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| IRBT > SEC Filings for IRBT > Form 10-Q on 5-May-2008 | All Recent SEC Filings |
5-May-2008
Quarterly Report
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the dates of the
financial statements and the reported amounts of revenue and expenses during the
reporting periods. On an ongoing basis, we evaluate our estimates and judgments,
in particular those related to revenue recognition; valuation allowances
(specifically sales returns and other allowances); assumptions used in valuing
stock-based compensation instruments; evaluating loss contingencies; and
valuation allowances for deferred tax assets. Actual amounts could differ
significantly from these estimates. Our management bases its estimates and
judgments on historical experience and various other factors that are believed
to be reasonable under the circumstances, the results of which form the basis
for making judgments about the carrying values of assets and liabilities and the
amounts of revenue and expenses that are not readily apparent from other
sources. Additional information about these critical accounting policies may be
found in the "Management's Discussion and Analysis of Financial Condition and
Results of Operations" section included in our Annual Report on Form 10-K for
the fiscal year ended December 29, 2007.
Overview of Results of Operations
The following table sets forth our results of operations as a percentage of
revenue for the three month periods ended March 29, 2008 and March 31, 2007:
Three Months Ended
March 29, March 31,
2008 2007
Revenue
Product revenue 88.3 % 86.4 %
Contract revenue 11.7 13.6
Total revenue 100.0 100.0
Cost of Revenue
Cost of product revenue 63.2 59.5
Cost of contract revenue 10.0 12.3
Total cost of revenue 73.2 71.8
Gross profit 26.8 28.2
Operating Expenses
Research and development 6.9 10.5
Selling and marketing 20.0 20.4
General and administrative 11.9 13.5
Total operating expenses 38.8 44.4
Operating loss (12.0 ) (16.2 )
Other income, net 0.9 2.3
Loss before income taxes (11.1 ) (13.9 )
Income tax expense (benefit) (4.1 ) 0.0
Net loss (7.0 )% (13.9 )%
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Comparison of Three Months Ended March 29, 2008 and March 31, 2007
Revenue
Three Months Ended
March 29, March 31, Dollar Percent
2008 2007 Change Change
(Dollars in thousands)
Total revenue $ 57,302 $ 39,487 $ 17,815 45.1 %
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Total revenue for the three months ended March 29, 2008 increased to
$57.3 million, or 45.1%, compared to $39.5 million for the three months ended
March 31, 2007. Revenue increased approximately $10.7 million, or 55.1%, in our
home robots business and increased approximately $7.1 million, or 35.5%, in our
government and industrial business.
The $10.7 million increase in revenue from our home robots division for the
three months ended March 29, 2008 was driven by a $9.2 million increase in home
floor care robots revenue due to a 31.9% increase in units shipped and a 16.1%
increase in average selling prices, and a $1.4 million increase in product life
cycle revenue (spares and accessories), as compared to the three months ended
March 31, 2007. Total home floor care robots shipped in the three months ended
March 29, 2008 were approximately 169,000 units compared to approximately
129,000 units in the three months ended March 31, 2007. The $7.1 million
increase in revenue from our government and industrial business for the three
months ended March 29, 2008 as compared to three months ended March 31, 2007 was
due to a $5.6 million increase in product sales of our military robots driven by
a 60.8% increase in units shipped, 156 units compared to 97 units, partially
offset by an 8.0% decrease in associated net average selling prices related to
product mix primarily attributable to expansion of our military product line
into lower priced models. In addition, there was an increase of $1.3 million in
recurring contract development revenue generated under funded research and
development contracts.
Cost of Revenue
Three Months Ended
March 29, March 31, Dollar Percent
2008 2007 Change Change
(Dollars in thousands)
Total cost of revenue $ 41,942 $ 28,370 $ 13,572 47.8 %
As a percentage of total revenue 73.2 % 71.8 %
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Total cost of revenue increased to $41.9 million in the three months ended
March 29, 2008, compared to $28.4 million in the three months ended March 31,
2007. The increase is primarily due to higher costs associated with the 31.9%
increase in home robot unit sales and 60.8% increase in government and
industrial unit sales.
