In this report, "Intuitive Surgical ," "Intuitive," the "Company," "we," "us," and "our" refer toIntuitive Surgical, Inc. and its wholly and majority-owned subsidiaries. This management's discussion and analysis of financial condition as ofSeptember 30, 2021 , and results of operations for the three and nine months endedSeptember 30, 2021 , and 2020, should be read in conjunction with management's discussion and analysis of financial condition and results of operations included in our Annual Report on Form 10-K for the year endedDecember 31, 2020 . This report contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Forward-looking statements relate to expectations concerning matters that are not historical facts. Words such as "estimates," "projects," "believes," "anticipates," "plans," "expects," "intends," "may," "will," "could," "should," "would," "targeted," and similar words and expressions are intended to identify forward-looking statements. These forward-looking statements include, but are not limited to, statements related to the expected impacts of the COVID-19 pandemic on our business, financial condition, and results of operations, the potential impact on our procedure volume, our acquisitions, our expected business, our expected new product introductions, the impacts of Extended Use Instruments, procedures and procedure adoption, future results of operations, future financial position, our ability to increase our revenues, the anticipated mix of our revenues between product and service revenues, our financing plans and future capital requirements, anticipated costs of revenue, anticipated expenses, our potential tax assets or liabilities, the effect of recent accounting pronouncements, our investments, anticipated cash flows, our ability to finance operations from cash flows and similar matters, and statements based on current expectations, estimates, forecasts, and projections about the economies and markets in which we operate and our beliefs and assumptions regarding these economies and markets. These forward-looking statements should be considered in light of various important factors, including, but not limited to, the following: our ability to obtain accurate procedure volume and mix in the midst of the COVID-19 pandemic; the risk that the COVID-19 pandemic could lead to further material delays and cancellations of, or reduced demand for, procedures; curtailed or delayed capital spending by hospitals; disruption to our supply chain, including increased difficulties in obtaining a sufficient amount of materials in the semiconductor and other markets; closures of our facilities; delays in surgeon training; delays in gathering clinical evidence; delays in obtaining new product approvals or clearances from theU.S. Food and Drug Administration due to the effects of the COVID-19 pandemic; the evaluation of the risks of robotic-assisted surgery in the presence of infectious diseases; diversion of management and other resources to respond to COVID-19 outbreaks; the impact of global and regional economic and credit market conditions on healthcare spending; the risk that the COVID-19 virus disrupts local economies and causes economies in our key markets to enter prolonged recessions; healthcare reform legislation in theU.S. and its impact on hospital spending, reimbursement, and fees levied on certain medical device revenues; changes in hospital admissions and actions by payers to limit or manage surgical procedures; the timing and success of product development and market acceptance of developed products; the results of any collaborations, in-licensing arrangements, joint ventures, strategic alliances, or partnerships, including the joint venture with Shanghai Fosun Pharmaceutical (Group) Co., Ltd.; our completion of and ability to successfully integrate acquisitions, including Schölly Fiberoptic's robotic endoscope business and Orpheus Medical; procedure counts; regulatory approvals, clearances, and restrictions or any dispute that may occur with any regulatory body; guidelines and recommendations in the healthcare and patient communities; intellectual property positions and litigation; competition in the medical device industry and in the specific markets of surgery in which we operate; risks associated with our operations outside ofthe United States ; unanticipated manufacturing disruptions or the inability to meet demand for products; our reliance on sole and single source suppliers; the results of legal proceedings to which we are or may become a party; product liability and other litigation claims; adverse publicity regarding us and the safety of our products and adequacy of training; our ability to expand into foreign markets; the impact of changes to tax legislation, guidance, and interpretations; changes in tariffs, trade barriers, and regulatory requirements; and other risk factors. Readers are cautioned not to place undue reliance on these forward-looking statements, which are based on current expectations and are subject to risks, uncertainties, and assumptions that are difficult to predict, including those risk factors described throughout this filing and in the Annual Report on Form 10-K for the fiscal year endedDecember 31, 2020 , and other periodic filings with theSecurities and Exchange Commission . Our actual results may differ materially and adversely from those expressed in any forward-looking statement. We undertake no obligation to publicly update or release any revisions to these forward-looking statements, except as required by law. Intuitive®, Intuitive Surgical®, da Vinci®, da Vinci S®, da Vinci S HD Surgical System®, da Vinci Si®, da Vinci Si HD Surgical System®, da Vinci Xi®,da Vinci SP®, EndoWrist®, Firefly®, InSite®, da Vinci Connect®,Intuitive Surgical EcoSystem®, da Vinci X®, SureFormTM, IonTM, IrisTM, and SynchroSealTM are our trademarks or registered trademarks. 23 -------------------------------------------------------------------------------- Table of Contents Overview Intuitive is committed to advancing patient care in surgery and other acute medical interventions. We are focused on innovating to enable physicians and healthcare providers to improve the quality of and access to minimally invasive care. Our mission reflects that we believe that minimally invasive care is life-enhancing care. Intuitive brings more than two decades of leadership in robotic-assisted surgical technology and solutions to its offerings. While surgery and acute interventions have improved significantly in the past decades, there remains a significant need for better outcomes and decreased variability of these outcomes across care teams. The current healthcare environment continues to stress critical resources, including the professionals who staff care teams: surgeons, anesthesiologists, nurses, and other staff. At the same time, governments strain to cover the healthcare needs of their populations and demand lower total cost per patient to treat disease. In the face of these challenges, we believe scientific, process, and technological advances in biology, computing, imaging, algorithms, and robotics offer new methods to solve continued and difficult problems. We address these needs by focusing on the quadruple aim. First, we focus on products and services that can improve outcomes and decrease variability in the hands of care teams. Second, we seek to improve the patient experience by minimizing disruption to lives and creating greater predictability for the treatment experience. Third, we seek to improve care team satisfaction by creating products and services that are dependable, smart, and optimized for the care environment in which they are used. Finally, we seek to lower the total cost to treat per patient episode when compared with existing treatment alternatives, providing a return on investment for hospitals and healthcare systems and value for payers. 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. Ourda 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") andda Vinci endoscopes. We also provide a comprehensive suite of services, training, and education programs. Within our integrated ecosystem, our hardware, software, and digital solutions 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. The da Vinci SP Surgical System accesses the body through a single incision while the other da Vinci Surgical Systems access the body through multiple incisions. We are still in a measured launch of our da Vinci SP Surgical System, and we have an installed base of 89 da Vinci SP Surgical Systems as ofSeptember 30, 2021 . Our plans for the rollout of the da Vinci SP Surgical System include putting systems in the hands of experiencedda Vinci users first while we optimize training pathways and our supply chain. We receivedU.S. Food and Drug Administration ("FDA") clearances for the da Vinci SP Surgical System for urological and certain transoral procedures. We also received clearance inSouth 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. We also plan to seek clearances in other OUS markets 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. Allda 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-portda 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 andda Vinci X platforms, including da Vinci Energy andda Vinci Stapler products, to 24 -------------------------------------------------------------------------------- Table of Contents 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 withda Vinci X orda 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. Our rollout of the Ion system in theU.S. is progressing well, and we are continuing to gather additional clinical evidence. We have placed 98 Ion systems as ofSeptember 30, 2021 . Ion systems are not included in ourda Vinci Surgical System installed base. We plan to seek clearances for Ion in OUS markets over time. 