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IRBT > SEC Filings for IRBT > Form 10-Q on 2-May-2014All Recent SEC Filings

Show all filings for IROBOT CORP

Form 10-Q for IROBOT CORP


2-May-2014

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 28, 2013, 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, Braava and Mirra products, PackBot tactical military robots, the Small Unmanned Ground Vehicle, FirstLook, Ava, RP-VITA, our home robots, defense and security robots and remote presence 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, including those risks and uncertainties described in our Annual Report on Form 10-K for the year ended December 28, 2013, 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 empower people to do more. 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 home care robots perform time-consuming domestic chores, while our defense and security robots perform tasks such as battlefield reconnaissance and bomb disposal, and multi-purpose tasks for law enforcement agencies and first responders, as well as certain commercial users. Our remote presence robots expand the reach of medical care by connecting physicians with patients from anywhere in the world and also provide autonomous telepresence capabilities enabling remote workers to more personally collaborate throughout the workplace. We sell our robots through a variety of distribution channels, including chain stores and other national retailers, through our on-line store, through value-added distributors and resellers, and to the U.S. military and other government agencies worldwide.
As of March 29, 2014, we had 539 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 consumer, military and enterprise 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, and our ability to successfully develop and introduce products and product enhancements into both new and existing markets. During the three month period ended March 29, 2014, strong growth in our domestic and international markets for home robots products drove an increase in our home robots business unit revenue of 16.5%, as compared to the three month period ended March 30, 2013. This increase resulted primarily from broadened availability of our Roomba 800 series robot, as well as our continued investment in advertising.
Offsetting this increase was a decrease in our defense and security business unit revenue of 49.5% during the three month period ended March 29, 2014 as compared to the three month period ended March 30, 2013, driven by decreases in


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contract revenue related to the U.S. Army's Brigade Combat Team Modernization program, and decreases in sales of spare parts for our Packbot and Small Unmanned Ground Vehicle robots.
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 goodwill and intangible assets; 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 28, 2013. 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, 2014 and March 30, 2013:

                                     Three Months Ended
                             March 29, 2014      March 30, 2013
Revenue                          100.0  %              100.0 %
Cost of revenue                   54.7                  56.2
Gross margin                      45.3                  43.8
Operating expenses
Research and development          14.8                  13.6
Selling and marketing             12.7                  10.1
General and administrative        10.8                  11.7
Total operating expenses          38.3                  35.4
Operating income                   7.0                   8.4
Other income (expense), net       (0.2 )                   -
Income before income taxes         6.8                   8.4
Income tax expense                 2.2                   0.5
Net income                         4.6  %                7.9 %

Comparison of Three Months Ended March 29, 2014 and March 30, 2013

Revenue

                                  Three Months Ended
                                                       Dollar    Percent
               March 29, 2014      March 30, 2013      Change     Change
                                         (In thousands)
Total revenue $        114,204    $        106,195    $ 8,009       7.5 %

Total revenue for the three months ended March 29, 2014 increased to $114.2 million, or 7.5%, compared to $106.2 million for the three months ended March 30, 2013. Revenue increased approximately $15.3 million, or 16.5%, in our home robots business unit and decreased approximately $5.5 million, or 49.5%, in our defense and security robots business unit.


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The $15.3 million increase in revenue from our home robots business unit for the three months ended March 29, 2014 was driven by a 10.5% increase in units shipped and a 5.7% increase in net average selling price as compared to the three months ended March 30, 2013. In the three months ended March 29, 2014, domestic home robots revenue increased $9.6 million, or 30.7%, and international home robots revenue increased $5.7 million, or 9.3%, as compared to the three months ended March 30, 2013. Total home robots shipped in the three months ended March 29, 2014 were 465 thousand units compared to 421 thousand units in the three months ended March 30, 2013. The increase in sales of our home robots, both domestically and internationally, resulted primarily from broadened availability of our Roomba 800 series robot, as well as our continued investment in advertising.
The $5.5 million decrease in revenue from our defense and security robots business unit for the three months ended March 29, 2014 was attributable to a $2.4 million decrease in defense and security product revenue and a $3.1 million decrease in contract revenue generated under research and development contracts. The $2.4 million decrease in defense and security product revenue resulted primarily from decreased sales of spare parts for our Packbot and Small Unmanned Ground Vehicle robots. The $3.1 million decrease in contract revenue was primarily due to a decrease in revenue related to the U.S. Army's Brigade Combat Team Modernization, or BCTM, program. Total defense and security robots shipped in the three months ended March 29, 2014 were 38 units compared to 18 units in the three months ended March 30, 2013, while net average selling price decreased from $108 thousand in the three months ended March 30, 2013 to $54 thousand in the three months ended March 29, 2014. The increase in the number of units shipped and the decrease in net average selling price resulted from increased sales of our lower-priced FirstLook robot in the three months ended March 29, 2014 as compared to the three months ended March 30, 2013.

