INTUITIVE SURGICAL, INC. This management's discussion and analysis of financial condition as ofJune 30, 2022 , and results of operations for the three and six months endedJune 30, 2022 , and 2021, should be read in conjunction with management's discussion and analysis of financial condition and results of operations included in our Annual Report on Form 10-K for the year endedDecember 31, 2021 . This report contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Forward-looking statements relate to expectations concerning matters that are not historical facts. Statements using words such as "estimates," "projects," "believes," "anticipates," "plans," "expects," "intends," "may," "will," "could," "should," "would," "targeted," and similar words and expressions are intended to identify forward-looking statements. These forward-looking statements are necessarily estimates reflecting the judgment of our management and involve a number of risks and uncertainties that could cause actual results to differ materially from those suggested by the forward-looking statements. These forward-looking statements include, but are not limited to, statements related to the expected impacts of the COVID-19 pandemic on our business, financial condition, and results of operations, future results of operations, future financial position, our financing plans and future capital requirements, our potential tax assets or liabilities, and statements based on current expectations, estimates, forecasts, and projections about the economies and markets in which we operate and our beliefs and assumptions regarding these economies and markets. These forward-looking statements should be considered in light of various important factors, including, but not limited to, the following: disruption to our supply chain, including increased difficulties in obtaining a sufficient supply of materials in the semiconductor and other markets; the risk that the COVID-19 pandemic could lead to material delays and cancellations of, or reduced demand for, procedures; curtailed or delayed capital spending by hospitals; closures of our facilities; delays in surgeon training; delays in gathering clinical evidence; delays in obtaining new product approvals, clearances, or certifications from theU.S. Food and Drug Administration ("FDA"); the evaluation of the risks of robotic-assisted surgery in the presence of infectious diseases; diversion of resources to respond to COVID-19 outbreaks; the risk that the COVID-19 virus causes economies in our key markets to enter prolonged recessions; the impact of global and regional economic and credit market conditions on healthcare spending; the risk of our inability to comply with complex FDA and other regulations, which may result in significant enforcement actions; regulatory approvals, clearances, certifications, and restrictions or any dispute that may occur with any regulatory body; guidelines and recommendations in the healthcare and patient communities; healthcare reform legislation in theU.S. and its impact on hospital spending, reimbursement, and fees levied on certain medical device revenues; changes in hospital admissions and actions by payers to limit or manage surgical procedures; the timing and success of product development and market acceptance of developed products; the results of any collaborations, in-licensing arrangements, joint ventures, strategic alliances, or partnerships, including the joint venture with Shanghai Fosun Pharmaceutical (Group) Co., Ltd.; our completion of and ability to successfully integrate acquisitions; intellectual property positions and litigation; competition in the medical device industry and in the specific markets of surgery in which we operate; risks associated with our operations and any expansion outside ofthe United States ; unanticipated manufacturing disruptions or the inability to meet demand for products; our reliance on sole and single source suppliers; the results of legal proceedings to which we are or may become a party, including, but not limited to, product liability claims; adverse publicity regarding us and the safety of our products and adequacy of training; the impact of changes to tax legislation, guidance, and interpretations; changes in tariffs, trade barriers, and regulatory requirements; and other risk factors. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report and which are based on current expectations and are subject to risks, uncertainties, and assumptions that are difficult to predict, including those risk factors described throughout this filing and identified under the heading "Risk Factors" in our Annual Report on Form 10-K for the year endedDecember 31, 2021 , as updated by our other filings with theSecurities and Exchange Commission . We undertake no obligation to publicly update or release any revisions to these forward-looking statements, except as required by law. Intuitive®, Intuitive Surgical®, da Vinci®, da Vinci S®, da Vinci S HD Surgical System®, da Vinci Si®, da Vinci X®, da Vinci Xi®, da Vinci SP®, EndoWrist®, Firefly®, InSite®, SureForm®, Ion®, Iris®, and SynchroSeal® are trademarks or registered trademarks of the Company.
Overview
As part of Intuitive's mission, we believe that minimally invasive care is
life-enhancing care. Intuitive is committed to advancing minimally invasive care
through a comprehensive ecosystem of products and services. This ecosystem
includes systems, instruments and accessories, learning, and services connected
by a digital portfolio that enables precision and control, seamless interactions
and experiences, and meaningful insights to drive better care.
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Intuitive brings nearly three decades of experience and technical innovation to
our robotic-assisted surgical solutions. While surgery and acute interventions
have improved significantly in the past decades, there remains a significant
need for better outcomes and decreased variability of these outcomes across care
teams. The current healthcare environment continues to stress critical
resources, including the professionals who staff care teams: surgeons,
anesthesiologists, nurses, and other staff. At the same time, governments strain
to cover the healthcare needs of their populations and demand lower total cost
per patient to treat disease. In the face of these challenges, we believe
scientific and technological advances in biology, computing, imaging,
algorithms, and robotics may offer new methods to solve continued and difficult
problems.
We address our customer needs by sharing their goals reflected in the quadruple
aim. First, we focus on improving patient outcomes through an ecosystem of
advanced robotic systems, instruments and accessories, progressive technology
learning pathways, and comprehensive support and program assistance services.
Second, we seek to improve the patient experience by minimizing disruption to
lives and creating greater predictability for the treatment experience. Third,
we seek to improve care team satisfaction by creating products and services that
are dependable, smart, and optimized for the care environment in which they are
used. Finally, we seek to lower the total cost to treat per patient episode when
compared with existing treatment alternatives, providing a return on investment
for hospitals and healthcare systems and value for payers.
Open surgery remains the predominant form of surgery and is used in almost every
area of the body. However, the large incisions required for open surgery create
trauma to patients, typically resulting in longer hospitalization and recovery
times, increased hospitalization costs, and additional pain and suffering
relative to minimally invasive surgery ("MIS"), where MIS is available. For over
three decades, MIS has reduced trauma to patients by allowing selected surgeries
to be performed through small ports rather than large incisions. MIS has been
widely adopted for certain surgical procedures.
Da Vinci Surgical Systems enable surgeons to extend the benefits of MIS to many
patients who would otherwise undergo a more invasive surgery by using
computational, robotic, and imaging technologies to overcome many of the
limitations of traditional open surgery or conventional MIS. Surgeons using a da
Vinci Surgical System operate while seated comfortably at a console viewing a
3D, high-definition image of the surgical field. This immersive console connects
surgeons to the surgical field and their instruments. While seated at the
console, the surgeon manipulates instrument controls in a natural manner,
similar to open surgical technique. Our technology is designed to provide
surgeons with a range of articulation of the surgical instruments used in the
surgical field analogous to the motions of a human wrist, while filtering out
the tremor inherent in a surgeon's hand. In designing our products, we focus on
making our technology easy and safe to use.
Our da Vinci products fall into five broad categories: da Vinci Surgical
Systems, da Vinci instruments and accessories, da Vinci Stapling, da Vinci
Energy, and da Vinci Vision, including Firefly Fluorescence imaging systems and
da Vinci Endoscopes. We also provide a comprehensive suite of systems, learning,
and services offerings. Digitally-enabled for more than two decades, these three
offerings aim to decrease variability by providing dependable, consistent
functionality and an integrated user experience. Our systems category includes
robotic platforms, software, vision, energy, and instruments and accessories.
Our learning category includes educational technology, such as simulation and
telepresence, as well as technical training programs and personalized
peer-to-peer learning opportunities. Our services category assists and optimizes
minimally invasive programs through readiness, on-demand support, consultation
for minimally invasive program optimization, and hospitals customized analytics.
Within our integrated ecosystem, our focus is to decrease variability in surgery
by offering actionable insights, with digital solutions, to take action with the
potential to improve outcomes, personalize learning, and optimize efficiency. We
take a holistic approach, offering intelligent technology and systems designed
to work together to make MIS intervention more available and applicable.
We have commercialized the following da Vinci Surgical Systems: the da Vinci
standard Surgical System in 1999, the da Vinci S Surgical System in 2006, the da
Vinci Si Surgical System in 2009, and the fourth generation da Vinci Xi Surgical
System in 2014. We have extended our fourth generation platform by adding the da
Vinci X Surgical System, commercialized in 2017, and the da Vinci SP Surgical
System, commercialized in 2018. The da Vinci SP Surgical System accesses the
body through a single incision while the other da Vinci Surgical Systems access
the body through multiple incisions. All da Vinci systems include a surgeon's
console (or consoles), imaging electronics, a patient-side cart, and
computational hardware and software. We are still in a measured launch of our da
Vinci SP Surgical System, and we have an installed base of 111 da Vinci SP
Surgical Systems as of June 30, 2022 . Our plans for the rollout of the da Vinci
SP Surgical System include putting systems in the hands of experienced da Vinci
users first while we optimize training pathways and our supply chain. We
received U.S. FDA clearances for the da Vinci SP Surgical System for urological
and certain transoral procedures. We also received clearance in South Korea
where the da Vinci SP Surgical System may be used for a broad set of procedures.
We plan to seek FDA clearances for additional indications for da Vinci SP over
time. We also plan to seek clearances in other OUS markets over time. The
success of the da Vinci SP Surgical System is dependent on positive experiences
and improved clinical outcomes for the procedures for which it has been cleared
as well as securing additional clinical clearances.
We offer approximately 70 different multi-port da Vinci instruments to provide
surgeons with flexibility in choosing the types of tools needed to perform a
particular surgery. These multi-port instruments are generally robotically
controlled and provide end effectors (tips) that are similar to those used in
either open or laparoscopic surgery. We offer advanced
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instrumentation for the da Vinci Xi and da Vinci X platforms, including da Vinci
Energy and da Vinci Stapler products, to provide surgeons with sophisticated,
computer-aided tools to precisely and efficiently interact with tissue. Da Vinci
X and da Vinci Xi Surgical Systems share the same instruments whereas the da
Vinci Si Surgical System uses instruments that are not compatible with da Vinci
X or da Vinci Xi systems. We currently offer nine core instruments on our da
Vinci SP Surgical System. We plan to expand the SP instrument offering over
time.
Training technologies include our Intuitive Simulation products, our Intuitive Telepresence remote case observation and telementoring tools, and our dual console for use in surgeon proctoring and collaborative surgery.
During the first quarter of 2019, the FDA cleared our Ion endoluminal system to enable minimally invasive biopsies in the lung. Our Ion system extends our commercial offering beyond surgery into diagnostic procedures with this first application. Our rollout of the Ion system is progressing well, and we are continuing to gather additional clinical evidence. We plan to seek additional clearances for the Ion system in OUS markets over time.
The success of new product introductions depends on a number of factors including, but not limited to, pricing, competition, market and consumer acceptance, the effective forecasting and management of product demand, inventory levels, the management of manufacturing and supply costs, and the risk that new products may have quality or other defects in the early stages of introduction.
