Annual Report 2016
Intuitive Surgical, Inc.
www.intuitivesurgical.com
Dear Owner,
As a healthcare community and industry, we have entered a period of rapid change. Advances in genetic
analysis, diagnostics and oncology have been substantial, previewing an era of precision diagnostics and treatment
planning. Today, surgery remains a mainstay approach in the hands of physicians treating complex disease, often
offering the highest likelihood of cure for underlying conditions. While surgery is a vital tool in treating disease
and combatting the effects of wear and tear on our bodies, we believe outcomes could, and should, be better.
For decades, surgeons have pursued mixing technique and technology improvements to increase the efficacy and
decrease the invasiveness of their surgeries. At Intuitive, we are focused on improving outcomes and minimizing
the disruption of surgery. We bring a holistic approach to pursuing this goal, starting with a deep understanding of
surgeons’ needs and surgical team interactions. We then focus on the smart application of technology in the areas of
enhanced imaging, intelligent systems, less-invasive approaches, data analytics and optimized learning. Sustainable
innovation in our markets involves validating not only clinical value but workflow and economic value as well.
2016 represented a strong year in pursuit of our mission, with use of da Vinci® increasing 15% over 2015 and
our installed base of da Vinci systems in clinical use increasing from 3,597 to 3,919 at year end. Our performance
in the year spanned multiple disciplines, including general surgery, urology, gynecology, thoracic surgery and
transoral surgery. It was also global, with strong growth and interest in several countries, including those in
Europe, Japan, China and Korea, to name a few.
After initially dismissing the power of computation and robotics in surgery, some large and small companies
have pledged their entry into the field. Additional competition into these markets is inevitable and validates the
pioneering work we have led for years. We anticipated this increase in competitive activity and do not take it
lightly. We seek to earn the ongoing business of our customers by a) designing holistic solutions to meet the
pressing needs of surgeons and their teams; b) validating our approaches clinically and economically; and c)
expanding the seamless ecosystem of products and services that supports our customers’ mission of building high
clinical outcome, efficient, successful surgery programs. Intuitive’s approach is to focus on delivery of real
technologies, products and services that truly make a difference.
2017 marks a change in our internal investment profile. Following significant early development, we are
accelerating to market new technologies that we believe can substantially improve outcomes in the hands of our
customers. These technologies include advanced imaging that will allow surgeons to see beyond the surface of
tissue and integrate other imaging modalities, our da Vinci SP platform that is targeted to enable natural orifice and
single-port approaches to surgery and our flexible robotic catheter program to enable better diagnostic access to the
lung. We believe these investments are platform technologies, allowing future capabilities to be built on the core
engineering they contain. To pursue global opportunity, we are expanding our direct reach in international markets,
particularly in Europe and Asia, as well as broadening our product line to satisfy customer needs in multiple
specialties and to meet a range of economic environments. We expect our spending profile to return to historical
norms as our business matures over the next couple of years.
We are also in a period in which global policy changes may occur rapidly, including tax and US health insurance
reform as well as global trade agreement and immigration changes. While we cannot predict the final form of new
policies, we are an agile organization and will respond as conditions require. Whatever future policy changes hold,
we believe high quality, repeatable surgery that delivers better patient outcomes will be valued and that we are well
positioned to respond.
Our organization has attracted and developed highly talented, mission-driven people from around the globe with
diverse experiences. We are the beneficiaries of the great efforts of nearly 4,000 employees who collaborate with
our customers, who are obsessed with the total performance of our offerings and who invent and deliver fantastic
new solutions to tough problems.
In closing, Intuitive has a substantial opportunity to enhance the capabilities of surgeons to fundamentally
improve surgery. We appreciate your support in helping Intuitive on this journey. I assure you that our team is
focused on working on those things that truly make a difference.
Gary Guthart
CEO
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(MARK ONE)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2016
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 000-30713
Intuitive Surgical, Inc.
(Exact name of Registrant as Specified in its Charter)
DELAWARE
(State or Other Jurisdiction of Incorporation or Organization)
77-0416458
(I.R.S. Employer Identification Number)
1020 KIFER RD
SUNNYVALE, CA 94086
(Address of Principal Executive Offices) (Zip Code)
(408) 523-2100
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class:
Common Stock, par value $0.001 per share
Name of Each Exchange on which Registered
The NASDAQ Global Select Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. Yes
No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes
No
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Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and
will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference
in Part III of this Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a
smaller reporting company. See definition of “large accelerated filer, “accelerated filer” and “smaller reporting company” in Rule
12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
(Do not check if a smaller reporting company)
Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes
No
The aggregate market value of the voting and non-voting common equity held by non-affiliates on June 30, 2016, based upon
the closing price of Common Stock on such date as reported by NASDAQ Global Select Market, was approximately
$25,194,062,637. Shares of voting stock held by each officer and director have been excluded in that such persons may be deemed
to be affiliates. This assumption regarding affiliate status is not necessarily a conclusive determination for other purposes.
The number of outstanding shares of the registrant’s common stock on January 20, 2017, was 38,786,979.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates information by reference to the definitive proxy statement for the Company’s Annual Meeting of
Stockholders to be held on or about April 20, 2017, to be filed within 120 days of the registrant’s fiscal year ended
December 31, 2016.
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INTUITIVE SURGICAL, INC.
INDEX
PART I
Item 1.
Business
Item 1A.
Risk Factors
Item 1B.
Unresolved Staff Comments
Item 2.
Properties
Item 3.
Legal Proceedings
Item 4.
Mine Safety Disclosures
PART II
Item 5.
Market for the Registrant’s Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities
Item 6.
Selected Financial Data
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Financial Statements and Supplementary Data
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A.
Controls and Procedures
Item 9B.
Other Information
PART III
Item 10.
Directors, Executive Officers and Corporate Governance
Item 11.
Executive Compensation
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13.
Certain Relationships and Related Transactions and Director Independence
Item 14.
Principal Accountant Fees and Services
PART IV
Item 15.
Exhibits and Financial Statement Schedules
SIGNATURES
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FORWARD LOOKING STATEMENTS
This report contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements
relate to expectations concerning matters that are not historical facts. Words such as “estimates,” “projects,” “believes,”
“anticipates,” “plans,” “expects,” “intends,” “may,” “will,” “could,” “should,” “would,” “targeted” and similar words and
expressions are intended to identify forward-looking statements. These forward-looking statements include, but are not limited
to, statements related to our expected business, new product introductions, procedures and procedure adoption, future results of
operations, future financial position, our ability to increase our revenues, the anticipated mix of our revenues between product and
service revenues, our financing plans and future capital requirements, anticipated costs of revenue, anticipated expenses, our
potential tax assets or liabilities, the effect of recent accounting pronouncements, our investments, anticipated cash flows, our
ability to finance operations from cash flows and similar matters, and statements based on current expectations, estimates, forecasts
and projections about the economies and markets in which we operate and our beliefs and assumptions regarding these economies
and markets. These forward-looking statements should be considered in light of various important factors, including the following:
the impact of global and regional economic and credit market conditions on health care spending; health care reform legislation
in the United States and its impact on hospital spending, reimbursement, insurance deductibles, and fees levied on certain medical
device revenues; changes in hospital admissions and actions by payers to limit or manage surgical procedures; timing and success
of product development and market acceptance of developed products; procedure counts; regulatory approvals, clearances and
restrictions, or any dispute that may occur with any regulatory body; guidelines and recommendations in the health care and patient
communities; intellectual property positions and litigation; competition in the medical device industry and in the specific markets
of surgery in which we operate; unanticipated manufacturing disruptions; our ability to meet demand for products; the results of
legal proceedings to which we are or may become a party; product liability and other litigation claims; potential adverse publicity
regarding our Company, the safety of our products and the adequacy of training; our ability to expand in foreign markets; and
other risk factors. Readers are cautioned not to place undue reliance on these forward-looking statements, which are based on
current expectations and are subject to risks, uncertainties, and assumptions that are difficult to predict, including those risk factors
described throughout this filing and particularly in Part I, “Item 1A. Risk Factors.” Our actual results may differ materially and
adversely from those expressed in any forward-looking statement. We undertake no obligation to publicly update or release any
revisions to these forward-looking statements, except as required by law.
ITEM 1.
BUSINESS
PART I
In this report, “Intuitive Surgical,” “Intuitive,” the “Company,” “we,” “us,” and “our” refer to Intuitive Surgical, Inc. and its
wholly-owned subsidiaries. Intuitive®, Intuitive Surgical®, da Vinci®, da Vinci® S®, da Vinci® Si HD Surgical System™, da Vinci®
S HD Surgical System®, da Vinci Si®, da Vinci Xi®, da Vinci® SP™, EndoWrist®, Firefly®, InSite®, da Vinci® Connect®, and Intuitive
Surgical EcoSystem™ are trademarks of Intuitive Surgical, Inc.
Company Background
Intuitive designs, manufactures and markets da Vinci Surgical Systems and related instruments and accessories, which taken
together, are advanced surgical systems that we consider an advanced generation of surgery. This advanced generation of surgery,
which we call da Vinci surgery, combines the benefits of minimally invasive surgery (“MIS”) for patients with the ease of use,
precision and dexterity of open surgery. A da Vinci Surgical System consists of a surgeon’s console, a patient-side cart, and a high
performance vision system. The da Vinci Surgical System translates a surgeon’s natural hand movements, which are performed
on instrument controls at a console, into corresponding micro-movements of instruments positioned inside the patient through
small incisions, or ports. The da Vinci Surgical System is designed to provide its operating surgeons with intuitive control, range
of motion, fine tissue manipulation capability and Three Dimensional (“3-D”), High-Definition (“HD”) vision while simultaneously
allowing surgeons to work through the small ports enabled by MIS procedures.
da Vinci Surgery
da Vinci Surgery utilizes computational, robotic and imaging technologies to enable improved patient outcomes compared to
other surgical and non-surgical therapies. da Vinci Surgery is aimed towards advancing the critical surgical ideals of entering the
body less invasively, seeing anatomy more clearly, interacting with tissue more precisely and building surgical skills. The da Vinci
Surgical System enables surgeons to avail or improve the benefits of MIS to many patients who would otherwise undergo a more
invasive surgery. Surgeons using the da Vinci system operate while seated comfortably at a console viewing a 3-D, HD image of
the surgical field. This immersive visualization connects surgeons to the surgical field and their instruments. While seated at the
console, the surgeon manipulates instrument controls in a natural manner, similar to the more intuitive open surgery technique.
Our technology is designed to provide surgeons with a range of motion in the surgical field analogous to the motions of a human
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wrist, while filtering out the tremor inherent in a surgeon’s hand. In designing our products, we focus on making our technology
easy to use.
Our systems provide the following features and benefits to surgeons:
Immersive 3-D Visualization. Our vision system includes a 3-D endoscope with two independent vision channels linked
to two separate color monitors through sophisticated image processing electronics. The da Vinci Surgical System provides
visualization of target anatomy with natural depth-of-field, enhanced contrast and magnification that is intended to facilitate
accurate tissue identification and tissue layer differentiation. With our Firefly Fluorescence Imaging technology, surgeons
can use our specialized imaging hardware in combination with an injectable fluorescent dye to visualize vasculature, tissue
perfusion, or biliary ducts beneath tissue surfaces in real-time.
Precise and Tremor-Free Endoscope Control. Our imaging system also incorporates our proprietary Navigator camera
control technology that allows the surgeon to easily change, move, zoom and rotate his or her field of vision. Surgeons
can reposition the surgical camera quickly with foot controls or zoom in, out, up, down, left and right by moving their hands
while maintaining a stable image.
EndoWrist Instruments. Our instruments are modeled after the human wrist, offering a greater range of motion than the
human hand. Most of our proprietary instruments, which we call EndoWrist instruments, incorporate “wrist” joints that
enable surgeons to reach behind tissues and suture with precision, just as they can in open surgery.
Intuitive Instrument Movements. Our technology is designed to transform the surgeon’s natural hand movements outside
the body into corresponding micro-movements inside the patient’s body. For example, with the da Vinci Surgical System,
a hand movement to the right outside the body causes the instrument inside the patient to be moved to the right. In contrast,
conventional MIS instruments are long rigid levers that rotate around a fulcrum, or pivot point, located at the port created
in the body wall. In conventional MIS, the instrument tip moves in the opposite direction from the surgeon’s hand and
surgeons must adjust their hand-eye coordination to translate their hand movements in that environment.
Scaled, Tremor Filtered Instrument Movement. With our technology, a surgeon can also use “motion scaling,” a feature
that translates, for example, a three-millimeter hand movement outside the patient’s body into a one-millimeter instrument
movement in the surgical field inside the patient’s body. Motion scaling is designed to allow precision and control for
delicate tasks. In addition, our technology filters the tremor inherent in a surgeon’s hands.
Improved Surgeon Ergonomics. The da Vinci Surgical System is designed to allow surgeons to operate while seated, which
may be clinically advantageous because of reduced surgeon fatigue. The da Vinci Surgical System’s design provides natural
hand-eye alignment at the surgeon’s console. Because the da Vinci Surgical System’s robotic arms hold the camera and
instruments steady, there is less surgeon and assistant fatigue.
Multi-Specialty Surgical Platform. The da Vinci Surgical System is designed to enable surgeons to perform a wide range
of surgical procedures, within our targeted gynecologic, urologic, general surgery, cardiothoracic and head and neck
specialties. To date, surgeons have used the da Vinci Surgical System to perform dozens of different types of surgical
procedures. While we do not expect all of these different types of procedures to become widely adopted, they demonstrate
the flexibility of the da Vinci Surgical System in approaching anatomy.
Advanced Training Tools. Surgeons can efficiently train and improve their da Vinci Surgery skills with a group of tools
unique to robotic surgery, including our da Vinci Skills Simulator for software based skills practice and assessment, our da
Vinci dual console for inter-operative collaboration, and our da Vinci Connect networking technology for on-line proctoring.
Products:
da Vinci Surgical System
We have commercialized four generations of the da Vinci Surgical System— the da Vinci Xi Surgical System, the da Vinci Si
Surgical System, the da Vinci S Surgical System and the standard da Vinci Surgical System. da Vinci Surgical Systems are comprised
of the following components:
Surgeon’s Console. The da Vinci Surgical System allows surgeons to operate while comfortably seated at an ergonomic
console viewing a 3-D image of the surgical field. The surgeon’s fingers grasp instrument controls below the display with
the surgeon’s hands naturally positioned relative to his or her eyes. Using electronic hardware, software, algorithms and
mechanics, our technology translates the surgeon’s hand movements into precise and corresponding real-time micro
movements of the EndoWrist instruments positioned inside the patient. On our most current systems, da Vinci Xi and da
Vinci Si, a second surgeon’s console may be used in two possible ways: to provide assistance to the primary surgeon during
surgery or to act as an active aid during surgeon-proctor training sessions. With the da Vinci Xi and da Vinci Si, a surgeon
sitting at a second console can view the same surgery as the primary surgeon and can be passed control of some or all of
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the da Vinci instruments during the surgery. In addition, surgeons can control 3-D virtual pointers to augment the dual
surgeon experience.
Patient-Side Cart. The patient-side cart holds electromechanical arms that manipulate the instruments inside the patient.
Up to four arms attached to the cart can be positioned as appropriate, and then locked into place. At least two arms hold
our EndoWrist instruments, one representing the surgeon’s left hand and one representing the surgeon’s right hand. A third
arm positions the endoscope, allowing the surgeon to easily move, zoom and rotate his or her field of vision. A fourth
instrument arm extends surgical capabilities by enabling the surgeon to add a third EndoWrist instrument to perform
additional tasks. The fourth instrument arm is a standard integrated feature on the da Vinci Xi and Si Surgical Systems, and
is available as an upgrade on three-arm da Vinci S and Si-e Surgical Systems.
3-D Vision System. Our vision system includes our InSite 3-D endoscope with two separate vision channels linked to two
separate color monitors through high performance video cameras and specialized image processing hardware. The resulting
3-D image has high resolution, high contrast, low flicker, and low cross fading. A digital zoom feature in the 3-D, HD vision
system allows surgeons to magnify the surgical field of view without adjusting the endoscope position and thereby reduces
interference between the endoscope and instruments. The 3-D, HD vision is a standard integrated feature on da Vinci Xi,
Si, and S Surgical Systems.
da Vinci Skills Simulator. The Skills Simulator is a practice tool that gives a user the opportunity to practice his or her
facility with the surgeon console controls. The Skills Simulator incorporates 3-D, physics-based computer simulation
technology to immerse the user within a virtual environment. The user navigates through the environment and completes
exercises by controlling virtual instruments from the surgeon console. Upon completion of a skills exercise, the Skills
Simulator provides a quantitative assessment of user performance based on a variety of task-specific metrics. The Skills
Simulator is intended to augment, not replace, existing training programs for the da Vinci Xi and Si Surgical Systems. Most
da Vinci Skills Simulators have been sold in connection with our da Vinci Xi and Si Surgical Systems.
da Vinci Xi Integrated Table Motion. Integrated Table Motion coordinates the movements of the da Vinci robot arms with
an advanced operating room table, the TruSystem® 7000dV sold by Trumpf MedicalTM, to enable shifting a patient's position
in real-time while the da Vinci surgical robotic arms remain docked. This gives operating room teams the capabilities to
optimally position the operating table so that gravity exposes anatomy during multi-quadrant da Vinci System procedures,
maximize reach and access to target anatomy enabling surgeons to interact with tissue at an ideal working angle, and
reposition the table during the procedure to enhance anesthesiologists’ care of the patient.
Firefly Fluorescence Imaging. Firefly is a standard feature of the da Vinci Xi Surgical System and available on our da Vinci
Si Surgical System. This imaging capability combines a fluorescent dye with a specialized da Vinci camera head, endoscope
and laser-based illuminator to allow surgeons to identify vasculature, tissue perfusion, or biliary ducts in three dimensions
beneath tissue surfaces to visualize critical anatomy. Firefly is generally used across the categories of urology, gynecology
and general surgery.
Standard da Vinci System. During 2014, we phased out the sale of all instrument, accessory and service contract offerings
for the standard da Vinci Surgical System.
Instruments and Accessories
EndoWrist Instruments. We manufacture a variety of instruments, most of which incorporate wrist joints for natural dexterity,
with tips customized for various surgical procedures. EndoWrist instruments are offered in a variety of sizes, of which 5mm
and 8mm diameter sizes are the most commonly sold. At their tips, the various EndoWrist instruments include forceps,
scissors, electrocautery, scalpels, and other surgical tools that are familiar to the surgeon from open surgery and conventional
MIS. A variety of EndoWrist instruments may be selected and used interchangeably during a surgery. Most of our EndoWrist
instruments are sterilizable and most are reusable for a defined number of procedures. A programmed memory chip inside
each instrument performs several functions that help determine how the da Vinci system and instruments work together. In
addition, the chip will generally not allow the instrument to be used for more than the prescribed number of procedures to
help ensure that its performance meets specifications during each procedure.
da Vinci Single-Site. da Vinci Single-Site is a set of non-wristed instruments and accessories that allow Surgical Systems
to work through a single incision, typically in the umbilicus, rather than multiple incisions. Single incision surgery is intended
to minimize trauma to patients by reducing the number of ports required to enter the body and is typically utilized for less
complex surgery than multi-port surgery.
EndoWrist One Vessel Sealer. The EndoWrist One Vessel Sealer is a wristed, single-use instrument intended for bipolar
coagulation and mechanical transection of vessels up to 7 mm in diameter and tissue bundles that fit in the jaws of the
instrument. This instrument enables surgeons to fully control vessel sealing, while providing the benefits of da Vinci surgery.
This instrument is designed to enhance surgical efficiency and autonomy in a variety of general surgery and gynecologic
procedures.
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EndoWrist Stapler. The EndoWrist Stapler is a wristed, stapling instrument intended for resection, transection and/or
creation of anastomoses. This instrument enables operators to precisely position and fire the stapler. We market two types
of staplers: The EndoWrist Stapler 45 and 30. The EndoWrist Stapler 45 is used in general, gynecologic and urologic surgery.
The EndoWrist Stapler 30, available with the da Vinci Xi Surgical System, is intended to deliver particular utility with fine
tissue interaction in lobectomy and other thoracic procedures.
Accessory Products. We sell various accessory products which are used in conjunction with the da Vinci Surgical System
as surgical procedures are performed. Accessory products include sterile drapes used to help ensure a sterile field during
surgery, vision products such as replacement 3-D stereo endoscopes, camera heads, light guides, and other items that facilitate
use of the da Vinci system.
Business Strategy
Our goal is to fundamentally improve surgery and maximize the number of patients who can derive the benefits of MIS.
Through the use of computer-aided robotic technologies our objective is to create value for patients, surgeons, and hospitals as
summarized below:
1. Patient Value. We believe that the value of a surgical procedure to a patient can be defined as: Patient Value = Procedure
Efficacy/Invasiveness. We define procedure efficacy as a measure of the success of the surgery in resolving the underlying
disease and invasiveness as how disruptive and painful the treatment is itself. When the patient value of a da Vinci
procedure is deemed higher than alternate treatment options, patients may seek out surgeons and hospitals that offer that
specific da Vinci procedure, potentially resulting in a local market share shift for the specific treatment. da Vinci procedure
adoption occurs procedure by procedure, and is driven by the relative patient value and total treatment costs of da Vinci
procedures compared to alternative treatment options for the same disease state. We believe most patients will place
higher value on procedures that are not only more efficacious, but also less invasive than alternative treatments. Our goal
is to provide products to surgeons who in turn provide patients with procedure options that are both highly effective and
less invasive than other surgical options.
2. Surgeon Value. We train surgeons on the use of our da Vinci Surgical System and assist them in building their practices
by their delivery of high patient value. We provide an ergonomic platform for surgeons to perform their procedures. We
seek to provide surgeons with reliable and easy to use products.
3. Hospital Value. We assist hospitals in building value by offering patient value using da Vinci products, thereby increasing
surgical revenue and reducing costs through lower complication rates and reduced length of patient stay. We believe da
Vinci Surgery is a cost effective approach to many surgeries as compared to alternative treatment options, as recognized
in many published studies.
Clinical Applications
We are the beneficiaries of productive collaborations with leading surgeons in exploring and developing new techniques and
applications for da Vinci Surgery—an important part of our creative process. We primarily focus our development efforts on those
procedures in which we believe our products bring the highest patient value, surgeon value, and hospital value. We currently focus
on five surgical specialties: gynecologic surgery, urologic surgery, general surgery, cardiothoracic surgery, and head and neck
surgery. Key procedures which we are focused on include da Vinci Prostatectomy (“dVP”), da Vinci Hysterectomy (“dVH”), hernia
repair, da Vinci Cholecystectomy, da Vinci Colon and Rectal procedures, da Vinci Partial Nephrectomy, da Vinci Sacrocolpopexy,
da Vinci Mitral Valve Repair, da Vinci Lobectomy, and da Vinci Transoral Robotic Surgery. In 2016, total U.S. procedure volume
was approximately 563,000, of which 44% was in gynecology, 33% was in general surgery, and 19% was in urology. Procedure
volume from our market outside of the U.S. was approximately 190,000 in 2016, of which most procedures were in urology.
Representative surgical applications are described below.
Gynecologic Surgery
Hysterectomy. Removal of the uterus is one of the most commonly performed surgeries in gynecology and is performed
for a variety of underlying benign and cancerous conditions. Hysterectomies can be performed using open surgery
(laparotomy), or MIS techniques, which include vaginal, laparoscopic, and robotic approaches. Prior to the clearance of da
Vinci surgery for use in gynecological procedures in 2005, the majority of hysterectomies performed were open surgeries.
We believe that da Vinci Surgery provides a large number of women the opportunity to receive a minimally invasive treatment
as an alternative to an open hysterectomy, as we estimate that nearly 80% of hysterectomies are performed with a MIS
technique. Hysterectomies for benign conditions can be performed using either multi-port or Single-Site technology and
we believe a majority of da Vinci surgery is performed using multi-port techniques. Single-Site instruments enable surgeons
to perform surgery through a single port via the patient’s belly button, allowing for virtually scarless results.
Sacrocolpopexy. The abdominal (open) sacrocolpopexy is one of the most successful operations for vaginal vault prolapse.
Sacrocolpopexy involves suturing a synthetic mesh that connects and supports the vagina to the sacrum (tailbone). A
sacrocolpopexy can be performed using a conventional laparoscopic technique; however, it is generally described as difficult
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and cumbersome to perform. Surgeons have reported that the da Vinci Surgical System’s capabilities may enable a large
number of these procedures to be performed through a minimally invasive technique, conferring the benefits of MIS to a
broader range of sacrocolpopexy patients.
Urologic Surgery
Prostatectomy. Radical prostatectomy is the removal of the prostate gland in patients diagnosed with clinically localized
prostate cancer. The standard approach to removal of the prostate has been via an open surgical procedure. The conventional
laparoscopic approach is an option, but is difficult and poses challenges to even the most skilled urologist. The da Vinci
Surgical System has enabled a large number of surgeons to convert from using an open surgical technique to a minimally
invasive technique.
Partial Nephrectomy. Partial nephrectomy is the removal of a small portion of a kidney (typically, an area of the kidney
containing a tumor). Partial nephrectomies are most commonly performed in patients diagnosed with clinically localized
renal cancer. Excluding da Vinci surgery, there are three common surgical approaches to performing partial nephrectomies:
open surgical technique, laparoscopy, and hand assisted laparoscopy, which is a hybrid of the open and laparoscopic
techniques. Surgeons have reported that the da Vinci Surgical System’s capabilities may enable a large number of these
procedures to be performed through a minimally invasive technique, conferring the benefits of MIS to a broader range of
partial nephrectomy patients. Treatment guidelines for patients with localized renal cancer recommend partial nephrectomy
due to the benefits nephron-sparing surgery has in long-term patient outcomes. Published clinical literature has shown that
the presence of a da Vinci Surgical System is associated with a higher-proportion of patients receiving a guideline-
recommended partial nephrectomy.
General Surgery
Colorectal Surgery. These procedures typically involve benign or cancerous conditions of the lower digestive system, in
particular the rectum or colon. Common procedures in this area include hemicolectomy, sigmoidectomy, low anterior
resection, and abdominoperineal resection. Conventional laparoscopy is not widely employed to treat these types of diseases,
due to their high degree of complexity. Surgeons have reported that the use of the da Vinci Surgery System and our latest
technologies, such as the da Vinci Xi Surgical System, EndoWrist Stapler, and EndoWrist Vessel Sealer, have enabled them
to offer MIS approaches to a broader range of colorectal surgery patients.
Hernia Repair. A hernia occurs when an organ or fatty tissue squeezes through a weak spot in a surrounding muscle or
connective fascia tissue. During a hernia repair surgery, the weakened abdominal wall tissue is secured and defects are
repaired. Common types of hernia are ventral and inguinal. Ventral, or abdominal hernia, may occur through a scar after
surgery in the abdomen. Inguinal hernia is a bulge in the groin and is more common in men. Hernia repair can be performed
using traditional open surgery or MIS. There is a wide-range of complexity in hernia repair surgeries and varying surgeon
opinion regarding optimal surgical approach. The benefits of minimally invasive and robotic hernia repair surgery vary by
patient.
Cholecystectomy. Cholecystectomy, or the surgical removal of the gall bladder, is a commonly performed general surgery
procedure. Cholecystectomy is the primary method for the treatment of gallstones and other gall bladder diseases. Most
cholecystectomies are performed using multi-port MIS techniques, although some surgeons choose to perform
cholecystectomy using manual single-port instrumentation. Using da Vinci Single-Site instruments, many of the technical
challenges of manual single-port MIS are reduced as surgeons benefit from additional precision, control, and improved
ergonomics. Multi-port da Vinci techniques are also being used for certain cases, and Firefly technology can be used to
visualize biliary anatomy in three dimensions beneath tissue surfaces during Single-Site and multi-port da Vinci
cholecystectomies.
Bariatric Surgery. A body of literature points to the benefit of surgery to treat patients for morbid obesity and its secondary
effects, such as diabetes. Sleeve gastrectomy and roux-en-Y gastric bypass (“RYGB”) are the most commonly performed
surgical procedures for morbid obesity in the U.S. The body habitus of morbidly obese patients can make laparoscopic
surgery physically challenging for the surgeon, and certain surgeons have found value in using the da Vinci Surgical System
to improve upon the ergonomics when performing minimally-invasive surgery in morbidly obese patients. In addition,
RYGB can be a technically challenging procedure because of the suturing, stapling, and tissue (bowel) manipulation that
is required. Surgeons using the da Vinci Surgical System have reported a reduction in a critical complication (anastomotic
leaks) relative to laparoscopic RYGB.
Cardiothoracic Surgery
Thoracic Surgery. Conventional approaches to surgical procedures in the thorax include both open and video-assisted
thoracoscopic approaches. Procedures performed via these methods include pulmonary wedge resection, pulmonary
lobectomy, thymectomy, mediastinal mass excision, and esophagectomy. Many thoracic procedures remain open procedures.
Surgeons have reported that the use of the da Vinci Surgery System in thoracic surgery has enabled them to offer MIS
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approaches to a broader range of thoracic surgery patients and improved clinical outcomes compared to open and video-
assisted thoracic surgery in published single-center, multi-center and national database clinical studies. We believe the
EndoWrist Stapler 30 may have particular utility in thoracic procedures.
Mitral Valve Repair. When patients are diagnosed with mitral valve disease, there are typically two surgical treatment
options from which they can choose: mitral valve replacement or mitral valve repair. Mitral valve repairs are generally
preferred over mitral valve replacement for a number of reasons, which include longevity and durability of the repaired
valve over a replacement valve and the elimination or reduction of the patient’s post-surgical pharmaceutical regimen.
Because mitral valve repairs are considered to be more technically challenging than mitral valve replacements, they are
only performed approximately 50% of the time. Several of our surgeon customers have reported an improvement in their
mitral valve repair rates over mitral valve replacements when using the da Vinci Surgical System.
Head and Neck Surgery
Transoral Surgery. Head and neck cancers are typically treated by either surgical resection or chemo-radiation, or a
combination of both. Surgical resection performed by an open approach may require a “jaw-splitting” mandibulotomy. This
procedure, while effective in treating cancer, is potentially traumatic and disfiguring to the patient. MIS approaches via the
mouth (transoral surgery) are challenged by line-of-sight limitations dictated by conventional endoscopic tools. Chemo-
radiation as a primary therapy does allow patients to avoid traumatic surgical incisions; however, literature suggests that
this modality diminishes patients’ ability to speak and swallow normally. Surgeons have reported that da Vinci Transoral
Surgery allows them to treat cancers occurring in the oropharynx (e.g., tonsil and base of tongue) and larynx via the mouth
and to overcome some of the line-of-sight limitations of conventional transoral surgery.
Procedure Mix
Our procedure business is broadly split into two categories: (1) cancer and other highly complex procedures and (2) less
complex procedures for benign conditions. Cancer and other highly complex procedures tend to be reimbursed at higher rates than
less complex procedures for benign conditions. Thus, hospitals are more sensitive to the costs associated with treating less complex
benign conditions. Our strategy is to provide hospitals with attractive clinical and economic solutions in each of these categories.
Our fully featured da Vinci Xi system with advanced instruments including the EndoWrist One Vessel Sealer, EndoWrist Stapler
products, and our Table Motion product target the more complex procedure segment. Lower priced products, including the three-
arm da Vinci Si-e System, refurbished da Vinci Si, and lower priced Single-Site instruments are targeted towards less complex
procedures.
Clinical Summary
We believe there are numerous additional applications that can be addressed with the da Vinci Surgical System and we work
closely with our surgeon customers to refine and explore new techniques in which da Vinci may bring value. As of December 31,
2016, we had an installed base of 3,919 da Vinci Surgical Systems, including 2,563 in the U.S., 665 in Europe, 502 in Asia, and
189 in the rest of the world. We estimate that surgeons using our technology completed approximately 753,000 surgical procedures
of various types in hospitals throughout the world during the year ended December 31, 2016. Of those da Vinci procedures performed
in 2016, we estimate that approximately 222,000 were dVH procedures and approximately 162,000 were dVP procedures.
Sales and Customer Support
Sales Model
We provide our products through direct sales organizations in the U.S., Japan, South Korea, and Europe, excluding Spain,
Portugal, Italy, Greece, and Eastern European countries. In the remainder of our markets outside of the U.S. (“OUS”), we provide
our products through distributors. No single customer accounted for more than 10% of revenue during the years ended December 31,
2016, 2015, and 2014. During the years ended December 31, 2016, 2015, and 2014, domestic revenue accounted for 72%, 71%,
and 70%, respectively, of total revenue, while revenue from our OUS markets accounted for 28%, 29%, and 30%, respectively.
As of December 31, 2016, and 2015, 86% and 88% of all long-lived assets were in the United States.
Our direct sales organization is composed of a capital sales team, responsible for selling da Vinci Surgical Systems, and a
clinical sales team, responsible for supporting da Vinci Surgical System use in surgical procedures performed at our hospital
accounts. Our hospital accounts include both individual hospitals and health care facilities and hospitals and health care facilities
that are part of an integrated delivery network (“IDN groups”). The initial da Vinci Surgical System sale into an account as a major
capital equipment purchase by our customers typically has a lengthy sales cycle that can be affected by macroeconomic factors,
capital spending prioritization, timing of budgeting cycles, and competitive bidding processes. Capital sales activities include
educating surgeons and hospital staff across multiple surgical specialties on the benefits of da Vinci Surgery, total treatment costs,
and the clinical applications that our technology enables. We also train our sales organization to educate hospital management on
the potential benefits of adopting our technology, including clinical benefits of da Vinci Surgery, potential reductions in
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complications and length of stay, and the resulting potential for increased patient satisfaction, surgeon recruitment, and procedure
volume.
Our clinical sales team works on site at the hospitals, interacting with surgeons, operating room staff, and hospital administrators
to develop and sustain successful robotics surgery programs. They assist the hospital in identifying surgeons who have an interest
in robotic surgery and the potential benefits provided by the da Vinci Surgical System. Our clinical sales team provides the current
clinical information on robotic surgery practices and new product applications to the hospital teams and has grown with the
expanded installed base of da Vinci Surgical Systems and the total number of procedures performed. We expect this organization
to continue to grow as our business expands.
Our customers place orders to replenish their supplies of instruments and accessories on a regular basis. Orders received are
typically shipped within one business day. Direct customers who purchase a new da Vinci Surgical System typically place an initial
stocking order of instruments and accessories within one month of receiving their system.
Our business is subject to seasonal fluctuations. Historically, our sales of da Vinci Surgical Systems have tended to be heaviest
during the third month of each fiscal quarter, lighter in the first and third fiscal quarters and heavier in the fourth fiscal quarter.
In addition, we have historically experienced lower procedure volume in the first and third fiscal quarters and higher procedure
volume in the second and fourth fiscal quarter. Procedures treating benign conditions are typically higher in the fourth quarter and
lower in the first quarter. Timing of procedures and changes in procedure volume impact the timing of instrument and accessory
and capital purchases.
Customer Support and Training Programs
We have a network of field service engineers across the U.S., Europe, and Asia and maintain relationships with various
distributors around the globe. This infrastructure of service and support specialists offers a full complement of services, including
24/7 support, installation, repair, and maintenance for our customers. We generate service revenue by providing these services to
our customers through comprehensive service contracts and time and material programs.
We provide basic system training that teaches the fundamental operating principles of the da Vinci Surgical System to surgeons,
surgical assistants, and operating room nurses. We have established training centers where initial system training and ongoing
surgical procedural training are provided, the latter led by expert surgeons. Surgeons may also practice their robotic surgery
technique using our da Vinci Skills Simulator. In addition, we help facilitate the proctoring of surgeons who are new to da Vinci
Surgery by experienced da Vinci Surgical System users. Proctors provide training to other surgeons on how to perform certain
surgical procedures with da Vinci Surgical Systems.
Research and Development
We focus our research and development efforts on providing our customers with new products and product improvements
that enable them to perform MIS procedures with less difficulty. We employ research and development and engineering staff
responsible for product design and engineering. We invested $239.6 million, $197.4 million, and $178.0 million of research and
development expenses for the years ended December 31, 2016, 2015, and 2014, respectively.
We establish strategic alliances with other medical device and technology based companies to complement our research and
development effort. To date, these alliances have taken several forms, including cooperation in the areas of product development,
training, procedure development, and marketing activities. We have formed alliances with several companies, including, but not
limited to, Erbe Elektromedizin GmbH, Johnson & Johnson, Olympus Corporation, Novadaq Technologies, Inc., Mimic
Technologies, Inc., Schoelly Fiberoptic GmbH, Trumpf Medical (a division of Hill-Rom Holdings, Inc.), InTouch Technology
Inc., Dextera Surgical Inc. and 3D Systems, Inc.
In September 2016, we agreed to establish a joint venture with Shanghai Fosun Pharmaceutical (Group) Co., Ltd. “Fosun
Pharma”, a subsidiary of Fosun International Limited, to research, develop, manufacture, and sell robotic-assisted catheter-based
medical devices. See “Item 7. Management’s Discussion and Analysis” for further details on the joint venture with Fosun Pharma.
Manufacturing
We manufacture our da Vinci Surgical Systems at our facility in Sunnyvale, California. We manufacture our instruments at
our Sunnyvale facility and our Mexicali, Mexico facility.
We purchase both custom and off-the-shelf components from a large number of suppliers and subject them to stringent quality
specifications and processes. Some of the components necessary for the assembly of our products are currently provided to us by
sole-sourced suppliers (the only recognized supply source available to us) or single-sourced suppliers (the only approved supply
source for us among other sources). We purchase the majority of our components and major assemblies through purchase orders
rather than long-term supply agreements and generally do not maintain large volumes of finished goods.
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Competition
We face competition in the forms of existing open surgery, conventional MIS, drug therapies, radiation treatment, and emerging
interventional surgical approaches. Our success depends on continued clinical and technical innovation, quality and reliability as
well as educating hospitals, surgeons and patients on the demonstrated results associated with da Vinci Surgery and its value
relative to other techniques. We also face competition from several companies that are developing new approaches and products
for the MIS market. We believe that many companies are focused on adding capability to manual MIS systems. Because many of
these developments are aimed at MIS, we believe that our da Vinci Surgical System may prove complementary to some of these
new technologies.
Moreover, as we add new robotically controlled products (e.g. Single-Site, EndoWrist stapler, and Vessel Sealer) that compete
with product offerings traditionally within the domains of open surgery and/or conventional MIS, we face greater competition
from larger and well established companies such as Ethicon Endo-Surgery, Inc.
Furthermore, as da Vinci use increases, a number of companies have introduced products in the field of robotic surgery or
have made explicit statements to enter the field of robotic surgery, including: Auris Surgical Robotics, Inc.; Avatera Medical
GmbH; Cambridge Medical Robotics Ltd; Johnson & Johnson and Google Inc. and their joint venture, Verb Surgical Inc.;
Medicaroid Inc.; MedRobotics Corp.; meerecompany Inc.; Medtronic PLC; Olympus Corp.; Samsung Corporation; Smart Robot
Technology Group Co. Ltd.; TransEnterix Inc.; and Titan Medical Inc. Companies with substantial experience in industrial robotics
could potentially expand into the field of surgical robotics and become a competitor. In addition, research efforts utilizing computers
and robotics in surgery are underway at various companies and research institutions. Our revenues may be adversely impacted as
our competitors announce their intent to enter our markets and as our customers anticipate the availability of competing products.
Intellectual Property
We place considerable importance on obtaining and maintaining patent, copyright and trade secret protection for significant
new technologies, products, and processes.
We generally rely upon a combination of intellectual property laws, as well as confidentiality procedures and contractual
provisions, to protect our proprietary technology. For example, we have trademarks, both registered and unregistered, that provide
distinctive identification of our products in the marketplace. We also have exclusive and non-exclusive patent licenses with various
third parties to supplement our own large and robust patent portfolio.
As of December 31, 2016, we held ownership or exclusive field-of-use licenses for more than 2,400 U.S. and foreign patents
and more than 1,800 U.S. and foreign patent applications. We intend to continue filing new patent applications in the U.S. and
foreign jurisdictions to seek protection for our technology.
Patents are granted for finite terms. Upon expiration, the inventions claimed in a patent enter the public domain.
Government Regulation
Our products and operations are subject to regulation by the FDA, the State of California and countries or regions in which
we market our products. In addition, our products must meet the requirements of a large and growing body of international standards
which govern the design, manufacture, materials content and sourcing, testing, certification, packaging, installation, use and
disposal of our products. We must continually keep abreast of these standards and requirements and integrate our compliance into
the development and regulatory documentation for our products. Failure to meet these standards could limit our ability to market
our products in those regions which require compliance to such standards. Examples of standards to which we are subject include
electrical safety standards such as those of the International Electrotechnical Commission (e.g. IEC 60601-ss series of standards),
and composition standards such as the Reduction of Hazardous Substances (“RoHS”) and the Waste Electrical and Electronic
Equipment (“WEEE”) Directives.
United States
The FDA regulates the development, testing, manufacturing, labeling, storage, recordkeeping, promotion, marketing,
distribution, and service of medical devices in the U.S. to ensure that medical products distributed domestically are safe and
effective for their intended uses. In addition, the FDA regulates the export of medical devices manufactured in the U.S. to markets
outside of the U.S. and the importation of medical devices manufactured abroad.
Under the Federal Food, Drug, and Cosmetic Act (“FFDCA”), medical devices are classified into one of three classes—Class
I, Class II or Class III—depending on the degree of risk associated with each medical device and the extent of control needed to
ensure safety and effectiveness. Our current products are Class I and Class II medical devices.
Class II devices are those which are subject to general controls and most require premarket demonstration of adherence to
certain performance standards or other special controls, as specified by the FDA, and clearance by the FDA. Premarket review
and clearance by the FDA for these devices is accomplished through the 510(k) premarket notification process. Unless a Class II
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device is exempt from premarket review, the manufacturer must submit to the FDA a premarket notification submission
demonstrating that the device is “substantially equivalent” in intended use and technology to a “predicate device” that is either:
1. a device that has grandfather marketing status because it was legally marketed prior to May 28, 1976, the date upon which
the Medical Device Amendments of 1976 were enacted, or
2. a device that has previously been cleared through the 510(k) process.
If the FDA agrees that the device is substantially equivalent to a predicate device, it will grant clearance to commercially
market the device in the U.S. The FDA has a statutory 90-day period to respond to a 510(k) submission, or a guidance-based 30-
day period for “special” 510(k) submissions which have a more restrictive scope and generally involve more specific or very
limited changes to a legally marketed device. As a practical matter, clearance often takes longer. The FDA may require further
information, including clinical data, to make a determination regarding substantial equivalence. If the FDA determines that the
device, or its intended use, is not “substantially equivalent,” the FDA may deny the request for clearance. Although unlikely for
the types of products marketed by us, the FDA may classify the device, or the particular use of the device, into Class III, and the
device sponsor must then fulfill more rigorous pre-market approval (“PMA”) requirements. A PMA application, which is intended
to demonstrate that a device is safe and effective, must be supported by extensive data, including data from preclinical studies and
human clinical trials. The FDA, by statute and regulation, has 180 days to review a PMA application, though the review more
often occurs over a significantly longer period of time, and can take up to several years. In approving a PMA application or clearing
a 510(k) submission, the FDA may also require some form of post-market surveillance when necessary to protect the public health
or to provide additional safety and effectiveness data for the device. In such cases, the manufacturer might be required to follow
certain patient groups for a number of years and makes periodic reports to the FDA on the clinical status of those patients.
After a device receives FDA 510(k) clearance, any modification that could significantly affect its safety or effectiveness, or
that would constitute a major change in its intended use, requires a new 510(k) clearance or could require a PMA application
approval. The FDA requires each manufacturer to make the determination of whether a modification requires a new 510(k)
notification or PMA application in the first instance, but the FDA can review any such decision. If the FDA disagrees with a
manufacturer’s decision not to seek a new 510(k) clearance or PMA approval for a particular change, the FDA may retroactively
require the manufacturer to seek 510(k) clearance or PMA approval. The FDA also can require the manufacturer to cease U.S.
marketing and/or recall the modified device until 510(k) clearance or PMA approval is obtained.
In addition, after a device is placed on the market, numerous FDA and other regulatory requirements continue to apply. These
include establishment registration and device listing with the FDA; compliance with medical device reporting regulations, which
require that manufacturers report to the FDA if their device may have caused or contributed to a death or serious injury or
malfunctioned in a way that would likely cause or contribute to a death or serious injury if it were to recur; and compliance with
corrections and removal reporting regulations, which require that manufacturers report to the FDA field corrections and product
recalls or removals if undertaken to reduce a risk to health posed by the device or to remedy a violation of the FFDCA that may
present a risk to health. The FDA and the Federal Trade Commission (“FTC”) also regulate the advertising and promotion of our
products to ensure that the claims we make are consistent with our regulatory clearances, that there is scientific data to substantiate
the claims and that our advertising is neither false nor misleading. In general, we may not promote or advertise our products for
uses not within the scope of our intended use statement in our clearances or make unsupported safety and effectiveness claims.
Many regulatory jurisdictions outside of the U.S. have similar regulations to which we are subject.
Our manufacturing processes are required to comply with the FDA’s Good Manufacturing Practice (“GMP”) requirements
contained in its Quality System Regulation (“QSR”) and associated regulations and guidance. The QSR covers, among other
things, the methods used in, and the facilities and controls used for, the design, manufacture, packaging, labeling, storage,
installation, and servicing of all medical devices intended for human use. The QSR also requires maintenance of extensive records
which demonstrate compliance with FDA regulation, the manufacturer’s own procedures, specifications and testing as well as
distribution and post-market experience. Compliance with the QSR is necessary to receive FDA clearance or approval to market
new products and is necessary for a manufacturer to be able to continue to market cleared or approved product offerings in the
U.S. A company’s facilities, records, and manufacturing processes are subject to periodic scheduled or unscheduled inspections
by the FDA, which may issue reports known as Forms FDA 483 or Notices of Inspectional Observations which list instances
where the FDA inspector believes the manufacturer has failed to comply with applicable regulations and/or procedures. If the
observations are sufficiently serious or the manufacturer fails to respond appropriately, the FDA may issue Warning Letters, or
Untitled Letters, which are notices of potential enforcement actions against the manufacturer. If a Warning Letter or Untitled Letter
is not addressed to the satisfaction of the FDA, or if the FDA becomes aware of any other serious issue with a manufacturer’s
products or facilities, it could result in fines, injunctions, civil penalties, delays, suspension or withdrawal of clearances, seizures
or recalls of products, operating restrictions, total shutdown of production facilities, prohibition on export or import and criminal
prosecution. Such actions may have further indirect consequences for the manufacturer outside of the U.S., and may adversely
affect the reputation of the manufacturer and the product. In the U.S., routine FDA inspections usually occur every two years, and
may occur more often for cause.
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To a greater or lesser extent, most other countries require some form of quality system and regulatory compliance, which may
include periodic inspections, inspections by third party auditors, and specialized documentation. Failure to meet all the requirements
of these countries could jeopardize our ability to import, market, support and receive reimbursement for the use of our products
in these countries.
In addition to the above, we may seek to conduct clinical studies or trials in the U.S. or other countries on products that have
not yet been cleared or approved for a particular indication. Additional regulations govern the approval, initiation, conduct,
documentation and reporting of clinical studies to regulatory agencies in the countries or regions in which they are conducted.
Such investigational use is generally also regulated by local and institutional requirements and policies which usually include
review by an ethics committee or institutional review board (“IRB”). Failure to comply with all regulations governing such studies
could subject the company to significant enforcement actions and sanctions, including halting of the study, seizure of investigational
devices or data, sanctions against investigators, civil or criminal penalties, and other actions. Without the data from one or more
clinical studies, it may not be possible for us to secure the data necessary to support certain regulatory submissions, to secure
reimbursement or demonstrate other requirements. We cannot assure that access to clinical investigators, sites and subjects,
documentation and data will be available on the terms and timeframes necessary.
Products manufactured outside the U.S. by or for us are subject to U.S. Customs and FDA inspection upon entry into the U.S.
We must demonstrate compliance of such products to U.S. regulations and carefully document the eventual distribution or re-
exportation of such products. Failure to comply with all applicable regulations could prevent us from having access to products
or components critical to the manufacture of finished products and lead to shortages and delays.
California Regulation
The State of California requires that we obtain a license to manufacture medical devices and until 2012 conducted periodic
inspections of medical device manufacturers. Our facilities and manufacturing processes were last inspected in July 2011 and were
found to be in compliance. In accordance with the State of California regulations, our license to manufacture is renewed annually
with any updated manufacturing information. Although the State of California has announced suspension of routine periodic
inspections, there can be no assurance the State of California will not resume such inspections or conduct such inspections under
specific circumstances which are not yet known.
Foreign Regulation
In order for us to market our products in countries outside the United States, we must obtain regulatory approvals and comply
with extensive product and quality system regulations in other countries. These regulations, including the requirements for approvals
or clearance and the time required for regulatory review, vary from country to country. Some countries have regulatory review
processes which are substantially longer than U.S. processes. Failure to obtain regulatory approval in a timely manner and to meet
all local requirements including language and specific safety standards in any foreign country in which we plan to market our
products could prevent us from marketing products in such countries or subject us to sanctions and fines.
To be sold in Japan, most medical devices must undergo thorough safety examinations and demonstrate medical efficacy
before they receive regulatory approval. We obtained from the Japanese Ministry of Health, Labor, and Welfare (“MHLW”)
approval for our da Vinci Si Surgical Systems in October 2012 and approval for our da Vinci Xi Surgical Systems in March 2015.
National reimbursement status was received in Japan for dVP procedures, effective April 2012 and for da Vinci partial nephrectomy
procedures in April 2016. We are currently seeking reimbursement for additional procedures through the MHLW’s Senshin Iryo
processes as well as alternative reimbursement processes. Our Senshin Iryo approvals require in-country clinical data and are
considered for reimbursed status in April of even numbered years.
