Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Index To Consolidated Financial Statements

			Page No.
Report of Independent Registered Public Accounting Firm			69
Consolidated Balance Sheets at December 31, 2019, and 2018			71
Consolidated Statements of Income for the years ended December 31, 2019, 2018, and 2017			72
Consolidated Statements of Comprehensive Income for the years ended December 31, 2019, 2018, and 2017			73
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2019, 2018, and 2017			74
Consolidated Statements of Cash Flows for the years ended December 31, 2019, 2018, and 2017			75
Notes to the Consolidated Financial Statements			76
Schedule II—Valuation and Qualifying Accounts			104

All other schedules have been omitted, because they are not applicable or the required information is shown in the Consolidated Financial Statements or the Notes thereto.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of Intuitive Surgical, Inc.

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheets of Intuitive Surgical, Inc. and its subsidiaries (the “Company”) as of December 31, 2019 and 2018, and the related consolidated statements of income, of comprehensive income, of stockholders’ equity and of cash flows for each of the three years in the period ended December 31, 2019, including the related notes and schedule of valuation and qualifying accounts for each of the three years in the period ended December 31, 2019 listed in the accompanying index (collectively referred to as the “consolidated financial statements”). We also have audited the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.

Change in Accounting Principle

As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for recognition of the income tax consequences of an intra-entity transfer of an asset, other than inventory, in 2018.

Basis for Opinions

The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control Over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Critical Audit Matters

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Acquisitions of Chindex and Schölly - Fair value of Intangible Assets and Contingent Consideration

As described in Note 7 to the consolidated financial statements, the Company completed two transactions accounted for as business combinations during the year ended December 31, 2019. During the first quarter of 2019, the Company’s majority-owned joint venture with Fosun Pharma acquired certain assets from Chindex and its affiliates (“Chindex”), a subsidiary of Fosun Pharma, for total purchase consideration of $66.0 million, which resulted in $64.7 million of contingent consideration liability and $48.2 million of distribution rights being recorded. Management measured the contingent consideration liability at estimated fair value using a discounted cash flow model, which requires significant inputs not observable in the market. For the contingent consideration, key assumptions included (1) the probability and timing of milestone achievements based on projected future revenues through 2019 and 2020 and (2) the discount rate used to calculate the present value of the milestone payments. For the distribution rights intangible asset, key assumptions included (1) the amount and timing of projected future cash flows, and (2) the discount rate used to determine the present value of these cash flows. During the third quarter of 2019, the Company acquired certain assets and operations from Schölly Fiberoptic GmbH (“Schölly”) for total purchase consideration of $101.4 million, which resulted in $28.0 million of a manufacturing process technology intangible asset being recorded. For the manufacturing process technology intangible asset, key assumptions included (1) the amount and timing of projected future cash flows and (2) the discount rate used to determine the present value of these cash flows.

The principal considerations for our determination that performing procedures relating to the acquisitions of Chindex and Schölly, specifically the fair value of the distribution rights intangible asset, contingent consideration liability, and manufacturing process technology intangible asset, is a critical audit matter are there was significant judgment by management in developing the fair value estimates. This in turn led to a high degree of auditor judgment, effort, and subjectivity in performing procedures and evaluating audit evidence relating to management's projected future cash flows, specifically the revenue projections, for the distribution rights intangible asset, contingent consideration liability and manufacturing process technology, and the discount rates for the distribution rights intangible asset and contingent consideration liability. In addition, the audit effort involved the use of professionals with specialized skill and knowledge to assist in performing these procedures and evaluating the audit evidence obtained from these procedures.

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the acquisition accounting, including controls over management's valuation of the distribution rights intangible asset and contingent consideration liability for the acquisition of Chindex and the manufacturing process technology intangible asset for the acquisition of Schölly, and controls over the development of the projected future cash flows, specifically revenue projections and discount rates. These procedures also included, among others, (i) reading the purchase agreements, (ii) evaluating management’s assessments of the completeness of the identified intangible assets acquired, and (iii) testing management’s process for estimating the fair value of the distribution rights, contingent consideration liability, and manufacturing process technology. Testing management’s process included evaluating the appropriateness of the methods used to develop the fair value estimates and evaluating the reasonableness of significant assumptions used by management, including the revenue projections and discount rates. Evaluating the reasonableness of the revenue projections included evaluating consistency with evidence obtained in other areas of the audit and considering historical trends of the Company’s business. Professionals with specialized skill and knowledge were used to assist in evaluating the reasonableness of the discount rates.

/s/ PricewaterhouseCoopers LLP

San Jose, California

February 7, 2020

We have served as the Company’s auditor since 2014.

INTUITIVE SURGICAL, INC.

CONSOLIDATED BALANCE SHEETS

(IN MILLIONS, EXCEPT PAR VALUE AMOUNTS)

			December 31,
			2019						2018
ASSETS
Current assets:
Cash and cash equivalents			$	1,167.6					$	857.9
Short-term investments			2,054.1						2,205.2
Accounts receivable, net of allowances of $8.3 and $8.2 as of December 31, 2019, and 2018, respectively			645.2						682.3
Inventory			595.5						409.0
Prepaids and other current assets			200.2						178.8
Total current assets			4,662.6						4,333.2
Property, plant, and equipment, net			1,272.9						812.0
Long-term investments			2,623.5						1,771.3
Deferred tax assets			425.6						428.6
Intangible and other assets, net			441.4						261.0
Goodwill			307.2						240.6
Total assets			$	9,733.2					$	7,846.7
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable			$	123.5					$	100.7
Accrued compensation and employee benefits			251.6						193.8
Deferred revenue			337.8						294.3
Other accrued liabilities			317.3						231.8
Total current liabilities			1,030.2						820.6
Other long-term liabilities			418.3						338.6
Total liabilities			1,448.5						1,159.2
Commitments and contingencies (Note 8)
Stockholders’ equity:
Preferred stock, 2.5 shares authorized, $0.001 par value, issuable in series; no shares issued and outstanding as of December 31, 2019, and 2018			—						—
Common stock, 300.0 shares authorized, $0.001 par value, 116.0 shares and 114.5 shares issued and outstanding as of December 31, 2019, and 2018, respectively			0.1						0.1
Additional paid-in capital			5,756.8						5,170.3
Retained earnings			2,494.5						1,521.7
Accumulated other comprehensive income/(loss)			12.4						(13.3)
Total Intuitive Surgical, Inc. stockholders’ equity			8,263.8						6,678.8
Noncontrolling interest in joint venture			20.9						8.7
Total stockholders’ equity			8,284.7						6,687.5
Total liabilities and stockholders’ equity			$	9,733.2					$	7,846.7

The accompanying notes are an integral part of these Consolidated Financial Statements.

INTUITIVE SURGICAL, INC.

CONSOLIDATED STATEMENTS OF INCOME

(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)

			Years Ended December 31,
			2019						2018						2017
Revenue:
Product			$	3,754.3					$	3,089.1					$	2,565.3
Service			724.2						635.1						572.9
Total revenue			4,478.5						3,724.2						3,138.2
Cost of revenue:
Product			1,119.1						906.2						756.3
Service			249.2						213.9						179.9
Total cost of revenue			1,368.3						1,120.1						936.2
Gross profit			3,110.2						2,604.1						2,202.0
Operating expenses:
Selling, general and administrative			1,178.4						986.6						810.5
Research and development			557.3						418.1						328.6
Total operating expenses			1,735.7						1,404.7						1,139.1
Income from operations			1,374.5						1,199.4						1,062.9
Interest and other income, net			127.7						80.1						41.9
Income before taxes			1,502.2						1,279.5						1,104.8
Income tax expense			120.4						154.5						433.9
Net income			1,381.8						1,125.0						670.9
Less: net income (loss) attributable to noncontrolling interest in joint venture			2.5						(2.9)						—
Net income attributable to Intuitive Surgical, Inc.			$	1,379.3					$	1,127.9					$	670.9
Net income per share attributable to Intuitive Surgical, Inc.:
Basic			$	11.95					$	9.92					$	6.01
Diluted			$	11.54					$	9.49					$	5.77
Shares used in computing net income per share attributable to Intuitive Surgical, Inc.:
Basic			115.4						113.7						111.7
Diluted			119.5						118.8						116.3
Total comprehensive income attributable to Intuitive Surgical, Inc.			$	1,405.0					$	1,130.1					$	664.3

The accompanying notes are an integral part of these Consolidated Financial Statements.

INTUITIVE SURGICAL, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(IN MILLIONS)

			Years Ended December 31,
			2019						2018						2017
Net income attributable to Intuitive Surgical, Inc.			$	1,379.3					$	1,127.9					$	670.9
Other comprehensive income (loss):
Change in foreign currency translation gains (losses)			0.3						(2.6)						3.6
Available-for-sale investments (net of tax):
Change in unrealized gains (losses)			30.7						0.3						(2.7)
Less: Reclassification adjustment for (gains) losses on investments			(0.5)						1.2						—
Net change			30.2						1.5						(2.7)
Derivative instruments (net of tax):
Change in unrealized gains (losses)			5.8						3.6						(8.6)
Less: Reclassification adjustment for (gains) losses on derivative instruments			(5.3)						(1.0)						1.2
Net change			0.5						2.6						(7.4)
Employee benefit plans (net of tax):
Change in unrealized gains (losses)			(5.9)						0.4						(0.3)
Less: Reclassification adjustment for losses on employee benefit plans			0.6						0.3						0.2
Net change			(5.3)						0.7						(0.1)
Other comprehensive gains (losses)			25.7						2.2						(6.6)
Total comprehensive income attributable to Intuitive Surgical, Inc.			$	1,405.0					$	1,130.1					$	664.3

The accompanying notes are an integral part of these Consolidated Financial Statements.

INTUITIVE SURGICAL, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(IN MILLIONS)

			Common Stock																		Additional Paid-In Capital						Retained Earnings						Accumulated Other Comprehensive Income/(Loss)						Total Intuitive Surgical, Inc. Stockholders’ Equity						Noncontrolling Interest in Joint Venture						Total Stockholders’ Equity
			Shares						Amount
Balances at December 31, 2016			38.8						$	—					$	4,211.8					$	1,617.6					$	(8.9)					$	5,820.5					$	—					$	5,820.5
Three-for-one stock split			77.6						0.1						(0.1)																		—												—
Issuance of common stock through employee stock plans			3.4												415.5																		415.5												415.5
Shares withheld related to net share settlement of equity awards			(0.2)												(5.1)						(51.5)												(56.6)												(56.6)
Share-based compensation expense related to employee stock plans															209.1																		209.1												209.1
Repurchase and retirement of common stock			(7.3)												(152.0)						(2,122.0)												(2,274.0)												(2,274.0)
Net income attributable to Intuitive Surgical, Inc.																					670.9												670.9												670.9
Other comprehensive loss																											(6.6)						(6.6)												(6.6)
Capital contribution from noncontrolling interest																																	—						2.0						2.0
Net loss attributable to noncontrolling interest in joint venture																																	—						(0.4)						(0.4)
Balances at December 31, 2017			112.3						$	0.1					$	4,679.2					$	115.0					$	(15.5)					$	4,778.8					$	1.6					$	4,780.4
Adoption of new accounting standards (1)																					392.1						(1.3)						390.8												390.8
Issuance of common stock through employee stock plans			2.5												236.6																		236.6												236.6
Shares withheld related to net share settlement of equity awards			(0.3)												(6.7)						(113.3)												(120.0)												(120.0)
Share-based compensation expense related to employee stock plans															261.2																		261.2												261.2
Net income attributable to Intuitive Surgical, Inc.																					1,127.9												1,127.9												1,127.9
Other comprehensive income																											3.5						3.5												3.5
Capital contribution from noncontrolling interest																																	—						10.0						10.0
Net loss attributable to noncontrolling interest in joint venture																																	—						(2.9)						(2.9)
Balances at December 31, 2018			114.5						$	0.1					$	5,170.3					$	1,521.7					$	(13.3)					$	6,678.8					$	8.7					$	6,687.5
Issuance of common stock through employee stock plans			2.4												272.8																		272.8												272.8
Shares withheld related to net share settlement of equity awards			(0.3)												(7.6)						(151.5)												(159.1)												(159.1)
Share-based compensation expense related to employee stock plans															335.8																		335.8												335.8
Repurchase and retirement of common stock			(0.6)												(14.5)						(255.0)												(269.5)												(269.5)
Net income attributable to Intuitive Surgical, Inc.																					1,379.3												1,379.3												1,379.3
Other comprehensive income (loss)																											25.7						25.7						(0.3)						25.4
Capital contribution from noncontrolling interest																																	—						10.0						10.0
Net income attributable to noncontrolling interest in joint venture																																	—						2.5						2.5
Balances at December 31, 2019			116.0						$	0.1					$	5,756.8					$	2,494.5					$	12.4					$	8,263.8					$	20.9					$	8,284.7
(1) Represents the adjustments related to the adoptions of Accounting Standards Update ("ASU") 2016-16, Income Taxes (Topic 740): Intra-Entity Transfer of Assets Other than Inventory, and ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.

