but not limited to, market conditions, competitive landscape, internal costs, gross margin objectives andpricing practices. The objective of ESP is to determine the price at which we would transact a sale if the deliverable were sold on a stand-alone basis. Thedetermination of ESP is made through consultation with and formal approval by our management, taking into consideration the go-to-market strategy.We have not made any material changes in the accounting methodology we use to estimate deferred revenue related to product where title has not transferred.We do not believe there will be a material change in the future estimates or assumptions used in our estimate of deferred revenue.Allowances for Warranty Obligations, Returns due to Stock Rotation, Sales Incentives and Doubtful AccountsOur standard warranty obligation to our direct customers generally provides for a right of return of any product for a full refund in the event that such productis not merchantable or is found to be damaged or defective. At the time revenue is recognized, an estimate of future warranty returns is recorded to reduce revenuein the amount of the expected credit or refund to be provided to our direct customers. At the time we record the reduction to revenue related to warranty returns, weinclude within cost of revenue a write-down to reduce the carrying value of such products to net realizable value. Our standard warranty obligation to end-usersprovides for replacement of a defective product for one or more years. Factors that affect the warranty obligation include product failure rates, material usage, andservice delivery costs incurred in correcting product failures. The estimated cost associated with fulfilling the warranty obligation to end-users is recorded in costof revenue. Because our products are manufactured by third-party manufacturers, in certain cases we have recourse to the third-party manufacturer for replacementor credit for the defective products. We give consideration to amounts recoverable from our third-party manufacturers in determining our warranty liability. Ourestimated allowances for product warranties can vary from actual results and we may have to record additional revenue reductions or charges to cost of revenue,which could materially impact our financial position and results of operations.In addition to warranty-related returns, certain distributors and retailers generally have the right to return product for stock rotation purposes. Upon shipmentof the product, we reduce revenue for an estimate of potential future stock rotation returns related to the current period product revenue. We analyze historicalreturns, channel inventory levels, current economic trends and changes in customer demand for our products when evaluating the adequacy of the allowance forsales returns, namely stock rotation returns. Our estimated allowances for returns due to stock rotation can vary from actual results and we may have to recordadditional revenue reductions, which could materially impact our financial position and results of operations.We accrue for sales incentives as a marketing expense if we receive an identifiable benefit in exchange and can reasonably estimate the fair value of theidentifiable benefit received; otherwise, it is recorded as a reduction of revenues. Our estimated provisions for sales incentives can vary from actual results and wemay have to record additional expenses or additional revenue reductions dependent on the classification of the sales incentive.We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. We regularlyperform credit evaluations of our customers’ financial condition and consider factors such as historical experience, credit quality, age of the accounts receivablebalances, and geographic or country-specific risks and economic conditions that may affect a customer’s ability to pay. The allowance for doubtful accounts isreviewed quarterly and adjusted if necessary based on our assessments of our customers’ ability to pay. If the financial condition of our customers shoulddeteriorate or if actual defaults are higher than our historical experience, additional allowances may be required, which could have an adverse impact on operatingexpenses.Valuation of InventoryWe value our inventory at the lower of cost or market, cost being determined using the first-in, first-out method. We continually assess the value of ourinventory and will periodically write down its value for estimated excess and obsolete inventory based upon assumptions about future demand and marketconditions. On a quarterly basis, we review inventory quantities on hand and on order under non-cancelable purchase commitments, including consignmentinventory, in comparison to our estimated forecast of product demand for the next nine months to determine what inventory, if any, are not saleable. Our analysis isbased on the demand forecast but takes into account market conditions, product development plans, product life expectancy and other factors. Based on thisanalysis, we write down the affected inventory value for estimated excess and obsolescence charges. At the point of loss recognition, a new, lower cost basis forthat inventory is established, and subsequent changes in facts and circumstances do not result in the restoration or increase in that newly established cost basis. Asdemonstrated during prior years, demand for our products can fluctuate significantly. If actual demand is lower than our forecasted demand and we fail to reduceour39Table of Contentsmanufacturing accordingly, we could be required to write down the value of additional inventory, which would have a negative effect on our gross profit.GoodwillGoodwill represents the purchase price over estimated fair value of net assets of businesses acquired in a business combination. Goodwill acquired in abusiness combination is not amortized, but instead tested for impairment at least annually on the first day of the fourth quarter. Should certain events or indicatorsof impairment occur between annual impairment tests, we will perform the impairment test as those events or indicators occur. Examples of such events orcircumstances include the following: a significant decline in our expected future cash flows, a sustained, significant decline in our stock price and marketcapitalization, a significant adverse change in the business climate, and slower growth rates.Goodwill is tested for impairment at the reporting unit level by first performing a qualitative assessment to determine whether it is more likely than not (thatis, a likelihood of more than 50%) that the fair value of the reporting unit is less than its carrying value. We identified the reporting units as retail, commercial andservice provider reporting units, as this is the lowest level for which discrete financial information is available and segment management regularly reviews theoperating results. The qualitative assessment considers the following factors: macroeconomic conditions, industry and market considerations, cost factors, overallcompany financial performance, events affecting the reporting units, and changes in our share price. If the reporting unit does not pass the qualitative assessment,we estimate our fair value and compare the fair value with the carrying value of our net assets. If the fair value is greater than the carrying value of our net assets,no impairment results. If the fair value is less than our carrying value, we would determine the fair value of the goodwill by comparing the implied fair value to thecarrying value of the goodwill in the same manner as if the business unit were being acquired in a business combination. Specifically, we would allocate the fairvalue to all of our assets and liabilities, including any unrecognized intangible assets, in a hypothetical analysis that would calculate the implied fair value ofgoodwill. If the implied fair value of goodwill is less than the recorded goodwill, an impairment charge would be recorded to earnings in the consolidatedstatements of operations. In the fourth fiscal quarter of 2015, we completed the annual impairment test of goodwill. The test was performed as of the first day of the fourth quarter, orSeptember 28, 2015.We performed a qualitative test for goodwill impairment of the retail and commercial reporting units as of September 28, 2015. Based upon the results of thequalitative testing, the respective fair values of the retail and commercial reporting units were substantially in excess of these reporting units’ carrying values. Webelieve that it is more-likely-than-not that the fair value of these reporting units are greater than their respective carrying values and therefore performing the firststep of the two-step impairment test for the retail and commercial reporting units was unnecessary. No goodwill impairment was recognized for the retail andcommercial reporting units in the years ended December 31, 2015, 2014 or 2013.In the fourth quarter of fiscal year 2014, we recorded an impairment charge of $74.2 million which was the entire goodwill balance related to the serviceprovider reporting unit in the year ended December 31, 2014. No goodwill impairment was recognized for the service provider reporting units in the year endedDecember 31, 2013.For retail and commercial reporting units, we do not believe it is likely that there will be a material change in the estimates or assumptions we use to test forimpairment losses on goodwill. However, if the actual results are not consistent with our estimates or assumptions, we may be exposed to a future impairmentcharge that could be material.Intangibles, NetPurchased intangibles with finite lives are amortized using the straight-line method over the estimated economic lives of the assets, which range from four toten years. Finite-lived intangibles are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets maynot be recoverable. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventualdisposition.In the fourth quarter of fiscal year 2015, we saw a decline in net revenue in the service provider reporting unit. According to our customers, purchaseconstraints will tighten further in 2016 and for the foreseeable future. Due to the decline in the long-term revenue and profit outlook, we performed therecoverability test of the long-lived assets within the service provider reporting unit. We estimated the undiscounted future cash flows directly associated with eachasset group and compared the amounts to the carrying value of each asset group. Based on the results of the recoverability test, the sum of undiscounted future cashflows was greater than the carrying value of each asset group and therefore no impairment was recorded. We also reviewed the depreciation and amortizationpolicies for the long-lived asset groups and ensured the remaining useful lives are appropriate.40Table of ContentsPurchased intangibles determined to have indefinite useful lives are not amortized. Indefinite-lived intangibles, namely in-process research and development(“IPR&D”), are reviewed for impairment at least annually during the fourth quarter and whenever events or changes in circumstances indicate that the carryingamount of such assets may not be recoverable. Measurement of an impairment loss for indefinite-lived assets that management expects to hold and use is based onthe fair value of the asset. Indefinite-lived assets to be disposed of are reported at the lower of carrying amount or fair value less costs to sell. The carrying value ofthe asset is reviewed on a regular basis for the existence of facts, both internal and external, that may suggest impairment.In the third quarter of 2013, we recorded an impairment charge of $2.0 million related to the abandonment of certain IPR&D projects obtained in AirCardacquisition in 2013. As of the end of the second fiscal quarter of 2014, all of the remaining IPR&D had reached technical feasibility and was reclassified todefinite-lived intangibles with an estimated useful life of four years. We recorded no other impairments of long-lived assets in the years ended December 31, 2015,2014 or 2013.Property and Equipment, NetProperty and equipment are stated at historical cost, less accumulated depreciation. We will perform an impairment test if certain events or indicators ofimpairment occur. Examples of such events or circumstances include the following: a significant decline in our expected future cash flows, a sustained, significantdecline in our stock price and market capitalization, a significant adverse change in the business climate, and slower growth rates. Recoverability of assets to beheld and used is measured by comparing the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. Ifthe carrying amount of the asset exceeds its estimated undiscounted future net cash flows, an impairment charge is recognized in the amount by which the carryingamount of the asset exceeds the fair value of the asset. The carrying value of the asset is reviewed on a regular basis for the existence of facts, both internal andexternal, that may suggest impairment. Charges related to the impairment of property and equipment were insignificant for the years ended December 31, 2015 ,2014 and 2013 .Income TaxesWe account for income taxes under an asset and liability approach. Under this method, income tax expense is recognized for the amount of taxes payable orrefundable for the current year. In addition, deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differencesresulting from different treatments for tax versus accounting of certain items, such as accruals and allowances not currently deductible for tax purposes. Thesedifferences result in deferred tax assets and liabilities, which are included within the consolidated balance sheet. We must then assess the likelihood that ourdeferred tax assets will be recovered from future taxable income and to the extent we believe that recovery is not more likely than not, we must establish avaluation allowance. Our assessment considers the recognition of deferred tax assets on a jurisdictional basis. Accordingly, in assessing our future taxable incomeon a jurisdictional basis, we consider the effect of its transfer pricing policies on that income. We have placed a valuation allowance against California deferred taxassets since the recovery of the assets is uncertain. We believe that all of our other deferred tax assets are recoverable; however, if there were a change in ourability to recover our deferred tax assets, we would be required to take a charge in the period in which we determined that recovery was not more likely than not.Uncertain tax provisions are recognized under guidance that provides that a company should use a more-likely-than-not recognition threshold based on thetechnical merits of the income tax position taken. Income tax positions that meet the more-likely-than-not recognition threshold should be measured in order todetermine the tax benefit to be recognized in the financial statements. We include interest expense and penalties related to uncertain tax positions as additional taxexpense.41Table of ContentsResults of OperationsThe following table sets forth, for the periods presented, the consolidated statements of operations data, which is derived from the accompanyingconsolidated financial statements: Year Ended December 31, 2015 2014 2013 (In thousands, except percentage data)Net revenue$1,300,695 100.0 % $1,393,515 100.0 % $1,369,633 100.0 %Cost of revenue933,016 71.7 % 995,597 71.4 % 976,018 71.3 %Gross profit367,679 28.3 % 397,918 28.6 % 393,615 28.7 %Operating expenses: Research and development86,499 6.7 % 90,902 6.5 % 85,168 6.2 %Sales and marketing146,794 11.2 % 157,017 11.4 % 153,804 11.2 %General and administrative45,313 3.5 % 46,552 3.3 % 48,915 3.6 %Restructuring and other charges6,398 0.5 % 2,209 0.2 % 5,335 0.4 %Litigation reserves, net(2,682) (0.2)% (1,011) (0.1)% 5,354 0.4 %Goodwill impairment charges— — % 74,196 5.3 % — — %Intangibles impairment charges— — % — — % 2,000 0.1 %Total operating expenses282,322 21.7 % 369,865 26.6 % 300,576 21.9 %Income from operations85,357 6.6 % 28,053 2.0 % 93,039 6.8 %Interest income295 0.0 % 253 0.0 % 400 0.0 %Other income (expense), net(88) 0.0 % 2,455 0.2 % (457) 0.0 %Income before income taxes85,564 6.6 % 30,761 2.2 % 92,982 6.8 %Provision for income taxes36,980 2.9 % 21,973 1.6 % 37,765 2.8 %Net income$48,584 3.7 % $8,788 0.6 % $55,217 4.0 %Net Revenue by Geographic RegionOur net revenue consists of gross product shipments, less allowances for estimated returns for stock rotation and warranty, price protection, end-usercustomer rebates and other sales incentives deemed to be a reduction of net revenue per the authoritative guidance for revenue recognition, and net changes indeferred revenue.We conduct business across three geographic regions: Americas, EMEA and APAC. For reporting purposes revenue is attributed to each geographic regionbased upon the location of the customer. Year Ended December 31, 2015 % Change 2014 % Change 2013 (In thousands, except percentage data)Americas$797,746 3.5 % $770,890 (2.3)% $789,318Percentage of net revenue61.4% 55.3% 57.7%EMEA$321,714 (23.7)% $421,887 2.2 % $412,688Percentage of net revenue24.7% 30.3% 30.1%APAC$181,235 (9.7)% $200,738 19.8 % $167,627Percentage of net revenue13.9% 14.4% 12.2%Total net revenue$1,300,695 (6.7)% $1,393,515 1.7 % $1,369,6332015 vs 2014The increase in Americas net revenue for the year ended December 31, 2015 compared to the prior year was driven primarily by an increase in grossshipments of our home security camera, home wireless and broadband gateways products, partially offset by a decrease in gross shipments of our mobile andmultimedia products. The increase was due primarily to continued growth and increasing average selling prices in the retail business unit driven by strong demandfor our products, including the Nighthawk42Table of Contentsseries and recently introduced Arlo Smart Home cameras. The increase in Americas net revenue was partially offset by a reduction in service provider net revenueas we decided to refocus our service provider business on profitability.The decrease in EMEA net revenue for the year ended December 31, 2015 compared to the prior year was driven primarily by a reduction in gross shipmentsof broadband gateways, home wireless products and switches, partially offset by an increase in gross shipments of home security camera products. We were alsochallenged by a difficult small business market climate caused by weakening foreign currencies compared to the U.S. dollar. The decrease was primarilyattributable to a reduction in gross shipments driven, in part, by continued decline in European service provider gross shipment as we restructured our serviceprovider business for profitability instead of gross shipment growth.The decrease in APAC net revenue for the year ended December 31, 2015 compared to the prior year was driven primarily by a reduction in gross shipmentsof mobile, home wireless, network storage products and switches, partially offset by an increase in gross shipments of our home security camera and broadbandgateway products. Similar to EMEA, APAC net revenue was constrained by weakening foreign currencies compared to the U.S. dollar.2014 vs 2013The decrease in Americas net revenue for the year ended December 31, 2014 compared to the prior year was driven primarily by a reduction in sales of ourhome wireless, multimedia, home security camera products and switches, partially offset by an increase in sales of our mobile products and broadband gateways.Net revenue for mobile products increased for the year ended December 31, 2014 as a result of the AirCard acquisition which was completed on April 2, 2013. Incontrast to 2013, the positive effect of the acquisition is included in our results of the entire year ended December 31, 2014. In our retail and distribution channels,we managed our inventory levels at our U.S. retail partners to be more aligned with historic levels, which contributed to the decline in the Americas net revenue forthe year ended December 31, 2014 compared to the prior year.The increase in EMEA net revenue for the year ended December 31, 2014 compared to the prior year was driven primarily by an increase in sales of ourswitches and broadband gateways, partially offset by a reduction in sales of our mobile products. The increase in EMEA net revenue was primarily driven by salesto our service provider customers in fiscal 2014. These positive effects to net revenue in fiscal year 2014 were partially offset by challenges resulting from themacro-economic environment, increased competition and pricing pressures in Europe, and weakening of foreign currencies compared to the U.S. dollar.The increase in APAC net revenue for the year ended December 31, 2014 compared to the prior year was driven primarily by an increase in sales of ourmobile, home wireless and broadband gateway products, partially offset by a reduction in sales of our small business wireless products. Net revenue for mobileproducts specifically increased for the year ended December 31, 2014 as a result of the AirCard acquisition which was completed on April 2, 2013. In contrast to2013, the positive effect of the acquisition was included in our results for the entire year ended December 31, 2014.Cost of Revenue and Gross MarginCost of revenue consists primarily of the following: the cost of finished products from our third party manufacturers; overhead costs, including purchasing,product planning, inventory control, warehousing and distribution logistics; third-party software licensing fees; inbound freight; warranty costs associated withreturned goods; write-downs for excess and obsolete inventory, amortization expense of certain acquired intangibles and acquisition accounting adjustments toinventory.We outsource our manufacturing, warehousing and distribution logistics. We believe this outsourcing strategy allows us to better manage our product costsand gross margin. Our gross margin can be affected by a number of factors, including fluctuation in foreign exchange rates, sales returns, changes in averageselling prices, end-user customer rebates and other sales incentives, and changes in our cost of goods sold due to fluctuations in prices paid for components, net ofvendor rebates, warranty and overhead costs, inbound freight, conversion costs, charges for excess or obsolete inventory and amortization of acquired intangibles.The following table presents costs of revenue and gross margin, for the periods indicated: Year Ended December 31, 2015 % Change 2014 % Change 2013 (In thousands, except percentage data)Cost of revenue$933,016 (6.3)% $995,597 2.0% $976,018Gross margin percentage28.3% 28.6% 28.7%43Table of Contents2015 vs 2014Cost of revenue decreased for the year ended December 31, 2015 compared to the prior year due primarily to the decrease in net revenue and related productcosts attributable, in part, to continued decline in net revenue to service provider customers worldwide, partially offset by an increase in freight costs of $4.0million.Our gross margin slightly decreased for the year ended December 31, 2015 compared to the prior year due primarily to weakening foreign currenciescompared to the U.S. dollar and, to a lesser extent, an increase in per unit freight costs. Foreign currency movements had an unfavorable impact of 2 percentagepoints on the year‑over‑year comparison. The decrease was largely offset by the positive effects of lower excess and obsolete inventory charges of $6.9 millionand the decrease in segment product mix toward service provider, which generally maintains lower margins. Net revenue from service providers decreased as apercentage of net revenue to 32.4% in the year ended December 31, 2015, compared to 41.6% in the prior year.We expect gross margin percentage to increase in the near term, as we expect less net revenue from our service provider business unit as a percentage of totalnet revenue, which generally carries lower gross margins than the retail and commercial business units. Forecasting future gross margin percentages is difficult,and there are a number of risks related to our ability to maintain or improve our current gross margin levels. Our cost of revenues as a percentage of revenues canvary significantly based upon a number of factors such as the following: uncertainties surrounding revenue levels, including future pricing and/or potentialdiscounts as a result of the economy or in response to the strengthening of the U.S. dollar in our international markets, and related production level variances;competition; changes in technology; changes in product mix; variability of stock-based compensation costs; royalties to third parties fluctuations in freight andrepair costs; manufacturing and purchase price variances; changes in prices on commodity components; warranty and recall costs; and the timing of sales,particularly to service providers which generally carry lower margins.2014 vs 2013Cost of revenue increased for the year ended December 31, 2014 compared to the prior year due primarily to the increase in net revenue and related productcosts driven by higher shipments, combined with an increase in excess and obsolete inventory charges of $7.5 million.Our gross margin slightly decreased for the year ended December 31, 2014 compared to the prior year primarily attributable to the slight increase in segmentproduct mix toward service provider, which generally maintains lower margins. Net revenue from service providers increased as a percentage of net revenue to41.6% in the year ended December 31, 2014, compared to 40.0% in the prior year.Operating ExpensesResearch and Development ExpenseResearch and development expenses consist primarily of personnel expenses, payments to suppliers for design services, safety and regulatory testing,product certification expenditures to qualify our products for sale into specific markets, prototypes and other consulting fees. Research and development expensesare recognized as they are incurred. We have invested in building our research and development organization to enhance our ability to introduce innovative andeasy-to-use products. The following table presents research and development expense, for the periods indicated: Year Ended December 31, 2015 % Change 2014 % Change 2013 (In thousands, except percentage data)Research and development expense$86,499 (4.8)% $90,902 6.7% $85,1682015 vs 2014Research and development expense decreased for the year ended December 31, 2015 compared to the prior year due primarily to a reduction in personnel-related costs of $4.7 million, driven by a reduction in headcount attributable to the restructuring activities executed in the first quarter of 2015. Headcountdecreased by 16 to 337 employees at December 31, 2015 compared to 353 employees at December 31, 2014.We believe that innovation and technological leadership is critical to our future success, and we are committed to continuing a significant level of researchand development to develop new technologies and products to combat competitive pressures. We44Table of Contentscontinue to invest in research and development to expand our cloud platform capabilities, grow our home security camera and home automation device portfolio,and develop innovative whole home WiFi coverage solutions. In the near term, we expect research and development expenses as a percentage of net revenue willslightly increase as we are allocating resources in the key areas that we expect will drive future growth and profitability. Research and development expenses willfluctuate depending on the timing and number of development activities in any given quarter and could vary significantly as a percentage of revenue depending onactual revenues achieved in any given quarter.2014 vs 2013Research and development expense increased for the year ended December 31, 2014 compared to the prior year due primarily to an increase of $3.9 millionin personnel and facility-related expenses driven by the overall growth in research and development headcount in comparison to prior year, and an increase of $2.6million in variable compensation. The average headcount for the year ended December 31, 2014 increased to 353 from 339 in the prior year as the additionalheadcount from the AirCard and Arada acquisitions were included in three quarters of 2013 as compared to the entire year in 2014.Sales and Marketing ExpenseSales and marketing expenses consist primarily of advertising, trade shows, corporate communications and other marketing expenses, product marketingexpenses, outbound freight costs, personnel expenses for sales and marketing staff and technical support expenses. The following table presents sales andmarketing expense, for the periods indicated: Year Ended December 31, 2015 % Change 2014 % Change 2013 (In thousands, except percentage data)Sales and marketing expense$146,794 (6.5)% $157,017 2.1% $153,8042015 vs 2014Sales and marketing expense decreased for the year ended December 31, 2015 compared to the prior year due primarily to a reduction in personnel-relatedcosts of $6.7 million, driven by a reduction in headcount attributable to the restructuring activities executed in the first quarter of 2015, and $2.7 million in outsideprofessional services. Headcount decreased by 38 employees to 339 employees at December 31, 2015 compared to 377 employees at December 31, 2014.We expect our sales and marketing expenses to slightly increase as a percentage of net revenue in the near term. Expenses may fluctuate depending onrevenue levels achieved as certain expenses, such as commissions, are determined based upon the revenues achieved. Forecasting sales and marketing expenses asa percentage of revenues is highly dependent on expected revenue levels and could vary significantly depending on actual revenues achieved in any given quarter.Marketing expenses will also fluctuate depending upon the timing and extent of marketing programs as we introduce new products.2014 vs 2013Sales and marketing expense increased for the year ended December 31, 2014 compared to the prior year due primarily to an increase of $1.6 million inpersonnel-related expense, driven primarily by additional stock-based compensation expense recognized relating to the modification of equity awards inconnection with the departure of the retail business unit general manager, $1.4 million in variable compensation expense, $1.2 million in marketing expenses and$0.7 million in intangibles amortization, partially offset by a decrease of $2.3 million in projects and professional services. Headcount decreased by 10 employeesto 377 employees at December 31, 2014 compared to 387 employees at December 31, 2013.45Table of ContentsGeneral and Administrative ExpenseGeneral and administrative expenses consist of salaries and related expenses for executives, finance and accounting, human resources, informationtechnology, professional fees, including legal costs associated with defending claims against us, allowance for doubtful accounts and other general corporateexpenses. The following table presents general and administrative expense, for the periods indicated: Year Ended December 31, 2015 % Change 2014 % Change 2013 (In thousands, except percentage data)General and administrative expense$45,313 (2.7)% $46,552 (4.8)% $48,9152015 vs 2014General and administrative expense decreased for the year ended