Commercialization of medical devices in Europe is regulated by the European Union (“EU”). The EU presently requires that
all medical products bear the Conformité Européenne (“CE”) mark, for compliance with the Medical Device Directive (93/42/
EEC) as amended. The CE mark is an international symbol of adherence to certain essential principles of safety and performance
mandated in applicable European medical device directives, which once affixed, enables a product to be sold in member countries
of the EU and those affiliated countries which accept the CE mark. The CE mark is also recognized in many countries outside of
the EU, such as Australia, and can assist in the clearance process. In order to affix the CE mark on products, a recognized European
Notified Body must certify a manufacturer’s quality system and design dossier for compliance with international and European
requirements. We have received authorization from Presafe Denmark A/S (formerly DGM Denmark A/S), a recognized European
Notified Body and part of Nemko Presafe A/S, to affix the CE mark to our da Vinci Surgical System and EndoWrist instruments
and accessories. To maintain authorization to apply the CE mark, we are subject to annual surveillance audits and periodic re-
certification audits. In September 2013, the European Commission adopted a recommendation indicating that all Notified Bodies,
including Presafe, should carry out unannounced audits, at least once every third year, of the manufacturers whose medical devices
they have certified. These unannounced audits can also extend to the manufacturer’s critical suppliers or sub-contractors (those
that supply a critical input or perform a critical function for the manufacturer).
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If we modify our existing products or develop new products in the future, we may need to apply for authorization to affix the
CE mark to such products. We do not know whether we will be able to obtain authorization to affix the CE mark for new or
modified products or whether we will continue to meet the safety and performance standards required to maintain the authorizations
we have already received. If we are unable to maintain authorizations to affix the CE mark to our products, we will no longer be
able to sell our products in member countries of the EU or those whose marketing authorizations are based on the CE mark.
Regulations in other countries, including the requirements for approvals or clearance and the time required for regulatory
review, vary from country to country. Certain countries, such as China and South Korea, have their own regulatory agencies. These
countries typically require regulatory approvals and compliance with extensive safety and quality system regulations. Failure to
obtain regulatory approval in any foreign country in which we plan to market our products, or failure to comply with any regulation
in any foreign country in which we market our products, may negatively impact our ability to generate revenue and harm our
business. Our system sales into China are also dependent on obtaining importation authorizations and hospitals completing a
central purchasing tender process under the authorization, the most recent of which expired at the end of 2015. In addition, local
regulations may apply which govern the use of our products and which could have an adverse effect on our product utilization if
they are unfavorable. All such regulations are revised from time to time and in general are increasing in complexity, and in the
scope and degree of documentation and testing required. There can be no assurance the outcomes from such documentation and
testing will be acceptable to any particular regulatory agency or will continue to be acceptable over time. There are further regulations
governing the importation, marketing, sale, distribution, use and service as well as the removal and disposal of medical devices
in the regions in which we operate and market our products. Failure to comply with any of these regulations could result in sanctions
or fines, and could prevent us from marketing our products in these regions.
Other Healthcare Laws
We are also subject to federal and state healthcare laws and regulations pertaining to fraud and abuse, physician payment
transparency, privacy, and security laws and regulations. These laws include:
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the federal Anti-Kickback Statute, which prohibits, among other things, persons from knowingly and willfully
soliciting, receiving, offering or paying remuneration, directly or indirectly, in exchange for or to induce either the
referral of an individual for, or the purchase, order or recommendation of, any good or service for which payment
may be made under federal healthcare programs, such as the Medicare and Medicaid programs. A person or entity
does not need to have actual knowledge of the federal Anti-Kickback Statute or specific intent to violate it to have
committed a violation. In addition, the government may assert that a claim including items or services resulting
from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the False
Claims Act;
federal false claims laws which prohibit, among other things, individuals or entities from knowingly presenting, or
causing to be presented, claims for payment from Medicare, Medicaid or other federal third-party payors that are
false or fraudulent;
the federal Civil Monetary Penalties Law, which prohibits, among other things, offering or transferring remuneration
to a federal healthcare beneficiary that a person knows or should know is likely to influence the beneficiary’s decision
to order or receive items or services reimbursable by the government from a particular provider or supplier;
federal criminal laws that prohibit executing a scheme to defraud any federal healthcare benefit program or making
false statements relating to healthcare matters;
the federal Health Insurance Portability and Accountability Act of 1996, as amended by the Health Information
Technology for Economic and Clinical Health Act, which governs the conduct of certain electronic healthcare
transactions and protects the security and privacy of protected health information;
the federal Physician Payment Sunshine Act, which requires (i) manufacturers of drugs, devices, biologics and medical
supplies for which payment is available under Medicare, Medicaid or the Children’s Health Insurance Program (with
certain exceptions) to report annually to the Centers for Medicare & Medicaid Services (“CMS”) information related
to payments or other “transfers of value” made to physicians (defined to include doctors, dentists, optometrists,
podiatrists and chiropractors) and teaching hospitals, and (ii) applicable manufacturers and group purchasing
organizations to report annually to CMS ownership and investment interests held by the physicians described above
and their immediate family members, and payments or other “transfers of value” to such physician owners.
Manufacturers are required to submit reports to CMS by the 90th day of each calendar year; and
analogous state and foreign law equivalents of each of the above federal laws, such as anti-kickback and false claims
laws which may apply to items or services reimbursed by any third-party payor, including commercial insurers; state
laws that require device companies to comply with the industry’s voluntary compliance guidelines and the applicable
compliance guidance promulgated by the federal government or otherwise restrict payments that may be made to
healthcare providers and other potential referral sources; state laws that require device manufacturers to report
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information related to payments and other “transfers of value” to physicians and other healthcare providers or
marketing expenditures; and state laws governing the privacy and security of health information in certain
circumstances, many of which differ from each other in significant ways and may not have the same effect, thus
complicating compliance efforts.
If our operations are found to violate any of the laws described above or any other laws and regulations that apply to us, we
may be subject to penalties, including civil and criminal penalties, damages, fines, the curtailment or restructuring of our operations,
the exclusion from our participation in federal and state healthcare programs and imprisonment, any of which could adversely
affect our ability to market our products and materially adversely affect our business, results of operations and financial condition.
Any action against us for violation of these laws, even if we successfully defend against it, could cause us to incur significant legal
expenses and divert our management’s attention from the operation of our business.
Third-Party Coverage and Reimbursement
In the U.S. and most markets OUS where we sell our products, the government and health insurance companies together are
responsible for hospital and surgeon reimbursement for virtually all covered surgical procedures. Governments and insurance
companies generally reimburse hospitals and physicians for surgery when the procedure is considered medically necessary. In the
U.S., CMS administers the Medicare and Medicaid programs (the latter, along with applicable state governments). Many other
third-party payors model their reimbursement methodologies after the Medicare program. As the single largest payor, this program
has a significant impact on other payors’ payment systems.
Generally, reimbursement for professional services performed at a facility by physicians is reported under billing codes issued
by the American Medical Association (“AMA”), known as Current Procedural Terminology (“CPT”) codes. Physician
reimbursement under Medicare generally is based on a fee schedule and determined by the relative values of the professional
service rendered. In addition, CMS and the National Center for Health Statistics (“NCHS”) are jointly responsible for overseeing
changes and modifications to billing codes used by hospitals to report inpatient procedures, known as ICD-9-CM procedural codes
prior to October 1, 2015, and ICD-10-PCS codes on and after October 1, 2015. For Medicare, CMS generally reimburses hospitals
for services provided during an inpatient stay based on a prospective payment system that is determined by a classification system
known as Medicare-Severity Diagnostic Related Groupings (“MS-DRGs”). MS-DRGs are assigned using a number of factors
including the principal diagnosis, major procedures, discharged status, patient age and complicating secondary diagnoses among
other things. Hospital outpatient services, reported by CPT codes, are assigned to clinically relevant Ambulatory Payment
Classifications (“APCs”) used to determine the payment amount for services provided.
On October 1, 2008, CMS and NCHS issued a new family of ICD-9-CM procedure codes for “Robotically Assisted
Procedures”. The purpose of the ICD-9-CM family of procedure codes, 17.4X, was to gather data on robotic assisted surgical
procedures. On and after October 1, 2015, a new family of ICD-10-PCS codes may be used-in conjunction with other applicable
procedure codes-to describe various robotic assisted procedures. An inpatient surgical procedure, completed with or without robotic
assistance, continues to be assigned to the clinically relevant MS-DRG.
Governments and insurance companies carefully review and increasingly challenge the prices charged for medical products
and surgical services. Reimbursement rates from private companies vary depending on the procedure performed, the third-party
payor, contract terms, and other factors. Because both hospitals and physicians may receive the same reimbursement for their
respective services, with or without robotics, regardless of actual costs incurred by the hospital or physician in furnishing the care,
including for the specific products used in that procedure, hospitals and physicians may decide not to use our products if
reimbursement amounts are insufficient to cover any additional costs incurred when purchasing our products.
Domestic institutions typically bill various third-party payors, such as Medicare, Medicaid and other government programs
and private insurance plans for the primary surgical procedure that includes our products. Because our da Vinci Surgical System
has been cleared for commercial distribution in the U.S. by the FDA, coverage and reimbursement by payors are generally
determined by the medical necessity of the primary surgical procedure. We believe that the additional procedures we intend to
pursue are established surgical procedures that are generally already reimbursable by government agencies and insurance companies
for appropriately selected patients. If hospitals do not obtain sufficient reimbursement from third-party payors for procedures
performed with our products, or if governmental and private payors’ policies do not cover surgical procedures performed using
our products, we may not be able to generate the revenues necessary to support our business.
In countries outside the U.S., reimbursement is obtained from various sources, including governmental authorities, private
health insurance plans, and labor unions. In most foreign countries, private insurance systems may also offer payments for some
therapies. In addition, health maintenance organizations are emerging in certain European countries. To effectively conduct our
business, we may need to seek OUS reimbursement approvals, and we do not know if these required approvals will be obtained
in a timely manner or at all. In some countries, patients may be permitted to pay directly for surgical services; however, such “co-
pay” practices are not common in most countries.
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In March 2010, the U.S. President signed the Patient Protection and Affordable Care Act, as amended by the Health Care and
Education Reconciliation Act (collectively, the “PPACA”), which makes changes that significantly impact healthcare providers,
insurers, pharmaceutical and medical device manufacturers. The PPACA contains a number of provisions designed to generate
the revenues necessary to fund health insurance coverage expansion, including, but not limited to fees or taxes on certain health-
related industries, including medical device manufacturers. For sales between January 1, 2013 and December 31, 2015, medical
device manufacturers were required to pay an excise tax (or sales tax) of 2.3% on certain U.S. medical device revenues. Under
this provision, we incurred an excise tax of approximately $17.0 million in 2015 which was included as a cost of revenue and a
reduction of product gross profit margin. In December, 2015, President Obama signed into law the Consolidated Appropriations
Act, 2016 (the “Appropriations Act”). The Appropriations Act includes a two-year moratorium on the medical device excise tax
such that medical device sales in 2016 and 2017 are exempt from the medical device excise tax. Unless there is further legislative
action, the tax will be automatically reinstated for sales of medical devices on or after January 1, 2018.
The PPACA also appropriates funding to research the comparative effectiveness of health care treatments and strategies. It
remains unclear how this research will influence future Medicare coverage and reimbursement decisions, as well as influence
other third-party payor coverage and reimbursement policies. As the U.S. congress and state governments determine how to
implement the PPACA, the full impact of the PPACA on the medical device industry and the sale of our products is currently
unknown. The PPACA, as well as other federal or state health care reform measures that may be adopted in the future, could have
a material adverse effect on our business. The taxes imposed by PPACA and the expansion in the government’s role in the U.S.
healthcare industry may result in decreased profits, lower reimbursement from payors for procedures that use our products and/
or reduced procedural volumes, all of which may adversely affect our business, financial condition and results of operations.
In addition, other legislative changes have been proposed and adopted since the PPACA was enacted. These changes included
an aggregate reduction in Medicare payments to providers of up to 2% per fiscal year, which went into effect on April 1, 2013 and
will remain in effect through 2025 unless additional Congressional action is taken. On January 2, 2013, the American Taxpayer
Relief Act of 2012 was signed into law, which, among other things, further reduced Medicare payments to several providers,
including hospitals, imaging centers and cancer treatment centers. The Medicare Access and CHIP Reauthorization Act of 2015,
enacted on April 16, 2015 (“MACRA”), repealed the formula by which Medicare made annual payment adjustments to physicians
and replaced the former formula with fixed annual updates and a new system of incentive payments scheduled to begin in 2019
that are based on various performance measures and physicians’ participation in alternative payment models such as accountable
care organizations.
There have also been judicial and congressional challenges to certain aspects of the PPACA, and we expect that the U.S.
federal government will seek to modify, repeal, or otherwise invalidate all, or certain provisions of, the PPACA. For instance, on
January 20, 2017, an executive order was issued, which stated that it is the U.S. federal government's policy to seek the prompt
repeal of the PPACA, and directed the heads of all executive departments and agencies to minimize the economic and regulatory
burdens of the PPACA to the maximum extent permitted by law. Any regulatory or legislative developments in domestic or foreign
markets that eliminate or reduce reimbursement rates for procedures performed with our products could harm our ability to sell
our products or cause downward pressure on the prices of our products, either of which would affect our ability to generate the
revenues necessary to support our business.
Employees
As of December 31, 2016, we had 3,755 employees, 466 of whom were engaged directly in research and development, 1,529
in manufacturing and service and 1,760 in marketing, sales, and administrative activities. None of our employees are covered by
a collective bargaining agreement, and we consider our relationship with our employees to be good.
General
We make our periodic and current reports, including our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q,
Current Reports on Form 8-K, our Code of Business Conduct and Ethics Policy and any amendments to those reports, available
free of charge, on our website as soon as practicable after such material is electronically filed or furnished with the Securities and
Exchange Commission (the “SEC”). Our website address is www.intuitivesurgical.com and the reports are filed under “SEC
Filings,” on the Company—Investor Relations portion of our website. Periodically, we webcast Company announcements, product
launch events and executive presentations which can be viewed via our Investor Relations page on our website. In addition, we
provide notifications of our material news including SEC filings, investor events, and press releases as part of our Investor Relations
page on our website. The contents of our website are not intended to be incorporated by reference into this report or in any other
report or document we file and any references to our website are intended to be inactive textual references only. The public may
read and copy any materials filed by the Company with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Room
1580, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the
SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements and other
information regarding issuers that file electronically with the SEC at www.sec.gov. The contents of these websites are not
incorporated into this filing. Further, references to the URLs for these websites are intended to be inactive textual references only.
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We operate our business as one segment as defined by U.S. generally accepted accounting principles. Our financial results
for the years ended December 31, 2016, 2015, and 2014 are discussed in “Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations” and “Item 8. Financial Statements and Supplementary Data” of this Annual Report.
Intuitive Surgical, Inc. was founded in 1995. We are a Delaware corporation with our corporate headquarters located at 1020
Kifer Road, Sunnyvale, California 94086. Our telephone number is (408) 523-2100, and our website address is
www.intuitivesurgical.com.
ITEM 1A. RISK FACTORS
RISKS RELATING TO OUR BUSINESS
IF OUR PRODUCTS DO NOT ACHIEVE MARKET ACCEPTANCE, WE WILL NOT BE ABLE TO GENERATE THE
REVENUE NECESSARY TO SUPPORT OUR BUSINESS.
The da Vinci Surgical System and our other products represent a fundamentally new way of performing surgery. Achieving
physician, patient, and third-party payor acceptance of da Vinci Surgery as a preferred method of performing surgery will be crucial
to our success. If our products fail to achieve market acceptance, customers will not purchase our products and we will not be
able to generate the revenue necessary to support our business. We believe that physicians and third-party payors’ acceptance of
the benefits of procedures performed using our products will be essential for acceptance of our products by patients. Physicians
will not recommend the use of our products unless we can demonstrate that they produce results comparable or superior to existing
surgical techniques. Even if we can prove the effectiveness of our products through clinical trials, surgeons may elect not to use
our products for any number of other reasons. For example, cardiologists may continue to recommend conventional heart surgery
simply because such surgery is already widely accepted. In addition, surgeons may be slow to adopt our products because of the
perceived liability risks arising from the use of new products and the uncertainty of reimbursement from third-party payors,
particularly in light of ongoing health care reform initiatives and the evolving U.S. health care environment following the 2016
U.S. elections.
We expect that there will be a learning process involved for surgical teams to become proficient in the use of our products.
Broad use of our products will require training of surgical teams. Market acceptance could be delayed by the time required to
complete this training. We may not be able to rapidly train surgical teams in numbers sufficient to generate adequate demand for
our products.
ECONOMIC CONDITIONS COULD MATERIALLY ADVERSELY AFFECT OUR COMPANY.
In recent years, there have been credit and sovereign debt concerns in certain European countries, as well as concerns about
continued slowed economic growth in China and other OUS markets, have caused economic uncertainty, disruptions in the financial
credit markets, volatile currency exchange rates and energy costs, concerns about inflation, slower economic activity, decreased
consumer confidence, reduced corporate profits and capital spending, adverse business conditions and liquidity concerns.
Uncertainty about current global economic conditions continues to pose a risk as customers may choose to postpone or reduce
spending in response to restraints on credit. There could be additional effects from adverse conditions in the credit markets on our
business, including the insolvency of key suppliers or their inability to obtain credit to finance the development and/or manufacture
of our products resulting in product delays, and the inability of our customers and distributors to obtain credit to finance purchases
of our products.
In addition, our business is closely tied to the overall U.S. healthcare system, relating to which there are concerns and
uncertainties as a result of explicit statements made by the U.S. federal government about its intentions to modify, repeal, or
otherwise invalidate all, or certain provisions of, the PPACA. In addition, the U.S. federal government has called for substantial
changes to trade, fiscal, and tax policies, which may include comprehensive tax reform and changes to existing trade agreements,
including, but not limited to, the North American Free Trade Agreement ("NAFTA"), may have a significant impact on our
operations. We cannot predict the impact, if any, that these changes could have on our business.
If economic conditions worsen or fail to improve or new legislation is passed related to the healthcare system, trade, fiscal
or tax policies, customer demand may not materialize to the levels we require to achieve our anticipated financial results, which
could have a material adverse effect on our business, financial condition, results of operations, or cash flows.
BECAUSE OUR MARKETS ARE HIGHLY COMPETITIVE, CUSTOMERS MAY CHOOSE TO PURCHASE OUR
COMPETITORS’ PRODUCTS OR SERVICES OR MAY NOT ACCEPT DA VINCI SURGERY, WHICH WOULD
RESULT IN REDUCED REVENUE AND LOSS OF MARKET SHARE.
da Vinci Surgery is a relatively new technology that competes with established and emerging treatment options in both disease
management and reconstructive medical procedures. These competitive treatment options include conventional MIS, open surgery,
interventional approaches, and pharmacological regimens. Some of these procedures are widely accepted in the medical community
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and in many cases have a long history of use. Technological advances could make such treatments more effective or less expensive
than using our products, which could render our products obsolete or unmarketable. Studies could be published that show that
other treatment options are more beneficial and/or cost-effective than da Vinci Surgery. We cannot be certain that physicians will
use our products to replace or supplement established treatments or that our products will continue to be competitive with current
or future technologies.
Additionally, we expect to face competition from companies that develop wristed, robotic or computer-assisted surgical
systems and products in the future. The following companies have introduced products in the field of robotic surgery or have made
explicit statements about their efforts to enter the field: Auris Surgical Robotics Inc.; Avatera Medical GmbH; Cambridge Medical
Robotics Ltd; Johnson & Johnson and Google Inc. and their joint venture, Verb Surgical Inc.; Medicaroid Inc.; MedRobotics
Corp.; meerecompany Inc.; Medtronic PLC; Olympus Corp.; Samsung Corporation; Smart Robot Technology Group Co. Ltd.;
TransEnterix Inc.; and Titan Medical Inc. Companies with substantial experience in industrial robotics could potentially expand
into the field of surgical robotics and become a competitor. Our revenues may be reduced due to pricing pressure or eliminated if
our competitors develop and market products that are more effective or less expensive than our products. If we are unable to
compete successfully, our revenues will suffer, which could have a material adverse effect on our business, financial condition,
result of operations or cash flows. We may not be able to maintain or improve our competitive position against current or potential
competitors, especially those with greater resources. In addition, third-party service providers that provide service to da Vinci
surgical system operators may emerge and compete with us on price or offerings. To date, substantially all of our customers have
sourced services on their da Vinci surgical systems from us through service contract commitments or time and materials contracts.
If we are unable to compete successfully with any third-party service providers, our revenues may suffer.
Recently, third party entities have begun to offer robotic surgery consulting services targeted at analyzing the cost-effectiveness
of hospitals’ robotic surgery programs, including procedures performed, placement of systems, and consumption of instruments
and accessories. We currently provide similar services and analysis to our customers, but it is difficult to assess the impact that
this may have on our business.
OUR CUSTOMERS MAY USE UNAUTHORIZED OR UNAPPROVED INSTRUMENTS AND ACCESSORIES, WHICH
WOULD RESULT IN REDUCED REVENUE AND LOSS OF MARKET SHARE.
A large portion of our revenue is generated through our sales of instruments and accessories. Third parties have attempted to
and may discover ways to manufacture and sell counterfeit reprocessed instruments and/or alter instruments that are compatible
and function with the da Vinci surgical system, and such activities may reduce our market share. Our sales arrangements with
customers generally prohibit the use of unauthorized or unapproved instruments and accessories with the da Vinci surgical systems,
warranties will be void if such instruments and accessories are used, and a programmed memory chip inside each instrument is
designed to prevent the instrument from being used for more than the prescribed number of procedures to help ensure that its
performance meets specifications during each procedure. However, these measures may not prevent the use of unauthorized or
unapproved instruments and accessories by our customers. In addition to potential reductions to our revenues and market share,
sales of unauthorized instruments and accessories by third parties may create safety and health risks to da Vinci patients and could
cause negative publicity for us if these products cause injuries and/or do not function as intended when used with the da Vinci
surgical systems, any of which could have a material adverse effect on our business, financial condition, results of operations, or
cash flows.
NEW PRODUCT DEVELOPMENTS AND INTRODUCTIONS MAY ADVERSELY IMPACT OUR FINANCIAL
RESULTS.
We develop and introduce new products with enhanced features and extended capabilities from time to time. We may introduce
new products that target different markets than what our existing products target. The success of new product introductions depends
on a number of factors including, but not limited to, timely and successful research and development, regulatory clearances or
approvals, pricing, competition, market and consumer acceptance, the effective forecasting and management of product demand,
inventory levels, the management of manufacturing and supply costs, and the risk that new products may have quality or other
defects in the early stages of introduction.
We invest substantially in various research and development projects to expand our product offerings. Our research and
development efforts are critical to our success, and our research and development projects may not be successful. We may be
unable to develop and market new products successfully, and the products we invest in and develop may not be well-received by
customers or meet our expectations. Our research and development investments may not generate significant operating income
or contribute to our future operating results for several years, and such contributions may not meet our expectations or even cover
the costs of such investments. In addition, the introduction or announcement of new products or product enhancements may shorten
the life cycle of our existing products or reduce demand for our current products, thereby offsetting any benefits of successful
product introductions and potentially leading to challenges in managing inventory of existing products.
Our products are subject to various regulatory processes, and we must obtain and maintain regulatory approvals in order to
sell our new products. If a potential purchaser believes that we plan to introduce a new product in the near future or if a potential
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purchaser is located in a country where a new product that we have introduced has not yet received regulatory approval, planned
purchases may be deferred or delayed. We have in the past experienced a slowdown in demand for existing products in advance
of new product introductions and may experience a slowdown in demand in the future as well. It is also possible that a new product
introduction could cause downward pressure on the prices of our existing products or require us to change how we sell our products,
either of which could have material adverse effect on our revenues.
If we fail to effectively develop new products and manage new product introductions in the future, our business, financial
condition, results of operations or cash flows could be materially adversely impacted.
WE EXPECT GROSS PROFIT MARGINS TO VARY OVER TIME, AND CHANGES IN OUR GROSS PROFIT
MARGINS COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION OR RESULTS OF OPERATIONS.
Our gross profit margins have fluctuated from period to period, and we expect that they will continue to fluctuate in the future.
Our gross profit margins may be adversely affected by numerous factors, including:
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changes in customer, geographic, or product mix, including mix of da Vinci Surgical System models sold;
changes in the portion of sales involving a trade-in of another system and the amount of trade-in credits given;
introduction of new products, which may have lower margins than our existing products;
our ability to maintain or reduce production costs;
changes to our pricing strategy;
changes in competition;
changes in production volume driven by demand for our products;
changes in material, labor or other manufacturing-related costs, including impact of foreign exchange rate fluctuations
for foreign-currency denominated costs;
changes to U.S. and foreign trade policies, including the enactment of tariffs on goods imported into the U.S., including
but not limited to, goods imported from Mexico where we manufacture a majority of our instruments that we sell;
inventory obsolescence and product recall charges; and
• market conditions.
If we are unable to offset the unfavorable impact of the factors noted above by increasing the volume of products shipped,
reducing product manufacturing costs or otherwise, our business, financial condition, results of operations or cash flows may be
materially adversely affected.
WE EXPERIENCE LONG AND VARIABLE CAPITAL SALES CYCLES AND SEASONALITY IN OUR BUSINESS,
WHICH MAY CAUSE FLUCTUATIONS IN OUR FINANCIAL RESULTS.
Our da Vinci Surgical System has a lengthy sales and purchase order cycle because it is a major capital item and its purchase
generally requires the approval of senior management of hospitals, their parent organizations, purchasing groups, and government
bodies, as applicable. In addition, sales to some of our customers are subject to competitive bidding or public tender processes.
These approval and bidding processes can be lengthy. In addition, IDN groups are creating larger networks of da Vinci system
operators, have increasing purchasing power, and are increasingly evaluating their da Vinci Surgery programs to optimize the
efficiency of the da Vinci system operations. As a result, hospitals may delay or accelerate system purchases in conjunction with
timing of their capital budget timelines. Further, the introduction of new products could adversely impact our sales cycle as
customers take additional time to assess the benefits and costs of such products. As a result, it is difficult for us to predict the
length of capital sales cycles and, therefore, the exact timing of capital sales. Historically, our sales of da Vinci Surgical Systems
have tended to be heaviest during the third month of each fiscal quarter, lighter in the first and third fiscal quarters, and heavier
in the fourth fiscal quarter.
We have experienced procedure growth for a number of benign conditions, including hysterectomies for benign conditions,
sacrocolpopexies, hernia repair, cholecystectomies, and certain other surgeries. Many of these types of surgeries may be postponed
in the short term by patients to avoid vacation periods and for other personal scheduling reasons. Patients may also accelerate
procedures to take advantage of insurance funding cut-off dates. Historically, we have experienced lower procedure volume in
the first and third fiscal quarters and higher procedure volume in the second and fourth fiscal quarters. Timing of procedures and
changes in procedure growth directly affect the timing of instrument and accessory purchases and capital purchases by customers.
The above factors may contribute to substantial fluctuations in our quarterly operating results. Because of these fluctuations,
it is possible that in some future quarters our operating results will fall below the expectations of securities analysts or investors.
If that happens, the market price of our stock would likely decrease. These fluctuations, among other factors, also mean that our
operating results in any particular period may not be relied upon as an indication of future performance.
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WE ARE SUBJECT TO A VARIETY OF RISKS DUE TO OUR OPERATIONS OUTSIDE OF THE U.S.
We manufacture, perform research and development activities, and distribute our products in OUS markets. Revenue from
OUS markets accounted for approximately 28%, 29%, and 30% of our revenue for the years ended December 31, 2016, 2015,
and 2014, respectively. Our OUS operations are, and will continue to be, subject to a number of risks including:
•
failure to obtain the same degree of protection against infringement of our intellectual property rights as we have in
the United States;
• multiple OUS regulatory requirements that are subject to change and that could impact our ability to manufacture
and sell our products;
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protectionist laws and business practices that favor local competitors, which could slow our growth in OUS markets;
local or national regulations that make it difficult or impractical to market or use our products;
inability or regulatory limitations on our ability to move goods across borders;
the risks associated with foreign currency exchange rate fluctuations;
difficulty in establishing, staffing and managing OUS operations;
the expense of establishing facilities and operations in new foreign markets;
building and maintaining an organization capable of supporting geographically dispersed operations;
anti-corruption laws, such as the U.S. Foreign Corrupt Practices Act, and other local laws prohibiting corrupt
payments to governmental officials; and
political and economic instability.
On June 23, 2016, the United Kingdom (UK) held a referendum in which voters approved an exit from the European Union
(the "EU"), commonly referred to as “Brexit”. As a result of the referendum, it is expected that the British government will begin
negotiating the terms of the UK’s future relationship with the EU. Although it is unknown what those terms will be, it is possible
that there will be greater restrictions on imports and exports between the UK and EU countries and increased regulatory complexities.
In addition, the U.S. federal government has made explicit statements about its intention to make changes to U.S. trade policy,
including signing an executive order to withdraw from the negotiating process of the Trans-Pacific Partnership, renegotiate the
terms of NAFTA, and imposing border taxes on imports into the U.S. We manufacture a majority of the instruments we sell in
Mexico and any legislation enacted that impacts the relationship between the U.S. and Mexico and/or the continuity of NAFTA
could adversely affect our operations and financial results. If enacted, any legislation taken by the U.S. federal government that
restricts trade, such as tariffs, trade barriers, and other protectionist or retaliatory measures taken by governments in Europe, Asia,
and other countries, could adversely impact our ability to sell products and services in our OUS markets.
Furthermore, a large portion of our OUS sales are denominated in U.S. dollars. As a result, an increase in the value of the
U.S. dollar relative to foreign currencies could make our products less competitive and/or less affordable in OUS markets.
If we are unable to meet and manage these risks, our OUS operations may not be successful, which would limit the growth
of our business and could have a material adverse effect on our business, financial condition, result of operations, or cash flows.
WE UTILIZE DISTRIBUTORS FOR A PORTION OF OUR SALES, WHICH SUBJECTS US TO A NUMBER OF RISKS
THAT COULD HARM OUR BUSINESS.
We have strategic relationships with a number of key distributors for sales and service of our products in certain foreign
countries. If these strategic relationships are terminated and not replaced, our revenues and/or ability to sell or service our products
in the markets serviced by these distributors could be adversely affected. In addition, we may be named as a defendant in lawsuits
against our distributors related to sales or service of our products performed by them. Please see our risk factor below titled “We
are Subject to Product Liability and Negligence Claims Relating to the Use of Our Products and Other Legal Proceedings That
Could Materially Adversely Affect Our Financial Condition, Divert Management's Attention, and Harm Our Business.” The actions
of our distributors may affect our ability to effectively market our products in certain foreign countries or regulatory jurisdictions
if the distributor holds the regulatory authorization in such countries or within such regions and causes, by action or inaction, the
suspension of such marketing authorization or sanctions for non-compliance. It may be difficult, expensive and time consuming
for us to re-establish market access or regulatory compliance in such case.
WE ARE EXPOSED TO THE CREDIT RISK OF SOME OF OUR CUSTOMERS, WHICH COULD RESULT IN
MATERIAL LOSSES.
We believe customer financing through leasing is an important consideration for some of our customers and have experienced
an increase in demand for customer financing. We may experience loss from a customer’s failure to make payments according to
the contractual lease terms. Our exposure to the credit risks relating to our lease financing arrangements may increase if our
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customers are adversely affected by changes in healthcare laws, coverage and reimbursement, economic pressures or uncertainty,
or other customer-specific factors.
Although we have programs in place that are designed to monitor and mitigate the associated risk, there can be no assurance
that such programs will be effective in reducing credit risks relating to these lease financing arrangements. Although we have not
experienced significant credit losses to date, should the level of credit losses we experience in the future exceed our expectations,
they could have a material adverse effect on our financial condition or results of operations.
WE MAY INCUR LOSSES ASSOCIATED WITH CURRENCY FLUCTUATIONS AND MAY NOT BE ABLE TO
EFFECTIVELY HEDGE OUR EXPOSURE.
Our operating results are subject to volatility due to fluctuations in foreign currency exchange rates. Our primary exposure
to fluctuations in foreign currency exchange rates relates to revenue and operating expenses denominated in currencies other than
the U.S. dollar. The weakening of foreign currencies relative to the U.S. dollar adversely affects our foreign currency-denominated
revenue. Margins on OUS revenue could also be materially adversely affected by foreign currency exchange rate fluctuations as
we may not be able to raise local prices to fully offset the strengthening of the U.S. dollar. Conversely, the strengthening of foreign
currencies relative to the U.S. dollar, while generally beneficial to our foreign currency-denominated revenue and earnings, may
cause us to reduce pricing on our products in our OUS markets and may cause us to incur losses on our foreign currency hedging
instruments, thereby limiting the benefit that strengthened foreign currencies could have on our results of operations.
We attempt to mitigate a portion of these risks through foreign currency hedging, based on our judgment of the appropriate
trade-offs among risk, opportunity, and expense. Although we have established a hedging program to partially hedge our exposure
to foreign currency exchange rate fluctuations, primarily related to transactions denominated in the Euro, Japanese Yen, Korean
Won, British Pound, and the Swiss Franc, and we regularly review our hedging program and make adjustments as necessary, our
hedging activities may not offset more than a portion of the adverse financial impact caused by unfavorable movement in foreign
currency exchange rates, which could materially adversely affect our financial condition or results of operations.
WE ARE EXPOSED TO CREDIT RISK AND FLUCTUATIONS IN THE MARKET VALUE OF OUR INVESTMENTS.
Our investment portfolio includes both domestic and international investments. The credit ratings and pricing of our
investments can be negatively affected by liquidity concerns, credit deterioration, financial results, economic risk, political risk
or other factors. As a result, the value and liquidity of our cash equivalents and marketable securities could fluctuate substantially.
Our other income and expense could also vary materially from expectations depending on gains or losses realized on the sale or
exchange of investments, impairment charges resulting from revaluations of debt and equity securities and other investments,
changes in interest rates, increases or decreases in cash balances, volatility in foreign exchange rates, and changes in fair value of
derivative instruments. Increased volatility in the financial markets and overall economic uncertainty could increase the risk that
actual amounts realized on our investments may differ significantly from the fair values currently assigned to them.
While we have not realized any significant losses on our cash equivalents or marketable securities, future fluctuations in their
value could have a material adverse impact on our business, financial condition, results of operations, or cash flows.
IF DEFECTS ARE DISCOVERED IN OUR PRODUCTS, WE MAY INCUR ADDITIONAL UNFORESEEN COSTS,
HOSPITALS MAY NOT PURCHASE OUR PRODUCTS AND OUR REPUTATION MAY SUFFER.
Our success depends on the quality and reliability of our products. While we subject components sourced and products
manufactured to stringent quality specifications and processes, our products incorporate mechanical parts, electrical components,
optical components, and computer software, any of which may contain errors or exhibit failures, especially when products are
first introduced. In addition, new products or enhancements may contain undetected errors or performance problems that, despite
testing, are discovered only after commercial shipment. Because our products are designed to be used to perform complex surgical
procedures, due to the serious and costly consequences of product failure, we and our customers have an increased sensitivity to
such defects. In the past, we have voluntarily recalled certain products. Although our products are subject to stringent quality
processes and controls, we cannot assure that our products will not experience component aging, errors, or performance problems
in the future. If we experience product flaws or performance problems, any or all of the following could occur:
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delays in product shipments;
loss of revenue;
delay in market acceptance;
diversion of our resources;
damage to our reputation;
product recalls;
regulatory actions;
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•
•
increased service or warranty costs; or
product liability claims.
Costs associated with product flaws or performance problems could have a material adverse effect on our business, financial
condition, results of operations, or cash flows.
WE ARE SUBJECT TO PRODUCT LIABILITY AND NEGLIGENCE CLAIMS RELATING TO THE USE OF OUR
PRODUCTS AND OTHER LEGAL PROCEEDINGS THAT COULD MATERIALLY ADVERSELY AFFECT OUR
FINANCIAL CONDITION, DIVERT MANAGEMENT’S ATTENTION AND HARM OUR BUSINESS.
We are and may become subject to various legal proceedings and claims that arise in or outside the ordinary course of business.
Certain current lawsuits and pending proceedings to which we are party, including purported class actions, derivative lawsuits,
and product liability litigation, are described in Note 7 to the Consolidated Financial Statements included in Part II, Item 8.
In particular, our business exposes us to significant risks of product liability claims, which are inherent to the medical device
industry. Product liability claims have been brought against us by or on behalf of individuals alleging that they have sustained
personal injuries and/or death as a result of purported product defects, the alleged failure to warn, and/or the alleged inadequate
training by us of physicians regarding the use of the da Vinci Surgical System. The individuals who have brought the product
liability claims seek recovery for their alleged personal injuries and in many cases, punitive damages. Current product liability
claims have resulted in negative publicity regarding our Company, and these and any other product liability or negligence claims
or product recalls also could harm our reputation. Please see our risk factor below titled “Negative Publicity, Whether Accurate
or Inaccurate, Concerning Our Products or Our Company Could Reduce Market Acceptance of Our Products and Could Result
in Decreased Product Demand and a Decline in Revenues” for additional risks related to the potential effects of negative publicity
on our business.
The outcome of these product liability claims and other legal proceedings cannot be predicted with certainty. We currently
self-insure our product liability risk and maintain third party insurance coverage for certain other liabilities. However, we cannot
determine whether our insurance coverage from third party carriers, or our self-insurance of product liability risk, would be
sufficient to cover the costs or potential losses related to these lawsuits and proceedings or otherwise be excluded under the terms
of any third party policy. Regardless of merit, litigation may be both time-consuming and disruptive to our operations and cause
significant legal costs (including settlements, judgments, legal fees, and other related defense costs) and diversion of management
attention. If we do not prevail in the purported class actions and derivative lawsuits, product liability litigation, or other legal
proceedings, we may be faced with significant monetary damages or injunctive relief against us that could have a material adverse
effect on our business, financial condition, results of operations, or cash flows.
NEGATIVE PUBLICITY, WHETHER ACCURATE OR INACCURATE, CONCERNING OUR PRODUCTS OR OUR
COMPANY COULD REDUCE MARKET ACCEPTANCE OF OUR PRODUCTS AND COULD RESULT IN
DECREASED PRODUCT DEMAND AND A DECLINE IN REVENUES.
There have been articles published and papers written questioning patient safety and efficacy associated with da Vinci Surgery,
the cost of da Vinci Surgery relative to other disease management methods, and the adequacy of surgeon training. Negative
publicity, including statements made by public officials, whether accurate or inaccurate, concerning our products or our Company
could reduce market acceptance of our products and could result in decreased product demand and a decline in revenues. In
addition, significant negative publicity could result in an increased number of product liability claims, regardless of whether these
claims are meritorious. The number of claims could be further increased by plaintiffs’ law firms that use a wide variety of media
to advertise their services and solicit clients for product liability cases against us.
WE ARE SUBJECT TO SIGNIFICANT, UNINSURED LIABILITIES.
For certain risks, we do not maintain insurance coverage because of cost and/or availability. For example, we self-insure our
product liability risks and we indemnify our directors and officers for third-party claims and do not insure for the underlying losses.
We also do not carry, among other types of coverage, earthquake insurance. In addition, in the future, we may not continue to
maintain certain existing insurance coverage or adequate levels of coverage. Premiums for many types of insurance have increased
significantly in recent years, and depending on market conditions and our circumstances, in the future, certain types of insurance
such as directors’ and officers’ insurance may not be available on acceptable terms, or at all. Because we retain some portion of
our insurable risks, and in some cases we are self-insured completely, unforeseen or catastrophic losses in excess of insurance
coverage could require us to pay substantial amounts, which may have a material adverse impact on our business, financial
condition, results of operations, or cash flows.
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WE MAY ENCOUNTER MANUFACTURING PROBLEMS OR DELAYS THAT COULD RESULT IN LOST REVENUE.
Manufacturing our products is a complex process. We (or our critical suppliers) may encounter difficulties in scaling up or
maintaining production of our products, including:
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problems involving production yields;
quality control and assurance;
component supply shortages;
import or export restrictions on components, materials or technology;
shortages of qualified personnel; and
compliance with state, federal and foreign regulations.
If demand for our products exceeds our manufacturing capacity, we could develop a substantial backlog of customer orders.
If we are unable to maintain larger-scale manufacturing capabilities, our ability to generate revenues will be limited and our
reputation in the marketplace could be damaged, which may have a material adverse impact on our business, financial condition,
results of operations, or cash flows.
OUR RELIANCE ON SOLE AND SINGLE SOURCE SUPPLIERS COULD HARM OUR ABILITY TO MEET DEMAND
FOR OUR PRODUCTS IN A TIMELY MANNER OR WITHIN BUDGET.
Some of the components necessary for the assembly of our products are currently provided to us by sole-sourced suppliers
or single-sourced suppliers. We generally purchase components through purchase orders rather than long-term supply agreements
and generally do not maintain large volumes of inventory. While alternative suppliers exist and could be identified for sole-sourced
components, the disruption or termination of the supply of components could cause a significant increase in the costs of these
components, which could affect our operating results. A disruption or termination in the supply of components could also result
in our inability to meet demand for our products, which could harm our ability to generate revenues, lead to customer dissatisfaction
and damage our reputation. Furthermore, if we are required to change the manufacturer of a key component of our products, we
may be required to verify that the new manufacturer maintains facilities and procedures that comply with quality standards and
with all applicable regulations and guidelines. The delays associated with the verification of a new manufacturer could delay our
ability to manufacture our products in a timely manner or within budget, which may have a material adverse impact on our business,
financial condition, results of operations, or cash flows.
IF INSTITUTIONS OR SURGEONS ARE UNABLE TO OBTAIN COVERAGE AND REIMBURSEMENT FROM
THIRD-PARTY PAYORS FOR PROCEDURES USING OUR PRODUCTS, OR IF REIMBURSEMENT IS
INSUFFICIENT TO COVER THE COSTS OF PURCHASING OUR PRODUCTS, WE MAY BE UNABLE TO
GENERATE SUFFICIENT SALES TO SUPPORT OUR BUSINESS.
In the United States, hospitals generally bill for the services performed with our products to various third-party payors, such
as Medicare, Medicaid, and other government programs and private insurance plans. If hospitals do not obtain sufficient
reimbursement from third-party payors for procedures performed with our products, or if government and private payors’ policies
do not cover surgical procedures performed using our products, we may not be able to generate the revenues necessary to support
our business. Our success in OUS markets also depends upon the eligibility of our products for coverage and reimbursement
through government-sponsored health care payment systems and third-party payors. Reimbursement practices vary significantly
by country. Many OUS markets have government-managed healthcare systems that control reimbursement for new products and
procedures. Other foreign markets have both private insurance systems and government-managed systems that control
reimbursement for new products and procedures. Market acceptance of our products may depend on the availability and level of
coverage and reimbursement in any country within a particular time. In addition, health care cost containment efforts similar to
those in the United States are prevalent in many of the other countries in which we intend to sell our products and these efforts
are expected to continue. Please see our risk factor below titled “Changes in Healthcare Legislation and Policy May Have a
Material Adverse Effect on Our Financial Condition and Results of Operations” for additional risks related to the ability of
institutions or surgeons to obtain reimbursements.
IF WE LOSE OUR KEY PERSONNEL OR ARE UNABLE TO ATTRACT AND RETAIN ADDITIONAL PERSONNEL,
OUR ABILITY TO COMPETE WILL BE HARMED.
We are highly dependent on the principal members of our management and scientific staff. Our product development plans
depend, in part, on our ability to attract and retain engineers with experience in mechanics, electronics, software and optics.
Attracting and retaining qualified personnel will be critical to our success, and competition for qualified personnel is intense. We
may not be able to attract and retain personnel on acceptable terms given the competition for such personnel among technology
and healthcare companies and universities. The loss of any of these persons or our inability to attract and retain qualified personnel
could harm our business and our ability to compete.
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NATURAL OR OTHER DISASTERS COULD DISRUPT OUR BUSINESS AND RESULT IN LOSS OF REVENUE OR
IN HIGHER EXPENSES.
Natural disasters, terrorist activities, and other business disruptions, including but not limited to internet security threats, could
seriously harm our revenue and financial condition and increase our costs and expenses. For example, the March 2011 earthquake
and tsunami in Japan and their aftermath created economic uncertainty and disrupted economic activities in Japan, including a
reduction in hospital spending. Furthermore, our corporate headquarters and many of our operations, including certain of our
manufacturing facilities, are located in California, a seismically active region. We do not have multiple-site capacity for all of our
operations in the event of a business disruption. A natural disaster in any of our major markets, or an unanticipated business
disruption caused, for example, by internet security threats, damage to global communication networks, or similar events could
have a material adverse impact on our business, financial condition, results of operations, or cash flows.
EPIDEMIC DISEASES OR THE PERCEPTION OF THEIR EFFECT COULD HAVE A MATERIAL ADVERSE
EFFECT ON OUR BUSINESS, FINANCIAL CONDITION, RESULTS OF OPERATIONS, OR CASH FLOWS.
Outbreaks of pandemic or contagious diseases, such as the Ebola virus, Middle East Respiratory Syndrome, Severe Acute
Respiratory Syndrome, or the H1N1 virus, could divert medical resources and priorities towards the treatment of that disease. An
outbreak of a contagious disease could also negatively affect hospital admission rates. This could negatively impact the number
of da Vinci procedures performed and have a material adverse effect on our business, financial condition, results of operations, or
cash flows.
IF WE DO NOT SUCCESSFULLY MANAGE OUR COLLABORATION ARRANGEMENTS, LICENSING
ARRANGEMENTS, JOINT VENTURES, STRATEGIC ALLIANCES, OR PARTNERSHIPS WITH THIRD PARTIES,
WE MAY NOT REALIZE THE EXPECTED BENEFITS FROM SUCH ALLIANCES AND IT MAY HAVE A MATERIAL
ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL CONDITION, RESULTS OF OPERATIONS, OR CASH
FLOWS.
From time to time, we enter into collaborations, in-licensing arrangements, joint ventures, strategic alliances or partnerships
to complement or augment our research and development, product development, training, procedure development, and marketing
efforts. Proposing, negotiating and implementing collaborations, in-licensing agreements, joint ventures, strategic alliances, or
partnerships may be a lengthy and complex process. In addition, other companies, including those with substantially greater
financial, marketing, sales, technology, or other business resources, may compete with us for these opportunities or arrangements.
As a result, we may not identify, secure, or complete any such arrangements in a timely manner, on a cost-effective basis or on
otherwise favorable terms, if it all.
There can be no assurance we will realize the expected benefits from these alliances. In addition, we may not be in a position
to exercise sole decision making authority regarding any collaboration or other arrangement, which could create the potential risk
of creating impasses on decisions, and our alliances may have economic or business interests that are, or that may become,
inconsistent with our interests. It is possible that conflicts may arise in these relationships, such as conflicts concerning the
achievement of performance milestones, or the interpretation of significant terms under any agreement, such as those related to
financial obligations, termination rights or the ownership or control of intellectual property developed during the collaboration.
These alliances can be difficult to manage, given the potentially different interests of the parties involved, and we could suffer
delays in product development or other operational difficulties.
The alliances may involve significant expense and divert the focus or attention of our management and other key personnel.
Any of these relationships may require us to incur non-recurring and other charges, increase our near- and long-term expenditures,
or disrupt our ordinary business activities. Such arrangements may also expose us to numerous known and unknown risks, including
unique risks with respect to the economic, political and regulatory environment of any foreign entities with whom we partner.
Any of the foregoing may have a material adverse effect on our business, financial condition, results of operations, or cash flows.
IF WE FAIL TO SUCCESSFULLY ACQUIRE OR INTEGRATE NEW BUSINESSES, PRODUCTS AND
TECHNOLOGY, WE MAY NOT REALIZE EXPECTED BENEFITS OR OUR BUSINESS MAY BE HARMED.
We need to grow our businesses in response to changing technologies, customer demands, and competitive pressures. In
some circumstances, we may decide to grow our business through the acquisition of complementary businesses, products, or
technologies rather than through internal development.
Identifying suitable acquisition candidates can be difficult, time-consuming and costly, and we may not be able to identify
suitable candidates or successfully complete identified acquisitions. In addition, completing an acquisition can divert our
management and key personnel from our business operations, which could harm our business and affect our financial results.
Even if we complete an acquisition, we may not be able to successfully integrate newly acquired organizations, products,
technologies, or employees into our operations, or may not fully realize some of the expected synergies. An acquired company
may have deficiencies in product quality or regulatory marketing authorizations which are not detected during due diligence
activities or which are unasserted at the time of acquisition. It may be difficult, expensive and time consuming for us to re-establish
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market access, regulatory compliance, or cure such deficiencies in product quality in such cases which may have a material adverse
impact on our financial condition and results of operations, or cash flows.
Integrating an acquisition can also be expensive and time-consuming, and may strain our resources. In many instances,
integrating a new business will also involve implementing or improving internal controls appropriate for a public company at a
business that lacks them. In addition, we may be unable to retain the employees of acquired companies, or the acquired company’s
customers, suppliers, distributors, or other partners for a variety of reasons, including that these entities may be our competitors
or may have close relationships with our competitors, which may have a material adverse impact on our business, financial
condition, results of operations, or cash flows.
CHANGES TO FINANCIAL ACCOUNTING STANDARDS MAY AFFECT OUR REPORTED RESULTS OF
OPERATIONS.
A change in accounting standards or practices can have a significant effect on our reported results and may even affect our
reporting of transactions completed before the change is effective. New accounting pronouncements and varying interpretations
of accounting pronouncements have occurred and may occur in the future. Changes to existing standards or the reevaluation of
current practices may adversely affect our reported financial results or the way we conduct our business.
WE USE ESTIMATES, MAKE JUDGMENTS AND APPLY CERTAIN METHODS IN MEASURING THE PROGRESS
OF OUR BUSINESS IN DETERMINING OUR FINANCIAL RESULTS AND IN APPLYING OUR ACCOUNTING
POLICIES. AS THESE ESTIMATES, JUDGMENTS, AND METHODS CHANGE, OUR ASSESSMENT OF THE
PROGRESS OF OUR BUSINESS AND OUR RESULTS OF OPERATIONS COULD VARY.
