IROBOT CORPORATION 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 Quarterly Report on Form 10-Q. 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 and Exchange Act of 1934, as amended (the "Exchange Act"), and are subject to the "safe harbor" created by those sections. In particular, statements contained in this Quarterly Report on Form 10-Q that are not historical facts, including, but not limited to statements concerning the impact of COVID-19 on our business, new product sales, product development and offerings, our consumer robots, our competition, our strategy, our market position, market acceptance of our products, seasonal factors, revenue recognition, our profits, growth of our revenues, composition of our revenues, our cost of revenues, units shipped, average selling prices, the impact of promotional activity and tariffs, the impact of semiconductor chip availability, operating expenses, diversification of our manufacturing supply chain, 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 this Quarterly Report on Form 10-Q and in Part I, "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the year endedJanuary 2, 2021 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 is a leading global consumer robot company that designs and builds robots that empower people to do more. Our consumer robots help people find smarter ways to clean and accomplish more in their daily lives. iRobot's portfolio of floor cleaning robots features proprietary technologies for the connected home and advanced concepts in cleaning, robot-based artificial intelligence, mapping and navigation, machine vision, home understanding, human-robot interaction and physical solutions. Leveraging this portfolio, our engineers are building an ecosystem of robots to help realize the smart home's potential. For more than 30 years, we have been a pioneer and leader in consumer robotics, robotic floor care and robotic artificial intelligence. As ofOctober 2, 2021 , we had 1,343 full-time employees. Since our founding in 1990, we have developed expertise in the disciplines necessary to design, build, sell and support 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 create next-generation robotic platforms. We believe that this approach accelerates the time to market, while also reducing the costs and risks associated with product development. These capabilities are amplified by the integration of a range of software-centric capabilities spanning artificial intelligence, home understanding and machine vision technologies that further improve cleaning performance and help personalize the cleaning experience, enabling customers to have greater control over where, when and how our robots clean. We believe that our significant expertise in robot design, engineering, and smart home technologies and targeted focus on understanding and addressing consumer needs, positions us well to capitalize on the anticipated growth in the market for robot-based consumer products. FromSeptember 2018 untilApril 2020 , our Roomba products were subject to Section 301 tariffs. InApril 2020 , we were granted a temporary exclusion from Section 301 List 3 tariffs by the United States Trade Representative ("USTR"). This exclusion, as extended inAugust 2020 , eliminated the 25% tariff on Roomba products imported fromChina untilDecember 31, 2020 and entitled us to a refund of approximately$57.0 million in tariffs paid since the date the Section 301 List 3 tariffs were imposed. EffectiveJanuary 1, 2021 , the 25% Section 301 tariff again applies to our Roomba products imported fromChina . For the three and nine months endedOctober 2, 2021 , the incremental Section 301 tariff cost was$14.1 million and$29.2 million , respectively. We expect this incremental cost will continue to impact our gross profit for the remainder of fiscal 2021. To diversify our manufacturing and help offset the adverse financial impact on our business of the 25% Section 301 tariff, we are focused on scaling the manufacture of our products inMalaysia . We commenced production of our products inMalaysia in late 2019 and we remain on track to haveMalaysia manufacturing at scale by the end of 2021. To continue expanding our business globally and increase our profitability in a highly competitive marketplace, we have continued to make progress on each key element of our strategy: 1) differentiating the iRobot experience; 2) building strong relationships with the consumer; and 3) nurturing the lifetime value of our customer relationships. We strive to differentiate the iRobot experience through the ongoing innovation of our existing product offerings and by bringing new products and services to market. During the first quarter of 2021, we enhanced the iRobot Genius Home Intelligence Platform ("Genius"), a powerful AI-based robot platform that gives users greater personalization and control over their cleaning robots. InSeptember 2021 , we introduced the latest upgrade to the Genius platform and launched our Roomba j7 Series robots featuring PrecisionVision Navigation technology in theU.S. and EMEA. Roomba j7 Series robots, powered by 18 -------------------------------------------------------------------------------- Genius, learn how to navigate the home, understand the owner's cleaning preferences and even recognize and avoid specific objects. The Roomba j7 Series with Genius provides greater levels of personalization, object detection and avoidance, new home automations and the ability to get smarter over time as it learns the home environment through the AI capabilities within Genius and receives over-the-air updates, allowing the robot to deliver a more intuitive cleaning experience. To continue building strong relationships with our consumers worldwide, we are focused on enhancing all aspects of the consumer experience, including investing in our digital marketing and e-commerce capabilities. At the end of the third quarter of 2021, our connected customer base grew 60% from the same period one year ago to 12.5 million customers who have opted in to our digital communications. We also continued to make important progress in nurturing the lifetime value of our customer relationships. In earlyApril 2021 , we introduced our new iRobot H1 handheld vacuum, enabling customers to purchase a complementary vacuum to clean in areas that our Roomba or Braava robots are typically unable