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

Overview

Open surgery remains the predominant form of surgery and is used in almost every
area of the body. However, the large incisions required for open surgery create
trauma to patients, typically resulting in longer hospitalization and recovery
times, increased hospitalization costs, and additional pain and suffering
relative to minimally invasive surgery ("MIS"), where MIS is available. For over
three decades, MIS has reduced trauma to patients by allowing selected surgeries
to be performed through small ports rather than large incisions. MIS has been
widely adopted for certain surgical procedures.
Da Vinci Surgical Systems enable surgeons to extend the benefits of MIS to many
patients who would otherwise undergo a more invasive surgery by using
computational, robotic, and imaging technologies to overcome many of the
limitations of traditional open surgery or conventional MIS. Surgeons using a da
Vinci Surgical System operate while seated comfortably at a console viewing a
3D, high-definition image of the surgical field. This immersive console connects
surgeons to the surgical field and their instruments. While seated at the
console, the surgeon manipulates instrument controls in a natural manner,
similar to open surgical technique. Our technology is designed to provide
surgeons with a range of articulation of the surgical instruments used in the
surgical field analogous to the motions of a human wrist, while filtering out
the tremor inherent in a surgeon's hand. In designing our products, we focus on
making our technology easy and safe to use.
Our da Vinci products fall into five broad categories: da Vinci Surgical
Systems, da Vinci instruments and accessories, da Vinci Stapling, da Vinci
Energy, and da Vinci Vision, including Firefly Fluorescence imaging systems
("Firefly") and da Vinci Endoscopes. We also provide a comprehensive suite of
services, training, and education programs. Within our integrated ecosystem, our
products are designed to decrease variability in surgery by offering dependable,
consistent functionality and user experiences for surgeons seeking better
outcomes. We take a holistic approach, offering intelligent technology and
systems designed to work together to make MIS intervention more available and
applicable.
We have commercialized the following da Vinci Surgical Systems: the da Vinci
standard Surgical System in 1999, the da Vinci S Surgical System in 2006, the da
Vinci Si Surgical System in 2009, and the fourth generation da Vinci Xi Surgical
System in 2014. We have extended our fourth generation platform by adding the da
Vinci X Surgical System, commercialized in the second quarter of 2017, and the
da Vinci SP Surgical System, commercialized in the third quarter of 2018. We are
early in the launch of our da Vinci SP Surgical System, and we have an installed
base of 69 da Vinci SP Surgical Systems as of December 31, 2020. Our plans for
the rollout of the da Vinci SP Surgical System include putting systems in the
hands of experienced da Vinci users first while we optimize training pathways
and our supply chain. We received FDA clearances for the da Vinci SP Surgical
System for urological and certain transoral procedures. We also received
clearance in South Korea where the da Vinci SP Surgical System may be used for a
broad set of procedures. We plan to seek FDA clearances for additional
indications for da Vinci SP over time. The success of the da Vinci SP Surgical
System is dependent on positive experiences and improved clinical outcomes for
the procedures for which it has been cleared as well as securing additional
clinical clearances. All da Vinci systems include a surgeon's console (or
consoles), imaging electronics, a patient-side cart, and computational hardware
and software.
We offer approximately 70 different multi-port da Vinci instruments to provide
surgeons with flexibility in choosing the types of tools needed to perform a
particular surgery. These multi-port instruments are generally robotically
controlled and provide end effectors (tips) that are similar to those used in
either open or laparoscopic surgery. We offer advanced instrumentation for the
da Vinci Xi and da Vinci X platforms, including da Vinci Energy and da Vinci
Stapler products, to provide surgeons with sophisticated, computer-aided tools
to precisely and efficiently interact with tissue. Da Vinci X and da Vinci Xi
Surgical Systems share the same instruments whereas the da Vinci Si Surgical
System uses instruments that are not compatible with da Vinci X or da Vinci Xi
systems. We currently offer nine core instruments on our da Vinci SP Surgical
System. We plan to expand the SP instrument offering over time.
Training technologies include our Intuitive Simulation products, our Intuitive
Telepresence remote case observation and telementoring tools, and our dual
console for use in surgeon proctoring and collaborative surgery.
During the first quarter of 2019, the FDA cleared our Ion endoluminal system to
enable minimally invasive biopsies in the lung. Our Ion system extends our
commercial offering beyond surgery into diagnostic procedures with this first
application. We are introducing the Ion system in the U.S. in a measured fashion
while we optimize training pathways and our supply chain and collect additional
clinical data. We are early in the launch and have placed 36 Ion systems for
commercial use as of December 31, 2020. Ion systems are not included in our da
Vinci Surgical System installed base. We currently have 3 Ion systems placed
with hospitals for gathering clinical data in addition to the systems placed for
commercial use.
The success of new product introductions depends on a number of factors
including, but not limited to, pricing, competition, market and consumer
acceptance, the effective forecasting and management of product demand,
inventory levels, the management of manufacturing and supply costs, and the risk
that new products may have quality or other defects in the early stages of
introduction.
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COVID-19 Pandemic
Procedures
Prior to the spread of COVID-19 in the first quarter of 2020, we experienced
procedure growth trends consistent with those experienced in the fourth quarter
of 2019, including strength in general surgery, growth in mature procedures in
the U.S., and growth in OUS urology. Beginning in January 2020, we saw a
substantial reduction in da Vinci procedures in China and, by early February
2020, procedures per week in China had declined by approximately 90% compared to
the weekly procedure rates experienced in early January 2020. As the COVID-19
pandemic subsided in China in March 2020, da Vinci procedure volume began to
recover and, by the end of the first quarter of 2020, China procedures per week
were approximately 70% of the early January 2020 weekly procedure rate. As the
COVID-19 pandemic spread to Western Europe and the U.S., we experienced a
significant decline in da Vinci procedures in the last half of March 2020, and
procedures per week in the U.S. declined to approximately 65% of the weekly
procedure rate experienced earlier in the first quarter of 2020.
In April 2020, procedures per week in the U.S. continued to decline, reaching
approximately 30% of pre-COVID-19 levels. In May and June, U.S. procedures began
a recovery phase, as COVID-19 cases dropped and elective procedures were
permitted, and, by the middle of June, had grown to nearly the same level as
that measured in the first two weeks of the first quarter of 2020. However, in
the last two weeks of June and into July, with the resurgence of COVID-19 cases,
some regions postponed elective procedures, and we experienced a corresponding
decline in da Vinci procedures. The impact of COVID-19 in Europe during the
second quarter varied by country with procedures in Italy, France, and the UK
declining more steeply, while Germany experienced a year-over-year increase in
procedures. During the second quarter of 2020, China procedures per week
continued to increase to a level consistent with the early January 2020 weekly
procedure rate.
In the third quarter of 2020, procedures recovered slowly in the U.S., leveling
off near pre-COVID-19 levels towards the end of the quarter. Outside of the
U.S., da Vinci procedures varied in the third quarter of 2020, depending on the
spread and/or resurgence of COVID-19. For example, COVID-19 had a less
significant impact in Germany where da Vinci procedures grew at mid-single
digits relative to the third quarter of 2019, while it had a more significant
impact in the U.K. where da Vinci procedures declined year over year. Procedures
in China grew significantly year over year in the third quarter of 2020, while
regional COVID-19 outbreaks resulted in year-over-year procedure growth rates in
Japan slowing somewhat relative to earlier in the year. The COVID-19 pandemic
has also affected the volumes of certain procedure types differently. For
example, patient concerns over exposure to COVID-19 and the fact that prostate
cancer can be slow growing, combined with lower prostate diagnoses and
treatments, have caused the number of dVP procedures to decline in the third
quarter of 2020 relative to the third quarter of 2019. Da Vinci bariatric
procedures grew significantly year over year in the third quarter of 2020 due to
our optimized instrument set and focus by our sales organization and may also
have benefited from certain patients prioritizing weight loss as obesity is a
significant COVID-19 risk factor. However, the diagnoses and treatment pathways
for bariatric patients are long, and many of the patients in the third quarter
may have begun their treatment pathway prior to the spread of COVID-19;
therefore, we cannot assure you that we will continue to see significant growth
in bariatric procedures.
In the fourth quarter of 2020, procedure volumes continued to be significantly
impacted by the COVID-19 pandemic as healthcare systems around the world
diverted resources to respond to the pandemic. The impact continued to differ
significantly by geography and region, depending on the spread and resurgence of
COVID-19. In the U.S., while procedures continued to recover in the early part
of the quarter, the resurgence of COVID-19 infections experienced by some states
had an increasingly adverse impact on our procedure volumes as the quarter
progressed, a trend that continued into January. The impact of a resurgence in a
particular region can be significant. Outside of the U.S., similar to the trends
noted in the third quarter, procedures also continued to vary significantly by
geography and region. The resurgence of COVID-19 had a more significant impact
on procedures in Italy, France, and the UK. Procedures in China continued to
grow significantly year over year. The trends that were noted in the third
quarter of 2020 in relation to types of procedures, such as dVP and bariatric
procedures, continued into the fourth quarter of 2020.
We continue to see that the impact of COVID-19 on our procedure volumes varies
widely by country, region, and type. When COVID-19 infection rates spike in a
particular region, procedure volumes have been negatively impacted and the
diagnoses of new conditions and their related treatments are deferred. Also,
based on our experience during 2020, we do not expect all markets, regions, and
procedure types to recover at the same pace. Due to the uncertainty of the
recovery, including the potential for COVID-19 infection rates to increase, the
extent and period of time over which the COVID-19 pandemic and any resultant
economic recession will impact hospital spending, and additional policy
responses that may be outlined by governments and other authorities, we cannot
reliably estimate the impact that the COVID-19 pandemic may have on procedure
volume in the first quarter of 2021 and beyond.
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System Demand
As the impact of the COVID-19 pandemic progressed throughout 2020, customers in
affected regions deferred decisions to purchase or lease systems into future
quarters and, in some cases, indefinitely. These deferral decisions continued
into the fourth quarter of 2020. In addition, the year-over-year stagnation in
procedures and, in turn, reduced utilization of our systems has resulted in
unused capacity in the existing installed base. We expect hospitals to first
fill their unused capacity before purchasing additional systems. The depth and
extent to which the COVID-19 pandemic will impact individual markets will vary
based on the availability of testing capabilities, personal protective
equipment, intensive care units and operating rooms, and medical staff, as well
as government interventions. As COVID-19 continues to disrupt healthcare
operations and patient flow, we expect that system placements will lag behind
the recovery of da Vinci procedure volume. While we cannot reliably estimate the
extent or period of time over which the COVID-19 pandemic and any resultant
economic recession will impact hospital spending, we anticipate lower
year-over-year system placements for the first quarter of 2021.
Customer Relief Program
In April 2020, we announced a program to provide financial relief to our
customers. The program was comprised of three main elements. The first element
provided credits against service fees otherwise due in the six-month period from
April 1 through September 30, 2020, that generally reflected the
underutilization of the system during that period. Those credits were offered to
most customers worldwide. The second element of the program deferred certain
lease payments, and the third element extended certain payment terms. Service
fee credits resulted in an $80 million decrease in service revenue in 2020.
While the short-term payment relief offered did not have a material impact to
the results of operations, we deferred $15 million of lease billings and
extended payment terms associated with $181 million of trade receivables since
the start of the program, of which $19 million remain outstanding as of
December 31, 2020. We may be subject to increased credit risks resulting in
collection delinquencies and defaults, which could materially impact our bad
debt write-offs and provisions for credit losses. Although we have programs in
place that are designed to monitor and mitigate the associated risks, there can
be no assurance that such programs will be effective in reducing credit risks
relating to these lease financing arrangements and extended payment terms.
General Increase in Risks
Capital markets and worldwide economies have been significantly impacted by the
COVID-19 pandemic, and it is possible that it could cause a prolonged recession
in local and/or global economies. Such an economic recession could have a
material adverse effect on our long-term business as hospitals curtail and
reduce capital and overall spending. The COVID-19 pandemic and local actions,
such as "shelter-in-place" orders and restrictions on our ability to travel and
access our customers or temporary closures of our facilities, including our
manufacturing operations, or the facilities of our suppliers and their contract
manufacturers, could further significantly impact our sales and our ability to
produce and ship our products and supply our customers. Any of these events
could negatively impact the number of da Vinci procedures performed or the
number of system placements and have a material adverse effect on our business,
financial condition, results of operations, or cash flows.
Our Response
Our priorities and actions during the COVID-19 pandemic are as follows. First,
we are focused on the health and safety of all those we serve - patients,
customers, our communities, and our employees - implementing continuous updates
to our health and safety policies and processes. Second, we are supporting our
customers according to their priorities - clinical, operational, and economic -
and ensuring continuity of supply by working with our suppliers and our
distributors. Third, we are securing our workforce economically. We have built a
valuable team over the years, and we believe they will be important in the
recovery that follows the pandemic. Finally, we will continue to invest in our
priority development programs while eliminating avoidable spend.
Business Model
Overview
We generate revenue from the placements of da Vinci Surgical Systems, in sales
or sales-type lease arrangements where revenue is recognized up-front or in
operating lease transactions and usage-based models where revenue is recognized
over time. We earn recurring revenue from the sales of instruments, accessories,
and services, as well as the revenue from operating leases. The da Vinci
Surgical System generally sells for between $0.5 million and $2.5 million,
depending upon the model, configuration, and geography, and represents a
significant capital equipment investment for our customers when purchased. Our
instruments and accessories have limited lives and will either expire or wear
out as they are used in surgery, at which point they need to be replaced. We
generally earn between $600 and $3,500 of instruments and accessories revenue
per surgical procedure performed, depending on the type and complexity of the
specific procedures performed and the number and type of instruments used.
During the fourth quarter of 2020, we launched our Extended Use Program (refer
to further discussion immediately below) with the intention to reduce the cost
for customers to treat patients, which in turn will reduce our overall
instruments and
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accessories revenue per procedure. We typically enter into service contracts at
the time systems are sold or leased at an annual fee between $80,000 and
$190,000, depending upon the configuration of the underlying system and
composition of the services offered under the contract. These service contracts
have generally been renewed at the end of the initial contractual service
periods.
We generate revenue from the placements of the Ion endoluminal system in a
business model consistent with the da Vinci Surgical System model described
above. We generate revenue from the placement of Ion systems, and we earn
recurring revenue from the sales of instruments and accessories used in biopsies
and ongoing system service. The average selling price of an Ion system is
generally significantly lower than the average selling price of our da Vinci
Surgical Systems. We are introducing the Ion system in the U.S. in a measured
fashion. For the years ended December 31, 2020, and 2019, the associated impact
to revenue and gross margin was not significant.
Extended Use Program
In 2020, we introduced our "Extended Use Program," which consists of select da
