Intuitive Surgical Inc 10-Q for FY2022 Q3
Intuitive Surgical Inc (ISRG)
10-Q
2022-10-21
For: 2022-09-30
View Original
Added on
April 12, 2026
About this 10-Q
Intuitive Surgical Inc filed this 10-Q on October 21, 2022, covering the quarter ended September 30, 2022 (FY2022 Q3).
Headline figures
Quarter ended September 30, 2022, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $1.56B
- up 11.0% from $1.4B a year earlier
- Net income
- $324M
- down 14.8% from net income of $380.5M a year earlier
- Diluted EPS
- $0.90
- down 13.5% from $1.04 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the quarterly period ended September 30, 2022
OR
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the transition period from to
Commission file number 000-30713
(Exact name of Registrant as specified in its Charter)
| (State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) | |||||||
(Address of principal executive offices) (Zip Code)
(408 ) 523-2100
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| x | Accelerated filer | ¨ | ||||||||||||
| Non-accelerated filer | ¨ | Smaller reporting company | ||||||||||||
| Emerging growth company | ||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No x
The Registrant had 353,384,570 shares of Common Stock, $0.001 par value per share, outstanding as of October 18, 2022.
INTUITIVE SURGICAL, INC.
TABLE OF CONTENTS
| Page No. | ||||||||
| PART I. FINANCIAL INFORMATION | ||||||||
Condensed Consolidated Balance Sheets as of September 30, 2022, and December 31, 2021 | ||||||||
Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2022, and 2021 | ||||||||
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2022, and 2021 | ||||||||
| PART II. OTHER INFORMATION | ||||||||
2
PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INTUITIVE SURGICAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
| in millions (except par values) | September 30, 2022 | December 31, 2021 | |||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Short-term investments | |||||||||||
| Accounts receivable, net | |||||||||||
| Inventory | |||||||||||
| Prepaids and other current assets | |||||||||||
| Total current assets | |||||||||||
| Property, plant, and equipment, net | |||||||||||
| Long-term investments | |||||||||||
| Deferred tax assets | |||||||||||
| Intangible and other assets, net | |||||||||||
| Goodwill | |||||||||||
| Total assets | $ | $ | |||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | $ | |||||||||
| Accrued compensation and employee benefits | |||||||||||
| Deferred revenue | |||||||||||
| Other accrued liabilities | |||||||||||
| Total current liabilities | |||||||||||
| Other long-term liabilities | |||||||||||
| Total liabilities | |||||||||||
| Contingencies (Note 8) | |||||||||||
| Stockholders’ equity: | |||||||||||
Preferred stock, | |||||||||||
Common stock, | |||||||||||
| Additional paid-in capital | |||||||||||
| Retained earnings | |||||||||||
| Accumulated other comprehensive loss | ( | ( | |||||||||
| Total Intuitive Surgical, Inc. stockholders’ equity | |||||||||||
| Noncontrolling interest in joint venture | |||||||||||
| Total stockholders’ equity | |||||||||||
| Total liabilities and stockholders’ equity | $ | $ | |||||||||
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements (Unaudited).
3
INTUITIVE SURGICAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| in millions (except per share amounts) | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
| Revenue: | |||||||||||||||||||||||
| Product | $ | $ | $ | $ | |||||||||||||||||||
| Service | |||||||||||||||||||||||
| Total revenue | |||||||||||||||||||||||
| Cost of revenue: | |||||||||||||||||||||||
| Product | |||||||||||||||||||||||
| Service | |||||||||||||||||||||||
| Total cost of revenue | |||||||||||||||||||||||
| Gross profit | |||||||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Selling, general and administrative | |||||||||||||||||||||||
| Research and development | |||||||||||||||||||||||
| Total operating expenses | |||||||||||||||||||||||
| Income from operations | |||||||||||||||||||||||
| Interest and other income, net | |||||||||||||||||||||||
| Income before taxes | |||||||||||||||||||||||
| Income tax expense | |||||||||||||||||||||||
| Net income | |||||||||||||||||||||||
| Less: net income attributable to noncontrolling interest in joint venture | |||||||||||||||||||||||
| Net income attributable to Intuitive Surgical, Inc. | $ | $ | $ | $ | |||||||||||||||||||
| Net income per share attributable to Intuitive Surgical, Inc.: | |||||||||||||||||||||||
| Basic | $ | $ | $ | $ | |||||||||||||||||||
| Diluted | $ | $ | $ | $ | |||||||||||||||||||
| Shares used in computing net income per share attributable to Intuitive Surgical, Inc.: | |||||||||||||||||||||||
| Basic | |||||||||||||||||||||||
| Diluted | |||||||||||||||||||||||
| Other comprehensive loss, net of tax: | |||||||||||||||||||||||
| Change in unrealized gains on hedge instruments | $ | $ | $ | $ | |||||||||||||||||||
| Change in unrealized losses on available-for-sale securities | ( | ( | ( | ( | |||||||||||||||||||
| Change in foreign currency translation losses | ( | ( | ( | ( | |||||||||||||||||||
| Change in prior service cost for employee benefit plans | |||||||||||||||||||||||
| Other comprehensive loss | ( | ( | ( | ( | |||||||||||||||||||
| Total comprehensive income | |||||||||||||||||||||||
| Less: comprehensive income (loss) attributable to noncontrolling interest | ( | ||||||||||||||||||||||
| Total comprehensive income attributable to Intuitive Surgical, Inc. | $ | $ | $ | $ | |||||||||||||||||||
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements (Unaudited).
4
INTUITIVE SURGICAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| Nine Months Ended September 30, | |||||||||||
| in millions | 2022 | 2021 | |||||||||
| Operating activities: | |||||||||||
| Net income | $ | $ | |||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Depreciation and loss on disposal of property, plant, and equipment | |||||||||||
| Amortization of intangible assets | |||||||||||
| Gain on sale of business | ( | ||||||||||
| Loss (gain) on investments, accretion, and amortization, net | ( | ||||||||||
| Deferred income taxes | ( | ( | |||||||||
| Share-based compensation expense | |||||||||||
| Amortization of contract acquisition assets | |||||||||||
| Changes in operating assets and liabilities, net of effects of acquisitions: | |||||||||||
| Accounts receivable | ( | ( | |||||||||
| Inventory | ( | ( | |||||||||
| Prepaids and other assets | ( | ( | |||||||||
| Accounts payable | |||||||||||
| Accrued compensation and employee benefits | ( | ||||||||||
| Deferred revenue | ( | ||||||||||
| Other liabilities | |||||||||||
| Net cash provided by operating activities | |||||||||||
| Investing activities: | |||||||||||
| Purchase of investments | ( | ( | |||||||||
| Proceeds from sales of investments | |||||||||||
| Proceeds from maturities of investments | |||||||||||
| Purchase of property, plant, and equipment and intellectual property | ( | ( | |||||||||
| Acquisition of businesses, net of cash, and other investing activities | ( | ( | |||||||||
| Net cash provided by (used in) investing activities | ( | ||||||||||
| Financing activities: | |||||||||||
| Proceeds from issuance of common stock relating to employee stock plans | |||||||||||
| Taxes paid related to net share settlement of equity awards | ( | ( | |||||||||
| Repurchase of common stock | ( | ||||||||||
| Payment of deferred purchase consideration | ( | ( | |||||||||
| Net cash provided by (used in) financing activities | ( | ||||||||||
| Effect of exchange rate changes on cash, cash equivalents, and restricted cash | ( | ||||||||||
| Net increase (decrease) in cash, cash equivalents, and restricted cash | ( | ||||||||||
| Cash, cash equivalents, and restricted cash, beginning of period | |||||||||||
| Cash, cash equivalents, and restricted cash, end of period | $ | $ | |||||||||
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements (Unaudited).
5
In this report, “Intuitive Surgical,” “Intuitive,” the “Company,” “we,” “us,” and “our” refer to Intuitive Surgical, Inc. and its wholly and majority-owned subsidiaries.
NOTE 1. DESCRIPTION OF THE BUSINESS
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
In the opinion of management, the accompanying unaudited Condensed Consolidated Financial Statements (“Financial Statements”) of Intuitive Surgical, Inc. and its wholly and majority-owned subsidiaries have been prepared on a consistent basis with the audited Consolidated Financial Statements for the fiscal year ended December 31, 2021, and include all adjustments, consisting of only normal, recurring adjustments, necessary to fairly state the information set forth herein. The Financial Statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) and, therefore, omit certain information and footnote disclosure necessary to present the Financial Statements in accordance with United States (“U.S.”) generally accepted accounting principles (“U.S. GAAP”). These Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021, which was filed with the SEC on February 3, 2022. The results of operations for the first nine months of 2022 are not necessarily indicative of the results to be expected for the entire fiscal year or any future periods.
Risks and Uncertainties
The Company’s future results of operations and liquidity could be materially adversely affected by macroeconomic factors contributing to delays in payments of outstanding receivables, supply chain disruptions, including shortages and inflationary pressure, uncertain or reduced demand, and the impact of any initiatives or programs that the Company may undertake to address financial and operational challenges faced by its customers.
In particular, the Company has experienced increased difficulties in obtaining a sufficient supply of a number of component materials used in its products, such as semiconductor components as well as a range of other materials including, but not limited to, metals and polymers, as global supply has become significantly constrained due to increased demand for certain materials. Additionally, prices of such materials have increased due to the increased demand and supply shortage. With rising interest rates, access to credit may become more difficult, and any insolvency of the Company’s key suppliers, including sole-source suppliers, may exacerbate current supply chain challenges. The Company is engaged in activities to seek to mitigate supply disruptions by, for example, increasing its communications with its suppliers and modifying its purchase order coverage and inventory levels. However, the global supply chain shortages will remain a challenge for the foreseeable future.
The Company has also experienced challenges in logistics, as certain shipping routes have been impacted by port closures. Such global shortages in important components and logistics challenges have resulted in, and will continue to cause, inflationary cost pressure in the Company’s supply chain. To date, the inflationary cost pressure has been more pronounced in the Company’s logistics costs, but these supply chain challenges have not materially impacted the Company’s results of operations or ability to deliver products and services to its customers. However, if shortages in important supply chain materials in the semiconductor or other markets or logistics challenges continue, the Company could fail to meet product demand, which could result in deferred or cancelled procedures. Additionally, if inflationary pressures in logistics or component costs persist, the Company may not be able to quickly or easily adjust pricing, reduce costs, or implement countermeasures. Additionally, there is uncertainty surrounding the impact of any monetary policy changes taken by the U.S. Federal Reserve and other central banks to address the structural risks associated with inflation.
Increased labor shortages globally, including staff burnout and attrition, could also impact the Company’s ability to hire and retain personnel critical to its manufacturing, logistics, and commercial operations. The Company is also highly dependent
6
on the principal members of its management and scientific staff. Attracting and retaining qualified personnel is critical to its success, and competition for them has become more intense. The loss of critical members of the Company’s team, or its inability to attract and retain qualified personnel, could significantly harm its operations, business, and ability to compete.
Hospitals are also experiencing staffing shortages and supply chain issues that could affect their ability to provide patient care. Additionally, hospitals are facing significant financial pressure as supply chain constraints and inflation drive up operating costs, rising interest rates make access to credit more expensive, unrealized losses decrease available cash reserves, and fiscal stimulus programs enacted during the COVID-19 pandemic wind down. To the extent macroeconomic conditions remain challenging, it is likely that hospitals’ spend on capital equipment will be adversely impacted. In addition, as competition progresses in various markets, longer selling cycles and pricing pressures are likely to result. As of the date of issuance of these Financial Statements, the extent to which these macroeconomic factors may materially adversely affect the Company’s financial condition, liquidity, or results of operations is uncertain.
The Company is also subject to additional risks and uncertainties due to the ongoing COVID-19 pandemic. The extent of the impact on the Company’s business is highly uncertain and difficult to predict. The Company’s customers may divert resources to treat COVID-19 patients and defer some elective surgical procedures, both of which may impact the Company’s customers’ ability to meet their obligations, including to the Company. The severity of the impact of the COVID-19 pandemic on the Company’s business will depend on a number of factors, including, but not limited to, the duration and severity of the pandemic and the extent and severity of the impact on the Company’s customers, all of which are uncertain and cannot be predicted.
Recently Adopted Accounting Pronouncements
Business Combinations
In October 2021, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers (“ASU 2021-08”), which creates an exception to the general recognition and measurement principle in ASC 805 by requiring companies to apply ASC 606 to recognize and measure contract assets and contract liabilities from contracts with customers acquired in a business combination. The guidance additionally clarifies that companies should apply the definition of a performance obligation in ASC 606 when recognizing contract liabilities assumed in a business combination. The Company has early adopted ASU 2021-08 as of January 1, 2022, on a prospective basis. The impact of the adoption of ASU 2021-08 had an immaterial impact on the Company’s Financial Statements in the nine months ended September 30, 2022.
Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions
In June 2022, the FASB issued ASU No. 2022-03, Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions (“ASU 2022-03”), which applies to all equity securities measured at fair value that are subject to contractual sale restrictions. This change prohibits entities from taking into account contractual restrictions on the sale of equity securities when estimating fair value and introduces required disclosures for such transactions. The Company has early adopted ASU 2022-03 as of July 1, 2022, on a prospective basis. There was no impact of the adoption of ASU 2022-03 on the Company’s Financial Statements in the three months ended September 30, 2022.
Recently Issued Accounting Pronouncements
Troubled Debt Restructurings and Vintage Disclosures
In March 2022, the FASB issued ASU No. 2022-02, Financial Instruments-Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures (“ASU 2022-02”), which eliminates the accounting guidance for troubled debt restructurings by creditors while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. Additionally, the standard requires disclosure of current-period gross write-offs by year of origination for financing receivables and net investments in leases within the scope of Subtopic ASC 326-20, Financial Instruments-Credit Losses-Measured at Amortized Cost. The standard will become effective for the Company beginning January 1, 2023, and should be applied prospectively. The adoption of ASU 2022-02 is not expected to have a material impact on the Company’s future Financial Statements.
Significant Accounting Policies
There have been no new or material changes to the significant accounting policies discussed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021, that are of significance, or potential significance, to the Company.
7
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, allowance for credit loss, and fair value by significant investment category reported as cash and cash equivalents, short-term investments, or long-term investments as of September 30, 2022 and December 31, 2021 (in millions):
| Reported as: | |||||||||||||||||||||||||||||||||||||||||||||||
| Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Allowance for Credit Loss | Fair Value | Cash and Cash Equivalents | Short- term Investments | Long- term Investments | ||||||||||||||||||||||||||||||||||||||||
| September 30, 2022 | |||||||||||||||||||||||||||||||||||||||||||||||
| Cash | $ | $ | — | $ | — | $ | — | $ | $ | $ | — | $ | — | ||||||||||||||||||||||||||||||||||
| Level 1: | |||||||||||||||||||||||||||||||||||||||||||||||
| Money market funds | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| U.S. treasuries | ( | ||||||||||||||||||||||||||||||||||||||||||||||
| Subtotal | ( | ||||||||||||||||||||||||||||||||||||||||||||||
| Level 2: | |||||||||||||||||||||||||||||||||||||||||||||||
| Commercial paper | |||||||||||||||||||||||||||||||||||||||||||||||
| Corporate debt securities | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||
| U.S. government agencies | ( | ||||||||||||||||||||||||||||||||||||||||||||||
| Municipal securities | ( | ||||||||||||||||||||||||||||||||||||||||||||||
| Subtotal | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||
| Total assets measured at fair value | $ | $ | $ | ( | $ | ( | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||
| Reported as: | |||||||||||||||||||||||||||||||||||||||||||||||
| Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Allowance for Credit Loss | Fair Value | Cash and Cash Equivalents | Short- term Investments | Long- term Investments | ||||||||||||||||||||||||||||||||||||||||
| December 31, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||
| Cash | $ | $ | — | $ | — | $ | — | $ | $ | $ | — | $ | — | ||||||||||||||||||||||||||||||||||
| Level 1: | |||||||||||||||||||||||||||||||||||||||||||||||
| Money market funds | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| U.S. treasuries | ( | ||||||||||||||||||||||||||||||||||||||||||||||
| Subtotal | ( | ||||||||||||||||||||||||||||||||||||||||||||||
| Level 2: | |||||||||||||||||||||||||||||||||||||||||||||||
| Commercial paper | |||||||||||||||||||||||||||||||||||||||||||||||
| Corporate debt securities | ( | ||||||||||||||||||||||||||||||||||||||||||||||
| U.S. government agencies | ( | ||||||||||||||||||||||||||||||||||||||||||||||
| Municipal securities | ( | ||||||||||||||||||||||||||||||||||||||||||||||
| Subtotal | ( | ||||||||||||||||||||||||||||||||||||||||||||||
| Total assets measured at fair value | $ | $ | $ | ( | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||
8
The following table summarizes the contractual maturities of the Company’s cash equivalents and available-for-sale investments (excluding cash and money market funds), as of September 30, 2022 (in millions):
| Amortized Cost | Fair Value | ||||||||||
| Mature in less than one year | $ | $ | |||||||||
| Mature in one to five years | |||||||||||
| Total | $ | $ | |||||||||
Actual maturities may differ from contractual maturities, because certain borrowers have the right to call or prepay certain obligations. Realized gains and losses recognized on the sale of investments were not material for any of the periods presented.
The following tables present the breakdown of the available-for-sale debt securities that have been in a continuous unrealized loss position deemed to be temporary, aggregated by investment category, as of September 30, 2022, and December 31, 2021 (in millions):
| September 30, 2022 | |||||||||||||||||||||||||||||||||||
| Less than 12 months | More than 12 months | Total | |||||||||||||||||||||||||||||||||
| Fair Value | Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | ||||||||||||||||||||||||||||||
| U.S. treasuries | $ | $ | ( | $ | $ | ( | $ | $ | ( | ||||||||||||||||||||||||||
| Corporate debt securities | ( | ( | ( | ||||||||||||||||||||||||||||||||
| U.S. government agencies | ( | ( | ( | ||||||||||||||||||||||||||||||||
| Municipal securities | ( | ( | ( | ||||||||||||||||||||||||||||||||
| Total | $ | $ | ( | $ | $ | ( | $ | $ | ( | ||||||||||||||||||||||||||
| December 31, 2021 | |||||||||||||||||||||||||||||||||||
| Less than 12 months | More than 12 months | Total | |||||||||||||||||||||||||||||||||
| Fair Value | Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | ||||||||||||||||||||||||||||||
| U.S. treasuries | $ | $ | ( | $ | $ | $ | $ | ( | |||||||||||||||||||||||||||
| Commercial paper | |||||||||||||||||||||||||||||||||||
| Corporate debt securities | ( | ( | |||||||||||||||||||||||||||||||||
| U.S. government agencies | ( | ( | |||||||||||||||||||||||||||||||||
| Municipal securities | ( | ( | |||||||||||||||||||||||||||||||||
| Total | $ | $ | ( | $ | $ | $ | $ | ( | |||||||||||||||||||||||||||
9
Equity Investments
The Company holds equity investments with readily determinable fair values and equity investments without readily determinable fair values. The Company generally recognizes equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer.
