Intuitive Surgical, Inc. — Q2 2009 Form 10-Q
Business and period: The company designs, manufactures, and markets da Vinci robotic surgical systems, instruments and accessories, and related services. This unaudited filing covers the quarter and six months ended June 30, 2009; comparisons are with the corresponding 2008 periods unless noted.
Financial performance
Amounts are in millions of dollars except per-share data, percentages, and system counts.
| Metric | Q2 2009 | Q2 2008 | H1 2009 | H1 2008 |
|---|---|---|---|---|
| Revenue | $260.6 | $219.2 | $449.0 | $407.4 |
| Gross profit / margin | $190.2 / 73.0% | $156.1 / 71.2% | $318.9 / 71.0% | $285.9 / 70.2% |
| Operating income / margin | $99.5 / 38% | $78.2 / 36% | $144.6 / 32% | $143.1 / 35% |
| Net income | $62.4 | $51.2 | $90.5 | $96.0 |
| Diluted EPS | $1.62 | $1.28 | $2.32 | $2.40 |
| Operating cash flow | — | $173.1 | $104.2 |
- Q2 revenue rose 19%; net income rose 22%. H1 revenue rose 10%, while net income fell 6% and operating income was nearly flat. H1 operating margin declined to 32% from 35%.
- Q2 recurring revenue grew 33% to $137.1 million, or 53% of revenue; H1 recurring revenue grew to $256.0 million, or 57% of revenue. Service revenue grew 40% in Q2 and 42% in H1.
- Q2 procedures grew approximately 52%, while 76 systems were sold versus 85 a year earlier. The installed base reached 1,242 systems. H1 system sales were 142 versus 159; system revenue declined to $193.0 million from $215.3 million.
- Q2 instruments and accessories revenue was $95.8 million, up from $73.6 million. Management said revenue per procedure declined approximately 15%, citing customer efficiency, procedure mix, and fewer initial stocking orders.
Financial position and liquidity
- At June 30, cash and cash equivalents were $173.4 million; short- and long-term investments were $728.6 million. Combined cash, cash equivalents, and investments totaled $902.1 million, compared with $901.9 million at December 31, 2008.
- Operating cash flow was $173.1 million for H1. Investing activities used $57.4 million and financing activities used $137.0 million, including a $150 million share repurchase. Cash and cash equivalents ended the period at $173.4 million, down $21.2 million from year-end.
- Total liabilities were $230.1 million, including $179.0 million current liabilities. The filing text does not provide a clear amount for interest-bearing debt; no debt balance is identified in the presented balance sheet.
Changes, outlook, risks, and unusual items
- da Vinci Si launch: Q1 upgrade offers led to $20.1 million of deferred revenue. The company recognized $13.8 million in Q2 and expected to recognize the remaining $6.3 million by year-end 2009. Recognition increased Q2 reported revenue and margins; management said the deferral and subsequent recognition had equal impacts on gross profit, operating income, and pretax income because no cost was deferred.
- Outlook: Management anticipated 2009 procedures to grow more than 45% from approximately 136,000 in 2008. It also expected continued substantial R&D investment and higher R&D expense. No specific revenue or earnings guidance was provided. Management cited recession-related pressure on hospital capital-equipment demand, affecting system sales.
- Repurchases: A $300 million authorization was approved in March 2009. The company completed a $150 million accelerated share repurchase, receiving and retiring approximately 1.4 million shares; $150 million remained authorized at quarter-end.
- Investment valuation: Auction-rate securities remained illiquid after failed auctions. The company reported $83.0 million of Level 3 auction-rate securities and a $7.7 million UBS put option at fair value. It considered unrealized investment losses temporary. The UBS right allows sale at par of approximately $71.2 million of securities during June 30, 2010–July 2, 2012, subject to its terms and UBS’s ability to perform.
- Tax and foreign exchange: H1 effective tax rate was 41.5%, versus 39.0%; gross unrecognized tax benefits increased to approximately $51.0 million. The company began hedging foreign currency exposures, principally euros, and cautioned that hedges may not offset all currency impacts.
- Legal and other risks: The company reported ordinary-course product liability, patent, contract, and other disputes, but said resolution was not likely to have a material adverse effect based on information available. It identified healthcare reform and reimbursement changes as potential demand risks. No material market-risk changes were reported.
Important facts for investors to verify
- How much of reported Q2 growth and margin improvement reflects the $13.8 million Si-related revenue recognition, and whether the remaining $6.3 million was recognized by year-end.
- Whether procedure growth translated into durable recurring revenue and whether the decline in system sales continued amid reduced hospital capital spending.
- Trends in instruments and accessories revenue per procedure, system placements, and the mix and profitability of Si upgrades.
- Recoverability and liquidity of auction-rate securities and the terms, timing, and counterparty risk of the UBS put right.
- Developments in unrecognized tax benefits, foreign-exchange exposures, reimbursement policy, and disclosed litigation.