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| IRBT > SEC Filings for IRBT > Form 10-K on 15-Feb-2013 | All Recent SEC Filings |
15-Feb-2013
Annual Report
The information contained in this section has been derived from our consolidated
financial statements and should be read together with our consolidated financial
statements and related notes included elsewhere in this Annual Report on
Form 10-K. This Annual Report on Form 10-K contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities and Exchange Act of 1934, as amended, or the
Exchange Act, and are subject to the "safe harbor" created by those sections. In
particular, statements contained in this Annual Report on Form 10-K that are not
historical facts, including, but not limited to statements concerning new
product sales, product development and offerings, Roomba, Scooba, Looj, Mint and
Verro products, PackBot tactical military robots, the Small Unmanned Ground
Vehicle, Ava, our home robots and defense and security robots business units,
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. We urge you to consider the risks and uncertainties discussed in
greater detail under the heading "Risk Factors" in evaluating our
forward-looking statements. We have no plans to update our forward-looking
statements to reflect events or circumstances after the date of this report. 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, Scooba floor washing
robot and Mint floor sweeping 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 and Small Unmanned Ground Vehicle
(SUGV) tactical ground military robots perform battlefield reconnaissance and
bomb disposal. 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 for certain programs within our defense
and security business unit.
As of December 29, 2012, we had 534 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 defense 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, and our ability to successfully develop and
introduce products and product enhancements.
Our total revenue for 2012 was $436.2 million, which represents a 6% decrease
from 2011 revenue of $465.5 million. Revenue for 2012 in our home robots
business increased $78.2 million compared to 2011 and represented 82% of our
total 2012 revenue compared to 60% in 2011. The increase in home robots revenue
was the result of growth in both domestic and international markets. Revenue for
2012 in our defense and security business decreased by $107.5 million compared
to 2011 as a direct result of troop withdrawals in Afghanistan, program
cancellations and ongoing budget reductions within the U.S. government. We
anticipate that our business performance over the next few years will be
primarily driven by our rapidly growing home technology business and expect that
our home robots revenue will comprise approximately 90% of our total revenue in
the near term.
During 2012, we recorded favorable adjustments to our home robots business
revenue resulting from reductions to our defective returns provision that were
directly attributable to lower defective returns experience and contractual
modifications limiting our defective returns liability with certain customers.
We also recorded favorable adjustments to our cost of product revenue relating
to reductions in our international warranty accrual for our home robots business
that were directly attributable to declining warranty cost experience. Both the
lower defective returns and warranty cost experience are related to our
sustained improvements in product quality for which we expect to receive
continuing benefits in the foreseeable future. Offsetting these favorable
adjustments were increases to our product cost of revenue resulting from
reserves established for excess inventory caused by the significant reduction in
sales in our defense and security business during the year. Additionally, we
recorded restructuring charges during 2012 associated with the write-off of
certain assets and the recording of severance related costs, the majority of
which related to a realignment of our cost structure due to the decline in our
defense and security business. Additionally, we closed our North Carolina
office, where our Maritime business formerly operated, and moved the research
component of that business to our Bedford, Massachusetts location. The net
impact of these adjustments was an increase to our 2012 net income and earnings
per share of approximately $6.6 million and $0.23, respectively.
On October 1, 2012, we acquired privately-held Evolution Robotics, Inc., the
developer of Mint and Mint Plus automatic floor cleaning robots based in
Pasadena, California, for approximately $74.5 million, net of cash received. Our
2012 net income and earnings per share were negatively impacted by $4.7 million
and $0.17, respectively, as a result of the inclusion of Evolution Robotics
operations as of the October 1, 2012 acquisition date. We currently expect the
Evolution Robotics operations to have a dilutive effect on our earnings through
the third quarter of 2013 and to become accretive beginning in the fourth
quarter of 2013.
Revenue
We currently derive revenue from product sales, government research and
development contracts, and commercial research and development contracts.
Product revenue is derived from the sale of our various home cleaning robots and
defense and security robots and related accessories. Research and development
revenue is derived from the execution of contracts awarded by the U.S. federal
government, other governments and a small number of other partners. In the
future, we expect to derive increasing revenue from product maintenance and
support services due to a focused effort to market these services to the
expanding installed base of our robots.
We currently derive a majority of our product revenue from the sale of our home
cleaning robots, and to a lesser extent, our PackBot and SUGV tactical military
robots. For the fiscal years ended December 29, 2012 and December 31, 2011,
product revenues accounted for 95.9% and 91.6% of total revenue, respectively.
