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Intuitive surgical inc. Intuitive surgical inc. Document Transcript

  • MORGAN STANLEY RESEARCH NORTH AMERICA Morgan Stanley & Co. Incorporated David R. Lewis David.R.Lewis@morganstanley.com +1 (1)415 576 2324 James Francescone James.Francescone@morganstanley.com +1 (1)212 761 3222 Steve Beuchaw October 20, 2010 Steve.Beuchaw@morganstanley.com +1 (1)212 761 6672 Stock Rating Intuitive Surgical Inc. Equal-weight Industry View Guidance Achievable; In-Line Consensus is Not Key Ratios and Statistics Reuters: ISRG.O Bloomberg: ISRG US Medical Technology / United States of America Solid results against ISRG guidance will likely be Price target NA overshadowed by missed consensus expectations Shr price, close (Oct 19, 2010) $279.04 (1%) and MSe (3%), in our view, as well as concerns Mkt cap, curr (mm) $11,375 that 4Q10 consensus numbers are not achievable. 52-Week Range $393.92-241.27 Guidance implies 4Q revenue of $344 – $376mm, slightly below consensus for 4Q of $378mm. Fiscal Year ending 12/09 12/10e 12/11e 12/12e Subsequently, while guidance numbers are achievable, ModelWare EPS ($) 5.93 8.75 10.80 12.96 the perception that upside to expectations is less likely, Prior ModelWare EPS ($) - 8.77 10.77 13.05 a hallmark of historical ISRG sentiment, will pressure the P/E 51.1 31.9 25.8 21.5 Consensus EPS ($)§ 5.93 8.72 10.36 12.28 multiple. We are incrementally lowering our revenue Div yld (%) - - - - numbers from $1,426mm to $1,397mm, but evidence of Unless otherwise noted, all metrics are based on Morgan Stanley ModelWare framework (please see explanation later in this note). a significant change in fundamentals was not readily § = Consensus data is provided by FactSet Estimates. evident and margin guidance leaves our EPS numbers e = Morgan Stanley Research estimates largely unchanged. Our base case EPS moves to $8.75 in FY10. Soft quarter or trend: Utilization pressures were pervasive across the device sector in 3Q and we continue to believe in some modest improvement into 4Q, which was supported by management commentary on the call. Combined with a seasonally stronger quarter, 35% procedure guidance may be achievable in 2010. However, placements growth fell from 58% in 1Q to 43% in 2Q and to 22% in 3Q, and box placements have remained relatively flat for three straight quarters. Both of these trends bear watching in 2011. 3Q Results: ISRG’s EPS of $2.14 beat MSe and consensus estimates by four cents, despite lower than expected top line numbers (-1% vs. consensus and -3% vs. MSe). With 105 system placements, Intuitive missed our estimate by eight and consensus by four. Overall, placements were a disappointment, but four placements in Japan is encouraging for future potential. Procedure Morgan Stanley does and seeks to do business with volume growth in 3Q of 33% was strong, driven by companies covered in Morgan Stanley Research. As OB/GYN, though slightly below expectations. Benign a result, investors should be aware that the firm may dVH contributed the most to growth, while malignant have a conflict of interest that could affect the objectivity of Morgan Stanley Research. Investors dVH remained strong. Procedure volumes may improve should consider Morgan Stanley Research as only a slightly into 4Q as procedure guidance was maintained single factor in making their investment decision. at 35%. For analyst certification and other important disclosures, refer to the Disclosure Section, located at the end of this report.
  • MORGAN STANLEY RESEARCH October 20, 2010 Intuitive Surgical Inc. Risk-Reward Snapshot: Intuitive Surgical (ISRG, $279.04, EW) Risk-Reward View Investment Thesis $450 • We expect revenue per procedure to 400 deteriorate by low single digits in the 350 $355 (+27%) long run, but this may be offset by higher stocking orders in the near 300 $ 279.04 $292 (+5%) term. 250 • Gross margin guidance looks $207 (-26%) conservative considering historically 200 high margins and favorable price/mix 150 shift from Si adoption. 100 • SG&A leverage may hit the P&L faster than expected as experienced users 50 require less sales support. 