Vinci Xi and da Vinci X instruments possessing 12 to 18 uses ("Extended Use
Instruments") compared to the current 10 use instruments. These Extended Use
Instruments represent some of our higher volume instruments but exclude
stapling, monopolar, and advanced energy instruments. Instruments included in
the program are used across a number of da Vinci surgeries. Their increased uses
are the result of continuous, significant investments in the design and
production capabilities of our instruments, resulting in improved quality and
durability. Extended Use Instruments have been introduced in the U.S. in October
2020 and in Europe in November 2020. They will be introduced at various times
throughout 2021 and 2022 in other geographies, depending on regulatory
processes. In addition, simultaneous with the regional launches of Extended Use
Instruments, we will lower the price of certain instruments that are most
commonly used in lower acuity procedures and/or lower reimbursed procedures
within the region. These actions will reduce the cost for customers to treat
patients, which in turn will reduce our revenue per procedure. Based on 2019
volume and mix of procedures, our Extended Use Program and the reduced pricing
on certain other instruments would have reduced 2019 annual instruments and
accessories revenue by approximately $150 to $170 million. The impact of these
actions on future revenue will be dependent on the future volume and mix of
procedures and whether cost elasticity will enable greater penetration into
available markets.
Recurring Revenue
Recurring revenue consists of instruments and accessories revenue, service
revenue, and operating lease revenue. Recurring revenue increased to $3.4
billion, or 77% of total revenue in 2020, compared to $3.2 billion, or 72% of
total revenue in 2019, and $2.6 billion, or 71% of total revenue in 2018.
Instruments and accessories revenue has grown at a faster rate than systems
revenue over time. Instruments and accessories revenue increased to $2.46
billion in 2020, compared to $2.41 billion in 2019 and $1.96 billion in 2018.
The growth of instruments and accessories revenue largely reflects continued
procedure adoption.
Service revenue was $724 million in 2020, compared to $724 million in 2019 and
$635 million in 2018. Service revenue remained unchanged, driven by the growth
of the base of installed da Vinci Surgical Systems, offset by the effects of the
Customer Relief Program. The installed base of da Vinci Surgical Systems grew 7%
to approximately 5,989 at December 31, 2020; 12% to approximately 5,582 at
December 31, 2019; and 13% to approximately 4,986 at December 31, 2018.
We use the installed base, number of shipments, and utilization of da Vinci
Surgical Systems as metrics for financial and operational decision-making and as
a means to evaluate period-to-period comparisons. Management believes that the
installed base, number of shipments, and utilization of da Vinci Surgical
Systems provide meaningful supplemental information regarding our performance,
as management believes that the installed base, number of shipments, and
utilization of da Vinci Surgical Systems are an indicator of the rate of
adoption of robotic-assisted surgery as well as an indicator of future recurring
revenue (particularly service revenue). Management believes that both it and
investors benefit from referring to the installed base, number of shipments, and
utilization of da Vinci Surgical Systems in assessing our performance and when
planning, forecasting, and analyzing future periods. The installed base, number
of shipments, and utilization of da Vinci Surgical Systems also facilitate
management's internal comparisons of our historical performance. We believe that
the installed base, number of shipments, and utilization of da Vinci Surgical
Systems are useful to investors as metrics, because (1) they allow for greater
transparency with respect to key metrics used by management in its financial and
operational decision-making, and (2) they are used by institutional investors
and the analyst community to help them analyze the performance of our business.
The vast majority of da Vinci Surgical Systems installed are connected via the
internet. System logs can also be accessed by field engineers for systems that
are not connected to the internet. We utilize this information as well as other
information from agreements and discussions with our customers that involve
estimates and judgments, which are, by their nature, subject to substantial
uncertainties and assumptions. Estimates and judgments for determining the
installed base, number of shipments, and utilization of da Vinci Surgical
Systems may be impacted over time by various factors, including system internet
connectivity, hospital and distributor reporting behavior, and inherent
complexities in new agreements. Such estimates and judgments are also
susceptible to technical errors. In addition, the relationship between the
installed base, number of shipments,
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and utilization of da Vinci Surgical Systems and our revenues may fluctuate from
period to period, and growth in the installed base, number of shipments, and
utilization of da Vinci Surgical Systems may not correspond to an increase in
revenue. The installed base, number of shipments, and utilization of da Vinci
Surgical Systems are not intended to be considered in isolation or as a
substitute for, or superior to, revenue or other financial information prepared
and presented in accordance with GAAP.
The COVID-19 pandemic reduced the number of shipments of da Vinci Surgical
Systems in 2020 as compared to the prior year. Based on the factors outlined in
the COVID-19 Pandemic section above, historical system shipment trends may not
be a good indicator of future system shipments.
Intuitive System Leasing
Since 2013, we have entered into sales-type and operating lease arrangements
directly with certain qualified customers as a way to offer customers
flexibility in how they acquire systems and expand their robotic-assisted
programs while leveraging our balance sheet. These leases generally have
commercially competitive terms as compared with other third-party entities that
offer equipment leasing. We have also entered into usage-based arrangements with
larger customers that have committed da Vinci programs where we charge for the
system and service as the systems are utilized. We include operating and
sales-type leases, and systems placed under usage-based arrangements, in our
system shipment and installed base disclosures. We exclude operating
lease-related revenue, usage-based revenue, and Ion system revenue from our da
Vinci Surgical System average selling price ("ASP") computations.
In the years ended December 31, 2020, 2019, and 2018, we shipped 432, 425, and
272 da Vinci Surgical Systems, respectively, under lease and usage-based
arrangements, of which 317, 384, and 229 systems, respectively, were operating
lease and usage-based arrangements. Revenue from operating lease arrangements is
generally recognized on a straight-line basis over the lease term. More
recently, we have entered into usage-based arrangements with certain large
customers whereby system and service revenue is recognized as the systems are
used. We set operating lease and usage-based pricing at a modest premium
relative to purchased systems reflecting the time value of money and, in the
case of usage-based arrangements, the risk that system utilization may fall
short of anticipated levels. The proportion of revenue recognized from
usage-based arrangements has not been significant and has been included in our
operating lease metrics herein. Operating lease revenue has grown at a faster
rate than overall systems revenue and was $177 million, $107 million, and
$51 million for the years ended December 31, 2020, 2019, and 2018, respectively.
Generally, lease transactions generate similar gross margins as our sale
transactions. As of December 31, 2020, a total of 901 da Vinci Surgical Systems
were installed at customers under operating lease or usage-based arrangements.
Our system leasing and usage-based models provide customers with flexibility
regarding how they acquire or obtain access to our systems. We believe that
these alternative financing structures have been effective and well-received,
and we are willing to expand the proportion of these structures based on
customer demand. As revenue for operating leases and usage-based systems is
recognized over time, total systems revenue growth is reduced in a period when
the number of operating lease and usage-based placements increases as a
proportion of total system placements.
Our exposure to the credit risks relating to our lease financing arrangements
may increase if our customers are adversely affected by changes in healthcare
laws, coverage and reimbursement, economic pressures or uncertainty, or other
customer-specific factors. In addition, as customers divert significant
resources to the treatment of or the preparation to treat patients with
COVID-19, we may be exposed to defaults under our lease financing arrangements.
Moreover, usage-based arrangements generally contain no minimum payments;
therefore, customers may exit such arrangements without paying a financial
penalty to us. As a result of the COVID-19 pandemic, we anticipate that some
customers will exit such arrangements or seek to amend the terms of our
operating lease and usage-based arrangements with them.
For some operating lease arrangements, our customers are provided with the right
to purchase the leased system at certain points during and/or at the end of the
lease term. Revenue generated from customer purchases of systems under operating
lease arrangements ("Lease Buyouts") was $52.2 million, $92.8 million, and
$48.8 million for the years ended December 31, 2020, 2019, and 2018,
respectively. We expect that revenue recognized from customer exercises of the
buyout options will fluctuate based on the timing of when, and if, customers
choose to exercise their buyout options.
Systems Revenue
System placements are driven by procedure growth in most markets. In geographies
where da Vinci procedure adoption is in an early stage or system placements are
constrained by regulation, system sales will precede procedure growth. System
placements also vary due to seasonality largely aligned with hospital budgeting
cycles. We typically place a higher proportion of annual system placements in
the fourth quarter and a lower proportion in the first quarter as customer
budgets are reset. Systems revenue is also affected by the proportion of system
placements under operating lease and usage-based arrangements, recurring
operating lease and usage-based revenue, operating lease buyouts, product mix,
ASPs, trade-in activities, and customer mix. Systems revenue declined 12% to
$1.18 billion in 2020. Systems revenue grew 19% to $1.35 billion in 2019 and 21%
to $1.13 billion in 2018. Based on the factors outlined in the COVID-19 Pandemic
section above, the ability to forecast
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future system shipments has been significantly disrupted and, therefore, we
believe that historical system shipment trends may not be a good indicator of
future system shipments.
Procedure Mix / Products
Our da Vinci Surgical Systems are generally used for soft tissue surgery for
areas of the body between the pelvis and the neck, primarily in general surgery,
gynecologic surgery, urologic surgery, cardiothoracic surgery, and head and neck
surgery. Within these categories, procedures range in complexity from cancer and
other highly complex procedures to less complex procedures for benign
conditions. Cancer and other highly complex procedures tend to be reimbursed at
higher rates than less complex procedures for benign conditions. Thus, hospitals
are more sensitive to the costs associated with treating less complex, benign
conditions. Our strategy is to provide hospitals with attractive clinical and
economic solutions across the spectrum of procedure complexity. Our fully
featured da Vinci Xi Surgical System with advanced instruments (including da
Vinci Energy and EndoWrist and SureForm Stapler products) and our Integrated
Table Motion product targets the more complex procedure segment. Our da Vinci X
Surgical System is targeted towards price sensitive markets and procedures. Our
da Vinci SP Surgical System complements the da Vinci Xi and X Surgical Systems
by enabling surgeons to access narrow workspaces.
Procedure Seasonality
More than half of da Vinci procedures performed are for benign conditions, most
notably hernia repairs, hysterectomies, and cholecystectomies. These benign
procedures and other short-term elective procedures tend to be more seasonal
than cancer operations and surgeries for other life-threatening conditions.
Seasonality in the U.S. for procedures for benign conditions typically results
in higher fourth quarter procedure volume when more patients have met annual
deductibles and lower first quarter procedure volume when deductibles are reset.
Seasonality outside the U.S. varies and is more pronounced around local holidays
and vacation periods. As a result of the factors outlined in the COVID-19
Pandemic section above, including the recommendations of authorities to defer
elective procedures, historical procedure patterns may be disrupted.
Distribution Channels
We provide our products through direct sales organizations in the U.S., Europe
(excluding Spain, Portugal, Italy, Greece, and most Eastern European countries),
China, Japan, South Korea, India, and Taiwan. In 2018, we began direct
operations in India and Taiwan. In January 2019, our Intuitive-Fosun joint
venture began direct sales for da Vinci products and services in China. In the
remainder of our OUS markets, we provide our products through distributors.
Regulatory Activities
Overview
Our products must meet the requirements of a large and growing body of
international standards that govern the product safety, efficacy, advertising,
labeling, safety reporting design, manufacture, materials content and sourcing,
testing, certification, packaging, installation, use, and disposal of our
products. Examples of such standards include electrical safety standards, such
as those of the International Electrotechnical Commission, and composition
standards, such as the Reduction of Hazardous Substances and the Waste
Electrical and Electronic Equipment Directives. Failure to meet these standards
could limit our ability to market our products in those regions that require
compliance to such standards.
Our products and operations are also subject to increasingly stringent medical
device, privacy, and other regulations by regional, federal, state, and local
authorities. We anticipate that timelines for the introduction of new products
and/or indications may be extended relative to past experience as a result of
these regulations. For example, we have seen elongated regulatory approval
timelines in the U.S. and the EU.
Clearances and Approvals
We have generally obtained the clearances required to market our products
associated with our da Vinci Surgical Multiport Systems (Standard, S, Si, Xi,
and X systems) for our targeted surgical specialties within the U.S., South
Korea, Japan, and the European markets in which we operate. Since 2018, we
obtained regulatory clearances for the following products:
•In November 2019, we obtained FDA clearance for our SynchroSeal instrument and
E-100 generator. Following the FDA clearance, in February 2020, we received CE
mark clearance for both products. In March 2020, we received regulatory
clearance in Japan to market both our SynchroSeal instrument and E-100
generator. In August 2020, we received regulatory clearance in South Korea to
market our E-100 generator.
•In July 2019, we obtained FDA clearance for our SureForm 45 Curved-Tip stapler
and SureForm 45 Gray reload, which round out our SureForm 45 portfolio. We have
also received CE mark clearance for our SureForm 45 Curved-Tip stapler and
SureForm 45 Gray reload.
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•In June 2019, we received CE mark clearance for our da Vinci Endoscope Plus for
the da Vinci Xi and da Vinci X Surgical Systems in Europe. Following the CE
mark, in July 2019, we obtained FDA clearance for our da Vinci Endoscope Plus.
We have also received regulatory clearances in South Korea and Japan to market
our da Vinci Endoscope Plus in December 2019 and May 2020, respectively.
•In June 2019, we obtained FDA clearance for our da Vinci Handheld Camera and,
in February 2020, we received CE mark clearance.
•In February 2019, we obtained FDA clearance for our Ion endoluminal system, our
new flexible, robotic-assisted, catheter-based platform, designed to navigate
through very small lung airways to reach peripheral nodules for biopsies. We are
introducing the Ion endoluminal system in a measured fashion while we optimize
training pathways and our supply chain and collect additional clinical data. We
have placed 36 Ion systems for commercial use as of December 31, 2020.
•In February 2019, we obtained FDA clearance for our Iris augmented reality
product. Iris is a service that delivers a 3D image of the patient anatomy
(initially targeting kidneys) to aid surgeons in both pre- and intra-operative
settings. We are currently conducting a pilot study of our Iris product and
service in the field at a small group of U.S. hospitals to gain initial product
experience and insights.
•In December 2018, we received product registration for our da Vinci Xi Surgical
System in China. The registration approval does not include advanced energy or
stapling products that attach to the da Vinci Xi system. Separate product
registrations are required for each of these products by China National Medical
Products Administration ("NMPA").
•In October 2018, the China National Health Commission published on its official
website the quota for major medical equipment to be imported and sold in China
through 2020. After an adjustment notice was published in the third quarter of
2020, the government will now allow for the total sale of 225 new surgical
robots into China, which could include da Vinci Surgical Systems as well as
surgical systems introduced by others. As of December 31, 2020, we have sold 111
da Vinci Surgical Systems under this quota. Future sales of da Vinci Surgical
Systems under the quota are uncertain, as they are dependent on hospitals
completing a tender process and receiving associated approvals.
•In May 2018 and July 2018, we received CE mark clearance and FDA clearance,
respectively, to market SureForm 60, our first 60mm stapler that completes our
