Annual Report 2017
Intuitive Surgical, Inc.
www.intuitivesurgical.com
Dear Owner,
Surgery is one of the primary therapies applied to complex disease. Worldwide, patients
seeking cure or relief undergo tens of millions of surgeries in response to a wide variety of conditions. In
the past century, physicians have innovated in surgical technique, in patient management and in the
design of devices they select to offer surgeries that are more effective and less disruptive to patients’
lives than in the past. Despite this progress, substantial opportunity exists to accelerate improvement in
outcomes and to decrease team-to-team variability in surgery. As demographic shifts towards aging
populations occur in many countries, decreasing the total cost to treat a patient per disease episode is
required by healthcare payers.
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. Innovation in our markets involves validating not only clinical value but also workflow,
efficiency and economic value as well. Improvements in patient outcomes measured across surgical
teams form the basis of improving the overall cost of care sought by hospitals and payers.
2017 was a strong year for Intuitive in pursuit of our mission. Use of da Vinci® increased 16%
over 2016 and our installed base of da Vinci systems in clinical use grew 13% in the year from 3,919 to
4,409 at year end. We serve multiple surgical disciplines, including general surgery, urology, gynecology,
thoracic and trans-oral surgery. This year, use of our products grew significantly in general surgery, up
32% over 2016. We are increasingly a global company, with strong growth and increasing demand in
several countries, including those in Europe, Japan, China and Korea, to name a few. Use of our
products outside the United States grew 23% in the year.
We believe that surgery, by its nature, is an intricate ballet requiring excellence from teams of
interacting professionals and technologies to deliver predictably outstanding results. As a result, our
development efforts are organized around the principle of holistic design and integration. To deliver
products and services that matter to our customers, our teams interact, analyze and deliver capability
across the spectrum of activities supporting a comprehensive robotic-assisted surgical program that we
view as an integrated ecosystem.
Because skill acquisition in surgery is important, our products and services are organized in
generational families. Shared design principles, operating methods, user interfaces and training
technologies allow surgical teams and hospitals to more quickly integrate new technologies and can
deliver a significantly improved framework to training environments. As consolidation has progressed in
health systems (with integrated delivery networks now owning multiple hospitals), standardization
across surgical platforms can decrease variability and inefficiency from residency and fellowship
programs to academic and community clinical settings. We are currently on our 4th generation of
surgical platforms. Our flagship da Vinci Xi surgical system is our most capable and flexible multi-
quadrant platform, launched in 2014. We added our da Vinci X surgical system in 2017 - which offers 4th
generation imaging, robotics and instrumentation for focused-quadrant surgeries at an attractive value.
In 2017, we submitted our 510(k) for our first application for our da Vinci SP surgical system. SP is
designed to deliver high precision, outstanding imaging and high dexterity to confined surgical spaces
and single-port applications. SP is not currently for sale and we plan to integrate SP into our fourth
generation platform after obtaining 510(k) clearance.
Generation 4
da Vinci X
da Vinci SP
da Vinci Xi
Robot assisted surgery has progressed from being a small percentage of global surgical
procedures to a significant driver of surgery’s future. We believe that the use of computing, novel
imaging, mechatronics, networking and algorithms are just beginning to demonstrate their potential to
enable better interventions. As a result, we have accelerated our investments in those technologies,
products and services that we think show promise in delivering better outcomes and decreased
variability in the hands of our customers. These technologies include: advanced imaging that will allow
surgeons to see beyond the surface of tissue and allow the integration of 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 the da
Vinci SP and the flexible catheter system represent platform technologies, allowing future capabilities to
be built on the core engineering they contain. To pursue the global opportunity, we are expanding our
direct reach in international markets, particularly in Europe and Asia. As an example of the global
opportunity for us, in Japan, the Ministry of Health, Labor and Welfare (MHLW) has approved 12 new
procedures for reimbursement when using our da Vinci Surgical System.
Health policy and regulation continue to be dynamic given the size of the healthcare economy,
levels of government debt and the aging of patient populations. Balancing these challenges are exciting
opportunities in scientific fields including precision diagnostics, robotics, molecular biology and machine
learning. Whatever future policy changes hold, we believe high quality, replicable surgery that delivers
improved patient outcomes will be valued and we continue to invest in accelerating future capabilities
and scientific approaches to measuring progress.
Intuitive is the beneficiary of an outstanding team of highly talented, mission-driven people
from around the globe bringing with them diverse experiences. Our team of over 4,400 employees
collaborate with our customers, our suppliers and research institutions worldwide. We are obsessed
with the total performance of our offerings and seek to invent and deliver effective solutions to tough
problems.
As we enter 2018, we are focused on making significant progress in the continued adoption of
our da Vinci systems in general surgery, the ongoing development of European markets and access to
customers in Asia, as well as advancing our new platforms – imaging, advanced instruments, da Vinci SP
and our diagnostic catheter platform. Finally, we continue to support additional clinical and economic
validation by global region.
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, 2017
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
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
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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, a smaller
reporting company, or emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting
company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer
(Do not check if a smaller reporting company)
Smaller reporting company
Emerging growth company
Accelerated filer
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period
for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
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, 2017, based upon
the closing price of Common Stock on such date as reported on the NASDAQ Global Select Market, was approximately
$34,385,417,181. 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 as of January 19, 2018, was 112,298,504.
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 19, 2018, to be filed within 120 days of the registrant’s fiscal year ended December 31,
.
2017
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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
Item 16.
Form 10-K Summary
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 provisional income tax expense related to the Tax Cuts and Jobs Act, the potential impact of the final
resolution of provisional estimates and potential subsequent adjustments due to additional guidance from and interpretations by
regulatory and standard-setting bodies and changes in assumptions, 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, therefore, be considered in
light of various important factors, including, but not limited to, the following: the impact of global and regional economic and
credit market conditions on healthcare spending; healthcare reform legislation in the U.S. and its impact on hospital spending,
reimbursement and fees levied on certain medical device revenues; changes in hospital admissions and actions by payers to limit
or manage surgical procedures; the timing and success of product development and market acceptance of developed products; the
results of any collaborations, in-licensing arrangements, joint ventures, strategic alliances or partnerships; procedure counts;
regulatory approvals, clearances and restrictions or any dispute that may occur with any regulatory body; guidelines and
recommendations in the healthcare 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 or
the inability 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; adverse publicity regarding us and the safety of our products and adequacy of training; our ability to
expand into foreign markets; the impact of changes to tax legislation, guidance, and interpretations; 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.
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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 and majority-owned subsidiaries. Intuitive®, Intuitive Surgical®, da Vinci®, da Vinci S®, da Vinci S HD Surgical System®,
da Vinci Si®, da Vinci Si HD Surgical System®, da Vinci Xi®, da Vinci SP®, EndoWrist®, Firefly®, InSite®, da Vinci Connect®,
Intuitive Surgical EcoSystem®, and da Vinci X® 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
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 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.
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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 Systems
We have commercialized the following four generational platforms of da Vinci Surgical Systems: our fourth generation da
Vinci X and da Vinci Xi Surgical Systems, our third generation da Vinci Si Surgical System, our second generation da Vinci S
Surgical System, and our first generation da Vinci standard 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 X, 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 da Vinci X, 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 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 da Vinci X, Xi, and Si Surgical Systems, and
is available as an upgrade on three-arm Si-e Surgical System.
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 X, 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 X, Xi, and Si Surgical Systems.
Most da Vinci Skills Simulators have been sold in connection with our da Vinci X, 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.
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Firefly Fluorescence Imaging. Firefly is a standard feature of the da Vinci X and 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.
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. Our EndoWrist
instruments are sterilizable at the hospital or provided sterile, 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 and wristed instruments and accessories that allow da Vinci
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 7mm 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.
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 where the numeric designation indicates the length of the staple line.
The EndoWrist Stapler 45 is used in general, gynecologic, and urologic surgery. The EndoWrist Stapler 30, available with
the da Vinci X and 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 Surgical 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:
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.
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.
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
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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 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. 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. Hysterectomies for benign conditions can be performed using either multi-port
or Single-Site technology and we estimate that 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
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 was 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
Hernia Repair. A hernia occurs when an organ or other tissue squeezes through a weak spot in a surrounding muscle or
connective tissue. During a hernia repair surgery, the weakened 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.
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. Surgeons have reported that the use of the da Vinci Surgery System and our
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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.
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 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 MIS 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
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 operate on tumors 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. Our da Vinci X Surgical System is priced between the da Vinci Si and Xi Surgical Systems and offers customers access
to many of the da Vinci Xi features, including da Vinci Xi advanced instrumentation and imaging systems, at a lower price point.
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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,
2017, we had an installed base of 4,409 da Vinci Surgical Systems, including 2,862 in the U.S., 742 in Europe, 579 in Asia, and
226 in the rest of the world. We estimate that surgeons using our technology completed approximately 877,000 surgical procedures
of various types in hospitals throughout the world during the year ended December 31, 2017.
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,
2017, 2016, and 2015. During the years ended December 31, 2017, 2016, and 2015, domestic revenue accounted for 73%, 72%,
and 71%, respectively, of total revenue, while revenue from our OUS markets accounted for 27%, 28%, and 29%, respectively.
As of December 31, 2017, and 2016, 88% and 86% of all long-lived assets were in the U.S., respectively.
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
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 hospitals, interacting with surgeons, operating room staff, and hospital administrators
to develop and sustain successful robotic 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. New direct customers who purchase a new da Vinci Surgical System typically place
an initial stocking order of instruments and accessories soon after they receive 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 fiscal quarter 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 quarters. Procedures treating benign conditions are typically higher in the fourth quarter and lower in the
first quarter. The 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 for our
customers, including 24/7 support, installation, repair, and maintenance. 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.
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Research and Development
We focus our research and development efforts on innovating products and product improvements that align with our mission
to provide more effective, less invasive, and easier care options for physicians, patients and their families. We employ research
and development and engineering staff responsible for product design and engineering. We invested $328.6 million, $239.6 million,
and $197.4 million of research and development expenses for the years ended December 31, 2017, 2016, and 2015, 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, 3D Systems, Inc., Erbe Elektromedizin GmbH, InTouch Technology Inc., Johnson & Johnson, JustRight Surgical, LLC,
Mimic Technologies, Inc., Novadaq Technologies, Inc., Olympus Corporation, Schoelly Fiberoptic GmbH, and Trumpf Medical
(a division of Hill-Rom Holdings, Inc.).
In 2017, our majority-owned joint venture with Shanghai Fosun Pharmaceutical (Group) Co., Ltd. (“Fosun Pharma”), a
subsidiary of Fosun International Limited, was legally formed. The joint venture was formed 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 and Mexicali, Mexico facilities.
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.
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 Systems may prove complementary to some of these
new technologies.
Moreover, as we add new robotically controlled products (e.g. Single-Site, EndoWrist Stapler, and EndoWrist One 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. and Medtronic PLC.
Furthermore, a number of companies have introduced products in the field of robotic surgery or have made explicit their
intention 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.; Medtronic PLC; meerecompany Inc.; Olympus Corp.; Samsung Corporation; Smart Robot Technology Group Co. Ltd.;
Titan Medical Inc.; and TransEnterix Inc. Other 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, 2017, we held ownership or exclusive field-of-use licenses for more than 2,750 U.S. and foreign patents
and more than 1,900 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.
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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
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:
•
•
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
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
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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.
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 provide assurance 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
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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).
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.
In April 2017, the Medical Device Regulation was adopted to replace the Medical Device Directive (93/42/EEC) as amended.
The Medical Device Regulation will apply after a three-year transition period and imposes stricter requirements for the marketing
and sale of medical devices and grants Notified Bodies increased post-market surveillance authority. We may be subject to risks
associated with additional testing, modification, certification, or amendment of our existing market authorizations, or we may be
required to modify products already installed at our customers’ facilities to comply with the official interpretations of these revised
regulations.
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:
•
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
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•
•
•
•
•
•
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
information related to payments and other “transfers of value” to physicians and other healthcare providers or
marketing expenditures and pricing information; 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
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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. Since October 1, 2015, a new family of ICD-10-PCS codes can 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.
In the U.S., there have been and continue to be a number of legislative initiatives to contain healthcare costs. In March 2010,
the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act (collectively,
the “PPACA”), was enacted. The PPACA made changes that have significantly impacted healthcare providers, insurers, and
pharmaceutical and medical device manufacturers. The PPACA contained 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
Medical Device Excise Tax (“MDET”) of approximately $17.0 million in 2015 which was included as a cost of revenue and a
reduction of product gross profit margin. The Consolidated Appropriations Act, 2016 (the “Appropriations Act”), enacted in
December 2015, included a two-year moratorium on MDET such that medical device sales in 2016 and 2017 were exempt from
the MDET. New legislation was passed in January 2018 such that MDET will be delayed until January 1, 2020.
The PPACA also appropriated 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. 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 types of 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. Individual states in the U.S. have also become increasingly aggressive in passing legislation and implementing
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regulations designed to control product pricing, including price or patient reimbursement constraints and discounts, and require
marketing cost disclosure and transparency measures.
There have also been judicial and congressional challenges to certain aspects of the PPACA, as well as efforts by the U.S.
administration to modify, repeal, or otherwise invalidate all, or certain provisions of, the PPACA. Since January 2017, the U.S.
President has signed two Executive Orders designed to delay the implementation of certain provisions of the PPACA or otherwise
circumvent some of the requirements for health insurance mandated by the PPACA. The current U.S. administration has also
announced that it will discontinue the payment of cost-sharing reduction (“CSR”) payments to insurance companies until Congress
approves the appropriation of funds for the CSR payments. The loss of the CSR payments is expected to increase premiums on
certain policies issued by qualified health plans under the PPACA. A bipartisan bill to appropriate funds for CSR payments has
been introduced in the Senate, but the future of that bill is uncertain. In addition, CMS has recently proposed regulations that
would give states greater flexibility in setting benchmarks for insurers in the individual and small group marketplaces, which may
have the effect of relaxing the essential health benefits required under the PPACA for plans sold through such marketplaces.
Because of the Tax Cuts and Jobs Act enacted on December 22, 2017, the PPACA's individual mandate penalty for not having
health insurance coverage will be eliminated starting in 2019. Further, each chamber of Congress has put forth multiple bills
designed to repeal or repeal and replace portions of the PPACA. Although the majority of these measures have not been enacted
by Congress to date, Congress will likely continue to consider other legislation to repeal or repeal and replace elements of the
PPACA. 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 adversely affect our business, financial condition, and results of operations.
Employees
As of December 31, 2017, we had 4,444 employees, 597 of whom were engaged directly in research and development, 1,868
in manufacturing and service, and 1,979 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,
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.
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, 2017, 2016, and 2015 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 is 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
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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.
Uncertainty about global economic conditions, including credit and sovereign debt concerns in certain European countries
and concerns about slowed economic growth in China and other OUS markets, have caused and may continue to cause 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. Customers and distributors may choose to postpone or reduce spending due to financial difficulties or may be unable
to obtain credit to finance purchases of our products due 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.
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 efforts made by the U.S. federal government to modify, repeal, or otherwise invalidate all, or certain
provisions of, the PPACA. In addition, the U.S. federal government has called for, or enacted, substantial changes to trade, fiscal,
and tax policies, which may include changes to existing trade agreements, including, but not limited to, the North American Free
Trade Agreement ("NAFTA"), and 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 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 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 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 face or expect to face competition from companies that develop or have developed wristed, robotic, or
computer-assisted surgical systems and products. 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. Other companies with substantial experience in industrial robotics could
potentially expand into the field of surgical robotics and become competitors. 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 services 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. Furthermore, there are third-party service providers
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offering 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. If we are unable to compete
successfully with any third-party service providers, our revenues may suffer.