The accompanying notes are an integral part of these Consolidated Financial Statements.

INTUITIVE SURGICAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN MILLIONS)

			Years Ended December 31,
			2019						2018						2017
Operating activities:
Net income			$	1,381.8					$	1,125.0					$	670.9
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and loss on disposal of property, plant, and equipment, net			160.0						108.6						86.2
Amortization of intangible assets			43.0						14.2						12.9
Loss (gain) on investment, accretion of discounts, and amortization of premiums on investments, net			(6.0)						1.8						21.2
Deferred income taxes			(8.0)						31.9						60.2
Share-based compensation expense			335.8						261.2						209.1
Amortization of contract acquisition assets			13.1						10.6						10.9
Changes in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable			38.8						(161.3)						(81.4)
Inventory			(360.5)						(279.0)						(115.5)
Prepaids and other assets			(116.9)						(77.7)						(38.9)
Accounts payable			12.3						16.7						14.0
Accrued compensation and employee benefits			57.4						26.2						31.2
Deferred revenue			35.5						54.3						43.7
Other liabilities			11.9						37.1						219.4
Net cash provided by operating activities			1,598.2						1,169.6						1,143.9
Investing activities:
Purchase of investments			(3,346.2)						(2,581.9)						(1,995.0)
Proceeds from sales of investments			107.3						274.0						1,861.3
Proceeds from maturities of investments			2,569.8						1,533.6						703.1
Purchase of property, plant, and equipment and intellectual property			(425.6)						(187.4)						(190.7)
Acquisition of businesses, net of cash			(59.7)						(87.9)						—
Net cash provided by (used in) investing activities			(1,154.4)						(1,049.6)						378.7
Financing activities:
Proceeds from issuance of common stock relating to employee stock plans			272.8						236.6						415.5
Taxes paid related to net share settlement of equity awards			(159.1)						(120.0)						(56.6)
Repurchase of common stock			(269.5)						—						(2,274.0)
Capital contribution from noncontrolling interest			10.0						10.0						2.0
Payment of deferred purchase consideration			(22.6)						(0.3)						—
Net cash provided by (used in) financing activities			(168.4)						126.3						(1,913.1)
Effect of exchange rate changes on cash, cash equivalents, and restricted cash			(2.2)						(0.1)						2.1
Net increase (decrease) in cash, cash equivalents, and restricted cash			273.2						246.2						(388.4)
Cash, cash equivalents, and restricted cash, beginning of year			909.4						663.2						1,051.6
Cash, cash equivalents, and restricted cash, end of year			$	1,182.6					$	909.4					$	663.2

The accompanying notes are an integral part of these Consolidated Financial Statements.

INTUITIVE SURGICAL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. DESCRIPTION OF THE BUSINESS

Intuitive Surgical, Inc. (“Intuitive” or the “Company”) develops, manufactures, and markets the da Vinci® Surgical System and the IonTM endoluminal system. The Company’s products and related services enable physicians and healthcare providers to improve the quality of and access to minimally invasive care. The systems consist of a surgeon console or consoles, a patient-side cart, a high-performance vision system, and proprietary instruments and accessories.

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) and include the accounts of the Company and its wholly- and majority-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

The Consolidated Financial Statements include the results and balances of the Company’s majority-owned joint venture (“Joint Venture”) with Shanghai Fosun Pharmaceutical (Group) Co., Ltd. (“Fosun Pharma”). Chindex Medical Limited (“Chindex”), a subsidiary of Fosun Pharma, has been its distribution partner for da Vinci Surgical Systems in China. The Company holds a controlling financial interest in the Joint Venture, and the noncontrolling interest is reflected as a separate component of the consolidated stockholders’ equity. The noncontrolling interest’s share of the earnings in the Joint Venture is presented separately in the Consolidated Statements of Income for the years ended December 31, 2019 and 2018, while the amount was inconsequential for the year ended December 31, 2017, and was included as a component of interest and other income, net in the Consolidated Statements of Income.

Beginning in 2018, the Company adopted Accounting Standards Update (“ASU”) No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfer of Assets Other than Inventory. The Company adopted this standard using the modified retrospective approach and, as a result, recorded a cumulative adjustment to retained earnings as of January 1, 2018.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the Consolidated Financial Statements and accompanying Notes to the Consolidated Financial Statements. The accounting estimates that require management’s most significant, difficult, and subjective judgments include the valuation and recognition of investments, revenue recognition and the valuation of revenue and allowances for sales returns and doubtful accounts, the estimation of exposures that are able to be hedged and the offsetting hedge transactions, the valuation of inventory, the valuation of and assessment of recoverability of intangible assets and their estimated useful lives, the valuation and recognition of share-based compensation, the recognition and measurement of current and deferred income tax assets, along with the assessment of recoverability, and liabilities, and the estimates for legal contingencies. Actual results could differ materially from these estimates.

Concentrations of Credit Risk and Other Risks and Uncertainties

The carrying amounts for financial instruments consisting of cash and cash equivalents, accounts receivable, accounts payable, and accrued liabilities approximate fair value due to their short maturities. Marketable securities and derivative instruments are stated at their estimated fair values, based on quoted market prices for the same or similar instruments. The counterparties to the agreements relating to the Company’s investment securities and derivative instruments consist of various major corporations, financial institutions, municipalities, and government agencies of high credit standing.

The Company’s accounts receivable are derived from net revenue to customers and distributors located throughout the world. The Company performs credit evaluations of its customers’ financial condition and, generally, requires no collateral from its customers. The Company provides reserves for potential credit losses but has not experienced significant losses to date. As of December 31, 2019, and 2018, 66% and 71%, respectively, of accounts receivable were from domestic customers. No single customer represented more than 10% of total revenue for the years ended December 31, 2019, 2018, and 2017.

During the years ended December 31, 2019, 2018, and 2017, domestic revenue accounted for 70%, 71%, and 73% of total revenue, respectively, while outside of the U.S. revenue accounted for 30%, 29%, and 27%, respectively, of total revenue for each of the years then ended.

Cash and Cash Equivalents

The Company considers all highly liquid investments with an original maturity from date of purchase of 90 days or less to be cash equivalents.

Restricted Cash

As of December 31, 2019, the Company had $15.0 million of restricted cash associated with its insurance programs. As of December 31, 2018, the Company had $51.5 million of restricted cash associated with its insurance programs and a shareholder litigation settlement that was reached in 2018. Restricted cash was included in prepaids and other current assets and intangible and other assets, net on the Consolidated Balance Sheets.

Investments

Available-for-sale investments. The Company’s investments may consist of U.S. treasury and U.S. government agency securities, taxable and tax-exempt municipal notes, corporate notes and bonds, commercial paper, non-U.S. government agency securities, and money market funds. The Company has designated all investments as available-for-sale and, therefore, such investments are reported at fair value, with unrealized gains and losses recorded in accumulated other comprehensive income (loss). For securities sold prior to maturity, the cost of securities sold is based on the specific identification method. Realized gains and losses on the sale of investments are recorded in interest and other income, net in the Consolidated Statements of Income. Investments with remaining maturities at date of purchase greater than 90 days and remaining maturities as of the reporting period less than one year are classified as short-term investments. Investments with remaining maturities greater than one year are classified as long-term investments.

Other-than-temporary impairment. All of the Company’s investments are subject to a periodic impairment review. The Company recognizes an impairment charge when a decline in the fair value of its investments below the cost basis is judged to be other-than-temporary. Factors considered in determining whether a loss is temporary included the extent and length of time that the investment’s fair value has been lower than its cost basis, the financial condition and near-term prospects of the investee, the extent of the loss related to credit of the issuer, the expected cash flows from the security, the Company’s intent to sell the security, and whether or not the Company will be required to sell the security prior to the expected recovery of the investment’s amortized cost basis. No significant charges were recorded during the years ended December 31, 2019, 2018, and 2017.

Fair Value Measurements

The Company measures the fair value of money market funds and certain U.S. treasury securities based on quoted prices in active markets for identical assets as Level 1 securities. Marketable securities measured at fair value using Level 2 inputs are primarily comprised of commercial paper, corporate notes and bonds, U.S. and non-U.S. government agencies, and municipal notes. The Company reviews trading activity and pricing for these investments as of the measurement date. When sufficient quoted pricing for identical securities is not available, the Company uses market pricing and other observable market inputs for similar securities obtained from various third-party data providers. These inputs either represent quoted prices for similar assets in active markets or have been derived from observable market data. This approach results in the Level 2 classification of these securities within the fair value hierarchy.

Inventory

Inventory is stated at the lower of cost or net realizable value on a first-in, first-out basis. Inventory costs include direct materials, direct labor, and normal manufacturing overhead. The cost basis of the Company’s inventory is reduced for any products that are considered excessive or obsolete based upon assumptions about future demand and market conditions.

Property, Plant, and Equipment

Property, plant, and equipment are stated at cost, net of accumulated depreciation. Depreciation is computed on a straight-line basis over the estimated useful lives of the assets, generally, as follows:

			Useful Lives
Building			Up to 30 years
Building improvements			Up to 15 years
Leasehold improvements			Lesser of useful life or term of lease
Equipment and furniture			5 years
Operating lease assets			Greater of lease term or 1 to 5 years
Computer and office equipment			3 years
Enterprise-wide software			5 years
Purchased software			Lesser of 3 years or life of license

Depreciation expense for the years ended December 31, 2019, 2018, and 2017, was $156.7 million, $105.9 million, and $82.1 million, respectively.

Capitalized Software Costs for Internal Use

The Company capitalizes direct costs associated with developing or obtaining internal use software, including enterprise-wide business software, that are incurred during the application development stage. These capitalized costs are recorded as capitalized software within property, plant, and equipment. Costs related to preliminary project activities and post-implementation activities are expensed as incurred. Upon being placed in service, amounts capitalized are amortized over an estimated useful life of up to 5 years, generally on a straight-line basis.

Business Combinations

The Company accounts for business acquisitions in accordance with ASC 805, Business Combinations. This standard requires the acquiring entity in a business combination to recognize all of (and only) the assets acquired and liabilities assumed in the transaction and establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed in a business combination. Certain provisions of this standard prescribe, among other things, the determination of acquisition-date fair value of consideration paid in a business combination, including contingent consideration. The Company allocates the acquisition-date fair value to the assets acquired and liabilities assumed based on the estimated fair values. The excess of the acquisition-date fair value of consideration paid over the fair values of the identifiable assets and liabilities is recorded as goodwill. Acquisition-related costs are recognized separately from the business combination and are expensed as incurred. The Company includes the results of operations of the businesses that are acquired as of the acquisition date.

Goodwill and Intangible Assets

Goodwill and intangible assets with indefinite useful lives are not amortized but are tested for impairment at least annually during the fourth quarter, or if circumstances indicate their value may no longer be recoverable. Goodwill represents the excess of the purchase price over the fair value of net identifiable assets and liabilities. The Company continues to operate in one segment, which is considered to be the sole reporting unit and, therefore, goodwill was tested for impairment at the enterprise level.

Intangible assets are carried at cost, net of accumulated amortization. The Company does not have intangible assets with indefinite useful lives other than goodwill. Amortization is recorded on a straight-line basis over the intangible assets’ useful lives, which range from approximately 1 to 9 years.

Impairment of Long-lived Assets

The Company evaluates long-lived assets, which include amortizable intangible and tangible assets, for impairment whenever events or changes in circumstances indicate that the carrying value of long-lived assets may not be recoverable. Recoverability is measured by comparing the net book value to the future undiscounted cash flows attributable to such assets. The Company recognizes an impairment charge equal to the amount by which the net book value exceeds its fair value. No material impairment losses were incurred in the periods presented.

Revenue Recognition

The Company’s revenue consists of product revenue resulting from the sale of systems, system components, instruments and accessories, and service revenue. The Company accounts for a contract with a customer when there is a legally enforceable contract between the Company and its customer, the rights of the parties are identified, the contract has commercial substance, and collectability of the contract consideration is probable. The Company’s revenues are measured based on the consideration specified in the contract with each customer, net of any sales incentives and taxes collected from customers that are remitted to government authorities.

The Company’s system sale arrangements generally contain multiple products and services. For these bundled sale arrangements, the Company accounts for individual products and services as separate performance obligations if they are a distinct product or service that is separately identifiable from other items in bundled packages and if a customer can benefit from the product or service on its own or with other resources that are readily available to the customer. The Company’s system sale arrangements include a combination of the following performance obligations: system(s); system components; system accessories; instruments; accessories; and system service. The Company’s system sale arrangements generally include a five-year period of service. The first year of service is generally free and included in the system sale arrangement, and the remaining four years are generally included at a stated service price. The Company considers the service terms in the arrangements that are legally enforceable to be performance obligations. Other than service, the Company generally satisfies all of the performance obligations up-front. System components, system accessories, instruments, accessories, and service are also sold on a stand-alone basis.