0 • Strong procedures growth will help Oct-08 Apr-09 Oct-09 Apr-10 Oct-10 Apr-11 Oct-11 the top line, but may not drive box Base Case (Oct-11) Historical Stock Performance Current Stock Price placements if hospitals increase utilization instead of purchasing new Bull 27x Bull • Our bull case assumes investors take a long-term view of the Case Case 11e stock, recognizing ISRG as a high-quality asset with strong systems. $355 EPS of long-term fundamentals deserving a premium multiple. • Uncertain development of hospital $11.44 • Boxes grow at a 30% CAGR through 2011 to reach 520. capital budgets and macro environment may lead to quarterly +$46 Cash • EBIT margins expand 200 bps in 2010 and 100 bps in 2011. volatility in results and provide a more per Share • EPS growth reaccelerates to 51% in 2010 and 39% in 2011. attractive entry point. Base 23x Base • Capex environment improves in 2010 compared to 2009. Case Case 11e • Boxes grow at a 2009-11 CAGR of 25%. A slight increase in $292 EPS of ASPs from stronger Si mix drives a 33% increase in Systems Catalysts $10.80 revenue to $652MM in 2010. • Japan Import License and +$44 Cash • Instruments & Accessories grows at 34% in 2010 as healthy Reimbursement [Late 2010] per Share procedures growth of 35% is boosted by a slight increase in revenue per procedure as stocking orders rise. • Operating margins increase 310 bps in 2010 required sales support is lower than management’s expectation and GMs expand 160 bps. Bear 18x Bear • Capital spending slowdown lasts through 2010, with recovery Case Case 11e beginning in 2011. Poor visibility on timing of recovery and $207 EPS of $9.17 downward revisions drive multiple compression. • Box placements up 15%+ in a challenging 2011. +$42 Cash per Share • Minimal operating leverage. Source: Morgan Stanley Research estimates, FactSet 2
  • MORGAN STANLEY RESEARCH October 20, 2010 Intuitive Surgical Inc. Exhibit 1 Intuitive Surgical: 3Q10 Variance Analysis Current Quarter Cons. 3Q09 Y/Y ($ in millions, except EPS) 3Q10E 3Q10A A vs E ($) A vs E (%)EPS Impact Est Actual % Change Revenues: Systems $165 $160 ($5) -3% ($0.03) $161 $135 17.8% Instruments & Accessories $134 $128 ($7) -5% ($0.04) $133 $101 26.5% Service & Training $57 $57 ($0) 0% ($0.00) $57 $44 30.7% Total Revenues $356 $344 ($12) -3% ($0.07) $349 $280 22.9% COGS $99 $94 ($6) -6% ($0.09) $81 16% Gross Profit $257 $251 ($6) -2% ($0.09) $252 $199 26% Operating Expenses: SG&A $92 $92 ($1) -1% $0.01 $70 31% R&D $32 $27 ($6) -17% ($0.08) $25 9% Total Operating Expenses $125 $119 ($6) -5% $0.09 $122 $95 25% Operating Income (Loss) $132 $132 ($0) 0% ($0.00) $130 $104 26% Interest & Other Inc. (Exp.) $5 $5 $1 -- $0.01 $4 15% Pretax income $137 $137 $0 -- $0.01 $136 $109 26% Income Taxes $51 $51 ($1) -1% $0.01 $51 $44 14% Net Income (Loss) $86 $87 $1 1% $85 $65 34% Diluted Shares Outstanding 40.7 40.5 (0) 0% $0.01 40.6 39.2 -- EPS, Diluted $2.10 $2.14 $0.04 2% $2.10 $1.64 30% Margin Analysis Gross Profit 72.1% 72.8% -- 70 bps 72.2% 71.0% 170 bps SG&A 25.9% 26.6% -- 70 bps 24.9% 170 bps R&D 9.1% 7.8% -- -130 bps 8.8% -100 bps Operating Income 37.1% 38.4% -- 130 bps 37.3% 37.3% 110 bps Pre-tax Income 38.4% 39.8% -- 140 bps 38.9% 38.9% 100 bps Tax Rate 37.4% 36.8% -- -60 bps 37.3% 40.7% -390 bps Net Income 24.0% 25.1% -- 110 bps 24.4% 23.0% 210 bps Other Metrics Total Revenues ($MM)* $356 $344 -12 -3% $274 26% Systems ($MM)* $165 $160 -5 -3% $130 23% Instruments & Accessories ($MM)* $134 $128 -7 -5% $100 27% Service & Training ($MM) $57 $57 0 0% $44 31% Total System Placements 113 105 -8 -7% 109 86 22% Est. Procedures (000's) 70.9 69.4 (1.5) -2% 70.8 52.1 33% Est. Revenue / Procedure ($) 1,893 1,838 (54) -3% 1,795 1,920 -4% Est. Revenue / Procedure ex. Stocking ($ 1,630 1,589 (41) -3% 1,648 -4% Est. Procedures / System / Week 3.41 3.36 (0.05) -1% 3.26 3% Deferred Revenue Total ($MM) 0.0 0.0 0.0 6.3 Systems ($MM) 0.0 0.0 0.0 5.6 Instruments & Accessories ($MM) 0.0 0.0 0.0 0.7 Source: Company data, Morgan Stanley Research estimates 3
