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 our pending acquisition by Amazon, expectations regarding the timing of the Merger, new product sales, product development and offerings, ability to address consumer needs, the expansion of our addressable market, factors for differentiation of our products, product integration plans, 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 ability to recover tariff refund claims, 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, efforts to mitigate supply chain challenges, availability of semiconductor chips, liquidity and the impact of cost-control measures and the amount of restructuring charges related to such activities, 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 and negative forms of such 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 1, "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the year endedJanuary 1, 2022 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. With over 30 years of artificial intelligence ("AI") and advanced robotics experience, we are focused on building thoughtful robots and developing intelligent home innovations that help make life better for millions of people around the world. iRobot's portfolio of home robots and smart home devices features proprietary technologies for the connected home and advanced concepts in cleaning, mapping and navigation, human-robot interaction and physical solutions. Leveraging this portfolio, we plan to add new capabilities and expand our offerings to help consumers make their homes easier to maintain, more efficient, more secure and healthier places to live. As ofJuly 2, 2022 , we had 1,438 full-time employees. Since our founding in 1990, we have developed the expertise 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, time and other risks associated with product development. These capabilities are amplified by iRobot OS, an evolution of our Genius Home Intelligence platform, which leverages our considerable expertise and ongoing investment in AI, home understanding and machine vision technologies to provide consumers with greater control over our products, simple integration with other smart home devices, recommendations that further enhance the cleaning experience and the ability to share and transfer home knowledge across multiple iRobot robots. We believe that the capabilities within iRobot OS will support our ability to build out a larger ecosystem that encompasses a broader range of adjacent robotic and smart home categories. 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 expand our total addressable market and capitalize on the anticipated growth in a wider range of robotic and smart home categories. 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: innovate, get, keep and grow. InMay 2022 , iRobot introduced iRobot OS, an evolution of our Genius Home Intelligence platform that delivers a new level of customer experience for a cleaner, healthier and smarter home. In addition, we continued to expand our connected customer base, maintained overall high levels of customer satisfaction and product utilization, and advanced key commercial activities aimed at increasing existing customer revenue, especially through our direct-to-consumer channel. During the second quarter of 2022, our connected customers who have opted-in to our digital communications grew to 15.7 million, an increase of 35% from the second quarter of 2021. 19 -------------------------------------------------------------------------------- InMarch 2022 , we were granted a temporary exclusion from Section 301 List 3 tariffs by the United States Trade Representative ("USTR"). This exclusion eliminates the 25% tariff on Roomba products imported fromChina beginning onOctober 12, 2021 and continuing untilDecember 31, 2022 . As ofJuly 2, 2022 , this tariff exclusion entitles us to a refund of approximately$32.0 million in tariffs paid. During the first quarter of 2022, we recognized$11.7 million of refunds as operating income (reduction to cost of product revenue) related to tariffs paid on Roomba robots imported afterOctober 12, 2021 and sold during fiscal 2021. While tariff refund claims are subject to the approval ofU.S. Customs, we currently expect to recover the entire balance of$32.0 million within the next twelve months. During the second quarter of 2022, our results were impacted by unanticipated order delays, cancellations and reductions from retailers in both EMEA andNorth America . Market conditions in these regions have been difficult. In EMEA, consumer confidence further eroded during the second quarter of 2022 as the region faces an economic recession and theRussia -Ukraine war continues. In theU.S. , retailers are addressing an uncertain consumer spending environment on the heels of high inflation, rising energy costs and slowing growth. We believe these macroeconomic trends and geopolitical events in these regions are likely to influence near-term orders from retailers and distributors as well as purchasing decisions by consumers. In response, we are in the process of initiating a restructuring of our operations