Intuitive Surgical, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Intuitive develops, manufactures, and markets the da Vinci surgical and Ion endoluminal systems, along with instruments, accessories, and related services. All financial amounts below are in U.S. dollars.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Total revenue | $1.557B | $1.403B | $4.567B | $4.159B |
| Gross profit | $1.052B | $971M | $3.085B | $2.898B |
| Gross margin | 67.6% | 69.2% | 67.5% | 69.7% |
| Operating income | $399M | $443M | $1.205B | $1.371B |
| Net income attributable to Intuitive | $324M | $381M | $997M | $1.324B |
| Diluted EPS | $0.90 | $1.04 | $2.74 | $3.63 |
- Q3 revenue grew 11% year over year; nine-month revenue grew 10%. Q3 instruments and accessories revenue rose 15% and service revenue 12%; systems revenue rose 3%.
- Da Vinci procedures increased approximately 20% in Q3 and 18% year to date. The installed base reached approximately 7,364 da Vinci systems, up 13% year over year. Ion procedures rose 212% in Q3, and its installed base reached approximately 254 systems.
- Q3 operating income fell 10% year over year, while attributable net income declined about 15%. For nine months, attributable net income declined about 25%. Higher operating expenses, lower margins, reduced interest and other income, and a higher effective tax rate contributed to the earnings pressure.
- Product gross margin declined to 67.5% in Q3 from 69.6%, reflecting higher freight and material costs, increased fixed costs and investment, foreign-exchange effects, and lower system average selling prices. Q3 consolidated gross margin was 67.6%.
- Nine-month operating cash flow was $1.053B, down from $1.522B. Working-capital use included a $419M increase in inventory. Capital expenditure and intellectual-property purchases were $395M.
Liquidity and balance sheet
- Cash, cash equivalents, and investments totaled $7.392B at September 30, 2022, versus $8.620B at December 31, 2021. The decrease primarily reflected $1.607B of share repurchases, capital spending, employee equity-award tax payments, and unrealized investment losses.
- Cash and cash equivalents were $1.538B; short- and long-term investments were $2.776B and $3.078B, respectively. Total liabilities were $1.687B. The balance sheet reports no debt balance.
- Management stated that available cash, investments, and expected operating proceeds should meet liquidity needs for the foreseeable future, while noting potential pressure from macroeconomic conditions.
Changes, outlook, and notable items
- Recurring revenue was $1.229B in Q3, 79% of total revenue, compared with $1.061B and 76% a year earlier. The recurring-revenue mix reflects instruments and accessories, service, and operating-lease revenue.
- Da Vinci system placements fell to 305 in Q3 from 336; U.S. placements declined amid hospital budget pressures, and fewer older systems were available for trade-in. System ASP also fell, to approximately $1.50M from $1.57M, with pricing discounts and foreign exchange among the factors.
- Management reported a softer U.S. capital pipeline and expects capital demand, particularly in the U.S., to remain affected while conditions are challenging. It did not provide a specific revenue or earnings forecast in the supplied filing text. It expected 2022 capital investments of $600M–$700M and said R&D spending is expected to continue increasing.
- Key risks include constrained semiconductor and other component supplies, logistics and inflationary cost pressures, labor shortages, rising interest rates, hospital financial and staffing pressures, competition, and COVID-related procedure disruption. Management said supply issues had not materially affected its results or ability to deliver to customers as of the report, but warned that continued disruption could constrain supply and defer or cancel procedures.
- Foreign-exchange movements reduced OUS revenue by $49M in Q3 and $102M for the first nine months, net of hedging. Unrealized losses on available-for-sale securities were $161M for the nine months and contributed to other comprehensive loss; the company said it did not intend, and was not more likely than not required, to sell the securities before recovery.
- The nine-month effective tax rate was 16.9%, versus 6.3% a year earlier, partly reflecting 2021’s $66.4M one-time Swiss deferred-tax benefit and lower excess tax benefits from employee equity awards in 2022. New U.S. rules requiring capitalization and amortization of certain R&D costs also affected 2022 tax expense. The Inflation Reduction Act’s stock-repurchase excise tax takes effect after 2022.
- Legal matters include product-liability cases and ongoing patent and antitrust litigation. The company cannot estimate potential losses beyond recorded accruals for certain matters. A Rebotix dispute was settled in October 2022, with an immaterial Q3 financial-statement impact. Separately, an October 19 jury verdict awarded Rex Medical $10M; the company intends to appeal and did not expect a material adverse effect.
Important facts for investors to verify
- Whether procedure growth and recurring revenue can sustain performance as system placements and U.S. hospital capital spending face pressure.
- Whether gross-margin declines persist as freight, materials, foreign exchange, pricing, and investment costs evolve.
- Whether inventory build and capital spending convert into demand and operating cash flow; compare actual 2022 capital expenditure with the stated $600M–$700M expectation.
- How investment-market losses, interest rates, foreign exchange, and tax-law changes affect earnings and comprehensive income.
- Developments in product-liability, patent, and antitrust proceedings, including the Rex Medical appeal and any resulting financial or operational impact.
- Whether supply-chain, hospital staffing, reimbursement, and regulatory developments—including China’s system quota and local procedure-payment limits—affect placements or procedure volumes.