IROBOT CORPORATION The information contained in this section has been derived from our consolidated financial statements and should be read together with our consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q. 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 and Exchange Act of 1934, as amended, or the Exchange Act, and are subject to the "safe harbor" created by those sections. In particular, statements contained in this Quarterly Report on Form 10-Q that are not historical facts, including, but not limited to statements concerning the impact of cost reduction actions and potential savings, new product sales, our direct-to-consumer sales channel, product development and offerings, our consumer robots, our competition, our strategy, our market position, the impact of tariffs, the recognition and timing of tariff refunds, whether we are able to obtain an extension to our tariff exclusion and the length of extension granted, the impact of COVID-19 on our business, our supply chain, market acceptance of our products, seasonal factors, revenue recognition, the impact of new accounting standards, credit losses, our profits, growth of our revenues, composition of our revenues, our cost of revenues, units shipped, average selling prices, 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 and expected use thereof, our valuations of investments, valuation and composition of our stock-based awards, and liquidity, constitute forward-looking statements and are made under these safe harbor provisions. Some of the forward-looking statements can be identified by the use of forward-looking terms such as "believes," "expects," "may," "will," "should," "could," "seek," "intends," "plans," "estimates," "anticipates," or other comparable terms. Forward-looking statements involve inherent risks and uncertainties, which could cause actual results to differ materially from those in the forward-looking statements. We urge you to consider the risks and uncertainties discussed in greater detail under the heading "Risk Factors" in this Quarterly Report on Form 10-Q and in Part I, "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the year endedDecember 28, 2019 in evaluating our forward-looking statements. We have no plans to update our forward-looking statements to reflect events or circumstances after the date of this report. We caution readers not to place undue reliance upon any such forward-looking statements, which speak only as of the date made. 20 --------------------------------------------------------------------------------
Overview
iRobot is a leading consumer robot company that designs and builds robots that empower people to do more both inside and outside of the home. Our consumer robots help people find smarter ways to clean and accomplish more in their daily lives. Our portfolio of solutions features proprietary technologies for the connected home and advanced concepts in cleaning, mapping and navigation, human-robot interaction and physical solutions. Leveraging this portfolio, our engineers are building an ecosystem of robots to empower the smart home. For more than 25 years, we have been a pioneer in the robotics and consumer products industries. We sell our robots through a variety of distribution channels, including chain stores and other national retailers, through our own website and app, dedicated e-commerce websites, the online arms of traditional retailers, and through value-added distributors and resellers worldwide. As ofSeptember 26, 2020 , we had 1,159 full-time employees. We have developed expertise in the disciplines necessary to design, build, sell and support durable, high-performance and cost-effective robots through the close integration of software, electronics and hardware. Our core technologies serve as reusable building blocks that we adapt and expand to create next-generation robotic platforms. We believe that this approach accelerates the time to market, while also reducing the costs and risk associated with product development. Our significant expertise in consumer needs, robot design, engineering and smart home technologies and trends positions us to capitalize on the growth we expect in the market for robot-based consumer products. 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. Furthermore, we believe that our efforts to cost-optimize our products and diversify our contract manufacturing and broader supply chain will continue to play an important role in maintaining competitive product pricing, reducing supply-chain risk and limitingChina -related tariff exposure, among other factors that impact our financial condition and results of operations. During the first quarter of 2020, the global pandemic related to the novel coronavirus ("COVID-19") presented significant challenges and adversely impacted our business and operating results. The pandemic directly and indirectly disrupted certain sales and supply chain activities and impacted our ability to address those challenges during the first quarter, which resulted in first-quarter revenue and a net loss per