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. While our sales arrangements
with customers generally prohibit the use of unauthorized or unapproved instruments and accessories with 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, 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
purchaser is located in a country where a new product that we have introduced has not yet received regulatory clearance, 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:
•
•
•
•
•
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;
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•
•
•
•
•
changes in competition;
changes in production volume driven by demand for our products;
changes in material, labor, or other manufacturing-related costs, including the 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.
The sales and purchase order cycle of our da Vinci Surgical System is lengthy 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. As a result, hospitals may delay or accelerate system purchases in conjunction
with timing of their capital budget timelines. Further, IDN groups are creating larger networks of da Vinci system operators with
increasing purchasing power and are increasingly evaluating their da Vinci Surgery programs to optimize the efficiency of the da
Vinci system operations. 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 fiscal quarter 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 repairs, 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 future periods 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.
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 27%, 28%, and 29% of our revenue for the years ended December 31, 2017, 2016,
and 2015, respectively. Our OUS operations are, and will continue to be, subject to a number of risks including:
•
failure to obtain or maintain the same degree of protection against infringement of our intellectual property rights
as we have in the U.S.;
• multiple OUS regulatory requirements that are subject to change and that could impact our ability to manufacture
and sell our products;
changes in tariffs, trade barriers, and regulatory requirements;
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;
•
•
•
• U.S. relations with the governments of the foreign countries in which we operate;
•
•
•
•
•
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;
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•
•
•
anti-corruption laws, such as the U.S. Foreign Corrupt Practices Act, and other local laws prohibiting corrupt
payments to governmental officials;
economic weakness, including inflation, or political instability in particular foreign economies and markets; and
business interruptions due to natural disasters, outbreak of disease, and other events beyond our control.
On June 23, 2016, the United Kingdom (the “UK”) held a referendum in which voters approved an exit from the European
Union (the “EU”), commonly referred to as “Brexit.” On March 29, 2017, the UK formally notified the EU of its intention to
withdraw pursuant to Article 50 of the Lisbon Treaty. The withdrawal of the UK from the EU will take effect either on the effective
date of the withdrawal agreement or, in the absence of agreement, two years after the UK provided its notice of withdrawal. As a
result of the referendum, the British government has begun negotiating the terms of the UK’s future relationship with the EU,
including the terms of trade between the UK and 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, increased regulatory complexities, and
economic and political uncertainty in the region.
In addition, the U.S. federal government has made recent proposals and 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 a 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
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. If the level of credit
losses we experience in the future exceed our expectations, such losses 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
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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. See “Item 7A.
Quantitative and Qualitative Disclosures About Market Risk” for additional discussion on the impact of foreign exchange risk.
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 provide assurance that our products will not experience component aging, errors, or performance
problems. 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;
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
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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 carry insurance to cover that
indemnity or the related underlying losses. We also do not carry, among other types of coverage, earthquake, and cyber 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.
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.
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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 U.S., 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 U.S.
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. For example, 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.
NATURAL DISASTERS OR OTHER EVENTS BEYOND OUR CONTROL 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, which in the past has experienced both severe earthquakes and other natural
disasters. We do not have multiple-site capacity for all of our operations in the event of a business disruption. Furthermore, parties
in our supply chain and our customers are similarly vulnerable to natural disasters or other sudden, unforeseen, and severe adverse
events. 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 EFFECTS COULD HAVE A MATERIAL ADVERSE
EFFECT ON OUR BUSINESS, FINANCIAL CONDITION, RESULTS OF OPERATIONS, OR CASH FLOWS.
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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. For example, in 2016, we entered into an agreement to form a joint venture with Fosun Pharma to research, develop,
manufacture, and sell robotic-assisted catheter-based medical devices. 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,
including Fosun Pharma. 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, regulatory marketing authorizations, or intellectual property protections, 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 market access, regulatory compliance, or cure such deficiencies in product quality or intellectual
property protection 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.
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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; and
changes in tax laws or the interpretation of such tax laws and changes in generally accepted accounting principles.
On December 22, 2017, the U.S. federal government enacted the Tax Cuts and Jobs Act (“2017 Tax Act”). The 2017 Tax Act
significantly changed the existing U.S. corporate income tax laws by, among other things, lowering the corporate tax rate,
implementing a territorial tax system, and imposing a one-time deemed repatriation toll tax on cumulative undistributed foreign
earnings, for which we have not previously provided U.S. taxes. Given the timing, scope, and magnitude of the changes enacted
by the 2017 Tax Act, along with on-going implementation efforts, guidance, and other developments from U.S. regulatory and
standard-setting bodies, the completion of the accounting for certain tax items included in Note 10 to the Consolidated Financial
Statements included in Part II, Item 8, that have been reported as provisional, or where no estimate of the impact was provided as
a result of us not having the necessary information, may be subject to material change. Any significant changes to our future
effective tax rate, including final resolution of provisional amounts relating to effects of the 2017 Tax Act, may result in a material
adverse effect 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
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
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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. Our efforts to address these problems may not be successful
and could result in unexpected interruptions, delays, cessation of service, and harm to 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 the U.S., there have been and continue to be a number of legislative initiatives to contain healthcare costs. In March 2010,
the PPACA was enacted, which made changes that have impacted and are expected to significantly impact the pharmaceutical and
medical device industries.
The PPACA contained 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 U.S. In December 2015, the former U.S. President signed
into law the Appropriations Act. The Appropriations Act included a two-year moratorium on the medical device excise tax such
that medical device revenues in 2016 and 2017 were exempt from the excise tax. New legislation was passed in January 2018
such that MDET will be delayed until January 1, 2020.
The PPACA also 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.
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.
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Since its enactment, there have been judicial and Congressional challenges to certain aspects of the PPACA, as well as efforts
by the current U.S. administration to modify, repeal or otherwise invalidate all, or certain provisions of, the PPACA. Since January
2017, the U.S. President has signed two Executive Orders designed to delay the implementation of certain provisions of the PPACA
or otherwise circumvent some of the requirements for health insurance mandated by the PPACA. The current U.S. administration
has also announced that it will discontinue the payment of cost-sharing reduction (“CSR”) payments to insurance companies until
Congress approves the appropriation of funds for the CSR payments. The loss of the CSR payments is expected to increase
premiums on certain policies issued by qualified health plans under the PPACA. A bipartisan bill to appropriate funds for CSR
payments has been introduced in the Senate, but the future of that bill is uncertain. In addition, CMS has recently proposed
regulations that would give states greater flexibility in setting benchmarks for insurers in the individual and small group
marketplaces, which may have the effect of relaxing the essential health benefits required under the PPACA for plans sold through
such marketplaces. Because of the 2017 Tax Act, the PPACA's individual mandate penalty for not having health insurance coverage
will be eliminated starting in 2019. It is unclear what impact the elimination of the individual mandate penalty will have on our
business, financial condition, results of operations, or cash flows. Further, each chamber of Congress has put forth multiple bills
designed to repeal or repeal and replace portions of the PPACA. Although the majority of these measures have not been enacted
by Congress to date, Congress will likely continue to consider other legislation to repeal or repeal and replace elements of the
PPACA.
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 types of 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 new quality and payment programs, such as
MACRA, may have on our business, financial condition, results of operations, or cash flows. Individual states in the U.S. have
also become increasingly aggressive in passing legislation and implementing regulations designed to control product pricing,
including price or patient reimbursement constraints, and discounts, and require marketing cost disclosure and transparency
measures.
We expect additional state and federal health care reform measures to be adopted in the future that 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 have a material adverse effect 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
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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.
A person or entity does not need 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 non-compliance. 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 $165,786 per year (and up to an aggregate of $1.105 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 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 or marketing expenditures and
pricing information. 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 U.S. 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 U.S.
Our products and operations are subject to extensive regulation in the U.S. 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 U.S. 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 U.S., 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.
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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 U.S. 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 U.S. 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 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 non-compliant as a result of
future changes in, or interpretations of, regulations by the FDA or other regulatory agencies. We also cannot predict the likelihood,
nature, or extent of government regulation that may arise from future legislation, administrative, or executive action. For example,
certain policies of the current U.S. administration may impact our business and industry. Namely, the current U.S. administration
has taken several executive actions, including the issuance of a number of Executive Orders, that could impose significant burdens
on, or otherwise materially delay, the FDA’s ability to engage in routine regulatory and oversight activities such as implementing
statutes through rulemaking, issuance of guidance, and review and approval of marketing applications. It is difficult to predict
how these requirements will be implemented, and the extent to which they will impact the FDA’s ability to exercise its regulatory
authority. If these executive actions impose constraints on FDA’s ability to engage in oversight and implementation activities in
the normal course, our business may be negatively impacted.
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 U.S. for any
new devices we intend to market in the U.S. 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:
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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 (“MDR”) 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;
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•
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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
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 provide assurance
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
provide assurance 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,
it 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 U.S. 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, for compliance with the Medical
Device Directive (93/42/EEC), as amended, 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
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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 EU 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.
In April 2017, the Medical Device Regulation was adopted to replace the Medical Device Directive (93/42/EEC), as amended.
The Medical Device Regulation will apply after a three-year transition period and imposes stricter requirements for the marketing
and sale of medical devices and grants Notified Bodies increased post-market surveillance authority. We may be subject to risks
associated with additional testing, modification, certification, or amendment of our existing market authorizations, or we may be
required to modify products already installed at our customers’ facilities to comply with the official interpretations of these revised
regulations.
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
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 EU. 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
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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.
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 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 U.S. 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
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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 maintain or grow our revenue.
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:
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the extent to which our products achieve and maintain market acceptance;
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 possible that in
future periods 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 2015, it reached a high of $185.73 and a low of $151.62; during fiscal 2016, it reached a high of $241.61 and a low
of $169.09; and during fiscal 2017, it reached a high of $403.70 and a low of $209.83, in each case after giving effect to the three-
for-one stock split of our issued and outstanding common stock in October 2017. Our stock price can fluctuate for a number of
reasons, including:
•
•
•
•
•
•
announcements about us or our competitors;
variations in operating results and financial guidance;
introduction or abandonment of new technologies or products;
regulatory approvals and enforcement actions;
changes in product pricing policies;
changes in earnings estimates by analysts;
34
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•
•
•
•
changes in accounting policies;
economic changes and overall market volatility;
litigation; and
political uncertainties.
In addition, stock markets generally have experienced, and in the future may experience significant price and volume volatility.
This volatility has 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. Further, 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, it 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, 2017, we own approximately 905,000 square feet of space on 81 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 U.S. and 15,000 square feet of space is leased to a third party. In Southaven, Mississippi,
we lease 117,000 square feet of space for service operations and will be used for future expansion of our operations. In Tokyo,
Japan and Seoul, South Korea, we lease 59,000 and 40,000 square feet, respectively, for our local training centers 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; Blacksburg, Virginia; and San Francisco, California for research and
development and other operations. We lease facilities for sales and operations in Osaka, Japan.
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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Table of Contents
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
All share and per share information presented have been retroactively adjusted to reflect the three-for-one stock split of our
PART II
issued and outstanding common stock in October 2017.
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
2017
2016
High
Low
High
Low
$
$
$
$
255.77
318.05
348.79
403.70
$
$
$
$
209.83
253.11
307.22
353.49
$
$
$
$
201.02
220.47
241.61
241.54
$
$
$
$
169.09
202.17
221.56
206.34
As of January 19, 2018, there were 189 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, 2017 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))
6,226,224
979,614
7,205,838
$
$
$
162.17
176.85
164.16
7,920,163
43,182
7,963,345
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, 2017.
Fiscal Period
October 1 to October 31, 2017
November 1 to November 30, 2017
December 1 to December 31, 2017
Total during quarter ended December 31, 2017
Total Number of
Shares
Repurchased
Average
Price Paid
Per Share
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)
— $
— $
— $
— $
—
—
—
—
— $
— $
— $
—
991.6 million
991.6 million
717.5 million
(1) Since March 2009, we have had an active stock repurchase program. As of December 31, 2017, our Board of Directors (the
“Board”) had 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 our share repurchase program to
$3.0 billion. In 2017, we entered into an accelerated share repurchase program (the “ASR Program”) with Goldman Sachs & Co.
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LLC (“Goldman”) and completed the ASR Program by making $2,274.0 million payment to Goldman for 7.3 million shares
repurchased, including a final settlement payment of $274.0 million in December 2017. See “Note 8. Stockholders' Equity,” in
Notes to the Consolidated Financial Statements, which is included in “Item 8. Financial Statements and Supplementary Data,”
for further details on the ASR Program. The remaining $717.5 million represents the amount available to repurchase shares under
the authorized repurchase program as of December 31, 2017. The authorized stock repurchase program does not have an expiration
date.
STOCK PERFORMANCE GRAPH
The graph set forth below compares the cumulative total stockholder return on our common stock between December 31,
2012, and December 31, 2017, with the cumulative total return of (i) the NASDAQ Composite Index, (ii) the S&P Healthcare
Index, and (iii) the S&P 500 Index over the same period. This graph assumes the investment of $100.00 on December 31, 2012
in our common stock, the NASDAQ Composite Index, the S&P Healthcare Index, and the S&P 500 Index, and assumes the re-
investment 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
2012
2013
2014
2015
2016
2017
$
$
$
$
100.00
100.00
100.00
100.00
$
$
$
$
78.32
140.12
141.46
132.39
$
$
$
$
107.87
160.78
177.30
150.51
$
$
$
$
111.38
171.97
189.52
152.59
$
$
$
$
129.32
187.22
205.65
170.84
$
$
$
$
223.26
242.71
251.05
208.14
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.
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
$
$
$
$
$
$
$
$
$
2017 (2)
2016
2015
2014
2013
(In millions, except per share amounts and headcount)
Fiscal Year (1)
$
$
$
$
$
$
$
$
$
3,128.9
2,194.1
660.0
5.91
5.67
111.7
116.3
3,846.5
5,758.0
327.1
4,726.8
4,444
$
$
$
$
$
$
$
$
$
2,704.4
1,890.1
735.9
6.40
6.24
114.9
117.9
4,837.9
6,486.9
112.6
5,777.8
3,755
$
$
$
$
$
$
$
$
$
2,384.4
1,577.9
588.8
5.29
5.18
111.3
113.7
3,347.8
4,907.3
95.9
4,319.5
3,211
$
$
$
$
$
$
$
$
$
2,131.7
1,413.8
418.8
3.78
3.70
110.7
113.1
2,497.0
3,959.4
78.8
3,379.4
2,978
2,265.1
1,594.2
671.0
5.71
5.58
117.6
120.3
2,753.9
3,950.3
68.0
3,501.4
2,792
(1) All share and per share information presented have been retroactively adjusted to reflect the three-for-one stock split of our issued and outstanding common
stock in October 2017.
(2) Reflects the provisional estimated amounts recorded for the enactment of the 2017 Tax Act. See Note 10 to the Consolidated Financial Statements included
in Part II, Item 8 of this report for further details.
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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 an 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 the following da Vinci Surgical Systems: the da Vinci standard Surgical
System, commercialized in 1999, the da Vinci S Surgical System, commercialized in 2006, the da Vinci Si Surgical System,
commercialized in 2009, the da Vinci Xi Surgical System, commercialized in 2014, and the da Vinci X Surgical System,
commercialized in the second quarter of 2017. These systems include a surgeon’s console (or consoles), imaging electronics, a
patient-side cart, and computational hardware and software.
