Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion of the financial condition and results of operations of iRobot Corporation should be read in conjunction with the consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q and the audited financial statements and notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended
January 2, 2016
, which has been filed with the SEC. This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and are subject to the “safe harbor” created by those sections. In particular, statements contained in this Quarterly Report on Form 10-Q, and in the documents incorporated by reference into this Quarterly Report on Form 10-Q, that are not historical facts, including, but not limited to statements concerning new product sales, product development and offerings, Roomba, Scooba, Looj, Braava, Braava jet and Mirra products, our consumer robots business unit, our competition, our strategy, our market position, market acceptance of our products, seasonal factors, revenue recognition, our profits, growth of our revenues, composition of our revenues, our cost of revenues, units shipped, average selling prices, the impact of the sale of our defense and security business unit, operating expenses, selling and marketing expenses, general and administrative expenses, research and development expenses, compensation costs, our projected income tax rate, our credit and letter of credit facilities, our valuations of investments, valuation and composition of our stock-based awards, and liquidity, constitute forward-looking statements and are made under these safe harbor provisions. Some of the forward-looking statements can be identified by the use of forward-looking terms such as “believes,” “expects,” “may,” “will,” “should,” “could,” “seek,” “intends,” “plans,” “estimates,” “anticipates,” or other comparable terms. Forward-looking statements involve inherent risks and uncertainties which could cause actual results to differ materially from those in the forward-looking statements, including those risks and uncertainties described in our Annual Report on Form 10-K for the year ended
January 2, 2016
, as well as elsewhere in our Quarterly Report on Form 10-Q. We urge you to consider the risks and uncertainties discussed in our Annual Report on Form 10-K and in our Quarterly Report on Form 10-Q for the quarter ended July 2, 2016 in evaluating our forward-looking statements. We have no plans to update our forward-looking statements to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q. We caution readers not to place undue reliance upon any such forward-looking statements, which speak only as of the date made.
Overview
iRobot designs and builds robots that empower people to do more. For over 25 years, we have developed proprietary technology incorporating advanced concepts in navigation, mobility, mapping and artificial intelligence to build industry-leading robots. Our robots help people find smarter ways to clean and accomplish more in their daily lives. We sell our robots through a variety of distribution channels, including chain stores and other national retailers, through our on-line store and through value-added distributors and resellers.
As of
October 1, 2016
, we had 572 full-time employees. We have developed expertise in the disciplines necessary to build durable, high-performance and cost-effective robots through the close integration of software, electronics and hardware. Our core technologies serve as reusable building blocks that we adapt and expand to develop next generation and new products, reducing the time, cost and risk of product development. Our significant expertise in robot design and engineering positions us to capitalize on the expected growth in the market for robot-based products.
We have taken several steps to become more focused on our well-established consumer business to capitalize on the substantial opportunities available to us within the home robotics market. First, we completed the sale of our defense and security business unit on April 4, 2016, pursuant to an Asset Purchase Agreement, dated February 2, 2016, with iRobot Defense Holdings, Inc., a recently-formed portfolio company of Arlington Capital Partners. The purchase agreement provided for a purchase price of up to $45.0 million, comprising $30.0 million at the closing of the transaction, subject to adjustments for working capital and indebtedness as set forth in the purchase agreement, and up to an additional $15.0 million based on the 2016 revenue of the defense and security business. Based on the final adjustments for working capital and indebtedness, the purchase price was $24.5 million. Second, we reallocated all of the research and development resources from our remote presence business to opportunities in our consumer business during the first quarter of 2016, and decided to fully exit the remote presence business during the second quarter of 2016. These actions were taken to solidify our position as the leader in diversified consumer robots and to focus on key technologies, with an emphasis on software, that allow our robots to understand the homes in which they operate. It is our intent to continue investing in these critical technologies and the economic opportunities they unlock.
Our continued success depends upon our ability to respond to a number of challenges in the consumer robots market. We believe the most significant of these include increasing competition, and our ability to successfully develop and introduce products and product enhancements into both new and existing markets.
During the nine-month period ended October 1, 2016, we launched the Braava jet mopping robot. The Braava jet was available exclusively on our website during the three-month period ended April 2, 2016. It became available in retail locations in the U.S. during the second quarter of 2016 and in China, Japan and EMEA in the third quarter of 2016.
