Intuitive Surgical, Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; comparisons are with Q1 2011 unless otherwise noted. The company designs, manufactures, and markets da Vinci surgical systems and related instruments, accessories, and services.
Financial and operating performance
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Total revenue | $495.2 million | $388.1 million | +28% |
| Product revenue | $414.4 million | $324.5 million | +28% |
| Service revenue | $80.8 million | $63.6 million | +27% |
| Gross profit / margin | $355.9 million / 72% | $278.8 million / 72% | +28% profit |
| Operating income / margin | $193.3 million / 39% | $148.3 million / 38% | +30% income |
| Net income / diluted EPS | $143.5 million / $3.50 | $104.1 million / $2.59 | +38% income |
| Cash provided by operations | $166.5 million | $105.4 million | +$61.1 million |
- Instruments and accessories revenue rose 32% to $207.8 million; system revenue rose 24% to $206.6 million. System sales were 140 versus 120, and reported average selling price increased to $1.47 million from $1.38 million.
- Recurring revenue was $288.6 million, up 31%, and represented 58% of revenue versus 57%. Procedures performed increased approximately 29%; the installed base reached 2,226 systems, up from 2,132 at year-end 2011.
- Product gross margin declined to 73.1% from 73.9%, which management attributed primarily to lower initial margins on new products. Service gross margin increased to 65.8% from 61.5%.
- At March 31, cash and cash equivalents were $325.9 million; short- and long-term investments totaled $2,045.1 million. Cash, cash equivalents, and investments together were approximately $2.4 billion. Current assets were $1,436.1 million and current liabilities $313.6 million.
- Operating cash flow was $166.5 million. Investing activities used $409.7 million, mainly reflecting net investment purchases and $49.8 million of property, equipment, intellectual property, and business purchases. Financing activities provided $103.1 million, primarily from employee stock issuance and related tax benefits.
- Total liabilities were $405.6 million; the filing’s balance sheet reports no debt line item. Share-based compensation expense was $34.4 million.
Material changes and notable items
- Growth reflected increased procedures, system sales, and recurring instrument and service revenue. The company cited U.S. hysterectomy and general surgery growth, European prostatectomy growth, and Japanese early-adopter system sales. The first quarter also had one more surgical day than Q1 2011 due to leap year.
- Operating expenses increased to $162.6 million from $130.5 million, including higher sales and administrative costs and research and development spending. R&D expense increased 22% to $38.4 million.
- The effective tax rate fell to 27.2% from 32.2%, mainly because of discrete recognition of previously unrecognized tax benefits following new IRS guidance, partly offset by expiration of the federal R&D credit. Gross unrecognized tax benefits were $93.8 million at quarter-end.
- The January 2012 acquisition of the Korean distributor increased goodwill by $21.2 million and intangible and other assets by $10.4 million. Management said the transaction was not material and was not expected to materially affect future operations.
- No share repurchases were made during the quarter; approximately $568.2 million remained authorized. The company had $330.3 million of cash, cash equivalents, and investments held by foreign subsidiaries and said it had no current plans to repatriate foreign earnings.
Outlook, risks, and contingencies
- No specific numerical revenue or earnings guidance is provided. Management expects recurring revenue to become a larger share of revenue, expects continued substantial investment in procedure adoption and product support, and anticipates R&D expense to increase. It expects stock-based compensation to rise in Q3 2012 due to a revised, twice-yearly option grant schedule.
- Management believes cash, investments, and expected product-sale income will meet liquidity needs for the foreseeable future and expects to fund future growth from operating cash flow.
- Management said European credit and sovereign-debt issues were slowing capital sales in the region and could affect global demand. System demand can fluctuate with economic and geopolitical conditions. Other cited risks include healthcare spending and reform, procedure adoption, regulatory approvals and reimbursement, competition, manufacturing disruptions, and product demand.
- Japanese reimbursement for da Vinci prostatectomy was to begin in April 2012. Management noted that future demand in Japan depends partly on obtaining clearances and adequate reimbursement for additional procedures and products.
- The company disclosed a pending securities class action and consolidated shareholder derivative actions concerning alleged past disclosures. It had accrued no amounts, stating outcomes could not be reasonably estimated; management believed resolution was unlikely to materially adversely affect the company. Auction-rate securities with $16.6 million fair value remained illiquid and were valued using Level 3 assumptions; management assessed unrealized losses as temporary.
- The filing states disclosure controls were effective and reports no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether procedure growth and system placements continue, and how much growth depends on U.S. gynecology, emerging procedures, or European and Japanese markets.
- Whether recurring revenue gains offset any slowdown in system sales, particularly given European economic conditions.
- Whether new-product costs and mix pressure product margins, and whether service margin improvement is sustainable.
- The durability of the lower tax rate, the status of the expired federal R&D credit, and resolution of the $93.8 million in unrecognized tax benefits.
- Developments in the shareholder litigation, illiquid auction-rate securities, and Japanese reimbursement and regulatory approvals.