We offer over 80 different multi-port da Vinci instruments enabling surgeons’ flexibility in choosing the types of tools needed
in a particular surgery. These multi-port 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, da Vinci Xi, and da Vinci
X 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. da Vinci X and da Vinci Xi Surgical Systems share the same
instruments whereas da Vinci Si Surgical System uses different instruments.
We offer Single-Site instruments for use with the da Vinci Si, da Vinci Xi, and da Vinci X Surgical Systems. Single-Site
instruments are most commonly used in cholecystectomy and hysterectomy 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.
Business Model
Overview
We generate revenue from the initial capital sales of da Vinci Surgical Systems, including systems under sales-type lease
arrangements, and revenue from operating lease arrangements and from the subsequent sales of instruments, accessories, and
service. The da Vinci Surgical System generally sells for approximately between $0.5 million and $2.5 million, depending upon
the model, configuration and geography, and represents a significant capital equipment investment for our customers. Our
instruments and accessories have limited lives 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 consists of instrument and accessory revenue, service revenue, and operating lease revenue. Recurring
revenue increased to $2.2 billion, or 72% of total revenue in 2017, compared with $1.9 billion, or 71% of total revenue in 2016,
and $1.7 billion, or 70% of total revenue in 2015.
Instrument and accessory revenue has generally grown at a faster rate than system revenue in the last few fiscal years. Instrument
and accessory revenue increased to $1.6 billion in 2017, compared with $1.4 billion in 2016 and $1.2 billion in 2015. The growth
of instrument and accessory revenue largely reflect continued procedure adoption.
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Service revenue growth has been driven by the growth of the base of installed da Vinci Surgical Systems. The installed base
of da Vinci Surgical Systems grew 13% to approximately 4,409 at December 31, 2017; 9% to approximately 3,919 at December 31,
2016; and 10% to approximately 3,597 at December 31, 2015. Service revenue grew 13% to $581.8 million in 2017; 11% to $517.0
million in 2016; and 8% to $464.8 million in 2015.
Operating lease revenue has grown as a larger proportion of systems shipped are under operating lease arrangements. In the
years ended December 31, 2017, 2016, and 2015, a total of 108, 62, and 43 of system placements were classified as operating
leases, respectively. Revenue from operating lease arrangements is generally recognized on a straight-line basis over the lease
term. Operating lease revenue for the years ended December 31, 2017, 2016, and 2015, was $25.9 million, $16.6 million and $7.0
million, respectively. As of December 31, 2017, a total of 164 da Vinci Surgical Systems were installed at customers under operating
lease arrangements.
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 Surgical 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 prices computations.
In the years ended December 31, 2017, 2016, and 2015, we shipped 139, 95, and 63 systems under lease arrangements,
respectively, of which 108, 62, and 43 were classified as operating leases, respectively. Generally, the operating lease arrangements
provide our customers with the right to purchase the leased system at some point during and/or at the end of the lease term. Revenue
generated from customer purchases of systems under operating lease arrangements (“Lease Buyouts”) was $39.5 million, $38.2
million, and $9.4 million for the years ended December 31, 2017, 2016, and 2015, 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. We believe our leasing program has been effective and well-received, and we are willing to expand it based
on customer demand, including offering more flexible options such as variable lease payments.
Systems Revenue
System placements are driven by procedure growth in most markets. In geographies where da Vinci procedure adoption is in
an early stage, system sales will precede procedure growth. System placements also vary due to seasonality. System revenue grew
15% to $910.2 million in 2017; 10% to $791.6 million in 2016; and 14% to $721.9 million in 2015. System revenue is also
affected by the proportion of systems placed that are under operating lease arrangements, recurring operating lease revenue,
operating lease buyouts, product mix, ASPs, and trade-in activities.
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 Surgical 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 Surgical System, refurbished da Vinci Si Surgical System, and Single-Site instruments, are
targeted towards less complex procedures. Our da Vinci X Surgical System is priced between the da Vinci Si and Xi Surgical
Systems and offers customers access to many of the da Vinci Xi features, including da Vinci Xi advanced instrumentation and
imaging systems, at a lower price point.
Procedure Seasonality
More than half of da Vinci procedures performed are for benign conditions, most notably benign hysterectomies, hernia repairs,
and cholecystectomies. 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 and is 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.
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Regulatory Activities
Clearances and Approvals
We have obtained the clearances required to market our multi-port products associated with all of our da Vinci Surgical Systems
(Standard, S, Si, Xi, and X systems) for our targeted surgical specialties within the U.S., South Korea, and the European markets
in which we operate.
In April 2017, we received CE mark clearance for our da Vinci X Surgical System in Europe. Following the CE mark, in May
2017, we received U.S. Food and Drug Administration (“FDA”) clearance to market our da Vinci X Surgical System in the U.S.
We received regulatory clearance for the da Vinci X Surgical System in South Korea in September 2017 (see the description of
the da Vinci X Surgical System in the New Product Introductions section below). Regulatory clearances for da Vinci X Surgical
System may be received in other markets over time.
In January 2016, we received FDA clearance for our Integrated Table Motion product. In March 2016, we received FDA
510(k) clearances in the U.S. and CE mark clearances in Europe 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 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 our fourth generation da Vinci Xi/X product family as a dedicated
single port patient console compatible with the existing da Vinci Xi/X surgeon console, vision cart, and other equipment. We have
since completed these modifications and executed clinical evaluations of the product. In December 2017, we submitted our form
510(k) for this da Vinci Single Port Surgical System for certain urology procedures. In the future, we intend to file additional form
510(k)s for procedures 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 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 university hospitals and surgical societies are
seeking reimbursement for additional procedures through the MHLW’s Senshin Iryo (Advanced Medical Care) processes as well
as alternative reimbursement processes. There are multiple pathways to obtain reimbursement for procedures including those that
require in-country clinical data/economic data. Reimbursements are considered in April of even numbered years. In January 2018,
a committee of the MHLW recommended 12 additional procedures for reimbursement. The reimbursement levels for each procedure
is uncertain and may be inadequate for broad adoption. 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, 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, relabeling, 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 a medical device manufacturer may take in the field without reporting, including, but not
limited to, routine servicing 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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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) and colorectal procedures. Target procedures in urology include 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 2017, approximately 877,000 surgical procedures were performed with the da Vinci Surgical Systems, compared with
approximately 753,000 and 652,000 procedures performed in 2016 and 2015, respectively. The growth in our overall procedure
volume in 2017 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 644,000 in 2017, compared with approximately 563,000 in 2016, and
approximately 499,000 in 2015. For 2017, general surgery was our fastest growing specialty in the U.S. with procedure volume
that grew to approximately 246,000 in 2017, compared with approximately 186,000 in 2016 and 140,000 in 2015, and the second
largest in procedure volume. For 2017, gynecology was our largest U.S. surgical specialty and the procedure volume was
approximately 252,000 in 2017, compared with 246,000 in 2016 and 238,000 in 2015. U.S. urology procedure volume was
approximately 118,000 in 2017, compared with approximately 109,000 in 2016, and 102,000 in 2015.
Procedures Outside of the U.S.
Overall OUS procedures grew to approximately 233,000 in 2017, compared with approximately 190,000 in 2016 and
approximately 153,000 in 2015. Procedure growth in most OUS markets was driven largely by urology procedure volume, which
grew to approximately 149,000 in 2017, compared with approximately 124,000 in 2016, and approximately 102,000 in 2015.
General surgery, and gynecologic oncology procedures also contributed to OUS procedure growth.
Recent Business Events and Trends
Procedures
Overall. During the year ended December 31, 2017, total da Vinci procedures grew approximately 16% compared with 15%
for the year ended December 31, 2016. U.S. procedure growth during the year ended December 31, 2017, was approximately 14%
compared with approximately 13% for the year ended December 31, 2016. The higher 2017 U.S. procedure growth was largely
attributable to growth in general surgery procedures, most notably hernia repair and colorectal procedures, and thoracic procedures,
as well as continued moderate growth in more mature gynecologic and urologic procedure categories.
Procedure volume OUS for the year ended December 31, 2017, grew approximately 23% compared with approximately 24%
growth for the year ended December 31, 2016, driven by continued growth in dVP procedures and earlier stage growth in kidney
cancer procedures, general surgery, and gynecology. 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 da Vinci procedures.
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U.S. Gynecology. In 2017, gynecology was our largest U.S. surgical specialty and the procedure volume was approximately
252,000 in 2017, compared with 246,000 in 2016 and 238,000 in 2015. 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 gynecologic procedures over the past several years was
primarily driven by consolidation of surgical volumes into surgeons that focus on cancer and complex surgeries, as well as higher
sacrocolpopexy procedure volume.
U.S. General Surgery. In 2017, general surgery was our second largest and fastest growing specialty in the U.S. with procedure
volume that grew to approximately 246,000 in 2017, compared with approximately 186,000 in 2016, and 140,000 in 2015. Ventral
and inguinal hernia, combined, contributed to the most incremental growth in U.S. general surgery procedures in 2016 and 2017.
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. da Vinci use in cholecystectomy grew modestly in 2017 compared to a modest decline in
2016. 2017 cholecystectomy growth was driven by higher multi-port cholecystectomies, more than offsetting lower Single-Site
cholecystectomy volume.
Global Urology. Along with U.S. general surgery, global urology procedures drove our recent procedure growth. dVP is the
largest urology procedure in the U.S. and is at various stages of adoption in different areas of the world. We believe our growth
in U.S. prostatectomy is largely aligned 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 largely fluctuate with the
overall prostatectomy market. dVP is the largest overall OUS procedure.
Kidney cancer procedures have also been a strong contributor to our recent global urology procedure growth. Clinical
publications have demonstrated that the presence of a da Vinci system in a hospital or market increases the likelihood that a
patient will receive nephron sparing surgery through a partial nephrectomy, which is typically surgical society guideline-
recommended therapy.
OUS Procedures. The 2017 OUS procedure growth rate reflects continued da Vinci adoption in European and Asian markets.
Growth was strong in Asia and varied by country in Europe. We experienced strong procedure growth in China as systems sold
under a previous public hospital quota system have been installed and as utilization of those systems have increased. However,
procedure growth is moderating in China. Future system placements and our ability to sustain procedure growth in China are
dependent on obtaining additional importation authorizations or public hospital quotas, as well as on hospitals completing a central
purchasing tender process under such authorizations. The most recent authorization expired at the end of 2015. The timing and
magnitude of future authorizations that may enable future system placements is not certain. We have 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. Future procedure growth in Japan will likely
be paced by the timing of procedure reimbursement approvals for procedures as well as the reimbursement levels for any of these
procedures in addition to dVP and partial nephrectomy. In January 2018, a committee of the MHLW recommended 12 additional
procedures for reimbursement. The reimbursement level for each procedure is uncertain at this time and may be insufficient for
broad adoption. In addition, it is possible that procedures will be adopted slowly or not at all, as there can be no assurance that
the perceived value of da Vinci procedures is greater than alternative therapies.
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 current 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, the timing of when we receive regulatory
clearance in our other OUS markets for our Xi Surgical System, X Surgical System, and related instruments as well as other
economic and geopolitical factors. Market acceptance of our recently launched X Surgical System may also impact future systems
placement. Demand may also be impacted by robotic surgery competition, including from companies that have introduced products
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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.; Medtronic PLC.; meerecompany Inc.; Olympus
Corp.; Samsung Corporation; Smart Robot Technology Group Co. Ltd.; Titan Medical, Inc.; and TransEnterix, Inc.
New Product Introductions
da Vinci X Surgical System. In May 2017, we launched a new da Vinci model, the da Vinci X, in the U.S. The da Vinci X
system provides surgeons and hospitals with access to some of the most advanced robotic-assisted surgery technology at a lower
cost. The da Vinci X uses the same vision cart and surgeon console that are found on our flagship product, the da Vinci Xi system,
giving our customers the option of adding advanced capabilities, and providing a pathway for upgrading should they choose to
do so as their practices and needs grow.
The da Vinci X enables optimized, focused-quadrant surgery including procedures like prostatectomy, hernia repair, and
benign hysterectomy, among others. The system features flexible port placement and 3-D digital optics, while incorporating the
same advanced instruments and accessories as the da Vinci Xi. The new system drives operational efficiencies through set-up
technology that uses voice and laser guidance, drape design that simplifies surgery preparations, and a lightweight, fully integrated
endoscope.
da Vinci Xi Integrated Table Motion. In January 2016, we launched Integrated Table Motion in the U.S. 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 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. EndoWrist Stapler 30 broadens our existing stapler product
line which includes EndoWrist Stapler 45 Blue, Green, and White reloads. Not all reloads or staplers are available for use on all
systems or in all countries.
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 is 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, while distribution outside of China will be conducted
by us. The joint venture is 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.
In the second quarter of 2017, the joint venture company was legally formed after receiving required approvals from the
relevant PRC government authorities and administrative agencies. During the third quarter of 2017, the joint venture received
contributions from us and Fosun Pharma. The joint venture also commenced hiring employees and began planning for the
establishment of manufacturing infrastructure. For 2017, the joint venture did not have a material impact on our consolidated
results. We expect that the joint venture will incur net losses before product commercialization and ramp up periods after
commercialization, and that it will not generate revenue in 2018. Further, 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 and the joint venture
will successfully commercialize such products; that the joint venture will not require additional contributions to fund its business;
or that the joint venture will become profitable.
2017 Financial Highlights
• Total revenue increased by 16% to $3.1 billion for the year ended December 31, 2017, compared with $2.7 billion for
the year ended December 31, 2016.
• Approximately 877,000 da Vinci procedures were performed during the year ended December 31, 2017, an increase of
approximately 16% compared with approximately 753,000 for the year ended December 31, 2016.
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•
•
Instrument and accessory revenue increased by 17% to $1.6 billion for the year ended December 31, 2017, compared
with $1.4 billion for the year ended December 31, 2016.
Systems revenue increased by 15% to $910.2 million for the year ended December 31, 2017, compared with 791.6 million
for the year ended December 31, 2016. A total of 684 da Vinci Surgical Systems were shipped for the year ended
December 31, 2017, compared with 537 for the year ended December 31, 2016.
• As of December 31, 2017, we had a da Vinci Surgical System installed base of approximately 4,409 systems, an increase
of approximately 13% compared with the installed base as of December 31, 2016.
• Gross profit as a percentage of revenue increased to 70.1% for the year ended December 31, 2017, compared with 69.9%
for the year ended December 31, 2016. Gross profit for the year ended December 31, 2017, was reduced by $7.8 million
related to a litigation settlement charge. Gross profit for the year ended December 31, 2016, benefited from a $7.1 million
Medical Device Excise Tax (“MDET”) refund.
• Operating income increased by 12% to $1,054.6 million for the year ended December 31, 2017, compared with $945.2
million for the year ended December 31, 2016. Operating income included $209.9 million and $178.0 million of share-
based compensation expense related to employee stock plans for the years ended December 31, 2017, and 2016,
respectively. Operating income for the year ended December 31, 2017, and 2016, also included pre-tax litigation charges
of $25.3 million and $12.1 million, respectively.
