iRobot 2014 Annual Report Download - page 99

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26
Cost of Revenue
Cost of 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, warranty,
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 27, 2014, December 28, 2013 and December 29, 2012, total cost
of revenue was 53.7%, 54.6% and 55.4% of total revenue, respectively. 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, they have recently been increasing. 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.
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 27, 2014, December 28, 2013 and December 29,
2012, gross margin was 46.3%, 45.4% and 44.6% of total revenue, respectively.
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;
• costs of test equipment used during product development; and
• occupancy and other overhead costs.
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, such as telepresence. 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 27, 2014, December 28, 2013 and December 29, 2012, research and development
expense was $69.4 million, $63.6 million and $57.1 million, or 12.5%, 13.1% and 13.1% of total revenue, respectively.
Selling, General and Administrative Expenses
Our selling, general and administrative expenses consist primarily of:
• salaries and related costs for sales and marketing personnel;
• salaries and related costs for executives and administrative personnel;
• advertising, marketing and other brand-building costs;
• customer service costs;
• professional services costs;
• information systems and infrastructure costs;
• travel and related costs; and
• occupancy and other overhead costs.
We anticipate that selling, general and administrative expenses will increase in absolute dollars but remain relatively
consistent, or decrease slightly, as a percentage of revenue in the foreseeable future as we continue to build the iRobot brand.
For the fiscal years ended December 27, 2014, December 28, 2013 and December 29, 2012 selling, general and
administrative expense was $135.5 million, $124.9 million and $112.1 million, or 24.3%, 25.6% and 25.7% of total revenue,
respectively.
Fiscal Periods
We operate and report using a 52-53 week fiscal year ending on the Saturday closest to December 31. Accordingly, our
Form 10-K