The following table is a summary of the activity related to equity investments (in millions):
| Reported as: | |||||||||||||||||||||||||||||||||||
December 31, 2021 Carrying Value | Changes in Fair Value (1) | Purchases / Sales / Other (2) | September 30, 2022 Carrying Value | Prepaids and other current assets | Intangible and other assets, net | ||||||||||||||||||||||||||||||
| Equity investments with readily determinable value (Level 1) | $ | $ | ( | $ | ( | $ | $ | $ | |||||||||||||||||||||||||||
| Equity investments without readily determinable value (Level 2) | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
(1) Recorded in Interest and other income, net. | |||||||||||||||||||||||||||||||||||
(2) Other includes foreign currency translation gains/(losses). | |||||||||||||||||||||||||||||||||||
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, intercompany balances, and other monetary assets or liabilities denominated in currencies other than the U.S. dollar (“USD”). The terms of the Company’s derivative contracts are generally twelve months or shorter. 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”), the Korean Won (“KRW”), and the New Taiwan Dollar (“TWD”). The Company also enters into currency forward contracts as cash flow hedges to hedge certain forecasted expense transactions denominated in EUR and the 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 loss in stockholders’ equity and reclassifies the amount into earnings in the same period in which the hedged 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, TWD, Indian Rupee (“INR”), Mexican Peso (“MXN”), and Chinese Yuan (“CNY”).
These derivative instruments are used to hedge against balance sheet foreign currency exposures. The related gains and losses were as follows (in millions):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Recognized gains in Interest and other income, net | $ | $ | $ | $ | |||||||||||||||||||
| Foreign exchange losses related to balance sheet re-measurement | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
10
The notional amounts for derivative instruments provide one measure of the transaction volume. Total gross notional amounts (in USD) for outstanding derivatives and the aggregate gross fair value at the end of each period were as follows (in millions):
| Derivatives Designated as Hedging Instruments | Derivatives Not Designated as Hedging Instruments | ||||||||||||||||||||||
| September 30, 2022 | December 31, 2021 | September 30, 2022 | December 31, 2021 | ||||||||||||||||||||
| Notional amounts: | |||||||||||||||||||||||
| Forward contracts | $ | $ | $ | $ | |||||||||||||||||||
| Gross fair value recorded in: | |||||||||||||||||||||||
| Prepaids and other current assets | $ | $ | $ | $ | |||||||||||||||||||
| Other accrued liabilities | $ | $ | $ | $ | |||||||||||||||||||
NOTE 4. BALANCE SHEET DETAILS AND OTHER FINANCIAL INFORMATION
Balance Sheet Details
The following tables provide details of selected balance sheet line items (in millions):
| As of | |||||||||||
| Inventory | September 30, 2022 | December 31, 2021 | |||||||||
| Raw materials | $ | $ | |||||||||
| Work-in-process | |||||||||||
| Finished goods | |||||||||||
| Total inventory | $ | $ | |||||||||
| As of | |||||||||||
| Prepaids and other current assets | September 30, 2022 | December 31, 2021 | |||||||||
| Prepaid taxes | $ | $ | |||||||||
| Equity investments | |||||||||||
| Net investment in sales-type leases–short-term | |||||||||||
| Other prepaids and other current assets | |||||||||||
| Total prepaids and other current assets | $ | $ | |||||||||
| As of | |||||||||||
| Other accrued liabilities–short-term | September 30, 2022 | December 31, 2021 | |||||||||
| Taxes payable | $ | $ | |||||||||
| Current portion of deferred and contingent purchase consideration | |||||||||||
| Accrued construction-related capital expenditures | |||||||||||
| Other accrued liabilities | |||||||||||
| Total other accrued liabilities–short-term | $ | $ | |||||||||
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| As of | |||||||||||
| Other long-term liabilities | September 30, 2022 | December 31, 2021 | |||||||||
| Income taxes–long-term | $ | $ | |||||||||
| Deferred revenue–long-term | |||||||||||
| Other long-term liabilities | |||||||||||
| Total other long-term liabilities | $ | $ | |||||||||
Supplemental Cash Flow Information
The following table provides supplemental non-cash investing and financing activities (in millions):
| Nine Months Ended September 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| Equipment transfers, including operating lease assets, from inventory to property, plant, and equipment | $ | $ | |||||||||
| Acquisition of property, plant, and equipment in accounts payable and accrued liabilities | $ | $ | |||||||||
NOTE 5. REVENUE AND CONTRACT ACQUISITION COSTS
The following table presents revenue disaggregated by types and geography (in millions):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| U.S. | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
| Instruments and accessories | $ | $ | $ | $ | |||||||||||||||||||
| Systems | |||||||||||||||||||||||
| Services | |||||||||||||||||||||||
Total U.S. revenue | $ | $ | $ | $ | |||||||||||||||||||
| Outside of U.S. (“OUS”) | |||||||||||||||||||||||
| Instruments and accessories | $ | $ | $ | $ | |||||||||||||||||||
| Systems | |||||||||||||||||||||||
| Services | |||||||||||||||||||||||
Total OUS revenue | $ | $ | $ | $ | |||||||||||||||||||
| Total | |||||||||||||||||||||||
| Instruments and accessories | $ | $ | $ | $ | |||||||||||||||||||
| Systems | |||||||||||||||||||||||
| Services | |||||||||||||||||||||||
Total revenue | $ | $ | $ | $ | |||||||||||||||||||
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 these performance obligations relate to service obligations in the Company’s system sale and lease arrangements that will be satisfied and recognized as revenue in future periods. The transaction price allocated to the remaining performance obligations was $1.84 billion as of September 30, 2022. The remaining performance obligations are expected to be satisfied over the term of the system sale, lease, and service arrangements, which are generally up to 5 years.
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Contract Assets and Liabilities
The following information summarizes the Company’s contract assets and liabilities (in millions):
| As of | |||||||||||
| September 30, 2022 | December 31, 2021 | ||||||||||
| Contract assets | $ | $ | |||||||||
| Deferred revenue | $ | $ | |||||||||
The Company invoices its customers based on the billing schedules in its sales arrangements. Payments are generally due 30 to 60 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.
Intuitive System Leasing
The following table presents revenue from Intuitive System Leasing arrangements (in millions):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Sales-type lease revenue | $ | $ | $ | $ | |||||||||||||||||||
| Operating lease revenue* | $ | $ | $ | $ | |||||||||||||||||||
| *Variable lease revenue relating to usage-based arrangements included within operating lease revenue | $ | $ | $ | $ | |||||||||||||||||||
Trade Accounts Receivable
The allowance for doubtful accounts is based on the Company’s assessment of the collectibility of customer accounts. The Company regularly reviews the allowance by considering factors such as historical experience, credit quality, the age of the accounts receivable balances, and current economic conditions that may affect a customer’s ability to pay. For the three and nine months ended September 30, 2022, and 2021, bad debt expense was not material.
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NOTE 6. LEASES
Lessor Information
Sales-type Leases. Lease receivables relating to sales-type lease arrangements are presented on the Condensed Consolidated Balance Sheets as follows (in millions):
| As of | |||||||||||
| September 30, 2022 | December 31, 2021 | ||||||||||
| Gross lease receivables | $ | $ | |||||||||
| Unearned income | ( | ( | |||||||||
| Subtotal | |||||||||||
| Allowance for credit loss | ( | ( | |||||||||
| Net investment in sales-type leases | $ | $ | |||||||||
| Reported as: | |||||||||||
| Prepaids and other current assets | $ | $ | |||||||||
| Intangible and other assets, net | |||||||||||
| Total, net | $ | $ | |||||||||
Contractual maturities of gross lease receivables as of September 30, 2022, are as follows (in millions):
| Fiscal Year | Amount | ||||
Remainder of 2022 | $ | ||||
| 2023 | |||||
| 2024 | |||||
| 2025 | |||||
| 2026 | |||||
| 2027 and thereafter | |||||
| Total | $ | ||||
The Company enters into sales-type leases with certain qualified customers to purchase its systems. Sales-type leases have terms that generally range from 24 to 84 months and are usually collateralized by a security interest in the underlying assets. The allowance for loan loss is based on the Company’s assessment of current expected lifetime losses on lease receivables. The Company regularly reviews the allowance by considering factors such as historical experience, credit quality, age of the lease receivable balances, and current economic conditions that may affect a customer’s ability to pay. Lease receivables are considered past due 90 days after invoice.
The Company manages the credit risk in net investment in sales-type leases using a number of factors, including, but not limited to the following: size of operations; profitability, liquidity, and debt ratios; payment history; and past due amounts. The Company also uses credit scores obtained from external providers as a key indicator for the purposes of determining credit quality. The following table summarizes the amortized cost basis by year of origination and by credit quality for the net investment in sales-type leases as of September 30, 2022 (in millions):
| 2022 | 2021 | 2020 | 2019 | 2018 | Prior | Net Investment | |||||||||||||||||||||||||||||||||||
| Credit Rating: | |||||||||||||||||||||||||||||||||||||||||
| High | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||
| Moderate | |||||||||||||||||||||||||||||||||||||||||
| Low | |||||||||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||
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NOTE 7. GOODWILL AND INTANGIBLE ASSETS
Acquisitions
There were no material acquisitions for the nine months ended September 30, 2022, and 2021.
Goodwill
The following table summarizes the changes in the carrying amount of goodwill (in millions):
| Amount | |||||
Balance as of December 31, 2021 | $ | ||||
| Acquisition activity | |||||
| Translation and other | ( | ||||
Balance as of September 30, 2022 | $ | ||||
Intangible Assets
The following table summarizes the components of gross intangible assets, accumulated amortization, and net intangible asset balances as of September 30, 2022, and December 31, 2021 (in millions):
| September 30, 2022 | December 31, 2021 | |||||||||||||||||||||||||||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | |||||||||||||||||||||||||||||||||
| Patents and developed technology | $ | $ | ( | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||||
| Distribution rights and others | ( | ( | ||||||||||||||||||||||||||||||||||||
| Customer relationships | ( | ( | ||||||||||||||||||||||||||||||||||||
| Total intangible assets | $ | $ | ( | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||||
The estimated future amortization expense related to intangible assets as of September 30, 2022, is as follows (in millions):
| Fiscal Year | Amount | ||||
Remainder of 2022 | $ | ||||
| 2023 | |||||
| 2024 | |||||
| 2025 | |||||
| 2026 | |||||
| 2027 and thereafter | |||||
| Total | $ | ||||
The preceding expected amortization expense is an estimate. Actual amounts of amortization expense may differ from estimated amounts due to additional intangible asset acquisitions, measurement-period adjustments to intangible assets, changes in foreign currency exchange rates, impairments of intangible assets, accelerated amortization of intangible assets, and other events.
NOTE 8. 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 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
15
settlements, judgments, legal fees, and other related defense costs) could have a material adverse effect on the Company’s business, financial position, and future results of operations.
Product Liability Litigation
The Company is currently named as a defendant in a number of individual product liability lawsuits filed in various state and federal courts. The plaintiffs generally allege that they or a family member underwent surgical procedures that utilized the da Vinci Surgical System and sustained a variety of personal injuries and, in some cases, death as a result of such surgery. Several of the filed cases have trial dates in the next 12 months.
The cases raise a variety of allegations including, to varying degrees, that plaintiffs’ injuries resulted from purported defects in the da Vinci Surgical System and/or failure on the Company’s part to provide adequate training resources to the healthcare professionals who performed plaintiffs’ surgeries. The cases further allege that the Company failed to adequately disclose and/or misrepresented the potential risks and/or benefits of the da Vinci Surgical System. Plaintiffs also assert a variety of causes of action, including, for example, strict liability based on purported design defects, negligence, fraud, breach of express and implied warranties, unjust enrichment, and loss of consortium. Plaintiffs seek recovery for alleged personal injuries and, in many cases, punitive damages. The Company disputes these allegations and is defending against these claims.
The Company’s estimate of the anticipated cost of resolving the pending cases is based on negotiations with attorneys for the claimants. The final outcome of the pending lawsuits and claims, and others that might arise, is dependent on many variables that are difficult to predict, and the ultimate cost associated with these product liability lawsuits and claims may be materially different than the amount of the current estimate and accruals and could have a material adverse effect on the Company’s business, financial position, and future results of operations. Although there is a reasonable possibility that a loss in excess of the amount recognized exists, the Company is unable to estimate the possible loss or range of loss in excess of the amount recognized at this time.
Patent Litigation
On June 30, 2017, Ethicon LLC, Ethicon Endo-Surgery, Inc., and Ethicon US LLC (collectively, “Ethicon”) filed a complaint for patent infringement against the Company in the U.S. District Court for the District of Delaware. The complaint, which was served on the Company on July 12, 2017, alleges that the Company’s EndoWrist Stapler instruments infringe several of Ethicon’s patents. Ethicon asserts infringement of U.S. Patent Nos. 9,585,658; 8,479,969; 9,113,874; 8,998,058; 8,991,677; 9,084,601; and 8,616,431. A claim construction hearing occurred on October 1, 2018, and the Court issued a scheduling order on December 28, 2018. On March 20, 2019, the Court granted the Company’s Motion to Stay pending an Inter Partes Review to 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. There is currently no trial date scheduled for this matter.
On August 27, 2018, Ethicon filed a second complaint for patent infringement against the Company in the U.S. District Court for the District of Delaware. The complaint alleges that the Company’s SureForm 60 Staplers infringe five of Ethicon’s patents. Ethicon asserts infringement of U.S. Patent Nos. 9,884,369; 7,490,749; 8,602,288; 8,602,287; and 9,326,770. The Company filed an answer denying all claims. On March 19, 2019, Ethicon filed a Motion for Leave to File a First Amended Complaint, removing allegations related to U.S. Patent No. 9,326,770 and adding allegations related to U.S. Patent Nos. 9,844,379 and 8,479,969. On July 17, 2019, the Court entered an order denying the amendment, without prejudice, and granting the parties’ joint stipulation to stay the case in its entirety in light of the USITC investigation involving U.S. Patent Nos. 9,844,369 and 7,490,749, discussed below. There is currently no trial date scheduled for this matter.
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.
On May 30, 2019, Ethicon filed a complaint with the USITC, asserting infringement of U.S. Patent Nos. 9,884,369 (“’369”); 7,490,749 (“’749”); 9,844,379 (“’379”); 9,113,874 (“’874”); and 8,479,969 (“’969”). On June 28, 2019, the USITC voted to institute an investigation (No. 337-TA-1167) with respect to the claims in this complaint. The accused products include the Company’s EndoWrist 30, EndoWrist 45, SureForm 45, and SureForm 60 Staplers, as well as the stapler reload cartridges. In March 2020, Ethicon dismissed its claims concerning the ’749 patent. The evidentiary hearing took place in February 2021. On March 26, 2021, the U.S. Patent Trial and Appeal Board (“PTAB”) issued a Final Written Decision in which it found the claims in the ’379 patent asserted against the Company in this USITC proceeding to be invalid. On June 8, 2021, the Chief Administrative Law Judge issued an Initial Determination concluding that (1) the accused products do not infringe the asserted claims in the ’874 or ’969 patents; (2) the asserted claims in the ’874 and ’969 patents are invalid; (3) the accused SureForm staplers and associated reload cartridges infringe two claims of the ’369 patent; (4) the accused SureForm staplers and associated reload cartridges infringe two claims of the ’379 patent; and (5) the Company was estopped from contending that the asserted claims in the ’379 patent are invalid. Ethicon has not challenged the Initial Determination with regard to the findings
16
that absolve Intuitive of any liability regarding the accused EndoWrist staplers and associated reload cartridges. On October 14, 2021, the USITC issued its Opinion in which it made the following rulings: (1) the USITC absolved Intuitive from any liability regarding the ’874, ’969, and ’369 patents; and (2) the USITC found that, while the SureForm staplers and their associated reload cartridges infringe the asserted claims in the ’379 patent, it has suspended the imposition of any remedial order pending an opinion from the U.S. Court of Appeal for the Federal Circuit of whether the Patent and Trademark Office correctly found the asserted claims in this patent to be invalid. On May 23, 2022, the U.S. Court of Appeal for the Federal Circuit affirmed the earlier PTAB Final Written Decision invalidating the asserted claims in the ’379 patent. An adverse ruling on Ethicon’s appeal of the USITC’s Opinion could result in a prohibition on importing the accused SureForm products into the U.S. or necessitating workarounds. Based on currently available information, the Company does not believe that any losses arising from this matter would be material.
Commercial Litigation
On February 27, 2019, Restore Robotics LLC and Restore Repair LLC (“Restore”) filed a complaint in the Northern District of Florida 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 filed 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.
On April 11, 2022, the Court granted in part and denied in part the parties’ Motions for Summary Judgment. Shortly thereafter, Restore’s licensor, Rebotix Repair LLC filed a notice in the related Rebotix action (described below) that it had received an email from the U.S. Food and Drug Administration (“FDA”) confirming that “extending the number of uses and modifying [EndoWrist] instrument[s] with a new chip” constitutes “remanufacturing,” and required 510(k) clearance, which neither Restore nor Rebotix has obtained. In light of this communication with the FDA, on April 13, 2022, the Company filed a Motion for Reconsideration to the Court’s Summary Judgment Order, which the Court denied on May 31, 2022. A trial date has been set for February 6, 2023. 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.
On September 28, 2020, Rebotix Repair Inc. (“Rebotix”) filed a complaint in the Middle District of Florida alleging anti-trust claims against the Company relating to EndoWrist service, maintenance, and repair processes. On April 1, 2022, the Court stayed this case based on Rebotix’s representation that the FDA would soon be issuing a decision on whether Rebotix’s services require 510(k) clearance. On April 11, 2022, Rebotix filed a Notice of FDA Decision, which included correspondence from the FDA concluding that Rebotix’s activities constituted remanufacturing and would require FDA review and clearance. On April 13, 2022, the Court issued an Order directing the parties to confer and file a joint status report by May 4, 2022, on how the FDA’s decision impacts this case and how the parties wish to proceed. On May 4, 2022, the parties filed a joint status report. The case was scheduled for trial in December 2022. On October 7, 2022, the parties resolved all of their claims against one another. The settlement had an immaterial impact on the Company’s Financial Statements for the three months ended September 30, 2022. The Company expects that dismissals with prejudice will be filed shortly.
Similar to the claims asserted in the Restore case, on May 10, 2021, Surgical Instrument Service Company, Inc. (“SIS”) filed a complaint in the Northern District of California Court alleging anti-trust claims against the Company relating to EndoWrist service, maintenance, and repair processes. The Court granted in part and denied in part the Company’s Motion to Dismiss, and discovery has commenced. The Company filed an answer denying the anti-trust allegations and filed counterclaims against SIS. The counterclaims allege that SIS violated the Federal Lanham Act, California’s Unfair Competition Law, and California’s False Advertising Law and that SIS is also liable to the Company for Unfair Competition and Tortious Interference with Contract. Based on currently available information, the Company is unable to make a reasonable estimate of loss or range of losses, if any, arising from this matter.
