filings.toolsItem 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index To Consolidated Financial Statements
All other schedules have been omitted, because they are not applicable or the required information is shown in the Consolidated Financial Statements or the Notes thereto.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Intuitive Surgical, Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Intuitive Surgical, Inc. and its subsidiaries (the “Company”) as of December 31, 2021 and 2020, 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, 2021, including the related notes and financial statement schedule listed in the index appearing under Item 15(a)(2) (collectively referred to as the “consolidated financial statements”). We also have audited the Company’s internal control over financial reporting as of December 31, 2021, 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, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021 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, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
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.
Determination of Standalone Selling Prices Related to System Sale Arrangements
As described in Notes 2 and 5 to the consolidated financial statements, the Company recognized $1,693.4 million of systems revenue, during the year ended December 31, 2021. 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. 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 management 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 principal considerations for our determination that performing procedures relating to the determination of standalone selling prices related to system sale arrangements is a critical audit matter are the significant judgment by management when determining estimates of standalone selling prices, which in turn led to a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating audit evidence relating to the estimates of standalone selling prices used to allocate the transaction price of an arrangement to each distinct performance obligation.
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 over the revenue recognition process, including controls over the determination of the estimates of standalone selling prices. These procedures also included, among others, (i) testing management’s process for determining the estimates of standalone selling prices; (ii) evaluating the appropriateness of the overall methodology used by management to develop the estimates, including the appropriateness of the data inputs related to the products and services, geographies, and type of customer used in the methodology; (iii) testing the completeness and accuracy of the data used in the methodology; and (iv) testing the accuracy of management’s calculations of estimated selling prices.
/s/ PricewaterhouseCoopers LLP
San Jose, California
February 3, 2022
We have served as the Company’s auditor since 2014.
INTUITIVE SURGICAL, INC.
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT PAR VALUE AMOUNTS)
| December 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 1,290.9 | $ | 1,622.6 | |||||||
| Short-term investments | 2,913.1 | 3,488.8 | |||||||||
| Accounts receivable, net of allowances of $20.2 and $17.7 as of December 31, 2021, and 2020, respectively | 782.7 | 645.5 | |||||||||
| Inventory | 587.1 | 601.5 | |||||||||
| Prepaids and other current assets | 271.1 | 267.5 | |||||||||
| Total current assets | 5,844.9 | 6,625.9 | |||||||||
| Property, plant, and equipment, net | 1,876.4 | 1,577.3 | |||||||||
| Long-term investments | 4,415.5 | 1,757.7 | |||||||||
| Deferred tax assets | 441.4 | 367.7 | |||||||||
| Intangible and other assets, net | 633.2 | 503.6 | |||||||||
| Goodwill | 343.6 | 336.7 | |||||||||
| Total assets | $ | 13,555.0 | $ | 11,168.9 | |||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | 121.2 | $ | 81.6 | |||||||
| Accrued compensation and employee benefits | 350.1 | 235.0 | |||||||||
| Deferred revenue | 377.2 | 350.3 | |||||||||
| Other accrued liabilities | 301.3 | 298.3 | |||||||||
| Total current liabilities | 1,149.8 | 965.2 | |||||||||
| Other long-term liabilities | 453.7 | 444.6 | |||||||||
| Total liabilities | 1,603.5 | 1,409.8 | |||||||||
| 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, 2021, and 2020 | — | — | |||||||||
| Common stock, 600.0 shares authorized, $0.001 par value, 357.7 shares and 353.1 shares issued and outstanding as of December 31, 2021, and 2020, respectively | 0.4 | 0.4 | |||||||||
| Additional paid-in capital | 7,164.0 | 6,444.9 | |||||||||
| Retained earnings | 4,760.9 | 3,261.3 | |||||||||
| Accumulated other comprehensive income (loss) | (24.2) | 24.9 | |||||||||
| Total Intuitive Surgical, Inc. stockholders’ equity | 11,901.1 | 9,731.5 | |||||||||
| Noncontrolling interest in joint venture | 50.4 | 27.6 | |||||||||
| Total stockholders’ equity | 11,951.5 | 9,759.1 | |||||||||
| Total liabilities and stockholders’ equity | $ | 13,555.0 | $ | 11,168.9 |
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, | |||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||
| Revenue: | |||||||||||||||||
| Product | $ | 4,793.9 | $ | 3,634.6 | $ | 3,754.3 | |||||||||||
| Service | 916.2 | 723.8 | 724.2 | ||||||||||||||
| Total revenue | 5,710.1 | 4,358.4 | 4,478.5 | ||||||||||||||
| Cost of revenue: | |||||||||||||||||
| Product | 1,464.1 | 1,230.3 | 1,119.1 | ||||||||||||||
| Service | 287.5 | 266.9 | 249.2 | ||||||||||||||
| Total cost of revenue | 1,751.6 | 1,497.2 | 1,368.3 | ||||||||||||||
| Gross profit | 3,958.5 | 2,861.2 | 3,110.2 | ||||||||||||||
| Operating expenses: | |||||||||||||||||
| Selling, general and administrative | 1,466.5 | 1,216.3 | 1,178.4 | ||||||||||||||
| Research and development | 671.0 | 595.1 | 557.3 | ||||||||||||||
| Total operating expenses | 2,137.5 | 1,811.4 | 1,735.7 | ||||||||||||||
| Income from operations | 1,821.0 | 1,049.8 | 1,374.5 | ||||||||||||||
| Interest and other income, net | 69.3 | 157.2 | 127.7 | ||||||||||||||
| Income before taxes | 1,890.3 | 1,207.0 | 1,502.2 | ||||||||||||||
| Income tax expense | 162.2 | 140.2 | 120.4 | ||||||||||||||
| Net income | 1,728.1 | 1,066.8 | 1,381.8 | ||||||||||||||
| Less: net income attributable to noncontrolling interest in joint venture | 23.5 | 6.2 | 2.5 | ||||||||||||||
| Net income attributable to Intuitive Surgical, Inc. | $ | 1,704.6 | $ | 1,060.6 | $ | 1,379.3 | |||||||||||
| Net income per share attributable to Intuitive Surgical, Inc.: | |||||||||||||||||
| Basic | $ | 4.79 | $ | 3.02 | $ | 3.98 | |||||||||||
| Diluted | $ | 4.66 | $ | 2.94 | $ | 3.85 | |||||||||||
| Shares used in computing net income per share attributable to Intuitive Surgical, Inc.: | |||||||||||||||||
| Basic | 356.1 | 351.1 | 346.2 | ||||||||||||||
| Diluted | 365.8 | 361.0 | 358.4 | ||||||||||||||
| Total comprehensive income attributable to Intuitive Surgical, Inc. | $ | 1,655.5 | $ | 1,073.1 | $ | 1,405.0 |
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, | |||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||
| Net income attributable to Intuitive Surgical, Inc. | $ | 1,704.6 | $ | 1,060.6 | $ | 1,379.3 | |||||||||||
| Other comprehensive income (loss): | |||||||||||||||||
| Change in foreign currency translation gains (losses) | (12.6) | 4.7 | 0.3 | ||||||||||||||
| Available-for-sale investments (net of tax): | |||||||||||||||||
| Change in unrealized gains (losses) | (45.5) | 13.8 | 30.7 | ||||||||||||||
| Less: Reclassification adjustment for (gains) losses on investments | — | (4.7) | (0.5) | ||||||||||||||
| Net change | (45.5) | 9.1 | 30.2 | ||||||||||||||
| Derivative instruments (net of tax): | |||||||||||||||||
| Change in unrealized gains (losses) | 12.3 | (0.8) | 5.8 | ||||||||||||||
| Less: Reclassification adjustment for (gains) losses on derivative instruments | (4.9) | (2.8) | (5.3) | ||||||||||||||
| Net change | 7.4 | (3.6) | 0.5 | ||||||||||||||
| Employee benefit plans (net of tax): | |||||||||||||||||
| Change in unrealized gains (losses) | 0.1 | 1.0 | (5.9) | ||||||||||||||
| Less: Reclassification adjustment for losses on employee benefit plans | 1.5 | 1.3 | 0.6 | ||||||||||||||
| Net change | 1.6 | 2.3 | (5.3) | ||||||||||||||
| Other comprehensive income (loss) | (49.1) | 12.5 | 25.7 | ||||||||||||||
| Total comprehensive income attributable to Intuitive Surgical, Inc. | $ | 1,655.5 | $ | 1,073.1 | $ | 1,405.0 |
The accompanying notes are an integral part of these Consolidated Financial Statements.
