Case Study: iRobot
iRobot, a leading global consumer robotics company, had always used distributors to support its international business. But when it decided to make two strategic acquisitions, it encountered a risk it had never needed to manage: foreign currency risk.
In order to protect its margins, iRobot needed to mitigate its newly acquired FX risk. To accomplish this, it took advantage of Hedge Trackers’ ability to customize the right combination of CapellaFX software, consulting and hedge accounting services. This ensured iRobot would be ready and able to react, no matter the situation.
Custom Hedge Program #1
A Strategic Acquisition in Japan
Up until 2017, iRobot leveraged distributors across the world to fulfill international sales. It was selling its products internationally in U.S. Dollars (USD), which meant it did not have the inherent FX risk associated with international sales.
Then the company made a significant change: it acquired a distributor in Japan. Instead of selling products to a distributor, it now was the distributor. So, instead of selling to a distributor in USD, it began selling to local retailers in Japanese yen (JPY). As a result, iRobot could capture additional margins from international sales.
But there was only one problem.
For the first time in the company’s history, iRobot had direct JPY exposure – a tradeoff for higher margins. If it wanted to maintain those margins, it would have to protect itself from changes in JPY exchange rates on future revenue. iRobot needed to hedge its currency risk.
To achieve its overall goal, iRobot reached out to risk management and hedge accounting experts.
Finding a Partner in 60 Days
It all happened pretty fast. It had to.
iRobot had only two months to develop a hedge program before the deal to acquire the distributor closed, at which time its margins would begin to be exposed to currency risk. It needed to find a partner who could quickly understand the business need, develop a risk management program and then implement it in two months.
As it turned out, the team would only need one month.
“Deciding to work with Hedge Trackers was a no-brainer. All it took was one solid referral and speaking to the team directly.”
Hedge Trackers quickly helped iRobot’s finance team implement a currency hedge program. By facilitating working sessions right away and closely managing the project within tight deadlines, Hedge Trackers ensured that a customized risk management strategy, proper accounting policies, controls and procedures were all in place. The solution had the necessary internal and external approvals ready when the deal closed, and iRobot was ready to execute hedges on Day 1.
After the initial program was set up, Hedge Trackers was poised to support iRobot with special hedge accounting and future strategies on an ongoing basis.
Custom Hedge Program #2
Another Strategic Acquisition in Europe
iRobot continued to evolve, and later in 2017, it engaged in another strategic acquisition – this time in Europe.
“This was a more complex situation than the Japanese purchase and required a completely different approach,” said Laurent. “I talked with Jeff from Hedge Trackers fairly often because he also helps with our monthly journal entries and disclosures. So, when this new acquisition occurred, my first reaction was to call him.”
Hedge Trackers helped design a hedging program for the new set of circumstances in Europe. At surface level, the situation held similarities to the Japan acquisition. However, the European acquisition had nuances that did not allow a copy and paste of strategies. A solution would have to be thoughtfully customized from the ground up.
The most notable nuance of the European acquisition was that the new entities were going to be gradually integrated into iRobot’s supply chain structure instead of all at once.
This required a short-term initial strategy to accommodate the initial supply chain structure and the transition, followed by the long-term strategy the company still uses today. Hedge Trackers outlined a complete transition plan to protect iRobot’s margins from currency risk from the initial hedge relationship structure, through the transition to the final corporate structure. With Hedge Trackers’ support, iRobot was fully prepared for and protected as it integrated this new foreign business activity.
Custom Hedge Program #3
Continuing Support: One Call Away
Since the original implementation in 2017, iRobot has consulted Hedge Trackers about once a quarter on smaller treasury and accounting nuances and once a year for bigger questions.
Most recently, iRobot has been evaluating changes in circumstances that are driving a re-evaluation of a foreign subsidiary’s functional currency.
Changing a functional currency has a major impact on an existing hedge program. It changes the exposed entity and hedged item completely – turning any existing program inside out. To figure out what those implications were, weigh the options and address the requirements of ASC 830 accounting rules, Laurent once again turned to Hedge Trackers for guidance.
“Hedge Trackers has played a crucial role in helping us with preliminary work and exploring our options, so we can knowledgeably make the right business decision. This has helped guide our thought process and frame how we should think about functional currency.”
More Than Partners: A Part of Your Team
Throughout these larger projects and strategic conversations, Hedge Trackers also supports iRobot’s day-to-day and month-to-month hedge accounting needs. From transitioning to new guidance (ASU 2017-12) to preparing disclosures and journal entries to developing custom hedge programs, the team has been there.
“From a time perspective, we could not do all of this without the support of Hedge Trackers. We don’t have a technical derivative accountant in-house that can do what they do, so support from Hedge Trackers has been critical, saving us considerable time while complementing and augmenting our internal capabilities. They’ve added considerable value and been incredibly responsive to support our accounting team,” said Laurent.
The treasury team uses CapellaFX, Hedge Trackers’ software, to coordinate trading activity, monitor hedge positions and complete reporting. Laurent also leverages the system’s automated designation documentation and effectiveness assessment features required to support special hedge accounting treatments. The accounting team at iRobot relies on Hedge Trackers’ derivative accounting team to manage and deliver its technical hedge accounting results.
“Since we have fewer resources across accounting, finance and treasury, and generally a smaller volume of trades, we have opted for standard CapellaFX functionality. But even at the standard level, I find it much more technical, more integrated into the workflow and more user friendly than other systems I’ve tried,” said Laurent. “But more importantly, if I run into any situations where I need to make a change or do a dedesignation, I know I can reach out to Hedge Trackers for guidance on that change.”
For any small questions, general concerns or bigger picture items, Hedge Trackers is always available to Laurent and his team. In fact, Jeff – iRobot’s lead consultant – is essentially an extension of Laurent’s team.
“Together, we figure out what makes the most sense from a business and accounting perspective. If we want to make a certain change, what are the implications to our current programs? How do we change our documentation? Do we need to terminate or de-designate and re-designate? Those are the types of quick questions Jeff helps us answer,” explained Laurent. “And if Jeff doesn’t know the answer, he’s willing to bring in his colleagues for more help. [Hedge Trackers’ CEO] Helen Kane even makes herself available to meet with our team and address any and all questions.”
“Hedge Trackers is certainly delivering on our objective to protect revenue as much as possible. But its team of consultants is also providing invaluable guidance and education.”
Getting Real Results
iRobot was a $600 million revenue company when it first started working with Hedge Trackers. Just last year, it reached $1.2 billion in revenue. And half of its revenues are generated outside of the U.S.
The USD value of this revenue needed not only protection but also predictability – and Hedge Trackers delivered on both with the right balance and combination of its full suite of services (accounting, consulting and software).
“At the end of the day, we recognize that our hedges may or may not be directly in our favor all the time. But we have determined that predicting and protecting our cash flows is a necessary requirement over anything else,” said Laurent.
iRobot, with Hedge Trackers’ assistance, has made the predictability of USD results possible, and, therefore, iRobot can carefully and strategically continue to grow its international business model.