iRobot
Annual Report 2015

Plain-text annual report

IRBT2016 Proxy Statement Notice of Annual Meeting of Stockholders to be held on May 25, 2016 P r o x y S t a t e m e n t March 29, 2016 Dear Fellow Stockholder, I cordially invite you to attend the Annual Meeting of stockholders of iRobot Corporation, a Delaware corporation (the “Company”), to be held on Wednesday, May 25, 2016, at 8:30 a.m., local time, at the Company’s headquarters located at 8 Crosby Drive, Bedford, Massachusetts 01730. Your board of directors is recommending two highly qualified and experienced nominees for election to the board of directors at the 2016 annual meeting. At this annual meeting, we will ask you to: (1) elect these Class II directors; (2) ratify the appointment of the accounting firm of PricewaterhouseCoopers LLP as the Company’s independent registered public accountants for the current fiscal year; (3) approve amendments to our amended and restated certificate of incorporation to eliminate supermajority voting requirements; (4) approve amendments to our amended and restated certificate of incorporation to declassify the board of directors; and (5) approve an advisory vote on the compensation of our named executive officers. The accompanying materials include the Notice of Annual Meeting of Stockholders and Proxy Statement, which provide detailed information about the matters to be considered at the 2016 annual meeting. We urge you to use the enclosed WHITE proxy card TODAY to vote by telephone, by Internet or by signing, dating and returning the WHITE proxy card in the postage-paid envelope provided. Because approval of Proposals 3 and 4 requires the affirmative vote of at least 75% of the outstanding shares, your vote will be especially important at this year’s annual meeting. Additionally, as you may know, Red Mountain Capital Partners LLC and certain of its affiliates (“Red Mountain”) has notified the Company of its intention to nominate two individuals for election as directors at the annual meeting in opposition to the nominees recommended by your board of directors. You may receive proxy solicitation materials from Red Mountain. The Company is not responsible for the accuracy of any information provided by or relating to Red Mountain or its nominees contained in solicitation materials filed or disseminated by or on behalf of Red Mountain or any other statements that Red Mountain may make. The board of directors does NOT endorse any Red Mountain nominee and strongly recommends that you NOT sign or return any Green proxy card sent to you by Red Mountain. If you have previously submitted a Green proxy card sent to you by Red Mountain, you can revoke that proxy card and vote FOR our board of directors’ nominees and on the other matters to be voted on at the annual meeting by using the enclosed WHITE proxy card. If you have any questions about the Annual Meeting or how to vote your shares, please contact Innisfree M&A Incorporated, our proxy solicitor assisting us in connection with the Annual Meeting. Stockholders may call toll free at (877) 717-3929. Banks and brokers may call collect at (212) 750-5833. Thank you for your continued support, interest and investment in iRobot. Sincerely, Colin M. Angle Chairman of the Board and Chief Executive Officer P r o x y S t a t e m e n t iROBOT CORPORATION NOTICE OF ANNUAL MEETING OF STOCKHOLDERS To Be Held on May 25, 2016 To the Stockholders of iRobot Corporation: The annual meeting of stockholders of iRobot Corporation, a Delaware corporation (the “Company”), will be held on Wednesday, May 25, 2016, at 8:30 a.m., local time, at the Company’s headquarters located at 8 Crosby Drive, Bedford, Massachusetts 01730, for the following purposes: 1. To elect two (2) Class II directors, nominated by the board of directors, each to serve for a three year term and until his successor has been duly elected and qualified or until his earlier resignation or removal; 2. To ratify the appointment of the accounting firm of PricewaterhouseCoopers LLP as the Company’s independent registered public accountants for the current fiscal year; 3. To approve amendments to our amended and restated certificate of incorporation to eliminate supermajority voting requirements; 4. To approve amendments to our amended and restated certificate of incorporation to declassify the board of directors; and 5. To hold an advisory vote on the approval of the compensation of our named executive officers. Proposal 1 relates solely to the election of two (2) Class II directors nominated by the board of directors and does not include any other matters relating to the election of directors, including without limitation, the election of directors nominated by any stockholder of the Company. Red Mountain Capital Partners LLC and certain of its affiliates (“Red Mountain”) has notified the Company that Red Mountain intends to nominate two individuals for election as directors at the annual meeting in opposition to the nominees recommended by your board of directors. Any candidates nominated by Red Mountain have NOT been endorsed by your board of directors. YOUR BOARD OF DIRECTORS RECOMMENDS THAT YOU DO NOT SIGN ANY GREEN PROXY CARDS SENT TO YOU BY RED MOUNTAIN OR ANY OF ITS AFFILIATES. IF YOU HAVE PREVIOUSLY SIGNED A GREEN PROXY CARD SENT TO YOU BY RED MOUNTAIN OR ITS AFFILIATES, YOU CAN REVOKE IT BY SIGNING, DATING AND MAILING THE ENCLOSED WHITE PROXY CARD IN THE ENVELOPE PROVIDED. Holders of shares as of the close of business on April 5, 2016, the record date for voting at the annual meeting, are urged to submit a WHITE proxy card, even if your shares were sold after such date. If your brokerage firm, bank, broker-dealer or other similar organization is the holder of record of your shares (i.e., your shares are held in “street-name”), you will receive voting instructions from the holder of record. You must follow these instructions in order for your shares to be voted. We recommend that you instruct your broker or other nominee, by following those instructions, to vote your shares for the WHITE proxy card. All stockholders are cordially invited to attend the annual meeting in person. In accordance with our security procedures, all persons attending the annual meeting will be required to present a form of government- issued picture identification. If you hold your shares in “street-name”, you must also provide proof of ownership (such as recent brokerage statement). If you are a holder of record and attend the annual meeting, you may vote by ballot in person even if you have previously returned your proxy card. If you hold your shares in “street- name” and wish to vote in person, you must provide a “legal proxy” from your bank or broker. Directions to the annual meeting can be found at the Company’s website, http://www.irobot.com. Notice of Annual Meeting of Stockholders and iRobot 2016 Proxy Statement Please note that, even if you plan to attend the annual meeting, we recommend that you vote using the enclosed WHITE proxy card TODAY, to ensure that your shares will be represented. By Order of the Board of Directors, GLEN D. WEINSTEIN Executive Vice President, Chief Legal Officer and Secretary Bedford, Massachusetts March 29, 2016 If you have any questions or require assistance with voting, please call: Innisfree M&A Incorporated 501 Madison Avenue, 20th Floor New York, NY 10022 Stockholders May Call Toll Free at (877) 717-3929 Banks and Brokers May Call Collect at (212) 750-5833 WHETHER OR NOT YOU EXPECT TO ATTEND THE ANNUAL MEETING, PLEASE VOTE BY TELEPHONE, OVER THE INTERNET OR BY SIGNING, DATING AND RETURNING THE ENCLOSED WHITE PROXY CARD IN THE POSTAGE-PAID ENVELOPE PROVIDED IN ORDER TO ASSURE REPRESENTATION OF YOUR SHARES. Notice of Annual Meeting of Stockholders and iRobot 2016 Proxy Statement P r o x y S t a t e m e n t TABLE OF CONTENTS PROXY STATEMENT BACKGROUND OF THE SOLICITATION PROPOSAL 1 — ELECTION OF DIRECTORS Nominees Recommendation of the Board DIRECTORS AND EXECUTIVE OFFICERS CORPORATE GOVERNANCE AND BOARD MATTERS Board Leadership Structure Independence of Members of the Board of Directors Executive Sessions of Independent Directors The Board of Directors’ Role in Risk Oversight Policies Governing Director Nominations Policy Governing Security Holder Communications with the Board of Directors Policy Governing Director Attendance at Annual Meetings of Stockholders Board of Directors Evaluation Program Code of Ethics THE BOARD OF DIRECTORS AND ITS COMMITTEES Board of Directors Audit Committee Compensation and Talent Committee Nominating and Corporate Governance Committee Strategy and Finance Committee Compensation and Talent Committee Interlocks and Insider Participation REPORT OF THE AUDIT COMMITTEE OF THE BOARD OF DIRECTORS REPORT OF THE COMPENSATION AND TALENT COMMITTEE OF THE BOARD OF DIRECTORS COMPENSATION AND OTHER INFORMATION CONCERNING EXECUTIVE OFFICERS AND DIRECTORS Compensation Discussion and Analysis Compensation Consultant Independence Executive Compensation Summary Grants of Plan-Based Awards in 2015 Outstanding Equity Awards at Fiscal Year End Option Exercises and Stock Vested Equity Compensation Plan Information Potential Benefits Upon Termination or Change in Control Director Compensation Transactions with Related Persons PROPOSAL 2 — RATIFICATION OF APPOINTMENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTANTS PricewaterhouseCoopers LLP Fees Recommendation of the Board PROPOSAL 3 — APPROVAL OF AMENDMENTS TO OUR AMENDED AND RESTATED CERTIFICATE OF INCORPORATION TO ELIMINATE SUPERMAJORITY VOTING REQUIREMENTS Recommendation of the Board 1 4 10 10 11 12 19 19 19 19 20 20 22 22 23 23 24 24 24 25 25 26 26 27 29 30 30 41 43 44 45 46 47 47 49 51 52 53 54 55 56 PROPOSAL 4 — APPROVAL OF AMENDMENTS TO OUR AMENDED AND RESTATED CERTIFICATE OF INCORPORATION TO DECLASSIFY OUR BOARD OF DIRECTORS Recommendation of the Board PROPOSAL 5 — ADVISORY VOTE TO APPROVE THE COMPENSATION OF OUR NAMED EXECUTIVE OFFICERS Recommendation of the Board SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OTHER MATTERS STOCKHOLDER PROPOSALS SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE EXPENSES AND SOLICITATION Exhibit A ANNEX A ANNEX B 57 57 58 58 59 61 61 61 61 A A-1 B-1 P r o x y S t a t e m e n t iROBOT CORPORATION PROXY STATEMENT For the Annual Meeting of Stockholders To Be Held on May 25, 2016 March 29, 2016 This proxy statement and the WHITE proxy card are furnished in connection with the solicitation of proxies by the board of directors of iRobot Corporation, a Delaware corporation (the “Company” or “iRobot”), for use at the annual meeting of stockholders to be held on Wednesday, May 25, 2016, at 8:30 a.m., local time, at the Company’s headquarters located at 8 Crosby Drive, Bedford, Massachusetts 01730, and any adjournments or postponements thereof. An annual report to stockholders, containing financial statements for the fiscal year ended January 2, 2016, is being mailed together with this proxy statement to all stockholders entitled to vote at the annual meeting. This proxy statement and the accompanying WHITE proxy card are expected to be first mailed to stockholders on or about March 29, 2016. The purposes of the annual meeting are to elect two (2) Class II directors for three-year terms, to ratify the appointment of the Company’s independent registered public accountants, to approve amendments to our amended and restated certificate of incorporation to eliminate supermajority voting requirements, to approve amendments to our amended and restated certificate of incorporation to declassify the board of directors (such amendments, together, the “Certificate Amendments”), and to hold an advisory vote on the compensation of our named executive officers. Only stockholders of record at the close of business on April 5, 2016 will be entitled to receive notice of and to vote at the annual meeting. As of March 24, 2016, 28,918,311 shares of common stock, $.01 par value per share, of the Company were issued and outstanding. The holders of common stock are entitled to one vote per share on any proposal presented at the annual meeting. Stockholders may vote in person or by proxy. If you attend the annual meeting, you may vote in person even if you have previously returned your proxy card. Any proxy given pursuant to this solicitation may be revoked by the person giving it at any time before it is voted. Proxies may be revoked by (i) filing a written notice of revocation bearing a later date than the proxy with the Secretary of the Company, (ii) duly completing a later-dated proxy relating to the same shares, or (iii) attending the annual meeting and voting in person (although attendance at the annual meeting will not in and of itself constitute a revocation of a proxy). Any written notice of revocation or subsequent proxy should be sent so as to be delivered to iRobot Corporation, 8 Crosby Drive, Bedford, Massachusetts 01730, Attention: Secretary, before the taking of the vote at the annual meeting. The representation in person or by proxy of at least a majority of the outstanding shares of common stock entitled to vote at the annual meeting is necessary to constitute a quorum for the transaction of business. Votes withheld from any nominee, abstentions and broker “non-votes” are counted as present or represented for purposes of determining the presence or absence of a quorum for the annual meeting. A broker “non-vote” occurs when a nominee holding shares for a beneficial owner votes on one proposal but does not vote on another proposal because, with respect to such other proposal, the nominee does not have discretionary voting power and has not received instructions from the beneficial owner. Broker “non-votes” are not considered voted for the particular matter. If Red Mountain provides proxy materials in opposition to our board of directors to your broker to forward to you on its behalf, your broker will not have discretionary authority to vote your shares on any of the matters to be presented at the annual meeting. Therefore, if you hold your shares in “street-name” through a broker or other nominee, absent voting instructions from you, your shares will not be counted as voting and will have no effect on those proposals requiring approval by a plurality or majority of the votes cast, and will have the same effect as if you voted against Proposals 3 and 4. On the other hand, in the absence of Red Mountain providing proxy materials in opposition to our board to your broker to forward to you on its behalf, Proposal 2 to ratify the appointment of our independent registered public accountants will be a “routine” matter for which your broker does not need your voting instruction in order to vote your shares. Notice of Annual Meeting of Stockholders and iRobot 2016 Proxy Statement 1 For Proposal 1, our by-laws require that, in an uncontested election, each director be elected by the affirmative vote of holders of a majority of the votes cast by holders of shares present, in person or represented by proxy, and entitled to vote on the matter is required for approval. Red Mountain has notified us of its intent to nominate two individuals for election as directors at the annual meeting. If Red Mountain proceeds with its alternative nominations, the election of directors would be considered a contested election. In a contested election, directors are elected by a plurality of the votes cast, meaning that the director nominees receiving the most votes would be elected. As a result, the two director nominees receiving the most votes at the annual meeting will be elected. You may not vote your shares cumulatively or for a greater number of persons than the number of director nominees named in this proxy statement. In the event Red Mountain does not proceed with its nominations or withdraws its nominees on or prior to the day preceding the date the Company first mails the proxy materials for the annual meeting to the Company’s stockholders, the election of directors will not be contested, and directors will be elected by the affirmative vote of holders of a majority of the votes cast by holders of shares present, in person or represented by proxy, and entitled to vote on the matter. For Proposal 2, the ratification of the appointment of PricewaterhouseCoopers LLP as the Company’s independent registered public accountants for the current fiscal year, and Proposal 5, the advisory vote on the compensation of our named executive officers, an affirmative vote of holders of a majority of the votes cast by holders of shares present, in person or represented by proxy, and entitled to vote on each such matter is required for approval. Abstentions and broker non-votes are not considered votes cast for either proposal and, therefore, will not have any effect on the outcome of such proposal. For Proposals 3 and 4, votes on the Certificate Amendments, an affirmative vote of not less than 75% of the outstanding shares entitled to vote as of the record date is required for approval of each such Proposal. Abstentions and broker non-votes will have the same effect as if you voted against Proposals 3 and 4. All properly executed WHITE proxies returned in time to be counted at the annual meeting will be voted by the named proxies at the annual meeting. Where a choice has been specified on the WHITE proxy with respect to the foregoing matters, the shares represented by the WHITE proxy will be voted in accordance with the specifications. If you return a validly executed WHITE proxy card without indicating how your shares should be voted on a matter and you do not revoke your proxy, such WHITE proxies will be voted FOR election of the director nominees set forth on the WHITE proxy card, FOR ratification of the appointment of our independent registered public accountants, FOR each of the Certificate Amendments, and FOR the approval on an advisory basis, of the compensation of our named executive officers. OUR BOARD OF DIRECTORS RECOMMENDS THAT YOU DO NOT SIGN OR OTHERWISE VOTE USING ANY GREEN PROXY CARD SENT TO YOU BY RED MOUNTAIN OR ANY OF ITS AFFILIATES. If you have any questions or require assistance with voting, please call: INNISFREE M&A INCORPORATED 501 Madison Avenue, 20th Floor New York, NY 10022 Stockholders May Call Toll-Free at (877) 717-3929 Banks and Brokers May Call Collect at (212) 750-5833 Aside from the election of directors, the ratification of the appointment of the independent registered public accountants, the approval of the Certificate, Amendments, and the advisory vote on the compensation of our named executive officers, the board of directors knows of no other matters to be presented at the annual meeting. If any other matter should be presented at the annual meeting upon which a vote properly may be taken, shares represented by all WHITE proxy cards received by the board of directors will be voted with respect thereto at the discretion of the persons named as proxies. Notice of Annual Meeting of Stockholders and iRobot 2016 Proxy Statement 2 P r o x y S t a t e m e n t You may receive proxy solicitation materials from Red Mountain, including an opposition proxy statement and Green proxy card. Our board of directors recommends that you do not sign or otherwise vote using any Green proxy card sent to you by Red Mountain. To vote as our board of directors recommends, stockholders must use the WHITE proxy card or attend the annual meeting and vote in person. Voting against any Red Mountain nominees or voting to withhold or abstain on the Green proxy card will not be counted as a vote for our board’s nominees and will result in the revocation of any previous vote you may have cast on the WHITE proxy card. If you wish to vote pursuant to the recommendation of our board of directors, you should disregard any proxy card you receive other than the WHITE proxy card. If you have previously voted using the Green proxy card sent to you by Red Mountain, you have the right to change your vote by executing a later dated WHITE proxy card or by attending and voting at the annual meeting. Only the latest dated proxy you submit will be counted. OUR BOARD RECOMMENDS THAT YOU DO NOT VOTE FOR ANY INDIVIDUALS WHO MAY BE NOMINATED BY RED MOUNTAIN OR ANY OF ITS AFFILIATES. IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS FOR THE STOCKHOLDER MEETING TO BE HELD ON MAY 25, 2016. THE PROXY STATEMENT AND ANNUAL REPORT TO STOCKHOLDERS ARE AVAILABLE AT http://investor.irobot.com/ phoenix.zhtml?c=193096&p=irol-sec. Notice of Annual Meeting of Stockholders and iRobot 2016 Proxy Statement 3 Background of the Solicitation The following timeline is provided in order to help stockholders understand the discussions that have been held between the Company and Red Mountain Capital (“Red Mountain”) during 2015 and 2016 regarding our strategic plan and discussions about potential candidates to join our Board. These discussions were terminated with no agreement, and Red Mountain has nominated two directors to serve in place of the two directors who are recommended by our Board for election. During these conversations, the Company’s representatives provided only publicly available information, as Red Mountain refused several requests to sign confidentiality agreements that would have enabled us to discuss our strategies and plans in more depth. The Board does not endorse the Red Mountain nominees and unanimously recommends you use the WHITE proxy card to vote FOR the election of each of the nominees proposed by the Board. On February 12, 2014, as part of our Board’s ongoing review of the Company’s business and financial performance, our Board decided to focus resources and capital on the Company’s home robots business unit, and began considering strategic alternatives with respect to the Company’s defense and security (“D&S”) business unit. In connection with this decision, our Board engaged Blackstone Advisory Partners LP, now known as PJT Partners, to begin exploring a potential sale of the D&S business unit. On April 1, 2014, in connection with its review of the Company’s capital allocation plan, our Board authorized the repurchase of up to $50 million of our common stock for the twelve months ended April 30, 2015. On July 29, 2014, at Red Mountain’s request, a call took place between a representative of the Company and Ted Moon, a Red Mountain analyst, in which Mr. Moon asked questions regarding the Company’s business and strategy for the future. On February 11, 2015 and February 24, 2015, at Red Mountain’s request, follow-up calls took place between a representative of the Company and Mr. Moon regarding the Company’s financial outlook and strategy. On March 19, 2015 our Board authorized the repurchase of up to $50 million of our common stock for the twelve months ending April 30, 2016. On March 11, 2015, in conjunction with the Piper Jaffray Technology, Media & Telecommunications Conference in New York City, our Chief Executive Officer, Colin Angle, and our Senior Vice President, Investor Relations, Elise Caffrey, met with Mr. Moon as part of a meeting with a larger group of investors. During the meeting, Mr. Angle and Ms. Caffrey discussed our business and various operational matters with the group. On March 17, 2015, in conjunction with the Sidoti & Company Emerging Growth Research Institutional Investor Forum in New York City, our Chief Financial Officer, Alison Dean, and Ms. Caffrey met briefly with Mr. Moon. During the meeting, Ms. Dean responded to questions from Mr. Moon regarding our financial reporting and business outlook. Mr. Moon requested an in-person meeting with management, which was agreed would occur following the Company’s April 22, 2015 earnings call. On April 8, 2015, Red Mountain filed a Schedule 13D with the SEC disclosing it beneficially owned 5.1% of the outstanding shares of common stock of the Company and sent a letter to the Company stating that Red Mountain expected to engage in a dialogue with the Company’s management regarding a number of actions that it believed the Company could take to create value for our stockholders. In particular, Red Mountain’s Schedule 13D and letter suggested that the Company: (i) focus exclusively on home robots; (ii) optimize its capital structure by increasing leverage; (iii) allocate capital by focusing on risk-adjusted returns; and (iv) upgrade its corporate governance. Following Red Mountain’s letter to the Company, members of the Company’s management team had four in- person meetings with representatives of Red Mountain, which occurred on May 1, 2015, May 15, 2015, June 23, 2015, and August 3, 2015. These meetings covered a broad range of topics, including the Company’s business and results of Notice of Annual Meeting of Stockholders and iRobot 2016 Proxy Statement 4 P r o x y S t a t e m e n t operations, our earnings performance, long-term business strategies, including the potential sale and/or discontinuation of our D&S and remote presence business units, capital allocation strategy and the composition of our Board. On June 12, 2015, Paul Sagan resigned from the Board. Following Mr. Sagan’s resignation, our Nominating and Corporate Governance Committee (the “Nominating Committee”) engaged a nationally recognized director search firm to help the Nominating Committee and the Board fill the vacancy on the Board left by Mr. Sagan’s resignation. As discussed in “Corporate Governance and Board Matters-Policies Governing Director Nominations,” our Nominating Committee seeks members from diverse professional backgrounds who combine a broad spectrum of relevant industry and strategic experience and expertise that, in concert, offer us and our stockholders diversity of opinion and insight in the areas most important to us and our corporate mission. Through this skills-based approach, our Nominating Committee focused on reviewing the skill set of our then-existing directors and adding to our Board a director who would broaden the experience of the then-existing Board and strengthen the ability of our Board to offer practical business advice and strategic guidance to management and fulfill its fiduciary duties to stockholders. On June 29, 2015, the Company entered into an exclusivity agreement with a potential buyer of the D&S business unit. Following termination of negotiations with this party, the Company entered into a letter of intent with the ultimate buyer of the D&S business unit on November 24, 2015, as further described below. During the spring and summer of 2015, following consultation and advice from an investment banker and other advisors, our Board reviewed the Company’s capital allocation plan and considered whether the Company’s existing share repurchase program should be increased, and the various methods through which an increased program could be implemented. In connection with these considerations, our Board decided the final size of the revised share repurchase program and that its implementation would be made in conjunction with the sale of the D&S business unit. In July 2015, our Board formed an ad hoc strategy and finance committee to, among other things, review the Company’s strategic objectives and transactional opportunities to support those objectives. On July 29, 2015, Mr. Willem Mesdag, the Managing Partner of Red Mountain, sent a letter to Mr. Angle in which Red Mountain expressed dissatisfaction that the Company had seemingly not taken steps to divest the D&S business unit and return “excess capital to shareholders through a stock repurchase.” Red Mountain suggested that the Company consider a $100 million Dutch tender offer for the purchase of its own shares. In an August 6, 2015 letter to the Company, Red Mountain indicated that it “decided to sell our stake in iRobot.” In the letter, Red Mountain said it “appreciate[d] that [the Company’s] board has considered our views, and I trust that they are being taken seriously.” Despite this letter, to the best of our knowledge, Red Mountain did not subsequently sell its stake in the Company. On August 17, 2015, after a thorough search process by the nationally recognized director search firm, and considered deliberation by our Nominating Committee and our Board, including the Company’s skills-based approach to Board composition, the Company announced the appointment of Mohamad Ali, president and chief executive officer of Carbonite, Inc., to our Board, to fill the vacancy of Paul Sagan. In an August 21, 2015 letter to the Company, Red Mountain again emphasized that the Company had a significant opportunity to create stockholder value by focusing on its home robots business unit and by allocating capital more efficiently through a tender offer for its shares. In this letter, Mr. Mesdag also stated “[o]ur dialogue has been open and candid, and we have been impressed with your additions to the senior management team and your board. Your recent appointment of Mohamad Ali to the board is consistent and commendable…I’m confident that Mr. Ali’s experience at HP…provided him with valuable lessons with regard to the importance of evaluating each business segment’s contribution to the overall enterprise and efficient capital allocation…HP’s share price more than doubled during Mr. Ali’s tenure as Chief Strategy Officer. Mr. Ali also has a distinguished record as a director of City National Bank, the board of which has created enormous value for its shareholders Notice of Annual Meeting of Stockholders and iRobot 2016 Proxy Statement 5 over the years, and recently sold the bank to the Royal Bank of Canada at an exceptional valuation. I trust that Mr. Ali will bring his relevant experience to the board of iRobot, and will help you to drive shareholder value in addition to maintaining your innovation edge.” On November 10, 2015, the Company hosted an Analyst Day in New York City, where the Company publicly announced that it was shifting its focus to home robots and the connected home and would de-emphasize its D&S and remote presence businesses. On November 11, 2015, there was an in-person meeting between George McNamee, the Company’s then- lead independent director, Deborah Ellinger, the chair of our Nominating Committee, Mr. Angle, Ms. Caffrey, and Mr. Mesdag, of Red Mountain. At the meeting, the parties discussed our business and its strategic direction (primarily the Company’s decision to focus on home robots and Red Mountain’s belief that the Company should sell the D&S and remote presence business units). At this meeting, Mr. Mesdag requested that he be appointed to our Board and issued an ultimatum that if he were not appointed by us, he would initiate a proxy fight for a full slate of directors at the 2016 annual meeting to gain representation for himself and his nominees on our Board. Following this meeting with our directors, on November 12, 2015, Mr. Mesdag sent a letter to the Company requesting that the parties negotiate a settlement agreement that would provide Red Mountain with representation on our Board. In this letter, Mr. Mesdag delivered an ultimatum that if such a settlement were not reached by December 1, 2015, then Red Mountain would release a public letter disclosing its intent to seek representation on our Board. On November 24, 2015, the Company entered into a letter of intent with Arlington Capital Partners to sell them the Company’s D&S business unit. On November 24, 2015, Mr. Angle sent an email to Mr. Mesdag acknowledging Mr. Mesdag’s interest in joining the Board and invited him to participate in the Board’s standard process for evaluating director candidates by requesting information required under the Company’s nomination and corporate governance policies. In response, Mr. Mesdag provided his resume and references to the Company. Mr. Mesdag also invited the Company to direct its representatives to contact Red Mountain’s lawyers to commence settlement negotiations. On December 1, 2015, Mr. Angle spoke by telephone with Mr. Mesdag and informed Mr. Mesdag that the Company was open to considering director nominee candidates suggested by Red Mountain. Mr. Angle also informed Mr. Mesdag that our Nominating Committee follows a process for adding directors to our Board that involves in-person interviews of director candidates, reference checks and other steps to help ensure both a complementary fit with the Board, as well as finding candidates with skill sets which align well the Company’s current business needs. Mr. Angle informed Mr. Mesdag that Mr. Mesdag could be an active participant in this process, but that our Board could not agree to his ultimatum which set this arbitrary December 1st deadline, especially in light of the fact that the period for stockholders to nominate directors did not even open until January 21, 2016. Mr. Angle also requested that Mr. Mesdag execute a short term confidentiality agreement so that the Company could discuss with him certain material non-public steps it was undertaking to enhance stockholder value. Mr. Mesdag declined to execute a confidentiality agreement and asked whether as part of this process there was a chance he would not be added to our Board. Mr. Angle indicated that there was a possibility that Mr. Mesdag would not be added to the Board at the conclusion of this process but in these circumstances, Mr. Mesdag would have sufficient time to nominate candidates to our Board and run a proxy contest. Mr. Mesdag then stated that he was one of the most qualified public company board director candidates that iRobot could hope to attract and that he wanted to be added to our Board immediately and would not engage in any type of process. At the conclusion of the conversation, Mr. Mesdag stated that he would be on our Board “quick or less quick” and would be making a filing with the SEC later that day indicating his intention to run a proxy contest. Following this conversation, on December 1, 2015, Red Mountain publicly filed a letter to our Board outlining its “value enhancement” plan for the Company and announcing its intention to nominate directors for election at our 2016 annual meeting of stockholders. Notice of Annual Meeting of Stockholders and iRobot 2016 Proxy Statement 6 P r o x y S t a t e m e n t On December 28, 2015, the Company announced that our Board had authorized a new share repurchase plan whereby the Company would purchase up to one million shares of its common stock during the 2016 fiscal year, replacing the Company’s existing share repurchase plan. On January 5, 2016, representatives of the Company and Red Mountain had discussions concerning Red Mountain’s stated intention to nominate directors for election at the Company’s 2016 annual meeting. The Company’s representatives indicated that the Company hoped to make a public announcement on material developments in its business in the near future and requested that Red Mountain not make any public announcement or officially file nomination papers until after the Company disclosed these developments. The Company’s representatives indicated that Red Mountain would still have sufficient time after this announcement to nominate directors under the Company’s by-laws. Red Mountain’s representatives indicated that while these corporate actions may be beneficial to all stockholders, Red Mountain would still want representation on the Board. Both parties agreed to update their clients and then continue their discussions. On January 6, 2016, representatives of the Company and Red Mountain had a follow up call on the previous day’s discussions. On this call, Red Mountain’s representatives stated that Red Mountain would not wait to nominate directors until after the Company made its announcement. Red Mountain’s representatives reiterated that Mr. Mesdag wanted to be added to the Board and to immediately begin settlement discussions to effect this result. The Company’s representatives indicated that they would inform the Company of this position. On January 13, 2016, the Company’s representative invited Red Mountain’s lawyers to propose terms for a potential settlement so that the Board could understand and evaluate the settlement terms that would be acceptable to Red Mountain. On January 15, 2016, Red Mountain’s representatives sent the Company’s representatives a draft term sheet for a proposed settlement agreement, which provided for the immediate resignation of a current director, an increase in the size of our Board from eight directors to nine, and the appointment of Mr. Mesdag and Lawrence Peiros to fill the resulting vacancies. Following receipt of Red Mountain’s term sheet, our Board requested to meet with Mr. Peiros to evaluate his candidacy as a director nominee. The Company again requested that Red Mountain enter into a short-term confidentiality agreement so that the parties could discuss certain material, non-public information concerning the Company in connection with these settlement discussions. Red Mountain’s representatives refused to make Mr. Peiros available unless it was in the context of a settlement agreement where he and Mr. Mesdag would be immediately appointed to the Board. Red Mountain again refused to enter into a confidentiality agreement. On January 25, 2016, Red Mountain sent a letter to our Board expressing its disappointment that the Company had not entered into settlement discussions to add Messrs. Peiros and Mesdag to the Board. On January 31, 2016, Mr. Angle again asked Mr. Mesdag to enter into a short-term confidentiality agreement with a term of one trading day that would allow the Company to discuss with Red Mountain certain material non-public information that the Company believed would be of interest to Red Mountain and could facilitate a negotiated settlement. On February 1, 2016, Red Mountain responded by stating that it would only enter a confidentiality agreement if the Company agreed to pursue good faith settlement negotiations that would result in Messrs. Peiros and Mesdag being added to our Board. The Company rejected Red Mountain’s ultimatum because it would have required the Company to commit to appointing both Messrs. Peiros and Mesdag to our Board before meeting or having any contact with Mr. Peiros. Red Mountain refused to enter into a confidentiality agreement. On February 4, 2016, the Company announced that it entered into a definitive agreement to sell the D&S business unit to a private equity buyer. Additionally, the Company announced that it was expanding its current share repurchase initiative by $65 million, increasing the total 2016 program to more than $100 million. Notice of Annual Meeting of Stockholders and iRobot 2016 Proxy Statement 7 After the Company’s February 4, 2016 announcement, Mr. Angle contacted Mr. Mesdag to discuss his reactions to the D&S business unit sale and the expansion of the share repurchase program and continue to attempt to amicably settle the parties’ differences. As part of these discussions, Mr. Angle indicated to Mr. Mesdag the Company’s willingness to discuss with him the composition of the Board. In that regard, Mr. Angle indicated that as part of the Nominating Committee’s skills-based approach to its director nominations, the Board was considering adding a sitting chief executive officer from the software industry to the Board and indicated the Board would welcome any candidates that Mr. Mesdag may know who had these qualifications. Mr. Mesdag agreed to make Mr. Peiros available to the members of the Nominating Committee. On February 10, 2016, three members of the Board, Mr. Angle, Ms. Ellinger and Gail Deegan, individually interviewed Mr. Peiros by telephone as part of the Board’s efforts to evaluate his qualifications to serve as a director. During January, February and March 2016, the Nominating Committee continued to work with a nationally recognized director search firm to identify potential new director candidates. In this search, the Nominating Committee again followed the Company’s longstanding approach and guidelines for reviewing the skill set of existing directors, identifying future company needs, and identifying the ideal qualifications that a new board member should bring to the Company. The search firm presented 49 candidates for consideration by the Nominating Committee. The Nominating Committee conducted interviews with 8 candidates and spoke to references of many of them during this period. On February 14, 2016, Mr. Angle provided Mr. Mesdag with a draft of a settlement agreement containing terms upon which the Company would amicably resolve matters with Red Mountain and avoid the expense and distraction of a proxy contest. The draft settlement agreement provided, among other things, that: (i) the Company would appoint a new director to our Board, subject to Red Mountain’s approval (provided that Red Mountain could not reject more than two candidates proposed by the Company); (ii) the Company would purchase at least $100 million of its stock in 2016; (iii) the Company would submit proposals to be considered at the Company’s 2016 annual meeting that would declassify the Board and eliminate the supermajority voting provisions from the Company’s certificate of incorporation; (iv) Red Mountain would vote all of its Company shares in favor of the Board’s director nominees and governance proposals at the Company’s 2016 annual meeting; (v) Red Mountain would agree to customary standstill restrictions until 30 days prior to the Company’s advance notice deadline for director nominations for the Company’s 2017 annual meeting; and (vi) the Company would reimburse Red Mountain for its expenses incurred in connection with these matters, up to $75,000. On February 16, 2016, Red Mountain’s representatives responded by providing the Company’s representatives with a revised draft of the proposed settlement agreement, which included, among other revisions, the requirement that both Mr. Mesdag and Mr. Peiros be appointed to our Board immediately and provided Red Mountain with approval rights over an additional new director candidate. On February 18, 2016, Red Mountain publicly filed a letter notifying the Company that Red Mountain intended to nominate Messrs. Mesdag and Peiros for election to the Board at the Company’s 2016 annual meeting. On March 1, 2016, the Company announced it had entered into an accelerated stock repurchase agreement (“ASR Agreement”) with JPMorgan Chase Bank, N.A. to repurchase an aggregate of $85 million of the Company’s common stock bringing the total stock repurchases for 2016 to over $100 million. On March 4, 2016, Ms. Ellinger contacted Mr. Mesdag to see if he was interested in having an in-person meeting to discuss a potential settlement. The parties agreed to meet in New York on March 9, 2016. At the March 9, 2016 meeting, Ms. Ellinger proposed a settlement pursuant to which, among other things: (i) one of Red Mountain’s nominees, Mr. Peiros, would be immediately appointed to the Board; (ii) Mr. McNamee would not be a nominee for election as a director at the 2016 annual meeting and would retire from the Board as of the Company’s 2016 annual meeting; (iii) Ms. Ellinger would become the Company’s lead Notice of Annual Meeting of Stockholders and iRobot 2016 Proxy Statement 8 P r o x y S t a t e m e n t independent director; (iv) the Company would immediately add to the Board a new director who is a chief executive officer of a software company and this director would also be up for election at the 2016 annual meeting; and (v) Red Mountain would agree to customary standstill protections which would expire 30 days prior to the director nomination deadline for the Company’s 2017 annual meeting. After a discussion of these settlement terms, the potential outcomes of the proxy contest for the 2016 annual meeting and Red Mountain’s investment philosophy regarding the Company, Mr. Mesdag indicated that he would consider the settlement proposal and provide Ms. Ellinger with a response on the following day. On March 10, 2016, Mr. Mesdag contacted Ms. Ellinger and rejected the Company’s settlement proposal. Instead, Mr. Mesdag indicated that Red Mountain would settle only if he personally, as well as Mr. Peiros, were added to our Board. Mr. Mesdag indicated that if the Company agreed to this proposal, Red Mountain would also agree: (i) to a three year limit on Mr. Mesdag’s Board membership, during which three-year term, Mr. Mesdag would be required to maintain at least 5% ownership of the Company’s common stock, and (ii) Red Mountain’s standstill would be in effect as long as Mr. Mesdag was on the Board. After a discussion of the terms of this settlement proposal, Ms. Ellinger agreed to take this settlement proposal to our Board, while also reiterating the Board’s previous position that the best way to reach a settlement would be for Mr. Mesdag to remove his own name from consideration and suggest alternative candidates in his place. On March 13, 2016, after considered deliberation, our Board voted unanimously to reject Red Mountain’s proposal and not to add Mr. Mesdag to our Board. After careful consideration, the Nominating Committee concluded that Michael Bell’s experience as a chief executive officer of a public technology company and his expertise in the Internet of Things, and consumer products and services provided the skill set sought by the Nominating Committee and the Board. Our Board then: (i) added Mr. Bell to the Board immediately; (ii) determined that Mr. Bell and Mr. Ali would be the Board’s two nominees for election at the 2016 annual meeting; and (iii) named Ms. Ellinger as lead independent director. Following the Board deliberation, on the same day, Ms. Ellinger called Mr. Mesdag to inform him that the Board had unanimously voted not to accept his settlement offer. She reiterated the Board’s willingness to consider a settlement that included adding Mr. Peiros to the Board. Ms. Ellinger again emphasized the importance of the Company’s skills-based approach to board composition pursuant to which the Board sought to add directors who broaden the skill set of our existing directors and strengthen the ability of our Board to offer practical business advice and strategic guidance to management and fulfill its fiduciary duties to stockholders. In that regard, Ms. Ellinger reiterated the importance of software experience for our next Board member. She also indicated to Mr. Mesdag that the Board believed that he did not possess the skills they were looking for, in particular, that Mr. Mesdag has no known operating experience in software development, data analytics, Internet of Things or international technology sourcing. On March 14, 2016, the Company issued a press release announcing (i) the appointment of Mr. Bell to the board, (ii) the coming retirement of George McNamee, (iii) the election of Ms. Ellinger as lead independent director, (iv) the Board’s determination to seek stockholder approval at the 2016 annual meeting to (X) amend to our certificate of incorporation to declassify the Board, and (Y) amend our governing documents to eliminate supermajority voting requirements relating to the removal of directors and amendments to our certificate of incorporation and by-laws, and (v) the Board’s approval of an amendment to the Company’s by-laws to provide proxy access for eligible stockholders of the Company. On March 18, 2016, Red Mountain filed with the SEC a preliminary proxy statement with respect to its nominees. On March 18, 2016, the Company filed with the SEC a preliminary proxy statement with respect to the Company’s 2016 annual meeting. On March 23, 2016, the Company filed with the SEC amendment number 1 to its preliminary proxy statement. On March 24, 2016, Red Mountain filed with the SEC amendment number 1 to its preliminary proxy statement. Notice of Annual Meeting of Stockholders and iRobot 2016 Proxy Statement 9 PROPOSAL 1 ELECTION OF DIRECTORS Nominees Our board of directors currently consists of nine members. Our amended and restated certificate of incorporation currently divides the board of directors into three classes. One class is elected each year for a term of three years. The board of directors, upon the recommendation of the nominating and corporate governance committee, has nominated Mohamad Ali and Michael Bell and recommended that each be elected to the board of directors as a Class II director, each to hold office until the annual meeting of stockholders to be held in the year 2019 or until his successor has been duly elected and qualified or until his earlier death, resignation or removal. Mr. Ali and Mr. Bell are currently Class II directors whose terms are set to expire at this annual meeting. Each of Mr. Ali and Mr. Bell has consented to being named in this proxy statement and has agreed to serve if elected. The board of directors is also composed of (i) three Class III directors (Gail Deegan, Andrea Geisser, and Michelle V. Stacy) whose terms are currently set to expire upon the election and qualification of directors at the annual meeting of stockholders to be held in 2017, (ii) three Class I directors (Colin M. Angle, Ronald Chwang, Ph.D., and Deborah G. Ellinger) whose terms are currently set to expire upon the election and qualification of directors at the annual meeting of stockholders to be held in 2018, and (iii) George C. McNamee, currently a Class II director, who has informed us that he will retire following the end of his term at the annual meeting. The board of directors knows of no reason why any of the nominees named in this proxy statement would be unable or for good cause will not serve, but if any nominee should for any reason be unable to serve or for good cause will not serve, the board of directors reserves the right to nominate substitute nominees for election prior to the annual meeting, in which case the Company will file an amendment to this proxy statement disclosing the identity of such substitute nominees and related information and the proxies will be voted for such substitute nominees. Unless otherwise instructed, the proxy holders will vote the proxies received by them for the nominees named below. We have received a notice from Red Mountain for the nomination of two individuals for election to our board of directors at the annual meeting in opposition to the director nominees named in this proxy statement. The board of directors does not endorse any Red Mountain nominees and unanimously recommends that you vote for the directors who have been named in this proxy statement and on the WHITE proxy card, and do not sign or otherwise vote using any Green proxy card sent to you by Red Mountain. OUR BOARD OF DIRECTORS RECOMMENDS THAT YOU DO NOT SIGN ANY PROXY CARDS SENT TO YOU BY RED MOUNTAIN OR ANY OF ITS AFFILIATES. IF YOU HAVE PREVIOUSLY SIGNED OR OTHERWISE VOTED USING A GREEN PROXY CARD SENT TO YOU BY RED MOUNTAIN OR ANY OF ITS AFFILIATES, YOU CAN REVOKE IT BY SIGNING, DATING AND MAILING THE ENCLOSED WHITE PROXY CARD IN THE ENVELOPE PROVIDED. Notice of Annual Meeting of Stockholders and iRobot 2016 Proxy Statement 10 P r o x y S t a t e m e n t Recommendation of the Board THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE “FOR” ELECTION OF THE NOMINEES LISTED BELOW. The following table sets forth our nominees to be elected at the annual meeting and continuing directors, the positions with us currently held by each nominee and director, the year each nominee’s or director’s current term is currently set to expire and each nominee’s and director’s current class: Nominee’s or Director’s Name Position(s) with the Company Year Current Term Will Expire Current Class of Director Nominees for Class II Directors: Mohamad Ali(1) Michael Bell(2) Continuing Directors: Gail Deegan Andrea Geisser Michelle V. Stacy Colin M. Angle Ronald Chwang, Ph.D. Director Director Director Director Director Chairman of the Board, Chief Executive Officer and Director Director Deborah G. Ellinger Lead Independent Director 2016 2016 2017 2017 2017 2018 2018 2018 II II III III III I I I (1) Mr. Ali was appointed by the board of directors as a Class II director in August 2015. (2) Mr. Bell was appointed by the board of directors as a Class II director in March 2016. Notice of Annual Meeting of Stockholders and iRobot 2016 Proxy Statement 11 Directors and Executive Officers The following table sets forth the director nominees to be elected at the annual meeting, the directors and the executive officers of the Company, their ages immediately prior to the annual meeting, and the positions currently held by each such person with the Company: Name Colin M. Angle(4) Deborah G. Ellinger(3)(4) Mohamad Ali(1)(4) Michael Bell Ronald Chwang, Ph.D.(1)(4) Gail Deegan(2)(3) Andrea Geisser(1)(2) George C. McNamee(3)(5) Michelle V. Stacy(1)(2) Alison Dean Russell J. Campanello Christian Cerda Glen D. Weinstein Age 48 57 45 49 68 69 73 69 61 51 60 45 45 Position Chairman of the Board, Chief Executive Officer and Director Lead Independent Director Director Director Director Director Director Director Director Executive Vice President, Chief Financial Officer, Treasurer and Principal Accounting Officer Executive Vice President, Human Resources and Corporate Communications Executive Vice President and General Manager, Home Robots Business Unit Executive Vice President, Chief Legal Officer (1) Member of compensation and talent committee (2) Member of audit committee (3) Member of nominating and corporate governance committee (4) Member of strategy and finance committee (5) Mr. McNamee will be retiring from the board of directors and all committees thereof and is therefore not standing for re-election at this annual meeting. Board of Directors Colin M. Angle Age: 48 iRobot Committees: (cid:129) Strategy and Finance Committee Public Directorships: (cid:129) iRobot Colin M. Angle, a co-founder of iRobot, has served as chairman of the board since October 2008, as chief executive officer since June 1997, and prior to that, as our president since November 1992. He has served as a director since October 1992. As a co-founder and chief executive officer, Mr. Angle provides a critical contribution to the board of directors with his detailed knowledge of the Company, our employees, our client base, our prospects, the strategic Skills and Qualifications Board Experience: Director of two private companies, Striiv, Inc. and Ixcela, Inc., and director of three nonprofits, Science from Scientists, Rise and Tech Hub collaborative. marketplace and our competitors. Mr. Angle previously worked at the National Aeronautical and Space Administration’s Jet Propulsion Laboratory where he participated in the design of the behavior controlled rovers that led to Sojourner exploring Mars in 1997. He holds a B.S. in Electrical Engineering and an M.S. in Computer Science, both from MIT. Senior Leadership Experience: More than two decades serving as President and CEO of iRobot. Notice of Annual Meeting of Stockholders and iRobot 2016 Proxy Statement 12 P r o x y S t a t e m e n t Deborah G. Ellinger Age: 57 Lead Independent Director iRobot Committees: (cid:129) Chair of Nominating and Corporate Governance; Strategy and Finance Public Directorships: (cid:129) iRobot; Interpublic Group Deborah G. Ellinger has served as a director since November 2011. She has been the chief executive officer or president of three private-equity backed companies, each of which yielded three to seven times return on capital to investors. Ms. Ellinger brings extensive experience in international retail and consumer products, serving as the former chief executive officer of The Princeton Review, a company which assists students in test preparation, from 2012 to 2014, former president of Restoration Hardware, a luxury home furnishings retailer, from 2008 to 2009 and former chief executive officer of Wellness Pet Food, a natural pet-food company, from 2004 to 2008. Ms. Ellinger led each of those companies while they were owned by private equity firms, and successfully grew each business before transitioning it to new ownership. Previously, she served as an executive vice president at CVS Pharmacy, Skills and Qualifications Board Experience: Director of Interpublic Group, a public company, and The Commonwealth Institute, a nonprofit; former director of Sealy Corporation, National Life Group, and several private companies, including The Princeton Review, RenewLife, Restoration Hardware, and Malden Mills Industries. a senior vice president at Staples and a partner at The Boston Consulting Group; she began her career with Mellon Financial Corporation. She also serves on the board of Interpublic Group and The Commonwealth Institute, a nonprofit, and is a former director of The Princeton Review, Sealy Corporation, National Life Group, and several private companies. Her assignments have taken her all over the world; she has lived and worked in Europe, Asia and America. Ms. Ellinger is qualified as a Barrister- at-Law in London, as a member of the Inner Temple. She holds an M.A. and B.A. in Law and Mathematics from the University of Cambridge, England. Senior Leadership Experience: CEO of The Princeton Review; president of Restoration Hardware, CEO of Wellness Pet Food, EVP of CVS Pharmacy, SVP of Staples, and a partner at The Boston Consulting Group Mohamad Ali Age: 45 iRobot Committees: (cid:129) Chair of Strategy and Public Directorships: (cid:129) iRobot, Carbonite, Inc. Finance; Compensation and Talent Mohamad Ali has served as a director since August 2015 and brings extensive experience with capital allocation in technology companies, as well as strategic software development, including cloud infrastructure and data analytics. He has served as the president, chief executive officer and director of Carbonite, Inc from 2014 to present. Mr. Ali has successfully led Carbonite’s continued growth, serving the ever-evolving technology needs of small and mid- size businesses and consumers. Boston-based Carbonite provides cloud and hybrid backup and recovery solutions for home and business. Previously, Mr. Ali served as chief strategy officer at Hewlett-Packard, a manufacturer of computers and enterprise products, from 2012 to 2014 and president of Avaya Global Services, an enterprise Skills and Qualifications communications company. He also served in senior leadership roles at IBM Corporation, a multinational technology and consulting company, where he acquired numerous companies to build IBM’s analytics and big data business. In addition to serving on the board of directors of Carbonite, Mr. Ali is also a director of Oxfam America and Massachusetts Technology Leadership Council and previously served on the Board of Directors of City National Corporation and City National Bank. He was named to Boston Business Journal’s 2008 “40 Under 40” list, and recognized by Massachusetts High Tech magazine as a 2011 All-Star. Mr. Ali holds a B.S. and an M.S. in Electrical Engineering, both from Stanford University. Board Experience: Director of Carbonite and two nonprofits, Oxfam America and Massachusetts Technology Leadership Council; former director of City National Corporation and City National Bank. Senior Leadership Experience: CEO of Carbonite; CSO of Hewlett-Packard; President of Avaya Global Services; and Senior executive at IBM. Notice of Annual Meeting of Stockholders and iRobot 2016 Proxy Statement 13 Michael Bell Age: 49 Public Directorships: (cid:129) iRobot, Silver Spring Networks Michael Bell has served as a director since March 2016 and brings significant expertise in the Internet of Things from his work at Silver Spring Networks, Inc., Intel Corporation, Apple, Inc., and Palm, Inc. He has been the chief executive officer and president of Silver Spring Networks, a leading networking platform and solutions provider for smart energy networks, since September 2015. Previously, from 2010 to 2015 he held various roles at Intel Corporation, a multinational technology corporation specializing in the production of semiconductor chips, including Corporate Vice President New Devices Group, Corporate VP Mobile and Communications Group and Corporate Vice President Ultra Mobility Group. He was head of Product Development at Palm, Inc. from 2007 to 2010. He worked at Apple, Inc. from 1991 to 2007 and played significant roles in development of Apple iPhone and Apple TV products, serving as Vice President, CPU Software from 2002 to 2007. Mr. Bell is a director of Silver Spring Networks, Inc. He holds a B.S. in Mechanical Engineering from the University of Pennsylvania. Skills and Qualifications Board Experience: Director of Silver Spring Networks and several private companies. Senior Leadership Experience: CEO and President of Silver Spring Networks, Inc.; formerly, CVP and GM of New Devices Group at Intel; VP of Intel Architecture Group and Director of smartphone product development; SVP of Palm, Inc., and VP, CPU Software at Apple Inc. Dr. Ronald Chwang iRobot Committees: (cid:129) Compensation and Talent; Public Directorships: (cid:129) iRobot, AU Optronics Age: 68 Strategy and Finance Ronald Chwang, Ph.D., has served as a director since November 1998 and brings extensive experience in technology, manufacturing, supply chain, business development and Asian operations. Since January 2005, he has been the chairman and president of iD Ventures America, LLC (formerly known as Acer Technology Ventures, LLC) part of the iD SoftCapital Group, a venture investment and management consulting service group. He was the chief executive officer of Acer America from 1992 until 1997, growing it to over $1 Billion in revenues, and then became Skills and Qualifications chairman and president of Acer Technology Ventures until 2004, managing high-tech venture investment activities in North America. Previously, he was president of two Acer business groups in Taiwan, from 1986 to 1991. Dr. Chwang also serves on the board of directors of AU Optronics. He holds a B.Eng. (with honors) in Electrical Engineering from McGill University and a Ph.D. in Electrical Engineering from the University of Southern California. Board Experience: Director of AU Optronics, Anchor Semiconductor Inc., CoAdna Photonics Inc., Dragonfly Technology Inc., mCube Inc., Silicon Frontline Technology Inc., Striiv, Inc., and QED Labs, LLC; former director of Silicon Storage. Senior Leadership Experience: Chairman and President of iD Ventures America, Chairman and President of Acer Technology Ventures, CEO of Acer America, and President of Acer business units in Taiwan. Notice of Annual Meeting of Stockholders and iRobot 2016 Proxy Statement 14 P r o x y S t a t e m e n t Gail Deegan Age: 69 iRobot Committees: (cid:129) Chair of Audit; Nominating and Corporate Governance Public Directorships: (cid:129) iRobot Gail Deegan has served as a director since May 2011 and brings extensive experience as a former chief financial officer of three public companies and director of five public companies, in addition to iRobot; she has served as Audit Committee Chair for three boards of directors. From 1996 until her retirement in 2001, Ms. Deegan served as executive vice president and chief financial officer of Houghton Mifflin, a publishing company. She was previously senior vice president of regulatory and government affairs for NYNEX New England, and vice president and chief financial officer of New England Telephone. Earlier in her career she was senior vice president, chief financial officer and treasurer of Eastern Skills and Qualifications Board Experience: Former director of EMC Corporation, TJX Companies, Inc., EG&G (now called Perkin Elmer), Hartford Life, and Houghton Mifflin. Enterprises, as well as chief administrative officer of that company. Ms. Deegan is a former director of EMC Corporation, TJX Companies, Inc., and three other public companies. She brings deep experience with financial accounting matters for complex organizations, capital allocation, business transformation, and oversight of corporate governance requirements and financial reporting processes. Ms. Deegan holds a B.A. in Elementary Education from The College of Saint Rose, an M.S. in History from Ohio State University, and an M.B.A. from Simmons College School of Management. Senior Leadership Experience: EVP and CFO of Houghton Mifflin Company; SVP of regulatory and government affairs for NYNEX New England; VP and CFO of New England Telephone; SVP, CFO, CAO, and treasurer of Eastern Enterprises. Andrea Geisser Age: 73 iRobot Committees: (cid:129) Chair of Compensation and Public Directorships: (cid:129) iRobot Talent; Audit Andrea Geisser has served as a director since March 2004 and brings substantial expertise in financial management and company oversight as a private equity director. He is currently a senior advisor to Zephyr Management Inc., a global private equity firm that specializes in emerging markets, a role in which he has served since 2006, and a member of the investment committee of some of the funds managed by Zephyr Management. From 1995 to 2005, Mr. Geisser was a founder and managing director of Fenway Partners LLC, a middle market private equity firm. Prior to founding Fenway Partners, he was a managing director of Skills and Qualifications Board Experience: Former director of Aurora Foods, Bantam Books, Decorative Concepts, and Harry Winston. Butler Capital Corporation. Prior to that, Mr. Geisser was a managing director of Onex Investment Corporation, a Canadian management buyout company, and was a senior officer of Exor America from 1974 