iRobot 2012 Annual Report Download - page 58

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We believe that we have built a trusted, recognized brand by providing high-quality robots. We believe that customer
word-of-mouth has been a significant driver of our brand's success to date, which can work very well for products that inspire a
high level of user loyalty because users are likely to share their positive experiences. Our grass-roots marketing efforts focus on
feeding this word-of-mouth momentum and we use public relations as well as advertising to promote our products.
Our innovative robots and public relations campaigns have generated extensive press coverage. In addition, iRobot and
our consumer robots have won several awards and our inclusion among the first-tier partners on the U.S. Army's Brigade
Combat Team Modernization program has greatly enhanced our brand and awareness among defense and security customers.
Through these efforts, we have been able to build our brand, and we expect that our reputation for innovative products and
customer support will continue to play a significant role in our growth and success.
Manufacturing
Our core competencies are the design, development and marketing of robots. Our manufacturing strategy is to outsource
non-core competencies, such as the production of our robots, to third-party entities skilled in manufacturing. By relying on the
outsourced manufacture of both our consumer and military robots, we can focus our engineering expertise on the design of
robots.
Manufacturing a new product requires a close relationship between our product designers and the manufacturing
organizations. Using multiple engineering techniques, our products are introduced to the selected production facility at an
early-development stage and the feedback provided by manufacturing is incorporated into the design before tooling is finalized
and mass production begins. As a result, we believe that we can significantly reduce the time required to move a product from
its design phase to mass production deliveries, with improved quality and yields.
We outsource the manufacturing of our consumer products to six contract manufacturers, each of which manufactures at
a single plant in China. We outsource the manufacturing of our defense and security robots to three contract manufacturers, all
of which are located in the United States.
Research and Development
We believe that our future success depends upon our ability to continue to develop new products and product accessories,
and enhancements to and applications for our existing products. For the years ended December 29, 2012, December 31, 2011
and January 1, 2011, our research and development expenses were $37.2 million, $36.5 million and $24.8 million, respectively.
In addition to our internal research and development activities, for the years ended December 29, 2012, December 31, 2011 and
January 1, 2011, we have incurred research and development expenses under funded development arrangements with defense
and security third parties of $16.8 million, $26.5 million and $27.1 million, respectively. Of our total research and development
spending in 2012, 2011 and 2010, approximately 29.6%, 40.2% and 50.4%, respectively was funded by government-sponsored
research and development contracts. For the years ended December 29, 2012, December 31, 2011 and January 1, 2011, the
combined investment in future technologies, classified as cost of revenue and research and development expense, was $54.0
million, $63.0 million and $51.9 million, respectively. We intend to continue our investment in research and development to
respond to and anticipate customer needs, and to enable us to introduce new products over the next few years that will continue
to address our existing and adjacent market sectors.
Our research and development is conducted by teams dedicated to particular projects. Our domestic research and
development efforts are primarily located at our headquarters in Bedford, Massachusetts and our special projects engineering
offices in San Luis Obispo and Pasadena, California.
Our research and development efforts for our next-generation products are supported by a variety of sources. Our next-
generation defense products are predominately supported by U.S. governmental research organizations. Government funding is
provided to further the development of robot technologies with the expectation that if the projects result in the development of
technically viable prototypes, the government will purchase multiple production units for future use in the field. The
government funding that we receive allows us to accelerate the development of multiple technologies. While the
U.S. government retains certain rights to military projects that it has funded, such as the right to use inventions and disclose
technical data relating to those projects without constraining the recipient's use of that data, we retain ownership of patents and
know-how and are generally free to develop other commercial products, both consumer and industrial, utilizing the
technologies developed during these projects. The rights which the government retains, however, may allow it to provide use of
patent rights and know-how to others, and some of the know-how might be used by these third parties for their own
development of consumer and industrial products. Similarly, expertise developed while designing consumer products is used in
designing products for defense and security applications. We also work with strategic collaborators to develop industry-specific
technologies.
Competition
The market for robots is highly competitive, rapidly evolving and subject to changing technologies, shifting customer
needs and expectations and the likely increased introduction of new products. We believe that a number of established