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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

______________________________________________ 

FORM 10-Q

 ______________________________________________

☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED October 2, 2021

OR

☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM              TO             

COMMISSION FILE NUMBER 001-36414

______________________________________________ 

iROBOT CORPORATION

(Exact name of registrant as specified in its charter)

 ______________________________________________

Delaware			77-0259335
(State or other jurisdiction of incorporation or organization)			(I.R.S. Employer Identification No.)

8 Crosby Drive

Bedford, MA 01730

(Address of principal executive offices, including zip code)

(781) 430-3000

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class			Trading Symbol(s)			Name of each exchange on which registered
Common Stock, $0.01 par value			IRBT			The Nasdaq Stock Market LLC

______________________________________________ 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  x    No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

        

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Large accelerated filer			☒			Accelerated filer			☐
Non-accelerated filer			☐			Smaller reporting company			☐
						Emerging growth company			☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o    

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  x 

The number of shares outstanding of the Registrant’s Common Stock as of October 29, 2021 was 26,958,286.

        

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iROBOT CORPORATION

FORM 10-Q

FOR THE QUARTER ENDED OCTOBER 2, 2021

INDEX

			Page
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets as of October 2, 2021 and January 2, 2021			3
Consolidated Statements of Income for the three and nine months ended October 2, 2021 and September 26, 2020			4
Consolidated Statements of Comprehensive Income for the three and nine months ended October 2, 2021 and September 26, 2020			5
Consolidated Statements of Stockholders' Equity for the three and nine months ended October 2, 2021 and September 26, 2020			6
Consolidated Statements of Cash Flows for the nine months ended October 2, 2021 and September 26, 2020			8
Notes to Consolidated Financial Statements			9
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			17
Item 3. Quantitative and Qualitative Disclosures about Market Risk			28
Item 4. Controls and Procedures			29
PART II: OTHER INFORMATION
Item 1. Legal Proceedings			30
Item 1A. Risk Factors			30
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			31
Item 5. Other Information			31
Item 6. Exhibits			33
Signatures			34

2

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iROBOT CORPORATION

CONSOLIDATED BALANCE SHEETS

(in thousands, except per share amounts)

(unaudited)

 

			October 2, 2021						January 2, 2021
ASSETS
Current assets:
Cash and cash equivalents			$	218,012					$	432,635
Short term investments			29,909						51,081
Accounts receivable, net			240,722						170,526
Inventory			353,724						181,756
Other current assets			46,367						45,223
Total current assets			888,734						881,221
Property and equipment, net			80,227						76,584
Operating lease right-of-use assets			39,096						43,682
Deferred tax assets			39,778						33,404
Goodwill			121,909						125,872
Intangible assets, net			8,348						9,902
Other assets			31,542						19,063
Total assets			$	1,209,634					$	1,189,728
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable			$	259,396					$	165,779
Accrued expenses			130,958						131,388
Deferred revenue and customer advances			11,076						10,400
Total current liabilities			401,430						307,567
Operating lease liabilities			45,206						50,485
Deferred tax liabilities			118						705
Other long-term liabilities			22,344						26,537
Total long-term liabilities			67,668						77,727
Total liabilities			469,098						385,294
Commitments and contingencies (Note 10)
Preferred stock, 5,000 shares authorized and none outstanding			—						—
Common stock, $0.01 par value, 100,000 shares authorized; 26,954 and 28,184 shares issued and outstanding, respectively			270						282
Additional paid-in capital			215,592						205,256
Retained earnings			517,221						599,389
Accumulated other comprehensive income (loss)			7,453						(493)
Total stockholders’ equity			740,536						804,434
Total liabilities and stockholders’ equity			$	1,209,634					$	1,189,728

The accompanying notes are an integral part of the consolidated financial statements.

3

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iROBOT CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share amounts)

(unaudited)

 

			Three Months Ended												Nine Months Ended
			October 2, 2021						September 26, 2020						October 2, 2021						September 26, 2020
Revenue			$	440,682					$	413,145					$	1,109,539					$	885,563
Cost of revenue:
Cost of product revenue			277,703						214,079						684,190						429,060
Amortization of acquired intangible assets			225						225						675						1,695
Total cost of revenue			277,928						214,304						684,865						430,755
Gross profit			162,754						198,841						424,674						454,808
Operating expenses:
Research and development			40,262						38,613						120,859						111,929
Selling and marketing			59,055						50,488						186,722						136,144
General and administrative			22,688						28,490						72,587						74,919
Amortization of acquired intangible assets			251						256						661						764
Total operating expenses			122,256						117,847						380,829						323,756
Operating income			40,498						80,994						43,845						131,052
Other income, net			26,585						42,240						26,139						41,837
Income before income taxes			67,083						123,234						69,984						172,889
Income tax expense			9,867						29,982						8,083						39,156
Net income			$	57,216					$	93,252					$	61,901					$	133,733
Net income per share:
Basic			$	2.09					$	3.33					$	2.22					$	4.76
Diluted			$	2.06					$	3.27					$	2.17					$	4.69
Number of shares used in per share calculations:
Basic			27,413						28,031						27,923						28,084
Diluted			27,803						28,539						28,475						28,502

The accompanying notes are an integral part of the consolidated financial statements.

4

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iROBOT CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

(unaudited)

 

			Three Months Ended												Nine Months Ended
			October 2, 2021						September 26, 2020						October 2, 2021						September 26, 2020
Net income			$	57,216					$	93,252					$	61,901					$	133,733
Other comprehensive income:
Net foreign currency translation adjustments			(3,974)						5,600						(8,743)						6,864
Net unrealized gains (losses) on cash flow hedges, net of tax			5,181						(8,418)						18,113						(5,379)
Net gains on cash flow hedge reclassified into earnings, net of tax			(878)						(745)						(1,420)						(3,533)
Net unrealized losses on marketable securities, net of tax			—						(30)						(4)						(10)
Total comprehensive income			$	57,545					$	89,659					$	69,847					$	131,675

The accompanying notes are an integral part of the consolidated financial statements.

5

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iROBOT CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(in thousands)

(unaudited)

			Common Stock												Additional Paid-In Capital												Retained Earnings						Accumulated Other Comprehensive Income ("AOCI")						Stockholders’ Equity
			Shares						Value
Balance at July 3, 2021			28,050						$	281					$	216,375											$	557,452					$	7,124					$	781,232
Issuance of common stock under employee stock plans			1						—						27																								27
Vesting of restricted stock units			105						1						(1)																								—
Stock-based compensation															2,073																								2,073
Stock withheld to cover tax withholdings requirements upon restricted stock vesting			(4)						—						(362)																								(362)
Other comprehensive income																																	329						329
Directors' deferred compensation															21																								21
Stock repurchases			(1,198)						(12)						(2,541)												(97,447)												(100,000)
Net income																											57,216												57,216
Balance at October 2, 2021			26,954						$	270					$	215,592											$	517,221					$	7,453					$	740,536

			Common Stock												Additional Paid-In Capital												Retained Earnings						Accumulated Other Comprehensive Income (Loss) ("AOCI")						Stockholders’ Equity
			Shares						Value
Balance at January 2, 2021			28,184						$	282					$	205,256											$	599,389					$	(493)					$	804,434
Issuance of common stock under employee stock plans			122						1						5,156																								5,157
Vesting of restricted stock units			338						3						(3)																								—
Stock-based compensation															16,195																								16,195
Stock withheld to cover tax withholdings requirements upon restricted stock vesting			(45)						—						(5,161)																								(5,161)
Other comprehensive income																																	7,946						7,946
Directors' deferred compensation															64																								64
Stock repurchases			(1,645)						(16)						(5,915)												(144,069)												(150,000)
Net income																											61,901												61,901
Balance at October 2, 2021			26,954						$	270					$	215,592											$	517,221					$	7,453					$	740,536

The accompanying notes are an integral part of the consolidated financial statements.

6

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iROBOT CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(in thousands)

(unaudited)

			Common Stock												Additional Paid-In Capital												Retained Earnings						Accumulated Other Comprehensive Income (Loss) ("AOCI")						Stockholders’ Equity
			Shares						Value
Balance at June 27, 2020			27,998						$	280					$	184,436											$	492,802					$	4,544					$	682,062
Issuance of common stock under employee stock plans			10						—						358																								358
Vesting of restricted stock units			113						1						(1)																								—
Stock-based compensation															9,843																								9,843
Stock withheld to cover tax withholdings requirements upon restricted stock vesting			(1)						—						(29)																								(29)
Other comprehensive loss																																	(3,593)						(3,593)
Directors' deferred compensation															21																								21
Net income																											93,252												93,252
Balance at September 26, 2020			28,120						$	281					$	194,628											$	586,054					$	951					$	781,914

			Common Stock												Additional Paid-In Capital												Retained Earnings						Accumulated Other Comprehensive Income (Loss) ("AOCI")						Stockholders’ Equity
			Shares						Value
Balance at December 28, 2019			28,352						$	284					$	196,455											$	452,321					$	3,009					$	652,069
Issuance of common stock under employee stock plans			122						1						4,047																								4,048
Vesting of restricted stock units			356						3						(3)																								—
Stock-based compensation															20,904																								20,904
Stock withheld to cover tax withholdings requirements upon restricted stock vesting			(46)						—						(1,845)																								(1,845)
Other comprehensive loss																																	(2,058)						(2,058)
Directors' deferred compensation															63																								63
Stock repurchases			(664)						(7)						(24,993)																								(25,000)
Net income																											133,733												133,733
Balance at September 26, 2020			28,120						$	281					$	194,628											$	586,054					$	951					$	781,914

The accompanying notes are an integral part of the consolidated financial statements.

