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 Annual Report on Form 10-K. This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended (the "Exchange Act"), and are subject to the "safe harbor" created by those sections. In particular, statements contained in this Annual Report on Form 10-K that are not historical facts, including, but not limited to statements concerning new product sales, product development and offerings, 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, operating expenses, selling and marketing expenses, general and administrative expenses, research and development expenses, and compensation costs, our projected income tax rate, our credit and letter of credit facilities, our valuations of investments, valuation and composition of our stock-based awards, and liquidity, constitute forward-looking statements and are made under these safe harbor provisions. Some of the forward-looking statements can be identified by the use of forward-looking terms such as "believes," "expects," "may," "will," "should," "could," "seek," "intends," "plans," "estimates," "anticipates," or other comparable terms. Forward-looking statements involve inherent risks and uncertainties, which could cause actual results to differ materially from those in the forward-looking statements. We urge you to consider the risks and uncertainties discussed in greater detail under the heading "Risk Factors" in evaluating our forward-looking statements. We have no plans to update our forward-looking statements to reflect events or circumstances after the date of this report. We caution readers not to place undue reliance upon any such forward-looking statements, which speak only as of the date made.
Overview
iRobot 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, mapping and navigation, 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.
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 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.
Since the introduction of the Roomba robotic vacuum cleaner ("RVC") in 2002, we
have sold more than 30 million consumer robots worldwide to become a global,
market-leading consumer robotics innovator with a strong presence in major
geographic regions worldwide. In 2020, iRobot sold more than $1.4 billion in
consumer robots and navigated challenging market conditions as the COVID-19
pandemic directly and indirectly impacted all aspects of our business. Our
commitment to innovation and funding critical research and development projects
continued to yield tangible results through new product launches and new and
enhanced features and functionality. In addition to launching the Roomba i3 and
i3+ in North America during 2020, we introduced the iRobot Genius Home
Intelligence ("Genius"), a powerful new platform that delivers an expansive
range of digital features and experiences across our entire line of Wi-Fi
connected floor cleaning robots. Genius powers the iRobot HOME App, through
which Roomba and Braava users can operate their WiFi-connected floor cleaning
robots. Genius delivers a far greater level of personalization and control over
their floor cleaning robots, enable users to determine when, where and how their
robots clean. In addition, users can receive suggestions from the HOME app about
their cleaning activities that factors in the user's unique homes, schedules,
cleaning preferences and smart home integrations. In addition to these major new
product launches, we introduced the Roomba s9 and s9+ in the Asia Pacific region
and the Roomba Combo in select European countries during 2020.
Other 2020 highlights included our efforts to balance cost reductions as the
global pandemic began with investments to advance software-based research and
development and support the growth of our direct-to-consumer sales channel.
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Operationally, we managed through substantial changes in anticipated demand to
align production across our supply chain with substantially higher orders over
the course of the year while advancing plans to expand our manufacturing
capacity and overcome pandemic-related delays in Malaysia . Our profitability in
2020 benefited from an exclusion to United States tariffs on RVCs made in and
imported from China . We also appointed new leaders to oversee our finance,
accounting and IT; supply chain; commercial; and marketing organizations.
Our total revenue for 2020 was $1,430.4 million , which represents a 17.8%
increase from revenue of $1,214.0 million for 2019. Domestic revenue grew $141.0
million , or 23.4%, and international revenue increased by $75.4 million , or
12.3%, primarily as a result of higher sales of our premium robots.
Fiscal Periods
We operate and report using a 52-53 week fiscal year ending on the Saturday
closest to December 31 . Accordingly, our fiscal quarters will end on the
Saturday that falls closest to the last day of the third month of each quarter.
The fiscal year ended January 2, 2021 ("fiscal 2020") was a 53-week fiscal year.
The fiscal years ended December 28, 2019 ("fiscal 2019") and December 29, 2018
("fiscal 2018") were 52-week fiscal years.
Use of Non-GAAP Financial Measures
In addition to our results determined in accordance with accounting principles
generally accepted in the United States of America ("GAAP"), we report non-GAAP
financial measures in our quarterly and annual earnings releases, investor
presentations and other investor communications. We use these non-GAAP financial
measures to evaluate and analyze our core operating performance, trends and to
develop short-term and long-term operational plans.
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 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 eliminates tariffs on the Company's products
imported from China until December 31, 2020 and entitles 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.
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
that are not reflective of income tax expense incurred as a result of current
period earnings. These certain tax items include, among other non-recurring tax
items, impacts from the Tax Cuts and Jobs Act of 2017 and stock-based
compensation windfalls/shortfalls.
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.