The home robots division cost of revenue increased as a percent of revenue by
3.5 percentage points in the three months ended March 29, 2008 as compared to
the three months ended March 31, 2007. This increase was primarily attributable
to shipments to Linens 'N Things for which we recorded costs, but did not
recognize revenue due to collectability concerns given their financial condition
and recent bankruptcy filing.
The government and industrial robots division cost of revenue decreased as a
percent of revenue by 0.7 percentage points in the three months ended March 29,
2008 as compared to the three months ended March 31, 2007. This was due to a
16.2% decrease in average unit costs related to product mix primarily
attributable to expansion of our military product line into lower priced models
in our government and industrial division.
Gross Profit
Three Months Ended
March 29, March 31, Dollar Percent
2008 2007 Change Change
(Dollar in thousands)
Total gross profit $ 15,360 $ 11,117 $ 4,243 38.2 %
As a percentage of total revenue 26.8 % 28.2 %
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Gross profit increased $4.2 million, or 38.2%, to $15.4 million (26.8% of revenue) in the three months ended March 29, 2008, from $11.1 million (28.2% of revenue) in the three months ended March 31, 2007. The decrease in gross profit as a percentage of revenue in the three months ended March 29, 2008 compared to the three months ended March 31, 2007 was the result of the home robots division gross profit decreasing 3.5 percentage points, partially offset by the government and industrial division increasing 0.7 percentage points. The 3.5 percentage point decrease in the home robots division is primarily attributable to shipments to Linens 'N Things for which we recorded costs but did not recognize revenue due to collectability concerns given their financial condition and recent bankruptcy filing. The government and industrial increase was primarily the result of overhead leverage.
Research and Development
Three Months Ended
March 29, March 31, Dollar Percent
2008 2007 Change Change
(Dollars in thousands)
Total research and development expense $ 3,973 $ 4,156 $ (183 ) (4.4 %)
As a percentage of total revenue 6.9 % 10.5 %
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Research and development expenses decreased by $0.2 million, or 4.4%, to
$4.0 million (6.9% of revenue) in the three months ended March 29, 2008, from
$4.2 million (10.5% of revenue) for the three months ended March 31, 2007. The
decrease in research and development expenses is primarily due to a decrease in
material costs associated with internal research and development projects.
Given the seasonality of our business and the impact on quarterly revenues,
research and development expenses are expected to fluctuate as a percent of
revenue throughout the year.
Overall research and development headcount decreased to 104 at March 29, 2008
compared to 107 as of March, 31, 2007, a decrease of 3 employees or 3%.
In addition to our internal research and development activities discussed
above, we incur research and development expenses under funded development
arrangements with both governments and industrial third parties. For the three
months ended March 29, 2008, these expenses amounted to $5.7 million compared to
$4.9 million for the three months ended March 31, 2007. In accordance with
accounting principles generally accepted in the United States, these expenses
have been classified as cost of revenue rather than research and development
expense. Headcount for research and development under funded development
arrangements increased to 65 at March 29, 2008 compared to 60 at March 31, 2007,
an increase of 5 employees or 8%.
Selling and Marketing
Three Months Ended
March 29, March 31, Dollar Percent
2008 2007 Change Change
(Dollars in thousands)
Total selling and marketing expense $ 11,458 $ 8,049 $ 3,409 42.4 %
As a percentage of total revenue 20.0 % 20.4 %
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Selling and marketing expenses increased by $3.4 million, or 42.4%, to
$11.5 million (20.0% of revenue) in the three months ended March 29, 2008 from
$8.0 million (20.4% of revenue) in the three months ended March 31, 2007. The
increase was primarily driven by increases of $1.8 million in television, online
and print media and $1.0 million in direct fulfillment related expenses due
primarily to a 50.7% growth in our direct business. Our direct business, which
carries a higher selling and marketing cost per revenue dollar than retail
sales, accounted for 26.1% of our home robots division revenue in the three
months ended March 29, 2008 compared to 26.8% in the three months ended
March 31, 2007. Marketing consulting and research increased by $0.6 million as
compared to the three months ended March 31, 2007.
