ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Open surgery remains the predominant form of surgery and is used in almost every area of the body. However, the large incisions required for open surgery create trauma to patients, typically resulting in longer hospitalization and recovery times, increased hospitalization costs, and additional pain and suffering relative to minimally invasive surgery (“MIS”), where MIS is available. For over three decades, MIS has reduced trauma to patients by allowing selected surgeries to be performed through small ports rather than large incisions. MIS has been widely adopted for certain surgical procedures.
Da Vinci Surgical Systems enable surgeons to extend the benefits of MIS to many patients who would otherwise undergo a more invasive surgery by using computational, robotic, and imaging technologies to overcome many of the limitations of traditional open surgery or conventional MIS. Surgeons using a da Vinci Surgical System operate while seated comfortably at a console viewing a 3D, high-definition image of the surgical field. This immersive console connects surgeons to the surgical field and their instruments. While seated at the console, the surgeon manipulates instrument controls in a natural manner, similar to open surgical technique. Our technology is designed to provide surgeons with a range of articulation of the surgical instruments used in the surgical field analogous to the motions of a human wrist, while filtering out the tremor inherent in a surgeon’s hand. In designing our products, we focus on making our technology easy and safe to use.
Our da Vinci products fall into five broad categories: da Vinci Surgical Systems, da Vinci instruments and accessories, da Vinci Stapling, da Vinci Energy, and da Vinci Vision, including Firefly Fluorescence imaging systems (“Firefly”) and da Vinci Endoscopes. We also provide a comprehensive suite of services, training, and education programs. Within our integrated ecosystem, our products are designed to decrease variability in surgery by offering dependable, consistent functionality and user experiences for surgeons seeking better outcomes. We take a holistic approach offering intelligent technology and systems designed to work together to make MIS intervention more available and applicable.
We have commercialized the following da Vinci Surgical Systems: the da Vinci standard Surgical System in 1999, the da Vinci S Surgical System in 2006, the da Vinci Si Surgical System in 2009, and the fourth generation da Vinci Xi Surgical System in 2014. We have extended our fourth generation platform by adding the da Vinci X Surgical System, commercialized in the second quarter of 2017, and the da Vinci SP Surgical System, commercialized in the third quarter of 2018. We are early in the launch of our da Vinci SP Surgical System, and we have placed 29 da Vinci SP Surgical Systems in 2019 and have an installed base of 44 as of December 31, 2019. Our plans for the rollout of the da Vinci SP Surgical System include putting systems in the hands of experienced da Vinci users first while we optimize training pathways and our supply chain. We received FDA clearances for the da Vinci SP Surgical System for urological and certain transoral procedures. We also received clearance in South Korea where the da Vinci SP Surgical System may be used for a broad set of procedures. We plan to seek FDA clearances for additional indications for da Vinci SP over time. The success of the da Vinci SP Surgical System is dependent on positive experiences and improved clinical outcomes for the procedures for which it has been cleared as well as securing additional clinical clearances. All da Vinci systems include a surgeon’s console (or consoles), imaging electronics, a patient-side cart, and computational hardware and software.
We offer over 80 different multi-port da Vinci instruments to provide surgeons with flexibility in choosing the types of tools needed to perform a particular surgery. These multi-port instruments are generally robotically controlled and provide end effectors (tips) that are similar to those used in either open or laparoscopic surgery. We offer advanced instrumentation for the da Vinci Xi and da Vinci X platforms, including the da Vinci Vessel Sealer Extend and da Vinci Stapler products, to provide surgeons with sophisticated, computer-aided tools to precisely and efficiently interact with tissue. Da Vinci X and da Vinci Xi Surgical Systems share the same instruments whereas the da Vinci Si Surgical System uses instruments that are not compatible with X or Xi systems. We currently offer nine core instruments on our da Vinci SP Surgical System. We plan to expand the SP instrument offering over time.
Training technologies include our Intuitive Simulation products, our Intuitive Telepresence remote case observation and telementoring tools, and our dual console for use in surgeon proctoring and collaborative surgery.
During the first quarter of 2019, the FDA cleared our Ion endoluminal system to enable minimally invasive biopsies in the lung. Our Ion system extends our commercial offering beyond surgery into diagnostic procedures with this first application. We are introducing the Ion system in the U.S. in a measured fashion while we optimize training pathways and our supply chain and collect additional clinical data. We are early in the launch and have placed 10 Ion systems for commercial use through December 31, 2019, which are not included in our da Vinci Surgical System installed base. We have also placed 6 Ion systems with hospitals for gathering clinical data.
The success of new product introductions depends on a number of factors including, but not limited to, pricing, competition, market and consumer acceptance, the effective forecasting and management of product demand, inventory levels, the management of manufacturing and supply costs, and the risk that new products may have quality or other defects in the early stages of introduction.
Business Model
Overview
We generate revenue from the placements of da Vinci Surgical Systems, in sales or sales-type lease arrangements where revenue is recognized up-front or in operating lease transactions and usage-based models where revenue is recognized over time. We earn recurring revenue from the sales of instruments, accessories, and services, as well as the revenue from operating leases. The da Vinci Surgical System generally sells for between $0.5 million and $2.5 million, depending upon the model, configuration, and geography, and represents a significant capital equipment investment for our customers when purchased. Our instruments and accessories have limited lives and will either expire or wear out as they are used in surgery, at which point they need to be replaced. We generally earn between $700 and $3,500 of instrument and accessory revenue per surgical procedure performed, depending on the type and complexity of the specific procedures performed and the number and type of instruments used. We typically enter into service contracts at the time systems are sold or leased at an annual fee between $80,000 and $190,000, depending upon the configuration of the underlying system and composition of the services offered under the contract. These service contracts have generally been renewed at the end of the initial contractual service periods.
We generate revenue from the placements of the Ion endoluminal system in a business model consistent with the da Vinci Surgical System model described above. We generate revenue from the placement of Ion systems, and we earn recurring revenue from the sales of instruments and accessories used in biopsies and ongoing system service. We are introducing the Ion system in the U.S. in a measured fashion. For the year ended December 31, 2019, the associated impact to revenue and gross margin was not significant.
Recurring Revenue
Recurring revenue consists of instrument and accessory revenue, service revenue, and operating lease revenue. Recurring revenue increased to $3.2 billion, or 72% of total revenue in 2019, compared with $2.6 billion, or 71% of total revenue in 2018, and $2.2 billion, or 71% of total revenue in 2017.
Instrument and accessory revenue has grown at a faster rate than systems revenue over time. Instrument and accessory revenue increased to $2.4 billion in 2019, compared with $2.0 billion in 2018 and $1.6 billion in 2017. The growth of instrument and accessory revenue largely reflects continued procedure adoption.
Service revenue growth has been driven by the growth of the base of installed da Vinci Surgical Systems. The installed base of da Vinci Surgical Systems grew 12% to approximately 5,582 at December 31, 2019; 13% to approximately 4,986 at December 31, 2018; and 13% to approximately 4,409 at December 31, 2017. Service revenue increased to $724 million in 2019, compared with $635 million in 2018 and $573 million in 2017.
Intuitive System Leasing
Since 2013, we have entered into sales-type and operating lease arrangements directly with certain qualified customers as a way to offer customers flexibility in how they acquire systems and expand their robotic-assisted programs while leveraging our balance sheet. These leases generally have commercially competitive terms as compared with other third-party entities that offer equipment leasing. We have also entered into usage-based arrangements with larger customers that have committed da Vinci programs where we charge for the system and service as the systems are utilized. We include operating and sales-type leases, and systems placed under usage-based arrangements, in our system shipment and installed base disclosures. We exclude operating lease-related revenue, usage-based revenue, and Ion system revenue from our da Vinci Surgical System average selling price (“ASP”) computations.
In the years ended December 31, 2019, 2018, and 2017, we shipped 425, 272, and 139 systems, respectively, under lease and usage-based arrangements, of which 384, 229, and 108 systems, respectively, were operating lease and usage-based arrangements. Revenue from operating lease arrangements is generally recognized on a straight-line basis over the lease term. More recently, we have entered into usage-based arrangements with certain large customers whereby system and service revenue is recognized as the systems are used. We set operating lease and usage-based pricing at a modest premium relative to purchased systems reflecting the time value of money and, in the case of usage-based arrangements, the risk that system utilization may fall short of anticipated levels. The proportion of revenue recognized from usage-based arrangements has not been significant and has been included in our operating lease metrics herein. Operating lease revenue has grown at a faster rate than overall systems revenue and was $106.9 million, $51.4 million, and $25.9 million for the years ended December 31, 2019, 2018, and 2017, respectively. Generally, lease transactions generate similar gross margins as our sale transactions. As of December 31, 2019, a total of 658 da Vinci Surgical Systems were installed at customers under operating lease or usage-based arrangements.
Our system leasing and usage-based models provide customers with flexibility regarding how they acquire or obtain access to our systems. We believe that these alternative financing structures have been effective and well-received, and we are willing to expand the proportion of these structures based on customer demand. As revenue for operating leases and usage-based
systems is recognized over time, total systems revenue growth is reduced in a period when the number of operating lease and usage-based placements increases as a proportion of total system placements.
Our exposure to the credit risks relating to our lease financing arrangements may increase if our customers are adversely affected by changes in healthcare laws, coverage and reimbursement, economic pressures or uncertainty, or other customer-specific factors. Also, usage-based leases generally contain no minimum payments; therefore, customers may exit such arrangements without paying a financial penalty to us.
For some operating lease arrangements, our customers are provided with the right to purchase the leased system at certain points during and/or at the end of the lease term. Revenue generated from customer purchases of systems under operating lease arrangements (“Lease Buyouts”) was $92.8 million, $48.8 million, and $39.5 million for the years ended December 31, 2019, 2018, and 2017, respectively. We expect that revenue recognized from customer exercises of the buyout options will fluctuate based on the timing of when, and if, customers choose to exercise their buyout options.
Systems Revenue
System placements are driven by procedure growth in most markets. In geographies where da Vinci procedure adoption is in an early stage, system sales will precede procedure growth. System placements also vary due to seasonality largely aligned with hospital budgeting cycles. We typically place a higher proportion of annual system placements in the fourth quarter and a lower proportion in the first quarter as customer budgets are reset. Systems revenue grew 19% to $1,346 million in 2019; 21% to $1,127 million in 2018; and 16% to $928 million in 2017. Systems revenue is also affected by the proportion of system placements under operating lease and usage-based arrangements, recurring operating lease and usage-based revenue, operating lease buyouts, product mix, ASPs, trade-in activities, and customer mix.
Procedure Mix / Products
Our da Vinci Surgical Systems are generally used for soft tissue surgery for areas of the body between the pelvis and the neck, primarily in general surgery, gynecologic surgery, urologic surgery, cardiothoracic surgery, and head and neck surgery. Within these categories, procedures range in complexity from cancer and other highly complex procedures to less complex procedures for benign conditions. Cancer and other highly complex procedures tend to be reimbursed at higher rates than less complex procedures for benign conditions. Thus, hospitals are more sensitive to the costs associated with treating less complex, benign conditions. Our strategy is to provide hospitals with attractive clinical and economic solutions across the spectrum of procedure complexity. Our fully featured da Vinci Xi Surgical System with advanced instruments, including the EndoWrist Vessel Sealer and EndoWrist Stapler products, and our Integrated Table Motion product targets the more complex procedure segment. Our da Vinci X Surgical System is targeted towards price sensitive markets and procedures. Our da Vinci SP Surgical System complements the da Vinci Xi and X Surgical Systems by enabling surgeons to access narrow workspaces.
Procedure Seasonality
More than half of da Vinci procedures performed are for benign conditions, most notably hernia repairs, hysterectomies, and cholecystectomies. These benign procedures and other short-term elective procedures tend to be more seasonal than cancer operations and surgeries for other life threatening conditions. Seasonality in the U.S. for these procedures for benign conditions typically results in higher fourth quarter procedure volume when more patients have met annual deductibles and lower first quarter procedure volume when deductibles are reset. Seasonality outside the U.S. varies and is more pronounced around local holidays and vacation periods.
Distribution Channels
We provide our products through direct sales organizations in the U.S., Europe (excluding Spain, Portugal, Italy, Greece, and most Eastern European countries), China, Japan, South Korea, India, and Taiwan. In May and December 2018, we began direct operations in India and Taiwan, respectively. In January 2019, our Intuitive-Fosun joint venture began direct sales for da Vinci products and services in China. In the remainder of our OUS markets, we provide our products through distributors.
Regulatory Activities
Overview
Our products must meet the requirements of a large and growing body of international standards that govern the product safety, efficacy, advertising, labeling, safety reporting design, manufacture, materials content and sourcing, testing, certification, packaging, installation, use, and disposal of our products. Examples of such standards include electrical safety standards, such as those of the International Electrotechnical Commission, and composition standards, such as the Reduction of Hazardous Substances and the Waste Electrical and Electronic Equipment Directives. Failure to meet these standards could limit our ability to market our products in those regions that require compliance to such standards.
Our products and operations are also subject to increasingly stringent medical device, privacy, and other regulations by regional, federal, state, and local authorities. We anticipate that timelines for the introduction of new products and/or indications may be extended relative to past experience as a result of these regulations.
Clearances and Approvals
We have generally obtained the clearances required to market our products associated with our da Vinci Surgical Multiport Systems (Standard, S, Si, Xi, and X systems) for our targeted surgical specialties within the U.S., South Korea, Japan, and the European markets in which we operate. Between 2017 and 2019, we obtained regulatory clearances for the following products:
•In November 2019, we obtained FDA clearance for our SynchroSeal instrument and E-100 generator.
•In July 2019, we obtained FDA clearance for our SureForm 45 Curved-Tip stapler and SureForm 45 Gray reload, which round out our SureForm 45 portfolio.
•In June 2019, we received CE mark clearance for our da Vinci Endoscope Plus for the da Vinci X/Xi Surgical Systems in Europe. Following the CE mark, in July 2019, we obtained FDA clearance for our da Vinci Endoscope Plus.
•In June 2019, we obtained FDA clearance for our da Vinci Handheld Camera.
•In February 2019, we obtained FDA clearance for our Ion endoluminal system, our new flexible, robotic-assisted, catheter-based platform, designed to navigate through very small lung airways to reach peripheral nodules for biopsies. We are introducing the Ion endoluminal system in a measured fashion while we optimize training pathways and our supply chain and collect additional clinical data. We have placed 10 Ion systems for commercial use through December 31, 2019.
•In February 2019, we obtained FDA clearance for our IRIS augmented reality product. IRIS is a service that delivers a 3D image of the patient anatomy (initially targeting kidneys) to aid surgeons in both pre- and intra-operative settings. We are in the early stages of an IRIS pilot study in the field at a small group of U.S. hospitals to gain initial product experience and insights.
•In December 2018, we received regulatory clearance for our da Vinci Xi Surgical System in China. The Xi clearance does not include advanced energy or stapling products that attach to the Xi system. Separate clearances are required for each of these products by China National Medical Products Administration (“NMPA”).
•In October 2018, the China National Health Commission published on its official website the quota for major medical equipment to be imported and sold in China through 2020. The government will allow the sale of 154 new surgical robots into China, which could include da Vinci Surgical Systems as well as surgical systems introduced by others. As of December 31, 2019, we have sold 57 da Vinci Surgical Systems under this quota. Future sales of da Vinci Surgical Systems under the quota are uncertain, as they are dependent on hospitals completing a tender process and receiving associated approvals.
•In July 2018, we obtained FDA clearance to market SureForm 60, our da Vinci EndoWrist 60mm Stapler. In January 2019, we obtained FDA clearance to market SureForm 45. We have also received regulatory clearance in South Korea and Japan to market SureForm 60 and SureForm 45 and 60.
•In May 2018, we obtained FDA clearance for the da Vinci SP Surgical System for urologic surgical procedures that are appropriate for a single port approach. In March 2019, we obtained FDA clearance for the da Vinci SP Surgical System for certain transoral procedures. We also received regulatory clearance for the da Vinci SP Surgical System in South Korea in May 2018. We continue to introduce the da Vinci SP Surgical System in a measured fashion while we optimize training pathways and our supply chain. We have placed 29 da Vinci SP Surgical Systems in 2019 and have an installed base of 44 as of December 31, 2019.
•In April 2018, we obtained FDA clearance for our da Vinci Vessel Sealer Extend.
•In April 2017, we received CE mark clearance for our da Vinci X Surgical System in Europe. Following the CE mark, in May 2017, we obtained FDA clearance to market our da Vinci X Surgical System in the U.S. We received regulatory clearance for the da Vinci X Surgical System in South Korea and Japan in September 2017 and April 2018, respectively. Regulatory clearances for the da Vinci X Surgical System may be received in other markets over time.
Refer to the descriptions of our products that received regulatory clearances in 2019 and 2018 in the New Product Introductions section below.
The Japanese Ministry of Health, Labor, and Welfare (“MHLW”) considers reimbursement for procedures in April of even-numbered years. The process for obtaining reimbursement requires Japanese university hospitals and surgical societies, with our support, to seek reimbursement. There are multiple pathways to obtain reimbursement for procedures, including those that require in-country clinical data/economic data. In April 2012 and April 2016, the MHLW granted reimbursement status for da Vinci Prostatectomy (“dVP”) and partial nephrectomy, respectively. Most prostatectomies and partial nephrectomies were open procedures prior to da Vinci reimbursement. Da Vinci procedure reimbursement for dVP and partial nephrectomy procedures are higher than open procedure reimbursements. An additional 12 da Vinci procedures were granted reimbursement effective April 1, 2018, including gastrectomy, low anterior resection, lobectomy, and hysterectomy, for both malignant and benign conditions. These additional 12 reimbursed procedures have varying levels of conventional, laparoscopic penetration and will be reimbursed at rates equal to the conventional, laparoscopic procedures. Given the reimbursement level and laparoscopic penetration for these 12 procedures, there can be no assurance that adoption will occur or that the adoption pace for these procedures will be similar to any other da Vinci procedures. If these procedures are not adopted and we are not successful in obtaining adequate procedure reimbursements for additional procedures, then the demand for our products in Japan could be limited.
Recalls and Corrections
Medical device companies have regulatory obligations to correct or remove medical devices in the field that could pose a risk to health. The definition of “recalls and corrections” is expansive and includes repair, replacement, inspections, relabeling, and issuance of new or additional instructions for use or reinforcement of existing instructions for use and training when such actions are taken for specific reasons of safety or compliance. These field actions require stringent documentation, reporting, and monitoring worldwide. There are other actions that a medical device manufacturer may take in the field without reporting including, but not limited to, routine servicing and stock rotations.
As we determine whether a field action is reportable in any regulatory jurisdiction, we prepare and submit notifications to the appropriate regulatory agency for the particular jurisdiction. Regulators can require the expansion, reclassification, or change in scope and language of the field action. In general, upon submitting required notifications to regulators regarding a field action that is a recall or correction, we will notify customers regarding the field action, provide any additional documentation required in their national language, and arrange, as required, return or replacement of the affected product or a field service visit to perform the correction.
Field actions as well as certain outcomes from regulatory activities can result in adverse effects on our business, including damage to our reputation, delays by customers of purchase decisions, reduction or stoppage of the use of installed systems, and reduced revenue as well as increased expenses.
Procedures
We model patient value as equal to procedure efficacy / invasiveness. In this equation, procedure efficacy is defined as a measure of the success of the surgery in resolving the underlying disease and invasiveness is defined as a measure of patient pain and disruption of regular activities. When the patient value of a da Vinci procedure is greater than that of alternative treatment options, patients may benefit from seeking out surgeons and hospitals that offer da Vinci Surgery, which could potentially result in a local market share shift. Adoption of da Vinci procedures occurs procedure by procedure and market by market and is driven by the relative patient value and total treatment costs of da Vinci procedures as compared to alternative treatment options for the same disease state or condition.
Worldwide Procedures
Our da Vinci systems and instruments are regulated independently in various countries and regions of the world. The discussion of indications for use and representative or target procedures is intended solely to provide an understanding of the market for da Vinci products and is not intended to promote for sale or use any Intuitive Surgical product outside of its licensed or cleared labeling and indications for use.
The adoption of robotic-assisted surgery using the da Vinci Surgical System has the potential to grow for those procedures that offer greater patient value than non-da Vinci alternatives and competitive total economics for healthcare providers. Our da Vinci Surgical Systems are used primarily in general surgery, gynecologic surgery, urologic surgery, cardiothoracic surgery, and head and neck surgery. We focus our organization and investments on developing, marketing, and training products and services for procedures in which da Vinci can bring patient value relative to alternative treatment options and/or economic benefit to healthcare providers. Target procedures in general surgery include hernia repair (both ventral and inguinal) and colorectal procedures. Target procedures in gynecology include da Vinci hysterectomy (“dVH”), for both cancer and benign conditions, and sacrocolpopexy. Target procedures in urology include da Vinci prostatectomy (“dVP”) and da Vinci partial nephrectomy. In cardiothoracic surgery, target procedures include da Vinci lobectomy and da Vinci mitral valve repair. In head
and neck surgery, target procedures include certain procedures resecting benign and malignant tumors classified as T1 and T2. Not all the indications, procedures, or products described may be available in a given country or region or on all generations of da Vinci Surgical Systems. Surgeons and their patients need to consult the product labeling in their specific country and for each product in order to determine the cleared uses, as well as important limitations, restrictions, or contraindications.
In 2019, approximately 1,229,000 surgical procedures were performed with da Vinci Surgical Systems, compared with approximately 1,038,000 and 877,000 surgical procedures performed with da Vinci Surgical Systems in 2018 and 2017, respectively. The growth in our overall procedure volume in 2019 was driven by growth in U.S. general surgery procedures and worldwide urology procedures.
U.S. Procedures
Overall U.S. procedure volume with da Vinci Surgical Systems grew to approximately 883,000 in 2019, compared with approximately 753,000 in 2018 and approximately 644,000 in 2017. General surgery was our largest and fastest growing U.S. specialty in 2019 with procedure volume that grew to approximately 421,000 in 2019, compared with approximately 325,000 in 2018 and approximately 246,000 in 2017. Gynecology was our second largest U.S. surgical specialty in 2019 with procedure volume that grew to approximately 282,000 in 2019, compared with approximately 265,000 in 2018 and approximately 252,000 in 2017. Urology was our third largest U.S. surgical specialty in 2019 with procedure volume that grew to approximately 138,000 in 2019, compared with approximately 128,000 in 2018 and approximately 118,000 in 2017.
Procedures Outside of the U.S.
Overall OUS procedure volume with da Vinci Surgical Systems grew to approximately 346,000 in 2019, compared with approximately 285,000 in 2018 and approximately 233,000 in 2017. Procedure growth in most OUS markets was driven largely by urology procedure volume, which grew to approximately 206,000 in 2019, compared with approximately 175,000 in 2018 and approximately 149,000 in 2017. General surgery and gynecology procedures also contributed to OUS procedure growth.
Recent Business Events and Trends
Procedures
Overall. Total da Vinci procedures grew approximately 18% for the year ended December 31, 2019, compared with approximately 18% for the year ended December 31, 2018. U.S. procedure growth was approximately 17% for the year ended December 31, 2019, compared with approximately 17% for the year ended December 31, 2018. 2019 U.S. procedure growth was largely attributable to growth in general surgery procedures, most notably hernia repair, cholecystectomy, colorectal, and bariatric procedures. U.S. procedure growth was also driven by growth in thoracic procedures, as well as moderate growth in more mature urologic and gynecologic procedure categories.
Procedure volume OUS grew approximately 21% for the year ended December 31, 2019, compared with approximately 22% for the year ended December 31, 2018. 2019 OUS procedure growth was driven by continued growth in urologic procedures, including prostatectomies and nephrectomies, and earlier stage growth in general surgery (particularly colorectal), gynecologic, and thoracic procedures. We believe growth in these global markets is being driven by increased acceptance among surgeons and health systems, supported by expanded global evidence validating the clinical and economic value of da Vinci procedures.
U.S. General Surgery. In 2019, general surgery was our largest and fastest growing specialty in the U.S. with procedure volume that grew to approximately 421,000 in 2019, compared with approximately 325,000 in 2018 and approximately 246,000 in 2017. Inguinal and ventral hernia repairs contributed the most incremental procedures in 2019, as they did in 2018 and 2017. We believe that growth in da Vinci hernia repair reflects improved clinical outcomes within certain patient populations, as well as potential cost benefits relative to certain alternative treatments. We believe hernia repair procedures represent a significant opportunity with the potential to drive growth in future periods. However, given the differences in surgical complexity associated with treatment of various hernia patient populations and varying surgeon opinion regarding optimal surgical technique, it is difficult to estimate the timing of and to what extent da Vinci hernia repair procedure volume will grow in the future. We expect a large portion of hernia repairs will continue to be performed via different modalities of surgery.
Adoption of da Vinci for colorectal procedures, which includes several underlying procedures including low anterior resections for rectal cancers and certain colon procedures for benign and cancerous conditions, has been ongoing for several years and is supported by our recently launched technologies, such as the EndoWrist Staplers and energy devices and Integrated Table Motion.
During 2019, we have seen increasing contributions to growth from other U.S. general surgery procedures, including cholecystectomy and bariatric procedures. Given the already very high level of laparoscopic techniques used in cholecystectomy, it is unclear whether growth is sustainable and to what extent da Vinci cholecystectomy may be adopted. Our third quarter 2018 introduction of the SureForm 60mm stapler product provides surgeons a better optimized robotic tool set for bariatric procedures.
U.S. Gynecology. In 2019, growth in gynecology procedures in the U.S. increased modestly compared to 2018. Procedure volume was approximately 282,000 in 2019, compared with approximately 265,000 in 2018 and approximately 252,000 in 2017, driven by growth in benign hysterectomy procedures and, to a lesser extent, growth in hysterectomy for cancer. Combining robotic, laparoscopic, and vaginal approaches, MIS represents about 80% of the U.S. hysterectomy market for benign conditions. We believe that our growth in gynecologic procedures over the past several years has primarily been driven by consolidation of gynecologic procedures into higher volume surgeons that focus on cancer and complex surgeries.
Global Urology. Along with U.S. general surgery, global urology procedures have also been a strong contributor to our overall procedure growth. In the U.S., dVP is the standard of care for the surgical treatment of prostate cancer, and we believe growth is largely aligned with surgical volumes of prostate cancer. 2019 growth in U.S. dVP procedures was consistent with growth in 2018. For OUS, dVP is at varying states of adoption in different areas of the world but is the largest overall da Vinci procedure. 2019 growth in OUS dVP procedures was consistent with growth in 2018.