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The following table reconciles gross profit, operating income, net income and
net income per share on a GAAP and non-GAAP basis for the fiscal years ended
January 2, 2021 , December 28, 2019 and December 29, 2018 :
Fiscal Year Ended
December 28, December 29,
January 2, 2021 2019 2018
GAAP Gross Profit $ 670,229 $ 543,927 $ 555,428
Amortization of acquired intangible assets 1,920 11,721 18,544
Stock-based compensation 1,511 1,486 1,407
Tariff refunds (36,486) - -
Non-GAAP Gross Profit $ 637,174 $ 557,134 $ 575,379
Non-GAAP Gross Margin 44.5 % 45.9 % 52.7 %
GAAP Operating Income $ 146,322 $ 86,618 $ 105,822
Amortization of acquired intangible assets 2,912 12,772 19,609
Stock-based compensation 29,975 23,744 25,804
Tariff refunds (36,486) - -Net merger, acquisition and divestiture (income) expense
(566) 466 138
IP litigation expense, net 5,444 2,218 3,556
Restructuring and other 2,073 - -
Non-GAAP Operating Income $ 149,674 Non-GAAP Operating Margin 10.5 % 10.4 % 14.2 % GAAP Net Income$ 147,068
Amortization of acquired intangible assets 2,912 12,772 19,609 Stock-based compensation 29,975 23,744 25,804 Tariff refunds (36,486) - -
Net merger, acquisition and divestiture (income) expense
(1,241) 466 138
IP litigation expense, net 5,444 2,218 3,556
Restructuring and other 2,073 - -
Gain on strategic investments (43,817) (8,904) (436)
Income tax effect 12,651 (11,576) (13,963)
Non-GAAP Net Income $ 118,579 $ 104,020 $ 122,700
GAAP Net Income Per Diluted Share $ 5.14 Dilutive effect of non-GAAP adjustments (1.00) 0.65 1.21 Non-GAAP Net Income Per Diluted Share $ 4.14
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, projected future cash flows and various other factors that we
believe are reasonable under the circumstances. Actual results may differ from
our estimates.
We believe that of our significant accounting policies, which are described in
the notes to our consolidated financial statements, the following accounting
policies involve a greater degree of judgment and complexity. Accordingly, we
believe
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that the following accounting policies are the most critical to aid in fully
understanding and evaluating our consolidated financial condition and results of
operations.
Revenue Recognition
We primarily derive our revenue from the sale of consumer robots and
accessories. We sell products directly to consumers through online stores and
indirectly through resellers and distributors. Revenue is recognized upon
transfer of control of promised products or services to customers, generally as
title and risk of loss pass, in an amount that reflects the consideration we
expect to receive in exchange for those products or services. Revenue is
recognized only to the extent that it is probable that a significant reversal of
revenue will not occur and when collection is considered probable. Taxes
collected from customers, which are subsequently remitted to governmental
authorities, are excluded from revenue. Shipping and handling expenses are
considered fulfillment activities and are expensed as incurred.
Our consumer robots are highly dependent on, and interrelated with, the embedded
software and cannot function without the software. As such, the consumer robots
are accounted for as a single performance obligation, and the revenue is
recognized at a point in time when the control is transferred to distributors,
resellers or directly to end customers through online stores. For certain
consumer robots with Wi-Fi capability ("connected robots"), each sale represents
an arrangement with multiple promises consisting of the robot, downloadable free
app, cloud services and potential future unspecified software upgrades. We have
determined that the app, cloud services and potential future unspecified
software upgrades represent one promised service to the customer to enhance the
functionality and interaction with the robot (referred to collectively as "Cloud
Services").
For contracts that contain multiple performance obligations, the transaction
price is allocated to each performance obligation based on a relative standalone
selling price ("SSP"). We estimate SSP for items that are not sold separately,
using market data if available or analysis of the cost of providing the products
or services plus a reasonable margin. The transaction price allocated to the
robots is recognized as revenue at a point in time when control is transferred
and when collection is considered probable. The transaction price allocated to
the Cloud Services is deferred and recognized on a straight-line basis over the
estimated term of the Cloud Services. For contracts with a duration of greater
than one year, the transaction price allocated to performance obligations that
are unsatisfied as of January 2, 2021 and December 28, 2019 was $11.5 million
and $4.0 million , respectively. We do not disclose the value of unsatisfied
performance obligations for contracts with an original expected duration of one
year or less.
Our products generally carry a one-year or two-year limited warranty that
promises customers that delivered products are as specified. We do not consider
these assurance-type warranties as a separate performance obligation and
therefore, we account for such warranties under ASC 460, "Guarantees." During
the fourth quarter of 2020, we began offering our customers the option to
purchase an extended warranty for a fee. Amounts paid for the extended warranty
plans are deferred and recognized as revenue on a straight-line basis over the
service period.
We provide limited rights of returns for direct-to-consumer sales generated
through our on-line stores and certain resellers and distributors. We record an
allowance for product returns based on specific terms and conditions included in
the customer agreements or based on historical experience and our expectation of
future returns. In addition, we may provide other credits or incentives, which
are accounted for as variable consideration when estimating the amount of
revenue to recognize. Where appropriate, these estimates take into consideration
relevant factors such as our historical experience, current contractual
requirements, specific known market events and trends and forecasted inventory
level in the channels. Overall, these reserves reflect our best estimates, and
the actual amounts of consideration ultimately received may differ from our
estimates. Returns and credits are estimated at contract inception and updated
at the end of each reporting period as additional information becomes available.