to better align our cost structure with near-term revenue expectations, advance key strategic priorities, increase efficiencies and generate profitable growth in 2023. As part of this restructuring, we are accelerating actions to shift certain non-core engineering functions to lower-cost regions and increasingly leverage our joint design manufacturing (JDM) partners; better balancing global and regional commercial and marketing resources to support go-to-market plans while driving efficiencies and achieving economies of scale; realigning other operational areas to best support current needs of the business; and reducing our global facilities footprint. These actions are expected to include an overall reduction of approximately 140 employees, which represents 10% of our workforce as ofJuly 2, 2022 . In conjunction with the workforce reduction, we expect to record restructuring charges totaling between$5 million and$6 million over the next two quarters with the majority of the restructuring charges anticipated in the third quarter of 2022. Merger Agreement OnAugust 4, 2022 , the Company entered into the Merger Agreement, by and among the Company, Parent and Merger Sub, pursuant to which Merger Sub will merge with and into the Company, with the Company surviving the Merger as a wholly owned subsidiary of Parent. As a result of the Merger, each share of the Common Stock, outstanding immediately prior to the Effective Time (subject to certain exceptions, including shares of Common Stock owned by the Company, Merger Sub, Parent or any of their respective direct or indirect wholly owned subsidiaries and shares of Common Stock owned by stockholders of the Company who have validly demanded and not withdrawn appraisal rights in accordance with Section 262 of the General Corporation Law of theState of Delaware ) will, at the Effective Time, automatically be cancelled and converted into the right to receive$61.00 in cash, without interest and subject to applicable withholding taxes. If the Merger is consummated, the Company's Common Stock will be delisted from theNasdaq Stock Market LLC and deregistered under the Securities Exchange Act of 1934. 20 --------------------------------------------------------------------------------
Key Financial Metrics and Non-GAAP Financial Measures
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. The most directly comparable financial measures to the following non-GAAP metrics calculated underU.S. GAAP are gross profit and operating (loss) income. During the three months endedJuly 2, 2022 andJuly 3, 2021 , we had gross profit of$80.9 million and$139.0 million , respectively, and operating loss of$63.9 million and$3.0 million , respectively. During the six months endedJuly 2, 2022 andJuly 3, 2021 , we had gross profit of$188.5 million and$261.9 million , respectively, and operating (loss) income of$(87.2) million and$3.3 million , respectively. A summary of key metrics for the three and six months endedJuly 2, 2022 , as compared to the three and six months endedJuly 3, 2021 , is as follows: Three Months Ended Six Months Ended July 2, 2022 July 3, 2021 July 2, 2022 July 3, 2021 (dollars in
thousands, except average gross selling prices)
(unaudited)
Total Revenue $ 255,351 $ 365,596 $ 547,320 $ 668,857
Non-GAAP Gross Profit $ 82,888 $
139,484
32.5 % 38.2 % 33.5 % 39.3 %
Non-GAAP Operating (Loss) Income $ (53,300) $ 8,951 $ (71,816) $ 23,905
Non-GAAP Operating Margin (20.9) % 2.4 % (13.1) % 3.6 %
Total robot units shipped (in thousands) 865 1,314 1,839 2,402
Average gross selling prices for robot
units $ 331 $
325
Our non-GAAP financial measures reflect adjustments based on the following items. 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.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 including adjustments after the measurement period has ended.
Stock-Based Compensation: Stock-based compensation is a non-cash charge relating to stock-based awards.
Tariff Refunds: Our Section 301 List 3 Tariff Exclusion was reinstated inMarch 2022 , which temporarily eliminates tariffs on our Roomba products imported fromChina beginning onOctober 12, 2021 untilDecember 31, 2022 . This temporary exclusion entitles us to a refund of all related tariffs previously paid sinceOctober 12, 2021 . We exclude the refunds for tariff costs expensed during fiscal 2021 from our fiscal 2022 non-GAAP measures because those tariff refunds associated with tariff costs incurred in the past have no impact to our current period earnings. 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. Restructuring and Other: Restructuring charges are related to one-time actions associated with realigning resources, enhancing operational productivity and efficiency, or improving our cost structure in support of our strategy. Such actions are not reflective of ongoing operations and include costs primarily associated with severance costs, certain professional fees, costs associated with consolidation of warehouses, and other non-recurring costs directly associated with resource realignments tied to strategic initiatives or changes in business conditions.