Three class action complaints were filed against the Company in the Northern District of California Court alleging anti-trust allegations relating to the service and repair of certain instruments manufactured by the Company. A complaint by Larkin Community Hospital was filed on May 20, 2021, a complaint by Franciscan Alliance, Inc. and King County Public Hospital District No. 1 was filed on July 6, 2021, and a complaint by Kaleida Health was filed on July 8, 2021. The Court has consolidated the Franciscan Alliance, Inc. and King County Public Hospital District No. 1 and Kaleida Health cases with the Larkin Community Hospital case, which is now captioned on the Larkin docket as “In Re: da Vinci Surgical Robot Antitrust Litigation.” A Consolidated Amended Class Action Complaint has been filed on behalf of each plaintiff named in the earlier-
17
NOTE 9. STOCKHOLDERS’ EQUITY
Stockholders’ Equity
The following tables present the changes in stockholders’ equity (in millions):
| Three Months Ended September 30, 2022 | |||||||||||||||||||||||||||||||||||||||||||||||
| 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 | ||||||||||||||||||||||||||||||||||||||||||||||
| Beginning balance | $ | $ | $ | $ | ( | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||
| Issuance of common stock through employee stock plans | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
| Shares withheld related to net share settlement of equity awards | ( | — | ( | ( | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||
| Share-based compensation expense related to employee stock plans | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Repurchase and retirement of common stock | ( | — | ( | ( | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||
| Net income attributable to Intuitive Surgical, Inc. | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | — | — | — | — | ( | ( | ( | ( | |||||||||||||||||||||||||||||||||||||||
| Net income attributable to noncontrolling interest in joint venture | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Ending balance | $ | $ | $ | $ | ( | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||
| Three Months Ended September 30, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||
| 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 | ||||||||||||||||||||||||||||||||||||||||||||||
Beginning balance | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock through employee stock plans | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
| Shares withheld related to net share settlement of equity awards | ( | — | ( | ( | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||
| Share-based compensation expense related to employee stock plans | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Net income attributable to Intuitive Surgical, Inc. | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
Other comprehensive income (loss) | — | — | — | — | ( | ( | ( | ( | |||||||||||||||||||||||||||||||||||||||
| Net income attributable to noncontrolling interest in joint venture | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
Ending balance | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||
18
| Nine Months Ended September 30, 2022 | |||||||||||||||||||||||||||||||||||||||||||||||
| 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 | ||||||||||||||||||||||||||||||||||||||||||||||
Beginning balance | $ | $ | $ | $ | ( | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||
| Issuance of common stock through employee stock plans | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
| Shares withheld related to net share settlement of equity awards | ( | — | ( | ( | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||
| Share-based compensation expense related to employee stock plans | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Repurchase and retirement of common stock | ( | — | ( | ( | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||
| Net income attributable to Intuitive Surgical, Inc. | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
Other comprehensive income (loss) | — | — | — | — | ( | ( | ( | ( | |||||||||||||||||||||||||||||||||||||||
| Net income attributable to noncontrolling interest in joint venture | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
Ending balance | $ | $ | $ | $ | ( | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||
| Nine Months Ended September 30, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||
| 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 | ||||||||||||||||||||||||||||||||||||||||||||||
Beginning balance | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock through employee stock plans | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
| Shares withheld related to net share settlement of equity awards | ( | — | ( | ( | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||
| Share-based compensation expense related to employee stock plans | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Net income attributable to Intuitive Surgical, Inc. | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
Other comprehensive income (loss) | — | — | — | — | ( | ( | ( | ( | |||||||||||||||||||||||||||||||||||||||
| Net income attributable to noncontrolling interest in joint venture | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
Ending balance | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||
Stock Repurchase Program
The Company’s Board of Directors (the “Board”) has authorized an aggregate of $10.0 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 July 2022, when the Board increased the authorized amount available under the Repurchase Program to $3.5 billion, including amounts remaining under previous authorization. As of September 30, 2022, the remaining amount of share repurchases authorized by the Board was $2.5 billion.
In August 2022, the Company entered into an accelerated share repurchase program (the “ASR Program”) with Goldman, Sachs & Co. (“Goldman”) to repurchase $1.0 billion of the Company’s common stock. The Company made a payment of $1.0 billion to Goldman and received an initial delivery of approximately 3.5 million shares of the Company’s common stock, which were subsequently retired. In September 2022, the ASR Program was completed, and an additional 1.1 million shares of common stock were received and retired. In total, 4.6 million shares were repurchased at an average price per share of $217.52 . The total cost of the ASR Program was reflected as a reduction to equity in the Condensed Consolidated Balance Sheets.
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The following table provides share repurchase activities (in millions, except per share amounts):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Shares repurchased | |||||||||||||||||||||||
| Average price per share | $ | $ | $ | $ | |||||||||||||||||||
| Value of shares repurchased | $ | $ | $ | $ | |||||||||||||||||||
Accumulated Other Comprehensive Loss, Net of Tax, Attributable to Intuitive Surgical, Inc.
The components of accumulated other comprehensive loss, net of tax, attributable to Intuitive Surgical, Inc. are as follows (in millions):
| Three Months Ended September 30, 2022 | |||||||||||||||||||||||||||||
| Gains (Losses) on Hedge Instruments | Unrealized Gains (Losses) on Available-for-Sale Securities | Foreign Currency Translation Gains (Losses) | Employee Benefit Plans | Total | |||||||||||||||||||||||||
| Beginning balance | $ | $ | ( | $ | ( | $ | ( | $ | ( | ||||||||||||||||||||
| Other comprehensive income (loss) before reclassifications | ( | ( | ( | ( | |||||||||||||||||||||||||
| Amounts reclassified from accumulated other comprehensive income (loss) | |||||||||||||||||||||||||||||
| Net current-period other comprehensive income (loss) | ( | ( | ( | ||||||||||||||||||||||||||
| Ending balance | $ | $ | ( | $ | ( | $ | ( | $ | ( | ||||||||||||||||||||
| Three Months Ended September 30, 2021 | |||||||||||||||||||||||||||||
| Gains (Losses) on Hedge Instruments | Unrealized Gains (Losses) on Available-for-Sale Securities | Foreign Currency Translation Gains (Losses) | Employee Benefit Plans | Total | |||||||||||||||||||||||||
| Beginning balance | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||
| Other comprehensive income (loss) before reclassifications | ( | ( | ( | ||||||||||||||||||||||||||
| Amounts reclassified from accumulated other comprehensive income (loss) | ( | ( | ( | ||||||||||||||||||||||||||
| Net current-period other comprehensive income (loss) | ( | ( | ( | ||||||||||||||||||||||||||
| Ending balance | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||
| Nine Months Ended September 30, 2022 | |||||||||||||||||||||||||||||
| Gains (Losses) on Hedge Instruments | Unrealized Gains (Losses) on Available-for-Sale Securities | Foreign Currency Translation Gains (Losses) | Employee Benefit Plans | Total | |||||||||||||||||||||||||
| Beginning balance | $ | $ | ( | $ | ( | $ | ( | $ | ( | ||||||||||||||||||||
| Other comprehensive income (loss) before reclassifications | ( | ( | ( | ( | |||||||||||||||||||||||||
| Amounts reclassified from accumulated other comprehensive income (loss) | |||||||||||||||||||||||||||||
| Net current-period other comprehensive income (loss) | ( | ( | ( | ||||||||||||||||||||||||||
| Ending balance | $ | $ | ( | $ | ( | $ | ( | $ | ( | ||||||||||||||||||||
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| Nine Months Ended September 30, 2021 | |||||||||||||||||||||||||||||
| Gains (Losses) on Hedge Instruments | Unrealized Gains (Losses) on Available-for-Sale Securities | Foreign Currency Translation Gains (Losses) | Employee Benefit Plans | Total | |||||||||||||||||||||||||
| Beginning balance | $ | ( | $ | $ | $ | ( | $ | ||||||||||||||||||||||
| Other comprehensive income (loss) before reclassifications | ( | ( | ( | ||||||||||||||||||||||||||
| Amounts reclassified from accumulated other comprehensive income (loss) | ( | ( | ( | ||||||||||||||||||||||||||
| Net current-period other comprehensive income (loss) | ( | ( | ( | ||||||||||||||||||||||||||
| Ending balance | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||
NOTE 10. SHARE-BASED COMPENSATION
In April 2022, the Company’s shareholders approved an amended and restated 2010 Incentive Award Plan to provide for an increase in the number of shares of common stock reserved for issuance thereunder from 103,350,000 to 110,350,000 . As of September 30, 2022, approximately 27.4 million shares were reserved for future issuance under the Company’s stock plans. A maximum of approximately 11.9 million of these shares can be awarded as restricted stock units (“RSUs”).
Stock Options Information
A summary of stock option activity under all stock plans for the nine months ended September 30, 2022, is presented as follows (in millions, except per share amounts):
| Stock Options Outstanding | ||||||||||||||
| Number Outstanding | Weighted-Average Exercise Price Per Share | |||||||||||||
Balance as of December 31, 2021 | $ | |||||||||||||
| Options granted | $ | |||||||||||||
| Options exercised | ( | $ | ||||||||||||
| Options forfeited/expired | ( | $ | ||||||||||||
Balance as of September 30, 2022 | $ | |||||||||||||
As of September 30, 2022, options to purchase an aggregate of 9.1 million shares of common stock were exercisable at a weighted average price of $115.73 per share.
Restricted Stock Units Information
A summary of RSUs activity under all stock plans for the nine months ended September 30, 2022, is presented as follows (in millions, except per share amounts):
| Shares | Weighted-Average Grant-Date Fair Value | ||||||||||
Unvested balance as of December 31, 2021 | $ | ||||||||||
| RSUs granted | $ | ||||||||||
| RSUs vested | ( | $ | |||||||||
| RSUs forfeited | ( | $ | |||||||||
Unvested balance as of September 30, 2022 | $ | ||||||||||
Performance Share Units
Beginning in 2022, in addition to RSUs and stock options, the Company granted performance share units (“PSUs”) to officers and other key employees subject to three-year cliff vesting and pre-established, quantitative goals. Whether any PSUs vest, and the amount that does vest, is tied to completion of service over three years and the achievement of three equally-weighted, quantitative goals that directly align with or help drive the Company’s strategy and long-term total shareholder return. The metrics are focused on relative total shareholder return (“TSR”), year-over-year procedure growth for 2023, and
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two-year compound annual procedure growth for 2024. TSR is considered a market condition, and the expense is determined at the grant date. This expense will not be adjusted even if the market condition is not met. The two procedure growth goals are considered performance conditions, and the expense is recorded over the vesting period based on the forecasted performance, which will be reassessed each reporting period based on the probability of achieving the two performance conditions. The number of shares earned at the end of the three-year period will vary, based on actual performance, from 0% to 125% of the target number of PSUs granted. PSUs are subject to forfeiture if employment terminates prior to the vesting date. PSUs are not considered issued or outstanding shares of the Company.
The Company calculates the fair value for each component of the PSUs individually. The fair value for the component with the TSR metric was determined using Monte Carlo simulation. The fair value per share for the components with the procedure growth metrics is equal to the closing stock price on the grant date. As part of the Company’s annual grant in 2022, 0.1 million PSUs were granted at a weighted-average grant-date fair value of $299.32 .
Employee Stock Purchase Plan
Under the Employee Stock Purchase Plan (“ESPP”), employees purchased approximately 0.4 million shares for $87.9 million and approximately 0.5 million shares for $75.9 million during the nine months ended September 30, 2022, and 2021, respectively.
Share-based Compensation Expense
The following table summarizes share-based compensation expense for the three and nine months ended September 30, 2022, and 2021 (in millions):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Cost of sales–products | $ | $ | $ | $ | |||||||||||||||||||
| Cost of sales–services | |||||||||||||||||||||||
| Total cost of sales | |||||||||||||||||||||||
| Selling, general, and administrative | |||||||||||||||||||||||
| Research and development | |||||||||||||||||||||||
| Share-based compensation expense before income taxes | |||||||||||||||||||||||
| Income tax benefit | |||||||||||||||||||||||
| Share-based compensation expense after income taxes | $ | $ | $ | $ | |||||||||||||||||||
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 ESPP. The weighted-average estimated fair values of stock options and the rights to acquire stock under the ESPP, as well as the weighted-average assumptions used in calculating the fair values of stock options and the rights to acquire stock under the ESPP that were granted during the three and nine months ended September 30, 2022, and 2021, were as follows:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Stock Options | |||||||||||||||||||||||
| Risk-free interest rate | |||||||||||||||||||||||
| Expected term (in years) | |||||||||||||||||||||||
| Expected volatility | |||||||||||||||||||||||
| Fair value at grant date | $ | $ | $ | $ | |||||||||||||||||||
| ESPP | |||||||||||||||||||||||
| Risk-free interest rate | |||||||||||||||||||||||
| Expected term (in years) | |||||||||||||||||||||||
| Expected volatility | |||||||||||||||||||||||
| Fair value at grant date | $ | $ | $ | $ | |||||||||||||||||||
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NOTE 11. INCOME TAXES
The provision for income taxes for the three and nine months ended September 30, 2022, reflected the impact of a change in U.S. tax law effective January 1, 2022, which requires the capitalization and amortization of research and experimental (“R&E”) expenditures incurred after December 31, 2021.
The effective tax rate for the three months ended September 30, 2021, included a one-time charge of $11.1 million related to intercompany charges for share-based compensation for relevant periods prior to 2020, triggered by additional Internal Revenue Service (“IRS”) guidance issued in July 2021 associated with a Ninth Circuit Court of Appeals opinion (the “Ninth Circuit Opinion”) involving an independent third party.
The effective tax rate for the nine months ended September 30, 2021, included a one-time benefit of $66.4 million from re-measurement of the Company’s Swiss deferred tax assets resulting from the extension of the economic useful life of certain intangible assets. This benefit was partially offset by the one-time charge of $11.1 million for the three months ended September 30, 2021, related to additional IRS guidance issued associated with the Ninth Circuit Opinion noted above.
The provision for income taxes for the three and nine months ended September 30, 2022, included excess tax benefits associated with employee equity plans of $18.1 million and $80.4 million, respectively, which reduced the Company’s effective tax rate by 4.5 and 6.6 percentage points, respectively. The provision for income taxes for the three and nine months ended September 30, 2021, included excess tax benefits associated with employee equity plans of $41.9 million and $158.9 million, respectively, which reduced the Company’s effective tax rate by 9.1 and 11.1 percentage points, respectively.
The Company files federal, state, and foreign income tax returns in many jurisdictions in the U.S. and abroad. Years prior to 2016 are considered closed for the most significant jurisdictions. Certain of the Company’s unrecognized tax benefits could change due to activities of various tax authorities, including evolving interpretations of existing tax laws in the jurisdictions that the Company operates, 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 IRS 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.
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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):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Numerator: | |||||||||||||||||||||||
| Net income attributable to Intuitive Surgical, Inc. | $ | $ | $ | $ | |||||||||||||||||||
| Denominator: | |||||||||||||||||||||||
| Weighted average shares outstanding used in basic calculation | |||||||||||||||||||||||
| Add: dilutive effect of potential common shares | |||||||||||||||||||||||
| Weighted average shares outstanding used in diluted calculation | |||||||||||||||||||||||
| Net income per share attributable to Intuitive Surgical, Inc.: | |||||||||||||||||||||||
| Basic | $ | $ | $ | $ | |||||||||||||||||||
| Diluted | $ | $ | $ | $ | |||||||||||||||||||
NOTE 13. SUBSEQUENT EVENT
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This management’s discussion and analysis of financial condition as of September 30, 2022, and results of operations for the three and nine months ended September 30, 2022, and 2021, should be read in conjunction with management’s discussion and analysis of financial condition and results of operations included in our Annual Report on Form 10-K for the year ended December 31, 2021.
This report contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements relate to expectations concerning matters that are not historical facts. Statements using words such as “estimates,” “projects,” “believes,” “anticipates,” “plans,” “expects,” “intends,” “may,” “will,” “could,” “should,” “would,” “targeted,” and similar words and expressions are intended to identify forward-looking statements. These forward-looking statements are necessarily estimates reflecting the judgment of our management and involve a number of risks and uncertainties that could cause actual results to differ materially from those suggested by the forward-looking statements. These forward-looking statements include, but are not limited to, statements related to the expected impacts of the COVID-19 pandemic on our business, financial condition, and results of operations, future results of operations, future financial position, our financing plans and future capital requirements, our potential tax assets or liabilities, and statements based on current expectations, estimates, forecasts, and projections about the economies and markets in which we operate and our beliefs and assumptions regarding these economies and markets. These forward-looking statements should be considered in light of various important factors, including, but not limited to, the following: overall macroeconomic environment that impact customer spending and our costs, including increased inflation and interest rates, the conflict in Ukraine, disruption to our supply chain, including increased difficulties in obtaining a sufficient supply of materials in the semiconductor and other markets; the risk that the COVID-19 pandemic could lead to material delays and cancellations of, or reduced demand for, procedures; curtailed or delayed capital spending by hospitals; closures of our facilities; delays in surgeon training; delays in gathering clinical evidence; delays in obtaining new product approvals, clearances, or certifications from the U.S. FDA; diversion of resources to respond to COVID-19 outbreaks; the risk that the COVID-19 virus causes economies in our key markets to enter prolonged recessions; the impact of global and regional economic and credit market conditions on healthcare spending; the risk of our inability to comply with complex FDA and other regulations, which may result in significant enforcement actions; regulatory approvals, clearances, certifications, and restrictions or any dispute that may occur with any regulatory body; guidelines and recommendations in the healthcare and patient communities; healthcare reform legislation in the U.S. and its impact on hospital spending, reimbursement, and fees levied on certain medical device revenues; changes in hospital admissions and actions by payers to limit or manage surgical procedures; the timing and success of product development and market acceptance of developed products; the results of any collaborations, in-licensing arrangements, joint ventures, strategic alliances, or partnerships, including the joint venture with Shanghai Fosun Pharmaceutical (Group) Co., Ltd.; our completion of and ability to successfully integrate acquisitions; intellectual property positions and litigation; competition in the medical device industry and in the specific markets of surgery in which we operate; risks associated with our operations and any expansion outside of the United States; unanticipated manufacturing disruptions or the inability to meet demand for products; our reliance on sole and single source suppliers; the results of legal proceedings to which we are or may become a party, including, but not limited to, product liability claims; adverse publicity regarding us and the safety of our products and adequacy of training; the impact of changes to tax legislation, guidance, and interpretations; changes in tariffs, trade barriers, and regulatory requirements; and other risk factors. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report and which are based on current expectations and are subject to risks, uncertainties, and assumptions that are difficult to predict, including those risk factors described throughout this filing and identified under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021, as updated by our other filings with the Securities and Exchange Commission. We undertake no obligation to publicly update or release any revisions to these forward-looking statements, except as required by law.
