Intuitive Surgical, Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. Financial statements are unaudited. The company develops and sells da Vinci surgical systems and the Ion endoluminal system, along with instruments, accessories, and services.
Financial performance
| Metric | Q3 2019 | Q3 2018 | First nine months 2019 | First nine months 2018 |
|---|---|---|---|---|
| Total revenue | $1,128.2 million | $920.9 million | $3,200.8 million | $2,677.7 million |
| Gross profit | $785.6 million | $642.3 million | $2,214.2 million | $1,868.4 million |
| Gross margin | 69.6% | 69.7% | 69.2% | 69.8% |
| Operating income | $365.7 million | $313.3 million | $976.9 million | $867.4 million |
| Net income attributable to Intuitive | $396.8 million | $292.5 million | $1,021.6 million | $835.4 million |
| Diluted EPS | $3.33 | $2.45 | $8.56 | $7.04 |
| Operating cash flow | Not provided for the quarter | Not provided for the quarter | $1,045.5 million | $831.5 million |
- Q3 revenue rose 23% year over year; instruments and accessories increased 25%, systems revenue 23%, and service revenue 15%. Da Vinci procedures grew nearly 20% in the quarter, and 275 da Vinci systems were shipped versus 231 a year earlier.
- For the first nine months, revenue increased 20%. Recurring revenue was $2,343.8 million, or 73% of total revenue, compared with $1,926.2 million, or 72%, in 2018.
- Q3 operating income grew 17%; operating margin was approximately 32%, versus 34% a year earlier. Higher operating expenses, including SG&A and R&D, outpaced revenue growth.
- Q3 income tax expense was only $0.3 million, including a $51.3 million benefit from remeasurement of Swiss deferred tax assets. The nine-month effective tax rate was 4.8%, versus 9.4% in 2018; this unusually low rate materially benefited reported earnings.
Financial position and cash
- At September 30, 2019, cash and cash equivalents were $969.6 million, short-term investments $1,928.0 million, and long-term investments $2,533.0 million: $5.4 billion combined, up about $0.6 billion from year-end 2018.
- Total assets were $9.1 billion and total liabilities $1.35 billion. The balance sheet reports no borrowings or debt; operating lease liabilities were $77.0 million.
- Current assets were $4.32 billion and current liabilities $930.9 million. Inventory increased to $579.6 million from $409.0 million at year-end.
- Nine-month investing cash outflow was $748.2 million, including $283.6 million for property, equipment, and intellectual property. Financing cash outflow was $219.2 million, including $269.5 million in share repurchases. Cash, cash equivalents, and restricted cash increased by $75.2 million.
Material changes, outlook, and risks
- Growth reflected procedure adoption and system placements: the installed da Vinci base reached approximately 5,406, up 12% year over year. The company reported 38 da Vinci SP systems placed and began commercial Ion shipments, with three systems shipped through September.
- Acquisitions included Chindex distribution assets in China through the Fosun joint venture and Schölly assets and operations for $100.6 million, including deferred payments. Schölly integration and manufacturing, employee retention, and regulatory recertification remain execution risks.
- Management expects capital investments to exceed $300 million in both 2019 and 2020, funded from operating cash flow, and expects R&D expense to continue increasing. No specific revenue or earnings guidance is provided; management cautions that nine-month results are not necessarily indicative of full-year results.
- Risks include product-liability lawsuits, including da Vinci injury claims, and Ethicon patent litigation. A USITC investigation could result in import restrictions or require product workarounds; the company said it could not estimate a loss range. It also noted possible losses in excess of existing product-liability accruals.
- The Medical Device Excise Tax was scheduled to resume January 1, 2020. Tax expense also remains subject to audits and uncertainty over further review of a Ninth Circuit tax decision. Other risks include regulatory approvals, reimbursement and hospital capital spending, competition, adoption of new products, and supply or manufacturing disruptions.
- Q3 gross margin was broadly stable year over year, while nine-month margin declined. Management attributed period-to-period effects to manufacturing efficiencies and higher intangible-asset amortization. Disclosure controls were assessed as effective.
Important facts for investors to verify
- How much earnings growth is sustainable excluding the $51.3 million Swiss tax benefit and volatile employee-equity tax benefits?
- Whether procedure growth, system placements, recurring revenue, and adoption of SP and Ion continue at the reported pace.
- Whether inventory growth and operating-lease placements convert into utilization, revenue, and cash generation as expected.
- Costs and outcomes of the Ethicon patent cases and product-liability claims, including exposure beyond recorded accruals.
- Schölly integration progress, deferred acquisition payments, and the expected capital spending above $300 million in 2019 and 2020.