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.
21
--------------------------------------------------------------------------------
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.
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.
The following table reconciles gross profit, operating (loss) income, net (loss)
income and net (loss) income per share on a GAAP and non-GAAP basis for the
three and six months ended
Three Months Ended Six Months Ended
July 2, 2022 July 3, 2021 July 2, 2022 July 3, 2021
(inthousands, except per share amounts)
GAAP Gross Profit$ 80,945 $
138,976
Amortization of acquired intangible assets 875 225 1,696 450 Stock-based compensation 585 283 1,026 646 Tariff refunds - - (11,727) - Restructuring and other 483 -$ 4,021 $ - Non-GAAP Gross Profit$ 82,888 $ 139,484 $ 183,476 $ 263,016 Non-GAAP Gross Margin 32.5 % 38.2 % 33.5 % 39.3 % GAAP Operating (Loss) Income$ (63,914) $ (3,042) $ (87,201) $ 3,347 Amortization of acquired intangible assets 1,400 430 2,731 859 Stock-based compensation 8,023 7,340 15,231 14,122 Tariff refunds - - (11,727) - Net merger, acquisition and divestiture expense 171 640 280 640 IP litigation expense, net 435 3,583 3,922 4,724 Restructuring and other 585 - 4,948 213 Non-GAAP Operating (Loss) Income$ (53,300) $ 8,951 $ (71,816) $ 23,905 Non-GAAP Operating Margin (20.9) % 2.4 % (13.1) % 3.6 % GAAP Net (Loss) Income$ (43,421) $ (2,758) $ (73,827) $ 4,685 Amortization of acquired intangible assets 1,400 430 2,731 859 Stock-based compensation 8,023 7,340 15,231 14,122 Tariff refunds - - (11,727) - Net merger, acquisition and divestiture expense 171 640 280 640 IP litigation expense, net 435 3,583 3,922 4,724 Restructuring and other 585 - 4,948 213 Loss on strategic investments 1,979 250 18,814 212 Income tax effect 21,350 (1,632) 12,165 (5,683) Non-GAAP Net (Loss) Income$ (9,478) $ 7,853 $ (27,463) $ 19,772
GAAP Net (Loss) Income Per Diluted Share
Dilutive effect of non-GAAP adjustments 1.25 0.37 1.71 0.52 Non-GAAP Net (Loss) Income Per Diluted Share$ (0.35) $
0.27
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance withU.S. GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, 22 -------------------------------------------------------------------------------- revenue, expenses and related disclosures. Our estimates and assumptions are based on historical experience and various other factors that we believe are reasonable under the circumstances. Actual results and outcomes may differ from our estimates and assumptions. The critical accounting policies affected most significantly by estimates and assumptions used in the preparation of our consolidated financial statements are described in Item 7 of our Annual Report on Form 10-K for the fiscal year endedJanuary 1, 2022 , filed with theSecurities and Exchange Commission onFebruary 15, 2022 . On an ongoing basis, we evaluate the critical accounting policies used to prepare our consolidated financial statements. There have been no material changes in these critical accounting policies and estimates.