The methods, estimates, and judgments we use in applying our accounting policies have a significant impact on our results
of operations. Such methods, estimates, and judgments are, by their nature, subject to substantial risks, uncertainties and
assumptions, and factors may arise over time may lead us to change our methods, estimates, and judgments. Changes in any of
our assumptions may adversely affect our reported financial results.
We utilize methods for determining surgical market sizes as well as the number and type (cancerous or benign) of certain da
Vinci procedures performed that involve estimates and judgments, which are, by their nature, subject to substantial risks,
uncertainties, and assumptions. Our estimates of surgical market sizes or the number and type of da Vinci procedures performed
do not have an impact on our results of operations, but are used to estimate the progress of our business. Estimates and judgments
for determining surgical market sizes and the number and type of da Vinci procedures and the accuracy of these estimates may be
impacted over time with changes in treatment modalities, hospital reporting behavior, system internet connectivity, distributor
reporting behavior, increases in procedures per field employee, and other factors. In addition, from time to time, we may change
the method for determining market sizes and the number and type of da Vinci procedures, causing variation in our reporting.
CHANGES IN OUR EFFECTIVE TAX RATE MAY IMPACT OUR RESULTS OF OPERATIONS.
We are subject to taxes in the U.S. and other jurisdictions. Tax rates in these jurisdictions may be subject to significant change
due to economic and/or political conditions. A number of other factors may also impact our future effective tax rate including:
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the jurisdictions in which profits are determined to be earned and taxed;
the resolution of issues arising from tax audits with various tax authorities;
changes in valuation of our deferred tax assets and liabilities;
increases in expenses not deductible for tax purposes, including write-offs of acquired intangibles and impairment
of goodwill in connection with acquisitions;
changes in availability of tax credits, tax holidays, and tax deductions;
changes in share-based compensation;
changes in tax laws or the interpretation of such tax laws and changes in generally accepted accounting principles;
and
the repatriation of non-U.S. earnings for which we have not previously provided for U.S. taxes.
The U.S. federal government has called for potentially substantial changes to U.S. tax policies and laws. We are unable to
predict what U.S. tax reform may be proposed or enacted in the future or what effect such changes would have on our business.
Any significant increase in our future effective tax rate could have a material adverse impact on our business, financial condition,
results of operations, or cash flows.
DISRUPTION OF CRITICAL INFORMATION SYSTEMS OR MATERIAL BREACHES IN THE SECURITY OF OUR
SYSTEMS COULD HARM OUR BUSINESS, CUSTOMER RELATIONS AND FINANCIAL CONDITION.
Information technology helps us operate efficiently, interface with customers, maintain financial accuracy and efficiency and
accurately produce our financial statements. If we do not allocate and effectively manage the resources necessary to build and
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sustain the proper technology infrastructure, we could be subject to transaction errors, processing inefficiencies, the loss of
customers, business disruptions or the loss of or damage to intellectual property through security breach. If our data management
systems do not effectively collect, store, process and report relevant data for the operation of our business, whether due to equipment
malfunction or constraints, software deficiencies or human error, our ability to effectively plan, forecast and execute our business
plan and comply with applicable laws and regulations will be impaired, perhaps materially. Any such impairment could materially
and adversely affect our financial condition, results of operations, cash flows and the timeliness with which we report our internal
and external operating results.
Our business requires us to use and store customer, employee and business partner personally identifiable information (“PII”).
This may include names, addresses, phone numbers, email addresses, contact preferences, tax identification numbers and payment
account information. We require user names and passwords in order to access our information technology systems. We also use
encryption and authentication technologies to secure the transmission and storage of data. These security measures may be
compromised as a result of security breaches by unauthorized persons, employee error, malfeasance, faulty password management
or other irregularity, and result in persons obtaining unauthorized access to our data or accounts. Third parties may attempt to
fraudulently induce employees or customers into disclosing user names, passwords or other sensitive information, which may in
turn be used to access our information technology systems. For example, our employees have received “phishing” emails and
phone calls attempting to induce them to divulge passwords and other sensitive information.
In addition, unauthorized persons may attempt to hack into our products or systems to obtain personal data relating to patients
or employees, our confidential or proprietary information or confidential information we hold on behalf of third parties. If the
unauthorized persons successfully hack into or interfere with our connected products or services, they may create issues with
product functionality that could pose a risk of loss of data, a risk to patient safety, and a risk of product recall or field activity. We
have programs in place to detect, contain and respond to data security incidents, and we make ongoing improvements to our
information-sharing products in order to minimize vulnerabilities, in accordance with industry and regulatory standards. However,
because the techniques used to obtain unauthorized access to or sabotage systems change frequently and may be difficult to detect,
we may not be able to anticipate and prevent these intrusions or mitigate them when and if they occur.
We also rely on external vendors to supply and/or support certain aspects of our information technology systems. The systems
of these external vendors may contain defects in design or manufacture or other problems that could unexpectedly compromise
information security of our own systems, and we are dependent on these third parties to deploy appropriate security programs to
protect their systems.
While we devote significant resources to network security, data encryption and other security measures to protect our systems
and data, these security measures cannot provide absolute security. We may experience a breach of our systems and may be unable
to protect sensitive data. The costs to us to eliminate or alleviate network security problems, bugs, viruses, worms, malicious
software programs and security vulnerabilities could be significant, and our efforts to address these problems may not be successful
and could result in unexpected interruptions, delays, cessation of service and may harm our business operations. Moreover, if a
computer security breach affects our systems or results in the unauthorized release of PII, our reputation and brand could be
materially damaged and use of our products and services could decrease. We would also be exposed to a risk of loss or litigation
and potential liability, which could have a material adverse impact on our business, financial condition, results of operations, or
cash flows.
RISKS RELATING TO OUR REGULATORY ENVIRONMENT
CHANGES IN HEALTHCARE LEGISLATION AND POLICY MAY HAVE A MATERIAL ADVERSE EFFECT ON
OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
In March 2010, the U.S. President signed the PPACA, which made changes that have impacted and are expected to significantly
impact the pharmaceutical and medical device industries.
The PPACA contains a number of provisions designed to generate the revenues necessary to fund health insurance coverage
expansions among other things. This includes fees or taxes on certain health-related industries, including medical device
manufacturers. For sales between January 1, 2013, and December 31, 2015, medical device manufacturers were required to pay
an excise tax (or sales tax) of 2.3% of certain U.S. medical device revenues. Though there were some exceptions to the excise tax,
this excise tax did apply to all or most of our products sold within the United States. In December 2015, President Obama signed
into law the Appropriations Act. The Appropriations Act includes a two-year moratorium on the medical device excise tax such
that medical device revenues in 2016 and 2017 will be exempt from the excise tax. Unless there is further legislative action during
that two-year period, the tax will be automatically reinstated for sales of medical devices on or after January 1, 2018. The PPACA
implemented a number of Medicare payment system reforms including a national pilot program on payment bundling to encourage
hospitals, physicians, and other providers to improve the coordination, quality, and efficiency of certain healthcare services through
bundled payment models, and appropriated funding for comparative effectiveness research.
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The taxes imposed by the PPACA and the expansion in the government’s role in the U.S. healthcare industry may result in
decreased profits to us, lower reimbursement by payors for our products, and/or reduced medical procedure volumes, all of which
may have a material adverse impact on our business, financial condition, results of operations, or cash flows.
There have been judicial and Congressional challenges to certain aspects of the PPACA, and we expect that the U.S. federal
government will seek to modify, repeal or otherwise invalidate all, or certain provisions of, the PPACA. For instance, on January
20, 2017, an executive order was issued, in which it was stated that it is the U.S. federal government's policy to seek the prompt
repeal of the PPACA, and directed the heads of all executive departments and agencies to minimize the economic and regulatory
burdens of the PPACA maximum extent permitted by law. Additional state and federal health care reform measures that may be
adopted in the future could have a material adverse effect on our industry generally and on our customers. Any changes of, or
uncertainty with respect to future reimbursement rates, or changes in hospital admission rates could impact our customers' demand
for our products and services, which in turn could impact our ability to successfully commercialize our products, or could limit
or eliminate our spending on certain development projects. These changes could have a material adverse effect on our business,
financial condition, results of operations or cash flows.
In addition, other legislative changes have been proposed and adopted since the PPACA was enacted. These changes included
aggregate reductions to Medicare payments to providers of up to 2% per fiscal year, which went into effect on April 1, 2013, and
will remain in effect through 2025 unless additional Congressional action is taken. On January 2, 2013, the American Taxpayer
Relief Act of 2012 was signed into law, which, among other things, further reduced Medicare payments to several providers,
including hospitals, imaging centers and cancer treatment centers, and increased the statute of limitations period for the government
to recover overpayments to providers from three to five years. MACRA repealed the formula by which Medicare made annual
payment adjustments to physicians and replaced the former formula with fixed annual updates and a new system of incentive
payments scheduled to begin in 2019 that are based on various performance measures and physicians’ participation in alternative
payment models such as accountable care organizations. It is unclear what impact MACRA may have on our business, financial
condition, results of operations, or cash flows.
Further, the federal, state and local governments, Medicare, Medicaid, managed care organizations, and foreign governments
have in the past considered, are currently considering, and may in the future consider healthcare policies and proposals intended
to curb rising healthcare costs, including those that could significantly affect both private and public reimbursement for healthcare
services. Future significant changes in the healthcare systems in the U.S. or other countries, including retroactive and prospective
rate and coverage criteria changes, competitive bidding or tender processes for certain products and services, and other changes
intended to reduce expenditures along with uncertainty about whether and how changes may be implemented, could have a negative
impact on the demand for our products. We are unable to predict whether other healthcare policies, including policies stemming
from legislation or regulations affecting our business may be proposed or enacted in the future; what effect such policies would
have on our business; or the effect ongoing uncertainty about these matters will have on the purchasing decisions of our customers.
WE ARE SUBJECT TO FEDERAL, STATE AND FOREIGN LAWS GOVERNING OUR BUSINESS PRACTICES
WHICH, IF VIOLATED, COULD RESULT IN SUBSTANTIAL PENALTIES. ADDITIONALLY, CHALLENGES TO
OR INVESTIGATION INTO OUR PRACTICES COULD CAUSE ADVERSE PUBLICITY AND BE COSTLY TO
RESPOND TO AND THUS COULD HARM OUR BUSINESS.
The Dodd-Frank Wall Street Reform and Consumer Protection Act requires us to track and disclose the source of any tantalum,
tin, gold, and tungsten used in manufacturing which may originate in the Democratic Republic of the Congo or adjoining regions
(so called “conflict minerals”). These metals are central to the technology industry and are present in some of our products as
component parts. In most cases no acceptable alternative material exists which has the necessary properties. Because it is not
possible to determine the source of the metals by analysis, we must obtain a good faith description of the source of the intermediate
components and raw materials from parties in our supply chain. The components that incorporate those metals may originate
from many sources and we purchase fabricated products from manufacturers who may have a long and difficult-to-trace supply
chain. As the spot price of these materials varies, producers of the metal intermediates can be expected to change the mix of
sources used. Accordingly, components and assemblies we buy may have a mix of sources as their origin. We are required to
carry out a diligent effort to determine and disclose the source of these materials. There can be no assurance we can obtain this
information accurately or reliably, or at all, from intermediate producers who may be unwilling or unable to provide this information
or further identify their sources of supply or to notify us if these sources change. In addition, these metals are subject to price
fluctuations and shortages which can affect our ability to obtain the manufactured materials we rely on at favorable terms or from
consistent sources. These changes could have an adverse impact on our ability to manufacture and market our devices and products.
The Medicare and Medicaid anti-kickback laws, and several similar state laws that may apply to items or services reimbursed
by any third-party payor, including commercial insurers, prohibit payments or other remuneration that could be considered to
induce hospitals, physicians or other potential purchasers of our products either to refer patients or to purchase, lease or order, or
arrange for or recommend the purchase, lease or order, of healthcare products or services for which payment may be made under
federal and state healthcare programs, such as Medicare and Medicaid and any other third-party payor programs. Further, the
PPACA, among other things, amends the intent requirement of the federal anti-kickback and criminal health care fraud statutes.
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A person or entity no longer needs to have actual knowledge of this statute or specific intent to violate it. In addition, the PPACA
provides that the government may assert that a claim including items or services resulting from a violation of the federal anti-
kickback statute constitutes a false or fraudulent claim for purposes of the false claims statutes. Although we would not submit
claims directly to government payors, manufacturers can be held liable under the federal false claim act if they are deemed to
“cause” the submission of false or fraudulent claims by, for example, providing inaccurate billing or coding information to customers
or promoting a product off-label.
These laws may affect our sales, marketing, and other promotional activities by limiting the kinds of financial arrangements
we may have with hospitals, physicians or other potential purchasers of our products. They particularly impact how we structure
our sales offerings, including discount practices, customer support, education and training programs, physician consulting and
other service arrangements. These laws are broadly written, and it is often difficult to determine precisely how these laws will be
applied to specific circumstances. Violating anti-kickback laws can result in civil and criminal penalties, which can be substantial
and include exclusion from government healthcare programs for noncompliance. Even an unsuccessful challenge or investigation
into our practices could cause adverse publicity, and be costly to defend, and thus could harm our business and results of operations.
The PPACA also imposes new reporting and disclosure requirements on device manufacturers for any “transfer of value”
made or distributed to prescribers and other healthcare providers. Such information must be made publicly available in a searchable
format. In addition, device manufacturers are required to report and disclose any ownership or investment interests held by
physicians and their immediate family members, as well as any transfers of value made to such physician owners and investors,
during the preceding calendar year. Failure to submit required information may result in civil monetary penalties of up to an
aggregate of $150,000 per year (and up to an aggregate of $1 million per year for “knowing failures”), for all payments, transfers
of value or ownership or investment interests not reported in an annual submission. Device manufacturers are required to submit
reports to CMS by the 90th day of each calendar year.
In addition, there has been a recent trend of increased federal and state regulation of payments made to physicians, including
the tracking and reporting of gifts, compensation and other remuneration to physicians. Certain states mandate implementation
of commercial compliance programs to ensure compliance with these laws, impose restrictions on device manufacturer marketing
practices and/or require the tracking and reporting of gifts, compensation and other remuneration to physicians. The shifting
commercial compliance environment and the need to build and maintain robust and expandable systems to comply with multiple
jurisdictions with different compliance and/or reporting requirements increases the possibility that a healthcare company may be
found out of compliance of one or more of the requirements, subjecting us to significant civil monetary penalties.
Compliance with complex foreign and U.S. laws and regulations that apply to our OUS operations increases our cost of doing
business in foreign jurisdictions and could expose us or our employees to fines and penalties in the United States and/or abroad.
These numerous and sometimes conflicting laws and regulations include U.S. laws such as the Foreign Corrupt Practices Act, and
similar laws in foreign countries, such as the U.K. Bribery Act of 2010, which became effective on July 1, 2011. Violations of
these laws and regulations could result in fines, criminal sanctions against us, our officers or our employees, prohibitions on the
conduct of our business and damage to our reputation. Although we have implemented policies and procedures designed to ensure
compliance with these laws, there can be no assurance that our employees, contractors or agents will not violate our policies.
OUR PRODUCTS ARE SUBJECT TO A LENGTHY AND UNCERTAIN DOMESTIC REGULATORY REVIEW
PROCESS. IF WE DO NOT OBTAIN AND MAINTAIN THE NECESSARY DOMESTIC REGULATORY
AUTHORIZATIONS, WE WILL NOT BE ABLE TO PROVIDE OUR PRODUCTS IN THE UNITED STATES.
Our products and operations are subject to extensive regulation in the United States by the FDA. The FDA regulates the
development and clinical testing, manufacturing, labeling, storage, record keeping, promotion, sales, distribution and post-market
support and medical device reporting in the United States to ensure that medical products distributed domestically are safe and
effective for their intended uses. In order for us to market products for use in the United States, we generally must first obtain
clearance from the FDA pursuant to Section 510(k) of the Federal Food Drug and Cosmetic Act (“FFDCA”). Clearance under
Section 510(k) requires demonstration that a new device is substantially equivalent to another device with 510(k) clearance or
grandfathered (“pre-amendment”) status. If we significantly modify our products after they receive FDA clearance, the FDA may
require us to submit a separate 510(k) or premarket approval application (“PMA”) for the modified product before we are permitted
to market the products in the United States. In addition, if we develop products in the future that are not considered to be substantially
equivalent to a device with 510(k) clearance or grandfathered status, we will be required to obtain FDA approval by submitting
a PMA. A PMA is typically a much more complex, lengthy and burdensome application than a 510(k). To support a PMA, the
FDA would likely require that we conduct one or more clinical studies to demonstrate that the device is safe and effective. In
some cases such studies may be requested for a 510(k) as well. The FDA may not act favorably or quickly in its review of our 510
(k) or PMA submissions, or we may encounter significant difficulties and costs in our efforts to obtain FDA clearance or approval,
all of which could delay or preclude the sale of new products in the United States. Moreover, we may not be able to meet the
requirements to obtain 510(k) clearance or PMA approval, in which case the FDA may not grant any necessary clearances or
approvals. In addition, the FDA may place significant limitations upon the intended use of our products as a condition to a 510
(k) clearance or PMA approval. Product applications can also be denied or withdrawn due to failure to comply with regulatory
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requirements or the occurrence of unforeseen problems following clearance or approval. Any delays or failure to obtain FDA
clearance or approvals of new products we develop, any limitations imposed by the FDA on new product use, or the costs of
obtaining FDA clearance or approvals could have a material adverse effect on our business, financial condition, results of operations
or cash flows.
In addition, the FDA or other regulatory agencies may change their policies, adopt additional regulations or revise existing
regulations, or take other actions which may prevent or delay approval or clearance of our products under development or impact
our ability to modify our currently approved or cleared products on a timely basis. We may be found noncompliant as a result of
future changes in, or interpretations of, regulations by the FDA or other regulatory agencies.
In order to conduct a clinical investigation involving human subjects for the purpose of demonstrating the safety and
effectiveness of a medical device, a company must, among other things, apply for and obtain Institutional Review Board (“IRB”)
approval of the proposed investigation. In addition, if the clinical study involves a “significant risk” (as defined by the FDA) to
human health, the sponsor of the investigation must also submit and obtain FDA approval of an Investigational Device Exemption
(“IDE”) application. Many of our products to date have been or would be considered significant risk devices requiring IDE approval
prior to investigational use. We may not be able to obtain FDA and/or IRB approval to undertake clinical trials in the United States
for any new devices we intend to market in the United States in the future. If we obtain such approvals, we may not be able to
conduct studies which comply with the IDE and other regulations governing clinical investigations or the data from any such trials
may not support clearance or approval of the investigational device. Failure to obtain such approvals or to comply with such
regulations could have a material adverse effect on our business, financial condition and results of operations. Certainty that clinical
trials will meet desired endpoints, produce meaningful or useful data and be free of unexpected adverse effects, or that the FDA
will accept the validity of foreign clinical study data cannot be assured, and such uncertainty could preclude or delay market
clearance or authorizations resulting in significant financial costs and reduced revenue.
In addition, some products may be regulated by the FDA as drugs, biologics or combination devices which carry still greater
requirements for clinical trials, regulatory submissions and approvals.
COMPLYING WITH FDA REGULATIONS IS A COMPLEX PROCESS, AND OUR FAILURE TO COMPLY FULLY
COULD SUBJECT US TO SIGNIFICANT ENFORCEMENT ACTIONS.
Because our products, including the da Vinci Surgical System, are commercially distributed, numerous quality and post-
market regulatory requirements apply, including the following:
•
•
•
•
•
•
continued compliance to the QSR, which requires manufacturers to follow design, testing, control, documentation
and other quality assurance procedures during the development and manufacturing process;
labeling regulations;
the FDA’s general prohibition against false or misleading statements in the labeling or promotion of products for
unapproved or “off-label” uses;
stringent complaint reporting and Medical Device Reporting regulations, which requires that manufacturers keep
detailed records of investigations or complaints against their devices and to report to the FDA if their device may
have caused or contributed to a death or serious injury or malfunctioned in a way that would likely cause or contribute
to a death or serious injury if it were to recur;
adequate use of the Corrective and Preventive Actions process to identify and correct or prevent significant systemic
failures of products or processes or in trends which suggest same; and
the reporting of Corrections and Removals, which requires that manufacturers report to the FDA recalls and field
corrective actions taken to reduce a risk to health or to remedy a violation of the FFDCA that may pose a risk to
health.
We are subject to inspection and marketing surveillance by the FDA to determine our compliance with regulatory requirements.
If the FDA finds that we have failed to comply, it can institute a wide variety of enforcement actions, ranging from inspectional
observations (Form FDA 483) to a public Warning Letter to more severe civil and criminal sanctions including the seizure of our
products and equipment or ban on the import or export of our products. The FDA has in the past issued and could in the future
issue Warning Letters or other communications to us. If we fail to satisfy or remediate the matters discussed in any such Warning
Letters or communications, the FDA could take further enforcement action, including prohibiting the sale or marketing of the
affected product. Our failure to comply with applicable requirements could lead to an enforcement action that may have an adverse
effect on our financial condition and results of operations. The receipt of a Warning Letter places certain limits on the ability to
obtain FDA issued Certificates to Foreign Government (“CFGs”) used for new and re-registration of products in certain foreign
countries.
The FDA also strictly regulates labeling, advertising, promotion, and other activities relating to the marketing of our products.
Medical devices may be promoted only for their cleared or approved indications and in accordance with the provisions of the
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cleared or approved label. It is possible that federal or state enforcement authorities might take action if they consider our
promotional or training materials to constitute promotion of an unapproved use, which could result in significant fines or penalties
under a variety of statutory authorities, including under the FFDCA as well as laws prohibiting false claims for reimbursement.
In addition, any modification or change of medical devices cleared for market requires the manufacturer to make a determination
whether the change is significant enough to require new 510(k) clearance. We have created labeling, advertising and user training
for the da Vinci Surgical System to describe specific surgical procedures that we believe are fully within the scope of our existing
510(k) indications for use stated in our 510(k) clearances. Although we have relied on expert in-house and external staff, consultants
and advisors, some of whom were formerly employed by FDA and familiar with FDA perspective, we cannot assure that the FDA
would agree that all such specific procedures are within the scope of the existing general clearance or that we have compiled
adequate information to support the safety and efficacy of using the da Vinci Surgical System for all such specific procedures.
From time to time we modify our products, including the hardware and software in the da Vinci Surgical System, after we obtain
510(k) clearance from the FDA for the devices in ways that we do not believe require new 510(k) clearance. We cannot assure
that the FDA would agree in all cases with our determinations not to seek new 510(k) clearance for any of these changes. If the
FDA disagrees with our assessments that a new 510(k) clearance was not required prior to commercializing the devices with these
changes or modifications, then the FDA could impose enforcement sanctions and/or require us to obtain 510(k) clearance for any
modification to our products. We may be prohibited from marketing the modified device until such 510(k) clearance is granted.
We have a wholly owned manufacturing facility located in Mexicali, Mexico which manufactures reusable and disposable
surgical instruments. This facility is registered with the FDA as well as Mexican authorities. The facility is operated under U.S.
and international quality system regulations including those applicable to Canada, the European Union, and Japan among others.
Our wholly owned manufacturing facility in Mexicali, Mexico has an FDA Establishment Registration but has not been inspected
by the FDA to date. If the FDA were to identify non-conformances in our product documentation or quality system compliance,
they could hold indefinitely the importation of instruments at the border which would deprive us of the ability to sell and supply
the majority of our customers until the FDA requirements have been satisfied. Similar supply disruptions could occur if key
suppliers outside of the U.S. were to encounter non-conformances with their documentation or quality system compliance.
OUR PRODUCTS ARE SUBJECT TO VARIOUS INTERNATIONAL REGULATORY PROCESSES AND APPROVAL
REQUIREMENTS. IF WE DO NOT OBTAIN AND MAINTAIN THE NECESSARY INTERNATIONAL REGULATORY
APPROVALS, WE WILL NOT BE ABLE TO PROVIDE OUR PRODUCTS IN FOREIGN COUNTRIES.
To be able to provide our products in other countries, we must obtain regulatory approvals and comply with the regulations
of those countries which may differ substantially from those of the United States. These regulations, including the requirements
for approvals and the time required for regulatory review, vary from country to country. Obtaining and maintaining foreign
regulatory approvals is complex, and we cannot be certain that we will receive regulatory approvals in any foreign country in
which we plan to market our products, or to obtain such approvals on a favorable schedule. If we fail to obtain or maintain regulatory
approval in any foreign country in which we plan to market our products, our ability to generate revenue will be harmed. In
particular, if the FDA refuses to provide CFGs our ability to register products or renew such registrations may be delayed or denied.
The EU requires that manufacturers of medical products obtain the right to affix the CE mark to their products before selling
them in member countries of the EU. The CE mark is an international symbol of adherence to quality assurance standards and
compliance with applicable European medical device directives. In order to obtain the authorization to affix the CE mark to
products, a manufacturer must obtain certification that its processes and products meet certain European quality standards. In
January 1999, we received permission to affix the CE mark to our da Vinci Surgical System and EndoWrist instruments and have
maintained this authorization continuously since that time. From time to time we seek the authorization to affix the CE mark to
new or modified products. Subsequent products and accessories have received marketing authorization by our Notified Body,
PreSafe.
As we modify existing products or develop new products in the future, including new instruments, we currently plan to apply
for authorization to affix the CE mark to such products. In addition, we are subject to annual regulatory audits in order to maintain
the CE mark authorizations we have already obtained including inspection of our compliance to required standards and directives.
We cannot be certain we will be able to affix the CE mark for new or modified products or that we will continue to meet the quality
and performance standards required to maintain the authorizations we have already received. If we are unable to maintain permission
to affix the CE mark to our products, we will no longer be able to sell our products in member countries of the EU and many
affiliated countries that accept the CE mark, which would have a material adverse effect on our results of operations. Some member
states of the European Union have additional requirements for registration and notification which may add to the time and effort
to obtain market access. In addition, the regulations applied to end users of our products may increase over time, forcing us to
provide additional solutions to regulations which do not apply directly to us, but which apply indirectly as they may limit our
customers’ ability to use our products.
To date, we received approvals from the Japanese Ministry of Health, Labor and Welfare (“MHLW”) for our da Vinci S, Si,
and Xi Surgical Systems and various associated instruments and accessories for use in certain da Vinci procedures. We may seek
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additional approvals for other products and/or indications, however, there can be no assurance that such approvals will be granted.
In addition, because not all of our instruments have received product approvals, and reimbursement is an additional process to
generate market acceptance, it is possible that procedures will be adopted slowly or not at all. Sales of our products depend, in
part, on the extent to which the costs of our products are reimbursed by governmental health administration authorities. To date,
we have received reimbursement approval for prostatectomy and partial nephrectomy procedures in Japan. There are multiple
pathways to obtain reimbursement for procedures including those that require in-country clinical data and which are considered
for reimbursed status in April of even numbered years. If we are not successful in obtaining the necessary reimbursement approvals
or obtaining approvals for future products and procedures, then the demand for our products could be limited. These limitations
could eliminate a significant market opportunity for our products in Japan.
Our capital sales in China are subject to importation authorizations and central purchasing tender processes. Therefore, future
system sales and our ability to grow future procedure volumes are dependent on the completion of these central purchasing tender
authorizations, the most recent of which expired at the end of 2015. The timing and magnitude of these future authorizations,
which may determine our system placements in future years, is not certain and we expect to continue to experience variability in
the timing of capital sales in China.
IF OUR MANUFACTURING FACILITIES DO NOT CONTINUE TO MEET FEDERAL, STATE OR OTHER
MANUFACTURING STANDARDS, WE MAY BE REQUIRED TO TEMPORARILY CEASE ALL OR PART OF OUR
MANUFACTURING OPERATIONS, IMPORT/EXPORT OF OUR PRODUCTS AND/OR RECALL SOME PRODUCTS
WHICH WOULD RESULT IN SIGNIFICANT PRODUCT DELIVERY DELAYS AND LOST REVENUE.
Our manufacturing facilities are subject to periodic inspection by regulatory authorities and our operations will continue to
be regulated and inspected by the FDA and other regulatory agencies for compliance with Good Manufacturing Practice
requirements contained in the QSR and other regulatory requirements. We are also required to comply with International
Organization for Standardization (“ISO”) quality system standards as well as European Directives and norms in order to produce
products for sale in the European Union. In addition, many countries such as Canada and Japan have very specific additional
regulatory requirements for quality assurance and manufacturing. If we fail to continue to comply with Good Manufacturing
Practice requirements, as well as ISO or other regulatory standards, we may be required to cease all or part of our operations until
we comply with these regulations.
We continue to be subject to FDA and certain other inspections at any time. Maintaining such compliance is difficult and
costly. We cannot be certain that our facilities will be found to comply with Good Manufacturing Practice requirements or ISO
standards and other regulatory requirements in future inspections and audits by regulatory authorities.
Our Sunnyvale, California facility is licensed by the State of California to manufacture medical devices. We have been subject
to periodic inspections by the California Department of Health Services Food and Drug Branch and, if we are unable to maintain
this license following any future inspections, we will be unable to manufacture or ship some products, which would have a material
adverse effect on our results of operations. In 2012 the State of California announced suspension of routine inspections but this
policy could be modified or inspections could be resumed for specific circumstances. In addition, both our Sunnyvale, California
and Mexicali, Mexico facilities are subject to periodic inspections by other regulatory bodies, including third party auditors on
behalf of national regulatory authorities. Compliance with multiple regulatory standards is complex, difficult and costly to maintain,
and material deficiencies could result in significant limitations on our ability to manufacture, transport and sell our products in
one or more countries.
IF HOSPITALS AND OTHER SURGERY FACILITIES DO NOT CONTINUE TO MEET FEDERAL, STATE OR
OTHER REGULATORY STANDARDS, THEY MAY BE REQUIRED TO TEMPORARILY CEASE ALL OR PART OF
THEIR DA VINCI UTILIZATION.
Our global customers are subject to periodic inspection by regulatory authorities. Our customers are required to comply with
applicable local and international regulations, including with respect to the reprocessing of da Vinci instruments and accessories.
Hospitals may not follow cleaning and sterilization instructions properly, or equipment used for cleaning and sterilization may
malfunction or be used improperly. If our customers deviate from cleaning and sterilization instructions, regulatory authorities
may require them to suspend use of da Vinci Surgical Systems.
RISKS RELATING TO OUR INTELLECTUAL PROPERTY
IF WE ARE UNABLE TO FULLY PROTECT AND SUCCESSFULLY DEFEND OUR INTELLECTUAL PROPERTY
FROM USE BY THIRD PARTIES, OUR ABILITY TO COMPETE IN THE MARKET WILL BE HARMED.
Significant competitors have emerged and in medical robotics. Our commercial success depends in part on obtaining patent
protection for the proprietary technologies contained in our products, and on successfully defending our patents against infringing
products and/or services in litigation or administrative proceedings, including patent oppositions, reviews, or reexaminations. We
will incur substantial costs in obtaining patents and, if necessary, defending our patent rights. We do not know whether we will
be successful in obtaining the desired patent protection for our new proprietary technologies, or that the protection we do obtain
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will be found valid and enforceable when challenged. The success of defending our proprietary rights can be highly uncertain
because it involves complex and often evolving legal issues and procedures that are dependent on particular facts of each case.
In addition to patents, we also rely on other intellectual property rights such as trade secret, copyright and trademark laws to
protect proprietary technologies. We further utilize nondisclosure agreements and other contractual provisions as well as technical
measures to protect our proprietary technologies. Nevertheless, these measures may be inadequate in protecting our technologies.
If these measures are proved to be inadequate in protecting our technologies, our competitive advantages may be reduced. Moreover,
we may not have adequate remedies for potential breaches by employees, consultants and others who participate in developing
our proprietary technologies against their agreements with us regarding intellectual property. As a result, our trade secrets may
be lost. Notwithstanding our efforts to protect our intellectual property, our competitors may independently develop similar or
alternative technologies or products that are equal or superior to our technologies without infringing any of our intellectual property
which would harm our ability to compete in the market.
As foreign markets become more significant in revenue for us, our foreign operations and strategic alliances with foreign
entities will likely increase. Our exposure to risks associated with these operations requires us to increase our reliance on protecting
our intellectual property against infringing products and/or services in markets outside the United States. The laws and judicial
systems in these countries may introduce yet another level of uncertainty to our effort to obtain the desired protection as well as
defending our rights.
OTHERS MAY BE SUCCESSFUL IN ASSERTING THAT OUR PRODUCTS INFRINGE THEIR INTELLECTUAL
PROPERTY RIGHTS, WHICH MAY CAUSE US TO PAY SUBSTANTIAL DAMAGES AND/OR ENJOIN US FROM
COMMERCIALIZING OUR PRODUCTS.
As we continue to introduce and commercialize new products and technologies, there may be U.S. and foreign patents issued
to third parties that relate to our products. Some of these patents may be broad enough to cover one or more aspects of our products.
We do not know whether any of these patents, if challenged, would be held valid, enforceable and infringed. From time to time,
we receive, and likely will continue to receive, letters from third parties accusing us of infringing and/or inviting us to license
their patents. We may be sued by, or become involved in an administrative proceeding with, one or more of these third parties.
We cannot be certain that a court or administrative body would agree with any arguments or defenses we may have concerning
invalidity, unenforceability or non-infringement of any third-party patent. In addition, other parties may have filed or will file
patent applications covering products that are similar or identical to ours. We cannot be certain that patents issuing from our own
patent application covering our products will have a priority date over any patents issuing from applications filed by a third party.
The medical device industry has experienced extensive intellectual property litigation and administrative proceedings. If
third parties assert infringement claims or institute administrative proceedings against us, our technical and management personnel
will need to spend time and effort and we will incur large expenses in defending these attacks. We cannot be certain that we will
prevail in infringement, invalidity or unenforceability claims against us. If plaintiffs in patent administrative proceedings are
successful, our patent portfolio may be adversely affected. If plaintiffs in any patent action are successful, we may be enjoined
from selling our products, we may have to pay substantial damages, including treble damages, or we may be required to obtain a
license that requires us to pay substantial royalties. In addition, any public announcements related to litigation or administrative
proceedings initiated or threatened against us could cause our stock price to decline.
OUR PRODUCTS RELY ON LICENSES FROM THIRD PARTIES, AND IF WE LOSE ACCESS TO THESE
TECHNOLOGIES, OUR REVENUES COULD DECLINE.
We rely on technology that we license from others, including technology that is integral to our products. We have entered into
license agreements with several industry partners. Any of these agreements may be terminated for breach. If any of these agreements
are terminated, we may be unable to reacquire the necessary license on satisfactory terms, or at all. The loss or failure to maintain
these licenses could prevent or delay further development or commercialization of our products, which may have a material adverse
effect on our business, financial condition, results of operations or cash flows.
RISKS RELATING TO OUR TRADING MARKETS
OUR FUTURE OPERATING RESULTS MAY BE BELOW SECURITIES ANALYSTS’ OR INVESTORS’
EXPECTATIONS, WHICH COULD CAUSE OUR STOCK PRICE TO DECLINE.
Due to the nascent nature of our industry, we have limited insight into trends that may emerge in our market and affect our
business. The revenue and income potential of our market are unproven, and we may be unable to continue to generate significant
revenues. Our products typically have lengthy sales cycles. In addition, our costs may be higher than we anticipated. If we fail
to generate sufficient revenues or our costs are higher than we expect, our results of operations may be materially adversely
affected. Further, future revenue from sales of our products is difficult to forecast because the market for new surgical technologies
is still evolving. Our results of operations will depend upon numerous factors, including:
•
the extent to which our products achieve and maintain market acceptance;
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•
•
•
•
•
•
•
•
•
•
•
actions relating to regulatory matters;
our timing and ability to develop our manufacturing and sales and marketing capabilities;
demand for our products;
the size and timing of particular sales and any collection delays related to those sales;
product quality and supply problems;
the progress of surgical training in the use of our products;
our ability to develop, introduce and market new or enhanced versions of our products on a timely basis;
third-party payor reimbursement policies;
our ability to protect our proprietary rights and defend against third party challenges;
our ability to license additional intellectual property rights; and
the progress and results of clinical trials.
Our operating results in any particular period will not be a reliable indication of our future performance. It is likely that in
some future quarters, our operating results will be below the expectations of securities analysts or investors. If this occurs, the
price of our common stock and the value of your investment will likely decline.
OUR STOCK PRICE HAS BEEN, AND WILL LIKELY CONTINUE TO BE, VOLATILE.
The market price of our common stock has experienced fluctuations and may fluctuate significantly in the future. For example,
during fiscal 2013, the NASDAQ closing price of one share of our common stock reached a high of $583.67 and a low of $355.93,
during fiscal 2014, it reached a high of $540.63 and a low of $352.35, during fiscal 2015, it reached a high of $557.20 and a low
of $454.86, and during fiscal 2016, it reached a high of $724.83 and a low of $507.28. Our stock price can fluctuate for a number
of reasons, including:
•
•
•
•
•
•
•
•
•
announcements about us or our competitors;
quarterly variations in operating results;
introduction or abandonment of new technologies or products;
regulatory approvals and enforcement actions;
changes in product pricing policies;
changes in earnings estimates by analysts or changes in accounting policies;
economic changes and overall market volatility;
litigation; and
political uncertainties.
In addition, stock markets have experienced significant price and volume volatility in the past, especially recently. This
volatility has had a substantial effect on the market prices of securities of many public companies for reasons frequently unrelated
or disproportionate to the operating performance of the specific companies. In addition, the securities of many medical device
companies, including us, have historically been subject to extensive price and volume fluctuations that may affect the market price
of their common stock. If these broad market fluctuations continue, they may have a material adverse impact on the market price
of our common stock.
ITEM 1B.
UNRESOLVED STAFF COMMENTS
None.
ITEM 2.
PROPERTIES
As of December 31, 2016, we own approximately 927,000 square feet of space on 70 acres of land in Sunnyvale, California,
where we house our headquarters, research and development, service and support functions, and certain of our manufacturing
operations. In Norcross, Georgia, we own approximately 92,000 square feet of space on 10 acres which serves as our East Coast
sales and training headquarters. In Aubonne, Switzerland, we own approximately 35,000 square feet of space on 2 acres, which
is used for our headquarters outside of the United States and 15,000 square feet of space is leased to a third party. In Southhaven,
Mississippi, we lease 117,000 square feet of space for service operations and will be used for future expansion of our operations.
We lease 62,000 square feet in Tokyo, Japan for our Japan training center and sales operations. We lease 157,000 square feet in
Mexicali, Mexico where we manufacture most of our EndoWrist instruments. We lease facilities in Milford, Connecticut, Raleigh,
North Carolina, and Blacksburg, Virginia for research and development and other operations. We also lease facilities for sales and
operations in Osaka, Japan and Seoul, South Korea.
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ITEM 3.
LEGAL PROCEEDINGS
The information included in Note 7 to the Consolidated Financial Statements included in Part II, Item 8 of this report is
incorporated herein by reference.
ITEM 4.
MINE SAFETY DISCLOSURES
Not applicable.
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PART II
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
PRICE RANGE OF COMMON STOCK
Our common stock is being traded on The NASDAQ Global Select Market under the symbol “ISRG.” The following table
sets forth the high and low closing prices of our common stock for each period indicated and are as reported by NASDAQ.
Fiscal
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2016
2015
High
Low
High
Low
$
$
$
$
603.07
661.41
724.83
724.61
$
$
$
$
507.28
606.50
664.67
619.01
$
$
$
$
535.36
552.98
557.20
553.37
$
$
$
$
487.52
483.78
455.47
454.86
As of January 20, 2017, there were 203 stockholders of record of our common stock, although we believe that there are a
significantly larger number of beneficial owners of our common stock.
DIVIDENDS
We have never declared or paid any cash dividends on our common stock. We intend to retain earnings for use in the operation
and expansion of our business.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The following table contains information as of December 31, 2016 for two categories of equity compensation plans.
Number of
securities to be
issued upon
exercise of
outstanding
options,
warrants and
rights (a)
Weighted-
average
exercise price
of outstanding
options
Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected in
column (a))
2,666,131
422,408
3,088,539
$
$
$
439.31
481.55
445.09
1,917,140
131,045
2,048,185
Plan Category
Equity compensation plans approved by security holders
Equity compensation plans not approved by security holders
Total
RECENT SALES OF UNREGISTERED SECURITIES
None.
ISSUER PURCHASES OF EQUITY SECURITIES
The table below summarizes our stock repurchase activity for the quarter ended December 31, 2016:
Fiscal Period
October 1 to October 31, 2016
November 1 to November 30, 2016
December 1 to December 31, 2016
Total during quarter ended December 31, 2016
Total Number of
Shares
Repurchased
Average
Price Paid
Per Share
— $
10,674
44,020
54,694
$
$
$
—
632.77
629.68
630.29
Total Number of
Shares Purchased As
Part of a Publicly
Announced Program
Approximate Dollar
Amount of Shares That
May Yet be Purchased
Under the Program (1)
— $
808.2 million
$
$
801.5 million
2,991.6 million
10,674
44,020
54,694
(1) Since March 2009, we have had an active stock repurchase program. As of December 31, 2016, the Board of Directors has
authorized an aggregate amount of up to $6.2 billion for stock repurchases, of which the most recent authorization occurred in
December 2016 when the Board increased the authorized amount available under the Company’s share repurchase program to
$3.0 billion. The remaining $2,991.6 million represents the amount available to repurchase shares under the authorized repurchase
program as of December 31, 2016. The authorized stock repurchase program does not have an expiration date.
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STOCK PERFORMANCE GRAPH
The graph set forth below compares the cumulative total stockholder return on our common stock between December 31,
2011 and December 31, 2016, with the cumulative total return of (i) the S&P Healthcare Index, (ii) the NASDAQ Composite
Index and (iii) the S&P 500 Index, over the same period. This graph assumes the investment of $100.00 on December 31, 2011
in our common stock, the S&P Healthcare Index, the NASDAQ Composite Index, and the S&P 500 Index and assumes the
reinvestment of dividends, if any.
The comparisons shown in the graph below are based upon historical data. We caution that the stock price performance shown
in the graph below is not necessarily indicative of, nor is it intended to forecast, the potential future performance of our common
stock.
COMPARISON OF CUMULATIVE TOTAL RETURN AMONG INTUITIVE SURGICAL, NASDAQ
COMPOSITE, S&P HEALTH CARE INDEX, AND S&P 500 INDEX
Intuitive Surgical, Inc.
NASDAQ Composite
S&P 500 Healthcare Index
S&P 500 Index
2011
2012
2013
2014
2015
2016
$
$
$
$
100.00
100.00
100.00
100.00
$
$
$
$
105.91
117.45
117.89
116.00
$
$
$
$
82.95
164.57
166.76
153.57
$
$
$
$
114.24
188.84
209.02
174.60
$
$
$
$
117.96
201.98
223.42
177.01
$
$
$
$
136.97
219.89
242.43
198.18
December 31,
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ITEM 6.
SELECTED FINANCIAL DATA
The following selected consolidated financial data should be read in conjunction with our Consolidated Financial Statements
and the accompanying Notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”
included elsewhere in this report. The selected data in this section is not intended to replace the Consolidated Financial Statements.
2016
2015
Fiscal Year
2014
2013
2012
(In millions, except per share amounts and headcount)
Revenue
Gross profit
Net income
Net income per common share:
Basic
Diluted
Shares used in computing basic and
diluted net income per share:
Basic
Diluted
Cash, cash equivalents and investments
Total assets
Other long-term liabilities
Stockholders’ equity
Total headcount
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
2,704.4
1,890.1
735.9
19.21
18.73
38.3
39.3
4,837.9
6,486.9
112.6
5,777.8
3,755
$
$
$
$
$
$
$
$
$
2,384.4
1,577.9
588.8
15.87
15.54
37.1
37.9
3,347.8
4,907.3
95.9
4,319.5
3,211
$
$
$
$
$
$
$
$
$
2,131.7
1,413.8
418.8
11.35
11.11
36.9
37.7
2,497.0
3,959.4
78.8
3,379.4
2,978
$
$
$
$
$
$
$
$
$
2,265.1
1,594.2
671.0
17.12
16.73
39.2
40.1
2,753.9
3,950.3
68.0
3,501.4
2,792
2,178.8
1,570.3
656.6
16.50
15.98
39.8
41.1
2,920.5
4,059.2
77.5
3,580.1
2,362
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ITEM 7.
Overview
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Open surgery remains the predominant form of surgery and is used in almost every area of the body. However, the large
incisions required for open surgery create trauma to patients, typically resulting in longer hospitalization and recovery times,
increased hospitalization costs, and additional pain and suffering relative to MIS, where MIS is available. For over three decades,
MIS has reduced trauma to patients by allowing selected surgeries to be performed through small ports rather than large incisions.
MIS has been widely adopted for certain surgical procedures.
da Vinci Surgical Systems enable surgeons to extend the benefits of MIS to many patients who would otherwise undergo a
more invasive surgery by using computational, robotic and imaging technologies to overcome many of the limitations of
conventional MIS. Surgeons using a da Vinci Surgical System operate while seated comfortably at a console viewing a 3-D
representation of a HD image of the surgical field. This immersive visualization connects surgeons to the surgical field and their
instruments. While seated at the console, the surgeon manipulates instrument controls in a natural manner, similar to the open
surgery technique. Our technology is designed to provide surgeons with a range of motion of MIS instruments in the surgical field
analogous to the motions of a human wrist, while filtering out the tremor inherent in a surgeon’s hand. In designing our products,
we focus on making our technology easy and safe to use.
Our products fall into four broad categories - the da Vinci Surgical Systems, InSite and Firefly Fluorescence imaging systems
(“Firefly”), instruments and accessories (e.g., EndoWrist, EndoWrist Vessel Sealer, da Vinci Single-Site and EndoWrist Stapler),
and training technologies. We have commercialized four generations of da Vinci Surgical Systems: the first is our da Vinci standard
Surgical System, commercialized in 1999, the second is our da Vinci S Surgical System, commercialized in 2006, the third is our
da Vinci Si Surgical System, commercialized in 2009, and the fourth is our da Vinci Xi Surgical System, commercialized in the
second quarter of 2014. These systems include a surgeon’s console (or consoles), imaging electronics, a patient-side cart, and
computational hardware and software.
We offer over 65 different multiport da Vinci instruments enabling surgeons’ flexibility in choosing the types of tools needed
in a particular surgery. These multiport instruments are generally robotically controlled versions of surgical tools that surgeons
would use in either open or laparoscopic surgery. We offer advanced instrumentation for the da Vinci Si and da Vinci Xi platforms,
including the EndoWrist Vessel Sealer and EndoWrist Stapler products, to provide surgeons with sophisticated, computer-aided
tools to precisely and efficiently interact with tissue. We offer our Single-Site instruments for use with the da Vinci Si and da Vinci
Xi Surgical Systems in cholecystectomy, benign hysterectomy, and salpingo-oophorectomy procedures. Single-Site instruments
enable surgeons to also perform surgery through a single port via the patient’s belly button, resulting in the potential for virtually
scarless results.
Training technologies include our da Vinci Skills Simulator, da Vinci Connect remote case observation and mentoring tool,
and our dual console for use in surgeon proctoring and collaborative surgery.
Procedures
We model patient value as equal to procedure efficacy / invasiveness. In this equation procedure efficacy is defined as a
measure of the success of the surgery in resolving the underlying disease and invasiveness is defined as a measure of patient pain
and disruption of regular activities. When the patient value of a da Vinci procedure is greater than that of alternative treatment
options, patients may benefit from seeking out surgeons and hospitals that offer da Vinci Surgery, which could potentially result
in a local market share shift. da Vinci procedure adoption occurs procedure by procedure, market by market, and is driven by the
relative patient value and total treatment costs of da Vinci procedures as compared to alternative treatment options for the same
disease state or condition.
Worldwide Procedures
da Vinci systems and instruments are regulated independently in various countries and regions of the world. The discussion
of indications for use and representative or target procedures is intended solely to provide an understanding of the market for da
Vinci products and is not intended to promote for sale or use any Intuitive Surgical product outside of its licensed or cleared labeling
and indications for use.
The adoption of da Vinci Surgery has the potential to grow for those procedures that offer greater patient value than non-da
Vinci alternatives, within the prevailing economics of healthcare providers. da Vinci Surgical Systems are used primarily in
gynecologic surgery, general surgery, urologic surgery, cardiothoracic surgery, and head and neck surgery. We focus our organization
and investments on developing, marketing, and training for those products and targeted procedures where da Vinci can bring patient
value relative to alternative treatment options and/or economic benefit to healthcare providers. Target procedures in gynecology
include da Vinci Hysterectomy (“dVH”), for both cancer and benign conditions, and sacrocolpopexy. Target procedures in general
surgery include hernia repair (both ventral and inguinal), colorectal procedures, and cholecystectomy. Target procedures in urology
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include da Vinci Prostatectomy (“dVP”) and partial nephrectomy. In cardiothoracic surgery, target procedures include da Vinci
Lobectomy and da Vinci Mitral Valve Repair. In head and neck surgery, target procedures include certain procedures resecting
benign and malignant tumors classified as T1 and T2. Not all the indications, procedures, or products described may be available
in a given country or region or on all generations of da Vinci Surgical Systems. Patients need to consult the product labeling in
their specific country and for each product in order to determine the actual authorized uses, as well as important limitations,
restrictions, or contraindications.
In 2016, approximately 753,000 surgical procedures were performed with the da Vinci Surgical System, compared with
approximately 652,000 and 570,000 procedures performed in 2015 and 2014, respectively. The growth in our overall procedure
volume in 2016 was driven by growth in U.S. general surgery procedures and worldwide urologic procedures.
U.S. Procedures
Overall U.S. procedure volume grew to approximately 563,000 in 2016, compared with approximately 499,000 in 2015, and
approximately 449,000 in 2014. Gynecology is our largest U.S. surgical specialty and the procedure volume was approximately
246,000 in 2016, compared with 238,000 in 2015 and 235,000 in 2014. General surgery is our second largest and fastest growing
specialty in the U.S. with procedure volume that grew to approximately 186,000 in 2016, compared with approximately 140,000
in 2015 and 107,000 in 2014. U.S. urology procedure volume was approximately 109,000 in 2016, compared with approximately
102,000 in 2015, and 91,000 in 2014.