During the three- and nine-month periods ended
October 1, 2016
, strong growth in both the domestic and international markets for consumer products drove increases in our consumer business revenue of 23% and 15% as compared to the three- and nine-month periods ended
September 26, 2015
. Domestic consumer revenue increased 13% and 30% in the three- and nine-month periods ended
October 1, 2016
compared to the three- and nine-month periods ended
September 26, 2015
, resulting primarily from successful marketing programs. International consumer revenue increased 30% and 6% in the three- and nine-month periods ended
October 1, 2016
compared to the three- and nine-month periods ended
September 26, 2015
, largely driven by the go-to-market transition in China to provide us with more direct control over our e-commerce channel. As a result of completing the sale of our defense and security business unit on April 4, 2016, there is no defense and security business unit revenue included in our financial results for the three months ended October 1, 2016. During the nine-month period ended October 1, 2016, defense and security business revenue decreased $21.4 million as compared to the nine-month period ended September 26, 2015.
During the three-month period ended
October 1, 2016
, we recorded a net benefit to revenue and income before income taxes of $0.1 million related to adjustments to our product returns reserves, compared to a net benefit to revenue and income before income taxes of $1.3 million during the three-month period ended
September 26, 2015
. During the nine-month period ended
October 1, 2016
, we recorded a net benefit to revenue and income before income taxes of $2.3 million related to adjustments to our product returns reserves, compared to a net benefit to revenue and income before income taxes of $5.0 million during the nine-month period ended
September 26, 2015
. The adjustment recorded in the three-month period ended October 1, 2016 resulted from lower product returns experience as compared to estimates used to establish reserves in prior periods. The adjustment recorded in the nine-month period ended October 1, 2016 resulted from lower product returns experience as compared to estimates used to establish reserves in prior periods, as well as the conversion of a customer to a contractual fixed rate of return. The adjustments recorded in the three- and nine-month periods ended September 26, 2015 resulted from lower product returns experience as compared to estimates used to establish reserves in prior periods.
During the three-month period ended July 2, 2016, we funded an Accelerated Stock Repurchase program of $85.0 million. This, combined with our repurchase of approximately $12.0 million of shares during the three months ended April 2, 2016, returned capital of approximately $97 million to shareholders during the nine months ended October 1, 2016.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates and judgments, in particular those related to revenue recognition (specifically sales returns and other allowances); valuation allowances; assumptions used in valuing goodwill and intangible assets; assumptions used in valuing stock-based compensation instruments; evaluating loss contingencies; and valuation allowances for deferred tax assets. Actual amounts could differ significantly from these estimates. Our management bases its estimates and judgments on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the amounts of revenue and expenses that are not readily apparent from other sources. Additional information about these critical accounting policies may be found in the "Management’s Discussion and Analysis of Financial Condition and Results of Operations" section included in our Annual Report on Form 10-K for the fiscal year ended
January 2, 2016
.
Overview of Results of Operations
The following table sets forth our results of operations as a percentage of revenue for the three and nine-month periods ended
October 1, 2016
and
September 26, 2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
October 1, 2016
|
|
September 26, 2015
|
|
October 1, 2016
|
|
September 26, 2015
|
Revenue
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
Cost of revenue
|
51.9
|
|
|
51.4
|
|
|
52.5
|
|
|
52.8
|
|
Gross margin
|
48.1
|
|
|
48.6
|
|
|
47.5
|
|
|
47.2
|
|
Operating expenses
|
|
|
|
|
|
|
|
Research and development
|
11.7
|
|
|
12.6
|
|
|
13.0
|
|
|
13.6
|
|
Selling and marketing
|
10.6
|
|
|
13.5
|
|
|
14.9
|
|
|
14.8
|
|
General and administrative
|
9.5
|
|
|
9.5
|
|
|
10.9
|
|
|
9.6
|
|
Total operating expenses
|
31.8
|
|
|
35.6
|
|
|
38.8
|
|
|
38.0
|
|
Operating income
|
16.3
|
|
|
13.0
|
|
|
8.7
|
|
|
9.2
|
|
Other expense, net
|
0.3
|
|
|
(0.1
|
)
|
|
0.4
|
|
|
(0.2
|
)
|
Income before income taxes
|
16.6
|
|
|
12.9
|
|
|
9.1
|
|
|
9.0
|
|
Income tax expense
|
5.0
|
|
|
4.0
|
|
|
2.8
|
|
|
3.0
|
|
Net income
|
11.6
|
%
|
|
8.9
|
%
|
|
6.3
|
%
|
|
6.0
|
%
|
Comparison of Three and Nine Months Ended
October 1, 2016
and
September 26, 2015
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
October 1, 2016
|
|
September 26, 2015
|
|
Dollar
Change
|
|
Percent
Change
|
|
October 1, 2016
|
|
September 26, 2015
|
|
Dollar
Change
|
|
Percent
Change
|
|
|
|
(In thousands)
|
|
|
|
|
|
(In thousands)
|
|
|
Total revenue
|
$168,610
|
|
$143,609
|
|
$25,001
|
|
17.4%
|
|
$448,110
|
|
$410,358
|
|
$37,752
|
|
9.2%
|
Total revenue for the three months ended
October 1, 2016
increased to
$168.6 million
, or
17.4%
, compared to
$143.6 million
for the three months ended
September 26, 2015
. Revenue increased approximately $31.5 million, or 23.0%, in our consumer business. For the three months ended October 1, 2016, defense and security business revenue decreased approximately $6.2 million as compared to the three months ended September 26, 2015 as a result of the sale of our defense and security business unit on April 4, 2016.
