Intuitive Surgical, Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Intuitive develops and sells da Vinci surgical systems and the Ion endoluminal system, along with instruments, accessories, and services. Financial statements are unaudited.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $1,098.9M | $909.3M | $2,072.6M | $1,756.8M |
| Gross profit | $759.0M | $632.3M | $1,428.6M | $1,226.1M |
| Operating income | $359.0M | $277.4M | $611.2M | $554.1M |
| Net income attributable to Intuitive | $318.3M | $255.3M | $624.8M | $542.9M |
| Diluted EPS | $2.67 | $2.15 | $5.23 | $4.59 |
- Q2 revenue rose 21% year over year; product revenue was $922.3M and service revenue was $176.6M. Instruments and accessories grew 22% to $578.5M; systems revenue grew 24% to $343.8M; service revenue grew 13%.
- Q2 gross margin was 69.1%, versus 69.5%; operating margin was approximately 33%, versus 31%. Q2 operating income increased 29%, though Q2 2018 included $42.5M of litigation charges.
- For the first half, revenue increased 18%, operating income 10%, and attributable net income 15%. Gross margin was approximately 69%, versus 70%.
- Q2 da Vinci procedures grew approximately 17% to 301,000; 273 systems shipped versus 220 a year earlier. The installed base was approximately 5,270, up 13% year over year. Recurring revenue represented 71% of Q2 revenue.
Cash, liquidity, and balance sheet
- Cash, cash equivalents, and investments totaled approximately $5.1B at June 30, up $313.8M from December 31, 2018. Current assets were $4.07B and current liabilities $807.5M.
- First-half operating cash flow was $649.2M, compared with $511.7M. Investing activities used $531.6M, including $196.9M for property, equipment, and intellectual property; financing activities used $220.4M, including $200.0M for share repurchases.
- The balance sheet reports no borrowings or debt line item. It reports $75.1M of operating lease liabilities. Total liabilities were $1.25B and stockholders’ equity was $7.28B.
- Inventory increased to $512.8M from $409.0M, which management attributed in part to systems placed under operating leases and safety-stock buildup.
Changes, outlook, and notable items
- Revenue growth reflected higher procedure volumes, system shipments, and service revenue from the larger installed base. U.S. procedures grew about 16% in the first half; outside the U.S. they grew about 21%.
- Operating expenses rose, particularly R&D, which increased 27% in Q2 and 39% for the first half. Management cited personnel and project costs for Ion, SP, informatics, advanced instruments and imaging, and future robotics. It expects substantial and increasing R&D investment.
- Management expects capital investments to exceed $250M in each of 2019 and 2020, funded from operating cash flow, and says existing liquidity should meet foreseeable requirements. No specific full-year revenue or earnings guidance is provided.
- Ion had FDA clearance, with commercial shipments anticipated by year-end 2019; the company described its rollout as measured. It had placed 34 da Vinci SP systems by June 30 and plans to pursue additional indications.
- In July 2019, the company agreed to acquire certain Schölly Fiberoptic assets and operations for approximately $100M, subject to closing conditions. Management flagged integration, manufacturing, employee-retention, and regulatory-certification risks.
- Legal contingencies include da Vinci product-liability claims and Ethicon patent disputes, including a USITC investigation. The company could not estimate potential losses beyond recorded accruals for the product-liability claims or estimate losses, if any, from the patent matters.
- Tax items warrant attention: the Q2 effective tax rate was 19.2%, versus 13.9%, while the first-half rate was 7.6%. A June 2019 appeals-court decision reversing an earlier tax opinion could adversely affect tax expense if it becomes final. A Swiss tax reform, if enacted, was expected to generate an approximately $51M deferred-tax benefit. The U.S. medical-device excise-tax moratorium was scheduled to end December 31, 2019.
- The company repurchased $200M of stock in the first half. It also notes that system placements under operating leases increased, which shifts some system revenue recognition over time.
Key facts for investors to verify
- Whether procedure growth, system demand, and recurring-revenue growth continue, especially in China and other international markets.
- Gross-margin effects from product mix, lease placements, amortization, manufacturing costs, and possible reinstatement of the medical-device excise tax.
- Ion and SP adoption, additional regulatory clearances, and the timing and execution of the Schölly acquisition.
- Developments in product-liability and patent litigation, and potential tax effects of court decisions, audits, and Swiss tax reform.
- Capital spending, inventory levels, lease growth, and cash generation relative to management’s plans.