COVID-19 Headwinds Force iRobot to Suspend Its 2021 Robotic Lawnmower Launch
IRobot expects to save $30 million this year by reducing its employee headcount 5% and shelving the planned 2021 launch of its Terra robotic lawnmower, among other spending cuts, said CEO Colin Angle on a Q1 investor call. COVID-19 supply-chain disruptions in March and April necessitated the belt-tightening measures, he said.
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Q1 revenue declined 19% to $193 million, 8% below the low point of its Feb. 5 guidance. Its $14.4 million Q1 operating loss compared unfavorably with a $22.3 million operating profit in the same 2019 quarter.
IRobot’s “inability” to “completely” meet Q1 demand was the “largest factor associated with the shortfall,” said Angle. Supply chain challenges “were unexpectedly complicated by the impact of COVID-19 on our organization, our contract manufacturers and some suppliers,” he said. Chinese factories “did not ramp back up to full capacity until late March” after shutting down completely for much of February, he said. As much of the U.S. went into lockdown in March, some retailers canceled, reduced or deferred product orders, he said.
Revenue in Q2 “will be heavily influenced by the steps that our retailers continue to take to manage their businesses during this pandemic,” said Chief Financial Officer Alison Dean. “We currently expect a Q2 operating loss that would reflect the combination of relatively soft anticipated revenue.”
IRobot expects about $57 million in refunds of the List 3 Section 301 tariffs it paid since the duties took effect in September 2018, including $6.6 million paid in Q1, said Dean. About $10 million of the refundable costs covers product currently in inventory, she said. The Office of the U.S. Trade Representative granted iRobot a tariff exclusion last week on the robotic vacuums it imports from China (see 2004230045). The refunds are expected in several installments this year, said Dean. The exclusion expires Aug. 7.
Management wants to wait and see "how the year plays out" before deciding how to put the financial benefit from the tariff exclusion and refund to best use, said Dean. There's "still a lot of uncertainty in the second half of the year," she said. "Getting the tariff exclusion and the refund is wonderful," but "we are going to carefully assess how and if we might want to deploy that against initiatives in the company versus having it improve the bottom line," she said. "That's work yet to come." Dean departs this week as CFO, replaced Monday by Vice President-Finance Julie Zeiler, who sat in on the call.
The company tracks all Section 301 tariff developments "diligently," said Dean. It knows many of the companies getting exclusions from the List 1 and 2 tariffs "were able to successfully extend their exclusions for up to another year," she said. "We assume that there will be a similar process for List 3 and if so, we’ll seek an extension in due course."
Angle conceded "we're a little in the dark, and there's no stated process," for extending iRobot's tariff exclusion past Aug. 7. With the List 1 and 2 exclusions, companies were informed of their extensions "prior to the expiration of their original exemption," he said. "In many cases, there was not even anything to apply for. If List 3 is handled in a similar fashion, we hope to know prior to the beginning of August as to whether that extension should happen." USTR didn't comment Wednesday.
The company's commitment to "geographical diversification” in its supply chain “remains unchanged,” despite getting the tariff exclusion on Chinese goods, said Angle. “We believe it is a strategic imperative to be manufacturing significant portions of our robots outside of China.” It vowed in February to source a third of its product volume from Malaysia in 2020 (see 2002060037). COVID-19 “slowed our progress,” said Angle Wednesday.
The pandemic confronted iRobot with “pragmatic challenges” in shifting production, said Angle. “First, China was shut down, and then as it opened up, Malaysia shut down. The physics of moving manufacturing have been delayed, but our intention is unchanged.”
It’s about 10-15% costlier sourcing product from Malaysia than from China, said Angle. “It all depends on volume, and how much volume we can move to Malaysia at what rate.” At peak economies of scale, it’s “absolutely” possible to drive down the cost premium to “single digits,” he said. “Could you get to parity” with China? “Probably not.”
Shelving the Terra robotic lawnmower “was a difficult decision,” said Angle. “We believe the market for Terra is very real and exciting, but it was the wrong time. This was, for iRobot, a moment of being very careful with our resources, being very careful with our cash.” Amid COVID-19-induced financial losses, Angle said he was worried most about "the overall intensity of ongoing technology investment that would be required over the coming quarters to continue advancing the product."
IRobot won’t speculate “when you might see Terra in the future,” said Angle. “There are too many unknowns to deal with” during the pandemic, he said: “I don’t want to set any expectations at this point in time.”