Macroeconomic Environment
Uncertainty surrounding macroeconomic factors in theU.S. and globally characterized by the supply chain environment, inflationary pressure, rising interest rates, labor shortages, and significant disruption in commodities as a result of theRussia andUkraine conflict may result in a recession, which could have a material adverse effect on our long-term business. We have experienced increased difficulties in obtaining a sufficient supply of a number of component materials used in our products, such as semiconductor components as well as a range of other materials, including, but not limited to, metals and polymers, as global supply has become significantly constrained due to increased demand for certain materials. Additionally, prices of such materials have increased due to the increased demand and supply shortage. With rising interest rates, access to credit may become more difficult and any insolvency of key suppliers, including single-source suppliers, may exacerbate current supply chain challenges. We are engaged in activities to seek to mitigate supply disruptions, but the global supply chain shortages are likely to remain a challenge for the foreseeable future. We have also experienced challenges in logistics, as certain shipping routes have been impacted by port closures. Such global shortages in important components and logistics challenges have resulted in, and will continue to cause, inflationary cost pressure in our supply chain. To date, the inflationary cost pressure has been more pronounced in our logistics costs, but these supply chain challenges have not materially impacted our results of operations or ability to deliver products and services to our customers. However, if shortages in important supply chain materials in the semiconductor or other markets or logistics challenges continue, we could fail to meet product demand, which could result in deferred or cancelled procedures. If inflationary pressures in logistics or component costs persist, we may not be able to adjust pricing, reduce costs, or implement countermeasures. Additionally, there is uncertainty surrounding the impact of any monetary policy changes taken by theU.S. Federal Reserve and other central banks to address the structural risks associated with inflation. Increased labor shortages globally, including staff burnout and attrition, could also impact our ability to hire and retain personnel critical to our manufacturing, logistics, and commercial operations. We are also highly dependent on the principal members of our management and scientific staff. Attracting and retaining qualified personnel is critical to our success, and competition for them has become more intense. The loss of critical members of our team, or our inability to attract and retain qualified personnel, could significantly harm our operations, business, and ability to compete. The current macroeconomic environment is impacting our customers financially and operationally as well. Hospitals are experiencing staffing shortages and supply chain issues that could affect their ability to provide patient care. Additionally, hospitals are facing significant financial pressure as supply chain constraints and inflation drive up operating costs, rising interest rates make access to credit more expensive, unrealized losses decrease available cash reserves, and fiscal stimulus programs enacted during the COVID-19 pandemic wind down. As a consequence of the financial pressures and decreased profitability, some hospitals have indicated that they are lowering their capital investment plans and tightening their operational budgets. We believe that these factors have contributed to a softening in ourU.S. capital pipeline, and we expect that demand for capital, particularly in theU.S. , will continue to be impacted while macroeconomic conditions remain challenging. In addition, as competition progresses in various markets, we will likely experience longer selling cycles and pricing pressures. Any or all of these factors could negatively impact the number ofda Vinci procedures performed or the number of system placements and have a material adverse effect on our business, financial condition, results of operations, or cash flows resulting in failure to achieve our anticipated financial results. 28 --------------------------------------------------------------------------------
COVID-19 Pandemic
Procedures
In 2021, COVID-19 resurgences continued to affectda Vinci procedure volumes at various times throughout the year in most of the markets that we operate in. After each resurgence, as COVID-19 cases and hospitalizations subsided, we saw procedure volumes recover. In theU.S. , the impact of high COVID-related hospitalization rates on procedure volumes also have been exacerbated by staffing shortages. Although hospitals are now better equipped to handle COVID patients as compared to the outset of the pandemic, COVID-19 resurgences have challenged, and will continue to challenge, hospital resources and negatively impactda Vinci procedure volumes. In addition, delays in diagnosis and treatment of underlying conditions have, and will continue to have, a negative impact onda Vinci procedure volumes. Volumes associated with benign procedures have generally been impacted to a higher degree when COVID-19 cases and hospitalizations increased, reflecting the deferability of certain elective surgeries. In early 2022, a resurgence of COVID-19 resulted in a significant increase in infections and hospitalization rates in theU.S. and certain countries inEurope , which, in turn, negatively impacted procedure volumes in January and February. As infections and hospitalizations started to decrease in February in theU.S. andEurope , we saw a recovery of procedure volumes. In March and during the second quarter of 2022, we also saw a resurgence in COVID-19 cases and increased hospitalizations and government interventions impacting parts ofAsia , particularlyChina , which negatively impacted procedure volumes. The depth and extent to which the COVID-19 pandemic will impact individual markets will vary based on the availability of resources and interventions, such as medical staff, intensive care units and operating rooms, and vaccinations, as well as government interventions. The impact of COVID-19 on our procedure volumes varies widely by country, region, and type. When COVID-19 infection rates spike in a particular region, procedure volumes have been negatively impacted and the diagnoses of new conditions and their related treatments have been deferred. General Increase in Risks The COVID-19 pandemic and local actions, such as "shelter-in-place" orders and restrictions on our ability to travel and access our customers or temporary closures of our facilities, including our training and manufacturing operations, or the facilities of our suppliers and their contract manufacturers, could further significantly impact our sales and our ability to produce and ship our products and supply our customers. In addition, COVID-19 has contributed to the staffing shortages experienced by hospitals, which impacts hospitals' ability to provide patient care and, in some cases, results in the deferral of elective surgeries.
Our Response
Our priorities and actions during the COVID-19 pandemic have been and remain as follows. First, we are focused on the health and safety of all those we serve-patients, customers, our communities, and our employees-implementing continuous updates to our health and safety policies and processes. Second, we are supporting our customers according to their priorities-clinical, operational, and economic-and ensuring continuity of supply by working with our suppliers and our distributors. Third, we are securing our workforce economically. We have built a valuable team over the years, and we believe they will be important in a recovery that follows the pandemic. Finally, we will continue to invest in our priority development programs while eliminating avoidable spend. As COVID-19 vaccination rates increase and the severity of cases decline, we are implementing our return-to-office strategy. We intend to remain flexible, allowing many of our employees to work remotely on at least a partial basis, while maintaining productivity and our culture. Our top priority in this process continues to be the health and safety of our employees.
Business Model
Overview
We generate revenue from the placements of da Vinci Surgical Systems, in sales or sales-type lease arrangements where revenue is recognized up-front or in operating lease transactions and usage-based models where revenue is recognized over time. We earn recurring revenue from the sales of instruments, accessories, and services, as well as the revenue from operating leases. The da Vinci Surgical System generally sells for between$0.5 million and$2.5 million , depending upon the model, configuration, and geography, and represents a significant capital equipment investment for our customers when purchased. Our instruments and accessories have limited lives and will either expire or wear out as they are used in surgery, at which point they need to be replaced. We generally earn between$600 and$3,500 of instruments and accessories revenue per surgical procedure performed, depending on the type and complexity of the specific procedures performed and the number and type of instruments used. Further, in late 2020, we launched our Extended Use Program (refer to further discussion immediately below) in theU.S. andEurope , with the intention to reduce the cost for customers to treat patients, which in turn will reduce our overall instruments and accessories revenue per procedure. We typically enter into service contracts at the time systems are sold or 29 -------------------------------------------------------------------------------- leased at an annual fee between$80,000 and$190,000 , depending upon the configuration of the underlying system and composition of the services offered under the contract. These service contracts have generally been renewed at the end of the initial contractual service periods. We generate revenue from our Ion endoluminal system in a business model consistent with the da Vinci Surgical System model described above. We generate revenue from the placement of Ion systems, in sales or sales-type lease arrangements where revenue is recognized up-front at a point in time or in operating lease transactions and usage-based models where revenue is recognized over time. We earn recurring revenue from the sales of instruments and accessories used in biopsies and ongoing system service, as well as revenue from operating leases. The average selling price of an Ion system is generally significantly lower than the average selling price of a da Vinci Surgical System. For the three and six months endedJune 30, 2022 , and 2021, Ion's contribution to revenue and gross margin was not significant.
Additionally, as part of our ecosystem of products and services, we provide a portfolio of learning offerings and digital solutions. We do not currently generate material revenue from these offerings.
Extended Use Program
In 2020, we introduced our "Extended Use Program," which consists of selectda Vinci Xi andda Vinci X instruments possessing 12 to 18 uses ("Extended Use Instruments") compared to previously 10 uses. These Extended Use Instruments represent some of our higher volume instruments but exclude stapling, monopolar, and advanced energy instruments. Instruments included in the program are used across a number ofda Vinci surgeries. Their increased uses are the result of continuous, significant investments in the design and production capabilities of our instruments, resulting in improved quality and durability. Extended Use Instruments were introduced in theU.S. andEurope in the fourth quarter of 2020 and launched in most other countries around the world in the first half of 2021, exceptChina due to regulatory timelines. In addition, simultaneous with the regional launches of Extended Use Instruments, we have lowered the price of certain instruments that are most commonly used in lower acuity procedures and/or lower reimbursed procedures within the region. These actions have reduced the cost for customers to treat patients, which in turn has reduced our revenue per procedure. In theU.S. andEurope , during 2021, we saw customers adjust their instrument buying patterns to reduce their inventory levels to reflect the additional uses per instrument. We believe that, as of the end of 2021, in theU.S. andEurope , full cutover to Extended Use Instruments has occurred, as customers have substantially utilized all of their remaining 10 use instruments. The precise impact of these actions on future revenue will be dependent on the future volume and mix of procedures and whether cost elasticity will enable greater penetration into available markets.