• As of December 31, 2017, we had $3.8 billion in cash, cash equivalents, and investments. Cash, cash equivalents, and
investments decreased by $1.0 billion compared with December 31, 2016, primarily as a result of the $2.3 billion
accelerated share buyback executed and settled during 2017, partially offset by cash generated from 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):
Years Ended December 31,
2017
% of
total
revenue
2016
% of
total
revenue
2015
% of
total
revenue
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
$
$
2,547.1
581.8
3,128.9
754.9
179.9
934.8
1,792.2
401.9
2,194.1
810.9
328.6
1,139.5
1,054.6
41.9
1,096.5
436.5
660.0
81% $
19%
100%
24%
6%
30%
57%
13%
70%
25%
11%
36%
34%
1%
35%
14%
21% $
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
81% $
19%
100%
25%
5%
30%
56%
14%
70%
26%
9%
35%
35%
1%
36%
9%
27% $
1,919.6
464.8
2,384.4
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
81%
19%
100%
27%
7%
34%
54%
12%
66%
27%
8%
35%
31%
1%
32%
7%
25%
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Total Revenue
Total revenue increased by 16% to $3.1 billion for the year ended December 31, 2017, compared with $2.7 billion for the
year ended December 31, 2016. Total revenue for the year ended December 31, 2016, increased by 13% compared with $2.4 billion
for the year ended December 31, 2015. The increase in total revenue for the year ended December 31, 2017, reflects 17% higher
instrument and accessory revenue driven by approximately 16% higher procedure volume, 15% higher systems revenue, and 13%
higher service revenue. The increase in total revenue for the year ended December 31, 2016, reflects 17% higher instrument and
accessory revenue driven by approximately 15% higher procedure volume, 10% higher systems revenue, and 11% higher service
revenue.
Revenue denominated in foreign currencies was approximately 17%, 19%, and 19% of total revenue for the years ended
December 31, 2017, 2016, and 2015, respectively. 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, 2017, as compared with 2016,
or for the year ended December 31, 2016, as compared with 2015.
Revenue generated in the U.S. accounted for 73%, 72%, and 71% of total revenue during the years ended December 31,
2017, 2016, and 2015, 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, 2017, 2016, and 2015, respectively (in millions, except percentages and unit shipments):
Revenue
Instruments and accessories
Systems
Total product revenue
Services
Total revenue
United States
OUS
Total revenue
% of Revenue - U.S.
% of Revenue - OUS
Instruments and accessories
Services
Operating lease (1)
Total recurring revenue (1)
% of Total revenue
Unit Shipments by Region:
U.S. unit shipments
OUS unit shipments
Total unit shipments*
*Systems shipped under operating leases (included in total unit shipments)
Unit Shipments involving System Trade-ins:
Unit shipments involving trade-ins
Unit shipments not involving trade-ins
Years Ended December 31,
2017
2016
2015
$
$
$
$
$
$
1,636.9
910.2
2,547.1
581.8
3,128.9
2,279.8
849.1
3,128.9
73%
27%
1,636.9
581.8
25.9
2,244.6
$
$
$
$
$
$
1,395.8
791.6
2,187.4
517.0
2,704.4
1,955.0
749.4
2,704.4
72%
28%
1,395.8
517.0
16.6
1,929.4
$
$
$
$
$
$
1,197.7
721.9
1,919.6
464.8
2,384.4
1,695.8
688.6
2,384.4
71%
29%
1,197.7
464.8
7.0
1,669.5
72%
71%
70%
417
267
684
108
163
521
338
199
537
62
156
381
298
194
492
43
151
341
(1) Starting fourth quarter of 2017, we included operating lease revenue that is classified as systems revenue, as a component of total recurring revenue and
revised prior years’ total recurring revenue for comparability purposes.
Product Revenue
2016-2017
Product revenue increased by 16% to $2.5 billion for the year ended December 31, 2017, compared with $2.2 billion for the
year ended December 31, 2016.
Instrument and accessory revenue increased by 17% to $1.6 billion for the year ended December 31, 2017, compared with
$1.4 billion for the year ended December 31, 2016. The increase in instrument and accessory revenue was driven by procedure
growth of approximately 16% and higher sales of our advanced instruments, partially offset by customer efficiency gains and
timing of orders. U.S. procedure growth in 2017 was approximately 14% compared with 13% in 2016 and was driven by growth
in general surgery procedures, most notably hernia repair and colorectal procedures; thoracic procedures; and a moderate growth
in the more mature gynecologic and urologic procedure categories. OUS procedure growth was approximately 23% for 2017,
compared with 24% for 2016, driven by continued growth in dVP procedures, earlier stage growth in kidney cancer procedures,
general surgery, and gynecology. Geographically, OUS procedure growth for the year ended December 31, 2017, was driven by
strong procedure expansion in Japan, China, and South Korea. Procedure growth varied by country in our European market.
Systems revenue increased by 15% to $910.2 million for the year ended December 31, 2017, compared with $791.6 million
for the year ended December 31, 2016. Higher systems revenue was primarily driven by higher system shipments and partly offset
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by a higher number of system placements under operating lease arrangements and lower da Vinci Surgical System average selling
price ("ASP").
During 2017, a total of 684 systems were shipped compared with 537 systems in 2016. By geography, 417 systems were
shipped into the U.S., 108 into Asia, 122 into Europe, and 37 into other markets, compared with 338 systems shipped into the
U.S., 96 into Asia, 79 into Europe, and 24 into other markets in 2016. During 2017, 108 of the 684 systems were shipped under
operating lease arrangements compared with 62 of 537 systems shipped during 2016. The increase in systems shipments was
primarily driven by procedure growth and the need for hospitals to expand or establish capacity.
Operating lease revenue was $25.9 million for the year ended December 31, 2017, compared with $16.6 million for the year
ended December 31, 2016. Revenue from Lease Buyouts was $39.5 million for year ended December 31, 2017, compared with
$38.2 million for the year ended December 31, 2016.
The da Vinci Surgical System ASP, excluding the impact of systems shipped under operating leases, was approximately $1.47
million and $1.52 million for 2017 and 2016, respectively. The lower 2017 ASP was driven by a higher proportion of systems
sales into price sensitive market segments. ASPs fluctuate period to period based on geographic and product mix, product pricing,
systems shipped involving trade-ins, and changes in foreign exchange rates.
2015-2016
Product revenue increased by 14% to $2.2 billion during the year ended December 31, 2016, from $1.9 billion during 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 an approximate
15% increase in procedure volume, reflecting approximately 13% U.S. procedure growth and 24% OUS procedure growth, and
higher sales of our advanced instruments, partially offset by customer buying patterns.
Systems revenue increased by 10% to $791.6 million during the year ended December 31, 2016, compared with $721.9 million
during 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.
The da Vinci Surgical System ASP, excluding the impact of systems shipped under operating leases, was approximately $1.52
million and $1.54 million for 2016 and 2015, respectively.
Service Revenue
Service revenue increased by 13% to $581.8 million for the year ended December 31, 2017, compared with $517.0 million
for the year ended December 31, 2016. 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. Higher service revenue in 2017 and 2016 was primarily
driven by a larger installed base of da Vinci Surgical Systems producing service revenue.
Gross Profit
Product gross profit increased by 18% for the year ended December 31, 2017, to $1.8 billion, representing 70.4% of product
revenue, compared with $1.5 billion, representing 69.7% of product revenue, for the year ended December 31, 2016. The higher
2017 product gross profit was primarily driven by higher product revenue.
The slightly higher product gross profit margin for the year ended December 31, 2017, as compared with the year ended
December 31, 2016, was due to manufacturing efficiencies and product cost reductions on some of our newer products, partially
offset by a $7.8 million litigation settlement charge related to a license and supply agreement recognized in cost of revenue during
the first quarter of 2017, and a $7.1 million MDET refund in 2016. In December 2015, the Consolidated Appropriations Act, 2016
(the “Appropriations Act”) was signed into law. The Appropriations Act included a two-year moratorium on MDET such that
medical device sales in 2016 and 2017 were exempt from the excise tax. New legislation was passed in January 2018 such that
MDET will be delayed until January 1, 2020.
Product gross profit for the year ended December 31, 2016, increased by 20% to $1.5 billion, or 69.7% of product revenue,
compared with $1.3 billion, or 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, and favorable product mix, including higher
sales of our da Vinci Xi Integrated Table Motion product. Product gross profit also included a $7.1 million MDET refund for the
year ended December 31, 2016, while product gross profit for the year ended December 31, 2015, included $17.0 million of MDET
expense, representing approximately 0.9% of total product revenue.
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Product gross profit for the year ended December 31, 2017, 2016, and 2015, included share-based compensation expense of
$28.1 million, $25.2 million, and $22.8 million, respectively, and amortization expense of intangible assets of $5.4 million, $7.8
million, and $12.7 million, respectively.
Service gross profit for the year ended December 31, 2017, increased to $401.9 million, or 69.1% of service revenue, compared
with $366.0 million, or 70.8% of service revenue, for the year ended December 31, 2016. The higher 2017 service gross profit
was driven by higher service revenue, reflecting a larger installed base of da Vinci Surgical Systems, partially offset by lower
service gross profit margin. The lower service gross profit margin for the year ended December 31, 2017, was primarily driven
by higher costs associated with the repair of da Vinci Xi endoscope products.
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 service gross profit margin
for the year ended December 31, 2016, was primarily driven by improved efficiency and gains made in servicing the da Vinci
Xi Surgical System.
Service gross profit for the years ended December 31, 2017, 2016, and 2015, included share-based compensation expense
of $14.0 million, $12.4 million, and $12.9 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, 2017, increased by 15% to $810.9 million,
compared with $705.3 million for the year ended December 31, 2016. The increase was primarily due to higher variable
compensation costs, higher OUS expenses associated with our expanded Asian and European teams, infrastructure to support our
growth, higher headcount, and higher litigation charges. Selling, general and administrative expenses also included pre-tax litigation
charges of $17.5 million and $12.1 million for the year ended December 31, 2017, and 2016, respectively.
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 years ended
December 31, 2016, and 2015 respectively.
Share-based compensation expense charged to selling, general and administrative expenses during the years ended
December 31, 2017, 2016, and 2015, was $111.8 million, $97.4 million, and $94.7 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, 2017, increased by 37% to $328.6 million, compared
with $239.6 million for the year ended December 31, 2016. The increase was primarily due to higher personnel and other project
costs to support a broader set of product development initiatives, including our da Vinci Single Port Surgical System; robotic-
assisted catheter-based medical devices; advanced imaging and analytics; advanced instrumentation; future generations of robotics;
and expense related to licensed intellectual property.
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; da Vinci
Single Port Surgical System; our robotic-assisted catheter-based system; advanced imaging and analytics; advanced
instrumentation; and next generation robotics.
Share-based compensation expense charged to research and development expense during the years ended December 31, 2017,
2016, and 2015, was $56.0 million, $43.0 million, and $37.7 million, respectively. Amortization expense related to intangible
assets for the years ended December 31, 2017, 2016, and 2015, was $7.5 million, $10.4 million, and $11.7 million, respectively.
Research and development expenses fluctuate with project timing. Based upon our broader set of product development
initiatives 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.
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Interest and Other Income, Net
Interest and other income, net, was $41.9 million for the year ended December 31, 2017, compared with $35.6 million for
2016 and $18.5 million for 2015. The increase in interest and other income, net, for the year ended December 31, 2017, was
primarily driven by higher interest earned due to higher interest rates. The increase in interest and other income, net, for the year
ended December 31, 2016, was primarily driven by higher interest earned on higher cash and investment balances.
Income Tax Expense
Our income tax expense was $436.5 million, $244.9 million, and $169.7 million for the years ended December 31, 2017,
2016, and 2015, respectively. The effective tax rate for 2017 was approximately 39.8% compared with 25.0% for 2016, and 22.4%
for 2015. Our effective tax rate for 2017 differs from the U.S. federal statutory rate of 35% primarily due to the effect of the below
mentioned one-time discrete items and state income taxes net of federal benefit, partially offset by 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.
Our tax rates for 2016 and 2015 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.
On December 22, 2017, the U.S. federal government enacted the 2017 Tax Act. The 2017 Tax Act includes a number of
changes in existing tax law impacting businesses, including a one-time deemed repatriation of cumulative undistributed foreign
earnings and a permanent reduction in the U.S. federal statutory rate from 35% to 21%, effective on January 1, 2018. Under U.S.
GAAP, changes in tax rates and tax law are accounted for in the period of enactment and deferred tax assets and liabilities are
measured at the enacted tax rate. Consistent with guidance issued by the Securities Exchange Commission (“SEC”), which provides
for a measurement period of one year from the enactment date to finalize the accounting for effects of the 2017 Tax Act, we
provisionally recorded an income tax expense of $317.8 million related to the 2017 Tax Act. Based on information available, we
reflected a provisional estimate of $270.2 million of income tax expense related to the one-time deemed repatriation toll charge.
As a result of the 2017 Tax Act, we can repatriate our cumulative undistributed foreign earnings back to the U.S. when needed
with minimal U.S. income tax consequences other than the one-time deemed repatriation toll charge. In addition, we recorded a
provisional estimate of $47.6 million income tax expense due to the re-measurement of our net deferred tax assets at a U.S. federal
statutory rate of 21%. For the global intangible low-taxed income (“GILTI”) provisions of the 2017 Tax Act, a provisional estimate
could not be made as we have not yet completed our assessment or elected an accounting policy to either recognize deferred taxes
for basis differences expected to reverse as GILTI or to record GILTI as period costs if and when incurred.
In accordance with SEC guidance, provisional amounts may be refined as a result of additional guidance from, and
interpretations by, U.S. regulatory and standard-setting bodies, and changes in assumptions. In the subsequent period, provisional
amounts will be adjusted for the effects, if any, of interpretative guidance issued after December 31, 2017, by the U.S. Department
of the Treasury. The effects of the 2017 Tax Act may be subject to changes for items that were previously reported as provisional
amounts, as well as any element of the 2017 Tax Act that a provisional estimate could not be made, and such changes could result
in a material effect on our future effective tax rate.
Our 2017, 2016, and 2015 tax provision reflected tax benefits of $62.4 million, $15.8 million, and $6.4 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 2017 tax provision also reflected excess tax benefits recognized in income tax
expense under Accounting Standards Update (“ASU”) No. 2016-09, Improvements to Employee Share-based Payment Accounting.
Our 2015 tax provision also reflected a $29.3 million tax benefit resulting from a 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.
In the first quarter of 2017, we adopted ASU No. 2016-09, which changes how the tax effects of share-based awards are
recognized. ASU No. 2016-09 requires excess tax benefits and tax deficiencies associated with employee equity to be recognized
in the provision for income taxes as discrete items in the period when the awards vest or are settled, whereas previously such
income tax effects were recorded as part of additional paid-in capital. Our provision for income taxes included excess tax benefits
associated with employee equity plans of $102.8 million, which reduced our effective tax rate by 9.4 percentage points for the
year ended December 31, 2017. The amount of excess tax benefits or deficiencies will fluctuate from period to period based on
the price of our stock, the volume of share-based instruments settled or vested, and the value assigned to employee equity awards
under U.S. GAAP. We expect that the adoption of this ASU will result in increased income tax expense volatility.
The tax holiday obtained in 2007 for our business operations in Switzerland ended on December 31, 2017. We received a
new tax ruling in Switzerland for new business operations. The new tax ruling is effective for years 2018 through 2022, which
will be extended for the next five years thereafter, to the extent certain terms and conditions continue to be met. The new ruling
would allow for a reduced cantonal tax rate based on various thresholds of investment, including the ownership, development,
and use of non-U.S. intellectual property rights and employment in such jurisdiction. The transfer of ownership of such intellectual
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property rights to our Swiss entity did not impact the Consolidated Financial Statements for the periods presented. We currently
do not expect that the change will materially impact our future annual Swiss tax obligation.