The Company recognizes revenue as the performance obligations are satisfied by transferring control of the product or service to a customer. The Company generally recognizes revenue for the performance obligations at the following points in time:

System sales. For systems (including system components and system accessories) sold directly to end customers, revenue is recognized when the Company transfers control to the customer, which is generally at the point when acceptance occurs that indicates customer acknowledgment of delivery or installation, depending on the terms of the arrangement. For systems sold through distributors, revenue is recognized generally at the time of shipment. The Company’s system arrangements generally do not provide a right of return. The systems are generally covered by a one-year warranty. Warranty costs were not material for the periods presented.

Instruments and accessories. Revenue from sales of instruments and accessories is recognized when control is transferred to the customers, which generally occurs at the time of shipment but also occurs at the time of delivery, depending on the customer arrangement. The Company allows its customers in the normal course of business to return unused products for a limited period of time subsequent to initial purchase and records an allowance against revenue for estimated returns.

Service. Service revenue is recognized over the term of the service period, as the customer benefits from the services throughout the service period. Revenue related to services performed on a time-and-materials basis is recognized when performed.

The Company offers its customers the opportunity to trade in their older systems for a credit towards the purchase of a newer generation system. The Company generally does not provide specified price trade-in rights or upgrade rights at the time of system purchase. Such trade-in or upgrade transactions are separately negotiated based on the circumstances at the time of the trade-in or upgrade, based on the then fair value of the system, and are generally not based on any pre-existing rights granted by the Company. Accordingly, such trade-ins and upgrades are not considered separate performance obligations in the arrangement for a system sale. Traded-in systems could be reconditioned and resold. The Company accounts for the fair value of the traded-in system in the total consideration in the arrangement by including the net realizable value of the traded-in system less a normal profit margin. The value of the traded-in system is determined as the amount, after reconditioning costs are added, that will allow a normal profit margin on the sale of the reconditioned unit to be generated. When there is no market for the traded-in units, no value is assigned. Traded-in units are reported as a component of inventory until resold, or otherwise disposed.

In addition, customers may also have the opportunity to upgrade their systems at a price determined at the time of the upgrade, for example, by adding a second surgeon console for use with the da Vinci Surgical System. Such upgrades are performed by completing component level upgrades at the customer’s site. Upgrade revenue is recognized when the component level upgrades are complete and all revenue recognition criteria are met.

For multiple-element arrangements, revenue is allocated to each performance obligation based on its relative standalone selling price. Standalone selling prices are based on observable prices at which the Company separately sells the products or services. If a standalone selling price is not directly observable, then the Company estimates the standalone selling price considering market conditions and entity-specific factors including, but not limited to, features and functionality of the products and services, geographies, and type of customer. The Company regularly reviews standalone selling prices and updates these estimates as necessary.

Assets Recognized from the Costs to Obtain a Contract with a Customer

The Company has determined that certain sales incentives provided to the Company’s sales team are required to be capitalized when the Company expects to generate future economic benefits from the related revenue-generating contracts subsequent to the initial capital sales transaction. When determining the economic life of the contract acquisition assets recognized, the Company considers historical service renewal rates, expectations of future customer renewals of service contracts, and other factors that could impact the economic benefits that the Company expects to generate from the relationship with its customers. The costs capitalized as contract acquisition costs included in intangible and other assets, net in the Consolidated Balance Sheets were $51.5 million and $34.2 million as of December 31, 2019, and 2018, respectively. The Company did not incur any impairment losses during the periods presented.

Intuitive System Leasing

The Company enters into sales-type and operating lease arrangements with certain qualified customers. Sales-type leases have terms that generally range from 24 to 84 months and are usually collateralized by a security interest in the underlying assets. Revenue related to multiple-element arrangements are allocated to lease and non-lease elements based on their relative standalone selling prices as prescribed by the Company’s revenue recognition policy. Lease elements generally include a system or system component, while non-lease elements generally include service, instruments, and accessories. For some lease arrangements, the customers are provided with the right to purchase the leased system at some point during and/or at the end of

the lease term. Except for certain usage-based lease arrangements, lease arrangements generally do not provide rights for the customers to exit or terminate the lease without incurring a penalty. For some leases, lease payments are based on the usage of the systems.

In determining whether a transaction should be classified as a sales-type or operating lease, the Company considers the following terms at lease commencement: (1) whether title of the system transfers automatically or for a nominal fee by the end of the lease term, (2) whether the present value of the minimum lease payments equals or exceeds substantially all of the fair value of the leased system, (3) whether the lease term is for the major part of the remaining economic life of the leased system, (4) whether the lease grants the lessee an option to purchase the leased system that the lessee is reasonably certain to exercise, and (5) whether the underlying system is of such a specialized nature that it is expected to have no alternative use to the Company at the end of the lease term.

The Company generally recognizes revenue from sales-type lease arrangements at the time the system is accepted by the customer, assuming all other revenue recognition criteria have been met. Revenue related to lease elements from sales-type leases is presented as product revenue. Revenue related to lease elements from operating lease arrangements is generally recognized on a straight-line basis over the lease term or based upon system usage and is presented as product revenue.

Other Leasing Arrangements

The Company determines if an arrangement contains a lease at inception. For arrangements where the Company is the lessee, operating leases are included in intangible and other assets, net, other accrued liabilities, and other long-term liabilities on the Consolidated Balance Sheet as of December 31, 2019. The Company currently does not have any finance leases.

Operating lease right-of-use ("ROU") assets and operating leases liabilities are recognized based on the present value of the future minimum lease payments over the lease term at the commencement date. ROU assets also include any initial direct costs incurred and any lease payments made at or before the lease commencement date, less lease incentives received. The Company uses its incremental borrowing rate based on the information available at the commencement date in determining the lease liabilities, as the Company's leases generally do not provide an implicit rate. Lease terms may include options to extend or terminate when the Company is reasonably certain the option will be exercised. Lease expense is recognized on a straight-line basis over the lease term.

The Company also has lease arrangements with lease and non-lease components. The Company elected the practical expedient not to separate non-lease components from lease components for the Company's real estate and automobile leases. Additionally, the Company applied a portfolio approach to effectively account for the operating lease ROU assets and lease liabilities for the Company's automobile leases. The Company also elected to apply the short-term lease measurement and recognition exemption in which ROU assets and lease liabilities are not recognized for leases with terms of 12 months or less.

Allowances for Sales Returns and Doubtful Accounts

The allowance for sales returns is based on the Company’s estimates of potential future returns of certain products and other allowances related to current period product revenue. The Company analyzes historical returns, current economic trends, and changes in customer demand and acceptance of the Company’s products. The allowance for doubtful accounts is based on the Company’s assessment of the collectability of customer accounts. The Company regularly reviews the allowance by considering factors such as historical experience, credit quality, the age of the accounts receivable balances, and current economic conditions that may affect a customer’s ability to pay.

Share-Based Compensation

The Company accounts for share-based employee compensation plans using the fair value recognition and measurement provisions under U.S. GAAP. The Company’s share-based compensation cost is measured at the grant date, based on the fair value of the award, and is recognized as expense on a straight-line basis over the requisite service period. The Company estimates expected forfeitures at the time of grant and revises the estimate, if necessary, in subsequent periods if actual forfeitures differ from those estimated.

Expected Term: The expected term represents the weighted-average period that the stock options are expected to be outstanding prior to being exercised. The Company determines expected term based on historical exercise patterns and its expectation of the time that it will take for employees to exercise options still outstanding.

Expected Volatility: The Company uses market-based implied volatility for purposes of valuing stock options granted. Market-based implied volatility is derived based on actively traded options with expirations greater than one year on the Company’s common stock. The extent to which the Company relies on market-based volatility when valuing options depends, among other things, on the availability of traded options on the Company’s stock and the term of such options. Due to sufficient volume of the traded options, the Company used 100% market-based implied volatility to value options granted, which the Company believes is more representative of future stock price trends than historical volatility.

Risk-Free Interest Rate: The risk-free interest rate is based on the U.S. treasury yield curve in effect at the time of grant for the expected term of the stock option.

The fair value of restricted stock units is determined based on the closing quoted price of the Company’s common stock on the date of the grant. See “Note 9. Share-Based Compensation,” for a detailed discussion of the Company’s stock plans and share-based compensation expense.

Computation of Net Income per Share

Basic net income per share attributable to Intuitive Surgical, Inc. is computed using the weighted-average number of shares outstanding during the period. Diluted net income per share attributable to Intuitive Surgical, Inc. is computed using the weighted-average number of the Company’s shares and dilutive potential shares outstanding during the period. Dilutive potential shares primarily consist of employee stock options, restricted stock units, and shares to be purchased by employees under the Company’s employee stock purchase plan.

U.S. GAAP requires that employee equity share options, non-vested shares, and similar equity instruments granted by the Company be treated as potential common shares outstanding in computing diluted earnings per share. Diluted shares outstanding include the dilutive effect of equity awards, which is calculated based on the average share price for each fiscal period using the treasury stock method. Under the treasury stock method, the amount the employee must pay for exercising stock options and the amount of compensation cost for future service that the Company has not yet recognized are assumed to be used to repurchase shares.

Research and Development Expenses

Research and development costs are expensed as incurred and include amortization of intangible assets, costs associated with co-development research and development licensing arrangements, costs of prototypes, salaries, benefits and other headcount-related costs, contract and other outside service fees, and facilities and overhead costs.

Foreign Currency and Other Hedging Instruments

For subsidiaries whose local currency is their functional currency, their assets and liabilities are translated into U.S. dollars at exchange rates at the balance sheet date, and revenues and expenses are translated using average exchange rates in effect during the period. Gains and losses from foreign currency translation are included in accumulated other comprehensive income (loss) within stockholders’ equity in the Consolidated Balance Sheets. For all non-functional currency account balances, the re-measurement of such balances to the functional currency results in either a foreign exchange gain or loss, which is recorded to interest and other income, net in the Consolidated Statements of Income in the same accounting period that the re-measurement occurred.

The Company uses derivatives to partially offset its business exposure to foreign currency exchange risk. The terms of the Company’s derivative contracts are generally twelve months or shorter. The Company typically hedges portions of its forecasted foreign currency exposure associated with revenue and expenses. The Company may also enter into foreign currency forward contracts to offset the foreign currency exchange gains and losses generated by re-measurement of certain assets and liabilities denominated in non-functional currencies. The hedging program is not designated for trading or speculative purposes.

The Company’s accounting policies for these instruments are based on whether the instruments are designated as hedging or non-hedging instruments. The Company records all derivatives on the Consolidated Balance Sheets at fair value. The effective portions of cash flow hedges are recorded in other comprehensive income (loss) (“OCI”) until the hedged item is recognized in earnings. Derivative instruments designated as cash flow hedges are de-designated as hedges when it is probable that the forecasted hedged transaction will not occur in the initially identified time period or within a subsequent two-month time period. Gains and losses in OCI associated with such derivative instruments are reclassified immediately into earnings through interest and other income, net. Any subsequent changes in fair value of such derivative instruments also are reflected in current earnings.

Derivatives that are not designated as hedging instruments and the ineffective portions of cash flow hedges are adjusted to fair value through earnings in interest and other income, net.

Income Taxes

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amounts that are expected more likely than not to be realized in the future.

The Company recognizes tax benefits from uncertain tax positions only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement.

The Company recognizes excess tax benefits and tax deficiencies in the provision for income taxes as discrete items in the period when the awards vest or are settled. The Company accounts for Global Intangible Low-Taxed Income (“GILTI”) as period costs when incurred.

Segments

The Company operates in one segment. Management uses one measurement of profitability and does not segregate its business for internal reporting. As of December 31, 2019, and 2018, 85% and 88% of long-lived assets were in the United States, respectively. Revenue is attributed to a geographic region based on the location of the end customer.

Legal Contingencies

From time to time, the Company is involved in a number of legal proceedings involving product liability, intellectual property, shareholder derivative actions, securities class actions, and other matters. A liability and related charge are recorded to earnings in the Company’s consolidated financial statements for legal contingencies when the loss is considered probable and the amount can be reasonably estimated. The assessment is re-evaluated each period and is based on all available information, including discussion with outside legal counsel. If a reasonable estimate of a known or probable loss cannot be made, but a range of probable losses can be estimated, the low-end of the range of losses is recognized if no amount within the range is a better estimate than any other. If a material loss is reasonably possible but not probable and can be reasonably estimated, the estimated loss or range of loss is disclosed in the notes to the consolidated financial statements. The Company expenses legal fees as incurred.

When determining the estimated probable loss or range of losses, significant judgment is required to be exercised in order to estimate the amount and timing of the loss to be recorded. Estimates of probable losses resulting from litigation are inherently difficult to make, particularly when the matters are in early procedural stages with incomplete facts and information. The final outcome of legal proceedings is dependent on many variables that are difficult to predict and, therefore, the ultimate cost to entirely resolve such matters may be materially different than the amount of current estimates. Consequently, new information or changes in judgments and estimates could have a material adverse effect on the Company’s business, financial condition, and results of operations or cash flows.

