Intuitive Surgical, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; compared with the three months ended March 31, 2014. Intuitive Surgical designs, manufactures, and markets da Vinci surgical systems, instruments and accessories, and related services.
Financial performance
| Metric | Q1 2015 | Q1 2014 | Change / context |
|---|---|---|---|
| Revenue | $532.1 million | $464.7 million | Up 15%; 2014 revenue excluded $25.6 million deferred under da Vinci Xi trade-out offers |
| Product revenue | $418.2 million | $360.8 million | Up 16% |
| Service revenue | $113.9 million | $103.9 million | Up 10% |
| Gross profit / margin | $336.8 million / 63% | $315.4 million / 68% | Margin declined, reflecting newer products, foreign exchange, trade-ins, and recall-related costs |
| Operating income / margin | $130.4 million / 24% | $56.6 million / 12% | Up 130%; prior-year comparison included a larger product-liability charge |
| Net income | $97.0 million | $44.3 million | Up 119% |
| Diluted EPS | $2.57 | $1.13 | Up from prior year |
| Operating cash flow | $123.7 million | $166.3 million | Lower, principally due to working-capital comparisons |
Revenue included $277.2 million from instruments and accessories, up 9%, and $141.0 million from systems, up 33%. Recurring revenue was $391.1 million, or 74% of total revenue, versus $358.7 million, or 77%, a year earlier. Approximately 151,000 da Vinci procedures were performed, up about 13%; the installed base reached 3,317 systems.
Product gross margin was 63.3%, versus 68.5%; service gross margin was 63.3%, versus 65.8%. Management attributed pressure to the higher share of recently launched products, stronger U.S. dollar effects, a greater proportion of Si system trade-ins, and recall-related and other one-time costs. Management expects margins on newer systems to improve with volume and manufacturing experience, but noted outcomes may vary.
Balance sheet, liquidity, and capital
At March 31, 2015, cash and cash equivalents were $701.1 million, short-term investments $661.1 million, and long-term investments $1,304.8 million, totaling approximately $2.7 billion. This total rose $170.0 million during the quarter. Current assets were $1,959.3 million and current liabilities $456.9 million. Total liabilities were $540.8 million; the balance sheet does not list borrowings or debt. The company said cash, investments, and expected operating cash flows should meet liquidity needs beyond one year and for the foreseeable future.
Cash flow from investing was negative $87.7 million, including net investment purchases and $19.2 million of property, equipment, and acquired intellectual property purchases. Financing cash flow was positive $66.0 million, including $80.2 million from stock issuance, partly offset by $14.7 million of share repurchases and $9.7 million of taxes on net share settlement. The board authorized up to $1.0 billion in additional repurchases in January; $985.3 million remained available at quarter-end. About $803.2 million of cash, cash equivalents, and investments were held by foreign subsidiaries, and the company said it had no current plan to repatriate foreign earnings.
Material changes, outlook, and risks
- Q1 procedure growth accelerated to about 13% overall, with U.S. growth of about 11% and international growth of about 22%. U.S. growth was led by general surgery, particularly hernia repair and colorectal procedures, with urology also contributing.
- System shipments increased to 99 from 87. The company shipped 75 Xi systems; 53 of 63 U.S. system shipments were Xi models. The da Vinci Xi received Japanese regulatory clearance in March 2015. Japan system shipments were one, versus 19 a year earlier, partly reflecting the pending Xi approval.
- Management provided no specific quantified full-year revenue or earnings guidance in the supplied filing text. It expects substantial continued R&D investment and says R&D expense is anticipated to increase. It cautioned that continued dollar strength could adversely affect revenue and product margins if pricing cannot be adjusted.
- Management described ongoing pressure on benign gynecology procedures and expected cholecystectomy declines to continue in 2015; growth in other general surgery procedures had offset that weakness. System demand remains dependent on procedure growth, Xi adoption, hospital economics, competition, regulatory clearances, and reimbursement—particularly additional reimbursement in Japan.
- Product liability exposure is significant. The company reported approximately 104 individual product liability lawsuits and a multi-plaintiff case involving 19 patients. It recorded a $7.2 million Q1 2015 charge for tolled claims, after $82.4 million in 2014; the accrued balance for those claims was $39.7 million at quarter-end. The company said additional loss is reasonably possible but cannot estimate an excess-loss range.
- Insurance coverage is also contested: insurers seek rescission of policies, and Ironshore denied indemnity and filed counterclaims after the company brought a contract action. Other securities and shareholder derivative cases remain pending; management said it could not estimate probable loss for material pending matters other than the tolled product claims.
- Product actions included the voluntary recall of the Si EndoWrist Stapler 45, with replacement instruments shipping in early 2015, and a March 2015 safety notice concerning equipment drapes. Management did not expect the drape matter to have a material financial-statement impact at that stage.
- The Q1 effective tax rate was 28.0%, versus 26.8%. The federal R&D credit had expired at year-end 2014; any retroactive reinstatement would be recorded when enacted. Gross unrecognized tax benefits were approximately $80.0 million at March 31, 2015.
Key investor verification points
- Assess revenue and operating-income comparisons after accounting for the 2014 Xi trade-out deferrals and the substantially larger prior-year product-liability charge.
- Track Xi adoption, procedure growth and mix, recurring revenue, system shipments, and whether new-product gross margins improve as management anticipates.
- Monitor the size and resolution of product-liability claims, related insurance disputes, and the adequacy of the $39.7 million accrual.
- Evaluate the effects of currency movements, hospital spending and reimbursement, regulatory approvals, and Japan reimbursement access on future demand and margins.
- Consider foreign-held liquidity and the tax consequences of any future repatriation; review changes in unrecognized tax benefits and the R&D credit.