INTUITIVE SURGICAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(IN MILIONS)
| Common Stock | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive (Loss)/Income | Total Intuitive Surgical, Inc. Stockholders’ Equity | Noncontrolling Interest in Joint Venture | Total Stockholders’ Equity | |||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||||
| Balances as of December 31, 2018 | 343.4 | $ | 0.3 | $ | 5,170.1 | $ | 1,521.7 | $ | (13.3) | $ | 6,678.8 | $ | 8.7 | $ | 6,687.5 | ||||||||||||||||||||||||||||||||
| Issuance of common stock through employee stock plans | 7.1 | 272.8 | 272.8 | 272.8 | |||||||||||||||||||||||||||||||||||||||||||
| Shares withheld related to net share settlement of equity awards | (0.9) | (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 | (1.7) | (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 as of December 31, 2019 | 347.9 | $ | 0.3 | $ | 5,756.6 | $ | 2,494.5 | $ | 12.4 | $ | 8,263.8 | $ | 20.9 | $ | 8,284.7 | ||||||||||||||||||||||||||||||||
| Adoption of new accounting standard (1) | (0.1) | (0.1) | (0.1) | ||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock through employee stock plans | 6.8 | 0.1 | 308.7 | 308.8 | 308.8 | ||||||||||||||||||||||||||||||||||||||||||
| Shares withheld related to net share settlement of equity awards | (0.9) | (7.9) | (167.3) | (175.2) | (175.2) | ||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation expense related to employee stock plans | 395.4 | 395.4 | 395.4 | ||||||||||||||||||||||||||||||||||||||||||||
| Repurchase and retirement of common stock | (0.7) | (7.9) | (126.4) | (134.3) | (134.3) | ||||||||||||||||||||||||||||||||||||||||||
| Net income attributable to Intuitive Surgical, Inc. | 1,060.6 | 1,060.6 | 1,060.6 | ||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | 12.5 | 12.5 | 0.5 | 13.0 | |||||||||||||||||||||||||||||||||||||||||||
| Net income attributable to noncontrolling interest in joint venture | — | 6.2 | 6.2 | ||||||||||||||||||||||||||||||||||||||||||||
| Balances as of December 31, 2020 | 353.1 | $ | 0.4 | $ | 6,444.9 | $ | 3,261.3 | $ | 24.9 | $ | 9,731.5 | $ | 27.6 | $ | 9,759.1 | ||||||||||||||||||||||||||||||||
| Issuance of common stock through employee stock plans | 5.4 | 276.5 | 276.5 | 276.5 | |||||||||||||||||||||||||||||||||||||||||||
| Shares withheld related to net share settlement of equity awards | (0.8) | (6.6) | (205.0) | (211.6) | (211.6) | ||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation expense related to employee stock plans | 449.2 | 449.2 | 449.2 | ||||||||||||||||||||||||||||||||||||||||||||
| Net income attributable to Intuitive Surgical, Inc. | 1,704.6 | 1,704.6 | 1,704.6 | ||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | (49.1) | (49.1) | (0.7) | (49.8) | |||||||||||||||||||||||||||||||||||||||||||
| Net income attributable to noncontrolling interest in joint venture | — | 23.5 | 23.5 | ||||||||||||||||||||||||||||||||||||||||||||
| Balances as of December 31, 2021 | 357.7 | $ | 0.4 | $ | 7,164.0 | $ | 4,760.9 | $ | (24.2) | $ | 11,901.1 | $ | 50.4 | $ | 11,951.5 | ||||||||||||||||||||||||||||||||
| (1) Represents the adjustment related to the adoption of Accounting Standards Update (“ASU”) 2016-13, Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. |
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, | |||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||
| Operating activities: | |||||||||||||||||
| Net income | $ | 1,728.1 | $ | 1,066.8 | $ | 1,381.8 | |||||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||||||||
| Depreciation and loss on disposal of property, plant, and equipment, net | 282.8 | 226.4 | 160.0 | ||||||||||||||
| Amortization of intangible assets | 27.4 | 49.8 | 43.0 | ||||||||||||||
| Loss (gain) on investments, accretion of discounts, and amortization of premiums on investments, net | 10.6 | (55.1) | (6.0) | ||||||||||||||
| Deferred income taxes | (62.6) | 57.6 | (8.0) | ||||||||||||||
| Share-based compensation expense | 449.2 | 395.4 | 335.8 | ||||||||||||||
| Amortization of contract acquisition assets | 22.0 | 17.1 | 13.1 | ||||||||||||||
| Changes in operating assets and liabilities, net of effects of acquisitions: | |||||||||||||||||
| Accounts receivable | (142.3) | 5.7 | 38.8 | ||||||||||||||
| Inventory | (256.0) | (170.1) | (360.5) | ||||||||||||||
| Prepaids and other assets | (204.9) | (111.8) | (116.9) | ||||||||||||||
| Accounts payable | 36.0 | (32.3) | 12.3 | ||||||||||||||
| Accrued compensation and employee benefits | 115.1 | (16.6) | 57.4 | ||||||||||||||
| Deferred revenue | 32.6 | 15.0 | 35.5 | ||||||||||||||
| Other liabilities | 51.4 | 36.9 | 11.9 | ||||||||||||||
| Net cash provided by operating activities | 2,089.4 | 1,484.8 | 1,598.2 | ||||||||||||||
| Investing activities: | |||||||||||||||||
| Purchase of investments | (6,452.0) | (4,292.9) | (3,346.2) | ||||||||||||||
| Proceeds from sales of investments | 84.9 | 800.7 | 107.3 | ||||||||||||||
| Proceeds from maturities of investments | 4,267.8 | 2,930.8 | 2,569.8 | ||||||||||||||
| Purchase of property, plant, and equipment and intellectual property | (353.5) | (341.5) | (425.6) | ||||||||||||||
| Acquisition of businesses, net of cash | (8.7) | (37.7) | (59.7) | ||||||||||||||
| Net cash used in investing activities | (2,461.5) | (940.6) | (1,154.4) | ||||||||||||||
| Financing activities: | |||||||||||||||||
| Proceeds from issuance of common stock relating to employee stock plans | 276.5 | 308.8 | 272.8 | ||||||||||||||
| Taxes paid related to net share settlement of equity awards | (211.6) | (175.2) | (159.1) | ||||||||||||||
| Repurchase of common stock | — | (134.3) | (269.5) | ||||||||||||||
| Capital contribution from noncontrolling interest | — | — | 10.0 | ||||||||||||||
| Payment of deferred purchase consideration | (21.9) | (85.0) | (22.6) | ||||||||||||||
| Net cash provided by (used in) financing activities | 43.0 | (85.7) | (168.4) | ||||||||||||||
| Effect of exchange rate changes on cash, cash equivalents, and restricted cash | (3.4) | (2.6) | (2.2) | ||||||||||||||
| Net increase (decrease) in cash, cash equivalents, and restricted cash | (332.5) | 455.9 | 273.2 | ||||||||||||||
| Cash, cash equivalents, and restricted cash, beginning of year | 1,638.5 | 1,182.6 | 909.4 | ||||||||||||||
| Cash, cash equivalents, and restricted cash, end of year | $ | 1,306.0 | $ | 1,638.5 | $ | 1,182.6 |
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 Ion® 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, 2021, 2020, and 2019.
Common Stock Split
Shares issued pursuant to the three-for-one stock split (the "Stock Split") of the Company's issued and outstanding common stock, par value $0.001 per share, were distributed on October 4, 2021, to stockholders of record as of September 27, 2021. All share and per-share information presented in the Consolidated Financial Statements have been retroactively adjusted to reflect the Stock Split.
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, complex, 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 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 primarily derived from billings related to revenue arrangements with 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 both December 31, 2021, and 2020, 67% of accounts receivable were from domestic customers.
During the years ended December 31, 2021, 2020, and 2019, domestic revenue accounted for 67%, 68%, and 70% of total revenue, respectively, while outside of the U.S. revenue accounted for 33%, 32%, and 30%, respectively, of total revenue for each of the years then ended.
The Company is subject to additional risks and uncertainties due to the COVID-19 pandemic. The extent of the impact on the Company’s business is highly uncertain and difficult to predict. In certain regions, the Company’s customers continue to divert resources to treat COVID-19 patients and defer some elective surgical procedures, both of which may impact the Company’s customers’ ability to meet their obligations, including to the Company. Furthermore, economies worldwide have been negatively impacted by the COVID-19 pandemic, and it is possible that the impact could cause an extended local and/or global economic recession. Such economic disruption could have a material adverse effect on the Company’s business as
hospitals curtail and reduce capital and overall spending. Policymakers around the globe have responded with fiscal policy actions to support the healthcare industry and their economies. However, the magnitude and overall effectiveness of these actions remains uncertain.
The severity of the impact of the COVID-19 pandemic on the Company’s business will depend on a number of factors, including, but not limited to, the duration and severity of the pandemic and the extent and severity of the impact on the Company’s customers, all of which are uncertain and cannot be predicted. The Company’s future results of operations and liquidity could be materially adversely affected by delays in payments of outstanding receivables, supply chain disruptions, including shortages and inflationary pressure, uncertain or reduced demand, and the impact of any initiatives or programs that the Company may undertake to address financial and operational challenges faced by its customers.
In particular, the Company has experienced increased difficulties in obtaining a sufficient supply of component materials used in its products, including those in the semiconductor market, as global supply has become significantly constrained due to increased demand in semiconductors and other materials. Additionally, prices of such materials have increased due to the increased demand and supply shortage. The Company is engaged in activities to seek to mitigate supply disruptions by, for example, increasing its communications with its suppliers and modifying its purchase order coverage and inventory levels.
However, the global supply chain shortages, including those in the semiconductor market, are likely to remain a challenge for the foreseeable future. The Company has also experienced challenges in logistics, as certain shipping routes have been impacted by port closures. Such global shortages in important components and logistics challenges have resulted in, and will continue to cause, inflationary cost pressure in the Company’s supply chain. To date, these challenges have not materially impacted the Company’s results of operations or ability to deliver product and services to its customers. However, if shortages in important supply chain materials in the semiconductor or other markets continue, the Company could fail to meet product demand, which would adversely impact its business, financial condition, results of operations, or cash flows.
Increased labor shortages globally, including staff burnout and attrition, could also impact the Company’s ability to hire and retain personnel critical to its manufacturing, logistics, and commercial operations. The Company is also highly dependent on the principal members of its management and scientific staff. Attracting and retaining qualified personnel is critical to its success, and competition for them has become more intense. The loss of critical members of the Company’s team, or its inability to attract and retain qualified personnel, could significantly harm its operations, business, and ability to compete. In addition, hospitals are also experiencing staffing shortages and supply chain issues that could impact their ability to provide patient care. As of the date of issuance of these Financial Statements, the extent to which the COVID-19 pandemic may materially adversely affect the Company’s financial condition, liquidity, or results of operations is uncertain.
Customer Relief Program
During the second quarter of 2020, the Company introduced a series of programs to provide financial relief to customers (the “Customer Relief Program”). As part of the Customer Relief Program, the Company provided its customers service fee credits, extended payment terms, and deferred payments related to Intuitive System Leasing arrangements. The Customer Relief Program ended at the end of the third quarter of 2020. There was no similar customer relief program offered in 2021.
Service fee credits. As part of the Customer Relief Program, the Company provided service fee credits to customers based on the reduction in the utilization of their systems during the second and third quarters of 2020 relative to a pre-COVID-19 level baseline. The Company reflected the service fee credits as a reduction of service revenue and accounts receivable in the quarter they were earned by its customers. The service fee credit program resulted in an $80 million decrease in service revenue in 2020.
Short-term payment relief. In response to the COVID-19 pandemic, the Company introduced a payment deferral program to provide financial relief to qualified customers. This relief extended payment terms up to 180 days for qualified and creditworthy customers.
The Company also introduced a lease payment deferral program in which creditworthy customers with active Intuitive system leasing arrangements could elect to defer lease payments up to five months that are payable at the end of the lease by extending the lease term. This program did not result in substantial increases in the rights of the lessor or the obligations of the lessee, and the Company elected to apply the relief provided by the Financial Accounting Standards Board (“FASB”) FAQ on accounting for COVID-19 and market volatility by not applying the lease modification guidance in ASC 842 to the lease arrangements affected by the deferrals and lease extensions.
For operating lease arrangements where the lease term was extended by adding the deferred period to the end of the contract, the Company recalculated the straight-line revenue based on the revised terms, consistent with the treatment accepted by the FASB FAQ on accounting for COVID-19. For its sales-type lease arrangements impacted, the Company accounted for the deferral in the timing of lease payments as if there were no changes in the lease contract, consistent with the treatment accepted by the FASB FAQ on accounting for COVID-19. While the short-term payment relief offered did not have a material impact on the results of operations, the Company deferred $15 million of lease billings and extended payment terms associated
with $181 million of billings during the program, of which $19 million remained outstanding as of December 31, 2020. All of the trade receivables with extended payment terms have been collected as of December 31, 2021.