Kidney cancer procedures have also been a strong contributor to our recent global urology procedure growth. Clinical publications have demonstrated that the use of a da Vinci system increases the likelihood that a patient will receive nephron sparing surgery through a partial nephrectomy, which is typically the surgical society guideline recommended therapy.
OUS Procedures. The 2019 OUS procedure growth rate reflects continued da Vinci adoption in European and Asian markets. In 2018 and the first quarter of 2019, procedure growth in China moderated, as the previous systems quota expired at the end of 2015 and the systems installed in China are highly utilized. In October 2018, the China National Health Commission announced a new quota to allow the sale of 154 new surgical robots into China through 2020, which could include da Vinci Surgical Systems. This quota applies to the da Vinci Si and recently approved da Vinci Xi Surgical Systems (refer to the previous discussion in the “Clearances and Approvals” section), as well as competitors’ products when and if cleared by NMPA. Sales of da Vinci Surgical Systems under the quota are uncertain, as they are dependent on provincial allocation processes and hospitals completing a tender process and receiving associated approvals. In the last three quarters of 2019, procedure growth in China accelerated, as initial systems placed during these quarters provided additional capacity in the field. In Japan, we experienced strong procedure growth after receiving the national reimbursements for dVP and partial nephrectomy in 2012 and 2016, respectively. However, as adoption for these procedures has progressed towards higher levels of penetration, growth in these two urologic procedures has moderated. A total of 12 additional da Vinci procedures were granted national reimbursement status effective April 1, 2018, including gastrectomy, low anterior resection, lobectomy, and hysterectomy, for both malignant and benign conditions. Procedure growth in Japan has accelerated since the new procedures were granted reimbursement status. However, these additional 12 reimbursed procedures have varying levels of conventional laparoscopic penetration and are reimbursed at rates equal to the conventional laparoscopic procedures. Given the reimbursement level and laparoscopic penetration for these procedures, there can be no assurance that adoption will occur or that the adoption pace for these procedures will be similar to any other da Vinci procedures. If these procedures are not adopted and we are not successful in obtaining adequate procedure reimbursement for additional procedures, then the demand for our products in Japan could be limited.
System Demand
Future demand for da Vinci Surgical Systems will be impacted by factors including hospital response to the evolving healthcare environment under the current U.S. administration, procedure growth rates, hospital consolidation trends, evolving system utilization and point of care dynamics, capital replacement trends, additional reimbursements in various global markets, including Japan, the timing around governmental tenders and authorizations, including China, the timing of when we receive regulatory clearance in our other OUS markets for our da Vinci Xi Surgical System, da Vinci X Surgical System, and da Vinci SP Surgical System, and related instruments, market response as well as other economic and geopolitical factors. Market acceptance of our recently launched da Vinci SP Surgical System and the nature and timing of additional da Vinci SP regulatory indications may also impact future system placements. Demand may also be impacted by robotic surgery competition, including from companies that have introduced products in the field of robotic surgery or have made explicit statements about their efforts to enter the field including, but not limited to, the following companies: Avatera Medical GmbH; CMR Surgical Limited; Johnson & Johnson (including their wholly-owned subsidiaries Auris Health, Inc. and Verb Surgical Inc.); Medicaroid Inc.; MedRobotics Corp.; Medtronic plc; meerecompany Inc.; Olympus Corp.; Samsung Corporation; Smart Robot Technology Group Co. Ltd.; Titan Medical, Inc.; TransEnterix, Inc.; and Wego Holding Co., Ltd.
Many of the above factors will also impact future demand for our recently cleared Ion system, as we extend our commercial offering into diagnostics, along with additional factors associated with a new product introduction, including, but not limited to, our ability to optimize manufacturing and our supply chain, competition, clinical data to demonstrate value, and market acceptance.
New Product Introductions
SynchroSeal and E-100 Generator. In November 2019, we obtained FDA clearance for our SynchroSeal instrument and E-100 generator. SynchroSeal is a single-use, bipolar, electrosurgical instrument intended for grasping, dissection, sealing, and transection of tissue. With its wristed articulation, rapid sealing cycle, and refined curved jaw, SynchroSeal offers enhanced
versatility to the da Vinci Energy portfolio. The E-100 generator is an electrosurgical generator developed to power two key instruments – Vessel Sealer Extend and SynchroSeal – on the da Vinci X and Xi Surgical Systems. The generator delivers high frequency energy for cutting, coagulation, and vessel sealing of tissues.
SureForm 45 Curved-Tip and Gray Reload. In July 2019, we obtained FDA clearance for the SureForm 45 Curved-Tip stapler and SureForm 45 Gray reload. SureForm 45 Curved-Tip is a single-use, fully wristed stapling instrument with a curved tip intended for resection, transection, and/or creation of anastomoses. SureForm 45 Gray reload is a new, single-use cartridge that contains multiple staggered rows of implantable staples and a stainless steel knife. The SureForm 45 Curved-Tip stapler and Gray reload have particular utility in thoracic procedures and round out our SureForm 45 portfolio. Not all reloads or staplers are available for use on all systems or in all countries.
Da Vinci Endoscope Plus. In June 2019, we received CE mark clearance in Europe for our da Vinci Endoscope Plus, an enhanced 3D endoscope for use with our da Vinci X and Xi Surgical Systems. Following the CE mark, in July 2019, we obtained FDA clearance for our da Vinci Endoscope Plus. The da Vinci Endoscope Plus leverages new sensor technology to allow for increased sharpness and color accuracy. The da Vinci Endoscope Plus is currently available in Europe and is expected to launch in the U.S. later in 2019.
Da Vinci Handheld Camera. In June 2019, we obtained FDA clearance for our da Vinci Handheld Camera, a lightweight, 2D camera head, which can be connected to third-party laparoscopes. This allows the laparoscopic image to be displayed on the da Vinci X/Xi vision cart to address aspects of da Vinci procedures that may require use of a laparoscope, thus eliminating the need for redundant equipment in the operating room and increasing procedure efficiency. We are introducing the da Vinci Handheld Camera in a measured fashion in 2019 with a broad launch expected in early 2020.
Ion endoluminal system. In February 2019, we obtained FDA clearance for the Ion endoluminal system, our new flexible, robotic-assisted, catheter-based platform designed to navigate through very small lung airways to reach peripheral nodules for biopsies. The Ion system uses an ultra-thin articulating robotic catheter that can move 180 degrees in all directions. The outer diameter of the catheter is 3.5mm, which allows physicians to navigate through small and tortuous airways to reach nodules in most airway segments within the lung. The Ion system’s flexible biopsy needle can also pass through very tight bends via Ion’s catheter to collect tissue in the peripheral lung. The catheter’s 2mm working channel can also accommodate other biopsy tools, such as biopsy forceps or cytology brushes, if necessary. We are introducing Ion in a measured fashion while we optimize training pathways and our supply chain and collect additional clinical data. We have placed 10 Ion systems for commercial use as of December 31, 2019.
IRIS. In February 2019, we obtained FDA clearance for our IRIS augmented reality product. IRIS is a service that delivers a 3D image of the patient anatomy (initially targeting kidneys) to aid surgeons in both the pre- and intra-operative settings. We are now in the early stages of an IRIS pilot study in the field at a small group of U.S. hospitals to gain initial product experience and insights.
SureForm 60 and SureForm 45 Staplers. In July 2018, we obtained FDA clearance for the SureForm 60 instrument with White, Blue, Green, and Black 60mm reloads. In January 2019, we obtained FDA clearance for the SureForm 45 instrument with White, Blue, Green, and Black 45mm reloads. Additionally, we received regulatory clearance in South Korea for the SureForm 60 instrument and 60mm reloads in June 2018 and July 2018, respectively, and for the SureForm 45 instrument and 45mm reloads in June 2019 and September 2019, respectively. Also, we received regulatory clearance in Japan for the SureForm 60 instrument and 60mm reloads in June 2018 and November 2018, respectively, and for the SureForm 45 instrument and 45mm reloads in September 2019. The SureForm 60 and SureForm 45 Staplers are single-use, fully wristed stapling instruments intended for resection, transection, and/or creation of anastomoses. The SureForm 60 instrument has particular utility in bariatric procedures, while the SureForm 45 instrument has particular utility in colorectal procedures. SureForm 60 and SureForm 45 Staplers broaden our existing stapler product line, which also includes EndoWrist Stapler 45 with White, Blue, and Green 45mm reloads and EndoWrist Stapler 30 with White, Blue, Green, and Gray 30mm reloads. Not all reloads or staplers are available for use on all systems or in all countries.
Da Vinci SP Surgical System. In May 2018, we obtained FDA clearance for the da Vinci SP Surgical System for urologic surgical procedures that are appropriate for a single port approach. In March 2019, we obtained FDA clearance for the da Vinci SP Surgical System for certain transoral procedures. The da Vinci SP Surgical System includes three, multi-jointed, wristed instruments and the first da Vinci fully wristed, 3DHD camera. The instruments and the camera all emerge through a single cannula and are triangulated around the target anatomy to avoid external instrument collisions that can occur in narrow surgical workspaces. The system enables flexible port placement and broad internal and external range of motion (e.g., 360 degrees of anatomical access) through the single SP arm. Surgeons control the fully articulating instruments and the camera on the da Vinci SP Surgical System, which uses the same fourth generation surgeon console as the da Vinci X and Xi Surgical Systems. The da Vinci SP Surgical System provides surgeons with robotic-assisted technology designed for deep and narrow access to tissue in the body. We anticipate pursuing further regulatory clearances for the da Vinci SP Surgical System, including colorectal applications, broadening the applicability of the SP platform over time. We continue to introduce the da Vinci SP
Surgical System in a measured fashion while we optimize training pathways and our supply chain. We have placed 29 da Vinci SP Surgical Systems in 2019 and have an installed base of 44 as of December 31, 2019.
Da Vinci Vessel Sealer Extend. In April 2018, we obtained FDA clearance for da Vinci Vessel Sealer Extend, our newest instrument in the Vessel Sealing family of products. Da Vinci Vessel Sealer Extend is a single-use, fully wristed bipolar electrosurgical instrument compatible with our fourth generation multiport systems. It is intended for grasping and blunt dissection of tissue and for bipolar coagulation and mechanical transection of vessels up to 7mm in diameter and tissue bundles that fit in the jaws of the instrument.
Da Vinci X Surgical System. In May 2017, we launched a new da Vinci model, the da Vinci X, in the U.S. The da Vinci X system provides surgeons and hospitals with access to some of the most advanced fourth generation da Vinci surgery technology at a lower cost. The da Vinci X system uses the same vision cart and surgeon console that are found on our flagship product, the da Vinci Xi system. For new customers, the da Vinci X system provides a cost effective capital entry point while providing a pathway for upgrading to other fourth generation systems. Existing customers may negotiate to trade in their older da Vinci systems in order to standardize their robotics programs onto the fourth generation platform, choosing which system model by considering clinical and economic factors.
The da Vinci X system enables optimized, focused-quadrant surgery, including procedures like prostatectomy, hernia repair, and benign hysterectomy, among others. The system features flexible port placement and 3D digital optics, while incorporating the same advanced instruments and accessories as the da Vinci Xi. The da Vinci X system drives operational efficiencies through set-up technology that uses voice and laser guidance, drape design that simplifies surgery preparations, and a lightweight, fully integrated endoscope.
Acquisition of Certain Assets from Schölly Fiberoptic
In July 2019, we entered into an agreement to acquire certain assets and operations from Schölly Fiberoptic GmbH (“Schölly”), a supplier of endoscopes and other visualization equipment (the "Schölly Acquisition"). On August 31, 2019, upon the satisfaction of closing conditions, we acquired control of these assets and operations, which collectively met the definition of a business. Total purchase consideration of $101.4 million, as of the acquisition date, consisted of an initial cash payment of $34.4 million and deferred cash payments totaling approximately $67.0 million, of which $37.3 million continues to be deferred as of December 31, 2019. The timing of the future payments is based upon achieving certain integration steps, which are expected to be completed around the end of 2020.
The process to manufacture endoscopes is complex, and there can be no assurance that we can successfully integrate or operate the endoscope manufacturing operations of the acquired business. For example, we may be unable to retain the employees of Schölly or its current suppliers. The integration process will be complex and involves the integration of manufacturing operations across multiple sites globally. The integration may require expenses and time in excess of expectations. Integrating the Schölly Acquisition will also involve getting certain regulatory approvals and re-certification of manufacturing sites. If we cannot successfully integrate or manufacture endoscopes subsequent to the Schölly Acquisition, it may have an adverse impact on our business, financial condition, results of operations, or cash flows.
2019 Operational and Financial Highlights
•Total revenue increased by 20% to $4.5 billion for the year ended December 31, 2019, compared with $3.7 billion for the year ended December 31, 2018.
•Approximately 1,229,000 da Vinci procedures were performed during the year ended December 31, 2019, an increase of 18% compared with approximately 1,038,000 da Vinci procedures for the year ended December 31, 2018.
•Instruments and accessories revenue increased by 23% to $2.4 billion for the year ended December 31, 2019, compared with $2.0 billion for the year ended December 31, 2018.
•Systems revenue increased by 19% to $1.3 billion for the year ended December 31, 2019, compared with $1.1 billion for the year ended December 31, 2018.
•A total of 1,119 da Vinci Surgical Systems were shipped during the year ended December 31, 2019, an increase of 21% compared with 926 systems during the year ended December 31, 2018.
•As of December 31, 2019, we had a da Vinci Surgical System installed base of approximately 5,582 systems, an increase of 12% compared with the installed base of approximately 4,986 systems as of December 31, 2018.
•During the year ended December 31, 2019, we began commercial sales of the Ion system and shipped the first 10 commercial systems.
•Gross profit as a percentage of revenue was 69.4% for the year ended December 31, 2019, compared with 69.9% for the year ended December 31, 2018.
•Operating income increased by 15% to $1.4 billion for the year ended December 31, 2019, compared with $1.2 billion for the year ended December 31, 2018. Operating income included $338 million and $263 million of share-based
compensation expense related to employee stock plans and $67.2 million and $31.6 million of intangible asset charges for the years ended December 31, 2019, and 2018, respectively.
•As of December 31, 2019, we had $5.8 billion in cash, cash equivalents, and investments. Cash, cash equivalents, and investments increased by $1.0 billion compared with December 31, 2018.
Results of Operations
This section of the Form 10-K generally discusses 2019 and 2018 items and year-to-year comparisons between 2019 and 2018. Discussions of 2017 items and year-to-year comparisons between 2018 and 2017 that are not included in this Form 10-K can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2018.
The following table sets forth, for the years indicated, certain Consolidated Statements of Income information (in millions, except percentages):
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Years Ended December 31,
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|
|
|
|
|
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|
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2019
|
|
% of
total
revenue
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|
2018
|
|
% of
total
revenue
|
|
2017
|
|
% of
total
revenue
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
$
|
3,754.3
|
|
|
84
|
%
|
|
$
|
3,089.1
|
|
|
83
|
%
|
|
$
|
2,565.3
|
|
|
82
|
%
|
|
Service
|
724.2
|
|
|
16
|
%
|
|
635.1
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|
|
17
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%
|
|
572.9
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|
|
18
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%
|
|
Total revenue
|
4,478.5
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|
|
100
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%
|
|
3,724.2
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|
|
100
|
%
|
|
3,138.2
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|
|
100
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%
|
|
Cost of revenue:
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|
|
|
|
|
|
|
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Product
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1,119.1
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|
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25
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%
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|
906.2
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|
|
24
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%
|
|
756.3
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|
|
24
|
%
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Service
|
249.2
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|
|
6
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%
|
|
213.9
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|
|
6
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%
|
|
179.9
|
|
|
6
|
%
|
|
Total cost of revenue
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1,368.3
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|
31
|
%
|
|
1,120.1
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|
|
30
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%
|
|
936.2
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|
|
30
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%
|
|
Product gross profit
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2,635.2
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|
|
59
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%
|
|
2,182.9
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|
|
59
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%
|
|
1,809.0
|
|
|
58
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%
|
|
Service gross profit
|
475.0
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|
|
10
|
%
|
|
421.2
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|
|
11
|
%
|
|
393.0
|
|
|
12
|
%
|
|
Gross profit
|
3,110.2
|
|
|
69
|
%
|
|
2,604.1
|
|
|
70
|
%
|
|
2,202.0
|
|
|
70
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%
|
|
Operating expenses:
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|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
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1,178.4
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26
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%
|
|
986.6
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|
|
27
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%
|
|
810.5
|
|
|
26
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%
|
|
Research and development
|
557.3
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|
|
12
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%
|
|
418.1
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|
|
11
|
%
|
|
328.6
|
|
|
10
|
%
|
|
Total operating expenses
|
1,735.7
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|
|
38
|
%
|
|
1,404.7
|
|
|
38
|
%
|
|
1,139.1
|
|
|
36
|
%
|
|
Income from operations
|
1,374.5
|
|
|
31
|
%
|
|
1,199.4
|
|
|
32
|
%
|
|
1,062.9
|
|
|
34
|
%
|
|
Interest and other income, net
|
127.7
|
|
|
3
|
%
|
|
80.1
|
|
|
2
|
%
|
|
41.9
|
|
|
1
|
%
|
|
Income before taxes
|
1,502.2
|
|
|
34
|
%
|
|
1,279.5
|
|
|
34
|
%
|
|
1,104.8
|
|
|
35
|
%
|
|
Income tax expense
|
120.4
|
|
|
3
|
%
|
|
154.5
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|
|
4
|
%
|
|
433.9
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|
|
14
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%
|
|
Net income
|
1,381.8
|
|
|
31
|
%
|
|
1,125.0
|
|
|
30
|
%
|
|
670.9
|
|
|
21
|
%
|
|
Less: net income (loss) attributable to noncontrolling interest in joint venture
|
2.5
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|
|
—
|
%
|
|
(2.9)
|
|
|
—
|
%
|
|
—
|
|
|
—
|
%
|
|
Net income attributable to Intuitive Surgical, Inc.
|
$
|
1,379.3
|
|
|
31
|
%
|
|
$
|
1,127.9
|
|
|
30
|
%
|
|
$
|
670.9
|
|
|
21
|
%
|
Total Revenue
Total revenue increased by 20% to $4.5 billion for the year ended December 31, 2019, compared with $3.7 billion for the year ended December 31, 2018. Total revenue for the year ended December 31, 2018, increased by 19% compared with $3.1 billion for the year ended December 31, 2017. The increase in total revenue for the year ended December 31, 2019, resulted from 23% higher instruments and accessories revenue, driven by approximately 18% higher procedure volume, 19% higher systems revenue, and 14% higher service revenue.
Revenue denominated in foreign currencies as a percentage of total revenue was approximately 20%, 20%, and 17% for the years ended December 31, 2019, 2018, and 2017, respectively. We generally sell our products and services in local currencies where we have direct distribution channels. Foreign currency rate fluctuations did not have a material impact on total revenue for the year ended December 31, 2019, as compared with 2018, or for the year ended December 31, 2018, as compared with 2017.
Revenue generated in the U.S. accounted for 70%, 71%, and 73% of total revenue for the years ended December 31, 2019, 2018, and 2017, respectively. We believe that U.S. revenue has accounted for the large majority of total revenue due to U.S. patients’ ability to choose their provider and method of treatment, reimbursement structures supportive of innovation and minimally invasive surgery, and our initial investments focused on U.S. infrastructure. We have been investing in our business in the OUS markets, and our OUS procedures have grown faster in proportion to U.S. procedures. We expect that our OUS procedures and revenue will make up a greater portion of our business in the long term.
The following table summarizes our revenue and system unit shipments for the years ended December 31, 2019, 2018, and 2017, respectively (in millions, except percentages and unit shipments):
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|
|
|
|
|
|
|
Years Ended December 31,
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|
2019
|
|
2018
|
|
2017
|
|
Revenue
|
|
|
|
|
|
|
Instruments and accessories
|
$
|
2,408.2
|
|
|
$
|
1,962.0
|
|
|
$
|
1,636.9
|
|
|
Systems
|
1,346.1
|
|
|
1,127.1
|
|
|
928.4
|
|
|
Total product revenue
|
3,754.3
|
|
|
3,089.1
|
|
|
2,565.3
|
|
|
Services
|
724.2
|
|
|
635.1
|
|
|
572.9
|
|
|
Total revenue
|
$
|
4,478.5
|
|
|
$
|
3,724.2
|
|
|
$
|
3,138.2
|
|
|
United States
|
$
|
3,129.5
|
|
|
$
|
2,633.5
|
|
|
$
|
2,285.8
|
|
|
OUS
|
1,349.0
|
|
|
1,090.7
|
|
|
852.4
|
|
|
Total revenue
|
$
|
4,478.5
|
|
|
$
|
3,724.2
|
|
|
$
|
3,138.2
|
|
|
% of Revenue - U.S.
|
70
|
%
|
|
71
|
%
|
|
73
|
%
|
|
% of Revenue - OUS
|
30
|
%
|
|
29
|
%
|
|
27
|
%
|
|
|
|
|
|
|
|
|
Instruments and accessories
|
$
|
2,408.2
|
|
|
$
|
1,962.0
|
|
|
$
|
1,636.9
|
|
|
Services
|
724.2
|
|
|
635.1
|
|
|
572.9
|
|
|
Operating lease
|
106.9
|
|
|
51.4
|
|
|
25.9
|
|
|
Total recurring revenue
|
$
|
3,239.3
|
|
|
$
|
2,648.5
|
|
|
$
|
2,235.7
|
|
|
% of Total revenue
|
72
|
%
|
|
71
|
%
|
|
71
|
%
|
|
|
|
|
|
|
|
|
Da Vinci Surgical System Shipments by Region:
|
|
|
|
|
|
|
U.S. unit shipments
|
728
|
|
|
581
|
|
|
417
|
|
|
OUS unit shipments
|
391
|
|
|
345
|
|
|
267
|
|
|
Total unit shipments*
|
1,119
|
|
|
926
|
|
|
684
|
|
|
*Systems shipped under operating leases (included in total unit shipments)
|
384
|
|
|
229
|
|
|
108
|
|
|
|
|
|
|
|
|
|
Ion System Shipments
|
10
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Da Vinci Surgical System Shipments involving System Trade-ins:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unit shipments involving trade-ins
|
442
|
|
|
277
|
|
|
163
|
|
|
Unit shipments not involving trade-ins
|
677
|
|
|
649
|
|
|
521
|
|
Product Revenue
Product revenue increased by 22% to $3.8 billion for the year ended December 31, 2019, compared with $3.1 billion for the year ended December 31, 2018. Product revenue increased by 20% to $3.1 billion for the year ended December 31, 2018, compared with $2.6 billion for the year ended December 31, 2017.
Instruments and accessories revenue increased by 23% to $2.4 billion for the year ended December 31, 2019, compared with $2.0 billion for the year ended December 31, 2018. The increase in instruments and accessories revenue was driven primarily by procedure growth of 18%, incremental sales of our advanced instruments, and customer buying patterns. U.S. procedure growth in 2019 of 17%, compared with 17% in 2018, was driven by strong growth in general surgery procedures, most notably hernia repair, cholecystectomy, colorectal, and bariatric procedures, and thoracic procedures as well as moderate growth in the more mature gynecologic and urologic procedures categories. OUS procedure growth in 2019 was 21% compared with 22% in 2018. Key drivers for OUS procedure growth in both years was driven by continued growth in urologic procedures
and earlier stage growth in general surgery and gynecology procedures. Geographically, OUS procedure growth was driven by procedure expansion in Japan, Germany, Korea, and China with varying results in other countries.
Systems revenue increased by 19% to $1.3 billion for the year ended December 31, 2019, compared with $1.1 billion for the year ended December 31, 2018. Higher systems revenue was primarily driven by higher system shipments, higher 2019 ASPs, higher operating lease revenue, and higher lease buyouts, partially offset by a higher proportion of system shipments under operating lease or usage-based arrangements.
During 2019, a total of 1,119 da Vinci Surgical Systems were shipped compared with 926 systems during 2018. By geography, 728 systems were shipped into the U.S., 169 into Europe, 182 into Asia, and 40 into other markets during 2019, compared with 581 systems shipped into the U.S., 169 into Europe, 116 into Asia, and 60 into other markets during 2018. During 2019, 384 of the 1,119 systems were shipped under operating lease arrangements, compared with 229 of the 926 systems shipped during 2018. The increase in system shipments was primarily driven by procedure growth, the need for hospitals to expand or establish capacity, and more customers trading in older da Vinci models for fourth generation da Vinci Xi and da Vinci X systems.
We shipped 425 and 272 da Vinci Surgical Systems under lease or usage-based arrangements, of which 384 and 229 systems were classified as operating leases for the years ended December 31, 2019, and 2018, respectively. Operating lease revenue was $106.9 million for the year ended December 31, 2019, compared with $51.4 million for the year ended December 31, 2018. Systems placed as operating leases represented 34% of total shipments during 2019, compared with 25% during 2018. A total of 658 da Vinci Surgical Systems were installed at customers under operating lease or usage-based arrangements as of December 31, 2019, compared with 350 as of December 31, 2018. Revenue from Lease Buyouts was $92.8 million for the year ended December 31, 2019, compared with $48.8 million for the year ended December 31, 2018. We expect revenue from Lease Buyouts to fluctuate period to period based on the timing of when, and if, customers choose to exercise the buyout options embedded in their leases.
The da Vinci Surgical System ASP, excluding the impact of systems shipped under operating leases and Ion systems, was approximately $1.52 million for the year ended December 31, 2019, compared with approximately $1.45 million for the year ended December 31, 2018. The higher 2019 ASP was largely driven by favorable geographic and product mix. ASP fluctuates from period to period based on geographic and product mix, product pricing, systems shipped involving trade-ins, and changes in foreign exchange rates.
Service Revenue
Service revenue increased by 14% to $724 million for the year ended December 31, 2019, compared with $635 million for the year ended December 31, 2018. Service revenue increased by 11% to $635 million for the year ended December 31, 2018, compared with $573 million for the year ended December 31, 2017. Higher service revenue in 2019 was primarily driven by a larger installed base of da Vinci Surgical Systems producing service revenue.