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. COVID-19 Pandemic Procedures In the first quarter of 2020, prior to the spread of COVID-19, 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 theU.S. , and growth in OUS urology. Beginning inJanuary 2020 , we saw a substantial reduction inda Vinci procedures inChina and, by earlyFebruary 2020 , procedures per week inChina had declined by approximately 90% compared to the weekly procedure rates experienced in earlyJanuary 2020 . As the COVID-19 pandemic subsided inChina inMarch 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 earlyJanuary 2020 weekly procedure rate. As the COVID-19 pandemic spread toWestern Europe and theU.S. , we experienced a significant decline inda Vinci procedures in the last half ofMarch 2020 to approximately 65% of the weekly procedure rate experienced earlier in the first quarter of 2020. In the second quarter of 2020, procedures per week in theU.S. continued to decline in April, reaching approximately 30% of pre-COVID-19 levels, followed by steady recovery in May and June, as COVID-19 cases dropped and elective procedures were permitted. However, with the resurgence of COVID-19 cases in the last two weeks of June, we experienced a corresponding decline inda Vinci procedures. The impact of COVID-19 inEurope during the second quarter of 2020 varied by country with procedures inItaly ,France , and theUK declining more steeply, whileGermany experienced a year-over-year increase in procedures. InChina , procedures per week continued to increase to a level consistent with the earlyJanuary 2020 weekly procedure rate. We experienced little impact on the procedure volume inKorea andJapan in the second quarter of 2020. In the third quarter of 2020, in theU.S. , procedures recovered slowly, leveling off to near pre-COVID-19 levels towards the end of the quarter. Outside of theU.S. ,da Vinci procedures varied depending on the spread and/or resurgence of COVID-19. For example, COVID-19 had a less significant impact inGermany whereda Vinci procedures grew at mid-single digits relative to the third quarter of 2019, while it had a more significant impact in theU.K. whereda Vinci procedures declined year over year. Procedures inChina grew significantly year over year, while COVID-19 outbreaks resulted in year-over-year procedure growth rates inJapan slowing somewhat relative to the second quarter. 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 ofda Vinci prostatectomy procedures to decline in the third quarter of 2020 relative to the third quarter of 2019. Notwithstanding the impacts of COVID-19,da Vinci bariatric procedures grew significantly year over year 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. In the first quarter of 2021, in theU.S. , the COVID-19 resurgence that affected procedures later in the fourth quarter of 2020 continued well intoJanuary 2021 . Then, as COVID-19 cases subsided beginning inFebruary 2021 ,da Vinci procedures experienced a steady improvement throughout February and March. InEurope , the spread of COVID-19 varied regionally, and procedure growth rates were mixed with strength inFrance and a year-over-year decline in the U.K. While there have been COVID-19 hot spots within some of ourAsia Pacific markets, they tended to be isolated and, in general, procedures performed well.China growth was significantly higher than other regions, reflecting the severity of the COVID-19 impact onChina during the first quarter of the prior year and the additional system installations during 2020. 25 -------------------------------------------------------------------------------- Table of Contents In the second quarter of 2021, as theU.S. continued its broad rollout of vaccinations, COVID-19 cases and hospitalizations decreased, and procedure volumes recovered, partially attributed to the performance of a number of procedures that were deferred during the pandemic. InEurope , the rollout of vaccinations and spread of COVID-19 varied regionally, and procedure growth rates were mixed with notable recovery in theU.K. We continued to see the impacts of regional resurgences of COVID-19 cases within theAsia Pacific markets with growth inIndia ,Taiwan , andJapan lagging behind that of other markets.China growth continued to be strong year over year, primarily reflecting the growth in the system installed base. In the third quarter of 2021, COVID-19 infections resurged as the quarter progressed, and we saw a corresponding impact to ourda Vinci procedures. In theU.S. , we saw decreasing procedure volumes in August and September compared to June as COVID-19 cases and hospitalizations increased. Late in the quarter, as COVID-19 cases began to slow, procedures began to recover. We continue to see certain regions of theU.S. particularly impacted. Outside of theU.S. , inEurope , the impact of COVID-19 in the third quarter of 2021 varied regionally with slower growth inItaly andFrance . We continue to see the impacts of regional resurgences of COVID-19 cases within theAsia Pacific markets, particularly inJapan andTaiwan .China growth in the third quarter continued to be stronger than otherAsia Pacific markets, primarily reflecting nearly 40% growth in the system installed base year over year. The depth and extent to which the COVID-19 pandemic will impact individual markets will vary based on the availability of vaccinations, personal protective equipment, intensive care units and operating rooms, and medical staff, as well as government interventions. 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 have been deferred. While there is a backlog of patients, it is unpredictable when those patients will ultimately seek diagnosis and treatment and whether they will be treated through surgery. Based on our experience during 2020, we do not expect all markets, regions, and procedure types to recover at the same time or at the same pace. System Demand In the first three quarters of 2020, customers in regions impacted by COVID-19 deferred decisions to purchase or lease systems into future quarters and, in some cases, indefinitely. However, in the first three quarters of 2021, we experienced strong system demand. In general, we believe that the COVID-19 pandemic had less of an impact on hospital spending capacity and that customers recognize thatda Vinci surgery meets their quadruple aim objectives better than other surgical approaches. More specifically, during the first three quarters of 2021, system demand reflected procedure growth, hospitals purchasing systems in preparation for a post-COVID-19 pandemic environment, and hospitals upgrading their system portfolio to access and/or standardize on fourth generation capabilities. General Increase in Risks Worldwide economies have been significantly impacted by the COVID-19 pandemic, and it is possible that factors related to the COVID-19 pandemic 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 training and 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. In particular, we have experienced increased difficulties in obtaining a sufficient amount of component materials used in our products, including those in the semiconductor market, as global supply has become significantly constrained due to increased demand in semiconductors and other materials. Additionally, prices of such materials have increased due to the increased demand and supply shortage. The global semiconductor and other materials supply shortage is likely to remain a challenge for the foreseeable future. We have also experienced challenges in logistics, as certain shipping routes have been impacted by port closures. Such global shortages in important components and logistics challenges have resulted in, and will continue to cause, inflationary cost pressure in our supply chain. To date, these challenges have not materially impacted our ability to deliver product and services to our customers. However, if shortages in important supply chain materials in the semiconductor or other markets continue, we could fail to meet product demand, which would adversely impact our business, financial condition, results of operations, or cash flows. Increased labor shortages globally, including staff burnout and attrition, could also impact our ability to hire and retain personnel critical to our manufacturing, logistics, and commercial operations. We are also highly dependent on the principal members of our management and scientific staff. Attracting and retaining qualified personnel is critical to our success, and competition for them has become more intense. The loss of critical members of our team, or our inability to attract and retain qualified personnel, could significantly harm our operations, business, and ability to compete. In addition, hospitals are also experiencing staffing shortages and supply chain issues that could impact their ability to provide patient care. Any of these 26 -------------------------------------------------------------------------------- Table of Contents events could negatively impact the number ofda 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 have been and remain 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 a recovery that follows the pandemic. Finally, we will continue to invest in our priority development programs while eliminating avoidable spend. As COVID-19 vaccination rates increase and cases decline, we have enhanced our focus on evaluating and implementing our return-to-office strategy. We intend to remain flexible, allowing many of our employees to work remotely on at least a partial basis, while maintaining productivity and our culture. Our top priority in this process continues to be the health and safety of our employees. 