Intuitive Surgical, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. The company develops and sells da Vinci robotic surgical systems, instruments and accessories, services, and the Ion endoluminal system. Results were substantially affected by COVID-19 disruptions to elective procedures and hospital spending.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $852.1 million | $1,098.9 million | $1,951.6 million | $2,072.6 million |
| Gross profit / margin | $502.9 million / 59% | $759.0 million / 69% | $1,241.1 million / 63% | $1,428.6 million / 69% |
| Operating income | $80.6 million | $359.0 million | $363.6 million | $611.2 million |
| Net income attributable to Intuitive | $68.0 million | $318.3 million | $381.5 million | $624.8 million |
| Diluted EPS | $0.57 | $2.67 | $3.19 | $5.23 |
- Q2 product revenue was $721.8 million and service revenue was $130.3 million. Instruments and accessories revenue fell 20% to $460.8 million; systems revenue fell 24% to $261.0 million.
- Q2 procedures declined approximately 19% year over year; da Vinci system shipments fell 35% to 178. The installed base reached approximately 5,764 systems, up about 9% year over year.
- Six-month operating cash flow was $582.7 million, versus $649.2 million. Capital expenditures and intellectual property purchases were $215.2 million. Cash, cash equivalents and investments totaled $6.07 billion at June 30, up $220 million from year-end 2019.
- Cash and cash equivalents were $2.04 billion; short- and long-term investments were $2.45 billion and $1.59 billion. Current assets were $5.90 billion and current liabilities $924.8 million. Total liabilities were $1.34 billion; the balance sheet presents no debt line item.
Changes and drivers
- Q2 revenue decreased 22% year over year; first-half revenue decreased 6%. Q2 operating income fell 78% and net income attributable to Intuitive fell 79%.
- The $59 million customer service-fee credit reduced Q2 service revenue. Lower procedure volumes and system placements also weighed on revenue. Service credits, unusually low production, higher freight, and excess or obsolete inventory costs contributed to weaker margins.
- U.S. procedures fell about 24% in Q2, while outside-U.S. procedures declined about 7%. U.S. procedure levels recovered toward early-Q1 levels by mid-June, then weakened again in late June and July amid renewed infections. China procedures recovered to early-January weekly levels by quarter-end; conditions varied across Europe.
- Despite lower revenue, R&D expense increased 19% in Q2 to $143.2 million, reflecting personnel and product-development investment. Six-month SG&A increased 6% to $587.2 million.
Outlook, risks and unusual items
- Management said it could not reliably estimate procedure volumes or the pandemic’s impact in Q3 and beyond. It anticipated lower year-over-year system placements for the rest of 2020 and expected production facilities could operate below normal capacity in Q3.
- Management estimated Q3 service-fee credits of $20 million to $50 million, depending on procedure disruption. The company deferred $10 million of lease billings and extended payment terms on $65 million of trade receivables under its relief program.
- Capital expenditures were expected to exceed $400 million in both 2020 and 2021. Management expected continued substantial R&D investment and said current cash and investments, together with expected operating income, should meet liquidity needs for the foreseeable future; it also expected reduced operating cash flow and further inventory build.
- In July 2020, the company announced an Extended Use Program and planned lower prices on certain instruments, beginning in Q4. Based on 2019 procedure volume and mix, management estimated these changes would have reduced annual instruments-and-accessories revenue by approximately $150 million to $170 million.
- A $36.8 million tax charge followed the U.S. Supreme Court’s denial of an appeal in a case concerning intercompany charges for employee share-based compensation. Q2’s effective tax rate was 34.5%; the six-month rate was 7.0%, reflecting, among other items, equity-related tax benefits.
- After quarter-end, the company’s InTouch investment was acquired by Teladoc. Intuitive expected to recognize an approximately $45 million gain in Q3, subject to changes in the fair value of the Teladoc shares; sale restrictions apply for six months.
- Risks include renewed COVID-19 disruptions, deferred procedures and hospital capital spending, supply-chain interruptions, customer payment defaults, and competition. Product-liability cases and patent disputes remain pending; an adverse U.S. trade ruling could restrict imports of certain staplers. The company said it could not estimate possible losses beyond recorded amounts for specified litigation.
- The company acquired Orpheus Medical in February 2020 to expand its surgical-video and informatics capabilities. The filing reports effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Investor verification priorities
- Track procedure recovery, regional COVID-19 trends, and whether late-June/July declines persist.
- Verify the extent and timing of Q3 service credits, customer payment deferrals, and any resulting credit losses or collection delays.
- Assess system placements, operating-lease mix, and hospital capital-spending recovery against management’s expectation of lower 2020 placements.
- Monitor gross-margin recovery, inventory levels, and the revenue and margin effects of the Extended Use Program and instrument price reductions.
- Follow the $36.8 million tax matter, the expected Teladoc-related gain, and material developments in product-liability and patent litigation.