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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, 2020
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 Road
Sunnyvale, California 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
Trading Symbol(s)
ISRG
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 every Interactive Data File required to be submitted pursuant to Rule 405 of
Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such
files). Yes ☒ No ☐
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
☒
☐
Accelerated filer
Smaller reporting company
Emerging growth company
☐
☐
☐
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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal
control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared
or issued its audit report. ☒
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, 2020, based upon the closing price of
Common Stock on such date as reported on The Nasdaq Global Select Market, was approximately $66.4 billion. 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 15, 2021, was 117,718,298.
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 22, 2021, to be filed within 120 days of the registrant’s fiscal year ended December 31, 2020.
Table of Contents
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II
Item 5.
Item 6.
Item 7.
INTUITIVE SURGICAL, INC.
INDEX
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Market for the Registrant’s Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Item 9.
Item 9A.
Item 9B.
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
Item 15.
Item 16.
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions and Director Independence
Principal Accountant Fees and Services
Exhibits and Financial Statement Schedules
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 the expected impacts of the COVID-19 pandemic on our business, financial condition, and results of operations, the
potential decline of our procedure volume, our acquisitions, our expected business, our expected new product introductions, the impacts of Extended Use
Instruments, 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: our ability to obtain accurate procedure
volume and mix in the midst of the COVID-19 pandemic; the risk that the COVID-19 pandemic could lead to further material delays and cancellations of,
or reduced demand for, procedures; curtailed or delayed capital spending by hospitals; disruption to our supply chain; closures of our facilities; delays in
surgeon training; delays in gathering clinical evidence; delays in obtaining new product approvals or clearances from the U.S. Food and Drug
Administration due to COVID-19; the evaluation of the risks of robotic-assisted surgery in the presence of infectious diseases; diversion of management
and other resources to respond to the COVID-19 outbreak; the impact of global and regional economic and credit market conditions on healthcare
spending; the risk that the COVID-19 virus disrupts local economies and causes economies in our key markets to enter prolonged recessions; 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, including the joint
venture with Shanghai Fosun Pharmaceutical (Group) Co., Ltd.; our completion of and ability to successfully integrate acquisitions, including Schölly
Fiberoptic's robotic endoscope business and Orpheus Medical; 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; risks associated with our operations outside of the
United States; unanticipated manufacturing disruptions or the inability to meet demand for products; our reliance on sole and single source suppliers; 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; changes in tariffs, trade barriers, and regulatory requirements; 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 X , da Vinci Xi , da Vinci SP , EndoWrist , Firefly , InSite , Intuitive Surgical EcoSystem , SureForm , Ion , Iris , and
SynchroSeal are trademarks or registered trademarks of the Company.
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Company Background
Intuitive is committed to advancing patient care in surgery and other acute medical interventions. The Company is focused on innovating to enable
physicians and healthcare providers to improve the quality of and access to minimally invasive care. Our mission reflects that we believe that minimally
invasive care is life-enhancing care. Intuitive brings more than two decades of leadership in robotic-assisted surgical technology and solutions to its
offerings. While surgery and acute interventions have improved significantly in the past decades, there remains a significant need for better outcomes and
decreased variability of these outcomes across care teams. The current healthcare environment continues to stress critical resources, including the
professionals who staff care teams: surgeons, anesthesiologists, nurses, and other staff. At the same time, governments strain to cover the healthcare needs
of their populations and demand lower total cost per patient to treat disease. In the face of these challenges, we believe scientific, process, and technological
advances in biology, computing, imaging, algorithms, and robotics offer new methods to solve continued and difficult problems.
We address these needs by focusing on the quadruple aim. First, we focus on products and services that can improve outcomes and decrease variability
in the hands of care teams. Second, we seek to improve the patient experience by minimizing disruption to lives and creating greater predictability for the
treatment experience. Third, we seek to improve care team satisfaction by creating products and services that are dependable, smart, and optimized for the
care environment in which they are used. Finally, we seek to lower the total cost to treat per patient episode when compared with existing treatment
alternatives, providing a return on investment for hospitals and healthcare systems and value for payers.
By striving to find less invasive ways to enter the body, provide clearer views of anatomy and more precise tissue interactions, and helping hone
surgical skills, Intuitive launched its first da Vinci Surgical System in 1999. In 2000, the U.S. Food and Drug Administration (“FDA”) cleared da Vinci for
general laparoscopic surgery.
The da Vinci Surgical System is designed to enable complex surgery using a minimally invasive approach. It consists of an ergonomic surgeon console
or consoles, a patient-side cart with an interactive arm or arms, a high-performance vision system, and proprietary instruments and accessories. Surgeons
using the da Vinci system operate while seated comfortably at a console viewing a three-dimensional, high definition (“3DHD”) 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 approach. Our technology is designed to provide surgeons with a range of motion analogous to the
motions of a human wrist, while filtering out the tremors inherent in a surgeon’s hands. In designing our products, we focus on making our technology easy
and safe to use.
Our da Vinci Surgical Systems provide the following features and benefits to surgeons:
Immersive 3DHD Visualization. Our vision system includes a 3DHD 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 the target anatomy with natural depth-
of-field 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 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, or right by moving their hands while maintaining a stable image.
Advanced Instruments. We offer a comprehensive suite of stapling, energy, and core instrumentation for our surgical systems. Most of our proprietary
instruments feature EndoWrist technology, incorporating “wrist” joints. Inspired by the human hand, our wristed instruments enable surgeons to orient the
instruments carefully relative to the tissue and suture with precision, just as they can in open surgery.
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Intuitive Instrument Movements. Our technology is designed to transform the surgeon’s natural hand movements outside of 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 of the
body causes the instrument inside the patient to be moved to the right. In contrast, conventional minimally invasive surgery (“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 compensate for the direction reversal by the pivot.
Scaled, Tremor Filtered Instrument Movement. With our technology, a surgeon can also use “motion scaling,” a feature that translates, for example, a
three-millimeter hand movement outside the patient’s body into a one-millimeter instrument movement in the surgical field inside the patient’s body.
Motion scaling is designed to allow precision and control for delicate tasks. In addition, our technology filters the tremor inherent in a surgeon’s hands.
Improved Surgeon Ergonomics. The da Vinci Surgical System is designed to allow surgeons to operate while seated, which may be
clinically advantageous because of reduced surgeon fatigue. The da Vinci Surgical System’s design provides natural hand-eye alignment at the surgeon’s
console. Because the da Vinci Surgical System’s robotic arms hold the camera and instruments steady, there is less surgeon and assistant fatigue.
Multi-Specialty Surgical Platform. The da Vinci Surgical System is designed to enable surgeons to perform a wide range of surgical procedures within
our targeted gynecologic, urologic, general surgery, cardiothoracic, and head and neck specialties. To date, surgeons have used the da Vinci Surgical
System to perform dozens of different types of surgical procedures. While we do not expect all of these different types of procedures to become widely
adopted, they demonstrate the flexibility of the da Vinci Surgical System.
Advanced Training Tools. Training technologies include our Simulation program, which provides for independent da Vinci skills development through
interactive Virtual Reality (“VR”) exercises, and our telementoring program, which provides real-time, surgeon-to-surgeon learning and collaboration
during robotic-assisted surgery with a da Vinci Surgical System.
Additionally, the FDA cleared Iris, Intuitive’s augmented reality imaging product, for use in kidney procedures. Iris extracts CT scans, runs them
through machine-learning algorithms, and returns a segmented model of the kidney for use in planning for a procedure and for intraoperative visualization
of the area. The tool uses augmented reality to give surgeons an image with details of the kidney anatomy – blood vessels, tumor shape, and size – that they
may not be able to see well with other imaging. Intuitive designed Iris, among other things, to be shared as a teaching tool among surgeons to coordinate
approaches to complex cases. It can also be part of the viewing experience during a procedure to enhance information and let surgeons know where critical
anatomy sits as they work through a procedure.
In 2019, the FDA cleared our Ion endoluminal system, which enables minimally invasive biopsies in the lung. Our Ion system is a flexible, robotic-
assisted, catheter-based platform that utilizes instruments and accessories, which extends our commercial offering beyond surgery into diagnostic,
endoluminal procedures with this first application. Many suspicious lesions found in the lung may be small and difficult to access, which can make
diagnosis challenging, and Ion helps physicians obtain tissue samples from deep within the lung, which could help enable earlier diagnosis.
Products
da Vinci Surgical Systems
Intuitive’s primary platform for robotic-assisted surgery is our family of da Vinci Surgical Systems. We have commercialized four generational
platforms of da Vinci Surgical Systems: our fourth generation da Vinci X, da Vinci Xi, and da Vinci SP 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 3DHD
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 da Vinci instruments positioned inside the patient. On most of our current systems (da
Vinci X, da Vinci Xi, and da Vinci Si), a second surgeon’s console may be used in two ways: to provide assistance to the primary surgeon during
surgery or to act as an active aid during surgeon-proctor training sessions. With the da Vinci 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 3D virtual pointers to augment the dual-surgeon experience.
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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 surgical 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 the
field of vision. A fourth instrument arm extends surgical capabilities by enabling the surgeon to add a third instrument to perform additional tasks.
The fourth instrument arm is a standard, integrated feature on the da Vinci X, da Vinci Xi, and da Vinci Si Surgical Systems. Our da Vinci SP
Surgical System includes a single arm with three, multi-jointed, wristed instruments and the first da Vinci fully wristed, 3DHD camera. The
instruments and the camera all emerge through a single cannula and are triangulated around the target anatomy to avoid external instrument
collisions that can occur in narrow surgical workspaces.
3DHD Vision System. Our vision system includes our InSite 3D endoscope with two separate vision channels linked to two separate color monitors
through high performance video cameras and specialized image processing hardware. The resulting 3DHD image has high resolution, high contrast,
low flicker, and low cross fading. A digital zoom feature in the 3DHD 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 3DHD vision system is a standard,
integrated feature on the da Vinci X, da Vinci Xi, da Vinci SP, da Vinci Si, and da Vinci S Surgical Systems.
Skills Simulator. The Skills Simulator is a practice tool that gives a user the opportunity to practice their skills and gain familiarity with the surgeon
console controls. The Skills Simulator incorporates 3D, physics-based computer simulation technology to immerse the user within a virtual
environment and provides training capabilities that have been used extensively by surgeons. 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, da Vinci Xi, and da Vinci SP Surgical Systems.
Da Vinci Xi Integrated Table Motion. Integrated Table Motion coordinates the movements of the da Vinci robotic arms with an advanced operating
room table, the TS 7000dV OR Table sold by Hillrom , to enable managing the patient’s position in real-time while the da Vinci robotic arms
remain docked. This gives operating room teams the capability to optimally position the operating table during da Vinci Surgical System procedures.
Integrated Table Motion enables surgeons to maximize reach, facilitate access, and choose the angle of approach to target anatomy, as well as
reposition the table during the procedure to enhance anesthesiologists’ management of the patient.
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Firefly Fluorescence Imaging. Firefly is a standard feature of the da Vinci X and da Vinci Xi Surgical Systems and is 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 typically used in the procedure categories of urology, gynecology, and general surgery.
Informatics
Intuitive Cloud. The vast majority of our systems are connected to the Intuitive cloud to enable proactive monitoring and provide software updates.
SimNow. Our cloud-enabled SimNow simulation platform is our latest generation simulator, which allows surgeons to learn and practice their
surgical skills. SimNow is compatible with multiple da Vinci platforms and can be connected to the internet. The SimNow online connection drives
real-time simulation performance tracking for surgeons and administrators through an online dashboard and supports remote updates of the VR
content and 3DHD videos to drive a more interactive and engaging customer experience.
Iris. In February 2019, the FDA cleared Iris, Intuitive’s augmented reality imaging product, for use in kidney procedures. Iris extracts CT scans, runs
them through machine-learning algorithms, and returns a segmented model of the kidney for use in planning for a procedure and for intraoperative
visualization of the area. The tool uses augmented reality to give surgeons an image with details of the kidney anatomy – blood vessels, tumor shape,
and size – that they may not be able to see well with other imaging. Intuitive designed Iris to be shared as a teaching tool among surgeons to
coordinate approaches to complex cases, for example. It can also be part of the viewing experience during a procedure to enhance information and
let surgeons know where critical anatomy sits as they work through a procedure. We are currently only using Iris in pilot studies. We launched our
first pilot site in the U.S. in December 2019 and have five pilot sites as of December 31, 2020.
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Instruments and Accessories
Da Vinci Instruments. We manufacture a variety of instruments, most of which incorporate EndoWrist technology with wristed joints for natural
dexterity and tips customized for various surgical procedures. Da Vinci instruments are offered in a variety of diameters, of which 8mm and 12mm
diameter sizes are the most commonly sold. Various da Vinci instrument tips include forceps, scissors, electrocautery tools, scalpels, and other
surgical tools that are familiar to the surgeon from open surgery and conventional MIS. A variety of instruments may be selected and used
interchangeably during a surgery. Most instruments are sterilizable at the hospital, while others are 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.
In 2020, we introduced our "Extended Use Program," which consists of select da Vinci Xi and da Vinci X instruments possessing 12 to 18 uses
("Extended Use Instruments") compared to the prior 10 use instruments. These Extended Use Instruments represent some of our higher volume
instruments but exclude stapling, monopolar, and advanced energy instruments. Instruments included in the program are used across a number of da
Vinci procedures. Their increased uses are the result of continuous, significant investments in the design and production capabilities of our
instruments, resulting in improved quality and durability. We introduced Extended Use Instruments in the U.S. in October 2020 and in Europe in
November 2020. We expect to introduce Extended Use Instruments in other geographies throughout 2021 and 2022, depending on the timing of
regulatory approvals.
Da Vinci Stapling. 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 four staplers available with the da Vinci X and da Vinci Xi Surgical
Systems: the EndoWrist Stapler 30 and 45 and the SureForm 45 and 60, where the numeric designation indicates the length of the staple line.
The EndoWrist Stapler 30 is intended to deliver particular utility with fine tissue interaction in lobectomy and other thoracic procedures.
The EndoWrist Stapler 45 is used in general surgery, gynecologic, thoracic, and urologic procedures. The SureForm 45 is intended to deliver
particular utility in thoracic procedures. The SureForm 60 is a single-use, fully wristed, stapling instrument intended to deliver particular utility in
bariatric procedures. We market five stapler reloads: gray (2.0 mm), white (2.5 mm), blue (3.5 mm), green (4.3 mm), and black (4.6 mm). Not all
reloads are available for use on all staplers. Not all staplers or reloads are available in all countries.
Da Vinci Energy. 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 robotic-assisted surgery. This instrument is designed to enhance surgical efficiency and autonomy in a
variety of general surgery and gynecologic procedures. The da Vinci Vessel Sealer Extend is our newest instrument in the Vessel Sealing family of
products. The da Vinci Vessel Sealer Extend is a single-use, fully wristed bipolar electrosurgical instrument compatible with our fourth generation
multiport systems. It is intended for grasping and blunt dissection of tissue and for bipolar coagulation and mechanical transection of vessels up to
7mm in diameter and tissue bundles that fit in the jaws of the instrument.
The E-100 generator is Intuitive's first generator and is offered as an upgrade to power the da Vinci Vessel Sealer Extend and SynchroSeal.
SynchroSeal will enable a surgeon to perform rapid, one-step sealing and transection with a single pedal press. SynchroSeal uses advanced bipolar
energy from its raised cut electrode to transect tissue and then cool down quickly.
Accessory Products. We sell various accessory products, which are used in conjunction with the da Vinci Surgical Systems as surgical procedures are
performed. Accessory products include sterile drapes used to help ensure a sterile field during surgery, vision products, such as replacement 3D
stereo endoscopes, camera heads, and light guides, and other items that facilitate use of the da Vinci Surgical Systems.
Ion endoluminal system
Our Ion endoluminal system extends our commercial offerings beyond surgery into diagnostic procedures with its first application. The Ion system is
our flexible, robotic-assisted, catheter-based platform designed to navigate through very small lung airways to reach peripheral nodules for biopsies. The
Ion system uses an ultra-thin articulating robotic catheter that can articulate 180 degrees in all directions. The outer diameter of the catheter is 3.5mm,
which allows physicians to navigate through small and tortuous airways to reach nodules in most airway segments within the lung. The Ion system’s
flexible biopsy needle can also pass through very tight bends via Ion’s catheter to collect tissue in the peripheral lung. The catheter’s 2mm working channel
can also accommodate other biopsy tools, such as biopsy forceps or cytology brushes, if necessary.
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Business Strategy
Our goal aligns with the Quadruple Aim: enabling physicians and hospitals to improve outcomes for their patients, improve their patient’s and the care
team’s experience, and lower the total cost to treat per patient episode. Through the use of smart, connected systems, robotic technologies, advanced
imaging, and informatics, 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: 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 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 that da Vinci surgery, which could potentially result in a local market share shift. Adoption
of da Vinci procedures occurs procedure by procedure and market by market and is driven by the relative patient value and the total treatment costs
of da Vinci procedures as compared to alternative treatment options for the same disease state or condition. We believe that 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 offer surgeons and their operating room staff training on the technical use of our products. We provide an ergonomic platform for
surgeons to perform their procedures. We seek to provide surgeons with reliable and easy-to-use products. The change to cloud-based analytics and
routine use of local analytics may help surgeons track their procedures and processes and, with a network-connected smartphone and the MyIntuitive
app, surgeons can access and explore their procedure data, such as console time and instrument usage, to gain insights into their program.
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 lengths of patient stay. We believe robotic-assisted surgery with the da Vinci Surgical
System is a cost effective approach to many surgeries as compared to alternative treatment options, as recognized in many published studies. We also
offer our Custom Hospital Analytics program, which enables the integration of data sources so that individual health institutions can analyze their
data in their own environment. Using this data, administrators, chiefs of surgery, and surgeons can gain alignment around their programs based on
their KPIs, determine best practices, assess gaps, and take actionable steps to address any gaps.
Clinical Applications
We are the beneficiaries of productive collaborations with leading surgeons in exploring and developing new techniques and applications for robotic-
assisted surgery with the da Vinci Surgical System and minimally invasive biopsies with the Ion endoluminal system—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 that we are focused on include da Vinci hysterectomy (“dVH”), da Vinci prostatectomy (“dVP”), da Vinci for hernia
repair, da Vinci for colon and rectal procedures, da Vinci for partial nephrectomy, da Vinci for sacrocolpopexy, da Vinci for lobectomy, da Vinci for
transoral robotic surgery, and da Vinci for bariatric surgery. We also focus on minimally invasive biopsies in the lung. 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-assisted approaches. Prior to the clearance of the da Vinci Surgical System for use in gynecological procedures in 2005,
the majority of hysterectomies performed were open surgeries. We believe that robotic-assisted surgery with the da Vinci Surgical System provides
patients the opportunity to receive a minimally invasive treatment as an alternative to an open hysterectomy.
Sacrocolpopexy. The abdominal (open) sacrocolpopexy is one of the operations performed to treat 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 larger number of these procedures to be performed through a minimally invasive technique, conferring the
benefits of MIS to a broader range of sacrocolpopexy patients.
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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 it 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 robotic-assisted surgery with a
da Vinci Surgical System, 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 that 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-assisted 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 robotic-assisted surgery with a da Vinci Surgical System and our latest technologies, such as the EndoWrist Stapler and
da Vinci Energy, have enabled them to offer MIS approaches to a broader range of colorectal surgery patients.
is a commonly performed general surgery
Cholecystectomy. Cholecystectomy, or
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. Firefly technology can be used to visualize biliary anatomy in three dimensions beneath the tissue surfaces during multi-port da
Vinci cholecystectomies.
the gall bladder,
the surgical
removal of
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 due to 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. Also, we believe SureForm
60 may have particular utility in bariatric procedures.
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 robotic-assisted surgery with a da Vinci
Surgical 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. Also,
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.
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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 (i.e., tonsil and base of tongue) and larynx via the mouth and to overcome
some of the line-of-sight limitations of conventional transoral surgery.
Da Vinci Procedure Mix
Our da Vinci procedure business is broadly split into two categories: (1) cancer procedures and (2) 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 across
the spectrum of procedure complexity. Our fully featured da Vinci Xi Surgical System with advanced instruments, including the da Vinci Energy and
EndoWrist and SureForm Stapler products, and our Integrated Table Motion product, targets the more complex procedure segment. Our da Vinci X
Surgical System is targeted towards price sensitive markets and procedures. Our da Vinci SP Surgical System complements the da Vinci Xi and X Surgical
Systems by enabling surgeons to access narrow workspaces.
Clinical Summary
We believe that 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 a da Vinci Surgical System may bring value. As of December 31, 2020, we had an
installed base of 5,989 da Vinci Surgical Systems, including 3,720 in the U.S., 1,059 in Europe, 894 in Asia, and 316 in the rest of the world. We estimate
that surgeons using our technology completed approximately 1,243,000 surgical procedures of various types in hospitals throughout the world during the
year ended December 31, 2020.
Additionally, we believe that there are numerous additional applications that can be addressed with the Ion endoluminal system. As of December 31,
2020, we had an installed base of 36 Ion endoluminal systems, all of which are located in the U.S.
Sales and Customer Support
Sales Model
We provide our products through direct sales organizations in the U.S., Europe (excluding Spain, Portugal, Italy, Greece, and most Eastern European
countries), China, Japan, South Korea, India, and Taiwan. In January 2019, our Intuitive-Fosun joint venture (referred to herein as the “Joint Venture”) with
Shanghai Fosun Pharmaceutical (Group) Co., Ltd. (“Fosun Pharma”) acquired certain assets related to the distribution business of Chindex Medical
Limited and its affiliates (“Chindex”), a subsidiary of Fosun Pharma, which has been our distribution partner for da Vinci Surgical Systems in China since
2011, and began direct operations for da Vinci products and services in China. See “Item 7. Management Discussion and Analysis” for further details on
the Joint Venture. In the remainder of our markets outside of the U.S. (“OUS”), we provide our products through distributors. During the years ended
December 31, 2020, 2019, and 2018, domestic revenue accounted for 68%, 70%, and 71%, respectively, of total revenue, while revenue from our OUS
markets accounted for 32%, 30%, and 29%, respectively, of total revenue. As of December 31, 2020, and 2019, 83% and 85% 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 systems, and a clinical sales team, responsible for supporting
system use in procedures performed at our hospital accounts. Our hospital accounts include both individual hospitals and healthcare facilities as well as
hospitals and healthcare facilities that are part of an integrated delivery network (“IDN groups”). The initial system sale into an account is a major capital
equipment purchase by our customers and 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 or physicians and hospital staff across
multiple specialties on the benefits of robotic-assisted surgery with a da Vinci Surgical System or robotic-assisted bronchoscopy with an Ion endoluminal
system, 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 the clinical benefits of robotic-assisted surgery with a da Vinci Surgical System or robotic-
assisted bronchoscopy with an Ion endoluminal system, potential reductions in complications and length of stay, and the resulting potential for increased
patient satisfaction, surgeon or physician recruitment, and procedure volume.
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Our clinical sales team works on site at hospitals, interacting with surgeons or physicians, operating room staff, and hospital administrators to develop
and sustain successful robotic-assisted surgery or bronchoscopy programs. They assist the hospital in identifying surgeons or physicians who have an
interest in robotic-assisted surgery or bronchoscopy and the potential benefits provided by the da Vinci Surgical System and the Ion endoluminal system.
Our clinical sales team provides current clinical information on robotic-assisted surgery or bronchoscopy practices and new product applications to the
hospital teams. Our clinical sales team has grown with the expanded installed bases of da Vinci Surgical Systems and Ion endoluminal systems as well as
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 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 heavier in the fourth quarter and
lighter in the first quarter, as hospital budgets are reset. In addition, we have historically experienced lower procedure volume in the first and third quarters
and higher procedure volume in the second and fourth quarters. More than half of da Vinci procedures performed are for benign conditions. These benign
procedures and other short-term elective procedures tend to be more seasonal than cancer procedures and surgeries for other life-threatening conditions. In
the U.S., volumes for procedures associated with benign conditions are typically seasonally higher in the fourth quarter when more patients have met
annual deductibles and lower in the first quarter when deductibles are reset. Seasonality outside the U.S. varies and is more pronounced around local
holidays and vacation periods. The timing of procedures and changes in procedure volume impact the timing of instrument and accessory and capital
purchases. As a result of factors outlined in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations—COVID-19
Pandemic" below, including the past and potential future recommendations of authorities to defer elective procedures, historical procedure patterns have
been and may continue to be disrupted.
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 systems to surgeons, surgical assistants, and operating room
nurses. We have established training centers where system training and ongoing surgical procedural training are provided, the latter led by expert surgeons.
Training technologies include our Simulation program, which provides independent da Vinci skills development through interactive VR exercises, and our
telementoring program, which provides real-time surgeon-to-surgeon learning and collaboration during robotic-assisted surgery.
Research and Development
We focus our research and development efforts on innovation and improvement for products and services that align with our mission: We believe that
minimally invasive care is life-enhancing care. Through ingenuity and intelligent technology, we believe that we can expand the potential of physicians to
heal without constraints. We employ engineering and research and development staff to focus on delivering future innovations and sustaining
improvements that advance our mission. In certain instances, we complement our research and development effort through collaborations with other
companies, such as Trumpf Medical (a division of Hill-Rom Holdings, Inc.).
Manufacturing
We manufacture our systems at our facilities in Sunnyvale, California and Durham, North Carolina. We manufacture our instruments at our facilities in
Sunnyvale, California and Mexicali, Mexico. We also have manufacturing at multiple sites in Germany.
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 relative to our anticipated demand.
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Competition
We face competition in the forms of existing open surgery, conventional MIS, drug therapies, radiation treatment, and emerging interventional surgical
approaches. Our success depends on continued clinical and technical innovation, quality and reliability, as well as educating hospitals, surgeons, and
patients on the demonstrated results associated with robotic-assisted surgery using da Vinci Surgical Systems and its value relative to other techniques. We
also face competition from several companies that have introduced or are developing new approaches and products for the MIS market. We believe that the
entrance or emergence of competition validates MIS and robotic-assisted surgery.
Moreover, as we add new robotically controlled products (e.g., da Vinci Stapling and da Vinci Energy) 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.
The companies that have introduced products in the field of robotic-assisted surgery or have made explicit statements about their efforts to enter the
field, include, but are not limited to: avateramedical GmbH; CMR Surgical Ltd.; Johnson & Johnson (including their wholly owned subsidiaries Auris
Health, Inc. and Verb Surgical Inc.); Medicaroid, Inc.; Medrobotics Corporation; Medtronic plc; meerecompany Inc.; MicroPort Scientific Corporation;
Olympus Corporation; Samsung Group; Shandong Weigao Group Medical Polymer Company Ltd.; 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, trademark, and trade secret protection for significant new
technologies, products, and processes.
We generally rely upon a combination of intellectual property laws, 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 robust patent portfolio.
As of December 31, 2020, we held ownership or exclusive field-of-use licenses for more than 4,000 U.S. and foreign patents and have filed more than
2,000 U.S. and foreign patent applications. We intend to continue filing new patent applications in the U.S. and foreign jurisdictions to seek protection for
our technology.
Patents are granted for finite terms. Upon expiration, the inventions claimed in a patent enter the public domain.
Government Regulation
Our products and operations are subject to regulation by the FDA, the State of California, and countries or regions in which we market our products. In
addition, our products must meet the requirements of a large and growing body of international standards, which govern the design, manufacture, materials
content and sourcing, testing, certification, packaging, installation, use, and disposal of our products. We must continually keep abreast of these standards
and requirements and integrate our compliance into the development and regulatory documentation for our products. Failure to meet these standards could
limit our ability to market our products in those regions that 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.
U.S. Regulation
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 II medical devices.
Class II medical 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
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process. Unless a Class II medical device is exempt from a 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 data, typically including data from preclinical studies and human clinical trials. The FDA, by statute and regulation, has 180 days to
review a PMA application, although 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 make 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.
Over the last several years, the FDA has proposed reforms to its 510(k) clearance process, and such proposals will include increased requirements for
clinical data and a longer review period and make it more difficult for manufacturers to utilize the 510(k) clearance process for their products. For example,
in November 2018, FDA officials announced forthcoming steps that the FDA intends to take to modernize the premarket notification pathway under
Section 510(k) of the FFDCA. Among other things, the FDA announced that it planned to develop proposals to drive manufacturers utilizing the 510(k)
pathway toward the use of newer predicates. These proposals included plans to potentially sunset certain older devices that were used as predicates under
the 510(k) clearance pathway and to potentially publish a list of devices that have been cleared on the basis of demonstrated substantial equivalence to
predicate devices that are more than 10 years old. In May 2019, the FDA solicited public feedback on these proposals. These proposals have not yet been
finalized or adopted, and the FDA may work with Congress to implement such proposals through legislation.
More recently, in September 2019, the FDA finalized guidance describing an optional “safety and performance based” premarket review pathway for
manufacturers of “certain, well-understood device types” to demonstrate substantial equivalence under the 510(k) clearance pathway by showing that such
device meets objective safety and performance criteria established by the FDA, thereby obviating the need for manufacturers to compare the safety and
performance of their medical devices to specific predicate devices in the clearance process. The FDA maintains a list of device types appropriate for the
“safety and performance based” pathway and will continue to develop product-specific guidance documents that identify the performance criteria for each
such device type, as well as the testing methods recommended in the guidance documents, where feasible.
In addition, after a device is placed on the market, numerous FDA and other regulatory requirements continue to apply. These requirements include
establishment registration and device listing with the FDA, compliance with medical device reporting regulations, which require that manufacturers report
to the FDA if their device may have caused or contributed to a death or serious injury or malfunctioned in a way that would likely cause or contribute to a
death or serious injury if it were to recur, and compliance with corrections and removal reporting regulations, which require that manufacturers report to the
FDA field corrections and product recalls or removals if undertaken to reduce a risk to health posed by the device or to remedy a violation of the FFDCA
that may present a risk to health. The FDA and the Federal Trade Commission (“FTC”) also regulate the advertising and promotion of our products to
ensure that the claims we make are consistent with our regulatory clearances, that there is scientific data to substantiate the claims, and that our advertising
is neither false nor misleading. In general, we may not promote or advertise our products for uses not within the scope of our intended use statement in our
clearances or make
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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 the 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 Form FDA 483 or Notices of Inspectional Observations, which list instances where the FDA investigator 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.
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 of 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, secure reimbursement, or demonstrate other
requirements. We cannot provide assurance that access to clinical investigators, sites, subjects, documentation, and data will be available on the terms and
in the 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 with 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 the suspension of routine periodic inspections, there can be no assurance that the State of California will not resume such
inspections or conduct such inspections under specific circumstances that 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 that are substantially longer than U.S. processes. Failure
to obtain regulatory approval in a timely manner and meet all of the 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.
For example, most medical devices must undergo thorough safety examinations and demonstrate medical efficacy before they receive regulatory
approval to be sold in Japan. We obtained approval from the Japanese Ministry of Health, Labor, and
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Welfare (“MHLW”) for our da Vinci Si Surgical System in October 2012, for our da Vinci Xi Surgical System in March 2015, and for our da Vinci X
Surgical System in April 2018. National reimbursement status in Japan was received for dVP procedures in April 2012 and for da Vinci partial
nephrectomy procedures in April 2016. An additional 12 da Vinci procedures were granted reimbursement effective April 1, 2018, including gastrectomy,
low anterior resection, lobectomy, and hysterectomy, for both malignant and benign conditions. An additional 7 procedures were granted reimbursement
effective April 1, 2020. These additional 19 reimbursed procedures have varying levels of conventional laparoscopic penetration and will be reimbursed at
rates equal to the conventional laparoscopic procedures. Given the reimbursement level and laparoscopic penetration for these 19 procedures, there can be
no assurance that adoption will occur or that the adoption pace for these procedures will be similar to any other da Vinci procedures. If these procedures are
not adopted and we are not successful in obtaining adequate procedure reimbursements for additional procedures, then the demand for our products in
Japan could be limited. The process of reimbursement for new da Vinci surgical procedures in Japan is led by the surgical societies. The societies submit
for reimbursement or incremental reimbursement to the MHLW for their evaluation. The decision to reimburse requires in-country clinical data and is fixed
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 that 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 Systems 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 May 2017, the Medical Device Regulation was implemented to replace the Medical Device Directive (93/42/EEC) as amended. The Medical Device
Regulation ((EU) 2017/745) comes into force on May 26, 2021, 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 provincial approvals,
as well as hospitals completing a tender process under the authorization. In October 2018, the China National Health Commission published on its official
website the quota for major medical equipment to be imported and sold in China through 2020. After an adjustment notice was published in the third
quarter of 2020, the government will now allow for the total sale of 225 new surgical robots into China, which could include da Vinci Surgical Systems as
well as surgical systems introduced by others. Sales of da Vinci Surgical Systems under the quota are uncertain, as they are dependent on hospitals
completing a tender process and receiving associated approvals. 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 that 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
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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 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 that 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. Private individuals can bring
False Claims Act “qui tam” actions on behalf of the government, and such individuals may share in amounts paid by the entity to the
government in fines or settlement;
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), certain other healthcare professionals (as described below),
and teaching hospitals, and (ii) applicable manufacturers and group purchasing organizations to report annually to CMS ownership any
investment interests held by the physicians described above and their immediate family members and payments or other “transfers of value”
to such physician owners. Additionally, on October 25, 2018, President Trump signed into law the “Substance Use-Disorder Prevention that
Promoted Opioid Recovery and Treatment for Patients and Communities Act,” which, in part (under a provision entitled “Fighting the Opioid
Epidemic with Sunshine”), extends the reporting and transparency requirements for physicians in the Physician Payments Sunshine Act to
physician assistants, nurse practitioners, clinical nurse specialists, certified registered nurse anesthetists, and certified nurse midwives (with
reporting requirements going into effect in 2022 for payments made in 2021). 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 laws governing the privacy and security of health information in certain circumstances,
including the E.U. General Data Protection Regulation (“GDPR”), many of which differ from each other in significant ways and may not have
the same effect, thus complicating compliance efforts.
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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 value 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, ICD-10-PCS
codes. For Medicare, CMS generally reimburses hospitals for services provided during an inpatient stay based on a prospective payment system that is
determined by a classification system known as Medicare-Severity Diagnostic Related Groupings (“MS-DRGs”). MS-DRGs are assigned using a number
of factors, including the principal diagnosis, major procedures, discharged status, patient age, and complicating secondary diagnoses, among other things.
Hospital outpatient services, reported by CPT codes, are assigned to clinically relevant Ambulatory Payment Classifications (“APCs”) used to determine
the payment amount for services provided.
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 Systems have 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.
Governmental and third-party payors may also consider additional factors when determining coverage and reimbursement, including the designation of the
surgical procedure as a covered benefit, the appropriateness of the procedure for the specific patient, support by guidelines established by the relevant
professional college or medical society, and a payor determination that the procedure is neither experimental nor investigational. 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,
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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.