Recurring Revenue
Recurring revenue consists of instruments and accessories revenue, service
revenue, and operating lease revenue. Recurring revenue increased to
Instruments and accessories revenue has grown at a faster rate than systems revenue over time. Instruments and accessories revenue increased to$3.10 billion in 2021, compared to$2.46 billion in 2020 and$2.41 billion in 2019. The increase in instruments and accessories revenue largely reflects continued procedure adoption. Service revenue was$916 million in 2021, compared to$724 million in 2020 and 2019. The increase in service revenue was primarily driven by the growth of the installed base of systems producing service revenue, as well as the effects of the Customer Relief Program in the prior year, which resulted in an$80 million decrease in service revenue in 2020. The installed base of da Vinci Surgical Systems grew 12% to approximately 6,730 as ofDecember 31, 2021 ; 7% to approximately 5,989 as ofDecember 31, 2020 ; and 12% to approximately 5,582 as ofDecember 31, 2019 . The installed base of Ion endoluminal systems was approximately 129 as ofDecember 31, 2021 ; approximately 36 as ofDecember 31, 2020 ; and approximately 10 as ofDecember 31, 2019 . We use the installed base, number of placements, and utilization of systems as metrics for financial and operational decision-making and as a means to evaluate period-to-period comparisons. Management believes that the installed base, number of placements, and utilization of systems provide meaningful supplemental information regarding our performance, as management believes that the installed base, number of placements, and utilization of systems are an indicator of the rate of adoption of robotic-assisted surgery or medical procedures as well as an indicator of future recurring revenue (particularly service revenue). Management believes that both it and investors benefit from referring to the installed base, number of placements, and utilization of systems in assessing our performance and when planning, forecasting, and analyzing future periods. The installed base, number of placements, and utilization of systems also facilitate management's internal comparisons of our historical performance. We believe that the installed base, number of placements, and utilization of systems are useful to investors as metrics, because (1) they allow for greater transparency with respect to key metrics used by management in its financial and operational decision-making, and (2) they are used by institutional investors and the analyst community to help them analyze the performance of our business. The vast majority of systems installed are connected via the internet. System 30 -------------------------------------------------------------------------------- logs can also be accessed by field engineers for systems that are not connected to the internet. We utilize this information as well as other information from agreements and discussions with our customers that involve estimates and judgments, which are, by their nature, subject to substantial uncertainties and assumptions. Estimates and judgments for determining the installed base, number of placements, and utilization of systems may be impacted over time by various factors, including system internet connectivity, hospital and distributor reporting behavior, and inherent complexities in new agreements. Such estimates and judgments are also susceptible to technical errors. In addition, the relationship between the installed base, number of placements, and utilization of systems and our revenues may fluctuate from period to period, and growth in the installed base, number of placements, and utilization of systems may not correspond to an increase in revenue. The installed base, number of placements, and utilization of systems are not intended to be considered in isolation or as a substitute for, or superior to, revenue or other financial information prepared and presented in accordance with generally accepted accounting principles.
Since 2013, we have entered into sales-type and operating lease arrangements directly with certain qualified customers as a way to offer customers flexibility in how they acquire systems and expand their robotic-assisted programs while leveraging our balance sheet. These leases generally have commercially competitive terms as compared to other third-party entities that offer equipment leasing. We have also entered into usage-based arrangements with qualified customers that have committedda Vinci programs where we charge for the system and service as the systems are utilized. We believe that these alternative financing structures have been effective and well-received, and we are willing to expand the proportion of these structures based on customer demand. We include operating and sales-type leases, and systems placed under usage-based arrangements, in our system placement and installed base disclosures. We exclude operating lease-related revenue, usage-based revenue, and Ion system revenue from our da Vinci Surgical System average selling price ("ASP") computations. In the years endedDecember 31, 2021 , 2020, and 2019, we placed 668, 432, and 425 da Vinci Surgical Systems, respectively, under lease and usage-based arrangements, of which 517, 317, and 384 systems, respectively, were operating lease and usage-based arrangements. Revenue from operating lease arrangements is generally recognized on a straight-line basis over the lease term or, in the case of usage-based arrangements, as the systems are used. We generally set operating lease and usage-based pricing at a modest premium relative to purchased systems reflecting the time value of money and, in the case of usage-based arrangements, the risk that system utilization may fall short of anticipated levels. Variable lease revenue recognized from usage-based arrangements has been included in our operating lease metrics herein. Operating lease revenue has grown at a faster rate than overall systems revenue and was$277 million ,$177 million , and$107 million for the years endedDecember 31, 2021 , 2020, and 2019, respectively. As revenue for operating leases and usage-based systems is recognized over time, total systems revenue growth is reduced in a period when the number of operating lease and usage-based placements increases as a proportion of total system placements. Generally, lease transactions generate similar gross margins as our sale transactions. As ofDecember 31, 2021 , a total of 1,294 da Vinci Surgical Systems were installed at customers under operating lease or usage-based arrangements. Our exposure to the credit risks relating to our lease financing arrangements may increase if our customers are adversely affected by changes in healthcare laws, coverage and reimbursement, economic pressures or uncertainty, or other customer-specific factors. In addition, as customers divert resources to the treatment of or the preparation to treat patients with COVID-19, we may be exposed to defaults under our lease financing arrangements. Moreover, usage-based arrangements generally contain no minimum payments; therefore, customers may exit such arrangements without paying a financial penalty to us. As a result of the COVID-19 pandemic, we anticipate that some customers will exit such arrangements or seek to amend the terms of our operating lease and usage-based arrangements with them. For some operating lease arrangements, our customers are provided with the right to purchase the leased system at certain points during and/or at the end of the lease term. Revenue generated from customer purchases of systems under operating lease arrangements ("Lease Buyouts") was$96.0 million ,$52.2 million , and$92.8 million for the years endedDecember 31, 2021 , 2020, and 2019, respectively. We expect that revenue recognized from customer exercises of the buyout options will fluctuate based on the timing of when, and if, customers choose to exercise their buyout options. Systems Revenue System placements are driven by procedure growth in most markets. In some markets, system placements are constrained by regulation. In geographies whereda Vinci procedure adoption is in an early stage or system placements are constrained by regulation, system sales will precede procedure growth. System placements also vary due to seasonality, largely aligned with hospital budgeting cycles. We typically place a higher proportion of annual system placements in the fourth quarter and a lower proportion in the first quarter as customer budgets are reset. Systems revenue is also affected by the proportion of system placements under operating lease and usage-based arrangements, recurring operating lease and usage-based revenue, operating lease buyouts, product mix, ASPs, trade-in activities, and customer mix. Systems revenue grew 44% to$1.69 billion in 2021. Systems revenue declined 12% to$1.18 billion in 2020. Systems revenue grew 19% to$1.35 billion in 2019. Based on the 31 --------------------------------------------------------------------------------
factors outlined in the COVID-19 Pandemic section above, we believe that historical system placement trends may not be a good indicator of future system placements.
Procedure Mix / Products Our da Vinci Surgical Systems are generally used for soft tissue surgery for areas of the body between the pelvis and the neck, primarily in general surgery, gynecologic surgery, urologic surgery, cardiothoracic surgery, and head and neck surgery. Within these categories, procedures range in complexity from cancer and other highly complex procedures to less complex procedures for benign conditions. Cancer and other highly complex procedures tend to be reimbursed at higher rates than less complex procedures for benign conditions. Thus, hospitals are more sensitive to the costs associated with treating less complex, benign conditions. Our strategy is to provide hospitals with attractive clinical and economic solutions across the spectrum of procedure complexity. Our fully featured da Vinci Xi Surgical System with advanced instruments (including da Vinci Energy and EndoWrist and SureForm Stapler products) and our Integrated Table Motion product targets the more complex procedure segment. Ourda Vinci X Surgical System is targeted towards price sensitive markets and procedures. Our da Vinci SP Surgical System complements the da Vinci Xi and X Surgical Systems by enabling surgeons to access narrow workspaces.
Procedure Seasonality
More than half ofda Vinci procedures performed are for benign conditions, most notably hernia repairs, hysterectomies, and cholecystectomies. These benign procedures and other short-term elective procedures tend to be more seasonal than cancer operations and surgeries for other life-threatening conditions. Seasonality in theU.S. for procedures for benign conditions typically results in higher fourth quarter procedure volume when more patients have met annual deductibles and lower first quarter procedure volume when deductibles are reset. Seasonality outside theU.S. varies and is more pronounced around local holidays and vacation periods. As a result of the factors outlined in the COVID-19 Pandemic section above, including past and potentially future recommendations of authorities to defer elective procedures, historical procedure patterns may be disrupted. Distribution Channels We provide our products through direct sales organizations in theU.S. ,Europe (excludingSpain ,Portugal ,Italy ,Greece , and most Eastern European countries),China (through our Intuitive-Fosun Pharma joint venture),Japan ,South Korea ,India ,Taiwan and, as ofJune 2022 ,Canada . In the remainder of our OUS markets, we provide our products through distributors.
Regulatory Activities
Overview
Our products must meet the requirements of a large and growing body of international standards that govern the product safety, efficacy, advertising, labeling, safety reporting design, manufacture, materials content and sourcing, testing, certification, packaging, installation, use, and disposal of our products. Examples of such standards include electrical safety standards, such as those of theInternational Electrotechnical Commission , and composition standards, such as the Reduction of Hazardous Substances and the Waste Electrical and Electronic Equipment Directives. Failure to meet these standards could limit our ability to market our products in those regions that require compliance to such standards. Our products and operations are also subject to increasingly stringent medical device, privacy, and other regulations by regional, federal, state, and local authorities. After a device is placed on the market, numerous FDA and other regulatory requirements continue to apply. These requirements include establishment registration and device listing with the FDA and compliance with medical device reporting regulations, which require that manufacturers report to the FDA if their device caused or contributed, or may have caused or contributed, to a death or serious injury or malfunctioned in a way that would likely cause or contribute to a death or serious injury if it were to recur. We recently revised our medical device reporting policies, which had been developed based on previous feedback from the FDA. These revisions have been made in consultation with the FDA to better align with existing regulations. There has been an increase in medical device reporting filings due to changes in our reportability criteria. In addition, we have been investing in resources and utilizing external experts to strengthen our quality system. These efforts are ongoing. We also anticipate that timelines for the introduction of new products and/or indications may be extended relative to past experience as a result of these regulations. For example, we have seen elongated regulatory approval timelines in theU.S. and the EU. 32 --------------------------------------------------------------------------------
Clearances and Approvals
We have generally obtained the clearances required to market our products
associated with our da Vinci Surgical Multiport Systems (Standard, S, Si, Xi,
and X systems) for our targeted surgical specialties within the
•In
•In
•InDecember 2021 , we obtained FDA clearance for our 8 mm SureForm 30 Curved-Tip Stapler and reloads for use in general, thoracic, gynecologic, urologic, and pediatric surgery. The 8 mm SureForm 30 stapler is expected to launch in theU.S. in 2022, with other countries to follow. •In late 2020 and early 2021, we obtained FDA clearance, CE mark clearance, and other regulatory clearances in most of our significant markets to market our Extended Use Instruments. •InNovember 2019 , we obtained FDA clearance for our SynchroSeal instrument and E-100 generator. Following the FDA clearance, inFebruary 2020 , we received CE mark clearance for both products. InMarch 2020 , we received regulatory clearance inJapan to market both our SynchroSeal instrument and E-100 generator. We received regulatory clearance inSouth Korea to market our SynchroSeal instrument and E-100 generator inJanuary 2020 andAugust 2020 , respectively. •InJune 2019 , we received CE mark clearance for our da Vinci Endoscope Plus for the da Vinci Xi and da Vinci X Surgical Systems inEurope . Following the CE mark, inJuly 2019 , we obtained FDA clearance for our da Vinci Endoscope Plus. We have also received regulatory clearances inSouth Korea andJapan to market our da Vinci Endoscope Plus inDecember 2019 andMay 2020 , respectively. InMarch 2022 , we received regulatory clearance inChina to market ourda Vinci Endoscope Plus.
