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") designs and builds robots that empower people to do more. The Company develops robotic technology and applies it to produce and market consumer 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 and Foreign Currency Translation
The accompanying consolidated financial statements include those of iRobot and its subsidiaries, after elimination of all intercompany balances and transactions. In addition, certain prior year amounts have been reclassified to conform to the current year presentation. iRobot has prepared the accompanying consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (GAAP).
For the Company's subsidiaries that transact in a functional currency other than the U.S. dollar, assets and liabilities are translated into U.S. dollars at period-end foreign exchange rates. Revenues and expenses are translated into U.S. dollars at the average foreign exchange rates for the period. Translation adjustments are excluded from the determination of net income and are recorded in accumulated other comprehensive income (loss), a separate component of stockholders' equity.
Use of Estimates
The preparation of these financial statements in conformity with GAAP requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenue and expenses and the disclosure of contingent assets and liabilities in the consolidated financial statements. These estimates and judgments, include but are not limited to, revenue recognition (specifically sales returns and other allowances); valuation of goodwill and acquired intangible assets; accounting for business combinations; evaluating loss contingencies; and accounting for income taxes and related valuation allowances. The Company bases these estimates and judgments on historical experience, market participant fair value considerations, projected future cash flows and various other factors that the Company believes are reasonable under the circumstances. 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.
Revenue Recognition
The Company primarily derives its revenue from product sales. Until the divestiture of the defense and security business unit in April 2016 (see Note 4), 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, the Company introduced its first connected robot. Each sale of a connected robot represents a multiple-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, which is the estimated life of the robot.
Sales to retailers 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 and certain international distributors. Accordingly, the Company reduces revenue for its estimates of liabilities for these rights of return, rebates, and price protection, as well as discounts and promotions, at the time the related sale is recorded. The estimates for rights of return are directly based on specific terms and conditions included in the customer agreements,
iROBOT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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. 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 adjustments for rebates and price protection are based on specific programs, expected usage and historical experience. Actual results could differ from these estimates. As of December 30, 2017, the Company has reserves for product returns of
$42.7 million
, discounts and promotions of
$58.2 million
and price protection of
$3.1 million
. As of December 31, 2016, the Company had reserves for product returns of
$27.7 million
, discounts and promotions of $
22.1 million
and price protection of $1.5 million.
Prior to the Company's divestiture of the defense and security business unit in April 2016 (see Note 4), 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 submitted 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 30, 2017, fiscal year 2016 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.
Business Combinations
The Company accounts for transactions that represent business combinations under the acquisition method of accounting. The Company allocates the total consideration paid for each acquisition to the assets it acquires and liabilities it assumes based on their fair values as of the date of acquisition, including identifiable intangible assets. The Company bases the fair value of identifiable intangible assets acquired in a business combination on valuations that use information and assumptions determined by management and which consider management’s best estimates of inputs and assumptions that a market participant would use. While the Company uses its best estimates and assumptions as part of the purchase price allocation process to accurately value assets acquired and liabilities assumed at the business combination date, its estimates and assumptions are inherently uncertain and subject to refinement. As a result, during the measurement period, which is generally one year from the acquisition date, any adjustment to the assets acquired and liabilities assumed is recorded against goodwill in the period in which the amount is determined. Any adjustment identified subsequent to the measurement period is included in operating results in the period in which the amount is determined.
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 30, 2017
and
December 31, 2016
, cash equivalents were comprised of money market funds totaling
$3.2 million
and
$157.0 million
, respectively. These cash equivalents are carried at cost, which approximates fair value.
iROBOT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Short Term Investments
The Company’s investments are classified as available-for-sale and are recorded at fair value with any unrealized gain or loss recorded as an element of stockholders’ equity. The fair value of investments is determined based on quoted market prices at the reporting date for those instruments. As of
December 30, 2017
and
December 31, 2016
, investments consisted of:
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December 30,
2017
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December 31,
2016
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Cost
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Fair
Market Value
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Cost
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Fair
Market Value
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|
(In thousands)
|
Corporate and government bonds
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$
|
37,767
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|
|
$
|
37,225
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$
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40,439
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|
|
$
|
39,930
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|
Total short term investments
|
$
|
37,767
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|
|
$
|
37,225
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|
|
$
|
40,439
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|
|
$
|
39,930
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|
As of
December 30, 2017
, the Company’s investments had maturity dates ranging from March 2018 to September 2020. The Company invests primarily in investment grade securities and limits the amount of investment in any single issuer.
Accounts receivable allowances
Allowance for product returns
: The Company records an allowance for product returns for the estimated amount of product that may be returned. The allowance is 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.
Allowance for discounts and promotions
: The Company records an allowance for discounts and promotions related to promotional marketing support, contractual discounts, etc. The allowance is based on specific programs, expected usage and historical experience.
Allowance for price protection
: The Company records an allowance for price protection for the estimated amount of support expected to be provided to customers for product transitions. The allowance is based on specific programs, expected usage and historical experience.
Allowance for doubtful accounts
: The Company records an allowance for doubtful accounts for the estimated amount of accounts receivable that may not be collected. The allowance is based on an assessment of customer creditworthiness, historical payment experience and the age of outstanding receivables.
iROBOT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Activity related to accounts receivable allowances was as follows:
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Fiscal Year Ended
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December 30,
2017
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December 31,
2016
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January 2,
2016
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(In thousands)
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Allowance for product returns
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Balance at beginning of period
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$
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27,673
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$
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25,992
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$
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27,449
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Acquired balance
|
6,088
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|
—
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|
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—
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Provision
|
54,981
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|
33,992
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|
27,432
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Deduction
|
(43,831
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)
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|
(28,826
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)
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|
(21,979
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)
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Other adjustments
|
(2,218
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)
|
|
(3,485
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)
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|
(6,910
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)
|
Balance at end of period
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$
|
42,693
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|
$
|
27,673
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|
$
|
25,992
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|
|
|
|
|
|
|
Allowance for discounts and promotions
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|
|
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|
Balance at beginning of period
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$
|
22,108
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|
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$
|
23,005
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|
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$
|
10,749
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Acquired balance
|
11,932
|
|
|
—
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|
|
—
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Provision
|
107,390
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|
|
45,869
|
|
|
39,482
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Deduction
|
(79,652
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)
|
|
(46,610
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)
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|
(26,587
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)
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Other adjustments
|
(3,567
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)
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|
(156
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)
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|
(639
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)
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Balance at end of period
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$
|
58,211
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$
|
22,108
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$
|
23,005
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|
|
|
|
|
|
|
Allowance for price protection
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|
|
|
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Balance at beginning of period
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$
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1,550
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|
|
$
|
—
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|
|
$
|
—
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|
Acquired balance
|
—
|
|
|
—
|
|
|
—
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|
Provision
|
3,215
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|
|
1,550
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|
|
—
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|
Deduction
|
(1,617
|
)
|
|
—
|
|
|
—
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|
Other adjustments
|
—
|
|
|
—
|
|
|
—
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|
Balance at end of period
|
$
|
3,148
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|
|
$
|
1,550
|
|
|
$
|
—
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|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
|
|
|
|
Balance at beginning of period
|
$
|
29
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|
|
$
|
33
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|
|
$
|
67
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Acquired balance
|
248
|
|
|
—
|
|
|
—
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|
Provision
|
1
|
|
|
—
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|
|
—
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|
Deduction
|
(2
|
)
|
|
(4
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)
|
|
(34
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)
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Other adjustments
|
—
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|
|
—
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|
|
—
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|
Balance at end of period
|
$
|
276
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|
|
$
|
29
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|
|
$
|
33
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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.