  • MORGAN STANLEY RESEARCH October 20, 2010 Intuitive Surgical Inc. Exhibit 2 Updated Guidance Implies a Range of $8.10-8.79 Centered Around $8.45 2009A 2010 2010 Assumption 2010 P&L Scenarios P&L Guidance Low Mid High Low Mid High Sales 1,052 30-33% 30.0% 31.5% 33.0% 1,368 1,384 1,399 Gross Margin 71.4% 72-73% 72.0% 72.5% 73.0% 72.0% 72.5% 73.0% Gross Profit 751 -- -- -- -- 985 1,003 1,022 Operating Expense 374 27-29% 29.0% 28.0% 27.0% 482 478 474 EBIT 377 -- -- -- -- 503 525 547 Non-Operating Income 19 $18.5MM -- -- -- 18.5 18.5 18.5 Pretax income 396 -- -- -- -- 521 543 566 Tax Rate 41.3% 37.2% 37.2% 37.2% 37.2% 37.2% 37.2% 37.2% Net Income 233 -- -- -- -- 327 341 355 Shares Outstanding 39 ~40.4MM 40.4 40.4 40.4 40.4 40.4 40.4 EPS $5.93 -- -- -- -- $8.10 $8.45 $8.79 EBIT Growth 33.2% 39.1% 44.9% EPS Growth 36.6% 42.4% 48.2% Source: Company data, Morgan Stanley Research estimates Exhibit 3 Box Placement Have Been Relatively Stable for Last Few Quarters Quarterly Systems Placements 120 100 22 OUS 30 24 22 80 20 14 19 30 26 20 20 60 17 22 13 40 80 80 86 83 11 71 72 66 52 54 55 56 20 43 46 44 33 US - 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 Source: Company data, Morgan Stanley Research 4
  • MORGAN STANLEY RESEARCH October 20, 2010 Intuitive Surgical Inc. Exhibit 4 Revenue Per Procedure Continues to Drop in 3Q10 Revenue Per Procedure $2,600 $2,400 $2,200 $2,000 $1,800 $1,600 $1,400 $1,200 $1,000 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 Total Revenue Per Procedure Revenue Per Procedure ex. Initial Stocking Source: Company data, Morgan Stanley Research Exhibit 5 3Q10 Gross and Operating Margins Drop Slightly EBIT Margin Gross Margin EBIT Margin / Gross Margin 80% 80% 70% 70% 60% 60% 50% 50% 40% 40% 30% 30% 20% 20% 10% 10% 0% 0% 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 Source: Company data, Morgan Stanley Research 5
  • MORGAN STANLEY RESEARCH October 20, 2010 Intuitive Surgical Inc. Exhibit 6 Model Changes 2010 2011 2012 Comments Systems ($MM) Current $ 651 $ 770 $ 863 Systems revenues in the quarter missed our estimate by 32.8% 18.2% 12.1% 3%, due to 8 fewer box placements than our estimate. While we continue to believe that fundamentals haven't Prior $ 674 $ 792 $ 904 changed, the upside to expectations seems less likely 37.5% 17.5% 14.0% Instruments & Accessories ($MM) Current $ 521 $ 674 $ 818 Our procedure growth estimate of 35% is unchanged for 33.9% 29.3% 21.2% 2010. We see procedure growth at ~30% and ~25% in Prior $ 527 $ 677 $ 825 2011 and 2012. 35.3% 28.5% 21.8% Service & Training ($MM) Current $ 224 $ 285 $ 354 Lower growth is driven by a lower estimate in installed 29.8% 27.7% 24.0% based due to fewer system placements. This line scales Prior $ 224 $ 290 $ 361 very reliably with installed base. 30.1% 29.2% 24.7% Total Revenues ($MM) Current $ 1,397 $ 1,730 $ 2,034 32.7% 23.8% 17.6% Upper end of guidance (30-33% growth) appears appropriate, in our view. Prior $ 1,426 $ 1,760 $ 2,090 35.5% 23.4% 18.8% Gross Profit ($MM) Current $ 1,019 $ 1,268 $ 1,501 % of Sales 73.0% 73.3% 73.8% Gross margins in 4Q are expected to be similar to that of 3Q. Prior $ 1,038 $ 1,290 $ 1,542 % of Sales 72.8% 73.3% 73.8% SG&A ($MM) Current $ 358 $ 439 $ 513 % of Sales 25.6% 25.4% 25.2% Operating expenses in 2010 were guided to grow 27-29% Prior $ 363 $ 447 $ 527 % of Sales 25.4% 25.4% 25.2% R&D ($MM) Current $ 117 $ 157 $ 185 % of Sales 8.3% 9.1% 9.1% Prior $ 124 $ 160 $ 190 % of Sales 8.7% 9.1% 9.1% Interest & Other Income (Expense) Current $ 19 $ 22 $ 29 Primarily interest income. Prior $ 18 $ 22 $ 29 EPS, diluted Lower revenues mostly offset by decreased operating Current $ 8.75 $ 10.80 $ 12.96 expenses. Prior $ 8.77 $ 10.77 $ 13.05 Diluted Shares Outstanding Expectations for share count have decreased slightly Current 40 41 42 along with a lower stock price. Prior 41 42 43 Free Cash Flow Current $ 499 $ 554 $ 678 Prior $ 501 $ 570 $ 704 Source: Company data, Morgan Stanley Research estimates 6
  • MORGAN STANLEY RESEARCH October 20, 2010 Intuitive Surgical Inc. Exhibit 7 Quarterly Income Statement, 2008A – 2012E Dollars in millions, except per share data 14% 25% 28% 33% Fiscal year ends Dec 31 20% 25% 26% 29% 2008A 2009A 2010E 2011E 2012E Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Systems 455.3 69.5 123.5 135.5 162.0 490.5 155.3 167.8 159.6 168.8 651.5 769.8 863.0 Instruments & Accessories 293.0 79.5 95.8 100.8 113.3 389.4 122.7 127.5 127.5 143.8 521.5 674.3 817.5 Service & Training 126.6 39.3 41.3 43.9 47.8 172.3 50.6 55.4 57.3 60.3 223.6 285.5 353.9 Total Revenue $874.9 $188.4 $260.6 $280.1 $323.0 $1,052.2 $328.6 $350.7 $344.4 $372.9 $1,396.6 $1,729.5 $2,034.4 Cost of Goods Sold 254.1 59.7 70.4 81.1 89.9 301.1 88.1 93.9 93.8 101.8 377.6 461.8 533.0 Gross Profit 620.8 128.7 190.2 199.0 233.2 751.1 240.5 256.8 250.6 271.1 1,019.0 1,267.7 1,501.4 R&D 79.4 21.3 23.4 24.7 25.8 95.1 28.0 28.5 26.9 33.2 116.6 157.4 185.1 SG&A 230.6 