We file federal, state, and foreign income tax returns in many jurisdictions in the U.S. and abroad. Years prior to 2014 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 the Internal Revenue Service and other tax authorities. 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 decreased
by $1.0 billion to $3.8 billion as of December 31, 2017, from $4.8 billion as of December 31, 2016, primarily as a result of the
$2.3 billion accelerated share buyback program executed and settled during 2017, partly offset by cash provided by our operations
and employee stock option exercises. Cash and cash equivalents plus short- and long-term investments increased from $3.3
billion as of December 31, 2015, to $4.8 billion as of December 31, 2016, primarily as a result of cash provided by our operations
and employee stock option exercises. Cash generation is one of our fundamental strengths and provides us with substantial financial
flexibility in meeting our operating, investing, and financing needs.
As of December 31, 2017, $1,543.4 million of our cash, cash equivalents, and investments were held by foreign subsidiaries.
Previously, amounts held by foreign subsidiaries were generally subject to U.S. income tax upon repatriation to the U.S. However,
the 2017 Tax Act enacted in December 2017, requires us to pay a one-time deemed repatriation toll charge on cumulative
undistributed foreign earnings for which we have not previously provided U.S. taxes. We estimated that our obligation associated
with this one-time deemed repatriation toll charge to be $270.2 million, which will be paid in installments over eight years. As a
result of the 2017 Tax Act, we can repatriate our cumulative undistributed foreign earnings back to the U.S. when needed with
minimal U.S. income tax consequences other than the one-time deemed repatriation toll charge and do not expect other material
non-U.S. tax consequences. We will continue to evaluate whether to repatriate all or a portion of the cumulative undistributed
foreign earnings based on expansion needs and as circumstances change. We are still evaluating whether to change our indefinite
reinvestment assertion in light of the 2017 Tax Act and consider that conclusion to be incomplete under guidance issued by the
SEC. If we subsequently change our assertion during the measurement period, we will account for the change in assertion as part
of the 2017 Tax Act enactment. We believe the cash flows provided by our operations will meet our 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,
2017
2016
2015
$
$
$
1,143.9
378.7
(1,913.1)
2.1
(388.4) $
1,087.0
(1,279.4)
514.4
—
322.0
$
$
806.2
(849.5)
159.1
(1.5)
114.3
For the year ended December 31, 2017, cash provided by our operating activities of $1,143.9 million exceeded our net income
of $660.0 million due to non-cash charges and changes in operating assets and liabilities as outlined below:
1. Our net income included non-cash charges, including share-based compensation of $209.1 million, depreciation and loss
of disposal of property, plant, and equipment of $86.2 million, deferred income taxes of $62.9 million, investment related
non-cash charges of $21.2 million, and amortization of intangible assets of $12.9 million.
2. Changes in operating assets and liabilities resulted in $91.6 million of cash provided by operating activities during the
year ended December 31, 2017. Operating assets and liabilities are primarily comprised of accounts receivable, inventory,
prepaid expenses and other assets, deferred revenue, and other accrued liabilities. Other accrued liabilities increased by
$219.3 million, primarily due to an increase in income tax payable as a result of the 2017 Tax Act. Deferred revenue,
which includes deferred service revenue that is being recognized as revenue over the service contract period, increased
by $52.8 million primarily due to the higher number of installed systems for which service contracts existed. Accrued
compensation and employee benefits increased by $31.2 million. Accounts payable increased by $14.0 million. The
favorable impact of these items on cash provided by operating activities was partly offset by an increase of $115.5 million
in inventory, including the transfer of equipment from inventory to property, plant, and equipment; an increase of $81.7
million in accounts receivable; and an increase of $28.5 million in prepaids and other assets. The increase in accounts
receivable was primarily driven by higher revenue and timing of collections. The increase in prepaids and other assets
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was primarily driven by higher lease receivable balances resulting from sales-type lease arrangement transactions entered
into during the year ended December 31, 2017.
For the year ended December 31, 2016, cash provided by our operating activities of $1,087.0 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; and amortization of intangible assets of $18.2 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 $806.2 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, amortization of intangible assets of
$24.4 million, and investment related non-cash charges 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.
Investing Activities
Net cash provided by investing activities for the year ended December 31, 2017, consisted of proceeds from the sales and
maturities of investments (net of purchases of investments) of $569.4 million partly offset by purchases of property, plant, and
equipment of $190.7 million.
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 for $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, plant, and equipment for $81.0
million.
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 tax exempt municipal notes, corporate notes and bonds,
commercial paper, non-U.S. government agency securities, cash deposits, and money market funds.
Financing Activities
Net cash used in financing activities during 2017 primarily consisted of $2,274.0 million related to an accelerated share
buyback program executed and settled during 2017 that is further described in “Note 8. Stockholders' Equity” in the Notes to the
Consolidated Financial Statements included in Item 8, and taxes paid on behalf of employees related to net share settlement of
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vested employee equity awards of $56.6 million. These uses partly offset by proceeds from stock option exercises and employee
stock purchases of $415.5 million.
Net cash provided by financing activities in 2016 consisted primarily of proceeds from stock option exercises and employee
stock purchases of $580.9 million, partly offset by $42.5 million used for the repurchase of 0.2 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, partly offset by $183.7 million used for the repurchase of 1.1 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 $11.0 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 and commercial commitments as of December 31, 2017 (in
millions):
Operating leases
Purchase commitments and obligations
Other
Total
Payments due by period
Total
Less than
1 year
1 to 3 years
3 to 5 years
More than 5
years
$
$
41.6
478.1
270.2
789.9
$
$
8.2
466.3
21.6
496.1
$
$
10.2
11.8
43.2
65.2
$
$
6.4
—
43.2
49.6
$
$
16.8
—
162.2
179.0
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. 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. Due to the enactment of the 2017 Tax Act,
we estimated a provisional obligation associated with a one-time deemed repatriation toll charge to be $270.2 million, which will
be paid in installments over eight years. This provisional amount, as well as the current estimated timing of payments, is subject
to change based on additional guidance from and interpretations by U.S. regulatory and standard-setting bodies and changes in
assumptions.
Off-Balance Sheet Arrangements
As of December 31, 2017, 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.
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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;
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. treasuries 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. 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. 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, 2017, 2016, and 2015. As of December 31, 2017,
and 2016, net unrealized losses on investments of $11.3 million and $8.6 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 sales 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.
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Hedge Accounting for Derivatives. We utilize foreign currency forward exchange contracts to hedge certain anticipated
foreign currency denominated sales transactions and expenses. 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 net realizable
value, 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.
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, 2017, 2016, and 2015. 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 components,
system accessories, instruments, accessories, and 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.
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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.
We 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, 2017, 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.
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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.
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- and long-term investments in a variety of high quality securities, including U.S. treasuries, U.S. government
agencies, corporate debt, cash deposits, money market funds, commercial paper, non-U.S. government agency securities, 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 loss. The weighted-
average duration of our portfolio as of December 31, 2017, was approximately 0.9 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 $8.3 million as of December 31, 2017. 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, 2017, sales denominated in foreign currencies (Euro, British Pound, Japanese Yen, and
Korean Won) were approximately 17% 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, 2017,
our revenue would have decreased by approximately $28.8 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, 2017, would have resulted in approximately $0.1 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.
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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, 2017 and 2016
Consolidated Statements of Income for the years ended December 31, 2017, 2016, and 2015
Consolidated Statements of Comprehensive Income for the years ended December 31, 2017, 2016, and 2015
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2017, 2016, and 2015
Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2016, and 2015
Notes to the Consolidated Financial Statements
Schedule II—Valuation and Qualifying Accounts
Page No.
61
63
64
65
66
67
68
94
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.
60
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Intuitive Surgical, Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Intuitive Surgical, Inc. and its subsidiaries as of December 31,
2017 and December 31, 2016, and the related consolidated statements of income, comprehensive income, stockholders’ equity
and cash flows for each of the three years in the period ended December 31, 2017, including the related notes and schedule of
valuation and qualifying accounts for each of the three years in the period ended December 31, 2017 appearing under Item 8
(collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over
financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position
of the Company as of December 31, 2017 and December 31, 2016, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 2017 in conformity with accounting principles generally accepted in the
United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013)
issued by the COSO.
Change in Accounting Principle
As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for certain
elements of its employee share-based payments in 2017.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, 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 the Company’s consolidated financial statements and on the Company's internal control over financial reporting based
on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States)
("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws
and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether
due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement
of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks.
Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial
statements. Our audits also included evaluating the accounting principles used and significant estimates made by management,
as well as evaluating the overall presentation of the consolidated financial statements. 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.
Definition and Limitations of Internal Control over Financial Reporting
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
61
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 2, 2018
We have served as the Company’s auditor since 2014.
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Table of Contents
INTUITIVE SURGICAL, INC.
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT PAR VALUE AMOUNTS)
ASSETS
Current assets:
Cash and cash equivalents
Short-term investments
Accounts receivable, net of allowances of $4.6 and $1.9 as of December 31, 2017, and
2016, 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, 2017, and 2016
Common stock, 300.0 shares authorized, $0.001 par value, 112.3 shares and 116.4
shares issued and outstanding as of December 31, 2017, and 2016, respectively
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss
Total Intuitive Surgical, Inc. stockholders’ equity
Noncontrolling interest in joint venture
Total stockholders’ equity
Total liabilities and stockholders’ equity
December 31,
2017
2016
$
648.2
$
1,312.4
511.9
241.2
97.2
2,810.9
613.1
1,885.9
87.3
159.7
201.1
1,036.6
1,518.0
430.2
182.3
83.3
3,250.4
458.4
2,283.3
150.9
142.8
201.1
5,758.0
$
6,486.9
$
$
82.5
$
167.6
284.5
169.5
704.1
327.1
1,031.2
—
0.1
4,679.2
61.4
(15.5)
4,725.2
1.6
4,726.8
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
—
5,777.8
6,486.9
$
5,758.0
$
See accompanying Notes to Consolidated Financial Statements.
63
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,
2017
2016
2015
$
$
2,547.1
581.8
3,128.9
$
2,187.4
517.0
2,704.4
754.9
179.9
934.8
2,194.1
810.9
328.6
1,139.5
1,054.6
41.9
1,096.5
436.5
660.0
5.91
5.67
111.7
116.3
$
$
$
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
6.40
6.24
114.9
117.9
$
$
$
$
$
$
1,919.6
464.8
2,384.4
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
5.29
5.18
111.3
113.7
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):
Years Ended December 31,
2017
2016
2015
$
660.0
$
735.9
$
588.8
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 (losses)
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 on employee benefit
plans recognized during the year, net of tax
Net change, net of tax effect
Other comprehensive gains (losses)
Total comprehensive income
$
3.6
(2.7)
—
(2.7)
(8.6)
1.2
(7.4)
(0.3)
0.2
(0.1)
(6.6)
653.4
2.0
(4.6)
0.2
(4.4)
4.1
(0.6)
3.5
(0.7)
0.2
(0.5)
0.6
$
736.5
$
See accompanying Notes to Consolidated Financial Statements.
(1.2)
(3.2)
(0.8)
(4.0)
7.8
(7.4)
0.4
(0.4)
0.8
0.4
(4.4)
584.4
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INTUITIVE SURGICAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(IN MILLIONS)
Shares
36.6
1.2
(0.4)
1.5
(0.1)
38.8
77.6
3.4
(0.2)
(7.3)
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
Balances at December 31, 2016
Three-for-one stock split
Capital contribution from
noncontrolling interest
Issuance of common stock
through 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
Loss in noncontrolling interest
Balances at December 31, 2017
Common Stock
Additional
Paid-In
Capital
Amount
$ — $2,896.8
Accumulated
Other
Comprehensive
Loss
Total
Intuitive
Surgical, Inc.
Stockholders’
Equity
Non
controlling
Interest
Total
Stockholders’
Equity
$
(5.1) $ 3,379.4
$
— $ 3,379.4
Retained
Earnings
$ 487.7
361.1
21.4
(1.1)
(9.9)
167.9
(16.3)
(167.4)
588.8
361.1
21.4
(11.0)
167.9
361.1
21.4
(11.0)
167.9
(183.7)
588.8
(4.4)
(4.4)
(9.5) $ 4,319.5
$
(183.7)
588.8
(4.4)
— $ 4,319.5
37.4
$ — $3,429.8
$ 899.2
$
580.9
29.8
(2.2)
(21.8)
177.6
(4.1)
(38.4)
735.9
580.9
29.8
(24.0)
177.6
(42.5)
735.9
$ — $4,211.8
$1,574.9
$
0.1
(0.1)
0.6
0.6
(8.9) $ 5,777.8
—
580.9
29.8
(24.0)
177.6
(42.5)
735.9
0.6
$
— $ 5,777.8
—
2.0
—
2.0
415.5
(56.6)
209.1
(2,274.0)
660.0
(6.6)
(0.4)
$ 4,726.8
(0.4)
1.6
415.5
(5.1)
(51.5)
209.1
(152.0)
(2,122.0)
660.0
415.5
(56.6)
209.1
(2,274.0)
660.0
(6.6)
(6.6)
112.3
$
0.1
$4,679.2
$
61.4
$
(15.5) $ 4,725.2
$
See accompanying Notes to Consolidated Financial Statements.
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Table of Contents
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 on investment, accretion of discounts, and amortization of premiums
on investments, net
Deferred income taxes
Income tax benefits 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 (1)
Investing activities:
Purchase of investments
Proceeds from sales of investments
Proceeds from maturities of investments
Purchase of property, plant and equipment, and intellectual property
Net cash provided by (used in) investing activities
Financing activities:
Proceeds from issuance of common stock relating to 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 (1)
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,
2017
2016
2015
$
660.0
$
735.9
$
588.8
86.2
12.9
21.2
62.9
—
209.1
(81.7)
(115.5)
(28.5)
14.0
31.2
52.8
219.3
1,143.9
(1,995.0)
1,861.3
703.1
(190.7)
378.7
415.5
(56.6)
(2,274.0)
2.0
(1,913.1)
2.1
(388.4)
1,036.6
648.2
$
73.9
18.2
35.9
18.7
29.8
177.6
(35.9)
(46.7)
(28.7)
15.9
18.7
19.9
53.8
1,087.0
(2,585.5)
389.9
970.1
(53.9)
(1,279.4)
580.9
(24.0)
(42.5)
—
514.4
—
322.0
714.6
1,036.6
$
65.1
24.4
26.4
4.6
21.5
167.9
(79.2)
(10.7)
(10.5)
(11.3)
21.5
8.2
(10.5)
806.2
(1,827.4)
233.1
825.8
(81.0)
(849.5)
361.1
(11.0)
(183.7)
(7.3)
159.1
(1.5)
114.3
600.3
714.6
(1) The Company adopted ASU No. 2016-09, Improvements to Employee Share-based Payment Accounting, during the first quarter of 2017. This ASU eliminates
the requirement to reclassify cash flows related to excess tax benefits from operating activities to financing activities on the consolidated statements of cash flows.
The Company adopted this provision retrospectively by reclassifying $44.1 million and $34.3 million of excess tax benefits from financing activities to operating
activities for the year ended December 31, 2016, and 2015, respectively.
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- and majority-owned subsidiaries.
All intercompany balances and transactions have been eliminated in consolidation.