Gross Profit
Product gross profit for the year ended December 31, 2019, increased 21% to $2.6 billion, representing 70.2% of product revenue, compared with $2.2 billion, representing 70.7% of product revenue, for the year ended December 31, 2018. The higher 2019 product gross profit was primarily driven by higher product revenue, partially offset by lower product gross profit margin. The lower product gross profit margin for the year ended December 31, 2019, was primarily driven by higher intangible assets amortization expense.
The MDET initially became effective on January 1, 2013, and we treated MDET as a reduction in gross profit. In December 2015, the Consolidated Appropriations Act, 2016 (the “Appropriations Act”) was signed into law. The Appropriations Act included a two-year moratorium on MDET such that medical device sales in 2016 and 2017 were exempt from the excise tax. This moratorium was extended through December 31, 2019, by the Extension of Continuing Appropriations Act of 2018, signed into law on January 22, 2018. The MDET was repealed in December 2019.
Product gross profit for the years ended December 31, 2019 and 2018, included share-based compensation expense of $46.6 million and $36.4 million, respectively, and intangible assets amortization expense of $31.5 million and $5.3 million, respectively.
Service gross profit for the year ended December 31, 2019, increased 13% to $475 million, representing 65.6% of service revenue, compared with $421 million, representing 66.3% of service revenue, for the year ended December 31, 2018. The higher 2019 service gross profit was driven by higher service revenue, reflecting a larger installed base of da Vinci Surgical Systems, partially offset by lower service gross profit margin. The lower service gross profit margin for the year ended December 31, 2019, was primarily driven by higher share-based compensation expense and intangible assets amortization.
Service gross profit for the years ended December 31, 2019 and 2018, included share-based compensation expense of $20.4 million and $16.8 million, respectively, and intangible assets amortization expense of $3.7 million and $0.8 million, respectively.
Selling, General and Administrative Expenses
Selling, general and administrative expenses include costs for sales, marketing and administrative personnel, sales and marketing activities, tradeshow expenses, legal expenses, regulatory fees, and general corporate expenses.
Selling, general and administrative expenses for the year ended December 31, 2019, increased by 19% to $1,178 million, compared with $987 million for the year ended December 31, 2018. The higher selling, general and administrative expenses in 2019 were primarily associated with our expanded Asian and European teams, including establishing our direct organizations in China, India, and Taiwan, increased infrastructure to support our growth, and higher headcount. Also, in the fourth quarters of 2019 and 2018, we made charitable contributions of $5.0 million and $25.2 million, respectively, to the Intuitive Foundation, a not-for-profit entity whose mission is to reduce the global burden of disease and suffering through research, education, and philanthropy aimed at better outcomes for patients around the globe.
Selling, general and administrative expenses included net pre-tax litigation charges of $0.8 million and $45.2 million for the years ended December 31, 2019, and 2018, respectively. The litigation charges for the year ended December 31, 2018, were primarily related to the settlement of the Abrams class action lawsuit further described in Note 8 to the Consolidated Financial Statements included in Part II, Item 8.
Selling, general and administrative expenses for the years ended December 31, 2019, and 2018, included share-based compensation expense of $170 million and $133 million, respectively, and intangible assets amortization expense of $5.7 million and $2.2 million, respectively.
Research and Development Expenses
Research and development costs are expensed as incurred. Research and development expenses include costs associated with the design, development, testing, and significant enhancement of our products.
Research and development expenses for the year ended December 31, 2019, increased by 33% to $557 million, compared with $418 million for the year ended December 31, 2018. The increase was primarily due to higher personnel-related expenses, intangible asset charges, and other project costs incurred to support a broader set of product development initiatives, including Ion and SP platform investments, informatics, advanced instrumentation, advanced imaging, and future generations of robotics.
Research and development expenses for the years ended December 31, 2019, and 2018, included share-based compensation expense of $101.4 million and $76.2 million, respectively, and intangible asset charges of $26.3 million and $23.3 million, respectively.
Research and development expenses fluctuate with project timing. Based upon our broader set of product development initiatives and the stage of the underlying projects, we expect to continue to make substantial investments in research and development and anticipate that research and development expenses will continue to increase in the future.
Interest and Other Income, Net
Interest and other income, net, was $127.7 million for the year ended December 31, 2019, compared with $80.1 million for the year ended December 31, 2018, and $41.9 million for the year ended December 31, 2017. The increase in interest and other income, net, for the year ended December 31, 2019, was primarily driven by higher interest earned due to higher interest rates and higher cash and investment balances.
Income Tax Expense
Our income tax expense was $120 million, $155 million, and $434 million for the years ended December 31, 2019, 2018, and 2017, respectively. Our effective tax rate for 2019 was approximately 8.0% compared with 12.1% for 2018 and 39.3% for 2017. Our effective tax rate for 2019 and 2018 differs from the U.S. federal statutory rate of 21% primarily due to the excess tax benefits recognized for employee share-based compensation, the effect of income earned by certain overseas entities being taxed at rates lower than the federal statutory rate, the federal research and development credit benefit, and the release of unrecognized tax benefits from the expiration of statutes of limitations, partially offset by U.S. tax on foreign earnings and state income taxes (net of federal benefit). In addition, our 2019 tax rate reflected a $51.3 million benefit associated with re-measurement of our Swiss deferred tax assets due to a Swiss statutory tax rate increase enacted as part of Swiss tax reform in August 2019.
Our tax rate for 2017 reflected the effect of a one-time discrete item in the amount of $317.8 million associated with the enactment of the 2017 Tax Act. Besides the impact of the 2017 Tax Act, our tax rate for 2017 differs from the U.S. federal statutory rate of 35% due to the effect of income earned by certain overseas entities being taxed at rates lower than the federal statutory rate, excess tax benefits recognized for employee share-based compensation, and the reversal of certain unrecognized tax benefits, partially offset by state income taxes (net of federal benefit).
On December 22, 2017, the U.S. federal government enacted the 2017 Tax Act. The 2017 Tax Act includes a number of changes in existing tax law impacting businesses, including a one-time deemed repatriation of cumulative undistributed foreign earnings and a permanent reduction in the U.S. federal statutory rate from 35% to 21%, effective on January 1, 2018.
Under U.S. GAAP, changes in tax rates and tax law are accounted for in the period of enactment and deferred tax assets and liabilities are measured at the enacted tax rate. In December 2017, we estimated an income tax expense of $317.8 million related to the 2017 Tax Act, $270.2 million of which related to the one-time deemed repatriation toll charge (“Toll Tax”) and $47.6 million of which related to the re-measurement of our net deferred tax assets at the reduced U.S. federal statutory rate of 21%. In December 2018, we completed our accounting for the effect of the 2017 Tax Act within the measurement period and reflected a $0.5 million net increase in the 2018 income tax expense.
In June 2018, we repatriated $1.6 billion of our cumulative undistributed foreign earnings back to the U.S. without any significant U.S. income tax consequences. We intend to repatriate earnings from our Swiss subsidiary as needed, since the U.S. and foreign tax implications of such repatriations are not expected to be significant. We will continue to indefinitely reinvest earnings from the rest of our foreign subsidiaries, which are not significant.
Our 2019, 2018, and 2017 provisions for income taxes included excess tax benefits associated with employee equity plans of $147 million, $116 million, and $103 million, respectively, which reduced our effective tax rate by 9.8, 9.1, and 9.3 percentage points, respectively. The amount of excess tax benefits or deficiencies will fluctuate from period to period based on the price of our stock, the volume of share-based instruments settled or vested, and the value assigned to employee equity awards under U.S. GAAP, which results in increased income tax expense volatility.
Our 2019, 2018, and 2017 tax provision reflected tax benefits of $8.4 million, $5.2 million, and $62.4 million, respectively, associated with the reversal of unrecognized tax benefits and interest resulting from the expiration of statutes of limitations in multiple jurisdictions and certain audit conclusions.
We file federal, state, and foreign income tax returns in many jurisdictions in the U.S. and abroad. Years prior to 2016 are considered closed for most significant jurisdictions. Certain of our unrecognized tax benefits could reverse based on the normal expiration of various statutes of limitations, which could affect our effective tax rate in the period in which they reverse.
We are subject to the examination of our income tax returns by the Internal Revenue Service and other tax authorities. The outcome of these audits cannot be predicted with certainty. Management regularly assesses the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. If any issues addressed in our tax audits are resolved in a manner not consistent with management’s expectations, we could be required to adjust our provision for income taxes in the period such resolution occurs.
In July 2015, a U.S. Tax Court opinion (the “2015 Opinion”) was issued involving an independent third party related to intercompany charges for share-based compensation. Based on the findings of the U.S. Tax Court, we were required to, and did, refund to our foreign subsidiaries the share-based compensation element of certain intercompany charges made in prior periods. Starting in 2015, direct share-based compensation has been excluded from intercompany charges. In June 2019, the Ninth Circuit Court of Appeals (the "Ninth Circuit") reversed the 2015 Opinion (the “Ninth Circuit Opinion”). Subsequently, a re-hearing of the case was requested, but the rehearing request was denied by the Ninth Circuit on November 12, 2019. However, a petition for appeal to the U.S. Supreme Court can be filed within 90 days of the denial. Since the Ninth Circuit Opinion potentially is subject to further judicial review, we continue to treat our share-based compensation expense in accordance with the 2015 Opinion and continue to recognize the related tax benefits in our financial statements based upon our evaluation of the position in light of the present facts. In the event of a final opinion that reverses the 2015 Opinion, there may be an adverse impact to our income tax expense and effective tax rate.
Net Income (Loss) Attributable to Noncontrolling Interest in Joint Venture
The Company’s majority-owned joint venture (the “Joint Venture”) with Shanghai Fosun Pharmaceutical (Group) Co., Ltd. (“Fosun Pharma”), a subsidiary of Fosun International Limited, was established to research, develop, manufacture, and sell robotic-assisted, catheter-based medical devices. The Joint Venture is owned 60% by us and 40% by Fosun Pharma and is located in China. The catheter-based technology will initially target early diagnosis and cost-effective treatment of lung cancer, one of the most commonly diagnosed forms of cancer in the world. Distribution of catheter-based medical devices in China will be conducted by the joint venture, while distribution outside of China will be conducted by us.
In January 2019, the Joint Venture acquired certain assets, including distribution rights, customer relationships, and certain personnel, from Chindex and its affiliates, a subsidiary of Fosun Pharma, and began direct operations for da Vinci products and services in China. As of December 31, 2019, the companies have contributed $55 million of up to $100 million required by the joint venture agreement.
We do not expect the Joint Venture to generate revenue in 2020 related to the sale of robotic-assisted, catheter-based medical devices. There can be no assurance that we and the Joint Venture will successfully commercialize such products. There can also be no assurance that the Joint Venture will not require additional contributions to fund its business, that the Joint
Venture will continue to be profitable, or that the acquired Chindex assets will be successfully integrated and the expected benefits will be realized.
Net income (loss) attributable to noncontrolling interest in Joint Venture for the year ended December 31, 2019, was $2.5 million, compared with $(2.9) million for the year ended December 31, 2018. The increase in net income attributable to noncontrolling interest in Joint Venture was primarily due to the increase in sales in China, partially offset by intangible assets amortization expense and higher costs to ramp up operations in China.
Liquidity and Capital Resources
Sources and Uses of Cash
Our principal source of liquidity is cash provided by operations and by the issuance of common stock through the exercise of stock options and our employee stock purchase program. Cash and cash equivalents plus short- and long-term investments increased by $1.0 billion to $5.8 billion as of December 31, 2019, from $4.8 billion as of December 31, 2018, primarily from cash provided by our operations, partially offset by capital expenditures and share repurchases. Cash and cash equivalents plus short- and long-term investments increased by $1.0 billion to $4.8 billion as of December 31, 2018, from $3.8 billion as of December 31, 2017, primarily from cash provided by our operations and employee stock option exercises.
As of December 31, 2019, $362 million of our cash, cash equivalents, and investments were held by foreign subsidiaries. We intend to repatriate earnings from our Swiss subsidiary as needed, since the U.S. and foreign tax implications of such repatriations are not expected to be significant. We will continue to indefinitely reinvest earnings from the rest of our foreign subsidiaries, which are not significant. We believe the cash provided by our operations will meet our liquidity needs for the foreseeable future.
See “Item 7A. Quantitative and Qualitative Disclosures About Market Risk” for discussion on the impact of interest rate risk and market risk on our investment portfolio.
Consolidated Cash Flow Data
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Years Ended December 31,
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2019
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2018
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2017
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(in millions)
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Net cash provided by (used in)
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Operating activities
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$
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1,598.2
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$
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1,169.6
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$
|
1,143.9
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Investing activities
|
(1,154.4)
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|
|
(1,049.6)
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378.7
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Financing activities
|
(168.4)
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|
126.3
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|
(1,913.1)
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|
|
Effect of exchange rates on cash, cash equivalents, and restricted cash
|
(2.2)
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|
|
(0.1)
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|
|
2.1
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|
|
Net increase (decrease) in cash, cash equivalents, and restricted cash
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$
|
273.2
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|
|
$
|
246.2
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|
|
$
|
(388.4)
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Operating Activities
For the year ended December 31, 2019, net cash provided by operating activities of $1,598 million exceeded our net income of $1,382 million, primarily due to the following reasons:
1.Our net income included non-cash charges of $537.9 million, consisting primarily of the following significant items: share-based compensation of $335.8 million; depreciation expense and losses on the disposal of property, plant, and equipment of $160.0 million; and amortization of intangible assets of $43.0 million.
2.The non-cash charges outlined above were partially offset by changes in operating assets and liabilities that resulted in $321.5 million of cash used by operating activities during the year ended December 31, 2019. Inventory, including the transfer of equipment from inventory to property, plant, and equipment, increased by $360.5 million, primarily due to the increased number of systems under operating lease and usage-based arrangements and build-up to address the growth in the business as well as to mitigate risks of disruption that could arise from trade, supply, or other matters. Prepaid expenses and other assets increased by $116.9 million, primarily due to an increase in leasing, an increase in deferred commissions, and an increase in prepaid taxes, driven by the timing of tax payments. The unfavorable impact of these items on cash provided by operating activities was partially offset by a $57.4 million increase in accrued compensation and employee benefits, primarily due to higher headcount, a $38.8 million decrease in accounts receivable, primarily due to the timing of collections, and a $35.5 million increase in deferred revenue, primarily due to the increased volume of sales contracts.
For the year ended December 31, 2018, net cash provided by operating activities of $1,170 million exceeded our net income of $1,125 million, primarily due to the following reasons:
1.Our net income included non-cash charges of $428.3 million, consisting primarily of the following significant items: share-based compensation of $261.2 million; depreciation expense and losses on the disposal of property, plant, and equipment of $108.6 million; deferred income taxes of $31.9 million; amortization of intangible assets of $14.2 million; and amortization of contract acquisitions assets of $10.6 million.
2.The non-cash charges outlined above were partially offset by changes in operating assets and liabilities that resulted in $383.7 million of cash used in operating activities during the year ended December 31, 2018. Inventory, including the transfer of equipment from inventory to property, plant, and equipment, increased by $279.0 million, primarily due to the increased number of systems under operating lease arrangements and build-up to address the growth in the business as well as to mitigate risks of disruption that could arise from trade, supply, or other matters. Accounts receivable increased by $161.3 million, primarily due to higher customer billings and timing of billings and collections. Prepaid expenses and other assets increased by $77.7 million. The unfavorable impact of these items on cash provided by operating activities was partially offset by a $54.3 million increase in deferred revenue, a $37.1 million increase in other accrued liabilities, and a $26.2 million increase in accrued compensation and employee benefits.
Investing Activities
Net cash used in investing activities for the year ended December 31, 2019, consisted of purchases of investments (net of proceeds from sales and maturities of investments) of $669.1 million, the acquisition of property and equipment of $425.6 million, and the acquisition of businesses, net of cash acquired, of $59.7 million.
Net cash used in investing activities for the year ended December 31, 2018, consisted of purchases of investments (net of proceeds from sales and maturities of investments) of $774.3 million, the acquisition of property and equipment of $187.4 million, and the acquisition of businesses of $87.9 million.
Net cash provided by investing activities for the year ended December 31, 2017, consisted of proceeds from sales and maturities of investments (net of purchases of investments) of $569.4 million, partially offset by the acquisition of property and equipment of $190.7 million.
We invest predominantly in high quality, fixed income securities. Our investment portfolio may, at any time, contain investments in U.S. treasury and U.S. government agency securities, taxable and tax-exempt municipal notes, corporate notes and bonds, commercial paper, non-U.S. government agency securities, cash deposits, and money market funds.
Financing Activities
Net cash used in financing activities for the year ended December 31, 2019, consisted primarily of cash used in the repurchase of approximately 0.6 million shares of our common stock in the open market for $269.5 million and taxes paid on behalf of employees related to net share settlements of vested employee equity awards of $159.1 million, partially offset by proceeds from stock option exercises and employee stock purchases of $272.8 million.
Net cash provided by financing activities for the year ended December 31, 2018, consisted primarily of proceeds from stock option exercises and employee stock purchases of $236.6 million, partially offset by taxes paid on behalf of employees related to net share settlements of vested employee equity awards of $120.0 million.
Net cash used in financing activities for the year ended December 31, 2017, consisted primarily of $2.3 billion related to an accelerated share buyback program executed and settled during 2017 and taxes paid on behalf of employees related to net share settlements of vested employee equity awards of $56.6 million, partially offset by proceeds from stock option exercises and employee stock purchases of $415.5 million.
Capital Expenditures
Our business is not capital equipment intensive. However, with the growth of our business and our investments in property and facilities and in manufacturing automation, capital investments in these areas have increased. We expect these capital investments to exceed $400 million in each of the next two years. We intend to fund these needs with cash generated from operations.
Our cash requirements depend on numerous factors, including market acceptance of our products, the resources we devote to developing and supporting our products, and other factors. We expect to continue to devote substantial resources to expand procedure adoption and acceptance of our products. We have made substantial investments in our commercial operations, product development activities, facilities, and intellectual property. Based upon our business model, we anticipate that we will continue to be able to fund future growth through cash provided from operations. We believe that our current cash, cash equivalents, and investment balances, together with income to be derived from the sale of our products, will be sufficient to meet our liquidity requirements for the foreseeable future.
Contractual Obligations and Commercial Commitments
The following table summarizes our contractual obligations and commercial commitments as of December 31, 2019 (in millions):
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Payments due by period
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Total
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Less than
1 year
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1 to 3 years
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3 to 5 years
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More than 5 years
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Operating leases (Note 6)
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$
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87.7
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|
|
$
|
9.6
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|
|
$
|
34.5
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|
|
$
|
21.2
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|
|
$
|
22.4
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Purchase commitments and obligations
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844.7
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|
|
805.6
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|
|
37.7
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|
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1.4
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—
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|
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Tax Cuts and Jobs Act Toll Tax (Note 11)
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225.2
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21.4
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|
42.9
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|
93.9
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|
|
67.0
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Total
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$
|
1,157.6
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$
|
836.6
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$
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115.1
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|
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$
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116.5
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$
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89.4
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Operating leases. We lease spaces for operations in the U.S. as well as in Japan, Mexico, China, South Korea, and other foreign countries. We also lease automobiles for certain sales and field service employees. These leases have varying terms up to 15 years. Operating lease amounts include future minimum lease payments under all of our non-cancellable operating leases with an initial term in excess of one year. Refer to Note 6 for further details.
Purchase commitments and obligations. These amounts include an estimate of all open purchase orders and contractual obligations in the ordinary course of business, including commitments with contract manufacturers and suppliers for which we have not received the goods or services, commitments for capital expenditures and construction-related activities for which we have not received the services, and acquisition and licensing of intellectual property. A majority of these purchase obligations are due within a year. Although open purchase orders are considered enforceable and legally binding, the terms generally allow us the option to cancel, reschedule, and adjust our requirements based on our business needs prior to the delivery of goods or performance of services. In addition to the above, we have committed to make potential future milestone payments to third parties as part of licensing, collaboration, and development arrangements. Payments under these agreements generally become due and payable only upon achievement of certain developmental, regulatory, and/or commercial milestones. For instances in which the achievement of these milestones is neither probable nor reasonably estimable, such contingencies have not been recorded on our Consolidated Balance Sheets and have not been included in the table above.
Tax Cuts and Jobs Act Toll Tax. As of December 31, 2019, our obligation associated with the deemed repatriation toll charge is $225.2 million, which is expected to be paid in installments. Refer to Note 11 for further details.
We are unable to make a reasonably reliable estimate as to when payments may occur for our unrecognized tax benefits. Therefore, our liability for unrecognized tax benefits is not included in the table above.
Off-Balance Sheet Arrangements
As of December 31, 2019, we did not have any significant off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K promulgated under the Exchange Act.
Critical Accounting Estimates
Our Consolidated Financial Statements are prepared in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”), which requires us to make judgments, estimates, and assumptions. See “Note 2. Summary of Significant Accounting Policies,” in Notes to the Consolidated Financial Statements, which is included in “Item 8. Financial Statements and Supplementary Data,” which describes our significant accounting policies and methods used in the preparation of our Consolidated Financial Statements. The methods, estimates, and judgments that we use in applying our accounting policies require us to make difficult and subjective judgments, often as a result of the need to make estimates regarding matters that are inherently uncertain. Our most critical accounting estimates include:
•the valuation and recognition of investments, which impacts our investment portfolio balance when we assess fair value and interest and other income, net, when we record impairments;
•the standalone selling prices used to allocate the contract consideration to the individual performance obligations, which impacts revenue recognition;
•the allowance for sales returns and doubtful accounts, which impacts revenue;
•the estimation of transactions to hedge, which impacts revenue and expense;
•the valuation of inventory, which impacts gross profit margins;
•the valuation of and assessment of recoverability of intangible assets and their estimated useful lives, which primarily impacts gross profit margin or operating expenses when we record asset impairments or accelerate their amortization;
•the valuation and recognition of share-based compensation, which impacts gross profit margin and operating expenses;
•the recognition and measurement of current and deferred income taxes (including the measurement of uncertain tax positions), which impact our provision for taxes; and
•the estimate of probable loss associated with legal contingencies, which impacts accrued liabilities and operating expenses.
Investments Valuation
Fair Value. Our investment portfolio may, at any time, contain investments in U.S. treasuries and U.S. government agency securities, non-U.S. government securities, taxable and/or tax-exempt municipal notes, corporate notes and bonds, commercial paper, cash deposits, and money market funds. The assessment of the fair value of investments can be difficult and subjective. U.S. GAAP establishes three levels of inputs that may be used to measure fair value. Each level of input has different levels of subjectivity and difficulty involved in determining fair value. Valuation of Level 1 and 2 instruments generally do not require significant management judgment and the estimation is not difficult. Level 3 instruments include unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. The determination of fair value for Level 3 instruments requires the most management judgment and subjectivity. There were no Level 3 securities for the periods presented.
Other-than-temporary impairment. After determining the fair value of our available-for-sale instruments, gains or losses on these securities are recorded to other comprehensive income (“OCI”) until either the security is sold or we determine that the decline in value is other-than-temporary. Factors considered in determining whether a loss is temporary include the extent and length of time that the investment's fair value has been lower than its cost basis, the financial condition and near-term prospects of the investee, the extent of the loss related to credit of the issuer, the expected cash flows from the security, the Company's intent to sell the security, and whether or not the Company will be required to sell the security prior to the expected recovery of the investment's amortized cost basis. These judgments could prove to be wrong, and companies with relatively high credit ratings and solid financial conditions may not be able to fulfill their obligations.
No significant impairment charges were recorded during the years ended December 31, 2019, 2018, and 2017. As of December 31, 2019, and 2018, net unrealized losses on investments of $20.4 million and $9.8 million, net of tax, respectively, were included in accumulated other comprehensive income/(loss).
Revenue recognition. Our system sale arrangements contain multiple products and services, including system(s), system components, system accessories, instruments, accessories, and service. Other than service, we generally deliver all of the products upfront. Each of these products and services is a distinct performance obligation. System accessories, instruments, accessories, and service are also sold on a standalone basis.
For multiple-element arrangements, revenue is allocated to each performance obligation based on its relative standalone selling price. Standalone selling prices are based on observable prices at which we separately sell the products or services. If a standalone selling price is not directly observable, then we estimate the standalone selling prices considering market conditions and entity-specific factors including, but not limited to, features and functionality of the products and services, geographies,
type of customer, and market conditions. We regularly review standalone selling prices and maintain internal controls over establishing and updating these estimates.
Our system sales arrangements generally include a five-year period of service. The first year of service is generally free and included in the system sale arrangement and the remaining four years are billed at a stated service price. Revenue that is allocated to the service obligation is deferred and recognized ratably over the service period.
Allowance for sales returns and doubtful accounts. We record estimated reductions in revenue for potential returns of certain products by customers and other allowances. As a result, management must make estimates of potential future product returns and other allowances related to current period product revenue. In making such estimates, management analyzes historical returns, current economic trends and changes in customer demand and acceptance of our products. If management were to make different judgments or utilize different estimates, material differences in the amount of reported revenue could result.
Similarly, we make estimates of the collectability of accounts receivable, especially analyzing the aging and nature of accounts receivable and historical bad debts, customer concentrations, customer credit-worthiness, current economic trends, and changes in customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. Credit evaluations are undertaken for all major sales transactions before shipment is authorized. On a quarterly basis, we evaluate aged items in the accounts receivable aging report and provide an allowance in an amount that we deem adequate for doubtful accounts. If management were to make different judgments or utilize different estimates, material differences in the amount of our reported operating expenses could result.
Hedge Accounting for Derivatives. We utilize foreign currency forward exchange contracts to hedge certain anticipated foreign currency-denominated sales transactions and expenses. When specific criteria required by relevant accounting standards have been met, changes in fair values of hedge contracts relating to anticipated transactions are recorded in OCI rather than net income until the underlying hedged transaction affects net income. By their nature, our estimates of anticipated transactions may fluctuate over time and may ultimately vary from actual transactions. When we determine that the transactions are no longer probable within a certain time frame, we are required to reclassify the cumulative changes in the fair values of the related hedge contracts from OCI to net income.
Inventory valuation. Inventory is stated at the lower of cost or net realizable value on a first-in, first-out basis. The cost basis of our inventory is reduced for any products that are considered excessive or obsolete based upon assumptions about future demand and market conditions. If actual future demand or market conditions are less favorable than those projected by management, additional inventory write-downs may be required, which could have a material adverse effect on the results of our operations.
