Intuitive Surgical, Inc. — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011. The company designs, manufactures, and markets da Vinci surgical systems and earns revenue from system sales, instruments and accessories, and service.
Financial performance
Amounts are in millions, except per-share data. Comparisons are with the corresponding 2010 period.
| Metric | Q2 2011 | Q2 2010 | First half 2011 | First half 2010 |
|---|---|---|---|---|
| Total revenue | $425.7 | $350.7 | $813.8 | $679.3 |
| Gross profit | $306.6 | $256.8 | $585.4 | $497.3 |
| Operating income | $168.1 | $139.7 | $316.4 | $269.4 |
| Net income | $117.4 | $88.7 | $221.5 | $174.0 |
| Diluted EPS | $2.91 | $2.19 | $5.51 | $4.31 |
| Gross margin | 72% | 73% | 72% | 73% |
| Operating margin | 39% | 40% | 39% | 40% |
- Q2 revenue rose 21%; net income rose about 32%. First-half revenue increased about 20% and net income about 27%.
- Q2 product revenue was $358.1 million and service revenue $67.6 million. Instruments and accessories revenue was $171.5 million, up 35%; system revenue was $186.6 million, up 11%. Recurring revenue was $239.1 million, or 56% of total revenue, versus $182.9 million, or 52%, a year earlier.
- Q2 product gross margin was 73.9%, down from 75.4%; service gross margin was 62.1%, up from 61.7%. Management attributed lower product margin primarily to lower system average selling prices, simulator sales, and higher excess-inventory reserves.
- For the first half, operating cash flow was $296.3 million, versus $291.1 million. Investing activities used $159.8 million; financing activities used $35.1 million. Cash and cash equivalents increased $102.2 million to $382.0 million.
Balance sheet and liquidity
- At June 30, cash, cash equivalents, and short- and long-term investments totaled $1.822 billion, compared with $1.609 billion at December 31, 2010. Current assets were $1.365 billion and current liabilities $274.0 million.
- Total assets were $2.650 billion; total liabilities were $361.4 million. The filing does not separately identify borrowings or provide a clear total debt value.
- Stockholders’ equity was $2.289 billion. The company said it expects cash, investments, and operating income to be sufficient to meet liquidity needs for the foreseeable future.
Material changes, outlook, and risks
- Procedure volume increased approximately 30% in Q2 and the first half. The company sold 129 systems in Q2 (108 a year earlier); its installed base reached 1,933 systems. International revenue grew, particularly with higher European sales.
- System average selling price declined to $1.44 million in Q2 from $1.48 million, reflecting trade-in credits and product and customer mix. Lower system upgrade revenue also affected comparisons.
- Management expects recurring revenue to become a larger share of total revenue and expects research and development expense to continue increasing. No specific numerical revenue or earnings guidance is provided. Management cautions that first-half results are not necessarily indicative of the full year.
- Risks cited include hospital spending and healthcare reform, procedure adoption and reimbursement, competition, regulatory clearances, product development and manufacturing disruption, and intellectual-property matters. The company expected Japan demand to remain curtailed through 2012 following the earthquake and tsunami, though it did not expect the impact on total revenue to be material.
- Legal contingencies include a securities class action and consolidated shareholder derivative actions concerning alleged historical disclosures. The company reported no accrual because the outcomes could not be reasonably estimated; it said it believed the cases were defensible and not likely to materially affect results.
- Unrecognized tax benefits were $86.2 million at June 30, including $81.9 million that would reduce the effective tax rate if recognized. Auction-rate securities included $18.7 million of Level 3 fair value assets; management considered unrealized losses temporary.
- Notable uses of cash included $150.7 million of first-half share repurchases and a $33.1 million purchase of land and buildings in Sunnyvale. The repurchase program had approximately $249.3 million remaining at quarter-end.
Important facts for investors to verify
- Whether procedure growth and recurring-revenue gains continue, and how much growth depends on system placements versus instrument and service sales.
- Whether product margins recover from lower selling prices, trade-in credits, simulator mix, and inventory reserves.
- Cash-flow conversion, inventory buildup, capital spending, and the pace and price of share repurchases.
- Progress on Japan reimbursement and demand, U.S. regulatory review of products, and adoption of newer procedures and products.
- Developments in the shareholder litigation, tax examinations and unrecognized tax benefits, and valuation or liquidity of auction-rate securities.