•In
Refer to the descriptions of our new products that received regulatory clearances in 2022, 2021, and 2020 in the New Product Introductions section below.
InOctober 2018 , theChina National Health Commission published on its official website the quota for major medical equipment to be sold inChina through 2020. After an adjustment notice was published in the third quarter of 2020, the government will now allow for the total sale of 225 new surgical robots intoChina , which could include da Vinci Surgical Systems as well as surgical systems introduced by others. As ofJune 30, 2022 , we have sold 172 da Vinci Surgical Systems under this quota, and five system quotas are no longer available; therefore, 48 surgical robots can still be sold under this quota. Future sales of da Vinci Surgical Systems under the quota are uncertain, as they are dependent on hospitals completing a tender process and receiving associated approvals.The Japanese Ministry of Health , Labor, and Welfare ("MHLW") considers reimbursement for procedures in April of even-numbered years. The process for obtaining reimbursement requires Japanese university hospitals and surgical societies, with our support, to seek reimbursement. There are multiple pathways to obtain reimbursement for procedures, including those that require in-country clinical data/economic data. InApril 2012 andApril 2016 , the MHLW granted reimbursement status for prostatectomy and partial nephrectomy, respectively. Most prostatectomies and partial nephrectomies were open procedures prior toda Vinci reimbursement.Da Vinci procedure reimbursement for prostatectomy and partial nephrectomy procedures are higher than open and conventional laparoscopic procedure reimbursements. An additional 12 da Vinci procedures were granted reimbursement effectiveApril 1, 2018 , including gastrectomy, low anterior resection, lobectomy, and hysterectomy, for both malignant and benign conditions, and an additional sevenda Vinci procedures were granted reimbursement effectiveApril 1, 2020 . An additional eightda Vinci procedures were granted reimbursement effectiveApril 1, 2022 , including colon resection. In addition, we received higher reimbursement forda Vinci gastrectomy procedures, as compared to open and conventional laparoscopic procedure reimbursements. The additional reimbursed procedures have varying levels of conventional laparoscopic penetration and will generally be reimbursed at rates equal to the conventional laparoscopic procedures. Given the reimbursement level and laparoscopic penetration for these additional procedures, there can be no assurance that the adoption pace for these procedures will be similar to prostatectomy or partial nephrectomy, given their higher reimbursement, or any otherda Vinci procedure. 33 --------------------------------------------------------------------------------
Recalls and Corrections
Medical device companies have regulatory obligations to correct or remove medical devices in the field that could pose a risk to health. The definition of "recalls and corrections" is expansive and includes repair, replacement, inspections, relabeling, and issuance of new or additional instructions for use or reinforcement of existing instructions for use and training when such actions are taken for specific reasons of safety or compliance. These field actions require stringent documentation, reporting, and monitoring worldwide. There are other actions that a medical device manufacturer may take in the field without reporting including, but not limited to, routine servicing and stock rotations. As we determine whether a field action is reportable in any regulatory jurisdiction, we prepare and submit notifications to the appropriate regulatory agency for the particular jurisdiction. Regulators can require the expansion, reclassification, or change in scope and language of the field action. In general, upon submitting required notifications to regulators regarding a field action that is a recall or correction, we will notify customers regarding the field action, provide any additional documentation required in their national language, and arrange, as required, the return or replacement of the affected product or a field service visit to perform the correction. Field actions, as well as certain outcomes from regulatory activities, can result in adverse effects on our business, including damage to our reputation, delays by customers of purchase decisions, reduction or stoppage of the use of installed systems, and reduced revenue as well as increased expenses.
Procedures
We model patient value as equal to procedure efficacy / invasiveness. In this equation, procedure efficacy is defined as a measure of the success of the surgery in resolving the underlying disease, and invasiveness is defined as a measure of patient pain and disruption of regular activities. When the patient value of ada Vinci procedure is greater than that of alternative treatment options, patients may benefit from seeking out surgeons and hospitals that offer da Vinci Surgery, which could potentially result in a local market share shift. Adoption ofda Vinci procedures occurs procedure by procedure and market by market and is driven by the relative patient value and total treatment costs ofda Vinci procedures as compared to alternative treatment options for the same disease state or condition. We use the number and type of procedures as metrics for financial and operational decision-making and as a means to evaluate period-to-period comparisons. Management believes that the number and type of procedures provide meaningful supplemental information regarding our performance, as management believes procedure volume is an indicator of the rate of adoption of robotic-assisted surgery as well as an indicator of future revenue (including revenue from usage-based arrangements). Management believes that both it and investors benefit from referring to the number and type of procedures in assessing our performance and when planning, forecasting, and analyzing future periods. The number and type of procedures also facilitate management's internal comparisons of our historical performance. We believe that the number and type of procedures are useful to investors as metrics, because (1) they allow for greater transparency with respect to key metrics used by management in its financial and operational decision-making, and (2) they are used by institutional investors and the analyst community to help them analyze the performance of our business. The vast majority of systems installed are connected via the internet. System logs can also be accessed by field engineers for systems that are not connected to the internet. We utilize certain methods that rely on information collected from the systems installed for determining the number and type of procedures performed that involve estimates and judgments, which are, by their nature, subject to substantial uncertainties and assumptions. Estimates and judgments for determining the number and type of procedures may be impacted over time by various factors, including changes in treatment modalities, hospital and distributor reporting behavior, and system internet connectivity. Such estimates and judgments are also susceptible to algorithmic or other technical errors. In addition, the relationship between the number and type of procedures and our revenues may fluctuate from period to period, and procedure volume growth may not correspond to an increase in revenue. The number and type of procedures are not intended to be considered in isolation or as a substitute for, or superior to, revenue or other financial information prepared and presented in accordance with generally accepted accounting principles.
Worldwide Procedures
Ourda Vinci systems and instruments are regulated independently in various countries and regions of the world. The discussion of indications for use and representative or target procedures is intended solely to provide an understanding of the market forda Vinci products and is not intended to promote for sale or use of any Intuitive product outside of its licensed or cleared labeling and indications for use. The adoption of robotic-assisted surgery using the da Vinci Surgical System has the potential to grow for those procedures that offer greater patient value than to non-da Vinci alternatives and competitive total economics for healthcare providers. Our da Vinci Surgical Systems are used primarily in general surgery, urologic surgery, gynecologic surgery, cardiothoracic surgery, and head and neck surgery. We focus our organization and investments on developing, marketing, and training products and services for procedures in whichda Vinci can bring patient value relative to alternative treatment options and/or economic 34 -------------------------------------------------------------------------------- benefit to healthcare providers. Target procedures in general surgery include hernia repair (both ventral and inguinal), colorectal procedures, cholecystostomies, and bariatrics. Target procedures in urology include prostatectomy and partial nephrectomy. Target procedures in gynecology include hysterectomy for both cancer and benign conditions and sacrocolpopexy. In cardiothoracic surgery, target procedures include lobectomy. In head and neck surgery, target procedures include transoral surgery. Not all indications, procedures, or products described may be available in a given country or region or on all generations ofda Vinci surgical systems. Surgeons and their patients need to consult the product labeling in their specific country and for each product in order to determine the cleared uses, as well as important limitations, restrictions, or contraindications. In 2021, approximately 1,594,000 surgical procedures were performed with da Vinci Surgical Systems, compared to approximately 1,243,000 and 1,229,000 surgical procedures performed with da Vinci Surgical Systems in 2020 and 2019, respectively. The increase in our overall procedure volume in 2021 reflects the significant disruption caused by the COVID-19 pandemic in 2020, as noted in the COVID-19 Pandemic section above, and was driven by growth inU.S. general surgery and gynecology procedures and worldwide urology procedures.
OverallU.S. procedure volume with da Vinci Surgical Systems grew to approximately 1,109,000 in 2021, compared to approximately 876,000 in 2020 and approximately 883,000 in 2019. General surgery was our largest and fastest growingU.S. specialty in 2020 with procedure volume that grew to approximately 589,000 in 2021, compared to approximately 434,000 in 2020 and approximately 421,000 in 2019. Gynecology was our second largestU.S. surgical specialty in 2021 with procedure volume that grew to approximately 316,000 in 2021, compared to approximately 267,000 in 2020 and approximately 282,000 in 2019. Urology was our third largestU.S. surgical specialty in 2021 with procedure volume that grew to approximately 153,000 in 2021, compared to approximately 134,000 in 2020 and approximately 138,000 in 2019.
Procedures Outside of the
Overall OUS procedure volume with da Vinci Surgical Systems grew to
approximately 485,000 in 2021, compared to approximately 367,000 in 2020 and
approximately 346,000 in 2019. Urology was our largest OUS specialty in 2021
with procedure volume that grew to approximately 264,000 in 2021, compared to
approximately 214,000 in 2020 and approximately 206,000 in 2019. General surgery
was our second largest OUS specialty in 2021 with procedure volume that grew to
approximately 101,000 in 2021, compared to approximately 68,000 in 2020 and
approximately 62,000 in 2019. Thoracic procedures also contributed to OUS
procedure growth with higher growth rates than urology and general surgery
procedures.
35
--------------------------------------------------------------------------------Recent Business Events and Trends
Procedures
Overall. Totalda Vinci procedures performed by our customers grew approximately 14% for the three months endedJune 30, 2022 , compared to approximately 68% for the three months endedJune 30, 2021 . Totalda Vinci procedures performed by our customers grew approximately 16% for the six months endedJune 30, 2022 , compared to approximately 39% for the six months endedJune 30, 2021 . The second quarter 2022 and 2021 procedure results (and comparative second quarter 2020 procedure results) reflect disruption caused by the COVID-19 pandemic, as noted in the COVID-19 Pandemic section above. The second quarter 2022 procedure growth was largely attributable to growth inU.S. general surgery and growth in OUS markets. Delays in both the diagnosis and treatments of disease reflecting disruptions caused by COVID-19 have previously and may continue to impact the number of procedures performed by our customers.U.S. Procedures.U.S. da Vinci procedures grew approximately 11% for the three months endedJune 30, 2022 , compared to approximately 77% for the three months endedJune 30, 2021 .U.S. da Vinci procedures grew approximately 13% for the six months endedJune 30, 2022 , compared to approximately 41% for the six months endedJune 30, 2021 . The second quarter 2022 and 2021 procedure results reflect disruption caused by the COVID-19 pandemic, as noted in the COVID-19 Pandemic section above. The second quarter 2022 U.S. procedure growth was largely attributable to growth in general surgery procedures, most notably bariatric, cholecystectomy, and hernia repair procedures. Growth in the more mature gynecologic and urologic procedure categories was more moderate. OUS Procedures. OUS da Vinci procedures grew approximately 22% for the three months endedJune 30, 2022 , compared to approximately 51% for the three months endedJune 30, 2021 . OUS da Vinci procedures grew approximately 23% for the six months endedJune 30, 2022 , compared to approximately 36% for the six months endedJune 30, 2021 . The second quarter 2022 and 2021 procedure results reflect disruption caused by the COVID-19 pandemic, as noted in the COVID-19 Pandemic section above. The second quarter 2022 OUS procedure growth was driven by continued growth in urologic procedures, including prostatectomies and partial nephrectomies, and earlier stage growth in general surgery (particularly colorectal), gynecology, and thoracic procedures. The second quarter 2022 OUS procedure growth rate reflects continuedda Vinci adoption in European and Asian markets. We saw strong procedure growth inJapan ,Italy , andGermany during the second quarter of 2022. However, our procedure volume inChina was impacted by an increase in COVID-19 cases and preventative measures and interventions taken by the government. We believe growth in our global markets is being driven by increased acceptance among surgeons and health systems, supported by expanded global evidence validating the clinical and economic value ofda Vinci procedures.