to reach. In addition, we are now offering extended warranty plans to customers who purchase our products directly from us. During the third quarter of 2021, the Roomba j7+ joined the Roomba i7+ as one of two Roomba robots available for customers to choose when they join iRobot Select, a subscription-based membership program in which members may pay an initiation fee and a recurring monthly fee to use their robot along with dedicated customer support, automatic accessory replacement services, premium protection services and eligibility for robot upgrades every three years. Since the start of the pandemic over 18 months ago, more consumers are buying our products online. Our direct-to-consumer, or DTC, sales were$39.7 million and$119.7 million , 9.0% and 10.8% of total revenue, for the three and nine months endedOctober 2, 2021 , respectively. DTC sales grew 13.0% and 45.2% during the three and nine months endedOctober 2, 2021 , respectively, compared to the same periods a year ago. We continue to invest in initiatives aimed at increasing the frequency and range of products, services and accessories that customers purchase directly from us. In addition to the pandemic's positive impact on accelerating demand for a wide range of consumer products including ours, it has also stressed the global supply chain involved in manufacturing these products. More specifically, semiconductor chip suppliers have been unable to keep pace with demand, the cost of raw materials such as resins has risen meaningfully along with oceanic transport and air freight costs. In addition to higher costs, it is also taking longer to transport products, regardless of the mode of transportation. We are taking a range of actions to manage through these supply chain challenges, from entering into longer-term supply agreements, qualifying new suppliers and leveraging our relationships with our contract manufacturers to efficiently export our products. During the third quarter of 2021, ocean transportation and air freight costs rose even higher than anticipated. We expect the higher transportation costs to remain elevated through at least the first three quarters of next year. We will continue to assess and implement measures to mitigate resulting adverse impacts on our operations and financial results. 19 -------------------------------------------------------------------------------- Key Financial Metrics In addition to the measures presented in our consolidated financial statements in accordance with accounting principles generally accepted inthe United States of America ("GAAP"), we use the following key metrics, including non-GAAP financial measures, to evaluate and analyze our core operating performance and trends, and to develop short-term and long-term operational plans. A summary of key metrics for the three and nine months endedOctober 2, 2021 , as compared to the three and nine months endedSeptember 26, 2020 , is as follows: Three Months Ended Nine Months Ended September 26, September 26, October 2, 2021 2020 October 2, 2021 2020 (dollars in
thousands, except average gross selling prices)
(unaudited)
Total Revenue $ 440,682 $ 413,145 $ 1,109,539 $ 885,563
Non-GAAP Gross Profit $ 162,993 $ 199,397 $ 426,008 $ 417,636
Non-GAAP Gross Margin 37.0 % 48.3 % 38.4 % 47.2 %
Non-GAAP Operating Income $ 47,981 $
93,125
10.9 % 22.5 % 6.5 % 13.5 %
Total robot units shipped (in thousands) 1,543 1,538 3,945 3,301
Average gross selling prices for robot
units $ 322 $ 312 $ 322 $ 311
Use of Non-GAAP Financial Measures
Our non-GAAP financial measures reflect adjustments based on the following
items. We exclude these items from our non-GAAP measures to facilitate an
evaluation of our current operating performance and comparisons to our past
operating performance. These items may vary significantly in magnitude or timing
and do not necessarily reflect anticipated future operating activities. In
addition, we believe that providing these non-GAAP measures affords investors a
view of our operating results that may be more easily compared with our peer
companies. These non-GAAP financial measures should not be considered a
substitute for, or superior to, financial measures calculated in accordance with
GAAP, and the financial results calculated in accordance with GAAP and
reconciliations from these results, provided below, should be carefully
evaluated.
Amortization of acquired intangible assets: Amortization of acquired intangible
assets consists of amortization of intangible assets including completed
technology, customer relationships, and reacquired distribution rights acquired
in connection with business combinations. Amortization charges for our
acquisition-related intangible assets are inconsistent in size and are
significantly impacted by the timing and valuation of our acquisitions.
Tariff Refunds: iRobot was granted a Section 301 List 3 Tariff Exclusion in
April 2020 , which temporarily eliminated tariffs on the Company's products
imported from China until December 31, 2020 and entitled the Company to a refund
of all related tariffs previously paid since September 2018 . We exclude the
refunds for tariff costs expensed during fiscals 2018 and 2019 from our fiscal
2020 non-GAAP measures because those tariff refunds associated with tariff costs
incurred in the past have no impact to our current period earnings.
Net Merger , Acquisition and Divestiture (Income) Expense: Net merger,
acquisition and divestiture (income) expense primarily consists of transaction
fees, professional fees, and transition and integration costs directly
associated with mergers, acquisitions and divestitures. It also includes
business combination adjustments after the measurement period has ended.
Stock-Based Compensation: Stock-based compensation is a non-cash charge relating
to stock-based awards.
IP Litigation Expense, Net: IP litigation expense, net relates to legal costs
incurred to litigate patent, trademark, copyright and false advertising
infringements, or to oppose or defend against interparty actions related to
intellectual property. Any settlement payment or proceeds resulting from these
infringements are included or netted against the costs.
Gain/Loss on Strategic Investments: Gain/loss on strategic investments includes
fair value adjustments, realized gains and losses on the sales of these
investments and losses on the impairment of these investments.
