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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

Open surgery remains the predominant form of surgery and is used in almost every area of the body. However, the large incisions required for open surgery create trauma to patients, typically resulting in longer hospitalization and recovery times, increased hospitalization costs, and additional pain and suffering relative to minimally invasive surgery (“MIS”), where MIS is available. For over three decades, MIS has reduced trauma to patients by allowing selected surgeries to be performed through small ports rather than large incisions. MIS has been widely adopted for certain surgical procedures.

Da Vinci Surgical Systems enable surgeons to extend the benefits of MIS to many patients who would otherwise undergo a more invasive surgery by using computational, robotic, and imaging technologies to overcome many of the limitations of traditional open surgery or conventional MIS. Surgeons using a da Vinci Surgical System operate while seated comfortably at a console viewing a 3D, high-definition image of the surgical field. This immersive console connects surgeons to the surgical field and their instruments. While seated at the console, the surgeon manipulates instrument controls in a natural manner, similar to open surgical technique. Our technology is designed to provide surgeons with a range of articulation of the surgical instruments used in the surgical field analogous to the motions of a human wrist, while filtering out the tremor inherent in a surgeon’s hand. In designing our products, we focus on making our technology easy and safe to use.

Our da Vinci products fall into five broad categories: da Vinci Surgical Systems, da Vinci instruments and accessories, da Vinci Stapling, da Vinci Energy, and da Vinci Vision, including Firefly Fluorescence imaging systems 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 categories aim to decrease variability by offering 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 99 da Vinci SP Surgical Systems as of December 31, 2021. Our plans for the rollout of the da Vinci SP Surgical System include putting systems in the hands of experienced da Vinci users first while we optimize training pathways and our supply chain. We received FDA clearances for the da Vinci SP Surgical System for urological and certain transoral procedures. We also received clearance in South Korea where the da Vinci SP Surgical System may be used for a broad set of procedures. We plan to seek FDA clearances for additional indications for da Vinci SP over time. 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 instrumentation for the da VinciXiandda VinciXplatforms, 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 VinciX and da VinciXiSurgical Systems share the same instruments whereas the da VinciSiSurgical 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 Iris augmented reality imaging product, 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.

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Our rollout of the Ion system is progressing well, and we are continuing to gather additional clinical evidence. We have placed 129 Ion systems as of December 31, 2021. Ion systems are not included in our da Vinci Surgical System installed base. We plan to seek additional clearances for Ion 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.

COVID-19 Pandemic

Procedures

Beginning in January 2020, as a result of the spread of COVID-19, we saw a substantial reduction in da Vinci procedures in China and, by early February 2020, procedures per week in China had declined by approximately 90% compared to the weekly procedure rates experienced in early January 2020. As the COVID-19 pandemic subsided in China in March 2020, da Vinci procedure volume began to recover and, by the end of the first quarter of 2020, China procedures per week were approximately 70% of the early January 2020 weekly procedure rate. As the COVID-19 pandemic spread to Western Europe and the U.S., we experienced a significant decline in da Vinci procedures in the last half of March 2020 to approximately 65% of the weekly procedure rate experienced earlier in the first quarter of 2020.

In the second quarter of 2020, procedures per week in the U.S. continued to decline in April, reaching approximately 30% of pre-COVID-19 levels followed by steady recovery in May and June, as COVID-19 cases dropped and elective procedures were permitted. However, with the resurgence of COVID-19 cases in the last two weeks of June, we experienced a corresponding decline in da Vinci procedures. The impact of COVID-19 in Europe during the second quarter of 2020 varied by country. In China, procedures per week continued to increase to a level consistent with the early January 2020 weekly procedure rate. We experienced little impact on the procedure volume in Korea and Japan in the second quarter of 2020.

In the third quarter of 2020, in the U.S., procedures recovered slowly, leveling off to near pre-COVID-19 levels towards the end of the quarter. Outside of the U.S., da Vinci procedures varied depending on the spread and/or resurgence of COVID-19. Procedures in China grew significantly year over year, while COVID-19 outbreaks resulted in year-over-year procedure growth rates in Japan slowing somewhat relative to the second quarter. The COVID-19 pandemic also affected the volumes of certain procedure types differently.

