NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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1.
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Nature of the Business
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iRobot Corporation ("iRobot" or the "Company") develops robotics and applies this technology in producing and marketing robots. The Company’s revenue is primarily generated from product sales.
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2.
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Summary of Significant Accounting Policies
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Basis of Presentation
The accompanying consolidated financial statements include those of iRobot and its subsidiaries, after elimination of all intercompany accounts and transactions. iRobot has prepared the accompanying consolidated financial statements in conformity with accounting principles generally accepted in the United States of America.
Use of Estimates
The preparation of these financial statements in conformity with accounting principles generally accepted in the United States requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and disclosure of contingent assets and liabilities. On an ongoing basis, management evaluates these estimates and judgments, including those related to revenue recognition, sales returns, bad debts, warranty claims, inventory reserves, valuation of investments, valuation of goodwill and intangible assets, assumptions used in valuing stock-based compensation instruments and income taxes. The Company bases these estimates on historical and anticipated results, and trends and on various other assumptions that the Company believes are reasonable under the circumstances, including assumptions as to future events. These estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. By their nature, estimates are subject to an inherent degree of uncertainty. Actual results may differ from the Company’s estimates.
Fiscal Year-End
The Company operates and reports using a
52
-53
week fiscal year ending on the Saturday closest to December 31. Accordingly, the Company’s fiscal quarters end on the Saturday that falls closest to the last day of the third month of each quarter.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original or remaining maturity of three months or less at the time of purchase to be cash equivalents. The Company invests its excess cash primarily in money market funds or savings accounts of major financial institutions. Accordingly, its cash equivalents are subject to minimal credit and market risk. At
December 31, 2016
and
January 2, 2016
, cash equivalents were comprised of money market funds totaling
$157.0 million
and
$110.8 million
, respectively. These cash equivalents are carried at cost, which approximates fair value.
Short Term Investments
The Company’s investments are classified as available-for-sale and are recorded at fair value with any unrealized gain or loss recorded as an element of stockholders’ equity. The fair value of investments is determined based on quoted market prices at the reporting date for those instruments. As of
December 31, 2016
and
January 2, 2016
, investments consisted of:
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December 31,
2016
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|
January 2,
2016
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|
Cost
|
|
Fair
Market Value
|
|
Cost
|
|
Fair
Market Value
|
|
(In thousands)
|
Corporate and government bonds
|
$
|
40,439
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|
|
$
|
39,930
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|
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$
|
33,622
|
|
|
$
|
33,124
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|
Total short term investments
|
$
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40,439
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$
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39,930
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$
|
33,622
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|
|
$
|
33,124
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|
As of
December 31, 2016
, the Company’s investments had maturity dates ranging from February 2017 to October 2019. The Company invests primarily in investment grade securities and limits the amount of investment in any single issuer.
iROBOT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Revenue Recognition
The Company primarily derives its revenue from product sales. Until the divestiture of the defense and security business unit on April 4, 2016 (see Note 15), the Company also generated minimal revenue from government and commercial research and development contracts. The Company sells products directly to customers and indirectly through resellers and distributors. The Company recognizes revenue from sales of robots under the terms of the customer agreement upon transfer of title and risk of loss to the customer, net of estimated returns and allowances, provided that collection is determined to be reasonably assured and no significant obligations remain.
Beginning in the third quarter of 2015, with the introduction of the Company's first connected robot, each sale of a connected robot represents a multi-element arrangement containing the robot, an app and potential future unspecified software upgrades. Revenue is allocated to the deliverables based on their relative selling prices which have been determined using best estimate of selling price (BESP), as the Company has not been able to establish vendor specific objective evidence (VSOE) or obtain relevant third party evidence (TPE). Revenue allocated to the app and unspecified software upgrades is then deferred and recognized on a straight-line basis over the period in which the Company expects to provide the upgrades over the estimated life of the robot.
Sales to domestic and Canadian resellers of consumer robots are typically subject to agreements allowing for limited rights of return, rebates and price protection. The Company also provides limited rights of returns for direct-to-consumer sales generated through its on-line stores, one domestic distributor and one international distributor. Accordingly, the Company reduces revenue for its estimates of liabilities for these rights of return, rebates and price protection at the time the related sale is recorded. These estimates for rights of return are directly based on specific terms and conditions included in the customer agreements, historical returns experience and various other assumptions that the Company believes are reasonable under the circumstances. In the case of new product introductions, the estimates for returns applied to the new products are based upon the estimates for the most similar predecessor products until such time that the Company has enough actual returns experience for the new products, which is typically two holiday return cycles. At that time, the Company incorporates that data into the development of returns estimates for the new products. The Company updates its analysis of returns on a quarterly basis. If actual returns differ significantly from the Company's estimates, or if modifications to individual customer agreements are entered into that impact their rights of returns, such differences could result in an adjustment to previously established reserves and could have a material impact, either favorably or unfavorably, on the Company’s results of operations for the period in which the actual returns become known or the agreement is modified. Except for the one international distributor noted above, the Company's international distributor agreements do not currently allow for product returns and, as a result, no reserve for returns is established for this group of customers. In 2016, the Company began selling to one domestic distributor under an agreement that provides product return privileges. As a result, the Company recognizes revenue from sales to this distributor when the product is resold by the distributor. The estimates and reserve for rebates and price protection are based on specific programs, expected usage and historical experience. Actual results could differ from these estimates.
Prior to the Company's divestiture of the defense and security business unit on April 4, 2016 (see Note 15), the Company generated minimal revenue from government contracts. Under cost-plus-fixed-fee (CPFF) type contracts, the Company recognized revenue based on costs incurred plus a pro rata portion of the total fixed fee. Costs incurred included labor and material that were directly associated with individual CPFF contracts plus indirect overhead and general and administrative type costs based upon billing rates submitted by the Company to the Defense Contract Management Agency (DCMA). Annually, the Company submits final indirect billing rates to DCMA based upon actual costs incurred throughout the year. In the situation where the Company’s final actual billing rates are greater than the estimated rates used, the Company records a cumulative revenue adjustment in the period in which the rate differential is collected from the customer. These final billing rates are subject to audit by the Defense Contract Audit Agency (DCAA), which can occur several years after the final billing rates are submitted and may result in material adjustments to revenue recognized based on estimated final billing rates. As of December 31, 2016, fiscal year 2015 is open for audit by DCAA. In the situation where the Company’s anticipated actual billing rates will be lower than the provisional rates used, the Company records a cumulative revenue adjustment in the period in which the rate differential is identified. Revenue on firm fixed price (FFP) contracts was recognized using the percentage-of-completion method. For government product FFP contracts, revenue was recognized as the product was shipped or in accordance with the contract terms. Costs and estimated gross margins on contracts were recorded as revenue as work was performed based on the percentage that incurred costs compared to estimated total costs utilizing the most recent estimates of costs and funding. Revenue earned in excess of billings, if any, was recorded as unbilled revenue. Billings in excess of revenue earned, if any, were recorded as deferred revenue.
iROBOT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Allowance for Doubtful Accounts
The Company maintains an allowance for doubtful accounts to provide for the estimated amount of accounts receivable that may not be collected. The allowance is based upon an assessment of customer creditworthiness, historical payment experience and the age of outstanding receivables.
Activity related to the allowance for doubtful accounts was as follows:
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Fiscal Year Ended
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|
December 31,
2016
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January 2,
2016
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|
December 27,
2014
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(In thousands)
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Balance at beginning of period
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$
|
33
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|
|
$
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67
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|
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$
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67
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Provision
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—
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—
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|
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—
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Deduction(*)
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(4
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)
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(34
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)
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—
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Balance at end of period
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$
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29
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$
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33
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$
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67
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___________________________
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(*)
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Deductions related to allowance for doubtful accounts represent amounts written off against the allowance, less recoveries.
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Inventory
Inventory is stated at the lower of cost or net realizable value with cost being determined using the first-in, first-out (FIFO) method. The Company maintains a reserve for inventory items to provide for an estimated amount of excess or obsolete inventory.
