Intuitive Surgical, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; unaudited. Intuitive Surgical designs, manufactures, and sells da Vinci robotic surgical systems and related instruments, accessories, and service. Revenue comes from system sales and recurring instruments, accessories, and service.
Key financial metrics
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Total revenue | $594.5 million | $532.1 million | +12% |
| Gross profit / margin | $405.0 million / 68.1% | $336.8 million / 63.3% | Margin +4.8 percentage points |
| Operating income / margin | $179.0 million / 30% | $130.4 million / 24% | +37% |
| Net income | $136.4 million | $97.0 million | +41% |
| Diluted EPS | $3.54 | $2.57 | +38% |
| Operating cash flow | $208.5 million | $123.7 million | +$84.8 million |
- Product revenue was $470.0 million (+12%); service revenue was $124.5 million (+9%). Instruments and accessories revenue rose 16% to $322.1 million; systems revenue rose 5% to $147.9 million.
- Recurring revenue was $446.6 million, 75% of total revenue, versus $391.1 million, or 74%, a year earlier. Approximately 176,000 procedures were performed (+17%); system shipments were 110 versus 99.
- Q1 gross-margin improvement reflected higher revenue, product cost reductions and manufacturing efficiencies, lower recall charges, and the absence of the medical-device excise tax that applied in Q1 2015. Service margins also improved with repair-cost efficiencies.
- Operating expenses were $226.0 million, up 9%; R&D increased 20% to $53.2 million, primarily with expanded product-development activity. The effective tax rate declined to 26.1% from 28.0%.
- Cash and cash equivalents were $980.5 million at March 31, 2016; short- and long-term investments were $2.82 billion. Cash, cash equivalents, and investments totaled about $3.8 billion, up $453.3 million from year-end. Current assets were $2.41 billion and current liabilities $452.9 million.
- Investing cash outflow was $191.9 million and financing cash inflow was $248.4 million. Financing included $258.8 million from employee stock plans. The company repurchased $8.1 million of shares in the quarter, with $808.2 million authorized remaining.
- Total liabilities were $555.9 million. The balance sheet presents no debt line item; the filing does not provide a separate debt balance.
Changes, outlook, and commentary
- Procedure growth was driven principally by U.S. general surgery, including hernia and colorectal procedures, and worldwide urology. U.S. procedure volume grew about 15%; outside the U.S. it grew about 22%. Management noted the leap-year calendar added a day and may have benefited reported growth.
- The installed base reached approximately 3,660 systems. Management expects recurring revenue and procedure adoption to benefit from the expanding installed base, and expects OUS procedures and revenue to grow faster than U.S. results over time.
- Management expects R&D spending to continue increasing and plans to continue investing in commercial operations, product development, and manufacturing. It believes current cash, investments, and expected operating cash flows will meet liquidity needs for the foreseeable future. No specific financial guidance was provided.
- New product and market developments included U.S. FDA clearance for integrated table motion in January 2016 and Xi Single-Site and 30mm stapler instruments in March 2016; Japanese reimbursement for partial nephrectomy became effective in April 2016.
- China system placements and sustained growth depend on additional import authorizations and hospital tenders; the most recent authorization expired at year-end 2015, and timing of future authorizations is uncertain. Japanese growth may depend on additional reimbursement approvals.
Risks, contingencies, and unusual items
- The company reported approximately 86 individual product-liability lawsuits, plus a multi-plaintiff action, and a significant number of claims under tolling agreements. It recorded Q1 charges of $1.9 million for tolled claims and had $24.8 million accrued at March 31. Management said additional losses are reasonably possible but could not estimate any amount above the accrual; ultimate costs could be materially different.
- In the Zarick product-liability trial, which began April 5, the plaintiff asserted damages of $300 million in pretrial filings and requested $15 million to $30 million in closing argument. The judge found no basis for punitive damages; the company said an unfavorable judgment was reasonably possible. The Taylor appeal was accepted for review by the Washington Supreme Court.
- Shareholder securities and derivative litigation remained pending. The company said it could not estimate probable losses or a range for material pending matters generally, and noted future legal costs could adversely affect results. Insurers’ rescission and coverage disputes also remained unresolved; management did not expect a material adverse effect from those matters based on information available.
- Other risks highlighted include healthcare spending and reimbursement pressure, procedure adoption and competition, regulatory clearances and field actions, manufacturing or supply disruptions, product safety and publicity, and foreign-market expansion. The filing reported no material change in market-risk disclosures and effective disclosure controls.
Investor verification points
- Check whether procedure growth and recurring-revenue gains continue, especially in U.S. general surgery and OUS markets.
- Track gross margins, the effects of new-product manufacturing costs, and whether Q1 margin gains persist.
- Monitor China import authorizations, Japanese reimbursement expansion, and system placements outside the U.S.
- Review developments in product-liability claims, including the Zarick matter, the tolled-claims accrual, and insurance coverage litigation.
- Assess cash generation separately from significant employee equity-plan proceeds and monitor investment balances and repurchases.