62.4 67.3 69.9 79.0 278.5 82.8 88.6 91.6 94.7 357.7 439.3 512.7 Other Charges 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Total Operating Expenses 309.9 83.7 90.6 94.5 104.8 373.6 110.8 117.1 118.5 127.9 474.3 596.7 697.8 Operating Income 310.8 45.0 99.5 104.5 128.4 377.4 129.7 139.7 132.1 143.2 544.7 671.1 803.6 Interest Income and Other (Expense) 24.4 5.0 5.2 4.4 4.1 18.7 4.1 4.5 5.0 4.9 18.5 22.3 29.0 Total Non-Operating Expenses 24.4 5.0 5.2 4.4 4.1 18.7 4.1 4.5 5.0 4.9 18.5 22.3 29.0 Pretax Income 335.2 50.0 104.7 108.9 132.5 396.1 133.8 144.2 137.1 148.1 563.2 693.4 832.6 Income Tax Expense 130.9 21.9 42.3 44.3 55.0 163.5 48.5 55.5 50.5 55.2 209.7 249.6 287.2 Income Tax Rate 39.0% 43.8% 40.4% 40.7% 41.5% 41.3% 36.2% 38.5% 36.8% 37.3% 37.2% 36.0% 34.5% Net Income 204.3 28.1 62.4 64.5 77.6 232.6 85.3 88.7 86.6 92.8 353.4 443.8 545.3 Fully Diluted Shares 39.9 39.3 38.6 39.2 39.7 39.2 40.2 40.5 40.5 40.3 40.4 41.1 42.1 Diluted EPS $5.12 $0.72 $1.62 $1.64 $1.95 $5.93 $2.12 $2.19 $2.14 $2.30 $8.75 $10.80 $12.96 19% Margin/Expense Analysis: Gross Margin 71.0% 68.3% 73.0% 71.0% 72.2% 71.4% 73.2% 73.2% 72.8% 72.7% 73.0% 73.3% 73.8% R&D 9.1% 11.3% 9.0% 8.8% 8.0% 9.0% 8.5% 8.1% 7.8% 8.9% 8.3% 9.1% 9.1% SG&A 26.4% 33.1% 25.8% 24.9% 24.5% 26.5% 25.2% 25.3% 26.6% 25.4% 25.6% 25.4% 25.2% Operating Income 35.5% 23.9% 38.2% 37.3% 39.7% 35.9% 39.5% 39.8% 38.4% 38.4% 39.0% 38.8% 39.5% Pretax Income 38.3% 26.6% 40.2% 38.9% 41.0% 37.6% 40.7% 41.1% 39.8% 39.7% 40.3% 40.1% 40.9% Net income 23.4% 14.9% 23.9% 23.0% 24.0% 22.1% 26.0% 25.3% 25.1% 24.9% 25.3% 25.7% 26.8% Growth Analysis: Revenue 45.7% 0.1% 18.9% 18.7% 39.5% 20.3% 74.4% 34.6% 22.9% 15.4% 32.7% 23.8% 17.6% Gross Profit 49.9% -0.8% 21.9% 17.4% 41.0% 21.0% 86.9% 35.0% 25.9% 16.3% 35.7% 24.4% 18.4% R&D 62.5% 30.7% 14.8% 12.8% 23.5% 19.8% 31.4% 22.0% 9.1% 28.8% 22.6% 35.0% 17.6% SG&A 45.3% 28.2% 17.0% 11.4% 28.0% 20.8% 32.8% 31.7% 31.1% 19.9% 28.4% 22.8% 16.7% Operating Income 50.4% -30.6% 27.3% 22.9% 55.2% 21.4% 188.1% 40.3% 26.4% 11.5% 44.3% 23.2% 19.8% Net Income 45.0% -37.2% 21.9% 12.0% 52.8% 13.8% 203.1% 42.2% 34.2% 19.7% 52.0% 25.6% 22.9% EPS 41.7% -36.3% 26.4% 14.5% 53.4% 16.0% 196.6% 35.4% 30.1% 17.9% 47.5% 23.3% 20.0% Average Diluted Shares 2.3% -1.3% -3.6% -2.2% -0.4% -1.8% 2.2% 5.0% 3.2% 1.6% 3.0% 1.8% 2.4% Source: Company data, Morgan Stanley Research estimates 7
  • MORGAN STANLEY RESEARCH October 20, 2010 Intuitive Surgical Inc. Exhibit 8 Annual Balance Sheet, 2008A – 2012E Dollars in millions, except per share data Fiscal year ends Dec 31 2008A 2009A 2010A 2011E 2012E Assets Cash and Investments $451.4 $555.4 $1,020.0 $1,164.0 $1,438.6 Trade Receivables 170.1 205.4 199.3 238.0 276.3 Inventories 63.5 57.6 77.2 90.2 102.8 Other Current Assets 19.0 28.2 27.5 27.5 27.5 Total Current Assets 703.9 846.6 1,324.1 1,519.8 1,845.1 Property, Plant & Equipment 117.0 125.7 146.0 163.3 174.2 Long-Term Investments 450.5 616.5 750.6 1,021.1 1,264.9 Intangibles 56.2 56.2 49.8 49.8 49.8 Goodwill 110.7 110.7 110.7 110.7 110.7 Deferred Tax Assets 35.9 53.3 53.2 53.2 53.2 Other 0.3 0.5 0.6 0.6 0.6 Total Assets $1,474.6 $1,809.7 $2,434.9 $2,918.5 $3,498.6 Liabilities Accounts Payable $20.5 $27.6 $41.2 $48.1 $54.8 Other Accrued Expenses & Deferred Revenue 144.0 175.2 214.4 256.1 297.3 Total Current Liabilities 164.5 202.8 255.6 304.3 352.1 Long-term debt, net deferred tax and other 43.3 69.7 75.4 75.4 75.4 Total Liabilities 207.9 272.4 331.0 379.7 427.5 Outstanding Shares 0.0 0.0 0.0 0.0 0.0 Additional paid-in capital 871.8 1,024.3 1,238.0 1,238.0 1,238.0 Treasury at Cost 0.0 0.0 0.0 0.0 0.0 Deferred compensation 0.0 0.0 0.0 0.0 0.0 Accumulated other comprehensive (2.9) 1.3 0.7 0.7 0.7 Retained (defecit) Earnings 397.8 511.7 865.1 1,300.1 1,832.4 Shareholders' Equity 1,266.8 1,537.3 2,103.8 2,538.8 3,071.1 Total Liabilities & Shareholders' Equity $1,474.6 $1,809.7 $2,434.9 $2,918.4 $3,498.6 Financial Metrics Total Debt 43.3 69.7 75.4 75.4 75.4 Net debt (debt-cash) (408.0) (485.8) (944.6) (1,088.6) (1,363.2) Net cash per share $10.22 $12.39 $23.40 $26.49 $32.39 Returns Return on Equity (ROE) 19.0% 16.6% 19.4% 18.7% 19.0% Return on Assets (ROA) 16.3% 14.2% 16.7% 16.2% 16.6% Return on Invested Capital (ROIC) 60.5% 58.8% 92.7% 115.0% 134.1% Liquidity Current Ratio (CA/CL) 4.3x 4.2x 5.2x 5.0x 5.2x Quick Ratio ((Cash+Mkt Sec+AR)/CL) 3.8 3.8 4.8 4.6 4.9 Cash Ratio 2.7 2.7 4.0 3.8 4.1 Acid-Test Ratio 3.9 3.9 4.9 4.7 4.9 Working Capital Metrics Days Sales Oustanding (DSO) 62.7 65.1 52.9 47.1 47.3 Days Payable Outstanding (DPO) 36.1 29.1 33.2 36.0 36.1 Inventory Days (DIO) 68.8 73.4 65.2 67.6 67.8 Cash Conversion Cycle 95.4 109.4 84.8 78.7 78.9 Source: Company data, Morgan Stanley Research estimates 8
