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IRBT > SEC Filings for IRBT > Form 10-Q on 1-Aug-2014All Recent SEC Filings

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Form 10-Q for IROBOT CORP


1-Aug-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, Kobra, 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 June 28, 2014, we had 548 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 and six month periods ended June 28, 2014, strong growth in our global markets for home robots products drove increases in our home robots business unit revenue of 15% and 16%, respectively, as compared to the three and six month periods ended June 29, 2013. These increases resulted from expanded distribution of our Roomba 800 series robot, as well as continued growth in China. Offsetting these increases were decreases in our defense and security business unit revenue of 59% and 55%, respectively, during the three and six month periods ended June 28, 2014 compared to the three and six month periods ended June 29, 2013.


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During the three month period ended June 28, 2014, we recorded a net benefit to revenue and income before income taxes of $1.2 million and $2.6 million, respectively, related to adjustments to our product returns reserves, compared to a net benefit to revenue and income before income taxes of $3.5 million related to adjustments to our product returns reserves during the three month period ended June 29, 2013. The adjustments recorded in both periods resulted from lower product returns experience.
Additionally, we released $2.1 million of valuation allowance related to certain tax attributes of Evolution Robotics, Inc. during the three month period ended June 28, 2014, compared to the release of $2.7 million of certain income tax reserves due to favorable conclusions of the IRS examination of our income tax returns for the years 2008, 2009 and 2010 during the three month period ended June 29, 2013.
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 and six month periods ended June 28, 2014 and June 29, 2013:

                                               Three Months Ended                   Six Months Ended
                                        June 28, 2014      June 29, 2013     June 28, 2014     June 29, 2013
Revenue                                       100.0 %          100.0  %          100.0  %          100.0  %
Cost of revenue                                55.6             52.7              55.2              54.3
Gross margin                                   44.4             47.3              44.8              45.7
Operating expenses
Research and development                       12.3             12.3              13.5              12.9
Selling and marketing                          16.8             17.1              15.0              14.0
General and administrative                      8.3             11.8               9.4              11.8
Total operating expenses                       37.4             41.2              37.9              38.7
Operating income                                6.9              6.1               7.0               7.1
Other income (expense), net                     0.1             (0.1 )               -              (0.1 )
Income before income taxes                      7.0              6.0               6.9               7.0
Income tax expense (benefit)                    0.9             (0.4 )             1.5                 -
Net income                                      6.1 %            6.4  %            5.4  %            7.0  %

Comparison of Three and Six Months Ended June 28, 2014 and June 29, 2013

Revenue

                                   Three Months Ended                                              Six Months Ended
                                                       Dollar     Percent                                              Dollar     Percent
                June 28, 2014       June 29, 2013      Change      Change      June 28, 2014       June 29, 2013       Change      Change
                                         (In thousands)                                                  (In thousands)
Total revenue $       139,803     $       130,362     $ 9,441        7.2 %   $       254,007     $       236,557     $ 17,450        7.4 %


