May 04, 2015      

Hedge fund and activist investor Red Mountain Capital Partners wants iRobot Corp. to withdraw from all markets except stand-alone home robots. According to government documents, Red Mountain bought 5.1 percent of iRobot’s outstanding common stock in April, and it wants the company out of defense, security, and telepresence products.

Red Mountain, which declined to comment on its strategies, also wants the company to restructure it leadership and financial strategies, according to Securities and Exchange Commission schedule 13D document. Specifically, Red Mountain is demanding that the chairman and chief-executive offices be split.

According to Red Mountain filings, iRobot is also under-leveraged and lacks a “disciplined” capital-allocation plan that is focused on risk-adjusted returns.

A spokesman for iRobot declined to comment, though he sent a one-sentence statement in email: “Red Mountain has filed a 13D reporting their 5% ownership in the company. Management will meet with them, as they do with all institutional investors, and listen to what they have to say.”

A source familiar with Red Mountain’s activist strategies, who requested anonymity because he was not authorized to discuss the transaction, said the company is unlikely to storm iRobot in the manner of famed corporate raider Carl Icahn.

Instead, the 10-year-old Red Mountain will probably work quietly and collaboratively in the background and with a multiyear horizon to effect its desired changes, said the source.

Red Mountain’s portfolio is diverse and is not dominated by any single industry. According to unconfirmed reports, it received a $100 million investment this year from the California State Teachers’ Retirement System.

IRobot’s revenue grows
IRobot’s first-quarter figures spotlighted its plan to “invest to drive home robot growth,” while also mentioning that its Defense and Security Robot unit saw revenue grow 17 percent during the quarter. Seventy percent of that growth was from sales of hardware spares and support.

The company beat revenue and earnings predictions in its first quarter, ended March 28. Overall revenue was $118 million, compared with $114.2 million a year ago. Profit for the quarter was $4.8 million, compared with $5.3 million in the first quarter of 2014. Per-share earnings reached 16 cents, while the same quarter last year saw per-share earnings of 18 cents.

IRobot currently makes defense robots.

IRobot currently makes robots for public safety and military uses, as well as hazardous materials handling.

The company said growth in the U.S. and China will push revenue from home robots up 11 to 13 percent.

And while iRobot executives say fiscal 2015 revenue will be $625 million to $635 million, they feel earnings per share (EPS) will be narrower than originally expected. Initially pegged at $1.25 to $1.45, they now expect EPS to be $1.25 to $1.35. Adjusted EBITDA projections remain the same: $85 million to $90 million.

IRobot’s in-home products include floor vacuums, scrubbers and moppers. Outside products include automated pool-maintenance devices and gutter cleaners.

In addition, iRobot executives have filed documents with the Federal Communications Commission to sell a robotic, battery-powered lawnmower. (The radio signals used to control the device fall under the FCC’s purview.)

Its office-environment systems include mobile pedestals for video collaboration, a telemedicine device, and bases for use with third-party pedestal products.

Defense and public safety systems include small, compact-treaded scramblers. IRobot designed the smallest model to be thrown into situations in which it can right itself and carry out commands. It can run detection, disruption, investigation, and surveillance missions. Larger hazardous-material machines have an arm ending in a pincer to move objects.

Red Mountain Capital Partners logo

According to the source, Red Mountain executives say iRobot will return more profit to shareholders if it pulls back to consumer-oriented products. It would free cash flow by eliminating the financial drag of other areas. If nothing else, defense spending is a political football, while home robotics is steadily growing.

CEOs and their boards never like interference from activist hedge funds, but a few have come to realize that interlopers might have valid points, said Jim Shein, clinical professor of strategy at the Kellogg School of Management at Northwestern University.

“If you track activist investors, they fell with the market in 2007 and then rose with the market,” Shein said. “But they began to outshine the market in 2012. Sometimes they have good ideas.”

Robotics giant FANUC Corp. is also dealing with an activist investor. In March, hedge fund Third Point LLC began demanding that the attention-phobic FANUC return profits from cash reserves to investors and that it operate more transparently and regularly with shareholders.