As of January 2, 2021 , we had reserves for product returns of $64.3 million and
other credits and incentives of $142.2 million . As of December 28, 2019 , we had
reserves for product returns of $55.2 million and other credits and incentives
of $134.0 million . Revenue recognized during the years ended January 2, 2021 and
December 28, 2019 related to performance obligations satisfied in a prior period
was not material.
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Credit Losses
We are exposed to credit losses primarily through sales of our products. We
assess each customer's ability to pay by conducting a credit review which
includes consideration of established credit ratings or an internal assessment
of the customer's creditworthiness based on an analysis of their financial
information when a credit rating is not available. We monitor the credit
exposure through active review of customer balances. Our expected loss
methodology for accounts receivable is developed through consideration of
factors including, but not limited to, historical collection experience, current
customer credit ratings, current and future economic and market conditions and
age of the receivable. Although we historically have not experienced significant
credit losses as it relates to trade accounts receivable, the COVID-19 pandemic
has caused uncertainty in some customer accounts. We recorded our estimate of
credit losses, resulting in an increase to the reserve and bad debt expense, of
$3.6 million during the fiscal year ended January 2, 2021 . As of January 2, 2021
and December 28, 2019 , we had an allowance for credit losses of $4.8 million and
$1.2 million , respectively.
Our exposure to credit losses may increase if our customers are adversely
affected by changes in economic pressures or uncertainty associated with local
or global economic recessions or other customer-specific factors. It is possible
that there could be a material adverse impact to the carrying amount of accounts
receivables if the liquidity of retailers, resellers and distributors continues
to be impacted by disruptions related to the COVID-19 pandemic.
Goodwill and Other Long-Lived Assets
Goodwill represents the excess of the purchase price in a business combination
over the fair value of the net tangible and intangible assets acquired. Goodwill
is not amortized but rather is assessed for impairment at the reporting unit
level annually during our fourth quarter of each fiscal year or more frequently
if we believe indicators of impairment exist. Goodwill impairment, if any, is
determined by comparing the reporting unit's fair value to its carrying value.
An impairment loss is recognized in an amount equal to the excess of the
reporting unit's carrying value over its fair value, up to the amount of
goodwill allocated to the reporting unit.
Other long-lived assets primarily consist of property and equipment, operating
lease right-of-use assets and intangible assets. We periodically evaluate the
recoverability of other long-lived assets whenever events and changes in
circumstances, such as reductions in demand or significant economic slowdowns in
the industry, indicate that the carrying amount of an asset may not be fully
recoverable. When indicators of impairment are present, the carrying values of
the asset group are evaluated in relation to the future undiscounted cash flows
of the underlying business. The net book value of the underlying asset is
adjusted to fair value if the sum of the expected discounted cash flows is less
than book value. Fair values are based on estimates of market prices and
assumptions concerning the amount and timing of estimated future cash flows and
assumed discount rates, reflecting varying degrees of perceived risk.
The impairment assessment of goodwill and other long-lived assets involves
significant estimates and assumptions, which may be unpredictable and inherently
uncertain. These estimates and assumptions include identification of reporting
units and asset groups, long-term growth rates, profitability, estimated useful
lives, comparable market multiples, and discount rates. Any changes in these
assumptions could impact the result of the impairment assessment. There was no
impairment of goodwill or other long-lived assets during fiscal 2020, 2019 and
2018.
Warranty
We generally provide a one-year warranty on all of our products except in
countries where a two-year warranty is required against defects in materials and
workmanship. Our standard warranty provides for repair or replacement of the
associated products during the warranty period. We record estimated warranty
costs in the period the related revenue is recognized based on historical
experience, expectations of future costs to repair or replace, and knowledge of
specific product failures outside our historical experience. Actual results
could differ from these estimates, which could cause increases or decreases to
the warranty reserves in future periods.
Stock-Based Compensation
We account for stock-based compensation through recognition of the fair value of
the stock-based compensation as a charge against earnings. The fair value for
time-based restricted stock units and performance-based restricted stock units
is based on the closing share price of our common stock on the date of grant.
For performance-based restricted stock units, the compensation cost is
recognized based on the number of units expected to vest upon the achievement of
the performance conditions. We recognize stock-based compensation as an expense
on a straight-line basis, over the requisite service period. We account for
forfeitures as they occur, rather than applying an estimated forfeiture rate.