Property and Equipment
Property and equipment are recorded at cost and consist primarily of computer equipment, leasehold improvements, business applications software and machinery. Depreciation is computed using the straight-line method over the estimated useful lives as follows:
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Estimated Useful Life
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Computer and research equipment
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2-5 years
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Furniture
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5
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Machinery
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2-5
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Tooling
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2-5
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Business applications software
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5-7
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Capital leases and leasehold improvements
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Lesser of economic benefit period or term of lease
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Expenditures for additions, renewals and betterments of plant and equipment are capitalized. Expenditures for repairs and maintenance are charged to expense as incurred. As assets are retired or sold, the related cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is credited or charged to operations.
Long-Lived Assets, including Purchased Intangible Assets
The Company periodically evaluates the recoverability of long-lived assets, including other purchased intangible 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.
Goodwill
Goodwill is recorded as the difference, if any, between the aggregate consideration paid for an acquisition and the fair value of the net tangible and intangible assets acquired. The Company evaluates goodwill for impairment at the reporting unit level (operating segment or one level below an operating segment) annually or more frequently if the Company believes indicators of impairment exist. In accordance with the guidance, the Company is permitted to first assess qualitative factors to
iROBOT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the Company concludes that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then a two-step goodwill impairment test is performed.
The first step of the impairment test involves comparing the fair values of the applicable reporting units with their aggregate carrying values, including goodwill. If the carrying amount of a reporting unit exceeds the reporting unit's fair value, the Company performs the second step of the goodwill impairment test to determine the amount of impairment loss. The second step of the goodwill impairment test involves comparing the implied fair value of the affected reporting unit's goodwill with the carrying value of that goodwill. The Company completes the annual impairment evaluation during the fourth quarter each year.
Research and Development
Costs incurred in the research and development of the Company’s products are expensed as incurred.
Internal Use Software
The Company capitalizes costs associated with the development and implementation of software for internal use. At
December 31, 2016
,
January 2, 2016
and
December 27, 2014
, the Company had
$9.5 million
,
$8.6 million
and
$8.2 million
, respectively, of costs related to enterprise-wide software included in fixed assets. Capitalized costs are being amortized over the assets’ estimated useful lives. The Company has recorded
$0.4 million
,
$0.7 million
and
$0.8 million
of amortization expense for the years ended
December 31, 2016
,
January 2, 2016
and
December 27, 2014
, respectively.
Concentration of Credit Risk and Significant Customers
Financial instruments which potentially expose the Company to concentrations of credit risk consist of accounts receivable. Management believes its credit policies are prudent and reflect normal industry terms and business risk. At
December 31, 2016
,
three
customers accounted for a total of
43.9%
of the Company's accounts receivable balance, each of which was greater than
10%
of the balance and two of whom secured their balance with guaranteed letters of credit which together represents 32.5% of the balance. At
January 2, 2016
,
two
customers accounted for a total of
34.1%
of the Company’s accounts receivable balance, each of which was greater than
10%
of the balance and each of whom secured their balance with guaranteed letters of credit. For the years ended
December 31, 2016
,
January 2, 2016
and
December 27, 2014
, revenue from U.S. federal government orders, contracts and subcontracts, represented
0.2%
,
5.1%
and
4.3%
of total revenue, respectively. For the fiscal years ended
December 31, 2016
,
January 2, 2016
and
December 27, 2014
, the Company generated an aggregate of
25.2%
,
26.0%
and
29.8%
, respectively, of total revenue from its consumer robots distributor in Japan (Sales on Demand Corporation) and a network of affiliated European distributors of its consumer robots (Robopolis SAS). For the year ended December 31, 2016, the Company generated 10.4% of total revenue from one of the Company's domestic retailers (Amazon).
The Company maintains its cash in bank deposit accounts at high quality financial institutions. The individual balances, at times, may exceed federally insured limits.
Stock-Based Compensation
The Company accounts for stock-based compensation through recognition of the fair value of the stock-based compensation as a charge against earnings. Stock-based compensation cost for stock options is estimated at the grant date based on each option’s fair value as calculated by the Black-Scholes option-pricing model. Stock-based compensation cost for restricted stock awards, time-based restricted stock units and performance-based restricted stock units is measured based on the closing fair market value of the Company's common stock on the date of grant. For performance-based restricted stock units, the compensation costs will be subsequently adjusted for assumptions of achievement during the period in which the assumption of achievement changes, as applicable. The Company recognizes stock-based compensation cost as expense ratably on a straight-line basis over the requisite service period, net of estimated forfeitures.
Advertising Expense
The Company expenses advertising costs as they are incurred. During the years ended
December 31, 2016
,
January 2, 2016
and
December 27, 2014
advertising expense totaled
$64.4 million
,
$54.7 million
and
$46.1 million
, respectively, and are recorded with the selling and marketing expenses line item.
iROBOT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Net Income Per Share
The following table presents the calculation of both basic and diluted net income per share:
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Fiscal Year Ended
|
|
December 31,
2016
|
|
January 2,
2016
|
|
December 27,
2014
|
Net income
|
$
|
41,939
|
|
|
$
|
44,130
|
|
|
$
|
37,803
|
|
Weighted-average shares outstanding
|
27,698
|
|
|
29,550
|
|
|
29,485
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|
Dilutive effect of employee stock options and restricted shares
|
594
|
|
|
557
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|
|
725
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|
Diluted weighted-average shares outstanding
|
28,292
|
|
|
30,107
|
|
|
30,210
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|
Basic income per share
|
$
|
1.51
|
|
|
$
|
1.49
|
|
|
$
|
1.28
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|
Diluted income per share
|
$
|
1.48
|
|
|
$
|
1.47
|
|
|
$
|
1.25
|
|
Restricted stock units and stock options representing approximately
0.4 million
,
0.5 million
and
0.2 million
shares of common stock for the fiscal years ended
December 31, 2016
,
January 2, 2016
and
December 27, 2014
, respectively, were excluded from the computation of diluted earnings per share for these periods because their effect would have been antidilutive.
Income Taxes
The Company is subject to taxation in the United States and various states and foreign jurisdictions. The statute of limitations for examinations by the Internal Revenue Service is closed for fiscal years prior to 2013. The statute of limitations for examinations by state tax authorities is closed for fiscal years prior to 2012. Federal carryforward attributes that were generated prior to fiscal year 2013 and state carryforward attributes that were generated prior to fiscal year 2012 may still be adjusted upon examination by the federal or state tax authorities if they either have been or will be used in a period for which the statute of limitations is still open.
Deferred taxes are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. Valuation allowances are provided if, based upon the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.
The Company monitors the realization of its deferred tax assets based on changes in circumstances, for example, recurring periods of income for tax purposes following historical periods of cumulative losses, generation of tax credits compared to future utilization of credits, or changes in tax laws or regulations. The Company's income tax provision and its assessment of the ability to realize its deferred tax assets involve significant judgments and estimates. The Company is currently generating state research credits that exceed the amount being utilized. As a result of this trend, a valuation allowance may be needed in the future related to these state tax credits.
As of December 28, 2013, the Company maintained a valuation allowance of
$2.1 million
related to certain state tax attributes from the Evolution Robotics, Inc. acquisition. During the year ended December 27, 2014, this valuation allowance was released when the realization of these state tax attributes became more likely than not. As of December 31, 2016, the Company did not record a valuation allowance as all deferred tax assets are considered realizable.
Comprehensive Income
Accumulated other comprehensive income includes unrealized gains and losses on certain investments. The differences between net income and comprehensive income were related to unrealized gains (losses) on investments, net of tax.