The Consolidated Financial Statements include the results and the balances of the Company's majority-owned joint venture
with Shanghai Fosun Pharmaceutical (Group) Co., Ltd. The Company holds a controlling financial interest in the joint venture
and the noncontrolling interest is reflected as a separate component of the consolidated stockholders’ equity. Noncontrolling interest
in net income was inconsequential to the consolidated results for all periods presented and, therefore, has been included as a
component of interest and other income, net in the consolidated statements of income.
Common Stock Split
Shares issued pursuant to the three-for-one stock split (the “Stock Split”) of the Company’s issued and outstanding common
stock, par value $0.001 per share, were distributed on October 5, 2017, to stockholders of record as of September 29, 2017. All
share and per share information presented in the Consolidated Financial Statements have been retroactively adjusted to reflect the
Stock Split.
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, 2017, and 2016, 69% and 73%, respectively, of accounts receivable were from domestic customers. No single
customer represented more than 10% of total revenue for the years ended December 31, 2017, 2016, and 2015.
During the years ended December 31, 2017, 2016, and 2015, domestic revenue accounted for 73%, 72%, and 71% of total
revenue, respectively, while outside of the U.S. revenue accounted for 27%, 28%, and 29%, respectively, of total revenue for each
of the years then ended.
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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 may consist of U.S. treasury and U.S. government agency
securities, taxable and tax exempt municipal notes, corporate notes and bonds, commercial paper, non-U.S. government agency
securities, 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
(loss). 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 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. No such charges were recorded during the years ended December 31, 2017, 2016, and 2015.
Fair Value Measurements
The Company measures the fair value of money market funds 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 commercial paper, corporate notes and bonds, U.S. and non-U.S. government agencies, and municipal
notes. 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 net realizable value, 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, 2017, 2016, and 2015, was $82.1 million, $70.7 million, and $61.1
million, respectively.
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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 $22.4 million, $11.8 million, and $14.8
million during the years ended December 31, 2017, 2016, and 2015, 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 if 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, 2017, there has been no impairment of goodwill.
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. Recoverability is
measured by comparing the net book value to the future undiscounted cash flows attributable to such assets. The Company
recognizes an impairment charge equal to the amount by which the net book value exceeds its fair value. 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, system components, or system accessories 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
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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, adding a second surgeon console for use with the da Vinci Si, Xi, and X Surgical Systems, or by upgrading a da Vinci
X Patient-Side Cart to an Xi Patient-Side Cart. Such upgrades are performed by completing component level upgrades at the
customer’s site or by swapping out the component upgraded. Upgrade revenue is recognized when the component level upgrades
have been completed and all other revenue recognition criteria have been met.
The Company's system sale arrangements contain multiple elements including a system(s), system accessories, instruments,
accessories, and system service. A da Vinci Surgical Systems are comprised of three components; a Patient-Side Cart, Surgeon’s
Console, and a Vision Cart. The Company generally delivers all of the elements, other than service, within days of entering into
the system sale arrangement. da Vinci X and Xi Patient-Side Carts, Surgeon’s Consoles, and Vision Carts are also sold on a stand-
alone basis, as are system accessories, instruments, accessories, and service. Each of these elements is a separate unit of accounting.
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.
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 or system component, 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 leased asset at
the inception of the lease, (3) whether the lease term exceeds 75% of the economic life of the leased asset, and (4) whether there
is an option to purchase the leased 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, 2017, 2016, and 2015,
was $25.9 million, $16.6 million, and $7.0 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 on a straight-line basis over the requisite service period.
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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 stock 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 stock 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.
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 the Company’s shares and dilutive potential shares
outstanding during the period. Dilutive potential shares primarily consist of employee stock options, restricted stock units, and
shares to be purchased by employees under the Company's employee stock purchase plan.
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 and the
amount of compensation cost for future service that the Company has not yet recognized are assumed to be used to repurchase
shares.
Research and Development Expenses
Research and development costs are expensed as incurred and 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.
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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, 2017, and 2016, 88% and 86% of long-lived assets were in the United States. Revenue
is attributed to a geographic region based on the location of the end customer.
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 re-evaluated 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 Not Yet Adopted
In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2014-09, Revenue from Contracts with
Customers, which sets forth a single, comprehensive revenue recognition model for all contracts with customers to improve
comparability. Subsequently, the FASB has issued several standards related to ASU 2014-09 (collectively, the “New Revenue
Standard”). The New Revenue Standard requires revenue recognition to depict the transfer of goods or services to customers in
an amount that reflects the consideration that the entity expects to receive in exchange for those goods or services. In addition,
the New Revenue Standard requires expanded disclosures. This New Revenue Standard permits the use of either the retrospective
or cumulative effect transition method when adopted. The New Revenue Standards becomes effective for the Company in the first
quarter of fiscal year 2018.
The Company will adopt the New Revenue Standard in the first quarter of fiscal year 2018 using the full retrospective method
to restate each prior reporting period presented in its Financial Statements. In preparation of adopting the New Revenue Standard,
the Company has implemented additional internal controls and updated key system functionality to enable future preparation of
financial information in accordance with the New Revenue Standard. The Company has also substantially completed its evaluation
of the impact of the New Revenue Standard on its historical financial statements. Based on that evaluation, the Company has
concluded that future billings related to future service included in its multi-year contracts should be part of the consideration
allocated to all performance obligations under the New Revenue Standard. Under the current standard, future service billings are
considered to be contingent revenue, and therefore, are not included in the consideration allocated. Accordingly, the amount of
consideration allocated to the performance obligations identified in the Company’s system arrangements will be different under
the New Revenue Standard than the amount allocated under the current standard. In general, this will result in an acceleration of
the amount revenue recognized for system sales with multi-year service contracts.
The Company currently expects total revenue to increase by approximately $9 million and $2 million for fiscal 2017 and
2016, respectively. Because future service billings will be included in the contract consideration allocated to all performance
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obligations in system sales arrangements with multi-year service commitments, the Company currently expects that a greater
amount of revenue will be allocated to the product related performance obligations under the New Revenue Standard. This is
expected to result in a shift or reclassification of $9 million and $6 million from service to product revenue for fiscal year 2017
and 2016, respectively. In addition, contract acquisition costs, such as sales commissions paid in connection with system sales
with multi-year service contracts, will be capitalized and amortized over the economic life of the contract under the New Revenue
Standard. Under the current guidance, the Company expenses such costs when incurred. As a result, the Company currently expects
that operating expenses will decrease by approximately $1 million and $2 million for fiscal years 2017 and 2016, respectively.
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. While substantially complete, the Company is still in the
process of finalizing its evaluation of the effect of the New Revenue Standard on the Company’s historical financial statements
and disclosures. The Company will finalize its accounting assessment and quantitative impact of the adoption of the New Revenue
Standard during the first quarter of fiscal year 2018. 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 lease equipment or other capital
assets, but does lease some of its facilities. The Company’s customers finance purchases of systems and ancillary products, including
directly with the Company. It is currently unknown whether the new standard will change customer buying patterns or behaviors.
The Company is evaluating the effect that this new standard will have on its Financial Statements and related disclosures.
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. Previously, the recognition of current and deferred income taxes associated with an intra-entity asset
transfer was prohibited until an asset had been sold to a third party. This ASU will be effective for the Company in first quarter
of 2018. 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. Upon adoption, the Company will record deferred tax assets with an offset to opening
retained earnings for amounts that entity had previously not recognized under existing guidance, but would be required to recognize
under the new guidance. The Company currently expects that the adoption will result in an increase in deferred tax assets, with
the corresponding cumulative effect adjustment recorded in retained earnings of approximately $390 million associated with an
intra-entity transfer of certain intellectual property rights related to the Company’s non-U.S. business to its Swiss entity. The
estimated adoption date impact may be materially different as a result of recording additional deferred taxes upon finalization of
the assessment of global intangible low-taxed income (“GILTI”) and other aspects from additional guidance and interpretations
by U.S. regulatory and standard-setting bodies related to the Tax Cuts and Jobs Act (“2017 Tax Act”).
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. The
Company does not expect a material impact upon the adoption of this ASU. Adoption of this ASU will not impact prior periods
but may impact the accounting of future transactions.
Adopted Accounting Pronouncement
Beginning in fiscal year 2017, the Company adopted ASU No. 2016-09, Improvements to Employee Share-based Payment
Accounting, which changes among other things, how the tax effects of share-based awards are recognized. ASU No. 2016-09
requires excess tax benefits and tax deficiencies to be recognized in the provision for income taxes as discrete items in the period
when the awards vest or are settled, whereas previously such income tax effects were generally recorded as part of additional paid-
in capital. The provision for income taxes for the year ended December 31, 2017, included excess tax benefits of $102.8 million
that reduced the Company’s effective tax rate by 9.4 percentage points. The recognized excess tax benefits resulted from share-
based compensation awards that vested or were settled during the year ended December 31, 2017. This ASU also eliminates the
requirement to reclassify cash flows related to excess tax benefits from operating activities to financing activities on the Company's
Consolidated Statements of Cash Flows. The Company adopted this provision retrospectively by reclassifying $44.1 million and
$34.3 million of excess tax benefits from financing activities to operating activities for the year ended December 31, 2016, and
2015, respectively. The Company also excluded the related tax benefits when applying the treasury stock method for computing
diluted shares outstanding on a prospective basis as required by this ASU. In addition, the Company elected to continue its current
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practice of estimating expected forfeitures. The amount of excess tax benefits and deficiencies recognized in the provision for
income taxes will fluctuate from period to period based on the price of the Company’s stock, the volume of share-based instruments
settled or vested, and the value assigned to share-based instruments under U.S. GAAP.
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, 2017, and 2016 (in millions):
December 31, 2017
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
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:
$
197.7
$
— $
— $
197.7
$
197.7
$
— $
—
445.0
1,029.1
1,474.1
38.4
946.6
901.3
2.5
301.1
2,189.9
—
—
—
—
0.2
—
—
—
0.2
—
(4.7)
(4.7)
—
(4.4)
(4.4)
—
(1.9)
(10.7)
445.0
1,024.4
1,469.4
38.4
942.4
896.9
2.5
299.2
2,179.4
445.0
5.5
450.5
—
—
—
—
—
—
—
396.2
396.2
38.4
403.9
311.7
2.5
159.7
916.2
—
622.7
622.7
—
538.5
585.2
—
139.5
1,263.2
$ 3,861.7
$
0.2
$
(15.4) $ 3,846.5
$
648.2
$ 1,312.4
$ 1,885.9
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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There were no transfers between Level 1 and Level 2 measurements during the year ended December 31, 2017, and there
were no changes in the valuation techniques used.
The following table summarizes the contractual maturities of the Company’s cash equivalents and available-for-sale
investments (excluding cash and money market funds), at December 31, 2017 (in millions):
Mature in less than one year
Mature in one to five years
Total
Amortized
Cost
Fair
Value
$
$
1,320.7
1,898.3
3,219.0
$
$
1,317.9
1,885.9
3,203.8
Realized gains and losses, net of tax, were not material for any of the periods presented.
As of December 31, 2017, and 2016, net unrealized losses on investments of $11.3 million and $8.6 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,
2017, and 2016 (in millions):
December 31, 2017
Corporate securities
U.S. treasuries
U.S. government agencies
Municipal securities
December 31, 2016
Corporate securities
U.S. treasuries
U.S. government agencies
Municipal securities
Unrealized losses less
than 12 months
Unrealized losses 12
months or greater
Total
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
$
567.6
763.5
428.9
236.3
$ 1,996.3
$ 1,056.1
357.1
538.2
728.8
$ 2,680.2
$
$
$
$
(2.1) $
(2.5)
(1.3)
(1.3)
(7.2) $
(5.0) $
(2.0)
(2.9)
(3.5)
(13.4) $
277.0
206.2
345.5
51.7
880.4
$
$
— $
—
—
—
— $
(2.3) $
844.6
(2.2)
969.7
(3.1)
774.4
(0.6)
288.0
(8.2) $ 2,876.7
— $ 1,056.1
357.1
—
—
538.2
728.8
—
— $ 2,680.2
$
$
$
$
(4.4)
(4.7)
(4.4)
(1.9)
(15.4)
(5.0)
(2.0)
(2.9)
(3.5)
(13.4)
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 loss in stockholders' equity and reclassifies into earnings in the same period in which the hedge transaction affects
earnings. The Company reclassified a net loss of $2.9 million and net gains of $0.9 million and $7.2 million to revenue related to
the hedged revenue transactions for the years ended December 31, 2017, 2016, and 2015, 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.
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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,
2017
2016
2015
$
$
(9.2) $
$
9.7
6.4
$
(5.6) $
7.0
(7.9)
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,
2017
December 31,
2016
December 31,
2017
December 31,
2016
$
$
$
128.5
0.9
2.9
$
$
$
109.7
6.2
1.0
$
$
$
168.4
1.2
4.6
$
$
$
143.7
5.6
0.6
NOTE 4.
BALANCE SHEET DETAILS AND OTHER FINANCIAL INFORMATION
The following table provides details of the inventories (in millions):
Inventory:
Raw materials
Work-in-process
Finished goods
Total inventory
December 31,
2017
2016
$
$
$
80.9
19.7
140.6
241.2
$
54.8
13.4
114.1
182.3
The following table provides details of the property, plant, and equipment, net (in millions):
December 31,
2017
2016
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
77
$
174.8
$
230.5
224.8
66.1
44.8
135.6
83.5
960.1
(347.0)
613.1
$
131.7
199.5
217.7
34.7
41.3
114.2
41.2
780.3
(321.9)
458.4
$
$
(13.8) $
(6.8)
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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
The following table provides details of the other long-term liabilities (in millions):
Other long-term liabilities:
Income taxes—long-term
Other long-term liabilities
Total other long-term liabilities
Supplemental Cash flow Information
The following table provides supplemental cash flow information (in millions):
Income taxes paid
Supplemental non-cash investing activities:
Equipment transfers from inventory to property, plant, and equipment
NOTE 5.
LEASES
December 31,
2017
2016
$
63.1
12.8
93.6
40.4
20.5
90.1
169.5
$
151.0
December 31,
2017
2016
286.8
40.3
327.1
$
$
84.9
27.7
112.6
$
$
$
$
Years Ended December 31,
2017
147.5
65.8
$
$
$
$
2016
138.4
39.3
2015
110.3
26.7
$
$
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,
2017
2016
$
$
128.0
(5.0)
(0.9)
122.1
41.9
80.2
$
122.1
$
104.3
(4.8)
(0.6)
98.9
29.8
69.1
98.9
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Contractual maturities of gross lease receivables as of December 31, 2017, are as follows (in millions):
Fiscal Year
2018
2019
2020
2021
2022
2023 and thereafter
Total
$
Amount
44.4
37.0
26.6
13.1
6.4
0.5
$
128.0
Operating Leases. The Company's operating lease terms are generally less than five years. Future minimum lease payments
related to non-cancellable portion of operating leases as of December 31, 2017, are as follows (in millions):
Fiscal Year
2018
2019
2020
2021
2022
2023 and thereafter
Total
$
Amount
42.6
41.2
34.0
19.5
8.4
0.7
$
146.4
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, 2017, and 2016 (in millions):
December 31, 2017
December 31, 2016
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
Patents and developed technology
$
156.0
$
Distribution rights and others
Customer relationships
Total intangible assets
9.2
28.6
$
193.8
$
(140.2) $
(9.2)
(18.4)
(167.8) $
15.8
$
158.7
$
—
10.2
26.0
9.2
28.6
$
196.5
$
(141.6) $
(9.1)
(14.3)
(165.0) $
17.1
0.1
14.3
31.5
Amortization expense related to intangible assets was $12.9 million, $18.2 million, and $24.4 million for the years ended
December 31, 2017, 2016, and 2015, respectively.