Restructuring and Other: Restructuring charges are related to one-time actions
associated with workforce reductions, including severance costs, certain
professional fees and other costs directly associated with resource realignments
tied to strategic initiatives or changes in business conditions.
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Income tax adjustments: Income tax adjustments include the tax effect of the
non-GAAP adjustments, calculated using the appropriate statutory tax rate for
each adjustment. We reassess the need for any valuation allowance recorded based
on the non-GAAP profitability and have eliminated the effect of the valuation
allowance recorded in the U.S. jurisdiction. We also exclude certain tax items,
including impact from stock-based compensation windfalls/shortfalls, that are
not reflective of income tax expense incurred as a result of current period
earnings.
The following table reconciles gross profit, operating income, net income and
net income per share on a GAAP and non-GAAP basis for the three and nine months
ended October 2, 2021 and September 26, 2020 (dollars in thousands, other than
per share data):
Three Months Ended Nine Months Ended
September 26, September 26,
October 2, 2021 2020 October 2, 2021 2020
GAAP Gross Profit $ 162,754 $
198,841
Amortization of acquired intangible assets 225 225 675 1,695 Stock-based compensation 284 331 929 1,150 Tariff refunds (270) - (270) (40,017) Non-GAAP Gross Profit$ 162,993 $ 199,397 $ 426,008 $ 417,636 Non-GAAP Gross Margin 37.0 % 48.3 % 38.4 % 47.2 % GAAP Operating Income$ 40,498 $ 80,994 $ 43,845 $ 131,052 Amortization of acquired intangible assets 476 481 1,336 2,459 Stock-based compensation 2,073 9,843 16,195 20,904 Tariff refunds (270) - (270) (40,017) Net merger, acquisition and divestiture expense (income) 635 - 1,274 (566) IP litigation expense, net 4,569 1,607 9,292 3,360 Restructuring and other - 200 213 2,063 Non-GAAP Operating Income$ 47,981 $
93,125
Non-GAAP Operating Margin 10.9 % 22.5 % 6.5 % 13.5 % GAAP Net Income$ 57,216 $
93,252
Amortization of acquired intangible assets 476 481 1,336 2,459 Stock-based compensation 2,073 9,843 16,195 20,904 Tariff refunds (270) - (270) (40,017) Net merger, acquisition and divestiture expense (income) 635 - 1,274 (1,241) IP litigation expense, net 4,569 1,607 9,292 3,360 Restructuring and other - 200 213 2,063 Gain on strategic investments (27,141) (43,480) (26,929) (43,567) Income tax effect 8,749 11,829 3,066 16,730 Non-GAAP Net Income$ 46,307 $ 73,732 $ 66,078 $ 94,424 GAAP Net Income Per Diluted Share $ 2.06 $
3.27 $ 2.17
Dilutive effect of non-GAAP adjustments (0.39) (0.69) 0.15 (1.38)
Non-GAAP Net Income Per Diluted Share $ 1.67 $
2.58 $ 2.32
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, revenue and expenses. These estimates and judgments,
include but are not limited to, revenue recognition including performance
obligations, variable consideration and other obligations such as product
returns and incentives; allowance for credit losses; product warranties;
valuation of goodwill and acquired intangible assets; valuation of
non-marketable equity investments; evaluating loss contingencies; accounting for
stock-based compensation including performance-based assessments; and accounting
for income taxes and related valuation allowances. We base these estimates and
judgments on historical experience, market participant fair value
considerations,
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projected future cash flows and various other factors that we believe are
reasonable under the circumstances. Actual results may differ from our
estimates. 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 January 2, 2021 .
Overview of Results of Operations
The following table sets forth our results of operations as a percentage of
revenue:
Three Months Ended Nine Months Ended
October 2, 2021 September 26, 2020 October 2, 2021 September 26, 2020
Revenue 100.0 % 100.0 % 100.0 % 100.0 %
Cost of revenue:
Cost of product revenue 63.0 51.8 61.6 48.5
Amortization of acquired intangible assets 0.1 0.1 0.1 0.1
Total cost of revenue 63.1 51.9 61.7 48.6
Gross profit 36.9 48.1 38.3 51.4
Operating expenses:
Research and development 9.1 9.3 10.9 12.6
Selling and marketing 13.4 12.2 16.8 15.4
General and administrative 5.1 6.9 6.5 8.5
Amortization of acquired intangible assets 0.1 0.1 0.1 0.1
Total operating expenses 27.7 28.5 34.3 36.6
Operating income 9.2 19.6 4.0 14.8
Other income, net 6.0 10.2 2.3 4.7
Income before income taxes 15.2 29.8 6.3 19.5
Income tax expense 2.2 7.2 0.7 4.4
Net income 13.0 % 22.6 % 5.6 % 15.1 %
Comparison of Three and Nine Months Ended October 2, 2021 and September 26, 2020
Revenue
Three Months Ended Nine Months Ended
October 2, September 26, Dollar Percent September 26, Dollar Percent
2021 2020 Change Change October 2, 2021 2020 Change Change
(Dollars in thousands) (Dollars in thousands)
Revenue $ 440,682 $ 413,145 $ 27,537 6.7 % $ 1,109,539 $ 885,563 $ 223,976 25.3 %
Revenue for the three months ended October 2, 2021 increased $27.5 million to
$440.7 million , or 6.7%, from $413.1 million for the three months ended
September 26, 2020 . The $27.5 million increase in revenue was partially driven
by 14.4% growth in sales of our mid and premium tier floor cleaning robots,
which contributed to a 3.2% increase in gross average selling price for the
three months ended October 2, 2021 compared to the three months ended
September 26, 2020 . In the three months ended October 2, 2021 , international
revenue increased $17.3 million , or 8.3%, which primarily reflected 15.4% growth
in EMEA and a 2.0% increase in Japan , while domestic revenue increased $10.3
million , or 5.0%. Our DTC revenue growth of 13.0% to $39.7 million , or 9.0% of
total revenue, reflected continued expansion of this channel as we invested in
enhancing the online buying experience and upgrading our digital marketing
capabilities.