Intuitive®, Intuitive Surgical®, da Vinci®, da Vinci S®, da Vinci S HD Surgical System®, da Vinci Si®, da Vinci X®, da Vinci Xi®, da Vinci SP®, EndoWrist®, Firefly®, InSite®, SureForm®, Ion®, Iris®, and SynchroSeal® are trademarks or registered trademarks of the Company.
Overview
As part of our mission, we believe that minimally invasive care is life-enhancing care. We are committed to advancing minimally invasive care through a comprehensive ecosystem of products and services. This ecosystem includes systems, instruments and accessories, learning, and services connected by a digital portfolio that enables precision and control, seamless interactions and experiences, and meaningful insights to drive better care.
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We bring nearly three decades of experience and technical innovation to our robotic-assisted surgical solutions. While surgery and acute interventions have improved significantly in the past decades, there remains a significant need for better outcomes and decreased variability of these outcomes across care teams. The current healthcare environment continues to stress critical resources, including the professionals who staff care teams: surgeons, anesthesiologists, nurses, and other staff. At the same time, governments strain to cover the healthcare needs of their populations and demand lower total cost per patient to treat disease. In the face of these challenges, we believe scientific and technological advances in biology, computing, imaging, algorithms, and robotics may offer new methods to solve continued and difficult problems.
We address our customer needs by sharing their goals reflected in the quadruple aim. First, we focus on improving patient outcomes through an ecosystem of advanced robotic systems, instruments and accessories, progressive technology learning pathways, and comprehensive support and program assistance services. Second, we seek to improve the patient experience by minimizing disruption to lives and creating greater predictability for the treatment experience. Third, we seek to improve care team satisfaction by creating products and services that are dependable, smart, and optimized for the care environment in which they are used. Finally, we seek to lower the total cost to treat per patient episode when compared with existing treatment alternatives, providing a return on investment for hospitals and healthcare systems and value for payers.
Open surgery remains the predominant form of surgery and is used in almost every area of the body. However, the large incisions required for open surgery create trauma to patients, typically resulting in longer hospitalization and recovery times, increased hospitalization costs, and additional pain and suffering relative to minimally invasive surgery (“MIS”), where MIS is available. For over three decades, MIS has reduced trauma to patients by allowing selected surgeries to be performed through small ports rather than large incisions. MIS has been widely adopted for certain surgical procedures.
Da Vinci Surgical Systems enable surgeons to extend the benefits of MIS to many patients who would otherwise undergo a more invasive surgery by using computational, robotic, and imaging technologies to overcome many of the limitations of traditional open surgery or conventional MIS. Surgeons using a da Vinci Surgical System operate while seated comfortably at a console viewing a 3D, high-definition image of the surgical field. This immersive console connects surgeons to the surgical field and their instruments. While seated at the console, the surgeon manipulates instrument controls in a natural manner, similar to open surgical technique. Our technology is designed to provide surgeons with a range of articulation of the surgical instruments used in the surgical field analogous to the motions of a human wrist, while filtering out the tremor inherent in a surgeon’s hand. In designing our products, we focus on making our technology easy and safe to use.
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 and da Vinci Endoscopes. We also provide a comprehensive suite of systems, learning, and services offerings. Digitally-enabled for more than two decades, these three offerings aim to decrease variability by providing dependable, consistent functionality and an integrated user experience. Our systems category includes robotic platforms, software, vision, energy, and instruments and accessories. Our learning category includes educational technology, such as simulation and telepresence, as well as technical training programs and personalized peer-to-peer learning opportunities. Our services category assists and optimizes minimally invasive programs through readiness, on-demand support, consultation for minimally invasive program optimization, and hospitals customized analytics. Within our integrated ecosystem, our focus is to decrease variability in surgery by offering actionable insights, with digital solutions, to take action with the potential to improve outcomes, personalize learning, and optimize efficiency. 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 2017, and the da Vinci SP Surgical System, commercialized in 2018. The da Vinci SP Surgical System accesses the body through a single incision while the other da Vinci Surgical Systems access the body through multiple incisions. All da Vinci systems include a surgeon’s console (or consoles), imaging electronics, a patient-side cart, and computational hardware and software. We are in the early stages of launching our da Vinci SP Surgical System, and we have an installed base of 115 da Vinci SP Surgical Systems as of September 30, 2022. We have received U.S. FDA clearance for the da Vinci SP Surgical System for urologic and certain transoral procedures, and we have received regulatory clearance in South Korea where the da Vinci SP Surgical System may be used for a broad set of procedures. In September 2022, we also received regulatory clearance for the da Vinci SP Surgical System in Japan for the same set of procedures as can be performed on the da Vinci Xi Surgical System in Japan. We plan to seek FDA clearances for additional indications for da Vinci SP over time. We also plan to seek clearances in other OUS markets over time. The success of the da Vinci SP Surgical System is dependent on positive experiences and improved clinical outcomes for the procedures for which it has been cleared as well as securing additional clinical clearances.
We offer approximately 70 different multi-port da Vinci instruments to provide surgeons with flexibility in choosing the types of tools needed to perform a particular surgery. These multi-port instruments are generally robotically controlled and
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provide end effectors (tips) that are similar to those used in either open or laparoscopic surgery. We offer advanced instrumentation for the da Vinci Xi and da Vinci X platforms, including da Vinci Energy and da Vinci Stapler products, to provide surgeons with sophisticated, computer-aided tools to precisely and efficiently interact with tissue. Da Vinci X and da Vinci Xi Surgical Systems share the same instruments whereas the da Vinci Si Surgical System uses instruments that are not compatible with da Vinci X or da Vinci Xi systems. We currently offer nine core instruments on our da Vinci SP Surgical System. We plan to expand the SP instrument offering over time.
Training technologies include our Intuitive Simulation products, our Intuitive Telepresence remote case observation and telementoring tools, and our dual console for use in surgeon proctoring and collaborative surgery.
During the first quarter of 2019, the FDA cleared our Ion endoluminal system to enable minimally invasive biopsies in the lung. Our Ion system extends our commercial offering beyond surgery into diagnostic procedures with this first application. Our rollout of the Ion system is progressing well, and we are continuing to gather additional clinical evidence. We plan to seek additional clearances for the Ion system in OUS markets over time.
The success of new product introductions depends on a number of factors including, but not limited to, pricing, competition, market and consumer acceptance, the effective forecasting and management of product demand, inventory levels, the management of manufacturing and supply costs, and the risk that new products may have quality or other defects in the early stages of introduction.
Macroeconomic Environment
Uncertainty surrounding macroeconomic factors in the U.S. and globally characterized by the supply chain environment, inflationary pressure, rising interest rates, labor shortages, and significant disruption in the commodities’ markets as a result of the Russia and Ukraine conflict may result in a recession, which could have a material adverse effect on our long-term business.
We have experienced increased difficulties in obtaining a sufficient supply of a number of component materials used in our products, such as semiconductor components as well as a range of other materials, including, but not limited to, metals and polymers, as global supply has become significantly constrained due to increased demand for certain materials. Additionally, prices of such materials have increased due to the increased demand and supply shortage. With rising interest rates, access to credit may become more difficult and any insolvency of key suppliers, including single-source suppliers, may exacerbate current supply chain challenges. We are engaged in activities to seek to mitigate supply disruptions, but the global supply chain shortages will remain a challenge for the foreseeable future.
We have also experienced challenges in logistics, as certain shipping routes have been impacted by port closures. Such global shortages in important components and logistics challenges have resulted in, and will continue to cause, inflationary cost pressure in our supply chain. To date, the inflationary cost pressure has been more pronounced in our logistics costs, but these supply chain challenges have not materially impacted our results of operations or ability to deliver products and services to our customers. However, if shortages in important supply chain materials in the semiconductor or other markets or logistics challenges continue, we could fail to meet product demand, which could result in deferred or cancelled procedures. If inflationary pressures in logistics or component costs persist, we may not be able to adjust pricing, reduce costs, or implement countermeasures. Additionally, there is uncertainty surrounding the impact of any monetary policy changes taken by the U.S. Federal Reserve and other central banks to address the structural risks associated with inflation.
Increased labor shortages globally, including staff burnout and attrition, could also impact our ability to hire and retain personnel critical to our manufacturing, logistics, and commercial operations. We are also highly dependent on the principal members of our management and scientific staff. Attracting and retaining qualified personnel is critical to our success, and competition for them has become more intense. The loss of critical members of our team, or our inability to attract and retain qualified personnel, could significantly harm our operations, business, and ability to compete.
The current macroeconomic environment is impacting our customers financially and operationally as well. Hospitals are experiencing staffing shortages and supply chain issues that could affect their ability to provide patient care. Additionally, hospitals are facing significant financial pressure as supply chain constraints and inflation drive up operating costs, rising interest rates make access to credit more expensive, unrealized losses decrease available cash reserves, and fiscal stimulus programs enacted during the COVID-19 pandemic wind down. As a consequence of the financial pressures and decreased profitability, some hospitals have indicated that they are lowering their capital investment plans and tightening their operational budgets. We believe that these factors have contributed to a softening in our U.S. capital pipeline, and we expect that demand for capital, particularly in the U.S., will continue to be impacted while macroeconomic conditions remain challenging. In addition, as competition progresses in various markets, we will likely experience longer selling cycles and pricing pressures. Any or all of these factors could negatively impact the number of da Vinci procedures performed or the number of system placements and have a material adverse effect on our business, financial condition, results of operations, or cash flows resulting in failure to achieve our anticipated financial results.
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COVID-19 Pandemic
Procedures
In 2021, COVID-19 resurgences affected da Vinci procedure volumes at various times throughout the year in most of the markets that we operate in. After each resurgence, as COVID-19 cases and hospitalizations subsided, we saw procedure volumes recover. In the U.S., the impact of high COVID-related hospitalization rates on procedure volumes were exacerbated by staffing shortages. Although hospitals were better equipped to handle COVID patients as compared to the outset of the pandemic, COVID-19 resurgences challenged hospital resources and negatively impacted da Vinci procedure volumes. In addition, delays in diagnosis and treatment of underlying conditions had a negative impact on da Vinci procedure volumes. Volumes associated with benign procedures were generally impacted to a higher degree when COVID-19 cases and hospitalizations increased, reflecting the deferability of certain elective surgeries.
In early 2022, a resurgence of COVID-19 resulted in a significant increase in infections and hospitalization rates in the U.S. and certain countries in Europe, which, in turn, negatively impacted procedure volumes in January and February. As infections and hospitalizations started to decrease in February in the U.S. and Europe, we saw a recovery of procedure volumes. In March and during the second quarter of 2022, we also saw a resurgence in COVID-19 cases and increased hospitalizations and government interventions impacting parts of Asia, particularly China, which negatively impacted procedure volumes. During the third quarter of 2022, we did not experience significant disruptions from COVID-19.
The depth and extent to which the COVID-19 pandemic will impact individual markets will vary based on the availability of resources and interventions, such as medical staff, intensive care units and operating rooms, and vaccinations, as well as government interventions. The impact of COVID-19 on our procedure volumes varies widely by country, region, and type. When COVID-19 infection rates spike in a particular region, procedure volumes have been negatively impacted and the diagnoses of new conditions and their related treatments have been deferred.
General Increase in Risks
The COVID-19 pandemic and local actions, such as “shelter-in-place” orders and restrictions on our ability to travel and access our customers or temporary closures of our facilities, including our training and manufacturing operations, or the facilities of our suppliers and their contract manufacturers, could further significantly impact our sales and our ability to produce and ship our products and supply our customers.
In addition, COVID-19 has contributed to the staffing shortages experienced by hospitals, which impacts hospitals’ ability to provide patient care and, in some cases, results in the deferral of elective surgeries.
Our Response
Our priorities and actions during the COVID-19 pandemic have been and remain as follows. First, we are focused on the health and safety of all those we serve–patients, customers, our communities, and our employees–implementing continuous updates to our health and safety policies and processes. Second, we are supporting our customers according to their priorities–clinical, operational, and economic–and ensuring continuity of supply by working with our suppliers and our distributors. Third, we are securing our workforce economically. We have built a valuable team over the years, and we believe they will be important in a recovery that follows the pandemic. Finally, we will continue to invest in our priority development programs while eliminating avoidable spend.
As COVID-19 vaccination rates increase and the severity of cases decline, we are implementing our return-to-office strategy. We intend to remain flexible, allowing many of our employees to work remotely on at least a partial basis, while maintaining productivity and our culture. Our top priority in this process continues to be the health and safety of our employees.
Business Model
Overview
We generate revenue from the placements of da Vinci Surgical Systems, in sales or sales-type lease arrangements where revenue is recognized up-front or in operating lease transactions and usage-based models where revenue is recognized over time. We earn recurring revenue from the sales of instruments, accessories, and services, as well as the revenue from operating leases. The da Vinci Surgical System generally sells for between $0.5 million and $2.5 million, depending upon the model, configuration, and geography, and represents a significant capital equipment investment for our customers when purchased. Our instruments and accessories have limited lives and will either expire or wear out as they are used in surgery, at which point they need to be replaced. We generally earn between $600 and $3,500 of instruments and accessories revenue per surgical procedure performed, depending on the type and complexity of the specific procedures performed and the number and type of instruments used. Further, in late 2020, we launched our Extended Use Program (refer to further discussion immediately below) in the U.S. and Europe, with the intention to reduce the cost for customers to treat patients, which in turn will reduce our overall instruments and accessories revenue per procedure. We typically enter into service contracts at the time systems are sold or
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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 our 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, in sales or sales-type lease arrangements where revenue is recognized up-front at a point in time or in operating lease transactions and usage-based models where revenue is recognized over time. We earn recurring revenue from the sales of instruments and accessories used in biopsies and ongoing system service, as well as revenue from operating leases. The average selling price of an Ion system is generally significantly lower than the average selling price of a da Vinci Surgical System. For the three and nine months ended September 30, 2022, and 2021, Ion’s contribution to revenue and gross margin was not significant.
Additionally, as part of our ecosystem of products and services, we provide a portfolio of learning offerings and digital solutions. We do not currently generate material revenue from these offerings.
Extended Use Program
In the fourth quarter of 2020, we introduced our “Extended Use Program” in the U.S. and Europe, which consists of select da Vinci Xi and da Vinci X instruments possessing 12 to 18 uses (“Extended Use Instruments”) compared to previously 10 uses. These Extended Use Instruments represent some of our higher volume instruments but exclude stapling, monopolar, and advanced energy instruments. Instruments included in the program are used across a number of da Vinci surgeries. Their increased uses are the result of continuous, significant investments in the design and production capabilities of our instruments, resulting in improved quality and durability. Extended Use Instruments were then launched in most other countries around the world in the first half of 2021, except China due to regulatory timelines. In addition, simultaneous with the regional launches of Extended Use Instruments, we have lowered the price of certain instruments that are most commonly used in lower acuity procedures and/or lower reimbursed procedures within the region. These actions have reduced the cost for customers to treat patients, which in turn has reduced our revenue per procedure. In the U.S. and Europe, during 2021, we saw customers adjust their instrument buying patterns to reduce their inventory levels to reflect the additional uses per instrument. We believe that, as of the end of 2021, in the U.S. and Europe, full cutover to Extended Use Instruments has occurred, as customers have substantially utilized all of their remaining 10 use instruments. The precise impact of these actions on future revenue will be dependent on the future volume and mix of procedures and whether cost elasticity will enable greater penetration into available markets.
Recurring Revenue
Recurring revenue consists of instruments and accessories revenue, service revenue, and operating lease revenue. Recurring revenue increased to $4.3 billion, or 75% of total revenue in 2021, compared to $3.4 billion, or 77% of total revenue in 2020, and $3.2 billion, or 72% of total revenue in 2019.
Instruments and accessories revenue has grown at a faster rate than systems revenue over time. Instruments and accessories revenue increased to $3.10 billion in 2021, compared to $2.46 billion in 2020 and $2.41 billion in 2019. The increase in instruments and accessories revenue largely reflects continued procedure adoption.
Service revenue was $916 million in 2021, compared to $724 million in 2020 and 2019. The increase in service revenue was primarily driven by the growth of the installed base of systems producing service revenue, as well as the effects of the Customer Relief Program in the prior year, which resulted in an $80 million decrease in service revenue in 2020. The installed base of da Vinci Surgical Systems grew 12% to approximately 6,730 as of December 31, 2021; 7% to approximately 5,989 as of December 31, 2020; and 12% to approximately 5,582 as of December 31, 2019. The installed base of Ion endoluminal systems was approximately 129 as of December 31, 2021; approximately 36 as of December 31, 2020; and approximately 10 as of December 31, 2019.
We use the installed base, number of placements, and utilization of systems as metrics for financial and operational decision-making and as a means to evaluate period-to-period comparisons. Management believes that the installed base, number of placements, and utilization of systems provide meaningful supplemental information regarding our performance, as management believes that the installed base, number of placements, and utilization of systems are an indicator of the rate of adoption of robotic-assisted surgery or medical procedures as well as an indicator of future recurring revenue (particularly service revenue). Management believes that both it and investors benefit from referring to the installed base, number of placements, and utilization of systems in assessing our performance and when planning, forecasting, and analyzing future periods. The installed base, number of placements, and utilization of systems also facilitate management’s internal comparisons of our historical performance. We believe that the installed base, number of placements, and utilization of systems are useful to investors as metrics, because (1) they allow for greater transparency with respect to key metrics used by management in its financial and operational decision-making, and (2) they are used by institutional investors and the analyst community to help them analyze the performance of our business. The vast majority of systems installed are connected via the internet. System
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logs can also be accessed by field engineers for systems that are not connected to the internet. We utilize this information as well as other information from agreements and discussions with our customers that involve estimates and judgments, which are, by their nature, subject to substantial uncertainties and assumptions. Estimates and judgments for determining the installed base, number of placements, and utilization of systems may be impacted over time by various factors, including system internet connectivity, hospital and distributor reporting behavior, and inherent complexities in new agreements. Such estimates and judgments are also susceptible to technical errors. In addition, the relationship between the installed base, number of placements, and utilization of systems and our revenues may fluctuate from period to period, and growth in the installed base, number of placements, and utilization of systems may not correspond to an increase in revenue. The installed base, number of placements, and utilization of systems are not intended to be considered in isolation or as a substitute for, or superior to, revenue or other financial information prepared and presented in accordance with generally accepted accounting principles.