to 1986. Mr. Geisser has been a board member and audit committee member of several private companies, and was the chair of the iRobot audit committee for several years. He holds a B.A. from Bocconi University in Milan, Italy and a P.M.D. from Harvard Business School. Senior Leadership Experience: Currently a senior advisor to Zephyr Management Inc. Formerly managing director of Fenway Partners LLC, and a senior executive with Butler Capital Corporation, Onex Investment Corporation and Exor America. Notice of Annual Meeting of Stockholders and iRobot 2016 Proxy Statement 15 George C. McNamee iRobot Committees: (cid:129) Nominating and Corporate Public Directorships: (cid:129) iRobot, Plug Power, Inc. Age: 69 Governance George C. McNamee has served as a director since August 1999; he brings extensive experience with the management of public and private companies, as well as deep financial expertise. Currently a private investor, Mr. McNamee served as a managing partner of FA Technology Ventures Corporation, an information and energy technology venture capital firm, from 2000 until 2012. He serves as chairman of the board of directors of Plug Power Inc., a leading fuel cell developer, and is a director of several private companies, a Sterling Fellow of Yale and a Trustee of the Albany Academies and The American Friends of Eton College. Mr. McNamee previously served on the board of directors of Broadpoint (now Gleacher) Securities as well as serving from 1984 to 2007 as chairman of its predecessor First Albany Companies and was also a board member of the New York Stock Exchange Inc., Maplnfo, Home Shopping Network, Inc. and the Meta Group. He holds a B.A. from Yale University. Mr. McNamee will be retiring from the board of directors and is not standing for re-election at this annual meeting. Skills and Qualifications Board Experience: Director of Plug Power and several private companies; former Director of Broadpoint (now Gleacher) Securities, First Albany Companies Inc., New York Stock Exchange Inc., Maplnfo, Home Shopping Network, and the Meta Group. Senior Leadership Experience: Managing partner of FA Technology Ventures Michelle V. Stacy iRobot Committees: (cid:129) Compensation and Talent; Public Directorships: (cid:129) iRobot; Flex Pharma, Inc. Age: 61 Audit Michelle V. Stacy has served as a director since August 2014. As the former president of Keurig, Inc. and former vice president and general manager with Gillette/Procter & Gamble Co., Ms. Stacy brings to the board of directors a wealth of experience leading consumer businesses and building global brands. During her five-year tenure at Keurig Inc., a division of Keurig Green Mountain, Inc., from 2008 to 2013, the company’s revenue grew from $493 million in 2008 to $4.3 billion for 2013. Ms. Stacy is a director of Coravin, Inc., Flex Pharma, Inc., Young Innovations Inc. and the French Cultural Center, a nonprofit. She is a professional speaker on leadership, innovation and growth. She holds a B.S. from Dartmouth College and an M.S. in Management from J.L. Kellogg Graduate School of Management - Northwestern University, and is bilingual in French and English. Skills and Qualifications Board Experience: Director of Coravin, Inc., Flex Pharma, Inc., Young Innovations Inc. and the French Cultural Center, a nonprofit; former director of Tervis Tumbler Company. Senior Leadership Experience: President of Keurig, Inc.; Managing Partner of ArchPoint Consulting from 2007 to 2008, and VP and GM with Gillette/Procter & Gamble from 1982 to 2007. Notice of Annual Meeting of Stockholders and iRobot 2016 Proxy Statement 16 P r o x y S t a t e m e n t Executive Officers Alison Dean Age: 51 Skills and Qualifications Senior Leadership Experience: In addition to CFO and EVP, Ms. Dean has served as SVP of corporate finance (February 2010 until April 2013), VP of finance (March 2007 until February 2010), VP of financial controls and analysis (August 2005 until March 2007). Prior to iRobot, Ms. Dean was VP and Corporate Controller at 3Com (1995 to August 2005). Russell J. Campanello Age: 60 Skills and Qualifications Senior Leadership Experience: Prior to iRobot, Mr. Campanello has held senior leadership roles at a variety of companies, including SVP, HR and admin, Phase Forward (April 2008 until September 2010); SVP of HR and marketing, Keane (September 2003 to October 2007); Chief people officer, NerveWire (August 2000 to February 2003); SVP of HR, Genzyme (November 1997 to July 2000) and VP of HR, Lotus (1986 to 1996). Alison Dean has served as our executive vice president, chief financial officer, treasurer and principal accounting officer since April 2013. Ms. Dean previously served as our senior vice president, corporate finance from February 2010 until March 2013. From March 2007 until February 2010, Ms. Dean served as our vice president, financial controls & analysis. From August 2005 until March 2007, Ms. Dean served as our vice president, financial planning & analysis. From 1995 to August 2005, Ms. Dean served in a number of positions at 3Com Corporation, including vice president and corporate controller from 2004 to 2005 and vice president of finance - worldwide sales from 2003 to 2004. Ms. Dean holds a B.A. in Business Economics from Brown University and an M.B.A. from Boston University. Russell J. Campanello has served as our executive vice president, human resources and corporate communications since February 2014. Mr. Campanello previously served as our senior vice president, human resources and corporate communications from July 2013 until February 2014. From November 2010 until July 2013, Mr. Campanello served as our senior vice president, human resources. Prior to joining iRobot, Mr. Campanello served as senior vice president, human resources and administration at Phase Forward, Inc. from April 2008 until September 2010. Mr. Campanello previously served as senior vice president of human resources and marketing at Keane, Inc., a business process and information technology consulting firm, from September 2003 to October 2007. Prior to Keane, Mr. Campanello served as chief people officer at NerveWire, Inc. from August 2000 to February 2003. Prior to NerveWire, he served as senior vice president, human resources at Genzyme Corp. from November 1997 to July 2000. Earlier in his career, Mr. Campanello spent nine years as vice president of human resources at Lotus Development Corporation. He holds a B.S. in Business Administration from the University of Massachusetts. Notice of Annual Meeting of Stockholders and iRobot 2016 Proxy Statement 17 Christian Cerda Age: 45 Skills and Qualifications Senior Leadership Experience: Prior to iRobot, Mr. Cerda was General Manager, Sales and Marketing at Whirlpool (June 2005 to March 2013), a Principal at The Boston Consulting Group (March 1999 to June 2005) and a financial analyst at Procter & Gamble (September 1993 to June 1996). Glen D. Weinstein Age: 45 Skills and Qualifications Senior Leadership Experience: More than fifteen years of service as SVP and General Counsel of iRobot. Prior to iRobot, Mr. Weinstein was an associate at Covington & Burling (September 1997 to July 2000). Christian Cerda has served as our executive vice president and general manager of our Home Robot Business Unit since February 2015, and its senior vice president and general manager since May 2013. He has direct responsibility over global sales, marketing and product management and oversees a multifunctional team managing all operational execution areas of the unit. Prior to iRobot, he was general manager and vice president of Sales and Marketing from April 2010 to March 2013 at Whirlpool Corporation, a multinational manufacturer of home appliances, where he was responsible for sales, marketing, brand communications, product development and operations. Previously, he served in senior positions at The Boston Consulting Group and Procter & Gamble Co. Mr. Cerda holds a B.S. in Computer Engineering from Universidad Simon Bolivar and an M.S. in Business Administration with distinction from the Northwestern University Kellogg Graduate School of Management. Glen D. Weinstein has served as our executive vice president and chief legal officer since August 2012. Mr. Weinstein previously served as our general counsel from July 2000 to August 2012 and as senior vice president from January 2005 to August 2012. Since March 2004, he has also served as our secretary. Prior to joining iRobot, Mr. Weinstein was with Covington & Burling LLP, a law firm in Washington, D.C. Mr. Weinstein holds a B.S. in Mechanical Engineering from MIT and a J.D. from the University of Virginia School of Law. Our executive officers are elected by the board of directors on an annual basis and serve until their successors have been duly elected and qualified or until their earlier death, resignation or removal. If you have any questions or require assistance with voting, please call: INNISFREE M&A INCORPORATED 501 Madison Avenue, 20th Floor New York, NY 10022 Stockholders May Call Toll-Free at (877) 717-3929 Banks and Brokers May Call Collect at (212) 750-5833 Annex A sets forth information relating to our directors, nominees for directors and certain of our officers and employees who are considered “participants” in our solicitation under the rules of the Securities and Exchange Commission by reason of their position as directors of the Company, as nominees for directors or because they may be soliciting proxies on our behalf. Notice of Annual Meeting of Stockholders and iRobot 2016 Proxy Statement 18 P r o x y S t a t e m e n t CORPORATE GOVERNANCE AND BOARD MATTERS Board Leadership Structure Mr. Angle serves as our chief executive officer and chairman of the board. The board of directors believes that having our executive officer as chairman of the board facilitates the board of directors’ decision-making process because Mr. Angle has first-hand knowledge of our operations and the major issues facing us. This also enables Mr. Angle to act as the key link between the board of directors and other members of management. To assure effective independent oversight, our by-laws provide that the independent members of our board of directors will designate a lead independent director if the chairman of the board is not an independent director, as discussed further in “Executive Sessions of Independent Directors” below. Independence of Members of the Board of Directors The board of directors has determined that Dr. Chwang, Mses. Deegan, Ellinger, and Stacy, and Messrs. Ali, Bell, Geisser, and McNamee are independent within the meaning of the director independence standards of The NASDAQ Stock Market, Inc. (“NASDAQ”), and the SEC. Furthermore, the board of directors has determined that each member of each of the committees of the board of directors is independent within the meaning of the director independence standards of NASDAQ and the SEC. Executive Sessions of Independent Directors Executive sessions of the independent directors are held during each regularly scheduled in-person meeting of the board of directors. Executive sessions do not include any of our non-independent directors and are chaired by a lead independent director who is appointed annually by the board of directors from our independent directors. Ms. Ellinger currently serves as the lead independent director. In this role, Ms. Ellinger serves as chairperson of the independent director sessions. The independent directors of the board of directors met in executive session four (4) times in 2015. In addition to acting as the chairperson of the independent director sessions, the lead independent director assists the board in assuring effective corporate governance. The lead independent director’s specific duties include: (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) providing the chairman of the board with input as to preparation of agendas for meetings; advising the chairman of the board as to the quality, quantity and timeliness of the flow of information from the Company’s management that is necessary for the independent directors to effectively and responsibly perform their duties; coordinating and developing the agenda for the executive sessions of the independent directors; acting as principal liaison between the independent directors and the chairman of the board on critical issues; acting as a spokesperson for the independent directors able to talk with major investors and stockholders on topics of overall governance; evaluating, along with the members of the compensation and talent committee, the chief executive officer’s performance and meeting with the chief executive officer to discuss such evaluation; and acting as chairperson of the board in the absence of the chairman of the board or a vacancy in the position of chairman of the board. In addition, the lead independent director works to ensure that “all voices are heard” within the boardroom and proactively spends considerable time with the chief executive officer, and other executive officers, to understand the Company’s vision and strategy and works to focus the board of directors on areas aligned with the Company’s vision and strategy. Notice of Annual Meeting of Stockholders and iRobot 2016 Proxy Statement 19 The Board of Directors’ Role in Risk Oversight The board of directors oversees our risk management process. This oversight is primarily accomplished through the board of directors’ committees and management’s reporting processes, including receiving regular reports from members of senior management on areas of material risk to the Company, including operational, financial, legal and regulatory, and strategic and reputational risks. The audit committee focuses on risk related to accounting, internal controls, and financial and tax reporting. The audit committee also assesses economic and business risks and monitors compliance with ethical standards. The compensation and talent committee identifies and oversees risks associated with our executive compensation policies and practices, and the nominating and corporate governance committee identifies and oversees risks associated with director independence, related party transactions and the implementation of corporate governance policies. The strategy and finance committee oversees currency risk management policies and risk related to other treasury and tax policies. Policies Governing Director Nominations Director Qualifications The nominating and corporate governance committee of the board of directors is responsible for reviewing with the board of directors from time to time the appropriate qualities, skills and characteristics desired of members of the board of directors in the context of the needs of the business and current make-up of the board of directors. This assessment includes consideration of the following minimum qualifications that the nominating and corporate governance committee believes must be met by all directors: (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) nominees must have experience at a strategic or policy making level in a business, government, non- profit or academic organization of high standing; nominees must be highly accomplished in their respective fields, with superior credentials and recognition; nominees must be well regarded in the community and shall have a long-term reputation for the highest ethical and moral standards; nominees must have sufficient time and availability to devote to the affairs of the Company, particularly in light of the number of boards on which the nominee may serve; nominees must be free of conflicts of interest and potential conflicts of interest, in particular with relationships with other boards; and nominees must, to the extent such nominee serves or has previously served on other boards, demonstrate a history of actively contributing at board meetings. We do not have a formal board diversity policy. However, pursuant to the Policy Governing Director Qualifications and Nominations, as part of its evaluation of potential director candidates and in addition to other standards the nominating and corporate governance committee may deem appropriate from time to time for the overall structure and composition of the board of directors, the nominating and corporate governance committee may consider whether each candidate, if elected, assists in achieving a mix of board members that represent a diversity of background and experience. Accordingly, the board of directors seeks members from diverse professional backgrounds who combine a broad spectrum of relevant industry and strategic experience and expertise that, in concert, offer us and our stockholders diversity of opinion and insight in the areas most important to us and our corporate mission. In addition, nominees for director are selected to have complementary, rather than overlapping, skill sets. All candidates for director nominee must have time available to devote to the activities of the board of directors. The nominating and corporate governance committee also considers the independence of candidates for director nominee, including the appearance of any conflict in serving as a director. Candidates for director nominee who do not meet all of these criteria may still be considered for nomination to the board of directors, if the nominating and corporate governance committee believes that the candidate will make an exceptional contribution to us and our stockholders. Notice of Annual Meeting of Stockholders and iRobot 2016 Proxy Statement 20 P r o x y S t a t e m e n t Process for Identifying and Evaluating Director Nominees The board of directors delegates the initial selection and nomination process to the nominating and corporate governance committee, with the expectation that other members of the board of directors, and of management, will be requested to take part in the process as appropriate. Generally, the nominating and corporate governance committee identifies candidates for director nominee in consultation with management, through the use of search firms or other advisors, through the recommendations submitted by stockholders or through such other methods as the nominating and corporate governance committee deems to be helpful to identify candidates. Once candidates have been identified, the nominating and corporate governance committee confirms that the candidates meet all of the minimum qualifications for director nominees established by the nominating and corporate governance committee. The nominating and corporate governance committee may gather information about the candidates through interviews, detailed questionnaires, comprehensive background checks or any other means that the nominating and corporate governance committee deems to be helpful in the evaluation process. The nominating and corporate governance committee then meets as a group to discuss and evaluate the qualities and skills of each candidate, both on an individual basis and taking into account the overall composition and needs of the board of directors. Based on the results of the evaluation process, the nominating and corporate governance committee recommends candidates for the board of directors’ approval as director nominees for election to the board of directors. The nominating and corporate governance committee also recommends candidates to the board of directors for appointment to the committees of the board of directors. Once appropriate candidates have been identified, the entire board of directors votes on the candidates, as the selection of board nominees is a responsibility of the entire board of directors. Procedures for Recommendation of Director Nominees by Stockholders The nominating and corporate governance committee will consider director nominee candidates who are recommended by our stockholders. Stockholders, in submitting recommendations to the nominating and corporate governance committee for director nominee candidates, shall follow the following procedures: The nominating and corporate governance committee must receive any such recommendation for nomination not earlier than the close of business on the 120th day prior to the first anniversary of the date of the proxy statement delivered to stockholders in connection with the preceding year’s annual meeting. All recommendations for nomination must be in writing and include the following: (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) Name and address of the stockholder making the recommendation; A representation that the stockholder is a record holder of the Company’s securities, or if the stockholder is not a record holder, evidence of ownership; Name, age, business and residential address, educational background, current principal occupation or employment, and principal occupation or employment for the preceding five full fiscal years of the individual recommended for consideration as a director nominee; A description of the qualifications and background of the proposed director nominee which addresses the minimum qualifications, actual or potential conflicts of interest, and other criteria for board membership approved by the board of directors from time to time and set forth in the Company’s Policy Governing Director Qualifications and Nominations; A description of all arrangements or understandings between the stockholder and the proposed director nominee; The consent of the proposed director nominee (i) to be named in the proxy statement for the annual meeting and (ii) to serve as a director if elected at such annual meeting; and Any other information regarding the proposed director nominee that is required to be included in the proxy statement. Notice of Annual Meeting of Stockholders and iRobot 2016 Proxy Statement 21 Nominations must be sent to the attention of our secretary by U.S. mail (including courier or expedited delivery service) to: iRobot Corporation 8 Crosby Drive Bedford, Massachusetts 01730 Attn: Secretary of iRobot Corporation Our Secretary will promptly forward any such nominations to the nominating and corporate governance committee. In addition, we recently amended the Company’s by-laws to permit eligible stockholders, or groups of stockholders, owning continuously for at least three years shares of the Company’s stock representing an aggregate of at least 3% of the Company’s outstanding shares, to nominate and include in the Company’s proxy materials director nominees constituting up to two or 25%, whichever is greater, of the board of directors, provided that the stockholders and nominees satisfy the requirements in our by-laws. Written notice of stockholder nominees to the board of directors must be received not later than the close of business on the 90th day nor earlier than the close of business on the 120th day prior to the first anniversary the proceeding year’s annual meeting. For details on the Company’s proxy access procedures, please refer to our by-laws. Policy Governing Security Holder Communications with the Board of Directors The board of directors provides to every security holder the ability to communicate with the board of directors as a whole and with individual directors on the board of directors through an established process for security holder communications as follows: For communications directed to the board of directors as a whole, security holders may send such communications to the attention of the chairman of the board of directors by U.S. mail (including courier or expedited delivery service) to: iRobot Corporation 8 Crosby Drive Bedford, Massachusetts 01730 Attn: Chairman of the Board, c/o Secretary For security holder communications directed to an individual director in his or her capacity as a member of the board of directors, security holders may send such communications to the attention of the individual director by U.S. mail (including courier or expedited delivery service) to: iRobot Corporation 8 Crosby Drive Bedford, Massachusetts 01730 Attn: [Name of the director], c/o Secretary We will forward any such security holder communication to the chairman of the board, as a representative of the board of directors, or to the director to whom the communication is addressed. We will forward such communications by certified U.S. mail to an address specified by each director and the chairman of the board for such purposes or by secure electronic transmission. Policy Governing Director Attendance at Annual Meetings of Stockholders Our policy is to schedule a regular meeting of the board of directors on the same date as our annual meeting of stockholders and, accordingly, directors are encouraged to be present at our stockholder meetings. The eight board members who were directors at the time of the annual meeting of stockholders held in 2015, attended the meeting. Notice of Annual Meeting of Stockholders and iRobot 2016 Proxy Statement 22 P r o x y S t a t e m e n t Board of Directors Evaluation Program The board of directors performs annual self-evaluations of its composition and performance, including evaluations of its standing committees and individual evaluations for each director. In addition, each of the standing committees of the board of directors conducts its own self-evaluation, which is reported to the board of directors. The board of directors retains the authority to engage its own advisors and consultants. For more corporate governance information, you are invited to access the Corporate Governance section of our website available at http://www.irobot.com. The following summarizes key information about the board of directors: Board and Governance Information* Size of Board Number of Independent Directors Average Age of Directors Board Meetings Held in Fiscal 2015 Average Tenure of Independent Directors (in years) Independent Directors Added in the Last Three Years Annual Election of Directors** Proxy Access Majority Voting for Directors No Supermajority Voting Requirements*** Lead Independent Director Independent Directors Meet Without Management Present Director Stock Ownership Guidelines Code of Business Conduct and Ethics for Directors, Officers and Employees Director Self-Evaluation Program 8 7 59 12 6 43% ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ * ** All board of directors data excludes George McNamee, who will retire following the 2016 annual meeting. The Company is seeking stockholder approval at the 2016 annual meeting to declassify its Board of Directors. *** The Company is seeking stockholder approval at the 2016 annual meeting to eliminate supermajority voting requirements in its governing documents relating to removal of directors and amendments to the Company’s certificate of incorporation and bylaws. Code of Ethics We have adopted a “code of ethics,” as defined by regulations promulgated under the Securities Act of 1933, as amended, and the Exchange Act, that applies to all of our directors and employees worldwide, including our principal executive officer, principal financial officer, principal accounting officer and controller, or persons performing similar functions. A current copy of the Code of Business Conduct and Ethics is available at the Corporate Governance section of our website at http://www.irobot.com. A copy of the Code of Business Conduct and Ethics may also be obtained, free of charge, from us upon a request directed to: iRobot Corporation, 8 Crosby Drive, Bedford, Massachusetts 01730, Attention: Investor Relations. We intend to disclose any amendment to or waiver of a provision of the Code of Business Conduct and Ethics that applies to our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, by posting such information on its website available at http://www.irobot.com and/or in our public filings with the SEC. For more corporate governance information, you are invited to access the Corporate Governance section of our website available at http://www.irobot.com. Notice of Annual Meeting of Stockholders and iRobot 2016 Proxy Statement 23 THE BOARD OF DIRECTORS AND ITS COMMITTEES Board of Directors The board of directors met twelve (12) times during the fiscal year ended January 2, 2016, and took action by unanimous written consent six (6) times. Each of the directors attended at least 75% of the aggregate of the total number of meetings of the board of directors and the total number of meetings of all committees of the board of directors on which they served during fiscal 2015. The board of directors has the following standing committees: audit committee; compensation and talent committee; nominating and corporate governance committee; and strategy and finance committee, each of which operates pursuant to a separate charter that has been approved by the board of directors. A current copy of each charter is available at the Corporate Governance section of our website at http://www.irobot.com. Each committee reviews the appropriateness of its charter at least annually. Each committee retains the authority to engage its own advisors and consultants. The composition and responsibilities of each committee are summarized below. Audit Committee The audit committee of the board of directors currently consists of Mr. Geisser and Mses. Deegan and Stacy, each of whom is an independent director within the meaning of the director independence standards of NASDAQ and the SEC, including Rule 10A-3(b)(1) under the Exchange Act, as amended, or the Exchange Act. In addition, the board of directors has determined that each of Mr. Geisser and Mses. Deegan and Stacy are financially literate and that Mr. Geisser and Ms. Deegan each qualifies as an “audit committee financial expert” under the rules of the SEC. Ms. Deegan serves as the chairman of the audit committee. The Company expects that Mr. Bell will be appointed to serve on the audit committee. The audit committee met seven (7) times and took action by unanimous written consent one (1) time during the fiscal year ended January 2, 2016. The audit committee operates under a written charter adopted by the board of directors, a current copy of which is available at the Corporate Governance section of our website at http://www.irobot.com. As described more fully in its charter, the audit committee oversees the integrity of our financial statements, our accounting and financial reporting processes, our internal controls over financial reporting, our internal and external audit functions and the safeguarding of our assets. In fulfilling its role, the audit committee responsibilities include: (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) appointing, approving the compensation of, and assessing the independence of our independent registered public accounting firm; pre-approving auditing and permissible non-audit services (including certain tax compliance, planning and advice services), and the terms of such services, to be provided by our independent registered public accounting firm; reviewing and discussing with management and the independent registered public accounting firm our annual and quarterly financial statements and related disclosures; coordinating the oversight and reviewing the adequacy of our internal control over financial reporting; overseeing the performance of our internal auditors and internal audit functions, including reviewing the annual internal audit risk assessment as well as the scope of, and overall plans for, the annual internal audit program; establishing policies and procedures for the receipt and retention of accounting related complaints and concerns; reviewing and discussing with management risk assessments and risk management, including cyber security; overseeing the development of business continuity plans; Notice of Annual Meeting of Stockholders and iRobot 2016 Proxy Statement 24 P r o x y S t a t e m e n t (cid:129) (cid:129) (cid:129) (cid:129) overseeing our compliance with certain legal and regulatory requirements including, but not limited to, the Foreign Corrupt Practices Act; preparing the audit committee report required by SEC rules to be included in our annual proxy statement: reviewing certain relationships and related transactions; and such other matters as the committee deems appropriate. For additional information concerning the audit committee, see the “Report of the Audit Committee of the Board of Directors.” Compensation and Talent Committee The compensation and talent committee of the board of directors currently consists of Messrs. Geisser and Ali, Dr. Chwang, and Ms. Stacy each of whom is an independent director within the meaning of the director independence standards of NASDAQ, a non-employee director as defined in Rule 16b-3 of the Exchange Act, and an outside director pursuant to Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Code”). Mr. Geisser serves as the chairman of the compensation and talent committee. The compensation and talent committee’s responsibilities include: (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) annually reviewing and approving corporate goals and objectives relevant to compensation of our chief executive officer and other executive officers; evaluating the performance of our chief executive officer in light of such corporate goals and objectives and determining the compensation of our chief executive officer and other executive officers; overseeing and administering our compensation, welfare, benefit and pension plans and similar plans; reviewing and making recommendations to the board of directors with respect to director compensation; and reviewing and making recommendations to the board of directors with respect to succession planning for senior management. The compensation and talent committee met six (6) times and took action by unanimous written consent seven (7) times during the fiscal year ended January 2, 2016. The compensation and talent committee operates under a written charter adopted by the board of directors, a current copy of which is available at the Corporate Governance section of our website at http://www.irobot.com. Nominating and Corporate Governance Committee The nominating and corporate governance committee of the board of directors currently consists of Mses. Ellinger and Deegan and Mr. McNamee, each of whom is an independent director within the meaning of the director independence standards of NASDAQ and applicable rules of the SEC. Ms. Ellinger serves as the chairman of the nominating and corporate governance committee. The nominating and corporate governance committee’s responsibilities include: (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) developing and recommending to the board criteria for board and committee membership; establishing procedures for identifying and evaluating director candidates including nominees recommended by stockholders; identifying individuals qualified to become board members; recommending to the board the persons to be nominated for election as directors and to each of the board’s committees; developing and recommending to the board a code of business conduct and ethics and a set of corporate governance guidelines; and overseeing the evaluation of the board and management. Notice of Annual Meeting of Stockholders and iRobot 2016 Proxy Statement 25 The nominating and corporate governance committee met four (4) times and took action by unanimous written consent one (1) time during the fiscal year ended January 2, 2016. The nominating and corporate governance committee operates under a written charter adopted by the board of directors, a current copy of which is available at the Corporate Governance section of our website at http://www.irobot.com. Strategy and Finance Committee In July 2015, the board of directors formed an ad hoc strategy and finance committee. The responsibilities of the strategy and finance committee included: (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) reviewing periodically with management the Company’s strategic objectives and their translation into stockholder value creation; reviewing with management on a regular basis contemplated transactional opportunities that support the Company’s strategic business objectives; reviewing with and, when appropriate, making recommendations to the board of directors regarding the Company’s capital allocation objectives, strategies and plans; reviewing the Company’s capital allocation process annually and significant capital programs periodically. reviewing and making recommendations to the board of directors regarding the Company’s authorization to repurchase its common stock, approving any actions taken under each such plan, and monitoring actual repurchases under the repurchase authorization; reviewing and discussing with management the Company’s annual and long-term business and financial plans, including the financial impacts of these plans; and as part of its review of the Company’s annual and long-term business and financial plans, reporting to the board of directors concerning its review of such plans and the financial and business assumptions underlying the Company’s financial projections and budgets; and reviewing the Company’s annual operating plan, and reviewing with management the significant projects, research and development programs or other investments. In March 2016, the ad hoc strategy and finance committee was replaced with a formal strategy and finance committee, which operates under a written charter adopted by the board of directors, a current copy of which is available at the Corporate Governance section of our website at http://www.irobot.com. Messrs. Ali and Angle, Dr. Chwang and Ms. Ellinger currently serve as members of the strategy and finance committee. Mr. Ali serves as the chairman of the strategy and finance committee. Compensation and Talent Committee Interlocks and Insider Participation During 2015, Dr. Chwang, Ms. Stacy and Messrs. Geisser and Ali served as members of the compensation and talent committee. No member of the compensation and talent committee was an employee or former employee of us or any of our subsidiaries, or had any relationship with us requiring disclosure herein. During the last year, no executive officer of the Company served as: (i) a member of the compensation and talent committee (or other committee of the board of directors performing equivalent functions or, in the absence of any such committee, the entire board of directors) of another entity, one of whose executive officers served on our compensation and talent committee; (ii) a director of another entity, one of whose executive officers served on our compensation and talent committee; or (iii) a member of the compensation and talent committee (or other committee of the board of directors performing equivalent functions or, in the absence of any such committee, the entire board of directors) of another entity, one of whose executive officers served as a director of the Company. Notice of Annual Meeting of Stockholders and iRobot 2016 Proxy Statement 26 P r o x y S t a t e m e n t REPORT OF THE AUDIT COMMITTEE OF THE BOARD OF DIRECTORS No portion of this audit committee report shall be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, through any general statement incorporating by reference in its entirety the proxy statement in which this report appears, except to the extent that the Company specifically incorporates this report or a portion of it by reference. In addition, this report shall not be deemed filed under either the Securities Act or the Exchange Act. This report is submitted by the audit committee of the board of directors. The audit committee currently consists of Mses. Deegan (chairman) and Stacy and Mr. Geisser. None of the members of the audit committee is an officer or employee of the Company, and the board of directors has determined that each member of the audit committee meets the independence requirements promulgated by NASDAQ and the SEC, including Rule 10A-3(b)(1) under the Exchange Act. Each of Mr. Geisser and Ms. Deegan is an “audit committee financial expert” as is currently defined under SEC rules. The audit committee operates under a written charter adopted by the board of directors. The audit committee oversees the Company’s accounting and financial reporting processes on behalf of the board of directors. The meetings of the audit committee are designed to facilitate and encourage communication among the audit committee, Company management, the independent registered public accounting firm and the Company’s internal audit function. The Company’s management has the primary responsibility for the financial statements, for maintaining effective internal control over financial reporting, and for assessing the effectiveness of internal control over financial reporting. In fulfilling its oversight responsibilities, the audit committee has reviewed and discussed with management the Company’s consolidated financial statements for the fiscal quarters and full year ended January 2, 2016, including a discussion of, among other things, the quarterly and annual earnings press releases, the quality of the Company’s accounting principles, the reasonableness of significant estimates and judgments, and the clarity of disclosures in the Company’s financial statements. The audit committee ensures that the Company establishes and appropriately resources a professional internal auditing function and that there are no unjustified restrictions or limitations imposed on that function. In addition to reviewing and approving the annual internal audit plan and overseeing other internal audit activities, the audit committee regularly reviews and discusses the results of internal audit reports. The audit committee also reviewed with PricewaterhouseCoopers LLP, the Company’s independent registered public accounting firm, the results of their audit and discussed matters required to be discussed by the Auditing Standard No. 16, Communications with Audit Committees, as adopted by the Public Company Accounting Oversight Board, other standards of the Public Company Accounting Oversight Board, rules of the SEC and other applicable regulations. The audit committee has reviewed permitted services under rules of the SEC as currently in effect and discussed with PricewaterhouseCoopers LLP their independence from management and the Company, including the matters in the written disclosures and the letter from the independent registered public accounting firm required by applicable requirements of the Public Company Accounting Oversight Board regarding the independent accountant’s communications with the audit committee concerning independence, and has considered and discussed the compatibility of non-audit services provided by PricewaterhouseCoopers LLP with that firm’s independence. For each engagement, Company management provided the audit committee with information about the services and fees, sufficiently detailed to allow the audit committee to make an informed judgment about the nature and scope of the services and the potential for the services to impair the independence of the independent registered public accounting firm. After the end of each fiscal year, Company management provides the audit committee with a summary of actual fees incurred with the independent registered public accounting firm. The audit committee meets with the independent registered public accounting firm, with and without management present, to discuss the results of their examinations; their evaluations of the Company’s internal Notice of Annual Meeting of Stockholders and iRobot 2016 Proxy Statement 27 control, including internal control over financial reporting; and the overall quality of the Company’s financial reporting. Additionally, the audit committee meets in separate executive sessions with the Company’s chief financial officer and the head of internal audit. In accordance with SEC rules and PricewaterhouseCoopers LLP policies, lead and concurring audit partners are subject to rotation requirements that limit the number of consecutive years an individual partner may provide services to our Company to a maximum of five years. The selection of the lead audit partner pursuant to this rotation policy involves a meeting between the candidate for the role and the chair of the audit committee, as well as with the full audit committee and members of management. The audit committee has also evaluated the performance of PricewaterhouseCoopers LLP, including, among other things, the length of time the firm has been engaged; its familiarity with our operations and businesses, accounting policies and practices, and our internal controls over financial reporting; and the appropriateness of fees paid to PricewaterhouseCoopers LLP for audit and non-audit services in 2015, on an absolute basis and as compared to the scope of prior year audits. Information about PricewaterhouseCoopers LLP’s fees for 2015 is discussed below in this proxy statement under “Proposal 2 - Ratification of Appointment of Independent Registered Public Accountants.” Based on its evaluation, the audit committee has retained PricewaterhouseCoopers LLP to serve as the Company’s independent registered public accounting firm for the 2016 fiscal year. Based on its review of the financial statements and the aforementioned discussions, the audit committee concluded that it would be reasonable to recommend, and on that basis did recommend, to the board of directors that the audited financial statements be included in the Company’s Annual Report on Form 10-K for the year ended January 2, 2016, which was filed with the SEC on February 19, 2016. Respectfully submitted by the Audit Committee, Gail Deegan (chairman) Michelle Stacy Andrea Geisser Notice of Annual Meeting of Stockholders and iRobot 2016 Proxy Statement 28 P r o x y S t a t e m e n t REPORT OF THE COMPENSATION AND TALENT COMMITTEE OF THE BOARD OF DIRECTORS No portion of this compensation and talent committee report shall be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, through any general statement incorporating by reference in its entirety the proxy statement in which this report appears, except to the extent that the Company specifically incorporates this report or a portion of it by reference. In addition, this report shall not be deemed filed under either the Securities Act or the Exchange Act. The compensation and talent committee of the board of directors, which is comprised solely of independent directors within the meaning of applicable rules of The NASDAQ Stock Market, Inc., outside directors within the meaning of Section 162(m) of the Internal Revenue Code of 1986, as amended, and non- employee directors within the meaning of Rule 16b-3 under the Securities Exchange Act of 1934, as amended, is responsible for developing executive compensation policies and advising the board of directors with respect to such policies and administering the Company’s cash incentive and equity incentive plans. The compensation and talent committee sets performance goals and objectives for the chief executive officer and the other executive officers, evaluates their performance with respect to those goals and sets their compensation based upon the evaluation of their performance. In evaluating executive officer pay, the compensation and talent committee retains the services of a compensation consultant and considers recommendations from the chief executive officer with respect to goals and compensation of the other executive officers. The compensation and talent committee assesses the information it receives in accordance with its business judgment. The compensation and talent committee also periodically reviews director compensation. All decisions with respect to executive and director compensation are approved by the compensation and talent committee. All decisions regarding chief executive officer and director compensation are reviewed and ratified by the full board. Ronald Chwang, Michelle Stacy, Andrea Geisser and Mohamad Ali are the current members of the compensation and talent committee. The compensation and talent committee has reviewed and discussed the Compensation Discussion and Analysis (the “CD&A”) for the year ended January 2, 2016 with management. In reliance on the reviews and discussions referred to above, the compensation and talent committee recommended to the board of directors, and the board of directors has approved, that the CD&A be included in this proxy statement and incorporated by reference in our Annual Report on Form 10-K for the year ended January 2, 2016, which was filed with the SEC on February 19, 2016. Respectfully submitted by the Compensation and Talent Committee, Andrea Geisser (chairman) Mohamad Ali Ronald Chwang Michelle Stacy Notice of Annual Meeting of Stockholders and iRobot 2016 Proxy Statement 29 COMPENSATION AND OTHER INFORMATION CONCERNING EXECUTIVE OFFICERS AND DIRECTORS Compensation Discussion and Analysis Overview Our compensation philosophy is based on a desire to balance retention of executive talent with pay for performance incentive compensation for continued service and our sustained financial and operating performance, which is designed to reward our named executive officers. We believe the compensation of our named executive officers should align our executives’ interests with those of our stockholders and focus executive behavior on the achievement of both near-term corporate targets as well as long-term business objectives and strategies. It is the responsibility of the compensation and talent committee of our board of directors to administer our compensation practices to ensure they are competitive and include incentives designed to appropriately drive our performance, including revenue, Adjusted EBITDA (as described below), and, when appropriate, individual objectives, including business unit contribution margin. Our compensation and talent committee annually reviews and approves elements of executive compensation, including executive officer base salaries, cash incentives and equity awards. Our performance as a company in 2015 was very strong. Full year revenue of $617 million represented an increase of 11% from full year revenue in 2014, and earnings per share of $1.47 in 2015 increased from earnings per share of $1.25 in 2014. Moreover, we launched the latest Roomba robot including new navigation and connectivity capabilities, while growing domestic home robot sales more than 25% year over year through successful investments in media and national promotions. Based on our 2015 performance, our named executive officers achieved and were paid short-term incentive cash compensation for 2015, while maintaining a significant portion of their compensation in the form of long-term incentives. The long-term incentives granted in 2015 included performance-based equity. We believe our compensation philosophies, as described below, have aligned executive compensation with Company performance. Objectives of Our Compensation Programs Our compensation programs for our executive officers are designed to achieve the following objectives: (cid:129) (cid:129) (cid:129) (cid:129) Provide competitive compensation that attracts, motivates and retains the best talent and the highest caliber executives to help us to achieve our strategic objectives; Connect a significant portion of the total potential compensation paid to executives to our annual financial performance; Align management’s interest with the interests of stockholders through long-term equity incentives; and Provide management with performance goals directly linked to our annual longer-term plan for growth and profit. We believe the compensation of our named executive officers should reflect their success as a management team, rather than as individuals, in attaining key operating objectives, such as Adjusted EBITDA, operating income as a percentage of revenue and revenue in dollars. We define Adjusted EBITDA as earnings before interest, taxes, depreciation and amortization, merger, acquisition and divestiture expenses, net intellectual property litigation expense, restructuring expense and non-cash stock compensation as shown in Exhibit A of this proxy. We also believe that the compensation of our named executive officers should not be based on the short- term performance of our stock, whether favorable or unfavorable, but rather that the price of our stock will, in the long-term, reflect our operating performance, and ultimately, the management of the Company by our named executive officers. Notice of Annual Meeting of Stockholders and iRobot 2016 Proxy Statement 30 P r o x y S t a t e m e n t Methodologies for Establishing Executive Compensation The compensation and talent committee, which is comprised entirely of independent directors, reviews the compensation packages for our named executive officers, including an analysis of all elements of compensation separately and in the aggregate. In determining the appropriate compensation levels for our chief executive officer, the compensation and talent committee meets with only itself and the executive vice president, human resources and corporate communications. With respect to the compensation levels of all other named executive officers, the compensation and talent committee meets with our chief executive officer and, as needed, our executive vice president, human resources and corporate communications. Our chief executive officer annually reviews the performance of each of the other named executive officers with the compensation and talent committee. The compensation and talent committee has engaged Pearl Meyer & Partners, LLC, (“Pearl Meyer”), as an independent compensation consultant to work with them in addition to our human resources department and the chief executive officer to assist them in developing recommendations regarding base salary levels, target incentive awards and actual payouts, performance goals for incentive compensation and equity awards for named executive officers. In conjunction with the annual performance review of each named executive officer, in February of each year, the compensation and talent committee carefully considers the recommendations of the chief executive officer with respect to the other executive officers when setting base salary, bonus payments under the prior year’s incentive compensation plan, and target amounts and performance goals for the current year’s incentive compensation plan. In addition, the compensation and talent committee similarly determines equity incentive awards, if any, for each named executive officer. Moreover, the compensation and talent committee considers the results of the advisory vote on named executive officer compensation, or the “say on pay” vote, that is completed each year at our annual meeting of stockholders. At the May 2015 annual meeting of stockholders, the Company held its annual say on pay vote. The results of the say on pay vote held in May 2015 were as follows: For Against Abstain 15,159,954 2,077,340 76,410 87.56% 12.00% 0.44% As part of ongoing efforts to be responsive to the concerns of our investors regarding our executive compensation programs and to reward outstanding operational and financial performance, the compensation and talent committee will, in consultation with Pearl Meyer, continue to consider changes to our compensation programs as appropriate in response to input from stockholders and evolving factors such as the business environment and competition for talent. The compensation and talent committee will continue to consider the outcome of our say on pay votes, regulatory changes and emerging best practices when making future compensation decisions for our named executive officers. Our compensation plans are developed, in part, by utilizing publicly available compensation data and subscription compensation survey data for national and regional companies in the technology, defense, household durables and robotics industries. We believe that the practices of this group of companies provide us with appropriate compensation benchmarks, because these companies have similar organizational structures and tend to compete with us to attract executives and other employees. For benchmarking executive compensation, we typically review the compensation data for companies with revenues, numbers of employees and market capitalizations similar to our profile. Notice of Annual Meeting of Stockholders and iRobot 2016 Proxy Statement 31 Compensation Consultant As the independent compensation consultant, Pearl Meyer provides the compensation and talent committee with advice on a broad range of executive compensation matters. The scope of its services includes the following: (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) Apprising the compensation and talent committee of compensation-related trends and developments in the marketplace; Informing the compensation and talent committee of regulatory developments relating to executive compensation practices; Assessing the composition of the peer companies used for comparative purposes; Identifying potential changes to the executive compensation program to maintain competitiveness and ensure consistency with business strategies, good governance practices and alignment with stockholder interests; and Reviewing the Compensation Discussion & Analysis section of the Company’s proxy statement. During fiscal 2015, Pearl Meyer attended all regularly scheduled meetings of the compensation and talent committee. The compensation and talent committee has assessed the independence of Pearl Meyer pursuant to SEC rules and concluded that no conflict of interest exists that would prevent Pearl Meyer from independently advising the compensation and talent committee. The Company did not engage Pearl Meyer for any other consulting work in fiscal 2015. Compensation Comparisons Developing a peer group for compensation comparison purposes is not an easy task for the Company. We do not have any “true” robotic comparator companies that are publicly-traded, stand-alone, U.S.