iRobot 2011 Annual Report Download - page 62

Form 10-K
We depend on the U.S. federal government for a significant portion of our revenue, and any reduction in
the amount of business that we do with the U.S. federal government would negatively impact our operating
results and financial condition.
For the years ended December 31, 2011 and January 1, 2011, we derived 36.1% and 38.4% of our total
revenue, respectively, directly or indirectly, from the U.S. federal government and its agencies. Any reduction in
the amount of revenue that we derive from a limited number of U.S. federal government agencies without an
offsetting increase in new sales to other customers would have a material adverse effect on our operating results.
U.S. Government programs in which we participate, or in which we may seek to participate in the future, must
compete with other programs for consideration during our nation’s budget formulation and appropriation
processes, and may be affected by changes in general economic conditions. Budget decisions made in this
environment may have long-term consequences for our size and structure and that of the defense industry. It is
possible that one or more of our programs will be reduced, extended, or terminated. Reductions in our existing
programs, unless offset by other programs and opportunities, could adversely affect our ability to grow our sales
and profitability.
Specifically, the defense industry in which we operate is dependent upon the level of equipment
expenditures by the armed forces of countries throughout the world, and especially those of the United States,
which represents a significant portion of world-wide defense expenditures. The war on terror has increased the
level of equipment expenditures by the U.S. armed forces. This level of spending may not be sustainable in light
of government spending priorities by the U.S. and the winding down of U.S. armed forces operations in Iraq and
Afghanistan. In addition, as a result of the failure of the Joint Select Committee on Deficit Reduction (Super
Committee) to agree on a deficit reduction plan, mandatory reductions in defense are required under the Budget
Control Act of 2011. The extent and scope of these cuts is difficult to assess at this time. Any decrease in demand
for new equipment or use of existing equipment will likely result in a decrease in demand of our products and
services, and correspondingly, our revenues, thereby adversely affecting our business, financial condition and
results of operations.
Our participation in specific major U.S. federal government programs is critical to both the development
and sale of our military robots. For example, in the years ended December 31, 2011 and January 1, 2011, 63.2%
and 62.7% of our total contract revenue was derived from our participation in the U.S. Army’s BCTM program,
respectively. The BCTM program was terminated in 2011 and additional work related to this program is
currently funded on an interim basis. Future sales of our military robots will depend largely on our ability to
secure contracts with the U.S. military under its robot programs. We expect that there will continue to be only a
limited number of major programs under which U.S. federal government agencies will seek to fund the
development of, or purchase, robots. Our business will, therefore, suffer if we are not awarded, either directly or
indirectly through third-party contractors, government contracts for robots that we are qualified to develop or
build. In addition, if the U.S. federal government or government agencies terminate or reduce the related prime
contract under which we serve as a subcontractor, revenues that we derive under that contract could be lost,
which would negatively impact our business and financial results. Moreover, it is difficult to predict the timing of
the award of government contracts and our revenue could fluctuate significantly based on the timing of any such
awards.
Even if we continue to receive funding for research and development under these contracts, there can be no
assurance that we will successfully complete the development of robots pursuant to these contracts or that, if
successfully developed, the U.S. federal government or any other customer will purchase these robots from us.
The U.S. federal government has the right when it contracts to use the technology developed by us to have robots
supplied by third parties. Any failure by us to complete the development of these robots, or to achieve successful
sales of these robots, would harm our business and results of operations. Our business and results of operations
could be negatively affected by significant changes in the policies and spending priorities of governments and
government agencies. Many of our government customers are subject to stringent budgetary constraints and our
continued performance under these contracts, or award of additional contracts from these agencies, could be
jeopardized by spending reductions or budget cutbacks at these agencies.
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