The PPACA also appropriated funding to research the comparative effectiveness of healthcare 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 healthcare 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 2030, unless
additional Congressional action is taken, with the exception of a temporary suspension of the 2% cut in Medicare payments from May 1, 2020, through
December 31, 2020. 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 that began in 2019 and 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 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, President Trump 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 Trump 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. Legislation to appropriate funds for CSR payments has been introduced in Congress, but
the future of such legislation is uncertain. In addition, CMS finalized regulations that, effective beginning with the 2020 plan year, 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.
As a result of the Tax Cuts and Jobs Act (“2017 Tax Act”) enacted on December 22, 2017, the PPACA’s individual mandate penalty for not having
health insurance coverage was 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. On December 14, 2018, a U.S. District Court Judge in the Northern District of Texas, ruled that the individual mandate is a
critical and inseverable feature of the ACA and, therefore, because it was repealed as part of the 2017 Tax Act, the remaining provisions of the ACA are
invalid as well. The Fifth Court of Appeals affirmed the district court's ruling that the individual mandate was unconstitutional, but it remanded the case
back to the district court for further analysis of whether the mandate could be severed from the Affordable Care Act. The Supreme Court of the United
States granted certiorari on March 2, 2020 and held oral arguments on November 10, 2020. The case is expected to be decided by mid-2021. It is unclear
how this decision, subsequent pending appeals, and other efforts to repeal and replace the ACA will impact the ACA and our business. Although the
majority of these measures have not been enacted by Congress to date, Congress may 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.
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Human Capital
The future success of our company depends on our ability to attract, retain, and further develop top talent. To facilitate talent attraction, retention, and
development, we strive to make Intuitive an inclusive, diverse, and safe workplace with opportunities for our employees to grow and develop in their
careers, supported by strong compensation, benefits, and health and wellness programs as well as by programs that build connections between our
employees and the communities in which they live and work.
At December 31, 2020, we had approximately 8,081 full-time employees, 1,111 of whom were engaged directly in research and development, 3,559 in
manufacturing and service, and 3,411 in marketing, sales and administrative activities. During 2020, the number of employees increased by approximately
755. Our employees are based in 27 different countries around the world. Our global workforce consists of diverse, highly skilled talent at all levels. During
2020, our turnover rate was less than 6.5%.
Inclusion and Diversity
We strive to foster a culture where mutual respect, inclusive behavior, and dignity are core to our individual expectations. Since our founding, we have
remained committed to fostering an inclusive environment in which our differing backgrounds, life experiences, and perspectives join to positively impact
the communities in which we live and serve.
We continue to build a culture where the best idea wins and our doors and minds are always open. We do this by leading with inclusion and
empowering everyone to do their best work as their most authentic selves—regardless of race, color, national origin, religion, sex, sexual orientation,
gender identity and expression, age, disability, or military service status. We are united by our collective purpose and common set of organizational values
that are core to our mission and culture.
We support the growth and expansion of our employee resource groups (ERGs), which foster an inclusive culture and sense of belonging for our
employees. Our ERGs provide a point of connection for employees who share common community attributes and want to engage, learn, communicate, and
participate in advancing our inclusion and diversity objectives. Our ERGs include the Women Intuitive Network, Intuitive Pan-Asian Community, BLACK
at Intuitive, Diverse Abilities, PRIDE, and VETS. In 2020, our ERGs grew from three to 10 companywide. These employee-volunteer-led groups focus on
four key impact areas including recruitment, employee development, community building, and business development. ERGs also provided ideas and
insight to senior management and various departments by serving as sources of employee feedback on important aspects of our business, such as talent
acquisition and retention, accessibility accommodations, and operational challenge solutions.
From a governance perspective, maintaining a mix of backgrounds and experience in our board composition is essential to understanding and
reflecting the needs of our diverse stakeholders. Currently, three of our 10 board members are women, one of our board members identifies as Hispanic,
and one of our board members identifies as Middle Eastern.
Health, Safety, and Wellness
The health, safety, and wellness of our employees is a priority in which we have always invested, and will continue to do so. These investments and the
prioritization of employee health, safety, and wellness took on particular significance in 2020 in light of COVID-19. We provide our employees and their
families with access to a variety of innovative, flexible, and convenient health and wellness programs. Program benefits are intended to provide protection
and security, so employees can have peace of mind concerning events that may require time away from work or that may impact their financial well-being.
Additionally, we provide programs to help support employee physical and mental health by providing tools and resources to help them improve or maintain
their health status, encourage engagement in healthy behaviors, and offer choices where possible so they are customized to meet their needs and the needs
of their families.
In response to the COVID-19 pandemic, we implemented significant changes that we determined were in the best interest of our employees, as well as
the communities in which we operate, in compliance with government regulations. This includes having the vast majority of our employees work from
home, while implementing additional safety measures for employees continuing critical on-site work. A number of employees critical to maintaining our
essential engineering, manufacturing, repair, and logistics functions have continued to work from Intuitive locations globally. To protect and support our
essential team members, we have implemented health and safety measures that included maximizing personal workspaces, changing shift schedules,
providing personal protective equipment (PPE), and instituting mandatory screening before accessing buildings. We created subteam groups, keeping the
same manufacturing teams working together to facilitate contact tracing and minimize potential staffing risk.
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Compensation and Benefits
We provide compensation and benefits programs to help meet the needs of our employees. In addition to base compensation, these programs, which
vary by country and region, include annual bonuses, stock awards, an Employee Stock Purchase Plan, 401(k) and pension plans, healthcare and insurance
benefits, health savings and flexible spending accounts, paid time off, family leave, family care resources, and flexible work schedules, among many
others. As a response to the COVID-19 pandemic, we implemented modifications to our compensation program, including paying a portion of 2020
bonuses mid-year to help staff cover unforeseen pandemic-related expenses. We also offered premium pay and a subsidized lunch program.
Ensuring fair and equitable pay is integral to our commitment to our employees. Our executive team and Board of Directors strongly support this
commitment. We conduct pay equity reviews annually to help us understand whether our compensation structure is appropriate and to identify what
improvements can be made. In addition, we utilize a robust inspection process with an independent consulting firm for gender and ethnicity hiring,
promotion, and wage equity to determine whether any statistically significant pay differences exist between women and men and between minorities and
non-minorities. If pay disparities are identified, we conduct further evaluation to determine whether remedial adjustments are appropriate. In addition,
employees can raise issues regarding pay equity with their manager, their human resources partner, or confidentially through our anonymous reporting
helpline.
Talent Development
We value our employees and the passion, commitment, and professional depth they provide. To enhance employee retention and job satisfaction, we
offer ongoing learning and leadership training opportunities that support growth.
With a commitment to achieving diverse representation within our leadership ranks that reflects the diversity that we see in our overall employee base,
we increased our leadership development efforts in 2020 by reinforcing development around our People Leader Success Model. Leadership development
focuses on people-leader effectiveness, cultural continuity, and organizational effectiveness, so that leaders at all levels have the capabilities and knowledge
that they and their teams need to succeed.
Our Global Talent Management team transitioned much of our leadership training from in-person sessions to remote learning with the emergence of
COVID-19 in 2020. Our scaled learning platform of on-demand and virtual classroom learning eliminates travel and allows employees worldwide to access
development at their convenience.
We have robust annual global performance review processes for reviewing all employees’ performance and pay. To support our managers, we train
them on conducting effective performance reviews and making compensation recommendations, which take into consideration market pay data and
performance, as well as experience in an employee’s respective role.
Community Programs and Our COVID-19 Response
We believe that building connections between our employees, their families, and our communities creates a more meaningful, fulfilling, and enjoyable
workplace. Through our engagement programs, our employees can pursue their interests and hobbies, connect to volunteering and giving opportunities, and
enjoy unique recreational experiences with family members.
The Intuitive Foundation is a nonprofit organization established and funded by Intuitive in 2018. Since its founding, the Intuitive Foundation has been
dedicated to promoting health, advancing education, and reducing human suffering. The Foundation supports outreach programs financially while we
provide the volunteers and mentors from within our company. Since its inception, we have contributed $55 million to the Intuitive Foundation to fulfill its
mission.
The events of 2020 inspired Intuitive employees to further support the Foundation’s work on several key initiatives. The Foundation’s multifaceted
response to the COVID-19 pandemic was a major focus in 2020. From the first days of the pandemic, Intuitive and the Intuitive Foundation engaged within
the communities in which we live and work. We converted some of our manufacturing lines to produce PPE, donating more than a million face shields
globally through the Intuitive Foundation. Employees and their families sewed facemasks and volunteered in their communities. Our engineers helped
design and implement updates to ventilators that made them easier to produce. Some of our medically trained employees volunteered as healthcare workers
on the front lines. Lastly, Intuitive and the Intuitive Foundation, along with many employees, contributed financially to support COVID-19 relief.
We encourage you to review the "Talent and workplace experience" and "Creating stronger communities" section of our Sustainability Report 2020
(located on our website) for more detailed information regarding our Human Capital programs and initiatives. Nothing on our website, including our
Sustainability Report 2020 or sections thereof, shall be deemed incorporated by reference into this Annual Report.
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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, 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.intuitive.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 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, 2020, 2019, and 2018 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.intuitive.com.
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ITEM 1A. RISK FACTORS
You should consider each of the following risk factors, which could materially affect our business, financial position, or future results of operations.
Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business,
financial position, or future results of operations. In addition, the global economic climate and additional or unforeseen effects from the COVID-19
pandemic amplify many of these risks.
RISK FACTORS SUMMARY
SUMMARY OF RISKS RELATING TO OUR BUSINESS
•
•
•
•
Because our markets are highly competitive, customers may choose to purchase our competitors’ products or services or may not accept da Vinci
robotic-assisted surgery, which would result in reduced revenue and loss of market share.
If our products do not achieve market acceptance, we will not be able to generate the revenue necessary to support our business.
Public health crises or epidemic diseases, or the perception of their effects, have had and could continue to have a material adverse effect on our
business and results of operations.
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.
•
If defects occur in our products, we may incur additional unforeseen costs, hospitals may not purchase our products, and our reputation may suffer.
• 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 subject to significant, uninsured liabilities.
• 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.
If we lose key personnel or are unable to attract and retain additional personnel, our ability to compete will be harmed.
•
• 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.
• We experience long and variable capital sales cycles and seasonality in our business, which may cause fluctuations in our financial results.
• New product developments and introductions may adversely impact our financial results.
• We are subject to a variety of risks due to our operations outside of the U.S.
• Disruption of critical information systems or material breaches in the security of our systems could harm our business, customer relations, and
financial condition.
• Our business is subject to complex and evolving laws and regulations regarding privacy, data protection, and other matters relating to information
collection.
•
•
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.
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, which may have a material adverse effect on our business, financial
condition, results of operations, or cash flows.
• Our customers may use unauthorized or unapproved instruments and accessories, which would result in reduced revenue and loss of market share.
• 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.
• We utilize distributors for a portion of our sales, which subjects us to a number of risks that could harm our business.
• We offer alternative capital acquisition approaches. As a result, we are exposed to the credit risk of some of our customers and the risk of losses of
revenue, which could result in material losses.
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• We are exposed to credit risk and fluctuations in the market value of our investments.
• We may incur losses associated with currency fluctuations and may not be able to effectively hedge our exposure.
• We may encounter manufacturing problems or delays that could result in lost revenue.
• Disruptions at the FDA and other government agencies caused by funding shortages or global health concerns could hinder their ability to hire,
retain or deploy key leadership and other personnel, or otherwise prevent products from being developed, approved, or commercialized in a timely
manner or at all, which may adversely affect our business.
Economic conditions could have a material adverse effect on our company.
Continued consolidation in the healthcare industry could have an adverse effect on our sales and results of operations.
•
•
• Natural disasters or other events beyond our control could disrupt our business and result in loss of revenue or higher expenses.
•
• We use estimates, make judgments, and apply certain methods in determining our financial results and in measuring the progress of our business.
As these estimates, judgments, and methods change, our results of operations and our assessment of the progress of our business could vary.
Changes in our effective tax rate may impact our results of operations.
SUMMARY OF RISKS RELATING TO OUR REGULATORY ENVIRONMENT
Complying with FDA regulations is a complex process, and our failure to comply fully could subject us to significant enforcement actions.
•
• 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 sell our products in the U.S.
•
If our manufacturing facilities do not continue to meet federal, state, or other manufacturing standards, we may be required to temporarily cease
all 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 products are subject to international regulatory processes and approval requirements. If we do not obtain and maintain the necessary
international regulatory approvals, we will not be able to sell our products in foreign countries.
Changes in healthcare legislation and policy may have a material adverse effect on our financial condition and results of operations.
•
• 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.
•
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.
SUMMARY OF 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.
• 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.
• Our products rely on licenses from third parties, which may not be available to us on commercially reasonable terms or at all. If we lose access to
these technologies, our revenues could decline.
SUMMARY OF GENERAL RISKS
• Our future operating results may be below securities analysts' or investors' expectations, which could cause our stock price to decline.
• Our stock price has been, and will likely continue to be volatile.
•
Changes to financial accounting standards may affect our reported results of operations.
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RISKS RELATING TO OUR BUSINESS
BECAUSE OUR MARKETS ARE HIGHLY COMPETITIVE, CUSTOMERS MAY CHOOSE TO PURCHASE OUR COMPETITORS’
PRODUCTS OR SERVICES OR MAY NOT ACCEPT DA VINCI ROBOTIC-ASSISTED SURGERY, WHICH WOULD RESULT IN
REDUCED REVENUE AND LOSS OF MARKET SHARE.
Robotic-assisted surgery with a da Vinci Surgical System 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 robotic-
assisted 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-assisted, or computer-assisted
surgical systems and products. Companies have introduced products in the field of robotic surgery or have made explicit statements about their efforts to
enter the field including, but not limited to, the following companies: avateramedical GmbH; CMR Surgical Ltd.; Johnson & Johnson (including their
wholly-owned subsidiaries Auris Health, Inc. and Verb Surgical Inc.); Medicaroid, Inc.; Medrobotics Corporation; Medtronic plc; MicroPort Scientific
Corporation; Olympus Corporation; Samsung Group; Shandong Weigao Group Medical Polymer Company Ltd.; 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 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 offering consulting services targeted at analyzing the
cost-effectiveness of hospitals’ robotic-assisted 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.
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 robotic-assisted 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 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 healthcare reform initiatives and the evolving U.S. healthcare
environment.
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.
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PUBLIC HEALTH CRISES OR EPIDEMIC DISEASES, OR THE PERCEPTION OF THEIR EFFECTS, HAVE HAD AND COULD
CONTINUE TO HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS AND RESULTS OF OPERATIONS.
Our global operations expose us to risks associated with public health crises and outbreaks of epidemic, pandemic, or contagious diseases, such as the
current outbreak of a novel strain of coronavirus (COVID-19). To date, COVID-19 has had, and may continue to have, an adverse impact on our
operations, our supply chains and distribution systems, and our expenses, including as a result of preventive and precautionary measures that we, other
businesses, and governments are taking. Due to these impacts and measures, we have experienced and may continue to experience significant and
unpredictable reductions in the demand for our products as healthcare customers divert medical resources and priorities towards the treatment of that
disease. In addition, our customers have delayed, cancelled, or redirected and, in the future, may delay, cancel, or redirect planned capital expenditures in
order to focus resources on COVID-19 or in response to economic disruption related to COVID-19. For example, as a result of the global COVID-19
pandemic, in the first half of 2020, we experienced a significant decline in procedure volume in the U.S. and Western Europe, as healthcare systems
diverted resources to meet the increasing demands of managing COVID-19. In addition, U.S. and global public health bodies have, at times, recommended
delaying elective surgeries during the COVID-19 pandemic, and surgeons and medical societies are evaluating the risks of minimally invasive surgeries in
the presence of infectious diseases, which we expect will continue to negatively impact the usage of our products and the number of da Vinci procedures
performed. Also, we may experience delays in obtaining new product approvals or clearances from the FDA or delays in recruiting patients for clinical
trials needed for new product approvals.
As a result of the COVID-19 outbreak, we have experienced significant business disruptions, including restrictions on our ability to travel as well as
distribute and service our products, temporary closures of our facilities and the facilities of our suppliers and their contract manufacturers, and a reduction
in access to our customers due to diverted resources and priorities and the business hours of hospitals, as governments institute prolonged shelter-in-place
and/or self-quarantine mandates. For example, our corporate headquarters and many of our operations, including certain of our manufacturing facilities, are
located in California, which has instituted risk reduction orders applicable to our employees in that region, significantly impacting the ability of our
employees to get to their places of work to produce products and hampering our products from moving through the supply chain. These unprecedented
measures to slow the spread of the virus taken by local governments and healthcare authorities globally, including the deferral of elective medical
procedures and social distancing measures, have had, and will continue to have, a significant negative impact on our operations and financial results.
In addition, the COVID-19 pandemic has adversely affected, and may continue to adversely affect, the economies and financial markets of many
countries, which may result in a period of regional, national, and global economic slowdown or regional, national, or global recessions that could curtail or
delay spending by hospitals and affect demand for our products as well as increased risk of customer defaults or delays in payments. Our customers may
terminate or amend their agreements for the purchase, lease, or service of our products due to bankruptcy, lack of liquidity, lack of funding, operational
failures, or other reasons. COVID-19 and the current financial, economic, and capital markets environment, and future developments in these and other
areas present material uncertainty and risk with respect to our performance, financial condition, volume of business, results of operations, and cash flows.
Due to the uncertain scope and duration of the pandemic and uncertain timing of global recovery and economic normalization, we are unable to estimate
the impacts on our operations and financial results.
Outbreaks of other epidemic, pandemic, or contagious diseases, such as, historically, the Ebola virus, Middle East Respiratory Syndrome, Severe
Acute Respiratory Syndrome, or the H1N1 virus, could also divert medical resources and priorities towards the treatment of that disease. An outbreak of
other contagious diseases could negatively affect hospital admission rates or disrupt our business similar to the impact of the COVID-19 pandemic
highlighted above. Any of these outbreaks 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 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, 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. In addition, to the extent that there is a shift from an inpatient setting to outpatient settings, we
may experience pricing pressure and a reduction in the number of procedures performed. Our success in OUS markets also depends upon the eligibility of
our products for coverage and reimbursement through government-sponsored healthcare 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
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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, healthcare 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 DEFECTS OCCUR 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:
•
•
•
•
•
•
•
•
•
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, product liability litigation, and patent litigation, are described in
Note 8 to the Consolidated Financial Statements included in Part II, Item 8.
In particular, our business exposes us to significant risks of product liability claims, which are inherent to the medical device industry. Product liability
claims have been brought against us by, or on behalf of, individuals alleging that they have sustained personal injuries and/or death as a result of purported
product defects, the alleged failure to warn, and/or the alleged inadequate training by us of physicians regarding the use of the da Vinci Surgical System.
The individuals who have brought the product liability claims seek recovery for their alleged personal injuries and, in many cases, punitive damages.
Current product liability claims have resulted in negative publicity regarding our Company, and these and any other product liability or negligence claims
or product recalls also could harm our reputation. Please see our risk factor below titled “Negative Publicity, Whether Accurate or Inaccurate, Concerning
Our Products or Our Company Could Reduce Market Acceptance of Our Products and Could Result in Decreased Product Demand and a Decline in
Revenues” for additional risks related to the potential effects of negative publicity on our business.
The outcome of these product liability claims and other legal proceedings cannot be predicted with certainty. We currently self-insure our product
liability risk and maintain third-party insurance coverage for certain other liabilities. However, we cannot determine whether our insurance coverage from
third-party carriers, or our self-insurance of product liability risk, would be sufficient to cover the costs or potential losses related to these lawsuits and
proceedings or otherwise be excluded under the terms of any third-party policy. Regardless of merit, litigation may be both time-consuming and disruptive
to our operations and cause significant legal costs (including settlements, judgments, legal fees, and other related defense costs) and diversion of
management attention. If we do not prevail in the purported class actions, product liability litigation, or other legal proceedings,
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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.
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 entirely self-insured, 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.
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 reports questioning patient safety and efficacy associated with robotic-assisted surgery with the da Vinci
Surgical System and its cost 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.
IF WE LOSE 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.
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.
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 the timing of their capital budget timelines. Further, IDN groups are creating larger networks
of da Vinci system users with increasing purchasing power and are increasingly evaluating their robotic-assisted surgery programs to optimize the
efficiency of surgeries using da Vinci Surgical Systems. 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
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sales of da Vinci Surgical Systems have tended to be heavier in the fourth quarter and lighter in the first quarter, as hospital budgets are reset.
We have experienced procedure growth for a number of benign conditions, including hysterectomies, 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 quarters of the year and higher procedure volume in the second and fourth quarters of the
year. The 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.
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. In the past, we have 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 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 32%, 30%, and 29% of our revenue for the years ended December 31, 2020, 2019, and 2018, 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, policies, and business practices that favor local competitors or lead to non-U.S. customers favoring domestic technology
solutions, 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;
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•
•
•
•
•
•
•
•
•
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, including differing labor relations;
the expense of establishing facilities and operations in new foreign markets;
building and maintaining an organization capable of supporting geographically dispersed operations, including appropriate business
procedures and controls;
anti-corruption laws, such as the U.S. Foreign Corrupt Practices Act ("FCPA"), and other local laws prohibiting corrupt payments to
governmental officials;
antitrust and anti-competition laws;
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.
We have increased, and will continue to increase, our operations in China. There is inherent risk, based on the complex relationships between China
and the U.S., that political, diplomatic, military, or other events could result in business disruptions, including increased regulatory enforcement against
companies, tariffs, trade embargoes, and export restrictions. Any of these events could reduce customer demand, increase the cost of our products and
services, or otherwise have a materially adverse impact on our customers' and suppliers' businesses and results of operations.
For example, in 2020, the U.S. government amended the Entity List rules to expand the requirement to obtain a license prior to the export of certain
technologies. In addition, in 2020, a new U.S. regulation seeks to prohibit the U.S. government from contracting with companies who use the products or
services of certain Chinese companies. We believe that these regulations do not materially impact our business at this time but cannot predict the impact
that additional regulatory changes may have on our business in the future. These actions or similar actions may result in policies and regulations in
response that could adversely affect our business operations in China, or may otherwise limit our ability to offer our products and services in China and
other parts of the world.
Following a national referendum and enactment of legislation by the government of the United Kingdom (the “UK”), the UK formally withdrew from
the European Union (the “EU”) and ratified a trade and cooperation agreement governing its future relationship with the EU. The agreement, which is
being applied provisionally from January 1, 2021, until it is ratified by the European Parliament and the Council of the European Union, addresses trade,
economic arrangements, law enforcement, judicial cooperation, and a governance framework, including procedures for dispute resolution, among other
things. Because the agreement merely sets forth a framework in many respects and will require complex additional bilateral negotiations between the UK
and the EU, significant political and economic uncertainty remains about how the precise terms of the relationship between the parties will differ from the
terms before withdrawal. These developments, or the perception that any related developments could occur, have had and may continue to have a material
adverse effect on global economic conditions and financial markets, and our business would likely be impacted and the demand for our products could be
depressed.
In addition, the U.S. federal government has made changes to U.S. trade policy, including entering into a successor to the North American Free Trade
Agreement ("NAFTA"), known as the United States-Mexico-Canada Agreement ("USMCA"), effective as of July 1, 2020. In addition, the U.S. federal
government has implemented, or is considering the imposition of, tariffs on certain foreign goods. Such tariffs and, if enacted, any further legislation or
actions taken by the U.S. federal government that restrict trade, such as additional 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. Tariffs
could increase the cost of our products and the components and raw materials that go into making them. These increased costs could adversely impact the
gross margin that we earn on our products, which could make our products less competitive and reduce consumer demand. Countries may also adopt other
protectionist measures that could limit our ability to offer our products and services.
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.
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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 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, which could adversely impact our business and reputation. 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. It is possible for such
vulnerabilities to remain undetected for an extended period, including several years or longer. The costs to us to eliminate or alleviate network security
problems, bugs, viruses, worms, ransomware and other 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.
OUR BUSINESS IS SUBJECT TO COMPLEX AND EVOLVING LAWS AND REGULATIONS REGARDING PRIVACY, DATA
PROTECTION, AND OTHER MATTERS RELATING TO INFORMATION COLLECTION.
There are numerous state, federal, and foreign laws, regulations, decisions, and directives regarding privacy and the collection, storage, transmission,
use, processing, disclosure, and protection of different types of personal data and personal information ("Personal Information") and other customer or
other data, the scope of which is continually evolving and subject to differing interpretations. We may be subject to significant consequences, including
penalties and fines, for any failure to comply with such laws, regulations, and directives.
For example, the General Data Protection Regulation (the "GDPR"), which is in effect across the European Economic Area (the "EEA"), imposes
several stringent requirements for controllers and processors of personal data and increased our obligations, for example, by imposing higher standards
when obtaining consent from individuals to process their personal data, requiring more robust disclosures to individuals, strengthening individual data
rights, shortening timelines for data breach notifications, limiting retention periods and secondary use of information, increasing requirements pertaining to
health data as
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well as pseudonymised (i.e., key-coded) data, and imposing additional obligations when we contract third-party processors in connection with the
processing of personal data. The GDPR provides that EU member states may make their own further laws and regulations limiting the processing of
genetic, biometric, or health data, which could limit our ability to use and share personal data or could cause our costs to increase and harm our business
and financial condition. Failure to comply with the requirements of the GDPR and the applicable national data protection laws of the EU member states
may result in fines of up to 4% of the total worldwide annual turnover of the preceding financial year and other administrative penalties. Compliance with
the new data protection rules imposed by GDPR may be onerous and adversely affect our business, financial condition, and results of operations.
California recently passed the California Consumer Privacy Act (the “CCPA”), which is considered by many to be the most far-reaching data privacy
law introduced in the US to date and which introduces new compliance burdens on many organizations doing business in California who collect Personal
Information about California residents. The CCPA’s definition of Personal Information is very broad and specifically includes biometric information. The
CCPA took effect in 2020 and will allow for significant fines by the state attorney general, as well as a private right of action from individuals in relation to
certain security breaches. The enactment of the CCPA is prompting a wave of similar legislative developments in other US states and creating the potential
for a patchwork of overlapping but different state laws. These developments are increasing our compliance burden and our risk, including risks of
regulatory fines, litigation and associated reputational harm. Additionally, a new California ballot initiative, the California Privacy Rights Act (the
“CPRA”) recently passed in California. The CPRA will impose additional data protection obligations on companies doing business in California. The
majority of the provisions will go into effect on January 1, 2023, and additional compliance investment and potential business process changes may be
required.
In addition, recent legal developments in Europe have created complexity and compliance uncertainty regarding certain transfers of Personal
Information from the EEA to the United States. For example, on July 16, 2020, the Court of Justice of the European Union (the "CJEU") invalidated the
EU-US Privacy Shield Framework ("Privacy Shield") under which Personal Information could be transferred from the EU to US entities who had self-
certified under the Privacy Shield scheme. While the CJEU upheld the adequacy of EU-specified standard contractual clauses (a form of contract approved
by the EU commission as an adequate Personal Information transfer mechanism), it made clear that reliance on them alone may not necessarily be
sufficient in all circumstances and that their use must be assessed on a case-by-case basis taking into account the surveillance laws and right of individuals
in the destination country. The CJEU went on to state that, if the competent supervisory authority believes that the standard contractual clauses cannot be
complied with in the recipient country and the required level of protection cannot be secured by other means, such supervisory authority is under an
obligation to suspend or prohibit that transfer unless the data exporter has already done so itself.
We rely on a mixture of mechanisms to transfer personal data from our EU business to the U.S. (including having previously relied on Privacy Shield)
and are evaluating what additional mechanisms may be required to establish adequate safeguards for Personal Information. As supervisory authorities issue
further guidance on Personal Information export mechanisms, including circumstances where the standard contractual clauses cannot be used and/or start
taking enforcement action, we could suffer additional costs, complaints, and/or regulatory investigations or fines. Moreover, if we are unable to transfer
Personal Information between and among countries and regions in which we operate, it could affect the manner in which we provide our services and could
adversely affect our financial results.
In Israel, The Protection of Privacy Law, 5741-1981 (the “Israeli Privacy Law”) regulates the protection of privacy and personal data, along with
several other specific regulations enacted thereunder and, in particular, the Privacy Protection Regulations (Data Security), 5777-2017 (together, the “Israeli
Privacy Law and Regulations”). Under the Israeli Privacy Law and Regulations, organizations are subject to various privacy and data protection
requirements, including mandatory registration of databases with the Israeli Registrar of Databases (if certain conditions are met), executing data
processing agreements with data recipients, safeguarding the collection and processing of personal data, safeguarding the transfer of personal data (which is
specifically subject to the requirements of the Privacy Protection Regulations), personal data breach notification obligations, and other requirements. The
Privacy Protection Authority (the “PPA”) is responsible for enforcement of the Israeli Privacy Law and Regulations and periodically publishes opinions
and guidelines on privacy matters. In terms of enforcement, failure to comply with the Israeli Privacy Law and Regulations can result in PPA
investigations, administrative fines or sanctions, and civil or criminal actions (civil proceedings may include statutory damages without the need to prove
actual damages).
Furthermore, any failure, or perceived failure, by us to comply with or make effective modifications to our policies or to comply with any federal,
state, or international privacy, data-retention, or data-protection-related laws, regulations, orders, or industry self-regulatory principles could result in
proceedings or actions against us by governmental entities or others, a loss of customer confidence, damage to our brand and reputation, and a loss of
customers, any of which could have an adverse effect on our business. In addition, various federal, state, and foreign legislative or regulatory bodies may
enact new or additional laws and regulations concerning privacy, data-retention, and data-protection issues, including laws or regulations mandating
disclosure to domestic or international law enforcement bodies, which could adversely impact our business or our reputation
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with customers. For example, some countries have adopted laws mandating that some Personal Information regarding customers in their country be
maintained solely in their country. Having to maintain local data centers and redesign product, service, and business operations to limit Personal
Information processing to within individual countries could increase our operating costs significantly.
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, 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. In 2019, we acquired certain assets and
operations from Schölly Fiberoptic GmbH, a supplier of endoscopes and other visualization equipment and, in 2020, we acquired Orpheus Medical Ltd.
and its wholly-owned subsidiaries (“Orpheus Medical”) to deepen and expand our integrated informatics platform. The integration of these acquisitions
involves complex operations across different geographic locations and new products, distribution networks, and legal jurisdictions. Therefore, we cannot
assure you that we can successfully integrate either or both of these acquisitions or realize the expected benefits from these acquisitions. Failure to
successfully integrate our acquisitions may have a material adverse impact 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, WHICH 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 the Joint Venture. In January 2019, the Joint Venture acquired certain assets related to the da Vinci distribution business of
Chindex, a subsidiary of Fosun Pharma, which has been our distribution partner for da Vinci Surgical Systems in China since 2011, following which the
Joint Venture began direct distribution operations for da Vinci products and services in China. There can be no assurance that we and the Joint Venture can
successfully complete the development of robotic-assisted, catheter-based medical devices, or that we and the Joint Venture will successfully
commercialize such products. There can also be no assurance that the Joint Venture will not require additional contributions to fund its business, that the
Joint Venture will become profitable, or that the acquired Chindex assets will be successfully integrated and that the expected benefits will be realized.
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 that 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
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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.
There can be no assurance that we will realize a return on our strategic investments. Further, if we acquire privately held companies, valuations of such
companies are inherently complex due to the lack of readily available market data. If we determine that our investments in privately held companies have
experienced a decline in value, we may be required to record impairments, which could be material and have an adverse effect on our results of operations.
These alliances may also involve significant expense and divert the focus and 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.
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 da Vinci Surgical Systems, any of which could have a material adverse effect on our business, financial condition,
results of operations, or cash flows.
WE EXPECT GROSS PROFIT MARGINS TO VARY OVER TIME, AND CHANGES IN OUR GROSS PROFIT MARGINS COULD
ADVERSELY AFFECT OUR FINANCIAL CONDITION OR RESULTS OF OPERATIONS.
Our gross profit margins have fluctuated from period to period, and we expect that they will continue to fluctuate in the future. Our gross profit
margins may be adversely affected by numerous factors, including:
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changes in customer, geographic, or product mix, including the mix of da Vinci Surgical System models sold or leased;
changes in the portion of sales involving a trade-in of another system and the amount of trade-in credits given;
introduction of new products, which may have lower margins than our existing products;
our ability to maintain or reduce production costs;
changes to our pricing strategy;
changes in competition;
changes in production volume driven by demand for our products;
changes in material, labor, or other manufacturing-related costs, including the impact of foreign exchange rate fluctuations for foreign
currency-denominated costs;
changes to U.S. and foreign trade policies, such as 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.
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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.” 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
cases.
WE OFFER ALTERNATIVE CAPITAL ACQUISITION APPROACHES. AS A RESULT, WE ARE EXPOSED TO THE CREDIT RISK OF
SOME OF OUR CUSTOMERS AND THE RISK OF LOSSES OF REVENUE, 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.
Certain of our leasing arrangements allow customers to cancel, return, or upgrade the systems leased prior to the end of the lease term without
incurring a financial penalty. We also lease our systems to certain qualified customers where the lease payments are based on their usage of the systems.
While leases and usage-based arrangements enable our customers to upgrade and get access to new technologies faster, it may also enable competitors to
more easily induce customers to switch to a competitor system. If customers do not perform a sufficient number of procedures on systems leased under
usage-based arrangements, or return or terminate leases prematurely, it could have a material adverse effect on our business, financial condition, result of
operations, or cash flows.
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.
Our Intuitive Ventures fund plans to invest in early-stage companies, which involve substantial risks and uncertainties. These risks and uncertainties
include, among other things, uncertainties inherent in research and development; uncertainties regarding the ability of Intuitive Ventures to identify
investment candidates; uncertainties regarding the success of Intuitive Ventures’ investments; uncertainties and variables inherent in the operating and
financial performance in investments made, including, among other things, competitive developments and general economic, political, business, industry,
regulatory and market conditions; future exchange and interest rates; and changes in tax and other laws, regulations, rates and policies.
While we have not realized any significant losses on our cash equivalents, marketable securities, or other investments, future fluctuations in their value
could have a material adverse impact on our business, financial condition, results of operations, or cash flows.
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WE MAY INCUR LOSSES ASSOCIATED WITH CURRENCY FLUCTUATIONS AND MAY NOT BE ABLE TO EFFECTIVELY HEDGE
OUR EXPOSURE.
Our operating results are subject to volatility due to fluctuations in foreign currency exchange rates. Our primary exposure to fluctuations in foreign
currency exchange rates relates to revenue and operating expenses denominated in currencies other than the U.S. dollar. The weakening of foreign
currencies relative to the U.S. dollar adversely affects our foreign currency-denominated revenue. Margins on OUS revenue could also be materially
adversely affected by foreign currency exchange rate fluctuations, as we may not be able to raise local prices to fully offset the strengthening of the U.S.
dollar. Conversely, the strengthening of foreign currencies relative to the U.S. dollar, while generally beneficial to our foreign currency-denominated
revenue and earnings, may cause us to reduce pricing on our products in our OUS markets and may cause us to incur losses on our foreign currency
hedging instruments, thereby limiting the benefit that strengthened foreign currencies could have on our results of operations.
