Intuitive Surgical, Inc. — Q2 2012 Form 10-Q
Reporting period: Three and six months ended June 30, 2012; comparisons are with the corresponding 2011 periods. The company designs, manufactures, and markets da Vinci surgical systems and related instruments, accessories, and service. Amounts are in millions of dollars except per-share data and system counts.
Financial performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Revenue | $536.5 | $425.7 | $1,031.7 | $813.8 |
| Gross profit / margin | $386.4 / 72% | $306.6 / 72% | $742.3 / 72% | $585.4 / 72% |
| Operating income / margin | $225.3 / 42% | $168.1 / 39% | $418.6 / 40% | $316.4 / 39% |
| Net income | $154.9 | $117.4 | $298.4 | $221.5 |
| Diluted EPS | $3.75 | $2.91 | $7.26 | $5.51 |
| Operating cash flow | Not presented quarterly | $383.0 | $306.3 |
- Q2 revenue rose 26%; net income rose 32% and diluted EPS rose 29%. First-half revenue rose 27%, net income 35%, and diluted EPS 32%.
- Q2 product revenue was $453.1 (up 27%) and service revenue $83.4 (up 23%). Instruments and accessories revenue increased 30% to $223.7; system revenue increased 23% to $229.4.
- Recurring revenue was $307.1 in Q2, 57% of total revenue, versus $239.1 and 56% a year earlier. First-half recurring revenue was $595.7, or 58% of revenue.
- Q2 gross margin remained 72%. Product gross margin declined to 72.9% from 73.9%; service gross margin improved to 67.4% from 62.1%. Management attributed product margin pressure to start-up costs and lower initial margins for newer products, and service margin improvement to lower parts consumption and field-upgrade costs.
- Cash and cash equivalents were $484.4 at June 30; short- and long-term investments were $728.1 and $1,418.7. Combined cash and investments totaled $2.631 billion, versus $2.172 billion at year-end 2011. Current assets were $1.703 billion and current liabilities $346.8. Total liabilities were $443.7; the filing reports no borrowings or debt balance.
- First-half investing cash outflow was $532.3, including net investment purchases of $468.7 and $63.6 for property, equipment, intellectual property, and business purchases. Financing cash inflow was $168.0, including $138.5 from employee stock issuance and $44.7 of excess tax benefits, partly offset by $15.2 in share repurchases.
Operating developments and changes
- Management reported Q2 da Vinci procedure growth of approximately 26% year over year and 150 system sales, compared with 129. The installed base reached 2,341 systems: 1,707 in the U.S., 389 in Europe, and 245 elsewhere.
- Growth was led by U.S. gynecology and general surgery and international prostatectomy procedures. U.S. da Vinci prostatectomy procedures declined, which management linked to changes in PSA testing and greater use of non-surgical disease management.
- European procedure growth was approximately 13% in Q2 and below management expectations; European capital sales and procedure activity were affected by economic and sovereign-debt pressures. International revenue increased in dollars, while the U.S. share of revenue rose to 81% in Q2 from 80% a year earlier.
- System average selling price increased to $1.53 million in Q2 from $1.44 million, primarily due to a richer mix of dual-console systems, simulators, and Firefly configurations.
- On January 11, 2012, the company acquired its Korean distributor and began selling directly in Korea; the company said the transaction was not material to its financial statements or expected future operations. It obtained national reimbursement for prostatectomy procedures in Japan in April 2012.
Outlook, risks, and contingencies
- Management expects recurring revenue to become a larger share of total revenue and says operations can be funded by operating cash flow. It believes current cash, investments, and expected product-sale income will meet liquidity needs for the foreseeable future.
- The company expects substantial continued R&D investment and said R&D expense would continue to increase. Prototype costs were expected to rise substantially in Q3 2012 and normalize in Q4. The company planned to begin construction of a new Sunnyvale building in Q3, with higher capital expenditures expected in future periods.
- Management noted that the revised 2012 stock-option grant schedule reduced Q1 and Q2 stock-based compensation by approximately $3 million and $5 million, respectively, compared with the prior practice; Q3 expense was expected to be approximately $8 million higher than under that prior practice.
- Key stated risks include health-care spending and reimbursement changes, economic conditions, procedure adoption and utilization, product development and regulatory approvals, competition, manufacturing disruptions, product demand, international expansion, and litigation. Management cautioned that actual results may differ materially from forward-looking statements.
- A securities class action was dismissed with prejudice and judgment entered for the company on June 1, 2012; plaintiffs appealed on June 20. Related consolidated derivative actions remained pending, with formal discovery stayed. The company had not accrued amounts for these cases, said outcomes could not be reasonably estimated, and believed resolution was not likely to materially harm the business.
- Gross unrecognized tax benefits were $97.2 million at June 30, including $92.9 million that would reduce the effective tax rate if recognized; accrued related interest was $8.8 million. These tax positions and open tax years remain uncertain.
- Cash and investments included $367.9 million held by foreign subsidiaries, generally subject to U.S. tax if repatriated; management said it had no current plans to repatriate those funds. Some auction-rate securities remained illiquid; $11.0 million was classified as Level 3 at June 30.
Important facts for investors to verify
- Whether procedure growth, especially in U.S. gynecology/general surgery and international markets, offsets continuing U.S. prostatectomy weakness and slower European activity.
- Whether recurring-revenue growth, installed-base utilization, and system sales sustain revenue and margins, including the cost and adoption trajectory of newly introduced products.
- Actual timing and spending for the Sunnyvale construction plan, and the anticipated Q3 prototype and stock-compensation expense changes.
- Developments in the securities appeal and derivative litigation, and any material change in uncertain tax positions or the liquidity and valuation of auction-rate securities.
- The filing states there were no changes to the 2011 Form 10-K risk factors; investors should review that filing for the full risk-factor detail.