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IRBT > SEC Filings for IRBT > Form 10-Q on 2-Nov-2012All Recent SEC Filings

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Form 10-Q for IROBOT CORP


2-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion of the financial condition and results of operations of iRobot Corporation should be read in conjunction with the consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q and the audited financial statements and notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2011, which has been filed with the SEC. This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and are subject to the "safe harbor" created by those sections. In particular, statements contained in this Quarterly Report on Form 10-Q, and in the documents incorporated by reference into this Quarterly Report on Form 10-Q, that are not historical facts, including, but not limited to statements concerning new product sales, product development and offerings, Roomba, Scooba, Looj and Verro products, PackBot tactical military robots, the Small Unmanned Ground Vehicle, FirstLook, Seaglider, Ava, our home robots and defense and security robots divisions, our competition, our strategy, our market position, market acceptance of our products, seasonal factors, revenue recognition, our profits, growth of our revenues, product life cycle revenue, composition of our revenues, our cost of revenues, units shipped, average selling prices, funding of our defense and security robot development programs, operating expenses, selling and marketing expenses, general and administrative expenses, research and development expenses, and compensation costs, our projected income tax rate, our credit and letter of credit facilities, our valuations of investments, valuation and composition of our stock-based awards, and liquidity, constitute forward-looking statements and are made under these safe harbor provisions. Some of the forward-looking statements can be identified by the use of forward-looking terms such as "believes," "expects," "may," "will," "should," "could," "seek," "intends," "plans," "estimates," "anticipates," or other comparable terms. Forward-looking statements involve inherent risks and uncertainties which could cause actual results to differ materially from those in the forward-looking statements, including those risks and uncertainties described in our Annual Report on Form 10-K for the year ended December 31, 2011, as well as elsewhere in this Quarterly Report on Form 10-Q. We urge you to consider the risks and uncertainties discussed in our Annual Report on Form 10-K and in Item 1A contained herein in evaluating our forward-looking statements. We have no plan to update our forward-looking statements to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q. We caution readers not to place undue reliance upon any such forward-looking statements, which speak only as of the date made.

Overview

iRobot designs and builds robots that make a difference. For over 20 years, we have developed proprietary technology incorporating advanced concepts in navigation, mobility, manipulation and artificial intelligence to build industry-leading robots. Our Roomba floor vacuuming robot and Scooba floor washing robot perform time-consuming domestic chores in the home, while our Looj gutter cleaning robot and Verro pool cleaning robot perform tasks outside the home. Our PackBot, Small Unmanned Ground Vehicle (SUGV), and FirstLook tactical ground military robots perform battlefield reconnaissance and bomb disposal. Our 1KA Seaglider unmanned underwater robot performs long endurance oceanic missions. We sell our robots to consumers through a variety of distribution channels, including chain stores and other national retailers, and through our on-line store, and to the U.S. military and other government agencies worldwide. We maintain certifications for AS9100 and Capability Maturity Model Integration. These certifications enable us to service our military products and services.

As of September 29, 2012, we had 590 full-time employees. We have developed expertise in the disciplines necessary to build durable, high-performance and cost-effective robots through the close integration of software, electronics and hardware. Our core technologies serve as reusable building blocks that we adapt and expand to develop next generation and new products, reducing the time, cost and risk of product development. Our significant expertise in robot design and engineering, combined with our management team's experience in military and consumer markets, positions us to capitalize on the expected growth in the market for robots.

Although we have successfully launched consumer and defense and security products, our continued success depends upon our ability to respond to a number of future challenges. We believe the most significant of these challenges include increasing competition in the markets for both our consumer and defense and security products, our ability to obtain U.S. federal government funding for research and development programs, uncertainty regarding the future level of U.S. federal government defense spending, and our ability to successfully develop and introduce products and product enhancements.

During the three and nine month periods ended September 29, 2012, strong growth in our domestic and international markets for home robots products drove increases in home robots business unit revenue of 33% and 34%, respectively, as compared to the three and nine month periods ended October 1, 2011. These increases in home robots revenue resulted primarily from our domestic advertising campaign, an increase in international marketing programs by us and our international distributors, and the expanded distribution of our Roomba 700 series robot. Offsetting these increases were decreases in our defense and security business unit revenue of 38% and 53%, respectively, for the same periods due to U.S. government funding and program delays. We expect revenue generated by our home robots business unit to comprise a greater percentage of our total revenue for fiscal 2012 as compared to fiscal 2011.