System Demand
We placed 279 da Vinci Surgical Systems in the second quarter of 2022, compared to 328 systems in the second quarter of 2021. The decrease in systems placed reflects a smaller number of third generationda Vinci systems available for trade-in, along with supply chain and logistical challenges impacting the number of systems available for shipment, and a softening of our capital pipeline in theU.S. caused by increased financial pressures on hospitals from higher inflation, increasing interest rates, and continued staffing shortages. As a consequence of the financial pressures and decreased profitability, some hospitals have indicated they are lowering their capital investment plans and tightening operational budgets. We expect that demand for capital, particularly in theU.S. , will be impacted while macroeconomic conditions remain challenging. In addition, given the lower number of older generation systems in the field, we expect the volume of trade-ins to be significantly lower in 2022 as compared to 2021. Second quarter 2022 placements declined 15% compared with 2021, and future placements of da Vinci Surgical Systems will be impacted by a number of factors: supply chain risks; economic and geopolitical factors; inflationary pressures; rising interest rates; hospital staffing shortages; the impact of the current COVID-19 pandemic, as noted in the COVID-19 Pandemic section above; hospital response to the evolving healthcare environment; procedure growth rates; hospital consolidation trends; evolving system utilization and point of care dynamics; capital replacement trends, including a declining number of older generation systems available for trade-in transactions; additional reimbursements in various global markets, includingJapan : the timing around governmental tenders and authorizations, includingChina ; the timing of when we receive regulatory clearance in our other OUS markets for ourda Vinci Xi Surgical System, da Vinci X Surgical System, and da Vinci SP Surgical System, and related instruments; and market response. Market acceptance of ourda Vinci SP Surgical System and the nature and timing of additional da Vinci SP regulatory indications may also impact future system placements. Demand may also be impacted by robotic-assisted surgery competition, including from companies that have introduced products in the field of robotic-assisted surgery or have made explicit statements about their efforts to enter the field including, but not limited to, the following companies: Asensus Surgical, Inc.; avateramedicalGmbH ;CMR Surgical Ltd. ; Johnson & Johnson;Medicaroid, Inc. ;Medrobotics Corporation ; Medtronic plc; meerecompany Inc.; MicroPort Scientific Corporation; Olympus Corporation;Samsung Group ; Shandong Weigao Group Medical Polymer Company Ltd.; and Titan Medical Inc. 36 -------------------------------------------------------------------------------- Many of the above factors will also impact future demand for our Ion system, as we extend our commercial offering into diagnostics, along with additional factors associated with a new product introduction, including, but not limited to, our ability to optimize manufacturing and our supply chain, competition, clinical data to demonstrate value, and market acceptance.
New Product Introductions
SureForm 30 Curved-Tip Stapler and Reloads. InDecember 2021 , we obtained FDA clearance for our 8 mm SureForm 30 Curved-Tip Stapler and reloads (gray, white, and blue) for use in general, thoracic, gynecologic, urologic, and pediatric surgery. It has been designed to help surgeons better visualize and reach anatomy through a combination of the 8 mm diameter instrument shaft and jaws, 120-degree cone of wristed articulation, and the curved tip. As it fits through the 8 mmda Vinci surgical system instrument cannula, the stapler allows different angles for surgeons to approach patient anatomy. Consistent with the other SureForm staplers, the 8 mm SureForm 30 Curved-Tip Stapler integrates SmartFire technology, which makes automatic adjustments to the firing process as staples are formed and the transection is made. The technology makes more than 1,000 measurements per second, helping achieve a consistent staple line. We are introducing the 8 mm SureForm 30 stapler in a measured fashion in theU.S. in 2022, with other countries to follow. SynchroSeal and E-100 Generator. InNovember 2019 , we obtained FDA clearance for our SynchroSeal instrument and E-100 generator. Following the FDA clearance, inFebruary 2020 , we received CE mark clearance for both products. InMarch 2020 , we received regulatory clearance inJapan to market both our SynchroSeal instrument and E-100 generator. InAugust 2020 , we received regulatory clearance inSouth Korea to market our E-100 generator. SynchroSeal is a single-use, bipolar, electrosurgical instrument intended for grasping, dissection, sealing, and transection of tissue. With its wristed articulation, rapid sealing cycle, and refined curved jaw, SynchroSeal offers enhanced versatility to the da Vinci Energy portfolio. The E-100 generator is an electrosurgical generator developed to power two key instruments-Vessel Sealer Extend and SynchroSeal-on the da Vinci X and da Vinci Xi Surgical Systems. The generator delivers high frequency energy for cutting, coagulation, and vessel sealing of tissues. Da Vinci Endoscope Plus. InJune 2019 , we received CE mark clearance for our da Vinci Endoscope Plus, an enhanced 3D endoscope for use with ourda Vinci X and Xi Surgical Systems. Following the CE mark, inJuly 2019 , we obtained FDA clearance for our da Vinci Endoscope Plus. We have also received regulatory clearances inSouth Korea andJapan to market our da Vinci Endoscope Plus inDecember 2019 andMay 2020 , respectively. InMarch 2022 , we received regulatory clearance inChina to market our da Vinci Endoscope Plus. The da Vinci Endoscope Plus leverages new sensor technology to allow for increased sharpness and color accuracy. Da Vinci Handheld Camera. InJune 2019 , we obtained FDA clearance for our da Vinci Handheld Camera, a lightweight, 2D camera head, which can be connected to third-party laparoscopes. This allows the laparoscopic image to be displayed on the da Vinci X/Xi vision cart to address aspects ofda Vinci procedures that may require use of a laparoscope, thus eliminating the need for redundant equipment in the operating room and increasing procedure efficiency. InFebruary 2020 , we received CE mark clearance for our da Vinci Handheld Camera. We broadly launched the da Vinci Handheld Camera in our European direct markets as well as in theU.S. inMay 2020 andJune 2020 , respectively. 37 --------------------------------------------------------------------------------
Second Quarter 2022 Operational and Financial Highlights
•Total revenue increased by 4% to$1.52 billion for the three months endedJune 30, 2022 , compared to$1.46 billion for the three months endedJune 30, 2021 . •Approximately 465,000da Vinci procedures were performed during the three months endedJune 30, 2022 , an increase of 14% compared to approximately 408,000 for the three months endedJune 30, 2021 . •Approximately 5,200 Ion procedures were performed during the three months endedJune 30, 2022 , an increase of 251% compared to approximately 1,480 for the three months endedJune 30, 2021 . •Instruments and accessories revenue increased by 12% to$895 million for the three months endedJune 30, 2022 , compared to$796 million for the three months endedJune 30, 2021 . •Systems revenue decreased by 15% to$375 million for the three months endedJune 30, 2022 , compared to$440 million during the three months endedJune 30, 2021 . •During the three months endedJune 30, 2022 , we placed 279 da Vinci Surgical Systems, a decrease of 15% compared to 328 systems during the three months endedJune 30, 2021 .
•As of
•Utilization of da Vinci Surgical Systems, measured in terms of procedures per system per year, increased 1% relative to the second quarter of 2021.
•During the three months endedJune 30, 2022 , we placed 41 Ion systems, an increase of 105% compared to 20 systems during the three months endedJune 30, 2021 . •As ofJune 30, 2022 , we had an Ion system installed base of approximately 204 systems, an increase of 191% compared to the installed base of approximately 70 systems as ofJune 30, 2021 .
•Gross profit as a percentage of revenue was 67.2% for the three months ended
•Operating income decreased by 22% to$398 million for the three months endedJune 30, 2022 , compared to$511 million during the three months endedJune 30, 2021 . Operating income included$127 million and$110 million of share-based compensation expense related to employee stock plans and$8.0 million and$10.9 million of intangible asset-related charges for the three months endedJune 30, 2022 , and 2021, respectively. •As ofJune 30, 2022 , we had$8.18 billion in cash, cash equivalents, and investments. Cash, cash equivalents, and investments decreased by$444 million , compared to$8.62 billion as ofDecember 31, 2021 , primarily as a result of cash used for share repurchases of$607 million , capital expenditures, and taxes paid related to net share settlements of equity awards, as well as unrealized losses on interest-bearing debt securities classified as available for sale, partially offset by cash provided by operating activities and proceeds from stock option exercises and employee stock purchases. 38 --------------------------------------------------------------------------------
Results of Operations
The following table sets forth, for the periods indicated, certain unaudited
Condensed Consolidated Statements of Income information (in millions, except
percentages):
Three Months Ended June 30, Six Months Ended June 30,
% of total % of total % of total % of total
2022 Revenue 2021 Revenue 2022 revenue 2021 revenue
Revenue:
Product $ 1,270.4 83 % $ 1,236.0 84 % $ 2,508.8 83 % $ 2,310.6 84 %
Service 251.7 17 % 228.0 16 % 501.0 17 % 445.5 16 %
Total revenue 1,522.1 100 % 1,464.0 100 % 3,009.8 100 % 2,756.1 100 %
Cost of revenue:
Product 421.0 27 % 374.0 25 % 818.3 27 % 693.3 25 %
Service 77.8 6 % 66.3 5 % 158.5 5 % 136.5 5 %
Total cost of revenue 498.8 33 % 440.3 30 % 976.8 32 % 829.8 30 %
Product gross profit 849.4 56 % 862.0 59 % 1,690.5 56 % 1,617.3 59 %
Service gross profit 173.9 11 % 161.7 11 % 342.5 12 % 309.0 11 %
Gross profit 1,023.3 67 % 1,023.7 70 % 2,033.0 68 % 1,926.3 70 %
Operating expenses:
Selling, general and administrative 418.4 27 % 350.2 24 % 809.5 27 % 676.2 24 %
Research and development 207.3 14 % 162.3 11 % 417.8 14 % 322.1 12 %
Total operating expenses 625.7 41 % 512.5 35 % 1,227.3 41 % 998.3 36 %
Income from operations 397.6 26 % 511.2 35 % 805.7 27 % 928.0 34 %
Interest and other income, net 9.3 1 % 15.0 1 % 3.6 - % 47.0 1 %
Income before taxes 406.9 27 % 526.2 36 % 809.3 27 % 975.0 35 %
Income tax expense 93.3 6 % 3.2 - % 126.3 4 % 16.8 - %
Net income 313.6 21 % 523.0 36 % 683.0 23 % 958.2 35 %
Less: net income attributable to
noncontrolling interest in joint
venture 5.8 1 % 5.8 1 % 9.6 1 % 14.7 1 %
Net income attributable to Intuitive
Surgical, Inc. $ 307.8 20 % $ 517.2 35 % $ 673.4 22 % $ 943.5 34 %
Total Revenue
Total revenue increased by 4% to $1.52 billion for the three months ended
June 30, 2022 , compared to $1.46 billion for the three months ended June 30,
2021 , resulting from 12% higher instruments and accessories revenue, driven by
approximately 14% higher procedure volume, partially offset by foreign currency
impacts, and 10% higher service revenue, partially offset by 15% lower systems
revenue, driven by 15% lower system placements and a higher proportion of system
placements under operating leases, partially offset by higher leasing revenue.