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 to other third-party entities that offer equipment leasing. We have also entered into usage-based arrangements with qualified customers that have committed da Vinci programs where we charge for the system and service as the systems are utilized. We believe that these alternative financing structures have been effective and well-received, and we are willing to expand the proportion of these structures based on customer demand. We include operating and sales-type leases, and systems placed under usage-based arrangements, in our system placement 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, 2021, 2020, and 2019, we placed 668, 432, and 425 da Vinci Surgical Systems, respectively, under lease and usage-based arrangements, of which 517, 317, and 384 systems, respectively, were operating lease and usage-based arrangements. Revenue from operating lease arrangements is generally recognized on a straight-line basis over the lease term or, in the case of usage-based arrangements, as the systems are used. We generally set operating lease and usage-based pricing at a modest premium relative to purchased systems reflecting the time value of money and, in the case of usage-based arrangements, the risk that system utilization may fall short of anticipated levels. Variable lease revenue recognized from usage-based arrangements has been included in our operating lease metrics herein. Operating lease revenue has grown at a faster rate than overall systems revenue and was $277 million, $177 million, and $107 million for the years ended December 31, 2021, 2020, and 2019, respectively. 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. Generally, lease transactions generate similar gross margins as our sale transactions. As of December 31, 2021, a total of 1,294 da Vinci Surgical Systems were installed at customers under operating lease or usage-based arrangements.
Our exposure to the credit risks relating to our lease financing arrangements may increase if our customers are adversely affected by changes in healthcare laws, coverage and reimbursement, economic pressures or uncertainty, or other customer-specific factors. As a result of these macroeconomic factors impacting our customers, we may be exposed to defaults under our lease financing arrangements. Moreover, usage-based arrangements generally contain no minimum payments; therefore, customers may exit such arrangements without paying a financial penalty to us.
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 $96.0 million, $52.2 million, and $92.8 million for the years ended December 31, 2021, 2020, and 2019, respectively. We expect that revenue recognized from customer exercises of the buyout options will fluctuate based on the timing of when, and if, customers choose to exercise their buyout options.
Systems Revenue
System placements are driven by procedure growth in most markets. In some markets, system placements are constrained by regulation. In geographies where da Vinci procedure adoption is in an early stage or system placements are constrained by regulation, system sales will precede procedure growth. System placements also vary due to seasonality, largely aligned with hospital budgeting cycles. We typically place a higher proportion of annual system placements in the fourth quarter and a lower proportion in the first quarter as customer budgets are reset. Systems revenue is also affected by the proportion of system placements under operating lease and usage-based arrangements, recurring operating lease and usage-based revenue, operating lease buyouts, product mix, ASPs, trade-in activities, and customer mix. Systems revenue grew 44% to $1.69 billion in 2021. Systems revenue declined 12% to $1.18 billion in 2020. Systems revenue grew 19% to $1.35 billion in 2019. Based on the factors outlined in the COVID-19 Pandemic section above, we believe that historical system placement trends may not be a good indicator of future system placements.
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Procedure Mix / Products
Our da Vinci Surgical Systems are generally used for soft tissue surgery for areas of the body between the pelvis and the neck, primarily in general surgery, gynecologic surgery, urologic surgery, cardiothoracic surgery, and head and neck surgery. Within these categories, procedures range in complexity from cancer and other highly complex procedures to less complex procedures for benign conditions. Cancer and other highly complex procedures tend to be reimbursed at higher rates than less complex procedures for benign conditions. Thus, hospitals are more sensitive to the costs associated with treating less complex, benign conditions. Our strategy is to provide hospitals with attractive clinical and economic solutions across the spectrum of procedure complexity. Our fully featured da Vinci Xi Surgical System with advanced instruments (including da Vinci Energy and EndoWrist and SureForm Stapler products) and our Integrated Table Motion product targets the more complex procedure segment. Our da Vinci X Surgical System is targeted towards price sensitive markets and procedures. Our da Vinci SP Surgical System complements the da Vinci Xi and X Surgical Systems by enabling surgeons to access narrow workspaces.
Procedure Seasonality
More than half of da Vinci procedures performed are for benign conditions, most notably hernia repairs, hysterectomies, and cholecystectomies. These benign procedures and other short-term elective procedures tend to be more seasonal than cancer operations and surgeries for other life-threatening conditions. Seasonality in the U.S. for procedures for benign conditions typically results in higher fourth quarter procedure volume when more patients have met annual deductibles and lower first quarter procedure volume when deductibles are reset. Seasonality outside the U.S. varies and is more pronounced around local holidays and vacation periods. As a result of the factors outlined in the COVID-19 Pandemic section above, including past and potentially future recommendations of authorities to defer elective procedures, historical procedure patterns may be disrupted.
Distribution Channels
We provide our products through direct sales organizations in the U.S., Europe (excluding Spain, Portugal, Italy, Greece, and most Eastern European countries), China (through our Intuitive-Fosun Pharma joint venture), Japan, South Korea, India, Taiwan and, as of June 2022, Canada. 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. After a device is placed on the market, numerous FDA and other regulatory requirements continue to apply. These requirements include establishment registration and device listing with the FDA and compliance with medical device reporting regulations, which require that manufacturers report to the FDA if their device caused or contributed, or may have caused or contributed, to a death or serious injury or malfunctioned in a way that would likely cause or contribute to a death or serious injury if it were to recur.
We recently revised our medical device reporting policies, which had been developed based on previous feedback from the FDA. These revisions have been made in consultation with the FDA to better align with existing regulations. There has been an increase in medical device reporting filings due to changes in our reportability criteria. In addition, we have been investing in resources and utilizing external experts to strengthen our quality system. These efforts are ongoing.
We also anticipate that timelines for the introduction of new products and/or indications may be extended relative to past experience as a result of these regulations. For example, we have seen elongated regulatory approval timelines in the U.S. and Europe.
Clearances and Approvals
We have generally obtained the clearances required to market our products associated with our da Vinci Surgical Multiport Systems (Standard, S, Si, Xi, and X systems) for our targeted surgical specialties within the U.S., South Korea, Japan, and the European markets in which we operate. Since 2020, we obtained regulatory clearances for the following products:
•In September 2022, we obtained regulatory clearance for the da Vinci SP Surgical System in Japan for use in general surgeries, thoracic surgeries (excluding cardiac procedures and intercostal approaches), urologic surgeries, gynecological surgeries, and trans-oral head and neck surgeries. We obtained the initial FDA clearance for our da
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Vinci SP Surgical System in April 2014 and have since invested in important platform refinements. We have also received regulatory clearance in South Korea for our da Vinci SP Surgical System in May 2018.
•In February 2022, we received regulatory clearance in China to market both our 12 mm SureForm 45 Stapler and SureForm 60 Stapler and corresponding reloads.
•In January 2022, we received regulatory clearance in China to market our da Vinci Vessel Sealer Extend with up to 7 mm vascular indications.
•In December 2021, we obtained FDA clearance for our 8 mm SureForm 30 Curved-Tip Stapler and reloads for use in general, thoracic, gynecologic, urologic, and pediatric surgery. The 8 mm SureForm 30 stapler is expected to launch in the U.S. in 2022, with other countries to follow.
•In late 2020 and early 2021, we obtained FDA clearance, Conformitè Europëenne (“CE”) mark clearance, and other regulatory clearances in most of our significant markets to market our Extended Use Instruments.
•In November 2019, we obtained FDA clearance for our SynchroSeal instrument and E-100 generator. Following the FDA clearance, in February 2020, we received CE mark clearance for both products. In March 2020, we received regulatory clearance in Japan to market both our SynchroSeal instrument and E-100 generator. We received regulatory clearance in South Korea to market our SynchroSeal instrument and E-100 generator in January 2020 and August 2020, respectively.
•In June 2019, we received CE mark clearance for our da Vinci Endoscope Plus for the da Vinci Xi and da Vinci X Surgical Systems in Europe. Following the CE mark, in July 2019, we obtained FDA clearance for our da Vinci Endoscope Plus. We have also received regulatory clearances in South Korea and Japan to market our da Vinci Endoscope Plus in December 2019 and May 2020, respectively. In March 2022, we received regulatory clearance in China to market our da Vinci Endoscope Plus.
•In June 2019, we obtained FDA clearance for our da Vinci Handheld Camera and, in February 2020, we received CE mark clearance.
Refer to the descriptions of our new products that received regulatory clearances in 2022, 2021, and 2020 in the New Product Introductions section below.
In October 2018, the China National Health Commission published on its official website the quota for major medical equipment to be sold in China through 2020. After an adjustment notice was published in the third quarter of 2020, the government will now allow for the total sale of 225 new surgical robots into China, which could include da Vinci Surgical Systems as well as surgical systems introduced by others. As of September 30, 2022, we have sold 180 da Vinci Surgical Systems under this quota, and five system quotas are no longer available; therefore, 40 surgical robots can still be sold 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.
During the third quarter of 2022, the Hunan Provincial Healthcare Security Administration implemented significant limits on what hospitals can charge patients for surgeries using robotic surgical technology, including soft tissue surgery and orthopedics. This rule has had a material negative impact on our procedures performed in the Hunan province. However, currently, only 3% of our installed base in China is located in the Hunan province. Companies providing robotic surgical technology, including our joint venture in China, are meeting with Chinese government healthcare agencies to discuss this development and provide feedback. We cannot assure you that other provincial healthcare administrations will not impose similar limits.
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 prostatectomy and partial nephrectomy, respectively. Most prostatectomies and partial nephrectomies were open procedures prior to da Vinci reimbursement. Da Vinci procedure reimbursement for prostatectomy and partial nephrectomy procedures are higher than open and conventional laparoscopic procedure reimbursements. An additional 12 da Vinci procedures were granted reimbursement effective April 1, 2018, including gastrectomy, low anterior resection, lobectomy, and hysterectomy, for both malignant and benign conditions, and an additional seven da Vinci procedures were granted reimbursement effective April 1, 2020. An additional eight da Vinci procedures were granted reimbursement effective April 1, 2022, including colon resection. In addition, we received higher reimbursement for da Vinci gastrectomy procedures, as compared to open and conventional laparoscopic procedure reimbursements. The additional reimbursed procedures have varying levels of conventional laparoscopic penetration and will generally be reimbursed at rates equal to the conventional laparoscopic procedures. Given the reimbursement level and laparoscopic penetration for these additional procedures, there can be no assurance that the adoption pace for these procedures will be similar to prostatectomy or partial nephrectomy, given their higher reimbursement, or any other da Vinci procedure.
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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, the return or replacement of the affected product or a field service visit to perform the correction.
Field actions, as well as certain outcomes from regulatory activities, can result in adverse effects on our business, including damage to our reputation, delays by customers of purchase decisions, reduction or stoppage of the use of installed systems, and reduced revenue as well as increased expenses.
Procedures
We model patient value as equal to procedure efficacy / invasiveness. In this equation, procedure efficacy is defined as a measure of the success of the surgery in resolving the underlying disease, and invasiveness is defined as a measure of patient pain and disruption of regular activities. When the patient value of a da Vinci procedure is greater than that of alternative treatment options, patients may benefit from seeking out surgeons and hospitals that offer da Vinci Surgery, which could potentially result in a local market share shift. Adoption of da Vinci procedures occurs procedure by procedure and market by market and is driven by the relative patient value and total treatment costs of da Vinci procedures as compared to alternative treatment options for the same disease state or condition.
We use the number and type of procedures as metrics for financial and operational decision-making and as a means to evaluate period-to-period comparisons. Management believes that the number and type of procedures provide meaningful supplemental information regarding our performance, as management believes procedure volume is an indicator of the rate of adoption of robotic-assisted surgery as well as an indicator of future revenue (including revenue from usage-based arrangements). Management believes that both it and investors benefit from referring to the number and type of procedures in assessing our performance and when planning, forecasting, and analyzing future periods. The number and type of procedures also facilitate management’s internal comparisons of our historical performance. We believe that the number and type of procedures are useful to investors as metrics, because (1) they allow for greater transparency with respect to key metrics used by management in its financial and operational decision-making, and (2) they are used by institutional investors and the analyst community to help them analyze the performance of our business. The vast majority of systems installed are connected via the internet. System logs can also be accessed by field engineers for systems that are not connected to the internet. We utilize certain methods that rely on information collected from the systems installed for determining the number and type of procedures performed that involve estimates and judgments, which are, by their nature, subject to substantial uncertainties and assumptions. Estimates and judgments for determining the number and type of procedures may be impacted over time by various factors, including changes in treatment modalities, hospital and distributor reporting behavior, and system internet connectivity. Such estimates and judgments are also susceptible to algorithmic or other technical errors. In addition, the relationship between the number and type of procedures and our revenues may fluctuate from period to period, and procedure volume growth may not correspond to an increase in revenue. The number and type of procedures are not intended to be considered in isolation or as a substitute for, or superior to, revenue or other financial information prepared and presented in accordance with generally accepted accounting principles.
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 of any Intuitive product outside of its licensed or cleared labeling and indications for use.
The adoption of robotic-assisted surgery using the da Vinci Surgical System has the potential to grow for those procedures that offer greater patient value than to non-da Vinci alternatives and competitive total economics for healthcare providers. Our da Vinci Surgical Systems are used primarily in general surgery, urologic surgery, gynecologic surgery, cardiothoracic surgery, and head and neck surgery. We focus our organization and investments on developing, marketing, and training products and services for procedures in which da Vinci can bring patient value relative to alternative treatment options and/or economic
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benefit to healthcare providers. Target procedures in general surgery include hernia repair (both ventral and inguinal), colorectal procedures, cholecystostomies, and bariatrics. Target procedures in urology include prostatectomy and partial nephrectomy. Target procedures in gynecology include hysterectomy for both cancer and benign conditions and sacrocolpopexy. In cardiothoracic surgery, target procedures include lobectomy. In head and neck surgery, target procedures include transoral surgery. Not all 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 2021, approximately 1,594,000 surgical procedures were performed with da Vinci Surgical Systems, compared to approximately 1,243,000 and 1,229,000 surgical procedures performed with da Vinci Surgical Systems in 2020 and 2019, respectively. The increase in our overall procedure volume in 2021 reflects the significant disruption caused by the COVID-19 pandemic in 2020, as noted in the COVID-19 Pandemic section above, and was driven by growth in U.S. general surgery and gynecologic procedures and worldwide urologic procedures.
U.S. Procedures
Overall U.S. procedure volume with da Vinci Surgical Systems grew to approximately 1,109,000 in 2021, compared to approximately 876,000 in 2020 and approximately 883,000 in 2019. General surgery was our largest and fastest growing U.S. specialty in 2020 with procedure volume that grew to approximately 589,000 in 2021, compared to approximately 434,000 in 2020 and approximately 421,000 in 2019. Gynecology was our second largest U.S. surgical specialty in 2021 with procedure volume that grew to approximately 316,000 in 2021, compared to approximately 267,000 in 2020 and approximately 282,000 in 2019. Urology was our third largest U.S. surgical specialty in 2021 with procedure volume that grew to approximately 153,000 in 2021, compared to approximately 134,000 in 2020 and approximately 138,000 in 2019.
Procedures Outside of the U.S.
Overall OUS procedure volume with da Vinci Surgical Systems grew to approximately 485,000 in 2021, compared to approximately 367,000 in 2020 and approximately 346,000 in 2019. Urology was our largest OUS specialty in 2021 with procedure volume that grew to approximately 264,000 in 2021, compared to approximately 214,000 in 2020 and approximately 206,000 in 2019. General surgery was our second largest OUS specialty in 2021 with procedure volume that grew to approximately 101,000 in 2021, compared to approximately 68,000 in 2020 and approximately 62,000 in 2019. Thoracic procedures also contributed to OUS procedure growth with higher growth rates than urologic and general surgery procedures.
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Recent Business Events and Trends
Procedures
Overall. Total da Vinci procedures performed by our customers grew approximately 20% for the three months ended September 30, 2022, compared to approximately 20% for the three months ended September 30, 2021. Total da Vinci procedures performed by our customers grew approximately 18% for the nine months ended September 30, 2022, compared to approximately 32% for the nine months ended September 30, 2021. The third quarter 2021 procedure results (and comparative third quarter 2020 procedure results) reflect disruption caused by the COVID-19 pandemic, as noted in the COVID-19 Pandemic section above. The third quarter 2022 procedure growth was largely attributable to growth in U.S. general surgery and growth in OUS markets. Delays in both the diagnosis and treatments of disease reflecting disruptions caused by COVID-19 have previously and may continue to impact the number of procedures performed by our customers.
U.S. Procedures. U.S. da Vinci procedures grew approximately 18% for the three months ended September 30, 2022, compared to approximately 16% for the three months ended September 30, 2021. U.S. da Vinci procedures grew approximately 15% for the nine months ended September 30, 2022, compared to approximately 31% for the nine months ended September 30, 2021. The third quarter 2021 procedure results (and comparative third quarter 2020 procedure results) reflect disruption caused by the COVID-19 pandemic, as noted in the COVID-19 Pandemic section above. The third quarter 2022 U.S. procedure growth was largely attributable to growth in general surgery procedures, most notably cholecystectomy, bariatric, and hernia repair procedures. Growth in the more mature gynecologic and urologic procedure categories was more moderate.
OUS Procedures. OUS da Vinci procedures grew approximately 24% for the three months ended September 30, 2022, compared to approximately 30% for the three months ended September 30, 2021. OUS da Vinci procedures grew approximately 24% for the nine months ended September 30, 2022, compared to approximately 34% for the nine months ended September 30, 2021. The third quarter 2021 procedure results (and comparative third quarter 2020 procedure results) reflect disruption caused by the COVID-19 pandemic, as noted in the COVID-19 Pandemic section above. The third quarter 2022 OUS procedure growth was driven by continued growth in urologic procedures, including prostatectomies and partial nephrectomies, and earlier stage growth in general surgery (particularly colorectal), gynecologic, and thoracic procedures. The third quarter 2022 OUS procedure growth rate reflects continued da Vinci adoption in European and Asian markets. We saw strong procedure growth in Japan, China, the UK, Germany, South Korea, and Italy during the third quarter of 2022. In China, increased procedure volumes were largely attributable to the easing of preventative measures and interventions taken by the government as a result of an increase in COVID-19 cases. The procedure growth rates in China recovered in the third quarter of 2022 as COVID-19 cases and the related preventative measures decreased, but recovery eased late in the quarter as COVID-19 cases increased in various regions. We believe growth in our 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.
System Demand
We placed 305 da Vinci Surgical Systems in the third quarter of 2022, compared to 336 systems in the third quarter of 2021. The decrease in systems placed reflects a smaller number of third generation da Vinci systems available for trade-in along with the macroeconomic challenges impacting our U.S. customers. As a consequence of the macroeconomic challenges, some hospitals have indicated they are lowering their capital investment plans and tightening operational budgets. We expect that demand for capital, particularly in the U.S., will be impacted while macroeconomic conditions remain challenging. In addition, given the lower number of older generation systems in the field, we have seen and continue to expect the volume of trade-ins to be significantly lower in 2022 as compared to 2021.