Intangible assets. Our intangible assets include identifiable intangible assets and goodwill. Identifiable intangible assets include developed technology, patents, distribution rights, customer relationships, licenses, and non-competition arrangements. All of our identifiable intangible assets have finite lives. Goodwill and intangible assets with indefinite lives are subject to an annual impairment review (or more frequent if impairment indicators arise) by applying a fair value-based test. There have been no such impairments.
Identifiable intangible assets with finite lives are subject to impairment testing and are reviewed for impairment when events or circumstances indicate that the carrying value of an asset is not recoverable and its carrying amount exceeds its fair value. We evaluate the recoverability of the carrying value of these identifiable intangible assets based on estimated undiscounted cash flows to be generated from such assets. If the cash flow estimates or the significant operating assumptions upon which they are based change in the future, we may be required to record additional impairment charges.
The valuation and classification of intangible assets and goodwill and the assignment of useful lives for purposes of amortization involves judgments and the use of estimates. The evaluation of these intangible assets and goodwill for impairment under established accounting guidelines is required on a recurring basis. Changes in business conditions could potentially require future adjustments to the assumptions made. When we determine that the useful lives of assets are shorter than we had originally estimated, we accelerate the rate of amortization over the assets’ new, shorter useful lives. No impairment charge or accelerated amortization was recorded for the years ended December 31, 2019, 2018, and 2017. A considerable amount of judgment is required in assessing impairment, which includes financial forecasts. If conditions are different from management’s current estimates, material write-downs of long-lived assets may be required, which would adversely affect our operating results.
Business combinations. We allocate the fair value of the purchase consideration to the assets acquired and liabilities assumed based on their estimated fair values at the acquisition date. The excess of the fair value of the purchase consideration over the fair value of assets acquired and liabilities assumed is recorded as goodwill. When determining the fair value of assets acquired and liabilities assumed, management is required to make certain estimates and assumptions, especially with respect to intangible assets. The estimates and assumptions used in valuing intangible assets include, but are not limited to, the amount
and timing of projected future cash flows, the discount rate used to determine the present value of these cash flows, and the determination of the assets’ life cycle. These estimates are inherently uncertain and, therefore, actual results may differ from the estimates made.
Accounting for stock options. We account for share-based compensation in accordance with the fair value recognition provisions of U.S. GAAP. We use the Black-Scholes-Merton option-pricing model, which requires the input of highly subjective assumptions. These assumptions include estimating the length of time employees will retain their vested stock options before exercising them, the estimated volatility of our common stock price over the expected term, and the number of options that will ultimately not complete their vesting requirements. The assumptions for expected volatility and expected term are the two assumptions that most significantly affect the grant date fair value of stock options. Changes in expected risk-free rate of return do not significantly impact the calculation of fair value and determining this input is not highly subjective.
We use implied volatility based on freely traded options in the open market, as we believe implied volatility is more reflective of market conditions and a better indicator of expected volatility than historical volatility. In determining the appropriateness of relying on implied volatility, we considered the following:
•the sufficiency of the trading volume of freely traded options;
•the ability to reasonably match the terms, such as the date of the grant and the exercise price of the freely traded options to options granted; and
•the length of the term of the freely traded options used to derive implied volatility.
The expected term represents the weighted-average period that our stock options are expected to be outstanding. The expected term is based on the observed and expected time to exercise. We determine expected term based on historical exercise patterns and our expectation of the time it will take for employees to exercise options still outstanding.
We develop an estimate of the number of share-based awards that will be forfeited due to employee turnover. Adjustments in the estimated forfeiture rates can have a significant effect on our reported share-based compensation, as we recognize the cumulative effect of the forfeiture rate adjustments for all expense amortization in the period that the estimated forfeiture rates are adjusted. We estimate and adjust forfeiture rates based on a periodic review of recent forfeiture activity and expected future employee turnover. If a revised forfeiture rate is higher than the previously estimated forfeiture rate, we may make an adjustment that will result in a decrease to the expense recognized in the financial statements during the period when the rate was changed. Adjustments in the estimated forfeiture rates could also cause changes in the amount of expense that we recognize in future periods.
Changes in these subjective assumptions can materially affect the estimate of the fair value of stock options and, consequently, the related amount of share-based compensation expense recognized in the Consolidated Statements of Income.
Accounting for income taxes. Significant management judgment is required in determining our provision for income taxes, deferred tax assets and liabilities, and any valuation allowance recorded against net deferred tax assets in accordance with U.S. GAAP. These estimates and judgments occur in the calculation of tax credits, benefits, and deductions and in the calculation of certain tax assets and liabilities, which arise from differences in the timing of recognition of revenue and expense for tax and financial statement purposes, as well as the interest and penalties related to uncertain tax positions. Significant changes to these estimates may result in an increase or decrease to our tax provision in the current or subsequent period.
We must assess the likelihood that we will be able to recover our deferred tax assets. In the event that all or part of our deferred tax assets are not recoverable in the future, we must increase our provision for taxes by recording a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be recoverable. In order for our deferred tax assets to be recoverable, we must be able to generate sufficient taxable income in those jurisdictions where the deferred tax assets are located. We consider forecasted income, including income that may be generated as a result of certain tax planning strategies, together with future reversals of existing taxable temporary differences, in determining the need for a valuation allowance. As of December 31, 2019, we believe it is more likely than not that our deferred tax assets ultimately will be recovered with the exception of our California deferred tax assets. We believe that, due to the computation of California taxes under the single sales factor, it is more likely than not that our California deferred tax assets will not be realized. Should there be a change in our ability to recover our deferred tax assets, our tax provision would be affected in the period in which such change takes place.
The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations. We recognize liabilities for uncertain tax positions based on a two-step process. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. If we determine that a tax position will more likely than not be sustained on audit, then the second step requires us to estimate and measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. It is inherently difficult and subjective to estimate such amounts, as we have to determine the probability of various possible outcomes. We re-evaluate these uncertain tax
positions on a quarterly basis. This evaluation is based on factors including, but not limited to, changes in facts or circumstances, changes in tax law, effective settlement of audit issues, and new audit activity. Such a change in recognition or measurement would result in the recognition of a tax benefit or an additional charge to the tax provision.
Accounting for legal contingencies. From time to time, we are involved in a number of legal proceedings involving product liability, intellectual property, shareholder derivative actions, securities class actions, insurance, employee-related, and other matters. We record a liability and related charge to earnings in our Consolidated Financial Statements for legal contingencies when the loss is considered probable and the amount can be reasonably estimated. Our assessment is re-evaluated each accounting period and is based on all available information, including discussion with any outside legal counsel that represents us. If a reasonable estimate of a known or probable loss cannot be made, but a range of probable losses can be estimated, the low-end of the range of losses is recognized if no amount within the range is a better estimate than any other. If a loss is reasonably possible, but not probable, and can be reasonably estimated, the estimated loss or range of loss is disclosed in the Notes to the Consolidated Financial Statements.
When determining the estimated probable loss or range of losses, significant judgment is required to be exercised in order to estimate the amount and timing of the loss to be recorded. Estimates of probable losses resulting from litigation are inherently difficult to make, particularly when the matters are in early procedural stages with incomplete facts and information. The final outcome of legal proceedings is dependent on many variables difficult to predict and, therefore, the ultimate cost to entirely resolve such matters may be materially different than the amount of current estimates. Consequently, new information or changes in judgments and estimates could have a material adverse effect on our business, financial condition, and results of operations or cash flows.
RECENT ACCOUNTING PRONOUNCEMENTS
See “Note 2. Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data” for a full description of recent accounting pronouncements including the respective expected dates of adoption and estimated effects, if any, on our Consolidated Financial Statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index To Consolidated Financial Statements
All other schedules have been omitted, because they are not applicable or the required information is shown in the Consolidated Financial Statements or the Notes thereto.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Intuitive Surgical, Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Intuitive Surgical, Inc. and its subsidiaries (the “Company”) as of December 31, 2019 and 2018, and the related consolidated statements of income, of comprehensive income, of stockholders’ equity and of cash flows for each of the three years in the period ended December 31, 2019, including the related notes and schedule of valuation and qualifying accounts for each of the three years in the period ended December 31, 2019 listed in the accompanying index (collectively referred to as the “consolidated financial statements”). We also have audited the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Change in Accounting Principle
As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for recognition of the income tax consequences of an intra-entity transfer of an asset, other than inventory, in 2018.
Basis for Opinions
The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control Over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Acquisitions of Chindex and Schölly - Fair value of Intangible Assets and Contingent Consideration
As described in Note 7 to the consolidated financial statements, the Company completed two transactions accounted for as business combinations during the year ended December 31, 2019. During the first quarter of 2019, the Company’s majority-owned joint venture with Fosun Pharma acquired certain assets from Chindex and its affiliates (“Chindex”), a subsidiary of Fosun Pharma, for total purchase consideration of $66.0 million, which resulted in $64.7 million of contingent consideration liability and $48.2 million of distribution rights being recorded. Management measured the contingent consideration liability at estimated fair value using a discounted cash flow model, which requires significant inputs not observable in the market. For the contingent consideration, key assumptions included (1) the probability and timing of milestone achievements based on projected future revenues through 2019 and 2020 and (2) the discount rate used to calculate the present value of the milestone payments. For the distribution rights intangible asset, key assumptions included (1) the amount and timing of projected future cash flows, and (2) the discount rate used to determine the present value of these cash flows. During the third quarter of 2019, the Company acquired certain assets and operations from Schölly Fiberoptic GmbH (“Schölly”) for total purchase consideration of $101.4 million, which resulted in $28.0 million of a manufacturing process technology intangible asset being recorded. For the manufacturing process technology intangible asset, key assumptions included (1) the amount and timing of projected future cash flows and (2) the discount rate used to determine the present value of these cash flows.
The principal considerations for our determination that performing procedures relating to the acquisitions of Chindex and Schölly, specifically the fair value of the distribution rights intangible asset, contingent consideration liability, and manufacturing process technology intangible asset, is a critical audit matter are there was significant judgment by management in developing the fair value estimates. This in turn led to a high degree of auditor judgment, effort, and subjectivity in performing procedures and evaluating audit evidence relating to management's projected future cash flows, specifically the revenue projections, for the distribution rights intangible asset, contingent consideration liability and manufacturing process technology, and the discount rates for the distribution rights intangible asset and contingent consideration liability. In addition, the audit effort involved the use of professionals with specialized skill and knowledge to assist in performing these procedures and evaluating the audit evidence obtained from these procedures.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the acquisition accounting, including controls over management's valuation of the distribution rights intangible asset and contingent consideration liability for the acquisition of Chindex and the manufacturing process technology intangible asset for the acquisition of Schölly, and controls over the development of the projected future cash flows, specifically revenue projections and discount rates. These procedures also included, among others, (i) reading the purchase agreements, (ii) evaluating management’s assessments of the completeness of the identified intangible assets acquired, and (iii) testing management’s process for estimating the fair value of the distribution rights, contingent consideration liability, and manufacturing process technology. Testing management’s process included evaluating the appropriateness of the methods used to develop the fair value estimates and evaluating the reasonableness of significant assumptions used by management, including the revenue projections and discount rates. Evaluating the reasonableness of the revenue projections included evaluating consistency with evidence obtained in other areas of the audit and considering historical trends of the Company’s business. Professionals with specialized skill and knowledge were used to assist in evaluating the reasonableness of the discount rates.
/s/ PricewaterhouseCoopers LLP
San Jose, California
February 7, 2020
We have served as the Company’s auditor since 2014.
INTUITIVE SURGICAL, INC.
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT PAR VALUE AMOUNTS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
2019
|
|
2018
|
|
ASSETS
|
|
|
|
|
Current assets:
|
|
|
|
|
Cash and cash equivalents
|
$
|
1,167.6
|
|
|
$
|
857.9
|
|
|
Short-term investments
|
2,054.1
|
|
|
2,205.2
|
|
|
Accounts receivable, net of allowances of $8.3 and $8.2 as of December 31, 2019, and 2018, respectively
|
645.2
|
|
|
682.3
|
|
|
Inventory
|
595.5
|
|
|
409.0
|
|
|
Prepaids and other current assets
|
200.2
|
|
|
178.8
|
|
|
|
|
|
|
|
Total current assets
|
4,662.6
|
|
|
4,333.2
|
|
|
Property, plant, and equipment, net
|
1,272.9
|
|
|
812.0
|
|
|
Long-term investments
|
2,623.5
|
|
|
1,771.3
|
|
|
Deferred tax assets
|
425.6
|
|
|
428.6
|
|
|
Intangible and other assets, net
|
441.4
|
|
|
261.0
|
|
|
Goodwill
|
307.2
|
|
|
240.6
|
|
|
Total assets
|
$
|
9,733.2
|
|
|
$
|
7,846.7
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
Current liabilities:
|
|
|
|
|
Accounts payable
|
$
|
123.5
|
|
|
$
|
100.7
|
|
|
Accrued compensation and employee benefits
|
251.6
|
|
|
193.8
|
|
|
Deferred revenue
|
337.8
|
|
|
294.3
|
|
|
Other accrued liabilities
|
317.3
|
|
|
231.8
|
|
|
Total current liabilities
|
1,030.2
|
|
|
820.6
|
|
|
Other long-term liabilities
|
418.3
|
|
|
338.6
|
|
|
Total liabilities
|
1,448.5
|
|
|
1,159.2
|
|
|
Commitments and contingencies (Note 8)
|
|
|
|
|
Stockholders’ equity:
|
|
|
|
|
Preferred stock, 2.5 shares authorized, $0.001 par value, issuable in series; no shares issued and outstanding as of December 31, 2019, and 2018
|
—
|
|
|
—
|
|
|
Common stock, 300.0 shares authorized, $0.001 par value, 116.0 shares and 114.5 shares issued and outstanding as of December 31, 2019, and 2018, respectively
|
0.1
|
|
|
0.1
|
|
|
Additional paid-in capital
|
5,756.8
|
|
|
5,170.3
|
|
|
Retained earnings
|
2,494.5
|
|
|
1,521.7
|
|
|
Accumulated other comprehensive income/(loss)
|
12.4
|
|
|
(13.3)
|
|
|
Total Intuitive Surgical, Inc. stockholders’ equity
|
8,263.8
|
|
|
6,678.8
|
|
|
Noncontrolling interest in joint venture
|
20.9
|
|
|
8.7
|
|
|
Total stockholders’ equity
|
8,284.7
|
|
|
6,687.5
|
|
|
Total liabilities and stockholders’ equity
|
$
|
9,733.2
|
|
|
$
|
7,846.7
|
|
The accompanying notes are an integral part of these Consolidated Financial Statements.
INTUITIVE SURGICAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
Revenue:
|
|
|
|
|
|
|
Product
|
$
|
3,754.3
|
|
|
$
|
3,089.1
|
|
|
$
|
2,565.3
|
|
|
Service
|
724.2
|
|
|
635.1
|
|
|
572.9
|
|
|
Total revenue
|
4,478.5
|
|
|
3,724.2
|
|
|
3,138.2
|
|
|
Cost of revenue:
|
|
|
|
|
|
|
Product
|
1,119.1
|
|
|
906.2
|
|
|
756.3
|
|
|
Service
|
249.2
|
|
|
213.9
|
|
|
179.9
|
|
|
Total cost of revenue
|
1,368.3
|
|
|
1,120.1
|
|
|
936.2
|
|
|
Gross profit
|
3,110.2
|
|
|
2,604.1
|
|
|
2,202.0
|
|
|
Operating expenses:
|
|
|
|
|
|
|
Selling, general and administrative
|
1,178.4
|
|
|
986.6
|
|
|
810.5
|
|
|
Research and development
|
557.3
|
|
|
418.1
|
|
|
328.6
|
|
|
Total operating expenses
|
1,735.7
|
|
|
1,404.7
|
|
|
1,139.1
|
|
|
Income from operations
|
1,374.5
|
|
|
1,199.4
|
|
|
1,062.9
|
|
|
Interest and other income, net
|
127.7
|
|
|
80.1
|
|
|
41.9
|
|
|
Income before taxes
|
1,502.2
|
|
|
1,279.5
|
|
|
1,104.8
|
|
|
Income tax expense
|
120.4
|
|
|
154.5
|
|
|
433.9
|
|
|
Net income
|
1,381.8
|
|
|
1,125.0
|
|
|
670.9
|
|
|
Less: net income (loss) attributable to noncontrolling interest in joint venture
|
2.5
|
|
|
(2.9)
|
|
|
—
|
|
|
Net income attributable to Intuitive Surgical, Inc.
|
$
|
1,379.3
|
|
|
$
|
1,127.9
|
|
|
$
|
670.9
|
|
|
Net income per share attributable to Intuitive Surgical, Inc.:
|
|
|
|
|
|
|
Basic
|
$
|
11.95
|
|
|
$
|
9.92
|
|
|
$
|
6.01
|
|
|
Diluted
|
$
|
11.54
|
|
|
$
|
9.49
|
|
|
$
|
5.77
|
|
|
Shares used in computing net income per share attributable to Intuitive Surgical, Inc.:
|
|
|
|
|
|
|
Basic
|
115.4
|
|
|
113.7
|
|
|
111.7
|
|
|
Diluted
|
119.5
|
|
|
118.8
|
|
|
116.3
|
|
|
Total comprehensive income attributable to Intuitive Surgical, Inc.
|
$
|
1,405.0
|
|
|
$
|
1,130.1
|
|
|
$
|
664.3
|
|
The accompanying notes are an integral part of these Consolidated Financial Statements.
INTUITIVE SURGICAL, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN MILLIONS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
Net income attributable to Intuitive Surgical, Inc.
|
$
|
1,379.3
|
|
|
$
|
1,127.9
|
|
|
$
|
670.9
|
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
Change in foreign currency translation gains (losses)
|
0.3
|
|
|
(2.6)
|
|
|
3.6
|
|
|
Available-for-sale investments (net of tax):
|
|
|
|
|
|
|
Change in unrealized gains (losses)
|
30.7
|
|
|
0.3
|
|
|
(2.7)
|
|
|
Less: Reclassification adjustment for (gains) losses on investments
|
(0.5)
|
|
|
1.2
|
|
|
—
|
|
|
Net change
|
30.2
|
|
|
1.5
|
|
|
(2.7)
|
|
|
Derivative instruments (net of tax):
|
|
|
|
|
|
|
Change in unrealized gains (losses)
|
5.8
|
|
|
3.6
|
|
|
(8.6)
|
|
|
Less: Reclassification adjustment for (gains) losses on derivative instruments
|
(5.3)
|
|
|
(1.0)
|
|
|
1.2
|
|
|
Net change
|
0.5
|
|
|
2.6
|
|
|
(7.4)
|
|
|
Employee benefit plans (net of tax):
|
|
|
|
|
|
|
Change in unrealized gains (losses)
|
(5.9)
|
|
|
0.4
|
|
|
(0.3)
|
|
|
Less: Reclassification adjustment for losses on employee benefit plans
|
0.6
|
|
|
0.3
|
|
|
0.2
|
|
|
Net change
|
(5.3)
|
|
|
0.7
|
|
|
(0.1)
|
|
|
Other comprehensive gains (losses)
|
25.7
|
|
|
2.2
|
|
|
(6.6)
|
|
|
Total comprehensive income attributable to Intuitive Surgical, Inc.
|
$
|
1,405.0
|
|
|
$
|
1,130.1
|
|
|
$
|
664.3
|
|
The accompanying notes are an integral part of these Consolidated Financial Statements.
INTUITIVE SURGICAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(IN MILLIONS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
|
Additional
Paid-In
Capital
|
|
Retained
Earnings
|
|
Accumulated
Other
Comprehensive
Income/(Loss)
|
|
Total Intuitive Surgical, Inc. Stockholders’ Equity
|
|
Noncontrolling
Interest
in
Joint
Venture
|
|
Total Stockholders’ Equity
|
|
|
Shares
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2016
|
38.8
|
|
|
$
|
—
|
|
|
$
|
4,211.8
|
|
|
$
|
1,617.6
|
|
|
$
|
(8.9)
|
|
|
$
|
5,820.5
|
|
|
$
|
—
|
|
|
$
|
5,820.5
|
|
|
Three-for-one stock split
|
77.6
|
|
|
0.1
|
|
|
(0.1)
|
|
|
|
|
|
|
|
|
—
|
|
|
|
|
|
—
|
|
|
Issuance of common stock through employee stock plans
|
3.4
|
|
|
|
|
|
415.5
|
|
|
|
|
|
|
|
|
415.5
|
|
|
|
|
415.5
|
|
|
Shares withheld related to net share settlement of equity awards
|
(0.2)
|
|
|
|
|
|
(5.1)
|
|
|
(51.5)
|
|
|
|
|
|
(56.6)
|
|
|
|
|
(56.6)
|
|
|
Share-based compensation expense related to employee stock plans
|
|
|
|
|
|
|
209.1
|
|
|
|
|
|
|
|
|
209.1
|
|
|
|
|
209.1
|
|
|
Repurchase and retirement of common stock
|
(7.3)
|
|
|
|
|
|
(152.0)
|
|
|
(2,122.0)
|
|
|
|
|
|
(2,274.0)
|
|
|
|
|
(2,274.0)
|
|
|
Net income attributable to Intuitive Surgical, Inc.
|
|
|
|
|
|
|
|
|
|
670.9
|
|
|
|
|
|
670.9
|
|
|
|
|
670.9
|
|
|
Other comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
(6.6)
|
|
|
(6.6)
|
|
|
|
|
(6.6)
|
|
|
Capital contribution from noncontrolling interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
2.0
|
|
|
2.0
|
|
|
Net loss attributable to noncontrolling interest in joint venture
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
(0.4)
|
|
|
(0.4)
|
|
|
Balances at December 31, 2017
|
112.3
|
|
|
$
|
0.1
|
|
|
$
|
4,679.2
|
|
|
$
|
115.0
|
|
|
$
|
(15.5)
|
|
|
$
|
4,778.8
|
|
|
$
|
1.6
|
|
|
$
|
4,780.4
|
|
|
Adoption of new accounting standards (1)
|
|
|
|
|
|
|
|
|
|
|
|
392.1
|
|
|
|
(1.3)
|
|
|
390.8
|
|
|
|
|
390.8
|
|
|
Issuance of common stock through employee stock plans
|
2.5
|
|
|
|
|
|
|
236.6
|
|
|
|
|
|
|
|
|
|
|
236.6
|
|
|
|
|
236.6
|
|
|
Shares withheld related to net share settlement of equity awards
|
(0.3)
|
|
|
|
|
|
|
(6.7)
|
|
|
|
(113.3)
|
|
|
|
|
|
|
(120.0)
|
|
|
|
|
(120.0)
|
|
|
Share-based compensation expense related to employee stock plans
|
|
|
|
|
|
|
|
261.2
|
|
|
|
|
|
|
|
|
|
|
261.2
|
|
|
|
|
261.2
|
|
|
Net income attributable to Intuitive Surgical, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
1,127.9
|
|
|
|
|
|
|
1,127.9
|
|
|
|
|
1,127.9
|
|
|
Other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.5
|
|
|
3.5
|
|
|
|
|
|
3.5
|
|
|
Capital contribution from noncontrolling interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
10.0
|
|
|
10.0
|
|
|
Net loss attributable to noncontrolling interest in joint venture
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
(2.9)
|
|
|
(2.9)
|
|
|
Balances at December 31, 2018
|
114.5
|
|
|
$
|
0.1
|
|
|
$
|
5,170.3
|
|
|
$
|
1,521.7
|
|
|
$
|
(13.3)
|
|
|
$
|
6,678.8
|
|
|
$
|
8.7
|
|
|
$
|
6,687.5
|
|
|
Issuance of common stock through employee stock plans
|
2.4
|
|
|
|
|
272.8
|
|
|
|
|
|
|
272.8
|
|
|
|
|
272.8
|
|
|
Shares withheld related to net share settlement of equity awards
|
(0.3)
|
|
|
|
|
(7.6)
|
|
|
(151.5)
|
|
|
|
|
(159.1)
|
|
|
|
|
(159.1)
|
|
|
Share-based compensation expense related to employee stock plans
|
|
|
|
|
335.8
|
|
|
|
|
|
|
335.8
|
|
|
|
|
335.8
|
|
|
Repurchase and retirement of common stock
|
(0.6)
|
|
|
|
|
(14.5)
|
|
|
(255.0)
|
|
|
|
|
(269.5)
|
|
|
|
|
(269.5)
|
|
|
Net income attributable to Intuitive Surgical, Inc.
|
|
|
|
|
|
|
1,379.3
|
|
|
|
|
1,379.3
|
|
|
|
|
1,379.3
|
|
|
Other comprehensive income (loss)
|
|
|
|
|
|
|
|
|
25.7
|
|
|
25.7
|
|
|
(0.3)
|
|
|
25.4
|
|
|
Capital contribution from noncontrolling interest
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
10.0
|
|
|
10.0
|
|
|
Net income attributable to noncontrolling interest in joint venture
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
2.5
|
|
|
|
2.5
|
|
|
Balances at December 31, 2019
|
116.0
|
|
|
$
|
0.1
|
|
|
|
$
|
5,756.8
|
|
|
|
$
|
2,494.5
|
|
|
|
$
|
12.4
|
|
|
|
$
|
8,263.8
|
|
|
|
$
|
20.9
|
|
|
|
$
|
8,284.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Represents the adjustments related to the adoptions of Accounting Standards Update ("ASU") 2016-16, Income Taxes (Topic 740): Intra-Entity Transfer of Assets Other than Inventory, and ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these Consolidated Financial Statements.