7

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iROBOT CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

			Nine Months Ended
			October 2, 2021						September 26, 2020
Cash flows from operating activities:
Net income			$	61,901					$	133,733
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Depreciation and amortization			23,978						25,705
Gain on equity investment			(26,929)						(43,480)
Stock-based compensation			16,195						20,904
Deferred income taxes, net			(8,190)						10,939
Other			4,496						4,785
Changes in operating assets and liabilities — (use) source
Accounts receivable			(71,368)						(32,572)
Inventory			(173,986)						(61,006)
Other assets			(5,851)						(20,718)
Accounts payable			93,530						46,098
Accrued expenses and other liabilities			(4,551)						12,358
Net cash (used in) provided by operating activities			(90,775)						96,746
Cash flows from investing activities:
Additions of property and equipment			(25,302)						(25,031)
Purchase of investments			(9,641)						(3,729)
Sales and maturities of investments			63,976						10,500
Net cash provided by (used in) investing activities			29,033						(18,260)
Cash flows from financing activities:
Proceeds from employee stock plans			5,157						4,048
Income tax withholding payment associated with restricted stock vesting			(5,161)						(1,845)
Stock repurchases			(150,000)						(25,000)
Net cash used in financing activities			(150,004)						(22,797)
Effect of exchange rate changes on cash and cash equivalents			(2,877)						2,125
Net (decrease) increase in cash and cash equivalents			(214,623)						57,814
Cash and cash equivalents, at beginning of period			432,635						239,392
Cash and cash equivalents, at end of period			$	218,012					$	297,206

The accompanying notes are an integral part of the consolidated financial statements.

8

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iROBOT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1. Description of Business

iRobot Corporation ("iRobot" or the "Company") designs and builds robots that empower people to do more. iRobot's consumer robots help people find smarter ways to clean and accomplish more in their daily lives. The Company's portfolio of floor cleaning robots features proprietary technologies for the connected home and advanced concepts in cleaning, robot-based artificial intelligence, mapping and navigation, machine vision, home understanding, human-robot interaction and physical solutions. Leveraging this portfolio, the Company's engineers are building an ecosystem of robots to help realize the smart home's potential. The Company’s revenue is primarily generated from product sales through a variety of distribution channels, including chain stores and other national retailers, through the Company's own website and app, dedicated e-commerce websites, the online arms of traditional retailers and through value-added distributors and resellers worldwide.

2. Summary of Significant Accounting Policies

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. iRobot has prepared the accompanying unaudited consolidated financial statements in conformity with accounting principles generally accepted in the United States of America ("GAAP").

In the opinion of management, all adjustments necessary to the unaudited interim consolidated financial statements have been made to state fairly the Company's financial position. Interim results are not necessarily indicative of results for the full fiscal year or any future periods. The information included in this Form 10-Q should be read in conjunction with the Company's audited consolidated financial statements and notes thereto included in its Annual Report on Form 10-K for the fiscal year ended January 2, 2021, filed with the Securities and Exchange Commission on February 16, 2021.

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.

Recently Adopted Accounting Standards

In December 2019, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2019-12, "Income Taxes - Simplifying the Accounting for Income Taxes." The ASU simplifies the accounting for income taxes by removing certain exceptions to the general principles as well as clarifying and amending existing guidance to improve consistent application. The amendments to this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. Depending on the amendment, adoption may be applied on the retrospective, modified retrospective or prospective basis. The Company adopted the standard in the first quarter of 2021 and the adoption had no impact on the Company's consolidated financial statements.

Recently Issued Accounting Standards

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.

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 and revenue and expenses. These estimates and judgments include, but are not limited to, revenue recognition, including performance obligations, variable consideration and other obligations such as product returns and incentives; allowance for credit losses; product warranties; valuation of goodwill and acquired intangible assets; valuation of non-marketable equity investments; evaluating loss contingencies; accounting for stock-based compensation including performance-based assessments; and accounting for income taxes and related valuation allowances. The Company bases its estimates and assumptions on historical experience, market participant fair value considerations, projected future cash flows, current conditions, including estimated economic implications of the COVID-19 pandemic and various other factors that the Company believes are reasonable under the circumstances. While there was not a material change to the consolidated financial statements related to these estimates as of and for the nine months ended October 2, 2021, the Company's future assessment of the magnitude and duration of the COVID-19 pandemic as well as other factors, could result in material impacts to the Company's consolidated financial statements in future reporting periods.The extent and continued impact of COVID-19 has been taken into account by management in making the significant assumptions and estimates related to the above. Actual results may differ from the Company’s estimates.

9

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iROBOT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

Credit Losses

The Company is exposed to credit losses primarily through sales of its products. The Company assesses each customer's ability to pay by conducting a credit review which includes consideration of established credit ratings or an internal assessment of the customer's creditworthiness based on an analysis of their financial information when a credit rating is not available. The Company monitors the credit exposure through active review of customer balances. The Company's expected loss methodology for accounts receivable is developed through consideration of factors including, but not limited to, historical collection experience, current customer credit ratings, current and future economic and market conditions and age of the receivable. Although the Company historically has not experienced significant credit losses as it relates to trade accounts receivable, the COVID-19 pandemic has caused uncertainty in some customer accounts. The Company did not have an adjustment to its estimate of credit losses during the three months ended October 2, 2021. The Company recorded a decrease to the reserve and bad debt expense of $2.1 million during the nine months ended October 2, 2021. As of October 2, 2021 and January 2, 2021, the Company had an allowance for credit losses of $2.7 million and $4.8 million, respectively.

Inventory

Inventory is stated at the lower of cost or net realizable value with cost being determined using the first-in, first-out method. The Company writes down its inventory for estimated obsolescence or excess inventory based upon assumptions around market conditions and estimates of future demand. Adjustments to reduce inventory to net realizable value are recognized in cost of revenue and have not been significant for the periods presented. Inventory primarily consists of finished goods at October 2, 2021 and January 2, 2021.

Strategic Investments

The Company holds non-marketable equity securities as part of its strategic investments portfolio. The Company classifies the majority of these securities as equity securities without readily determinable fair values and measures these investments at cost, less any impairment, adjusted for observable price changes. These investments are valued using significant unobservable inputs or data in an inactive market and the valuation requires the Company's judgment due to the absence of market prices and inherent lack of liquidity. The estimated fair value is based on quantitative and qualitative factors including, but not limited to, subsequent financing activities by the investee and projected discounted cash flows. At October 2, 2021 and January 2, 2021, the Company's equity securities without readily determinable fair values totaled $15.1 million and $17.4 million, respectively, and are included in other assets on the consolidated balance sheets.

On July 1, 2020, Teladoc Health, Inc. ("Teladoc") closed on its previously announced acquisition of InTouch Health, of which the Company held non-marketable equity securities. In exchange for its shares of InTouch Health, the Company received 0.2 million shares of Teladoc and recorded a gain of $38.6 million to other income, net during the second quarter of 2020. The Teladoc shares received were subject to time based contractual sales restrictions which expired in January 2021. These shares were accounted for as marketable equity securities and measured at fair value with unrealized gains and losses recognized in other income, net at the end of each reporting period. As a result, the Company entered into an economic hedge in July 2020 to reduce the Company's exposure to stock price fluctuations during the restricted period. During the first quarter of 2021, the Company received net proceeds of $51.5 million related to the sale of Teladoc shares with gross proceeds of $60.1 million, net of settlement payment of $8.6 million for the related economic hedge.

On July 22, 2021, Matterport, Inc. ("Matterport"), of which the Company held non-marketable equity securities, completed a merger with a special purpose acquisition company and began trading on Nasdaq under the symbol "MTTR." Prior to the merger, the Company accounted for the shares in Matterport as equity securities without readily determinable fair value. Upon consummation of the merger, the Company received 1.6 million shares of MTTR and recorded a gain of $20.3 million to other income, net. The post merger Matterport shares received are subject to time based contractual sales restrictions which expire in January 2022. These shares are accounted for as marketable equity securities and measured at fair value with unrealized gains and losses recognized in other income, net at the end of each reporting period. During the three months ended October 2, 2021, the Company recorded gains of $6.7 million associated with marking the shares to fair value. As of October 2, 2021, the shares in MTTR were valued at $29.8 million and are recorded in short term investments on the consolidated balance sheet.

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.

10

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iROBOT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

The following table presents the calculation of both basic and diluted net income per share (in thousands, except per share amounts): 

			Three Months Ended												Nine Months Ended
			October 2, 2021						September 26, 2020						October 2, 2021						September 26, 2020
Net income			$	57,216					$	93,252					$	61,901					$	133,733
Basic weighted-average common shares outstanding			27,413						28,031						27,923						28,084
Dilutive effect of employee stock awards			390						508						552						418
Diluted weighted-average common shares outstanding			27,803						28,539						28,475						28,502
Net income per share - Basic			$	2.09					$	3.33					$	2.22					$	4.76
Net income per share - Diluted			$	2.06					$	3.27					$	2.17					$	4.69

Employee stock awards representing approximately 0.2 million and 0.1 million shares of common stock for the three months ended October 2, 2021 and September 26, 2020, and approximately 0.1 million and 0.2 million shares of common stock for the nine months ended October 2, 2021 and September 26, 2020, respectively, were excluded from the computation of diluted earnings per share as their effect would have been antidilutive.

3. Revenue Recognition

The Company primarily derives its revenue from the sale of consumer robots and accessories. The Company sells products directly to consumers through online stores and indirectly through resellers and distributors. Revenue is recognized upon transfer of control of promised products or services to customers, generally as title and risk of loss pass, in an amount that reflects the consideration the Company expects to receive in exchange for those products or services. Revenue is recognized only to the extent that it is probable that a significant reversal of revenue will not occur and when collection is considered probable. Taxes collected from customers, which are subsequently remitted to governmental authorities, are excluded from revenue. Shipping and handling expenses are considered fulfillment activities and are expensed as incurred.

The Company’s consumer robots are highly dependent on, and interrelated with, the embedded software and cannot function without the software. As such, the consumer robots are accounted for as a single performance obligation, and the revenue is recognized at a point in time when the control is transferred to distributors, resellers or directly to end customers through online stores. For certain consumer robots with Wi-Fi capability ("connected robots"), each sale represents an arrangement with multiple promises consisting of the robot, downloadable free app, cloud services and potential future unspecified software upgrades. The Company has determined that the app, cloud services and potential future unspecified software upgrades represent one promised service to the customer to enhance the functionality and interaction with the robot (referred to collectively as "Cloud Services").