In the fourth quarter of 2020, procedure volumes continued to be significantly impacted by the COVID-19 pandemic as healthcare systems around the world diverted resources to respond to the pandemic. The impact continued to differ significantly by geography and region, depending on the spread and resurgence of COVID-19. In the U.S., while procedures continued to recover in the early part of the quarter, the resurgence of COVID-19 infections experienced by some states had an increasingly adverse impact on our procedure volumes as the quarter progressed, a trend that continued into January. Outside of the U.S., similar to the trends noted in the third quarter of 2020, procedures also continued to vary significantly by geography and region.

In the first quarter of 2021, in the U.S., the COVID-19 resurgence that affected procedures later in the fourth quarter of 2020 continued well into January 2021. Then, as COVID-19 cases subsided, procedures experienced a steady improvement throughout February and March. In Europe, the spread of COVID-19 varied regionally, and procedure growth rates were mixed. While there were COVID-19 hot spots within some of our Asia Pacific markets, they tended to be isolated and, in general, procedures performed well.

In the second quarter of 2021, as the U.S. continued its broad rollout of vaccinations, COVID-19 cases and hospitalizations decreased, and procedure volumes recovered, partially attributed to the performance of a number of procedures that were deferred during the pandemic. In Europe, the rollout of vaccinations and spread of COVID-19 varied regionally, and procedure growth rates were mixed. We continued to see the impacts of regional resurgences of COVID-19 cases within the Asia Pacific markets. China growth continued to be strong year over year, primarily reflecting the growth in the system installed base.

In the third quarter of 2021, COVID-19 infections resurged as the quarter progressed, and we saw a corresponding impact to our procedures. In the U.S., we saw decreasing procedure volumes in August and September compared to June as COVID-19 cases and hospitalizations increased. Late in the quarter, as COVID-19 cases began to slow, procedures began to recover. Outside of the U.S., in Europe, the impact of COVID-19 in the third quarter of 2021 varied regionally. We continued to see the impacts of regional resurgences of COVID-19 cases within the Asia Pacific markets. China growth in the third quarter continued to be stronger than other Asia Pacific markets.

In the fourth quarter of 2021, procedure volumes continued to recover in October and November from the COVID-19 resurgence related to the Delta variant in the third quarter. However, in December, procedure volumes were adversely impacted by the increase in hospitalizations in the U.S. and parts of Europe (most notably France and Italy) as the Omicron variant began to spread rapidly. This trend has continued into January 2022. In the U.S., high COVID-related hospitalization rates have been

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exacerbated by staffing shortages. Despite the fact that hospitals were better equipped to handle COVID patients in the fourth quarter of 2021 compared to the outset of the pandemic, COVID-19 resurgences like those being experienced in the U.S. and parts of Europe have challenged hospital resources and have negatively impacted da Vinci procedure volumes. In addition, delays in diagnosis and treatment of underlying conditions have, and will continue to, negatively impact da Vinci procedure volumes. Benign procedures experienced a more significant impact in December, reflecting the deferability of certain elective surgeries. Our Asia Pacific markets were not significantly impacted by the resurgence in COVID-19 and saw strong procedure growth across multiple specialties in China, South Korea, and Japan.

The depth and extent to which the COVID-19 pandemic will impact individual markets will vary based on the availability of vaccinations, personal protective equipment, intensive care units and operating rooms, and medical staff, 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. While there is a backlog of patients, it is unpredictable when those patients will ultimately seek diagnosis and treatment and whether they will be treated through surgery. Based on our experience during 2020 and 2021, we do not expect all markets, regions, and procedure types to recover at the same time or at the same pace.

System Demand

As the impact of the COVID-19 pandemic progressed throughout 2020, customers in affected regions deferred decisions to purchase or lease systems into future quarters and, in some cases, indefinitely. In addition, the year-over-year stagnation in procedures during 2020 and, in turn, reduced utilization of our systems had resulted in unused capacity in the existing installed base. However, throughout 2021, we experienced strong system demand, as utilization levels recovered. In general, we believe that the COVID-19 pandemic had less of an impact on hospital spending capacity and that customers recognize that surgery meets their quadruple aim objectives better than other surgical approaches. More specifically, during 2021, system demand reflected procedure growth, hospitals purchasing systems in preparation for a post-COVID-19 pandemic environment, and hospitals upgrading their system portfolio to access and/or standardize on fourth generation capabilities. However, hospitals are currently experiencing staffing shortages and supply chain issues that could impact their ability to provide patient care, defer elective surgeries, and impact their profitability, all of which could impact hospitals’ spend on capital equipment.