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, 2021, the Company had $17.9 million of restricted cash associated with its insurance programs. As of December 31, 2020, the Company had $18.0 million of restricted cash associated with its insurance programs. 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.
All of the Company’s investments are subject to a periodic impairment review. Available-for-sale investments in an unrealized loss position are written down to fair value through a charge to other income, net, if the Company intends to sell the security or it is more likely than not the Company will be required to sell the security before recovery of its amortized cost basis. The Company evaluates the remaining securities to determine what amount of the excess, if any, is caused by expected credit losses. Factors considered in determining whether a credit-related loss exists include the financial condition and near-term prospects of the investee, the extent of the loss related to credit of the issuer, and the expected cash flows from the security. No significant charges were recorded during the years ended December 31, 2021, 2020, and 2019.
Equity investments. The Company holds equity investments with readily determinable fair values and equity investments without readily determinable fair values. The Company generally recognizes equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer.
Fair Value Measurements
The Company measures the fair value of money market funds, certain U.S. treasury securities, and equity investments with readily determinable value 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, municipal notes, and equity investments without readily determinable value. 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. Additionally, the cost basis of the Company’s inventory does not include any unallocated fixed overhead costs associated with abnormally low utilization of its factories.
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, 2021, 2020, and 2019, was $280 million, $221 million, and $157 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. Once the software is ready for its intended use, amounts capitalized are amortized over an estimated useful life of up to 5 years, generally on a straight-line basis.
Implementation Costs in a Cloud Computing Arrangement
The Company capitalizes qualified implementation costs incurred in a hosting arrangement that is a service contract for which it is the customer in accordance with the requirements for capitalizing costs incurred to develop internal-use software. These capitalized implementation costs are recorded within intangible and other assets, net, and are generally amortized over the fixed, non-cancellable term of the associated hosting arrangement 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 the assets acquired, liabilities assumed, and any noncontrolling interest in the acquiree using acquisition-date fair values. 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 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 2 to 9 years.
Impairment of Long-lived Assets
The Company evaluates long-lived assets, which include finite-lived 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, and 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 at a point in time. 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 in the following manner:
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 could occur at the time of delivery, depending on the customer arrangement. The Company generally allows its customers in the normal course of business to return unused products for a limited period of time subsequent to the 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 can 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. The assigned value of the traded-in units is 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 system 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 $71.8 million and $53.1 million as of December 31, 2021, and 2020, respectively. The Company did not incur any impairment losses during the periods presented.
Intuitive System Leasing
The Company enters into lease arrangements with certain qualified customers. Leases have terms that generally range from 24 to 84 months and are usually collateralized by a security interest in the underlying assets. The Company also leases systems to certain qualified customers under usage-based arrangements that have terms up to 84 months. For these usage-based lease arrangements, the lease fee is generally billed monthly in arrears based on a contractual per-use fee, and usage is generally defined as the number of procedures performed with the system.
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. For some lease arrangements, 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. Certain lease arrangements may also include upgrade rights that allow customers to upgrade the leased system to newer technology at some point during the lease term. Generally, these upgrade rights do not specify the terms, including the price or structure of the future upgrade transactions, as those terms are negotiated based on the circumstances at the time of the upgrade, including the then-fair value of the system as well as other factors.
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 and is presented as product revenue. Revenue related to lease elements from usage-based arrangements is recognized as the customers utilize the systems 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, 2021. 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 does not have insight to the inputs necessary to calculate the implicit rate of the leases. 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.
Credit Losses
Trade accounts receivable. 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, age of the accounts receivable balances, and current economic conditions that may affect a customer’s ability to pay. For the years ended December 31, 2021, and 2020, bad debt expense was not material.
Net investment in sales-type leases. The Company enters into sales-type leases with certain qualified customers to purchase its systems. Sales-type leases have terms that generally range from 24 to 84 months and are usually collateralized by a security interest in the underlying assets. The allowance for loan loss is based on the Company’s assessment of the current expected lifetime loss on lease receivables. The Company regularly reviews the allowance by considering factors such as historical experience, credit quality, age of the lease receivable balances, and current economic conditions that may affect a customer’s ability to pay. Lease receivables are considered past due 90 days after invoice.
The Company manages the credit risk of the net investment in sales-type leases using a number of factors, including, but not limited to, the following: size of operations; profitability, liquidity, and debt ratios; payment history; and past due amounts. The Company also uses credit scores obtained from external providers as a key indicator for the purposes of determining credit quality. The following table summarizes the amortized cost basis by year of origination and by credit quality for the net investment in sales-type leases as of December 31, 2021 (in millions):
| 2021 | 2020 | 2019 | 2018 | 2017 | Prior | Net Investment | ||||||||||||||||||||||||||||||||||||||
| Credit Rating: | ||||||||||||||||||||||||||||||||||||||||||||
| High | $ | 101.7 | $ | 51.0 | $ | 18.8 | $ | 7.0 | $ | 1.7 | $ | — | $ | 180.2 | ||||||||||||||||||||||||||||||
| Moderate | 109.3 | 62.6 | 18.8 | 7.0 | 2.8 | 0.6 | 201.1 | |||||||||||||||||||||||||||||||||||||
| Low | 8.1 | 1.6 | 1.3 | 0.1 | — | 0.2 | 11.3 | |||||||||||||||||||||||||||||||||||||
| Total | $ | 219.1 | $ | 115.2 | $ | 38.9 | $ | 14.1 | $ | 4.5 | $ | 0.8 | $ | 392.6 | ||||||||||||||||||||||||||||||
For the year ended December 31, 2021, and 2020, credit losses related to the net investment in sales-type leases were not material.
The Company’s exposure to credit losses may increase if its customers are adversely affected by changes in healthcare laws, procedure coverage, and reimbursement, economic pressures or uncertainty associated with local or global economic recessions, disruption associated with the current COVID-19 pandemic, or other customer-specific factors. Although the Company has historically not experienced significant credit losses, it is possible that there could be a material adverse impact from potential adjustments of the carrying amount of trade and lease receivables as hospital cash flows are impacted by their response to the COVID-19 pandemic.
Available-for-sale debt securities. The Company’s investment portfolio at any point in time contains investments in U.S. treasury and U.S. government agency securities, taxable and tax-exempt municipal notes, corporate notes and bonds, commercial paper, non-U.S. government agency securities, cash deposits, and money market funds. The Company segments its portfolio based on the underlying risk profiles of the securities and have a zero loss expectation for U.S. treasury and U.S. government agency securities. The Company regularly reviews the securities in an unrealized loss position and evaluates the current expected credit loss by considering factors such as historical experience, market data, issuer-specific factors, and current economic conditions. For the years ended December 31, 2021 and 2020, credit losses related to available-for-sale debt securities were not material.
Allowance for Sales Returns
The allowance for sales returns is based on the Company’s estimates of potential future returns of certain products 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.
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. The Black-Scholes-Merton option-pricing model is used to estimate the fair value of
stock options granted and utilizes the following inputs: (1) closing quoted price of our common stock on the date of grant; (2) expected term; (3) expected volatility; and (4) risk-free interest rate.
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 10. 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 includes interest and penalty on unrecognized tax benefits as a component of its income tax expense.
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. The chief operating decision maker regularly reviews the operating results of the Company on a consolidated basis as part of making decisions for allocating resources and evaluating performance. As of December 31, 2021, and 2020, 84% and 83% 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
Certain Leases with Variable Lease Payments
In July 2021, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2021-05, Lessors — Certain Leases with Variable Lease Payments, which amends the lessor lease classification guidance in ASC 842 for leases that include any amount of variable lease payments that are not based on an index or rate. The Company has early adopted this ASU as of July 1, 2021, on a prospective basis. The standard had no impact on the Company's consolidated financial statements and related disclosures.
Recent Accounting Pronouncements
Business Combinations
In October 2021, the FASB issued ASU No. 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers (“ASU 2021-08”), which creates an exception to the general recognition and measurement principle in ASC 805 by requiring companies to apply ASC 606 to recognize and measure
contract assets and contract liabilities from contracts with customers acquired in a business combination. The guidance additionally clarifies that companies should apply the definition of a performance obligation in ASC 606 when recognizing contract liabilities assumed in a business combination. The Company will early adopt ASU 2021-08 as of January 1, 2022 on a prospective basis. The impact of the adoption of ASU 2021-08 cannot currently be determined, as it is dependent on future business combinations that the Company may enter into.