The $31.5 million increase in revenue from our consumer business for the three months ended
October 1, 2016
was driven primarily by a 33.8% increase in units shipped, partially offset by a 9.1% decrease in average selling price as compared to the three months ended
September 26, 2015
, due to product mix. In the three months ended
October 1, 2016
, domestic consumer revenue increased $7.7 million, or 13.3%, and international consumer revenue increased $23.8 million, or 30.2%, as compared to the three months ended
September 26, 2015
. Total consumer robots shipped in the three months ended
October 1, 2016
were 779,000 units compared to 582,000 units in the three months ended
September 26, 2015
. The increase in sales of our consumer robots resulted primarily from increased sales of our Roomba 900 series robots. Our first Roomba 900 series robot, Roomba 980, launched late in the three-month period ended September 26, 2015. Roomba 960 was introduced in the three- month period ended October 1, 2016.
Total revenue for the
nine months ended
October 1, 2016
increased to
$448.1 million
, or
9.2%
, compared to
$410.4 million
for the
nine months ended
September 26, 2015
. Revenue increased approximately $59.3 million, or 15.4%, in our consumer business. For the nine months ended October 1, 2016, defense and security business revenue decreased approximately $21.4 million as compared to the nine months ended September 26, 2015 as a result of the sale of our defense and security business unit on April 4, 2016.
The $59.3 million increase in revenue from our consumer business unit for the
nine months ended
October 1, 2016
was driven primarily by a 20.2% increase in units shipped, partially offset by a decrease in average selling price of 2.4% as
compared to the
nine months ended
September 26, 2015
. In the
nine months ended
October 1, 2016
, domestic consumer revenue increased $44.5 million, or 29.6%, and international consumer revenue increased $14.8 million, or 6.3%, as compared to the
nine months ended
September 26, 2015
. Total consumer robots shipped in the
nine months ended
October 1, 2016
were 2,002,000 units compared to 1,665,000 units in the
nine months ended
September 26, 2015
. The increase in sales of our consumer robots resulted primarily from increased sales of our Roomba 900 series robots. Our first Roomba 900 series robot, Roomba 980, launched late in the three-month period ended September 26, 2015. Roomba 960 was introduced in the three- month period ended October 1, 2016.
Cost of Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
October 1, 2016
|
|
September 26, 2015
|
|
Dollar
Change
|
|
Percent
Change
|
|
October 1, 2016
|
|
September 26, 2015
|
|
Dollar
Change
|
|
Percent
Change
|
|
(In thousands)
|
|
(In thousands)
|
Total cost of revenue
|
$87,550
|
|
$73,751
|
|
$13,799
|
|
18.7%
|
|
$235,437
|
|
$216,759
|
|
$18,678
|
|
8.6%
|
As a percentage of total revenue
|
51.9%
|
|
51.4%
|
|
|
|
|
|
52.5%
|
|
52.8%
|
|
|
|
|
Total cost of revenue increased to
$87.6 million
in the three months ended
October 1, 2016
, compared to
$73.8 million
in the three months ended
September 26, 2015
. Cost of revenue increased $17.2 million, or 26.7%, in our consumer business. The increase in cost of revenue for the three months ended
October 1, 2016
in our consumer business is primarily due to the 23.0% increase in revenue as well as increased warranty costs and elective rework costs associated with certain units, compared to the three months ended
September 26, 2015
. For the three months ended October 1, 2016, defense and security business cost of revenue decreased approximately $3.5 million as compared to the three months ended September 26, 2015 as a result of the sale of our defense and security business unit on April 4, 2016.