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Total revenue for the three months ended June 28, 2014 increased to $139.8 million, or 7.2%, compared to $130.4 million for the three months ended June 29, 2013. Revenue increased approximately $17.7 million, or 15.3%, in our home robots business unit and decreased approximately $7.4 million, or 59.1%, in our defense and security robots business unit.
The $17.7 million increase in revenue from our home robots business unit for the three months ended June 28, 2014 was driven by a 14.8% increase in units shipped and a 1.3% increase in average selling price as compared to the three months ended June 29, 2013. In the three months ended June 28, 2014, international home robots revenue increased $14.9 million, or 19.5%, and domestic home robots revenue increased $2.9 million, or 7.3%, as compared to the three months ended June 29, 2013. Total home robots shipped in the three months ended June 28, 2014 were 565,000 units compared to 492,000 units in the three months ended June 29, 2013. The increase in sales of our home robots, both domestically and internationally, resulted primarily from broadened availability of our Roomba 800 series robot. Continued growth in China also contributed to the increase in international sales of our home robots. These increases were partially offset by a $1.2 million favorable adjustment recorded to our returns reserve during the three month period ended June 28, 2014 compared to a $3.5 million favorable adjustment recorded to our returns reserve during the three month period ended June 29, 2013.
The $7.4 million decrease in revenue from our defense and security robots business unit for the three months ended June 28, 2014 was attributable to a $6.4 million decrease in defense and security product revenue and a $1.0 million decrease in contract revenue generated under research and development contracts. In the three months ended June 28, 2014, international defense and security robots revenue increased to 74% of total defense and security robots revenue, from 7% of total defense and security robots revenue in the three months ended June 29, 2013. The $6.4 million decrease in defense and security product revenue resulted primarily from decreased sales of our FirstLook robots of $6.9 million and decreased sales of spare parts of $1.1 million, partially offset by increased sales of our Packbot robots of $2.0 million. The $1.0 million decrease in contract revenue was primarily due to revenue related to the U.S. Army's Brigade Combat Team Modernization, or BCTM program, for which efforts were completed during the three months ended June 29, 2013. Total defense and security robots shipped in the three months ended June 28, 2014 were 40 units compared to 424 units in the three months ended June 29, 2013, while average selling price increased from $20 thousand in the three months ended June 29, 2013 to $80 thousand in the three months ended June 28, 2014. The decrease in the number of units shipped and the increase in average selling price resulted from decreased sales of our lower-priced FirstLook robot in the three months ended June 28, 2014 as compared to the three months ended June 29, 2013. Total revenue for the six months ended June 28, 2014 increased to $254.0 million, or 7.4%, compared to $236.6 million for the six months ended June 29, 2013. Revenue increased approximately $33.0 million, or 15.9%, in our home robots business unit and decreased approximately $12.9 million, or 54.6%, in our defense and security robots business unit.
The $33.0 million increase in revenue from our home robots business unit for the six months ended June 28, 2014 was driven by a 12.8% increase in units shipped and a 3.0% increase in average selling price as compared to the six months ended June 29, 2013. In the six months ended June 28, 2014, international home robots revenue increased $20.6 million, or 14.9%, and domestic home robots revenue increased $12.5 million, or 17.7%, as compared to the six months ended June 29, 2013. Total home robots shipped in the six months ended June 28, 2014 were 1,030,000 units compared to 913,000 units in the six months ended June 29, 2013. The increase in sales of our home robots, both domestically and internationally, resulted primarily from broadened availability of our Roomba 800 series robot. Continued growth in China also contributed to the increase in international sales of our home robots. These increases were partially offset by a $1.7 million favorable adjustment recorded to our returns reserve during the six month period ended June 28, 2014 compared to a $3.5 million favorable adjustment recorded to our returns reserve during the six month period ended June 29, 2013. The $12.9 million decrease in revenue from our defense and security robots business unit for the six months ended June 28, 2014 was attributable to a $8.8 million decrease in defense and security product revenue and a $4.0 million decrease in contract revenue generated under research and development contracts. In the six months ended June 28, 2014, international defense and security robots revenue increased to 58% of total defense and security robots revenue, from 12% of total defense and security robots revenue in the six months ended June 29, 2013. The $12.9 million decrease in defense and security product revenue resulted primarily from decreased sales of our FirstLook robots, as well as decreased sales of spare parts for our Small Unmanned Ground Vehicle and Packbot robots. These decreases were partially offset by increased sales of our Packbot robots. The $4.0 million decrease in contract revenue was primarily due to a decrease in revenue related to the BCTM program, for which efforts were completed during the three months ended June 29, 2013. Total defense and security robots shipped in the six months ended June 28, 2014 were 78 units compared to 442 units in the six months ended June 29, 2013, while average selling price increased from $24 thousand in the six months ended June 29, 2013 to $67 thousand in the six months ended June 28, 2014. The decrease in the number of units shipped and the increase in average selling price resulted from decreased sales of our lower-priced FirstLook robot in the six months ended June 28, 2014 as compared to the six months ended June 29, 2013.