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, 2021, and 2020 (in millions):
| Reported as: | |||||||||||||||||||||||||||||||||||||||||||||||
| Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Allowance for Credit Loss | Fair Value | Cash and Cash Equivalents | Short-term Investments | Long-term Investments | ||||||||||||||||||||||||||||||||||||||||
| December 31, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||
| Cash | $ | 572.3 | $ | — | $ | — | $ | — | $ | 572.3 | $ | 572.3 | $ | — | $ | — | |||||||||||||||||||||||||||||||
| Level 1: | |||||||||||||||||||||||||||||||||||||||||||||||
| Money market funds | 696.6 | — | — | — | 696.6 | 696.6 | — | — | |||||||||||||||||||||||||||||||||||||||
| U.S. treasuries | 3,429.1 | 6.3 | (15.4) | — | 3,420.0 | 17.0 | 1,100.3 | 2,302.7 | |||||||||||||||||||||||||||||||||||||||
| Subtotal | 4,125.7 | 6.3 | (15.4) | — | 4,116.6 | 713.6 | 1,100.3 | 2,302.7 | |||||||||||||||||||||||||||||||||||||||
| Level 2: | |||||||||||||||||||||||||||||||||||||||||||||||
| Commercial paper | 717.7 | — | — | — | 717.7 | — | 717.7 | — | |||||||||||||||||||||||||||||||||||||||
| Corporate securities | 2,485.6 | 2.7 | (11.9) | — | 2,476.4 | 5.0 | 886.7 | 1,584.7 | |||||||||||||||||||||||||||||||||||||||
| U.S. government agencies | 526.1 | 0.2 | (2.9) | — | 523.4 | — | 137.8 | 385.6 | |||||||||||||||||||||||||||||||||||||||
| Municipal securities | 213.4 | 0.7 | (1.0) | — | 213.1 | — | 70.6 | 142.5 | |||||||||||||||||||||||||||||||||||||||
| Subtotal | 3,942.8 | 3.6 | (15.8) | — | 3,930.6 | 5.0 | 1,812.8 | 2,112.8 | |||||||||||||||||||||||||||||||||||||||
| Total assets measured at fair value | $ | 8,640.8 | $ | 9.9 | $ | (31.2) | $ | — | $ | 8,619.5 | $ | 1,290.9 | $ | 2,913.1 | $ | 4,415.5 | |||||||||||||||||||||||||||||||
| Reported as: | |||||||||||||||||||||||||||||||||||||||||||||||
| Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Allowance for Credit Loss | Fair Value | Cash and Cash Equivalents | Short-term Investments | Long-term Investments | ||||||||||||||||||||||||||||||||||||||||
| December 31, 2020 | |||||||||||||||||||||||||||||||||||||||||||||||
| Cash | $ | 644.3 | $ | — | $ | — | $ | — | $ | 644.3 | $ | 644.3 | $ | — | $ | — | |||||||||||||||||||||||||||||||
| Level 1: | |||||||||||||||||||||||||||||||||||||||||||||||
| Money market funds | 625.8 | — | — | — | 625.8 | 625.8 | — | — | |||||||||||||||||||||||||||||||||||||||
| U.S. treasuries | 2,626.8 | 23.0 | — | — | 2,649.8 | 212.5 | 1,567.9 | 869.4 | |||||||||||||||||||||||||||||||||||||||
| Subtotal | 3,252.6 | 23.0 | — | — | 3,275.6 | 838.3 | 1,567.9 | 869.4 | |||||||||||||||||||||||||||||||||||||||
| Level 2: | |||||||||||||||||||||||||||||||||||||||||||||||
| Commercial paper | 671.3 | — | — | — | 671.3 | 64.1 | 607.2 | — | |||||||||||||||||||||||||||||||||||||||
| Corporate securities | 1,425.4 | 11.9 | (0.2) | — | 1,437.1 | 3.4 | 1,036.5 | 397.2 | |||||||||||||||||||||||||||||||||||||||
| U.S. government agencies | 716.5 | 2.5 | — | — | 719.0 | 72.5 | 233.6 | 412.9 | |||||||||||||||||||||||||||||||||||||||
| Municipal securities | 119.8 | 2.0 | — | — | 121.8 | — | 43.6 | 78.2 | |||||||||||||||||||||||||||||||||||||||
| Subtotal | 2,933.0 | 16.4 | (0.2) | — | 2,949.2 | 140.0 | 1,920.9 | 888.3 | |||||||||||||||||||||||||||||||||||||||
| Total assets measured at fair value | $ | 6,829.9 | $ | 39.4 | $ | (0.2) | $ | — | $ | 6,869.1 | $ | 1,622.6 | $ | 3,488.8 | $ | 1,757.7 |
The following table summarizes the contractual maturities of the Company’s cash equivalents and available-for-sale investments (excluding cash and money market funds) as of December 31, 2021 (in millions):
| Amortized Cost | Fair Value | ||||||||||
| Mature in less than one year | $ | 2,931.6 | $ | 2,935.1 | |||||||
| Mature in one to five years | 4,440.3 | 4,415.5 | |||||||||
| Total | $ | 7,371.9 | $ | 7,350.6 |
Actual maturities may differ from contractual maturities, because certain borrowers have the right to call or prepay certain obligations. Gross realized gains recognized on the sale of investments were not material and $8.3 million for the years ended December 31, 2021 and 2020, respectively. Gross realized losses recognized on the sale of investments were not material for the periods presented.
As of December 31, 2021, and 2020, net unrealized gains/(losses) on investments, net of tax, of $16.0 million and $29.5 million, 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 as of December 31, 2021, and 2020 (in millions):
| Unrealized losses less than 12 months | Unrealized losses 12 months or greater | Total | |||||||||||||||||||||||||||||||||
| December 31, 2021 | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | |||||||||||||||||||||||||||||
| Commercial paper | $ | 4.0 | $ | — | $ | — | $ | — | $ | 4.0 | $ | — | |||||||||||||||||||||||
| Corporate securities | 1,687.9 | (11.9) | — | — | 1,687.9 | (11.9) | |||||||||||||||||||||||||||||
| U.S. treasuries | 2,596.3 | (15.4) | — | — | 2,596.3 | (15.4) | |||||||||||||||||||||||||||||
| U.S. government agencies | 412.5 | (2.9) | — | — | 412.5 | (2.9) | |||||||||||||||||||||||||||||
| Municipal securities | 156.0 | (1.0) | — | — | 156.0 | (1.0) | |||||||||||||||||||||||||||||
| Total | $ | 4,856.7 | $ | (31.2) | $ | — | $ | — | $ | 4,856.7 | $ | (31.2) | |||||||||||||||||||||||
| December 31, 2020 | |||||||||||||||||||||||||||||||||||
| Corporate securities | $ | 352.7 | $ | (0.2) | $ | — | $ | — | $ | 352.7 | $ | (0.2) | |||||||||||||||||||||||
| U.S. treasuries | 278.1 | — | — | — | 278.1 | — | |||||||||||||||||||||||||||||
| U.S. government agencies | 63.5 | — | — | — | 63.5 | — | |||||||||||||||||||||||||||||
| Municipal securities | 21.3 | — | — | — | 21.3 | — | |||||||||||||||||||||||||||||
| Total | $ | 715.6 | $ | (0.2) | $ | — | $ | — | $ | 715.6 | $ | (0.2) |
The unrealized losses on the available-for-sale investments are related to commercial paper, corporate securities, U.S. treasuries, U.S. government agencies, and municipal 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.
Equity Investments
The following table is a summary of the activity related to equity investments (in millions):
| Reported as: | |||||||||||||||||||||||||||||||||||
| December 31, 2020 Carrying Value | Changes in Fair Value (1) | Sales/Purchases/Others (2) | December 31, 2021 Carrying Value | Prepaids and other current assets | Intangible and other assets, net | ||||||||||||||||||||||||||||||
| Equity investments with readily determinable value (Level 1) | $ | 60.1 | (17.7) | (15.5) | $ | 26.9 | $ | 26.9 | $ | — | |||||||||||||||||||||||||
| Equity investments without readily determinable value (Level 2) | $ | 30.2 | 43.8 | (58.4) | $ | 15.6 | $ | — | $ | 15.6 | |||||||||||||||||||||||||
| (1) Recorded in Interest and other income, net. | |||||||||||||||||||||||||||||||||||
| (2) Other includes conversion of certain equity investments without readily determinable value to equity investments with readily determinable value. |
The Company recognized a $43.8 million increase in fair value, which was reflected in Interest and other income, net, due to changes in observable prices for certain equity investments that are held at cost, because they lack readily determinable market values (Level 2). A total of $34.2 million of this increase in fair value was related to an equity investment in preferred shares of Broncus Holding Corporation (“Broncus”). There were no decreases in fair value reflected in net income due to impairments.
In September 2021, Broncus completed an IPO of common shares on the Stock Exchange of Hong Kong. Upon completion of its IPO, the Company’s preferred shares were converted to common shares, which have a readily determinable value (Level 1). The Company is restricted from selling these shares for a period of six months. Subsequent to the IPO, the Company recognized a $29.1 million decrease in fair value from this investment. Accordingly, for the year ended December 31, 2021, the Company has recognized a net gain of $5.1 million related to its Broncus investment, comprised of the $34.2 million gain reflected in changes in fair value for Level 2 equity investments, offset by the $29.1 million loss reflected in changes in fair value for Level 1 equity investments, both of which were reflected in Interest and other income, net.
The Company held an equity investment in common shares of Bolder Surgical Holdings, Inc. (“Bolder”), which was reflected in its financial statements on a cost basis. During the fourth quarter of 2021, Hologic, Inc., a publicly traded company, completed its acquisition of Bolder. Under the terms of the acquisition agreement, the Company received cash on the date of closing and recognized a gain on its investment of $9.5 million.
In January 2021, the Company sold all of its shares of Teladoc Health, Inc. (“Teladoc”), a publicly traded company, for $71.5 million and recognized a gain of $11.4 million, which was reflected in Interest and other income, net. This gain was offset by a $7.5 million loss recognized upon the settlement of a corresponding derivative collar contract.
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 hedged transaction affects earnings. The amounts reclassified to revenue and expenses related to the hedged transactions and the ineffective portions of cash flow hedges were not material for the periods presented.
Other Derivatives Not Designated as Hedging Instruments. Other derivatives not designated as hedging instruments consist primarily of forward contracts that the Company uses to hedge intercompany balances and other monetary assets or liabilities denominated in currencies other than the USD, primarily the EUR, GBP, JPY, KRW, CHF, Indian Rupee (“INR”), Mexican Peso (“MXN”), Chinese Yuan (“CNY”), and New Taiwan Dollar (“TWD”).