Total cost of revenue increased to
$235.4 million
in the
nine months ended
October 1, 2016
, compared to
$216.8 million
in the
nine months ended
September 26, 2015
. Cost of revenue increased $29.1 million, or 15.7%, in our consumer business.
The increase in cost of revenue for the
nine months ended
October 1, 2016
in our consumer business is primarily due to the 15.4% increase in revenue as well as increased warranty costs in the
nine months ended
October 1, 2016
compared to the
nine months ended
September 26, 2015
. For the nine months ended October 1, 2016, defense and security business cost of revenue decreased approximately $12.1 million as compared to the nine months ended September 26, 2015 as a result of the sale of our defense and security business unit on April 4, 2016. In addition, during the
nine months ended
October 1, 2016
, we recorded one-time costs, primarily related to inventory, of approximately $1.3 million associated with the shutdown of the remote presence business.
Gross Margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
October 1, 2016
|
|
September 26, 2015
|
|
Dollar
Change
|
|
Percent
Change
|
|
October 1, 2016
|
|
September 26, 2015
|
|
Dollar
Change
|
|
Percent
Change
|
|
(In thousands)
|
|
(In thousands)
|
Total gross margin
|
$81,060
|
|
$69,858
|
|
$11,202
|
|
16.0%
|
|
$212,673
|
|
$193,599
|
|
$19,074
|
|
9.9%
|
As a percentage of total revenue
|
48.1%
|
|
48.6%
|
|
|
|
|
|
47.5%
|
|
47.2%
|
|
|
|
|
Gross margin increased
$11.2 million
, or
16.0%
, to
$81.1 million
(
48.1%
of revenue) in the three months ended
October 1, 2016
from
$69.9 million
(
48.6%
of revenue) in the three months ended
September 26, 2015
. Gross margin as a percentage of revenue in the consumer business decreased 1.4 percentage points in the three months ended
October 1, 2016
compared to the three months ended
September 26, 2015
, primarily related to increased warranty costs including a specific feature issue on certain products.
Gross margin increased
$19.1 million
, or
9.9%
, to
$212.7 million
(
47.5%
of revenue) in the
nine months ended
October 1, 2016
from
$193.6 million
(
47.2%
of revenue) in the
nine months ended
September 26, 2015
. Gross margin as a
percentage of revenue in the consumer business decreased 0.1 percentage point in the
nine months ended
October 1, 2016
compared to the
nine months ended
September 26, 2015
.
Research and Development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
October 1, 2016
|
|
September 26, 2015
|
|
Dollar
Change
|
|
Percent
Change
|
|
October 1, 2016
|
|
September 26, 2015
|
|
Dollar
Change
|
|
Percent
Change
|
|
(In thousands)
|
|
(In thousands)
|
Total research and development
|
$19,672
|
|
$18,122
|
|
$1,550
|
|
8.6%
|
|
$57,944
|
|
$55,886
|
|
$2,058
|
|
3.7%
|
As a percentage of total revenue
|
11.7%
|
|
12.6%
|
|
|
|
|
|
13.0%
|
|
13.6%
|
|
|
|
|
Research and development expenses increased
$1.6 million
, or
8.6%
, to
$19.7 million
(
11.7%
of revenue) in the three months ended
October 1, 2016
from
$18.1 million
(
12.6%
of revenue) in the three months ended
September 26, 2015
. During the three months ended
October 1, 2016
, people-related costs increased approximately $3.9 million associated with increased headcount for the consumer business, especially related to software engineers, as compared to the three months ended
September 26, 2015
. This increase was partially offset by decreases in defense and security headcount and program spend of approximately $2.0 million and a decrease in remote presence program spend of $0.7 million that was not included in the three months ended October 1, 2016 as compared to the three months ended September 26, 2015.