share that was below our original targets. In light of the adverse impact of COVID-19 on our business and on macroeconomic conditions domestically and internationally, along with the uncertainty associated with a potential recovery, we implemented cost-reduction actions inApril 2020 that were aimed at generating net savings of approximately$30.0 million in 2020 while enabling us to accelerate investment in key initiatives. Our actions taken during the second quarter of 2020 included reducing our workforce by approximately 5%, furloughing retail-facing marketing staff inEurope , reducing hiring plans, suspending go-to-market and development plans for our Terra robot mower and curtailing working media spending. During the nine months endedSeptember 26, 2020 , we recorded a restructuring charge totaling$2.1 million primarily associated with severance costs arising from the workforce reduction. During the second quarter of 2020, we observed increased demand for our robots as maintaining a clean home took on greater prominence during the pandemic with sell-through momentum building globally with revenue substantially outperforming our plans at the start of the quarter. The favorable demand environment continued to strengthen in the third quarter of 2020 with stronger-than-anticipated retail orders and robust growth in our direct-to-consumer sales. While the improved business momentum, particularly in theU.S. , has resulted in a meaningfully better outlook for 2020, the economic environment remains highly uncertain and consumer spending for the upcoming holiday season is difficult to predict. As a result, it is challenging for us to forecast the full impact of COVID-19 on our operations, liquidity and financial results. Accordingly, current results and financial condition discussed herein may not be indicative of future operating results and trends. Refer to "Risk Factors" for further discussion of the impact of the COVID-19 pandemic on our business. InApril 2020 , we were granted a temporary exclusion from Section 301 List 3 tariffs by the United States Trade Representative ("USTR"). This exclusion, as extended inAugust 2020 , eliminates the 25% tariff on Roomba products imported fromChina untilDecember 31, 2020 and entitles us to a refund of approximately$60.3 million in tariffs paid since the date the Section 301 List 3 tariffs were imposed. During the nine months endedSeptember 26, 2020 , we recognized approximately$40.0 million of refunds for tariffs paid in 2018 and 2019 as a benefit to cost of product revenue, which contributed to our strong gross margin during the period. As ofSeptember 26, 2020 , we have received$34.9 million of the tariff refund and the outstanding refund receivable was approximately$25.4 million which is recorded in other current assets on the consolidated balance sheet. There is currently no process to apply for a further extension nor any formal indication from theU.S. government that any such exclusion extensions will be considered. If the exclusion is not extended pastDecember 31, 2020 , the 25% tariff will be reinstated, and we expect this incremental cost will dampen our gross profit in 2021. To diversify our manufacturing and help offset the adverse financial impact on our business of the 25% tariff, we are focused on scaling the manufacture of our products inMalaysia . We began this initiative last year with the goal of being capable of manufacturing broadly and at scale inMalaysia by the end of 2021. 21 -------------------------------------------------------------------------------- iRobot has continued to advance innovation and bring new products to market in recent quarters. InAugust 2020 , we launched iRobot Genius Home Intelligence Platform, a powerful AI-based robot platform that includes an expansive range of digital features and experiences for our line of Wi-Fi connected floor cleaning robots. The iRobot Genius gives users greater personalization and control over their cleaning robots. InSeptember 2020 , we launched Roomba i3 and i3+ inNorth America . The Roomba i3 offers intelligent navigation, a 3-Stage Cleaning System and personalized cleaning available with iRobot Genius while the Roomba i3+ also includes the self-emptying capability of Clean Base. We believe that the i3 and i3+ will play an important role in continuing to help shift our product mix up into the mid and premium tiers. Critical Accounting Policies and Estimates The preparation of financial statements in conformity with generally accepted accounting principles inthe United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses. These estimates and judgments include, but are not limited to, revenue recognition including performance obligations, variable consideration and other obligations such as product returns and incentives; allowance for credit losses; warranty costs; valuation of goodwill and acquired intangible assets; evaluating loss contingencies; accounting for stock-based compensation including performance-based assessments; and accounting for income taxes and related valuation allowances. We base these estimates and judgments on historical experience, market participant fair value considerations, projected future cash flows and various other factors that we believe are reasonable under the circumstances. Actual results may differ from our estimates. 