Customer Relief Program

In April 2020, we announced a program to provide financial relief to our customers. The program was comprised of three main elements. The first element provided credits against service fees otherwise due in the six-month period from April 1 through September 30, 2020, that generally reflected the underutilization of the system during that period. Those credits were offered to most customers worldwide. The second element of the program deferred certain lease payments, and the third element extended certain payment terms. Service fee credits resulted in an $80 million decrease in service revenue in 2020. While the short-term payment relief offered did not have a material impact to the results of operations, we deferred $15 million of lease billings and extended payment terms associated with $181 million of trade receivables during the program, of which $19 million remained outstanding as of December 31, 2020. All of the trade receivables with extended payment terms have been collected as of December 31, 2021. We may be subject to increased credit risks resulting in collection delinquencies and defaults, which could materially impact our bad debt write-offs and provisions for credit losses. Although we have programs in place that are designed to monitor and mitigate the associated risks, there can be no assurance that such programs will be effective in reducing credit risks relating to these lease financing arrangements and extended payment terms. There was no similar customer relief program offered in 2021.

General Increase in Risks

Worldwide economies have been significantly impacted by the COVID-19 pandemic, and it is possible that factors related to the COVID-19 pandemic could cause a prolonged recession in local and/or global economies. Such an economic recession could have a material adverse effect on our long-term business as hospitals curtail and reduce capital and overall spending. 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 particular, we have experienced increased difficulties in obtaining a sufficient supply of component materials used in our products, including those in the semiconductor market, as global supply has become significantly constrained due to increased demand in semiconductors and other materials. Additionally, prices of such materials have increased due to the increased demand and supply shortage. The global semiconductor and other materials supply shortage is 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, these challenges have not materially impacted our ability to deliver

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product and services to our customers. However, if shortages in important supply chain materials in the semiconductor or other markets continue, we could fail to meet product demand, which would adversely impact our business, financial condition, results of operations, or cash flows.

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. In addition, hospitals are also experiencing staffing shortages and supply chain issues that could impact their ability to provide patient care. Any of these events could negatively impact the number of 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.

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 cases decline, we have enhanced our focus on evaluating and 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 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, accessories, and services, as well as 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. During the fourth quarter of 2020, we launched our Extended Use Program (refer to further discussion immediately below) 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 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. We are introducing our Ion system in a measured fashion. For the years ended December 31, 2021, and 2020, the associated impact 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 select da Vinci Xi and da Vinci X instruments possessing 12 to 18 uses (“Extended Use Instruments”) compared to previously 10 uses. These Extended Use Instruments represent some of our higher volume instruments but exclude stapling, monopolar, and advanced energy instruments.

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Instruments included in the program are used across a number of da Vinci surgeries. Their increased uses are the result of continuous, significant investments in the design and production capabilities of our instruments, resulting in improved quality and durability. Extended Use Instruments have been introduced in the U.S. and Europe in the fourth quarter of 2020 and have launched in most other countries around the world in the first half of 2021, except China due to regulatory timelines. They will continue to be introduced at various times throughout 2022 in other geographies, depending on regulatory processes. In addition, simultaneous with the regional launches of Extended Use Instruments, we have lowered the price of certain instruments that are most commonly used in lower acuity procedures and/or lower reimbursed procedures within the region. These actions have reduced the cost for customers to treat patients, which in turn has reduced our revenue per procedure. In the U.S. and Europe, during 2021, we saw customers adjust their instrument buying patterns to reduce their inventory levels to reflect the additional uses per instrument. We believe that, as of the end of 2021, in the U.S. and Europe, full cutover to Extended Use Instruments has occurred, as customers have utilized substantially all of their remaining 10 use instruments. The precise impact of these actions on future revenue will be dependent on the future volume and mix of procedures and whether cost elasticity will enable greater penetration into available markets.

Recurring Revenue

Recurring revenue consists of instruments and accessories revenue, service revenue, and operating lease revenue. Recurring revenue increased to $4.3 billion, or 75% of total revenue in 2021, compared to $3.4 billion, or 77% of total revenue in 2020, and $3.2 billion, or 72% of total revenue in 2019.