Research and development expenses increased
$2.1 million
, or
3.7%
, to
$57.9 million
(
13.0%
of revenue) in the
nine months ended
October 1, 2016
from
$55.9 million
(
13.6
% of revenue) in the
nine months ended
September 26, 2015
. This increase was primarily attributable to increases in people-related costs of approximately $5.2 million associated with increased headcount for the consumer business, especially related to software engineers, and $0.8 million in program spend compared to the
nine months ended
September 26, 2015
. These increases were partially offset by a decrease of approximately $3.9 million related to defense and security headcount and program spend as compared to the
nine months ended
September 26, 2015
following completion of the sale of our defense and security business unit on April 4, 2016.
Selling and Marketing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
October 1, 2016
|
|
September 26, 2015
|
|
Dollar
Change
|
|
Percent
Change
|
|
October 1, 2016
|
|
September 26, 2015
|
|
Dollar
Change
|
|
Percent
Change
|
|
(In thousands)
|
|
(In thousands)
|
Total selling and marketing
|
$17,925
|
|
$19,379
|
|
$(1,454)
|
|
(7.5)%
|
|
$66,972
|
|
$60,896
|
|
$6,076
|
|
10.0%
|
As a percentage of total revenue
|
10.6%
|
|
13.5%
|
|
|
|
|
|
14.9%
|
|
14.8%
|
|
|
|
|
Selling and marketing expenses decreased by
$1.5 million
, or
7.5%
, to
$17.9 million
(
10.6%
of revenue) in the three months ended
October 1, 2016
from
$19.4 million
(
13.5%
of revenue) in the three months ended
September 26, 2015
. This decrease resulted primarily from decreases related to defense and security and remote presence direct marketing spend of $1.3 million and $0.2 million, respectively, compared to the three months ended
September 26, 2015
.
Selling and marketing expenses increased by
$6.1 million
, or
10.0%
, to
$67.0 million
(
14.9%
of revenue) in the
nine months ended
October 1, 2016
from
$60.9 million
(
14.8
% of revenue) in the
nine months ended
September 26, 2015
. This increase resulted primarily from increases of $4.2 million in domestic and international marketing investments, $2.9 million in people-related costs and $2.3 million of costs related to the go-to market transition in China compared to the
nine months ended
September 26, 2015
. These increases were partially offset by a decrease of $2.8 million related to defense and security direct marketing spend compared to the
nine months ended
September 26, 2015
.
General and Administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
October 1, 2016
|
|
September 26, 2015
|
|
Dollar
Change
|
|
Percent
Change
|
|
October 1, 2016
|
|
September 26, 2015
|
|
Dollar
Change
|
|
Percent
Change
|
|
(In thousands)
|
|
(In thousands)
|
Total general and administrative
|
$16,012
|
|
$13,701
|
|
$2,311
|
|
16.9%
|
|
$48,919
|
|
$39,195
|
|
$9,724
|
|
24.8%
|
As a percentage of total revenue
|
9.5%
|
|
9.5%
|
|
|
|
|
|
10.9%
|
|
9.6%
|
|
|
|
|
General and administrative expenses increased by
$2.3 million
, or
16.9%
, to
$16.0 million
(
9.5%
of revenue) in the three months ended
October 1, 2016
from
$13.7 million
(
9.5%
of revenue) in the three months ended
September 26, 2015
. This increase in the three months ended
October 1, 2016
compared to the three months ended
September 26, 2015
is primarily attributable to increases of $2.3 million in people-related costs and $0.6 million in consulting costs. These increases were partially offset by a decrease of approximately $0.7 million related to the defense and security business as compared to the three months ended September 26, 2015.
General and administrative expenses increased by
$9.7 million
, or
24.8%
, to
$48.9 million
(
10.9%
of revenue) in the
nine months ended
October 1, 2016
from
$39.2 million
(
9.6%
of revenue) in the
nine months ended
September 26, 2015
. This increase in the
nine months ended
October 1, 2016
compared to the
nine months ended
September 26, 2015
is primarily attributable to increases of $6.3 million in people-related costs, $2.7 million in legal, advisory and other consulting costs
associated with the proxy contest initiated by Red Mountain Partners and $0.8 million in other legal and consulting costs.
