Intuitive Surgical, Inc. — Q3 2009 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2009. The company designs, manufactures, and markets da Vinci surgical systems and earns revenue from system sales, instruments and accessories, and service.
Financial performance
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Q3 2009 | Q3 2008 | Nine months 2009 | Nine months 2008 |
|---|---|---|---|---|
| Revenue | $280.1 | $236.0 | $729.1 | $643.4 |
| Gross profit / margin | $199.0 / 71.0% | $169.6 / 71.9% | $517.9 / 71.0% | $455.4 / 70.8% |
| Operating income / margin | $104.5 / 37% | $85.0 / 36% | $249.1 / 34% | $228.1 / 35% |
| Net income | $64.5 | $57.6 | $155.1 | $153.6 |
| Diluted EPS | $1.64 | $1.44 | $3.97 | $3.84 |
| Operating cash flow | Not presented by quarter | $269.4 | $186.0 |
- Q3 revenue rose about 19% year over year; nine-month revenue rose about 13%. Nine-month net income was nearly flat, up about 1%.
- Q3 recurring revenue was $144.7 million, 52% of revenue, up 32%. For the nine months, recurring revenue was $400.6 million, 55% of revenue, versus $301.8 million and 47% in 2008.
- Q3 system sales were 86, compared with 91 a year earlier; nine-month sales were 228 versus 250. The installed base reached 1,308 systems.
- Cash, cash equivalents, and investments totaled $1.024 billion at September 30, up from $902 million at year-end 2008. Total assets were $1.638 billion; total liabilities were $247.5 million. No borrowings are identified in the presented balance sheet; long-term liabilities were $62.0 million.
- Nine-month investing cash outflow was $151.2 million and financing cash outflow was $107.1 million, including a $150 million share repurchase. Cash and cash equivalents increased $11.5 million to $206.1 million.
Material changes and management commentary
- Management attributed revenue growth to procedure adoption and the expanding installed base. Procedures grew approximately 49% in Q3 year over year; management expected at least 200,000 procedures in 2009, versus approximately 136,000 in 2008.
- Recurring revenue growth reflected instruments, accessories, and service. Service revenue rose 30% in Q3 and 38% for the first nine months, driven by the larger installed base.
- System sales remained pressured by reduced hospital capital-equipment demand associated with the economic recession. The new da Vinci Si represented 70 of Q3 system sales; 23 da Vinci S systems were upgraded to Si.
- Q3 and nine-month results included recognition of all $20.1 million deferred in Q1 for da Vinci Si upgrade offers: $13.8 million in Q2 and $6.3 million in Q3. This revenue had no associated deferred cost and therefore increased gross profit and operating income by the same amount.
- Product gross margin was lower year over year, which management attributed in part to excess standard da Vinci inventory and higher obsolete-inventory charges. Instruments and accessories revenue per procedure declined about 11% in Q3, reflecting fewer stocking orders, customer efficiency, and procedure mix.
- Management expects substantial continued R&D investment and said R&D expense is expected to increase. No formal full-year financial guidance is provided in the filing. The filing describes anticipated Japanese regulatory approval for the da Vinci S following an expert-panel recommendation, subject to further approval and commercialization requirements.
Liquidity, risks, and contingencies
- Cash generation was strong: nine-month operating cash flow increased to $269.4 million from $186.0 million. Management cited noncash expenses and working-capital contributions as factors.
- The investment portfolio included $82.2 million of auction-rate securities valued using Level 3 inputs. Auctions had continued to fail since February 2008. The company stated it intended to exercise a UBS right to sell certain securities at par beginning June 30, 2010; the right covers approximately $70.5 million par value and expires July 2, 2012. The related put-option fair value was $7.8 million.
- Gross unrecognized tax benefits were approximately $63.1 million at September 30, up from $42.0 million at December 31, 2008; $58.8 million would reduce the effective tax rate if recognized. The nine-month effective tax rate was 41.2%, versus 37.8% in 2008.
- The company disclosed ordinary-course product-liability, patent, contract, and other legal matters and said it did not expect their resolution to have a material adverse effect based on information then available.
- Newly highlighted risks include foreign-currency movements that hedges may not fully offset, and healthcare policy or reimbursement changes that could affect demand. The company reported no material change in market-risk disclosures and said disclosure controls were effective.
Most important facts for investors to verify
- Whether the 2009 procedure-growth expectation and recurring-revenue growth translated into durable demand, particularly while hospital system purchases remained constrained.
- How much of reported growth and profit depended on the one-time $20.1 million Si-upgrade revenue recognition, and how product margins evolve as excess inventory is addressed.
- The valuation, liquidity, and eventual recovery of auction-rate securities, including the ability to exercise the UBS right as intended.
- Developments in unrecognized tax benefits, legal matters, reimbursement policy, and foreign-exchange exposure.
- Whether the remaining $150 million share-repurchase authorization is used and how capital allocation affects liquidity and share count.