Intuitive Surgical, Inc. — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012. Financial statements are unaudited. The company designs, manufactures, and markets da Vinci surgical systems and related instruments, accessories, and services.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $537.8 million | $446.7 million | $1,569.5 million | $1,260.5 million |
| Gross profit / margin | $390.1 million / 73% | $325.5 million / 73% | $1,132.4 million / 72% | $910.9 million / 72% |
| Operating income / margin | $211.4 million / 39% | $178.9 million / 40% | $630.0 million / 40% | $495.3 million / 39% |
| Net income | $183.3 million | $122.4 million | $481.7 million | $343.9 million |
| Diluted EPS | $4.46 | $3.05 | $11.72 | $8.55 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $597.0 million | $463.9 million |
- Q3 revenue rose 20%; nine-month revenue rose 25%. Q3 product revenue was $450.0 million and service revenue $87.8 million. Nine-month product and service revenue were $1,317.5 million and $252.0 million, respectively.
- Q3 recurring revenue increased 24% to $305.8 million, or 57% of revenue; nine-month recurring revenue rose 27% to $901.5 million, also 57% of revenue.
- Q3 da Vinci system sales were 155 versus 133 a year earlier; nine-month sales were 445 versus 382. Installed base reached 2,462 systems, up from 2,132 at year-end 2011. Procedure volume grew approximately 22% in Q3 and 25% over nine months.
- Product gross margin eased year over year, reflecting newer products with lower introductory margins and higher inventory charges. Service gross margin improved, primarily due to lower service-parts consumption.
Liquidity, cash flow, and capital
- At September 30, cash and cash equivalents were $396.2 million; short- and long-term investments were $745.2 million and $1,559.7 million. Combined cash and investments totaled approximately $2.70 billion, versus $2.17 billion at December 31, 2011.
- Nine-month operating cash flow was $597.0 million. Investing activities used $712.6 million, including net investment purchases and acquisition-related outlays; financing provided $46.1 million. Cash and cash equivalents declined $69.6 million over the period.
- Total liabilities were $438.7 million, including $364.9 million current liabilities. The balance sheet presents no borrowings or debt line item. Management said current liquidity and operating cash generation should meet foreseeable requirements.
- The company repurchased $185.1 million of stock during the first nine months, including $169.8 million in Q3; approximately $383.1 million remained authorized at quarter-end. Employee equity issuances generated $176.5 million in the nine-month period.
Changes, outlook, and risks
- Growth came from U.S. gynecology and general surgery, international prostatectomy, higher system sales, and recurring instrument and service revenue. U.S. prostatectomy procedures declined approximately 20%, which management attributed to reduced PSA screening and a shift toward non-surgical management.
- European economic and sovereign-debt pressures slowed capital sales and procedure growth; European procedure growth was approximately 17% for the first nine months, below company expectations. Management also cited seasonality and commercial-organization depth as factors.
- Q3’s 15.0% effective tax rate, versus 32.3% a year earlier, included $35.1 million of discrete tax benefits, primarily from statute-of-limitations expirations. The nine-month rate was 25%, versus 32.1%. This tax benefit materially contributed to net income growth.
- No specific full-year revenue or earnings guidance is provided in the supplied filing text. Management expects recurring revenue to become a larger share of total revenue, anticipates continued substantial R&D investment and expense growth, and expects to fund growth from operations.
- Key risks include healthcare spending and reimbursement changes, regulatory approvals, procedure adoption and product acceptance, competition, manufacturing or supply disruptions, international market expansion, and litigation. The securities class-action dismissal was appealed; related shareholder derivative cases remained stayed pending that appeal. The company reported no accrual for these cases, said outcomes could not be reasonably estimated, and considered a material adverse effect unlikely.
- Other items to monitor: $81.1 million of gross unrecognized tax benefits; $418.8 million of cash, cash equivalents, and investments held by foreign subsidiaries; and $11.1 million of Level 3 auction-rate securities whose auctions had continued to fail.
Investor verification priorities
- Assess whether procedure growth and recurring-revenue gains can offset continued U.S. prostatectomy declines and weak European demand.
- Review the sustainability of earnings excluding discrete tax benefits and the impact of stock-based compensation, which was $115.0 million for nine months.
- Track product and service gross margins as newer offerings scale and inventory charges change.
- Verify cash deployment, investment portfolio valuation and liquidity, foreign-held funds, and the remaining share-repurchase authorization.
- Follow the securities appeal and derivative litigation, tax uncertainties, and regulatory/reimbursement progress in Japan and for new indications.