-based or size- appropriate. We believe our mix of technology and technology/consumer products peer group firms is appropriate for compensation and performance comparison purposes, but our peer group firms differ substantially from the peer groups used by proxy advisory firms. These firms tend to compare us to organizations in the Consumer Durables industry such as home builders, retailers and furniture distributors/manufacturers (i.e., companies with little to no technology attributes to their respective products). These differences in peer group firms used to determine alignment of pay and performance result in substantial differences in Company performance and how compensation is valued and delivered to executives. Technology and technology/consumer products companies perform and pay differently from home builders, retailers and furniture distributors/ manufacturers. The compensation and talent committee takes all of these unique dynamics into account annually when reviewing our peer group firms and compensation practices. The following selection criteria, developed in conjunction with the compensation and talent committee, which are thoroughly reviewed and adjusted (as needed), were used to develop the comparative peer group used in assessing the competitiveness of our executive compensation for purposes of fiscal 2015 compensation actions: (cid:129) (cid:129) (cid:129) Companies with revenues within a similar range and generally similar market capitalization; Companies within comparable industries that focus on high-tech products (e.g., information technology, consumer durables, consumer services, aerospace/defense, capital goods, electronics equipment, instruments and components, healthcare technology, computers and peripherals, networking equipment and computer hardware); Companies with highly-engineered products and complex technologies with multiple industry applications; Notice of Annual Meeting of Stockholders and iRobot 2016 Proxy Statement 32 P r o x y S t a t e m e n t (cid:129) (cid:129) (cid:129) Technology companies whose products contain both hardware and software components; and Companies with moderate to high sales growth and opportunity. Other secondary criteria also considered include: (cid:129) (cid:129) (cid:129) Companies classified as “disruptive innovation;” Companies with products with brand recognition and/or disposable income “luxury” goods; and Companies with moderate margins and levels of research and development expense that indicate similar business models and financial strategy. Our peer group for 2015 consisted of the following 16 companies: 3D Systems Corporation Accuray Incorporated AeroVironment, Inc. Mercury Systems, Inc. Netgear, Inc. Orbital Sciences Corporation American Science and Engineering, Inc. Plantronics, Inc. Bruker Corporation Cognex Corporation Logitech International S.A. Maxwell Technologies Inc. Synaptics Incorporated Tivo, Inc. Trimble Navigation Limited Universal Electronics, Inc. These 16 companies, at the time of the analysis, had median annual revenues of $552 million and a median market capitalization of $1.48 billion. The compensation and talent committee reviews all components of compensation for named executive officers. In accordance with its charter, the compensation and talent committee also, among other responsibilities, administers our incentive compensation plan, and reviews management’s recommendations on company-wide compensation programs and practices. In setting compensation levels for our executive officers in fiscal 2015, the compensation and talent committee considered many factors in addition to the benchmarking described above, including, but not limited to: (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) the scope and strategic impact of the executive officer’s responsibilities; our past business and segment performance, and future expectations; our long-term goals and strategies; the performance and experience of each individual; past compensation levels of each individual and of the named executive officers as a group; relative levels of pay among the executive officers; the amount of each component of compensation in the context of the executive officer’s total compensation and other benefits; for each named executive officer, other than the chief executive officer, the evaluations and recommendations of the chief executive officer; and the competitiveness of the compensation packages relative to the selected benchmarks as highlighted by the independent compensation consultant’s analysis. The compensation and talent committee determines compensation for our chief executive officer using the same factors it uses for other executive officers, while placing greater emphasis on performance-based opportunities through long-term equity and short-term cash incentive compensation, which we believe better aligns our chief executive officer’s interests with our success and the interests of our stockholders. In assessing the compensation paid to our chief executive officer, the compensation and talent committee relies on both information from our selected benchmarks and its judgment with respect to the factors described above. Notice of Annual Meeting of Stockholders and iRobot 2016 Proxy Statement 33 Elements of Compensation Our executive compensation program in 2015 consists of three primary elements: base salary, an annual cash incentive, and long-term equity interests, primarily in the form of time vesting restricted stock units, performance share units (“PSUs”) and stock options. All of our executive officers also are eligible for certain benefits offered to employees generally, including life, health, disability and dental insurance, as well as participation in our 401(k) plan. We have also entered into executive agreements with our executive officers that provide for certain severance benefits upon termination of employment, including a termination in connection with a change in control of the Company. Base Salary In 2015, the compensation and talent committee believes our executive officers, including our chief executive officer, were paid salaries in line with their qualifications, experience and responsibilities. Salaries are structured so they are within the range of salaries paid by the peer companies reviewed by the compensation and talent committee in the technology and robotics industry. We generally aim to set base salaries for each of our executives between the 55th and 75th percentiles in the technology and robotics industry and also take into consideration many additional factors (described below) that we believe enable us to attract, motivate and retain our leadership team in an extremely competitive environment. Salaries are reviewed on an annual basis. The compensation and talent committee reviewed the base salaries for each of our executive officers, taking into account an assessment of the individual’s responsibilities, experience, individual performance and contribution to our performance, and also generally takes into account the competitive environment for attracting and retaining executives consistent with our business needs. With respect to each of our executive officers, our chief executive officer provided a detailed evaluation and recommendation related to base salary adjustments, if any (excluding for himself). We believe the base salaries paid to our executive officers during our fiscal year 2015 helped to achieve our executive compensation objectives. In addition, we believe that the base salaries of our named executive officers, which range from 18% to 34% as a percentage of total compensation, are set at an appropriate level to keep a significant portion of executive compensation at risk as part of our compensation philosophy. In February 2016, and as part of the annual review process while taking into account the considerations discussed above, the compensation and talent committee also approved base salary adjustments for 2016 as noted in the table below. Colin M. Angle Alison Dean Russell J. Campanello Christian Cerda Glen D. Weinstein Cash Incentive Compensation 2014 Base Salary % Increase 2015 Base Salary % Increase 2016 Base Salary $650,000 $400,000 $325,000 $350,000 $348,500 3.8% 7.5% 4.6% 14.3% 4.7% $675,000 $430,000 $340,000 $400,000 $365,000 3.7% 7.0% 2.9% 5.0% 4.1% $700,000 $460,000 $350,000 $420,000 $380,000 The compensation and talent committee believes that short-term cash incentive compensation for executive officers should be contingent upon successful achievement of significant financial and business objectives and implementation of our business strategy. For our named executive officers, including our chief executive officer, the payment of cash incentive awards is based on an evaluation of achievement against predetermined Company financial and operational metrics in accordance with our Senior Executive Incentive Compensation Plan that was adopted by the compensation and talent committee. For each named executive officer, 100% of his or her target cash incentive compensation in 2015 was tied to key Company financial and operating performance measures. Target cash incentives for named executive officers are generally targeted between the 55th and 75th percentiles of similar cash incentives provided to officers in peer companies reviewed by the compensation and talent Notice of Annual Meeting of Stockholders and iRobot 2016 Proxy Statement 34 P r o x y S t a t e m e n t committee in the technology and robotics industries. The actual amount of the cash incentives paid to the named executive officers, however, is subject to the assessment of the compensation and talent committee of our performance in general and the achievement of specific goals. For fiscal 2015, the threshold, target and maximum bonus awards under our Senior Executive Incentive Compensation Plan for each of our named executive officers, as a percentage of base salary earned during the fiscal year, are set forth in the table below. These target bonus amounts were set at levels the compensation and talent committee determined were appropriate in order to achieve our objective of retaining those executives who perform at or above the levels necessary for us to achieve our business plan, which, among other things, involved growing the Company in a cost-effective way. Colin M. Angle Alison Dean Russell J. Campanello Christian Cerda Glen D. Weinstein Incentive Bonus Award Opportunity Payout Scale (% of base salary) Threshold (25% of target opportunity) (1) 25.00% 18.75% 15.00% 15.00% 15.00% Target (100%) 100.00% 75.00% 60.00% 60.00% 60.00% Maximum (200% of target opportunity) (2) 200.00% 150.00% 120.00% 120.00% 120.00% (1) (2) Cash incentive payments are made only after the Company has achieved specified Adjusted EBITDA hurdle, excluding cash incentive compensation expense. This reflects the maximum incentive cash payout levels established under our Senior Executive Incentive Compensation Plan for 2015 based on the specific targets established for fiscal 2015. While the Senior Executive Incentive Compensation Plan is designed to provide short-term cash incentive payments based upon objectively determinable formulas that tie cash incentive payments to specific financial goals and strategic milestones, the compensation and talent committee retains the discretion to adjust cash incentive payments under the Senior Executive Incentive Compensation Plan based upon additional factors. The following tables summarize the 2015 performance measures, associated weightings and goals for each of the named executive officers under the Senior Executive Incentive Compensation Plan. As discussed previously, the payout opportunity ranges from 25% of the target incentive opportunity for achieving threshold level of performance to 200% of the target incentive opportunity for achieving maximum level of performance. For each of our named executive officers, the Senior Executive Incentive Compensation Plan targets for 2015 were: Performance Measure Weighting Threshold Target Maximum Adjusted EBITDA, excluding cash incentive compensation expense Revenue 50% $99.2 million $110.2 million $154.2 million 50% $577.9 million $642.1 million $898.9 million Performance Goal The compensation and talent committee chose this mix of financial targets for cash incentive compensation because it believes that executive officers should be focused on a small set of critical, team-based financial and operating metrics that reinforce the executive’s role and impact and company business strategy. Also, the compensation and talent committee established a hurdle where the available total incentive compensation payout for the entire employee base – including the named executive officers – would be reduced on a dollar-for-dollar basis if Adjusted EBITDA, excluding cash incentive compensation expense, fell below $99.2 million (the threshold for Adjusted EBITDA shown in the table above). Notice of Annual Meeting of Stockholders and iRobot 2016 Proxy Statement 35 The following table shows our achievement against the various metrics used for calculating the 2015 cash incentive compensation for our named executive officers: Metric Adjusted EBITDA, excluding cash incentive compensation expense Company Revenue Total Payout (as a % of Target) Performance Goal Threshold Target (100%) Maximum 2015 Actual Performance $ in millions $99.2 $110.2 $577.9 $642.1 $154.2 $898.9 $100.6 $616.8 Actual Percentage Earned (as % of target) 56% 80% 69% Based on our achievement of the performance metrics set forth above, the following cash awards were made to the named executive officers for performance in fiscal 2015 pursuant to our Senior Executive Incentive Compensation Plan: Colin M. Angle Alison Dean Russell J. Campanello Christian Cerda Glen D. Weinstein Long-Term Incentives Incentive Bonus Award Original Target Incentive Opportunity $675,000 $322,500 $204,000 $240,000 $219,000 Achievement ICP Earned & Paid 69% 69% 69% 69% 69% $465,750 $222,525 $140,760 $165,600 $151,110 Executive officers (and other employees) are eligible to receive restricted stock, stock option grants, restricted stock units and other stock awards that are intended to promote success by aligning employee financial interests with long-term stockholder value. Long-term incentives are awarded based on various factors primarily relating to the responsibilities of the individual officer or employee, his or her past performance, anticipated future contributions, prior grants and Company performance. In general, our compensation and talent committee bases its decisions to grant long-term incentives on recommendations of our chief executive officer and the compensation and talent committee’s analysis of peer group and industry compensation information, with the intention of keeping the executives’ overall compensation at a competitive level with the comparator companies reviewed by the compensation and talent committee in the technology and robotics industries. Our compensation and talent committee also takes into consideration the number of shares of common stock outstanding, the number of shares of common stock authorized for issuance under our equity compensation plans, the number of options and other equity awards held by the executive officer for whom an award is being considered and other elements of the officer’s compensation, as well as our compensation objectives and policies described above when reviewing the long-term incentive program. During fiscal 2015, our compensation and talent committee approved the following stock option and restricted stock unit awards to each of our named executive officers: Colin M. Angle Alison Dean Russell J. Campanello Christian Cerda Glen D. Weinstein Grant Date Fair Value ($) Nonqualified Stock Option Awards (#) Restricted Stock Units (#) $1,977,388 $727,910 $395,819 $870,445 $395,819 46,588 17,150 9,325 20,500 9,325 38,800 14,283 7,767 17,083 7,767 Notice of Annual Meeting of Stockholders and iRobot 2016 Proxy Statement 36 In March 2014 we began granting PSUs and in March 2015, we again granted our PSUs to our named executive officers, using a mix of 50% restricted stock units, 25% PSUs and 25% stock options. The compensation and talent committee believes a mix in our long-term equity awards between stock options, restricted stock units and PSUs aligns the incentives of our executives with the interests of our stockholders and the long-term performance of the Company by directly tying a significant portion of the value that may be realized from our equity compensation to the performance of the Company and to an increase in our stock price. Long-Term Equity Components P r o x y S t a t e m e n t Stock Options 25% Time- Based 50% RSUs 50% Performance- Based 50% PSUs 25% The compensation and talent committee expects the mix of long-term equity vehicles to evolve, as needed, in coming years to continue to best align and support our longer-term business strategy. The Company’s and the compensation and talent committee’s goals for selecting metrics for the PSU component of the long-term incentive program include: (cid:129) (cid:129) (cid:129) (cid:129) Alignment with business strategy; Alignment with stockholder interest in improving long-term business fundamentals; Correlation with total stockholder return; and Complementary to our short-term incentive metrics. After a thoughtful process and consideration of various metrics, the compensation and talent committee determined that operating income percent (with a threshold requirement for a minimum amount of revenue) continued to be the optimal initial metric for our PSU component. We believe operating income percent is an excellent measure of the underlying profitability of the enterprise and it has historical correlation with total stockholder return. Operating income percent is also a regularly reported financial measure, is understood by our investor base, and can be reasonably forecasted over the relevant performance period. We believe operating income percent in our long-term incentives coupled with the revenue component of our short-term incentives provides strong executive focus on important short- and long-term business drivers. For the PSUs granted in 2014 and 2015, the number of shares actually earned at the end of the three-year period will range from 0% to 100% of the target number of PSUs granted based on the Company’s performance Notice of Annual Meeting of Stockholders and iRobot 2016 Proxy Statement 37 against three-year operating income and revenue goals. In addition, while all vesting of earned PSUs occurs on the third anniversary of the date of grant, achievement of cumulative intermediate targets for the three-year period will allow PSUs to be deemed earned but not yet vested for the intermediate periods. Achievement of the cumulative target will allow all shares subject to the PSUs to be earned regardless of the achievement of the intermediate annual targets. Unvested awards are not eligible to receive any dividends or voting rights until the point at which any shares are earned and vested. Under this plan, participants can only earn awards at 100% of target or at 0% of target (for performance below 100% of target) for each year as there is no scaled award opportunity under this plan at this time. The following table outlines the threshold, target and maximum three-year performance goals for the PSU plan for the 2014-2016 cycle. 2014 - 2016 PSU Performance Cycle 2014 2015 2016 Cumulative Corresponding Payout Operating Income Percent Revenue (in millions) Threshold Target Actual Performance Achieved 9.5% 8.0% 8.0% 9.0% 9.0% 9.8% 10.0% 10.0% —% —% 9.1% 9.1% —% 100.0% Actual Performance Achieved Actual Payout Level Achieved $557 $617 $— $— 100% 100% —% —% Threshold $545 $610 $685 $1,840 For 2014, one-third of the awarded PSUs were deemed earned if the Company achieved a minimum 8.0% operating income as a percentage of revenue and at least $545 million in total revenue. In 2014, the Company achieved 9.5% in operating income as a percentage of revenue and $557 million in revenue. Accordingly, one- third of the total number of PSUs awarded were earned but have not yet vested. For 2015, one-third of the awarded PSUs were deemed earned if the Company achieved a minimum 9.0% operating income as a percentage of revenue and at least $610 million in total revenue. In 2015, the Company achieved 9.8% in operating income as a percentage of revenue and $617 million in revenue. Accordingly, an additional one-third of the total number of PSUs awarded were also earned but have not yet vested. Specifically, the named-executive officers earned the following restricted stock units with respect to the 2014-2016 long-term incentive plan cycle: 2014 - 2016 PSU Performance Cycle Colin M. Angle Alison Dean Russell J. Campanello Glen D. Weinstein PSUs Granted 2014 Earned PSUs 2015 Earned PSUs 2016 Earned PSUs Total PSUs Earned to Date 2014-2016 PSUs Granted & Earned 13,550 4,467 4,308 2,467 4,516 1,489 1,436 822 4,517 1,489 1,436 822 — — — — 9,033 2,978 2,872 1,644 The following table outlines the threshold, target and maximum three-year performance goals for the PSU plan for the 2015-2017 cycle. 2015 - 2017 PSU Performance Cycle 2015 2016 2017 Cumulative Corresponding Payout Operating Income Percent Revenue (in millions) Actual Performance Achieved 9.8% —% —% —% Threshold $624 $705 $804 $2,133 Actual Performance Achieved Actual Payout Level Achieved $617 $— $— $— —% —% —% —% Threshold Target 9.0% 9.0% 9.0% 9.0% 9.5% 9.5% 9.2% 9.2% —% 100.0% Notice of Annual Meeting of Stockholders and iRobot 2016 Proxy Statement 38 P r o x y S t a t e m e n t For 2015, one-third of the awarded PSUs were deemed earned if the Company achieved a minimum 9.0% operating income as a percentage of revenue and at least $624 million in total revenue. In 2015, the Company achieved 9.8% in operating income as a percentage of revenue and $617 million in revenue. Accordingly, no portion of the PSUs awarded under the 2015 long-term incentive plan for the 2015 - 2017 plan cycle were earned. Specifically, the named-executive officers earned the following restricted share units with respect to the 2015 long-term incentive plan: Colin M. Angle Alison Dean Russell J. Campanello Christian Cerda Glen D. Weinstein PSUs Granted 2015 Earned PSUs 2016 Earned PSUs 2017 Earned PSUs Total PSUs Earned to Date 2015-2017 PSUs Granted & Earned 19,400 7,142 3,883 8,542 3,883 0 0 0 0 0 — — — — — — — — — — — — — — — Also, the Company determines the value of its annual equity awards early in the year (usually in March). Annual awards are sized relative to Company and individual performance for the prior year as is a typical practice for many companies. By granting our annual awards at the beginning of each year and using the prior year’s performance to size our awards, there could be a possible disconnect with our awards relative to our performance in the year of grant. Other Benefits and Perquisites We also have various broad-based employee benefit plans. Our executive officers participate in these plans on the same terms as other eligible employees, subject to any legal limits on the amounts that may be contributed by or paid to executive officers under these plans. We offer a 401(k) plan, which allows our employees to invest in a wide array of funds on a pre-tax basis. We do not provide pension arrangements or post-retirement health coverage for our named executive officers or other employees. We also maintain insurance and other benefit plans for our employees. We offer no perquisites to our executive officers that are not otherwise available to all of our employees. Stock Ownership Guidelines We introduced equity ownership guidelines in 2011 to further align the interests of our senior management and directors with those of our stockholders. Under the guidelines, executives are expected to hold common stock in an amount equal to a multiple of their base salary as determined by their position. The guidelines range from two times base salary for our senior executives to six times base salary for our chief executive officer. In addition, under the guidelines, our directors are expected to hold common stock in an amount equal to six times their current board retainer fee. For purposes of these guidelines, stock ownership includes shares for which the executive or director has direct or indirect ownership or control, including restricted stock and in-the-money vested stock options, but does not include unvested restricted stock units or unvested stock options. Executives and directors are expected to meet their ownership guidelines within five years of becoming subject to the guidelines. All executives and directors are currently meeting or are working to achieve these guidelines within the five year time period. Hedging/Pledging Policy Since 2005, we have had a written insider trading policy that prohibits holding Company securities as collateral in a margin account, any hedging transactions and prohibits pledging of Company securities as collateral for a loan unless the pledge has been approved by the compensation and talent committee of the board of directors. To date, no such approval has been requested or given. Notice of Annual Meeting of Stockholders and iRobot 2016 Proxy Statement 39 Executive Agreements We have entered into executive agreements with each of our named executive officers. The executive agreements provide for severance payments equal to 50% of such officer’s annual base salary at the highest annualized rate in effect during the one-year period immediately prior to termination, payable in six equal monthly installments, as well as monthly premium payments for continued health, dental and vision benefits for up to six months following termination, in the event that we terminate his or her employment other than for cause, as defined in the executive agreements. In addition, these executive agreements provide that if we experience a change in control, as defined in the executive agreements, and the employment of such officer is terminated by the Company without cause at any time within the period beginning on the date that is 45 days prior to the date of the public announcement of the execution of a definitive agreement for a change in control and ending on the first anniversary of the effective date of the change in control, or if such officer terminates his or her employment for good reason, as defined in the executive agreements, during the one-year period following the change in control, then all unvested equity held by such officer becomes fully-vested and immediately exercisable and such officer is entitled to severance payments equal to 200% of his or her annual base salary, at the highest annualized rate in effect during the period immediately prior to the effective date of the change in control and the date of termination of employment, and 200% of such officer’s highest target cash incentive with respect to the year prior to the year in which the change in control occurred and ending in the year in which the officer’s employment is terminated, each payable in 24 equal monthly installments, as well as monthly premium payments for continued health, dental and vision benefits for up to 24 months following termination. Receipt of the severance payments and benefits under the executive agreements is subject to the executive officer’s execution of a separation agreement, including a general release of claims, in a form and of a scope reasonably acceptable to the Company and compliance with any noncompetition, inventions and/or nondisclosure obligations owed to the Company. There are no tax gross-up payable under the executive agreements or otherwise. It is the belief of the compensation and talent committee that these provisions are consistent with executive severance arrangements that are customary for public companies at our stage of development and are necessary in order to hire and/or retain our key talent. Clawback In 2015, the Company adopted a clawback policy that provides the board of directors discretion to reduce the amount of future compensation payable to an executive of the Company for excess proceeds from incentive compensation received by such executive due to a material restatement of financial statements. The clawback period is the three-year period following the filing of any such restated financial statements with the SEC. Tax Deductibility of Executive Compensation In general, under Section 162(m) of the Code, we cannot deduct, for federal income tax purposes, compensation in excess of $1,000,000 paid to certain executive officers. This deduction limitation does not apply, however, to compensation that meets all the requirements to be deemed “qualified performance-based compensation” within the meaning of Section 162(m) of the Code and the regulations promulgated thereunder. We have considered the limitations on deductions imposed by Section 162(m) of the Code and it is our present intention, for so long as it is consistent with our overall compensation objective, to structure executive compensation to minimize application of the deduction limitations of Section 162(m) of the Code, while also maintaining the flexibility to pay compensation that is subject to the deduction limitations imposed by Section 162(m) of the Code. Notice of Annual Meeting of Stockholders and iRobot 2016 Proxy Statement 40 Risk Oversight of Compensation Programs The compensation and talent committee annually reviews and believes our compensation program for executive officers is not structured to be reasonably likely to present a material adverse risk to us based on the following factors: P r o x y S t a t e m e n t (cid:129) (cid:129) (cid:129) (cid:129) Our compensation program for executive officers is designed to provide a balanced mix of cash and equity and annual and longer-term incentives, including compensation based on the achievement of performance targets. The base salary portion of compensation is designed to provide a steady income regardless of our stock price performance so executives do not feel pressured to focus primarily on stock price performance to the detriment of other important business metrics. Our stock option grants and restricted stock unit grants generally vest over four years and, in the case of stock options, are only valuable if our stock price increases over time. Our PSUs vest only after the achievement of significant long-term metrics designed to drive the long- term interests of our stockholders. PSU awards align the interests of our executive officers with the success of our business strategy. (cid:129) (cid:129) Maximum payout levels for cash incentive compensation are capped. (cid:129) Our stock ownership guidelines align the interests of our executive officers with those of our stockholders. Compensation Consultant Independence Pursuant to its charter, the compensation and talent committee has the sole authority to retain, terminate, obtain advice from, oversee and compensate its outside advisors, including its compensation consultant. In 2014 in preparation for the 2015 fiscal year, the compensation and talent committee retained Pearl Meyer as its independent executive compensation consultant. None of our management team participated in the compensation and talent committee’s decision to retain Pearl Meyer. Pearl Meyer reports directly to the compensation and talent committee, and the compensation and talent committee may replace Pearl Meyer or hire additional consultants at any time. Pearl Meyer attends meetings of the compensation and talent committee, as requested, and communicates with the chairman of the compensation and talent committee between meetings; however, the committee makes all decisions regarding the compensation of the Company’s executive officers. Pearl Meyer provides various executive compensation services to the compensation and talent committee with respect to our executive officers and other key employees at the compensation and talent committee’s request. The services Pearl Meyer provides include advising the compensation and talent committee on the principal aspects of the executive compensation program and evolving best practices, and providing market information and analysis regarding the competitiveness of our program design and awards in relationship to our performance. The compensation and talent committee reviews the services provided by its outside consultants and believes Pearl Meyer is independent in providing executive compensation consulting services. The compensation and talent committee conducted a specific review of its relationship with Pearl Meyer in 2015, and determined Pearl Meyer’s work for the compensation and talent committee did not raise any conflicts of interest, consistent with the guidance provided under the Dodd-Frank Act and by the SEC and NASDAQ. In making this determination, the compensation and talent committee noted the following during 2015: (cid:129) (cid:129) Pearl Meyer did not provide any services to us or our management other than service to the compensation and talent committee (including compensation benchmarking for our senior leadership team), and it its services were limited to executive compensation consulting; Fees paid by us to Pearl Meyer represented less than 1.0% of Pearl Meyer’s total revenue for the period January 2015 through December 2015; Notice of Annual Meeting of Stockholders and iRobot 2016 Proxy Statement 41 (cid:129) (cid:129) (cid:129) (cid:129) Pearl Meyer maintains a Conflicts Policy and an Insider Trading Policy which were provided to the compensation and talent committee with specific policies and procedures designed to ensure independence; None of the Pearl Meyer consultants on our account had any business or personal relationship with our compensation and talent committee members; None of the Pearl Meyer consultants on our account, or Pearl Meyer, had any business or personal relationship with our executive officers; and None of the Pearl Meyer consultants on our account directly own shares of our stock. The compensation and talent committee continues to monitor the independence of its compensation consultant on a periodic basis. Notice of Annual Meeting of Stockholders and iRobot 2016 Proxy Statement 42 Executive Compensation Summary The following table sets forth summary compensation information for our chief executive officer, chief financial officer and the three other most highly compensated executive officers: SUMMARY COMPENSATION TABLE - 2015 Name and Principal Position Year Salary ($)(1) Stock Awards ($)(2) Option Awards ($)(2) Non-Equity Incentive Plan Compensation ($)(3) All Other Compensation ($)(4) Total ($) P r o x y S t a t e m e n t Colin M. Angle 2015 684,135 1,996,260 646,548 Chairman, Chief Executive Officer and Director 2014 646,154 1,762,178 589,970 2013 613,462 1,514,475 379,237 Alison Dean Executive Vice President, Chief Financial Officer, Treasurer and Principal Accounting Officer 2015 2014 2013 433,654 388,462 308,838 734,878 580,890 721,142 238,003 194,546 179,783 Russell J. Campanello Executive Vice President, Human Resources and Corporate Communications 2015 344,231 325,000 2014 399,595 129,411 187,841 560,299 2013 322,115 270,319 67,618 2015 400,000 2014 335,385 878,938 284,498 360,889 120,563 465,750 552,500 981,250 222,525 212,500 306,150 140,760 165,750 306,150 165,600 159,250 7,950 3,800,643 7,800 3,558,602 7,650 3,496,074 7,950 7,800 7,650 1,637,010 1,384,198 1,525,563 7,950 1,021,947 1,246,690 7,800 7,650 973,852 7,950 1,736,986 983,887 7,800 2015 369,481 399,595 129,411 151,110 7,950 1,057,547 Christian Cerda Executive Vice President and General Manager, Home Robots Business Unit Glen D. Weinstein Executive Vice President and Chief Legal Officer (1) (2) (3) (4) Represents salary earned in the fiscal years presented, which covered 53 weeks for fiscal year 2015 and 52 weeks for fiscal years 2014 and 2013. Represents the aggregate grant date fair value for stock and option awards granted in the fiscal years ended January 2, 2016, December 27, 2014 and December 28, 2013, as applicable, in accordance with Financial Accounting Standards Board, Accounting Standards Codification Topic 718 (“ASC Topic 718”). See the information appearing in note 9 to our consolidated financial statements included as part of our Annual Report on Form 10-K for the fiscal year ended January 2, 2016 for certain assumptions made in the valuation of stock and option awards. Represents amounts paid in 2016, 2015 and 2014, respectively under the Company’s Senior Executive Incentive Compensation Plan for performance in the fiscal years ended January 2, 2016, December 27, 2014 and December 28, 2013, as applicable. Includes 401(k) matching contributions for each of our named executive officers. Excludes medical, group life insurance and certain other benefits received by the named executive officers that are available generally to all of our salaried employees. Notice of Annual Meeting of Stockholders and iRobot 2016 Proxy Statement 43 Grants of Plan-Based Awards in 2015 The following table sets forth, for each of the named executive officers, information about grants of plan- based awards during fiscal year 2015: GRANTS OF PLAN-BASED AWARDS — 2015 Estimated Future Payouts Under Non-Equity Incentive Plan Awards(1) Estimated Future Payouts Under Equity Incentive Plan Awards(2) Grant Date Threshold ($) Target ($) Maximum ($) Threshold (#) Target (#) Maximum (#) All Other Stock Awards: Number of Shares of Stock or Units (#)(3) All Other Option Awards: Number of Securities Underlying Options (#)(3) Exercise or Base Price of Option Awards ($/Sh) Name Colin M. Angle — 168,750 675,000 1,350,000 3/6/2015 3/6/2015 3/6/2015 6/5/2015 — — — — — — — — — — — — Alison Dean — 80,625 322,500 645,000 Russell J. Campanello Christian Cerda Glen D. Weinstein 3/6/2015 3/6/2015 3/6/2015 6/5/2015 — 3/6/2015 3/6/2015 3/6/2015 6/5/2015 — 3/6/2015 3/6/2015 3/6/2015 6/5/2015 — 3/6/2015 3/6/2015 3/6/2015 6/5/2015 — — — — — — — — — — — — 51,000 — 204,000 — 408,000 — — — — — — — — — — 60,000 — 240,000 — 480,000 — — — — — — — — — — 54,750 — 219,000 — 438,000 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 19,400 19,400 — — — — — — — — 7,142 7,142 — — — — 3,883 — — — — 8,542 — — — — 3,883 — — — — — — — 3,883 — — — — 8,542 — — — — 3,883 — — — — — 38,800 — — — — 14,283 — — — — 7,767 — — — — 17,083 — — — — 7,767 — — — — — 23,238 23,350 — — — 8,550 8,600 — — — 4,650 4,675 — — — 10,225 10,275 — — — 4,650 4,675 — — — 34.30 32.38 — — — 34.30 32.38 — — — 34.30 32.38 — — — 34.30 32.38 — — — 34.30 32.38 Grant Date Fair Value of Stock and Option Awards ($) — 665,420 1,330,840 334,681 311,867 — 244,971 489,907 123,140 114,863 — 133,187 266,408 66,971 62,440 — 292,991 585,947 147,263 137,235 — 133,187 266,408 66,971 62,440 (1) (2) This reflects the threshold, target and maximum incentive cash payout levels established under our Senior Executive Incentive Compensation Plan. The actual amounts paid for fiscal year 2015 are disclosed in the “Non-Equity Incentive Plan Compensation” column of the Summary Compensation Table. This reflects the threshold, target and maximum equity incentive payout levels associated with PSUs made pursuant to our 2005 Stock Option and Incentive Plan, as amended (the “2005 Plan”), which amounts will be payable in shares of our common stock, if the performance thresholds are met under the terms of the awards (3) All stock awards and option awards were made pursuant to the 2005 Plan or our 2015 Stock Option and Incentive Plan (the “2015 Plan”). Notice of Annual Meeting of Stockholders and iRobot 2016 Proxy Statement 44 P r o x y S t a t e m e n t Outstanding Equity Awards at Fiscal Year End The following table sets forth, for each of the named executive officers, information about unexercised option awards and other unvested equity awards that were held as of January 2, 2016. OUTSTANDING EQUITY AWARDS AT FISCAL YEAR END — 2015 Option Awards Stock Awards Name Colin M. Angle Alison Dean Russell J. Campanello Grant Date 4/2/2010 4/1/2011 3/9/2012 3/8/2013 3/7/2014 6/6/2014 3/6/2015 6/5/2015 4/2/2010 4/1/2011 3/9/2012 3/8/2013 6/7/2013 3/7/2014 6/6/2014 3/6/2015 6/5/2015 12/30/2010 3/9/2012 3/8/2013 3/7/2014 6/6/2014 3/6/2015 6/5/2015 Number of Securities Underlying Unexercised Options (#) Exercisable Number of Securities Underlying Unexercised Options (#) Unexercisable (1)(2) Option Exercise Price ($) Option Expiration Date 113,950 45,200 38,274 24,871 6,771 8,619 — — 11,000 7,375 4,430 3,421 5,298 2,231 2,844 — — 40,000 5,156 4,435 2,155 2,746 — — — — 2,551 11,304 8,704 11,081 23,238 23,350 — — 295 1,554 3,177 2,869 3,656 8,550 8,600 — 344 2,015 2,770 3,529 4,650 4,675 14.52 33.48 26.59 22.86 43.35 35.43 34.30 32.38 14.52 33.48 26.59 22.86 34.67 43.35 35.43 34.30 32.38 24.53 26.59 22.86 43.35 35.43 34.30 32.38 4/2/2017 4/1/2018 3/9/2019 3/8/2020 3/7/2021 6/6/2021 3/6/2022 6/5/2022 4/2/2017 4/1/2018 3/9/2019 3/8/2020 6/7/2020 3/7/2021 6/6/2021 3/6/2022 6/5/2022 12/30/2017 3/9/2019 3/8/2020 3/7/2021 6/6/2021 3/6/2022 6/5/2022 Number of Shares or Units of Stock That Have Not Vested (#)(3) — — 20,312 33,124 29,358 — 38,800 — — — 2,350 4,550 7,400 9,677 — 14,283 — — 5,237 5,912 9,334 — 7,767 — Market Value of Shares or Units of Stock That Have Not Vested ($)(4) — — 719,045 1,172,590 1,039,273 — 1,373,520 — — — 83,190 161,070 261,960 342,566 — 505,618 — — 185,390 209,285 330,424 — 274,952 — Equity Incentive Plan Awards; Number of Unearned Shares, Units or Other Rights That Have Not Vested (#)(5) — — — — 4,517 — 19,400 — — — — — — 1,489 — 7,142 — — — — 1,436 — 3,883 — Equity Incentive Plan Awards; Payout or Market Value of Unearned Shares, Units or Other Rights That Have Not Vested ($)(4) — — — — 159,902 — 686,760 — — — — — — 52,711 — 252,827 — — — — 50,834 — 137,458 — Christian Cerda 3/8/2013 41,250 18,750 22.86 3/8/2020 15,000 531,000 — — Glen D. Weinstein 3/7/2014 6/6/2014 3/6/2015 6/5/2015 4/1/2011 3/9/2012 9/7/2012 3/8/2013 3/7/2014 6/6/2014 3/6/2015 6/5/2015 1384 1,762 — — 11,375 3,474 4,489 4,435 1,231 1,565 — — 1,779 2,263 10,225 10,275 — 364 1,036 2,015 1,582 2,010 4,650 4,675 43.35 35.43 34.30 32.38 33.48 26.59 25.99 22.86 43.35 35.43 34.30 32.38 3/7/2021 6/6/2021 3/6/2022 6/5/2022 4/1/2018 3/9/2019 9/7/2019 3/8/2020 3/7/2021 6/6/2021 3/6/2022 6/5/2022 6,243 — 17,083 — — 2,893 2,743 5,912 5,343 — 7,767 — 221,002 — 604,738 — — 102,412 97,102 209,285 189,142 — 274,952 — — — 8,542 — — — 302,387 — 823 — 3,883 — 29,134 — 137,458 — Notice of Annual Meeting of Stockholders and iRobot 2016 Proxy Statement 45 (1) (2) (3) Except as otherwise noted stock option grants vest over a four-year period, at a rate of twenty-five percent (25%) on the first anniversary of the grant date, and the remainder in equal quarterly installments thereafter. Stock options granted on June 6, 2014 vest at a rate of twenty-five percent (25%) on March 7, 2015, and the remainder in equal quarterly installments over a three-year period. Restricted stock unit awards vest over a four-year period, at a rate of twenty-five percent (25%) on each anniversary of the grant date. (4) Amounts disclosed in this column were calculated based on the closing price of our common stock on (5) December 31, 2015, the last business date of the fiscal year ended January 2, 2016. PSU awards are earned over a three-year period and vest at the end of such three-year period, dependent on achievement of pre-established performance goals and objectives. For additional information on the PSU awards, see the section above entitled “Compensation Discussion and Analysis - Elements of Compensation - Long-Term Incentives.” Option Exercises and Stock Vested The following table sets forth, for each of the named executive officers, information with respect to the exercise of stock options and the vesting of restricted stock unit awards during the year ended January 2, 2016. OPTION EXERCISES AND STOCK VESTED — 2015 Option Awards Stock Awards Shares Acquired on Exercise(#) 73,829 1,873 — — — Value Realized on Exercise($) (1) 1,706,396 34,126 — — — Number of Shares Acquired on Vesting(#) 49,350 11,490 19,098 9,582 11,265 Value Realized on Vesting($) (2) 1,688,706 385,524 658,674 330,387 374,248 Name Colin M. Angle Alison Dean Russell J. Campanello Christian Cerda Glen D. Weinstein (1) Amounts disclosed in this column were calculated based on the difference between the fair market value of our common stock on the date of exercise and the exercise price of the options in accordance with regulations promulgated under the Exchange Act. (2) Amounts disclosed in this column were calculated based on the fair market value of the shares on the date of settlement upon vesting. Notice of Annual Meeting of Stockholders and iRobot 2016 Proxy Statement 46 P r o x y S t a t e m e n t Equity Compensation Plan Information The following table provides information as of January 2, 2016 regarding shares of common stock that may be issued under our equity compensation plans, consisting of the Amended and Restated 2004 Stock Option and Incentive Plan, the 2005 Stock Option and Incentive Plan, as amended, the Evolution Robotics, Inc. 2007 Stock Plan, and the 2015 Stock Option and Incentive Plan. Number of securities to be issued upon exercise of outstanding options, units and rights (a) Weighted average exercise price of outstanding options, units and rights (b) Number of securities remaining available for future issuance under equity compensation plan (excluding securities referenced in column (a))(c) 2,262,840 (1) $27.61 2,484,296 (2) 49,079 (3) 2,311,919 (4) $ 4.52 $26.73 — 2,484,296 Plan Category Equity compensation plans approved by security holders Equity compensation plans not approved by security holders Total (1) Includes 1,238,471 shares of common stock issuable upon the exercise of outstanding options, 956,727 shares of common stock issuable upon the vesting of restricted stock units, and 67,642 shares of common stock issuable upon the vesting of PSUs if specified performance metrics are achieved. (2) As of January 2, 2016, there were no shares available for grants under the Amended and Restated 2004 Stock Option and Incentive Plan, our 2005 Stock Option and Incentive Plan, as amended, and the Evolution Robotics, Inc. 2007 Stock Plan, and 2,484,296 shares available under the 2015 Stock Option and Incentive Plan. In connection with the adoption of the 2015 Stock Option and Incentive Plan in 2015, the board of directors determined that no further shares would be granted under any previous Plans. Represents shares issued pursuant to the Evolution Robotics, Inc. 2007 Stock Plan, acquired by the company as part of the acquisition of Evolution Robotics, Inc., on October 1, 2012. Includes 1,287,550 shares of common stock issuable upon the exercise of outstanding options. (4) (3) Potential Benefits Upon Termination or Change in Control Severance and Change in Control Arrangements in General The Company has entered into executive agreements with each of the named executive officers, the terms of which are described in the “Compensation Discussion and Analysis” section above. Notice of Annual Meeting of Stockholders and iRobot 2016 Proxy Statement 47 Cash Payments and/or Acceleration of Vesting Following Certain Termination Events Assuming the employment of our named executive officers was terminated without cause (not in connection with a change in control) on January 2, 2016, our named executive officers would be entitled to cash payments in the amounts set forth opposite their names in the table below, subject to any deferrals required under Section 409A of the Code. Name Colin M. Angle Alison Dean Russell J. Campanello Christian Cerda Glen D. Weinstein Base Salary ($) 337,500 215,000 170,000 200,000 182,500 Continuation of Health Plan Premium Payments ($) 12,779 11,408 12,779 12,779 11,408 Total ($) 350,279 226,408 182,779 212,779 193,908 Assuming the employment of our named executive officers was terminated by the Company without cause during the period beginning on the date that is 45 days prior to the date of the public announcement of the execution of a definitive agreement for a change in control and ending on the first anniversary of the effective date of the change in control, or such officers resigned with good reason during the one-year period following a change in control and that such termination or resignation occurred on January 2, 2016, our named executive officers would be entitled to cash payments in the amounts set forth opposite their names in the below table, subject to any delay in payment required under Section 409A of the Code, and acceleration of vesting as set forth in the table below. The total amount payable to each executive officer may be subject to reduction in certain circumstances if the amount would cause the executive officer to incur an excise tax under Section 4999 of the Code. The following table provides the market value (that is, the value based upon our stock price on January 2, 2016, minus the exercise price, if any) of stock options and restricted stock units that would become exercisable or vested as a result of these acceleration events as of January 2, 2016. Name Colin M. Angle Alison Dean Russell J. Campanello Christian Cerda Glen D. Weinstein Base Salary ($) Bonus ($) 1,350,000 1,350,000 860,000 680,000 800,000 730,000 645,000 408,000 480,000 438,000 Continuation of Health Plan Premium Payments ($) Market Value of Stock Options ($) Market Value of Restricted Stock and Restricted Stock Units ($) Total ($) 51,115 45,631 51,115 51,115 45,631 260,305 4,304,428 7,315,848 59,782 47,532 277,403 57,457 1,354,404 2,964,817 1,000,050 2,186,697 1,356,740 2,965,258 872,893 2,143,981 Notice of Annual Meeting of Stockholders and iRobot 2016 Proxy Statement 48 Director Compensation In connection with our efforts to attract and retain highly-qualified individuals to serve on our board of directors, we maintain a cash and equity compensation policy for our non-employee members of our board of directors. In fiscal year 2015, each non-employee member of our board of directors was entitled to the following cash compensation: P r o x y S t a t e m e n t Annual retainer for Board membership Annual retainer for lead independent director Audit Committee Annual retainer for committee membership Additional retainer for committee chair Compensation and Talent Committee Annual retainer for committee membership Additional retainer for committee chair Nominating and Corporate Governance Committee Annual retainer for committee membership Additional retainer for committee chair Strategy and Finance Committee Annual retainer for committee membership Additional retainer for committee chair $50,000 $ 10,000 $ 10,000 $ 10,000 $ 7,500 $ 7,500 $ 5,000 $ 5,000 $ 7,500 — In July 2015, the board of directors formed an ad hoc strategy and finance committee focused on overseeing strategic objectives and their translation into stockholder value creation, along with reviewing the Company’s capital allocation process. Based upon this commitment of time, the compensation and talent committee approved additional compensation for members of the strategy and finance committee, as noted above, beginning in the third quarter of 2015. In March 2016, the ad hoc strategy and finance committee was replaced with a strategy and finance committee. The strategy and finance committee will have the same fee structure as the ad hoc strategy and finance committee. Pursuant to our Non-employee Directors’ Deferred Compensation Program, each non-employee director may elect in advance to defer the receipt of these cash fees. During the deferral period, the cash fees will be deemed invested in stock units. The deferred compensation will be settled in shares of our common stock upon the termination of service of the director or such other time as may have been previously elected by the director. The shares will be issued from our 2015 Plan or a subsequent stock option and incentive plan approved by our stockholders. In 2015, each of our non-employee members of our board of directors was entitled to the following equity compensation: Upon initial election to the board of directors, a non-employee director receives a one-time grant of restricted stock units having a fair market value of $220,000, measured at the end of the tenth week of the fiscal quarter in which the director was elected, which vests over a four-year period at a rate of twenty-five percent (25%) on each of the first four anniversaries of the grant date. At the end of the tenth week of the fiscal quarter in which our annual meeting of stockholders occurs, each re-elected non-employee director receives a grant of restricted stock units having a fair market value of $110,000, which vests on the earlier of the date of the first anniversary of such grant or the date of the first annual meeting of stockholders following the date of grant date. Notice of Annual Meeting of Stockholders and iRobot 2016 Proxy Statement 49 All of our directors are reimbursed for reasonable out-of-pocket expenses incurred in attending meetings of the board of directors. The following table provides compensation information for the fiscal year ended January 2, 2016 for each non-employee member of our board of directors. No member of our board of directors receives any additional compensation for services rendered as a member of our board of directors. DIRECTOR COMPENSATION TABLE — 2015 Name Mohamad Ali Ronald Chwang, Ph.D. Gail Deegan Deborah G. Ellinger Andrea Geisser (1) Paul J. Kern, Gen. U.S. Army (ret.) (3) George C. McNamee (1) Paul L. Sagan Michelle V. Stacy Fees Earned or Paid in Cash ($) Stock Awards ($)(2) 28,125 61,250 67,500 62,500 72,500 30,000 76,250 30,000 58,750 219,898 109,995 109,995 109,995 109,995 — 109,995 109,995 109,995 Total ($) 248,023 171,245 177,495 172,495 182,495 30,000 186,245 139,995 168,745 (1) Messrs. Geisser and McNamee deferred all of their 2015 cash compensation pursuant to our Non-employee (2) Directors’ Deferred Compensation Program under which they received stock units in lieu of cash. Represents the grant date fair value of restricted stock units awarded in the fiscal year ended January 2, 2016 in accordance with FASB ASC Topic 718. The grant date fair value is the fair market value of our common stock on the date of grant multiplied by the number of shares of common stock underlying such restricted stock unit award. (3) Gen. Kern stepped down from the board of directors at the 2015 annual meeting of stockholders, and as a result was not eligible to receive a stock award in 2015. Notice of Annual Meeting of Stockholders and iRobot 2016 Proxy Statement 50 P r o x y S t a t e m e n t The non-employee members of our board of directors who held such position on January 2, 2016 held the following aggregate number of unexercised options and unvested restricted stock units as of such date: Name Mohamad Ali Ronald Chwang, Ph.D. Gail Deegan Deborah G. Ellinger Andrea Geisser George C. McNamee Michelle V. Stacy Number of Securities Underlying Unexercised Options Number of Unvested Restricted Stock Units — 20,000 — — — 20,000 — 7,429 3,397 3,397 3,397 3,397 3,397 8,353 Transactions with Related Persons Other than compensation agreements and other arrangements which are described in the “Compensation Discussion and Analysis” section of this proxy statement, in 2015, there was no transaction or series of similar transactions to which we were or will be a party in which the amount involved exceeded or will exceed $120,000 and in which any director, executive officer, holder of five percent or more of any class of our capital stock or any member of their immediate family had or will have a direct or indirect material interest. Our board of directors has adopted a written related party transaction approval policy, which sets forth our policies and procedures for the review, approval or ratification of any transaction required to be reported in our filings with the SEC. Our policy with regard to related party transactions is that all related party transactions are to be reviewed by our general counsel, who will determine whether the contemplated transaction or arrangement requires the approval of the board of directors, the nominating and corporate governance committee, both or neither. Notice of Annual Meeting of Stockholders and iRobot 2016 Proxy Statement 51 PROPOSAL 2 RATIFICATION OF APPOINTMENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTANTS The audit committee of the board of directors has retained the firm of PricewaterhouseCoopers LLP (“PwC”), independent registered public accountants, to serve as independent registered public accountants for our 2016 fiscal year. PwC has served as our independent registered public accounting firm since 1999. The Company is asking stockholders to ratify the selection by the audit committee of the board of directors of PwC as our independent auditors for the 2016 fiscal year. Although ratification by the stockholders is not required by law, the board of directors has determined that it is desirable to request approval of this selection by the stockholders as a matter of good corporate governance. In the event the stockholders fail to ratify the appointment of PwC, the audit committee will consider this factor when making any determinations regarding PwC. Independence and Quality As provided in the audit committee charter, the audit committee is directly responsible for the appointment, compensation, retention and oversight of the work of the independent auditors for the purpose of preparing or issuing an audit report or performing other audit, review or attest services for the company. Each year, the audit committee considers whether to retain PwC and whether such service continues to be in the best interests of the Company and our stockholders. Among other things, the audit committee considers: (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) the quality and scope of the audit; the independence of PwC; the performance of the lead engagement partner, the number of people staffed on the engagement team, and the quality of the engagement team, including the quality of the audit committee’s ongoing communications with and the capability and expertise of the team; PwC’s tenure as our independent auditor and its familiarity with our global operations and business, accounting policies and practices, and internal controls over financial reporting; and external data relating to audit quality and performance, including recent PCAOB inspection reports available for PwC. Based on this evaluation, the members of the audit committee and the board of directors believe that PwC is independent and that it is in the best interests of the Company and our stockholders to retain PwC to serve as our independent auditors for the fiscal year 2016. The audit committee is also responsible for selecting the lead engagement partner. The rules of the Securities and Exchange Commission (the “SEC”) and PwC’s policies require mandatory rotation of the lead engagement partner every five years. In 2015, the audit committee selected a new lead engagement partner for the 2016 fiscal year. During 2015, the audit committee, including the chair of the audit committee, were directly involved in the selection of the new lead engagement partner. The process for selecting a new lead engagement partner was fulsome and allowed for thoughtful consideration of multiple candidates, each of whom met a list of specified criteria. The process included discussions between the chair of the audit committee and PwC as to all of the final candidates under consideration for the position, meetings with the full audit committee and management, and robust interviews with the final candidates. Notice of Annual Meeting of Stockholders and iRobot 2016 Proxy Statement 52 P r o x y S t a t e m e n t Pre-Approval of Audit and Non-audit Services The audit committee of the board of directors has implemented procedures under our audit committee pre- approval policy for audit and non-audit services (the “Pre-Approval Policy”) to ensure that all audit and permitted non-audit services to be provided to us have been pre-approved by the audit committee. Specifically, the audit committee pre-approves the use of PwC for specified audit and non-audit services, within approved monetary limits. If a proposed service has not been pre-approved pursuant to the Pre-Approval Policy, then it must be specifically pre-approved by the audit committee before it may be provided by PwC. Any pre-approved services exceeding the pre-approved monetary limits require specific approval by the audit committee. For additional information concerning the audit committee and its activities with PwC, see “The Board of Directors and Its Committees” and “Report of the Audit Committee of the Board of Directors.” Representatives of PwC attended all of the standard audit committee meetings in 2015. We expect that a representative of PwC will attend the annual meeting, and the representative will have an opportunity to make a statement if he or she so desires. The representative will also be available to respond to appropriate questions from stockholders. PricewaterhouseCoopers LLP Fees The following table shows the aggregate fees for professional services rendered by PwC to us during the fiscal years ended January 2, 2016 and December 27, 2014. Audit Fees Audit-Related Fees Tax Fees All Other Fees Total 2015 2014 $ 1,056,021 $ 278,217 140,187 3,394 963,497 124,569 150,000 3,394 $ 1,477,819 $ 1,241,460 Audit Fees Audit Fees for both years consist of fees for professional services associated with the annual consolidated financial statements audit, statutory filings, consents and assistance with and review of documents filed with the SEC. Audit-Related Fees Consists of fees associated with services related to review of accounting for significant transactions and other services that were reasonably related to the performance of audits or reviews of our financial statements and were not reported above under “Audit Fees.” Tax Fees Tax Fees consist of fees for professional services rendered for assistance with federal, state, local and international tax planning and compliance. All Other Fees All other fees include licenses to technical accounting research software. The audit committee has determined that the provision of services described above to us by PwC is compatible with maintaining their independence. Notice of Annual Meeting of Stockholders and iRobot 2016 Proxy Statement 53 Recommendation of the Board THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE “FOR” THE RATIFICATION OF PRICEWATERHOUSECOOPERS LLP AS iROBOT’S INDEPENDENT REGISTERED PUBLIC ACCOUNTANTS FOR 2016. Notice of Annual Meeting of Stockholders and iRobot 2016 Proxy Statement 54 P r o x y S t a t e m e n t PROPOSAL 3 APPROVAL OF AMENDMENTS TO OUR AMENDED AND RESTATED CERTIFICATE OF INCORPORATION TO ELIMINATE SUPERMAJORITY VOTING REQUIREMENTS At our 2014 annual meeting of stockholders, our stockholders voted to request that our board of directors take the steps necessary so that each voting requirement in our existing amended and restated certificate of incorporation (the “Existing Certificate”) and by-laws that calls for a greater than a simple majority vote be eliminated and replaced by a majority voting standard. In 2015, our nominating and corporate governance committee and our board of directors determined it was appropriate to propose the amendments described below, and included the proposal described below in our proxy statement for the 2015 annual meeting. Despite receiving the affirmative votes of holders of 58% of the outstanding shares at the 2015 annual meeting, the proposal failed to receive the affirmative vote of holders of 75% of the outstanding shares, which is the required threshold for approval of the proposal. Our board of directors continues to believe that the amendments described below are in the best interests of the Company’s stockholders, and, in light of the strong support received at the 2015 annual meeting, our board of directors has unanimously adopted a resolution approving and declaring the advisability of the below amendments to our Existing Certificate, which change the voting provisions in the Existing Certificate as follows: Removal of Directors; Article VI, Section 5 - Currently, the approval of the holders of 75% or more of the shares of the Company entitled to vote at an election of directors is required to remove a director from office prior to the expiration of his or her term with cause. If this proposal is approved, stockholders will have the ability to remove a director from office prior to the expiration of his or her term with cause and the affirmative vote of a majority of the shares of the Company entitled to vote at an election of directors, which is the lowest allowable vote threshold under Delaware law; provided, however, that if Proposal 4 is approved by stockholders, the ability to remove will be without cause. By-law Amendments; Article VIII, Section 2 - Currently, the Existing Certificate allows stockholders to amend or repeal our by-laws if at least 75% of the shares of the Company entitled to vote on such matter vote in favor of the amendment or repeal. If this proposal is approved, stockholders will have the ability to amend our by-laws with the affirmative vote of a majority of the shares cast and entitled to vote on such matter (with “abstentions,” “broker non-votes,” and “withheld” votes not counted as a vote either “for” or “against” such amendment or repeal). Amendments to Certain Provisions of the Certificate of Incorporation; Article IX - Currently, the approval of at least 75% of the shares of the Company entitled to vote on such matter is required to amend or repeal Articles V, VI, VII, VIII or IX of the Existing Certificate, which address, among other things, actions by written consent of stockholders, special meetings of stockholders requirements and procedures for electing and removing board members and filling vacancies, limitation of liability of directors, by-law amendments, and amendments of the Existing Certificate. If this proposal is approved, the threshold approval for stockholders to amend or repeal these provisions will be a vote of the majority of the outstanding shares of the Company entitled to vote on such amendment or repeal, which is the lowest allowable vote threshold under Delaware law. This description of the proposed amendments to our Existing Certificate is a summary and is qualified by the full text of the proposed amendments to our Existing Certificate, which is attached to this proxy statement as Annex B and is marked to show the changes described above. To be approved, the proposed amendments to our Existing Certificate require an affirmative vote of holders of 75% of the outstanding shares entitled to vote on the record date. If approved, the proposed amendments to our Existing Certificate will become effective upon the filing of an amended and restated certificate of corporation with the Secretary of State of the State of Delaware, which we would do promptly after the annual meeting. Notice of Annual Meeting of Stockholders and iRobot 2016 Proxy Statement 55 If this proposal is approved by the stockholders, we will make conforming amendments to our by-laws to require the vote of a majority of the shares cast for the amendment or repeal of our by-laws. Recommendation of the Board THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE “FOR” APPROVAL OF AMENDMENTS TO OUR AMENDED AND RESTATED CERTIFICATE OF INCORPORATION TO ELIMINATE SUPERMAJORITY VOTING REQUIREMENTS. Notice of Annual Meeting of Stockholders and iRobot 2016 Proxy Statement 56 P r o x y S t a t e m e n t PROPOSAL 4 APPROVAL OF AMENDMENTS TO OUR AMENDED AND RESTATED CERTIFICATE OF INCORPORATION TO DECLASSIFY THE BOARD OF DIRECTORS At our 2015 annual meeting of stockholders, our stockholders voted to request that our board of directors take the steps necessary to reorganize the board of directors into one class with each director subject to election each year. As part of the request, our stockholders proposed that the Company would have the option to phase such declassification in over three years. On March 18, 2016, our board of directors, after carefully considering the advantages and disadvantage of reorganizing the board of directors into one class with each director subject to election each year, unanimously adopted a resolution approving and declaring the advisability of amendments to our Existing Certificate that would declassify our board of directors and instead provide for the annual election of our directors, subject to obtaining approval of such amendments by our stockholders at the 2016 annual meeting. Article VI, Section 3 of our Existing Certificate currently provides that our directors are divided into three classes, with each class serving a three-year term. Under the proposed amendments to our Existing Certificate in this Proposal 4, Article VI, Section 3 of the Existing Certificate would be amended to phase out the classified board structure. If the proposed amendments are approved, commencing with the class of directors standing for election at the 2017 annual meeting of stockholders, directors will stand for election for one-year terms expiring at the next succeeding annual meeting of stockholders. The directors who were elected at the 2015 annual meeting of stockholders, whose terms will expire in 2018, and the directors who are elected at the 2016 annual meeting of stockholders, whose terms will expire in 2019, will hold office until the end of their current terms and thereafter would be eligible for reelection for one-year terms. As a result, the board of directors will be fully declassified upon the 2019 annual meeting of stockholders. In all cases, each director will hold office until his or her successor is duly elected and qualified or until his or her earlier resignation or removal. Any director appointed to the board of directors to fill a vacancy following the 2017 annual meeting of stockholders will hold office for a term expiring at the next annual meeting of stockholders following such appointment. Corresponding changes related to the declassification of the board would be made to Article VI, Section 4 of the Existing Certificate pertaining to vacancies on the board of directors. Article VI, Section 5 of the Existing Certificate, which currently provides that directors may be removed by stockholders only for cause, would also be amended to allow for removal of directors without cause. If the stockholders do not approve this Proposal 4, our board of directors will remain classified and our directors will continue to be subject to the classifications set forth in our Existing Certificate. This description of the proposed amendments to our Existing Certificate is a summary and is qualified by the full text of the proposed amendments to our Existing Certificate, which is attached to this proxy statement as Annex B and is marked to show the changes described above. To be approved, the proposed amendments to our Existing Certificate require an affirmative vote of holders of 75% of the outstanding shares entitled to vote on the record date. If approved, the proposed amendments to our Existing Certificate will become effective upon the filing of an amended and restated certificate of corporation with the Secretary of State of the State of Delaware, which we would do promptly after the annual meeting. Recommendation of the Board THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE “FOR” THE APPROVAL OF AMENDMENTS TO OUR AMENDED AND RESTATED CERTIFICATE OF INCORPORATION TO DECLASSIFY THE BOARD OF DIRECTORS. Notice of Annual Meeting of Stockholders and iRobot 2016 Proxy Statement 57 PROPOSAL 5 ADVISORY VOTE TO APPROVE THE COMPENSATION OF OUR NAMED EXECUTIVE OFFICERS The following proposal, commonly known as a “say on pay” proposal, gives our stockholders the opportunity to vote to approve, on an advisory basis, the compensation of our named executive officers. This vote is not intended to address any specific item of compensation or the compensation of any particular officer, but rather the overall compensation of our named executive officers and our compensation philosophy, policies and practices, as discussed in this proxy statement. Accordingly, we are asking our stockholders to vote “FOR” the following resolution at our annual meeting of stockholders: “RESOLVED, that the Company’s stockholders approve, on an advisory basis, the compensation of the Company’s named executive officers, as disclosed in this proxy statement, including the Compensation Discussion and Analysis, compensation tables and narrative discussion.” Before you vote, we recommend that you read the Compensation Discussion and Analysis and Executive Compensation Summary sections of this proxy statement for additional details on the Company’s executive compensation programs and philosophy. This vote is advisory, and therefore not binding on the Company, the compensation and talent committee or our board of directors. However, our board of directors and our compensation and talent committee value the opinions of our stockholders and intend to take into account the outcome of the vote when considering future compensation decisions for our named executive officers. At our 2011 annual meeting of stockholders, our stockholders voted, on a non-binding, advisory basis, for the Company to hold future, non-binding advisory votes on the compensation of our named executive officers on an annual basis. In accordance with the advisory vote by our stockholders, and pursuant to Section 14A of the Exchange Act, our board of directors holds non-binding, advisory votes on the compensation of our named executive officers every year. Recommendation of the Board THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE “FOR” THE APPROVAL, ON AN ADVISORY BASIS, OF THE COMPENSATION OF OUR NAMED EXECUTIVE OFFICERS AS DISCLOSED IN THIS PROXY STATEMENT. Notice of Annual Meeting of Stockholders and iRobot 2016 Proxy Statement 58 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information regarding beneficial ownership of the Company’s common stock as of March 11, 2016: (i) by each person who is known by the Company to beneficially own more than 5% of the outstanding shares of common stock; (ii) by each director or nominee of the Company; (iii) by each named executive officer of the Company; and (iv) by all directors and executive officers of the Company as a group. Unless otherwise noted below, the address of each person listed on the table is c/o iRobot Corporation, 8 Crosby Drive, Bedford, Massachusetts 01730. P r o x y S t a t e m e n t Name of Beneficial Owner BlackRock, Inc.