IROBOT Regina Ruggieri

May 3, 2015

EXECUTIVE SUMMARY

It is anticipated that iRobot, through the execution of several recommended strategies, willincrease its total revenue to $606M in 2015, from $477M in 2014 and reduce its days ininventory from 53 in 2014 to 50 in 2015 while maintaining cost of sales at 54% and its cashat 33% of sales. Achieving these goals will result in a $38M contribution to retainedearnings by the end of 2015.

Several options are evaluated for how to best use the expected $38M surplus. Of these, theprioritized recommended use of funds is for new product development, specifically thenext general of the Scooba® floor cleaning series. The new product is estimated to deliver anet value of $58.7M to iRobot within the first 5 years after its launch.

New Product development is critical for iRobot to maintain its competitive position in thehome robot market, in response to increased competitive pressure and changing consumerdemand, and several studies have statistically correlated new product innovation withthe increased market capitalization of the firm.

Forecasted TSR (2015-2016) for iRobot is expected to exceed the minimum requiredreturn, if the successful development and commercialization of the new Scooba® productoccurs by Q1 2016.

INCOME STATEMENT AND BALANCE SHEETKEY GOALS AND STRATEGIES FOR 2015 TO GENERATE SURPLUS FUNDS

iRobot will focus on achieving the following key goals associated with its Income Statement and Balance Sheet:

December 27,

2014

2015

Forecast

ASSETS

Cash as a % of sales 33% 33%

Avg Collection Period (days)* 47 30

Days Inventory* 53 50

LIABILITIES & EQUITY

Days Payable 58 68

in $M,

except Earnings per Share

December 27,

2014

2015

Forecast

Total Revenue* $557 $613

Cost of Revenue $299 $330

Gross Margin $258 $283

R&D Expense* $69 $79

Selling & Marketing Expense* $86 $98

Net Income $38 $38

Earnings per Share $1.28 $1.28

Income Statement

Balance Sheet

*Prioritized Goals Strategies

Increase R&D Expense as a %

of Sales to 13% (from 12.5% in

2014)

Increase investment in research and

development, as % of sales, in response

to anticipate customer needs and

emergence of new competition.

Increase investment in marketing of

current home robots to protect against

new market entrants (Panasonic) and

facilitate revenue growth.

Increase Selling & Marketing

Expense as a % of Sales to

16% (from 15% in 2014)

Reduce days in inventory from

53 in 2014 to 50 in 2015

Leverage manufacturing flexibility to

accurately manage inventory

Revenue sales growth of10%,

a decrease from 2014 (14%)

due to increased competition

Mostly organic growth, enabled by

increased marketing and focus on

strategic pricing

Reduce average customer

collection period from 47 to

30 days

Revise terms and conditions of sales

Increase Days Payable to

suppliers from 58 days to 68

days.

Integrative negotiations with suppliers;

offer them additional partnership

opportunities.

STATEMENT OF CASH FLOW ANALYSIS:KEY CASH FLOW GOALS & STRATEGIES TO GENERATE FUNDS SURPLUS

Key G o a l s S t r a t e g i e s

Maintain level of PPE

investment at 6% of sales,

while organically growing

sales.

Raise funds via organic sales growth coupled with

strategic pricing. The additional purchases of

equipment purchases will facilitate new product

development, a key strategic objective for iRobot.

Reduce Average Collection

Period from Customers to 30

days (from 40 days in 2014)

Changing terms and conditions of sales to customers.

Increase Days Payable to

Suppliers to 68 days (from

58 days in 2014).

Renegotiate contracts with vendors to increase days

payable.

Inventory: $3M cash

inflow

Leveraging outsourced manufacturing to result in

improved flexibility and responsiveness to customer

demand.

C a s h F l o w E f f e c t s

Accounts Receivable:

$20.7M cash outflow

Reduce Days in Inventory to

50 (from 55 in 2014)

Accounts Payable: $1M

cash inflow

Property, Plant &

Equipment: $5.5M cash

outflow

$ 3 8 M c o n t r i b u t i o n t o Re t a i n e d E a r n i n g s i s f o r e c a s t e d

Note: this goal comes with risk of hurting supplier relationships, however, alternative ways to keep supplier relationships healthy are being evaluated and include increased purchases and co-licensing agreements. Negotiations are underway.

OPTION EVALUATION: HOW COULD IROBOT USE THE EXPECTED $38M SURPLUS IN 2016?