During the three month period ended June 30, 2012, we completed our periodic assessment of customer defective product returns in our home robots business unit. This assessment demonstrated lower actual returns experience than the estimates included on


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our historical returns reserve. We believe these lower actual returns are the result of our sustained investment in product quality. In the second quarter, we accordingly adjusted our accrual rates to reflect these lower return rates resulting in a $3.3 million benefit to revenue, and a $0.08 per share benefit to net income per share. During the three month period ended September 29, 2012, we realized an additional benefit to revenue of $7.7 million, and a $0.18 per share benefit to net income per share, related to customer defective product returns based on amended customer agreements, which we believe resulted from our sustained investment in product quality.

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 (specifically sales returns and other allowances); valuation 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 31, 2011.


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Overview of Results of Operations

The following table sets forth our results of operations as a percentage of
revenue for the three and nine month periods ended September 29, 2012 and
October 1, 2011:



                                                  Three Months Ended                                          Nine Months Ended
                                    September 29, 2012              October 1, 2011             September 29, 2012             October 1, 2011
Revenue
Product revenue                                    95.9 %                       91.4 %                         95.6 %                      90.8 %
Contract revenue                                    4.1                          8.6                            4.4                         9.2

Total revenue                                     100.0                        100.0                          100.0                       100.0

Cost of revenue
Cost of product revenue                            53.0                         52.9                           54.9                        53.1
Cost of contract revenue                            3.5                          5.5                            3.9                         6.3

Total cost of revenue                              56.5                         58.4                           58.8                        59.4

Gross margin                                       43.5                         41.6                           41.2                        40.6

Operating expenses
Research and development                            6.7                          7.4                            8.0                         7.7
Selling and marketing                               9.8                         12.1                           13.4                        12.0
General and administrative                          9.0                          9.1                            9.7                         9.5

Total operating expenses                           25.5                         28.6                           31.1                        29.2

Operating income                                   18.0                         13.0                           10.1                        11.4
Other income (expense), net                         0.2                         (0.1 )                          0.2                         0.1

Income before income taxes                         18.2                         12.9                           10.3                        11.5
Income tax expense                                  6.1                          1.2                            3.4                         2.7

Net income                                         12.1 %                       11.7 %                          6.9 %                       8.8 %

Comparison of Three and Nine Months Ended September 29, 2012 and October 1, 2011

Revenue



                                                      Three Months Ended                                               Nine Months Ended
                                   September 29,       October 1,      Dollar       Percent        September 29,       October 1,       Dollar       Percent
                                       2012               2011         Change       Change             2012               2011          Change       Change
                                                           (In thousands)                                                  (In thousands)
Total revenue                     $       126,298     $    120,373     $ 5,925           4.9 %    $       335,550     $    334,732     $    818           0.2 %

Total revenue for the three months ended September 29, 2012 increased to $126.3 million, or 4.9%, compared to $120.4 million for the three months ended October 1, 2011. Revenue increased approximately $23.9 million, or 33.1%, in our home robots division and decreased approximately $18.0 million, or 37.5%, in our defense and security robots division.

The $23.9 million increase in revenue from our home robots division for the three months ended September 29, 2012 was driven by a 23.4% increase in units shipped and a 7.9% increase in net average selling price as compared to the three months ended October 1, 2011. In the three months ended September 29, 2012, international home robots revenue increased $9.0 million and domestic home robots revenue increased $14.9 million as compared to the three months ended October 1, 2011. Total home robots shipped in the three months ended September 29, 2012 were 416,000 units compared to 337,000 units in the three months ended October 1, 2011. The increase in home robots division revenue and units shipped was primarily attributable to a 83.3% increase in domestic sales of our home robots products and a 16.5% increase in international sales of our home robots products. The increase in domestic sales of our home robots products was primarily attributable to increased sales to domestic retail stores driven by our recent domestic advertising campaign, expanded distribution of our Roomba 700 series robot and adjustments to our return provision due to gradual improvement in returns resulting from sustained investment in product quality. The increase in international sales is due primarily to increased demand in our European market. This increase in demand was driven by demand for our Roomba 700 series robot and an increase in marketing programs by us and our international distributors. Home robots division revenue from international sales was 65.8% of total home robots division revenue in the three month period ending September 29, 2012 as compared to 75.2% in the three month period ended October 1, 2011. In addition, net average selling prices in the home robots division increased due to increased volume of higher priced products including the Roomba 700 series robot, and fewer sales of our lower priced Roomba series robots in the current quarter and compared to the prior year.