Instruments and accessories revenue has grown at a faster rate than systems revenue over time. Instruments and accessories revenue increased to $3.10 billion in 2021, compared to $2.46 billion in 2020 and $2.41 billion in 2019. The increase in instruments and accessories revenue largely reflects continued procedure adoption.

Service revenue was $916 million in 2021, compared to $724 million in 2020 and 2019. The increase in service revenue was primarily driven by the growth of the base of installed da Vinci Surgical Systems producing service revenue, as well as the effects of the Customer Relief Program in the prior year, which resulted in an $80 million decrease in service revenue in 2020. The installed base of da Vinci Surgical Systems grew 12% to approximately 6,730 as of December 31, 2021; 7% to approximately 5,989 as of December 31, 2020; and 12% to approximately 5,582 as of December 31, 2019.

We use the installed base, number of placements, and utilization of da Vinci Surgical 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 da Vinci Surgical Systems provide meaningful supplemental information regarding our performance, as management believes that the installed base, number of placements, and utilization of da Vinci Surgical Systems are an indicator of the rate of adoption of robotic-assisted surgery 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 da Vinci Surgical Systems in assessing our performance and when planning, forecasting, and analyzing future periods. The installed base, number of placements, and utilization of da Vinci Surgical Systems also facilitate management’s internal comparisons of our historical performance. We believe that the installed base, number of placements, and utilization of da Vinci Surgical 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 da Vinci Surgical 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 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 da Vinci Surgical 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 da Vinci Surgical Systems and our revenues may fluctuate from period to period, and growth in the installed base, number of placements, and utilization of da Vinci Surgical Systems may not correspond to an increase in revenue. The installed base, number of placements, and utilization of da Vinci Surgical 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 GAAP.

Intuitive System Leasing

Since 2013, we have entered into sales-type and operating lease arrangements directly with certain qualified customers as a way to offer customers flexibility in how they acquire systems and expand their robotic-assisted programs while leveraging our balance sheet. These leases generally have commercially competitive terms as compared with other third-party entities that offer equipment leasing. We have also entered into usage-based arrangements with qualified customers that have committed da Vinci programs where we charge for the system and service as the systems are utilized. We believe that these alternative

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financing structures have been effective and well-received, and we are willing to expand the proportion of these structures based on customer demand. We include operating and sales-type leases, and systems placed under usage-based arrangements, in our system placement and installed base disclosures. We exclude operating lease-related revenue, usage-based revenue, and Ion system revenue from our da Vinci Surgical System average selling price (“ASP”) computations.

In the years ended December 31, 2021, 2020, and 2019, we placed 668, 432, and 425 da Vinci Surgical Systems, respectively, under lease and usage-based arrangements, of which 517, 317, and 384 systems, respectively, were operating lease and usage-based arrangements. Revenue from operating lease arrangements is generally recognized on a straight-line basis over the lease term or, in the case of usage-based arrangements, as the systems are used. We generally set operating lease and usage-based pricing at a modest premium relative to purchased systems reflecting the time value of money and, in the case of usage-based arrangements, the risk that system utilization may fall short of anticipated levels. The proportion of revenue recognized from usage-based arrangements has not been significant and has been included in our operating lease metrics herein. Operating lease revenue has grown at a faster rate than overall systems revenue and was $277 million, $177 million, and $107 million for the years ended December 31, 2021, 2020, and 2019, respectively. As revenue for operating leases and usage-based systems is recognized over time, total systems revenue growth is reduced in a period when the number of operating lease and usage-based placements increases as a proportion of total system placements. Generally, lease transactions generate similar gross margins as our sale transactions. As of December 31, 2021, a total of 1,294 da Vinci Surgical Systems were installed at customers under operating lease or usage-based arrangements.

Our exposure to the credit risks relating to our lease financing arrangements may increase if our customers are adversely affected by changes in healthcare laws, coverage and reimbursement, economic pressures or uncertainty, or other customer-specific factors. 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 ended December 31, 2021, 2020, and 2019, respectively. We expect that revenue recognized from customer exercises of the buyout options will fluctuate based on the timing of when, and if, customers choose to exercise their buyout options.