Procedures Outside of the U.S.
Overall OUS procedures grew to approximately 190,000 in 2016, compared with approximately 153,000 in 2015 and
approximately 121,000 in 2014. Procedure growth in most OUS markets was driven largely by urology procedure volume. dVP
procedure volume grew to approximately 92,000 in 2016, compared with approximately 79,000 in 2015, and approximately 65,000
in 2014. Partial nephrectomy, general surgery, and gynecologic oncology procedures also contributed to OUS procedure growth.
See “Recent Business Events and Trends” for further discussion on U.S. and OUS procedures.
Business Model
Overview
We generate revenue from both the initial capital sales of da Vinci Surgical Systems and from subsequent sales of instruments,
accessories and service, as recurring revenue. The da Vinci Surgical System generally sells for approximately between $0.6 million
and $2.5 million, depending upon the model, configuration and geography, and represents a significant capital equipment investment
for our customers. We generate recurring revenue as our customers purchase our EndoWrist and Single-Site instrument and accessory
products used in performing procedures with the da Vinci Surgical System. Our instruments and accessories have a limited life
and will either expire or wear out as they are used in surgery, at which point they need to be replaced. We typically enter into
service contracts at the time systems are sold at an annual rate of approximately $80,000 to $170,000, depending upon the
configuration of the underlying system and composition of the services offered under the contract. These service contracts have
generally been renewed at the end of the initial contractual service periods.
Recurring Revenue
Recurring revenue has generally grown at a faster rate than system revenue in the last few fiscal years. Recurring revenue
increased to $1.9 billion, or 71% of total revenue in 2016, compared with $1.7 billion, or 70% of total revenue in 2015 and $1.5
billion, or 70% of total revenue in 2014. The growth of recurring revenue and its increasing proportion of total revenue largely
reflect continued procedure adoption on a growing base of installed da Vinci Surgical Systems. The installed base of da Vinci
Surgical Systems has grown to approximately 3,919 at December 31, 2016, compared with 3,597 at December 31, 2015, and 3,266
at December 31, 2014.
Procedure Mix / Products
Our procedure business is primarily comprised of: (1) cancer and other highly complex procedures and (2) less complex
procedures for benign conditions. Cancer and other highly complex procedures tend to be reimbursed at higher rates than less
complex procedures for benign conditions. Thus, hospitals are more sensitive to the costs associated with treating less complex
benign conditions. Our strategy is to provide hospitals with attractive clinical and economic solutions in each of these procedure
categories. Our fully featured da Vinci Xi system with advanced instruments including the EndoWrist Vessel Sealer, EndoWrist
Stapler products, and our Table Motion product target the more complex procedure segment. Lower priced products, including
the three-arm da Vinci Si-e System, refurbished da Vinci Si, and Single-Site instruments, are targeted towards less complex
procedures.
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Procedure Seasonality
More than half of da Vinci procedures performed are for benign conditions, most notably benign hysterectomies, hernia repairs,
and cholecystectomies. The proportion of these procedures for benign conditions has grown over time in relation to the total
number of procedures performed. Hysterectomies for benign conditions, hernia repairs, cholecystectomies, and other short-term
elective procedures tend to be more seasonal than cancer operations and surgeries for other life threatening conditions. Seasonality
in the U.S. for these procedures for benign conditions typically results in higher fourth quarter procedure volume when more
patients have met annual deductibles and lower first quarter procedure volume when deductibles are reset. Seasonality outside the
U.S. varies but is often more pronounced around local holidays and vacation periods.
Distribution Channels
We provide our products through direct sales organizations in the U.S., Japan, South Korea, and Europe, excluding Spain,
Portugal, Italy, Greece, and Eastern European countries. In the remainder of our OUS markets, we provide our products through
distributors.
Intuitive Surgical da Vinci System Leasing
Since 2013, we have entered into sales-type and operating lease arrangements directly with certain qualified customers as a
way to offer customers flexibility in how they acquire da Vinci systems and expand da Vinci surgery availability while leveraging
our balance sheet. The leases generally have commercially competitive terms as compared with other third party entities that offer
equipment leasing. We include both operating and sales-type leases in our system shipment and installed base disclosures. We
exclude operating leases from our system average selling price computations.
In the years ended December 31, 2016, 2015, and 2014, we shipped 95, 63, and 41 systems under lease arrangements,
respectively, of which 62, 43, and 14 were classified as operating leases, respectively. Generally, the operating lease arrangements
provide our customers with the right to purchase the leased system sometime during or at the end of the lease term. Revenue
generated from customer purchases of systems under operating lease arrangements (“Lease Buyouts”) was $38.2 million, $9.4
million, and $0 million for the years ended December 31, 2016, 2015, and 2014, respectively. We expect that revenue recognized
from customer exercises of the buyout options will fluctuate based on the timing of when, and if, customers choose to exercise
their buyout options. Operating lease revenue for the years ended December 31, 2016, 2015, and 2014, was $16.6 million, $7.0
million and $1.3 million, respectively. As of December 31, 2016, 79 da Vinci systems were installed at customers under operating
lease arrangements. We believe our leasing program has been an effective and well-received, and we are willing to expand it based
on customer demand.
Regulatory Activities
Clearances and Approvals
We have obtained the clearances required to market our multiport products associated with all generations of our da Vinci
Surgical Systems (Standard, S, Si, and Xi systems) for our targeted surgical specialties within the U.S. and most of the European
markets in which we operate.
In March 2014, we received FDA clearance to market our da Vinci Xi Surgical System in the U.S., our fourth generation da
Vinci Surgical System (see the description of the da Vinci Xi Surgical System in the New Product Introductions section below).
In June 2014, we received CE mark clearance for our da Vinci Xi Surgical System in Europe. We received regulatory clearances
for the da Vinci Xi Surgical System in South Korea in October 2014 and in Japan in March 2015. The regulatory status of the da
Vinci Xi Surgical System in other OUS markets varies by country.
We also received FDA clearance on an initial set of instruments for the Xi Surgical system in early 2014. Later in 2014, we
received FDA clearances for Xi versions of our EndoWrist Vessel Sealer, Firefly, and EndoWrist Stapler 45. In September 2014,
we received FDA clearance to market the wristed version of our Single-Site needle driver product for use on benign hysterectomy,
cholecystectomy, and salpingo oophorectomy procedures. In the second quarter of 2015, we received FDA clearance for an
additional set of da Vinci Xi instruments. In April 2015, we received CE Mark status to sell the EndoWrist Stapler for the Si and
Xi Surgical Systems in European markets. In June 2015, we received CE mark clearance in Europe and in January 2016 we received
U.S. FDA clearance for our Integrated Table Motion product. In March 2016, we received FDA 510(k) clearances in the U.S. for
Single-Site instruments and the 30mm EndoWrist stapler products for the da Vinci Xi Surgical System (see the description of the
EndoWrist Stapler 30 in the New Product Introductions section below). In March 2016, we also received CE mark clearances in
Europe for Single-Site instruments and the 30mm EndoWrist stapler products for the da Vinci Xi Surgical System.
In April 2014, we received FDA clearance to market our da Vinci Single Port Surgical System in the U.S. for single-port
urologic surgeries. At the time, we decided not to market that version of the da Vinci Single Port Surgical System. We instead
elected to pursue the necessary modifications to integrate it into the da Vinci Xi product family as a dedicated single port patient
console compatible with the existing da Vinci Xi surgeon console, vision cart, and other equipment. We have since completed
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these modifications and have begun clinical evaluations of the product. We plan to seek FDA clearance(s) for this da Vinci Xi
version of the da Vinci Single Port Surgical System for procedure(s) in which a single small entry point to the body and parallel
delivery of instruments is important. Such surgeries could include those performed through a natural orifice like the mouth for
head and neck procedures or those performed through a single skin incision. We do not anticipate material revenue contribution
from the da Vinci Single Port Surgical System in 2017.
We obtained approval from the Japanese Ministry of Health, Labor, and Welfare (“MHLW”) for our da Vinci Xi Surgical
System in March 2015. National reimbursement status was received for dVP procedures in Japan effective April 2012 and for da
Vinci partial nephrectomy procedures in April 2016. With our support, Japanese surgical societies are seeking reimbursement for
additional procedures through the MHLW’s Senshin Iryo processes as well as alternative reimbursement processes. Senshin Iryo
approvals require in-country clinical data and are considered in April of even numbered years. There can be no assurance that we
will gain additional reimbursements for the procedures or at the times we have targeted. If we are not successful in obtaining
additional regulatory clearances, importation licenses, and adequate procedure reimbursements for future products and procedures,
then the demand for our products in Japan could be limited.
Recalls and Corrections
Medical device companies have regulatory obligations to correct or remove medical devices in the field that could pose a risk
to health. The definition of “recalls and corrections” is expansive and includes repair, replacement, inspections, re-labeling, and
issuance of new or additional instructions for use or reinforcement of existing instructions for use and training when such actions
are taken for specific reasons of safety or compliance. These field actions require stringent documentation, reporting, and monitoring
worldwide. There are other actions which a medical device manufacturer may take in the field without reporting, including routine
servicing, the introduction of new products and new indications for use, and stock rotations.
As we determine whether a field action is reportable in any regulatory jurisdiction, we prepare and submit notifications to the
appropriate regulatory agency for the particular jurisdiction. Regulators can require the expansion, reclassification, or change in
scope and language of the field action. In general, upon submitting required notifications to regulators regarding a field action
which is a recall or correction, we will notify customers regarding the field action, provide any additional documentation required
in their national language, and arrange, as required, return or replacement of the affected product or a field service visit to perform
the correction.
Field actions as well as certain outcomes from regulatory activities can result in adverse effects on our business, including
damage to our reputation, delays by customers of purchase decisions, reduction or stoppage of the use of installed systems, and
reduced revenue as well as increased expenses.
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Recent Business Events and Trends
Procedures
Overall. During the year ended December 31, 2016, total da Vinci procedures grew approximately 15% compared with 14%
for the year ended December 31, 2015. U.S. procedure growth during the year ended December 31, 2016 was approximately 13%,
compared with approximately 11% for the year ended December 31, 2015. The higher 2016 U.S. procedure growth was largely
attributable to growth in general surgery procedures, most notably hernia repair and colorectal procedures, as well as moderate
growth in more mature gynecologic and urologic procedure categories.
Procedure volume OUS for the year ended December 31, 2016, grew approximately 24% compared with approximately 26%
growth for the year ended December 31, 2015, driven by continued growth in dVP procedures and earlier stage growth in kidney
cancer procedures. We believe growth in these global markets is being driven by increased acceptance among surgeons and health
systems, supported by expanded global evidence validating the clinical and economic value of dVP.
The 2016 OUS procedure growth rate reflects continued da Vinci adoption in European and Asian markets. Growth was strong
in Asia and variable by country in Europe. We experienced strong procedure growth in China as systems sold under a previous
public hospital quota system have been installed. However, procedure adoption in China, future system placements and our ability
to sustain procedure growth are dependent on obtaining additional importation authorizations and hospitals completing a central
purchasing tender process under the authorization. The most recent authorization expired at the end of 2015. The timing and
magnitude of future authorizations, which may enable future system placements, is not certain. In Japan, procedure growth rates
are likely to be paced by the timing of procedure reimbursement approvals for procedures in addition to dVP and partial nephrectomy.
We also experienced strong procedure growth in Japan since receiving the national reimbursements, outlined above, for dVP and
partial nephrectomy. However, as adoption for these procedures has progressed, procedure growth in Japan is slowing.
U.S. Gynecology. Gynecology is our largest U.S. surgical specialty and the procedure volume was approximately 246,000 in
2016, compared with 238,000 in 2015 and 235,000 in 2014. We believe that overall U.S. gynecologic surgery volume for benign
conditions (robotic and other modalities) has been pressured in recent years by factors including, but not limited to, a trend by
payers toward encouraging conservative disease management, trends towards higher patient deductibles and co-pays, and FDA
actions regarding the use of power morcellation in uterine surgeries. Combining robotic, laparoscopic, and vaginal approaches,
MIS represents about 80% of the U.S. hysterectomy market for benign conditions, and thus the rate of migration from open
surgeries to MIS has slowed. We believe that our modest growth in dVH procedures in 2015 and 2016 was driven by an increasing
proportion of dVH procedures consolidating to gynecologic oncologists, a group of surgeons more aligned with da Vinci Surgical
System utilization. Total U.S. dVH procedure volume was approximately 204,000, 196,000, and 191,000 in 2016, 2015, and 2014,
respectively.
U.S. General Surgery. General surgery is our second largest and fastest growing specialty in the U.S. with procedure volume
that grew to approximately 186,000 in 2016, compared with approximately 140,000 in 2015, and 107,000 in 2014. Ventral and
inguinal hernia, combined, contributed to the most incremental growth in U.S. general surgery procedures in 2015 and 2016. We
believe that growth in da Vinci hernia repair reflects improved clinical outcomes within certain patient populations, as well as
potential cost benefits relative to certain alternative treatments. We believe hernia repair procedures represent a significant
opportunity with the potential to drive growth in future periods, however, given the differences in complexity among hernia patient
populations and varying surgeon opinion regarding optimal surgical technique, it is difficult to estimate the timing of and to what
extent da Vinci hernia repair procedure volume will grow in the future. We expect a large portion of hernia repairs will continue
to be performed via different modalities of surgery.
Adoption of da Vinci for colorectal procedures, which includes several underlying procedures including low anterior resections
for rectal cancers and certain colon procedures for benign and cancerous conditions, has been ongoing for several years, and is
supported by our recently launched technologies such as the da Vinci Xi Surgical System, EndoWrist Stapler, EndoWrist Vessel
Sealer, and Integrated Table Motion.
dVP. U.S. dVP is the largest urology procedure in the U.S. with 70,000 dVPs performed in 2016, compared with 66,000 in
2015, and 60,000 in 2014.
We believe the return to growth in U.S. dVP in 2014 and our subsequent growth rate reflects surgical procedures being
performed for men who may have previously deferred screening or definitive treatment. We believe that our lower 2016 growth
rate reflects surgical volumes coming into closer alignment with new diagnoses of prostate cancer. As the U.S. standard of care
for the surgical treatment of prostate cancer, we expect that the number of dVP procedures performed in the U.S. will fluctuate
with the overall prostatectomy market. dVP is the largest overall OUS procedure with approximately 92,000 performed in 2016,
compared with 79,000 in 2015, and 65,000 in 2014. dVP is at various stages of adoption in different areas of the world.
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System Demand
Future demand for da Vinci Surgical Systems will be impacted by factors including hospital response to the evolving health
care environment under the new U.S. administration, procedure growth rates, hospital consolidation trends, evolving system
utilization and point of care dynamics, capital replacement trends, additional reimbursements in various global markets including
Japan, the timing around governmental tenders and authorizations, including China, and the timing of when we receive regulatory
clearance in our other OUS markets for our Xi System and related instruments. Demand may also be impacted by robotic surgery
competition, including from companies that have introduced products in the field of robotic surgery or have made explicit statements
about their efforts to enter the field, including but not limited to: Auris Surgical Robotics, Inc.; Avatera Medical GmbH; Cambridge
Medical Robotics Ltd.; Johnson & Johnson and Google Inc. and their joint venture, Verb Surgical Inc.; Medicaroid Inc.;
MedRobotics Corp.; meerecompany Inc.; Medtronic PLC.; Olympus Corp.; Samsung Corporation; Smart Robot Technology Group
Co. Ltd.; Titan Medical, Inc.; and TransEnterix, Inc., as well as other economic and geopolitical factors.
New Product Introductions
da Vinci Xi Surgical System. During April 2014, we launched our newest da Vinci model, the da Vinci Xi, in the U.S. The
da Vinci Xi can be used across a wide spectrum of MIS procedures, and has been optimized for multi-quadrant surgeries. The da
Vinci Xi expands upon core da Vinci features including wristed instruments, 3-D HD visualization, intuitive motion, and ergonomic
design, while improving ease of use, and delivering several new features, including:
• A new overhead instrument arm architecture designed to facilitate anatomical access from virtually any position.
• A new digital endoscope architecture that creates a simpler, more compact design with improved vision definition and
clarity.
• An ability to attach the endoscope to any arm, providing flexibility for visualizing the surgical site.
•
Smaller, thinner arms with newly designed joints that offer a greater range of motion than before.
• Longer instrument shafts designed to give surgeons greater operative reach.
• Ease of use enhancements, including automated pre-surgical deployment of the da Vinci robot arms.
With the da Vinci Xi, we now offer hospitals a broader line of da Vinci Surgical Systems to match their surgical profile and
patient care requirements. These include the da Vinci Si-e, a lower price system suited for surgeries requiring two instrument arms;
the da Vinci Si, which has the capability of controlling three instrument arms; and the da Vinci Xi, which has four universal
instrument arms that attach to a rotating overhead platform. We separately applied for FDA clearance for the da Vinci Xi Firefly,
Vessel Sealer, and Stapler 45 products and received clearances for these products in 2014. See the Clearances and Approvals
section above for more information on regulatory clearances of the da Vinci Xi platform products.
da Vinci Xi Integrated Table Motion. Integrated Table Motion coordinates the movements of the da Vinci robot arms with
an advanced operating room table, the TruSystem® 7000dV sold by Trumpf MedicalTM, to enable shifting a patient's position in
real-time while the da Vinci surgical robotic arms remain docked. This gives operating room teams the capabilities to optimally
position the operating table so that gravity exposes anatomy during multi-quadrant da Vinci System procedures, maximize reach
and access to target anatomy enabling surgeons to interact with tissue at an ideal working angle, and reposition the table during
the procedure to enhance anesthesiologists’ care of the patient.
EndoWrist Stapler 45. In October 2012, we received FDA clearance for the EndoWrist Stapler 45 instrument with Blue and
Green 45mm reloads for use with the da Vinci Si Surgical System. The EndoWrist Stapler 45 is a wristed, stapling instrument
intended for resection, transection and/or creation of anastomoses in general, gynecologic, and urologic surgery. This instrument
enables operators to precisely position and fire the stapler. Its initial surgical use was directed towards colorectal procedures. In
January 2015, we began to ship initial da Vinci Xi versions of the EndoWrist Stapler 45, including Blue, Green, and White 45 mm
reloads. The White reloads are only available on the da Vinci Xi platform.
EndoWrist Stapler 30. In March 2016, we received FDA clearance in the U.S. for the EndoWrist Stapler 30 instrument with
Blue, Green, White, and Gray 30mm reloads for use with the da Vinci Xi Surgical System. It is intended to deliver particular utility
with fine tissue interaction in lobectomy and other thoracic procedures. The EndoWrist Stapler 30 is a wristed, stapling instrument
intended for resection, transection and/or creation of anastomoses.
Intuitive Surgical-Fosun Medical Technology (Shanghai) Co., Ltd.
In September 2016, we agreed to establish a joint venture with Shanghai Fosun Pharmaceutical (Group) Co., Ltd. “Fosun
Pharma”, a subsidiary of Fosun International Limited, to research, develop, manufacture, and sell robotic-assisted catheter-based
medical devices. The joint venture will initially produce products targeting early diagnosis and cost-effective treatment of lung
cancer, one of the most commonly diagnosed forms of cancer in the world. The technology will be used in robotic-assisted medical
devices based on catheters and incorporates proprietary intellectual property developed or owned by us. The joint venture will be
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located in Shanghai, China, where it will perform research and development activities and manufacture catheter-based products
for global distribution. Distribution in China will be conducted by the joint venture. Distribution outside of China will be conducted
by us. The joint venture will be owned 60% by us and 40% by Fosun Pharma. The companies will contribute up to $100 million
as required by the joint venture, an arrangement representing a significant expansion of our relationship with Fosun Pharma. Since
2011, Chindex Medical Limited, a subsidiary of Fosun Pharma, has been our distribution partner for da Vinci Surgical Systems
in China.
Formation of the joint venture company is subject to approvals by the relevant PRC government authorities and administrative
agencies. Upon formation, we expect the joint venture will commence the hiring of employees and establish manufacturing and
research and development infrastructures. We expect that the joint venture will incur net losses before product commercialization,
and we do not expect the joint venture to generate revenue until after 2017. There can be no assurance that we and the joint venture
can successfully complete the development of the robotic-assisted catheter-based medical devices, that we or the joint venture
will obtain the necessary regulatory approvals and successfully commercialize the products, that the joint venture will not require
additional contributions to fund its business, or that the joint venture will become profitable.
2016 Financial Highlights
• Total revenue increased by 13% to $2.7 billion for the year ended December 31, 2016, compared with $2.4 billion for
the year ended December 31, 2015.
• Approximately 753,000 da Vinci procedures were performed during the year ended December 31, 2016, an increase of
•
approximately 15% compared with approximately 652,000 for the year ended December 31, 2015.
Instrument and accessory revenue increased by 17% to $1.4 billion for the year ended December 31, 2016, compared
with $1.2 billion for the year ended December 31, 2015.
• Recurring revenue increased by 15% to $1.9 billion for the year ended December 31, 2016, compared with $1.7 billion
for the year ended December 31, 2015, representing 71% and 70% of total revenue in 2016 and 2015, respectively.
•
Systems revenue increased by 10% to $791.6 million for the year ended December 31, 2016, compared with $721.9
million for the year ended December 31, 2015. 537 da Vinci Surgical Systems were shipped for the year ended
December 31, 2016, compared with 492 for the year ended December 31, 2015.
• As of December 31, 2016, we had a da Vinci Surgical System installed base of approximately 3,919 systems, an increase
of approximately 9% compared with the installed base as of December 31, 2015.
• Gross profit as a percentage of revenue increased to 69.9% for the year ended December 31, 2016, compared with 66.2%
for the year ended December 31, 2015. Gross profit for the year ended December 31, 2016, included a $7.1 million benefit
due to a Medical Device Excise Tax (“MDET”) refund.
• Operating income increased by 28% to $945.2 million for the year ended December 31, 2016, compared with $740.0
million for the year ended December 31, 2015. Operating income included $178.0 million and $168.1 million of share-
based compensation expense related to employee stock plans for the years ended December 31, 2016, and 2015,
respectively. Operating income for the year ended December 31, 2016, and 2015, also included pre-tax litigation charges
of $12.1 million and $13.2 million, respectively.
• As of December 31, 2016, we had $4.8 billion in cash, cash equivalents, and investments. Cash, cash equivalents, and
investments increased by $1.5 billion compared with December 31, 2015, primarily as a result of cash provided by
operating activities and employee stock option exercises.
Results of Operations
The following table sets forth, for the years indicated, certain Consolidated Statements of Income information (in millions,
except percentages):
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Revenue:
Product
Service
Total revenue
Cost of revenue:
Product
Service
Total cost of revenue
Product gross profit
Service gross profit
Gross profit
Operating expenses:
Selling, general and administrative
Research and development
Total operating expenses
Income from operations
Interest and other income, net
Income before taxes
Income tax expense
Net income
Total Revenue
2016
2,187.4
517.0
2,704.4
663.3
151.0
814.3
1,524.1
366.0
1,890.1
705.3
239.6
944.9
945.2
35.6
980.8
244.9
735.9
$
$
Years Ended December 31,
% of
total
revenue
2015
% of
total
revenue
2014
% of
total
revenue
81% $
19%
100%
1,919.6
464.8
2,384.4
81% $
19%
100%
1,702.7
429.0
2,131.7
80%
20%
100%
25%
5%
30%
56%
14%
70%
26%
9%
35%
35%
1%
36%
9%
27% $
647.2
159.3
806.5
1,272.4
305.5
1,577.9
640.5
197.4
837.9
740.0
18.5
758.5
169.7
588.8
27%
7%
34%
54%
12%
66%
27%
8%
35%
31%
1%
32%
7%
25% $
569.9
148.0
717.9
1,132.8
281.0
1,413.8
691.0
178.0
869.0
544.8
4.2
549.0
130.2
418.8
27%
7%
34%
53%
13%
66%
32%
8%
40%
26%
—%
26%
6%
20%
Total revenue was $2.7 billion for the year ended December 31, 2016, and increased by 13% compared with $2.4 billion for
the year ended December 31, 2015. Total revenue for the year ended December 31, 2015, increased by 12% compared with $2.1
billion for the year ended December 31, 2014. The increase in total revenue for the year ended December 31, 2016, reflects 15%
higher recurring revenue driven by approximately 15% higher procedure volume, and 10% higher systems revenue. The increase
in total revenue for the year ended December 31, 2015, reflects 14% higher systems revenue and 11% higher recurring revenue
driven by approximately 14% higher procedure volume.
We sell our products and services in Euros and British Pounds in those European markets where we have direct distribution
channels, and in Japanese Yen and Korean Won in Japan and South Korea, respectively. Foreign currency did not have a material
impact on total revenue for the year ended December 31, 2016, as compared with 2015. Revenue for the year ended December 31,
2015, as compared with 2014, was negatively impacted by the strengthening of the U.S. dollar against these other currencies. We
hedge a portion of our foreign currency denominated revenue and those hedges partially offset the negative impact of the
strengthened U.S. dollar on revenue for the year ended December 31, 2015. Revenue denominated in foreign currencies was
approximately 19%, 19%, and 16% of total revenue for the years ended December 31, 2016, 2015, and 2014, respectively. The
U.S. dollar generally has strengthened against the other currencies that we transaction our sales in during latter half of 2016. If
the U.S. dollar continues to remain as strong or strengthens further against the other currencies we transact our sales in, and we
are not able to adjust our foreign currency denominated pricing, our revenue may be negatively impacted in 2017.
Revenue generated in the U.S. accounted for 72%, 71%, and 70% of total revenue during the years ended December 31,
2016, 2015, and 2014, respectively. We believe that U.S. revenue has accounted for the large majority of total revenue due to
patients’ ability to choose their provider and method of treatment in the U.S., reimbursement structures supportive of innovation
and minimally invasive surgery, and initial investments focused on U.S. infrastructure. We have been investing in our business in
the OUS market and our OUS procedures have grown faster in proportion to U.S. procedures. We expect that our OUS procedures
and revenue will make up a greater portion of our business in the long term.
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The following table summarizes our revenue and da Vinci Surgical System unit shipments for the years ended December
31, 2016, 2015, and 2014, respectively (in millions, except percentages and unit shipments):
Revenue
Instruments and accessories
Systems
Total product revenue
Services
Total revenue
Recurring revenue
% of total revenue
United States
OUS
Total revenue
% of Revenue - United States
% of Revenue - OUS
Unit Shipments by Region:
United States unit shipments
OUS unit shipments
Total unit shipments*
Unit Shipments by Model:
da Vinci S
da Vinci Si-e - Single console (3 arm)
da Vinci Si - Single console (4 arm)
da Vinci Si - Dual console
da Vinci Xi - Single console
da Vinci Xi - Dual console
Total unit shipments*
Unit Shipments involving System Trade-ins:
Unit shipments involving trade-ins of da Vinci standard Surgical Systems
Unit shipments involving trade-ins of da Vinci S Surgical Systems
Unit shipments involving trade-ins of da Vinci Si Surgical Systems
Total unit shipments involving trade-ins
Unit shipments not involving trade-ins
Total unit shipments*
*Systems shipped under operating leases (included in total unit shipments)
Product Revenue
2015-2016
Years Ended December 31,
2016
2015
2014
$
$
$
$
$
$
$
$
$
$
1,395.8
791.6
2,187.4
517.0
2,704.4
1,912.8
71%
1,955.0
749.4
2,704.4
72%
28%
$
$
$
$
$
1,197.7
721.9
1,919.6
464.8
2,384.4
1,662.5
70%
1,695.8
688.6
2,384.4
71%
29%
1,070.2
632.5
1,702.7
429.0
2,131.7
1,499.2
70%
1,490.9
640.8
2,131.7
70%
30%
338
199
537
1
2
122
5
301
106
537
1
86
69
156
381
537
62
298
194
492
1
7
107
22
250
105
492
5
99
47
151
341
492
43
238
193
431
10
29
143
43
157
49
431
18
82
31
131
300
431
14
Product revenue increased by 14% to $2.2 billion for the year ended December 31, 2016, compared with $1.9 billion for the
year ended December 31, 2015.
Instrument and accessory revenue increased by 17% to $1.4 billion for the year ended December 31, 2016, compared with
$1.2 billion for the year ended December 31, 2015. The increase in instrument and accessory revenue was driven by procedure
growth of approximately 15% and higher sales of our advanced instruments, partially offset by customer buying patterns. 2016
U.S. procedure growth was approximately 13% compared with 11% in 2015 and was largely attributable to growth in general
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surgery procedures, most notably hernia repair and colorectal procedures, as well as moderate growth in more mature gynecologic
and urologic procedure categories. OUS procedure growth was approximately 24% for 2016, compared with 26% for 2015, driven
by continued growth in dVP and earlier stage growth in kidney cancer procedures.
Systems revenue increased by 10% to $791.6 million for the year ended December 31, 2016, compared with $721.9 million
for the year ended December 31, 2015. Higher systems revenue was driven by higher system shipments, higher number of Lease
Buyouts, and higher revenue from our Integrated Table Motion product. Revenue from Lease Buyouts was $38.2 million for year
ended December 31, 2016, compared with $9.4 million for the year ended December 31, 2015. We expect revenue from Lease
Buyouts to fluctuate period to period based on the timing of when, and if, customers choose to exercise the buyout options embedded
in their leases.
During 2016, a total of 537 systems were shipped compared with 492 systems in 2015. By geography, 338 systems were
shipped into the U.S., 96 into Asia, 79 into Europe, and 24 into other markets, compared with 298 systems shipped into the U.S.,
77 into Asia, 90 into Europe, and 27 into other markets in 2015. During 2016, 62 of the 537 systems were shipped under operating
lease arrangements compared with 43 of 492 systems shipped during 2015. Operating lease revenue was $16.6 million for the
year ended December 31, 2016, compared with $7.0 million for the year ended December 31, 2015. The increase in systems
shipments was primarily driven by procedure growth in 2016.
The da Vinci Surgical System average selling price (“ASP”), excluding the impact of systems shipped under operating leases,
was approximately $1.52 million and $1.54 million for 2016 and 2015, respectively. ASPs fluctuate period to period based on
geographic and product mix, product pricing, systems shipped involving trade-ins, and changes in foreign exchange rates.
2014-2015
Product revenue increased by 13% to $1.9 billion during the year ended December 31, 2015, from $1.7 billion during the
year ended December 31, 2014.
Instrument and accessory revenue increased by 12% to $1.2 billion for the year ended December 31, 2015, compared with
$1.1 billion for the year ended December 31, 2014. The increase in instrument and accessory revenue was driven by an approximate
14% increase in procedure volume, reflecting approximately 11% U.S. procedure growth and 26% OUS procedure growth as well
as a higher product mix of advanced instruments, partially offset by an unfavorable impact of weakening foreign currencies.
Systems revenue increased by 14% to $721.9 million during the year ended December 31, 2015, compared with $632.5 million
during the year ended December 31, 2014, driven by higher da Vinci Surgical Systems shipped in 2015. We shipped 492 da Vinci
Surgical Systems in 2015, compared with 431 in 2014, primarily reflecting higher system sales into the U.S. During 2015, 298
systems were shipped into the U.S., 90 into Europe, 77 into Asia, and 27 into other markets, compared with 238 systems shipped
into the U.S., 97 into Europe, 67 into Asia, and 29 into other markets in 2014. The increase in U.S. systems sales was driven by
higher procedure growth in 2015 and a favorable market response to the da Vinci Xi System that was launched in the second quarter
of 2014.
The da Vinci Surgical System ASP, excluding the impact of systems shipped under operating leases, was approximately $1.54
million and $1.50 million for 2015 and 2014. The systems ASP reflected a higher proportion of da Vinci Xi and dual console
systems sold in 2015, partially offset by the negative impact of weaker foreign currencies.
Service Revenue
Service revenue increased by 11% to $517.0 million for the year ended December 31, 2016, compared with $464.8 million
for the year ended December 31, 2015. Service revenue increased by 8% to $464.8 million for the year ended December 31, 2015,
compared with $429.0 million for the year ended December 31, 2014. Higher service revenue in 2016 and 2015 was primarily
driven by a larger installed base of da Vinci Surgical Systems producing service revenue.
Gross Profit
Product gross profit increased by 20% for the year ended December 31, 2016, to $1.5 billion, representing 69.7% of product
revenue, compared with $1.3 billion, representing 66.3% of product revenue, for the year ended December 31, 2015. The higher
2016 product gross profit was primarily driven by higher product revenue and higher gross profit margin.
The higher product gross profit margin for the year ended December 31, 2016, as compared with the year ended December 31,
2015, was driven by product cost reductions and manufacturing efficiencies on our da Vinci Xi System and other newer products,
the MDET impact described below, and favorable product mix, including higher sales of our da Vinci Xi Integrated Table Motion
product.
In September 2016 the Internal Revenue Service approved a $7.1 million refund claim that we submitted in connection with
MDET filings for the periods from the first quarter of 2013 to the third quarter of 2014. Product gross profit included a $7.1 million
benefit related to the MDET refund for the year ended December 31, 2016, compared with $17.0 million expense for the year
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ended December 31, 2015. The Consolidated Appropriations Act, 2016 includes a two-year moratorium such that medical device
sales in 2016 and 2017 will be exempt from the medical device excise tax.
Product gross profit for the year ended December 31, 2015, increased by 12% to $1.3 billion, or 66.3% of product revenue,
compared with $1.1 billion, or 66.5% of product revenue, for the year ended December 31, 2014. The lower 2015 product gross
profit margin was driven by a higher sales mix of recently introduced products that yield lower gross profit margins, including
the da Vinci Xi Surgical System and EndoWrist One Vessel Sealer and Stapler, and an unfavorable foreign currency impact related
to OUS sales.
Margins on newly launched products will typically be lower than that of our more mature products reflecting vendor pricing
on lower volumes and temporary tooling costs. Over time, as volumes increase and we refine our manufacturing processes and
products, we expect to see improvement in the margins of these newly launched products as realized and described above in the
2016 results. However, gross margins may ultimately differ for these newly launched products relative to previously launched
products based on market conditions, volume, and complexity of the product.
Product gross profit for the year ended December 31, 2016, 2015, and 2014, included share-based compensation expense of
$25.2 million, $22.8 million, and $19.1 million, respectively. Product gross profit for the year ended December 31, 2016, 2015,
and 2014 included amortization expense of intangible assets of $7.8 million, $12.7 million, and $10.8 million, respectively.
Service gross profit for the year ended December 31, 2016, increased to $366.0 million, or 70.8% of service revenue, compared
with $305.5 million, or 65.7% of service revenue for the year ended December 31, 2015. The higher 2016 service gross profit was
driven by higher service revenue, reflecting a larger installed base of da Vinci Surgical Systems, and higher service gross profit
margin. The higher service gross profit margin for the year ended December 31, 2016, as compared with the year ended
December 31, 2015, was primarily driven by improved efficiency and gains made in servicing the da Vinci Xi Surgical System.
During the year ended December 31, 2016, particularly during the second quarter, we were generally able to utilize lower cost
refurbished endoscopes to meet customer service and replacement needs. Our ability to utilize lower cost refurbished endoscopes
to meet service needs may vary period to period. As our installed base of da Vinci Xi surgical system increases, we will need to
expand our service pool with new endoscopes, which is expected to result in higher field replacement costs.
Service gross profit for the year ended December 31, 2015, increased to $305.5 million, or 65.7% of service revenue, compared
with $281.0 million, or 65.5% of service revenue for the year ended December 31, 2014. The higher 2015 service gross profit was
driven by higher service revenue, reflecting a larger installed base of da Vinci Surgical Systems.
Service gross profit for the years ended December 31, 2016, 2015, and 2014, included share-based compensation expense of
$12.4 million, $12.9 million and $13.5 million, respectively.
Selling, General and Administrative Expenses
Selling, general and administrative expenses include costs for sales, marketing and administrative personnel, sales and
marketing activities, tradeshow expenses, legal expenses, regulatory fees and general corporate expenses.
Selling, general and administrative expenses for the year ended December 31, 2016, increased by 10% to $705.3 million,
compared with $640.5 million for the year ended December 31, 2015. The increase was primarily due to higher OUS expenses
associated with our expanded Asian and European teams, infrastructure, higher headcount, and higher legal fees. Selling, general
and administrative expenses also included pre-tax litigation charges of $12.1 million and $13.2 million for the year ended
December 31, 2016, and 2015 respectively.
Selling, general and administrative expenses for the year ended December 31, 2015, decreased by 7% to $640.5 million
compared with $691.0 million for the year ended December 31, 2014. The decrease was primarily due to lower pre-tax litigation
charges of $13.2 million in 2015, compared with $82.4 million in 2014, and to a lesser extent, the impact of the stronger U.S.
dollar on expenses denominated in foreign currencies. These decreases were partially offset by increased costs associated with
the expansion of our Japanese and other organizations OUS, as well as higher regulatory compliance costs and higher incentive
compensation costs.
Share-based compensation expense charged to selling, general and administrative expenses during the years ended
December 31, 2016, 2015, and 2014 were $97.4 million, $94.7 million, and $99.0 million, respectively.
Research and Development Expenses
Research and development costs are expensed as incurred. Research and development expenses include costs associated with
the design, development, testing and significant enhancement of our products.
Research and development expenses for the year ended December 31, 2016, increased by 21% to $239.6 million, compared
with $197.4 million for the year ended December 31, 2015. The increase was primarily due to higher personnel and other project
costs to support a broader set of product development initiatives, including additional da Vinci Xi platform products, our da Vinci
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Single Port Surgical System, robotic-assisted catheter-based medical devices, advanced imaging and analytics, advanced
instrumentation, and next generation robotics.
Research and development expenses for the year ended December 31, 2015, increased by 11% to $197.4 million compared
with $178.0 million for the year ended December 31, 2014. The increase was driven primarily by growth in our product development
organization, including development in advanced imaging, advanced instrumentation, and next generation robotics, and higher
incentive compensation costs.
Share-based compensation expense charged to research and development expense during the years ended December 31, 2016,
2015, and 2014, was $43.0 million, $37.7 million and $37.5 million, respectively. Amortization expense related to intangible assets
for the years ended December 31, 2016, 2015, and 2014, was $10.4 million, $11.7 million and $11.6 million, respectively.
Research and development expenses fluctuate with project timing. Based upon our broader set of product development initiative
and the stage of the underlying projects, we expect to continue to make substantial investments in research and development and
anticipate that research and development expenses will continue to increase in the future.
Operating Expenses
We plan to make substantial investments in several strategic areas to advance several key product development innovations
in research, development, and clinical investment into 2017. We anticipate that we will invest up to $80 million more in 2017 in
these areas than our typical growth rate.
Interest and Other Income, Net
Interest and other income, net, was $35.6 million for the year ended December 31, 2016, compared with $18.5 million for
2015 and $4.2 million for 2014. The increase in interest and other income, net for the year ended December 31, 2016, was primarily
driven by higher interest earned during the year ended December 31, 2016, on higher cash and investment balances. The increase
in interest and other income, net for the year ended December 31, 2015, was partly due to higher 2015 interest income as compared
with 2014 and the $8.5 million impairment charges recorded in 2014 related to two equity investments.
Income Tax Expense
Our income tax expense was $244.9 million, $169.7 million, and $130.2 million for the years ended December 31, 2016,
2015, and 2014, respectively. The effective tax rate for 2016 was approximately 25.0% compared with 22.4% for 2015, and 23.7%
for 2014. Our tax rates for these periods differ from the U.S. federal statutory rate of 35% primarily due to the effect of income
earned by certain of our overseas entities being taxed at rates lower than the federal statutory rate and reversal of certain unrecognized
tax benefits, partially offset by state income taxes net of federal benefit. We intend to indefinitely reinvest outside the U.S. all of
our undistributed foreign earnings that were not previously subject to U.S. tax.
Our 2016, 2015, and 2014 tax provision reflected tax benefits of $15.8 million, $6.4 million, and $20.3 million, respectively,
associated with the reversal of unrecognized tax benefits and interests resulting from expiration of statutes of limitations in multiple
jurisdictions and certain audit settlements. Our 2015 tax provision also reflected a $29.3 million tax benefit resulting from a recent
U.S. Tax Court opinion involving an independent third party, issued in the third quarter of 2015. Based on the findings of the U.S.
Tax Court, we were required to, and did, refund to our foreign subsidiaries the share-based compensation element of certain
intercompany charges made in prior periods. Starting from 2015, share-based compensation has been excluded from intercompany
charges.
We file federal, state, and foreign income tax returns in many jurisdictions in the U.S. and abroad. Years prior to 2013 are
considered closed for most significant jurisdictions. Certain of our unrecognized tax benefits could reverse based on the normal
expiration of various statutes of limitations, which could affect our effective tax rate in the period in which they reverse.
We are subject to the examination of our income tax returns by various tax authorities and the outcome of these audits cannot
be predicted with certainty. Management regularly assesses the likelihood of adverse outcomes resulting from these examinations
to determine the adequacy of our provision for income taxes. If any issues addressed in our tax audits are resolved in a manner
not consistent with management’s expectations, we could be required to adjust our provision for income taxes in the period such
resolution occurs.
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Liquidity and Capital Resources
Sources and Uses of Cash
Our principal source of liquidity is cash provided by operations and issuance of common stock through exercise of stock
options and our employee stock purchase program. Cash and cash equivalents plus short and long-term investments increased by
$1.5 billion to $4.8 billion at December 31, 2016, from $3.3 billion at December 31, 2015, and $2.5 billion at December 31, 2014.
Cash generation is one of our fundamental strengths and provides us with substantial financial flexibility in meeting our operating,
investing, and financing needs.
On January 27, 2017, we made a payment of $2.0 billion related to an accelerated share repurchase program that we entered
into with Goldman, Sachs & Co. to repurchase our common stock. We made that payment using part of our cash and investments
held in the U.S. at December 31, 2016. For further details of the accelerated share repurchased program, see “Note 8. Stockholders’
Equity” to “Item 8. Financial Statements and Supplementary Data”.
As of December 31, 2016, $1,309.5 million of our cash, cash equivalents and investments were held by foreign subsidiaries.
Amounts held by foreign subsidiaries are generally subject to U.S. income tax on repatriation to the U.S. We currently have no
plans to repatriate any foreign earnings back to the U.S. Our intent is to reinvest these funds outside of the U.S. indefinitely, and
we believe our cash flows provided by our U.S. operations will meet our U.S. liquidity needs for the foreseeable future.
See “Item 7A. Quantitative and Qualitative Disclosures About Market Risk” for discussion on the impact of interest rate risk
and market risk on our investment portfolio.
Consolidated Cash Flow Data
(in millions)
Net cash provided by (used in)
Operating activities
Investing activities
Financing activities
Effect of exchange rates on cash and cash equivalents
Net increase (decrease) in cash and cash equivalents
Operating Activities
Years Ended December 31,
2016
2015
2014
$
$
1,042.9
(1,279.4)
558.5
—
322.0
$
$
771.9
(849.5)
193.4
(1.5)
114.3
$
$
665.1
(153.9)
(692.4)
(0.6)
(181.8)
For the year ended December 31, 2016, cash provided by our operating activities of $1,042.9 million exceeded our net income
of $735.9 million primarily due certain to non-cash charges as outlined below:
1. Our net income included non-cash charges including in the form of share-based compensation of $177.6 million;
depreciation and loss of disposal of property, plant, and equipment of $73.9 million; investment related non-cash charges
of $35.9 million; deferred income tax of $18.7 million; amortization of intangible assets of $18.2 million; partly offset
by tax benefits from employee stock plans of $14.3 million.
2. The non-cash charges outlined above were partly offset by changes in operating assets and liabilities that resulted in $3.0
million of cash used by operating activities during the year ended December 31, 2016. Operating assets and liabilities
are primarily comprised of accounts receivable, inventory, prepaid expenses, deferred revenue, and other accrued
liabilities. Inventory, including the transfer of equipment from inventory to property, plant and equipment, increased by
$46.7 million. Accounts receivable increased $35.9 million primarily driven by higher revenue and timing of collections.
Prepaids and other assets increased $28.7 million primarily driven by higher lease receivable balances resulting from
sales-type lease arrangement transactions entered into during year ended December 31, 2016. The unfavorable impact
of these items on cash provided by operating activities was partly offset by a $53.8 million increase in other liabilities,
primarily due to higher income tax payable, a $19.9 million increase in deferred revenue, an $18.7 million increase in
accrued compensation and employee benefits, and a $15.9 million increase in accounts payable. Deferred revenue, which
includes deferred service revenue that is being recognized as revenue over the service contract period, increased primarily
due to the increase in the number of installed systems for which service contracts existed.
For the year ended December 31, 2015, cash provided by our operating activities of $771.9 million exceeded our net income
of $588.8 million for two primary reasons:
1. Our net income included non-cash charges primarily in the form of share-based compensation of $167.9 million,
depreciation and loss of disposal of property, plant, and equipment of $65.1 million, income tax benefits from employee
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stock plans of $21.5 million, amortization of intangible assets of $24.4 million, and accretion of discounts and amortization
of premiums on investments of $26.4 million.
2. The non-cash charges outlined above were partly offset by changes in operating assets and liabilities that resulted in $92.5
million of cash used by operating activities.
Operating assets and liabilities are primarily comprised of accounts receivable, inventory, deferred revenue, other accrued
liabilities, and prepaid expenses. Accounts receivable increased $79.2 million in 2015 reflecting higher sales in 2015 and timing
of sales and collections. Prepaids and other assets increased $10.5 million primarily driven by higher lease receivable balances
resulting from sales-type lease arrangements entered into in 2015. Accrued liabilities decreased by $10.5 million mainly due to
settlement payments made related to accrued product liability litigation. Other changes in operating assets and liabilities include
an inventory increase of $10.7 million, net of equipment transfers from inventory to property, plant and equipment, and a decrease
in accounts payable of $11.3 million also resulted in cash used by operating activities. The unfavorable impact of these items on
cash provided by operating activities was partly offset by a $21.5 million increase in accrued compensation and employee benefits
and an $8.2 million increase of deferred revenue.
For the year ended December 31, 2014, cash flow from operations of $665.1 million exceeded our net income of $418.8
million for two primary reasons:
1. Our net income included substantial non-cash charges primarily in the form of share-based compensation, amortization
of intangible assets, taxes, and depreciation. These non-cash charges totaled $232.1 million during the year ended
December 31, 2014.
2. Changes in operating assets and liabilities resulted in approximately $14.2 million in cash provided by operating activities
during the year ended December 31, 2014.
Accrued liabilities increased $63.4 million, mainly driven by an increase in product liability accruals. Deferred revenue
increased by $19.8 million in 2014 primarily due to the increase in the number of installed systems for which service contracts
existed. Also, accrued compensation and accounts payable increased $39.1 million. The favorable impact of these items on cash
provided by operating activities was partly offset by an increase in accounts receivable of $13.7 million in 2014 reflecting timing
of our system sales and related collections, a net increase in inventory of $26.8 million primarily due to expanded product offerings,
and an increase in prepaids and other assets of $67.6 million, primarily driven by timing of tax payments and an increase in lease
receivables relating to sales-type lease arrangements entered into during 2014.
Investing Activities
Net cash used in investing activities for the year ended December 31, 2016, consisted of purchases of investments (net of the
proceeds from the sales and maturities of investments) of $1.2 billion and purchases of property, plant and equipment $53.9 million.
Net cash used in investing activities for the year ended December 31, 2015, consisted of purchases of investments (net of the
proceeds from the sales and maturities of investments) of $768.5 million and purchases of property and equipment $81.0 million.
Net cash used in investing activities for the year ended December 31, 2014, consisted primarily of cash used for purchases
of property and equipment of $105.6 million and purchases of businesses of $84.3 million, partially offset by the proceeds from
the sales and maturities of investments (net of purchases of investments) of $36.0 million. Purchases of property included the
acquisition of approximately 15 acres of land in Sunnyvale, California for future expansion in 2014. For the year ended December
31, 2014, we acquired certain intellectual property, know-how, fixed assets, and employees from Luna Innovations, Inc. and we
reacquired the distribution rights from our former Japanese distributor, Adachi Co, Ltd.
We invest predominantly in high quality, fixed income securities. Our investment portfolio may at any time contain investments
in U.S. Treasury and U.S. government agency securities, taxable and/or tax exempt municipal notes, corporate notes and bonds,
commercial paper, cash deposits, and money market funds.
Financing Activities
Net cash provided by financing activities in 2016 consisted primarily of proceeds from stock option exercises and employee
stock purchases of $580.9 million and excess tax benefits of $44.1 million, partly offset by $42.5 million used for the repurchase
of 0.1 million shares of our common stock through open market transactions and taxes paid on behalf of employees related to net
share settlement of vested employee equity awards of $24.0 million.
Net cash provided by financing activities in 2015 consisted primarily of proceeds from stock option exercises and employee
stock purchases of $361.1 million and excess tax benefits of $34.3 million, partly offset by $183.7 million used for the repurchase
of 0.4 million shares of our common stock through open market transactions and taxes paid on behalf of employees related to net
share settlement of vested employee equity awards of $11.0 million.
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Net cash used in financing activities in 2014 consisted primarily of $1.0 billion used for the repurchase of 2.5 million shares
of our common stock through an accelerated share repurchase program, offset by proceeds from stock option exercises and employee
stock purchases of $283.6 million and excess tax benefits of $24.0 million.
Our cash requirements depend on numerous factors, including market acceptance of our products, the resources we devote
to developing and supporting our products and other factors. We expect to continue to devote substantial resources to expand
procedure adoption and acceptance of our products. We have made substantial investments in our commercial operations, product
development activities, facilities, and intellectual property. Based upon our business model, we anticipate that we will continue
to be able to fund future growth through cash provided from operations. We believe that our current cash, cash equivalents and
investment balances, together with income to be derived from the sale of our products, will be sufficient to meet our liquidity
requirements beyond one year and for the foreseeable future.