Revenue for the nine months ended October 2, 2021 increased $224.0 million to
$1,109.5 million , or 25.3%, compared to $885.6 million for the nine months ended
September 26, 2020 . The $224.0 million increase in revenue was primarily
attributable to a 19.5% increase in units shipped and a 3.5% increase in gross
average selling price for the nine months ended October 2, 2021 compared to the
nine months ended September 26, 2020 . The increase in gross average selling
price was primarily driven by a 33.7% growth in sales of our mid and premium
tier floor cleaning robots. In the nine months ended October 2, 2021 ,
international revenue increased $124.2 million , or 27.2% due primarily to 34.8%
growth in EMEA and a 13.5% increase in Japan , while domestic revenue increased
$99.7 million , or 23.3%. Our DTC revenue growth of 45.2% to $119.7 million , or
10.8% of total revenue, contributed to these increases.
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Cost of Product Revenue
Three Months Ended Nine Months Ended
September 26, Dollar Percent September 26, Dollar Percent
October 2, 2021 2020 Change Change October 2, 2021 2020 Change Change
(Dollars in thousands) (Dollars in thousands)
Cost of product
revenue $ 277,703 $ 214,079 $ 63,624 29.7 % $ 684,190 $ 429,060 $ 255,130 59.5 %
As a percentage of
revenue 63.0 % 51.8 % 61.6 % 48.5 %
Cost of product revenue increased to $277.7 million in the three months ended
October 2, 2021 , compared to $214.1 million in the three months ended
September 26, 2020 . The $63.6 million increase in cost of product revenue is due
to the 6.7% increase in revenue. In addition, cost of product revenue during the
three months ended October 2, 2021 included $14.1 million in tariff costs,
whereas last year, we did not have any tariff costs as we were granted temporary
exclusion from Section 301 List 3 tariffs. The increase in cost of product
revenue was also impacted by higher warranty costs and global supply chain
challenges associated with increased oceanic transport and air freight expenses
and higher raw materials and component costs associated with limited
semiconductor chip availability.
Cost of product revenue increased to $684.2 million in the nine months ended
October 2, 2021 , compared to $429.1 million in the nine months ended
September 26, 2020 . The $255.1 million increase in cost of product revenue is
due to the 25.3% increase in revenue. In addition, cost of product revenue
during the nine months ended October 2, 2021 included $29.2 million in tariff
costs, whereas last year, we recognized a benefit of $40.0 million from tariff
refunds. The increase in cost of product revenue was also impacted by higher
warranty costs and global supply chain challenges associated with increased
oceanic transport and air freight expenses and higher raw materials and
component costs associated with limited semiconductor chip availability.
Gross Profit
Three Months Ended Nine Months Ended
September 26, Dollar Percent September 26, Dollar Percent
October 2, 2021 2020 Change Change October 2, 2021 2020 Change Change
(Dollars in thousands) (Dollars in thousands)
Gross profit $ 162,754 $ 198,841 $ (36,087) (18.1) % $ 424,674 $ 454,808 $ (30,134) (6.6) %
Gross margin 36.9 % 48.1 % 38.3 % 51.4 %
Gross margin decreased to 36.9% in the three months ended October 2, 2021 ,
compared to 48.1% in the three months ended September 26, 2020 . Gross margin
decreased 11.2% driven by Section 301 List 3 tariff costs of $14.1 million
included in the three months ended October 2, 2021 compared to no tariff costs
during the same period last year. The remainder of the decrease in gross margin
was driven by supply chain headwinds with increases in freight and material
costs, pricing and promotional activity and higher warranty expense. We expect
gross margin pressure to continue over the next few quarters as we anticipate
continued elevated costs associated with increased raw materials, oceanic
transport and air freight expenses as well as higher component costs associated
with limited semiconductor chip availability.