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Cost of Revenue

                              Three Months Ended                       Six Months Ended
                      June      June
                       28,       29,     Dollar   Percent   June 28,   June 29,   Dollar    Percent
                      2014      2013     Change   Change      2014       2013     Change    Change
                                (In thousands)                          (In thousands)
Total cost of
revenue              $77,682   $68,757   $8,925    13.0%    $140,176   $128,425   $11,751    9.2%
As a percentage of
total revenue         55.6%     52.7%                        55.2%      54.3%

Total cost of revenue increased to $77.7 million in the three months ended June 28, 2014, compared to $68.8 million in the three months ended June 29, 2013. Cost of revenue increased $12.2 million, or 21.7%, in our home robots business unit, and decreased $3.3 million, or 50.6%, in our defense and security business unit. The increase in cost of revenue for the three months ended June 28, 2014 in our home robots business unit is primarily due to the 14.8% increase in home robots units shipped as compared to the three months ended June 29, 2013. The decrease in cost of revenue for the three months ended June 28, 2014 in our defense and security business unit resulted from the 59.1% decrease in revenue.
Total cost of revenue increased to $140.2 million in the six months ended June 28, 2014, compared to $128.4 million in the six months ended June 29, 2013. Cost of revenue increased $17.7 million, or 17.0%, in our home robots business unit, and decreased $5.6 million, or 45.4%, in our defense and security business unit. The increase in cost of revenue for the six months ended June 28, 2014 in our home robots business unit is primarily due to the 12.8% increase in home robots units shipped as compared to the six months ended June 29, 2013. The decrease in cost of revenue for the six months ended June 28, 2014 in our defense and security business unit resulted from the 54.6% decrease in revenue.

Gross Margin

                                 Three Months Ended                       Six Months Ended
                         June      June
                          28,       29,     Dollar   Percent   June 28,   June 29,   Dollar   Percent
                         2014      2013     Change   Change      2014       2013     Change   Change
                                   (In thousands)                          (In thousands)
Total gross margin      $62,121   $61,605    $516     0.8%     $113,831   $108,132   $5,699    5.3%
As a percentage of
total revenue            44.4%     47.3%                        44.8%      45.7%

Gross margin increased $0.5 million, or 0.8%, to $62.1 million (44.4% of revenue) in the three months ended June 28, 2014 from $61.6 million (47.3% of revenue) in the three months ended June 29, 2013. Gross margin as a percentage of revenue in the home robots and defense and security business units decreased 2.7 percentage points and 10.8 percentage points, respectively. The 2.7 percentage point decrease in the home robots business unit resulted from incremental warranty reserves of $2.0 million, driven primarily by actual warranty experience in certain European markets. In addition, increases in margins for our Roomba robots were offset by a higher mix of lower margin wet floor care products, as well as increases in other costs of sales during the three month period ended June 28, 2014 compared to the three month period ended June 29, 2013. We also recorded a smaller favorable adjustment to our returns reserve during the three month period ended June 28, 2014 than the favorable adjustment recorded to our returns reserve during the three month period ended June 29, 2013. The 10.8 percentage point decrease in the defense and security business unit is mostly attributable to the unfavorable overhead leverage associated with the 59.1% decrease in the defense and security robots business unit revenue in the three months ended June 28, 2014 compared to the three months ended June 29, 2013.
Gross margin increased $5.7 million, or 5.3%, to $113.8 million (44.8% of revenue) in the six months ended June 28, 2014 from $108.1 million (45.7% of revenue) in the six months ended June 29, 2013. Gross margin as a percentage of revenue in the home robots and defense and security business units decreased 0.5 percentage points and 10.6 percentage points, respectively. The 0.5 percentage point decrease in the home robots business unit resulted from incremental warranty reserves of $2.7 million, driven primarily by actual warranty experience in certain European markets. In addition, increases in the higher margin Roomba 800 series robot were offset by a higher mix of lower margin wet floor care products, as well as increases in other costs of sales during the six month period ended June 28, 2014 compared to the six month period ended June 29, 2013. We also recorded a smaller favorable adjustment to our returns reserve during the six month period ended June 28, 2014 than the favorable adjustment recorded to our returns reserve during the six month period ended June 29, 2013. The 10.6 percentage point decrease in the defense and security business unit is attributable to the unfavorable overhead leverage