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, | |||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||
| Recognized gains (losses) in interest and other income, net | $ | 15.5 | $ | (12.3) | $ | 6.4 | |||||||||||
| Foreign exchange gains (losses) related to balance sheet re-measurement | $ | (16.4) | $ | 10.9 | $ | (1.5) |
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, 2021 | December 31, 2020 | December 31, 2021 | December 31, 2020 | ||||||||||||||||||||
| Notional amounts: | |||||||||||||||||||||||
| Forward contracts | $ | 181.2 | $ | 154.3 | $ | 318.8 | $ | 309.8 | |||||||||||||||
| Gross fair value recorded in: | |||||||||||||||||||||||
| Prepaid and other current assets | $ | 5.7 | $ | 0.9 | $ | 6.9 | $ | 0.7 | |||||||||||||||
| Other accrued liabilities | $ | 0.5 | $ | 4.3 | $ | 0.8 | $ | 5.4 |
NOTE 4. CONSOLIDATED FINANCIAL STATEMENT DETAILS
The following tables provide details of selected consolidated financial statement items (in millions):
| December 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Inventory: | |||||||||||
| Raw materials | $ | 214.6 | $ | 184.1 | |||||||
| Work-in-process | 96.4 | 75.6 | |||||||||
| Finished goods | 276.1 | 341.8 | |||||||||
| Total inventory | $ | 587.1 | $ | 601.5 |
| December 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Prepaids and other current assets: | |||||||||||
| Prepaid taxes | $ | 4.3 | $ | 28.9 | |||||||
| Equity investments | 26.9 | 60.1 | |||||||||
| Net investment in sales-type leases – short-term | 110.3 | 81.1 | |||||||||
| Other prepaids and other current assets | 129.6 | 97.4 | |||||||||
| Total prepaids and other current assets | $ | 271.1 | $ | 267.5 |
| December 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Property, plant, and equipment, net: | |||||||||||
| Land | $ | 367.8 | $ | 277.9 | |||||||
| Building and building/leasehold improvements | 812.5 | 773.8 | |||||||||
| Machinery and equipment | 497.6 | 428.0 | |||||||||
| Operating lease assets – Intuitive System Leasing | 616.1 | 419.9 | |||||||||
| Computer and office equipment | 123.7 | 112.6 | |||||||||
| Capitalized software | 217.6 | 205.4 | |||||||||
| Construction-in-process | 209.7 | 117.4 | |||||||||
| Gross property, plant, and equipment | 2,845.0 | 2,335.0 | |||||||||
| Less: Accumulated depreciation* | (968.6) | (757.7) | |||||||||
| Total property, plant, and equipment, net | $ | 1,876.4 | $ | 1,577.3 | |||||||
| *Accumulated depreciation associated with operating lease assets – Intuitive System Leasing | $ | (182.1) | $ | (112.1) |
| December 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Other accrued liabilities – short-term: | |||||||||||
| Taxes payable | $ | 54.1 | $ | 47.2 | |||||||
| Current portion of deferred purchase consideration | 11.6 | 10.4 | |||||||||
| Current portion of contingent consideration | 0.4 | 15.1 | |||||||||
| Other accrued liabilities | 235.2 | 225.6 | |||||||||
| Total other accrued liabilities – short-term | $ | 301.3 | $ | 298.3 |
| December 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Other long-term liabilities: | |||||||||||
| Income taxes – long-term | $ | 316.6 | $ | 305.6 | |||||||
| Deferred revenue – long-term | 36.8 | 32.1 | |||||||||
| Other long-term liabilities | 100.3 | 106.9 | |||||||||
| Total other long-term liabilities | $ | 453.7 | $ | 444.6 |
Supplemental Cash flow Information
The following table provides supplemental cash flow information (in millions):
| Years Ended December 31, | |||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||
| Income taxes paid | $ | 180.0 | $ | 34.4 | $ | 158.6 | |||||||||||
| Supplemental non-cash investing and financing activities: | |||||||||||||||||
| Equipment transfers from inventory to property, plant, and equipment | $ | 302.4 | $ | 186.5 | $ | 210.6 | |||||||||||
| Acquisition of property, plant, and equipment in accounts payable and accrued liabilities | $ | 32.1 | $ | 47.3 | $ | 30.2 | |||||||||||
| Deferred purchase and contingent consideration related to acquisitions | $ | 6.5 | $ | 4.2 | $ | 86.6 |
NOTE 5. REVENUE
The following table presents revenue disaggregated by types and geography (in millions):
| Years Ended December 31, | |||||||||||||||||||||||||||||
| U.S. | 2021 | 2020 | 2019 | ||||||||||||||||||||||||||
| Instruments and accessories | $ | 2,225.1 | $ | 1,785.1 | $ | 1,790.4 | |||||||||||||||||||||||
| Systems | 1,024.8 | 695.0 | 830.7 | ||||||||||||||||||||||||||
| Services | 603.3 | 482.6 | 508.4 | ||||||||||||||||||||||||||
| Total U.S. revenue | $ | 3,853.2 | $ | 2,962.7 | $ | 3,129.5 | |||||||||||||||||||||||
| Outside of U.S. (“OUS”) | |||||||||||||||||||||||||||||
| Instruments and accessories | $ | 875.4 | $ | 670.6 | $ | 617.8 | |||||||||||||||||||||||
| Systems | 668.6 | 483.9 | 515.4 | ||||||||||||||||||||||||||
| Services | 312.9 | 241.2 | 215.8 | ||||||||||||||||||||||||||
| Total OUS revenue | $ | 1,856.9 | $ | 1,395.7 | $ | 1,349.0 | |||||||||||||||||||||||
| Total | |||||||||||||||||||||||||||||
| Instruments and accessories | $ | 3,100.5 | $ | 2,455.7 | $ | 2,408.2 | |||||||||||||||||||||||
| Systems | 1,693.4 | 1,178.9 | 1,346.1 | ||||||||||||||||||||||||||
| Services | 916.2 | 723.8 | 724.2 | ||||||||||||||||||||||||||
| Total revenue | $ | 5,710.1 | $ | 4,358.4 | $ | 4,478.5 |
Remaining Performance Obligations
The transaction price allocated to remaining performance obligations relates to amounts allocated to products and services for which revenue has not yet been recognized. A significant portion of these performance obligations relate to service obligations in the Company's system sale and lease arrangements that will be satisfied and recognized as revenue in future periods. The transaction price allocated to the remaining performance obligations was $1.86 billion as of December 31, 2021. The remaining performance obligations are expected to be satisfied over the term of the system sale, lease, and service arrangements, which are generally up to 5 years.
Contract Assets and Liabilities
The following information summarizes the Company’s contract assets and liabilities (in millions):
| December 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Contract assets | $ | 46.9 | $ | 34.6 | |||||||
| Deferred revenue | $ | 414.0 | $ | 382.3 |
The Company invoices its customers based on the billing schedules in its sales arrangements. Payments are generally due 30 to 60 days from date of invoice. Contract assets for the periods presented primarily represent the difference between the revenue that was recognized based on the relative standalone selling price of the related performance obligations satisfied and the contractual billing terms in the arrangements. Deferred revenue for the periods presented primarily relates to service contracts where the service fees are billed up-front, generally quarterly or annually, prior to those services having been performed. The associated deferred revenue is generally recognized over the term of the service period. The Company did not have any significant impairment losses on its contract assets for the periods presented.
During the year ended December 31, 2021, the Company recognized $351 million of revenue that was included in the deferred revenue balance as of December 31, 2020. During the year ended December 31, 2020, the Company recognized $282 million of revenue that was included in the deferred revenue balance as of December 31, 2019.
Intuitive System Leasing
The following table presents product revenue from Intuitive System Leasing arrangements (in millions):
| Years Ended December 31, | ||||||||||||||||||||
| 2021 | 2020 | 2019 | ||||||||||||||||||
| Sales-type lease revenue | $ | 220.3 | $ | 154.4 | $ | 81.6 | ||||||||||||||
| Operating lease revenue (1) | $ | 276.9 | $ | 176.7 | $ | 106.9 | ||||||||||||||
| (1) Includes variable lease revenue relating to usage-based arrangements. |
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, | |||||||||||
| 2021 | 2020 | ||||||||||
| Gross lease receivables | $ | 404.0 | $ | 286.1 | |||||||
| Unearned income | (11.4) | (11.1) | |||||||||
| Subtotal | 392.6 | 275.0 | |||||||||
| Allowance for credit loss | (3.6) | (4.4) | |||||||||
| Net investment in sales-type leases | $ | 389.0 | $ | 270.6 | |||||||
| Reported as: | |||||||||||
| Prepaids and other current assets | $ | 110.3 | $ | 81.1 | |||||||
| Intangible and other assets, net | 278.7 | 189.5 | |||||||||
| Total, net | $ | 389.0 | $ | 270.6 |
Contractual maturities of gross lease receivables as of December 31, 2021, are as follows (in millions):
| Fiscal Year | Amount | ||||
| 2022 | $ | 117.8 | |||
| 2023 | 102.8 | ||||
| 2024 | 90.3 | ||||
| 2025 | 61.1 | ||||
| 2026 | 29.3 | ||||
| 2027 and thereafter | 2.7 | ||||
| Total | $ | 404.0 |
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, 2021, are as follows (in millions):
| Fiscal Year | Amount | ||||
| 2022 | $ | 260.3 | |||
| 2023 | 223.8 | ||||
| 2024 | 173.6 | ||||
| 2025 | 121.8 | ||||
| 2026 | 61.2 | ||||
| 2027 and thereafter | 21.9 | ||||
| Total | $ | 862.6 |
Variable lease revenue relating to usage-based arrangements was not material for the years ended December 31, 2021, 2020, and 2019.
Lessee Information
The Company enters into operating leases for real estate, automobiles, and certain equipment. Operating lease expense was $20.4 million, $21.0 million, and $19.1 million for the years ended December 31, 2021, 2020, and 2019, respectively. For leases with terms of 12 months or less, the related expense was not material for each of the years ended December 31, 2021, 2020, and 2019.
Supplemental cash flow information for the years ended December 31, 2021, 2020, and 2019 related to operating leases was as follows (in millions):
| Years Ended December 31, | ||||||||||||||||||||||||||
| 2021 | 2020 | 2019 | ||||||||||||||||||||||||
| Cash paid for leases that were included within operating cash outflows | $ | 23.2 | $ | 11.0 | $ | 18.8 | ||||||||||||||||||||
| Right-of-use assets recognized related to new lease obligations | $ | 30.6 | $ | 9.6 | $ | 21.5 | ||||||||||||||||||||
Supplemental balance sheet information, as of December 31, 2021, and 2020, related to operating leases was as follows (in millions, except lease term and discount rate):
| December 31, | ||||||||||||||||||||
| Reported as: | 2021 | 2020 | ||||||||||||||||||
| Intangible and other assets, net (Right-of-use assets) | $ | 74.4 | $ | 63.9 | ||||||||||||||||
| Other accrued liabilities | $ | 20.4 | $ | 21.9 | ||||||||||||||||
| Other long-term liabilities | 66.6 | 58.0 | ||||||||||||||||||
| Total lease liabilities | $ | 87.0 | $ | 79.9 | ||||||||||||||||
| Weighted-average remaining lease term | 4.9 years | 5.3 years | ||||||||||||||||||
| Weighted-average discount rate | 2.5 | % | 3.2 | % |
As of December 31, 2021, the future payments related to the Company’s operating lease liabilities are scheduled as follows (in millions):
| Fiscal Year | Amount | |||||||||||||
| 2022 | $ | 22.0 | ||||||||||||
| 2023 | 21.9 | |||||||||||||
| 2024 | 16.6 | |||||||||||||
| 2025 | 14.5 | |||||||||||||
| 2026 | 12.1 | |||||||||||||
| 2027 and thereafter | 9.1 | |||||||||||||
| Total lease payments | 96.2 | |||||||||||||
| Less imputed interest | (9.2) | |||||||||||||
| Total operating lease liabilities | $ | 87.0 |
NOTE 7. GOODWILL AND INTANGIBLE ASSETS
Acquisitions in 2021
There were no material acquisitions in 2021.
Acquisitions in 2020
Orpheus Medical
In February 2020, the Company acquired Orpheus Medical Ltd. and its wholly-owned subsidiaries to deepen and expand the Company’s integrated informatics platform. Orpheus Medical provides hospitals with information technology connectivity, as well as expertise in processing and archiving surgical videos.
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. As of the acquisition date, the estimated total undiscounted contingent consideration was approximately $81 million, based on the underlying performance of the business in 2019 and 2020 as well as the amount and timing of the contingent consideration payments. Since the acquisition date, the total undiscounted contingent consideration decreased by approximately $1 million due to changes in the timing of the milestone achievements. For the years ended December 31, 2021, 2020, and 2019, the contingent consideration liability changed due to payments of $12.9 million, $53.7 million, and $16.5 million, respectively, and net additional expenses, which were recorded to selling, general and administrative expenses, of zero, $11.3 million, and $7.2 million, respectively, primarily related to accretion due to the passage of time. As of December 31, 2021, all contingent consideration has been settled and paid.
