iRobot 2010 Annual Report Download - page 76

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United States, we believe that labor in China is becoming more scarce. Consequently, the labor costs for our home
robots could increase in the future.
Cost of contract revenue includes the direct labor costs of engineering resources committed to funded research
and development contracts, as well as third-party consulting, travel and associated direct material costs. Addi-
tionally, we include overhead expenses such as indirect engineering labor, occupancy costs associated with the
project resources, engineering tools and supplies and program management expenses. For the fiscal years ended
January 1, 2011 and January 2, 2010, cost of contract revenue was 66.9% and 84.5% of total contract revenue,
respectively.
Gross Margin
Our gross margin as a percentage of revenue varies according to the mix of product and contract revenue, the
mix of products sold, total sales volume, the level of defective product returns, and levels of other product costs such
as warranty, scrap, re-work and manufacturing overhead. For the years ended January 1, 2011 and January 2, 2010,
gross margin was 36.3% and 30.5% of total revenue, respectively.
Research and Development Expenses
Research and development expenses consist primarily of:
• salaries and related costs for our engineers;
• costs for high technology components used in product and prototype development; and
• costs of test equipment used during product development.
We have significantly expanded our research and development capabilities and expect to continue to expand
these capabilities in the future. We are committed to consistently maintaining the level of innovative design and
development of new products as we strive to enhance our ability to serve our existing consumer and military markets
as well as new markets for robots. We anticipate that research and development expenses will increase in absolute
dollars for the foreseeable future.
For the fiscal years ended January 1, 2011 and January 2, 2010, research and development expense was
$24.8 million and $14.7 million, or 6.2% and 4.9% of total revenue, respectively.
In addition to our internal research and development activities discussed above, we incur research and
development expenses under funded development arrangements with both governments and other third parties. For
the fiscal years ended January 1, 2011 and January 2, 2010, these expenses amounted to $27.1 million and
$30.8 million, respectively. In accordance with generally accepted accounting principles, these expenses have been
classified as cost of revenue rather than research and development expense. For the years ended January 1, 2011,
January 2, 2010 and December 27, 2008, the combined investment in future technologies, classified as cost of
revenue and research and development expense, was $51.9 million, $45.5 million and $41.5 million, respectively.
Selling, General and Administrative Expenses
Our selling, general and administrative expenses consist primarily of:
• salaries and related costs for sales and marketing personnel;
• salaries and related costs for executives and administrative personnel;
• advertising, marketing and other brand-building costs;
• fulfillment costs associated with direct-to-consumer sales through our on-line store;
• customer service costs;
• professional services costs;
• information systems and infrastructure costs;
30