Total revenue increased by 9% to $3.0 billion for the six months ended June 30,
2022 , compared to $2.8 billion for the six months ended June 30, 2021 , resulting
from 14% higher instruments and accessories revenue, driven by approximately 16%
higher procedure volume, partially offset by foreign currency impacts and the
effects of the Extended Use Program, and 12% higher service revenue, partially
offset by 1% lower systems revenue, driven by 6% lower system placements,
partially offset by higher leasing revenue.
Revenue denominated in foreign currencies as a percentage of total revenue was
approximately 22% and 24% for the three and six months ended June 30, 2022 ,
respectively, and 21% and 22% for the three and six months ended 2021,
respectively. We generally sell our products and services in local currencies
where we have direct distribution channels. Foreign currency rate fluctuations,
as determined by comparing current period revenue in USD to current period
revenue in local currency using the same foreign exchange rates as the prior
year same period, net of the impacts from foreign currency hedging, had an
unfavorable impact on OUS total revenue of $35 million and $53 million for the
three and six months ended June 30, 2022 , respectively. Foreign currency rate
fluctuations, net of the impacts from foreign currency hedging, had a favorable
impact on OUS total revenue of $18 million and $34 million for the three and six
months ended June 30, 2021 , respectively.
39
--------------------------------------------------------------------------------
Revenue generated in the U.S. accounted for 66% of total revenue for both the
three and six months ended June 30, 2022 , respectively, and 69% and 67% for the
three and six months ended 2021, respectively. We believe that U.S. revenue has
accounted for the large majority of total revenue due to U.S. patients' ability
to choose their provider and method of treatment, reimbursement structures
supportive of innovation and MIS, and our initial investments focused on U.S.
infrastructure. We have been investing in our business in the OUS markets, and
our OUS procedures have grown faster in proportion to U.S. procedures. We expect
that our OUS procedures and revenue will make up a greater portion of our
business in the long term.
The following table summarizes our revenue and system unit placements for the
three and six months ended June 30, 2022 , and 2021, respectively (in millions,
except percentages and unit placements):
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
Revenue
Instruments and accessories $ 895.3 $ 796.4 $ 1,705.6 $ 1,502.3
Systems 375.1 439.6 803.2 808.3
Total product revenue 1,270.4 1,236.0 2,508.8 2,310.6
Services 251.7 228.0 501.0 445.5
Total revenue $ 1,522.1 $ 1,464.0 $ 3,009.8 $ 2,756.1
United States $ 1,011.1 $ 1,005.8 $ 1,975.9 $ 1,853.3
OUS 511.0 458.2 1,033.9 902.8
Total revenue $ 1,522.1 $ 1,464.0 $ 3,009.8 $ 2,756.1
% of Revenue-U.S. 66 % 69 % 66 % 67 %
% of Revenue-OUS 34 % 31 % 34 % 33 %
Instruments and accessories $ 895.3 $ 796.4 $ 1,705.6 $ 1,502.3
Services 251.7 228.0 501.0 445.5
Operating lease revenue 93.0 67.3 176.2 126.3
Total recurring revenue $ 1,240.0 $ 1,091.7 $ 2,382.8 $ 2,074.1
% of Total revenue 81 % 75 % 79 % 75 %
Da Vinci Surgical Systems Placements by
Region:
U.S. unit placements 150 213 336 403
OUS unit placements 129 115 254 223
Total unit placements* 279 328 590 626
*Systems placed under operating leases
(included in total unit placements) 117 108 225 235
Da Vinci Surgical Systems Placements
involving System Trade-ins:
Unit placements involving trade-ins 56 125 164 257
Unit placements not involving trade-ins 223 203 426 369
Ion Systems Placements** 41 20 75 34
**Systems placed under operating leases
(included in total unit placements) 25 9 40 19
Product Revenue
Three Months Ended
Product revenue increased by 3% to
40
--------------------------------------------------------------------------------
Instruments and accessories revenue increased by 12% to $895 million for the
three months ended June 30, 2022 , compared to $796 million for the three months
ended June 30, 2021 . The increase in instruments and accessories revenue was
driven primarily by procedure growth of approximately 14% and incremental sales
of our advanced instruments, partially offset by foreign currency impacts. The
second quarter 2022 U.S. procedure growth was approximately 11%, driven by
strong growth in general surgery procedures, most notably bariatric,
cholecystectomy, and hernia repair procedures, as well as moderate growth in the
more mature gynecologic and urologic procedures categories. The second quarter
2022 OUS procedure growth was approximately 22%, driven by continued growth in
urology procedures, most notably prostatectomy and partial nephrectomy
procedures, and earlier stage growth in general surgery (particularly
colorectal), gynecology, and thoracic procedures. Both growth rates were
impacted by the disruption caused by the COVID-19 pandemic, as noted in the
COVID-19 Pandemic section above. Geographically, the second quarter 2022 OUS
procedure growth was driven by procedure expansion in a number of markets with
particular strength in Japan , Italy , and Germany .
Systems revenue decreased by 15% to $375 million for the three months ended
June 30, 2022 , compared to $440 million for the three months ended June 30,
2021 . The lower second quarter 2022 systems revenue was primarily driven by
fewer system placements, lower second quarter 2022 ASPs, lower sales-type lease
revenue, lower lease buyout revenue, and a higher proportion of system
placements under operating leases, partially offset by higher operating lease
revenue.
During the second quarter of 2022, 279 da Vinci Surgical Systems were placed
compared to 328 systems during the second quarter of 2021. By geography, 150
systems were placed in the U.S. , 78 in Europe , 46 in Asia , and 5 in other
markets during the second quarter of 2022, compared to 213 systems placed in the
U.S. , 63 in Europe , 41 in Asia , and 11 in other markets during the second
quarter of 2021. The decrease in systems placements was primarily driven by a
smaller number of third generation da Vinci systems available for trade-in,
along with supply chain and logistical challenges impacting the number of
systems available for shipment, and a softening of our capital pipeline in the
U.S. caused by increased financial pressures on hospitals. Nevertheless, the
incremental systems placements reflect procedure growth, customers trading in da
Vinci Si Surgical Systems for fourth generation da Vinci Xi and da Vinci X
systems in order to access fourth generation instruments and capabilities as
well as to standardize their system portfolio, and further customer validation
that da Vinci surgery addresses their quadruple aim objectives. As of June 30,
2022 , we had a da Vinci Surgical System installed base of approximately 7,135
systems, compared to the installed base of approximately 6,335 systems as of
June 30, 2021 .
We placed 152 and 168 da Vinci Surgical Systems under lease or usage-based
arrangements, of which 117 and 108 systems were classified as operating leases
for the three months ended June 30, 2022 , and 2021, respectively. Operating
lease revenue, including the impact of Ion systems, was $93.0 million for the
three months ended June 30, 2022 , compared to $67.3 million for the three months
ended June 30, 2021 . Da Vinci Surgical Systems placed as operating leases
represented 42% of total placements during the second quarter of 2022, compared
to 33% during the second quarter of 2021. A total of 1,469 da Vinci Surgical
Systems were installed at customers under operating lease or usage-based
arrangements as of June 30, 2022 , compared to 1,073 as of June 30, 2021 . Revenue
from Lease Buyouts was $22.5 million for the three months ended June 30, 2022 ,
compared to $26.1 million for the three months ended June 30, 2021 . We expect
revenue from Lease Buyouts to fluctuate period to period depending on the timing
of when, and if, customers choose to exercise the buyout options embedded in
their leases.
The da Vinci Surgical System ASP, excluding the impact of systems placed under
operating lease or usage-based arrangements and Ion systems, was approximately
$1.50 million for the three months ended June 30, 2022 , compared to
approximately $1.55 million for the three months ended June 30, 2021 . The lower
second quarter 2022 ASP was largely driven by unfavorable geographic mix and
foreign currency impacts, partially offset by lower pricing discounts and fewer
trade-ins. ASP fluctuates from period to period based on geographic and product
mix, product pricing, systems placed involving trade-ins, and changes in foreign
exchange rates.
During the second quarter of 2022, 41 Ion systems were placed compared to 20
systems during the second quarter of 2021. As of June 30, 2022 , we had an Ion
system installed base of approximately 204 systems, compared to the installed
base of approximately 70 systems as of June 30, 2021 . We placed 26 and 11 Ion
systems under lease or usage-based arrangements, of which 25 and 9 systems were
classified as operating leases for the three months ended June 30, 2022 , and
2021, respectively. Ion systems placed as operating leases represented 61% of
total placements during the second quarter of 2022, compared to 45% during the
second quarter of 2021. A total of 90 Ion systems were installed at customers
under operating or usage-based arrangements as of June 30, 2022 , compared to 30
as of June 30, 2021 .
