XML 25 R7.htm IDEA: XBRL DOCUMENT v2.3.0.15
Summary of Significant Accounting Policies
9 Months Ended
Oct. 01, 2011
Summary of Significant Accounting Policies [Abstract] 
Summary of Significant Accounting Policies
2. Summary of Significant Accounting Policies
     Basis of Presentation
     The accompanying consolidated financial statements include those of iRobot and its subsidiaries, after elimination of all intercompany accounts and transactions. iRobot has prepared the accompanying consolidated financial statements in conformity with accounting principles generally accepted in the United States of America.
     The accompanying financial data as of October 1, 2011 and for the three and nine months ended October 1, 2011 and October 2, 2010 has been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations. However, the Company believes that the disclosures are adequate to make the information presented not misleading. The year-end balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States. These consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and the notes thereto included in its Annual Report on Form 10-K for the fiscal year ended January 1, 2011, filed with the SEC on February 18, 2011.
     In the opinion of management, all adjustments necessary to state fairly its statement of financial position as of October 1, 2011 and results of operations and cash flows for the periods ended October 1, 2011 and October 2, 2010 have been made. The results of operations and cash flows for any interim period are not necessarily indicative of the operating results and cash flows for the full fiscal year or any future periods.
     Use of Estimates
     The preparation of these financial statements in conformity with accounting principles generally accepted in the United States requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and disclosure of contingent assets and liabilities. On an ongoing basis, management evaluates these estimates and judgments, including those related to revenue recognition, sales returns, bad debts, warranty claims, inventory reserves, valuation of investments, assumptions used in valuing stock-based compensation instruments and income taxes. The Company bases these estimates on historical and anticipated results, and trends and on various other assumptions that the Company believes are reasonable under the circumstances, including assumptions as to future events. These estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. By their nature, estimates are subject to an inherent degree of uncertainty. Actual results may differ from the Company’s estimates.
     Fiscal Year-End
     The Company operates and reports using a 52-53 week fiscal year ending on the Saturday closest to December 31. Accordingly, the Company’s fiscal quarters end on the Saturday that falls closest to the last day of the third month of each quarter.
     Revenue Recognition
     The Company derives its revenue from product sales, government research and development contracts, and commercial research and development contracts. The Company sells products directly to customers and indirectly through resellers and distributors. The Company recognizes revenue from sales of home robots under the terms of the customer agreement upon transfer of title and risk of loss to the customer, net of estimated returns, provided that collection is determined to be reasonably assured and no significant obligations remain. Sales to resellers are typically subject to agreements allowing for limited rights of return for defective products only, rebates and price protection. The Company has typically not taken product returns except for defective products. Accordingly, the Company reduces revenue for its estimates of liabilities for these rights at the time the related sale is recorded. The Company makes an estimate of sales returns for products sold by resellers directly based on historical returns experience and other relevant data. The Company’s international distributor agreements do not currently allow for product returns and, as a result, no reserve for returns is established for this group of customers. The Company has aggregated and analyzed historical returns from resellers and end users which form the basis of its estimate of future sales returns by resellers or end users. When a right of return exists, the provision for these estimated returns is recorded as a reduction of revenue at the time that the related revenue is recorded. If actual returns differ significantly from its estimates, such differences could have a material impact on the Company’s results of operations for the period in which the returns become known. The estimates for returns are adjusted periodically based upon historical rates of returns. The estimates and reserve for rebates and price protection are based on specific programs, expected usage and historical experience. Actual results could differ from these estimates.
     Under cost-plus-fixed-fee (“CPFF”) type contracts, the Company recognizes revenue based on costs incurred plus a pro rata portion of the total fixed fee. Costs incurred include labor and material that are directly associated with individual CPFF contracts plus indirect overhead and general and administrative type costs based upon billing rates submitted by the Company to the Defense Contract Management Agency (“DCMA”). Annually, the Company submits final indirect billing rates to DCMA based upon actual costs incurred throughout the year. These final billing rates are subject to audit by the Defense Contract Audit Agency (“DCAA”) which can occur several years after the final billing rates are submitted and may result in material adjustments to revenue recognized based on estimated final billing rates. As of October 1, 2011, fiscal years 2007, 2008, 2009 and 2010 are open for audit by DCAA. In the situation where the Company’s anticipated actual billing rates will be lower than the provisional rates currently in effect, the Company records a cumulative revenue adjustment in the period in which the rate differential is identified. Revenue on firm fixed price (“FFP”) contracts is recognized using the percentage-of-completion method. For government product FFP contracts revenue is recognized as the product is shipped or in accordance with the contract terms. Costs and estimated gross margins on contracts are recorded as revenue as work is performed based on the percentage that incurred costs compare to estimated total costs utilizing the most recent estimates of costs and funding. Changes in job performance, job conditions, and estimated profitability, including those arising from final contract settlements and government audit, may result in revisions to costs and income and are recognized in the period in which the revisions are determined. Since many contracts extend over a long period of time, revisions in cost and funding estimates during the progress of work have the effect of adjusting earnings applicable to past performance in the current period. When the current contract estimate indicates a loss, a provision is made for the total anticipated loss in the current period. Revenue earned in excess of billings, if any, is recorded as unbilled revenue. Billings in excess of revenue earned, if any, are recorded as deferred revenue.
     Accounting for Share-Based Payments
     The Company accounts for share-based payments to employees, including grants of employee stock options and awards in the form of restricted shares and restricted stock units by establishing the fair value of each option grant using the Black-Scholes option- pricing model and the fair value of awards based on stock price at the time of grant. The fair value of share-based payments is recorded by the Company as a charge against earnings. The Company recognizes share-based payment expense over the requisite service period of the underlying grants and awards. The Company’s share-based payment awards are accounted for as equity instruments.
     Net Income Per Share
     The following table presents the calculation of both basic and diluted net income per share:
                                 