The estimated future amortization expense related to intangible assets as of December 31, 2017, is as follows (in millions):
Fiscal Year
2018
2019
2020
2021
2022
2023 and thereafter
Total
79
Amount
9.6
4.6
4.6
3.4
2.1
1.7
26.0
$
$
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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, 2017, are as follows (in
millions):
Fiscal Year
2018
2019
2020
2021
2022
2023 and thereafter
Total
Amount
8.2
5.8
4.4
3.4
3.0
16.8
41.6
$
$
Other commitments include an estimated amount of approximately $478.1 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, employment, 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.
A liability and related charge to earnings are recorded 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 re-evaluated
each accounting period and is based on all available information, including impact of negotiations, settlements, rulings, advice
of legal counsel, and other information and events pertaining to each case. Nevertheless, it is possible that additional 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.
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 retitled 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 remained. The plaintiffs moved for class certification
on September 1, 2015, and following opposition and reply briefing, the court held a hearing on the motion on January 21, 2016.
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 LLP 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
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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. On December 22, 2016, the court entered
an order granting plaintiffs’ motion for class certification. On January 5, 2017, the Company filed a Petition for Permission to
Appeal from the order granting class certification in the U.S. Court of Appeals for the Ninth Circuit. On October 30, 2017, the
court of appeals denied the Company’s petition. On January 12, 2017, plaintiffs sought leave to file a motion for partial
reconsideration of the court’s class certification order, which the court granted on March 17, 2017. Plaintiffs filed the motion for
reconsideration itself on April 3, 2017, and the Company filed its opposition on April 17, 2017. The court denied the motion on
September 29, 2017. 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 February 9, 2017, the Company moved to dismiss the amended complaint.
Following opposition and reply briefing, the matter was fully submitted to the court on March 2, 2017. The court denied the motion
on September 29, 2017. On July 13, 2017, the parties filed a stipulation vacating the case schedule, which the court entered on
July 14, 2017. On November 8, 2017, the court entered a new case schedule, with trial set to begin on October 30, 2018. While
the Company intends to vigorously defend itself, the actual outcome of this matter is dependent on many variables that are difficult
to predict. Based on currently available information, the Company is unable to make a reasonable estimate of loss or range of
losses, if any, arising from this matter.
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 named the Company as a nominal defendant and named a number of the Company’s current and former officers and
directors as defendants. The plaintiff sought 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 sought 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 retitled 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, which the court denied 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). While the motion was pending, 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. 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 Teachers’ 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, which the court granted on June 2, 2016. Additional discussions between the parties ensued,
and on September 15, 2016, they executed a confidential Memorandum of Understanding that contained the essential terms of a
settlement to which the parties agreed in principle. That settlement, as later finalized, provided 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, which also included terms that required the Company
to reimburse the plaintiffs’ lawyers’ legal fees, was approved by the court in the Public School Teachers’ Pension and Retirement
Fund of Chicago action on October 20, 2017, following the notice process described below. Accordingly, on December 26, 2017,
the parties in the In re Intuitive Surgical, Inc. Shareholder Derivative Litigation action filed a stipulation requesting that the court
dismiss the action with prejudice. The court entered the stipulation later the same day, and the matter is now resolved.
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
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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 demurrer (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
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 contained the essential terms of a settlement to which the parties agreed in principle. 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 and ruling that the motions for summary judgment and summary adjudication (along with other pre-trial motions)
were moot. The parties finalized the settlement over the ensuing months, appearing before the court periodically to keep it apprised
of their progress. The final settlement provided 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 and the other similar derivative
cases (see above and below, respectively, for additional description). The settlement also included terms that required the Company
to reimburse the plaintiffs’ lawyers’ legal fees. On July 7, 2017, the plaintiff filed a motion for preliminary approval of the settlement,
and on July 18, 2017, the Company filed a statement of non-opposition. On August 9, 2017, the court entered an order preliminarily
approving settlement, providing for notice to the Company’s shareholders, and setting a final settlement hearing. On October 20,
2017, the final settlement was approved by the court. During the year ended December 31, 2017, the Company recorded $11.7
million, respectively, of pre-tax charges to reflect the cost of settling this matter. As of December 31, 2017, the final settlement
was paid in full.
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 was
resolved by the settlement of the In re Intuitive Surgical, Inc. Shareholder Derivative Litigation action (see above for additional
description), and was subject to the December 26, 2017 stipulated dismissal of that action with prejudice. The matter is now
resolved.
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 contained the essential terms of a settlement to which the parties had agreed in principle. That settlement, as later finalized,
provided 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, which
also included terms that required the Company to reimburse the plaintiffs’ lawyers’ legal fees, was approved by the court in the
Public School Teachers’ Pension and Retirement Fund of Chicago action as described above. Accordingly, on December 26, 2017,
the parties in the City of Plantation Police Officers’ Employees’ Retirement System action filed a stipulation requesting that the
court dismiss the action with prejudice. The court entered the stipulation on December 29, 2017, and the matter is now resolved.
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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. On September 11, 2017, the plaintiff filed a
motion to lift the stay and reopen the case and for leave to file amended complaint. On September 25, 2017, the individual defendants
filed an opposition to plaintiffs’ motion, which the Company joined on September 26, 2017. Plaintiff filed his reply October 2,
2017, and the Court set a hearing for January 25, 2018. While the motion was pending however, the settlement described above
was approved by the court in the Public School Teachers’ Pension and Retirement Fund of Chicago action. Accordingly, on
November 22, 2017, the parties in the Back action filed a stipulation requesting that the court dismiss the action with prejudice.
The court entered the stipulation later the same day, and the matter is now resolved.
Product Liability Litigation
The Company is currently named as a defendant in approximately 43 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
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 from 22 different states who had surgeries in
which their surgeons used the da Vinci Surgical System. Several of the filed cases have trial dates in the next 12 months.
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.
Plaintiffs’ attorneys have also engaged in well-funded national advertising efforts seeking patients dissatisfied with surgery
utilizing the da Vinci Surgical System. 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 years ended December 31, 2017, 2016, and 2015, the Company
recorded $16.3 million, $8.3 million, and $13.8 million, respectively, of pre-tax charges to reflect the estimated cost of settling a
number of the product liability claims covered by the tolling agreements. As of December 31, 2017, and 2016, a total of $12.8
million and $20.5 million, respectively, were included in other accrued liabilities in the accompanying Consolidated Balance
Sheets related to the pending product-liability cases and the tolled product liability claims.
The Company’s estimate of the anticipated cost of resolving both the pending cases and the tolled 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.
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
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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 (“Washington 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. On February 9, 2017, the Washington Supreme Court vacated
the defense verdict and remanded the case for retrial. In November 2017, the Company reached a confidential settlement with the
plaintiff, which did not have a material adverse effect on the Company’s business, financial position, or future results of operations.
Patent Litigation
On June 30, 2017, Ethicon LLC, Ethicon Endo-Surgery, Inc., and Ethicon US LLC (collectively, “Ethicon”) filed a complaint
for patent infringement against the Company in the United States District Court for the District of Delaware. The complaint, which
was served on the Company on July 12, 2017, alleges that the Company’s EndoWrist Stapler instruments infringe several of
Ethicon’s patents. Based on currently available information, the Company is unable to make a reasonable estimate of loss or range
of losses, if any, arising from this matter.
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 the Repurchase
Program to $3.0 billion. As of December 31, 2017, the remaining amount of share repurchases authorized by the Board under the
Repurchase Program was approximately $717.5 million.
On January 24, 2017, the Company entered into an accelerated share repurchase program (the “ASR Program”) with Goldman
Sachs & Co. LLC (“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 7.3
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. Settlement was based on the daily volume-weighted average price per share of
the Company’s common stock during the repurchase period, less a discount, and resulted in the Company being required either
to deliver shares of common stock or to make a cash payment to Goldman. On December 7, 2017, the Company completed the
ASR Program by making a final settlement payment of $274.0 million to Goldman.
The following table provides the stock repurchase activities during the years ended December 31, 2017, 2016, and 2015 (in
millions, except per share amounts):
Shares repurchased
Average price per share
Value of shares repurchased
Years Ended December 31,
2017
2016
2015
7.3
310.32
2,274.0
$
$
$
$
0.2
201.70
42.5
$
$
1.1
167.41
183.7
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, 2017, 2016, and 2015, the Company reduced common stock and additional paid-in capital by an
aggregate of $152.0 million, $4.1 million, and $16.3 million, respectively, and charged $2,122.0 million, $38.4 million, $167.4
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, 2017, and
2016, are as follows (in millions):
Year Ended December 31, 2017
Gains
(Losses)
on Hedge
Instruments
Unrealized
Gains
(Losses) on
Available-
for-Sale
Securities
Foreign
Currency
Translation
Gains
(Losses)
Employee
Benefit Plans
Total
Beginning balance
$
5.0
$
(8.6) $
(1.3) $
(4.0) $
(8.9)
Other comprehensive income (loss) before
reclassifications
Reclassified from accumulated other comprehensive
loss
Net current-period other comprehensive income (loss)
Ending balance
(8.6)
(2.7)
1.2
(7.4)
(2.4) $
—
(2.7)
(11.3) $
$
3.6
—
3.6
2.3
$
(0.3)
(8.0)
0.2
(0.1)
(4.1) $
1.4
(6.6)
(15.5)
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
$
1.5
$
(4.2) $
(3.3) $
(3.5) $
(9.5)
Other comprehensive income (loss) before
reclassifications
Reclassified from accumulated other comprehensive
loss
Net current-period other comprehensive income (loss)
4.1
(0.6)
3.5
Ending balance
$
5.0
$
(4.6)
0.2
(4.4)
(8.6) $
2.0
—
2.0
(1.3) $
(0.7)
0.2
(0.5)
(4.0) $
0.8
(0.2)
0.6
(8.9)
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 2017, 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 21,150,000 to 24,450,000. As of December 31, 2017, approximately 6.2 million shares
were reserved for future issuance under the 2010 Plan. A maximum of 2.7 million of these shares can be awarded as RSUs.
2009 Employment Commencement Incentive Plan. In October 2009, the Board 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 3,465,000 to 4,365,000.
As of December 31, 2017, approximately 43,000 shares were reserved for future issuance under the New Hire Plan. However, the
Company intends to no longer issue grants from the New Hire Plan in the future and plans to instead utilize the 2010 Plan to make
grants to new employees.
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2000 Equity Incentive Plan. In March 2000, the Board 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 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. The Company makes annual option grants on February 15 (or the next business day if the date is
not a business day) and 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.
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 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 450,000. 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, 2017, approximately 0.1 million shares were reserved for future issuance under
the Directors’ Plan.
2000 Employee Stock Purchase Plan. In March 2000, the Board 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. In April 2017, the Company’s
stockholders approved an amended and restated ESPP to provide for an increase in the number of shares of common stock reserved
for issuance from 6,090,315 to 7,590,315.
The Company issued 0.2 million, 0.2 million, and 0.3 million shares under the ESPP, representing approximately $38.3 million,
$32.5 million, and $31.2 million in employee contributions for the years ended December 31, 2017, 2016, and 2015, respectively.
As of December 31, 2017, there were approximately 1.6 million shares reserved for future issuance under the ESPP.
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Restricted Stock Units. 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.
Stock Option Information
Option activity during fiscal 2017 under all the stock plans was as follows (in millions, except per share amounts):
Balance at December 31, 2016
Options granted
Options exercised
Options forfeited/expired
Balance at December 31, 2017
Stock Options Outstanding
Number
Outstanding
Weighted Average
Exercise Price Per
Share
$
9.3
0.7
$
(2.7) $
(0.1) $
$
7.2
148.36
287.11
140.70
204.94
164.16
The aggregate intrinsic value of stock options exercised under our stock plans determined as of the date of option exercise
was $379.9 million, $273.3 million, and $196.5 million during the years ended December 31, 2017, 2016, and 2015, respectively.
Cash received from option exercises and employee stock purchase plans for the years ended December 31, 2017, 2016, and 2015,
was $415.5 million, $580.9 million, and $361.1 million, respectively. The income tax benefit from stock options exercised
was $118.9 million for the year ended December 31, 2017.
The following table summarizes significant ranges of outstanding and exercisable options as of December 31, 2017 (number
of shares and aggregate intrinsic value in millions):
Options Outstanding
Options Exercisable
Range of
Exercise Prices
$31.96 - $113.73
$114.61 - $153.05
$155.57 - $172.44
$172.76 - $213.77
$213.97 - $391.04
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)
1.6
1.5
1.6
1.4
1.1
7.2
2.3
5.9
5.4
6.7
9.1
5.6
$
$
$
$
$
$
92.43
140.19
169.56
184.30
266.31
164.16
$1,447.2
1.6
1.4
1.4
1.0
0.3
5.7
$
$
$
$
$
$
92.43
139.87
169.67
185.29
250.46
147.32
$1,234.4
4.9
(1) The aggregate intrinsic value represents the total pre-tax intrinsic value, based on the Company’s closing stock price of $364.94 at December 31, 2017, 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, 2017, a total of 7.1 million shares of stock options vested and expected to vest had a weighted average
remaining contractual life of 5.6 years, an aggregate intrinsic value of $1,429.6 million, and a weighted average exercise price of
$162.50.
Restricted Stock Units Information
RSU activity for the year ended December 31, 2017, was as follows (in millions, except per share amounts):
Unvested balance at December 31, 2016
Granted
Vested
Forfeited
Unvested balance at December 31, 2017
87
Shares
Weighted Average
Grant Date Fair
Value
$
1.8
1.0
$
(0.6) $
(0.1) $
$
2.1
174.72
249.34
171.42
204.08
209.55
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As of December 31, 2017, 1.9 million shares of RSUs were expected to vest with an aggregate intrinsic value of $700.1
million. The aggregate vesting date fair value of RSUs vested was $144.2 million, $65.3 million, and $29.5 million during the
years ended December 31, 2017, 2016, and 2015, respectively.
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,
2017
2016
2015
28.1
14.0
42.1
111.8
56.0
209.9
49.2
160.7
$
$
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
$
$
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, 2017, 2016, and 2015, 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,
2017
2016
2015
1.8%
4.1
25%
1.1%
4.2
26%
1.6%
4.3
28%
$
67.03
$
47.06
$
43.82
1.2%
1.2
28%
0.6%
1.2
30%
0.4%
1.2
31%
$
$
79.77
249.34
$
$
57.57
184.59
$
$
48.91
170.64
As share-based compensation expense recognized in the Consolidated Statements of Income during the years ended
December 31, 2017, 2016, and 2015, is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures.
For share-based compensation accounting, the Company elected to continue estimating expected forfeitures at the time of grant
and revise, if necessary, in subsequent periods if actual forfeitures differ from those estimated.
As of December 31, 2017, there were a total of $69.9 million, $278.9 million, and $18.4 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 2.3 years for unvested stock
options, 2.4 years for unvested restricted stock units, and 1.5 years for rights granted to acquire common stock under the ESPP.
NOTE 10.
INCOME TAXES
Income before provision for income taxes for the years ended December 31, 2017, 2016, and 2015, consisted of the following
(in millions):
U.S.
