Intuitive Surgical, Inc. — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013; comparisons are with the corresponding 2012 periods. The company designs, manufactures, and markets da Vinci surgical systems, instruments and accessories, and related services. Financial statements are unaudited.
Financial performance
| Metric | Q2 2013 | Q2 2012 | First half 2013 | First half 2012 |
|---|---|---|---|---|
| Total revenue | $578.5m | $536.5m | $1,189.9m | $1,031.7m |
| Gross profit / margin | $405.2m / 70% | $386.4m / 72% | $839.5m / 71% | $742.3m / 72% |
| Operating income / margin | $218.5m / 38% | $225.3m / 42% | $469.7m / 39% | $418.6m / 40% |
| Net income | $159.1m | $154.9m | $348.0m | $298.4m |
| Diluted EPS | $3.90 | $3.75 | $8.47 | $7.26 |
| Operating cash flow | Not separately provided | Not separately provided | $447.1m | $375.8m |
- Q2 revenue grew 8%; first-half revenue grew 15%. Q2 net income rose about 3%, while operating income declined about 3%. First-half net income increased about 17%.
- Recurring revenue rose 18% to $362.6m in Q2 and was 63% of revenue, versus 57% a year earlier. Instruments and accessories revenue increased 18% to $264.5m; service revenue increased 18% to $98.1m.
- Q2 system revenue fell 6% to $215.9m; 143 systems were sold versus 150. First-half system revenue was $471.8m, with 307 systems sold versus 290.
- Q2 gross margin declined mainly because of the U.S. medical-device excise tax and lower margins on newer instruments. Q2 product cost included $6.2m of excise tax; first-half cost included $12.7m.
Balance sheet, liquidity and capital allocation
- At June 30, cash and cash equivalents were $432.7m, short-term investments $857.5m, and long-term investments $1,737.0m: approximately $3.03bn combined. Cash and investments increased from approximately $2.92bn at year-end 2012.
- Total liabilities were $482.5m, including $390.9m current liabilities. The filing reports no borrowings or debt balance. Current assets were $1.86bn.
- First-half operating cash flow of $447.1m was offset by $291.0m of investing outflows and $276.8m of financing outflows; cash declined $121.0m to $432.7m. Financing included $415.4m of share repurchases, partly offset by employee stock issuance proceeds and tax benefits.
- The company repurchased 0.8m shares for $415.4m in the first half, at an average $491.28 per share. The board authorized an additional $1.0bn repurchase in March; approximately $0.9bn remained authorized at June 30.
- $565.9m of cash and investments were held by foreign subsidiaries. Management said it did not plan to repatriate those earnings and believed operating cash flows and existing resources would meet liquidity needs for the foreseeable future.
Material changes and operating trends
- First-half da Vinci procedure volume increased approximately 18% year over year, but U.S. da Vinci prostatectomy procedures declined approximately 8%. Q2 U.S. prostatectomy procedures were about 2% below Q1.
- Growth was driven by U.S. general surgery and gynecology, and international urology. U.S. system sales were weaker: 90 in Q2 versus 124 a year earlier, while international sales rose to 53 from 26. International revenue reached 27% of Q2 revenue, compared with 19%.
- The installed base grew to 2,799 systems from 2,585 at December 31, 2012. Inventories rose to $169.3m from $121.5m, principally reflecting lower-than-expected system sales and expanded product offerings.
- Q2 SG&A increased 20% to $145.5m, driven by organizational growth, litigation-related legal costs, and share-based compensation. R&D increased 2% to $41.2m. Management expects substantial R&D investment and expense to continue increasing.
Outlook, risks and unusual items
- No numerical revenue or earnings guidance is provided in the supplied filing text. Management expected U.S. benign procedure growth to remain below 2012 levels and said it could decline further depending on hospital admissions, payer behavior, health reform, and other factors. It expected recurring revenue to become a larger share of total revenue.
- Management attributed slower-than-expected benign gynecology growth and weaker Q2 system purchases to reduced hospital admissions and financial pressure, adoption dynamics, quality notifications, and negative media coverage. European economic conditions also weighed on capital sales and procedure growth.
- The FDA issued a July 16, 2013 warning letter following four inspection observations concerning field-action reporting, product-claim change procedures, and design documentation. The company said it was implementing corrective actions but could not assure the FDA would consider them adequate on reinspection.
- The company reported approximately 33 product-liability lawsuits and a substantial increase in claimant inquiries, but could not estimate the financial impact or possible loss range. A 2010 securities class-action appeal remained pending; two newer securities class actions had been filed. In the Taylor product-liability case, a jury returned a defense verdict in May 2013; the plaintiff appealed.
- A May field notice addressed possible micro-cracks in certain Monopolar Curved Scissors; replacement products began shipping May 31. The company reported no confirmed patient injury attributable to the issue and no material impact on Q2 procedures.
- First-half tax expense included a $7.5m discrete benefit from reinstatement of the 2012 federal R&D credit. Gross unrecognized tax benefits were $102.2m at June 30, up from $88.0m at year-end.
Important facts for investors to verify
- Whether procedure growth, particularly U.S. benign gynecology, continues to slow and how that affects system purchases and recurring revenue.
- Progress on FDA corrective actions and any effect of the warning letter or future inspection on products, marketing, or operations.
- Development and potential financial exposure of product-liability claims and securities litigation; the filing provides no estimable loss range.
- Whether gross margins recover as newer products scale, and the continuing impact of the medical-device excise tax.
- Cash deployment, repurchase pace, inventory levels, and the availability of foreign-held funds for U.S. needs.