    Three Months Ended     Nine Months Ended  
    October 1, 2011     October 2, 2010     October 1, 2011     October 2, 2010  
Net income
  $ 14,052     $ 7,032     $ 29,553     $ 18,514  
 
                       
Weighted-average shares outstanding
    26,902       25,428       26,568       25,293  
Dilutive effect of employee stock options and restricted shares
    1,038       1,052       1,255       1,026  
 
                       
Diluted weighted-average shares outstanding
    27,940       26,480       27,823       26,319  
 
                       
Basic income per share
  $ 0.52     $ 0.28     $ 1.11     $ 0.73  
Diluted income per share
  $ 0.50     $ 0.27     $ 1.06     $ 0.70  
     Potentially dilutive securities representing approximately 0.5 million and 1.2 million shares of common stock for the three month periods ended October 1, 2011 and October 2, 2010, respectively, and approximately 0.3 million and 1.0 million shares of common stock for the nine month periods ended October 1, 2011 and October 2, 2010, respectively, were excluded from the computation of diluted earnings per share for these periods because their effect would have been antidilutive.
     Income Taxes
     Deferred taxes are determined based on the difference between the book and tax basis of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. Valuation allowances are provided, if based upon the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.
     The Company recorded a tax provision of $1.4 million and $0.7 million for the three month periods ended October 1, 2011 and October 2, 2010, respectively. The $1.4 million provision for the three month period ended October 1, 2011 was based upon a projected 2011 effective income tax rate of 31% offset by a net tax benefit of $3.5 million resulting from the completion in the period of a comprehensive evaluation of the Company’s research and development credit and domestic manufacturing deductions. The $0.7 million provision for the three month period ended October 2, 2010 was based upon a projected 2010 effective tax rate of 38% offset by a $2.3 million one-time benefit associated with the full release of the Company’s valuation allowance relating to state deferred tax assets.
     The Company recorded a tax provision of $9.0 million and $7.8 million for the nine month periods ended October 1, 2011 and October 2, 2010, respectively. The $9.0 million provision for the nine month period ended October 1, 2011 was based upon a projected 2011 effective income tax rate of 31% offset by a net tax benefit of $3.5 million resulting from the completion in the period of a comprehensive evaluation of the Company’s research and development credit and domestic manufacturing deductions. The $7.8 million provision for the nine month period ended October 2, 2010 was based upon a projected 2010 effective tax rate of 38% offset by a $2.3 million one-time benefit associated with the full release of the Company’s valuation allowance relating to state deferred tax assets.
     The decrease in the projected effective tax rates from 38% in 2010 to 31% in 2011 was primarily due to the benefit of research and development tax credits in 2011 as compared to fiscal 2010 when this credit was retroactively re-enacted into law in the fourth quarter, higher domestic manufacturing deductions in 2011, and lower anticipated state tax, net of federal benefit due to state tax credits and state tax law changes.
     During the three month period ended October 1, 2011, the Company recorded a $1.3 million reserve for uncertain tax positions due to the Company’s assessment of certain aspects of its research and development credits. The Company had not previously recorded any reserves for uncertain tax positions. Consequently, the balance of the reserve for uncertain tax positions at October 1, 2011 was $1.3 million. The Company includes interest and penalties related to unrecognized tax benefits within its provision for income taxes.
     Comprehensive Income
     Comprehensive income includes unrealized gains (losses) on certain investments. The differences between net income and comprehensive income were as follows:
                                 
