Intuitive Surgical, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; financial statements are unaudited. Comparisons are with the three months ended March 31, 2012 unless otherwise stated. The company designs, manufactures, and markets da Vinci surgical systems and related instruments, accessories, and services.
Financial performance and liquidity
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Total revenue | $611.4 million | $495.2 million |
| Gross profit / margin | $434.3 million / 71% | $355.9 million / 72% |
| Operating income / margin | $251.2 million / 41% | $193.3 million / 39% |
| Net income | $188.9 million | $143.5 million |
| Diluted earnings per share | $4.56 | $3.50 |
| Cash from operations | $258.0 million | $165.0 million |
- Revenue increased 23%. Product revenue was $517.0 million and service revenue was $94.4 million. Instruments and accessories revenue rose 26% to $261.1 million; system revenue rose to $255.9 million. Recurring revenue was $355.5 million, or 58% of total revenue.
- The company sold 164 systems, versus 140; system average selling price increased to $1.55 million from $1.47 million, primarily reflecting a higher proportion of dual-console systems. Procedure volume grew approximately 18%, and the installed base reached 2,710 systems.
- Gross margin declined about one percentage point. Management attributed the decrease in product margin primarily to the new U.S. medical device excise tax ($6.5 million in Q1) and lower initial margins on newer instruments. Service gross margin improved to 67.4% from 65.8%.
- Operating expenses were $183.1 million, up from $162.6 million, reflecting organizational growth and higher stock-based compensation. Stock-based compensation expense was $38.2 million.
- Cash, cash equivalents, and investments totaled $3.116 billion at March 31, up $195.5 million from year-end. Cash and cash equivalents alone were $427.5 million. The balance sheet reports total liabilities of $463.6 million and does not separately list a debt balance.
- Operating cash flow was $258.0 million; investing cash flow was negative $348.0 million, largely reflecting net investment purchases; financing cash flow was negative $35.8 million. The company repurchased 299,112 shares for $145.7 million and authorized an additional $1.0 billion in repurchases in March.
Changes versus prior period
- Net income increased 32% and operating income increased 30%, while revenue grew 23%; operating margin improved from 39% to 41%.
- U.S. revenue represented 75% of total revenue, down from 79%, as international revenue grew faster, driven in part by higher system sales in Japan.
- U.S. da Vinci prostatectomy procedures declined approximately 11% year over year, while total da Vinci procedures increased approximately 18%. Growth was led by U.S. general surgery and gynecology and international urology.
- Cash from operations increased by $93.0 million. Cash and cash equivalents declined during the quarter, in part because the company deployed cash into investments and repurchased shares.
Outlook, commentary, and risks
- Management expects to continue substantial investment in research and development and anticipates R&D expense will increase. It stated that cash, investments, and expected operating cash flows should fund requirements for the foreseeable future; no specific revenue or earnings guidance is provided in the filing text.
- Management cited European economic and sovereign-debt pressures as weighing on capital sales and procedure growth. It also noted that reduced PSA screening and greater use of non-surgical management are pressuring U.S. prostatectomy procedures.
- Management warned that negative press questioning da Vinci safety, efficacy, cost, and surgeon training could delay adoption and adversely affect revenue growth. Benign and elective procedures are seasonal, with lower activity typically in the first quarter.
- The company disclosed approximately 26 individual product-liability lawsuits, including allegations concerning product defects, warnings, and training. A wrongful-death/product-liability trial began in April 2013. The company said it could not reasonably estimate outcomes and had accrued no amounts for these cases; it believes resolution is not likely to have a material adverse effect based on currently available information, while acknowledging uncertainty.
- A securities class-action appeal remained pending; related derivative cases were stayed. The filing also warns litigation costs or outcomes could materially affect the business. The company reported a substantial increase in injury claims and tolling agreements with certain claimants.
- The Q1 tax provision included a $7.5 million net benefit related to reinstatement of the 2012 federal R&D credit. Gross unrecognized tax benefits were $96.6 million at quarter-end. The company intends to indefinitely reinvest certain undistributed foreign earnings; $523.9 million of cash, cash equivalents, and investments was held by foreign subsidiaries.
- Disclosure controls were assessed as effective at the reasonable-assurance level; no material change in internal control over financial reporting was reported.
Key facts for investors to verify
- Whether procedure growth, particularly in general surgery and gynecology, can offset continued weakness in U.S. prostatectomy procedures.
- Whether lower initial margins on newer instruments and the medical device excise tax continue to pressure product gross margin.
- How system sales and adoption develop internationally, especially in Japan and Europe, and whether the quarter’s system-sales mix is sustained.
- The status and potential financial exposure of product-liability claims, the Taylor trial, and the securities litigation; no litigation accrual was recorded for the described cases.
- The sustainability of operating cash generation and the effect of share repurchases, investment activity, and foreign-held cash on liquidity and capital allocation.
- The effect of the discrete R&D tax credit benefit and the $96.6 million of unrecognized tax benefits on future effective tax rates.