Other Income (Expense), Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
October 1, 2016
|
|
September 26, 2015
|
|
Dollar
Change
|
|
Percent
Change
|
|
October 1, 2016
|
|
September 26, 2015
|
|
Dollar
Change
|
|
Percent
Change
|
|
(In thousands)
|
|
(In thousands)
|
Total other income (expense), net
|
$523
|
|
$(93)
|
|
$616
|
|
(662.4)%
|
|
$2,142
|
|
$(948)
|
|
$3,090
|
|
(325.9)%
|
As a percentage of total revenue
|
0.3%
|
|
(0.1)%
|
|
|
|
|
|
0.4%
|
|
(0.2)%
|
|
|
|
|
Other income (expense), net, amounted to
$0.5 million
and
$(0.1) million
for the three months ended
October 1, 2016
and
September 26, 2015
, respectively. Other income (expense), net, amounted to
$2.1 million
and
$(0.9) million
for the
nine months ended
October 1, 2016
and
September 26, 2015
, respectively. Other income, net for the three months ended
October 1, 2016
consisted of defense and security transition services income of $0.4 million as well as interest income, partially offset by foreign currency losses. Other income, net for the nine months ended
October 1, 2016
consisted of defense and security transition services income of $0.8 million, a gain on sale of a cost method investment of approximately $0.6 million, a gain on the sale of the defense and security business unit of $0.4 million, as well as interest income, partially offset by impairment on a cost method investment of approximately $0.1 million and foreign currency exchange losses. Other expense, net for the three and nine-month periods ended
September 26, 2015
consisted primarily of foreign currency exchange losses resulting from foreign currency exchange rate fluctuations, partially offset by interest income.
Income Tax Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
October 1, 2016
|
|
September 26, 2015
|
|
Dollar
Change
|
|
Percent
Change
|
|
October 1, 2016
|
|
September 26, 2015
|
|
Dollar
Change
|
|
Percent
Change
|
|
(In thousands)
|
|
(In thousands)
|
Total income tax expense
|
$8,462
|
|
$5,770
|
|
$2,692
|
|
46.7%
|
|
$12,722
|
|
$11,875
|
|
$847
|
|
7.1%
|
As a percentage of pre-tax income
|
30.2%
|
|
31.1%
|
|
|
|
|
|
31.0%
|
|
32.4%
|
|
|
|
|
We recorded a tax provision of
$8.5 million
and
$5.8 million
for the three months ended
October 1, 2016
and
September 26, 2015
, respectively. The
$8.5 million
provision for the three months ended
October 1, 2016
resulted in an effective income tax rate of
30.2%
. The
$5.8 million
provision for the three months ended
September 26, 2015
resulted in an effective income tax rate of
31.1%
. The difference between the effective income tax rate of
30.2%
for the three months ended
October 1, 2016
and
31.1%
for the three months ended
September 26, 2015
was primarily due to the inclusion of the federal research and development tax credit in the three months ended
October 1, 2016
that was not in effect for the three months ended
September 26, 2015
. The effective income tax rate for the three months ended
September 26, 2015
does not include any benefit for the federal research and development tax credit. The federal research and development tax credit was permanently extended as part of the Protecting Americans from Tax Hikes Act of 2015, which was signed into law on December 18, 2015.
We recorded a tax provision of
$12.7 million
and
$11.9 million
for the
nine months ended
October 1, 2016
and
September 26, 2015
, respectively. The
$12.7 million
provision for the
nine months ended
October 1, 2016
resulted in an effective income tax rate of
31.0%
. The
$11.9 million
provision for the
nine months ended
September 26, 2015
resulted in an effective income tax rate of
32.4%
. The difference between the effective income tax rate of
31.0%
for the
nine months ended
October 1, 2016
and
32.4%
for the
nine months ended
September 26, 2015
was primarily due to the inclusion of the federal
research and development tax credit in the
nine months ended
October 1, 2016
that was not in effect for the
nine months ended
September 26, 2015
, partially offset by a discrete income tax expense associated with the sale of the defense and security business. The effective income tax rate for the
nine months ended
September 26, 2015
does not include any benefit for the federal research and development tax credit. The federal research and development tax credit was permanently extended as part of the Protecting Americans from Tax Hikes Act of 2015, which was signed into law on December 18, 2015.
Liquidity and Capital Resources
At
October 1, 2016
, our principal sources of liquidity were cash and cash equivalents totaling
$164.6 million
, short-term investments of
$38.2 million
and accounts receivable of
$67.6 million
.
We manufacture and distribute our products through contract manufacturers and third-party logistics providers. We believe that this approach gives us the advantages of relatively low capital investment and significant flexibility in scheduling production and managing inventory levels. By leasing our office facilities, we also minimize the cash needed for expansion. Accordingly, our capital spending is generally limited to leasehold improvements, computers, office furniture, product-specific production tooling, internal use software and test equipment. In the
nine months ended
October 1, 2016
and
September 26, 2015
, we spent
$8.4 million
and
$7.6 million
, respectively, on capital equipment.