For contracts that contain multiple performance obligations, the transaction price is allocated to each performance obligation based on a relative standalone selling price ("SSP"). The Company estimates SSP for items that are not sold separately, using market data if available or analysis of the cost of providing the products or services plus a reasonable margin. The transaction price allocated to the robots is recognized as revenue at a point in time when control is transferred and when collection is considered probable. The transaction price allocated to the Cloud Services is deferred and recognized on a straight-line basis over the estimated term of the Cloud Services. For contracts with a duration of greater than one year, the transaction price allocated to performance obligations that are unsatisfied as of October 2, 2021 and January 2, 2021 was $17.8 million and $11.5 million, respectively. The Company does not disclose the value of unsatisfied performance obligations for contracts with an original expected duration of one year or less.

The Company’s products generally carry a one-year or two-year limited warranty that promises customers that delivered products are as specified. The Company does not consider these assurance-type warranties as a separate performance obligation and therefore, the Company accounts for such warranties under ASC 460, "Guarantees." During the fourth quarter of 2020, the Company began offering its customers the option to purchase an extended warranty for a fee. Amounts paid for the extended warranty plans are deferred and recognized as revenue on a straight-line basis over the service period.

The Company provides limited rights of returns for direct-to-consumer sales generated through its online stores and certain resellers and distributors. The Company records an allowance for product returns based on specific terms and conditions included in the customer agreements or based on historical experience and the Company's expectation of future returns. In addition, the Company may provide other credits or incentives which are accounted for as variable consideration when estimating the amount of revenue to recognize. Where appropriate, these estimates take into consideration relevant factors such as the Company’s historical experience, current contractual requirements, specific known market events and forecasted inventory level in the channels. Overall, these reserves reflect the Company’s best estimates, and the actual amounts of

11

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iROBOT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

consideration ultimately received may differ from the Company’s estimates. Returns and credits are estimated at the time of sale and updated at the end of each reporting period as additional information becomes available. As of October 2, 2021, the Company has reserves for product returns of $54.9 million and other credits and incentives of $75.3 million. As of January 2, 2021, the Company had reserves for product returns of $64.3 million and other credits and incentives of $142.2 million. Revenue recognized during the three and nine months ended October 2, 2021 and September 26, 2020 related to performance obligations satisfied in a prior period was not material.

Disaggregation of Revenue

The following table provides information about disaggregated revenue by geographical region (in thousands):

			Three Months Ended												Nine Months Ended
			October 2, 2021						September 26, 2020						October 2, 2021						September 26, 2020
United States			$	216,542					$	206,276					$	528,138					$	428,389
EMEA			132,130						114,477						339,918						252,184
Japan			66,823						65,490						154,652						136,215
Other			25,187						26,902						86,831						68,775
Total revenue			$	440,682					$	413,145					$	1,109,539					$	885,563

Contract Balances

The following table provides information about receivables and contract liabilities from contracts with customers (in thousands):

			October 2, 2021						January 2, 2021
Accounts receivable, net			$	240,722					$	170,526
Contract liabilities			21,001						17,700

The Company invoices customers based upon contractual billing schedules, and accounts receivable are recorded when the right to consideration becomes unconditional. Contract liabilities include deferred revenue associated with the Cloud Services and extended warranty plans as well as prepayments received from customers in advance of product shipments. The change in the opening and closing balances of the Company’s contract assets and contract liabilities primarily results from the timing difference between the Company’s performance and the customer’s payment. During the three months ended October 2, 2021 and September 26, 2020, the Company recognized $6.6 million and $1.8 million, respectively, of the contract liability balance as revenue upon transfer of the products or services to customers. During the nine months ended October 2, 2021 and September 26, 2020, the Company recognized $10.5 million and $4.6 million, respectively, of the contract liability balance as revenue upon transfer of the products or services to customers.

4. Leases

The Company's leasing arrangements primarily consist of operating leases for its facilities which include corporate, sales and marketing and research and development offices and equipment under various non-cancelable lease arrangements. For leases with terms greater than 12 months, the Company records the related right-of-use asset and lease obligation at the present value of lease payments over the term. Leases with an initial term of 12 months or less are not recorded on the balance sheet. Lease expense is recognized on a straight-line basis over the lease term. The Company's leases typically include rental escalation clauses, renewal options and/or termination options that are factored into the determination of lease payments when appropriate. The Company does not separate lease and nonlease components of contracts and excludes all variable lease payments from the measurement of right-of-use assets and lease liabilities. The Company's variable lease payments generally include usage based nonlease components. The Company's lease agreements do not contain any residual value guarantees or restrictive covenants.

The Company's existing leases do not provide a readily determinable implicit rate. Therefore, the Company estimates its incremental borrowing rate to discount the lease payments. At October 2, 2021, the Company's weighted average discount rate was 3.58%, while the weighted average remaining lease term was 7.79 years.

12

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iROBOT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

The components of lease expense were as follows (in thousands):

			Three Months Ended												Nine Months Ended
			October 2, 2021						September 26, 2020						October 2, 2021						September 26, 2020
Operating lease cost			$	2,181					$	2,287					$	6,315					$	6,932
Variable lease cost			837						823						2,765						2,827
Total lease cost			$	3,018					$	3,110					$	9,080					$	9,759

Supplemental cash flow information related to leases was as follows (in thousands):

			Three Months Ended												Nine Months Ended
			October 2, 2021						September 26, 2020						October 2, 2021						September 26, 2020
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases			$	2,150					$	2,750					$	6,529					$	7,516
Right-of-use assets obtained in exchange for lease obligations:
Operating leases			$	—					$	744					$	—					$	2,310

Maturities of operating lease liabilities were as follows as of October 2, 2021 (in thousands):

Remainder of 2021			$	1,598
2022			8,561
2023			7,627
2024			6,571
2025			6,600
Thereafter			28,525
Total minimum lease payments			$	59,482
Less: imputed interest			7,985
Present value of future minimum lease payments			$	51,497
Less: current portion of operating lease liabilities (Note 6)			6,291
Long-term lease liabilities			$	45,206

5. Goodwill and Other Intangible Assets

The following table summarizes the activity in the carrying amount of goodwill and intangible assets for the nine months ended October 2, 2021 (in thousands):

			Goodwill						Intangible assets
Balance as of January 2, 2021			$	125,872					$	9,902
Amortization			—						(1,336)
Effect of foreign currency translation			(3,963)						(218)
Balance as of October 2, 2021			$	121,909					$	8,348

13

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iROBOT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

6. Accrued Expenses

Accrued expenses consisted of the following at (in thousands):

			October 2, 2021						January 2, 2021
Accrued manufacturing and logistics cost			$	28,967					$	20,093
Accrued warranty			28,061						24,392
Accrued compensation and benefits			17,471						17,635
Accrued income taxes			10,777						3,806
Accrued bonus			8,617						31,523
Current portion of operating lease liabilities			6,291						6,315
Accrued sales and other indirect taxes payable			5,343						15,480
Derivative liability			3,799						4,268
Accrued other			21,632						7,876
			$	130,958					$	131,388

7. 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 British Pound, Canadian Dollar, Euro and Japanese Yen. The Company uses derivative instruments that are designated in cash flow hedge relationships to reduce or eliminate the effects of foreign exchange rate change on sales. These contracts typically have maturities of three years or less. At October 2, 2021 and January 2, 2021, the Company had outstanding cash flow hedges with a total notional value of $381.5 million and $431.9 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 twelve months or less. At October 2, 2021 and January 2, 2021, the Company had outstanding foreign currency economic hedges with a total notional value of $299.1 million and $192.2 million, respectively.

As described in Note 2, during July 2020, the Company entered into a forward sale contract as an economic hedge to reduce the Company's exposure to stock price fluctuations on one of its marketable equity securities. The contract had a maturity date of January 2021 and was settled during the first quarter of 2021. The total notional value of this economic hedge was $51.5 million at January 2, 2021.

The fair values of derivative instruments are as follows (in thousands):

									Fair Value
			Classification						October 2, 2021						January 2, 2021
Derivatives not designated as hedging instruments:
Foreign currency forward contracts			Other current assets						$	5,658					$	261
Foreign currency forward contracts			Other assets						2,931						—
Foreign currency forward contracts			Accrued expenses						3,171						2,176
Forward sale contract			Other current assets						—						3,904
Derivatives designated as cash flow hedges:
Foreign currency forward contracts			Other current assets						$	3,258					$	362
Foreign currency forward contracts			Other assets						5,639						679
Foreign currency forward contracts			Accrued expenses						628						2,092
Foreign currency forward contracts			Long-term liabilities						591						8,554

14

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iROBOT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

Losses associated with derivative instruments not designated as hedging instruments are as follows (in thousands):

									Three Months Ended												Nine Months Ended
			Classification						October 2, 2021						September 26, 2020						October 2, 2021						September 26, 2020
Loss recognized in income			Other income, net						$	(1,606)					$	(2,232)					$	(11,229)					$	(3,475)

The following tables reflect the effect of derivatives designated as cash flow hedging (in thousands): 

						Gain (loss) recognized in OCI on Derivative (1)
						Three Months Ended												Nine Months Ended
						October 2, 2021						September 26, 2020						October 2, 2021						September 26, 2020
Foreign currency forward contracts						$	6,851					$	(11,230)					$	23,959					$	(7,177)

(1)The amount represents the change in fair value of derivative contracts due to changes in spot rates.