Recently Adopted Accounting Pronouncements

Leases

In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-02, Leases (Topic 842) (“Topic 842”), which amended prior accounting standards for leases. The Company adopted Topic 842 on January 1, 2019, using the alternative modified transition method, which requires a cumulative-effect adjustment, if any, to the opening balance of retained earnings to be recognized on the date of adoption with prior periods not restated. There was no cumulative-effect adjustment recorded on January 1, 2019. Please see the description of the Company's "Intuitive System Leasing" and "Other Leasing Arrangements" accounting policies above. Also, see "Note 6. Leases" for further information.

As permitted by the new standard, the Company elected the following practical expedients when assessing the transition impact from both the lessee and lessor perspectives: (i) not to reassess whether any expired or existing contracts as of January 1, 2019, are or contain leases; (ii) not to reassess the lease classification for any expired or existing leases as of January 1, 2019; (iii) not to reassess initial direct costs for any existing leases as of January 1, 2019; and (iv) not to reassess whether land easements meet the definition of a lease.

The primary impact for the Company was the balance sheet recognition of ROU assets and lease liabilities for operating leases as a lessee.

Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract

In August 2018, the FASB issued ASU No. 2018-15, Intangibles (Topic 350): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. This standard also requires customers to amortize the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement. The Company early adopted this standard, as of January 1, 2019, on a prospective basis for all applicable implementation costs.

The Company recorded these capitalized implementation costs within intangible and other assets, net in the accompanying Consolidated Balance Sheets and recognized the related amortization expenses generally over the fixed, non-cancellable term of the associated arrangement on a straight-line basis. The adoption did not have a material impact on the Company's financial position and the results of operations in 2019.

Recent Accounting Pronouncements Not Yet Adopted

Financial Instruments (Topic 326)

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"), which requires an entity to measure expected credit losses for certain financial instruments and financial assets, including trade receivables. This standard also modifies the impairment model for available-for-sale debt securities and requires that credit losses be recorded through an allowance for credit losses and limits the credit loss to the amount by which fair value is below amortized cost. The Company will adopt ASU 2016-13 as of January 1, 2020, using the modified retrospective transition method. The adoption of ASU 2016-13 is not expected to have a material impact on the Company's financial position and the results of operations.

NOTE 3. FINANCIAL INSTRUMENTS

Cash, Cash Equivalents, and Investments

The following tables summarize the Company’s cash and available-for-sale marketable securities’ amortized cost, gross unrealized gains, gross unrealized losses, and fair value by significant investment category reported as cash and cash equivalents or short-term or long-term investments as of December 31, 2019, and 2018 (in millions):

																											Reported as:
			Amortized Cost						Gross Unrealized Gains						Gross Unrealized Losses						Fair Value						Cash and Cash Equivalents						Short-term Investments						Long-term Investments
December 31, 2019
Cash			$	413.1					$	—					$	—					$	413.1					$	413.1					$	—					$	—
Level 1:
Money market funds			726.8						—						—						726.8						726.8						—						—
U.S. treasuries			1,935.8						9.7						(0.4)						1,945.1						—						890.8						1,054.3
Subtotal			2,662.6						9.7						(0.4)						2,671.9						726.8						890.8						1,054.3
Level 2:
Commercial paper			165.1						—						—						165.1						25.5						139.6						—
Corporate securities			2,096.1						16.8						(0.2)						2,112.7						—						798.5						1,314.2
U.S. government agencies			418.3						1.1						(0.2)						419.2						—						209.6						209.6
Non-U.S. government securities			4.5						—						—						4.5						—						4.5						—
Municipal securities			58.4						0.3						—						58.7						2.2						11.1						45.4
Subtotal			2,742.4						18.2						(0.4)						2,760.2						27.7						1,163.3						1,569.2
Total assets measured at fair value			$	5,818.1					$	27.9					$	(0.8)					$	5,845.2					$	1,167.6					$	2,054.1					$	2,623.5

																											Reported as:
			Amortized Cost						Gross Unrealized Gains						Gross Unrealized Losses						Fair Value						Cash and Cash Equivalents						Short-term Investments						Long-term Investments
December 31, 2018
Cash			$	269.4					$	—					$	—					$	269.4					$	269.4					$	—					$	—
Level 1:
Money market funds			569.1						—						—						569.1						569.1						—						—
U.S. treasuries			1,477.8						1.7						(5.3)						1,474.2						10.0						897.8						566.4
Subtotal			2,046.9						1.7						(5.3)						2,043.3						579.1						897.8						566.4
Level 2:
Commercial paper			110.7						—						—						110.7						1.4						109.3						—
Corporate securities			1,607.8						1.3						(4.8)						1,604.3						8.0						724.5						871.8
U.S. government agencies			791.8						0.3						(3.8)						788.3						—						468.9						319.4
Municipal securities			18.4						—						—						18.4						—						4.7						13.7
Subtotal			2,528.7						1.6						(8.6)						2,521.7						9.4						1,307.4						1,204.9
Total assets measured at fair value			$	4,845.0					$	3.3					$	(13.9)					$	4,834.4					$	857.9					$	2,205.2					$	1,771.3

As of December 31, 2018, the Company also recorded $36.5 million of restricted cash equivalents (comprised of money market funds and U.S. treasuries, which would be considered highly liquid investments with original maturity dates that are 90 days or less) in connection with a concluded legal matter in prepaids and other current assets in the accompanying Consolidated Balance Sheets.

The following table summarizes the contractual maturities of the Company’s cash equivalents and available-for-sale investments (excluding cash and money market funds) at December 31, 2019 (in millions):

			Amortized Cost						Fair Value
Mature in less than one year			$	2,082.4					$	2,087.7
Mature in one to five years			2,595.8						2,617.6
Total			$	4,678.2					$	4,705.3

Realized gains and losses, net of tax, were not material for any of the periods presented.

As of December 31, 2019, and 2018, net unrealized gains/(losses) on investments of $20.4 million and $(9.8) million, net of tax, respectively, were included in accumulated other comprehensive income/(loss) in the accompanying Consolidated Balance Sheets.

The following tables present the breakdown of the available-for-sale investments with unrealized losses at December 31, 2019, and 2018 (in millions):

			Unrealized losses less than 12 months																		Unrealized losses 12 months or greater																		Total
December 31, 2019			Fair Value						Unrealized Losses						Fair Value						Unrealized Losses						Fair Value						Unrealized Losses
Corporate securities			$	237.0					$	(0.2)					$	—					$	—					$	237.0					$	(0.2)
U.S. treasuries			236.5						(0.2)						87.5						(0.2)						324.0						(0.4)
U.S. government agencies			45.9						(0.1)						45.5						(0.1)						91.4						(0.2)
Total			$	519.4					$	(0.5)					$	133.0					$	(0.3)					$	652.4					$	(0.8)
December 31, 2018
Corporate securities			$	727.4					$	(1.7)					$	409.6					$	(3.1)					$	1,137.0					$	(4.8)
U.S. treasuries			478.7						(0.9)						592.8						(4.4)						1,071.5						(5.3)
U.S. government agencies			228.0						(0.2)						425.2						(3.6)						653.2						(3.8)
Total			$	1,434.1					$	(2.8)					$	1,427.6					$	(11.1)					$	2,861.7					$	(13.9)

The unrealized losses on the available-for-sale investments are related to corporate securities and government securities. The Company determined these unrealized losses to be temporary. Factors considered in determining whether a loss is temporary included the length of time and extent to which the investment’s fair value has been less than the cost basis, the

financial condition and near-term prospects of the investee, the extent of the loss related to credit of the issuer, the expected cash flows from the security, the Company’s intent to sell the security, and whether or not the Company will be required to sell the security before the recovery of its amortized cost.

Foreign currency derivatives

The objective of the Company’s hedging program is to mitigate the impact of changes in currency exchange rates on net cash flow from foreign currency-denominated sales, expenses, and intercompany balances and other monetary assets or liabilities denominated in currencies other than the U.S. dollar (“USD”). The derivative assets and liabilities are measured using Level 2 fair value inputs.

Cash Flow Hedges. The Company enters into currency forward contracts as cash flow hedges to hedge certain forecasted revenue transactions denominated in currencies other than the USD, primarily the Euro (“EUR”), the British Pound (“GBP”), the Japanese Yen (“JPY”), and the Korean Won (“KRW”). The Company also enters into currency forward contracts as cash flow hedges to hedge certain forecasted expense transactions denominated in EUR and Swiss Franc (“CHF”).

For these derivatives, the Company reports the unrealized after-tax gain or loss from the hedge as a component of accumulated other comprehensive income/(loss) in stockholders’ equity and reclassifies the amount into earnings in the same period in which the hedge transaction affects earnings. The amounts reclassified to revenue and expenses related to the hedged transactions and the ineffective portions of cash flow hedges were not material for the periods presented.

Other Derivatives Not Designated as Hedging Instruments. Other derivatives not designated as hedging instruments consist primarily of forward contracts that the Company uses to hedge intercompany balances and other monetary assets or liabilities denominated in currencies other than the USD, primarily the EUR, GBP, JPY, KRW, CHF, Indian Rupee, and New Taiwan Dollar.

These derivative instruments are used to hedge against balance sheet foreign currency exposures. The related gains and losses were as follows (in millions):

			Years Ended December 31,
			2019						2018						2017
Recognized gains (losses) in interest and other income, net			$	6.4					$	8.7					$	(9.2)
Foreign exchange gains (losses) related to balance sheet re-measurement			$	(1.5)					$	(2.6)					$	9.7

The notional amounts for derivative instruments provide one measure of the transaction volume. Total gross notional amounts (in USD) for derivatives and the aggregate gross fair value outstanding at the end of each period were as follows (in millions):

			Derivatives Designated as Hedging Instruments																		Derivatives Not Designated as Hedging Instruments
			December 31, 2019						December 31, 2018						December 31, 2019						December 31, 2018
Notional amounts:
Forward contracts			$	154.5					$	183.0					$	227.2					$	182.7
Gross fair value recorded in:
Prepaid and other current assets			$	1.3					$	3.1					$	2.2					$	4.1
Other accrued liabilities			$	0.5					$	0.9					$	0.7					$	1.1

NOTE 4. CONSOLIDATED FINANCIAL STATEMENT DETAILS

The following tables provide details of selected consolidated financial statement items (in millions):

			December 31,
			2019						2018
Inventory:
Raw materials			$	211.0					$	164.1
Work-in-process			75.9						40.0
Finished goods			308.6						204.9
Total inventory			$	595.5					$	409.0

			December 31,
			2019						2018
Property, plant, and equipment, net:
Land			$	248.0					$	184.6
Building and building/leasehold improvements			408.3						266.2
Machinery and equipment			357.2						280.1
Operating lease assets—Intuitive System Leasing			293.8						150.2
Computer and office equipment			74.0						52.6
Capitalized software			182.2						157.8
Construction-in-process			272.5						156.7
Gross property, plant, and equipment			1,836.0						1,248.2
Less: Accumulated depreciation*			(563.1)						(436.2)
Total property, plant, and equipment, net			$	1,272.9					$	812.0
*Accumulated depreciation associated with operating lease assets—Intuitive System Leasing			(62.2)						(32.1)

			December 31,
			2019						2018
Other accrued liabilities—short-term
Taxes payable			$	37.9					$	39.1
Litigation-related accruals			5.8						55.0
Current portion of deferred purchase consideration payments			35.7						4.6
Current portion of contingent consideration			44.5						—
Other accrued liabilities			193.4						133.1
Total other accrued liabilities—short-term			$	317.3					$	231.8

			December 31,
			2019						2018
Other long-term liabilities:
Income taxes—long-term			$	258.6					$	270.2
Deferred revenue—long-term			27.4						33.0
Other long-term liabilities			132.3						35.4
Total other long-term liabilities			$	418.3					$	338.6

Supplemental Cash flow Information

The following table provides supplemental cash flow information (in millions):

			Years Ended December 31,
			2019						2018						2017
Income taxes paid			$	158.6					$	179.2					$	147.5
Supplemental non-cash investing and financing activities:
Equipment transfers from inventory to property, plant, and equipment			$	210.6					$	125.7					$	65.8
Deferred payments and contingent consideration related to business combinations			$	86.6					$	16.7					$	—

NOTE 5. REVENUE

The following table presents revenue disaggregated by types and geography (in millions):

															Years Ended December 31,
U.S.															2019						2018						2017
Instruments and accessories															$	1,790.4					$	1,485.2					$	1,263.1
Systems															830.7						692.2						603.5
Services															508.4						456.1						419.2
Total U.S. revenue															$	3,129.5					$	2,633.5					$	2,285.8
Outside of U.S. (“OUS”)
Instruments and accessories															$	617.8					$	476.8					$	373.8
Systems															515.4						434.9						324.9
Services															215.8						179.0						153.7
Total OUS revenue															$	1,349.0					$	1,090.7					$	852.4
Total
Instruments and accessories															$	2,408.2					$	1,962.0					$	1,636.9
Systems															1,346.1						1,127.1						928.4
Services															724.2						635.1						572.9
Total revenue															$	4,478.5					$	3,724.2					$	3,138.2

Remaining Performance Obligations

The transaction price allocated to remaining performance obligations relates to amounts allocated to products and services for which revenue has not yet been recognized. A significant portion of this amount relates to performance obligations in the Company’s service contracts that will be satisfied and recognized as revenue in future periods. In addition, non-lease elements associated with the Company’s lease arrangements are primarily comprised of service contracts that will be satisfied and recognized as revenue in future periods. The transaction price allocated to the remaining performance obligations and the non-lease elements associated with the lease arrangements were $1,597 million as of December 31, 2019. The remaining performance obligations are expected to be satisfied over the term of the individual sales arrangements, which generally are 5 years. Service revenue associated with the lease arrangements will generally be recognized over the service period, which generally coincides with the lease term.