Warranty
The Company typically provides a
one
-year warranty (with the exception of European consumer products, which typically have a
two
-year warranty period) against defects in materials and workmanship and will either repair the goods, provide replacement products at no charge to the customer or refund amounts to the customer for defective products. The Company records estimated warranty costs, based on historical experience by product, at the time revenue is recognized.
iROBOT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Actual results could differ from these estimates, which could cause increases or decreases to the warranty reserves in future periods.
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
|
Computer and research equipment
|
2-5 years
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Furniture
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5
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Machinery
|
2-5
|
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Tooling
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2-5
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Business applications software
|
5-7
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Capital leases and leasehold improvements
|
Lesser of economic benefit period or term of lease
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|
Expenditures for additions, renewals and betterments of property 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.
Goodwill and Other Long-Lived Assets
Goodwill represents the excess of the purchase price in a business combination over the fair value of the net tangible and intangible assets acquired. Goodwill is not amortized but rather is assessed for impairment at the reporting unit level (operating segment or one level below an operating segment) annually or more frequently if the Company believes 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. The Company completes the annual impairment evaluation during the fourth quarter each year.
Other long-lived assets consist principally of completed technology, tradename, customer relationships, reacquired distribution rights and non-competition agreements. 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 Company periodically evaluates 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.
Other Assets
At
December 30, 2017
and
December 31, 2016
, other assets consisted primarily of cost and an equity method investment totaling
$14.2 million
and
$12.9 million
, respectively. 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.
iROBOT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Financial Instruments and Hedging Activities
The Company utilizes derivative instruments to hedge specific financial risks including foreign exchange risk. The Company does not engage in speculative hedging activity. In order to account for a derivative instrument as a hedge, specific criteria must be met, including: (i) ensuring at the inception of the hedge that formal documentation exists for both the hedging relationship and the entity’s risk management objective and strategy for undertaking the hedge and (ii) at the inception of the hedge and on an ongoing basis, the hedging relationship is expected to be highly effective in achieving offsetting changes in fair value attributed to the hedged risk during the period that the hedge is designated. Further, an assessment of effectiveness is required whenever financial statements or earnings are reported. Absent meeting these criteria, changes in fair value are recognized in other income, net, in the consolidated statements of income. Once the underlying forecasted transaction is realized, the gain or loss from the derivative designated as a hedge of the transaction is reclassified from accumulated other comprehensive income (loss) to the statement of income, in revenue or cost of revenue. Any ineffective portion of the derivatives designated as cash flow hedges is recognized in current earnings.
Fair Value Measurements
The Company accounts for certain assets and liabilities at fair value. The fair value is established based on a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include:
•
Level 1 - observable inputs such as quoted prices for identical instruments in active markets;
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•
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Level 2 - inputs other than quoted prices in active markets that are either directly or indirectly observable; and
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•
|
Level 3 - unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.
|
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. The fair value of employee stock options is estimated at the grant date using the Black-Scholes option-pricing model. The fair value for restricted stock awards, time-based restricted stock units and performance-based restricted stock units is based on the closing share price of the Company's 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. The Company recognizes stock-based compensation as expense over the requisite service period. The Company has elected to account for forfeitures as they occur, rather than applying an estimated forfeiture rate, following its adoption of ASU 2016-09 in the first quarter of 2017.
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 30, 2017
and
December 31, 2016
, the Company had
$12.8 million
and
$9.5 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
$1.5 million
,
$0.4 million
and
$0.7 million
of amortization expense for the years ended
December 30, 2017
,
December 31, 2016
and
January 2, 2016
, respectively.
Advertising Expense
The Company expenses advertising costs as they are incurred. During the years ended
December 30, 2017
,
December 31, 2016
and
January 2, 2016
advertising expense totaled
$91.8 million
,
$64.4 million
and
$54.7 million
, respectively, and are recorded within the selling and marketing expenses line item.
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 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. The Company regularly reviews the deferred tax assets for recoverability considering historical profitability, projected future taxable income, future reversals of existing taxable temporary differences, as well as feasible tax planning strategies in each jurisdiction. As of December 30, 2017, the Company recorded a valuation allowance of
$0.8 million
for certain foreign deferred tax assets for which the Company believes do not meet the "more likely than not" criteria for recognition.
iROBOT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company reports a liability for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in a tax return. The Company recognizes interest and penalties, if any, related to unrecognized tax benefits in the income tax provision.
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the "Act") was signed into law making significant changes to the Internal Revenue Code. Changes include, but are not limited to, a federal corporate tax rate decrease from 35% to 21% for tax years beginning after December 31, 2017, the transition of U.S. international taxation from a worldwide tax system to a territorial system and a one-time transition tax on the mandatory deemed repatriation of foreign earnings. We have estimated our provision for income taxes in accordance with the Act and guidance available as of the date of this filing and as a result have recorded a one-time income tax provision of
$11.9 million
in the fourth quarter of 2017, the period in which the legislation was enacted. The one-time income tax provision includes
$8.9 million
related to the remeasurement of certain deferred tax assets and liabilities based on the tax rates at which they are expected to reverse in the future. The one-time income tax expense also includes a provisional amount of
$3.0 million
related to the one-time transition tax on the mandatory deemed repatriation of foreign earnings.
On December 22, 2017, Staff Accounting Bulletin No. 118 (SAB 118) was issued to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Act. In accordance with SAB 118, we have determined that the
$3.0 million
of current income tax provision recorded relating to the transition tax on the mandatory deemed repatriation of foreign earnings was a provisional amount and a reasonable estimate at December 30, 2017. Additional information and analysis is necessary to complete the calculation and accounting relating to the transition tax on the mandatory deemed repatriation of foreign earnings. Any subsequent adjustments to this amount will be recorded to current income tax provision during the measurement period which is not expected to extend beyond one year from the enactment date.
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 30, 2017
,
one
customer accounted for a total of
11.5%
of the Company's accounts receivable balance. 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. For the fiscal year ended
December 30, 2017
, the Company generated
13.5%
of total revenue from one of its retailers (Amazon). For the fiscal year ended
December 31, 2016
, the Company generated
12.9%
,
12.3%
and
10.4%
of total revenue from its distributor in Japan, Sales On Demand Corporation (SODC), Robopolis SAS, a network of affiliated European distributors (Robopolis) and Amazon, respectively. For the fiscal year ended
January 2, 2016
, the Company generated
13.3%
and
12.7%
of total revenue from SODC and Robopolis, respectively. On April 3, 2017, the Company acquired the iRobot-related distribution business of SODC, and on October 2, 2017, the Company acquired Robopolis (see Note 3).
The Company maintains its cash in bank deposit accounts at high quality financial institutions. The individual balances, at times, may exceed federally insured limits.
Net Income Per Share
Basic income per share is calculated using the Company's weighted-average outstanding common shares. Diluted income per share is calculated using the Company's weighted-average outstanding common shares including the dilutive effect of stock awards as determined under the treasury stock method. The following table presents the calculation of both basic and diluted net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
December 30,
2017
|
|
December 31,
2016
|
|
January 2,
2016
|
Net income
|
$
|
50,964
|
|
|
$
|
41,939
|
|
|
$
|
44,130
|
|
Weighted-average shares outstanding
|
27,611
|
|
|
27,698
|
|
|
29,550
|
|
Dilutive effect of employee stock options and restricted shares
|
1,142
|
|
|
594
|
|
|
557
|
|
Diluted weighted-average shares outstanding
|
28,753
|
|
|
28,292
|
|
|
30,107
|
|
Basic income per share
|
$
|
1.85
|
|
|
$
|
1.51
|
|
|
$
|
1.49
|
|
Diluted income per share
|
$
|
1.77
|
|
|
$
|
1.48
|
|
|
$
|
1.47
|
|
iROBOT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Restricted stock units and stock options representing approximately
0.0 million
,
0.4 million
and
0.5 million
shares of common stock for the fiscal years ended
December 30, 2017
,
December 31, 2016
and
January 2, 2016
, respectively, were excluded from the computation of diluted earnings per share as their effect would have been antidilutive.