(3) 40 East 52nd St. New York, NY 10022 The Vanguard Group, Inc.(4) 100 Vanguard Boulevard Malvern, PA 19355 Shares Beneficially Owned(1) 2,737,709 Percentage of Shares Beneficially Owned(2) 9.44% 2,105,142 7.26% 6.15% Red Mountain Capital Partners LLC (5) 1,782,500 10100 Santa Monica Boulevard Suite 925 Los Angeles, CA 90067 T. Rowe Price Associates, Inc.(6) 100 East Pratt Street Baltimore, MD 21202-1009 Colin M. Angle(7) Alison Dean(8) Russell J. Campanello(9) Glen D. Weinstein(10) Christian Cerda (11) Ronald Chwang(12) Gail Deegan Deborah G. Ellinger Andrea Geisser(13) George C. McNamee(14) Michelle V. Stacy Mohamad Ali All executive officers, directors and nominees as a group(15) (12 persons) 1,498,580 5.17% 651,718 70,809 104,616 74,985 77,789 260,806 13,125 17,266 74,403 108,656 1,652 1,455,825 2.23% * * * * * * * * * * * 4.94% * (1) Represents less than 1% of the outstanding common stock. Beneficial ownership is determined in accordance with the rules of the SEC and includes voting and investment power with respect to shares. Unless otherwise indicated below, to the knowledge of the Company, all persons listed below have sole voting and investment power with respect to their shares of common stock, except to the extent authority is shared by spouses under applicable law. Pursuant to the rules of the SEC, the number of shares of common stock deemed outstanding includes (i) shares issuable pursuant to options held by the respective person or group that are currently exercisable or may be exercised within 60 days of March 11, 2016 and (ii) shares issuable pursuant to restricted stock units held by the respective person or group that vest within 60 days of March 11, 2016. Notice of Annual Meeting of Stockholders and iRobot 2016 Proxy Statement 59 (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (14) (15) Applicable percentage of ownership as of March 11, 2016 is based upon 28,989,617 shares of common stock outstanding. BlackRock Inc. has sole voting power with respect to 2,671,655 shares and sole dispositive power with respect to 2,737,709 shares. The address of BlackRock Inc. is 55 East 52nd Street, New York, NY 10055. This information has been obtained from a Schedule 13G/A filed by BlackRock Inc. with the SEC on January 26, 2016. The Vanguard Group, Inc. has sole voting power with respect to 42,409 shares, shared voting power with respect to 4,400 shares, sole dispositive power with respect to 2,060,133 shares and shared dispositive power with respect to 45,009 shares. Vanguard Fiduciary Trust Company (“VFTC”), a wholly-owned subsidiary of The Vanguard Group, Inc., is the beneficial owner of 40,609 shares as a result of its serving as investment manager of collective trust accounts. Vanguard Investments Australia, Ltd. (“VIA”), a wholly-owned subsidiary of The Vanguard Group, Inc., is the beneficial owner of 6,200 shares as a result of its serving as investment manager of Australian investment offerings. The address of each reporting entity is 100 Vanguard Boulevard, Malvern, PA 19355. This information has been obtained from a Schedule 13G/A filed by The Vanguard Group, Inc. with the SEC on February 10, 2016. Red Mountain Capital Partners LLC has sole voting power with respect to 1,782,500 shares and sole dispositive power with respect to 1,782,500. This information has been obtained from a Schedule 13D/A filed by Red Mountain Capital Partners LLC with the SEC on March 18, 2016. The address of Red Mountain Capital Partners LLC is 10100 Santa Monica Boulevard, Suite 925, Los Angeles, CA 90067. T. Rowe Price Associates, Inc. has sole voting power with respect to 267,780 shares and sole dispositive power with respect to 1,498,580 shares. This information has been obtained from a Schedule 13G filed by T. Rowe Price Associates, Inc. with the SEC on February 11, 2016. The address of T. Rowe Price Associates, Inc. is 100 E. Pratt Street, Baltimore, MD 21202. Includes 250,505 shares issuable to Mr. Angle upon exercise of stock options. Includes 40,597 shares issuable to Ms. Dean upon exercise of stock options. Includes 57,102 shares issuable to Mr. Campanello upon exercise of stock options. Includes 29,244 shares issuable to Mr. Weinstein upon exercise of stock options. Includes 51,152 shares issuable to Mr. Cerda upon exercise of stock options. Includes an aggregate of 140,000 shares held by iD5 Fund, L.P. Dr. Chwang is a general partner of the management company for iD5 Fund, L.P. and may be deemed to share voting and investment power with respect to all shares held by iD5 Fund, L.P. Dr. Chwang disclaims beneficial ownership of such shares except to the extent of his pecuniary interest, if any. Also includes 20,000 shares issuable to Dr. Chwang upon exercise of stock options and 79,210 shares held in a trust for the benefit of certain of his family members. As co-trustees of the family trust, Dr. Chwang shares voting and dispositive power over the shares held by the trust with his spouse. Includes 14,901 shares issuable to Mr. Geisser upon termination of service. Includes 20,000 shares issuable to Mr. McNamee upon exercise of stock options and 5,861 shares issuable to Mr. McNamee upon termination of service. Includes an aggregate of 468,000 shares issuable upon exercise of stock options held by seven executive officers and directors and an aggregate of 20,762 shares issuable upon termination of service to two directors. Notice of Annual Meeting of Stockholders and iRobot 2016 Proxy Statement 60 P r o x y S t a t e m e n t OTHER MATTERS The board of directors knows of no other matters to be brought before the annual meeting. If any other matters are properly brought before the annual meeting, the persons appointed in the accompanying proxy intend to vote the shares represented thereby in accordance with their best judgment on such matters, under applicable laws. STOCKHOLDER PROPOSALS Proposals of stockholders intended for inclusion in the proxy statement to be furnished to all stockholders entitled to vote at our 2017 annual meeting of stockholders, pursuant to Rule 14a-8 promulgated under the Exchange Act by the Securities and Exchange Commission, must be received at the Company’s principal executive offices not later than November 29, 2016. Stockholders who meet the applicable eligibility requirements under the proxy access provision of our by-laws and wish to include nominees for our board of directors in the Company’s proxy statement for the 2017 annual meeting, or stockholders who wish to make a proposal at the 2017 annual meeting (other than a proposal made pursuant to Rule 14a-8 or pursuant to the proxy access provision of our by-laws), must in each case notify us between January 25, 2017 and February 24, 2017. If a stockholder who wishes to present a proposal fails to notify us by February 24, 2017 and such proposal is brought before the 2017 annual meeting, then under the Securities and Exchange Commission’s proxy rules, the proxies solicited by management with respect to the 2017 annual meeting will confer discretionary voting authority with respect to the stockholder’s proposal on the persons selected by management to vote the proxies. If a stockholder makes a timely notification, the proxies may still exercise discretionary voting authority under circumstances consistent with the SEC’s proxy rules. In order to curtail controversy as to the date on which we received a proposal, it is suggested that proponents submit their proposals by Certified Mail, Return Receipt Requested, to iRobot Corporation, 8 Crosby Drive, Bedford, Massachusetts 01730, Attention: Secretary. SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Exchange Act requires our directors, executive officers and persons who own more than ten percent of a registered class of our equity securities to file reports of ownership and changes in ownership with the SEC. Such persons are required by regulations of the SEC to furnish us with copies of all such filings. Based solely on our review of copies of such filings we believe that all such persons complied on a timely basis with all Section 16(a) filing requirements during the fiscal year ended January 2, 2016. EXPENSES AND SOLICITATION We will bear the cost of solicitation of proxies by the Company from our stockholders. In addition to soliciting stockholders by mail, we will reimburse banks, brokers and other custodians, nominees and fiduciaries for their reasonable out-of-pocket costs in forwarding proxy materials to the beneficial owners of shares held of record by them. We have retained Innisfree M&A Incorporated to aid in soliciting proxies and advise on certain matters relating to the anticipated contested annual meeting for a fee estimated not to exceed $450,000 plus reasonable out- of-pocket expenses. We have agreed to indemnify Innisfree M&A Incorporated against certain liabilities arising under the federal securities laws. Innisfree M&A Incorporated has informed us that it expects that approximately 50 of its employees will assist in the solicitation. Proxies may be solicited on or behalf by telephone or through other means by our directors, officers, and other employees who will receive no additional compensation therefor. Annex A sets forth information relating to our directors, nominees, executive officers and employees who are considered “participants” in our solicitation under SEC rules. As a result of the proxy solicitation by Red Mountain and the matters being considered at the annual meeting, the Company will incur additional costs related to the mailing and printing of proxy materials, telephone solicitation, data processing and tabulation costs, and other related expenses of approximately $1.3 million in the aggregate. The Company also will incur significant additional expenses related to the solicitation (in excess of those normally spent for an annual meeting) which are expected to be approximately $2.5 million in the aggregate. These additional expenses include the fee payable to our proxy solicitor and the fees of outside counsel and financial and other advisors advising the Company in connection with a contested solicitation of proxies. To date, we have incurred approximately $800,000 of these solicitation costs. Notice of Annual Meeting of Stockholders and iRobot 2016 Proxy Statement 61 Exhibit A iRobot Corporation Adjusted EBITDA Reconciliation to GAAP (unaudited, in thousands) Net income Interest income, net Income tax expense Depreciation Amortization EBITDA Stock-based compensation expense Merger, acquisition and divestiture expense* Net intellectual property litigation expense Restructuring expense For the twelve months ended January 2, 2015 December 27, 2014 $ 44,130 $ 37,803 (678) 18,841 11,375 3,715 77,383 14,183 822 (394) — (673) 14,606 9,192 3,857 64,785 13,778 — 1214 — Adjusted EBITDA $ 91,994 $ 79,777 * This definition was modified in the fourth quarter of fiscal 2015 to incorporate divestiture related costs. Use of Non-GAAP Financial Measures In evaluating its business, iRobot considers and uses Adjusted EBITDA as a supplemental measure of its operating performance. The Company defines Adjusted EBITDA as earnings before interest, taxes, depreciation, amortization, stock-based compensation expense, merger, acquisition and divestiture expense, net intellectual property litigation expense, and restructuring expense. The Company also presents Adjusted EBITDA because it believes it is frequently used by securities analysts, investors and other interested parties as a measure of financial performance. The term Adjusted EBITDA is not defined under U.S. generally accepted accounting principles, or U.S. GAAP, and is not a measure of operating income, operating performance or liquidity presented in accordance with U.S. GAAP. Adjusted EBITDA has limitations as an analytical tool, and when assessing the Company’s operating performance, investors should not consider Adjusted EBITDA in isolation, or as a substitute for net income (loss) or other consolidated income statement data prepared in accordance with U.S. GAAP. Among other things, Adjusted EBITDA does not reflect the Company’s actual cash expenditures. Other companies may calculate similar measures differently than iRobot, limiting their usefulness as comparative tools. iRobot compensates for these limitations by relying primarily on its GAAP results and using Adjusted EBITDA only supplementally. A ANNEX A INFORMATION CONCERNING PERSONS WHO MAY BE DEEMED PARTICIPANTS IN IROBOT’S SOLICITATION OF PROXIES The following sets forth the name, principal business address and the present principal occupation or employment, and the name, principal business and address of any corporation or other organization in which their employment is carried on, of the directors, director nominees and executive officers of iRobot Corporation who, under SEC rules, may be deemed to be “participants” in our solicitation of proxies from our stockholders in connection with the 2016 annual meeting of stockholders. Non-employee Directors and Nominees The following table sets forth the names and business addresses of our current non-employee directors and nominees. The principal occupation or employment of each non-employee director or nominee who may be deemed to be a participant is set forth in the section of this proxy statement entitled “Election of Directors.” P r o x y S t a t e m e n t Name Mohamad Ali Michael Bell Ronald Chwang, Ph.D. Gail Deegan Deborah G. Ellinger Andrea Geisser George C. McNamee Michelle V. Stacy Business Address iRobot Corporation 8 Crosby Drive Bedford, Massachusetts 01730 iRobot Corporation 8 Crosby Drive Bedford, Massachusetts 01730 iRobot Corporation 8 Crosby Drive Bedford, Massachusetts 01730 iRobot Corporation 8 Crosby Drive Bedford, Massachusetts 01730 iRobot Corporation 8 Crosby Drive Bedford, Massachusetts 01730 iRobot Corporation 8 Crosby Drive Bedford, Massachusetts 01730 iRobot Corporation 8 Crosby Drive Bedford, Massachusetts 01730 iRobot Corporation 8 Crosby Drive Bedford, Massachusetts 01730 A-1 Executive Officers and Other Employees The principal occupations of our executive officers and other employees who may be deemed “participants” in our solicitation of proxies are set forth below. The principal occupation refers to such person’s position with our company and the business address is iRobot Corporation, 8 Crosby Drive, Bedford, Massachusetts 01730. Name Position Colin M. Angle Chairman of the Board, Chief Executive Officer and Director Executive Vice President, Chief Financial Officer, Treasurer and Principal Accounting Officer Alison Dean Russell J. Campanello Executive Vice President, Human Resources and Corporate Communications Glen D. Weinstein Christian Cerda Executive Vice President, Chief Legal Officer Executive Vice President and General Manager, Home Robots Business Unit Information Regarding Ownership of Company Securities by Participants Except as described in this Annex A, or as otherwise indicated in the “Security Ownership of Certain Beneficial Owner and Management” section of this proxy statement, none of the persons listed above under “Directors and Nominees” and “Executive Officers and Other Employees” owns any of our securities of record but not beneficially. The number of shares of our common stock held by directors, nominees and the named executive officers as of March 11, 2016, is set forth in the “Security Ownership of Certain Beneficial Owner and Management” section of this proxy statement. Information Regarding Transactions in Our Securities by Participants The following table sets forth purchases and sales during the past two years of shares of our common stock by the persons listed above under “Directors and Nominees” and “Executive Officers and Other Employees”. Unless otherwise indicated, all transactions were in the public market and none of the purchase price or market value of those shares is represented by funds borrowed or otherwise obtained for the purpose of acquiring or holding such securities. Name Colin M. Angle Purchase/(Sale) of Common Stock (number of shares) (2,694) (3,574) 26,000 (26,000) (6,690) 38,800 (2,183) (5,383) (8,740) (2,685) 73,829 (45,446) (52,138) (6,936) (3,153) (2,233) (7,801) (9,567) Transaction Type (5) (5) (2) (4) (4) (1) (5) (5) (5) (5) (2) (6) (4) (4) (5) (5) (5) (5) Date 4/1/2014 4/2/2014 11/3/2014 11/3/2014 12/3/2014 3/6/2015 3/7/2015 3/8/2015 3/9/2015 4/1/2015 11/16/2015 11/16/2015 12/15/2015 12/16/2015 3/7/2016 3/7/2016 3/8/2016 3/9/2016 A-2 Name Alison Dean Russell J. Campanello Glen D. Weinstein P r o x y S t a t e m e n t Purchase/(Sale) of Common Stock (number of shares) 49,733 (326) (254) (1,209) 14,283 (782) (728) (764) (303) (1,203) 1,873 (1,873) (1,161) (726) (740) (764) 19,183 10,000 (10,000) (2,857) 7,767 (783) (945) (1,703) (632) (701) (961) (1,703) 8,617 1,500 (1,500) (470) (515) 1,500 (1,500) 1,500 (1,500) 1,500 (1,500) 1,500 (1,500) Transaction Type (1) (5) (5) (5) (1) (5) (5) (5) (5) (5) (2) (4) (5) (5) (5) (5) (1) (2) (4) (5) (1) (5) (5) (5) (5) (5) (5) (5) (1) (2) (4) (5) (5) (2) (4) (2) (4) (2) (4) (2) (4) Date 3/11/2016 4/1/2014 4/2/2014 6/9/2014 3/6/2015 3/7/2015 3/8/2015 3/9/2015 4/1/2015 6/8/2015 7/15/2015 7/15/2015 3/7/2016 3/7/2016 3/8/2016 3/9/2016 3/11/2016 11/24/2014 11/24/2014 12/30/2014 3/6/2015 3/7/2015 3/8/2015 3/9/2015 3/7/2016 3/7/2016 3/8/2016 3/9/2016 3/11/2016 4/1/2014 4/1/2014 4/1/2014 4/2/2014 5/1/2014 5/1/2014 6/2/2014 6/2/2014 7/1/2014 7/1/2014 8/1/2014 8/1/2014 A-3 Name Christina Cerda Mohamad Ali Ronald Chwang, Ph.D. Gail Deegan Deborah G. Ellinger Andrea Geisser George C. McNamee Purchase/(Sale) of Common Stock (number of shares) 1,500 (1,500) (1,105) 1,500 (1,500) 1,500 (1,500) 1,300 (1,300) 7,767 (467) (955) (941) (468) (892) (632) (401) (961) (941) 11,750 17,083 (752) (2,422) (1,389) (677) (2,438) 15,667 7,429 3,243 3,397 10,000 (1,598) 3,243 3,397 3,243 3,397 3,243 3,397 40,000 10,000 (10,000) 3,243 Transaction Type (2) (4) (5) (2) (4) (2) (4) (2) (4) (1) (5) (5) (5) (5) (5) (5) (5) (5) (5) (1) (1) (5) (5) (5) (5) (5) (1) (1) (1) (1) (2) (6) (1) (1) (1) (1) (1) (1) (2) (2) (6) (1) Date 9/2/2014 9/2/2014 9/8/2014 10/1/2014 10/1/2014 11/3/2014 11/3/2014 12/1/2014 12/1/2014 3/6/2015 3/7/2015 3/8/2015 3/9/2015 4/1/2015 9/8/2015 3/7/2016 3/7/2016 3/8/2016 3/9/2016 3/11/2016 3/6/2015 3/7/2015 3/8/2015 3/7/2016 3/7/2016 3/8/2016 3/11/2016 9/4/2015 6/6/2014 6/5/2015 6/17/2015 12/1/2014 6/6/2014 6/5/2015 6/6/2014 6/5/2015 6/6/2014 6/5/2015 11/2/2015 5/27/2014 5/27/2014 6/6/2014 A-4 Name Michelle V. Stacy Date 3/26/2015 3/26/2015 5/12/2015 5/12/2015 6/5/2015 10/27/2015 10/27/2015 9/5/2014 6/5/2015 3/15/2016 3/15/2016 Purchase/(Sale) of Common Stock (number of shares) 10,000 (10,000) 10,000 (10,000) 3,397 30,000 30,000 6,608 3,397 1,500 1,500 Transaction Type (2) (4) (2) (6) (1) (2) (4) (1) (1) (3) (3) P r o x y S t a t e m e n t (1) (2) (3) (4) (5) (6) Acquired - Restricted stock unit grant Acquired - Option exercise Acquired - Open market acquisition Disposed - Open market sale pursuant to Rule 10b5-1 plan Disposed - Shares withheld to satisfy tax withholding obligations in connection with the vesting of restricted stock unit awards Disposed - Open market sale Miscellaneous Information Regarding Participants Except as described in this Annex A or otherwise disclosed in this proxy statement, no person listed above under “Directors and Nominees” and “Executive Officers and Other Employees” or any of his or her “associates” beneficially owns (within the meaning of Rule 13d-3 under the Exchange Act), directly or indirectly, any shares or other securities of the Company or any of its subsidiaries. Furthermore, except as described in this Annex A or otherwise disclosed in this proxy statement, no such person or any of his or her associates is either a party to any transaction or series of similar transactions in the last fiscal year, or any currently proposed transaction or series of similar transactions (1) to which the Company or any of its subsidiaries was or is to be a party, (2) in which the amount involved exceeds $120,000 and (3) in which such person or associate had or will have a direct or indirect material interest. Except as described in this Annex A or otherwise disclosed in this proxy statement, no person listed above under “Directors and Nominees” and “Executive Officers and Other Employees” or any of his or her associates has entered into any arrangement or understanding with any person with respect to (1) any future employment with the Company or its affiliates, or (2) any future transactions to which the Company or any of its affiliates will or may be a party. Except as described in this Annex A or otherwise disclosed in this proxy statement, there are no contracts, arrangements or understandings by any of the persons listed under “Directors and Nominees” and “Executive Officers and Other Employees” within the past year with any person with respect to any of our securities, including, but not limited to, joint ventures, loan or option arrangements, puts or calls, guarantees against loss or guarantees of profit, division of losses or profits, or the giving or withholding of proxies. Except as described in this Annex A or otherwise disclosed in this proxy statement, no persons listed under “Directors and Nominees” and “Executive Officers and Other Employees” has any substantial interest, direct or indirect, by security holdings or otherwise, in any matter to be acted upon at the 2016 annual meeting of stockholders (and no other person who is a party to an arrangement or understanding pursuant to which a nominee for election as director is proposed to be elected, has any such interests). A-5 P r o x y S t a t e m e n t ANNEX B PROPOSED AMENDMENTS TO OUR CERTIFICATE OF INCORPORATION The following are proposed changes to our amended and restated certificate of incorporation as described in Proposals 3 and 4. The text indicated by underline will be added, and the text indicated by strike-through will be deleted. ************************* AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF IROBOT CORPORATION iRobot Corporation, a corporation organized and existing under the laws of the State of Delaware (the “Corporation”), hereby certifies as follows: 1. The name of the Corporation is iRobot Corporation. The date of the filing of its original Certificate of Incorporation with the Secretary of State of the State of Delaware was December 20, 2000 (the “Original Certificate”). The name under which the Corporation filed the Original Certificate was iRobot Corporation. 2. This Amended and Restated Certificate of Incorporation (the “Certificate”) amends, restates and integrates the provisions of the Amended and Restated Certificate of Incorporation that was filed with the Secretary of State of the State of Delaware on October 26November 15, 2005 (the “Amended and Restated Certificate”), and was duly adopted in accordance with the provisions of Sections 242 and 245 of the Delaware General Corporation Law (the “DGCL”). 3. The text of the Amended and Restated Certificate is hereby amended and restated in its entirety to provide as herein set forth in full. The name of the Corporation is iRobot Corporation. ARTICLE I ARTICLE II The address of the Corporation’s registered office in the State of Delaware is c/o Corporation Service Company, 2711 Centerville Road, Suite 400, City of Wilmington 19808, County of New Castle. The name of its registered agent at such address is Corporation Service Company. ARTICLE III The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the DGCL. B-1 ARTICLE IV CAPITAL STOCK The total number of shares of capital stock which the Corporation shall have authority to issue is One Hundred Five Million (105,000,000) shares, of which (i) One Hundred Million (100,000,000) shares shall be a class designated as common stock, par value $0.01 per share (the “Common Stock”), and (ii) Five Million (5,000,000) shares shall be a class designated as undesignated preferred stock, par value $0.01 per share (the “Undesignated Preferred Stock”). The number of authorized shares of the class of Common Stock and Undesignated Preferred Stock may from time to time be increased or decreased (but not below the number of shares outstanding) by the affirmative vote of the holders of a majority of the outstanding shares of Common Stock entitled to vote, without a vote of the holders of the Undesignated Preferred Stock (except as otherwise provided in any certificate of designations of any series of Undesignated Preferred Stock). The powers, preferences and rights of, and the qualifications, limitations and restrictions upon, each class or series of stock shall be determined in accordance with, or as set forth below in, this Article IV. A. COMMON STOCK Subject to all the rights, powers and preferences of the Undesignated Preferred Stock and except as provided by law or in this Article IV (or in any certificate of designations of any series of Undesignated Preferred Stock): (a) the holders of the Common Stock shall have the exclusive right to vote for the election of directors of the Corporation (the “Directors”) and on all other matters requiring stockholder action, each outstanding share entitling the holder thereof to one vote on each matter properly submitted to the stockholders of the Corporation for their vote; provided, however, that, except as otherwise required by law, holders of Common Stock, as such, shall not be entitled to vote on any amendment to this Certificate (or on any amendment to a certificate of designations of any series of Undesignated Preferred Stock) that alters or changes the powers, preferences, rights or other terms of one or more outstanding series of Undesignated Preferred Stock if the holders of such affected series are entitled to vote, either separately or together with the holders of one or more other such series, on such amendment pursuant to this Certificate (or pursuant to a certificate of designations of any series of Undesignated Preferred Stock) or pursuant to the DGCL; (b) dividends may be declared and paid or set apart for payment upon the Common Stock out of any assets or funds of the Corporation legally available for the payment of dividends, but only when and as declared by the Board or any authorized committee thereof; and (c) upon the voluntary or involuntary liquidation, dissolution or winding up of the Corporation, the net assets of the Corporation shall be distributed pro rata to the holders of the Common Stock. B. UNDESIGNATED PREFERRED STOCK The Board of Directors or any authorized committee thereof is expressly authorized, to the fullest extent permitted by law, to provide for the issuance of the shares of Undesignated Preferred Stock in one or more series of such stock, and by filing a certificate pursuant to applicable law of the State of Delaware, to establish or change from time to time the number of shares of each such series, and to fix the designations, powers, including voting powers, full or limited, or no voting powers, preferences and the relative, participating, optional or other special rights of the shares of each series and any qualifications, limitations and restrictions thereof. B-2 ARTICLE V STOCKHOLDER ACTION 1. Action without Meeting. Except as otherwise provided herein, any action required or permitted to be taken by the stockholders of the Corporation at any annual or special meeting of stockholders of the Corporation must be effected at a duly called annual or special meeting of stockholders and may not be taken or effected by a written consent of stockholders in lieu thereof. 2. Special Meetings. Except as otherwise required by statute and subject to the rights, if any, of the holders of any series of Undesignated Preferred Stock, special meetings of the stockholders of the Corporation may be called only by the Board of Directors acting pursuant to a resolution approved by the affirmative vote of a majority of the Directors then in office. Only those matters set forth in the notice of the special meeting may be considered or acted upon at a special meeting of stockholders of the Corporation. P r o x y S t a t e m e n t ARTICLE VI DIRECTORS 1. General. The business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors except as otherwise provided herein or required by law. 2. Election of Directors. Election of Directors need not be by written ballot unless the By-laws of the Corporation (the “By-laws”) shall so provide. 3. Number of Directors; Term of Office. The number of Directors of the Corporation shall be fixed solely and exclusively by resolution duly adopted from time to time by the Board of Directors. The Directors, other than those who may be elected by the holders of any series of Undesignated Preferred Stock, shall be classified, with respect to the term for which they severally hold office, into three classes, as nearly equal in number as reasonably possible. The initial Class I Directors of the Corporation shall be Colin M. Angle and Ronald Chwang; the initial Class II Directors of the Corporation shall be Helen Greiner, George C. McNamee and Peter Meekin; and the initial Class III Directors of the Corporation shall be Rodney A. Brooks, Andrea Geisser and Jacques S. Gansler. The initial Class I Directors shall serve for a term expiring at the annual meeting of stockholders to be held in 2006, the initial Class II Directors shall serve for a term expiring at the annual meeting of stockholders to be held in 2007, and the initial Class III Directors shall serve for a term expiring at the annual meeting of stockholders to be held in 2008. At each annual meeting of stockholders, Directors elected to succeed those Directors whose terms expire shall be elected for a term of office to expire at the third succeeding annual meeting of stockholders after their election. Subject to the rights, if any, of the holders of any series of Undesignated Preferred Stock: (i) at the annual meeting of stockholders of the Corporation that is held in calendar year 2017 (the “2017 Annual Meeting”), the Directors whose terms expire at the 2017 Annual Meeting (or such Directors’ successors) shall be elected to hold office for a one- year term expiring at the annual meeting of stockholders of the Corporation that is held in calendar year 2018 (the “2018 Annual Meeting”); (ii) at the 2018 Annual Meeting, the Directors whose terms expire at that meeting (or such Directors’ successors) shall be elected to hold office for a one-year term expiring at the annual meeting of stockholders of the Corporation that is held in calendar year 2019 (the “2019 Annual Meeting”); and (iii) at the 2019 Annual Meeting and each annual meeting of stockholders of the Corporation thereafter, all Directors shall be elected to hold office for a one-year term expiring at the next annual meeting of stockholders of the Corporation. For the avoidance of doubt, each person appointed by the Directors of the Corporation or elected by the stockholders of the Corporation to the Board of Directors before the 2017 Annual Meeting shall serve for the full term to which he or she was appointed or B-3 elected before the 2017 Annual Meeting. Notwithstanding the foregoing, the Directors elected to each class shall hold office until their successors are duly elected and qualified or until their earlier resignation, death or removal. Notwithstanding the foregoing, whenever, pursuant to the provisions of Article IV of this Certificate, the holders of any one or more series of Undesignated Preferred Stock shall have the right, voting separately as a series or together with holders of other such series, to elect Directors at an annual or special meeting of stockholders, the election, term of office, filling of vacancies and other features of such directorships shall be governed by the terms of this Certificate and any certificate of designations applicable thereto. 4. Vacancies. Subject to the rights, if any, of the holders of any series of Undesignated Preferred Stock to elect Directors and to fill vacancies in the Board of Directors relating thereto, any and all vacancies in the Board of Directors, however occurring, including, without limitation, by reason of an increase in size of the Board of Directors, or the death, resignation, disqualification or removal of a Director, shall be filled solely and exclusively by the affirmative vote of a majority of the remaining Directors then in office, even if less than a quorum of the Board of Directors, and not by the stockholders. Any Director appointed in accordance with the preceding sentence following the 2017 Annual Meeting shall hold office for a term expiring at the next annual meeting of stockholders of the Corporation held after such appointment for the remainder of the full term of the class of Directors in which the new directorship was created or the vacancy occurred and until such Director’s successor shall have been duly elected and qualified or until his or her earlier resignation, death or removal. Subject to the rights, if any, of the holders of any series of Undesignated Preferred Stock to elect Directors, when the number of Directors is increased or decreased, the Board of Directors shall, subject to Article VI.3 hereof, determine the class or classes to which the increased or decreased number of Directors shall be apportioned; provided, however, that no decrease in the number of Directors shall shorten the term of any incumbent Director. In the event of a vacancy in the Board of Directors, the remaining Directors, except as otherwise provided by law, shall exercise the powers of the full Board of Directors until the vacancy is filled. 5. Removal. Subject to the rights, if any, of any series of Undesignated Preferred Stock to elect Directors and to remove any Director whom the holders of any such stock have the right to elect, any Director (including persons elected by Directors to fill vacancies in the Board of Directors) may be removed from office (i) only with without cause and (ii) only by the affirmative vote of the holders of 75% or more majority of the shares then entitled to vote at an election of Directors. At least forty-five (45) days prior to any meeting of stockholders at which it is proposed that any Director be removed from office, written notice of such proposed removal and the alleged grounds thereof shall be sent to the Director whose removal will be considered at the meeting. ARTICLE VII LIMITATION OF LIABILITY A Director of the Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a Director, except for liability (a) for any breach of the Director’s duty of loyalty to the Corporation or its stockholders, (b) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (c) under Section 174 of the DGCL or (d) for any transaction from which the Director derived an improper personal benefit. If the DGCL is amended after the effective date of this Certificate to authorize corporate action further eliminating or limiting the personal liability of Directors, then the liability of a Director of the Corporation shall be eliminated or limited to the fullest extent permitted by the DGCL, as so amended. Any repeal or modification of this Article VII by either of (i) the stockholders of the Corporation or (ii) an amendment to the DGCL, shall not adversely affect any right or protection existing at the time of such repeal or modification with respect to any acts or omissions occurring before such repeal or modification of a person serving as a Director at the time of such repeal or modification. B-4 P r o x y S t a t e m e n t ARTICLE VIII AMENDMENT OF BY-LAWS 1. Amendment by Directors. Except as otherwise provided by law, the By-laws of the Corporation may be amended or repealed by the Board of Directors by the affirmative vote of a majority of the Directors then in office. 2. Amendment by Stockholders. The By-laws of the Corporation may be amended or repealed at any annual meeting of stockholders, or special meeting of stockholders called for such purpose as provided in the By-laws, by the affirmative vote of at least 75%the majority of the outstanding shares votes cast by the stockholders entitled to vote on such amendment or repeal, voting together as a single class (with “abstentions”, “broker non-votes” and “withheld” votes not counted as a vote either “for” or “against” such amendment or repeal); provided, however, that if the Board of Directors recommends that stockholders approve such amendment or repeal at such meeting of stockholders, such amendment or repeal shall only require the affirmative vote of the majority of the outstanding shares entitled to vote on such amendment or repeal, voting together as a single class. ARTICLE IX AMENDMENT OF CERTIFICATE OF INCORPORATION The Corporation reserves the right to amend or repeal this Certificate in the manner now or hereafter prescribed by statute and this Certificate, and all rights conferred upon stockholders herein are granted subject to this reservation. Whenever any vote of the holders of voting stock is required to amend or repeal any provision of this Certificate, and in addition to any other vote of holders of voting stock that is required by this Certificate or by law, such amendment or repeal shall require the affirmative vote of the majority of the outstanding shares entitled to vote on such amendment or repeal, and the affirmative vote of the majority of the outstanding shares of each class entitled to vote thereon as a class, at a duly constituted meeting of stockholders called expressly for such purpose; provided, however, that the affirmative vote of not less than 75% of the outstanding shares entitled to vote on such amendment or repeal, and the affirmative vote of not less than 75% of the outstanding shares of each class entitled to vote thereon as a class, shall be required to amend or repeal any provision of Article V, Article VI, Article VII, Article VIII or Article IX of this Certificate. B-5 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-K (Mark One)  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended January 2, 2016 OR  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file no. 001-36414 iROBOT CORPORATION (Exact name of registrant as specified in its charter) Delaware (State or other jurisdiction of incorporation or organization) 8 Crosby Drive, Bedford, MA (Address of principal executive offices) 77-0259 335 (I.R.S. Employer Identification No.) 01730 (Zip Code) F o r m 1 0 - K (781) 430-3000 (Registrant’s telephone number, including area code) _______________________________________________ SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: Common Stock, $0.01 par value per share The NASDAQ Stock Market LLC SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None Indicate by check-mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  No  Indicate by check-mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes  No  Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  No  Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  No  Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer  Accelerated filer  Non-accelerated filer  Smaller reporting company  (Do not check if a smaller reporting company) Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  No  The aggregate market value of the Common Stock held by nonaffiliates of the registrant was approximately $963.2 million based on the last reported sale of the Common Stock on the NASDAQ Global Market on June 26, 2015, the last business day of the registrant's most recently completed second fiscal quarter. As of February 16, 2016, there were 28,992,738 shares of the registrant’s Common Stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE The registrant intends to file a definitive Proxy Statement pursuant to Regulation 14A within 120 days of the end of the fiscal year ended January 2, 2016. Portions of such Proxy Statement are incorporated by reference into Part III of this Form 10-K.  iROBOT CORPORATION ANNUAL REPORT ON FORM 10-K Year Ended January 2, 2016 TABLE OF CONTENTS Part I Page Item 1. Business Item 1A. Risk Factors Item 1B. Unresolved Staff Comments Item 2. Properties Item 3. Legal Proceedings Item 4. Mine Safety Disclosures Item 5. Part II Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Selected Financial Data Item 6. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations Item 7A. Quantitative and Qualitative Disclosures about Market Risk Item 8. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Item 9A. Controls and Procedures Item 9B. Other Information Financial Statements and Supplementary Data Part III Item 10. Directors, Executive Officers and Corporate Governance Item 11. Executive Compensation Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Item 13. Certain Relationships and Related Transactions, and Directors Independence Item 14. Principal Accounting Fees and Services Item 15. Exhibits, Financial Statement Schedules Part IV 2 F o r m 1 0 - K 3 12 24 25 25 25 26 27 28 45 46 76 76 78 78 78 78 78 78 79 PART I ITEM 1. BUSINESS This Annual Report on Form 10-K contains forward-looking statements. All statements other than statements of historical facts contained in this Annual Report on Form 10-K, including statements regarding our future results of operations and financial position, business strategy, plans and objectives of management for future operations, and plans for product development and manufacturing are forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. We discuss certain of these risks in greater detail in the “Risk Factors” section and elsewhere in this Annual Report on Form 10-K. Also, these forward-looking statements speak only as of the date of this Annual Report on Form 10-K, and we have no plans to update our forward-looking statements to reflect events or circumstances occurring after the date of this Annual Report. We caution readers not to place undue reliance upon any such forward-looking statements. iRobot, Roomba, Ava, Scooba, Mint, ViPR, NorthStar, Create, PackBot, FirstLook, iAdapt, Aware, Home Base, Looj, Braava, Kobra, AeroForce, uPoint, AeroVac, Mirra, and Virtual Wall are trademarks of iRobot Corporation. Overview iRobot Corporation ("iRobot" or the "Company" or "we") designs and builds robots that empower people to do more. For 25 years, we have developed proprietary technology incorporating advanced concepts in navigation, mobility, manipulation and artificial intelligence to build industry-leading robots. Our home robots, which represented 91% of our revenue in 2015, and which we expect will grow to an even larger percentage of our revenue in 2016 and beyond, perform time-consuming domestic chores. Our defense and security robots perform tasks such as battlefield reconnaissance and bomb disposal, and multi-purpose tasks for law enforcement agencies and first responders, as well as certain commercial users. Our remote presence robots expand the reach of medical care by connecting physicians with patients from anywhere in the world and also provide autonomous telepresence capabilities enabling remote workers to more personally collaborate throughout the workplace. We sell our robots through a variety of distribution channels, including chain stores and other national retailers, through our on-line store, through value-added distributors and resellers, and to the U.S. military and other government agencies worldwide. Since our founding, we have accumulated expertise in all the disciplines necessary to design and build durable, high- performance and cost-effective robots through the close integration of software, electronics and hardware. Our core technologies serve as reusable building blocks that we adapt and expand to develop next generation and new products, reducing the time, cost and risk of product development. Our significant expertise in robot design and engineering positions us to capitalize on the growth we expect in the market for robot-based products. We believe that the sophisticated technologies in our existing applications are adaptable to a broad array of markets such as commercial cleaning, elder care, home automation, healthcare, video collaboration, landscaping, agriculture, and other vertical markets. Over the past thirteen years, we have sold more than 15 million of our home robots. During that time, we also sold approximately 6,000 of our defense and security robots, most of which have been sold to the U.S. military and deployed on missions in Afghanistan and Iraq, and more recently to state, local and international government entities. During 2015, we took several steps to become more focused on our well established home robots business to capitalize on the substantial opportunities available to us within consumer markets. First, we entered into an Asset Purchase Agreement on February 2, 2016 with iRobot Defense Holdings, Inc., a recently-formed portfolio company of Arlington Capital Partners, which provides for the sale of our defense and security business unit. The purchase price is up to $45.0 million, of which $30.0 million will be paid at the closing of the transaction, subject to adjustments for working capital and indebtedness as set forth in the purchase agreement, and up to an additional $15.0 million of which may be paid based on 2016 revenue of the defense and security business unit. The transaction is expected to close during the first quarter of 2016. Second, we reallocated research and development resources from a next generation remote presence platform to opportunities in our home robots business. These actions were taken to solidify our position as the leader in diversified home robots and to focus on key technologies, with 3 F o r m 1 0 - K an emphasis on software, that allow our robots to understand the homes in which they operate. It is our intent to continue investing in these critical technologies and the economic opportunities they unlock. In addition to the above, we achieved a number of significant milestones in 2015 that we believe will assist us in continuing to generate profitable growth and enhance value for our shareholders. In particular, we successfully launched Roomba 980, our first connected home robot incorporating Visual Simultaneous Location and Mapping, or vSLAM, which provides the robot with the capability to dynamically create and update a map of its surroundings. This is our first step into the Internet of Things, enabling new functionality such as remote app-control and systematic navigation, as well as paving the way for new products and capabilities in the future. Additionally, we implemented new Roomba marketing programs in the United States that resulted in a significant return on our investment and which we plan to leverage as part of our strategy to accelerate growth in international markets. In our continuing effort to return capital to our shareholders, we repurchased 1,260,276 shares of our common stock for an aggregate purchase price of $37.4 million during fiscal year 2015. In conjunction with the announcement to divest our defense and security business unit, we also announced a $65 million increase to our current share repurchase initiative, partially funded from the expected proceeds from the divestiture, bringing total repurchases authorized under the 2016 program to more than $100 million. We intend to initiate the incremental program in the first quarter of fiscal 2016 in conjunction with the completion of the defense and security business unit divestiture. This initiative, coupled with the previous return of capital, balances our interest to return cash to shareholders while maintaining sufficient cash to operate and invest in our business. Our total revenue for 2015 was $616.8 million, which represents an 11% increase from 2014 revenue of $556.8 million. This increase in revenue was largely attributable to a $52.2 million increase in revenue in our home robots business unit as a direct result of growth in our domestic market. Domestic growth was primarily attributable to increased sales as a result of significant investments in advertising media and national promotions as well as the launch of Roomba 980. International home robots revenue growth slowed compared to fiscal 2014 as a result of negative macroeconomic conditions, specifically in Japan and Russia, offset by a significant growth increase in China. Revenue increased $9.5 million in our defense and security business, primarily attributable to increased sales of our SUGV robot. Our home robots revenue represented 91% of our total revenue for both 2015 and 2014. With the anticipated divestiture of our defense and security business unit, our revenue for the next few years will almost entirely be driven by our rapidly growing home robots business. Our financial performance in 2016 will be driven by our home robots business unit. Our strategy is to maintain Roomba’s market leadership while positioning it as a key component in the connected home. We expect growth to be driven by: • Expanded worldwide consumer adoption of Roomba supported by targeted marketing programs similar to the successful programs we introduced in the United States in 2015; • Wider geographic distribution of Roomba 980; • Building a second material revenue stream, which we expect to do with our wet floor care products; and • Regional growth in China, with specific emphasis on further accelerating growth in the e-commerce channel. Strategy We are a technology company with the goal of designing and marketing innovative robots that empower people to do more. Our deep understanding of the consumer, the consumer's needs and how robots meet those needs ensures that every robot is created with a person in mind. We strive to drive innovation, serve as an industry catalyst and change the world by fueling the era of robots. We intend to increase the penetration of our products in existing markets, expand existing products into new markets, and develop and launch new products into current and adjacent markets. Our strategy is to maintain a leadership position by delivering robotic technology-based automated home maintenance solutions that delight our customers and anticipate their needs, while extending our technical leadership in the areas of autonomous navigation, manipulation and cloud connectivity and services. With increasing levels of autonomy, continued mobility improvements, more sophisticated sensor suites and advanced human interfaces, our robots will expand in effectiveness and efficiency and reduce the requirements for actual physical operator presence and control. In the area of automated home maintenance, we seek to improve the quality of life with robotic solutions requiring as little human physical intervention as possible. 4 As part of our 2016 plan, we have made capital allocation choices that will require significant investments in our business during the year in order to drive future revenue diversification for our home robots business unit and further revenue acceleration in 2017, 2018 and beyond. In order to execute this plan we need to continue to strategically invest in a number of areas to: • Strengthen our marketing capabilities globally and accelerate worldwide consumer adoption of Roomba to maintain our market-leading position in robotic vacuum cleaners; • Better position ourselves in China to capture an even larger share of the rapidly growing market for robotic floor care; • Develop our wet floor care business to generate a material, secondary revenue stream; • Scale our infrastructure to support future connected products; • Explore, develop and grow adjacent non-floor care home robot products that can generate meaningful diversified revenue streams; and • Make continued operational improvements that can reduce product and operating costs. Key elements of our strategy include: Talent: Investing in our people and our culture. To develop and integrate the best technology and to be the most innovative robotics company, we must attract the most talented people across our functional areas. Our success is directly related to the talents and abilities of our workforce, and to a culture, work environment and leadership that supports its development and growth. Our strategy focuses on transforming our company into one of the most attractive workplaces for those seeking to participate in the robotics field. Technology: Investing in robotic technology and products to build better robots. A better robot lives in our world by moving around its environment more intelligently, by cooperating with the people it serves more compellingly, and by physically interacting with its surroundings more effectively. We strive to achieve and sustain world leadership with best-in- class technology in the areas of autonomy, navigation, cloud robotics and manipulation. Our superiority in user experience comes from leveraging the powerful capabilities of the connected world combined with thoughtful, intuitive design. We are committed to developing, maturing and integrating these technologies to support our business and make these a reality in our products. We implement these technologies with strict cost requirements to support our high-margin, profitable business model. Tempo: Investing to improve our agility, speed and operational efficiency. We strive to increase our pace of innovation and bring compelling products to market more quickly in a cost-effective and highly reliable form. We are committed to refining our innovation and product development culture and processes to deliver results faster by increasing the pace of development, gaining efficiencies through designing and leveraging modular architecture and reusable hardware and software components across products, and utilizing remote software updates and cloud computing to provide rapid cycles for release of new features in the installed base of our products. Brand. We invest in building a company with a vision, that strives to solve difficult problems, and empowers people to do more. We strive to achieve this image by designing high-quality robots with a recognizable look and feel and a streamlined ease of use, by employing impactful marketing, and by continuing to give back to the community. We invest in building and advertising one unified, global brand. Technology We are focused on behavior-based, artificially-intelligent systems developed to meet customer requirements in multiple market segments. Our systems are designed to move around their environments intelligently, by cooperating with the people they serve and by physically interacting with their surroundings. Our robots rely on technology related to navigation, cloud robotics and manipulation to accomplish their missions autonomously. Autonomy. Our robots employ intelligent autonomy because, without autonomy, robots require continuous human attention. Autonomy requires, among other things, advanced navigation and dynamically updated mapping. We seek to achieve and sustain a leadership position in navigation and mapping to enable a higher level of autonomy. 5 F o r m 1 0 - K Navigation. Our mobile robots navigate through their environment in a variety of ways. Some do it simply by reacting to encounters with obstacles. Others use more sophisticated means that make use of maps to plan out paths, track their travel, and determine their location in the environment. Intelligent navigation empowers our robots to operate autonomously with purposeful intent. Autonomous navigation is the key enabler for our latest products. Cloud Robotics. Connectivity and cloud services are important because they can leverage additional computational resources and capabilities. Cloud robotics refers to cloud-based shared services that solve robotic challenges and enhance robots’ capabilities. By using the power of off-board computing and storage, it is possible to develop algorithms that aid with object recognition, post-process and store large maps, and share data between multiple robots operating in the same environment. Cloud robotics will allow our robots to plan more intelligently, be more productive and keep getting smarter as they are used. Manipulation. Manipulation means physically interacting with the world to move or control objects. It is ultimately what sets robots apart from any other technology. Combining these four components, we have created proprietary, reusable building blocks of robotics capabilities, including mobility platforms, manipulators, navigation and control algorithms and user interfaces. Our technology building blocks typically allow us to take a known platform and modify it for a new mission instead of starting from scratch for each application. We believe this allows us to design and develop innovative robots quickly and cost-effectively. Products Historically, we have designed and marketed robots for the consumer and defense and security markets. Upon completion of the divestiture of our defense and security business unit, we will be primarily focusing on the consumer market. With over two decades of leadership in the robot industry, we remain committed to establishing robot and software platforms for invention and discovery and creating robots that improve the standards of living worldwide. Consumer Products We sell various products that are designed for use in and around the home. Our current consumer products are focused on both indoor and outdoor cleaning applications. We believe our consumer products provide value to our customers by delivering a better way to clean and by freeing people from repetitive home cleaning tasks. In order to ensure the continued acceptance of our robots we will continue to invest in technology necessary to further improve their cleaning capabilities. We currently offer multiple Roomba floor vacuuming robots with varying price points ranging from $375 to $899 based upon features and performance characteristics. Our Roomba robot's compact disc shape allows it to clean under kick boards, beds and other furniture, resulting in cleaner floors since the Roomba can access more of the floor than standard upright vacuum cleaners. In addition, Roomba eliminates the need to manually vacuum -- it cleans automatically upon the push of a button or through scheduling. In September 2015, we launched our newest robot, Roomba 980, our first connected robot. Roomba 980 delivers entire level cleaning through smart navigation, recharging as needed and resumes until finished. The iRobot HOME App allows consumers the ability to conveniently schedule cleanings at anytime from anywhere. The Roomba 600 series robots offer a three-stage cleaning system which thoroughly vacuums every section of the floor multiple times, as well as AeroVac technology and improved brush design enabling the robot to better handle fibers like hair, pet fur, lint and carpet fuzz. The Roomba 700 series robots offer improved debris pick up, a larger debris bin that vigorously pulls debris and hair off brushes into the bin, and dual air filters that capture dust particles as fine as 0.3 microns. The Roomba 800 series robots offer our AEROForce technology which incorporates brushless, counter-rotating extractors that amplify suction for superior performance over bristle brushes, while requiring less maintenance than previous Roomba models. We currently offer the Braava automatic floor mopping robots designed exclusively for hard surface floors with a price of $299. These robots provide a different cleaning approach than our Roomba products. The Braava automatically dusts and damp mops hard surface floors using popular cleaning cloths or our specially designed reusable microfiber cloths, and includes a special reservoir that dispenses liquid throughout the cleaning cycle to keep the cloth damp. Our Scooba 450 floor scrubbing robot has a price point of $599. Unlike a conventional mop that spreads dirty water on the floor, Scooba will apply only fresh water and cleaning solution to the floor from a clean tank. Scooba will clean dirt and grime, is safe for use on all sealed, hard floor surfaces, including wood and tile, and is smart enough to avoid carpet. Our Mirra Pool Cleaning Robot is used to clean residential pools and removes debris as small as two microns from pool floors, walls and 6 stairs. Mirra is brought to market under the iRobot brand through a relationship with Aquatron, Inc., which developed the pool cleaning robots. Our Looj Gutter Cleaning Robot was designed to simplify the difficult and dangerous job of gutter cleaning. The Looj cleans an entire stretch of gutter, reducing the number of times a ladder must be repositioned and climbed during gutter cleaning. Defense and Security Products As noted above, we expect to complete the divestiture of our defense and security business unit during the first quarter of 2016. In the defense and security product markets, we currently offer several unmanned ground vehicles. Our tactical ground robots include the combat-tested 510 PackBot, the 310 SUGV, the 110 FirstLook small, light, throwable robot, and the 710 Kobra multi-purpose robot capable of carrying heavy payloads. The PackBot, SUGV, FirstLook, and Kobra robots comprise a family of robots using many common platform components and offer our patented flipper technology that enables robots to easily climb stairs, navigate rubble, and penetrate inaccessible areas. These robots, which are beginning to utilize the uPoint Multi-Robot Control system, a universal control system for our line of defense and security robots, are designed to keep war fighters and public safety officials out of harm's way and are designed for high-performance, durability and ease of use while performing search, reconnaissance, mapping, bomb disposal and other dangerous missions. As of January 2, 2016, we have delivered approximately 6,000 robots to military and civil defense forces and research communities worldwide. The robots are currently priced between approximately $20,000 and $600,000 per unit, depending on model, configuration and quantities ordered. We have continued to refine the PackBot product line, focusing on enhanced modularity and providing new capabilities to support a variety of mission scenarios. Our unique Aware 2 software is incorporated into the advanced 510 PackBot chassis and operator control unit. As a result, PackBot can support multiple configurations and payloads with the same chassis and operator control unit, providing customers with a single robot capable of performing a variety of missions. We also utilize Configure-To-Order (CTO) procurement options for our commercial 510 PackBot, allowing customers to tailor the product to their specific mission needs. The combined benefits of the Aware 2 software and CTO procurement options establish the 510 PackBot as a truly modular multi-mission robotic platform. The 110 FirstLook is an expandable, lightweight robot that performs persistent observation and investigates dangerous and hazardous material while keeping its operator out of harm’s way. The 310 SUGV is a lightweight, backpackable robot well-suited to dismounted operations. It has a modular design that accommodates a wide range of optional payloads and sensors, including a dexterous manipulator, and can easily climb stairs, roll over obstacles and enter inaccessible and dangerous areas. The 710 Kobra is a powerful, rugged, fast robot that supports or carries multiple and heavy payloads, and can lift up to 330 pounds. Remote Presence Products We currently have two products based upon our Ava mobile robotics platform. The U.S. Food and Drug Administration approved RP-VITA telemedicine robot expands the reach of medical care by connecting physicians with patients from anywhere in the world. The RP-VITA combines the latest in autonomous navigation and mobility technologies developed by iRobot with the state-of-the-art telemedicine and electronic health record integration developed by InTouch Health. The RP- VITA, which is sold to healthcare customers by InTouch Health, was introduced in 2012 and began shipping in early 2013. Our Ava 500 Video Collaboration robot, which we began selling in 2014, delivers autonomous telepresence to the enterprise market, enabling remote workers to more personally collaborate throughout the workplace. The Ava 500 blends together our autonomous navigation capabilities with Cisco’s TelePresence to enable people working off-site to participate in meetings, presentations and events where movement and location spontaneity are important. Strategic Alliances In addition to our internal technology development, we leverage relevant robotic technologies through licensing, acquisitions and/or other partnerships. These strategic alliances are an important part of our product development and distribution strategies. We rely on strategic alliances to provide technology, complementary product offerings and increased and quicker access to markets. We seek to form relationships with organizations that can provide best-in-class technology or market advantages for establishing iRobot technology in new market segments. 