Contract Assets and Liabilities

The following information summarizes the Company’s contract assets and liabilities (in millions):

			As of
			December 31, 2019						December 31, 2018
Contract assets			$	20.8					$	12.4
Deferred revenue			$	365.2					$	327.3

The Company invoices its customers based on the billing schedules in its sales arrangements. Payments are generally due 30 days from date of invoice. Contract assets for the periods presented primarily represent the difference between the revenue that was recognized based on the relative standalone selling price of the related performance obligations satisfied and the contractual billing terms in the arrangements. Deferred revenue for the periods presented primarily relates to service contracts where the service fees are billed up-front, generally quarterly or annually, prior to those services having been performed. The associated deferred revenue is generally recognized over the term of the service period. The Company did not have any significant impairment losses on its contract assets for the periods presented.

During the year ended December 31, 2019, the Company recognized $307 million of revenue that was included in the deferred revenue balance as of December 31, 2018. During the year ended December 31, 2018, the Company recognized $269 million of revenue that was included in the deferred revenue balance as of December 31, 2017.

Intuitive System Leasing

The following table presents revenue from Intuitive System Leasing arrangements (in millions):

						Years Ended December 31,
						2019						2018						2017
Sales-type lease revenue						$	81.6					$	69.8					$	49.5
Operating lease revenue						$	106.9					$	51.4					$	25.9

NOTE 6. LEASES

Lessor Information related to Intuitive System Leasing

Sales-type Leases. Lease receivables relating to sales-type lease arrangements are presented on the Consolidated Balance Sheets as follows (in millions):

			December 31,
			2019						2018
Gross lease receivables			$	191.9					$	150.4
Unearned income			(10.1)						(6.3)
Allowance for credit loss			(1.2)						(1.0)
Net investment in sales-type leases			$	180.6					$	143.1
Reported as:
Prepaids and other current assets			$	63.1					$	51.2
Intangible and other assets, net			117.5						91.9
Total, net			$	180.6					$	143.1

Contractual maturities of gross lease receivables as of December 31, 2019, are as follows (in millions):

Fiscal Year			Amount
2020			$	63.5
2021			52.9
2022			36.2
2023			22.1
2024			15.4
2025 and thereafter			1.8
Total			$	191.9

Operating Leases. The Company’s operating lease terms are generally less than seven years. Future minimum lease payments related to the non-cancellable portion of operating leases (which excludes contingent payments related to usage-based arrangements) as of December 31, 2019, are as follows (in millions):

Fiscal Year			Amount
2020			$	146.5
2021			134.2
2022			116.0
2023			86.6
2024			40.6
2025 and thereafter			10.8
Total			$	534.7

Contingent rental revenue relating to operating lease arrangements was not material for the years ended December 31, 2019, 2018, and 2017.

Lessee Information

The Company enters into operating leases for real estate, automobiles, and certain equipment. Operating lease expense was $19.1 million for the year ended December 31, 2019. For leases with terms of 12 months or less, the related expense for the year ended December 31, 2019 was not material.

Supplemental cash flow information for the year ended December 31, 2019, related to operating leases was as follows (in millions):

			Amount
Cash paid for leases that were included within operating cash outflows			$	18.8
Right-of-use assets recognized related to new lease obligations			$	21.5

Supplemental balance sheet information, as of December 31, 2019, related to operating leases was as follows (in millions, except lease term and discount rate):

Reported as:			Amount
Intangible and other assets, net (Right-of-use assets)			$	74.4
Other accrued liabilities			$	7.7
Other long-term liabilities			68.7
Total lease liabilities			$	76.4
Weighted average remaining lease term			6.1 years
Weighted average discount rate			3.4		%

As of December 31, 2019, the future payments related to the Company's operating lease liabilities are scheduled as follows (in millions):

Fiscal Year			Amount
2020			$	9.6
2021			19.7
2022			14.7
2023			12.8
2024			8.4
2025 and thereafter			22.4
Total lease payments			$	87.6
Less imputed interest			(11.2)
Total operating lease liabilities			$	76.4

ASC 840 Disclosures

The Company elected the alternative modified transition method and is required to present previously disclosed information under the prior accounting standards for leases.

Lessor Information

Sales-type Leases. Contractual maturities of gross lease receivables as of December 31, 2018, are as follows (in millions):

Fiscal Year			Amount
2019			$	50.8
2020			46.5
2021			29.7
2022			14.9
2023			7.5
2024 and thereafter			1.0
Total lease payments			$	150.4

Operating Leases. Future minimum lease payments related to the non-cancellable portion of operating leases (which excludes contingent payments related to usage-based arrangements) as of December 31, 2018, are as follows (in millions):

Fiscal Year			Amount
2019			$	88.0
2020			85.8
2021			68.8
2022			51.3
2023			25.4
2024 and thereafter			1.9
Total lease payments			$	321.2

Lessee Information

Operating Leases. Future minimum lease commitments under the Company's operating leases as of December 31, 2018, are as follows (in millions):

Fiscal Year			Amount
2019			$	15.1
2020			14.5
2021			12.7
2022			11.2
2023			11.0
2024 and thereafter			30.9
Total lease payments			$	95.4

NOTE 7. GOODWILL AND INTANGIBLE ASSETS

Acquisitions in 2019

Chindex

During the first quarter of 2019, the Company's majority-owned Joint Venture with Fosun Pharma acquired certain assets from Chindex and its affiliates, a subsidiary of Fosun Pharma, including distribution rights, customer relationships, and certain personnel on January 5, 2019, which collectively met the definition of a business. Chindex was the Company's distributor of da Vinci products and services in China. The transaction enhances the Company's ability to serve patients, surgeons, and hospitals in China.

The total purchase consideration of $66.0 million, as of the acquisition date, included a contingent consideration liability of $64.7 million and an upfront cash payment of $1.3 million. The amount and timing of the future contingent consideration payments are based upon the underlying performance of the business in 2019 and 2020. As of the acquisition date, the estimated total undiscounted contingent consideration was approximately $81 million. As of December 31, 2019, the estimated total undiscounted contingent consideration has decreased by approximately $6 million due to a change in the timing of the milestone achievements. The contingent consideration liability was measured at estimated fair value using a discounted cash flow model, which requires significant inputs not observable in the market and, thus, represents a Level 3 measurement. Key assumptions included (1) the probability and timing of milestone achievements based on projected future revenues through 2019 and 2020, and (2) the discount rate used to calculate the present value of the milestone payments. At each reporting period until the contingent consideration is settled, the Company remeasures the contingent consideration liability and records changes in fair value within selling, general and administrative expenses. For the year ended December 31, 2019, the contingent consideration liability changed due to payments of $16.5 million and net additional expenses of $7.2 million, primarily related to accretion due to the passage of time. Changes to the contingent consideration estimate can result from adjustments to discount rates, accretion due to the passage of time, or change in estimates in the performance of the business. The assumptions related to determining the fair value of contingent consideration include a significant amount of judgment, and any changes in the underlying estimates could have a material impact on the amount of contingent consideration adjustment recorded in any given period.

The Company recorded $1.7 million of net tangible assets, $58.6 million of intangible assets, and $5.7 million of residual goodwill. Intangible assets included distribution rights of $48.2 million and customer relationships of $10.4 million, which are being amortized over a weighted-average period of 2.9 years. Key assumptions included (1) the amount and timing of projected

future cash flows, and (2) the discount rate used to determine the present value of these cash flows. The goodwill is not amortizable for income tax purposes. The allocation of purchase consideration was completed in the third quarter of 2019. There were no adjustments to the provisional amounts in the measurement period.

Schölly

During the third quarter of 2019, the Company acquired certain assets and operations from Schölly Fiberoptic GmbH ("Schölly"), including manufacturing process technology, a non-compete agreement, certain personnel, and net tangible assets on August 31, 2019, which collectively met the definition of a business. The Company believes that the transaction strengthens the Company's supply chain and manufacturing capacity for imaging products used in the Company's da Vinci systems. The total purchase consideration of $101.4 million consists of an initial cash payment of $34.4 million and deferred cash payments totaling approximately $67.0 million, of which $37.3 million continues to be deferred as of December 31, 2019. The timing of the future payments is based upon achieving certain integration steps, which occur during 2020 and are expected to be completed around the end of 2020.

The Company preliminarily recorded $10.7 million of net tangible assets, which included $6.7 million of inventory and $1.4 million of cash, $31.0 million of intangible assets, and $59.7 million of residual goodwill. The balances include the net impact of adjustments to the preliminary allocation of the purchase price within the one year measurement period, which increased intangible assets and goodwill by $0.5 million and $0.4 million, respectively, during the fourth quarter of 2019. There was no significant impact to the Consolidated Statements of Income as result of these adjustments. Intangible assets included manufacturing process technology of $28.0 million and non-compete provisions of $3.0 million, which are being amortized over a weighted-average period of 6.6 years. Key assumptions included (1) the amount and timing of projected future cash flows, and (2) the discount rate used to determine the present value of these cash flows. The allocation of purchase consideration is considered preliminary with provisional amounts primarily related to working capital. Goodwill primarily consists of the manufacturing and other synergies of the combined operations and the value of the assembled workforce. The majority of goodwill is not deductible for income tax purposes.

In 2019, the Company has included the results of the acquired businesses, since their acquisition dates, in its Consolidated Financial Statements, and the revenues and earnings were not material in the year. Pro forma results of operations related to the acquisitions have not been presented, because the operating results of the acquired businesses are not considered material to the Consolidated Financial Statements.

Acquisitions in 2018

During the second quarter of 2018, the Company terminated its India distribution relationship with Vattikuti Technologies Pvt. Ltd. and acquired certain assets related to that distribution business on May 25, 2018, which collectively met the definition of a business. The transaction enhances the Company’s ability to serve patients, surgeons, and hospitals in India. After the net impact of measurement-period adjustments of $2.5 million, the purchase consideration consisted of $36.2 million in cash and the Company recorded $4.1 million of net tangible assets, $24.2 million of intangible assets, and $7.3 million of residual goodwill. Intangible assets included reacquired distribution rights, customer relationships, and a non-compete agreement, which are being amortized over a weighted average period of 4.3 years.

During the third quarter of 2018, the Company acquired intellectual property, exclusive field of use rights, and certain key employees from InTouch Technologies, Inc. on August 17, 2018, which collectively met the definition of a business. The transaction enhances the Company’s network capabilities in using real-time data to support surgeons. The total purchase consideration of $38.7 million, as of the acquisition date, consisted of an initial cash payment of $22.0 million and subsequent cash payments totaling approximately $16.7 million. The Company recorded $13.3 million of intangible assets and $25.4 million of residual goodwill. Intangible assets included developed technology and a non-compete agreement, which are being amortized over a weighted average period of 5.7 years. The goodwill will be amortized for income tax purposes.

During the fourth quarter of 2018, the Company acquired its Taiwan distributor, Unison Surgicals Company, on December 11, 2018, which met the definition of a business. The transaction enhances the Company’s ability to serve patients, surgeons, and hospitals in Taiwan. The purchase consideration consisted of $35.4 million in cash. The Company recorded $13.1 million of net tangible assets, which included $7.6 million of cash, $17.3 million of intangible assets, and $5.0 million of residual goodwill. Intangible assets included customer relationships and non-compete agreements, which are being amortized over a weighted average period of 6.6 years.

In 2018, the Company has included the results of the acquired businesses, since their acquisition dates, in its Consolidated Financial Statements, and the revenues and earnings were not material in the year. Pro forma results of operations related to the acquisitions have not been presented, because the operating results of the acquired businesses are not material to the Consolidated Financial Statements.

Goodwill

The following table summarizes the changes in the carrying amount of goodwill (in millions):

						Amount
Balance at December 31, 2017						$	201.1
Acquisition activity						40.2
Translation and other						(0.7)
Balance at December 31, 2018						240.6
Acquisition activity						65.4
Translation and other						1.2
Balance at December 31, 2019						$	307.2

The Company completed its annual goodwill impairment test and determined that no impairment existed. As of December 31, 2019, there has been no impairment of goodwill.