    Three Months Ended     Nine Months Ended  
    October 1, 2011     October 2, 2010     October 1, 2011     October 2, 2010  
Net income, as reported
  $ 14,052     $ 7,032     $ 29,553     $ 18,514  
Unrealized gains (losses) on investments, net of tax
    (97 )     87       (2 )     164  
 
                       
Total comprehensive income
  $ 13,955     $ 7,119     $ 29,551     $ 18,678  
 
                       
     Fair Value Measurements
     The authoritative guidance for fair value establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.
     The Company’s assets measured at fair value on a recurring basis at October 1, 2011, were as follows:
                         
    Fair Value Measurements as of October 1, 2011  
Description   Level 1     Level 2     Level 3  
    (In thousands)  
Assets:
                       
Money Market Funds
  $ 70,445     $ —     $ —  
U.S. Government bonds
    —       2,509       —  
Corporate bonds
    —       11,153       —  
 
                 
Total assets measured at fair value
  $ 70,445     $ 13,662     $ —  
 
                 
     The Company’s assets measured at fair value on a recurring basis at January 1, 2011, were as follows:
                         
    Fair Value Measurements as of January 1, 2011  
Description   Level 1     Level 2     Level 3  
            (In thousands)          
Assets:
                       
Money Market Funds
  $ 5,090     $ —     $ —  
U.S. Government bonds
    —       2,504       —  
Corporate bonds
    —       11,424       —  
 
                 
Total assets measured at fair value
  $ 5,090     $ 13,928     $ —  
 
                 
     In each table above, the bond investments are valued based on observable market inputs as of the Company’s reporting date and are included in Level 2 inputs. In determining the fair value of our Level 2 bond investments, the Company considers the appropriateness of a model and assumptions used by a pricing vendor to price the investments. The pricing vendor’s model relies on a comprehensive multi-dimensional relational model that uses standard inputs including benchmark yields, reported trades, broker/dealer quotes, issue spreads, two-sided markets, benchmark securities, bids, offers and reference data including market research publications. The bond investments are recorded at fair value and marked-to-market at the end of each reporting period and realized and unrealized gains and losses are included in comprehensive income (loss) for that period. The fair value of the Company’s bond investments are included in short term investments in its consolidated balance sheet.
     Goodwill
     Goodwill is recorded as the difference, if any, between the aggregate consideration paid for an acquisition and the fair value of the net tangible and intangible assets acquired. The Company tests goodwill for impairment at the reporting unit level (operating segment or one level below an operating segment) annually or more frequently if the Company believes indicators of impairment exist. The performance of the test involves a two-step process. The first step of the impairment test involves comparing the fair values of the applicable reporting units with their aggregate carrying values, including goodwill. If the carrying amount of a reporting unit exceeds the reporting unit’s fair value, the Company performs the second step of the goodwill impairment test to determine the amount of impairment loss. The second step of the goodwill impairment test involves comparing the implied fair value of the affected reporting unit’s goodwill with the carrying value of that goodwill.
     Recent Accounting Pronouncements
     In May 2011, the Financial Accounting Standards Board (“FASB”) issued amended guidance on fair value measurement and related disclosures. The new guidance clarifies the concepts applicable for fair value measurement of non-financial assets and requires the disclosure of quantitative information about the unobservable inputs used in a fair value measurement. This guidance will be effective for reporting periods beginning after December 15, 2011, and will be applied prospectively. The Company does not anticipate a material impact on its consolidated financial statements as a result of the adoption of this amended guidance.
     In June 2011, the FASB amended its accounting guidance on the presentation of other comprehensive income (OCI) in an entity’s financial statements. The amended guidance eliminates the option to present the components of OCI as part of the statement of changes in shareholders equity and provides two options for presenting OCI: in a statement included in the income statement or in a separate statement immediately following the income statement. The amendments do not change the guidance for the items that have to be reported in OCI or when an item of OCI has to be moved into net income. For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company does not anticipate that its adoption of this guidance will have a material impact on its consolidated results.
     In September 2011, the FASB issued updated guidance on the periodic testing of goodwill for impairment. The updated guidance gives companies the option to perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. The amendment is intended to reduce the cost and complexity of the annual goodwill impairment test by providing entities an option to perform a qualitative assessment to determine whether further impairment testing is necessary. The updated accounting guidance is effective for fiscal years beginning after December 15, 2011, with early adoption permitted. The Company currently believes its adoption of this guidance will not impact its consolidated financial statements.
     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 the impact of recently issued standards, which are not yet effective, will not have a material impact on the Company’s consolidated financial statements upon adoption.