7 In 2011, we signed a joint development and licensing agreement with InTouch Health, a leading remote presence telemedicine solution provider, which resulted in the introduction in 2012 of the RP-VITA, the first autonomous navigation remote presence robot to receive U.S. Food and Drug Administration clearance for use in hospitals. In 2013, we signed a joint marketing agreement and have worked in close alliance with Cisco to bring our enterprise-grade Ava 500 Video Collaboration robot to market. The Ava 500 blends together our autonomous navigation capabilities with Cisco’s TelePresence to enable people working off-site to participate in meetings, presentations and events where movement and location spontaneity are important. We continue to explore strategic partnership opportunities for our remote presence technology. Our strategy of working closely with third parties extends to the design of our products. By offering extensible platforms designed to carry payloads, we have designed and manufactured our products to leverage the work of those individuals and organizations that offer specialized technological expertise. The PackBot, Kobra and FirstLook robots are designed with open interfaces that allow third-party developers to add payloads to our robots, improving their functionality. Sales and Distribution Channels We sell our products through distinct sales channels to the consumer, defense and security, telemedicine, and video collaboration markets. For the fiscal years ended January 2, 2016, December 27, 2014 and December 28, 2013, sales to non- U.S. customers accounted for 56.0%, 60.9% and 59.5% of total revenue, respectively. For the fiscal years ended January 2, 2016, December 27, 2014 and December 28, 2013, U.S. federal government orders, contracts and subcontracts accounted for 5.1%, 4.3% and 6.2% of total revenue, respectively. For the years ended January 2, 2016, December 27, 2014 and December 28, 2013, we generated an aggregate of 26.0%, 29.8% and 33.2% of our revenue, respectively, from our home robots distributor in Japan (Sales on Demand Corporation) and a network of affiliated European distributors of our home robots (Robopolis SAS). F o r m 1 0 - K Home Robots In the United States and Canada, we sell our consumer products through a network of national retailers. In 2015, this network consisted of more than 60 retailers which often sell either one or some combination of our products. Certain smaller domestic retail operations are supported by distributors to whom we sell our products directly. In support of sales in the United States and Canada, we maintain an in-house sales and product management team. Outside of the United States and Canada, our products have been sold in more than 50 countries, primarily through a network of in-country distributors who resell to retail stores in their respective countries. These distributors are supported by our international sales and product marketing team. Our retail and distributor networks are our primary distribution channels for our consumer products. We also offer products direct-to-consumer through our domestic and international on-line stores, representing 6.1%, 6.1% and 5.9% of total home robots business unit revenue for fiscal 2015, 2014 and 2013, respectively. We have established valuable databases and customer lists that allow us to target directly those consumers most likely to purchase a new robot or upgrade. We believe we maintain a close connection with our customers in each of our markets, which provides an enhanced position from which to improve our distribution and product offerings. Defense and Security As noted above, we expect to complete the divestiture of our defense and security business unit during the first quarter of 2016. We currently sell our defense and security products directly to end users and indirectly through prime contractors and distributors. While the majority of defense and security products have been sold to date to various operations within the U.S. federal government, we also sell to state and local agencies as well as to international government organizations, research labs, nuclear and industrial companies and universities. Our military products are sold overseas in compliance with the International Traffic in Arms Regulations, or ITAR. We have sold our products to the governments of various countries in the past several years, including the United Kingdom, France, Germany, Sweden, Norway, Italy, Brazil, Pakistan, Israel, Australia, Republic of Korea, Singapore, Bosnia, Lithuania, Qatar, Taiwan, South Africa and Canada. Remote Presence The RP-VITA telemedicine robot, which was jointly developed with InTouch Health and incorporates our Ava mobile robotics platform, is sold to healthcare customers by InTouch Health. Our Ava 500 Video Collaboration robot, which 8 incorporates our Ava mobile robotics platform and Cisco’s TelePresence, is available from certified Cisco partners on a limited basis. Customer Service and Support We also provide ongoing customer service and support. Consumer customer service representatives, the majority of whom are employees of outsourced service organizations or our distribution partners, are extensively trained on the technical intricacies of our consumer products. Defense and security customer representatives are usually former military personnel who are experienced in logistical and technical support requirements for military operations. Customer service for the RP-VITA product is provided by InTouch Health. Customer service for the Ava 500 is provided by iRobot. Marketing and Brand We market our home robots to end-user customers through our sales and marketing teams as well as through our extensive network of retailers and in-country distributors. We market our defense and security products directly through our team of government sales specialists to end users and indirectly through prime contractors. Our website is also playing an increasing role in supporting brand awareness, addressing customer questions and serving as a showcase for our products. Our marketing strategy is to increase our brand awareness and associate the iRobot brand with innovation, reliability, safety and value. Our sales and marketing expenses represented 15.9%, 15.5% and 14.7% of our total revenue in 2015, 2014 and 2013, respectively. We expect to continue to invest in national advertising, consumer and industry trade shows, direct marketing and public relations to further build brand awareness. We believe that we have built a trusted, recognized brand by providing high-quality robots. We believe that customer word-of-mouth has been a significant driver of our brand's success to date, which can work very well for products that inspire a high level of user loyalty because users are likely to share their positive experiences. Our grass-roots marketing efforts focus on feeding this word-of-mouth momentum and we use public relations as well as advertising to promote our products. Our innovative robots and public relations campaigns have generated extensive press coverage, and iRobot and our consumer robots have won several awards. Through these efforts, we have been able to build our brand, and we expect that our reputation for innovative products and customer support will continue to play a significant role in our growth and success. Manufacturing Our core competencies are the design, development and marketing of robots. Our manufacturing strategy is to outsource non-core competencies, such as the production of our robots, to third-party entities skilled in manufacturing. By relying on the outsourced manufacture of our consumer, military and remote presence robots, we can focus our engineering expertise on the design of robots. Manufacturing a new product requires a close relationship between our product designers and the manufacturing organizations. Using multiple engineering techniques, our products are introduced to the selected production facility at an early-development stage and the feedback provided by manufacturing is incorporated into the design before tooling is finalized and mass production begins. As a result, we believe that we can significantly reduce the time required to move a product from its design phase to mass production deliveries, with improved quality and yields. We outsource the manufacturing of our consumer products to four contract manufacturers, each of which manufactures at a single plant in China. We outsource the manufacturing of our defense and security robots to two contract manufacturers, both of which are located in the United States. Research and Development We believe that our future success depends upon our ability to continue to develop new products and product accessories, and enhancements to and applications for our existing products. For the years ended January 2, 2016, December 27, 2014 and December 28, 2013, our research and development expenses were $76.1 million, $69.4 million and $63.6 million, or 12.3%, 12.5% and 13.1% of revenue, respectively. We intend to continue our investment in research and development to respond to and anticipate customer needs, and to enable us to introduce new products over the next few years that will continue to address our existing and adjacent market sectors. 9 Our research and development is conducted by teams dedicated to particular projects. Our research and development efforts are primarily located at our headquarters in Bedford, Massachusetts and our office in Pasadena, California. Competition 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. We believe that a number of established companies have developed or are developing robots that will compete directly with our product offerings, and many of our competitors have significantly more financial and other resources than we possess. Our competitors include developers of robot floor cleaning products and developers of small unmanned ground vehicles. While we believe many of our customers purchase our Roomba floor vacuuming robots, Braava floor cleaning and Scooba floor washing robots as a supplement to, rather than a replacement for, their traditional vacuum cleaners and wet floor cleaning methods, we do compete in some cases with providers of traditional cleaning products. We believe that the principal competitive factors in the market for robots include product features, performance for the intended mission, cost of purchase, total cost of system operation, including maintenance and support, ease of use, integration with existing equipment, quality, reliability, customer support, brand and reputation. Our ability to remain competitive will depend to a great extent upon our ongoing performance in the areas of product development and customer support. We cannot provide assurance that our products will continue to compete favorably or that we will be successful in the face of increasing competition from new products and enhancements introduced by existing competitors or new companies entering the markets in which we provide products. F o r m 1 0 - K Intellectual Property We believe that our continued success depends in large part on our proprietary technology, the intellectual skills of our employees and the ability of our employees to continue to innovate. We rely on a combination of patent, copyright, trademark and trade secret laws, as well as confidentiality agreements, to establish and protect our proprietary rights. As part of the sale of our defense and security business, we will transfer to the buyer ownership of certain of our intellectual property related to the defense and security business, including patents, patent applications and trademarks. As of January 2, 2016, we held 375 U.S. patents, more than 350 foreign patents, additional design registrations, and more than 500 patent applications pending worldwide. Our U.S. patents will begin to expire in 2019. We will continue to file and prosecute patent (or design registration, as applicable) applications when and where appropriate to attempt to protect our rights in our proprietary technologies. We also encourage our employees to continue to invent and develop new technologies so as to maintain our competitiveness in the marketplace. It is possible that our current patents, or patents which we may later acquire, may be successfully challenged or invalidated in whole or in part. It is also possible that we may not obtain issued patents for our pending patent applications or other inventions we seek to protect. In that regard, we sometimes permit certain intellectual property to lapse or go abandoned under appropriate circumstances, and due to uncertainties inherent in prosecuting patent applications, sometimes patent applications are rejected and we subsequently abandon them. It is also possible that we may not develop proprietary products or technologies in the future that are patentable, or that any patent issued to us may not provide us with any competitive advantages, or that the patents of others will harm or altogether preclude our ability to do business. Our registered U.S. trademarks include iRobot, Roomba, Ava, Scooba, Mint, ViPR, NorthStar, Create, PackBot, FirstLook, iAdapt, Aware, Home Base, Looj, Braava, Kobra, AeroForce, uPoint, AeroVac, Mirra, and Virtual Wall. Our marks iRobot, Roomba, Virtual Wall, Scooba, and certain other trademarks, have also been registered in selected foreign countries. Our means of protecting our proprietary rights may not be adequate, and our competitors may independently develop technology that is similar to ours. Legal protections afford only limited protection for our technology. The laws of many countries do not protect our proprietary rights to as great an extent as do the laws of the United States. Despite our efforts to protect our proprietary rights, unauthorized parties have in the past attempted, and may in the future attempt, to copy aspects of our products or to obtain and use information that we regard as proprietary. Third parties may also design around our proprietary rights, which may render our protected products less valuable, if the design around is favorably received in the marketplace. In addition, if any of our products or the technology underlying our products is covered by third-party patents or other intellectual property rights, we could be subject to various legal actions. We cannot assure you that our products do not 10 infringe patents held by others or that they will not in the future. We have received in the past communications from third parties relating to technologies used in our various robot products that have alleged infringement of patents or violation of other intellectual property rights. In response to these communications, we have contacted these third parties to convey our good faith belief that we do not infringe the patents in question or otherwise violate those parties' rights. Although there have been no additional actions or communications with respect to these allegations, we cannot assure you that we will not receive further correspondence from these parties, or not be subject to additional allegations of infringement from others. Litigation may be necessary to enforce our intellectual property rights, to protect our trade secrets, to determine the validity and scope of the proprietary rights of others, or to defend against claims of infringement or invalidity, misappropriation, or other claims. Any such litigation could result in substantial costs and diversion of our resources. Moreover, any settlement of or adverse judgment resulting from such litigation could require us to obtain a license to continue to use the technology that is the subject of the claim, or otherwise restrict or prohibit our use of the technology. Any required licenses may not be available to us on acceptable terms, if at all. If we attempt to design around the technology at issue or to find another provider of suitable alternative technology to permit us to continue offering applicable software or product solutions, our continued supply of software or product solutions could be disrupted or our introduction of new or enhanced software or products could be significantly delayed. Regulations We are subject to various government regulations, including various U.S. federal government regulations as a contractor and subcontractor to the U.S. federal government. Following closing of the sale of our defense and security business unit, we will be subject to certain of these regulations only as they pertain to matters related to our operation of the defense and security business unit prior to the sale. Among the most significant U.S. federal government regulations currently affecting our business are: • • • • • • the Federal Acquisition Regulations and supplemental agency regulations, which comprehensively regulate the formation and administration of, and performance under government contracts; the Truth in Negotiations Act, which requires certification and disclosure of all cost and pricing data in connection with contract negotiations; the Cost Accounting Standards, which impose accounting requirements that govern our right to reimbursement under cost-based government contracts; the Foreign Corrupt Practices Act, which prohibits U.S. companies from providing anything of value to a foreign official to help obtain, retain or direct business, or obtain any unfair advantages; the False Claims Act and the False Statements Act, which, respectively, impose penalties for payments made on the basis of false facts provided to the government, and impose penalties on the basis of false statements, even if they do not result in a payment; and laws, regulations and executive orders restricting the use and dissemination of information classified for national security purposes and the exportation of certain products and technical data. We also need special security clearances to continue working on and advancing certain of our projects with the U.S. federal government. Classified programs generally will require that we comply with various Executive Orders, federal laws and regulations and customer security requirements that may include restrictions on how we develop, store, protect and share information, and may require our employees to obtain government clearances. The nature of the work we do for the federal government may also limit the parties who may invest in or acquire us. Export laws may keep us from providing potential foreign acquirers with a review of the technical data they would be acquiring. In addition, there are special requirements for foreign parties who wish to buy or acquire control or influence over companies that control technology or produce goods in the security interests of the United States. Finally, the government may require a prospective foreign owner to establish intermediaries to actually run that part of the company that does classified work, and establishing a subsidiary and its separate operation may make such an acquisition less appealing to such potential acquirers. 11 In addition, the export from the United States of many of our products may require the issuance of a license by the U.S. Department of Commerce under the Export Administration Act, as amended, and its implementing Regulations as kept in force by the International Emergency Economic Powers Act of 1977, as amended. Some of our products may require the issuance of a license by the U.S. Department of State under the Arms Export Control Act and its implementing Regulations, which licenses are generally harder to obtain and take longer to obtain than do Export Administration Act licenses. Our business may require the compliance with state or local laws designed to limit the uses of personal user information gathered online or require online services to establish privacy policies. Defense and Security Product Backlog Our defense and security product backlog consists of written purchase orders or contracts received from our defense and security customers. Total backlog of product sales to defense and security customers, which includes federal, state, local and foreign governments, and non-government customers, as of January 2, 2016, December 27, 2014 and December 28, 2013, amounted to approximately $10.5 million, $18.2 million and $8.8 million, respectively. There can be no assurance that any of our backlog will result in revenue. At the closing of the sale of our defense and security business unit, all defense and security product backlog will transfer to the buyer. Employees As of January 2, 2016, we had 622 full-time employees located in the United States and abroad. We believe that we have F o r m 1 0 - K a good relationship with our employees. Available Information We were incorporated in California in August 1990 under the name IS Robotics, Inc. and reincorporated as IS Robotics Corporation in Massachusetts in June 1994. We reincorporated in Delaware as iRobot Corporation in December 2000. We conduct operations and maintain a number of subsidiaries in the United States and abroad, including operations in Hong Kong, the United Kingdom and China. We also maintain iRobot Securities Corporation, a Massachusetts securities corporation, to invest our cash balances on a short-term basis. Our website address is www.irobot.com. Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available free of charge through the investor relations page of our internet website as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission. Alternatively, these reports may be accessed at the SEC’s website at www.sec.gov. ITEM 1A. RISK FACTORS We operate in a rapidly changing environment that involves a number of risks, some of which are beyond our control. This discussion highlights some of the risks which may affect future operating results. These are the risks and uncertainties we believe are most important for you to consider. Additional risks and uncertainties not presently known to us, which we currently deem immaterial or which are similar to those faced by other companies in our industry or business in general, may also impair our business operations. If any of the following risks or uncertainties actually occurs, our business, financial condition and operating results would likely suffer. We operate in an emerging market, which makes it difficult to evaluate our business and future prospects. Robots represent a new and emerging market. Accordingly, our business and future prospects are difficult to evaluate. We cannot accurately predict the extent to which demand for consumer robots will increase, if at all. You should consider the challenges, risks and uncertainties frequently encountered by companies using new and unproven business models in rapidly evolving markets. These challenges include our ability to: • generate sufficient revenue and gross margin to maintain profitability; • • • • acquire and maintain market share in our consumer and defense markets; attract and retain customers of our consumer robots; attract and retain additional engineers and other highly-qualified personnel; expand our product offerings beyond our existing robots; and 12 • adapt to new or changing policies and spending priorities of governments and government agencies. If we fail to successfully address these and other challenges, risks and uncertainties, our business, results of operations and financial condition would be materially harmed. Our financial results often vary significantly from quarter-to-quarter due to a number of factors, which may lead to volatility in our stock price. Our quarterly revenue and other operating results have varied in the past and are likely to continue to vary significantly from quarter-to-quarter in the future. These fluctuations may be due to numerous factors including: • • the size, timing and mix of orders from retail stores and international distributors for our home robots; the mix of products that we sell in the period; • disruption of supply of our products from our manufacturers; • disruptions to our supply chain due to inclement weather, labor disruptions or other factors beyond our control; • seasonality in the sales of our products; • unanticipated costs incurred in the introduction of new products; • • • costs and availability of labor and raw materials; costs of freight; changes in our rate of returns for our consumer products; • our ability to introduce new products and enhancements to our existing products on a timely basis; • warranty costs associated with our consumer products; • • the size and timing of orders from military and other government agencies; the amount of government funding and the political, budgetary and purchasing constraints of our government agency customers; and • cancellations, delays or contract amendments by government agency customers. We cannot be certain that our revenues will grow at rates that will allow us to maintain profitability during every fiscal quarter, or even every fiscal year. We base our current and future expense levels on our internal operating plans and sales forecasts, including forecasts of holiday sales for our consumer products. A significant portion of our operating expenses, such as research and development expenses, certain marketing and promotional expenses and employee wages and salaries, do not vary directly with sales and are difficult to adjust in the short term. As a result, if sales for a quarter are below our expectations, we might not be able to reduce operating expenses for that quarter and, therefore, we would not be able to reduce our operating expenses for the fiscal year. Accordingly, a sales shortfall during a fiscal quarter, and in particular the fourth quarter of a fiscal year, could have a disproportionate effect on our operating results for that quarter or that year. Because of quarterly fluctuations, we believe that quarter-to-quarter comparisons of our operating results are not necessarily meaningful. Moreover, our operating results may not meet expectations of equity research analysts or investors. If this occurs, the trading price of our common stock could fall substantially either suddenly or over time. Global economic conditions and any associated impact on consumer spending could have a material adverse effect on our business, results of operations and financial condition. Continued economic uncertainty and reductions in consumer spending, particularly in certain international markets such as the European Union, China and Japan, may result in reductions in sales of our consumer robots. Additionally, disruptions in credit markets may materially limit consumer credit availability and restrict credit availability of our retail customers, which would also impact purchases of our consumer robots. Any reduction in sales of our consumer robots, resulting from reductions in consumer spending or continued disruption in the availability of credit to retailers or consumers, could materially and adversely affect our business, results of operations and financial condition. Because we are a global business that in 2015 generated approximately 56% of our total revenue from sales to customers outside of the United States, we are subject to a number of additional risks including foreign currency fluctuations. These fluctuations may make our products more expensive to our distributors, which in turn may impact sales directly or the ability or willingness of our distribution partners to invest in growing product demand. 13 F o r m 1 0 - K The majority of our business currently depends on our consumer robots, and our sales growth and operating results would be negatively impacted if we are unable to enhance our current consumer robots or develop new consumer robots at competitive prices or in a timely manner, or if the consumer robot market does not achieve broad market acceptance. For the years ended January 2, 2016, December 27, 2014 and December 28, 2013, we derived 90.7%, 91.1% and 87.8% of our total revenue from our consumer robots, respectively. For the foreseeable future, we expect that a significant portion of our revenue will be derived from sales of consumer robots in general and home floor care products in particular. Accordingly, our future success depends upon our ability to further penetrate the consumer home care market, to enhance our current consumer products and develop and introduce new consumer products offering enhanced performance and functionality at competitive prices. The development and application of new technologies involve time, substantial costs and risks. Our inability to achieve significant sales of our newly introduced robots, or to enhance, develop and introduce other products in a timely manner, or at all, would materially harm our sales growth and operating results. Even if consumer robots gain wide market acceptance, our robots may not adequately address market requirements and may not continue to gain market acceptance. If robots generally, or our robots specifically, do not gain wide market acceptance, we may not be able to achieve our anticipated level of growth, and our revenue and results of operations would suffer. We have signed a definitive agreement to divest our defense and security business unit. If we are unable to consummate this transaction, we may be subject to significant reputational, financial, and operational consequences. On February 2, 2016, we entered into an Asset Purchase Agreement with iRobot Defense Holdings, Inc., a recently- formed portfolio company of Arlington Capital Partners, which provides for the sale of our defense and security business unit. Consummation of this transaction is subject to the satisfaction of customary closing conditions for transactions of this type. If these closing conditions are not satisfied, Buyer may not be obligated to consummate the purchase of our defense and security business unit. We believe that, if this transaction is not completed, our continued operation of our defense and security business unit may be adversely affected as a result of the public disclosure of our intention to divest this business unit, including harming relationships with key customers and suppliers and our ability to retain key employees within the defense and security business unit. In addition, if the transaction is not consummated, we may be unable to enter into a similar transaction with another party or may be unable to enter into a transaction with financial or other terms as favorable as those provided in the asset purchase agreement with the buyer. Although we have signed a definitive agreement to divest our defense and security business unit, we currently depend on the U.S. federal government for a portion of our revenue, and any unexpected reduction in the amount of business that we do with the U.S. federal government would negatively impact our operating results and financial condition. For the years ended January 2, 2016, December 27, 2014 and December 28, 2013, we derived 5.1%, 4.3% and 6.2% of our total revenue, respectively, directly or indirectly, from the U.S. federal government and its agencies. If we are unable to complete the divestiture of our defense and security business unit, further reduction in the amount of revenue that we derive from a limited number of U.S. federal government agencies without an offsetting increase in new sales to other customers would have a material adverse effect on our operating results. Specifically, the defense industry in which we operate is dependent upon the level of equipment expenditures by the armed forces of countries throughout the world, and especially those of the United States, which represents a significant portion of world-wide defense expenditures. In prior years, the war on terror increased the level of equipment expenditures by the U.S. armed forces; however, this level of spending does not appear to be sustainable in light of current government spending priorities. If we are unable to complete the divestiture of our defense and security business unit, future sales of our military robots will depend largely on our ability to secure contracts with the U.S. military under its robot programs. We expect that there will continue to be only a limited number of programs under which U.S. federal government agencies will seek to fund the development of, or purchase, robots. Moreover, it is difficult to predict the timing of the award of government contracts and our revenue could fluctuate significantly based on the timing of any such awards. 14 We depend on single source manufacturers, and our reputation and results of operations would be harmed if these manufacturers fail to meet our requirements. We currently depend largely on several single source contract manufacturers, for the manufacture of our various families of home care and defense products. All contract manufacturers for our home robots are located in China. These manufacturers supply substantially all of the raw materials and provide all facilities and labor required to manufacture our products. If these companies were to terminate their arrangements with us or fail to provide the required capacity and quality on a timely basis, we would be unable to manufacture our products until replacement contract manufacturing services could be obtained or volume transferred to an alternative manufacturing partner, each of which is a costly and time-consuming process. We cannot assure you that we would be able to establish alternative manufacturing arrangements on acceptable terms or in a timely manner. Our reliance on these contract manufacturers involves certain risks, including the following: • • • • • lack of direct control over production capacity and delivery schedules; lack of direct control over quality assurance, manufacturing yields and production costs; lack of enforceable contractual provisions over the production and costs of consumer products; risk of loss of inventory while in transit; risks associated with international commerce, including unexpected changes in legal and regulatory requirements, changes in tariffs and trade policies, risks associated with the protection of intellectual property and political and economic instability; and • our attempts to add additional manufacturing resources may be significantly delayed and thereby create disruptions in production of our products. Any interruption in the manufacture of our products would be likely to result in delays in shipment, lost sales and revenue and damage to our reputation in the market, all of which would harm our business and results of operations. In addition, while our contract obligations with our contract manufacturers in China are typically denominated in U.S. dollars, changes in currency exchange rates could impact our suppliers and increase our prices. Any efforts to expand our product offerings beyond our current markets may not succeed, which could negatively impact our operating results. We have focused historically on selling our robots in the home floor care and defense and security markets. Efforts to expand our product offerings beyond the markets that we currently serve, however, may divert management resources from existing operations and require us to commit significant financial resources to an unproven business, either of which could significantly impair our operating results. Moreover, efforts to expand beyond our existing markets may never result in new products that achieve market acceptance, create additional revenue or become profitable. If we fail to maintain or increase consumer robot sales through our distribution channels, our operating results would be negatively impacted. We do not have long-term contracts regarding purchase volumes with any of our retail partners. As a result, purchases generally occur on an order-by-order basis, and the relationships, as well as particular orders, can generally be terminated or otherwise materially changed at any time by our retail partners. A decision by a major retail partner, whether motivated by competitive considerations, financial difficulties, economic conditions or otherwise, to decrease its purchases from us, to reduce the shelf space for our products or to change its manner of doing business with us could significantly damage our consumer product sales and negatively impact our business, financial condition and results of operations. In addition, during recent years, various retailers, including some of our partners, have experienced significant changes and difficulties, including consolidation of ownership, increased centralization of purchasing decisions, restructurings, bankruptcies and liquidations. These and other financial problems of some of our retailers increase the risk of extending credit to these retailers. A significant adverse change in a retail partner relationship with us or in a retail partner’s financial position could cause us to limit or discontinue business with that partner, require us to assume more credit risk relating to that partner’s receivables or limit our ability to collect amounts related to previous purchases by that partner, all of which could harm our business and financial condition. Disruption of the iRobot on-line store could also decrease our home robot sales. 15 We have recently begun to spend significant amounts on advertising and other marketing campaigns, which may not be successful or cost effective. We have recently begun to spend significant amounts on advertising and other marketing campaigns, such as television, print advertising, and social media, as well as increased promotional activities, to acquire new customers, and we expect our marketing expenses to increase in the future as we continue to spend significant amounts to increase awareness of our home robot products. For the years ended January 2, 2016, December 27, 2014 and December 28, 2013, sales and marketing expenses were $97.8 million, $86.1 million and $71.5 million, respectively, representing approximately 15.9%, 15.5% and 14.7% of our revenue, respectively. While we seek to structure our advertising campaigns in the manner that we believe is most likely to encourage people to purchase our products, we may fail to identify advertising opportunities that satisfy our anticipated return on advertising spend as we scale our investments in marketing or to fully understand or estimate the conditions and behaviors that drive customer behavior. If any of our advertising campaigns prove less successful than anticipated in attracting customers, we may not be able to recover our advertising spend, and our revenue may fail to meet market expectations, either of which could have an adverse effect on our business. There can be no assurance that our advertising and other marketing efforts will result in increased sales of our products. Our contracts with the U.S. federal government contain certain provisions that may be unfavorable to us and subject us to government audits, which could materially harm our business and results of operations. Our contracts and subcontracts with the U.S. federal government subject us to certain risks and give the U.S. federal government rights and remedies not typically found in commercial contracts, including rights that allow the U.S. federal government to: F o r m 1 0 - K • • • • • • terminate contracts for convenience, in whole or in part, at any time and for any reason; reduce or modify contracts or subcontracts if its requirements or budgetary constraints change; cancel multi-year contracts and related orders if funds for contract performance for any subsequent year become unavailable; exercise production priorities, which allow it to require that we accept government purchase orders or produce products under its contracts before we produce products under other contracts, which may displace or delay production of more profitable orders; claim certain rights in products provided by us; and control or prohibit the export of certain of our products. Several of our prime contracts with the U.S. federal government do not contain a limitation of liability provision, creating a risk of responsibility for direct and consequential damages. Several subcontracts with prime contractors hold the prime contractor harmless against liability that stems from our work and do not contain a limitation of liability. These provisions could cause substantial liability for us, especially given the use to which our products may be put. In addition, we are subject to audits by the U.S. federal government as part of routine audits of government contracts. As part of an audit, these agencies may review our performance on contracts, cost structures and compliance with applicable laws, regulations and standards. If any of our costs are found to be allocated improperly to a specific contract, the costs may not be reimbursed and any costs already reimbursed for such contract may have to be refunded. Accordingly, an audit could result in a material adjustment to our revenue and results of operations. Moreover, if an audit uncovers improper or illegal activities, we may be subject to civil and criminal penalties and administrative sanctions, including termination of contracts, forfeiture of profits, suspension of payments, fines and suspension or debarment from doing business with the government. If any of the foregoing were to occur, or if the U.S. federal government otherwise ceased doing business with us or decreased the amount of business with us, our business and operating results could be materially harmed and the value of your investment in our common stock could be impaired. Some of our contracts with the U.S. federal government allow it to use inventions developed under the contracts and to disclose technical data to third parties, which could harm our ability to compete. Some of our contracts allow the U.S. federal government rights to use, or have others use, patented inventions developed under those contracts on behalf of the government. Some of the contracts allow the federal government to disclose technical 16 data without constraining the recipient in how that data is used. The ability of third parties to use patents and technical data for government purposes creates the possibility that the government could attempt to establish additional sources for the products we provide that stem from these contracts. It may also allow the government the ability to negotiate with us to reduce our prices for products we provide to it. The potential that the government may release some of the technical data without constraint creates the possibility that third parties may be able to use this data to compete with us in the commercial sector. We face intense competition from other providers of robots, including diversified technology providers, as well as competition from providers offering alternative products, which could negatively impact our results of operations and cause our market share to decline. We believe that a number of companies have developed or are developing robots that will compete directly with our product offerings. Additionally, large and small companies, government-sponsored laboratories and universities are aggressively pursuing contracts for robot-focused research and development. Many current and potential competitors have substantially greater financial, marketing, research and manufacturing resources than we possess, and there can be no assurance that our current and future competitors will not be more successful than us. Moreover, while we believe many of our customers purchase our floor vacuuming robots as a supplement to, rather than a replacement for, their traditional vacuum cleaners; we also compete in some cases with providers of traditional vacuum cleaners. Our competitors include developers of robot floor cleaning products, developers of small unmanned ground vehicles, and established government contractors working on unmanned systems. 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. In the event that the robot market expands further, we expect that competition will intensify as additional competitors enter the market and current competitors expand their product lines. Companies competing with us may introduce products that are competitively priced, have increased performance or functionality, or incorporate technological advances that we have not yet developed or implemented. Increased competitive pressure could result in a loss of sales or market share or cause us to lower prices for our products, any of which would harm our business and operating results. We cannot assure you that our products will continue to compete favorably or that we will be successful in the face of increasing competition from new products and enhancements introduced by existing competitors or new companies entering the markets in which we provide products. Our failure to compete successfully could cause our revenue and market share to decline, which would negatively impact our results of operations and financial condition. If critical components of our products that we currently purchase from a small number of suppliers become unavailable, we may incur delays in shipment, which could damage our business. We and our outsourced manufacturers obtain hardware components, various subsystems, raw materials and batteries from a limited group of suppliers, some of which are sole suppliers. We do not have any long-term agreements with these suppliers obligating them to continue to sell components or products to us. If we or our outsourced manufacturers are unable to obtain components from third-party suppliers in the quantities and of the quality that we require, on a timely basis and at acceptable prices, we may not be able to deliver our products on a timely or cost-effective basis to our customers, which could cause customers to terminate their contracts with us, reduce our gross margin and seriously harm our business, results of operations and financial condition. Moreover, if any of our suppliers become financially unstable, we may have to find new suppliers. It may take several months to locate alternative suppliers, if required, or to re-tool our products to accommodate components from different suppliers. We may experience significant delays in manufacturing and shipping our products to customers and incur additional development, manufacturing and other costs to establish alternative sources of supply if we lose any of these sources. We cannot predict if we will be able to obtain replacement components within the time frames that we require at an affordable cost, or at all. 17 F o r m 1 0 - K Our products are complex and could have unknown defects or errors, which may give rise to claims against us, diminish our brand or divert our resources from other purposes. Our robots rely on the interplay among behavior-based artificially intelligent systems, real-world dynamic sensors, user- friendly interfaces and tightly-integrated, electromechanical designs to accomplish their missions. Despite testing, our new or existing products have contained defects and errors and may in the future contain defects, errors or performance problems when first introduced, when new versions or enhancements are released, or even after these products have been used by our customers for a period of time. These problems could result in expensive and time-consuming design modifications or warranty charges, delays in the introduction of new products or enhancements, significant increases in our service and maintenance costs, exposure to liability for damages, mandatory or voluntary recall or product upgrades, damaged customer relationships and harm to our reputation, any of which could materially harm our results of operations and ability to achieve market acceptance. Our quality control procedures relating to the raw materials and components that it receives from third-party suppliers as well as our quality control procedures relating to its products after those products are designed, manufactured and packaged may not be sufficient. In addition, increased development and warranty costs, including the costs of any mandatory or voluntary recall, could be substantial and could reduce our operating margins. Moreover, because military robots are used in dangerous situations, the failure or malfunction of any of these robots, including our own, could significantly damage our reputation and support for robot solutions in general. The existence of any defects, errors, or failures in our products could also lead to product liability claims or lawsuits against us. A successful product liability claim could result in substantial cost, diminish our brand and divert management’s attention and resources, which could have a negative impact on our business, financial condition and results of operations. We collect, store, process, and use customer data, including certain personal and robot-specific information, which subjects us to governmental regulation and other legal obligations related to privacy, information security, and data protection, and any security breaches or our actual or perceived failure to comply with such legal obligations could harm our business. Our latest Roomba products, as well as additional products in development, collect, store, process, and use certain customer data, which subjects us to governmental regulation and other legal obligations related to privacy, information security, and data protection, and any security breaches or our actual or perceived failure to comply with such legal obligations could harm our business. We collect, store, process, and use personal information and other user data, and we rely on third parties that are not directly under our control to do so as well. If our security measures, some of which are managed by third parties, are breached or fail, unauthorized persons may be able to obtain access to or acquire sensitive user data, which may expose us to a risk of loss, litigation, or regulatory proceedings. Depending on the nature of the information compromised, in the event of a data breach or other unauthorized access to or acquisition of our user data, we may also have obligations to notify users about the incident, and we may need to provide some form of remedy, such as a subscription to a credit monitoring service, for the individuals affected by the incident. A growing number of legislative and regulatory bodies have adopted consumer notification requirements in the event of unauthorized access to or acquisition of certain types of personal data. Such breach notification laws continue to evolve and may be inconsistent from one jurisdiction to another. Complying with these obligations could cause us to incur substantial costs and could increase negative publicity surrounding any incident that compromises user data. If we are unable to attract and retain additional skilled personnel, we may be unable to grow our business. To execute our growth plan, we must attract and retain additional, highly-qualified personnel. Competition for hiring these employees is intense, especially with regard to engineers with high levels of experience in designing, developing and integrating robots. Many of the companies with which we compete for hiring experienced employees have greater resources than we have. If we fail to attract new technical personnel or fail to retain and motivate our current employees, our business and future growth prospects could be severely harmed. We may be sued by third parties for alleged infringement of their proprietary rights, which could be costly, time- consuming and limit our ability to use certain technologies in the future. If the size of our markets increases, we would be more likely to be subject to claims that our technologies infringe upon the intellectual property or other proprietary rights of third parties. In addition, the vendors from which we license technology used in our products could become subject to similar infringement claims. Our vendors, or we, may not be able to withstand 18 third-party infringement claims. Any claims, with or without merit, could be time-consuming and expensive, and could divert our management’s attention away from the execution of our business plan. Moreover, any settlement or adverse judgment resulting from the claim could require us to pay substantial amounts or obtain a license to continue to use the technology that is the subject of the claim, or otherwise restrict or prohibit our use of the technology. There can be no assurance that we would be able to obtain a license from the third party asserting the claim on commercially reasonable terms, if at all, that we would be able to develop alternative technology on a timely basis, if at all, or that we would be able to obtain a license to use a suitable alternative technology to permit us to continue offering, and our customers to continue using, our affected product. In addition, we may be required to indemnify our retail and distribution partners for third-party intellectual property infringement claims, which would increase the cost to us of an adverse ruling in such a claim. An adverse determination could also prevent us from offering our products to others. Infringement claims asserted against us or our vendors may have a material adverse effect on our business, results of operations or financial condition. If we fail to protect, or incur significant costs in defending, our intellectual property and other proprietary rights, our business and results of operations could be materially harmed. Our success depends on our ability to protect our intellectual property and other proprietary rights. We rely primarily on patents, trademarks, copyrights, trade secrets and unfair competition laws, as well as license agreements and other contractual provisions, to protect our intellectual property and other proprietary rights. Significant technology used in our products, however, is not the subject of any patent protection, and we may be unable to obtain patent protection on such technology in the future. Moreover, existing U.S. legal standards relating to the validity, enforceability and scope of protection of intellectual property rights offer only limited protection, may not provide us with any competitive advantages, and may be challenged by third parties. In addition, the laws of countries other than the United States in which we market our products may afford little or no effective protection of our intellectual property. Accordingly, despite our efforts, we may be unable to prevent third parties from infringing upon or misappropriating our intellectual property or otherwise gaining access to our technology. Unauthorized third parties may try to copy or reverse engineer our products or portions of our products or otherwise obtain and use our intellectual property. Some of our contracts with the U.S. federal government allow the federal government to disclose technical data regarding the products developed on behalf of the government under the contract without constraining the recipient on how it is used. This ability of the government creates the potential that third parties may be able to use this data to compete with us in the commercial sector. If we fail to protect our intellectual property and other proprietary rights, our business, results of operations or financial condition could be materially harmed. In addition, defending our intellectual property rights may entail significant expense. We believe that certain products in the marketplace may infringe our existing intellectual property rights. We have, from time to time, resorted to legal proceedings to protect our intellectual property and may continue to do so in the future. We may be required to expend significant resources to monitor and protect our intellectual property rights. Any of our intellectual property rights may be challenged by others or invalidated through administrative processes or litigation. If we resort to legal proceedings to enforce our intellectual property rights or to determine the validity and scope of the intellectual property or other proprietary rights of others, the proceedings could result in significant expense to us and divert the attention and efforts of our management and technical employees, even if we were to prevail. If we fail to enhance our brand, our ability to expand our customer base will be impaired and our operating results may suffer. We believe that developing and maintaining awareness of the iRobot brand is critical to achieving widespread acceptance of our existing and future products and is an important element in attracting new customers. Furthermore, we expect the importance of global brand recognition to increase as competition develops. If customers do not perceive our products to be of high quality, our brand and reputation could be harmed, which could adversely impact our financial results. In addition, brand promotion efforts may not yield significant revenue or increased revenue sufficient to offset the additional expenses incurred in building our brand. Maintaining, protecting, and enhancing our brand may require us to make substantial investments, and these investments may not be successful. If we fail to successfully maintain, promote, and position our brand and protect our reputation, or if we incur significant expenses in this effort, our business, financial condition and operating results may be adversely affected. 19 We depend on the experience and expertise of our senior management team and key technical employees, and the loss of any key employee may impair our ability to operate effectively. Our success depends upon the continued services of our senior management team and key technical employees, such as our project management personnel and senior engineers. Moreover, we often must comply with provisions in government contracts that require employment of persons with specified levels of education and work experience. Each of our executive officers, key technical personnel and other employees could terminate his or her relationship with us at any time. The loss of any member of our senior management team might significantly delay or prevent the achievement of our business objectives and could materially harm our business and customer relationships. In addition, because of the highly technical nature of our robots, the loss of any significant number of our existing engineering and project management personnel could have a material adverse effect on our business and operating results. We are subject to extensive U.S. federal government regulation, and our failure to comply with applicable regulations could subject us to penalties that may restrict our ability to conduct our business. As a contractor and subcontractor to the U.S. federal government, we are subject to and must comply with various government regulations that impact our operating costs, profit margins and the internal organization and operation of our business. Following closing of the sale of our defense and security business unit, we will be subject to certain of these regulations only as they pertain to matters related to our operation of the defense and security business unit prior to the sale. Among the most significant regulations currently affecting our business are: F o r m 1 0 - K • • • • • • the Federal Acquisition Regulations and supplemental agency regulations, which comprehensively regulate the formation and administration of, and performance under government contracts; the Truth in Negotiations Act, which requires certification and disclosure of all cost and pricing data in connection with contract negotiations; the Cost Accounting Standards, which impose accounting requirements that govern our right to reimbursement under cost-based government contracts; the Foreign Corrupt Practices Act, which prohibits U.S. companies from providing anything of value to a foreign official to help obtain, retain or direct business, or obtain any unfair advantage; the False Claims Act and the False Statements Act, which, respectively, impose penalties for payments made on the basis of false facts provided to the government, and impose penalties on the basis of false statements, even if they do not result in a payment; laws, regulations and executive orders restricting the use and dissemination of information classified for national security purposes and the exportation of certain products and technical data; • Certain contracts from the U.S. federal government may require us to maintain certain certifications including but not limited to AS9100 and CMMI; • Contractor Purchasing Systems review (CPSR) requirements, which evaluate the efficiency and effectiveness with which we spend U.S. Government funds; and • The sale of our products in countries outside the United States is regulated by the governments of those countries. While compliance with such regulation will generally be undertaken by our international distributors, we may assist with such compliance and in certain cases may be liable if a distributor fails to comply. We must comply with U.S. laws regulating the export of our products. In addition, we are required to obtain a license from the U.S. federal government to export our PackBot, Kobra and SUGV lines of defense and security robots. We cannot be sure of our ability to obtain any licenses required to export our products or to receive authorization from the U.S. federal government for international sales or domestic sales to foreign persons. Moreover, the export regimes and the governing policies applicable to our business are subject to change. We cannot assure you of the extent that such export authorizations will be available to us, if at all, in the future. In some cases where we act as a subcontractor, we rely upon the compliance activities of our prime contractors, and we cannot assure you that they have taken or will take all measures necessary to comply with applicable export laws. If we or our prime contractor partners cannot obtain required government approvals under applicable regulations in a timely manner or at all, we would be delayed or prevented from selling our products in international jurisdictions, which could materially harm our business, operating results and ability to generate revenue. 