Accounting for Income Taxes
Deferred tax assets and liabilities are determined based on the difference
between the financial statement and tax basis using enacted tax rates in effect
in the years in which those temporary differences are expected to be recovered
or settled in
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each jurisdiction. A valuation allowance is provided if, based upon the weight
of available evidence, it is more likely than not that the related benefits will
not be realized. We regularly review the deferred tax assets for recoverability
considering historical profitability, projected future taxable income, future
reversals of existing taxable temporary differences, as well as feasible tax
planning strategies in each jurisdiction. As of January 2, 2021 , December 28,
2019 and December 29, 2018 , we had a valuation allowance of $7.6 million , $3.8
million and $1.1 million , respectively, for certain deferred tax assets for
which we believe do not meet the "more likely than not" criteria for
recognition.
We report a liability for unrecognized tax benefits resulting from uncertain tax
positions taken or expected to be taken in a tax return. We recognize interest
and penalties, if any, related to unrecognized tax benefits in the income tax
provision.
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Overview of Results of Operations
The following table sets forth our results of operations for the periods shown
(in thousands):
Fiscal Year Ended
January 2, December 28, December 29,
2021 2019 2018
Revenue $ 1,430,390 $ 1,214,010 $ 1,092,584
Cost of revenue:
Cost of product revenue 758,241 658,362 518,612
Amortization of acquired intangible assets 1,920 11,721 18,544
Total cost of revenue 760,161 670,083 537,156
Gross profit 670,229 543,927 555,428
Operating expenses:
Research and development 156,670 141,607 140,629
Selling and marketing 265,475 231,548 210,411
General and administrative 100,770 83,103 97,501
Amortization of acquired intangible assets 992 1,051 1,065
Total operating expenses 523,907 457,309 449,606
Operating income 146,322 86,618 105,822
Other income, net 41,593 12,215 2,800
Income before income taxes 187,915 98,833 108,622
Income tax expense 40,847 13,533 20,630
Net income $ 147,068 $ 85,300 $ 87,992 The following table sets forth our results of operations as a percentage of revenue for the periods shown:
Fiscal Year Ended
January 2, December 28, December 29,
2021 2019 2018
Revenue 100.0 % 100.0 % 100.0 %
Cost of revenue:
Cost of product revenue 53.0 54.2 47.5
Amortization of acquired intangible assets 0.1 1.0 1.7
Total cost of revenue 53.1 55.2 49.2
Gross margin 46.9 44.8 50.8
Operating expenses:
Research and development 11.0 11.7 12.9
Selling and marketing 18.6 19.1 19.3
General and administrative 7.0 6.8 8.9
Amortization of acquired intangible assets 0.1 0.1 0.1
Total operating expenses 36.7 37.7 41.2
Operating income 10.2 7.1 9.6
Other income, net 3.0 1.0 0.3
Income before income taxes 13.2 8.1 9.9
Income tax expense 2.9 1.1 1.9
Net income 10.3 % 7.0 % 8.0 %
33-------------------------------------------------------------------------------- Table of Contents Comparison of Years EndedJanuary 2, 2021 ,December 28, 2019 andDecember 29, 2018 Revenue We primarily derive our revenue from product sales through a variety of distribution channels, including chain stores and other national retailers, through our own website and app, dedicated e-commerce websites, the online arms of traditional retailers and through value-added distributors and resellers worldwide. We recognize revenue upon transfer of control of promised products or services to customers, generally as title and risk of loss pass, in an amount that reflects total consideration, net of estimated returns and allowances. The following table shows revenue for fiscal years 2020, 2019 and 2018 (dollars in thousands): Fiscal Year Ended January 2, December 28, December 29, $ Change 2020 $ Change 2019 2021 2019 2018 vs. 2019 vs. 2018 Revenue$ 1,430,390 $ 1,214,010 $ 1,092,584 $ 216,380 $ 121,426 Year endedJanuary 2, 2021 as compared to the year endedDecember 28, 2019 Revenue increased 17.8% to$1,430.4 million in fiscal 2020 from$1,214.0 million in fiscal 2019. Although the initial impact of the COVID-19 pandemic on our sales and manufacturing supply chain activities during the first quarter of 2020 resulted in a revenue decline, demand for our robots increased substantially during the remainder of fiscal 2020 as maintaining a clean home took on greater prominence during the pandemic. We saw significant growth in our direct-to-consumer sales generating 11% of total fiscal 2020 revenue, up from approximately 6% in 2019. The increase in revenue was primarily driven by strong demand with a 10.1% increase in total units shipped in fiscal 2020 as compared to fiscal 2019. Units shipped increased to approximately 5.5 million units compared to approximately 5.0 million units in fiscal 2019. In fiscal 2020, domestic revenue increased$141.0 million , or 23.4%, while international revenue increased$75.4 million , or 12.3%, as compared to fiscal 2019. The international revenue growth was driven by increases in revenue fromJapan and EMEA of 20% and 8%, respectively, compared to 2019. Year endedDecember 28, 2019 as compared to the year endedDecember 29, 2018 Revenue increased 11.1% to$1,214.0 million in fiscal 2019 from$1,092.6 million in fiscal 2018. The$121.4 million increase in revenue was driven by an increase in average selling price of 5.4%. The increase in average selling price was