Gross margin decreased to 38.3% in the nine months ended October 2, 2021
compared to 51.4% in the nine months ended September 26, 2020 . Gross margin
decreased 13.1% driven by Section 301 List 3 tariff costs of $29.2 million
included in the nine months ended October 2, 2021 , while we recognized a benefit
of $40.0 million from tariff refunds during the nine months ended September 26,
2020 . The remainder of the decrease in gross margin was mainly driven by supply
chain headwinds with increased component costs and transportation fees, pricing
and promotional activity and product mix.
Research and Development
Three Months Ended Nine Months Ended
September 26, Dollar Percent September 26, Dollar Percent
October 2, 2021 2020 Change Change October 2, 2021 2020 Change Change
(Dollars in thousands) (Dollars in thousands)
Research and
development $ 40,262 $ 38,613 $ 1,649 4.3 % $ 120,859 $ 111,929 $ 8,930 8.0 %
As a percentage of
revenue 9.1 % 9.3 % 10.9 % 12.6 %
Research and development expenses increased $1.6 million , or 4.3%, to $40.3
million (9.1% of revenue) in the three months ended October 2, 2021 from $38.6
million (9.3% of revenue) in the three months ended September 26, 2020 . This
increase is primarily due to a $2.8 million increase in program-related costs
and $3.8 million higher people-related costs
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associated with additional headcount. These increases were offset by lower
short-term incentive compensation cost of $4.5 million resulting from changes in
assessments driven by supply chain challenges as further discussed elsewhere in
this Quarterly Report on Form 10-Q.
Research and development expenses increased $8.9 million , or 8.0%, to $120.9
million (10.9% of revenue) in the nine months ended October 2, 2021 from $111.9
million (12.6% of revenue) in the nine months ended September 26, 2020 . This
increase is primarily due to a $7.7 million increase in program-related costs
and a $7.0 million increase in people-related costs associated with additional
headcount offset by lower short-term incentive compensation of $5.2 million
resulting from changes in assessments driven by supply chain challenges as
further discussed elsewhere in this Quarterly Report on Form 10-Q.
Selling and Marketing
Three Months Ended Nine Months Ended
September 26, Dollar Percent September 26, Dollar Percent
October 2, 2021 2020 Change Change October 2, 2021 2020 Change Change
(Dollars in thousands) (Dollars in thousands)
Selling and marketing $ 59,055 $ 50,488 $ 8,567 17.0 % $ 186,722 $ 136,144 $ 50,578 37.2 %
As a percentage of
revenue 13.4 % 12.2 % 16.8 % 15.4 %
Selling and marketing expenses increased $8.6 million , or 17.0%, to $59.1
million (13.4% of revenue) in the three months ended October 2, 2021 from $50.5
million (12.2% of revenue) in the three months ended September 26, 2020 . This
increase was primarily attributable to higher marketing spend of $5.9 million
associated with increased use of working media to support our new launches and
drive sales growth, $4.0 million increase in people-related costs associated
with additional headcount as well as $2.0 million higher technology related cost
including cloud service and maintenance and support fees as we continue to
invest in our digital marketing and e-commerce capabilities. These increases
were offset by lower short-term incentive compensation of $2.2 million resulting
from changes in assessments driven by supply chain challenges as further
discussed elsewhere in this Quarterly Report on Form 10-Q.
Selling and marketing expenses increased $50.6 million , or 37.2%, to $186.7
million (16.8% of revenue) in the nine months ended October 2, 2021 from $136.1
million (15.4% of revenue) in the nine months ended September 26, 2020 . This
increase was primarily attributable to higher marketing spend of $35.2 million
associated with increased used of working media to drive sales growth and new
launches, $10.0 million higher people-related costs associated with additional
headcount as well as $5.7 million higher technology related cost including cloud
service and maintenance and support fees as we continue to invest in our digital
marketing and e-commerce capabilities. These increases were offset by lower
short-term incentive compensation of $2.5 million resulting from changes in
assessments driven by supply chain challenges as further discussed elsewhere in
this Quarterly Report on Form 10-Q.
General and Administrative
Three Months Ended Nine Months Ended
September 26, Dollar Percent September 26, Dollar Percent
October 2, 2021 2020 Change Change October 2, 2021 2020 Change Change
(Dollars in thousands) (Dollars in thousands)
General and
administrative $ 22,688 $ 28,490 $ (5,802) (20.4) % $ 72,587 $ 74,919 $ (2,332) (3.1) %
As a percentage of
revenue 5.1 % 6.9 % 6.5 % 8.5 %
General and administrative expenses decreased $5.8 million , or 20.4%, to $22.7
million (5.1% of revenue) in the three months ended October 2, 2021 from $28.5
million (6.9% of revenue) in the three months ended September 26, 2020 . This
decrease is primarily due to lower vesting expectations related to our
performance-based stock-based compensation and lower short-term incentive
compensation cost of $11.3 million resulting from changes in assessments driven
by the supply chain challenges discussed elsewhere in this Quarterly Report on
Form 10-Q. This decrease is offset by increases in legal fees of $3.5 million
driven by higher intellectual property litigation costs, people-related costs of
$1.2 million associated with additional headcount as well as higher consulting
services costs of $1.1 million .
