Intuitive Surgical, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; comparisons are with Q1 2020 unless noted. Intuitive develops and sells da Vinci robotic surgical systems and instruments, services, and the Ion lung-biopsy platform. Figures are in U.S. dollars.
Financial and operating performance
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Total revenue | $1.292 billion | $1.100 billion | +18% |
| Gross profit / gross margin | $903 million / 69.9% | $738 million / 67.1% | Margin +2.8 percentage points |
| Operating income / margin | $417 million / 32.3% | $283 million / 25.7% | +47% |
| Net income attributable to Intuitive | $426 million | $314 million | +36% |
| Diluted earnings per share | $3.51 | $2.62 | +34% |
| Cash provided by operating activities | $478 million | $353 million | +$125 million |
- Revenue mix: Product revenue was $1.075 billion (+19%), including $706 million from instruments and accessories (+14%) and $369 million from systems (+30%). Service revenue was $218 million (+9%). U.S. revenue was $848 million; outside-U.S. revenue was $445 million.
- Margins: Product gross margin was 70.3%, up from 67.1%; service gross margin was 67.7%, versus 67.5%. Management attributed improved product margin mainly to higher system average selling prices, lower transition and freight costs, and lower intangible amortization.
- Operating costs and taxes: SG&A increased 6% to $326 million and R&D increased 9% to $160 million. The effective tax rate was 3.0%, compared with a tax benefit and negative 2.6% rate in Q1 2020; employee equity-plan tax benefits materially reduced the 2021 rate.
- Cash, investments, and liquidity: Cash, cash equivalents, and investments totaled $7.23 billion at March 31, up $361 million from year-end 2020. Cash and equivalents were $1.40 billion; short- and long-term investments were $3.16 billion and $2.67 billion. Current assets were $6.07 billion versus current liabilities of $905 million. The balance sheet presents no debt line item.
- Cash flow and capital allocation: Investing activities used $597 million, largely reflecting net investment purchases; financing activities used $102 million, including $178 million of taxes on net share settlements, partly offset by $84 million of employee-plan proceeds. No shares were repurchased during the quarter.
- Debt and other balance-sheet items: Total liabilities were $1.35 billion and stockholders’ equity was $10.19 billion. The filing does not provide a separate borrowings balance.
Material changes and business trends
- Da Vinci procedures rose approximately 16% to 360,000; system shipments increased 26% to 298. The installed base reached approximately 6,142 systems, up about 8% year over year, and utilization per system increased 8%.
- Procedure growth was approximately 14% in the U.S. and 23% outside the U.S. Management reported continued recovery during February and March, but regional performance varied; China’s comparison benefited from severe COVID-related disruption in Q1 2020.
- System placements reflected procedure growth, upgrades to fourth-generation systems, and hospital preparation for a post-pandemic environment. Systems placed under operating leases represented 43% of shipments, versus 32% a year earlier.
- Instruments and accessories revenue growth was below procedure growth, partly because customers adjusted purchasing and inventory patterns in response to the Extended Use Program. Recurring revenue was $982 million, or 76% of total revenue, versus $855 million, or 78%.
Outlook, risks, and unusual items
- Outlook: The company did not provide a numerical revenue or earnings forecast in this filing and said it could not reliably estimate the pandemic’s impact on revenue in Q2 2021 and beyond. It expects R&D expense to continue increasing and capital expenditures to exceed $300 million in both 2021 and 2022. Management believes available cash, investments, and operating cash generation will meet liquidity needs for the foreseeable future.
- COVID-19 and supply chain: Hospital resource constraints and deferred elective procedures may suppress procedure volumes and system demand. Semiconductor and other component shortages, reliance on sole- or single-source suppliers, and higher input prices could constrain production or raise costs.
- Extended Use Program: Wider adoption of instruments with more uses and price reductions for selected instruments are expected to reduce instrument revenue per procedure. Based on 2019 volume and mix, the program and related pricing changes would have reduced annual instruments and accessories revenue by an estimated $150 million to $170 million.
- Legal contingencies: The company faces da Vinci product-liability cases, Ethicon patent litigation and a U.S. International Trade Commission investigation involving staplers, and antitrust litigation concerning service and repair practices. Several product-liability trials were expected within 12 months; the company could not estimate potential losses beyond recorded amounts for the matters described. An unfavorable trade ruling could restrict imports or require product changes.
- Unusual income items: Q1 interest and other income included approximately $14 million of gains on strategic investments. The company also sold its Teladoc shares for $71.5 million, recognizing an $11.4 million gain, partly offset by a $7.5 million loss on a related collar settlement. Tax benefits from employee equity awards were $73.4 million and significantly lowered the effective tax rate.
Important facts for investors to verify
- Whether procedure recovery and system-placement growth persist as COVID-19 conditions and hospital capacity evolve.
- The effect of Extended Use adoption and instrument pricing on revenue per procedure, recurring revenue, and margins.
- Whether semiconductor and other supply constraints affect production, deliveries, costs, or customer demand.
- Developments in the Ethicon ITC/patent matters and product-liability and antitrust cases, including any rulings, settlements, or changes in estimated exposure.
- How much reported earnings growth and the low tax rate depend on investment gains and employee equity-plan tax benefits.
- Execution against planned capital expenditures above $300 million in each of 2021 and 2022, and the continuing increase in R&D spending.