IRobot Cuts Operating Profit Outlook on Tariffs, Supply Chain Woes
IRobot slashed operating income projections for the fiscal year ending Jan. 1 on concerns over higher supply chain costs, price increases and Section 301 tariffs, Chief Financial Officer Julie Zeiler said on an Oct. 28 earnings call. Q3 gross margin declined by 11 percentage points, with 60% of the decrease due to an unexpected $14 million in tariff costs and “supply chain headwinds.”
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The company now expects 2021 gross margin of 36%, reflecting tariff costs of $42 million to $43 million, Zeiler said. Until this month, iRobot was optimistic it would get Section 301 tariff relief in the second half in the form of a retroactive refund for tariffs paid this year, Zeiler said. A Q4 tariff exclusion retroactive to Jan. 1, would have resulted in higher earnings per share by $1.24-$1.27. The company now expects a Q4 net loss per share of $0.63-$1.24.
Tariffs “remain a wild card,” CEO Colin Angle said. The company believes an exclusion from tariffs “is likely,” but it’s unclear how quickly that can be granted. If tariffs remain in place next year, iRobot expects FY 2022 tariff costs will “decline meaningfully” from 2021 levels.
Expanding on opening remarks in Q&A on the tariff outlook for 2022, Angle noted the language for the exemption process is open for comments (see 2110070041). The determining factors of what qualifies for an exclusion hasn't been finalized, Angle said. “The proposed language, if it stays as currently written,” would grant companies receiving an exclusion relief back only to Oct. 12, he said. Language in a Senate bill “that we liked” was “not reflected in language” presented by the U.S. trade representative, Angle said. The company is “optimistic” its case for exclusion from tariffs is strong, but it remains in a “holding pattern."
Angle said iRobot’s effort to achieve production scale in Malaysia by year-end is on schedule, but there’s “more work” to do. About 80% of products produced in Malaysia will be targeted for North America, he said. Manufacturing costs in Malaysia will be at a “slight premium” over production costs in China, he said.
Semiconductor shortages left the company unable to fulfill a significant level of expected orders in the second half, Angle said. On the outlook for next year, he cited the challenge of getting all the chips it needs “to build all of the robots that the market would absorb.” He expects shortages to continue through the first half. “It only takes one chip to stop us from building a robot in certain circumstances,” he said. The CEO believes parts availability will be “largely behind us” by July.
Inventory “remained elevated” in Q3 at 116 days, vs. 93 days a year ago, reflecting higher “in-transit” inventory due to global supply chain troubles. The company expects inventory to revert to historical levels in Q4. Zeiler expects inventory to end the year “lean.”