Log in
E-mail
Password
Remember
Forgot password ?
Become a member for free
Sign up
Sign up
New member
Sign up for FREE
New customer
Discover our services
Settings
Settings
Dynamic quotes 
OFFON

MarketScreener Homepage  >  Equities  >  Nasdaq  >  Intuitive Surgical, Inc.    ISRG

INTUITIVE SURGICAL, INC.

(ISRG)
  Report
SummaryQuotesChartsNewsRatingsCalendarCompanyFinancialsConsensusRevisions 
News SummaryMost relevantAll newsPress ReleasesOfficial PublicationsSector newsMarketScreener Strategies

INTUITIVE SURGICAL : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-K)

share with twitter share with LinkedIn share with facebook
share via e-mail
02/07/2020 | 05:22pm EDT

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 placed 29 da
Vinci SP Surgical Systems in 2019 and have an installed base of 44 as of
December 31, 2019. 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 over 80 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 the da Vinci Vessel Sealer Extend 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 X or 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 10 Ion systems for
commercial use through December 31, 2019, which are not included in our da Vinci
Surgical System installed base. We have also placed 6 Ion systems with hospitals
for gathering clinical data.
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.
                                       46
--------------------------------------------------------------------------------
  Table of Contents
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 $700 and $3,500 of instrument and accessory revenue per
surgical procedure performed, depending on the type and complexity of the
specific procedures performed and the number and type of instruments used. 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. We are introducing the Ion system in the U.S. in a
measured fashion. For the year ended December 31, 2019, the associated impact to
revenue and gross margin was not significant.
Recurring Revenue
Recurring revenue consists of instrument and accessory revenue, service revenue,
and operating lease revenue. Recurring revenue increased to $3.2 billion, or 72%
of total revenue in 2019, compared with $2.6 billion, or 71% of total revenue in
2018, and $2.2 billion, or 71% of total revenue in 2017.
Instrument and accessory revenue has grown at a faster rate than systems revenue
over time. Instrument and accessory revenue increased to $2.4 billion in 2019,
compared with $2.0 billion in 2018 and $1.6 billion in 2017. The growth of
instrument and accessory revenue largely reflects continued procedure adoption.
Service revenue growth has been driven by the growth of the base of installed da
Vinci Surgical Systems. The installed base of da Vinci Surgical Systems grew 12%
to approximately 5,582 at December 31, 2019; 13% to approximately 4,986 at
December 31, 2018; and 13% to approximately 4,409 at December 31, 2017. Service
revenue increased to $724 million in 2019, compared with $635 million in 2018
and $573 million in 2017.
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, 2019, 2018, and 2017, we shipped 425, 272, and
139 systems, respectively, under lease and usage-based arrangements, of which
384, 229, and 108 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 $106.9 million, $51.4 million, and $25.9 million for the years ended
December 31, 2019, 2018, and 2017, respectively. Generally, lease transactions
generate similar gross margins as our sale transactions. As of December 31,
2019, a total of 658 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
                                       47
--------------------------------------------------------------------------------
  Table of Contents
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. Also, usage-based leases generally contain no minimum
payments; therefore, customers may exit such arrangements without paying a
financial penalty to us.
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 $92.8 million, $48.8 million, and
$39.5 million for the years ended December 31, 2019, 2018, and 2017,
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, 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 grew 19% to $1,346
million in 2019; 21% to $1,127 million in 2018; and 16% to $928 million in 2017.
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.
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 the
EndoWrist Vessel Sealer and EndoWrist 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 these procedures for benign conditions typically
results in higher fourth quarter procedure volume when more patients have met
annual deductibles and lower first quarter procedure volume when deductibles are
reset. Seasonality outside the U.S. varies and is more pronounced around local
holidays and vacation periods.
Distribution Channels
We provide our products through direct sales organizations in the U.S., Europe
(excluding Spain, Portugal, Italy, Greece, and most Eastern European countries),
China, Japan, South Korea, India, and Taiwan. In May and December 2018, we began
direct operations in India and Taiwan, respectively. 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.
                                       48
--------------------------------------------------------------------------------
  Table of Contents
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.
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. Between 2017 and
2019, we obtained regulatory clearances for the following products:
•In November 2019, we obtained FDA clearance for our SynchroSeal instrument and
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.
•In June 2019, we received CE mark clearance for our da Vinci Endoscope Plus for
the da Vinci X/Xi Surgical Systems in Europe. Following the CE mark, in July
2019, we obtained FDA clearance for our da Vinci Endoscope Plus.
•In June 2019, we obtained FDA clearance for our da Vinci Handheld Camera.
•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 10 Ion systems for commercial use through December 31, 2019.
•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 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.
•In December 2018, we received regulatory clearance for our da Vinci Xi Surgical
System in China. The Xi clearance does not include advanced energy or stapling
products that attach to the Xi system. Separate clearances 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. The government will allow the sale of 154 new surgical robots into
China, which could include da Vinci Surgical Systems as well as surgical systems
introduced by others. As of December 31, 2019, we have sold 57 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 July 2018, we obtained FDA clearance to market SureForm 60, our da Vinci
EndoWrist 60mm Stapler. In January 2019, we obtained FDA clearance to market
SureForm 45. We have also received regulatory clearance in South Korea and Japan
to market SureForm 60 and SureForm 45 and 60.
•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 placed 29 da Vinci SP Surgical Systems in
2019 and have an installed base of 44 as of December 31, 2019.
•In April 2018, we obtained FDA clearance for our da Vinci Vessel Sealer Extend.
•In April 2017, we received CE mark clearance for our da Vinci X Surgical System
in Europe. Following the CE mark, in May 2017, we obtained FDA clearance to
market our da Vinci X Surgical System in the U.S. We received regulatory
clearance for the da Vinci X Surgical System in South Korea and Japan in
September 2017 and April 2018, respectively. Regulatory clearances for the da
Vinci X Surgical System may be received in other markets over time.
                                       49
--------------------------------------------------------------------------------
  Table of Contents
Refer to the descriptions of our products that received regulatory clearances in
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 da Vinci Prostatectomy ("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 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. These
additional 12 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 12 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.
Recalls and Corrections
Medical device companies have regulatory obligations to correct or remove
medical devices in the field that could pose a risk to health. The definition of
"recalls and corrections" is expansive and includes repair, replacement,
inspections, relabeling, and issuance of new or additional instructions for use
or reinforcement of existing instructions for use and training when such actions
are taken for specific reasons of safety or compliance. These field actions
require stringent documentation, reporting, and monitoring worldwide. There are
other actions 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.
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 benefit
to healthcare providers. Target procedures in general surgery include hernia
repair (both ventral and inguinal) and colorectal procedures. Target procedures
in gynecology include da Vinci hysterectomy ("dVH"), for both cancer and benign
conditions, and sacrocolpopexy. Target procedures in urology include da Vinci
prostatectomy ("dVP") and da Vinci partial nephrectomy. In cardiothoracic
surgery, target procedures include da Vinci lobectomy and da Vinci mitral valve
repair. In head
                                       50
--------------------------------------------------------------------------------
  Table of Contents
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 2019, approximately 1,229,000 surgical procedures were performed with da
Vinci Surgical Systems, compared with approximately 1,038,000 and 877,000