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 endedDecember 28, 2019 . EffectiveDecember 29, 2019 , we adopted the new credit losses standard under Accounting Standards Codification 326. The new standard did not result in an adjustment upon adoption. Although we historically have not experienced significant credit losses as it relates to trade accounts receivable, the COVID-19 pandemic has caused uncertainty in some customer accounts. As a result, we recorded our estimate of credit losses, resulting in an increase to the reserve and bad debt expense of$1.0 million and$5.5 million during the three and nine months endedSeptember 26, 2020 , respectively. As ofSeptember 26, 2020 , we had an allowance for credit losses of$6.5 million . We have updated our accounting policy in Note 2 of the consolidated financial statements. Overview of Results of Operations The following table sets forth our results of operations as a percentage of revenue: Three Months Ended Nine Months Ended September 26, 2020 September 28, 2019 September 26, 2020 September 28, 2019 Revenue 100.0 % 100.0 % 100.0 % 100.0 % Cost of revenue: Cost of product revenue 51.8 51.6 48.5 51.2 Amortization of acquired intangible assets 0.1 1.1 0.1 1.2 Total cost of revenue 51.9 52.7 48.6 52.4 Gross profit 48.1 47.3 51.4 47.6 Operating expenses: Research and development 9.3 11.5 12.6 13.2 Selling and marketing 12.2 14.6 15.4 17.5 General and administrative 6.9 6.4 8.5 7.9 Amortization of acquired intangible assets 0.1 0.1 0.1 0.1 Total operating expenses 28.5 32.6 36.6 38.7 Operating income 19.6 14.7 14.8 8.9 Other income, net 10.2 0.3 4.7 0.5 Income before income taxes 29.8 15.0 19.5 9.4 Income tax expense 7.2 2.7 4.4 1.1 Net income 22.6 % 12.3 % 15.1 % 8.3 % 22
-------------------------------------------------------------------------------- Comparison of Three and Nine Months EndedSeptember 26, 2020 andSeptember 28, 2019 Revenue Three Months Ended Nine Months Ended September 26, September 28, Dollar Percent September 26, September 28, Dollar Percent 2020 2019 Change Change 2020 2019 Change Change (In thousands) (In thousands) Revenue$ 413,145 $ 289,399 $ 123,746 42.8 %$ 885,563 $ 787,232 $ 98,331 12.5 % Revenue for the three months endedSeptember 26, 2020 increased$123.7 million to$413.1 million , or 42.8%, compared to$289.4 million for the three months endedSeptember 28, 2019 . The$123.7 million increase in revenue was primarily attributable to a 36.0% increase in units shipped for the three months endedSeptember 26, 2020 compared to the three months endedSeptember 28, 2019 . The demand for our robots continued to increase substantially as maintaining a clean home took on greater prominence during the pandemic. Sell through momentum continued to build globally in the third quarter, resulting in stronger-than-anticipated retail orders and robust growth in our direct-to-consumer sales. In the three months endedSeptember 26, 2020 , domestic revenue increased$88.3 million , or 74.9%, while international revenue increased$35.4 million , or 20.6%. Revenue for the nine months endedSeptember 26, 2020 increased$98.3 million to$885.6 million , or 12.5%, compared to$787.2 million for the nine months endedSeptember 28, 2019 . Although the initial impact of the COVID-19 pandemic on our sales and manufacturing supply chain activities during the first quarter of 2020 resulted in a revenue decline, demand for our robots increased substantially during the second and third quarters of 2020 as maintaining a clean home took on greater prominence during the pandemic with sell-through momentum building globally. Units shipped increased 7.1% for the nine months endedSeptember 26, 2020 compared to the nine months endedSeptember 28, 2019 . In the nine months endedSeptember 26, 2020 , domestic revenue increased$71.9 million , or 20.2%, and international revenue increased$26.4 million , or 6.1%, as compared to the nine months endedSeptember 28, 2019 . Cost of Product Revenue Three Months Ended Nine Months Ended September 26, September 28, Dollar Percent September 26, September 28, Dollar Percent 2020 2019 Change Change 2020 2019 Change Change (In thousands) (In thousands) Cost of product revenue$ 214,079 $ 149,463 $ 64,616 43.2 %$ 429,060 $ 403,392 $ 25,668 6.4 % As a percentage of revenue 51.8 % 51.6 % 48.5 % 51.2 % Cost of product revenue increased to$214.1 million in the three months endedSeptember 26, 2020 , compared to$149.5 million in the three months endedSeptember 28, 2019 . The$64.6 million increase in cost of product revenue is primarily due to the 42.8% increase in revenue. Cost of product revenue increased to$429.1 million in the nine months endedSeptember 26, 2020 , compared to$403.4 million in the nine months endedSeptember 28, 2019 . The$25.7 million increase in cost of product revenue is