INTUITIVE SURGICAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
Operating activities:
|
|
|
|
|
|
|
Net income
|
$
|
1,381.8
|
|
|
$
|
1,125.0
|
|
|
$
|
670.9
|
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
Depreciation and loss on disposal of property, plant, and equipment, net
|
160.0
|
|
|
108.6
|
|
|
86.2
|
|
|
Amortization of intangible assets
|
43.0
|
|
|
14.2
|
|
|
12.9
|
|
|
Loss (gain) on investment, accretion of discounts, and amortization of premiums on investments, net
|
(6.0)
|
|
|
1.8
|
|
|
21.2
|
|
|
Deferred income taxes
|
(8.0)
|
|
|
31.9
|
|
|
60.2
|
|
|
Share-based compensation expense
|
335.8
|
|
|
261.2
|
|
|
209.1
|
|
|
Amortization of contract acquisition assets
|
13.1
|
|
10.6
|
|
|
10.9
|
|
Changes in operating assets and liabilities, net of effects of acquisitions:
|
|
|
|
|
|
|
Accounts receivable
|
38.8
|
|
|
(161.3)
|
|
|
(81.4)
|
|
|
Inventory
|
(360.5)
|
|
|
(279.0)
|
|
|
(115.5)
|
|
|
Prepaids and other assets
|
(116.9)
|
|
|
(77.7)
|
|
|
(38.9)
|
|
|
Accounts payable
|
12.3
|
|
|
16.7
|
|
|
14.0
|
|
|
Accrued compensation and employee benefits
|
57.4
|
|
|
26.2
|
|
|
31.2
|
|
|
Deferred revenue
|
35.5
|
|
|
54.3
|
|
|
43.7
|
|
|
Other liabilities
|
11.9
|
|
|
37.1
|
|
|
219.4
|
|
|
Net cash provided by operating activities
|
1,598.2
|
|
|
1,169.6
|
|
|
1,143.9
|
|
|
Investing activities:
|
|
|
|
|
|
|
Purchase of investments
|
(3,346.2)
|
|
|
(2,581.9)
|
|
|
(1,995.0)
|
|
|
Proceeds from sales of investments
|
107.3
|
|
|
274.0
|
|
|
1,861.3
|
|
|
Proceeds from maturities of investments
|
2,569.8
|
|
|
1,533.6
|
|
|
703.1
|
|
|
Purchase of property, plant, and equipment and intellectual property
|
(425.6)
|
|
|
(187.4)
|
|
|
(190.7)
|
|
|
Acquisition of businesses, net of cash
|
(59.7)
|
|
|
(87.9)
|
|
|
—
|
|
|
Net cash provided by (used in) investing activities
|
(1,154.4)
|
|
|
(1,049.6)
|
|
|
378.7
|
|
|
Financing activities:
|
|
|
|
|
|
|
Proceeds from issuance of common stock relating to employee stock plans
|
272.8
|
|
|
236.6
|
|
|
415.5
|
|
|
Taxes paid related to net share settlement of equity awards
|
(159.1)
|
|
|
(120.0)
|
|
|
(56.6)
|
|
|
Repurchase of common stock
|
(269.5)
|
|
|
—
|
|
|
(2,274.0)
|
|
|
Capital contribution from noncontrolling interest
|
10.0
|
|
|
10.0
|
|
|
2.0
|
|
|
Payment of deferred purchase consideration
|
(22.6)
|
|
|
(0.3)
|
|
|
—
|
|
|
Net cash provided by (used in) financing activities
|
(168.4)
|
|
|
126.3
|
|
|
(1,913.1)
|
|
|
Effect of exchange rate changes on cash, cash equivalents, and restricted cash
|
(2.2)
|
|
|
(0.1)
|
|
|
2.1
|
|
|
Net increase (decrease) in cash, cash equivalents, and restricted cash
|
273.2
|
|
|
246.2
|
|
|
(388.4)
|
|
|
Cash, cash equivalents, and restricted cash, beginning of year
|
909.4
|
|
|
663.2
|
|
|
1,051.6
|
|
|
Cash, cash equivalents, and restricted cash, end of year
|
$
|
1,182.6
|
|
|
$
|
909.4
|
|
|
$
|
663.2
|
|
The accompanying notes are an integral part of these Consolidated Financial Statements.
INTUITIVE SURGICAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. DESCRIPTION OF THE BUSINESS
Intuitive Surgical, Inc. (“Intuitive” or the “Company”) develops, manufactures, and markets the da Vinci® Surgical System and the IonTM endoluminal system. The Company’s products and related services enable physicians and healthcare providers to improve the quality of and access to minimally invasive care. The systems consist of a surgeon console or consoles, a patient-side cart, a high-performance vision system, and proprietary instruments and accessories.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) and include the accounts of the Company and its wholly- and majority-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
The Consolidated Financial Statements include the results and balances of the Company’s majority-owned joint venture (“Joint Venture”) with Shanghai Fosun Pharmaceutical (Group) Co., Ltd. (“Fosun Pharma”). Chindex Medical Limited (“Chindex”), a subsidiary of Fosun Pharma, has been its distribution partner for da Vinci Surgical Systems in China. The Company holds a controlling financial interest in the Joint Venture, and the noncontrolling interest is reflected as a separate component of the consolidated stockholders’ equity. The noncontrolling interest’s share of the earnings in the Joint Venture is presented separately in the Consolidated Statements of Income for the years ended December 31, 2019 and 2018, while the amount was inconsequential for the year ended December 31, 2017, and was included as a component of interest and other income, net in the Consolidated Statements of Income.
Beginning in 2018, the Company adopted Accounting Standards Update (“ASU”) No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfer of Assets Other than Inventory. The Company adopted this standard using the modified retrospective approach and, as a result, recorded a cumulative adjustment to retained earnings as of January 1, 2018.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the Consolidated Financial Statements and accompanying Notes to the Consolidated Financial Statements. The accounting estimates that require management’s most significant, difficult, and subjective judgments include the valuation and recognition of investments, revenue recognition and the valuation of revenue and allowances for sales returns and doubtful accounts, the estimation of exposures that are able to be hedged and the offsetting hedge transactions, the valuation of inventory, the valuation of and assessment of recoverability of intangible assets and their estimated useful lives, the valuation and recognition of share-based compensation, the recognition and measurement of current and deferred income tax assets, along with the assessment of recoverability, and liabilities, and the estimates for legal contingencies. Actual results could differ materially from these estimates.
Concentrations of Credit Risk and Other Risks and Uncertainties
The carrying amounts for financial instruments consisting of cash and cash equivalents, accounts receivable, accounts payable, and accrued liabilities approximate fair value due to their short maturities. Marketable securities and derivative instruments are stated at their estimated fair values, based on quoted market prices for the same or similar instruments. The counterparties to the agreements relating to the Company’s investment securities and derivative instruments consist of various major corporations, financial institutions, municipalities, and government agencies of high credit standing.
The Company’s accounts receivable are derived from net revenue to customers and distributors located throughout the world. The Company performs credit evaluations of its customers’ financial condition and, generally, requires no collateral from its customers. The Company provides reserves for potential credit losses but has not experienced significant losses to date. As of December 31, 2019, and 2018, 66% and 71%, respectively, of accounts receivable were from domestic customers. No single customer represented more than 10% of total revenue for the years ended December 31, 2019, 2018, and 2017.
During the years ended December 31, 2019, 2018, and 2017, domestic revenue accounted for 70%, 71%, and 73% of total revenue, respectively, while outside of the U.S. revenue accounted for 30%, 29%, and 27%, respectively, of total revenue for each of the years then ended.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity from date of purchase of 90 days or less to be cash equivalents.
Restricted Cash
As of December 31, 2019, the Company had $15.0 million of restricted cash associated with its insurance programs. As of December 31, 2018, the Company had $51.5 million of restricted cash associated with its insurance programs and a shareholder litigation settlement that was reached in 2018. Restricted cash was included in prepaids and other current assets and intangible and other assets, net on the Consolidated Balance Sheets.
Investments
Available-for-sale investments. The Company’s investments may consist of U.S. treasury and U.S. government agency securities, taxable and tax-exempt municipal notes, corporate notes and bonds, commercial paper, non-U.S. government agency securities, and money market funds. The Company has designated all investments as available-for-sale and, therefore, such investments are reported at fair value, with unrealized gains and losses recorded in accumulated other comprehensive income (loss). For securities sold prior to maturity, the cost of securities sold is based on the specific identification method. Realized gains and losses on the sale of investments are recorded in interest and other income, net in the Consolidated Statements of Income. Investments with remaining maturities at date of purchase greater than 90 days and remaining maturities as of the reporting period less than one year are classified as short-term investments. Investments with remaining maturities greater than one year are classified as long-term investments.
Other-than-temporary impairment. All of the Company’s investments are subject to a periodic impairment review. The Company recognizes an impairment charge when a decline in the fair value of its investments below the cost basis is judged to be other-than-temporary. Factors considered in determining whether a loss is temporary included the extent and length of time that the investment’s fair value has been lower than its cost basis, the financial condition and near-term prospects of the investee, the extent of the loss related to credit of the issuer, the expected cash flows from the security, the Company’s intent to sell the security, and whether or not the Company will be required to sell the security prior to the expected recovery of the investment’s amortized cost basis. No significant charges were recorded during the years ended December 31, 2019, 2018, and 2017.
Fair Value Measurements
The Company measures the fair value of money market funds and certain U.S. treasury securities based on quoted prices in active markets for identical assets as Level 1 securities. Marketable securities measured at fair value using Level 2 inputs are primarily comprised of commercial paper, corporate notes and bonds, U.S. and non-U.S. government agencies, and municipal notes. The Company reviews trading activity and pricing for these investments as of the measurement date. When sufficient quoted pricing for identical securities is not available, the Company uses market pricing and other observable market inputs for similar securities obtained from various third-party data providers. These inputs either represent quoted prices for similar assets in active markets or have been derived from observable market data. This approach results in the Level 2 classification of these securities within the fair value hierarchy.
Inventory
Inventory is stated at the lower of cost or net realizable value on a first-in, first-out basis. Inventory costs include direct materials, direct labor, and normal manufacturing overhead. The cost basis of the Company’s inventory is reduced for any products that are considered excessive or obsolete based upon assumptions about future demand and market conditions.
Property, Plant, and Equipment
Property, plant, and equipment are stated at cost, net of accumulated depreciation. Depreciation is computed on a straight-line basis over the estimated useful lives of the assets, generally, as follows:
|
|
|
|
|
|
|
|
|
Useful Lives
|
|
Building
|
Up to 30 years
|
|
Building improvements
|
Up to 15 years
|
|
Leasehold improvements
|
Lesser of useful life or term of lease
|
|
Equipment and furniture
|
5 years
|
|
Operating lease assets
|
Greater of lease term or 1 to 5 years
|
|
Computer and office equipment
|
3 years
|
|
Enterprise-wide software
|
5 years
|
|
Purchased software
|
Lesser of 3 years or life of license
|
Depreciation expense for the years ended December 31, 2019, 2018, and 2017, was $156.7 million, $105.9 million, and $82.1 million, respectively.
Capitalized Software Costs for Internal Use
The Company capitalizes direct costs associated with developing or obtaining internal use software, including enterprise-wide business software, that are incurred during the application development stage. These capitalized costs are recorded as capitalized software within property, plant, and equipment. Costs related to preliminary project activities and post-implementation activities are expensed as incurred. Upon being placed in service, amounts capitalized are amortized over an estimated useful life of up to 5 years, generally on a straight-line basis.
Business Combinations
The Company accounts for business acquisitions in accordance with ASC 805, Business Combinations. This standard requires the acquiring entity in a business combination to recognize all of (and only) the assets acquired and liabilities assumed in the transaction and establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed in a business combination. Certain provisions of this standard prescribe, among other things, the determination of acquisition-date fair value of consideration paid in a business combination, including contingent consideration. The Company allocates the acquisition-date fair value to the assets acquired and liabilities assumed based on the estimated fair values. The excess of the acquisition-date fair value of consideration paid over the fair values of the identifiable assets and liabilities is recorded as goodwill. Acquisition-related costs are recognized separately from the business combination and are expensed as incurred. The Company includes the results of operations of the businesses that are acquired as of the acquisition date.
Goodwill and Intangible Assets
Goodwill and intangible assets with indefinite useful lives are not amortized but are tested for impairment at least annually during the fourth quarter, or if circumstances indicate their value may no longer be recoverable. Goodwill represents the excess of the purchase price over the fair value of net identifiable assets and liabilities. The Company continues to operate in one segment, which is considered to be the sole reporting unit and, therefore, goodwill was tested for impairment at the enterprise level.
Intangible assets are carried at cost, net of accumulated amortization. The Company does not have intangible assets with indefinite useful lives other than goodwill. Amortization is recorded on a straight-line basis over the intangible assets’ useful lives, which range from approximately 1 to 9 years.
Impairment of Long-lived Assets
The Company evaluates long-lived assets, which include amortizable intangible and tangible assets, for impairment whenever events or changes in circumstances indicate that the carrying value of long-lived assets may not be recoverable. Recoverability is measured by comparing the net book value to the future undiscounted cash flows attributable to such assets. The Company recognizes an impairment charge equal to the amount by which the net book value exceeds its fair value. No material impairment losses were incurred in the periods presented.
Revenue Recognition
The Company’s revenue consists of product revenue resulting from the sale of systems, system components, instruments and accessories, and service revenue. The Company accounts for a contract with a customer when there is a legally enforceable contract between the Company and its customer, the rights of the parties are identified, the contract has commercial substance, and collectability of the contract consideration is probable. The Company’s revenues are measured based on the consideration specified in the contract with each customer, net of any sales incentives and taxes collected from customers that are remitted to government authorities.
The Company’s system sale arrangements generally contain multiple products and services. For these bundled sale arrangements, the Company accounts for individual products and services as separate performance obligations if they are a distinct product or service that is separately identifiable from other items in bundled packages and if a customer can benefit from the product or service on its own or with other resources that are readily available to the customer. The Company’s system sale arrangements include a combination of the following performance obligations: system(s); system components; system accessories; instruments; accessories; and system service. The Company’s system sale arrangements generally include a five-year period of service. The first year of service is generally free and included in the system sale arrangement, and the remaining four years are generally included at a stated service price. The Company considers the service terms in the arrangements that are legally enforceable to be performance obligations. Other than service, the Company generally satisfies all of the performance obligations up-front. System components, system accessories, instruments, accessories, and service are also sold on a stand-alone basis.
The Company recognizes revenue as the performance obligations are satisfied by transferring control of the product or service to a customer. The Company generally recognizes revenue for the performance obligations at the following points in time:
System sales. For systems (including system components and system accessories) sold directly to end customers, revenue is recognized when the Company transfers control to the customer, which is generally at the point when acceptance occurs that indicates customer acknowledgment of delivery or installation, depending on the terms of the arrangement. For systems sold through distributors, revenue is recognized generally at the time of shipment. The Company’s system arrangements generally do not provide a right of return. The systems are generally covered by a one-year warranty. Warranty costs were not material for the periods presented.
Instruments and accessories. Revenue from sales of instruments and accessories is recognized when control is transferred to the customers, which generally occurs at the time of shipment but also occurs at the time of delivery, depending on the customer arrangement. The Company allows its customers in the normal course of business to return unused products for a limited period of time subsequent to initial purchase and records an allowance against revenue for estimated returns.
Service. Service revenue is recognized over the term of the service period, as the customer benefits from the services throughout the service period. Revenue related to services performed on a time-and-materials basis is recognized when performed.
The Company offers its customers the opportunity to trade in their older systems for a credit towards the purchase of a newer generation system. The Company generally does not provide specified price trade-in rights or upgrade rights at the time of system purchase. Such trade-in or upgrade transactions are separately negotiated based on the circumstances at the time of the trade-in or upgrade, based on the then fair value of the system, and are generally not based on any pre-existing rights granted by the Company. Accordingly, such trade-ins and upgrades are not considered separate performance obligations in the arrangement for a system sale. Traded-in systems could be reconditioned and resold. The Company accounts for the fair value of the traded-in system in the total consideration in the arrangement by including the net realizable value of the traded-in system less a normal profit margin. The value of the traded-in system is determined as the amount, after reconditioning costs are added, that will allow a normal profit margin on the sale of the reconditioned unit to be generated. When there is no market for the traded-in units, no value is assigned. Traded-in units are reported as a component of inventory until resold, or otherwise disposed.
In addition, customers may also have the opportunity to upgrade their systems at a price determined at the time of the upgrade, for example, by adding a second surgeon console for use with the da Vinci Surgical System. Such upgrades are performed by completing component level upgrades at the customer’s site. Upgrade revenue is recognized when the component level upgrades are complete and all revenue recognition criteria are met.
For multiple-element arrangements, revenue is allocated to each performance obligation based on its relative standalone selling price. Standalone selling prices are based on observable prices at which the Company separately sells the products or services. If a standalone selling price is not directly observable, then the Company estimates the standalone selling price considering market conditions and entity-specific factors including, but not limited to, features and functionality of the products and services, geographies, and type of customer. The Company regularly reviews standalone selling prices and updates these estimates as necessary.
Assets Recognized from the Costs to Obtain a Contract with a Customer
The Company has determined that certain sales incentives provided to the Company’s sales team are required to be capitalized when the Company expects to generate future economic benefits from the related revenue-generating contracts subsequent to the initial capital sales transaction. When determining the economic life of the contract acquisition assets recognized, the Company considers historical service renewal rates, expectations of future customer renewals of service contracts, and other factors that could impact the economic benefits that the Company expects to generate from the relationship with its customers. The costs capitalized as contract acquisition costs included in intangible and other assets, net in the Consolidated Balance Sheets were $51.5 million and $34.2 million as of December 31, 2019, and 2018, respectively. The Company did not incur any impairment losses during the periods presented.
Intuitive System Leasing
The Company enters into sales-type and operating lease arrangements with certain qualified customers. Sales-type leases have terms that generally range from 24 to 84 months and are usually collateralized by a security interest in the underlying assets. Revenue related to multiple-element arrangements are allocated to lease and non-lease elements based on their relative standalone selling prices as prescribed by the Company’s revenue recognition policy. Lease elements generally include a system or system component, while non-lease elements generally include service, instruments, and accessories. For some lease arrangements, the customers are provided with the right to purchase the leased system at some point during and/or at the end of
the lease term. Except for certain usage-based lease arrangements, lease arrangements generally do not provide rights for the customers to exit or terminate the lease without incurring a penalty. For some leases, lease payments are based on the usage of the systems.
In determining whether a transaction should be classified as a sales-type or operating lease, the Company considers the following terms at lease commencement: (1) whether title of the system transfers automatically or for a nominal fee by the end of the lease term, (2) whether the present value of the minimum lease payments equals or exceeds substantially all of the fair value of the leased system, (3) whether the lease term is for the major part of the remaining economic life of the leased system, (4) whether the lease grants the lessee an option to purchase the leased system that the lessee is reasonably certain to exercise, and (5) whether the underlying system is of such a specialized nature that it is expected to have no alternative use to the Company at the end of the lease term.
The Company generally recognizes revenue from sales-type lease arrangements at the time the system is accepted by the customer, assuming all other revenue recognition criteria have been met. Revenue related to lease elements from sales-type leases is presented as product revenue. Revenue related to lease elements from operating lease arrangements is generally recognized on a straight-line basis over the lease term or based upon system usage and is presented as product revenue.
Other Leasing Arrangements
The Company determines if an arrangement contains a lease at inception. For arrangements where the Company is the lessee, operating leases are included in intangible and other assets, net, other accrued liabilities, and other long-term liabilities on the Consolidated Balance Sheet as of December 31, 2019. The Company currently does not have any finance leases.
Operating lease right-of-use ("ROU") assets and operating leases liabilities are recognized based on the present value of the future minimum lease payments over the lease term at the commencement date. ROU assets also include any initial direct costs incurred and any lease payments made at or before the lease commencement date, less lease incentives received. The Company uses its incremental borrowing rate based on the information available at the commencement date in determining the lease liabilities, as the Company's leases generally do not provide an implicit rate. Lease terms may include options to extend or terminate when the Company is reasonably certain the option will be exercised. Lease expense is recognized on a straight-line basis over the lease term.
The Company also has lease arrangements with lease and non-lease components. The Company elected the practical expedient not to separate non-lease components from lease components for the Company's real estate and automobile leases. Additionally, the Company applied a portfolio approach to effectively account for the operating lease ROU assets and lease liabilities for the Company's automobile leases. The Company also elected to apply the short-term lease measurement and recognition exemption in which ROU assets and lease liabilities are not recognized for leases with terms of 12 months or less.
Allowances for Sales Returns and Doubtful Accounts
The allowance for sales returns is based on the Company’s estimates of potential future returns of certain products and other allowances related to current period product revenue. The Company analyzes historical returns, current economic trends, and changes in customer demand and acceptance of the Company’s products. The allowance for doubtful accounts is based on the Company’s assessment of the collectability of customer accounts. The Company regularly reviews the allowance by considering factors such as historical experience, credit quality, the age of the accounts receivable balances, and current economic conditions that may affect a customer’s ability to pay.
Share-Based Compensation
The Company accounts for share-based employee compensation plans using the fair value recognition and measurement provisions under U.S. GAAP. The Company’s share-based compensation cost is measured at the grant date, based on the fair value of the award, and is recognized as expense on a straight-line basis over the requisite service period. The Company estimates expected forfeitures at the time of grant and revises the estimate, if necessary, in subsequent periods if actual forfeitures differ from those estimated.
Expected Term: The expected term represents the weighted-average period that the stock options are expected to be outstanding prior to being exercised. The Company determines expected term based on historical exercise patterns and its expectation of the time that it will take for employees to exercise options still outstanding.
Expected Volatility: The Company uses market-based implied volatility for purposes of valuing stock options granted. Market-based implied volatility is derived based on actively traded options with expirations greater than one year on the Company’s common stock. The extent to which the Company relies on market-based volatility when valuing options depends, among other things, on the availability of traded options on the Company’s stock and the term of such options. Due to sufficient volume of the traded options, the Company used 100% market-based implied volatility to value options granted, which the Company believes is more representative of future stock price trends than historical volatility.
Risk-Free Interest Rate: The risk-free interest rate is based on the U.S. treasury yield curve in effect at the time of grant for the expected term of the stock option.
The fair value of restricted stock units is determined based on the closing quoted price of the Company’s common stock on the date of the grant. See “Note 9. Share-Based Compensation,” for a detailed discussion of the Company’s stock plans and share-based compensation expense.
Computation of Net Income per Share
Basic net income per share attributable to Intuitive Surgical, Inc. is computed using the weighted-average number of shares outstanding during the period. Diluted net income per share attributable to Intuitive Surgical, Inc. is computed using the weighted-average number of the Company’s shares and dilutive potential shares outstanding during the period. Dilutive potential shares primarily consist of employee stock options, restricted stock units, and shares to be purchased by employees under the Company’s employee stock purchase plan.
U.S. GAAP requires that employee equity share options, non-vested shares, and similar equity instruments granted by the Company be treated as potential common shares outstanding in computing diluted earnings per share. Diluted shares outstanding include the dilutive effect of equity awards, which is calculated based on the average share price for each fiscal period using the treasury stock method. Under the treasury stock method, the amount the employee must pay for exercising stock options and the amount of compensation cost for future service that the Company has not yet recognized are assumed to be used to repurchase shares.
Research and Development Expenses
Research and development costs are expensed as incurred and include amortization of intangible assets, costs associated with co-development research and development licensing arrangements, costs of prototypes, salaries, benefits and other headcount-related costs, contract and other outside service fees, and facilities and overhead costs.
Foreign Currency and Other Hedging Instruments
For subsidiaries whose local currency is their functional currency, their assets and liabilities are translated into U.S. dollars at exchange rates at the balance sheet date, and revenues and expenses are translated using average exchange rates in effect during the period. Gains and losses from foreign currency translation are included in accumulated other comprehensive income (loss) within stockholders’ equity in the Consolidated Balance Sheets. For all non-functional currency account balances, the re-measurement of such balances to the functional currency results in either a foreign exchange gain or loss, which is recorded to interest and other income, net in the Consolidated Statements of Income in the same accounting period that the re-measurement occurred.
The Company uses derivatives to partially offset its business exposure to foreign currency exchange risk. The terms of the Company’s derivative contracts are generally twelve months or shorter. The Company typically hedges portions of its forecasted foreign currency exposure associated with revenue and expenses. The Company may also enter into foreign currency forward contracts to offset the foreign currency exchange gains and losses generated by re-measurement of certain assets and liabilities denominated in non-functional currencies. The hedging program is not designated for trading or speculative purposes.
The Company’s accounting policies for these instruments are based on whether the instruments are designated as hedging or non-hedging instruments. The Company records all derivatives on the Consolidated Balance Sheets at fair value. The effective portions of cash flow hedges are recorded in other comprehensive income (loss) (“OCI”) until the hedged item is recognized in earnings. Derivative instruments designated as cash flow hedges are de-designated as hedges when it is probable that the forecasted hedged transaction will not occur in the initially identified time period or within a subsequent two-month time period. Gains and losses in OCI associated with such derivative instruments are reclassified immediately into earnings through interest and other income, net. Any subsequent changes in fair value of such derivative instruments also are reflected in current earnings.
Derivatives that are not designated as hedging instruments and the ineffective portions of cash flow hedges are adjusted to fair value through earnings in interest and other income, net.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amounts that are expected more likely than not to be realized in the future.
The Company recognizes tax benefits from uncertain tax positions only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement.
The Company recognizes excess tax benefits and tax deficiencies in the provision for income taxes as discrete items in the period when the awards vest or are settled. The Company accounts for Global Intangible Low-Taxed Income (“GILTI”) as period costs when incurred.
Segments
The Company operates in one segment. Management uses one measurement of profitability and does not segregate its business for internal reporting. As of December 31, 2019, and 2018, 85% and 88% of long-lived assets were in the United States, respectively. Revenue is attributed to a geographic region based on the location of the end customer.
Legal Contingencies
From time to time, the Company is involved in a number of legal proceedings involving product liability, intellectual property, shareholder derivative actions, securities class actions, and other matters. A liability and related charge are recorded to earnings in the Company’s consolidated financial statements for legal contingencies when the loss is considered probable and the amount can be reasonably estimated. The assessment is re-evaluated each period and is based on all available information, including discussion with outside legal counsel. If a reasonable estimate of a known or probable loss cannot be made, but a range of probable losses can be estimated, the low-end of the range of losses is recognized if no amount within the range is a better estimate than any other. If a material loss is reasonably possible but not probable and can be reasonably estimated, the estimated loss or range of loss is disclosed in the notes to the consolidated financial statements. The Company expenses legal fees as incurred.
When determining the estimated probable loss or range of losses, significant judgment is required to be exercised in order to estimate the amount and timing of the loss to be recorded. Estimates of probable losses resulting from litigation are inherently difficult to make, particularly when the matters are in early procedural stages with incomplete facts and information. The final outcome of legal proceedings is dependent on many variables that are difficult to predict and, therefore, the ultimate cost to entirely resolve such matters may be materially different than the amount of current estimates. Consequently, new information or changes in judgments and estimates could have a material adverse effect on the Company’s business, financial condition, and results of operations or cash flows.