						Gain recognized in earnings on cash flow hedging instruments
						Three Months Ended												Nine Months Ended
						October 2, 2021						September 26, 2020						October 2, 2021						September 26, 2020
						Revenue												Revenue
Consolidated statements of operations in which the effects of cash flow hedging instruments are recorded						$	440,682					$	413,145					$	1,109,539					$	885,563
Gain on cash flow hedging relationships:
Foreign currency forward contracts:
Amount of gain reclassified from AOCI into earnings						$	1,161					$	993					$	1,878					$	4,711

8. Fair Value Measurements

The Company’s financial assets and liabilities measured at fair value on a recurring basis were as follows (in thousands):

			Fair Value Measurements as of October 2, 2021
			Level 1						Level 2 (1)						Level 3
Assets:
Money market funds			$	95,501					$	—					$	—
Marketable equity securities, $23,286 at cost (2)			29,909						—						—
Derivative instruments (Note 7)			—						17,486						—
Total assets measured at fair value			$	125,410					$	17,486					$	—
Liabilities:
Derivative instruments (Note 7)			$	—					$	4,390					$	—
Total liabilities measured at fair value			$	—					$	4,390					$	—

15

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iROBOT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

			Fair Value Measurements as of January 2, 2021
			Level 1						Level 2 (1)						Level 3
Assets:
Money market funds			$	47,529					$	—					$	—
Marketable equity securities, $46,578 at cost			47,576						—						—
Corporate and government bonds, $3,498 at cost			—						3,505						—
Derivative instruments (Note 7)			—						5,206						—
Total assets measured at fair value			$	95,105					$	8,711					$	—
Liabilities:
Derivative instruments (Note 7)			$	—					$	12,822					$	—
Total liabilities measured at fair value			$	—					$	12,822					$	—

(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.

(2)The related unrealized gain recorded in other income, net was $6.6 million for the three months ended October 2, 2021. Marketable equity securities are included in short term investments on the consolidated balance sheet.

9. Stockholders' Equity

Share Repurchase Activity

The Company's Board of Directors approved a stock repurchase program authorizing up to $200.0 million in share repurchases from time to time until September 5, 2021 which was extended until March 31, 2022. As of October 2, 2021, $25.0 million remained available for further repurchase under the program.

On August 2, 2021, the Company entered into an accelerated share repurchase ("ASR") agreement with Wells Fargo Bank, National Association ("Wells Fargo"), under which the Company paid $100.0 million and received an aggregate initial share delivery of 943,285 shares of its common stock, which were immediately retired. In September 2021, Wells Fargo delivered an additional 254,933 shares of the Company's common stock to complete settlement of the ASR agreement. Under this agreement, the Company repurchased a total of 1,198,218 shares of its common stock at an average price of $83.46, totaling $100.0 million during the three months ended October 2, 2021. The final number of shares repurchased was based on the volume-weighted average price of its common stock over the duration of the ASR agreement, less a discount.

On March 11, 2021, the Company entered into a Rule 10b5-1 plan to repurchase $50.0 million of common stock and the Company repurchased 446,954 shares of its common stock at an average price of $111.85, totaling $50.0 million during the second quarter of 2021.

On March 10, 2020, the Company entered into a Rule 10b5-1 plan to repurchase $25.0 million of common stock and the Company repurchased 663,602 shares of its common stock at an average price of $37.65, totaling $25.0 million in March 2020.

10. 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.

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.

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iROBOT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

Accordingly, the Company has no liabilities recorded for these agreements as of October 2, 2021 and January 2, 2021, respectively.

Warranty

The Company provides warranties on most products and has established a reserve for warranty obligations based on estimated warranty costs. The reserve is included as part of accrued expenses (Note 6) in the accompanying consolidated balance sheets.    

Activity related to the warranty accrual was as follows (in thousands):

			Three Months Ended												Nine Months Ended
			October 2, 2021						September 26, 2020						October 2, 2021						September 26, 2020
Balance at beginning of period			$	24,718					$	13,769					$	24,392					$	13,856
Provision			10,913						5,525						31,334						13,395
Warranty usage			(7,570)						(4,633)						(27,665)						(12,590)
Balance at end of period			$	28,061					$	14,661					$	28,061					$	14,661

11. Income Taxes

The Company recorded an income tax expense of $9.9 million and $30.0 million for the three months ended October 2, 2021 and September 26, 2020, respectively. The $9.9 million income tax expense for the three months ended October 2, 2021 resulted in an effective income tax rate of  14.7%. The $30.0 million income tax expense for the three months ended September 26, 2020 resulted in an effective tax rate of 24.3%. The decrease in the effective income tax rate was primarily due to the greater impact of tax benefits, such as the research and development tax credit, on a lower pretax income base.

The Company's 14.7% effective rate of income tax expense for the three months ended October 2, 2021 was lower than the federal statutory tax rate of 21% primarily because of the impact of tax benefit from foreign derived intangible income ("FDII") and research and development tax credits.

The Company recorded an income tax expense of $8.1 million and $39.2 million for the nine months ended October 2, 2021 and September 26, 2020, respectively. The $8.1 million income tax expense for the nine months ended October 2, 2021 resulted in an effective tax rate of 11.5%.  The $39.2 million income tax expense for the nine months ended September 26, 2020 resulted in an effective tax rate of 22.6%. The decrease in the effective income tax rate was primarily due to the recognition of discrete tax benefits related to stock-based compensation as well as the greater impact of tax benefits, such as the research and development income credit, on a lower pretax income base.

The Company's effective income tax rate of 11.5% for the nine months ended October 2, 2021 differed from the federal statutory tax rate of 21% primarily due to the recognition of discrete tax benefits related to stock-based compensation as well as the impact of tax benefits from FDII and research and development tax credits.

12. Industry Segment, Geographic Information and Significant Customers

The Company operates as one operating segment. The Company's consumer robots products are offered to consumers through a variety of distribution channels, including chain stores and other national retailers, through the Company's own website and app, dedicated e-commerce websites, the online arms of traditional retailers, and through value-added distributors and resellers worldwide.

Significant Customers

For each of the three months ended October 2, 2021 and September 26, 2020, the Company generated 26.6% of total revenue from one of its retailers.

For the nine months ended October 2, 2021 and September 26, 2020, the Company generated 25.9% and 26.4% of total revenue, respectively, from one of its retailers.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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 (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 COVID-19 on our business, new product sales, product development and offerings, our consumer robots, our competition, our strategy, our market position, market acceptance of our products, seasonal factors, revenue recognition, our profits, growth of our revenues, composition of our revenues, our cost of revenues, units shipped, average selling prices, the impact of promotional activity and tariffs, the impact of semiconductor chip availability, operating expenses, diversification of our manufacturing supply chain, selling and marketing expenses, general and administrative expenses, research and development expenses, and compensation costs, our projected income tax rate, our credit and letter of credit facilities, our valuations of investments, valuation and composition of our stock-based awards, and liquidity, constitute forward-looking statements and are made under these safe harbor provisions. Some of the forward-looking statements can be identified by the use of forward-looking terms such as "believes," "expects," "may," "will," "should," "could," "seek," "intends," "plans," "estimates," "anticipates," or other comparable terms. Forward-looking statements involve inherent risks and uncertainties, which could cause actual results to differ materially from those in the forward-looking statements. We urge you to consider the risks and uncertainties discussed in greater detail under the heading "Risk Factors" in 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 ended January 2, 2021 in evaluating our forward-looking statements. We have no plans to update our forward-looking statements to reflect events or circumstances after the date of this report. We caution readers not to place undue reliance upon any such forward-looking statements, which speak only as of the date made.

Overview

iRobot is a leading global consumer robot company that designs and builds robots that empower people to do more. Our consumer robots help people find smarter ways to clean and accomplish more in their daily lives. iRobot's portfolio of floor cleaning robots features proprietary technologies for the connected home and advanced concepts in cleaning, robot-based artificial intelligence, mapping and navigation, machine vision, home understanding, human-robot interaction and physical solutions. Leveraging this portfolio, our engineers are building an ecosystem of robots to help realize the smart home’s potential. For more than 30 years, we have been a pioneer and leader in consumer robotics, robotic floor care and robotic artificial intelligence.

As of October 2, 2021, we had 1,343 full-time employees. Since our founding in 1990, we have developed expertise in the disciplines necessary to design, build, sell and support durable, high-performance and cost-effective robots through the close integration of software, electronics and hardware. Our core technologies serve as reusable building blocks that we adapt and expand to create next-generation robotic platforms. We believe that this approach accelerates the time to market, while also reducing the costs and risks associated with product development. These capabilities are amplified by the integration of a range of software-centric capabilities spanning artificial intelligence, home understanding and machine vision technologies that further improve cleaning performance and help personalize the cleaning experience, enabling customers to have greater control over where, when and how our robots clean. We believe that our significant expertise in robot design, engineering, and smart home technologies and targeted focus on understanding and addressing consumer needs, positions us well to capitalize on the anticipated growth in the market for robot-based consumer products.

From September 2018 until April 2020, our Roomba products were subject to Section 301 tariffs. In April 2020, we were granted a temporary exclusion from Section 301 List 3 tariffs by the United States Trade Representative ("USTR"). This exclusion, as extended in August 2020, eliminated the 25% tariff on Roomba products imported from China until December 31, 2020 and entitled us to a refund of approximately $57.0 million in tariffs paid since the date the Section 301 List 3 tariffs were imposed. Effective January 1, 2021, the 25% Section 301 tariff again applies to our Roomba products imported from China. For the three and nine months ended October 2, 2021, the incremental Section 301 tariff cost was $14.1 million and $29.2 million, respectively. We expect this incremental cost will continue to impact our gross profit for the remainder of fiscal 2021. To diversify our manufacturing and help offset the adverse financial impact on our business of the 25% Section 301 tariff, we are focused on scaling the manufacture of our products in Malaysia. We commenced production of our products in Malaysia in late 2019 and we remain on track to have Malaysia manufacturing at scale by the end of 2021.

To continue expanding our business globally and increase our profitability in a highly competitive marketplace, we have continued to make progress on each key element of our strategy: 1) differentiating the iRobot experience; 2) building strong relationships with the consumer; and 3) nurturing the lifetime value of our customer relationships.