December 31, 2015 compared to the prior year due primarily to a reduction in facilities,allocation and other expenses of $2.6 million and outside professional services of $0.7 million, partially offset by an increase in variable compensation of $2.2million. Headcount decreased by 1 employee to 155 employees at December 31, 2015 compared to 156 employees at December 31, 2014.We expect our general and administrative expenses to slightly increase in absolute dollar value in the near term but they could fluctuate depending on anumber of factors, including the level and timing of expenditures associated with the litigation described in Note 9, Commitments and Contingencies, in the Notesto Consolidated Financial Statements in Item 8 of Part II of this Annual Report on Form 10-K. Future general and administrative expense increases or decreases inabsolute dollars are difficult to predict due to the lack of visibility of certain costs, including legal costs associated with defending claims against us, as well aslegal costs associated with asserting and enforcing our intellectual property portfolio and other factors.2014 vs 2013General and administrative expense decreased for the year ended December 31, 2014 compared to the prior year due primarily to a $3.5 million decrease inoutside professional services, primarily resulting from litigation and merger and acquisition services incurred in 2013 that were not repeated in 2014, partiallyoffset by a $1.3 million increase in variable compensation expense. Headcount increased by 12 employees to 156 employees at December 31, 2014 comparedto 144 employees at December 31, 2013.Restructuring and Other Charges Year Ended December 31, 2015 % Change 2014 % Change 2013 (In thousands, except percentage data)Restructuring and other charges$6,398 189.6% $2,209 (58.6)% $5,335Restructuring and other charges increased for the year ended December 31, 2015 compared to the prior year. Expenses recognized for the year endedDecember 31, 2015 relate primarily to contract and employee termination charges, as well as other activities attributable to the restructuring actions announced inFebruary 2015 primarily for the service provider business unit. During the year ended December 31, 2014, we recognized a charge of $1.4 million relatingprimarily to expenses associated with the early termination of a lease agreement in Canada and a charge of $0.8 million primarily relating to one-time separationcharges associated with the departure of the retail business unit general manager. During the year ended December 31, 2013, we recognized $3.3 million in one-time separation charges associated with the consolidation of certain teams and locations in effort to drive efficiencies and realign resources to better focus on keygrowth markets. In addition, we recognized $1.9 million in transition costs relating to the AirCard acquisition completed in the second quarter of 2013 and $0.2million relating to an office lease exit liability.In the first fiscal quarter of 2016, we expect to incur restructuring charges of between approximately $1.5 million and $2.5 million related to the reduction ofthe cost structure of the service provider business unit and supporting functions. Such restructuring actions are subject to significant risks, including delays inimplementing expense control programs or workforce reductions and the failure to meet operational targets due to the loss of employees, all of which would impairour ability to achieve anticipated cost reductions. If we do not achieve the anticipated cost reductions, our financial results could be negatively impacted.Litigation Reserves, Net46Table of Contents Year Ended December 31, 2015 % Change 2014 % Change 2013 (In thousands, except percentage data)Litigation reserves, net$(2,682) 165.3% $(1,011) ** $5,354**Percentage data not meaningfulWe recognized a benefit of $2.7 million during the year ended December 31, 2015 resulting from adjustments recorded to release litigation reservespreviously accrued associated with the Ericsson patent litigation matter. We recognized $1.0 million benefits in litigation-related reserves during the year endedDecember 31, 2014 resulting from the adjustments made to decrease the accrued litigation reserves relating to Ericsson after the Federal Circuits issued its opinionand order in our appeal. In contrast, we recognized $5.4 million expenses during the year ended December 31, 2013 for costs relating primarily to the Ericsson andRuckus litigation matters.For a detailed discussion of our litigation matters, refer to Note 9, Commitments and Contingencies , in Notes to Consolidated Financial Statements in Item 8of Part II of this Annual Report on Form 10-K.Goodwill Impairment Charges Year Ended December 31, 2015 % Change 2014 % Change 2013 (In thousands, except percentage data)Goodwill impairment charges$— (100.0)% $74,196 ** $—**Percentage data not meaningfulWe did not recognize a goodwill impairment change during the years ended December 31, 2015 and December 31, 2013. We recognized a goodwillimpairment charge of $74.2 million during the year ended December 31, 2014 related to our service provider business unit. The goodwill impairment was due to adecrease in the estimated fair value of the business resulting from a decline in the long-term revenue and profitability projections of the business.Refer to Note 3, Balance Sheet Components , for additional information regarding the Company's goodwill impairment assessment.Intangibles Impairment Charges Year Ended December 31, 2015 % Change 2014 % Change 2013 (In thousands, except percentage data)Intangibles impairment charges$— ** $— (100.0)% $2,000**Percentage data not meaningfulWe did not recognize any intangibles impairment charges during the years ended December 31, 2015 and December 31, 2014. We recorded an intangiblesimpairment charge of $2.0 million during the year ended December 31, 2013 relating to the abandonment of certain IPR&D projects acquired in the AirCardacquisition.Refer to Note 2, Business Acquisitions and the Intangibles section of Note 3, Balance Sheet Components , in Notes to Consolidated Financial Statements inItem 8 of Part II of this Annual Report on Form 10-K for further discussion.47Table of ContentsInterest Income and Other Income (Expense), NetInterest income represents amounts earned on our cash, cash equivalents and short-term investments. Other income (expense), net, primarily represents gainsand losses on transactions denominated in foreign currencies and other miscellaneous income and expenses. The following table presents interest income and otherincome, net, for the periods indicated: Year Ended December 31, 2015 % Change 2014 % Change 2013 (In thousands, except percentage data)Interest income$295 16.6 % $253 (36.8)% $400Other income (expense), net(88) ** 2,455 ** (457)Total interest income and other income, net$207 (92.4)% $2,708 ** $(57)** Percentage change not meaningful.2015 vs 2014Total interest income and other income (expense), net, decreased for the year ended December 31, 2015 compared to the prior year. During the year endedDecember 31, 2014, we recognized income of $2.8 million relating to the execution of a litigation settlement agreement, which was partially offset by foreigncurrency losses incurred. In contrast, no significant other income (expense) was recognized during the year ended December 31, 2015.Interest income and other expense, net will fluctuate due to changes in interest rates and returns on our cash, cash equivalents and short-term investments,any future impairment of investments, foreign currency rate fluctuations on hedged exposures, fluctuations in costs associated with our hedging program, gains andlosses on asset disposals and timing of non-income based taxes and license fees. The cash balance could also decrease depending upon the amount of cash used inour stock repurchase activity, any future acquisitions and other factors which would also impact our interest income.2014 vs 2013Interest income decreased for the year ended December 31, 2014 compared to the prior year due primarily to the decrease in our cash, cash equivalents andshort term investment balance attributable to the AirCard and Arada acquisitions completed in the second quarter of 2013 and repurchase of shares in the fourthquarter of 2013 and fiscal year 2014.Other income (expense), net increased for the year ended December 31, 2014 compared to the prior year due primarily to $2.8 million received relating tothe execution of a litigation settlement agreement during the year, partially offset by foreign currency losses incurred.Provision for Income Taxes Year Ended December 31, 2015 % Change 2014 % Change 2013 (In thousands, except percentage data)Provision for income taxes$36,980 68.3% $21,973 (41.8)% $37,765Effective tax rate43.2% 71.4% 40.6%2015 vs 2014Provision for income taxes increased for the year ended December 31, 2015 compared to the prior year due primarily to higher pretax income. The effectivetax rate for the year ended December 31, 2015 differed from the U.S. statutory rate of 35% due to earnings from foreign jurisdictions, state taxes, tax credits andnon-deductible expenses. The effective tax rate for December 31, 2014 differed from the U.S. statutory rate of 35% due to earnings from foreign jurisdictions,impairment of goodwill not deductible for tax, valuation allowance established to reduce certain deferred tax assets, state taxes, tax credits and non-deductibleexpenses. For the year ended December 31, 2015, tax on earnings from foreign operations increased the effective tax rate by 7.1 percentage points compared to anincrease of 19.8 percentage points for 2014. The decrease in the effective tax rate from earnings of foreign operations in 2015 compared to 2014 resulted from the2014 tax effect of non-deductible losses caused by the impairment of goodwill in foreign jurisdictions where no benefit can be claimed. The 2015 effective tax ratedecreased by 7.8 percentage points when compared to 2014 for the 2014 goodwill impairments that are not deductible for U.S. federal and state tax purposes.48Table of Contents2014 vs 2013Provision for income taxes decreased for the year ended December 31, 2014 compared to the prior year due primarily to lower pretax income. Theeffective tax rate for the year ended December 31, 2014 differed from the U.S. statutory rate of 35% due to earnings from foreign jurisdictions, impairment ofgoodwill not deductible for tax, valuation allowance established to reduce certain deferred tax assets, state taxes, tax credits and non-deductible expenses. Theeffective tax rate for December 31, 2013 differed from the U.S. statutory rate of 35% due to the same items with the exception of the goodwill impairment and thevaluation allowance. For the year ended December 31, 2014, tax on earnings from foreign operations increased the effective tax rate by 19.8 percentage pointscompared to an increase of 3.9 percentage points for 2013. The increase in the effective tax rate from earnings of foreign operations in 2014 compared to 2013resulted from the tax effect of non-deductible losses caused by the impairment of goodwill in foreign jurisdictions where no benefit can be claimed. The 2014effective tax rate was increased by 7.8 percentage points for goodwill impairments that are not deductible for U.S. federal and state tax purposes.Segment InformationA description of our products and services, as well as segment financial data, for each segment can be found in Note 12, Segment Information, Operations byGeographic Area and Customer Concentration , in Notes to Consolidated Financial Statements in Item 8 of Part II of this Annual Report on Form 10-K.Retail Year Ended December 31, 2015 % Change 2014 % Change 2013 (in thousands, except percentage data)Net revenue$614,367 20.9% $508,100 (0.4)% $509,924Percentage of net revenue47.2% 36.5% 37.3%Contribution income85,231 11.8% 76,266 3.9 % 73,418Contribution margin13.9% 15.0% 14.4%2015 vs 2014Retail net revenue increased for the year ended December 31, 2015 compared to the prior year due primarily to an increase in gross shipments of homesecurity camera , broadband gateways and home wireless products. In addition, the increase in retail net revenue was due to increasing average selling prices,mainly driven by our Nighthawk and Arlo product lines. Geographically, we experienced growth in the Americas, while net revenue in EMEA declined dueprimarily to challenges resulting from the macro-economic environment, increased competition and pricing pressures we continue to experience in the region, aswell as weakening foreign currencies compared to the U.S. dollar. Net revenue in APAC also declined compared to the prior year period as a result of thestrengthening of the U.S. dollar. We continue to see strong end-user demand for our recently introduced retail products, including the Nighthawk series and ArloSmart Home cameras. Through the year ended December 31, 2015, we have continued to expand our distribution of Arlo with U.S. retail customers and in selectinternational markets, driving sequential gross shipment growth in each of the four quarters of 2015. In contrast, we didn’t release the product until December of2014.Contribution income increased for the year ended December 31, 2015 compared to the prior year due primarily to the increase in net revenue, partially offsetby the negative effects of increases in freight costs of $5.9 million and operating expenses of $16.9 million, primarily driven by an increase in research anddevelopment expenses.2014 vs 2013Retail net revenue decreased for the year ended December 31, 2014 compared to the prior year due primarily to a reduction in gross shipments of ourmultimedia and powerline products, partially offset by an increase in gross shipments of home wireless products and broadband gateways. Geographically, weexperienced an increase in APAC and a decrease in EMEA and the Americas. We continued to see strong end-user demand for our retail products in 2014,however our net revenue was partially constrained by a reduction in weeks of inventory on-hand with our U.S retail channel partners.Contribution income increased for the year ended December 31, 2014 compared to the prior year due primarily to the reduction of $4.3 million in operatingexpenses, primarily driven by a decrease in product marketing expenses.49Table of ContentsCommercial Year Ended December 31, 2015 % Change 2014 % Change 2013 (in thousands, except percentage data)Net revenue$264,846 (13.4)% $305,677 (1.8)% $311,261Percentage of net revenue20.4% 21.9% 22.7%Contribution income53,393 (24.6)% 70,810 6.5 % 66,506Contribution margin20.2% 23.2% 21.4%2015 vs 2014Commercial net revenue decreased for the year ended December 31, 2015 compared to the prior year due primarily to a reduction in gross shipments ofnetwork storage, wireless products and switches. Geographically, we experienced a reduction in EMEA and APAC net revenue and a slight increase in theAmericas. Commercial net revenue continued to be impacted by the difficult small business market climate in Europe and by weakening foreign currencies ascompared to the U.S. dollar driving increased pricing pressures.Contribution income decreased for the year ended December 31, 2015 compared to the prior year due primarily to a reduction in net revenue. This effect wasfurther amplified by the reduction in operating expenses occurring at lower rate than the reduction of cost of revenue, primarily driven by an increase in productmanagement and marketing expense of $1.0 million.2014 vs 2013Commercial net revenue decreased for the year ended December 31, 2014 compared to the prior year due primarily to a reduction in gross shipments of ournetwork storage and wireless products, partially offset by an increase in shipments of switches. Geographically, we experienced an increase in EMEA and adecrease in the Americas and APAC. C ommercial net revenue was negatively impacted by increased competition, particularly in our network storage products.Contribution income increased for the year ended December 31, 2014 compared to the prior year due primarily to a reduction in freight costs of $2.4 millionand a reduction of $1.2 million in warranty costs, partially offset by the reduction in net revenue for the year ended December 31, 2014 compared to the prior year.Service Provider Year Ended December 31, 2015 % Change 2014 % Change 2013 (in thousands, except percentage data)Net revenue$421,482 (27.3)% $579,738 5.7 % $548,448Percentage of net revenue32.4% 41.6% 40.0%Contribution income39,151 (17.7)% 47,547 (7.9)% 51,620Contribution margin9.3% 8.2% 9.4%2015 vs 2014Service provider net revenue decreased for the year ended December 31, 2015 compared to the prior year due primarily to a reduction in gross shipments inall geographies. As the profit margin of this business unit continued to deteriorate throughout 2014, we decided to restructure the business in the first quarter of2015 to downsize the net revenue and cost structure of this business unit while focusing our resources on more profitable accounts and technologies. Serviceprovider net revenue is also negatively impacted by the strengthening of U.S. dollars.Contribution income decreased for the year ended December 31, 2015 compared to the prior year due primarily to a reduction in net revenue, partially offsetby the positive effects of the reduction of operating expenses occurring at higher rate than the reduction of cost of revenue, primarily driven by decreases inresearch and development of $14.6 million and in sales and marketing expenses of $9.4 million. In the second half of 2015, the profit margin of this business unitreturned to levels to be successful long term.50Table of Contents 2014 vs 2013Service provider net revenue increased for the year ended December 31, 2014 compared to the prior year due primarily to an increase in gross shipments ofour mobile products. Net revenue for mobile products increased for the year ended December 31, 2014 as a result of the AirCard acquisition which was completedon April 2, 2013. In contrast to 2013, the positive effect of the acquisition is included in our results for the entire year of 2014.Contribution income decreased for the year ended December 31, 2014 compared to the prior year due primarily to the increase in operating expenses of $6.4million, primarily relating to research and development and sales and marketing, and an increase in charges for excess and obsolete inventory. These expenseswere partially offset by the increase in gross profit attributable to net revenue growth compared to the prior year.Liquidity and Capital ResourcesAs of December 31, 2015 , we had cash, cash equivalents and short-term investments totaling $278.3 million . Our cash and cash equivalents balanceincreased from $141.2 million as of December 31, 2014 to $181.9 million as of December 31, 2015 . Our short-term investments, which represent the investmentof funds available for current operations, decreased from $115.9 million as of December 31, 2014 to $96.3 million as of December 31, 2015 , due primarily to thematurity of treasuries being used to fund the repurchase of common stock during the period. Operating activities during the year ended December 31, 2015generated cash of $110.4 million , compared to $109.0 million in 2014 , resulting primarily from changes in working capital and in deferred income taxes, offsetby a decrease in net income when excluding the $74.2 million of non-cash goodwill impairment charge. Investing activities during the year ended December 31,2015 provided cash of $6.0 million , resulting primarily from net proceeds from the sales and maturities of short term investments, partially offset by purchases ofproperty and equipment. During the year ended December 31, 2015 , financing activities used cash of $75.6 million , primarily due to the repurchase of commonstock, partially offset by proceeds from the issuance of common stock upon exercise of stock options and our employee stock purchase program.Our days sales outstanding ("DSO") increased from 73 days as of December 31, 2014 to 77 days as of December 31, 2015. The increase is mainly due toextension of credits to retailers for holiday selling seasons, and our sales to retailers increased significantly during the 2015 holiday season compared to the 2014holiday season .Our accounts payable decreased from $106.4 million at December 31, 2014 to $90.5 million at December 31, 2015 , primarily as a result of timing ofpayments.Inventory decreased from $222.9 million at December 31, 2014 to $213.1 million at December 31, 2015 . Ending inventory turns increased to 4.8 turns in thethree months ended December 31, 2015 , up from 4.5 turns in the three months ended December 31, 2014 .We enter into foreign currency forward-exchange contracts, which typically mature in three to five months, to hedge a portion of our exposure to foreigncurrency fluctuations of foreign currency-denominated revenue, costs of revenue, certain operating expenses, receivables, payables, and cash balances. We recordon the consolidated balance sheet at each reporting period the fair value of our forward-exchange contracts and record any fair value adjustments in ourconsolidated statements of operations and in our consolidated balance sheets. Gains and losses associated with currency rate changes on hedge contracts that arenon-designated under the authoritative guidance for derivatives and hedging are recorded within other income (expense), net, offsetting foreign exchange gains andlosses on our monetary assets and liabilities. Gains and losses associated with currency rate changes on hedge contracts that are designated cash flow hedges underthe authoritative guidance for derivatives and hedging are recorded within accumulated other comprehensive income until the related revenue, costs of revenue, orexpenses are recognized.51Table of ContentsOn October 21, 2008, October 17, 2014 and July 21, 2015, our Board of Directors authorized management to repurchase up to 6.0 million , 3.0 million and3.0 million shares of our outstanding common stock, respectively, which, at the time of authorization, were incremental to the remaining shares under the sharerepurchase programs. Under the authorizations, we may repurchase shares of our common stock, depending on market conditions, in the open market or throughprivately negotiated transactions. The timing and actual number of shares subject to repurchase are at the discretion of management and are contingent on a numberof factors, such as levels of cash generation from operations, cash requirements for acquisitions and the price of our common stock. As of December 31, 2015, theshare repurchase programs authorized prior to July 2015 have been completed and there were 2.2 million shares remaining in the buyback program. Werepurchased, reported based on trade date, approximately 3.8 million shares of common stock at a cost of $117.7 million during the year ended December 31, 2015. During the years ended December 31, 2014 and December 31, 2013 , we repurchased, reported based on trade date, approximately 2.8 million shares of commonstock at a cost of $90.6 million and approximately 2.0 million shares of common stock at a cost of $63.1 million, respectively.We also repurchased, as reported based on trade date, approximately 85,000 shares of common stock at a cost of $2.6 million , under a repurchase program tohelp administratively facilitate the withholding and subsequent remittance of personal income and payroll taxes for individuals receiving RSUs during the yearended December 31, 2015. Similarly, during the years ended December 31, 2014 and December 31, 2013, we repurchased, as reported on trade date,approximately 82,000 shares of common stock at a cost of $2.6 million and 14,000 shares of common stock at a cost of $0.5 million , respectively, under the sameprogram to help facilitate tax withholding for RSUs.These shares were retired upon repurchase. Our policy related to repurchases of its common stock is to charge the excess of cost over par value to retainedearnings. All repurchases were made in compliance with Rule 10b-18 under the Securities Exchange Act of 1934, as amended.Based on our current plans and market conditions, we believe that our existing cash, cash equivalents and short-term investments will be sufficient to satisfyour anticipated cash requirements for at least the next twelve months. However, we may require or desire additional funds to support our operating expenses andcapital requirements or for other purposes, such as acquisitions, and may seek to raise such additional funds through public or private equity financing or fromother sources. We cannot assure you that additional financing will be available at all or that, if available, such financing would be obtainable on terms favorable tous and would not be dilutive. Our future liquidity and cash requirements will depend on numerous factors, including the introduction of new products and potentialacquisitions of related businesses or technology.BacklogAs of December 31, 2015 , we had a backlog of approximately $115.6 million, compared to approximately $114.6 million as of December 31, 2014 ,primarily due to product demand required in the future. Our backlog consists of products for which customer purchase orders have been received and that arescheduled or in the process of being scheduled for shipment. While we expect to fulfill the order backlog within the current year, most orders are subject torescheduling or cancellation with minimal penalties. Because of the possibility of customer changes in product scheduling or order cancellation, our backlog as ofany particular date may not be an indicator of net revenue for any succeeding period.Contractual Obligations and Off-Balance Sheet ArrangementsContractual ObligationsThe following table describes our commitments to settle non-cancelable lease and purchase commitments as of December 31, 2015 (in thousands). Less Than 1-3 3-5 More Than 1 Year Years Years 5 Years TotalOperating leases$8,429 $11,359 $10,746 $23,209 $53,743Purchase obligations132,819 — — — 132,819 $141,248 $11,359 $10,746 $23,209 $186,562We lease office space, cars and equipment under non-cancelable operating leases with various expiration dates through December 2026. Rent expense in theyears ended December 31, 2015 , 2014 , and 2013 was $9.8 million , $10.8 million and $9.9 million , respectively. The terms of some of the office leases providefor rental payments on a graduated scale. We recognize rent expense on a straight-line basis over the lease period, and have accrued for rent expense incurred butnot paid. The amounts52Table of Contentspresented are consistent with contractual terms and are not expected to differ significantly, unless a substantial change in our headcount needs requires us to exit anoffice facility early or expand our occupied space.We enter into various inventory-related purchase agreements with suppliers. Generally, under these agreements, 50% of the orders are cancelable by givingnotice 46 to 60 days prior to the expected shipment date and 25% of orders are cancelable by giving notice 31 to 45 days prior to the expected shipment date.Orders are not cancelable within 30 days prior to the expected shipment date. At December 31, 2015 , we had $132.8 million in non-cancelable purchasecommitments with suppliers. We expect to sell all products for which we have committed purchases from suppliers.As of December 31, 2015 and December 31, 2014 , we had $15.8 million and $16.3 million, respectively, of total gross unrecognized tax benefits and relatedinterest and penalties. The timing of any payments that could result from these unrecognized tax benefits will depend upon a number of factors. The unrecognizedtax benefits have been excluded from the contractual obligations table because reasonable estimates cannot be made of whether, or when, any cash payments forsuch items might occur. The possible reduction in liabilities for uncertain tax positions in multiple jurisdictions that may impact the statement of operations in thenext 12 months is approximately $0.6 million, excluding the interest, penalties and the effect of any related deferred tax assets or liabilities.Off-Balance Sheet ArrangementsAs of December 31, 2015 , we did not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K.Recent Accounting PronouncementsSee Note 1, The Company and Summary of Significant Accounting Policies , in Notes to Consolidated Financial Statements in Item 8 of Part II of thisAnnual Report on Form 10-K, for a full description of recent accounting pronouncements, including the expected dates of adoption and estimated effects onfinancial condition and results of operations, which are hereby incorporated by reference.Item 7A.Quantitative and Qualitative Disclosures About Market RiskInterest Rate RiskWe do not use derivative financial instruments in our investment portfolio. We have an investment portfolio of fixed income securities that are classified asavailable-for-sale securities. These securities, like all fixed income instruments, are subject to interest rate risk and will fall in value if market interest ratesincrease. We attempt to limit this exposure by investing primarily in highly rated short-term securities. Our investment policy requires investments to be ratedtriple-A with the objective of minimizing the potential risk of principal loss. Due to the short duration and conservative nature of our investment portfolio, amovement of 10% by market interest rates would not have a material impact on our operating results and the total value of the portfolio over the next fiscal year.We monitor our interest rate and credit risks, including our credit exposure to specific rating categories and to individual issuers. There were no impairmentcharges on our investments during fiscal 2015 .Foreign Currency Transaction RiskWe invoice some of our international customers in foreign currencies including, but not limited to, the Australian dollar, British pound, euro, Canadiandollar, and Japanese yen. As the customers that are currently invoiced in local currency become a larger percentage of our business, or to the extent we begin to billadditional customers in foreign currencies, the impact of fluctuations in foreign exchange rates could have a more significant impact on our results of operations.For those customers in our international markets that we continue to sell to in U.S. dollars, an increase in the value of the U.S. dollar relative to foreign currenciescould make our products more expensive and therefore reduce the demand for our products. Such a decline in the demand for our products could reduce sales andnegatively impact our operating results. Certain operating expenses of our foreign operations require payment in the local currencies.We are exposed to risks associated with foreign exchange rate fluctuations due to our international sales and operating activities. These exposures maychange over time as business practices evolve and could negatively impact our operating results and financial condition. We use foreign currency forward contractderivatives to partially offset our business exposure to foreign exchange risk on our foreign currency denominated assets and liabilities. Additionally, we enter intocertain foreign currency forward contracts that have been designated as cash flow hedges under