Overview of Results of Operations
The following table sets forth our results of operations as a percentage of
revenue:
Three Months Ended Six Months Ended
July 2, 2022 July 3, 2021 July 2, 2022 July 3, 2021
Revenue 100.0 % 100.0 % 100.0 % 100.0 %
Cost of revenue:
Cost of product revenue 68.0 61.9 65.3 60.7
Amortization of acquired intangible assets 0.3 0.1 0.3 0.1
Total cost of revenue 68.3 62.0 65.6 60.8
Gross profit 31.7 38.0 34.4 39.2
Operating expenses:
Research and development 16.4 10.6 15.4 12.0
Selling and marketing 29.8 20.9 25.0 19.1
General and administrative 10.3 7.2 9.7 7.5
Amortization of acquired intangible assets 0.2 0.1 0.2 0.1
Total operating expenses 56.7 38.8 50.3 38.7
Operating (loss) income (25.0) (0.8) (15.9) 0.5
Other expense, net (0.9) (0.1) (3.5) (0.1)
(Loss) income before income taxes (25.9) (0.9) (19.4) 0.4
Income tax benefit (8.9) (0.1) (5.9) (0.3)
Net (loss) income (17.0) % (0.8) % (13.5) % 0.7 %
Comparison of Three and Six Months Ended
Revenue
Three Months Ended Six Months Ended
Dollar Percent Dollar Percent
July 2, 2022 July 3, 2021 Change Change July 2, 2022 July 3, 2021 Change Change
(Dollars in thousands) (Dollars in thousands)
Revenue $ 255,351 $ 365,596 $ (110,245) (30.2) % $ 547,320 $ 668,857 $ (121,537) (18.2) %
Revenue for the three months ended July 2, 2022 decreased $110.2 million to
$255.4 million , or 30.2%, from $365.6 million for the three months ended July 3,
2021 . Geographically, in the three months ended July 2, 2022 , domestic revenue
decreased $57.4 million , or 29.2%, and international revenue decreased $52.8
million , or 31.3%, which primarily reflected a 38.9% decrease in EMEA. These
decreases were due to ongoing order softness from distributors in EMEA and the
timing of expected orders that had shifted to the second half of 2022,
compounded by unanticipated order reductions, delays and cancellations from
retailers in North America and EMEA. The decrease in revenue reflected a 34.2%
decrease in total robots shipped, slightly offset by a 1.8% increase in gross
average selling price for the three months ended July 2, 2022 , compared to the
three months ended July 3, 2021 .
23
--------------------------------------------------------------------------------
Revenue for the six months ended July 2, 2022 decreased $121.5 million to
$547,320 , or 18.2% from $668.9 million for the six months ended July 3, 2021 .
Geographically, in the six months ended July 2, 2022 , international revenue
decreased $102.5 million , or 28.7%, which primarily reflected a 41.5% decrease
in EMEA, and domestic revenue decreased $19.0 million , or 6.1%. Whereas revenue
for the first six months of 2021 benefited from stronger pandemic-driven
consumer demand and a relatively unconstrained supply chain environment, revenue
for the first six months of 2022 was impacted by order softness from
distributors in EMEA and the timing of expected orders that had shifted to the
second half of 2022, compounded by unanticipated order reductions, delays and
cancellations from retailers in North America and EMEA. These decreases in
revenue reflected a 23.4% decrease in total robots shipped, slightly offset by a
3.1% increase in gross average selling price for the six months ended July 2,
2022 , compared to the six months ended July 3, 2021 .
Cost of Product Revenue
Three Months Ended Six Months Ended
Dollar Percent Dollar Percent
July 2, 2022 July 3, 2021 Change Change July 2, 2022 July 3, 2021 Change Change
(Dollars in thousands) (Dollars in thousands)
Cost of product
revenue $ 173,531 $ 226,395 $ (52,864) (23.4) % $ 357,164 $ 406,487 $ (49,323) (12.1) %
As a percentage of
revenue 68.0 % 61.9 % 65.3 % 60.7 %
Cost of product revenue decreased to $173.5 million in the three months ended
July 2, 2022 , compared to $226.4 million in the three months ended July 3, 2021 .
The decrease in cost was primarily driven by the 30.2% decrease in revenue. In
addition, we benefited from lower tariff cost of $0.5 million during the three
months ended July 2, 2022 , compared to $11.6 million in tariff cost during the
same period last year. These decreases were offset by higher supply chain costs
continuing from the second half of fiscal 2021.
Cost of product revenue decreased to $357.2 million in the six months ended
July 2, 2022 , compared to $406.5 million in the six months ended July 3, 2021 .
