Intuitive Surgical, Inc. — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. The company designs, manufactures, and markets da Vinci surgical systems and related instruments, accessories, and services. Financial amounts below are in millions, except per-share data and where noted.
Financial results
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Total revenue | $586.1 | $512.2 | $1,118.2 | $976.9 |
| Gross profit | $386.5 | $344.4 | $723.3 | $659.8 |
| Gross margin | 65.9% | 67.2% | 64.7% | 67.5% |
| Operating income | $173.8 | $143.0 | $304.2 | $199.6 |
| Net income | $134.5 | $104.0 | $231.5 | $148.3 |
| Diluted EPS | $3.56 | $2.77 | $6.14 | $3.87 |
| Operating cash flow | Not separately reported | Not separately reported | $308.8 | $320.3 |
Q2 revenue increased 14% year over year; net income increased about 29%. First-half revenue rose about 14% and net income about 56%. First-half operating cash flow was below the prior year despite higher earnings, reflecting working-capital movements and other factors described below.
- Revenue mix: Q2 product revenue was $472.8 and service revenue $113.3. Instruments and accessories revenue rose 13% to $296.8; systems revenue rose 22% to $176.0. Recurring revenue was $410.1, or 70% of Q2 revenue, versus $368.5, or 72%, a year earlier.
- Procedures and systems: Approximately 162,000 da Vinci procedures were performed in Q2, up about 14%. The company shipped 118 systems versus 96 in Q2 2014. Installed base reached approximately 3,398 systems at quarter-end.
- Margins and expenses: Q2 operating margin was approximately 29.7%, compared with 27.9% a year earlier. Gross margin declined, reflecting newer products, foreign exchange, system trade-ins, and service costs for the Xi platform. First-half SG&A fell to $325.3 from $377.0, primarily because product-liability charges were lower; R&D rose to $93.8 from $83.2.
- Cash, liquidity, and debt: At June 30, cash and cash equivalents were $915.4, short-term investments $646.1, and long-term investments $1,307.1, totaling approximately $2.87 billion. Current assets were $2,163.2 and current liabilities $474.4. Total liabilities were $561.8; the filing’s balance sheet reports no debt balance. The company said available cash, investments, and expected operating cash flows should meet foreseeable liquidity needs. About $799.4 of cash, cash equivalents, and investments was held by foreign subsidiaries, with no current plan to repatriate foreign earnings.
- Cash flows and capital allocation: First-half investing cash outflow was $97.6, including $32.8 for property, equipment, and acquired intellectual property. Financing cash inflow was $104.8, including $157.5 from stock issuance, offset partly by $64.0 of repurchases and $10.0 of employee tax withholding. Cash and cash equivalents increased $315.1. The company had $936.0 remaining under its repurchase authorization at June 30.
Material changes and business developments
- Procedure growth accelerated: first-half worldwide procedures grew approximately 13%, compared with 8% in the prior-year period; U.S. growth was about 10% and international growth about 25%.
- System sales benefited from demand for the da Vinci Xi, launched in 2014, and higher shipments in the U.S., Europe, and other markets. International revenue was 29% of Q2 revenue, up from 25% in Q2 2014.
- Prior-year comparisons were affected by the Xi trade-out program: first-half 2014 revenue excluded $19.9 of net revenue deferred under that program.
- First-half gross margin fell year over year. Management attributed pressure to lower initial margins on new products, the stronger U.S. dollar, a higher share of Si system trade-ins, and recall-related and other one-time costs. Service margin also declined due to initial Xi servicing costs and endoscope replacement needs.
Outlook, commentary, and risks
- No specific full-year revenue or earnings guidance is provided in the supplied filing text. Management expected R&D expense to continue increasing and anticipated international procedures and revenue to grow faster than in the U.S. It said future demand for systems depends on procedure growth, Xi adoption, utilization, competition, reimbursement, regulatory clearances, and economic conditions.
- Management warned that continued U.S. dollar strength could further pressure revenue and product margins if foreign-currency pricing cannot be adjusted. Foreign-currency sales were approximately 20% of Q2 revenue; hedges only partly offset currency effects.
- Product-liability exposure is material: the company reported approximately 101 individual lawsuits and a multi-plaintiff suit involving 45 patients. It recorded $13.8 of related charges in the first half of 2015 and had $38.0 accrued for tolled claims at June 30. The company said additional losses are reasonably possible but could not estimate an excess-loss range; ultimate costs could materially differ from accruals.
- Insurance disputes concern rescission of product-liability policies and coverage for certain claims. The company intends to defend the cases. It stated that, except for the tolled product-liability claims, material pending litigation losses were not considered probable or not reasonably estimable.
- Product and regulatory matters include a voluntary recall of the Si EndoWrist Stapler 45, replacement shipments beginning in 2015, and a safety notice for certain equipment drapes. Management did not expect the drape matter to materially affect the financial statements. Field actions or adverse publicity could nevertheless harm adoption, sales, or reputation.
- Other demand risks cited include hospital spending and reimbursement, procedure adoption, competition, regulatory approvals, manufacturing and supply, and changes in treatment trends. U.S. benign gynecology and cholecystectomy procedures faced pressure; general surgery growth, particularly hernia repair and colorectal procedures, was a positive driver.
- The 2015 effective tax rate benefited from approximately $7.8 of discrete tax benefits, mainly from releases of unrecognized tax benefits after audits. Unrecognized tax benefits totaled about $76.2 at June 30. The company also noted that a federal R&D tax credit had expired and could be recognized if reinstated.
Important facts for investors to verify
- Whether procedure growth, Xi system demand, and recurring instrument and service revenue continue at the reported pace.
- Whether new-product, foreign-exchange, trade-in, and servicing costs stabilize or continue to weigh on gross margins.
- Developments in product-liability mediation and litigation, adequacy of the $38.0 accrual, and outcomes of related insurance disputes.
- Effects of currency movements, reimbursement and regulatory developments, and any further product recalls or safety actions.
- Cash generation, investment liquidity, foreign-held funds, repurchase activity, and the effect of stock-based compensation and employee equity issuance.