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+ inNorth 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 theAsia 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. 27 -------------------------------------------------------------------------------- Table of Contents 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 inMalaysia . Our profitability in 2020 benefited from an exclusion toUnited States tariffs on RVCs made in and imported fromChina . 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 toDecember 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 endedJanuary 2, 2021 ("fiscal 2020") was a 53-week fiscal year. The fiscal years endedDecember 28, 2019 ("fiscal 2019") andDecember 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 inthe 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 inApril 2020 , which temporarily eliminates tariffs on the Company's products imported fromChina untilDecember 31, 2020 and entitles the Company to a refund of all related tariffs previously paid sinceSeptember 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 theU.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. 28 -------------------------------------------------------------------------------- Table of Contents 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 endedJanuary 2, 2021 ,December 28, 2019 andDecember 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 29 -------------------------------------------------------------------------------- Table of Contents 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 ofJanuary 2, 2021 andDecember 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 ofJanuary 2, 2021 , we had reserves for product returns of$64.3 million and other credits and incentives of$142.2 million . As ofDecember 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 endedJanuary 2, 2021 andDecember 28, 2019 related to performance obligations satisfied in a prior period was not material. 30 -------------------------------------------------------------------------------- Table of Contents 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 endedJanuary 2, 2021 . As ofJanuary 2, 2021 andDecember 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 AssetsGoodwill 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 31 -------------------------------------------------------------------------------- Table of Contents 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 ofJanuary 2, 2021 ,December 28, 2019 andDecember 29, 2018 , we had a valuation allowance of$7.6 million ,$3.8 million and$1.1 million , respectively, for certain deferred tax assets for which we believe do not meet the "more likely than not" criteria for recognition. We report a liability for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in a tax return. We recognize interest and penalties, if any, related to unrecognized tax benefits in the income tax provision. 32 -------------------------------------------------------------------------------- Table of Contents Overview of Results of Operations The following table sets forth our results of operations for the periods shown (in thousands): Fiscal Year Ended January 2, December 28, December 29, 2021 2019 2018 Revenue$ 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 endedJanuary 2, 2021 as compared to the year endedDecember 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 endedDecember 28, 2019 as compared to the year endedDecember 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 ourInTouch Health investment when Teladoc Health, Inc., or Teladoc, acquiredInTouch Health and exchanged our shares ofInTouch 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. 37 -------------------------------------------------------------------------------- Table of Contents 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 endedJanuary 2, 2021 as compared to the year endedDecember 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 endedDecember 28, 2019 as compared to the year endedDecember 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 AtJanuary 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 ofJanuary 2, 2021 , compared to$391.7 million as ofDecember 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 endedJanuary 2, 2021 andDecember 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 inSouthern China andMalaysia 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. OnApril 24, 2020 , we were granted a temporary exclusion from Section 301 List 3 tariffs by the United States Trade Representative. This exclusion, as extended inAugust 2020 , temporarily eliminated the 25% tariff on Roomba products imported fromChina untilDecember 31, 2020 and entitled us to a refund of approximately$57.0 million in tariffs paid since the date the Section 301 List 3 tariffs were imposed. In the fiscal year endedJanuary 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 ofJanuary 2, 2021 , we have received$47.1 million in cash associated with our tariff refunds from theU.S. government. While tariff refund claims are subject to the approval ofU.S. Customs, we currently expect to receive the remaining refunds of$9.9 million within the next nine months. 38 -------------------------------------------------------------------------------- Table of Contents Cash provided by operating activities Year endedJanuary 2, 2021 as compared to the year endedDecember 28, 2019 Net cash provided by our operations for the fiscal year endedJanuary 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 endedDecember 28, 2019 as compared to the year endedDecember 29, 2018 Net cash provided by our operations for the fiscal year endedDecember 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 endedJanuary 2, 2021 as compared to the year endedDecember 28, 2019 Net cash used in investing activities for the fiscal year endedJanuary 2, 2021 was$22.2 million . During the year endedJanuary 2, 2021 , we invested$31.6 million in the purchase of property and equipment, including machinery and tooling for new products and manufacturing expansion inMalaysia . 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 endedDecember 28, 2019 as compared to the year endedDecember 29, 2018 Net cash used in investing activities for the fiscal year endedDecember 28, 2019 was$20.9 million . During the year endedDecember 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 inMalaysia . 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 endedJanuary 2, 2021 as compared to the year endedDecember 28, 2019 Net cash used in financing activities for the fiscal year endedJanuary 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 inMarch 2020 . Year endedDecember 28, 2019 as compared to the year endedDecember 29, 2018 Net cash used in investing activities for the fiscal year endedDecember 28, 2019 was$0.1 million . During the year endedDecember 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 InJune 2018 , we entered into a new agreement withBank 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 toJune 2023 . As ofJanuary 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 39 -------------------------------------------------------------------------------- Table of Contents 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 ofJanuary 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 withBank of America, N.A ., available to fund letters of credit up to an aggregate outstanding amount of$5.0 million . As ofJanuary 2, 2021 , we had letters of credit outstanding of$0.7 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 of220.0 million Japanese Yen . As ofJanuary 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 ofJanuary 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 AtJanuary 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 ofJanuary 2, 2021 , we had no off-balance sheet arrangements as defined in Item 303(a)(4) of Regulation S-K. 40
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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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