The decrease in cost was primarily driven by the 18.2% decrease in revenue,
lower Section 301 tariff expense and lower warranty costs during the six months
ended July 2, 2022 compared to the six months ended July 3, 2021 . In March 2022 ,
we were granted a temporary exclusion from Section 301 List 3 tariffs which
eliminates the 25% tariff on Roomba products imported from China beginning on
October 12, 2021 and continuing until December 31, 2022 . As a result of this
exclusion, we recognized approximately $11.7 million as a benefit to cost of
product revenue related to tariffs expensed in fiscal 2021 during the six months
ended July 2, 2022 , compared to $15.0 million in tariff expense during the six
months ended July 3, 2021 . The decrease was offset by higher supply chain cost
continuing from the second half of fiscal 2021 and a one-time action associated
with the consolidation of warehouses of $4.0 million in the U.S during the six
months ended July 2, 2022 .
Gross Profit
Three Months Ended Six Months Ended
Dollar Percent Dollar Percent
July 2, 2022 July 3, 2021 Change Change July 2, 2022 July 3, 2021 Change Change
(Dollars in thousands) (Dollars in thousands)
Gross profit $ 80,945 $ 138,976 $ (58,031) (41.8) % $ 188,460 $ 261,920 $ (73,460) (28.0) %
Gross margin 31.7 % 38.0 % 34.4 % 39.2 %
Gross margin decreased to 31.7% in the three months ended July 2, 2022 , compared
to 38.0% in the three months ended July 3, 2021 . Gross margin decreased 6.3%
driven by changes in pricing and promotion, higher supply chain cost continuing
from the second half of fiscal 2021, as well as unfavorable changes in foreign
exchange rates and the impact of lower revenue on our fixed costs. The decrease
is offset by lower tariff cost as we were granted temporary exclusion from
Section 301 List 3 which eliminates the 25% tariffs on Roomba products imported
from China as previously described, as well as lower warranty expense. We expect
gross margin pressure to continue over the next two quarters, but to improve by
next year through a multitude of product cost optimization, manufacturing and
supply chain initiatives that have been implemented over the past few quarters.
Gross margin decreased to 34.4% in the six months ended July 2, 2022 , compared
to 39.2% in the six months ended July 3, 2021 . Gross margin decreased 4.8%
driven by changes in pricing and promotional activity, higher supply chain cost
continuing from the second half of fiscal 2021, changes in foreign exchange
rates and the impact of lower revenue on our fixed costs. The decrease is offset
by lower tariff cost as we were granted temporary exclusion from Section 301
List 3 which eliminates the 25% tariffs on Roomba products imported from China
as previously described, and lower warranty expense. In addition, gross margin
was favorably impacted from $11.7 million recognized as a benefit from tariff
refunds during the first quarter of 2022 related to tariffs expensed in fiscal
2021.
24
--------------------------------------------------------------------------------
Research and Development
Three Months Ended Six Months Ended
Dollar Percent Dollar Percent
July 2, 2022 July 3, 2021 Change Change July 2, 2022 July 3, 2021 Change Change
(Dollars in thousands) (Dollars in thousands)
Research and
development $ 41,937 $ 38,677 $ 3,260 8.4 % $ 84,466 $ 80,597 $ 3,869 4.8 %
As a percentage of
revenue 16.4 % 10.6 % 15.4 % 12.0 %
Research and development expenses increased $3.3 million , or 8.4%, to $41.9
million (16.4% of revenue) in the three months ended July 2, 2022 from $38.7
million (10.6% of revenue) in the three months ended July 3, 2021 . This increase
was primarily due to a $2.6 million increase in people-related costs associated
with additional headcount.
