2. EXECUTIVE SUMMARY
It is anticipated that iRobot, through the execution of several recommended strategies, will
increase its total revenue to $606M in 2015, from $477M in 2014 and reduce its days in
inventory from 53 in 2014 to 50 in 2015 while maintaining cost of sales at 54% and its cash
at 33% of sales. Achieving these goals will result in a $38M contribution to retained
earnings by the end of 2015.
Several options are evaluated for how to best use the expected $38M surplus. Of these, the
prioritized recommended use of funds is for new product development, specifically the
next general of the Scooba® floor cleaning series. The new product is estimated to deliver a
net value of $58.7M to iRobot within the first 5 years after its launch.
New Product development is critical for iRobot to maintain its competitive position in the
home robot market, in response to increased competitive pressure and changing consumer
demand, and several studies have statistically correlated new product innovation with
the increased market capitalization of the firm.
Forecasted TSR (2015-2016) for iRobot is expected to exceed the minimum required
return, if the successful development and commercialization of the new Scooba® product
occurs by Q1 2016.
3. INCOME STATEMENT AND BALANCE SHEET
KEY GOALS AND STRATEGIES FOR 2015 TO GENERATE SURPLUS FUNDS
iRobot will focus on achieving the following key goals associated with its Income Statement and Balance
Sheet:
December 27,
2014
2015
Forecast
ASSETS
Cash as a % of sales 33% 33%
Avg Collection Period (days)* 47 30
Days Inventory* 53 50
LIABILITIES & EQUITY
Days Payable 58 68
in $M,
except Earnings per Share
December 27,
2014
2015
Forecast
Total Revenue* $557 $613
Cost of Revenue $299 $330
Gross Margin $258 $283
R&D Expense* $69 $79
Selling & Marketing Expense* $86 $98
Net Income $38 $38
Earnings per Share $1.28 $1.28
Income Statement
Balance Sheet
*Prioritized Goals Strategies
Increase R&D Expense as a %
of Sales to 13% (from 12.5% in
2014)
Increase investment in research and
development, as % of sales, in response
to anticipate customer needs and
emergence of new competition.
Increase investment in marketing of
current home robots to protect against
new market entrants (Panasonic) and
facilitate revenue growth.
Increase Selling & Marketing
Expense as a % of Sales to
16% (from 15% in 2014)
Reduce days in inventory from
53 in 2014 to 50 in 2015
Leverage manufacturing flexibility to
accurately manage inventory
Revenue sales growth of10%,
a decrease from 2014 (14%)
due to increased competition
Mostly organic growth, enabled by
increased marketing and focus on
strategic pricing
Reduce average customer
collection period from 47 to
30 days
Revise terms and conditions of sales
Increase Days Payable to
suppliers from 58 days to 68
days.
Integrative negotiations with suppliers;
offer them additional partnership
opportunities.
4. STATEMENT OF CASH FLOW ANALYSIS:
KEY CASH FLOW GOALS & STRATEGIES TO GENERATE FUNDS SURPLUS
Key G o a l s S t r a t e g i e s
Maintain level of PPE
investment at 6% of sales,
while organically growing
sales.
Raise funds via organic sales growth coupled with
strategic pricing. The additional purchases of
equipment purchases will facilitate new product
development, a key strategic objective for iRobot.
Reduce Average Collection
Period from Customers to 30
days (from 40 days in 2014)
Changing terms and conditions of sales to customers.
Increase Days Payable to
Suppliers to 68 days (from
58 days in 2014).
Renegotiate contracts with vendors to increase days
payable.
Inventory: $3M cash
inflow
Leveraging outsourced manufacturing to result in
improved flexibility and responsiveness to customer
demand.
C a s h F l ow E f f e c t s
Accounts Receivable:
$20.7M cash outflow
Reduce Days in Inventory to
50 (from 55 in 2014)
Accounts Payable: $1M
cash inflow
Property, Plant &
Equipment: $5.5M cash
outflow
$ 3 8 M c o n t r i b u t i o n t o Re t a i n e d E a r n i n g s i s f o r e c a s t e d
Note: this goal comes with risk of hurting supplier relationships,
however, alternative ways to keep supplier relationships healthy
are being evaluated and include increased purchases and co-
licensing agreements. Negotiations are underway.
5. OPTION EVALUATION: HOW COULD IROBOT
USE THE EXPECTED $38M SURPLUS IN 2016?