Foreign
Total income before provision for income taxes
88
Years Ended December 31,
2017
2016
2015
$
$
765.0
331.5
1,096.5
$
$
653.0
327.8
980.8
$
$
425.1
333.4
758.5
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The provision for income taxes for the years ended December 31, 2017, 2016, and 2015, consisted of the following (in
millions):
Current
Federal
State
Foreign
Deferred
Federal
State
Foreign
Total income tax expense
Years Ended December 31,
2017
2016
2015
$
$
$
$
$
352.1
13.0
8.7
373.8
65.5
(0.4)
(2.4)
62.7
436.5
$
$
$
$
$
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
Income tax expense differs from amounts computed by applying the statutory federal income rate of 35% for the years ended
December 31, 2017, 2016, and 2015, 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
Tax Cuts and Jobs Act impact
Excess tax benefits
Other
Total income tax expense
Years Ended December 31,
2017
2016
2015
$
383.8
$
343.3
$
265.5
16.0
(107.3)
(15.3)
10.8
(7.9)
(62.4)
—
317.8
(102.8)
3.8
436.5
$
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
$
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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,
2017
2016
$
$
$
$
$
$
79.1
29.7
27.5
10.5
146.8
(29.4)
117.4
$
$
$
(26.3) $
(3.6)
(0.2)
(30.1) $
$
87.3
122.2
47.4
15.6
9.8
195.0
(17.2)
177.8
(25.2)
(2.3)
(0.2)
(27.7)
150.1
The 2017 Tax Act was enacted on December 22, 2017. The 2017 Tax Act includes a number of changes in existing tax law
impacting businesses, including a one-time deemed repatriation of cumulative undistributed foreign earnings and a permanent
reduction in the U.S. federal statutory rate from 35% to 21%, effective on January 1, 2018. Under U.S. GAAP, changes in tax
rates and tax law are accounted for in the period of enactment and deferred tax assets and liabilities are measured at the enacted
tax rate. Consistent with guidance issued by the Securities Exchange Commission (“SEC”), which provides for a measurement
period of one year from the enactment date to finalize the accounting for effects of the 2017 Tax Act, the Company provisionally
recorded an income tax expense of $317.8 million related to the 2017 Tax Act. Based on information available, the Company
estimated the cumulative undistributed foreign earnings to be approximately $1,873.8 million and recorded a provisional estimate
of $270.2 million of income tax expense related to the one-time deemed repatriation toll charge, which will be payable over eight
years. As a result of the 2017 Tax Act, the Company can repatriate the cumulative undistributed foreign earnings back to the U.S.
when needed with minimal U.S. income tax consequences other than the one-time deemed repatriation toll charge. The Company
is still evaluating whether to change its indefinite reinvestment assertion in light of the 2017 Tax Act and consider that conclusion
to be incomplete under guidance issued by the SEC. If the Company subsequently changes its assertion during the measurement
period, the Company will account for the change in assertion as part of the 2017 Tax Act enactment.
In addition, the Company recorded a provisional estimate of $47.6 million income tax expense due to the re-measurement of
its net deferred tax assets at a U.S. federal statutory rate that was reduced from 35% to 21%. For the GILTI provisions of the 2017
Tax Act, a provisional estimate could not be made as the Company has not yet completed its assessment or elected an accounting
policy to either recognize deferred taxes for basis differences expected to reverse as GILTI or to record GILTI as period costs if
and when incurred.
In accordance with SEC guidance, provisional amounts may be refined as a result of additional guidance from, and
interpretations by, U.S. regulatory and standard-setting bodies, and changes in assumptions. In the subsequent period, provisional
amounts will be adjusted for the effects, if any, of interpretative guidance issued after December 31, 2017, by the U.S. Department
of the Treasury. The effects of the 2017 Tax Act may be subject to changes for items that were previously reported as provisional
amounts, as well as any element of the 2017 Tax Act that a provisional estimate could not be made, and such changes could be
material.
The Company adopted ASU No. 2016-09 in the first quarter of 2017, which resulted in excess tax benefits associated with
employee equity plans of $102.8 million being recognized in the income tax provision for the year ended December 31, 2017.
Excess tax benefits associated with employee equity plans was previously recorded in additional paid-in capital and the adoption
of this ASU resulted in reducing the Company’s effective tax rate by 9.4 percentage points for the year ended December 31, 2017.
The amount of excess tax benefits or deficiencies will fluctuate from period to period based on the price of the Company’s stock,
the volume of share-based instruments settled or vested, and the value assigned to employee equity awards under U.S. GAAP.
The Company’s tax holiday obtained in 2007 for business operations in Switzerland ended on December 31, 2017. The tax
benefit from the tax holiday for the year ended December 31, 2017, was approximately $10.9 million, or $0.09 per diluted share.
The Company received a new tax ruling in Switzerland for new business operations. The new ruling is effective for years 2018
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through 2022, which will be extended for the next five years thereafter, to the extent certain terms and conditions continue to be
met. The new ruling would allow for a reduced cantonal tax rate based on various thresholds of investment, including the ownership,
development, and use of the non-U.S. intellectual property rights and employment in such jurisdiction. The transfer of ownership
of such intellectual property rights to the Company's Swiss entity did not impact the Consolidated Financial Statements for the
periods presented.
As of December 31, 2017, and 2016, the Company had valuation allowances of $29.4 million and $17.2 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 decrease of its gross unrecognized tax benefits of approximately $40.6 million during the year
ended December 31, 2017. The net decrease was primarily due to the reversal of gross unrecognized tax benefits in connection
with the expiration of certain statutes of limitation in various jurisdictions and associated re-measurement of uncertain tax position,
partially offset by increases related to 2017 uncertain tax positions. The Company had gross unrecognized tax benefits of
approximately $65.4 million, $106.0 million, and $92.4 million as of December 31, 2017, 2016, and 2015, 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, 2017, 2016, and 2015, gross interest
related to unrecognized tax benefits accrued was approximately $1.8 million, $3.7 million, and $2.9 million, respectively. A
majority of the Company's net unrecognized tax benefits and related interest is presented in Other accrued liabilities on the
Consolidated Balance Sheets.
A reconciliation of the beginning and ending amounts of gross unrecognized income tax benefits for the years ended
December 31, 2017, 2016, and 2015, 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,
2017
2016
2015
$
$
106.0
21.1
—
(46.5)
(0.5)
(14.7)
65.4
$
$
92.4
29.9
—
(0.5)
—
(15.8)
106.0
$
$
75.5
28.9
0.3
—
(11.4)
(0.9)
92.4
The Company files federal, state and foreign income tax returns in many U.S. and OUS jurisdictions. Years before 2014 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. 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.
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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):
Numerator:
Net income
Denominator:
Years Ended December 31,
2017
2016
2015
$
660.0
$
735.9
$
588.8
Weighted-average shares outstanding in basic calculation
Add: dilutive effect of potential common shares
Weighted-average shares used in computing diluted net income per
share
111.7
4.6
116.3
114.9
3.0
117.9
Net income per share:
Basic
Diluted
$
$
5.91
5.67
$
$
6.40
6.24
$
$
111.3
2.4
113.7
5.29
5.18
Share-based compensation awards of approximately 0.2 million, 0.6 million, and 5.0 million shares for the years ended
December 31, 2017, 2016, and 2015, 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 anti-dilutive 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 100% 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. 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
Net income (loss) (1)(2)
Net income (loss) per share:
Basic
Diluted
(1) Includes discrete tax benefits (expense) as follows:
Income tax (expense) related to the 2017 Tax Act
Excess tax benefits related to share-based compensation
arrangements
Certain one-time tax benefits
(2) Includes pre-tax litigation benefits (charges)
Revenue
Gross profit (1)
Net income (1)(2)(3)
Net income per share:
Basic
Diluted
(1) Includes pre-tax medical device excise tax refund benefit
(2) Includes discrete tax benefits as follows:
Audit settlement and expiration of the statutes of limitations
in multiple jurisdictions
(3) Includes pre-tax litigation (charges)
Three Months Ended
December 31,
2017
September 30,
2017
June 30,
2017
March 31,
2017
892.4
$
$
633.3
(38.8) $
(0.35) $
(0.35) $
806.1
566.8
297.5
2.66
2.55
$
$
$
$
$
756.2
527.9
221.5
2.00
1.92
$
$
$
$
$
674.2
466.1
179.8
1.61
1.56
(317.8) $
— $
— $
—
19.9
$
— $
1.2
$
19.7
68.4
$
$
(9.7) $
30.6
$
— $
4.5
$
32.6
—
(21.3)
Three Months Ended
December 31,
2016
September 30,
2016
June 30,
2016
March 31,
2016
756.9
527.2
204.0
1.75
1.71
$
$
$
$
$
682.9
487.0
211.0
1.82
1.77
$
$
$
$
$
670.1
470.9
184.5
1.61
1.57
$
$
$
$
$
594.5
405.0
136.4
1.21
1.18
— $
7.1
$
— $
—
— $
(5.5) $
15.8
$
— $
— $
(4.4) $
—
(2.2)
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
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VALUATION AND QUALIFYING ACCOUNTS
(IN MILLIONS)
SCHEDULE II
Allowance for doubtful accounts, loan credit losses,
and sales returns
Year ended December 31, 2017
Year ended December 31, 2016
Year ended December 31, 2015
(1) Primarily represents products returned.
Balance at
Beginning of
Year
Additions
Deductions (1)
Balance at
End of Year
$
$
$
10.8
9.4
5.5
$
$
$
36.1
24.6
22.3
$
$
$
(32.3) $
(23.2) $
(18.4) $
14.6
10.8
9.4
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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, 2017.
The effectiveness of our internal control over financial reporting as of December 31, 2017, 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,
2017, 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.
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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, 2017.
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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Amended and Restated Certificate of Incorporation of the Company, as amended.
EXHIBIT INDEX
Amended and Restated Bylaws of the Company.
Specimen Stock Certificate.
3.1(1)
3.2(2)
4.1(3)
10.1(4)
2000 Equity Incentive Plan. *
10.2(4)
2000 Non-Employee Directors’ Stock Option Plan. *
10.3(5)
Form of Indemnity Agreement. *
10.4(6)
2009 Employment Commencement Incentive Plan, as amended and restated. *
10.5(7)
2000 Employee Stock Purchase Plan. *
10.6(8)
2010 Incentive Award Plan, as amended and restated. *
10.7(9)
Severance Plan. *
10.8(10)
Form of Intuitive Surgical, Inc. 2000 Equity Incentive Plan Stock Option Agreement (Incentive and Nonstatutory
Stock Options). *
10.9(11)
Form of Intuitive Surgical, Inc. 2009 Employment Commencement Incentive Plan Stock Option Grant Notice. *
10.10(12)
Form of Intuitive Surgical, Inc. 2009 Employment Commencement Incentive Plan Restricted Stock Unit Grant
Notice. *
10.11(13)
Form of Intuitive Surgical, Inc. 2010 Incentive Award Plan Stock Option Grant Notice. *
10.12(14)
Form of Intuitive Surgical, Inc. 2010 Incentive Award Plan Restricted Stock Unit Grant Notice. *
10.13(15) Master Confirmation and Supplemental Confirmation between Intuitive Surgical, Inc. and Goldman Sachs & Co.
21.1
23.1
31.1
31.2
32.1
101
LLC dated January 24, 2017.
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,
2017, formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Balance Sheets, (ii)
Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated
Statements of Stockholders’ Equity, (v) Consolidated Statements of Cash Flows, and (vi) Notes to Consolidated
Financial Statements, tagged at Level I through IV.
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
Incorporated by reference to Exhibit 3.1 filed with the Company’s Quarterly Report on Form 10-Q filed on October 20, 2017 (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 Exhibit 4.2 filed with the Company’s Registration Statement Amendment on Form S-1/A filed on May 2, 2000 (File
No. 333-33016).
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 10.1 filed with the Company’s Current Report on Form 8-K filed on April 26, 2017 (File No. 000-30713).
Incorporated by reference to Exhibit 10.2 filed with the Company’s Current Report on Form 8-K filed on April 26, 2017 (File No. 000-30713).
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).
(10) 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).
(11) Incorporated by reference to Exhibit 10.9 filed with the Company’s 2015 Annual Report on Form 10-K filed on February 2, 2016 (File No. 000-30713).
(12) Incorporated by reference to Exhibit 10.10 filed with the Company’s 2015 Annual Report on Form 10-K filed on February 2, 2016 (File No. 000-30713).
(13) Incorporated by reference to Exhibit 10.11 filed with the Company’s 2015 Annual Report on Form 10-K filed on February 2, 2016 (File No. 000-30713).
(14) Incorporated by reference to Exhibit 10.12 filed with the Company’s 2015 Annual Report on Form 10-K filed on February 2, 2016 (File No. 000-30713).
(15) Incorporated by reference to Exhibit 10.13 filed with the Company’s 2016 Annual Report on Form 10-K filed on February 6, 2017 (File No. 000-30713).
99
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* Management contract or compensatory plan or arrangement.
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ITEM 16.
FORM 10-K SUMMARY
None.
101
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 2, 2018
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 2, 2018
Senior Vice President and Chief Financial Officer (Principal
Financial Officer)
February 2, 2018
Vice President, Corporate Controller (Principal Accounting
Officer)
February 2, 2018
/S/ LONNIE M. SMITH
Chairman of the Board of Directors
February 2, 2018
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/ JAMI DOVER NACHTSHEIM
Director
Jami Dover Nachtsheim
/S/ MARK J. RUBASH
Director
Mark J. Rubash
102
February 2, 2018
February 2, 2018
February 2, 2018
February 2, 2018
February 2, 2018
February 2, 2018
February 2, 2018
INTUITIVE SURGICAL, INC.
SUBSIDIARIES (All 100% Owned other than Intuitive Surgical-Fosun Medical Technology (Shanghai) Co., Ltd.)
Exhibit 21.1
Subsidiaries of the Registrant
I.S. Holdings C.V.
I.S. Netherlands C.V.
Intuitive Surgical AB
Intuitive Surgical ApS
Intuitive Surgical Australia Proprietary
Intuitive Surgical Brasil Importacao E Comercio De Equipamentos
Cirurgicos Ltda.
Intuitive Surgical BV
Intuitive Surgical Deutschland GmbH
Intuitive Surgical GK
Intuitive Surgical HK Limited
Intuitive Surgical Holdings, LLC
Intuitive Surgical India Private Limited
Intuitive Surgical International Ltd.
Intuitive Surgical Korea Limited
Intuitive Surgical Limited
Intuitive Surgical Medical Device and Technology (Shanghai) Co., Ltd.
Intuitive Surgical Medical Device Taiwan Ltd.
Intuitive Surgical Operations, Inc.
Intuitive Surgical Pte. Ltd.
Intuitive Surgical S. de R. L. de C.V.
Intuitive Surgical S.A.S.
Intuitive Surgical s.r.o.
Intuitive Surgical Sarl
Intuitive Surgical Spain SL
Intuitive Surgical SPRL
Intuitive Surgical-Fosun Medical Technology (Shanghai) Co., Ltd.
State or Other Jurisdiction of Incorporation
Netherlands
Netherlands
Sweden
Denmark
Australia
Brazil
Netherlands
Germany
Japan
Hong Kong
Delaware, U.S.
India
Cayman
Korea
United Kingdom
China
Taiwan
Delaware, U.S.
Singapore
Mexico
France
Czech Republic
Switzerland
Spain
Belgium
China
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 333-221043, 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 2, 2018 relating to the 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 2, 2018
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 2, 2018
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 2, 2018
By:
/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,
2017 (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 2, 2018
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,
2017 (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 2, 2018