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. Further, in late 2020, we launched our Extended Use Program (refer to further discussion immediately below) in theU.S. andEurope , with the intention to reduce the cost for customers to treat patients, which in turn will reduce the overall instruments and 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. Consistent with the da Vinci Surgical System model described above, we generate revenue from the placements of the Ion endoluminal system at the time of sale in or sales-type lease arrangements or over time in operating lease transactions and usage-based models. We generate revenue from the placements of the Ion system, and we earn recurring revenue from the sales of instruments and accessories used in biopsies and ongoing system service. Ion systems are presented separately from our da Vinci Surgical Systems installed base. For the three and nine months endedSeptember 30, 2021 , Ion's contribution to revenue and gross margin was not significant. Extended Use Program InJuly 2020 , we announced our "Extended Use Program," which consists of selectda Vinci Xi andda 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 ofda 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 theU.S. andEurope in the fourth quarter of 2020 and have launched in most other countries around the world in the first half of 2021, exceptChina due to regulatory timelines. They will continue to be introduced at various times throughout the remainder of 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 . In theU.S. andEurope , during the first three quarters of 2021, we saw customers adjust their instrument buying patterns to reduce their inventory levels to reflect the additional uses per instrument. Additionally, we believe that, as of the end of Q3 2021, in theU.S. andEurope , full cutover to Extended Use Instruments has occurred, as customers have utilized substantially all of their 27 -------------------------------------------------------------------------------- Table of Contents remaining 10 use instruments. The precise 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 growth of the installed base of da Vinci Surgical Systems, offset by an$80 million decrease due to service fee credits provided to customers as part of the Customer Relief Program that was implemented as a result of the COVID-19 pandemic in the second quarter of 2020. The installed base of da Vinci Surgical Systems grew 7% to approximately 5,989 atDecember 31, 2020 ; 12% to approximately 5,582 atDecember 31, 2019 ; and 13% to approximately 4,986 atDecember 31, 2018 . We use the installed base, number of shipments, and utilization ofda 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, 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.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 surgery programs while leveraging our balance sheet. These leases generally have commercially competitive terms as compared to other third-party entities that offer equipment leasing. We have also entered into usage-based arrangements with qualified customers that have committedda Vinci programs where we charge for the system and service as the systems are utilized. 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. 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 endedDecember 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 or, in the case of usage-based arrangements, as the systems are used. We generally 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 28 -------------------------------------------------------------------------------- Table of Contents lease revenue has grown at a faster rate than overall systems revenue and was$177 million ,$107 million , and$51 million for the years endedDecember 31, 2020 , 2019, and 2018, respectively. As revenue from operating lease and usage-based arrangements 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. Generally, lease transactions generate similar gross margins as our sale transactions. As ofDecember 31, 2020 , a total of 901 da Vinci Surgical Systems were installed at customers under operating lease or usage-based arrangements. 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 continue to divert 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 endedDecember 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 some markets, systems placements are constrained by regulation. In geographies whereda Vinci procedure adoption is in an early stage, system sales will precede procedure growth. System placements also vary due to seasonality largely aligned with hospital budgeting cycles. We typically place a higher proportion of annual system placements in the fourth quarter and a lower proportion in the first quarter as customer budgets are reset. Systems revenue 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, 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. Ourda 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 ofda 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 theU.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 theU.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 past and potentially future recommendations of authorities to defer elective procedures, historical procedure patterns may be disrupted. Distribution Channels We provide our products through direct sales organizations in theU.S. ,Europe (excludingSpain ,Portugal ,Italy ,Greece , and most Eastern European countries),China ,Japan ,South Korea ,India , andTaiwan . In 2018, we began direct operations inIndia andTaiwan . InJanuary 2019 , our Intuitive-Fosun joint venture began direct sales forda Vinci products and services inChina . In the remainder of our OUS markets, we provide our products through distributors. 29 -------------------------------------------------------------------------------- Table of Contents Regulatory Activities Overview Our products must meet the requirements of a large and growing body of international standards that govern the product safety, efficacy, advertising, labeling, safety reporting design, manufacture, materials content and sourcing, testing, certification, packaging, installation, use, and disposal of our products. Examples of such standards include electrical safety standards, such as those of theInternational 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 theU.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 theU.S. ,South Korea ,Japan , and the European markets in which we operate. Since 2019, we obtained regulatory clearances for the following products: •In late 2020 and early 2021, we obtained FDA clearance, CE mark clearance, and regulatory clearances in most of our significant markets to market our Extended Use Instruments. •InNovember 2019 , we obtained FDA clearance for our SynchroSeal instrument and E-100 generator. Following the FDA clearance, inFebruary 2020 , we received CE mark clearance for both products. InMarch 2020 , we received regulatory clearance inJapan to market both our SynchroSeal instrument and E-100 generator. We received regulatory clearance inSouth Korea to market our SynchroSeal instrument and E-100 generator inJanuary 2020 andAugust 2020 , respectively. •InJuly 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. InSeptember 2019 , we received regulatory clearance inJapan to market both our SureForm 45 Curved-Tip stapler and SureForm 45 Gray reload. We received regulatory clearance inSouth Korea to market our SureForm 45 Curved-Tip stapler and SureForm 45 Gray reload inJune 2021 andJuly 2021 , respectively. •InJune 2019 , we received CE mark clearance for our da Vinci Endoscope Plus for the da Vinci Xi and da Vinci X Surgical Systems inEurope . Following the CE mark, inJuly 2019 , we obtained FDA clearance for our da Vinci Endoscope Plus. We have also received regulatory clearances inSouth Korea andJapan to market our da Vinci Endoscope Plus inDecember 2019 andMay 2020 , respectively. •InJune 2019 , we obtained FDA clearance for our da Vinci Handheld Camera and, inFebruary 2020 , we received CE mark clearance. •InFebruary 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. Our rollout of the Ion system in theU.S. is progressing well, and we are continuing to gather additional clinical evidence. We have placed 98 Ion systems as ofSeptember 30, 2021 . •InFebruary 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 number ofU.S. hospitals to gain initial product experience and insights. •InDecember 2018 , we received product registration for our da Vinci Xi Surgical System inChina . 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 with theChina National Medical Products Administration ("NMPA"). •InOctober 2018 , theChina National Health Commission published on its official website the quota for major medical equipment to be imported and sold inChina 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 intoChina , which could include da Vinci Surgical Systems as well as surgical systems introduced by others. As ofSeptember 30, 2021 , we have sold 153 da Vinci Surgical Systems under this quota. Future sales ofda Vinci Surgical Systems under the quota are uncertain, as they are dependent on hospitals completing a tender process and receiving associated approvals. 