primarily due to the 12.5% increase in revenue as well as increases in warranty and rework costs, offset by the recognition of the tariff refunds of approximately$40.0 million for tariffs paid in 2018 and 2019. OnApril 24, 2020 , we were granted a temporary exclusion, as extended inAugust 2020 , from Section 301 List 3 tariffs by the United States Trade Representative, which temporarily eliminates the 25% tariff on Roomba products imported fromChina untilDecember 31, 2020 . Gross Profit Three Months Ended Nine Months Ended September 26, September 28, Dollar Percent September 26, September 28, Dollar Percent 2020 2019 Change Change 2020 2019 Change Change (In thousands) (In thousands) Gross profit$ 198,841 $ 136,841 $ 62,000 45.3 %$ 454,808 $ 374,557 $ 80,251 21.4 % Gross margin 48.1 % 47.3 % 51.4 % 47.6 % Gross margin increased to 48.1% in the three months endedSeptember 26, 2020 compared to 47.3% in the three months endedSeptember 28, 2019 . The slight increase in gross margin is due to higher revenue and lack of tariff expense, mostly offset by changes in pricing and promotional activity during the three months endedSeptember 26, 2020 compared to the three months endedSeptember 28, 2019 . 23 -------------------------------------------------------------------------------- Gross margin increased to 51.4% in the nine months endedSeptember 26, 2020 compared to 47.6% in the nine months endedSeptember 28, 2019 . The increase in gross margin is primarily related to the recognition of the tariff refunds of$40.0 million for tariffs paid in 2018 and 2019 as a benefit to cost of product revenue, partially offset by changes in pricing and promotional activity during the nine months endedSeptember 26, 2020 compared to the nine months endedSeptember 28, 2019 . We anticipate our 2020 fourth-quarter gross margin will decrease slightly from that of the third quarter due to promotional programs planned with retailers during the holiday season. There is currently no process to apply for a further extension nor any formal indication from theU.S. government that any such exclusion extensions will be considered. If the exclusion is not extended pastDecember 31, 2020 , the 25% tariff will be reinstated, and we expect this incremental cost will dampen our gross profit in 2021. To diversify our manufacturing and help offset the adverse financial impact on our business of the 25% tariff, we are focused on scaling the manufacture of our products inMalaysia . We began this initiative last year with the goal of being capable of manufacturing broadly and at scale inMalaysia by the end of 2021. Research and Development Three Months Ended Nine Months Ended September 26, September 28, Dollar Percent September 26, September 28, Dollar Percent 2020 2019 Change Change 2020 2019 Change Change (In thousands) (In thousands) Research and development$ 38,613 $ 33,401 $ 5,212 15.6 %$ 111,929 $ 104,320 $ 7,609 7.3 % As a percentage of revenue 9.3 % 11.5 % 12.6 % 13.2 % Research and development expenses increased$5.2 million , or 15.6%, to$38.6 million (9.3% of revenue) in the three months endedSeptember 26, 2020 from$33.4 million (11.5% of revenue) in the three months endedSeptember 28, 2019 . This increase is primarily due to a$5.3 million increase in people-related costs mostly attributable to higher performance-based stock-based compensation and short-term incentive compensation costs. Research and development expenses increased$7.6 million , or 7.3%, to$111.9 million (12.6% of revenue) in the nine months endedSeptember 26, 2020 from$104.3 million (13.2% of revenue) in the nine months endedSeptember 28, 2019 . This increase is primarily due to a$5.5 million increase in people-related costs, mostly attributable to higher performance-based stock-based compensation and short-term incentive compensation costs, as well as$1.7 million of restructuring charges associated with the reduction in workforce during the second quarter of 2020. Selling and Marketing Three Months Ended Nine Months Ended September 26, September 28, Dollar Percent September 26, September 28, Dollar Percent 2020 2019 Change Change 2020 2019 Change Change (In thousands) (In thousands) Selling and marketing$ 50,488 $ 42,257 $ 8,231 19.5 %$ 136,144 $ 137,502 $ (1,358) (1.0) % As a percentage of revenue 12.2 % 14.6 % 15.4 % 17.5 % Selling and marketing expenses increased$8.2 million , or 19.5%, to$50.5 million (12.2% of revenue) in the three months endedSeptember 26, 2020 from$42.3 million (14.6% of revenue) in the three months endedSeptember 28, 2019 . This increase was primarily attributable to a$5.5 million increase in marketing activities to support the new product launch inNorth America and to build our direct-to consumer sales channel, as well as a$2.4 million increase in people-related costs mostly related to higher short-term incentive compensation costs. Selling and marketing expenses decreased$1.4 million , or 1.0%, to$136.1 million (15.4% of revenue) in the nine months endedSeptember 26, 2020 from$137.5 million (17.5% of revenue) in the nine months endedSeptember 28, 2019 . This decrease was primarily attributable to delayed implementation of certain marketing activities as a result of the pandemic resulting in a decrease of$3.3 million year over year, offset by a$1.9 million increase in people-related costs resulting from higher incentive compensation costs. We expect selling and marketing costs will increase during the fourth quarter of 2020, which is consistent with historical trending as we accelerate working media to drive demand around the holiday season. 