Fair Value Measurements
The authoritative guidance for fair value establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.
iROBOT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Financial Assets and Liabilities
The Company’s financial assets and liabilities measured at fair value on a recurring basis at
December 31, 2016
, were as follows:
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|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements as of
|
|
December 31, 2016
|
Description
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
(In thousands)
|
Assets:
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
|
|
|
Money market funds
|
$
|
156,980
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Short term investments
|
|
|
|
|
|
Corporate and government bonds (1)
|
—
|
|
|
39,930
|
|
|
—
|
|
Other current assets
|
|
|
|
|
|
Derivative instruments (Note 13) (2)
|
—
|
|
|
180
|
|
|
—
|
|
Total assets measured at fair value
|
$
|
156,980
|
|
|
$
|
40,110
|
|
|
$
|
—
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
Accrued expenses
|
|
|
|
|
|
Derivative instruments (Note 13) (2)
|
$
|
—
|
|
|
$
|
43
|
|
|
$
|
—
|
|
Total liabilities measured at fair value
|
$
|
—
|
|
|
$
|
43
|
|
|
$
|
—
|
|
The Company’s financial assets and liabilities measured at fair value on a recurring basis at
January 2, 2016
, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements as of
|
|
January 2, 2016
|
Description
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
(In thousands)
|
Assets:
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
|
|
|
Money market funds
|
$
|
110,817
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Short term investments
|
|
|
|
|
|
Corporate and government bonds (1)
|
—
|
|
|
33,124
|
|
|
—
|
|
Total assets measured at fair value
|
$
|
110,817
|
|
|
$
|
33,124
|
|
|
$
|
—
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
Accrued expenses
|
|
|
|
|
|
Derivative instruments (Note 13) (2)
|
$
|
—
|
|
|
28
|
|
|
$
|
—
|
|
Total liabilities measured at fair value
|
$
|
—
|
|
|
$
|
28
|
|
|
$
|
—
|
|
(1) The bond investments are valued based on observable market values as of the Company's reporting date. The bond investments are recorded at fair value and marked-to-market at the end of each reporting period. The realized and unrealized gains and losses are included in comprehensive income for that period.
(2) Derivative instruments are valued using an income approach based on the present value of the forward rate less the contract rate multiplied by the notional amount.
Recent Accounting Pronouncements
In January 2017, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) FASB issued ASU No. 2017-04, "Intangibles - Goodwill and Other (Topic 350)." ASU No. 2017-04 eliminates step 2 from the
iROBOT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
goodwill impairment test, instead an entity should recognize an impairment charge for the amount by which the carrying amount of goodwill exceeds the reporting unit's fair value. ASU 2017-04 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, with early adoption permitted. The Company does not believe that ASU 2017-04 will have a material effect on its consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-01, "Business Combinations (Topic 805) Clarifying the Definition of a Business". The Amendments in this Update is to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. The guidance is effective for annual periods beginning after December 15, 2017, including interim periods within those periods. The Company is currently evaluating the impact of ASU 2017-01 on its consolidated financial statements.
In October 2016, the FASB issued ASU No. 2016-16, "Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory.” ASU 2016-16 clarifies the accounting for the current and deferred income taxes for an intra-entity transfer of an asset other than inventory. ASU 2016-16 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, with early adoption permitted. The Company is currently evaluating the impact of ASU 2016-16 on its consolidated financial statements.
In August 2016, the FASB issued ASU No. 2016-15, "Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments." ASU 2016-15 refines how companies classify certain aspects of the cash flow statement in regards to debt prepayment, settlement of debt instruments, contingent consideration payments, proceeds from insurance claims and life insurance policies, distribution from equity method investees, beneficial interests in securitization transactions and separately identifiable cash flows. ASU 2016-15 is effective for annual periods beginning after December 15, 2017, and for interim periods within fiscal years beginning after December 15, 2018. Early adoption is permitted. The Company is currently evaluating the impact of ASU 2016-15 on its consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-09, "Improvements to Employee Share-Based Payment Accounting," which simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The Company is currently evaluating the impact of ASU 2016-09 on its consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, "Leases." ASU 2016-02 requires lessees to recognize the assets and liabilities on their balance sheet for the rights and obligations created by most leases and continue to recognize expenses on their income statements over the lease term. It will also require disclosures designed to give financial statement users information on the amount, timing, and uncertainty of cash flows arising from leases. The guidance is effective for annual reporting periods beginning after December 15, 2018 and interim periods within those fiscal years, with early adoption permitted. The Company is currently evaluating the impact of the standard on its consolidated financial statements.
In November 2015, the FASB issued ASU No. 2015-17, "Income Taxes: Balance Sheet Classification of Deferred Taxes." ASU 2015-17 requires that the presentation of deferred tax assets and liabilities be classified as noncurrent on the balance sheet instead of separating deferred taxes into current and noncurrent amounts. This standard will become effective for fiscal years, and the interim periods within those years, beginning after December 15, 2016, with early adoption allowed. The Company elected to prospectively adopt ASU 2015-17 as of January 2, 2016. The prior reporting period was not retrospectively adjusted. The adoption of this guidance had no impact on the Company's Consolidated Statements of Income and Comprehensive Income.
In July 2015, the FASB issued ASU No. 2015-11, "Inventory: Simplifying the Measurement of Inventory." ASU 2015-11 applies only to inventory for which cost is determined by methods other than last-in, first-out and the retail inventory method, which includes inventory that is measured using first-in, first-out or average cost. Inventory within the scope of this standard is required to be measured at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The new standard will be effective for the Company on January 1, 2017. The Company does not believe that the adoption of ASU 2015-11 will have a material effect on its financial condition or results of operations.
In April 2015, the FASB issued ASU No. 2015-05, "Intangibles - Goodwill and Other - Internal-Use Software: Customer's Accounting for Fees Paid in a Cloud Computing Arrangement." Under ASU 2015-05, if a cloud computing arrangement includes a software license, the software license element of the arrangement should be accounted for consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the arrangement should be accounted for as a service contract. The new standard became effective for the Company on January 3, 2016. The adoption of this standard did not have a material impact on the Company's consolidated financial statements.
In February 2015, the FASB issued ASU No. 2015-02, "Consolidation - Amendments to the Consolidation Analysis." ASU 2015-02 reduces the number of consolidation models and changes the way reporting entities evaluate a variable interest
iROBOT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
entity. It is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2015. The Company adopted ASU 2015-02 effective January 3, 2016. The adoption of this standard did not have a material impact on the Company's consolidated financial statements.
In June 2014, the FASB issued ASU No. 2014-12, "Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period." ASU 2014-12 requires a reporting entity to treat a performance target that affects vesting and that could be achieved after the requisite service period as a performance condition. It is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2015. The Company adopted ASU 2014-12 effective January 3, 2016. The adoption of this standard did not have a material impact on the Company's consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers," which provides guidance for revenue recognition. The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The new guidance initially was effective for annual reporting periods beginning after December 15, 2016, including interim periods within those annual reporting periods. In July 2015, the FASB voted to defer the effective date of the new accounting guidance related to revenue recognition by one year to December 17, 2017 for annual reporting periods beginning after that date and permitted early adoption of the standard, but not before the original effective date of December 15, 2016. The Company is continuing to evaluate the impact that the adoption of the new revenue recognition standard will have on its consolidated financial statements, but anticipates that the additional disclosure requirements will represent a significant change from current guidance. The Company currently anticipates adopting the standard using the modified retrospective method.
From time to time, new accounting pronouncements are issued by FASB that are adopted by the Company as of the specified effective date. Unless otherwise discussed, the Company believes that recently issued standards, which are not yet effective, will not have a material impact on the Company’s consolidated financial statements upon adoption.
Inventory consists of the following at:
|
|
|
|
|
|
|
|
|
|
December 31,
2016
|
|
January 2,
2016
|
|
(In thousands)
|
Raw materials
|
$
|
4,717
|
|
|
$
|
9,082
|
|
Finished goods
|
45,861
|
|
|
52,596
|
|
|
$
|
50,578
|
|
|
$
|
61,678
|
|
|
|
|
4.
|
Property and Equipment
|
Property and equipment consists of the following at:
|
|
|
|
|
|
|
|
|
|
December 31,
2016
|
|
January 2,
2016
|
|
(In thousands)
|
Computer and equipment
|
$
|
7,378
|
|
|
$
|
13,825
|
|
Furniture
|
2,906
|
|
|
2,441
|
|
Machinery
|
9,154
|
|
|
7,134
|
|
Tooling
|
20,487
|
|
|
16,599
|
|
Leasehold improvements
|
21,383
|
|
|
21,022
|
|
Business applications software
|
9,471
|
|
|
8,559
|
|
|
70,779
|
|
|
69,580
|
|
Less: accumulated depreciation
|
43,247
|
|
|
42,730
|
|
|
$
|
27,532
|
|
|
$
|
26,850
|
|
Depreciation expense for the years ended
December 31, 2016
,
January 2, 2016
and
December 27, 2014
was
$10.0 million
,
$11.4 million
, and
$9.2 million
, respectively.
