iRobot 2009 Annual Report Download - page 59

Form 10-K
We base our current and future expense levels on our internal operating plans and sales forecasts, including
forecasts of holiday sales for our consumer products. A significant portion of our operating expenses, such as
research and development expenses, certain marketing and promotional expenses and employee wages and salaries,
do not vary directly with sales and are difficult to adjust in the short term. As a result, if sales for a quarter,
particularly the final quarter of a fiscal year, are below our expectations, we might not be able to reduce operating
expenses for that quarter and, therefore, we would not be able to reduce our operating expenses for the fiscal year.
Accordingly, a sales shortfall during a fiscal quarter, and in particular the fourth quarter of a fiscal year, could have a
disproportionate effect on our operating results for that quarter or that year. As a result of these factors, we may
report operating results that do not meet the expectations of equity research analysts and investors. This could cause
the trading price of our common stock to decline.
If critical components of our products that we currently purchase from a small number of suppliers
become unavailable, we may incur delays in shipment, which could damage our business.
We and our outsourced manufacturers obtain hardware components, various subsystems, raw materials and
batteries from a limited group of suppliers, some of which are sole suppliers. We do not have any long-term
agreements with these suppliers obligating them to continue to sell components or products to us. Our reliance on
these suppliers involves significant risks and uncertainties, including whether our suppliers will provide an adequate
supply of required components of sufficient quality, will increase prices for the components and will perform their
obligations on a timely basis. If we or our outsourced manufacturers are unable to obtain components from third-
party suppliers in the quantities and of the quality that we require, on a timely basis and at acceptable prices, we may
not be able to deliver our products on a timely or cost-effective basis to our customers, which could cause customers
to terminate their contracts with us, reduce our gross margin and seriously harm our business, results of operations
and financial condition. Moreover, if any of our suppliers become financially unstable, we may have to find new
suppliers. It may take several months to locate alternative suppliers, if required, or to re-tool our products to
accommodate components from different suppliers. We may experience significant delays in manufacturing and
shipping our products to customers and incur additional development, manufacturing and other costs to establish
alternative sources of supply if we lose any of these sources. We cannot predict if we will be able to obtain
replacement components within the time frames that we require at an affordable cost, or at all. In particular, the
prices of ABS plastic and nickel (for batteries) have fluctuated greatly and we cannot provide assurance that the
prices of these components will not materially impact our results of operations.
Our products are complex and could have unknown defects or errors, which may give rise to claims
against us, diminish our brand or divert our resources from other purposes.
Our robots rely on the interplay among behavior-based artificially intelligent systems, real-world dynamic
sensors, user-friendly interfaces and tightly-integrated, electromechanical designs to accomplish their missions.
Despite testing, our new or existing products have contained defects and errors and may in the future contain
defects, errors or performance problems when first introduced, when new versions or enhancements are released, or
even after these products have been used by our customers for a period of time. These problems could result in
expensive and time-consuming design modifications or warranty charges, delays in the introduction of new
products or enhancements, significant increases in our service and maintenance costs, exposure to liability for
damages, damaged customer relationships and harm to our reputation, any of which could materially harm our
results of operations and ability to achieve market acceptance. Our quality control procedures relating to the raw
materials and components that it receives from third-party suppliers as well as our quality control procedures
relating to its products after those products are designed, manufactured and packaged may not be sufficient. In
addition, increased development and warranty costs, including the costs of any mandatory or voluntary recall or
product upgrades, could be substantial and could reduce our operating margins. Moreover, because military robots
are used in dangerous situations, the failure or malfunction of any of these robots, including our own, could
significantly damage our reputation and support for robot solutions in general. The existence of any defects, errors,
or failures in our products could also lead to product liability claims or lawsuits against us. A successful product
liability claim could result in substantial cost, diminish our brand and divert management’s attention and resources,
which could have a negative impact on our business, financial condition and results of operations.
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