Contractual Obligations and Commercial Commitments
The following table summarizes our contractual obligations as of December 31, 2016 (in millions):
Operating leases
Purchase commitments and obligations
Total contractual obligations
Payments due by period
Total
Less than
1 year
1 to 3 years
3 to 5 years
More than 5
years
$
$
36.7
345.8
382.5
$
$
7.1
342.7
349.8
$
$
9.2
3.1
12.3
$
$
5.4
—
5.4
$
$
15.0
—
15.0
Operating leases. We lease spaces for operations in the U.S. as well as in Japan, South Korea, Mexico, and other foreign
countries. We also lease automobiles for certain sales and field service employees. Operating lease amounts include future minimum
lease payments under all our non-cancellable operating leases with an initial term in excess of one year.
Purchase commitments and obligations. These amounts include an estimate of all open purchase orders and contractual
obligations in the ordinary course of business, including commitments with contract manufacturers and suppliers, for which we
have not received the goods or services and acquisition and licensing of intellectual property. A majority of these purchase
obligations are due within a year. Although open purchase orders are considered enforceable and legally binding, the terms generally
allow us the option to cancel, reschedule, and adjust our requirements based on our business needs prior to the delivery of goods
or performance of services. In addition to the above, we have committed to make potential future milestone payments to third
parties as part of licensing, collaboration and development arrangements. Payments under these agreements generally become due
and payable only upon achievement of certain developmental, regulatory and/or commercial milestones. Because the achievement
of these milestones is neither probable nor reasonably estimable, such contingencies have not been recorded on our Consolidated
Balance Sheets and have not been included in the table above.
Other commitments. We are unable to make a reasonably reliable estimate as to when payments may occur for our unrecognized
tax benefits. Therefore, our liability for unrecognized tax benefits is not included in the table above.
Off-Balance Sheet Arrangements
As of December 31, 2016, we did not have any significant off-balance sheet arrangements, as defined in Item 303(a)(4)(ii)
of SEC Regulation S-K promulgated under the Exchange Act.
Critical Accounting Estimates
Our Consolidated Financial Statements are prepared in conformity with U.S. generally accepted accounting principles (“U.S.
GAAP”), which requires us to make judgments, estimates and assumptions. See “Note 2. Summary of Significant Accounting
Policies,” in Notes to the Consolidated Financial Statements, which is included in “Item 8. Financial Statements and Supplementary
Data,” which describes our significant accounting policies and methods used in the preparation of our Consolidated Financial
Statements. The methods, estimates and judgments that we use in applying our accounting policies require us to make difficult
and subjective judgments, often as a result of the need to make estimates regarding matters that are inherently uncertain. Our
most critical accounting estimates include:
•
•
•
•
•
the valuation and recognition of investments, which impacts our investment portfolio balance when we assess fair
value, and interest and other income, net, when we record impairments;
the valuation of revenue and allowance for sales returns and doubtful accounts, which impacts revenue;
the estimation of transactions to hedge, which impacts revenue and other expense;
the valuation of inventory, which impacts gross profit margins;
the assessment of recoverability of intangible assets and their estimated useful lives, which primarily impacts gross
profit margin or operating expenses when we record asset impairments or accelerate their amortization;
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•
•
•
the valuation and recognition of share-based compensation, which impacts gross profit margin and operating
expenses;
the recognition and measurement of current and deferred income taxes (including the measurement of uncertain tax
positions), which impact our provision for taxes; and
the estimate of probable loss associated with product liability claims, which impacts accrued liabilities and operating
expenses.
Investments Valuation
Fair Value
Our investment portfolio may at any time contain investments in U.S. Treasury and U.S. government agency securities, Non-
U.S. government securities, taxable and/or tax exempt municipal notes, corporate notes and bonds, commercial paper, cash deposits,
and money market funds. In the current market environment, the assessment of the fair value of investments can be difficult and
subjective. U.S. GAAP establishes three levels of inputs that may be used to measure fair value. Each level of input has different
levels of subjectivity and difficulty involved in determining fair value. Valuation of Level 1 and 2 instruments generally do not
require significant management judgment and the estimation is not difficult. Level 3 instruments include unobservable inputs that
are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. The determination
of fair value for Level 3 instruments requires the most management judgment and subjectivity. There were no Level 3 securities
for the periods presented.
Other-than-temporary impairment
After determining the fair value of our available-for-sales instruments, gains or losses on these securities are recorded to other
comprehensive income, until either the security is sold or we determine that the decline in value is other-than-temporary. The
primary differentiating factors we considered in classifying impairments as either temporary or other-than-temporary impairments
are our intent and ability to retain our investment in the issuer for a period of time sufficient to allow for any anticipated recovery
in market value, the length of the time and the extent to which the market value of the investment has been less than cost, the
financial condition and near-term prospects of the issuer. Given the current market conditions, these judgments could prove to
be wrong, and companies with relatively high credit ratings and solid financial conditions may not be able to fulfill their obligations.
No impairment charges were recorded during the years ended December 31, 2016 and 2015. During the year ended December
31, 2014, we recorded pre-tax losses of $8.5 million related to a decline in the value of two equity investments that we concluded
were other-than-temporary. As of December 31, 2016, and 2015, net unrealized losses on investments of $8.6 million and $4.2
million, net of tax, respectively, were included in accumulated other comprehensive loss.
Allowance for sales returns and doubtful accounts. We record estimated reductions in revenue for potential returns of
products by customers and other allowances. As a result, management must make estimates of potential future product returns
and other allowances related to current period product revenue. In making such estimates, management analyzes historical returns,
current economic trends and changes in customer demand and acceptance of our products. If management were to make different
judgments or utilize different estimates, material differences in the amount of reported revenue could result.
Similarly, we make estimates of the collectability of accounts receivable, especially analyzing the aging and nature of accounts
receivable and historical bad debts, customer concentrations, customer credit-worthiness, current economic trends, and changes
in customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. Credit evaluations are undertaken
for all major sale transactions before shipment is authorized. On a quarterly basis, we evaluate aged items in the accounts receivable
aging report and provide an allowance in an amount we deem adequate for doubtful accounts. If management were to make
different judgments or utilize different estimates, material differences in the amount of our reported operating expenses could
result.
Hedge Accounting for Derivatives. We utilize foreign currency forward exchange contracts to hedge certain anticipated
foreign currency sales transactions. When specific criteria required by relevant accounting standards have been met, changes in
fair values of hedge contracts relating to anticipated transactions are recorded in other comprehensive income (“OCI”) rather than
net income until the underlying hedged transaction affects net income. By their nature, our estimates of anticipated transactions
may fluctuate over time and may ultimately vary from actual transactions. When we determine that the transactions are no longer
probable within a certain time-frame, we are required to reclassify the cumulative changes in the fair values of the related hedge
contracts from OCI to net income.
Inventory valuation. Inventory is stated at the lower of standard cost, which approximates actual costs, or market, on a first-
in, first-out basis. The cost basis of our inventory is reduced for any products that are considered excessive or obsolete based
upon assumptions about future demand and market conditions. If actual future demand or market conditions are less favorable
than those projected by management, additional inventory write-downs may be required, which could have a material adverse
effect on the results of our operations.
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Intangible Assets. Our intangible assets include identifiable intangibles and goodwill. Identifiable intangibles include
developed technology, patents, distribution rights, customer relationships, and licenses. All of our identifiable intangibles have
finite lives. Goodwill and intangible assets with indefinite lives are subject to an annual impairment review (or more frequent if
impairment indicators arise) by applying a fair-value based test. There have been no impairments from the analysis required by
U.S. GAAP.
Identifiable intangible assets with finite lives are subject to impairment testing and are reviewed for impairment when events
or circumstances indicate that the carrying value of an asset is not recoverable and its carrying amount exceeds its fair value. We
evaluate the recoverability of the carrying value of these identifiable intangible assets based on estimated undiscounted cash flows
to be generated from such assets. If the cash flow estimates or the significant operating assumptions upon which they are based
change in the future, we may be required to record additional impairment charges.
The valuation and classification of intangible assets and goodwill and the assignment of useful lives for purposes of amortization
involves judgments and the use of estimates. The evaluation of these intangibles and goodwill for impairment under established
accounting guidelines is required on a recurring basis. Changes in business conditions could potentially require future adjustments
to the assumptions made. When we determine that the useful lives of assets are shorter than we had originally estimated, we
accelerate the rate of amortization over the assets’ new, shorter useful lives. No impairment charge or accelerated amortization
was recorded for the years ended December 31, 2016, 2015, and 2014. A considerable amount of judgment is required in assessing
impairment, which includes financial forecasts. If conditions are different from management’s current estimates, material write-
downs of long-lived assets may be required, which would adversely affect our operating results.
Revenue recognition. Our system sale arrangements contain multiple elements, including system(s), system accessories,
instruments, accessories, and system service. We generally deliver all of the elements, other than service, within days of entering
into the system sale arrangement. Each of these elements is a separate unit of accounting. System accessories, instruments,
accessories, and service are also sold on a stand-alone basis.
For multiple-element arrangements, revenue is allocated to each unit of accounting based on their relative selling prices.
Relative selling prices are based first on vendor specific objective evidence of fair value (“VSOE”), then on third-party evidence
of selling price (“TPE”) when VSOE does not exist, and then on management's best estimate of the selling price (“ESP”) when
VSOE and TPE do not exist.
Our system sales arrangements generally include a one-year period of free service and four additional years of service that
are generally billed for separately on an annual basis at a contractually stated price. The revenue allocated to the free service
period is deferred and recognized ratably over the free service period. Amounts billed for the additional years of service are recorded
into deferred revenue when they are billed and recognized ratably over the service period.
Because we have neither VSOE nor TPE for our systems, the allocation of revenue is based on ESP for the systems sold. The
objective of ESP is to determine the price at which we would transact a sale, had the product been sold on a stand-alone basis. We
determine ESP for our systems by considering multiple factors, including, but not limited to, features and functionality of the
system, geographies, type of customer, and market conditions. We regularly review ESP and maintain internal controls over
establishing and updating these estimates.
Accounting for stock options. We account for share-based compensation in accordance with the fair value recognition
provisions of U.S. GAAP. We use the Black-Scholes-Merton option-pricing model which requires the input of highly subjective
assumptions. These assumptions include estimating the length of time employees will retain their vested stock options before
exercising them, the estimated volatility of our common stock price over the expected term, and the number of options that will
ultimately not complete their vesting requirements. The assumptions for expected volatility and expected term are the two
assumptions that most significantly affect the grant date fair value of stock options. Changes in expected risk-free rate of return
do not significantly impact the calculation of fair value, and determining this input is not highly subjective.
We use implied volatility based on freely traded options in the open market, as we believe implied volatility is more reflective
of market conditions and a better indicator of expected volatility than historical volatility. In determining the appropriateness of
relying on implied volatility, we considered the following:
•
•
•
the sufficiency of the trading volume of freely traded options;
the ability to reasonably match the terms, such as the date of the grant and the exercise price of the freely traded
options to options granted; and
the length of the term of the freely traded options used to derive implied volatility.
The expected term represents the weighted-average period that our stock options are expected to be outstanding. The expected
term is based on the observed and expected time to exercise. We determine expected term based on historical exercise patterns
and our expectation of the time it will take for employees to exercise options still outstanding.
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U.S. GAAP requires us to develop an estimate of the number of share-based awards that will be forfeited due to employee
turnover. Adjustments in the estimated forfeiture rates can have a significant effect on our reported share-based compensation,
as we recognize the cumulative effect of the rate adjustments for all expense amortization in the period the estimated forfeiture
rates were adjusted. We estimate and adjust forfeiture rates based on a periodic review of recent forfeiture activity and expected
future employee turnover. If a revised forfeiture rate is higher than previously estimated forfeiture rate, we may make an adjustment
that will result in a decrease to the expense recognized in the financial statements during the period when the rate was changed.
Adjustments in the estimated forfeiture rates could also cause changes in the amount of expense that we recognize in future periods.
Changes in these subjective assumptions can materially affect the estimate of fair value of stock options and, consequently,
the related amount of share-based compensation expense recognized on the Consolidated Statements of Income.
Accounting for income taxes. Significant management judgment is required in determining our provision for income taxes,
deferred tax assets and liabilities and any valuation allowance recorded against net deferred tax assets in accordance with U.S.
GAAP. These estimates and judgments occur in the calculation of tax credits, benefits, and deductions, and in the calculation of
certain tax assets and liabilities, which arise from differences in the timing of recognition of revenue and expense for tax and
financial statement purposes, as well as the interest and penalties related to uncertain tax positions. Significant changes to these
estimates may result in an increase or decrease to our tax provision in the current or subsequent period.
We must assess the likelihood that we will be able to recover our deferred tax assets. If recovery is less than a 50% likelihood,
we must increase our provision for taxes by recording a valuation allowance to reduce our deferred tax assets to the amount that
is more likely than not to be recoverable. As of December 31, 2016, we believe it is more likely than not that our deferred tax
assets ultimately will be recovered with the exception of our California deferred tax assets. We believe that due to the computation
of California taxes under the single sales factor, it is more likely than not that our California deferred tax assets will not be realized.
Should there be a change in our ability to recover our deferred tax assets, our tax provision would be affected in the period in
which such change takes place.
The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations. We
recognize liabilities for uncertain tax positions based on a two-step process. The first step is to evaluate the tax position for
recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be
sustained on audit, including resolution of related appeals or litigation processes, if any. If we determine that a tax position will
more likely than not be sustained on audit, then the second step requires us to estimate and measure the tax benefit as the largest
amount that is more than 50% likely to be realized upon ultimate settlement. It is inherently difficult and subjective to estimate
such amounts, as we have to determine the probability of various possible outcomes. We re-evaluate these uncertain tax positions
on a quarterly basis. This evaluation is based on factors including, but not limited to, changes in facts or circumstances, changes
in tax law, effective settlement of audit issues, and new audit activity. Such a change in recognition or measurement would result
in the recognition of a tax benefit or an additional charge to the tax provision.
Accounting for legal contingencies. We are involved in a number of legal proceedings involving product liability, intellectual
property, shareholder derivative actions, securities class actions, insurance, employee related, and other matters. We record a
liability and related charge to earnings in our consolidated financial statements for legal contingencies when the loss is considered
probable and the amount can be reasonably estimated. Our assessment is reevaluated each accounting period and is based on all
available information, including discussion with any outside legal counsel that represents us. If a reasonable estimate of a known
or probable loss cannot be made, but a range of probable losses can be estimated, the low-end of the range of losses is recognized
if no amount within the range is a better estimate than any other. If a loss is reasonably possible, but not probable and can be
reasonably estimated, the estimated loss or range of loss is disclosed in the notes to the consolidated financial statements.
When determining the estimated probable loss or range of losses, significant judgment is required to be exercised in order to
estimate the amount and timing of the loss to be recorded. Estimates of probable losses resulting from litigation are inherently
difficult to make, particularly when the matters are in early procedural stages with incomplete facts and information. The final
outcome of legal proceedings is dependent on many variables difficult to predict, and therefore, the ultimate cost to entirely resolve
such matters may be materially different than the amount of current estimates. Consequently, new information or changes in
judgments and estimates could have a material adverse effect on our business, financial condition, and results of operations or
cash flows.
RECENT ACCOUNTING PRONOUNCEMENTS
See “Note 2. Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements in “Item 8.
Financial Statements and Supplementary Data” for a full description of recent accounting pronouncements including the respective
expected dates of adoption and estimated effects, if any on our consolidated financial statements.
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ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate and Market Risk
The primary objective of our investment activities is to preserve principal while at the same time maximizing the income we
receive from our investments without significantly increasing risk. To achieve this objective, we maintain our portfolio of cash
equivalents and short-term and long-term investments in a variety of high quality securities, including U.S. treasuries and
government agencies, corporate debt, money market funds, commercial paper, and taxable or tax exempt municipal bonds. The
securities are classified as available-for-sale and consequently are recorded at fair value with unrealized gains or losses reported
as a separate component of accumulated other comprehensive income (loss). The weighted-average maturity of our investments
as of December 31, 2016, was approximately 1.1 years. If interest rates rise, the market value of our investments may decline,
which could result in a realized loss if we are forced to sell an investment before its scheduled maturity. A hypothetical increase
in interest rate by 25 basis points would have resulted in a decrease in the fair value of our net investment position of approximately
$12.5 million as of December 31, 2016. We do not utilize derivative financial instruments to manage our interest rate risks.
The uncertain financial markets have resulted in a tightening in the credit markets, a reduced level of liquidity in many financial
markets, and extreme volatility in fixed income and credit markets. The credit ratings of the securities we have invested in could
further deteriorate and may have an adverse impact on the carrying value of these investments.
Foreign Exchange Risk
The majority of our revenue, expense, and capital purchasing activities are transacted in U.S. dollars. However, we sell in
Euros and British Pounds in those European markets where we have direct distribution channels, as well as in Japanese Yen, and
in Korean Won. We operate in a number of markets on a direct sales basis and incur operating expenses in local currencies in
Europe, Japan, and South Korea. We also purchase certain product components from non-U.S. suppliers in local currency. As a
result, because a portion of our operations consist of sales activities outside of the U.S., we have foreign exchange exposures to
non-U.S. dollar revenues, operating expenses, accounts receivable, accounts payable, and foreign currency bank balances.
For the year ended December 31, 2016, sales denominated in foreign currencies (Euro, British Pound, Japanese Yen, and
Korean Won) were approximately 19% of total revenue. The objective of our hedging program is to mitigate the impact of changes
in currency exchange rates on our net cash flow from foreign currency denominated sales. For the year ended December 31, 2016,
our revenue would have decreased by approximately $25.2 million if the U.S. dollar exchange rate strengthened by 10%. We also
hedge the net recognized non-functional currency balance sheet exposures with foreign exchange forward contracts to reduce the
risk that our earnings and cash flows will be adversely affected by changes in exchange rates. A 10% strengthening of the U.S.
dollar exchange rate against all currencies to which we have exposure, after considering foreign currency hedges and offsetting
positions as of December 31, 2016, would have resulted in a less than $0.5 million decrease in the carrying amounts of those net
assets. Actual gains and losses in the future may differ materially from the hypothetical gains and losses discussed above based
on changes in the timing and amount of foreign currency exchange rate movements and our actual exposure and hedging
transactions. Bank counterparties to foreign exchange forward contracts expose us to credit-related losses in the event of their
nonperformance. To mitigate that risk, we only contract with counterparties that meet certain minimum requirements under our
counterparty risk assessment process. We monitor ratings and potential downgrades on at least a quarterly basis. Based on our
ongoing assessment of counterparty risk, we will adjust our exposure to various counterparties.
Although we sell to distributors outside of the U.S. in U.S. dollars, strengthening of the dollar can impact our distributors’
margins and could impact the end customers’ ability to purchase our product if our distributors seek to recover the impact of the
change in the dollar by increasing product and service prices. Less than 10% of our revenue is conducted through distributors
outside the U.S. Strengthening of the dollar relative to non-U.S. currencies could have an adverse impact on our business.
Our operations outside of the U.S. are subject to risks typical of operations outside of the U.S., including, but not limited to,
differing economic conditions, changes in political climate, differing tax structures, other regulations and restrictions, and foreign
exchange rate volatility.
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ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index To Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets at December 31, 2016 and 2015
Consolidated Statements of Income for the years ended December 31, 2016, 2015, and 2014
Consolidated Statements of Comprehensive Income for the years ended December 31, 2016, 2015, and 2014
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2016, 2015, and 2014
Consolidated Statements of Cash Flows for the years ended December 31, 2016, 2015, and 2014
Notes to the Consolidated Financial Statements
Schedule II—Valuation and Qualifying Accounts
Page No.
58
59
60
61
62
63
64
89
All other schedules have been omitted because they are not applicable or the required information is shown in the Consolidated
Financial Statements or the Notes thereto.
57
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Intuitive Surgical, Inc.
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, comprehensive
income, stockholders’ equity and cash flows present fairly, in all material respects, the financial position of Intuitive Surgical, Inc.
and its subsidiaries at December 31, 2016 and December 31, 2015, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 2016 in conformity with accounting principles generally accepted in the
United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents
fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial
statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting
as of December 31, 2016, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial
statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment
of the effectiveness of internal control over financial reporting, included in Management's Report on Internal Control over Financial
Reporting appearing under item 9A. Our responsibility is to express opinions on these financial statements, on the financial
statement schedule, and on the Company's internal control over financial reporting based on our integrated audits. We conducted
our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of
material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our
audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the
overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding
of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design
and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures
as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets
of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that
could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
San Jose, California
February 3, 2017
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INTUITIVE SURGICAL, INC.
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT PAR VALUE AMOUNTS)
Current assets:
ASSETS
Cash and cash equivalents
Short-term investments
Accounts receivable, net of allowances of $1.9 and $2.1 at December 31, 2016 and
2015, respectively
Inventory
Prepaids and other current assets
Total current assets
Property, plant and equipment, net
Long-term investments
Deferred tax assets
Intangible and other assets, net
Goodwill
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable
Accrued compensation and employee benefits
Deferred revenue
Other accrued liabilities
Total current liabilities
Other long-term liabilities
Total liabilities
Commitments and contingencies (Note 7)
Stockholders’ equity:
Preferred stock, 2.5 shares authorized, $0.001 par value, issuable in series; no shares
issued and outstanding as of December 31, 2016 and December 31, 2015, respectively
Common stock, 100.0 shares authorized, $0.001 par value, 38.8 shares and 37.4 shares
issued and outstanding as of December 31, 2016 and December 31, 2015, respectively
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss
Total stockholders’ equity
Total liabilities and stockholders’ equity
$
$
$
December 31,
2016
2015
$
$
1,036.6
1,518.0
714.6
845.2
394.3
167.9
73.5
2,195.5
432.1
1,788.0
167.8
122.8
201.1
4,907.3
52.6
117.3
225.6
96.4
491.9
95.9
587.8
430.2
182.3
83.3
3,250.4
458.4
2,283.3
150.9
142.8
201.1
6,486.9
68.5
136.4
240.6
151.0
596.5
112.6
709.1
$
$
—
—
—
4,211.8
1,574.9
(8.9)
5,777.8
6,486.9
$
—
3,429.8
899.2
(9.5)
4,319.5
4,907.3
See accompanying Notes to Consolidated Financial Statements.
59
INTUITIVE SURGICAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Table of Contents
Revenue:
Product
Service
Total revenue
Cost of revenue:
Product
Service
Total cost of revenue
Gross profit
Operating expenses:
Selling, general and administrative
Research and development
Total operating expenses
Income from operations
Interest and other income, net
Income before taxes
Income tax expense
Net income
Net income per share:
Basic
Diluted
Shares used in computing net income per share:
Basic
Diluted
Years Ended December 31,
2016
2015
2014
$
$
2,187.4
517.0
2,704.4
$
1,919.6
464.8
2,384.4
663.3
151.0
814.3
1,890.1
705.3
239.6
944.9
945.2
35.6
980.8
244.9
735.9
19.21
18.73
38.3
39.3
$
$
$
647.2
159.3
806.5
1,577.9
640.5
197.4
837.9
740.0
18.5
758.5
169.7
588.8
15.87
15.54
37.1
37.9
$
$
$
$
$
$
1,702.7
429.0
2,131.7
569.9
148.0
717.9
1,413.8
691.0
178.0
869.0
544.8
4.2
549.0
130.2
418.8
11.35
11.11
36.9
37.7
See accompanying Notes to Consolidated Financial Statements.
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INTUITIVE SURGICAL, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN MILLIONS)
Net income
Other comprehensive income (loss):
Change in foreign currency translation gains (losses)
Available-for-sale investments:
Change in unrealized losses, net of tax
Less: Reclassification adjustment for net gains (losses) on investments
recognized during the year, net of tax
Net change, net of tax effect
Derivative instruments:
Change in unrealized gains
Less: Reclassification adjustment for gains (losses) on derivative
instruments recognized during the year, net of tax
Net change, net of tax effect
Employee benefit plans:
Change in unrealized losses, net of tax
Less: Reclassification adjustment for gains (losses) on employee
benefit plans recognized during the year, net of tax
Net change, net of tax effect
Other comprehensive gains (losses)
Total comprehensive income
Years Ended December 31,
2016
2015
2014
$
735.9
$
588.8
$
418.8
2.0
(4.6)
0.2
(4.4)
4.1
(0.6)
3.5
(0.7)
(1.2)
(3.2)
(0.8)
(4.0)
7.8
(7.4)
0.4
(0.4)
0.2
(0.5)
0.6
736.5
$
0.8
0.4
(4.4)
584.4
$
$
(2.5)
(3.9)
2.0
(1.9)
8.6
(7.5)
1.1
(4.2)
0.3
(3.9)
(7.2)
411.6
See accompanying Notes to Consolidated Financial Statements.
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INTUITIVE SURGICAL, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(IN MILLIONS)
Balances at December 31, 2013
Issuance of common stock
through employee stock plans
Income tax benefit from
employee stock plans
Share-based compensation
expense related to employee
stock plans
Repurchase and retirement of
common stock
Net income
Other comprehensive loss
Balances at December 31, 2014
Issuance of common stock
through employee stock plans
Income tax benefit from
employee stock plans
Shares withheld related to net
share settlement of equity
awards
Share-based compensation
expense related to employee
stock plans
Repurchase and retirement of
common stock
Net income
Other comprehensive loss
Balances at December 31, 2015
Issuance of common stock
through employee stock plans
Income tax benefit from
employee stock plans
Shares withheld related to net
share settlement of equity
awards
Share-based compensation
expense related to employee
stock plans
Repurchase and retirement of
common stock
Net income
Other comprehensive income
Common Stock
Shares
Amount
Additional
Paid-In
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income (loss)
38.2
$
— $
2,519.9
$
979.4
$
2.1
$
0.9
(2.5)
283.6
13.9
168.9
(89.5)
(910.5)
418.8
36.6
$
— $
2,896.8
$
487.7
$
(7.2)
(5.1) $
1.2
(0.4)
361.1
21.4
(1.1)
(9.9)
167.9
(16.3)
(167.4)
588.8
37.4
$
— $
3,429.8
$
899.2
$
(4.4)
(9.5) $
1.5
(0.1)
580.9
29.8
(2.2)
(21.8)
177.6
(4.1)
(38.4)
735.9
Total
3,501.4
283.6
13.9
168.9
(1,000.0)
418.8
(7.2)
3,379.4
361.1
21.4
(11.0)
167.9
(183.7)
588.8
(4.4)
4,319.5
580.9
29.8
(24.0)
177.6
(42.5)
735.9
0.6
(8.9) $
0.6
5,777.8
Balances at December 31, 2016
38.8
$
— $
4,211.8
$
1,574.9
$
See accompanying Notes to Consolidated Financial Statements.
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INTUITIVE SURGICAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
Operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and loss on disposal of property, plant, and equipment, net
Amortization of intangible assets
Loss (gain) on investment, accretion of discounts, and amortization of
premiums on investments, net
Deferred income taxes
Income tax benefits from employee stock plans
Excess tax benefit from employee stock plans
Share-based compensation expense
Changes in operating assets and liabilities, net of effects of acquisition:
Accounts receivable
Inventory
Prepaids and other assets
Accounts payable
Accrued compensation and employee benefits
Deferred revenue
Other liabilities
Net cash provided by operating activities
Investing activities:
Purchase of investments
Proceeds from sales of investments
Proceeds from maturities of investments
Purchase of property, plant and equipment, intellectual property
Acquisition of business, net of cash acquired
Net cash used in investing activities
Financing activities:
Proceeds from issuance of common stock relating to employee stock plans
Excess tax benefit from employee stock plans
Taxes paid related to net share settlement of equity awards
Repurchase and retirement of common stock
Other financing activities
Net cash provided by (used in) financing activities
Effect of exchange rate changes on cash and cash equivalents
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
$
Years Ended December 31,
2016
2015
2014
$
735.9
$
588.8
$
418.8
73.9
18.2
35.9
18.7
29.8
(44.1)
177.6
(35.9)
(46.7)
(28.7)
15.9
18.7
19.9
53.8
1,042.9
(2,585.5)
389.9
970.1
(53.9)
—
(1,279.4)
580.9
44.1
(24.0)
(42.5)
—
558.5
—
322.0
714.6
1,036.6
$
65.1
24.4
26.4
4.6
21.5
(34.3)
167.9
(79.2)
(10.7)
(10.5)
(11.3)
21.5
8.2
(10.5)
771.9
(1,827.4)
233.1
825.8
(81.0)
—
(849.5)
361.1
34.3
(11.0)
(183.7)
(7.3)
193.4
(1.5)
114.3
600.3
714.6
$
52.0
22.4
33.9
(35.0)
13.9
(24.0)
168.9
(13.7)
(26.8)
(67.6)
17.7
21.4
19.8
63.4
665.1
(1,344.6)
665.9
714.7
(105.6)
(84.3)
(153.9)
283.6
24.0
—
(1,000.0)
—
(692.4)
(0.6)
(181.8)
782.1
600.3
See accompanying Notes to Consolidated Financial Statements.
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INTUITIVE SURGICAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1.
DESCRIPTION OF THE BUSINESS
Intuitive Surgical, Inc. designs, manufactures, and markets da Vinci® Surgical Systems and related instruments and accessories,
which taken together, are advanced surgical systems that the Company considers an advanced generation of surgery. This advanced
generation of surgery, which the Company calls da Vinci Surgery, combines the benefits of MIS for patients with the ease of use,
precision and dexterity of open surgery. A da Vinci Surgical System consists of a surgeon’s console, a patient-side cart and a high
performance vision system. The da Vinci Surgical System translates a surgeon’s natural hand movements, which are performed
on instrument controls at a console, into corresponding micro-movements of instruments positioned inside the patient through
small incisions, or ports. The da Vinci Surgical System is designed to provide its operating surgeons with intuitive control, range
of motion, fine tissue manipulation capability and 3-D, HD vision while simultaneously allowing surgeons to work through the
small ports enabled by MIS procedures.
NOTE 2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted
accounting principles (“U.S. GAAP”) and include the accounts of the Company and its wholly-owned subsidiaries. All significant
inter-company balances and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and
assumptions that affect the amounts reported in the Consolidated Financial Statements and accompanying Notes to the Consolidated
Financial Statements. The accounting estimates that require management’s most significant, difficult and subjective judgments
include the valuation and recognition of investments, the valuation of the revenue and allowance for sales returns and doubtful
accounts, the estimation of hedging transactions, the valuation of inventory, the assessment of recoverability of intangible assets
and their estimated useful lives, revenue recognition, the valuation and recognition of share-based compensation, the recognition
and measurement of current and deferred income tax assets and liabilities, and legal contingencies estimates. Actual results could
differ materially from these estimates.
Concentrations of Credit Risk and Other Risks and Uncertainties
The carrying amounts for financial instruments consisting of cash and cash equivalents, accounts receivable, accounts payable
and accrued liabilities approximate fair value due to their short maturities. Marketable securities and derivative instruments are
stated at their estimated fair values, based on quoted market prices for the same or similar instruments. The counterparties to the
agreements relating to the Company’s investment securities and derivative instruments consist of various major corporations,
financial institutions, municipalities and government agencies of high credit standing.
The Company’s accounts receivable are derived from net revenue to customers and distributors located throughout the world.
The Company performs credit evaluations of its customers’ financial condition and, generally, requires no collateral from its
customers. The Company provides reserves for potential credit losses but has not experienced significant losses to date. As of
December 31, 2016, and 2015, 73% and 69%, respectively, of accounts receivable were from domestic customers. No single
customer represented more than 10% of total revenue for the years ended December 31, 2016, 2015, and 2014.
During the years ended December 31, 2016, 2015, and 2014, domestic revenue accounted for 72%, 71%, and 70% of total
revenue, respectively, while outside of the U.S. revenue accounted for 28%, 29%, and 30%, respectively, of total revenue for each
of the years then ended.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity from date of purchase of 90 days or less to
be cash equivalents.
Investments
Available-for-sale investments. The Company’s investments consist of U.S. treasury and U.S. government agency securities,
taxable and tax exempt municipal notes, corporate notes and bonds, commercial paper, and money market funds. The Company
has designated all investments as available-for-sale and therefore, such investments are reported at fair value, with unrealized
gains and losses recorded in accumulated other comprehensive income. For securities sold prior to maturity, the cost of securities
sold is based on the specific identification method. Realized gains and losses on the sale of investments are recorded in interest
and other income, net in the Consolidated Statements of Income. Investments with original maturities greater than approximately
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three months and remaining maturities less than one year are classified as short-term investments. Investments with remaining
maturities greater than one year are classified as long-term investments.
Other-than-temporary impairment. All of the Company’s investments are subject to a periodic impairment review. The
Company recognizes an impairment charge when a decline in the fair value of its investments below the cost basis is judged to
be other-than-temporary. Factors considered in determining whether a loss is temporary included the extent and length of time
the investment's fair value has been lower than its cost basis, the financial condition and near-term prospects of the investee, extent
of the loss related to credit of the issuer, the expected cash flows from the security, the Company’s intent to sell the security, and
whether or not the Company will be required to sell the security prior the expected recovery of the investment's amortized cost
basis. During the year ended December 31, 2014, the Company recorded pre-tax other-than-temporary losses of $8.5 million
related to equity investments. No such charges were recorded during the years ended December 31, 2016, and 2015.
Fair Value Measurements
The Company measures the fair value of money market funds, corporate equity securities and certain U.S. Treasury securities
based on quoted prices in active markets for identical assets as Level 1 securities. Marketable securities, measured at fair value
using Level 2 inputs, are primarily comprised of U.S. and non-U.S. government agencies and corporate debt securities. The
Company reviews trading activity and pricing for these investments as of the measurement date. When sufficient quoted pricing
for identical securities is not available, the Company uses market pricing and other observable market inputs for similar securities
obtained from various third party data providers. These inputs either represent quoted prices for similar assets in active markets
or have been derived from observable market data. This approach results in the Level 2 classification of these securities within
the fair value hierarchy.
Inventory
Inventory is stated at the lower of standard cost, which approximates actual costs, or market, on a first-in, first-out basis.
Inventory costs include direct materials, direct labor, and normal manufacturing overhead. The cost basis of the Company’s
inventory is reduced for any products that are considered excessive or obsolete based upon assumptions about future demand and
market conditions.
Property, Plant and Equipment
Property, plant and equipment are stated at cost, net of accumulated depreciation. Depreciation is computed on a straight-
line basis over the estimated useful lives of the assets generally as follows:
Building
Building improvements
Leasehold improvements
Equipment and furniture
Operating lease assets
Computer and office equipment
Enterprise-wide software
Purchased software
Useful Lives
Up to 30 years
Up to 15 years
Lesser of useful life or term of lease
5 years
Greater of lease term or 1 to 5 years
3 years
5 years
Lesser of 3 years or life of license
Depreciation expense for the years ended December 31, 2016, 2015, and 2014 was $70.7 million, $61.1 million, and $52.0
million, respectively.
Capitalized Software Costs for Internal Use
Internally developed software primarily includes enterprise-level business software that the Company customizes to meet its
specific operational needs. The Company capitalized costs for internal use software of $11.8 million, $14.8 million, and $12.0
million during the years ended December 31, 2016, 2015, and 2014, respectively. Upon being placed in service, these costs are
depreciated over an estimated useful life of up to 5 years.
Goodwill and Intangible Assets
Goodwill and intangible assets with indefinite useful lives are not amortized, but are tested for impairment at least annually
during the fourth fiscal quarter, or as circumstances indicate their value may no longer be recoverable. Goodwill represents the
excess of the purchase price over the fair value of net tangible and identifiable intangible assets. The Company continues to operate
in one segment, which is considered to be the sole reporting unit and therefore, goodwill was tested for impairment at the enterprise
level. As of December 31, 2016, there has been no impairment of goodwill.
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Intangible assets are carried at cost, net of accumulated amortization. The Company does not have intangible assets with
indefinite useful lives other than goodwill. Amortization is recorded on a straight-line basis over the intangible assets' useful lives,
which range from approximately 1 to 9 years.
Impairment of Long-lived assets
The Company evaluates long-lived assets, which include amortizable intangible and tangible assets, for impairment whenever
events or changes in circumstances indicate that the carrying value of long-lived assets may not be recoverable. The Company
recognizes such impairment in the event the net book value of such assets exceeds the future undiscounted cash flows attributable
to such assets. No material impairment losses were incurred in the periods presented.
Revenue Recognition
The Company’s revenue consists of product revenue resulting from the sales of systems, instruments and accessories, and
service revenue. The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred or
service has been rendered, the price is fixed or determinable, and collectability is reasonably assured. Revenue is presented net
of taxes collected from customers that are remitted to government authorities. The Company generally recognizes revenue at the
following points in time:
•
System sales. For systems sold directly to end customers, revenue is recognized when acceptance occurs, which is deemed
to have occurred upon customer acknowledgment of delivery or installation, depending on the terms of the arrangement. For
systems sold through distributors, revenue is recognized when title and risk of loss has transferred, which generally occurs at the
time of shipment. Distributors do not have price protection rights and the Company’s system arrangements generally do not
provide a right of return. The da Vinci Surgical Systems are delivered with a software component. However, because the software
and non-software elements function together to deliver the system’s essential functionality, the Company's arrangements are
excluded from being accounted for under software revenue recognition guidance.
•
Instruments and accessories. Revenue from sales of instruments and accessories is generally recognized at the time of
shipment. The Company allows its customers in the normal course of business to return unused products for a limited period of
time subsequent to initial purchase and records an allowance against revenue recognized based on historical experience.
•
Service. Service revenue is recognized ratably over the term of the service period. Revenue related to services performed
on a time-and-materials basis is recognized when it is earned and billable.
The Company offers its customers the opportunity to trade in their older systems for credit towards the purchase of a newer
generation system. The Company generally does not provide specified price trade-in rights or upgrade rights at the time of system
purchase. Such trade-in or upgrade transactions are separately negotiated based on the circumstances at the time of the trade-in
or upgrade, based on the then fair value of the system, and are generally not based on any pre-existing rights granted by the
Company. Accordingly, such trade-ins and upgrades are not considered as separate deliverables in the arrangement for a system
sale.
As part of a trade-in transaction, the customer receives a new generation system in exchange for its pre-owned system. The
trade-in credit is negotiated at the time of the trade-in and is applied towards the purchase price of the new generation unit. Traded-
in systems can be reconditioned and resold. The Company accounts for trade-ins consistent with the guidance in AICPA Technical
Practice Aid 5100.01, Equipment Sales Net of Trade-Ins (“TPA 5100.01”). The Company applies the accounting guidance by
crediting system revenue for the negotiated price of the new generation system, while the difference between (a) the trade-in
allowance and (b) the net realizable value of the traded-in system less a normal profit margin is treated as a sales allowance. The
value of the traded-in system is determined as the amount, after reconditioning costs are added, that will allow a normal profit
margin on the sale of the reconditioned unit to be generated. When there is no market for the traded-in units, no value is assigned.
Traded-in units are reported as a component of inventory until reconditioned and resold, or otherwise disposed.
In addition, customers may also have the opportunity to upgrade their systems, for example, by adding a fourth arm to a three-
arm system or adding a second surgeon console for use with the da Vinci Si and Xi Surgical System. Such upgrades are performed
by completing component level upgrades at the customer’s site. Upgrade revenue is recognized when the component level upgrades
are complete and all revenue recognition criteria are met.
The Company's system sale arrangements contain multiple elements including a system(s), system accessories, instruments,
accessories, and system service. The Company generally delivers all of the elements, other than service, within days of entering
into the system sale arrangement. Each of these elements is a separate unit of accounting. System accessories, instruments,
accessories, and service are also sold on a stand-alone basis.
For multiple-element arrangements, revenue is allocated to each unit of accounting based on their relative selling prices.
Relative selling prices are based first on vendor specific objective evidence of fair value (“VSOE”), then on third-party evidence
of selling price (“TPE”) when VSOE does not exist, and then on management's best estimate of the selling price (“ESP”) when
VSOE and TPE do not exist.
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The Company’s system sales arrangements generally include a one-year period of free service and four additional years of
service that are generally billed for separately on an annual basis at a contractually stated price. The revenue allocated to the free
service period is deferred and recognized ratably over the free service period. Amounts billed for the additional years of service
are recorded into deferred revenue when they are billed and recognized ratably over the service period. Deferred revenue, for the
periods presented, was primarily comprised of contract consideration related to services not yet performed.
Because the Company has neither VSOE nor TPE for its systems, the allocation of revenue is based on ESP for the systems
sold. The objective of ESP is to determine the price at which the Company would transact a sale, had the product been sold on a
stand-alone basis. The Company determines ESP for its systems by considering multiple factors, including, but not limited to,
features and functionality of the system, geographies, type of customer, and market conditions. The Company regularly reviews
ESP and maintains internal controls over establishing and updating these estimates.
Leases
The Company enters into sales-type lease and operating lease arrangements with certain qualified customers to purchase or
rent its systems. Sales-type leases have terms that generally range from 24 to 84 months and are usually collateralized by a security
interest in the underlying assets. Revenue related to multiple-element arrangements are allocated to lease and non-lease elements
based on their relative selling prices as prescribed by the Company's revenue recognition policy. Lease elements generally include
a da Vinci Surgical System, while non-lease elements generally include service, instruments and accessories. In determining
whether a transaction should be classified as a sales-type or operating lease, the Company considers the following terms: (1)
whether title of the system transfers automatically or for a nominal fee at the end of the term of the lease, (2) whether the present
value of the minimum lease payments are equal to or greater than 90% of the fair market value of the system at the inception of
the lease, (3) whether the life of the lease exceeds 75% of the life of the asset, and (4) whether there is an option to purchase the
asset at a "bargain price" at the end of the lease term.
The Company generally recognizes revenue from sales-type lease arrangements at the time the system is accepted by the
customer, assuming all other revenue recognition criteria have been met. Revenue from sales-type leases is presented as product
revenue. Revenue from operating lease arrangements is recognized as earned over the lease term, which is generally on a straight-
line basis and is presented as product revenue. Operating lease revenue for the years ended December 31, 2016, 2015, and 2014
was $16.6 million, $7.0 million, and $1.3 million, respectively.
Allowance for Sales Returns and Doubtful Accounts
The allowance for sales returns is based on the Company’s estimates of potential future product returns and other allowances
related to current period product revenue. The Company analyzes historical returns, current economic trends, and changes in
customer demand and acceptance of the Company's products. The allowance for doubtful accounts is based on the Company’s
assessment of the collectability of customer accounts. The Company regularly reviews the allowance by considering factors such
as historical experience, credit quality, the age of the accounts receivable balances, and current economic conditions that may
affect a customer’s ability to pay.
Share-Based Compensation
The Company accounts for share-based employee compensation plans using the fair value recognition and measurement
provisions under U.S. GAAP. The Company’s share-based compensation cost is measured at the grant date, based on the fair
value of the award, and is recognized as expense over the requisite service period.
Expected Term: The expected term represents the weighted-average period that the stock options are expected to be
outstanding prior to being exercised. The Company determines expected term based on historical exercise patterns and its
expectation of the time it will take for employees to exercise options still outstanding.
Expected Volatility: The Company uses market-based implied volatility for purposes of valuing options granted. Market-
based implied volatility is derived based on at least one-year traded options on the Company’s common stock. The extent to which
the Company relies on market-based volatility when valuing options, depend among other things, on the availability of traded
options on the Company’s stock and the term of such options. Due to sufficient volume of the traded options, the Company used
100% market-based implied volatility to value options granted, which the Company believes is more representative of future stock
price trends than historical volatility.
Risk-Free Interest Rate: The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant
for the expected term of the option.
The fair value of restricted stock units is determined based on the closing quoted price of the Company’s common stock on
the day of the grant. See “Note 9. Share-Based Compensation,” for a detailed discussion of the Company’s stock plans and share-
based compensation expense.
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Computation of Net Income per Share
Basic net income per share is computed using the weighted-average number of shares outstanding during the period. Diluted
net income per share is computed using the weighted-average number of shares and dilutive potential shares outstanding during
the period. Dilutive potential shares primarily consist of employee stock options and restricted stock units.
U.S. GAAP requires that employee equity share options, non-vested shares and similar equity instruments granted by the
Company be treated as potential common shares outstanding in computing diluted earnings per share. Diluted shares outstanding
include the dilutive effect of equity awards, which is calculated based on the average share price for each fiscal period using the
treasury stock method. Under the treasury stock method, the amount the employee must pay for exercising stock options, the
amount of compensation cost for future service that the Company has not yet recognized, and the amount of tax benefits that would
be recorded in additional-paid-in-capital (“APIC”) when the award becomes deductible are all assumed to be used to repurchase
shares.
Research and Development Expenses
Research and development expenses include amortization of intangible assets, costs associated with co-development R&D
licensing arrangements, costs of prototypes, salaries, benefits and other headcount related costs, contract and other outside service
fees, and facilities and overhead costs.
Foreign Currency and Other Hedging Instruments
For subsidiaries whose local currency is their functional currency, their assets and liabilities are translated into U.S. dollars
at exchange rates at the balance sheet date and revenues and expenses are translated using average exchange rates in effect during
the period. Gains and losses from foreign currency translation are included in accumulated other comprehensive income (loss)
within stockholders’ equity in the Consolidated Balance Sheets. For all non-functional currency account balances, the re-
measurement of such balances to the functional currency results in either a foreign exchange gain or loss, which is recorded to
interest and other income, net in the Consolidated Statements of Income in the same accounting period that the re-measurement
occurred.
The Company uses derivatives to partially offset its business exposure to foreign currency exchange risk. The terms of the
Company's derivative contracts are generally twelve months or shorter. The Company typically hedges portions of its forecasted
foreign currency exposure associated with revenue and expenses. The Company may also enter into foreign currency forward
contracts to offset the foreign currency exchange gains and losses generated by re-measurement of certain assets and liabilities
denominated in non-functional currencies. The hedging program is not designated for trading or speculative purposes.
The Company’s accounting policies for these instruments are based on whether the instruments are designated as hedge or
non-hedge instruments. The Company records all derivatives on the Consolidated Balance Sheets at fair value. The effective
portions of cash flow hedges are recorded in other comprehensive income (loss) (“OCI”) until the hedged item is recognized in
earnings. Derivative instruments designated as cash flow hedges are de-designated as hedges when it is probable the forecasted
hedged transaction will not occur in the initially identified time period or within a subsequent two month time period. Gains and
losses in OCI associated with such derivative instruments are reclassified immediately into earnings through interest and other
income, net. Any subsequent changes in fair value of such derivative instruments also are reflected in current earnings.
Derivatives that are not designated as hedging instruments and the ineffective portions of cash flow hedges are adjusted to
fair value through earnings in interest and other income, net.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable income in the year in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date. Valuation allowances are established when necessary to reduce deferred
tax assets to the amounts that are expected more likely than not to be realized in the future.
The Company recognizes tax benefits from uncertain tax positions only if it is more likely than not that the tax position will
be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized
in the financial statements from such positions are then measured based on the largest benefit that has a greater than 50% likelihood
of being realized upon ultimate settlement.
Segments
The Company operates in one segment. Management uses one measurement of profitability and does not segregate its business
for internal reporting. As of December 31, 2016 and 2015, 86% and 88% of long-lived assets were in the United States. Revenue
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is attributed to a geographic region based on the location of the end customer. For the years ended December 31, 2016, 2015, and
2014, 72%, 71%, and 70%, respectively, of net revenue were generated in the United States.
Legal Contingencies
The Company is involved in a number of legal proceedings involving product liability, intellectual property, shareholder
derivative actions, securities class actions, and other matters. A liability and related charge are recorded to earnings in the Company's
consolidated financial statements for legal contingencies when the loss is considered probable and the amount can be reasonably
estimated. The assessment is reevaluated each accounting period and is based on all available information, including discussion
with outside legal counsel. If a reasonable estimate of a known or probable loss cannot be made, but a range of probable losses
can be estimated, the low-end of the range of losses is recognized if no amount within the range is a better estimate than any other.
If a material loss is reasonably possible, but not probable and can be reasonably estimated, the estimated loss or range of loss is
disclosed in the notes to the consolidated financial statements. The Company expenses legal fees as incurred.
When determining the estimated probable loss or range of losses, significant judgment is required to be exercised in order to
estimate the amount and timing of the loss to be recorded. Estimates of probable losses resulting from litigation are inherently
difficult to make, particularly when the matters are in early procedural stages with incomplete facts and information. The final
outcome of legal proceedings is dependent on many variables difficult to predict, and therefore, the ultimate cost to entirely resolve
such matters may be materially different than the amount of current estimates. Consequently, new information or changes in
judgments and estimates could have a material adverse effect on the Company's business, financial condition, and results of
operations or cash flows.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No.
2014-09, Revenue from Contracts with Customers. This new standard will replace most of the existing revenue recognition guidance
in U.S. GAAP when it becomes effective and permits the use of either the retrospective or cumulative effect transition method.
The new standard, as amended, becomes effective for the Company in the first quarter of fiscal year 2018, but allows the Company
to adopt the standard one year earlier if it so chooses. The Company currently plans to adopt this accounting standard in the first
quarter of fiscal year 2018.
The Company currently anticipates adopting this ASU using the full retrospective method to restate each prior reporting period
presented in our consolidated financial statements. While the Company is continuing to assess the effect of this new standard, the
Company currently believes that contractual future billings related to services included in our multi-year contracts will be considered
performance obligations that should be part of the contract consideration allocated to all deliverables. Under the current standard
future service billings are considered to be contingent revenue. Accordingly, the amount of contract consideration allocated to the
performance obligations identified in the Company’s system arrangements would be different under the new standard than the
amount allocated under the current standard. The Company currently expects that under the new standard a greater amount of the
contract consideration would be allocated to the product-related performance obligations, which are generally delivered upfront.
In addition, the Company also expects that incremental contract acquisition costs of obtaining revenue generating contracts, such
as sales commissions paid in connection with system sales with multi-year service commitments, would be capitalized and amortized
over the economic life of the contract. Under the current guidance, the Company expenses such costs when incurred.