At
December 31, 2016
, other assets consisted of eleven investments totaling
$12.9 million
. At
January 2, 2016
, other assets consisted of six investments totaling
$9.4 million
. At December 31, 2016, these investments consisted of cost method investments of
$10.9 million
, an equity method investment of
$1.5 million
and notes receivable of
$0.5 million
. The Company regularly monitors these investments to determine if facts and circumstances have changed in a manner that would require a change in accounting methodology. Additionally, the Company regularly evaluates whether or not these investments have been impaired by considering such factors as economic environment, market conditions, operational performance and other specific factors relating to the businesses underlying the investments. If any such impairment is identified, a reduction in the carrying value of the investments would be recorded at that time. During 2016, the Company recorded impairment on a cost method investment of approximately
$0.1 million
. Since the Company believes the fair value of its remaining investments is greater than the carrying value of its investments, it has not impaired these investments.
Accrued expenses consist of the following at:
|
|
|
|
|
|
|
|
|
|
December 31,
2016
|
|
January 2,
2016
|
|
(In thousands)
|
Accrued warranty
|
8,464
|
|
|
6,907
|
|
Accrued direct fulfillment costs
|
1,722
|
|
|
2,030
|
|
Accrued customer deposits
|
1,171
|
|
|
788
|
|
Accrued federal and state income taxes
|
1,059
|
|
|
—
|
|
Accrued accounting fees
|
686
|
|
|
395
|
|
Accrued sales tax
|
422
|
|
|
625
|
|
Accrued sales commissions
|
404
|
|
|
465
|
|
Accrued rent
|
327
|
|
|
547
|
|
Accrued other
|
5,599
|
|
|
4,197
|
|
|
$
|
19,854
|
|
|
$
|
15,954
|
|
Accrued compensation consists of the following at:
|
|
|
|
|
|
|
|
|
|
December 31,
2016
|
|
January 2,
2016
|
|
(In thousands)
|
Accrued bonus
|
$
|
14,226
|
|
|
$
|
8,640
|
|
Accrued other compensation
|
6,789
|
|
|
7,112
|
|
|
$
|
21,015
|
|
|
$
|
15,752
|
|
|
|
|
7.
|
Working Capital Facilities
|
Credit Facility
The Company has an unsecured revolving credit facility with Bank of America, N.A., which is available to fund working capital and other corporate purposes. As of
December 31, 2016
, the total amount of the credit facility was
$75.0 million
and the full amount was available for borrowing. The interest on loans under the credit facility will accrue, at the Company's election, at either (1) LIBOR plus a margin, currently equal to
1.0%
, based on the Company's 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%
. The credit facility will terminate and all amounts outstanding thereunder will be due and payable in full on
December 20, 2018
.
As of
December 31, 2016
, the Company had
no
outstanding borrowings under its revolving credit facility. This credit facility contains customary terms and conditions for credit facilities of this type, including restrictions on the Company's ability to incur or guaranty additional indebtedness, create liens, enter into transactions with affiliates, make loans or investments, sell assets, pay dividends or make distributions on, or repurchase, the Company's stock, and consolidate or merge with other entities.
In addition, the Company is 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.
This 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, the Company's obligations under the credit facility may be accelerated.
As of
December 31, 2016
, the Company was in compliance with all covenants under its credit facility.
Letter of Credit Facility
The Company has an unsecured revolving letter of credit facility with Bank of America, N.A. The credit facility is available to fund letters of credit on the Company's behalf up to an aggregate outstanding amount of
$5 million
. The Company may terminate at any time, subject to proper notice, or from time to time permanently reduce the amount of the credit facility.
The Company pays a fee on outstanding letters of credit issued under the credit facility of up to 1.5% per annum of the outstanding letters of credit. The maturity date for letters of credit issued under the credit facility must be no later than 365 days following the maturity date of the credit facility.
As of December 31, 2016, there were letters of credit outstanding of
$1.0 million
under the revolving letter of credit facility. The credit facility contains customary terms and conditions for credit facilities of this type, including restrictions on the Company's ability to incur or guaranty additional indebtedness, create liens, enter into transactions with affiliates, make loans or investments, sell assets, pay dividends or make distributions on, or repurchase stock, and consolidate or merge with other entities. In addition, the Company is 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 also 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, the lender may accelerate the obligations under the credit facility.
As of December 31, 2016, the Company was in compliance with all covenants under the revolving letter of credit facility.
Common stockholders are entitled to one vote for each share held and to receive dividends if and when declared by the Board of Directors and subject to and qualified by the rights of holders of the preferred stock. Upon dissolution or liquidation of the Company, holders of common stock will be entitled to receive all available assets subject to any preferential rights of any then outstanding preferred stock.
On April 2, 2014, the Company announced a stock repurchase program. Under the program, the Company could purchase up to
$50 million
of its common stock from
May 1, 2014
to
April 30, 2015
. On March 19, 2015, the Company announced an additional stock repurchase program, which authorized the repurchase of
$50 million
of its common stock from
May 1, 2015
to
April 30, 2016
. On December 28, 2015, the Company replaced the then-current stock repurchase program with a new stock repurchase program, effective January 4, 2016 and ending on December 31, 2016, pursuant to which the Company was authorized to purchase up to one million shares or $40 million of its common stock. On March 1, 2016, the Company replaced the then-current stock repurchase program and entered into an accelerated share repurchase (ASR) agreement to repurchase an aggregate of
$85.0 million
of common stock.
During 2016, 2015 and 2014, the Company repurchased
2,641,122
shares totaling
$97.0 million
,
1,260,276
shares totaling
$37.4 million
and
55,973
shares totaling
$1.7 million
, respectively, in the open market under these stock repurchase plans.
iROBOT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
|
|
9.
|
Stock Option Plans and Stock-Based Compensation
|
The Company has options outstanding under three stock incentive plans: the 2005 Stock Option and Incentive Plan (the "2005 Plan"), the Evolution Robotics, Inc. 2007 Stock Plan (the "2007 Plan") and the 2015 Stock Option and Incentive Plan (the "2015 Plan" and together with the 2005 Plan and the 2007 Plan, the “Plans”). All options that remained outstanding under the 2004 Stock Option and Incentive Plan as of December 27, 2014 were exercised during fiscal 2015. The 2015 Plan is the only one of the three plans under which new awards may currently be granted. Under the 2015 Plan, which became effective
May 20, 2015
,
3,100,000
shares were initially reserved for issuance in the form of incentive stock options, non-qualified stock options, stock appreciation rights, deferred stock awards, restricted stock units, unrestricted stock awards, cash-based awards, performance share awards and dividend equivalent rights. Stock awards returned to the Plans, with the exception of those issued under the 2007 Plan, as a result of their expiration, cancellation or termination are automatically made available for issuance under the 2015 Plan. Eligibility for incentive stock options is limited to those individuals whose employment status would qualify them for the tax treatment associated with incentive stock options in accordance with the Internal Revenue Code of 1986, as amended. As of
December 31, 2016
, there were
1,495,517
shares available for future grant under the 2015 Plan.
Options granted under the Plans are subject to terms and conditions as determined by the compensation committee of the board of directors, including vesting periods. Options granted under the Plans are exercisable in full at any time subsequent to vesting, generally vest over
four years
, and expire
five
or
ten
years from the date of grant or, if earlier,
90
days from employee termination. The exercise price of stock options is typically equal to the closing price on the NASDAQ Global Select Market on the date of grant. Other awards granted under the Plans generally vest over periods from three to four years.
In conjunction with the acquisition of Evolution Robotics, Inc. on October 1, 2012, each outstanding and unvested incentive stock option held by Evolution employees as of the acquisition date was automatically converted into stock options of the Company under the same terms and conditions as were applicable to the original Evolution grants. The number of replacement options granted and the associated exercise prices were determined utilizing a conversion ratio as defined in the merger agreement. There were
114,248
incentive stock options issued by the Company as a result of this automatic conversion with exercise prices ranging from
$2.55
to
$4.81
. All of these options were granted from the 2007 Plan, which was assumed by the Company as a result of the acquisition.
The Company recognized
$3.2 million
of stock-based compensation expense during the fiscal year ended
December 31, 2016
for stock options. The unamortized fair value as of
December 31, 2016
associated with these grants was
$6.8 million
with a weighted-average remaining recognition period of
2.85
years. The Company expects to recognize associated stock-based compensation expense of
$2.8 million
,
$2.1 million
,
$1.4 million
and
$0.5 million
in 2017, 2018, 2019 and 2020, respectively.