the authoritative guidance for derivatives and hedging to53Table of Contentspartially offset our business exposure to foreign exchange risk on portions of our anticipated foreign currency revenue, costs of revenue, and certain operatingexpenses. The objective of these foreign currency forward contracts is to reduce the impact of currency exchange rate movements on our operating results byoffsetting gains and losses on the forward contracts with increases or decreases in foreign currency transactions. The contracts are marked-to-market on a monthlybasis with gains and losses included in other income (expense), net in the consolidated statements of operations, and in accumulated other comprehensive incomeon the consolidated balance sheets. We do not use foreign currency contracts for speculative or trading purposes. Hedging of our balance sheet and anticipated cashflow exposures may not always be effective to protect us against currency exchange rate fluctuations. In addition, we do not fully hedge our balance sheet andanticipated cash flow exposures, leaving us at risk to foreign exchange gains and losses on the un-hedged exposures. If there were an adverse movement inexchange rates, we might suffer significant losses. See Note 5, Derivative Financial Instruments, of the Notes to Consolidated Financial Statements for additionaldisclosure on our foreign currency contracts, which are hereby incorporated by reference into this Part II, Item 7A.As of December 31, 2015 , we had net assets in various local currencies. A hypothetical 10% movement in foreign exchange rates would result in an after-taxpositive or negative impact of $0.7 million net income, net of our hedged position, at December 31, 2015 . Actual future gains and losses associated with ourforeign currency exposures and positions may differ materially from the sensitivity analyses performed as of December 31, 2015 due to the inherent limitationsassociated with predicting the foreign currency exchange rates, and our actual exposures and positions. For the year ended December 31, 2015 , 20% of total netrevenue was denominated in a currency other than the U.S. dollar.54Table of ContentsItem 8.Financial Statements and Supplementary DataReport of Independent Registered Public Accounting FirmTo the Board of Directors and Stockholders of NETGEAR, Inc.:In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a) (1) present fairly, in all material respects, the financialposition of NETGEAR, Inc. and its subsidiaries at December 31, 2015 and December 31, 2014 , and the results of their operations and their cash flows for each ofthe three years in the period ended December 31, 2015 in conformity with accounting principles generally accepted in the United States of America. In addition, inour opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2) presents fairly, in all material respects, the information set forththerein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effectiveinternal control over financial reporting as of December 31, 2015 , based on criteria established in Internal Control - Integrated Framework (2013) issued by theCommittee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial statements andfinancial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control overfinancial reporting, included in Management's Report on Internal Control over Financial Reporting under Item 9A. Our responsibility is to express opinions onthese financial statements, on the financial statement schedule, and on the Company's internal control over financial reporting based on our integrated audits. Weconducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we planand perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internalcontrol over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, andevaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal controlover financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal controlbased on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our auditsprovide a reasonable basis for our opinions.A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting andthe preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control overfinancial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect thetransactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only inaccordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection ofunauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance withthe policies or procedures may deteriorate./s/ PricewaterhouseCoopers LLPSan Jose, CAFebruary 19, 201655Table of ContentsNETGEAR, INC.CONSOLIDATED BALANCE SHEETS(In thousands, except share and per share data) As of December 31, 2015 December 31, 2014ASSETS Current assets: Cash and cash equivalents$181,945 $141,234Short-term investments96,321 115,895Accounts receivable, net290,642 275,689Inventories213,118 222,883Deferred income taxes— 29,039Prepaid expenses and other current assets39,117 38,225Total current assets821,143 822,965Property and equipment, net22,384 29,694Intangibles, net48,947 66,230Goodwill81,721 81,721Other non-current assets76,374 48,077Total assets$1,050,569 $1,048,687LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable$90,546 $106,357Accrued employee compensation27,868 21,588Other accrued liabilities166,282 143,742Deferred revenue29,125 30,023Income taxes payable1,951 2,406Total current liabilities315,772 304,116Non-current income taxes payable14,444 15,252Other non-current liabilities11,643 7,754Total liabilities341,859 327,122Commitments and contingencies (Note 9) Stockholders’ equity: Preferred stock: $0.001 par value; 5,000,000 shares authorized; none issued or outstanding— —Common stock: $0.001 par value; 200,000,000 shares authorized; shares issued and outstanding: 32,600,990 and34,709,022 at December 31, 2015 and 2014, respectively33 35Additional paid-in capital513,047 454,144Accumulated other comprehensive income3 38Retained earnings195,627 267,348Total stockholders’ equity708,710 721,565Total liabilities and stockholders’ equity$1,050,569 $1,048,687The accompanying notes are an integral part of these consolidated financial statements.56Table of ContentsNETGEAR, INC.CONSOLIDATED STATEMENTS OF OPERATIONS(In thousands, except per share data) Year Ended December 31, 2015 2014 2013Net revenue $1,300,695 $1,393,515 $1,369,633Cost of revenue 933,016 995,597 976,018Gross profit 367,679 397,918 393,615Operating expenses: Research and development 86,499 90,902 85,168Sales and marketing 146,794 157,017 153,804General and administrative 45,313 46,552 48,915Restructuring and other charges 6,398 2,209 5,335Litigation reserves, net (2,682) (1,011) 5,354Goodwill impairment charges — 74,196 —Intangibles impairment charges — — 2,000Total operating expenses 282,322 369,865 300,576Income from operations 85,357 28,053 93,039Interest income 295 253 400Other income (expense), net (88) 2,455 (457)Income before income taxes 85,564 30,761 92,982Provision for income taxes 36,980 21,973 37,765Net income $48,584 $8,788 $55,217Net income per share: Basic $1.47 $0.25 $1.44Diluted $1.44 $0.24 $1.42Weighted average shares used to compute net income per share: Basic 33,161 35,771 38,379Diluted 33,788 36,445 38,948The accompanying notes are an integral part of these consolidated financial statements.57Table of ContentsNETGEAR, INC.CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME(In thousands) Year Ended December 31, 2015 2014 2013Net income $48,584 $8,788 $55,217Other comprehensive income (loss), before tax: Unrealized gain (loss) on derivative instruments — (22) 89Unrealized loss on available-for-sale securities (56) (14) (40)Other comprehensive income (loss), before tax (56) (36) 49Tax benefit related to items of other comprehensive income 21 5 16Other comprehensive income (loss), net of tax (35) (31) 65Comprehensive income $48,549 $8,757 $55,282The accompanying notes are an integral part of these consolidated financial statements.58Table of ContentsNETGEAR, INC.CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY(In thousands) Common Stock Shares Amount Additional Paid-InCapital Accumulated OtherComprehensive Income (Loss) Retained Earnings TotalBalance at December 31, 201238,342 $38 $394,427 $4 $360,142 $754,611Change in unrealized gains and losses onavailable-for-sale securities, net of tax— — — (24) — (24)Change in unrealized gains and losses onderivatives, net of tax— — — 89 — 89Net income— — — — 55,217 55,217Stock-based compensation expense— — 17,419 — — 17,419Purchase and retirement of commonstock(2,018) (1) — — (63,583) (63,584)Issuance of common stock under stock-based compensation plans516 — 9,626 — — 9,626Tax impact from exercises andcancellations of stock options— — 429 — — 429Balance at December 31, 201336,840 37 421,901 69 351,776 773,783Change in unrealized gains and losses onavailable-for-sale securities, net of tax— — — (9) — (9)Change in unrealized gains and losses onderivatives, net of tax— — — (22) — (22)Net income— — — — 8,788 8,788Stock-based compensation expense— — 19,983 — — 19,983Purchase and retirement of commonstock(2,908) (2) — — (93,216) (93,218)Issuance of common stock under stock-based compensation plans777 — 12,741 — — 12,741Tax impact from exercises andcancellations of stock options— — (481) — — (481)Balance at December 31, 201434,709 35 454,144 38 267,348 721,565Change in unrealized gains and losses onavailable-for-sale securities, net of tax———(35)—(35)Change in unrealized gains and losses onderivatives, net of tax——————Net income————48,58448,584Stock-based compensation expense——16,813——16,813Purchase and retirement of commonstock(3,855)(4)——(120,305)(120,309)Issuance of common stock under stock-based compensation plans1,747244,323——44,325Tax impact from exercises andcancellations of stock options——(2,233)——(2,233)Balance at December 31, 201532,601$33$513,047$3$195,627$708,710The accompanying notes are an integral part of these consolidated financial statements.59Table of ContentsNETGEAR, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS(In thousands) Year Ended December 31, 2015 2014 2013Cash flows from operating activities: Net income$48,584 $8,788 $55,217Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization35,850 35,590 32,854Purchase premium amortization/discount accretion on investments, net(57) 11 1,103Non-cash stock-based compensation16,825 20,014 17,462Income tax impact associated with stock option exercises(2,233) (481) 429Excess tax benefit from stock-based compensation(759) (485) (767)Goodwill impairment charges— 74,196 —Intangibles impairment charges— — 2,000Deferred income taxes(710) (20,261) (7,927)Changes in assets and liabilities, net of effect of acquisitions: Accounts receivable(14,952) (9,205) (10,470)Inventories9,765 1,573 (46,679)Prepaid expenses and other assets560 (7,905) (4,615)Accounts payable(14,990) (8,236) 36,250Accrued employee compensation6,280 5,037 (1,787)Other accrued liabilities29,987 2,574 15,069Deferred revenue(2,496) 5,188 (1,211)Income taxes payable(1,263) 2,566 (26)Net cash provided by operating activities110,391 108,964 86,902Cash flows from investing activities: Purchases of short-term investments(110,316) (145,186) (153,464)Proceeds from sales and maturities of short-term investments130,273 134,827 275,406Purchase of property and equipment(14,000) (19,338) (18,050)Payments for patents— — (275)Proceeds from sale of cost method investments— — 3,890Payments made in connection with business acquisitions, net of cash acquired— (1,050) (147,240)Net cash provided by (used in) investing activities5,957 (30,747) (39,733)Cash flows from financing activities: Purchase and retirement of common stock(120,309) (93,218) (63,585)Proceeds from exercise of stock options40,928 9,979 7,487Proceeds from issuance of common stock under employee stock purchase plan2,985 2,762 2,139Excess tax benefit from stock-based compensation759 485 767Net cash used in financing activities(75,637) (79,992) (53,192)Net increase (decrease) in cash and cash equivalents40,711 (1,775) (6,023)Cash and cash equivalents, at beginning of year141,234 143,009 149,032Cash and cash equivalents, at end of year$181,945 $141,234 $143,009Supplemental Cash Flow Information: Cash paid for income taxes$40,273 $38,938 $45,982The accompanying notes are an integral part of these consolidated financial statements.60Table of ContentsNETGEAR, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSNote 1. The Company and Summary of Significant Accounting PoliciesThe CompanyNETGEAR, Inc. (“NETGEAR” or the “Company”) was incorporated in Delaware in January 1996. The Company is a global networking company thatdelivers innovative products to consumers, businesses and service providers. The Company's products are built on a variety of proven technologies such as wireless(WiFi and LTE), Ethernet and powerline, with a focus on reliability and ease-of-use. The product line consists of wired and wireless devices that enablenetworking, broadband access and network connectivity. These products are available in multiple configurations to address the needs of the end-users in eachgeographic region in which the Company's products are sold.The Company operates in three specific business segments: retail, commercial, and service provider. The Company believes this structure enables it to betterfocus its efforts on the Company's core customer segments and allows it to be more nimble and opportunistic as a company overall. Each business unit containsleadership focused on the product development efforts, both from a product marketing and engineering standpoint, to service the unique needs of these customersegments. The retail business unit is focused on individual consumers and consists of high performance, dependable and easy-to-use home networking, home videosecurity, storage and digital media products. The commercial business unit is focused on small and medium-sized businesses and consists of business networking,storage and security solutions that bring enterprise class functionality at an affordable price. The service provider business unit is focused on the service providermarket and consists of made-to-order and retail-proven whole home networking hardware and software solutions, as well as 4G LTE hotspots sold to serviceproviders for sale to their subscribers.The Company sells networking products through multiple sales channels worldwide, including traditional retailers, online retailers, wholesale distributors,direct market resellers (“DMRs”), value-added resellers (“VARs”), and broadband service providers.Basis of presentationThe accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All inter-company accountsand transactions have been eliminated in the consolidation of these subsidiaries.Fiscal periodsThe Company's fiscal year begins on January 1 of the year stated and ends on December 31 of the same year. The Company reports its results on a fiscalquarter basis rather than on a calendar quarter basis. Under the fiscal quarter basis, each of the first three fiscal quarters ends on the Sunday closest to the calendarquarter end, with the fourth quarter ending on December 31.Use of estimatesThe preparation of financial statements in conformity with U.S. generally accepted accounting principles (GAAP) requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statementsand the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates.Cash and cash equivalentsThe Company considers all highly liquid investments with an original maturity at the time of purchase of three months or less to be cash equivalents. TheCompany deposits cash and cash equivalents with high credit quality financial institutions.Short-term investmentsShort-term investments are partially comprised of marketable securities that consist of government securities with an original maturity or a remainingmaturity at the time of purchase, of greater than three months and no more than 12 months. The marketable securities are held in the Company's name with onehigh quality financial institution, which acts as the Company's custodian and investment manager. These marketable securities are classified as available-for-salesecurities in accordance with the provisions of the authoritative guidance for investments and are carried at fair value with unrealized gains and losses reported as aseparate component of stockholders' equity.61Table of ContentsNETGEAR, 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 theCompany. 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 uncertaintiesThe Company's products are concentrated in the networking industry, which is characterized by rapid technological advances, changes in customerrequirements and evolving regulatory requirements and industry standards. The success of the Company depends on management's ability to anticipate and/or torespond quickly and adequately to such changes. Any significant delays in the development or introduction of products could have a material adverse effect on theCompany'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 willnot 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 manufacturingcapacity. Any interruption or delay in manufacturing could have a material adverse effect on the Company's business and operating results.Derivative financial instrumentsThe Company uses foreign currency forward contracts to manage the exposures to foreign exchange risk related to expected future cash flows on certainforecasted revenue, costs of revenue, operating expenses, and on certain existing assets and liabilities. Foreign currency forward contracts generally mature withinfive months of inception. Under its foreign currency risk management strategy, the Company utilizes derivative instruments to reduce the impact of currencyexchange rate movements on the Company's operating results by offsetting gains and losses on the forward contracts with increases or decreases in foreigncurrency 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 inthe authoritative guidance for derivatives and hedging must be adjusted to fair value through earnings. For derivative instruments that hedge the exposure tovariability 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 asa component of accumulated other comprehensive income in stockholders' equity and reclassified into earnings in the same period or periods during which thehedged transaction affects earnings. The ineffective portion of the gain or loss on the derivative instrument is recognized in current earnings. To receive hedgeaccounting treatment, cash flow hedges must be highly effective in offsetting changes to expected future cash flows on hedged transactions. For derivativesdesignated 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 andaccounts receivable. The Company believes that there is minimal credit risk associated with the investment of its cash and cash equivalents and short-terminvestments, 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-terminvestments 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 ofend-users. The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of the Company's customers to makerequired payments. The Company regularly performs credit evaluations of the Company's customers' financial condition and considers factors such as historicalexperience, credit quality, age of the accounts receivable balances, geographic or country-specific risks and current economic conditions that may affect customers'ability to pay. The Company does not require collateral from its customers. The Company secures credit insurance for certain customers in international anddomestic markets.As of December 31, 2015 and December 31, 2014 , Best Buy, Inc. accounted for 37% and 21% of the Company's total accounts receivable, respectively, andno other customers accounted for 10% or greater of the Company's total accounts receivable.62Table of ContentsNETGEAR, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)The Company is exposed to credit loss in the event of nonperformance by counterparties to the foreign currency forward contracts used to mitigate the effectof 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 failureof additional counterparties is possible.Fair value measurementsThe carrying amounts of the Company's financial instruments, including cash equivalents, short-term investments, accounts receivable, and accounts payableapproximate their fair values due to their short maturities. Foreign currency forward contracts are recorded at fair value based on observable market data. SeeNote 13, Fair Value Measurements, of the Notes to Consolidated Financial Statements for disclosures regarding fair value measurements in accordance with theauthoritative guidance for fair value measurements and disclosures.Cost method investmentsThe Company's cost method investments are included in other non-current assets in the consolidated balance sheets and are carried at cost, adjusted for anyimpairment, because the Company does not have a controlling interest and does not have the ability to exercise significant influence over these companies. TheCompany monitors these investments for impairment on a quarterly basis, and adjusts carrying value for any impairment charges recognized. Realized gains andlosses on these investments are reported in other income (expense), net in the consolidated statements of operations.Allowance for doubtful accountsThe Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. TheCompany regularly performs credit evaluations of its customers' financial condition and considers factors such as historical experience, credit quality, age of theaccounts receivable balances, and geographic or country-specific risks and economic conditions that may affect a customer's ability to pay. The allowance fordoubtful accounts is reviewed quarterly and adjusted if necessary based on the Company's assessments of its customers' ability to pay. If the financial condition ofthe Company's customers should deteriorate or if actual defaults are higher than the Company's historical experience, additional allowances may be required, whichcould have an adverse impact on operating expenses.InventoriesInventories consist primarily of finished goods which are valued at the lower of cost or market, with cost being determined using the first-in, first-outmethod. The Company writes down its inventories based on estimated excess and obsolete inventories determined primarily by future demand forecasts. At thepoint of loss recognition, a new, lower cost basis for that inventory is established, and subsequent changes in facts and circumstances do not result in the restorationor increase of the newly established cost basis.Property and equipment, netProperty and equipment are stated at historical cost, less accumulated depreciation. Depreciation is computed using the straight-line method over theestimated useful lives of the assets as follows:Computer equipment2 yearsFurniture and fixtures5 yearsSoftware2-5 yearsMachinery and equipment2-3 yearsLeasehold improvementsShorter of the lease term or 5 yearsRecoverability of assets to be held and used is measured by comparing the carrying amount of an asset to the estimated undiscounted future cash flowsexpected to be generated by the asset. If the carrying amount of the asset exceeds its estimated undiscounted future cash flows, an impairment charge is recognizedin the amount by which the carrying amount of the asset exceeds the fair value of the asset. The carrying value of the asset is reviewed on a regular basis for theexistence of facts, both63Table of ContentsNETGEAR, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)internal and external, that may suggest impairment. Charges related to the impairment of property and equipment were insignificant for the years ended December31, 2015 , 2014 and 2013 .GoodwillGoodwill represents the purchase price over estimated fair value of net assets of businesses acquired in a business combination. Goodwill acquired in abusiness combination is not amortized, but instead tested for impairment at least annually on the first day of the fourth quarter. Should certain events or indicatorsof impairment occur between annual impairment tests, the Company performs the impairment test as those events or indicators occur. Examples of such events orcircumstances include the following: a significant decline in the Company’s expected future cash flows; a sustained, significant decline in the Company’s stockprice and market capitalization; a significant adverse change in the business climate; and slower growth rates.Goodwill is tested for impairment at the reporting unit level by first performing a qualitative assessment to determine whether it is more likely than not (thatis, a likelihood of more than 50%) that the fair value of the reporting unit is less than its carrying value. The Company identified the reporting units as retail,commercial and service provider reporting units, as this is the lowest level for which discrete financial information is available and segment management regularlyreviews the operating results. The qualitative assessment considers the following factors: macroeconomic conditions, industry and market considerations, costfactors, overall company financial performance, events affecting the reporting units, and changes in the Company's share price. If the reporting unit does not passthe qualitative assessment, the Company estimates its fair value and compares the fair value with the carrying value of its net assets. If the fair value is greater thanthe carrying value of its net assets, no impairment is recorded. If the fair value is less than its carrying value, the Company would determine the fair value of thegoodwill by comparing the implied fair value to the carrying value of the goodwill in the same manner as if the reporting unit were being acquired in a businesscombination. Specifically, the Company would allocate the fair value to all of its assets and liabilities, including any unrecognized intangibles, in a hypotheticalanalysis that would calculate the implied fair value of goodwill. If the implied fair value of goodwill is less than the recorded goodwill, an impairment chargewould be recorded to earnings in the consolidated statements of operations.We did not recognize any goodwill impairment charges during the years ended December 31, 2015 and 2013 and recorded a goodwill impairment charge of $74.2 million which was the entire goodwill balance related to the service provider reporting unit.Intangibles, netPurchased intangibles with finite lives are amortized using the straight-line method over the estimated economic lives of the assets, which range from four toten years. Finite-lived intangibles are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets maynot be recoverable. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventualdisposition.In the fourth quarter of fiscal year 2015, the Company saw a decline in net revenue in the service provider reporting unit. According to its customers,purchase constraints will tighten further in 2016 and for the foreseeable future. Due to the decline in the long-term revenue and profit outlook, the Companyperformed the recoverability test of the long-lived assets within the service provider reporting unit. The Company estimated the undiscounted future cash flowsdirectly associated with each asset group and compared the amounts to the carrying value of each asset group. Based on the results of the recoverability test, thesum of undiscounted future cash flows was greater than the carrying value of each asset group and therefore no impairment was recorded. The Company alsoreviewed the depreciation and amortization policies for the long-lived asset groups and ensured the remaining useful lives are appropriate.Purchased intangibles determined to have indefinite useful lives are not amortized. Indefinite-lived intangibles are reviewed for impairment at least annuallyduring the fourth quarter and whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Measurementof an impairment loss for indefinite-lived assets that management expects to hold and use is based on the fair value of the asset. Indefinite-lived assets to bedisposed of are reported at the lower of carrying amount or fair value less costs to sell. The carrying value of the asset is reviewed on a regular basis for theexistence of facts, both internal and external, that may suggest impairment.In the third quarter of 2013, the Company recorded an impairment charge of $2.0 million related to the abandonment of certain IPR&D projects obtained inthe AirCard acquisition in 2013. As of the end of the second quarter of 2014, all of the remaining IPR&D had reached technical feasibility and was reclassified todefinite-lived intangibles with an estimated useful life of four years. No other impairments to long-lived assets were recognized in the years ended December 31,2015 , 2014 and 2013 .64Table of ContentsNETGEAR, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)Warranty obligationsThe Company provides for estimated future warranty obligations at the time revenue is recognized. The Company's standard warranty obligation to its directcustomers generally provides for a right of return of any product for a full refund in the event that such product is not merchantable or is found to be damaged ordefective. At the time revenue is recognized, an estimate of future warranty returns is recorded to reduce revenue in the amount of the expected credit or refund tobe provided to its direct customers. At the time the Company records the reduction to revenue related to warranty returns, the Company includes within cost ofrevenue a write-down to reduce the carrying value of such products to net realizable value. The Company's standard warranty obligation to its end-users providesfor replacement of a defective product for one or more years. Factors that affect the warranty obligation include product failure rates, material usage, and servicedelivery costs incurred in correcting product failures. The estimated cost associated with fulfilling the Company's warranty obligation to end-users is recorded incost of revenue. Because the Company's products are manufactured by third-party manufacturers, in certain cases the Company has recourse to the third-partymanufacturer for replacement or credit for the defective products. The Company gives consideration to amounts recoverable from its third-party manufacturers indetermining its warranty liability.Revenue recognitionRevenue from product sales is generally recognized at the time the product is shipped provided that persuasive evidence of an arrangement exists, title andrisk of loss has transferred to the customer, the selling price is fixed or determinable and collection of the related receivable is reasonably assured. Currently, forsome of the Company's customers, title passes to the customer upon delivery to the port or country of destination, upon their receipt of the product, or upon thecustomer's resale of the product. At the end of each fiscal quarter, the Company estimates and defers revenue related to product where title has not transferred. Therevenue continues to be deferred until such time that title passes to the customer. The Company assesses collectability based on a number of factors, includinggeneral economic and market conditions, past transaction history with the customer, and the creditworthiness of the customer. If the Company determines thatcollection is not reasonably assured, then revenue is deferred until receipt of the payment from the customer.The Company has product offerings with multiple elements. The Company's multiple-element product offerings include networking hardware with embeddedsoftware, various software subscription services, and support, which are considered separate units of accounting. In general, the networking hardware withembedded software is delivered up front, while the subscription services and support are delivered over the subscription and support period. The Companyallocates revenue to the software deliverables and the non-software deliverables (including software deliverables which function together with hardwaredeliverables to provide the product's essential functionality) based upon their relative selling price. Revenue allocated to each unit of accounting is then recognizedwhen persuasive evidence of an arrangement exists, title and risk of loss has transferred to the customer, the selling price is fixed or determinable and collection ofthe related receivable is reasonably assured.When applying the relative selling price method, the Company determines the selling price for each deliverable using vendor-specific objective evidence("VSOE") of fair value of the deliverable, or when VSOE of fair value is unavailable, its best estimate of selling price (“ESP”), as the Company has determined itis unable to establish third-party evidence of selling price for the deliverables. In determining VSOE, the Company requires that a substantial majority of theselling prices for a deliverable sold on a stand-alone basis fall within a reasonably narrow pricing range, generally evidenced by approximately 80% of suchhistorical stand-alone transactions falling within +/-15% of the median price. The Company determines ESP for a deliverable by considering multiple factorsincluding, but not limited to, market conditions, competitive landscape, internal costs, gross margin objectives and pricing practices. The objective of ESP is todetermine the price at which the Company would transact a sale if the deliverable were sold on a stand-alone basis. The determination of ESP is made throughconsultation with and formal approval by the Company's management, taking into consideration the go-to-market strategy.Certain distributors and retailers generally have the right to return product for stock rotation purposes. Upon shipment of the product, the Company reducesrevenue for an estimate of potential future product warranty and stock rotation returns related to the current period product revenue. Management analyzeshistorical returns, channel inventory levels, current economic trends and changes in customer demand for the Company's products when evaluating the adequacy ofthe allowance for sales returns, namely warranty and stock rotation returns. Revenue on shipments is also reduced for estimated price protection and salesincentives deemed to be contra-revenue under the authoritative guidance for revenue recognition. 