Systems Revenue

System placements are driven by procedure growth in most markets. In some markets, system placements are constrained by regulation. In geographies where da Vinciprocedureadoption is in an early stage or system placements are constrained by regulation, system sales will precede procedure growth. System placements also vary due to seasonality largely aligned with hospital budgeting cycles. We typically place a higher proportion of annual system placements in the fourth quarter and a lower proportion in the first quarter as customer budgets are reset. Systems revenue is also affected by the proportion of system placements under operating lease and usage-based arrangements, recurring operating lease and usage-based revenue, operating lease buyouts, product mix, ASPs, trade-in activities, and customer mix. Systems revenue grew 44% to $1.69 billion in 2021. Systems revenue declined 12% to $1.18 billion in 2020. Systems revenue grew 19% to $1.35 billion in 2019. Based on the factors outlined in the COVID-19 Pandemic section above, we believe that historical system placement trends may not be a good indicator of future system placements.

Procedure Mix / Products

Our da Vinci Surgical Systems are generally used for soft tissue surgery for areas of the body between the pelvis and the neck, primarily in general surgery, gynecologic surgery, urologic surgery, cardiothoracic surgery, and head and neck surgery. Within these categories, procedures range in complexity from cancer and other highly complex procedures to less complex procedures for benign conditions. Cancer and other highly complex procedures tend to be reimbursed at higher rates than less complex procedures for benign conditions. Thus, hospitals are more sensitive to the costs associated with treating less complex, benign conditions. Our strategy is to provide hospitals with attractive clinical and economic solutions across the spectrum of procedure complexity. Our fully featured da Vinci Xi Surgical System with advanced instruments (including da Vinci Energy and EndoWrist and SureForm Stapler products) and our Integrated Table Motion product targets the more complex procedure segment. Our da Vinci X Surgical System is targeted towards price sensitive markets and procedures. Our da Vinci SP Surgical System complements the da Vinci Xi and X Surgical Systems by enabling surgeons to access narrow workspaces.

Procedure Seasonality

More than half of da Vinci procedures performed are for benign conditions, most notably hernia repairs, hysterectomies, and cholecystectomies. These benign procedures and other short-term elective procedures tend to be more seasonal than cancer

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operations and surgeries for other life-threatening conditions. Seasonality in the U.S. for procedures for benign conditions typically results in higher fourth quarter procedure volume when more patients have met annual deductibles and lower first quarter procedure volume when deductibles are reset. Seasonality outside the U.S. varies and is more pronounced around local holidays and vacation periods. As a result of the factors outlined in the COVID-19 Pandemic section above, including past and potentially future recommendations of authorities to defer elective procedures, historical procedure patterns may be disrupted.

Distribution Channels

We provide our products through direct sales organizations in the U.S., Europe (excluding Spain, Portugal, Italy, Greece, and most Eastern European countries), China, Japan, South Korea, India, and Taiwan. In January 2019, our Intuitive-Fosun joint venture began direct sales for da Vinci products and services in China. In the remainder of our OUS markets, we provide our products through distributors.

Regulatory Activities

Overview

Our products must meet the requirements of a large and growing body of international standards that govern the product safety, efficacy, advertising, labeling, safety reporting design, manufacture, materials content and sourcing, testing, certification, packaging, installation, use, and disposal of our products. Examples of such standards include electrical safety standards, such as those of the International Electrotechnical Commission, and composition standards, such as the Reduction of Hazardous Substances and the Waste Electrical and Electronic Equipment Directives. Failure to meet these standards could limit our ability to market our products in those regions that require compliance to such standards.

Our products and operations are also subject to increasingly stringent medical device, privacy, and other regulations by regional, federal, state, and local authorities. We anticipate that timelines for the introduction of new products and/or indications may be extended relative to past experience as a result of these regulations. For example, we have seen elongated regulatory approval timelines in the U.S. and the EU.

Clearances and Approvals

We have generally obtained the clearances required to market our products associated with our da Vinci Surgical Multiport Systems (Standard, S, Si, Xi, and X systems) for our targeted surgical specialties within the U.S., South Korea, Japan, and the European markets in which we operate. Since 2019, we obtained regulatory clearances for the following products:

•In December 2021, we obtained FDA clearance for our 8 mm SureForm 30 Curved-Tip Stapler and reloads for use in general, thoracic, gynecologic, urologic, and pediatric surgery. The 8 mm SureForm 30 stapler is expected to launch in the U.S. in 2022, with other countries to follow.

•In late 2020 and early 2021, we obtained FDA clearance, CE mark clearance, and other regulatory clearances in most of our significant markets to market our Extended Use Instruments.

