Intuitive Surgical, Inc. — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The filing is an annual report, not a standalone quarterly filing; selected fourth-quarter results are also summarized below. Intuitive develops and sells da Vinci robotic-assisted surgical systems, instruments and accessories, and related services. It reported one operating segment.
Financial and operating performance
| Metric | FY 2018 | FY 2017 | Change |
|---|---|---|---|
| Revenue | $3.724 billion | $3.138 billion | +19% |
| Gross profit / margin | $2.604 billion / 69.9% | $2.202 billion / 70.2% | Margin down 0.3 percentage points |
| Operating income / margin | $1.199 billion / 32% | $1.063 billion / 34% | Income +13% |
| Net income attributable to Intuitive | $1.128 billion | $671 million | +68% |
| Diluted EPS | $9.49 | $5.77 | +64% |
| Cash from operating activities | $1.170 billion | $1.144 billion | +2% |
| Cash, cash equivalents and investments | $4.834 billion | $3.847 billion | +$988 million |
| Total assets / total liabilities | $7.847 billion / $1.159 billion | $5.777 billion / $996 million | — |
Recurring revenue was $2.649 billion, 71% of total revenue. Instruments and accessories generated $1.962 billion (+20%); system revenue was $1.127 billion (+21%); and service revenue was $635 million (+11%). Approximately 1.037 million procedures were performed, up 18%, and the installed base grew 13% to 4,986 systems. The company reported no material debt balance; the filing does not identify borrowings as a material source of financing.
Liquidity was supported by $3.063 billion of cash and short-term investments and $1.771 billion of long-term investments at year-end. Management said operating cash flows and existing cash and investments should meet foreseeable liquidity needs. Capital expenditures are expected to exceed $250 million in each of the next two years.
Fourth quarter: Revenue was $1.047 billion versus $892 million in Q4 2017; gross profit was $736 million versus $634 million. Net income attributable to Intuitive was $292.5 million versus a $31.5 million loss in Q4 2017. The prior-year quarter included a $317.8 million tax expense associated with the 2017 Tax Act. Q4 2018 also included a $25.2 million charitable foundation contribution and $2.5 million of specified one-time tax benefits.
Material changes and unusual items
- Revenue growth reflected higher procedures, system shipments and recurring instrument sales. Systems shipped increased to 926 from 684; 277 shipments involved trade-ins, compared with 163 in 2017.
- Gross margin edged lower, primarily because service margin fell to 66.3% from 68.6%, reflecting higher repair and replacement costs for da Vinci Xi/X endoscopes. Product gross margin was broadly stable.
- Operating expenses rose 23% to $1.405 billion, including higher commercial and R&D investment, litigation charges and the $25.2 million foundation contribution. R&D expense increased 27% to $418 million.
- The 2018 effective tax rate was 12.1%, versus 39.3% in 2017. The comparison is affected by the 2017 Tax Act charge and 2018 tax benefits, including $116.2 million of excess tax benefits from employee equity awards.
- Cash and investments increased despite $1.050 billion of net investing cash outflow, including $774 million of net investment purchases, $187 million of property and equipment purchases, and $88 million for acquisitions. Operating cash flow was partly absorbed by working capital, including a $279 million inventory increase.
- ASC 606 revenue guidance was adopted retrospectively. The company said adoption did not materially change reported revenue for the periods presented, though it changed allocation and timing of revenue and capitalized certain contract acquisition costs.
Outlook, risks and contingencies
- No specific revenue, earnings or procedure-growth guidance is provided in the filing. Management expects substantial R&D investment and increasing R&D expense; it also expects capital investment above $250 million annually for the next two years.
- The da Vinci SP launch is being managed gradually: 15 systems were placed in 2018. Additional regulatory indications are planned, but adoption and clearances are uncertain. FDA clearance for the Ion lung-biopsy system remained pending at year-end.
- China system sales depend on hospital tenders and approvals under a quota permitting 154 new surgical robots through 2020; the company’s share and timing are uncertain. In January 2019, its joint venture began direct China distribution after acquiring distribution-related assets, with estimated payments of $80–$90 million contingent on commercial milestones.
- Japan’s 12 additional reimbursed procedures became eligible in April 2018, but reimbursement at conventional laparoscopic rates may constrain adoption. Procedure growth in China moderated amid quota constraints.
- Key risks include competition from established and new surgical-robotics companies; clinical adoption, reimbursement and regulatory uncertainty; product quality and recalls; sole- and single-source suppliers; tariffs and foreign exchange; cybersecurity and privacy; and litigation. Product liability risk is self-insured.
- The company recorded $45.2 million of pre-tax litigation charges in 2018, including a $42.5 million settlement of the securities class action, which was finally approved in December 2018 and concluded after the appeals period. Product-liability cases remain pending; the company said potential losses beyond recorded accruals could not be reasonably estimated. Two Ethicon patent cases involving staplers were pending, with trial dates in 2019 and 2020; loss estimates were not available.
- There were no significant off-balance-sheet arrangements. Purchase commitments and obligations totaled $711 million, mostly due within one year, though many purchase orders can be canceled or adjusted. The company had $246.7 million of remaining deemed-repatriation tax obligation payable in installments.
Important facts for investors to verify
- Whether procedure growth, especially in U.S. general surgery and international markets, continues to drive recurring instrument revenue.
- Whether service margins recover as Xi/X endoscope repair and replacement costs evolve.
- How China quota allocations and hospital tenders affect system placements and procedure capacity.
- The pace of da Vinci SP adoption, additional clearances, and Ion regulatory progress.
- Developments in product-liability and patent litigation, including potential costs beyond recorded accruals.
- How the unusually low 2018 tax rate compares with future tax rates after discrete equity-award benefits and other tax items.
- The balance-sheet and disclosure effects of adopting the new lease accounting standard in 2019.