Intuitive Surgical, Inc. — Q1 2019 Form 10-Q
Unaudited results for the three months ended March 31, 2019; comparisons are with Q1 2018 unless noted. Intuitive develops and sells the da Vinci surgical system and Ion endoluminal system, and earns revenue from systems, instruments and accessories, and services. Amounts are in millions of dollars except per-share data, percentages, and system counts.
Financial performance and liquidity
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Total revenue | $973.7 | $847.5 | +15% |
| Product revenue | $799.8 | $694.8 | +15% |
| Instruments and accessories | $552.3 | $460.3 | +20% |
| Systems revenue | $247.5 | $234.5 | +6% |
| Service revenue | $173.9 | $152.7 | +14% |
| Gross profit / margin | $669.6 / 68.8% | $593.8 / 70.1% | Margin down 1.3 points |
| Operating income / margin | $252.2 / 25.9% | $276.7 / 32.6% | Income down 9% |
| Net income attributable to Intuitive | $306.5 | $287.6 | +7% |
| Diluted earnings per share | $2.56 | $2.44 | +5% |
| Cash from operations | $333.2 | $280.2 | +19% |
Q1 2019 net income included a $24.3 tax benefit, versus $2.6 tax expense a year earlier. The filing attributes the low effective tax rate of (8.7%) largely to excess tax benefits from employee equity plans; these benefits were $72.7 and reduced the effective rate by 26 percentage points. This tax item helped net income rise despite lower operating income.
Cash, cash equivalents, and short- and long-term investments totaled $5.1 billion at March 31, 2019, up $230.2 from year-end. Cash and cash equivalents were $875.7; current assets were $4.025 billion and current liabilities $740.2. The balance sheet reports total liabilities of $1.195 billion and no borrowings or debt balance; the filing does not present a separate debt metric. Operating cash flow was partly offset by $308.9 used in investing and $41.8 used in financing. Capital expenditures and intellectual property purchases were $114.8.
Material changes and operating drivers
- Approximately 282,000 da Vinci procedures were performed, up about 18%; U.S. procedures grew about 17% and outside-U.S. procedures about 21%. The installed base reached approximately 5,114 systems, up about 13% year over year.
- Shipments rose to 235 systems from 185. Systems revenue grew more slowly, partly because the reported average selling price, excluding operating-lease systems, fell to approximately $1.31 million from $1.49 million. Management cited more trade-ins, a greater share of lower-priced models, geographic and channel mix, and volume incentives.
- Recurring revenue (instruments and accessories, services, and operating leases) was $746.6, or 77% of revenue, versus $622.5, or 73%. Operating-lease revenue increased to $20.4 from $9.5.
- Operating expenses rose to $417.4 from $317.1. SG&A increased 23% to $273.4, reflecting expanded teams and infrastructure, including direct operations in China, India, and Taiwan. R&D increased 51% to $144.0 as the company invested in Ion, SP, informatics, instrumentation, imaging, and future robotic systems.
- Gross margin declined, with management citing higher intangible-asset amortization, lower system selling prices, and product and geographic mix; improved manufacturing efficiencies partly offset these effects. Intangible-asset charges were $30.2 versus $7.6.
Outlook, commentary, and risks
The filing provides no formal revenue or earnings guidance. Management said R&D investment is expected to remain substantial and increase, and capital investments are expected to exceed $250 million in each of the next two years. It expects current cash, investments, and operating cash generation to fund liquidity needs for the foreseeable future. Ion commercial shipments were anticipated to begin by year-end 2019, with a measured launch; management did not expect Ion to have a significant 2019 revenue or gross-margin impact. The company had placed 21 da Vinci SP systems by quarter-end and plans a measured rollout while developing training and supply capacity.
- Key demand uncertainties include hospital spending and capital budgets, procedure adoption and reimbursement, competition, system utilization, product acceptance, regulatory clearances, and manufacturing and supply-chain execution. China system sales under the quota for 154 new surgical robots through 2020 depend on hospital tenders and approvals; sales are uncertain.
- Product-liability cases include claims alleging injury or death associated with da Vinci procedures. The company accrued $10.5 for certain matters and said possible losses in excess of recognized amounts could not be estimated; additional costs could materially affect results.
- Ethicon patent cases concern EndoWrist and SureForm staplers. One case was stayed pending patent review; the company could not estimate a loss range for either case.
- The Fosun joint venture acquired Chindex China distribution assets for $66.0 in preliminary consideration, including $64.7 of contingent consideration tied to 2019–2020 commercial milestones. Fair-value changes may affect earnings; the acquired business’s results were not material to date.
- The quarter included adoption of the new lease standard, recognizing $74.2 of operating-lease right-of-use assets and $76.6 of lease liabilities; adoption had no opening retained-earnings adjustment.
Important facts for investors to verify
- Whether procedure growth and recurring-revenue expansion continue, particularly in general surgery and outside the U.S.
- System shipment economics: ASP, trade-in mix, operating-lease placements, and the conversion of placements into recurring revenue.
- Whether margin pressure and elevated R&D and SG&A spending persist, and how much reported earnings depend on equity-award tax benefits.
- Ion and SP launch progress, regulatory clearances, clinical evidence, supply readiness, and customer adoption.
- Outcomes and potential additional costs from product-liability and patent litigation, and milestone payments under the Chindex acquisition.
- Capital spending against management’s stated expectation of more than $250 million annually in each of the next two years.