product offering of 30, 45, and 60mm lengths. In January 2019 and February 2019,
we obtained FDA clearance and CE mark clearance, respectively, to market
SureForm 45. We have also received regulatory clearance in South Korea and Japan
to market both SureForm 60 and SureForm 45.
•In May 2018, we obtained FDA clearance for the da Vinci SP Surgical System for
urologic surgical procedures that are appropriate for a single port approach. In
March 2019, we obtained FDA clearance for the da Vinci SP Surgical System for
certain transoral procedures. We also received regulatory clearance for the da
Vinci SP Surgical System in South Korea in May 2018. We continue to introduce
the da Vinci SP Surgical System in a measured fashion while we optimize training
pathways and our supply chain. We have an installed base of 69 da Vinci SP
Surgical Systems as of December 31, 2020.
•In September 2017 and April 2018, we obtained CE mark clearance and FDA
clearance, respectively, for our da Vinci Vessel Sealer Extend.
Refer to the descriptions of our products that received regulatory clearances in
2020, 2019, and 2018 in the New Product Introductions section below.
The Japanese Ministry of Health, Labor, and Welfare ("MHLW") considers
reimbursement for procedures in April of even-numbered years. The process for
obtaining reimbursement requires Japanese university hospitals and surgical
societies, with our support, to seek reimbursement. There are multiple pathways
to obtain reimbursement for procedures, including those that require in-country
clinical data/economic data. In April 2012 and April 2016, the MHLW granted
reimbursement status for dVP and partial nephrectomy, respectively. Most
prostatectomies and partial nephrectomies were open procedures prior to da Vinci
reimbursement. Da Vinci procedure reimbursement for dVP and partial nephrectomy
procedures are higher than open and conventional laparoscopic procedure
reimbursements. An additional 12 da Vinci procedures were granted reimbursement
effective April 1, 2018, including gastrectomy, low anterior resection,
lobectomy, and hysterectomy, for both malignant and benign conditions. An
additional 7 da Vinci procedures were granted reimbursement effective April 1,
2020. These additional 19 reimbursed procedures have varying levels of
conventional laparoscopic penetration and will be reimbursed at rates equal to
the conventional, laparoscopic procedures. Given the reimbursement level and
laparoscopic penetration for these 19 procedures, there can be no assurance that
the adoption pace for these procedures will be similar to dVP or partial
nephrectomy, given their higher reimbursement, or any other da Vinci procedure.
Recalls and Corrections
Medical device companies have regulatory obligations to correct or remove
medical devices in the field that could pose a risk to health. The definition of
"recalls and corrections" is expansive and includes repair, replacement,
inspections, relabeling, and issuance of new or additional instructions for use
or reinforcement of existing instructions for use and training when such
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actions are taken for specific reasons of safety or compliance. These field
actions require stringent documentation, reporting, and monitoring worldwide.
There are other actions that a medical device manufacturer may take in the field
without reporting including, but not limited to, routine servicing and stock
rotations.
As we determine whether a field action is reportable in any regulatory
jurisdiction, we prepare and submit notifications to the appropriate regulatory
agency for the particular jurisdiction. Regulators can require the expansion,
reclassification, or change in scope and language of the field action. In
general, upon submitting required notifications to regulators regarding a field
action that is a recall or correction, we will notify customers regarding the
field action, provide any additional documentation required in their national
language, and arrange, as required, return or replacement of the affected
product or a field service visit to perform the correction.
Field actions as well as certain outcomes from regulatory activities can result
in adverse effects on our business, including damage to our reputation, delays
by customers of purchase decisions, reduction or stoppage of the use of
installed systems, and reduced revenue as well as increased expenses.
Procedures
We model patient value as equal to procedure efficacy / invasiveness. In this
equation, procedure efficacy is defined as a measure of the success of the
surgery in resolving the underlying disease and invasiveness is defined as a
measure of patient pain and disruption of regular activities. When the patient
value of a da Vinci procedure is greater than that of alternative treatment
options, patients may benefit from seeking out surgeons and hospitals that offer
da Vinci Surgery, which could potentially result in a local market share shift.
Adoption of da Vinci procedures occurs procedure by procedure and market by
market and is driven by the relative patient value and total treatment costs of
da Vinci procedures as compared to alternative treatment options for the same
disease state or condition.
We use the number and type of da Vinci procedures as metrics for financial and
operational decision-making and as a means to evaluate period-to-period
comparisons. Management believes that the number and type of da Vinci procedures
provide meaningful supplemental information regarding our performance, as
management believes procedure volume is an indicator of the rate of adoption of
robotic-assisted surgery as well as an indicator of future revenue (including
revenue from usage-based arrangements). Management believes that both it and
investors benefit from referring to the number and type of da Vinci procedures
in assessing our performance and when planning, forecasting, and analyzing
future periods. The number and type of da Vinci procedures also facilitate
management's internal comparisons of our historical performance. We believe that
the number and type of da Vinci procedures are useful to investors as metrics,
because (1) they allow for greater transparency with respect to key metrics used
by management in its financial and operational decision-making, and (2) they are
used by institutional investors and the analyst community to help them analyze
the performance of our business. The vast majority of da Vinci Surgical Systems
installed are connected via the internet. System logs can also be accessed by
field engineers for systems that are not connected to the internet. We utilize
certain methods that rely on information collected from the systems installed
for determining the number and type of da Vinci procedures performed that
involve estimates and judgments, which are, by their nature, subject to
substantial uncertainties and assumptions. Estimates and judgments for
determining the number and type of da Vinci procedures may be impacted over time
by various factors, including changes in treatment modalities, hospital and
distributor reporting behavior, and system internet connectivity. Such estimates
and judgments are also susceptible to algorithmic or other technical errors. In
addition, the relationship between the number and type of da Vinci procedures
and our revenues may fluctuate from period to period, and da Vinci procedure
volume growth may not correspond to an increase in revenue. The number and type
of da Vinci procedures are not intended to be considered in isolation or as a
substitute for, or superior to, revenue or other financial information prepared
and presented in accordance with GAAP. The COVID-19 pandemic reduced the number
of da Vinci procedures performed by our customers in the first three quarters of
2020 as compared to our expectations. Based on the factors outlined in the
COVID-19 Pandemic section above, the ability to forecast future procedures based
on historical procedure patterns has been disrupted. Therefore, we believe that
historical procedure trends may not be a good indicator of future procedure
volumes.
Worldwide Procedures
Our da Vinci systems and instruments are regulated independently in various
countries and regions of the world. The discussion of indications for use and
representative or target procedures is intended solely to provide an
understanding of the market for da Vinci products and is not intended to promote
for sale or use any Intuitive Surgical product outside of its licensed or
cleared labeling and indications for use.
The adoption of robotic-assisted surgery using the da Vinci Surgical System has
the potential to grow for those procedures that offer greater patient value than
non-da Vinci alternatives and competitive total economics for healthcare
providers. Our da Vinci Surgical Systems are used primarily in general surgery,
gynecologic surgery, urologic surgery, cardiothoracic surgery, and head and neck
surgery. We focus our organization and investments on developing, marketing, and
training products and services for procedures in which da Vinci can bring
patient value relative to alternative treatment options and/or economic
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benefit to healthcare providers. Target procedures in general surgery include
hernia repair (both ventral and inguinal), colorectal procedures, bariatrics,
and cholecystectomies. Target procedures in gynecology include da Vinci
hysterectomy ("dVH") for both cancer and benign conditions. Target procedures in
urology include da Vinci prostatectomy ("dVP") and da Vinci partial nephrectomy.
In cardiothoracic surgery, target procedures include da Vinci lobectomy. In head
and neck surgery, target procedures include certain procedures resecting benign
and malignant tumors classified as T1 and T2. Not all the indications,
procedures, or products described may be available in a given country or region
or on all generations of da Vinci Surgical Systems. Surgeons and their patients
need to consult the product labeling in their specific country and for each
product in order to determine the cleared uses, as well as important
limitations, restrictions, or contraindications.
In 2020, approximately 1,243,000 surgical procedures were performed with da
Vinci Surgical Systems, compared to approximately 1,229,000 and 1,038,000
surgical procedures performed with da Vinci Surgical Systems in 2019 and 2018,
respectively. The reduced growth in our overall procedure volume in 2020
reflects significant disruption caused by the COVID-19 pandemic, as noted in the
COVID-19 Pandemic section above, and was driven by growth in U.S. general
surgery procedures and worldwide urology procedures.
U.S. Procedures
Overall U.S. procedure volume with da Vinci Surgical Systems grew to
approximately 876,000 in 2020, compared to approximately 883,000 in 2019 and
approximately 753,000 in 2018. General surgery was our largest and fastest
growing U.S. specialty in 2020 with procedure volume that grew to approximately
434,000 in 2020, compared to approximately 421,000 in 2019 and approximately
325,000 in 2018. Gynecology was our second largest U.S. surgical specialty in
2020 with procedure volume that declined to approximately 267,000 in 2020,
compared to approximately 282,000 in 2019 and approximately 265,000 in 2018.
Urology was our third largest U.S. surgical specialty in 2020 with procedure
volume that declined to approximately 134,000 in 2020, compared to approximately
138,000 in 2019 and approximately 128,000 in 2018.
Procedures Outside of the U.S.
Overall OUS procedure volume with da Vinci Surgical Systems grew to
approximately 367,000 in 2020, compared to approximately 346,000 in 2019 and
approximately 285,000 in 2018. Procedure growth in most OUS markets was driven
largely by urology procedure volume, which grew to approximately 214,000 in
2020, compared to approximately 206,000 in 2019 and approximately 175,000 in
2018. General surgery and thoracic procedures also contributed to OUS procedure
growth with higher growth rates than urology procedures.
Recent Business Events and Trends
Procedures
Overall. Total da Vinci procedures performed by our customers grew approximately
1% for the year ended December 31, 2020, compared to approximately 18% for the
year ended December 31, 2019. Total da Vinci procedures performed by our
customers grew approximately 6% for the three months ended December 31, 2020,
compared to approximately 19% for the three months ended December 31, 2019. The
full year and fourth quarter 2020 procedure results reflect significant
disruption caused by the COVID-19 pandemic, as noted in the COVID-19 Pandemic
section above. The COVID-19 pandemic continued to impact our procedures in
geographies and markets where there was a resurgence of the virus. Delays in
both the diagnosis of and treatments of disease reflecting patient concerns over
contracting COVID-19 has also impacted the number of procedures. This was most
pronounced in dVP procedures.
U.S. da Vinci procedures declined approximately 1% for the year ended December
31, 2020, as compared to the prior year. U.S. da Vinci procedures grew
approximately 17% for the year ended December 31, 2019. The 2020 U.S. procedure
results reflect significant disruption caused by the COVID-19 pandemic, as noted
in the COVID-19 Pandemic section above. The 2020 U.S. procedure decline was
largely attributable to a decline in gynecology procedures, most notably benign
dVH procedures, and urology procedures, most notably dVP procedures. Offsetting
these declines was continued growth in general surgery procedures, most notably
cholecystectomy and bariatric procedures.
U.S. da Vinci procedures grew approximately 5% for the three months ended
December 31, 2020, compared to approximately 18% for the three months ended
December 31, 2019. The fourth quarter 2020 U.S. procedure results reflect
significant disruption caused by the COVID-19 pandemic and regional resurgences,
as noted in the COVID-19 Pandemic section above. We saw varied performance in
each of the procedure categories during the fourth quarter of 2020, with growth
in general surgery and gynecology procedures offset by declines in urology
procedures. The resurgence increased as the quarter progressed, and we saw a
more severe impact on procedures later in the quarter. The resurgence continued
into January, negatively impacting procedure volumes.
OUS da Vinci procedures grew approximately 6% for the year ended December 31,
2020, compared to approximately 21% for the year ended December 31, 2019. The
2020 OUS procedure growth reflects significant disruption caused by the COVID-19
pandemic, as noted in the COVID-19 Pandemic section above. 2020 OUS procedure
growth was driven by
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continued growth in urologic procedures, including nephrectomies and
prostatectomies, and earlier stage growth in general surgery (particularly
colorectal), thoracic, and gynecology procedures. We believe growth in these
global markets is being driven by increased acceptance among surgeons and health
systems, supported by expanded global evidence validating the clinical and
economic value of da Vinci procedures.
OUS da Vinci procedures grew approximately 11% for the three months ended
December 31, 2020, compared to approximately 21% for the three months ended
December 31, 2019. The fourth quarter 2020 OUS procedure growth reflects
significant procedure disruption caused by the COVID-19 pandemic, as noted in
the COVID-19 Pandemic section above. The disruption was more pronounced in the
UK, Italy, France, the Nordics, Spain, and India. COVID-19 disruption was less
pronounced in China, Japan, and South Korea, where we experienced procedure
growth compared to the fourth quarter of 2019.
U.S. General Surgery. In 2020, general surgery procedures in the U.S. grew to
approximately 434,000 in 2020, compared to approximately 421,000 in 2019 and
approximately 325,000 in 2018. Cholecystectomy and bariatric procedures
contributed to the most incremental procedures in 2020, while inguinal and
ventral hernia repairs contributed the most incremental procedures in 2019 and
2018.
Given the already very high level of laparoscopic techniques used in
cholecystectomy, it is unclear whether growth is sustainable and to what extent
da Vinci cholecystectomy may be adopted. Bariatric procedures grew significantly
year over year. These procedures have been an increased area of focus in 2020
and may also have benefited from certain patients prioritizing weight loss as
obesity is a significant COVID-19 risk factor. In addition, our SureForm 60mm
stapler product provides surgeons a more optimized robotic tool set for
bariatric procedures. However, the diagnoses and treatment pathways for
bariatric patients are long, and many of the patients may have begun their
treatment pathway prior to the spread of COVID-19; therefore, we cannot provide
any assurance that we will continue to see significant growth in bariatric
procedures in future periods.
We believe that growth in da Vinci hernia repair reflects improved clinical
outcomes within certain patient populations, as well as potential cost benefits
relative to certain alternative treatments. We believe hernia repair procedures
represent a significant opportunity with the potential to drive growth in future
periods. However, given the differences in surgical complexity associated with
treatment of various hernia patient populations and varying surgeon opinion
regarding optimal surgical technique, it is difficult to estimate the timing of
and to what extent da Vinci hernia repair procedure volume will grow in the
future. We expect a large portion of hernia repairs will continue to be
performed via different modalities of surgery.
Adoption of da Vinci for colorectal procedures, which includes several
underlying procedures including low anterior resections for rectal cancers and
certain colon procedures for benign and cancerous conditions, has been ongoing
for several years and is supported by our recently launched technologies, such
as the EndoWrist Staplers and energy devices and Integrated Table Motion.
U.S. Gynecology. In 2020, gynecology procedures in the U.S. declined modestly
compared to 2019. Procedure volume was approximately 267,000 in 2020, compared
to approximately 282,000 in 2019 and approximately 265,000 in 2018, driven by a
decline in benign hysterectomy procedures partially offset, to a much lesser
extent, by growth in hysterectomy for cancer. Combining robotic, laparoscopic,
and vaginal approaches, MIS represents about 80% of the U.S. hysterectomy market
for benign conditions. We believe that our growth in gynecologic procedures over
the past several years has primarily been driven by consolidation of gynecologic