  • MORGAN STANLEY RESEARCH October 20, 2010 Intuitive Surgical Inc. Exhibit 9 Annual Cash Flow Statement, 2008A – 2012E Dollars in millions, except per share data Fiscal year ends Dec 31 2008A 2009A 2010E 2011E 2012E From Operating Activity GAAP Net Income $204.3 $232.6 $353.4 $434.9 $532.3 Depreciation & Amortization 25.1 34.6 31.1 33.9 41.5 Deferred Taxes & Tax Credits (17.9) (17.1) (5.8) 0.0 0.0 Loss (Gain) on Sale of Plant and Equipment 0.0 0.0 0.0 0.0 0.0 Net Change in Working Capital (9.9) 38.0 51.0 (3.1) (2.9) Other 0.0 0.0 0.0 0.0 0.0 Stock Based Compensation Expense 76.6 97.0 119.2 139.2 159.2 Cash From Operations 278.2 385.1 549.0 604.9 730.0 From Investing Activity Capital Expenditures (62.5) (53.4) (49.9) (51.2) (52.4) Chg in Investment Securities (198.6) (239.0) (348.0) (270.6) (243.8) Acquisitions 0.0 0.0 0.0 0.0 0.0 Other (43.5) 0.0 0.0 0.0 0.0 Net from Investing (304.5) (292.4) (397.9) (321.7) (296.3) From Financing Activity Chg in Short-Term Debt 0.0 0.0 0.0 0.0 0.0 Chg in Long-Term Debt 0.0 0.0 0.0 0.0 0.0 Change in Equity 98.0 (66.2) 100.7 (139.2) (159.2) Net Decrease in Investments 0.0 0.0 0.0 0.0 0.0 Net from Financing 98.0 (66.2) 100.7 (139.2) (159.2) Effect of exchange rate change 0.1 0.3 (1.1) 0.0 0.0 Net Cash Flow $71.8 $26.8 $250.7 $144.0 $274.6 Cash at Beginning of Year 122.8 194.6 221.4 472.1 616.1 Cash at End of Year 194.6 221.4 472.1 616.1 890.7 Financial Metrics Free Cash Flow 215.8 331.6 499.0 553.7 677.6 Free Cash Flow / share $5.40 $8.46 $12.36 $13.47 $16.10 Free Cash Flow Yield 1.8% 2.9% 4.2% 4.6% 5.4% Source: Company data, Morgan Stanley Research estimates 9
  • MORGAN STANLEY RESEARCH October 20, 2010 Intuitive Surgical Inc. Morgan Stanley ModelWare is a proprietary analytic framework that helps clients uncover value, adjusting for distortions and ambiguities created by local accounting regulations. For example, ModelWare EPS adjusts for one-time events, capitalizes operating leases (where their use is significant), and converts inventory from LIFO costing to a FIFO basis. ModelWare also emphasizes the separation of operating performance of a company from its financing for a more complete view of how a company generates earnings. Disclosure Section The information and opinions in Morgan Stanley Research were prepared by Morgan Stanley & Co. Incorporated, and/or Morgan Stanley C.T.V.M. S.A. As used in this disclosure section, "Morgan Stanley" includes Morgan Stanley & Co. Incorporated, Morgan Stanley C.T.V.M. S.A. and their affiliates as necessary. For important disclosures, stock price charts and equity rating histories regarding companies that are the subject of this report, please see the Morgan Stanley Research Disclosure Website at www.morganstanley.com/researchdisclosures, or contact your investment representative or Morgan Stanley Research at 1585 Broadway, (Attention: Research Management), New York, NY, 10036 USA. Analyst Certification The following analysts hereby certify that their views about the companies and their securities discussed in this report are accurately expressed and that they have not received and will not receive direct or indirect compensation in exchange for expressing specific recommendations or views in this report: David Lewis. Unless otherwise stated, the individuals listed on the cover page of this report are research analysts. Global Research Conflict Management Policy Morgan Stanley Research has been published in accordance with our conflict management policy, which is available at www.morganstanley.com/institutional/research/conflictpolicies. Important US Regulatory Disclosures on Subject Companies As of September 30, 2010, Morgan Stanley beneficially owned 1% or more of a class of common equity securities of the following companies covered in Morgan Stanley Research: Baxter International, Gen-Probe Inc., Hologic, Inc., Hospira, Illumina, Integra LifeSciences, Intuitive Surgical Inc.. Within the last 12 months, Morgan Stanley managed or co-managed a public offering (or 144A offering) of securities of