surgical procedures performed with da Vinci Surgical Systems in 2018 and 2017,
respectively. The growth in our overall procedure volume in 2019 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 883,000 in 2019, compared with approximately 753,000 in 2018 and
approximately 644,000 in 2017. General surgery was our largest and fastest
growing U.S. specialty in 2019 with procedure volume that grew to approximately
421,000 in 2019, compared with approximately 325,000 in 2018 and approximately
246,000 in 2017. Gynecology was our second largest U.S. surgical specialty in
2019 with procedure volume that grew to approximately 282,000 in 2019, compared
with approximately 265,000 in 2018 and approximately 252,000 in 2017. Urology
was our third largest U.S. surgical specialty in 2019 with procedure volume that
grew to approximately 138,000 in 2019, compared with approximately 128,000 in
2018 and approximately 118,000 in 2017.
Procedures Outside of the U.S.
Overall OUS procedure volume with da Vinci Surgical Systems grew to
approximately 346,000 in 2019, compared with approximately 285,000 in 2018 and
approximately 233,000 in 2017. Procedure growth in most OUS markets was driven
largely by urology procedure volume, which grew to approximately 206,000 in
2019, compared with approximately 175,000 in 2018 and approximately 149,000 in
2017. General surgery and gynecology procedures also contributed to OUS
procedure growth.
Recent Business Events and Trends
Procedures
Overall. Total da Vinci procedures grew approximately 18% for the year ended
December 31, 2019, compared with approximately 18% for the year ended December
31, 2018. U.S. procedure growth was approximately 17% for the year ended
December 31, 2019, compared with approximately 17% for the year ended December
31, 2018. 2019 U.S. procedure growth was largely attributable to growth in
general surgery procedures, most notably hernia repair, cholecystectomy,
colorectal, and bariatric procedures. U.S. procedure growth was also driven by
growth in thoracic procedures, as well as moderate growth in more mature
urologic and gynecologic procedure categories.
Procedure volume OUS grew approximately 21% for the year ended December 31,
2019, compared with approximately 22% for the year ended December 31, 2018. 2019
OUS procedure growth was driven by continued growth in urologic procedures,
including prostatectomies and nephrectomies, and earlier stage growth in general
surgery (particularly colorectal), gynecologic, and thoracic 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.
U.S. General Surgery. In 2019, general surgery was our largest and fastest
growing specialty in the U.S. with procedure volume that grew to approximately
421,000 in 2019, compared with approximately 325,000 in 2018 and approximately
246,000 in 2017. Inguinal and ventral hernia repairs contributed the most
incremental procedures in 2019, as they did in 2018 and 2017. We believe that
growth in da Vinci hernia repair reflects improved clinical outcomes within
certain patient populations, as well as potential cost benefits relative to
certain alternative treatments. We believe hernia repair procedures represent a
significant opportunity with the potential to drive growth in future periods.
However, given the differences in 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.
During 2019, we have seen increasing contributions to growth from other U.S.
general surgery procedures, including cholecystectomy and bariatric procedures.
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. Our third quarter 2018 introduction of
the SureForm 60mm stapler product provides surgeons a better optimized robotic
tool set for bariatric procedures.
                                       51
--------------------------------------------------------------------------------
  Table of Contents
U.S. Gynecology. In 2019, growth in gynecology procedures in the U.S. increased
modestly compared to 2018. Procedure volume was approximately 282,000 in 2019,
compared with approximately 265,000 in 2018 and approximately 252,000 in 2017,
driven by growth in benign hysterectomy procedures and, to a lesser extent,
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.
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. 2019
growth in U.S. dVP procedures was consistent with growth in 2018. For OUS, dVP
is at varying states of adoption in different areas of the world but is the
largest overall da Vinci procedure. 2019 growth in OUS dVP procedures was
consistent with growth in 2018.
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 2019 OUS procedure growth rate reflects continued da Vinci
adoption in European and Asian markets. In 2018 and the first quarter of 2019,
procedure growth in China moderated, as the previous systems quota expired at
the end of 2015 and the systems installed in China are highly utilized. In
October 2018, the China National Health Commission announced a new quota to
allow the sale of 154 new surgical robots into China through 2020, which could
include da Vinci Surgical Systems. This quota applies to the da Vinci Si and
recently approved da Vinci Xi Surgical Systems (refer to the previous discussion
in the "Clearances and Approvals" section), as well as competitors' products
when and if cleared by NMPA. Sales of da Vinci Surgical Systems under the quota
are uncertain, as they are dependent on provincial allocation processes and
hospitals completing a tender process and receiving associated approvals. In the
last three quarters of 2019, procedure growth in China accelerated, as initial
systems placed during these quarters provided additional capacity in the field.
In Japan, we experienced strong procedure growth after receiving the national
reimbursements for dVP and partial nephrectomy in 2012 and 2016, respectively.
However, as adoption for these procedures has progressed towards higher levels
of penetration, growth in these two urologic procedures has moderated. A total
of 12 additional da Vinci procedures were granted national reimbursement status
effective April 1, 2018, including gastrectomy, low anterior resection,
lobectomy, and hysterectomy, for both malignant and benign conditions. Procedure
growth in Japan has accelerated since the new procedures were granted
reimbursement status. However, these additional 12 reimbursed procedures have
varying levels of conventional laparoscopic penetration and are reimbursed at
rates equal to the conventional laparoscopic procedures. Given the reimbursement
level and laparoscopic penetration for these 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
reimbursement for additional procedures, then the demand for our products in
Japan could be limited.
System Demand
Future demand for da Vinci Surgical Systems will be impacted by factors
including hospital response to the evolving healthcare environment under the
current U.S. administration, procedure growth rates, hospital consolidation
trends, evolving system utilization and point of care dynamics, capital
replacement trends, additional reimbursements in various global markets,
including Japan, the timing around governmental tenders and authorizations,
including China, the timing of when we receive regulatory clearance in our other
OUS markets for our da Vinci Xi Surgical System, da Vinci X Surgical System, and
da Vinci SP Surgical System, and related instruments, market response as well as
other economic and geopolitical factors. 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 surgery competition, including from companies
that have introduced products in the field of robotic surgery or have made
explicit statements about their efforts to enter the field including, but not
limited to, the following companies: Avatera Medical GmbH; CMR Surgical Limited;
Johnson & Johnson (including their wholly-owned subsidiaries Auris Health, Inc.
and Verb Surgical Inc.); Medicaroid Inc.; MedRobotics Corp.; Medtronic plc;
meerecompany Inc.; Olympus Corp.; Samsung Corporation; Smart Robot Technology
Group Co. Ltd.; Titan Medical, Inc.; TransEnterix, Inc.; and Wego Holding Co.,
Ltd.
Many of the above factors will also impact future demand for our recently
cleared 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. 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
                                       52
--------------------------------------------------------------------------------
  Table of Contents
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 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. 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 in Europe
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. The da Vinci Endoscope
Plus leverages new sensor technology to allow for increased sharpness and color
accuracy. The da Vinci Endoscope Plus is currently available in Europe and is
expected to launch in the U.S. later in 2019.
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. We are introducing
the da Vinci Handheld Camera in a measured fashion in 2019 with a broad launch
expected in early 2020.
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 move 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 while we optimize
training pathways and our supply chain and collect additional clinical data. We
have placed 10 Ion systems for commercial use as of December 31, 2019.
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 July 2018, we obtained FDA clearance
for the SureForm 60 instrument with White, Blue, Green, and Black 60mm reloads.
In January 2019, we obtained FDA clearance 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 White, Blue, Green, and Gray 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 Surgical System, which uses the same fourth generation surgeon console
