Intuitive Surgical, Inc. — Q3 2011 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2011; unaudited. The company designs, manufactures, and markets da Vinci surgical systems, earning revenue from system sales and recurring instruments, accessories, and service.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $446.7 million | $344.4 million | $1,260.5 million | $1,023.7 million |
| Gross profit / margin | $325.5 million / 73% | $250.6 million / 73% | $910.9 million / 72% | $747.9 million / 73% |
| Operating income / margin | $178.9 million / 40% | $132.1 million / 38% | $495.3 million / 39% | $401.5 million / 39% |
| Net income | $122.4 million | $86.6 million | $343.9 million | $260.6 million |
| Diluted EPS | $3.05 | $2.14 | $8.55 | $6.45 |
| Operating cash flow | Not presented by quarter | $447.9 million | $404.1 million |
- Q3 revenue rose approximately 30%; nine-month revenue rose approximately 23%. Q3 net income increased approximately 41%; nine-month net income increased approximately 32%.
- Q3 product revenue was $374.9 million and service revenue $71.8 million. Instruments and accessories revenue increased 38% to $175.8 million; systems revenue increased 25% to $199.1 million.
- Recurring revenue was $247.6 million in Q3 (55% of revenue) and $707.7 million for nine months (56%). The installed base reached 2,031 systems, versus 1,752 at year-end 2010.
- Q3 product gross margin was 74.3%, versus 74.6%; nine-month product gross margin was 74.0%, versus 75.2%. Service gross margins improved to 65.2% in Q3 and 63.0% for nine months.
Liquidity, cash flow, and capital
- At September 30, cash and cash equivalents were $298.2 million; short- and long-term investments were $1,589.1 million. Combined cash, cash equivalents, and investments totaled $1,887.3 million.
- Current assets were $1,311.9 million and current liabilities $284.1 million. Total liabilities were $377.0 million. The balance sheet presents no borrowings or debt line item; long-term liabilities were $92.9 million.
- Nine-month operating cash flow was $447.9 million; investing cash outflow was $324.6 million and financing cash outflow $105.3 million. Capital expenditures and acquired intellectual property totaled $67.7 million, including $33.1 million for land and buildings near headquarters.
- The company repurchased $331.8 million of stock in the first nine months, including $181.1 million in Q3; approximately $68.2 million of authorization remained at quarter-end.
Changes, outlook, and risks
- System sales were 133 in Q3 versus 105 a year earlier; nine-month sales were 382 versus 317. Procedures grew approximately 30% year over year in both periods. Management attributed growth to continued adoption, higher system sales, and recurring demand from the larger installed base.
- International revenue increased to 21% of Q3 revenue and 22% for nine months, compared with 17% and 19%, respectively, a year earlier. European procedure adoption contributed to growth. Japan represented approximately 2% of nine-month revenue.
- Management expects recurring revenue to become a larger share of total revenue and anticipates continued substantial investment and increases in R&D expense. The filing provides no specific financial guidance or quantified full-year forecast; it cautions that nine-month results do not predict full-year results.
- Product margin pressure reflected lower-margin simulators and fluorescence products, system trade-in credits, and higher excess-inventory reserves. SG&A and R&D increased with staffing, commissions, development activity, and stock compensation.
- Management expected Japanese demand to remain curtailed through 2012 following the earthquake and tsunami, while judging the overall revenue impact immaterial. Risks also include procedure adoption, hospital spending and healthcare reform, regulatory approvals, competition, manufacturing disruptions, and natural or other disasters.
- A securities class action and consolidated derivative actions remained pending. The class-action motion to dismiss was scheduled for a January 2012 hearing. The company said it could not reasonably estimate the outcome, recorded no related accrual, and believed resolution was unlikely to materially harm its financial position or results.
- Gross unrecognized tax benefits were $91.5 million at quarter-end, with $7.2 million of accrued related interest. Securities included auction-rate securities valued using unobservable inputs; management considered unrealized losses temporary.
Key facts for investors to verify
- Whether procedure growth and system placements continue to support recurring revenue as a larger share of sales.
- How trade-ins, product mix, inventory reserves, and newer lower-margin products affect gross margins.
- Cash and investment portfolio composition, including auction-rate security valuation and liquidity.
- Developments in the pending securities and derivative litigation and the tax exposures disclosed.
- Effects of Japan-related disruption, healthcare spending conditions, regulatory approvals, and other risks on demand and operations.