Intuitive Surgical, Inc. — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. The filing also reports unaudited fourth-quarter results. Amounts are in U.S. dollars; financial figures are in millions unless noted.
Business context
Intuitive designs, manufactures, and markets da Vinci robotic-assisted surgical systems, instruments and accessories, and related services. It operates as one reportable segment. At year-end, its installed base was 4,409 systems, and approximately 877,000 procedures were performed during 2017. Recurring revenue—primarily instruments and accessories, service, and operating leases—represented 72% of revenue.
Key financial metrics
| Metric | 2017 | 2016 | Change / context |
|---|---|---|---|
| Revenue | $3,128.9 | $2,704.4 | Up 16% |
| Gross profit | $2,194.1 | $1,890.1 | Gross margin 70.1%, versus 69.9% |
| Operating income | $1,054.6 | $945.2 | Up 12%; operating margin 33.7%, versus 34.9% |
| Net income | $660.0 | $735.9 | Down 10%; diluted EPS $5.67 versus $6.24 |
| Cash from operations | $1,143.9 | $1,087.0 | Up about 5% |
| Cash, cash equivalents, and investments | $3,846.5 | $4,837.9 | Down about $1.0 billion |
| Total assets | $5,758.0 | $6,486.9 | |
| Total liabilities | $1,031.2 | $709.1 | |
| Stockholders’ equity | $4,726.8 | $5,777.8 |
Revenue mix: Product revenue was $2,547.1 (including $1,636.9 of instruments and accessories and $910.2 of systems); service revenue was $581.8. U.S. revenue was 73% of total. System shipments rose to 684 from 537; system average selling price, excluding operating leases, declined to approximately $1.47 million from $1.52 million.
Liquidity and debt: Year-end current assets were $2,810.9 and current liabilities were $704.1. The filing does not present a borrowings or debt balance in the balance sheet; it reports other long-term liabilities of $327.1. Management said operating cash flows and existing cash and investments should meet foreseeable liquidity needs.
Fourth quarter: Revenue was $892.4 and gross profit was $633.3. Net loss was $38.8, primarily reflecting a $317.8 income tax expense provisionally recorded for the 2017 Tax Act; diluted loss per share was $0.35.
Material changes versus 2016
- Revenue growth reflected approximately 16% higher procedure volume, 17% growth in instruments and accessories, 15% growth in systems revenue, and 13% growth in service revenue.
- Gross margin edged higher, supported by manufacturing efficiencies and product cost reductions. Service margin declined to 69.1% from 70.8%, mainly due to higher repair costs for da Vinci Xi endoscopes.
- Operating expenses increased 21% to $1,139.5. Research and development expense rose 37% to $328.6 as the company expanded product-development programs.
- Net income fell despite operating growth, chiefly because the 2017 tax provision included the provisional Tax Act charge. The effective tax rate was approximately 39.8%, versus 25.0% in 2016; $102.8 of excess share-based compensation tax benefits partly offset the increase.
- Cash and investments declined mainly because of a $2,274.0 accelerated share repurchase, which repurchased 7.3 million shares. Cash provided by operations increased to $1,143.9.
Outlook, commentary, risks, and unusual items
- No quantified revenue, earnings, or procedure-growth guidance is provided. Management expects substantial continued R&D investment and expects R&D expenses to increase.
- The 2017 Tax Act resulted in a provisional $270.2 toll charge on deemed repatriation of foreign earnings, payable over eight years, and a provisional $47.6 deferred-tax remeasurement charge. The company said its accounting assessment remained subject to refinement and additional guidance.
- Management cited procedure growth in U.S. general surgery and worldwide urology. It also noted uncertainty around future system placements in China, reimbursement expansion in Japan, and adoption of newer products, including the da Vinci X launched in 2017.
- Key risks include competition from established and emerging surgical-robotics companies; regulatory and reimbursement changes; product quality, recalls, and patient-safety concerns; reliance on sole- or single-source suppliers; foreign-exchange and trade exposure; and long, seasonal capital-sales cycles.
- Legal matters include approximately 43 individual product-liability lawsuits and a multi-plaintiff case; the company could not estimate possible losses beyond recorded accruals. Ethicon filed a patent-infringement suit in 2017 concerning EndoWrist staplers; the company could not estimate a loss range. Several shareholder derivative actions were settled and dismissed, with $11.7 of 2017 charges reported for the settlement.
- The company recorded a $7.8 litigation settlement charge in cost of revenue and $25.3 in total pre-tax litigation charges in 2017. Product-liability settlement charges were $16.3. The company self-insures product-liability risk.
- The financial statements received an unqualified audit opinion, and the auditor and management concluded internal control over financial reporting was effective as of year-end.
Important facts for investors to verify
- Whether procedure growth and recurring-revenue expansion continue, particularly in general surgery, urology, and international markets.
- How the Tax Act’s provisional amounts, GILTI treatment, and subsequent guidance affect final tax expense, cash taxes, and the effective tax rate.
- Whether the company can sustain margins amid lower system ASPs, service repair costs, competitive pressure, and product-mix changes.
- Developments and potential financial exposure in product-liability, shareholder, and patent litigation, including losses beyond recorded accruals.
- China authorization and tender timing, Japanese reimbursement levels, and regulatory approvals for new products and indications.
- Cash generation and capital allocation following the $2.274 billion repurchase, including use of the remaining $717.5 million authorization.