The fair value of each option grant for the fiscal years ended
December 31, 2016
,
January 2, 2016
and
December 27, 2014
was computed on the grant date using the Black-Scholes option-pricing model with the following assumptions:
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
December 31,
2016
|
|
January 2,
2016
|
|
December 27,
2014
|
Risk-free interest rate
|
1.17% — 1.89%
|
|
1.47% — 1.75%
|
|
1.65% — 1.69%
|
Expected dividend yield
|
—
|
|
—
|
|
—
|
Expected life
|
4.01 — 4.03 years
|
|
3.98 — 4.02 years
|
|
3.91 — 4.00 years
|
Expected volatility
|
38.9% — 42.1%
|
|
46.5% — 52.4%
|
|
52.8% — 56.0%
|
The risk-free interest rate is derived from the average U.S. Treasury constant maturity rate, which approximates the rate in effect at the time of grant, commensurate with the expected life of the instrument. The dividend yield is zero based upon the fact the Company has never paid and has no present intention to pay cash dividends. The Company utilizes company specific historical data for purposes of establishing expected volatility and expected term.
Based upon the above assumptions, the weighted average fair value of each stock option granted for the fiscal years ended
December 31, 2016
,
January 2, 2016
and
December 27, 2014
was
$12.88
,
$13.21
and
$15.87
, respectively.
iROBOT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The table below summarizes stock option plan activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
Weighted Average
Exercise Price
|
|
Weighted Average
Remaining
Contractual Term
|
|
Aggregate
Intrinsic
Value(1)
|
Outstanding at December 28, 2013
|
1,770,375
|
|
|
$
|
19.89
|
|
|
|
|
|
Granted
|
233,181
|
|
|
37.10
|
|
|
|
|
|
Exercised
|
(486,252
|
)
|
|
18.39
|
|
|
|
|
|
Canceled
|
(43,984
|
)
|
|
27.17
|
|
|
|
|
|
Outstanding at December 27, 2014
|
1,473,320
|
|
|
$
|
22.89
|
|
|
|
|
|
Granted
|
323,104
|
|
|
32.58
|
|
|
|
|
|
Exercised
|
(390,085
|
)
|
|
16.57
|
|
|
|
|
|
Canceled
|
(118,789
|
)
|
|
28.41
|
|
|
|
|
|
Outstanding at January 2, 2016
|
1,287,550
|
|
|
$
|
26.73
|
|
|
|
|
|
Granted
|
314,770
|
|
|
38.03
|
|
|
|
|
|
Exercised
|
(456,498
|
)
|
|
20.47
|
|
|
|
|
|
Canceled
|
(57,648
|
)
|
|
33.28
|
|
|
|
|
|
Outstanding at December 31, 2016
|
1,088,174
|
|
|
$
|
32.27
|
|
|
4.63 years
|
|
$28.5 million
|
Vested and expected to vest at December 31, 2016
|
1,027,399
|
|
|
$
|
32.01
|
|
|
4.55 years
|
|
$27.2 million
|
Exercisable as of December 31, 2016
|
530,059
|
|
|
$
|
28.45
|
|
|
3.34 years
|
|
$15.9 million
|
Weighted average fair value of options granted during the fiscal year ended December 31, 2016
|
|
|
$
|
12.88
|
|
|
|
|
|
Options available for future grant at December 31, 2016
|
1,495,517
|
|
|
|
|
|
|
|
_________________________
|
|
(1)
|
The aggregate intrinsic value on the table was calculated based upon the positive difference between the closing market value of the Company’s stock on
December 31, 2016
of
$58.45
and the exercise price of the underlying option.
|
During fiscal years
2016
,
2015
, and
2014
, the total intrinsic value of stock options exercised was
$10.3 million
,
$5.9 million
and
$10.5 million
, respectively. No amounts relating to stock-based compensation have been capitalized.
The following table summarizes information about stock options outstanding at
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
Options Exercisable
|
Range of Exercise Prices
|
|
Number
Outstanding
|
|
Weighted Average
Remaining
Contractual Life
|
|
Weighted Average
Exercise Price
|
Number
Exercisable
|
|
Weighted Average
Exercise Price
|
$ 3.54 - $ 21.23
|
|
37,580
|
|
|
4.21 years
|
|
$
|
7.72
|
|
|
37,580
|
|
|
$
|
7.72
|
|
22.86 - 22.86
|
|
142,278
|
|
|
3.18
|
|
22.86
|
|
|
132,265
|
|
|
22.86
|
|
24.53 - 29.60
|
|
146,630
|
|
|
3.59
|
|
27.65
|
|
|
100,303
|
|
|
26.75
|
|
32.38 - 32.38
|
|
70,590
|
|
|
5.43
|
|
32.38
|
|
|
25,544
|
|
|
32.38
|
|
33.14 - 33.14
|
|
128,595
|
|
|
6.19
|
|
33.14
|
|
|
—
|
|
|
—
|
|
33.29 - 33.48
|
|
123,935
|
|
|
2.27
|
|
33.42
|
|
|
105,726
|
|
|
33.44
|
|
33.72 - 34.30
|
|
124,259
|
|
|
5.33
|
|
34.16
|
|
|
45,410
|
|
|
34.17
|
|
34.67 - 37.08
|
|
89,585
|
|
|
4.46
|
|
35.77
|
|
|
56,634
|
|
|
35.64
|
|
37.62 - 37.62
|
|
110,575
|
|
|
6.44
|
|
37.62
|
|
|
—
|
|
|
—
|
|
39.09 - 58.55
|
|
114,147
|
|
|
5.89
|
|
45.77
|
|
|
26,597
|
|
|
43.35
|
|
$ 3.54 - $58.55
|
|
1,088,174
|
|
|
4.63 years
|
|
$
|
32.27
|
|
|
530,059
|
|
|
$
|
28.45
|
|
During the fiscal year ended
December 31, 2016
, the Company recognized
$12.8 million
of stock-based compensation expense associated with restricted stock units. As of
December 31, 2016
,
January 2, 2016
and
December 27, 2014
, the
iROBOT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
unamortized fair value of all restricted stock units was
$28.9 million
,
$24.3 million
and
$20.1 million
, respectively. The Company expects to recognize associated stock-based compensation expense of
$11.2 million
,
$8.9 million
,
$6.4 million
and
$2.4 million
in 2017, 2018, 2019 and 2020, respectively.
The table below summarizes activity relating to restricted stock units:
|
|
|
|
|
|
|
|
|
Number of
Shares Underlying
Restricted Stock
|
|
Weighted Average
Grant Date Fair
Value
|
Outstanding at December 28, 2013
|
927,654
|
|
|
$
|
25.50
|
|
Granted
|
372,159
|
|
|
38.25
|
|
Vested
|
(318,367
|
)
|
|
25.38
|
|
Forfeited
|
(71,591
|
)
|
|
28.42
|
|
Outstanding at December 27, 2014
|
909,855
|
|
|
$
|
30.53
|
|
Granted
|
576,410
|
|
|
32.33
|
|
Vested
|
(340,754
|
)
|
|
29.13
|
|
Forfeited
|
(121,142
|
)
|
|
31.49
|
|
Outstanding at January 2, 2016
|
1,024,369
|
|
|
$
|
31.90
|
|
Granted
|
458,237
|
|
|
37.93
|
|
Vested
|
(363,643
|
)
|
|
30.42
|
|
Forfeited
|
(98,917
|
)
|
|
32.13
|
|
Outstanding at December 31, 2016
|
1,020,046
|
|
|
$
|
35.23
|
|
In 2014, 2015 and 2016 the Company granted performance-based restricted stock units (PSUs) to certain of its employees. The performance metric for these awards is operating income percent, with a threshold requirement for a minimum amount of revenue growth. These awards vest over a three year period. The number of shares actually earned at the end of the three year period will range from 0% to 100% of the target number of PSUs granted based on the Company’s performance against three year operating income and revenue goals. In addition, while all vesting of earned PSUs occurs on the third anniversary of the date of grant, achievement of cumulative intermediate targets for each individual year will allow PSUs to be deemed earned but not yet vested for the intermediate periods. Achievement of the cumulative target will allow all shares subject to the PSUs to be earned regardless of the achievement of the intermediate individual year targets.