30 -------------------------------------------------------------------------------- Table of Contents Refer to the descriptions of our products that received regulatory clearances in 2021, 2020, and 2019 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. InApril 2012 andApril 2016 , the MHLW granted reimbursement status for robotic-assisted prostatectomy and partial nephrectomy, respectively. Most prostatectomies and partial nephrectomies were open procedures prior toda Vinci reimbursement.Da Vinci procedure reimbursement for robotic-assisted prostatectomy and partial nephrectomy procedures are higher than open and conventional laparoscopic procedure reimbursements. An additional 12da Vinci procedures were granted reimbursement effectiveApril 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 effectiveApril 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 robotic-assisted prostatectomy or partial nephrectomy, given their higher reimbursement, or any otherda 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 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 ada 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 ofda Vinci procedures occurs procedure by procedure and market by market and is driven by the relative patient value and total treatment costs ofda Vinci procedures as compared to alternative treatment options for the same disease state or condition. We use the number and type ofda 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 ofda 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 ofda Vinci procedures in assessing our performance and when planning, forecasting, and analyzing future periods. The number and type ofda Vinci procedures also facilitate management's internal comparisons of our historical performance. We believe that the number and type ofda 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 ofda 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 31 -------------------------------------------------------------------------------- Table of Contents ofda 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 ofda Vinci procedures and our revenues may fluctuate from period to period, andda Vinci procedure volume growth may not correspond to an increase in revenue. The number and type ofda 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. Worldwide Procedures Ourda 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 forda Vinci products and is not intended to promote for sale or use of any Intuitive 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 to 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 whichda Vinci can bring patient value relative to alternative treatment options and/or economic benefit to healthcare providers. Target procedures in general surgery include hernia repair (both ventral and inguinal), colorectal procedures, bariatrics, and cholecystostomies. Target procedures in gynecology include hysterectomy for both cancer and benign conditions. Target procedures in urology include prostatectomy and partial nephrectomy. In cardiothoracic surgery, target procedures include lobectomy. In head and neck surgery, target procedures include certain procedures resecting benign and malignant tumors classified as T1 and T2. Not all of the indications, procedures, or products described may be available in a given country or region or on all generations ofda 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 inU.S. general surgery procedures and worldwide urology procedures.U.S. Procedures OverallU.S. procedure volume with da Vinci Surgical Systems declined 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 growingU.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 largestU.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 largestU.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 theU.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. 32 -------------------------------------------------------------------------------- Table of Contents Recent Business Events and Trends Procedures Overall. Totalda Vinci procedures performed by our customers grew approximately 20% for the three months endedSeptember 30, 2021 , compared to approximately 7% for the three months endedSeptember 30, 2020 . Totalda Vinci procedures performed by our customers grew approximately 32% for the nine months endedSeptember 30, 2021 , as compared with the same period in the prior year. Totalda Vinci procedures declined approximately 1% for the nine months endedSeptember 30, 2020 . The third quarter and year-to-date procedure results for both periods reflect impacts from the COVID-19 pandemic, as noted in the COVID-19 Pandemic section above. Growth in the third quarter of 2021 was impacted by a resurgence of COVID-19. We saw growth in most of the major procedure categories in the third quarter of 2021, most notably in general surgery procedures (particularly bariatrics, cholecystectomies, and hernia repair) and, to a lesser extent, urology and gynecology procedures. The rates of recovery in urology procedures continue to be impacted by the COVID-19 pandemic due to delays in both the diagnosis of and procedures in patient populations that are considered to be at higher risk from COVID-19 infections as well as for conditions that may progress more slowly.U.S. Procedures.U.S. da Vinci procedures grew approximately 16% for the three months endedSeptember 30, 2021 , compared to approximately 7% for the three months endedSeptember 30, 2020 .U.S. da Vinci procedures grew approximately 31% for the nine months endedSeptember 30, 2021 , as compared with the same period in the prior year.U.S. da Vinci procedures declined approximately 3% for the nine months endedSeptember 30, 2020 . As noted in the COVID-19 Pandemic section above, theU.S. procedure results for the three and nine months endedSeptember 30, 2020 , reflected significant disruption caused by the COVID-19 pandemic. Growth in the third quarter of 2021 was impacted by a resurgence of COVID-19 as cases and hospitalizations once again increased. During the third quarter of 2021,U.S. procedure growth was largely attributable to general surgery procedures, most notably bariatric, cholecystectomy, and hernia repair procedures and, to a lesser extent, urology and gynecology procedures. OUS Procedures. OUS da Vinci procedures grew approximately 30% for the three months endedSeptember 30, 2021 , compared to approximately 9% for the three months endedSeptember 30, 2020 . OUS da Vinci procedures grew approximately 34% for the nine months endedSeptember 30, 2021 , compared to approximately 5% for the nine months endedSeptember 30, 2020 . As noted in the COVID-19 Pandemic section above, the OUS procedure results for the three and nine months endedSeptember 30, 2020 , reflected significant disruption caused by the COVID-19 pandemic. Similar toU.S. procedures above, during the third quarter of 2021, OUS da Vinci procedure volumes were impacted as COVID-19 cases and hospitalizations increased in a number of countries. By procedure category, OUS procedure growth was driven by continued growth in urology procedures, most notably prostatectomy and partial nephrectomy procedures, as well as earlier stage growth in general surgery (particularly colorectal), gynecology, and thoracic procedures. The OUS procedure growth rate also reflects continuedda Vinci adoption in European and Asian markets. We saw strong procedure growth inChina , theUK ,South Korea ,Germany , andJapan during the third quarter of 2021. System Demand We placed 336 da Vinci Surgical Systems in the third quarter of 2021, compared to 195 systems in the third quarter of 2020. The increase in systems placed reflects the significant disruption experienced as a result of the COVID-19 pandemic in the third quarter of 2020, as well as procedure growth, more customers trading in da Vinci Si Surgical Systems for fourth generationda Vinci systems in order to access fourth generation instruments and capabilities as well as to standardize their system portfolio, and further customer validation thatda Vinci surgery addresses their quadruple aim objectives. While third quarter 2021 placements grew 72% compared with 2020, future placements of da Vinci Surgical Systems will be impacted by a number of factors: supply chain risks; 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, includingJapan : the timing around governmental tenders and authorizations, includingChina ; 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. A few of these companies include, but are not limited to, Asensus Surgical, Inc.; avateramedicalGmbH ;CMR Surgical Ltd. ; Johnson & Johnson (including their wholly owned subsidiariesAuris Health, Inc. andVerb Surgical Inc. );Medicaroid Corporation ;Medrobotics Corporation ; Medtronic plc; meerecompany Inc.; MicroPort Scientific Corporation; Olympus Corporation;Samsung Group ; Shandong Weigao Group Medical Polymer Company Ltd.; and Titan Medical Inc. 33 -------------------------------------------------------------------------------- Table of Contents 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. InNovember 2019 , we obtained FDA clearance for our SynchroSeal instrument and E-100 generator. Following the FDA clearance, inFebruary 2020 , we received CE mark clearance for both products. InMarch 2020 , we received regulatory clearance inJapan to market both our SynchroSeal instrument and E-100 generator. We received regulatory clearance inSouth Korea to market our SynchroSeal instrument and E-100 generator inJanuary 2020 andAugust 2020 , respectively. 