Pandemic Delaying IRobot’s Malaysia Transition to ‘Well Into 2021,’ Says CEO
IRobot anticipates “going back to a world” of 25% Section 301 tariffs on Chinese-sourced goods once its List 3 tariff exclusion expires Dec. 31, said CEO Colin Angle on a Q3 call Wednesday. The pandemic delayed iRobot’s “original plans” to shift most U.S.-bound production to Malaysia by the end of 2020 to reduce or eliminate its Chinese tariff exposure (see 1910230024), instead pushing the Malaysia transition “well into 2021,” he said. The stock closed 13% lower at $83.48, a day after reaching a 52-week high of $98.55.
Sign up for a free preview to unlock the rest of this article
Export Compliance Daily combines U.S. export control news, foreign border import regulation and policy developments into a single daily information service that reliably informs its trade professional readers about important current issues affecting their operations.
The company's Malaysia investments are “finite,” said Angle. “By the end of 2021, we will have the vast majority of product coming into North America manufactured efficiently in Malaysia. What starts the year as a headwind ends the year reversed as a tailwind.” The “dynamics” of product shipments will mean that most of the goods sold in 2021 will still face 25% tariff exposure, he said. “We’ll be able to talk to the state of maturation of our non-Chinese manufacturing capabilities through the year, but it’s going to be late in the year, and largely 2022, before those tariff costs that are reimposed on Jan. 1 are reduced in their impact.”
IRobot continues to “make progress moving to Malaysia,” said Angle. “The physics of the tariff policies are what they are. We’re just trying to be very clear in communicating how that’s going to play out.” Under the List 3 exclusion, Customs and Border Protection by the end of Q3 refunded iRobot about 60% of its $60 million tariff costs, said Chief Financial Officer Julie Zeiler. It expects to receive the balance over the next three quarters, but the timing is at CBP’s “discretion,” she said.
The company is “committed to Malaysia,” even if the tariffs were to disappear under a Biden administration, said Angle. “We believe that geographic diversification is critical for a number of different reasons. Malaysia makes a ton of sense. We’re invested in making that our second geography of manufacturing.” IRobot's April 22 tariff exclusion originally was valid through Aug. 7 (see 2004230045), but later extended to year-end.
Work and learning from home helped drive 43% Q3 revenue growth at iRobot, including a 75% U.S. sales increase, said Angle. “The pandemic has impacted individuals and families in profound ways with the home becoming a primary hub for work, education, exercise, entertainment and more.”
IRobot took part in its sixth straight Prime Day event last week, said Angle. “Despite the change in Prime Day from its usual timing in early July, it was a solid event for us,” with Amazon highlighting the Roomba robotic vacuum as “one of its top-selling deals,” he said. The company will report Prime Day results with its Q4 earnings in early February. Amazon was 27% of iRobot’s Q3 revenue, said Zeiler. “We are cautiously optimistic for a strong fourth quarter,” she said, but “it remains to be seen how the pandemic, an uncertain economic environment and the shifting of an event like Prime Day from July to mid-October will influence the holiday gift-giving season.”
The company’s 2020 revenue expectations “have steadily improved” since lockdowns spiked in late April, said Zeiler. IRobot now expects 2020 revenue of $1.365 billion to $1.375 billion, she said. At the high end of the range, that would mean an increase of nearly 14% from 2019, 2 points higher than its Feb. 5 pre-pandemic forecast. It projects Q4 revenue growth of 12% to 15% from the 2019 quarter, said Zeiler.
IRobot is “in a situation where we’re seeing strong acceleration in demand for our products,” said Angle. That’s “compounded” by strong sales growth in the company’s direct-to-consumer sales channel, he said. Q3 revenue in that channel grew 155% to $35 million, “as we are starting to see early returns on some of the initial investments that we’ve made to improve the buying experience on our digital properties,” he said. Those “positive momentum drivers” will be in place for 2021, “and thus we are qualitatively confident about the continuation of the strong momentum” next year, he said.
The “incredibly challenging period” of the pandemic forced iRobot to make supply-chain “adjustments” to be sure it could “keep up with demand,” said Zeiler when asked about a notice on the company’s online store Wednesday that it was experiencing shipping delays and delivery times may be longer than normal. “Given all of the growth, there is occasionally a situation on our website where shipping is delayed,” said Angle. “But we believe that we have the systems in place to make those types of disruptions very short.”