iROBOT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The components of income tax expense were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
December 31,
2016
|
|
January 2,
2016
|
|
December 27,
2014
|
|
(In thousands)
|
Current
|
|
|
|
|
|
Federal
|
$
|
17,639
|
|
|
$
|
20,033
|
|
|
$
|
15,128
|
|
State
|
1,054
|
|
|
972
|
|
|
129
|
|
Foreign
|
310
|
|
|
121
|
|
|
91
|
|
Total current tax provision
|
19,003
|
|
|
21,126
|
|
|
15,348
|
|
Deferred
|
|
|
|
|
|
Federal
|
$
|
781
|
|
|
$
|
(1,657
|
)
|
|
$
|
1,268
|
|
State
|
(95
|
)
|
|
(628
|
)
|
|
(2,010
|
)
|
Foreign
|
(267
|
)
|
|
—
|
|
|
—
|
|
Total deferred tax provision
|
419
|
|
|
(2,285
|
)
|
|
(742
|
)
|
Total income tax provision
|
$
|
19,422
|
|
|
$
|
18,841
|
|
|
$
|
14,606
|
|
As of
December 31, 2016
, a deferred tax liability has not been established for approximately
$1.6 million
of cumulative undistributed earnings of non-U.S. subsidiaries, as the Company plans to keep these amounts permanently reinvested overseas. The amount of any unrecognized deferred tax liability on these undistributed earnings would be immaterial.
The components of net deferred tax assets were as follows:
|
|
|
|
|
|
|
|
|
|
December 31,
2016
|
|
January 2,
2016
|
|
(In thousands)
|
Net deferred tax assets
|
|
|
|
Non-current deferred tax assets
|
|
|
|
Accounts receivable
|
$
|
11,850
|
|
|
$
|
7,924
|
|
Accrued expenses
|
6,233
|
|
|
9,110
|
|
Stock-based compensation
|
6,150
|
|
|
5,962
|
|
Tax credits
|
5,999
|
|
|
6,114
|
|
Property and equipment
|
1,934
|
|
|
1,308
|
|
Inventory
|
1,318
|
|
|
2,885
|
|
Net operating loss carryforwards
|
1,010
|
|
|
3,606
|
|
Other
|
1,336
|
|
|
1,625
|
|
Total non-current deferred tax assets
|
35,830
|
|
|
38,534
|
|
Non-current deferred tax liabilities
|
|
|
|
Prepaids
|
715
|
|
|
623
|
|
Intangible assets
|
4,530
|
|
|
6,190
|
|
Total non-current deferred tax liabilities
|
5,245
|
|
|
6,813
|
|
Total net deferred tax assets
|
$
|
30,585
|
|
|
$
|
31,721
|
|
In November 2015, the FASB issued ASU No. 2015-17, "Income Taxes: Balance Sheet Classification of Deferred Taxes." ASU 2015-17 requires that the presentation of deferred tax assets and liabilities be classified as noncurrent on the balance sheet instead of separating deferred taxes into current and non-current amounts. This standard became effective for fiscal years, and the interim periods within those years, beginning after December 15, 2016, with early adoption
iROBOT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
allowed. The Company elected to prospectively early adopt ASU 2015-17 on the first day of the fourth quarter of the fiscal year ended January 2, 2016. The adoption of this guidance had no impact on the Company's Consolidated Statements of Income and Comprehensive Income.
As of December 28, 2013, the Company maintained a valuation allowance of
$2.1 million
related to certain state tax attributes from the Evolution Robotics, Inc. acquisition. During the year ended December 27, 2014, this valuation allowance was released when realization of these state tax attributes became more likely than not. As of December 31, 2016, the Company did not record a valuation allowance as all deferred tax assets are considered realizable.
The table below summarizes activity relating to the valuation allowance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
Balance at
beginning of
period
|
|
Additions
Charged to
Costs and
Expenses
|
|
Additions Charged to Goodwill
|
|
Deductions
|
|
Balance
at End
of Period
|
|
(In thousands)
|
December 27, 2014
|
$
|
2,090
|
|
|
—
|
|
|
—
|
|
|
2,090
|
|
|
$
|
—
|
|
January 2, 2016
|
$
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
$
|
—
|
|
December 31, 2016
|
$
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
$
|
—
|
|
The Company has federal net operating loss carryforwards of
$1.0 million
and
$8.0 million
as of
December 31, 2016
and
January 2, 2016
, respectively, which expire in 2031. The Company has state net operating loss carryforwards of
$8.9 million
and
$15.0 million
as of December 31, 2016 and January 2, 2016, respectively, which expire from 2029 to 2031. The Company has federal research and development credit carryforwards of
$1.0 million
and
$1.0 million
as of
December 31, 2016
and
January 2, 2016
, respectively, which expire from 2026 to 2031. The Company has state research and development credit carryforwards of
$10.0 million
and
$9.3 million
as of December 31, 2016 and January 2, 2016, respectively, which expire from 2023 to 2031. Under the Internal Revenue Code, certain substantial changes in the Company’s ownership could result in an annual limitation on the amount of these tax carryforwards which can be utilized in future years. As of
December 31, 2016
, the Company has
$9.9 million
of federal and state net operating loss carryforwards and
$2.2 million
of federal and state research and development credits related to the acquisition of Evolution Robotics that are limited by Section 382 and Section 383, respectively, of the Internal Revenue Code. However, these limitations are not expected to cause any of these federal and state net operating loss carryforwards or federal and state research and development credits to expire prior to being utilized.
The reconciliation of the expected tax (benefit) expense (computed by applying the federal statutory rate to income before income taxes) to actual tax expense was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
December 31,
2016
|
|
January 2,
2016
|
|
December 27,
2014
|
|
(In thousands)
|
Expected federal income tax
|
$
|
21,476
|
|
|
$
|
22,040
|
|
|
$
|
18,344
|
|
Miscellaneous permanent items
|
516
|
|
|
608
|
|
|
691
|
|
State taxes (net of federal benefit)
|
1,360
|
|
|
982
|
|
|
1,058
|
|
Federal and state credits
|
(2,233
|
)
|
|
(2,767
|
)
|
|
(1,487
|
)
|
Change in valuation allowance
|
—
|
|
|
—
|
|
|
(2,090
|
)
|
Domestic production activities deduction
|
(1,731
|
)
|
|
(2,145
|
)
|
|
(1,562
|
)
|
Settlement of uncertain tax positions
|
(167
|
)
|
|
(194
|
)
|
|
(176
|
)
|
Other
|
201
|
|
|
317
|
|
|
(172
|
)
|
|
$
|
19,422
|
|
|
$
|
18,841
|
|
|
$
|
14,606
|
|
iROBOT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
A summary of the Company’s adjustments to its gross unrecognized tax benefits in the current year is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
December 31, 2016
|
|
January 2,
2016
|
|
December 27, 2014
|
|
(in thousands)
|
Balance at beginning of period
|
$
|
6,616
|
|
|
$
|
2,491
|
|
|
$
|
2,618
|
|
Increase (decrease) for tax positions related to the current year
|
2,851
|
|
|
786
|
|
|
252
|
|
Increase (decrease) for tax positions related to prior years
|
(4,224
|
)
|
|
3,533
|
|
|
(108
|
)
|
Decreases for settlements with applicable taxing authorities
|
—
|
|
|
—
|
|
|
(271
|
)
|
Decreases for lapses of statute of limitations
|
(97
|
)
|
|
(194
|
)
|
|
—
|
|
Balance at end of period
|
$
|
5,146
|
|
|
$
|
6,616
|
|
|
$
|
2,491
|
|
The Company accrues interest and, if applicable, penalties for any uncertain tax positions. Interest and penalties are classified as a component of income tax expense. As of
December 31, 2016
,
January 2, 2016
and
December 27, 2014
there were no material accrued interest or penalties. Over the next twelve months, it is reasonably possible that the Company may recognize approximately
$0.1 million
of previously net unrecognized tax benefits related to U.S. federal, state and foreign tax audits and expiration of the statute of limitations. If all of our unrecognized tax benefits as of
December 31, 2016
were to become recognizable in the future, we would record a
$2.2 million
benefit, inclusive of interest, to the income tax provision, reflective of federal benefit on state items.