Recently Adopted Accounting Standards
In May 2017, the Financial Accounting Standards Board (FASB) issued Accounting Standards update (ASU) No. 2017-09, "Stock Compensation – Scope of Modification Accounting," that clarifies that all changes to share-based payment awards are not necessarily accounted for as a modification. Under the new guidance, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award changes as a result of the change in terms or conditions. This guidance is effective prospectively beginning January 1, 2018, with early adoption permitted. This guidance will apply to any future modifications. During the fourth quarter of 2017, the Company adopted this standard, which did not have an impact on the Company's consolidated financial statements and related disclosures.
In January 2017, the FASB issued ASU No. 2017-01, "Business Combinations; Clarifying the Definition of a Business." ASU 2017-01 clarifies 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. This guidance is effective for annual periods beginning after December 15, 2017, including interim periods within those periods. During the fourth quarter of 2017, the Company adopted this standard, which did not have an impact on the Company's consolidated financial statements and related disclosures.
In January 2017, the FASB issued ASU No. 2017-04, "Intangibles - Goodwill and Other." ASU 2017-04 eliminates step 2 from the goodwill impairment test, instead requiring that an entity 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. During the fourth quarter of 2017, the Company adopted this standard, which did not have a material impact on the Company's consolidated financial statements and related disclosures.
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. During the fourth quarter of 2017, the Company adopted this standard, which did not have a material impact on the Company's consolidated financial statements and related disclosures.
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 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. Under the new standard, all excess tax benefits and tax deficiencies are recorded as a component of the provision for income taxes in the reporting period in which they occur. Additionally, ASU 2016-09 requires that the Company present excess tax benefits on the Statement of Cash Flows as an operating activity. The Company adopted ASU 2016-09 effective January 1, 2017 and elected to apply this adoption prospectively. Upon the adoption, the Company elected to account for forfeitures of share-based payments as they occur prospectively. Prior periods have not been adjusted. As of the adoption date, this standard did not have a material impact on the Company's consolidated financial statements.
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 Company adopted ASU 2015-11 effective January 1, 2017. The adoption of this standard did not have a material impact on the Company's consolidated financial statements and related disclosures.
Recently Issued Accounting Standards
In August 2017, the FASB issued ASU No. 2017-12, "Derivatives and Hedging," that was created to better align accounting rules with a company’s risk management activities, better reflect the economic results of hedging in the financial statements, and simplify hedge accounting treatment. The guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. For cash flow hedges existing at the
iROBOT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
adoption date, the standard requires adoption on a modified retrospective basis with a cumulative-effect adjustment to the consolidated balance sheet as of the beginning of the year of adoption. The amendments to presentation guidance and disclosure requirements are required to be adopted prospectively. The Company is currently evaluating the impact of the standard on its consolidated financial statements.
In October 2016, the FASB issued ASU No. 2016-16, "Income Taxes: 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 does not believe the adoption of ASU 2016-16 will have a material impact 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 pending adoption of ASU 2016-02 on its consolidated financial statements, and currently expects that most of its operating lease commitments will be subject to the new standard and recognized as operating lease liabilities and right-of-use assets upon its adoption of ASU 2016-02, which will increase the total assets and total liabilities that the Company reports relative to such amounts prior to adoption.
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 was originally 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 standard will be effective for the Company beginning in the first quarter of 2018. The Company will adopt the standard using the modified retrospective method.
The Company primarily derives its revenue from product sales. The adoption is not expected to have a material effect on the timing of recognition or measurement of revenue from the Company’s product sales. The Company also derives revenue from sales of connected robots, which represent arrangements with multiple performance obligations consisting of the robot, the iRobot Home app, potential future unspecified software upgrades and cloud services. ASU 2014-09 requires revenue to be allocated amongst material performance obligations based on stand-alone selling price and recognized based on the transfer of control of the material performance obligations. It is the Company’s position that the app, upgrades and cloud services related to the current offerings constitute a single immaterial performance obligation and therefore, the revenue associated with the robot and services will be recognized upon transfer of control to the customer.
The Company's product sales are typically subject to limited rights of return, rebates, discounts and promotions and price protection. Accordingly, the Company reduces revenue for its estimates of allowances for these rights of return, rebates, discounts and promotions and price protection at the time the related sale is recorded based on contractual term, future expectation and historical experience. The Company does not expect that there will be material changes to the recognition of these allowances, and that these will continue to be recorded at the time the related revenue is recorded for the sales. The Company does expect that upon adoption of the standard, certain compliance-related charges will be estimated and recorded as a reduction of revenue at the time of sale, rather than upon resolution of the validity of the charges, but expects the impact of this to be immaterial to revenue.
The Company does not expect the provisions of the new standard to impact the manner in which it treats certain costs to fulfill contracts (i.e., shipping and handling costs) and costs to acquire new contracts (i.e., commissions). Under the new standard, the Company will elect the practical expedient on shipping and handling costs and continue to treat these costs as fulfillment costs and expense as incurred. Further, commissions will continue to be expensed as incurred as the impact to the consolidated financial statements is immaterial. The new standard will also result in enhanced revenue related disclosures.
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.
Acquisition of Robopolis
On October 2, 2017, the Company closed the acquisition of its largest European distributor, Robopolis SAS, a French company (Robopolis), subsequently renamed to iRobot France SAS. The initial purchase price was approximately
$170.1 million
in cash, net of acquired cash of
$38.0 million
, subject to the finalization of the working capital adjustment in accordance with the stock purchase agreement. The acquisition will better enable the Company to maintain its leadership position and grow its business in several Western European countries through direct control of pre- and post-sales market activities including sales, marketing, branding, channel relationships and customer service. The results of operations for this acquisition have been included in the Company’s operating results since the acquisition date.
The estimated fair values of assets acquired and liabilities assumed are provisional and are based on the information that was available as of the acquisition date to estimate the fair value of assets acquired and liabilities assumed. Therefore, the provisional measurements of fair value reflected are subject to change and such changes could be significant. The Company is continuing to analyze certain pre-acquisition income tax filing positions of Robopolis in various taxing jurisdictions that will assist the Company in finalizing the amounts to record any assumed uncertain income tax positions. The Company expects to finalize the valuation and complete the purchase price allocation as soon as practicable, but no later than one year from the acquisition date.
The following table summarizes the preliminary allocation of the purchase price (in thousands):
|
|
|
|
|
Cash
|
$
|
37,981
|
|
Accounts receivable
|
21,426
|
|
Inventory
|
36,304
|
|
Goodwill
|
79,558
|
|
Intangible assets
|
36,597
|
|
Other assets
|
2,456
|
|
Total assets
|
214,322
|
|
|
|
Accounts payable
|
(29,391
|
)
|
Accrued expenses
|
(3,376
|
)
|
Deferred tax liabilities
|
(10,833
|
)
|
Other liabilities
|
(645
|
)
|
Total liabilities assumed
|
(44,245
|
)
|
Net assets acquired
|
$
|
170,077
|
|
The following table reflects the fair value of the acquired identifiable intangible assets and related estimates of useful lives:
|
|
|
|
|
|
|
|
|
|
Useful Life
|
|
Fair Value
|
|
|
|
|
(in thousands)
|
Reacquired distribution rights
|
|
2.25 years
|
|
$
|
29,296
|
|
Customer relationships
|
|
14 years
|
|
7,029
|
|
Non-competition agreements
|
|
3 years
|
|
272
|
|
Total
|
|
|
|
$
|
36,597
|
|
The amount assigned to identifiable intangible assets acquired was based on their fair values determined as of the acquisition date, primarily using the income approach by discounting to present value the free cash flows expected to be generated by each asset over its remaining life. The discount rate used was approximately
14.5%
. 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.
