iRobot 2012 Annual Report Download - page 78

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our ability to estimate were to change significantly from those experienced in the past, incremental reductions or increases to
revenue may result based on this new experience.
Under cost-plus research and development contracts, we recognize revenue based on costs incurred plus a pro-rata
portion of the total fixed fee. Costs and estimated gross margins on contracts are recorded as work is performed based on the
percentage that incurred costs bear to estimated total costs utilizing the most recent estimates of costs and funding. We
recognize revenue on firm fixed price (FFP) contracts 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. 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 recorded or recognized, as the case may be, 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, 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 Stock-Based Awards
We recognized $4.6 million of stock-based compensation expense during the fiscal year ended December 29, 2012 for
stock options. The unamortized fair value as of December 29, 2012 associated with these grants was $10.8 million with a
weighted-average remaining recognition period of 2.54 years.
The risk-free interest rate is derived from the average U.S. Treasury constant maturity rate, which approximates the rate
in effect at the time of grant, commensurate with the expected life of the instrument. The dividend yield is zero based upon the
fact that we have never paid and have no present intention to pay cash dividends. Prior to 2010, the expected term calculation
was based upon the simplified method provided under the relevant authoritative guidance. During 2010, we began to rely solely
on company specific historical data to calculate the expected term. Given our initial public offering in November 2005 and the
resulting short history as a public company, we could not rely solely on company specific historical data for purposes of
establishing expected volatility. Consequently, prior to 2010, we performed an analysis that included company specific
historical data combined with data of several peer companies with similar expected option lives to develop expected volatility
assumptions. During 2010, we began to rely solely on company specific historical data for purposes of establishing expected
volatility.
Based upon the above assumptions, the weighted average fair value of each stock option granted for the fiscal year ended
December 29, 2012 was $13.23.
During the fiscal year ended December 29, 2012, the Company recognized $6.4 million of stock-based compensation
associated with restricted stock units. Unamortized expense associated with restricted stock units at December 29, 2012, was
$17.9 million.
We have assumed a forfeiture rate for all stock options, restricted stock awards and restricted stock-based units granted
subsequent to the Company’s initial filing of its Form S-1 with the SEC. In the future, we will record incremental stock-based
compensation expense if the actual forfeiture rates are lower than estimated and will record a recovery of prior stock-based
compensation expense if the actual forfeitures are higher than estimated.
Accounting for stock-based awards requires significant judgment and the use of estimates, particularly surrounding
assumptions such as stock price volatility and expected option lives to value equity-based compensation.
Accounting for Income Taxes
Deferred taxes are determined based on the difference between the financial statement 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.
We monitor the realization of our deferred tax assets based on changes in circumstances, for example, recurring periods
of income for tax purposes following historical periods of cumulative losses or changes in tax laws or regulations. Our income
tax provision and our assessment of the ability to realize our deferred tax assets involve significant judgments and estimates. In
fiscal 2012, as part of the accounting for our acquisition of Evolution Robotics, Inc., we recorded a valuation allowance of $2.7
million related to certain state tax attributes of Evolution Robotics, Inc. At December 29, 2012, we have total deferred tax
assets of $30.6 million offset by a valuation allowance of $2.7 million.
Warranty
We typically provide a one-year warranty (with the exception of European consumer products which typically have a
two-year warranty period and our defense and security spares which typically have a warranty period of less than one year)
against defects in materials and workmanship and will either repair the goods, provide replacement products at no charge to the
customer or refund amounts to the customer for defective products. We record estimated warranty costs, based on historical