We attempt to mitigate a portion of these risks through foreign currency hedging, based on our judgment of the appropriate trade-offs among risk,
opportunity, and expense. Although we have established a hedging program to partially hedge our exposure to foreign currency exchange rate fluctuations,
primarily related to transactions denominated in the Euro, Japanese Yen, Korean Won, British Pound, and 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 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
develop or 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.
DISRUPTIONS AT THE FDA AND OTHER GOVERNMENT AGENCIES CAUSED BY FUNDING SHORTAGES OR GLOBAL HEALTH
CONCERNS COULD HINDER THEIR ABILITY TO HIRE, RETAIN, OR DEPLOY KEY LEADERSHIP AND OTHER PERSONNEL, OR
OTHERWISE PREVENT PRODUCTS FROM BEING DEVELOPED, APPROVED, OR COMMERCIALIZED IN A TIMELY MANNER OR
AT ALL, WHICH MAY ADVERSELY AFFECT OUR BUSINESS.
Hospital, health systems, and physicians depend on a number of government agencies and services to effectively deliver healthcare to their patients. A
prolonged government shutdown could impact inspections, regulatory review and certifications, grants, or approvals or could cause other situations that
could impede their ability to effectively deliver healthcare, including attempts to reduce payments and other reimbursements to hospitals by federal
healthcare programs. These situations could adversely affect our customers’ ability to perform procedures with our devices and/or their decisions to
purchase additional products from us.
In addition, the ability of the FDA to review and clear or approve new products can be affected by a variety of factors, including government budget
and funding levels, ability to hire and retain key personnel and accept the payment of user fees, and statutory, regulatory, and policy changes. In addition,
government funding of other government agencies that fund research and development activities is subject to the political process, which is inherently fluid
and unpredictable. Disruptions at the FDA and other agencies, including a prolonged government shutdown, may cause significant regulatory delays and,
therefore, delay our efforts to seek clearances or approvals from the FDA and adversely affect business travel and import and export of products, all of
which could have a material adverse effect on our business, financial condition, results of operations, or cash flows. For example, over the last several
years, including for 35 days beginning on December 22, 2018, the U.S. government
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has shut down several times and certain regulatory agencies, such as the FDA, have had to furlough critical FDA employees and stop critical activities.
Separately, in response to the global COVID-19 pandemic, on March 10, 2020, the FDA announced its intention to postpone most foreign inspections
of manufacturing facilities and products through April 2020 and, subsequently, on March 18, 2020, the FDA temporarily postponed routine surveillance
inspections of domestic manufacturing facilities. Subsequently, on July 10, 2020, the FDA announced its intention to resume certain on-site inspections of
domestic manufacturing facilities subject to a risk-based prioritization system. The FDA intends to use this risk-based assessment system to identify the
categories of regulatory activity that can occur within a given geographic area, ranging from mission-critical inspections to resumption of all regulatory
activities. Regulatory authorities outside the United States may adopt similar restrictions or other policy measures in response to the COVID-19 pandemic.
If a prolonged government shutdown occurs, or if global health concerns continue to prevent the FDA or other regulatory authorities from conducting their
regular inspections, reviews, or other regulatory activities, it could significantly impact the ability of the FDA or other regulatory authorities to timely
review and process our regulatory submissions, which could have a material adverse effect on our business.
CONTINUED CONSOLIDATION IN THE HEALTHCARE INDUSTRY COULD HAVE AN ADVERSE EFFECT ON OUR SALES AND
RESULTS OF OPERATIONS.
The healthcare industry has been consolidating, and organizations continue to consolidate purchasing decisions for many of our healthcare provider
customers. Numerous initiatives and reforms by legislators, regulators, and third-party payers to curb the rising cost of healthcare have catalyzed a
consolidation of aggregate purchasing power within the markets in which we sell our products. As the healthcare industry consolidates, competition to
provide products and services is expected to continue to intensify, resulting in pricing pressures and decreased average selling prices. We expect that market
demand, government regulation, third-party payor coverage and reimbursement policies, government contracting requirements, and societal pressures will
continue to change the worldwide healthcare industry, resulting in further consolidation, which may exert further downward pressure on prices of our
products and services and may have a material adverse impact on our business, financial condition, results of operations, or cash flows.
ECONOMIC CONDITIONS COULD HAVE A MATERIAL ADVERSE EFFECT ON 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, has caused and may continue to cause disruptions in the financial credit markets, volatile currency
exchange rates, concerns about inflation, slower economic activity, decreased consumer confidence, reduced corporate profits and capital spending, 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 manufacturing 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 replacement of NAFTA by the USMCA (effective July 1, 2020), that 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 or 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.
NATURAL DISASTERS OR OTHER EVENTS BEYOND OUR CONTROL COULD DISRUPT OUR BUSINESS AND RESULT IN LOSS OF
REVENUE OR HIGHER EXPENSES.
Natural disasters, terrorist activities, and other business disruptions including, but not limited to, internet security threats and violence motivated by
political or social causes, 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. Moreover, global climate change could result in certain types of natural disasters occurring more frequently or with more intense effects.
Our corporate headquarters and many of our operations, including certain of our manufacturing facilities, are located in California, which has experienced
both severe earthquakes and other natural disasters in the past and is vulnerable to climate change effects. For example, increasing intensity of drought
throughout the state and annual periods of wildfire danger increase the probability of planned power outages in the communities where we work and live.
This danger has the potential to impact our employees' abilities to commute to work or to work from home and stay connected effectively during the
COVID-19 pandemic. We do not
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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.
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.
We are unable to predict what changes to the tax laws of the U.S. and other jurisdictions may be proposed or enacted in the future or what effect such
changes would have on our business. Any significant increase in our future effective tax rate could have a material adverse impact on our business,
financial condition, results of operations, or cash flows.
WE USE ESTIMATES, MAKE JUDGMENTS, AND APPLY CERTAIN METHODS IN DETERMINING OUR FINANCIAL RESULTS AND IN
MEASURING THE PROGRESS OF OUR BUSINESS. AS THESE ESTIMATES, JUDGMENTS, AND METHODS CHANGE, OUR RESULTS
OF OPERATIONS AND OUR ASSESSMENT OF THE PROGRESS OF OUR BUSINESS 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 that 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.
RISKS RELATING TO OUR REGULATORY ENVIRONMENT
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 require that manufacturers keep detailed records of
investigations or complaints against their devices and 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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•
•
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 the 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 Federal Food Drug and Cosmetic Act (“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 the FDA and are familiar with
the 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 with Mexican authorities. The facility is operated under U.S. and international quality system regulations,
including those applicable to Canada, the EU, 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 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 SELL 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 FFDCA. Clearance under Section 510(k) requires demonstration that
a new device is substantially equivalent to another device with 510(k) clearance or grandfathered (“pre-amendment”) status. If we significantly modify our
products after they receive FDA clearance, the FDA may require us to submit a separate 510(k) or premarket approval application (“PMA”) for the
modified product before we are permitted to market the products in the 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)
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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, either
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 us 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 that 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, revise existing regulations, or take other
actions that 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. Over the last several years, the FDA has proposed reforms to its 510(k) clearance process, and such proposals could include increased
requirements for clinical data and a longer review period, or could make it more difficult for manufacturers to utilize the 510(k) clearance process for their
products. For example, in November 2018, FDA officials announced forthcoming steps that the FDA intends to take to modernize the premarket
notification pathway under Section 510(k) of the FFDCA. Among other things, the FDA announced that it plans to develop proposals to drive
manufacturers utilizing the 510(k) pathway toward the use of newer predicates. These proposals include plans to potentially sunset certain older devices
that were used as predicates under the 510(k) clearance pathway, and to potentially publish a list of devices that have been cleared on the basis of
demonstrated substantial equivalence to predicate devices that are more than 10 years old. In May 2019, the FDA solicited public feedback on these
proposals. These proposals have not yet been finalized or adopted, and the FDA may work with Congress to implement such proposals through legislation.
Accordingly, it is unclear the extent to which any proposals, if adopted, could impose additional regulatory requirements on us that could delay our ability
to obtain new 510(k) clearances, increase the costs of compliance, or restrict our ability to maintain our current clearances, or otherwise create competition
that may negatively affect our business.
More recently, in September 2019, the FDA finalized guidance describing an optional “safety and performance based” premarket review pathway for
manufacturers of “certain, well-understood device types” to demonstrate substantial equivalence under the 510(k) clearance pathway by showing that such
device meets objective safety and performance criteria established by the FDA, thereby obviating the need for manufacturers to compare the safety and
performance of their medical devices to specific predicate devices in the clearance process. The FDA maintains a list device types appropriate for the
“safety and performance based” pathway and will continue to develop product-specific guidance documents that identify the performance criteria for each
such device type, as well as the testing methods recommended in the guidance documents, where feasible. The FDA may establish performance criteria for
classes of devices for which we or our competitors seek or currently have received clearance, and it is unclear the extent to which such performance
standards, if established, could impact our ability to obtain new 510(k) clearances or otherwise create competition that may negatively affect our business.
We also cannot predict the likelihood, nature, or extent of government regulation that may arise from future legislation, administrative, or executive
action. For example, the results of the 2020 election may impact our business and industry. Namely, the Trump administration took 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 whether or how these requirements will be implemented and whether or how they will be rescinded or
replaced under the Biden administration. The policies and priorities of a new administration are unknown and could materially impact the regulation of our
products. If executive actions impose constraints on the 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 that we intend to market in the U.S. in the future. If we do 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
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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.
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.
We started participating in the Medical Device Single Audit Program (“MDSAP”), which allows an MDSAP-recognized auditing organization to
conduct a single regulatory audit of a medical device manufacturer that evaluates the Company’s quality system to confirm compliance with the
requirements of multiple regulatory jurisdictions, including the U.S., Japan, Brazil, Australia, and Canada. The information will be shared and reviewed
amongst all the regulatory authorities in the MDSAP, who may or may not determine that additional information or auditing is required.
Our Sunnyvale, California facility is licensed by the State of California to manufacture medical devices. We have been subject to periodic inspections
by the California Department of Health Services Food and Drug Branch and, if we are unable to maintain this license following any future inspections, we
will be unable to manufacture or ship some products, which would have a material adverse effect on our results of operations. In 2012, the State of
California announced suspension of routine inspections, but this policy could be modified or inspections could be resumed for specific circumstances. In
addition, both our Sunnyvale, California and Mexicali, Mexico facilities are subject to periodic inspections by other regulatory bodies, including third-party
auditors on behalf of national regulatory authorities. Compliance with multiple regulatory standards is complex, difficult, and costly to maintain, and
material deficiencies could result in significant limitations on our ability to manufacture, transport, and sell our products in one or more countries.
OUR PRODUCTS ARE SUBJECT TO INTERNATIONAL REGULATORY PROCESSES AND APPROVAL REQUIREMENTS. IF WE DO
NOT OBTAIN AND MAINTAIN THE NECESSARY INTERNATIONAL REGULATORY APPROVALS, WE WILL NOT BE ABLE TO SELL
OUR PRODUCTS IN FOREIGN COUNTRIES.
To be able to sell 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 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 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
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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 that 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 that 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 that do not
apply directly to us but which apply indirectly, as they may limit our customers’ ability to use our products.
In May 2017, the EU Medical Device Regulation was implemented to replace the Medical Device Directive (93/42/EEC), as amended. The Medical
Device Regulation ((EU) 2017/745) comes into force on May 26, 2021, 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. Further, Switzerland, which is the country from which we import our products into the
EU and where our EU regulatory team is based, has not yet entered into a Mutual Recognition Agreement with the EU that covers the Medical Device
Regulation and allows medical devices to move freely between Switzerland and the EU. Therefore, we may be required to adjust the manner in which we
bring our products into the EU market. Any such adjustments could cause temporary disruptions in and have adverse financial implications to our business
in Europe.
To date, we received approvals from the Japanese Ministry of Health, Labor and Welfare (“MHLW”) for our da Vinci S, Si, Xi, and X 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.
In April 2012 and April 2016, we have received reimbursement approval for prostatectomy and partial nephrectomy, respectively. An additional 12
procedures were granted reimbursement for Japan in April 2018, including gastrectomy, anterior resection, lobectomy, and hysterectomy, for both
malignant and benign conditions. An additional 7 procedures were granted reimbursement effective April 1, 2020. These additional 19 reimbursed
procedures have varying levels of conventional laparoscopic penetration and will be reimbursed at rates equal to the conventional laparoscopic procedures.
Given the reimbursement level and laparoscopic penetration for these 19 procedures, there can be no assurance that adoption will occur or that the adoption
pace for these procedures will be similar to any other da Vinci procedures. 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 purchasing tender processes. In October 2018, the China National Health
Commission published on its official website the quota for major medical equipment to be imported and sold in China through 2020. After an adjustment
notice was published in the third quarter of 2020, the government will now allow for the total sale of 225 new surgical robots into China, which could
include da Vinci Surgical Systems as well as surgical systems introduced by others. Future system sales and our ability to grow future procedure volumes
are dependent on the completion of these purchasing tender authorizations. 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.
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.
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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. 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.
Since its enactment, there have been judicial and Congressional challenges to certain aspects of the PPACA as well as efforts by the Trump
administration to modify, repeal, or otherwise invalidate all, or certain provisions of, the PPACA. Since January 2017, President Trump 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 Trump 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. Legislation to appropriate funds for CSR payments has been
introduced in Congress, but the future of such legislation is uncertain. In addition, CMS finalized regulations that, effective beginning with the 2020 plan
year, 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 was 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.
On December 14, 2018, a U.S. District Court Judge in the Northern District of Texas, ruled that the individual mandate is a critical and inseverable feature
of the ACA and, therefore, because it was repealed as part of the 2017 Tax Act, the remaining provisions of the ACA are invalid as well. The Fifth Circuit
Court of Appeals affirmed the district court's ruling that the individual mandate was unconstitutional, but it remanded the case back to the district court for
further analysis of whether the mandate could be severed from the Affordable Care Act. The Supreme Court of the United States granted certiorari on
March 2, 2020, and held oral arguments on November 10, 2020. The case is expected to be decided by mid-2021. It is unclear how this decision,
subsequent pending appeals, and other efforts to repeal and replace the ACA will impact the ACA and our business.
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 may 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 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 2030, unless
additional Congressional action is taken, with the exception of a temporary suspension of the 2% cut in Medicare payments from May 1, 2020, through
December 31, 2020. 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 that began in 2019,
which 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 healthcare 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 to, 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,
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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 what 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 that 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 that
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 that we can obtain this information accurately or reliably, or at all, from intermediate producers who may be unwilling or unable
to provide this information or further identify their sources of supply or to notify us if these sources change. In addition, these metals are subject to price
fluctuations and shortages that can affect our ability to obtain the manufactured materials that 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 federal Anti-Kickback Statute and 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, 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, a person or entity does not need to have actual knowledge of this statute or specific intent to violate it.
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. The federal civil and criminal false claims laws and civil monetary penalties laws, including the
federal civil False Claims Act, 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 healthcare programs that are false or fraudulent. 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.
The Health Insurance Portability and Accountability Act of 1996, or HIPAA, which created additional federal criminal statutes that prohibit, among
other things, executing a scheme to defraud any healthcare benefit program and making false statements relating to healthcare matters. Similar to the
federal Anti-Kickback Statute, a person or entity does not need to have actual knowledge of the statute or specific intent to violate it to have committed a
violation.
These laws may affect our sales, marketing, and other promotional activities by limiting the kinds of financial arrangements that 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, speaker, 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 and false
claims laws can result in civil and criminal fines and penalties, which can be substantial and include monetary damages and penalties, imprisonment, and
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 federal Physicians Payments Sunshine Act imposes reporting and disclosure requirements on device manufacturers for any “transfer of value”
made or distributed to physicians (including family members), certain other healthcare providers, and teaching hospitals. Such information must be made
publicly available in a searchable format. In addition, device manufacturers
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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. Additionally, on October 25, 2018, President Trump signed into
law the “Substance Use-Disorder Prevention that Promoted Opioid Recovery and Treatment for Patients and Communities Act” which in part (under a
provision entitled “Fighting the Opioid Epidemic with Sunshine”) extends the reporting and transparency requirements for physicians in the Physician
Payments Sunshine Act to physician assistants, nurse practitioners, clinical nurse specialists, certified registered nurse anesthetists, and certified nurse
midwives (with reporting requirements going into effect in 2022 for payments made in 2021). Failure to submit required information may result in civil
monetary penalties 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 with 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 FCPA, and similar laws in foreign countries, such as the U.K. Bribery Act of 2010. 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 operations are subject to certain antitrust and competition laws in the jurisdictions in which we conduct our business, in particular the U.S. and the
EU. These laws prohibit, among other things, anticompetitive agreements and practices. If any of our commercial agreements or practices are found to
violate or infringe such laws, we may be subject to civil and other penalties. We may also be subject to third-party claims for damages. Further, agreements
that infringe upon these antitrust and competition laws may be void and unenforceable, in whole or in part, or require modification in order to be lawful and
enforceable. If we are unable to enforce our commercial agreements, whether at all or in material part, our results of operations, financial position, and cash
flows could be adversely affected.
We are also subject to claims, lawsuits, and government investigations involving labor and employment. Such claims, lawsuits, and government
investigations are inherently uncertain. Regardless of the outcome, any of these types of legal proceedings can have an adverse impact on us because of
legal costs, diversion of management resources, and other factors.
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 the particular facts of each case.
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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 to 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 that 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 to or identical to ours. We cannot be certain that patents issuing from our own patent applications covering our products will have a priority
date over any patents issuing from applications filed by a third party.
The medical device industry has experienced extensive intellectual property litigation and administrative proceedings. If third parties assert
infringement claims or institute administrative proceedings against us, our technical and management personnel will need to spend significant time and
effort, and we will incur large expenses in defending against these attacks. We cannot be certain that we will prevail in defending against infringement,
validity, or enforceability 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 or importing 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 or relocate our manufacturing facilities. 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, WHICH MAY NOT BE AVAILABLE TO US ON COMMERCIALLY
REASONABLE TERMS OR AT ALL. 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. There is no assurance that we can obtain
licenses on acceptable terms or at all. The license agreements we have entered into with several industry partners 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 failure to obtain or maintain the
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.
GENERAL RISK FACTORS
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
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affected. Further, future revenue from sales of our products is difficult to forecast, because the market for new surgical technologies is still evolving. Our
results of operations will depend upon numerous factors, including:
•
•
•
•
•
•
•
•
•
•
•
•
the extent to which our products achieve and maintain market acceptance;
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 2018, it reached
a high of $574.74 and a low of $375.25; during 2019, it reached a high of $598.81 and a low of $450.24; and during 2020, it reached a high of $818.10 and
a low of $367.75. 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 or recommendations by analysts;
changes in accounting policies;
economic changes and overall market volatility;
litigation;
• media coverage, whether accurate or inaccurate, fair or misleading;
•
•
•
political uncertainties;
short sales on shares of our common stock or other activities by short sellers; and
our stock repurchase program.
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.
CHANGES TO FINANCIAL ACCOUNTING STANDARDS MAY AFFECT OUR REPORTED RESULTS OF OPERATIONS.
A change in accounting standards can have a significant effect on our reported results and may retroactively affect previously reported results. 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.
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ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
As of December 31, 2020, we own approximately 1.2 million square feet of space on 98 acres of land in Sunnyvale, California, where we house our
principal headquarters, research and development, service, and support functions, and certain of our manufacturing operations.
Outside of Sunnyvale, California, we own facilities in other U.S. locations that are used for sales, training, engineering, and administrative functions as
well as manufacturing. We also lease approximately 620,000 square feet of space for certain engineering, warehousing, and support functions at various
locations in the U.S. Outside of the U.S., we own properties in Mexicali, Mexico, primarily for manufacturing operations, and Aubonne, Switzerland,
primarily for our international headquarters. In China, our Joint Venture leases facilities for research and development, manufacturing, and sales operations.
In Germany, we own and lease facilities for manufacturing operations, as we integrate and build out operations of our acquisition of certain assets and
operations from Schölly Fiberoptic GmbH. In Israel, we lease facilities, including space for the operations of our recent acquisition of Orpheus Medical. In
addition, we lease various international facilities for sales and other operations.
ITEM 3. LEGAL PROCEEDINGS
The information included in Note 8 to the Consolidated Financial Statements included in Part II, Item 8 of this report is incorporated herein by
reference.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
COMMON STOCK
Our common stock is traded on The Nasdaq Global Select Market under the symbol “ISRG.”
As of January 15, 2021, there were 159 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, 2020, for two categories of equity compensation plans.
Plan Category
Equity compensation plans approved by security holders
Equity compensation plans not approved by security holders
(1)
Total
Number of
securities to be
issued upon
exercise of
outstanding
options,
warrants and
rights (a)
Weighted-
average
exercise price
of outstanding
options
(2)
4,104,159 $
371,711 $
4,475,870 $
315.57
189.00
305.07
Number of
securities remaining
available for future
issuance under equity
compensation
plans (excluding
securities reflected in
column (a))
9,139,869
—
9,139,869
(1) Represents options under the Amended and Restated 2009 Employment Commencement Incentive Plan, adopted by the Board in October 2009 and first used in 2010. 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 ten years. This plan expired in October 2019 and, therefore, there are no
shares reserved for future issuance. However, awards granted prior to the plan's expiration continue to remain outstanding until their original expiration date.
(2) The weighted-average exercise price is calculated based solely on the exercise prices of the outstanding options and does not reflect the shares that will be issued upon the vesting of
outstanding awards of RSUs, which have no exercise price.
Material Features of the Amended and Restated 2009 Employment Commencement Incentive Plan
In October 2009, the Board adopted our Amended and Restated 2009 Employment Commencement Incentive Plan, or the 2009 Plan, pursuant to Rule
5653(c)(4) of the Nasdaq Global Market, which was subsequently amended by the Board in February 2011, July 2011, February 2012, July 2012, January
2013, May 2013, December 2013, and April 2015.
Awards granted under the 2009 Plan were intended to constitute “employment inducement awards” under Nasdaq Listing Rule 5635(c)(4) and,
therefore, the 2009 Plan was intended to be exempt from the Nasdaq Listing Rules regarding stockholder approval of stock option and stock purchase
plans. A total of 4,365,000 shares of our common stock were reserved for issuance under the 2009 Plan. The 2009 Plan provided for the grant of non-
qualified stock options, restricted stock units, restricted stock awards, dividend equivalents, or stock appreciation rights. These awards may have been
granted to individuals who were then new employees, or were commencing employment with us or one of our subsidiaries following a bona fide period of
non-employment with us, and for whom such awards were granted as a material inducement to commencing employment with us or one of our
subsidiaries. This plan expired in October 2019 and, therefore, there are no shares reserved for future issuance. However, awards granted prior to the plan's
expiration continue to remain outstanding until their original expiration date.
The 2009 Plan is administered by the Compensation Committee or another committee of the Board. The plan administrator has broad discretion to take
action under the 2009 Plan, as well as make adjustments to the terms and conditions of existing awards, in the event of certain transactions and events
affecting our common stock, including a change in control, stock dividends, stock splits, mergers, acquisitions, consolidations, and other corporate
transactions. In addition, in the event of certain non-reciprocal transactions with our stockholders known as “equity restructurings,” the plan administrator
will make equitable adjustments to the 2009 Plan and outstanding awards.
The Board may amend, suspend, or terminate the 2009 Plan at any time, provided that no such action may impair any rights under any outstanding
awards without the consent of the participant.
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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, 2020.
Fiscal Period
October 1 to October 31, 2020
November 1 to November 30, 2020
December 1 to December 31, 2020
Total during quarter ended December 31, 2020
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)
— $
51,914 $
— $
51,914 $
—
661.07
—
661.07
— $
51,914 $
— $
51,914
1.6 billion
1.6 billion
1.6 billion
(1) Since March 2009, we have had an active stock repurchase program. As of December 31, 2020, our Board of Directors (the “Board”) had authorized an
aggregate amount of up to $7.5 billion for stock repurchases, of which the most recent authorization occurred in January 2019, when the Board increased
the authorized amount available under our share repurchase program to $2.0 billion. The remaining $1.6 billion represents the amount available to
repurchase shares under the authorized repurchase program as of December 31, 2020. The authorized stock repurchase program does not have an expiration
date.
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STOCK PERFORMANCE GRAPH
The graph set forth below compares the cumulative total stockholder return on our common stock between December 31, 2015, and December 31,
2020, with the cumulative total return of (i) the Nasdaq Composite Index, (ii) the S&P 500 Healthcare Index, and (iii) the S&P 500 Index over the same
period. This graph assumes an investment of $100.00 on December 31, 2015 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, NASDAQ COMPOSITE, S&P HEALTHCARE
INDEX, AND S&P 500 INDEX
Intuitive Surgical, Inc.
Nasdaq Composite
S&P 500 Healthcare Index
S&P 500 Index
December 31,
2015
2016
2017
2018
2019
2020
$
$
$
$
100.00 $
100.00 $
100.00 $
100.00 $
116.11 $
108.87 $
95.64 $
111.96 $
200.46 $
141.13 $
114.77 $
136.40 $
263.07 $
137.12 $
120.16 $
130.42 $
326.91 $
187.44 $
142.60 $
171.49 $
449.37
271.64
158.90
203.04
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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.
2020
2019
Fiscal Year
2018
2017 (1)
2016
$
Revenue
Gross profit
$
Net income attributable to Intuitive Surgical, Inc. $
Net income per share attributable to Intuitive
Surgical, Inc.:
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
$
$
$
$
(In millions, except per share amounts and headcount)
4,358.4 $
2,861.2 $
1,060.6 $
4,478.5 $
3,110.2 $
1,379.3 $
3,724.2 $
2,604.1 $
1,127.9 $
3,138.2 $
2,202.0 $
670.9 $
9.06 $
8.82 $
11.95 $
11.54 $
9.92 $
9.49 $
6.01 $
5.77 $
117.0
120.3
6,869.1 $
11,168.9 $
444.6 $
9,759.1 $
115.4
119.5
5,845.2 $
9,733.2 $
418.3 $
8,284.7 $
113.7
118.8
4,834.4 $
7,846.7 $
338.6 $
6,687.5 $
111.7
116.3
3,846.5 $
5,776.8 $
333.6 $
4,780.4 $
Total headcount
8,081
7,326
5,527
4,444
2,706.5
1,892.9
738.3
6.43
6.26
114.9
117.9
4,837.9
6,521.4
112.1
5,820.1
3,755
(1) Reflects amounts recorded for the enactment of the 2017 Tax Act.
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
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 minimally invasive surgery (“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 traditional open surgery or conventional MIS. Surgeons
using a da Vinci Surgical System operate while seated comfortably at a console viewing a 3D, high-definition image of the surgical field. This immersive
console 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 open surgical technique. Our technology is designed to provide surgeons with a range of articulation of the surgical instruments used 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 da Vinci products fall into five broad categories: da Vinci Surgical Systems, da Vinci instruments and accessories, da Vinci Stapling, da Vinci
Energy, and da Vinci Vision, including Firefly Fluorescence imaging systems (“Firefly”) and da Vinci Endoscopes. We also provide a comprehensive suite
of services, training, and education programs. Within our integrated ecosystem, our products are designed to decrease variability in surgery by offering
dependable, consistent functionality and user experiences for surgeons seeking better outcomes. We take a holistic approach, offering intelligent technology
and systems designed to work together to make MIS intervention more available and applicable.
We have commercialized the following da Vinci Surgical Systems: the da Vinci standard Surgical System in 1999, the da Vinci S Surgical System in
2006, the da Vinci Si Surgical System in 2009, and the fourth generation da Vinci Xi Surgical System in 2014. We have extended our fourth generation
platform by adding the da Vinci X Surgical System, commercialized in the second quarter of 2017, and the da Vinci SP Surgical System, commercialized in
the third quarter of 2018. We are early in the launch of our da Vinci SP Surgical System, and we have an installed base of 69 da Vinci SP Surgical Systems
as of December 31, 2020. Our plans for the rollout of the da Vinci SP Surgical System include putting systems in the hands of experienced da Vinci users
first while we optimize training pathways and our supply chain. We received FDA clearances for the da Vinci SP Surgical System for urological and certain
transoral procedures. We also received clearance in South Korea where the da Vinci SP Surgical System may be used for a broad set of procedures. We plan
to seek FDA clearances for additional indications for da Vinci SP over time. The success of the da Vinci SP Surgical System is dependent on positive
experiences and improved clinical outcomes for the procedures for which it has been cleared as well as securing additional clinical clearances. All da Vinci
systems include a surgeon’s console (or consoles), imaging electronics, a patient-side cart, and computational hardware and software.
We offer approximately 70 different multi-port da Vinci instruments to provide surgeons with flexibility in choosing the types of tools needed to
perform a particular surgery. These multi-port instruments are generally robotically controlled and provide end effectors (tips) that are similar to those used
in either open or laparoscopic surgery. We offer advanced instrumentation for the da Vinci Xi and da Vinci X platforms, including da Vinci Energy and da
Vinci 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 the da Vinci Si Surgical System uses instruments that are not compatible with da Vinci X or
da Vinci Xi systems. We currently offer nine core instruments on our da Vinci SP Surgical System. We plan to expand the SP instrument offering over time.
Training technologies include our Intuitive Simulation products, our Intuitive Telepresence remote case observation and telementoring tools, and our
dual console for use in surgeon proctoring and collaborative surgery.
During the first quarter of 2019, the FDA cleared our Ion endoluminal system to enable minimally invasive biopsies in the lung. Our Ion system
extends our commercial offering beyond surgery into diagnostic procedures with this first application. We are introducing the Ion system in the U.S. in a
measured fashion while we optimize training pathways and our supply chain and collect additional clinical data. We are early in the launch and have placed
36 Ion systems for commercial use as of December 31, 2020. Ion systems are not included in our da Vinci Surgical System installed base. We currently
have 3 Ion systems placed with hospitals for gathering clinical data in addition to the systems placed for commercial use.
The success of new product introductions depends on a number of factors including, but not limited to, 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.
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COVID-19 Pandemic
Procedures
Prior to the spread of COVID-19 in the first quarter of 2020, we experienced procedure growth trends consistent with those experienced in the fourth
quarter of 2019, including strength in general surgery, growth in mature procedures in the U.S., and growth in OUS urology. Beginning in January 2020, we
saw a substantial reduction in da Vinci procedures in China and, by early February 2020, procedures per week in China had declined by approximately 90%
compared to the weekly procedure rates experienced in early January 2020. As the COVID-19 pandemic subsided in China in March 2020, da Vinci
procedure volume began to recover and, by the end of the first quarter of 2020, China procedures per week were approximately 70% of the early January
2020 weekly procedure rate. As the COVID-19 pandemic spread to Western Europe and the U.S., we experienced a significant decline in da Vinci
procedures in the last half of March 2020, and procedures per week in the U.S. declined to approximately 65% of the weekly procedure rate experienced
earlier in the first quarter of 2020.
In April 2020, procedures per week in the U.S. continued to decline, reaching approximately 30% of pre-COVID-19 levels. In May and June, U.S.
procedures began a recovery phase, as COVID-19 cases dropped and elective procedures were permitted, and, by the middle of June, had grown to nearly
the same level as that measured in the first two weeks of the first quarter of 2020. However, in the last two weeks of June and into July, with the resurgence
of COVID-19 cases, some regions postponed elective procedures, and we experienced a corresponding decline in da Vinci procedures. The impact of
COVID-19 in Europe during the second quarter varied by country with procedures in Italy, France, and the UK declining more steeply, while Germany
experienced a year-over-year increase in procedures. During the second quarter of 2020, China procedures per week continued to increase to a level
consistent with the early January 2020 weekly procedure rate.
In the third quarter of 2020, procedures recovered slowly in the U.S., leveling off near pre-COVID-19 levels towards the end of the quarter. Outside of
the U.S., da Vinci procedures varied in the third quarter of 2020, depending on the spread and/or resurgence of COVID-19. For example, COVID-19 had a
less significant impact in Germany where da Vinci procedures grew at mid-single digits relative to the third quarter of 2019, while it had a more significant
impact in the U.K. where da Vinci procedures declined year over year. Procedures in China grew significantly year over year in the third quarter of 2020,
while regional COVID-19 outbreaks resulted in year-over-year procedure growth rates in Japan slowing somewhat relative to earlier in the year. The
COVID-19 pandemic has also affected the volumes of certain procedure types differently. For example, patient concerns over exposure to COVID-19 and
the fact that prostate cancer can be slow growing, combined with lower prostate diagnoses and treatments, have caused the number of dVP procedures to
decline in the third quarter of 2020 relative to the third quarter of 2019. Da Vinci bariatric procedures grew significantly year over year in the third quarter
of 2020 due to our optimized instrument set and focus by our sales organization and may also have benefited from certain patients prioritizing weight loss
as obesity is a significant COVID-19 risk factor. However, the diagnoses and treatment pathways for bariatric patients are long, and many of the patients in
the third quarter may have begun their treatment pathway prior to the spread of COVID-19; therefore, we cannot assure you that we will continue to see
significant growth in bariatric procedures.
In the fourth quarter of 2020, procedure volumes continued to be significantly impacted by the COVID-19 pandemic as healthcare systems around the
world diverted resources to respond to the pandemic. The impact continued to differ significantly by geography and region, depending on the spread and
resurgence of COVID-19. In the U.S., while procedures continued to recover in the early part of the quarter, the resurgence of COVID-19 infections
experienced by some states had an increasingly adverse impact on our procedure volumes as the quarter progressed, a trend that continued into January.
The impact of a resurgence in a particular region can be significant. Outside of the U.S., similar to the trends noted in the third quarter, procedures also
continued to vary significantly by geography and region. The resurgence of COVID-19 had a more significant impact on procedures in Italy, France, and
the UK. Procedures in China continued to grow significantly year over year. The trends that were noted in the third quarter of 2020 in relation to types of
procedures, such as dVP and bariatric procedures, continued into the fourth quarter of 2020.
We continue to see that the impact of COVID-19 on our procedure volumes varies widely by country, region, and type. When COVID-19 infection
rates spike in a particular region, procedure volumes have been negatively impacted and the diagnoses of new conditions and their related treatments are
deferred. Also, based on our experience during 2020, we do not expect all markets, regions, and procedure types to recover at the same pace. Due to the
uncertainty of the recovery, including the potential for COVID-19 infection rates to increase, the extent and period of time over which the COVID-19
pandemic and any resultant economic recession will impact hospital spending, and additional policy responses that may be outlined by governments and
other authorities, we cannot reliably estimate the impact that the COVID-19 pandemic may have on procedure volume in the first quarter of 2021 and
beyond.