Included in the Company’s state tax credit carryforwards are unrecognized tax benefits related to stock-based compensation beginning from January 1, 2006 of
$0.7 million
and
$0.6 million
as of
December 31, 2016
and
January 2, 2016
, respectively. Included in the Company's state net operating loss carryforwards are unrecognized tax benefits related to stock-based compensation beginning from January 1, 2006 of
$1.8 million
and
$1.0
million as of December 31, 2016 and January 2, 2016, respectively. These unrecognized tax benefits will be credited to additional paid-in capital when they reduce income taxes payable. Therefore, these amounts were not included in the Company’s gross or net deferred tax assets at
December 31, 2016
and
January 2, 2016
.
The Company follows the with and without approach for direct and indirect effects of windfall tax deductions.
|
|
|
11.
|
Commitments and Contingencies
|
Legal Proceedings
From time to time and in the ordinary course of business, the Company is subject to various claims, charges and litigation. The outcome of litigation cannot be predicted with certainty and some lawsuits, claims or proceedings may be disposed of unfavorably to us, which could materially affect our financial condition or results of operations.
Lease Obligations
The Company leases its facilities. Rental expense under operating leases for fiscal
2016
,
2015
and
2014
amounted to
$6.0 million
,
$4.9 million
, and
$4.8 million
, respectively. Future minimum rental payments under operating leases were as follows as of
December 31, 2016
:
|
|
|
|
|
|
Operating
Leases
|
2017
|
$
|
4,773
|
|
2018
|
4,438
|
|
2019
|
4,209
|
|
2020
|
2,126
|
|
2021
|
1,182
|
|
Thereafter
|
2,046
|
|
Total minimum lease payments
|
$
|
18,774
|
|
iROBOT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Outstanding Purchase Orders
At
December 31, 2016
, we had outstanding purchase orders aggregating approximately
$103.2 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 cancelable 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.
Guarantees and Indemnification Obligations
The Company enters into standard indemnification agreements in the ordinary course of business. Pursuant to these agreements, the Company indemnifies and agrees to reimburse the indemnified party for losses incurred by the indemnified party, generally the Company’s customers, in connection with any patent, copyright, trade secret or other proprietary right infringement claim by any third party. The term of these indemnification agreements is generally perpetual any time after execution of the agreement. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited. The Company has never incurred costs to defend lawsuits or settle claims related to these indemnification agreements. As a result, the Company believes the estimated fair value of these agreements is minimal. Accordingly, the Company has no liabilities recorded for these agreements as of
December 31, 2016
and
January 2, 2016
, respectively.
Government Contract Contingencies
Prior to the completion of the divestiture of our defense and security business unit during the second quarter of 2016, the Company had several prime contracts with the U.S. federal government which did not contain a limitation of liability provision, creating a risk of responsibility for direct and consequential damages. Several subcontracts with prime contractors hold the prime contractor harmless against liability that stems from our work and do not contain a limitation of liability. These provisions could cause substantial liability for the Company. In addition, the Company is subject to audits by the U.S. federal government as part of routine audits of government contracts. As part of an audit, these agencies may review the Company’s performance on contracts, cost structures and compliance with applicable laws, regulations and standards. If any of its costs are found to be allocated improperly to a specific contract, the costs may not be reimbursed and any costs already reimbursed for such contract may have to be refunded. Accordingly, an audit could result in a material adjustment to our revenue and results of operations. Annually, the Company submits final indirect billing rates to DCMA based upon actual costs incurred throughout the year. These final billing rates are subject to audit by DCAA. As of
December 31, 2016
, fiscal years 2015 and 2016 are open for audit by DCAA.
Warranty
The Company provides warranties on most products and has established a reserve for warranty based on estimated warranty costs. The reserve is included as part of accrued expenses (Note 6) in the accompanying consolidated balance sheets.
Activity related to the warranty accrual was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
December 31,
2016
|
|
January 2,
2016
|
|
December 27,
2014
|
|
(In thousands)
|
Balance at beginning of period
|
$
|
6,907
|
|
|
$
|
7,769
|
|
|
$
|
6,497
|
|
Provision
|
7,494
|
|
|
4,598
|
|
|
6,410
|
|
Warranty usage (*)
|
(5,937
|
)
|
|
(5,460
|
)
|
|
(5,138
|
)
|
Balance at end of period
|
$
|
8,464
|
|
|
$
|
6,907
|
|
|
$
|
7,769
|
|
__________________________________
|
|
(*)
|
Warranty usage includes costs incurred for warranty obligations and the release of warranty liabilities associated with the divestiture of the defense and security business unit.
|
iROBOT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Sales Taxes
The Company collects and remits sales tax in jurisdictions in which it has a physical presence or it believes nexus exists, which therefore obligates the Company to collect and remit sales tax. The Company continually evaluates whether it has established nexus in new jurisdictions with respect to sales tax. The Company has recorded a liability for potential exposure in states where there is uncertainty about the point in time at which the Company established a sufficient business connection to create nexus. The Company continues to analyze possible sales tax exposure, but does not currently believe that any individual claim or aggregate claims that might arise will ultimately have a material effect on its consolidated results of operations, financial position or cash flows.
The Company sponsors a retirement plan under Section 401(k) of the Internal Revenue Code (the "Retirement Plan"). All Company employees, with the exception of temporary, contract and international employees are eligible to participate in the Retirement Plan after satisfying age and length of service requirements prescribed by the plan. Under the Retirement Plan, employees may make tax-deferred contributions, and the Company, at its sole discretion, and subject to the limits prescribed by the IRS, may make either a nonelective contribution on behalf of all eligible employees or a matching contribution on behalf of all plan participants.
The Company elected to make a matching contribution of approximately
$1.7 million
,
$1.8 million
and
$1.7 million
for the plan years ended
December 31, 2016
,
January 2, 2016
and
December 27, 2014
("Plan-Year 2016," "Plan-Year 2015" and "Plan-Year 2014"), respectively. The employer contribution represents a matching contribution at a rate of
50%
of each employee’s first
six percent
contribution. Accordingly, each employee participating during Plan-Year 2016, Plan-Year 2015 and Plan-Year 2014 is entitled up to a maximum of
three percent
of his or her eligible annual payroll. The employer matching contribution for Plan-Year 2016 is included in accrued compensation in the accompanying consolidated balance sheet.
|
|
|
13.
|
Derivative Instruments
|
The Company is exposed to adverse changes in foreign currency exchange rates, primarily related to sales in the Canadian Dollar and the Euro. As a result, the Company periodically enters into foreign currency forward contracts to minimize the impact of fluctuating exchange rates on results of operations. These derivative instruments have maturities of two months or less and have not qualified for hedge accounting.
In addition, during 2016, the Company entered into a foreign currency option to hedge the Japanese Yen purchase price of a previously announced acquisition expected to close in the quarter ended July 1, 2017. The instrument has a maturity of four months and does not qualify for hedge accounting.
Notional amounts and fair values of derivative instruments are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional amount
|
|
Fair Value
|
|
Classification
|
|
December 31, 2016
|
|
January 2, 2016
|
|
December 31, 2016
|
|
January 2, 2016
|
|
|
|
(In thousands)
|
Foreign currency option contracts
|
Other current assets
|
|
$
|
396
|
|
|
$
|
—
|
|
|
$
|
180
|
|
|
$
|
—
|
|
Foreign currency forward contracts
|
Accrued expenses
|
|
$
|
7,680
|
|
|
$
|
6,773
|
|
|
$
|
43
|
|
|
$
|
28
|
|
Gains associated with derivative instruments are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended
|
|
Classification
|
|
December 31, 2016
|
|
January 2, 2016
|
|
|
|
(In thousands)
|
Derivatives not designated as hedging instruments
|
|
|
|
|
Gain recognized in income
|
Other income, net
|
|
$
|
29
|
|
|
$
|
368
|
|
iROBOT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
|
|
14.
|
Goodwill and other intangible assets
|
The carrying amount of the goodwill as of
December 31, 2016
is
$41.1 million
, which resulted from the acquisition of Evolution Robotics, Inc. in October 2012. The Company's goodwill balance as of
January 2, 2016
was
$48.8 million
, which consisted of the
$41.1 million
from the acquisition of Evolution Robotics, Inc. and was assigned to the home robots reporting unit and
$7.7 million
related to the acquisition of Nekton Research, LLC completed in September 2008 and was assigned to the defense and security reporting unit. On April 4, 2016, the Company completed the sale of its defense and security business unit and therefore the goodwill balance assigned to the defense and security business unit was written off during the three months ended July 2, 2016. As a result of the divestiture, the Company now has one reporting unit, consumer robots.