The new revenue standard is principle based and interpretation of those principles may vary from company to company based
on their unique circumstances. It is possible that interpretation, industry practice, and guidance may evolve as companies and the
accounting profession work to implement this new standard. The Company is still in the process of evaluating the effect of the
new standard on the Company’s historical financial statements. While the Company has not completed its evaluation, the Company
currently believes that the impact to revenue and expense recognized will not be material to any of the years presented. As the
Company completes its evaluation of this new standard, new information may arise that could change the Company's current
understanding of the impact to revenue and expense recognized. Additionally, the Company will continue to monitor industry
activities and any additional guidance provided by regulators, standards setters, or the accounting profession and adjust the
Company’s assessment and implementation plans accordingly.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which amends the existing accounting standards
for leases. The new standard requires lessees to record a right-of-use asset and a corresponding lease liability on the balance sheet
(with the exception of short-term leases). The new standard also requires expanded disclosures regarding leasing arrangements.
The new standard becomes effective for the Company in the first quarter of fiscal year 2019 and early adoption is permitted. The
new standard is required to be adopted using the modified retrospective approach and requires application of the new standard at
the beginning of the earliest comparative period presented. The Company generally does not finance purchases of equipment or
other capital, but does lease some of its facilities. The Company’s customers finance purchases of da Vinci systems and ancillary
products, including directly with the Company. It is currently unknown whether the new standard will change customer buying
69
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patterns or behaviors. The Company is evaluating the effect that this new standard will have on its Consolidated Financial Statements
and related disclosures.
In March 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-based Payment Accounting. This ASU
simplifies the accounting for share-based payment transactions, including the income tax consequences, classification of awards
as either equity or liabilities, and classification on the statement of cash flows. This ASU requires that excess tax benefits and
deficiencies be recognized as income tax benefit or expense in the income statement, instead of in equity as under the current
guidance. In addition, these amounts will be classified as an operating activity in the statement of cash flows, instead of as a
financing activity as they are currently presented. The Company currently plans to implement this ASU as required in the first
quarter of fiscal year 2017. The Company also plans to apply the presentation requirements related to the presentation of excess
tax benefits in the statement of cash flows retrospectively. The Company does not believe that a cumulative effect adjustment will
be recorded in the year of adoption, but the Company anticipates increased income tax expense volatility as a result of adopting
this ASU.
In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfer of Assets Other than
Inventory, which requires the recognition of the income tax consequences of an intra-entity transfer of an asset, other than inventory,
when the transfer occurs. This ASU will be effective for the Company in first quarter of 2018 with early adoption permitted. This
ASU is required to be adopted using the modified retrospective approach, with a cumulative catch-up adjustment to retained
earnings in the period of adoption. The Company is currently evaluating the impact of adopting this ASU on its consolidated
financial statements.
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business,
which clarifies the definition of a business to assist entities with evaluating whether transactions should be accounted for as
acquisitions (or disposals) of assets or businesses. The standard will be effective for the Company in the first quarter of 2018.
Early adoption is permitted. The Company is currently evaluating the impact of adopting this ASU on its consolidated financial
statements.
NOTE 3.
FINANCIAL INSTRUMENTS
Cash, Cash Equivalents and Investments
The following tables summarize the Company’s cash and available-for-sale marketable securities’ amortized cost, gross
unrealized gains, gross unrealized losses, and fair value by significant investment category reported as cash and cash equivalents
or short-term or long-term investments as of December 31, 2016, and 2015 (in millions):
December 31, 2016
Cash
Level 1:
Money market funds
U.S. treasuries
Subtotal
Level 2:
Commercial paper
Corporate securities
U.S. government agencies
Non-U.S. government
securities
Municipal securities
Subtotal
Total assets measured at fair
value
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
Cash and
Cash
Equivalents
Short-term
Investments
Long-term
Investments
Reported as:
$
227.7
$
— $
— $
227.7
$
227.7
$
— $
—
612.4
625.9
1,238.3
139.6
1,471.8
938.7
18.5
815.4
3,384.0
—
0.1
0.1
—
0.7
0.5
—
—
1.2
—
(2.0)
(2.0)
—
(5.0)
(2.9)
—
(3.5)
(11.4)
612.4
624.0
1,236.4
139.6
1,467.5
936.3
18.5
811.9
3,373.8
612.4
157.9
770.3
31.1
2.9
—
—
4.6
38.6
—
168.4
168.4
108.5
555.4
342.7
—
297.7
297.7
—
909.2
593.6
16.0
327.0
1,349.6
2.5
480.3
1,985.6
$ 4,850.0
$
1.3
$
(13.4) $ 4,837.9
$ 1,036.6
$ 1,518.0
$ 2,283.3
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December 31, 2015
Cash
Level 1:
Money market funds
U.S. treasuries & corporate
equity securities
Subtotal
Level 2:
Commercial paper
Corporate securities
U.S. government agencies
Non-U.S. government
securities
Municipal securities
Subtotal
Total assets measured at fair
value
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
Cash and
Cash
Equivalents
Short-term
Investments
Long-term
Investments
Reported as:
$
202.6
$
— $
— $
202.6
$
202.6
$
— $
430.6
253.6
684.2
76.4
1,131.0
618.5
28.8
611.9
2,466.6
—
—
—
—
0.8
—
—
0.6
1.4
—
430.6
430.6
(1.8)
(1.8)
—
(3.0)
(1.5)
(0.1)
(0.6)
(5.2)
251.8
682.4
76.4
1,128.8
617.0
28.7
611.9
2,462.8
50.6
481.2
3.8
—
27.0
—
—
30.8
—
52.4
52.4
72.6
384.5
194.8
10.3
130.6
792.8
—
—
148.8
148.8
—
744.3
395.2
18.4
481.3
1,639.2
$ 3,353.4
$
1.4
$
(7.0) $ 3,347.8
$
714.6
$
845.2
$ 1,788.0
There were no transfers between Level 1 and Level 2 measurements during the year ended December 31, 2016, and there
were no changes in the valuation techniques used.
The following table summarizes the contractual maturities of the Company’s marketable cash equivalents and available-for-
sale investments (excluding cash and money market funds), at December 31, 2016 (in millions):
Mature in less than one year
Mature in one to five years
Total
Amortized
Cost
Fair
Value
$
$
1,714.9
2,295.0
4,009.9
$
$
1,714.5
2,283.3
3,997.8
Realized gains and losses, net of tax, were not material for any of the periods presented.
As of December 31, 2016, and 2015, net unrealized losses on investments of $8.6 million and $4.2 million, net of tax,
respectively, were included in accumulated other comprehensive loss in the accompanying Consolidated Balance Sheets.
The following tables present the breakdown of the available-for-sale investments with unrealized losses at December 31,
2016, and 2015 (in millions):
December 31, 2016
Corporate securities
U.S. Treasuries
U.S. Government and agency securities
Municipal securities
December 31, 2015
Corporate securities
U.S. Treasuries and equity securities
U.S. Government and agency securities
Municipal securities
Non-U.S. government securities
Unrealized losses less
than 12 months
Unrealized losses 12
months or greater
Total
Fair
Value
$ 1,056.1
357.1
538.2
728.8
$ 2,680.2
$
869.9
231.2
561.7
340.0
28.7
$ 2,031.5
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
(5.0) $
(2.0)
(2.9)
(3.5)
(13.4) $
(3.0) $
(1.8)
(1.5)
(0.6)
(0.1)
(7.0) $
$
$
$
$
71
— $
—
—
—
— $
— $
—
—
—
—
— $
— $ 1,056.1
357.1
—
538.2
—
728.8
—
— $ 2,680.2
869.9
— $
231.2
—
561.7
—
340.0
—
28.7
—
— $ 2,031.5
$
$
$
$
(5.0)
(2.0)
(2.9)
(3.5)
(13.4)
(3.0)
(1.8)
(1.5)
(0.6)
(0.1)
(7.0)
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The unrealized losses on the available-for-sale investments are related to corporate securities and government securities. The
Company determined these unrealized losses to be temporary. Factors considered in determining whether a loss is temporary
included the length of time and extent to which the investment's fair value has been less than the cost basis; the financial condition
and near-term prospects of the investee; extent of the loss related to credit of the issuer; the expected cash flows from the security;
the Company’s intent to sell the security; and whether or not the Company will be required to sell the security before the recovery
of its amortized cost.
Foreign currency derivatives
The objective of the Company’s hedging program is to mitigate the impact of changes in currency exchange rates on net cash
flow from foreign currency denominated sales, expenses, and intercompany balances and other monetary assets or liabilities
denominated in currencies other than the U.S. dollar ("USD"). The derivative assets and liabilities are measured using Level 2
fair value inputs.
Cash Flow Hedges
The Company enters into currency forward contracts as cash flow hedges to hedge certain forecasted revenue transactions
denominated in currencies other than the USD, primarily the European Euro (“EUR”), the British Pound (“GBP”), the Japanese
Yen (“JPY”), and the Korean Won (“KRW”). The Company also enters into currency forward contracts as cash flow hedges to
hedge certain forecasted expense transactions denominated in EUR and Swiss Franc (“CHF”).
For these derivatives, the Company reports the after-tax gain or loss from the hedge as a component of accumulated other
comprehensive income (loss) in stockholders' equity and reclassifies into earnings in the same period in which the hedge transaction
affects earnings. The Company reclassified net gains of $0.9 million, $7.2 million, and $7.5 million to revenue related to the
hedged revenue transactions for the years ended December 31, 2016, 2015, and 2014, respectively. The amounts reclassified to
expenses related to the hedged transactions and the ineffective portions of cash flow hedges were not material for the periods
presented.
Other Derivatives Not Designated as Hedging Instruments
Other derivatives not designated as hedging instruments consist primarily of forward contracts that the Company uses to
hedge intercompany balances and other monetary assets or liabilities denominated in currencies other than the USD, primarily
the EUR, GBP, JPY, KRW, and CHF.
These derivative instruments are used to hedge against balance sheet foreign currency exposures. The related gains and losses
were as follows (in millions):
Recognized gains (losses) in interest and other income, net
Foreign exchange gains (losses) related to balance sheet re-measurement
Years Ended December 31,
2016
2015
2014
$
$
$
6.4
(5.6) $
$
7.0
(7.9) $
5.7
(6.9)
The notional amounts for derivative instruments provide one measure of the transaction volume. Total gross notional amounts
(in USD) for derivatives and aggregate gross fair value outstanding at the end of each period were as follows (in millions):
Notional amounts:
Forward contracts
Gross fair value recorded in:
Prepaid and other current assets
Other accrued liabilities
Derivatives Designated as Hedging
Instruments
Derivatives Not Designated as
Hedging Instruments
December 31,
2016
December 31,
2015
December 31,
2016
December 31,
2015
$
$
$
109.7
6.2
1.0
$
$
$
89.1
2.0
0.5
$
$
$
143.7
5.6
0.6
$
$
$
128.7
2.6
0.2
NOTE 4.
BALANCE SHEET DETAILS AND OTHER FINANCIAL INFORMATION
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The following table provides details of the inventories (in millions):
Inventory:
Raw materials
Work-in-process
Finished goods
Total inventory
December 31,
2016
2015
$
$
$
54.8
13.4
114.1
182.3
$
53.3
10.2
104.4
167.9
The following table provides details of the property, plant and equipment, net (in millions):
December 31,
2016
2015
Property, plant and equipment, net:
Land
Building and building/leasehold improvements
Machinery and equipment
Operating lease assets
Computer and office equipment
Capitalized software
Construction-in-process
Gross property, plant and equipment
Less: Accumulated depreciation*
Total property, plant and equipment, net
*Accumulated depreciation associated with operating lease assets
$
131.7
$
199.5
217.7
34.7
41.3
114.2
41.2
780.3
(321.9)
458.4
$
131.7
191.5
197.6
15.0
35.7
84.5
43.2
699.2
(267.1)
432.1
$
$
(6.8) $
(2.6)
The following table provides details of the other accrued liabilities—short term (in millions):
Other accrued liabilities—short term:
Taxes payable
Tolled product liability claims accrued
Other accrued liabilities
Total other accrued liabilities—short-term
December 31,
2016
2015
$
$
$
40.4
20.5
90.1
151.0
$
11.4
24.4
60.6
96.4
The following table provides details of the other long-term liabilities balance sheet item (in millions):
Other long-term liabilities:
Income taxes—long term
Other long-term liabilities
Total other long-term liabilities
73
December 31,
2016
2015
$
$
84.9
27.7
112.6
$
$
74.3
21.6
95.9
Table of Contents
Supplemental Cash flow Information
The following table provides supplemental cash flow information (in millions):
Income taxes paid
Supplemental non-cash investing activities:
Years Ended December 31,
2016
$ 138.4
2015
$ 110.3
2014
$ 176.8
Equipment transfers from inventory to property, plant and equipment
$
39.3
$
26.7
$
27.2
NOTE 5.
LEASES
(a) Lease Receivables
Lease receivables relating to sales-type lease arrangements are presented on the Consolidated Balance Sheets as follows (in
millions):
Gross lease receivables
Unearned income
Allowance for credit loss
Net investment in sales-type leases
Reported as:
Prepaids and other current assets
Intangible and other assets, net
Total, net
December 31,
2016
2015
$
$
104.3
(4.8)
(0.6)
98.9
29.8
69.1
98.9
$
$
67.1
(3.4)
(0.4)
63.3
16.1
47.2
63.3
Contractual maturities of gross lease receivables at December 31, 2016, are as follows (in millions):
Fiscal Year
2017
2018
2019
2020
2021
2022 and thereafter
Total
(b) Operating Leases
Amount
32.1
31.6
22.0
12.5
5.1
1.0
104.3
$
The Company's operating lease terms are generally less than five years. Future minimum lease payments related to
noncancelable portion of operating leases at December 31, 2016 are as follows (in millions):
Fiscal Year
2017
2018
2019
2020
2021
2022 and thereafter
Total
Amount
24.4
22.7
19.9
13.7
4.5
0.5
85.7
$
Contingent rental revenue relating to operating lease arrangements were not material for the periods presented.
NOTE 6.
INTANGIBLE ASSETS
The following table summarizes the components of gross intangible asset, accumulated amortization, and net intangible asset
balances as of December 31, 2016, and 2015 (in millions):
74
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December 31, 2016
December 31, 2015
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
Patents and developed technology
$
158.7
$
Distribution rights and others
Customer relationships
Total intangible assets
9.2
28.6
$
196.5
$
(141.6) $
(9.1)
(14.3)
(165.0) $
17.1
$
159.7
$
0.1
14.3
31.5
9.2
28.6
$
197.5
$
(129.6) $
(8.0)
(10.2)
(147.8) $
30.1
1.2
18.4
49.7
Amortization expense related to intangible assets was $18.2 million, $24.4 million, and $22.4 million for the years ended
December 31, 2016, 2015, and 2014, respectively.
The estimated future amortization expense related to intangible assets as of December 31, 2016, is as follows (in millions):
Fiscal Year
2017
2018
2019
2020
2021
2022 and thereafter
Total
Amount
12.5
8.6
3.6
3.4
2.3
1.1
31.5
$
$
NOTE 7.
COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company leases space for operations in United States, Mexico, Japan, South Korea, and certain other foreign countries.
The Company also leases automobiles for certain sales and field service employees. These leases have varying terms up to fifteen
years.
Future minimum lease commitments under the Company’s operating leases as of December 31, 2016, are as follows (in
millions):
Fiscal Year
2017
2018
2019
2020
2021
2022 and thereafter
Total
Amount
7.1
5.7
3.5
2.8
2.6
15.0
36.7
$
$
Other commitments include an estimated amount of approximately $345.8 million relating to the Company's open purchase
orders and contractual obligations that occur in the ordinary course of business, including commitments with suppliers, for which
we have not received the goods or services.
CONTINGENCIES
The Company is involved in a variety of claims, lawsuits, investigations and proceedings relating to securities laws, product
liability, intellectual property, insurance, contract disputes, employee related, and other matters. Certain of these lawsuits and
claims are described in further detail below. It is not possible to predict what the outcome of these matters will be and the Company
cannot guarantee that any resolution will be reached on commercially reasonable terms, if at all. With the exception of the charges
recorded related to the Company’s estimate of the probable loss associated with the tolled product liability claims described below,
the Company has determined that an estimate of either probable losses or range of loss related to material pending or threatened
litigation matters cannot be determined as of December 31, 2016. Nevertheless, it is possible that future legal costs (including
settlements, judgments, legal fees and other related defense costs) could have a material adverse effect on the Company's business,
financial position, or future results of operations.
75
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The Company is also a party to various other legal actions that arise in the ordinary course of business and does not believe
that any of these other legal actions will have a material adverse impact on the Company's business, financial position, or future
results of operations.
In accordance with U.S. GAAP, the Company records a liability when it is both probable that a liability has been incurred
and the amount of the loss can be reasonably estimated. These provisions are reviewed at least quarterly and adjusted to reflect
the impact of negotiations, settlements, rulings, advice of legal counsel, and other information and events pertaining to each case.
Purported Shareholder Class Action Lawsuits filed April 26, 2013 and May 24, 2013
On April 26, 2013, a purported class action lawsuit entitled Abrams v. Intuitive Surgical, et al., No. 5-13-cv-1920, was filed
against a number of the Company's current and former officers and directors in the United States District Court for the Northern
District of California. A substantially identical complaint, entitled Adel v. Intuitive Surgical, et al., No. 5:13-cv-02365, was filed
in the same court against the same defendants on May 24, 2013. The Adel case was voluntarily dismissed without prejudice on
August 20, 2013.
On October 15, 2013, plaintiffs in the Abrams matter filed an amended complaint. The case has since been re-titled In re
Intuitive Surgical Securities Litigation, No. 5:13-cv-1920. The plaintiffs seek unspecified damages on behalf of a putative class
of persons who purchased or otherwise acquired the Company's common stock between February 6, 2012, and July 18, 2013. The
amended complaint alleges that the defendants violated federal securities laws by allegedly making false and misleading statements
and omitting certain material facts in certain public statements and in the Company's filings with the SEC. On November 18, 2013,
the court appointed the Employees’ Retirement System of the State of Hawaii as lead plaintiff and appointed lead counsel. The
Company filed a motion to dismiss the amended complaint on December 16, 2013, which was granted in part and denied in part
on August 21, 2014. The plaintiffs elected not to further amend their complaint at that time. On October 22, 2014, the court granted
the Company’s motion for leave to file a motion for reconsideration of the court’s August 21, 2014, order. The Company filed its
motion for reconsideration on November 5, 2014. Following opposition and reply briefing, the court denied the motion on December
15, 2014, allowing the case to move forward on the claims that remain. The plaintiffs moved for class certification on September
1, 2015, the Company filed its opposition on October 15, 2015, and the plaintiffs filed their reply on November 16, 2015. On
January 21, 2016, the court held a hearing on the motion. While that motion remained pending, on October 11, 2016, the Company
sent plaintiffs’ lead counsel Labaton Sucharow LLP a letter enclosing a draft motion for sanctions pursuant to Federal Rule of
Civil Procedure 11, primarily based on statements to the court that lacked a proper factual basis. In response, on November 1,
2016, plaintiffs’ local counsel withdrew from the case entirely and withdrew their signatures from the disputed pleadings. On
November 2, 2016, Labaton Sucharow filed a motion for leave to file an amended complaint that did not include the disputed
statements. On November 16, 2016, the Company filed an opposition to plaintiffs’ motion, along with an independent motion to
strike the amended complaint and the pleadings from which plaintiffs’ local counsel withdrew their signatures. Following additional
briefing, the motion for leave to amend and motion to strike were fully submitted to the Court on November 23, 2016, and December
7, 2016, respectively. At a conference on December 15, 2016, the court informed the parties that it would issue written rulings by
January 30, 2017, addressing the motion to amend and motion to strike. At the Company’s request, the court vacated the case
schedule in the interim, with instructions for the parties to devise a new schedule within 15 days of its rulings. On December 22,
2016, the court entered an order granting plaintiffs’ motion for class certification. In a footnote, the court indicated that it will
grant plaintiffs’ motion for leave to file an amended complaint. On January 25, 2017, the court entered an order granting plaintiffs’
motion for leave to amend the complaint and denying the Company’s motion to strike. On January 5, 2017, the Company filed a
Petition for Permission to Appeal from the court’s December 22, 2016 order granting class certification in the Ninth Circuit Court
of Appeals. The Court of Appeals has not yet ruled on the Company’s Petition. Based on currently available information, the
Company does not believe the resolution of this matter will have a material adverse effect on the Company's business, financial
position, or future results of operations.
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Purported Derivative Actions filed on February 3, 2014, February 21, 2014, March 21, 2014, June 3, 2014, and March 5,
2015
On February 3, 2014, an alleged stockholder, Robert Berg, caused a purported stockholder’s derivative lawsuit entitled Berg
v. Guthart et al., No. 4:14-CV-00515, to be filed in the United States District Court for the Northern District of California. The
lawsuit names the Company as a nominal defendant and names a number of the Company’s current and former officers and
directors as defendants. The plaintiff seeks to recover, on the Company’s behalf, unspecified damages purportedly sustained by
the Company in connection with allegedly misleading statements and/or omissions made in connection with the Company’s
financial reporting for the period between 2012 and early 2014. The plaintiff also seeks a series of changes to the Company’s
corporate governance policies and an award of attorneys’ fees. On April 3, 2014, the case was related to In re Intuitive Surgical
Securities Litigation. On July 30, 2014, the court granted Berg’s motion to be appointed lead plaintiff, denied the City of
Birmingham’s motion seeking such appointment (see below for additional description), and re-titled the matter In re Intuitive
Surgical, Inc. Shareholder Derivative Litigation, No. 4:14-CV-00515. On August 13, 2014, the plaintiffs filed a consolidated
complaint, making allegations substantially similar to the allegations in the original complaint. On September 12, 2014, the
Company filed a motion to dismiss the consolidated complaint. The plaintiffs filed an opposition on October 9, 2014, and the
Company filed its reply on October 30, 2014. The court denied the Company's motion to dismiss on November 16, 2015. On
January 26, 2016, the Company moved to stay this lawsuit in favor of Public School Teachers’ Pension and Retirement Fund of
Chicago v. Guthart et al. (see below for additional description). Plaintiff opposed the motion to stay on February 16, 2016, the
Company filed its reply on March 1, 2016, and a hearing was set for June 16, 2016. While the motion was pending, however, the
Company and the plaintiff agreed in principle that the plaintiff would file a motion to intervene in the Public School Teachers’
Pension and Retirement Fund of Chicago action and withdraw his opposition to the motion to stay. On March 17, 2016, the parties
jointly requested that the court not rule on the motion to stay while the agreement was being implemented. Following additional
negotiations, the plaintiff filed an unopposed motion to intervene on April 29, 2016. After additional briefing, on May 23, 2016,
the court in the Public School Teacher's Pension and Retirement Fund of Chicago action granted the motion. Accordingly, on
May 31, 2016, the parties filed a stipulation requesting that the court stay In re Intuitive Surgical, Inc. Shareholder Derivative
Litigation. The court granted the stay on June 2, 2016. Additional discussions between the parties ensued, and on September 15,
2016, they executed a confidential Memorandum of Understanding that contains the essential terms of a settlement to which the
parties have agreed in principle. That settlement, which is still being finalized, will provide for a dismissal with prejudice and
release of all claims brought in both the In re Intuitive Surgical, Inc. Shareholder Derivative Litigation action and the Public School
Teachers’ Pension and Retirement Fund of Chicago action, as well as City of Plantation Police Officers’ Employees’ Retirement
System v. Guthart et al. (see below for additional description). The settlement will be subject to court approval as described below.
In the interim, the In re Intuitive Surgical, Inc. Shareholder Derivative Litigation action remains stayed. It is probable that the
final settlement agreement will include terms that will require the Company to reimburse the plaintiffs' lawyers' legal fees. At this
time, the Company is unable to estimate the probable amount of those legal fees. Based on currently available information, the
Company does not believe the resolution of this matter will have a material adverse effect on the Company's business, financial
position or future results of operations.
On February 21, 2014, a second alleged stockholder caused a substantially similar purported stockholder’s derivative lawsuit
entitled Public School Teachers’ Pension and Retirement Fund of Chicago v. Guthart et al., No. CIV 526930, to be filed in the
Superior Court of the State of California, County of San Mateo, against the same parties and seeking the same relief. On March
26, 2014, the case was removed to the United States District Court for the Northern District of California, where it was related to
In re Intuitive Surgical Securities Litigation and Berg v. Guthart on April 30, 2014. The district court remanded the case back to
San Mateo County Superior Court on June 30, 2014. On August 28, 2014, the Company filed a motion seeking to stay the case
in favor of the federal action and asking that the plaintiff be required to post a bond on the grounds that the action was duplicative
and was not in the Company’s best interests. On November 13, 2014, the superior court entered an order denying in part the
Company’s motion to stay and denying the Company's request for plaintiff's bond. On November 18, 2014, the Company petitioned
the First Appellate District of the California, Court of Appeal for a writ of mandate directing the superior court to stay the case in
its entirety. At the same time, the Company requested an immediate stay of proceedings pending resolution of the petition. On
November 19, 2014, the court of appeal granted the Company’s request for an immediate stay of the proceedings and set a briefing
schedule for the petition. The plaintiff filed its opposition to the petition on December 8, 2014, and the Company filed its reply
on December 22, 2014. The petition was denied on January 8, 2015. On January 20, 2015, the Company filed a demurer (moved
to dismiss the complaint). The plaintiff filed its opposition to the demurrer on February 10, 2015, and the Company filed its reply
on February 20, 2015. A hearing was held on February 27, 2015, and the court overruled the demurrer on March 27, 2015. The
court's order was entered on April 2, 2015. On June 19, 2015, the Company moved for summary judgment, and a hearing on the
Company's motion was set for September 4, 2015. On July 6, 2015, the court amended the case schedule, and the Company
withdrew its motion for summary judgment. The court later further amended the case schedule, and trial was eventually reset for
September 16, 2016. On May 23, 2016, the court granted an unopposed motion to intervene filed by the plaintiffs in In re Intuitive
Surgical, Inc. Shareholder Derivative Litigation and City of Birmingham Relief and Retirement System v. Guthart et al. (see above
and below for additional description). The Company filed a new motion for summary judgment on June 1, 2016, and the plaintiff
filed a motion for summary adjudication regarding certain affirmative defenses on June 2, 2016. Following opposition and reply
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briefing, the court heard argument on the motions for summary judgment and summary adjudication on August 24, 2016. While
the motions were pending, on September 15, 2016, the parties executed the confidential Memorandum of Understanding described
above, which contains the essential terms of a settlement to which the parties have agreed in principle. That settlement, which is
still being finalized, will provide for a dismissal with prejudice and release of all claims brought in the Public School Teachers’
Pension and Retirement Fund of Chicago action, as well as the In re Intuitive Surgical, Inc. Shareholder Derivative Litigation
action and the City of Plantation Police Officers’ Employees’ Retirement System action (see above and below, respectively, for
additional description). The settlement will be subject to court approval. The parties notified the court of the Memorandum of
Understanding on September 15, 2016, and on September 16, 2016, the court entered an order vacating the trial date, ruling that
the motions for summary judgment and summary adjudication (along with other pre-trial motions) are moot, and scheduling an
approval hearing regarding the settlement for January 17, 2017. At the hearing on that date, the parties informed the court that
they are still finalizing the settlement and thus are not yet in a position to seek court approval. In response; the court scheduled a
status conference for February 17, 2017; the date for the approval hearing has yet to be determined. Based on currently available
information, the Company does not believe the resolution of this matter will have a material adverse effect on the Company's
business, financial position, or future results of operations.
On March 21, 2014, a third alleged stockholder caused a substantially similar purported stockholder’s derivative lawsuit
entitled City of Birmingham Relief and Retirement System v. Guthart et al., No. 5-14-CV-01307, to be filed in the United States
District Court for the Northern District of California against the same parties and seeking the same relief. On April 8, 2014, the
lawsuit was related to In re Intuitive Surgical Securities Litigation and Berg v. Guthart. On July 30, 2014, the court consolidated
the case with Berg v. Guthart and, as noted above, granted Berg’s motion to be appointed lead plaintiff and denied the City of
Birmingham’s motion seeking such appointment. Accordingly, the City of Birmingham Relief and Retirement System action will
be resolved by the pending settlement of the In re Intuitive Surgical, Inc. Shareholder Derivative Litigation action (see above for
additional description). Based on currently available information, the Company does not believe the resolution of this matter will
have a material adverse effect on the Company's business, financial position, or future results of operations.
On June 3, 2014, a fourth alleged stockholder caused a substantially similar purported stockholder’s derivative lawsuit entitled
City of Plantation Police Officers’ Employees’ Retirement System v. Guthart et al., C.A. No. 9726-CB, to be filed in the Court of
Chancery of the State of Delaware. The Company filed a motion to stay proceedings in favor of the earlier-filed stockholder
derivative lawsuits pending in federal and state courts in California. In light of the Company’s motion, the plaintiff agreed to a
stay of all proceedings in the case in favor of the earlier-filed actions. While the case was stayed, the parties agreed that the plaintiff
would file a motion to intervene in the Public School Teachers’ Pension and Retirement Fund of Chicago action (see above for
additional description). The plaintiff filed an unopposed motion to intervene on April 29, 2016. After additional briefing, on May
23, 2016, the court in the Public School Teachers’ Pension and Retirement Fund of Chicago action granted the plaintiff’s motion.
However, on June 21, 2016, in response to discovery requests, the plaintiff admitted that it did not continuously hold the Company’s
stock during all relevant times. Accordingly, on July 21, 2016, the plaintiff filed a request for dismissal as an additional plaintiff
in the Public School Teachers’ Pension and Retirement Fund of Chicago action, which the court in that action granted with prejudice
on July 22, 2016. On September 15, 2016, the parties executed the confidential Memorandum of Understanding described above,
which contains the essential terms of a settlement to which the parties have agreed in principle. That settlement, which is still
being finalized, will provide for a dismissal with prejudice and release of all claims brought in the City of Plantation Police
Officers’ Employees’ Retirement System action, as well as both the In re Intuitive Surgical, Inc. Shareholder Derivative Litigation
action and the Public School Teachers’ Pension and Retirement Fund of Chicago action (see above for additional description).
The settlement will be subject to court approval as described above. In the interim, the City of Plantation Police Officers’ Employees’
Retirement System action remains stayed. Based on currently available information, the Company does not believe the resolution
of this matter will have a material adverse effect on the Company's business, financial position, or future results of operations.
On March 5, 2015, a fifth alleged stockholder caused a substantially similar purported stockholder’s derivative lawsuit entitled
Back v. Guthart et al., No. 3:15-CV-01037, to be filed in the United States District Court for the Northern District of California.
On April 7, 2015, the lawsuit was related to In re Intuitive Surgical Securities Litigation and Berg v. Guthart. The Company filed
a motion to dismiss the complaint on July 10, 2015. On August 13, 2015, the parties stipulated to a complete stay of the matter
and the court entered an order reflecting the stay on August 17, 2015. The Company believes the settlement of the cases described
above will make this action moot and will move for dismissal on that basis. Based on currently available information, the Company
does not believe the resolution of this matter will have a material adverse effect on the Company's business, financial position, or
future results of operations.
Product Liability Litigation
The Company is currently named as a defendant in approximately 52 individual product liability lawsuits filed in various
state and federal courts by plaintiffs who allege that they or a family member underwent surgical procedures that utilized the da
Vinci Surgical System and sustained a variety of personal injuries and, in some cases, death as a result of such surgery. The Company
has also received a large number of product liability claims from plaintiffs' attorneys, many of which are subject to certain tolling
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agreements further discussed below. The Company has also been named as a defendant in a multi-plaintiff lawsuit filed in Missouri
state court. In total, plaintiffs in that case seek damages on behalf of 55 patients who had da Vinci Surgeries in 22 different states.
The cases raise a variety of allegations including, to varying degrees, that plaintiffs’ injuries resulted from purported defects
in the da Vinci Surgical System and/or failure on the Company's part to provide adequate training resources to the healthcare
professionals who performed plaintiffs’ surgeries. The cases further allege that the Company failed to adequately disclose and/or
misrepresented the potential risks and/or benefits of the da Vinci Surgical System. Plaintiffs also assert a variety of causes of action,
including for example, strict liability based on purported design defects, negligence, fraud, breach of express and implied warranties,
unjust enrichment, and loss of consortium. Plaintiffs seek recovery for alleged personal injuries and, in many cases, punitive
damages. The Company has reached confidential settlements in many of the filed cases.
Plaintiffs’ attorneys have also engaged in well-funded national advertising efforts seeking patients dissatisfied with da Vinci
Surgery. The Company has received a significant number of such claims from plaintiffs’ attorneys that it believes are a result of
these advertising efforts. A substantial number of claims relate to alleged complications from surgeries performed with certain
versions of Monopolar Curved Scissor (“MCS”) instruments which included an MCS tip cover accessory that was the subject of
a market withdrawal in 2012 and MCS instruments that were the subject of a recall in 2013. In an effort to avoid the expense and
distraction of defending multiple lawsuits, the Company entered into tolling agreements to pause the applicable statutes of
limitations for many of these claims and engaged in confidential mediation efforts.
After an extended confidential mediation process with legal counsel for many of the claimants covered by the tolling
agreements, the Company determined during 2014 that, while it denies any and all liability, in light of the costs and risks of
litigation, settlement of certain claims was appropriate. During the year ended December 31, 2016, and 2015, the Company recorded
pre-tax charges of $8.3 million and $13.8 million, respectively, to reflect the estimated cost of settling a number of the product
liability claims covered by the tolling agreements.
The Company’s estimate of the anticipated cost of resolving these claims is based on negotiations with attorneys for claimants
who have participated in the mediation process. Nonetheless, it is possible that more claims will be made by additional individuals
and that the claimants whose claims were not resolved through the mediation program, as well as those claimants who have not
participated in mediations, will choose to pursue greater amounts in a court of law. Consequently, the final outcome of these
claims is dependent on many variables that are difficult to predict and the ultimate cost associated with these product liability
claims may be materially different than the amount of the current estimate and accruals and could have a material adverse effect
on the Company's business, financial position, and future results of operations. Although there is a reasonable possibility that a
loss in excess of the amount recognized exists, the Company is unable to estimate the possible loss or range of loss in excess of
the amount recognized at this time. As of December 31, 2016, and 2015, a total of $20.5 million and $24.4 million, respectively,
were included in other accrued liabilities in the accompanying Consolidated Balance Sheets related to the tolled product liability
claims.
In February 2011, the Company was named as a defendant in a product liability action that had originally been filed in
Washington State Superior Court for Kitsap County against the healthcare providers and hospital involved in a decedent’s surgery
on such decedent's behalf (Josette Taylor, as Personal Representative of the Estate of Fred E. Taylor, deceased; and on behalf of
the Estate of Fred E. Taylor v. Intuitive Surgical, Inc., No. 09-2-03136-5). In Taylor, plaintiff asserted wrongful death and product
liability claims against the Company, generally alleging that the decedent died four years after surgery as a result of injuries
purportedly suffered during the surgery, which was conducted with the use of the da Vinci Surgical System. The plaintiff in Taylor
asserted that such injuries were caused, in whole or in part, by the Company's purported failure to properly train, warn, and instruct
the surgeon. The lawsuit sought unspecified damages for past medical expenses, pain and suffering, loss of consortium as well as
punitive damages. A trial commenced on April 15, 2013. On May 23, 2013, the jury returned a defense verdict, finding that the
Company was not negligent. Judgment was entered in the Company's favor on June 7, 2013. Subsequent to the verdict, the plaintiff
filed a notice of appeal. That appeal was denied on July 7, 2015. On July 27, 2015, plaintiff filed a motion for reconsideration
with the Court of Appeal; the Court of Appeal denied the motion for reconsideration on August 10, 2015. On September 9, 2015,
plaintiff filed a Petition for Review with the Washington State Supreme Court. On February 10, 2016, the Washington Supreme
Court issued an order granting the plaintiff’s Petition for Review. Oral argument on the appeal before the Washington Supreme
Court was heard on June 7, 2016. The court will issue an opinion at a future time.
Insurance Litigation
In October 2013, the Company was named as a defendant in an insurance action entitled Illinois Union Insurance Co. v.
Intuitive Surgical, Inc., No. 3:13-cv-04863-JST, filed in the United States District Court for the Northern District of California.
Plaintiff Illinois Union Insurance Co. (“Illinois Union”) seeks to rescind the Life Sciences Products-Completed Operations Liability
Policy issued by plaintiff to the Company, which provides coverage for product liability claims first made against the Company
during the policy period March 1, 2013, to March 1, 2014. In December 2013, the Company was named as a defendant in another
insurance action entitled Navigators Specialty Insurance Co. v. Intuitive Surgical, Inc., No. 5:13-cv-05801-JST, also filed in the
Northern District of California. Plaintiff Navigators Specialty Insurance Co. (“Navigators”) alleges that the Follow Form Excess
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Liability Insurance Policy issued by plaintiff to the Company for product liability claims first made against the Company during
the policy period March 1, 2013 to March 1, 2014, should be rescinded. These cases have been consolidated under docket number
3:13-cv-04863. Both plaintiffs generally allege that the Company did not disclose the existence of tolling agreements or the number
of claimants incorporated within those agreements, and allege that those agreements were material to plaintiffs’ underwriting
processes. On October 20, 2015, the Company filed a complaint alleging breach of contract and bad faith against Illinois Union
and Navigators in an action entitled Intuitive Surgical Inc. v. Illinois Union Insurance Co., et al., No. 3:15-cv-04834-JST, based
on the defendants failure to indemnify the Company for losses incurred in the defense and settlement of certain product liability
claims brought against the Company during the insurance policy period March 1, 2013 to March 1, 2014. The Company’s breach
of contract and bad faith action against the insurers has been consolidated with the insurers’ rescission actions for all purposes
except for trial. Both Illinois Union and Navigators moved to dismiss the Company's complaint in that action. The court denied
both Illinois Union and Navigators’ motions to dismiss the breach of contract claims against the insurers, denied the motion to
dismiss the bad faith claim against Illinois Union, and granted the motion to dismiss the bad faith claim against Navigators.
On March 15, 2016, Illinois Union and Navigators filed motions for summary judgment. On May 26, 2016, the Company
and Navigators filed a notice with the court that they had reached a confidential settlement of the litigation between the two parties.
On May 27, 2016, the Court denied Illinois Union’s motion for summary judgment. Illinois Union sought leave to move for
reconsideration of the Court’s order denying Illinois Union’s motion for summary judgment, which the court denied. On July 27,
2016, Illinois Union filed a motion to stay the case and for permission to file an interlocutory appeal with respect to the denial of
summary judgment with the U.S. Court of Appeals for the Ninth Circuit. The Court denied the motion to stay on October 11, 2016.
On September 15, 2016, the Court dismissed both the Company’s breach of contract claim against Navigators and Navigators’
rescission case against the Company with prejudice. Based on currently available information, the Company does not believe the
Navigators settlement or resolution of the Illinois Union matter will have a material adverse effect on the Company's business,
financial position, or future results of operations.
NOTE 8.
STOCKHOLDERS’ EQUITY
STOCK REPURCHASE PROGRAM
The Company's Board of Directors (the “Board”) has authorized an aggregate of $6.2 billion of funding for the Company’s
common stock repurchase program (the “Repurchase Program”) since originally established in March 2009, of which the most
recent authorization occurred in December 2016 when the Board increased the authorized amount available under Repurchase
Program to $3.0 billion. As of December 31, 2016, the remaining amount of share repurchases authorized by the Board was
approximately $2,991.6 million under the Repurchase Program. The $42.5 million of share repurchases for the year ended
December 31, 2016, were repurchased in the open market.
On January 24, 2017, subsequent to the end of fiscal year 2016, the Company entered into an accelerated share repurchase
program (the “ASR Program”) with Goldman, Sachs & Co. (“Goldman”) to repurchase $2.0 billion of the Company’s common
stock. On January 27, 2017, the Company made a payment of $2.0 billion to Goldman and Goldman delivered to the Company
an initial delivery of approximately 2.4 million shares of the Company’s common stock, which represents 80% of the payment
amount divided by the closing price of the Company’s common stock on January 23, 2017. The total number of shares that the
Company will repurchase under the ASR Program will be based generally on the daily volume-weighted average price per share
of the Company's common stock during the repurchase period, less a discount. Depending on the circumstances at settlement,
Goldman may be required to deliver additional shares of common stock to the Company or the Company may be required either
to deliver shares of common stock or make a cash payment to Goldman. Final settlement of the ASR Program is expected to be
completed by the end of the fourth quarter of 2017, although the completion date may be accelerated at Goldman’s option during
an acceleration period prior to the scheduled termination date.
The following table provides the stock repurchase activities during the years ended December 31, 2016, 2015, and 2014 (in
millions, except per share amounts):
Shares repurchased
Average price per share
Value of shares repurchased
Years Ended December 31,
2016
2015
2014
0.1
605.10
42.5
$
$
0.4
502.23
183.7
$
$
2.5
397.52
1,000.0
$
$
The Company uses the par value method of accounting for its stock repurchases. As a result of the share repurchases during
the years ended December 31, 2016, 2015, and 2014, the Company reduced common stock and additional paid-in capital by an
aggregate of $4.1 million, $16.3 million, and $89.5 million, respectively, and charged $38.4 million, $167.4 million, $910.5 million,
respectively, to retained earnings.
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ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The components of accumulated other comprehensive income (loss) net of tax, for the years ended December 31, 2016, and
2015 are as follows (in millions):
Year Ended December 31, 2016
Gains
(Losses)
on Hedge
Instruments
Unrealized
Gains
(Losses) on
Available-
for-Sale
Securities
Foreign
Currency
Translation
Gains
(Losses)
Employee
Benefit Plans
Total
Beginning balance
Other comprehensive income before reclassifications
Reclassified from accumulated other comprehensive
income (loss)
Net current-period other comprehensive income (loss)
Ending balance
$
$
1.5
4.1
(0.6)
3.5
$
5.0
$
(4.2) $
(4.6)
0.2
(4.4)
(8.6) $
(3.3) $
2.0
—
2.0
(1.3) $
(3.5) $
(0.7)
0.2
(0.5)
(4.0) $
(9.5)
0.8
(0.2)
0.6
(8.9)
Year Ended December 31, 2015
Gains
(Losses)
on Hedge
Instruments
Unrealized
Gains
(Losses) on
Available-
for-Sale
Securities
Foreign
Currency
Translation
Gains
(Losses)
Employee
Benefit Plans
Total
Beginning balance
Other comprehensive income before reclassifications
Reclassified from accumulated other comprehensive
income (loss)
Net current-period other comprehensive income (loss)
Ending balance
$
$
1.1
7.8
(7.4)
0.4
$
1.5
$
(0.2) $
(3.2)
(0.8)
(4.0)
(4.2) $
(2.1) $
(1.2)
—
(1.2)
(3.3) $
(3.9) $
(0.4)
0.8
0.4
(3.5) $
(5.1)
3.0
(7.4)
(4.4)
(9.5)
NOTE 9.
SHARE-BASED COMPENSATION
Stock Plans
2010 Incentive Award Plan
In April 2010, the Company’s stockholders approved the 2010 Incentive Award Plan (“2010 Plan”). Under this plan, the
Company issues nonqualified stock options (“NSOs”) and restricted stock units (“RSUs”) to employees and certain consultants.
The 2010 Plan generally permits NSOs to be granted at no less than the fair market value of the common stock on the date of
grant, with terms of 10 years from the date of grant. The 2010 Plan expires in 2020. In April 2016, the Company's stockholders
approved an amended and restated 2010 Plan to provide for an increase in the number of shares of common stock reserved for
issuance from 6,250,000 to 7,050,000. As of December 31, 2016, approximately 1.7 million shares were reserved for future
issuance under the 2010 Plan. A maximum of 0.8 million of these shares can be awarded as RSUs.
2009 Employment Commencement Incentive Plan
In October 2009, the Board of Directors adopted the 2009 Employment Commencement Incentive Plan (“New Hire Plan”).
The New Hire Plan provides for the shares to be used exclusively for the grant of RSUs and NSOs to new employees (“New Hire
Options”), who were not previously employees or non-employee directors of the Company. The Compensation Committee approves
all equity awards under the New Hire Plan, which are granted to newly-hired employees once a month on the fifth business day
of each month after their hire. Options are granted at an exercise price not less than the fair market value of the stock on the date
of grant and have a term not to exceed 10 years.
In April 2015, the Board of Directors amended and restated the New Hire Plan to provide for an increase in the number of
shares of common stock authorized for issuance pursuant to awards granted under the New Hire Plan from 1,155,000 to 1,455,000.
As of December 31, 2016, approximately 0.1 million shares were reserved for future issuance under the New Hire Plan.
2000 Equity Incentive Plan
In March 2000, the Board of Directors adopted the 2000 Equity Incentive Plan (“2000 Plan”), which took effect upon the
closing of the Company’s initial public offering. Under this plan, certain employees, consultants and non-employee directors
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could be granted Incentive Stock Options (“ISOs”) and Nonstatutory Stock Options (“NSOs”) to purchase shares of the Company’s
common stock. The 2000 Plan permitted ISOs to be granted at an exercise price not less than the fair value on the date of the
grant and NSOs at an exercise price not less than 85% of the fair value on the date of grant. Options granted under the 2000 Plan
generally expire 10 years from the date of grant and become exercisable upon grant subject to repurchase rights in favor of the
Company until vested. The 2000 Plan expired in March 2010. However, options granted prior to the plan’s expiration continue
to remain outstanding until their original expiration date.
Employee Option Vesting
Prior to 2012, annual stock options were granted to employees on February 15 of each year or the next business day if the
date was not a business day (“Annual Grant”). The grants generally vested 6/48 upon completion of 6 months service and 1/48 per
month thereafter. Beginning in 2013, the Company split the annual grant into a grant on February 15 (or the next business day if
the date is not a business day) and a separate grant on August 15 (or the next business day if the date is not a business day). The
February 15 grants vest 6/48 upon completion of 6 months service and 1/48 per month thereafter. The August 15 stock option
grants vest 7/48 at the end of one month and 1/48 per month thereafter through a 3.5 year vesting period.
Prior to 2014, New Hire Options generally vested 6/48 upon completion of 6 months service and 1/48 per month thereafter.
Beginning in 2014, New Hire Options generally vest 12/48 upon completion of one year service and 1/48 per month thereafter.
Option vesting terms are determined by the Board of Directors and, in the future, may vary from past practices.
2000 Non-Employee Directors’ Stock Option Plan
In March 2000, the Board of Directors adopted the 2000 Non-Employee Directors’ Stock Option Plan (the “Directors’ Plan”).
In October 2009, the automatic evergreen increase provisions were eliminated so that no further automatic increases will be made
to the number of shares reserved for issuance under the Directors’ Plan. In addition, the common stock authorized for issuance
under the Directors’ Plan was reduced to 150,000. Options are granted at an exercise price not less than the fair market value of
the stock on the date of grant and have a term not to exceed 10 years. Prior to 2016, initial stock option grants to new non-employee
directors vest over a three-year period with 12/36 of the shares vesting after one year from the date of grant and 1/36 of the shares
vesting monthly thereafter. Annual stock option grants vest one year from the date of the grant. Since 2016, new non-employee
directors receive pro-rated stock option grants that vest on the same term as the annual stock option grants. As of December 31,
2016, approximately 48,000 shares were reserved for future issuance under the Directors’ Plan.
2000 Employee Stock Purchase Plan
In March 2000, the Board of Directors adopted the 2000 Employee Stock Purchase Plan (the “ESPP”). Employees are generally
eligible to participate in the ESPP if they are customarily employed by the Company for more than 20 hours per week and more
than 5 months in a calendar year and are not 5% stockholders of the Company. Under the ESPP, eligible employees may select
a rate of payroll deduction up to 15% of their eligible compensation subject to certain maximum purchase limitations. The duration
for each offering period is 24 months and is divided into four purchase periods of approximately six months in length. Offerings
are concurrent. The purchase price of the shares under the offering is the lesser of 85% of the fair market value of the shares on
the offering date or 85% of the fair market value of the shares on the purchase date. A two-year look-back feature in the ESPP
causes the offering period to reset if the fair value of the Company’s common stock on the first or last day of the purchase period
is less than that on the original offering date. ESPP purchases by employees are settled with newly-issued common stock from
the ESPP’s previously authorized and available pool of shares.
The Company issued 0.1 million, 0.1 million and 0.1 million shares under the ESPP, representing approximately $32.5 million,
$31.2 million, and $29.4 million in employee contributions for the years ended December 31, 2016, 2015, and 2014, respectively.
As of December 31, 2016, there were approximately 0.1 million shares reserved for future issuance under the ESPP.
Restricted Stock Units
Beginning in 2014, equity awards granted to employees and non-employee directors include a mix of stock options and RSUs.
The RSUs to employees vest in one-fourth increments annually over a four-year period. Prior to 2016, initial RSUs granted to
new non-employee directors are vested in one-third increments over a three-year period. Annual RSU grants to non-employee
directors vest one year from the date of grant. Since 2016, new non-employee directors receive pro-rated RSU grants that vest
on the same term as the annual RSU grants. The number of shares issued on the date the RSUs vest is net of the minimum statutory
tax withholdings, which are paid in cash to the appropriate taxing authorities on behalf of the Company’s employees.
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Stock Option Information
Option activity during fiscal 2016 under all the stock plans was as follows (in millions, except per share amounts):
Balance at December 31, 2015
Options granted
Options exercised
Options forfeited/expired
Balance at December 31, 2016
Stock Options Outstanding
Number
Outstanding
Weighted Average
Exercise Price Per
Share
$
4.2
0.3
$
(1.3) $
(0.1) $
$
3.1
421.00
616.97
410.98
494.64
445.09
The aggregate intrinsic value of stock options exercised under our stock plans determined as of the date of option exercise
was $273.3 million, $196.5 million, and $146.2 million during the years ended December 31, 2016, 2015, and 2014, respectively.
Cash received from option exercises and employee stock purchase plans for the years ended December 31, 2016, 2015, and 2014
was $580.9 million, $361.1 million, and $283.6 million, respectively. The income tax benefit realized from stock options exercised
was $82.9 million for the year ended December 31, 2016.