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The $18.0 million decrease in revenue from our defense and security robots division was driven by a $15.5 million decrease in defense and security robots revenue and a $5.2 million decrease in recurring contract development revenue generated under research and development contracts, partially offset by a $2.7 million increase in product life cycle revenue (spare parts, accessories). The $15.5 million decrease in defense and security robots revenue was primarily due to a decrease in sales of PackBot and SUGV units in the three month period ended September 29, 2012 as compared to the three month period ended October 1, 2011. Total defense and security robots shipped in the three months ended September 29, 2012 were 76 units compared to 194 units in the three months ended October 1, 2011. The $2.7 million increase in product life cycle revenue is due to increased sales of Packbot spares. The $5.2 million decrease in recurring contract development revenue generated under research and development contracts was primarily the result of decreases in government funding for our SUGV, Research and Maritime programs. Continued funding delays for government contracts have reduced our near-term visibility in our defense and security robots division and contributed to the decrease in period-over-period revenue in this division. We cannot predict with any certainty the extent to which these funding delays will continue.

Total revenue for the nine months ended September 29, 2012 increased to $335.6 million, or 0.2%, compared to $334.7 million for the nine months ended October 1, 2011. Revenue increased approximately $69.8 million, or 34.2%, in our home robots division and decreased approximately $68.9 million, or 52.8%, in our defense and security robots division.

The $69.8 million increase in revenue from our home robots division for the nine months ended September 29, 2012 was driven by a 21.7% increase in units shipped and a 12.2% increase in net average selling price as compared to the nine months ended October 1, 2011. In the nine months ended September 29, 2012, international home robots revenue increased $42.3 million and domestic home robots revenue increased $27.5 million as compared to the nine months ended October 1, 2011. Total home robots shipped in the nine months ended September 29, 2012 were 1,234,000 units compared to 1,014,000 units in the nine months ended October 1, 2011. The increase in home robots division revenue and units shipped was primarily attributable to a 29.0% increase in international sales of our home robots products and a 47.1% increase in domestic sales of our home robots products. The increase in international sales is due primarily to increased demand in our European and Asian markets, particularly Japan. This increase in demand was driven by our Roomba 700 series robot and an increase in marketing programs by us and our international distributors. Home robots division revenue from international sales was 68.6% of total home robots division revenue in the nine month period ending September 29, 2012 as compared to 71.4% in the nine month period ended October 1, 2011. The increase in domestic sales of our home robots products was primarily attributable to increased sales to domestic retail stores driven by our recent domestic advertising campaign, expanded distribution of our Roomba 700 series robot and adjustments to our return provision due to gradual improvement in returns resulting from sustained investment in product quality. In addition, net average selling prices in the home robots division increased due to increased volume of higher priced products including the Roomba 700 series robot, and fewer sales of our lower priced Roomba series robots in the nine month period ended September 29, 2012 compared to the nine month period ended October 1, 2011.

The $68.9 million decrease in revenue from our defense and security robots division was driven by a $46.4 million decrease in defense and security robot revenue, a $15.7 million decrease in recurring contract development revenue generated under research and development contracts, and a $6.8 million decrease in product life cycle revenue (spare parts, accessories). The $46.4 million decrease in defense and security robots revenue was primarily due to a decrease in sales of higher price PackBot and SUGV units in the nine month period ended September 29, 2012 as compared to the nine month period ended October 1, 2011. Net average selling price decreased by 63.5% due to product mix primarily attributable to FirstLook units shipped in the nine month period ended September 29, 2012 which have a lower selling price than the PackBot and SUGV units that comprised a larger portion of the units shipped in the nine-month period ended October 1, 2011. Total defense and security robots shipped in the nine months ended September 29, 2012 were 263 units compared to 500 units in the nine months ended October 1, 2011. The $15.7 million decrease in recurring contract development revenue generated under research and development contracts was primarily the result of decreases in government funding for our SUGV, Research and Maritime programs. The $6.8 million decrease in product life cycle revenue is due to reduction in spares associated with lower robot sales and a decrease in PackBot upgrades. Continued funding delays for government contracts have reduced our near-term visibility in our defense and security robots division and contributed to the decrease in period-over-period revenue in this division. We cannot predict with any certainty the extent to which these funding delays will continue.

Cost of Revenue



                                                          Three Months Ended                                                      Nine Months Ended
                                     September 29,         October 1,        Dollar        Percent         September 29,         October 1,         Dollar         Percent
                                         2012                 2011           Change        Change              2012                 2011            Change         Change
                                                                (In thousands)                                                        (In thousands)
Total cost of revenue               $        71,396       $     70,330       $ 1,066            1.5 %     $       197,188       $    198,699       $ (1,511 )          (0.8 )%
As a percentage of total revenue               56.5 %             58.4 %                                             58.8 %             59.4 %


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Total cost of revenue increased to $71.4 million in the three months ended September 29, 2012, compared to $70.3 million in the three months ended October 1, 2011. The increase is primarily due to the 23.4% increase in home robots units shipped offset by the 60.8% decrease in defense and security units shipped and the product mix of those units.