Research and development expenses increased $3.9 million , or 4.8%, to $84.5
million (15.4% of revenue) in the six months ended July 2, 2022 from $80.6
million (12.0% of revenue) in the six months ended July 3, 2021 . This increase
was primarily due to a $5.0 million increase in people-related costs associated
with additional headcount, offset by a $1.4 million decrease in program-related
costs, and a $1.0 million decrease in incentive compensation costs.
Selling and Marketing
Three Months Ended Six Months Ended
Dollar Percent Dollar Percent
July 2, 2022 July 3, 2021 Change Change July 2, 2022 July 3, 2021 Change Change
(Dollars in thousands) (Dollars in thousands)
Selling and marketing
(0.9) %$ 137,082 $ 127,668 $ 9,414 7.4 % As a percentage of revenue 29.8 % 20.9 % 25.0 % 19.1 % Selling and marketing expenses decreased$0.7 million , or 0.9%, to$76.0 million (29.8% of revenue) in the three months endedJuly 2, 2022 from$76.7 million (20.9% of revenue) in the three months endedJuly 3, 2021 . This decrease was primarily attributable to lower marketing spend of$3.9 million associated with decreased use of working media, offset by a$2.6 million increase in people-related costs associated with additional headcount. Selling and marketing expenses increased$9.4 million , or 7.4%, to$137.1 million (25.0% of revenue) in the six months endedJuly 3, 2021 from$127.7 million (19.1% of revenue) in the six months endedJuly 3, 2021 . This increase was primarily driven by a$4.6 million increase in people-related costs associated with additional headcount and higher marketing spend of$3.1 million associated with increased use of working media during the first quarter of 2022. In addition, the increase was also attributable to a$1.2 million increase in technology related costs including cloud service and maintenance and support fees as we continue to invest in our digital marketing and e-commerce capabilities. General and Administrative Three Months Ended Six Months Ended Dollar Percent Dollar Percent July 2, 2022 July 3, 2021 Change Change July 2, 2022 July 3, 2021 Change Change (Dollars in thousands) (Dollars in thousands) General and administrative$ 26,380 $ 26,459 $ (79) (0.3) %$ 53,078 $ 49,899 $ 3,179 6.4 %
As a percentage of revenue 10.3 % 7.2 % 9.7 % 7.5 % General and administrative expenses of$26.4 million (10.3% of revenue) in the three months endedJuly 2, 2022 , remained relatively flat compared to$26.5 million (7.2% of revenue) in the three months endedJuly 3, 2021 . During the three months endedJuly 2, 2022 , legal fees decreased$3.1 million driven by lower intellectual property litigation cost, offset by increases of$2.0 million related to the allowance for credit losses and$0.8 million associated with people-related costs. General and administrative expenses increased$3.2 million , or 6.4%, to$53.1 million (9.7% of revenue) in the six months endedJuly 2, 2022 from$49.9 million (7.5% of revenue) in the six months endedJuly 3, 2021 . This increase was primarily attributable to increases of$3.6 million related to the allowance for credit losses and$1.7 million of enterprise software 25 --------------------------------------------------------------------------------
maintenance, support and services cost. These increases were offset by a
decrease in legal fees of
Amortization of Acquired Intangible Assets
Three Months Ended Six Months Ended
Dollar Percent Dollar Percent
July 2, 2022 July 3, 2021 Change Change July 2, 2022 July 3, 2021 Change Change
(Dollars in thousands) (Dollars in thousands)
Cost of revenue $ 875 $ 225 $ 650 288.9 % $ 1,696 $ 450 $ 1,246 276.9 %
Operating expense 525 205 320 156.1 % 1,035 409 626 153.1 %
Total amortization
expense $ 1,400 $ 430 $ 970 225.6 % $ 2,731 $ 859 $ 1,872 217.9 %
As a percentage of
revenue 0.5 % 0.1 % 0.5 % 0.1 %
The increase in amortization of acquired intangible assets in the three and six
months ended July 2, 2022 as compared to the three and six months ended July 3,
2021 , was primarily related to the acquired intangible assets as part of the
acquisition of Aeris Cleantec AG in the fourth quarter of 2021.