65Table of ContentsNETGEAR, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)Sales incentivesThe Company accrues for sales incentives as a marketing expense if it receives an identifiable benefit in exchange and can reasonably estimate the fair valueof the identifiable benefit received; otherwise, it is recorded as a reduction to revenues. As a consequence, the Company records a substantial portion of its channelmarketing costs as a reduction of revenue.The Company records estimated reductions to revenues for sales incentives at the later of when the related revenue is recognized or when the program isoffered to the customer or end consumer.Shipping and handling fees and costsThe Company includes shipping and handling fees billed to customers in net revenue. Shipping and handling costs associated with inbound freight areincluded in cost of revenue. In cases where the Company gives a freight allowance to the customer for their own inbound freight costs, such costs are appropriatelyrecorded as a reduction in net revenue. Shipping and handling costs associated with outbound freight are included in sales and marketing expenses and totaled$10.4 million , $10.5 million and $11.6 million in the years ended December 31, 2015 , 2014 and 2013 respectively.Research and developmentCosts incurred in the research and development of new products are charged to expense as incurred.Advertising costsAdvertising costs are expensed as incurred. Total advertising and promotional expenses were $19.4 million , $19.1 million , and $18.0 million in the yearsended December 31, 2015 , 2014 and 2013 respectively.Income taxesThe Company accounts for income taxes under an asset and liability approach. Under this method, income tax expense is recognized for the amount of taxespayable or refundable for the current year. In addition, deferred tax assets and liabilities are recognized for the expected future tax consequences of temporarydifferences resulting from different treatment for tax versus accounting for certain items, such as accruals and allowances not currently deductible for tax purposes.These differences result in deferred tax assets and liabilities, which are included within the consolidated balance sheet. The Company must then assess thelikelihood that the Company's deferred tax assets will be recovered from future taxable income and to the extent the Company believes that recovery is not morelikely than not, the Company must establish a valuation allowance. The Company’s assessment considers the recognition of deferred tax assets on a jurisdictionalbasis. Accordingly, in assessing its future taxable income on a jurisdictional basis, the Company considers the effect of its transfer pricing policies on that income.In the ordinary course of business there is inherent uncertainty in assessing the Company's income tax positions. The Company assesses its tax positions andrecords benefits for all years subject to examination based on management's evaluation of the facts, circumstances and information available at the reporting date.For those tax positions where it is more likely than not that a tax benefit will be sustained, the Company records the largest amount of tax benefit with a greaterthan 50 percent likelihood of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. For those incometax positions where it is not more likely than not that a tax benefit will be sustained, no tax benefit has been recorded in the financial statements. Where applicable,associated interest and penalties have also been recognized as a component of income tax expense.Net income per shareBasic net income per share is computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted netincome per share reflects the additional dilution from potential issuances of common stock, such as stock issuable pursuant to the exercise of stock options andawards. Potentially dilutive shares are excluded from the computation of diluted net income per share when their effect is anti-dilutive.Stock-based compensationThe Company measures stock-based compensation at the grant date based on the fair value of the award. The fair value of stock options is estimated usingthe Black-Scholes option pricing model. Estimated compensation cost relating to restricted stock66Table of ContentsNETGEAR, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)units (“RSUs”) is based on the closing fair market value of the Company’s common stock on the date of grant. The fair value of Employee Stock Purchase Plan(“ESPP”) is based on the 15% discount at purchase, since the price of the shares is determined at the purchase date.The compensation expense for equity awards is reduced by an estimate for forfeitures and is recognized over the vesting period of the award under a gradedvesting method. In addition, the Company will recognize an excess benefit from stock-based compensation in equity based on the difference between tax expensecomputed with consideration of the windfall deduction and without consideration of the windfall deduction. In addition, the Company accounts for the indirecteffects of stock-based compensation on the research tax credit and the foreign tax credit in the income statement. See Note 11, Employee Benefit Plans , of theNotes to Consolidated Financial Statements for a further discussion on stock-based compensation.Comprehensive incomeComprehensive income consists of net income and other gains and losses affecting stockholder's equity that the Company excluded from net income,including gains and losses related to fair value of short-term investments and the effective portion of cash flow hedges that were outstanding as of the end of theyear.Foreign currency translation and re-measurementThe Company's functional currency is the U.S. dollar for all of its international subsidiaries. Foreign currency transactions of international subsidiaries are re-measured into U.S. dollars at the end-of-period exchange rates for monetary assets and liabilities, and historical exchange rates for non-monetary assets. Expensesare re-measured at average exchange rates in effect during each period, except for expenses related to non-monetary assets, which are re-measured at historicalexchange rates. Revenue is re-measured at average exchange rates in effect during each period. Gains and losses arising from foreign currency transactions areincluded in other income (expense), net.Recent accounting pronouncementsIn May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customer" (Topic 606). The guidance in this update supersedes the revenuerecognition requirements in Topic 605, Revenue Recognition. Under the new guidance, an entity should recognize revenue to depict the transfer of promised goodsor services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidancealso specifies the accounting for some costs to obtain or fulfill a contract with a customer. An entity should apply the amendments in the update eitherretrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying this update recognized at the date of initialapplication. On July 9, 2015, the FASB concluded to delay the effective date of the new revenue standard by one year. ASU 2014-09 is effective for the Companybeginning in the first quarter fiscal 2018. Early adoption is permitted but may not occur earlier than January 1, 2017, the original effective date of the standard forthe Company. The Company is in the process of evaluating the available transition methods and the impact of this standard on its financial position, results ofoperations or cash flows.In July 2015, the FASB issued ASU 2015-11, "Simplifying the Measurement of Inventory" (Topic 330). The new guidance changes the subsequentmeasurement of inventory from lower of cost or market to lower of cost and net realizable value. ASU 2015-11 should be applied on a prospective basis and iseffective for the Company beginning in the first fiscal quarter of 2017. Early adoption is permitted. The Company does not expect the adoption of this guidance tohave a material impact on its financial position, results of operations or cash flows.In November 2015, the FASB issued ASU 2015-17, "Balance Sheet Classification of Deferred Taxes" (Topic 740), which simplifies the presentation ofdeferred income taxes. This ASU requires that deferred tax assets and liabilities be classified as non-current in a statement of financial position. ASU 2015-17 maybe adopted either prospectively or retrospectively and is effective for reporting periods beginning after December 15, 2016, with early adoption permitted. TheCompany elected early adoption ASU 2015-17 effective December 31, 2015 on a prospective basis. Adoption of this ASU resulted in a reclassification of our netcurrent deferred tax asset to the net non-current deferred tax asset in our Consolidated Balance Sheet as of December 31, 2015. No prior periods wereretrospectively adjusted.In January 2016, the FASB issued ASU 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities (Subtopic 825-10). Thechanges to the current US GAAP financial instruments model primarily affect the accounting for equity investments, financial liabilities under the fair valueoption, and the presentation and disclosure requirements for financial67Table of ContentsNETGEAR, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)instruments. The Company is currently evaluating what impact, if any, the adoption of this standard will have on its results of its financial position, results ofoperations or cash flows.Note 2. Business AcquisitionsArada Systems, Inc.On June 21, 2013 , the Company acquired certain assets and operations of Arada Systems, Inc. (“Arada”), a privately-held company that develops, licenses,and provides solutions for the next generation of uses of Wi-Fi, for total purchase consideration of $5.3 million in cash. The Company believes the acquisition willbolster its wireless product offerings in its commercial business unit and strengthen its position in the small to medium-sized campus wireless LAN market. TheCompany paid $4.2 million of the aggregate purchase price in the second quarter of 2013, and paid the remaining $1.1 million in the second quarter of 2014.The acquisition qualified as a business combination and was accounted for using the acquisition method of accounting. The results of Arada have beenincluded in the consolidated financial statements since the date of acquisition. Pro forma results of operations for the acquisition are not presented as the financialimpact to the Company's consolidated results of operations is not material.The allocation of the purchase price was as follows (in thousands):Property and equipment, net$15Intangibles, net4,040Goodwill1,195Total purchase price$5,250Of the $1.2 million of goodwill recorded on the acquisition of Arada, approximately $0.7 million and $1.2 million are deductible for U.S. federal and stateincome tax purposes, respectively. The goodwill recognized, which was assigned to the Company's commercial business unit, is primarily attributable to expectedsynergies resulting from the acquisition.The Company designated $4.0 million of the acquired intangibles as technology. The value was calculated based on the present value of the future estimatedcash flows derived from estimated savings attributable to the existing technology and discounted at 21.5% . The acquired existing technology is being amortizedover an estimated useful life of five years .AirCard Division of Sierra Wireless, Inc.On April 2, 2013 , the Company completed the acquisition of select assets and operations of the Sierra Wireless, Inc. AirCard business ("AirCard"),including customer relationships, a world-class LTE engineering team, certain intellectual property, inventory and property and equipment. The Company believesthis acquisition will accelerate the mobile initiative of the service provider business unit to become a global leader in providing the latest in LTE data networkingaccess devices.The Company paid $140.0 million of the aggregate purchase price in the second quarter of 2013. The acquisition qualified as a business combination andwas accounted for using the acquisition method of accounting. The results of AirCard have been included in the consolidated financial statements since the date ofacquisition. Revenue and earnings for AirCard as of the acquisition date are not presented as the business was fully integrated into the service provider businessunit subsequent to the acquisition and therefore impracticable for the Company to quantify.The allocation of the purchase price was as follows (in thousands):Inventories$2,874Prepaid expenses and other current assets12,256Property and equipment, net7,455Intangibles, net69,700Goodwill53,841Liabilities assumed(6,096)Total purchase price$140,03068Table of ContentsNETGEAR, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)In the third quarter of 2013, the Company made an adjustment of $0.5 million to goodwill related to revised inventory estimates.Of the $53.8 million of goodwill recorded on the acquisition of AirCard, approximately $35.8 million , $53.8 million and $2.3 million is deductible for U.S.federal, U.S. state and Canadian income tax purposes, respectively. The goodwill recognized, which was assigned to the Company's service provider business unit,is primarily attributable to expected synergies resulting from the acquisition.The Company designated $16.3 million of the acquired intangibles as technology. The value was calculated based on the present value of the futureestimated cash flows derived from estimated savings attributable to the existing technology and discounted at 10.0% . The acquired technology is being amortizedover an estimated useful life of four years .The Company designated $40.5 million of the acquired intangibles as customer relationships. The value was calculated based on the present value of thefuture estimated cash flows derived from projections of future operations attributable to existing customer relationships and discounted at 12.0% . The acquiredcustomer relationships are being amortized over an estimated useful life of eight yearsThe Company designated $2.3 million of the acquired intangibles as non-compete agreements. The value was calculated based on the present value of thefuture estimated cash flows derived from projections of future operations attributable to the non-compete agreements and discounted at 12.0% . The acquiredagreements are being amortized over an estimated useful life of five years .The Company designated $1.1 million of the acquired intangibles as backlog. The value was calculated based on the present value of the future contractualrevenue and discounted at 10.0% . The acquired backlog was fully amortized in the second quarter of 2013.The Company acquired $9.5 million in in-process research and development (“IPR&D”) projects. The value was calculated based on the present value offuture estimated cash flows discounted at 13.0% , derived from projections of future revenues attributable to the assets, expected economic life of the assets, androyalty rates. IPR&D acquired is considered indefinite lived intangibles until research and development efforts associated with the projects are completed orabandoned. The most significant of the acquired IPR&D projects relate to multimode LTE technologies, Mobile Hot Spot, USB dongle, and Module form factors.During the third quarter of 2013, the Company recorded an intangibles impairment charge of $2.0 million related to the abandonment of certain IPR&D projectspreviously acquired. As of the end of the second quarter of 2014, $7.5 million of the acquired IPR&D had reached technical feasibility and was reclassified todefinite-lived intangibles and with an estimated useful life of four years.Pro forma financial informationThe unaudited pro forma financial information in the table below summarizes the combined results of our operations and those of AirCard for the periodsshown as though the acquisition of AirCard occurred as of the beginning of the fiscal year 2012. The pro forma financial information for the periods presentedincludes the accounting effects of the business combination, including adjustments to the amortization of intangibles, fair value of acquired inventory, acquisition-related costs, integration expenses and related tax effects of these adjustments, where applicable. This information is for informational purposes only, is subject to anumber of estimates, assumptions and other uncertainties, and may not be indicative of the results of operations that would have been achieved if the acquisitionhad taken place at January 1, 2012.The unaudited pro forma financial information is as follows (in thousands): Year Ended December 31, 2013 (in millions)Net revenue$1,415Net income$57 69Table of ContentsNETGEAR, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)Note 3. Balance Sheet Components (in thousands)Available-for-sale short-term investments As of December 31, 2015 December 31, 2014 Cost Unrealized Gain Unrealized Loss Estimated FairValue Cost Unrealized Gain Unrealized Loss Estimated FairValueU.S. treasuries$95,057 $1 $(65) $94,993 $114,944 $6 $(15) $114,935Certificates of deposits147 — — 147 158 — — 158Total$95,204 $1 $(65) $95,140 $115,102 $6 $(15) $115,093The Company’s short-term investments are primarily comprised of marketable securities that are classified as available-for-sale and consist of governmentsecurities with an original maturity or remaining maturity at the time of purchase of greater than three months and no more than twelve months . Accordingly, noneof the available-for-sale securities have unrealized losses greater than 12 months.Cost method investmentsThe carrying value of the Company's cost method investments was $0.1 million and $1.3 million for the years ended December 31, 2015 and December 31,2014 . These investments are included in other non-current assets in the consolidated balance sheets and are carried at cost, adjusted for any impairment, becausethe Company does not have a controlling interest and does not have the ability to exercise significant influence over these companies. The Company monitors theseinvestments for impairment on a quarterly basis, and adjusts carrying value for any impairment charges recognized. There were no impairments recognized in theyears ended December 31, 2015 , December 31, 2014 and December 31, 2013 . Realized gains and losses on these investments are reported in other income(expense), net in the consolidated statements of operations. No material gains or losses were recorded in the years ended December 31, 2015 , 2014 and 2013 .Accounts receivable, net As of December 31, 2015 December 31, 2014Gross accounts receivable$309,926 $296,239Allowance for doubtful accounts(1,255) (1,255)Allowance for sales returns(15,904) (17,489)Allowance for price protection(2,125) (1,806)Total allowances(19,284) (20,550)Total accounts receivable, net$290,642 $275,689Inventories As of December 31, 2015 December 31, 2014Raw materials$4,292 $3,625Work-in-process2 8Finished goods208,824 219,250Total inventories$213,118 $222,883The Company records provisions for excess and obsolete inventory based on forecasts of future demand. While management believes the estimates andassumptions underlying its current forecasts are reasonable, there is risk that additional charges may be necessary if current forecasts are greater than actualdemand.70Table of ContentsNETGEAR, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)Property and equipment, net As of December 31, 2015 December 31, 2014Computer equipment$11,161 $9,779Furniture, fixtures and leasehold improvements18,317 19,379Software30,396 29,294Machinery and equipment66,662 60,135Total property and equipment, gross126,536 118,587Accumulated depreciation and amortization(104,152) (88,893)Total property and equipment, net$22,384 $29,694Depreciation and amortization expense pertaining to property and equipment was $18.1 million , $17.6 million and $17.3 million for the years endedDecember 31, 2015 , 2014 and 2013 , respectively.Intangibles, net The following tables present details of the Company’s purchased intangibles: Gross AccumulatedAmortization NetDecember 31, 2015 Technology$61,099 $(48,485) $12,614Customer contracts and relationships56,500 (23,290) 33,210Other10,545 (7,422) 3,123Total intangibles, net128,144 (79,197) 48,947 Gross AccumulatedAmortization NetDecember 31, 2014 Technology$61,099 $(39,341) $21,758Customer contracts and relationships56,500 (16,205) 40,295Other10,545 (6,368) 4,177Total intangibles, net$128,144 $(61,914) $66,230Amortization of purchased intangibles in the years ended December 31, 2015 , 2014 and 2013 was $17.3 million , $17.9 million and $15.5 million ,respectively. In the year ended December 31, 2013, the Company recorded an impairment charge of $2.0 million due to the abandonment of IPR&D acquired aspart of the AirCard acquisition. No impairment charges were recorded in the years ended December 31, 2015 and 2014 .Estimated amortization expense related to finite-lived intangibles for each of the next five years and thereafter is as follows:Year Ended December 31,Amount2016$16,921201711,38620187,87120196,02820205,316Thereafter1,425Total expected amortization expense$48,94771Table of ContentsNETGEAR, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)Goodwill The changes in the carrying amount of goodwill during the years ended December 31, 2015 and 2014 are as follows: Retail Commercial Service Provider TotalGoodwill at December 31, 2013 $45,442 $36,279 $74,196 $155,916 Goodwill impairment charges — — (74,196) (74,196)Goodwill at December 31, 2014 45,442 $36,279 — 81,721 Goodwill impairment charges — — — —Goodwill at December 31, 2015 $45,442 $36,279 $— $81,721In the fourth fiscal quarter of 2015, the Company completed the annual impairment test of goodwill. The test was performed as of the first day of the fourthquarter.The Company performed a qualitative test for goodwill impairment of the retail and commercial reporting units as of September 28, 2015. Based upon theresults of the qualitative testing, the respective fair values of the retail and commercial reporting units were substantially in excess of these reporting units’ carryingvalues. The Company believes it is more-likely-than-not that the fair value of these reporting units are greater than their respective carrying values and thereforeperforming the first step of the two-step impairment test for the retail and commercial reporting units was unnecessary. No goodwill impairment was recognizedfor the retail and commercial reporting units in the years ended December 31, 2015, 2014 or 2013.In the fourth quarter of fiscal year 2014, the Company recorded a goodwill impairment charge of $74.2 million related to the service provider reporting unitin the year ended December 31, 2014.There were no impairments to goodwill in the years ended December 31, 2015 and 2013 . Accumulated goodwill impairment charges for the years endedDecember 31, 2015 and 2014, was $74.2 million and $74.2 million , respectively.Other non-current assets As of December 31, 2015 December 31, 2014Non-current deferred income taxes$68,445*$38,696Cost method investments105 1,322Other7,824 8,059Total other non-current assets$76,374 $48,077* Includes a reclassification of the net current deferred tax asset to the net non-current deferred tax asset in the consolidated Balance Sheet as of December 31, 2015. No prior periods wereretrospectively adjusted. Refer to Note 1, The Company and Summary of Significant Accounting Policies , for additional information regarding the early adoption of the ASU 2015-17.Other accrued liabilities As of December 31, 2015 December 31, 2014Sales and marketing programs$69,693 $54,582Warranty obligation56,706 44,888Freight5,748 6,827Other34,135 37,445Total other accrued liabilities$166,282 $143,742Note 4. Restructuring and Other ChargesThe Company accounts for its restructuring plans under the authoritative guidance for exit or disposal activities. The Company presents expenses related torestructuring and other charges as a separate line item in its consolidated statements of operations.72Table of ContentsNETGEAR, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)During the year ended December 31, 2015 , the Company incurred restructuring and other charges of $6.4 million . Restructuring charges recognized areprimarily related to contract and employee termination charges, as well as other activities attributable to the restructuring actions announced in February 2015.During the year ended December 31, 2014 , the Company incurred restructuring charges of $2.2 million . The Company recognized a charge of $1.4 millionrelating primarily to expenses associated with the early termination of a lease agreement in Canada and $0.8 million relating to one-time separation costs,primarily relating to the departure of the general manager of the retail business unit in the first quarter of 2014.The following tables provide a summary of accrued restructuring and other charges activity for the years ended December 31, 2015 and 2014: Restructuring Acquisition transition costs Total (in thousands)Balance at December 31, 2013$1,013 $10 $1,023Additions2,228 6 2,234Cash payments(2,901) (16) (2,917)Adjustments(24) — (24)Balance at December 31, 2014316 — 316Additions (a)5,946 — 5,946Cash payments(5,736) — (5,736)Balance at December 31, 2015$526 $— $526(a) Total restructuring and other charges recognized in the Company's consolidated statement of operations for the year ended December 31, 2015 includes non-cash charges and adjustments,net of $0.5 million . These amounts have been excluded from the table above.Note 5. Derivative Financial InstrumentsThe Company’s subsidiaries have had, and will continue to have material future cash flows, including revenue and expenses, which are denominated incurrencies other than the Company’s functional currency. The Company and all its subsidiaries designate the U.S. dollar as the functional currency. Changes inexchange rates between the Company’s functional currency and other currencies in which the Company transacts business will cause fluctuations in cash flowexpectations and cash flow realized or settled. Accordingly, the Company uses derivatives to mitigate its business exposure to foreign exchange risk. The Companyenters into foreign currency forward contracts in Australian dollars, British pounds, Euros, Canadian dollar, and Japanese yen to manage the exposures to foreignexchange risk related to expected future cash flows on certain forecasted revenue, costs of revenue, operating expenses and existing assets and liabilities. TheCompany does not enter into derivatives transactions for trading or speculative purposes.The Company’s foreign currency forward contracts do not contain any credit-risk-related contingent features. The Company is exposed to credit losses in theevent of nonperformance by the counter-parties of its forward contracts. The Company enters into derivative contracts with high-quality financial institutions andlimits the amount of credit exposure to any one counter-party. In addition, the derivative contracts typically mature in less than six months and the Companycontinuously evaluates the credit standing of its counter-party financial institutions. The counter-parties to these arrangements are large highly rated financialinstitutions and the Company does not consider non-performance a material risk.The Company may choose not to hedge certain foreign exchange exposures for a variety of reasons, including, but not limited to, materiality, accountingconsiderations and the prohibitive economic cost of hedging particular exposures. There can be no assurance the hedges will offset more than a portion of thefinancial impact resulting from movements in foreign exchange rates. The Company’s accounting policies for these instruments are based on whether theinstruments are designated as hedge or non-hedge instruments in accordance with the authoritative guidance for derivatives and hedging. The Company records allderivatives on the balance sheet at fair value. The effective portions of cash flow hedges are recorded in other comprehensive income ("OCI") until the hedged itemis recognized in earnings. Derivatives that are not designated as hedging instruments and the ineffective portions of its designated hedges are adjusted to fair valuethrough earnings in other income (expense), net in