20 Also, we need special clearances to continue working on and advancing certain of our projects with the U.S. federal government. Obtaining and maintaining security clearances for employees involves a lengthy process, and it is difficult to identify, recruit and retain employees who already hold security clearances. If our employees are unable to obtain security clearances in a timely manner, or at all, or if our employees who hold security clearances are unable to maintain the clearances or terminate employment with us, then a customer requiring classified work could terminate the contract or decide not to renew it upon its expiration. In addition, we expect that many of the contracts on which we will bid will require us to demonstrate our ability to obtain facility security clearances and employ personnel with specified types of security clearances. To the extent we are not able to obtain facility security clearances or engage employees with the required security clearances for a particular contract, we may not be able to bid on or win new contracts, or effectively rebid on expiring contracts. Classified programs generally will require that we comply with various Executive Orders, federal laws and regulations and customer security requirements that may include restrictions on how we develop, store, protect and share information, and may require our employees to obtain government clearances. Our failure to comply with applicable regulations, rules and approvals could result in the imposition of penalties, the loss of our government contracts or our suspension or debarment from contracting with the federal government generally, any of which would harm our business, financial condition and results of operations. Acquisitions and potential future acquisitions could be difficult to integrate, divert the attention of key personnel, disrupt our business, dilute stockholder value and impair our financial results. As part of our business strategy, we have in the past acquired, and we intend to continue to consider additional acquisitions of companies, technologies and products that we believe could accelerate our ability to compete in our core markets or allow us to enter new markets. Acquisitions and combinations are accompanied by a number of risks, including the difficulty of integrating the operations and personnel of the acquired companies, the potential disruption of our ongoing business, the potential distraction of management, expenses related to the acquisition and potential unknown liabilities associated with acquired businesses. Any inability to integrate completed acquisitions or combinations in an efficient and timely manner could have an adverse impact on our results of operations. In addition, we may not be able to recognize any expected synergies or benefits in connection with a future acquisition or combination. If we are not successful in completing acquisitions or combinations that we may pursue in the future, we may incur substantial expenses and devote significant management time and resources without a successful result. In addition, future acquisitions could require use of substantial portions of our available cash or result in dilutive issuances of securities. In addition, charges to earnings as a result of acquisitions may adversely affect our operating results in the foreseeable future, which could have a material and adverse effect on the market value of our common stock. In particular we have allocated the cost of acquiring businesses to the individual assets acquired and liabilities assumed, including various identifiable intangible assets such as acquired technology, acquired trade names and acquired customer relationships based on their respective fair values. Our estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain. After we complete an acquisition, the following factors could result in material charges and adversely affect our operating results and may adversely affect our cash flows: • • • • • • • • costs incurred to combine the operations of businesses we acquire, such as transitional employee expenses and employee retention, redeployment or relocation expenses; impairment of goodwill or intangible assets; amortization of intangible assets acquired; a reduction in the useful lives of intangible assets acquired; identification of or changes to assumed contingent liabilities, both income tax and non-income tax related after our final determination of the amounts for these contingencies or the conclusion of the measurement period (generally up to one year from the acquisition date), whichever comes first; charges to our operating results to eliminate certain duplicative pre-merger activities, to restructure our operations or to reduce our cost structure; charges to our operating results resulting from expenses incurred to effect the acquisition; and charges to our operating results due to the expensing of certain stock awards assumed in an acquisition. 21 F o r m 1 0 - K We may not be able to obtain capital when desired on favorable terms, if at all, or without dilution to our stockholders. We anticipate that our current cash, cash equivalents, cash provided by operating activities and funds available through our working capital line of credit, will be sufficient to meet our current and anticipated needs for general corporate purposes. We operate in an emerging market, however, which makes our prospects difficult to evaluate. It is possible that we may not generate sufficient cash flow from operations or otherwise have the capital resources to meet our future capital needs. In such cases we may need additional financing to execute on our current or future business strategies. If we raise additional funds through the issuance of equity or convertible debt securities, the percentage ownership of our stockholders could be significantly diluted, and these newly-issued securities may have rights, preferences or privileges senior to those of existing stockholders. We cannot assure you that additional financing will be available on terms favorable to us, or at all. If adequate funds are not available or are not available on acceptable terms, if and when needed, our ability to fund our operations, take advantage of unanticipated opportunities, develop or enhance our products, or otherwise respond to competitive pressures would be significantly limited. In addition, our access to credit through our working capital line of credit may be limited by the restrictive financial covenants contained in that agreement, which require us to maintain profitability. Cybersecurity risks could adversely affect our business and disrupt our operations. The threats to network and data security are increasingly diverse and sophisticated. Despite our efforts and processes to prevent breaches, our devices, as well as our servers, computer systems, and those of third parties that we use in our operations are vulnerable to cybersecurity risks, including cyber attacks such as viruses and worms, phishing attacks, denial-of-service attacks, and similar disruptions from unauthorized tampering with our servers and computer systems or those of third parties that we use in our operations, which could lead to interruptions, delays, loss of critical data, and loss of consumer confidence. In addition, we may be the target of email scams that attempt to acquire sensitive information or company assets. Despite our efforts to create security barriers to such threats, we may not be able to entirely mitigate these risks. Any cyber attack that attempts to obtain our data and assets, disrupt our service, or otherwise access our systems, or those of third parties we use, if successful, could adversely affect our business, operating results, and financial condition, be expensive to remedy, and damage our reputation. If we suffer data breaches involving the designs, schematics or source code for our products, our brand, business and financial results could be adversely affected. We attempt to securely store our designs, schematics and source code for our products as they are created. A breach, whether physical, electronic or otherwise, of the systems on which this sensitive data is stored could lead to damage or piracy of our products. If we or our partners are subject to data security breaches, we may have a loss in sales or increased costs arising from the restoration or implementation of additional security measures, either of which could materially and adversely affect our brand, business and financial results. Environmental laws and regulations and unforeseen costs could negatively impact our future earnings. The manufacture and sale of our products in certain states and countries may subject us to environmental and other regulations. We also face increasing complexity in our product design as we adjust to legal and regulatory requirements relating to our products. There is no assurance that such existing laws or future laws will not impair future earnings or results of operations. Business disruptions resulting from international uncertainties could negatively impact our profitability. We derive, and expect to continue to derive, a significant portion of our revenue from international sales in various European and Far East markets, and Canada. For the fiscal years ended January 2, 2016, December 27, 2014 and December 28, 2013, sales to non-U.S. customers accounted for 56.0%, 60.9% and 59.5% of total revenue, respectively. Our international revenue and operations are subject to a number of material risks, including, but not limited to: • difficulties in staffing, managing and supporting operations in multiple countries; • difficulties in enforcing agreements and collecting receivables through foreign legal systems and other relevant legal issues; • • fewer legal protections for intellectual property; foreign and U.S. taxation issues, tariffs, and international trade barriers; 22 • difficulties in obtaining any necessary governmental authorizations for the export of our products to certain foreign jurisdictions; • potential fluctuations in foreign economies; • government currency control and restrictions on repatriation of earnings; • fluctuations in the value of foreign currencies and interest rates; • general economic and political conditions in the markets in which we operate; • domestic and international economic or political changes, hostilities and other disruptions in regions where we currently operate or may operate in the future; • changes in foreign currency exchange rates; • different and changing legal and regulatory requirements in the jurisdictions in which we currently operate or may operate in the future; and • outside of the United States, we primarily rely on a network of exclusive distributors, some of whom may be operating without written contracts. Negative developments in any of these areas in one or more countries could result in a reduction in demand for our products, the cancellation or delay of orders already placed, threats to our intellectual property, difficulty in collecting receivables, and a higher cost of doing business, any of which could negatively impact our business, financial condition or results of operations. Moreover, our sales, including sales to customers outside the United States, are primarily denominated in U.S. dollars, and downward fluctuations in the value of foreign currencies relative to the U.S. dollar may make our products more expensive than other products, which could harm our business. If we experience a disaster or other business continuity problem, we may not be able to recover successfully, which could cause material financial loss, loss of human capital, regulatory actions, reputational harm, or legal liability. If we experience a local or regional disaster or other business continuity problem, such as an earthquake, terrorist attack, pandemic or other natural or man-made disaster, our continued success will depend, in part, on the availability of our personnel, our office facilities, and the proper functioning of our computer, telecommunication and other related systems and operations. As we grow our operations in new geographic regions, the potential for particular types of natural or man-made disasters, political, economic or infrastructure instabilities, or other country- or region-specific business continuity risks increases. The effects of new regulations relating to conflict minerals may adversely affect our business. On August 22, 2012, under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the SEC adopted new requirements for companies that use certain minerals and metals, known as conflict minerals, in their products, whether or not these products are manufactured by third parties. These requirements require companies to research, disclose and report whether or not such minerals originate from the Democratic Republic of Congo and adjoining countries. We have to research whether such minerals are used in the manufacture of our products. However, the implementation of these requirements could adversely affect the sourcing, availability and pricing of such minerals if they are found to be used in the manufacture of our products. In addition, we continue to incur additional costs to comply with the disclosure requirements, including costs related to determining the source of any of the relevant minerals and metals used in our products. Since our supply chain is complex, we may not be able to sufficiently verify the origins for these minerals and metals used in our products through the due diligence procedures that we implement, which may harm our reputation. In such event, we may also face difficulties in satisfying customers who require that all of the components of our products are certified as conflict mineral free. Our income tax provision and other tax liabilities may be insufficient if taxing authorities are successful in asserting tax positions that are contrary to our position. Additionally, there is no guarantee that we will realize our deferred tax assets. From time to time, we are audited by various federal, state, local and foreign authorities regarding income tax matters. Significant judgment is required to determine our provision for income taxes and our liabilities for federal, state, local and foreign taxes. Although we believe our approach to determining the appropriate tax treatment is supportable and in accordance with relevant authoritative guidance it is possible that the final tax authority will take a tax position that is materially different than that which is reflected in our income tax provision. Such differences could have a material adverse effect on our income 23 tax provision or benefit, in the reporting period in which such determination is made and, consequently, on our results of operations, financial position and/or cash flows for such period. The realization of our deferred tax assets ultimately depends on the existence of sufficient income in either the carryback or carryforward periods under the tax law. Due to significant estimates utilized in establishing a valuation allowance and the potential for changes in facts and circumstances, it is possible that we will be required to record additional valuation allowance in future reporting periods. Our results of operations would be impacted negatively if we determine that additional deferred tax asset valuation allowance is required in a future reporting period. Our business could be negatively affected as a result of activist investors. In the event that any activist investor makes proposals concerning our operations, governance or other matters, or seeks to change our board of directors, our review and consideration of such proposals may be a significant distraction for our management and employees, and could require the expenditure of significant time and resources by us. We have received significant attention from an activist investor, Red Mountain Capital Partners, or RMCP, since April 2015. On February 18, 2016, RMCP delivered notice to us that it plans to nominate two director candidates for election to our board of directors at our 2016 annual meeting of stockholders. As a result of this potential proxy contest, our business could be adversely affected, including incurring significant costs, diverting the attention of our management and employees, and making it more difficult to attract and retain qualified personnel and business partners. Provisions in our certificate of incorporation and by-laws or Delaware law might discourage, delay or prevent a change of control of our company or changes in our management and, therefore, depress the trading price of our common stock. Provisions of our certificate of incorporation and by-laws and Delaware law may discourage, delay or prevent a merger, acquisition or other change in control that stockholders may consider favorable, including transactions in which you might otherwise receive a premium for your shares of our common stock. These provisions may also prevent or frustrate attempts by our stockholders to replace or remove our management. These provisions include: F o r m 1 0 - K • • • • • • limitations on the removal of directors; a classified board of directors so that not all members of our board are elected at one time; advance notice requirements for stockholder proposals and nominations; the inability of stockholders to act by written consent or to call special meetings; the ability of our board of directors to make, alter or repeal our by-laws; and the ability of our board of directors to designate the terms of and issue new series of preferred stock without stockholder approval. The affirmative vote of the holders of at least 75% of our shares of capital stock entitled to vote is necessary to amend or repeal the above provisions of our certificate of incorporation. In addition, absent approval of our board of directors, our by- laws may only be amended or repealed by the affirmative vote of the holders of at least 75% of our shares of capital stock entitled to vote. In addition, Section 203 of the Delaware General Corporation Law prohibits a publicly-held Delaware corporation from engaging in a business combination with an interested stockholder, generally a person which together with its affiliates owns, or within the last three years has owned, 15% of our voting stock, for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. The existence of the foregoing provisions and anti-takeover measures could limit the price that investors might be willing to pay in the future for shares of our common stock. They could also deter potential acquirers of our company, thereby reducing the likelihood that you could receive a premium for your common stock in an acquisition. ITEM 1B. UNRESOLVED STAFF COMMENTS None. 24 ITEM 2. PROPERTIES Our corporate headquarters are located in Bedford, Massachusetts, where we lease approximately 203,000 square feet. This lease expires on May 1, 2020. We lease smaller facilities in Hong Kong; Guangzhou, China; London, England; and Pasadena, California. We do not own any real property. We believe that our leased facilities and additional or alternative space available to us will be adequate to meet our needs for the foreseeable future. ITEM 3. LEGAL PROCEEDINGS From time to time and in the ordinary course of business, we are subject to various claims, charges and litigation. The outcome of litigation cannot be predicted with certainty and some lawsuits, claims or proceedings may be disposed of unfavorably to us, which could materially affect our financial condition or results of operations. ITEM 4. MINE SAFETY DISCLOSURES Not Applicable. 25 PART II ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Our common stock is listed on the NASDAQ Global Market under the symbol “IRBT”. The following table sets forth, for the periods indicated, the high and low sales prices per share for our common stock as reported on the NASDAQ Global Market. Fiscal 2014: First quarter Second quarter Third quarter Fourth quarter Fiscal 2015: First quarter Second quarter Third quarter Fourth quarter High Low $ $ $ $ $ $ $ $ 48.36 $ 44.43 $ 42.00 $ 38.10 $ 35.27 $ 34.93 $ 33.27 $ 37.71 $ 32.93 30.11 30.24 29.73 28.05 31.61 27.55 28.27 F o r m 1 0 - K As of February 16, 2016, there were approximately 28,992,738 shares of our common stock outstanding held by approximately 125 stockholders of record and the last reported sale price of our common stock on the NASDAQ Global Market on February 16, 2016 was $30.72 per share. Issuer Purchases of Equity Securities The following is a summary of our repurchases of our common stock during the three months ended January 2, 2016: Period Fiscal month beginning September 27, 2015 and ended October 24, 2015 Fiscal month beginning October 25, 2015 and ended November 21, 2015 Fiscal month beginning November 22, 2015 and ended January 2, 2016 Total __________________________ (a) Total number of Shares Purchased (1) (b) Average Price Paid per Share (c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2) (d) Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs 228,186 $ 28.87 228,186 $ 23,100,000 — 169,344 397,530 $ — 32.94 30.61 — 23,100,000 169,344 397,530 $ 17,500,000 17,500,000 (1) Consists of shares of our common stock. All repurchases were made in open market transactions and pursuant to our previously-announced stock repurchase program. (2) On March 19, 2015, we announced the adoption of our stock repurchase program, which provided that we may purchase up to $50 million of our common stock from May 1, 2015 to April 30, 2016. Dividend Policy We have never declared or paid any cash dividends on our capital stock. We currently expect to retain future earnings, if any, to finance the growth and development of our business and we do not anticipate paying any cash dividends in the foreseeable future. 26 ITEM 6. SELECTED FINANCIAL DATA The selected historical financial data set forth below as of January 2, 2016 and December 27, 2014 and for the years ended January 2, 2016, December 27, 2014 and December 28, 2013 are derived from financial statements, which have been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm. Consolidated balance sheets as of January 2, 2016 and December 27, 2014 and the related consolidated statements of income and of cash flows for each of the three years in the period ended January 2, 2016 and notes thereto appear elsewhere in this Annual Report on Form 10-K. The selected historical financial data as of December 28, 2013, December 29, 2012 and December 31, 2011 and for the years ended December 29, 2012 and December 31, 2011 are derived from our financial statements, which have been audited by PricewaterhouseCoopers LLP and which are not included elsewhere in this Annual Report. In fiscal year 2012, we initiated a reorganization that resulted in, among other things, the centralization of all of our engineering and operations activities. This reorganization was completed at the beginning of fiscal year 2013. In conjunction with this reorganization, we reviewed the financial statement classification of our costs and expenses. As a result of this review, we decided to classify certain expenses differently than had been classified and presented in prior periods to provide a more clear understanding of our financial performance. Because the classification of certain expenses on the income statement changed in fiscal year 2013 as compared to prior periods, we recast the financial results of prior periods in a manner consistent with the fiscal year 2015, 2014 and 2013 presentation for comparability purposes. The following selected consolidated financial data reflects the reclassified amounts for the years ended December 29, 2012 and December 31, 2011. The following selected consolidated financial data should be read in conjunction with our consolidated financial statements, the related notes and "Management’s Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Annual Report on Form 10-K. The historical results are not necessarily indicative of the results to be expected for any future period. Year Ended January 2, 2016 December 27, 2014 December 28, 2013 (In thousands, except earnings per share amounts) December 29, 2012 Consolidated Statements of Income: Revenue Cost of revenue Gross margin Operating expenses Research and development Selling and marketing General and administrative Total operating expenses Operating income Net income Net income per common share basic Diluted Shares used in per common share calculations Basic Diluted $ 616,778 $ 327,852 556,846 $ 298,791 487,401 $ 266,247 288,926 258,055 221,154 76,071 97,772 54,465 228,308 60,618 44,130 $ 1.49 $ 1.47 $ 69,408 86,091 49,439 204,938 53,117 37,803 $ 1.28 $ 1.25 $ 63,649 71,529 53,358 188,536 32,618 27,641 $ 0.97 $ 0.94 $ $ $ $ 436,244 $ 241,896 194,348 57,066 66,412 45,698 169,176 25,172 17,297 $ 0.63 $ 0.61 $ 29,550 30,107 29,485 30,210 28,495 29,354 27,577 28,301 27 December 31, 2011 465,500 257,847 207,653 60,100 50,477 43,753 154,330 53,323 40,191 1.50 1.44 26,712 27,924 Consolidated Balance Sheet Data: Cash and cash equivalents Short term investments Total assets Total liabilities Total stockholders’ equity January 2, 2016 December 27, 2014 December 28, 2013 (In thousands) December 29, 2012 December 31, 2011 $ 179,915 $ 33,124 521,743 104,332 417,411 185,957 $ 36,166 493,213 102,777 390,436 165,404 $ 21,954 416,337 85,648 330,689 126,770 $ 12,430 354,313 78,496 275,817 166,308 17,811 332,213 89,255 242,958 ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS F o r m 1 0 - K The information contained in this section has been derived from our consolidated financial statements and should be read together with our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended, or the Exchange Act, and are subject to the “safe harbor” created by those sections. In particular, statements contained in this Annual Report on Form 10-K that are not historical facts, including, but not limited to statements concerning new product sales, product development and offerings, Roomba, Scooba, Looj, Braava and Mirra products, PackBot tactical military robots, the Small Unmanned Ground Vehicle, FirstLook, Kobra, Ava, our home robots, defense and security robots and remote presence robots business units, our competition, our strategy, our market position, market acceptance of our products, seasonal factors, revenue recognition, our profits, growth of our revenues, product life cycle revenue, composition of our revenues, our cost of revenues, units shipped, average selling prices, funding of our defense and security robot development programs, operating expenses, selling and marketing expenses, general and administrative expenses, research and development expenses, and compensation costs, our projected income tax rate, our credit and letter of credit facilities, our valuations of investments, valuation and composition of our stock-based awards, and liquidity, constitute forward-looking statements and are made under these safe harbor provisions. Some of the forward-looking statements can be identified by the use of forward-looking terms such as “believes,” “expects,” “may,” “will,” “should,” “could,” “seek,” “intends,” “plans,” “estimates,” “anticipates,” or other comparable terms. Forward-looking statements involve inherent risks and uncertainties, which could cause actual results to differ materially from those in the forward-looking statements. We urge you to consider the risks and uncertainties discussed in greater detail under the heading “Risk Factors” in evaluating our forward-looking statements. We have no plans to update our forward-looking statements to reflect events or circumstances after the date of this report. We caution readers not to place undue reliance upon any such forward-looking statements, which speak only as of the date made. Overview iRobot designs and builds robots that empower people to do more. For 25 years, we have developed proprietary technology incorporating advanced concepts in navigation, mobility, manipulation and artificial intelligence to build industry- leading robots. Our home robots perform time-consuming domestic chores while our defense and security robots perform tasks such as battlefield reconnaissance and bomb disposal, and multi-purpose tasks for law enforcement agencies and first responders, as well as certain commercial users. We sell our robots through a variety of distribution channels, including chain stores and other national retailers, through our on-line store, through value-added distributors and resellers, and to the U.S. military and other government agencies worldwide. During 2015, we took several steps to become more focused on our well-established home robots business unit to capitalize on the substantial opportunities available to us within consumer markets. First, we entered into an Asset Purchase Agreement on February 2, 2016 with iRobot Defense Holdings, Inc., a recently-formed portfolio company of Arlington Capital Partners, which provides for the sale of our defense and security business unit. The purchase price is up to $45.0 million, of which $30.0 million will be paid at the closing of the transaction, subject to adjustments for working capital and indebtedness as set forth in the purchase agreement, and up to an additional $15.0 million of which may be paid based on 2016 revenue of the defense and security business unit. The transaction is expected to close during the first quarter of 2016. Second, we 28 reallocated research and development resources from a next generation remote presence platform to opportunities in our home robots business unit. These actions were taken to solidify our position as the leader in diversified home robots and to focus on key technologies, with an emphasis on software, that allow our robots to understand the homes in which they operate. It is our intent to continue investing in these critical technologies and the economic opportunities they unlock. As of January 2, 2016, we had 622 full-time employees. We have developed expertise in the disciplines necessary to build durable, high-performance and cost-effective robots through the close integration of software, electronics and hardware. Our core technologies serve as reusable building blocks that we adapt and expand to develop next generation and new products, reducing the time, cost and risk of product development. Our significant expertise in robot design and engineering positions us to capitalize on the expected growth in the market for robot-based products. Although we have successfully launched consumer and defense and security products, our continued success depends upon our ability to respond to a number of future challenges. We believe the most significant of these challenges include increasing market competition, and our ability to successfully develop and introduce products and product enhancements into both new and existing markets. During 2015, we launched our first connected robot, Roomba 980. Roomba 980 has navigating and mapping capabilities using vSLAM technology that we acquired as part of our acquisition of Evolution Robotics. Roomba 980 was available on our website, in select retail locations in the U.S. and in Japan, as well as several European markets during fiscal 2015. Roomba 980 will be available in additional domestic and international locations in fiscal 2016. Our total revenue for 2015 was $616.8 million, which represents an 11% increase from 2014 revenue of $556.8 million. This increase in revenue was largely attributable to a $52.2 million increase in revenue in our home robots business as a direct result of growth in our domestic market. Domestic growth was primarily attributable to increased sales as a result of significant media investments as well as the launch of Roomba 980. International home robots revenue growth slowed compared to fiscal 2014 as a result of negative macroeconomic conditions, specifically in Japan and Russia, offset by a significant growth increase in China. Revenue increased $9.5 million in our defense and security business as compared to 2014, primarily attributable to increased sales of our SUGV robot. During 2015, we recorded a net benefit to revenue and income before income taxes of $6.9 million related to adjustments to our product returns reserves compared to a net benefit to revenue and income before income taxes of $4.3 million and $5.7 million during fiscal 2014. The adjustments recorded in each of these periods resulted from lower product returns experience as compared to estimates used to establish reserves in prior periods, resulting from continued improvements in product quality, especially in our most recently released products. Our home robots revenue represented 91% of our total revenue for both 2015 and 2014. With the expected divestiture of our defense and security business, our revenue for the next few years will be driven by our rapidly growing home robots business. Our total revenue for 2014 was $556.8 million, which represents a 14% increase from 2013 revenue of $487.4 million. This increase in revenue was largely attributable to a $79.6 million increase in revenue in our home robots business as a direct result of growth in both domestic and international markets, which was primarily driven by expanded distribution of our Roomba 800 series robot worldwide, growth in China and the replacement of the Roomba 500 series robot with the higher- priced Roomba 600 series in club stores. The increase in home robots revenue was partially offset by a decrease in revenue of $4.5 million in our defense and security business related to continued budget reductions within the U.S. government in 2014. We began selling our remote presence robots into the healthcare market and the enterprise market in 2013 and 2014, respectively. However, these sales did not generate meaningful revenue in 2014 or 2013. Our home robots revenue represented 91% of our total 2014 revenue compared to 88% in 2013. Revenue We currently derive revenue from product sales and, to a lesser extent, government and commercial research and development contracts. Product revenue is derived from the sale of our various home cleaning robots and defense and security robots and related spares and accessories. Research and development revenue is derived from the execution of contracts awarded by the U.S. federal government, other governments and a small number of other partners. 29 F o r m 1 0 - K We currently derive a majority of our product revenue from the sale of our home cleaning robots, and to a lesser extent, our PackBot, FirstLook, SUGV and Kobra defense and security robots, and product life cycle revenue related to these robots. For the fiscal years ended January 2, 2016, December 27, 2014 and December 28, 2013, product revenues accounted for 99.8%, 99.2% and 98.0% of total revenue, respectively. For the fiscal years ended January 2, 2016, December 27, 2014 and December 28, 2013, our funded research and development contracts accounted for approximately 0.2%, 0.8% and 2.0% of our total revenue, respectively. For the fiscal years ended January 2, 2016, December 27, 2014 and December 28, 2013, approximately 76.6%, 75.7% and 75.3%, respectively, of our home robot product revenue resulted from sales to 15 customers, which were comprised of both domestic retailers and international distributors. Direct-to-consumer revenue generated through our domestic and international on-line stores accounted for 6.1%, 6.1% and 5.9% of our home robot product revenue for the fiscal years ended January 2, 2016, December 27, 2014 and December 28, 2013, respectively. We typically sell our recently launched products direct on- line, and then subsequently offer these products through other channels of distribution. For the fiscal years ended January 2, 2016, December 27, 2014 and December 28, 2013, sales to non-U.S. customers accounted for 56.0%, 60.9% and 59.5% of total revenue, respectively. Our revenue from product sales is generated through sales to our retail distribution channels, our distributor network and to certain U.S. and foreign governments. We recognize revenue from sales of robots under the terms of the customer agreement upon transfer of title and risk of loss to the customer, net of estimated returns, provided that collection is determined to be reasonably assured and no significant obligations remain. During 2015, we recorded a net benefit to revenue and income before income taxes of $6.9 million related to adjustments to our product returns reserves compared to a net benefit to revenue and income before income taxes of $4.3 million and $5.7 million during fiscal 2014. The net adjustments recorded in 2015 and 2014 resulted from lower product returns experience as compared to estimates used to establish reserves in prior periods. Revenue from our defense and security business unit is occasionally influenced by the September 30 fiscal year-end of the U.S. federal government. In addition, our revenue can be affected by the timing of the release of new products and the size and timing of contract awards from defense and other government agencies. Historically, revenue from consumer product sales has been significantly seasonal, with a majority of our consumer product revenue generated in the second half of the year (in advance of the holiday season). A significant portion of our revenue was recorded in the second half of 2014 and 2015 and we expect this trend to continue into 2016. 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 January 2, 2016, December 27, 2014 and December 28, 2013, total cost of revenue was 53.2%, 53.7% and 54.6% 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 January 2, 2016, December 27, 2014 and December 28, 2013, gross margin was 46.8%, 46.3% and 45.4% of total revenue, respectively. 30 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 markets as well as new markets for robots. 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 January 2, 2016, December 27, 2014 and December 28, 2013, research and development expense was $76.1 million, $69.4 million and $63.6 million, or 12.3%, 12.5% and 13.1% of total revenue, respectively. Selling, Marketing, General and Administrative Expenses Our selling, marketing, 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 in 2016, selling, marketing, general and administrative expenses will increase in absolute dollars and as a percentage of revenue and will, for the foreseeable future thereafter, continue to increase in absolute dollars but remain relatively consistent, or decrease slightly, as a percentage of revenue, as we continue to build the iRobot brand. For the fiscal years ended January 2, 2016, December 27, 2014 and December 28, 2013 selling, marketing, general and administrative expense was $152.2 million, $135.5 million and $124.9 million, or 24.7%, 24.3% and 25.6% 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 fiscal quarters will end on the Saturday that falls closest to the last day of the third month of each quarter. Critical Accounting Policies and Estimates Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses, and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates. We believe that of our significant accounting policies, which are described in the notes to our consolidated financial statements, the following accounting policies involve a greater degree of judgment and complexity. Accordingly, we believe that the following accounting policies are the most critical to aid in fully understanding and evaluating our consolidated financial condition and results of operations. 31 F o r m 1 0 - K Revenue Recognition We derive our revenue from product sales and, to a lesser extent, government and commercial research and development contracts. We sell products directly to customers and indirectly through resellers and distributors. We recognize revenue from sales of robots under the terms of the customer agreement upon transfer of title and risk of loss to the customer, net of estimated returns, provided that collection is determined to be reasonably assured and no significant obligations remain. Beginning in the third quarter of 2015, with the introduction of our first connected robot, each sale of a connected robot represents a multi-element arrangement containing the robot, an app and potential future unspecified software upgrades. Revenue is allocated to the deliverables based on their relative selling prices which have been determined using best estimate of selling price (BESP), as we have not been able to establish vendor specific objective evidence (VSOE) or obtain relevant third party evidence (TPE). Revenue allocated to the app and unspecified software upgrades is then deferred and recognized on a straight-line basis over the period in which we expect to provide the upgrades over the estimated life of the robot. Sales to domestic and Canadian resellers of home robots are typically subject to agreements allowing for limited rights of return, rebates and price protection. We also provide limited rights of returns for direct-to-consumer sales generated through our on-line stores. Accordingly, we reduce revenue for our estimates of liabilities for these rights of return, rebates and price protection at the time the related sale is recorded. These estimates for rights of return are directly based on specific terms and conditions included in the reseller agreements, historical returns experience and various other assumptions that we believe are reasonable under the circumstances. In the case of new product introductions, the estimates for returns applied to the new products are based upon the estimates for the most similar predecessor products until such time that we have enough actual returns experience for the new products, which is typically two holiday returns cycles. At that time, we incorporate that data into the development of returns estimates for the new products. We update our analysis of returns on a quarterly basis. If actual returns differ significantly from our estimates, or if modifications to individual reseller agreements are entered into that impact their rights of returns, such differences could result in an adjustment to previously established reserves and could have a material impact, either favorably or unfavorably, on our results of operations for the period in which the actual returns become known or the reseller agreement is modified. Our international distributor agreements do not currently allow for product returns and, as a result, no reserve for returns is established for this group of customers. The estimates and reserve for rebates and price protection are based on specific programs, expected usage and historical experience. Actual results could differ from these estimates. Under cost-plus-fixed-fee (CPFF) type contracts, we recognize revenue based on costs incurred plus a pro rata portion of the total fixed fee. Costs incurred include labor and material that are directly associated with individual CPFF contracts plus indirect overhead and general and administrative type costs based upon billing rates we submit to the Defense Contract Management Agency (DCMA). We submit on an annual basis final indirect billing rates to DCMA based upon actual costs incurred throughout the year. In the situation where our final actual billing rates are greater than the estimated rates currently in effect, we record a cumulative revenue adjustment in the period in which the rate differential is collected from the customer. These final billing rates are subject to audit by the Defense Contract Audit Agency (DCAA), which can occur several years after the final billing rates are submitted and may result in material adjustments to revenue recognized based on estimated final billing rates. As of January 2, 2016, fiscal years 2012 through 2015 are open for audit by DCAA. In the situation where our anticipated actual billing rates will be lower than the provisional rates currently in effect, we record a cumulative revenue adjustment in the period in which the rate differential is identified. Revenue on firm fixed price (FFP) contracts is recognized using the percentage-of-completion method. For government product FFP contracts, revenue is recognized as the product is shipped or in accordance with the contract terms. Costs and estimated gross margins on contracts are recorded as revenue as work is performed based on the percentage that incurred costs compare to estimated total costs utilizing the most recent estimates of costs and funding. Changes in job performance, job conditions, and estimated profitability, including those arising from final contract settlements and government audits, may result in revisions to costs and income and are recognized in the period in which the revisions are determined. Since many contracts extend over a long period of time, revisions in cost and funding estimates during the progress of work have the effect of adjusting earnings applicable to past performance in the current period. When the current contract estimate indicates a loss, a provision is made for the total anticipated loss in the current period. Revenue earned in excess of billings, if any, is recorded as unbilled revenue. Billings in excess of revenue earned, if any, are recorded as deferred revenue. 32 Accounting for Stock-Based Awards We recognized $3.4 million of stock-based compensation expense during the fiscal year ended January 2, 2016 for stock options. The unamortized fair value as of January 2, 2016 associated with these grants was $6.4 million with a weighted- average remaining recognition period of 2.83 years. The risk-free interest rate is derived from the average U.S. Treasury constant maturity rate, which approximates the rate in effect at the time of grant, commensurate with the expected life of the instrument. The dividend yield is zero based upon the fact that we have never paid and have no present intention to pay cash dividends. We utilize company-specific historical data for purposes of establishing expected volatility and expected term. Based upon the above assumptions, the weighted average fair value of each stock option granted for the fiscal year ended January 2, 2016 was $13.21. During the fiscal year ended January 2, 2016, we recognized $10.7 million of stock-based compensation associated with restricted stock units. Unamortized expense associated with restricted stock units at January 2, 2016, was $24.3 million. We have assumed a forfeiture rate for all stock options and restricted stock-based units based on our historical data. In the future, we will record incremental stock-based compensation expense if the actual forfeiture rates are lower than estimated and will record a recovery of prior stock-based compensation expense if the actual forfeitures are higher than estimated. Accounting for stock-based awards requires significant judgment and the use of estimates, particularly surrounding assumptions such as stock price volatility and expected option lives to value equity-based compensation. Accounting for Income Taxes We are subject to taxation in the United States and various states and foreign jurisdictions. The statute of limitations for examinations by the Internal Revenue Service is closed for fiscal years prior to 2012. The statute of limitations for examinations by state tax authorities is closed for fiscal years prior to 2011. Federal carryforward attributes that were generated prior to fiscal year 2012 and state carryforward attributes that were generated prior to fiscal year 2011 may still be adjusted upon examination by the federal or state tax authorities if they either have been or will be used in a period for which the statute of limitations is still open. Deferred taxes are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. Valuation allowances are provided if, based upon the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. We monitor the realization of our deferred tax assets based on changes in circumstances, for example, recurring periods of income for tax purposes following historical periods of cumulative losses, generation of tax credits compared to future utilization of credits, or changes in tax laws or regulations. Our income tax provision and our assessment of the ability to realize our deferred tax assets involve significant judgments and estimates. We are currently generating state research credits that exceed the amount being utilized. As a result of this trend, a valuation allowance may be needed in the future related to these state tax credits. As of December 28, 2013, we maintained a valuation allowance of $2.1 million related to certain state tax attributes from the Evolution Robotics, Inc. acquisition. During the year ended December 27, 2014, this valuation allowance was released when the realization of these state tax attributes became more likely than not. As of January 2, 2016, we did not record a valuation allowance as all deferred tax assets are considered realizable. Warranty We typically provide a one-year warranty (with the exception of European consumer products which typically have a two-year warranty period, and our defense and security spares and remote presence robots, which typically have a warranty period of less than one year) against defects in materials and workmanship and will either repair the goods, provide replacement products at no charge to the customer or refund amounts to the customer for defective products. We record estimated warranty costs, based on historical experience by product, at the time we recognize product revenue. Actual results could differ from these estimates, which could cause increases or decreases to our warranty reserves in future periods. 33 Inventory Valuation We value our inventory at the lower of the actual cost of our inventory or its current estimated market value. We write down inventory for obsolescence or unmarketable inventories based upon assumptions about future demand and market conditions. Actual demand and market conditions may be lower than those that we project and this difference could have a material adverse effect on our gross margin if inventory write-downs beyond those initially recorded become necessary. Alternatively, if actual demand and market conditions are more favorable than those we estimated at the time of such a write- down, our gross margin could be favorably impacted in future periods. Long-Lived Assets, including Purchased Intangible Assets We periodically evaluate the recoverability of long-lived assets, including other purchased intangible assets whenever events and changes in circumstances, such as reductions in demand or significant economic slowdowns in the industry, indicate that the carrying amount of an asset may not be fully recoverable. When indicators of impairment are present, the carrying values of the asset group are evaluated in relation to the future undiscounted cash flows of the underlying business. The net book value of the underlying asset is adjusted to fair value if the sum of the expected discounted cash flows is less than book value. Fair values are based on estimates of market prices and assumptions concerning the amount and timing of estimated future cash flows and assumed discount rates, reflecting varying degrees of perceived risk. Goodwill Goodwill is recorded as the difference, if any, between the aggregate consideration paid for an acquisition and the fair value of the net tangible and intangible assets acquired. We evaluate goodwill for impairment at the reporting unit level (operating segment or one level below an operating segment) annually or more frequently if we believe indicators of impairment exist. In accordance with guidance, we are permitted to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If we conclude that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then a two-step goodwill impairment test is performed. The first step of the impairment test involves comparing the fair values of the applicable reporting units with their aggregate carrying values, including goodwill. If the carrying amount of a reporting unit exceeds the reporting unit's fair value, we perform the second step of the goodwill impairment test to determine the amount of impairment loss. The second step of the goodwill impairment test involves comparing the implied fair value of the affected reporting unit's goodwill with the carrying value of that goodwill. We complete the annual impairment evaluation during the fourth quarter each year. F o r m 1 0 - K 34 Overview of Results of Operations The following table sets forth our results of operations for the periods shown: Revenue Cost of revenue (1) Gross margin Operating expenses Research and development (1) Selling and marketing (1) General and administrative (1) Total operating expenses Operating income Other income (expense), net Income before income taxes Income tax expense Net income January 2, 2016 Fiscal Year Ended December 27, 2014 (In thousands) December 28, 2013 $ 616,778 $ 327,852 288,926 76,071 97,772 54,465 228,308 60,618 2,353 62,971 18,841 $ 44,130 $ 556,846 $ 298,791 258,055 69,408 86,091 49,439 204,938 53,117 (708) 52,409 14,606 37,803 $ 487,401 266,247 221,154 63,649 71,529 53,358 188,536 32,618 (203) 32,415 4,774 27,641 ___________________ (1) Stock-based compensation recorded in fiscal 2015, 2014 and 2013 breaks down by expense classification as follows. Cost of revenue Research and development Selling and marketing General and administrative $ January 2, 2016 Fiscal Year Ended December 27, 2014 (In thousands) December 28, 2013 1,076 $ 3,256 1,457 8,394 865 $ 3,359 1,296 8,258 700 2,700 1,246 8,763 The following table sets forth our results of operations as a percentage of revenue for the periods shown: Revenue Cost of revenue Gross margin Operating expenses Research and development Selling and marketing General and administrative Total operating expenses Operating income Other income (expense), net Income before income taxes Income tax expense Net income Fiscal Year Ended January 2, 2016 December 27, 2014 December 28, 2013 100.0% 53.2 46.8 12.3 15.9 8.8 37.0 9.8 0.5 10.3 3.1 7.2% 100.0% 53.7 46.3 12.5 15.5 8.9 36.9 9.4 (0.1) 9.3 2.6 6.7% 100.0% 54.6 45.4 13.1 14.7 10.9 38.7 6.7 — 6.7 1.0 5.7% 35 Comparison of Years Ended January 2, 2016 and December 27, 2014 Revenue Fiscal Year Ended January 2, 2016 December 27, 2014 Dollar Change Percent Change (In thousands) Total Revenue $ 616,778 $ 556,846 $ 59,932 10.8% Our revenue increased 10.8% to $616.8 million in fiscal 2015 from $556.8 million in fiscal 2014. Revenue increased $52.2 million, or 10.3%, in our home robots business unit, and $9.5 million, or 20.9%, in our defense and security business unit. The $52.2 million increase in revenue from our home robots business unit was driven by a 12.1% increase in units shipped, partially offset by a 1.5% decrease in net average selling price. In fiscal 2015, domestic home robots revenue increased $47.3 million, or 25.2%, and international home robots revenue increased $4.9 million, or 1.5%, compared to fiscal 2014. Total home robots shipped in fiscal 2015 were 2,436,000 units compared to 2,174,000 units in fiscal 2014. The increase in domestic home robots revenue was primarily attributable to increased sales as a result of significant investments in advertising media and national promotions as well as the launch of Roomba 980. International home robots revenue growth slowed compared to fiscal 2014 as a result of negative macroeconomic conditions, specifically in Japan and Russia, offset by a significant growth increase in China. The increase in revenue also includes a $1.6 million favorable adjustment associated with the release of marketing allowances to a former customer that went unused and for which the statute of limitations has lapsed. During 2015, we recorded a net benefit to revenue and income before income taxes of $6.9 million related to adjustments to our product returns reserves compared to a net benefit to revenue and income before income taxes of $4.3 million and $5.7 million during fiscal 2014. The net adjustments recorded in each period resulted from lower product returns experience as compared to estimates used to establish reserves in prior periods. F o r m 1 0 - K The $9.5 million increase in revenue from our defense and security business unit was driven by a $7.7 million increase in defense and security robot revenue and a $4.1 million increase in product life cycle revenue (spare parts, accessories), partially offset by a $2.3 million decrease in recurring contract revenue generated under research and development contracts. Total defense and security robots shipped in fiscal 2015 were 294 units compared to 265 units in fiscal 2014, while the net average selling price of our defense and security robots increased from approximately $56 thousand in fiscal 2014 to approximately $77 thousand in fiscal 2015. The increase in the number of units shipped and the increase in average selling price resulted from increased sales of our higher-priced SUGV robot in fiscal 2015 as compared to fiscal 2014. The $2.3 million decrease in contract revenue was primarily due to our change in strategy to not pursue funded research. The $4.1 million increase in product life cycle revenue was driven primarily by the delivery of robots and spare parts under a contract with the Canadian Department of National Defence. Cost of Revenue Total cost of revenue As a percentage of total revenue Fiscal Year Ended January 2, 2016 December 27, 2014 Dollar Change Percent Change $ 327,852 $ 53.2% 298,791 (In thousands) $ 53.7% 29,061 9.7% Total cost of revenue increased $29.1 million, or 9.7% to $327.9 million in fiscal 2015, compared to $298.8 million in fiscal 2014. The increase is primarily due to the 12.1% and 10.9% increase of units shipped in our home robots business unit and defense and security business unit, respectively. These increases are partially offset by a higher mix of lower margin products sold in the defense and security business unit. 36 Gross Margin Total gross margin As a percentage of total revenue Fiscal Year Ended January 2, 2016 December 27, 2014 Dollar Change Percent Change $ 288,926 $ 46.8% 258,055 (In thousands) $ 46.3% 30,871 12.0% Gross margin increased $30.9 million, or 12.0%, to $288.9 million (46.8% of revenue) in fiscal 2015 from $258.1 million (46.3% of revenue) in fiscal 2014. The increase in gross margin as a percentage of revenue was the result of the home robots business unit gross margin increasing 0.4 percentage points, partially offset by the defense and security business unit gross margin decreasing 0.5 percentage points. The 0.4 percentage point increase in the home robots business unit was primarily driven by favorable product and customer mix, the introduction of the higher margin Roomba 980, a decrease in warranty costs, as well as the favorable impact of the $1.6 million adjustment to revenue related to the release of marketing allowances. During 2015, we recorded a net benefit to revenue and gross margin of $6.9 million related to adjustments to our product returns reserves compared to a net benefit to revenue and gross margin of $4.3 million and $5.7 million during fiscal 2014. The 0.5 percentage point decrease in the defense and security business unit is attributable to the increase in sales of our lower margin robots. Research and Development Total research and development As a percentage of total revenue Fiscal Year Ended January 2, 2016 December 27, 2014 Dollar Change Percent Change $ 76,071 $ 12.3% 69,408 (In thousands) $ 12.5% 6,663 9.6% Research and development expenses increased $6.7 million, or 9.6%, to $76.1 million (12.3% of revenue) in fiscal 2015 from $69.4 million (12.5% of revenue) in fiscal 2014. This increase is attributable to increased efforts in product development and continued product enhancements. People-related costs increased $7.0 million associated with an approximate 10% increase in headcount, especially related to software engineers, as well as a $0.7 million increase in materials. These increases were partially offset by decreased consulting expenses of $1.0 million in 2015 compared to 2014. Selling and Marketing Total selling and marketing As a percentage of total revenue Fiscal Year Ended January 2, 2016 December 27, 2014 Dollar Change Percent Change $ 97,772 $ 15.9% 86,091 (In thousands) $ 15.5% 11,681 13.6% Selling and marketing expenses increased by $11.7 million, or 13.6%, to $97.8 million (15.9% of revenue) in fiscal 2015 from $86.1 million (15.5% of revenue) in fiscal 2014. This increase is primarily attributable to an increase of $8.9 million in investments in advertising media, national promotions and other selling and marketing costs incurred to support the retail launch of the Roomba 980 series and our continued global marketing and branding efforts, as well as increases in people- related costs of $2.2 million driven by increased headcount in fiscal 2015 compared to fiscal 2014. 37 General and Administrative General and administrative As a percentage of total revenue Fiscal Year Ended January 2, 2016 December 27, 2014 Dollar Change Percent Change $ 54,465 $ 8.8% 49,439 (In thousands) $ 8.9% 5,026 10.2% General and administrative expenses increased by $5.0 million, or 10.2%, to $54.5 million (8.8% of revenue) in fiscal 2015 from $49.4 million (8.9% of revenue) in fiscal 2014. This increase is primarily attributable to increases of $2.6 million in consulting costs, $1.8 million in people-related costs and $0.7 million related to investments in enterprise hardware and software maintenance, support, and services. Other Income (Expense), Net Other income (expense), net As a percentage of total revenue Fiscal Year Ended January 2, 2016 December 27, 2014 Dollar Change Percent Change $ 2,353 $ 0.5% (In thousands) $ (708) (0.1)% 3,061 (432.3)% F o r m 1 0 - K Other income (expense), net, amounted to $2.4 million and $(0.7) million for fiscal 2015 and fiscal 2014, respectively. During fiscal 2015, we recorded a gain of approximately $3.3 million related to the sale of a cost method investment, which was offset primarily by foreign currency exchange losses resulting from foreign currency exchange rate fluctuations. Income Tax Provision Income tax provision As a percentage of pre-tax income Fiscal Year Ended January 2, 2016 December 27, 2014 Dollar Change Percent Change $ 18,841 $ 29.9% 14,606 (In thousands) $ 27.9% 4,235 29.0% We recorded an income tax provision of $18.8 million and $14.6 million for fiscal 2015 and fiscal 2014, respectively. The $18.8 million income tax provision for fiscal 2015 was based upon a 2015 effective income tax rate of 31.3% reduced by a net income tax benefit of $0.9 million primarily resulting from an increase in federal and state tax credits upon filing the 2014 tax returns during 2015. The $14.6 million provision for fiscal 2014 was based upon a 2014 effective income tax rate of 31.5% plus a net income tax benefit of $1.9 million primarily resulting from the release of $2.1 million of valuation allowance related to certain state tax attributes of Evolution Robotics, Inc. The federal research and development tax credit expired at the end of 2014. In December 2015, legislation was enacted that included the permanent extension of the federal research and development tax credit. The legislation also retroactively reinstated the research and development tax credit for 2015. Comparison of Years Ended December 27, 2014 and December 28, 2013 Revenue Total Revenue $ 556,846 $ 487,401 $ 69,445 14.2% Fiscal Year Ended December 27, 2014 December 28, 2013 Dollar Change Percent Change (In thousands) 38 Our revenue increased 14.2% to $556.8 million in fiscal 2014 from $487.4 million in fiscal 2013. Revenue increased $79.6 million, or 18.6%, in our home robots business unit, and decreased $4.5 million, or 9.0%, in our defense and security business unit. The $79.6 million increase in revenue from our home robots business unit was driven by a 12.5% increase in units shipped and a 6.1% increase in net average selling price. In fiscal 2014, international home robots revenue increased $46.0 million, or 16.8%, and domestic home robots revenue increased $33.5 million, or 21.8%, compared to fiscal 2013. Total home robots shipped in fiscal 2014 were 2,174,000 units compared to 1,933,000 units in fiscal 2013. The increase in both domestic and international home robots revenue was primarily driven by expanded distribution of our Roomba 800 series robot worldwide, and the replacement of the Roomba 500 series robot with the higher-priced Roomba 600 series in club stores. International home robots revenue growth was further supported by strong demand in China, where revenue increased over 200% in fiscal 2014 compared to fiscal 2013. The $4.5 million decrease in revenue from our defense and security business unit was driven by a $4.7 million decrease in defense and security robot revenue and a $1.2 million decrease in recurring contract development revenue generated under research and development contracts, partially offset by a $1.4 million increase in product life cycle revenue (spare parts, accessories). Total defense and security robots shipped in fiscal 2014 were 265 units compared to 534 units in fiscal 2013, while the net average selling price of our defense and security robots increased from approximately $36 thousand in fiscal 2013 to approximately $56 thousand in fiscal 2014. The decrease in the number of units shipped and the increase in average selling price resulted from decreased sales of our lower-priced FirstLook robot in fiscal 2014 as compared to fiscal 2013. The $1.2 million decrease in contract revenue was primarily due to a decrease in revenue related to the U.S. Army's Brigade Combat Team Modernization program, for which efforts were completed during the first half of fiscal 2013. The $1.4 million increase in product life cycle revenue was due to an increase in Packbot upgrades, partially offset by decreases in FirstLook and SUGV spares. Continued funding delays for government contracts have reduced our near-term visibility in our defense and security business unit and contributed to the decrease in period-over-period revenue in this business unit. As previously described, we have entered into an agreement to sell our defense and security business unit. We anticipate this transaction will close during the first quarter of 2016. Cost of Revenue Total cost of revenue As a percentage of total revenue Fiscal Year Ended December 27, 2014 December 28, 2013 Dollar Change Percent Change $ 298,791 $ 53.7% 266,247 (In thousands) $ 54.6% 32,544 12.2% Total cost of revenue increased to $298.8 million in fiscal 2014, compared to $266.2 million in fiscal 2013. The increase is primarily due to the 12.5% increase in home robot units shipped, as well as the increase in per unit costs of defense and security robots driven by a lower mix of the lower-cost FirstLook robot in fiscal 2014 compared to fiscal 2013. These increases are partially offset by the 50.4% decrease in defense and security units shipped in fiscal 2014 as compared to fiscal 2013. Gross Margin Total gross margin As a percentage of total revenue Fiscal Year Ended December 27, 2014 December 28, 2013 Dollar Change Percent Change $ 258,055 $ 46.3% 221,154 (In thousands) $ 45.4% 36,901 16.7% Gross margin increased $36.9 million, or 16.7%, to $258.1 million (46.3% of revenue) in fiscal 2014 from $221.2 million (45.4% of revenue) in fiscal 2013. The increase in gross margin as a percentage of revenue was the result of the home robots business unit gross margin increasing 1.2 percentage points, partially offset by the defense and security business unit gross 39 F o r m 1 0 - K margin decreasing 3.7 percentage points. The 1.2 percentage point increase in the home robots business unit was primarily driven by favorable product and customer mix, with increased volume of higher margin Roomba 800 and 600 series robots in fiscal 2014 compared to fiscal 2013. During 2014, we recorded a net benefit to revenue and gross margin of $4.3 million and $5.7 million, respectively, related to adjustments to our product returns reserves, compared to a net benefit to both revenue and gross margin of $7.9 million related to adjustments to our product returns reserves during fiscal 2013. The net adjustments recorded in each period resulted from lower product returns experience as compared to estimates used to establish reserves in prior periods. The favorable product and customer mix was partially offset by the decrease in favorable adjustments to our product returns reserve in fiscal 2014 compared to fiscal 2013. The 3.7 percentage point decrease in the defense and security business unit is attributable to unfavorable overhead leverage associated with the 9.0% decrease in the defense and security business unit revenue. Research and Development Total research and development As a percentage of total revenue Fiscal Year Ended December 27, 2014 December 28, 2013 Dollar Change Percent Change $ 69,408 $ 12.5% 63,649 (In thousands) $ 13.1% 5,759 9.0% Research and development expenses increased $5.8 million, or 9.0%, to $69.4 million (12.5% of revenue) in fiscal 2014 from $63.6 million (13.1% of revenue) in fiscal 2013. This increase is attributable to increased efforts in product development and continued product enhancements, including increases in consultant and other people-related costs of $3.5 million in 2014 compared to 2013. Selling and Marketing Total selling and marketing As a percentage of total revenue Fiscal Year Ended December 27, 2014 December 28, 2013 Dollar Change Percent Change $ 86,091 $ 15.5% 71,529 (In thousands) $ 14.7% 14,562 20.4% Selling and marketing expenses increased by $14.6 million, or 20.4%, to $86.1 million (15.5% of revenue) in fiscal 2014 from $71.5 million (14.7% of revenue) in fiscal 2013. This increase is primarily attributable to $11.6 million in promotions, marketing displays, on-line media and other selling and marketing costs incurred to support the retail launch of the Roomba 800 series and Scooba 450 robots and our continued global marketing and branding efforts, as well as increases in people- related costs of $2.6 million driven by increased headcount in fiscal 2014 compared to fiscal 2013. General and Administrative General and administrative As a percentage of total revenue Fiscal Year Ended December 27, 2014 December 28, 2013 Dollar Change Percent Change $ 49,439 $ 8.9% 53,358 (In thousands) $ 10.9% (3,919) (7.3)% General and administrative expenses decreased by $3.9 million, or 7.3%, to $49.4 million (8.9% of revenue) in fiscal 2014 from $53.4 million (10.9% of revenue) in fiscal 2013. This decrease is primarily attributable to a $3.9 million decrease in people-related costs. Additionally, we recorded a $1.8 million write-down of an intangible asset in fiscal 2013, resulting from a decision made in 2013 to refocus our funded research activities that significantly reduced our utilization of the technology associated with the intangible asset, with no such write-down in fiscal 2014. These decreases are partially offset by increases in consulting and other miscellaneous general and administrative costs. 