Six Months Ended
Product revenue increased by 9% to
Instruments and accessories revenue increased by 14% to$1.71 billion for the six months endedJune 30, 2022 , compared to$1.50 billion for the six months endedJune 30, 2021 . The increase in instruments and accessories revenue was primarily driven by procedure growth of approximately 16% and incremental sales of our advanced instruments. The increase was 41 -------------------------------------------------------------------------------- partially offset by foreign currency impacts in the six months endedJune 30, 2022 , and the benefit of stocking orders in the six months endedJune 30, 2021 , associated with the launch our Extended Use Program. The year-to-date 2022 U.S. procedure growth was approximately 13%, driven by strong growth in general surgery procedures, most notably bariatric, cholecystectomy, and hernia repair procedures, as well as moderate growth in the more mature gynecologic and urologic procedures categories. The year-to-date 2022 OUS procedure growth was approximately 23%, driven by continued growth in urology procedures, most notably prostatectomy and partial nephrectomy procedures, and earlier stage growth in general surgery (particularly colorectal), gynecology, and thoracic procedures. Both growth rates were impacted by the disruption caused by the COVID-19 pandemic, as noted in the COVID-19 Pandemic section above. Geographically, the year-to-date 2022 OUS procedure growth was driven by procedure expansion in a number of markets with particular strength inJapan ,China , theUK ,Germany , andItaly . Systems revenue decreased by 1% to$803 million for the six months endedJune 30, 2022 , compared to$808 million for the six months endedJune 30, 2021 . The decrease in systems revenue was primarily driven by fewer system placements, lower year-to-date 2022 ASPs, lower sales-type lease revenue, and lower lease buyout revenue, partially offset by higher operating lease revenue. During the six months endedJune 30, 2022 , a total of 590 da Vinci Surgical Systems were placed compared to 626 systems during the six months endedJune 30, 2021 . By geography, 336 systems were placed in theU.S. , 156 inEurope , 88 inAsia , and 10 in other markets during the six months endedJune 30, 2022 , compared to 403 systems placed in theU.S. , 122 inEurope , 85 inAsia , and 16 in other markets during the six months endedJune 30, 2021 . The decrease in systems placements was primarily driven by a softening of our capital pipeline in theU.S. caused by increased financial pressures on hospitals, a smaller number of third generationda Vinci systems available for trade-in, along with supply chain and logistical challenges impacting the number of systems available for shipment. We placed 280 and 305 da Vinci Surgical Systems under lease or usage-based arrangements, of which 225 and 235 systems were classified as operating leases for the six months endedJune 30, 2022 , and 2021, respectively. Operating lease revenue, including the impact of Ion systems, was$176.2 million for the six months endedJune 30, 2022 , compared to$126.3 million for the six months endedJune 30, 2021 . Da Vinci Surgical Systems placed as operating leases represented 38% of total placements during the six months endedJune 30, 2022 , compared to 38% during the six months endedJune 30, 2021 . Revenue from Lease Buyouts was$38.0 million for the six months endedJune 30, 2022 , compared to$45.2 million for the six months endedJune 30, 2021 . We expect revenue from Lease Buyouts to fluctuate period to period depending on the timing of when, and if, customers choose to exercise the buyout options embedded in their leases. The da Vinci Surgical System ASP, excluding the impact of systems placed under operating lease or usage-based arrangements and Ion systems, was approximately$1.53 million for the six months endedJune 30, 2022 , compared to approximately$1.59 million for the six months endedJune 30, 2021 . The lower year-to-date 2022 ASP was largely driven by unfavorable geographic mix and foreign currency impacts, partially offset by fewer trade-ins and favorable product mix. ASP fluctuates from period to period based on geographic and product mix, product pricing, systems placed involving trade-ins, and changes in foreign exchange rates. During the six months endedJune 30, 2022 , 75 Ion systems were placed compared to 34 systems during the six months endedJune 30, 2021 . We placed 45 and 23 Ion systems under lease or usage-based arrangements, of which 40 and 19 systems were classified as operating leases for the six months endedJune 30, 2022 , and 2021, respectively. Ion systems placed as operating leases represented 53% of total placements during the six months endedJune 30, 2022 , compared to 56% during the six months endedJune 30, 2021 .
Service Revenue
Service revenue increased by 10% to$252 million for the three months endedJune 30, 2022 , compared to$228 million for the three months endedJune 30, 2021 . The increase in service revenue was primarily driven by a larger installed base of systems producing service revenue, partially offset by foreign currency impacts. Service revenue increased by 12% to$501 million for the six months endedJune 30, 2022 , compared to$446 million for the six months endedJune 30, 2021 . The increase in service revenue was primarily driven by a larger installed base of systems producing service revenue, partially offset by foreign currency impacts.
Gross Profit
Product gross profit for the three months endedJune 30, 2022 , decreased by 1% to$849 million , representing 66.9% of product revenue, compared to$862 million , representing 69.7% of product revenue, for the three months endedJune 30, 2021 . The lower product gross profit for the three months endedJune 30, 2022 , was primarily driven by lower product gross profit margin, partially offset by higher product revenue. The lower product gross profit margin for the three months endedJune 30, 2022 , was primarily driven by higher freight and material costs, higher fixed costs from investments to drive growth of the 42 --------------------------------------------------------------------------------
business and strengthen our operating capabilities, unfavorable foreign currency impacts, and lower second quarter 2022 system ASPs.
Product gross profit for the six months endedJune 30, 2022 , increased by 5% to$1.7 billion , representing 67.4% of product revenue, compared to$1.6 billion , representing 70.0% of product revenue, for the six months endedJune 30, 2021 . The higher product gross profit for the six months endedJune 30, 2022 , was primarily driven by higher product revenue, partially offset by lower product gross profit margin. The lower product gross profit margin for the six months endedJune 30, 2022 , was primarily driven by higher fixed costs from investments to drive growth of the business and strengthen our operating capabilities, higher freight and material costs, unfavorable foreign currency impacts, and lower year-to-date 2022 system ASPs. Product gross profit for the three and six months endedJune 30, 2022 , included share-based compensation expense of$20.3 million and$39.0 million , respectively, compared with$16.6 million and$31.9 million for the three and six months endedJune 30, 2021 , respectively. Product gross profit for the three and six months endedJune 30, 2022 , included intangible assets amortization expense of$3.7 million and$7.3 million , respectively, compared with$4.7 million and$10.1 million for the three and six months endedJune 30, 2021 , respectively. Service gross profit for the three months endedJune 30, 2022 , increased by 8% to$174 million , representing 69.1% of service revenue, compared to$162 million , representing 70.9% of service revenue, for the three months endedJune 30, 2021 . The higher service gross profit for the three months endedJune 30, 2022 , was primarily driven by higher service revenue, reflecting a larger installed base of systems. The lower service gross profit margin for the three months endedJune 30, 2022 , was primarily driven by higher labor, material, and infrastructure costs as well as unfavorable foreign currency impacts. Service gross profit for the six months endedJune 30, 2022 , increased by 11% to$343 million , representing 68.4% of service revenue, compared to$309 million , representing 69.4% of service revenue, for the six months endedJune 30, 2021 . The higher service gross profit for the six months endedJune 30, 2022 , was primarily driven by higher service revenue, reflecting a larger installed base of systems. The lower service gross profit margin for the six months endedJune 30, 2022 , was primarily driven by higher labor, material, and infrastructure costs as well as unfavorable foreign currency impacts. Service gross profit for the three and six months endedJune 30, 2022 , included share-based compensation expense of$5.8 million and$11.4 million , respectively, compared with$5.2 million and$10.9 million for the three and six months endedJune 30, 2021 , respectively. Service gross profit for the three and six months endedJune 30, 2022 , included intangible assets amortization expense of$0.2 million and$0.4 million , respectively, compared with$0.3 million and$0.6 million for the three and six months endedJune 30, 2021 , respectively.
Selling, General and Administrative Expenses
Selling, general and administrative expenses include costs for sales, marketing, and administrative personnel, sales and marketing activities, trade show expenses, legal expenses, regulatory fees, and general corporate expenses.
Selling, general and administrative expenses for the three months endedJune 30, 2022 , increased by 19% to$418 million , compared to$350 million for the three months endedJune 30, 2021 . Selling, general and administrative expenses for the six months endedJune 30, 2022 , increased by 20% to$810 million , compared to$676 million for the six months endedJune 30, 2021 . The increase in selling, general and administrative expenses for the three and six months endedJune 30, 2022 , was primarily driven by higher headcount, resulting in increased fixed and share-based compensation expense, higher variable compensation, and increased infrastructure costs to support our growth. In addition, there were higher travel, training, and marketing expenses for the three and six months endedJune 30, 2022 , as compared with the prior year. Selling, general and administrative expenses for the three and six months endedJune 30, 2022 , included share-based compensation expense of$62.7 million and$123.0 million , respectively, compared with$55.7 million and$108.8 million for the three and six months endedJune 30, 2021 , respectively. Selling, general and administrative expenses for the three and six months endedJune 30, 2022 , included intangible assets amortization expense of$1.6 million and$3.2 million , respectively, compared with$1.9 million and$3.6 million for the three and six months endedJune 30, 2021 , respectively.
Research and Development Expenses
Research and development costs are expensed as incurred. Research and development expenses include costs associated with the design, development, testing, and significant enhancement of our products.
Research and development expenses for the three months endedJune 30, 2022 , increased by 28% to$207 million , compared to$162 million for the three months endedJune 30, 2021 . The increase in research and development expenses for the three months endedJune 30, 2022 , was primarily driven by higher personnel-related expenses, including share-based compensation expense, and other project costs incurred to support a broader set of product development initiatives, including Ion and SP platform investments, digital investments, advanced instrumentation, advanced imaging, and future generations of robotics. Research and development expenses for the six months endedJune 30, 2022 , increased by 30% to$418 million , 43 -------------------------------------------------------------------------------- compared to$322 million for the six months endedJune 30, 2021 . The increase in research and development expenses for the six months endedJune 30, 2022 , was primarily driven by higher personnel-related expenses, including share-based compensation expense, intangible asset charges, and other project costs incurred to support a broader set of product development initiatives, including Ion and SP platform investments, digital investments, advanced instrumentation, advanced imaging, and future generations of robotics. Research and development expenses for the three and six months endedJune 30, 2022 , included share-based compensation expense of$38.5 million and$75.3 million , respectively, compared with$32.6 million and$62.7 million for the three and six months endedJune 30, 2021 , respectively. Research and development expenses for the three and six months endedJune 30, 2022 , included intangible asset charges of$2.5 million and$11.0 million , respectively, compared with$4.0 million and$4.7 million for the three and six months endedJune 30, 2021 , respectively. Research and development expenses fluctuate with project timing. Based upon our broader set of product development initiatives and the stage of the underlying projects, we expect to continue to make substantial investments in research and development and anticipate that research and development expenses will continue to increase in the future.