primarily driven by the launch of our new products during the second half of fiscal 2018 and throughout 2019. Total robots shipped in fiscal 2019 increased 10.0% to approximately 5.0 million units compared to approximately 4.5 million units in fiscal 2018. In fiscal 2019, domestic revenue increased$42.6 million , or 7.6%, and international revenue increased$78.8 million , or 14.8%, compared to fiscal 2018. The international revenue growth was driven primarily by increases in revenue fromJapan and EMEA of 21% and 15%, respectively, compared to fiscal 2018. Cost of Product Revenue Cost of product revenue consists of product cost, including costs of our contract manufacturers for production, freight, import duties, tariffs, logistics and fulfillment costs, manufacturing and tooling equipment depreciation and warranty cost. We outsource the manufacture of our products to contract manufacturers inSouthern China and added manufacturing capacity inMalaysia duringNovember 2019 . While labor costs in these regions traditionally have been favorable compared to labor costs elsewhere in the world, includingthe United States , they have been increasing for the last few years. In addition, because our purchase contract with our contract manufacturers inChina andMalaysia are typically denominated inU.S. dollars, changes in currency exchange rates may impact our suppliers and increase our prices. The following table shows cost of product revenue for fiscal years 2020, 2019 and 2018 (dollars in thousands): Fiscal Year Ended January 2, December 28, December 29, $ Change 2020 $ Change 2019 2021 2019 2018 vs. 2019 vs. 2018 Cost of product revenue$ 758,241 $ 658,362 $ 518,612 $ 99,879 $ 139,750 As a percentage of revenue 53.0 % 54.2 % 47.5 % Year endedJanuary 2, 2021 as compared to the year endedDecember 28, 2019 Cost of product revenue increased$99.9 million , or 15.2%, to$758.2 million in fiscal 2020, compared to$658.4 million in fiscal 2019. The increase is primarily due to the 17.8% increase in revenue, as well as increases in warranty and rework costs, offset by the recognition of the tariff refunds of approximately$36.5 million for tariffs paid in 2018 and 2019. OnApril 24, 2020 , we were granted a temporary exclusion, as extended inAugust 2020 , from Section 301 List 3 tariffs bythe United States 34 -------------------------------------------------------------------------------- Table of Contents Trade Representative, which temporarily eliminated the 25% tariff on Roomba products imported fromChina untilDecember 31, 2020 . Year endedDecember 28, 2019 as compared to the year endedDecember 29, 2018 Cost of product revenue increased$139.8 million , or 26.9%, to$658.4 million in fiscal 2019, compared to$518.6 million in fiscal 2018. The increase is primarily due to the 11.1% increase in revenue and higher tariffs on our Roomba products imported intothe United States fromChina . EffectiveSeptember 24, 2018 , tariffs on our Roomba products were set at 10%, and effectiveMay 10, 2019 , tariffs further increased to 25%. Gross Profit Our gross profit as a percentage of revenue, referred to as our gross margin, varies according to the mix of products sold, total sales volume, the level of promotional activities, and levels of other product costs such as warranty, scrap, rework and overhead. The following table shows gross profit for fiscal years 2020, 2019 and 2018 (dollars in thousands): Fiscal Year Ended January 2, December 28, December 29, $ Change 2020 $ Change 2019 2021 2019 2018 vs. 2019 vs. 2018 Gross profit$ 670,229 $ 543,927 $ 555,428 $ 126,302 $ (11,501) Gross margin 46.9 % 44.8 % 50.8 %
Year ended
Gross profit increased$126.3 million , or 23.2%, to$670.2 million (46.9% of revenue) in fiscal 2020 from$543.9 million (44.8% of revenue) in fiscal 2019. The increase in gross margin was primarily related to the recognition of the tariff refunds of$36.5 million for tariffs paid in 2018 and 2019 as a benefit to cost of product revenue, partially offset by impact of price reductions and promotional activity during fiscal 2020 compared to fiscal 2019. We have not been granted an extension of our tariff exclusion pastDecember 31, 2020 and therefore a 25% tariff on Roombas imported fromChina was reinstated at the beginning in fiscal 2021. We expect tariff reinstatement to negatively impact our gross profit. To diversify our supply chain and help offset the adverse financial impact on our business of the tariff, we plan to substantially increase our production inMalaysia by qualifying additional contract manufacturers and add new lines by the end of 2021. Year endedDecember 28, 2019 as compared to the year endedDecember 29, 2018 Gross profit decreased$11.5 million , or 2.1%, to$543.9 million (44.8% of revenue) in fiscal 2019 from$555.4 million (50.8% of revenue) in fiscal 2018. The decrease in gross margin was primarily related to increased promotional activity and pricing reductions for certain products as well as the increased tariffs on our Roomba products imported tothe United States fromChina . Research and Development Research and development expenses consist primarily of: •salaries and related costs for our engineers; •costs for research and development contractors and consultants; •costs of components and test equipment used for product and prototype development; and •occupancy and other overhead costs. Our research and development team develops new software and hardware products as well as improves and enhances our existing software and hardware products to address customer demands and emerging trends. We have significantly expanded our research and development capabilities including the introduction of iRobot Genius Home Intelligence, our powerful robot platform that unlocks an expansive range of digital features and experiences to our customers. We expect to continue to expand these capabilities in the future. We are committed to consistently maintaining the level of innovative design and development of new products as we strive to enhance our ability to serve our existing consumer markets as well as new markets for robots. We anticipate that in 2021 research and development expenses will increase in absolute dollars but remain relatively consistent as a percentage of revenue. 