24 -------------------------------------------------------------------------------- General and Administrative Three Months Ended Nine Months Ended September 26, September 28, Dollar Percent September 26, September 28, Dollar Percent 2020 2019 Change Change 2020 2019 Change Change (In thousands) (In thousands) General and administrative$ 28,490 $ 18,372 $ 10,118 55.1 %$ 74,919 $ 61,871 $ 13,048 21.1 % As a percentage of revenue 6.9 % 6.4 % 8.5 % 7.9 % General and administrative expenses increased$10.1 million , or 55.1%, to$28.5 million (6.9% of revenue) in the three months endedSeptember 26, 2020 from$18.4 million (6.4% of revenue) in the three months endedSeptember 28, 2019 . This increase is primarily due to higher performance-based stock-based compensation and short-term incentive compensation costs of$8.8 million , as well as increases in legal fees of$1.9 million driven by higher intellectual property litigation costs, and the allowance for credit losses of$1.0 million associated with the uncertainty of collection from certain customer accounts resulting from the pandemic. General and administrative expenses increased$13.0 million , or 21.1%, to$74.9 million (8.5% of revenue) in the nine months endedSeptember 26, 2020 from$61.9 million (7.9% of revenue) in the nine months endedSeptember 28, 2019 . This increase is primarily due to higher performance-based stock-based compensation and short-term incentive compensation costs of$6.5 million , as well as increases in the allowance for credit losses of$5.5 million associated with the uncertainty of collection from certain customer accounts resulting from the pandemic, and legal fees of$4.3 million , driven by higher intellectual property litigation costs. Amortization of Acquired Intangible Assets Three Months Ended Nine Months Ended September 26, September Dollar Percent September September 28, Dollar Percent 2020 28, 2019 Change Change 26, 2020 2019 Change Change (In thousands) (In thousands) Cost of revenue$ 225 $ 3,095 $ (2,870) (92.7) %$ 1,695 $ 9,283 $ (7,588) (81.7) % Operating expense 256 256 - - % 764 796 (32) (4.0) % Total amortization expense$ 481 $ 3,351 $ (2,870) (85.6) %$ 2,459 $ 10,079 $ (7,620) (75.6) % As a percentage of revenue 0.1 % 1.2 % 0.3 % 1.3 % The decrease in amortization of acquired intangible assets in the three and nine months endedSeptember 26, 2020 as compared to the three and nine months endedSeptember 28, 2019 , was primarily related to the reacquired distribution rights intangible asset which was fully amortized in the fourth quarter of 2019. Other Income, Net Three Months Ended Nine Months Ended September 26, September 28, Dollar Percent September 26, September Dollar Percent 2020 2019 Change Change 2020 28, 2019 Change Change (In thousands) (In thousands) Other income, net$ 42,240 $ 900 $ 41,340 4,593.3 %$ 41,837 $ 3,713 $ 38,124 1,026.8 % As a percentage of revenue 10.2 % 0.3 % 4.7 % 0.5 % Other income, net, amounted to$42.2 million and$0.9 million for the three months endedSeptember 26, 2020 andSeptember 28, 2019 , respectively. Other income, net includes interest income, interest expense, foreign currency gains (losses) as well as gains (losses) from strategic investments. The primary driver of the changes for the three and nine months endedSeptember 26, 2020 compared to the three and nine months endedSeptember 28, 2019 was the gains associated with ourInTouch Health investment when Teladoc Health, Inc., or Teladoc, acquiredInTouch Health and exchanged our shares ofInTouch Health for shares of Teladoc during the third quarter of 2020. 25 --------------------------------------------------------------------------------
Income Tax Expense
Three Months Ended Nine Months Ended
September 26, September Dollar Percent September 26, September Dollar Percent
2020 28, 2019 Change Change 2020 28, 2019 Change Change
(In thousands) (In thousands)
Income tax expense $ 29,982 $ 7,923 $ 22,059 278.4 % $ 39,156 $ 8,522 $ 30,634 359.5 %
Effective income tax
rate 24.3 % 18.2 % 22.6 % 11.6 %
We recorded an income tax expense of $30.0 million and $7.9 million for the
three months ended September 26, 2020 and September 28, 2019 , respectively. The
$30.0 million income tax expense for the three months ended September 26, 2020
resulted in an effective income tax rate of 24.3%. The $7.9 million income tax
expense for the three months ended September 28, 2019 resulted in an effective
income tax rate of 18.2%. The increase in the effective income tax rate was
primarily due to the jurisdictional profit mix and the impact of valuation
allowances.