Intangible Assets

The following table summarizes the components of gross intangible asset, accumulated amortization, and net intangible asset balances as of December 31, 2019, and 2018 (in millions):

						December 31, 2019																														December 31, 2018
						Gross Carrying Amount						Accumulated Amortization						Net Carrying Amount						Gross Carrying Amount						Accumulated Amortization						Net Carrying Amount
Patents and developed technology						$	186.7					$	(149.0)					$	37.7					$	158.7					$	(144.7)					$	14.0
Distribution rights and others						91.3						(44.9)						46.4						40.2						(12.9)						27.3
Customer relationships						57.7						(29.7)						28.0						48.5						(23.1)						25.4
Total intangible assets						$	335.7					$	(223.6)					$	112.1					$	247.4					$	(180.7)					$	66.7

Amortization expense related to intangible assets was $43.0 million, $14.2 million, and $12.9 million for the years ended December 31, 2019, 2018, and 2017, respectively.

The estimated future amortization expense related to intangible assets as of December 31, 2019, is as follows (in millions):

Fiscal Year			Amount
2020			$	46.1
2021			18.7
2022			16.0
2023			11.5
2024			9.4
2025 and thereafter			10.4
Total			$	112.1

The preceding expected amortization expense is an estimate. Actual amounts of amortization expense may differ from estimated amounts due to additional intangible asset acquisitions, changes in foreign currency exchange rates, impairment of intangible assets, accelerated amortization of intangible assets, and other events.

NOTE 8. COMMITMENTS AND CONTINGENCIES

COMMITMENTS

Our commitments include an estimated amount of approximately $845 million relating to the Company’s open purchase orders and contractual obligations that occur in the ordinary course of business, including commitments with contract manufacturers and suppliers for which the Company has not received the goods or services, commitments for capital expenditures and construction-related activities for which the Company has not received the services, and acquisition and licensing of intellectual property. Although open purchase orders are considered enforceable and legally binding, the terms generally allow the Company the option to cancel, reschedule, and adjust its requirements based on its business needs prior to the delivery of goods or performance of services. In addition to the above, the Company has committed to make certain future milestone payments to third parties as part of licensing, collaboration, and development arrangements. Payments under these arrangements generally become due and payable only upon the achievement of certain specified developmental, regulatory,

and/or commercial milestones. For instances in which the achievement of these milestones is neither probable nor reasonably estimable, such contingencies are not included in the estimated amount.

CONTINGENCIES

From time to time, the Company is involved in a variety of claims, lawsuits, investigations, and proceedings relating to securities laws, product liability, intellectual property, insurance, contract disputes, employment, and other matters. Certain of these lawsuits and claims are described in further detail below. It is not possible to predict what the outcome of these matters will be, and the Company cannot guarantee that any resolution will be reached on commercially reasonable terms, if at all.

A liability and related charge to earnings are recorded in the Consolidated Financial Statements for legal contingencies when the loss is considered probable and the amount can be reasonably estimated. The assessment is re-evaluated each accounting period and is based on all available information, including the impact of negotiations, settlements, rulings, advice of legal counsel, and other information and events pertaining to each case. Nevertheless, it is possible that additional future legal costs (including settlements, judgments, legal fees, and other related defense costs) could have a material adverse effect on the Company’s business, financial position, or future results of operations.

During the years ended December 31, 2019, 2018, and 2017, the Company recorded pre-tax litigation charges of $0.5 million, $45.2 million, and $16.3 million, respectively, related to the securities class action lawsuits and the tolled product liability claims described below. A total of $4.2 million and $53.0 million associated with these matters were included in other accrued liabilities in the accompanying Consolidated Balance Sheets as of December 31, 2019, and 2018, respectively.

Purported Shareholder Class Action Lawsuits filed April 26, 2013, and May 24, 2013

On April 26, 2013, a purported class action lawsuit entitled Abrams v. Intuitive Surgical, et al., No. 5-13-cv-1920, was filed against a number of the Company’s current and former officers and directors in the U.S. District Court for the Northern District of California.

The case has since been retitled In re Intuitive Surgical Securities Litigation, No. 5:13-cv-1920. The plaintiffs sought damages on behalf of a putative class of persons who purchased or otherwise acquired the Company’s common stock between February 6, 2012, and July 18, 2013. The amended complaint alleged that the defendants violated federal securities laws by allegedly making false and misleading statements and omitting certain material facts in certain public statements and in the Company’s filings with the SEC.

On June 11, 2018, the Company reached an agreement in principle to enter into a settlement agreement, which stipulates a payment of $42.5 million by the Company. The court granted preliminary approval on October 4, 2018, and on December 20, 2018, the court granted final approval. During the year ended December 31, 2018, the Company recorded a pre-tax charge of $42.5 million for this matter. In connection with the settlement, the Company deposited $42.5 million into an escrow account established for disbursements, which was recorded in prepaids and other current assets in the accompanying Consolidated Balance Sheets as of December 31, 2018. The appeals period expired on January 21, 2019, the payment was made in 2019, and the matter has been concluded.

Product Liability Litigation

The Company is currently named as a defendant in a number of individual product liability lawsuits filed in various state and federal courts. The plaintiffs generally allege that they or a family member underwent surgical procedures that utilized the da Vinci Surgical System and sustained a variety of personal injuries and, in some cases, death as a result of such surgery. Several of the filed cases have trial dates in the next 12 months.

The cases raise a variety of allegations including, to varying degrees, that plaintiffs’ injuries resulted from purported defects in the da Vinci Surgical System and/or failure on the Company’s part to provide adequate training resources to the healthcare professionals who performed plaintiffs’ surgeries. The cases further allege that the Company failed to adequately disclose and/or misrepresented the potential risks and/or benefits of the da Vinci Surgical System. Plaintiffs also assert a variety of causes of action, including, for example, strict liability based on purported design defects, negligence, fraud, breach of express and implied warranties, unjust enrichment, and loss of consortium. Plaintiffs seek recovery for alleged personal injuries and, in many cases, punitive damages.

In addition to the filed cases, the Company previously received a substantial number of claims relating to alleged complications from surgeries performed with certain versions of Monopolar Curved Scissor (“MCS”) instruments, which included an MCS tip cover accessory that was the subject of a market withdrawal in 2012 and MCS instruments that were the subject of a recall in 2013. In an effort to avoid the expense and distraction of defending multiple lawsuits, the Company entered into tolling agreements to pause the applicable statutes of limitations for many of these claims and engaged in confidential mediation efforts. As of December 31, 2019, the majority of the “tolled claims” have either been resolved or the matters have been filed.

During the years ended December 31, 2019, 2018, and 2017, the Company recorded $0.5 million, $2.7 million, and $16.3 million, respectively, of pre-tax charges to reflect the estimated cost of settling a number of the product liability claims covered by the tolling agreements. As of December 31, 2019, and 2018, a total of $4.2 million and $10.5 million, respectively, were included in other accrued liabilities in the accompanying Consolidated Balance Sheets related to the tolled product liability claims.

The Company’s estimate of the anticipated cost of resolving the pending lawsuits and claims is based on negotiations with attorneys for the plaintiffs/claimants. The final outcome of the pending lawsuits and claims, and others that might arise, is dependent on many variables that are difficult to predict and the ultimate cost associated with these product liability lawsuits and claims may be materially different than the amount of the current estimate and accruals and could have a material adverse effect on the Company’s business, financial position, and future results of operations. Although there is a reasonable possibility that a loss in excess of the amount recognized exists, the Company is unable to estimate the possible loss or range of loss in excess of the amount recognized at this time.

Patent Litigation

On June 30, 2017, Ethicon LLC, Ethicon Endo-Surgery, Inc., and Ethicon US LLC (collectively, “Ethicon”) filed a complaint for patent infringement against the Company in the U.S. District Court for the District of Delaware. The complaint, which was served on the Company on July 12, 2017, alleges that the Company’s EndoWrist Stapler instruments infringe several of Ethicon’s patents. Ethicon asserts infringement of U.S. Patent Nos. 9,585,658, 8,479,969, 9,113,874, 8,998,058, 8,991,677, 9,084,601, and 8,616,431. A claim construction hearing occurred on October 1, 2018, and the court issued a scheduling order on December 28, 2018. On March 20, 2019, the court granted the Company's Motion to Stay pending an Inter Parties Review to be held at the Patent Trademark and Appeals Board to review patentability of six of the seven patents noted above and vacated the trial date. On August 1, 2019, the court granted the parties' joint stipulation to modify the stay in light of Ethicon's U.S. International Trade Commission ("USITC") complaint against Intuitive involving U.S. Patent Nos. 8,479,969 and 9,113,874, discussed below.

On August 27, 2018, Ethicon filed a second complaint for patent infringement against the Company in the U.S. District Court for the District of Delaware. The complaint alleges that the Company’s SureForm 60 Staplers infringe five of Ethicon’s patents. Ethicon asserts infringement of the U.S. Patent Nos. 9,884,369, 7,490,749, 8,602,288, 8,602,287, and 9,326,770. The Company filed an answer denying all claims. On March 19, 2019, Ethicon filed a Motion for Leave to File a First Amended Complaint, removing allegations related to U.S. Patent No. 9,326,770 and adding allegations related to U.S. Patent Nos. 9,844,379 and 8,479,969. On July 17, 2019, the court entered an order denying the amendment, without prejudice, and granting the parties' joint stipulation to stay the case in its entirety in light of the USITC investigation involving U.S. Patent Nos. 9,844,369 and 7,490,749, discussed below.

On May 30, 2019, Ethicon filed a complaint with the USITC, asserting infringement of U.S. Patent Nos. 9,884,369, 7,490,749, 9,844,379, 9,113,874, and 8,479,969. On June 28, 2019, the USITC voted to institute an investigation (No. 337-TA-1167) with respect to claims in this complaint. The accused products include the Company's EndoWrist 30, EndoWrist 45, SureForm 45, and SureForm 60 Staplers, as well as the stapler reload cartridges. The evidentiary hearing is set for April 20-24, 2020, and the target for completion of the investigation is December 7, 2020. An unfavorable ruling by the USITC could have an adverse effect on our results of operations, including a prohibition on importing the accused products into the U.S. or necessitating workarounds that may limit certain features of our products.

Based on currently available information, the Company is unable to make a reasonable estimate of losses or range of losses, if any, arising from these matters.

Commercial Litigation

On February 27, 2019, Restore Robotics LLC and Restore Robotics Repair LLC ("Restore") filed a Complaint alleging anti-trust claims against the Company. On May 13, 2019, Restore filed an Amended Complaint alleging anti-trust claims relating to the da Vinci Surgical System and EndoWrist service, maintenance, and repair processes. On September 16, 2019, the Court partially granted and partially denied the Company's Motion to Dismiss the Amended Complaint.

On September 30, 2019, the Company filed an Answer denying the anti-trust allegations and a Counterclaim against Restore. The Company filed Amended Counterclaims after the Court partially granted and partially denied Restore's Motion to Dismiss the Counterclaim. The Amended Counterclaims allege that Restore violated the Federal Lanham Act, the Federal Computer Fraud and Abuse Act, and Florida's Deceptive and Unfair Trade Practices Act and that Restore is also liable to the Company for Unfair Competition and Tortious Interference with Contract. On January 7, 2020, the Court denied Restore's Motion to Dismiss the Amended Counterclaims.

In its initial scheduling order, the Court stated that it anticipate trial in this case to occur on or before February 2022. Based on currently available information, the Company is unable to make a reasonable estimate of loss or range of losses, if any, arising from these matters.

NOTE 9. STOCKHOLDERS’ EQUITY

STOCK REPURCHASE PROGRAM

Through December 31, 2019, the Company’s Board of Directors (the “Board”) has authorized an aggregate of $7.5 billion of funding for the Company’s common stock repurchase program (the “Repurchase Program”) since its establishment in March 2009. The most recent authorization occurred in January 2019 when the Board increased the authorized amount available under the Repurchase Program to $2.0 billion. As of December 31, 2019, the remaining amount of share repurchases authorized by the Board under the Repurchase Program was approximately $1.7 billion.

The following table provides the stock repurchase activities during the years ended December 31, 2019, 2018, and 2017 (in millions, except per share amounts):

			Years Ended December 31,
			2019						2018						2017
Shares repurchased			0.6						—						7.3
Average price per share			$	481.35					$	—					$	310.32
Value of shares repurchased			$	269.5					$	—					$	2,274.0

The Company uses the par value method of accounting for its stock repurchases. As a result of share repurchase activities during the years ended December 31, 2019, 2018, and 2017, the Company reduced common stock and additional paid-in capital by an aggregate of $14.5 million, zero, and $152 million, respectively, and charged $255 million, zero, $2,122 million, respectively, to retained earnings.

ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The components of accumulated other comprehensive income (loss), net of tax, for the years ended December 31, 2019, and 2018, are as follows (in millions):

			Year Ended December 31, 2019
			Gains (Losses) on Hedge Instruments						Unrealized Gains (Losses) on Available-for-Sale Securities						Foreign Currency Translation Gains (Losses)						Employee Benefit Plans						Total
Beginning balance			$	0.2					$	(9.8)					$	(0.3)					$	(3.4)					$	(13.3)
Other comprehensive income (loss) before reclassifications			5.8						30.7						0.3						(5.9)						30.9
Reclassified from accumulated other comprehensive (loss)			(5.3)						(0.5)						—						0.6						(5.2)
Net current-period other comprehensive income (loss)			0.5						30.2						0.3						(5.3)						25.7
Ending balance			$	0.7					$	20.4					$	—					$	(8.7)					$	12.4
			Year Ended December 31, 2018
			Gains (Losses) on Hedge Instruments						Unrealized Gains (Losses) on Available-for-Sale Securities						Foreign Currency Translation Gains (Losses)						Employee Benefit Plans						Total
Beginning balance			$	(2.4)					$	(11.3)					$	2.3					$	(4.1)					$	(15.5)
Other comprehensive income (loss) before reclassifications			3.6						0.3						(2.6)						0.4						1.7
Reclassified from accumulated other comprehensive income (loss)			(1.0)						1.2						—						0.3						0.5
Net current-period other comprehensive income (loss)			2.6						1.5						(2.6)						0.7						2.2
Ending balance			$	0.2					$	(9.8)					$	(0.3)					$	(3.4)					$	(13.3)

NOTE 10. SHARE-BASED COMPENSATION

Stock Plans

2010 Incentive Award Plan. In April 2010, the Company’s stockholders approved the 2010 Incentive Award Plan (“2010 Plan”). Under this plan, the Company issues nonqualified stock options (“NSOs”) and restricted stock units (“RSUs”) to employees and certain consultants. The 2010 Plan generally permits NSOs to be granted at no less than the fair market value of the common stock on the date of grant, with terms of 10 years from the date of grant. The 2010 Plan expires in 2029. In April 2019, the Company’s stockholders approved an amended and restated 2010 Plan to provide for an increase in the number of shares of common stock reserved for issuance from 24,450,000 to 28,450,000. As of December 31, 2019, approximately 5.9 million shares were reserved for future issuance under the 2010 Plan. A maximum of 2.6 million of these shares can be awarded as RSUs.

2009 Employment Commencement Incentive Plan. In October 2009, the Board adopted the 2009 Employment Commencement Incentive Plan (“New Hire Plan”). The New Hire Plan provides for the shares to be used exclusively for the grant of RSUs and NSOs to new employees (“New Hire Options”), who were not previously employees or non-employee directors of the Company. The Compensation Committee approves all equity awards under the New Hire Plan, which are granted to newly-hired employees once a month on the fifth business day of each month after their hire. Options are granted at an exercise price not less than the fair market value of the stock on the date of grant and have a term not to exceed 10 years.

In April 2015, the Board of Directors amended and restated the New Hire Plan to provide for an increase in the number of shares of common stock authorized for issuance pursuant to awards granted under the New Hire Plan from 3,465,000 to 4,365,000. The New Hire Plan expired in October 2019 and, therefore, there are no shares reserved for future issuance under the New Hire Plan. However, awards granted prior to the plan's expiration continue to remain outstanding until their original expiration date.

2000 Equity Incentive Plan. In March 2000, the Board adopted the 2000 Equity Incentive Plan (“2000 Plan”), which took effect upon the closing of the Company’s initial public offering. Under this plan, certain employees, consultants, and non-employee directors could be granted Incentive Stock Options (“ISOs”) and Nonstatutory Stock Options (“NSOs”) to purchase shares of the Company’s common stock. The 2000 Plan permitted ISOs to be granted at an exercise price not less than the fair value on the date of the grant and NSOs at an exercise price not less than 85% of the fair value on the date of grant. Options granted under the 2000 Plan generally expire 10 years from the date of grant and become exercisable upon grant subject to repurchase rights in favor of the Company until vested. The 2000 Plan expired in March 2010. However, options granted prior to the plan’s expiration continue to remain outstanding until their original expiration date.

Employee Option Vesting. The Company makes annual option grants on February 15 (or the next business day if the date is not a business day) and on August 15 (or the next business day if the date is not a business day). The February 15 grants vest 6/48 upon completion of 6 months of service and 1/48 per month thereafter. The August 15 stock option grants vest 7/48 at the end of one month and 1/48 per month thereafter through a 3.5-year vesting period.

New Hire Options generally vest 12/48 upon completion of one year of service and 1/48 per month thereafter. Option vesting terms are determined by the Board and, in the future, may vary from past practices.

2000 Non-Employee Directors’ Stock Option Plan. In March 2000, the Board of Directors adopted the 2000 Non-Employee Directors’ Stock Option Plan (the “Directors’ Plan”). In October 2009, the automatic evergreen increase provisions were eliminated so that no further automatic increases will be made to the number of shares reserved for issuance under the Directors’ Plan. In addition, the common stock authorized for issuance under the Directors’ Plan was reduced to 450,000. Options are granted at an exercise price not less than the fair market value of the stock on the date of grant and have a term not to exceed 10 years. Prior to 2016, initial stock option grants to new non-employee directors vested over a three-year period with 12/36 of the shares vesting after one year from the date of grant and 1/36 of the shares vesting monthly thereafter. Annual stock option grants vested one year from the date of the grant. Since 2016, new non-employee directors receive pro-rated stock option grants that vest on the same term as the annual stock option grants. As of December 31, 2019, approximately 0.1 million shares were reserved for future issuance under the Directors’ Plan. However, the Company no longer intends to issue grants from the Directors’ Plan in the future and instead plans to utilize the 2010 Plan to make grants to non-employee directors.

2000 Employee Stock Purchase Plan. In March 2000, the Board adopted the 2000 Employee Stock Purchase Plan (the “ESPP”). Employees are generally eligible to participate in the ESPP if they are customarily employed by the Company for more than 20 hours per week and more than 5 months in a calendar year and are not 5% stockholders of the Company. Under the ESPP, eligible employees may select a rate of payroll deduction up to 15% of their eligible compensation subject to certain maximum purchase limitations. The duration for each offering period is 24 months and is divided into four purchase periods of approximately six months in length. Offerings are concurrent. The purchase price of the shares under the offering is the lesser of 85% of the fair market value of the shares on the offering date or 85% of the fair market value of the shares on the purchase date. A two-year look-back feature in the ESPP causes the offering period to reset if the fair value of the Company’s common

stock on the first or last day of the purchase period is less than that on the original offering date. ESPP purchases by employees are settled with newly-issued common stock from the ESPP’s previously authorized and available pool of shares. In April 2017, the Company’s stockholders approved an amended and restated ESPP to provide for an increase in the number of shares of common stock reserved for issuance from 6,090,315 to 7,590,315.

The Company issued 0.2 million, 0.2 million, and 0.2 million shares under the ESPP, representing approximately $56.4 million, $46.8 million, and $38.3 million in employee contributions for the years ended December 31, 2019, 2018, and 2017, respectively. As of December 31, 2019, there were approximately 1.2 million shares reserved for future issuance under the ESPP.

Restricted Stock Units. Equity awards granted to employees and non-employee directors include a mix of stock options and RSUs. The RSUs to employees vest in one-fourth increments annually over a four-year period. The RSUs to existing non-employee directors vest one year from the date of grant or at the next Annual Shareholders Meeting, whichever comes first. New non-employee directors receive pro-rated RSU grants that vest on the same term as the annual RSU grants. The number of shares issued on the date the RSUs vest is net of the minimum statutory tax withholdings, which are paid in cash to the appropriate taxing authorities on behalf of the Company’s employees.

Stock Option Information

Option activity during fiscal 2019 under all the stock plans was as follows (in millions, except per share amounts):

									Stock Options Outstanding
									Number Outstanding						Weighted Average Exercise Price Per Share
Balance at December 31, 2018									6.2						$	200.79
Options granted									0.6						$	523.30
Options exercised									(1.3)						$	159.46
Options forfeited/expired									(0.1)						$	381.82
Balance at December 31, 2019									5.4						$	246.64

The aggregate intrinsic value of stock options exercised under the Company’s stock plans determined as of the date of option exercise was $512.0 million, $526.6 million, and $379.9 million during the years ended December 31, 2019, 2018, and 2017, respectively. Cash received from option exercises and employee stock purchase plans for the years ended December 31, 2019, 2018, and 2017, was $272.8 million, $236.6 million, and $415.5 million, respectively. The income tax benefit from stock options exercised was $109.7 million for the year ended December 31, 2019.

The following table summarizes significant ranges of outstanding and exercisable options as of December 31, 2019 (number of shares and aggregate intrinsic value in millions):

						Options Outstanding																																										Options Exercisable
Range of Exercise Prices						Number of Shares						Weighted Average Remaining Contractual Life						Weighted Average Exercise Price Per Share						Aggregate Intrinsic Value (1)						Number of Shares						Weighted Average Remaining Contractual Life						Weighted Average Exercise Price Per Share						Aggregate Intrinsic Value (1)
$86.88-$148.03						1.1						2.8						$	127.46											1.1												$	127.46
$150.50-$172.44						1.4						3.6						$	166.28											1.4												$	166.29
$172.76-$231.00						1.2						5.1						$	194.42											1.2												$	193.89
$231.11-$505.36						1.1						8.1						$	376.53											0.5												$	334.67
$508.19-$585.57						0.6						9.0						$	536.41											0.1												$	531.66
Total						5.4						5.3						$	246.64					$	1,844.4					4.3						4.4						$	195.76					$	1,702.4

(1)The aggregate intrinsic value represents the total pre-tax intrinsic value, based on the Company’s closing stock price of $591.15 at December 31, 2019, which would have been received by the option holders had all in-the-money option holders exercised their options as of that date.

As of December 31, 2019, a total of 5.2 million shares of stock options vested and expected to vest had a weighted-average remaining contractual life of 5.2 years, an aggregate intrinsic value of $1,833.1 million, and a weighted-average exercise price of $241.65.

Restricted Stock Units Information

RSU activity for the year ended December 31, 2019, was as follows (in millions, except per share amounts):

			Shares						Weighted Average Grant Date Fair Value
Unvested balance at December 31, 2018			2.0						$	295.70
Granted			0.8						541.36
Vested			(0.8)						258.87
Forfeited			(0.1)						382.52
Unvested balance at December 31, 2019			1.9						410.09

As of December 31, 2019, 1.7 million shares of RSUs were expected to vest with an aggregate intrinsic value of $1,032 million. The aggregate vesting date fair value of RSUs vested was $433.2 million, $334.3 million, and $144.2 million during the years ended December 31, 2019, 2018, and 2017, respectively.

Share-Based Compensation Expense

The following table summarizes share-based compensation expense (in millions):

			Years Ended December 31,
			2019						2018						2017
Cost of sales—products			$	46.6					$	36.4					$	28.1
Cost of sales—services			20.4						16.8						14.0
Total cost of sales			67.0						53.2						42.1
Selling, general and administrative			169.5						133.2						111.8
Research and development			101.4						76.2						56.0
Share-based compensation expense before income taxes			337.9						262.6						209.9
Income tax effect			70.2						54.3						49.2
Share-based compensation expense after income taxes			$	267.7					$	208.3					$	160.7

The Black-Scholes option pricing model is used to estimate the fair value of stock options granted under the Company’s share-based compensation plans and rights to acquire stock granted under the Company’s employee stock purchase plan. The weighted-average estimated fair values of stock options, the rights to acquire stock under the ESPP, and RSUs, as well as the weighted average assumptions used in calculating the fair values of stock options and rights to acquire stock under the ESPP that were granted during the years ended December 31, 2019, 2018, and 2017, were as follows:

			Years Ended December 31,
STOCK OPTION PLANS			2019						2018						2017
Risk-free interest rate			2.0		%				2.7		%				1.8		%
Expected term (years)			4.1						4.3						4.1
Volatility			30		%				33		%				25		%
Fair value at grant date			$	142.53					$	146.30					$	67.03
EMPLOYEE STOCK PURCHASE PLAN
Risk-free interest rate			2.1		%				2.1		%				1.2		%
Expected term (years)			1.2						1.3						1.2
Volatility			29		%				32		%				28		%
Fair value at grant date			$	148.99					$	135.84					$	79.77
RESTRICTED STOCK UNITS
Fair value at grant date			$	541.36					$	431.11					$	249.34

As share-based compensation expense recognized in the Consolidated Statements of Income during the years ended December 31, 2019, 2018, and 2017, is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures.

As of December 31, 2019, there was a total of $110.1 million, $493.6 million, and $31.4 million of total unrecognized compensation expense related to unvested stock options, restricted stock units, and employee stock purchases, respectively. The unrecognized compensation expense is expected to be recognized over a weighted-average period of 2.5 years for unvested stock options, 2.2 years for unvested restricted stock units, and 1.4 years for rights granted to acquire common stock under the ESPP.