Benefit is unlikely to outweigh foregone benefits of investing in other ways.

Option Costs / Risks

Decrease future interest expenses

Reduce product development timelines and access new innovation sooner

Holding emergency cash is not necessary, due to contract manufacturing and lower capital expenditure

Pay down debt

Hold as emergency cash

Appropriate for acquisition

Use funds for R&D

Use funds for Marketing

Breakthrough innovations will improve competitive position

Enable sales of consumer product portfolio; strengthen competitive position

Liquidity; improved responsiveness to industry changes

Potential Benefit Rating

Negligible

Longer-term return on investment; potential for technical or commercial failure

Enable sales of consumer product portfolio

Benefits > costs Costs = benefits Costs < benefitsRating

Key

OPTION EVALUATION: HOW COULD IROBOT USE THE EXPECTED $38M SURPLUS IN 2016?

Increasingly more difficult to measure ad effectiveness, return.

Option Costs / Risks

Improve sales of household robots

Additional source of income

May not directly improve sales

Use funds for Advertising

Use to refine sales channels (e-commerce)

Make External Investments

Pay Dividends

Buy back stock

Please shareholders; attract new shareholders to stock

Return value to shareholders

Will enable an improved e-commerce platform

Potential Benefit Rating

Against long-term objectives to use extra earnings for internal business development

Motivation for buy-backs is often questioned by analysts

Returns on investments are not guaranteed; may be less than foregone benefits of internal fund use

Benefits > costs Costs = benefits Costs < benefitsRating

Key

WHAT IF IROBOT SHOULD REQUIRE NEW FUNDS IN THE FUTURE?

iRobot currently has no material cash commitments, and is expected to have a surplus of funds by end of 2015

Recurring trade payables, expense accruals and operating leases are to be funded through working capital, funds provided by operating activities and existing working capital line of credit.

If iRobot should need additional funds in the future, these funds may be raised in several ways that have been ranked in terms of appropriateness for the company:

1. New product commercialization / strategic pricing

2. Reducing % of revenue held as cash

3. Reducing Inventory Days

4. Reducing average customer collection period

5. Increasing short term debt

Existing Line of Credit:• Maximum credit: $5M

• Current credit used: $3.5M

• Interest: 1.5% p.a.

• Coverage ration >4

(assumed)

PRIORITIZED OPTIONS FOR RAISING FUTURE FUNDS: VIABLE METHODS AVAILABLE TO IROBOT

Option Comment

New Product

Commercialization

• New product launches will add additional revenue streams

• Stock price increases are statistically correlated with new product commercialization 1, 2, 3

Strategic Pricing • Cursory competitive analysis has revealed that iRobot products are priced below the median

among competitors, although brand and innovative quality is superior. There is room to implement

strategic pricing, which is the most impactful profit lever.

Hold less cash • iRobot is currently holding 33% of its sales as cash; given 2015 sales growth, this resulted in a

$19M outflow of cash.

• Given ongoing focus and improvements in managing working capital, coupled with its flexible

manufacturing and distribution systems, iRobot does not need to retain this much in cash

• If iRobot were to hold 31% of revenue as cash in 2015, this would release $15M in cash.

Reduce level of inventory • Each 2 day reduction in inventory days will result in $1.8M cash inflow

Reduce Average Account

Collection Period

• For each day of reduction, there is a $1.7M inflow of cash

• A shortened collection period may turn some consumers away

Increase short term debt • Depends on interest rate; viable but not preferred for iRobot

Inte

rnal

Equity

Ass

et M

ana

gem

ent

Debt

Takeaway: Second to new product commercialization and strategic pricing initiatives, iRobot’s next best methods for raising funds is to hold less cash, which would generate the most significant cash flow, followed by other asset management options.

Taking on additional short term debt is viable, but only after other options have been exhausted, due to the uncertainty involved with interest rates and terms.