In the fourth quarter of
2016
, the Company completed its annual goodwill impairment test on the goodwill associated with the acquisition of Evolution Robotics, Inc. and did not identify any goodwill impairment.
Other intangible assets include the value assigned to completed technology, research contracts, and trade names. The estimated useful lives for all of these intangible assets are
two
to
ten
years. The intangible assets are being amortized on a straight-line basis, which is consistent with the pattern that the estimated economic benefits of the intangible assets are expected to be utilized.
Intangible assets at
December 31, 2016
and
January 2, 2016
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
January 2, 2016
|
|
Cost
|
|
Accumulated
Amortization
|
|
Net
|
|
Cost
|
|
Accumulated
Amortization
|
|
Net
|
|
(In thousands)
|
Completed technology
|
$
|
26,900
|
|
|
$
|
14,693
|
|
|
$
|
12,207
|
|
|
$
|
26,900
|
|
|
$
|
11,236
|
|
|
$
|
15,664
|
|
Tradename
|
100
|
|
|
100
|
|
|
—
|
|
|
100
|
|
|
100
|
|
|
—
|
|
Total
|
$
|
27,000
|
|
|
$
|
14,793
|
|
|
$
|
12,207
|
|
|
$
|
27,000
|
|
|
$
|
11,336
|
|
|
$
|
15,664
|
|
Amortization expense related to acquired intangible assets was
$3.5 million
for each of the fiscal years ended
December 31, 2016
,
January 2, 2016
and
December 27, 2014
. The estimated future amortization expense related to current intangible assets in each of the five succeeding fiscal years is expected to be as follows:
|
|
|
|
|
|
(In thousands)
|
2017
|
$
|
3,457
|
|
2018
|
3,457
|
|
2019
|
2,818
|
|
2020
|
900
|
|
2021
|
900
|
|
Thereafter
|
675
|
|
Total
|
$
|
12,207
|
|
iROBOT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
On April 4, 2016, the Company completed the sale of the defense and security business unit to iRobot Defense Holdings, Inc., a portfolio company of Arlington Capital Partners. The final purchase price, including adjustments for working capital and indebtedness, was
$24.5 million
. The Company recognized a gain of
$0.4 million
on the sale of assets, which is recorded as a component of other income (expense), net, for the year ended December 31, 2016. The sale of the defense and security business did not meet the criteria for discontinued operations presentation as it did not represent a strategic shift that had a major effect on the Company's operations and financial results.
The Company and iRobot Defense Holdings, Inc. have also entered into a Transition Services Agreement (TSA), pursuant to which the Company will continue to perform certain functions on iRobot Defense Holdings Inc.’s behalf during a transition period not to exceed 12 months. The TSA provides for the reimbursement of the Company for direct costs incurred in order to provide such functions and is recorded as a component of other income. For the year ended December 31, 2016 the Company recognized $1.2 million of TSA reimbursement.
|
|
|
16.
|
Restructuring charges
|
During the three months ended July 2, 2016, the Company decided to fully exit its remote presence business. As a result, the Company incurred restructuring charges of approximately $1.9 million related to the write-off of certain inventory, workforce reductions and the write-off of certain fixed assets. No restructuring charges were incurred in 2015. In 2014, the Company paid the remaining balance of the restructuring charges incurred in 2013.
The activity for the restructuring program is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
December 31, 2016
|
|
January 2, 2016
|
|
December 27, 2014
|
|
(In thousands)
|
Balance at beginning of period
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
675
|
|
Charges
|
1,857
|
|
|
—
|
|
|
—
|
|
Utilization
|
(1,669
|
)
|
|
—
|
|
|
(675
|
)
|
Balance at end of period
|
$
|
188
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
17.
|
Industry Segment, Geographic Information and Significant Customers
|
Prior to completing the sale of the Company's defense and security business (see Note 15), the Company’s reportable segments consisted of the home business unit and the defense and security business unit. Following this divestiture, which was completed on April 4, 2016, the Company now operates as
one
business segment, consumer robots, the results of which are included in the Company's consolidated statements of income and comprehensive income. The Company's consumer robots products are offered to consumers through a network of retail businesses throughout the United States, to various countries through international distributors and retailers, and through the Company's on-line store.
Geographic Information
For the fiscal years ended
December 31, 2016
,
January 2, 2016
and
December 27, 2014
, sales to non-U.S. customers accounted for
51.2%
,
56.0%
and
60.9%
of total revenue, respectively. For the fiscal years ended
December 31, 2016
,
January 2, 2016
and
December 27, 2014
, sales to the Company's consumer robots distributor in Japan accounted for
12.9%
,
13.3%
, and
17.0%
of total revenue, respectively.
iROBOT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Significant Customers
For the fiscal years ended
December 31, 2016
,
January 2, 2016
and
December 27, 2014
, U.S. federal government orders, contracts and subcontracts accounted for
0.2%
,
5.1%
and
4.3%
of total revenue, respectively. For the fiscal years ended
December 31, 2016
,
January 2, 2016
and
December 27, 2014
approximately
72.8%
,
76.6%
and
75.7%
, respectively, of consumer robot product revenue resulted from sales to
15
customers. For the fiscal years ended
December 31, 2016
,
January 2, 2016
and
December 27, 2014
, the Company generated an aggregate of
25.2%
,
26.0%
and
29.8%
, respectively, of its total revenue from its consumer robots distributor in Japan (Sales on Demand Corporation) and a network of affiliated European distributors of the Company's consumer robots (Robopolis SAS). For the year ended December 31, 2016, the Company generated
10.4%
of total revenue from one of the Company's domestic retailers (Amazon).
|
|
|
18.
|
Quarterly Information (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Quarter Ended
|
|
December 31,
2016
|
|
October 1,
2016
|
|
July 2,
2016
|
|
April 2,
2016
|
|
January 2,
2016
|
|
September 26,
2015
|
|
June 27,
2015
|
|
March 28,
2015
|
|
(In thousands, except per share amounts)
|
Revenue
|
$
|
212,494
|
|
|
$
|
168,610
|
|
|
$
|
148,696
|
|
|
$
|
130,804
|
|
|
$
|
206,420
|
|
|
$
|
143,609
|
|
|
$
|
148,788
|
|
|
$
|
117,961
|
|
Gross margin
|
106,642
|
|
|
81,060
|
|
|
69,652
|
|
|
61,961
|
|
|
95,327
|
|
|
69,858
|
|
|
70,033
|
|
|
53,708
|
|
Net income
|
13,681
|
|
|
19,512
|
|
|
4,814
|
|
|
3,932
|
|
|
19,331
|
|
|
12,793
|
|
|
7,252
|
|
|
4,754
|
|
Diluted earnings per share
|
$
|
0.49
|
|
|
$
|
0.70
|
|
|
$
|
0.17
|
|
|
$
|
0.13
|
|
|
$
|
0.65
|
|
|
$
|
0.42
|
|
|
$
|
0.24
|
|
|
$
|
0.16
|
|
During the third quarter of 2016, the Company identified immaterial errors to previously reported other income from an equity investee that was previously accounted for as a cost method investment. The amounts corrected out-of-period in other income resulted in a $1.4 million increase in the fourth quarter 2016 income before taxes. Of the $1.4 million adjustment, $1.2 million relates to prior years and $0.2 million relates to the first three quarters of 2016. The adjustment did not have a material impact on the reported financial positions or results of operations for the three and twelve months ended December 31, 2016. Additionally, had the errors been recorded in the prior period to which they relate, the impact would not have been material to the reported financial position or results of operations for those periods.
During the fourth quarter of 2015, the Company identified immaterial errors to previously reported revenue due to certain customer allowances recorded at an incorrect rate and a reserve calculation which was overstated. The recorded out of period adjustment to revenue resulted in a
$1.5 million
increase in fourth quarter 2015 income before taxes. Of the
$1.5 million
adjustment,
$0.7 million
relates to prior years and
$0.8 million
relates to the first three quarters of 2015. The adjustment did not have a material impact on the reported financial position or results of operations for the three and twelve months ended January 2, 2016. Additionally, had the errors been recorded in the prior periods to which they relate, the impact would not have been material to the reported financial position or results of operations for those periods.