procedures into higher volume surgeons that focus on cancer and complex
surgeries. However, due to the COVID-19 pandemic, we saw an increase in the
deferral of non-urgent procedures, such as benign hysterectomy procedures.
Global Urology. Along with U.S. general surgery, global urology procedures have
also been a strong contributor to our overall procedure growth. In the U.S., dVP
is the standard of care for the surgical treatment of prostate cancer, and we
believe growth is largely aligned with surgical volumes of prostate cancer. In
2020, U.S. dVP procedures declined modestly, compared to modest growth in 2019.
For OUS, dVP is at varying states of adoption in different areas of the world
but is the largest overall da Vinci procedure. In 2020, we saw slight growth in
OUS dVP procedures compared to mid-teens growth in 2019.
Kidney cancer procedures have also been a strong contributor to our recent
global urology procedure growth. Clinical publications have demonstrated that
the use of a da Vinci system increases the likelihood that a patient will
receive nephron sparing surgery through a partial nephrectomy, which is
typically the surgical society guideline recommended therapy.
OUS Procedures. The 2020 OUS procedure growth rate reflects continued da Vinci
adoption in European and Asian markets, although it also reflects significant
disruption caused by the COVID-19 pandemic, as noted in the COVID-19 Pandemic
section above. The disruption was most pronounced in the UK, Italy, and France.
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System Demand
Future demand for da Vinci Surgical Systems will be impacted by a number of
factors: economic and geopolitical factors; the impact of the current COVID-19
pandemic, as noted in the COVID-19 Pandemic section above; hospital response to
the evolving healthcare environment; procedure growth rates; hospital
consolidation trends; evolving system utilization and point of care dynamics;
capital replacement trends; additional reimbursements in various global markets,
including Japan; the timing around governmental tenders and authorizations,
including China; the timing of when we receive regulatory clearance in our other
OUS markets for our da Vinci Xi Surgical System, da Vinci X Surgical System, and
da Vinci SP Surgical System, and related instruments; and market response.
Market acceptance of our recently launched da Vinci SP Surgical System and the
nature and timing of additional da Vinci SP regulatory indications may also
impact future system placements.
Demand may also be impacted by robotic-assisted surgery competition, including
from companies that have introduced products in the field of robotic-assisted
surgery or have made explicit statements about their efforts to enter the field
including, but not limited to, the following companies: avateramedical GmbH; CMR
Surgical Ltd.; Johnson & Johnson (including their wholly owned subsidiaries
Auris Health, Inc. and Verb Surgical Inc.); Medicaroid, Inc.; Medrobotics
Corporation; Medtronic plc; meerecompany Inc.; MicroPort Scientific Corporation;
Olympus Corporation; Samsung Group; Shandong Weigao Group Medical Polymer
Company Ltd.; Smart Robot Technology Group Co. Ltd.; Titan Medical Inc.; and
TransEnterix, Inc.
Many of the above factors will also impact future demand for our Ion system, as
we extend our commercial offering into diagnostics, along with additional
factors associated with a new product introduction, including, but not limited
to, our ability to optimize manufacturing and our supply chain, competition,
clinical data to demonstrate value, and market acceptance.
New Product Introductions
SynchroSeal and E-100 Generator. In November 2019, we obtained FDA clearance for
our SynchroSeal instrument and E-100 generator. Following the FDA clearance, in
February 2020, we received CE mark clearance for both products. In March 2020,
we received regulatory clearance in Japan to market both our SynchroSeal
instrument and E-100 generator. In August 2020, we received regulatory clearance
in South Korea to market our E-100 generator. SynchroSeal is a single-use,
bipolar, electrosurgical instrument intended for grasping, dissection, sealing,
and transection of tissue. With its wristed articulation, rapid sealing cycle,
and refined curved jaw, SynchroSeal offers enhanced versatility to the da Vinci
Energy portfolio. The E-100 generator is an electrosurgical generator developed
to power two key instruments-Vessel Sealer Extend and SynchroSeal-on the da
Vinci X and da Vinci Xi Surgical Systems. The generator delivers high frequency
energy for cutting, coagulation, and vessel sealing of tissues.
SureForm 45 Curved-Tip and Gray Reload. In July 2019, we obtained FDA clearance
for the SureForm 45 Curved-Tip stapler and SureForm 45 Gray reload. We have also
received CE mark clearance for our SureForm 45 Curved-Tip stapler and SureForm
45 Gray reload. SureForm 45 Curved-Tip is a single-use, fully wristed stapling
instrument with a curved tip intended for resection, transection, and/or
creation of anastomoses. SureForm 45 Gray reload is a new, single-use cartridge
that contains multiple staggered rows of implantable staples and a stainless
steel knife. The SureForm 45 Curved-Tip stapler and Gray reload have particular
utility in thoracic procedures and round out our SureForm 45 portfolio. Not all
reloads or staplers are available for use on all systems or in all countries.
Da Vinci Endoscope Plus. In June 2019, we received CE mark clearance for our da
Vinci Endoscope Plus, an enhanced 3D endoscope for use with our da Vinci X and
Xi Surgical Systems. Following the CE mark, in July 2019, we obtained FDA
clearance for our da Vinci Endoscope Plus. We have also received regulatory
clearances in South Korea and Japan to market our da Vinci Endoscope Plus in
December 2019 and May 2020, respectively. The da Vinci Endoscope Plus leverages
new sensor technology to allow for increased sharpness and color accuracy.
Da Vinci Handheld Camera. In June 2019, we obtained FDA clearance for our da
Vinci Handheld Camera, a lightweight, 2D camera head, which can be connected to
third-party laparoscopes. This allows the laparoscopic image to be displayed on
the da Vinci X/Xi vision cart to address aspects of da Vinci procedures that may
require use of a laparoscope, thus eliminating the need for redundant equipment
in the operating room and increasing procedure efficiency. In February 2020, we
received CE mark clearance for our da Vinci Handheld Camera. We broadly launched
the da Vinci Handheld Camera in our European direct markets as well as in the
U.S. in May 2020 and June 2020, respectively.
Ion endoluminal system. In February 2019, we obtained FDA clearance for the Ion
endoluminal system, our new flexible, robotic-assisted, catheter-based platform
designed to navigate through very small lung airways to reach peripheral nodules
for biopsies. The Ion system uses an ultra-thin articulating robotic catheter
that can articulate 180 degrees in all directions. The outer diameter of the
catheter is 3.5mm, which allows physicians to navigate through small and
tortuous airways to reach nodules in most airway segments within the lung. The
Ion system's flexible biopsy needle can also pass through very tight bends via
Ion's catheter to collect tissue in the peripheral lung. The catheter's 2mm
working channel can also accommodate other biopsy tools, such as biopsy forceps
or cytology brushes, if necessary. We are introducing Ion in a measured fashion
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while we optimize training pathways and our supply chain and collect additional
clinical data. We have placed 36 Ion systems for commercial use as of December
31, 2020.
Iris. In February 2019, we obtained FDA clearance for our Iris augmented reality
product. Iris is a service that delivers a 3D image of the patient anatomy
(initially targeting kidneys) to aid surgeons in both the pre- and
intra-operative settings. We are now in the early stages of an Iris pilot study
in the field at a small group of U.S. hospitals to gain initial product
experience and insights.
SureForm 60 and SureForm 45 Staplers. In May 2018 and July 2018, we received CE
mark clearance and FDA clearance, respectively, for the SureForm 60 instrument
with White, Blue, Green, and Black 60mm reloads. In January 2019 and February
2019, we obtained FDA clearance and CE mark clearance, respectively, for the
SureForm 45 instrument with White, Blue, Green, and Black 45mm reloads.
Additionally, we received regulatory clearance in South Korea for the SureForm
60 instrument and 60mm reloads in June 2018 and July 2018, respectively, and for
the SureForm 45 instrument and 45mm reloads in June 2019 and September 2019,
respectively. Also, we received regulatory clearance in Japan for the SureForm
60 instrument and 60mm reloads in June 2018 and November 2018, respectively, and
for the SureForm 45 instrument and 45mm reloads in September 2019. The SureForm
60 and SureForm 45 Staplers are single-use, fully wristed stapling instruments
intended for resection, transection, and/or creation of anastomoses. The
SureForm 60 instrument has particular utility in bariatric procedures, while the
SureForm 45 instrument has particular utility in colorectal procedures. SureForm
60 and SureForm 45 Staplers broaden our existing stapler product line, which
also includes EndoWrist Stapler 45 with White, Blue, and Green 45mm reloads and
EndoWrist Stapler 30 with Gray, White, Blue, and Green 30mm reloads. Not all
reloads or staplers are available for use on all systems or in all countries.
Da Vinci SP Surgical System. In May 2018, we obtained FDA clearance for the da
Vinci SP Surgical System for urologic surgical procedures that are appropriate
for a single port approach. In March 2019, we obtained FDA clearance for the da
Vinci SP Surgical System for certain transoral procedures. The da Vinci SP
Surgical System includes three, multi-jointed, wristed instruments and the first
da Vinci fully wristed, 3DHD camera. The instruments and the camera all emerge
through a single cannula and are triangulated around the target anatomy to avoid
external instrument collisions that can occur in narrow surgical workspaces. The
system enables flexible port placement and broad internal and external range of
motion (e.g., 360 degrees of anatomical access) through the single SP arm.
Surgeons control the fully articulating instruments and the camera on the da
Vinci SP system, which uses the same fourth generation surgeon console as the da
Vinci X and Xi systems. The da Vinci SP Surgical System provides surgeons with
robotic-assisted technology designed for deep and narrow access to tissue in the
body. We anticipate pursuing further regulatory clearances for the da Vinci SP
Surgical System, including colorectal applications, broadening the applicability
of the SP platform over time. We continue to introduce the da Vinci SP Surgical
System in a measured fashion while we optimize training pathways and our supply
chain. We have an installed base of 69 da Vinci SP Surgical Systems as of
December 31, 2020.
Da Vinci Vessel Sealer Extend. In September 2017 and April 2018, we received CE
mark clearance and FDA clearance, respectively, for da Vinci Vessel Sealer
Extend, our newest instrument in the Vessel Sealing family of products. Da Vinci
Vessel Sealer Extend is a single-use, fully wristed bipolar electrosurgical
instrument compatible with our fourth generation multiport systems. It is
intended for grasping and blunt dissection of tissue and for bipolar coagulation
and mechanical transection of vessels up to 7mm in diameter and tissue bundles
that fit in the jaws of the instrument.
Acquisition of Orpheus Medical
In February 2020, we acquired Orpheus Medical Ltd. and its wholly owned
subsidiaries to deepen and expand our integrated informatics platform. Orpheus
Medical provides hospitals with information technology connectivity, as well as
expertise in processing and archiving surgical videos. Orpheus Medical is a
wholly owned subsidiary of Intuitive.
Intuitive Ventures
We launched Intuitive Ventures, an inaugural $100 million fund focused on
investment opportunities in companies that share Intuitive's commitment to
advancing positive outcomes in healthcare.
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2020 Operational and Financial Highlights
•Total revenue decreased by 3% to $4.4 billion for the year ended December 31,
2020, compared to $4.5 billion for the year ended December 31, 2019.
•Approximately 1,243,000 da Vinci procedures were performed during the year
ended December 31, 2020, an increase of 1% compared to approximately 1,229,000
da Vinci procedures for the year ended December 31, 2019.
•Instruments and accessories revenue increased by 2% to $2.46 billion for the
year ended December 31, 2020, compared to $2.41 billion for the year ended
December 31, 2019.
•Systems revenue decreased by 12% to $1.18 billion for the year ended
December 31, 2020, compared to $1.35 billion for the year ended December 31,
2019.
•A total of 936 da Vinci Surgical Systems were shipped during the year ended
December 31, 2020, a decrease of 16% compared to 1,119 systems during the year
ended December 31, 2019.
•As of December 31, 2020, we had a da Vinci Surgical System installed base of
approximately 5,989 systems, an increase of 7% compared to the installed base of
approximately 5,582 systems as of December 31, 2019.
•Utilization of da Vinci Surgical Systems, measured in terms of procedures per
system per year, declined 2% relative to 2019.
•During the year ended December 31, 2020, we placed 26 Ion systems for
commercial use, compared to 10 Ion systems during the year ended December 31,
2019.
•Gross profit as a percentage of revenue was 65.6% for the year ended
December 31, 2020, compared to 69.4% for the year ended December 31, 2019.
•Operating income decreased by 24% to $1.05 billion for the year ended
December 31, 2020, compared to $1.37 billion for the year ended December 31,
2019. Operating income included $399 million and $338 million of share-based
compensation expense related to employee stock plans and $60.9 million and $67.2
million of intangible asset-related charges for the years ended December 31,
2020, and 2019, respectively.
•As of December 31, 2020, we had $6.87 billion in cash, cash equivalents, and
investments. Cash, cash equivalents, and investments increased by $1.02 billion,
compared to $5.85 billion in December 31, 2019, primarily as a result of cash
generated from operating activities, partially offset by capital expenditures.
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Results of Operations
This section of the Form 10-K generally discusses 2020 and 2019 items and
year-to-year comparisons between 2020 and 2019. Discussions of 2018 items and
year-to-year comparisons between 2019 and 2018 that are not included in this
Form 10-K can be found in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in Part II, Item 7 of the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 2019.
The following table sets forth, for the years indicated, certain Consolidated
Statements of Income information (in millions, except percentages):
                                                                                   Years Ended December 31,
                                                               % of                                    % of                                    % of
                                                              total                                   total                                   total
                                           2020              revenue               2019              revenue               2018              revenue
Revenue:
Product                                $ 3,634.6                   83  %       $ 3,754.3                   84  %       $ 3,089.1                   83  %
Service                                    723.8                   17  %           724.2                   16  %           635.1                   17  %
Total revenue                            4,358.4                  100  %         4,478.5                  100  %         3,724.2                  100  %
Cost of revenue:
Product                                  1,230.3                   28  %         1,119.1                   25  %           906.2                   24  %
Service                                    266.9                    6  %           249.2                    6  %           213.9                    6  %
Total cost of revenue                    1,497.2                   34  %         1,368.3                   31  %         1,120.1                   30  %
Product gross profit                     2,404.3                   55  %         2,635.2                   59  %         2,182.9                   59  %
Service gross profit                       456.9                   11  %           475.0                   10  %           421.2                   11  %
Gross profit                             2,861.2                   66  %         3,110.2                   69  %         2,604.1                   70  %
Operating expenses:
Selling, general and administrative      1,216.3                   28  %         1,178.4                   26  %           986.6                   27  %
Research and development                   595.1                   14  %           557.3                   12  %           418.1                   11  %
Total operating expenses                 1,811.4                   42  %         1,735.7                   38  %         1,404.7                   38  %
Income from operations                   1,049.8                   24  %         1,374.5                   31  %         1,199.4                   32  %
Interest and other income, net             157.2                    4  %           127.7                    3  %            80.1                    2  %
Income before taxes                      1,207.0                   28  %         1,502.2                   34  %         1,279.5                   34  %
Income tax expense                         140.2                    3  %           120.4                    3  %           154.5                    4  %
Net income                               1,066.8                   24  %         1,381.8                   31  %         1,125.0                   30  %
Less: net income (loss) attributable
to noncontrolling interest in joint
venture                                      6.2                    -  %             2.5                    -  %            (2.9)                   -  %
Net income attributable to Intuitive
Surgical, Inc.                         $ 1,060.6                   24  %       $ 1,379.3                   31  %       $ 1,127.9                   30  %