Hig

her

pri

ority

$38M EXPECTED SURPLUS, RECOMMENDED TO BE USED FOR NEW PRODUCT INNOVATION

Anticipated outcome: $38.3M contribution to retained earnings by end of 2015

By executing the aforementioned strategies, iRobot will achieve the following:

Increase total revenue to $606M in 2015, from $477M in 2014

Reduced days in inventory to 50 in 2015, from 53 in 2014, through flexible inventory management per contract manufacturing

Maintained current cost of sales at 54% and maintained 2014 level of liquidity by holding 33% of sales as cash and cash equivalents

$7.7M

$15.3M

$15.3M Internal R&D

Acquire new

technology

Strategic

marketing

R e c o m m e n d e d U s e o f S u r p l u s F u n d s

In the face of increasing competition, including sizeable new entrants such as Panasonic and a multitude of

low-cost providers in China now in the home robotics industry, new product innovation is critical for iRobot’s

long-term success. Therefore, iRobot should invest the anticipate surplus of funds in the development or

acquisition of new technologies.

$30.6M (80%)

of forecasted

surplus should be

used for new

product

innovation,

including internal

development and

external scouting

and acquisition

of new

technologies.

K e y

T a k e -

a w a y

CAPITAL BUDGETING ANALYSIS: NEW PRODUCT DEVELOPMENT: “SCOOBA® DOOBA”

iRobot has a unique opportunity to apply new, innovative technology to improve the performance of its current home cleaning robots.

New product concept is called Scooba® Dooba and is built around a revolutionary new shape that can clean more surfaces than the Rulo®.

“The Rulo triangle shape was developed

after years of R&D into vacuum

cleaners,” a Panasonic spokeswoman

said via email. “It is the first in the

industry to be equipped with a fully

fledged v-shaped brush.” 1

Ra

tion

ale

Opp

ort

un

ity

Successful

commercialization

of new product is

estimated to deliver

a net value of

$58.7M to iRobot

within the first 5

years after it is

launched.

iRobot faces new competitive pressure from Panasonic Corp• Panasonic launched MC-RS1 Rulo in Jan 2015, which holds distinct cleaning

advantage over the circular Roomba line

Home cleaning robot industry is highly competitiveiRobot depends on new product innovation to withstand competition

Scooba® Dooba

iRobot

$(30)

$(20)

$(10)

$-

$10

$20

$30

$40

$50

$60

$70

$80

2015 2016 2017 2018 2019 2020

Forecasted Project Cash Flows

Operating Cash Flows Total Balance Sheet Changes Net Cash Flows

CAPITAL BUDGETING ANALYSISKEY ASSUMPTIONS AND RISKS OF THE MODEL

Key Assumptions Risks

• 125K unit sales, YR1

• Annual sales growth peak

7% in YR2

• $850/unit list price

• No sunk costs

• No R&D expense required,

as patent to be purchased

from 3rd party

• 2% sales cannibalization

• Potential opportunity costs

valued at $1M/yr

Mitigation

• If sales volume <58K units

in YR1, then NPV will be

negative

• If market doesn’t accept

$850 list, and list is

lowered to $388/unit, then

NPV will be negative

• If sales cannibalization

exceeds 10%, then NPV

will be negative

• Conduct customer

interviews (VOC) &

execute strategic marketing

communications

• Conduct pricing focus

groups, competitive

analyses, implement an

effective go-to-market

strategy

• Conduct customer

interviews (VOC) and focus

groups

Scooba® Dooba

iRobot

New product development risks can be significantly reduced through specific strategies, increasing the likelihood that the project will add the anticipate value to iRobot.

STRATEGIC PRICINGRATIONALE FOR THE $850 SUGGESTED LIST PRICE

Scooba® Dooba

iRobot

$816 Base Value*

*est. based on market data

$800 Competition

List price

Average

$808

Est. Value of “Best Alternative” (US) Quantify “value-add” features Add together

Additional FeaturesValue

Added USD

Aesthetic appeal 1.51% $12.20

Ability to reach more corners 2.35% $18.99

Improved pivoting and turn radius 1.33% $10.75

TOTAL VALUE ADDED $41.94

Note: Value quantified as %,

based on results from consumer

focus group product evaluation

Scooba® Dooba unit

List Price

$808 + $42 =

$850

NEW PRODUCT INNOVATION IMPROVES COMPANY STOCK PRICE

Studies have found that new product innovation, whether through internal development or external acquisition, improves company stock price

“Total market returns to an innovation product are $643M, more than 13 times the $49M average innovation event return”• Smaller firms consistently receive

larger returns than larger firms• Announcement of commercialization

activities generates the highest return, since they get the most attention from the press.