Interest and Other Income, Net
Interest and other income, net, for the three months endedJune 30, 2022 , decreased by 38% to$9.3 million , compared to$15.0 million for the three months endedJune 30, 2021 . The decrease in interest and other income, net, for the three months endedJune 30, 2022 , was primarily driven by foreign exchange losses (compared to foreign exchange gains in the three months endedJune 30, 2021 ), partially offset by higher interest income earned, due to higher cash and investment balances and an increase in average interest rates. Interest and other income, net, for the six months endedJune 30, 2022 , decreased by 92% to$3.6 million , compared to$47.0 million for six months endedJune 30, 2021 . The decrease in interest and other income, net, for the six months endedJune 30, 2022 , was primarily driven by unrealized losses on investments resulting from strategic arrangements (compared to unrealized gains on investments resulting from strategic arrangements in the six months endedJune 30, 2021 ) and foreign exchange losses (compared to foreign exchange gains in the six months endedJune 30, 2021 ), partially offset by higher interest income earned, due to higher cash and investment balances. We held an equity investment in preferred shares of Broncus Holding Corporation ("Broncus"), which was reflected in our financial statements on a cost basis. In the first quarter of 2021, we recorded an unrealized gain on our investment in Broncus of approximately$14 million . InSeptember 2021 , Broncus completed an initial public offering ("IPO") of common shares on theStock Exchange of Hong Kong . Upon completion of the IPO, the preferred shares were converted to common shares in Broncus. We were restricted from selling these shares for a period of six months. For the three and six months endedJune 30, 2022 , we recognized an unrealized loss on this investment of approximately$1.1 million and$18.3 million , respectively.
Income Tax Expense
Income tax expense for the three months endedJune 30, 2022 , was$93.3 million , or 22.9% of income before taxes, compared to$3.2 million , or 0.6% of income before taxes, for the three months endedJune 30, 2021 . Income tax expense for the six months endedJune 30, 2022 , was$126.3 million , or 15.6% of income before taxes, compared to$16.8 million , or 1.7% of income before taxes, for the six months endedJune 30, 2021 . Our effective tax rate for the three months endedJune 30, 2022 , differed from theU.S. federal statutory tax rate of 21% primarily due toU.S. tax on foreign earnings and state income taxes (net of federal benefit), partially offset by excess tax benefits associated with employee equity plans, the effect of income earned by certain overseas entities being taxed at rates lower than the federal statutory rate, and the federal research and development ("R&D") credit benefit. Our effective tax rates for the six months endedJune 30, 2022 , and for the three and six months endedJune 30, 2021 , differed from theU.S. federal statutory rate of 21% primarily due to excess tax benefits associated with employee equity plans, the effect of income earned by certain overseas entities being taxed at rates lower than the federal statutory rate, and the federal R&D credit benefit, partially offset byU.S. tax on foreign earnings and state income taxes (net of federal benefit). The increase in income tax expense for the three and six months endedJune 30, 2022 , was primarily due to the impact of capitalization of research and experimental ("R&E") expenditures and lower excess tax benefits, as discussed below, as well as the fact that the effective tax rate for the three and six months endedJune 30, 2021 , included a one-time benefit of$66.4 million from re-measurement of our Swiss deferred tax assets resulting from the extension of the economic useful life of certain intangible assets. Our provision for income taxes for the three and six months endedJune 30, 2022 , reflected the impact of a change inU.S. tax law effectiveJanuary 1, 2022 , which requires the capitalization and amortization of R&E expenditures incurred afterDecember 31, 2021 . 44 -------------------------------------------------------------------------------- Our provision for income taxes for the three and six months endedJune 30, 2022 , included excess tax benefits associated with employee equity plans of$9.3 million and$62.3 million , respectively, which reduced our effective tax rate by 2.3 and 7.7 percentage points, respectively. Our provision for income taxes for the three and six months endedJune 30, 2021 , included excess tax benefits associated with employee equity plans of$43.6 million and$117.0 million , respectively, which reduced our effective tax rate by 8.3 and 12.0 percentage points, respectively. The amount of excess tax benefits or deficiencies will fluctuate from period to period based on the price of our stock, the volume of share-based awards settled or vested, and the value assigned to employee equity awards underU.S. GAAP, which results in increased income tax expense volatility. We file federal, state, and foreign income tax returns in many jurisdictions in theU.S. and abroad. Years prior to 2016 are considered closed for most significant jurisdictions. Certain of our unrecognized tax benefits could change due to activities of various tax authorities, including evolving interpretations of existing tax laws in the jurisdictions we operate, potential assessment of additional tax, possible settlement of audits, or through normal expiration of various statutes of limitations, which could affect our effective tax rate in the period in which they change. Due to the uncertainty related to the timing and potential outcome of audits, we cannot estimate the range of reasonably possible change in unrecognized tax benefits that may occur in the next 12 months. We are subject to the examination of our income tax returns by theIRS and other tax authorities. The outcome of these audits cannot be predicted with certainty. Management regularly assesses the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. If any issues addressed in our tax audits are resolved in a manner not consistent with management's expectations, we could be required to adjust our provision for income taxes in the period such resolution occurs.
Net Income Attributable to Noncontrolling Interest in Joint Venture
Net income attributable to noncontrolling interest in Joint Venture for the three and six months endedJune 30, 2022 , was$5.8 million and$9.6 million , respectively. Net income attributable to noncontrolling interest in Joint Venture for the three and six months endedJune 30, 2021 , was$5.8 million and$14.7 million , respectively. The decrease in net income attributable to noncontrolling interest in Joint Venture for the six months endedJune 30, 2022 , was primarily due to a decrease in sales and an increase in selling, general and administrative expenses inChina .
Liquidity and Capital Resources
Sources and Uses of Cash and Cash Equivalents
Our principal source of liquidity is cash provided by operations and by the issuance of common stock through the exercise of stock options and our employee stock purchase program. Cash and cash equivalents plus short- and long-term investments decreased by$0.44 billion to$8.18 billion as ofJune 30, 2022 , from$8.62 billion as ofDecember 31, 2021 , primarily from cash used in share repurchases, capital expenditures, and taxes paid related to net share settlements of equity awards, as well as unrealized losses on interest-bearing debt securities classified as available for sale, offset by cash provided by our operations and proceeds from stock option exercises and employee stock purchases. Our cash requirements depend on numerous factors, including market acceptance of our products, the resources we devote to developing and supporting our products, and other factors. We expect to continue to devote substantial resources to expand procedure adoption and acceptance of our products. We have made substantial investments in our commercial operations, product development activities, facilities, and intellectual property. Based on our business model, we anticipate that we will continue to be able to fund future growth through cash provided by our operations. We believe that our current cash, cash equivalents, and investment balances, together with income to be derived from the sale of our products, will be sufficient to meet our liquidity requirements for the foreseeable future. However, as a result of the COVID-19 pandemic and the increasing risk of a recession as well as other macroeconomic and geopolitical headwinds, we may experience reduced cash flow from operations if we experience decreased revenues or if we extend payment terms on sales and operating lease and usage-based arrangements. See "Item 7A. Quantitative and Qualitative Disclosures About Market Risk" in our Form 10-K for the fiscal year endedDecember 31, 2021 , for discussion on the impact of interest rate risk and market risk on our investment portfolio. 45 --------------------------------------------------------------------------------
Condensed Consolidated Cash Flow Data
The following table summarizes our cash flows for the six months ended
Six Months Ended
2022 2021
Net cash provided by (used in):
Operating activities $ 669.7 $ 1,020.3
Investing activities 251.5 (981.7)
Financing activities (682.0) (43.9)Effect of exchange rates on cash, cash equivalents, and restricted cash
6.0 (2.6)
Net increase (decrease) in cash, cash equivalents, and restricted
cash $ 245.2 $ (7.9)
Operating Activities
For the six months ended June 30, 2022 , net income of $683 million exceeded our
net cash provided by operating activities of $670 million , primarily due to the
following factors:
1.Changes in operating assets and liabilities resulted in $434 million of cash
used in operating activities during the six months ended June 30, 2022 .
Inventory, including the transfer of equipment from inventory to property,
plant, and equipment, increased by $246 million , primarily to address the growth
in the business as well as to mitigate risks of disruption that could arise from
trade, supply, or other matters. Refer to the Condensed Consolidated Financial
Statements (Unaudited) in Note 4 for further details in the supplemental cash
flow information. Prepaid expenses and other assets increased by $90 million ,
primarily due to an increase in net investments in sales-type leases. Accrued
compensation and employee benefits decreased by $72 million , primarily due to
payments of 2021 incentive compensation. Accounts receivable increased by $56
million , primarily due to the timing of billings and collections. The
unfavorable impact of these items on cash provided by operating activities was
partially offset by a $20 million increase in other liabilities, primarily due
to additional accruals related to capital expenditures, and a $12 million
increase in accounts payable, primarily due to the timing of billing and
payments.
2.The changes in operating assets and liabilities outlined above were partially
offset by non-cash charges of $421 million included in our net income,
consisting primarily of the following significant items: share-based
compensation of $248 million ; depreciation expense and losses on the disposal of
property, plant, and equipment of $158 million ; and net losses on investments,
accretion, and amortization of $34 million .
Investing Activities
Net cash provided by investing activities for the six months endedJune 30, 2022 , consisted primarily of proceeds from maturities of investments, net of purchases, of$489 million , partially offset by the acquisition of property and equipment of$226 million . We invest predominantly in high quality, fixed income securities. Our investment portfolio may, at any time, contain investments inU.S. treasury andU.S. government agency securities, taxable and tax-exempt municipal notes, corporate notes and bonds, commercial paper, non-U.S. government agency securities, cash deposits, and money market funds.
Financing Activities
Net cash used in financing activities during the six months endedJune 30, 2022 , consisted primarily of cash used in the repurchase of approximately 2.6 million shares of our common stock in the open market for$607 million and taxes paid on behalf of employees related to net share settlements of equity awards of$179 million , partially offset by proceeds from stock option exercises and employee stock purchases of$107 million .
Capital Expenditures
Our business is not capital equipment intensive. However, with the growth of our business and our investments in property and facilities and in manufacturing automation, capital investments in these areas have increased. We expect these capital investments to increase significantly in 2022 to a range between$700 million and$800 million . A significant portion of this investment involves the construction of facilities to provide incremental space for growth, consolidate operations to enhance efficiency, and replace leased spaces with owned spaces. These capital investments will also expand our OUS footprint in support of opportunities for growth in key international markets. We intend to fund these capital investments with cash generated from operations. 46 --------------------------------------------------------------------------------
Critical Accounting Estimates
The discussion and analysis of our financial condition and results of operations are based upon our Financial Statements, which have been prepared in accordance withU.S. GAAP. The preparation of these Financial Statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses. On an ongoing basis, we evaluate our critical accounting estimates. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. There have been no new or material changes to the critical accounting estimates discussed in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2021 , that are of significance, or potential significance, to the Company. 47
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