Our strategy for delivering consumer products to our distributors and retail customers gives us the flexibility to provide container shipments directly to retailers from China and, alternatively, allows our distributors and retail partners to take possession of product in the customer's domestic market. Accordingly, our consumer product inventory consists of goods shipped to our third-party logistics providers for the fulfillment of distributor, retail and direct-to-consumer sales. Our contract manufacturers are also responsible for purchasing and stocking the majority of the components required for the production of our products, and they typically invoice us when the finished goods are shipped.
As of
October 1, 2016
, we held cash, cash equivalents and short-term investments of $202.7 million, primarily the result of our increased profitability, as well as our on-going focus on managing working capital. Net cash provided by our operations for the nine-month period ended
October 1, 2016
, was $67.0 million of which the principal components were our net income of $28.3 million, non-cash charges of $26.4 million, and a net increase in operating assets and liabilities of $12.4 million. The increase in net operating assets and liabilities includes a decrease in accounts receivable (including unbilled revenue) of $31.0 million primarily due to collections of accounts receivable and timing of the billing in respective periods, partially offset by an $11.5 million cash outflow primarily related to increases in consumer inventory and a $4.3 million decrease in accounts payable and accrued expenses primarily related to the timing of payments. As of
October 1, 2016
, we did not have any borrowings outstanding under our working capital line of credit and had $1.0 million in letters of credit outstanding under our revolving letter of credit facility.
In the nine months ended October 1, 2016, we received $23.5 million for the divestiture of our defense and security business unit, net of a $1.0 million payment to our financial adviser. We invested $8.4 million in the purchase of property and equipment, including machinery and tooling for new products. We purchased $16.6 million of marketable securities, while sales and maturities of marketable securities amounted to $11.5 million. We made strategic investments of $0.5 million in the form of preferred shares and received an earn-out payment of $0.6 million from a strategic investment.
During the nine months ended October 1, 2016, we received $4.5 million from the exercise of stock options and $1.1 million from the excess tax benefit related to our stock-based compensation plans. In addition, we repurchased 2,633,580 shares of our common stock through share repurchases of $12.0 million and our accelerated share repurchase program of $85.0 million which was completed in our third quarter. Shares issued upon vesting of restricted stock were net of 39,676 shares retained by us to cover employee tax withholdings of $1.3 million.
Working Capital Facilities
Credit Facility
We have an unsecured revolving credit facility with Bank of America, N.A., which is available to fund working capital and other corporate purposes. As of
October 1, 2016
, the total amount of our credit facility was $75.0 million and the full amount was available for borrowing. The interest on loans under our credit facility accrues, at our election, at either (1) LIBOR plus a margin, currently equal to 1.0%, based on our ratio of indebtedness to Adjusted EBITDA (the "Eurodollar Rate"), or (2) the lender’s base rate. The lender’s base rate is equal to the highest of (1) the federal funds rate plus 0.5%, (2) the lender’s prime rate and (3) the Eurodollar Rate plus 1.0%. The credit facility will terminate and all amounts outstanding thereunder will be due and payable in full on December 20, 2018.
As of
October 1, 2016
, we had no outstanding borrowings under our revolving credit facility. This credit facility contains customary terms and conditions for credit facilities of this type, including restrictions on our ability to incur or guaranty additional indebtedness, create liens, enter into transactions with affiliates, make loans or investments, sell assets, pay dividends or make distributions on, or repurchase, our stock, and consolidate or merge with other entities.
In addition, we are required to meet certain financial covenants customary with this type of agreement, including maintaining a maximum ratio of indebtedness to Adjusted EBITDA and a minimum specified interest coverage ratio.
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, our obligations under the credit facility may be accelerated.
As of
October 1, 2016
, we were in compliance with all covenants under the revolving credit facility.
Letter of Credit Facility
We have an unsecured revolving letter of credit facility with Bank of America, N.A. The credit facility is available to fund letters of credit on our behalf up to an aggregate outstanding amount of $5.0 million. We may terminate at any time, subject to proper notice, or from time to time permanently reduce the amount of the credit facility.