• Returns of firms announcing an innovation have a negative impact on competitors’ returns

• Initial market return is first measurable 4.7 years ahead of launch of new product

Source: A. Sood & G. Tellis (2009) Do Innovations Really Pay Off? Marketing Science. 28 (3): 442-456

“Firm market cap is typically influenced by commercialization success of new technologies”

Source: K.B. Saji & S.S. Mishra (2011) Antecedents and consequences of technology acquisition intent: empirical evidence from global high-tech industry. Journal of Strategic Marketing 20 (2): 165-183.

“Early mover acquirers who realize superior stock returns are those that conduct acquisitions in related industries, during industry expansionary phases and finance their acquisition…. with cash”• Although returns of acquiring companies are typically negative,

early-movers (the first firms to acquire, ahead of wave of acquisitions within an industry) experience larger combined returns.

Source: Carrow, Heron, Saxton (2004) Do early birds get the return?: An empiracleinvestigation of early-move advantages in acquisitions. Strategic Management Journal. 25: 563-585..

Key Takeaway: Several empirical studies have statistically correlated new product innovation with

increased company stock performance. Thus, the recommended use of $38M surplus for new product

development or acquisition will improve iRobot’s stock performance and increase its market value.

PROJECTED IROBOT STOCK-BASED COMPENSATION: 2015 AND BEYOND

• Stock options are granted as compensation to employees across most levels of iRobot

• Terms and conditions of granted options are determined by a committee within the board of directors.

• The company anticipates future stock-based compensation expenses as follows:

Option iRobot’s General Terms & Conditions

Exercise price Based on NASDAQ closing price on issue date

Vesting Period 1-5 years

Expiration 7-10 years from issue date

Value Fair value estimated using Black-Scholes option-

pricing model with assumptions for options granted

in FY2014:

• Risk-free rate: 1.65%-1.69%

• Expected life: 3.91-4.00 years

• Expected Volatility: 52.8%-56.0%

$2.9

$2.2

$1.1

$0.4

$-

$0.5

$1.0

$1.5

$2.0

$2.5

$3.0

$3.5

2015 2016 2017 2018

$M

Forecasted Stock-Based Compensation Expenses

WHAT MAKES IROBOT STOCK PRICE CHANGE?

IRBT share price is very sensitive to earnings reports, as is typical for the tech sector!

It is not sensitive to other company news (share repurchase program).

3/19/15: Stock price unchanged following announcement of share repurchase program

by iRobot Corporation under which, the company will repurchase up to $50 million worth

of its shares. The program will commence in May, 2015.1

2/5/15: Stock price dropped to lowest price in the past year on: -8.6%

drop to$29.20/share directly followed Q4 and full-year 2014 financial

results and modest Q1 forecasts which were below analyst expectations3,4

4/22/14: Stock price soared to $40 (close to

52-week high of $42) following release of Q1

results that exceeded expectations2

IROBOT’S VOLATILITY IS ABOVE-AVERAGE WHEN EARNINGS REPORTS ARE RELEASED

Technology stocks are among the most volatile:

Average iRBT

price change is

12.09% on

earnings report

days, more

volatile than

the average

technology

stock.

IROBOT STOCK PRICE EVALUATIONRELATIVE TO STAKEHOLDER COMPANIES

Com

petito

rsIn

flue

nci

ng F

act

ors

Lockheed Martin

• Earnings reports

• New government contracts

• Successful tests for new innovative

technology for US Navy

Company Stock Ticker

Starting Share

Price

(2/1/ 2015)

Current Share

Price

(5/1/15)

Change in

Equity

Quarterly

dividends HPR EAR

iRobot IRBT $31.55 $32.39 $84.0 not paid 2.66% 11%

Lockheed Martin LMT $187.94 $189.00 $106.0 $1.50 0.56% 2%

Helen of Troy Corp. HELE $76.11 $89.11 $1,300.0 not paid 17.08% 88%

Jarden JAH $48.74 $51.61 $287.0 not paid 5.83% 25%

Panasonic PCRFY $11.43 $14.32 $289.0 not paid 25.28% 146%

Electrolux AB ELUXY $61.43 $59.69 -$174.0 not paid -2.83% -11%

Helen of Troy Corporation

• 4/28/15 increase correlated with Q4,

FY14 Earnings release: Revenue

+21%

iRobot Suppliers

Kin Yat Industrial Co. Ltd

Jetta Company Ltd

Gem City Engineering Corp.

Contract manufacturers in

China and US; all are

privately owned.

