iRobot Needs a Recharge

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iRobot (NAS: IRBT) reported earnings last night, and the crowd went mild. After-hours trading showed the shares up as much as 5%, but this morning those gains have already evaporated, and the stock's trading down significantly. But why? After all, the maker of Roomba vacuums and PackBot battledroids accomplished quite a bit:

  • The company grew its quarterly revenues 11% to $108 million (just a bit slower than we saw in the first quarter).
  • It earned 51% more profit than a year ago, an acceleration from last quarter's 35% pace.
  • And iRobot grew earnings per share 45%, to $0.29, which was also better growth than we saw in the first quarter.

Best of all, CEO Colin Angle called the second-quarter results "a positive trend in domestic consumer spending for our home robot products." So positive, in fact, that he's "increasing our full-year expectations." Angle now promises to earn about $0.24 per share in Q3, and to close out the year with roughly $1.07 per share in profit.

Too good to be true?
The news sure sounds good. But is it too good to be true? Last quarter, I highlighted several red flags that had begun flapping at iRobot. I pointed them out to you, then waited the Fool-mandated disclosure period before acting on my concerns. Only then did I sell my iRobot shares. Today, I'm feeling pretty good about that decision, as iRobot continues to post disturbing numbers.

Take a look at the balance sheet for example. Last quarter, iRobot had a problem with inventories growing faster than sales. The company explained that as a necessary consequence of building up 'bots to supply SUGVs for the Pentagon contract it's fulfilling with Boeing (NYS: BA) , and also prepping to roll out new Roombas and Scoobas for retail sale. Whatever the reason, the inventory build hurt iRobot's free cash flow, which turned negative last quarter. 

This quarter, the problem wasn't inventory increases (which only tracked sales growth). It was accounts receivable that ran away from iRobot in 2 -- up 45% against the 11% increase in sales.

But the result was the same: Increasingly negative free cash flow -- now clocked at -$13.1 million for the first half, versus positive free cash flow of $19.5 million in H1 2010. Rather than reversing the cash burn, iRobot seems to be tossing more cash in the furnace, burning nearly twice as much cash in Q2 as it did in Q1.

Needless to say, I don't like the new trend at iRobot. And I have no plans to invest in the company again until it gets its cash machine back on track.

Will iRobot find free cash flow religion again?Add it to your Fool Watchlistand find out.

At the time this article was published Rich Smithdoes not own shares of, nor is he short, any company named above.Motley Fool newsletter serviceshave recommended buying shares of iRobot. Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has adisclosure policy.

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