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System Demand
As the impact of the COVID-19 pandemic progressed throughout 2020, customers in affected regions deferred decisions to purchase or lease systems
into future quarters and, in some cases, indefinitely. These deferral decisions continued into the fourth quarter of 2020. In addition, the year-over-year
stagnation in procedures and, in turn, reduced utilization of our systems has resulted in unused capacity in the existing installed base. We expect hospitals
to first fill their unused capacity before purchasing additional systems. The depth and extent to which the COVID-19 pandemic will impact individual
markets will vary based on the availability of testing capabilities, personal protective equipment, intensive care units and operating rooms, and medical
staff, as well as government interventions. As COVID-19 continues to disrupt healthcare operations and patient flow, we expect that system placements
will lag behind the recovery of da Vinci procedure volume. While we cannot reliably estimate the extent or period of time over which the COVID-19
pandemic and any resultant economic recession will impact hospital spending, we anticipate lower year-over-year system placements for the first quarter of
2021.
Customer Relief Program
In April 2020, we announced a program to provide financial relief to our customers. The program was comprised of three main elements. The first
element provided credits against service fees otherwise due in the six-month period from April 1 through September 30, 2020, that generally reflected the
underutilization of the system during that period. Those credits were offered to most customers worldwide. The second element of the program deferred
certain lease payments, and the third element extended certain payment terms. Service fee credits resulted in an $80 million decrease in service revenue in
2020. While the short-term payment relief offered did not have a material impact to the results of operations, we deferred $15 million of lease billings and
extended payment terms associated with $181 million of trade receivables since the start of the program, of which $19 million remain outstanding as of
December 31, 2020. We may be subject to increased credit risks resulting in collection delinquencies and defaults, which could materially impact our bad
debt write-offs and provisions for credit losses. Although we have programs in place that are designed to monitor and mitigate the associated risks, there
can be no assurance that such programs will be effective in reducing credit risks relating to these lease financing arrangements and extended payment
terms.
General Increase in Risks
Capital markets and worldwide economies have been significantly impacted by the COVID-19 pandemic, and it is possible that it could cause a
prolonged recession in local and/or global economies. Such an economic recession could have a material adverse effect on our long-term business as
hospitals curtail and reduce capital and overall spending. The COVID-19 pandemic and local actions, such as “shelter-in-place” orders and restrictions on
our ability to travel and access our customers or temporary closures of our facilities, including our manufacturing operations, or the facilities of our
suppliers and their contract manufacturers, could further significantly impact our sales and our ability to produce and ship our products and supply our
customers. Any of these events could negatively impact the number of da Vinci procedures performed or the number of system placements and have a
material adverse effect on our business, financial condition, results of operations, or cash flows.
Our Response
Our priorities and actions during the COVID-19 pandemic are as follows. First, we are focused on the health and safety of all those we serve – patients,
customers, our communities, and our employees – implementing continuous updates to our health and safety policies and processes. Second, we are
supporting our customers according to their priorities – clinical, operational, and economic – and ensuring continuity of supply by working with our
suppliers and our distributors. Third, we are securing our workforce economically. We have built a valuable team over the years, and we believe they will
be important in the recovery that follows the pandemic. Finally, we will continue to invest in our priority development programs while eliminating
avoidable spend.
Business Model
Overview
We generate revenue from the placements of da Vinci Surgical Systems, in sales or sales-type lease arrangements where revenue is recognized up-front
or in operating lease transactions and usage-based models where revenue is recognized over time. We earn recurring revenue from the sales of instruments,
accessories, and services, as well as the revenue from operating leases. The da Vinci Surgical System generally sells for 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 when
purchased. 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 generally earn between $600 and $3,500 of instruments and accessories revenue per surgical procedure performed, depending on the type and
complexity of the specific procedures performed and the number and type of instruments used. During the fourth quarter of 2020, we launched our
Extended Use Program (refer to further discussion immediately below) with the intention to reduce the cost for customers to treat patients, which in turn
will reduce our overall instruments and
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accessories revenue per procedure. We typically enter into service contracts at the time systems are sold or leased at an annual fee between $80,000 and
$190,000, 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.
We generate revenue from the placements of the Ion endoluminal system in a business model consistent with the da Vinci Surgical System model
described above. We generate revenue from the placement of Ion systems, and we earn recurring revenue from the sales of instruments and accessories
used in biopsies and ongoing system service. The average selling price of an Ion system is generally significantly lower than the average selling price of
our da Vinci Surgical Systems. We are introducing the Ion system in the U.S. in a measured fashion. For the years ended December 31, 2020, and 2019, the
associated impact to revenue and gross margin was not significant.
Extended Use Program
In 2020, we introduced our "Extended Use Program," which consists of select da Vinci Xi and da Vinci X instruments possessing 12 to 18 uses
("Extended Use Instruments") compared to the current 10 use instruments. These Extended Use Instruments represent some of our higher volume
instruments but exclude stapling, monopolar, and advanced energy instruments. Instruments included in the program are used across a number of da Vinci
surgeries. Their increased uses are the result of continuous, significant investments in the design and production capabilities of our instruments, resulting in
improved quality and durability. Extended Use Instruments have been introduced in the U.S. in October 2020 and in Europe in November 2020. They will
be introduced at various times throughout 2021 and 2022 in other geographies, depending on regulatory processes. In addition, simultaneous with the
regional launches of Extended Use Instruments, we will lower the price of certain instruments that are most commonly used in lower acuity procedures
and/or lower reimbursed procedures within the region. These actions will reduce the cost for customers to treat patients, which in turn will reduce our
revenue per procedure. Based on 2019 volume and mix of procedures, our Extended Use Program and the reduced pricing on certain other instruments
would have reduced 2019 annual instruments and accessories revenue by approximately $150 to $170 million. The impact of these actions on future
revenue will be dependent on the future volume and mix of procedures and whether cost elasticity will enable greater penetration into available markets.
Recurring Revenue
Recurring revenue consists of instruments and accessories revenue, service revenue, and operating lease revenue. Recurring revenue increased to $3.4
billion, or 77% of total revenue in 2020, compared to $3.2 billion, or 72% of total revenue in 2019, and $2.6 billion, or 71% of total revenue in 2018.
Instruments and accessories revenue has grown at a faster rate than systems revenue over time. Instruments and accessories revenue increased to $2.46
billion in 2020, compared to $2.41 billion in 2019 and $1.96 billion in 2018. The growth of instruments and accessories revenue largely reflects continued
procedure adoption.
Service revenue was $724 million in 2020, compared to $724 million in 2019 and $635 million in 2018. Service revenue remained unchanged, driven
by the growth of the base of installed da Vinci Surgical Systems, offset by the effects of the Customer Relief Program. The installed base of da Vinci
Surgical Systems grew 7% to approximately 5,989 at December 31, 2020; 12% to approximately 5,582 at December 31, 2019; and 13% to approximately
4,986 at December 31, 2018.
We use the installed base, number of shipments, and utilization of da Vinci Surgical Systems as metrics for financial and operational decision-making
and as a means to evaluate period-to-period comparisons. Management believes that the installed base, number of shipments, and utilization of da Vinci
Surgical Systems provide meaningful supplemental information regarding our performance, as management believes that the installed base, number of
shipments, and utilization of da Vinci Surgical Systems are an indicator of the rate of adoption of robotic-assisted surgery as well as an indicator of future
recurring revenue (particularly service revenue). Management believes that both it and investors benefit from referring to the installed base, number of
shipments, and utilization of da Vinci Surgical Systems in assessing our performance and when planning, forecasting, and analyzing future periods. The
installed base, number of shipments, and utilization of da Vinci Surgical Systems also facilitate management’s internal comparisons of our historical
performance. We believe that the installed base, number of shipments, and utilization of da Vinci Surgical Systems are useful to investors as metrics,
because (1) they allow for greater transparency with respect to key metrics used by management in its financial and operational decision-making, and (2)
they are used by institutional investors and the analyst community to help them analyze the performance of our business. The vast majority of da Vinci
Surgical Systems installed are connected via the internet. System logs can also be accessed by field engineers for systems that are not connected to the
internet. We utilize this information as well as other information from agreements and discussions with our customers that involve estimates and
judgments, which are, by their nature, subject to substantial uncertainties and assumptions. Estimates and judgments for determining the installed base,
number of shipments, and utilization of da Vinci Surgical Systems may be impacted over time by various factors, including system internet connectivity,
hospital and distributor reporting behavior, and inherent complexities in new agreements. Such estimates and judgments are also susceptible to technical
errors. In addition, the relationship between the installed base, number of shipments,
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and utilization of da Vinci Surgical Systems and our revenues may fluctuate from period to period, and growth in the installed base, number of shipments,
and utilization of da Vinci Surgical Systems may not correspond to an increase in revenue. The installed base, number of shipments, and utilization of da
Vinci Surgical Systems are not intended to be considered in isolation or as a substitute for, or superior to, revenue or other financial information prepared
and presented in accordance with GAAP.
The COVID-19 pandemic reduced the number of shipments of da Vinci Surgical Systems in 2020 as compared to the prior year. Based on the factors
outlined in the COVID-19 Pandemic section above, historical system shipment trends may not be a good indicator of future system shipments.
Intuitive 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 systems and expand their robotic-assisted programs while leveraging our balance sheet. These leases generally have
commercially competitive terms as compared with other third-party entities that offer equipment leasing. We have also entered into usage-based
arrangements with larger customers that have committed da Vinci programs where we charge for the system and service as the systems are utilized. We
include operating and sales-type leases, and systems placed under usage-based arrangements, in our system shipment and installed base disclosures. We
exclude operating lease-related revenue, usage-based revenue, and Ion system revenue from our da Vinci Surgical System average selling price (“ASP”)
computations.
In the years ended December 31, 2020, 2019, and 2018, we shipped 432, 425, and 272 da Vinci Surgical Systems, respectively, under lease and usage-
based arrangements, of which 317, 384, and 229 systems, respectively, were operating lease and usage-based arrangements. Revenue from operating lease
arrangements is generally recognized on a straight-line basis over the lease term. More recently, we have entered into usage-based arrangements with
certain large customers whereby system and service revenue is recognized as the systems are used. We set operating lease and usage-based pricing at a
modest premium relative to purchased systems reflecting the time value of money and, in the case of usage-based arrangements, the risk that system
utilization may fall short of anticipated levels. The proportion of revenue recognized from usage-based arrangements has not been significant and has been
included in our operating lease metrics herein. Operating lease revenue has grown at a faster rate than overall systems revenue and was $177 million, $107
million, and $51 million for the years ended December 31, 2020, 2019, and 2018, respectively. Generally, lease transactions generate similar gross margins
as our sale transactions. As of December 31, 2020, a total of 901 da Vinci Surgical Systems were installed at customers under operating lease or usage-
based arrangements.
Our system leasing and usage-based models provide customers with flexibility regarding how they acquire or obtain access to our systems. We believe
that these alternative financing structures have been effective and well-received, and we are willing to expand the proportion of these structures based on
customer demand. As revenue for operating leases and usage-based systems is recognized over time, total systems revenue growth is reduced in a period
when the number of operating lease and usage-based placements increases as a proportion of total system placements.
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. In addition, as customers divert
significant resources to the treatment of or the preparation to treat patients with COVID-19, we may be exposed to defaults under our lease financing
arrangements. Moreover, usage-based arrangements generally contain no minimum payments; therefore, customers may exit such arrangements without
paying a financial penalty to us. As a result of the COVID-19 pandemic, we anticipate that some customers will exit such arrangements or seek to amend
the terms of our operating lease and usage-based arrangements with them.
For some operating lease arrangements, our customers are provided with the right to purchase the leased system at certain points during and/or at the
end of the lease term. Revenue generated from customer purchases of systems under operating lease arrangements (“Lease Buyouts”) was $52.2 million,
$92.8 million, and $48.8 million for the years ended December 31, 2020, 2019, and 2018, 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.
Systems Revenue
System placements are driven by procedure growth in most markets. In geographies where da Vinci procedure adoption is in an early stage or system
placements are constrained by regulation, system sales will precede procedure growth. System placements also vary due to seasonality largely aligned with
hospital budgeting cycles. We typically place a higher proportion of annual system placements in the fourth quarter and a lower proportion in the first
quarter as customer budgets are reset. Systems revenue is also affected by the proportion of system placements under operating lease and usage-based
arrangements, recurring operating lease and usage-based revenue, operating lease buyouts, product mix, ASPs, trade-in activities, and customer mix.
Systems revenue declined 12% to $1.18 billion in 2020. Systems revenue grew 19% to $1.35 billion in 2019 and 21% to $1.13 billion in 2018. Based on
the factors outlined in the COVID-19 Pandemic section above, the ability to forecast
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future system shipments has been significantly disrupted and, therefore, we believe that historical system shipment trends may not be a good indicator of
future system shipments.
Procedure Mix / Products
Our da Vinci Surgical Systems are generally used for soft tissue surgery for areas of the body between the pelvis and the neck, primarily in general
surgery, gynecologic surgery, urologic surgery, cardiothoracic surgery, and head and neck surgery. Within these categories, procedures range in complexity
from cancer and other highly complex procedures to 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 across the spectrum of procedure
complexity. Our fully featured da Vinci Xi Surgical System with advanced instruments (including da Vinci Energy and EndoWrist and SureForm Stapler
products) and our Integrated Table Motion product targets the more complex procedure segment. Our da Vinci X Surgical System is targeted towards price
sensitive markets and procedures. Our da Vinci SP Surgical System complements the da Vinci Xi and X Surgical Systems by enabling surgeons to access
narrow workspaces.
Procedure Seasonality
More than half of da Vinci procedures performed are for benign conditions, most notably hernia repairs, hysterectomies, and cholecystectomies. These
benign procedures 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 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. As a result of the factors outlined in the COVID-19 Pandemic section above, including the
recommendations of authorities to defer elective procedures, historical procedure patterns may be disrupted.
Distribution Channels
We provide our products through direct sales organizations in the U.S., Europe (excluding Spain, Portugal, Italy, Greece, and most Eastern European
countries), China, Japan, South Korea, India, and Taiwan. In 2018, we began direct operations in India and Taiwan. In January 2019, our Intuitive-Fosun
joint venture began direct sales for da Vinci products and services in China. In the remainder of our OUS markets, we provide our products through
distributors.
Regulatory Activities
Overview
Our products must meet the requirements of a large and growing body of international standards that govern the product safety, efficacy, advertising,
labeling, safety reporting design, manufacture, materials content and sourcing, testing, certification, packaging, installation, use, and disposal of our
products. Examples of such standards include electrical safety standards, such as those of the International Electrotechnical Commission, and composition
standards, such as the Reduction of Hazardous Substances and the Waste Electrical and Electronic Equipment Directives. Failure to meet these standards
could limit our ability to market our products in those regions that require compliance to such standards.
Our products and operations are also subject to increasingly stringent medical device, privacy, and other regulations by regional, federal, state, and
local authorities. We anticipate that timelines for the introduction of new products and/or indications may be extended relative to past experience as a result
of these regulations. For example, we have seen elongated regulatory approval timelines in the U.S. and the EU.
Clearances and Approvals
We have generally obtained the clearances required to market our products associated with our da Vinci Surgical Multiport Systems (Standard, S, Si,
Xi, and X systems) for our targeted surgical specialties within the U.S., South Korea, Japan, and the European markets in which we operate. Since 2018, we
obtained regulatory clearances for the following products:
•
•
In November 2019, we obtained FDA clearance for our SynchroSeal instrument and E-100 generator. Following the FDA clearance, in February
2020, we received CE mark clearance for both products. In March 2020, we received regulatory clearance in Japan to market both our
SynchroSeal instrument and E-100 generator. In August 2020, we received regulatory clearance in South Korea to market our E-100 generator.
In July 2019, we obtained FDA clearance for our SureForm 45 Curved-Tip stapler and SureForm 45 Gray reload, which round out our SureForm
45 portfolio. We have also received CE mark clearance for our SureForm 45 Curved-Tip stapler and SureForm 45 Gray reload.
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•
•
•
•
•
•
•
•
In June 2019, we received CE mark clearance for our da Vinci Endoscope Plus for the da Vinci Xi and da Vinci X Surgical Systems in Europe.
Following the CE mark, in July 2019, we obtained FDA clearance for our da Vinci Endoscope Plus. We have also received regulatory clearances
in South Korea and Japan to market our da Vinci Endoscope Plus in December 2019 and May 2020, respectively.
In June 2019, we obtained FDA clearance for our da Vinci Handheld Camera and, in February 2020, we received CE mark clearance.
In February 2019, we obtained FDA clearance for our Ion endoluminal system, our new flexible, robotic-assisted, catheter-based platform,
designed to navigate through very small lung airways to reach peripheral nodules for biopsies. We are introducing the Ion endoluminal system in a
measured fashion while we optimize training pathways and our supply chain and collect additional clinical data. We have placed 36 Ion systems
for commercial use as of December 31, 2020.
In February 2019, we obtained FDA clearance for our Iris augmented reality product. Iris is a service that delivers a 3D image of the patient
anatomy (initially targeting kidneys) to aid surgeons in both pre- and intra-operative settings. We are currently conducting a pilot study of our Iris
product and service in the field at a small group of U.S. hospitals to gain initial product experience and insights.
In December 2018, we received product registration for our da Vinci Xi Surgical System in China. The registration approval does not include
advanced energy or stapling products that attach to the da Vinci Xi system. Separate product registrations are required for each of these products
by China National Medical Products Administration (“NMPA”).
In October 2018, the China National Health Commission published on its official website the quota for major medical equipment to be imported
and sold in China through 2020. After an adjustment notice was published in the third quarter of 2020, the government will now allow for the total
sale of 225 new surgical robots into China, which could include da Vinci Surgical Systems as well as surgical systems introduced by others. As of
December 31, 2020, we have sold 111 da Vinci Surgical Systems under this quota. Future sales of da Vinci Surgical Systems under the quota are
uncertain, as they are dependent on hospitals completing a tender process and receiving associated approvals.
In May 2018 and July 2018, we received CE mark clearance and FDA clearance, respectively, to market SureForm 60, our first 60mm stapler that
completes our product offering of 30, 45, and 60mm lengths. In January 2019 and February 2019, we obtained FDA clearance and CE mark
clearance, respectively, to market SureForm 45. We have also received regulatory clearance in South Korea and Japan to market both SureForm 60
and SureForm 45.
In May 2018, we obtained FDA clearance for the da Vinci SP Surgical System for urologic surgical procedures that are appropriate for a single
port approach. In March 2019, we obtained FDA clearance for the da Vinci SP Surgical System for certain transoral procedures. We also received
regulatory clearance for the da Vinci SP Surgical System in South Korea in May 2018. We continue to introduce the da Vinci SP Surgical System
in a measured fashion while we optimize training pathways and our supply chain. We have an installed base of 69 da Vinci SP Surgical Systems as
of December 31, 2020.
•
In September 2017 and April 2018, we obtained CE mark clearance and FDA clearance, respectively, for our da Vinci Vessel Sealer Extend.
Refer to the descriptions of our products that received regulatory clearances in 2020, 2019, and 2018 in the New Product Introductions section below.
The Japanese Ministry of Health, Labor, and Welfare (“MHLW”) considers reimbursement for procedures in April of even-numbered years. The
process for obtaining reimbursement requires Japanese university hospitals and surgical societies, with our support, to seek reimbursement. There are
multiple pathways to obtain reimbursement for procedures, including those that require in-country clinical data/economic data. In April 2012 and April
2016, the MHLW granted reimbursement status for dVP and partial nephrectomy, respectively. Most prostatectomies and partial nephrectomies were open
procedures prior to da Vinci reimbursement. Da Vinci procedure reimbursement for dVP and partial nephrectomy procedures are higher than open and
conventional laparoscopic procedure reimbursements. An additional 12 da Vinci procedures were granted reimbursement effective April 1, 2018, including
gastrectomy, low anterior resection, lobectomy, and hysterectomy, for both malignant and benign conditions. An additional 7 da Vinci procedures were
granted reimbursement effective April 1, 2020. These additional 19 reimbursed procedures have varying levels of conventional laparoscopic penetration
and will be reimbursed at rates equal to the conventional, laparoscopic procedures. Given the reimbursement level and laparoscopic penetration for these 19
procedures, there can be no assurance that the adoption pace for these procedures will be similar to dVP or partial nephrectomy, given their higher
reimbursement, or any other da Vinci procedure.
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
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actions are taken for specific reasons of safety or compliance. These field actions require stringent documentation, reporting, and monitoring worldwide.
There are other actions that 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 that 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.
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. Adoption of da Vinci procedures occurs procedure by procedure and 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.
We use the number and type of da Vinci procedures as metrics for financial and operational decision-making and as a means to evaluate period-to-
period comparisons. Management believes that the number and type of da Vinci procedures provide meaningful supplemental information regarding our
performance, as management believes procedure volume is an indicator of the rate of adoption of robotic-assisted surgery as well as an indicator of future
revenue (including revenue from usage-based arrangements). Management believes that both it and investors benefit from referring to the number and type
of da Vinci procedures in assessing our performance and when planning, forecasting, and analyzing future periods. The number and type of da Vinci
procedures also facilitate management’s internal comparisons of our historical performance. We believe that the number and type of da Vinci procedures
are useful to investors as metrics, because (1) they allow for greater transparency with respect to key metrics used by management in its financial and
operational decision-making, and (2) they are used by institutional investors and the analyst community to help them analyze the performance of our
business. The vast majority of da Vinci Surgical Systems installed are connected via the internet. System logs can also be accessed by field engineers for
systems that are not connected to the internet. We utilize certain methods that rely on information collected from the systems installed for determining the
number and type of da Vinci procedures performed that involve estimates and judgments, which are, by their nature, subject to substantial uncertainties and
assumptions. Estimates and judgments for determining the number and type of da Vinci procedures may be impacted over time by various factors,
including changes in treatment modalities, hospital and distributor reporting behavior, and system internet connectivity. Such estimates and judgments are
also susceptible to algorithmic or other technical errors. In addition, the relationship between the number and type of da Vinci procedures and our revenues
may fluctuate from period to period, and da Vinci procedure volume growth may not correspond to an increase in revenue. The number and type of da
Vinci procedures are not intended to be considered in isolation or as a substitute for, or superior to, revenue or other financial information prepared and
presented in accordance with GAAP. The COVID-19 pandemic reduced the number of da Vinci procedures performed by our customers in the first three
quarters of 2020 as compared to our expectations. Based on the factors outlined in the COVID-19 Pandemic section above, the ability to forecast future
procedures based on historical procedure patterns has been disrupted. Therefore, we believe that historical procedure trends may not be a good indicator of
future procedure volumes.
Worldwide Procedures
Our 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 robotic-assisted surgery using the da Vinci Surgical System has the potential to grow for those procedures that offer greater patient
value than non-da Vinci alternatives and competitive total economics for healthcare providers. Our da Vinci Surgical Systems are used primarily in general
surgery, gynecologic surgery, urologic surgery, cardiothoracic surgery, and head and neck surgery. We focus our organization and investments on
developing, marketing, and training products and services for procedures in which da Vinci can bring patient value relative to alternative treatment options
and/or economic
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benefit to healthcare providers. Target procedures in general surgery include hernia repair (both ventral and inguinal), colorectal procedures, bariatrics, and
cholecystectomies. Target procedures in gynecology include da Vinci hysterectomy (“dVH”) for both cancer and benign conditions. Target procedures in
urology include da Vinci prostatectomy (“dVP”) and da Vinci partial nephrectomy. In cardiothoracic surgery, target procedures include da Vinci lobectomy.
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. Surgeons
and their patients need to consult the product labeling in their specific country and for each product in order to determine the cleared uses, as well as
important limitations, restrictions, or contraindications.
In 2020, approximately 1,243,000 surgical procedures were performed with da Vinci Surgical Systems, compared to approximately 1,229,000 and
1,038,000 surgical procedures performed with da Vinci Surgical Systems in 2019 and 2018, respectively. The reduced growth in our overall procedure
volume in 2020 reflects significant disruption caused by the COVID-19 pandemic, as noted in the COVID-19 Pandemic section above, and was driven by
growth in U.S. general surgery procedures and worldwide urology procedures.
U.S. Procedures
Overall U.S. procedure volume with da Vinci Surgical Systems grew to approximately 876,000 in 2020, compared to approximately 883,000 in 2019
and approximately 753,000 in 2018. General surgery was our largest and fastest growing U.S. specialty in 2020 with procedure volume that grew to
approximately 434,000 in 2020, compared to approximately 421,000 in 2019 and approximately 325,000 in 2018. Gynecology was our second largest U.S.
surgical specialty in 2020 with procedure volume that declined to approximately 267,000 in 2020, compared to approximately 282,000 in 2019 and
approximately 265,000 in 2018. Urology was our third largest U.S. surgical specialty in 2020 with procedure volume that declined to approximately
134,000 in 2020, compared to approximately 138,000 in 2019 and approximately 128,000 in 2018.
Procedures Outside of the U.S.
Overall OUS procedure volume with da Vinci Surgical Systems grew to approximately 367,000 in 2020, compared to approximately 346,000 in 2019
and approximately 285,000 in 2018. Procedure growth in most OUS markets was driven largely by urology procedure volume, which grew to
approximately 214,000 in 2020, compared to approximately 206,000 in 2019 and approximately 175,000 in 2018. General surgery and thoracic procedures
also contributed to OUS procedure growth with higher growth rates than urology procedures.
Recent Business Events and Trends
Procedures
Overall. Total da Vinci procedures performed by our customers grew approximately 1% for the year ended December 31, 2020, compared to
approximately 18% for the year ended December 31, 2019. Total da Vinci procedures performed by our customers grew approximately 6% for the three
months ended December 31, 2020, compared to approximately 19% for the three months ended December 31, 2019. The full year and fourth quarter 2020
procedure results reflect significant disruption caused by the COVID-19 pandemic, as noted in the COVID-19 Pandemic section above. The COVID-19
pandemic continued to impact our procedures in geographies and markets where there was a resurgence of the virus. Delays in both the diagnosis of and
treatments of disease reflecting patient concerns over contracting COVID-19 has also impacted the number of procedures. This was most pronounced in
dVP procedures.
U.S. da Vinci procedures declined approximately 1% for the year ended December 31, 2020, as compared to the prior year. U.S. da Vinci procedures
grew approximately 17% for the year ended December 31, 2019. The 2020 U.S. procedure results reflect significant disruption caused by the COVID-19
pandemic, as noted in the COVID-19 Pandemic section above. The 2020 U.S. procedure decline was largely attributable to a decline in gynecology
procedures, most notably benign dVH procedures, and urology procedures, most notably dVP procedures. Offsetting these declines was continued growth
in general surgery procedures, most notably cholecystectomy and bariatric procedures.
U.S. da Vinci procedures grew approximately 5% for the three months ended December 31, 2020, compared to approximately 18% for the three
months ended December 31, 2019. The fourth quarter 2020 U.S. procedure results reflect significant disruption caused by the COVID-19 pandemic and
regional resurgences, as noted in the COVID-19 Pandemic section above. We saw varied performance in each of the procedure categories during the fourth
quarter of 2020, with growth in general surgery and gynecology procedures offset by declines in urology procedures. The resurgence increased as the
quarter progressed, and we saw a more severe impact on procedures later in the quarter. The resurgence continued into January, negatively impacting
procedure volumes.
OUS da Vinci procedures grew approximately 6% for the year ended December 31, 2020, compared to approximately 21% for the year ended
December 31, 2019. The 2020 OUS procedure growth reflects significant disruption caused by the COVID-19 pandemic, as noted in the COVID-19
Pandemic section above. 2020 OUS procedure growth was driven by
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continued growth in urologic procedures, including nephrectomies and prostatectomies, and earlier stage growth in general surgery (particularly colorectal),
thoracic, and gynecology procedures. We believe growth in these global markets is being driven by increased acceptance among surgeons and health
systems, supported by expanded global evidence validating the clinical and economic value of da Vinci procedures.
OUS da Vinci procedures grew approximately 11% for the three months ended December 31, 2020, compared to approximately 21% for the three
months ended December 31, 2019. The fourth quarter 2020 OUS procedure growth reflects significant procedure disruption caused by the COVID-19
pandemic, as noted in the COVID-19 Pandemic section above. The disruption was more pronounced in the UK, Italy, France, the Nordics, Spain, and India.
COVID-19 disruption was less pronounced in China, Japan, and South Korea, where we experienced procedure growth compared to the fourth quarter of
2019.
U.S. General Surgery. In 2020, general surgery procedures in the U.S. grew to approximately 434,000 in 2020, compared to approximately 421,000 in
2019 and approximately 325,000 in 2018. Cholecystectomy and bariatric procedures contributed to the most incremental procedures in 2020, while
inguinal and ventral hernia repairs contributed the most incremental procedures in 2019 and 2018.
Given the already very high level of laparoscopic techniques used in cholecystectomy, it is unclear whether growth is sustainable and to what extent da
Vinci cholecystectomy may be adopted. Bariatric procedures grew significantly year over year. These procedures have been an increased area of focus in
2020 and may also have benefited from certain patients prioritizing weight loss as obesity is a significant COVID-19 risk factor. In addition, our SureForm
60mm stapler product provides surgeons a more optimized robotic tool set for bariatric procedures. However, the diagnoses and treatment pathways for
bariatric patients are long, and many of the patients may have begun their treatment pathway prior to the spread of COVID-19; therefore, we cannot
provide any assurance that we will continue to see significant growth in bariatric procedures in future periods.
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 surgical complexity associated with treatment of various 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 EndoWrist Staplers and energy devices and Integrated Table Motion.
U.S. Gynecology. In 2020, gynecology procedures in the U.S. declined modestly compared to 2019. Procedure volume was approximately 267,000 in
2020, compared to approximately 282,000 in 2019 and approximately 265,000 in 2018, driven by a decline in benign hysterectomy procedures partially
offset, to a much lesser extent, by growth in hysterectomy for cancer. Combining robotic, laparoscopic, and vaginal approaches, MIS represents about 80%
of the U.S. hysterectomy market for benign conditions. We believe that our growth in gynecologic procedures over the past several years has primarily
been driven by consolidation of gynecologic procedures into higher volume surgeons that focus on cancer and complex surgeries. However, due to the
COVID-19 pandemic, we saw an increase in the deferral of non-urgent procedures, such as benign hysterectomy procedures.
Global Urology. Along with U.S. general surgery, global urology procedures have also been a strong contributor to our overall procedure growth. In
the U.S., dVP is the standard of care for the surgical treatment of prostate cancer, and we believe growth is largely aligned with surgical volumes of
prostate cancer. In 2020, U.S. dVP procedures declined modestly, compared to modest growth in 2019. For OUS, dVP is at varying states of adoption in
different areas of the world but is the largest overall da Vinci procedure. In 2020, we saw slight growth in OUS dVP procedures compared to mid-teens
growth in 2019.
Kidney cancer procedures have also been a strong contributor to our recent global urology procedure growth. Clinical publications have demonstrated
that the use of a da Vinci system increases the likelihood that a patient will receive nephron sparing surgery through a partial nephrectomy, which is
typically the surgical society guideline recommended therapy.
OUS Procedures. The 2020 OUS procedure growth rate reflects continued da Vinci adoption in European and Asian markets, although it also reflects
significant disruption caused by the COVID-19 pandemic, as noted in the COVID-19 Pandemic section above. The disruption was most pronounced in the
UK, Italy, and France.
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System Demand
Future demand for da Vinci Surgical Systems will be impacted by a number of factors: economic and geopolitical factors; the impact of the current
COVID-19 pandemic, as noted in the COVID-19 Pandemic section above; hospital response to the evolving healthcare environment; 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 da Vinci Xi Surgical System, da Vinci X Surgical System, and da Vinci SP Surgical System, and
related instruments; and market response. Market acceptance of our recently launched da Vinci SP Surgical System and the nature and timing of additional
da Vinci SP regulatory indications may also impact future system placements.
Demand may also be impacted by robotic-assisted surgery competition, including from companies that have introduced products in the field of robotic-
assisted surgery or have made explicit statements about their efforts to enter the field including, but not limited to, the following companies: avateramedical
GmbH; CMR Surgical Ltd.; Johnson & Johnson (including their wholly owned subsidiaries Auris Health, Inc. and Verb Surgical Inc.); Medicaroid, Inc.;
Medrobotics Corporation; Medtronic plc; meerecompany Inc.; MicroPort Scientific Corporation; Olympus Corporation; Samsung Group; Shandong
Weigao Group Medical Polymer Company Ltd.; Smart Robot Technology Group Co. Ltd.; Titan Medical Inc.; and TransEnterix, Inc.
Many of the above factors will also impact future demand for our Ion system, as we extend our commercial offering into diagnostics, along with
additional factors associated with a new product introduction, including, but not limited to, our ability to optimize manufacturing and our supply chain,
competition, clinical data to demonstrate value, and market acceptance.
New Product Introductions
SynchroSeal and E-100 Generator. In November 2019, we obtained FDA clearance for our SynchroSeal instrument and E-100 generator. Following
the FDA clearance, in February 2020, we received CE mark clearance for both products. In March 2020, we received regulatory clearance in Japan to
market both our SynchroSeal instrument and E-100 generator. In August 2020, we received regulatory clearance in South Korea to market our E-100
generator. SynchroSeal is a single-use, bipolar, electrosurgical instrument intended for grasping, dissection, sealing, and transection of tissue. With its
wristed articulation, rapid sealing cycle, and refined curved jaw, SynchroSeal offers enhanced versatility to the da Vinci Energy portfolio. The E-100
generator is an electrosurgical generator developed to power two key instruments–Vessel Sealer Extend and SynchroSeal–on the da Vinci X and da Vinci
Xi Surgical Systems. The generator delivers high frequency energy for cutting, coagulation, and vessel sealing of tissues.
SureForm 45 Curved-Tip and Gray Reload. In July 2019, we obtained FDA clearance for the SureForm 45 Curved-Tip stapler and SureForm 45 Gray
reload. We have also received CE mark clearance for our SureForm 45 Curved-Tip stapler and SureForm 45 Gray reload. SureForm 45 Curved-Tip is a
single-use, fully wristed stapling instrument with a curved tip intended for resection, transection, and/or creation of anastomoses. SureForm 45 Gray reload
is a new, single-use cartridge that contains multiple staggered rows of implantable staples and a stainless steel knife. The SureForm 45 Curved-Tip stapler
and Gray reload have particular utility in thoracic procedures and round out our SureForm 45 portfolio. Not all reloads or staplers are available for use on
all systems or in all countries.
Da Vinci Endoscope Plus. In June 2019, we received CE mark clearance for our da Vinci Endoscope Plus, an enhanced 3D endoscope for use with our
da Vinci X and Xi Surgical Systems. Following the CE mark, in July 2019, we obtained FDA clearance for our da Vinci Endoscope Plus. We have also
received regulatory clearances in South Korea and Japan to market our da Vinci Endoscope Plus in December 2019 and May 2020, respectively. The da
Vinci Endoscope Plus leverages new sensor technology to allow for increased sharpness and color accuracy.