The following table summarizes significant ranges of outstanding and exercisable options as of December 31, 2016 (number
of shares and aggregate intrinsic value in millions):
Options Outstanding
Options Exercisable
Range of
Exercise Prices
$95.89 - $341.19
$343.83 - $459.14
$466.70 - $517.31
$518.29 - $614.78
$618.96 - $718.04
Total
Weighted
Average
Remaining
Contractual Life
Weighted
Average
Exercise Price
Per Share
Number
of Shares
Aggregate
Intrinsic
Value (1)
Number
of Shares
Weighted
Average
Remaining
Contractual Life
Weighted
Average
Exercise Price
Per Share
Aggregate
Intrinsic
Value (1)
0.8
0.8
0.7
0.6
0.2
3.1
3.0
6.8
6.3
7.4
9.6
6.0
$
$
$
$
$
$
279.22
416.51
508.52
550.88
685.31
445.09
$ 593.3
0.8
0.6
0.6
0.4
—
2.4
$
$
$
$
$
$
279.22
410.32
509.04
557.95
692.54
417.93
$ 516.4
5.2
(1) The aggregate intrinsic value represents the total pre-tax intrinsic value, based on the Company’s closing stock price of $634.17 at December 31, 2016, which
would have been received by the option holders had all in-the-money option holders exercised their options as of that date.
As of December 31, 2016, a total of 3.0 million shares of stock options vested and expected to vest had a weighted average
remaining contractual life of 5.9 years, an aggregate intrinsic value of $587.5 million, and a weighted average exercise price of
$442.48.
Restricted Stock Units Information
RSU activity for the year ended December 31, 2016, was as follows (in millions, except per share amounts):
Unvested balance at December 31, 2015
Granted
Vested
Forfeited
Unvested balance at December 31, 2016
Shares
Weighted Average
Grant Date Fair
Value
$
0.4
$
0.3
(0.1) $
— $
$
0.6
485.55
553.76
481.84
509.75
524.17
As of December 31, 2016, 0.5 million shares of RSUs were expected to vest with an aggregate intrinsic value of $336.2
million. During the year ended December 31, 2016, approximately 35,000 RSUs were forfeited. The aggregate vesting date fair
value of RSUs vested was $65.3 million, $29.5 million and $0 million during the years ended December 31, 2016, 2015, and 2014,
respectively.
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Share-Based Compensation Expense
The following table summarizes share-based compensation expense (in millions):
Cost of sales—products
Cost of sales—services
Total cost of sales
Selling, general and administrative
Research and development
Share-based compensation expense before income taxes
Income tax effect
Share-based compensation expense after income taxes
Years Ended December 31,
2016
2015
2014
25.2
12.4
37.6
97.4
43.0
178.0
56.1
121.9
$
$
22.8
12.9
35.7
94.7
37.7
168.1
51.8
116.3
$
$
19.1
13.5
32.6
99.0
37.5
169.1
53.5
115.6
$
$
The Black-Scholes option pricing model is used to estimate the fair value of stock options granted under the Company’s share-
based compensation plans and rights to acquire stock granted under the Company’s employee stock purchase plan. The weighted
average estimated fair values of stock options, the rights to acquire stock granted, and RSUs, as well as the weighted average
assumptions used in calculating the fair values of stock options and rights to acquire stock under the ESPP that were granted during
the years ended December 31, 2016, 2015, and 2014, were as follows:
STOCK OPTION PLANS
Risk free interest rate
Expected term (years)
Volatility
Fair value at grant date
EMPLOYEE STOCK PURCHASE PLAN
Risk free interest rate
Expected term (years)
Volatility
Fair value at grant date
RESTRICTED STOCK UNITS
Fair value at grant date
Years Ended December 31,
2016
2015
2014
1.1%
4.2
26%
1.6%
4.3
28%
1.5%
4.3
31%
$
141.18
$
131.47
$
122.39
0.6%
1.2
30%
0.4%
1.2
31%
0.2%
1.2
33%
$
$
172.71
553.76
$
$
146.72
511.92
$
$
124.60
441.36
As share-based compensation expense recognized in the Consolidated Statements of Income during the years ended
December 31, 2016, 2015, and 2014, is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures.
Share-based compensation accounting requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent
periods if actual forfeitures differ from those estimated.
As of December 31, 2016, there were a total of $80.3 million, $200.3 million, and $9.0 million, of total unrecognized
compensation expense related to unvested stock options, restricted stock units, and employee stock purchases, respectively. The
unrecognized compensation expense is expected to be recognized over a weighted average period of 2.2 years for unvested stock
options, 2.6 years for unvested restricted stock units, and 1.0 year for rights granted to acquire stock under the ESPP.
Excess tax benefits are realized tax deductions for exercised options and vested RSUs in excess of the deferred tax assets
attributable to share-based compensation expense for such equity awards. Excess tax benefits of $44.1 million, $34.3 million,
and $24.0 million for the years ended December 31, 2016, 2015, and 2014, respectively, have been classified as a financing cash
inflow.
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NOTE 10.
INCOME TAXES
Income before provision for income taxes for the years ended December 31, 2016, 2015, and 2014, consisted of the following
(in millions):
U.S.
Foreign
Total income before provision for income taxes
Years Ended December 31,
2016
2015
2014
$
$
653.0
327.8
980.8
$
$
425.1
333.4
758.5
$
$
353.0
196.0
549.0
The provision for income taxes for the years ended December 31, 2016, 2015, and 2014 consisted of the following (in millions):
Current
Federal
State
Foreign
Deferred
Federal
State
Foreign
Total income tax expense
Years Ended December 31,
2016
2015
2014
$
$
$
$
$
207.0
13.4
5.4
225.8
18.3
0.6
0.2
19.1
244.9
$
$
$
$
$
148.7
8.4
7.6
164.7
7.5
0.5
(3.0)
5.0
169.7
$
$
$
$
$
150.5
7.0
7.5
165.0
(30.9)
(0.6)
(3.3)
(34.8)
130.2
Income tax expense differs from amounts computed by applying the statutory federal income rate of 35% for the years ended
December 31, 2016, 2015, and 2014 as a result of the following (in millions):
Federal tax at statutory rate
Increase (reduction) in tax resulting from:
State taxes, net of federal benefits
Foreign rate differential
Research and development credit
Share-based compensation not benefited
Domestic production activities deduction
Reversal of unrecognized tax benefits
Reversal of share-based compensation from intercompany charges
Other
Total income tax expense
Years Ended December 31,
2016
2015
2014
$
343.3
$
265.5
$
192.2
14.0
(86.2)
(7.8)
3.6
(8.0)
(15.8)
—
1.8
244.9
$
8.9
(67.4)
(6.4)
6.9
(5.3)
(6.4)
(25.0)
(1.1)
169.7
$
6.4
(47.4)
(5.0)
7.7
(4.6)
(20.3)
—
1.2
130.2
$
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Deferred income taxes reflect tax carry forwards and the net tax effects of temporary differences between the carrying amounts
of assets and liabilities for financial reporting and the amounts used for income tax purposes. Significant components of the
Company’s deferred tax assets and liabilities are as follows (in millions):
Deferred tax assets:
Share-based compensation expense
Expenses deducted in later years for tax purposes
Research and other credits
Other
Gross deferred tax assets
Valuation allowance
Deferred tax assets
Deferred tax liabilities:
Fixed assets
Intangible assets
Other
Deferred tax liabilities
Net deferred tax assets
December 31,
2016
2015
$
$
$
$
$
$
122.2
47.4
15.6
9.8
195.0
(17.2)
177.8
$
$
$
(25.2) $
(2.3)
(0.2)
(27.7) $
$
150.1
140.5
47.1
13.5
7.5
208.6
(15.2)
193.4
(24.0)
(2.0)
(0.5)
(26.5)
166.9
The Company has not provided U.S. income taxes and foreign withholding taxes on the undistributed earnings of its foreign
subsidiaries as of December 31, 2016, because the Company intends to indefinitely reinvest such earnings outside the U.S. If
these foreign earnings were to be repatriated in the future, the related U.S. tax liability may be reduced by any foreign income
taxes previously paid on these earnings. As of December 31, 2016, the cumulative amount of earnings upon which U.S. income
taxes have not been provided was approximately $1,454.2 million. Determination of the amount of unrecognized deferred tax
liability related to these earnings is not practicable at this time. The Company has a tax holiday in effect for its business operations
in Switzerland which will continue until the end of year 2017 to the extent certain terms and conditions continue to be met. This
tax holiday provides for a lower rate of taxation in Switzerland based on various thresholds of investment and employment in such
jurisdiction. As of December 31, 2016, the Company remained in compliance with the terms of the holiday. At the end of the tax
holiday, Swiss taxable income may be taxed at a higher rate depending on the applicable federal and cantonal rules. Tax benefit
from the Swiss tax holiday for the year ended December 31, 2016, was approximately $10.0 million, or $0.25 per diluted share.
As of December 31, 2016, and 2015, the Company had valuation allowances of $17.2 million and $15.2 million, respectively,
primarily related to California deferred tax assets generated by California R&D credit forwards which have no expiration period.
The Company recorded a valuation allowance against its California deferred tax assets as it is more likely than not these deferred
tax assets will not be realized as a result of the computation of California taxes under the single sales factor.
The Company recorded a net increase of its gross unrecognized tax benefits of approximately $13.6 million during the year
ended December 31, 2016. The net increase was primarily due to increases related to 2016 uncertain tax positions, partially offset
by the reversal of gross unrecognized tax benefits in connection with the expiration of certain statutes of limitation in various
jurisdictions. The Company had gross unrecognized tax benefits of approximately $106.0 million, $92.4 million, and $75.5 million
as of December 31, 2016, 2015, and 2014, respectively, which if recognized, would result in a reduction of the Company’s effective
tax rate. The Company included interest expense accrued on unrecognized tax benefits as a component of its income tax expense.
As of December 31, 2016, 2015, and 2014, gross interest related to unrecognized tax benefits accrued was approximately $3.7
million, $2.9 million, and $2.5 million, respectively. The Company classified a majority of its net unrecognized tax benefits and
related interest in Other accrued liabilities on the Consolidated Balance Sheets.
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A reconciliation of the beginning and ending amounts of gross unrecognized income tax benefits for the years ended
December 31, 2016, 2015, and 2014 are as follows (in millions):
Beginning balance
Increases related to tax positions taken during the current year
Increases related to tax positions taken during a prior year
Decreases related to tax positions taken during a prior year
Decreases related to settlements with tax authorities
Decreases related to expiration of statute of limitations
Ending balance
Years Ended December 31,
2016
2015
2014
$
$
92.4
29.9
—
(0.5)
—
(15.8)
106.0
$
$
75.5
28.9
0.3
—
(11.4)
(0.9)
92.4
$
$
74.0
22.3
—
—
(19.1)
(1.7)
75.5
The Company files federal, state and foreign income tax returns in many U.S. and OUS jurisdictions. Years before 2013 are
closed for the significant jurisdictions. Certain of the Company’s unrecognized tax benefits could change due to activities of
various tax authorities, including potential assessment of additional tax, possible settlement of audits, or through normal expiration
of various statutes of limitations, which could affect the Company’s effective tax rate in the period in which they change. While
it is reasonably possible that a benefit could be recorded, due to the uncertainty related to the timing and potential outcome of
audits, the Company cannot estimate the range of reasonably possible change in unrecognized tax benefits that may occur in the
next 12 months.
The Company is subject to the examination of its income tax returns by the Internal Revenue Service and other tax authorities.
The outcome of these audits cannot be predicted with certainty. The Company's management regularly assesses the likelihood of
adverse outcomes resulting from these examinations to determine the adequacy of the Company’s provision for income taxes. If
any issues addressed in the Company’s tax audits are resolved in a manner not consistent with management’s expectations, the
Company could be required to adjust its provision for income taxes in the period such resolution occurs.
NOTE 11.
NET INCOME PER SHARE
The following table presents the computation of basic and diluted net income per share (in millions, except per share amounts):
Net income
Basic:
Weighted-average shares outstanding
Basic net income per share
Diluted:
Weighted-average shares outstanding used in basic calculation
Add: Dilutive potential shares
Weighted-average shares used in computing diluted net income per
share
Diluted net income per share
Years Ended December 31,
2016
2015
2014
735.9
$
588.8
$
418.8
38.3
19.21
$
37.1
15.87
$
38.3
1.0
37.1
0.8
39.3
18.73
$
37.9
15.54
$
36.9
11.35
36.9
0.8
37.7
11.11
$
$
$
Share-based compensation awards of approximately 0.2 million, 1.7 million, and 2.4 million shares for the years ended
December 31, 2016, 2015, and 2014, respectively, were outstanding, but were not included in the computation of diluted net
income per share because the effect of including such shares would have been antidilutive in the periods presented.
NOTE 12.
EMPLOYEE BENEFIT PLANS
The Company sponsors various retirement plans for its eligible U.S. and non-U.S. employees. For employees in the U.S., the
Company maintains the Intuitive Surgical, Inc. 401(k) Plan (the “Plan”). As allowed under Section 401(k) of the Internal Revenue
Code, the Plan provides tax-deferred salary contributions for eligible U.S. employees. The Plan allows employees to contribute
up to 75% of their annual compensation to the Plan on a pre-tax and after-tax basis. Employee contributions are limited to a
maximum annual amount as set periodically by the Internal Revenue Code. Beginning in 2015, the Company began matching
contributions made to the Plan by the employees. The Company matches 200% of employee contributions up to $1,500 per calendar
year per person. All matching employer contributions vest immediately.
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SELECTED QUARTERLY DATA
(UNAUDITED, IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Revenue
Gross profit (3)
Net income (1)(2)(3)
Net income per common share
Basic
Diluted
(1) Includes discrete tax benefits as follows:
Audit settlement and expiration of the statutes of limitations
in multiple jurisdictions
(2) Includes pre-tax litigation charges
(3) Includes pre-tax medical device excise tax refund benefit
Revenue
Gross profit
Net income (1)(2)
Net income per common share
Basic
Diluted
(1) Includes discrete tax benefits as follows:
Audit settlement and expiration of the statutes of limitations
in multiple jurisdictions
Reversal of the share-based compensation intercompany
charges as a result of U.S. Tax Court opinion
Reinstatement of the 2015 federal R&D tax credit
(2) Includes pre-tax litigation charges (recoveries)
Three Months Ended
December 31,
2016
September 30,
2016
June 30,
2016
March 31,
2016
756.9
527.2
204.0
5.26
5.13
$
$
$
$
$
682.9
487.0
211.0
5.45
5.31
$
$
$
$
$
670.1
470.9
184.5
4.82
4.71
$
$
$
$
$
— $
5.5
$
— $
15.8
$
— $
7.1
$
— $
4.4
$
— $
Three Months Ended
594.5
405.0
136.4
3.62
3.54
—
2.2
—
December 31,
2015
September 30,
2015
June 30,
2015
March 31,
2015
676.5
458.8
190.0
5.09
4.99
$
$
$
$
$
589.7
395.8
167.3
4.49
4.40
$
$
$
$
$
— $
— $
— $
6.4
$
(0.6) $
29.3
$
— $
— $
586.1
386.5
134.5
3.64
3.56
$
$
$
$
$
7.8
$
— $
— $
6.6
$
532.1
336.8
97.0
2.64
2.57
—
—
—
7.2
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
88
VALUATION AND QUALIFYING ACCOUNTS
(IN MILLIONS)
SCHEDULE II
Allowance for doubtful accounts and loan credit losses,
and sales returns
Year ended December 31, 2016
Year ended December 31, 2015
Year ended December 31, 2014
$
$
$
(1) Primarily represents products returned.
Balance at
Beginning of
Year
Additions
Deductions (1)
Balance at
End of Year
9.4
5.5
5.8
$
$
$
24.6
22.3
22.2
$
$
$
(23.2) $
(18.4) $
(22.5) $
10.8
9.4
5.5
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Table of Contents
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURES
None.
ITEM 9A.
CONTROLS AND PROCEDURES
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our
Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and
forms and that such information is accumulated and communicated to our management, including our principal executive officer
and principal financial officer, as appropriate, to allow for timely decisions regarding required disclosure.
As required by SEC Rule 13a-15(b), we carried out an evaluation, under the supervision and with the participation of our
management, including our principal executive officer and principal financial officer, of the effectiveness of the design and operation
of our disclosure controls and procedures as of the end of the period covered by this Annual Report on Form 10-K. Based on the
foregoing, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures
were effective at the reasonable assurance level.
Inherent Limitations Over Internal Controls
Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP. Our internal control
over financial reporting includes those policies and procedures that:
(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions
of our assets;
(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with U.S. GAAP, and that our receipts and expenditures are being made only in accordance with authorizations
of our management and directors; and
(iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition
of our assets that could have a material effect on the financial statements.
Management, including our principal executive officer and principal financial officer, does not expect that our internal controls
will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must
reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because
of the inherent limitations in all control systems, no evaluation of internal controls can provide absolute assurance that all control
issues and instances of fraud, if any, have been detected. Also, any evaluation of the effectiveness of controls in future periods
are subject to the risk that those internal controls may become inadequate because of changes in business conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such
term is defined in the Exchange Act Rules 13a-15(f). Under the supervision and with the participation of our management, including
our principal executive officer and principal financial officer, we conducted an assessment of the effectiveness of our internal
control over financial reporting based on the framework in Internal Control Integrated Framework (2013) issued by the Committee
of Sponsoring Organizations of the Treadway Commission. Based on the results of our assessment under the framework in the
Internal Control—Integrated Framework (2013), our management concluded that our internal control over financial reporting was
effective as of December 31, 2016.
The effectiveness of our internal control over financial reporting as of December 31, 2016, has been audited by an independent
registered public accounting firm, as stated in their report, which is included under “Item 8. Financial Statements and Supplementary
Data” of this Annual Report.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the quarter ended December 31,
2016, that have materially affected, or are reasonably likely to materially affect, our internal control over financial statements.
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ITEM 9B.
OTHER INFORMATION
None.
91
Table of Contents
PART III
Certain information required by Part III is omitted from this report on Form 10-K and is incorporated herein by reference to
our definitive Proxy Statement for our next Annual Meeting of Stockholders (the “Proxy Statement”), which we intend to file
pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended, within 120 days after December 31, 2016.
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this item concerning our directors and corporate governance is incorporated by reference to the
information set forth in the section titled “Directors and Corporate Governance” in our Proxy Statement. Information required
by this item concerning our executive officers is incorporated by reference to the information set forth in the section entitled
“Executive Officers of the Company” in our Proxy Statement. Information regarding our Section 16 reporting compliance and
code of business conduct and ethics is incorporated by reference to the information set forth in the section entitled “Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” in our Proxy Statement.
ITEM 11.
EXECUTIVE COMPENSATION
The information required by this item regarding executive compensation is incorporated by reference to the information set
forth in the sections titled “Executive Compensation” and “Compensation for Directors” in our Proxy Statement.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required by this item regarding security ownership of certain beneficial owners and management is
incorporated by reference to the information set forth in the section titled “Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters” in our Proxy Statement.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
The information required by this item regarding certain relationships and related transactions and director independence is
incorporated by reference to the information set forth in the sections titled “Certain Relationships and Related Transactions” and
“Directors and Corporate Governance” in our Proxy Statement.
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item regarding principal accountant fees and services is incorporated by reference to the
information set forth in the section titled “Principal Accountant Fees and Services” in our Proxy Statement.
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ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULE
(a) The following documents are filed as part of this Annual Report on Form 10-K
PART IV
1) Financial Statements—See Index to Consolidated Financial Statements at Item 8 of this report on Form 10-K.
2) The following financial statement schedule of Intuitive Surgical, Inc. is filed as part of this report and should
be read in conjunction with the financial statements of Intuitive Surgical, Inc.:
Schedule II: Valuation and Qualifying Accounts.
All other schedules have been omitted because they are not applicable, not required under the instructions, or the
information requested is set forth in the consolidated financial statements or related notes thereto.
3) Exhibits
The exhibits filed as part of this report are listed under “Exhibits” at subsection (b) of this Item 15.
(b) Exhibits
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EXHIBIT INDEX
Amended and Restated Certificate of Incorporation of the Company.
Certificate of Amendment to Amended and Restated Certificate of Incorporation of the Company.
Certificate of Amendment to Amended and Restated Certificate of Incorporation of the Company.
Amended and Restated Bylaws of the Company.
Specimen Stock Certificate.
3.1(1)
3.2(1)
3.3(2)
3.4(3)
4.1(4)
10.1(4)
2000 Equity Incentive Plan. *
10.2(4)
2000 Non-Employee Directors’ Stock Option Plan. *
10.3(4)
2000 Employee Stock Purchase Plan. *
10.4(5)
Form of Indemnity Agreement. *
10.5(6)
2009 Employment Commencement Incentive Plan, as amended and restated. *
10.6(7)
2010 Incentive Award Plan, as amended and restated. *
10.7(8)
Severance Plan. *
10.8(9)
Form of Intuitive Surgical, Inc. 2000 Equity Incentive Plan Stock Option Agreement (Incentive and Nonstatutory
Stock Options). *
10.9(10)
Form of Intuitive Surgical, Inc. 2009 Employment Commencement Incentive Plan Stock Option Grant Notice. *
10.10(10)
Form of Intuitive Surgical, Inc. 2009 Employment Commencement Incentive Plan Restricted Stock Unit Grant
Notice. *
10.11(10)
Form of Intuitive Surgical, Inc. 2010 Incentive Award Plan Stock Option Grant Notice. *
10.12(10)
Form of Intuitive Surgical, Inc. 2010 Incentive Award Plan Restricted Stock Unit Grant Notice. *
10.13
Master Confirmation and Supplemental Confirmation between Intuitive Surgical, Inc. and Goldman, Sachs &
Co., dated January 24, 2017.
21.1
23.1
31.1
31.2
32.1
101
Intuitive Surgical, Inc. Subsidiaries.
Consent of Independent Registered Public Accounting Firm.
Certification of Principal Executive Officer.
Certification of Principal Financial Officer.
Certification of Chief Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
The following materials from Intuitive Surgical, Inc.’s Annual Report on Form 10-K for the year ended
December 31, 2016, formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Balance
Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statement of Stockholders’ Equity, (iv)
Consolidated Statements of Cash Flows, and (v) Notes to Consolidated Financial Statements, tagged at Level I
through IV.
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
Incorporated by reference to exhibits filed with the Company’s 2008 Annual Report on Form 10-K filed on February 6, 2009 (File No. 000-30713).
Incorporated by reference to Exhibit A filed with the Company’s Definitive Proxy Statement on Schedule 14A filed on March 1, 2012 (File No. 000-30713).
Incorporated by reference to Exhibit 3.1 filed with the Company’s Current Report on Form 8-K filed on December 13, 2016 (File No. 000-30713).
Incorporated by reference to exhibits filed with the Company’s Registration Statement on Form S-1 filed on March 22, 2000 (File No. 333-33016).
Incorporated by reference to Exhibit 10.1 filed with the Company’s Current Report on Form 8-K filed on August 3, 2015 (File No. 000-30713).
Incorporated by reference to Exhibit 4.2 filed with the Company’s Registration Statement on Form S-8 filed on May 1, 2015 (File No. 333-203793).
Incorporated by reference to Exhibit 4.1 filed with the Company’s Registration Statement on Form S-8 filed on May 1, 2015 (File No. 333-203793).
Incorporated by reference to Exhibit 10.1 filed with the Company’s Current Report on Form 8-K filed on December 2, 2008 (File No. 000-30713).
Incorporated by reference to Exhibit 10.2 filed with the Company’s Quarterly Report on Form 10-Q filed on July 23, 2009 (File No. 000-30713).
(10) Incorporated by reference to exhibits filed with the Company’s 2015 Annual Report on Form 10-K filed on February 2, 2016 (File No. 000-30713).
* Management contract or compensatory plan or arrangement.
94
Table of Contents
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
SIGNATURES
INTUITIVE SURGICAL, INC.
By:
/S/ GARY S. GUTHART
Gary S. Guthart, Ph.D.
President and Chief Executive Officer
Date: February 3, 2017
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/S/ GARY S. GUTHART
Gary S. Guthart, Ph.D.
/S/ MARSHALL L. MOHR
Marshall L. Mohr
/S/ JAMIE E. SAMATH
Jamie E. Samath
President, Chief Executive Officer, and Director (Principal
Executive Officer)
February 3, 2017
Senior Vice President and Chief Financial Officer (Principal
Financial Officer)
February 3, 2017
Vice President, Corporate Controller (Principal Accounting
Officer)
February 3, 2017
/S/ LONNIE M. SMITH
Chairman of the Board of Directors
February 3, 2017
February 3, 2017
February 3, 2017
February 3, 2017
February 3, 2017
February 3, 2017
February 3, 2017
Lonnie M. Smith
/S/ CRAIG H. BARRATT
Director
Craig H. Barratt, Ph.D.
/S/ MICHAEL A. FRIEDMAN
Director
Michael A. Friedman, M.D.
/S/ AMAL M. JOHNSON
Director
Amal M. Johnson
/S/ KEITH R. LEONARD JR.
Director
Keith R. Leonard Jr.
/S/ ALAN J. LEVY
Alan J. Levy, Ph.D.
Director
/S/ MARK J. RUBASH
Director
Mark J. Rubash
George Stalk Jr.
Director
95
GOLDMAN, SACHS & CO. | 200 WEST STREET | NEW YORK, NEW YORK 10282-2198 | TEL:
212-902-1000
Opening Transaction
Exhibit 10.13
Execution Version
To:
A/C:
From:
Re:
Intuitive Surgical, Inc.
1266 Kifer Rd
Sunnyvale, CA 94086
#########
Goldman, Sachs & Co.
Accelerated Stock Repurchases
Ref. No:
As provided in the Supplemental Confirmation
Date:
January 24, 2017
This master confirmation (this “Master Confirmation”), dated as of January 24, 2017 is intended to set forth
certain terms and provisions of certain Transactions (each, a “Transaction”) entered into from time to time between
Goldman, Sachs & Co. (“GS&Co.”) and Intuitive Surgical, Inc. (“Counterparty”). This Master Confirmation, taken
alone, is neither a commitment by either party to enter into any Transaction nor evidence of a Transaction. The additional
terms of any particular Transaction shall be set forth in (i) a Supplemental Confirmation in the form of Schedule A
hereto (a “Supplemental Confirmation”) and (ii) a trade notification in the form of Schedule B hereto (a “Trade
Notification”), each of which shall reference this Master Confirmation and supplement, form a part of, and be subject
to this Master Confirmation. This Master Confirmation, each Supplemental Confirmation and the related Trade
Notification together shall constitute a “Confirmation” as referred to in the Agreement specified below.
The definitions and provisions contained in the 2002 ISDA Equity Derivatives Definitions (the “Equity
Definitions”), as published by the International Swaps and Derivatives Association, Inc., are incorporated into this
Master Confirmation. This Master Confirmation, each Supplemental Confirmation and the related Trade Notification
evidence a complete binding agreement between Counterparty and GS&Co. as to the subject matter and terms of each
Transaction to which this Master Confirmation, such Supplemental Confirmation and Trade Notification relate and
shall supersede all prior or contemporaneous written or oral communications with respect thereto.
This Master Confirmation, each Supplemental Confirmation and each Trade Notification supplement form a
part of, and are subject to an agreement in the form of the ISDA 2002 Master Agreement (the “Agreement”) as if
GS&Co. and Counterparty had executed the Agreement on the date of this Master Confirmation (but without any
Schedule except for (i) the election of New York law (without reference to its choice of laws doctrine other than Title
14 of Article 5 of the New York General Obligations Law) as the governing law, (ii) the election that subparagraph (ii)
of Section 2(c) will not apply to the Transactions, and (iii) the election that the “Cross Default” provisions of Section
5(a)(vi), as amended by (x) deleting the words “, or becoming capable at such time of being declared,” from Section
5(a)(vi)(1) and (y) inserting at the end of Section 5(a)(vi) “; provided, however, that notwithstanding the foregoing, an
Event of Default shall not be deemed to have occurred at any time under clause (2) hereof if the default is a failure to
pay caused, as demonstrated to the reasonable satisfaction of the other party, solely by an error or omission of an
administrative or operational nature where (i) funds required to make payment were available to the relevant party to
enable it to make the relevant payment when due and (ii) such payment is in fact made within 2 Local Business Days
after the relevant party receives written notice from an interested party of such default”, shall apply to GS&Co. and
Counterparty, with a “Threshold Amount” of USD 50 million in each case).
1
The Transactions shall be the sole Transactions under the Agreement. If there exists any ISDA Master
Agreement between GS&Co. and Counterparty or any confirmation or other agreement between GS&Co. and
Counterparty pursuant to which an ISDA Master Agreement is deemed to exist between GS&Co. and Counterparty,
then notwithstanding anything to the contrary in such ISDA Master Agreement, such confirmation or agreement or any
other agreement to which GS&Co. and Counterparty are parties, the Transactions shall not be considered Transactions
under, or otherwise governed by, such existing or deemed ISDA Master Agreement.
All provisions contained or incorporated by reference in the Agreement shall govern this Master Confirmation,
each Supplemental Confirmation and each Trade Notification except as expressly modified herein or in the related
Supplemental Confirmation.
If, in relation to any Transaction to which this Master Confirmation, a Supplemental Confirmation and a related
Trade Notification relate, there is any inconsistency between the Agreement, this Master Confirmation, any
Supplemental Confirmation, any Trade Notification and the Equity Definitions, the following will prevail for purposes
of such Transaction in the order of precedence indicated: (i) such Trade Notification; (ii) such Supplemental
Confirmation; (iii) this Master Confirmation; (iv) the Equity Definitions; and (v) the Agreement.
Each Transaction constitutes a Share Forward Transaction for the purposes of the Equity Definitions. Set
1.
forth below are the terms and conditions that, together with the terms and conditions set forth in the Supplemental
Confirmation and Trade Notification relating to any Transaction, shall govern such Transaction.
General Terms:
Trade Date:
For each Transaction, as set forth in the related Supplemental Confirmation.
Buyer:
Seller:
Shares:
Counterparty
GS&Co.
Common Stock, par value USD 0.001 per share, of Counterparty (Ticker: ISRG)
Exchange:
The NASDAQ Global Select Market
Related Exchange(s):
All Exchanges.
Prepayment\Variable
Obligation:
Applicable
Prepayment Amount:
For each Transaction, as set forth in the related Supplemental Confirmation.
Prepayment Date:
For each Transaction, as set forth in the related Supplemental Confirmation.
Valuation:
VWAP Price:
For any Exchange Business Day, as determined by the Calculation Agent based on
the NASDAQ 10b-18 Volume Weighted Average Price per Share for the regular
trading session (including any extensions thereof) of the Exchange on such
Exchange Business Day (without regard to pre-open or after hours trading outside
of such regular trading session for such Exchange Business Day), as published by
Bloomberg at 4:15 p.m. New York time (or 15 minutes following the end of any
extension of the regular trading session) on such Exchange Business Day, on
Bloomberg page “ISRG Q AQR_SEC” (or any successor thereto), or if
such price is not so reported on such Exchange Business Day for any reason or is,
in the Calculation Agent’s reasonable discretion, erroneous, such VWAP Price shall
be as reasonably determined by the Calculation Agent. For purposes of calculating
2
the VWAP Price, the Calculation Agent will include only those trades that are
reported during the period of time during which Counterparty could purchase its
own shares under Rule 10b-18(b)(2) and are effected pursuant to the conditions of
Rule 10b-18(b)(3), each under the Securities Exchange Act of 1934, as amended
(the “Exchange Act”) (such trades, “Rule 10b-18 eligible transactions”).
Forward Price:
The average of the VWAP Prices for the Exchange Business Days in the Calculation
Period, subject to “Valuation Disruption” below.
Forward Price
Adjustment Amount:
For each Transaction, as set forth in the related Supplemental Confirmation and
Trade Notification.
Calculation Period:
The period from and including the Calculation Period Start Date to and including
the Termination Date.
Calculation Period Start Date: For each Transaction, as set forth in the related Supplemental Confirmation.
Termination Date:
The Scheduled Termination Date; provided that GS&Co. shall have the right to
designate any Exchange Business Day on or after the First Acceleration Date to be
the Termination Date (the “Accelerated Termination Date”) by delivering notice
to Counterparty of any such designation prior to 6:00 P.M. New York City time on
the designated Accelerated Termination Date.
Scheduled Termination Date: For each Transaction, as set forth in the related Supplemental Confirmation, subject
to postponement as provided in “Valuation Disruption” below.
First Acceleration Date:
For each Transaction, as set forth in the related Supplemental Confirmation.
Valuation Disruption:
The definition of “Market Disruption Event” in Section 6.3(a) of the Equity
Definitions is hereby amended by deleting the words “at any time during the one-
hour period that ends at the relevant Valuation Time, Latest Exercise Time, Knock-
in Valuation Time or Knock-out Valuation Time, as the case may be” and inserting
the words “at any time on any Scheduled Trading Day during the Calculation Period
or Settlement Valuation Period” after the word “material,” in the third line thereof.
Section 6.3(d) of the Equity Definitions is hereby amended by deleting the
remainder of the provision following the term “Scheduled Closing Time” in the
fourth line thereof.
Notwithstanding anything to the contrary in the Equity Definitions, to the extent
that a Disrupted Day occurs (i) in the Calculation Period, the Calculation Agent
may, in its good faith and commercially reasonable discretion, postpone the
Scheduled Termination Date, or (ii) in the Settlement Valuation Period, the
Calculation Agent may extend the Settlement Valuation Period. If any such
Disrupted Day is a Disrupted Day because of a Market Disruption Event (or a
deemed Market Disruption Event as provided herein), the Calculation Agent shall
determine whether (i) such Disrupted Day is a Disrupted Day in full, in which case
the VWAP Price for such Disrupted Day shall not be included for purposes of
determining the Forward Price or the Settlement Price, as the case may be, or (ii)
such Disrupted Day is a Disrupted Day only in part, in which case the VWAP Price
for such Disrupted Day shall be determined by the Calculation Agent based on
Rule 10b-18 eligible transactions in the Shares on such Disrupted Day effected
before the relevant Market Disruption Event occurred and/or after the relevant
Market Disruption Event ended, and the weighting of the VWAP Price for the
3
relevant Exchange Business Days during the Calculation Period or the Settlement
Valuation Period, as the case may be, shall be adjusted in a commercially reasonable
manner by the Calculation Agent for purposes of determining the Forward Price
or the Settlement Price, as the case may be, with such adjustments based on, among
other factors, the duration of any Market Disruption Event and the volume,
historical trading patterns and price of the Shares. Any Scheduled Trading Day on
which the Exchange is scheduled to close prior to its normal close of trading shall
be deemed to be a Disrupted Day in full.
If a Disrupted Day occurs during the Calculation Period or the Settlement Valuation
Period, as the case may be, and each of the nine immediately following Scheduled
Trading Days is a Disrupted Day, then the Calculation Agent, in its good faith and
commercially reasonable discretion, may deem such ninth Scheduled Trading Day
to be an Exchange Business Day that is not a Disrupted Day and determine the
VWAP Price for such ninth Scheduled Trading Day using its good faith estimate
of the value of the Shares on such ninth Scheduled Trading Day based on the
volume, historical trading patterns and price of the Shares and such other factors
as it deems appropriate.
If the Number of Shares to be Delivered is positive, Physical Settlement shall be
applicable; provided that GS&Co. does not, and shall not, make the agreement or
the representations set forth in Section 9.11 of the Equity Definitions related to the
restrictions imposed by applicable securities laws with respect to any Shares
delivered by GS&Co. to Counterparty under any Transaction. If the Number of
Shares to be Delivered is negative, then the Counterparty Settlement Provisions in
Annex A shall apply.
A number of Shares equal to (i) (a) the Prepayment Amount divided by (b) the
Divisor Amount minus (ii) the number of Initial Shares.
The greater of (i) the Forward Price minus the Forward Price Adjustment Amount
and (ii) $60.00.
Settlement Terms:
Settlement Procedures:
Number of Shares
to be Delivered:
Divisor Amount:
Excess Dividend Amount:
For the avoidance of doubt, all references to the Excess Dividend Amount shall be
deleted from Section 9.2(a)(iii) of the Equity Definitions.
Settlement Date:
If the Number of Shares to be Delivered is positive, the date that is one Settlement
Cycle immediately following the Termination Date.
Settlement Currency:
USD
Initial Share Delivery:
GS&Co. shall deliver a number of Shares equal to the Initial Shares to Counterparty
on the Initial Share Delivery Date in accordance with Section 9.4 of the Equity
Definitions, with the Initial Share Delivery Date deemed to be a “Settlement Date”
for purposes of such Section 9.4.
Initial Share Delivery Date:
For each Transaction, as set forth in the related Supplemental Confirmation.
Initial Shares:
For each Transaction, as set forth in the related Supplemental Confirmation.
Share Adjustments:
4
Potential Adjustment Event: Notwithstanding anything to the contrary in Section 11.2(e) of the Equity
Definitions, an Extraordinary Dividend shall not constitute a Potential Adjustment
Event.
It shall constitute an additional Potential Adjustment Event if the Scheduled
Termination Date for any Transaction is postponed pursuant to “Valuation
Disruption” above, in which case the Calculation Agent may, in its commercially
reasonable discretion, adjust any relevant terms of any such Transaction as
appropriate to account for the economic effect on the Transaction of such
postponement.
Extraordinary Dividend:
Any dividend or distribution on the Shares (other than any dividend or distribution
of the type described in Section 11.2(e)(i) or Section 11.2(e)(ii)(A) or (B) of the
Equity Definitions).
Method of Adjustment:
Calculation Agent Adjustment
Extraordinary Events:
Consequences of
Merger Events:
(a) Share-for-Share:
Modified Calculation Agent Adjustment
(b) Share-for-Other:
Cancellation and Payment
(c) Share-for-Combined:
Component Adjustment
Tender Offer:
Applicable; provided that (i) Section 12.1(l) of the Equity Definitions shall be
amended (x) by deleting the parenthetical in the fifth line thereof, (y) by replacing
“that” in the fifth line thereof with “whether or not such announcement” and (z)
by adding immediately after the words “Tender Offer” in the fifth line thereof “,
and any publicly announced change or amendment to such an announcement
(including the announcement of an abandonment of such intention)” and (ii)
Sections 12.3(a) and 12.3(d) of the Equity Definitions shall each be amended by
replacing each occurrence of the words “Tender Offer Date” by “Announcement
Date”.
Consequences of
Tender Offers:
(a) Share-for-Share:
(b) Share-for-Other:
Modified Calculation Agent Adjustment or Cancellation and Payment, at
the election of GS&Co.
Modified Calculation Agent Adjustment or Cancellation and Payment, at
the election of GS&Co.
(c) Share-for-Combined:
Modified Calculation Agent Adjustment or Cancellation and Payment, at
the election of GS&Co.
Nationalization,
Insolvency or Delisting:
Cancellation and Payment; provided that in addition to the provisions of Section
12.6(a)(iii) of the Equity Definitions, it shall also constitute a Delisting if the
Exchange is located in the United States and the Shares are not immediately re-
listed, re-traded or re-quoted on any of the New York Stock Exchange, NYSE MKT,
The NASDAQ Global Select Market or The NASDAQ Global Market (or their
5
respective successors); if the Shares are immediately re-listed, re-traded or re-
quoted on any such exchange or quotation system, such exchange or quotation
system shall be deemed to be the Exchange.
Additional Disruption Events:
(a) Change in Law:
(b) Failure to Deliver:
(c)
Insolvency Filing:
(d) Loss of Stock Borrow:
Applicable
Applicable
Applicable
Applicable
Maximum Stock Loan Rate:
275 basis points per annum
Hedging Party:
Determining Party:
Hedging Adjustments:
GS&Co.; provided that, upon request from Counterparty, GS&Co. shall promptly
provide Counterparty with a written explanation describing in reasonable detail
any determination or calculation made by GS&Co. as Hedging Party (but without
disclosing GS&Co.’s proprietary models or other information that may be
proprietary or subject to contractual, legal or regulatory obligations to not disclose
such information). Whenever the Hedging Party is required to act or to exercise
judgment in any way with respect to any Transaction hereunder (but not, for the
avoidance of doubt, the making of any election it is entitled to make as “Hedging
Party”), it will do so in good faith and in a commercially reasonable manner.
GS&Co.; provided that, upon request from Counterparty, GS&Co. shall promptly
provide Counterparty with a written explanation describing in reasonable detail
any determination or calculation made by GS&Co. as Determining Party (but
without disclosing GS&Co.’s proprietary models or other information that may be
proprietary or subject to contractual, legal or regulatory obligations to not disclose
such information). Whenever the Determining Party is required to act or to exercise
judgment in any way with respect to any Transaction hereunder, it will do so in
good faith and in a commercially reasonable manner.
For the avoidance of doubt, whenever the Calculation Agent is called upon to make
an adjustment pursuant to the terms of this Master Confirmation or the Equity
Definitions to take into account the effect of an event, the Calculation Agent shall
make such adjustment by reference to the effect of such event on GS&Co., assuming
that GS&Co. maintains a commercially reasonable Hedge Position.
6
Additional Termination Event(s): Notwithstanding anything to the contrary in the Equity Definitions, if, as a result
of an Extraordinary Event, any Transaction would be cancelled or terminated
(whether in whole or in part) pursuant to Article 12 of the Equity Definitions, an
Additional Termination Event (with such terminated Transaction(s) (or portions
thereof) being the Affected Transaction(s) and Counterparty being the sole Affected
Party) shall be deemed to occur, and, in lieu of Sections 12.7, 12.8 and 12.9 of the
Equity Definitions, Section 6 of the Agreement shall apply to such Affected
Transaction(s).
The declaration by the Issuer of any Extraordinary Dividend, the ex-dividend date
for which occurs or is scheduled to occur during the Relevant Dividend Period,
will constitute an Additional Termination Event, with Counterparty as the sole
Affected Party and all Transactions hereunder as the Affected Transactions. For
the avoidance of doubt, any amount payable under Section 6(d)(ii) of the Agreement
in respect of such Additional Termination Event shall be calculated without regard
to such Extraordinary Dividend.
Relevant Dividend Period:
The period from and including the Calculation Period Start Date to and including
the Relevant Dividend Period End Date.
Relevant Dividend Period
End Date:
If Annex A applies, the last day of the Settlement Valuation Period; otherwise, the
Termination Date.
Non-Reliance/Agreements and
Acknowledgements Regarding
Hedging Activities/Additional
Acknowledgements:
Applicable
Transfer:
Notwithstanding anything to the contrary in the Agreement, GS&Co. may assign,
transfer and set over all rights, title and interest, powers, privileges and remedies
of GS&Co. under any Transaction, in whole or in part, to an affiliate of GS&Co.
whose obligations are guaranteed by The Goldman Sachs Group, Inc. without the
consent of Counterparty. GS&Co. shall promptly, and in any event within ten (10)
Exchange Business Days, provide a written notice of such transfer pursuant to the
immediately preceding sentence to Counterparty.
GS&Co. Payment Instructions:
Counterparty’s Contact Details
for Purpose of Giving Notice:
GS&Co.’s Contact Details for
Purpose of Giving Notice:
Chase Manhattan Bank New York
For A/C Goldman, Sachs & Co.
A/C #############
ABA: ##########
To be provided by Counterparty
Goldman, Sachs & Co.
200 West Street
New York, NY 10282-2198
Attention: ############, Equity Capital Markets
Telephone: ############
Facsimile: ############
Email: ###################
7
With a copy to:
Attention: #############, Equity Capital Markets
Telephone: ############
Facsimile: ############
Email: ####################
And email notification to the following address:
#####################################
Calculation Agent. GS&Co.; provided that, upon receipt of a written request from Counterparty, the Calculation
2.
Agent shall use good faith efforts to provide to Counterparty, within five (5) Exchange Business Days from the receipt
of such request, a written explanation describing in reasonable detail any calculation, adjustment or determination made
by it (including any quotations, market data or information from external sources used in making such calculation,
adjustment or determination, as the case may be, but without disclosing the Calculation Agent’s proprietary models or
other information that is subject to contractual, legal or regulatory obligations to not disclose such information).
3.
warranties and covenants in the Agreement, each party represents, warrants and covenants to the other party that:
Additional Mutual Representations, Warranties and Covenants of Each Party. In addition to the representations,
(i)
Eligible Contract Participant. It is an “eligible contract participant”, as defined in the U.S. Commodity
Exchange Act (as amended), and is entering into each Transaction hereunder as principal (and not as agent or in any
other capacity, fiduciary or otherwise) and not for the benefit of any third party.
(ii)
Accredited Investor. Each party acknowledges that the offer and sale of each Transaction to it is
intended to be exempt from registration under the Securities Act of 1933, as amended (the “Securities Act”), by virtue
of Section 4(a)(2) thereof. Accordingly, each party represents and warrants to the other that (i) it has the financial
ability to bear the economic risk of its investment in each Transaction and is able to bear a total loss of its investment,
(ii) it is an “accredited investor” as that term is defined under Regulation D under the Securities Act and (iii) the
disposition of each Transaction is restricted under this Master Confirmation, the Securities Act and state securities laws.
3A.
Guarantee of The Goldman Sachs Group, Inc. The obligations of GS&Co. in respect of each Transaction
hereunder will be guaranteed by The Goldman Sachs Group, Inc. pursuant to (i) the General Guarantee Agreement,
dated January 30, 2006, made by The Goldman Sachs Group, Inc. relating to certain obligations of GS&Co. (available
as Exhibit 10.45 to The Goldman Sachs Group, Inc. Annual Report on Form 10-K for the fiscal year ended November
25, 2005), or (ii) any replacement or successor guarantee, which may be in the form of a general guarantee or a guarantee
that specifically references the Transactions. The parties agree and acknowledge that any such guarantee shall not be
a Credit Support Document hereunder, and that the Goldman Sachs Group, Inc. shall not be a Credit Support Provider
hereunder.
4.
warranties and covenants in the Agreement, Counterparty represents, warrants and covenants to GS&Co. that:
Additional Representations, Warranties and Covenants of Counterparty. In addition to the representations,
(a)
The purchase or writing of each Transaction and the transactions contemplated hereby will not violate
Rule 13e-1 or Rule 13e-4 under the Exchange Act.
(b)
It is not entering into any Transaction (i) on the basis of, and is not aware of, any material non-public
information with respect to the Shares, (ii) in anticipation of, in connection with, or to facilitate, a distribution of its
securities, a self-tender offer or a third-party tender offer or (iii) to create actual or apparent trading activity in the
Shares (or any security convertible into or exchangeable for the Shares) or to raise or depress or otherwise manipulate
the price of the Shares (or any security convertible into or exchangeable for the Shares).
(c)
Each Transaction is being entered into pursuant to a publicly disclosed Share buy-back program and
its Board of Directors has approved the use of derivatives to effect the Share buy-back program.
8
(d)
Without limiting the generality of Section 13.1 of the Equity Definitions, Counterparty acknowledges
that neither GS&Co. nor any of its affiliates is making any representations or warranties or taking any position or
expressing any view with respect to the treatment of any Transaction under any accounting standards including ASC
Topic 260, Earnings Per Share, ASC Topic 815, Derivatives and Hedging, or ASC Topic 480, Distinguishing Liabilities
from Equity and ASC 815-40, Derivatives and Hedging – Contracts in Entity’s Own Equity.
(e)
As of (i) the date hereof and (ii) the Trade Date for each Transaction hereunder, Counterparty is in
compliance with its reporting obligations under the Exchange Act and its most recent Annual Report on Form 10-K,
together with all reports subsequently filed by it pursuant to the Exchange Act, taken together and as amended and
supplemented to the date of this representation, do not, as of their respective filing dates, contain any untrue statement
of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements
therein, in the light of the circumstances under which they were made, not misleading.
(f)
Counterparty shall report each Transaction as required under Regulation S-K under the Exchange
Act.
(g)
The Shares are not, and Counterparty will not cause the Shares to be, subject to a “restricted period” (as
defined in Regulation M promulgated under the Exchange Act (“Regulation M”)) at any time during any Regulation
M Period (as defined below) for any Transaction unless Counterparty has provided written notice to GS&Co. of such
restricted period not later than the Scheduled Trading Day immediately preceding the first day of such “restricted
period”; Counterparty acknowledges that any such notice may cause a Disrupted Day to occur pursuant to Section 5
below; accordingly, Counterparty acknowledges that its delivery of such notice must comply with the standards set
forth in Section 6 below; “Regulation M Period” means, for any Transaction, (i) the Relevant Period (as defined
below) and (ii) the Settlement Valuation Period, if any, for such Transaction. “Relevant Period” means, for any
Transaction, the period commencing on the Calculation Period Start Date for such Transaction and ending on the earlier
of (i) the Scheduled Termination Date and (ii) the last Additional Relevant Day (as specified in the related Supplemental
Confirmation) for such Transaction, or such earlier day as elected by GS&Co. and communicated to Counterparty on
such day (or, if later, the First Acceleration Date without regard to any acceleration thereof pursuant to “Special
Provisions for Acquisition Transaction Announcements” below).
(h)
As of the Trade Date and the Prepayment Date for each Transaction, Counterparty is not “insolvent” (as
such term is defined under Section 101(32) of the U.S. Bankruptcy Code (Title 11 of the United States Code) (the
“Bankruptcy Code”)) and Counterparty would be able to purchase a number of Shares with a value equal to the
Prepayment Amount in compliance with the laws of the jurisdiction of Counterparty’s incorporation.
(i)
Counterparty is not and, after giving effect to any Transaction, will not be, required to register as an
“investment company” as such term is defined in the Investment Company Act of 1940, as amended.
(j)
Counterparty has not and will not enter into agreements similar to the Transactions described herein
where any initial hedge period, calculation period, relevant period or settlement valuation period (each however defined)
in such other transaction will overlap at any time (including as a result of extensions in such initial hedge period,
calculation period, relevant period or settlement valuation period as provided in the relevant agreements) with any
Relevant Period or, if applicable, any Settlement Valuation Period under this Master Confirmation. In the event that
the initial hedge period, relevant period, calculation period or settlement valuation period in any other similar transaction
overlaps with any Relevant Period or, if applicable, Settlement Valuation Period under this Master Confirmation as a
result of any postponement of the Scheduled Termination Date or extension of the Settlement Valuation Period pursuant
to “Valuation Disruption” above, Counterparty shall promptly amend such transaction to avoid any such overlap.