Total Revenue
Total revenue decreased by 3% to $4.4 billion for the year ended December 31,
2020, compared to $4.5 billion for the year ended December 31, 2019. Total
revenue for the year ended December 31, 2019, increased by 20% compared to $3.7
billion for the year ended December 31, 2018. The decrease in total revenue for
the year ended December 31, 2020, resulted from 12% lower systems revenue,
driven by 16% fewer system placements partially offset by a 65% increase in
operating lease revenue, and 2% higher instruments and accessories revenue,
driven by approximately 1% higher procedure volume. Service revenue was
consistent year over year, driven by a larger installed base of da Vinci
Surgical Systems producing service revenue, offset by an $80 million decrease as
a result of the service fee credits provided to customers as part of our
Customer Relief Program.
Revenue denominated in foreign currencies as a percentage of total revenue was
approximately 23%, 20%, and 20% for the years ended December 31, 2020, 2019, and
2018, respectively. We generally sell our products and services in local
currencies where we have direct distribution channels. Foreign currency rate
fluctuations did not have a material impact on total revenue for the year ended
December 31, 2020, as compared to 2019, or for the year ended December 31, 2019,
as compared to 2018.
Revenue generated in the U.S. accounted for 68%, 70%, and 71% of total revenue
for the years ended December 31, 2020, 2019, and 2018, respectively. We believe
that U.S. revenue has accounted for the large majority of total revenue due to
U.S. patients' ability to choose their provider and method of treatment,
reimbursement structures supportive of innovation and MIS,
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and our initial investments focused on U.S. infrastructure. We have been
investing in our business in the OUS markets, and our OUS procedures have grown
faster in proportion to U.S. procedures. We expect that our OUS procedures and
revenue will make up a greater portion of our business in the long term.
However, the current increase in OUS revenue as a percentage of total revenue is
a result of the COVID-19 pandemic and is reflective that U.S. procedures and
revenue were more impacted than OUS procedures and revenue.
As the COVID-19 pandemic is expected to continue to cause strain on hospital
resources, as outlined in the COVID-19 Pandemic section above, including
recommended deferrals of elective procedures by various authorities and policy
makers, we cannot reliably estimate the extent procedures and system placements
will be impacted in the first quarter of 2021 and beyond.
The following table summarizes our revenue and system unit shipments for the
years ended December 31, 2020, 2019, and 2018, respectively (in millions, except
percentages and unit shipments):
                                                                       Years Ended December 31,
                                                              2020               2019               2018
Revenue
Instruments and accessories                               $ 2,455.7          $ 2,408.2          $ 1,962.0
Systems                                                     1,178.9            1,346.1            1,127.1
Total product revenue                                       3,634.6            3,754.3            3,089.1
Services                                                      723.8              724.2              635.1
Total revenue                                             $ 4,358.4          $ 4,478.5          $ 3,724.2
U.S.                                                      $ 2,962.7          $ 3,129.5          $ 2,633.5
OUS                                                         1,395.7            1,349.0            1,090.7
Total revenue                                             $ 4,358.4          $ 4,478.5          $ 3,724.2
% of Revenue - U.S.                                              68  %              70  %              71  %
% of Revenue - OUS                                               32  %              30  %              29  %