For the fiscal years ended December 29, 2012 and December 31, 2011, our funded
research and development contracts accounted for approximately 4.1% and 8.4% of
our total revenue, respectively. We expect to continue to perform funded
research and development work with the intent of leveraging the technology
developed to advance our new product development efforts. In the future, based
on changes in operational needs from the U.S. armed forces, and significant
pressures on U.S. spending levels, we anticipate that revenue from product sales
to the U.S. armed forces will decrease in the near term. In addition, we expect
that revenue from funded research and development contracts could decrease on an
absolute dollar basis.
For the fiscal years ended December 29, 2012 and December 31, 2011,
approximately 75.4% and 74.0%, respectively, of our home robot product revenue
resulted from sales to 15 customers. For fiscal 2012 and fiscal 2011, the
customers were comprised of both U.S. retailers and international distributors.
Direct-to-consumer revenue generated through our domestic and international
on-line stores accounted for 6.3% of our home robot product revenue for the
fiscal year ended December 29, 2012 compared to 9.6% in the fiscal year ended
December 31, 2011. We typically sell our recently launched products direct
on-line, and then subsequently offer these products through other channels of
distribution. In addition, 79.5% and 88.4% of defense product revenue, and 95.2%
and 95.7% of funded research and development contract revenue, resulted from
orders and contracts or subcontracts with the U.S. federal government in the
fiscal years ended December 29, 2012 and December 31, 2011, respectively.
For the fiscal years ended December 29, 2012 and December 31, 2011, sales to
non-U.S. customers accounted for 57.3% and 45.5% of total revenue, respectively.
Our revenue from product sales is generated through sales to our retail
distribution channels, our distributor network and to certain U.S. and foreign
governments. We recognize revenue from the sales of home robots under the terms
of the customer agreement upon transfer of title and risk of loss to the
customer, net of estimated returns, provided that collection is determined to be
reasonably assured and no significant obligations remain. During 2012, we
recorded favorable adjustments to our home robots business revenue resulting
from reductions to our defective returns provision that were directly
attributable to lower defective returns experience and contractual modifications
limiting our defective returns liability with certain customers.
Revenue from our defense and security robot sales and revenue from funded
research and development contracts are occasionally influenced by the
September 30 fiscal year-end of the U.S. federal government. In addition, our
revenue can be affected by the timing of the release of new products and the
size and timing of contract awards from defense and other government agencies.
Historically, revenue from consumer product sales has been significantly
seasonal, with a majority of our consumer product revenue generated in the
second half of the year (in advance of the holiday season). As a result of the
growth of our international consumer business, which is less seasonal than our
domestic consumer business, our consumer product revenue is currently spread
more evenly throughout the year.
Cost of Revenue
Cost of product revenue includes the cost of raw materials and labor that go
into the development and manufacture of our products as well as manufacturing
overhead costs such as manufacturing engineering, quality assurance, logistics
and warranty costs. For the fiscal years ended December 29, 2012 and
December 31, 2011, cost of product revenue was 57.3% and 57.9% of total product
revenue, respectively. The decrease in cost of product revenue as a percentage
of revenue was driven primarily by unfavorable absorption of our overhead
expense against lower revenue, restructuring charges, scrap, rework and excess
and obsolete inventory costs in our defense and security business unit, offset
by a shift in our product mix to higher margin home robot products and favorable
adjustments relating to reductions in our international warranty accrual for our
home robots business that were directly attributable to declining warranty cost
experience. Raw material costs, which are our most significant cost items, can
fluctuate materially on a periodic basis, although many components have been
historically stable. Additionally, unit costs can vary significantly depending
on the mix of products sold. There can be no assurance that our costs of raw
materials will not increase. Labor costs also comprise a significant portion of
our cost of revenue. We outsource the manufacture of our home robots to contract
manufacturers in China. While labor costs in China traditionally have been
favorable compared to labor costs elsewhere in the world, including the United
States, we believe that labor in China is becoming more scarce. In addition
fluctuations in currency exchange rates could increase the cost of labor.
Consequently, the labor costs for our home robots could increase in the future.
Cost of contract revenue includes the direct labor costs of engineering
resources committed to funded research and development contracts, as well as
third-party consulting, travel and associated direct material costs.
Additionally, we include overhead expenses such as indirect engineering labor,
occupancy costs associated with the project resources, engineering tools and
supplies and program management expenses. For the fiscal years ended December
29, 2012 and December 31, 2011, cost of contract revenue was 94.9% and 67.9% of
total contract revenue, respectively.