General and administrative expenses decreased $2.3 million , or 3.1%, to $72.6
million (6.5% of revenue) in the nine months ended October 2, 2021 from $74.9
million (8.5% of revenue) in the nine months ended September 26, 2020 . This
decrease is primarily due to lower vesting expectations related to our
performance-based stock-based compensation and lower short-term incentive
compensation cost of $9.6 million from changes in assessments driven by the
supply chain challenges
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discussed elsewhere in this Quarterly Report on Form 10-Q. We also saw a
decrease in allowance for credit loss of $7.6 million . These decreases were
offset by an increase in legal fees of $6.5 million driven by higher
intellectual property litigation costs, an increase in people-related cost of
$4.3 million associated with additional headcount, and higher consulting
services cost of $1.6 million . During the nine months ended October 2, 2021 , the
allowance for credit loss decreased $2.1 million as a result of improved
financial conditions and credit rating for certain customer accounts. During the
nine months ended September 26, 2020 , the allowance for credit loss increased by
$5.5 million due to concerns about certain customers' ability to successfully
navigate the pandemic.
Amortization of Acquired Intangible Assets
Three Months Ended Nine Months Ended
September 26, Dollar Percent October 2, September Dollar Percent
October 2, 2021 2020 Change Change 2021 26, 2020 Change Change
(Dollars in thousands) (Dollars in thousands)
Cost of revenue $ 225 $ 225 $ - - % $ 675 $ 1,695 $ (1,020) (60.2) %
Operating expense 251 256 (5) (2.0) % 661 764 (103) (13.5) %
Total amortization
expense $ 476 $ 481 $ (5) (1.0) % $ 1,336 $ 2,459 $ (1,123) (45.7) %
As a percentage of
revenue 0.1 % 0.1 % 0.1 % 0.3 %
The decrease in amortization of acquired intangible assets in the nine months
ended October 2, 2021 as compared to the nine months ended September 26, 2020 ,
was primarily related to the acquired technology intangible asset that was fully
amortized in the second quarter of 2020.
Other Income, Net
Three Months Ended Nine Months Ended
September 26, Dollar Percent September 26, Dollar Percent
October 2, 2021 2020 Change Change October 2, 2021 2020 Change Change
(Dollars in thousands) (Dollars in thousands)
Other income, net $ 26,585 $ 42,240 $ (15,655) (37.1) % $ 26,139 $ 41,837 $ (15,698) (37.5) %
As a percentage of
revenue 6.0 % 10.2 % 2.3 % 4.7 %
During the three and nine months ended October 2, 2021 , other income, net
primarily consists of a gain of $20.3 million associated with our Matterport
investment when Matterport completed a merger and we received shares in MTTR,
and a gain of $6.7 million associated with marking the shares to fair value.
During the three and nine months ended September 26, 2020 , other income, net
primarily consists of a gain of $43.5 million associated with our InTouch Health
investment when Teladoc Health, Inc., or Teladoc, acquired InTouch Health and
exchanged our shares of InTouch Health for shares of Teladoc during the third
quarter of 2020.
Income Tax Expense
Three Months Ended Nine Months Ended
October 2, September 26, Dollar Percent October 2, September 26, Dollar Percent
2021 2020 Change Change 2021 2020 Change Change
(Dollars in thousands) (Dollars in thousands)
Income tax expense $ 9,867 $ 29,982 $ (20,115) (67.1) % $ 8,083 $ 39,156 $ (31,073) (79.4) %
Effective income tax
rate 14.7 % 24.3 % 11.5 % 22.6 %
We recorded an income tax expense of $9.9 million and $30.0 million for the
three months ended October 2, 2021 and September 26, 2020 , respectively. The
$9.9 million income tax expense for the three months ended October 2, 2021
resulted in an effective income tax rate of 14.7%. The $30.0 million income tax
expense for the three months ended September 26, 2020 resulted in an effective
income tax rate of 24.3%. The decrease in effective tax rate was primarily due
to the greater impact of tax benefits, such as the research and development tax
credit, on a lower pretax income base.
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Our 14.7% effective rate of income tax expense for the three months ended
October 2, 2021 was lower than the federal statutory tax rate of 21% primarily
because of the impact of tax benefits from foreign derived intangible income
("FDII") and research and development tax credits.
We recorded an income tax expense of $8.1 million and $39.2 million for the nine
months ended October 2, 2021 and September 26, 2020 , respectively. The $8.1
million income tax expense for the nine months ended October 2, 2021 resulted in
an effective income tax rate of 11.5%. The $39.2 million income tax expense for
the nine months ended September 26, 2020 resulted in an effective income tax
rate of 22.6%. The decrease in the effective income tax rate was primarily due
to the recognition of discrete tax benefits related to stock-based compensation
as well as the greater impact of tax benefits, such as the research and
development income credit, on a lower pretax income base.
Our effective income tax rate of 11.5% for the nine months ended October 2, 2021
differed from the federal statutory tax rate of 21% primarily due to the
recognition of a discrete tax benefits related to stock-based compensation as
well as the impact of tax benefits from FDII and research and development tax
credits.