Instruments and accessories                               $ 2,455.7          $ 2,408.2          $ 1,962.0
Services                                                      723.8              724.2              635.1
Operating lease revenue                                       176.7              106.9               51.4
Total recurring revenue                                   $ 3,356.2          $ 3,239.3          $ 2,648.5
% of Total revenue                                               77  %              72  %              71  %

Da Vinci Surgical System Shipments by Region:
U.S. unit shipments                                             600                728                581
OUS unit shipments                                              336                391                345
Total unit shipments*                                           936              1,119                926
*Systems shipped under operating leases (included in
total unit shipments)                                           317                384                229

Ion System Shipments                                             26                 10                  -

Da Vinci Surgical System Shipments involving System Trade-ins:

Unit shipments involving trade-ins                              447                442                277
Unit shipments not involving trade-ins                          489                677                649



Product Revenue
Product revenue decreased by 3% to $3.6 billion for the year ended December 31,
2020, compared to $3.8 billion for the year ended December 31, 2019. Product
revenue for the year ended December 31, 2019, increased by 22% compared to $3.1
billion for the year ended December 31, 2018.
Instruments and accessories revenue increased by 2% to $2.46 billion for the
year ended December 31, 2020, compared to $2.41 billion for the year ended
December 31, 2019. The increase in instruments and accessories revenue was
driven primarily by procedure growth of 1%, stocking orders in Q4 associated
with the Company's launch of Extended Use Instruments, and
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incremental sales of our advanced instruments. The 2020 U.S. procedure volumes
declined by approximately 1%, primarily as a result of the significant
disruption caused by the COVID-19 pandemic, as noted in the COVID-19 Pandemic
section above, compared to 2019 U.S. procedure growth of 17%. The 2020 OUS
procedure volumes grew by approximately 6%, compared to 2019 OUS procedure
growth of 21%, also driven by the significant disruption caused by the COVID-19
pandemic, as noted in the COVID-19 Pandemic section above. Geographically, the
2020 OUS procedure growth was driven by China, Japan, Korea, and Germany with
varying results in other countries.
Systems revenue decreased by 12% to $1.18 billion for the year ended
December 31, 2020, compared to $1.35 billion for the year ended December 31,
2019. The lower 2020 systems revenue was primarily driven by fewer system
shipments, lower 2020 ASPs, and lower lease buyouts, partially offset by higher
operating lease revenue.
During 2020, a total of 936 da Vinci Surgical Systems were shipped compared to
1,119 systems during 2019. By geography, 600 systems were shipped into the U.S.,
136 into Europe, 157 into Asia, and 43 into other markets during 2020, compared
to 728 systems shipped into the U.S., 169 into Europe, 182 into Asia, and 40
into other markets during 2019. During 2020, 317 of the 936 systems were shipped
under operating lease arrangements, compared to 384 of the 1,119 systems shipped
during 2019. The decrease in system shipments was primarily driven by decisions
by customers to defer purchases or leases of systems into future quarters and,
in some cases, indefinitely, as a result of the COVID-19 pandemic, as well as
the decline in procedures, which lead to excess capacity at certain hospitals.
We shipped 432 and 425 da Vinci Surgical Systems under lease or usage-based
arrangements, of which 317 and 384 systems were classified as operating leases
for the years ended December 31, 2020, and 2019, respectively. Operating lease
revenue was $177 million for the year ended December 31, 2020, compared to $107
million for the year ended December 31, 2019. Systems placed as operating leases
represented 34% of total shipments during 2020, compared to 34% during 2019. A
total of 901 da Vinci Surgical Systems were installed at customers under
operating lease or usage-based arrangements as of December 31, 2020, compared to
658 as of December 31, 2019. Revenue from Lease Buyouts was $52 million for the
year ended December 31, 2020, compared to $93 million for the year ended
December 31, 2019. We expect revenue from Lease Buyouts to fluctuate period to
period based on the timing of when, and if, customers choose to exercise the
buyout options embedded in their leases.
The da Vinci Surgical System ASP, excluding the impact of systems shipped under
operating lease or usage-based arrangements and Ion systems, was approximately
$1.50 million for the year ended December 31, 2020, compared to approximately
$1.52 million for the year ended December 31, 2019. The lower 2020 ASP was
largely driven by higher relative trade-in volume, partially offset by favorable
geographic and product mix. ASP fluctuates from period to period based on
geographic and product mix, product pricing, systems shipped involving
trade-ins, and changes in foreign exchange rates.
Service Revenue
Service revenue remained unchanged at $724 million for the year ended
December 31, 2020, compared to $724 million for the year ended December 31,
2019. Service revenue for the year ended December 31, 2019, increased by 14%
compared to $635 million for the year ended December 31, 2018. Service revenue
in 2020 was primarily driven by a larger installed base of da Vinci Surgical
Systems producing service revenue, offset by an $80 million decrease as a result
of the service fee credits provided to customers as part of our Customer Relief
Program.
Gross Profit
Product gross profit for the year ended December 31, 2020, decreased by 9% to
$2.4 billion, representing 66.2% of product revenue, compared to $2.6 billion,
representing 70.2% of product revenue, for the year ended December 31, 2019. The
lower 2020 product gross profit was primarily driven by lower product revenue
and lower product gross profit margin. The lower product gross profit margin for
the year ended December 31, 2020, was primarily driven by higher excess and
obsolete inventory costs related to transitioning to new technologies coupled
with the decrease in demand for older technologies, period costs associated with
abnormally low production, and higher freight costs. These higher charges were
primarily a result of the COVID-19 pandemic. There were also increased costs
associated with da Vinci Si product transitions and higher intangible assets
amortization expense and share-based compensation expense.
Product gross profit for the years ended December 31, 2020 and 2019, included
share-based compensation expense of $58.9 million and $46.6 million,
respectively, and intangible assets amortization expense of $35.5 million and
$31.5 million, respectively.
Service gross profit for the year ended December 31, 2020, decreased by 4% to
$457 million, representing 63.1% of service revenue, compared to $475 million,
representing 65.6% of service revenue, for the year ended December 31, 2019. The
lower 2020 service gross profit was driven by lower service revenue and lower
service gross profit margin. The lower service gross profit margin for the year
ended December 31, 2020, was primarily driven by the $80 million decrease in
service revenue as a result of our Customer Relief Program.
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Service gross profit for the years ended December 31, 2020 and 2019, included
share-based compensation expense of $24.0 million and $20.4 million,
respectively, and intangible assets amortization expense of $3.7 million and
$3.7 million, respectively.
As a result of the continued impacts from the COVID-19 pandemic, our production
facilities may run at less than normal capacity in the first quarter of 2021.
Accordingly, certain fixed production overhead costs may be expensed as
incurred, reducing our gross profit margin. We cannot reliably estimate the
extent to which the COVID-19 pandemic will impact our overall demand in the
first quarter and beyond.
Selling, General and Administrative Expenses
Selling, general and administrative expenses include costs for sales, marketing
and administrative personnel, sales and marketing activities, tradeshow
expenses, legal expenses, regulatory fees, and general corporate expenses.
Selling, general and administrative expenses for the year ended December 31,
2020, increased by 3% to $1.22 billion, compared to $1.18 billion for the year
ended December 31, 2019. The increase in selling, general and administrative
expenses for the year ended December 31, 2020, were primarily driven by higher
headcount, resulting in increased share-based compensation expense, and
increased infrastructure to support our growth, partially offset by lower
marketing, travel, and training expenses as well as lower variable compensation.
Also, in the fourth quarters of 2020 and 2019, we made charitable contributions
of $25 million and $5 million, respectively, to the Intuitive Foundation, a
not-for-profit entity whose mission is to reduce the global burden of disease
and suffering through research, education, and philanthropy aimed at better
outcomes for patients around the globe.
Selling, general and administrative expenses for the years ended December 31,
2020, and 2019, included share-based compensation expense of $202 million and
$170 million, respectively, and intangible assets amortization expense of $6.9
million and $5.7 million, respectively.
Our spending in 2020 reflected a curtailment of certain costs as a result of the
COVID-19 pandemic, including travel, marketing events, surgeon training,
clinical trials, and other related expenses. We expect that these costs will
increase to the extent that the impact of COVID-19 decreases and decline to the
extent that the impact of COVID-19 increases. However, we will continue to
support our customers, invest in innovation focused on the quadruple aim, and
invest in manufacturing and our supply chain to ensure supply for our customers.
We will continue to manage the hiring of volume-related roles, such as sales
representatives and manufacturing employees, to meet the needs of the business.
Research and Development Expenses
Research and development costs are expensed as incurred. Research and
development expenses include costs associated with the design, development,
testing, and significant enhancement of our products.
Research and development expenses for the year ended December 31, 2020,
increased by 7% to $595 million, compared to $557 million for the year ended
December 31, 2019. The increase was primarily due to higher personnel-related
expenses and other project costs incurred to support a broader set of product
development initiatives, including Ion and SP platform investments, informatics,
advanced instrumentation, advanced imaging, and future generations of robotics,
partially offset by lower intangible asset-related charges.
Research and development expenses for the years ended December 31, 2020, and
2019, included share-based compensation expense of $114 million and $101
million, respectively, and intangible asset charges of $15.8 million and $26.3
million, respectively.
Research and development expenses fluctuate with project timing. Based upon our
broader set of product development initiatives and the stage of the underlying
projects, we expect to continue to make substantial investments in research and
development and anticipate that research and development expenses will continue
to increase in the future.
Interest and Other Income, Net
Interest and other income, net, was $157.2 million for the year ended
December 31, 2020, compared to $127.7 million for the year ended December 31,
2019, and $80.1 million for the year ended December 31, 2018. The increase in
interest and other income, net, for the year ended December 31, 2020, was
primarily driven by unrealized gains on strategic investments and realized gains
on the sale of certain securities, partially offset by lower interest income
earned, despite higher cash and investment balances, due to the decline in
average interest rates, and realized foreign exchange losses.
The Company held an equity investment in preferred shares of InTouch
Technologies, Inc. ("InTouch"), which was reflected in the Company's financial
statements on a cost basis. On July 1, 2020, Teladoc Health, Inc. ("Teladoc"), a
publicly traded company, completed its acquisition of InTouch. Based on the
terms of the agreement, the Company has received Teladoc shares on the date of
closing and recognized a gain on its investment of approximately $45 million.
The Company was
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restricted from selling these shares for a period of six months. In January
2021, the Company sold all of its shares in Teladoc. Additionally, the Company
recorded unrealized gains on other strategic investments of approximately
$22 million.
Income Tax Expense
Our income tax expense was $140 million, $120 million, and $155 million for the
years ended December 31, 2020, 2019, and 2018, respectively. Our effective tax
rate for 2020 was approximately 11.6% compared to 8.0% for 2019 and 12.1% for
2018. Our effective tax rate for 2020, 2019, and 2018 differs from the U.S.
federal statutory rate of 21% primarily due to the excess tax benefits
recognized for employee share-based compensation, the effect of income earned by
certain overseas entities being taxed at rates lower than the federal statutory
rate, and the federal research and development credit benefit, partially offset
by U.S. tax on foreign earnings and state income taxes (net of federal benefit).
In addition, our 2020 tax rate reflected a $39.3 million increase in income tax
expense discussed below, and our 2019 tax rate reflected a $51.3 million benefit
associated with re-measurement of our Swiss deferred tax assets due to a Swiss
statutory tax rate increase enacted as part of Swiss tax reform in August 2019.
Our 2020, 2019, and 2018 provisions for income taxes included excess tax
benefits associated with employee equity plans of $166 million, $147 million,
and $116 million, respectively, which reduced our effective tax rate by 13.8,
9.8, and 9.1 percentage points, respectively. The amount of excess tax benefits
or deficiencies will fluctuate from period to period based on the price of our
stock, the volume of share-based awards settled or vested, and the value
assigned to employee equity awards under U.S. GAAP, which results in increased
income tax expense volatility.
We intend to repatriate earnings from our Swiss subsidiary and our joint venture
in Hong Kong, as needed, and the U.S. and foreign tax implications of such
repatriations are not expected to be significant. We will continue to
indefinitely reinvest earnings from the rest of our foreign subsidiaries, which
are not significant.
In July 2015, a U.S. Tax Court opinion (the "2015 Opinion") was issued involving
an independent third party related to charging foreign subsidiaries for
share-based compensation. Based on the findings of the U.S. Tax Court, direct
share-based compensation had been excluded from our intercompany charges
starting in 2015. In June 2019, the Ninth Circuit Court of Appeals (the "Ninth
Circuit") reversed the 2015 Opinion (the "Ninth Circuit Opinion"). Subsequently,
a re-hearing of the case was requested, but was denied in November 2019. In
February 2020, a petition was filed to appeal the Ninth Circuit Opinion to the
U.S. Supreme Court. The petition was denied by the U.S. Supreme Court on June
22, 2020, which makes the Ninth Circuit Opinion binding precedent in the Ninth
Circuit. As a result, we recorded an increase in the income tax provision of
$39.3 million during the year ended December 31, 2020. We will continue to
monitor future IRS actions or other developments regarding this matter and will
assess the impact of any such developments to our income tax provision in the
quarter that they occur. We are treating share-based compensation expense in
accordance with the Ninth Circuit Opinion for 2020 and future periods.
We file federal, state, and foreign income tax returns in many jurisdictions in
the U.S. and abroad. Years prior to 2016 are considered closed for most
significant jurisdictions. Certain of our unrecognized tax benefits could
reverse based on the normal expiration of various statutes of limitations, which
could affect our effective tax rate in the period in which they reverse.
We are subject to the examination of our income tax returns by the Internal
Revenue Service and other tax authorities. The outcome of these audits cannot be
predicted with certainty. Management regularly assesses the likelihood of
adverse outcomes resulting from these examinations to determine the adequacy of
our provision for income taxes. If any issues addressed in our tax audits are
resolved in a manner not consistent with management's expectations, we could be
required to adjust our provision for income taxes in the period such resolution
occurs.
Net Income (Loss) Attributable to Noncontrolling Interest in Joint Venture
The Company's majority-owned joint venture (the "Joint Venture") with Shanghai
Fosun Pharmaceutical (Group) Co., Ltd. ("Fosun Pharma"), a subsidiary of Fosun
International Limited, was established to research, develop, manufacture, and
sell robotic-assisted, catheter-based medical devices. The Joint Venture is
owned 60% by us and 40% by Fosun Pharma and is located in China. The
catheter-based technology will initially target early diagnosis and
cost-effective treatment of lung cancer, one of the most commonly diagnosed
forms of cancer in the world. Distribution of catheter-based medical devices in
China will be conducted by the joint venture, while distribution outside of
China will be conducted by us.
In January 2019, the Joint Venture acquired certain assets, including
distribution rights, customer relationships, and certain personnel, from Chindex
and its affiliates, a subsidiary of Fosun Pharma, and began direct operations
for da Vinci products and services in China. As of December 31, 2020, the
companies have contributed $55 million of up to $100 million required by the
joint venture agreement.
We do not expect the Joint Venture to generate revenue in 2021 related to the
sale of robotic-assisted, catheter-based medical devices. There can be no
assurance that we and the Joint Venture will successfully commercialize such
products. There can also be no assurance that the Joint Venture will not require
additional contributions to fund its business, that the Joint
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Venture will continue to be profitable, or that the acquired Chindex assets will
be successfully integrated and the expected benefits will be realized.
Net income (loss) attributable to noncontrolling interest in Joint Venture for
the year ended December 31, 2020, was $6.2 million, compared to $2.5 million for
the year ended December 31, 2019, and $(2.9) million for the year ended December
31, 2018. The increase in net income attributable to noncontrolling interest in
Joint Venture for the year ended December 31, 2020, was primarily due to the
increase in sales in China, partially offset by re-measurement losses related to
the contingent consideration from the acquisition.
Liquidity and Capital Resources
Sources and Uses of Cash
Our principal source of liquidity is cash provided by operations and by the
issuance of common stock through the exercise of stock options and our employee
stock purchase program. Cash and cash equivalents plus short- and long-term
investments increased by $1.02 billion to $6.87 billion as of December 31, 2020,
from $5.85 billion as of December 31, 2019, primarily from cash provided by our
operations and proceeds from stock option exercises and employee stock
purchases, partially offset by capital expenditures, taxes paid related to net
share settlements of equity awards, and share repurchases. Cash and cash
equivalents plus short- and long-term investments increased by $1.02 billion to
$5.85 billion as of December 31, 2019, from $4.83 billion as of December 31,
2018, primarily from cash provided by our operations, partially offset by
capital expenditures and share repurchases.
Our cash requirements depend on numerous factors, including market acceptance of
our products, the resources we devote to developing and supporting our products,
and other factors. We expect to continue to devote substantial resources to
expand procedure adoption and acceptance of our products. We have made
substantial investments in our commercial operations, product development
activities, facilities, and intellectual property. Based upon our business
model, we anticipate that we will continue to be able to fund future growth
through cash provided by our operations. We believe that our current cash, cash
equivalents, and investment balances, together with income to be derived from
the sale of our products, will be sufficient to meet our liquidity requirements
for the foreseeable future. However, as a result of the COVID-19 pandemic, we
expect to experience reduced cash flow from operations as a result of decreased
revenues and extending payment terms on sales and operating lease and
usage-based arrangements.
As of December 31, 2020, $556 million of our cash, cash equivalents, and
investments was held by foreign subsidiaries. We intend to repatriate earnings
from our Swiss subsidiary and joint venture in Hong Kong, as needed, since the
U.S. and foreign tax implications of such repatriations are not expected to be
significant. We will continue to indefinitely reinvest earnings from the rest of
our foreign subsidiaries, which are not significant.
See "Item 7A. Quantitative and Qualitative Disclosures About Market Risk" for
discussion on the impact of interest rate risk and market risk on our investment
portfolio.
Consolidated Cash Flow Data
The following table summarizes our cash flows for the years ended December 31,
2020, 2019, and 2018:
                                                                        Years Ended December 31,
                                                               2020               2019               2018
(in millions)
Net cash provided by (used in)
Operating activities                                       $ 1,484.8          $ 1,598.2          $ 1,169.6
Investing activities                                          (940.6)          (1,154.4)          (1,049.6)
Financing activities                                           (85.7)            (168.4)             126.3