We recorded an income tax expense of $39.2 million and $8.5 million for the nine
months ended September 26, 2020 and September 28, 2019 , respectively. The $39.2
million income tax expense for the nine months ended September 26, 2020 resulted
in an effective income tax rate of 22.6%. The $8.5 million income tax expense
for the nine months ended September 28, 2019 resulted in an effective income tax
rate of 11.6%. The increase in the effective income tax rate was primarily due
to the recognition of tax expense associated with stock-based compensation
compared to a tax benefit for the prior period.
Our effective income tax rate of 24.3% and 22.6% for three and nine months ended
September 26, 2020 differed from the federal statutory tax rate of 21% primarily
due to the jurisdictional mix of earnings and the recognition of valuation
allowances during the period.
On March 27, 2020 , the Coronavirus Aid, Relief, and Economic Security Act
("CARES Act") was enacted in response to the COVID-19 pandemic. We continue to
evaluate the impact of the CARES Act, but at present do not expect the CARES Act
to result in any material income tax benefit.
Liquidity and Capital Resources
At September 26, 2020 , our principal sources of liquidity were cash and cash
equivalents totaling $297.2 million and short-term investments of $60.1 million .
Our working capital was $542.7 million as of September 26, 2020 , compared to
$364.2 million as of September 28, 2019 .
We manufacture and distribute our products through contract manufacturers and
third-party logistics providers. We believe this approach gives us the
advantages of relatively low capital investment and significant flexibility in
scheduling production and managing inventory levels. By leasing our office
facilities, we also minimize the cash needed for expansion although we invest
periodically in upgrading these facilities, a portion of which investment will
be reimbursed by the landlords of these facilities. Accordingly, our capital
spending is generally limited to machinery and tooling, leasehold improvements,
business applications software and computer and equipment. In the three months
ended September 26, 2020 and September 28, 2019 , we spent $25.0 million and
$27.1 million , respectively, on capital expenditures.
Our strategy for delivering consumer products to our distributors and retail
customers gives us the flexibility to provide container shipments directly from
our contract manufacturers in Southern China and Malaysia to our customers and,
alternatively, allows our distributors and certain retail customers to take
possession of product on a domestic basis. Accordingly, our inventory consists
of goods shipped to our third-party logistics providers for the fulfillment of
distributor, retail and direct-to-consumer sales. Our contract manufacturers are
also responsible for purchasing and stocking components required for the
production of our products, and they typically invoice us when the finished
goods are shipped.
As a result of the COVID-19 pandemic, we have taken, and are continuing to take,
certain actions to increase liquidity and strengthen our financial position. We
implemented cost-reduction actions in April 2020 that are aimed at generating
net savings of approximately $30.0 million in 2020 while enabling us to
accelerate investment in key initiatives. Our actions taken during the second
quarter of 2020 included reducing our workforce by approximately 5%, furloughing
retail-facing marketing staff in Europe , reducing hiring plans, suspending
go-to-market and development plans for our Terra robot mower and curtailing
working media spending. On April 24, 2020 , we were granted a temporary exclusion
from Section 301 List 3 tariffs by the United States Trade Representative. This
exclusion, as extended in August 2020 , temporarily eliminates the 25% tariff on
Roomba products imported from China until December 31, 2020 and entitles us to a
refund of approximately $60.3 million in tariffs paid since the date the Section
301 List 3 tariffs were imposed. During the nine months ended September 26,
2020 , we recognized $40.0 million of refunds for tariffs paid in 2018 and 2019
as a benefit to cost of product revenue. As of
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September 26, 2020 , we have received $34.9 million in cash associated with our
tariff refunds from the U.S. government. We expect to receive the remaining
refunds within the next nine months, subject to the timing of releases from U.S.
