Intuitive Surgical, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Intuitive develops, manufactures, and markets the da Vinci Surgical System and Ion endoluminal system. Unless otherwise noted, financial amounts below are in millions of dollars.
Financial performance and liquidity
| Metric | Q3 2020 | Q3 2019 | First nine months 2020 | First nine months 2019 |
|---|---|---|---|---|
| Revenue | $1,077.7 | $1,128.2 | $3,029.3 | $3,200.8 |
| Gross profit | $724.3 | $785.6 | $1,965.4 | $2,214.2 |
| Gross margin | 67.2% | 69.6% | 64.9% | 69.2% |
| Operating income | $270.4 | $365.7 | $634.0 | $976.9 |
| Net income attributable to Intuitive | $313.9 | $396.8 | $695.4 | $1,021.6 |
| Diluted EPS | $2.60 | $3.33 | $5.80 | $8.56 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $857.3 | $1,045.5 |
- Q3 revenue fell 4% year over year; nine-month revenue fell 5%. Systems revenue declined 21% in Q3 and 13% year to date, while Q3 instruments and accessories revenue rose 4%.
- Operating expenses increased 8% in Q3 and 8% for the first nine months, including higher R&D and share-based compensation. Operating income declined 26% in Q3 and 35% year to date.
- At September 30, cash and cash equivalents were $1,370.6; short- and long-term investments were $4,990.8, totaling approximately $6.36 billion. This compares with $5.85 billion at December 31, 2019. Current assets were $6,300.3 versus current liabilities of $894.7. The balance sheet reports no interest-bearing debt line item.
- Nine-month investing cash outflow was $606.3 and financing cash outflow was $45.9. Capital expenditures and intellectual property purchases were $279.6. Cash, cash equivalents, and restricted cash increased by $203.1.
- Management reported $1.508 billion in remaining performance obligations, primarily service-related, generally expected to be satisfied over the underlying contract terms.
Material changes versus the prior comparable period
- COVID-19 disrupted elective procedures and hospital purchasing. Q3 da Vinci procedures grew approximately 7% year over year, versus 20% in Q3 2019; nine-month procedures declined approximately 1%, compared with 18% growth in the prior-year period.
- Q3 system shipments fell to 195 from 275, and nine-month shipments fell to 610 from 783. Management attributed lower placements to deferred purchasing and leasing and unused capacity in hospitals’ installed systems. The installed base reached approximately 5,865, up 8% year over year; utilization per system declined 2% in Q3.
- Service revenue was reduced by $23 million in Q3 and $82 million year to date due to customer service-fee credits. The program also deferred $14 million of lease billings and extended payment terms on $181 million of billings; $85 million remained outstanding at quarter-end.
- Gross margin pressure reflected reduced production and related fixed-cost absorption, inventory charges, higher freight costs, and customer relief credits. Nine-month product gross margin was 65.6%, versus 69.7% in 2019; service gross margin was 61.5%, versus 66.4%.
- Interest and other income benefited from investment gains, including an approximately $45 million gain related to Teladoc’s acquisition of InTouch and approximately $17 million of gains on other strategic investments in Q3.
Outlook, management commentary, and risks
- Management anticipated lower year-over-year system placements for the remainder of 2020 and said it could not reliably estimate procedure volumes or the pandemic’s impact on results for Q4 and beyond. It noted that system placements may lag procedure recovery as hospitals use existing capacity first.
- Management expected capital investments to exceed $300 million in both 2020 and 2021, funded from operating cash flow, and expected substantial R&D investment to continue increasing.
- The Extended Use Program, introduced in 2020, increases eligible instruments’ uses from 10 to 12–18 and includes price reductions on certain instruments. Based on 2019 volume and procedure mix, management estimated these changes would have reduced annual instruments and accessories revenue by approximately $150–$170 million; actual effects depend on future volume, mix, and market response.
- Key pandemic risks include renewed procedure deferrals, hospital capital-spending cuts, supply-chain or facility disruption, delayed customer payments, and lease or payment-term defaults. Management stated that the scale and duration of impacts remained uncertain.
- Contingencies include da Vinci product-liability lawsuits; Ethicon patent litigation, including a USITC investigation with an evidentiary hearing set for February 2021; and antitrust claims involving repair and service. The company could not estimate possible losses beyond amounts recognized for product-liability matters or estimate losses for the cited patent and commercial matters.
- A Supreme Court denial in June 2020 made a Ninth Circuit tax opinion binding in the relevant circuit; the company recorded a $36.8 million increase in tax expense and unrecognized tax benefits for prior periods. Q3 and year-to-date tax rates also compare against a 2019 period that included a $51.3 million Swiss deferred-tax remeasurement benefit.
Important facts for investors to verify
- Whether procedure volumes, utilization, and hospital capital budgets recover, and how that translates into system placements and recurring revenue.
- The end of customer relief credits after Q3, collection of extended-term receivables, and credit quality of lease customers.
- Gross-margin recovery as production normalizes and the effects of inventory, freight, and the Extended Use Program.
- Whether investment gains and tax benefits materially affect comparisons with recurring operating performance.
- Developments in the Ethicon USITC investigation, product-liability cases, and repair/service antitrust litigation.
- Execution and spending for Ion, da Vinci SP, Orpheus Medical, and planned capital investments; the filing provides no specific earnings or revenue guidance.