Third quarter 2022 placements declined 9% compared with 2021, and future placements of da Vinci Surgical Systems will be impacted by a number of factors: supply chain risks; economic and geopolitical factors; inflationary pressures; rising interest rates; hospital staffing shortages; the impact of the current COVID-19 pandemic, as noted in the COVID-19 Pandemic section above; hospital response to the evolving healthcare environment; procedure growth rates; hospital consolidation trends; evolving system utilization and point of care dynamics; capital replacement trends, including a declining number of older generation systems available for trade-in transactions; additional reimbursements in various global markets, including Japan; the timing around governmental tenders and authorizations, including China; the timing of when we receive regulatory clearance in our other OUS markets for our da Vinci Xi Surgical System, da Vinci X Surgical System, and da Vinci SP Surgical System, and related instruments; and market response. Market acceptance of our da Vinci SP Surgical System and the nature and timing of additional da Vinci SP regulatory indications may also impact future system placements.
Demand may also be impacted by robotic-assisted surgery competition, including from companies that have introduced products in the field of robotic-assisted surgery or have made explicit statements about their efforts to enter the field including, but not limited to, the following companies: Asensus Surgical, Inc.; avateramedical GmbH; CMR Surgical Ltd.; Johnson & Johnson; Medicaroid Corporation; Medrobotics Corporation; Medtronic plc; meerecompany Inc.; Shanghai Microport Medbot
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(Group) Co., Ltd.; Olympus Corporation; Samsung Electronics Co., Ltd; Shandong Weigao Group Medical Polymer Company Ltd.; and Titan Medical Inc.
Many of the above factors will also impact future demand for our Ion system, as we extend our commercial offering into diagnostics, along with additional factors associated with a new product introduction, including, but not limited to, our ability to optimize manufacturing and our supply chain, competition, clinical data to demonstrate value, and market acceptance.
New Product Introductions
SureForm 30 Curved-Tip Stapler and Reloads. In December 2021, we obtained FDA clearance for our 8 mm SureForm 30 Curved-Tip Stapler and reloads (gray, white, and blue) for use in general, thoracic, gynecologic, urologic, and pediatric surgery. It has been designed to help surgeons better visualize and reach anatomy through a combination of the 8 mm diameter instrument shaft and jaws, 120-degree cone of wristed articulation, and the curved tip. As it fits through the 8 mm da Vinci surgical system instrument cannula, the stapler allows different angles for surgeons to approach patient anatomy. Consistent with the other SureForm staplers, the 8 mm SureForm 30 Curved-Tip Stapler integrates SmartFire technology, which makes automatic adjustments to the firing process as staples are formed and the transection is made. The technology makes more than 1,000 measurements per second, helping achieve a consistent staple line. We are introducing the 8 mm SureForm 30 stapler in a measured fashion in the U.S. in 2022, with other countries to follow.
SynchroSeal and E-100 Generator. In November 2019, we obtained FDA clearance for our SynchroSeal instrument and E-100 generator. Following the FDA clearance, in February 2020, we received CE mark clearance for both products. In March 2020, we received regulatory clearance in Japan to market both our SynchroSeal instrument and E-100 generator. In August 2020, we received regulatory clearance in South Korea to market our E-100 generator. SynchroSeal is a single-use, bipolar, electrosurgical instrument intended for grasping, dissection, sealing, and transection of tissue. With its wristed articulation, rapid sealing cycle, and refined curved jaw, SynchroSeal offers enhanced versatility to the da Vinci Energy portfolio. The E-100 generator is an electrosurgical generator developed to power two key instruments–Vessel Sealer Extend and SynchroSeal–on the da Vinci X and da Vinci Xi Surgical Systems. The generator delivers high frequency energy for cutting, coagulation, and vessel sealing of tissues.
Da Vinci Endoscope Plus. In June 2019, we received CE mark clearance for our da Vinci Endoscope Plus, an enhanced 3D endoscope for use with our da Vinci X and Xi Surgical Systems. Following the CE mark, in July 2019, we obtained FDA clearance for our da Vinci Endoscope Plus. We have also received regulatory clearances in South Korea and Japan to market our da Vinci Endoscope Plus in December 2019 and May 2020, respectively. In March 2022, we received regulatory clearance in China to market our da Vinci Endoscope Plus. The da Vinci Endoscope Plus leverages new sensor technology to allow for increased sharpness and color accuracy.
Da Vinci Handheld Camera. In June 2019, we obtained FDA clearance for our da Vinci Handheld Camera, a lightweight, 2D camera head, which can be connected to third-party laparoscopes. This allows the laparoscopic image to be displayed on the da Vinci X/Xi vision cart to address aspects of da Vinci procedures that may require use of a laparoscope, thus eliminating the need for redundant equipment in the operating room and increasing procedure efficiency. In February 2020, we received CE mark clearance for our da Vinci Handheld Camera. We broadly launched the da Vinci Handheld Camera in our European direct markets as well as in the U.S. in May 2020 and June 2020, respectively.
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Third Quarter 2022 Operational and Financial Highlights
•Total revenue increased by 11% to $1.56 billion for the three months ended September 30, 2022, compared to $1.40 billion for the three months ended September 30, 2021.
•Approximately 475,000 da Vinci procedures were performed during the three months ended September 30, 2022, an increase of 20% compared to approximately 395,000 for the three months ended September 30, 2021.
•Approximately 6,450 Ion procedures were performed during the three months ended September 30, 2022, an increase of 212% compared to approximately 2,070 for the three months ended September 30, 2021.
•Instruments and accessories revenue increased by 15% to $872 million for the three months ended September 30, 2022, compared to $755 million for the three months ended September 30, 2021.
•Systems revenue increased by 3% to $426 million for the three months ended September 30, 2022, compared to $415 million during the three months ended September 30, 2021.
•During the three months ended September 30, 2022, we placed 305 da Vinci Surgical Systems, a decrease of 9% compared to 336 systems during the three months ended September 30, 2021.
•As of September 30, 2022, we had a da Vinci Surgical System installed base of approximately 7,364 systems, an increase of 13% compared to the installed base of approximately 6,525 systems as of September 30, 2021.
•Utilization of da Vinci Surgical Systems, measured in terms of procedures per system per year, increased 7% relative to the third quarter of 2021.
•During the three months ended September 30, 2022, we placed 50 Ion systems, an increase of 79% compared to 28 systems during the three months ended September 30, 2021.
•As of September 30, 2022, we had an Ion system installed base of approximately 254 systems, an increase of 159% compared to the installed base of approximately 98 systems as of September 30, 2021.
•Gross profit as a percentage of revenue was 67.6% for the three months ended September 30, 2022, compared to 69.2% for the three months ended September 30, 2021.
•Operating income decreased by 10% to $399 million for the three months ended September 30, 2022, compared to $443 million during the three months ended September 30, 2021. Operating income included $139 million and $123 million of share-based compensation expense related to employee stock plans and $8.2 million and $6.4 million of intangible asset-related charges for the three months ended September 30, 2022, and 2021, respectively.
•As of September 30, 2022, we had $7.39 billion in cash, cash equivalents, and investments. Cash, cash equivalents, and investments decreased by $1.23 billion, compared to $8.62 billion as of December 31, 2021, primarily as a result of cash used for share repurchases of $1.61 billion, capital expenditures, and taxes paid related to net share settlements of equity awards, as well as unrealized losses on interest-bearing debt securities classified as available for sale, partially offset by cash provided by operating activities and proceeds from stock option exercises and employee stock purchases.
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Results of Operations
The following table sets forth, for the periods indicated, certain unaudited Condensed Consolidated Statements of Income information (in millions, except percentages):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||||||||||||||||
| 2022 | % of total Revenue | 2021 | % of total Revenue | 2022 | % of total revenue | 2021 | % of total revenue | ||||||||||||||||||||||||||||||||||||||||
| Revenue: | |||||||||||||||||||||||||||||||||||||||||||||||
| Product | $ | 1,297.5 | 83 | % | $ | 1,170.6 | 83 | % | $ | 3,806.3 | 83 | % | $ | 3,481.2 | 84 | % | |||||||||||||||||||||||||||||||
| Service | 259.9 | 17 | % | 232.7 | 17 | % | 760.9 | 17 | % | 678.2 | 16 | % | |||||||||||||||||||||||||||||||||||
| Total revenue | 1,557.4 | 100 | % | 1,403.3 | 100 | % | 4,567.2 | 100 | % | 4,159.4 | 100 | % | |||||||||||||||||||||||||||||||||||
| Cost of revenue: | |||||||||||||||||||||||||||||||||||||||||||||||
| Product | 421.6 | 27 | % | 355.8 | 25 | % | 1,239.9 | 27 | % | 1,049.1 | 25 | % | |||||||||||||||||||||||||||||||||||
| Service | 83.7 | 5 | % | 76.1 | 6 | % | 242.2 | 5 | % | 212.6 | 5 | % | |||||||||||||||||||||||||||||||||||
| Total cost of revenue | 505.3 | 32 | % | 431.9 | 31 | % | 1,482.1 | 32 | % | 1,261.7 | 30 | % | |||||||||||||||||||||||||||||||||||
| Product gross profit | 875.9 | 56 | % | 814.8 | 58 | % | 2,566.4 | 56 | % | 2,432.1 | 59 | % | |||||||||||||||||||||||||||||||||||
| Service gross profit | 176.2 | 12 | % | 156.6 | 11 | % | 518.7 | 12 | % | 465.6 | 11 | % | |||||||||||||||||||||||||||||||||||
| Gross profit | 1,052.1 | 68 | % | 971.4 | 69 | % | 3,085.1 | 68 | % | 2,897.7 | 70 | % | |||||||||||||||||||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||||||||||||||||||||||||||
| Selling, general and administrative | 436.1 | 28 | % | 363.3 | 26 | % | 1,245.6 | 27 | % | 1,039.5 | 25 | % | |||||||||||||||||||||||||||||||||||
| Research and development | 217.1 | 14 | % | 165.5 | 11 | % | 634.9 | 15 | % | 487.6 | 12 | % | |||||||||||||||||||||||||||||||||||
| Total operating expenses | 653.2 | 42 | % | 528.8 | 37 | % | 1,880.5 | 42 | % | 1,527.1 | 37 | % | |||||||||||||||||||||||||||||||||||
| Income from operations | 398.9 | 26 | % | 442.6 | 32 | % | 1,204.6 | 26 | % | 1,370.6 | 33 | % | |||||||||||||||||||||||||||||||||||
| Interest and other income, net | 3.9 | — | % | 18.5 | 1 | % | 7.5 | — | % | 65.5 | 2 | % | |||||||||||||||||||||||||||||||||||
| Income before taxes | 402.8 | 26 | % | 461.1 | 33 | % | 1,212.1 | 26 | % | 1,436.1 | 35 | % | |||||||||||||||||||||||||||||||||||
| Income tax expense | 78.1 | 5 | % | 73.9 | 5 | % | 204.4 | 4 | % | 90.7 | 3 | % | |||||||||||||||||||||||||||||||||||
| Net income | 324.7 | 21 | % | 387.2 | 28 | % | 1,007.7 | 22 | % | 1,345.4 | 32 | % | |||||||||||||||||||||||||||||||||||
| Less: net income attributable to noncontrolling interest in joint venture | 0.7 | — | % | 6.7 | 1 | % | 10.3 | — | % | 21.4 | — | % | |||||||||||||||||||||||||||||||||||
| Net income attributable to Intuitive Surgical, Inc. | $ | 324.0 | 21 | % | $ | 380.5 | 27 | % | $ | 997.4 | 22 | % | $ | 1,324.0 | 32 | % | |||||||||||||||||||||||||||||||
Total Revenue
Total revenue increased by 11% to $1.56 billion for the three months ended September 30, 2022, compared to $1.40 billion for the three months ended September 30, 2021, resulting from 15% higher instruments and accessories revenue, driven by approximately 20% higher da Vinci procedure volume, partially offset by foreign currency impacts and customer buying patterns, 12% higher service revenue, and 3% higher systems revenue, driven by higher leasing revenue and a lower proportion of da Vinci system placements under operating leases, partially offset by 9% lower da Vinci system placements.
Total revenue increased by 10% to $4.6 billion for the nine months ended September 30, 2022, compared to $4.2 billion for the nine months ended September 30, 2021, resulting from 14% higher instruments and accessories revenue, driven by approximately 18% higher da Vinci procedure volume, partially offset by foreign currency impacts, customer buying patterns, the effects of the Extended Use Program in 2021, and 12% higher service revenue.
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Revenue denominated in foreign currencies as a percentage of total revenue was approximately 22% and 23% for the three and nine months ended September 30, 2022, respectively, and 23% and 22% for the three and nine months ended 2021, respectively. We generally sell our products and services in local currencies where we have direct distribution channels. Foreign currency rate fluctuations, as determined by comparing current period revenue in USD to current period revenue in local currency using the same foreign exchange rates as the prior year same period, net of the impacts from foreign currency hedging, had an unfavorable impact on OUS total revenue of $49 million and $102 million for the three and nine months ended September 30, 2022, respectively. Foreign currency rate fluctuations, net of the impacts from foreign currency hedging, had a favorable impact on OUS total revenue of $5 million and $39 million for the three and nine months ended September 30, 2021, respectively.
Revenue generated in the U.S. accounted for 70% and 67% of total revenue for the three and nine months ended September 30, 2022, respectively, and 68% and 67% for the three and nine months ended 2021, respectively. We believe that U.S. revenue has accounted for the large majority of total revenue due to U.S. patients’ ability to choose their provider and method of treatment, reimbursement structures supportive of innovation and MIS, 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.
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The following table summarizes our revenue and system unit placements for the three and nine months ended September 30, 2022, and 2021, respectively (in millions, except percentages and unit placements):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Revenue | |||||||||||||||||||||||
| Instruments and accessories | $ | 871.6 | $ | 755.4 | $ | 2,577.2 | $ | 2,257.7 | |||||||||||||||
| Systems | 425.9 | 415.2 | 1,229.1 | 1,223.5 | |||||||||||||||||||
| Total product revenue | 1,297.5 | 1,170.6 | 3,806.3 | 3,481.2 | |||||||||||||||||||
| Services | 259.9 | 232.7 | 760.9 | 678.2 | |||||||||||||||||||
| Total revenue | $ | 1,557.4 | $ | 1,403.3 | $ | 4,567.2 | $ | 4,159.4 | |||||||||||||||
| United States | $ | 1,083.0 | $ | 952.2 | $ | 3,058.9 | $ | 2,805.5 | |||||||||||||||
| OUS | 474.4 | 451.1 | 1,508.3 | 1,353.9 | |||||||||||||||||||
| Total revenue | $ | 1,557.4 | $ | 1,403.3 | $ | 4,567.2 | $ | 4,159.4 | |||||||||||||||
| % of Revenue–U.S. | 70 | % | 68 | % | 67 | % | 67 | % | |||||||||||||||
| % of Revenue–OUS | 30 | % | 32 | % | 33 | % | 33 | % | |||||||||||||||
| Instruments and accessories | $ | 871.6 | $ | 755.4 | $ | 2,577.2 | $ | 2,257.7 | |||||||||||||||
| Services | 259.9 | 232.7 | 760.9 | 678.2 | |||||||||||||||||||
| Operating lease revenue | 97.5 | 72.5 | 273.7 | 198.8 | |||||||||||||||||||
| Total recurring revenue | $ | 1,229.0 | $ | 1,060.6 | $ | 3,611.8 | $ | 3,134.7 | |||||||||||||||
| % of Total revenue | 79 | % | 76 | % | 79 | % | 75 | % | |||||||||||||||
Da Vinci Surgical Systems Placements by Region: | |||||||||||||||||||||||
| U.S. unit placements | 175 | 227 | 511 | 630 | |||||||||||||||||||
| OUS unit placements | 130 | 109 | 384 | 332 | |||||||||||||||||||
| Total unit placements* | 305 | 336 | 895 | 962 | |||||||||||||||||||
| *Systems placed under operating leases (included in total unit placements) | 113 | 139 | 338 | 374 | |||||||||||||||||||
Da Vinci Surgical Systems Placements involving System Trade-ins: | |||||||||||||||||||||||
| Unit placements involving trade-ins | 71 | 136 | 235 | 393 | |||||||||||||||||||
| Unit placements not involving trade-ins | 234 | 200 | 660 | 569 | |||||||||||||||||||
| Ion Systems Placements** | 50 | 28 | 125 | 62 | |||||||||||||||||||
| **Systems placed under operating leases (included in total unit placements) | 27 | 19 | 67 | 38 | |||||||||||||||||||
Product Revenue
Three Months Ended September 30, 2022
Product revenue increased by 11% to $1.30 billion for the three months ended September 30, 2022, compared to $1.17 billion for the three months ended September 30, 2021.
Instruments and accessories revenue increased by 15% to $872 million for the three months ended September 30, 2022, compared to $755 million for the three months ended September 30, 2021. The increase in instruments and accessories revenue was driven primarily by da Vinci procedure growth of approximately 20% and incremental sales of our advanced instruments, partially offset by foreign currency impacts and customer buying patterns. The third quarter 2022 U.S. da Vinci procedure growth was approximately 18%, driven by strong growth in general surgery procedures, most notably cholecystectomy, bariatric, and hernia repair procedures, as well as moderate growth in the more mature gynecologic and urologic procedures categories. The third quarter 2022 OUS da Vinci procedure growth was approximately 24%, driven by continued growth in
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urologic procedures, most notably prostatectomy and partial nephrectomy procedures, and earlier stage growth in general surgery (particularly colorectal), gynecologic, and thoracic procedures. Both growth rates were impacted by the disruption caused by the COVID-19 pandemic in the three months ended September 30, 2021, as noted in the COVID-19 Pandemic section above. Geographically, the third quarter 2022 OUS da Vinci procedure growth was driven by procedure expansion in a number of markets with particular strength in Japan, China, the UK, Germany, South Korea, and Italy.
Systems revenue increased by 3% to $426 million for the three months ended September 30, 2022, compared to $415 million for the three months ended September 30, 2021. The higher third quarter 2022 systems revenue was primarily driven by higher operating lease revenue and a lower proportion of da Vinci system placements under operating leases, partially offset by fewer da Vinci system placements, lower third quarter 2022 ASPs, lower sales-type lease revenue, and lower lease buyout revenue.
During the third quarter of 2022, 305 da Vinci Surgical Systems were placed compared to 336 systems during the third quarter of 2021. By geography, 175 systems were placed in the U.S., 54 in Europe, 64 in Asia, and 12 in other markets during the third quarter of 2022, compared to 227 systems placed in the U.S., 47 in Europe, 47 in Asia, and 15 in other markets during the third quarter of 2021. The decrease in systems placements was primarily driven by a smaller number of third generation da Vinci systems available for trade-in along with the macroeconomic challenges impacting our U.S. customers. Nevertheless, the incremental systems placements reflect procedure growth, customers trading in da Vinci Si Surgical Systems for fourth generation da Vinci Xi and da Vinci X systems in order to access fourth generation instruments and capabilities as well as to standardize their system portfolio, and further customer validation that da Vinci surgery addresses their quadruple aim objectives. As of September 30, 2022, we had a da Vinci Surgical System installed base of approximately 7,364 systems, compared to the installed base of approximately 6,525 systems as of September 30, 2021.
