Intuitive Surgical, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; comparisons are with Q1 2017 unless noted. The company designs, manufactures, and markets da Vinci surgical systems and related instruments, accessories, and services. Financial statements are unaudited. Prior-period revenue and results were restated for adoption of ASC 606.
Financial performance and liquidity
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Total revenue | $847.5 million | $679.6 million | +25% |
| Gross profit / margin | $593.8 million / 70.1% | $469.8 million / 69.1% | Margin +1.0 percentage point |
| Operating income / margin | $276.7 million / 32.6% | $193.4 million / 28.5% | Operating income +43% |
| Net income attributable to Intuitive Surgical | $287.6 million | $180.8 million | +59% |
| Diluted earnings per share | $2.44 | $1.57 | +55% |
| Cash from operating activities | $280.2 million | $241.5 million | +$38.7 million |
- Revenue mix: Product revenue was $694.8 million (+28%), including instruments and accessories of $460.3 million (+21%) and systems of $234.5 million (+46%). Service revenue was $152.7 million (+11%). U.S. revenue was $572.4 million (+16%); outside-U.S. revenue was $275.1 million (+49%).
- Margins and costs: Product gross margin was 71.0%, versus 69.4%; service gross margin was 65.8%, versus 67.9%, with the decline attributed primarily to higher repair and replacement costs for Xi/X endoscopes. R&D expense rose 30% to $95.5 million; management expects R&D spending to continue increasing.
- Cash and liquidity: Cash, cash equivalents, and investments totaled approximately $4.1 billion at quarter-end, up $221.7 million from year-end 2017. Cash and cash equivalents were $974.7 million; short- and long-term investments were $1,542.6 million and $1,550.9 million. Current assets were $3,381.7 million and current liabilities $581.2 million. The filing reports no debt balance in the presented balance sheet; total liabilities were $919.8 million.
- Cash flow and investment: Investing activities provided $53.6 million, including net proceeds from investment sales and maturities, partly offset by $40.1 million of property, equipment, and intellectual-property purchases. Financing activities used $8.3 million, primarily reflecting $102.5 million of taxes paid on net share settlements, partly offset by $86.2 million of employee stock-plan proceeds.
Material changes and operating trends
- Approximately 238,000 da Vinci procedures were performed, up about 15%; growth was about 14% in the U.S. and 18% outside the U.S. The installed base reached approximately 4,528 systems, up about 13% year over year. Systems shipped totaled 185, compared with 133.
- Revenue growth reflected procedure growth, higher system shipments, and a favorable foreign-exchange contribution of about three percentage points. The 2017 comparison was affected by a $23.4 million system-revenue deferral related to the da Vinci X trade-out program. Systems revenue growth therefore includes a comparison-period effect.
- Q1 2017 gross profit was reduced by a $7.8 million litigation settlement charge. Operating income included litigation-related charges of $5.2 million in Q1 2018 and $21.3 million in Q1 2017.
- ASC 606 was adopted retrospectively. It generally accelerates recognition of consideration allocated to product obligations and defers less to service obligations; it also capitalizes qualifying contract-acquisition costs. The company reported no effect on total cash flows from adoption.
Outlook, risks, and unusual items
- The company gave no specific revenue or earnings forecast in the supplied filing text. Management said operating cash flows and existing cash and investments should meet liquidity needs for the foreseeable future, and expects substantial continued investment in commercial operations, product development, manufacturing, and facilities.
- Management cited slower Q1 procedure growth than the prior-year quarter, particularly outside the U.S., with holiday timing and slower growth in Europe, Japan, and China among the factors. China system placements depend on further import authorizations and public-hospital quotas; timing and scale are uncertain. Japan’s newly reimbursed procedures may not be adopted at the pace of established procedures.
- The effective tax rate was 0.9%, versus 10.5%, reflecting the lower federal statutory rate, employee-equity tax benefits, and R&D credits, partly offset by state taxes and foreign-earnings taxes. The filing includes a $9.1 million estimate for tax on global intangible low-taxed income. Tax Act calculations remained subject to further guidance and measurement-period adjustments.
- A $390.8 million deferred tax asset and corresponding retained-earnings adjustment were recorded upon adoption of the intra-entity asset-transfer tax standard, relating to intellectual property transferred to a Swiss entity. The company cautioned that the final tax assessment could differ materially.
- Legal exposures include a shareholder securities class action scheduled for trial beginning October 30, 2018, multiple product-liability cases and unresolved claims, and an Ethicon patent-infringement action. The company could not estimate a loss or range for the securities or patent matter, or losses in excess of recorded product-liability accruals. Product-liability accruals were $17.4 million at March 31, 2018.
- Other risks discussed include product safety and recalls, regulatory approvals and restrictions, competition, reimbursement and hospital spending, manufacturing capacity, and adoption of new products. The company expects its Fosun joint venture to incur losses before commercialization and does not expect it to generate revenue in 2018.
Important facts for investors to verify
- How much of reported growth reflects underlying procedure and system demand versus the $23.4 million Q1 2017 trade-out deferral, currency effects, and shipment timing.
- Whether the unusually low 0.9% effective tax rate is sustainable, and the eventual effects of Tax Act and global intangible low-taxed income accounting.
- Progress in China authorizations and Japanese reimbursement-driven adoption, alongside procedure-growth trends by region.
- Future service costs, particularly Xi/X endoscope repair and replacement costs, and the pace of R&D and other operating-expense growth.
- Developments in product-liability, securities, and patent litigation, including potential costs beyond existing accruals.
- Cash and investment balances, investment portfolio risks, and any future use of the $717.5 million remaining share-repurchase authorization; no shares were repurchased in Q1 2018.