We pay 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
October 1, 2016
, we had letters of credit outstanding of $1.0 million under our revolving letter of credit facility. The credit facility contains customary terms and conditions for credit facilities of this type, including restrictions on our ability to incur or guaranty additional indebtedness, create liens, enter into transactions with affiliates, make loans or investments, sell assets, pay dividends or make distributions on, or repurchase, our stock, and consolidate or merge with other entities. In addition, we are required to meet certain financial covenants customary with this type of agreement, including maintaining a maximum ratio of indebtedness to Adjusted EBITDA and a minimum specified interest coverage ratio.
The credit facility 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
October 1, 2016
, we were in compliance with all covenants under the revolving letter of credit facility.
Working Capital and Capital Expenditure Needs
We currently have no material cash commitments, except for normal recurring trade payables, expense accruals and operating leases, all of which we anticipate funding through working capital, funds provided by operating activities and our existing working capital line of credit. We do not currently anticipate significant investment in property, plant and equipment, and we believe that our outsourced approach to manufacturing provides us with flexibility in both managing inventory levels and financing our inventory. We believe our existing cash and cash equivalents, short-term investments, cash provided by operating activities, and funds available through our working capital line of credit will be sufficient to meet our working capital and capital expenditure needs over at least the next twelve months. In the event that our revenue plan does not meet our expectations, we may eliminate or curtail expenditures to mitigate the impact on our working capital. Our future capital requirements will depend on many factors, including our rate of revenue growth, the expansion of our marketing and sales activities, the timing and extent of spending to support product development efforts, the timing of introductions of new products and enhancements to existing products, the acquisition of new capabilities or technologies, and the continuing market acceptance of our products and services. Moreover, to the extent that existing cash and cash equivalents, short-term investments, cash from operations, and cash from short-term borrowing are insufficient to fund our future activities, we may need to raise additional funds through public or private equity or debt financing. As part of our business strategy, we may consider additional acquisitions of companies, technologies and products, which could also require us to seek additional equity or debt financing. Additional funds may not be available on terms favorable to us or at all.
Contractual Obligations
We generally do not enter into binding purchase commitments. Our principal commitments generally consist of obligations under our working capital line of credit, leases for office space and minimum contractual obligations for materials. Other obligations primarily consist of software licensing arrangements.
Off-Balance Sheet Arrangements
As of
October 1, 2016
, we had no off-balance sheet arrangements as defined in Item 303(a)(4) of Regulation S-K.
Recently Issued Accounting Pronouncements
See Footnote 2 to the Consolidated Financial Statements for a discussion of recently issued accounting pronouncements.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
Interest Rate Sensitivity
At
October 1, 2016
, we had unrestricted cash and cash equivalents of $164.6 million and short term investments of $38.2 million. The unrestricted cash and cash equivalents are held for working capital purposes. We do not enter into investments for trading or speculative purposes. Some of the securities in which we invest, however, may be subject to market risk. This means that a change in prevailing interest rates may cause the fair market value of the investment to fluctuate. To minimize this risk in the future, we intend to maintain our portfolio of cash equivalents in a variety of securities, commercial paper, money market funds, debt securities and certificates of deposit. Due to the short-term nature of these investments, we believe that we do not have any material exposure to changes in the fair value of our investment portfolio as a result of changes in interest rates. As of
October 1, 2016
, all of our cash and cash equivalents were held in demand deposits and money market accounts.
Our exposure to market risk also relates to the increase or decrease in the amount of interest expense we must pay on any outstanding debt instruments, primarily certain borrowings under our working capital line of credit. The advances under the working capital line of credit bear a variable rate of interest determined at the time of the borrowing. At
October 1, 2016
, we had letters of credit outstanding of $1.0 million under our revolving letter of credit facility.
Exchange Rate Sensitivity
We maintain sales and business operations in foreign countries. As such, we have exposure to adverse changes in exchange rates associated with operating expenses of our foreign operations, but we believe this exposure to be immaterial. Additionally, we accept orders for consumer products in currencies other than the U.S. dollar. We regularly monitor the level of non-U.S. dollar accounts receivable balances to determine if any actions, including possibly entering into foreign currency forward contracts or swaps, should be taken to minimize the impact of fluctuating exchange rates on our results of operations. Our international revenue is primarily denominated in U.S. dollars and therefore any fluctuations in the Euro or any other non-U.S. dollar currencies will have minimal direct impact on our international revenue. However, as the U.S. dollar strengthens or weakens against other currencies, our international distributors may be impacted, which could affect their profitability and our ability to maintain current pricing levels on our international consumer products.