We strive to differentiate the iRobot experience through the ongoing innovation of our existing product offerings and by bringing new products and services to market. During the first quarter of 2021, we enhanced the iRobot Genius Home Intelligence Platform ("Genius"), a powerful AI-based robot platform that gives users greater personalization and control over their cleaning robots. In September 2021, we introduced the latest upgrade to the Genius platform and launched our Roomba j7 Series robots featuring PrecisionVision Navigation technology in the U.S. and EMEA. Roomba j7 Series robots, powered by

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Genius, learn how to navigate the home, understand the owner's cleaning preferences and even recognize and avoid specific objects. The Roomba j7 Series with Genius provides greater levels of personalization, object detection and avoidance, new home automations and the ability to get smarter over time as it learns the home environment through the AI capabilities within Genius and receives over-the-air updates, allowing the robot to deliver a more intuitive cleaning experience.

To continue building strong relationships with our consumers worldwide, we are focused on enhancing all aspects of the consumer experience, including investing in our digital marketing and e-commerce capabilities. At the end of the third quarter of 2021, our connected customer base grew 60% from the same period one year ago to 12.5 million customers who have opted in to our digital communications.

We also continued to make important progress in nurturing the lifetime value of our customer relationships. In early April 2021, we introduced our new iRobot H1 handheld vacuum, enabling customers to purchase a complementary vacuum to clean in areas that our Roomba or Braava robots are typically unable to reach. In addition, we are now offering extended warranty plans to customers who purchase our products directly from us. During the third quarter of 2021, the Roomba j7+ joined the Roomba i7+ as one of two Roomba robots available for customers to choose when they join iRobot Select, a subscription-based membership program in which members may pay an initiation fee and a recurring monthly fee to use their robot along with dedicated customer support, automatic accessory replacement services, premium protection services and eligibility for robot upgrades every three years. Since the start of the pandemic over 18 months ago, more consumers are buying our products online. Our direct-to-consumer, or DTC, sales were $39.7 million and $119.7 million, 9.0% and 10.8% of total revenue, for the three and nine months ended October 2, 2021, respectively. DTC sales grew 13.0% and 45.2% during the three and nine months ended October 2, 2021, respectively, compared to the same periods a year ago. We continue to invest in initiatives aimed at increasing the frequency and range of products, services and accessories that customers purchase directly from us.

In addition to the pandemic's positive impact on accelerating demand for a wide range of consumer products including ours, it has also stressed the global supply chain involved in manufacturing these products. More specifically, semiconductor chip suppliers have been unable to keep pace with demand, the cost of raw materials such as resins has risen meaningfully along with oceanic transport and air freight costs. In addition to higher costs, it is also taking longer to transport products, regardless of the mode of transportation. We are taking a range of actions to manage through these supply chain challenges, from entering into longer-term supply agreements, qualifying new suppliers and leveraging our relationships with our contract manufacturers to efficiently export our products. During the third quarter of 2021, ocean transportation and air freight costs rose even higher than anticipated. We expect the higher transportation costs to remain elevated through at least the first three quarters of next year. We will continue to assess and implement measures to mitigate resulting adverse impacts on our operations and financial results.

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Key Financial Metrics

In addition to the measures presented in our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America ("GAAP"), we use the following key metrics, including non-GAAP financial measures, to evaluate and analyze our core operating performance and trends, and to develop short-term and long-term operational plans. A summary of key metrics for the three and nine months ended October 2, 2021, as compared to the three and nine months ended September 26, 2020, is as follows:

			Three Months Ended												Nine Months Ended
			October 2, 2021						September 26, 2020						October 2, 2021						September 26, 2020
			(dollars in thousands, except average gross selling prices)
			(unaudited)
Total Revenue			$	440,682					$	413,145					$	1,109,539					$	885,563
Non-GAAP Gross Profit			$	162,993					$	199,397					$	426,008					$	417,636
Non-GAAP Gross Margin			37.0		%				48.3		%				38.4		%				47.2		%
Non-GAAP Operating Income			$	47,981					$	93,125					$	71,885					$	119,255
Non-GAAP Operating Margin			10.9		%				22.5		%				6.5		%				13.5		%
Total robot units shipped (in thousands)			1,543						1,538						3,945						3,301
Average gross selling prices for robot units			$	322					$	312					$	322					$	311

Use of Non-GAAP Financial Measures

Our non-GAAP financial measures reflect adjustments based on the following items. We exclude these items from our non-GAAP measures to facilitate an evaluation of our current operating performance and comparisons to our past operating performance. These items may vary significantly in magnitude or timing and do not necessarily reflect anticipated future operating activities. In addition, we believe that providing these non-GAAP measures affords investors a view of our operating results that may be more easily compared with our peer companies. These non-GAAP financial measures should not be considered a substitute for, or superior to, financial measures calculated in accordance with GAAP, and the financial results calculated in accordance with GAAP and reconciliations from these results, provided below, should be carefully evaluated.

Amortization of acquired intangible assets: Amortization of acquired intangible assets consists of amortization of intangible assets including completed technology, customer relationships, and reacquired distribution rights acquired in connection with business combinations. Amortization charges for our acquisition-related intangible assets are inconsistent in size and are significantly impacted by the timing and valuation of our acquisitions.

Tariff Refunds: iRobot was granted a Section 301 List 3 Tariff Exclusion in April 2020, which temporarily eliminated tariffs on the Company’s products imported from China until December 31, 2020 and entitled the Company to a refund of all related tariffs previously paid since September 2018. We exclude the refunds for tariff costs expensed during fiscals 2018 and 2019 from our fiscal 2020 non-GAAP measures because those tariff refunds associated with tariff costs incurred in the past have no impact to our current period earnings.

Net Merger, Acquisition and Divestiture (Income) Expense: Net merger, acquisition and divestiture (income) expense primarily consists of transaction fees, professional fees, and transition and integration costs directly associated with mergers, acquisitions and divestitures. It also includes business combination adjustments after the measurement period has ended.

Stock-Based Compensation: Stock-based compensation is a non-cash charge relating to stock-based awards.

IP Litigation Expense, Net: IP litigation expense, net relates to legal costs incurred to litigate patent, trademark, copyright and false advertising infringements, or to oppose or defend against interparty actions related to intellectual property. Any settlement payment or proceeds resulting from these infringements are included or netted against the costs.

Gain/Loss on Strategic Investments: Gain/loss on strategic investments includes fair value adjustments, realized gains and losses on the sales of these investments and losses on the impairment of these investments.

Restructuring and Other: Restructuring charges are related to one-time actions associated with workforce reductions, including severance costs, certain professional fees and other costs directly associated with resource realignments tied to strategic initiatives or changes in business conditions.

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Income tax adjustments: Income tax adjustments include the tax effect of the non-GAAP adjustments, calculated using the appropriate statutory tax rate for each adjustment. We reassess the need for any valuation allowance recorded based on the non-GAAP profitability and have eliminated the effect of the valuation allowance recorded in the U.S. jurisdiction. We also exclude certain tax items, including impact from stock-based compensation windfalls/shortfalls, that are not reflective of income tax expense incurred as a result of current period earnings.

The following table reconciles gross profit, operating income, net income and net income per share on a GAAP and non-GAAP basis for the three and nine months ended October 2, 2021 and September 26, 2020 (dollars in thousands, other than per share data):

			Three Months Ended												Nine Months Ended
			October 2, 2021						September 26, 2020						October 2, 2021						September 26, 2020
GAAP Gross Profit			$	162,754					$	198,841					$	424,674					$	454,808
Amortization of acquired intangible assets			225						225						675						1,695
Stock-based compensation			284						331						929						1,150
Tariff refunds			(270)						—						(270)						(40,017)
Non-GAAP Gross Profit			$	162,993					$	199,397					$	426,008					$	417,636
Non-GAAP Gross Margin			37.0		%				48.3		%				38.4		%				47.2		%
GAAP Operating Income			$	40,498					$	80,994					$	43,845					$	131,052
Amortization of acquired intangible assets			476						481						1,336						2,459
Stock-based compensation			2,073						9,843						16,195						20,904
Tariff refunds			(270)						—						(270)						(40,017)
Net merger, acquisition and divestiture expense (income)			635						—						1,274						(566)
IP litigation expense, net			4,569						1,607						9,292						3,360
Restructuring and other			—						200						213						2,063
Non-GAAP Operating Income			$	47,981					$	93,125					$	71,885					$	119,255
Non-GAAP Operating Margin			10.9		%				22.5		%				6.5		%				13.5		%
GAAP Net Income			$	57,216					$	93,252					$	61,901					$	133,733
Amortization of acquired intangible assets			476						481						1,336						2,459
Stock-based compensation			2,073						9,843						16,195						20,904
Tariff refunds			(270)						—						(270)						(40,017)
Net merger, acquisition and divestiture expense (income)			635						—						1,274						(1,241)
IP litigation expense, net			4,569						1,607						9,292						3,360
Restructuring and other			—						200						213						2,063
Gain on strategic investments			(27,141)						(43,480)						(26,929)						(43,567)
Income tax effect			8,749						11,829						3,066						16,730
Non-GAAP Net Income			$	46,307					$	73,732					$	66,078					$	94,424
GAAP Net Income Per Diluted Share			$	2.06					$	3.27					$	2.17					$	4.69
Dilutive effect of non-GAAP adjustments			(0.39)						(0.69)						0.15						(1.38)
Non-GAAP Net Income Per Diluted Share			$	1.67					$	2.58					$	2.32					$	3.31

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenue and expenses. These estimates and judgments, include but are not limited to, revenue recognition including performance obligations, variable consideration and other obligations such as product returns and incentives; allowance for credit losses; product warranties; valuation of goodwill and acquired intangible assets; valuation of non-marketable equity investments; evaluating loss contingencies; accounting for stock-based compensation including performance-based assessments; and accounting for income taxes and related valuation allowances. We base these estimates and judgments on historical experience, market participant fair value considerations,

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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 ended January 2, 2021.