Overall selling and marketing headcount increased to 36 at March 29, 2008
compared to 29 as of March 31, 2007, an increase of 7 employees or 24.1% growth,
primarily due to headcount growth in our overseas territories.
General and Administrative
Three Months Ended
March 29, March 31, Dollar Percent
2008 2007 Change Change
(Dollars in thousands)
Total general and administrative expense $ 6,778 $ 5,327 $ 1,451 27.2 %
As a percentage of total revenue 11.9 % 13.5 %
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General and administrative expenses increased by $1.5 million, or 27.2%, to
$6.8 million (11.8% of revenue) in the three months ended March 29, 2008 from
$5.3 million (13.5% of revenue) in the three months ended March 31, 2007. The
increase in general and administrative expenses was driven by increases of
$0.6 million in compensation expense due to increased headcount, $0.3 million in
stock-based compensation, $0.3 million in bad debt expense associated with
collectability concerns of receivables due from Linens 'N Things given their
financial condition and recent bankruptcy filing, and $0.2 million in various
other expenses, over the comparable period last year.
Overall general and administrative headcount increased to 97 at March 29,
2008 compared to 74 as of March 31, 2007, an increase of 23 employees or 31.1%
growth.
For the full fiscal year 2008, we expect total operating expenses consisting
of Research and Development, Selling and Marketing, and General and
Administrative to be approximately 31% to 33% of revenue.
Other Income, Net
Three Months Ended
March 29, March 31, Dollar Percent
2008 2007 Change Change
(Dollars in thousands)
Total other income, net $ 495 $ 931 $ (436 ) (46.8 %)
As a percentage of total revenue 0.9 % 2.3 %
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Other income, net amounted to $0.5 million for the three months ended
March 29, 2008 compared to $1.0 million for the three months ended March 31,
2007.
Other income, net was directly related to interest income resulting from the
investment in auction rate securities and money market accounts. The lower other
income, net for the three month period ended March 29, 2008 as compared to the
three month period ended March 31, 2007 is attributable to lower average auction
rate securities and money market account balances and due to reduced interest
rates earned on the portfolio.
Income Tax Provision
Three Months Ended
March 29, March 31, Dollar Percent
2008 2007 Change Change
(Dollars in thousands)
Total income tax provision (benefit) $ (2,349 ) $ 17 $ (2,366 ) N/A
As a percentage of total revenue (4.1 %) 0.0 %
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In the three months ending March 29, 2008, we recorded a $2.3 million tax
benefit based on a projected effective 2008 income tax rate of 37%.
Liquidity and Capital Resources
At March 29, 2008, our principal sources of liquidity were cash and cash
equivalents totaling $22.9 million and accounts receivable of $21.9 million.
As of March 29, 2008, we held auction rate securities with a par value of
approximately $17.5 million and a fair value of approximately $15.4 million. The
fair values of these securities are estimated utilizing a discounted cash flow
model which also considered limited secondary market indicators as of March 29,
2008. These analyses consider, among other things, the collateralization
underlying the security investments, the creditworthiness of the counterparty,
and the timing of expected future cash flows. These securities were also
compared, when possible, to other observable market data with similar
characteristics to the securities held by us. As
a result of the temporary declines in fair value for our auction rate
securities, which we attribute to liquidity issues of the securities rather than
credit issues, we have recorded an unrealized loss of $2.1 million to
Accumulated other comprehensive loss on the balance sheet. A substantial
majority of the underlying assets of these auction rate securities are student
loans which are backed by the federal government under the Federal Family
Education Loan Program. In February 2008, auctions began to fail for these
securities and each auction since then has failed. Based on the overall failure
rate of these auctions, the frequency of the failures, and the underlying
maturities of the securities, a portion of which are greater than 30 years, we
have classified these investments as long-term assets on our balance sheet.
If the issuers of our auction rate securities are unable to successfully
close future auctions or refinance their debt in the near term and their credit
ratings deteriorate, we may in the future be required to record additional
unrealized losses or an impairment charge on these investments. Based on our
expected operating cash flows and our other sources of cash, we do not
anticipate that the current lack of liquidity on these investments will affect
our ability to execute our current business plan.