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

                                                 (2.6)              (2.2)              (0.1)
Net increase (decrease) in cash, cash equivalents, and
restricted cash                                            $   455.9          $   273.2          $   246.2



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Operating Activities
For the year ended December 31, 2020, net cash provided by operating activities
of $1.48 billion exceeded our net income of $1.07 billion, primarily due to the
following factors:
1.Our net income included non-cash charges of $691 million, consisting primarily
of the following significant items: share-based compensation of $395 million;
depreciation expense and losses on the disposal of property, plant, and
equipment of $226 million; deferred income taxes of $58 million; gains on
investments, accretion, and amortization, net, of $55 million; and amortization
of intangible assets of $50 million.
2.The non-cash charges outlined above were partially offset by changes in
operating assets and liabilities that resulted in $273 million of cash used by
operating activities during the year ended December 31, 2020. Inventory,
including the transfer of equipment from inventory to property, plant, and
equipment, increased by $170 million, primarily due to the increased number of
systems under operating lease and usage-based arrangements and build-up to
mitigate risks of disruption that could arise from trade, supply, or other
matters, such as the COVID-19 pandemic. Prepaid expenses and other assets
increased by $112 million, primarily due to an increase in leasing and an
increase in deferred commissions. Accounts payable decreased by $32 million,
primarily due to the timing of payments. Accrued compensation and employee
benefits decreased by $17 million, primarily due to the timing of bonus
payments. The unfavorable impact of these items on cash provided by operating
activities was partially offset by a $37 million increase in other liabilities,
primarily due to additional income tax reserves, and a $15 million increase in
deferred revenue, primarily due to the effects of the Customer Relief Program.
For the year ended December 31, 2019, net cash provided by operating activities
of $1.60 billion exceeded our net income of $1.38 billion, primarily due to the
following factors:
1.Our net income included non-cash charges of $538 million, consisting primarily
of the following significant items: share-based compensation of $336 million;
depreciation expense and losses on the disposal of property, plant, and
equipment of $160 million; and amortization of intangible assets of $43 million.
2.The non-cash charges outlined above were partially offset by changes in
operating assets and liabilities that resulted in $322 million of cash used in
operating activities during the year ended December 31, 2019. Inventory,
including the transfer of equipment from inventory to property, plant, and
equipment, increased by $361 million, primarily due to the increased number of
systems under operating lease and usage-based arrangements and build-up to
address the growth in the business as well as to mitigate risks of disruption
that could arise from trade, supply, or other matters. Prepaid expenses and
other assets increased by $117 million, primarily due to an increase in leasing,
an increase in deferred commissions, and an increase in prepaid taxes, driven by
the timing of tax payments. The unfavorable impact of these items on cash
provided by operating activities was partially offset by a $57 million increase
in accrued compensation and employee benefits, primarily due to higher
headcount, a $39 million decrease in accounts receivable, primarily due to the
timing of collections, and a $36 million increase in deferred revenue, primarily
due to the increased volume of sales contracts.
Investing Activities
Net cash used in investing activities for the year ended December 31, 2020,
consisted of purchases of investments (net of proceeds from sales and maturities
of investments) of $561 million, the acquisition of property and equipment of
$342 million, and the Orpheus Medical acquisition, net of cash acquired, of $38
million.
Net cash used in investing activities for the year ended December 31, 2019,
consisted of purchases of investments (net of proceeds from sales and maturities
of investments) of $669 million, the acquisition of property and equipment
of $426 million, and the acquisition of businesses, net of cash acquired, of $60
million.
Net cash provided by investing activities for the year ended December 31, 2018,
consisted of purchases of investments (net of proceeds from sales and maturities
of investments) of $774 million, the acquisition of property and equipment of
$187 million, and the acquisition of businesses of $88 million.
We invest predominantly in high quality, fixed income securities. Our investment
portfolio may, at any time, contain investments in U.S. treasury and U.S.
government agency securities, taxable and tax-exempt municipal notes, corporate
notes and bonds, commercial paper, non-U.S. government agency securities, cash
deposits, and money market funds.
Financing Activities
Net cash used in financing activities for the year ended December 31, 2020,
consisted primarily of taxes paid on behalf of employees related to net share
settlements of vested employee equity awards of $175 million, cash used in the
repurchase of approximately 0.2 million shares of our common stock in the open
market for $134 million, and the payment of deferred purchase consideration of
$85 million, partially offset by proceeds from stock option exercises and
employee stock purchases of $309 million.
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Net cash used in financing activities for the year ended December 31, 2019,
consisted primarily of cash used in the repurchase of approximately 0.6 million
shares of our common stock in the open market for $270 million and taxes paid on
behalf of employees related to net share settlements of vested employee equity
awards of $159 million, partially offset by proceeds from stock option exercises
and employee stock purchases of $273 million.
Net cash provided by financing activities for the year ended December 31, 2018,
consisted primarily of proceeds from stock option exercises and employee stock
purchases of $237 million, partially offset by taxes paid on behalf of employees
related to net share settlements of vested employee equity awards of $120
million.
Capital Expenditures
Our business is not capital equipment intensive. However, with the growth of our
business and our investments in property and facilities and in manufacturing
automation, capital investments in these areas have increased. We expect these
capital investments to exceed $300 million in 2021 and remain in a relatively
consistent range in 2022. We intend to fund these needs with cash generated from
operations.
Contractual Obligations and Commercial Commitments
We have the following contractual obligations and commercial commitments as of
December 31, 2020:
                                                                              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)                $   88.8          $     22.7

$ 32.5 $ 18.6 $ 15.0 Purchase commitments and obligations 629.5

               622.4                    7.1                      -                   -
2017 Tax Act deemed repatriation tax        203.8                21.4                   61.7                  120.7                   -
Total                                    $  922.1          $    666.5          $       101.3          $       139.3          $     15.0


