iRobot 2012 Annual Report Download - page 76

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agreement upon transfer of title and risk of loss to the customer, net of estimated returns, provided that collection is determined
to be reasonably assured and no significant obligations remain. During 2012, we recorded favorable adjustments to our home
robots business revenue resulting from reductions to our defective returns provision that were directly attributable to lower
defective returns experience and contractual modifications limiting our defective returns liability with certain customers.
Revenue from our defense and security robot sales and revenue from funded research and development contracts are
occasionally influenced by the September 30 fiscal year-end of the U.S. federal government. In addition, our revenue can be
affected by the timing of the release of new products and the size and timing of contract awards from defense and other
government agencies. Historically, revenue from consumer product sales has been significantly seasonal, with a majority of our
consumer product revenue generated in the second half of the year (in advance of the holiday season). As a result of the growth
of our international consumer business, which is less seasonal than our domestic consumer business, our consumer product
revenue is currently spread more evenly throughout the year.
Cost of Revenue
Cost of product revenue includes the cost of raw materials and labor that go into the development and manufacture of our
products as well as manufacturing overhead costs such as manufacturing engineering, quality assurance, logistics and warranty
costs. For the fiscal years ended December 29, 2012 and December 31, 2011, cost of product revenue was 57.3% and 57.9% of
total product revenue, respectively. The decrease in cost of product revenue as a percentage of revenue was driven primarily by
unfavorable absorption of our overhead expense against lower revenue, restructuring charges, scrap, rework and excess and
obsolete inventory costs in our defense and security business unit, offset by a shift in our product mix to higher margin home
robot products and favorable adjustments relating to reductions in our international warranty accrual for our home robots
business that were directly attributable to declining warranty cost experience. Raw material costs, which are our most
significant cost items, can fluctuate materially on a periodic basis, although many components have been historically stable.
Additionally, unit costs can vary significantly depending on the mix of products sold. There can be no assurance that our costs
of raw materials will not increase. Labor costs also comprise a significant portion of our cost of revenue. We outsource the
manufacture of our home robots to contract manufacturers in China. While labor costs in China traditionally have been
favorable compared to labor costs elsewhere in the world, including the United States, we believe that labor in China is
becoming more scarce. In addition fluctuations in currency exchange rates could increase the cost of labor. 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. Additionally, 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 December 29, 2012 and December 31, 2011, cost
of contract revenue was 94.9% and 67.9% 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 December 29, 2012 and December 31, 2011, gross margin
was 41.2% and 41.3% of total revenue, respectively. The decrease in margin was driven primarily by unfavorable absorption of
our overhead expense against lower revenue, restructuring charges, scrap, rework and excess and obsolete inventory costs in
our defense and security business unit, offset by product mix to higher margin home robot products, favorable adjustments to
our return provision due to gradual improvement in returns resulting from sustained investment in product quality, and
favorable adjustments relating to reductions in our international warranty accrual for our home robots business that were
directly attributable to declining warranty cost experience.
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 but remain relatively consistent
as a percentage of revenue in the foreseeable future.
For the fiscal years ended December 29, 2012 and December 31, 2011, research and development expense was
$37.2 million and $36.5 million, or 8.5% and 7.8% of total revenue, respectively.