Gross Margin
Our gross margin as a percentage of revenue varies according to the mix of
product and contract revenue, the mix of products sold, total sales volume, the
level of defective product returns, and levels of other product costs such as
warranty, scrap, re-work and manufacturing overhead. For the years ended
December 29, 2012 and December 31, 2011, gross margin was 41.2% and 41.3% of
total revenue, respectively. The decrease in margin was driven primarily by
unfavorable absorption of our overhead expense against lower revenue,
restructuring charges, scrap, rework and excess and obsolete inventory costs in
our defense and security business unit, offset by product mix to higher margin
home robot products, favorable adjustments to our return provision due to
gradual improvement in returns resulting from sustained investment in product
quality, and favorable adjustments relating to reductions in our international
warranty accrual for our home robots business that were directly attributable to
declining warranty cost experience.
Research and Development Expenses
Research and development expenses consist primarily of:
• salaries and related costs for our engineers;
• costs for high technology components used in product and prototype development; and
• costs of test equipment used during product development.
We have significantly expanded our research and development capabilities and expect to continue to expand these capabilities in the future. We are committed to consistently maintaining the level of innovative design and development of new products as we strive to enhance our ability to serve our existing consumer and military markets as well as new markets for
robots. We anticipate that research and development expenses will increase in
absolute dollars but remain relatively consistent as a percentage of revenue in
the foreseeable future.
For the fiscal years ended December 29, 2012 and December 31, 2011, research and
development expense was $37.2 million and $36.5 million, or 8.5% and 7.8% of
total revenue, respectively.
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 other third parties. For the fiscal years ended
December 29, 2012 and December 31, 2011, these expenses amounted to
$16.8 million and $26.5 million, respectively. In accordance with generally
accepted accounting principles, these expenses have been classified as cost of
revenue rather than research and development expense. For the years ended
December 29, 2012 and December 31, 2011, the combined investment in future
technologies, classified as cost of revenue and research and development
expense, was $54.0 million and $63.0 million, respectively.
Selling, General and Administrative Expenses
Our selling, general and administrative expenses consist primarily of:
• salaries and related costs for sales and marketing personnel;
• salaries and related costs for executives and administrative personnel;
• advertising, marketing and other brand-building costs;
• fulfillment costs associated with direct-to-consumer sales through our on-line store;
• customer service costs;
• professional services costs;
• information systems and infrastructure costs;
• travel and related costs; and
• occupancy and other overhead costs.
We anticipate that selling, general and administrative expenses will increase in
absolute dollars but remain relatively consistent as a percentage of revenue in
the foreseeable future as we continue to build the iRobot brand and also
maintain company profitability.
For the fiscal years ended December 29, 2012 and December 31, 2011, selling,
general and administrative expense was $117.3 million and $102.3 million, or
26.9% and 22.0% of total revenue, respectively.
Fiscal Periods
We operate and report using a 52-53 week fiscal year ending on the Saturday
closest to December 31. Accordingly, our fiscal quarters will end on the
Saturday that falls closest to the last day of the third month of each quarter.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with accounting
principles generally accepted in the United States of America. The preparation
of these consolidated financial statements requires us to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenue,
costs and expenses, and related disclosures. We evaluate our estimates and
assumptions on an ongoing basis. Our actual results may differ from these
estimates.
We believe that of our significant accounting policies, which are described in
the notes to our consolidated financial statements, the following accounting
policies involve a greater degree of judgment and complexity. Accordingly, we
believe that the following accounting policies are the most critical to aid in
fully understanding and evaluating our consolidated financial condition and
results of operations.
Revenue Recognition
We recognize revenue from sales of consumer products under the terms of the
customer agreement upon transfer of title and risk of loss to the customer,
which is typically upon the delivery of the product, provided the price is fixed
or determinable, collection is determined to be reasonably assured and no
significant obligations remain. Sales to domestic resellers are typically
subject to agreements allowing for limited rights of return for defective
products only, rebates and price protection. Accordingly, we reduce revenue for
our estimates of liabilities for these rights of return at the time the related
sale is recorded. We establish a provision for sales returns for products sold
by domestic resellers directly based on historical return experience and other
relevant data. Our international distributor agreements do not currently allow
for product returns and, as a result, no reserve for returns is established for
this group of customers. We have aggregated and analyzed historical returns from
domestic resellers and end users which form the basis of our estimate of future
sales returns by resellers or end users. When a right of return exists, the
provision for these estimated returns is recorded as a reduction of revenue at
the time that the related revenue
is recorded. If actual returns from retailers differ significantly from our
estimates, such differences could have a material impact on our results of
operations for the period in which the actual returns become known. Our returns
reserve is calculated as a percentage of gross consumer product revenue. A small
increase or decrease in our actual experience of returns could have a material
impact on our quarterly and annual results of operations. The estimates for
returns are adjusted periodically based upon historical rates of returns. The
estimates and reserve for rebates and price protection are based on specific
programs, expected usage and historical experience. Actual results could differ
from these estimates. If future trends or our ability to estimate were to change
significantly from those experienced in the past, incremental reductions or
increases to revenue may result based on this new experience.