•In November 2019, we obtained FDA clearance for our SynchroSeal instrument and E-100 generator. Following the FDA clearance, in February 2020, we received CE mark clearance for both products. In March 2020, we received regulatory clearance in Japan to market both our SynchroSeal instrument and E-100 generator. We received regulatory clearance in South Korea to market our SynchroSeal instrument and E-100 generator in January 2020 and August 2020, respectively.

•In July 2019, we obtained FDA clearance for our SureForm 45 Curved-Tip Stapler and SureForm 45 Gray reload, which round out our SureForm 45 portfolio. We have also received CE mark clearance for our SureForm 45 Curved-Tip Stapler and SureForm 45 Gray reload. In September 2019, we received regulatory clearance in Japan to market both our SureForm 45 Curved-Tip Stapler and SureForm 45 Gray reload. We received regulatory clearance in South Korea to market our SureForm 45 Curved-Tip Stapler and SureForm 45 Gray reload in June 2021 and July 2021, respectively.

•In June 2019, we received CE mark clearance for our da Vinci Endoscope Plus for the da Vinci Xi and da Vinci X Surgical Systems in Europe. Following the CE mark, in July 2019, we obtained FDA clearance for our da Vinci Endoscope Plus. We have also received regulatory clearances in South Korea and Japan to market our da Vinci Endoscope Plus in December 2019 and May 2020, respectively.

•In June 2019, we obtained FDA clearance for our da Vinci Handheld Camera and, in February 2020, we received CE mark clearance.

•In February 2019, we obtained FDA clearance for our Ion endoluminal system, our flexible, robotic-assisted, catheter-based platform, designed to navigate through very small lung airways to reach peripheral nodules for biopsies. Our rollout of the Ion system is progressing well, and we are continuing to gather additional clinical evidence. We have placed 129 Ion systems as of December 31, 2021.

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•In February 2019, we obtained FDA clearance for our Iris augmented reality product. Iris is a service that delivers a 3D image of the patient anatomy (initially targeting kidneys) to aid surgeons in both pre- and intra-operative settings. We are currently conducting a pilot study of our Iris product and service in the field at a small group of U.S. hospitals to gain initial product experience and insights.

Refer to the descriptions of our products that received regulatory clearances in 2021, 2020, and 2019 in the New Product Introductions section below.

In October 2018, the China National Health Commission published on its official website the quota for major medical equipment to be imported and sold in China through 2020. After an adjustment notice was published in the third quarter of 2020, the government will now allow for the total sale of 225 new surgical robots into China, which could include da Vinci Surgical Systems as well as surgical systems introduced by others. As of December 31, 2021, we have sold 161 da Vinci Surgical Systems under this quota, and one system quota has expired; therefore, 63 surgical robots can still be imported and 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 considers reimbursement for procedures in April of even-numbered years. The process for obtaining reimbursement requires Japanese university hospitals and surgical societies, with our support, to seek reimbursement. There are multiple pathways to obtain reimbursement for procedures, including those that require in-country clinical data/economic data. In April 2012 and April 2016, the MHLW granted reimbursement status for prostatectomy and partial nephrectomy, respectively. Most prostatectomies and partial nephrectomies were open procedures prior to da Vinci reimbursement. Da Vinci procedure reimbursement for prostatectomy and partial nephrectomy procedures are higher than open and conventional laparoscopic procedure reimbursements. An additional 12 da Vinci procedures were granted reimbursement effective April 1, 2018, including gastrectomy, low anterior resection, lobectomy, and hysterectomy for both malignant and benign conditions. An additional 7 da Vinci procedures were granted reimbursement effective April 1, 2020. These additional 19 reimbursed procedures have varying levels of conventional laparoscopic penetration and will be reimbursed at rates equal to the conventional, laparoscopic procedures. Given the reimbursement level and laparoscopic penetration for these 19 procedures, there can be no assurance that the adoption pace for these procedures will be similar to prostatectomy or partial nephrectomy, given their higher reimbursement, or any other da Vinci procedure.

Recalls and Corrections

Medical device companies have regulatory obligations to correct or remove medical devices in the field that could pose a risk to health. The definition of “recalls and corrections” is expansive and includes repair, replacement, inspections, relabeling, and issuance of new or additional instructions for use or reinforcement of existing instructions for use and training when such actions are taken for specific reasons of safety or compliance. These field actions require stringent documentation, reporting, and monitoring worldwide. There are other actions that a medical device manufacturer may take in the field without reporting including, but not limited to, routine servicing and stock rotations.