Benefit is unlikely to outweigh
foregone benefits of investing in
other ways.
Option Costs / Risks
Decrease future interest
expenses
Reduce product development
timelines and access new
innovation sooner
Holding emergency cash is not
necessary, due to contract
manufacturing and lower capital
expenditure
Pay down debt
Hold as emergency cash
Appropriate for
acquisition
Use funds for R&D
Use funds for Marketing
Breakthrough innovations will
improve competitive position
Enable sales of consumer
product portfolio; strengthen
competitive position
Liquidity; improved
responsiveness to industry
changes
Potential Benefit Rating
Negligible
Longer-term return on investment;
potential for technical or
commercial failure
Enable sales of consumer
product portfolio
Benefits > costs Costs = benefits Costs < benefits
Rating
Key
6. OPTION EVALUATION: HOW COULD IROBOT
USE THE EXPECTED $38M SURPLUS IN 2016?
Increasingly more difficult to
measure ad effectiveness,
return.
Option Costs / Risks
Improve sales of household
robots
Additional source of income
May not directly improve sales
Use funds for Advertising
Use to refine sales
channels (e-commerce)
Make External Investments
Pay Dividends
Buy back stock
Please shareholders; attract
new shareholders to stock
Return value to shareholders
Will enable an improved e-
commerce platform
Potential Benefit Rating
Against long-term objectives
to use extra earnings for
internal business
development
Motivation for buy-backs is
often questioned by analysts
Returns on investments are not
guaranteed; may be less than
foregone benefits of internal
fund use
Benefits > costs Costs = benefits Costs < benefits
Rating
Key
7. WHAT IF IROBOT SHOULD REQUIRE NEW
FUNDS IN THE FUTURE?
iRobot currently has no material cash commitments, and is expected
to have a surplus of funds by end of 2015
Recurring trade payables, expense accruals and operating leases are
to be funded through working capital, funds provided by operating
activities and existing working capital line of credit.
If iRobot should need additional funds in the future, these funds may
be raised in several ways that have been ranked in terms of
appropriateness for the company:
1. New product commercialization / strategic pricing
2. Reducing % of revenue held as cash
3. Reducing Inventory Days
4. Reducing average customer collection period
5. Increasing short term debt
Existing Line of Credit:
• Maximum credit: $5M
• Current credit used: $3.5M
• Interest: 1.5% p.a.
• Coverage ration >4
(assumed)
8. PRIORITIZED OPTIONS FOR RAISING FUTURE
FUNDS: VIABLE METHODS AVAILABLE TO IROBOT
Option Comment
New Product
Commercialization
• New product launches will add additional revenue streams
• Stock price increases are statistically correlated with new product commercialization 1, 2, 3
Strategic Pricing • Cursory competitive analysis has revealed that iRobot products are priced below the median
among competitors, although brand and innovative quality is superior. There is room to implement
strategic pricing, which is the most impactful profit lever.
Hold less cash • iRobot is currently holding 33% of its sales as cash; given 2015 sales growth, this resulted in a
$19M outflow of cash.
• Given ongoing focus and improvements in managing working capital, coupled with its flexible
manufacturing and distribution systems, iRobot does not need to retain this much in cash
• If iRobot were to hold 31% of revenue as cash in 2015, this would release $15M in cash.
Reduce level of inventory • Each 2 day reduction in inventory days will result in $1.8M cash inflow
Reduce Average Account
Collection Period
• For each day of reduction, there is a $1.7M inflow of cash
• A shortened collection period may turn some consumers away
Increase short term debt • Depends on interest rate; viable but not preferred for iRobot
Internal
Equity
AssetManagementDebt
Takeaway: Second to new product commercialization and strategic pricing initiatives, iRobot’s next best methods for raising
funds is to hold less cash, which would generate the most significant cash flow, followed by other asset management options.
Taking on additional short term debt is viable, but only after other options have been exhausted, due to the uncertainty
involved with interest rates and terms.