Abbott Laboratories, Hospira, Life Technologies, Talecris Biotherapeutics Holdings. Within the last 12 months, Morgan Stanley has received compensation for investment banking services from Abbott Laboratories, Beckman Coulter, Boston Scientific, CareFusion Corp., Covidien, Edwards Lifesciences, Hospira, Integra LifeSciences, Johnson & Johnson, Life Technologies, Medtronic Inc., Stryker Corporation, Talecris Biotherapeutics Holdings, Thermo Fisher Scientific Inc. In the next 3 months, Morgan Stanley expects to receive or intends to seek compensation for investment banking services from Abbott Laboratories, Abiomed, Affymetrix, American Medical Systems Holdings, Inc., Beckman Coulter, Becton Dickinson, Boston Scientific, CareFusion Corp., Covidien, Edwards Lifesciences, Gen-Probe Inc., Haemonetics Corporation, Hologic, Inc., Hospira, Illumina, Integra LifeSciences, Intuitive Surgical Inc., Johnson & Johnson, Life Technologies, Medtronic Inc., Myriad Genetics, St. Jude Medical, Stryker Corporation, Talecris Biotherapeutics Holdings, Thermo Fisher Scientific Inc, Waters Corp, Zimmer Holdings, Inc.. Within the last 12 months, Morgan Stanley has received compensation for products and services other than investment banking services from Abbott Laboratories, Beckman Coulter, Illumina, Medtronic Inc., Talecris Biotherapeutics Holdings, Thermo Fisher Scientific Inc. Within the last 12 months, Morgan Stanley has provided or is providing investment banking services to, or has an investment banking client relationship with, the following company: Abbott Laboratories, Abiomed, Affymetrix, American Medical Systems Holdings, Inc., Beckman Coulter, Becton Dickinson, Boston Scientific, CareFusion Corp., Covidien, Edwards Lifesciences, Gen-Probe Inc., Haemonetics Corporation, Hologic, Inc., Hospira, Illumina, Integra LifeSciences, Intuitive Surgical Inc., Johnson & Johnson, Life Technologies, Medtronic Inc., Myriad Genetics, St. Jude Medical, Stryker Corporation, Talecris Biotherapeutics Holdings, Thermo Fisher Scientific Inc, Waters Corp, Zimmer Holdings, Inc.. Within the last 12 months, Morgan Stanley has either provided or is providing non-investment banking, securities-related services to and/or in the past has entered into an agreement to provide services or has a client relationship with the following company: Abbott Laboratories, Beckman Coulter, Edwards Lifesciences, Hologic, Inc., Hospira, Illumina, Integra LifeSciences, Johnson & Johnson, Life Technologies, Medtronic Inc., Stryker Corporation, Talecris Biotherapeutics Holdings, Thermo Fisher Scientific Inc. Morgan Stanley & Co. Incorporated makes a market in the securities of Abbott Laboratories, Abiomed, Affymetrix, American Medical Systems Holdings, Inc., Baxter International, Beckman Coulter, Becton Dickinson, Boston Scientific, CareFusion Corp., Covidien, Edwards Lifesciences, Gen-Probe Inc., Haemonetics Corporation, Hansen Medical, Inc., Hologic, Inc., Hospira, Illumina, Integra LifeSciences, Intuitive Surgical Inc., Johnson & Johnson, Life Technologies, Medtronic Inc., Myriad Genetics, St. Jude Medical, Stryker Corporation, Talecris Biotherapeutics Holdings, Thermo Fisher Scientific Inc, Waters Corp, Zimmer Holdings, Inc.. The equity research analysts or strategists principally responsible for the preparation of Morgan Stanley Research have received compensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors, firm revenues and overall investment banking revenues. Morgan Stanley and its affiliates do business that relates to companies/instruments covered in Morgan Stanley Research, including market making, providing liquidity and specialized trading, risk arbitrage and other proprietary trading, fund management, commercial banking, extension of credit, investment services and investment banking. Morgan Stanley sells to and buys from customers the securities/instruments of companies covered in Morgan Stanley Research on a principal basis. Morgan Stanley may have a position in the debt of the Company or instruments discussed in this report. Certain disclosures listed above are also for compliance with applicable regulations in non-US jurisdictions. STOCK RATINGS Morgan Stanley uses a relative rating system using terms such as Overweight, Equal-weight, Not-Rated or Underweight (see definitions below). Morgan Stanley does not assign ratings of Buy, Hold