Da Vinci Handheld Camera. In June 2019, we obtained FDA clearance for our da Vinci Handheld Camera, a lightweight, 2D camera head, which can
be connected to third-party laparoscopes. This allows the laparoscopic image to be displayed on the da Vinci X/Xi vision cart to address aspects of da Vinci
procedures that may require use of a laparoscope, thus eliminating the need for redundant equipment in the operating room and increasing procedure
efficiency. In February 2020, we received CE mark clearance for our da Vinci Handheld Camera. We broadly launched the da Vinci Handheld Camera in
our European direct markets as well as in the U.S. in May 2020 and June 2020, respectively.
Ion endoluminal system. In February 2019, we obtained FDA clearance for the Ion endoluminal system, our new flexible, robotic-assisted, catheter-
based platform designed to navigate through very small lung airways to reach peripheral nodules for biopsies. The Ion system uses an ultra-thin articulating
robotic catheter that can articulate 180 degrees in all directions. The outer diameter of the catheter is 3.5mm, which allows physicians to navigate through
small and tortuous airways to reach nodules in most airway segments within the lung. The Ion system’s flexible biopsy needle can also pass through very
tight bends via Ion’s catheter to collect tissue in the peripheral lung. The catheter’s 2mm working channel can also accommodate other biopsy tools, such as
biopsy forceps or cytology brushes, if necessary. We are introducing Ion in a measured fashion
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while we optimize training pathways and our supply chain and collect additional clinical data. We have placed 36 Ion systems for commercial use as of
December 31, 2020.
Iris. In February 2019, we obtained FDA clearance for our Iris augmented reality product. Iris is a service that delivers a 3D image of the patient
anatomy (initially targeting kidneys) to aid surgeons in both the pre- and intra-operative settings. We are now in the early stages of an Iris pilot study in the
field at a small group of U.S. hospitals to gain initial product experience and insights.
SureForm 60 and SureForm 45 Staplers. In May 2018 and July 2018, we received CE mark clearance and FDA clearance, respectively, for the
SureForm 60 instrument with White, Blue, Green, and Black 60mm reloads. In January 2019 and February 2019, we obtained FDA clearance and CE mark
clearance, respectively, for the SureForm 45 instrument with White, Blue, Green, and Black 45mm reloads. Additionally, we received regulatory clearance
in South Korea for the SureForm 60 instrument and 60mm reloads in June 2018 and July 2018, respectively, and for the SureForm 45 instrument and
45mm reloads in June 2019 and September 2019, respectively. Also, we received regulatory clearance in Japan for the SureForm 60 instrument and 60mm
reloads in June 2018 and November 2018, respectively, and for the SureForm 45 instrument and 45mm reloads in September 2019. The SureForm 60 and
SureForm 45 Staplers are single-use, fully wristed stapling instruments intended for resection, transection, and/or creation of anastomoses. The SureForm
60 instrument has particular utility in bariatric procedures, while the SureForm 45 instrument has particular utility in colorectal procedures. SureForm 60
and SureForm 45 Staplers broaden our existing stapler product line, which also includes EndoWrist Stapler 45 with White, Blue, and Green 45mm reloads
and EndoWrist Stapler 30 with Gray, White, Blue, and Green 30mm reloads. Not all reloads or staplers are available for use on all systems or in all
countries.
Da Vinci SP Surgical System. In May 2018, we obtained FDA clearance for the da Vinci SP Surgical System for urologic surgical procedures that are
appropriate for a single port approach. In March 2019, we obtained FDA clearance for the da Vinci SP Surgical System for certain transoral procedures.
The da Vinci SP Surgical System includes three, multi-jointed, wristed instruments and the first da Vinci fully wristed, 3DHD camera. The instruments and
the camera all emerge through a single cannula and are triangulated around the target anatomy to avoid external instrument collisions that can occur in
narrow surgical workspaces. The system enables flexible port placement and broad internal and external range of motion (e.g., 360 degrees of anatomical
access) through the single SP arm. Surgeons control the fully articulating instruments and the camera on the da Vinci SP system, which uses the same
fourth generation surgeon console as the da Vinci X and Xi systems. The da Vinci SP Surgical System provides surgeons with robotic-assisted technology
designed for deep and narrow access to tissue in the body. We anticipate pursuing further regulatory clearances for the da Vinci SP Surgical System,
including colorectal applications, broadening the applicability of the SP platform over time. We continue to introduce the da Vinci SP Surgical System in a
measured fashion while we optimize training pathways and our supply chain. We have an installed base of 69 da Vinci SP Surgical Systems as of
December 31, 2020.
Da Vinci Vessel Sealer Extend. In September 2017 and April 2018, we received CE mark clearance and FDA clearance, respectively, for da Vinci Vessel
Sealer Extend, our newest instrument in the Vessel Sealing family of products. Da Vinci Vessel Sealer Extend is a single-use, fully wristed bipolar
electrosurgical instrument compatible with our fourth generation multiport systems. It is intended for grasping and blunt dissection of tissue and for bipolar
coagulation and mechanical transection of vessels up to 7mm in diameter and tissue bundles that fit in the jaws of the instrument.
Acquisition of Orpheus Medical
In February 2020, we acquired Orpheus Medical Ltd. and its wholly owned subsidiaries to deepen and expand our integrated informatics platform.
Orpheus Medical provides hospitals with information technology connectivity, as well as expertise in processing and archiving surgical videos. Orpheus
Medical is a wholly owned subsidiary of Intuitive.
Intuitive Ventures
We launched Intuitive Ventures, an inaugural $100 million fund focused on investment opportunities in companies that share Intuitive's commitment to
advancing positive outcomes in healthcare.
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2020 Operational and Financial Highlights
•
Total revenue decreased by 3% to $4.4 billion for the year ended December 31, 2020, compared to $4.5 billion for the year ended December 31,
2019.
• Approximately 1,243,000 da Vinci procedures were performed during the year ended December 31, 2020, an increase of 1% compared to
approximately 1,229,000 da Vinci procedures for the year ended December 31, 2019.
•
•
Instruments and accessories revenue increased by 2% to $2.46 billion for the year ended December 31, 2020, compared to $2.41 billion for the
year ended December 31, 2019.
Systems revenue decreased by 12% to $1.18 billion for the year ended December 31, 2020, compared to $1.35 billion for the year ended
December 31, 2019.
• A total of 936 da Vinci Surgical Systems were shipped during the year ended December 31, 2020, a decrease of 16% compared to 1,119 systems
during the year ended December 31, 2019.
• As of December 31, 2020, we had a da Vinci Surgical System installed base of approximately 5,989 systems, an increase of 7% compared to the
installed base of approximately 5,582 systems as of December 31, 2019.
• Utilization of da Vinci Surgical Systems, measured in terms of procedures per system per year, declined 2% relative to 2019.
• During the year ended December 31, 2020, we placed 26 Ion systems for commercial use, compared to 10 Ion systems during the year ended
December 31, 2019.
• Gross profit as a percentage of revenue was 65.6% for the year ended December 31, 2020, compared to 69.4% for the year ended December 31,
2019.
• Operating income decreased by 24% to $1.05 billion for the year ended December 31, 2020, compared to $1.37 billion for the year ended
December 31, 2019. Operating income included $399 million and $338 million of share-based compensation expense related to employee stock
plans and $60.9 million and $67.2 million of intangible asset-related charges for the years ended December 31, 2020, and 2019, respectively.
• As of December 31, 2020, we had $6.87 billion in cash, cash equivalents, and investments. Cash, cash equivalents, and investments increased by
$1.02 billion, compared to $5.85 billion in December 31, 2019, primarily as a result of cash generated from operating activities, partially offset by
capital expenditures.
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Results of Operations
This section of the Form 10-K generally discusses 2020 and 2019 items and year-to-year comparisons between 2020 and 2019. Discussions of 2018
items and year-to-year comparisons between 2019 and 2018 that are not included in this Form 10-K can be found in "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 2019.
The following table sets forth, for the years indicated, certain Consolidated Statements of Income information (in millions, except percentages):
2020
% of
total
revenue
Years Ended December 31,
% of
total
revenue
2019
2018
% of
total
revenue
3,634.6
723.8
4,358.4
1,230.3
266.9
1,497.2
2,404.3
456.9
2,861.2
1,216.3
595.1
1,811.4
1,049.8
157.2
1,207.0
140.2
1,066.8
6.2
1,060.6
83 % $
17 %
100 %
28 %
6 %
34 %
55 %
11 %
66 %
28 %
14 %
42 %
24 %
4 %
28 %
3 %
24 %
— %
24 % $
3,754.3
724.2
4,478.5
1,119.1
249.2
1,368.3
2,635.2
475.0
3,110.2
1,178.4
557.3
1,735.7
1,374.5
127.7
1,502.2
120.4
1,381.8
2.5
1,379.3
84 % $
16 %
100 %
25 %
6 %
31 %
59 %
10 %
69 %
26 %
12 %
38 %
31 %
3 %
34 %
3 %
31 %
— %
31 % $
3,089.1
635.1
3,724.2
906.2
213.9
1,120.1
2,182.9
421.2
2,604.1
986.6
418.1
1,404.7
1,199.4
80.1
1,279.5
154.5
1,125.0
(2.9)
1,127.9
83 %
17 %
100 %
24 %
6 %
30 %
59 %
11 %
70 %
27 %
11 %
38 %
32 %
2 %
34 %
4 %
30 %
— %
30 %
$
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
Less: net income (loss) attributable to
noncontrolling interest in joint venture
Net income attributable to Intuitive Surgical, Inc. $
Total Revenue
Total revenue decreased by 3% to $4.4 billion for the year ended December 31, 2020, compared to $4.5 billion for the year ended December 31, 2019.
Total revenue for the year ended December 31, 2019, increased by 20% compared to $3.7 billion for the year ended December 31, 2018. The decrease in
total revenue for the year ended December 31, 2020, resulted from 12% lower systems revenue, driven by 16% fewer system placements partially offset by
a 65% increase in operating lease revenue, and 2% higher instruments and accessories revenue, driven by approximately 1% higher procedure volume.
Service revenue was consistent year over year, driven by a larger installed base of da Vinci Surgical Systems producing service revenue, offset by an
$80 million decrease as a result of the service fee credits provided to customers as part of our Customer Relief Program.
Revenue denominated in foreign currencies as a percentage of total revenue was approximately 23%, 20%, and 20% for the years ended December 31,
2020, 2019, and 2018, respectively. We generally sell our products and services in local currencies where we have direct distribution channels. Foreign
currency rate fluctuations did not have a material impact on total revenue for the year ended December 31, 2020, as compared to 2019, or for the year
ended December 31, 2019, as compared to 2018.
Revenue generated in the U.S. accounted for 68%, 70%, and 71% of total revenue for the years ended December 31, 2020, 2019, and 2018,
respectively. We believe that U.S. revenue has accounted for the large majority of total revenue due to U.S. patients’ ability to choose their provider and
method of treatment, reimbursement structures supportive of innovation and MIS,
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and our initial investments focused on U.S. infrastructure. We have been investing in our business in the OUS markets, 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. However, the current increase in OUS revenue as a percentage of total revenue is a result of the COVID-19 pandemic and is reflective that U.S.
procedures and revenue were more impacted than OUS procedures and revenue.
As the COVID-19 pandemic is expected to continue to cause strain on hospital resources, as outlined in the COVID-19 Pandemic section above,
including recommended deferrals of elective procedures by various authorities and policy makers, we cannot reliably estimate the extent procedures and
system placements will be impacted in the first quarter of 2021 and beyond.
The following table summarizes our revenue and system unit shipments for the years ended December 31, 2020, 2019, and 2018, respectively (in
millions, except percentages and unit shipments):
Revenue
Instruments and accessories
Systems
Total product revenue
Services
Total revenue
U.S.
OUS
Total revenue
% of Revenue - U.S.
% of Revenue - OUS
Instruments and accessories
Services
Operating lease revenue
Total recurring revenue
% of Total revenue
Da Vinci Surgical System Shipments by Region:
U.S. unit shipments
OUS unit shipments
Total unit shipments*
*Systems shipped under operating leases (included in total unit shipments)
Ion System Shipments
Da Vinci Surgical System Shipments involving System Trade-ins:
Unit shipments involving trade-ins
Unit shipments not involving trade-ins
2020
Years Ended December 31,
2019
2018
$
$
$
$
$
$
2,455.7
1,178.9
3,634.6
723.8
4,358.4
2,962.7
1,395.7
4,358.4
68 %
32 %
2,455.7
723.8
176.7
3,356.2
$
$
$
$
$
$
2,408.2
1,346.1
3,754.3
724.2
4,478.5
3,129.5
1,349.0
4,478.5
70 %
30 %
2,408.2
724.2
106.9
3,239.3
$
$
$
$
$
$
1,962.0
1,127.1
3,089.1
635.1
3,724.2
2,633.5
1,090.7
3,724.2
71 %
29 %
1,962.0
635.1
51.4
2,648.5
77 %
72 %
71 %
600
336
936
317
26
447
489
728
391
1,119
384
10
442
677
581
345
926
229
—
277
649
Product Revenue
Product revenue decreased by 3% to $3.6 billion for the year ended December 31, 2020, compared to $3.8 billion for the year ended December 31,
2019. Product revenue for the year ended December 31, 2019, increased by 22% compared to $3.1 billion for the year ended December 31, 2018.
Instruments and accessories revenue increased by 2% to $2.46 billion for the year ended December 31, 2020, compared to $2.41 billion for the year
ended December 31, 2019. The increase in instruments and accessories revenue was driven primarily by procedure growth of 1%, stocking orders in Q4
associated with the Company's launch of Extended Use Instruments, and
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incremental sales of our advanced instruments. The 2020 U.S. procedure volumes declined by approximately 1%, primarily as a result of the significant
disruption caused by the COVID-19 pandemic, as noted in the COVID-19 Pandemic section above, compared to 2019 U.S. procedure growth of 17%. The
2020 OUS procedure volumes grew by approximately 6%, compared to 2019 OUS procedure growth of 21%, also driven by the significant disruption
caused by the COVID-19 pandemic, as noted in the COVID-19 Pandemic section above. Geographically, the 2020 OUS procedure growth was driven by
China, Japan, Korea, and Germany with varying results in other countries.
Systems revenue decreased by 12% to $1.18 billion for the year ended December 31, 2020, compared to $1.35 billion for the year ended December 31,
2019. The lower 2020 systems revenue was primarily driven by fewer system shipments, lower 2020 ASPs, and lower lease buyouts, partially offset by
higher operating lease revenue.
During 2020, a total of 936 da Vinci Surgical Systems were shipped compared to 1,119 systems during 2019. By geography, 600 systems were shipped
into the U.S., 136 into Europe, 157 into Asia, and 43 into other markets during 2020, compared to 728 systems shipped into the U.S., 169 into Europe, 182
into Asia, and 40 into other markets during 2019. During 2020, 317 of the 936 systems were shipped under operating lease arrangements, compared to 384
of the 1,119 systems shipped during 2019. The decrease in system shipments was primarily driven by decisions by customers to defer purchases or leases
of systems into future quarters and, in some cases, indefinitely, as a result of the COVID-19 pandemic, as well as the decline in procedures, which lead to
excess capacity at certain hospitals.
We shipped 432 and 425 da Vinci Surgical Systems under lease or usage-based arrangements, of which 317 and 384 systems were classified as
operating leases for the years ended December 31, 2020, and 2019, respectively. Operating lease revenue was $177 million for the year ended December
31, 2020, compared to $107 million for the year ended December 31, 2019. Systems placed as operating leases represented 34% of total shipments during
2020, compared to 34% during 2019. A total of 901 da Vinci Surgical Systems were installed at customers under operating lease or usage-based
arrangements as of December 31, 2020, compared to 658 as of December 31, 2019. Revenue from Lease Buyouts was $52 million for the year ended
December 31, 2020, compared to $93 million for the year ended December 31, 2019. We expect revenue from Lease Buyouts to fluctuate period to period
based on the timing of when, and if, customers choose to exercise the buyout options embedded in their leases.
The da Vinci Surgical System ASP, excluding the impact of systems shipped under operating lease or usage-based arrangements and Ion systems, was
approximately $1.50 million for the year ended December 31, 2020, compared to approximately $1.52 million for the year ended December 31, 2019. The
lower 2020 ASP was largely driven by higher relative trade-in volume, partially offset by favorable geographic and product mix. ASP fluctuates from
period to period based on geographic and product mix, product pricing, systems shipped involving trade-ins, and changes in foreign exchange rates.
Service Revenue
Service revenue remained unchanged at $724 million for the year ended December 31, 2020, compared to $724 million for the year ended
December 31, 2019. Service revenue for the year ended December 31, 2019, increased by 14% compared to $635 million for the year ended December 31,
2018. Service revenue in 2020 was primarily driven by a larger installed base of da Vinci Surgical Systems producing service revenue, offset by an
$80 million decrease as a result of the service fee credits provided to customers as part of our Customer Relief Program.
Gross Profit
Product gross profit for the year ended December 31, 2020, decreased by 9% to $2.4 billion, representing 66.2% of product revenue, compared to $2.6
billion, representing 70.2% of product revenue, for the year ended December 31, 2019. The lower 2020 product gross profit was primarily driven by lower
product revenue and lower product gross profit margin. The lower product gross profit margin for the year ended December 31, 2020, was primarily driven
by higher excess and obsolete inventory costs related to transitioning to new technologies coupled with the decrease in demand for older technologies,
period costs associated with abnormally low production, and higher freight costs. These higher charges were primarily a result of the COVID-19 pandemic.
There were also increased costs associated with da Vinci Si product transitions and higher intangible assets amortization expense and share-based
compensation expense.
Product gross profit for the years ended December 31, 2020 and 2019, included share-based compensation expense of $58.9 million and $46.6 million,
respectively, and intangible assets amortization expense of $35.5 million and $31.5 million, respectively.
Service gross profit for the year ended December 31, 2020, decreased by 4% to $457 million, representing 63.1% of service revenue, compared to
$475 million, representing 65.6% of service revenue, for the year ended December 31, 2019. The lower 2020 service gross profit was driven by lower
service revenue and lower service gross profit margin. The lower service gross profit margin for the year ended December 31, 2020, was primarily driven
by the $80 million decrease in service revenue as a result of our Customer Relief Program.
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Service gross profit for the years ended December 31, 2020 and 2019, included share-based compensation expense of $24.0 million and $20.4 million,
respectively, and intangible assets amortization expense of $3.7 million and $3.7 million, respectively.
As a result of the continued impacts from the COVID-19 pandemic, our production facilities may run at less than normal capacity in the first quarter of
2021. Accordingly, certain fixed production overhead costs may be expensed as incurred, reducing our gross profit margin. We cannot reliably estimate the
extent to which the COVID-19 pandemic will impact our overall demand in the first quarter and beyond.
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, 2020, increased by 3% to $1.22 billion, compared to $1.18 billion for the
year ended December 31, 2019. The increase in selling, general and administrative expenses for the year ended December 31, 2020, were primarily driven
by higher headcount, resulting in increased share-based compensation expense, and increased infrastructure to support our growth, partially offset by lower
marketing, travel, and training expenses as well as lower variable compensation. Also, in the fourth quarters of 2020 and 2019, we made charitable
contributions of $25 million and $5 million, respectively, to the Intuitive Foundation, a not-for-profit entity whose mission is to reduce the global burden of
disease and suffering through research, education, and philanthropy aimed at better outcomes for patients around the globe.
Selling, general and administrative expenses for the years ended December 31, 2020, and 2019, included share-based compensation expense of $202
million and $170 million, respectively, and intangible assets amortization expense of $6.9 million and $5.7 million, respectively.
Our spending in 2020 reflected a curtailment of certain costs as a result of the COVID-19 pandemic, including travel, marketing events, surgeon
training, clinical trials, and other related expenses. We expect that these costs will increase to the extent that the impact of COVID-19 decreases and decline
to the extent that the impact of COVID-19 increases. However, we will continue to support our customers, invest in innovation focused on the quadruple
aim, and invest in manufacturing and our supply chain to ensure supply for our customers. We will continue to manage the hiring of volume-related roles,
such as sales representatives and manufacturing employees, to meet the needs of the business.
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, 2020, increased by 7% to $595 million, compared to $557 million for the year
ended December 31, 2019. The increase was primarily due to higher personnel-related expenses and other project costs incurred to support a broader set of
product development initiatives, including Ion and SP platform investments, informatics, advanced instrumentation, advanced imaging, and future
generations of robotics, partially offset by lower intangible asset-related charges.
Research and development expenses for the years ended December 31, 2020, and 2019, included share-based compensation expense of $114 million
and $101 million, respectively, and intangible asset charges of $15.8 million and $26.3 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.
Interest and Other Income, Net
Interest and other income, net, was $157.2 million for the year ended December 31, 2020, compared to $127.7 million for the year ended December
31, 2019, and $80.1 million for the year ended December 31, 2018. The increase in interest and other income, net, for the year ended December 31, 2020,
was primarily driven by unrealized gains on strategic investments and realized gains on the sale of certain securities, partially offset by lower interest
income earned, despite higher cash and investment balances, due to the decline in average interest rates, and realized foreign exchange losses.
The Company held an equity investment in preferred shares of InTouch Technologies, Inc. ("InTouch"), which was reflected in the Company's
financial statements on a cost basis. On July 1, 2020, Teladoc Health, Inc. ("Teladoc"), a publicly traded company, completed its acquisition of InTouch.
Based on the terms of the agreement, the Company has received Teladoc shares on the date of closing and recognized a gain on its investment of
approximately $45 million. The Company was
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restricted from selling these shares for a period of six months. In January 2021, the Company sold all of its shares in Teladoc. Additionally, the Company
recorded unrealized gains on other strategic investments of approximately $22 million.
Income Tax Expense
Our income tax expense was $140 million, $120 million, and $155 million for the years ended December 31, 2020, 2019, and 2018, respectively. Our
effective tax rate for 2020 was approximately 11.6% compared to 8.0% for 2019 and 12.1% for 2018. Our effective tax rate for 2020, 2019, and 2018
differs from the U.S. federal statutory rate of 21% primarily due to the excess tax benefits recognized for employee share-based compensation, the effect of
income earned by certain overseas entities being taxed at rates lower than the federal statutory rate, and the federal research and development credit benefit,
partially offset by U.S. tax on foreign earnings and state income taxes (net of federal benefit). In addition, our 2020 tax rate reflected a $39.3 million
increase in income tax expense discussed below, and our 2019 tax rate reflected a $51.3 million benefit associated with re-measurement of our Swiss
deferred tax assets due to a Swiss statutory tax rate increase enacted as part of Swiss tax reform in August 2019.
Our 2020, 2019, and 2018 provisions for income taxes included excess tax benefits associated with employee equity plans of $166 million, $147
million, and $116 million, respectively, which reduced our effective tax rate by 13.8, 9.8, and 9.1 percentage points, respectively. 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 awards settled or vested, and the
value assigned to employee equity awards under U.S. GAAP, which results in increased income tax expense volatility.
We intend to repatriate earnings from our Swiss subsidiary and our joint venture in Hong Kong, as needed, and the U.S. and foreign tax implications of
such repatriations are not expected to be significant. We will continue to indefinitely reinvest earnings from the rest of our foreign subsidiaries, which are
not significant.
In July 2015, a U.S. Tax Court opinion (the “2015 Opinion”) was issued involving an independent third party related to charging foreign subsidiaries
for share-based compensation. Based on the findings of the U.S. Tax Court, direct share-based compensation had been excluded from our intercompany
charges starting in 2015. In June 2019, the Ninth Circuit Court of Appeals (the "Ninth Circuit") reversed the 2015 Opinion (the “Ninth Circuit Opinion”).
Subsequently, a re-hearing of the case was requested, but was denied in November 2019. In February 2020, a petition was filed to appeal the Ninth Circuit
Opinion to the U.S. Supreme Court. The petition was denied by the U.S. Supreme Court on June 22, 2020, which makes the Ninth Circuit Opinion binding
precedent in the Ninth Circuit. As a result, we recorded an increase in the income tax provision of $39.3 million during the year ended December 31, 2020.
We will continue to monitor future IRS actions or other developments regarding this matter and will assess the impact of any such developments to our
income tax provision in the quarter that they occur. We are treating share-based compensation expense in accordance with the Ninth Circuit Opinion for
2020 and future periods.
We file federal, state, and foreign income tax returns in many jurisdictions in the U.S. and abroad. Years prior to 2016 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.
Net Income (Loss) Attributable to Noncontrolling Interest in Joint Venture
The Company’s majority-owned joint venture (the “Joint Venture”) with Shanghai Fosun Pharmaceutical (Group) Co., Ltd. (“Fosun Pharma”), a
subsidiary of Fosun International Limited, was established to research, develop, manufacture, and sell robotic-assisted, catheter-based medical devices. The
Joint Venture is owned 60% by us and 40% by Fosun Pharma and is located in China. The catheter-based technology will initially target early diagnosis
and cost-effective treatment of lung cancer, one of the most commonly diagnosed forms of cancer in the world. Distribution of catheter-based medical
devices in China will be conducted by the joint venture, while distribution outside of China will be conducted by us.
In January 2019, the Joint Venture acquired certain assets, including distribution rights, customer relationships, and certain personnel, from Chindex
and its affiliates, a subsidiary of Fosun Pharma, and began direct operations for da Vinci products and services in China. As of December 31, 2020, the
companies have contributed $55 million of up to $100 million required by the joint venture agreement.
We do not expect the Joint Venture to generate revenue in 2021 related to the sale of robotic-assisted, catheter-based medical devices. There can be no
assurance that we and the Joint Venture will successfully commercialize such products. There can also be no assurance that the Joint Venture will not
require additional contributions to fund its business, that the Joint
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Venture will continue to be profitable, or that the acquired Chindex assets will be successfully integrated and the expected benefits will be realized.
Net income (loss) attributable to noncontrolling interest in Joint Venture for the year ended December 31, 2020, was $6.2 million, compared to
$2.5 million for the year ended December 31, 2019, and $(2.9) million for the year ended December 31, 2018. The increase in net income attributable to
noncontrolling interest in Joint Venture for the year ended December 31, 2020, was primarily due to the increase in sales in China, partially offset by re-
measurement losses related to the contingent consideration from the acquisition.
Liquidity and Capital Resources
Sources and Uses of Cash
Our principal source of liquidity is cash provided by operations and by the issuance of common stock through the exercise of stock options and our
employee stock purchase program. Cash and cash equivalents plus short- and long-term investments increased by $1.02 billion to $6.87 billion as of
December 31, 2020, from $5.85 billion as of December 31, 2019, primarily from cash provided by our operations and proceeds from stock option exercises
and employee stock purchases, partially offset by capital expenditures, taxes paid related to net share settlements of equity awards, and share repurchases.
Cash and cash equivalents plus short- and long-term investments increased by $1.02 billion to $5.85 billion as of December 31, 2019, from $4.83 billion as
of December 31, 2018, primarily from cash provided by our operations, partially offset by capital expenditures and share repurchases.
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 by our 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 for the foreseeable future. However, as a result of the COVID-19 pandemic, we expect to experience reduced cash flow from
operations as a result of decreased revenues and extending payment terms on sales and operating lease and usage-based arrangements.
As of December 31, 2020, $556 million of our cash, cash equivalents, and investments was held by foreign subsidiaries. We intend to repatriate
earnings from our Swiss subsidiary and joint venture in Hong Kong, as needed, since the U.S. and foreign tax implications of such repatriations are not
expected to be significant. We will continue to indefinitely reinvest earnings from the rest of our foreign subsidiaries, which are not significant.
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
The following table summarizes our cash flows for the years ended December 31, 2020, 2019, and 2018:
(in millions)
Net cash provided by (used in)
Operating activities
Investing activities
Financing activities
Effect of exchange rates on cash, cash equivalents, and restricted cash
Net increase (decrease) in cash, cash equivalents, and restricted cash
2020
Years Ended December 31,
2019
2018
$
$
1,484.8 $
(940.6)
(85.7)
(2.6)
455.9 $
1,598.2 $
(1,154.4)
(168.4)
(2.2)
273.2 $
1,169.6
(1,049.6)
126.3
(0.1)
246.2
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Operating Activities
For the year ended December 31, 2020, net cash provided by operating activities of $1.48 billion exceeded our net income of $1.07 billion, primarily
due to the following factors:
1. Our net income included non-cash charges of $691 million, consisting primarily of the following significant items: share-based compensation of
$395 million; depreciation expense and losses on the disposal of property, plant, and equipment of $226 million; deferred income taxes of $58
million; gains on investments, accretion, and amortization, net, of $55 million; and amortization of intangible assets of $50 million.
2. The non-cash charges outlined above were partially offset by changes in operating assets and liabilities that resulted in $273 million of cash used
by operating activities during the year ended December 31, 2020. Inventory, including the transfer of equipment from inventory to property, plant,
and equipment, increased by $170 million, primarily due to the increased number of systems under operating lease and usage-based arrangements
and build-up to mitigate risks of disruption that could arise from trade, supply, or other matters, such as the COVID-19 pandemic. Prepaid
expenses and other assets increased by $112 million, primarily due to an increase in leasing and an increase in deferred commissions. Accounts
payable decreased by $32 million, primarily due to the timing of payments. Accrued compensation and employee benefits decreased by $17
million, primarily due to the timing of bonus payments. The unfavorable impact of these items on cash provided by operating activities was
partially offset by a $37 million increase in other liabilities, primarily due to additional income tax reserves, and a $15 million increase in deferred
revenue, primarily due to the effects of the Customer Relief Program.
For the year ended December 31, 2019, net cash provided by operating activities of $1.60 billion exceeded our net income of $1.38 billion, primarily
due to the following factors:
1. Our net income included non-cash charges of $538 million, consisting primarily of the following significant items: share-based compensation of
$336 million; depreciation expense and losses on the disposal of property, plant, and equipment of $160 million; and amortization of intangible
assets of $43 million.
2. The non-cash charges outlined above were partially offset by changes in operating assets and liabilities that resulted in $322 million of cash used
in operating activities during the year ended December 31, 2019. Inventory, including the transfer of equipment from inventory to property, plant,
and equipment, increased by $361 million, primarily due to the increased number of systems under operating lease and usage-based arrangements
and build-up to address the growth in the business as well as to mitigate risks of disruption that could arise from trade, supply, or other matters.
Prepaid expenses and other assets increased by $117 million, primarily due to an increase in leasing, an increase in deferred commissions, and an
increase in prepaid taxes, driven by the timing of tax payments. The unfavorable impact of these items on cash provided by operating activities
was partially offset by a $57 million increase in accrued compensation and employee benefits, primarily due to higher headcount, a $39 million
decrease in accounts receivable, primarily due to the timing of collections, and a $36 million increase in deferred revenue, primarily due to the
increased volume of sales contracts.
Investing Activities
Net cash used in investing activities for the year ended December 31, 2020, consisted of purchases of investments (net of proceeds from sales and
maturities of investments) of $561 million, the acquisition of property and equipment of $342 million, and the Orpheus Medical acquisition, net of cash
acquired, of $38 million.
Net cash used in investing activities for the year ended December 31, 2019, consisted of purchases of investments (net of proceeds from sales and
maturities of investments) of $669 million, the acquisition of property and equipment of $426 million, and the acquisition of businesses, net of cash
acquired, of $60 million.
Net cash provided by investing activities for the year ended December 31, 2018, consisted of purchases of investments (net of proceeds from sales and
maturities of investments) of $774 million, the acquisition of property and equipment of $187 million, and the acquisition of businesses of $88 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 for the year ended December 31, 2020, consisted primarily of taxes paid on behalf of employees related to net
share settlements of vested employee equity awards of $175 million, cash used in the repurchase of approximately 0.2 million shares of our common stock
in the open market for $134 million, and the payment of deferred purchase consideration of $85 million, partially offset by proceeds from stock option
exercises and employee stock purchases of $309 million.
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Net cash used in financing activities for the year ended December 31, 2019, consisted primarily of cash used in the repurchase of approximately 0.6
million shares of our common stock in the open market for $270 million and taxes paid on behalf of employees related to net share settlements of vested
employee equity awards of $159 million, partially offset by proceeds from stock option exercises and employee stock purchases of $273 million.
Net cash provided by financing activities for the year ended December 31, 2018, consisted primarily of proceeds from stock option exercises and
employee stock purchases of $237 million, partially offset by taxes paid on behalf of employees related to net share settlements of vested employee equity
awards of $120 million.
Capital Expenditures
Our business is not capital equipment intensive. However, with the growth of our business and our investments in property and facilities and in
manufacturing automation, capital investments in these areas have increased. We expect these capital investments to exceed $300 million in 2021 and
remain in a relatively consistent range in 2022. We intend to fund these needs with cash generated from operations.
Contractual Obligations and Commercial Commitments
We have the following contractual obligations and commercial commitments as of December 31, 2020:
Operating leases (Note 6)
Purchase commitments and obligations
2017 Tax Act deemed repatriation tax
Total
$
$
88.8 $
629.5
203.8
922.1 $
22.7 $
622.4
21.4
666.5 $
32.5 $
7.1
61.7
101.3 $
18.6 $
—
120.7
139.3 $
More than 5 years
15.0
—
—
15.0
Total
Less than
1 year
1 to 3 years
3 to 5 years
Payments due by period
Operating leases. We lease spaces for operations in the U.S. as well as in Japan, Mexico, China, South Korea, and other foreign countries. We also
lease automobiles for certain sales and field service employees. These leases have varying terms up to 15 years. Operating lease amounts include future
minimum lease payments under all of our non-cancellable operating leases with an initial term in excess of one year. Refer to Note 6 to the Consolidated
Financial Statements included in Part II, Item 8 for further details.
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, commitments
for capital expenditures and construction-related activities for which we have not received the 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. For instances in which 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.
2017 Tax Act deemed repatriation tax. As of December 31, 2020, our obligation associated with the deemed repatriation tax is $204 million, which is
expected to be paid in installments in accordance with the 2017 Tax Act.
We are unable to make a reasonably reliable estimate as to when payments may occur for our unrecognized tax benefits. Therefore, our liability for
unrecognized tax benefits is not included in the table above.
Off-Balance Sheet Arrangements
As of December 31, 2020, 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 standalone selling prices used to allocate the contract consideration to the individual performance obligations, which impacts revenue
recognition;
the allowance for sales returns and doubtful accounts, which impacts revenue;
the valuation of inventory, which impacts gross profit margins;
the valuation of and 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 legal contingencies, 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, money market funds, and
equity investments with and without readily determinable value. 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.
After determining the fair value of our available-for-sale instruments, we identify instruments with an amortized cost basis in excess of estimated fair
value. Available-for-sale instruments in an unrealized loss position are written down to fair value through a charge to other income, net in the Consolidated
Statements of Income, if we intend to sell the security or it is more likely than not we will be required to sell the security before recovery of its amortized
cost basis. For the remaining securities, we assess what amount of the excess, if any, is caused by expected credit losses. Factors considered in determining
whether a credit-related loss exists include the financial condition and near-term prospects of the investee, the extent of the loss related to credit of the
issuer, and the expected cash flows from the security. 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.