as the da Vinci X and Xi Surgical 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
                                       53
--------------------------------------------------------------------------------
  Table of Contents
Surgical System in a measured fashion while we optimize training pathways and
our supply chain. We have placed 29 da Vinci SP Surgical Systems in 2019 and
have an installed base of 44 as of December 31, 2019.
Da Vinci Vessel Sealer Extend. In April 2018, we obtained FDA clearance 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.
Da Vinci X Surgical System. In May 2017, we launched a new da Vinci model, the
da Vinci X, in the U.S. The da Vinci X system provides surgeons and hospitals
with access to some of the most advanced fourth generation da Vinci surgery
technology at a lower cost. The da Vinci X system uses the same vision cart and
surgeon console that are found on our flagship product, the da Vinci Xi system.
For new customers, the da Vinci X system provides a cost effective capital entry
point while providing a pathway for upgrading to other fourth generation
systems. Existing customers may negotiate to trade in their older da Vinci
systems in order to standardize their robotics programs onto the fourth
generation platform, choosing which system model by considering clinical and
economic factors.
The da Vinci X system enables optimized, focused-quadrant surgery, including
procedures like prostatectomy, hernia repair, and benign hysterectomy, among
others. The system features flexible port placement and 3D digital optics, while
incorporating the same advanced instruments and accessories as the da Vinci Xi.
The da Vinci X system drives operational efficiencies through set-up technology
that uses voice and laser guidance, drape design that simplifies surgery
preparations, and a lightweight, fully integrated endoscope.
Acquisition of Certain Assets from Schölly Fiberoptic
In July 2019, we entered into an agreement to acquire certain assets and
operations from Schölly Fiberoptic GmbH ("Schölly"), a supplier of endoscopes
and other visualization equipment (the "Schölly Acquisition"). On August 31,
2019, upon the satisfaction of closing conditions, we acquired control of these
assets and operations, which collectively met the definition of a business.
Total purchase consideration of $101.4 million, as of the acquisition date,
consisted of an initial cash payment of $34.4 million and deferred cash payments
totaling approximately $67.0 million, of which $37.3 million continues to be
deferred as of December 31, 2019. The timing of the future payments is based
upon achieving certain integration steps, which are expected to be completed
around the end of 2020.
The process to manufacture endoscopes is complex, and there can be no assurance
that we can successfully integrate or operate the endoscope manufacturing
operations of the acquired business. For example, we may be unable to retain the
employees of Schölly or its current suppliers. The integration process will be
complex and involves the integration of manufacturing operations across multiple
sites globally. The integration may require expenses and time in excess of
expectations. Integrating the Schölly Acquisition will also involve getting
certain regulatory approvals and re-certification of manufacturing sites. If we
cannot successfully integrate or manufacture endoscopes subsequent to the
Schölly Acquisition, it may have an adverse impact on our business, financial
condition, results of operations, or cash flows.
2019 Operational and Financial Highlights
•Total revenue increased by 20% to $4.5 billion for the year ended December 31,
2019, compared with $3.7 billion for the year ended December 31, 2018.
•Approximately 1,229,000 da Vinci procedures were performed during the year
ended December 31, 2019, an increase of 18% compared with approximately
1,038,000 da Vinci procedures for the year ended December 31, 2018.
•Instruments and accessories revenue increased by 23% to $2.4 billion for the
year ended December 31, 2019, compared with $2.0 billion for the year ended
December 31, 2018.
•Systems revenue increased by 19% to $1.3 billion for the year ended
December 31, 2019, compared with $1.1 billion for the year ended December 31,
2018.
•A total of 1,119 da Vinci Surgical Systems were shipped during the year ended
December 31, 2019, an increase of 21% compared with 926 systems during the year
ended December 31, 2018.
•As of December 31, 2019, we had a da Vinci Surgical System installed base of
approximately 5,582 systems, an increase of 12% compared with the installed base
of approximately 4,986 systems as of December 31, 2018.
•During the year ended December 31, 2019, we began commercial sales of the Ion
system and shipped the first 10 commercial systems.
•Gross profit as a percentage of revenue was 69.4% for the year ended
December 31, 2019, compared with 69.9% for the year ended December 31, 2018.
•Operating income increased by 15% to $1.4 billion for the year ended
December 31, 2019, compared with $1.2 billion for the year ended December 31,
2018. Operating income included $338 million and $263 million of share-based
                                       54
--------------------------------------------------------------------------------
  Table of Contents
compensation expense related to employee stock plans and $67.2 million and
$31.6 million of intangible asset charges for the years ended December 31, 2019,
and 2018, respectively.
•As of December 31, 2019, we had $5.8 billion in cash, cash equivalents, and
investments. Cash, cash equivalents, and investments increased by $1.0 billion
compared with December 31, 2018.
Results of Operations
This section of the Form 10-K generally discusses 2019 and 2018 items and
year-to-year comparisons between 2019 and 2018. Discussions of 2017 items and
year-to-year comparisons between 2018 and 2017 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, 2018.
The following table sets forth, for the years indicated, certain Consolidated
Statements of Income information (in millions, except percentages):
                                                                                    Years Ended December 31,
                                                                % of                                   % of                                   % of
                                                                total                                  total                                  total
                                             2019              revenue              2018              revenue              2017              revenue
Revenue:
Product                                  $ 3,754.3                  84  %       $ 3,089.1                  83  %       $ 2,565.3                  82  %
Service                                      724.2                  16  %           635.1                  17  %           572.9                  18  %
Total revenue                              4,478.5                 100  %         3,724.2                 100  %         3,138.2                 100  %
Cost of revenue:
Product                                    1,119.1                  25  %           906.2                  24  %           756.3                  24  %
Service                                      249.2                   6  %           213.9                   6  %           179.9                   6  %
Total cost of revenue                      1,368.3                  31  %         1,120.1                  30  %           936.2                  30  %
Product gross profit                       2,635.2                  59  %         2,182.9                  59  %         1,809.0                  58  %
Service gross profit                         475.0                  10  %           421.2                  11  %           393.0                  12  %
Gross profit                               3,110.2                  69  %         2,604.1                  70  %         2,202.0                  70  %
Operating expenses:
Selling, general and administrative        1,178.4                  26  %           986.6                  27  %           810.5                  26  %
Research and development                     557.3                  12  %           418.1                  11  %           328.6                  10  %
Total operating expenses                   1,735.7                  38  %         1,404.7                  38  %         1,139.1                  36  %
Income from operations                     1,374.5                  31  %         1,199.4                  32  %         1,062.9                  34  %
Interest and other income, net               127.7                   3  %            80.1                   2  %            41.9                   1  %
Income before taxes                        1,502.2                  34  %         1,279.5                  34  %         1,104.8                  35  %
Income tax expense                           120.4                   3  %           154.5                   4  %           433.9                  14  %
Net income                                 1,381.8                  31  %         1,125.0                  30  %           670.9                  21  %
Less: net income (loss) attributable to
noncontrolling interest in joint venture       2.5                   -  %            (2.9)                  -  %               -                   -  %
Net income attributable to Intuitive
Surgical, Inc.                           $ 1,379.3                  31  %       $ 1,127.9                  30  %       $   670.9                  21  %