Jarden

• 3/11/15: New home canning product

release correlated with rise in stock

price

Panasonic

• 4/29/15 earnings call reporting

favorable FY14 results is correlated

with jump in stock price

• 4/18/15: announcement of multi-year

alliance for new product innovation

correlated with stock price increase

Electrolux AB

• 4/8/15: Fall in price correlated with

sudden departure of US division head

Long Positions

ELUXY anticipated to decrease due to likelihood of negative product revenue cash flows in Q1, a

result of sustained period of new product innovation and increased competition.

SHORT POSITION ON ELECTROLUX AB (ELUXY)

3 month Holding

Period Return

Annualized Return

37.21%

254%

100 Shares at $61.43

Assets Liabilities & Equity

$6,143.00 (Proceeds from Sale) $6,143.00 (Liability)

$3,071.50 (Margin Deposit) 3071.50 (Equity; 50% Margin)

Total $9,214.50 $9,214.50

Balance Sheet on 2/2/15

100 Shares at $50.00

Assets Liabilities & Equity

$6,143 (Proceeds from Sale) $5,000 (Liability)

$3,071.50 (Margin Deposit) $4,214.50 (Equity; 50% Margin)

Total $9,214.50 $9,214.50

Balance Sheet on 5/2/15

ELUXY is not expected to pay dividends during the holding period, per Yahoo Finance

Forecasted TSR > Min Required TSR

IRBT FORECASTED TOTAL SHAREHOLDER RETURN (5/1/15-5/1/16) IS LIKELY TO EXCEED REQUIRED RETURN

Forecasted Total Shareholder Return (TSR)

Influencing Factors

Stock price is expected to increase in 2016, given a new product launch scheduled for Q1. Currently Scooba® Dooba concept is showing a high probability of technical and commercial success, and project schedule calls for launch in Jan, 2016.

iRobot will continue active scouting of new technology, and positive press releases relating to progression or acquisition of new technology will prompt demand for IRBT stock, causing price to increase.

5/1/2015 5/1/2016 TSR

$32.39 $42.00 29.67%

Potential Stock Price and Resultant TSR (5/1/16):

$32.00 $33.00 $34.00 $35.00 $36.00 $37.00 $38.00 $39.00 $40.00 $41.00 $42.00 $43.00

-1.20% 1.88% 4.97% 8.06% 11.15% 14.23% 17.32% 20.41% 23.49% 26.58% 29.67% 32.76%

Scenario Model

Different stock price increases will yield various shareholder total returns. Potential TSRs are modeled below:

Estimated Minimum Required TSR:

rf 1.36%

Beta 1.9

Rm 14.75%

CAPM 26.80%

IRBT forecasted TSR will exceed minimum required TSR, if stock price increases to $42.00 or higher as of May 1, 2016. With proper execution of strategies, this price is considered very attainable.

Takeaway

CONCLUSIONS

1. Increase R&D Expense as a % of

Sales to 13% (from 12.5% in 2014)

2. Increase Selling & Marketing

Expense as a % of Sales to 16%

(from 15% in 2014)

3. Reduce days in inventory from 53

in 2014 to 50 in 2015

4. Reduce average customer

collection period from 47 to 30

days

5. Increase Days Payable to suppliers

from 58 days to 68 days.

6. Maintain level of PPE investment

at 6% of sales, while organically

growing sales.

“The market for robots is highly competitive,

rapidly evolving and subject to changing

technologies, shifting customer needs and

expectations and the

likely increased introduction of new products. Our

ability to remain competitive will depend to a

great extent upon our ongoing performance in the

areas of product development and customer

support.”

-iRobot 2014 10K

$38M contribution to retained earnings by

the end of 2015.

Use surplus funds for new product

development and additional marketing

support, which will increase company stock

price and likely result in TSR above required

TSR.

Key Goals:

Expected Result:

Recommendation:

APPENDIX

A NOTE ON IROBOT CAPITAL STRUCTURE

iRobot does not have long term debt in the form of bonds.

Long term debt is in the form of leases and legal obligations only.

Therefore, iRobot is considered to be an all equity financed company.

iRobot cost of capital is estimated as follows:

rf 1.36%

Beta 1.9

Rm 14.75%

CAPM 26.80%

Estimated cost of debt and weight 0% 0%

Estimated cost of equity and weight 27% 100%

Tax Rate 32%

Estimated WACC 27%

WeightCost