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
			October 2, 2021						September 26, 2020						October 2, 2021						September 26, 2020
Revenue			100.0		%				100.0		%				100.0		%				100.0		%
Cost of revenue:
Cost of product revenue			63.0						51.8						61.6						48.5
Amortization of acquired intangible assets			0.1						0.1						0.1						0.1
Total cost of revenue			63.1						51.9						61.7						48.6
Gross profit			36.9						48.1						38.3						51.4
Operating expenses:
Research and development			9.1						9.3						10.9						12.6
Selling and marketing			13.4						12.2						16.8						15.4
General and administrative			5.1						6.9						6.5						8.5
Amortization of acquired intangible assets			0.1						0.1						0.1						0.1
Total operating expenses			27.7						28.5						34.3						36.6
Operating income			9.2						19.6						4.0						14.8
Other income, net			6.0						10.2						2.3						4.7
Income before income taxes			15.2						29.8						6.3						19.5
Income tax expense			2.2						7.2						0.7						4.4
Net income			13.0		%				22.6		%				5.6		%				15.1		%

Comparison of Three and Nine Months Ended October 2, 2021 and September 26, 2020

Revenue

			Three Months Ended																								Nine Months Ended
			October 2, 2021						September 26, 2020						Dollar Change						Percent Change						October 2, 2021						September 26, 2020						Dollar Change						Percent Change
									(Dollars in thousands)																								(Dollars in thousands)
Revenue			$	440,682					$	413,145					$	27,537					6.7		%				$	1,109,539					$	885,563					$	223,976					25.3		%

Revenue for the three months ended October 2, 2021 increased $27.5 million to $440.7 million, or 6.7%, from $413.1 million for the three months ended September 26, 2020. The $27.5 million increase in revenue was partially driven by 14.4% growth in sales of our mid and premium tier floor cleaning robots, which contributed to a 3.2% increase in gross average selling price for the three months ended October 2, 2021 compared to the three months ended September 26, 2020. In the three months ended October 2, 2021, international revenue increased $17.3 million, or 8.3%, which primarily reflected 15.4% growth in EMEA and a 2.0% increase in Japan, while domestic revenue increased $10.3 million, or 5.0%. Our DTC revenue growth of 13.0% to $39.7 million, or 9.0% of total revenue, reflected continued expansion of this channel as we invested in enhancing the online buying experience and upgrading our digital marketing capabilities.

Revenue for the nine months ended October 2, 2021 increased $224.0 million to $1,109.5 million, or 25.3%, compared to $885.6 million for the nine months ended September 26, 2020. The $224.0 million increase in revenue was primarily attributable to a 19.5% increase in units shipped and a 3.5% increase in gross average selling price for the nine months ended October 2, 2021 compared to the nine months ended September 26, 2020. The increase in gross average selling price was primarily driven by a 33.7% growth in sales of our mid and premium tier floor cleaning robots. In the nine months ended October 2, 2021, international revenue increased $124.2 million, or 27.2% due primarily to 34.8% growth in EMEA and a 13.5% increase in Japan, while domestic revenue increased $99.7 million, or 23.3%. Our DTC revenue growth of 45.2% to $119.7 million, or 10.8% of total revenue, contributed to these increases.

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Cost of Product Revenue

			Three Months Ended																								Nine Months Ended
			October 2, 2021						September 26, 2020						Dollar Change						Percent Change						October 2, 2021						September 26, 2020						Dollar Change						Percent Change
			(Dollars in thousands)																								(Dollars in thousands)
Cost of product revenue			$	277,703					$	214,079					$	63,624					29.7		%				$	684,190					$	429,060					$	255,130					59.5		%
As a percentage of revenue			63.0		%				51.8		%																61.6		%				48.5		%

Cost of product revenue increased to $277.7 million in the three months ended October 2, 2021, compared to $214.1 million in the three months ended September 26, 2020. The $63.6 million increase in cost of product revenue is due to the 6.7% increase in revenue. In addition, cost of product revenue during the three months ended October 2, 2021 included $14.1 million in tariff costs, whereas last year, we did not have any tariff costs as we were granted temporary exclusion from Section 301 List 3 tariffs. The increase in cost of product revenue was also impacted by higher warranty costs and global supply chain challenges associated with increased oceanic transport and air freight expenses and higher raw materials and component costs associated with limited semiconductor chip availability.

Cost of product revenue increased to $684.2 million in the nine months ended October 2, 2021, compared to $429.1 million in the nine months ended September 26, 2020. The $255.1 million increase in cost of product revenue is due to the 25.3% increase in revenue. In addition, cost of product revenue during the nine months ended October 2, 2021 included $29.2 million in tariff costs, whereas last year, we recognized a benefit of $40.0 million from tariff refunds. The increase in cost of product revenue was also impacted by higher warranty costs and global supply chain challenges associated with increased oceanic transport and air freight expenses and higher raw materials and component costs associated with limited semiconductor chip availability.

Gross Profit

			Three Months Ended																								Nine Months Ended
			October 2, 2021						September 26, 2020						Dollar Change						Percent Change						October 2, 2021						September 26, 2020						Dollar Change						Percent Change
			(Dollars in thousands)																								(Dollars in thousands)
Gross profit			$	162,754					$	198,841					$	(36,087)					(18.1)		%				$	424,674					$	454,808					$	(30,134)					(6.6)		%
Gross margin			36.9		%				48.1		%																38.3		%				51.4		%

Gross margin decreased to 36.9% in the three months ended October 2, 2021, compared to 48.1% in the three months ended September 26, 2020. Gross margin decreased 11.2% driven by Section 301 List 3 tariff costs of $14.1 million included in the three months ended October 2, 2021 compared to no tariff costs during the same period last year. The remainder of the decrease in gross margin was driven by supply chain headwinds with increases in freight and material costs, pricing and promotional activity and higher warranty expense. We expect gross margin pressure to continue over the next few quarters as we anticipate continued elevated costs associated with increased raw materials, oceanic transport and air freight expenses as well as higher component costs associated with limited semiconductor chip availability.

Gross margin decreased to 38.3% in the nine months ended October 2, 2021 compared to 51.4% in the nine months ended September 26, 2020. Gross margin decreased 13.1% driven by Section 301 List 3 tariff costs of $29.2 million included in the nine months ended October 2, 2021, while we recognized a benefit of $40.0 million from tariff refunds during the nine months ended September 26, 2020. The remainder of the decrease in gross margin was mainly driven by supply chain headwinds with increased component costs and transportation fees, pricing and promotional activity and product mix.

Research and Development

			Three Months Ended																								Nine Months Ended
			October 2, 2021						September 26, 2020						Dollar Change						Percent Change						October 2, 2021						September 26, 2020						Dollar Change						Percent Change
			(Dollars in thousands)																								(Dollars in thousands)
Research and development			$	40,262					$	38,613					$	1,649					4.3		%				$	120,859					$	111,929					$	8,930					8.0		%
As a percentage of revenue			9.1		%				9.3		%																10.9		%				12.6		%

Research and development expenses increased $1.6 million, or 4.3%, to $40.3 million (9.1% of revenue) in the three months ended October 2, 2021 from $38.6 million (9.3% of revenue) in the three months ended September 26, 2020. This increase is primarily due to a $2.8 million increase in program-related costs and $3.8 million higher people-related costs

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associated with additional headcount. These increases were offset by lower short-term incentive compensation cost of $4.5 million resulting from changes in assessments driven by supply chain challenges as further discussed elsewhere in this Quarterly Report on Form 10-Q.

Research and development expenses increased $8.9 million, or 8.0%, to $120.9 million (10.9% of revenue) in the nine months ended October 2, 2021 from $111.9 million (12.6% of revenue) in the nine months ended September 26, 2020. This increase is primarily due to a $7.7 million increase in program-related costs and a $7.0 million increase in people-related costs associated with additional headcount offset by lower short-term incentive compensation of $5.2 million resulting from changes in assessments driven by supply chain challenges as further discussed elsewhere in this Quarterly Report on Form 10-Q.

Selling and Marketing

			Three Months Ended																								Nine Months Ended
			October 2, 2021						September 26, 2020						Dollar Change						Percent Change						October 2, 2021						September 26, 2020						Dollar Change						Percent Change
			(Dollars in thousands)																								(Dollars in thousands)
Selling and marketing			$	59,055					$	50,488					$	8,567					17.0		%				$	186,722					$	136,144					$	50,578					37.2		%
As a percentage of revenue			13.4		%				12.2		%																16.8		%				15.4		%

Selling and marketing expenses increased $8.6 million, or 17.0%, to $59.1 million (13.4% of revenue) in the three months ended October 2, 2021 from $50.5 million (12.2% of revenue) in the three months ended September 26, 2020. This increase was primarily attributable to higher marketing spend of $5.9 million associated with increased use of working media to support our new launches and drive sales growth, $4.0 million increase in people-related costs associated with additional headcount as well as $2.0 million higher technology related cost including cloud service and maintenance and support fees as we continue to invest in our digital marketing and e-commerce capabilities. These increases were offset by lower short-term incentive compensation of $2.2 million resulting from changes in assessments driven by supply chain challenges as further discussed elsewhere in this Quarterly Report on Form 10-Q.

Selling and marketing expenses increased $50.6 million, or 37.2%, to $186.7 million (16.8% of revenue) in the nine months ended October 2, 2021 from $136.1 million (15.4% of revenue) in the nine months ended September 26, 2020. This increase was primarily attributable to higher marketing spend of $35.2 million associated with increased used of working media to drive sales growth and new launches, $10.0 million higher people-related costs associated with additional headcount as well as $5.7 million higher technology related cost including cloud service and maintenance and support fees as we continue to invest in our digital marketing and e-commerce capabilities. These increases were offset by lower short-term incentive compensation of $2.5 million resulting from changes in assessments driven by supply chain challenges as further discussed elsewhere in this Quarterly Report on Form 10-Q.

General and Administrative

			Three Months Ended																								Nine Months Ended
			October 2, 2021						September 26, 2020						Dollar Change						Percent Change						October 2, 2021						September 26, 2020						Dollar Change						Percent Change
			(Dollars in thousands)																								(Dollars in thousands)
General and administrative			$	22,688					$	28,490					$	(5,802)					(20.4)		%				$	72,587					$	74,919					$	(2,332)					(3.1)		%
As a percentage of revenue			5.1		%				6.9		%																6.5		%				8.5		%

General and administrative expenses decreased $5.8 million, or 20.4%, to $22.7 million (5.1% of revenue) in the three months ended October 2, 2021 from $28.5 million (6.9% of revenue) in the three months ended September 26, 2020. This decrease is primarily due to lower vesting expectations related to our performance-based stock-based compensation and lower short-term incentive compensation cost of $11.3 million resulting from changes in assessments driven by the supply chain challenges discussed elsewhere in this Quarterly Report on Form 10-Q. This decrease is offset by increases in legal fees of $3.5 million driven by higher intellectual property litigation costs, people-related costs of $1.2 million associated with additional headcount as well as higher consulting services costs of $1.1 million.