Cost of Revenue

                                                    Three Months Ended
                                                                        Dollar    Percent
                                  March 29, 2014     March 30, 2013     Change     Change
                                                      (In thousands)
Total cost of revenue            $       62,494     $       59,668     $ 2,826       4.7 %
As a percentage of total revenue           54.7 %             56.2 %

Total cost of revenue increased to $62.5 million in the three months ended March 29, 2014, compared to $59.7 million in the three months ended March 30, 2013. Cost of revenue increased $5.6 million, or 11.6%, in our home robots business unit, and decreased $2.3 million, or 39.6%, in our defense and security business unit. Other cost of revenue decreased $0.4 million, or 7.5%. The increase in cost of revenue for the three months ended March 29, 2014 in our home robots business unit is primarily due to the 10.5% increase in home robots units shipped as compared to the three months ended March 30, 2013. The decrease in cost of revenue for the three months ended March 29, 2014 in our defense and security business unit resulted from the 49.5% decrease in revenue.

Gross Margin

                                                    Three Months Ended
                                                                        Dollar    Percent
                                  March 29, 2014     March 30, 2013     Change     Change
                                                      (In thousands)
Total gross margin               $       51,710     $       46,527     $ 5,183      11.1 %
As a percentage of total revenue           45.3 %             43.8 %

Gross margin increased $5.2 million, or 11.1%, to $51.7 million (45.3% of revenue) in the three months ended March 29, 2014 from $46.5 million (43.8% of revenue) in the three months ended March 30, 2013. Gross margin as a percentage of revenue in the home robots business unit increased 2.2 percentage points, and gross margin as a percentage of revenue in the defense and security robots business unit decreased 10.3 percentage points. The 2.2 percentage point increase in the home robots business unit is attributable to the 5.7% increase in net average selling price, driven by the inclusion of the higher margin Roomba 800 series robot sales in the three months ended March 29, 2014. The 10.3 percentage point decrease in the defense and security business unit is attributable to the unfavorable overhead leverage associated with the 49.5% decrease in the defense and security robots business unit revenue in the three months ended March 29, 2014 compared to the three months ended March 30, 2013.


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Research and Development

                                                    Three Months Ended
                                                                        Dollar    Percent
                                  March 29, 2014     March 30, 2013     Change     Change
                                                      (In thousands)
Total research and development   $       16,934     $       14,408     $ 2,526      17.5 %
As a percentage of total revenue           14.8 %             13.6 %

Research and development expenses increased $2.5 million, or 17.5%, to $16.9 million (14.8% of revenue) in the three months ended March 29, 2014 from $14.4 million (13.6% of revenue) in the three months ended March 30, 2013. This increase is primarily attributable to increases in consultant and contractor costs of $1.1 million, and increased compensation costs of $0.7 million. The remaining increase of $0.7 million relates to increases in occupancy costs, recruiting fees and other office expenses.

Selling and Marketing

                                                    Three Months Ended
                                                                        Dollar    Percent
                                  March 29, 2014     March 30, 2013     Change     Change
                                                      (In thousands)
Total selling and marketing      $       14,532     $       10,697     $ 3,835      35.9 %
As a percentage of total revenue           12.7 %             10.1 %

Selling and marketing expenses increased by $3.8 million, or 35.9%, to $14.5 million (12.7% of revenue) in the three months ended March 29, 2014 from $10.7 million (10.1% of revenue) in the three months ended March 30, 2013. This increase is primarily attributable to a $2.7 million increase in marketing expenses incurred during the three months ended March 29, 2014 as compared to the three months ended March 30, 2013, to support the recent launch of the Roomba 800 series robot, and our continued global marketing and branding efforts. Additionally, compensation costs increased $0.9 million for the three months ended March 29, 2014 as compared to the three months ended March 30, 2013.