NOTE 11. INCOME TAXES

Income before provision for income taxes for the years ended December 31, 2019, 2018, and 2017, consisted of the following (in millions):

			Years Ended December 31,
			2019						2018						2017
U.S.			$	1,053.7					$	852.7					$	774.7
Foreign			448.5						426.8						330.1
Total income before provision for income taxes			$	1,502.2					$	1,279.5					$	1,104.8

The provision for income taxes for the years ended December 31, 2019, 2018, and 2017, consisted of the following (in millions):

			Years Ended December 31,
			2019						2018						2017
Current
Federal			$	82.0					$	89.5					$	352.1
State			26.5						21.1						13.0
Foreign			18.0						9.9						8.7
			$	126.5					$	120.5					$	373.8
Deferred
Federal			$	8.5					$	(4.1)					$	62.8
State			3.2						(0.3)						(0.3)
Foreign			(17.8)						38.4						(2.4)
			$	(6.1)					$	34.0					$	60.1
Total income tax expense			$	120.4					$	154.5					$	433.9

Income tax expense differs from amounts computed by applying the statutory federal income rate of 21% for the years ended December 31, 2019, and 2018, and 35% for the year ended December 31, 2017, as a result of the following (in millions):

			Years Ended December 31,
			2019						2018						2017
Federal tax at statutory rate			$	315.5					$	268.7					$	386.7
Increase (reduction) in tax resulting from:
State taxes, net of federal benefits			29.7						20.8						16.0
Foreign rate differential			(56.2)						(44.7)						(115.7)
U.S. tax on foreign earnings			55.0						43.7						8.4
Research and development credit			(32.7)						(25.2)						(15.3)
Share-based compensation not benefited			13.5						9.9						10.8
Domestic production activities deduction			—						—						(7.9)
Reversal of unrecognized tax benefits			(8.4)						(5.2)						(62.4)
Tax Cuts and Jobs Act impact			—						0.5						317.8
Excess tax benefits related to share-based compensation arrangements			(146.5)						(116.2)						(102.8)
Deferred tax remeasurement due to Swiss Tax Reform			(51.3)						—						—
Other			1.8						2.2						(1.7)
Total income tax expense			$	120.4					$	154.5					$	433.9

Deferred income taxes reflect tax carry forwards and the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities are as follows (in millions):

			December 31,
			2019						2018
Deferred tax assets:
Share-based compensation expense			$	95.6					$	87.2
Expenses deducted in later years for tax purposes			42.0						29.1
Intangible assets			362.3						351.9
Research and other credits			56.1						40.1
Other			10.4						9.0
Gross deferred tax assets			$	566.4					$	517.3
Valuation allowance			(57.2)						(42.3)
Deferred tax assets			$	509.2					$	475.0
Deferred tax liabilities:
Fixed assets			$	(75.3)					$	(42.2)
Intangible assets			(8.3)						(7.5)
Other			—						(0.1)
Deferred tax liabilities			$	(83.6)					$	(49.8)
Net deferred tax assets			$	425.6					$	425.2

In December 2017, the 2017 Tax Act was enacted, which includes a number of changes in existing tax law impacting businesses, including a one-time deemed repatriation of cumulative undistributed foreign earnings and a permanent reduction in the U.S. federal statutory rate from 35% to 21%, effective on January 1, 2018. The Securities Exchange Commission (“SEC”) issued guidance for a measurement period of one year from the enactment date to finalize the accounting for effects of the 2017 Tax Act. The Company recorded an income tax expense of $317.8 million in its 2017 income tax provision related to the 2017 Tax Act, which included a provisional estimate of $270.2 million related to the one-time deemed repatriation toll charge (“Toll Tax”) and a provisional estimate of $47.6 million income tax expense due to the re-measurement of its net deferred tax assets at a reduced U.S. federal statutory rate of 21%. In December 2018, the Company completed its accounting for the effect of the 2017 Tax Act within the measurement period under the SEC guidance and reflected a net $0.5 million increase in the 2018 income tax expense.

The Company repatriated $1.6 billion of its cumulative undistributed foreign earnings back to the U.S. in June 2018 without any significant U.S. income tax consequences. The Company intends to repatriate earnings from its Swiss subsidiary as needed, since the U.S. and foreign tax implications of such repatriations are not expected to be significant. The Company will continue to indefinitely reinvest earnings from the rest of our foreign subsidiaries, which are not significant.

The Company’s tax holiday obtained in 2007 for business operations in Switzerland ended on December 31, 2017. The Company received a new tax ruling in Switzerland for new business operations. The new ruling is effective for years 2018 through 2022, which will be extended for the next five years thereafter to the extent certain terms and conditions continue to be met. The new ruling allows for a reduced cantonal tax rate based on various thresholds of investment, including the ownership, development, and use of the non-U.S. intellectual property rights and employment in such jurisdiction. The tax benefits from Swiss tax holidays for the years ended December 31, 2019, and 2018, were insignificant, while for the year ended December 31, 2017, was approximately $10.9 million, or $0.09 per diluted share.

In August 2019, Swiss tax reform was enacted, which resulted in a higher statutory rate for the Company's Swiss entity for years after 2019. The Company remeasured its Swiss deferred tax asset at the enacted tax rate and recorded an income tax benefit of $51.3 million in its 2019 tax provision.

As of December 31, 2019, and 2018, the Company had valuation allowances of $57.2 million and $42.3 million, respectively, primarily related to California deferred tax assets generated by California R&D credit forwards, which have no expiration period. The Company recorded a valuation allowance against its California deferred tax assets, as it is more likely than not these deferred tax assets will not be realized as a result of the computation of California taxes under the single sales factor.

The Company recorded a net increase of its gross unrecognized tax benefits of $17.9 million during the year ended December 31, 2019. The net increase was primarily due to increases related to 2019 uncertain tax positions, partially offset by the reversal of gross unrecognized tax benefits in connection with the expiration of certain statutes of limitation in various

jurisdictions and an audit conclusion. The Company had gross unrecognized tax benefits of approximately $96.7 million, $78.8 million, and $65.4 million as of December 31, 2019, 2018, and 2017, respectively, which, if recognized, would result in a reduction of the Company’s effective tax rate. The Company included interest expense accrued on unrecognized tax benefits as a component of its income tax expense. As of December 31, 2019, 2018, and 2017, gross interest related to unrecognized tax benefits accrued was $2.9 million, $2.6 million, and $1.8 million, respectively. A majority of the Company’s net unrecognized tax benefits and related interest is presented in other long-term liabilities on the Consolidated Balance Sheets.

A reconciliation of the beginning and ending amounts of gross unrecognized income tax benefits for the years ended December 31, 2019, 2018, and 2017, are as follows (in millions):

			Years Ended December 31,
			2019						2018						2017
Beginning balance			$	78.8					$	65.4					$	106.0
Increases related to tax positions taken during the current year			26.5						22.5						21.1
Increases related to tax positions taken during a prior year			1.2						—						—
Decreases related to tax positions taken during a prior year			—						(0.9)						(46.5)
Decreases related to settlements with tax authorities			(3.8)						—						(0.5)
Decreases related to expiration of statute of limitations			(6.0)						(8.2)						(14.7)
Ending balance			$	96.7					$	78.8					$	65.4

The Company files federal, state, and foreign income tax returns in many U.S. and OUS jurisdictions. Years before 2016 are closed for the significant jurisdictions. Certain of the Company’s unrecognized tax benefits could change due to activities of various tax authorities, including potential assessment of additional tax, possible settlement of audits, or through normal expiration of various statutes of limitations, which could affect the Company’s effective tax rate in the period in which they change. Due to the uncertainty related to the timing and potential outcome of audits, the Company cannot estimate the range of reasonably possible change in unrecognized tax benefits that may occur in the next 12 months.

The Company is subject to the examination of its income tax returns by the Internal Revenue Service and other tax authorities. The outcome of these audits cannot be predicted with certainty. The Company’s management regularly assesses the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of the Company’s provision for income taxes. If any issues addressed in the Company’s tax audits are resolved in a manner not consistent with management’s expectations, the Company could be required to adjust its provision for income taxes in the period such resolution occurs.

In July 2015, a U.S. Tax Court opinion (the “2015 Opinion”) was issued involving an independent third party related to intercompany charges for share-based compensation. Based on the findings of the U.S. Tax Court, the Company was required to, and did, refund to its foreign subsidiaries the share-based compensation element of certain intercompany charges made in prior periods. Starting in 2015, direct share-based compensation has been excluded from intercompany charges. In June 2019, the Ninth Circuit Court of Appeals (the "Ninth Circuit") reversed the 2015 Opinion (the “Ninth Circuit Opinion”). Subsequently, a re-hearing of the case was requested, but the rehearing request was denied by the Ninth Circuit on November 12, 2019. However, a petition for appeal to the U.S. Supreme Court can be filed within 90 days of the denial. Since the Ninth Circuit Opinion potentially is subject to further judicial review, the Company continues to treat its share-based compensation expense in accordance with the 2015 Opinion and continues to recognize the related tax benefits in its financial statements based upon its evaluation of the position in light of the present facts. In the event of a final opinion that reverses the 2015 Opinion, there may be an adverse impact to the Company’s income tax expense and effective tax rate.

NOTE 12. NET INCOME PER SHARE

The following table presents the computation of basic and diluted net income per share attributable to Intuitive Surgical, Inc. (in millions, except per share amounts):

			Years Ended December 31,
			2019						2018						2017
Numerator:
Net income attributable to Intuitive Surgical, Inc.			$	1,379.3					$	1,127.9					$	670.9
Denominator:
Weighted average shares outstanding used in basic calculation			115.4						113.7						111.7
Add: dilutive effect of potential common shares			4.1						5.1						4.6
Weighted average shares outstanding used in diluted calculation			119.5						118.8						116.3
Net income per share attributable to Intuitive Surgical, Inc.:
Basic			$	11.95					$	9.92					$	6.01
Diluted			$	11.54					$	9.49					$	5.77

Share-based compensation awards of approximately 0.7 million, 0.4 million, and 0.2 million shares for the years ended December 31, 2019, 2018, and 2017, respectively, were outstanding but were not included in the computation of diluted net income per share attributable to Intuitive Surgical, Inc. common stockholders, because the effect of including such shares would have been anti-dilutive in the periods presented.

NOTE 13. EMPLOYEE BENEFIT PLANS

The Company sponsors various retirement plans for its eligible U.S. and non-U.S. employees. For employees in the U.S., the Company maintains the Intuitive Surgical, Inc. 401(k) Plan (the “Plan”). As allowed under Section 401(k) of the Internal Revenue Code, the Plan provides tax-deferred salary contributions for eligible U.S. employees. The Plan allows employees to contribute up to 100% of their annual compensation to the Plan on a pre-tax and after-tax basis. Employee contributions are limited to a maximum annual amount as set periodically by the Internal Revenue Code. The Company matches 200% of employee contributions up to $1,500 per calendar year per person. All matching employer contributions vest immediately.

SELECTED QUARTERLY DATA

(UNAUDITED, IN MILLIONS, EXCEPT PER SHARE AMOUNTS)

			Three Months Ended
			December 31, 2019						September 30, 2019						June 30, 2019						March 31, 2019
Revenue			$	1,277.7					$	1,128.2					$	1,098.9					$	973.7
Gross profit			$	896.0					$	785.6					$	759.0					$	669.6
Net income attributable to Intuitive Surgical, Inc. (1)(2)(3)			$	357.7					$	396.8					$	318.3					$	306.5
Net income attributable to Intuitive Surgical, Inc. per share:
Basic			$	3.09					$	3.44					$	2.76					$	2.67
Diluted			$	2.99					$	3.33					$	2.67					$	2.56
(1) Includes discrete tax benefits as follows:
Excess tax benefits related to share-based compensation arrangements			$	33.7					$	28.8					$	11.3					$	72.7
One-time tax benefit related to the enactment of Swiss tax reform			$	—					$	51.3					$	—					$	—
(2) Includes acquisition-related benefits (charges)			$	(3.1)					$	3.0					$	(4.1)					$	(3.0)
(3) Includes charitable foundation contribution expense			$	(5.0)					$	—					$	—					$	—
			Three Months Ended
			December 31, 2018						September 30, 2018						June 30, 2018						March 31, 2018
Revenue			$	1,046.5					$	920.9					$	909.3					$	847.5
Gross profit			$	735.7					$	642.3					$	632.3					$	593.8
Net income attributable to Intuitive Surgical, Inc. (1)(2)(3)			$	292.5					$	292.5					$	255.3					$	287.6
Net income attributable to Intuitive Surgical, Inc. per share:
Basic			$	2.56					$	2.57					$	2.25					$	2.55
Diluted			$	2.45					$	2.45					$	2.15					$	2.44
(1) Includes discrete tax benefits as follows:
Excess tax benefits related to share-based compensation arrangements			$	15.8					$	24.1					$	21.6					$	54.7
Certain one-time tax benefits			$	2.5					$	4.6					$	—					$	—
(2) Includes pre-tax litigation benefits (charges)			$	—					$	1.8					$	(42.5)					$	(4.5)
(3) Includes charitable foundation contribution expense			$	(25.2)					$	—					$	—					$	—

SCHEDULE II

VALUATION AND QUALIFYING ACCOUNTS

(IN MILLIONS)

			Balance at Beginning of Year						Additions						Deductions (1)						Balance at End of Year
Allowance for doubtful accounts, loan credit losses, and sales returns
Year ended December 31, 2019			$	20.4					$	46.9					$	(45.9)					$	21.4
Year ended December 31, 2018			$	14.6					$	46.0					$	(40.2)					$	20.4
Year ended December 31, 2017			$	10.8					$	36.1					$	(32.3)					$	14.6

(1)Primarily represents products returned.