General and administrative expenses decreased $2.3 million, or 3.1%, to $72.6 million (6.5% of revenue) in the nine months ended October 2, 2021 from $74.9 million (8.5% of revenue) in the nine months ended September 26, 2020. This decrease is primarily due to lower vesting expectations related to our performance-based stock-based compensation and lower short-term incentive compensation cost of $9.6 million from changes in assessments driven by the supply chain challenges

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discussed elsewhere in this Quarterly Report on Form 10-Q. We also saw a decrease in allowance for credit loss of $7.6 million. These decreases were offset by an increase in legal fees of $6.5 million driven by higher intellectual property litigation costs, an increase in people-related cost of $4.3 million associated with additional headcount, and higher consulting services cost of $1.6 million. During the nine months ended October 2, 2021, the allowance for credit loss decreased $2.1 million as a result of improved financial conditions and credit rating for certain customer accounts. During the nine months ended September 26, 2020, the allowance for credit loss increased by $5.5 million due to concerns about certain customers' ability to successfully navigate the pandemic.

Amortization of Acquired Intangible Assets

			Three Months Ended																								Nine Months Ended
			October 2, 2021						September 26, 2020						Dollar Change						Percent Change						October 2, 2021						September 26, 2020						Dollar Change						Percent Change
			(Dollars in thousands)																								(Dollars in thousands)
Cost of revenue			$	225					$	225					$	—					—		%				$	675					$	1,695					$	(1,020)					(60.2)		%
Operating expense			251						256						(5)						(2.0)		%				661						764						(103)						(13.5)		%
Total amortization expense			$	476					$	481					$	(5)					(1.0)		%				$	1,336					$	2,459					$	(1,123)					(45.7)		%
As a percentage of revenue			0.1		%				0.1		%																0.1		%				0.3		%

The decrease in amortization of acquired intangible assets in the nine months ended October 2, 2021 as compared to the nine months ended September 26, 2020, was primarily related to the acquired technology intangible asset that was fully amortized in the second quarter of 2020.

Other Income, Net

			Three Months Ended																								Nine Months Ended
			October 2, 2021						September 26, 2020						Dollar Change						Percent Change						October 2, 2021						September 26, 2020						Dollar Change						Percent Change
			(Dollars in thousands)																								(Dollars in thousands)
Other income, net			$	26,585					$	42,240					$	(15,655)					(37.1)		%				$	26,139					$	41,837					$	(15,698)					(37.5)		%
As a percentage of revenue			6.0		%				10.2		%																2.3		%				4.7		%

During the three and nine months ended October 2, 2021, other income, net primarily consists of a gain of $20.3 million associated with our Matterport investment when Matterport completed a merger and we received shares in MTTR, and a gain of $6.7 million associated with marking the shares to fair value. During the three and nine months ended September 26, 2020, other income, net primarily consists of a gain of $43.5 million associated with our InTouch Health investment when Teladoc Health, Inc., or Teladoc, acquired InTouch Health and exchanged our shares of InTouch Health for shares of Teladoc during the third quarter of 2020.

Income Tax Expense

			Three Months Ended																								Nine Months Ended
			October 2, 2021						September 26, 2020						Dollar Change						Percent Change						October 2, 2021						September 26, 2020						Dollar Change						Percent Change
			(Dollars in thousands)																								(Dollars in thousands)
Income tax expense			$	9,867					$	29,982					$	(20,115)					(67.1)		%				$	8,083					$	39,156					$	(31,073)					(79.4)		%
Effective income tax rate			14.7		%				24.3		%																11.5		%				22.6		%

We recorded an income tax expense of $9.9 million and $30.0 million for the three months ended October 2, 2021 and September 26, 2020, respectively. The $9.9 million income tax expense for the three months ended October 2, 2021 resulted in an effective income tax rate of 14.7%. 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 decrease in effective tax rate was primarily due to the greater impact of tax benefits, such as the research and development tax credit, on a lower pretax income base.

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Our 14.7% effective rate of income tax expense for the three months ended October 2, 2021 was lower than the federal statutory tax rate of 21% primarily because of the impact of tax benefits from foreign derived intangible income ("FDII") and research and development tax credits.

We recorded an income tax expense of $8.1 million and $39.2 million for the nine months ended October 2, 2021 and September 26, 2020, respectively. The $8.1 million income tax expense for the nine months ended October 2, 2021 resulted in an effective income tax rate of 11.5%. 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 decrease in the effective income tax rate was primarily due to the recognition of discrete tax benefits related to stock-based compensation as well as the greater impact of tax benefits, such as the research and development income credit, on a lower pretax income base.

Our effective income tax rate of 11.5% for the nine months ended October 2, 2021 differed from the federal statutory tax rate of 21% primarily due to the recognition of a discrete tax benefits related to stock-based compensation as well as the impact of tax benefits from FDII and research and development tax credits.

The effective tax rate for interim periods is determined based upon our estimated annual effective tax rate, adjusted for the effect of discrete items arising in that quarter. The impact of such inclusions could result in a higher or lower effective tax rate during a quarter, based upon the geographic mix and timing of our actual earnings or losses versus annual projections.

Liquidity and Capital Resources

At October 2, 2021, our principal sources of liquidity were cash and cash equivalents totaling $218.0 million. Our working capital was $487.3 million as of October 2, 2021, compared to $573.7 million as of January 2, 2021.

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 October 2, 2021 and September 26, 2020, we spent $25.3 million and $25.0 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.

Cash used in operating activities

Net cash used in operating activities for the nine months ended October 2, 2021 was $90.8 million, of which the principal components were the cash outflow of $162.2 million from change in working capital, partially offset by our net income of $61.9 million and non-cash charges of $9.6 million. The change in working capital was driven by increases in inventory of $174.0 million and accounts receivable of $71.4 million. This was partially offset by an increase in accounts payable and accrued liabilities of $89.0 million.

Cash provided by investing activities

Net cash provided by investing activities for the nine months ended October 2, 2021 was $29.0 million. During the nine months ended October 2, 2021, we received $64.0 million from the sales and maturities of our investments while we paid $9.6 million for the purchases of investments. We invested $25.3 million in the purchase of property and equipment, including machinery and tooling for new products and manufacturing expansion in Malaysia.

Cash used in financing activities

Net cash used in financing activities for the nine months ended October 2, 2021 was $150.0 million, which primarily reflects the repurchase of 1,198,218 shares of our common stock for $100.0 million under an accelerated share repurchase agreement during the three months ended October 2, 2021, and the repurchase of 446,954 shares of our common stock for $50.0 million under the stock repurchase program during the second quarter of 2021.

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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 October 2, 2021, we had no outstanding borrowings under our revolving credit facility. The revolving line of credit is available to fund working capital and other corporate purposes. The interest on loans under our credit facility accrues, at our election, at either (1) LIBOR plus a margin, currently equal to 1.0%, based on our ratio of indebtedness to Adjusted EBITDA (the "Eurodollar Rate"), or (2) the lender’s base rate. The lender’s base rate is equal to the highest of (1) the federal funds rate plus 0.5%, (2) the lender’s prime rate and (3) the Eurodollar Rate plus 1.0%. In the event that LIBOR is discontinued as expected in 2023, 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 October 2, 2021, we were in compliance with all covenants under the revolving credit facility.

Lines of Credit

We have an unsecured letter of credit facility with Bank of America, N.A., available to fund letters of credit up to an aggregate outstanding amount of $5.0 million. As of October 2, 2021, 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 250.0 million Japanese Yen. As of October 2, 2021, we had no outstanding balance under the guarantee line of credit. 

Working Capital and Capital Expenditure Needs

We currently have no material cash commitments, except for normal recurring trade payables, expense accruals, capital expenditures and operating leases, all of which we anticipate funding through working capital and funds provided by operating activities. We believe our outsourced approach to manufacturing provides us with flexibility in both managing inventory levels and financing our inventory. We believe our existing cash and cash equivalents, short-term investments, and funds available through our credit facility will be sufficient to meet our working capital and capital expenditure needs over at least the next twelve months. In the event our revenue plan does not meet our expectations, we may eliminate or curtail expenditures to mitigate the impact on our working capital. Our future capital requirements will depend on many factors, including our rate of revenue growth or decline, the expansion or contraction of our marketing and sales activities, the timing and extent of spending to support product development efforts, the timing of introductions of new products and enhancements to existing products, the acquisition of new capabilities or technologies, the continuing market acceptance of our products and services, and the impact of COVID-19 on our business. Moreover, to the extent existing cash and cash equivalents, 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.

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Share Repurchases

Our Board of Directors approved a stock repurchase program authorizing up to $200.0 million in share repurchases from time to time until September 5, 2021 which was extended until March 31, 2022. As of October 2, 2021, $25.0 million remained available for further repurchase under the program.

On August 2, 2021, we entered into an accelerated share repurchase ("ASR") agreement with Wells Fargo Bank, National Association ("Wells Fargo"), under which we paid $100.0 million and received an aggregate initial share delivery of 943,285 shares of our common stock, which were immediately retired. In September 2021, Wells Fargo delivered an additional 254,933 shares of our common stock to complete settlement of the ASR agreement. Under this agreement, we repurchased a total of 1,198,218 shares of our common stock at an average price of $83.46, totaling $100.0 million during the three months ended October 2, 2021. The final number of shares repurchased was based on the volume-weighted average price of our common stock over the duration of the ASR agreement, less a discount.