General and Administrative

                                                    Three Months Ended
                                                                        Dollar    Percent
                                  March 29, 2014     March 30, 2013     Change     Change
                                                      (In thousands)
Total general and administrative $       12,264     $       12,458     $ (194 )    (1.6 )%
As a percentage of total revenue           10.8 %             11.7 %

General and administrative expenses decreased by $0.2 million, or 1.6%, to $12.3 million (10.8% of revenue) in the three months ended March 29, 2014 from $12.5 million (11.7% of revenue) in the three months ended March 30, 2013. This decrease is primarily attributable to decreased compensation costs of $0.4 million, partially offset by increased legal expenses of $0.3 million in the three months ended March 29, 2014 as compared to the three months ended March 30, 2013. The increase in legal expenses relates to fees incurred in protecting our patents.

Other Income (Expense), Net

                                                      Three Months Ended
                                                                          Dollar    Percent
                                   March 29, 2014     March 30, 2013      Change     Change
                                                        (In thousands)
Total other income (expense), net $      (187 )      $         (96 )     $  (91 )     94.8 %
As a percentage of total revenue         (0.2 )%                 - %


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Other income (expense), net, amounted to $(0.2) million and $(0.1) million for the three months ended March 29, 2014 and March 30, 2013, respectively. Other income (expense), net, for the three month periods ended March 29, 2014 and March 30, 2013 consisted primarily of interest income offset by foreign currency exchange losses resulting from foreign currency exchange rate fluctuations.

Income Tax Expense

                                                      Three Months Ended
                                                                          Dollar    Percent
                                   March 29, 2014     March 30, 2013      Change     Change
                                                        (In thousands)
Total income tax expense          $       2,513      $         513       $ 2,000     389.9 %
As a percentage of pre-tax income          32.2 %              5.8 %

We recorded a tax provision of $2.5 million and $0.5 million for the three month periods ended March 29, 2014 and March 30, 2013, respectively. The $2.5 million provision for the three month period ended March 29, 2014 resulted in an effective income tax rate of 32.2%. The $0.5 million provision for the three month period ended March 30, 2013 resulted in an effective income tax rate of 5.8%. The increase in the effective income tax rate from 5.8% for the three month period ended March 30, 2013 to 32.2% for the three month period ended March 29, 2014 was primarily due to legislation that was enacted in January 2013 that included the extension of the federal research and development tax credits. The legislation retroactively reinstated research and development tax credits for 2012 and extended them through December 31, 2013. As a result, we recorded a discrete benefit related to 2012 during the three month period ended March 30, 2013. In addition, the federal research and development tax credits expired at the end of 2013 and have not been enacted for 2014. Therefore, the effective income tax rate of 32.2% for the three month period ended March 29, 2014 does not include any benefit for the federal research and development tax credits. Liquidity and Capital Resources
At March 29, 2014, our principal sources of liquidity were cash and cash equivalents totaling $154.8 million, short-term investments of $30.5 million and accounts receivable of $36.5 million.
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. Accordingly, our capital spending is generally limited to leasehold improvements, computers, office furniture, product-specific production tooling, internal use software and test equipment. In the three months ended March 29, 2014 and March 30, 2013, we spent $2.2 million and $1.1 million, respectively, on capital equipment. Our strategy for delivering home robots products to our distributors and retail customers gives us the flexibility to provide container shipments directly to the retailer from China and, alternatively, allows our distributors and retail partners to take possession of product on a domestic basis. Accordingly, our home robots product inventory consists of goods shipped to our third-party logistics providers for the fulfillment of distributor, retail and direct-to-consumer sales. Our inventory of defense and security and remote presence products consists of finished goods inventory that is generally built to order, as well as spare parts. Our contract manufacturers are responsible for purchasing and stocking the majority of components required for the production of our products, and they typically invoice us when the finished goods are shipped.
The balance of cash and short-term investments of $185.4 million at March 29, 2014 is primarily the result of cash generated by operations and our on-going focus on managing working capital. As of March 29, 2014, we did not have any borrowings outstanding under our working capital line of credit and had $1.6 million in letters of credit outstanding under our revolving letter of credit facility.
Discussion of Cash Flows
Net cash used in operating activities for the three months ended March 29, 2014 was $7.8 million, compared to the $0.2 million of net cash provided by operating activities for the three months ended March 30, 2013. The net cash used in operating activities was primarily driven by a decrease in cash of $7.0 million resulting from a decrease in accrued compensation of $11.9 million in 2014 compared to a decrease of $4.9 million in 2013 as a result of a larger pay-out of incentive compensation in 2014, a decrease in cash of $3.1 million resulting from net income of $5.3 million in 2014 compared to net income of $8.4 million in 2013, a decrease in cash of $2.2 million resulting from an increase in the adjustment to net income to reclassify the tax benefit of excess stock-based compensation deductions from operating activities to financing activities of $2.2 million