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 consisted of an initial cash payment of $34.4 million and deferred cash payments totaling approximately $67.0 million, of which $13.6 million was deferred as of December 31, 2020. As of December 31, 2021, all deferred cash payments have been made.
The Company recorded $11.5 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 $58.9 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 decreased goodwill by $0.8 million during 2020. 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 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.
Goodwill
The following table summarizes the changes in the carrying amount of goodwill (in millions):
| Amount | ||||||||
| Balance as of December 31, 2019 | $ | 307.2 | ||||||
| Acquisition activity | 29.3 | |||||||
| Translation and other | 0.2 | |||||||
| Balance as of December 31, 2020 | 336.7 | |||||||
| Acquisition activity | 8.0 | |||||||
| Translation and other | (1.1) | |||||||
| Balance as of December 31, 2021 | $ | 343.6 |
The Company completed its annual goodwill impairment test and determined that no impairment existed. As of December 31, 2021, 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, 2021, and 2020 (in millions):
| December 31, 2021 | December 31, 2020 | |||||||||||||||||||||||||||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | |||||||||||||||||||||||||||||||||
| Patents and developed technology | $ | 219.3 | $ | (173.2) | $ | 46.1 | $ | 198.4 | $ | (158.7) | $ | 39.7 | ||||||||||||||||||||||||||
| Distribution rights and others | 26.3 | (19.4) | 6.9 | 91.9 | (77.4) | 14.5 | ||||||||||||||||||||||||||||||||
| Customer relationships | 31.8 | (14.3) | 17.5 | 59.0 | (35.8) | 23.2 | ||||||||||||||||||||||||||||||||
| Total intangible assets | $ | 277.4 | $ | (206.9) | $ | 70.5 | $ | 349.3 | $ | (271.9) | $ | 77.4 |
Amortization expense related to intangible assets was $27.4 million, $49.8 million, and $43.0 million for the years ended December 31, 2021, 2020, and 2019, respectively.
The estimated future amortization expense related to intangible assets as of December 31, 2021, is as follows (in millions):
| Fiscal Year | Amount | ||||
| 2022 | $ | 23.6 | |||
| 2023 | 19.0 | ||||
| 2024 | 15.0 | ||||
| 2025 | 9.6 | ||||
| 2026 | 2.7 | ||||
| 2027 and thereafter | 0.6 | ||||
| Total | $ | 70.5 |
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
As of December 31, 2021, the Company’s commitments include an estimated amount of approximately $1.51 billion 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. Additionally, 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, and future results of operations.
During the years ended December 31, 2021, 2020, and 2019, pre-tax litigation charges (benefits) related to securities class action lawsuits and product liability claims were not material.
Product Liability Litigation
The Company is currently named as a defendant in a number of individual product liability lawsuits filed in various state and federal courts. The plaintiffs generally allege that they or a family member underwent surgical procedures that utilized the da Vinci Surgical System and sustained a variety of personal injuries and, in some cases, death as a result of such surgery. Several of the filed cases have trial dates in the next 12 months.
The cases raise a variety of allegations including, to varying degrees, that plaintiffs’ injuries resulted from purported defects in the da Vinci Surgical System and/or failure on the Company’s part to provide adequate training resources to the healthcare professionals who performed plaintiffs’ surgeries. The cases further allege that the Company failed to adequately disclose and/or misrepresented the potential risks and/or benefits of the da Vinci Surgical System. Plaintiffs also assert a variety of causes of action, including, for example, strict liability based on purported design defects, negligence, fraud, breach of express and implied warranties, unjust enrichment, and loss of consortium. Plaintiffs seek recovery for alleged personal injuries and, in many cases, punitive damages. The Company disputes these allegations and is defending against these claims.
The Company’s estimate of the anticipated cost of resolving the pending cases is based on negotiations with attorneys for the claimants. The final outcome of the pending lawsuits and claims, and others that might arise, is dependent on many variables that are difficult to predict, and the ultimate cost associated with these product liability lawsuits and claims may be materially different than the amount of the current estimate and accruals and could have a material adverse effect on the Company’s business, financial position, and future results of operations. Although there is a reasonable possibility that a loss in excess of the amount recognized exists, the Company is unable to estimate the possible loss or range of loss in excess of the amount recognized at this time.
Patent Litigation
On June 30, 2017, Ethicon LLC, Ethicon Endo-Surgery, Inc., and Ethicon US LLC (collectively, “Ethicon”) filed a complaint for patent infringement against the Company in the U.S. District Court for the District of Delaware. The complaint, which was served on the Company on July 12, 2017, alleges that the Company’s EndoWrist Stapler instruments infringe several of Ethicon’s patents. Ethicon asserts infringement of U.S. Patent Nos. 9,585,658; 8,479,969; 9,113,874; 8,998,058; 8,991,677; 9,084,601; and 8,616,431. A claim construction hearing occurred on October 1, 2018, and the court issued a scheduling order on December 28, 2018. On March 20, 2019, the court granted the Company’s Motion to Stay pending an Inter Partes Review to be held at the Patent Trademark and Appeals Board to review patentability of six of the seven patents noted above and vacated the trial date. On August 1, 2019, the court granted the parties’ joint stipulation to modify the stay in light of Ethicon’s U.S. International Trade Commission (“USITC”) complaint against Intuitive involving U.S. Patent Nos. 8,479,969 and 9,113,874, discussed below. There is currently no trial date scheduled for this matter.
On August 27, 2018, Ethicon filed a second complaint for patent infringement against the Company in the U.S. District Court for the District of Delaware. The complaint alleges that the Company’s SureForm 60 Staplers infringe five of Ethicon’s patents. Ethicon asserts infringement of U.S. Patent Nos. 9,884,369; 7,490,749; 8,602,288; 8,602,287; and 9,326,770. The Company filed an answer denying all claims. On March 19, 2019, Ethicon filed a Motion for Leave to File a First Amended Complaint, removing allegations related to U.S. Patent No. 9,326,770 and adding allegations related to U.S. Patent Nos. 9,844,379 and 8,479,969. On July 17, 2019, the court entered an order denying the amendment, without prejudice, and granting
the parties’ joint stipulation to stay the case in its entirety in light of the USITC investigation involving U.S. Patent Nos. 9,844,369 and 7,490,749, discussed below. There is currently no trial date scheduled for this matter.
Based on currently available information, the Company is unable to make a reasonable estimate of loss or range of losses, if any, arising from these matters.
On May 30, 2019, Ethicon filed a complaint with the USITC, asserting infringement of U.S. Patent Nos. 9,884,369 (“’369”); 7,490,749 (“’749”); 9,844,379 (“’379”); 9,113,874 (“’874”); and 8,479,969 (“’969”). On June 28, 2019, the USITC voted to institute an investigation (No. 337-TA-1167) with respect to the claims in this complaint. The accused products include the Company’s EndoWrist 30, EndoWrist 45, SureForm 45, and SureForm 60 Staplers, as well as the stapler reload cartridges. In March 2020, Ethicon dismissed its claims concerning the ’749 patent. The evidentiary hearing took place in February 2021. On June 8, 2021, the Chief Administrative Law Judge issued an Initial Determination concluding that (1) the accused products do not infringe the asserted claims in the ’874 or ’969 patents; (2) the asserted claims in the ’874 and ’969 patents are invalid; (3) the accused SureForm staplers and associated reload cartridges infringe two claims of the ’369 patent; (4) the accused SureForm staplers and associated reload cartridges infringe two claims of the ’379 patent; and (5) the Company was estopped from contending that the asserted claims in the ’379 patent are invalid. Ethicon has not challenged the Initial Determination with regard to the findings that absolve Intuitive of any liability regarding the accused EndoWrist staplers and associated reload cartridges. On October 14, 2021, the USITC issued its Opinion in which it made the following rulings: (1) the USITC absolved Intuitive from any liability regarding the ’874, ’969, and ’369 patents; and (2) the USITC found that, while the SureForm staplers and their associated reload cartridges infringe the asserted claims in the ’379 patent, it has suspended the imposition of any remedial order pending an opinion from the Federal Circuit Court of Appeal of whether the Patent and Trademark Office correctly found the asserted claims in this patent to be invalid. The Company and Ethicon have filed Notices of Appeal regarding the USITC Opinion. A lifting of the suspension of any remedial order by the USITC could result in a prohibition on importing the accused SureForm products into the U.S. or necessitating workarounds. Based on currently available information, the Company does not believe that any losses arising from this matter would be material.
Commercial Litigation
On February 27, 2019, Restore Robotics LLC and Restore Repair LLC (“Restore”) filed a complaint in the Northern District of Florida alleging anti-trust claims against the Company. On May 13, 2019, Restore filed an amended complaint alleging anti-trust claims relating to the da Vinci Surgical System and EndoWrist service, maintenance, and repair processes. On September 16, 2019, the Court partially granted and partially denied the Company’s Motion to Dismiss the amended complaint.
On September 30, 2019, the Company filed an answer denying the anti-trust allegations and filed a counterclaim against Restore. The Company filed amended counterclaims after the Court partially granted and partially denied Restore’s Motion to Dismiss the counterclaim. The amended counterclaims allege that Restore violated the Federal Lanham Act, the Federal Computer Fraud and Abuse Act, and Florida’s Deceptive and Unfair Trade Practices Act and that Restore is also liable to the Company for Unfair Competition and Tortious Interference with Contract. On January 7, 2020, the Court denied Restore’s Motion to Dismiss the amended counterclaims.
Motions for Summary Judgment have been filed by the Company and Restore. Subject to the rulings on those motions, the Court anticipates a trial date in later summer or early fall 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.
On September 28, 2020, Rebotix Repair Inc. (“Rebotix”) filed a complaint in the Middle District of Florida alleging anti-trust claims against the Company relating to EndoWrist service, maintenance, and repair processes. The complaint was formally served on the Company on October 6, 2020. On March 8, 2021, the Court partially granted and partially denied the Company’s Motion to Dismiss the complaint. The Company filed an answer denying the anti-trust allegations and filed counterclaims against Rebotix. The counterclaims allege that Rebotix violated the Federal Lanham Act and Florida’s Deceptive and Unfair Trade Practices Act and that Rebotix is also liable to the Company for Tortious Interference with Contract.
Motions for Summary Judgment have been filed by the Company and Rebotix. Subject to the rulings on these motions, the Court anticipates a trial date in or around May 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 this matter.
Similar to the claims asserted in the Restore case, on May 10, 2021, Surgical Instrument Service Company, Inc. filed a complaint in the Northern District of California Court alleging anti-trust claims against the Company relating to EndoWrist service, maintenance, and repair processes. The Court denied the Company's Motion to Dismiss, and discovery has commenced. Based on currently available information, the Company is unable to make a reasonable estimate of loss or range of losses, if any, arising from this matter.
