Intuitive Surgical, Inc. — FY 2009 Form 10-K
Reporting period: Fiscal year ended December 31, 2009; quarterly comparisons below are Q4 2009 versus Q4 2008. Amounts are in U.S. dollars; financial figures are in millions unless stated otherwise.
Business context and reporting period
Intuitive Surgical designs, manufactures and markets da Vinci surgical systems, instruments, accessories and related services. Its model combines capital sales of systems with recurring instruments, accessories and service revenue. At year-end, the installed base was 1,395 systems, and surgeons performed approximately 205,000 procedures in 2009. The company operates as one reportable segment.
Financial performance and liquidity
| Metric | FY 2009 | FY 2008 | Change |
|---|---|---|---|
| Revenue | $1,052.2 | $874.9 | +20% |
| Gross profit / margin | $751.1 / 71.4% | $620.8 / 71.0% | Margin +0.4 percentage points |
| Operating income / margin | $377.4 / 35.9% | $310.8 / 35.5% | Income +21% |
| Net income / margin | $232.6 / 22.1% | $204.3 / 23.4% | Income +14%; margin declined |
| Diluted EPS | $5.93 | $5.12 | +16% |
| Operating cash flow | $385.1 | $278.2 | +38% |
Q4 comparison: Revenue was $323.0 million versus $231.5 million (+40%); gross profit was $233.2 million versus $165.3 million; net income was $77.6 million versus $50.8 million; diluted EPS was $1.95 versus $1.27.
- Recurring revenue grew 34% to $561.7 million and represented 53% of total revenue, up from 48% in 2008. Instruments and accessories revenue rose 33% to $389.4 million; system revenue increased 8% to $490.5 million; services rose to $172.3 million.
- Product gross margin was 73.0%, down from 73.3%, partly reflecting the da Vinci Si launch. Service gross margin improved to 63.1% from 57.3%, supported by the larger installed base and lower service costs per system.
- Cash, cash equivalents and investments totaled $1,172.0 million at year-end, up from $901.9 million. Current assets were $846.6 million and current liabilities $202.8 million (about 4.2x current ratio). Total liabilities were $272.4 million. The balance sheet presents no borrowings or debt line item.
- Investing cash outflow was $292.4 million and financing cash outflow was $66.2 million. The company generated $385.1 million from operations, repurchased $150.0 million of stock, and spent $53.4 million on capital expenditures and intellectual property. It reported no significant off-balance-sheet arrangements.
Material changes versus the prior comparable period
- Procedures increased 51% to approximately 205,000, while system sales were nearly flat at 338 versus 335. The installed base grew from 1,111 to 1,395 systems.
- da Vinci hysterectomy procedures rose 101% to about 69,000; prostatectomy procedures rose 23% to about 90,000. Management expected hysterectomy volume to exceed prostatectomy volume in 2010.
- International revenue was 21% of total, compared with 22% in 2008. The global recession constrained hospital capital purchases, although management said system demand improved toward year-end.
- Operating expenses rose 21% to $373.6 million, including a 20% increase in R&D to $95.1 million. Pre-tax stock-based compensation expense increased to $97.0 million from $76.6 million.
Outlook, risks, contingencies and unusual items
- Management expected recurring revenue to become a larger share of revenue, planned continued substantial R&D investment and believed available cash and expected operating income would fund requirements for the foreseeable future. No quantified revenue or earnings guidance was provided.
- Japan granted Shonin approval for the da Vinci S system in November 2009; commercialization remained dependent on trade and import requirements and obtaining appropriate reimbursement. The company also received U.S. clearance for transoral otolaryngologic procedures in December 2009.
- Key risks include hospital capital-spending weakness, competition and adoption rates, reimbursement and healthcare reform, regulatory approvals and compliance, product liability or defects, manufacturing capacity and reliance on sole- or single-source suppliers, foreign exchange and intellectual-property litigation.
- The FDA’s April 2008 inspection resulted in a Form 483 citing complaint-handling and supplier-management deficiencies. The company reported proposed corrective actions but could not assure the FDA would find them adequate on re-inspection.
- Investments included $81.3 million of illiquid auction-rate securities (ARS). UBS provided a right to sell approximately $69.9 million par value at par during June 2010–July 2012; the company intended to exercise it beginning June 30, 2010. Recovery depended in part on UBS’s ability to repurchase. Other ARS remained illiquid and could incur further valuation losses.
- Legal matters included product-liability, patent and contract disputes. Management considered its defenses meritorious and did not expect resolution to have a material adverse effect based on information then available, while acknowledging outcomes were uncertain. Gross unrecognized tax benefits were approximately $70.0 million at year-end; timing of any payment was not reliably estimable.
- A $20.1 million first-quarter deferral related to da Vinci Si upgrade offers was recognized by the end of Q3 after offers were declined, upgrades completed or accessories delivered. The company repurchased 1.4 million shares for $150.0 million in 2009; $150.0 million remained authorized.
Important facts for investors to verify
- Whether procedure growth, especially hysterectomy adoption, translated into sustained instrument utilization and recurring revenue growth.
- How hospital capital spending and system sales evolved after the recession, and the contribution and margins of da Vinci Si systems and upgrades.
- The realization and liquidity of ARS, including the UBS repurchase right and valuation of the remaining securities.
- Progress on FDA corrective actions, regulatory clearances, Japan reimbursement and commercialization, and any material developments in litigation or tax audits.
- Whether rising operating expenses, stock-based compensation and the effective tax rate affect future earnings conversion and margins.