Intuitive Surgical, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. Intuitive designs and sells da Vinci surgical systems and related instruments, accessories, and services. The financial statements are unaudited; 2017 comparative results were retrospectively restated for ASC 606 revenue recognition.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $909.3 million (+20%) | $758.8 million | $1,756.8 million (+22%) | $1,438.4 million |
| Gross profit | $632.3 million | $530.1 million | $1,226.1 million | $999.9 million |
| Gross margin | 69.5% | 69.9% | Approximately 70% | Approximately 70% |
| Operating income | $277.4 million (+7%); 31% margin | $259.9 million; 35% margin | $554.1 million (+22%) | $453.3 million |
| Net income attributable to Intuitive | $255.3 million | $223.0 million | $542.9 million | $403.8 million |
| Diluted EPS | $2.15 | $1.94 | $4.59 | $3.50 |
- Q2 product revenue was $753.5 million (+22%) and service revenue was $155.8 million (+11%). Instruments and accessories rose 20%; systems revenue rose 25%.
- For the first half, operating cash flow was $511.7 million, compared with $458.0 million. Purchases of property, equipment, and intellectual property were $84.9 million. Cash, cash equivalents, and restricted cash increased $555.3 million.
- At June 30, cash and cash equivalents were $1.204 billion, short-term investments $1.729 billion, and long-term investments $1.327 billion—about $4.26 billion combined. Current assets were $3.986 billion versus current liabilities of $666.4 million. The balance sheet lists no borrowings or other interest-bearing debt.
- Total liabilities were $980.4 million and total assets $6.850 billion. Inventory increased to $331.5 million from $241.2 million at year-end.
Material changes and operating trends
- Approximately 257,000 da Vinci procedures were performed in Q2, up about 18%. First-half procedure growth was about 17%; U.S. growth was 16% and outside-U.S. growth was 20%.
- Q2 system shipments rose to 220 from 166. The installed base reached approximately 4,666 systems, up about 12% year over year. First-half shipments were 405 versus 299.
- Recurring revenue was $643.4 million in Q2, 71% of total revenue. Outside-U.S. revenue represented 29% of Q2 revenue, compared with 27% a year earlier.
- Q2 operating expenses rose to $354.9 million from $270.2 million, including a $42.5 million securities-litigation charge. SG&A also reflects investment in expanded Asian and European teams and infrastructure.
- Q2 system average selling price, excluding operating leases, declined to approximately $1.42 million from $1.46 million, primarily due to more trade-ins and product mix.
Outlook, risks, and unusual items
- No formal full-year revenue or earnings guidance is provided. Management said it expects substantial continued R&D investment and expects R&D expense to increase; it believes operating cash flows and existing liquidity will meet foreseeable needs.
- The da Vinci SP system received U.S. clearance for urologic procedures; measured U.S. launch and customer shipments were expected in the second half of 2018. Additional indications require further regulatory clearance. SureForm 60 received U.S. clearance in July 2018, after quarter-end.
- Management cited uncertainty around Chinese system quotas and import authorizations, procedure adoption and reimbursement in Japan, hospital spending, competition, product acceptance, and regulatory outcomes. China-related capacity constraints moderated procedure growth.
- The company recorded $42.5 million for an agreement in principle to settle the Abrams securities class action, subject to final agreement and court approval. It also recorded $4.5 million of first-half product-liability charges. Further product-liability losses could materially exceed accruals; the company could not estimate the excess range. Ethicon patent litigation remained pending, with no loss estimate available.
- The Tax Act drove a lower effective tax rate; first-half 2018 rate was 7.4%, including employee equity tax benefits and R&D credits. The company repatriated $1.6 billion of foreign earnings in June without significant incremental tax, but continued evaluating certain Tax Act accounting and reinvestment matters.
- Accounting changes affected comparability: ASC 606 was adopted retrospectively, and a separate January 2018 accounting adoption produced a $390.8 million deferred-tax-asset and retained-earnings adjustment tied to transferred intellectual property.
Investor facts to verify
- Whether the $42.5 million securities settlement received final court approval and whether additional litigation costs or product-liability claims arise.
- Whether procedure growth, system placements, and utilization sustain momentum, particularly amid Chinese quota constraints and varying Japanese reimbursement economics.
- How system mix, trade-ins, operating leases, and service-repair costs affect selling prices and margins.
- Final Tax Act accounting, including global intangible low-taxed income and the company’s indefinite-reinvestment assessment.
- Whether the SP launch and further product clearances proceed as expected, and how competitive entry or regulatory actions affect adoption.