Recently Adopted Accounting Pronouncements
Leases
In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-02, Leases (Topic 842) (“Topic 842”), which amended prior accounting standards for leases. The Company adopted Topic 842 on January 1, 2019, using the alternative modified transition method, which requires a cumulative-effect adjustment, if any, to the opening balance of retained earnings to be recognized on the date of adoption with prior periods not restated. There was no cumulative-effect adjustment recorded on January 1, 2019. Please see the description of the Company's "Intuitive System Leasing" and "Other Leasing Arrangements" accounting policies above. Also, see "Note 6. Leases" for further information.
As permitted by the new standard, the Company elected the following practical expedients when assessing the transition impact from both the lessee and lessor perspectives: (i) not to reassess whether any expired or existing contracts as of January 1, 2019, are or contain leases; (ii) not to reassess the lease classification for any expired or existing leases as of January 1, 2019; (iii) not to reassess initial direct costs for any existing leases as of January 1, 2019; and (iv) not to reassess whether land easements meet the definition of a lease.
The primary impact for the Company was the balance sheet recognition of ROU assets and lease liabilities for operating leases as a lessee.
Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract
In August 2018, the FASB issued ASU No. 2018-15, Intangibles (Topic 350): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. This standard also requires customers to amortize the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement. The Company early adopted this standard, as of January 1, 2019, on a prospective basis for all applicable implementation costs.
The Company recorded these capitalized implementation costs within intangible and other assets, net in the accompanying Consolidated Balance Sheets and recognized the related amortization expenses generally over the fixed, non-cancellable term of the associated arrangement on a straight-line basis. The adoption did not have a material impact on the Company's financial position and the results of operations in 2019.
Recent Accounting Pronouncements Not Yet Adopted
Financial Instruments (Topic 326)
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"), which requires an entity to measure expected credit losses for certain financial instruments and financial assets, including trade receivables. This standard also modifies the impairment model for available-for-sale debt securities and requires that credit losses be recorded through an allowance for credit losses and limits the credit loss to the amount by which fair value is below amortized cost. The Company will adopt ASU 2016-13 as of January 1, 2020, using the modified retrospective transition method. The adoption of ASU 2016-13 is not expected to have a material impact on the Company's financial position and the results of operations.
NOTE 3. FINANCIAL INSTRUMENTS
Cash, Cash Equivalents, and Investments
The following tables summarize the Company’s cash and available-for-sale marketable securities’ amortized cost, gross unrealized gains, gross unrealized losses, and fair value by significant investment category reported as cash and cash equivalents or short-term or long-term investments as of December 31, 2019, and 2018 (in millions):
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|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported as:
|
|
|
|
|
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair
Value
|
|
Cash and
Cash
Equivalents
|
|
Short-term
Investments
|
|
Long-term
Investments
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
$
|
413.1
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
413.1
|
|
|
$
|
413.1
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Level 1:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
726.8
|
|
|
—
|
|
|
—
|
|
|
726.8
|
|
|
726.8
|
|
|
—
|
|
|
—
|
|
|
U.S. treasuries
|
1,935.8
|
|
|
9.7
|
|
|
(0.4)
|
|
|
1,945.1
|
|
|
—
|
|
|
890.8
|
|
|
1,054.3
|
|
|
Subtotal
|
2,662.6
|
|
|
9.7
|
|
|
(0.4)
|
|
|
2,671.9
|
|
|
726.8
|
|
|
890.8
|
|
|
1,054.3
|
|
|
Level 2:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper
|
165.1
|
|
|
—
|
|
|
—
|
|
|
165.1
|
|
|
25.5
|
|
|
139.6
|
|
|
—
|
|
|
Corporate securities
|
2,096.1
|
|
|
16.8
|
|
|
(0.2)
|
|
|
2,112.7
|
|
|
—
|
|
|
798.5
|
|
|
1,314.2
|
|
|
U.S. government agencies
|
418.3
|
|
|
1.1
|
|
|
(0.2)
|
|
|
419.2
|
|
|
—
|
|
|
209.6
|
|
|
209.6
|
|
|
Non-U.S. government securities
|
4.5
|
|
|
—
|
|
|
—
|
|
|
4.5
|
|
|
—
|
|
|
4.5
|
|
|
—
|
|
|
Municipal securities
|
58.4
|
|
|
0.3
|
|
|
—
|
|
|
58.7
|
|
|
2.2
|
|
|
11.1
|
|
|
45.4
|
|
|
Subtotal
|
2,742.4
|
|
|
18.2
|
|
|
(0.4)
|
|
|
2,760.2
|
|
|
27.7
|
|
|
1,163.3
|
|
|
1,569.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets measured at fair value
|
$
|
5,818.1
|
|
|
$
|
27.9
|
|
|
$
|
(0.8)
|
|
|
$
|
5,845.2
|
|
|
$
|
1,167.6
|
|
|
$
|
2,054.1
|
|
|
$
|
2,623.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
Reported as:
|
|
|
|
|
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair
Value
|
|
Cash and
Cash
Equivalents
|
|
Short-term
Investments
|
|
Long-term
Investments
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
$
|
269.4
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
269.4
|
|
|
$
|
269.4
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Level 1:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
569.1
|
|
|
—
|
|
|
—
|
|
|
569.1
|
|
|
569.1
|
|
|
—
|
|
|
—
|
|
|
U.S. treasuries
|
1,477.8
|
|
|
1.7
|
|
|
(5.3)
|
|
|
1,474.2
|
|
|
10.0
|
|
|
897.8
|
|
|
566.4
|
|
|
Subtotal
|
2,046.9
|
|
|
1.7
|
|
|
(5.3)
|
|
|
2,043.3
|
|
|
579.1
|
|
|
897.8
|
|
|
566.4
|
|
|
Level 2:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper
|
110.7
|
|
|
—
|
|
|
—
|
|
|
110.7
|
|
|
1.4
|
|
|
109.3
|
|
|
—
|
|
|
Corporate securities
|
1,607.8
|
|
|
1.3
|
|
|
(4.8)
|
|
|
1,604.3
|
|
|
8.0
|
|
|
724.5
|
|
|
871.8
|
|
|
U.S. government agencies
|
791.8
|
|
|
0.3
|
|
|
(3.8)
|
|
|
788.3
|
|
|
—
|
|
|
468.9
|
|
|
319.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal securities
|
18.4
|
|
|
—
|
|
|
—
|
|
|
18.4
|
|
|
—
|
|
|
4.7
|
|
|
13.7
|
|
|
Subtotal
|
2,528.7
|
|
|
1.6
|
|
|
(8.6)
|
|
|
2,521.7
|
|
|
9.4
|
|
|
1,307.4
|
|
|
1,204.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets measured at fair value
|
$
|
4,845.0
|
|
|
$
|
3.3
|
|
|
$
|
(13.9)
|
|
|
$
|
4,834.4
|
|
|
$
|
857.9
|
|
|
$
|
2,205.2
|
|
|
$
|
1,771.3
|
|
As of December 31, 2018, the Company also recorded $36.5 million of restricted cash equivalents (comprised of money market funds and U.S. treasuries, which would be considered highly liquid investments with original maturity dates that are 90 days or less) in connection with a concluded legal matter in prepaids and other current assets in the accompanying Consolidated Balance Sheets.
The following table summarizes the contractual maturities of the Company’s cash equivalents and available-for-sale investments (excluding cash and money market funds) at December 31, 2019 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
Cost
|
|
Fair
Value
|
|
Mature in less than one year
|
$
|
2,082.4
|
|
|
$
|
2,087.7
|
|
|
Mature in one to five years
|
2,595.8
|
|
|
2,617.6
|
|
|
|
|
|
|
|
Total
|
$
|
4,678.2
|
|
|
$
|
4,705.3
|
|
Realized gains and losses, net of tax, were not material for any of the periods presented.
As of December 31, 2019, and 2018, net unrealized gains/(losses) on investments of $20.4 million and $(9.8) million, net of tax, respectively, were included in accumulated other comprehensive income/(loss) in the accompanying Consolidated Balance Sheets.
The following tables present the breakdown of the available-for-sale investments with unrealized losses at December 31, 2019, and 2018 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized losses less
than 12 months
|
|
|
|
Unrealized losses 12
months or greater
|
|
|
|
Total
|
|
|
|
December 31, 2019
|
Fair
Value
|
|
Unrealized
Losses
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Corporate securities
|
$
|
237.0
|
|
|
$
|
(0.2)
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
237.0
|
|
|
$
|
(0.2)
|
|
|
U.S. treasuries
|
236.5
|
|
|
(0.2)
|
|
|
87.5
|
|
|
(0.2)
|
|
|
324.0
|
|
|
(0.4)
|
|
|
U.S. government agencies
|
45.9
|
|
|
(0.1)
|
|
|
45.5
|
|
|
(0.1)
|
|
|
91.4
|
|
|
(0.2)
|
|
|
Total
|
$
|
519.4
|
|
|
$
|
(0.5)
|
|
|
$
|
133.0
|
|
|
$
|
(0.3)
|
|
|
$
|
652.4
|
|
|
$
|
(0.8)
|
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate securities
|
$
|
727.4
|
|
|
$
|
(1.7)
|
|
|
$
|
409.6
|
|
|
$
|
(3.1)
|
|
|
$
|
1,137.0
|
|
|
$
|
(4.8)
|
|
|
U.S. treasuries
|
478.7
|
|
|
(0.9)
|
|
|
592.8
|
|
|
(4.4)
|
|
|
1,071.5
|
|
|
(5.3)
|
|
|
U.S. government agencies
|
228.0
|
|
|
(0.2)
|
|
|
425.2
|
|
|
(3.6)
|
|
|
653.2
|
|
|
(3.8)
|
|
|
Total
|
$
|
1,434.1
|
|
|
$
|
(2.8)
|
|
|
$
|
1,427.6
|
|
|
$
|
(11.1)
|
|
|
$
|
2,861.7
|
|
|
$
|
(13.9)
|
|
The unrealized losses on the available-for-sale investments are related to corporate securities and government securities. The Company determined these unrealized losses to be temporary. Factors considered in determining whether a loss is temporary included the length of time and extent to which the investment’s fair value has been less than the cost basis, the
financial condition and near-term prospects of the investee, the extent of the loss related to credit of the issuer, the expected cash flows from the security, the Company’s intent to sell the security, and whether or not the Company will be required to sell the security before the recovery of its amortized cost.
Foreign currency derivatives
The objective of the Company’s hedging program is to mitigate the impact of changes in currency exchange rates on net cash flow from foreign currency-denominated sales, expenses, and intercompany balances and other monetary assets or liabilities denominated in currencies other than the U.S. dollar (“USD”). The derivative assets and liabilities are measured using Level 2 fair value inputs.
Cash Flow Hedges. The Company enters into currency forward contracts as cash flow hedges to hedge certain forecasted revenue transactions denominated in currencies other than the USD, primarily the Euro (“EUR”), the British Pound (“GBP”), the Japanese Yen (“JPY”), and the Korean Won (“KRW”). The Company also enters into currency forward contracts as cash flow hedges to hedge certain forecasted expense transactions denominated in EUR and Swiss Franc (“CHF”).
For these derivatives, the Company reports the unrealized after-tax gain or loss from the hedge as a component of accumulated other comprehensive income/(loss) in stockholders’ equity and reclassifies the amount into earnings in the same period in which the hedge transaction affects earnings. The amounts reclassified to revenue and expenses related to the hedged transactions and the ineffective portions of cash flow hedges were not material for the periods presented.
Other Derivatives Not Designated as Hedging Instruments. Other derivatives not designated as hedging instruments consist primarily of forward contracts that the Company uses to hedge intercompany balances and other monetary assets or liabilities denominated in currencies other than the USD, primarily the EUR, GBP, JPY, KRW, CHF, Indian Rupee, and New Taiwan Dollar.
These derivative instruments are used to hedge against balance sheet foreign currency exposures. The related gains and losses were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
Recognized gains (losses) in interest and other income, net
|
$
|
6.4
|
|
|
$
|
8.7
|
|
|
$
|
(9.2)
|
|
|
Foreign exchange gains (losses) related to balance sheet re-measurement
|
$
|
(1.5)
|
|
|
$
|
(2.6)
|
|
|
$
|
9.7
|
|
The notional amounts for derivative instruments provide one measure of the transaction volume. Total gross notional amounts (in USD) for derivatives and the aggregate gross fair value outstanding at the end of each period were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives Designated as Hedging Instruments
|
|
|
|
Derivatives Not Designated as Hedging Instruments
|
|
|
|
|
December 31,
2019
|
|
December 31,
2018
|
|
December 31,
2019
|
|
December 31,
2018
|
|
Notional amounts:
|
|
|
|
|
|
|
|
|
Forward contracts
|
$
|
154.5
|
|
|
$
|
183.0
|
|
|
$
|
227.2
|
|
|
$
|
182.7
|
|
|
Gross fair value recorded in:
|
|
|
|
|
|
|
|
|
Prepaid and other current assets
|
$
|
1.3
|
|
|
$
|
3.1
|
|
|
$
|
2.2
|
|
|
$
|
4.1
|
|
|
Other accrued liabilities
|
$
|
0.5
|
|
|
$
|
0.9
|
|
|
$
|
0.7
|
|
|
$
|
1.1
|
|
NOTE 4. CONSOLIDATED FINANCIAL STATEMENT DETAILS
The following tables provide details of selected consolidated financial statement items (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
2019
|
|
2018
|
|
Inventory:
|
|
|
|
|
Raw materials
|
$
|
211.0
|
|
|
$
|
164.1
|
|
|
Work-in-process
|
75.9
|
|
|
40.0
|
|
|
Finished goods
|
308.6
|
|
|
204.9
|
|
|
Total inventory
|
$
|
595.5
|
|
|
$
|
409.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
2019
|
|
2018
|
|
Property, plant, and equipment, net:
|
|
|
|
|
Land
|
$
|
248.0
|
|
|
$
|
184.6
|
|
|
Building and building/leasehold improvements
|
408.3
|
|
|
266.2
|
|
|
Machinery and equipment
|
357.2
|
|
|
280.1
|
|
|
Operating lease assets—Intuitive System Leasing
|
293.8
|
|
|
150.2
|
|
|
Computer and office equipment
|
74.0
|
|
|
52.6
|
|
|
Capitalized software
|
182.2
|
|
|
157.8
|
|
|
Construction-in-process
|
272.5
|
|
|
156.7
|
|
|
Gross property, plant, and equipment
|
1,836.0
|
|
|
1,248.2
|
|
|
Less: Accumulated depreciation*
|
(563.1)
|
|
|
(436.2)
|
|
|
Total property, plant, and equipment, net
|
$
|
1,272.9
|
|
|
$
|
812.0
|
|
|
|
|
|
|
|
*Accumulated depreciation associated with operating lease assets—Intuitive System Leasing
|
(62.2)
|
|
|
(32.1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
2019
|
|
2018
|
|
Other accrued liabilities—short-term
|
|
|
|
|
Taxes payable
|
$
|
37.9
|
|
|
$
|
39.1
|
|
|
Litigation-related accruals
|
5.8
|
|
|
55.0
|
|
|
Current portion of deferred purchase consideration payments
|
35.7
|
|
|
4.6
|
|
|
Current portion of contingent consideration
|
44.5
|
|
|
—
|
|
|
Other accrued liabilities
|
193.4
|
|
|
133.1
|
|
|
Total other accrued liabilities—short-term
|
$
|
317.3
|
|
|
$
|
231.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
2019
|
|
2018
|
|
Other long-term liabilities:
|
|
|
|
|
Income taxes—long-term
|
$
|
258.6
|
|
|
$
|
270.2
|
|
|
Deferred revenue—long-term
|
27.4
|
|
|
33.0
|
|
|
Other long-term liabilities
|
132.3
|
|
|
35.4
|
|
|
Total other long-term liabilities
|
$
|
418.3
|
|
|
$
|
338.6
|
|
Supplemental Cash flow Information
The following table provides supplemental cash flow information (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
Income taxes paid
|
$
|
158.6
|
|
|
$
|
179.2
|
|
|
$
|
147.5
|
|
|
Supplemental non-cash investing and financing activities:
|
|
|
|
|
|
|
Equipment transfers from inventory to property, plant, and equipment
|
$
|
210.6
|
|
|
$
|
125.7
|
|
|
$
|
65.8
|
|
|
Deferred payments and contingent consideration related to business combinations
|
$
|
86.6
|
|
|
$
|
16.7
|
|
|
$
|
—
|
|
NOTE 5. REVENUE
The following table presents revenue disaggregated by types and geography (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
U.S.
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
Instruments and accessories
|
|
|
|
|
$
|
1,790.4
|
|
|
$
|
1,485.2
|
|
|
$
|
1,263.1
|
|
|
Systems
|
|
|
|
|
830.7
|
|
|
692.2
|
|
|
603.5
|
|
|
Services
|
|
|
|
|
508.4
|
|
|
456.1
|
|
|
419.2
|
|
|
Total U.S. revenue
|
|
|
|
|
$
|
3,129.5
|
|
|
$
|
2,633.5
|
|
|
$
|
2,285.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outside of U.S. (“OUS”)
|
|
|
|
|
|
|
|
|
|
|
Instruments and accessories
|
|
|
|
|
$
|
617.8
|
|
|
$
|
476.8
|
|
|
$
|
373.8
|
|
|
Systems
|
|
|
|
|
515.4
|
|
|
434.9
|
|
|
324.9
|
|
|
Services
|
|
|
|
|
215.8
|
|
|
179.0
|
|
|
153.7
|
|
|
Total OUS revenue
|
|
|
|
|
$
|
1,349.0
|
|
|
$
|
1,090.7
|
|
|
$
|
852.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
Instruments and accessories
|
|
|
|
|
$
|
2,408.2
|
|
|
$
|
1,962.0
|
|
|
$
|
1,636.9
|
|
|
Systems
|
|
|
|
|
1,346.1
|
|
|
1,127.1
|
|
|
928.4
|
|
|
Services
|
|
|
|
|
724.2
|
|
|
635.1
|
|
|
572.9
|
|
|
Total revenue
|
|
|
|
|
$
|
4,478.5
|
|
|
$
|
3,724.2
|
|
|
$
|
3,138.2
|
|
Remaining Performance Obligations
The transaction price allocated to remaining performance obligations relates to amounts allocated to products and services for which revenue has not yet been recognized. A significant portion of this amount relates to performance obligations in the Company’s service contracts that will be satisfied and recognized as revenue in future periods. In addition, non-lease elements associated with the Company’s lease arrangements are primarily comprised of service contracts that will be satisfied and recognized as revenue in future periods. The transaction price allocated to the remaining performance obligations and the non-lease elements associated with the lease arrangements were $1,597 million as of December 31, 2019. The remaining performance obligations are expected to be satisfied over the term of the individual sales arrangements, which generally are 5 years. Service revenue associated with the lease arrangements will generally be recognized over the service period, which generally coincides with the lease term.
Contract Assets and Liabilities
The following information summarizes the Company’s contract assets and liabilities (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
|
December 31, 2019
|
|
December 31, 2018
|
|
Contract assets
|
$
|
20.8
|
|
|
$
|
12.4
|
|
|
Deferred revenue
|
$
|
365.2
|
|
|
$
|
327.3
|
|
The Company invoices its customers based on the billing schedules in its sales arrangements. Payments are generally due 30 days from date of invoice. Contract assets for the periods presented primarily represent the difference between the revenue that was recognized based on the relative standalone selling price of the related performance obligations satisfied and the contractual billing terms in the arrangements. Deferred revenue for the periods presented primarily relates to service contracts where the service fees are billed up-front, generally quarterly or annually, prior to those services having been performed. The associated deferred revenue is generally recognized over the term of the service period. The Company did not have any significant impairment losses on its contract assets for the periods presented.
During the year ended December 31, 2019, the Company recognized $307 million of revenue that was included in the deferred revenue balance as of December 31, 2018. During the year ended December 31, 2018, the Company recognized $269 million of revenue that was included in the deferred revenue balance as of December 31, 2017.
Intuitive System Leasing
The following table presents revenue from Intuitive System Leasing arrangements (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
Sales-type lease revenue
|
|
$
|
81.6
|
|
|
$
|
69.8
|
|
|
$
|
49.5
|
|
|
Operating lease revenue
|
|
$
|
106.9
|
|
|
$
|
51.4
|
|
|
$
|
25.9
|
|
NOTE 6. LEASES
Lessor Information related to Intuitive System Leasing
Sales-type Leases. Lease receivables relating to sales-type lease arrangements are presented on the Consolidated Balance Sheets as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
2019
|
|
2018
|
|
Gross lease receivables
|
$
|
191.9
|
|
|
$
|
150.4
|
|
|
Unearned income
|
(10.1)
|
|
|
(6.3)
|
|
|
Allowance for credit loss
|
(1.2)
|
|
|
(1.0)
|
|
|
Net investment in sales-type leases
|
$
|
180.6
|
|
|
$
|
143.1
|
|
|
Reported as:
|
|
|
|
|
Prepaids and other current assets
|
$
|
63.1
|
|
|
$
|
51.2
|
|
|
Intangible and other assets, net
|
117.5
|
|
|
91.9
|
|
|
Total, net
|
$
|
180.6
|
|
|
$
|
143.1
|
|
Contractual maturities of gross lease receivables as of December 31, 2019, are as follows (in millions):
|
|
|
|
|
|
|
|
Fiscal Year
|
Amount
|
|
|
|
|
2020
|
$
|
63.5
|
|
|
2021
|
52.9
|
|
|
2022
|
36.2
|
|
|
2023
|
22.1
|
|
|
2024
|
15.4
|
|
|
2025 and thereafter
|
1.8
|
|
|
Total
|
$
|
191.9
|
|
Operating Leases. The Company’s operating lease terms are generally less than seven years. Future minimum lease payments related to the non-cancellable portion of operating leases (which excludes contingent payments related to usage-based arrangements) as of December 31, 2019, are as follows (in millions):
|
|
|
|
|
|
|
|
Fiscal Year
|
Amount
|
|
|
|
|
2020
|
$
|
146.5
|
|
|
2021
|
134.2
|
|
|
2022
|
116.0
|
|
|
2023
|
86.6
|
|
|
2024
|
40.6
|
|
|
2025 and thereafter
|
10.8
|
|
|
Total
|
$
|
534.7
|
|
Contingent rental revenue relating to operating lease arrangements was not material for the years ended December 31, 2019, 2018, and 2017.
Lessee Information
The Company enters into operating leases for real estate, automobiles, and certain equipment. Operating lease expense was $19.1 million for the year ended December 31, 2019. For leases with terms of 12 months or less, the related expense for the year ended December 31, 2019 was not material.
Supplemental cash flow information for the year ended December 31, 2019, related to operating leases was as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
|
|
Cash paid for leases that were included within operating cash outflows
|
$
|
18.8
|
|
|
|
|
|
Right-of-use assets recognized related to new lease obligations
|
$
|
21.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental balance sheet information, as of December 31, 2019, related to operating leases was as follows (in millions, except lease term and discount rate):
|
|
|
|
|
|
|
|
|
|
|
Reported as:
|
Amount
|
|
|
|
|
Intangible and other assets, net (Right-of-use assets)
|
$
|
74.4
|
|
|
|
|
|
Other accrued liabilities
|
$
|
7.7
|
|
|
|
|
|
Other long-term liabilities
|
68.7
|
|
|
|
|
|
Total lease liabilities
|
$
|
76.4
|
|
|
|
|
|
Weighted average remaining lease term
|
6.1 years
|
|
|
|
|
Weighted average discount rate
|
3.4
|
%
|
|
|
|
As of December 31, 2019, the future payments related to the Company's operating lease liabilities are scheduled as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
Amount
|
|
|
|
|
2020
|
$
|
9.6
|
|
|
|
|
|
2021
|
19.7
|
|
|
|
|
|
2022
|
14.7
|
|
|
|
|
|
2023
|
12.8
|
|
|
|
|
|
2024
|
8.4
|
|
|
|
|
|
2025 and thereafter
|
22.4
|
|
|
|
|
|
Total lease payments
|
$
|
87.6
|
|
|
|
|
|
Less imputed interest
|
(11.2)
|
|
|
|
|
|
Total operating lease liabilities
|
$
|
76.4
|
|
|
|
|
ASC 840 Disclosures
The Company elected the alternative modified transition method and is required to present previously disclosed information under the prior accounting standards for leases.
Lessor Information
Sales-type Leases. Contractual maturities of gross lease receivables as of December 31, 2018, are as follows (in millions):
|
|
|
|
|
|
|
|
Fiscal Year
|
Amount
|
|
2019
|
$
|
50.8
|
|
|
2020
|
46.5
|
|
|
2021
|
29.7
|
|
|
2022
|
14.9
|
|
|
2023
|
7.5
|
|
|
2024 and thereafter
|
1.0
|
|
|
Total lease payments
|
$
|
150.4
|
|
Operating Leases. Future minimum lease payments related to the non-cancellable portion of operating leases (which excludes contingent payments related to usage-based arrangements) as of December 31, 2018, are as follows (in millions):
|
|
|
|
|
|
|
|
Fiscal Year
|
Amount
|
|
2019
|
$
|
88.0
|
|
|
2020
|
85.8
|
|
|
2021
|
68.8
|
|
|
2022
|
51.3
|
|
|
2023
|
25.4
|
|
|
2024 and thereafter
|
1.9
|
|
|
Total lease payments
|
$
|
321.2
|
|
Lessee Information
Operating Leases. Future minimum lease commitments under the Company's operating leases as of December 31, 2018, are as follows (in millions):
|
|
|
|
|
|
|
|
Fiscal Year
|
Amount
|
|
2019
|
$
|
15.1
|
|
|
2020
|
14.5
|
|
|
2021
|
12.7
|
|
|
2022
|
11.2
|
|
|
2023
|
11.0
|
|
|
2024 and thereafter
|
30.9
|
|
|
Total lease payments
|
$
|
95.4
|
|
NOTE 7. GOODWILL AND INTANGIBLE ASSETS
Acquisitions in 2019
Chindex
During the first quarter of 2019, the Company's majority-owned Joint Venture with Fosun Pharma acquired certain assets from Chindex and its affiliates, a subsidiary of Fosun Pharma, including distribution rights, customer relationships, and certain personnel on January 5, 2019, which collectively met the definition of a business. Chindex was the Company's distributor of da Vinci products and services in China. The transaction enhances the Company's ability to serve patients, surgeons, and hospitals in China.