Goodwill represents the excess of the purchase price over the fair values of the net tangible and intangible assets acquired. In accordance with current accounting standards, the goodwill is not being amortized and will be tested for impairment at least annually. None of the goodwill associated with this transaction will be deductible for tax purposes.
Acquisition of Sales On Demand Corporation
On April 3, 2017, the Company closed its acquisition of the iRobot-related distribution business of Sales On Demand Corporation (SODC), iRobot Japan G.K., for approximately
$16.6 million
in cash, equal to the book value of the acquired assets. The acquisition will better enable the Company to maintain its leadership position and accelerate the growth of its business in Japan through direct control of pre- and post-sales market activities including sales, marketing, branding, channel relationships and customer service. It also expands the Company's presence and customer outreach opportunities in Japan. The acquisition was a stock purchase. The results of operations for this acquisition have been included in the Company's operating results since the acquisition date.
During the three months ended September 30, 2017, the Company finalized the purchase price allocation and made measurement period adjustments to the provisional amounts reported as the estimated fair values of assets acquired. These measurement period adjustments resulted in a
$2.2 million
non-taxable gain on business acquisition which represents the excess of the fair value of the net assets acquired over the purchase price. The gain on business acquisition was recorded within other income, net in the consolidated statements of income. The Company believes that the gain on business acquisition was due to the transaction not being subjected to a competitive bidding process and the purchase price being determined based on the net book value of the net assets acquired.
The following table summarizes the final allocation of the purchase price (in thousands):
|
|
|
|
|
Cash
|
$
|
125
|
|
Accounts receivable, net (1)
|
(5,496
|
)
|
Inventory
|
18,290
|
|
Other assets
|
2,065
|
|
Deferred tax assets, net
|
409
|
|
Goodwill
|
—
|
|
Intangible assets
|
8,640
|
|
Total assets acquired
|
24,033
|
|
|
|
Accrued expenses and other current liabilities
|
(4,450
|
)
|
Other liabilities
|
(691
|
)
|
Total liabilities assumed
|
(5,141
|
)
|
Net assets acquired
|
$
|
18,892
|
|
Gain on business acquisition
|
(2,243
|
)
|
Total purchase price
|
$
|
16,649
|
|
(1) The accounts receivable balance reflects reserves for product returns, discounts and promotions assumed as part of the acquisition.
The following table reflects the fair value of the acquired identifiable intangible assets and related estimates of useful lives:
|
|
|
|
|
|
|
|
|
|
Useful Life
|
|
Fair Value
|
|
|
|
|
(in thousands)
|
Customer relationships
|
|
13 years
|
|
$
|
4,490
|
|
Reacquired distribution rights
|
|
9 months
|
|
4,150
|
|
Total
|
|
|
|
$
|
8,640
|
|
Pro Forma Results (Unaudited)
The following table shows unaudited pro forma results of operations as if we had acquired Robopolis on January 3, 2016 (dollars in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
December 30,
2017
|
|
December 31,
2016
|
Revenue
|
$
|
901,612
|
|
|
$
|
718,917
|
|
Net income
|
$
|
51,887
|
|
|
$
|
53,320
|
|
Net income per share:
|
|
|
|
Basic income per share
|
$
|
1.88
|
|
|
$
|
1.93
|
|
Diluted income per share
|
$
|
1.80
|
|
|
$
|
1.88
|
|
We have not furnished pro forma financial information relating to our other fiscal 2017 acquisition because such information is not material, individually or in the aggregate, to our financial results. The unaudited pro forma results of operations are not necessarily indicative of the actual results that would have occurred had the transactions taken place at the beginning of the periods indicated.
In April 2016, the Company completed the sale of its 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. The sale of its 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. also entered into a Transition Services Agreement (TSA), pursuant to which the Company continued to perform certain functions on iRobot Defense Holdings Inc.’s behalf during a transition period not to exceed 12 months. The TSA provided for the reimbursement to the Company for direct costs incurred in order to provide such functions and was recorded as a component of other income. The transition period was completed during the three months ended April 1, 2017.
Inventory consists of the following at:
|
|
|
|
|
|
|
|
|
|
December 30,
2017
|
|
December 31,
2016
|
|
(In thousands)
|
Raw materials
|
$
|
4,036
|
|
|
$
|
4,717
|
|
Finished goods
|
102,896
|
|
|
45,861
|
|
|
$
|
106,932
|
|
|
$
|
50,578
|
|
|
|
|
6.
|
Property and Equipment
|
Property and equipment consists of the following at:
|
|
|
|
|
|
|
|
|
|
December 30,
2017
|
|
December 31,
2016
|
|
(In thousands)
|
Computer and equipment
|
$
|
10,669
|
|
|
$
|
7,378
|
|
Furniture
|
4,120
|
|
|
2,906
|
|
Machinery
|
14,202
|
|
|
9,154
|
|
Tooling
|
31,783
|
|
|
20,487
|
|
Leasehold improvements
|
26,136
|
|
|
21,383
|
|
Business applications software
|
12,757
|
|
|
9,471
|
|
|
99,667
|
|
|
70,779
|
|
Less: accumulated depreciation
|
55,088
|
|
|
43,247
|
|
|
$
|
44,579
|
|
|
$
|
27,532
|
|
Depreciation expense for the years ended
December 30, 2017
,
December 31, 2016
and
January 2, 2016
was
$12.3 million
,
$10.0 million
, and
$11.4 million
, respectively.
|
|
|
7.
|
Goodwill and other intangible assets
|
The following table summarizes the activity in the carrying amount of goodwill for fiscal years 2017 and 2016:
|
|
|
|
|
|
(In thousands)
|
|
|
Balance as of January 2, 2016
|
$
|
48,751
|
|
Divestiture (1)
|
(7,710
|
)
|
Balance as of December 31, 2016
|
41,041
|
|
Acquisitions (Note 3)
|
79,558
|
|
Effect of foreign currency translation
|
841
|
|
Balance as of December 30, 2017
|
$
|
121,440
|
|
|
|
(1)
|
In April 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.
|
Intangible assets at
December 30, 2017
and
December 31, 2016
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 30, 2017
|
|
December 31, 2016
|
|
Cost
|
|
Accumulated
Amortization
|
|
Net
|
|
Cost
|
|
Accumulated
Amortization
|
|
Net
|
|
(In thousands)
|
Completed technology
|
$
|
26,900
|
|
|
$
|
18,150
|
|
|
$
|
8,750
|
|
|
$
|
26,900
|
|
|
$
|
14,693
|
|
|
$
|
12,207
|
|
Tradename
|
100
|
|
|
100
|
|
|
—
|
|
|
100
|
|
|
100
|
|
|
—
|
|
Customer relationships
|
11,594
|
|
|
418
|
|
|
11,176
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Reacquired distribution rights
|
33,760
|
|
|
9,226
|
|
|
24,534
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Non-competition agreements
|
275
|
|
|
23
|
|
|
252
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
$
|
72,629
|
|
|
$
|
27,917
|
|
|
$
|
44,712
|
|
|
$
|
27,000
|
|
|
$
|
14,793
|
|
|
$
|
12,207
|
|
iROBOT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Amortization expense related to acquired intangible assets was
$13.1 million
,
$3.5 million
, and
$3.5 million
for the fiscal years ended
December 30, 2017
,
December 31, 2016
and
January 2, 2016
, respectively. 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)
|
2018
|
$
|
19,767
|
|
2019
|
13,188
|
|
2020
|
1,950
|
|
2021
|
1,714
|
|
2022
|
1,489
|
|
Thereafter
|
6,604
|
|
Total
|
$
|
44,712
|
|
iROBOT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Accrued expenses consist of the following at:
|
|
|
|
|
|
|
|
|
|
December 30,
2017
|
|
December 31,
2016
|
|
(In thousands)
|
Accrued bonus
|
20,443
|
|
|
14,226
|
|
Accrued warranty
|
11,264
|
|
|
8,464
|
|
Accrued other compensation
|
9,071
|
|
|
6,789
|
|
Accrued sales and other taxes
|
7,256
|
|
|
422
|
|
Accrued federal and state income taxes
|
7,110
|
|
|
1,059
|
|
Accrued sales and marketing
|
3,299
|
|
|
404
|
|
Accrued direct fulfillment costs
|
1,885
|
|
|
1,722
|
|
Accrued customer deposits
|
1,324
|
|
|
1,171
|
|
Accrued accounting fees
|
1,221
|
|
|
686
|
|
Accrued rent
|
—
|
|
|
327
|
|
Accrued other
|
10,774
|
|
|
5,599
|
|
|
$
|
73,647
|
|
|
$
|
40,869
|
|
|
|
|
9.