35 -------------------------------------------------------------------------------- Table of Contents The following table shows research and development costs for fiscal years 2020, 2019 and 2018 (dollars in thousands): Fiscal Year Ended January 2, December 28, December 29, $ Change 2020 $ Change 2019 2021 2019 2018 vs. 2019 vs. 2018 Research and development$ 156,670 $ 141,607
11.0 % 11.7 % 12.9 %
Year ended
Research and development expenses increased$15.1 million , or 10.6%, to$156.7 million (11.0% of revenue) in fiscal 2020 from$141.6 million (11.7% of revenue) in fiscal 2019. This increase is primarily due to an$8.7 million increase in people-related costs, mostly attributable to higher short-term incentive compensation costs, as well as higher program-related costs of$4.3 million during fiscal 2020. Year endedDecember 28, 2019 as compared to the year endedDecember 29, 2018 Research and development expenses increased$1.0 million , or 0.7%, to$141.6 million (11.7% of revenue) in fiscal 2019 from$140.6 million (12.9% of revenue) in fiscal 2018. This increase is primarily due to an increase in people-related costs of$8.3 million resulting from increased headcount, partially offset by lower program-related costs of$7.4 million and other efforts to control costs during fiscal 2019. Selling and Marketing Our selling and marketing expenses consist primarily of: •salaries and related costs for sales and marketing personnel; •advertising, marketing and other brand-building costs; •customer service costs; and •travel and related costs. We anticipate that in 2021, selling and marketing expenses will increase in absolute dollars and as a percentage of revenue due to incremental investment to enhance the consumer's buying experience on our digital properties and support continued growth of our direct-to-consumer channel as well as continue to build awareness of our products. The following table shows selling and marketing costs for fiscal years 2020, 2019 and 2018 (dollars in thousands): Fiscal Year Ended January 2, December 28, December 29, $ Change 2020 $ Change 2019 2021 2019 2018 vs. 2019 vs. 2018 Selling and marketing$ 265,475 $ 231,548 $ 210,411 $ 33,927 $ 21,137 As a percentage of revenue 18.6 % 19.1 % 19.3 % Year endedJanuary 2, 2021 as compared to the year endedDecember 28, 2019 Selling and marketing expenses increased by$33.9 million , or 14.7%, to$265.5 million (18.6% of revenue) in fiscal 2020 from$231.5 million (19.1% of revenue) in fiscal 2019. This increase is primarily attributable to an increase in marketing investments of$30.7 million primarily related to advertising campaigns in all regions during the holiday season and marketing activities to build our direct-to-consumer sales channel, as well as higher people-related costs of$2.9 million mainly driven by short-term incentive compensation. Year endedDecember 28, 2019 as compared to the year endedDecember 29, 2018 Selling and marketing expenses increased by$21.1 million , or 10.0%, to$231.5 million (19.1% of revenue) in fiscal 2019 from$210.4 million (19.3% of revenue) in fiscal 2018. This increase is primarily attributable to an increase in marketing investments of$13.7 million to support our new product launches and certain promotional and advertising campaigns in all regions as well as higher people-related costs of$6.0 million . These increases were partially offset by lower incentive compensation and efforts to control overall sales and marketing costs. General and Administrative Our general and administrative expenses consist primarily of: •salaries and related costs for executives and administrative personnel; •professional services costs; •information systems and infrastructure costs; •travel and related costs; and 36 -------------------------------------------------------------------------------- Table of Contents •occupancy and other overhead costs. The following table shows general and administrative costs for fiscal years 2020, 2019 and 2018 (dollars in thousands): Fiscal Year Ended January 2, December 28, December 29, $ Change 2020 $ Change 2019 2021 2019 2018 vs. 2019 vs. 2018 General and administrative$ 100,770 $ 83,103
7.0 % 6.8 % 8.9 %
Year ended January 2, 2021 as compared to the year ended December 28, 2019
General and administrative expenses increased by $17.7 million , or 21.3%, to
$100.8 million (7.0% of revenue) in fiscal 2020 from $83.1 million (6.8% of
revenue) in fiscal 2019. This increase is primarily attributable to higher
short-term incentive compensation and performance-based stock-based compensation
of $11.6 million , an increase of $4.8 million in legal fees driven by higher
intellectual property litigation costs, and a $2.6 million increase in the
allowance for credit losses associated with the uncertainty of collection from
certain customer accounts resulting from the pandemic.