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 January 2, 2021. Our principal commitments generally consist of obligations under our credit facility, leases for office space and minimum contractual obligations. Other obligations primarily consist of subscription services. There have been no material changes in our contractual obligations and commitments since January 2, 2021.

At October 2, 2021, we had outstanding purchase orders aggregating approximately $494.8 million. The purchase orders, the majority of which are with our contract manufacturers for the purchase of inventory in the normal course of business, are for manufacturing and non-manufacturing related goods and services, and are generally cancellable without penalty. In circumstances where we have determined that we have financial exposure associated with any of these commitments, we record a liability in the period in which that exposure is identified.

Off-Balance Sheet Arrangements

As of October 2, 2021, 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 October 2, 2021 and January 2, 2021, we had outstanding cash flow hedges with a total notional value of $381.5 million and $431.9 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 October 2, 2021 and January 2, 2021, we had outstanding economic hedges with a total notional value of $299.1 million and $192.2 million, respectively.

At October 2, 2021, 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 $42.1 million.

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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 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 the Securities 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.

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Part II. Other Information

Item 1. Legal Proceedings

This information is included in Note 10, 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.

Item 1A. Risk Factors

We operate in a rapidly changing environment that involves a number of risks that could materially affect our business, financial condition or future results, some of which are beyond our control. In addition to the other information set forth in this report, the risks and uncertainties that we believe are most important for you to consider are discussed in Part I, "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the year ended January 2, 2021, which could materially affect our business, financial condition or future results. Additional risks and uncertainties not presently known to us, which we currently deem immaterial or which are similar to those faced by other companies in our industry or business in general, may also impair our business operations. There are no material changes to the Risk Factors described in our Annual Report on Form 10-K for the year ended January 2, 2021, as supplemented by the Risk Factors described in our Quarterly Report on Form 10-Q for the quarter ended July 3, 2021, other than as set forth below:

Significant developments in U.S. trade policies have had, and we expect will continue to have, a material adverse effect on our business, financial condition and results of operations.

The U.S. government has indicated its intent to alter its approach to international trade policy and in some cases to renegotiate, or potentially terminate, certain existing bilateral or multi-lateral trade agreements and treaties with foreign countries. Effective September 24, 2018, the U.S. government implemented a 10% tariff on certain goods imported from China, which include the majority of those imported by the Company. These tariffs were increased to 25% on May 10, 2019 and were slated to further increase to 30% in October 2019 until a last-minute interim deal was reached between the United States and China. Although the United States and China signed a new trade agreement in January 2020, most of the previously-implemented tariffs on goods imported from China remain in place (including the tariffs described above), and uncertainty remains as to the short-term and long-term future of economic relations between the United States and China.

From September 2018 until April 2020, our Roomba products were subject to Section 301 tariffs. On April 24, 2020, we were granted a temporary exclusion from Section 301 List 3 tariffs by the United States Trade Representative ("USTR"). This exclusion, as extended in August 2020, eliminated the 25% tariff on Roomba products until December 31, 2020 and entitled us to a refund of $57.0 million in tariffs paid since the date the Section 301 List 3 tariffs were imposed.

Effective as of January 1, 2021, the 25% Section 301 tariff again applies to our Roomba products imported from China. Although we have begun relocating a meaningful portion of our supply chain from China to Malaysia, we again face compression on our margin on products sold and pricing pressures on our products. The already-implemented, and any additional or increased, tariffs have caused, and may in the future cause, us to further increase prices to our customers which we believe has reduced, and in the future may reduce, demand for our products.

On October 4, 2021, the USTR announced its decision to establish a new process for importers to apply for exclusions from Section 301 tariffs in 549 product categories, including robotic vacuum cleaners. Beginning October 12, 2021, the USTR started accepting comments on whether or not reinstating certain tariff exclusions will impact or result in severe economic harm to companies or other interests of the United States. The USTR will accept comments through December 1, 2021. We have submitted comments prior to the deadline. However, the timing for action by the USTR is uncertain. Therefore, we cannot say definitively when, or even if, iRobot will be granted additional tariff relief on our products still manufactured in China, nor can we guarantee the terms upon which any tariff relief ultimately may be granted.

These tariffs, and other governmental action relating to international trade agreements or policies, have directly or indirectly adversely impacted demand for our products, our costs, customers, suppliers, distributors, resellers and/or the U.S. economy or certain sectors thereof and, as a result, have adversely impacted, and we expect will continue to adversely impact, our business, financial condition and results of operations. It remains unclear what the U.S. or foreign governments will or will not do with respect to tariffs, international trade agreements and policies on a short-term or long-term basis. We cannot predict future trade policy, whether exclusions will be reinstated, or the terms of any renegotiated trade agreements and their impacts on our business. The adoption and expansion of trade restrictions, the occurrence of a trade war, or other governmental action related to tariffs or trade agreements or policies has the potential to further adversely impact demand for our products, our costs,

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our customers, our suppliers, and the U.S. economy, which in turn could further adversely impact our business, financial condition and results of operations.

In response to international trade policy, as well as other risks associated with concentrated manufacturing in China, we have begun relocating a meaningful portion of our supply chain from China to Malaysia. Such relocation activities increase costs and risks associated with establishing new manufacturing facilities.

Surges in demand impacting the cost and availability of transportation have had, and we expect will continue to have, an adverse impact on our business, financial condition and results of operations.

Surges in demand related to COVID-19, as well as other factors, have continued to strain the global supply chain network, which has resulted in carrier-imposed capacity restrictions, carrier delays, and longer lead times. Demand for Chinese imports has caused shipment receiving and unloading backlogs at many U.S. ports that have been unable to keep pace with unprecedented inbound container volume. The situation has been further exacerbated by COVID-19 illness and protocols at many port locations. Due to the backlog and increasing trade imbalance with China, many shipping containers are not being sent back to China, or are being sent to China empty. With continued increases in demand for containers, limited supply and freight vendors bearing the cost of shipping empty containers, the market cost of inbound freight has increased by several multiples compared to calendar year 2020 averages. To the extent that transportation costs and interruptions continue, we may face increased pressure on gross margins, product delivery delays and an inability to fulfill orders for our products.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The following is a summary of our repurchases of our common stock during the three months ended October 2, 2021:

			Total number of Shares Purchased (1)			Average Price Paid per Share			Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2)			Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs
Fiscal month beginning July 4, 2021 and ended July 31, 2021			—			$	—		—			$	125,000,000
Fiscal month beginning August 1, 2021 and ended August 28, 2021			943,285			83.46			943,285			46,000,000
Fiscal month beginning August 29, 2021 and ended October 2, 2021			254,933			83.46			254,933			25,000,000
Total			1,198,218			$	83.46		1,198,218			$	25,000,000

 __________________________

(1)     Consists of shares of our common stock. All repurchases were made in open market transactions and pursuant to our previously-announced stock repurchase program as further discussed below and elsewhere in this Quarterly Report on Form 10-Q.

(2)    As previously disclosed on March 10, 2020, our Board of Directors approved a stock repurchase program authorizing up to $200.0 million in share repurchases through September 2021. Our Board of Directors modified the existing stock repurchase program for the remaining $125.0 million to permit an accelerated share repurchase ("ASR") transaction and extended the authorization until March 31, 2022. On August 2, 2021, we entered into an ASR agreement with Wells Fargo Bank, National Association ("Wells Fargo") to repurchase an aggregate of $100.0 million of our common stock. Pursuant to the ASR agreement, we paid Wells Fargo $100.0 million in August 2021 and received an initial delivery of 943,285 shares of our common stock. In September 2021, we received an additional 254,933 shares upon settlement. The calculation of the average price per share for the period July 4, 2021 to October 2, 2021 in the table above is based solely on the result of dividing the $100.0 million we paid towards the ASR by the total shares received under the plan of 1,198,218.

Item 5. Other Information

10b5-1 Trading Plans

Our policy governing transactions in our securities by our directors, officers, and employees permits our officers, directors, funds affiliated with our directors, and certain other persons to enter into trading plans complying with Rule 10b5-l under the Exchange Act. We have been advised that certain of our officers and directors (including Colin Angle, Chief Executive Officer and Glen Weinstein, EVP and Chief Legal Officer, as well as Mohamad Ali and Deborah Ellinger, each a director of the Company) have entered into trading plans (each a "Plan" and collectively, the "Plans") covering periods after the date of this Quarterly Report on Form 10-Q in accordance with Rule 10b5-l and our policy governing transactions in our securities. Generally, under these trading plans, the individual relinquishes control over the transactions once the trading plan is put into place. Accordingly, sales under these plans may occur at any time, including possibly before, simultaneously with, or immediately after significant events involving the Company.

We anticipate that, as permitted by Rule 10b5-1 and our policy governing transactions in our securities, some or all of our officers, directors and employees may establish trading plans in the future. We intend to disclose the names of our executive officers and directors who establish a trading plan in compliance with Rule 10b5-1 and the requirements of our policy

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governing transactions in our securities in our future quarterly and annual reports on Form 10-Q and 10-K filed with the Securities and Exchange Commission. We undertake no obligation to update or revise the information provided herein.

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Item 6. Exhibits

 

EXHIBIT INDEX

Exhibit Number						Description
10.1*†						Accelerated Share Repurchase Agreement by and between the Registrant and Wells Fargo, National Association, dated August 2, 2021
31.1*						Certification Pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934
31.2*						Certification Pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934
32.1**						Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.SCH*						Inline XBRL Taxonomy Extension Schema Document
101.CAL*						Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB*						Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE*						Inline XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF*						Inline XBRL Taxonomy Extension Definition Linkbase Document
104*						Cover Page Interactive Data File (formatted as inline XBRL with applicable taxonomy extension information contained in Exhibits 101.*)

 __________________________

*			Filed herewith
**			Furnished herewith
†			Certain portions of this exhibit have been omitted pursuant to Item 601(b)(10)(iv) of Regulation S-K because such information is both (i) not material and (ii) information that the Registrant treats as private or confidential.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

			iROBOT CORPORATION
Date: November 4, 2021			By:			/s/ Julie Zeiler
						Julie Zeiler
						Executive Vice President and Chief Financial Officer (Principal Financial Officer)

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