Total Revenue
Total revenue increased by 20% to $4.5 billion for the year ended December 31,
2019, compared with $3.7 billion for the year ended December 31, 2018. Total
revenue for the year ended December 31, 2018, increased by 19% compared with
$3.1 billion for the year ended December 31, 2017. The increase in total revenue
for the year ended December 31, 2019, resulted from 23% higher instruments and
accessories revenue, driven by approximately 18% higher procedure volume, 19%
higher systems revenue, and 14% higher service revenue.
Revenue denominated in foreign currencies as a percentage of total revenue was
approximately 20%, 20%, and 17% for the years ended December 31, 2019, 2018, and
2017, 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, 2019, as compared with 2018, or for the year ended December 31,
2018, as compared with 2017.
                                       55
--------------------------------------------------------------------------------
  Table of Contents
Revenue generated in the U.S. accounted for 70%, 71%, and 73% of total revenue
for the years ended December 31, 2019, 2018, and 2017, 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 minimally invasive
surgery, 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.
The following table summarizes our revenue and system unit shipments for the
years ended December 31, 2019, 2018, and 2017, respectively (in millions, except
percentages and unit shipments):
                                                                        

Years Ended December 31,

                                                               2019               2018               2017

Revenue

Instruments and accessories                                $ 2,408.2$ 1,962.0$ 1,636.9
Systems                                                      1,346.1            1,127.1              928.4
Total product revenue                                        3,754.3            3,089.1            2,565.3
Services                                                       724.2              635.1              572.9
Total revenue                                              $ 4,478.5$ 3,724.2$ 3,138.2
United States                                              $ 3,129.5$ 2,633.5$ 2,285.8
OUS                                                          1,349.0            1,090.7              852.4
Total revenue                                              $ 4,478.5$ 3,724.2$ 3,138.2
% of Revenue - U.S.                                               70  %              71  %              73  %
% of Revenue - OUS                                                30  %              29  %              27  %

Instruments and accessories                                $ 2,408.2$ 1,962.0$ 1,636.9
Services                                                       724.2              635.1              572.9
Operating lease                                                106.9               51.4               25.9
Total recurring revenue                                    $ 3,239.3$ 2,648.5$ 2,235.7
% of Total revenue                                                72  %              71  %              71  %

Da Vinci Surgical System Shipments by Region:
U.S. unit shipments                                              728                581                417
OUS unit shipments                                               391                345                267
Total unit shipments*                                          1,119                926                684
*Systems shipped under operating leases (included in total
unit shipments)                                                  384                229                108

Ion System Shipments                                              10                  -                  -

Da Vinci Surgical System Shipments involving System Trade-ins:


Unit shipments involving trade-ins                               442                277                163
Unit shipments not involving trade-ins                           677                649                521