The effective tax rate for interim periods is determined based upon our
estimated annual effective tax rate, adjusted for the effect of discrete items
arising in that quarter. The impact of such inclusions could result in a higher
or lower effective tax rate during a quarter, based upon the geographic mix and
timing of our actual earnings or losses versus annual projections.
Liquidity and Capital Resources
At October 2, 2021 , our principal sources of liquidity were cash and cash
equivalents totaling $218.0 million . Our working capital was $487.3 million as
of October 2, 2021 , compared to $573.7 million as of January 2, 2021 .
We manufacture and distribute our products through contract manufacturers and
third-party logistics providers. We believe 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, although we invest
periodically in upgrading these facilities, a portion of which investment will
be reimbursed by the landlords of these facilities. Accordingly, our capital
spending is generally limited to machinery and tooling, leasehold improvements,
business applications software and computer and equipment. In the three months
ended October 2, 2021 and September 26, 2020 , we spent $25.3 million and $25.0
million , respectively, on capital expenditures.
Our strategy for delivering consumer products to our distributors and retail
customers gives us the flexibility to provide container shipments directly from
our contract manufacturers in Southern China and Malaysia to our customers and,
alternatively, allows our distributors and certain retail customers to take
possession of product on a domestic basis. Accordingly, our inventory consists
of goods shipped to our third-party logistics providers for the fulfillment of
distributor, retail and direct-to-consumer sales. Our contract manufacturers are
also responsible for purchasing and stocking components required for the
production of our products, and they typically invoice us when the finished
goods are shipped.
Cash used in operating activities
Net cash used in operating activities for the nine months ended October 2, 2021
was $90.8 million , of which the principal components were the cash outflow of
$162.2 million from change in working capital, partially offset by our net
income of $61.9 million and non-cash charges of $9.6 million . The change in
working capital was driven by increases in inventory of $174.0 million and
accounts receivable of $71.4 million . This was partially offset by an increase
in accounts payable and accrued liabilities of $89.0 million .
Cash provided by investing activities
Net cash provided by investing activities for the nine months ended October 2,
2021 was $29.0 million . During the nine months ended October 2, 2021 , we
received $64.0 million from the sales and maturities of our investments while we
paid $9.6 million for the purchases of investments. We invested $25.3 million in
the purchase of property and equipment, including machinery and tooling for new
products and manufacturing expansion in Malaysia .
Cash used in financing activities
Net cash used in financing activities for the nine months ended October 2, 2021
was $150.0 million , which primarily reflects the repurchase of 1,198,218 shares
of our common stock for $100.0 million under an accelerated share repurchase
agreement during the three months ended October 2, 2021 , and the repurchase of
446,954 shares of our common stock for $50.0 million under the stock repurchase
program during the second quarter of 2021.
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Working Capital Facilities
Credit Facility
In June 2018 , we entered into a new agreement with Bank of America, N.A .,
increasing the amount of our unsecured revolving line of credit from $75.0
million to $150.0 million and extending the term of the credit facility to June
2023 . As of October 2, 2021 , we had no outstanding borrowings under our
revolving credit facility. The revolving line of credit is available to fund
working capital and other corporate purposes. 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%. In the event that
LIBOR is discontinued as expected in 2023, we expect the interest rates for our
debt following such event will be based on either alternate base rates or agreed
upon replacement rates. While we do not expect a LIBOR discontinuation would
affect our ability to borrow or maintain already outstanding borrowings, it
could result in higher interest rates.
The credit facility contains customary terms and conditions for credit
facilities of this type, including restrictions on our ability to incur or
guarantee 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 this type of agreement, including maintaining a maximum ratio of
indebtedness to Adjusted EBITDA and a minimum specified interest coverage ratio.
The credit facility contains customary events of default, including for payment
defaults, breaches of representations, breaches of affirmative or negative
covenants, cross defaults to other material indebtedness, bankruptcy and failure
to discharge certain judgments. If a default occurs and is not cured within any
applicable cure period or is not waived, our obligations under the credit
facility may be accelerated.
As of October 2, 2021 , we were in compliance with all covenants under the
revolving credit facility.
Lines of Credit
We have an unsecured letter of credit facility with Bank of America, N.A .,
available to fund letters of credit up to an aggregate outstanding amount of
$5.0 million . As of October 2, 2021 , we had letters of credit outstanding of
$0.7 million under our letter of credit facility and other lines of credit with
Bank of America, N.A .
We have an unsecured guarantee line of credit with Mizuho, Bank Ltd. , available
to fund import tax payments up to an aggregate outstanding amount of
250.0 million Japanese Yen . As of October 2, 2021 , we had no outstanding balance
under the guarantee line of credit.