The total purchase consideration of $66.0 million, as of the acquisition date, included a contingent consideration liability of $64.7 million and an upfront cash payment of $1.3 million. The amount and timing of the future contingent consideration payments are based upon the underlying performance of the business in 2019 and 2020. As of the acquisition date, the estimated total undiscounted contingent consideration was approximately $81 million. As of December 31, 2019, the estimated total undiscounted contingent consideration has decreased by approximately $6 million due to a change in the timing of the milestone achievements. The contingent consideration liability was measured at estimated fair value using a discounted cash flow model, which requires significant inputs not observable in the market and, thus, represents a Level 3 measurement. Key assumptions included (1) the probability and timing of milestone achievements based on projected future revenues through 2019 and 2020, and (2) the discount rate used to calculate the present value of the milestone payments. At each reporting period until the contingent consideration is settled, the Company remeasures the contingent consideration liability and records changes in fair value within selling, general and administrative expenses. For the year ended December 31, 2019, the contingent consideration liability changed due to payments of $16.5 million and net additional expenses of $7.2 million, primarily related to accretion due to the passage of time. Changes to the contingent consideration estimate can result from adjustments to discount rates, accretion due to the passage of time, or change in estimates in the performance of the business. The assumptions related to determining the fair value of contingent consideration include a significant amount of judgment, and any changes in the underlying estimates could have a material impact on the amount of contingent consideration adjustment recorded in any given period.
The Company recorded $1.7 million of net tangible assets, $58.6 million of intangible assets, and $5.7 million of residual goodwill. Intangible assets included distribution rights of $48.2 million and customer relationships of $10.4 million, which are being amortized over a weighted-average period of 2.9 years. Key assumptions included (1) the amount and timing of projected
future cash flows, and (2) the discount rate used to determine the present value of these cash flows. The goodwill is not amortizable for income tax purposes. The allocation of purchase consideration was completed in the third quarter of 2019. There were no adjustments to the provisional amounts in the measurement period.
Schölly
During the third quarter of 2019, the Company acquired certain assets and operations from Schölly Fiberoptic GmbH ("Schölly"), including manufacturing process technology, a non-compete agreement, certain personnel, and net tangible assets on August 31, 2019, which collectively met the definition of a business. The Company believes that the transaction strengthens the Company's supply chain and manufacturing capacity for imaging products used in the Company's da Vinci systems. The total purchase consideration of $101.4 million consists of an initial cash payment of $34.4 million and deferred cash payments totaling approximately $67.0 million, of which $37.3 million continues to be deferred as of December 31, 2019. The timing of the future payments is based upon achieving certain integration steps, which occur during 2020 and are expected to be completed around the end of 2020.
The Company preliminarily recorded $10.7 million of net tangible assets, which included $6.7 million of inventory and $1.4 million of cash, $31.0 million of intangible assets, and $59.7 million of residual goodwill. The balances include the net impact of adjustments to the preliminary allocation of the purchase price within the one year measurement period, which increased intangible assets and goodwill by $0.5 million and $0.4 million, respectively, during the fourth quarter of 2019. There was no significant impact to the Consolidated Statements of Income as result of these adjustments. Intangible assets included manufacturing process technology of $28.0 million and non-compete provisions of $3.0 million, which are being amortized over a weighted-average period of 6.6 years. Key assumptions included (1) the amount and timing of projected future cash flows, and (2) the discount rate used to determine the present value of these cash flows. The allocation of purchase consideration is considered preliminary with provisional amounts primarily related to working capital. Goodwill primarily consists of the manufacturing and other synergies of the combined operations and the value of the assembled workforce. The majority of goodwill is not deductible for income tax purposes.
In 2019, the Company has included the results of the acquired businesses, since their acquisition dates, in its Consolidated Financial Statements, and the revenues and earnings were not material in the year. Pro forma results of operations related to the acquisitions have not been presented, because the operating results of the acquired businesses are not considered material to the Consolidated Financial Statements.
Acquisitions in 2018
During the second quarter of 2018, the Company terminated its India distribution relationship with Vattikuti Technologies Pvt. Ltd. and acquired certain assets related to that distribution business on May 25, 2018, which collectively met the definition of a business. The transaction enhances the Company’s ability to serve patients, surgeons, and hospitals in India. After the net impact of measurement-period adjustments of $2.5 million, the purchase consideration consisted of $36.2 million in cash and the Company recorded $4.1 million of net tangible assets, $24.2 million of intangible assets, and $7.3 million of residual goodwill. Intangible assets included reacquired distribution rights, customer relationships, and a non-compete agreement, which are being amortized over a weighted average period of 4.3 years.
During the third quarter of 2018, the Company acquired intellectual property, exclusive field of use rights, and certain key employees from InTouch Technologies, Inc. on August 17, 2018, which collectively met the definition of a business. The transaction enhances the Company’s network capabilities in using real-time data to support surgeons. The total purchase consideration of $38.7 million, as of the acquisition date, consisted of an initial cash payment of $22.0 million and subsequent cash payments totaling approximately $16.7 million. The Company recorded $13.3 million of intangible assets and $25.4 million of residual goodwill. Intangible assets included developed technology and a non-compete agreement, which are being amortized over a weighted average period of 5.7 years. The goodwill will be amortized for income tax purposes.
During the fourth quarter of 2018, the Company acquired its Taiwan distributor, Unison Surgicals Company, on December 11, 2018, which met the definition of a business. The transaction enhances the Company’s ability to serve patients, surgeons, and hospitals in Taiwan. The purchase consideration consisted of $35.4 million in cash. The Company recorded $13.1 million of net tangible assets, which included $7.6 million of cash, $17.3 million of intangible assets, and $5.0 million of residual goodwill. Intangible assets included customer relationships and non-compete agreements, which are being amortized over a weighted average period of 6.6 years.
In 2018, the Company has included the results of the acquired businesses, since their acquisition dates, in its Consolidated Financial Statements, and the revenues and earnings were not material in the year. Pro forma results of operations related to the acquisitions have not been presented, because the operating results of the acquired businesses are not material to the Consolidated Financial Statements.
Goodwill
The following table summarizes the changes in the carrying amount of goodwill (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
Balance at December 31, 2017
|
|
$
|
201.1
|
|
|
Acquisition activity
|
|
40.2
|
|
|
Translation and other
|
|
(0.7)
|
|
|
Balance at December 31, 2018
|
|
240.6
|
|
|
Acquisition activity
|
|
65.4
|
|
|
Translation and other
|
|
1.2
|
|
|
Balance at December 31, 2019
|
|
$
|
307.2
|
|
The Company completed its annual goodwill impairment test and determined that no impairment existed. As of December 31, 2019, there has been no impairment of goodwill.
Intangible Assets
The following table summarizes the components of gross intangible asset, accumulated amortization, and net intangible asset balances as of December 31, 2019, and 2018 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
|
|
December 31, 2018
|
|
|
|
|
|
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net
Carrying
Amount
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net
Carrying
Amount
|
|
Patents and developed technology
|
|
$
|
186.7
|
|
|
$
|
(149.0)
|
|
|
$
|
37.7
|
|
|
$
|
158.7
|
|
|
$
|
(144.7)
|
|
|
$
|
14.0
|
|
|
Distribution rights and others
|
|
91.3
|
|
|
(44.9)
|
|
|
46.4
|
|
|
40.2
|
|
|
(12.9)
|
|
|
27.3
|
|
|
Customer relationships
|
|
57.7
|
|
|
(29.7)
|
|
|
28.0
|
|
|
48.5
|
|
|
(23.1)
|
|
|
25.4
|
|
|
Total intangible assets
|
|
$
|
335.7
|
|
|
$
|
(223.6)
|
|
|
$
|
112.1
|
|
|
$
|
247.4
|
|
|
$
|
(180.7)
|
|
|
$
|
66.7
|
|
Amortization expense related to intangible assets was $43.0 million, $14.2 million, and $12.9 million for the years ended December 31, 2019, 2018, and 2017, respectively.
The estimated future amortization expense related to intangible assets as of December 31, 2019, is as follows (in millions):
|
|
|
|
|
|
|
|
Fiscal Year
|
Amount
|
|
2020
|
$
|
46.1
|
|
|
2021
|
18.7
|
|
|
2022
|
16.0
|
|
|
2023
|
11.5
|
|
|
2024
|
9.4
|
|
|
2025 and thereafter
|
10.4
|
|
|
Total
|
$
|
112.1
|
|
The preceding expected amortization expense is an estimate. Actual amounts of amortization expense may differ from estimated amounts due to additional intangible asset acquisitions, changes in foreign currency exchange rates, impairment of intangible assets, accelerated amortization of intangible assets, and other events.
NOTE 8. COMMITMENTS AND CONTINGENCIES
COMMITMENTS
Our commitments include an estimated amount of approximately $845 million relating to the Company’s open purchase orders and contractual obligations that occur in the ordinary course of business, including commitments with contract manufacturers and suppliers for which the Company has not received the goods or services, commitments for capital expenditures and construction-related activities for which the Company has not received the services, and acquisition and licensing of intellectual property. Although open purchase orders are considered enforceable and legally binding, the terms generally allow the Company the option to cancel, reschedule, and adjust its requirements based on its business needs prior to the delivery of goods or performance of services. In addition to the above, the Company has committed to make certain future milestone payments to third parties as part of licensing, collaboration, and development arrangements. Payments under these arrangements generally become due and payable only upon the achievement of certain specified developmental, regulatory,
and/or commercial milestones. For instances in which the achievement of these milestones is neither probable nor reasonably estimable, such contingencies are not included in the estimated amount.
CONTINGENCIES
From time to time, the Company is involved in a variety of claims, lawsuits, investigations, and proceedings relating to securities laws, product liability, intellectual property, insurance, contract disputes, employment, and other matters. Certain of these lawsuits and claims are described in further detail below. It is not possible to predict what the outcome of these matters will be, and the Company cannot guarantee that any resolution will be reached on commercially reasonable terms, if at all.
A liability and related charge to earnings are recorded in the Consolidated Financial Statements for legal contingencies when the loss is considered probable and the amount can be reasonably estimated. The assessment is re-evaluated each accounting period and is based on all available information, including the impact of negotiations, settlements, rulings, advice of legal counsel, and other information and events pertaining to each case. Nevertheless, it is possible that additional future legal costs (including settlements, judgments, legal fees, and other related defense costs) could have a material adverse effect on the Company’s business, financial position, or future results of operations.
During the years ended December 31, 2019, 2018, and 2017, the Company recorded pre-tax litigation charges of $0.5 million, $45.2 million, and $16.3 million, respectively, related to the securities class action lawsuits and the tolled product liability claims described below. A total of $4.2 million and $53.0 million associated with these matters were included in other accrued liabilities in the accompanying Consolidated Balance Sheets as of December 31, 2019, and 2018, respectively.
Purported Shareholder Class Action Lawsuits filed April 26, 2013, and May 24, 2013
On April 26, 2013, a purported class action lawsuit entitled Abrams v. Intuitive Surgical, et al., No. 5-13-cv-1920, was filed against a number of the Company’s current and former officers and directors in the U.S. District Court for the Northern District of California.
The case has since been retitled In re Intuitive Surgical Securities Litigation, No. 5:13-cv-1920. The plaintiffs sought damages on behalf of a putative class of persons who purchased or otherwise acquired the Company’s common stock between February 6, 2012, and July 18, 2013. The amended complaint alleged that the defendants violated federal securities laws by allegedly making false and misleading statements and omitting certain material facts in certain public statements and in the Company’s filings with the SEC.
On June 11, 2018, the Company reached an agreement in principle to enter into a settlement agreement, which stipulates a payment of $42.5 million by the Company. The court granted preliminary approval on October 4, 2018, and on December 20, 2018, the court granted final approval. During the year ended December 31, 2018, the Company recorded a pre-tax charge of $42.5 million for this matter. In connection with the settlement, the Company deposited $42.5 million into an escrow account established for disbursements, which was recorded in prepaids and other current assets in the accompanying Consolidated Balance Sheets as of December 31, 2018. The appeals period expired on January 21, 2019, the payment was made in 2019, and the matter has been concluded.
Product Liability Litigation
The Company is currently named as a defendant in a number of individual product liability lawsuits filed in various state and federal courts. The plaintiffs generally allege that they or a family member underwent surgical procedures that utilized the da Vinci Surgical System and sustained a variety of personal injuries and, in some cases, death as a result of such surgery. Several of the filed cases have trial dates in the next 12 months.
The cases raise a variety of allegations including, to varying degrees, that plaintiffs’ injuries resulted from purported defects in the da Vinci Surgical System and/or failure on the Company’s part to provide adequate training resources to the healthcare professionals who performed plaintiffs’ surgeries. The cases further allege that the Company failed to adequately disclose and/or misrepresented the potential risks and/or benefits of the da Vinci Surgical System. Plaintiffs also assert a variety of causes of action, including, for example, strict liability based on purported design defects, negligence, fraud, breach of express and implied warranties, unjust enrichment, and loss of consortium. Plaintiffs seek recovery for alleged personal injuries and, in many cases, punitive damages.
In addition to the filed cases, the Company previously received a substantial number of claims relating to alleged complications from surgeries performed with certain versions of Monopolar Curved Scissor (“MCS”) instruments, which included an MCS tip cover accessory that was the subject of a market withdrawal in 2012 and MCS instruments that were the subject of a recall in 2013. In an effort to avoid the expense and distraction of defending multiple lawsuits, the Company entered into tolling agreements to pause the applicable statutes of limitations for many of these claims and engaged in confidential mediation efforts. As of December 31, 2019, the majority of the “tolled claims” have either been resolved or the matters have been filed.
During the years ended December 31, 2019, 2018, and 2017, the Company recorded $0.5 million, $2.7 million, and $16.3 million, respectively, of pre-tax charges to reflect the estimated cost of settling a number of the product liability claims covered by the tolling agreements. As of December 31, 2019, and 2018, a total of $4.2 million and $10.5 million, respectively, were included in other accrued liabilities in the accompanying Consolidated Balance Sheets related to the tolled product liability claims.
The Company’s estimate of the anticipated cost of resolving the pending lawsuits and claims is based on negotiations with attorneys for the plaintiffs/claimants. The final outcome of the pending lawsuits and claims, and others that might arise, is dependent on many variables that are difficult to predict and the ultimate cost associated with these product liability lawsuits and claims may be materially different than the amount of the current estimate and accruals and could have a material adverse effect on the Company’s business, financial position, and future results of operations. Although there is a reasonable possibility that a loss in excess of the amount recognized exists, the Company is unable to estimate the possible loss or range of loss in excess of the amount recognized at this time.
Patent Litigation
On June 30, 2017, Ethicon LLC, Ethicon Endo-Surgery, Inc., and Ethicon US LLC (collectively, “Ethicon”) filed a complaint for patent infringement against the Company in the U.S. District Court for the District of Delaware. The complaint, which was served on the Company on July 12, 2017, alleges that the Company’s EndoWrist Stapler instruments infringe several of Ethicon’s patents. Ethicon asserts infringement of U.S. Patent Nos. 9,585,658, 8,479,969, 9,113,874, 8,998,058, 8,991,677, 9,084,601, and 8,616,431. A claim construction hearing occurred on October 1, 2018, and the court issued a scheduling order on December 28, 2018. On March 20, 2019, the court granted the Company's Motion to Stay pending an Inter Parties Review to be held at the Patent Trademark and Appeals Board to review patentability of six of the seven patents noted above and vacated the trial date. On August 1, 2019, the court granted the parties' joint stipulation to modify the stay in light of Ethicon's U.S. International Trade Commission ("USITC") complaint against Intuitive involving U.S. Patent Nos. 8,479,969 and 9,113,874, discussed below.
On August 27, 2018, Ethicon filed a second complaint for patent infringement against the Company in the U.S. District Court for the District of Delaware. The complaint alleges that the Company’s SureForm 60 Staplers infringe five of Ethicon’s patents. Ethicon asserts infringement of the U.S. Patent Nos. 9,884,369, 7,490,749, 8,602,288, 8,602,287, and 9,326,770. The Company filed an answer denying all claims. On March 19, 2019, Ethicon filed a Motion for Leave to File a First Amended Complaint, removing allegations related to U.S. Patent No. 9,326,770 and adding allegations related to U.S. Patent Nos. 9,844,379 and 8,479,969. On July 17, 2019, the court entered an order denying the amendment, without prejudice, and granting the parties' joint stipulation to stay the case in its entirety in light of the USITC investigation involving U.S. Patent Nos. 9,844,369 and 7,490,749, discussed below.
On May 30, 2019, Ethicon filed a complaint with the USITC, asserting infringement of U.S. Patent Nos. 9,884,369, 7,490,749, 9,844,379, 9,113,874, and 8,479,969. On June 28, 2019, the USITC voted to institute an investigation (No. 337-TA-1167) with respect to claims in this complaint. The accused products include the Company's EndoWrist 30, EndoWrist 45, SureForm 45, and SureForm 60 Staplers, as well as the stapler reload cartridges. The evidentiary hearing is set for April 20-24, 2020, and the target for completion of the investigation is December 7, 2020. An unfavorable ruling by the USITC could have an adverse effect on our results of operations, including a prohibition on importing the accused products into the U.S. or necessitating workarounds that may limit certain features of our products.
Based on currently available information, the Company is unable to make a reasonable estimate of losses or range of losses, if any, arising from these matters.
Commercial Litigation
On February 27, 2019, Restore Robotics LLC and Restore Robotics Repair LLC ("Restore") filed a Complaint alleging anti-trust claims against the Company. On May 13, 2019, Restore filed an Amended Complaint alleging anti-trust claims relating to the da Vinci Surgical System and EndoWrist service, maintenance, and repair processes. On September 16, 2019, the Court partially granted and partially denied the Company's Motion to Dismiss the Amended Complaint.
On September 30, 2019, the Company filed an Answer denying the anti-trust allegations and a Counterclaim against Restore. The Company filed Amended Counterclaims after the Court partially granted and partially denied Restore's Motion to Dismiss the Counterclaim. The Amended Counterclaims allege that Restore violated the Federal Lanham Act, the Federal Computer Fraud and Abuse Act, and Florida's Deceptive and Unfair Trade Practices Act and that Restore is also liable to the Company for Unfair Competition and Tortious Interference with Contract. On January 7, 2020, the Court denied Restore's Motion to Dismiss the Amended Counterclaims.
In its initial scheduling order, the Court stated that it anticipate trial in this case to occur on or before February 2022. Based on currently available information, the Company is unable to make a reasonable estimate of loss or range of losses, if any, arising from these matters.
NOTE 9. STOCKHOLDERS’ EQUITY
STOCK REPURCHASE PROGRAM
Through December 31, 2019, the Company’s Board of Directors (the “Board”) has authorized an aggregate of $7.5 billion of funding for the Company’s common stock repurchase program (the “Repurchase Program”) since its establishment in March 2009. The most recent authorization occurred in January 2019 when the Board increased the authorized amount available under the Repurchase Program to $2.0 billion. As of December 31, 2019, the remaining amount of share repurchases authorized by the Board under the Repurchase Program was approximately $1.7 billion.
The following table provides the stock repurchase activities during the years ended December 31, 2019, 2018, and 2017 (in millions, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
Shares repurchased
|
0.6
|
|
|
—
|
|
|
7.3
|
|
|
Average price per share
|
$
|
481.35
|
|
|
$
|
—
|
|
|
$
|
310.32
|
|
|
Value of shares repurchased
|
$
|
269.5
|
|
|
$
|
—
|
|
|
$
|
2,274.0
|
|
The Company uses the par value method of accounting for its stock repurchases. As a result of share repurchase activities during the years ended December 31, 2019, 2018, and 2017, the Company reduced common stock and additional paid-in capital by an aggregate of $14.5 million, zero, and $152 million, respectively, and charged $255 million, zero, $2,122 million, respectively, to retained earnings.
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The components of accumulated other comprehensive income (loss), net of tax, for the years ended December 31, 2019, and 2018, are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
Gains (Losses)
on Hedge
Instruments
|
|
Unrealized
Gains (Losses)
on
Available-for-Sale Securities
|
|
Foreign
Currency
Translation
Gains
(Losses)
|
|
Employee Benefit Plans
|
|
Total
|
|
Beginning balance
|
$
|
0.2
|
|
|
$
|
(9.8)
|
|
|
$
|
(0.3)
|
|
|
$
|
(3.4)
|
|
|
|
$
|
(13.3)
|
|
|
Other comprehensive income (loss) before reclassifications
|
5.8
|
|
|
30.7
|
|
|
0.3
|
|
|
(5.9)
|
|
|
30.9
|
|
|
Reclassified from accumulated other comprehensive (loss)
|
(5.3)
|
|
|
(0.5)
|
|
|
—
|
|
|
0.6
|
|
|
(5.2)
|
|
|
Net current-period other comprehensive income (loss)
|
0.5
|
|
|
30.2
|
|
|
0.3
|
|
|
(5.3)
|
|
|
25.7
|
|
|
Ending balance
|
$
|
0.7
|
|
|
$
|
20.4
|
|
|
$
|
—
|
|
|
$
|
(8.7)
|
|
|
$
|
12.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
Gains
(Losses)
on Hedge
Instruments
|
|
Unrealized
Gains
(Losses)
on
Available-for-Sale Securities
|
|
Foreign
Currency
Translation
Gains
(Losses)
|
|
Employee Benefit Plans
|
|
Total
|
|
Beginning balance
|
$
|
(2.4)
|
|
|
$
|
(11.3)
|
|
|
$
|
2.3
|
|
|
$
|
(4.1)
|
|
|
$
|
(15.5)
|
|
|
Other comprehensive income (loss) before reclassifications
|
3.6
|
|
|
0.3
|
|
|
(2.6)
|
|
|
0.4
|
|
|
1.7
|
|
|
Reclassified from accumulated other comprehensive income (loss)
|
(1.0)
|
|
|
1.2
|
|
|
—
|
|
|
0.3
|
|
|
0.5
|
|
|
Net current-period other comprehensive income (loss)
|
2.6
|
|
|
1.5
|
|
|
(2.6)
|
|
|
0.7
|
|
|
2.2
|
|
|
Ending balance
|
$
|
0.2
|
|
|
$
|
(9.8)
|
|
|
$
|
(0.3)
|
|
|
$
|
(3.4)
|
|
|
$
|
(13.3)
|
|
NOTE 10. SHARE-BASED COMPENSATION
Stock Plans
2010 Incentive Award Plan. In April 2010, the Company’s stockholders approved the 2010 Incentive Award Plan (“2010 Plan”). Under this plan, the Company issues nonqualified stock options (“NSOs”) and restricted stock units (“RSUs”) to employees and certain consultants. The 2010 Plan generally permits NSOs to be granted at no less than the fair market value of the common stock on the date of grant, with terms of 10 years from the date of grant. The 2010 Plan expires in 2029. In April 2019, the Company’s stockholders approved an amended and restated 2010 Plan to provide for an increase in the number of shares of common stock reserved for issuance from 24,450,000 to 28,450,000. As of December 31, 2019, approximately 5.9 million shares were reserved for future issuance under the 2010 Plan. A maximum of 2.6 million of these shares can be awarded as RSUs.
2009 Employment Commencement Incentive Plan. In October 2009, the Board adopted the 2009 Employment Commencement Incentive Plan (“New Hire Plan”). The New Hire Plan provides for the shares to be used exclusively for the grant of RSUs and NSOs to new employees (“New Hire Options”), who were not previously employees or non-employee directors of the Company. The Compensation Committee approves all equity awards under the New Hire Plan, which are granted to newly-hired employees once a month on the fifth business day of each month after their hire. Options are granted at an exercise price not less than the fair market value of the stock on the date of grant and have a term not to exceed 10 years.
In April 2015, the Board of Directors amended and restated the New Hire Plan to provide for an increase in the number of shares of common stock authorized for issuance pursuant to awards granted under the New Hire Plan from 3,465,000 to 4,365,000. The New Hire Plan expired in October 2019 and, therefore, there are no shares reserved for future issuance under the New Hire Plan. However, awards granted prior to the plan's expiration continue to remain outstanding until their original expiration date.
2000 Equity Incentive Plan. In March 2000, the Board adopted the 2000 Equity Incentive Plan (“2000 Plan”), which took effect upon the closing of the Company’s initial public offering. Under this plan, certain employees, consultants, and non-employee directors could be granted Incentive Stock Options (“ISOs”) and Nonstatutory Stock Options (“NSOs”) to purchase shares of the Company’s common stock. The 2000 Plan permitted ISOs to be granted at an exercise price not less than the fair value on the date of the grant and NSOs at an exercise price not less than 85% of the fair value on the date of grant. Options granted under the 2000 Plan generally expire 10 years from the date of grant and become exercisable upon grant subject to repurchase rights in favor of the Company until vested. The 2000 Plan expired in March 2010. However, options granted prior to the plan’s expiration continue to remain outstanding until their original expiration date.
Employee Option Vesting. The Company makes annual option grants on February 15 (or the next business day if the date is not a business day) and on August 15 (or the next business day if the date is not a business day). The February 15 grants vest 6/48 upon completion of 6 months of service and 1/48 per month thereafter. The August 15 stock option grants vest 7/48 at the end of one month and 1/48 per month thereafter through a 3.5-year vesting period.
New Hire Options generally vest 12/48 upon completion of one year of service and 1/48 per month thereafter. Option vesting terms are determined by the Board and, in the future, may vary from past practices.
2000 Non-Employee Directors’ Stock Option Plan. In March 2000, the Board of Directors adopted the 2000 Non-Employee Directors’ Stock Option Plan (the “Directors’ Plan”). In October 2009, the automatic evergreen increase provisions were eliminated so that no further automatic increases will be made to the number of shares reserved for issuance under the Directors’ Plan. In addition, the common stock authorized for issuance under the Directors’ Plan was reduced to 450,000. Options are granted at an exercise price not less than the fair market value of the stock on the date of grant and have a term not to exceed 10 years. Prior to 2016, initial stock option grants to new non-employee directors vested over a three-year period with 12/36 of the shares vesting after one year from the date of grant and 1/36 of the shares vesting monthly thereafter. Annual stock option grants vested one year from the date of the grant. Since 2016, new non-employee directors receive pro-rated stock option grants that vest on the same term as the annual stock option grants. As of December 31, 2019, approximately 0.1 million shares were reserved for future issuance under the Directors’ Plan. However, the Company no longer intends to issue grants from the Directors’ Plan in the future and instead plans to utilize the 2010 Plan to make grants to non-employee directors.