Product Revenue
Product revenue increased by 22% to $3.8 billion for the year ended December 31,
2019, compared with $3.1 billion for the year ended December 31, 2018. Product
revenue increased by 20% to $3.1 billion for the year ended December 31, 2018,
compared with $2.6 billion for the year ended December 31, 2017.
Instruments and accessories revenue increased by 23% to $2.4 billion for the
year ended December 31, 2019, compared with $2.0 billion for the year ended
December 31, 2018. The increase in instruments and accessories revenue was
driven primarily by procedure growth of 18%, incremental sales of our advanced
instruments, and customer buying patterns. U.S. procedure growth in 2019 of 17%,
compared with 17% in 2018, was driven by strong growth in general surgery
procedures, most notably hernia repair, cholecystectomy, colorectal, and
bariatric procedures, and thoracic procedures as well as moderate growth in the
more mature gynecologic and urologic procedures categories. OUS procedure growth
in 2019 was 21% compared with 22% in 2018. Key drivers for OUS procedure growth
in both years was driven by continued growth in urologic procedures
                                       56
--------------------------------------------------------------------------------
  Table of Contents
and earlier stage growth in general surgery and gynecology procedures.
Geographically, OUS procedure growth was driven by procedure expansion in Japan,
Germany, Korea, and China with varying results in other countries.
Systems revenue increased by 19% to $1.3 billion for the year ended December 31,
2019, compared with $1.1 billion for the year ended December 31, 2018. Higher
systems revenue was primarily driven by higher system shipments, higher 2019
ASPs, higher operating lease revenue, and higher lease buyouts, partially offset
by a higher proportion of system shipments under operating lease or usage-based
arrangements.
During 2019, a total of 1,119 da Vinci Surgical Systems were shipped compared
with 926 systems during 2018. By geography, 728 systems were shipped into the
U.S., 169 into Europe, 182 into Asia, and 40 into other markets during 2019,
compared with 581 systems shipped into the U.S., 169 into Europe, 116 into Asia,
and 60 into other markets during 2018. During 2019, 384 of the 1,119 systems
were shipped under operating lease arrangements, compared with 229 of the 926
systems shipped during 2018. The increase in system shipments was primarily
driven by procedure growth, the need for hospitals to expand or establish
capacity, and more customers trading in older da Vinci models for fourth
generation da Vinci Xi and da Vinci X systems.
We shipped 425 and 272 da Vinci Surgical Systems under lease or usage-based
arrangements, of which 384 and 229 systems were classified as operating leases
for the years ended December 31, 2019, and 2018, respectively. Operating lease
revenue was $106.9 million for the year ended December 31, 2019, compared with
$51.4 million for the year ended December 31, 2018. Systems placed as operating
leases represented 34% of total shipments during 2019, compared with 25% during
2018. A total of 658 da Vinci Surgical Systems were installed at customers under
operating lease or usage-based arrangements as of December 31, 2019, compared
with 350 as of December 31, 2018. Revenue from Lease Buyouts was $92.8 million
for the year ended December 31, 2019, compared with $48.8 million for the year
ended December 31, 2018. 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 leases and Ion systems, was approximately $1.52 million for the year
ended December 31, 2019, compared with approximately $1.45 million for the year
ended December 31, 2018. The higher 2019 ASP was largely driven 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 increased by 14% to $724 million for the year ended December 31,
2019, compared with $635 million for the year ended December 31, 2018. Service
revenue increased by 11% to $635 million for the year ended December 31, 2018,
compared with $573 million for the year ended December 31, 2017. Higher service
revenue in 2019 was primarily driven by a larger installed base of da Vinci
Surgical Systems producing service revenue.
Gross Profit
Product gross profit for the year ended December 31, 2019, increased 21% to $2.6
billion, representing 70.2% of product revenue, compared with $2.2 billion,
representing 70.7% of product revenue, for the year ended December 31, 2018. The
higher 2019 product gross profit was primarily driven by higher product revenue,
partially offset by lower product gross profit margin. The lower product gross
profit margin for the year ended December 31, 2019, was primarily driven by
higher intangible assets amortization expense.
The MDET initially became effective on January 1, 2013, and we treated MDET as a
reduction in gross profit. In December 2015, the Consolidated Appropriations
Act, 2016 (the "Appropriations Act") was signed into law. The Appropriations Act
included a two-year moratorium on MDET such that medical device sales in 2016
and 2017 were exempt from the excise tax. This moratorium was extended through
December 31, 2019, by the Extension of Continuing Appropriations Act of 2018,
signed into law on January 22, 2018. The MDET was repealed in December 2019.
Product gross profit for the years ended December 31, 2019 and 2018, included
share-based compensation expense of $46.6 million and $36.4 million,
respectively, and intangible assets amortization expense of $31.5 million and
$5.3 million, respectively.
Service gross profit for the year ended December 31, 2019, increased 13% to $475
million, representing 65.6% of service revenue, compared with $421 million,
representing 66.3% of service revenue, for the year ended December 31, 2018. The
higher 2019 service gross profit was driven by higher service revenue,
reflecting a larger installed base of da Vinci Surgical Systems, partially
offset by lower service gross profit margin. The lower service gross profit
margin for the year ended December 31, 2019, was primarily driven by higher
share-based compensation expense and intangible assets amortization.
                                       57
--------------------------------------------------------------------------------
  Table of Contents
Service gross profit for the years ended December 31, 2019 and 2018, included
share-based compensation expense of $20.4 million and $16.8 million,
respectively, and intangible assets amortization expense of $3.7 million and
$0.8 million, respectively.
Selling, General and Administrative Expenses
Selling, general and administrative expenses include costs for sales, marketing
and administrative personnel, sales and marketing activities, tradeshow
expenses, legal expenses, regulatory fees, and general corporate expenses.
Selling, general and administrative expenses for the year ended December 31,
2019, increased by 19% to $1,178 million, compared with $987 million for the
year ended December 31, 2018. The higher selling, general and administrative
expenses in 2019 were primarily associated with our expanded Asian and European
teams, including establishing our direct organizations in China, India, and
Taiwan, increased infrastructure to support our growth, and higher headcount.
Also, in the fourth quarters of 2019 and 2018, we made charitable contributions
of $5.0 million and $25.2 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 included net pre-tax litigation
charges of $0.8 million and $45.2 million for the years ended December 31, 2019,
and 2018, respectively. The litigation charges for the year ended December 31,
2018, were primarily related to the settlement of the Abrams class action
lawsuit further described in Note 8 to the Consolidated Financial Statements
included in Part II, Item 8.
Selling, general and administrative expenses for the years ended December 31,
2019, and 2018, included share-based compensation expense of $170 million and
$133 million, respectively, and intangible assets amortization expense of $5.7
million and $2.2 million, respectively.
Research and Development Expenses