We placed 130 and 166 da Vinci Surgical Systems under lease or usage-based arrangements, of which 113 and 139 systems were classified as operating leases for the three months ended September 30, 2022, and 2021, respectively. Operating lease revenue, including the impact of Ion systems, was $97.5 million for the three months ended September 30, 2022, compared to $72.5 million for the three months ended September 30, 2021. Da Vinci Surgical Systems placed as operating leases represented 37% of total placements during the third quarter of 2022, compared to 41% during the third quarter of 2021. A total of 1,562 da Vinci Surgical Systems were installed at customers under operating lease or usage-based arrangements as of September 30, 2022, compared to 1,179 as of September 30, 2021. Revenue from Lease Buyouts was $17.4 million for the three months ended September 30, 2022, compared to $24.7 million for the three months ended September 30, 2021. We expect revenue from Lease Buyouts to fluctuate period to period depending on the timing of when, and if, customers choose to exercise the buyout options embedded in their leases.
The da Vinci Surgical System ASP, excluding the impact of systems placed under operating lease or usage-based arrangements and Ion systems, was approximately $1.50 million for the three months ended September 30, 2022, compared to approximately $1.57 million for the three months ended September 30, 2021. The lower third quarter 2022 ASP was largely driven by higher pricing discounts and foreign currency impacts, partially offset by favorable product mix and fewer trade-ins. ASP fluctuates from period to period based on geographic and product mix, product pricing, systems placed involving trade-ins, and changes in foreign exchange rates.
During the third quarter of 2022, 50 Ion systems were placed compared to 28 systems during the third quarter of 2021. As of September 30, 2022, we had an Ion system installed base of approximately 254 systems, compared to the installed base of approximately 98 systems as of September 30, 2021. We placed 29 and 20 Ion systems under lease or usage-based arrangements, of which 27 and 19 systems were classified as operating leases for the three months ended September 30, 2022, and 2021, respectively. Ion systems placed as operating leases represented 54% of total placements during the third quarter of 2022, compared to 68% during the third quarter of 2021. A total of 112 Ion systems were installed at customers under operating or usage-based arrangements as of September 30, 2022, compared to 49 as of September 30, 2021.
Nine Months Ended September 30, 2022
Product revenue increased by 9% to $3.81 billion for the nine months ended September 30, 2022, compared to $3.48 billion for the nine months ended September 30, 2021.
Instruments and accessories revenue increased by 14% to $2.58 billion for the nine months ended September 30, 2022, compared to $2.26 billion for the nine months ended September 30, 2021. The increase in instruments and accessories revenue was primarily driven by da Vinci procedure growth of approximately 18% and incremental sales of our advanced instruments. The increase was partially offset by foreign currency impacts and customer buying patterns in the nine months ended September 30, 2022, and the benefit of stocking orders in the nine months ended September 30, 2021, associated with the launch of our Extended Use Program. The year-to-date 2022 U.S. da Vinci procedure growth was approximately 15%, driven by strong growth in general surgery procedures, most notably cholecystectomy, hernia repair, and bariatric procedures, as well as moderate growth in the more mature gynecologic and urologic procedures categories. The year-to-date 2022 OUS da Vinci procedure growth was approximately 24%, driven by continued growth in urologic procedures, most notably prostatectomy and
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partial nephrectomy procedures, and earlier stage growth in general surgery (particularly colorectal), gynecologic, and thoracic procedures. Both growth rates were impacted by the disruption caused by the COVID-19 pandemic, as noted in the COVID-19 Pandemic section above. Geographically, the year-to-date 2022 OUS da Vinci procedure growth was driven by procedure expansion in a number of markets with particular strength in Japan, China, the UK, Germany, and Italy.
Systems revenue increased nominally to $1.23 billion for the nine months ended September 30, 2022, compared to $1.22 billion for the nine months ended September 30, 2021. The increase in systems revenue was primarily driven by higher operating lease revenue and a lower proportion of da Vinci system placements under operating leases, partially offset by fewer da Vinci system placements, lower year-to-date 2022 ASPs, lower sales-type lease revenue, and lower lease buyout revenue.
During the nine months ended September 30, 2022, a total of 895 da Vinci Surgical Systems were placed compared to 962 systems during the nine months ended September 30, 2021. By geography, 511 systems were placed in the U.S., 210 in Europe, 152 in Asia, and 22 in other markets during the nine months ended September 30, 2022, compared to 630 systems placed in the U.S., 169 in Europe, 132 in Asia, and 31 in other markets during the nine months ended September 30, 2021. The decrease in systems placements was primarily driven by a smaller number of third generation da Vinci systems available for trade-in along with the macroeconomic challenges impacting our U.S. customers.
We placed 410 and 471 da Vinci Surgical Systems under lease or usage-based arrangements, of which 338 and 374 systems were classified as operating leases for the nine months ended September 30, 2022, and 2021, respectively. Operating lease revenue, including the impact of Ion systems, was $273.7 million for the nine months ended September 30, 2022, compared to $198.8 million for the nine months ended September 30, 2021. Da Vinci Surgical Systems placed as operating leases represented 38% of total placements during the nine months ended September 30, 2022, compared to 39% during the nine months ended September 30, 2021. Revenue from Lease Buyouts was $55.4 million for the nine months ended September 30, 2022, compared to $69.9 million for the nine months ended September 30, 2021. We expect revenue from Lease Buyouts to fluctuate period to period depending on the timing of when, and if, customers choose to exercise the buyout options embedded in their leases.
The da Vinci Surgical System ASP, excluding the impact of systems placed under operating lease or usage-based arrangements and Ion systems, was approximately $1.52 million for the nine months ended September 30, 2022, compared to approximately $1.59 million for the nine months ended September 30, 2021. The lower year-to-date 2022 ASP was largely driven by unfavorable geographic mix, foreign currency impacts, and higher pricing discounts, partially offset by fewer trade-ins and favorable product mix. ASP fluctuates from period to period based on geographic and product mix, product pricing, systems placed involving trade-ins, and changes in foreign exchange rates.
During the nine months ended September 30, 2022, 125 Ion systems were placed compared to 62 systems during the nine months ended September 30, 2021. We placed 74 and 43 Ion systems under lease or usage-based arrangements, of which 67 and 38 systems were classified as operating leases for the nine months ended September 30, 2022, and 2021, respectively. Ion systems placed as operating leases represented 54% of total placements during the nine months ended September 30, 2022, compared to 61% during the nine months ended September 30, 2021.
Service Revenue
Service revenue increased by 12% to $260 million for the three months ended September 30, 2022, compared to $233 million for the three months ended September 30, 2021. The increase in service revenue was primarily driven by a larger installed base of systems producing service revenue, partially offset by foreign currency impacts.
Service revenue increased by 12% to $761 million for the nine months ended September 30, 2022, compared to $678 million for the nine months ended September 30, 2021. The increase in service revenue was primarily driven by a larger installed base of systems producing service revenue, partially offset by foreign currency impacts.
Gross Profit
Product gross profit for the three months ended September 30, 2022, increased by 7% to $876 million, representing 67.5% of product revenue, compared to $815 million, representing 69.6% of product revenue, for the three months ended September 30, 2021. The higher product gross profit for the three months ended September 30, 2022, was primarily driven by higher product revenue, partially offset by lower product gross profit margin. The lower product gross profit margin for the three months ended September 30, 2022, was primarily driven by higher freight and material costs, higher fixed costs from investments to drive growth of the business and strengthen our operating capabilities, unfavorable foreign currency impacts, and lower third quarter 2022 system ASPs.
Product gross profit for the nine months ended September 30, 2022, increased by 6% to $2.57 billion, representing 67.4% of product revenue, compared to $2.43 billion, representing 69.9% of product revenue, for the nine months ended September 30, 2021. The higher product gross profit for the nine months ended September 30, 2022, was primarily driven by
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higher product revenue, partially offset by lower product gross profit margin. The lower product gross profit margin for the nine months ended September 30, 2022, was primarily driven by higher fixed costs from investments to drive growth of the business and strengthen our operating capabilities, higher freight and material costs, unfavorable foreign currency impacts, and lower year-to-date 2022 system ASPs.
Product gross profit for the three and nine months ended September 30, 2022, included share-based compensation expense of $22.0 million and $61.0 million, respectively, compared with $19.0 million and $50.9 million for the three and nine months ended September 30, 2021, respectively. Product gross profit for the three and nine months ended September 30, 2022, included intangible assets amortization expense of $5.1 million and $12.4 million, respectively, compared with $3.8 million and $13.9 million for the three and nine months ended September 30, 2021, respectively.
Service gross profit for the three months ended September 30, 2022, increased by 13% to $176 million, representing 67.8% of service revenue, compared to $157 million, representing 67.3% of service revenue, for the three months ended September 30, 2021. The higher service gross profit for the three months ended September 30, 2022, was primarily driven by higher service revenue, reflecting a larger installed base of systems. The higher service gross profit margin for the three months ended September 30, 2022, was primarily driven by favorable impacts from the volume and mix of repairs, partially offset by higher infrastructure and freight costs as well as unfavorable foreign currency impacts.
Service gross profit for the nine months ended September 30, 2022, increased by 11% to $519 million, representing 68.2% of service revenue, compared to $466 million, representing 68.7% of service revenue, for the nine months ended September 30, 2021. The higher service gross profit for the nine months ended September 30, 2022, was primarily driven by higher service revenue, reflecting a larger installed base of systems. The lower service gross profit margin for the nine months ended September 30, 2022, was primarily driven by higher infrastructure, freight, and material costs as well as unfavorable foreign currency impacts, partially offset by favorable impacts from the volume and mix of repairs.
Service gross profit for the three and nine months ended September 30, 2022, included share-based compensation expense of $6.3 million and $17.7 million, respectively, compared with $6.0 million and $16.9 million for the three and nine months ended September 30, 2021, respectively. Service gross profit for the three and nine months ended September 30, 2022, included intangible assets amortization expense of $0.8 million and $1.2 million, respectively, compared with $0.2 million and $0.8 million for the three and nine months ended September 30, 2021, respectively.
Selling, General and Administrative Expenses
Selling, general and administrative expenses include costs for sales, marketing, and administrative personnel, sales and marketing activities, trade show expenses, legal expenses, regulatory fees, and general corporate expenses.
Selling, general and administrative expenses for the three months ended September 30, 2022, increased by 20% to $436 million, compared to $363 million for the three months ended September 30, 2021. Selling, general and administrative expenses for the nine months ended September 30, 2022, increased by 20% to $1.25 billion, compared to $1.04 billion for the nine months ended September 30, 2021. The increase in selling, general and administrative expenses for the three and nine months ended September 30, 2022, was primarily driven by higher headcount, resulting in increased fixed and share-based compensation expense, higher variable compensation, and increased infrastructure costs to support our growth, partially offset by favorable foreign currency impacts. In addition, there were higher travel, marketing, and training expenses for the three and nine months ended September 30, 2022, as compared with the prior year.
Selling, general and administrative expenses for the three and nine months ended September 30, 2022, included share-based compensation expense of $68.0 million and $191.0 million, respectively, compared with $62.5 million and $171.3 million for the three and nine months ended September 30, 2021, respectively. Selling, general and administrative expenses for the three and nine months ended September 30, 2022, included intangible assets amortization expense of $1.4 million and $4.6 million, respectively, compared with $1.8 million and $5.4 million for the three and nine months ended September 30, 2021, 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 three months ended September 30, 2022, increased by 31% to $217 million, compared to $166 million for the three months ended September 30, 2021. The increase in research and development expenses for the three months ended September 30, 2022, was primarily driven by higher personnel-related expenses, including share-based compensation expense, and other project costs incurred to support a broader set of product development initiatives, including future generations of robotics, Ion and SP platform investments, digital investments, and advanced instrumentation. Research and development expenses for the nine months ended September 30, 2022, increased by 30% to $635 million,
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compared to $488 million for the nine months ended September 30, 2021. The increase in research and development expenses for the nine months ended September 30, 2022, was primarily driven by higher personnel-related expenses, including share-based compensation expense, intangible asset charges, and other project costs incurred to support a broader set of product development initiatives, including Ion and SP platform investments, future generations of robotics, digital investments, and advanced instrumentation.
Research and development expenses for the three and nine months ended September 30, 2022, included share-based compensation expense of $42.3 million and $117.6 million, respectively, compared with $35.4 million and $98.1 million for the three and nine months ended September 30, 2021, respectively. Research and development expenses for the three and nine months ended September 30, 2022, included intangible asset charges of $0.9 million and $11.9 million, respectively, compared with $0.6 million and $5.3 million for the three and nine months ended September 30, 2021, respectively.
Research and development expenses fluctuate with project timing. Based upon our broader set of product development initiatives and the stage of the underlying projects, we expect to continue to make substantial investments in research and development and anticipate that research and development expenses will continue to increase in the future.
Interest and Other Income, Net
Interest and other income, net, for the three months ended September 30, 2022, decreased by 79% to $3.9 million, compared to $18.5 million for the three months ended September 30, 2021. The decrease in interest and other income, net, for the three months ended September 30, 2022, was primarily driven by an unrealized loss on our investment in Broncus (compared to an unrealized gain on our investment in Broncus in the three months ended September 30, 2021), as noted below, and higher foreign exchange losses, partially offset by higher interest income earned, despite lower cash and investment balances, due to an increase in average interest rates.
Interest and other income, net, for the nine months ended September 30, 2022, decreased by 89% to $7.5 million, compared to $65.5 million for nine months ended September 30, 2021. The decrease in interest and other income, net, for the nine months ended September 30, 2022, was primarily driven by unrealized losses on investments resulting from strategic arrangements (compared to unrealized gains on investments resulting from strategic arrangements in the nine months ended September 30, 2021) and higher foreign exchange losses, partially offset by higher interest income earned, despite lower cash and investment balances, due to an increase in average interest rates.
We held an equity investment in preferred shares of Broncus, which was reflected in our Financial Statements on a cost basis. In the first quarter of 2021, we recorded an unrealized gain on our investment in Broncus of approximately $14 million. In September 2021, Broncus completed an IPO of common shares on the Stock Exchange of Hong Kong. Upon completion of the IPO, the preferred shares were converted to common shares in Broncus, and we recognized a net gain on this investment in the three months ended September 30, 2021 of approximately $8 million. We were restricted from selling these shares for a period of six months. For the three and nine months ended September 30, 2022, we recognized an unrealized loss on this investment of approximately $3.3 million and $21.6 million, respectively.
Income Tax Expense
Income tax expense for the three months ended September 30, 2022, was $78.1 million, or 19.4% of income before taxes, compared to $73.9 million, or 16.0% of income before taxes, for the three months ended September 30, 2021. Income tax expense for the nine months ended September 30, 2022, was $204.4 million, or 16.9% of income before taxes, compared to $90.7 million, or 6.3% of income before taxes, for the nine months ended September 30, 2021.
Our effective tax rates for the three and nine months ended September 30, 2022, and 2021, differed from the U.S. federal statutory rate of 21% primarily due to excess tax benefits associated with employee equity plans, the effect of income earned by certain overseas entities being taxed at rates lower than the federal statutory rate, and the federal R&D credit benefit, partially offset by U.S. tax on foreign earnings and state income taxes (net of federal benefit).
The increase in income tax expense for the three months ended September 30, 2022, was primarily due to the impact of capitalization of R&E and lower excess tax benefits, as discussed below, partially offset by the fact that the tax expense for the three months ended September 30, 2021, included a one-time charge of $11.1 million, which related to intercompany charges for share-based compensation for relevant periods prior to 2020, triggered by additional IRS guidance issued in July 2021 associated with the Ninth Circuit Opinion involving an independent third party.
The increase in income tax expense for the nine months ended September 30, 2022, was primarily due to the impact of capitalization of R&E and lower excess tax benefits, as discussed below, as well as the fact that the effective tax rate for the nine months ended September 30, 2021, included a one-time benefit of $66.4 million from re-measurement of our Swiss deferred tax assets resulting from the extension of the economic useful life of certain intangible assets, partially offset by the
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one-time charge of $11.1 million related to additional IRS guidance issued associated with the Ninth Circuit Opinion noted above.
Our provision for income taxes for the three and nine months ended September 30, 2022, included excess tax benefits associated with employee equity plans of $18.1 million and $80.4 million, respectively, which reduced our effective tax rate by 4.5 and 6.6 percentage points, respectively. Our provision for income taxes for the three and nine months ended September 30, 2021, included excess tax benefits associated with employee equity plans of $41.9 million and $158.9 million, respectively, which reduced our effective tax rate by 9.1 and 11.1 percentage points, respectively. The amount of excess tax benefits or deficiencies will fluctuate from period to period based on the price of our stock, the volume of share-based awards settled or vested, and the value assigned to employee equity awards under U.S. GAAP, which results in increased income tax expense volatility.
On August 16, 2022, the Inflation Reduction Act was enacted in the United States. The IRA introduces a 15% alternative minimum tax based on the financial statement income of certain large corporations, effective for tax years beginning after December 31, 2022. The IRA also includes a 1% excise tax on the net fair market value of stock repurchases made after December 31, 2022. We have considered the applicable tax law changes, and there is no impact to our tax provision for the three and nine months ended September 30, 2022. We will continue to evaluate the impact of these tax law changes on future periods.
We file federal, state, and foreign income tax returns in many jurisdictions in the U.S. and abroad. Years prior to 2016 are considered closed for most significant jurisdictions. Certain of our unrecognized tax benefits could change due to activities of various tax authorities, including evolving interpretations of existing tax laws in the jurisdictions we operate, potential assessment of additional tax, possible settlement of audits, or through normal expiration of various statutes of limitations, which could affect our effective tax rate in the period in which they change. Due to the uncertainty related to the timing and potential outcome of audits, we cannot estimate the range of reasonably possible change in unrecognized tax benefits that may occur in the next 12 months.
We are subject to the examination of our income tax returns by the IRS and other tax authorities. The outcome of these audits cannot be predicted with certainty. Management regularly assesses the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. If any issues addressed in our tax audits are resolved in a manner not consistent with management’s expectations, we could be required to adjust our provision for income taxes in the period such resolution occurs.
Net Income Attributable to Noncontrolling Interest in Joint Venture
Net income attributable to noncontrolling interest in Joint Venture for the three and nine months ended September 30, 2022, was $0.7 million and $10.3 million, respectively. Net income attributable to noncontrolling interest in Joint Venture for the three and nine months ended September 30, 2021, was $6.7 million and $21.4 million, respectively. The decrease in net income attributable to noncontrolling interest in Joint Venture for the three and nine months ended September 30, 2022, was primarily due to a decrease in sales and an increase in selling, general and administrative expenses in China.