Higherpriority
9. $38M EXPECTED SURPLUS, RECOMMENDED TO
BE USED FOR NEW PRODUCT INNOVATION
Anticipated outcome: $38.3M contribution to
retained earnings by end of 2015
By executing the
aforementioned
strategies, iRobot will
achieve the following:
Increase total revenue
to $606M in 2015,
from $477M in 2014
Reduced days in
inventory to 50 in
2015, from 53 in 2014,
through flexible
inventory management
per contract
manufacturing
Maintained current cost
of sales at 54% and
maintained 2014 level
of liquidity by holding
33% of sales as cash
and cash equivalents
$7.7M
$15.3M
$15.3M Internal R&D
Acquire new
technology
Strategic
marketing
R e c o m m e n d e d U s e o f S u r p l u s F u n d s
In the face of increasing competition, including sizeable new entrants such as Panasonic and a multitude of
low-cost providers in China now in the home robotics industry, new product innovation is critical for iRobot’s
long-term success. Therefore, iRobot should invest the anticipate surplus of funds in the development or
acquisition of new technologies.
$30.6M (80%)
of forecasted
surplus should be
used for new
product
innovation,
including internal
development and
external scouting
and acquisition
of new
technologies.
K e y
T a k e -
a w a y
10. CAPITAL BUDGETING ANALYSIS:
NEW PRODUCT DEVELOPMENT: “SCOOBA® DOOBA”
iRobot has a unique opportunity to apply new, innovative technology to
improve the performance of its current home cleaning robots.
New product concept is called Scooba® Dooba and is built around a
revolutionary new shape that can clean more surfaces than the Rulo®.
“The Rulo triangle shape was developed
after years of R&D into vacuum
cleaners,” a Panasonic spokeswoman
said via email. “It is the first in the
industry to be equipped with a fully
fledged v-shaped brush.” 1
RationaleOpportunity
Successful
commercialization
of new product is
estimated to deliver
a net value of
$58.7M to iRobot
within the first 5
years after it is
launched.
iRobot faces new competitive pressure from Panasonic Corp
• Panasonic launched MC-RS1 Rulo in Jan 2015, which holds distinct cleaning
advantage over the circular Roomba line
Home cleaning robot industry is highly competitive
iRobot depends on new product innovation to withstand competition
Scooba® Dooba
iRobot
$(30)
$(20)
$(10)
$-
$10
$20
$30
$40
$50
$60
$70
$80
2015 2016 2017 2018 2019 2020
Forecasted Project Cash Flows
Operating Cash Flows Total Balance Sheet Changes Net Cash Flows
11. CAPITAL BUDGETING ANALYSIS
KEY ASSUMPTIONS AND RISKS OF THE MODEL
Key Assumptions Risks
• 125K unit sales, YR1
• Annual sales growth peak
7% in YR2
• $850/unit list price
• No sunk costs
• No R&D expense required,
as patent to be purchased
from 3rd party
• 2% sales cannibalization
• Potential opportunity costs
valued at $1M/yr
Mitigation
• If sales volume <58K units
in YR1, then NPV will be
negative
• If market doesn’t accept
$850 list, and list is
lowered to $388/unit, then
NPV will be negative
• If sales cannibalization
exceeds 10%, then NPV
will be negative
• Conduct customer
interviews (VOC) &
execute strategic marketing
communications
• Conduct pricing focus
groups, competitive
analyses, implement an
effective go-to-market
strategy
• Conduct customer
interviews (VOC) and focus
groups
Scooba® Dooba
iRobot
New product development risks can be significantly reduced through specific strategies, increasing
the likelihood that the project will add the anticipate value to iRobot.
12. STRATEGIC PRICING
RATIONALE FOR THE $850 SUGGESTED LIST PRICE
Scooba® Dooba
iRobot
$816 Base Value*
*est. based on
market data
$800
Competition
List price
Average
$808
Est. Value of “Best Alternative” (US) Quantify “value-add” features Add together
Additional Features
Value
Added USD
Aesthetic appeal 1.51% $12.20
Ability to reach more corners 2.35% $18.99
Improved pivoting and turn radius 1.33% $10.75
TOTAL VALUE ADDED $41.94
Note: Value quantified as %,
based on results from consumer
focus group product evaluation
Scooba® Dooba unit
List Price
$808 + $42 =
$850
13. NEW PRODUCT INNOVATION IMPROVES
COMPANY STOCK PRICE
Studies have found that new product innovation, whether through internal development or
external acquisition, improves company stock price
“Total market returns to an
innovation product are $643M,
more than 13 times the $49M
average innovation event return”
• Smaller firms consistently receive
larger returns than larger firms
• Announcement of commercialization
activities generates the highest
return, since they get the most
attention from the press.