Operating leases. We lease spaces for operations in the U.S. as well as in
Japan, Mexico, China, South Korea, and other foreign countries. We also lease
automobiles for certain sales and field service employees. These leases have
varying terms up to 15 years. Operating lease amounts include future minimum
lease payments under all of our non-cancellable operating leases with an initial
term in excess of one year. Refer to Note 6 to the Consolidated Financial
Statements included in Part II, Item 8 for further details.
Purchase commitments and obligations. These amounts include an estimate of all
open purchase orders and contractual obligations in the ordinary course of
business, including commitments with contract manufacturers and suppliers for
which we have not received the goods or services, commitments for capital
expenditures and construction-related activities for which we have not received
the services, and acquisition and licensing of intellectual property. A majority
of these purchase obligations are due within a year. Although open purchase
orders are considered enforceable and legally binding, the terms generally allow
us the option to cancel, reschedule, and adjust our requirements based on our
business needs prior to the delivery of goods or performance of services. In
addition to the above, we have committed to make potential future milestone
payments to third parties as part of licensing, collaboration, and development
arrangements. Payments under these agreements generally become due and payable
only upon achievement of certain developmental, regulatory, and/or commercial
milestones. For instances in which the achievement of these milestones is
neither probable nor reasonably estimable, such contingencies have not been
recorded on our Consolidated Balance Sheets and have not been included in the
table above.
2017 Tax Act deemed repatriation tax. As of December 31, 2020, our obligation
associated with the deemed repatriation tax is $204 million, which is expected
to be paid in installments in accordance with the 2017 Tax Act.
We are unable to make a reasonably reliable estimate as to when payments may
occur for our unrecognized tax benefits. Therefore, our liability for
unrecognized tax benefits is not included in the table above.
Off-Balance Sheet Arrangements
As of December 31, 2020, we did not have any significant off-balance sheet
arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K promulgated
under the Exchange Act.
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Critical Accounting Estimates
Our Consolidated Financial Statements are prepared in conformity with U.S.
generally accepted accounting principles ("U.S. GAAP"), which requires us to
make judgments, estimates, and assumptions. See "Note 2. Summary of Significant
Accounting Policies," in Notes to the Consolidated Financial Statements, which
is included in "Item 8. Financial Statements and Supplementary Data," which
describes our significant accounting policies and methods used in the
preparation of our Consolidated Financial Statements. The methods, estimates,
and judgments that we use in applying our accounting policies require us to make
difficult and subjective judgments, often as a result of the need to make
estimates regarding matters that are inherently uncertain. Our most critical
accounting estimates include:
•the valuation and recognition of investments, which impacts our investment
portfolio balance when we assess fair value and interest and other income, net,
when we record impairments;
•the standalone selling prices used to allocate the contract consideration to
the individual performance obligations, which impacts revenue recognition;
•the allowance for sales returns and doubtful accounts, which impacts revenue;
•the valuation of inventory, which impacts gross profit margins;
•the valuation of and assessment of recoverability of intangible assets and
their estimated useful lives, which primarily impacts gross profit margin or
operating expenses when we record asset impairments or accelerate their
amortization;
•the valuation and recognition of share-based compensation, which impacts gross
profit margin and operating expenses;
•the recognition and measurement of current and deferred income taxes (including
the measurement of uncertain tax positions), which impact our provision for
taxes; and
•the estimate of probable loss associated with legal contingencies, which
impacts accrued liabilities and operating expenses.
Investments Valuation
Fair Value. Our investment portfolio may, at any time, contain investments in
U.S. treasuries and U.S. government agency securities, non-U.S. government
securities, taxable and/or tax-exempt municipal notes, corporate notes and
bonds, commercial paper, cash deposits, money market funds, and equity
investments with and without readily determinable value. The assessment of the
fair value of investments can be difficult and subjective. U.S. GAAP establishes
three levels of inputs that may be used to measure fair value. Each level of
input has different levels of subjectivity and difficulty involved in
determining fair value. Valuation of Level 1 and 2 instruments generally do not
require significant management judgment and the estimation is not difficult.
Level 3 instruments include unobservable inputs that are supported by little or
no market activity and that are significant to the fair value of the assets or
liabilities. The determination of fair value for Level 3 instruments requires
the most management judgment and subjectivity. There were no Level 3 securities
for the periods presented.
After determining the fair value of our available-for-sale instruments, we
identify instruments with an amortized cost basis in excess of estimated fair
value. Available-for-sale instruments in an unrealized loss position are written
down to fair value through a charge to other income, net in the Consolidated
Statements of Income, if we intend to sell the security or it is more likely
than not we will be required to sell the security before recovery of its
amortized cost basis. For the remaining securities, we assess what amount of the
excess, if any, is caused by expected credit losses. Factors considered in
determining whether a credit-related loss exists include the financial condition
and near-term prospects of the investee, the extent of the loss related to
credit of the issuer, and the expected cash flows from the security. These
judgments could prove to be wrong, and companies with relatively high credit
ratings and solid financial conditions may not be able to fulfill their
obligations.
Additionally, we have investments in equity securities without readily
determinable fair values, which are generally recorded at cost, plus or minus
subsequent observable price changes in orderly transactions for identical or
similar investments, less impairments. As part of our assessment for impairment
indicators, we consider significant deterioration in the earnings performance
and overall business prospects of the investee as well as significant adverse
changes in the external environment these investments operate. If our
qualitative assessment indicates the investments are impaired, the fair value of
these equity securities would be estimated, which would involve a significant
degree of judgement and subjectivity.
No significant impairment charges were recorded during the years ended December
31, 2020, 2019, and 2018. As of December 31, 2020, and 2019, net unrealized
losses on investments of $29.5 million and $20.4 million, net of tax,
respectively, were included in accumulated other comprehensive income/(loss).
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Revenue recognition. Our system sale arrangements contain multiple products and
services, including system(s), system components, system accessories,
instruments, accessories, and service. Other than service, we generally deliver
all of the products upfront. Each of these products and services is a distinct
performance obligation. System accessories, instruments, accessories, and
service are also sold on a standalone basis.
For multiple-element arrangements, revenue is allocated to each performance
obligation based on its relative standalone selling price. Standalone selling
prices are based on observable prices at which we separately sell the products
or services. If a standalone selling price is not directly observable, then we
estimate the standalone selling prices considering market conditions and
entity-specific factors including, but not limited to, features and
functionality of the products and services, geographies, type of customer, and
market conditions. We regularly review standalone selling prices and maintain
internal controls over establishing and updating these estimates.
Our system sales arrangements generally include a five-year period of service.
The first year of service is generally free and included in the system sale
arrangement and the remaining four years are billed at a stated service price.
Revenue that is allocated to the service obligation is deferred and recognized
ratably over the service period.
Allowance for sales returns and doubtful accounts. We record estimated
reductions in revenue for potential returns of certain products by customers. As
a result, management must make estimates of potential future product returns
related to current period product revenue. In making such estimates, management
analyzes historical returns, current economic trends and changes in customer
demand and acceptance of our products. If management were to make different
judgments or utilize different estimates, material differences in the amount of
reported revenue could result.
Similarly, we make estimates of the collectability of accounts receivable,
especially analyzing the aging and nature of accounts receivable and historical
bad debts, customer concentrations, customer credit-worthiness, current economic
trends, and changes in customer payment terms when evaluating the adequacy of
the allowance for doubtful accounts. Credit evaluations are undertaken for all
major sales transactions before shipment is authorized. On a quarterly basis, we
evaluate aged items in the accounts receivable aging report and provide an
allowance in an amount that we deem adequate for doubtful accounts. If
management were to make different judgments or utilize different estimates,
material differences in the amount of our reported operating expenses could
result.
Inventory valuation. Inventory is stated at the lower of cost or net realizable
value on a first-in, first-out basis. The cost basis of our inventory is reduced
for any products that are considered excessive or obsolete based upon
assumptions about future demand and market conditions. If actual future demand
or market conditions are less favorable than those projected by management,
additional inventory write-downs may be required, which could have a material
adverse effect on the results of our operations.
Intangible assets. Our intangible assets include identifiable intangible assets
and goodwill. Identifiable intangible assets include developed technology,
patents, distribution rights, customer relationships, licenses, and
non-competition arrangements. All of our identifiable intangible assets have
finite lives. Goodwill and intangible assets with indefinite lives are subject
to an annual impairment review (or more frequent if impairment indicators arise)
by applying a fair value-based test. There have been no such impairments.
Identifiable intangible assets with finite lives are subject to impairment
testing and are reviewed for impairment when events or circumstances indicate
that the carrying value of an asset is not recoverable and its carrying amount
exceeds its fair value. We evaluate the recoverability of the carrying value of
these identifiable intangible assets based on estimated undiscounted cash flows
to be generated from such assets. If the cash flow estimates or the significant
operating assumptions upon which they are based change in the future, we may be
required to record additional impairment charges.
The valuation and classification of intangible assets and goodwill and the
assignment of useful lives for purposes of amortization involves judgments and
the use of estimates. The evaluation of these intangible assets and goodwill for
impairment under established accounting guidelines is required on a recurring
basis. Changes in business conditions could potentially require future
adjustments to the assumptions made. When we determine that the useful lives of
assets are shorter than we had originally estimated, we accelerate the rate of
amortization over the assets' new, shorter useful lives. No impairment charge or
accelerated amortization was recorded for the years ended December 31, 2020,
2019, and 2018. A considerable amount of judgment is required in assessing
impairment, which includes financial forecasts. If conditions are different from
management's current estimates, material write-downs of long-lived assets may be
required, which would adversely affect our operating results.
Business combinations. We allocate the fair value of the purchase consideration,
including contingent consideration, to the assets acquired and liabilities
assumed based on their estimated fair values at the acquisition date. The excess
of the fair value of the purchase consideration over the fair value of assets
acquired, liabilities assumed, and any noncontrolling interest is recorded as
goodwill. When determining the fair value of assets acquired, liabilities
assumed, and any noncontrolling interest, management is required to make certain
estimates and assumptions, especially with respect to intangible assets. The
estimates
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and assumptions used in valuing intangible assets include, but are not limited
to, the amount and timing of projected future cash flows, the discount rate used
to determine the present value of these cash flows, and the determination of the
assets' life cycle. These estimates are inherently uncertain and, therefore,
actual results may differ from the estimates made.
Accounting for stock options. We account for share-based compensation in
accordance with the fair value recognition provisions of U.S. GAAP. We use the
Black-Scholes-Merton option-pricing model, which requires the input of highly
subjective assumptions. These assumptions include estimating the length of time
employees will retain their vested stock options before exercising them and the
estimated volatility of our common stock price over the expected term. The
assumptions for expected volatility and expected term are the two assumptions
that most significantly affect the grant date fair value of stock options.
Changes in expected risk-free rate of return do not significantly impact the
calculation of fair value and determining this input is not highly subjective.
We use implied volatility based on our traded options in the open market, as we
believe implied volatility is more reflective of market conditions and a better
indicator of expected volatility than historical volatility. In determining the
appropriateness of relying on implied volatility, we considered the following:
•the sufficiency of the trading volume of our traded options;
•the ability to reasonably match the terms, such as the date of the grant and
the exercise price of our traded options to options granted; and
•the length of the term of our traded options used to derive implied volatility.
The expected term represents the weighted-average period that our stock options
are expected to be outstanding. The expected term is based on the observed and
expected time to exercise. We determine expected term based on historical
exercise patterns and our expectation of the time it will take for employees to
exercise options still outstanding.
Changes in these subjective assumptions can materially affect the estimate of
the fair value of stock options and, consequently, the related amount of
share-based compensation expense recognized in the Consolidated Statements of
Income.
Accounting for income taxes. Significant management judgment is required in
determining our provision for income taxes, deferred tax assets and liabilities,
and any valuation allowance recorded against net deferred tax assets in
accordance with U.S. GAAP. These estimates and judgments occur in the
calculation of tax credits, benefits, and deductions and in the calculation of
certain tax assets and liabilities, which arise from differences in the timing
of recognition of revenue and expense for tax and financial statement purposes,
as well as the interest and penalties related to uncertain tax positions.
Significant changes to these estimates may result in an increase or decrease to
our tax provision in the current or subsequent period.
We must assess the likelihood that we will be able to recover our deferred tax
assets. In the event that all or part of our deferred tax assets are not
recoverable in the future, we must increase our provision for taxes by recording
a valuation allowance to reduce our deferred tax assets to the amount that is
more likely than not to be recoverable. In order for our deferred tax assets to
be recoverable, we must be able to generate sufficient taxable income in those
jurisdictions where the deferred tax assets are located. We consider forecasted
income, including income that may be generated as a result of certain tax
planning strategies, together with future reversals of existing taxable
temporary differences, in determining the need for a valuation allowance. As of
December 31, 2020, we believe it is more likely than not that our deferred tax
assets ultimately will be recovered with the exception of our California
deferred tax assets. We believe that, due to the computation of California taxes
under the single sales factor, it is more likely than not that our California
deferred tax assets will not be realized. Should there be a change in our
ability to recover our deferred tax assets, our tax provision would be affected
in the period in which such change takes place.
The calculation of our tax liabilities involves dealing with uncertainties in
the application of complex tax regulations. We recognize liabilities for
uncertain tax positions based on a two-step process. The first step is to
evaluate the tax position for recognition by determining if the weight of
available evidence indicates that it is more likely than not that the position
will be sustained on audit, including resolution of related appeals or
litigation processes, if any. If we determine that a tax position will more
likely than not be sustained on audit, then the second step requires us to
estimate and measure the tax benefit as the largest amount that is more than 50%
likely to be realized upon ultimate settlement. It is inherently difficult and
subjective to estimate such amounts, as we have to determine the probability of
various possible outcomes. We re-evaluate these uncertain tax positions on a
quarterly basis. This evaluation is based on factors including, but not limited
to, changes in facts or circumstances, changes in tax law, effective settlement
of audit issues, and new audit activity. Such a change in recognition or
measurement would result in the recognition of a tax benefit or an additional
charge to the tax provision.
Accounting for legal contingencies.  From time to time, we are involved in a
number of legal proceedings involving product liability, intellectual property,
shareholder derivative actions, securities class actions, insurance,
employee-related, and other matters. We record a liability and related charge to
earnings in our Consolidated Financial Statements for legal contingencies when
the loss is considered probable and the amount can be reasonably estimated. Our
assessment is re-evaluated each accounting period and is based on all available
information, including discussion with any outside legal counsel that
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represents us. If a reasonable estimate of a known or probable loss cannot be
made, but a range of probable losses can be estimated, the low-end of the range
of losses is recognized if no amount within the range is a better estimate than
any other. If a loss is reasonably possible, but not probable, and can be
reasonably estimated, the estimated loss or range of loss is disclosed in the
Notes to the Consolidated Financial Statements.
When determining the estimated probable loss or range of losses, significant
judgment is required to be exercised in order to estimate the amount and timing
of the loss to be recorded. Estimates of probable losses resulting from
litigation are inherently difficult to make, particularly when the matters are
in early procedural stages with incomplete facts and information. The final
outcome of legal proceedings is dependent on many variables difficult to predict
and, therefore, the ultimate cost to entirely resolve such matters may be
materially different than the amount of current estimates. Consequently, new
information or changes in judgments and estimates could have a material adverse
effect on our business, financial condition, and results of operations or cash
flows.
RECENT ACCOUNTING PRONOUNCEMENTS
See "Note 2. Summary of Significant Accounting Policies" of the Notes to
Consolidated Financial Statements in "Item 8. Financial Statements and
Supplementary Data" for a full description of recent accounting pronouncements,
including the respective expected dates of adoption and estimated effects, if
any, on our Consolidated Financial Statements.
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