Liquidity and Capital Resources
Sources and Uses of Cash and Cash Equivalents
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 decreased by $1.23 billion to $7.39 billion as of September 30, 2022, from $8.62 billion as of December 31, 2021, primarily from cash used in share repurchases, capital expenditures, and taxes paid related to net share settlements of equity awards, as well as unrealized losses on interest-bearing debt securities classified as available for sale, offset by cash provided by our operations and proceeds from stock option exercises and employee stock purchases.
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 on our business model, we anticipate that we will continue to be able to fund future growth through cash provided by our operations. We believe that our current cash, cash equivalents, and investment balances, together with income to be derived from the sale of our products, will be sufficient to meet our liquidity requirements for the foreseeable future. However, we may experience reduced cash flow from operations as a result of the COVID-19 pandemic and the increasing risk of a recession along with other macroeconomic and geopolitical headwinds.
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See “Item 7A. Quantitative and Qualitative Disclosures About Market Risk” in our Form 10-K for the fiscal year ended December 31, 2021, for discussion on the impact of interest rate risk and market risk on our investment portfolio.
Condensed Consolidated Cash Flow Data
The following table summarizes our cash flows for the nine months ended September 30, 2022, and 2021 (in millions):
| Nine Months Ended September 30, | |||||||||||
2022 | 2021 | ||||||||||
| Net cash provided by (used in): | |||||||||||
| Operating activities | $ | 1,052.9 | $ | 1,521.7 | |||||||
| Investing activities | 796.0 | (1,820.5) | |||||||||
| Financing activities | (1,608.8) | 24.4 | |||||||||
| Effect of exchange rates on cash, cash equivalents, and restricted cash | 7.9 | (2.3) | |||||||||
| Net increase (decrease) in cash, cash equivalents, and restricted cash | $ | 248.0 | $ | (276.7) | |||||||
Operating Activities
For the nine months ended September 30, 2022, net cash provided by operating activities of $1,053 million exceeded our net income of $1,008 million, primarily due to the following factors:
1.Our net income included non-cash charges of $604 million, consisting primarily of the following significant items: share-based compensation of $386 million; depreciation expense and losses on the disposal of property, plant, and equipment of $239 million; and net losses on investments, accretion, and amortization of $43 million.
2.The non-cash charges outlined above were partially offset by changes in operating assets and liabilities that resulted in $558 million of cash used in operating activities during the nine months ended September 30, 2022. Inventory, including the transfer of equipment from inventory to property, plant, and equipment, increased by $419 million, primarily to address the growth in the business as well as to mitigate risks of disruption that could arise from trade, supply, or other matters. Refer to Note 4 to the Financial Statements for further details in the supplemental cash flow information. Prepaid expenses and other assets increased by $97 million, primarily due to an increase in net investments in sales-type leases. Accounts receivable increased by $67 million, primarily due to the timing of billings and collections. Accrued compensation and employee benefits decreased by $42 million, primarily due to payments of 2021 incentive compensation. The unfavorable impact of these items on cash provided by operating activities was partially offset by a $62 million increase in other liabilities, primarily due to additional accruals related to capital expenditures, and a $26 million increase in accounts payable, primarily due to the timing of billing and payments.
Investing Activities
Net cash provided by investing activities for the nine months ended September 30, 2022, consisted primarily of proceeds from maturities and sale of investments, net of purchases, of $1.20 billion, partially offset by $395 million paid for the acquisition of property, plant, and equipment and intellectual property. 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 during the nine months ended September 30, 2022, consisted primarily of cash used in the repurchase of approximately 7.2 million shares of our common stock for $1.61 billion, 4.6 million shares of which related to an accelerated share buyback program executed and settled during the quarter and further described in Note 9 to the Financial Statements, and taxes paid on behalf of employees related to net share settlements of equity awards of $187 million, partially offset by proceeds from stock option exercises and employee stock purchases of $189 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 increase significantly in 2022 to a range between $600 million and $700 million. A significant portion of this investment involves the construction of facilities to provide incremental space for growth, consolidate operations to enhance efficiency, and replace leased spaces with owned spaces. These capital investments will also expand our OUS footprint in support of opportunities for growth in key international markets. We intend to fund these capital investments with cash generated from operations.
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Critical Accounting Estimates
The discussion and analysis of our financial condition and results of operations are based upon our Financial Statements, which have been prepared in accordance with U.S. GAAP. The preparation of these Financial Statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses. On an ongoing basis, we evaluate our critical accounting estimates. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. There have been no new or material changes to the critical accounting estimates discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, that are of significance, or potential significance, to the Company.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in our market risk during the three months ended September 30, 2022, compared to the disclosures in Part II, Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2021.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow for timely decisions regarding required disclosure.
As required by SEC Rule 13a-15(b), we carried out an evaluation, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on the foregoing, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level.
Changes in Internal Control over Financial Reporting
There has been no change in our internal control over financial reporting that occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information included in Note 8 to the Condensed Consolidated Financial Statements (Unaudited) included in Part I, Item 1 of this quarterly report is incorporated herein by reference.
ITEM 1A. RISK FACTORS
You should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, which could materially affect our business, financial position, or future results of operations. The risks described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial position, or future results of operations. The risk factors set forth below updates, and should be read together with, the risk factors described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021.
RISKS RELATING TO OUR BUSINESS
THE INFLATIONARY ENVIRONMENT COULD MATERIALLY ADVERSELY IMPACT OUR BUSINESS AND RESULTS OF OPERATIONS.
Our operating results could be materially impacted by changes in the overall macroeconomic environment and other economic factors that impact customer confidence and spending, including capital spending. Changes in economic conditions, supply chain constraints, logistics challenges, labor shortages, the conflict in Ukraine, and steps taken by governments and central banks, particularly in response to the COVID-19 pandemic as well as other stimulus and spending programs, have led to higher inflation, which is likely, in turn, to lead to an increase in costs and may cause changes in fiscal and monetary policy, including increased interest rates. In a higher inflationary environment, we may be unable to raise the prices of our products and services sufficiently to keep up with the rate of inflation. Impacts from inflationary pressures could be more pronounced and materially adversely impact aspects of our business where revenue streams and cost commitments are linked to contractual agreements that extend further into the future, as we may not be able to quickly or easily adjust pricing, reduce costs, or implement counter measures.
Additionally, hospitals are currently experiencing financial and operational pressures as a result of staffing shortages, the supply chain environment, and increased inflation, which could impact their ability to access capital markets and other funding sources, increase cost of funding, or impede their ability to comply with debt covenants, all of which could impede their ability to provide patient care, defer elective surgeries, and impact their profitability. To the extent that hospitals continue to face financial pressures, reductions in government spending, or higher interest rates, it is likely that hospitals’ ability or willingness to spend on capital equipment will be adversely impacted, all of which could have a material adverse effect on our business, financial condition, results of operations, or cash flows.
IF WE LOSE KEY PERSONNEL OR ARE UNABLE TO ATTRACT AND RETAIN ADDITIONAL PERSONNEL, OUR ABILITY TO COMPETE WILL BE HARMED AND INCREASES IN LABOR COSTS COULD MATERIALLY ADVERSELY IMPACT OUR BUSINESS AND RESULTS OF OPERATIONS.
We are highly dependent on the principal members of our management and scientific staff. For example, our product development plans depend, in part, on our ability to attract and retain engineers with experience in mechanics, electronics, software, and optics. Attracting and retaining qualified personnel will be critical to our success, and competition for qualified personnel is intense. We may not be able to attract and retain personnel on acceptable terms given the constrained labor market and competition for such personnel among technology and healthcare companies. Additionally, as a result of recent declines in our stock price, certain long-term incentive benefits, such as recently issued stock options, may be viewed as having less value and, accordingly, could lead to higher attrition. Moreover, we may encounter higher recruiting expenses, wage rates, and retention benefits. The extent and duration of the impact of labor market challenges are subject to numerous factors, including the continuing impact of the COVID-19 pandemic, availability of qualified and highly skilled persons in the markets where we operate and unemployment levels within these markets, behavioral changes, such as fully engaging employees and earning loyalty, prevailing wage rates, health and other insurance and benefit costs, inflation, adoption of new or revised employment and labor laws and regulations or government programs, safety levels of our operations, and our reputation within the labor market. The loss of any of our qualified personnel or our inability to attract and retain qualified personnel could harm our business and our ability to compete and related expenses could materially adversely affect our results of operations and financial condition.
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THE ONGOING ARMED CONFLICT BETWEEN RUSSIA AND UKRAINE COULD ADVERSELY AFFECT OUR BUSINESS, FINANCIAL CONDITION, AND RESULTS OF OPERATIONS.
On February 24, 2022, Russian military forces launched a military action in Ukraine, and sustained conflict and disruption in the region is likely. The length, impact, and outcome of this ongoing military conflict is highly unpredictable and could lead to significant market and other disruptions, including significant volatility in commodity prices and supply of energy resources, instability in financial markets, supply chain interruptions, political and social instability, trade disputes or trade barriers, changes in consumer or purchaser preferences, as well as an increase in cyberattacks and espionage.
Russia’s recognition of two separatist republics in the Donetsk and Luhansk regions of Ukraine and subsequent military action against Ukraine have led to substantial expansion of sanction programs imposed by the United States, the European Union, the United Kingdom, Canada, Switzerland, Japan, and other countries against Russia, Belarus, the Crimea Region of Ukraine, the so-called Donetsk People’s Republic, and the so-called Luhansk People’s Republic, including, among others:
•blocking sanctions against some of the largest state-owned and private Russian financial institutions (and their subsequent removal from the Society for Worldwide Interbank Financial Telecommunication payment system) and certain Russian businesses, some of which have significant financial and trade ties to the European Union;
•blocking sanctions against Russian and Belarusian individuals, including the Russian President, other politicians, and those with government connections or involved in Russian military activities; and
•blocking of Russia’s foreign currency reserves as well as expansion of sectoral sanctions and export and trade restrictions, limitations on investments and access to capital markets, and bans on various Russian imports.
In retaliation against new international sanctions and as part of measures to stabilize and support the volatile Russian financial and currency markets, the Russian authorities also imposed significant currency control measures aimed at restricting the outflow of foreign currency and capital from Russia, imposed various restrictions on transacting with non-Russian parties, banned exports of various products, and imposed other economic and financial restrictions. The situation is rapidly evolving, and additional sanctions by Russia on the one hand, and by the other countries on the other hand, could adversely affect the global economy, financial markets, energy supply and prices, certain critical materials and metals, supply chains, and global logistics and could adversely affect our business, financial condition, and results of operations.
We are actively monitoring the situation in Ukraine and Russia and assessing its impact on our business, including our business partners and customers. To date, we have not experienced any material interruptions in our infrastructure, supplies, technology systems, or networks needed to support our operations. We have no way to predict the progress or outcome of the military conflict in Ukraine or its impacts in Ukraine, Russia, Belarus, Europe, or the U.S. The extent and duration of the military action, sanctions, other consequences, such as Russia imposing restrictions on transactions or banning the export of energy products, including natural gas, and the resulting market disruptions could be significant and could potentially have substantial impact on the global economy and our business for an unknown period of time. Impacts to our business may include, but are not limited to, procedures performed, demand for our products, and ability to spend on capital equipment and healthcare in general. Any such disruption may also magnify the impact of other risks described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021.
CYBERATTACKS OR CYBERSECURITY INCIDENTS IN CONNECTION WITH THE POLITICAL UNCERTAINTY IN RUSSIA AND UKRAINE COULD EITHER DIRECTLY OR INDIRECTLY IMPACT OUR OPERATIONS.
Due to the political uncertainty involving Russia and Ukraine, there is also an increased likelihood that the tensions could result in cyberattacks or cybersecurity incidents that could either directly or indirectly impact our operations. Any attempts by cyber attackers to disrupt our services or information systems or the services or information systems of our vendors, if successful, could harm our business, result in the misappropriation of funds, be expensive to remedy, and damage our reputation or brand. Insurance may not be sufficient to cover significant expenses and losses related to such cyberattacks and cybersecurity incidents.
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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
There were no unregistered sales of equity securities during the period covered by this report.
(c) Issuer Purchases of Equity Securities
The table below summarizes our stock repurchase activity for the quarter ended September 30, 2022.
| Fiscal Period | Total Number of Shares Repurchased | Average Price Paid Per Share | Total Number of Shares Purchased As Part of a Publicly Announced Program | Approximate Dollar Amount of Shares That May Yet be Purchased Under the Program (1) | |||||||||||||||||||
July 1 to July 31, 2022 | — | $ | — | — | $ | 3.5 | billion | ||||||||||||||||
August 1 to August 31, 2022 | 3,500,481 | $ | 217.52 | 3,500,481 | $ | 2.7 | billion | ||||||||||||||||
September 1 to September 30, 2022 | 1,096,826 | $ | 217.52 | 1,096,826 | $ | 2.5 | billion | ||||||||||||||||
Total during quarter ended September 30, 2022 | 4,597,307 | $ | 217.52 | 4,597,307 | |||||||||||||||||||
(1) Since March 2009, we have had an active stock Repurchase Program. As of September 30, 2022, our Board had authorized an aggregate amount of up to $10.0 billion for stock repurchases, of which the most recent authorization occurred in July 2022, when our Board increased the authorized amount available under our stock Repurchase Program to $3.5 billion. The remaining $2.5 billion represents the amount available to repurchase shares under the authorized stock Repurchase Program as of September 30, 2022. The authorized stock Repurchase Program does not have an expiration date.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
Sustainability Program Update
We have made significant progress on several fronts with respect to our sustainability program, including the hiring of a Senior Director, Environmental, Social and Governance.
Environmental Stewardship
Our Company is committed to formalizing its external reporting in alignment with a number of well-recognized disclosure standards. We are currently working to scope this commitment appropriately, so that the disclosure methodology we develop is appropriate and can be reported alongside other well-recognized global disclosure standards. We intend to publish the Task Force on Climate-Related Financial Disclosures (“TCFD”) report by the first quarter of 2023.
Inclusion and Diversity
Our Company’s inclusion and diversity (“I&D”) mission is to build an inclusive, equitable, and diverse environment where every individual can belong and flourish – in our company and the communities we serve. We believe that everyone should feel included and fairly treated, and we embrace the unique qualities that make people who they are. We have a four-part strategy, and we made progress in each of these areas in 2022 under the leadership of our Vice President of Global I&D and our Company’s I&D Council.
Diverse workforce: Increase leader and employee representation to fuel innovation and better mirror the patients we serve. To source more diverse candidates and increase our rigor in fair talent selection, we created a dedicated Diversity Talent Attraction team within Talent Acquisition, implemented new sourcing partnerships, and participated in career fair events for women, people of color, veterans, and people with disabilities. We also implemented required training for our recruiters, hiring managers, and interview teams focused on fair and inclusive hiring practices.
Inclusive experience: Make employees from all backgrounds feel welcome, supported, and valued. We continued to build momentum in our employee resource groups (“ERGs”), including the addition of a seventh ERG for the Hispanic/Latinx community and the introduction of a new “cultural moments” approach to communication. We rolled out Inclusive Leadership training to all senior leaders at the VP level and above. We participated in the Disability Equality Index and were named a “Best Place to Work for Disability Inclusion.”
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Fair practices: Openly share progress and continuously improve our people practices in areas such as representation, pay equity, and promotion practices. We completed a self-ID campaign with our U.S. employees in February and, in September, we provided an expanded view of our employee diversity data, including our U.S. EEO-1 consolidated report, on our website at https://www.intuitive.com/en-us/about-us/company/inclusion-diversity/fair-practices.
Industry engagement: Engage with the healthcare community, suppliers, partners, and shareholders to drive positive change. We launched a new section of our website focused on I&D, and we continued to grow our customer Women in da Vinci Surgery community. We also engaged with third parties to bring specialized resources to better support our employees, including Disability:IN, Catalyst, and a gender identity consultant.
Cybersecurity
In 2022, our cybersecurity systems and processes achieved International Standards Organization (ISO) 27001 certification and continued to adhere to National Institute of Science and Technology guidelines. In addition, we work with third-party security rating organizations and government agencies to evaluate information security practices. All employees receive annual training on our information security policy in addition to ongoing information security training across a variety of topics and trends. Our senior leaders hold quarterly reviews of our information and product security. Our Board of Directors reviews information and product security matters several times a year.
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ITEM 6. EXHIBITS
| Exhibit Number | Exhibit Description | ||||
| 3.1(a) | |||||
| 3.1(b) | |||||
| 3.2 | |||||
| 31.1 | |||||
| 31.2 | |||||
| 32.1 | |||||
| 32.2 | |||||
| 101 | The following materials from Intuitive Surgical, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2022, formatted in Inline XBRL (Extensible Business Reporting Language): (i) the unaudited Condensed Consolidated Balance Sheets, (ii) the unaudited Condensed Consolidated Statements of Comprehensive Income, (iii) the unaudited Condensed Consolidated Statements of Cash Flows, and (iv) Notes to Condensed Consolidated Financial Statements (unaudited), tagged at Level I through IV. | ||||
| 104 | The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2022, formatted in Inline XBRL and contained in Exhibit 101. | ||||
53
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| INTUITIVE SURGICAL, INC. | ||||||||
| By: | /s/ JAMIE E. SAMATH | |||||||
| Jamie E. Samath | ||||||||
| Senior Vice President and Chief Financial Officer | ||||||||
| (Principal Financial Officer and duly authorized signatory) | ||||||||
Date: October 21, 2022
54
EXHIBIT 31.1
Certification of Chief Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Gary S. Guthart, certify that:
1.I have reviewed this quarterly report on Form 10-Q of Intuitive Surgical, Inc.;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: October 21, 2022
By: | /S/ GARY S. GUTHART | ||||
Gary S. Guthart, Ph.D. President and Chief Executive Officer | |||||
EXHIBIT 31.2
Certification of Chief Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Jamie E. Samath, certify that:
1.I have reviewed this quarterly report on Form 10-Q of Intuitive Surgical, Inc.;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: October 21, 2022
By: | /S/ JAMIE E. SAMATH | ||||
Jamie E. Samath Senior Vice President and Chief Financial Officer | |||||
EXHIBIT 32.1
Certification of Chief Executive Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of Intuitive Surgical, Inc. (the “Company”) hereby certifies, to such officer’s knowledge, that:
(i)the accompanying Quarterly Report on Form 10-Q of the Company for the quarterly period ended September 30, 2022 (the “Report”) fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and
(ii)the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: October 21, 2022
By: | /S/ GARY S. GUTHART | ||||
Gary S. Guthart, Ph.D. President and Chief Executive Officer | |||||
EXHIBIT 32.2
Certification of Chief Financial Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of Intuitive Surgical, Inc. (the “Company”) hereby certifies, to such officer’s knowledge, that:
(i)the accompanying Quarterly Report on Form 10-Q of the Company for the quarterly period ended September 30, 2022 (the “Report”) fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and
(ii)the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: October 21, 2022
By: | /S/ JAMIE E. SAMATH | ||||
Jamie E. Samath Senior Vice President and Chief Financial Officer | |||||