2000 Employee Stock Purchase Plan. In March 2000, the Board adopted the 2000 Employee Stock Purchase Plan (the “ESPP”). Employees are generally eligible to participate in the ESPP if they are customarily employed by the Company for more than 20 hours per week and more than 5 months in a calendar year and are not 5% stockholders of the Company. Under the ESPP, eligible employees may select a rate of payroll deduction up to 15% of their eligible compensation subject to certain maximum purchase limitations. The duration for each offering period is 24 months and is divided into four purchase periods of approximately six months in length. Offerings are concurrent. The purchase price of the shares under the offering is the lesser of 85% of the fair market value of the shares on the offering date or 85% of the fair market value of the shares on the purchase date. A two-year look-back feature in the ESPP causes the offering period to reset if the fair value of the Company’s common
stock on the first or last day of the purchase period is less than that on the original offering date. ESPP purchases by employees are settled with newly-issued common stock from the ESPP’s previously authorized and available pool of shares. In April 2017, the Company’s stockholders approved an amended and restated ESPP to provide for an increase in the number of shares of common stock reserved for issuance from 6,090,315 to 7,590,315.
The Company issued 0.2 million, 0.2 million, and 0.2 million shares under the ESPP, representing approximately $56.4 million, $46.8 million, and $38.3 million in employee contributions for the years ended December 31, 2019, 2018, and 2017, respectively. As of December 31, 2019, there were approximately 1.2 million shares reserved for future issuance under the ESPP.
Restricted Stock Units. Equity awards granted to employees and non-employee directors include a mix of stock options and RSUs. The RSUs to employees vest in one-fourth increments annually over a four-year period. The RSUs to existing non-employee directors vest one year from the date of grant or at the next Annual Shareholders Meeting, whichever comes first. New non-employee directors receive pro-rated RSU grants that vest on the same term as the annual RSU grants. The number of shares issued on the date the RSUs vest is net of the minimum statutory tax withholdings, which are paid in cash to the appropriate taxing authorities on behalf of the Company’s employees.
Stock Option Information
Option activity during fiscal 2019 under all the stock plans was as follows (in millions, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options Outstanding
|
|
|
|
|
|
|
Number
Outstanding
|
|
Weighted Average
Exercise Price Per
Share
|
|
Balance at December 31, 2018
|
|
|
6.2
|
|
|
$
|
200.79
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
0.6
|
|
|
$
|
523.30
|
|
|
Options exercised
|
|
|
(1.3)
|
|
|
$
|
159.46
|
|
|
Options forfeited/expired
|
|
|
(0.1)
|
|
|
$
|
381.82
|
|
|
Balance at December 31, 2019
|
|
|
5.4
|
|
|
$
|
246.64
|
|
The aggregate intrinsic value of stock options exercised under the Company’s stock plans determined as of the date of option exercise was $512.0 million, $526.6 million, and $379.9 million during the years ended December 31, 2019, 2018, and 2017, respectively. Cash received from option exercises and employee stock purchase plans for the years ended December 31, 2019, 2018, and 2017, was $272.8 million, $236.6 million, and $415.5 million, respectively. The income tax benefit from stock options exercised was $109.7 million for the year ended December 31, 2019.
The following table summarizes significant ranges of outstanding and exercisable options as of December 31, 2019 (number of shares and aggregate intrinsic value in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
|
|
|
|
|
Options Exercisable
|
|
|
|
|
|
|
Range of
Exercise Prices
|
|
Number
of Shares
|
|
Weighted
Average
Remaining
Contractual Life
|
|
Weighted
Average
Exercise Price
Per Share
|
|
Aggregate
Intrinsic
Value (1)
|
|
Number
of Shares
|
|
Weighted
Average
Remaining
Contractual Life
|
|
Weighted
Average
Exercise Price
Per Share
|
|
Aggregate
Intrinsic
Value (1)
|
|
$86.88-$148.03
|
|
1.1
|
|
|
2.8
|
|
$
|
127.46
|
|
|
|
|
1.1
|
|
|
|
|
$
|
127.46
|
|
|
|
|
$150.50-$172.44
|
|
1.4
|
|
|
3.6
|
|
$
|
166.28
|
|
|
|
|
1.4
|
|
|
|
|
$
|
166.29
|
|
|
|
|
$172.76-$231.00
|
|
1.2
|
|
|
5.1
|
|
$
|
194.42
|
|
|
|
|
1.2
|
|
|
|
|
$
|
193.89
|
|
|
|
|
$231.11-$505.36
|
|
1.1
|
|
|
8.1
|
|
$
|
376.53
|
|
|
|
|
0.5
|
|
|
|
|
$
|
334.67
|
|
|
|
|
$508.19-$585.57
|
|
0.6
|
|
|
9.0
|
|
$
|
536.41
|
|
|
|
|
0.1
|
|
|
|
|
$
|
531.66
|
|
|
|
|
Total
|
|
5.4
|
|
|
5.3
|
|
$
|
246.64
|
|
|
$
|
1,844.4
|
|
|
4.3
|
|
|
4.4
|
|
$
|
195.76
|
|
|
$
|
1,702.4
|
|
(1)The aggregate intrinsic value represents the total pre-tax intrinsic value, based on the Company’s closing stock price of $591.15 at December 31, 2019, which would have been received by the option holders had all in-the-money option holders exercised their options as of that date.
As of December 31, 2019, a total of 5.2 million shares of stock options vested and expected to vest had a weighted-average remaining contractual life of 5.2 years, an aggregate intrinsic value of $1,833.1 million, and a weighted-average exercise price of $241.65.
Restricted Stock Units Information
RSU activity for the year ended December 31, 2019, was as follows (in millions, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted Average
Grant Date Fair Value
|
|
Unvested balance at December 31, 2018
|
2.0
|
|
|
$
|
295.70
|
|
|
Granted
|
0.8
|
|
|
541.36
|
|
Vested
|
(0.8)
|
|
|
258.87
|
|
Forfeited
|
(0.1)
|
|
|
382.52
|
|
Unvested balance at December 31, 2019
|
1.9
|
|
|
410.09
|
As of December 31, 2019, 1.7 million shares of RSUs were expected to vest with an aggregate intrinsic value of $1,032 million. The aggregate vesting date fair value of RSUs vested was $433.2 million, $334.3 million, and $144.2 million during the years ended December 31, 2019, 2018, and 2017, respectively.
Share-Based Compensation Expense
The following table summarizes share-based compensation expense (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
Cost of sales—products
|
$
|
46.6
|
|
|
$
|
36.4
|
|
|
$
|
28.1
|
|
|
Cost of sales—services
|
20.4
|
|
|
16.8
|
|
|
14.0
|
|
|
Total cost of sales
|
67.0
|
|
|
53.2
|
|
|
42.1
|
|
|
Selling, general and administrative
|
169.5
|
|
|
133.2
|
|
|
111.8
|
|
|
Research and development
|
101.4
|
|
|
76.2
|
|
|
56.0
|
|
|
Share-based compensation expense before income taxes
|
337.9
|
|
|
262.6
|
|
|
209.9
|
|
|
Income tax effect
|
70.2
|
|
|
54.3
|
|
|
49.2
|
|
|
Share-based compensation expense after income taxes
|
$
|
267.7
|
|
|
$
|
208.3
|
|
|
$
|
160.7
|
|
The Black-Scholes option pricing model is used to estimate the fair value of stock options granted under the Company’s share-based compensation plans and rights to acquire stock granted under the Company’s employee stock purchase plan. The weighted-average estimated fair values of stock options, the rights to acquire stock under the ESPP, and RSUs, as well as the weighted average assumptions used in calculating the fair values of stock options and rights to acquire stock under the ESPP that were granted during the years ended December 31, 2019, 2018, and 2017, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
STOCK OPTION PLANS
|
2019
|
|
2018
|
|
2017
|
|
Risk-free interest rate
|
2.0
|
%
|
|
2.7
|
%
|
|
1.8
|
%
|
|
Expected term (years)
|
4.1
|
|
4.3
|
|
4.1
|
|
Volatility
|
30
|
%
|
|
33
|
%
|
|
25
|
%
|
|
Fair value at grant date
|
$
|
142.53
|
|
|
$
|
146.30
|
|
|
$
|
67.03
|
|
|
|
|
|
|
|
|
|
EMPLOYEE STOCK PURCHASE PLAN
|
|
|
|
|
|
|
Risk-free interest rate
|
2.1
|
%
|
|
2.1
|
%
|
|
1.2
|
%
|
|
Expected term (years)
|
1.2
|
|
1.3
|
|
1.2
|
|
Volatility
|
29
|
%
|
|
32
|
%
|
|
28
|
%
|
|
Fair value at grant date
|
$
|
148.99
|
|
|
$
|
135.84
|
|
|
$
|
79.77
|
|
|
RESTRICTED STOCK UNITS
|
|
|
|
|
|
|
Fair value at grant date
|
$
|
541.36
|
|
|
$
|
431.11
|
|
|
$
|
249.34
|
|
|
|
|
|
|
|
|
As share-based compensation expense recognized in the Consolidated Statements of Income during the years ended December 31, 2019, 2018, and 2017, is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures.
As of December 31, 2019, there was a total of $110.1 million, $493.6 million, and $31.4 million of total unrecognized compensation expense related to unvested stock options, restricted stock units, and employee stock purchases, respectively. The unrecognized compensation expense is expected to be recognized over a weighted-average period of 2.5 years for unvested stock options, 2.2 years for unvested restricted stock units, and 1.4 years for rights granted to acquire common stock under the ESPP.
NOTE 11. INCOME TAXES
Income before provision for income taxes for the years ended December 31, 2019, 2018, and 2017, consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
U.S.
|
$
|
1,053.7
|
|
|
$
|
852.7
|
|
|
$
|
774.7
|
|
|
Foreign
|
448.5
|
|
|
426.8
|
|
|
330.1
|
|
|
Total income before provision for income taxes
|
$
|
1,502.2
|
|
|
$
|
1,279.5
|
|
|
$
|
1,104.8
|
|
The provision for income taxes for the years ended December 31, 2019, 2018, and 2017, consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
Current
|
|
|
|
|
|
|
Federal
|
$
|
82.0
|
|
|
$
|
89.5
|
|
|
$
|
352.1
|
|
|
State
|
26.5
|
|
|
21.1
|
|
|
13.0
|
|
|
Foreign
|
18.0
|
|
|
9.9
|
|
|
8.7
|
|
|
|
$
|
126.5
|
|
|
$
|
120.5
|
|
|
$
|
373.8
|
|
|
Deferred
|
|
|
|
|
|
|
Federal
|
$
|
8.5
|
|
|
$
|
(4.1)
|
|
|
$
|
62.8
|
|
|
State
|
3.2
|
|
|
(0.3)
|
|
|
(0.3)
|
|
|
Foreign
|
(17.8)
|
|
|
38.4
|
|
|
(2.4)
|
|
|
|
$
|
(6.1)
|
|
|
$
|
34.0
|
|
|
$
|
60.1
|
|
|
Total income tax expense
|
$
|
120.4
|
|
|
$
|
154.5
|
|
|
$
|
433.9
|
|
Income tax expense differs from amounts computed by applying the statutory federal income rate of 21% for the years ended December 31, 2019, and 2018, and 35% for the year ended December 31, 2017, as a result of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
Federal tax at statutory rate
|
$
|
315.5
|
|
|
$
|
268.7
|
|
|
$
|
386.7
|
|
|
Increase (reduction) in tax resulting from:
|
|
|
|
|
|
|
State taxes, net of federal benefits
|
29.7
|
|
|
20.8
|
|
|
16.0
|
|
|
Foreign rate differential
|
(56.2)
|
|
|
(44.7)
|
|
|
(115.7)
|
|
|
U.S. tax on foreign earnings
|
55.0
|
|
|
43.7
|
|
|
8.4
|
|
|
Research and development credit
|
(32.7)
|
|
|
(25.2)
|
|
|
(15.3)
|
|
|
Share-based compensation not benefited
|
13.5
|
|
|
9.9
|
|
|
10.8
|
|
|
Domestic production activities deduction
|
—
|
|
|
—
|
|
|
(7.9)
|
|
|
Reversal of unrecognized tax benefits
|
(8.4)
|
|
|
(5.2)
|
|
|
(62.4)
|
|
|
|
|
|
|
|
|
|
Tax Cuts and Jobs Act impact
|
—
|
|
|
0.5
|
|
|
317.8
|
|
Excess tax benefits related to share-based compensation
arrangements
|
(146.5)
|
|
|
(116.2)
|
|
|
(102.8)
|
|
|
Deferred tax remeasurement due to Swiss Tax Reform
|
(51.3)
|
|
|
—
|
|
|
—
|
|
|
Other
|
1.8
|
|
|
2.2
|
|
|
(1.7)
|
|
|
Total income tax expense
|
$
|
120.4
|
|
|
$
|
154.5
|
|
|
$
|
433.9
|
|
Deferred income taxes reflect tax carry forwards and the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
2019
|
|
2018
|
|
Deferred tax assets:
|
|
|
|
|
Share-based compensation expense
|
$
|
95.6
|
|
|
$
|
87.2
|
|
|
Expenses deducted in later years for tax purposes
|
42.0
|
|
|
29.1
|
|
|
Intangible assets
|
362.3
|
|
|
351.9
|
|
|
Research and other credits
|
56.1
|
|
|
40.1
|
|
|
Other
|
10.4
|
|
|
9.0
|
|
|
Gross deferred tax assets
|
$
|
566.4
|
|
|
$
|
517.3
|
|
|
Valuation allowance
|
(57.2)
|
|
|
(42.3)
|
|
|
Deferred tax assets
|
$
|
509.2
|
|
|
$
|
475.0
|
|
|
Deferred tax liabilities:
|
|
|
|
|
Fixed assets
|
$
|
(75.3)
|
|
|
$
|
(42.2)
|
|
|
Intangible assets
|
(8.3)
|
|
|
(7.5)
|
|
|
Other
|
—
|
|
|
(0.1)
|
|
|
Deferred tax liabilities
|
$
|
(83.6)
|
|
|
$
|
(49.8)
|
|
|
Net deferred tax assets
|
$
|
425.6
|
|
|
$
|
425.2
|
|
In December 2017, the 2017 Tax Act was enacted, which includes a number of changes in existing tax law impacting businesses, including a one-time deemed repatriation of cumulative undistributed foreign earnings and a permanent reduction in the U.S. federal statutory rate from 35% to 21%, effective on January 1, 2018. The Securities Exchange Commission (“SEC”) issued guidance for a measurement period of one year from the enactment date to finalize the accounting for effects of the 2017 Tax Act. The Company recorded an income tax expense of $317.8 million in its 2017 income tax provision related to the 2017 Tax Act, which included a provisional estimate of $270.2 million related to the one-time deemed repatriation toll charge (“Toll Tax”) and a provisional estimate of $47.6 million income tax expense due to the re-measurement of its net deferred tax assets at a reduced U.S. federal statutory rate of 21%. In December 2018, the Company completed its accounting for the effect of the 2017 Tax Act within the measurement period under the SEC guidance and reflected a net $0.5 million increase in the 2018 income tax expense.
The Company repatriated $1.6 billion of its cumulative undistributed foreign earnings back to the U.S. in June 2018 without any significant U.S. income tax consequences. The Company intends to repatriate earnings from its Swiss subsidiary as needed, since the U.S. and foreign tax implications of such repatriations are not expected to be significant. The Company will continue to indefinitely reinvest earnings from the rest of our foreign subsidiaries, which are not significant.
The Company’s tax holiday obtained in 2007 for business operations in Switzerland ended on December 31, 2017. The Company received a new tax ruling in Switzerland for new business operations. The new ruling is effective for years 2018 through 2022, which will be extended for the next five years thereafter to the extent certain terms and conditions continue to be met. The new ruling allows for a reduced cantonal tax rate based on various thresholds of investment, including the ownership, development, and use of the non-U.S. intellectual property rights and employment in such jurisdiction. The tax benefits from Swiss tax holidays for the years ended December 31, 2019, and 2018, were insignificant, while for the year ended December 31, 2017, was approximately $10.9 million, or $0.09 per diluted share.
In August 2019, Swiss tax reform was enacted, which resulted in a higher statutory rate for the Company's Swiss entity for years after 2019. The Company remeasured its Swiss deferred tax asset at the enacted tax rate and recorded an income tax benefit of $51.3 million in its 2019 tax provision.
As of December 31, 2019, and 2018, the Company had valuation allowances of $57.2 million and $42.3 million, respectively, primarily related to California deferred tax assets generated by California R&D credit forwards, which have no expiration period. The Company recorded a valuation allowance against its California deferred tax assets, as it is more likely than not these deferred tax assets will not be realized as a result of the computation of California taxes under the single sales factor.
The Company recorded a net increase of its gross unrecognized tax benefits of $17.9 million during the year ended December 31, 2019. The net increase was primarily due to increases related to 2019 uncertain tax positions, partially offset by the reversal of gross unrecognized tax benefits in connection with the expiration of certain statutes of limitation in various
jurisdictions and an audit conclusion. The Company had gross unrecognized tax benefits of approximately $96.7 million, $78.8 million, and $65.4 million as of December 31, 2019, 2018, and 2017, respectively, which, if recognized, would result in a reduction of the Company’s effective tax rate. The Company included interest expense accrued on unrecognized tax benefits as a component of its income tax expense. As of December 31, 2019, 2018, and 2017, gross interest related to unrecognized tax benefits accrued was $2.9 million, $2.6 million, and $1.8 million, respectively. A majority of the Company’s net unrecognized tax benefits and related interest is presented in other long-term liabilities on the Consolidated Balance Sheets.
A reconciliation of the beginning and ending amounts of gross unrecognized income tax benefits for the years ended December 31, 2019, 2018, and 2017, are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
Beginning balance
|
$
|
78.8
|
|
|
$
|
65.4
|
|
|
$
|
106.0
|
|
|
Increases related to tax positions taken during the current year
|
26.5
|
|
|
22.5
|
|
|
21.1
|
|
|
|
|
|
|
|
|
|
Increases related to tax positions taken during a prior year
|
1.2
|
|
|
—
|
|
|
—
|
|
|
Decreases related to tax positions taken during a prior year
|
—
|
|
|
(0.9)
|
|
|
(46.5)
|
|
|
Decreases related to settlements with tax authorities
|
(3.8)
|
|
|
—
|
|
|
(0.5)
|
|
|
Decreases related to expiration of statute of limitations
|
(6.0)
|
|
|
(8.2)
|
|
|
(14.7)
|
|
|
Ending balance
|
$
|
96.7
|
|
|
$
|
78.8
|
|
|
$
|
65.4
|
|
The Company files federal, state, and foreign income tax returns in many U.S. and OUS jurisdictions. Years before 2016 are closed for the significant jurisdictions. Certain of the Company’s unrecognized tax benefits could change due to activities of various tax authorities, including potential assessment of additional tax, possible settlement of audits, or through normal expiration of various statutes of limitations, which could affect the Company’s effective tax rate in the period in which they change. Due to the uncertainty related to the timing and potential outcome of audits, the Company cannot estimate the range of reasonably possible change in unrecognized tax benefits that may occur in the next 12 months.
The Company is subject to the examination of its income tax returns by the Internal Revenue Service and other tax authorities. The outcome of these audits cannot be predicted with certainty. The Company’s management regularly assesses the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of the Company’s provision for income taxes. If any issues addressed in the Company’s tax audits are resolved in a manner not consistent with management’s expectations, the Company could be required to adjust its provision for income taxes in the period such resolution occurs.
In July 2015, a U.S. Tax Court opinion (the “2015 Opinion”) was issued involving an independent third party related to intercompany charges for share-based compensation. Based on the findings of the U.S. Tax Court, the Company was required to, and did, refund to its foreign subsidiaries the share-based compensation element of certain intercompany charges made in prior periods. Starting in 2015, direct share-based compensation has been excluded from intercompany charges. In June 2019, the Ninth Circuit Court of Appeals (the "Ninth Circuit") reversed the 2015 Opinion (the “Ninth Circuit Opinion”). Subsequently, a re-hearing of the case was requested, but the rehearing request was denied by the Ninth Circuit on November 12, 2019. However, a petition for appeal to the U.S. Supreme Court can be filed within 90 days of the denial. Since the Ninth Circuit Opinion potentially is subject to further judicial review, the Company continues to treat its share-based compensation expense in accordance with the 2015 Opinion and continues to recognize the related tax benefits in its financial statements based upon its evaluation of the position in light of the present facts. In the event of a final opinion that reverses the 2015 Opinion, there may be an adverse impact to the Company’s income tax expense and effective tax rate.
NOTE 12. NET INCOME PER SHARE
The following table presents the computation of basic and diluted net income per share attributable to Intuitive Surgical, Inc. (in millions, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
Numerator:
|
|
|
|
|
|
|
Net income attributable to Intuitive Surgical, Inc.
|
$
|
1,379.3
|
|
|
$
|
1,127.9
|
|
|
$
|
670.9
|
|
|
Denominator:
|
|
|
|
|
|
|
Weighted average shares outstanding used in basic calculation
|
115.4
|
|
|
113.7
|
|
|
111.7
|
|
|
Add: dilutive effect of potential common shares
|
4.1
|
|
|
5.1
|
|
|
4.6
|
|
|
Weighted average shares outstanding used in diluted calculation
|
119.5
|
|
|
118.8
|
|
|
116.3
|
|
|
Net income per share attributable to Intuitive Surgical, Inc.:
|
|
|
|
|
|
|
Basic
|
$
|
11.95
|
|
|
$
|
9.92
|
|
|
$
|
6.01
|
|
|
Diluted
|
$
|
11.54
|
|
|
$
|
9.49
|
|
|
$
|
5.77
|
|
Share-based compensation awards of approximately 0.7 million, 0.4 million, and 0.2 million shares for the years ended December 31, 2019, 2018, and 2017, respectively, were outstanding but were not included in the computation of diluted net income per share attributable to Intuitive Surgical, Inc. common stockholders, because the effect of including such shares would have been anti-dilutive in the periods presented.
NOTE 13. EMPLOYEE BENEFIT PLANS
The Company sponsors various retirement plans for its eligible U.S. and non-U.S. employees. For employees in the U.S., the Company maintains the Intuitive Surgical, Inc. 401(k) Plan (the “Plan”). As allowed under Section 401(k) of the Internal Revenue Code, the Plan provides tax-deferred salary contributions for eligible U.S. employees. The Plan allows employees to contribute up to 100% of their annual compensation to the Plan on a pre-tax and after-tax basis. Employee contributions are limited to a maximum annual amount as set periodically by the Internal Revenue Code. The Company matches 200% of employee contributions up to $1,500 per calendar year per person. All matching employer contributions vest immediately.
SELECTED QUARTERLY DATA
(UNAUDITED, IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
December 31,
2019
|
|
September 30,
2019
|
|
June 30,
2019
|
|
March 31,
2019
|
|
Revenue
|
$
|
1,277.7
|
|
|
$
|
1,128.2
|
|
|
$
|
1,098.9
|
|
|
$
|
973.7
|
|
|
Gross profit
|
$
|
896.0
|
|
|
$
|
785.6
|
|
|
$
|
759.0
|
|
|
$
|
669.6
|
|
|
Net income attributable to Intuitive Surgical, Inc. (1)(2)(3)
|
$
|
357.7
|
|
|
$
|
396.8
|
|
|
$
|
318.3
|
|
|
$
|
306.5
|
|
|
Net income attributable to Intuitive Surgical, Inc. per share:
|
|
|
|
|
|
|
|
|
Basic
|
$
|
3.09
|
|
|
$
|
3.44
|
|
|
$
|
2.76
|
|
|
$
|
2.67
|
|
|
Diluted
|
$
|
2.99
|
|
|
$
|
3.33
|
|
|
$
|
2.67
|
|
|
$
|
2.56
|
|
|
|
|
|
|
|
|
|
|
|
(1) Includes discrete tax benefits as follows:
|
|
|
|
|
|
|
|
|
Excess tax benefits related to share-based compensation arrangements
|
$
|
33.7
|
|
|
$
|
28.8
|
|
|
$
|
11.3
|
|
|
$
|
72.7
|
|
|
One-time tax benefit related to the enactment of Swiss tax reform
|
$
|
—
|
|
|
$
|
51.3
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
(2) Includes acquisition-related benefits (charges)
|
$
|
(3.1)
|
|
|
$
|
3.0
|
|
|
$
|
(4.1)
|
|
|
$
|
(3.0)
|
|
|
(3) Includes charitable foundation contribution expense
|
$
|
(5.0)
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
December 31,
2018
|
|
September 30,
2018
|
|
June 30,
2018
|
|
March 31,
2018
|
|
Revenue
|
$
|
1,046.5
|
|
|
$
|
920.9
|
|
|
$
|
909.3
|
|
|
$
|
847.5
|
|
|
Gross profit
|
$
|
735.7
|
|
|
$
|
642.3
|
|
|
$
|
632.3
|
|
|
$
|
593.8
|
|
|
Net income attributable to Intuitive Surgical, Inc. (1)(2)(3)
|
$
|
292.5
|
|
|
$
|
292.5
|
|
|
$
|
255.3
|
|
|
$
|
287.6
|
|
|
Net income attributable to Intuitive Surgical, Inc. per share:
|
|
|
|
|
|
|
|
|
Basic
|
$
|
2.56
|
|
|
$
|
2.57
|
|
|
$
|
2.25
|
|
|
$
|
2.55
|
|
|
Diluted
|
$
|
2.45
|
|
|
$
|
2.45
|
|
|
$
|
2.15
|
|
|
$
|
2.44
|
|
|
|
|
|
|
|
|
|
|
|
(1) Includes discrete tax benefits as follows:
|
|
|
|
|
|
|
|
|
Excess tax benefits related to share-based compensation arrangements
|
$
|
15.8
|
|
|
$
|
24.1
|
|
|
$
|
21.6
|
|
|
$
|
54.7
|
|
|
Certain one-time tax benefits
|
$
|
2.5
|
|
|
$
|
4.6
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
(2) Includes pre-tax litigation benefits (charges)
|
$
|
—
|
|
|
$
|
1.8
|
|
|
$
|
(42.5)
|
|
|
$
|
(4.5)
|
|
|
(3) Includes charitable foundation contribution expense
|
$
|
(25.2)
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|