Under cost-plus research and development contracts, we recognize revenue based
on costs incurred plus a pro-rata portion of the total fixed fee. Costs and
estimated gross margins on contracts are recorded as work is performed based on
the percentage that incurred costs bear to estimated total costs utilizing the
most recent estimates of costs and funding. We recognize revenue on firm fixed
price (FFP) contracts using the percentage-of-completion method. For government
product FFP contracts, revenue is recognized as the product is shipped or in
accordance with the contract terms. Changes in job performance, job conditions
and estimated profitability, including those arising from final contract
settlements and government audit, may result in revisions to costs and income,
and are recorded or recognized, as the case may be, in the period in which the
revisions are determined. Since many contracts extend over a long period of
time, revisions in cost and funding estimates during the progress of work have
the effect of adjusting earnings applicable to past performance in the current
period. When the current contract estimate indicates a loss, provision is made
for the total anticipated loss in the current period. Revenue earned in excess
of billings, if any, is recorded as unbilled revenue. Billings in excess of
revenue earned, if any, are recorded as deferred revenue.
Accounting for Stock-Based Awards
We recognized $4.6 million of stock-based compensation expense during the fiscal
year ended December 29, 2012 for stock options. The unamortized fair value as of
December 29, 2012 associated with these grants was $10.8 million with a
weighted-average remaining recognition period of 2.54 years.
The risk-free interest rate is derived from the average U.S. Treasury constant
maturity rate, which approximates the rate in effect at the time of grant,
commensurate with the expected life of the instrument. The dividend yield is
zero based upon the fact that we have never paid and have no present intention
to pay cash dividends. Prior to 2010, the expected term calculation was based
upon the simplified method provided under the relevant authoritative guidance.
During 2010, we began to rely solely on company specific historical data to
calculate the expected term. Given our initial public offering in November 2005
and the resulting short history as a public company, we could not rely solely on
company specific historical data for purposes of establishing expected
volatility. Consequently, prior to 2010, we performed an analysis that included
company specific historical data combined with data of several peer companies
with similar expected option lives to develop expected volatility assumptions.
During 2010, we began to rely solely on company specific historical data for
purposes of establishing expected volatility.
Based upon the above assumptions, the weighted average fair value of each stock
option granted for the fiscal year ended December 29, 2012 was $13.23.
During the fiscal year ended December 29, 2012, the Company recognized
$6.4 million of stock-based compensation associated with restricted stock units.
Unamortized expense associated with restricted stock units at December 29, 2012,
was $17.9 million.
We have assumed a forfeiture rate for all stock options, restricted stock awards
and restricted stock-based units granted subsequent to the Company's initial
filing of its Form S-1 with the SEC. In the future, we will record incremental
stock-based compensation expense if the actual forfeiture rates are lower than
estimated and will record a recovery of prior stock-based compensation expense
if the actual forfeitures are higher than estimated.
Accounting for stock-based awards requires significant judgment and the use of
estimates, particularly surrounding assumptions such as stock price volatility
and expected option lives to value equity-based compensation.
Accounting for Income Taxes
Deferred taxes are determined based on the difference between the financial
statement and tax basis of assets and liabilities using enacted tax rates in
effect in the years in which the differences are expected to reverse. Valuation
allowances are provided if, based upon the weight of available evidence, it is
more likely than not that some or all of the deferred tax assets will not be
realized.
We monitor the realization of our deferred tax assets based on changes in
circumstances, for example, recurring periods of income for tax purposes
following historical periods of cumulative losses or changes in tax laws or
regulations. Our income tax provision and our assessment of the ability to
realize our deferred tax assets involve significant judgments and estimates. In
fiscal 2012, as part of the accounting for our acquisition of Evolution
Robotics, Inc., we recorded a valuation allowance of $2.7
million related to certain state tax attributes of Evolution Robotics, Inc. At
December 29, 2012, we have total deferred tax assets of $30.6 million offset by
a valuation allowance of $2.7 million.
Warranty
We typically provide a one-year warranty (with the exception of European
consumer products which typically have a two-year warranty period and our
defense and security spares which typically have a warranty period of less than
one year) against defects in materials and workmanship and will either repair
the goods, provide replacement products at no charge to the customer or refund
amounts to the customer for defective products. We record estimated warranty
costs, based on historical experience by product, at the time we recognize
product revenue. Actual results could differ from these estimates, which could
cause increases or decreases to our warranty reserves in future periods.
Inventory Valuation
We value our inventory at the lower of the actual cost of our inventory or its
current estimated market value. We write down inventory for obsolescence or
unmarketable inventories based upon assumptions about future demand and market
conditions. Actual demand and market conditions may be lower than those that we
project and this difference could have a material adverse effect on our gross
. . .
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