Customs.
Cash provided by operating activities
Net cash provided by operating activities for the nine months ended
September 26, 2020 was $96.7 million , of which the principal components were our
net income of $133.7 million and non-cash charges of $18.9 million , partially
offset by cash outflow of $55.8 million from increases in working capital. The
increase in working capital was mainly driven by an increase in inventory of
$61.0 million in advance of the holiday season and inventory associated with the
launch of Roomba i3 and i3+ during the third quarter of 2020.
Cash used in investing activities
Net cash used in investing activities for the nine months ended September 26,
2020 was $18.3 million . During the nine months ended September 26, 2020 , we
invested $25.0 million in the purchase of property and equipment, including
machinery and tooling for new products and manufacturing expansion in Malaysia .
In addition, we made strategic investments of $3.7 million , while proceeds from
the sales and maturities of marketable securities amounted to $10.5 million .
Cash used in financing activities
Net cash used in financing activities for the nine months ended September 26,
2020 was $22.8 million , which primarily reflects the repurchase of 663,602
shares of our common stock for $25.0 million under our stock repurchase program
in March 2020 .
Working Capital Facilities
Credit Facility
In June 2018 , we entered into a new agreement with Bank of America, N.A .,
increasing the amount of our unsecured revolving line of credit from $75.0
million to $150.0 million and extending the term of the credit facility to June
2023 . As of September 26, 2020 , we had no outstanding borrowings under our
revolving credit facility. The revolving line of credit is available to fund
working capital and other corporate purposes. The interest on loans under our
credit facility accrues, at our election, at either (1) LIBOR plus a margin,
currently equal to 1.0%, based on our ratio of indebtedness to Adjusted EBITDA
(the "Eurodollar Rate"), or (2) the lender's base rate. The lender's base rate
is equal to the highest of (1) the federal funds rate plus 0.5%, (2) the
lender's prime rate and (3) the Eurodollar Rate plus 1.0%. In the event that
LIBOR is discontinued as expected in 2021, we expect the interest rates for our
debt following such event will be based on either alternate base rates or agreed
upon replacement rates. While we do not expect a LIBOR discontinuation would
affect our ability to borrow or maintain already outstanding borrowings, it
could result in higher interest rates.
The credit facility contains customary terms and conditions for credit
facilities of this type, including restrictions on our ability to incur or
guarantee additional indebtedness, create liens, enter into transactions with
affiliates, make loans or investments, sell assets, pay dividends or make
distributions on, or repurchase, our stock, and consolidate or merge with other
entities. In addition, we are required to meet certain financial covenants
customary with this type of agreement, including maintaining a maximum ratio of
indebtedness to Adjusted EBITDA and a minimum specified interest coverage ratio.
The credit facility contains customary events of default, including for payment
defaults, breaches of representations, breaches of affirmative or negative
covenants, cross defaults to other material indebtedness, bankruptcy and failure
to discharge certain judgments. If a default occurs and is not cured within any
applicable cure period or is not waived, our obligations under the credit
facility may be accelerated.
As of September 26, 2020 , we were in compliance with all covenants under the
revolving credit facility.
Lines of Credit
We have an unsecured letter of credit facility with Bank of America, N.A .,
available to fund letters of credit up to an aggregate outstanding amount of
$5.0 million . As of September 26, 2020 , we had letters of credit outstanding of
$0.7 million under our letter of credit facility and other lines of credit with
Bank of America, N.A .
We have an unsecured guarantee line of credit with Mizuho, Bank Ltd. , available
to fund import tax payments up to an aggregate outstanding amount of
220.0 million Japanese Yen . As of September 26, 2020 , we had no outstanding
balance under the guarantee line of credit.