Other Expense, Net
Three Months Ended Six Months Ended
Dollar Percent Dollar Percent
July 2, 2022 July 3, 2021 Change Change July 2, 2022 July 3, 2021 Change Change
(Dollars in thousands) (Dollars in thousands)
Other expense, net $ (2,182) $ (286) $ (1,896) 662.9 % $ (18,928) $ (446) $ (18,482) 4,143.9 %
As a percentage of
revenue (0.9) % (0.1) % (3.5) % (0.1) %
Other expense, net during the three months ended July 2, 2022 , was primarily
driven by losses on strategic investments. Other expense, net during the six
months ended July 2, 2022 , primarily consists of a realized loss of
$17.1 million associated with the sale of Matterport shares. Other expense, net
includes interest income, interest expense, foreign currency gains (losses) as
well as gains (losses) from strategic investments.
Income Tax Benefit
Three Months Ended Six Months Ended
Dollar Percent Dollar Percent
July 2, 2022 July 3, 2021 Change Change July 2, 2022 July 3, 2021 Change Change
(Dollars in thousands) (Dollars in thousands)
Income tax benefit $ (22,675) $ (570) $ (22,105) 3,878.1 % $ (32,302) $ (1,784) $ (30,518) 1,710.7 %
Effective income tax
rate 34.3 % 17.1 % 30.4 % (61.5) %
We recorded an income tax benefit of $22.7 million and $0.6 million for the
three months ended July 2, 2022 and July 3, 2021 , respectively. The $22.7
million income tax benefit for the three months ended July 2, 2022 resulted in
an effective income tax rate of 34.3%. The $0.6 million income tax benefit for
the three months ended July 3, 2021 resulted in an effective income tax rate of
17.1%. The increase in the effective income tax rate was primarily driven by the
change in expected mix of geographic earnings and tax attributes during the
three months ended July 2, 2022 as well as discrete tax expense recognized in
the three months ended July 3, 2021 .
Our 34.3% effective rate of income tax for the three months ended July 2, 2022
was higher than the federal statutory tax rate of 21% primarily because of the
recognition of R&D credits and the benefit associated with Foreign-Derived
Intangible Income.
We recorded an income tax benefit of $32.3 million and $1.8 million for the six
months ended July 2, 2022 and July 3, 2021 , respectively. The $32.3 million
income tax benefit for the six months ended July 2, 2022 resulted in an
effective tax rate of 30.4%. The $1.8 million income tax benefit for the six
months ended July 3, 2021 resulted in an effective tax rate of (61.5)%.
26
--------------------------------------------------------------------------------
The change in the effective income tax rate was primarily due to the recognition
of discrete tax benefits related to stock-based compensation during the six
months period ended July 3, 2021 compared to a discrete tax expense during the
current year.
The Company's effective income tax rate of 30.4% for the six months ended
Liquidity and Capital Resources
AtJuly 2, 2022 , our principal sources of liquidity were cash and cash equivalents totaling$63.4 million . Our working capital, which represents our total current assets less total current liabilities, was$327.7 million as ofJuly 2, 2022 , compared to$393.9 million as ofJanuary 1, 2022 . Cash and cash equivalents held by our foreign subsidiaries totaled$22.6 million as ofJuly 2, 2022 . We expect the cash held overseas to be permanently reinvested outside ofthe United States , and ourU.S. operation to be funded through its own operating cash flows, cash, and if necessary, through borrowing under our working capital credit facility. OnAugust 4, 2022 , we entered into the Merger Agreement with Amazon and Merger Sub, providing for the acquisition of iRobot by Amazon. We have agreed to various covenants and agreements, including, among others, agreements to conduct our business in the ordinary course of business between the execution of the Merger Agreement and the closing of the Merger. Outside of certain limited exceptions, we may not take certain actions without Amazon's consent, including (i) acquiring businesses and disposing of significant assets, (ii) incurring expenditures above specified thresholds; (iii) incurring additional debt above specified thresholds, (iv) issuing additional securities, or (v) repurchasing shares of our outstanding common stock. We do not believe these restrictions will prevent us from meeting our ongoing costs of operations, working capital needs or capital expenditure requirements. 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, and only invest periodically in leasehold improvements, a portion of which is often 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. During the six months endedJuly 2, 2022 andJuly 3, 2021 , we spent$4.9 million and$21.9 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 inSouthern China andMalaysia to our customers or, 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 six months endedJuly 2, 2022 was$186.5 million , of which the principal components were the cash outflow of$133.8 million from change in working capital and our net loss of$73.8 million , partially offset by non-cash charges of$21.1 million . The change in working capital was driven by decreases in accounts payable and accrued liabilities of$102.1 million and increases in inventory and other assets of$70.4 million and$31.7 million , respectively. This was partially offset by a decrease in accounts receivable of$70.4 million .