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. InJuly 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. InSeptember 2019 , we received regulatory clearance inJapan to market both our SureForm 45 Curved-Tip stapler and SureForm 45 Gray reload. We received regulatory clearance inSouth Korea to market our SureForm 45 Curved-Tip stapler and SureForm 45 Gray reload inJune 2021 andJuly 2021 , respectively. Not all reloads or staplers are available for use on all systems or in all countries. Da Vinci Endoscope Plus. InJune 2019 , we received CE mark clearance for our da Vinci Endoscope Plus, an enhanced 3D endoscope for use with ourda Vinci X and Xi Surgical Systems. Following the CE mark, inJuly 2019 , we obtained FDA clearance for our da Vinci Endoscope Plus. We have also received regulatory clearances inSouth Korea andJapan to market our da Vinci Endoscope Plus inDecember 2019 andMay 2020 , respectively. The da Vinci Endoscope Plus leverages new sensor technology to allow for increased sharpness and color accuracy. Da Vinci Handheld Camera. InJune 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 ofda Vinci procedures that may require use of a laparoscope, thus eliminating the need for redundant equipment in the operating room and increasing procedure efficiency. InFebruary 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 theU.S. inMay 2020 andJune 2020 , respectively. Ion endoluminal system. InFebruary 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. Our rollout of the Ion system in theU.S. is progressing well, and we are continuing to gather additional clinical evidence. We have placed 98 Ion systems as ofSeptember 30, 2021 . Iris. InFebruary 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 number ofU.S. hospitals to gain initial product experience and insights. 34 -------------------------------------------------------------------------------- Table of Contents Third Quarter 2021 Operational and Financial Highlights •Total revenue increased by 30% to$1.40 billion for the three months endedSeptember 30, 2021 , compared to$1.08 billion for the three months endedSeptember 30, 2020 . The compound annual growth rate between the third quarter of 2019 and the third quarter of 2021 was 12%. •Approximately 395,000da Vinci procedures were performed during the three months endedSeptember 30, 2021 , an increase of 20% compared to approximately 329,000 for the three months endedSeptember 30, 2020 . The compound annual growth rate between the third quarter of 2019 and the third quarter of 2021 was 13%. •Instruments and accessories revenue increased by 20% to$755 million for the three months endedSeptember 30, 2021 , compared to$631 million for the three months endedSeptember 30, 2020 . •Systems revenue increased by 55% to$415 million for the three months endedSeptember 30, 2021 , compared to$268 million during the three months endedSeptember 30, 2020 . •A total of 336 da Vinci Surgical Systems were shipped during the three months endedSeptember 30, 2021 , an increase of 72% compared to 195 systems during the three months endedSeptember 30, 2020 . •As ofSeptember 30, 2021 , we had a da Vinci Surgical System installed base of approximately 6,525 systems, an increase of approximately 11% compared to the installed base of approximately 5,865 systems as ofSeptember 30, 2020 . •Utilization ofda Vinci systems, measured in terms of procedures per system per year, increased 9% relative to the third quarter of 2020. The compound annual growth rate between the third quarter of 2019 and the third quarter of 2021 was 3%. •During the three months endedSeptember 30, 2021 , we placed 28 Ion systems, compared to 11 systems during the three months endedSeptember 30, 2020 . •Gross profit as a percentage of revenue was 69.2% for the three months endedSeptember 30, 2021 , compared to 67.2% for the three months endedSeptember 30, 2020 . •Operating income increased by 64% to$443 million for the three months endedSeptember 30, 2021 , compared to$270 million during the three months endedSeptember 30, 2020 . Operating income included charges for share-based compensation of$123 million and$107 million related to employee stock plans and$6.4 million and$21.7 million of intangible asset-related charges for the three months endedSeptember 30, 2021 , and 2020, respectively. •As ofSeptember 30, 2021 , we had$8.22 billion in cash, cash equivalents, and investments. Cash, cash equivalents, and investments increased by$1.35 billion , compared toDecember 31, 2020 , primarily as a result of cash provided by our operations and proceeds from stock option exercises and employee stock purchases, partially offset by capital expenditures and taxes paid related to net share settlements of equity awards. 35 -------------------------------------------------------------------------------- Table of Contents Results of Operations The following table sets forth, for the periods indicated, certain unaudited Condensed Consolidated Statements of Income information (in millions, except percentages): Three Months EndedSeptember 30 ,
Nine Months Ended
% of total % of total % of total % of total 2021 revenue 2020 revenue 2021 revenue 2020 revenue Revenue: Product$ 1,170.6 83 %$ 898.4 83 %$ 3,481.1 84 %$ 2,521.0 83 % Service 232.7 17 % 179.3 17 % 678.3 16 % 508.3 17 % Total revenue 1,403.3 100 % 1,077.7 100 % 4,159.4 100 % 3,029.3 100 % Cost of revenue: Product 355.8 25 % 287.7 27 % 1,049.1 25 % 868.2 29 % Service 76.1 6 % 65.7 6 % 212.6 5 % 195.7 6 % Total cost of revenue 431.9 31 % 353.4 33 % 1,261.7 30 % 1,063.9 35 % Product gross profit 814.8 58 % 610.7 56 % 2,432.0 59 % 1,652.8 54 % Service gross profit 156.6 11 % 113.6 11 % 465.7 11 % 312.6 11 % Gross profit 971.4 69 % 724.3 67 % 2,897.7 70 % 1,965.4 65 % Operating expenses: Selling, general and administrative 363.3 26 % 298.9 28 % 1,039.5 25 % 886.1 29 % Research and development 165.5 11 % 155.0 14 % 487.6 12 % 445.3 15 % Total operating expenses 528.8 37 % 453.9 42 % 1,527.1 37 % 1,331.4 44 % Income from operations 442.6 32 % 270.4 25 % 1,370.6 33 % 634.0 21 % Interest and other income, net 18.5 1 % 84.8 8 % 65.5 2 % 136.5 5 % Income before taxes 461.1 33 % 355.2 33 % 1,436.1 35 % 770.5 26 % Income tax expense (benefit) 73.9 5 % 38.4 4 % 90.7 3 % 67.3 2 % Net income 387.2 28 % 316.8 29 % 1,345.4 32 % 703.2 24 % Less: net income attributable to noncontrolling interest in joint venture 6.7 1 % 2.9 - % 21.4 - % 7.8 - % Net income attributable toIntuitive Surgical, Inc. $ 380.5 27 %$ 313.9 29 %$ 1,324.0 32 %$ 695.4 24 % Total Revenue Total revenue increased by 30% to$1.4 billion for the three months endedSeptember 30, 2021 , compared to$1.1 billion for the three months endedSeptember 30, 2020 , resulting from 55% higher systems revenue, driven by 72% higher system placements, 20% higher instruments and accessories revenue, driven by approximately 20% higher procedure volume, and 30% higher service revenue. Total revenue increased by 37% to$4.2 billion for the nine months endedSeptember 30, 2021 , compared to$3.0 billion for the nine months endedSeptember 30, 2020 , resulting from 51% higher systems revenue, driven by 58% higher system placements, 32% higher instruments and accessories revenue, driven by approximately 32% higher procedure volume, and 33% higher service revenue. In conjunction with our 2020 COVID-19 Customer Relief Program implemented in the second quarter of 2020, service revenue was reduced by$23 million and$82 million for the three and nine months endedSeptember 30, 2020 , respectively, for service fee credits provided to customers. Revenue denominated in foreign currencies as a percentage of total revenue was approximately 23% and 22% for the three and nine months endedSeptember 30, 2021 , respectively, and 22% and 23% for the three and nine months endedSeptember 30, 2020 , 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 three and nine months endedSeptember 30, 2021 , nor for the three and nine months ended andSeptember 30, 2020 . Revenue generated in theU.S. accounted for 68% and 67% of total revenue for the three and nine months endedSeptember 30, 2021 , and 69% and 68% for the three and nine months endedSeptember 30, 2020 , respectively. We believe that 36 -------------------------------------------------------------------------------- Table of ContentsU.S. revenue has accounted for the large majority of total revenue due toU.S. patients' ability to choose their provider and method of treatment, reimbursement structures supportive of innovation and MIS, and our initial investments focused onU.S. infrastructure. We have been investing in our business in the OUS markets, and our OUS procedures have grown faster in proportion toU.S. procedures. We expect that our OUS procedures and revenue will make up a greater portion of our business in the long term. As the COVID-19 pandemic is expected to continue to cause a strain on hospital resources, as outlined in the COVID-19 Pandemic section above, we cannot reliably estimate the extent total revenue will be impacted in the fourth quarter of 2021 and beyond. The following table summarizes our revenue and system unit shipments for the three and nine months endedSeptember 30, 2021 , and 2020, respectively (in millions, except percentages and unit shipments): Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Revenue Instruments and accessories $ 755.4$ 630.5 $ 2,257.7 $ 1,708.9 Systems 415.2 267.8 1,223.4 812.1 Total product revenue 1,170.6 898.3 3,481.1 2,521.0 Services 232.7 179.4 678.3 508.3 Total revenue$ 1,403.3 $ 1,077.7 $ 4,159.4 $ 3,029.3 United States $ 952.2$ 743.8 $ 2,805.5 $ 2,060.8 OUS 451.1 333.9 1,353.9 968.5 Total revenue$ 1,403.3 $ 1,077.7 $ 4,159.4 $ 3,029.3 % of Revenue - U.S. 68 % 69 % 67 % 68 % % of Revenue - OUS 32 % 31 % 33 % 32 % Instruments and accessories $ 755.4$ 630.5 $ 2,257.7 $ 1,708.9 Services 232.7 179.4 678.3 508.3 Operating lease revenue 72.5 45.7 198.8 127.0 Total recurring revenue$ 1,060.6 $ 855.6 $ 3,134.8 $ 2,344.2 % of Total revenue 76 % 79 % 75 % 77 % Da Vinci Surgical Systems Shipments by Region: U.S. unit shipments 227 116 630 404 OUS unit shipments 109 79 332 206 Total unit shipments* 336 195 962 610 *Systems shipped under operating leases (included in total unit shipments) 139 68 374 197 Da Vinci Surgical Systems Shipments involving System Trade-ins: Unit shipments involving trade-ins 136 78 393 286 Unit shipments not involving trade-ins 200 117 569 324 Ion Systems Shipments 28 11 62 22 37