• Returns of firms announcing an
innovation have a negative impact
on competitors’ returns
• Initial market return is first
measurable 4.7 years ahead of
launch of new product
Source: A. Sood & G. Tellis (2009) Do
Innovations Really Pay Off? Marketing
Science. 28 (3): 442-456
“Firm market cap is typically influenced by
commercialization success of new technologies”
Source: K.B. Saji & S.S. Mishra (2011) Antecedents and consequences of
technology acquisition intent: empirical evidence from global high-tech industry.
Journal of Strategic Marketing 20 (2): 165-183.
“Early mover acquirers who realize superior stock returns
are those that conduct acquisitions in related industries,
during industry expansionary phases and finance their
acquisition…. with cash”
• Although returns of acquiring companies are typically negative,
early-movers (the first firms to acquire, ahead of wave of
acquisitions within an industry) experience larger combined returns.
Source: Carrow, Heron, Saxton (2004) Do early birds get the return?: An empiracle
investigation of early-move advantages in acquisitions. Strategic Management
Journal. 25: 563-585..
Key Takeaway: Several empirical studies have statistically correlated new product innovation with
increased company stock performance. Thus, the recommended use of $38M surplus for new product
development or acquisition will improve iRobot’s stock performance and increase its market value.
14. PROJECTED IROBOT STOCK-BASED
COMPENSATION: 2015 AND BEYOND
• Stock options are granted as compensation
to employees across most levels of iRobot
• Terms and conditions of granted options
are determined by a committee within the
board of directors.
• The company anticipates future stock-
based compensation expenses as follows:
Option iRobot’s General Terms & Conditions
Exercise price Based on NASDAQ closing price on issue date
Vesting Period 1-5 years
Expiration 7-10 years from issue date
Value Fair value estimated using Black-Scholes option-
pricing model with assumptions for options granted
in FY2014:
• Risk-free rate: 1.65%-1.69%
• Expected life: 3.91-4.00 years
• Expected Volatility: 52.8%-56.0%
$2.9
$2.2
$1.1
$0.4
$-
$0.5
$1.0
$1.5
$2.0
$2.5
$3.0
$3.5
2015 2016 2017 2018
$M
Forecasted Stock-Based Compensation Expenses
15. WHAT MAKES IROBOT STOCK PRICE CHANGE?
IRBT share price is very sensitive to earnings reports, as is typical for the tech sector!
It is not sensitive to other company news (share repurchase program).
3/19/15: Stock price unchanged following announcement of share repurchase program
by iRobot Corporation under which, the company will repurchase up to $50 million worth
of its shares. The program will commence in May, 2015.1
2/5/15: Stock price dropped to lowest price in the past year on: -8.6%
drop to$29.20/share directly followed Q4 and full-year 2014 financial
results and modest Q1 forecasts which were below analyst expectations3,4
4/22/14: Stock price soared to $40 (close to
52-week high of $42) following release of Q1
results that exceeded expectations2
16. IROBOT’S VOLATILITY IS ABOVE-AVERAGE
WHEN EARNINGS REPORTS ARE RELEASED
Technology stocks are among the most volatile:
Average iRBT
price change is
12.09% on
earnings report
days, more
volatile than
the average
technology
stock.
17. IROBOT STOCK PRICE EVALUATION
RELATIVE TO STAKEHOLDER COMPANIES
CompetitorsInfluencingFactors
Lockheed Martin
• Earnings reports
• New government contracts
• Successful tests for new innovative
technology for US Navy
Company Stock Ticker
Starting Share
Price
(2/1/ 2015)
Current Share
Price
(5/1/15)
Change in
Equity
Quarterly
dividends HPR EAR
iRobot IRBT $31.55 $32.39 $84.0 not paid 2.66% 11%
Lockheed Martin LMT $187.94 $189.00 $106.0 $1.50 0.56% 2%
Helen of Troy Corp. HELE $76.11 $89.11 $1,300.0 not paid 17.08% 88%
Jarden JAH $48.74 $51.61 $287.0 not paid 5.83% 25%
Panasonic PCRFY $11.43 $14.32 $289.0 not paid 25.28% 146%
Electrolux AB ELUXY $61.43 $59.69 -$174.0 not paid -2.83% -11%
Helen of Troy Corporation
• 4/28/15 increase correlated with Q4,
FY14 Earnings release: Revenue
+21%
iRobot Suppliers
Kin Yat Industrial Co. Ltd
Jetta Company Ltd
Gem City Engineering Corp.
Contract manufacturers in
China and US; all are
privately owned.