Cash provided by investing activities
Net cash provided by investing activities for the six months endedJuly 2, 2022 was$9.4 million . During the six months endedJuly 2, 2022 , we received$17.4 million from the sales and maturities of our investments while we paid$3.1 million for the purchases of investments. We invested$4.9 million in the purchase of property and equipment, primarily related to machinery and tooling for new products.
Cash provided by financing activities
Net cash provided by financing activities for the six months endedJuly 2, 2022 was$36.5 million . During the six months endedJuly 2, 2022 , we received$35.0 million from borrowings under the revolving credit facility. We also received$3.1 million from employee stock plans and paid$1.6 million upon vesting of restricted stock where 27,064 shares were retained by us to cover employee tax withholdings. 27 --------------------------------------------------------------------------------
Working Capital Facilities Credit Facility
We currently have a
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. 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. OnMay 4, 2022 , we entered into a Second Amendment to the Amended and Restated Credit Agreement (the "Credit Agreement") withBank of America N.A . (the "Amendment") with an effective date ofMarch 31, 2022 . The Amendment waives the quarterly tested leverage and interest coverage covenants in the Credit Agreement for the first, second and third quarters of 2022. The interest coverage ratio calculation for the fourth quarter of 2022 was changed to a trailing nine months. Additionally, a new liquidity covenant was added for the remainder of 2022. The Amendment also increases the borrowing rate under the Credit Agreement for 2022 to LIBOR plus 1.5%. As ofJuly 2, 2022 , we were in compliance with the covenants under the Credit Agreement.
Lines of Credit
We have an unsecured letter of credit facility withBank of America, N.A ., available to fund letters of credit up to an aggregate outstanding amount of$5.0 million . As ofJuly 2, 2022 , we had letters of credit outstanding of$0.4 million under our letter of credit facility and other lines of credit withBank of America, N.A . We have an unsecured guarantee line of credit withMizuho, Bank Ltd. , available to fund import tax payments up to an aggregate outstanding amount of250.0 million Japanese Yen . As ofJuly 2, 2022 , 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 existing cash and cash equivalents as well as through our credit facility. 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 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 further to mitigate the impact on our working capital. We are optimistic that recent and anticipated drawdowns on our working capital credit facility will be repaid through anticipated cash provided by operating activities over the coming quarters. 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, the overall macro economic conditions due to heightened inflation and reduced consumer confidence stemming from theRussia -Ukraine war and the ongoing impact of the COVID-19 pandemic 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.
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 endedJanuary 1, 2022 . Our principal commitments generally consist of obligations under our credit facility, leases for office space, inventory related purchase obligations, and minimum contractual obligations. Other obligations consist primarily of subscription services. There have been no material changes in our contractual obligations and commitments sinceJanuary 1, 2022 . 28 -------------------------------------------------------------------------------- As ofJuly 2, 2022 , we had outstanding purchase orders aggregating approximately$368.8 million ,$70.6 million of which are not cancellable without penalty. 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.
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.
© Edgar Online, source