Three class action complaints were filed against the Company in the Northern District of California Court alleging anti-trust allegations relating to the service and repair of certain instruments manufactured by the Company. A complaint by Larkin
Community Hospital was filed on May 20, 2021, a complaint by Franciscan Alliance, Inc. and King County Public Hospital District No. 1 was filed on July 6, 2021, and a complaint by Kaleida Health was filed on July 8, 2021. The Court has consolidated the Franciscan Alliance, Inc. and King County Public Hospital District No. 1 and Kaleida Health cases with the Larkin Community Hospital case, which is now captioned on the Larkin docket as “In Re: da Vinci Surgical Robot Antitrust Litigation.” A Consolidated Amended Class Action Complaint has been filed on behalf of each plaintiff named in the earlier-filed cases. On January 14, 2022, Kaleida Health voluntarily dismissed itself as a party to this case. On January 18, 2022, the Company filed an answer against the plaintiffs in this matter, and discovery has commenced. 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, 2021, 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, 2021, the remaining amount of share repurchases authorized by the Board under the Repurchase Program was approximately $1.6 billion.
The following table provides the stock repurchase activities (in millions, except per share amounts):
| Years Ended December 31, | |||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||
| Shares repurchased | — | 0.7 | 1.7 | ||||||||||||||
| Average price per share | $ | — | $ | 183.84 | $ | 160.45 | |||||||||||
| Value of shares repurchased | $ | — | $ | 134.3 | $ | 269.5 |
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, 2021, 2020, and 2019, the Company reduced common stock and additional paid-in capital by an aggregate of zero, $8 million, and $15 million, respectively, and charged zero, $126 million, and $255 million, respectively, to retained earnings.
Accumulated Other Comprehensive Income (Loss)
The components of accumulated other comprehensive income (loss), net of tax, are as follows (in millions):
| Year Ended December 31, 2021 | |||||||||||||||||||||||||||||
| Unrealized Gains (Losses) on Hedging Instruments | Unrealized Gains (Losses) on Available-for-Sale Securities | Foreign Currency Translation Gains (Losses) | Employee Benefit Plans | Total | |||||||||||||||||||||||||
| Beginning balance | $ | (2.9) | $ | 29.5 | $ | 4.7 | $ | (6.4) | $ | 24.9 | |||||||||||||||||||
| Other comprehensive income (loss) before reclassifications | 12.3 | (45.5) | (12.6) | 0.1 | (45.7) | ||||||||||||||||||||||||
| Reclassified from accumulated other comprehensive income (loss) | (4.9) | — | — | 1.5 | (3.4) | ||||||||||||||||||||||||
| Net current-period other comprehensive income (loss) | 7.4 | (45.5) | (12.6) | 1.6 | (49.1) | ||||||||||||||||||||||||
| Ending balance | $ | 4.5 | $ | (16.0) | $ | (7.9) | $ | (4.8) | $ | (24.2) | |||||||||||||||||||
| Year Ended December 31, 2020 | |||||||||||||||||||||||||||||
| Unrealized Gains (Losses) on Hedging Instruments | Unrealized Gains (Losses) on Available-for-Sale Securities | Foreign Currency Translation Gains (Losses) | Employee Benefit Plans | Total | |||||||||||||||||||||||||
| Beginning balance | $ | 0.7 | $ | 20.4 | $ | — | $ | (8.7) | $ | 12.4 | |||||||||||||||||||
| Other comprehensive income (loss) before reclassifications | (0.8) | 13.8 | 4.7 | 1.0 | 18.7 | ||||||||||||||||||||||||
| Reclassified from accumulated other comprehensive income (loss) | (2.8) | (4.7) | — | 1.3 | (6.2) | ||||||||||||||||||||||||
| Net current-period other comprehensive income (loss) | (3.6) | 9.1 | 4.7 | 2.3 | 12.5 | ||||||||||||||||||||||||
| Ending balance | $ | (2.9) | $ | 29.5 | $ | 4.7 | $ | (6.4) | $ | 24.9 |
The income tax impacts were not material for the years ended December 31, 2021, and 2020.
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 2031. In April 2021, the Company’s shareholders approved an amended and restated 2010 Plan to provide for an increase in the number of shares of common stock reserved for issuance thereunder from 97,350,000 to 103,350,000. As of December 31, 2021, approximately 25.5 million shares were reserved for future issuance under the 2010 Plan. A maximum of 11.1 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 10,395,000 to 13,095,000. The New Hire Plan expired in October 2019 and, therefore, there are no shares reserved for future grants under the New Hire Plan. However, awards granted prior to the plan’s expiration continue to remain outstanding until their original expiration date.
Employee Option Vesting. Prior to 2020, the Company made 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). Beginning in 2020, the Company changed the timing of its annual equity award grants to the last business day of February and on the same date in August or, if that date is not a business day, the next business day. The February grants vest 6/48 upon completion of 6 months of service and 1/48 per month thereafter. The August 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 1,350,000. 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. The Directors’ Plan was terminated in November 2020 and, therefore, there are no shares reserved for future grants under the Directors’ Plan. However, options granted prior to the plan's termination continue to remain outstanding until their original expiration date.
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 18,270,945 to 22,770,945.
The Company issued 0.5 million, 0.5 million, and 0.6 million shares under the ESPP, representing approximately $75.9 million, $71.2 million, and $56.4 million in employee contributions for the years ended December 31, 2021, 2020, and 2019, respectively. As of December 31, 2021, there were approximately 2.8 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 granted to employees vest in one-fourth increments annually over a four-year period. The RSUs granted 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 2021 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 as of December 31, 2020 | 13.4 | $ | 101.69 | ||||||||
| Options granted | 1.1 | $ | 294.53 | ||||||||
| Options exercised | (2.7) | $ | 74.39 | ||||||||
| Options forfeited/expired | (0.1) | $ | 198.34 | ||||||||
| Balance as of December 31, 2021 | 11.7 | $ | 125.07 |
The aggregate intrinsic value of stock options exercised under the Company’s stock plans determined as of the date of option exercise was $613 million, $598 million, and $512 million during the years ended December 31, 2021, 2020, and 2019, respectively. Cash received from option exercises and employee stock purchase plans for the years ended December 31, 2021, 2020, and 2019, was $276 million, $309 million, and $273 million, respectively. The income tax benefit from stock options exercised was $138 million for the year ended December 31, 2021.
The following table summarizes significant ranges of outstanding and exercisable options as of December 31, 2021 (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) | ||||||||||||||||||||||||||||||||||||||||||
| $29.91-$49.34 | 1.4 | 1.9 | $ | 45.18 | 1.4 | $ | 45.18 | |||||||||||||||||||||||||||||||||||||||||||
| $51.02-$57.11 | 1.4 | 2.5 | $ | 54.39 | 1.4 | $ | 54.39 | |||||||||||||||||||||||||||||||||||||||||||
| $57.48-$59.46 | 1.4 | 2.9 | $ | 58.78 | 1.4 | $ | 58.78 | |||||||||||||||||||||||||||||||||||||||||||
| $59.58-$77.00 | 1.3 | 2.8 | $ | 69.07 | 1.3 | $ | 69.07 | |||||||||||||||||||||||||||||||||||||||||||
| $77.04-$139.52 | 1.6 | 5.6 | $ | 108.72 | 1.6 | $ | 108.24 | |||||||||||||||||||||||||||||||||||||||||||
| $143.49-$174.26 | 1.4 | 7.1 | $ | 168.88 | 1.1 | $ | 169.46 | |||||||||||||||||||||||||||||||||||||||||||
| $175.53-$182.83 | 1.3 | 7.6 | $ | 179.91 | 0.7 | $ | 180.38 | |||||||||||||||||||||||||||||||||||||||||||
| $182.90-$245.60 | 1.3 | 8.7 | $ | 234.88 | 0.4 | $ | 230.62 | |||||||||||||||||||||||||||||||||||||||||||
| $249.83-$341.16 | 0.1 | 9.1 | $ | 270.94 | — | $ | 251.85 | |||||||||||||||||||||||||||||||||||||||||||
| $347.42-$347.42 | 0.5 | 9.6 | $ | 347.42 | 0.1 | $ | 347.42 | |||||||||||||||||||||||||||||||||||||||||||
| Total | 11.7 | 5.1 | $ | 125.07 | $ | 2,737 | 9.4 | 4.3 | $ | 99.52 | $ | 2,453 |
(1)The aggregate intrinsic value represents the total pre-tax intrinsic value, based on the Company’s closing stock price of $359.30 as of December 31, 2021, 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, 2021, a total of 11.5 million shares of stock options vested and expected to vest had a weighted-average remaining contractual life of 5.0 years, an aggregate intrinsic value of $2.72 billion, and a weighted-average exercise price of $122.97.
Restricted Stock Units Information
RSU activity for the year ended December 31, 2021, was as follows (in millions, except per share amounts):
| Shares | Weighted-Average Grant Date Fair Value | ||||||||||
| Unvested balance as of December 31, 2020 | 5.3 | $ | 163.30 | ||||||||
| Granted | 1.9 | $ | 256.52 | ||||||||
| Vested | (2.1) | $ | 145.60 | ||||||||
| Forfeited | (0.3) | $ | 193.61 | ||||||||
| Unvested balance as of December 31, 2021 | 4.8 | $ | 207.37 |
As of December 31, 2021, 4.3 million shares of RSUs were expected to vest with an aggregate intrinsic value of $1.56 billion. The aggregate vesting date fair value of RSUs vested was $578 million, $478 million, and $433 million during the years ended December 31, 2021, 2020, and 2019, respectively.