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associated with the 54.6% decrease in the defense and security robots business unit revenue in the six months ended June 28, 2014 compared to the six months ended June 29, 2013.
Research and Development

                                 Three Months Ended                       Six Months Ended
                         June      June
                          28,       29,     Dollar   Percent   June 28,   June 29,   Dollar   Percent
                         2014      2013     Change   Change      2014       2013     Change   Change
                                   (In thousands)                          (In thousands)
Total research and
development             $17,245   $15,997   $1,248    7.8%     $34,179    $30,405    $3,774    12.4%
As a percentage of
total revenue            12.3%     12.3%                        13.5%      12.9%

Research and development expenses increased $1.2 million, or 7.8%, to $17.2 million (12.3% of revenue) in the three months ended June 28, 2014 from $16.0 million (12.3% of revenue) in the three months ended June 29, 2013. This increase is primarily attributable to increases in consultant costs, occupancy costs, recruiting fees and legal expenses.
Research and development expenses increased $3.8 million, or 12.4%, to $34.2 million (13.5% of revenue) in the six months ended June 28, 2014 from $30.4 million (12.9% of revenue) in the six months ended June 29, 2013. This increase is primarily attributable to increases in consultant and contractor costs of $1.9 million. The remaining increase relates to increases in people-related costs and occupancy expenses.

Selling and Marketing

                                 Three Months Ended                       Six Months Ended
                         June      June
                          28,       29,     Dollar   Percent   June 28,   June 29,   Dollar   Percent
                         2014      2013     Change   Change      2014       2013     Change   Change
                                   (In thousands)                          (In thousands)
Total selling and
marketing               $23,535   $22,309   $1,226    5.5%     $38,067    $33,006    $5,061    15.3%
As a percentage of
total revenue            16.8%     17.1%                        15.0%      14.0%

Selling and marketing expenses increased by $1.2 million, or 5.5%, to $23.5 million (16.8% of revenue) in the three months ended June 28, 2014 from $22.3 million (17.1% of revenue) in the three months ended June 29, 2013. This increase is primarily attributable to increases in people-related costs of $0.8 million during the three months ended June 28, 2014 as compared to the three months ended June 29, 2013. The remaining increase resulted from increases in customer support costs and third party commissions for the three months ended June 28, 2014 as compared to the three months ended June 29, 2013. Selling and marketing expenses increased by $5.1 million, or 15.3%, to $38.1 million (15.0% of revenue) in the six months ended June 28, 2014 from $33.0 million (14.0% of revenue) in the six months ended June 29, 2013. This increase is primarily attributable to $3.1 million in marketing displays, on-line media and other selling and marketing costs incurred to support the retail launch of the Roomba 800 series and Scooba 450 robots, as well as increases in people-related costs of $2.0 million driven by increased headcount during the six months ended June 28, 2014 as compared to the six months ended June 29, 2013.
General and Administrative

                               Three Months Ended                         Six Months Ended
                      June      June
                       28,       29,      Dollar    Percent   June 28,   June 29,    Dollar    Percent
                      2014      2013      Change    Change      2014       2013      Change    Change
                                 (In thousands)                            (In thousands)
Total general and
administrative       $11,666   $15,395   $(3,729)   (24.2)%   $23,930    $27,853    $(3,923)   (14.1)%
As a percentage of
total revenue         8.3%      11.8%                           9.4%      11.8%

General and administrative expenses decreased by $3.7 million, or 24.2%, to $11.7 million (8.3% of revenue) in the three months ended June 28, 2014 from $15.4 million (11.8% of revenue) in the three months ended June 29, 2013. This decrease is primarily attributable to decreased compensation and benefit costs of $2.1 million in the three months ended June 28, 2014


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compared to the three months ended June 29, 2013, as well as a $1.8 million intangible asset impairment recorded in the three months ended June 29, 2013, partially offset by increases in other general and administrative costs. General and administrative expenses decreased by $3.9 million, or 14.1%, to $23.9 million (9.4% of revenue) in the six months ended June 28, 2014 from $27.9 million (11.8% of revenue) in the six months ended June 29, 2013. This decrease is primarily attributable to decreased compensation and benefit costs of $2.5 . . .

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