Total cost of revenue decreased to $197.2 million in the nine months ended September 29, 2012, compared to $198.7 million in the nine months ended October 1, 2011. The decrease is primarily due to the 47.4% decrease in defense and security units shipped and the product mix of those units, offset by the 21.7% increase in home robots units shipped.

Gross Margin



                                                            Three Months Ended                                                Nine Months Ended
                                        September 29,        October 1,       Dollar       Percent        September 29,        October 1,       Dollar       Percent
                                            2012                2011          Change       Change             2012                2011          Change       Change
                                                              (In thousands)                                                    (In thousands)
Total gross margin                     $        54,902      $     50,043      $ 4,859           9.7 %    $       138,362      $    136,033      $ 2,329           1.7 %
As a percentage of total revenue                  43.5 %            41.6 %                                          41.2 %            40.6 %

Gross margin increased $4.9 million, or 9.7%, to $54.9 million (43.5% of revenue) in the three months ended September 29, 2012 from $50.0 million (41.6% of revenue) in the three months ended October 1, 2011. The increase in gross margin as a percentage of revenue was the result of the home robots division gross margin increasing 5.5 percentage points and the defense and security robots division gross margin decreasing 15.7 percentage points. The 5.5 percentage point increase in the home robots division is primarily attributable to adjustments to our return provision due to gradual improvement in returns resulting from sustained investment in product quality. Also contributing to this increase is improved leverage of our overhead expense against higher revenue in the three month period ended September 29, 2012 as compared to the three month period ended October 1, 2011. The 15.7 percentage point decrease in the defense and security robots division is primarily attributable to unfavorable absorption of our overhead expense against lower revenue, scrap, rework and excess and obsolete inventory costs in the three month period ended September 29, 2012 as compared to the three month period ended October 1, 2011.

Gross margin increased $2.3 million, or 1.7%, to $138.4 million (41.2% of revenue) in the nine months ended September 29, 2012 from $136.0 million (40.6% of revenue) in the nine months ended October 1, 2011. The increase in gross margin as a percentage of revenue was the result of the home robots division gross margin increasing 4.5 percentage points offset by the defense and security robots division gross margin decreasing 29.1 percentage points. The 4.5 percentage point increase in the home robots division is attributable to adjustments to our return provision due to gradual improvement in returns resulting from sustained investment in product quality, changes in customer and product mix to higher margin home robots products including the introduction of our Roomba 700 series and Scooba 230 robots, lower warranty expense, and improved leverage of our overhead expense against higher revenue in the nine month period ended September 29, 2012 as compared to the nine month period ended October 1, 2011 The 29.1 percentage point decrease in the defense and security robots division is primarily attributable to unfavorable absorption of our overhead expense against lower revenue, scrap, rework and excess and obsolete inventory costs in the nine month period ended September 29, 2012 as compared to the nine month period ended October 1, 2011, and product mix primarily attributable to the lower-margin FirstLook units shipped in the nine month period ended September 29, 2012 compared to PackBot and SUGV units shipped in the nine month period ended October 1, 2011.

Research and Development



                                                              Three Months Ended                                                      Nine Months Ended
                                        September 29,         October 1,        Dollar         Percent          September 29,         October 1,         Dollar        Percent
                                            2012                 2011           Change         Change               2012                 2011            Change        Change
                                                                (In thousands)                                                          (In thousands)
Total research and development         $         8,406       $      8,948       $  (542 )          (6.1 )%     $        26,797       $     25,823       $    974            3.8 %
As a percentage of total revenue                   6.7 %              7.4 %                                                8.0 %              7.7 %

Research and development expenses decreased $0.5 million, or 6.1%, to $8.4 million (6.7% of revenue) in the three months ended September 29, 2012 from $8.9 million (7.4% of revenue) in the three months ended October 1, 2011. The decrease in research and development expenses is primarily due to reduced compensation associated with internal research and development projects in our defense and security business unit partially offset by increases in compensation and contractor expense associated with internal research and development projects in our home robots business unit.


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Research and development expenses increased $1.0 million, or 3.8%, to $26.8 million (8.0% of revenue) in the nine months ended September 29, 2012 from $25.8 million (7.7% of revenue) in the nine months ended October 1, 2011. The increase . . .

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