Jarden
• 3/11/15: New home canning product
release correlated with rise in stock
price
Panasonic
• 4/29/15 earnings call reporting
favorable FY14 results is correlated
with jump in stock price
• 4/18/15: announcement of multi-year
alliance for new product innovation
correlated with stock price increase
Electrolux AB
• 4/8/15: Fall in price correlated with
sudden departure of US division head
Long Positions
18. ELUXY anticipated to decrease due to likelihood of negative product revenue cash flows in Q1, a
result of sustained period of new product innovation and increased competition.
SHORT POSITION ON ELECTROLUX AB (ELUXY)
3 month Holding
Period Return
Annualized Return
37.21%
254%
100 Shares at $61.43
Assets Liabilities & Equity
$6,143.00 (Proceeds from Sale) $6,143.00 (Liability)
$3,071.50 (Margin Deposit) 3071.50 (Equity; 50% Margin)
Total $9,214.50 $9,214.50
Balance Sheet on 2/2/15
100 Shares at $50.00
Assets Liabilities & Equity
$6,143 (Proceeds from Sale) $5,000 (Liability)
$3,071.50 (Margin Deposit) $4,214.50 (Equity; 50% Margin)
Total $9,214.50 $9,214.50
Balance Sheet on 5/2/15
ELUXY is not expected to pay dividends during the holding period, per Yahoo Finance
19. Forecasted TSR > Min Required TSR
IRBT FORECASTED TOTAL SHAREHOLDER RETURN
(5/1/15-5/1/16) IS LIKELY TO EXCEED REQUIRED RETURN
Forecasted Total Shareholder Return (TSR)
Influencing Factors
Stock price is expected to increase in 2016, given a new
product launch scheduled for Q1. Currently Scooba®
Dooba concept is showing a high probability of technical
and commercial success, and project schedule calls for
launch in Jan, 2016.
iRobot will continue active scouting of new technology, and
positive press releases relating to progression or
acquisition of new technology will prompt demand for
IRBT stock, causing price to increase.
5/1/2015 5/1/2016 TSR
$32.39 $42.00 29.67%
Potential Stock Price and Resultant TSR (5/1/16):
$32.00 $33.00 $34.00 $35.00 $36.00 $37.00 $38.00 $39.00 $40.00 $41.00 $42.00 $43.00
-1.20% 1.88% 4.97% 8.06% 11.15% 14.23% 17.32% 20.41% 23.49% 26.58% 29.67% 32.76%
Scenario Model
Different stock price increases will yield various
shareholder total returns. Potential TSRs are modeled
below:
Estimated Minimum Required TSR:
rf 1.36%
Beta 1.9
Rm 14.75%
CAPM 26.80%
IRBT forecasted TSR will exceed minimum required
TSR, if stock price increases to $42.00 or higher as
of May 1, 2016. With proper execution of
strategies, this price is considered very attainable.
Takeaway
20. CONCLUSIONS
1. Increase R&D Expense as a % of
Sales to 13% (from 12.5% in 2014)
2. Increase Selling & Marketing
Expense as a % of Sales to 16%
(from 15% in 2014)
3. Reduce days in inventory from 53
in 2014 to 50 in 2015
4. Reduce average customer
collection period from 47 to 30
days
5. Increase Days Payable to suppliers
from 58 days to 68 days.
6. Maintain level of PPE investment
at 6% of sales, while organically
growing sales.
“The market for robots is highly competitive,
rapidly evolving and subject to changing
technologies, shifting customer needs and
expectations and the
likely increased introduction of new products. Our
ability to remain competitive will depend to a
great extent upon our ongoing performance in the
areas of product development and customer
support.”
-iRobot 2014 10K
$38M contribution to retained earnings by
the end of 2015.
Use surplus funds for new product
development and additional marketing
support, which will increase company stock
price and likely result in TSR above required
TSR.
Key Goals:
Expected Result:
Recommendation:
22. A NOTE ON IROBOT CAPITAL STRUCTURE
iRobot does not have long term debt in the form of bonds.
Long term debt is in the form of leases and legal obligations only.
Therefore, iRobot is considered to be an all equity financed
company.
iRobot cost of capital is estimated as follows:
rf 1.36%
Beta 1.9
Rm 14.75%
CAPM 26.80%
Estimated cost of debt and weight 0% 0%
Estimated cost of equity and weight 27% 100%
Tax Rate 32%
Estimated WACC 27%
WeightCost