|
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 30, 2017
, 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 30, 2017
, 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 guarantee 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 30, 2017
, 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 30, 2017
, 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 guarantee 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 30, 2017
, the Company was in compliance with all covenants under the revolving letter of credit facility.
|
|
|
10.
|
Derivative Instruments and Hedging Activities
|
The Company operates internationally and, in the normal course of business, is exposed to fluctuations in foreign currency exchange rates. The foreign currency exposures typically arise from transactions denominated in currencies other than the functional currency of the Company's operations, primarily the Japanese Yen, Canadian dollar and the Euro. The Company uses derivative instruments that are designated in cash flow hedge relationships to reduce or eliminate the effects of foreign exchange rate changes on purchases and sales. These contracts typically have maturities of
fourteen
months or less. At
December 30, 2017
and
December 31, 2016
, the Company had outstanding cash flow hedges with a total notional value of
$73.7 million
and
$0.0 million
, respectively.
The Company also enters into economic hedges that are not designated as hedges from an accounting standpoint to reduce or eliminate the effects of foreign exchange rate changes typically related to short term trade receivables and payables. These contracts typically have maturities of
two
months or less. At
December 30, 2017
and
December 31, 2016
, the Company had outstanding economic hedges with a total notional value of
$36.6 million
and
$8.1 million
, respectively.
The fair values of derivative instruments are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
Classification
|
|
December 30, 2017
|
|
December 31, 2016
|
|
|
(In thousands)
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
Foreign currency option contracts
|
Other current assets
|
|
$
|
—
|
|
|
$
|
180
|
|
Foreign currency forward contracts
|
Other current assets
|
|
413
|
|
|
—
|
|
Foreign currency forward contracts
|
Accrued expenses
|
|
221
|
|
|
43
|
|
Derivatives designated as cash flow hedges:
|
|
|
|
|
Foreign currency forward contracts
|
Other current assets
|
|
$
|
488
|
|
|
$
|
—
|
|
Foreign currency forward contracts
|
Other assets
|
|
116
|
|
|
—
|
|
Foreign currency forward contracts
|
Accrued expenses
|
|
279
|
|
|
—
|
|
Gains (losses) associated with derivative instruments not designated as hedging instruments are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year ended
|
|
Classification
|
|
December 30, 2017
|
|
December 31, 2016
|
|
|
|
(In thousands)
|
Gain (loss) recognized in income
|
Other income, net
|
|
$
|
(444
|
)
|
|
$
|
29
|
|
iROBOT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following tables reflect the effect of foreign exchange forward contracts that are designated as cash flow hedging instruments for the years ended
December 30, 2017
and
December 31, 2016
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective Portion
|
|
Ineffective Portion
|
|
|
Gain (loss) recognized in OCI on Derivative (1)
|
|
Gain (loss) reclassified from accumulated OCI into income (2)
|
|
Gain (loss) recognized in income (3)
|
|
|
Fiscal year ended
|
|
|
|
Fiscal year ended
|
|
|
|
Fiscal year ended
|
|
|
December 30, 2017
|
|
December 31, 2016
|
|
Classification
|
|
December 30, 2017
|
|
December 31, 2016
|
|
Classification
|
|
December 30, 2017
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts
|
|
$
|
584
|
|
|
$
|
—
|
|
|
Revenue
|
|
$
|
320
|
|
|
$
|
—
|
|
|
Other income, net
|
|
$
|
(5
|
)
|
|
$
|
—
|
|
|
|
|
|
|
|
Cost of revenue
|
|
$
|
(63
|
)
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
(1)
|
The amount represents the change in fair value of derivative contracts due to changes in spot rates.
|
|
|
(2)
|
The amount represents reclassification from other comprehensive income to earnings that occurs when the hedged item affects earnings.
|
|
|
(3)
|
The amount represents the change in fair value of derivative contracts due to changes in the forward rates. No gains or losses were reclassified as a result of discontinuance of cash flow hedges.
|
|
|
|
11.
|
Fair Value Measurements
|
The Company’s financial assets and liabilities measured at fair value on a recurring basis at
December 30, 2017
, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements as of
|
|
December 30, 2017
|
Description
|
Level 1
|
|
Level 2 (1)
|
|
Level 3
|
|
(In thousands)
|
Assets:
|
|
|
|
|
|
Money market funds
|
$
|
3,165
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Corporate and government bonds
|
—
|
|
|
37,225
|
|
|
—
|
|
Derivative instruments (Note 10)
|
—
|
|
|
1,017
|
|
|
—
|
|
Total assets measured at fair value
|
$
|
3,165
|
|
|
$
|
38,242
|
|
|
$
|
—
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
Derivative instruments (Note 10)
|
$
|
—
|
|
|
$
|
500
|
|
|
$
|
—
|
|
Total liabilities measured at fair value
|
$
|
—
|
|
|
$
|
500
|
|
|
$
|
—
|
|
The Company’s financial assets and liabilities measured at fair value on a recurring basis at
December 31, 2016
, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements as of
|
|
December 31, 2016
|
Description
|
Level 1
|
|
Level 2 (1)
|
|
Level 3
|
|
(In thousands)
|
Assets:
|
|
|
|
|
|
Money market funds
|
$
|
156,980
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Corporate and government bonds
|
—
|
|
|
39,930
|
|
|
—
|
|
Derivative instruments (Note 10)
|
—
|
|
|
180
|
|
|
—
|
|
Total assets measured at fair value
|
$
|
156,980
|
|
|
$
|
40,110
|
|
|
$
|
—
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
Derivative instruments (Note 10)
|
$
|
—
|
|
|
$
|
43
|
|
|
$
|
—
|
|
Total liabilities measured at fair value
|
$
|
—
|
|
|
$
|
43
|
|
|
$
|
—
|
|
(1) Level 2 fair value estimates are based on observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Preferred Stock
The Company has authorized
5,000,000
shares of undesignated preferred stock with a par value of
$0.01
per share. None of the preferred shares were issued and outstanding at December 30, 2017 and December 31, 2016.
Common Stock
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.
Share Repurchase Activity
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.
The Company did not repurchase any shares of common stock during fiscal year 2017. During fiscal year 2016 and 2015, the Company repurchased
2,641,122
shares totaling
$97.0 million
and
1,260,276
shares totaling
$37.4 million
, respectively, in the open market under these stock repurchase plans.
|
|
|
13.
|
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
iROBOT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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. The grant of any full value award (e.g., restricted stock units) under the 2015 Plan is counted against the share reserve for future grants under the 2015 Plan as
1.61
shares for every one share actually subject to such award. As of
December 30, 2017
, there were
590,655
shares available for future grant under the 2015 Plan. The Company recognized
$19.8 million
,
$16.0 million
and
$14.2 million
of stock-based compensation expense during the fiscal years ended
December 30, 2017
, December 31, 2016, and January 2, 2016, respectively.