Working Capital and Capital Expenditure Needs
We currently have no material cash commitments, except for normal recurring
trade payables, expense accruals, capital expenditures and operating leases, all
of which we anticipate funding through working capital and funds provided by
operating activities. We believe our outsourced approach to manufacturing
provides us with flexibility in both managing inventory levels and financing our
inventory. We believe our existing cash and cash equivalents, short-term
investments, and funds available through our credit facility will be sufficient
to meet our working capital and capital expenditure needs over at least the next
twelve months. In the event our revenue plan does not meet our expectations, we
may eliminate or curtail expenditures to mitigate the impact on our working
capital. Our future capital requirements will depend on many factors, including
our rate of revenue growth or decline, the expansion or contraction of our
marketing and sales activities, the timing and extent of spending to support
product development efforts, the timing of introductions of new products and
enhancements to existing products, the acquisition of new capabilities or
technologies, the continuing market acceptance of our products and services, and
the impact of COVID-19 on our business. Moreover, to the extent existing cash
and cash equivalents, cash from operations, and cash from short-term borrowing
are insufficient to fund our future activities, we may need to raise additional
funds through public or private equity or debt financing. As part of our
business strategy, we may consider additional acquisitions of companies,
technologies and products, which could also require us to seek additional equity
or debt financing. Additional funds may not be available on terms favorable to
us or at all.
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Share Repurchases
Our Board of Directors approved a stock repurchase program authorizing up to
$200.0 million in share repurchases from time to time until September 5, 2021
which was extended until March 31, 2022 . As of October 2, 2021 , $25.0 million
remained available for further repurchase under the program.
On August 2, 2021 , we entered into an accelerated share repurchase ("ASR")
agreement with Wells Fargo Bank, National Association ("Wells Fargo"), under
which we paid $100.0 million and received an aggregate initial share delivery of
943,285 shares of our common stock, which were immediately retired. In September
2021 , Wells Fargo delivered an additional 254,933 shares of our common stock to
complete settlement of the ASR agreement. Under this agreement, we repurchased a
total of 1,198,218 shares of our common stock at an average price of $83.46 ,
totaling $100.0 million during the three months ended October 2, 2021 . The final
number of shares repurchased was based on the volume-weighted average price of
our common stock over the duration of the ASR agreement, less a discount.
Contractual Obligations
The disclosure of our contractual obligations and commitments is set forth under
the heading "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Contractual Obligations" in our Annual Report on Form
10-K for the year ended January 2, 2021 . Our principal commitments generally
consist of obligations under our credit facility, leases for office space and
minimum contractual obligations. Other obligations primarily consist of
subscription services. There have been no material changes in our contractual
obligations and commitments since January 2, 2021 .
At October 2, 2021 , we had outstanding purchase orders aggregating approximately
$494.8 million . The purchase orders, the majority of which are with our contract
manufacturers for the purchase of inventory in the normal course of business,
are for manufacturing and non-manufacturing related goods and services, and are
generally cancellable without penalty. In circumstances where we have determined
that we have financial exposure associated with any of these commitments, we
record a liability in the period in which that exposure is identified.
Off-Balance Sheet Arrangements
As of October 2, 2021 , we had no off-balance sheet arrangements as defined in
Item 303(a)(4) of Regulation S-K.
Recently Adopted Accounting Pronouncements
See Note 2 to the Consolidated Financial Statements for a discussion of recently
adopted accounting pronouncements.
Recently Issued Accounting Pronouncements
See Note 2 to the Consolidated Financial Statements for a discussion of recently
issued accounting pronouncements.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
Exchange Rate Sensitivity
Our international revenue and expenses are denominated in multiple currencies,
including British Pounds, Canadian Dollars, Chinese Renminbi, Euros and Japanese
Yen. As such, we have exposure to adverse changes in exchange rates associated
with the revenue and operating expenses of our foreign operations. Any
fluctuations in other currencies will have minimal direct impact on our
international revenue.
In addition to international business conducted in foreign currencies, we have
international revenue denominated in U.S. dollars. As the U.S. dollar
strengthens or weakens against other currencies, our international distributors
may be impacted, which could affect their profitability and our ability to
maintain current pricing levels on our international consumer products.
We regularly monitor the forecast of non-U.S. dollar revenue and expenses and
the level of non-U.S. dollar monetary asset and liability balances to determine
if any actions, including possibly entering into foreign currency contracts
should be taken to minimize the impact of fluctuating exchange rates on our
results of operations. Periodically, we enter into forward exchange contracts to
hedge against foreign currency fluctuations. These contracts may or may not be
designated as cash flow hedges for accounting purposes. We use cash flow hedges
primarily to reduce the effects of foreign exchange rate changes on sales in
Euros and Japanese Yen. At October 2, 2021 and January 2, 2021 , we had
outstanding cash flow hedges with a total notional value of $381.5 million and
$431.9 million , respectively.
We also enter into economic hedges that are not designated as hedges from an
accounting standpoint to reduce or eliminate the effects of foreign exchange
rate changes typically related to short term trade receivables and payables.
These contracts have maturities of twelve months or less. At October 2, 2021 and
January 2, 2021 , we had outstanding economic hedges with a total notional value
of $299.1 million and $192.2 million , respectively.
At October 2, 2021 , assuming all other variables are constant, if the U.S.
Dollar weakened or strengthened by 10%, the fair market value of our foreign
currency contracts would increase or decrease by approximately $42.1 million .
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