Share-Based Compensation Expense
The following table summarizes share-based compensation expense (in millions):
| Years Ended December 31, | |||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||
| Cost of sales—products | $ | 68.9 | $ | 58.9 | $ | 46.6 | |||||||||||
| Cost of sales—services | 22.2 | 24.0 | 20.4 | ||||||||||||||
| Total cost of sales | 91.1 | 82.9 | 67.0 | ||||||||||||||
| Selling, general and administrative | 231.6 | 202.2 | 169.5 | ||||||||||||||
| Research and development | 134.1 | 113.6 | 101.4 | ||||||||||||||
| Share-based compensation expense before income taxes | 456.8 | 398.7 | 337.9 | ||||||||||||||
| Income tax effect | 93.7 | 81.4 | 70.2 | ||||||||||||||
| Share-based compensation expense after income taxes | $ | 363.1 | $ | 317.3 | $ | 267.7 |
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, 2021, 2020, and 2019, were as follows:
| Years Ended December 31, | |||||||||||||||||
| STOCK OPTION PLANS | 2021 | 2020 | 2019 | ||||||||||||||
| Risk-free interest rate | 0.8% | 0.6% | 2.0% | ||||||||||||||
| Expected term (years) | 4.1 | 4.1 | 4.1 | ||||||||||||||
| Volatility | 32% | 32% | 30% | ||||||||||||||
| Fair value at grant date | $78.23 | $54.34 | $47.51 | ||||||||||||||
| EMPLOYEE STOCK PURCHASE PLAN | |||||||||||||||||
| Risk-free interest rate | 0.1% | 0.9% | 2.1% | ||||||||||||||
| Expected term (years) | 1.2 | 1.2 | 1.2 | ||||||||||||||
| Volatility | 29% | 30% | 29% | ||||||||||||||
| Fair value at grant date | $89.98 | $57.29 | $49.66 | ||||||||||||||
| RESTRICTED STOCK UNITS | |||||||||||||||||
| Fair value at grant date | $256.52 | $181.89 | $180.45 |
As share-based compensation expense recognized in the Consolidated Statements of Income during the years ended December 31, 2021, 2020, and 2019, is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures.
As of December 31, 2021, there was $122 million, $616 million, and $38 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 2.3 years for unvested stock options, 2.2 years for unvested restricted stock units, and 1.5 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, 2021, 2020, and 2019, consisted of the following (in millions):
| Years Ended December 31, | |||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||
| U.S. | $ | 1,298.7 | $ | 926.8 | $ | 1,053.7 | |||||||||||
| Foreign | 591.6 | 280.2 | 448.5 | ||||||||||||||
| Total income before provision for income taxes | $ | 1,890.3 | $ | 1,207.0 | $ | 1,502.2 |
The provision for income taxes for the years ended December 31, 2021, 2020, and 2019, consisted of the following (in millions):
| Years Ended December 31, | |||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||
| Current | |||||||||||||||||
| Federal | $ | 158.8 | $ | 34.2 | $ | 82.0 | |||||||||||
| State | 17.3 | 21.5 | 26.5 | ||||||||||||||
| Foreign | 50.1 | 26.9 | 18.0 | ||||||||||||||
| 226.2 | 82.6 | 126.5 | |||||||||||||||
| Deferred | |||||||||||||||||
| Federal | (21.4) | 23.8 | 8.5 | ||||||||||||||
| State | 0.5 | 1.6 | 3.2 | ||||||||||||||
| Foreign | (43.1) | 32.2 | (17.8) | ||||||||||||||
| (64.0) | 57.6 | (6.1) | |||||||||||||||
| Total income tax expense | $ | 162.2 | $ | 140.2 | $ | 120.4 |
Income tax expense differs from amounts computed by applying the statutory federal income rate of 21% for the years ended December 31, 2021, 2020, and 2019, as a result of the following (in millions):
| Years Ended December 31, | |||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||
| Federal tax at statutory rate | $ | 397.0 | $ | 253.5 | $ | 315.5 | |||||||||||
| Increase (reduction) in tax resulting from: | |||||||||||||||||
| State taxes, net of federal benefits | 33.1 | 23.1 | 29.7 | ||||||||||||||
| Foreign rate differential | (54.3) | (19.3) | (56.2) | ||||||||||||||
| U.S. tax on foreign earnings | 40.1 | 29.3 | 55.0 | ||||||||||||||
| Research and development credit | (30.7) | (37.1) | (32.7) | ||||||||||||||
| Share-based compensation not benefited | 17.8 | 14.3 | 13.5 | ||||||||||||||
| Unrecognized tax benefit related to share-based compensation | 13.6 | 39.3 | — | ||||||||||||||
| Reversal of unrecognized tax benefits | (3.0) | (4.0) | (8.4) | ||||||||||||||
| Excess tax benefits related to share-based compensation | (185.8) | (166.2) | (146.5) | ||||||||||||||
| Deferred tax re-measurement | (66.4) | — | (51.3) | ||||||||||||||
| Other | 0.8 | 7.3 | 1.8 | ||||||||||||||
| Total income tax expense | $ | 162.2 | $ | 140.2 | $ | 120.4 |
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, | |||||||||||
| 2021 | 2020 | ||||||||||
| Deferred tax assets: | |||||||||||
| Net operating losses | $ | 9.7 | $ | 27.7 | |||||||
| Share-based compensation expense | 110.9 | 101.1 | |||||||||
| Lease liabilities | 15.2 | 12.0 | |||||||||
| Expenses deducted in later years for tax purposes | 38.4 | 29.3 | |||||||||
| Intangible assets | 373.9 | 321.8 | |||||||||
| Research and other credits | 98.5 | 76.3 | |||||||||
| Other | 5.3 | — | |||||||||
| Gross deferred tax assets | 651.9 | 568.2 | |||||||||
| Valuation allowance | (104.6) | (81.4) | |||||||||
| Deferred tax assets | 547.3 | 486.8 | |||||||||
| Deferred tax liabilities: | |||||||||||
| Property, plant, and equipment | (79.4) | (91.1) | |||||||||
| Right-of-use assets | (12.3) | (8.4) | |||||||||
| Intangible assets | (9.7) | (10.1) | |||||||||
| Other | (5.1) | (13.2) | |||||||||
| Deferred tax liabilities | (106.5) | (122.8) | |||||||||
| Net deferred tax assets | $ | 440.8 | $ | 364.0 |
As of December 31, 2021, and 2020, the Company had valuation allowances of $104.6 million and $81.4 million, respectively, primarily related to California research and development credit carry forwards, for which the Company does not believe a tax benefit is more likely than not to be realized.
As of December 31, 2021, the Company had US and foreign federal net operating loss carryforwards of $23.9 million and foreign local net operating loss carryforwards of $207.3 million, which will begin to expire in 2027, if not utilized. Utilization of these net operating loss carryforwards may be subject to certain limitations. The Company does not expect the limitations to result in any permanent loss of these tax benefits.
The Company intends to repatriate earnings from its Swiss subsidiary and joint venture in Hong Kong, as needed, and 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 its foreign subsidiaries, which are not significant.
The Company’s 2021 income tax expense included a one-time benefit of $66.4 million from re-measurement of its Swiss deferred tax assets resulting from the extension of the economic useful life of certain intangible assets. The Company’s 2019 income tax expense included a one-time benefit of $51.3 million associated with re-measurement of its Swiss deferred tax assets due to a Swiss statutory tax rate increase enacted as part of Swiss tax reform in August 2019.
A reconciliation of the beginning and ending amounts of gross unrecognized income tax benefits for the years ended December 31, 2021, 2020, and 2019, are as follows (in millions):
| Years Ended December 31, | |||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||
| Beginning balance | $ | 176.3 | $ | 96.7 | $ | 78.8 | |||||||||||
| Increases related to tax positions taken during the current year | 40.6 | 40.1 | 26.5 | ||||||||||||||
| Increases related to tax positions taken during a prior year | 11.2 | 46.1 | 1.2 | ||||||||||||||
| Decreases related to tax positions taken during a prior year | (1.3) | — | — | ||||||||||||||
| Decreases related to settlements with tax authorities | (0.2) | (0.5) | (3.8) | ||||||||||||||
| Decreases related to expiration of statute of limitations | (4.1) | (6.1) | (6.0) | ||||||||||||||
| Ending balance | $ | 222.5 | $ | 176.3 | $ | 96.7 |
As of December 31, 2021, 2020, and 2019, gross interest related to unrecognized tax benefits accrued was $14.9 million, $11.0 million, and $2.9 million, respectively. The Company’s net unrecognized tax benefits and related interest are presented in other long-term liabilities and long term deferred tax assets on the Consolidated Balance Sheets.
Total gross unrecognized tax benefits as of December 31, 2021, were $222.5 million, which, if recognized, would result in a reduction of the Company’s effective tax rate.
In July 2015, a U.S. Tax Court opinion (the “2015 Opinion”) was issued involving an independent third party related to charging foreign subsidiaries for share-based compensation. Based on the findings of the U.S. Tax Court, direct share-based compensation had been excluded from the Company’s intercompany charges starting in 2015. In June 2019, the Ninth Circuit Court of Appeals (the “Ninth Circuit”) reversed the 2015 Opinion (the “Ninth Circuit Opinion”). Subsequently, a re-hearing of the case was requested, but was denied in November 2019. In February 2020, a petition was filed to appeal the Ninth Circuit Opinion to the U.S. Supreme Court. The petition was denied by the U.S. Supreme Court on June 22, 2020, which makes the Ninth Circuit Opinion binding precedent in the Ninth Circuit. As a result, the Company recorded an increase in the income tax provision of $39.3 million during the year ended December 31, 2020. An additional charge of $13.6 million related to this matter was recorded to income tax expense in 2021, primarily as a result of additional IRS guidance issued in July 2021. The Company will continue to monitor future IRS actions or other developments regarding this matter and will assess the impact of any such developments to its income tax provision in the quarter that they occur. The Company is treating share-based compensation expense in accordance with the Ninth Circuit Opinion for 2020 and future periods.
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.
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, | |||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||
| Numerator: | |||||||||||||||||
| Net income attributable to Intuitive Surgical, Inc. | $ | 1,704.6 | $ | 1,060.6 | $ | 1,379.3 | |||||||||||
| Denominator: | |||||||||||||||||
| Weighted-average shares outstanding used in basic calculation | 356.1 | 351.1 | 346.2 | ||||||||||||||
| Add: dilutive effect of potential common shares | 9.7 | 9.9 | 12.2 | ||||||||||||||
| Weighted-average shares outstanding used in diluted calculation | 365.8 | 361.0 | 358.4 | ||||||||||||||
| Net income per share attributable to Intuitive Surgical, Inc.: | |||||||||||||||||
| Basic | $ | 4.79 | $ | 3.02 | $ | 3.98 | |||||||||||
| Diluted | $ | 4.66 | $ | 2.94 | $ | 3.85 |
Share-based compensation awards of approximately 0.8 million, 1.9 million, and 2.0 million shares for the years ended December 31, 2021, 2020, and 2019, 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.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(IN MILLIONS)
| Balance at Beginning of Year | Additions | Deductions (1) | Balance at End of Year | ||||||||||||||||||||
| Sales returns and allowances | |||||||||||||||||||||||
| Year ended December 31, 2021 | $ | 15.5 | $ | 41.7 | $ | (44.1) | $ | 13.1 | |||||||||||||||
| Year ended December 31, 2020 | $ | 11.7 | $ | 39.7 | $ | (35.9) | $ | 15.5 | |||||||||||||||
| Year ended December 31, 2019 | $ | 11.2 | $ | 43.2 | $ | (42.7) | $ | 11.7 |
(1)Primarily represents products returned.
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