the consolidated statement of operations.73Table of ContentsNETGEAR, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)The fair values of the Company’s derivative instruments and the line items on the consolidated balance sheet to which they were recorded as ofDecember 31, 2015 , and December 31, 2014 , are summarized as follows (in thousands): Derivative Assets Balance SheetLocation Fair value atDecember 31, 2015 Balance SheetLocation Fair value atDecember 31, 2014Derivative assets not designated as hedginginstruments Prepaid expenses and othercurrent assets $3,203 Prepaid expenses and othercurrent assets $2,416Derivative assets designated as hedginginstruments Prepaid expenses and othercurrent assets 2 Prepaid expenses and othercurrent assets —Total $3,205 $2,416 Derivative Liabilities Balance SheetLocation Fair value atDecember 31, 2015 Balance SheetLocation Fair value atDecember 31, 2014Derivative liabilities not designated as hedginginstruments Other accrued liabilities $447 Other accrued liabilities $409Derivative liabilities designated as hedginginstruments Other accrued liabilities 4 Other accrued liabilities 38Total $451 $447For details of the Company’s fair value measurements, see Note 13, Fair Value Measurements.Offsetting Derivative Assets and LiabilitiesThe Company has entered into master netting arrangements which allow net settlements under certain conditions. Although netting is permitted, it iscurrently the Company's policy and practice to record all derivative assets and liabilities on a gross basis in the consolidated balance sheets.The following tables set forth the offsetting of derivative assets as of December 31, 2015 and December 31, 2014 (in thousands):As of December 31, 2015 Gross Amounts Not Offset in the Consolidated BalanceSheets Gross Amounts ofRecognized Assets Gross Amounts Offset in theConsolidated Balance Sheets Net Amounts Of AssetsPresented in the ConsolidatedBalance Sheets Financial Instruments Cash Collateral Pledged Net AmountBarclays $577 $— $577 $(56) $— $521Wells Fargo 2,628 — 2,628 (395) — 2,233Total $3,205 $— $3,205 $(451) $— $2,754As of December 31, 2014 Gross Amounts Not Offset in the Consolidated BalanceSheets Gross Amounts ofRecognized Assets Gross Amounts Offset in theConsolidated Balance Sheets Net Amounts Of AssetsPresented in the ConsolidatedBalance Sheets Financial Instruments Cash Collateral Pledged Net AmountBarclays $319 $— $319 $(16) $— $303Wells Fargo 2,097 — 2,097 (431) — 1,666Total $2,416 $— $2,416 $(447) $— $1,96974Table of ContentsNETGEAR, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)The following tables set forth the offsetting of derivative liabilities as of December 31, 2015 and December 31, 2014 (in thousands):As of December 31, 2015 Gross Amounts Not Offset in the Consolidated BalanceSheets Gross Amounts ofRecognized Liabilities Gross Amounts Offset in theConsolidated Balance Sheets Net Amounts Of LiabilitiesPresented in the ConsolidatedBalance Sheets Financial Instruments Cash Collateral Pledged Net AmountBarclays $56 $— $56 $(56) $— $—Wells Fargo 395 — 395 (395) — —Total $451 $— $451 $(451) $— $—As of December 31, 2014 Gross Amounts Not Offset in the Consolidated BalanceSheets Gross Amounts ofRecognized Liabilities Gross Amounts Offset in theConsolidated Balance Sheets Net Amounts Of LiabilitiesPresented in the ConsolidatedBalance Sheets Financial Instruments Cash Collateral Pledged Net AmountBarclays $16 $— $16 $(16) $— $—Wells Fargo 431 — 431 (431) — —Total $447 $— $447 $(447) $— $—Cash flow hedgesTo help manage the exposure of operating margins to fluctuations in foreign currency exchange rates, the Company hedges a portion of its anticipatedforeign currency revenue, costs of revenue and certain operating expenses. These hedges are designated at the inception of the hedge relationship as cash flowhedges under the authoritative guidance for derivatives and hedging. Effectiveness is tested at least quarterly both prospectively and retrospectively usingregression analysis to ensure that the hedge relationship has been effective and is likely to remain effective in the future. The Company typically hedges portions ofits anticipated foreign currency exposure for three to five months. The Company enters into about five forward contracts per quarter with an average size ofapproximately $7 million USD equivalent related to its cash flow hedging program.The Company expects to reclassify to earnings all of the amounts recorded in OCI associated with its cash flow hedges over the next 12 months. OCIassociated with cash flow hedges of foreign currency revenue is recognized as a component of net revenue in the same period as the related revenue is recognized.OCI associated with cash flow hedges of foreign currency costs of revenue and operating expenses are recognized as a component of cost of revenue and operatingexpense in the same period as the related costs of revenue and operating expenses are recognized.Derivative instruments designated as cash flow hedges must be de-designated as hedges when it is probable the forecasted hedged transaction will not occurwithin the designated hedge period or if not recognized within 60 days following the end of the hedge period. Deferred gains and losses in OCI associated withsuch derivative instruments are reclassified immediately into earnings through other income and expense. Any subsequent changes in the fair value of suchderivative instruments are reflected in current earnings unless they are re-designated as hedges of other transactions. The Company did not recognize any materialnet gains or losses related to the loss of hedge designation on discontinued cash flow hedges during the years ended December 31, 2015 , 2014 and 2013 .75Table of ContentsNETGEAR, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)The effects of the Company’s derivative instruments on OCI and the consolidated statement of operations for the years ended December 31, 2015 , 2014 and2013 are summarized as follows (in thousands):Derivatives Designated as Hedging Instruments Year Ended December 31, 2015 Gain (Loss) Recognized inOCI -EffectivePortion (a) Location ofGain (Loss)Reclassified fromOCIinto Income -EffectivePortion Gain (Loss)ReclassifiedfromOCI intoIncome -EffectivePortion (a) Location ofGain (Loss)Recognized inIncome andExcluded fromEffectiveness Testing Amount of Gain (Loss)Recognized inIncome andExcluded fromEffectiveness TestingCash flow hedges: Foreign currency forward contracts $453 Net revenue $462 Other income(expense), net $(52)Foreign currency forward contracts — Cost of revenue 6 Other income(expense), net —Foreign currency forward contracts — Operating expenses (15) Other income(expense), net —Total $453 $453 $(52)Derivatives Designated asHedging Instruments Year Ended December 31, 2014 Gain (Loss)Recognized inOCI -EffectivePortion (a) Location ofGain (Loss)Reclassifiedfrom OCIinto Income -EffectivePortion Gain (Loss)ReclassifiedfromOCI intoIncome -EffectivePortion (a) Location ofGain (Loss)Recognized inIncome andExcluded fromEffectiveness Testing Amount of Gain (Loss) Recognized inIncome andExcluded fromEffectiveness TestingCash flow hedges: Foreign currency forward contracts $292 Net revenue $459 Other income(expense), net $(144)Foreign currency forward contracts — Cost of revenue 4 Other income(expense), net —Foreign currency forward contracts — Operatingexpenses (149) Other income(expense), net —Total $292 $314 $(144)Derivatives Designated asHedging Instruments Year Ended December 31, 2013 Gain (Loss)Recognized inOCI -EffectivePortion (a) Location ofGain (Loss)Reclassifiedfrom OCIinto Income -EffectivePortion Gain (Loss)ReclassifiedfromOCI intoIncome -EffectivePortion (a) Location ofGain (Loss)Recognized inIncome andExcluded fromEffectiveness Testing Amount of Gain (Loss) Recognized inIncome andExcluded fromEffectiveness TestingCash flow hedges: Foreign currency forward contracts $775 Net revenue $844 Other income(expense), net $(117)Foreign currency forward contracts — Cost of revenue (9) Other income(expense), net —Foreign currency forward contracts — Operatingexpenses (149) Other income(expense), net —Total $775 $686 $(117)(a)Refer to Note 10, Stockholders' Equity , which summarizes the accumulated other comprehensive income activity related to derivatives.76Table of ContentsNETGEAR, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)The Company did not recognize any material net gains or losses related to the loss of hedge designation as there were no discontinued cash flow hedgesduring the years ended December 31, 2015 , 2014 and 2013 .Non-designated hedgesThe Company enters into non-designated hedges under the authoritative guidance for derivatives and hedging to manage the exposure of non-functionalcurrency monetary assets and liabilities held on its financial statements to fluctuations in foreign currency exchange rates, as well as to reduce volatility in otherincome and expense. The non-designated hedges are generally expected to offset the changes in value of its net non-functional currency asset and liability positionresulting from foreign exchange rate fluctuations. Foreign currency denominated accounts receivable and payable are hedged with non-designated hedges when therelated anticipated foreign revenue and expenses are recognized in the Company’s financial statements. The Company also hedges certain non-functional currencymonetary assets and liabilities that may not be incorporated into the cash flow hedge program. The Company adjusts its non-designated hedges monthly and entersinto about 15 non-designated derivatives per quarter. The average size of its non-designated hedges is approximately $2 million USD equivalent and these hedgesnormally range from one to five months in duration.The effects of the Company’s derivatives not designated as hedging instruments in other income (expense), net in the consolidated statements of operationsfor the years ended December 31, 2015 , 2014 and 2013 , are as follows (in thousands): Derivatives Not Designated as Hedging Instruments Location of Gains (Losses)Recognized in Income on DerivativeAmount of Gains (Losses)Recognized in Income on DerivativeYear ended December 31,20152014 2013Foreign currency forward contracts Other income (expense), net4,9564,897 $458Note 6. Net Income Per ShareBasic net income per share is computed by dividing the net income for the period by the weighted average number of common shares outstanding during theperiod. Diluted net income per share is computed by dividing the net income for the period by the weighted average number of shares of common stock andpotentially dilutive common stock outstanding during the period. Potentially dilutive common shares include outstanding stock options and unvested restrictedstock awards, which are reflected in diluted net income per share by application of the treasury stock method. Under the treasury stock method, the amount that theemployee must pay for exercising stock options, the amount of stock-based compensation cost for future services that the Company has not yet recognized, and theestimated tax benefit that would be recorded in additional paid-in capital upon exercise are assumed to be used to repurchase shares.77Table of ContentsNETGEAR, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)Net income per share for the years ended December 31, 2015 , 2014 and 2013 are as follows (in thousands, except per share data): Year Ended December 31, 2015 December 31, 2014 December 31, 2013Numerator: Net income $48,584 $8,788 $55,217 Denominator: Weighted average common shares - basic 33,161 35,771 38,379Potentially dilutive common share equivalent 627 674 569Weighted average common shares - dilutive 33,788 36,445 38,948 Basic net income per share $1.47 $0.25 $1.44Diluted net income per share $1.44 $0.24 $1.42 Anti-dilutive employee stock-based awards, excluded 1,807 2,617 2,846Note 7. Other Income (Expense), NetOther income (expense), net consisted of the following (in thousands): Year Ended December 31, 2015 2014 2013Foreign currency transaction loss, net$(5,114) $(5,642) $(1,592)Foreign currency contract gain, net4,904 4,753 341Gain on litigation settlements— 2,800 —Other122 544 794Total$(88) $2,455 $(457)Note 8. Income TaxesIncome before income taxes consists of the following (in thousands): Year Ended December 31, 2015 2014 2013United States$88,681 $25,152 $91,318International(3,117) 5,609 1,664Total$85,564 $30,761 $92,98278Table of ContentsNETGEAR, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Year Ended December 31, 2015 2014 2013Current: U.S. Federal$30,970 $29,089 $30,989State3,139 2,873 3,751Foreign6,105 10,930 11,224 40,214 42,892 45,964Deferred: U.S. Federal(2,645) (20,347) (6,741)State134 (326) (1,164)Foreign(723) (246) (294) (3,234) (20,919) (8,199)Total$36,980 $21,973 $37,765Net deferred tax assets consist of the following (in thousands): Year Ended December 31, 2015 2014Deferred Tax Assets: Accruals and allowances$29,279 $25,756Net operating loss carryforwards5,353 6,210Stock-based compensation9,895 12,416Deferred rent2,740 2,137Deferred revenue1,185 1,654Tax credit carryforwards2,262 1,769Acquired intangibles22,778 21,916Other— 142Total deferred tax assets73,492 72,000 Deferred Tax Liabilities: Depreciation and amortization(967) (1,245)Other(438) —Total deferred tax liabilities(1,405) (1,245) Valuation Allowance**:(3,642) (3,020) Net deferred tax assets$68,445 $67,735 Current portion$— $29,039Non-current portion68,445*38,696Net deferred tax assets$68,445 $67,735* This includes a reclassification of the net current deferred tax asset to the net non-current deferred tax asset in the consolidated Balance Sheet as of December 31, 2015. No prior periods wereretrospectively adjusted. Refer to Note 1, The Company and Summary of Significant Accounting Policies , for additional information regarding the early adoption of the ASU 2015-17.** Valuation allowance is presented gross. The valuation allowance net of the federal tax effect is ($2,367) and ($1,963) for the years ended December 31, 2015 and December 31, 2014,respectively.79Table of ContentsNETGEAR, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)Management's judgment is required in determining the Company's provision for income taxes, its deferred tax assets and any valuation allowance recordedagainst its deferred tax assets. As of December 31, 2015, a valuation allowance of $3.6 million was placed against California deferred tax assets since the recoveryof the assets is uncertain. There was a valuation allowance of $3.0 million placed against deferred tax assets as of December 31, 2014. Accordingly, the valuationallowance increased $0.6 million during 2015. In management's judgment it is more likely than not that the remaining deferred tax assets will be realized in thefuture as of December 31, 2015 , and as such no valuation allowance has been recorded against the remaining deferred tax assets.The effective tax rate differs from the applicable U.S. statutory federal income tax rate as follows: Year Ended December 31, 2015 2014 2013Tax at federal statutory rate35.0 % 35.0 % 35.0 %State, net of federal benefit2.6 % 2.5 % 2.2 %Impact of international operations7.1 % 19.8 % 3.9 %Stock-based compensation(0.4)% 5.5 % 1.8 %Tax credits(1.2)% (3.8)% (1.9)%Valuation allowance— % 3.5 % — %Goodwill impairment— % 7.8 % — %Others0.1 % 1.1 % (0.4)%Provision for income taxes43.2 % 71.4 % 40.6 %Income tax benefits (detriments) in the amount of $(2.2) million , $(0.5) million and $0.4 million related to stock options were credited to additional paid-incapital during the years ended December 31, 2015 , 2014 , and 2013 , respectively. As a result of changes in fair value of available for sale securities, income taxbenefit of $21,000 , $5,000 and $16,000 were recorded in comprehensive income related to the years ended December 31, 2015 , 2014 , and 2013 , respectively.As of December 31, 2015 , the Company has approximately $15.3 million and $50,000 of acquired federal and state net operating loss carry forwards as wellas $2.3 million of California tax credits carryforwards. All of these losses are subject to annual usage limitations under Internal Revenue Code Section 382. Thefederal losses expire in different years beginning in fiscal 2021 . The state loss begins to expire in fiscal 2017 . The state tax credit carryforwards have noexpiration.The Company files income tax returns in the U.S. federal jurisdiction and various state, local, and foreign jurisdictions. With few exceptions, the Company isno longer subject to U.S. federal, state, or local income tax examinations for years before 2009. The Company is no longer subject to foreign income taxexaminations before 2004. In November 2012, the Italian Tax Authority (ITA) commenced an audit of the Company’s 2004 through 2011 tax years, and hassubsequently extended audit procedures to include the 2012 tax year. The Company is currently in litigation with the ITA with respect to all of these years. In April2015, the German Tax Authority commenced an examination of the Company’s 2008 and 2013 tax years. The examination is ongoing. The Company has limitedaudit activity in various states and other foreign jurisdictions. Due to the uncertain nature of ongoing tax audits, the Company has recorded its liability for uncertaintax positions as part of its long-term liability as payments cannot be anticipated over the next 12 months. The existing tax positions of the Company continue togenerate an increase in the liability for uncertain tax positions. The liability for uncertain tax positions may be reduced for liabilities that are settled with taxingauthorities or on which the statute of limitations could expire without assessment from tax authorities. The possible reduction in liabilities for uncertain taxpositions resulting from the expiration of statutes of limitation in multiple jurisdictions in the next 12 months is approximately $0.6 million, excluding the interest,penalties and the effect of any related deferred tax assets or liabilities.80Table of ContentsNETGEAR, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)A reconciliation of the beginning and ending amount of gross unrecognized tax benefits (“UTB”) is as follows (in thousands): Federal, State, and Foreign TaxGross UTB Balance at December 31, 2012$12,339Additions based on tax positions related to the current year1,866Additions for tax positions of prior years4,106Settlements(3,134)Reductions for tax positions of prior years(1,163)Reductions due to lapse of applicable statutes(1,314)Adjustments due to foreign exchange rate movement43Gross UTB Balance at December 31, 201312,743Additions based on tax positions related to the current year1,894Additions for tax positions of prior years1,722Settlements(503)Reductions for tax positions of prior years(152)Reductions due to lapse of applicable statutes(1,838)Adjustments due to foreign exchange rate movement(502)Gross UTB Balance at December 31, 2014$13,364Additions based on tax positions related to the current year1,608Additions for tax positions of prior years228Settlements(199)Reductions for tax positions of prior years(302)Reductions due to lapse of applicable statutes(1,053)Adjustments due to foreign exchange rate movement(816)Gross UTB Balance at December 31, 201512,830The total amount of net UTB that, if recognized would affect the effective tax rate as of December 31, 2015 is $11.3 million . The ending net UTB resultsfrom adjusting the gross balance at December 31, 2015 for items such as U.S. federal and state deferred tax, foreign tax credits, interest, and deductible taxes. Thenet UTB is included as a component of non-current income taxes payable within the consolidated balance sheet.The Company recognizes interest and penalties accrued related to unrecognized tax benefits in income tax expense. During the years ended December 31,2015 , 2014 , and 2013 , total interest and penalties expensed were $0.1 million , $1.1 million and $0.4 million , respectively. As of December 31, 2015 and 2014 ,accrued interest and penalties on a gross basis was $3.1 million and $3.0 million , respectively. Included in accrued interest are amounts related to tax positions forwhich the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility.With the exception of those foreign sales subsidiaries for which deferred tax has been provided, the Company intends to indefinitely reinvest foreignearnings. These earnings were approximately $136.9 million and $78.3 million as of December 31, 2015 and December 31, 2014 , respectively. Because of theavailability of U.S. foreign tax credits, it is not practicable to determine the income tax liability that would be payable if such earnings were not indefinitelyreinvested.Note 9. Commitments and ContingenciesLeasesThe Company leases office space, cars and equipment under non-cancelable operating leases with various expiration dates through December 2026 . Rentexpense in the years ended, December 31, 2015 , 2014 , and 2013 was $9.8 million , $10.8 million and $9.9 million , respectively. The terms of some of theCompany’s office leases provide for rental payments on a graduated scale.81Table of ContentsNETGEAR, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)The Company recognizes rent expense on a straight-line basis over the lease period, and has accrued for rent expense incurred but not paid.Future minimum lease payments under non-cancelable operating leases are as follows (in thousands):Year Ending December 31, 2016$8,42920175,76120185,59820195,34220205,404Thereafter23,209Total minimum lease payments$53,743Employment AgreementsThe Company has signed various employment agreements with key executives pursuant to which, if their employment is terminated without cause, suchemployees are entitled to receive their base salary (and commission or bonus, as applicable) for 52 weeks (for the Chief Executive Officer), 39 weeks (for theSenior Vice President of Worldwide Operations and Support) and up to 26 weeks (for other key executives). Such employees will also continue to have stockoptions vest for up to a one -year period following such termination without cause. If a termination without cause or resignation for good reason occurs within oneyear of a change in control, such employees are entitled to full acceleration (for the Chief Executive Officer) and up to two years acceleration (for other keyexecutives) of any unvested portion of his or her equity awards. The Company has no liabilities recorded for these agreements as of December 31, 2015 .Purchase ObligationsThe Company has entered into various inventory-related purchase agreements with suppliers. Generally, under these agreements, 50% of orders arecancelable by giving notice 46 to 60 days prior to the expected shipment date and 25% of orders are cancelable by giving notice 31 to 45 days prior to the expectedshipment date. Orders are non-cancelable within 30 days prior to the expected shipment date. At December 31, 2015 , the Company had approximately $133million in non-cancelable purchase commitments with suppliers. The Company establishes a loss liability for all products it does not expect to sell for which it hascommitted purchases from suppliers. Such losses have not been material to date. From time to time the Company’s suppliers procure unique complex componentson the Company's behalf. If these components do not meet specified technical criteria or are defective, the Company should not be obligated to purchase thematerials. However, disputes may arise as a result and significant resources may be spent resolving such disputes.Warranty obligationsChanges in the Company's warranty liability, which is included as a component of “Other accrued liabilities” in the consolidated balance sheets, are asfollows (in thousands): Year Ended December 31, 2015 2014 2013Balance at the beginning of the year$44,888 $48,754 $46,659Provision for warranty obligations made during the year80,085 62,709 69,755Settlements made during the year(68,267) (66,575) (67,660)Balance at the end of year$56,706 $44,888 $48,75482Table of ContentsNETGEAR, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)Guarantees and IndemnificationsThe Company, as permitted under Delaware law and in accordance with its Bylaws, indemnifies its officers and directors for certain events or occurrences,subject to certain limits, while the officer or director is or was serving at the Company’s request in such capacity. The term of the indemnification period is for theofficer’s or director’s lifetime. The maximum amount of potential future indemnification is unlimited; however, the Company has a Director and Officer InsurancePolicy that limits its exposure and enables it to recover a portion of any future amounts paid. As a result of its insurance policy coverage, the Company believes thefair value of each indemnification agreement is minimal. Accordingly, the Company has no liabilities recorded for these agreements as of December 31, 2015 .In its sales agreements, the Company typically agrees to indemnify its direct customers, distributors and resellers for any expenses or liability resulting fromclaimed infringements of patents, trademarks or copyrights of third parties. The terms of these indemnification agreements are generally perpetual any time afterexecution of the agreement. The maximum amount of potential future indemnification is unlimited. The Company believes the estimated fair value of theseagreements is minimal. Accordingly, the Company has no liabilities recorded for these agreements as of December 31, 2015 .Litigation and Other Legal MattersThe Company is involved in disputes, litigation, and other legal actions, including, but not limited to, the matters described below. In all cases, at eachreporting period, the Company evaluates whether or not a potential loss amount or a potential range of loss is probable and reasonably estimable under theprovisions of the authoritative guidance that addresses accounting for contingencies. In such cases, the Company accrues for the amount, or if a range, theCompany accrues the low end of the range, only if there is not a better estimate than any other amount within the range, as a component of legal expense withinlitigation reserves, net. The Company monitors developments in these legal matters that could affect the estimate the Company had previously accrued. In relationto such matters, the Company currently believes that there are no existing claims or proceedings that are likely to have a material adverse effect on its financialposition within the next twelve months, or the outcome of these matters is currently not determinable. There are many uncertainties associated with any litigation,and these actions or other third-party claims against the Company may cause the Company to incur costly litigation and/or substantial settlement charges. Inaddition, the resolution of any intellectual property litigation may require the Company to make royalty payments, which could have an adverse effect in futureperiods. If any of those events were to occur, the Company's business, financial condition, results of operations, and cash flows could be adversely affected. Theactual liability in any such matters may be materially different from the Company's estimates, which could result in the need to adjust the liability and recordadditional expenses.Ericsson v. NETGEAR, Inc.On September 14, 2010, Ericsson Inc. and Telefonaktiebolaget LM Ericsson (collectively “Ericsson”) filed a patent infringement lawsuit against theCompany and defendants D-Link Corporation, D-Link Systems, Inc., Acer, Inc., Acer America Corporation, and Gateway, Inc. in the U.S. District Court, EasternDistrict of Texas alleging that the defendants infringe certain Ericsson patents. The Company has been accused of infringing eight U.S. patents: 5,790,516 (the“‘516 Patent”); 6,330,435 (the “‘435 Patent”); 6,424,625 (the “‘625 Patent”); 6,519,223 (the “‘223 Patent”); 6,772,215 (the “‘215 Patent”); 5,987,019 (the “‘019Patent”); 6,466,568 (the “‘568 Patent”); and 5,771,468 (the “'468 Patent"). Ericsson generally alleges that the Company and the other defendants have infringedand continue to infringe the Ericsson patents through the defendants' IEEE 802.11-compliant products. In addition, Ericsson alleged that the Company infringedthe claimed methods and apparatuses of the '468 Patent through the Company's PCMCIA routers. The Company filed its answer to the Ericsson complaint onDecember 17, 2010 where it asserted the affirmative defenses of noninfringement and invalidity of the asserted patents. On June 8, 2011, Ericsson filed anamended complaint that added Dell, Toshiba and Belkin as defendants. At the status conference held on June 9, 2011, the Court set a Markman (claimconstruction) hearing for June 28, 2012 and trial for June 3, 2013. On June 21, 2012, Ericsson dismissed the '468 Patent (“Multi-purpose base station”) withprejudice and gave the Company a covenant not to sue as to products in the marketplace now or in the past. On June 22, 2012, Intel filed its Complaint inIntervention, meaning that Intel became an official defendant in the Ericsson case. During the exchange of the expert reports, Ericsson dropped the '516 Patent (theOFDM “pulse shaping” patent). In addition, Ericsson dropped the '223 Patent (packet discard patent) against all the defendants' products, except for those productsthat use Intel chips. Thus, Ericsson has now dropped the '468 Patent (wireless base station), the '516 Patent (OFDM pulse shaping), and the '223 Patent (packetdiscard patent) for all non-Intel products.A jury trial in the Ericsson case occurred in the Eastern District of Texas from June 3 through June 13, 2013. After hearing the evidence, the jury found noinfringement of the '435 and '223 Patents, and the jury found infringement of claim 1 of the '62583Table of ContentsNETGEAR, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)Patent, claims 1 and 5 of the '568 Patent, and claims 1 and 2 of the '215 Patent. The jury also found that there was no willful infringement by any defendant.Additionally, the jury found no invalidity of the asserted claims of the '435 and '625 Patents. The jury assessed the following damages against the defendants: D-Link: $435,000 ; NETGEAR: $3,555,000 ; Acer/Gateway: $1,170,000 ; Dell: $1,920,000 ; Toshiba: $2,445,000 ; Belkin: $600,000 . The damages awards equatedto 15 cent s per unit for each accused 802.11 device sold by each defendant ( 5 cent per patent).On December 16, 2013, the Company and defendants submitted their appeal brief to the Federal Circuit. Ericsson filed its response brief on February 20,2014, and the defendants filed their reply brief before on March 24, 2014. The oral arguments before the Federal Circuit took place on June 5, 2014.On December 4, 2014, the Federal Circuit issued its opinion and order in the Company’s Ericsson appeal. The Federal Circuit vacated the entirety of the $3.6million jury verdict against the Company and the ongoing 15 cent per unit royalty verdict, and also vacated the entirety of the verdict against the other defendantsand their ongoing royalties, finding that the District Court hadn’t properly instructed the jury on royalty rates and Ericsson’s licensing promises. The FederalCircuit held that the lower court had failed to adequately instruct the jury about Ericsson’s actual commitments to license the infringed patents on reasonable andnondiscriminatory (“RAND”) terms. Further, the Federal Circuit stated that the lower court had neglected to inform the jury that a royalty for a patentedtechnology must be removed from the value of the entire standard, and that a RAND royalty rate should be based on the invention’s value, rather than any addedvalue from standardization. The jury’s damages awards were therefore completely vacated, and the case was remanded for further proceedings.While the Federal Circuit found the district court had inadequate jury instructions, it held that there was enough evidence for the jury to find infringement oftwo claims of U.S. Patent Number 6,466,568 and two claims of U.S. Patent Number 6,772,215, but reversed the lower court’s decision not to grant anoninfringement judgment as a matter of law regarding the third patent, U.S. Patent Number 6,424,625, finding that no reasonable jury could find that the ‘625Patent was infringed by the defendants.In September of 2013, Broadcom filed petitions in the USPTO at the Patent Trial and Appeal Board (PTAB) seeking inter partes review (“IPR”) ofEricsson’s three patents that the jury found were infringed by the Company and other defendants. On March 6, 2015, the PTAB invalidated all the claims of thesethree patents that were asserted against the Company and other defendants at trial -- claim 1 of the '625 Patent, claims 1 and 5 of the '568 Patent, and claims 1 and 2of the '215 Patent -- ruling these claims were anticipated or obvious in light of prior art. The PTAB also rejected two motions to amend by Ericsson, which soughtto substitute certain proposed claims in the '625 and '568 patents, should they be found unpatentable by the PTAB. This PTAB decision comes on top of theFederal Circuit decision (a) vacating the jury verdict after finding that the district court had not properly instructed the jury on royalty rates and Ericsson’slicensing promises, and (b) ruling that no reasonable jury could have found the ‘625 Patent infringed. Ericsson appealed the PTAB decision to the Federal Circuitand also requested that the PTAB reconsider its decision, but the PTAB denied Ericsson’s request for reconsideration. While Ericsson appeals the PTAB decisionthe present status of the case is that the Company does not infringe on any valid Ericsson patent, and accordingly the Company reversed the accruals related to thiscase in the first fiscal quarter of 2015.Agenzia Entrate Provincial Revenue Office 1 of Milan v. NETGEAR International, Inc.In November 2012, the Italian tax police began a comprehensive tax audit of NETGEAR International, Inc.’s Italian Branch. The scope of the audit initiallywas from 2004 through 2011 and was subsequently expanded to include 2012. The tax audit encompasses Corporate Income Tax (IRES), Regional Business Tax(IRAP) and Value-Added Tax (VAT). In December 2013, December 2014, August 2015, and December 2015 an assessment was issued by Inland RevenueAgency, Provincial Head Office No. 1 of Milan-Auditing Department (Milan Tax Office) for the 2004 tax year, the 2005 through 2007 tax years, the 2008 through2010 tax years, and the 2011 through 2012 tax years, respectively. In May 2014, the Company filed with the Provincial Tax Court of Milan (Tax Court) a Requestfor Hearing in Open Court and Request for Suspension of the Tax Assessment for the 2004 year. The hearing was held and decision was issued on November 7,2014. The Tax Court found in favor of the Company and nullified the assessment by the Inland Revenue Agency for 2004. The Inland Revenue Agency appealedthe decision of the Tax Court on June 12, 2015. The Company filed its counter appeal with respect to the 2004 year during September 2015. With respect to 2005through 2007, the Company filed its briefs with the Tax Court in mid-February. In June, 2015, the Company filed with the Provincial Tax Court of Milan (TaxCourt) a Request for Hearing in Open Court and Request for Suspension of the Tax Assessment for the 2005 through 2007 tax years. The hearing for suspensionwas held and the Request for Suspension of payment was granted. The hearing for the validity of the tax assessment was held in December 2015 and we areawaiting a decision from the court. With respect to 2008 through 2010, the Company filed its briefs with the Tax Court in October 2015. With respect to 2011through 2012, the Company plans to file its briefs with the Tax Court to contest this assessment. It is too early to reasonably estimate any financial impact to theCompany resulting from this litigation matter.84Table of ContentsNETGEAR, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)Via Vadis v. NETGEAR, Inc.On August 22, 2014, the Company was sued by Via Vadis, LLC and AC Technologies, S.A. (“Via Vadis”), in the Western District of Texas. The complaintalleges that the Company’s ReadyNAS and Stora products “with built-in BitTorrent software" allegedly infringe three related patents of Via Vadis (U.S. PatentNos. 7,904,680, RE40, 521, and 8,656,125). Via Vadis filed similar complaints against Belkin, Buffalo, Blizzard, D-Link, and Amazon.By referring to “built-in BitTorrent software,” the Company believes that the complaint is referring to the BitTorrent Sync application, which was released byBitTorrent Inc. in spring of 2014. At a high-level, the application allows file synchronization across multiple devices by storing the underlying files on multiplelocal devices, rather than on a centralized server. The Company’s ReadyNAS products do not include BitTorrent software when sold. The BitTorrent application isprovided as one of a multitude of potential download options, but the software itself is not included on the Company’s devices when shipped. Therefore, the onlyviable allegation at this point is an indirect infringement allegation.On November 10, 2014, the Company answered the complaint denying that it infringes the patents in suit and also asserting the affirmative defenses that thepatents in suit are invalid and barred by the equitable doctrines of laches, waiver, and/or estoppel.On February 5, 2015, the Court set the claim construction hearing for December 4, 2015 and allowed discovery for claim construction purposes tocommence. On February 6, 2015, the Company filed its motion to transfer venue from the Western District of Texas to the Northern District of California with theCourt; on February 13, 2015, Via Vadis filed its opposition to the Company’s motion to transfer; and on February 20, 2015, the Company filed its reply brief on itsmotion to transfer. In early April 2015, the Company received the plaintiff’s infringement contentions, and on June 12, 2015, the defendants served invaliditycontentions. Discovery in the case was stayed until the Court issues its claim construction order. On July 30, 2015 the Court granted the Company’s motion totransfer venue to the Northern District of California. In addition, the Company learned that Amazon and Blizzard filed petitions for the inter partes reviews(“IPRs”) for the patents in suit. On October 30, 2015, the Company and Via Vadis filed a joint stipulation requesting that the Court vacate all deadlines and enter astay of all proceedings in the case pending the Patent Trial and Appeal Board’s final non-appealable decision on the IPRs initiated by Amazon and Blizzard. OnNovember 2, 2015 the Court granted the requested stay.It is too early to reasonably estimate any financial impact to the Company resulting from this litigation matter.Wetro Lan v. NETGEAR, Inc.On January 30, 2015, the Company was sued by a non-practicing entity called Wetro Lan LLC (“Wetro Lan”) in United States District Court, Eastern Districtof Texas, Marshall Division. Wetro Lan alleges direct infringement by the Company of United States Patent No. 6,795,918 (the “'918 Patent”) entitled “ServiceLevel Computer Security” based on the Company’s manufacture and selling of the “NETGEAR WGR614v9 Wireless Router and similarly situated NETGEAR,Inc. Wireless Routers.” On April 13, 2015 the Company answered the complaint. The Company denied that it infringed the patent and asserted several affirmativedefenses (counterclaims), including noninfringement, invalidity, limitation of damages, laches, waiver, estoppel, and other equitable defenses, and on May 4, 2015Wetro Lan answered the Company’s counterclaims.On July 16, 2015, the Company filed with the Court a motion to transfer venue from the Eastern District of Texas to the Northern District of California. OnAugust 17, 2015, Wetro Lan filed with the Court its opposition to the Company’s motion to transfer venue, and on August 24, 2015 the Company filed its Reply inSupport of Transfer as filed. In November 2015, Wetro Lan filed a notice requesting a scheduling conference from which deadlines in the case arise. On January29, 2016, the Court issued an order consolidating twenty Wetro Lan cases, including the case against the Company for all pretrial issues, except for venue. In thelead case, Wetro Lan v. ADTRAN (No. 2:15-cv-00041), the Court has not yet issued any docket control order or set any scheduling conference. The Court also hasnot yet ruled on the Company’s transfer motion.It is too early to reasonably estimate any financial impact to the Company resulting from this litigation matter. Frequency Systems LLC v NETGEAR, Inc. On May 8, 2015, the Company was sued by a non-practicing entity named Frequency Systems LLC (“Frequency Systems”) in the United States DistrictCourt, Eastern District of Texas. Frequency Systems alleges direct or indirect infringement by the Company of a single patent, U.S. Pat. No. 8,417,205 (the “'205Patent”), entitled “Antenna selection scheme for multiple antennae.”85Table of ContentsNETGEAR, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)Frequency Systems alleges infringement generically by the Company’s “wireless routers and access points product families” without specifying any models.Frequency Systems also simultaneously sued ADTRAN, TCL Communications, Amped Wireless, ASUS, Belkin, Buffalo, Cisco, D-Link, EnGeniusTechnologies, Extreme Networks, HP, HTC, Huawei, ATEN Technology, IOGear, Kyocera, LG, Linksys, Motorola Mobility, Novatel Wireless, Sharp, TP-Link,TRENDnet, Western Digital, ZTE, and ZyXEL.The Company answered the complaint on July 23, 2015 asserting various defenses, including noninfringement and invalidity of the patent in suit.Recently, it appears that Frequency Systems granted RPX Corporation a license. This is significant because the Company’s products that use WiFi chipsets oflicensed companies (i.e. companies that are RPX members) likely will be licensed. The licensed RPX members include Broadcom and QualComm-Atheros.On September 24, 2015, Frequency Systems served preliminary infringement contentions. Frequency Systems alleges that the Company infringes claims 1, 2and 4 of the '205 Patent by the sale of products that are compliant with the 802.11n wireless standard, and identifies the following Company models as exemplars:R8000, R7500, R7000, R6400, R6300, R6250, AC1450, R6220, R6200, R6100, R6050, WNDR4700, WNDR4720, WNDR4500, WNDR4300, WNDR3700,WNDR3400, WNR2500, JNR3210, WNR2020, R7900, R6700, D7800, D7000, D6400, D6200, DGND4000, DGND3700, C7000, C6300, C3700, MBR1515,MBR1515A, MVBR1517, MVBR1210C, WNDAP660, EX7000, EX6200, EX6150, EX6100, X3920, EX3700, WN2500RP, WN3000RP, EX2700, A6210,LG2200D, LG6100D, WNDAP620, WND930, WNDAP360, WNDAP350, WN203, WN802T, and D2200D.The Court held its initial scheduling conference on September 30, 2015. The Company’s invalidity contentions were submitted on November 25, 2015.Frequency Systems granted RPX Corporation members a license sometime in the fall of 2015. This was significant because the Company’s products that useWiFi chipsets of licensed companies (i.e. companies that are RPX members) became licensed to the ‘205 Patent, and essentially all of the Company’s WiFi chipproviders are licensed to the ‘205 patent through their RPX membership.Accordingly, on November 23, 2015, Frequency Systems submitted an unopposed motion to dismiss its claims for relief against the Company withoutprejudice and with all attorneys’ fees, costs of Court, and expenses borne by the party incurring same. On December 14, 2015, the Court ordered that FrequencySystems’ claims for relief against the Company be dismissed without prejudice.There was no material financial impact to the Company resulting from this litigation matter.Verifire Network Solutions v NETGEAR, Inc.On June 3, 2015, the Company was sued by a non-practicing entity named Verifire Network Solutions, LLC. (“Verifire”) in the United States District Court,Eastern District of Texas. Verifire alleges direct infringement by the Company of a single patent, US Patent No. 8,463,727 (the “'727 Patent”), entitled“Communication management system and communication management method,” and the complaint targets Netgear’s ProSAFE® business-class VPN Firewall andProSECURE® UTM Firewall product families. Verifire recently has sued several other companies in the same Court on the same patent, including Fortinet,WatchGuard, Check Point, and Hewlett Packard.The Company received an extension to answer the complaint and filed its Answer to the on August 26, 2015. On September 22, 2015, Verifire produced itspreliminary infringement contentions. Verifire asserted that claims 1 and 3 of the '727 Patent cover all network security equipment, including firewalls such as theProSAFE and ProSECURE lines manufactured by the Company.Recently, many defendants settled, as RPX Corporation appears to have signed a settlement agreement with Verifire to settle out RPX members. Theremaining defendants are: ADTRAN, Panda Distribution, Inc., and the Company. The Court held its initial scheduling conference on September 30, 2015. TheCompany’s invalidity contentions were submitted on November 25, 2015. The Company served its initial disclosures on October 21, 2015, and the Company’sinvalidity contentions were served on November 25, 2015.86Table of ContentsNETGEAR, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)Without admitting any wrongdoing or violation of law and to avoid the distraction and expense of continued litigation and the uncertainty of a jury verdict onthe merits, on January 7, 2016, the Company and Verifire settled the lawsuit for a one-time payment from the Company to Verifire in return for a perpetual,worldwide, and fully-paid-up license from Verifire to the Company to all of Verifire’s currently-held patents. The Court dismissed the case with prejudice onJanuary 26, 2016. The settlement did not have a material financial impact to the Company.Chrimar Systems, Inc. v NETGEAR, Inc.On July 1, 2015, the Company was sued by a non-practicing entity named Chrimar Systems, Inc., doing business as CMS Technologies and Chrimar HoldingCompany, LLC (collectively, “CMS”), in the Eastern District of Texas for allegedly infringing four patents-U.S. Patent Nos. 8,155,012 (the “'012 Patent”), entitled“System and method for adapting a piece of terminal equipment”; 8,942,107 (the “'107 Patent”), entitled “Piece of ethernet terminal equipment”; 8,902,760 (the“'760 Patent”), entitled “Network system and optional tethers”; and 9,019,838 (the “'838 Patent”), entitled “Central piece of network equipment” (collectively“patents-in-suit”). The patents-in-suit relate to using or embedding an electrical DC current or signal into an existing Ethernet communication link in order to transmit additionaldata about the devices on the communication link, and the specifications for the patents are identical. It appears that Chrimar has approximately 40 active cases inthe Eastern District of Texas, as well as some cases in the Northern District of California on the patents-in-suit and the parent patent to the patents-in-suit.The Company received an extension until September 15, 2015 to answer the complaint. The Company answered the complaint with a Motion to DismissChrimar’s indirect infringement claims. Chrimar subsequently filed a response to the Company’s motion to dismiss and Chrimar’s First Amended Complaint.Chrimar responded to the Motion to Dismiss by dropping its induced infringement claims and providing supplemental allegations in support of its contributoryinfringement claims with respect to the '760 Patent. For the '012, '107 and '838 Patents, Chrimar now only alleges direct infringement. Chrimar originally asserteddirect and indirect infringement for all four patents-in-suit.Subsequently, on October 5, 2015, the Company filed a Motion to Dismiss the Direct Infringement Claims Relating to the '760 Patent. Chrimar filed itsresponse to this motion to dismiss on October 15, 2015, and the Company filed its Reply on October 26, 2015. Chrimar filed an Amended Complaint on December23, 2015 to address the deficiencies in Chrimar’s complaint pointed out by the Company’s Motion to Dismiss the Direct Infringement Claims Relating to the ‘760Patent, and the Company filed its Answer to the Amended Complaint on January 10, 2016.On November 24, 2015, Chrimar served its infringement contentions on the Company, and Chrimar is generally attempting to assert that the patents in suitcover the Power over Ethernet standard (802.3af and 802.3at) used by certain of NETGEAR’s products.On December 3, 2015, the Company filed with the Court a motion to transfer venue to the District Court for the Northern District of California and theirmemorandum of law in support thereof. On December 23, 2015, Chrimar filed its response to the Company’s motion to transfer, and, on January 8, 2016, theCompany filed its reply brief in support of its motion to transfer venue. On January 15, 2016, the Court granted the Company’s motion to transfer venue to theDistrict Court for the Northern District of California.It is too early to reasonably estimate any financial impact to the Company resulting from this litigation matter.Wi3, INC. v. NETGEAR, Inc.On November 12, 2015, a lawsuit was filed against the Company by a company called Wi3, INC. (“Wi3”) in the United States District Court, WesternDistrict of New York. The patent No. 6,108,331 (the “'331 Patent”) is entitled “Single Medium Wiring Scheme for Multiple Signal Distribution in Building andAccess Port Therefor,” and was filed in 1998, and should expire in July 2018. The complaint alleges direct and indirect infringement, and accuses NETGEAR’sMoCA Network Adapters and/or Network Extenders (including at least model MCA1001 v2) of infringing at least claims 26, 27, 29, and 30. The complaint allegesno pre-suit knowledge of the patent, but seeks enhanced damages. The patent has been asserted in three prior cases, and all three cases were resolved in the earlystages. The Company has received an extension until March 11, 2016 to answer the Complaint.It is too early to reasonably estimate any financial impact to the Company resulting from this litigation matter.87Table of ContentsNETGEAR, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)IP Indemnification ClaimsIn its sales agreements, the Company typically agrees to indemnify its direct customers, distributors and resellers (the “Indemnified Parties”) for anyexpenses or liability resulting from claimed infringements by the Company's products of patents, trademarks or copyrights of third parties that are asserted againstthe Indemnified Parties, subject to customary carve outs. The terms of these indemnification agreements are generally perpetual after execution of the agreement.The maximum amount of potential future indemnification is generally unlimited. From time to time, the Company receives requests for indemnity and may chooseto assume the defense of such litigation asserted against the Indemnified Parties.Environmental RegulationThe European Union (“EU”) enacted the Waste Electrical and Electronic Equipment Directive, which makes producers of electrical goods, including homeand commercial business networking products, financially responsible for specified collection, recycling, treatment and disposal of past and future coveredproducts. The deadline for the individual member states of the EU to transpose the directive into law in their respective countries was August 13, 2004 (suchlegislation, together with the directive, the “WEEE Legislation”). Producers participating in the market were financially responsible for implementing theseresponsibilities under the WEEE Legislation beginning in August 13, 2005. The Company adopted the authoritative guidance for asset retirement andenvironmental obligations in the third quarter of fiscal 2005 and has determined that its effect did not have a material impact on the Company's consolidated resultsof operations and financial position. The WEEE Directive was recast on July 24, 2012, published on August 13, 2012, and was implemented by all member stateson February 14, 2014. The Company has determined that its effect did not have material impact on its consolidated results of operations and financial positions dueto this recasting. Similar WEEE Legislation has been or may be enacted in other jurisdictions, including in the United States, Canada, Mexico, China, India,Australia and Japan. The Company continues to monitor WEEE Legislation and similar legislation in other jurisdictions as individual countries issue theirimplementation guidance. The Company believes it has met the applicable requirements of current WEEE Legislation and similar legislation in other jurisdictions,to the extent implementation requirements has been published.Additionally, the EU enacted the Restriction of Hazardous Substances Directive (“RoHS Legislation”), the REACH Regulation, Packaging Directive and theBattery Directive. EU RoHS Legislation, along with similar legislation in China, requires manufacturers to ensure certain substances, including polybrominatedbiphenyls (“PBD”), polybrominated diphenyl ethers (“PBDE”), mercury, cadmium, hexavalent chromium and lead (except for allowed exempted materials andapplications), are below specified maximum concentration values in certain products put on the market after July 1, 2006. The RoHS Directive was recast on July21, 2011 and went into force on January 3, 2013. The Company has determined that its effect did not have material impact on its consolidated results of operationsand financial positions due to this recasting. The REACH Regulation requires manufacturers to ensure the published lists of substances of very high concern incertain products are below specified maximum concentration values. The Battery Directive controls use of certain types of battery technology in certain productsand requires mandatory marking. The Company believes it has met the requirements of the RoHS Directive Legislation, the REACH Regulation and the BatteryDirective Legislation.Additionally, the EU enacted the Energy Using Product (“EuP”) Directive, which came into force in August 2007. The EuP Directive required manufacturersof certain products to meet minimum energy efficiency performance requirements. These requirements were documented in EuP implementing measures issued forspecific product categories. The implementing measures affecting the Company's products are minimum power supply efficiencies and may include requiredequipment standby modes, which also reduce energy consumption. The EuP Directive was repealed in November 2009 and replaced by the Energy RelatedProducts ("ErP") Directive, which includes the same implementing measures of the former EuP Directive and new implementing measures applicable to theCompany's products. The Company is in compliance with applicable implementing measures of the ErP Directives since it came into force.88Table of ContentsNETGEAR, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)Note 10. Stockholders’ EquityCommon Stock Repurchase ProgramsOn October 21, 2008, October 17, 2014 and July 21, 2015, the Company’s Board of Directors authorized management to repurchase up to 6.0 million , 3.0million and 3.0 million shares of the Company’s outstanding common stock, respectively, which, at the time of authorization, were incremental to the remainingshares under the share repurchase programs. Under the authorizations, the Company may repurchase shares of its common stock, depending on market conditions,in the open market or through privately negotiated transactions. The timing and actual number of shares subject to repurchase are at the discretion of managementand are contingent on a number of factors, such as levels of cash generation from operations, cash requirements for acquisitions and the price of the Company’scommon stock. As of December 31, 2015, both share repurchase programs authorized prior to July 2015 have been completed and there were 2.2 million sharesremaining in the Company's buyback program. The Company repurchased, reported based on trade date, approximately 3.8 million shares of common stock at acost of $117.7 million during the year ended December 31, 2015 . During the years ended December 31, 2014 and December 31, 2013 , the Company repurchasedand retired, reported based on trade date, approximately 2.8 million shares of common stock at a cost of $90.6 million and approximately 2.0 million shares ofcommon stock at a cost of $63.1 million , respectively.The Company repurchased, as reported based on trade date, approximately 85,000 shares of common stock at a cost of $2.6 million , under a repurchaseprogram to help administratively facilitate the withholding and subsequent remittance of personal income and payroll taxes for individuals receiving RSUs duringthe year ended December 31, 2015 . Similarly, during the years ended December 31, 2014 and December 31, 2013 , the Company repurchased approximately82,000 shares of common stock at a cost of $2.6 million and 14,000 shares of common stock at a cost of $0.5 million , respectively, under the same program tohelp facilitate tax withholding for RSUs.These shares were retired upon repurchase. The Company’s policy related to repurchases of its common stock is to charge the excess of cost over par value toretained earnings. All repurchases were made in compliance with Rule 10b-18 under the Securities Exchange Act of 1934, as amended.Accumulated Other Comprehensive Income (Loss)The following table sets forth the changes in accumulated other comprehensive income by component, net of tax, during the years ended December 31, 2015, 2014 and 2013 (in thousands): Gains and losses on availablefor sale securities Gains and losses on derivatives TotalBalance as of December 31, 2012$28 $(24) $4 Other comprehensive income (loss) before reclassifications(24) 775 751 Amounts reclassified from accumulated other comprehensive loss— (686) (686) Net current period other comprehensive income (loss)(24) 89 65Balance as of December 31, 2013$4 $65 $69 Other comprehensive income (loss) before reclassifications(9) 292 283 Amounts reclassified from accumulated other comprehensive loss— (314) (314) Net current period other comprehensive loss(9) (22) (31)Balance as of December 31, 2014$(5) $43 $38 Other comprehensive income before reclassifications(35) 453 418 Amounts reclassified from accumulated other comprehensive loss— (453) (453) Net current period other comprehensive income(35) — (35)Balance as of December 31, 2015$(40) $43 $389Table of ContentsNETGEAR, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)The following tables provide details about significant amounts reclassified out of each component of accumulated other comprehensive income for the yearsended December 31, 2015 , 2014 and 2013 (in thousands):Details about Accumulated Other ComprehensiveIncome Components Year Ended December 31, 2015 Year Ended December 31, 2014 Year Ended December 31, 2013 Amount Reclassifiedfrom AOCI Affected Line Item in theStatement of Operations Amount Reclassifiedfrom AOCI Affected Line Item in theStatement of Operations Amount Reclassifiedfrom AOCI Affected Line Item in theStatement of OperationsGains and losses on cash flow hedge: Foreign currency forward contracts $462 Net revenue $459 Net revenue $844 Net revenueForeign currency forward contracts 6 Cost of revenue 4 Cost of revenue (9) Cost of revenueForeign currency forward contracts (15) Operating expenses (149) Operating expenses (149) Operating expenses 453 Total before tax 314 Total before tax 686 Total before tax — Tax expense (1) — Tax expense (1) — Tax expense (1) $453 Total, net of tax $314 Total, net of tax $686 Total, net of tax(1)Under our tax structure all hedging gains and losses from derivative contracts are ultimately borne by a legal entity in a jurisdiction with no income tax. 90Table of ContentsNETGEAR, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)Note 11. Employee Benefit Plans2000 Stock Option PlanIn April 2000, the Company adopted the 2000 Stock Option Plan (the “2000 Plan”). The 2000 Plan provided for the granting of stock options to employeesand consultants of the Company. Upon the Company's initial public offering in 2003, the 2000 Plan was terminated and all shares that remained reserved but notissued under the 2000 Plan at the time of its termination were transferred to the 2003 Plan. No further equity awards can be granted under the 2000 Plan.Outstanding awards under the 2000 Stock Plan remain subject to the terms and conditions of the 2000 Plan.2003 Stock PlanIn April 2003, the Company adopted the 2003 Stock Plan (the “2003 Plan”). The 2003 Plan provided for the granting of stock options to employees andconsultants of the Company. During the second quarter of 2013, the Company's 2003 Stock Plan expired. No further equity awards can be granted under the 2003Plan. Outstanding awards under the 2003 Stock Plan remain subject to the terms and conditions of the 2003 plan.2006 Long Term Incentive PlanIn April 2006, the Company adopted the 2006 Long Term Incentive Plan (the “2006 Plan”). The 2006 Plan provides for the granting of stock options, stockappreciation rights, restricted stock, performance awards and other stock awards, to eligible directors, employees and consultants of the Company. Upon adoptionof the 2006 Plan, the Company reserved 2,500,000 shares of common stock for issuance. During the period from 2008 to 2014, the Company adopted amendmentswhich increased the number of shares of the Company’s common stock that may be issued under the 2006 Plan by an additional 8.5 million shares. In addition,RSUs granted under the 2006 Plan on or after June 6, 2012 are counted against shares authorized under the plan as 1.58 shares of common stock for each sharesubject to such award. As of December 31, 2015 , approximately 1.5 million shares were reserved for future grants under the 2006 Plan.Options granted under the 2006 Plan may be either incentive stock options ("ISOs") or nonqualified stock options ("NSOs"). ISOs may be granted only toCompany employees (including officers and directors who are also employees). NSOs may be granted to Company employees, directors and consultants. Optionsgranted generally are exercisable up to ten years provided, however, that (i) the exercise price of the ISO or NSO is not less than the estimated fair value of theunderlying stock on the date of grant and (ii) the exercise price of the ISO or NSO granted to a 10% shareholder is not less than 110% of the estimated fair value ofthe underlying stock on the date of grant. Options granted under the 2006 Plan generally vest over four years , with the first tranche vesting at the end of 12 monthsand the remaining shares underlying the option vesting