-------------------------------------------------------------------------------- Table of Contents Product Revenue Three Months EndedSeptember 30, 2021 Product revenue increased by 30% to$1.17 billion for the three months endedSeptember 30, 2021 , compared to$0.90 billion for the three months endedSeptember 30, 2020 . Instruments and accessories revenue increased by 20% to$755 million for the three months endedSeptember 30, 2021 , compared to$631 million for the three months endedSeptember 30, 2020 . The increase in instruments and accessories revenue was driven primarily by procedure growth of approximately 20%. The third quarter 2021 U.S. procedure growth was approximately 16%, driven by growth in general surgery procedures, most notably bariatric, cholecystectomy, and hernia repair procedures and, to a lesser extent, urology and gynecology procedures. The third quarter 2021 OUS procedure growth was approximately 30%, driven by continued growth in urology procedures, most notably prostatectomy and partial nephrectomy procedures, as well as earlier stage growth in general surgery (particularly colorectal), gynecology, and thoracic procedures. Both growth rates were impacted by the disruption caused by the COVID-19 pandemic, as noted in the COVID-19 Pandemic section above. Geographically, the third quarter 2021 OUS procedure growth was driven by procedure expansion inChina , theUK ,South Korea ,Germany , andJapan . Systems revenue increased by 55% to$415 million for the three months endedSeptember 30, 2021 , compared to$268 million for the three months endedSeptember 30, 2020 . The higher third quarter 2021 systems revenue was primarily driven by higher system shipments, higher operating lease revenue, higher lease buyouts, and higher third quarter 2021 ASPs, partially offset by a higher proportion of system shipments under operating leases. During the third quarter of 2021, a total of 336 da Vinci Surgical Systems were shipped compared to 195 systems during the third quarter of 2020. By geography, 227 systems were shipped into theU.S. , 47 intoEurope , 47 intoAsia , and 15 into other markets during the third quarter of 2021, compared to 116 systems shipped into theU.S. , 39 intoEurope , 34 intoAsia , and 6 into other markets during the third quarter of 2020. The increase in systems shipments was primarily driven by decisions in the third quarter of 2020 by customers to defer purchases or leases of systems into future quarters as a result of the COVID-19 pandemic, as well as procedure growth, more customers trading inda Vinci Si Surgical Systems for fourth generationda Vinci Xi andda Vinci X systems in order to access fourth generation instruments and capabilities as well as to standardize their system portfolio, and further customer validation thatda Vinci surgery addresses their quadruple aim objectives. We shipped 166 and 83 da Vinci Surgical Systems under lease arrangements, of which 139 and 68 systems were classified as operating leases, for the three months endedSeptember 30, 2021 , and 2020, respectively. Operating lease revenue was$72.5 million for the three months endedSeptember 30, 2021 , compared to$45.7 million for the three months endedSeptember 30, 2020 . Systems placed as operating leases represented 41% of total shipments during the third quarter of 2021, compared to 35% during the third quarter of 2020. A total of 1,179 da Vinci Surgical Systems were installed at customers under operating lease or usage-based arrangements as ofSeptember 30, 2021 , compared to 806 as ofSeptember 30, 2020 . Revenue from Lease Buyouts was$24.7 million for the three months endedSeptember 30, 2021 , compared to$16.9 million for the three months endedSeptember 30, 2020 . We expect revenue from Lease Buyouts to fluctuate period to period depending 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$1.57 million for the three months endedSeptember 30, 2021 , compared to approximately$1.55 million for the three months endedSeptember 30, 2020 . 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. Nine Months EndedSeptember 30, 2021 Product revenue increased by 38% to$3.5 billion for the nine months endedSeptember 30, 2021 , compared to$2.5 billion for the nine months endedSeptember 30, 2020 . Instruments and accessories revenue increased by 32% to$2.26 billion for the nine months endedSeptember 30, 2021 , compared to$1.71 billion for the nine months endedSeptember 30, 2020 . The increase in instruments and accessories revenue was driven primarily by procedure growth of approximately 32%. The year-to-date 2021 U.S. procedure growth was approximately 31%, driven by growth in general surgery procedures, most notably bariatric, cholecystectomy, and hernia repair procedures, as well as moderate growth in the more mature gynecologic and urologic procedures categories. The year-to-date 2021 OUS procedure growth was approximately 34%, driven by continued growth in urology procedures, most notably prostatectomy and partial nephrectomy procedures, as well as earlier stage growth in general surgery (particularly colorectal), gynecology, and thoracic procedures. Both growth rates were positively impacted by the disruption caused by the COVID-19 pandemic in 2020, as noted in the COVID-19 Pandemic section above. Geographically, the year-to-date 2021 OUS procedure growth was driven by procedure expansion inChina ,Germany ,Japan , theUK , andSouth Korea . 38 -------------------------------------------------------------------------------- Table of Contents Systems revenue increased by 51% to$1,223 million for the nine months endedSeptember 30, 2021 , compared to$812 million for the nine months endedSeptember 30, 2020 . The higher year-to-date 2021 systems revenue was primarily driven by higher system shipments, higher operating lease revenue, higher year-to-date 2021 ASPs, and higher lease buyouts, partially offset by a higher proportion of system shipments under operating leases. During the nine months endedSeptember 30, 2021 , a total of 962 da Vinci Surgical Systems were shipped compared to 610 systems during the nine months endedSeptember 30, 2020 . By geography, 630 systems were shipped into theU.S. , 169 intoEurope , 132 intoAsia , and 31 into other markets during the nine months endedSeptember 30, 2021 , compared to 404 systems shipped into theU.S. , 82 intoEurope , 109 intoAsia , and 15 into other markets during the nine months endedSeptember 30, 2020 . The increase in systems shipments was primarily driven by decisions in the second and third quarters of 2020 by customers to defer purchases or leases of systems into future quarters as a result of the COVID-19 pandemic, as well as procedure growth, more customers trading inda Vinci Si Surgical Systems for fourth generationda Vinci Xi andda Vinci X systems in order to access fourth generation instruments and capabilities as well as to standardize their system portfolio, and further customer validation thatda Vinci surgery addresses their quadruple aim objectives. We shipped 471 and 265 da Vinci Surgical Systems under lease arrangements, of which 374 and 197 systems were classified as operating leases, for the nine months endedSeptember 30, 2021 , and 2020, respectively. Operating lease revenue was$198.8 million for the nine months endedSeptember 30, 2021 , compared to$127.0 million for the nine months endedSeptember 30, 2020 . Systems placed as operating leases represented 39% of total shipments during the nine months endedSeptember 30, 2021 , compared to 32% during the nine months endedSeptember 30, 2020 . Revenue from Lease Buyouts was$69.9 million for the nine months endedSeptember 30, 2021 , compared to$38.5 million for the nine months endedSeptember 30, 2020 . We expect revenue from Lease Buyouts to fluctuate period to period depending 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$1.59 million for the nine months endedSeptember 30, 2021 , compared to approximately$1.54 million for the nine months endedSeptember 30, 2020 . ASP fluctuates from period to period based on geographic and product mix, product pricing, systems shipped involving trade-ins, and changes in foreign exchange rates. Service Revenue Service revenue increased by 30% to$233 million for the three months endedSeptember 30, 2021 , compared to$179 million for the three months endedSeptember 30, 2020 . The increase in service revenue was primarily driven by a larger installed base of da Vinci Surgical Systems producing service revenue, as well as the effects of the Customer Relief Program in the prior year, which resulted in a$23 million decrease in service revenue in the three months endedSeptember 30, 2020 . Service revenue increased by 33% to$678 million for the nine months endedSeptember 30, 2021 , compared to$508 million for the nine months endedSeptember 30, 2020 . The increase in service revenue was primarily driven by a larger installed base of da Vinci Surgical Systems producing service revenue, as well as the effects of the Customer Relief Program in the prior year, which resulted in an$82 million decrease in service revenue in the nine months endedSeptember 30, 2020 . Gross Profit Product gross profit for the three months endedSeptember 30, 2021 , increased 33% to$815 million , representing 69.6% of product revenue, compared to$611 million , representing 68.0% of product revenue, for the three months endedSeptember 30, 2020 . The higher product gross profit for the three months endedSeptember 30, 2021 , was primarily driven by higher product revenue and higher product gross profit margin. The higher product gross profit margin for the three months endedSeptember 30, 2021 , was primarily driven by higher third quarter 2021 ASPs and lower year-over-year excess and obsolete inventory costs, partially offset by higher freight costs. In addition, we incurred period costs associated with abnormally low production in the third quarter of 2020, which did not recur in the third quarter of 2021 as a result of increased production volumes. Product gross profit for the nine months endedSeptember 30, 2021 , increased 47% to$2.4 billion , representing 69.9% of product revenue, compared to$1.7 billion , representing 65.6% of product revenue, for the nine months endedSeptember 30, 2020 . The higher product gross profit for the nine months endedSeptember 30, 2021 , was primarily driven by higher product revenue and higher product gross profit margin. The higher product gross profit margin for the nine months endedSeptember 30, 2021 , was primarily driven by higher year-to-date 2021 ASPs, lower year-over-year excess and obsolete inventory costs, lower year-over-year intangible assets amortization expense, and lower year-over-year costs associated withda Vinci Si product transitions, partially offset by higher share-based compensation expense. In addition, we incurred period costs in the second and third quarters of 2020 associated with abnormally low production, which did not recur in the second and third quarters of 2021 as a result of increased production volumes. 