5.
Additional Covenants of GS&Co. In addition to the covenants in the Agreement, the Master Confirmation
and herein, GS&Co. agrees to use commercially reasonable efforts, during any Settlement Valuation Period under this
Master Confirmation, to make all purchases of Shares in connection with the Transaction in a manner that would comply
with the limitations set forth in clauses (b)(2), (b)(3) and (b)(4) of Rule 10b-18 under the Exchange Act (“Rule 10b-18”),
as if such rule was applicable to such purchases and taking into account any applicable Securities and Exchange
Commission no-action letters as appropriate, and subject to any delays between the execution and reporting of a trade
of the Shares on the Exchange and other circumstances beyond GS&Co.’s control; provided that, without limiting the
9
generality of the first sentence of this Paragraph 3, GS&Co. shall not be responsible for any failure to comply with
Rule 10b-18(b)(3) to the extent any transaction that was executed (or deemed to be executed) by or on behalf of the
Counterparty or an affiliated purchaser pursuant to a separate agreement is not deemed to be an “independent bid” or
an “independent transaction” for purposes of Rule 10b-18(b)(3).
Regulatory Disruption. In the event that GS&Co. reasonably concludes in good faith and based on the advice
6.
of counsel, that it is appropriate with respect to any legal, regulatory or self-regulatory requirements or related policies
and procedures (whether or not such requirements, policies or procedures are imposed by law or have been voluntarily
adopted by GS&Co., but provided that such requirements, policies or procedures are generally applicable in similar
situations and applied to the relevant Transaction in a non-discriminatory manner), for it to refrain from purchasing
Shares on any Scheduled Trading Day or Days during the Calculation Period or, if applicable, the Settlement Valuation
Period, GS&Co. may by written notice to Counterparty elect to deem that a Market Disruption Event has occurred and
will be continuing on such Scheduled Trading Day or Days; provided that if such deemed Market Disruption Event is
deemed to have occurred solely in response to such related policies or procedures, such Scheduled Trading Day or
Days will each be a Disrupted Day in full. GS&Co. shall promptly notify Counterparty upon exercising its rights
pursuant to this provision and shall subsequently notify Counterparty in writing on the Scheduled Trading Day GS&Co.
reasonably believes in good faith and upon the advice of counsel that it may resume its market activity.
7.
10b5-1 Plan. Counterparty represents, warrants and covenants to GS&Co. that:
(a)
Counterparty is entering into this Master Confirmation and each Transaction hereunder in good faith
and not as part of a plan or scheme to evade the prohibitions of Rule 10b5-1 under the Exchange Act (“Rule 10b5-1”)
or any other antifraud or anti-manipulation provisions of the federal or applicable state securities laws and that it has
not entered into or altered and will not enter into or alter any corresponding or hedging transaction or position with
respect to the Shares. Counterparty acknowledges that it is the intent of the parties that each Transaction entered into
under this Master Confirmation comply with the requirements of paragraphs (c)(1)(i)(A) and (B) of Rule 10b5-1 and
each Transaction entered into under this Master Confirmation shall be interpreted to comply with the requirements of
Rule 10b5-1(c).
(b)
Counterparty will not seek to control or influence GS&Co.’s decision to make any “purchases or
sales” (within the meaning of Rule 10b5-1(c)(1)(i)(B)(3)) under any Transaction entered into under this Master
Confirmation, including, without limitation, GS&Co.’s decision to enter into any hedging transactions. Counterparty
represents and warrants that it has consulted with its own advisors as to the legal aspects of its adoption and
implementation of this Master Confirmation, each Supplemental Confirmation and each Trade Notification under Rule
10b5-1.
(c)
Counterparty acknowledges and agrees that any amendment, modification, waiver or termination of
this Master Confirmation, the relevant Supplemental Confirmation or Trade Notification must be effected in accordance
with the requirements for the amendment or termination of a “plan” as defined in Rule 10b5-1(c). Without limiting
the generality of the foregoing, any such amendment, modification, waiver or termination shall be made in good faith
and not as part of a plan or scheme to evade the prohibitions of Rule 10b-5, and no such amendment, modification or
waiver shall be made at any time at which Counterparty or any officer, director, manager or similar person of Counterparty
is aware of any material non-public information regarding Counterparty or the Shares.
8.
Counterparty Purchases. Counterparty (or any “affiliated purchaser” as defined in Rule 10b-18) shall not,
without the prior written consent of GS&Co., directly or indirectly purchase any Shares (including by means of a
derivative instrument), listed contracts on the Shares or securities that are convertible into, or exchangeable or exercisable
for Shares (including, without limitation, any Rule 10b-18 purchases of blocks (as defined in Rule 10b-18)) during any
Relevant Period or, if applicable, Settlement Valuation Period, except through GS&Co. Notwithstanding the
immediately preceding paragraph or anything herein to the contrary, Counterparty may purchase Shares on any
Exchange Business Day during any Relevant Period pursuant to any Rule 10b5-1 or Rule 10b-18 repurchase
plan entered into with GS&Co., so long as, on any such Exchange Business Day, such purchases do not in the
aggregate exceed 5% of the ADTV (as such term is defined in Rule 10b-18(a)(1)) on such Exchange Business Day.
10
9.
Definitions:
Special Provisions for Merger Transactions. Notwithstanding anything to the contrary herein or in the Equity
(a)
Counterparty agrees that it:
(i) will not during the period commencing on the Trade Date through the end of the Relevant
Period or, if applicable, the Settlement Valuation Period for any Transaction make, or permit to be made, any
public announcement (as defined in Rule 165(f) under the Securities Act) of any Merger Transaction or potential
Merger Transaction unless such public announcement is made prior to the opening or after the close of the
regular trading session on the Exchange for the Shares;
(ii)
shall promptly notify GS&Co. following any such announcement that such announcement
has been made (and Counterparty shall use commercially reasonable efforts to so notify GS&Co. prior to the
next opening of the regular trading session on the Exchange); and
(iii) shall promptly (but in any event prior to the next opening of the regular trading session on
the Exchange) provide GS&Co. with written notice specifying (i) Counterparty’s average daily Rule 10b-18
Purchases (as defined in Rule 10b-18) during the three full calendar months immediately preceding the
announcement date that were not effected through GS&Co. or its affiliates and (ii) the number of Shares
purchased pursuant to the proviso in Rule 10b-18(b)(4) under the Exchange Act for the three full calendar
months preceding the announcement date. Such written notice shall be deemed to be a certification by
Counterparty to GS&Co. that such information is true and correct. In addition, Counterparty shall promptly
notify GS&Co. of the earlier to occur of the completion of such transaction and the completion of the vote by
target shareholders. Counterparty acknowledges that any such notice may cause the terms of any Transaction
to be adjusted or such Transaction to be terminated; accordingly, Counterparty acknowledges that its delivery
of such notice must comply with the standards set forth in Section 6 above.
(b)
GS&Co. in its commercially reasonable discretion may (i) make adjustments in good faith and in a
commercially reasonable manner to the terms of any Transaction, including, without limitation, the Scheduled
Termination Date or the Forward Price Adjustment Amount, and/or suspend the Calculation Period and/or any Settlement
Valuation Period or (ii) treat the occurrence of such public announcement as an Additional Termination Event with
Counterparty as the sole Affected Party and the Transactions hereunder as the Affected Transactions and with the amount
under Section 6(e) of the Agreement determined taking into account the fact that the Calculation Period or Settlement
Valuation Period, as the case may be, had fewer Scheduled Trading Days than originally anticipated.
“Merger Transaction” means any merger, acquisition or similar transaction involving a recapitalization as
contemplated by Rule 10b-18(a)(13)(iv) under the Exchange Act, other than, solely for purposes of this Section 9, any
such transaction in which the consideration consists solely of cash and there is no valuation period.
10.
Special Provisions for Acquisition Transaction Announcements. (a) If an Acquisition Transaction
Announcement occurs on or prior to the Settlement Date for any Transaction, then the Calculation Agent shall make
such adjustments to the exercise, settlement, payment or any other terms of such Transaction (including, without
limitation, the Forward Price Adjustment Amount) as the Calculation Agent determines appropriate, at such time or at
multiple times as the Calculation Agent determines appropriate, to account for the economic effect on such Transaction
of such Acquisition Transaction Announcement (including adjustments to account for changes in volatility, expected
dividends, stock loan rate and liquidity relevant to the Shares or to such Transaction). If an Acquisition Transaction
Announcement occurs after the Trade Date, but prior to the First Acceleration Date of any Transaction, the First
Acceleration Date shall be the date of such Acquisition Transaction Announcement.
(b)
“Acquisition Transaction Announcement” means (i) the announcement of an Acquisition
Transaction, (ii) an announcement that Counterparty or any of its subsidiaries has entered into an agreement, a letter
of intent or an understanding designed to result in an Acquisition Transaction, (iii) the announcement of the intention
to solicit or enter into, or to explore strategic alternatives or other similar undertaking that may include, an Acquisition
Transaction, (iv) any other announcement that in the reasonable judgment of the Calculation Agent may result in an
11
Acquisition Transaction or (v) any announcement of any change or amendment to any previous Acquisition Transaction
Announcement (including any announcement of the abandonment of any such previously announced Acquisition
Transaction, agreement, letter of intent, understanding or intention). For the avoidance of doubt, announcements as
used in the definition of Acquisition Transaction Announcement refer to any public announcement whether made by
the Issuer or a third party.
(c)
“Acquisition Transaction” means (i) any Merger Event (for purposes of this definition the definition
of Merger Event shall be read with the references therein to “100%” being replaced by “15%” and to “50%” by “75%”
and without reference to the clause beginning immediately following the definition of Reverse Merger therein to the
end of such definition), Tender Offer or Merger Transaction or any other transaction involving the merger of Counterparty
with or into any third party, (ii) the sale or transfer of all or substantially all of the assets of Counterparty, (iii) a
recapitalization, reclassification, binding share exchange or other similar transaction, (iv) any acquisition, lease,
exchange, transfer, disposition (including by way of spin-off or distribution) of assets (including any capital stock or
other ownership interests in subsidiaries) or other similar event by Counterparty or any of its subsidiaries where the
aggregate consideration transferable or receivable by or to Counterparty or its subsidiaries exceeds 15% of the market
capitalization of Counterparty and (v) any transaction in which Counterparty or its board of directors has a legal
obligation to make a recommendation to its shareholders in respect of such transaction (whether pursuant to Rule 14e-2
under the Exchange Act or otherwise).
11.
Acknowledgments. (a) The parties hereto intend for:
(i) each Transaction to be a “securities contract” as defined in Section 741(7) of the Bankruptcy
Code, a “swap agreement” as defined in Section 101(53B) of the Bankruptcy Code and a “forward contract”
as defined in Section 101(25) of the Bankruptcy Code, and the parties hereto to be entitled to the protections
afforded by, among other Sections, Sections 362(b)(6), 362(b)(17), 362(b)(27), 362(o), 546(e), 546(g), 546
(j), 555, 556, 560 and 561 of the Bankruptcy Code;
(ii) the Agreement to be a “master netting agreement” as defined in Section 101(38A) of the
Bankruptcy Code;
(iii) a party’s right to liquidate, terminate or accelerate any Transaction, net out or offset termination
values or payment amounts, and to exercise any other remedies upon the occurrence of any Event of Default
or Termination Event under the Agreement with respect to the other party or any Extraordinary Event that
results in the termination or cancellation of any Transaction to constitute a “contractual right” (as defined in
the Bankruptcy Code); and
(iv) all payments for, under or in connection with each Transaction, all payments for the Shares
(including, for the avoidance of doubt, payment of the Prepayment Amount) and the transfer of such Shares
to constitute “settlement payments” and “transfers” (as defined in the Bankruptcy Code).
(b)
Counterparty acknowledges that:
during the term of any Transaction, GS&Co. and its affiliates may buy or sell Shares or
other securities or buy or sell options or futures contracts or enter into swaps or other derivative securities in order to
establish, adjust or unwind its hedge position with respect to such Transaction;
(i)
GS&Co. and its affiliates may also be active in the market for the Shares and derivatives
linked to the Shares other than in connection with hedging activities in relation to any Transaction, including acting as
agent or as principal and for its own account or on behalf of customers;
(ii)
(iii) GS&Co. shall make its own determination as to whether, when or in what manner any
hedging or market activities in Counterparty’s securities shall be conducted and shall do so in a manner that it deems
appropriate to hedge its price and market risk with respect to the Forward Price and the VWAP Price;
12
any market activities of GS&Co. and its affiliates with respect to the Shares may affect the
market price and volatility of the Shares, as well as the Forward Price and VWAP Price, each in a manner that may be
adverse to Counterparty; and
(iv)
each Transaction is a derivatives transaction in which it has granted GS&Co. an option;
GS&Co. may purchase shares for its own account at an average price that may be greater than, or less than, the price
paid by Counterparty under the terms of the related Transaction.
(v)
(c)
Counterparty:
(i)
is an “institutional account” as defined in FINRA Rule 4512(c);
(ii)
is capable of evaluating investment risks independently, both in general and with regard to
all transactions and investment strategies involving a security or securities, and will exercise independent judgment in
evaluating the recommendations of GS&Co. or its associated persons, unless it has otherwise notified GS&Co. in
writing; and
(iii)
will notify GS&Co. if any of the statements contained in clause (i) or (ii) of this Section 10
(c) ceases to be true.
12.
collateral that would otherwise secure the obligations of Counterparty herein or pursuant to the Agreement.
Credit Support Documents. The parties hereto acknowledge that no Transaction hereunder is secured by any
13.
No Netting or Set-off. Obligations under any Transaction shall not be netted, recouped or set off (including
pursuant to Section 6 of the Agreement) against any other obligations of the parties, whether arising under the Agreement,
this Master Confirmation, any Supplemental Confirmation, any Trade Notification or under any other agreement
between the parties hereto, by operation of law or otherwise, and no other obligations of the parties shall be netted,
recouped or set off (including pursuant to Section 6 of the Agreement) against obligations under any Transaction,
whether arising under the Agreement, this Master Confirmation, any Supplemental Confirmation, any Trade Notification
or under any other agreement between the parties hereto, by operation of law or otherwise, and each party hereby waives
any such right of setoff, netting or recoupment.
14.
Delivery of Shares. Notwithstanding anything to the contrary herein, GS&Co. may, by prior notice to
Counterparty, satisfy its obligation to deliver any Shares or Alternative Delivery Property on any date due (an “Original
Delivery Date”) by making separate deliveries of Shares or such Alternative Delivery Property, as the case may be, at
more than one time on or prior to such Original Delivery Date, so long as the aggregate number of Shares and/or
Alternative Delivery Units so delivered on or prior to such Original Delivery Date is equal to the number required to
be delivered on such Original Delivery Date.
15.
Early Termination. In the event that an Early Termination Date (whether as a result of an Event of Default or
a Termination Event) occurs or is designated with respect to any Transaction (except as a result of a Merger Event in
which the consideration or proceeds to be paid to holders of Shares consists solely of cash), if either party would owe
any amount to the other party pursuant to Section 6(d)(ii) of the Agreement or Article 12 of the Equity Definitions (any
such amount, a “Payment Amount”), then, in lieu of any payment of such Payment Amount, Counterparty may, no
later than the Early Termination Date or the date on which such Transaction is terminated, elect to deliver or for GS&Co.
to deliver, as the case may be, to the other party a number of Shares (or, in the case of a Merger Event, a number of
units, each comprising the number or amount of the securities or property that a hypothetical holder of one Share would
receive in such Merger Event (each such unit, an “Alternative Delivery Unit” and, the securities or property comprising
such unit, “Alternative Delivery Property”)) with a value equal to the Payment Amount, as determined by the
Calculation Agent (and the parties agree that, in making such determination of value, the Calculation Agent may take
into account a number of factors, including the market price of the Shares or Alternative Delivery Property on the date
of early termination and, if such delivery is made by GS&Co., the prices at which GS&Co. purchases Shares or
Alternative Delivery Property, in a commercially reasonable manner and over a commercially reasonable time period,
to fulfill its delivery obligations under this Section 15); provided that in determining the composition of any Alternative
13
Delivery Unit, if the relevant Merger Event involves a choice of consideration to be received by holders, such holder
shall be deemed to have elected to receive the maximum possible amount of cash. If such delivery is made by
Counterparty, paragraphs 2 through 7 of Annex A shall apply as if such delivery were a settlement of the Transaction
to which Net Share Settlement applied, the Cash Settlement Payment Date were the Early Termination Date and the
Forward Cash Settlement Amount were zero (0) minus the Payment Amount owed by Counterparty.
16.
Calculations and Payment Date upon Early Termination. The parties acknowledge and agree that in calculating
(a) the Close-Out Amount pursuant to Section 6 of the Agreement and (b) the amount due upon cancellation or
termination of any Transaction (whether in whole or in part) pursuant to Article 12 of the Equity Definitions as a result
of an Extraordinary Event, GS&Co. may (but need not) determine such amount based on (i) expected losses assuming
a commercially reasonable (including, without limitation, with regard to reasonable legal and regulatory guidelines)
risk bid were used to determine loss or (ii) the price at which one or more market participants would offer to sell to the
Seller a block of Shares equal in number to the Seller’s hedge position in relation to the Transaction. Notwithstanding
anything to the contrary in Section 6(d)(ii) of the Agreement or Article 12 of the Equity Definitions, all amounts
calculated as being due in respect of an Early Termination Date under Section 6(e) of the Agreement or upon cancellation
or termination of the relevant Transaction under Article 12 of the Equity Definitions will be payable on the second
Exchange Business Day immediately following the day that notice of the amount payable is effective; provided that if
Counterparty elects to receive or deliver Shares or Alternative Delivery Units in accordance with Section 15, such
Shares or Alternative Delivery Units shall be delivered on a date selected by the Calculation Agent as promptly as
practicable thereafter.
Automatic Termination Provisions. Notwithstanding anything to the contrary in Section 6 of the Agreement,
17.
if a Termination Price is specified in any Supplemental Confirmation, then an Additional Termination Event with
Counterparty as the sole Affected Party and the Transaction to which such Supplemental Confirmation relates as the
Affected Transaction will automatically occur without any notice or action by GS&Co. or Counterparty if the price of
the Shares on the Exchange at any time falls below such Termination Price at any time on two consecutive Exchange
Business Days, and such second consecutive Exchange Business Day will be the “Early Termination Date” for purposes
of the Agreement.
18.
Delivery of Cash. For the avoidance of doubt, nothing in this Master Confirmation shall be interpreted as
requiring Counterparty to deliver cash in respect of the settlement of the Transactions contemplated by this Master
Confirmation following payment by Counterparty of the relevant Prepayment Amount, except in circumstances where
the required cash settlement thereof is permitted for classification of the contract as equity by ASC 815-40, Derivatives
and Hedging – Contracts in Entity’s Own Equity as in effect on the relevant Trade Date (including, without limitation,
where Counterparty so elects to deliver cash or fails timely to elect to deliver Shares or Alternative Delivery Property
in respect of the settlement of such Transactions).
19.
Claim in Bankruptcy. GS&Co. acknowledges and agrees that this Master Confirmation is not intended to
convey to it rights with respect to any Transaction hereunder that are senior to the claims of common stockholders in
the event of Counterparty’s bankruptcy.
20.
[Reserved].
21.
[Reserved].
22.
Governing Law. The Agreement, this Master Confirmation, each Supplemental Confirmation, each Trade
Notification and all matters arising in connection with the Agreement, this Master Confirmation, each Supplemental
Confirmation and each Trade Notification shall be governed by, and construed and enforced in accordance with, the
laws of the State of New York (without reference to its choice of laws doctrine other than Title 14 of Article 5 of the
New York General Obligations Law).
23.
Offices.
(a)
The Office of GS&Co. for each Transaction is: 200 West Street, New York, NY 10282-2198.
14
(b)
The Office of Counterparty for each Transaction is: Intuitive Surgical, Inc., 1266 Kifer Rd, Sunnyvale,
CA 94086.
Arbitration. The Agreement, this Master Confirmation, each Supplemental Confirmation and each
24.
Trade Notification are subject to the following arbitration provisions:
(a)
All parties to this Master Confirmation are giving up the right to sue each other in court,
including the right to a trial by jury, except as provided by the rules of the arbitration forum in which a claim
is filed.
(b)
Arbitration awards are generally final and binding; a party’s ability to have a court reverse or
modify an arbitration award is very limited.
(c)
The ability of the parties to obtain documents, witness statements and other discovery is
generally more limited in arbitration than in court proceedings.
(d)
The arbitrators do not have to explain the reason(s) for their award.
(e)
The panel of arbitrators will typically include a minority of arbitrators who were or are affiliated
with the securities industry, unless Counterparty is a member of the organization sponsoring the arbitration
facility, in which case all arbitrators may be affiliated with the securities industry.
(f)
The rules of some arbitration forums may impose time limits for bringing a claim in arbitration.
In some cases, a claim that is ineligible for arbitration may be brought in court.
(g)
The rules of the arbitration forum in which the claim is filed, and any amendments thereto,
shall be incorporated into this Master Confirmation.
Counterparty agrees that any and all controversies that may arise between Counterparty and GS&Co.,
including, but not limited to, those arising out of or relating to the Agreement or any Transaction hereunder,
shall be determined by arbitration conducted before FINRA Dispute Resolution (“FINRA-DR”), or if FINRA-
DR declines to hear the matter, before the American Arbitration Association, in accordance with their arbitration
rules then in force. The award of the arbitrator shall be final, and judgment upon the award rendered may be
entered in any court, state or federal, having jurisdiction.
No person shall bring a putative or certified class action to arbitration, nor seek to enforce any pre-
dispute arbitration agreement against any person who has initiated in court a putative class action or who is a
member of a putative class who has not opted out of the class with respect to any claims encompassed by the
putative class action until: (i) the class certification is denied; (ii) the class is decertified; or (iii) Counterparty
is excluded from the class by the court.
Such forbearance to enforce an agreement to arbitrate shall not constitute a waiver of any rights under
this Master Confirmation except to the extent stated herein.
Counterparts.
25.
This Master Confirmation may be executed in any number of counterparts, all of which
shall constitute one and the same instrument, and any party hereto may execute this Master Confirmation by signing
and delivering one or more counterparts.
15
Counterparty hereby agrees (a) to check this Master Confirmation carefully and immediately upon receipt so
that errors or discrepancies can be promptly identified and rectified and (b) to confirm that the foregoing (in the exact
form provided by GS&Co.) correctly sets forth the terms of the agreement between GS&Co. and Counterparty with
respect to any particular Transaction to which this Master Confirmation relates, by manually signing this Master
Confirmation or this page hereof as evidence of agreement to such terms and providing the other information requested
herein and immediately returning an executed copy to Equity Derivatives Documentation Department, facsimile No.
###############.
Yours faithfully,
GOLDMAN, SACHS & CO.
By:
/s/ DANIELA ROUSE
Authorized Signatory
Name: Daniela Rouse
Title: Vice President
Agreed and Accepted By:
INTUITIVE SURGICAL, INC.
By:
/s/ MARSHALL L. MOHR
Name: Marshall L. Mohr
Title: Senior Vice President and Chief Financial Officer
16
SCHEDULE A
SUPPLEMENTAL CONFIRMATION
To:
Intuitive Surgical, Inc.
1266 Kifer Rd
Sunnyvale, CA 94086
From:
Goldman, Sachs & Co.
Subject:
Accelerated Stock Repurchases
Ref. No:
[Insert Reference No.]
Date:
[Insert Date]
The purpose of this Supplemental Confirmation is to confirm the terms and conditions of the Transaction
entered into between Goldman, Sachs & Co. (“GS&Co.”) and Intuitive Surgical, Inc. (“Counterparty”) (together, the
“Contracting Parties”) on the Trade Date specified below. Supplemental Confirmation is a binding contract between
GS&Co. and Counterparty as of the relevant Trade Date for the Transaction referenced below.
1.
This Supplemental Confirmation supplements, forms part of, and is subject to the Master Confirmation dated
as of January 24, 2017 (the “Master Confirmation”) between the Contracting Parties, as amended and supplemented
from time to time. All provisions contained in the Master Confirmation govern this Supplemental Confirmation except
as expressly modified below.
2.
The terms of the Transaction to which this Supplemental Confirmation relates are as follows:
Trade Date:
Forward Price Adjustment Amount:
Reference Date:
Testing Times:
[ ]
As set forth in the Trade Notification, to be the product of the Relevant
Closing Price on the Reference Date and the Discount Percentage.
The first Exchange Business Day following the Trade Date
Each of 1:00 p.m., New York City time, 2:00 p.m., New York City
time, 3:00 p.m., New York City time, and 3:30 p.m., New York City
time.
A-1
Discount Percentage:
The Discount Percentage shall be set forth in the Trade Notification
and shall be determined by the Calculation Agent based on the
Discount Percentage Table in Appendix I hereto (the “Table”) by
reference to the Reference Implied Volatility. In each such case,
(ii)
the figures appearing in the Table are the
Implied
Discount Percentage
those Reference
Volatilities that appear exactly in the relevant row of such
table;
for
(iii) for Reference Implied Volatilities falling
between the amounts appearing in such column or row, as
applicable, the Discount Percentage will be calculated by
the Calculation Agent using linear interpolation;
(iv) if the Discount Percentage is otherwise not
determinable pursuant to the foregoing because the
Reference Implied Volatility is less than the lowest
Reference Implied Volatility appearing in the Table, the
Discount Percentage will be determined by the Calculation
Agent by reference to such lowest Reference Implied
Volatility; and
(v)
if the Discount Percentage is otherwise
not determinable pursuant to the foregoing because the
Reference Implied Volatility is greater than the highest
Reference Implied Volatility appearing in the Table, such
Discount Percentage will be determined by the Calculation
Agent by reference to such highest Reference Implied
Volatility.
The arithmetic average of the Relevant Listed Volatilities for each
Option Reference Date at each Testing Time. The Reference Implied
Volatility determined as described above shall be set forth in the Trade
Notification.
If, for any Option Reference Date at any Testing Time, there is a listed
put option expiring on such Option Reference Date with a strike price
equal to the Intraday Price as of such Testing Time, the Relevant
Listed Volatility for such Option Reference Date at such Testing Time
shall be the Listed Volatility at such Testing Time for such listed put
option. If, for any Option Reference Date and any Testing Time, the
Intraday Price as of such Testing Time does not match any of the
strike prices of the listed put options expiring on such Option
Reference Date, the Relevant Listed Volatility for such Option
Reference Date at such Testing Time shall be the volatility determined
for the put option expiring on such Option Reference Date by the
Calculation Agent using the Listed Volatility at such Testing Time of
the listed put option expiring on such Option Reference Date with a
strike price that is next-higher than the Intraday Price as of such
Testing Time. If, for any Option Reference Date at any Testing Time,
there are no listed put options expiring on such Option Reference
Date with a strike price that is higher than the Intraday Price as of
such Testing Time, the Relevant Listed Volatility for such Option
Reference Date at the relevant Testing Time shall be as determined
by the Calculation Agent in a commercially reasonable manner.
For any listed option and any Testing Time, as determined by the
Calculation Agent based on bid implied volatility (IVB) as published
by Bloomberg on Bloomberg page “ISRG Q OMON
” (or any successor thereto) at such Testing Time, or if such
Exchange Business Day is a Disrupted Day (in whole or in part),
such volatility is not so reported at such Testing Time for any reason
or the reported volatility is clearly erroneous, the Listed Volatility
shall be as determined by the Calculation Agent in a commercially
reasonable manner.
A-2
Reference Implied Volatility:
Relevant Listed Volatility:
Listed Volatility:
Option Reference Dates:
Relevant Closing Price:
Intraday Price:
Calculation Period Start Date:
Scheduled Termination Date:
First Acceleration Date:
Prepayment Amount:
Prepayment Date:
Initial Shares:
The scheduled listed options expiry dates for each of April 2017 and
July 2017.
For any Exchange Business Day, the closing price per Share for the
regular trading session (including any extensions thereof) of the
Exchange on such Exchange Business Day, as determined by the
Calculation Agent based on Bloomberg page “ISRG Q QR
” (or any successor thereto) at 4:15 p.m. New York City time
(or 15 minutes following the end of any extension of the regular
trading session of the Exchange) on such Exchange Business Day,
or if such Exchange Business Day is a Disrupted Day (determined
pursuant to the Equity Definitions without any amendment or
modification), if such price is not so reported on such Exchange
Business Day for any reason or the reported price is clearly erroneous,
the Relevant Closing Price shall be as determined by the Calculation
Agent in a commercially reasonable manner.
For any Testing Time, the per Share price on the Exchange at such
Testing Time as determined by the Calculation Agent, or if a Market
Disruption Event (determined pursuant to the Equity Definitions as
modified by the Master Confirmation) is ongoing at such Testing
Time, if such price is not so reported on the Exchange at such Testing
Time for any reason or if the reported price on the Exchange at such
Testing Time is clearly erroneous, the Intraday Price at such Testing
Time shall be as determined by the Calculation Agent in a
commercially reasonable manner.
[ ]
[ ]
[ ]
[ ]
[ ]
[ ] Shares; provided that if, in connection with the Transaction,
GS&Co. is unable to borrow or otherwise acquire a number of Shares
equal to the Initial Shares for delivery to Counterparty on the Initial
Share Delivery Date, the Initial Shares delivered on the Initial Share
Delivery Date shall be reduced to such number of Shares that GS&Co.
is able to so borrow or otherwise acquire ; provided further that if
the Initial Shares are reduced as provided in the preceding proviso,
then GS&Co. shall use commercially reasonable efforts to borrow
or otherwise acquire an additional number of Shares equal to the
shortfall in the Initial Shares delivered on the Initial Share Delivery
Date and shall deliver such additional Shares as promptly as
practicable, and all Shares so delivered shall be considered Initial
Shares.
Initial Share Delivery Date:
[ ]
Termination Price:
Additional Relevant Days:
USD [ ] per Share
The 5 Exchange Business Days immediately following the
Calculation Period.
Counterparty represents and warrants to GS&Co. that neither it nor any “affiliated purchaser” (as defined in
3.
Rule 10b-18 under the Exchange Act) has made any purchases of blocks pursuant to the proviso in Rule 10b-18(b)(4)
under the Exchange Act during either (i) the four full calendar weeks immediately preceding the Trade Date or (ii)
during the calendar week in which the Trade Date occurs.
4.
Notwithstanding anything to the contrary herein or in the Master Confirmation:
A-3
(i) the effectiveness of the Transaction evidenced by this Supplemental Confirmation is conditioned
on Counterparty’s release, and public dissemination thereof, following execution hereof (and in all cases on the Trade
Date), of the press release disclosing (x) its entry into this Transaction and (y) earnings and related financial results for
the quarter ending on or about December 31, 2016 (such time of release and public dissemination, the “Release Time”);
and
(ii) the representations and warranties of Counterparty in clause (i) of Section 4(b) shall be deemed to
be given immediately following the Release Time on the Trade Date and not as of the time that Counterparty executes
this Supplemental Confirmation.
5.
This Supplemental Confirmation may be executed in any number of counterparts, all of which shall constitute
one and the same instrument, and any party hereto may execute this Supplemental Confirmation by signing and
delivering one or more counterparts.
A-4
Counterparty hereby agrees (a) to check this Supplemental Confirmation carefully and immediately upon
receipt so that errors or discrepancies can be promptly identified and rectified and (b) to confirm that the foregoing (in
the exact form provided by GS&Co.) correctly sets forth the terms of the agreement between GS&Co. and Counterparty
with respect to the Transaction to which this Supplemental Confirmation relates, by manually signing this Supplemental
Confirmation or this page hereof as evidence of agreement to such terms and providing the other information requested
herein and immediately returning an executed copy to Equity Derivatives Documentation Department, facsimile No.
###############.
Yours sincerely,
GOLDMAN, SACHS & CO.
By:
/s/ DANIELA ROUSE
Authorized Signatory
Name: Daniela Rouse
Title: Vice President
Agreed and Accepted By:
INTUITIVE SURGICAL, INC.
By:
/s/ MARSHALL L. MOHR
Name: Marshall L. Mohr
Title: Senior Vice President and Chief Financial Officer
A-5
APPENDIX I
DISCOUNT PERCENTAGE TABLE
Reference Implied Volatility
[ ]
Discount Percentage
[ ]
A-6
SCHEDULE B
TRADE NOTIFICATION
To:
Intuitive Surgical, Inc.
1266 Kifer Rd
Sunnyvale, CA 94086
From:
Goldman, Sachs & Co.
Subject:
Accelerated Stock Repurchases
Ref. No:
[Insert Reference No.]
Date:
[Insert Date]
The purpose of this Trade Notification is to notify you of certain terms in the Transaction entered into between
Goldman, Sachs & Co. (“GS&Co.”) and Intuitive Surgical, Inc. (“Counterparty”) (together, the “Contracting
Parties”) bearing the trade reference number set forth above.
This Trade Notification supplements, forms part of, and is subject to (i) the Supplemental Confirmation dated
as of January 24, 2017 between the Contracting Parties, as amended and supplemented from time to time (the
“Supplemental Confirmation”) and (ii) the Master Confirmation dated as of January 24, 2017 between the Contracting
Parties, as amended and supplemented from time to time (the “Master Confirmation”). All provisions contained in
the Master Confirmation and Supplemental Confirmation govern this Trade Notification except as expressly modified
below.
Relevant Closing Price:
Discount Percentage:
Reference Implied Volatility:
USD [ ]
[ ]
[ ]
Forward Price Adjustment Amount:
USD [ ]
Yours sincerely,
GOLDMAN, SACHS & CO.
By: ________________________________
Authorized Signatory
B-1
ANNEX A
COUNTERPARTY SETTLEMENT PROVISIONS
1.
The following Counterparty Settlement Provisions shall apply to the extent indicated under
the Master Confirmation:
Settlement Currency:
USD
Settlement Method Election: Applicable; provided that (i) Section 7.1 of the Equity
Definitions is hereby amended by deleting the word “Physical”
in the sixth line thereof and replacing it with the words “Net
Share” and (ii) the Electing Party may make a settlement method
election only if the Electing Party represents and warrants to
GS&Co. in writing on the date it notifies GS&Co. of its election
that, as of such date, the Electing Party is not aware of any
material non-public information concerning Counterparty or the
Shares and is electing the settlement method in good faith and
not as part of a plan or scheme to evade compliance with the
federal securities laws.
Electing Party:
Counterparty
Settlement Method
Election Date:
The earlier of (i) the Scheduled Termination Date and (ii) the
second Exchange Business Day immediately following the
Accelerated Termination Date (in which case the election under
Section 7.1 of the Equity Definitions shall be made no later than
10 minutes prior to the open of trading on the Exchange on such
second Exchange Business Day), as the case may be.
Default Settlement Method:
Cash Settlement
Forward Cash Settlement
Amount:
Settlement Price:
The Number of Shares to be Delivered multiplied by the
Settlement Price.
The average of the VWAP Prices for the Exchange Business Days
in the Settlement Valuation Period, subject to Valuation
Disruption as specified in the Master Confirmation.
Settlement Valuation Period: A number of Scheduled Trading Days selected by GS&Co. in its
good faith commercially reasonable discretion by reference to
(x) the then-prevailing volume limitations of Rule 10b-18 in
respect of the Shares and (y) the number of commercially
reasonable Scheduled Trading Days necessary or advisable to
unwind a commercially reasonable hedge position, beginning on
the Scheduled Trading Day immediately following the earlier of
(i) the Scheduled Termination Date or (ii) the Exchange Business
Day immediately following the Termination Date.
Cash Settlement:
If Cash Settlement is applicable, then Buyer shall pay to Seller
the absolute value of the Forward Cash Settlement Amount on
the Cash Settlement Payment Date.
1
Cash Settlement
Payment Date:
Net Share Settlement
Procedures:
The date one Settlement Cycle following the last day of the
Settlement Valuation Period.
If Net Share Settlement is applicable, Net Share Settlement shall
be made in accordance with paragraphs 2 through 7 below.
2.
Net Share Settlement shall be made by delivery on the Cash Settlement Payment Date of a
number of Shares satisfying the conditions set forth in paragraph 3 below (the “Registered Settlement Shares”), or a
number of Shares not satisfying such conditions (the “Unregistered Settlement Shares”), in either case with a value
equal to the absolute value of the Forward Cash Settlement Amount, as determined by the Calculation Agent, with such
Shares’ value determined by the Calculation Agent (which value shall, in the case of Unregistered Settlement Shares,
take into account a commercially reasonable illiquidity discount).
3.
Counterparty may only deliver Registered Settlement Shares pursuant to paragraph 2 above
if:
(a)
a registration statement covering public resale of the Registered Settlement Shares by
GS&Co. (the “Registration Statement”) shall have been filed with the Securities and Exchange Commission under
the Securities Act and been declared or otherwise become effective on or prior to the date of delivery, and no stop order
shall be in effect with respect to the Registration Statement; a printed prospectus relating to the Registered Settlement
Shares (including any prospectus supplement thereto, the “Prospectus”) shall have been delivered to GS&Co., in such
quantities as GS&Co. shall reasonably have requested, on or prior to the date of delivery;
(b)
the form and content of the Registration Statement and the Prospectus (including, without
limitation, any sections describing the plan of distribution) shall be satisfactory to GS&Co.;
(c)
as of or prior to the date of delivery, GS&Co. and its agents shall have been afforded a
reasonable opportunity to conduct a due diligence investigation with respect to Counterparty customary in scope for
underwritten offerings of equity securities of similar size and the results of such investigation are satisfactory to GS&Co.,
in its discretion; and
(d)
as of the date of delivery, an agreement (the “Underwriting Agreement”) shall have been
entered into with GS&Co. in connection with the public resale of the Registered Settlement Shares by GS&Co.
substantially similar to underwriting agreements customary for underwritten offerings of equity securities of similar
size, in form and substance satisfactory to GS&Co., which Underwriting Agreement shall include, without limitation,
provisions substantially similar to those contained in such underwriting agreements relating, without limitation, to the
indemnification of, and contribution in connection with the liability of, GS&Co. and its affiliates and the provision of
customary opinions, accountants’ comfort letters and lawyers’ negative assurance letters.
4.
If Counterparty delivers Unregistered Settlement Shares pursuant to paragraph 2 above:
(a)
all Unregistered Settlement Shares shall be delivered to GS&Co. (or any affiliate of GS&Co.
designated by GS&Co.) pursuant to the exemption from the registration requirements of the Securities Act provided
by Section 4(a)(2) thereof;
(b)
as of or prior to the date of delivery, GS&Co. and any potential purchaser of any such shares
from GS&Co. (or any affiliate of GS&Co. designated by GS&Co.) identified by GS&Co. shall be afforded a
commercially reasonable opportunity to conduct a due diligence investigation with respect to Counterparty customary
in scope for private placements of equity securities for an issuance of similar size (including, without limitation, the
2
right to have made available to them for inspection all financial and other records, pertinent corporate documents and
other information reasonably requested by them);
(c)
as of the date of delivery, Counterparty shall enter into an agreement (a “Private Placement
Agreement”) with GS&Co. (or any affiliate of GS&Co. designated by GS&Co.) in connection with the private
placement of such shares by Counterparty to GS&Co. (or any such affiliate) and the private resale of such shares by
GS&Co. (or any such affiliate), substantially similar to private placement purchase agreements customary for private
placements of equity securities for an issuance of similar size, in form and substance commercially reasonably
satisfactory to GS&Co., which Private Placement Agreement shall include, without limitation, provisions substantially
similar to those contained in such private placement purchase agreements relating, without limitation, to the
indemnification of, and contribution in connection with the liability of, GS&Co. and its affiliates and the provision of
customary opinions, accountants’ comfort letters and lawyers’ negative assurance letters, and shall provide for the
payment by Counterparty of all reasonable fees and expenses in connection with such resale, including all reasonable
fees and expenses of counsel for GS&Co., and shall contain representations, warranties, covenants and agreements of
Counterparty reasonably necessary or advisable to establish and maintain the availability of an exemption from the
registration requirements of the Securities Act for such resales; and
(d)
in connection with the private placement of such shares by Counterparty to GS&Co. (or any
such affiliate) and the private resale of such shares by GS&Co. (or any such affiliate), Counterparty shall, if so requested
by GS&Co., prepare, in cooperation with GS&Co., a private placement memorandum in form and substance reasonably
satisfactory to GS&Co.
5.
GS&Co., itself or through an affiliate (the “Selling Agent”) or any underwriter(s), will sell
all, or such lesser portion as may be required hereunder, of the Registered Settlement Shares or Unregistered Settlement
Shares and any Makewhole Shares (as defined below) (together, the “Settlement Shares”) delivered by Counterparty
to GS&Co. pursuant to paragraph 6 below commencing on the Cash Settlement Payment Date and continuing until the
date on which the aggregate Net Proceeds (as such term is defined below) of such sales, as determined by GS&Co., is
equal to the absolute value of the Forward Cash Settlement Amount (such date, the “Final Resale Date”). If the
proceeds of any sale(s) made by GS&Co., the Selling Agent or any underwriter(s), net of any fees and commissions
(including, without limitation, underwriting or placement fees) customary for similar transactions under the
circumstances at the time of the offering, together with commercially reasonable carrying charges and expenses incurred
in connection with the offer and sale of the Shares (including, but without limitation to, the covering of any over-
allotment or short position (syndicate or otherwise)) (the “Net Proceeds”) exceed the absolute value of the Forward
Cash Settlement Amount, GS&Co. will refund, in USD (or, at Counterparty’s election, Shares of equivalent value, as
determined by the Calculation Agent), such excess to Counterparty on the date that is three (3) Currency Business Days
following the Final Resale Date, and, if any portion of the Settlement Shares remains unsold, GS&Co. shall return to
Counterparty on that date such unsold Shares.
6.
If the Calculation Agent determines that the Net Proceeds received from the sale of the
Registered Settlement Shares or Unregistered Settlement Shares or any Makewhole Shares, if any, pursuant to this
paragraph 6 are less than the absolute value of the Forward Cash Settlement Amount (the amount in USD by which
the Net Proceeds are less than the absolute value of the Forward Cash Settlement Amount being the “Shortfall” and
the date on which such determination is made, the “Deficiency Determination Date”), Counterparty shall on the
Exchange Business Day next succeeding the Deficiency Determination Date (the “Makewhole Notice Date”) deliver
to GS&Co., through the Selling Agent, a notice of Counterparty’s election that Counterparty shall either (i) pay an
amount in cash equal to the Shortfall on the day that is one (1) Currency Business Day after the Makewhole Notice
Date, or (ii) deliver additional Shares. If Counterparty elects to deliver to GS&Co. additional Shares, then Counterparty
shall deliver additional Shares in compliance with the terms and conditions of paragraph 3 or paragraph 4 above, as
the case may be (the “Makewhole Shares”), on the first Clearance System Business Day which is also an Exchange
Business Day following the Makewhole Notice Date in such number as the Calculation Agent reasonably believes
would have a market value on that Exchange Business Day equal to the Shortfall. Such Makewhole Shares shall be
sold by GS&Co. in accordance with the provisions above; provided that if the sum of the Net Proceeds from the sale
of the originally delivered Shares and the Net Proceeds from the sale of any Makewhole Shares is less than the absolute
3
value of the Forward Cash Settlement Amount then Counterparty shall, at its election, either make such cash payment
or deliver to GS&Co. further Makewhole Shares until such Shortfall has been reduced to zero.
7.
Notwithstanding the foregoing, in no event shall the aggregate number of Settlement Shares
and Makewhole Shares be greater than the Reserved Shares minus the amount of any Shares actually delivered by
Counterparty under any other Transaction(s) under this Master Confirmation (the result of such calculation, the “Capped
Number”). Counterparty represents and warrants (which shall be deemed to be repeated on each day that a Transaction
is outstanding) that the Capped Number is equal to or less than the number of Shares determined according to the
following formula:
A – B
Where A = the number of authorized but unissued shares of the Counterparty that are not reserved
for future issuance on the date of the determination of the Capped Number; and
B = the maximum number of Shares required to be delivered to third parties if Counterparty
elected Net Share Settlement of all transactions in the Shares (other than Transactions in
the Shares under this Master Confirmation) with all third parties that are then currently
outstanding and unexercised.
“Reserved Shares” means initially, 6,106,591 Shares. The Reserved Shares may be increased or
decreased in a Supplemental Confirmation.
4
INTUITIVE SURGICAL, INC.
SUBSIDIARIES (All 100% Owned)
Subsidiaries of the Registrant
Intuitive Surgical Holdings, LLC
Intuitive Surgical S. de R. L. de C.V.
Intuitive Surgical Sarl
Intuitive Surgical International Ltd.
Intuitive Surgical S.A.S.
Intuitive Surgical Deutschland GmbH
Intuitive Surgical SPRL
Intuitive Surgical Limited
Intuitive Surgical Pte. Ltd.
Intuitive Surgical HK Limited
Intuitive Surgical Operations, Inc.
Intuitive Surgical GK
Intuitive Surgical Brasil Importacao E Comercio De Equipamentos
Cirurgicos Ltda.
Intuitive Surgical AB
Intuitive Surgical Medical Device and Technology (Shanghai) Co., Ltd.
Intuitive Surgical Korea Limited
Intuitive Surgical s.r.o.
I.S. Netherlands C.V.
I.S. Holdings C.V.
Intuitive Surgical BV
Intuitive Surgical India Private Limited
Intuitive Surgical Medical Device Taiwan Ltd.
Intuitive Surgical ApS
Exhibit 21.1
State or Other Jurisdiction of Incorporation
Delaware, U.S.
Mexico
Switzerland
Cayman
France
Germany
Belgium
United Kingdom
Singapore
Hong Kong
Delaware, U.S.
Japan
Brazil
Sweden
China
Korea
Czech Republic
Netherlands
Netherlands
Netherlands
India
Taiwan
Denmark
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 333-211064, 333-203793,
333-189399, 333-184488, 333-180863, 333-175904, 333-173803, 333-166833, 333-164586, 333-159228, 333-152558,
333-143433, 333-135004, 333-127162, 333-116499, 333-99893, 333-65342, and 333-43558) of Intuitive Surgical, Inc. of our
report dated February 3, 2017, relating to the consolidated financial statements, financial statement schedule, and the effectiveness
of internal control over financial reporting, which appears in this Form 10-K.
Exhibit 23.1
/s/ PricewaterhouseCoopers LLP
San Jose, California
February 3, 2017
Certification of Chief Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 31.1
I, Gary S. Guthart, certify that:
1.
2.
3.
4.
I have reviewed this annual report on Form 10-K of Intuitive Surgical, Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report,
fairly present in all material respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control
over financial reporting (as defined in Exchange Act Rules 13a–15(f) and 15d–15(f)) for the registrant and
have:
a)
b)
c)
d)
designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating
to the registrant, including its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which this report is being prepared;
designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
evaluated the effectiveness of the registrant’s disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report based on such evaluation; and
disclosed in this report any change in the registrant’s internal control over financial reporting
that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal
quarter in the case of an annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the registrant’s auditors and the audit committee of the
registrant’s board of directors (or persons performing the equivalent functions):
a)
b)
all significant deficiencies and material weaknesses in the design or operation of internal
control over financial reporting which are reasonably likely to adversely affect the
registrant’s ability to record, process, summarize and report financial information; and
any fraud, whether or not material, that involves management or other employees who have
a significant role in the registrant’s internal control over financial reporting.
Date: February 3, 2017
By:
/S/ GARY S. GUTHART
Gary S. Guthart, Ph.D.
President and Chief Executive Officer
Certification of Principal Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 31.2
I, Marshall L. Mohr, certify that:
1.
2.
3.
4.
I have reviewed this annual report on Form 10-K of Intuitive Surgical, Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit
to state a material fact necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this
report, fairly present in all material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and
internal control over financial reporting (as defined in Exchange Act Rules 13a–15(f) and 15d–15(f))
for the registrant and have:
a)
b)
c)
d)
designed such disclosure controls and procedures, or caused such disclosure controls
and procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this
report is being prepared;
designed such internal control over financial reporting, or caused such internal control
over financial reporting to be designed under our supervision, to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted
accounting principles;
evaluated the effectiveness of the registrant’s disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered by this report based on
such evaluation; and
disclosed in this report any change in the registrant’s internal control over financial
reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s
fourth fiscal quarter in the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant’s internal control over financial
reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the registrant’s auditors and the audit committee of the
registrant’s board of directors (or persons performing the equivalent functions):
a)
b)
all significant deficiencies and material weaknesses in the design or operation of
internal control over financial reporting which are reasonably likely to adversely affect
the registrant’s ability to record, process, summarize and report financial information;
and
any fraud, whether or not material, that involves management or other employees who
have a significant role in the registrant’s internal control over financial reporting.
Date: February 3, 2017
/S/ MARSHALL L. MOHR
Marshall L. Mohr
Senior Vice President and Chief Financial Officer
Exhibit 32.1
Certification of Chief Executive Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Pursuant to 18 U.S.C. § 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer
of Intuitive Surgical, Inc. (the “Company”) hereby certifies, to such officer’s knowledge, that:
(i)
(ii)
the accompanying Annual Report on Form 10-K of the Company for the period ended December 31,
2016 (the “Report”) fully complies with the requirements of Section 13(a) or Section 15(d), as
applicable, of the Securities Exchange Act of 1934, as amended; and
the information contained in the Report fairly presents, in all material respects, the financial condition
and results of operations of the Company.
/S/ GARY S. GUTHART
Gary S. Guthart, Ph.D.
President and Chief Executive Officer
Date: February 3, 2017
Certification of Principal Financial Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Pursuant to 18 U.S.C. § 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer
of Intuitive Surgical, Inc. (the “Company”) hereby certifies, to such officer’s knowledge, that:
(i)
(ii)
the accompanying Annual Report on Form 10-K of the Company for the period ended December 31,
2016 (the “Report”) fully complies with the requirements of Section 13(a) or Section 15(d), as
applicable, of the Securities Exchange Act of 1934, as amended; and
the information contained in the Report fairly presents, in all material respects, the financial condition
and results of operations of the Company.
/S/ MARSHALL L. MOHR
Marshall L. Mohr
Senior Vice President and Chief Financial Officer
Date: February 3, 2017