Intuitive Surgical, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. Intuitive Surgical designs, manufactures, and markets da Vinci surgical systems and related instruments, accessories, and services. Financial amounts are in U.S. dollars; dollar figures below are in millions unless stated otherwise.
Financial performance and liquidity
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Revenue | $674.2 | $594.5 | +13% |
| Gross profit / margin | $466.1 / 69.1% | $405.0 / 68.1% | Margin +1.0 percentage point |
| Operating income | $191.5 | $179.0 | +7% |
| Net income | $179.8 | $136.4 | +32% |
| Diluted EPS | $4.67 | $3.54 | +32% |
| Cash from operations | $241.5 | $226.8 | +$14.7 |
- Product revenue was $534.0 (+14%); service revenue was $140.2 (+13%). Instruments and accessories generated $380.8 (+18%). Recurring revenue rose 17% to $521.0, or 77% of total revenue.
- Approximately 207,000 procedures were performed, up nearly 18%. Systems shipments rose to 133 from 110; the installed base was approximately 4,023, up about 10% year over year.
- Operating expenses increased 22% to $274.6, including R&D of $73.5 (+38%) and SG&A of $201.1 (+16%). Operating margin was approximately 28.4%, versus 30.1% a year earlier; net margin was approximately 26.7%, versus 22.9%.
- Cash, cash equivalents, and investments totaled approximately $3.15 billion at March 31, down about $1.69 billion from year-end, mainly due to a $2.0 billion accelerated share repurchase. The company reported $708.6 in cash and cash equivalents and $2,438.2 in short- and long-term investments. No debt balance is presented in the balance sheet.
- Total liabilities were $680.5; current assets of $2,167.7 compared with current liabilities of $558.2. The company reported operating cash flow of $241.5 and capital spending of $53.0.
Material changes and unusual items
- Q1 revenue included a $23.4 deferral under a trade-out program for certain system buyers, with $8.1 of associated costs also deferred. Eligible customers may return purchased systems for credit toward a future system; deferred amounts are to be recognized when rights are exercised or expire, subject to revenue recognition requirements.
- Gross margin benefited from product cost reductions and manufacturing efficiencies, partly offset by a $7.8 litigation settlement charge related to a license and supply agreement. Operating income included $21.3 of litigation-related charges, including a $13.5 product-liability charge.
- Adoption of share-based payment accounting guidance resulted in $32.6 of excess tax benefits in the tax provision, reducing the effective tax rate by 16.3 percentage points. The reported effective rate was 10.2%, versus 26.1% in Q1 2016; management cautioned that the new treatment may increase tax-rate volatility.
- The company paid $2.0 billion under an accelerated share repurchase agreement and received an initial delivery of approximately 2.4 million shares. Final share settlement was scheduled by Q4 2017, subject to possible acceleration and settlement terms.
Outlook, management commentary, and risks
- No specific revenue, earnings, or procedure-growth guidance is provided. Management expects substantial continued R&D investment and anticipates R&D expense will continue to increase. It believes cash and investments, together with operating cash flows, will meet liquidity needs for the foreseeable future.
- Management attributed procedure growth to U.S. general surgery and global urology, and reported faster Q1 growth outside the U.S. (approximately 28%) than in the U.S. (approximately 14%). European Q1 growth benefited from Easter falling in Q2 rather than Q1 as in 2016.
- Demand risks include hospital capital spending and consolidation, procedure adoption and reimbursement, competition, regulatory approvals, and customer utilization. China placements depend on future import authorizations or public-hospital quotas and tender processes; timing and scale are uncertain. Further Japanese reimbursement approvals are also uncertain.
- The da Vinci Single Port system was undergoing clinical evaluation; the company planned to seek FDA clearance and said it was unlikely to contribute revenue in 2017. A China-based catheter-device joint venture was subject to government approvals, expected to incur losses before commercialization, and was not expected to generate revenue until after 2017.
- Contingencies include approximately 51 individual product-liability lawsuits and a multi-plaintiff case involving 55 patients. Accrued liabilities for tolled product-liability claims were $33.2 at March 31, up from $20.5 at year-end. The company said additional claims and costs could have a material adverse effect, and it could not estimate possible losses above its accrual. A Washington product-liability case was remanded for retrial. Securities and derivative litigation also remained ongoing or subject to proposed settlement and court approval.
Important facts for investors to verify
- How much of revenue and net-income growth is sustainable, given the $32.6 share-award tax benefit and the timing of the $23.4 trade-out deferral?
- Whether procedure growth, recurring revenue, system shipments, and system utilization continue at recent rates, and how seasonality affects comparisons.
- The final number and pricing of shares settled under the $2.0 billion accelerated repurchase, and the company’s remaining repurchase authorization of approximately $991.6.
- Developments in product-liability claims, related insurance coverage disputes, and the securities and derivative cases, including possible costs beyond recorded accruals.
- Progress on China authorizations and tenders, Japanese reimbursement, regulatory clearances, and commercialization plans for the Single Port system and catheter-device joint venture.