39 -------------------------------------------------------------------------------- Table of Contents Product gross profit for the three and nine months endedSeptember 30, 2021 , included share-based compensation expense of$19.0 million and$50.9 million , respectively, compared with$16.2 million and$43.0 million , for the three and nine months endedSeptember 30, 2020 , respectively. Product gross profit for the three and nine months endedSeptember 30, 2021 , included intangible assets amortization expense of$3.8 million and$12.7 million , respectively, compared with$9.0 million and$26.7 million , for the three and nine months endedSeptember 30, 2020 , respectively. Service gross profit for the three months endedSeptember 30, 2021 , increased 38% to$157 million , representing 67.3% of service revenue, compared to$114 million , representing 63.4% of service revenue, for the three months endedSeptember 30, 2020 . The higher service gross profit for the three months endedSeptember 30, 2021 , was primarily driven by higher service revenue, reflecting a larger installed base of da Vinci Surgical Systems, and higher service gross profit margin. The lower service gross profit margin for the three months endedSeptember 30, 2020 , was primarily driven by the decrease in service revenue as a result of the Customer Relief Program. Service gross profit for the nine months endedSeptember 30, 2021 , increased 49% to$466 million , representing 68.7% of service revenue, compared to$313 million , representing 61.5% of service revenue, for the nine months endedSeptember 30, 2020 . The higher service gross profit for the nine months endedSeptember 30, 2021 , was primarily driven by higher service revenue, reflecting a larger installed base of da Vinci Surgical Systems, and higher service gross profit margin. The lower service gross profit margin for the nine months endedSeptember 30, 2020 , was primarily driven by the decrease in service revenue as a result of the Customer Relief Program. Service gross profit for the three and nine months endedSeptember 30, 2021 , included share-based compensation expense of$6.0 million and$16.9 million , respectively, compared with$7.1 million and$17.8 million , for the three and nine months endedSeptember 30, 2020 , respectively. Service gross profit for the three and nine months endedSeptember 30, 2021 , included intangible asset charges of$0.2 million and$1.9 million , respectively, compared with$0.9 million and$2.7 million , for the three and nine months endedSeptember 30, 2020 , respectively. Selling, General and Administrative Expenses Selling, general and administrative expenses include costs for sales, marketing, and administrative personnel, sales and marketing activities, tradeshow expenses, legal expenses, regulatory fees, and general corporate expenses. Selling, general and administrative expenses for the three months endedSeptember 30, 2021 , increased by 22% to$363 million , compared to$299 million for the three months endedSeptember 30, 2020 . Selling, general and administrative expenses for the nine months endedSeptember 30, 2021 , increased by 17% to$1,040 million , compared to$886 million for the nine months endedSeptember 30, 2020 . The increase in selling, general and administrative expenses for the three and nine months endedSeptember 30, 2021 , was primarily driven by higher headcount, resulting in increased fixed and share-based compensation expense, higher variable compensation, and increased infrastructure to support our growth. In addition, there were higher marketing, travel, and training expenses for the three and nine months endedSeptember 30, 2021 , as compared with the prior year. Selling, general and administrative expenses for the three and nine months endedSeptember 30, 2021 , included share-based compensation expense of$62.5 million and$171.3 million , respectively, compared with$54.2 million and$149.5 million , for the three and nine months endedSeptember 30, 2020 , respectively. Selling, general and administrative expenses for the three and nine months endedSeptember 30, 2021 , included intangible assets amortization expense of$1.8 million and$5.4 million , respectively, compared with$1.8 million and$5.2 million , for the three and nine months endedSeptember 30, 2020 , respectively. Selling, general and administrative expenses were 26% and 25% for the three and nine months endedSeptember 30, 2021 , as a percentage of revenue, compared to 28% and 29% for the three and nine months endedSeptember 30, 2020 , and 25% and 26% for the three and nine months endedSeptember 30, 2019 . Our spending in the third quarter of 2021 reflected a continued but less pronounced curtailment of certain costs as a result of the COVID-19 pandemic, including travel, marketing events, clinical trials, and other related expenses. We expect that these costs will continue to increase to the extent that the impact of COVID-19 decreases and decline to the extent that the impact of COVID-19 increases. In addition, we expect spending to increase overall and as a percentage of sales as we 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. 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 three months endedSeptember 30, 2021 , increased by 7% to$166 million , compared to$155 million for the three months endedSeptember 30, 2020 . Research and development expenses for the nine months endedSeptember 30, 2021 , increased by 9% to$488 million , compared to$445 million for the nine months ended 40 -------------------------------------------------------------------------------- Table of ContentsSeptember 30, 2020 . The increases in research and development expenses for the three and nine months endedSeptember 30, 2021 , were primarily driven by 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. Research and development expenses for the three and nine months endedSeptember 30, 2021 , included share-based compensation expense of$35.4 million and$98.1 million , respectively, compared with$29.5 million and$84.1 million for the three and nine months endedSeptember 30, 2020 , respectively. Research and development expenses for the three and nine months endedSeptember 30, 2021 , included intangible asset-related charges of$0.6 million and$5.3 million , respectively, compared with$10.0 million and$15.0 million for the three and nine months endedSeptember 30, 2020 , 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, for the three and nine months endedSeptember 30, 2021 , was$18.5 million , and$65.5 million , respectively, compared with$84.8 million , and$136.5 million , for the three and nine months endedSeptember 30, 2020 , respectively. The decrease in interest and other income, net, for the three and nine months endedSeptember 30, 2021 , was primarily driven by lower unrealized gains on investments resulting from strategic arrangements, lower interest income earned, despite higher cash and investment balances, due to the decline in average interest rates, and gains on the sale of certain securities in the second quarter of 2020, partially offset by higher foreign exchange losses realized in the second quarter of 2020. We held an equity investment in preferred shares of Broncus, which was reflected in our financial statements on a cost basis. InSeptember 2021 , Broncus completed an IPO. Upon completion of the IPO, the preferred shares were converted to common shares in Broncus, and we recognized a net gain on this investment in the third quarter of 2021 of approximately$8 million . We are restricted from selling these shares for a period of six months. Additionally, during the first quarter of 2021, we recorded an unrealized gain on our investment in Broncus of approximately$14 million . We held an equity investment in preferred shares of InTouch, which was reflected in our financial statements on a cost basis. OnJuly 1, 2020 , Teladoc completed its acquisition of InTouch. Based on the terms of the agreement, we received Teladoc shares on the date of closing and recognized a gain on its investment in the third quarter of 2020 of approximately$45 million . Income Tax Expense Income tax expense for the three months endedSeptember 30, 2021 , was$73.9 million , or 16.0% of income before taxes, compared to$38.4 million , or 10.8% of income before taxes, for the three months endedSeptember 30, 2020 . Income tax expense for the nine months endedSeptember 30, 2021 , was$90.7 million , or 6.3% of income before taxes, compared to$67.3 million , or 8.7% of income before taxes, for the nine months endedSeptember 30, 2020 . Our effective tax rate for the three and