40 Other Expense, Net Other expense, net As a percentage of total revenue Fiscal Year Ended December 27, 2014 December 28, 2013 Dollar Change Percent Change $ $ (708) (0.1)% (203) (In thousands) $ — % (505) 248.8% Other income (expense), net, amounted to $(0.7) million and $(0.2) million for fiscal 2014 and fiscal 2013, respectively, and consisted primarily foreign currency exchange losses resulting from foreign currency exchange rate fluctuations, offset by interest income. Income Tax Provision Income tax provision As a percentage of pre-tax income Fiscal Year Ended December 27, 2014 December 28, 2013 Dollar Change Percent Change $ 14,606 $ 27.9% (In thousands) 4,774 $ 14.7% 9,832 205.9% We recorded an income tax provision of $14.6 million and $4.8 million for fiscal 2014 and fiscal 2013, respectively. The $14.6 million income tax provision for fiscal 2014 was based upon a 2014 effective income tax rate of 31.5% reduced by a net income tax benefit of $1.9 million primarily resulting from the release of $2.1 million of valuation allowance related to certain state tax attributes of Evolution Robotics, Inc. The $4.8 million provision for fiscal 2013 was based upon a 2013 effective income tax rate of 28.5% plus a net income tax benefit of $4.5 million primarily resulting from the extension of the federal research and development tax credit in 2013 and the settlement of uncertain tax positions upon completion of an IRS audit. In January 2013, legislation was enacted that included the extension of the federal research and development tax credits. The legislation retroactively reinstated the research and development tax credit for 2012 and extended it through December 31, 2013. As a result, we recorded a discrete benefit of approximately $1.7 million related to 2012 in 2013. The increase in the effective tax rate from 28.5% in 2013 to 31.5% in 2014 was primarily due to a smaller research and development credit in 2014 as compared to 2013 and an increase in state tax expense in 2014 as compared to 2013. Liquidity and Capital Resources At January 2, 2016, our principal sources of liquidity were cash and cash equivalents totaling $179.9 million, short-term investments of $33.1 million and accounts receivable of $104.7 million. We manufacture and distribute our products through contract manufacturers and third-party logistics providers. We believe that this approach gives us the advantages of relatively low capital investment and significant flexibility in scheduling production and managing inventory levels. By leasing our office facilities, we also minimize the cash needed for expansion. Accordingly, our capital spending is generally limited to leasehold improvements, computers, office furniture, product-specific production tooling, internal use software and test equipment. In the fiscal years ended January 2, 2016, December 27, 2014 and December 28, 2013, we spent $9.4 million, $13.8 million and $6.8 million respectively, on capital equipment. Our strategy for delivering home robots products to our distributors and retail customers gives us the flexibility to provide container shipments directly to the retailer from China and, alternatively, allows our distributors and retail partners to take possession of product on a domestic basis. Accordingly, our home robots product inventory consists of goods shipped to our third-party logistics providers for the fulfillment of distributor, retail and direct-to-consumer sales. Our inventory of defense and security products consists mostly of components, as well as carefully-managed levels of sub-assemblies. Our contract manufacturers are also responsible for purchasing and stocking components required for the production of our products, and they typically invoice us when the finished goods are shipped. As of January 2, 2016, we held cash, cash equivalents and short-term investments of $213.0 million, primarily the result of our increased profitability, as well as our on-going focus on managing working capital. Net cash provided by our operations for the fiscal year ended January 2, 2016 was $26.7 million, of which the principal components were our net income of 41 $44.1 million and non-cash charges of $23.9 million, partially offset by a net increase in operating assets and liabilities of $41.3 million. The increase in net operating assets and liabilities includes an increase in accounts receivable (including unbilled revenue) of $31.5 million primarily due to an increase in revenue and timing of billing in respective periods and a $14.0 million increase in inventory primarily to support increased domestic sales and the roll-out of Roomba 980. As of January 2, 2016, we did not have any borrowings outstanding under our working capital line of credit and had $1.5 million in letters of credit outstanding under our revolving letter of credit facility. We invested $9.4 million in the purchase of property and equipment in 2015, including tooling for new products. We purchased $17.8 million of marketable securities in 2015, while sales and maturities of marketable securities amounted to $20.5 million. We received $5.6 million from sales of other assets. We made strategic investments of $1.0 million in the form of preferred shares and notes receivable. During 2015, we received $6.5 million from the exercise of stock options and $1.5 million from the excess tax benefit related to our stock-based compensation plans. In addition, we repurchased 1,260,276 shares of our common stock for an aggregate purchase price of $37.4 million. Shares issued upon vesting of restricted stock were net of 37,969 shares retained by us to cover employee tax withholdings of $1.3 million. Net cash provided by our operations for the fiscal year ended December 27, 2014 was $40.6 million, of which the principal components were our net income of $37.8 million and non-cash charges of $27.2 million, partially offset by a net increase in operating assets and liabilities of $24.4 million. The increase in net operating assets and liabilities includes an increase in accounts receivable (including unbilled revenue) of $33.5 million primarily due to an increase in revenue, normal billing and collection activities and timing of the billing in respective periods, a $3.4 million decrease in accrued compensation reflecting higher accrual for incentive compensation in 2013 compared to 2014, a $2.9 million increase on other assets relating to an increase in prepaid income tax expenses, a $2.4 million increase in inventory, partially offset by a $19.9 million increase in accounts payable and accrued expenses as a result of normal purchasing and vendor payment activities. We invested $13.8 million in the purchase of property and equipment in 2014, including $3.5 million for leasehold improvements in our Bedford, Massachusetts office. We purchased $31.2 million of marketable securities in 2014, while maturities of marketable securities amounted to $16.5 million. We also made a strategic investment of $250 thousand in a cost- method investment. During 2014, we received $8.9 million from the exercise of stock options and $3.1 million from the excess tax benefit related to our stock-based compensation plans. In addition, we repurchased 55,973 shares of our common stock for an aggregate purchase price of $1.7 million. Shares issued upon vesting of restricted stock were net of 39,297 shares retained by us to cover employee tax withholdings of $1.6 million. F o r m 1 0 - K Working Capital Facilities Credit Facility We have an unsecured revolving credit facility with Bank of America, N.A., which is available to fund working capital and other corporate purposes. As of January 2, 2016, the total amount of our credit facility was $75.0 million and the full amount was available for borrowing. The interest on loans under our credit facility accrues, at our election, at either (1) LIBOR plus a margin, currently equal to 1.0%, based on our ratio of indebtedness to Adjusted EBITDA (the "Eurodollar Rate"), or (2) the lender’s base rate. The lender’s base rate is equal to the highest of (1) the federal funds rate plus 0.5%, (2) the lender’s prime rate and (3) the Eurodollar Rate plus 1.0%. The credit facility will terminate and all amounts outstanding thereunder will be due and payable in full on December 20, 2018. As of January 2, 2016, we had no outstanding borrowings under our revolving credit facility. This credit facility contains customary terms and conditions for credit facilities of this type, including restrictions on our ability to incur or guaranty additional indebtedness, create liens, enter into transactions with affiliates, make loans or investments, sell assets, pay dividends or make distributions on, or repurchase, our stock, and consolidate or merge with other entities. In addition, we are required to meet certain financial covenants customary with this type of agreement, including maintaining a maximum ratio of indebtedness to Adjusted EBITDA and a minimum specified interest coverage ratio. This credit facility contains customary events of default, including for payment defaults, breaches of representations, breaches of affirmative or negative covenants, cross defaults to other material indebtedness, bankruptcy and failure to discharge 42 certain judgments. If a default occurs and is not cured within any applicable cure period or is not waived, our obligations under the credit facility may be accelerated. As of January 2, 2016, we were in compliance with all covenants under the revolving credit facility. Letter of Credit Facility We have an unsecured revolving letter of credit facility with Bank of America, N.A. The credit facility is available to fund letters of credit on our behalf up to an aggregate outstanding amount of $5 million. We may terminate at any time, subject to proper notice, or from time to time permanently reduce the amount of the credit facility. We pay a fee on outstanding letters of credit issued under the credit facility of up to 1.5% per annum of the outstanding letters of credit. The maturity date for letters of credit issued under the credit facility must be no later than 365 days following the maturity date of the credit facility. As of January 2, 2016, we had letters of credit outstanding of $1.5 million under our revolving letter of credit facility. The credit facility contains customary terms and conditions for credit facilities of this type, including restrictions on our ability to incur or guaranty additional indebtedness, create liens, enter into transactions with affiliates, make loans or investments, sell assets, pay dividends or make distributions on, or repurchase, our stock, and consolidate or merge with other entities. In addition, we are required to meet certain financial covenants customary with this type of agreement, including maintaining a maximum ratio of indebtedness to Adjusted EBITDA and a minimum specified interest coverage ratio. The credit facility also contains customary events of default, including for payment defaults, breaches of representations, breaches of affirmative or negative covenants, cross defaults to other material indebtedness, bankruptcy, and failure to discharge certain judgments. If a default occurs and is not cured within any applicable cure period or is not waived, the lender may accelerate the obligations under the credit facility. As of January 2, 2016, we were in compliance with all covenants under the revolving letter of credit facility. Working Capital and Capital Expenditure Needs We currently have no material cash commitments, except for normal recurring trade payables, expense accruals and operating leases, all of which we anticipate funding through working capital, funds provided by operating activities and our existing working capital line of credit. We do not currently anticipate significant investment in property, plant and equipment, and we believe that our outsourced approach to manufacturing provides us with flexibility in both managing inventory levels and financing our inventory. We believe our existing cash and cash equivalents, short-term investments, cash provided by operating activities, and funds available through our working capital line of credit will be sufficient to meet our working capital and capital expenditure needs over at least the next twelve months. In the event that our revenue plan does not meet our expectations, we may eliminate or curtail expenditures to mitigate the impact on our working capital. Our future capital requirements will depend on many factors, including our rate of revenue growth, the expansion of our marketing and sales activities, the timing and extent of spending to support product development efforts, the timing of introductions of new products and enhancements to existing products, the acquisition of new capabilities or technologies, and the continuing market acceptance of our products and services. Moreover, to the extent that existing cash and cash equivalents, short-term investments, cash from operations, and cash from short-term borrowing are insufficient to fund our future activities, we may need to raise additional funds through public or private equity or debt financing. As part of our business strategy, we may consider additional acquisitions of companies, technologies and products, which could also require us to seek additional equity or debt financing. Additional funds may not be available on terms favorable to us or at all. Contractual Obligations We generally do not enter into binding purchase commitments. Our principal commitments consist of obligations under our working capital line of credit, leases for office space and minimum contractual obligations for material. Other obligations consist of software licensing arrangements. The following table describes our commitments to settle contractual obligations in cash as of January 2, 2016: 43 Less Than 1 Year 1 to 3 Years Payments Due by Period 3 to 5 Years (In thousands) More Than 5 Years Total Operating leases Minimum contractual payments Other obligations Total $ $ 3,856 $ 675 641 5,172 $ 6,368 $ — 2,307 8,675 $ 3,903 $ — 493 4,396 $ — $ — — — $ 14,127 675 3,441 18,243 At January 2, 2016, we had outstanding purchase orders aggregating approximately $74.7 million. The purchase orders, the majority of which are with our contract manufacturers for the purchase of inventory in the normal course of business, are for manufacturing and non-manufacturing related goods and services, and are generally cancelable without penalty. In circumstances where we determine that we have financial exposure associated with any of these commitments, we record a liability in the period in which that exposure is identified. Off-Balance Sheet Arrangements As of January 2, 2016, we had no off-balance sheet arrangements as defined in Item 303(a)(4) of Regulation S-K. Recently Issued Accounting Pronouncements F o r m 1 0 - K In November 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2015-17, "Income Taxes: Balance Sheet Classification of Deferred Taxes." ASU 2015-17 requires that the presentation of deferred tax assets and liabilities be classified as noncurrent on the balance sheet instead of separating deferred taxes into current and noncurrent amounts. This standard will become effective for fiscal years, and the interim periods within those years, beginning after December 15, 2016, with early adoption allowed. We elected to prospectively adopt ASU 2015-17. The prior reporting period was not retrospectively adjusted. The adoption of this guidance had no impact on our Consolidated Statements of Income and Comprehensive Income. In July 2015, the FASB issued ASU No. 2015-11, "Inventory: Simplifying the Measurement of Inventory." ASU 2015-11 applies only to inventory for which cost is determined by methods other than last-in, first-out and the retail inventory method, which includes inventory that is measured using first-in, first-out or average cost. Inventory within the scope of this standard is required to be measured at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The new standard will be effective for us on January 1, 2017. We are currently assessing the potential impact of ASU 2015-11 on our consolidated financial statements. In April 2015, the FASB issued ASU No. 2015-05, "Intangibles - Goodwill and Other - Internal-Use Software: Customer's Accounting for Fees Paid in a Cloud Computing Arrangement." Under ASU 2015-05, if a cloud computing arrangement includes a software license, the software license element of the arrangement should be accounted for consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the arrangement should be accounted for as a service contract. The new standard will be effective for us on January 3, 2016. We do not believe that the impact of this standard will be material to our consolidated financial statements. In April 2015, the FASB issued ASU No. 2015-03, "Interest - Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs." ASU 2015-03 requires an entity to present debt issuance costs related to a recognized debt liability as a direct deduction from the carrying amount of that debt liability consistent with debt discounts and is effective for financial statements issued for fiscal years beginning after December 15, 2015 and interim periods within those fiscal years. We do not believe that the impact of this standard will be material to our consolidated financial statements. In February 2015, the FASB issued ASU No. 2015-02, "Consolidation - Amendments to the Consolidation Analysis." ASU 2015-02 reduces the number of consolidation models and changes the way reporting entities evaluate a variable interest entity. It is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 44 2015. Early adoption is permitted. We do not believe that the impact of this standard will be material to our consolidated financial statements. In June 2014, the FASB issued ASU No. 2014-12, "Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period." ASU 2014-12 requires a reporting entity to treat a performance target that affects vesting and that could be achieved after the requisite service period as a performance condition. It is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2015. Early adoption is permitted. We do not believe that the impact of this standard will be material to our consolidated financial statements. In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers," which provides guidance for revenue recognition. The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The new guidance is effective for annual reporting periods beginning after December 15, 2016, including interim periods within those annual reporting periods. In July 2015, the FASB voted to defer the effective date of the new accounting guidance related to revenue recognition by one year to December 17, 2017 for annual reporting periods beginning after that date and permitted early adoption of the standard, but not before the original effective date of December 15, 2016. We are in the process of evaluating the impact that the adoption of the new revenue recognition standard issued in May 2014 will have on our consolidated financial statements and footnote disclosures. From time to time, new accounting pronouncements are issued by FASB that we adopt as of the specified effective date. Unless otherwise discussed, we believe that recently issued standards that are not yet effective will not have a material impact on our consolidated financial statements upon adoption. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Foreign Currency Exchange Risk We maintain sales and business operations in foreign countries. As such, we have exposure to adverse changes in exchange rates associated with operating expenses of our foreign operations, but we believe this exposure to be immaterial. Additionally, we accept orders for home robots products in currencies other than the U.S. dollar. We regularly monitor the level of non-U.S. dollar accounts receivable balances to determine if any actions, including possibly entering into foreign currency forward contracts or swaps, should be taken to minimize the impact of fluctuating exchange rates on our results of operations. Our international revenue is primarily denominated in U.S. dollars and therefore any fluctuations in the Euro or any other non- U.S. dollar currencies will have minimal direct impact on our international revenue. However, as the U.S. dollar strengthens or weakens against other currencies, our international distributors may be impacted, which could affect their profitability and our ability to maintain current pricing levels on our international consumer products. Interest Rate Sensitivity At January 2, 2016, we had unrestricted cash and cash equivalents of $179.9 million and short term investments of $33.1 million. The unrestricted cash and cash equivalents are held for working capital purposes. We do not enter into investments for trading or speculative purposes. Some of the securities in which we invest, however, may be subject to market risk. This means that a change in prevailing interest rates may cause the fair market value of the investment to fluctuate. To minimize this risk in the future, we intend to maintain our portfolio of cash equivalents in a variety of securities, commercial paper, money market funds, debt securities and certificates of deposit. Due to the short-term nature of these investments, we believe that we do not have any material exposure to changes in the fair value of our investment portfolio as a result of changes in interest rates. As of January 2, 2016, all of our cash and cash equivalents were held in demand deposits and money market accounts. Our exposure to market risk also relates to the increase or decrease in the amount of interest expense we must pay on any outstanding debt instruments, primarily certain borrowings under our working capital line of credit. The advances under the working capital line of credit bear a variable rate of interest determined at the time of the borrowing. At January 2, 2016, we had letters of credit outstanding of $1.5 million under our revolving letter of credit facility. 45 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA iROBOT CORPORATION INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm Consolidated Balance Sheets at January 2, 2016 and December 27, 2014 Consolidated Statements of Income for the Years ended January 2, 2016, December 27, 2014 and December 28, 2013 Consolidated Statements of Comprehensive Income for the Years ended January 2, 2016, December 27, 2014 and December 28, 2013 Consolidated Statements of Stockholders’ Equity for the Years ended January 2, 2016, December 27, 2014 and December 28, 2013 Consolidated Statements of Cash Flows for the Years ended January 2, 2016, December 27, 2014 and December 28, 2013 Notes to Consolidated Financial Statements Page 47 48 49 50 51 52 53 F o r m 1 0 - K 46 Report of Independent Registered Public Accounting Firm To the Board of Directors and Stockholders of iRobot Corporation: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows present fairly, in all material respects, the financial position of iRobot Corporation and its subsidiaries at January 2, 2016 and December 27, 2014, and the results of their operations and their cash flows for each of the three years in the period ended January 2, 2016 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of January 2, 2016, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on these financial statements and on the Company's internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. As discussed in Note 10 to the consolidated financial statements, the Company changed the manner in which it accounts for the classification of deferred taxes in the consolidated balance sheets due to the adoption of ASU 2015-17, Balance Sheet Classification of Deferred Taxes. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ PricewaterhouseCoopers LLP Boston, Massachusetts February 19, 2016 47 iROBOT CORPORATION CONSOLIDATED BALANCE SHEETS January 2, 2016 December 27, 2014 (In thousands) F o r m 1 0 - K 185,957 36,166 71,056 2,614 47,857 21,505 9,704 374,859 31,297 8,409 48,751 19,146 10,751 493,213 60,256 18,701 16,235 3,849 99,041 3,736 Current assets: ASSETS Cash and cash equivalents Short term investments Accounts receivable, net of allowance of $33 at January 2, 2016 and $67 at December 27, 2014 Unbilled revenue Inventory Deferred tax assets Other current assets Total current assets Property and equipment, net Deferred tax assets Goodwill Intangible assets, net Other assets Total assets $ $ 179,915 $ 33,124 104,679 452 61,678 — 9,501 389,349 26,850 31,721 48,751 15,664 9,408 521,743 $ LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable Accrued expenses Accrued compensation Deferred revenue and customer advances Total current liabilities Long term liabilities Commitments and contingencies (Note 11): Redeemable convertible preferred stock, 5,000,000 shares authorized and no shares issued or outstanding Common stock, $0.01 par value, 100,000,000 shares authorized; and 29,091,806 and 29,644,602 shares issued and outstanding at January 2, 2016 and December 27, 2014, respectively Additional paid-in capital Retained earnings Accumulated other comprehensive loss Total stockholders’ equity Total liabilities, redeemable convertible preferred stock and stockholders’ equity $ See accompanying Notes to Consolidated Financial Statements 48 $ 61,655 $ 15,954 15,752 3,265 96,626 7,706 — — 291 232,345 185,011 (236) 417,411 521,743 $ 297 249,409 140,881 (151) 390,436 493,213 iROBOT CORPORATION CONSOLIDATED STATEMENTS OF INCOME Fiscal Year Ended January 2, 2016 December 27, 2014 (In thousands, except per share amounts) December 28, 2013 Revenue Cost of revenue(1) Gross margin Operating expenses: Research and development(1) Selling and marketing(1) General and administrative(1) Total operating expenses Operating income Other income (expense), net Income before income taxes Income tax expense Net income Net income per share $ 616,778 $ 327,852 288,926 76,071 97,772 54,465 228,308 60,618 2,353 62,971 18,841 $ 44,130 $ 556,846 $ 298,791 258,055 69,408 86,091 49,439 204,938 53,117 (708) 52,409 14,606 37,803 $ Basic Diluted $ $ Number of weighted average common shares used in calculations per share Basic Diluted __________________________ 1.49 $ 1.47 $ 1.28 $ 1.25 $ 29,550 30,107 29,485 30,210 487,401 266,247 221,154 63,649 71,529 53,358 188,536 32,618 (203) 32,415 4,774 27,641 0.97 0.94 28,495 29,354 (1) Stock-based compensation recorded in fiscal 2015, 2014 and 2013 breaks down by expense classification as follows: Cost of revenue Research and development Selling and marketing General and administrative $ January 2, 2016 Fiscal Year Ended December 27, 2014 (In thousands) December 28, 2013 1,076 $ 3,256 1,457 8,394 865 $ 3,359 1,296 8,258 700 2,700 1,246 8,763 See accompanying Notes to Consolidated Financial Statements 49 iROBOT CORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Net income Other comprehensive loss, net of tax: Unrealized losses on investments, net of tax Total comprehensive income $ $ January 2, 2016 Fiscal Year Ended December 27, 2014 (In thousands) December 28, 2013 44,130 $ 37,803 $ 27,641 (85) 44,045 $ (298) 37,505 $ (52) 27,589 See accompanying Notes to Consolidated Financial Statements F o r m 1 0 - K 50 iROBOT CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY Balance at December 29, 2012 Issuance of common stock for exercise of stock options Conversion of deferred compensation Vesting of restricted stock units Tax benefit of excess stock based compensation deduction Amortization of deferred compensation relating to stock options and restricted stock units Stock withheld to cover tax withholdings requirements upon vesting of restricted stock units Unrealized loss on short term investment Directors' deferred compensation Net income Balance at December 28, 2013 Issuance of common stock for exercise of stock options Vesting of restricted stock units Tax benefit of excess stock based compensation deduction Amortization of deferred compensation relating to stock options and restricted stock units Stock withheld to cover tax withholdings requirements upon vesting of restricted stock units Unrealized loss on short term investment Directors' deferred compensation Stock repurchases Net income Balance at December 27, 2014 Issuance of common stock for exercise of stock options Conversion of deferred compensation Vesting of restricted stock units Tax benefit of excess stock based compensation deduction Amortization of deferred compensation relating to stock options and restricted stock units Stock withheld to cover tax withholdings requirements upon vesting of restricted stock units Unrealized loss on short term investment Directors' deferred compensation Common Stock Shares Value Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive Income (Loss) Stockholders’ Equity 27,781,659 $ 278 $ 199,903 $ 75,437 $ 199 $ (In thousands, except share data) 840,951 9,780 348,141 8 — 3 (45,278) 13,621 — (3) 1,413 13,409 (1,212) 44 28,935,253 $ 289 $ 227,175 $ 103,078 $ 27,641 486,252 318,367 5 3 (39,297) (55,973) 8,938 (3) 2,776 13,778 (1,626) 49 (1,678) 37,803 (52) 147 $ (298) 275,817 13,629 — — 1,413 13,409 (1,212) (52) 44 27,641 330,689 8,943 — 2,776 13,778 (1,626) (298) 49 (1,678) 37,803 29,644,602 $ 297 $ 249,409 $ 140,881 $ (151) $ 390,436 390,085 14,610 340,754 4 — 3 (37,969) 6,460 — (3) 822 14,183 (1,295) 149 (85) 6,464 — — 822 14,183 (1,295) (85) 149 (37,393) 44,130 417,411 Stock repurchases Net income (1,260,276) (13) (37,380) 44,130 Balance at January 2, 2016 29,091,806 $ 291 $ 232,345 $ 185,011 $ (236) $ See accompanying Notes to Consolidated Financial Statements 51 iROBOT CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS January 2, 2016 Fiscal Year Ended December 27, 2014 (In thousands) December 28, 2013 $ 44,130 $ 37,803 $ 27,641 Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization Loss on disposal of property and equipment Gain on sale of cost method investment Goodwill and intangible assets impairment Stock-based compensation Deferred income taxes, net Tax benefit of excess stock-based compensation deductions Non-cash director deferred compensation Changes in operating assets and liabilities — (use) source Accounts receivable Unbilled revenue Inventory Other assets Accounts payable Accrued expenses Accrued compensation Deferred revenue and customer advances Long term liabilities Net cash provided by operating activities Cash flows from investing activities: Additions of property and equipment Change in other assets Proceeds from sale of cost method investment Purchases of investments Sales and maturities of investments Proceeds from sale of assets Net cash used in investing activities Cash flows from financing activities: Income tax withholding payment associated with restricted stock vesting Proceeds from stock option exercises Stock repurchases Tax benefit of excess stock-based compensation deductions Net cash provided by (used in) financing activities Net increase (decrease) in cash and cash equivalents Cash and cash equivalents, at beginning of period Cash and cash equivalents, at end of period Supplemental disclosure of cash flow information Cash paid for income taxes Non-cash investing and financing activities: Transfer of inventory to property and equipment Additions of property and equipment included in accounts payable $ $ $ F o r m 1 0 - K 15,090 214 (3,287) — 14,183 (985) (1,467) 149 (33,623) 2,162 (13,978) 203 3,786 (2,768) (483) (584) 3,970 26,712 (9,372) (1,015) 5,645 (17,755) 20,500 — (1,997) (1,295) 6,464 (37,393) 1,467 (30,757) (6,042) 185,957 179,915 $ 13,049 246 — — 13,778 3,101 (3,051) 49 (31,708) (1,758) (2,387) (2,856) 16,249 3,695 (3,371) (1,236) (997) 40,606 (13,774) (250) — (31,219) 16,500 — (28,743) (1,626) 8,943 (1,678) 3,051 8,690 20,553 165,404 185,957 $ 12,169 189 — 1,988 13,409 (768) (2,406) 44 (9,935) 340 (9,365) 1,980 (1,743) 1,255 7,751 (1,172) 515 41,892 (6,829) (2,000) — (17,946) 8,044 650 (18,081) (1,212) 13,629 — 2,406 14,823 38,634 126,770 165,404 14,341 $ 15,508 $ 7,235 157 848 $ 637 3,235 $ 223 572 See accompanying Notes to Consolidated Financial Statements 52 iROBOT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Nature of the Business iRobot Corporation ("iRobot" or the "Company") develops robotics and artificial intelligence technologies and applies these technologies in producing and marketing robots. The Company’s revenue is primarily generated from product sales. 2. Summary of Significant Accounting Policies Basis of Presentation The accompanying consolidated financial statements include those of iRobot and its subsidiaries, after elimination of all intercompany accounts and transactions. iRobot has prepared the accompanying consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. Use of Estimates The preparation of these financial statements in conformity with accounting principles generally accepted in the United States requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and disclosure of contingent assets and liabilities. On an ongoing basis, management evaluates these estimates and judgments, including those related to revenue recognition, sales returns, bad debts, warranty claims, inventory reserves, valuation of investments, valuation of goodwill and intangible assets, assumptions used in valuing stock-based compensation instruments and income taxes. The Company bases these estimates on historical and anticipated results, and trends and on various other assumptions that the Company believes are reasonable under the circumstances, including assumptions as to future events. These estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. By their nature, estimates are subject to an inherent degree of uncertainty. Actual results may differ from the Company’s estimates. Fiscal Year-End The Company operates and reports using a 52-53 week fiscal year ending on the Saturday closest to December 31. Accordingly, the Company’s fiscal quarters end on the Saturday that falls closest to the last day of the third month of each quarter. Cash and Cash Equivalents The Company considers all highly liquid investments with an original or remaining maturity of three months or less at the time of purchase to be cash equivalents. The Company invests its excess cash primarily in money market funds or savings accounts of major financial institutions. Accordingly, its cash equivalents are subject to minimal credit and market risk. At January 2, 2016 and December 27, 2014, cash equivalents were comprised of money market funds totaling $110.8 million and $109.8 million, respectively. These cash equivalents are carried at cost, which approximates fair value. Short Term Investments The Company’s investments are classified as available-for-sale and are recorded at fair value with any unrealized gain or loss recorded as an element of stockholders’ equity. The fair value of investments is determined based on quoted market prices at the reporting date for those instruments. As of January 2, 2016 and December 27, 2014, investments consisted of: Corporate and government bonds Total short term investments January 2, 2016 December 27, 2014 Cost Fair Market Value Cost Fair Market Value (In thousands) $ $ 33,622 $ 33,622 $ 33,124 $ 33,124 $ 36,659 $ 36,659 $ 36,166 36,166 53 F o r m 1 0 - K iROBOT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) As of January 2, 2016, the Company’s investments had maturity dates ranging from January 2016 to August 2018. The Company invests primarily in investment grade securities and limits the amount of investment in any single issuer. Revenue Recognition The Company derives its revenue from product sales and, to a lesser extent, government and commercial research and development contracts. The Company sells products directly to customers and indirectly through resellers and distributors. The Company recognizes revenue from sales of robots under the terms of the customer agreement upon transfer of title and risk of loss to the customer, net of estimated returns, provided that collection is determined to be reasonably assured and no significant obligations remain. Beginning in the third quarter of 2015, with the introduction of the Company's first connected robot, each sale of a connected robot represents a multi-element arrangement containing the robot, an app and potential future unspecified software upgrades. Revenue is allocated to the deliverables based on their relative selling prices which have been determined using best estimate of selling price (BESP), as the Company has not been able to establish vendor specific objective evidence (VSOE) or obtain relevant third party evidence (TPE). Revenue allocated to the app and unspecified software upgrades is then deferred and recognized on a straight-line basis over the period in which the Company expects to provide the upgrades over the estimated life of the robot. Sales to domestic and Canadian resellers of home robots are typically subject to agreements allowing for limited rights of return, rebates and price protection. The Company also provides limited rights of returns for direct-to-consumer sales generated through its on-line stores. Accordingly, the Company reduces revenue for its estimates of liabilities for these rights of return, rebates and price protection at the time the related sale is recorded. These estimates for rights of return are directly based on specific terms and conditions included in the reseller agreements, historical returns experience and various other assumptions that the Company believes are reasonable under the circumstances. In the case of new product introductions, the estimates for returns applied to the new products are based upon the estimates for the most similar predecessor products until such time that the Company has enough actual returns experience for the new products, which is typically two holiday return cycles. At that time, the Company incorporates that data into the development of returns estimates for the new products. The Company updates its analysis of returns on a quarterly basis. If actual returns differ significantly from the Company's estimates, or if modifications to individual reseller agreements are entered into that impact their rights of returns, such differences could result in an adjustment to previously established reserves and could have a material impact, either favorably or unfavorably, on the Company's results of operations for the period in which the actual returns become known or the reseller agreement is modified. The Company’s international distributor agreements do not currently allow for product returns and, as a result, no reserve for returns is established for this group of customers. The estimates and reserve for rebates and price protection are based on specific programs, expected usage and historical experience. Actual results could differ from these estimates. Under cost-plus-fixed-fee (CPFF) type contracts, the Company recognizes revenue based on costs incurred plus a pro rata portion of the total fixed fee. Costs incurred include labor and material that are directly associated with individual CPFF contracts plus indirect overhead and general and administrative type costs based upon billing rates submitted by the Company to the Defense Contract Management Agency (DCMA). Annually, the Company submits final indirect billing rates to DCMA based upon actual costs incurred throughout the year. In the situation where the Company’s final actual billing rates are greater than the estimated rates currently in effect, the Company records a cumulative revenue adjustment in the period in which the rate differential is collected from the customer. These final billing rates are subject to audit by the Defense Contract Audit Agency (DCAA), which can occur several years after the final billing rates are submitted and may result in material adjustments to revenue recognized based on estimated final billing rates. As of January 2, 2016, fiscal years 2012 through 2015 are open for audit by DCAA. In the situation where the Company’s anticipated actual billing rates will be lower than the provisional rates currently in effect, the Company records a cumulative revenue adjustment in the period in which the rate differential is identified. Revenue on firm fixed price (FFP) contracts is recognized using the percentage-of-completion method. For government product FFP contracts, revenue is recognized as the product is shipped or in accordance with the contract terms. Costs and estimated gross margins on contracts are recorded as revenue as work is performed based on the percentage that incurred costs compare to estimated total costs utilizing the most recent estimates of costs and funding. Changes in job performance, job conditions, and estimated profitability, including those arising from final contract settlements and government 54 iROBOT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) audits, may result in revisions to costs and income and are recognized in the period in which the revisions are determined. Since many contracts extend over a long period of time, revisions in cost and funding estimates during the progress of work have the effect of adjusting earnings applicable to past performance in the current period. When the current contract estimate indicates a loss, a provision is made for the total anticipated loss in the current period. Revenue earned in excess of billings, if any, is recorded as unbilled revenue. Billings in excess of revenue earned, if any, are recorded as deferred revenue. Allowance for Doubtful Accounts The Company maintains an allowance for doubtful accounts to provide for the estimated amount of accounts receivable that may not be collected. The allowance is based upon an assessment of customer creditworthiness, historical payment experience and the age of outstanding receivables. Activity related to the allowance for doubtful accounts was as follows: Balance at beginning of period Provision Deduction(*) Balance at end of period January 2, 2016 Fiscal Year Ended December 27, 2014 (In thousands) December 28, 2013 $ $ 67 $ — (34) 33 $ 67 $ — — 67 $ 111 — (44) 67 ___________________________ (*) Deductions related to allowance for doubtful accounts represent amounts written off against the allowance, less recoveries. Inventory Inventory is stated at the lower of cost or net realizable value with cost being determined using the first-in, first-out (FIFO) method. The Company maintains a reserve for inventory items to provide for an estimated amount of excess or obsolete inventory. Activity related to the inventory reserve was as follows: Balance at beginning of period Provision Deduction(*) Balance at end of period January 2, 2016 Fiscal Year Ended December 27, 2014 (In thousands) $ $ 5,251 $ 424 (1,753) 3,922 $ 5,280 $ 1,045 (1,074) 5,251 $ December 28, 2013 6,608 1,571 (2,899) 5,280 ___________________________ (*) Deductions related to inventory reserve accounts represent amounts written off against the reserve. Property and Equipment Property and equipment are recorded at cost and consist primarily of computer equipment, leasehold improvements, business applications software and machinery. Depreciation is computed using the straight-line method over the estimated useful lives as follows: 55 iROBOT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Computer and research equipment Furniture Machinery Tooling Business applications software Capital leases and leasehold improvements Estimated Useful Life 3 years 5 2-5 2-5 5-7 Lesser of economic benefit period or term of lease Expenditures for additions, renewals and betterments of plant and equipment are capitalized. Expenditures for repairs and maintenance are charged to expense as incurred. As assets are retired or sold, the related cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is credited or charged to operations. Long-Lived Assets, including Purchased Intangible Assets The Company periodically evaluates the recoverability of long-lived assets, including other purchased intangible assets whenever events and changes in circumstances, such as reductions in demand or significant economic slowdowns in the industry, indicate that the carrying amount of an asset may not be fully recoverable. When indicators of impairment are present, the carrying values of the asset group are evaluated in relation to the future undiscounted cash flows of the underlying business. The net book value of the underlying asset is adjusted to fair value if the sum of the expected discounted cash flows is less than book value. Fair values are based on estimates of market prices and assumptions concerning the amount and timing of estimated future cash flows and assumed discount rates, reflecting varying degrees of perceived risk. F o r m 1 0 - K Goodwill Goodwill is recorded as the difference, if any, between the aggregate consideration paid for an acquisition and the fair value of the net tangible and intangible assets acquired. The Company evaluates goodwill for impairment at the reporting unit level (operating segment or one level below an operating segment) annually or more frequently if the Company believes indicators of impairment exist. In accordance with the guidance, the Company is permitted to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the Company concludes that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then a two-step goodwill impairment test is performed. The first step of the impairment test involves comparing the fair values of the applicable reporting units with their aggregate carrying values, including goodwill. If the carrying amount of a reporting unit exceeds the reporting unit's fair value, the Company performs the second step of the goodwill impairment test to determine the amount of impairment loss. The second step of the goodwill impairment test involves comparing the implied fair value of the affected reporting unit's goodwill with the carrying value of that goodwill. The Company completes the annual impairment evaluation during the fourth quarter each year. Research and Development Costs incurred in the research and development of the Company’s products are expensed as incurred. Internal Use Software The Company capitalizes costs associated with the development and implementation of software for internal use. At January 2, 2016, December 27, 2014 and December 28, 2013, the Company had $8.6 million, $8.2 million and $8.2 million, respectively, of costs related to enterprise-wide software included in fixed assets. Capitalized costs are being amortized over the assets’ estimated useful lives. The Company has recorded $0.7 million, $0.8 million and $0.9 million of amortization expense for the years ended January 2, 2016, December 27, 2014 and December 28, 2013, respectively. 56 iROBOT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Concentration of Credit Risk and Significant Customers Financial instruments which potentially expose the Company to concentrations of credit risk consist of accounts receivable. Management believes its credit policies are prudent and reflect normal industry terms and business risk. At January 2, 2016, three customers accounted for a total of 45.8% of the Company's accounts receivable balance, each of which was greater than 10% of the balance and two of whom secured their balance with guaranteed letters of credit which together represents 34.1% of the balance. At December 27, 2014, two customers accounted for a total of 32.2% of the Company’s accounts receivable balance, each of which was greater than 10% of the balance and each of whom secured their balance with guaranteed letters of credit. For the years ended January 2, 2016, December 27, 2014 and December 28, 2013, revenue from U.S. federal government orders, contracts and subcontracts, represented 5.1%, 4.3% and 6.2% of total revenue, respectively. For the fiscal years ended January 2, 2016, December 27, 2014 and December 28, 2013, the Company generated an aggregate of 26.0%, 29.8% and 33.2%, respectively, of total revenue from its home robots distributor in Japan (Sales on Demand Corporation) and a network of affiliated European distributors of its home robots (Robopolis SAS). The Company maintains its cash in bank deposit accounts at high quality financial institutions. The individual balances, at times, may exceed federally insured limits. Stock-Based Compensation The Company accounts for stock-based compensation through recognition of the fair value of the stock-based compensation as a charge against earnings. Stock-based compensation cost for stock options is estimated at the grant date based on each option’s fair value as calculated by the Black-Scholes option-pricing model. Stock-based compensation cost for restricted stock awards, time-based restricted stock units and performance-based restricted stock units is measured based on the closing fair market value of the Company's common stock on the date of grant. For performance-based restricted stock units, the compensation costs will be subsequently adjusted for assumptions of achievement during the period in which the assumption of achievement changes, as applicable. The Company recognizes stock-based compensation cost as expense ratably on a straight-line basis over the requisite service period, net of estimated forfeitures. Advertising Expense The Company expenses advertising costs as they are incurred. During the years ended January 2, 2016, December 27, 2014 and December 28, 2013 advertising expense totaled $54.7 million, $46.1 million and $38.2 million, respectively, and are recorded with the selling and marketing expenses line item. Net Income Per Share The following table presents the calculation of both basic and diluted net income per share: Net income Weighted-average shares outstanding Dilutive effect of employee stock options and restricted shares Diluted weighted-average shares outstanding Basic income per share Diluted income per share Fiscal Year Ended January 2, 2016 December 27, 2014 December 28, 2013 $ $ $ 44,130 $ 29,550 557 30,107 1.49 $ 1.47 $ 37,803 $ 29,485 725 30,210 1.28 $ 1.25 $ 27,641 28,495 859 29,354 0.97 0.94 Restricted stock units and stock options representing approximately 0.5 million, 0.2 million and 0.7 million shares of common stock for the fiscal years ended January 2, 2016, December 27, 2014 and December 28, 2013, respectively, were excluded from the computation of diluted earnings per share for these periods because their effect would have been antidilutive. 57 iROBOT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Income Taxes The Company is subject to taxation in the United States and various states and foreign jurisdictions. The statute of limitations for examinations by the Internal Revenue Service is closed for fiscal years prior to 2012. The statute of limitations for examinations by state tax authorities is closed for fiscal years prior to 2011. Federal carryforward attributes that were generated prior to fiscal year 2012 and state carryforward attributes that were generated prior to fiscal year 2011 may still be adjusted upon examination by the federal or state tax authorities if they either have been or will be used in a period for which the statute of limitations is still open. Deferred taxes are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. Valuation allowances are provided if, based upon the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. The Company monitors the realization of its deferred tax assets based on changes in circumstances, for example, recurring periods of income for tax purposes following historical periods of cumulative losses, generation of tax credits compared to future utilization of credits, or changes in tax laws or regulations. The Company's income tax provision and its assessment of the ability to realize its deferred tax assets involve significant judgments and estimates. The Company is currently generating state research credits that exceed the amount being utilized. As a result of this trend, a valuation allowance may be needed in the future related to these state tax credits. F o r m 1 0 - K As of December 28, 2013, the Company maintained a valuation allowance of $2.1 million related to certain state tax attributes from the Evolution Robotics, Inc. acquisition. During the year ended December 27, 2014, this valuation allowance was released when the realization of these state tax attributes became more likely than not. As of January 2, 2016, the Company did not record a valuation allowance as all deferred tax assets are considered realizable. Comprehensive Income Accumulated other comprehensive income includes unrealized gains and losses on certain investments. The differences between net income and comprehensive income were related to unrealized gains (losses) on investments, net of tax. Fair Value Measurements The authoritative guidance for fair value establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. 58 iROBOT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Financial Assets and Liabilities The Company’s financial assets and liabilities measured at fair value on a recurring basis at January 2, 2016, were as follows: Description Assets: Cash and cash equivalents Money market funds Short term investments Corporate and government bonds (1) Total assets measured at fair value Liabilities: Accrued expenses Derivative instruments (Note 13) (2) Total liabilities measured at fair value Fair Value Measurements as of January 2, 2016 Level 1 Level 2 Level 3 (In thousands) $ $ $ $ 110,817 $ — $ — 110,817 $ 33,124 33,124 $ — $ — $ 28 $ 28 $ The Company’s financial assets measured at fair value on a recurring basis at December 27, 2014, were as follows: Description Assets: Cash and cash equivalents Money market funds Short term investments Corporate and government bonds (1) Total assets measured at fair value Fair Value Measurements as of December 27, 2014 Level 1 Level 2 Level 3 (In thousands) $ $ 109,843 $ — $ — 109,843 $ 36,166 36,166 $ — — — — — — — — (1) The bond investments are valued based on observable market values as of the Company's reporting date. The bond investments are recorded at fair value and marked-to-market at the end of each reporting period. The realized and unrealized gains and losses are included in comprehensive income for that period. (2) Derivative instruments are valued using an income approach based on the present value of the forward rate less the contract rate multiplied by the notional amount. Recent Accounting Pronouncements In November 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2015-17, "Income Taxes: Balance Sheet Classification of Deferred Taxes." ASU 2015-17 requires that the presentation of deferred tax assets and liabilities be classified as noncurrent on the balance sheet instead of separating deferred taxes into current and noncurrent amounts. This standard will become effective for fiscal years, and the interim periods within those years, beginning after December 15, 2016, with early adoption allowed. The Company elected to prospectively adopt ASU 2015-17. The prior reporting period was not retrospectively adjusted. The adoption of this guidance had no impact on the Company's Consolidated Statements of Income and Comprehensive Income. 59 iROBOT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) In July 2015, the FASB issued ASU No. 2015-11, "Inventory: Simplifying the Measurement of Inventory." ASU 2015-11 applies only to inventory for which cost is determined by methods other than last-in, first-out and the retail inventory method, which includes inventory that is measured using first-in, first-out or average cost. Inventory within the scope of this standard is required to be measured at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The new standard will be effective for the Company on January 1, 2017. The Company is currently assessing the potential impact of ASU 2015- 11 on its consolidated financial statements. In April 2015, the FASB issued ASU No. 2015-05, "Intangibles - Goodwill and Other - Internal-Use Software: Customer's Accounting for Fees Paid in a Cloud Computing Arrangement." Under ASU 2015-05, if a cloud computing arrangement includes a software license, the software license element of the arrangement should be accounted for consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the arrangement should be accounted for as a service contract. The new standard will be effective for the Company on January 3, 2016. The Company does not believe that the impact of this standard will be material to the Company’s consolidated financial statements. In April 2015, the FASB issued ASU No. 2015-03, "Interest - Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs." ASU 2015-03 requires an entity to present debt issuance costs related to a recognized debt liability as a direct deduction from the carrying amount of that debt liability consistent with debt discounts and is effective for financial statements issued for fiscal years beginning after December 15, 2015 and interim periods within those fiscal years. The Company does not believe that the impact of this standard will be material to the Company’s consolidated financial statements. F o r m 1 0 - K In February 2015, the FASB issued ASU No. 2015-02, "Consolidation - Amendments to the Consolidation Analysis." ASU 2015-02 reduces the number of consolidation models and changes the way reporting entities evaluate a variable interest entity. It is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2015. Early adoption is permitted. The Company does not believe that the impact of this standard will be material to the Company’s consolidated financial statements. In June 2014, the FASB issued ASU No. 2014-12, "Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period." ASU 2014-12 requires a reporting entity to treat a performance target that affects vesting and that could be achieved after the requisite service period as a performance condition. It is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2015. Early adoption is permitted. The Company does not believe that the impact of this standard will be material to the Company's consolidated financial statements. In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers," which provides guidance for revenue recognition. The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The new guidance is effective for annual reporting periods beginning after December 15, 2016, including interim periods within those annual reporting periods. In July 2015, the FASB voted to defer the effective date of the new accounting guidance related to revenue recognition by one year to December 17, 2017 for annual reporting periods beginning after that date and permitted early adoption of the standard, but not before the original effective date of December 15, 2016. The Company is in the process of evaluating the impact that the adoption of the new revenue recognition standard issued in May 2014 will have on its consolidated financial statements and footnote disclosures. From time to time, new accounting pronouncements are issued by FASB that are adopted by the Company as of the specified effective date. Unless otherwise discussed, the Company believes that recently issued standards, which are not yet effective, will not have a material impact on the Company’s consolidated financial statements upon adoption. 60 iROBOT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) 3. Inventory Inventory consists of the following at: Raw materials Finished goods 4. Property and Equipment Property and equipment consists of the following at: Computer and equipment Furniture Machinery Tooling Leasehold improvements Business applications software Less: accumulated depreciation January 2, 2016 December 27, 2014 (In thousands) 9,082 $ 52,596 61,678 $ 9,455 38,402 47,857 January 2, 2016 December 27, 2014 (In thousands) 13,825 $ 2,441 7,134 16,599 21,022 8,559 69,580 42,730 26,850 $ 15,173 2,297 5,307 18,614 20,833 8,214 70,438 39,141 31,297 $ $ $ $ Depreciation expense for the years ended January 2, 2016, December 27, 2014 and December 28, 2013 was $11.4 million, $9.2 million, and $8.1 million, respectively. 5. Other Assets At January 2, 2016, other assets consisted of six investments totaling $9.4 million. At December 27, 2014, other assets consisted of three investments totaling $10.8 million. At January 2, 2016, these investments consisted primarily of cost method investments and notes receivable. The Company regularly monitors these investments to determine if facts and circumstances have changed in a manner that would require a change in accounting methodology. Additionally, the Company regularly evaluates whether or not these investments have been impaired by considering such factors as economic environment, market conditions, operational performance and other specific factors relating to the businesses underlying the investments. If any such impairment is identified, a reduction in the carrying value of the investments would be recorded at that time. Since the Company believes the fair value of its investments is greater than the carrying value of its investments, it has not impaired these investments. 