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in 2014 compared to $43 thousand in 2013, a decrease in cash of $0.7 million resulting from a decrease in inventory of $4.1 million in 2014 compared to a decrease of $4.8 million in 2013, offset by an increase in cash of $3.0 million resulting from a decrease in accounts payable and accrued expenses of $9.3 million in 2014 compared to a decrease of $12.3 million in 2013 as a result of normal purchasing and vendor payment activities, and an increase in cash of $2.0 million resulting from an increase in deferred revenue and customer advances of $0.7 million in 2014 compared to an increase of $2.6 million in 2013 as a result of normal fluctuations in prepayments received from customers in advance of product shipments.

Net cash used in investing activities for the three months ended March 29, 2014 was $10.9 million, an increase of $6.3 million compared to the $4.6 million of net cash used in investing activities for the three months ended March 30, 2013. Capital additions were $2.2 million and $1.1 million for the three months ended March 29, 2014 and March 30, 2013, respectively. Cash used for strategic investments was zero and $2.0 million for the three months ended March 29, 2014 and March 30, 2013, respectively. The $2.0 million used in 2013 represents an additional investment in the preferred shares of InTouch Technologies, Inc. following our initial investment of $6.0 million in 2012. The net purchase of investments was $8.7 million for the three months ended March 29, 2014 and $1.5 million for the three months ended March 30, 2013. This activity varies from period to period based upon the maturity dates of our investments, yields on the types of short instruments in which we invest, and the level of cash available for investment.

Net cash provided by financing activities for the three months ended March 29, 2014 was $8.1 million, an increase of $6.8 million compared to the $1.3 million of net cash provided by financing activities for the three months ended March 30, 2013. We generated $7.0 million and $1.7 million from the exercise of stock options during the three months ended March 29, 2014 and March 30, 2013, respectively. We generated $2.2 million and $43 thousand of tax benefits from excess stock-based compensation deductions during the three months ended March 29, 2014 and March 30, 2013, respectively. We spent $1.1 million and $0.5 million in the payment of income tax withholdings associated with restricted stock vesting during the three months ended March 29, 2014 and March 30, 2013, respectively.
Working Capital Facilities
Credit Facility
We have an unsecured revolving credit facility with Bank of America, N.A., which is available to fund working capital and other corporate purposes. As of March 29, 2014, the total amount available for borrowing under our credit facility was $75.0 million, and the full amount was available for borrowing. The interest on loans under our credit facility accrues, at our election, at either
(1) LIBOR plus a margin, currently equal to 1.0%, based on our ratio of indebtedness to Adjusted EBITDA (the Eurodollar Rate), or (2) the lender's base rate. The lender's base rate is equal to the highest of (1) the federal funds rate plus 0.5%, (2) the lender's prime rate and (3) the Eurodollar Rate plus 1.0%. The credit facility termination date is December 20, 2018. As of March 29, 2014, we had no outstanding borrowings under our revolving credit facility. 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 dividends or make distributions on, or repurchase, our stock, and consolidate or merge with other entities. In addition, we are required to meet certain financial covenants customary with . . .

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