iRobot(IRBT) - 2019 Q4 - Annual Report

Part I Business iRobot is a global consumer robot company, primarily known for Roomba RVCs and Braava mops, which achieved over $1.2 billion in 2019 revenue while focusing on global penetration, product diversification, and profitability - The company has sold over 30 million consumer robots worldwide since the first Roomba launch in 2002[7] - Strategic priorities for 2020 include expanding Roomba's global penetration, diversifying with Braava and Terra products, and improving long-term profitability by mitigating tariff impacts and optimizing costs[8] - To mitigate exposure to China tariffs, the company commenced production at a new manufacturing facility in Malaysia in 2019 and plans to ramp up volumes there in 2020[8][23] 2019 Financial Highlights | Metric | 2019 | 2018 | % Change | | :--- | :--- | :--- | :--- | | Total Revenue | $1,214.0 million | $1,092.6 million | 11.1% | | Domestic Revenue Growth | - | - | 7.6% | | International Revenue Growth | - | - | 14.8% | Products iRobot's product portfolio centers on home cleaning robots, including Roomba vacuums and Braava mops, with ongoing development in robotic lawn mowers and STEM education robots - The Roomba product family ranges in price from approximately $250 to $1,099, with the s9 Series offering 40 times more suction power than the 600 Series[12] - The Braava jet m Series can automatically clean in sequence with Roomba 900, i7, and s9 robots, vacuuming first and then mopping[15] - The company is developing the Terra t7 robotic lawn mower, which uses advanced mapping and navigation instead of boundary wires, and acquired Root Robotics in April 2019 to enter the STEM education market[16][17] Sales, Marketing, and Manufacturing iRobot utilizes a global sales network, including significant online retail partnerships like Amazon, with manufacturing outsourced primarily to China and Malaysia to support international sales and mitigate tariff risks - Sales to non-U.S. customers accounted for 50.3% of total revenue in 2019[19] - Amazon is a key retailer, representing 21.3% of total revenue in 2019, up from 17.3% in 2018 and 13.5% in 2017[19] - Manufacturing is outsourced to four contract manufacturers in Southern China, with additional capacity added in Malaysia in late 2019[23] Sales & Marketing Expense as a Percentage of Revenue | Year | % of Revenue | | :--- | :--- | | 2019 | 19.1% | | 2018 | 19.3% | | 2017 | 18.3% | Research and Development Ongoing R&D is crucial for iRobot's future success, with $141.6 million invested in 2019, representing 11.7% of revenue, to develop new products and enhance existing ones R&D Expenses | Year | Amount | % of Revenue | | :--- | :--- | :--- | | 2019 | $141.6 million | 11.7% | | 2018 | $140.6 million | 12.9% | | 2017 | $113.1 million | 12.8% | Intellectual Property iRobot heavily relies on its intellectual property, holding over 1,500 patents globally and actively defending its rights through litigation, despite upcoming U.S. patent expirations - As of December 28, 2019, the company held 501 U.S. patents, over 1,000 foreign patents, and had more than 1,500 patent applications pending worldwide[26] - In October 2019, iRobot initiated a patent infringement lawsuit against SharkNinja Operating LLC for infringement of 5 patents related to robotic vacuum cleaners[27] Risk Factors The company faces significant risks including market dependence on consumer robots, intense competition, reliance on limited manufacturers in China, adverse impacts from tariffs, cybersecurity threats, data privacy regulations, and intellectual property protection challenges - The business depends solely on consumer robots, and its success hinges on enhancing current products and developing new ones in a competitive market[37] - The company faces intense competition from diversified technology providers (e.g., Samsung, LG), floor care brands (e.g., Dyson, Shark), and robotics-focused firms (e.g., Ecovacs, Roborock)[38] - Reliance on a limited number of manufacturers, with a majority of production in China, exposes the company to risks of disruption, quality control issues, and political/economic instability[41] - U.S. trade policies, particularly tariffs on goods from China (which increased to 25% in May 2019), have had and are expected to continue to have a material adverse effect on business, financial condition, and results of operations[59] - The company is subject to complex data privacy laws like GDPR and the California Consumer Privacy Act (CCPA), and any failure to comply could result in significant expense and harm to the business[49] Unresolved Staff Comments There are no unresolved staff comments - No unresolved staff comments were reported[82] Properties The company's corporate headquarters are in a leased 270,000 square foot facility in Bedford, Massachusetts, with additional global leased facilities deemed adequate for future needs - Corporate headquarters are in a leased facility of approximately 270,000 square feet in Bedford, Massachusetts[83] Legal Proceedings The company faces multiple class action and shareholder lawsuits alleging violations of the Securities Exchange Act and breaches of fiduciary duty related to past acquisitions and financial performance - Multiple shareholder lawsuits were filed against the company and certain directors and officers in late 2019 and early 2020[84][86] - The allegations primarily concern allegedly false and misleading statements regarding the acquisitions of SODC and Robopolis and the company's subsequent financial performance[84] Mine Safety Disclosures This item is not applicable to the company - This item is not applicable to the company[87] Part II Selected Financial Data This section provides a five-year summary of consolidated financial data, highlighting consistent revenue growth from $616.8 million in 2016 to $1,214.0 million in 2019, alongside increases in operating income, net income, and total assets Selected Consolidated Financial Data (In thousands, except per share data) | | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Total revenue | $1,214,010 | $1,092,584 | $883,911 | | Gross profit | $543,927 | $555,428 | $433,159 | | Operating income | $86,618 | $105,822 | $72,690 | | Net income | $85,300 | $87,992 | $50,964 | | Diluted Net Income Per Share | $2.97 | $3.07 | $1.77 | | Total assets | $920,753 | $766,961 | $691,522 | | Total stockholders' equity | $652,069 | $535,322 | $470,327 | Management's Discussion and Analysis of Financial Condition and Results of Operations Fiscal 2019 revenue grew 11.1% to $1.21 billion, driven by new products, though gross margin declined to 44.8% due to tariffs and promotions, resulting in lower operating income, while liquidity remains strong with $239.4 million in cash Results of Operations Fiscal 2019 revenue increased 11.1% to $1.214 billion, driven by new products and international growth, despite a significant gross margin decline to 44.8% due to tariffs and promotions, leading to a decrease in operating income - The decrease in gross margin was primarily due to increased promotional activity, pricing reductions, and the impact of increased tariffs on Roomba products imported to the U.S. from China[120] - General and administrative expenses decreased by $14.4 million (14.8%) in 2019, mainly due to lower incentive compensation costs and a decrease in legal costs after a favorable litigation outcome in late 2018[131] Revenue Comparison (2019 vs. 2018) | Metric | 2019 | 2018 | Change | | :--- | :--- | :--- | :--- | | Total Revenue | $1,214.0M | $1,092.6M | +11.1% | | Gross Profit | $543.9M | $555.4M | -2.1% | | Gross Margin | 44.8% | 50.8% | -6.0 p.p. | | Operating Income | $86.6M | $105.8M | -18.1% | Liquidity and Capital Resources As of December 28, 2019, iRobot maintained strong liquidity with $239.4 million in cash and a $150.0 million revolving credit line, supported by $130.1 million in operating cash flow, sufficient for future needs - The company has a $150.0 million unsecured revolving line of credit, with no outstanding borrowings as of year-end 2019[144] Key Liquidity and Cash Flow Data (FY 2019) | Metric | Amount | | :--- | :--- | | Cash and cash equivalents (End of Period) | $239.4 million | | Working Capital (End of Period) | $391.7 million | | Net cash provided by operating activities | $130.1 million | | Net cash used in investing activities | $20.9 million | | Capital Expenditures | $35.3 million | Quantitative and Qualitative Disclosures About Market Risk The company manages market risks, primarily foreign currency fluctuations through derivative instruments like forward exchange contracts with a notional value of $424.6 million, while interest rate risk is considered minimal - The company uses foreign currency forward contracts to hedge against fluctuations in currencies like the Euro and Japanese Yen[151] - At year-end 2019, the company had outstanding cash flow hedges with a total notional value of $424.6 million and economic hedges with a notional value of $58.4 million[151] - A hypothetical 10% change in the U.S. Dollar exchange rate would change the fair market value of the company's foreign currency contracts by approximately $48.4 million[151] Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements for fiscal year 2019, including balance sheets, income statements, and cash flow statements, along with detailed notes on accounting policies and financial details - The independent auditor's report, issued by PricewaterhouseCoopers LLP, provides an unqualified opinion on the consolidated financial statements and the effectiveness of internal control over financial reporting[156] - A critical audit matter identified was the allowance for product returns, which involved significant management judgment regarding historical experience and future expectations[165][166] Notes to Consolidated Financial Statements The notes detail accounting policies and financial figures, covering revenue recognition for connected robots, adoption of ASC 842 for leases, purchase price allocation for acquisitions, goodwill, stock-based compensation, legal contingencies, and income taxes - Revenue from connected robots launched since Q3 2018 (e.g., Roomba i7) is allocated between the physical robot (recognized at transfer) and 'Cloud Services' (deferred and recognized over the service period)[213] - The company adopted the new lease accounting standard ASC 842 in 2019, resulting in the recognition of $52.8 million in right-of-use assets and $67.3 million in lease liabilities on the balance sheet[209][224] - As of year-end 2019, total unrecognized tax benefits were $7.1 million The company is currently under IRS examination for the 2014 and 2015 tax years[286] Controls and Procedures Management, including the CEO and CFO, concluded that disclosure controls and internal control over financial reporting were effective as of December 28, 2019, with no material changes reported - The CEO and CFO concluded that disclosure controls and procedures were effective as of the end of the fiscal year[293] - Management concluded that the company maintained effective internal control over financial reporting as of December 28, 2019[294] Other Information This section discloses that certain officers and directors, including the CEO, have entered into Rule 10b5-1 trading plans for company stock sales - Certain officers and directors have entered into trading plans compliant with Rule 10b5-1 of the Exchange Act[297] Part III Directors, Executive Officers, Corporate Governance, Executive Compensation, and Other Matters Information for Items 10 through 14, covering directors, executive officers, corporate governance, executive compensation, and related matters, is incorporated by reference from the company's definitive proxy statement - Information for Items 10, 11, 12, 13, and 14 is incorporated by reference from the company's definitive proxy statement, which will be filed at a later date[298][299][300][301][302] Part IV Exhibits, Financial Statement Schedules This section lists all financial statements, schedules, and exhibits filed with the Form 10-K, including key corporate documents and required certifications - This section lists all exhibits filed with the 10-K, including governance documents, material agreements, and required certifications[303][304] Form 10-K Summary This item is not applicable - This item is not applicable[307]