While the ongoing trade war between the U.S. and China has been challenging for many companies, iRobot (NASDAQ:IRBT) has arguably been among the hardest-hit technology stocks. After hitting all-time highs earlier this year, the stock has since lost more than half its value after two successive quarters of sub-par earnings reports.

Investors will be looking for any hint of good news when the company reports the financial results of its recently completed third quarter after the market close on Tuesday, Oct. 22. Let's take a look at the effect of tariffs and review iRobot's previous quarterly results to see if they provide any insight into what investors can expect when the company reports earnings this time.

A woman sitting on the floor looking a small dog as a a robotic vacuum cleans in the foreground

Image source: iRobot.

How tariffs are affecting iRobot's results

In September of last year, the Trump administration imposed a 10% tariff on a host of goods manufactured in China. Since the majority of iRobot's products are produced there, the company took a hit, but management initially believed the levies wouldn't "materially impact segment growth." 

As the trade war escalated, though, that levy was increased to 25%. In its Q2 conference call, iRobot CEO Colin Angle addressed the issue, saying the U.S. market was "growing more slowly than we had originally anticipated, driven by the direct and indirect impacts of the ongoing US/China trade war and related tariffs," and as a result, the company was lowering its second half expectations.

This wasn't just posturing. In testimony to U.S. trade officials in June, Angle said the trade war and the resulting tariffs had "created significant business uncertainty for iRobot," crimping both research and development spending and hiring. 

iRobot now expects direct tariff costs for the year in a range of $35 million to $40 million, up from its previous estimates of $20 million to $25 million. The company raised prices for its products in the U.S., but that move is only expected to partially offset the tariff increases from earlier this year.

To put those numbers into perspective, iRobot's full-year net income for 2018 was just short of $88 million, so the tariffs could potentially eat nearly half of the company's profit for this year. 

Slowing results and lowered guidance

In the second quarter, iRobot reported revenue of $260 million, up 15% year over year, the second successive quarter of lower-than-expected growth. Operating income declined more than 60% to $5.3 million, producing earnings per share (EPS) of $0.25, down from $0.37 in the prior-year quarter.

The company lowered its full-year revenue growth to a range of 10% to 14%, down from its previous forecast of between 17% to 20%. The bottom line will be hit even harder. iRobot now expects EPS for the year of between $2.40 and $3.15, down more than 15% compared to its previously issued guidance. By comparison, the company produced EPS of $3.18 in 2018.

What the future could hold

iRobot's management doesn't provide quarterly guidance, but analysts' consensus estimates are calling for Q3 revenue of $260 million, a decline of about 2% compared to the prior-year quarter, with EPS of about $0.52, a drop-off of nearly 54%. 

While President Trump recently announced progress toward a trade deal, China immediately countered, saying more work needed to be done.

iRobot isn't sitting idly by, waiting for politicians to hash out a deal. The company said it is working to diversify its supply chain and will move manufacturing of some of its less complicated components out of China. There are plans to move at least one line of robots to Malaysia, with the first product due to roll off the assembly line in that country by the end of the year.

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