or Sell to the stocks we cover. Overweight, Equal-weight, Not-Rated and Underweight are not the equivalent of buy, hold and sell. Investors should carefully read the definitions of all ratings used in Morgan Stanley Research. In addition, since Morgan Stanley Research contains more complete information concerning the analyst's views, investors should carefully read Morgan Stanley Research, in its entirety, and not infer the contents from the rating alone. In any case, ratings (or research) should not be used or relied upon as investment advice. An investor's decision to buy or sell a stock should depend on individual circumstances (such as the investor's existing holdings) and other considerations. Global Stock Ratings Distribution (as of September 30, 2010) For disclosure purposes only (in accordance with NASD and NYSE requirements), we include the category headings of Buy, Hold, and Sell alongside our ratings of Overweight, Equal-weight, Not-Rated and Underweight. Morgan Stanley does not assign ratings of Buy, Hold or Sell to the stocks we cover. Overweight, Equal-weight, Not-Rated and Underweight are not the equivalent of buy, hold, and sell but represent recommended relative 10
  • MORGAN STANLEY RESEARCH October 20, 2010 Intuitive Surgical Inc. weightings (see definitions below). To satisfy regulatory requirements, we correspond Overweight, our most positive stock rating, with a buy recommendation; we correspond Equal-weight and Not-Rated to hold and Underweight to sell recommendations, respectively. Coverage Universe Investment Banking Clients (IBC) % of % of % of Rating Stock Rating Category Count Total Count Total IBC Category Overweight/Buy 1115 42% 394 43% 35% Equal-weight/Hold 1146 43% 413 45% 36% Not-Rated/Hold 14 1% 4 0% 29% Underweight/Sell 381 14% 99 11% 26% Total 2,656 910 Data include common stock and ADRs currently assigned ratings. An investor's decision to buy or sell a stock should depend on individual circumstances (such as the investor's existing holdings) and other considerations. Investment Banking Clients are companies from whom Morgan Stanley received investment banking compensation in the last 12 months. Analyst Stock Ratings Overweight (O). The stock's total return is expected to exceed the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next 12-18 months. Equal-weight (E). The stock's total return is expected to be in line with the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next 12-18 months. Not-Rated (NR). Currently the analyst does not have adequate conviction about the stock's total return relative to the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next 12-18 months. Underweight (U). The stock's total return is expected to be below the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next 12-18 months. Unless otherwise specified, the time frame for price targets included in Morgan Stanley Research is 12 to 18 months. Analyst Industry Views Attractive (A): The analyst expects the performance of his or her industry coverage universe over the next 12-18 months to be attractive vs. the relevant broad market benchmark, as indicated below. In-Line (I): The analyst expects the performance of his or her industry coverage universe over the next 12-18 months to be in line with the relevant broad market benchmark, as indicated below. Cautious (C): The analyst views the performance of his or her industry coverage universe over the next 12-18 months with caution vs. the relevant broad market benchmark, as indicated below. Benchmarks for each region are as follows: North America - S&P 500; Latin America - relevant MSCI country index or MSCI Latin America Index; Europe - MSCI Europe; Japan - TOPIX; Asia - relevant MSCI country index. . Important Disclosures for Morgan Stanley Smith Barney LLC Customers Citi Investment Research & Analysis (CIRA) research reports may be available about the companies or topics that are the subject of Morgan Stanley Research. Ask your Financial Advisor or use Research Center to view any available CIRA research reports in addition to Morgan Stanley research reports. Important disclosures regarding the relationship between the companies that are the subject of Morgan Stanley Research and Morgan Stanley Smith Barney LLC, Morgan Stanley and Citigroup Global Markets Inc. or any of their affiliates, are available on the Morgan Stanley