Year ended December 28, 2019 as compared to the year ended December 29, 2018
General and administrative expenses decreased by $14.4 million , or 14.8%, to
$83.1 million (6.8% of revenue) in fiscal 2019 from $97.5 million (8.9% of
revenue) in fiscal 2018. This decrease is primarily attributable to lower
short-term and long-term incentive compensation costs of $8.2 million and a
decrease in legal costs of $4.1 million after favorable determination of a
previously-disclosed intellectual property litigation suit in the fourth quarter
of 2018.
Amortization of Acquired Intangible Assets
Amortization of acquired technology and reacquired distribution rights are
recorded within cost of revenue whereas the amortization of acquired customer
relationships, non-compete agreements and tradenames are recorded within
operating expenses. Reacquired distribution rights are amortized on an
accelerated basis, while all other intangible assets are amortized over their
respective estimated useful lives on a straight-line basis, consistent with the
pattern in which the economic benefits are being utilized.
The following table shows total amortization expense for fiscal years 2020, 2019
and 2018 (dollars in thousands):
Fiscal Year Ended
January 2, December 28, December 29, $ Change 2020 $ Change 2019
2021 2019 2018 vs. 2019 vs. 2018
Cost of revenue $ 1,920 $ 11,721 $ 18,544 $ (9,801) $ (6,823)
Operating expense 992 1,051 1,065 (59) (14)
Total amortization expense $ 2,912 $ 12,772 $ 19,609 $ (9,860) $ (6,837)
As a percentage of revenue 0.2 % 1.1 % 1.8 %
The decreases in amortization of acquired intangible assets during fiscal 2020
and fiscal 2019 were primarily related to the reacquired distribution rights
intangible assets which were fully amortized in the fourth quarter of 2019.
Other Income, Net
Other income, net includes interest income, interest expense, foreign currency
gains (losses) as well as gains (losses) from strategic investments. The
following table shows other income, net for fiscal years 2020, 2019 and 2018
(dollars in thousands):
Fiscal Year Ended
January 2, December 28, December 29, $ Change 2020 $ Change 2019
2021 2019 2018 vs. 2019 vs. 2018
Other income, net $ 41,593 $ 12,215
3.0 % 1.0 % 0.3 %
Other income, net, amounted to $41.6 million , $12.2 million and $2.8 million for
fiscal 2020, 2019 and 2018, respectively. During fiscal 2020, other income, net,
includes the gains of $38.6 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. During
fiscal 2019, other income, net, included an $8.4 million gain on sale of an
equity investment.
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Income Tax Provision
The following table shows income tax provision for fiscal years 2020, 2019 and
2018 (dollars in thousands):
Fiscal Year Ended
January 2, December 28, December 29, $ Change 2020 $ Change 2019
2021 2019 2018 vs. 2019 vs. 2018
Income tax provision $ 40,847 $ 13,533
21.7 % 13.7 % 19.0 %
Year ended January 2, 2021 as compared to the year ended December 28, 2019
We recorded an income tax provision of $40.8 million and $13.5 million for
fiscal 2020 and fiscal 2019, respectively. The $40.8 million provision for
fiscal 2020 resulted in an effective income tax rate of 21.7%. The $13.5 million
provision for fiscal 2019 resulted in an effective income tax rate of 13.7%.
Our effective income tax rate of 21.7% for fiscal 2020 differed from the federal
statutory tax rate of 21% primarily due to the recognition of state income taxes
and valuation allowances offset by tax benefits related to research and
development tax credits and the deduction for Foreign Derived Intangible Income.
The increase in the effective income tax rate of 21.7% for fiscal 2020 as
compared to 13.7% for fiscal 2019 is primarily due to a discrete tax benefit
associated with stock-based compensation in 2019.
Year ended December 28, 2019 as compared to the year ended December 29, 2018
We recorded an income tax provision of $13.5 million and $20.6 million for
fiscal 2019 and fiscal 2018, respectively. The $13.5 million provision for
fiscal 2019 resulted in an effective income tax rate of 13.7%. The $20.6 million
provision for fiscal 2018 resulted in an effective income tax rate of 19.0%.
Our effective income tax rate of 13.7% for fiscal 2019 differed from the federal
statutory tax rate of 21% primarily due to the recognition of tax benefits
related to stock-based compensation. The decrease in the effective income tax
rate of 13.7% for fiscal 2019 as compared to 19.0% for fiscal 2018 is primarily
due to a discrete tax charge associated with a restructuring of the EMEA
business and impacts from the remeasurement of certain deferred tax charges in
fiscal 2018.
Liquidity and Capital Resources
At January 2, 2021 , our principal sources of liquidity were cash and cash
equivalents totaling $432.6 million and short-term investments of $51.1 million .