nine months endedSeptember 30, 2021 , and 2020, differs from theU.S. federal statutory rate of 21% primarily due to excess tax benefits associated with employee equity plans, the effect of income earned by certain overseas entities being taxed at rates lower than the federal statutory rate, and federal R&D credit benefit, partially offset byU.S. tax on foreign earnings and state income taxes (net of federal benefit). Our effective tax rate for the nine months endedSeptember 30, 2021 , included a one-time benefit of$66.4 million from re-measurement of our Swiss deferred tax assets resulting from the extension of the economic useful life of certain intangible assets. Our effective tax rate for the nine months endedSeptember 30, 2020 , reflected a one-time increase of$36.8 million in unrecognized tax benefits with a corresponding increase to income tax expense. This increase was related to intercompany charges for share-based compensation for relevant periods prior to 2020, triggered by the finalization of aNinth Circuit Court of Appeals opinion involving an independent third party. An additional charge of$11.1 million related to this matter was recorded to income tax expense for the three and nine months endedSeptember 30, 2021 , as a result of additionalIRS guidance issued inJuly 2021 . Our provision for income taxes for the three and nine months endedSeptember 30, 2021 , included excess tax benefits associated with employee equity plans of$41.9 million and$158.9 million , which reduced our effective tax rate by 9.1 and 11.1 percentage points, respectively. Our provision for income taxes for the three and nine months endedSeptember 30, 2020 , included excess tax benefits associated with employee equity plans of$47.9 million and$144.8 million , which reduced our effective tax rate by 13.5 and 18.8 percentage points, respectively. The amount of excess tax benefits or deficiencies will fluctuate from period to period based on the price of our stock, the volume of share-based instruments settled or vested, and the value assigned to employee equity awards underU.S. GAAP, which results in increased income tax expense volatility. 41 -------------------------------------------------------------------------------- Table of Contents We file federal, state, and foreign income tax returns in manyU.S. and OUS jurisdictions. Years before 2016 are closed for the significant jurisdictions. Certain of our unrecognized tax benefits could change due to activities of various tax authorities, including evolving interpretations of existing tax laws in the jurisdictions we operate, potential assessment of additional tax, possible settlement of audits, or through normal expiration of various statutes of limitations, which could affect our effective tax rate in the period in which they change. Due to the uncertainty related to the timing and potential outcome of audits, we cannot estimate the range of reasonably possible change in unrecognized tax benefits that may occur in the next 12 months. We are subject to the examination of our income tax returns by theIRS 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 Attributable to Noncontrolling Interest in Joint Venture Net income attributable to noncontrolling interest in Joint Venture for the three and nine months endedSeptember 30, 2021 , was$6.7 million and$21.4 million , respectively. Net income attributable to noncontrolling interest in Joint Venture for the three and nine months endedSeptember 30, 2020 , was$2.9 million and$7.8 million , respectively. The increase in net income attributable to noncontrolling interest in Joint Venture was primarily due to increased sales inChina during the three and nine months endedSeptember 30, 2021 , as well as re-measurement losses related to contingent consideration during the three and nine months endedSeptember 30, 2020 , which did not recur in the same periods of 2021 as the contingent consideration has been finalized and paid. 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$1.35 billion to$8.22 billion as ofSeptember 30, 2021 , from$6.87 billion as ofDecember 31, 2020 , primarily from cash provided by our operations and proceeds from stock option exercises and employee stock purchases, partially offset by capital expenditures and taxes paid related to net share settlements of equity awards. Our cash requirements depend on numerous factors, including market acceptance of our products, the resources we devote to developing and supporting our products, and other factors. We expect to continue to devote substantial resources to expand procedure adoption and acceptance of our products. We have made substantial investments in our commercial operations, product development activities, facilities, and intellectual property. Based upon our business model, we anticipate that we will continue to be able to fund future growth through cash provided by our operations. We believe that our current cash, cash equivalents, and investment balances, together with income to be derived from the sale of our products, will be sufficient to meet our liquidity requirements for the foreseeable future. See "Item 7A. Quantitative and Qualitative Disclosures About Market Risk" in our Form 10-K for the fiscal year endedDecember 31, 2020 , for discussion on the impact of interest rate risk and market risk on our investment portfolio. Condensed Consolidated Cash Flow Data The following table summarizes our cash flows for the nine months endedSeptember 30, 2021 , and 2020 (in millions): Nine Months Ended September 30, 2021 2020 Net cash provided by (used in) Operating activities$ 1,521.7 $ 857.3 Investing activities (1,820.5) (606.3) Financing activities 24.4 (45.9)
Effect of exchange rates on cash, cash equivalents, and restricted cash
(2.3) (2.0) Net increase (decrease) in cash, cash equivalents, and restricted cash$ (276.7) $ 203.1 42
-------------------------------------------------------------------------------- Table of Contents Operating Activities For the nine months endedSeptember 30, 2021 , net cash provided by operating activities of$1,522 million exceeded our net income of$1,345 million , primarily due to the following reasons: 1.Our net income included non-cash charges of$534 million , consisting primarily of the following significant items: share-based compensation of$331 million ; depreciation expense and losses on the disposal of property, plant, and equipment of$209 million ; changes in deferred income taxes of$(41) million ; and amortization of intangible assets of$21 million . 2.The non-cash charges outlined above were partially offset by changes in operating assets and liabilities that resulted in$357 million of cash used by operating activities during the nine months endedSeptember 30, 2021 . Prepaid expenses and other assets increased by$217 million , primarily due to an increase in prepaid taxes, driven by the timing of tax payments, and an increase in leasing. Inventory, including the effect of systems inventory built and transferred to property, plant, and equipment as a result of systems placed under operating lease and usage-based arrangements, increased by$189 million , primarily to address the growth in the business as well as to mitigate risks of disruption that could arise from trade, supply, or other matters. Refer to further details in the supplemental cash flow information in Note 4 to the Condensed Consolidated Financial Statements (Unaudited) included in Item 1, Part I. Accounts receivable increased by$55 million , primarily due to the timing of collections. The unfavorable impact of these items on cash provided by operating activities was partially offset by a$36 million increase in accounts payable, primarily due to the timing of payments and vendor billings, a$35 million increase in other liabilities, primarily due to the timing of payments, and a$30 million increase in accrued compensation and employee benefits, primarily due to higher headcount and variable compensation. Investing Activities Net cash used in investing activities for the nine months endedSeptember 30, 2021 , consisted primarily of purchases of investments (net of proceeds from sales and maturities of investments) of$1,609 million , the acquisition of property and equipment of$203 million , and the acquisition of a business, net of cash acquired, of$9 million . We invest predominantly in high quality, fixed income securities. Our investment portfolio may, at any time, contain investments inU.S. treasury andU.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 provided by financing activities during the nine months endedSeptember 30, 2021 , consisted primarily of proceeds from stock options and exercises and employee stock purchases of$245 million , partially offset by taxes paid on behalf of employees related to net share settlements of vested employee stock purchases of$201 million and the payment of deferred purchase consideration from prior acquisitions of$19 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 increase further in 2022. We intend to fund these needs with cash generated from operations. Critical Accounting Estimates The discussion and analysis of our financial condition and results of operations are based upon our Financial Statements, which have been prepared in accordance withU.S. GAAP. The preparation of these Financial Statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses. On an ongoing basis, we evaluate our critical accounting estimates. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. There have been no new or material changes to the critical accounting estimates discussed in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2020 , that are of significance, or potential significance, to us. 43
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