Research and development costs are expensed as incurred. Research and
development expenses include costs associated with the design, development,
testing, and significant enhancement of our products.
Research and development expenses for the year ended December 31, 2019,
increased by 33% to $557 million, compared with $418 million for the year ended
December 31, 2018. The increase was primarily due to higher personnel-related
expenses, intangible asset charges, 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.
Research and development expenses for the years ended December 31, 2019, and
2018, included share-based compensation expense of $101.4 million and $76.2
million, respectively, and intangible asset charges of $26.3 million and $23.3
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 $127.7 million for the year ended
December 31, 2019, compared with $80.1 million for the year ended December 31,
2018, and $41.9 million for the year ended December 31, 2017. The increase in
interest and other income, net, for the year ended December 31, 2019, was
primarily driven by higher interest earned due to higher interest rates and
higher cash and investment balances.
Income Tax Expense
Our income tax expense was $120 million, $155 million, and $434 million for the
years ended December 31, 2019, 2018, and 2017, respectively. Our effective tax
rate for 2019 was approximately 8.0% compared with 12.1% for 2018 and 39.3% for
2017. Our effective tax rate for 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,
the federal research and development credit benefit, and the release of
unrecognized tax benefits from the expiration of statutes of limitations,
partially offset by U.S. tax on foreign earnings and state income taxes (net of
federal benefit). In addition, 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 tax rate for 2017 reflected the effect of a one-time discrete item in the
amount of $317.8 million associated with the enactment of the 2017 Tax Act.
Besides the impact of the 2017 Tax Act, our tax rate for 2017 differs from the
U.S. federal statutory rate of 35% due to the effect of income earned by certain
overseas entities being taxed at rates lower than the federal statutory rate,
excess tax benefits recognized for employee share-based compensation, and the
reversal of certain unrecognized tax benefits, partially offset by state income
taxes (net of federal benefit).
                                       58
--------------------------------------------------------------------------------
  Table of Contents
On December 22, 2017, the U.S. federal government enacted the 2017 Tax Act. The
2017 Tax Act includes a number of changes in existing tax law impacting
businesses, including a one-time deemed repatriation of cumulative undistributed
foreign earnings and a permanent reduction in the U.S. federal statutory rate
from 35% to 21%, effective on January 1, 2018.
Under U.S. GAAP, changes in tax rates and tax law are accounted for in the
period of enactment and deferred tax assets and liabilities are measured at the
enacted tax rate. In December 2017, we estimated an income tax expense of
$317.8 million related to the 2017 Tax Act, $270.2 million of which related to
the one-time deemed repatriation toll charge ("Toll Tax") and $47.6 million of
which related to the re-measurement of our net deferred tax assets at the
reduced U.S. federal statutory rate of 21%. In December 2018, we completed our
accounting for the effect of the 2017 Tax Act within the measurement period and
reflected a $0.5 million net increase in the 2018 income tax expense.
In June 2018, we repatriated $1.6 billion of our cumulative undistributed
foreign earnings back to the U.S. without any significant U.S. income tax
consequences. We intend to repatriate earnings from our Swiss subsidiary 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.
Our 2019, 2018, and 2017 provisions for income taxes included excess tax
benefits associated with employee equity plans of $147 million, $116 million,
and $103 million, respectively, which reduced our effective tax rate by 9.8,
9.1, and 9.3 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 instruments settled or vested, and the value
assigned to employee equity awards under U.S. GAAP, which results in increased
income tax expense volatility.
Our 2019, 2018, and 2017 tax provision reflected tax benefits of $8.4 million,
$5.2 million, and $62.4 million, respectively, associated with the reversal of
unrecognized tax benefits and interest resulting from the expiration of statutes
of limitations in multiple jurisdictions and certain audit conclusions.
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.
In July 2015, a U.S. Tax Court opinion (the "2015 Opinion") was issued involving
an independent third party related to intercompany charges for share-based
compensation. Based on the findings of the U.S. Tax Court, we were required to,
and did, refund to our foreign subsidiaries the share-based compensation element
of certain intercompany charges made in prior periods. Starting in 2015, direct
share-based compensation has been excluded from intercompany charges. 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 the rehearing request was denied by the Ninth Circuit on
November 12, 2019. However, a petition for appeal to the U.S. Supreme Court can
be filed within 90 days of the denial. Since the Ninth Circuit Opinion
potentially is subject to further judicial review, we continue to treat our
share-based compensation expense in accordance with the 2015 Opinion and
continue to recognize the related tax benefits in our financial statements based
upon our evaluation of the position in light of the present facts. In the event
of a final opinion that reverses the 2015 Opinion, there may be an adverse
impact to our income tax expense and effective tax rate.
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, 2019, 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 2020 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
                                       59
--------------------------------------------------------------------------------
  Table of Contents
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, 2019, was $2.5 million, compared with $(2.9) million
for the year ended December 31, 2018. The increase in net income attributable to
noncontrolling interest in Joint Venture was primarily due to the increase in
sales in China, partially offset by intangible assets amortization expense and
higher costs to ramp up operations in China.
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 $1.0 billion to $5.8 billion as of December 31, 2019,
from $4.8 billion as of December 31, 2018, primarily from cash provided by our
operations, partially offset by capital expenditures and share repurchases. Cash
and cash equivalents plus short- and long-term investments increased by $1.0
billion to $4.8 billion as of December 31, 2018, from $3.8 billion as of
December 31, 2017, primarily from cash provided by our operations and employee
stock option exercises.
As of December 31, 2019, $362 million of our cash, cash equivalents, and
investments were held by foreign subsidiaries. We intend to repatriate earnings
from our Swiss subsidiary 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. We believe the cash provided by our operations will meet
our liquidity needs for the foreseeable future.
See "Item 7A. Quantitative and Qualitative Disclosures About Market Risk" for
discussion on the impact of interest rate risk and market risk on our investment
portfolio.
Consolidated Cash Flow Data
                                                                         Years Ended December 31,
                                                                2019               2018               2017
(in millions)
Net cash provided by (used in)
Operating activities                                        $ 1,598.2$ 1,169.6$ 1,143.9
Investing activities                                         (1,154.4)          (1,049.6)             378.7
Financing activities                                           (168.4)             126.3           (1,913.1)