Additionally, we have investments in equity securities without readily determinable fair values, which are generally recorded at cost, plus or minus
subsequent observable price changes in orderly transactions for identical or similar investments, less impairments. As part of our assessment for
impairment indicators, we consider significant deterioration in the earnings performance and overall business prospects of the investee as well as
significant adverse changes in the external environment these investments operate. If our qualitative assessment indicates the investments are impaired, the
fair value of these equity securities would be estimated, which would involve a significant degree of judgement and subjectivity.
No significant impairment charges were recorded during the years ended December 31, 2020, 2019, and 2018. As of December 31, 2020, and 2019,
net unrealized losses on investments of $29.5 million and $20.4 million, net of tax, respectively, were included in accumulated other comprehensive
income/(loss).
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Revenue recognition. Our system sale arrangements contain multiple products and services, including system(s), system components, system
accessories, instruments, accessories, and service. Other than service, we generally deliver all of the products upfront. Each of these products and services
is a distinct performance obligation. System accessories, instruments, accessories, and service are also sold on a standalone basis.
For multiple-element arrangements, revenue is allocated to each performance obligation based on its relative standalone selling price. Standalone
selling prices are based on observable prices at which we separately sell the products or services. If a standalone selling price is not directly observable,
then we estimate the standalone selling prices considering market conditions and entity-specific factors including, but not limited to, features and
functionality of the products and services, geographies, type of customer, and market conditions. We regularly review standalone selling prices and
maintain internal controls over establishing and updating these estimates.
Our system sales arrangements generally include a five-year period of service. The first year of service is generally free and included in the system sale
arrangement and the remaining four years are billed at a stated service price. Revenue that is allocated to the service obligation is deferred and recognized
ratably over the service period.
Allowance for sales returns and doubtful accounts. We record estimated reductions in revenue for potential returns of certain products by
customers. As a result, management must make estimates of potential future product returns 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 that 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.
Inventory valuation. Inventory is stated at the lower of cost 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 intangible assets and goodwill. Identifiable intangible assets include developed
technology, patents, distribution rights, customer relationships, licenses, and non-competition arrangements. All of our identifiable intangible assets 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 such impairments.
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 intangible assets 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, 2020, 2019, and 2018. 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.
Business combinations. We allocate the fair value of the purchase consideration, including contingent consideration, to the assets acquired and
liabilities assumed based on their estimated fair values at the acquisition date. The excess of the fair value of the purchase consideration over the fair value
of assets acquired, liabilities assumed, and any noncontrolling interest is recorded as goodwill. When determining the fair value of assets acquired,
liabilities assumed, and any noncontrolling interest, management is required to make certain estimates and assumptions, especially with respect to
intangible assets. The estimates
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and assumptions used in valuing intangible assets include, but are not limited to, the amount and timing of projected future cash flows, the discount rate
used to determine the present value of these cash flows, and the determination of the assets’ life cycle. These estimates are inherently uncertain and,
therefore, actual results may differ from the estimates made.
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 and the estimated volatility of our common stock price over the
expected term. The assumptions for expected volatility and expected term are the two assumptions that most significantly affect the grant date fair value of
stock options. Changes in expected risk-free rate of return do not significantly impact the calculation of fair value and determining this input is not highly
subjective.
We use implied volatility based on our 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 our traded options;
the ability to reasonably match the terms, such as the date of the grant and the exercise price of our traded options to options granted; and
the length of the term of our 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.
Changes in these subjective assumptions can materially affect the estimate of the fair value of stock options and, consequently, the related amount of
share-based compensation expense recognized in 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. In the event that all or part of our deferred tax assets are not
recoverable in the future, 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. In order for our deferred tax assets to be recoverable, we must be able to generate sufficient taxable income in those
jurisdictions where the deferred tax assets are located. We consider forecasted income, including income that may be generated as a result of certain tax
planning strategies, together with future reversals of existing taxable temporary differences, in determining the need for a valuation allowance. As of
December 31, 2020, 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. From time to time, 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 re-evaluated each accounting period and is based on all available information, including discussion with any outside legal
counsel that
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represents us. If a reasonable estimate of a known or probable loss cannot be made, but a range of probable losses can be estimated, the low-end of the
range of losses is recognized if no amount within the range is a better estimate than any other. If a loss is reasonably possible, but not probable, and can be
reasonably estimated, the estimated loss or range of loss is disclosed in the Notes to the Consolidated Financial Statements.
When determining the estimated probable loss or range of losses, significant judgment is required to be exercised in order to estimate the amount and
timing of the loss to be recorded. Estimates of probable losses resulting from litigation are inherently difficult to make, particularly when the matters are in
early procedural stages with incomplete facts and information. The final outcome of legal proceedings is dependent on many variables difficult to predict
and, therefore, the ultimate cost to entirely resolve such matters may be materially different than the amount of current estimates. Consequently, new
information or changes in judgments and estimates could have a material adverse effect on our business, financial condition, and results of operations or
cash flows.
RECENT ACCOUNTING PRONOUNCEMENTS
See “Note 2. Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements in “Item 8. Financial Statements and
Supplementary Data” for a full description of recent accounting pronouncements, including the respective expected dates of adoption and estimated effects,
if any, on our Consolidated Financial Statements.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate and Market Risk
The primary objective of our investment activities is to preserve principal while supporting the Company's liquidity requirements. To achieve this
objective, we maintain a diversified portfolio of cash equivalents and short- and long-term investments in a variety of high quality securities, including 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. 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, 2020, was approximately 0.7 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 $10.5 million as of December 31, 2020. We do not utilize derivative
financial instruments to manage our interest rate risks.
Uncertain financial markets could result 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 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 generally sell our products and
services in local currencies where we have direct distribution channels. We operate in a number of markets on a direct sales basis and incur operating
expenses in local currencies. 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, 2020, sales denominated in foreign currencies were approximately 23% 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 and
expenses. For the year ended December 31, 2020, our revenue would have decreased by approximately $72.6 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, 2020, would
have resulted in an approximately $1.7 million increase 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 credit ratings and potential downgrades on at least a quarterly basis. Based on our ongoing assessment of
counterparty risk, we will adjust our exposure to various counterparties.
Although we sell to distributors outside of the U.S. in U.S. dollars, strengthening of the dollar can impact our distributors’ margins and could impact
the end customers’ ability to purchase our product if our distributors seek to recover the impact of the change in the dollar by increasing product and
service prices. Less than 10% of our revenue is conducted through distributors outside the U.S. Strengthening of the dollar relative to non-U.S. currencies
could have an adverse impact on our business.
Our operations outside of the U.S. are subject to risks typical of operations outside of the U.S. including, but not limited to, differing economic
conditions, changes in political climate, differing tax structures, other regulations and restrictions, and foreign exchange rate volatility.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index To Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets at December 31, 2020, and 2019
Consolidated Statements of Income for the years ended December 31, 2020, 2019, and 2018
Consolidated Statements of Comprehensive Income for the years ended December 31, 2020, 2019, and 2018
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2020, 2019, and 2018
Consolidated Statements of Cash Flows for the years ended December 31, 2020, 2019, and 2018
Notes to the Consolidated Financial Statements
Schedule II—Valuation and Qualifying Accounts
Page No.
80
81
82
83
84
85
86
115
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.
78
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders 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 (the “Company”) as of December 31, 2020
and 2019, and the related consolidated statements of income, of comprehensive income, of stockholders’ equity and of cash flows for each of the three
years in the period ended December 31, 2020, including the related notes and financial statement schedule listed in the index appearing under Item 15(a)(2)
(collectively referred to as the “consolidated financial statements”). We also have audited the Company’s internal control over financial reporting as of
December 31, 2020, 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, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020 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, 2020, 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 recognition of the income tax
consequences of an intra-entity transfer of an asset, other than inventory, in 2018.
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 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.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was
communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated
financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not
alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below,
providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Determination of Standalone Selling Prices Related to System Sale Arrangements
As described in Notes 2 and 5 to the consolidated financial statements, the Company recognized $1,178.9 million of systems revenue, during the year
ended December 31, 2020. The Company's system sale arrangements include a combination of the following performance obligations: system(s); system
components; system accessories; instruments; accessories; and system service. For multiple-element arrangements, revenue is allocated to each
performance obligation based on its relative standalone selling price. Standalone selling prices are based on observable prices at which the Company
separately sells the products or services. If a standalone selling price is not directly observable, then management estimates the standalone selling price
considering market conditions and entity-specific factors including, but not limited to, features and functionality of the products and services, geographies,
and type of customer.
The principal considerations for our determination that performing procedures relating to the determination of standalone selling prices related to system
sale arrangements is a critical audit matter are the high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating audit
evidence relating to the estimates of standalone selling prices used to allocate the transaction price of an arrangement to each distinct performance
obligation.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated
financial statements. These procedures included testing the effectiveness of controls over the revenue recognition process, including controls over the
determination of the estimates of standalone selling prices. These procedures also included, among others, (i) testing management's process for determining
the estimates of standalone selling prices; (ii) evaluating the appropriateness of the overall methodology used by management to develop the estimates,
including the appropriateness of the data inputs related to the products and services, geographies, and type of customer used in the methodology; (iii)
testing the completeness and accuracy of the data used in the methodology; and (iv) testing the accuracy of management's calculations of estimated selling
prices.
/s/ PricewaterhouseCoopers LLP
San Jose, California
February 9, 2021
We have served as the Company’s auditor since 2014.
79
INTUITIVE SURGICAL, INC.
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT PAR VALUE AMOUNTS)
Table of Contents
ASSETS
Current assets:
Cash and cash equivalents
Short-term investments
Accounts receivable, net of allowances of $17.7 and $8.3 as of December 31, 2020, and 2019, 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 8)
Stockholders’ equity:
Preferred stock, 2.5 shares authorized, $0.001 par value, issuable in series; no shares issued and outstanding
as of December 31, 2020, and 2019
Common stock, 300.0 shares authorized, $0.001 par value, 117.7 shares and 116.0 shares issued and
outstanding as of December 31, 2020, and 2019, respectively
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income
Total Intuitive Surgical, Inc. stockholders’ equity
Noncontrolling interest in joint venture
Total stockholders’ equity
Total liabilities and stockholders’ equity
December 31,
2020
2019
$
$
$
$
1,622.6 $
3,488.8
645.5
601.5
267.5
6,625.9
1,577.3
1,757.7
367.7
503.6
336.7
11,168.9 $
81.6 $
235.0
350.3
298.3
965.2
444.6
1,409.8
—
0.1
6,445.2
3,261.3
24.9
9,731.5
27.6
9,759.1
11,168.9 $
1,167.6
2,054.1
645.2
595.5
200.2
4,662.6
1,272.9
2,623.5
425.6
441.4
307.2
9,733.2
123.5
251.6
337.8
317.3
1,030.2
418.3
1,448.5
—
0.1
5,756.8
2,494.5
12.4
8,263.8
20.9
8,284.7
9,733.2
The accompanying notes are an integral part of these Consolidated Financial Statements.
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Table of Contents
INTUITIVE SURGICAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
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
Less: net income (loss) attributable to noncontrolling interest in joint venture
Net income attributable to Intuitive Surgical, Inc.
Net income per share attributable to Intuitive Surgical, Inc.:
Basic
Diluted
Shares used in computing net income per share attributable to Intuitive Surgical, Inc.:
Basic
Diluted
Total comprehensive income attributable to Intuitive Surgical, Inc.
Years Ended December 31,
2020
2019
2018
$
$
$
$
$
3,634.6 $
723.8
4,358.4
1,230.3
266.9
1,497.2
2,861.2
1,216.3
595.1
1,811.4
1,049.8
157.2
1,207.0
140.2
1,066.8
6.2
1,060.6 $
9.06 $
8.82 $
117.0
120.3
3,754.3 $
724.2
4,478.5
1,119.1
249.2
1,368.3
3,110.2
1,178.4
557.3
1,735.7
1,374.5
127.7
1,502.2
120.4
1,381.8
2.5
1,379.3 $
11.95 $
11.54 $
115.4
119.5
1,073.1 $
1,405.0 $
3,089.1
635.1
3,724.2
906.2
213.9
1,120.1
2,604.1
986.6
418.1
1,404.7
1,199.4
80.1
1,279.5
154.5
1,125.0
(2.9)
1,127.9
9.92
9.49
113.7
118.8
1,130.1
The accompanying notes are an integral part of these Consolidated Financial Statements.
81
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INTUITIVE SURGICAL, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN MILLIONS)
Net income attributable to Intuitive Surgical, Inc.
Other comprehensive income (loss):
Change in foreign currency translation gains (losses)
Available-for-sale investments (net of tax):
Change in unrealized gains (losses)
Less: Reclassification adjustment for (gains) losses on investments
Net change
Derivative instruments (net of tax):
Change in unrealized gains (losses)
Less: Reclassification adjustment for (gains) losses on derivative instruments
Net change
Employee benefit plans (net of tax):
Change in unrealized gains (losses)
Less: Reclassification adjustment for losses on employee benefit plans
Net change
Other comprehensive gains (losses)
Total comprehensive income attributable to Intuitive Surgical, Inc.
$
Years Ended December 31,
2020
2019
2018
$
1,060.6 $
1,379.3 $
1,127.9
4.7
13.8
(4.7)
9.1
(0.8)
(2.8)
(3.6)
0.3
30.7
(0.5)
30.2
5.8
(5.3)
0.5
1.0
1.3
2.3
12.5
1,073.1 $
(5.9)
0.6
(5.3)
25.7
1,405.0 $
(2.6)
0.3
1.2
1.5
3.6
(1.0)
2.6
0.4
0.3
0.7
2.2
1,130.1
The accompanying notes are an integral part of these Consolidated Financial Statements.
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INTUITIVE SURGICAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(IN MILIONS)
Balances at December 31, 2017
Adoption of new accounting standards (1)
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
Net income attributable to Intuitive
Surgical, Inc.
Other comprehensive income
Capital contribution from noncontrolling
interest
Net loss attributable to noncontrolling
interest in joint venture
Balances at December 31, 2018
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 attributable to Intuitive
Surgical, Inc.
Other comprehensive income (loss)
Capital contribution from noncontrolling
interest
Net loss attributable to noncontrolling
interest in joint venture
Balances at December 31, 2019
Adoption of new accounting standard
(2)
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 attributable to Intuitive
Surgical, Inc.
Other comprehensive income
Net income attributable to noncontrolling
interest in joint venture
Common Stock
Shares
112.3
Amount
0.1
$
Additional
Paid-In
Capital
$ 4,679.2
Retained
Earnings
Accumulated
Other
Comprehensive
Income/(Loss)
$
$
115.0
392.1
(15.5)
(1.3)
Total Intuitive
Surgical, Inc.
Stockholders’
Equity
4,778.8
390.8
$
Noncontrolling
Interest
in
Joint
Venture
$
1.6
$
Total
Stockholders’
Equity
4,780.4
390.8
2.5
(0.3)
236.6
(6.7)
261.2
(113.3)
1,127.9
3.5
114.5
$
0.1
$ 5,170.3
$
1,521.7
$
(13.3)
$
2.4
(0.3)
(0.6)
272.8
(7.6)
335.8
(14.5)
(151.5)
(255.0)
1,379.3
25.7
116.0
$
0.1
$ 5,756.8
$
2,494.5
$
12.4
$
2.2
(0.3)
(0.2)
308.8
(7.9)
395.4
(7.9)
(0.1)
(167.3)
(126.4)
1,060.6
12.5
236.6
(120.0)
261.2
1,127.9
3.5
—
—
6,678.8
$
272.8
(159.1)
335.8
(269.5)
1,379.3
25.7
—
—
8,263.8
$
10.0
(2.9)
8.7
$
(0.3)
10.0
2.5
20.9
$
(0.1)
308.8
(175.2)
395.4
(134.3)
1,060.6
12.5
—
9,731.5
0.5
6.2
27.6
$
$
236.6
(120.0)
261.2
1,127.9
3.5
10.0
(2.9)
6,687.5
272.8
(159.1)
335.8
(269.5)
1,379.3
25.4
10.0
2.5
8,284.7
(0.1)
308.8
(175.2)
395.4
(134.3)
1,060.6
13.0
6.2
9,759.1
Balances at December 31, 2020
117.7
$
0.1
$ 6,445.2
$
3,261.3
$
24.9
$
(1) Represents the adjustments related to the adoptions of Accounting Standards Update ("ASU") 2016-16, Income Taxes (Topic 740): Intra-Entity Transfer of Assets Other than Inventory, and
ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.
(2) Represents the adjustment related to the adoption of Accounting Standards Update ("ASU") 2016-13, Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.
The accompanying notes are an integral part of these Consolidated Financial Statements.
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INTUITIVE SURGICAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
Operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and loss on disposal of property, plant, and equipment, net
Amortization of intangible assets
Loss (gain) on investments, accretion of discounts, and amortization of premiums on
investments, net
Deferred income taxes
Share-based compensation expense
Amortization of contract acquisition assets
Changes in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable
Inventory
Prepaids and other assets
Accounts payable
Accrued compensation and employee benefits
Deferred revenue
Other liabilities
Net cash provided by operating activities
Investing activities:
Purchase of investments
Proceeds from sales of investments
Proceeds from maturities of investments
Purchase of property, plant, and equipment and intellectual property
Acquisition of businesses, net of cash
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 of common stock
Capital contribution from noncontrolling interest
Payment of deferred purchase consideration
Net cash provided by (used in) financing activities
Effect of exchange rate changes on cash, cash equivalents, and restricted cash
Net increase (decrease) in cash, cash equivalents, and restricted cash
Cash, cash equivalents, and restricted cash, beginning of year
Cash, cash equivalents, and restricted cash, end of year
Years Ended December 31,
2020
2019
2018
$
1,066.8 $
1,381.8 $
1,125.0
226.4
49.8
(55.1)
57.6
395.4
17.1
5.7
(170.1)
(111.8)
(32.3)
(16.6)
15.0
36.9
1,484.8
(4,292.9)
800.7
2,930.8
(341.5)
(37.7)
(940.6)
160.0
43.0
(6.0)
(8.0)
335.8
13.1
38.8
(360.5)
(116.9)
12.3
57.4
35.5
11.9
1,598.2
(3,346.2)
107.3
2,569.8
(425.6)
(59.7)
(1,154.4)
308.8
(175.2)
(134.3)
—
(85.0)
(85.7)
(2.6)
455.9
1,182.6
1,638.5 $
272.8
(159.1)
(269.5)
10.0
(22.6)
(168.4)
(2.2)
273.2
909.4
1,182.6 $
$
108.6
14.2
1.8
31.9
261.2
10.6
(161.3)
(279.0)
(77.7)
16.7
26.2
54.3
37.1
1,169.6
(2,581.9)
274.0
1,533.6
(187.4)
(87.9)
(1,049.6)
236.6
(120.0)
—
10.0
(0.3)
126.3
(0.1)
246.2
663.2
909.4
The accompanying notes are an integral part of these 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. (“Intuitive” or the “Company”) develops, manufactures, and markets the da Vinci Surgical System and the Ion endoluminal
system. The Company’s products and related services enable physicians and healthcare providers to improve the quality of and access to minimally
invasive care. The systems consist of a surgeon console or consoles, a patient-side cart, a high-performance vision system, and proprietary instruments and
accessories.
®
®
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 balances of the Company’s majority-owned joint venture (“Joint Venture”) with
Shanghai Fosun Pharmaceutical (Group) Co., Ltd. (“Fosun Pharma”). Chindex Medical Limited (“Chindex”), a subsidiary of Fosun Pharma, has been its
distribution partner for da Vinci Surgical Systems in China. 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. The noncontrolling interest’s share of the earnings in the Joint
Venture is presented separately in the Consolidated Statements of Income for the years ended December 31, 2020, 2019, and 2018.
Beginning in 2018, the Company adopted Accounting Standards Update ("ASU") No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfer of
Assets Other than Inventory. The Company adopted this standard using the modified retrospective approach and, as a result, recorded a cumulative
adjustment to retained earnings as of January 1, 2018.
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, complex, and subjective judgments include the valuation and recognition of investments, revenue recognition
and the valuation of revenue and allowances for sales returns and doubtful accounts, the valuation of inventory, the valuation of and assessment of
recoverability of intangible assets and their estimated useful lives, the valuation and recognition of share-based compensation, the recognition and
measurement of current and deferred income tax assets, along with the assessment of recoverability, and liabilities, and the estimates for legal
contingencies. 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 primarily derived from billings related to revenue arrangements with 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, 2020, and
2019, 67% and 66%, respectively, of accounts receivable were from domestic customers.
During the years ended December 31, 2020, 2019, and 2018, domestic revenue accounted for 68%, 70%, and 71% of total revenue, respectively, while
outside of the U.S. revenue accounted for 32%, 30%, and 29%, respectively, of total revenue for each of the years then ended.
The Company is subject to additional risks and uncertainties due to the COVID-19 pandemic. The extent of the impact on the Company's business is
highly uncertain and difficult to predict. The Company's customers are diverting resources to treat COVID-19 patients and deferring elective surgical
procedures, both of which are likely to impact customers' ability to meet their obligations, including to the Company. Furthermore, capital markets and
economies worldwide have been negatively impacted by the COVID-19 pandemic, and it is possible that the impact could cause an extended local and/or
global economic recession. Such economic disruption could have a material adverse effect on our business as hospitals curtail and reduce capital and
overall spending. Policymakers around the globe have responded with fiscal policy actions to support the healthcare industry and economy as a whole.
However, the magnitude and overall effectiveness of these actions remains uncertain.
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The severity of the impact of the COVID-19 pandemic on the Company's business will depend on a number of factors, including, but not limited to,
the duration and severity of the pandemic and the extent and severity of the impact on the Company's customers, all of which are uncertain and cannot be
predicted. The Company's future results of operations and liquidity could be materially adversely affected by delays in payments of outstanding
receivables, supply chain disruptions, uncertain or reduced demand, and the impact of any initiatives or programs that the Company may undertake to
address financial and operational challenges faced by its customers. As of the date of issuance of these Financial Statements, the extent to which the
COVID-19 pandemic may materially adversely affect the Company's financial condition, liquidity, or results of operations is uncertain.
Customer Relief Program
During the second quarter of 2020, the Company introduced a series of programs to provide financial relief to customers (the “Customer Relief
Program”). As part of the Customer Relief Program, the Company provided its customers service fee credits, extended payment terms, and deferred
payments related to Intuitive System Leasing arrangements. The Customer Relief Program ended at the end of the third quarter of 2020.
Service fee credits. As part of the Customer Relief Program, the Company provided service fee credits to customers based on the reduction in the
utilization of their systems during the second and third quarters of 2020 relative to a pre-COVID-19 level baseline. The Company reflected the service fee
credits as a reduction of service revenue and accounts receivable in the quarter they were earned by its customers. The service fee credit program resulted
in a $80 million decrease in service revenue in 2020.
Short-term payment relief. In response to the COVID-19 pandemic, the Company introduced a payment deferral program to provide financial relief to
qualified customers. This relief extended payment terms up to 180 days for qualified and creditworthy customers.
The Company also introduced a lease payment deferral program in which creditworthy customers with active Intuitive System Leasing arrangements
could elect to defer lease payments up to five months that are payable at the end of the lease by extending the lease term. This program did not result in
substantial increases in the rights of the lessor or the obligations of the lessee, and the Company elected to apply the relief provided by the Financial
Accounting Standards Board (“FASB”) FAQ on accounting for COVID-19 and market volatility by not applying the lease modification guidance in ASC
842 to the lease arrangements affected by the deferrals and lease extensions.
For operating lease arrangements where the lease term was extended by adding the deferred period to the end of the contract, the Company
recalculated the straight-line revenue based on the revised terms, consistent with the treatment accepted by the FASB FAQ on accounting for COVID-19.
For its sales-type lease arrangements impacted, the Company accounted for the deferral in the timing of lease payments as if there were no changes in the
lease contract, consistent with the treatment accepted by the FASB FAQ on accounting for COVID-19. While the short-term payment relief offered did not
have a material impact on the results of operations, the Company deferred $15 million of lease billings and extended payment terms associated with
$181 million of billings during the program, of which $19 million remained outstanding as of December 31, 2020.
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.
Restricted Cash
As of December 31, 2020, the Company had $18.0 million of restricted cash associated with its insurance programs and bank guarantee collateral. As
of December 31, 2019, the Company had $15.0 million of restricted cash associated with its insurance programs. Restricted cash was included in prepaids
and other current assets and intangible and other assets, net on the Consolidated Balance Sheets.
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 remaining maturities at date of purchase greater than 90 days and remaining maturities as of the reporting period less than one year are
classified as short-term investments. Investments with remaining maturities greater than one year are classified as long-term investments.
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All of the Company’s investments are subject to a periodic impairment review. Available-for-sale investments in an unrealized loss position are written
down to fair value through a charge to other income, net, if the Company intends to sell the security or it is more likely than not the Company will be
required to sell the security before recovery of its amortized cost basis. The Company evaluates the remaining securities to determine what amount of the
excess, if any, is caused by expected credit losses. Factors considered in determining whether a credit-related loss exists include the financial condition and
near-term prospects of the investee, the extent of the loss related to credit of the issuer, and the expected cash flows from the security. No significant
charges were recorded during the years ended December 31, 2020, 2019, and 2018.
Fair Value Measurements
The Company measures the fair value of money market funds, certain U.S. treasury securities, and equity investments with readily determinable value
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, municipal notes, and equity investments
without readily determinable value. 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 cost 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. Additionally, the cost basis of the Company's inventory does not include any unallocated
fixed overhead costs associated with abnormally low utilization of our factories.
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, 2020, 2019, and 2018, was $220.6 million, $156.7 million, and $105.9 million, respectively.
Capitalized Software Costs for Internal Use
The Company capitalizes direct costs associated with developing or obtaining internal use software, including enterprise-wide business software, that
are incurred during the application development stage. These capitalized costs are recorded as capitalized software within property, plant, and equipment.
Costs related to preliminary project activities and post-implementation activities are expensed as incurred. Once the software is ready for its intended use,
amounts capitalized are amortized over an estimated useful life of up to 5 years, generally on a straight-line basis.
Implementation Costs in a Cloud Computing Arrangement
The Company capitalizes qualified implementation costs incurred in a hosting arrangement that is a service contract for which it is the customer in
accordance with the requirements for capitalizing costs incurred to develop internal-use software. These capitalized implementation costs are recorded
within intangible and other assets, net, and are generally amortized over the fixed, non-cancellable term of the associated hosting arrangement on a straight-
line basis.
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Business Combinations
The Company accounts for business acquisitions in accordance with ASC 805, Business Combinations. This standard requires the acquiring entity in a
business combination to recognize the assets acquired, liabilities assumed, and any noncontrolling interest in the acquiree using acquisition-date fair values.
Certain provisions of this standard prescribe, among other things, the determination of acquisition-date fair value of consideration paid in a business
combination, including contingent consideration. The excess of the acquisition-date fair value of consideration paid over the fair values of the identifiable
assets and liabilities is recorded as goodwill. Acquisition-related costs are recognized separately from the business combination and are expensed as
incurred. The Company includes the results of operations of the businesses that are acquired as of the acquisition date.
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 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
identifiable assets and liabilities. 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.
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 2 to 9 years.
Impairment of Long-lived Assets
The Company evaluates long-lived assets, which include finite-lived 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 sale of systems, system components, instruments and accessories, and service
revenue. The Company accounts for a contract with a customer when there is a legally enforceable contract between the Company and its customer, the
rights of the parties are identified, the contract has commercial substance, and collectability of the contract consideration is probable. The Company’s
revenues are measured based on the consideration specified in the contract with each customer, net of any sales incentives and taxes collected from
customers that are remitted to government authorities.
The Company’s system sale arrangements generally contain multiple products and services. For these bundled sale arrangements, the Company
accounts for individual products and services as separate performance obligations if they are a distinct product or service that is separately identifiable from
other items in bundled packages and if a customer can benefit from the product or service on its own or with other resources that are readily available to the
customer. The Company’s system sale arrangements include a combination of the following performance obligations: system(s); system components;
system accessories; instruments; accessories; and system service. The Company’s system sale arrangements generally include a five-year period of service.
The first year of service is generally free and included in the system sale arrangement, and the remaining four years are generally included at a stated
service price. The Company considers the service terms in the arrangements that are legally enforceable to be performance obligations. Other than service,
the Company generally satisfies all of the performance obligations up-front. System components, system accessories, instruments, accessories, and service
are also sold on a stand-alone basis.
The Company recognizes revenue as the performance obligations are satisfied by transferring control of the product or service to a customer. The
Company generally recognizes revenue for the performance obligations at the following points in time:
System sales. For systems (including system components and system accessories) sold directly to end customers, revenue is recognized when the
Company transfers control to the customer, which is generally at the point when acceptance occurs that indicates customer acknowledgment of
delivery or installation, depending on the terms of the arrangement. For systems sold through distributors, revenue is recognized generally at the time
of shipment. The Company’s system arrangements generally do not provide a right of return. The systems are generally covered by a one-year
warranty. Warranty costs were not material for the periods presented.
Instruments and accessories. Revenue from sales of instruments and accessories is recognized when control is transferred to the customers, which
generally occurs at the time of shipment but also occurs at the time of delivery,
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depending on the customer arrangement. 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 for estimated returns.
Service. Service revenue is recognized over the term of the service period, as the customer benefits from the services throughout the service
period. Revenue related to services performed on a time-and-materials basis is recognized when performed.
The Company offers its customers the opportunity to trade in their older systems for a 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 separate performance obligations in
the arrangement for a system sale. Traded-in systems could be reconditioned and resold. The Company accounts for the fair value of the traded-in system in
the total consideration in the arrangement by including the net realizable value of the traded-in system less a normal profit margin. The value of the traded-
in system is determined as the amount, after reconditioning costs are added, that will allow a normal profit margin on the sale of the reconditioned unit to
be generated. When there is no market for the traded-in units, no value is assigned. Traded-in units are reported as a component of inventory until resold, or
otherwise disposed.
In addition, customers may also have the opportunity to upgrade their systems at a price determined at the time of the upgrade, for example, by adding
a second surgeon console for use with the da Vinci Surgical System. Such upgrades are performed by completing component level upgrades at the
customer’s site. Upgrade revenue is recognized when the component level upgrades are complete and all revenue recognition criteria are met.
For multiple-element arrangements, revenue is allocated to each performance obligation based on its relative standalone selling price. Standalone
selling prices are based on observable prices at which the Company separately sells the products or services. If a standalone selling price is not directly
observable, then the Company estimates the standalone selling price considering market conditions and entity-specific factors including, but not limited to,
features and functionality of the products and services, geographies, and type of customer. The Company regularly reviews standalone selling prices and
updates these estimates as necessary.
Assets Recognized from the Costs to Obtain a Contract with a Customer
The Company has determined that certain sales incentives provided to the Company’s sales team are required to be capitalized when the Company
expects to generate future economic benefits from the related revenue-generating contracts subsequent to the initial system sales transaction. When
determining the economic life of the contract acquisition assets recognized, the Company considers historical service renewal rates, expectations of future
customer renewals of service contracts, and other factors that could impact the economic benefits that the Company expects to generate from the
relationship with its customers. The costs capitalized as contract acquisition costs included in intangible and other assets, net in the Consolidated Balance
Sheets were $53.1 million and $51.5 million as of December 31, 2020, and 2019, respectively. The Company did not incur any impairment losses during
the periods presented.
Intuitive System Leasing
The Company enters into lease arrangements with certain qualified customers. Leases have terms that generally range from 24 to 84 months and are
usually collateralized by a security interest in the underlying assets. The Company also leases systems to certain qualified customers under usage-based
arrangements that have terms up to 84 months. For these usage-based lease arrangements, the lease fee is generally billed monthly in arrears based on a
predetermined per-use fee, and usage is generally defined as the number of da Vinci procedures performed with the system.
Revenue related to multiple-element arrangements are allocated to lease and non-lease elements based on their relative standalone selling prices as
prescribed by the Company’s revenue recognition policy. Lease elements generally include a system or system component, while non-lease elements
generally include service, instruments, and accessories. For some lease arrangements, customers are provided with the right to purchase the system leased
at some point during and/or at the end of the lease term. Except for certain usage-based lease arrangements, lease arrangements generally do not provide
rights for the customers to exit or terminate the lease without incurring a penalty. Certain lease arrangements may also include upgrade rights that allow
customers to upgrade the leased system to newer technology at some point during the lease term. Generally, these upgrade rights do not specify the terms,
including the price or structure of the future upgrade transactions, as those terms are negotiated based on the circumstances at the time of the upgrade,
including the then-fair value of the system as well as other factors.
In determining whether a transaction should be classified as a sales-type or operating lease, the Company considers the following terms at lease
commencement: (1) whether title of the system transfers automatically or for a nominal fee by the end
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of the lease term, (2) whether the present value of the minimum lease payments equals or exceeds substantially all of the fair value of the leased system, (3)
whether the lease term is for the major part of the remaining economic life of the leased system, (4) whether the lease grants the lessee an option to
purchase the leased system that the lessee is reasonably certain to exercise, and (5) whether the underlying system is of such a specialized nature that it is
expected to have no alternative use to the Company 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 related to lease elements from sales-type leases is presented as product revenue. Revenue related to
lease elements from operating lease arrangements is generally recognized on a straight-line basis over the lease term or based upon system usage and is
presented as product revenue. Revenue related to usage-based arrangements is recognized as the customers utilize the systems.
Other Leasing Arrangements
The Company determines if an arrangement contains a lease at inception. For arrangements where the Company is the lessee, operating leases are
included in intangible and other assets, net, other accrued liabilities, and other long-term liabilities on the Consolidated Balance Sheet as of December 31,
2020. The Company currently does not have any finance leases.
Operating lease right-of-use ("ROU") assets and operating leases liabilities are recognized based on the present value of the future minimum lease
payments over the lease term at the commencement date. ROU assets also include any initial direct costs incurred and any lease payments made at or
before the lease commencement date, less lease incentives received. The Company uses its incremental borrowing rate based on the information available
at the commencement date in determining the lease liabilities, as the Company does not have insight to the inputs necessary to calculate the implicit rate of
the leases. Lease terms may include options to extend or terminate when the Company is reasonably certain the option will be exercised. Lease expense is
recognized on a straight-line basis over the lease term.
The Company also has lease arrangements with lease and non-lease components. The Company elected the practical expedient not to separate non-
lease components from lease components for the Company's real estate and automobile leases. Additionally, the Company applied a portfolio approach to
effectively account for the operating lease ROU assets and lease liabilities for the Company's automobile leases. The Company also elected to apply the
short-term lease measurement and recognition exemption in which ROU assets and lease liabilities are not recognized for leases with terms of 12 months or
less.