Stock Options
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.
As of
December 30, 2017
, the unamortized compensation costs associated with stock options was
$4.0 million
with a weighted-average remaining recognition period of
2.07
years.
The following table summarizes stock option activity for fiscal years 2017, 2016 and 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
Weighted Average
Exercise Price
|
|
Weighted Average
Remaining
Contractual Term
|
|
Aggregate
Intrinsic
Value(1)
|
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
|
|
|
|
|
|
Granted
|
10,975
|
|
|
57.33
|
|
|
|
|
|
Exercised
|
(367,267
|
)
|
|
28.79
|
|
|
|
|
|
Canceled
|
(18,928
|
)
|
|
36.72
|
|
|
|
|
|
Outstanding at December 30, 2017
|
712,954
|
|
|
$
|
34.34
|
|
|
4.27 years
|
|
$30.2 million
|
Vested and expected to vest at December 30, 2017
|
712,954
|
|
|
$
|
34.34
|
|
|
4.27 years
|
|
$30.2 million
|
Exercisable as of December 30, 2017
|
399,163
|
|
|
$
|
32.10
|
|
|
3.62 years
|
|
$17.8 million
|
_________________________
|
|
(1)
|
The aggregate intrinsic value on the table above represents the difference between the Company's closing stock price on
December 30, 2017
of
$76.70
and the exercise price of the underlying in-the-money option.
|
The fair value of each option grant for the fiscal years ended
December 30, 2017
,
December 31, 2016
, and
January 2, 2016
was computed on the grant date using the Black-Scholes option-pricing model with the following assumptions:
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
December 30,
2017
|
|
December 31,
2016
|
|
January 2,
2016
|
Risk-free interest rate
|
2.11%
|
|
1.17% — 1.89%
|
|
1.47% — 1.75%
|
Expected dividend yield
|
—
|
|
—
|
|
—
|
Expected life
|
4.01 years
|
|
4.01 — 4.03 years
|
|
3.98 — 4.02 years
|
Expected volatility
|
38.0%
|
|
38.9% — 42.1%
|
|
46.5% — 52.4%
|
iROBOT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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.
During fiscal years 2017, 2016, and 2015, the total intrinsic value of stock options exercised was
$21.8 million
,
$10.3 million
, and
$5.9 million
, respectively.
The following table summarizes information about stock options outstanding at
December 30, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 - $ 26.59
|
|
113,447
|
|
|
1.90 years
|
|
$
|
23.00
|
|
|
113,447
|
|
|
$
|
23.00
|
|
29.60 - 32.38
|
|
109,187
|
|
|
4.54
|
|
31.13
|
|
|
55,396
|
|
|
31.33
|
|
33.14 - 33.14
|
|
108,113
|
|
|
5.19
|
|
33.14
|
|
|
39,085
|
|
|
33.14
|
|
33.29 - 34.30
|
|
116,942
|
|
|
4.06
|
|
34.01
|
|
|
66,770
|
|
|
33.99
|
|
35.43 - 37.08
|
|
58,858
|
|
|
3.52
|
|
35.72
|
|
|
49,232
|
|
|
35.60
|
|
37.62 - 37.62
|
|
99,370
|
|
|
5.44
|
|
37.62
|
|
|
31,467
|
|
|
37.62
|
|
39.09 - 39.09
|
|
37,589
|
|
|
5.69
|
|
39.09
|
|
|
9,434
|
|
|
39.09
|
|
43.35 - 43.35
|
|
29,605
|
|
|
3.18
|
|
43.35
|
|
|
27,178
|
|
|
43.35
|
|
57.33 - 57.33
|
|
10,975
|
|
|
6.19
|
|
57.33
|
|
|
—
|
|
|
—
|
|
58.55 - 58.55
|
|
28,868
|
|
|
5.94
|
|
58.55
|
|
|
7,154
|
|
|
58.55
|
|
$ 3.54 - $58.55
|
|
712,954
|
|
|
4.27 years
|
|
$
|
34.34
|
|
|
399,163
|
|
|
$
|
32.10
|
|
Restricted Stock Units
Restricted stock units entitle the holder to a specific number of shares of common stock upon vesting, typically over a
four
-year period. As of
December 30, 2017
, the unamortized compensation costs associated with restricted stock units was
$39.3 million
with a weighted-average remaining recognition period of
2.52
years.
The following table summarizes the restricted stock unit activity for fiscal years 2017, 2016 and 2015:
|
|
|
|
|
|
|
|
|
Number of
Shares Underlying
Restricted Stock
|
|
Weighted Average
Grant Date Fair
Value
|
Outstanding at December 27, 2014
|
880,138
|
|
|
$
|
30.10
|
|
Granted
|
505,277
|
|
|
36.88
|
|
Vested
|
(340,754
|
)
|
|
29.13
|
|
Forfeited
|
(110,784
|
)
|
|
30.82
|
|
Outstanding at January 2, 2016
|
933,877
|
|
|
$
|
31.42
|
|
Granted
|
458,237
|
|
|
37.93
|
|
Vested
|
(358,018
|
)
|
|
30.81
|
|
Forfeited
|
(98,917
|
)
|
|
32.13
|
|
Outstanding at December 31, 2016
|
935,179
|
|
|
$
|
35.07
|
|
Granted
|
396,164
|
|
|
72.63
|
|
Vested
|
(351,543
|
)
|
|
33.73
|
|
Forfeited
|
(41,347
|
)
|
|
39.52
|
|
Outstanding at December 30, 2017
|
938,453
|
|
|
$
|
51.24
|
|
iROBOT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The aggregate intrinsic value of outstanding restricted stock units at December 30, 2017 was
$72.0 million
based on the Company's closing stock price on
December 30, 2017
of
$76.70
, with a weighted average remaining contractual term of
1.50
years.
Performance Based Restricted Stock Units
The Company grants performance-based restricted stock units (PSUs) to certain of its employees. The PSUs have performance metrics based on financial performance of the Company measured at the end of a
three
-year performance period. The performance metric for these awards is operating income percent, with a threshold requirement for a minimum amount of revenue growth. The number of shares actually earned at the end of the three year period will range from
0%
to
200%
of the target number of PSUs granted based on the Company’s performance against the performance conditions.
The unamortized fair value as of
December 30, 2017
associated with performance based restricted stock units was
$5.6 million
with a weighted-average remaining recognition period of
1.39
years.
The following table summarizes the performance based restricted stock unit activity for fiscal years 2017, 2016 and 2015:
|
|
|
|
|
|
|
|
|
Number of
Shares Underlying
PSU (1)
|
|
Weighted Average
Grant Date Fair
Value
|
Outstanding at December 27, 2014
|
29,717
|
|
|
$
|
43.35
|
|
Granted
|
71,133
|
|
|
34.30
|
|
Vested
|
—
|
|
|
—
|
|
Forfeited
|
(10,358
|
)
|
|
38.60
|
|
Outstanding at January 2, 2016
|
90,492
|
|
|
$
|
36.78
|
|
Granted
|
82,085
|
|
|
33.36
|
|
Vested
|
(5,625
|
)
|
|
34.30
|
|
Forfeited
|
(3,041
|
)
|
|
34.30
|
|
Outstanding at December 31, 2016
|
163,911
|
|
|
$
|
35.03
|
|
Granted
|
105,650
|
|
|
57.33
|
|
Vested
|
(24,792
|
)
|
|
43.35
|
|
Forfeited
|
(2,708
|
)
|
|
39.71
|
|
Outstanding at December 30, 2017
|
242,061
|
|
|
$
|
43.97
|
|
_________________________
(1) Includes the target number of PSUs.