Effect of exchange rates on cash, cash equivalents, and restricted cash

                                                  (2.2)              (0.1)               2.1
Net increase (decrease) in cash, cash equivalents, and
restricted cash                                             $   273.2$   246.2$  (388.4)



Operating Activities
For the year ended December 31, 2019, net cash provided by operating activities
of $1,598 million exceeded our net income of $1,382 million, primarily due to
the following reasons:
1.Our net income included non-cash charges of $537.9 million, consisting
primarily of the following significant items: share-based compensation of $335.8
million; depreciation expense and losses on the disposal of property, plant, and
equipment of $160.0 million; and amortization of intangible assets of $43.0
million.
2.The non-cash charges outlined above were partially offset by changes in
operating assets and liabilities that resulted in $321.5 million of cash used by
operating activities during the year ended December 31, 2019. Inventory,
including the transfer of equipment from inventory to property, plant, and
equipment, increased by $360.5 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 $116.9 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 $57.4 million
increase in accrued compensation and employee benefits, primarily due to higher
headcount, a $38.8 million decrease in accounts receivable, primarily due to the
timing of collections, and a $35.5 million increase in deferred revenue,
primarily due to the increased volume of sales contracts.
                                       60
--------------------------------------------------------------------------------
  Table of Contents
For the year ended December 31, 2018, net cash provided by operating activities
of $1,170 million exceeded our net income of $1,125 million, primarily due to
the following reasons:
1.Our net income included non-cash charges of $428.3 million, consisting
primarily of the following significant items: share-based compensation of $261.2
million; depreciation expense and losses on the disposal of property, plant, and
equipment of $108.6 million; deferred income taxes of $31.9 million;
amortization of intangible assets of $14.2 million; and amortization of contract
acquisitions assets of $10.6 million.
2.The non-cash charges outlined above were partially offset by changes in
operating assets and liabilities that resulted in $383.7 million of cash used in
operating activities during the year ended December 31, 2018. Inventory,
including the transfer of equipment from inventory to property, plant, and
equipment, increased by $279.0 million, primarily due to the increased number of
systems under operating lease 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. Accounts receivable increased by $161.3
million, primarily due to higher customer billings and timing of billings and
collections. Prepaid expenses and other assets increased by $77.7 million. The
unfavorable impact of these items on cash provided by operating activities was
partially offset by a $54.3 million increase in deferred revenue, a $37.1
million increase in other accrued liabilities, and a $26.2 million increase in
accrued compensation and employee benefits.
Investing Activities
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 $669.1 million, the acquisition of property and equipment of
$425.6 million, and the acquisition of businesses, net of cash acquired, of
$59.7 million.
Net cash used in investing activities for the year ended December 31, 2018,
consisted of purchases of investments (net of proceeds from sales and maturities
of investments) of $774.3 million, the acquisition of property and equipment
of $187.4 million, and the acquisition of businesses of $87.9 million.
Net cash provided by investing activities for the year ended December 31, 2017,
consisted of proceeds from sales and maturities of investments (net of purchases
of investments) of $569.4 million, partially offset by the acquisition of
property and equipment of $190.7 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, 2019,
consisted primarily of cash used in the repurchase of approximately 0.6 million
shares of our common stock in the open market for $269.5 million and taxes paid
on behalf of employees related to net share settlements of vested employee
equity awards of $159.1 million, partially offset by proceeds from stock option
exercises and employee stock purchases of $272.8 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 $236.6 million, partially offset by taxes paid on behalf of
employees related to net share settlements of vested employee equity awards of
$120.0 million.
Net cash used in financing activities for the year ended December 31, 2017,
consisted primarily of $2.3 billion related to an accelerated share buyback
program executed and settled during 2017 and taxes paid on behalf of employees
related to net share settlements of vested employee equity awards of $56.6
million, partially offset by proceeds from stock option exercises and employee
stock purchases of $415.5 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 $400 million in each of the next two years. We
intend to fund these needs with cash generated from operations.
Our cash requirements depend on numerous factors, including market acceptance of
our products, the resources we devote to developing and supporting our products,
and other factors. We expect to continue to devote substantial resources to
expand procedure adoption and acceptance of our products. We have made
substantial investments in our commercial operations, product development
activities, facilities, and intellectual property. Based upon our business
model, we anticipate that we will continue to be able to fund future growth
through cash provided from operations. We believe that our current cash, cash
equivalents, and investment balances, together with income to be derived from
the sale of our products, will be sufficient to meet our liquidity requirements
for the foreseeable future.
                                       61

--------------------------------------------------------------------------------

Table of Contents Contractual Obligations and Commercial Commitments The following table summarizes our contractual obligations and commercial commitments as of December 31, 2019 (in millions):

Payments due by period

                                                             Less than                                                  More than 5
                                            Total             1 year           1 to 3 years         3 to 5 years           years
Operating leases (Note 6)                $    87.7$    9.6

$ 34.5$ 21.2$ 22.4 Purchase commitments and obligations 844.7

             805.6                 37.7                  1.4                  -
Tax Cuts and Jobs Act Toll Tax (Note 11)     225.2              21.4                 42.9                 93.9               67.0
Total                                    $ 1,157.6$  836.6$     115.1$     116.5$    89.4