monthly over the remaining three years .Stock appreciation rights may be granted under the 2006 Plan subject to the terms specified by the plan administrator, provided that the term of any such rightmay not exceed ten (10) years from the date of grant. The exercise price generally cannot be less than the fair market value of the Company’s common stock on thedate the stock appreciation right is granted.Restricted stock awards may be granted under the 2006 Plan subject to the terms specified by the plan administrator. The period over which any restrictedaward may fully vest is generally no less than three years. Restricted stock awards are non-vested stock awards that may include grants of restricted stock or grantsof restricted stock units (“RSUs”). Restricted stock awards are independent of option grants and are generally subject to forfeiture if employment terminates priorto the release of the restrictions. During that period, ownership of the shares cannot be transferred. Restricted stock has the same voting rights as other commonstock and is considered to be currently issued and outstanding. RSUs do not have the voting rights of common stock, and the shares underlying the RSUs are notconsidered issued and outstanding. The Company expenses the cost of the restricted stock awards, which is determined to be the fair market value of the shares atthe date of grant, ratably over the period during which the restrictions lapse.Performance awards may be in the form of performance shares or performance units. Performance shares are awards denominated in shares of Companycommon stock and a performance unit is an award denominated in units having a dollar value or other currency, as determined by the plan administrator. The planadministrator will determine the number of performance awards that will be granted and will establish the performance goals and other conditions for payment ofsuch performance awards. The period of measuring the achievement of performance goals will be a minimum of twelve months.91Table of ContentsNETGEAR, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)Other stock-based awards may be granted under the 2006 Plan subject to the terms specified by the plan administrator. Other stock-based awards may includedividend equivalents, restricted stock awards, or amounts which are equivalent to all or a portion of any federal, state, local, domestic or foreign taxes relating to anaward, and may be payable in shares, cash, other securities or any other form of property as the plan administrator may determine.In the event of a change in control of the Company, all awards under the 2006 Plan vest in full and all outstanding performance shares and performance unitswill be paid out upon transfer.Any shares of common stock subject to an award that is forfeited, settled in cash, expires or is otherwise settled without the issuance of shares shall again beavailable for awards under the 2006 Plan. Additionally, any shares that are tendered by a participant of the 2006 Plan or retained by the Company as full or partialpayment to the Company for the purchase of an award or to satisfy tax withholding obligations in connection with an award shall no longer again be madeavailable for issuance under the 2006 Plan.Employee Stock Purchase PlanThe Company sponsors an Employee Stock Purchase Plan (the “ESPP”), pursuant to which eligible employees may contribute up to 10% of compensation,subject to certain income limits, to purchase shares of the Company’s common stock. Employees may purchase stock semi-annually at a price equal to 85% of thefair market value on the purchase date. Since the price of the shares is determined at the purchase date, the Company recognizes expense based on the 15%discount at purchase. For the years ended December 31, 2015 , 2014 , and 2013 , the Company recognized ESPP compensation expense of $0.5 million , $0.5million and $0.4 million , respectively. As of December 31, 2015 , 0.1 million shares were reserved for future issuance under the ESPP.Option ActivityStock option activity during the year ended December 31, 2015 was as follows: Number ofShares Weighted AverageExercise Price PerShare WeightedAverageRemainingContractualTerm AggregateIntrinsicValue (In thousands) (In dollars) (In years) (In thousands)Outstanding at December 31, 20143,939 $30.58 Granted296 31.34 Exercised(1,353) 30.55 Cancelled(163) 33.09 Expired(258) 34.78 Outstanding at December 31, 20152,461 $30.08 5.7 $29,109 As of December 31, 2015: Vested and expected to vest2,386 $30.02 5.6 $28,358Exercisable Options1,784 $29.26 4.7 $22,562The aggregate intrinsic values in the table above represent the total pre-tax intrinsic values (the difference between the Company’s closing stock price on thelast trading day of 2015 and the exercise price, multiplied by the number of shares underlying the in-the-money options) that would have been received by theoption holders had all option holders exercised their options on December 31, 2015 . This amount changes based on the fair market value of the Company’s stock.Total intrinsic value of options exercised for the year ended December 31, 2015 , 2014 , and 2013 was $11.4 million , $3.4 million and $4.2 million , respectively.The total fair value of options vested during the years ended December 31, 2015 , 2014 , and 2013 was $6.5 million , $10.0 million and $13.0 million ,respectively.92Table of ContentsNETGEAR, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)The following table summarizes significant ranges of outstanding and exercisable stock options as of December 31, 2015 : Options Outstanding Options ExercisableRange of Exercise PricesSharesOutstanding Weighted-AverageRemainingContractualLife Weighted-AverageExercisePrice PerShare SharesExercisable Weighted-AverageExercisePrice PerShare (In thousands) (In years) (In dollars) (In thousands) (In dollars)$10.69 - $28.79591 3.01 $20.84 585 $20.77$29.23 - $31.31573 6.65 30.86 274 30.39$31.45 - $32.54557 7.53 32.49 291 32.48$32.55 - $35.32583 5.70 34.24 504 34.32$36.80 - $40.01157 5.25 38.13 130 38.36$10.69 - $40.012,461 5.66 $30.08 1,784 $29.26RSU ActivityRSU activity during the year ended December 31, 2015 was as follows: Number ofShares Weighted AverageGrant Date Fair ValuePerShare WeightedAverageRemainingContractualTerm Aggregate Intrinsic Value (In thousands) (In dollars) (In years) (In thousands)Outstanding at December 31, 2014858 $30.68 RSUs granted525 32.16 RSUs vested(285) 31.06 RSUs cancelled(134) 31.52 Outstanding at December 31, 2015964 $31.63 1.46 $40,399Total intrinsic value of RSUs, or the release date fair value of RSUs, vested during the years ended December 31, 2015 , 2014 and 2013 was $8.9 million ,$9.0 million and $2.9 million , respectively. The total fair value or RSUs, or the grant date fair value of RSUs, vested during the years ended December 31, 2015 ,2014 and 2013 was $8.8 million , $8.4 million and $2.3 million , respectively.Valuation and Expense InformationThe Company measures stock-based compensation at the grant date based on the estimated fair value of the award. Estimated compensation cost relating toRSUs is based on the closing fair market value of the Company’s common stock on the date of grant. The fair value of Employee Stock Purchase Plan (“ESPP”) isbased on the 15% discount at purchase, since the price of the shares is determined at the purchase date. The fair value of each option award is estimated on the dateof grant using a Black-Scholes-Merton option valuation model that uses the assumptions noted in the following table. The estimated expected term of optionsgranted is derived from historical data on employee exercise and post-vesting employment termination behavior. The risk free interest rate is based on the impliedyield currently available on U.S. Treasury securities with a remaining term commensurate with the estimated expected term. Expected volatility is based onhistorical volatility over the most recent period commensurate with the estimated expected term.93Table of ContentsNETGEAR, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)The following table sets forth the weighted-average assumptions used to estimate the fair value stock option grants during the years ended December 31,2015 , 2014 and 2013 : Year Ended December 31, 2015 2014 2013Expected life (in years)4.5 4.5 4.4Risk-free interest rate1.44% 1.43% 0.72%Expected volatility39.3% 42.6% 48.05%Dividend yield— — —The weighted average estimated fair value of options granted during the years ended December 31, 2015 , 2014 and 2013 was $10.83 , $12.04 and $13.29 ,respectively.The following table sets forth stock-based compensation expense resulting from stock options, restricted stock awards, and the Employee Stock PurchasePlan included in the Company’s consolidated statements of operations (in thousands): Year Ended December 31, 2015 2014 2013Cost of revenue$1,566 $2,037 $1,577Research and development3,451 4,916 3,943Sales and marketing5,022 6,168 5,379General and administrative6,786 6,893 6,563Total$16,825 $20,014 $17,462The Company recognizes these compensation costs net of the estimated forfeitures on a straight-line basis over the requisite service period of the award,which is generally the option vesting term of four years .Total stock-based compensation cost capitalized in inventory was less than $0.5 million in the year ended December 31, 2015 , 2014 and 2013 .As of December 31, 2015 , $6.4 million of unrecognized compensation cost related to stock options, adjusted for estimated forfeitures, is expected to berecognized over a weighted-average period of 2.4 years . As of December 31, 2015 , $19.6 million of unrecognized compensation cost related to unvested RSUs,adjusted for estimated forfeitures, is expected to be recognized over a weighted-average period of 2.5 years .401(k) PlanIn April 2000, the Company adopted the NETGEAR 401(k) Plan to which employees may contribute up to 100% of salary subject to the legal maximum. Inthe first quarter of 2012, the Company began matching 50% of contributions for employees that remain active with the Company through the end of the fiscal year,up to a maximum of $6,000 in employee contributions. During the years ended December 31, 2015 , 2014 and 2013 the Company recognized $0.9 million , $1.0million and $1.0 million , respectively, in expenses related to the 401(k) match.Note 12. Segment Information, Operations by Geographic Area and Customer ConcentrationOperating segments are components of an enterprise about which separate financial information is available and is regularly evaluated by management,namely the Chief Operating Decision Maker (“CODM”) of an organization, in order to determine operating and resource allocation decisions. By this definition,the Company has identified its CEO as the CODM and operates in three specific business units: retail, commercial, and service provider. The retail business unitconsists of high performance, dependable and easy-to-use home networking, home video security, storage and digital media products. The commercial businessunit consists of business networking, storage and security solutions that bring enterprise class functionality down to the small and medium-sized business at anaffordable price. The service provider business unit consists of made-to-order and retail proven, whole home networking hardware and software solutions as wellas 4G LTE hotspots sold to service providers for sale to their94Table of ContentsNETGEAR, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)subscribers. Each business unit contains leadership focused on the product development efforts, both from a product marketing and engineering standpoint, toservice the unique needs of these customer segments. The Company believes this structure enables it to better focus its efforts on the Company's core customersegments and allows it to be more nimble and opportunistic as a company overall.The results of the reportable segments are derived directly from the Company’s management reporting system. The results are based on the Company’smethod of internal reporting and are not necessarily in conformity with accounting principles generally accepted in the United States. Management measures theperformance of each segment based on several metrics, including contribution income. Segment contribution income includes all product line segment revenuesless the related cost of sales, research and development and sales and marketing costs. Contribution income is used, in part, to evaluate the performance of, andallocate resources to, each of the segments. Certain operating expenses are not allocated to segments because they are separately managed at the corporate level.These unallocated indirect costs include corporate costs, such as corporate research and development, corporate marketing expense and general and administrativecosts, amortization of intangibles, stock-based compensation expense, restructuring and other charges, acquisition-related expense, impact to cost of sales fromacquisition accounting adjustments to inventory, litigation reserves, net, impairment charges, and interest and other income (expense), net. The Company does notevaluate operating segments using discrete asset information.Financial information for each reportable segment and a reconciliation of segment contribution income to income before income taxes is as follows (inthousands, except percentage data): Year Ended December 31, 2015 2014 2013Net revenue: Retail$614,367 $508,100 $509,924Commercial264,846 305,677 311,261Service provider421,482 579,738 548,448Total net revenues$1,300,695 $1,393,515 $1,369,633Contribution income: Retail$85,231 $76,266 $73,418 Retail contribution margin13.9% 15.0% 14.4% Commercial53,393 70,810 66,506 Commercial contribution margin20.2% 23.2% 21.4% Service Provider39,151 47,547 51,620 Service Provider contribution margin9.3% 8.2% 9.4% Total segment contribution income177,775 194,623 191,544Corporate and unallocated costs(54,501) (53,581) (51,629)Amortization of intangibles (1)(16,969) (17,573) (15,217)Stock-based compensation expense(16,825) (20,014) (17,462)Restructuring and other charges(6,398) (2,209) (5,335)Acquisition-related expense (2)— (8) (940)Impact to cost of sales from acquisition accounting adjustments to inventory(407) — (568)Litigation reserves, net2,682 1,011 (5,354)Goodwill impairment charges— (74,196) —Intangibles impairment charges— — (2,000)Interest income295 253 400Other income (expense), net(88) 2,455 (457)Income before income taxes$85,564 $30,761 $92,982________________________________(1)Amount excludes amortization expense related to patents within purchased intangibles in costs of revenues.(2)These acquisition-related charges were expensed in the period incurred and reported in the Company's consolidated statements of operations within cost of revenues and operating expense.95Table of ContentsNETGEAR, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)The Company conducts business across three geographic regions: Americas; Europe, Middle-East and Africa (“EMEA”) and Asia Pacific ("APAC'). Netrevenue by geography comprises gross revenue less such items as end-user customer rebates and other sales incentives deemed to be a reduction of net revenue perthe authoritative guidance for revenue recognition, sales returns and price protection. For reporting purposes revenue is attributed to each geographic region basedon the location of the customer.The following table shows net revenue by geography for the periods indicated (in thousands): Year Ended December 31, 2015 2014 2013United States (U.S.)$779,361 $750,933 $769,357Americas (excluding U.S.)18,385 19,957 19,961United Kingdom (U.K.)103,649 154,503 142,729EMEA (excluding U.K.)218,065 267,384 269,959APAC181,235 200,738 167,627Total net revenue$1,300,695 $1,393,515 $1,369,633Best Buy Co., Inc. and Affiliates accounted for 15% of net revenue, wholly within the retail business unit, in the year ended December 31, 2015. Nocustomers accounted for 10% or more of net revenue in the years ended December 31, 2014 and 2013.Long-lived assets include purchased intangibles, goodwill and property and equipment. The Company's property and equipment are located in the followinggeographic locations (in thousands): As of December 31, 2015 December 31, 2014United States$9,832 $12,453Canada3,586 4,375EMEA468 657China6,562 10,786APAC (excluding China)1,936 1,423 $22,384 $29,694Note 13. Fair Value Measurements (in thousands)The Company determines the fair values of its financial instruments based on a fair value hierarchy, which requires an entity to maximize the use ofobservable inputs and minimize the use of unobservable inputs when measuring fair value. The classification of a financial asset or liability within the hierarchy isbased upon the lowest level input that is significant to the fair value measurement. The fair value hierarchy prioritizes the inputs into three levels that may be usedto measure fair value:Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;Level 2: Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of theasset or liability;Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by littleor no market activity).96Table of ContentsNETGEAR, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)The following tables summarize assets and liabilities measured at fair value on a recurring basis as of December 31, 2015 and 2014: As of December 31, 2015 Total Quoted marketprices in activemarkets(Level 1) Significantotherobservableinputs(Level 2) Significantunobservableinputs(Level 3)Cash equivalents-money-market funds$10,976 $10,976 $— $—Available-for-sale securities- U.S. treasuries (1)94,993 94,993 — —Available-for-sale securities-certificates of deposit (1)147 147 — —Trading securities - mutual funds (1)1,181 1,181 — —Foreign currency forward contracts (2)3,205 — 3,205 —Total assets measured at fair value$110,502 $107,297 $3,205 $— (1)Included in short-term investments on the Company's consolidated balance sheet.(2)Included in prepaid expenses and other current assets on the Company's consolidated balance sheet. As of December 31, 2015 Total Quoted marketprices in activemarkets(Level 1) Significantotherobservableinputs(Level 2) Significantunobservableinputs(Level 3)Foreign currency forward contracts (3)$451 $— $451 $—Total liabilities measured at fair value$451 $— $451 $— (3)Included in other accrued liabilities on the Company's consolidated balance sheet. As of December 31, 2014 Total Quoted marketprices in activemarkets(Level 1) Significantotherobservableinputs(Level 2) Significantunobservableinputs(Level 3)Cash equivalents-money-market funds$4,408 $4,408 $— $—Available-for-sale securities-U.S. treasuries (1)114,935 114,935 — —Available-for-sale securities-certificates of deposit (1)158 158 — —Trading securities-mutual funds (1)802 802 — —Foreign currency forward contracts (2)2,416 — 2,416 —Total assets measured at fair value$122,719 $120,303 $2,416 $— (1)Included in short-term investments on the Company's consolidated balance sheet.(2)Included in prepaid expenses and other current assets on the Company's consolidated balance sheet.97Table of ContentsNETGEAR, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) As of December 31, 2014 Total Quoted marketprices in activemarkets(Level 1) Significantotherobservableinputs(Level 2) Significantunobservableinputs(Level 3)Foreign currency forward contracts (3)$447 $— $447 $—Total liabilities measured at fair value$447 $— $447 $—(3)Included in other accrued liabilities on the Company's consolidated balance sheet.The Company's investments in cash equivalents and available-for-sale securities are classified within Level 1 of the fair value hierarchy because they arevalued based on quoted market prices in active markets. The Company enters into foreign currency forward contracts with only those counterparties that have long-term credit ratings of A-/A3 or higher. The Company's foreign currency forward contracts are classified within Level 2 of the fair value hierarchy as they arevalued using pricing models that take into account the contract terms as well as currency rates and counterparty credit rates. The Company verifies thereasonableness of these pricing models using observable market data for related inputs into such models. Additionally, the Company includes an adjustment fornon-performance risk in the recognized measure of fair value of derivative instruments. At December 31, 2015 and December 31, 2014 , the adjustment for non-performance risk did not have a material impact on the fair value of the Company's foreign currency forward contracts. The carrying value of non-financial assetsand liabilities measured at fair value in the financial statements on a recurring basis, including accounts receivable and accounts payable, approximate fair valuedue to their short maturities.Note 14. Subsequent EventIn January 2016, the Company went through a restructuring to reduce the cost structure of the service provider business unit and supporting functions, tomatch the reduced revenue outlook and concentrate resources on long-term and profitable accounts. The Company estimates its cost will be between approximately$1.5 million and $2.5 million . These charges primarily include severance, other one-time termination benefits and other associated costs. The Company expects torecord the majority of these charges and complete the restructuring by the end of the first fiscal quarter of 2016..98Table of ContentsQUARTERLY FINANCIAL DATA(In thousands, except per share amounts)(Unaudited)The following table presents unaudited quarterly financial information for each of the Company’s last eight quarters. This information has been derived fromthe Company’s unaudited financial statements and has been prepared on the same basis as the audited consolidated financial statements appearing elsewhere in thisAnnual Report on Form 10-K. In the opinion of management, all necessary adjustments, consisting only of normal recurring adjustments, have been included tostate fairly the quarterly results. December 31, 2015 September 27, 2015June 28, 2015March 29, 2015Net revenue$360,863 $341,893$288,782$309,157Gross profit$105,416 $96,327$77,656$88,280Provision for income taxes$8,927 $10,780$7,258$10,015Net income$21,807 $15,099$3,667$8,011Net income per share—basic$0.68 $0.47$0.11$0.23Net income per share—diluted$0.66 $0.47$0.11$0.23 December 31, 2014(a)September 28, 2014June 29, 2014March 30, 2014Net revenue$353,182 $353,338$337,604$349,391Gross profit$100,474 $102,333$97,186$97,925Provision (benefit) for income taxes$(5,609) $8,847$9,698$9,037Net income (loss)$(40,353) $20,025$14,705$14,411Net income (loss) per share—basic$(1.16) $0.56$0.41$0.39Net income (loss) per share—diluted$(1.16) $0.55$0.40$0.39(a) Net loss includes a non-cash goodwill impairment charge of $74.2 million relating to the service provider business unit.99Table of ContentsItem 9.Changes in and Disagreements With Accountants on Accounting and Financial DisclosureNone.Item 9A.Controls and ProceduresManagement’s Report on Internal Control Over Financial ReportingOur management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under theExchange Act). Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of anyevaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate.Our management, including our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of our internal control overfinancial reporting as of December 31, 2015 . In making this assessment, our management used the criteria established in Internal Control—Integrated Framework(2013) , issued by The Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on management’s assessment using those criteria,our management concluded that our internal control over financial reporting was effective as of December 31, 2015 . The effectiveness of our internal control overfinancial reporting as of December 31, 2015 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in theirreport which is included in this Annual Report on Form 10-K.Changes in Internal Control Over Financial ReportingThere was no change in our internal control over financial reporting that occurred during the fourth quarter of fiscal year 2015 that has materially affected, oris reasonably likely to materially affect, our internal control over financial reporting. Evaluation of Disclosure Controls and ProceduresBased on an evaluation under the supervision and with the participation of our management (including our Chief Executive Officer and Chief FinancialOfficer), our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures as defined in Rules 13a-15(e) and15d-15(e) under the Exchange Act were effective as of the end of the period covered by this Annual Report on Form 10-K to ensure that information required to bedisclosed by us in reports that we file or submit under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified inthe SEC’s rules and forms and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, asappropriate to allow timely decisions regarding required disclosure.Item 9B.Other InformationNone.PART IIICertain information required by Part III is incorporated herein by reference from our proxy statement related to our 2016 Annual Meeting of Stockholders,which we intend to file no later than 120 days after the end of the fiscal year covered by this Form 10-K.Item 10.Directors, Executive Officers and Corporate GovernanceThe information required by this Item concerning our directors, executive officers, standing committees and procedures by which stockholders mayrecommend nominees to our Board of Directors, is incorporated by reference to the sections of our Proxy Statement under the headings “Information Concerningthe Nominees and Incumbent Nominees,” “Board and Committee Meetings,” “Audit Committee” and “Section 16(a) Beneficial Ownership ReportingCompliance,” and to the information contained in the section captioned “Executive Officers of the Registrant” included under Part I of this Annual Report on Form10-K.100Table of ContentsWe have adopted a Code of Ethics that applies to our Chief Executive Officer and senior financial officers, as required by the SEC. The current version ofour Code of Ethics can be found on our Internet site at http://www.netgear.com. Additional information required by this Item regarding our Code of Ethics isincorporated by reference to the information contained in the section captioned “Corporate Governance Policies and Practices” in our Proxy Statement.We intend to satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding an amendment to, or waiver from, a provision of our Code of Ethicsby posting such information on our website at http://www.netgear.com within four business days following the date of such amendment or waiver. Item 11.Executive CompensationThe information required by this Item is incorporated by reference to the sections of our Proxy Statement under the headings “Compensation Discussion andAnalysis,” “Executive Compensation,” “Director Compensation,” “Fiscal Year 2015 Director Compensation,” “Compensation Committee Interlocks and InsiderParticipation,” and “Report of the Compensation Committee of the Board of Directors.”Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder MattersThe additional information required by this Item is incorporated by reference to the information contained in the section captioned “Equity CompensationPlan Information” in our Proxy Statement. The additional information required by this Item is incorporated by reference to the information contained in the section captioned “Security Ownership ofCertain Beneficial Owners and Management” in our Proxy Statement. Item 13.Certain Relationships and Related Transactions, and Director IndependenceThe information required by this Item is incorporated by reference to the information contained in the section captioned “Election of Directors” and “RelatedParty Transactions” in our Proxy Statement. Item 14.Principal Accounting Fees and ServicesThe information required by this Item related to audit fees and services is incorporated by reference to the information contained in the section captioned“Ratification of Appointment of Independent Registered Public Accounting Firm” appearing in our Proxy Statement.101Table of ContentsPART IVItem 15.Exhibits, Financial Statement Schedule(a) The following documents are filed as part of this report:(1) Financial Statements. PageReport of Independent Registered Public Accounting Firm55Consolidated Balance Sheets as of December 31, 2015 and 201456Consolidated Statements of Operations for the three years ended December 31, 2015, 2014 and 201357Consolidated Statements of Comprehensive Income for the three years ended December 31, 2015, 2014 and 201358Consolidated Statements of Stockholders’ Equity for the three years ended December 31, 2015, 2014 and 201359Consolidated Statements of Cash Flows for the three years ended December 31, 2015, 2014 and 201360Notes to Consolidated Financial Statements61Quarterly Financial Data (unaudited)99Management’s Report on Internal Control Over Financial Reporting37(2) Financial Statement Schedule.The following financial statement schedule of NETGEAR, Inc. for the fiscal years ended December 31, 2015 , 2014 and 2013 is filed as part of this Form 10-K andshould be read in conjunction with the consolidated financial statements of NETGEAR, Inc.Schedule II—Valuation and Qualifying Accounts(In thousands) Balance atBeginningof Year Additions Deductions Balanceat End ofYearAllowance for doubtful accounts: Year ended December 31, 2015$1,255 $35 $(35) $1,255Year ended December 31, 20141,255 189 (189) 1,255Year ended December 31, 20131,256 277 (278) 1,255 Allowance for sales returns and warranty: Year ended December 31, 201562,376 105,987 (95,754) 72,609Year ended December 31, 201466,221 97,546 (101,391) 62,376Year ended December 31, 201363,690 104,810 (102,279) 66,221 Allowance for price protection: Year ended December 31, 20151,806 7,467 (7,148) 2,125Year ended December 31, 20144,273 7,534 (10,001) 1,806Year ended December 31, 20131,783 8,352 (5,862) 4,273(3) Exhibits.The exhibits listed in the accompanying Index to Exhibits are filed or incorporated by reference as part of this report.102Table of ContentsSIGNATURESPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Annual Report to be signedon its behalf by the undersigned, thereunto duly authorized, in the City of San Jose, State of California, on the 19th day of February 2016. NETGEAR, INC. By: /s/ PATRICK C.S. LO Patrick C.S. Lo Chairman of the Board and Chief Executive Officer103Table of ContentsPOWER OF ATTORNEYKNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Patrick C.S. Lo and Christine M.Gorjanc, and each of them, his attorneys-in-fact, each with the power of substitution, for him in any and all capacities, to sign any and all amendments to thisReport on Form 10-K and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission,hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof.Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrantand in the capacities and on the dates indicated:Signature Title Date /S/ PATRICK C.S. LO Chairman of the Board and Chief Executive Officer February 19, 2016Patrick C.S. Lo (Principal Executive Officer) /S/ CHRISTINE M. GORJANC Chief Financial Officer February 19, 2016Christine M. Gorjanc (Principal Financial and Accounting Officer) /S/ JOCELYN CARTER-MILLER Director February 19, 2016Jocelyn Carter-Miller /S/ RALPH E. FAISON Director February 19, 2016Ralph E. Faison /S/ A. TIMOTHY GODWIN Director February 19, 2016A. Timothy Godwin /S/ JEF GRAHAM Director February 19, 2016Jef Graham /S/ GREGORY J. ROSSMANN Director February 19, 2016Gregory J. Rossmann /S/ BARBARA V. SCHERER Director February 19, 2016Barbara V. Scherer /S/ JULIE A. SHIMER Director February 19, 2016Julie A. Shimer /S/ GRADY K. SUMMERS Director February 19, 2016Grady K. Summers /S/ THOMAS H. WAECHTER Director February 19, 2016Thomas H. Waechter 104Table of ContentsINDEX TO EXHIBITS Incorporated by Reference ExhibitNumber Exhibit Description Form Date Number FiledHerewith2.1 Asset Purchase Agreement, dated as of January 28, 2013, by and among the registrant, NETGEAR Holdings Limited, NETGEARInternational Limited, NETGEAR Canada Limited, NETGEAR Australia PTY, LTD, Sierra Wireless, Inc., Sierra Wireless, Inc., SierraWireless America, Inc. and Sierra Wireless (Australia) PTY LTD 10-K 2/26/2013 10.35 3.1 Amended and Restated Certificate of Incorporation of the registrant S-1 7/30/2003 3.3 3.2 Amended and Restated Bylaws of the registrant S-1 7/30/2003 3.5 4.1 Form of registrant's common stock certificate S-1 7/30/2003 4.1 10.1 Form of Indemnification Agreement for directors and officers S-1 7/30/2003 10.1 10.2# 2000 Stock Option Plan and forms of agreements thereunder S-1 7/30/2003 10.2 10.3# 2003 Stock Plan and forms of agreements thereunder, as amended 10-K 2/26/2013 10.3 10.4# 2003 Employee Stock Purchase Plan, as amended 10-K 2/26/2013 10.4 10.5# Amended and Restated 2006 Long-Term Incentive Plan and forms of agreements thereunder S-8 6/6/2014 4.3 10.6# NETGEAR, Inc. Deferred Compensation Plan 8-K 4/5/2013 10.1 10.7# NETGEAR, Inc. Executive Bonus Plan, as amended and restated April 1, 2013 DEF14A 4/16/2013 Appendix A 10.8* Warehousing Agreement, dated July 5, 2001, between the registrant and APL Logistics Americas, Ltd. S-1 7/30/2003 10.25 10.9* Distribution Operation Agreement, dated April 27, 2001, between the registrant and DSV Solutions B.V. (formerly Furness LogisticsBV) S-1 7/30/2003 10.26 10.10* Distribution Operation Agreement, dated December 1, 2001, between the registrant and Kerry Logistics (Hong Kong) Limited S-1 7/30/2003 10.27 10.11 Office Lease, dated as of September 25, 2007, by and between the registrant and BRE/Plumeria, LLC 8-K 9/27/2007 10.1 10.11a First Amendment to Office Lease, dated as of April 23, 2008, by and between the registrant and BRE/Plumeria, LLC 10-Q 5/9/2008 10.1 10.11b Second Amendment to Office Lease, dated June 25, 2015, by and between the registrant and KBSII/Plumeria, LLC X10.12# Offer Letter, dated December 3, 1999, between the registrant and Patrick C.S. Lo S-1 7/30/2003 10.5 10.12a# Amendment to Offer Letter, dated December 23, 2008, between the registrant and Patrick C.S. Lo 10-K 3/4/2009 10.51 10.13# Offer Letter, dated December 9, 1999, between the registrant and Mark G. Merrill S-1 7/30/2003 10.8 10.13a# Amendment to Offer Letter, dated December 28, 2008, between the registrant and Mark G. Merrill 10-K 3/4/2009 10.52 10.14# Employment Agreement, dated November 4, 2002, between the registrant and Michael F. Falcon S-1 7/30/2003 10.1 10.14a# Amendment to Employment Agreement, dated December 29, 2008, between the registrant and Michael F. Falcon 10-K 3/4/2009 10.49 10.15# Employment Agreement, dated November 16, 2005, between the registrant and Christine M. Gorjanc 8-K 11/22/2005 10.32 10.15a# Amendment to Employment Agreement, dated December 31, 2008, between the registrant and Christine M. Gorjanc 10-K 3/4/2009 10.50 10.15b# Amendment #2 to Employment Agreement, dated September 21, 2009, between the registrant and Christine M. Gorjanc 8-K 9/21/2009 10.1 10.16# Change of Control and Severance Agreement, dated October 5, 2009, between the registrant and Andrew W. Kim 10-Q 5/6/2014 10.1 10.17# Employment Agreement, dated July 8, 2013, between the registrant and John P. McHugh 8-K 7/11/2013 10.1 10.18# Separation Agreement and Mutual Release, dated February 26, 2014, between the registrant and David S.G. Soares 8-K 2/26/2014 10.1 10.19# Separation Agreement and Mutual Release, dated February 10, 2015, between the registrant and Michael Clegg 8-K 2/10/2015 10.1 10.20# Amended and Restated Change of Control and Severance Agreement, dated September 18, 2014, between the registrant and Jeffrey M.Capone 10-K 2/20/2015 10.22 10.21# Amendment to Employment Agreement, dated October 20, 2015, between the registrant and Michael A. Werdann X21.1 List of subsidiaries and affiliates 10-K 2/25/2014 21.1 23.1 Consent of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm X24.1 Power of Attorney (included on signature page) X31.1 Certification of Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-14(a) / 15d-14(a), as adopted pursuant toSection 302 of the Sarbanes-Oxley Act of 2002 X31.2 Certification of Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-14(a) / 15d-14(a), as adopted pursuant toSection 302 of the Sarbanes-Oxley Act of 2002 X32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-OxleyAct of 2002 X32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-OxleyAct of 2002 X101.INS XBRL Instance Document X105Table of Contents101.SCH XBRL Taxonomy Extension Schema Document X101.CAL XBRL Taxonomy Extension Calculation Linkbase Document X101.DEF XBRL Taxonomy Extension Definition Linkbase Document X101.LAB XBRL Taxonomy Extension Label Linkbase Document X101.PRE XBRL Taxonomy Extension Presentation Linkbase Document X # Indicates management contract or compensatory plan or arrangement. * Confidential treatment has been granted as to certain portions of this Exhibit. 106NETGEAR, INC.SECOND AMENDMENT TO EMPLOYMENT AGREEMENTThis second amendment (the “ Amendment ”) is made by and between Michael Werdann (the “ Executive ”) andNETGEAR, Inc. (the “ Company ” and together with the Executive hereinafter collectively referred to as the “ Parties ”) effective asof October 1, 2015.WHEREAS , the Parties previously entered into an employment agreement, dated November 3, 2003, and an amendment tosuch agreement dated December 30, 2008 (as amended, the “ Agreement ”); andWHEREAS , in connection with Executive’s promotion to Senior Vice President of Worldwide Sales, the Parties wish toamend the Agreement to update certain equity award terminology referenced therein and to make the Agreement’s change of controlterms more consistent with other executive officers of the Company.NOW, THEREFORE , for good and valuable consideration, Executive and the Company agree that the Agreement ishereby amended as follows:1. Severance . The last sentence of Section 6(a) of the Agreement shall be deleted and replaced in its entiretyby the following:“In addition, if Executive’s employment terminates other than voluntarily or for “Cause” (as defined herein), Executive willbe entitled to continue to have all stock options, restricted stock awards and all other equity awards vest during the twelvemonth period immediately following the date of such termination.”2. Change of Control/Good Reason . Section 8(a) of the Agreement shall be deleted and replaced in its entiretyby the following:“(a) If within one year following any Change of Control (as defined below) Executive’s employment is terminated withoutCause or voluntarily by Executive for Good Reason, Executive will receive two years acceleration of any unvested portion ofall stock options, restricted stock awards and all other equity awards.”3. Full Force and Effect . To the extent not expressly amended hereby, the Agreement shall remain in fullforce and effect.4. Entire Agreement . This Amendment and the Agreement constitute the full and entire understanding andagreement between the Parties with regard to the subjects hereof and thereof.5. Successors and Assigns . This Amendment and the rights and obligations of the parties hereunder shallinure to the benefit of, and be binding upon, their respective successors, assigns, and legal representatives.6. Governing Law . This Amendment will be governed by the laws of the State of California (with theexception of its conflict of laws provisions).IN WITNESS WHEREOF , each of the Parties has executed this Amendment, in the case of the Company by its dulyauthorized officer, as of the day and year set forth above.COMPANY NETGEAR, INC.By: /s/ Andrew Kim Name: Andrew Kim Title: SVP, Corp. Dev. & General Counsel Date: October 20, 2015 EXECUTIVE /s/ Michael Werdann Michael WerdannDate: October 20, 2015 SECOND AMENDMENT TO OFFICE LEASEThis Second Amendment to Office Lease (this “Second Amendment”) is made and entered into by and between KBSII 350PLUMERIA, LLC , a Delaware limited liability company (“Landlord”), as successor-in-interest to BRE/Plumeria, LLC (“OriginalLandlord”), and NETGEAR, INC. , a Delaware corporation (“Tenant”), effective as of July 1, 2015 (the “Effective Date”).W I T N E S S E T HWHEREAS, Landlord and Tenant are parties to that certain Office Lease dated September 25, 2007 originally entered into byand between Original Landlord and Tenant (the “Original Lease”), as amended by that certain First Amendment dated April 25,2008 (the “First Amendment”; the Original Lease, as amended by the First Amendment, being the “Lease”), pursuant to whichTenant is currently leasing from Landlord certain premises containing a total of approximately 142,700 rentable square feet of space(the “Premises”) comprising the entirety of the building located at 350 East Plumeria Drive, San Jose, California; andWHEREAS, the current Lease Term is scheduled to expire on March 31, 2018;WHEREAS, Landlord and Tenant desire to amend the Lease to, among other things, extend the Lease Term, all as moreparticularly provided hereinbelow;NOW, THEREFORE, pursuant to the foregoing, and in consideration of the mutual covenants and agreements contained inthe Lease and herein, Landlord and Tenant hereby agree that the Lease is hereby modified and amended as set forth below:1. Defined Terms. All capitalized terms used herein shall have the same meaning as defined in the Lease, unlessotherwise defined in this Second Amendment.2. Extension of Lease Term. Landlord and Tenant hereby agree to extend the Lease Term for an additional period oftime continuing through and expiring on September 30, 2025 (the “Extension Term”), upon and subject to all of the existing terms ofthe Lease, except as otherwise hereinafter provided.3. Base Rent. Tenant shall continue to pay Base Rent in accordance with the terms of the Lease; provided, however,commencing on the Effective Date and continuing through the Extension Term the Base Rent for the Premises shall be equal to thefollowing:Period Monthly Installment07/01/2015 – 06/30/2016 $235,455.00*07/01/2016 – 06/30/2017 $242,518.65**07/01/2017 – 06/30/2018 $249,794.2107/01/2018 – 06/30/2019 $257,288.04 1 07/01/2019 – 06/30/2020 $265,006.6807/01/2020 – 06/30/2021 $272,956.8807/01/2021 – 06/30/2022 $281,145.5807/01/2022 – 06/30/2023 $289,579.9507/01/2023 – 06/30/2024 $298,267.3507/01/2024 – 06/30/2025 $307,215.3707/01/2025 – 09/30/2025 $316,431.83* Base Rent for the time period from July 1, 2015 through December 31, 2015 shall be abated in its entirety.** (i) Base Rent for the time period from January 1, 2017 through February 28, 2017 shall be abated in its entirety.(ii) Tenant shall receive a partial abatement of the Base Rent due for the month of March 2017 in the amount of$214,962.70 so that during the month of March 2017 the Base Rent due shall equal $27,555.95 (all of the aboveabated Base Rent shall be collectively referred to herein as the “Abated Base Rent”). Notwithstanding the foregoingto the contrary, if Tenant defaults under the terms of the Lease, and such default results in the termination of theLease, then the unamortized amount of the Abated Base Rent, amortized on a straight-line basis over the ExtensionTerm, shall immediately become due and payable as part of Additional Rent under the Lease as of the day prior tosuch termination. In such event, Landlord shall be entitled to recover, in addition to any other amounts due fromTenant, the amount of the Abated Base Rent due under this Paragraph as Additional Rent.During the periods above in which the Base Rent is abated Tenant shall continue to be obligated to pay all other sumsdue under the Lease, including, without limitation, all Additional Rent (i.e., it being acknowledged and agreed thatthe abatement shall only apply to the Base Rent and shall not apply to any other charges or rent due under the Lease).Notwithstanding the foregoing to the contrary, during the Lease Term Landlord shall have the one (1) time right on atleast sixty (60) days prior written notice to pay Tenant for the full amount of any future Abated Base Rent. In theevent Landlord tenders such payment to Tenant, then the scheduled Abated Base Rent for which Landlord paidTenant for shall be cancelled and Tenant shall pay Base Rent for such months without any such abatement.4. Additional Rent. Tenant shall continue to pay all Additional Rent as set forth in the Lease throughout the ExtensionTerm, including, without limitation, Tenant’s Share of Direct Expenses; provided, however, for purposes of calculating “DirectExpenses” (as originally defined in Section 4.2.1 of the Original Lease) from and after the Effective Date, the “Management Fee” (as 2 originally defined in Section 4.2.1 of the Original Lease) included in Direct Expenses shall be equal to $70,636.50 per calendar yearduring the Extension Term (i.e., equal to $5,886.38 per month, which equates to two and one-half percent (2.5%) of the Base Rentdue using the initial rate (without taking into account any abatement) following the Effective Date).5. Condition of the Premises. Tenant hereby agrees to accept the Premises in their existing “AS-IS”, “WHERE-IS”and “WITH ALL FAULTS” condition, and Landlord shall have no obligation whatsoever to refurbish or otherwise improve thePremises at any time; provided,however, Landlord agrees to provide Tenant with an allowance of up to (but not to exceed) $713,500 (which is equal to $5.00 persquare foot of rentable area) (the “Allowance”) which Allowance may be used as a reimbursement of Tenant’s expenses paid byTenant to third-parties in connection with the installation of Alterations (as defined in Section 8.1 of the Original Lease) to thePremises performed after the Effective Date. Any such Alterations shall be constructed in accordance with the terms and conditionsof Article 8 of the Original Lease and shall be subject to Landlord’s review and approval of plans and specifications as moreparticularly described in the Lease. In the event Tenant desires any such reimbursement of the Allowance, Tenant shall notifyLandlord of the amounts that Tenant wants reimbursed (and, if reimbursed, Tenant shall include actual copies of paid invoicesreflecting amounts Tenant desires to have reimbursed) within eighteen (18) months following the Effective Date, and,notwithstanding anything herein to the contrary, if Tenant fails to so notify Landlord in writing of such amounts Tenant desires tohave reimbursed within said eighteen (18) month period, Tenant shall not be entitled to any such reimbursement and all suchAllowance shall belong to Landlord and Tenant shall have no rights thereto. Landlord’s payment of the Allowance, or such portionthereof as Tenant may be entitled to, shall be made within thirty (30) days after each and all of the following conditions shall havebeen satisfied: (a) the Alterations shall have been completed in accordance with the plans submitted to and approved by Landlord inaccordance with the Lease; (b) Tenant shall have delivered to Landlord satisfactory evidence that all mechanics’ lien rights of allcontractors, suppliers, subcontractors, or materialmen furnishing labor, supplies or materials in the construction or installation of theAlterations have been unconditionally waived, released, or extinguished; (c) Tenant shall have delivered to Landlord paid receipts orother written evidence satisfactorily substantiating the actual amount of the construction costs of the Alterations; and (d) Tenant shallnot then be in default of any of the provisions of the Lease beyond applicable notice and cure periods. If, at any time, the amountremaining in the Allowance is insufficient to pay for any requested reimbursements or expenses, then Tenant shall bear the cost ofany excess and shall promptly pay the estimated cost of such excess to the applicable payee. If Tenant’s reimbursements are lessthan the Allowance, Tenant shall not receive any credit whatsoever for the difference. Except as otherwise expressly set forth in thisparagraph, Tenant acknowledges and agrees that any and all improvements or allowances required to be performed or provided byLandlord in the Lease, if any, have been performed or satisfied.6. Assignment/Subletting. The phrase “sixty percent (60%)” as set forth in the third and twenty-fourth lines of Section14.3.1 of the Original Lease is amended to be “fifty percent 3 (50%).” In addition, the parenthetical “(up to, in the case of such tenant improvements, a maximum of Two Dollars and FiftyCenters ($2.50) per rentable square foot in the Contemplated Transfer Space)” in the fourteenth through sixteenth lines of Section14.3.1 is hereby deleted.7. Security Deposit. Landlord is currently holding a Security Deposit under the Lease in the amount of $278,265.00 asset forth in Item 8 of the Summary of Basic Lease Information of the Original Lease. Within thirty (30) days after the Effective DateLandlord agrees to refund the Security Deposit to Tenant and upon such refund the “Security Deposit” set forth in Item 8 of theSummary of Basic Lease Information of the Original Lease shall be amended to be “None.”8. Electric Vehicle Charging Stations. Within six (6) months following the Effective Date hereof, Landlord agrees toinstall three (3) electronic vehicle charging stations (with eachsuch station allowing two (2) cars to be charged at once) in the Project in a location mutually agreeable to Landlord and Tenant. Thestyle and specification of the same shall be in Landlord’s reasonable discretion and shall be subject to Tenant’s reasonable approval.9. Renewal Options. Tenant shall continue to have the two (2) five (5) year options to further extend the Lease Termin accordance with the terms and conditions of Article 31 of the Original Lease; provided, however, the phrase “expiration of theinitial Term of this Lease” as set forth in the third line of Section 31.2 of the Original Lease is amended to read “expiration of theExtension Term.”10. Cancellation Option. Tenant shall have the one-time right to terminate the Lease in accordance with and subject tothe terms and conditions of Exhibit A attached hereto and incorporated herein for all purposes.11. Energy Disclosure. Tenant acknowledges and agrees that: (a) it has received all disclosures and otherdocumentation or information for the Building required under Section 25402.10 of the California Public Resources Code and itsimplementing regulations, (b) such disclosure information is for the current occupancy and use of the Building, (c) the energy profileof the Building will vary depending on future occupancy or use of the Building, (d) the Building has not been proposed for LEEDratings, and (e) Landlord make no claims, representations or warranties regarding the future Energy Star profile of the Building.Tenant waives any claims or assertions that Landlord has failed to make the adequate energy disclosures required under applicablelaw and in no event shall Tenant assert a breach of the Lease or right to rescind the Lease (or this Second Amendment) due to anyinadequate energy disclosures. During the Lease Term, Tenant shall reasonably cooperate with Landlord in connection with anyenergy disclosures for the Project that Landlord may be required to make in the future, such cooperation shall include, withoutlimitation, execution of any reasonable release required for Landlord to access energy usage at the Project.12. CASp Disclosure. As of the Effective Date of this Second Amendment, to Landlord’s knowledge the Premiseshas not undergone inspection by a Certified Access Specialist (CASp). 4 13. No Preferential Rights or Options. Notwithstanding anything contained in the Lease to the contrary, except withrespect to the renewal options described in Paragraph 9 of this Second Amendment and the cancellation option set forth in Paragraph10 and Exhibit A of this Second Amendment, Landlord and Tenant stipulate and agree that Tenant has no preferential rights oroptions under the Lease, as herein amended, such as any rights of renewal, expansion, reduction, refusal, offer, purchase,termination, relocation or any other such preferential rights or options, such rights originally set forth in the Lease being hereby nulland void in their entirety and of no further force or effect.14. Brokers. Tenant represents and warrants that it has had no dealings with any broker or agent other than NewmarkCornish & Carey (“Broker”) in connection with the negotiation or execution of this Second Amendment, and Tenant agrees toindemnify Landlord and hold Landlord harmless from and against any and all costs, expenses or liability for commissions or othercompensations or charges claimed by any broker or agent, other than 5 Broker, with respect to this Second Amendment or the transactions evidenced hereby. Landlord shall pay a commission to Brokerpursuant to a separate written agreement between Landlord and Broker.15. Miscellaneous. With the exception of those terms and conditions specifically modified and amended herein, theherein referenced Lease shall remain in full force and effect in accordance with all its terms and conditions. In the event of anyconflict between the terms and provisions of this Second Amendment and the terms and provisions of the Lease, the terms andprovisions of this Second Amendment shall supersede and control.16. Counterparts/Facsimile Signatures. This Second Amendment may be executed in any number of counterparts,each of which shall be deemed an original, and all of such counterparts shall constitute one agreement. To facilitate execution of thisSecond Amendment, the parties may execute and exchange facsimile counterparts of the signature pages and facsimile counterpartsshall serve as originals.[REMAINDER OF PAGE LEFT BLANK] 6 IN WITNESS WHEREOF, the parties hereto have executed this Second Amendment on the dates set forth in the respectivesignature blocks below, to be effective for all purposes, however, as of the Effective Date. LANDLORD: KBSII 350 PLUMERIA, LLC,a Delaware limited liability company By:KBS Capital Advisors, LLC,a Delaware limited liability company, as agent By:/s/ Brent Carroll Brent Carroll, Senior Vice President Date:June 25, 2015 TENANT: NETGEAR, INC.,a Delaware corporation By:/s/ Andrew Kim Name:Andrew Kim Title:SVP, Corp. Dev. & General Counsel Date:June 25, 2015 7 EXHIBIT ACANCELLATION OPTIONProvided no event of default shall then exist under the Lease past applicable notice and cure periods, Tenant shall have theright at any time on or before July 1, 2022, to send Landlord irrevocable written notice (the “Termination Notice”) that Tenant haselected to terminate this Lease, effective on July 1, 2023 (“Termination Date”).If Tenant elects to terminate this Lease pursuant to the immediately preceding sentence, the effectiveness of such terminationshall be conditioned upon Tenant paying to Landlord, simultaneously with Tenant’s delivery of the Termination Notice to Landlord,a termination fee equal to the sum of $1,166,875.50, which amount is equal to the sum of (i) the unamortized portion of thebrokerage commissions paid by Landlord with respect to this Second Amendment, plus (ii) the unamortized portion of the Base Rentabatement provided by Landlord in connection with this Second Amendment, plus (iii) the unamortized portion of the Allowanceprovided in connection with this Second Amendment (as such amounts in (i) – (iii) are amortized on a straight-line basis over theperiod commencing on the Effective Date and continuing through the expiration of the Extension Term plus interest on suchamortized amount payable at a rate of eight percent (8%) per annum) (collectively the “Termination Fee”). Such Termination Fee isconsideration for Tenant’s option to terminate and shall not be applied to Base Rent, Additional Rent or any other obligation ofTenant. Except as otherwise expressly set forth in this Lease, Landlord and Tenant shall be relieved of all obligations accruing underthis Lease after the Termination Date, but not any obligations accruing under the Lease prior to the effective date of suchtermination. Both Landlord and Tenant acknowledge and agree that it would be impracticable or extremely difficult to affix damagesif Tenant terminates this Lease and that the Termination Fee set forth above represents a reasonable estimate of Landlord’s damagesin the event Tenant terminates this Lease under this Exhibit A. If Tenant does not timely deliver the Termination Notice orTermination Fee to Landlord, then this termination option shall become null and void and the Lease shall continue in full force andeffect. 8 Exhibit 23.1CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMWe hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 333-107718, 333-136892, 333-136895, 333-151638, 333-160869, 333-168349, 333-181892 and 333-196579) of NETGEAR, Inc. of our report dated February 19, 2016 relating to the financial statements, financialstatement schedule and the effectiveness of internal control over financial reporting, which appears in this Form 10-K./s/ PricewaterhouseCoopers LLPSan Jose, CaliforniaFebruary 19, 2016EXHIBIT 31.1CHIEF EXECUTIVE OFFICER CERTIFICATIONI, Patrick C.S. Lo, certify that:1.I have reviewed this annual report on Form 10-K of NETGEAR, Inc. (the “Registrant”);2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;4.The Registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))for the Registrant and have:a.Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensurethat material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities,particularly during the period in which this report is being prepared;b.Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision,to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes inaccordance with generally accepted accounting principles;c.Evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this report our conclusions about the effectivenessof the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; andd.Disclosed in this report any change in the Registrant's internal control over financial reporting that occurred during the Registrant's most recent fiscalquarter (the Registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect,the Registrant's internal control over financial reporting; and5.The Registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theRegistrant's auditors and the audit committee of the Registrant's board of directors (or persons performing the equivalent functions):a.All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likelyto adversely affect the Registrant's ability to record, process, summarize and report financial information; andb.Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal control overfinancial reporting.Date: February 19, 2016 /s/ PATRICK C.S. LO Patrick C.S. Lo Chairman and Chief Executive Officer NETGEAR, Inc.EXHIBIT 31.2CHIEF FINANCIAL OFFICER CERTIFICATIONI, Christine M. Gorjanc, certify that:1.I have reviewed this annual report on Form 10-K of NETGEAR, Inc. (the “Registrant”);2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;4.The Registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))for the Registrant and have:a.Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensurethat material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities,particularly during the period in which this report is being prepared;b.Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision,to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes inaccordance with generally accepted accounting principles;c.Evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this report our conclusions about the effectivenessof the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; andd.Disclosed in this report any change in the Registrant's internal control over financial reporting that occurred during the Registrant's most recent fiscalquarter (the Registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect,the Registrant's internal control over financial reporting; and5. The Registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theRegistrant's auditors and the audit committee of the Registrant's board of directors (or persons performing the equivalent functions):a.All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likelyto adversely affect the Registrant's ability to record, process, summarize and report financial information; andb.Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal control overfinancial reporting.Date: February 19, 2016 /s/ CHRISTINE M. GORJANC Christine M. Gorjanc Chief Financial Officer NETGEAR, Inc. EXHIBIT 32.1CERTIFICATION OF CHIEF EXECUTIVE OFFICERPURSUANT TO18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002In connection with the Annual Report of NETGEAR, Inc. (the “Company”) on Form 10-K for the year ended December 31, 2015 , as filed with the Securitiesand Exchange Commission on the date hereof (the “Report”), I, Patrick C.S. Lo, Chairman and Chief Executive Officer of the Company, certify, pursuant to 18U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (“Section 906”), that:(1)The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.Date: February 19, 2016 By: /s/ PATRICK C.S. LO Patrick C.S. Lo Chairman and Chief Executive OfficerThis certification accompanies the Form 10-K to which it relates, is not deemed filed with the Securities and Exchange Commission and is not to beincorporated by reference into any filing of the Company under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended(whether made before or after the date of this Form 10-K), irrespective of any general incorporation language contained in such filing.EXHIBIT 32.2CERTIFICATION OF CHIEF FINANCIAL OFFICERPURSUANT TO18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002In connection with the Annual Report of NETGEAR, Inc. (the “Company”) on Form 10-K for the year ended December 31, 2015 , as filed with the Securitiesand Exchange Commission on the date hereof (the “Report”), I, Christine M. Gorjanc, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C.Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (“Section 906”), that:(1) The Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934, as amended; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.Date: February 19, 2016 By: /s/ CHRISTINE M. GORJANC Christine M. Gorjanc Chief Financial Officer NETGEAR, Inc.This certification accompanies the Form 10-K to which it relates, is not deemed filed with the Securities and Exchange Commission and is not to be incorporatedby reference into any filing of the Company under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (whether madebefore or after the date of this Form 10-K), irrespective of any general incorporation language contained in such filing.

Continue reading text version or see original annual report in PDF format above