The aggregate intrinsic value of outstanding PSUs was
$18.6 million
based on the Company's closing stock price on
December 30, 2017
of
$76.70
with a weighted average remaining contractual term of
1.39
years.
Employee Stock Purchase Plan
In May 2017, the Company’s stockholders approved the 2017 Employee Stock Purchase Plan (ESPP). The Company reserved a total of
700,000
shares of common stock for issuance under this plan. The ESPP is administered over
six
-month offering periods beginning November 15 and May 15 of each year. Eligible employees can contribute
1%
to
15%
of their compensation each period up to
$4,000
, for the purchase of common stock not to exceed
1,000
shares per the six-month period. On the last business day of each period, shares of common stock are purchased at a purchase price of
85%
of the lower of the fair market values of the stock as of the beginning and the end of the offering period. The first offering period began November 15, 2017, resulting in an immaterial stock-based compensation expense for the year ended December 30, 2017.
iROBOT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
|
|
14.
|
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 years
2017
,
2016
and 2015 amounted to
$8.9 million
,
$6.0 million
, and
$4.9 million
, respectively. Future minimum rental payments under operating leases were as follows as of
December 30, 2017
:
|
|
|
|
|
|
Operating
Leases
|
2018
|
$
|
6,361
|
|
2019
|
6,901
|
|
2020
|
6,506
|
|
2021
|
6,502
|
|
2022
|
6,498
|
|
Thereafter
|
39,839
|
|
Total minimum lease payments
|
$
|
72,607
|
|
Outstanding Purchase Orders
At
December 30, 2017
, we had outstanding purchase orders aggregating approximately
$74.4 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 30, 2017
and
December 31, 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 submitted 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 30, 2017
, fiscal year 2016 is open for audit by DCAA.
iROBOT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 8) in the accompanying consolidated balance sheets.
Activity related to the warranty accrual was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
December 30,
2017
|
|
December 31,
2016
|
|
January 2,
2016
|
|
(In thousands)
|
Balance at beginning of period
|
$
|
8,464
|
|
|
$
|
6,907
|
|
|
$
|
7,769
|
|
Liability assumed (1)
|
2,186
|
|
|
—
|
|
|
—
|
|
Provision
|
8,591
|
|
|
7,494
|
|
|
4,598
|
|
Warranty usage (2)
|
(7,977
|
)
|
|
(5,937
|
)
|
|
(5,460
|
)
|
Balance at end of period
|
$
|
11,264
|
|
|
$
|
8,464
|
|
|
$
|
6,907
|
|
__________________________________
|
|
(1)
|
Warranty assumed as part of the acquisition of the iRobot-related distribution business of Sales On Demand Corporation (see Note 3).
|
|
|
(2)
|
Warranty usage includes costs incurred for warranty obligations and, for the twelve month period ended December 31, 2016, the release of warranty liabilities associated with the divestiture of the defense and security business unit.
|
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
$2.4 million
,
$1.7 million
and
$1.8 million
for the plan years ended
December 30, 2017
,
December 31, 2016
and
January 2, 2016
("Plan-Year 2017," "Plan-Year 2016" and "Plan-Year 2015"), 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 2017, Plan-Year 2016 and Plan-Year 2015 is entitled up to a maximum of
three percent
of his or her eligible annual payroll.
iROBOT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Income (loss) before provision for income taxes was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
December 30,
2017
|
|
December 31,
2016
|
|
January 2,
2016
|
|
(In thousands)
|
Domestic
|
$
|
71,382
|
|
|
$
|
61,706
|
|
|
$
|
62,391
|
|
Foreign
|
4,984
|
|
|
(345
|
)
|
|
580
|
|
Income before income taxes
|
$
|
76,366
|
|
|
$
|
61,361
|
|
|
$
|
62,971
|
|
The components of income tax expense were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
December 30,
2017
|
|
December 31,
2016
|
|
January 2,
2016
|
|
(In thousands)
|
Current
|
|
|
|
|
|
Federal
|
$
|
17,555
|
|
|
$
|
17,639
|
|
|
$
|
20,033
|
|
State
|
1,691
|
|
|
1,054
|
|
|
972
|
|
Foreign
|
7,355
|
|
|
310
|
|
|
121
|
|
Total current income tax provision
|
26,601
|
|
|
19,003
|
|
|
21,126
|
|
Deferred
|
|
|
|
|
|
Federal
|
$
|
6,664
|
|
|
$
|
781
|
|
|
$
|
(1,657
|
)
|
State
|
(2,470
|
)
|
|
(95
|
)
|
|
(628
|
)
|
Foreign
|
(5,393
|
)
|
|
(267
|
)
|
|
—
|
|
Total deferred income tax provision
|
(1,199
|
)
|
|
419
|
|
|
(2,285
|
)
|
Total income tax provision
|
$
|
25,402
|
|
|
$
|
19,422
|
|
|
$
|
18,841
|
|
Due to the adoption of ASU 2016-09 in 2017, all excess tax benefits and deficiencies are recognized as income tax expense in the Company’s consolidated statement of income. This will result in increased volatility in the Company’s effective tax rate.
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the "Act") was signed into law making significant changes to the Internal Revenue Code. Changes include, but are not limited to, a federal corporate tax rate decrease from 35% to 21% for tax years beginning after December 31, 2017, the transition of U.S. international taxation from a worldwide tax system to a territorial system and a one-time transition tax on the mandatory deemed repatriation of foreign earnings. The Company has estimated the provision for income taxes in accordance with the Act and guidance available as of the date of this filing and as a result have recorded a one-time income tax provision of
$11.9 million
as additional income tax provision in the fourth quarter of 2017, the period in which the legislation was enacted. The one-time income tax provision includes
$8.9 million
related to the remeasurement of certain deferred tax assets and liabilities based on the tax rates at which they are expected to reverse in the future. The one-time income tax expense also includes a provisional amount of
$3.0 million
related to the one-time transition tax on the mandatory deemed repatriation of foreign earnings.
On December 22, 2017, Staff Accounting Bulletin No. 118 (SAB 118) was issued to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Act. In accordance with SAB 118, the Company has determined that the
$3.0 million
of current income tax provision recorded relating to the transition tax on the mandatory deemed repatriation of foreign earnings was a provisional amount and a reasonable estimate at December 30, 2017. Additional information and analysis is necessary to complete the calculation and accounting relating to the transition tax on the mandatory deemed repatriation of foreign earnings. Any subsequent adjustments to this amount will be recorded to current income tax provision during the measurement period which is not expected to extend beyond one year from the enactment date.