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 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.
Tax Cuts and Jobs Act Toll Tax. As of December 31, 2019, our obligation
associated with the deemed repatriation toll charge is $225.2 million, which is
expected to be paid in installments. Refer to Note 11 for further details.
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, 2019, 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.
                                       62
--------------------------------------------------------------------------------
  Table of Contents
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 estimation of transactions to hedge, which impacts revenue and expense;
•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, and money market funds. The assessment
of the fair value of investments can be difficult and subjective. U.S. GAAP
establishes three levels of inputs that may be used to measure fair value. Each
level of input has different levels of subjectivity and difficulty involved in
determining fair value. Valuation of Level 1 and 2 instruments generally do not
require significant management judgment and the estimation is not difficult.
Level 3 instruments include unobservable inputs that are supported by little or
no market activity and that are significant to the fair value of the assets or
liabilities. The determination of fair value for Level 3 instruments requires
the most management judgment and subjectivity. There were no Level 3 securities
for the periods presented.
Other-than-temporary impairment. After determining the fair value of our
available-for-sale instruments, gains or losses on these securities are recorded
to other comprehensive income ("OCI") until either the security is sold or we
determine that the decline in value is other-than-temporary. Factors considered
in determining whether a loss is temporary include the extent and length of time
that the investment's fair value has been lower than its 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 prior to the expected recovery of the
investment's amortized cost basis. These judgments could prove to be wrong, and
companies with relatively high credit ratings and solid financial conditions may
not be able to fulfill their obligations.
No significant impairment charges were recorded during the years ended December
31, 2019, 2018, and 2017. As of December 31, 2019, and 2018, net unrealized
losses on investments of $20.4 million and $9.8 million, net of tax,
respectively, were included in accumulated other comprehensive income/(loss).
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,
                                       63
--------------------------------------------------------------------------------
  Table of Contents
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 and
other allowances. As a result, management must make estimates of potential
future product returns and other allowances related to current period product
revenue. In making such estimates, management analyzes historical returns,
current economic trends and changes in customer demand and acceptance of our
products. If management were to make different judgments or utilize different
estimates, material differences in the amount of reported revenue could result.
Similarly, we make estimates of the collectability of accounts receivable,
especially analyzing the aging and nature of accounts receivable and historical
bad debts, customer concentrations, customer credit-worthiness, current economic
trends, and changes in customer payment terms when evaluating the adequacy of
the allowance for doubtful accounts. Credit evaluations are undertaken for all
major sales transactions before shipment is authorized. On a quarterly basis, we
evaluate aged items in the accounts receivable aging report and provide an
allowance in an amount 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.
Hedge Accounting for Derivatives. We utilize foreign currency forward exchange
contracts to hedge certain anticipated foreign currency-denominated sales
transactions and expenses. When specific criteria required by relevant
accounting standards have been met, changes in fair values of hedge contracts
relating to anticipated transactions are recorded in OCI rather than net income
until the underlying hedged transaction affects net income. By their nature, our
estimates of anticipated transactions may fluctuate over time and may ultimately
vary from actual transactions. When we determine that the transactions are no
longer probable within a certain time frame, we are required to reclassify the
cumulative changes in the fair values of the related hedge contracts from OCI to
net income.
Inventory valuation. Inventory is stated at the lower of 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, 2019,
2018, and 2017. 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
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 and liabilities assumed is
recorded as goodwill. When determining the fair value of assets acquired and
liabilities assumed, management is required to make certain estimates and
assumptions, especially with respect to intangible assets. The estimates and
assumptions used in valuing intangible assets include, but are not limited to,
the amount
                                       64
--------------------------------------------------------------------------------
  Table of Contents
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, the
estimated volatility of our common stock price over the expected term, and the
number of options that will ultimately not complete their vesting requirements.
The assumptions for expected volatility and expected term are the two
assumptions that most significantly affect the grant date fair value of stock
options. Changes in expected risk-free rate of return do not significantly
impact the calculation of fair value and determining this input is not highly
subjective.
We use implied volatility based on freely traded options in the open market, as
we believe implied volatility is more reflective of market conditions and a
better indicator of expected volatility than historical volatility. In
determining the appropriateness of relying on implied volatility, we considered
the following:
•the sufficiency of the trading volume of freely traded options;
•the ability to reasonably match the terms, such as the date of the grant and
the exercise price of the freely traded options to options granted; and
•the length of the term of the freely traded options used to derive implied
volatility.
The expected term represents the weighted-average period that our stock options
are expected to be outstanding. The expected term is based on the observed and
expected time to exercise. We determine expected term based on historical
exercise patterns and our expectation of the time it will take for employees to
exercise options still outstanding.
We develop an estimate of the number of share-based awards that will be
forfeited due to employee turnover. Adjustments in the estimated forfeiture
rates can have a significant effect on our reported share-based compensation, as
we recognize the cumulative effect of the forfeiture rate adjustments for all
expense amortization in the period that the estimated forfeiture rates are
adjusted. We estimate and adjust forfeiture rates based on a periodic review of
recent forfeiture activity and expected future employee turnover. If a revised
forfeiture rate is higher than the previously estimated forfeiture rate, we may
make an adjustment that will result in a decrease to the expense recognized in
the financial statements during the period when the rate was changed.
Adjustments in the estimated forfeiture rates could also cause changes in the
amount of expense that we recognize in future periods.
Changes in these subjective assumptions can materially affect the estimate of
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, 2019, 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
                                       65
--------------------------------------------------------------------------------
  Table of Contents
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 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.
                                       66

--------------------------------------------------------------------------------

Table of Contents

© Edgar Online, source Glimpses

share with twitter share with LinkedIn share with facebook
share via e-mail
Latest news on INTUITIVE SURGICAL, INC.
02/10Intuitive Acquires Orpheus Medical to Expand Informatics Platform for Hospita..
GL
02/07INTUITIVE SURGICAL : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION..
AQ
02/06INTUITIVE SURGICAL, INC. : Report
CO
02/05INTUITIVE SURGICAL, INC. : Report
CO
02/04INTUITIVE SURGICAL, INC. : Report
CO
02/03INTUITIVE SURGICAL : Report of unscheduled material events or corporate event
PU
02/03INTUITIVE SURGICAL INC : Change in Directors or Principal Officers (form 8-K)
AQ
02/03Intuitive Announces Retirement of Board Chair Lonnie M. Smith; Dr. Craig H. B..
GL
01/30INTUITIVE SURGICAL, INC. : SEC Filing 8K
CO
01/30INTUITIVE SURGICAL, INC. : Report
CO
More news