Credit Losses
Trade accounts receivable. 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. For the years ended December 31, 2020, and 2019, bad debt expense was not
significant.
Net investment in sales-type leases. The Company enters into sales-type leases with certain qualified customers to purchase 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. The allowance for
loan loss is based on the Company's assessment of current expected lifetime loss on lease receivables. The Company regularly reviews the allowance by
considering factors such as historical experience, credit quality, the age of the lease receivable balances, and current economic conditions that may affect a
customer's ability to pay. Lease receivables are considered past due 90 days after invoice.
The Company manages the credit risk in net investment in sales-type leases using a number of factors, including, but not limited to the following: size
of operations; profitability, liquidity, and debt ratios; payment history; and past due amounts. The Company also uses credit scores obtained from external
providers as a key indicator for the purposes of determining credit quality. The following table presents credit quality by class of net investment in sales-
type lease as of December 31, 2020. The following table summarizes the amortized cost basis by year of origination and credit quality indicator as of
December 31, 2020 (in millions):
Credit Rating:
High
Moderate
Low
Total
2020
2019
2018
2017
2016
Prior
Net Investment
$
$
78.0 $
74.6
5.7
158.3 $
36.4 $
30.1
—
66.5 $
12.2 $
18.8
1.1
32.1 $
7.8 $
3.6
0.7
12.1 $
1.5 $
2.0
1.3
4.8 $
1.2 $
—
—
1.2 $
137.1
129.1
8.8
275.0
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For the year ended December 31, 2020, and 2019, credit losses related to net investment in sales-type leases were not significant.
Available-for-sale debt securities. The Company's investment portfolio at any point in time contains 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. The Company segments its portfolio based on the underlying risk profiles of the securities and have a zero loss
expectation for U.S. treasury and U.S. government agency securities. The Company regularly reviews the securities in an unrealized loss position and
evaluates the current expected credit loss by considering factors such as historical experience, market data, issuer-specific factors, and current economic
conditions. For the year ended December 31, 2020, the credit losses related to available-for-sales debt securities were not significant. For the year ended
December 31, 2019, there were no credit losses recognized related to available-for-sales debt securities.
The Company's exposure to credit losses may increase if its customers are adversely affected by changes in healthcare laws, coverage, and
reimbursement, economic pressures or uncertainty associated with local or global economic recessions, disruption associated with the current COVID-19
pandemic, or other customer-specific factors. Although the Company has historically not experienced significant credit losses, it is possible that there could
be a material adverse impact from potential adjustments of the carrying amount of lease and trade receivables as hospital cash flows are impacted by their
response to the COVID-19 pandemic and deferral of elective surgical procedures.
Allowance for Sales Returns
The allowance for sales returns is based on the Company’s estimates of potential future returns of certain products 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.
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. The Company estimates expected forfeitures at the time of grant and revises the estimate, if necessary,
in subsequent periods if actual forfeitures differ from those estimated.
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 that 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 actively traded options with expirations greater than one year on the Company’s common stock. The extent to which the Company
relies on market-based volatility when valuing options depends, 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 date of the grant. See
“Note 10. 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 attributable to Intuitive Surgical, Inc. is computed using the weighted-average number of shares outstanding during the
period. Diluted net income per share attributable to Intuitive Surgical, Inc. 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
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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 research
and development 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 hedging or non-hedging 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 that the forecasted hedged transaction will not occur in the initially identified time period or within a subsequent
two-month time period. Gains and losses in OCI associated with such derivative instruments are reclassified immediately into earnings through interest and
other income, net. Any subsequent changes in fair value of such derivative instruments also are reflected in current earnings. Derivatives that are not
designated as hedging instruments and the ineffective portions of cash flow hedges are adjusted to fair value through earnings in interest and other income,
net.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established, when
necessary, to reduce deferred tax assets to the amounts that are expected more likely than not to be realized in the future.
The Company recognizes tax benefits from uncertain tax positions only if it is more likely than not that the tax position will be sustained on
examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such
positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. The Company
includes interest and penalty on unrecognized tax benefits as a component of its income tax expense.
The Company recognizes excess tax benefits and tax deficiencies in the provision for income taxes as discrete items in the period when the awards vest
or are settled. The Company accounts for Global Intangible Low-Taxed Income (“GILTI”) as period costs when incurred.
Segments
The Company operates in one segment. The chief operating decision maker regularly reviews the operating results of the Company on a consolidated
basis as part of making decisions for allocating resources and evaluating performance. As of December 31, 2020, and 2019, 83% and 85% of long-lived
assets were in the United States, respectively. Revenue is attributed to a geographic region based on the location of the end customer.
Legal Contingencies
From time to time, 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
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the amount can be reasonably estimated. The assessment is re-evaluated each 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 that are 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.
Recently Adopted Accounting Pronouncements
Financial Instruments
In June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments (Topic 326) ("Topic 326"), which replaces
existing incurred loss impairment guidance and establishes a single allowance framework for financial assets carried at amortized cost. The Company
adopted Topic 326 on January 1, 2020, using a modified retrospective transition method, which requires a cumulative-effect adjustment, if any, to the
opening balance of retained earnings to be recognized on the date of adoption with prior period not restated. The cumulative-effect adjustment recorded on
January 1, 2020, was not material. Refer to the description of the Company's "Credit Losses" accounting policy in the "Significant Accounting Policies"
section above.
Recent Accounting Pronouncements
The Company continues to monitor new accounting pronouncements issued by the FASB and does not believe any recently issued accounting
pronouncements will have a material impact on the Company's consolidated financial statements.
NOTE 3. FINANCIAL INSTRUMENTS
Cash, Cash Equivalents, and Investments
The following tables summarize the Company’s cash and available-for-sale marketable securities’ amortized cost, gross unrealized gains, gross
unrealized losses, and fair value by significant investment category reported as cash and cash equivalents or short-term or long-term investments as of
December 31, 2020, and 2019 (in millions):
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
Cash and
Cash
Equivalents
Short-term
Investments
Long-term
Investments
Reported as:
$
644.3 $
— $
— $
644.3 $
644.3 $
— $
—
December 31, 2020
Cash
Level 1:
Money market funds
U.S. treasuries
Subtotal
Level 2:
Commercial paper
Corporate securities
U.S. government agencies
Municipal securities
Subtotal
Total assets measured at fair value $
625.8
2,626.8
3,252.6
671.3
1,425.4
716.5
119.8
2,933.0
6,829.9 $
—
23.0
23.0
—
11.9
2.5
2.0
16.4
39.4 $
—
—
—
—
(0.2)
—
—
(0.2)
(0.2) $
625.8
2,649.8
3,275.6
671.3
1,437.1
719.0
121.8
2,949.2
6,869.1 $
625.8
212.5
838.3
64.1
3.4
72.5
—
140.0
1,622.6 $
—
1,567.9
1,567.9
607.2
1,036.5
233.6
43.6
1,920.9
3,488.8 $
—
869.4
869.4
—
397.2
412.9
78.2
888.3
1,757.7
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December 31, 2019
Cash
Level 1:
Money market funds
U.S. treasuries
Subtotal
Level 2:
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
Cash and
Cash
Equivalents
Short-term
Investments
Long-term
Investments
Reported as:
$
413.1 $
— $
— $
413.1 $
413.1 $
— $
—
Commercial paper
Corporate securities
U.S. government agencies
Non-U.S. government securities
Municipal securities
Subtotal
Total assets measured at fair value $
726.8
1,935.8
2,662.6
165.1
2,096.1
418.3
4.5
58.4
2,742.4
5,818.1 $
—
9.7
9.7
—
16.8
1.1
—
0.3
18.2
27.9 $
—
(0.4)
(0.4)
—
(0.2)
(0.2)
—
—
(0.4)
(0.8) $
726.8
1,945.1
2,671.9
165.1
2,112.7
419.2
4.5
58.7
2,760.2
5,845.2 $
726.8
—
726.8
25.5
—
—
—
2.2
27.7
1,167.6 $
—
890.8
890.8
139.6
798.5
209.6
4.5
11.1
1,163.3
2,054.1 $
—
1,054.3
1,054.3
—
1,314.2
209.6
—
45.4
1,569.2
2,623.5
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, 2020 (in millions):
Mature in less than one year
Mature in one to five years
Total
Amortized
Cost
Fair
Value
$
$
3,831.5 $
1,728.3
5,559.8 $
3,841.3
1,757.7
5,599.0
Actual maturities may differ from contractual maturities, because certain borrowers have the right to call or prepay certain obligations. Gross realized
gains recognized on the sale of investments was $8.3 million for the year ended December 31, 2020, and not material for the prior year comparative period.
Gross realized losses recognized on the sale of investments were not material for the periods presented.
As of December 31, 2020, and 2019, net unrealized gains/(losses) on investments of $29.5 million and $20.4 million, net of tax, respectively, were
included in accumulated other comprehensive income/(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, 2020, and 2019 (in millions):
December 31, 2020
Corporate securities
U.S. treasuries
U.S. government agencies
Municipal securities
Total
December 31, 2019
Corporate securities
U.S. treasuries
U.S. government agencies
Total
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
$
$
$
$
352.7 $
278.1
63.5
21.3
715.6 $
237.0 $
236.5
45.9
519.4 $
(0.2) $
—
—
—
(0.2) $
(0.2) $
(0.2)
(0.1)
(0.5) $
— $
—
—
—
— $
— $
87.5
45.5
133.0 $
— $
—
—
—
— $
— $
(0.2)
(0.1)
(0.3) $
352.7 $
278.1
63.5
21.3
715.6 $
237.0 $
324.0
91.4
652.4 $
(0.2)
—
—
—
(0.2)
(0.2)
(0.4)
(0.2)
(0.8)
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The unrealized losses on the available-for-sale investments are related to corporate securities, U.S. treasuries, and U.S. government agencies. 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, the 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.
Equity Investments
The Company holds equity investments with readily determinable fair values and equity investments without readily determinable fair values. The
Company generally recognizes equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes
resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer.
The following table is a summary of the activity related to equity investments (in millions):
December 31, 2019
Carrying Value
Changes in Fair
Value
(1)
Sales/Purchases/Others
(2)
December 31, 2020
Carrying Value
Reported as:
Prepaids and
other current
assets
Intangible and
other assets,
net
Equity investments with readily determinable
value (Level 1)
Equity investments without readily
determinable value (Level 2)
$
$
— $
24.6 $
0.3 $
66.2 $
59.8 $
(60.6) $
60.1 $
30.2 $
60.1 $
— $
—
30.2
(1)
(2)
Recorded in Interest and other income, net.
Other includes conversion of certain equity investments without readily determinable value to equity investments with readily determinable value.
The Company recognized a $66.2 million increase in fair value, which was reflected in Interest and other income, net, due to changes in observable
prices for certain equity investments that had been held at cost, because they lacked readily determinable market values. A total of $44.8 million of this
increase in fair value was related to an equity investment in preferred shares of InTouch Technologies, Inc. ("InTouch"), an entity that was acquired by
Teladoc Health, Inc. ("Teladoc"), a publicly traded company, on July 1, 2020. Upon acquisition, the Company's shares were converted to shares in Teladoc,
which have a readily determinable value. The Company was restricted from selling these shares for a period of six months. There were no decreases in fair
value reflected in net income due to impairments.
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 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 unrealized after-tax gain or loss from the hedge as a component of accumulated other comprehensive
income/(loss) in stockholders’ equity and reclassifies the amount into earnings in the same period in which the hedge transaction affects earnings. The
amounts reclassified to revenue and expenses related to the hedged transactions and the ineffective portions of cash flow hedges were not material for the
periods presented.
Other Derivatives Not Designated as Hedging Instruments. Other derivatives not designated as hedging instruments consist primarily of forward
contracts that the Company uses to hedge intercompany balances and other monetary assets or liabilities denominated in currencies other than the USD,
primarily the EUR, GBP, JPY, KRW, CHF, Indian Rupee ("INR"), Mexican Peso ("MXN"), Chinese Yuan ("CNY"), and New Taiwan Dollar ("TWD").
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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
2020
Years Ended December 31,
2019
2018
$
$
(12.3) $
10.9 $
6.4 $
(1.5) $
8.7
(2.6)
The notional amounts for derivative instruments provide one measure of the transaction volume. Total gross notional amounts (in USD) for derivatives
and the 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,
2020
December 31,
2019
December 31,
2020
December 31,
2019
$
$
$
154.3 $
154.5 $
309.8 $
227.2
0.9 $
4.3 $
1.3 $
0.5 $
0.7 $
5.4 $
2.2
0.7
NOTE 4. CONSOLIDATED FINANCIAL STATEMENT DETAILS
The following tables provide details of selected consolidated financial statement items (in millions):
Inventory:
Raw materials
Work-in-process
Finished goods
Total inventory
Prepaids and other current assets:
Prepaid taxes
Equity investments
Net investment in sales-type leases – short-term
Other prepaids and other current assets
Total prepaids and other current assets
96
December 31,
2020
2019
184.1 $
75.6
341.8
601.5 $
December 31,
2020
2019
28.9 $
60.1
81.1
97.4
267.5 $
211.0
75.9
308.6
595.5
28.0
—
63.1
109.1
200.2
$
$
$
$
Table of Contents
Property, plant, and equipment, net:
Land
Building and building/leasehold improvements
Machinery and equipment
Operating lease assets—Intuitive System Leasing
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—Intuitive System Leasing
Other accrued liabilities—short-term
Taxes payable
Current portion of deferred purchase consideration payments
Current portion of contingent consideration
Other accrued liabilities
Total other accrued liabilities—short-term
Other long-term liabilities:
Income taxes—long-term
Deferred revenue—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 and financing activities:
Equipment transfers from inventory to property, plant, and equipment
Acquisition of property, plant, and equipment in accounts payable and accrued
liabilities
Deferred payments and contingent consideration related to business combinations
$
$
$
$
2020
Years Ended December 31,
2019
2018
34.4 $
158.6 $
186.5 $
210.6 $
47.3 $
4.2 $
30.2 $
86.6 $
97
December 31,
2020
2019
277.9 $
773.8
428.0
419.9
112.6
205.4
117.4
2,335.0
(757.7)
1,577.3 $
248.0
408.3
357.2
293.8
74.0
182.2
272.5
1,836.0
(563.1)
1,272.9
(112.1)
(62.2)
December 31,
2020
2019
47.2 $
10.4
15.1
225.6
298.3 $
December 31,
2020
2019
305.6 $
32.1
106.9
444.6 $
37.9
35.7
44.5
199.2
317.3
258.6
27.4
132.3
418.3
179.2
125.7
21.7
16.7
Table of Contents
NOTE 5. REVENUE
The following table presents revenue disaggregated by types and geography (in millions):
U.S.
Instruments and accessories
Systems
Services
Total U.S. revenue
Outside of U.S. (“OUS”)
Instruments and accessories
Systems
Services
Total OUS revenue
Total
Instruments and accessories
Systems
Services
Total revenue
Years Ended December 31,
2020
2019
2018
$
$
$
$
$
$
1,785.1 $
695.0
482.6
2,962.7 $
670.6 $
483.9
241.2
1,395.7 $
2,455.7 $
1,178.9
723.8
4,358.4 $
1,790.4 $
830.7
508.4
3,129.5 $
617.8 $
515.4
215.8
1,349.0 $
2,408.2 $
1,346.1
724.2
4,478.5 $
1,485.2
692.2
456.1
2,633.5
476.8
434.9
179.0
1,090.7
1,962.0
1,127.1
635.1
3,724.2
Remaining Performance Obligations
The transaction price allocated to remaining performance obligations relates to amounts allocated to products and services for which revenue has not
yet been recognized. A significant portion of this amount relates to performance obligations in the Company’s service contracts that will be satisfied and
recognized as revenue in future periods. In addition, non-lease elements associated with the Company’s lease arrangements are primarily comprised of
service contracts that will be satisfied and recognized as revenue in future periods. The transaction price allocated to the remaining performance obligations
and the non-lease elements associated with the lease arrangements were $1,682 million as of December 31, 2020. The remaining performance obligations
are expected to be satisfied over the term of the individual sales arrangements, which generally are 5 years. Service revenue associated with the lease
arrangements will generally be recognized over the service period, which generally coincides with the lease term.
Contract Assets and Liabilities
The following information summarizes the Company’s contract assets and liabilities (in millions):
Contract assets
Deferred revenue
December 31,
2020
2019
$
$
34.6 $
382.3 $
20.8
365.2
The Company invoices its customers based on the billing schedules in its sales arrangements. Payments are generally due 30 days from date of invoice.
Contract assets for the periods presented primarily represent the difference between the revenue that was recognized based on the relative standalone
selling price of the related performance obligations satisfied and the contractual billing terms in the arrangements. Deferred revenue for the periods
presented primarily relates to service contracts where the service fees are billed up-front, generally quarterly or annually, prior to those services having
been performed. The associated deferred revenue is generally recognized over the term of the service period. The Company did not have any significant
impairment losses on its contract assets for the periods presented.
During the year ended December 31, 2020, the Company recognized $282 million of revenue that was included in the deferred revenue balance as of
December 31, 2019. During the year ended December 31, 2019, the Company recognized $307 million of revenue that was included in the deferred
revenue balance as of December 31, 2018.
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Intuitive System Leasing
The following table presents product revenue from Intuitive System Leasing arrangements (in millions):
Sales-type lease revenue
Operating lease revenue
NOTE 6. LEASES
Lessor Information related to Intuitive System Leasing
2020
Years Ended December 31,
2019
2018
$
$
154.4 $
176.7 $
81.6 $
106.9 $
69.8
51.4
Sales-type Leases. Lease receivables relating to sales-type lease arrangements are presented on the Consolidated Balance Sheets as follows (in
millions):
Gross lease receivables
Unearned income
Subtotal
Allowance for credit loss
Net investment in sales-type leases
Reported as:
Prepaids and other current assets
Intangible and other assets, net
Total, net
Contractual maturities of gross lease receivables as of December 31, 2020, are as follows (in millions):
Fiscal Year
2021
2022
2023
2024
2025
2026 and thereafter
Total
99
December 31,
2020
2019
$
$
$
$
$
286.1 $
(11.1)
275.0 $
(4.4)
270.6 $
81.1 $
189.5
270.6 $
191.9
(10.1)
181.8
(1.2)
180.6
63.1
117.5
180.6
Amount
82.7
71.1
55.5
46.3
27.3
3.2
286.1
$
$
Table of Contents
Operating Leases. The Company’s operating lease terms are generally less than seven years. Future minimum lease payments related to the non-
cancellable portion of operating leases (which excludes contingent payments related to usage-based arrangements) as of December 31, 2020, are as follows
(in millions):
Fiscal Year
2021
2022
2023
2024
2025
2026 and thereafter
Total
187.4
177.3
145.9
97.7
45.2
14.7
668.2
Amount
$
$
Variable lease revenue relating to usage-based arrangements was not material for the years ended December 31, 2020, 2019, and 2018.
Lessee Information
The Company enters into operating leases for real estate, automobiles, and certain equipment. Operating lease expense was $21.0 million for the year
ended December 31, 2020. For leases with terms of 12 months or less, the related expense for the year ended December 31, 2020 was not material.
Supplemental cash flow information for the year ended December 31, 2020, related to operating leases was as follows (in millions):
Cash paid for leases that were included within operating cash outflows
Right-of-use assets recognized related to new lease obligations
Amount
11.0
9.6
$
$
Supplemental balance sheet information, as of December 31, 2020, related to operating leases was as follows (in millions, except lease term and
discount rate):
Reported as:
Intangible and other assets, net (Right-of-use assets)
Other accrued liabilities
Other long-term liabilities
Total lease liabilities
Weighted average remaining lease term
Weighted average discount rate
$
$
$
As of December 31, 2020, the future payments related to the Company's operating lease liabilities are scheduled as follows (in millions):
Fiscal Year
2021
2022
2023
2024
2025
2026 and thereafter
Total lease payments
Less imputed interest
Total operating lease liabilities
100
$
$
$
Amount
63.9
21.9
58.0
79.9
5.3 years
3.2 %
Amount
22.7
17.7
14.8
9.9
8.7
15.0
88.8
(8.9)
79.9
Table of Contents
NOTE 7. GOODWILL AND INTANGIBLE ASSETS
Acquisitions in 2020
Orpheus Medical
In February 2020, the Company acquired Orpheus Medical Ltd. and its wholly-owned subsidiaries (“Orpheus Medical”) to deepen and expand the
Company's integrated informatics platform (the “Orpheus Medical Acquisition”). Orpheus Medical provides hospitals with information technology
connectivity, as well as expertise in processing and archiving surgical videos.
Acquisitions in 2019
Chindex
During the first quarter of 2019, the Company's majority-owned Joint Venture with Fosun Pharma acquired certain assets from Chindex and its
affiliates, a subsidiary of Fosun Pharma, including distribution rights, customer relationships, and certain personnel on January 5, 2019, which collectively
met the definition of a business. Chindex was the Company's distributor of da Vinci products and services in China. The transaction enhances the
Company's ability to serve patients, surgeons, and hospitals in China.
The total purchase consideration of $66.0 million, as of the acquisition date, included a contingent consideration liability of $64.7 million and an
upfront cash payment of $1.3 million. The amount and timing of the contingent consideration payments were based upon the underlying performance of the
business in 2019 and 2020. As of the acquisition date, the estimated total undiscounted contingent consideration was approximately $81 million. As of
December 31, 2020, the total undiscounted contingent consideration has decreased by approximately $1 million due to a change in the timing of the
milestone achievements. The contingent consideration liability was measured at estimated fair value using a discounted cash flow model, which requires
significant inputs not observable in the market and, thus, represents a Level 3 measurement. Key assumptions included (1) the probability and timing of
milestone achievements based on projected future revenues through 2019 and 2020, and (2) the discount rate used to calculate the present value of the
milestone payments. At each reporting period until the contingent consideration is settled, the Company remeasures the contingent consideration liability
and records changes in fair value within selling, general and administrative expenses. For the year ended December 31, 2020, the contingent consideration
liability changed due to payments of $53.7 million and net additional expenses of $11.3 million, primarily related to accretion due to the passage of time.
Changes to the contingent consideration estimate can result from adjustments to discount rates, accretion due to the passage of time, or change in estimates
in the performance of the business. The assumptions related to determining the fair value of contingent consideration include a significant amount of
judgment, and any changes in the underlying estimates could have a material impact on the amount of contingent consideration adjustment recorded in any
given period.
The Company recorded $1.7 million of net tangible assets, $58.6 million of intangible assets, and $5.7 million of residual goodwill. Intangible assets
included distribution rights of $48.2 million and customer relationships of $10.4 million, which are being amortized over a weighted-average period of 2.9
years. Key assumptions included (1) the amount and timing of projected future cash flows, and (2) the discount rate used to determine the present value of
these cash flows. The goodwill is not amortizable for income tax purposes. The allocation of purchase consideration was completed in the third quarter of
2019. There were no adjustments to the provisional amounts in the measurement period.
Schölly
During the third quarter of 2019, the Company acquired certain assets and operations from Schölly Fiberoptic GmbH ("Schölly"), including
manufacturing process technology, a non-compete agreement, certain personnel, and net tangible assets on August 31, 2019, which collectively met the
definition of a business. The Company believes that the transaction strengthens the Company's supply chain and manufacturing capacity for imaging
products used in the Company's da Vinci systems. The total purchase consideration of $101.4 million consists of an initial cash payment of $34.4 million
and deferred cash payments totaling approximately $67.0 million, of which $13.6 million continues to be deferred as of December 31, 2020. The timing of
the future payments is based upon achieving certain integration steps, which will be substantially completed in early 2021.
The Company recorded $11.5 million of net tangible assets, which included $6.7 million of inventory and $1.4 million of cash, $31.0 million of
intangible assets, and $58.9 million of residual goodwill. The balances include the net impact of adjustments to the preliminary allocation of the purchase
price within the one year measurement period, which decreased goodwill by $0.8 million during 2020. There was no significant impact to the Consolidated
Statements of Income as result of these adjustments. Intangible assets included manufacturing process technology of $28.0 million and non-compete
provisions of $3.0 million, which are being amortized over a weighted-average period of 6.6 years. Key assumptions included (1) the amount and timing of
projected future cash flows, and (2) the discount rate used to determine the present value of these cash flows. The allocation of purchase consideration is
considered preliminary with provisional amounts primarily related to working capital.
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Goodwill primarily consists of the manufacturing and other synergies of the combined operations and the value of the assembled workforce. The majority
of goodwill is not deductible for income tax purposes.
In 2019, the Company has included the results of the acquired businesses, since their acquisition dates, in its Consolidated Financial Statements, and
the revenues and earnings were not material in the year. Pro forma results of operations related to the acquisitions have not been presented, because the
operating results of the acquired businesses are not considered material to the Consolidated Financial Statements.
Goodwill
The following table summarizes the changes in the carrying amount of goodwill (in millions):
Balance at December 31, 2018
Acquisition activity
Translation and other
Balance at December 31, 2019
Acquisition activity
Translation and other
Balance at December 31, 2020
Amount
240.6
65.4
1.2
307.2
29.3
0.2
336.7
$
$
The Company completed its annual goodwill impairment test and determined that no impairment existed. As of December 31, 2020, there has been no
impairment of goodwill.
Intangible Assets
The following table summarizes the components of gross intangible asset, accumulated amortization, and net intangible asset balances as of
December 31, 2020, and 2019 (in millions):
Patents and developed technology
Distribution rights and others
Customer relationships
Total intangible assets
December 31, 2020
December 31, 2019
Gross Carrying
Amount
Accumulated
Amortization
$
$
198.4 $
91.9
59.0
349.3 $
(158.7) $
(77.4)
(35.8)
(271.9) $
Net
Carrying
Amount
Gross Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
39.7 $
14.5
23.2
77.4 $
186.7 $
91.3
57.7
335.7 $
(149.0) $
(44.9)
(29.7)
(223.6) $
37.7
46.4
28.0
112.1
Amortization expense related to intangible assets was $49.8 million, $43.0 million, and $14.2 million for the years ended December 31, 2020, 2019,
and 2018, respectively.
The estimated future amortization expense related to intangible assets as of December 31, 2020, is as follows (in millions):
Fiscal Year
2021
2022
2023
2024
2025
2026 and thereafter
Total
Amount
21.3
18.1
13.4
11.4
9.8
3.4
77.4
$
$
The preceding expected amortization expense is an estimate. Actual amounts of amortization expense may differ from estimated amounts due to
additional intangible asset acquisitions, changes in foreign currency exchange rates, impairment of intangible assets, accelerated amortization of intangible
assets, and other events.
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NOTE 8. COMMITMENTS AND CONTINGENCIES
Commitments
Our commitments include an estimated amount of approximately $630 million relating to the Company’s open purchase orders and contractual
obligations that occur in the ordinary course of business, including commitments with contract manufacturers and suppliers for which the Company has not
received the goods or services, commitments for capital expenditures and construction-related activities for which the Company has not received the
services, and acquisition and licensing of intellectual property. Although open purchase orders are considered enforceable and legally binding, the terms
generally allow the Company the option to cancel, reschedule, and adjust its requirements based on its business needs prior to the delivery of goods or
performance of services. Additionally, the Company has committed to make certain future milestone payments to third parties as part of licensing,
collaboration, and development arrangements. Payments under these arrangements generally become due and payable only upon the achievement of certain
specified developmental, regulatory, and/or commercial milestones. For instances in which the achievement of these milestones is neither probable nor
reasonably estimable, such contingencies are not included in the estimated amount.
Contingencies
From time to time, 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 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 the 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, and future results of operations.
During the years ended December 31, 2020, 2019, and 2018, the Company recorded pre-tax litigation charges (benefits) of $(1.2) million, $0.5 million,
and $45.2 million, respectively, related to securities class action lawsuits and product liability claims.
Product Liability Litigation
The Company is currently named as a defendant in a number of individual product liability lawsuits filed in various state and federal courts. The
plaintiffs generally 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. 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. The Company disputes these allegations and is defending against these claims.
The Company’s estimate of the anticipated cost of resolving the pending cases is based on negotiations with attorneys for the claimants. The final
outcome of the pending lawsuits and claims, and others that might arise, is dependent on many variables that are difficult to predict, and the ultimate cost
associated with these product liability lawsuits and 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.
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 U.S. 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. Ethicon asserts infringement of U.S. Patent Nos. 9,585,658,
8,479,969, 9,113,874, 8,998,058, 8,991,677, 9,084,601, and 8,616,431. A claim construction hearing occurred on October 1, 2018, and the court issued a
scheduling order on December 28, 2018. On March 20, 2019, the court granted the Company's Motion to Stay pending an Inter Partes Review to
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be held at the Patent Trademark and Appeals Board to review patentability of six of the seven patents noted above and vacated the trial date. On August 1,
2019, the court granted the parties' joint stipulation to modify the stay in light of Ethicon's U.S. International Trade Commission ("USITC") complaint
against Intuitive involving U.S. Patent Nos. 8,479,969 and 9,113,874, discussed below.
On August 27, 2018, Ethicon filed a second complaint for patent infringement against the Company in the U.S. District Court for the District of
Delaware. The complaint alleges that the Company’s SureForm 60 Staplers infringe five of Ethicon’s patents. Ethicon asserts infringement of U.S. Patent
Nos. 9,884,369, 7,490,749, 8,602,288, 8,602,287, and 9,326,770. The Company filed an answer denying all claims. On March 19, 2019, Ethicon filed a
Motion for Leave to File a First Amended Complaint, removing allegations related to U.S. Patent No. 9,326,770 and adding allegations related to U.S.
Patent Nos. 9,844,379 and 8,479,969. On July 17, 2019, the court entered an order denying the amendment, without prejudice, and granting the parties'
joint stipulation to stay the case in its entirety in light of the USITC investigation involving U.S. Patent Nos. 9,844,369 and 7,490,749, discussed below.
On May 30, 2019, Ethicon filed a complaint with the USITC, asserting infringement of U.S. Patent Nos. 9,884,369, 7,490,749, 9,844,379, 9,113,874,
and 8,479,969. On June 28, 2019, the USITC voted to institute an investigation (No. 337-TA-1167) with respect to the claims in this complaint. The
accused products include the Company's EndoWrist 30, EndoWrist 45, SureForm 45, and SureForm 60 Staplers, as well as the stapler reload cartridges. In
March 2020, Ethicon dismissed its claims concerning U.S. Patent No. 7,490,749. The evidentiary hearing has been set for February 8, 2021. An
unfavorable ruling by the USITC could have an adverse effect on our results of operations, including a prohibition on importing the accused products into
the U.S. or necessitating workarounds that may limit certain features of our products.
Based on currently available information, the Company is unable to make a reasonable estimate of loss or range of losses, if any, arising from these
matters.
Commercial Litigation
On February 27, 2019, Restore Robotics LLC and Restore Repair LLC ("Restore") filed a complaint alleging anti-trust claims against the Company.
On May 13, 2019, Restore filed an amended complaint alleging anti-trust claims relating to the da Vinci Surgical System and EndoWrist service,
maintenance, and repair processes. On September 16, 2019, the Court partially granted and partially denied the Company's Motion to Dismiss the amended
complaint.
On September 30, 2019, the Company filed an answer denying the anti-trust allegations and a counterclaim against Restore. The Company filed
amended counterclaims after the Court partially granted and partially denied Restore's motion to dismiss the counterclaim. The amended counterclaims
allege that Restore violated the Federal Lanham Act, the Federal Computer Fraud and Abuse Act, and Florida's Deceptive and Unfair Trade Practices Act
and that Restore is also liable to the Company for Unfair Competition and Tortious Interference with Contract. On January 7, 2020, the Court denied
Restore's motion to dismiss the amended counterclaims. In its initial scheduling order, the Court stated that it anticipated trial in this case to occur in or
before February 2022.
On September 28, 2020, Rebotix Repair Inc. (“Rebotix”) filed a complaint alleging anti-trust claims against the Company relating to EndoWrist
service, maintenance, and repair processes. The complaint was formally served on the Company on October 6, 2020, and the Court anticipates trial in this
case to occur in or around March 2022. On December 8, 2020, the Company filed a motion to dismiss the complaint.
Based on currently available information, the Company is unable to make a reasonable estimate of loss or range of losses, if any, arising from these
matters.
NOTE 9. STOCKHOLDERS’ EQUITY
Stock Repurchase Program
Through December 31, 2020, the Company’s Board of Directors (the “Board”) has authorized an aggregate of $7.5 billion of funding for the
Company’s common stock repurchase program (the “Repurchase Program”) since its establishment in March 2009. The most recent authorization occurred
in January 2019 when the Board increased the authorized amount available under the Repurchase Program to $2.0 billion. As of December 31, 2020, the
remaining amount of share repurchases authorized by the Board under the Repurchase Program was approximately $1.6 billion.
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The following table provides the stock repurchase activities during the years ended December 31, 2020, 2019, and 2018 (in millions, except per share
amounts):
Shares repurchased
Average price per share
Value of shares repurchased
2020
Years Ended December 31,
2019
2018
$
$
0.2
551.51 $
134.3 $
0.6
481.35 $
269.5 $
—
—
—
The Company uses the par value method of accounting for its stock repurchases. As a result of share repurchase activities during the years ended
December 31, 2020, 2019, and 2018, the Company reduced common stock and additional paid-in capital by an aggregate of $8 million, $15 million, and
zero, respectively, and charged $126 million, $255 million, and zero, respectively, to retained earnings.
Accumulated Other Comprehensive Income (Loss)
The components of accumulated other comprehensive income (loss), net of tax, for the years ended December 31, 2020, and 2019, are as follows (in
millions):
Unrealized
Gains (Losses)
on
Available-for-Sale
Securities
Year Ended December 31, 2020
Foreign
Currency
Translation
Gains
(Losses)
Employee Benefit
Plans
Gains (Losses)
on Hedge
Instruments
0.7 $
(0.8)
(2.8)
(3.6)
(2.9) $
20.4 $
13.8
(4.7)
9.1
29.5 $
— $
4.7
—
4.7
4.7 $
(8.7) $
1.0
1.3
2.3
(6.4) $
Total
12.4
18.7
(6.2)
12.5
24.9
Year Ended December 31, 2019
Gains
(Losses)
on Hedge
Instruments
Unrealized
Gains
(Losses)
on
Available-for-Sale
Securities
Foreign
Currency
Translation
Gains
(Losses)
Employee Benefit
Plans
Total
0.2 $
5.8
(5.3)
0.5
0.7 $
(9.8) $
30.7
(0.5)
30.2
20.4 $
(0.3) $
0.3
—
0.3
— $
(3.4) $
(5.9)
0.6
(5.3)
(8.7) $
(13.3)
30.9
(5.2)
25.7
12.4
Beginning balance
Other comprehensive income (loss) before reclassifications
Reclassified from accumulated other comprehensive (loss)
Net current-period other comprehensive income (loss)
Ending balance
Beginning balance
Other comprehensive income (loss) before reclassifications
Reclassified from accumulated other comprehensive income
(loss)
Net current-period other comprehensive income (loss)
Ending balance
NOTE 10. 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 2029. In April 2020, 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 28,450,000 to 32,450,000. As of December 31, 2020, approximately 8.1 million shares were
reserved for future issuance under the 2010 Plan. A maximum of 3.5 million of these shares can be awarded as RSUs.