61 iROBOT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) 6. Accrued Expenses Accrued expenses consist of the following at: Accrued warranty Accrued direct fulfillment costs Accrued sales tax Accrued customer deposits Accrued rent Accrued sales commissions Accrued accounting fees Accrued other Accrued compensation consists of the following at: Accrued bonus Accrued other compensation 7. Working Capital Facilities Credit Facility January 2, 2016 December 27, 2014 (In thousands) 6,907 $ 2,030 625 788 547 465 395 4,197 15,954 $ 7,769 1,346 867 702 701 531 167 6,618 18,701 $ $ January 2, 2016 December 27, 2014 (In thousands) 8,640 $ 7,112 15,752 $ 8,455 7,780 16,235 $ $ F o r m 1 0 - K The Company has an unsecured revolving credit facility with Bank of America, N.A., which is available to fund working capital and other corporate purposes. As of January 2, 2016, the total amount of the credit facility was $75.0 million and the full amount was available for borrowing. The interest on loans under the credit facility will accrue, at the Company's election, at either (1) LIBOR plus a margin, currently equal to 1.0%, based on the Company's ratio of indebtedness to Adjusted EBITDA (the "Eurodollar Rate"), or (2) the lender's base rate. The lender's base rate is equal to the highest of (1) the federal funds rate plus 0.5%, (2) the lender's prime rate and (3) the Eurodollar Rate plus 1.0%. The credit facility will terminate and all amounts outstanding thereunder will be due and payable in full on December 20, 2018. As of January 2, 2016, the Company had no outstanding borrowings under its revolving credit facility. This credit facility contains customary terms and conditions for credit facilities of this type, including restrictions on the Company's ability to incur or guaranty additional indebtedness, create liens, enter into transactions with affiliates, make loans or investments, sell assets, pay dividends or make distributions on, or repurchase, the Company's stock, and consolidate or merge with other entities. In addition, the Company is required to meet certain financial covenants customary with this type of agreement, including maintaining a maximum ratio of indebtedness to Adjusted EBITDA and a minimum specified interest coverage ratio. This credit facility contains customary events of default, including for payment defaults, breaches of representations, breaches of affirmative or negative covenants, cross defaults to other material indebtedness, bankruptcy and failure to discharge certain judgments. If a default occurs and is not cured within any applicable cure period or is not waived, the Company's obligations under the credit facility may be accelerated. As of January 2, 2016, the Company was in compliance with all covenants under its credit facility. 62 Letter of Credit Facility The Company has an unsecured revolving letter of credit facility with Bank of America, N.A. The credit facility is available to fund letters of credit on the Company's behalf up to an aggregate outstanding amount of $5 million. The Company may terminate at any time, subject to proper notice, or from time to time permanently reduce the amount of the credit facility. The Company pays a fee on outstanding letters of credit issued under the credit facility of up to 1.5% per annum of the outstanding letters of credit. The maturity date for letters of credit issued under the credit facility must be no later than 365 days following the maturity date of the credit facility. As of January 2, 2016, there were letters of credit outstanding of $1.5 million under the revolving letter of credit facility. The credit facility contains customary terms and conditions for credit facilities of this type, including restrictions on the Company's ability to incur or guaranty additional indebtedness, create liens, enter into transactions with affiliates, make loans or investments, sell assets, pay dividends or make distributions on, or repurchase stock, and consolidate or merge with other entities. In addition, the Company is required to meet certain financial covenants customary with this type of agreement, including maintaining a maximum ratio of indebtedness to Adjusted EBITDA and a minimum specified interest coverage ratio. The credit facility also contains customary events of default, including for payment defaults, breaches of representations, breaches of affirmative or negative covenants, cross defaults to other material indebtedness, bankruptcy, and failure to discharge certain judgments. If a default occurs and is not cured within any applicable cure period or is not waived, the lender may accelerate the obligations under the credit facility. As of January 2, 2016, the Company was in compliance with all covenants under the revolving letter of credit facility. 8. Common Stock Common stockholders are entitled to one vote for each share held and to receive dividends if and when declared by the Board of Directors and subject to and qualified by the rights of holders of the preferred stock. Upon dissolution or liquidation of the Company, holders of common stock will be entitled to receive all available assets subject to any preferential rights of any then outstanding preferred stock. On April 2, 2014, the Company announced a stock repurchase program. Under the program, the Company may purchase up to $50 million of its common stock from May 1, 2014 to April 30, 2015. On March 19, 2015, the Company announced an additional stock repurchase program, which authorized the repurchase of $50 million of its common stock from May 1, 2015 to April 30, 2016. During 2015 and 2014, the Company repurchased 1,260,276 shares totaling $37.4 million and 55,973 shares totaling $1.7 million, respectively, in the open market under these stock repurchase plans. During the fourth quarter of 2015, the Company replaced the then-current stock repurchase program with a new stock repurchase program, effective January 4, 2016 and ending on December 31, 2016, pursuant to which the Company is authorized to purchase up to one million shares or $40 million of its common stock, whichever occurs earlier. 9. Stock Option Plans and Stock-Based Compensation The Company has options outstanding under three stock incentive plans: the 2005 Stock Option and Incentive Plan (the "2005 Plan"), the Evolution Robotics, Inc. 2007 Stock Plan (the "2007 Plan") and the 2015 Stock Option and Incentive Plan (the "2015 Plan" and together with the 2005 Plan and the 2007 Plan, the “Plans”). All options that remained outstanding under the 2004 Stock Option and Incentive Plan as of December 27, 2014 were exercised during fiscal 2015. The 2015 Plan is the only one of the three plans under which new awards may currently be granted. Under the 2015 Plan, which became effective May 20, 2015, 3,100,000 shares were initially reserved for issuance in the form of incentive stock options, non-qualified stock options, stock appreciation rights, deferred stock awards, restricted stock units, unrestricted stock awards, cash-based awards, performance share awards and dividend equivalent rights. Stock awards returned to the Plans, with the exception of those issued under the 2007 Plan, as a result of their expiration, cancellation or termination are automatically made available for issuance under the 2015 Plan. Eligibility for incentive stock options is limited to those individuals whose employment status would qualify them for the tax treatment associated with incentive stock options in accordance with the Internal Revenue Code of 1986, as amended. As of January 2, 2016, there were 2,484,296 shares available for future grant under the 2015 Plan. 63 iROBOT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Options granted under the Plans are subject to terms and conditions as determined by the compensation committee of the board of directors, including vesting periods. Options granted under the Plans are exercisable in full at any time subsequent to vesting, generally vest over four years, and expire five or ten years from the date of grant or, if earlier, 90 days from employee termination. The exercise price of stock options is typically equal to the closing price on the NASDAQ Global Market on the date of grant. Other awards granted under the Plans generally vest over periods from three to four years. In conjunction with the acquisition of Evolution Robotics, Inc. on October 1, 2012, each outstanding and unvested incentive stock option held by Evolution employees as of the acquisition date was automatically converted into stock options of the Company under the same terms and conditions as were applicable to the original Evolution grants. The number of replacement options granted and the associated exercise prices were determined utilizing a conversion ratio as defined in the merger agreement. There were 114,248 incentive stock options issued by the Company as a result of this automatic conversion with exercise prices ranging from $2.55 to $4.81. All of these options were granted from the 2007 Plan, which was assumed by the Company as a result of the acquisition. The Company recognized $3.4 million of stock-based compensation expense during the fiscal year ended January 2, 2016 for stock options. The unamortized fair value as of January 2, 2016 associated with these grants was $6.4 million with a weighted-average remaining recognition period of 2.83 years. The Company expects to recognize associated stock-based compensation expense of $2.6 million, $1.9 million, $1.3 million and $0.6 million in 2016, 2017, 2018 and 2019, respectively. F o r m 1 0 - K The fair value of each option grant for the fiscal years ended January 2, 2016, December 27, 2014 and December 28, 2013 was computed on the grant date using the Black-Scholes option-pricing model with the following assumptions: Risk-free interest rate Expected dividend yield Expected life Expected volatility January 2, 2016 1.47% — 1.75% — 3.98 — 4.02 years 46.5% — 52.4% Fiscal Year Ended December 27, 2014 1.65% — 1.69% — December 28, 2013 0.90% — 1.77% — 3.91 — 4.00 years 4.03 — 4.21 years 54.0% — 58.0% 52.8% — 56.0% The risk-free interest rate is derived from the average U.S. Treasury constant maturity rate, which approximates the rate in effect at the time of grant, commensurate with the expected life of the instrument. The dividend yield is zero based upon the fact the Company has never paid and has no present intention to pay cash dividends. The Company utilizes company specific historical data for purposes of establishing expected volatility and expected term. Based upon the above assumptions, the weighted average fair value of each stock option granted for the fiscal years ended January 2, 2016, December 27, 2014 and December 28, 2013 was $13.21, $15.87 and $11.17, respectively. 64 iROBOT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) The table below summarizes stock option plan activity: Number of Shares Weighted Average Exercise Price Weighted Average Remaining Contractual Term Aggregate Intrinsic Value(1) Outstanding at December 29, 2012 Granted Exercised Canceled Outstanding at December 28, 2013 Granted Exercised Canceled Outstanding at December 27, 2014 Granted Exercised Canceled Outstanding at January 2, 2016 Vested and expected to vest at January 2, 2016 Exercisable as of January 2, 2016 Weighted average fair value of options granted during the fiscal year ended January 2, 2016 2,503,667 $ 293,325 (840,951) (185,666) 1,770,375 $ 233,181 (486,252) (43,984) 1,473,320 $ 323,104 (390,085) (118,789) 1,287,550 $ 1,230,537 $ 768,184 $ $ 18.27 24.60 16.21 22.16 19.89 37.10 18.39 27.17 22.89 32.58 16.57 28.41 26.73 26.45 23.18 13.21 4.00 years $11.6 million 3.90 years $11.4 million 2.74 years $9.6 million Options available for future grant at January 2, 2016 2,484,296 _________________________ (1) The aggregate intrinsic value on the table was calculated based upon the positive difference between the closing market value of the Company’s stock on January 2, 2016 of $35.40 and the exercise price of the underlying option. During fiscal years 2015, 2014, and 2013, the total intrinsic value of stock options exercised was $5.9 million, $10.5 million and $12.1 million, respectively. No amounts relating to stock-based compensation have been capitalized. The following table summarizes information about stock options outstanding at January 2, 2016: Options Outstanding Options Exercisable Range of Exercise Prices Number Outstanding Weighted Average Exercise Price Number Exercisable Weighted Average Exercise Price $ 3.54 - $ 13.46 14.52 - 14.52 17.70 - 21.23 22.86 - 22.86 24.53 - 26.59 29.60 - 32.38 33.29 - 33.48 33.72 - 34.30 34.67 - 37.08 43.35 - 43.35 $ 3.54 - $43.35 $ Weighted Average Remaining Contractual Life 2.88 years 1.25 1.61 4.10 2.85 6.51 3.27 6.24 5.34 4.95 81,723 144,017 82,171 166,757 167,468 162,225 159,940 168,599 107,648 47,002 1,287,550 4.00 years $ 65 7.97 14.52 18.44 22.86 25.75 31.04 33.42 34.13 35.83 43.35 26.73 78,713 $ 144,017 73,194 112,252 153,635 1,500 125,453 12,671 44,991 21,758 768,184 $ 8.09 14.52 18.41 22.86 25.71 31.22 33.46 33.72 35.66 43.35 23.18 iROBOT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) During the fiscal year ended January 2, 2016, the Company recognized $10.7 million of stock-based compensation expense associated with restricted stock units. As of January 2, 2016, December 27, 2014 and December 28, 2013, the unamortized fair value of all restricted stock units was $24.3 million, $20.1 million and $17.5 million, respectively. The Company expects to recognize associated stock-based compensation expense of $9.7 million, $7.3 million, $5.2 million and $2.1 million in 2016, 2017, 2018 and 2019, respectively. The table below summarizes activity relating to restricted stock units: Outstanding at December 29, 2012 Granted Vested Forfeited Outstanding at December 28, 2013 Granted Vested Forfeited Outstanding at December 27, 2014 Granted Vested Forfeited Outstanding at January 2, 2016 Number of Shares Underlying Restricted Stock Weighted Average Grant Date Fair Value 941,030 $ 521,056 (348,141 ) (186,291 ) 927,654 $ 372,159 (318,367 ) (71,591 ) 909,855 $ 576,410 (340,754 ) (121,142 ) 1,024,369 $ F o r m 1 0 - K 24.09 25.87 22.57 24.91 25.50 38.25 25.38 28.42 30.53 32.33 29.13 31.49 31.90 In 2014 and 2015, the Company granted performance-based restricted stock units (PSUs) to certain of its employees. The performance metric for these awards is operating income percent, with a threshold requirement for a minimum amount of revenue growth. These awards vest over a three year period. The number of shares actually earned at the end of the three year period will range from 0% to 100% of the target number of PSUs granted based on the Company’s performance against three year operating income and revenue goals. In addition, while all vesting of earned PSUs occurs on the third anniversary of the date of grant, achievement of cumulative intermediate targets for each individual year will allow PSUs to be deemed earned but not yet vested for the intermediate periods. Achievement of the cumulative target will allow all shares subject to the PSUs to be earned regardless of the achievement of the intermediate individual year targets. 66 iROBOT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) 10. Income Taxes The components of income tax expense were as follows: Current Federal State Foreign Total current tax provision Deferred Federal State Total deferred tax provision Total income tax provision January 2, 2016 Fiscal Year Ended December 27, 2014 (In thousands) December 28, 2013 $ $ 20,033 $ 972 121 21,126 (1,657) (628) (2,285) 18,841 $ 15,128 $ 129 91 15,348 1,268 (2,010) (742) 14,606 $ 6,363 1,124 41 7,528 (2,026) (728) (2,754) 4,774 In certain jurisdictions, an immaterial provision has been made for deferred taxes on undistributed earnings of non- U.S. subsidiaries. In other jurisdictions, for the remaining undistributed earnings of non-U.S. subsidiaries, no provision has been made for deferred taxes as these earnings have been indefinitely reinvested. As of January 2, 2016, a deferred tax liability has not been established for approximately $1.0 million of cumulative undistributed earnings of non-U.S. subsidiaries, as the Company plans to keep these amounts permanently reinvested overseas. The amount of any unrecognized deferred tax liability on these undistributed earnings would be immaterial. 67 iROBOT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) The components of net deferred tax assets were as follows: Net deferred tax assets Current deferred tax assets Reserves and accruals Stock-based compensation Net operating loss carryforwards Foreign tax credits Total current deferred tax assets Non-current deferred tax assets Reserves and accruals Tax credits Property and equipment Stock-based compensation Net operating loss carryforwards Total non-current deferred tax assets Current deferred tax liabilities Prepaids Total current deferred tax liabilities Non-current deferred tax liabilities Prepaids Intangible assets Total non-current deferred tax liabilities Total net deferred tax assets January 2, 2016 December 27, 2014 (In thousands) $ — $ — — — — 21,544 6,114 1,308 5,962 3,606 38,534 — — 623 6,190 6,813 31,721 $ $ 18,568 767 2,470 148 21,953 586 5,927 178 5,011 3,879 15,581 448 448 — 7,172 7,172 29,914 F o r m 1 0 - K In November 2015, the FASB issued ASU No. 2015-17, "Income Taxes: Balance Sheet Classification of Deferred Taxes." ASU 2015-17 requires that the presentation of deferred tax assets and liabilities be classified as noncurrent on the balance sheet instead of separating deferred taxes into current and noncurrent amounts. This standard will become effective for fiscal years, and the interim periods within those years, beginning after December 15, 2016, with early adoption allowed. The Company elected to prospectively adopt ASU 2015-17. The prior reporting period was not retrospectively adjusted. The adoption of this guidance had no impact on the Company's Consolidated Statements of Income and Comprehensive Income. As of December 28, 2013, the Company maintained a valuation allowance of $2.1 million related to certain state tax attributes from the Evolution Robotics, Inc. acquisition. During the year ended December 27, 2014, this valuation allowance was released when realization of these state tax attributes became more likely than not. As of January 2, 2016, the Company did not record a valuation allowance as all deferred tax assets are considered realizable. The table below summarizes activity relating to the valuation allowance: Fiscal Year Ended December 28, 2013 December 27, 2014 January 2, 2016 Balance at beginning of period Additions Charged to Costs and Expenses $ $ $ 2,691 2,090 — — — — Additions Charged to Goodwill (In thousands) Deductions Balance at End of Period — — — 601 $ 2,090 $ — $ 2,090 — — 68 iROBOT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) The Company has federal net operating loss carryforwards of $8.0 million and $15.1 million as of January 2, 2016 and December 27, 2014, respectively, which expire in 2031. The Company has state net operating loss carryforwards of $15.0 million and $19.4 million as of January 2, 2016 and December 27, 2014, respectively, which expire from 2029 to 2031. The Company has federal research and development credit carryforwards of $1.0 million and $1.0 million as of January 2, 2016 and December 27, 2014, respectively, which expire from 2026 to 2031. The Company has state research and development credit carryforwards of $9.3 million and $8.1 million as of January 2, 2016 and December 27, 2014, respectively, which expire from 2023 to 2030. The Company has state investment tax credit carryforwards of $0.3 million and $0.7 million as of January 2, 2016 and December 27, 2014, respectively, which expire from 2024 to 2025. Under the Internal Revenue Code, certain substantial changes in the Company’s ownership could result in an annual limitation on the amount of these tax carryforwards which can be utilized in future years. As of January 2, 2016, the Company has $23.0 million of federal and state net operating loss carryforwards and $2.2 million of federal and state research and development credits related to the acquisition of Evolution Robotics that are limited by Section 382 and Section 383, respectively, of the Internal Revenue Code. However, these limitations are not expected to cause any of these federal and state net operating loss carryforwards or federal and state research and development credits to expire prior to being utilized. The reconciliation of the expected tax (benefit) expense (computed by applying the federal statutory rate to income before income taxes) to actual tax expense was as follows: Expected federal income tax Miscellaneous permanent items State taxes (net of federal benefit) Federal and state credits Change in valuation allowance Domestic production activities deduction Settlement of uncertain tax positions Other January 2, 2016 Fiscal Year Ended December 27, 2014 (In thousands) December 28, 2013 $ 22,040 $ 608 982 (2,767) — (2,145) (194) 317 $ 18,841 $ 18,344 $ 691 1,058 (1,487) (2,090) (1,562) (176) (172) 14,606 $ 11,345 405 867 (3,909) — (1,168) (2,696) (70) 4,774 A summary of the Company’s adjustments to its gross unrecognized tax benefits in the current year is as follows: Balance at beginning of period Increase for tax positions related to the current year Increase (decrease) for tax positions related to prior years Decreases for settlements with applicable taxing authorities Decreases for lapses of statute of limitations Balance at end of period January 2, 2016 Fiscal Year Ended December 27, 2014 (in thousands) December 28, 2013 $ $ 2,491 $ 786 3,533 — (194) 6,616 $ 2,618 $ 252 (108) (271) — 2,491 $ 4,469 355 490 (2,696) — 2,618 The Company accrues interest and, if applicable, penalties for any uncertain tax positions. Interest and penalties are classified as a component of income tax expense. As of January 2, 2016, December 27, 2014 and December 28, 2013 69 iROBOT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) there were no material accrued interest or penalties. Over the next twelve months, it is reasonably possible that the Company may recognize approximately $0.2 million of previously net unrecognized tax benefits related to U.S. federal, state and foreign tax audits and expiration of the statute of limitations. If all of our unrecognized tax benefits as of January 2, 2016 were to become recognizable in the future, we would record a $2.1 million benefit, inclusive of interest, to the income tax provision, reflective of federal benefit on state items. Included in the Company’s state tax credit carryforwards are unrecognized tax benefits related to stock-based compensation beginning from January 1, 2006 of $0.6 million and $0.5 million as of January 2, 2016 and December 27, 2014, respectively. Included in the Company's state net operating loss carryforwards are unrecognized tax benefits related to stock-based compensation beginning from January 1, 2006 of $1.0 million and $0.7 million as of January 2, 2016 and December 27, 2014, respectively. These unrecognized tax benefits will be credited to additional paid-in capital when they reduce income taxes payable. Therefore, these amounts were not included in the Company’s gross or net deferred tax assets at January 2, 2016 and December 27, 2014. The Company follows the with and without approach for direct and indirect effects of windfall tax deductions. 11. Commitments and Contingencies Legal From time to time and in the ordinary course of business, the Company is subject to various claims, charges and litigation. The outcome of litigation cannot be predicted with certainty and some lawsuits, claims or proceedings may be disposed of unfavorably to us, which could materially affect the Company's financial condition or results of operations. Lease Obligations The Company leases its facilities. Rental expense under operating leases for fiscal 2015, 2014 and 2013 amounted to $4.9 million, $4.8 million, and $5.3 million, respectively. Future minimum rental payments under operating leases were as follows as of January 2, 2016: F o r m 1 0 - K 2016 2017 2018 2019 2020 Thereafter Total minimum lease payments Outstanding Purchase Orders Operating Leases 3,856 3,411 2,957 2,925 978 — 14,127 $ $ At January 2, 2016, we had outstanding purchase orders aggregating approximately $74.7 million. The purchase orders, the majority of which are with our contract manufacturers for the purchase of inventory in the normal course of business, are for manufacturing and non-manufacturing related goods and services, and are generally cancelable without penalty. In circumstances where we determine that we have financial exposure associated with any of these commitments, we record a liability in the period in which that exposure is identified. Guarantees and Indemnification Obligations The Company enters into standard indemnification agreements in the ordinary course of business. Pursuant to these agreements, the Company indemnifies and agrees to reimburse the indemnified party for losses incurred by the indemnified party, generally the Company’s customers, in connection with any patent, copyright, trade secret or other proprietary right infringement claim by any third party. The term of these indemnification agreements is generally perpetual any time after 70 iROBOT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) execution of the agreement. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited. The Company has never incurred costs to defend lawsuits or settle claims related to these indemnification agreements. As a result, the Company believes the estimated fair value of these agreements is minimal. Accordingly, the Company has no liabilities recorded for these agreements as of January 2, 2016 and December 27, 2014, respectively. Government Contract Contingencies Several of the Company’s prime contracts with the U.S. federal government do not contain a limitation of liability provision, creating a risk of responsibility for direct and consequential damages. Several subcontracts with prime contractors hold the prime contractor harmless against liability that stems from our work and do not contain a limitation of liability. These provisions could cause substantial liability for the Company. In addition, the Company is subject to audits by the U.S. federal government as part of routine audits of government contracts. As part of an audit, these agencies may review the Company’s performance on contracts, cost structures and compliance with applicable laws, regulations and standards. If any of its costs are found to be allocated improperly to a specific contract, the costs may not be reimbursed and any costs already reimbursed for such contract may have to be refunded. Accordingly, an audit could result in a material adjustment to our revenue and results of operations. Annually, the Company submits final indirect billing rates to DCMA based upon actual costs incurred throughout the year. These final billing rates are subject to audit by DCAA. As of January 2, 2016, fiscal years 2012 through 2015 are open for audit by DCAA. Warranty The Company provides warranties on most products and has established a reserve for warranty based on estimated warranty costs. The reserve is included as part of accrued expenses (Note 6) in the accompanying consolidated balance sheets. Activity related to the warranty accrual was as follows: Balance at beginning of period Provision Warranty usage(*) Balance at end of period __________________________________ (*) Warranty usage includes costs incurred for warranty obligations. January 2, 2016 Fiscal Year Ended December 27, 2014 (In thousands) $ $ 7,769 $ 4,598 (5,460) 6,907 $ 6,497 $ 6,410 (5,138) 7,769 $ December 28, 2013 6,057 1,744 (1,304) 6,497 Sales Taxes The Company collects and remits sales tax in jurisdictions in which it has a physical presence or it believes nexus exists, which therefore obligates the Company to collect and remit sales tax. The Company continually evaluates whether it has established nexus in new jurisdictions with respect to sales tax. The Company has recorded a liability for potential exposure in states where there is uncertainty about the point in time at which the Company established a sufficient business connection to create nexus. The Company continues to analyze possible sales tax exposure, but does not currently believe that any individual claim or aggregate claims that might arise will ultimately have a material effect on its consolidated results of operations, financial position or cash flows. 12. Employee Benefits The Company sponsors a retirement plan under Section 401(k) of the Internal Revenue Code (the "Retirement Plan"). All Company employees, with the exception of temporary, contract and international employees are eligible to participate in the 71 iROBOT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Retirement Plan after satisfying age and length of service requirements prescribed by the plan. Under the Retirement Plan, employees may make tax-deferred contributions, and the Company, at its sole discretion, and subject to the limits prescribed by the IRS, may make either a nonelective contribution on behalf of all eligible employees or a matching contribution on behalf of all plan participants. The Company elected to make a matching contribution of approximately $1.8 million, $1.7 million and $1.5 million for the plan years ended January 2, 2016, December 27, 2014 and December 28, 2013 ("Plan-Year 2015," "Plan-Year 2014" and "Plan-Year 2013"), respectively. The employer contribution represents a matching contribution at a rate of 50% of each employee’s first six percent contribution. Accordingly, each employee participating during Plan-Year 2015, Plan-Year 2014 and Plan-Year 2013 is entitled up to a maximum of three percent of his or her eligible annual payroll. The employer matching contribution for Plan-Year 2015 is included in accrued compensation in the accompanying consolidated balance sheet. 13. Derivative Instruments The Company is exposed to adverse changes in foreign currency exchange rates, primarily related to sales in the Canadian Dollar and the Euro. As a result, the Company periodically enters into foreign currency forward contracts to minimize the impact of fluctuating exchange rates on results of operations. These derivative instruments have maturities of two months or less and have not qualified for hedge accounting. Notional amounts and fair values of derivative instruments are as follows: F o r m 1 0 - K Classification January 2, 2016 December 27, 2014 January 2, 2016 December 27, 2014 Notional amount Fair Value (In thousands) Foreign currency forward contracts Accrued expenses $ 6,773 $ — $ 28 $ — Gains/(losses) associated with derivative instruments are as follows: Classification January 2, 2016 December 27, 2014 Twelve Months Ended (In thousands) Derivatives not designated as hedging instruments Gain (loss) recognized in income Other expense, net $ 368 $ — 14. Goodwill and other intangible assets The carrying amount of the goodwill at January 2, 2016 is $48.8 million. $41.0 million resulted from the acquisition of Evolution Robotics, Inc. in October 2012 and was assigned to the home robots reporting unit. $7.7 million (net of a subsequent write-down of $0.2 million) resulted from the acquisition of Nekton Research, LLC completed in September 2008 and was assigned to the defense and security reporting unit. In conjunction with the reorganization completed as of the beginning of the fiscal year 2013, the defense and security reporting unit was divided into two reporting units: the defense and security reporting unit and the research reporting unit. As a result, the goodwill of $7.9 million was reassigned utilizing a relative fair value allocation approach. $7.7 million and $0.2 million were reassigned to the defense and security and research reporting units, respectively. 72 iROBOT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) During the second quarter of 2013, the Company decided to refocus its funded research activities. The Company considered this decision to be an impairment indicator, requiring an interim impairment test within the research reporting unit. The Company performed an impairment assessment using the income approach, and determined that goodwill was impaired. The Company recorded an impairment loss of $0.2 million within general and administrative expenses during the fiscal year ended December 28, 2013. In the fourth quarter of 2015, the Company completed its annual goodwill impairment tests on the goodwill associated with the acquisitions of Evolution Robotics, Inc. and Nekton Research, LLC and did not identify any goodwill impairment. The Company further considered the subsequent event of the signed definitive agreement associated with the sale of the defense and security business unit, and reevaluated its position which incorporated the associated purchase price and reconfirmed that no impairment of the Nekton goodwill exists. Other intangible assets include the value assigned to completed technology, research contracts, and trade names. The estimated useful lives for all of these intangible assets are two to ten years. The intangible assets are being amortized on a straight-line basis, which is consistent with the pattern that the estimated economic benefits of the intangible assets are expected to be utilized. Intangible assets at January 2, 2016 and December 27, 2014 consisted of the following: January 2, 2016 Cost Accumulated Amortization December 27, 2014 Net Cost Accumulated Amortization Impairment Loss Net Completed technology Research contracts Tradename $ 26,900 $ — 100 (In thousands) 11,236 $ 15,664 $ 30,600 $ — — 100 800 — 100 Total $ 27,000 $ 11,336 $ 15,664 $ 31,500 $ 9,691 $ 100 775 10,566 $ 1,788 $ 19,121 — 25 — — 1,788 $ 19,146 As part of the Company's decision during 2013 to refocus its funded research activities, the Company decided to no longer pursue certain research contracts in which completed technology acquired as part of the acquisition of Nekton Research, LLC was utilized. As a result, the Company performed an impairment assessment of the associated intangible asset using the income approach, and recorded an impairment loss of $1.8 million within general and administrative expenses during the fiscal year ended December 28, 2013. Amortization expense related to acquired intangible assets was $3.5 million, $3.5 million, and $3.8 million for the fiscal years ended January 2, 2016, December 27, 2014 and December 28, 2013, respectively. The estimated future amortization expense related to current intangible assets in each of the five succeeding fiscal years is expected to be as follows: 2016 2017 2018 2019 2020 Total $ (In thousands) 3,457 3,457 3,457 2,818 900 $ 14,089 15. Restructuring charges In 2013, the Company incurred restructuring charges of $3.3 million primarily related to a $1.8 million write-down of an intangible asset, costs associated with the closing of its San Luis Obispo, California office and severance-related costs. 73 The activity for the restructuring program is presented below: Balance at beginning of period Charges Utilization Balance at end of period Fiscal Year Ended January 2, 2016 December 27, 2014 December 28, 2013 (In thousands) $ $ — $ — — — $ 675 $ — (675) — $ 197 3,296 (2,818) 675 16. Industry Segment, Geographic Information and Significant Customers The Company operates in two reportable segments, the home robots business unit and the defense and security business unit. The nature of products and types of customers for the two segments vary significantly. As such, the segments are managed separately. F o r m 1 0 - K Home Robots The Company’s home robots business unit offers products to consumers through a network of retail businesses throughout the United States, to various countries through international distributors and retailers, and through the Company’s on-line store. The Company’s home robots business unit includes mobile robots used in the maintenance of households. Defense and Security Robots The Company’s defense and security business unit offers products to the U.S. Department of Defense through a small U.S. government-focused sales force, and to other North American and international entities through small domestic and international sales teams, as well as through North American and international distributors. The Company’s defense and security robots are used to increase warfighters', law enforcement, security forces and first responders' safety and productivity. Other The Company’s other revenue and cost of revenue result from other smaller business units that do not meet the criteria of a reportable segment, as well as certain operational costs included in cost of revenue. 74 iROBOT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) The table below presents segment information about revenue, cost of revenue, gross margin and income before income taxes: Revenue: Home Robots Defense & Security Robots Other Total revenue Cost of revenue: Home Robots Defense & Security Robots Other Total cost of revenue Gross margin: Home Robots Defense & Security Robots Other Total gross margin Research and development Selling and marketing General and administrative Other expense, net Income before income taxes January 2, 2016 Fiscal Year Ended December 27, 2014 (In thousands) December 28, 2013 $ 559,619 $ 55,004 2,155 616,778 274,613 29,737 23,502 327,852 285,006 25,267 (21,347) 288,926 76,071 97,772 54,465 2,353 $ 62,971 $ 507,414 $ 45,502 3,930 556,846 251,095 24,409 23,287 298,791 256,319 21,093 (19,357) 258,055 69,408 86,091 49,439 (708) 52,409 $ 427,853 50,003 9,545 487,401 217,011 24,975 24,261 266,247 210,842 25,028 (14,716) 221,154 63,649 71,529 53,358 (203) 32,415 As of January 2, 2016, goodwill of $41.0 million and purchased intangible assets, net of $15.7 million recorded in conjunction with the acquisition of Evolution Robotics, Inc. in October 2012 are directly associated with the home robots business unit. Goodwill of $7.7 million recorded in conjunction with the acquisition of Nekton in September 2008 is directly associated with the defense and security business unit. Other long lived assets are not directly attributable to individual business segments. Geographic Information For the fiscal years ended January 2, 2016, December 27, 2014 and December 28, 2013, sales to non-U.S. customers accounted for 56.0%, 60.9% and 59.5% of total revenue, respectively. For the fiscal years ended January 2, 2016, December 27, 2014 and December 28, 2013, sales to our home robots distributor in Japan accounted for 13.3%, 17.0%, and 19.8% of total revenue, respectively. Significant Customers For the fiscal years ended January 2, 2016, December 27, 2014 and December 28, 2013, U.S. federal government orders, contracts and subcontracts accounted for 5.1%, 4.3% and 6.2% of total revenue, respectively. For the fiscal years ended January 2, 2016, December 27, 2014 and December 28, 2013 approximately 76.6%, 75.7% and 75.3%, respectively, of our home robot product revenue resulted from sales to 15 customers. For the fiscal years ended January 2, 2016, December 27, 2014 and December 28, 2013, the Company generated an aggregate of 26.0%, 29.8% and 33.2%, respectively, of its total revenue from its home robots distributor in Japan (Sales on Demand Corporation) and a network of affiliated European distributors of the Company's home robots (Robopolis SAS). 75 iROBOT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) 17. Quarterly Information (Unaudited) Fiscal Quarter Ended January 2, 2016 September 26, 2015 June 27, 2015 March 28, 2015 December 27, 2014 September 27, 2014 June 28, 2014 March 29, 2014 (In thousands, except per share amounts) $ 206,420 $ 95,327 19,331 143,609 $ 148,788 $ 69,858 12,793 70,033 7,252 117,961 $ 53,708 4,754 159,342 $ 76,335 9,386 143,497 $ 139,803 $ 67,889 14,607 62,121 8,530 114,204 51,710 5,280 $ 0.65 $ 0.42 $ 0.24 $ 0.16 $ 0.31 $ 0.48 $ 0.28 $ 0.18 Revenue Gross margin Net income Diluted earnings per share During the fourth quarter of 2015, the Company identified immaterial errors to previously reported revenue due to certain customer allowances recorded at an incorrect rate and a reserve calculation which was overstated. The recorded out of period adjustment to revenue resulted in a $1.5 million increase in fourth quarter 2015 income before taxes. Of the $1.5 million adjustment, $0.7 million relates to prior years and $0.8 million relates to the first three quarters of 2015. The adjustment did not have a material impact on the reported financial position or results of operations for the three and twelve months ended January 2, 2016. Additionally, had the errors been recorded in the prior periods to which they relate, the impact would not have been material to the reported financial position or results of operations for those periods. F o r m 1 0 - K 18. Subsequent Event On February 2, 2016, the Company entered into an Asset Purchase Agreement with iRobot Defense Holdings, Inc., a recently-formed portfolio company of Arlington Capital Partners, to sell all of the assets and certain liabilities of the defense and security business unit. The purchase price is up to $45.0 million, of which $30.0 million will be paid at the closing of the transaction, subject to adjustments for working capital and indebtedness as set forth in the purchase agreement, and up to an additional $15.0 million of which may be earned based on 2016 revenue of the defense and security business unit. The transaction is expected to close during the first quarter of 2016. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not Applicable. ITEM 9A. CONTROLS AND PROCEDURES Evaluation of disclosure controls and procedures. As required by Rule 13a-15(b) under the Exchange Act, we have carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer (CEO) and our Chief Financial Officer (CFO), of the effectiveness, as of the end of the period covered by this report, of the design and operation of our “disclosure controls and procedures” as defined in Rule 13a-15(e) promulgated by the SEC under the Exchange Act. Based upon that evaluation, our CEO and our CFO concluded that our disclosure controls and procedures, as of the end of such period, were adequate and effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information was accumulated and communicated to management, as appropriate, to allow timely decisions regarding required disclosure. Management’s Report on Internal Control Over Financial Reporting The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) promulgated under the 76 Exchange Act as a process designed by, or under the supervision of, the Company’s principal executive and principal financial officers and effected by the Company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that: • Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company; • Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and • Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Under the supervision and with the participation of management, including our principal executive and financial officers, we assessed the Company’s internal control over financial reporting as of January 2, 2016, based on criteria for effective internal control over financial reporting established in Internal Control — Integrated Framework (2013), issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, management concluded that the Company maintained effective internal control over financial reporting as of January 2, 2016 based on the specified criteria. The effectiveness of the Company’s internal control over financial reporting as of January 2, 2016 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which is included herein. Changes in Internal Control Over Financial Reporting During the quarter ended January 2, 2016, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 77 F o r m 1 0 - K ITEM 9B. OTHER INFORMATION Our policy governing transactions in our securities by our directors, officers, and employees permits our officers, directors, funds affiliated with our directors, and certain other persons to enter into trading plans complying with Rule 10b5-l under the Securities Exchange Act of 1934, as amended. We have been advised that certain of our officers and directors (including Colin Angle, Chief Executive Officer and Glen D. Weinstein, EVP & Chief Legal Officer) of the Company have entered into trading plans (each a “Plan” and collectively, the “Plans”) covering periods after the date of this Annual Report on Form 10-K in accordance with Rule 10b5-l and our policy governing transactions in our securities. Generally, under these trading plans, the individual relinquishes control over the transactions once the trading plan is put into place. Accordingly, sales under these plans may occur at any time, including possibly before, simultaneously with, or immediately after significant events involving our company. We anticipate that, as permitted by Rule 10b5-l and our policy governing transactions in our securities, some or all of our officers, directors and employees may establish trading plans in the future. We intend to disclose the names of our executive officers and directors who establish a trading plan in compliance with Rule 10b5-l and the requirements of our policy governing transactions in our securities in our future quarterly and annual reports on Form 10-Q and 10-K filed with the Securities and Exchange Commission. We, however, undertake no obligation to update or revise the information provided herein, including for revision or termination of an established trading plan, other than in such quarterly and annual reports. PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE The information required under this item is incorporated herein by reference to the Company’s definitive proxy statement pursuant to Regulation 14A, which proxy statement will be filed with the Securities and Exchange Commission not later than 120 days after the close of the Company’s fiscal year ended January 2, 2016. ITEM 11. EXECUTIVE COMPENSATION The information required under this item is incorporated herein by reference to the Company’s definitive proxy statement pursuant to Regulation 14A, which proxy statement will be filed with the Securities and Exchange Commission not later than 120 days after the close of the Company’s fiscal year ended January 2, 2016. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The information required under this item is incorporated herein by reference to the Company’s definitive proxy statement pursuant to Regulation 14A, which proxy statement will be filed with the Securities and Exchange Commission not later than 120 days after the close of the Company’s fiscal year ended January 2, 2016. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE The information required under this item is incorporated herein by reference to the Company’s definitive proxy statement pursuant to Regulation 14A, which proxy statement will be filed with the Securities and Exchange Commission not later than 120 days after the close of the Company’s fiscal year ended January 2, 2016. ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES The information required under this item is incorporated herein by reference to the Company’s definitive proxy statement pursuant to Regulation 14A, which proxy statement will be filed with the Securities and Exchange Commission not later than 120 days after the close of the Company’s fiscal year ended January 2, 2016. 78 ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES PART IV (a) The following are filed as part of this Annual Report on Form 10-K: 1. Financial Statements The following consolidated financial statements are included in Item 8: Report of Independent Registered Public Accounting Firm Consolidated Balance Sheets at January 2, 2016 and December 27, 2014 Consolidated Statements of Income for the Years ended January 2, 2016, December 27, 2014 and December 28, 2013 Consolidated Statements of Comprehensive Income for the Years ended January 2, 2016, December 27, 2014 and December 28, 2013 Consolidated Statements of Stockholders’ Equity for the Years ended January 2, 2016, December 27, 2014 and December 28, 2013 Consolidated Statements of Cash Flows for the Years ended January 2, 2016, December 27, 2014 and December 28, 2013 Notes to Consolidated Financial Statements 2. Financial Statement Schedules All other schedules have been omitted since the required information is not present, or not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements or the Notes thereto. 3. Exhibits — See item 15(b) of this report below (b) Exhibits The following exhibits are filed as part of and incorporated by reference into this Annual Report: 79 F o r m 1 0 - K Exhibit Number 3.1(1) 3.2 4.1(1) 10.1†(1) 10.2† 10.3† 10.4†(1) 10.5† 10.6#(1) 10.7† 10.8* 10.9† 10.10† 10.11† 10.12# 10.13 10.14 10.15# 10.16† 10.17† 10.18 21.1* 23.1* 24.1 31.1* 31.2* 32.1* Description Form of Second Amended and Restated Certificate of Incorporation of the Registrant dated November 15, 2005 Amended and Restated By-laws of the Registrant (filed as Exhibit 3.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 28, 2014 and incorporated by reference herein) Specimen Stock Certificate for shares of the Registrant’s Common Stock Form of Indemnification Agreement between the Registrant and its Directors and Executive Officers Amended and Restated 2004 Stock Option and Incentive Plan and forms of agreements thereunder (filed as Exhibit 10.4 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2007 and incorporated by reference herein) Form of Executive Agreement between the Registrant and certain executive officers of the Registrant, as amended (filed as Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended October 2, 2010 and incorporated by reference herein) Employment Agreement between the Registrant and Colin Angle, dated as of January 1, 1997 2005 Stock Option and Incentive Plan, as amended, and forms of agreements thereunder (filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on June 2, 2009 and incorporated by reference herein) Manufacturing and Services Agreement between the Registrant and Gem City Engineering Corporation, dated as of July 27, 2004 Non-Employee Directors’ Deferred Compensation Program, as amended (filed as Exhibit 10.19 to the Registrant’s Annual Report on Form 10-K for the year ended December 29, 2007 and incorporated by reference herein) Lease Agreement between the Registrant and Boston Properties Limited Partnership for premises located at 4- 18 Crosby Drive, Bedford, Massachusetts, dated as of February 22, 2007 (as amended to date) Senior Executive Incentive Compensation Plan (filed as Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended July 2, 2011 and incorporated by reference herein) Form of Deferred Stock Award Agreement under the 2005 Stock Option and Incentive Plan (filed as Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 28, 2008 and incorporated by reference herein) Form of Restricted Stock Award Agreement under the 2005 Stock Option and Incentive Plan (filed as Exhibit 10.4 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 28, 2008 and incorporated by reference herein) Manufacturing Services Agreement between the Registrant and Jabil Circuit, Inc., dated as of March 18, 2010 (filed as Exhibit 10.1 to Amendment No. 1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended April 3, 2010 and incorporated by reference herein) Amended and Restated Credit Agreement between the Registrant and Bank of America N.A. dated December 20, 2013 (filed as Exhibit 10.15 to the Registrant's Annual Report on Form 10-K for the year ended December 28, 2013 and incorporated by reference herein) Amended and Restated Reimbursement Agreement between the Registrant and Bank of America N.A. dated December 20, 2013 (filed as Exhibit 10.16 to the Registrant's Annual Report on Form 10-K for the year ended December 28, 2013 and incorporated by reference herein) Manufacturing Services Agreement between the Registrant and Kin Yat Industrial Company Limited, dated as of January 22, 2014 (filed as Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 29, 2014 and incorporated by reference herein) Evolution Robotics, Inc. 2007 Stock Plan and forms of agreements thereunder 2015 Stock Option and Incentive Plan and forms of agreements thereunder (filed as Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 27, 2015 and incorporated by reference herein) Separation Agreement by and between the Registrant and Paolo Pirjanian, dated as of July 2, 2015 (filed as Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 26, 2015 and incorporated by reference herein) Subsidiaries of the Registrant Consent of PricewaterhouseCoopers LLP Power of Attorney (incorporated by reference to the signature page of this report on Form 10-K) Certification Pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934 Certification Pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934 Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 80 Exhibit Number 101* Description The following materials from the Registrant’s Annual Report on Form 10-K for the year ended January 2, 2016 formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Stockholders' Equity, (v) the Consolidated Statements of Cash Flows, and (vi) related notes to these financial statements † # Indicates a management contract or any compensatory plan, contract or arrangement. Confidential treatment requested for portions of this document. (1) Incorporated by reference herein to the exhibits to the Company’s Registration Statement on Form S-1 (File No. 333- 126907) * Filed herewith 81 Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized. SIGNATURES iROBOT CORPORATION By: /s/ Colin M. Angle Colin M. Angle Chairman of the Board, Chief Executive Officer and Director Date: February 19, 2016 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Colin M. Angle and Alison Dean, jointly and severally, his or her attorney-in-fact, with the power of substitution, for him or her in any and all capacities, to sign any amendments to this Annual Report on Form 10-K and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his or her substitute or substitutes, may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Annual Report on Form 10-K has been signed by the following persons in the capacities indicated on February 19, 2016. F o r m 1 0 - K Signature Title(s) /s/ COLIN M. ANGLE Colin M. Angle /s/ ALISON DEAN Alison Dean /s/ RONALD CHWANG Ronald Chwang /s/ MICHELLE V. STACY Michelle V. Stacy /s/ GAIL DEEGAN Gail Deegan /s/ ANDREA GEISSER Andrea Geisser Chairman of the Board, Chief Executive Officer and Director (Principal Executive Officer) Executive Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) Director Director Director Director 82 /s/ GEORGE C. MCNAMEE George C. McNamee /s/ DEBORAH G. ELLINGER Deborah G. Ellinger /s/ MOHAMAD ALI Mohamad Ali Director Director Director 83 Exhibit Number 3.1(1) 3.2 4.1(1) 10.1†(1) 10.2† 10.3† 10.4†(1) 10.5† 10.6#(1) 10.7† 10.8* 10.9† 10.10† 10.11† 10.12# 10.13 10.14 10.15# 10.16† 10.17† 10.18 21.1* 23.1* 24.1 31.1* EXHIBIT INDEX Description Form of Second Amended and Restated Certificate of Incorporation of the Registrant dated November 15, 2005 Amended and Restated By-laws of the Registrant (filed as Exhibit 3.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 28, 2014 and incorporated by reference herein) Specimen Stock Certificate for shares of the Registrant’s Common Stock Form of Indemnification Agreement between the Registrant and its Directors and Executive Officers Amended and Restated 2004 Stock Option and Incentive Plan and forms of agreements thereunder (filed as Exhibit 10.4 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2007 and incorporated by reference herein) Form of Executive Agreement between the Registrant and certain executive officers of the Registrant, as amended (filed as Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended October 2, 2010 and incorporated by reference herein) Employment Agreement between the Registrant and Colin Angle, dated as of January 1, 1997 2005 Stock Option and Incentive Plan, as amended, and forms of agreements thereunder (filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on June 2, 2009 and incorporated by reference herein) Manufacturing and Services Agreement between the Registrant and Gem City Engineering Corporation, dated as of July 27, 2004 Non-Employee Directors’ Deferred Compensation Program, as amended (filed as Exhibit 10.19 to the Registrant’s Annual Report on Form 10-K for the year ended December 29, 2007 and incorporated by reference herein) Lease Agreement between the Registrant and Boston Properties Limited Partnership for premises located at 4- 18 Crosby Drive, Bedford, Massachusetts, dated as of February 22, 2007 (as amended to date) Senior Executive Incentive Compensation Plan (filed as Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended July 2, 2011 and incorporated by reference herein) Form of Deferred Stock Award Agreement under the 2005 Stock Option and Incentive Plan (filed as Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 28, 2008 and incorporated by reference herein) Form of Restricted Stock Award Agreement under the 2005 Stock Option and Incentive Plan (filed as Exhibit 10.4 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 28, 2008 and incorporated by reference herein) Manufacturing Services Agreement between the Registrant and Jabil Circuit, Inc., dated as of March 18, 2010 (filed as Exhibit 10.1 to Amendment No. 1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended April 3, 2010 and incorporated by reference herein) Amended and Restated Credit Agreement between the Registrant and Bank of America N.A. dated December 20, 2013 (filed as Exhibit 10.15 to the Registrant's Annual Report on Form 10-K for the year ended December 28, 2013 and incorporated by reference herein) Amended and Restated Reimbursement Agreement between the Registrant and Bank of America N.A. dated December 20, 2013 (filed as Exhibit 10.16 to the Registrant's Annual Report on Form 10-K for the year ended December 28, 2013 and incorporated by reference herein) Manufacturing Services Agreement between the Registrant and Kin Yat Industrial Company Limited, dated as of January 22, 2014 (filed as Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 29, 2014 and incorporated by reference herein) Evolution Robotics, Inc. 2007 Stock Plan and forms of agreements thereunder 2015 Stock Option and Incentive Plan and forms of agreements thereunder (filed as Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 27, 2015 and incorporated by reference herein) Separation Agreement by and between the Registrant and Paolo Pirjanian, dated as of July 2, 2015 (filed as Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 26, 2015 and incorporated by reference herein) Subsidiaries of the Registrant Consent of PricewaterhouseCoopers LLP Power of Attorney (incorporated by reference to the signature page of this report on Form 10-K) Certification Pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934 84 31.2* 32.1* 101* † # Certification Pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934 Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 The following materials from the Registrant’s Annual Report on Form 10-K for the year ended January 2, 2016 formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Stockholders' Equity, (v) the Consolidated Statements of Cash Flows, and (vi) related notes to these financial statements Indicates a management contract or any compensatory plan, contract or arrangement. Confidential treatment requested for portions of this document. (1) Incorporated by reference herein to the exhibits to the Company’s Registration Statement on Form S-1 (File No. 333- 126907) * Filed herewith 85  The graph below matches the cumulative 5-Year total return of holders of iRobot Corporation's common stock with the cumulative total returns of the NASDAQ Composite index and S&P Technology Hardware & Equipment Industry Group. The graph assumes that the value of the investment in our common stock, in each index, and in the peer group (including reinvestment of dividends) was $100 on 12/31/2010 and tracks it through 12/31/2015. COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN* Among iRobot Corporation, the NASDAQ Composite Index, and S&P Technology Hardware & Equipment Industry Group $250 $200 $150 $100 $50 $0 12/10 3/11 6/11 9/11 12/11 3/12 6/12 9/12 12/12 3/13 6/13 9/13 12/13 3/14 6/14 9/14 12/14 3/15 6/15 9/15 12/15 iRobot Corporation NASDAQ Composite S&P Technology Hardware & Equipment Industry Group *$100 invested on 12/31/10 in stock or index, including reinvestment of dividends. Fiscal year ending December 31. Copyright© 2016 S&P, a division of McGraw Hill Financial. All rights reserved. iRobot Corporation NASDAQ Composite S&P Technology Hardware & Equipment Industry Group 12/10 100.00 100.00 100.00 1/11 108.52 102.13 105.48 2/11 115.43 105.16 107.11 3/11 132.19 104.83 103.21 4/11 142.36 108.40 105.00 5/11 135.05 107.04 103.66 6/11 141.84 104.78 99.22 7/11 140.70 104.64 102.77 9/11 101.13 92.10 92.14 10/12 72.15 115.04 123.07 11/13 133.48 161.23 138.77 12/14 139.55 188.78 185.22 10/11 136.09 102.12 102.82 11/12 75.72 116.65 125.19 12/13 139.75 166.19 142.46 1/15 126.81 184.88 183.04 11/11 127.61 100.21 100.28 12/12 75.32 116.92 120.65 1/14 142.04 162.97 134.99 2/15 132.03 198.10 200.71 12/11 119.98 100.53 101.31 1/13 91.96 121.98 114.22 2/14 168.49 171.76 140.47 3/15 131.15 194.95 191.16 1/12 132.80 107.84 112.24 2/13 86.17 122.74 113.51 3/14 164.99 167.53 144.92 4/15 130.31 197.04 193.40 2/12 102.57 113.87 124.72 3/13 103.14 127.54 115.91 4/14 134.65 164.08 151.46 5/15 128.42 202.60 199.22 3/12 109.57 118.78 134.66 4/13 116.92 130.45 113.53 5/14 142.00 169.39 159.96 6/15 128.14 199.00 188.87 4/12 94.90 117.11 130.34 5/13 135.81 135.25 120.50 6/14 164.59 176.10 162.96 7/15 123.75 204.43 187.39 5/12 85.13 109.19 121.21 6/13 159.85 133.47 113.40 7/14 130.10 174.58 165.06 8/15 117.77 190.33 174.20 6/12 89.03 112.95 122.26 7/13 140.51 142.27 123.93 8/14 130.35 182.66 173.86 9/15 117.12 184.09 170.27 7/12 91.48 113.57 125.94 8/13 131.31 141.49 125.69 9/14 122.39 179.04 170.30 10/15 120.62 201.19 184.33 8/12 101.25 118.56 135.78 9/13 151.31 149.35 125.46 10/14 143.57 184.18 177.82 11/15 133.00 203.79 179.85 8/11 111.82 98.64 96.12 9/12 91.48 120.49 136.85 10/13 136.13 155.49 132.67 11/14 146.38 191.05 191.49 12/15 142.28 199.95 167.76 The stock price performance included in this graph is not necessarily indicative of future stock price performance. S&P Technology Hardware & Equipment Industry Group Amphenol Corporation Apple Inc. Cisco Systems, Inc. Corning Incorporated Emc Corporation F5 Networks, Inc. Flir Systems, Inc. Harris Corporation Hewlett Packard Enterprise Company Hp Inc. Juniper Networks, Inc. Motorola Solutions, Inc. Netapp, Inc. Qualcomm Incorporated Sandisk Corporation Seagate Technology Public Limited Company Te Connectivity Ltd. Western Digital Corporation Michael Bell Director Dr. Ronald Chwang Director Gail Deegan Director, Audit Committee Chair Deborah G. Ellinger Lead Independent Director, Nominating and Corporate Governance Committee Chair Andrea Geisser Director, Compensation and Talent Committee Chair George C. McNamee Director Michelle Stacy Director Executive Team Colin M. Angle Chief Executive Officer Alison Dean Executive Vice President, Chief Financial Officer and Treasurer Russell Campanello Executive Vice President, Human Resources and Corporate Communications Glen D. Weinstein Executive Vice President, Chief Legal Officer Christian Cerda Executive Vice President and General Manager, Home Robots Business Unit Corporate Office 8 Crosby Drive Bedford, Massachusetts 01730 Phone: 781.430.3000 Fax: 781.430.3001 Transfer Agent Computershare Trust Company, Inc. 350 Indiana Street Suite 750 Golden, Colorado 80401 Phone: 303.262.0600 Legal Counsel Goodwin Procter LLP Exchange Place 53 State Street Boston, Massachusetts 02109 Phone: 617.570.1000 Independent Registered Public Accounting Firm PricewaterhouseCoopers LLP 101 Seaport Boulevard Boston, Massachusetts 02210 Phone: 617.530.5000 Common Stock Information Our common stock is traded on the Nasdaq National Market under the symbol IRBT. Investor Information Elise P. Caffrey SVP, Investor Relations A copy of our financial reports, stock quotes, news releases, SEC filings, as well as information on our products is available in the Investor Relations section of www.irobot.com Board Members Colin M. Angle Co-founder, Chairman of the Board and Chief Executive Officer Mohamad Ali Director, Strategy and Finance Committee Chair iRobot Mission Empowering People To Do More Corporate Headquarters 8 Crosby Drive Bedford, MA 01730 USA Phone: 781.430.3000 Fax: 781.430.3001 www.irobot.com info@irobot.com 

Continue reading text version or see original annual report in PDF format above