Working Capital and Capital Expenditure Needs
We currently have no material cash commitments, except for normal recurring
trade payables, expense accruals, capital expenditures and operating leases, all
of which we anticipate funding through working capital and funds provided by
operating activities. We believe our outsourced approach to manufacturing
provides us with flexibility in both managing inventory levels
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and financing our inventory. We believe our existing cash and cash equivalents,
short-term investments, and funds available through our credit facility will be
sufficient to meet our working capital and capital expenditure needs over at
least the next twelve months. In the event our revenue plan does not meet our
expectations, we may eliminate or curtail expenditures to mitigate the impact on
our working capital. Our future capital requirements will depend on many
factors, including our rate of revenue growth or decline, the expansion or
contraction of our marketing and sales activities, the timing and extent of
spending to support product development efforts, the timing of introductions of
new products and enhancements to existing products, the acquisition of new
capabilities or technologies, the continuing market acceptance of our products
and services, and the impact of COVID-19 on our business. Moreover, to the
extent existing cash and cash equivalents, short-term investments, cash from
operations, and cash from short-term borrowing are insufficient to fund our
future activities, we may need to raise additional funds through public or
private equity or debt financing. As part of our business strategy, we may
consider additional acquisitions of companies, technologies and products, which
could also require us to seek additional equity or debt financing. Additional
funds may not be available on terms favorable to us or at all.
Contractual Obligations
The disclosure of our contractual obligations and commitments is set forth under
the heading "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Contractual Obligations" in our Annual Report on Form
10-K for the year ended December 28, 2019 . Our principal commitments generally
consist of obligations under our credit facility, leases for office space and
minimum contractual obligations. Other obligations consist of primarily of
subscription services. There have been no material changes in our contractual
obligations and commitments since December 28, 2019 .
Off-Balance Sheet Arrangements
As of September 26, 2020 , we had no off-balance sheet arrangements as defined in
Item 303(a)(4) of Regulation S-K.
Recently Adopted Accounting Pronouncements
See Note 2 to the Consolidated Financial Statements for a discussion of recently
adopted accounting pronouncements.
Recently Issued Accounting Pronouncements
See Note 2 to the Consolidated Financial Statements for a discussion of recently
issued accounting pronouncements.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
Exchange Rate Sensitivity
Our international revenue and expenses are denominated in multiple currencies,
including British Pounds, Canadian Dollars, Chinese Renminbi, Euros and Japanese
Yen. As such, we have exposure to adverse changes in exchange rates associated
with the revenue and operating expenses of our foreign operations. Any
fluctuations in other currencies will have minimal direct impact on our
international revenue.
In addition to international business conducted in foreign currencies, we have
international revenue denominated in U.S. dollars. 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.
We regularly monitor the forecast of non-U.S. dollar revenue and expenses and
the level of non-U.S. dollar monetary asset and liability balances to determine
if any actions, including possibly entering into foreign currency contracts
should be taken to minimize the impact of fluctuating exchange rates on our
results of operations. Periodically, we enter into forward exchange contracts to
hedge against foreign currency fluctuations. These contracts may or may not be
designated as cash flow hedges for accounting purposes. We use cash flow hedges
primarily to reduce the effects of foreign exchange rate changes on sales in
Euros and Japanese Yen. At September 26, 2020 and December 28, 2019 , we had
outstanding cash flow hedges with a total notional value of $430.2 million and
$424.6 million , respectively.
We also enter 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 have maturities of twelve months or less. At September 26, 2020
and December 28, 2019 , we had outstanding economic hedges with a total notional
value of $26.8 million and $58.4 million , respectively.
At September 26, 2020 , assuming all other variables are constant, if the U.S.
Dollar weakened or strengthened by 10%, the fair market value of our foreign
currency contracts would increase or decrease by approximately $47.4 million .
Item 4. Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief
Financial Officer, evaluated the effectiveness of our disclosure controls and
procedures (as defined in Rule 13a-15(e) of the Exchange Act as of the end of
the period covered by this report. Based on that evaluation, our Chief Executive
Officer and Chief Financial Officer concluded that
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our disclosure controls and procedures as of the end of the period covered by this report were effective at a reasonable assurance level in ensuring that information required to be disclosed by us in reports that we file or submit under the Exchange Act (i) is recorded, processed, summarized and reported within the time periods specified in theSecurities and Exchange Commission's rules and forms; and (ii) accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely discussions regarding required disclosure. We believe that a control system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the control system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. There was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Part II. Other Information Item 1. Legal Proceedings This information is included in Note 11, Commitments and Contingencies, in the accompanying notes to the unaudited consolidated financial statements and is incorporated herein by reference from Item 1 of Part I.
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