We manufacture and distribute our products through contract manufacturers and
third-party logistics providers. We believe that this approach gives us the
advantages of relatively low capital investment and significant flexibility in
scheduling production and managing inventory levels. By leasing our office
facilities, we also minimize the cash needed for expansion. However, cash flow
will be impacted in the coming months as we finalize the build out of new leased
facilities for occupancy during the second quarter of 2008. Accordingly, our
capital spending is generally limited to leasehold improvements, computers,
office furniture and product-specific production tooling and test equipment. In
the three-month periods ended March 29, 2008 and March 31, 2007, we spent
$3.9 million, and $1.8 million, respectively, the majority of which was for
leasehold improvements.
Discussion of Cash Flows
Net cash provided by our operating activities in the three months ended
March 29, 2008 was $0.2 million compared to net cash provided by operating
activities of $2.4 million in the three months ended March 31, 2007. The cash
provided by our operating activities in the three months ended March 29, 2008
was primarily due to a decrease in accounts receivable (including unbilled
revenue) of $25.3 million, partially offset by a net loss of $4.0 million, a
decrease in accounts payable of $16.7 million, a decrease in accrued expenses of
$2.0 million, an increase in inventory of $1.0 million and an increase in other
assets of $4.1 million. In addition, in the three months ended March 29, 2008,
we had depreciation and amortization expenses of approximately $1.6 million and
stock-based compensation of $0.9 million, both of which are non-cash expenses.
The cash provided by our operating activities in the three months ended
March 31, 2007 was primarily due to a decrease in accounts receivable (including
unbilled revenue) of $12.7 million, a decrease in inventory of $4.7 million, and
a decrease in other assets of $1.0 million, partially offset by a net loss of
$5.5 million and a net decrease in liabilities of $12.4 million. In addition, in
the three months ended March 31, 2007, we had depreciation and amortization
expenses of approximately $1.2 million and stock-based compensation of
$0.7 million, both of which are non-cash expenses.
Net cash used by our investing activities was $4.9 million in the three
months ended March 29, 2008 compared to net cash provided by our investing
activities of $2.6 million in the three months ended March 31, 2007. Investing
activities in the three months ended March 29, 2008 represent the sale of
investments of $29.0 million, offset by the purchase of investments of
$30.0 million and the purchase of capital equipment and leasehold improvements
of $3.9 million. Investing activities in the three months ended March 31, 2007
represent the purchase of short-term investments of $15.4 million and capital
equipment of $1.8 million, offset by the sale of short-term investments of
$19.8 million.
Net cash provided by our financing activities was approximately $0.8 million
in the three months ended March 29, 2008 compared to net cash used by our
financing activities of $1.2 million in the three months ended March 31, 2007.
Included in the financing activities for the three months ended March 29, 2008
was $0.6 million in proceeds from the exercise of stock options. Net cash used
by our financing activities for the three months ended March 31, 2007 includes a
$1.6 million payment by us of the minimum tax withholding obligation relating to
a stock option exercise during the period. This figure was offset by
$0.4 million of proceeds from the exercise of stock options.
Working Capital Facility
On June 5, 2007, we entered into a $35.0 million unsecured revolving credit
facility with Bank of America, N.A. to replace our expired working capital line
of credit with Bank of America. The credit facility will be available to fund
working capital and other corporate purposes. The interest on loans under our
working capital line of credit will accrue, at our election, at either (i) Bank
of America's prime rate minus 1% or (ii) the Eurodollar rate plus 1.25%. The
credit facility will terminate and all amounts outstanding thereunder will be
due and payable in full on June 5, 2010. As of March 29, 2008, we had letters of
credit outstanding of $2.1 million and $32.9 million available under our working
capital line of credit. This credit facility contains customary terms and
conditions for credit facilities of this type, including restrictions on our
ability to incur or guaranty additional indebtedness, create liens, enter into
transactions with affiliates, make loans or investments, sell assets, pay
. . .
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