Intuitive Surgical, Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018; comparative figures are for the corresponding 2017 periods. Amounts are in U.S. dollars unless noted. The company designs, manufactures, and markets da Vinci robotic-assisted surgical systems and related instruments, accessories, and services.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Total revenue | $920.9 million | $807.8 million | $2,677.7 million | $2,246.2 million |
| Gross profit / margin | $642.3 million / 69.7% | $568.1 million / 70.3% | $1,868.4 million / 69.8% | $1,568.0 million / 69.8% |
| Operating income / margin | $313.3 million / 34.0% | $280.6 million / 34.7% | $867.4 million / 32.4% | $733.9 million / 32.7% |
| Net income attributable to Intuitive Surgical | $292.5 million | $298.6 million | $835.4 million | $702.4 million |
| Diluted earnings per share | $2.45 | $2.56 | $7.04 | $6.06 |
| Cash provided by operating activities | — | $831.5 million | $811.9 million |
- Q3 revenue increased 14% year over year; nine-month revenue rose 19%. Q3 instrument and accessory revenue grew 21% to $486.3 million, systems revenue grew 5% to $274.6 million, and service revenue grew 11% to $160.0 million.
- Q3 procedures increased approximately 20% to 256,000; nine-month procedure growth was approximately 18%. The installed base reached approximately 4,814 systems, up about 13% year over year. The company shipped 231 systems in Q3 versus 169 a year earlier.
- Q3 attributable net income and diluted EPS declined despite higher revenue and operating income, largely reflecting the shift from a 2017 tax benefit to 2018 tax expense. Nine-month attributable net income increased 19%.
- At September 30, cash and cash equivalents were $1.008 billion, short-term investments $2.128 billion, and long-term investments $1.435 billion—about $4.57 billion combined. This was up $724 million from December 31, 2017. Current assets were $4.253 billion and current liabilities $703.3 million.
- Total assets were $7.319 billion, total liabilities $1.030 billion, and stockholders’ equity $6.289 billion. The balance sheet presents no separate borrowings or debt line item; the filing text does not provide a clear total debt figure.
- Nine-month investing cash use was $563.3 million, including $131.9 million for property, equipment, and intellectual property and $60.1 million for acquisitions. Financing provided $92.6 million; no shares were repurchased in the first nine months of 2018, compared with $2.0 billion of repurchases in the 2017 period.
Material changes and operating developments
- U.S. revenue represented 73% of Q3 revenue and 71% of nine-month revenue. Nine-month OUS procedure growth was approximately 21%, but growth moderated from 24% in the prior-year period, primarily because of slower growth in China.
- Recurring revenue— instruments and accessories, services, and operating leases—was $660.3 million in Q3, or 72% of revenue, versus $552.5 million, or 68%, a year earlier.
- Q3 systems revenue growth was modest relative to shipment growth, partly reflecting more systems placed under operating leases and the prior-year da Vinci X trade-out program. Q3 2017 included $21.3 million of revenue associated with that program.
- Service gross margin declined to 66.6% from 69.4%, primarily due to higher repair and replacement costs for da Vinci Xi/X endoscopes. Total gross margin was 69.7%, compared with 70.3%.
- SG&A rose 8% in Q3 and 19% year to date; R&D rose 29% and 23%, respectively. Management attributed higher spending to expanded international teams and infrastructure, litigation, personnel, and broader product-development programs.
Outlook, commentary, risks, and unusual items
- The filing gives no specific numeric revenue, earnings, or procedure-growth guidance. Management expects substantial, continuing R&D investment and approximately $300 million of planned capital expenditures for new manufacturing, engineering, and administrative facilities. It says operating cash flow and current cash and investments should meet foreseeable liquidity needs.
- Management described a measured U.S. launch of the da Vinci SP system; three systems were shipped in Q3 after U.S. clearance for certain urologic procedures. SureForm 60 and Vessel Sealer Extend also received U.S. clearances during 2018. The company submitted a premarket notification for its Ion endoluminal system in August.
- Legal matters include a proposed $42.5 million settlement of the securities class action, subject to final court approval, and product-liability claims. The company recorded $45.2 million of net pretax charges/recoveries for securities and tolled product-liability matters in the first nine months. It could not estimate possible losses above the product-liability accrual.
- Ethicon filed two patent-infringement suits involving the company’s EndoWrist and SureForm staplers. The company said it could not reasonably estimate potential losses in either matter; Ethicon indicated it may seek preliminary injunctive relief in the newer case.
- Tax expense was $43.4 million in Q3, versus a $7.2 million benefit in Q3 2017. The nine-month effective tax rate was 9.4%. Tax rates reflect, among other items, equity-award tax benefits, R&D credits, and Tax Act provisions; the company was still evaluating certain Tax Act and global intangible low-taxed income accounting matters.
- The company adopted ASC 606 retrospectively, changing allocation and timing of revenue recognition in bundled system arrangements and capitalizing certain contract-acquisition costs. It also recorded a $390.8 million deferred tax asset and corresponding retained-earnings adjustment at January 1, 2018 related to an intra-entity intellectual-property transfer.
- Key business risks include procedure adoption and reimbursement, healthcare spending and hospital capital budgets, regulatory approvals, product safety and litigation, competition, manufacturing capacity, foreign exchange, and China’s system import quota and authorization process. Japan’s newly reimbursed procedures may not achieve expected adoption.
Investor verification priorities
- Track procedure growth and utilization by geography, especially China’s quota constraints and adoption of newly reimbursed procedures in Japan.
- Assess the quality and durability of growth in instruments, system placements, recurring revenue, and operating leases; monitor lease buyouts and system average selling prices.
- Verify whether endoscope repair and replacement costs continue to pressure service margins and whether R&D, SG&A, and facility investment affect operating leverage.
- Follow final approval and payment of the securities settlement, outcomes of product-liability claims, and developments in both Ethicon patent cases.
- Monitor tax-accounting finalization, cash generation and investment balances, planned capital spending, and any changes to the company’s liquidity outlook.