Our working capital, which represents our total current assets less total
current liabilities, was $573.7 million as of January 2, 2021 , compared to
$391.7 million as of December 28, 2019 .
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 fiscal years
ended January 2, 2021 and December 28, 2019 , we spent $31.6 million and $35.3
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.
On April 24, 2020 , we were granted a temporary exclusion from Section 301 List 3
tariffs by the United States Trade Representative. This exclusion, as extended
in August 2020 , temporarily eliminated the 25% tariff on Roomba products
imported from China until December 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. In the fiscal year ended January 2, 2021 , we recognized
$36.5 million of refunds for tariffs paid in 2018 and 2019 as a benefit to cost
of product revenue. As of January 2, 2021 , we have received $47.1 million in
cash associated with our tariff refunds from the U.S. government. While tariff
refund claims are subject to the approval of U.S. Customs, we currently expect
to receive the remaining refunds of $9.9 million within the next nine months.
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Cash provided by operating activities
Year ended January 2, 2021 as compared to the year ended December 28, 2019
Net cash provided by our operations for the fiscal year ended January 2, 2021
was $232.0 million , of which the principal components were our net income of
$147.1 million , non-cash charges of $41.2 million and changes in working capital
of $43.8 million . The changes in working capital include increases in accounts
payable and accrued liabilities of $106.0 million , partially offset by increases
in inventory of $24.5 million , accounts receivable of $21.9 million and other
assets of $15.8 million .
Year ended December 28, 2019 as compared to the year ended December 29, 2018
Net cash provided by our operations for the fiscal year ended December 28,
2019 was $130.1 million , of which the principal components were our net income
of $85.3 million and non-cash charges of $48.6 million , partially offset by
changes in working capital. The changes in working capital include decreases in
accounts receivable of $13.1 million and inventory of $7.3 million , partially
offset by a decrease in accounts payable and accrued liabilities of
$20.9 million .
Cash used in investing activities
Year ended January 2, 2021 as compared to the year ended December 28, 2019
Net cash used in investing activities for the fiscal year ended January 2, 2021
was $22.2 million . During the year ended January 2, 2021 , we invested $31.6
million in the purchase of property and equipment, including machinery
and tooling for new products and manufacturing expansion in Malaysia . In
addition, we made strategic investments of $4.2 million while proceeds from the
sales and maturities of marketable securities amounted to $13.5 million .
Year ended December 28, 2019 as compared to the year ended December 29, 2018
Net cash used in investing activities for the fiscal year ended December 28,
2019 was $20.9 million . During the year ended December 28, 2019 , we invested
$35.3 million in the purchase of property and equipment, including machinery and
tooling for new products as well as expansion to a new manufacturing facility in
Malaysia . In addition, we made strategic investments of $5.4 million and paid
$2.8 million for a business acquisition. This was partially offset by proceeds
of $12.9 million we received from the sales and maturities of marketable
securities and $9.8 million upon the sale of an equity investment.
Cash used in financing activities
Year ended January 2, 2021 as compared to the year ended December 28, 2019
Net cash used in financing activities for the fiscal year ended January 2, 2021
was $21.3 million , which primarily
reflects the repurchase of 663,602 shares of our common stock for $25.0 million
under our stock repurchase program in March
2020 .
Year ended December 28, 2019 as compared to the year ended December 29, 2018
Net cash used in investing activities for the fiscal year ended December 28,
2019 was $0.1 million . During the year ended December 28, 2019 , we received $7.1
million from employee stock plans and paid $7.3 million upon vesting of
restricted stock where 59,260 shares were retained by us to cover employee tax
withholdings.
Working Capital Facility
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 January 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 2021, 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
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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 January 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 January 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 220.0
million Japanese Yen . As of January 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, short-term investments, 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
We generally do not enter into binding purchase commitments. Our principal
commitments consist of obligations under our credit facility, leases for office
space and minimum contractual obligations. Other obligations consist primarily
of subscription services. The following table describes our commitments to
settle contractual obligations in cash as of January 2, 2021 (in thousands):
Payments Due by Period
Less Than 1 to 3 3 to 5 More Than
1 Year Years Years 5 Years Total
Operating leases $ 8,226 $ 16,280 $ 13,202 $ 28,539 $ 66,247
Minimum contractual payments 10,792 22,013 18,917 - 51,722
Other obligations 12,666 14,711 13,054 - 40,431
Total $ 31,684 $ 53,004 $ 45,173 $ 28,539 $ 158,400
At January 2, 2021 , we had outstanding purchase orders aggregating approximately
$341.9 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 determine 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 January 2, 2021 , we had no off-balance sheet arrangements as defined in
Item 303(a)(4) of Regulation S-K.
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Table of Contents Recently Adopted Accounting Pronouncements See Note 2 to the accompanying consolidated financial statements for a description of recently adopted accounting standards. Recently Issued Accounting Pronouncements See Note 2 to the accompanying consolidated financial statements for a description of certain recently issued accounting standards which may impact our financial statements in future reporting periods.
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