iROBOT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
A reconciliation of the expected tax (benefit) expense computed by applying the federal statutory rate to income before income taxes to actual tax expense is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
December 30,
2017
|
|
December 31,
2016
|
|
January 2,
2016
|
|
(In thousands)
|
Expected federal income tax
|
$
|
26,728
|
|
|
$
|
21,476
|
|
|
$
|
22,040
|
|
Miscellaneous permanent items
|
2,979
|
|
|
516
|
|
|
608
|
|
State taxes (net of federal benefit)
|
2,089
|
|
|
1,360
|
|
|
982
|
|
Federal and state credits
|
(4,486
|
)
|
|
(2,233
|
)
|
|
(2,767
|
)
|
Change in valuation allowance
|
800
|
|
|
—
|
|
|
—
|
|
Domestic production activities deduction
|
(1,528
|
)
|
|
(1,731
|
)
|
|
(2,145
|
)
|
Statute of limitation expirations of uncertain tax positions
|
(106
|
)
|
|
(167
|
)
|
|
(194
|
)
|
Excess tax benefits relating to stock-based compensation
|
(11,709
|
)
|
|
—
|
|
|
—
|
|
Tax Cuts and Jobs Act of 2017
|
11,861
|
|
|
—
|
|
|
—
|
|
Other
|
(1,226
|
)
|
|
201
|
|
|
317
|
|
|
$
|
25,402
|
|
|
$
|
19,422
|
|
|
$
|
18,841
|
|
The components of net deferred tax assets were as follows:
|
|
|
|
|
|
|
|
|
|
December 30,
2017
|
|
December 31,
2016
|
|
(In thousands)
|
Deferred tax assets
|
|
|
|
Reserves and accruals
|
$
|
24,315
|
|
|
$
|
20,737
|
|
Tax credits
|
6,666
|
|
|
5,999
|
|
Property and equipment
|
1,382
|
|
|
1,934
|
|
Stock-based compensation
|
4,277
|
|
|
6,150
|
|
Net operating loss carryforwards
|
144
|
|
|
1,010
|
|
Valuation allowance
|
(800
|
)
|
|
—
|
|
Gross deferred tax assets
|
35,984
|
|
|
35,830
|
|
Deferred tax liabilities
|
|
|
|
Intangible assets
|
13,419
|
|
|
4,530
|
|
Other
|
573
|
|
|
715
|
|
Gross deferred tax liabilities
|
13,992
|
|
|
5,245
|
|
Net deferred tax assets
|
$
|
21,992
|
|
|
$
|
30,585
|
|
The Act includes a mandatory one-time tax on accumulated earnings of foreign subsidiaries, and as a result, all previously unremitted earnings for which no U.S. deferred tax liability had been accrued have now been subject to U.S. tax. Notwithstanding the U.S. taxation of these amounts, the Company intends to continue to invest all of these earnings, as well as the capital in these subsidiaries, indefinitely outside of the U.S. The amount of any unrecognized deferred tax liability on these undistributed earnings would be immaterial.
The Company has fully utilized both the federal and state net operating loss carryforwards as of December 30, 2017. The Company had federal and state net operating loss carryforwards of
$1.0 million
and
$8.9 million
, respectively, as of December 31, 2016. The Company has fully utilized the federal research and development credit carryforwards as of December 30, 2017 and had
$1.0 million
of federal research and development credit carryforwards as of December 31, 2016. The Company has state research and development credit carryforwards of
$10.1 million
and
$10.0 million
as of December 30, 2017 and December 31, 2016, respectively, which expire from 2026 to 2032. Under the Internal Revenue Code and state law, 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 30, 2017, the Company has
$1.0 million
of state research and development credits related to the acquisition of Evolution Robotics that are limited by Section 382 and Section 383,
iROBOT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
respectively, of the Internal Revenue Code. However, these limitations are not expected to cause any of these state research and development credits to expire prior to being utilized.
As of December 30, 2017, the Company recorded a valuation allowance of
$0.8 million
for certain foreign deferred tax assets for which the Company believes do not meet the "more likely than not" criteria for recognition.
A summary of the Company’s adjustments to its gross unrecognized tax benefits in the current year is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
December 30, 2017
|
|
December 31,
2016
|
|
January 2,
2016
|
|
(in thousands)
|
Balance at beginning of period
|
$
|
5,146
|
|
|
$
|
6,616
|
|
|
$
|
2,491
|
|
Increase for tax positions related to the current year
|
580
|
|
|
2,851
|
|
|
786
|
|
Increase (decrease) for tax positions related to prior years
|
(523
|
)
|
|
(4,224
|
)
|
|
3,533
|
|
Decreases for settlements with applicable taxing authorities
|
—
|
|
|
—
|
|
|
—
|
|
Decreases for lapses of statute of limitations
|
(613
|
)
|
|
(97
|
)
|
|
(194
|
)
|
Balance at end of period
|
$
|
4,590
|
|
|
$
|
5,146
|
|
|
$
|
6,616
|
|
The Company accrues interest and, if applicable, penalties for any uncertain tax positions as a component of income tax expense. As of December 30, 2017, December 31, 2016 and January 2, 2016 there were no material accrued interest or penalties.
The Company is subject to taxation in the United States (federal and state) and foreign jurisdictions. The statute of limitations for examinations by the Internal Revenue Service (the "IRS") is closed for fiscal years prior to 2014. The statute of limitations for examinations by state tax authorities is closed for fiscal years prior to 2013. Federal and state carryforward attributes that were generated prior to fiscal 2014 and 2013, respectively, 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. The Company is currently under examination by the IRS for the years 2014 and 2015. The Company does not expect a significant change in the amount of unrecognized tax benefits within the next 12 months. If all of the Company's unrecognized tax benefits as of December 30, 2017 were to become recognizable in the future, it would record a
$2.0 million
benefit, inclusive of interest, to the income tax provision.
|
|
|
17.
|
Industry Segment, Geographic Information and Significant Customers
|
Prior to completing the sale of the Company's defense and security business (see Note 4), the Company’s reportable segments consisted of the home business unit and the defense and security business unit. Following this divestiture, which was completed in April 2016, the Company now operates as
one
operating 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 30, 2017
,
December 31, 2016
and
January 2, 2016
, sales to non-U.S. customers accounted for
48.8%
,
51.2%
and
56.0%
of total revenue, respectively.
Significant Customers
For the fiscal years ended
December 30, 2017
,
December 31, 2016
and
January 2, 2016
approximately
62.7%
,
72.8%
and
76.6%
, respectively, of consumer robots revenue resulted from sales to
15
customers. For the fiscal year ended
December 30, 2017
, the Company generated
13.5%
of total revenue from one of its retailers (Amazon). For the fiscal year ended
December 31, 2016
, the Company generated
12.9%
,
12.3%
and
10.4%
of total revenue from its distributor in Japan (Sales On Demand Corporation), a network of affiliated European distributors (Robopolis SAS) and Amazon, respectively. For the fiscal year ended
January 2, 2016
, the Company generated
13.3%
and
12.7%
of total revenue from Sales on Demand Corporation and Robopolis SAS, respectively. On April 3, 2017, the Company acquired the iRobot-related distribution business of Sales On Demand Corporation, and on October 2, 2017, the Company acquired Robopolis SAS (see Note 3).
iROBOT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
|
|
18.
|
Quarterly Information (Unaudited)
|
The following information has been derived from unaudited consolidated financial statements that, in the opinion of management, include all recurring adjustments necessary for a fair statement of such information (dollars in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Quarter Ended
|
|
December 30,
2017
|
|
September 30,
2017
|
|
July 1,
2017
|
|
April 1,
2017
|
|
December 31,
2016
|
|
October 1,
2016
|
|
July 2,
2016
|
|
April 2,
2016
|
|
(In thousands, except per share amounts)
|
Revenue
|
$
|
326,897
|
|
|
$
|
205,399
|
|
|
$
|
183,148
|
|
|
$
|
168,467
|
|
|
$
|
212,494
|
|
|
$
|
168,610
|
|
|
$
|
148,696
|
|
|
$
|
130,804
|
|
Gross margin
|
153,542
|
|
|
102,383
|
|
|
89,891
|
|
|
87,343
|
|
|
106,642
|
|
|
81,060
|
|
|
69,652
|
|
|
61,961
|
|
Net income
|
4,620
|
|
|
22,082
|
|
|
7,903
|
|
|
16,359
|
|
|
13,681
|
|
|
19,512
|
|
|
4,814
|
|
|
3,932
|
|
Diluted earnings per share
|
$
|
0.16
|
|
|
$
|
0.76
|
|
|
$
|
0.27
|
|
|
$
|
0.58
|
|
|
$
|
0.49
|
|
|
$
|
0.70
|
|
|
$
|
0.17
|
|
|
$
|
0.13
|
|