Smith Barney disclosure website at www.morganstanleysmithbarney.com/researchdisclosures. For Morgan Stanley and Citigroup Global Markets, Inc. specific disclosures, you may refer to www.morganstanley.com/researchdisclosures and https://www.citigroupgeo.com/geopublic/Disclosures/index_a.html. Each Morgan Stanley Equity Research report is reviewed and approved on behalf of Morgan Stanley Smith Barney LLC. This review and approval is conducted by the same person who reviews the Equity Research report on behalf of Morgan Stanley. This could create a conflict of interest. Other Important Disclosures Morgan Stanley & Co. International PLC and its affiliates have a significant financial interest in the debt securities of Abbott Laboratories, Baxter International, Beckman Coulter, Becton Dickinson, Boston Scientific, CareFusion Corp., Covidien, Edwards Lifesciences, Hologic, Inc., Integra LifeSciences, Johnson & Johnson, Life Technologies, Medtronic Inc., Stryker Corporation, Talecris Biotherapeutics Holdings. Morgan Stanley produces an equity research product called a "Tactical Idea." Views contained in a "Tactical Idea" on a particular stock may be contrary to the recommendations or views expressed in research on the same stock. 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  • MORGAN STANLEY RESEARCH October 20, 2010 Intuitive Surgical Inc. Morgan Stanley Research personnel may participate in company events such as site visits and are generally prohibited from accepting payment by the company of associated expenses unless pre-approved by authorized members of Research management. The value of and income from your investments may vary because of changes in interest rates, foreign exchange rates, default rates, prepayment rates, securities/instruments prices, market indexes, operational or financial conditions of companies or other factors. There may be time limitations on the exercise of options or other rights in securities/instruments transactions. Past performance is not necessarily a guide to future performance. Estimates of future performance are based on assumptions that may not be realized. If provided, and unless otherwise stated, the closing price on the cover page is that of the primary exchange for the subject company's securities/instruments. 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  • MORGAN STANLEY RESEARCH The Americas Europe Japan Asia/Pacific 1585 Broadway 20 Bank Street, Canary Wharf 4-20-3 Ebisu, Shibuya-ku 1 Austin Road West New York, NY 10036-8293 London E14 4AD Tokyo 150-6008 Kowloon United States United Kingdom Japan Hong Kong Tel: +1 (1) 212 761 4000 Tel: +44 (0) 20 7 425 8000 Tel: +81 (0) 3 5424 5000 Tel: +852 2848 5200 Industry Coverage:Medical Technology Company (Ticker) Rating (as of) Price* (10/19/2010) David R. Lewis Abbott Laboratories (ABT.N) O (09/04/2008) $52.87 Abiomed (ABMD.O) E (02/06/2009) $10.61 American Medical Systems E (11/05/2008) $20.34 Holdings, Inc. (AMMD.O) Baxter International (BAX.N) O (09/04/2008) $48.6 Beckman Coulter (BEC.N) E (09/14/2009) $49.06 Becton Dickinson (BDX.N) E (07/31/2009) $76.35 Boston Scientific (BSX.N) E (09/10/2010) $5.97 CareFusion Corp. (CFN.N) O (05/20/2010) $24.4 Covidien (COV.N) O (07/15/2010) $39.87 Edwards Lifesciences (EW.N) E (09/04/2008) $65.42 Gen-Probe Inc. (GPRO.O) E (11/21/2008) $48.01 Haemonetics Corporation (HAE.N) E (12/20/2006) $54.91 Hansen Medical, Inc. (HNSN.O) U (01/08/2009) $1.82 Hologic, Inc. (HOLX.O) E (05/05/2009) $16.15 Integra LifeSciences (IART.O) E (09/10/2010) $39.96 Intuitive Surgical Inc. (ISRG.O) E (10/20/2010) $279.04 Johnson & Johnson (JNJ.N) E (08/10/2010) $63.29 Medtronic Inc. (MDT.N) E (09/04/2008) $33.37 St. Jude Medical (STJ.N) E (09/04/2008) $39.76 Stryker Corporation (SYK.N) O (01/08/2010) $50.07 Talecris Biotherapeutics Holdings ++ $23.8 (TLCR.O) Zimmer Holdings, Inc. (ZMH.N) E (07/16/2009) $50.66 Marshall Urist, M.D., Ph.D. Affymetrix (AFFX.O) E (07/20/2009) $4.41 Hospira (HSP.N) E (07/16/2009) $57.77 Illumina (ILMN.O) O (01/23/2009) $49.83 Life Technologies (LIFE.O) O (03/19/2009) $45.51 Myriad Genetics (MYGN.O) E (03/19/2009) $19.07 Thermo Fisher Scientific Inc O (09/11/2009) $47.92 (TMO.N) Waters Corp (WAT.N) E (12/12/2008) $70.92 Stock Ratings are subject to change. Please see latest research for each company. * Historical prices are not split adjusted. © 2010 Morgan Stanley