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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. The New Hire Plan expired in October 2019
and, therefore, there are no shares reserved for future issuance under the New Hire Plan. However, awards granted prior to the plan's expiration continue to
remain outstanding until their original expiration date.
Employee Option Vesting. Historically, the Company has made 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). Beginning in 2020, the Company changed the timing of its
annual equity award grants to the last business day of February and on the same date in August, or if that date is not a business day, the next business day.
The February grants vest 6/48 upon completion of 6 months of service and 1/48 per month thereafter. The August 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 of 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 vested 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 vested 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. The
Directors' Plan was terminated in November 2020 and, therefore, there are no shares reserved for future issuance under the Directors' Plan. However,
options granted prior to the plan's termination continue to remain outstanding until their original expiration date.
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 0.2 million shares under the ESPP, representing approximately $71.2 million, $56.4 million, and
$46.8 million in employee contributions for the years ended December 31, 2020, 2019, and 2018, respectively. As of December 31, 2020, there were
approximately 1.1 million shares reserved for future issuance under the ESPP.
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. The RSUs to existing non-employee directors vest one year from the date of
grant or at the next Annual Shareholders Meeting, whichever comes first. New non-employee directors receive pro-rated RSU grants that vest on the same
term as the annual RSU grants. The number of shares issued on the date the RSUs vest is net of the minimum statutory tax withholdings, which are paid in
cash to the appropriate taxing authorities on behalf of the Company’s employees.
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Stock Option Information
Option activity during fiscal 2020 under all the stock plans was as follows (in millions, except per share amounts):
Balance at December 31, 2019
Options granted
Options exercised
Options forfeited/expired
Balance at December 31, 2020
Stock Options Outstanding
Number
Outstanding
Weighted Average
Exercise Price Per
Share
5.4 $
0.5 $
(1.3) $
(0.1) $
4.5 $
246.64
624.45
179.67
490.77
305.06
The aggregate intrinsic value of stock options exercised under the Company’s stock plans determined as of the date of option exercise was $598
million, $512 million, and $527 million during the years ended December 31, 2020, 2019, and 2018, respectively. Cash received from option exercises and
employee stock purchase plans for the years ended December 31, 2020, 2019, and 2018, was $309 million, $273 million, and $237 million, respectively.
The income tax benefit from stock options exercised was $135 million for the year ended December 31, 2020.
The following table summarizes significant ranges of outstanding and exercisable options as of December 31, 2020 (number of shares and aggregate
intrinsic value in millions):
Range of
Exercise Prices
Number
of Shares
$89.74-$165.59
$165.68-$178.39
$178.75-$328.46
$347.53-$533.96
$537.40-$758.07
Total
0.9
1.1
1.0
1.0
0.5
4.5
Options Outstanding
Weighted
Average
Remaining
Contractual Life
2.9
3.2
4.8
8.1
8.9
5.3
$
$
$
$
$
$
Weighted
Average
Exercise Price
Per Share
Aggregate
Intrinsic
Value (1)
Number
of Shares
141.87
173.41
238.80
492.87
625.37
305.06 $
2,296
0.9
1.1
1.0
0.5
0.1
3.6
Options Exercisable
Weighted
Average
Remaining
Contractual Life
Weighted
Average
Exercise Price
Per Share
Aggregate
Intrinsic
Value (1)
$
$
$
$
$
$
141.86
173.41
237.40
482.29
596.67
241.12 $
2,050
4.4
(1) The aggregate intrinsic value represents the total pre-tax intrinsic value, based on the Company’s closing stock price of $818.10 at December 31, 2020, 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, 2020, a total of 4.4 million shares of stock options vested and expected to vest had a weighted-average remaining contractual life
of 5.2 years, an aggregate intrinsic value of $2,275 million, and a weighted-average exercise price of $299.61.
Restricted Stock Units Information
RSU activity for the year ended December 31, 2020, was as follows (in millions, except per share amounts):
Unvested balance at December 31, 2019
Granted
Vested
Forfeited
Unvested balance at December 31, 2020
Shares
Weighted Average
Grant Date Fair Value
410.09
545.67
345.91
469.68
489.91
1.9 $
0.7
(0.7)
(0.1)
1.8
As of December 31, 2020, 1.6 million shares of RSUs were expected to vest with an aggregate intrinsic value of $1,309 million. The aggregate vesting
date fair value of RSUs vested was $478 million, $433 million, and $334 million during the years ended December 31, 2020, 2019, and 2018, respectively.
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Share-Based Compensation Expense
The following table summarizes share-based compensation expense (in millions):
Cost of sales—products
Cost of sales—services
Total cost of sales
Selling, general and administrative
Research and development
Share-based compensation expense before income taxes
Income tax effect
Share-based compensation expense after income taxes
2020
Years Ended December 31,
2019
2018
$
$
58.9 $
24.0
82.9
202.2
113.6
398.7
81.4
317.3 $
46.6 $
20.4
67.0
169.5
101.4
337.9
70.2
267.7 $
36.4
16.8
53.2
133.2
76.2
262.6
54.3
208.3
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 under the ESPP, 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, 2020, 2019, and 2018, 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
2020
0.6%
4.1
32%
$163.01
0.9%
1.2
30%
$171.87
$545.67
Years Ended December 31,
2019
2.0%
4.1
30%
$142.53
2.1%
1.2
29%
$148.99
$541.36
2018
2.7%
4.3
33%
$146.30
2.1%
1.3
32%
$135.84
$431.11
As share-based compensation expense recognized in the Consolidated Statements of Income during the years ended December 31, 2020, 2019, and
2018, is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures.
As of December 31, 2020, there was a total of $119 million, $534 million, and $19 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 2.4 years for unvested stock options, 2.2 years for unvested restricted stock units, and 1.0 years for rights
granted to acquire common stock under the ESPP.
NOTE 11. INCOME TAXES
Income before provision for income taxes for the years ended December 31, 2020, 2019, and 2018, consisted of the following (in millions):
U.S.
Foreign
Total income before provision for income taxes
2020
Years Ended December 31,
2019
2018
$
$
926.8 $
280.2
1,207.0 $
1,053.7 $
448.5
1,502.2 $
852.7
426.8
1,279.5
108
Table of Contents
The provision for income taxes for the years ended December 31, 2020, 2019, and 2018, consisted of the following (in millions):
Current
Federal
State
Foreign
Deferred
Federal
State
Foreign
Total income tax expense
2020
Years Ended December 31,
2019
2018
$
$
$
$
$
34.2 $
21.5
26.9
82.6 $
23.8 $
1.6
32.2
57.6 $
140.2 $
82.0 $
26.5
18.0
126.5 $
8.5 $
3.2
(17.8)
(6.1) $
120.4 $
89.5
21.1
9.9
120.5
(4.1)
(0.3)
38.4
34.0
154.5
Income tax expense differs from amounts computed by applying the statutory federal income rate of 21% for the years ended December 31, 2020,
2019, and 2018, 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
U.S. tax on foreign earnings
Research and development credit
Share-based compensation not benefited
Unrecognized tax benefit related to share-based compensation
Reversal of unrecognized tax benefits
Excess tax benefits related to share-based compensation
Deferred tax remeasurement due to Swiss Tax Reform
Other
Total income tax expense
2020
Years Ended December 31,
2019
2018
$
253.5 $
315.5 $
268.7
23.1
(19.3)
29.3
(37.1)
14.3
39.3
(4.0)
(166.2)
—
7.3
140.2 $
29.7
(56.2)
55.0
(32.7)
13.5
—
(8.4)
(146.5)
(51.3)
1.8
120.4 $
20.8
(44.7)
43.7
(25.2)
9.9
—
(5.2)
(116.2)
—
2.7
154.5
$
109
Table of Contents
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:
Net operating losses
Share-based compensation expense
Lease liabilities
Expenses deducted in later years for tax purposes
Intangible assets
Research and other credits
Other
Gross deferred tax assets
Valuation allowance
Deferred tax assets
Deferred tax liabilities:
Fixed assets
Right-of-use assets
Intangible assets
Other
Deferred tax liabilities
Net deferred tax assets
December 31,
2020
2019
$
$
$
$
$
$
$
27.7 $
101.1
12.0 $
29.3
321.8
76.3
—
568.2 $
(81.4)
486.8 $
(91.1) $
(8.4)
(10.1)
(13.2)
(122.8) $
364.0 $
5.1
95.6
17.0
25.0
362.3
56.1
5.3
566.4
(57.2)
509.2
(58.3)
(17.0)
(8.3)
—
(83.6)
425.6
As of December 31, 2020, and 2019, the Company had valuation allowances of $81.4 million and $57.2 million, respectively, primarily related to
California research and development credit carry forwards, for which the Company does not believe a tax benefit is more likely than not to be realized.
As of December 31, 2020, the Company had foreign federal net operating loss carryforwards of $253 million and foreign local net operating loss
carryforwards of $534 million, which will begin to expire in 2024, if not utilized. Utilization of these net operating loss carryforwards may be subject to
certain limitations. The Company does not expect the limitations to result in any permanent loss of these tax benefits.
The Company intends to repatriate earnings from its Swiss subsidiary and joint venture in Hong Kong, as needed, and the U.S. and foreign tax
implications of such repatriations are not expected to be significant. The Company will continue to indefinitely reinvest earnings from the rest of our
foreign subsidiaries, which are not significant.
In August 2019, Swiss tax reform was enacted, which resulted in a higher statutory rate for the Company's Swiss entity for years after 2019. The
Company remeasured its Swiss deferred tax asset at the enacted tax rate and recorded an income tax benefit of $51.3 million in its 2019 income tax
provision.
A reconciliation of the beginning and ending amounts of gross unrecognized income tax benefits for the years ended December 31, 2020, 2019, and
2018, 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
2020
Years Ended December 31,
2019
2018
$
$
96.7 $
40.1
46.1
—
(0.5)
(6.1)
176.3 $
78.8 $
26.5
1.2
—
(3.8)
(6.0)
96.7 $
65.4
22.5
—
(0.9)
(8.2)
78.8
110
Table of Contents
As of December 31, 2020, 2019, and 2018, gross interest related to unrecognized tax benefits accrued was $11.0 million, $2.9 million, and
$2.6 million, respectively. The Company’s net unrecognized tax benefits and related interest are presented in other long-term liabilities and long term
deferred tax assets on the Consolidated Balance Sheets.
Total gross unrecognized tax benefits as of December 31, 2020, were $176.3 million, which, if recognized, would result in a reduction of the
Company’s effective tax rate.
In July 2015, a U.S. Tax Court opinion (the “2015 Opinion”) was issued involving an independent third party related to charging foreign subsidiaries
for share-based compensation. Based on the findings of the U.S. Tax Court, direct share-based compensation had been excluded from our intercompany
charges starting in 2015. In June 2019, the Ninth Circuit Court of Appeals (the "Ninth Circuit") reversed the 2015 Opinion (the “Ninth Circuit Opinion”).
Subsequently, a re-hearing of the case was requested, but was denied in November 2019. In February 2020, a petition was filed to appeal the Ninth Circuit
Opinion to the U.S. Supreme Court. The petition was denied by the U.S. Supreme Court on June 22, 2020, which makes the Ninth Circuit Opinion binding
precedent in the Ninth Circuit. As a result, the Company recorded an increase in the income tax provision of $39.3 million during the year ended
December 31, 2020. The Company will continue to monitor future IRS actions or other developments regarding this matter and will assess the impact of
any such developments to our income tax provision in the quarter that they occur. We are treating share-based compensation expense in accordance with
the Ninth Circuit Opinion for 2020 and future periods.
The Company files federal, state, and foreign income tax returns in many U.S. and OUS jurisdictions. Years before 2016 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.
NOTE 12. NET INCOME PER SHARE
The following table presents the computation of basic and diluted net income per share attributable to Intuitive Surgical, Inc. (in millions, except per
share amounts):
Numerator:
Net income attributable to Intuitive Surgical, Inc.
Denominator:
Weighted average shares outstanding used in basic calculation
Add: dilutive effect of potential common shares
Weighted average shares outstanding used in diluted calculation
Net income per share attributable to Intuitive Surgical, Inc.:
Basic
Diluted
2020
Years Ended December 31,
2019
2018
$
$
$
1,060.6 $
1,379.3 $
1,127.9
117.0
3.3
120.3
9.06 $
8.82 $
115.4
4.1
119.5
11.95 $
11.54 $
113.7
5.1
118.8
9.92
9.49
Share-based compensation awards of approximately 0.6 million, 0.7 million, and 0.4 million shares for the years ended December 31, 2020, 2019, and
2018, respectively, were outstanding but were not included in the computation of diluted net income per share attributable to Intuitive Surgical, Inc.
common stockholders, because the effect of including such shares would have been anti-dilutive in the periods presented.
111
NOTE 13. 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 attributable to Intuitive Surgical, Inc.
Net income attributable to Intuitive Surgical, Inc. per share:
(1)(2)(3)
Basic
Diluted
(1) Includes discrete tax benefits as follows:
Excess tax benefits related to share-based compensation arrangements
Discrete tax expense arising from the conclusion of a tax matter
(2) Includes acquisition-related benefits (charges)
(3) Includes charitable foundation contribution expense
Revenue
Gross profit
Net income attributable to Intuitive Surgical, Inc.
Net income attributable to Intuitive Surgical, Inc. per share:
(1)(2)(3)
Basic
Diluted
(1) Includes discrete tax benefits as follows:
Excess tax benefits related to share-based compensation arrangements
One-time tax benefit related to the enactment of Swiss tax reform
(2) Includes acquisition-related benefits (charges)
(3) Includes charitable foundation contribution expense
December 31,
2020
September 30,
2020
June 30,
2020
March 31,
2020
Three Months Ended
1,329.1 $
895.8 $
365.2 $
3.11 $
3.02 $
21.3 $
— $
(2.9) $
(25.0) $
1,077.7 $
724.3 $
313.9 $
2.68 $
2.60 $
47.9 $
— $
(4.6) $
— $
852.1 $
502.9 $
68 $
0.58 $
0.57 $
31.6 $
(36.8) $
(4.4) $
— $
1,099.5
738.2
313.5
2.69
2.62
65.4
—
1.4
—
December 31,
2019
September 30,
2019
June 30,
2019
March 31,
2019
Three Months Ended
1,277.7 $
896.0 $
357.7 $
3.09 $
2.99 $
33.7 $
— $
(3.1) $
(5.0) $
1,128.2 $
785.6 $
396.8 $
3.44 $
3.33 $
28.8 $
51.3 $
3.0 $
— $
1,098.9 $
759.0 $
318.3 $
2.76 $
2.67 $
11.3 $
— $
(4.1) $
— $
973.7
669.6
306.5
2.67
2.56
72.7
—
(3.0)
—
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
113
Table of Contents
VALUATION AND QUALIFYING ACCOUNTS
(IN MILLIONS)
SCHEDULE II
Sales returns and allowances
Year ended December 31, 2020
Year ended December 31, 2019
Year ended December 31, 2018
(1) Primarily represents products returned.
Balance at
Beginning of
Year
Additions
Deductions
(1)
Balance at
End of Year
$
$
$
11.7 $
11.2 $
9.1 $
39.7 $
43.2 $
42.3 $
(35.9) $
(42.7) $
(40.2) $
15.5
11.7
11.2
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Table of Contents
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
None.
ITEM 9A. CONTROLS AND PROCEDURES
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is
recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and
communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow for timely decisions
regarding required disclosure.
As required by SEC Rule 13a-15(b), we carried out an evaluation, under the supervision and with the participation of our management, including our
principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of
the end of the period covered by this Annual Report on Form 10-K. Based on the foregoing, our principal executive officer and principal financial officer
concluded that our disclosure controls and procedures were effective at the reasonable assurance level.
Inherent Limitations Over Internal Controls
Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with U.S. GAAP. Our internal control over financial reporting includes those
policies and procedures that:
(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;
(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S.
GAAP and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and
(iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have
a material effect on the financial statements.
Management, including our principal executive officer and principal financial officer, does not expect that our internal controls will prevent or detect
all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of
controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of internal controls can provide
absolute assurance that all control issues and instances of fraud, if any, have been detected. Also, any evaluation of the effectiveness of controls in future
periods are subject to the risk that those internal controls may become inadequate because of changes in business conditions or that the degree of
compliance with the policies or procedures may deteriorate.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in the
Exchange Act Rules 13a-15(f). Under the supervision and with the participation of our management, including our principal executive officer and principal
financial officer, we conducted an assessment of the effectiveness of our internal control over financial reporting based on the framework in Internal
Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on the results of our
assessment under the framework in the Internal Control—Integrated Framework (2013), our management concluded that our internal control over financial
reporting was effective as of December 31, 2020.
The effectiveness of our internal control over financial reporting as of December 31, 2020, 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, 2020, that have materially
affected, or are reasonably likely to materially affect, our internal control over financial statements.
ITEM 9B. OTHER INFORMATION
None.
115
Table of Contents
PART III
Certain information required by Part III is omitted from this report on Form 10-K and is incorporated herein by reference to our definitive Proxy
Statement for our next Annual Meeting of Stockholders (the “Proxy Statement”), which we intend to file pursuant to Regulation 14A of the Securities
Exchange Act of 1934, as amended, within 120 days after December 31, 2020.
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.
116
Table of Contents
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE
PART IV
(a) The following documents are filed as part of this Annual Report on Form 10-K.
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. for 2020, 2019, and 2018 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
Page
115
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
117
Table of Contents
3.1(1)
3.2(2)
4.1(3)
4.2
10.1(4)
10.2(5)
10.3(6)
10.4(7)
10.5(8)
10.6(9)
10.7(10)
10.8(11)
10.9(12)
10.10(13)
10.11(14)
21.1
23.1
31.1
31.2
32.1
101
104
EXHIBIT INDEX
Amended and Restated Certificate of Incorporation of the Company, as amended.
Amended and Restated Bylaws of the Company.
Specimen Stock Certificate.
Description of the Registrant's Securities Registered Pursuant to Section 12 of the Securities Exchange Act of 1934.
2000 Non-Employee Directors’ Stock Option Plan. *
Form of Indemnity Agreement. *
2009 Employment Commencement Incentive Plan, as amended and restated. *
2000 Employee Stock Purchase Plan, as amended and restated. *
2010 Incentive Award Plan, as amended and restated. *
Severance Plan. *
Form of Amended and Restated Intuitive Surgical, Inc. 2009 Employment Commencement Incentive Plan Stock Option Grant Notice. *
Form of Amended and Restated Intuitive Surgical, Inc. 2009 Employment Commencement Incentive Plan Restricted Stock Unit Grant
Notice. *
Form of Amended and Restated Intuitive Surgical, Inc. 2010 Incentive Award Plan Global Stock Option Grant Notice. *
Form of Amended and Restated Intuitive Surgical, Inc. 2010 Incentive Award Plan Global Restricted Stock Unit Grant Notice. *
Master Confirmation and Supplemental Confirmation between Intuitive Surgical, Inc. and Goldman Sachs & Co. 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, 2020, formatted in
Inline XBRL (Inline 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.
The cover page from Intuitive Surgical, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2020, formatted in Inline
XBRL and contained in Exhibit 101.
(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 July 23, 2020 (File No. 000-30713).
Incorporated by reference to Exhibit 3.1 filed with the Company’s Current Report on Form 8-K filed on February 1, 2021 (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 10.1 filed with the Company’s Current Report on Form 8-K filed on April 28, 2020 (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 10.9 filed with the Company’s 2015 Annual Report on Form 10-K filed on February 2, 2016 (File No. 000-30713).
(11) 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).
(12) Incorporated by reference to Exhibit 10.2 filed with the Company’s Quarterly Report on Form 10-Q filed on July 23, 2020 (File No. 000-30713).
(13) Incorporated by reference to Exhibit 10.3 filed with the Company’s Quarterly Report on Form 10-Q filed on July 23, 2020 (File No. 000-30713).
(14) 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).
* Management contract or compensatory plan or arrangement.
ITEM 16. FORM 10-K SUMMARY
None.
118
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 9, 2021
Power of Attorney
Each person whose individual signature appears below hereby authorizes and appoints Gary Guthart, Ph.D., and Marshall Mohr, and each of them,
with full power of substitution and re-substitution and full power to act without the other, as his or her true and lawful attorney-in-fact and agent to act in
his or her name, place, and stead and to execute in the name and on behalf of each person, individually and in each capacity stated below, and to file any
and all amendments to this annual report on Form 10‑K and to file the same, with all exhibits thereto, and other documents in connection therewith, with
the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform
each and every act and thing, ratifying and confirming all that said attorneys-in-fact and agents or any of them or their or his substitute or substitutes may
lawfully do or cause to be done by virtue thereof.
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
/S/ CRAIG H. BARRATT
Craig H. Barratt, Ph.D.
/S/ JOSEPH C. BEERY
Joseph C. Beery
/S/ AMAL M. JOHNSON
Amal M. Johnson
/S/ DON R. KANIA
Don R. Kania, Ph.D.
/S/ AMY L. LADD
Amy L. Ladd, Ph.D.
/S/ KEITH R. LEONARD JR.
Keith R. Leonard Jr.
/S/ ALAN J. LEVY
Alan J. Levy, Ph.D.
/S/ JAMI DOVER NACHTSHEIM
Jami Dover Nachtsheim
/S/ MARK J. RUBASH
Mark J. Rubash
President, Chief Executive Officer, and Director
(Principal Executive Officer)
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
Senior Vice President, Finance
(Principal Accounting Officer)
Chairman of the Board of Directors
Director
Director
Director
Director
Director
Director
Director
Director
119
February 9, 2021
February 9, 2021
February 9, 2021
February 9, 2021
February 9, 2021
February 9, 2021
February 9, 2021
February 9, 2021
February 9, 2021
February 9, 2021
February 9, 2021
February 9, 2021
DESCRIPTION OF THE REGISTRANT’S SECURITIES
REGISTERED PURSUANT TO SECTION 12 OF THE
SECURITIES EXCHANGE ACT OF 1934
Exhibit 4.2
As of December 31, 2020, Intuitive Surgical, Inc. (“Intuitive Surgical,” the “Company,” “we,” “us” or “our”) had one
class of securities registered under Section 12 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”): our
common stock, $0.001 par value per share (“Common Stock”).
Description of Common Stock
The following description of our Common Stock is a summary and does not purport to be complete. It is subject to and
qualified in its entirety by reference to our Amended and Restated Certificate of Incorporation, as amended (the “Certificate of
Incorporation”), and our Amended and Restated Bylaws (the “Bylaws”), each of which are incorporated by reference as an
exhibit to the Annual Report on Form 10-K of which this Exhibit 4.2 is a part. We encourage you to read our Certificate of
Incorporation, our Bylaws, and the applicable provisions of the Delaware General Corporation Law for additional information.
Authorized Capital Stock
Our authorized capital stock consist of 300,000,000 shares of Common Stock and 2,500,000 shares of undesignated
preferred stock, $0.001 par value per share (“Preferred Stock”). The outstanding shares of our Common Stock are fully paid and
nonassessable.
Voting Rights
The holders of Common Stock are entitled to one vote per share on all matters on which the holders of Common Stock are
entitled to vote and do not have cumulative voting rights.
Dividend Rights
Subject to preferences that may be applicable to any Preferred Stock outstanding at the time, the holders of outstanding
shares of Common Stock are entitled to receive ratably any dividends out of assets legally available therefor as our board of
directors may from time to time determine.
Liquidation Rights
In the event of a liquidation, dissolution, or winding-up of the Company, holders of Common Stock are entitled to share
equally and ratably in the assets of the Company, if any, remaining after the payment of all debts and liabilities of the Company
and the liquidation preference of any outstanding Preferred Stock.
Rights and Preferences
Holders of our Common Stock have no preemptive, conversion, subscription, or other rights, and there are no redemption
or sinking fund provisions applicable to our Common Stock. The rights, preferences, and privileges of the holders of our
Common Stock are subject to, and may be adversely affected by, the rights of the holders of shares of any series of our Preferred
Stock that we may designate in the future.
Listing
Our Common Stock is listed and traded on the Nasdaq Global Select Market under the symbol “ISRG.”
Preferred Stock – Limitations on Rights of Holders of Common Stock
Our board of directors has the authority, without further action by our stockholders, to issue up to 2,500,000 shares of
Preferred Stock in one or more series and to fix the rights, preferences, privileges and restrictions thereof. These rights,
preferences, and privileges, could include dividend rights, conversion rights, voting rights, terms of redemption, liquidation
preferences, sinking fund terms, and the number of shares constituting, or the designation of, such series, any or all of which may
be greater than the rights of Common Stock. The issuance of our Preferred Stock could adversely affect the voting power of
holders of Common Stock and the likelihood that such holders will receive dividend payments and payments upon our
liquidation. In addition, the issuance of Preferred Stock could have the effect of delaying, deferring, or preventing a change in
control of the Company or other corporate action. As of December 31, 2020, no shares of Preferred Stock were outstanding.
Anti-Takeover Effects of Delaware Law and Our Amended and Restated Certificate of Incorporation and
Amended and Restated Bylaws
Some provisions of Delaware law and our Certificate of Incorporation and our Bylaws contain provisions that could make
the following transactions more difficult: acquisition of us by means of a tender offer; acquisition of us by means of a proxy
contest or otherwise; or removal of our incumbent officers and directors. It is possible that these provisions could make it more
difficult to accomplish or could deter transactions that stockholders may otherwise consider to be in their best interest or in our
best interests, including transactions that might result in a premium over the market price for our shares.
These provisions, summarized below, are expected to discourage coercive takeover practices and inadequate takeover
bids. These provisions are also designed to encourage persons seeking to acquire control of us to first negotiate with our board of
directors. We believe that the benefits of increased protection of our potential ability to negotiate with the proponent of an
unfriendly or unsolicited proposal to acquire or restructure us outweigh the disadvantages of discouraging these proposals
because negotiation of these proposals, could result in an improvement of their terms.
Delaware Anti-Takeover Statute
We are subject to Section 203 of the Delaware General Corporation Law. In general, the statute prohibits a publicly held
Delaware corporation from engaging in any “business combination” with any “interested stockholder” for a period of three years
following the date that the stockholder became an interested stockholder unless:
•
•
•
prior to the date the stockholder became an interested stockholder, the board of directors of the corporation
approved either the business combination or the transaction that resulted in the stockholder becoming an interested
stockholder;
upon consummation of the transaction that resulted in the stockholder’s becoming an interested stockholder, the
interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the
transaction commenced, excluding those shares owned by persons who are directors and also officers and
employee stock plans in which employee participants do not have the right to determine confidentially whether
shares held subject to the plan will be tendered in a tender or exchange offer; or
on or subsequent to the date the stockholder became an interested stockholder, the business combination is
approved by the board of directors and authorized at an annual or special meeting of stockholders, and not by
written consent, by the affirmative vote of at least two-thirds of the outstanding voting stock that is not owned by
the interested stockholder.
Section 203 defines “business combination” to include:
•
•
•
•
•
any merger or consolidation involving the corporation and the interested stockholder;
any sale, transfer, pledge, or other disposition involving the interested stockholder of 10% or more of the assets of
the corporation;
subject to exceptions, any transaction that results in the issuance or transfer by the corporation of any stock of the
corporation to the interested stockholder;
subject to exceptions, any transaction involving the corporation that has the effect of increasing the proportionate
share of the stock of any class or series of the corporation beneficially owned by the interested stockholder; and
the receipt by the interested stockholder of the benefit of any loans, advances, guarantees, pledges, or other
financial benefits provided by or through the corporation.
In general, Section 203 defines an interested stockholder as any entity or person beneficially owning 15% or more of the
outstanding voting stock of the corporation and any entity or person affiliated with or controlling or controlled by the entity or
person.
Undesignated Preferred Stock
The ability to authorize undesignated Preferred Stock makes it possible for our board of directors to issue Preferred Stock
with voting or other rights or preferences that could impede the success of any attempt to change control of us. These and other
provisions may have the effect of deterring hostile takeovers or delaying changes in control or management of the Company.
Special Stockholder Meetings
Our Certificate of Incorporation and Bylaws provide that a special meeting of stockholders may be called (i) by our board
of directors pursuant to a resolution adopted by a majority of the total number of authorized directors (whether or not there exist
any vacancies in previously authorized directorships at the time any such resolution is presented to the board of directors for
adoption), (ii) by the Chairman of our board of directors, (iii) by our Chief Executive Officer, or (iv) upon written request to our
corporate secretary, by one or more holders of record of our Common Stock owning not less than 20% of the total number of
shares of our Common Stock entitled to vote on the matter or matters to be brought before the proposed special meeting.
Requirements for Advance Notification of Stockholder Nominations and Proposals
Our Bylaws establish advance notice procedures with respect to stockholder proposals and the nomination of candidates
for election as directors, other than nominations made by or at the direction of the board of directors. These procedures provide
that notice of stockholder proposals must be timely given in writing to our corporate secretary prior to the meeting at which the
action is to be taken. Generally, to be timely, notice must be received at our principal executive office not less than 90 days nor
more than 120 days prior to the first anniversary date of the annual meeting the preceding year. As a result, our Bylaws may have
the effect of precluding the conduct of certain business at a meeting if the proper procedures are not followed. These provisions
may also discourage or deter a potential acquirer from conducting a solicitation of proxies to elect the acquirer’s own slate of
directors or otherwise attempting to obtain control of the Company.
No Cumulative Voting
The Delaware General Corporation Law provides that stockholders are not entitled to the right to cumulate votes in the
election of directors unless our Certificate of Incorporation provides otherwise. Our Certificate of Incorporation and Bylaws do
not expressly provide for cumulative voting.
Board Composition
Our Certificate of Incorporation also provides that the authorized number of directors may be changed only by resolution
of the board of directors. Furthermore, any vacancy on our board of directors, however occurring, including a vacancy resulting
from an increase in the size of our board, may only be filled by the affirmative vote of a majority of our directors then in
office, even if less than a quorum, unless our board of directors determines by resolution that such vacancy or newly created
directorship shall be filled by the stockholders. The limitations on the number of directors and treatment of vacancies have the
effect of making it more difficult for stockholders to change the composition of our board of directors.
No Stockholder Action by Written Consent
Our Certificate of Incorporation provides that all stockholder actions are required to be taken by a vote of the stockholders
at an annual or special meeting and that stockholders may not take any action by written consent in lieu of a meeting. This limit
may lengthen the amount of time required to take stockholder actions and would prevent the amendment of our Bylaws or
removal of directors by our stockholders without holding a meeting of stockholders.
Choice of Forum
Unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware (or,
in the event that the Chancery Court does not have jurisdiction, the federal district court for the District of Delaware or other state
courts of the State of Delaware) is the sole and exclusive forum for (i) any derivative action or proceeding brought on behalf of
us, (ii) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers or stockholders to us or to
our stockholders, (iii) any action arising pursuant to any provision of the Delaware General Corporation Law or the Certificate of
Incorporation or Bylaws (as either may be amended from time to time) or (iv) any action asserting a claim against us governed by
the internal affairs doctrine. In addition, unless we consent in writing to the selection of an alternate forum, the federal district
courts of the United States shall be the exclusive forum for the resolution of any complaint asserting a cause of action arising
under the Securities Act of 1933, as amended. Nothing in our Certificate of Incorporation or Bylaws will preclude stockholders
that assert claims to enforce any liability or duty created by the Securities Exchange Act of 1934, as amended, or any other claim
for which the federal courts of the United States have exclusive jurisdiction.
This choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable
for disputes with us or any of our directors, officers, other employees or stockholders, which may discourage lawsuits with
respect to such claims, although our stockholders will not be deemed to have waived our compliance with federal securities laws
and the rules and regulations thereunder.
Transfer Agent
The transfer agent and registrar for our Common Stock is Computershare Trust Company, N.A.
INTUITIVE SURGICAL, INC.
SUBSIDIARIES (All 100% owned other than Intuitive Surgical-Fosun (HongKong) Co., Ltd. and Intuitive Surgical-Fosun Medical Technology
(Shanghai) Co., Ltd.)
Exhibit 21.1
Subsidiaries of the Registrant
Intuitive Surgical AB
Intuitive Surgical ApS
Intuitive Surgical Australia Proprietary Limited
Intuitive Surgical B.V.
Intuitive Surgical Brasil Importacao E Comercio De Equipamentos Cirurgicos Ltda.
Intuitive Surgical Canada Inc.
Intuitive Surgical Deutschland GmbH
Intuitive Surgical GK
Intuitive Surgical HK Limited
Intuitive Surgical Holdings, LLC
Intuitive Surgical India Private Limited
Intuitive Surgical International B.V.
Intuitive Surgical International Finance LLC
Intuitive Surgical Ireland Limited
Intuitive Surgical Korea Limited
Intuitive Surgical Israel Ltd.
Intuitive Surgical Limited
Intuitive Surgical Medical Device Science & Technology (Shanghai) Co., Ltd.
Intuitive Surgical Medical Device Taiwan Ltd.
Intuitive Surgical Operations, Inc.
Intuitive Surgical Optics GmbH
Intuitive Surgical Service Optics 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 Sarl Taiwan Branch
Intuitive Surgical Spain, S.L.
Intuitive Surgical SPRL
Intuitive Surgical Turkey Medikal Cihaz Ticaret Limited Serketi
Intuitive Surgical-Fosun (HongKong) Co., Ltd.
Intuitive Surgical-Fosun Medical Technology (Shanghai) Co., Ltd.
Intuitive Ventures Fund I, LLC
Orpheus Medical GmbH
Orpheus Medical Inc.
Orpheus Medical Ltd.
Orpheus Medical USA Inc.
Schölly Micro Optics GmbH
State or Other Jurisdiction of Incorporation
Sweden
Denmark
Australia
Netherlands
Brazil
Canada
Germany
Japan
Hong Kong
Delaware, U.S.
India
Netherlands
Delaware, U.S.
Ireland
South Korea
Israel
United Kingdom
China
Taiwan
Delaware, U.S.
Germany
Massachusetts, U.S.
Singapore
Mexico
France
Czech Republic
Switzerland
Taiwan
Spain
Belgium
Turkey
Hong Kong
China
Delaware, U.S.
Germany
Delaware, U.S.
Israel
Delaware, U.S.
Germany
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 333-240046, 333-232829, 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 9, 2021, 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 9, 2021
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 9, 2021
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 9, 2021
By:
/S/ MARSHALL L. MOHR
Marshall L. Mohr
Executive Vice President and Chief Financial Officer
Certification of Chief Executive Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 32.1
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, 2020 (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 9, 2021
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, 2020 (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
Executive Vice President and Chief Financial Officer
Date: February 9, 2021