As we determine whether a field action is reportable in any regulatory jurisdiction, we prepare and submit notifications to the appropriate regulatory agency for the particular jurisdiction. Regulators can require the expansion, reclassification, or change in scope and language of the field action. In general, upon submitting required notifications to regulators regarding a field action that is a recall or correction, we will notify customers regarding the field action, provide any additional documentation required in their national language, and arrange, as required, return or replacement of the affected product or a field service visit to perform the correction.

Field actions as well as certain outcomes from regulatory activities can result in adverse effects on our business, including damage to our reputation, delays by customers of purchase decisions, reduction or stoppage of the use of installed systems, and reduced revenue as well as increased expenses.

Procedures

We model patient value as equal to procedure efficacy / invasiveness. In this equation, procedure efficacy is defined as a measure of the success of the surgery in resolving the underlying disease and invasiveness is defined as a measure of patient pain and disruption of regular activities. When the patient value of a da Vinci procedure is greater than that of alternative treatment options, patients may benefit from seeking out surgeons and hospitals that offer da Vinci Surgery, which could potentially result in a local market share shift. Adoption of da Vinci procedures occurs procedure by procedure and market by market and is driven by the relative patient value and total treatment costs of da Vinci procedures as compared to alternative treatment options for the same disease state or condition.

We use the number and type of da Vinci 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 da Vinci 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

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usage-based arrangements). Management believes that both it and investors benefit from referring to the number and type of da Vinci procedures in assessing our performance and when planning, forecasting, and analyzing future periods. The number and type of da Vinci procedures also facilitate management’s internal comparisons of our historical performance. We believe that the number and type of da Vinci 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 da Vinci Surgical 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 da Vinci 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 da Vinci 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 da Vinci procedures and our revenues may fluctuate from period to period, and da Vinci procedure volume growth may not correspond to an increase in revenue. The number and type of da Vinci 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 GAAP.

Worldwide Procedures

Our da Vinci systems and instruments are regulated independently in various countries and regions of the world. The discussion of indications for use and representative or target procedures is intended solely to provide an understanding of the market for da Vinci products and is not intended to promote for sale or use any Intuitive Surgical product outside of its licensed or cleared labeling and indications for use.

The adoption of robotic-assisted surgery using the da Vinci Surgical System has the potential to grow for those procedures that offer greater patient value than non-da Vinci alternatives and competitive total economics for healthcare providers. Our da Vinci Surgical Systems are used primarily in general surgery, urologic surgery, gynecologic surgery, cardiothoracic surgery, and head and neck surgery. We focus our organization and investments on developing, marketing, and training products and services for procedures in which da Vinci can bring patient value relative to alternative treatment options and/or economic benefit to healthcare providers. Target procedures in general surgery include hernia repair (both ventral and inguinal), colorectal procedures, cholecystectomies, 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 the indications, procedures, or products described may be available in a given country or region or on all generations of da Vinci Surgical Systems. Surgeons and their patients need to consult the product labeling in their specific country and for each product in order to determine the cleared uses, as well as important limitations, restrictions, or contraindications.

In 2021, approximately 1,594,000 surgical procedures were performed with da Vinci Surgical Systems, compared to approximately 1,243,000 and 1,229,000 surgical procedures performed with da Vinci Surgical Systems in 2020 and 2019, respectively. The increase in our overall procedure volume in 2021 reflects the significant disruption caused by the COVID-19 pandemic in 2020, as noted in the COVID-19 Pandemic section above, and was driven by growth in U.S. general surgery and gynecology procedures and worldwide urology procedures.

U.S. Procedures

Overall U.S. procedure volume with da Vinci Surgical Systems grew to approximately 1,109,000 in 2021, compared to approximately 876,000 in 2020 and approximately 883,000 in 2019. General surgery was our largest and fastest growing U.S. specialty in 2021 with procedure volume that grew to approximately 589,000 in 2021, compared to approximately 434,000 in 2020 and approximately 421,000 in 2019. Gynecology was our second largest U.S. surgical specialty in 2021 with procedure volume that grew to approximately 316,000 in 2021, compared to approximately 267,000 in 2020 and approximately 282,000 in 2019. Urology was our third largest U.S. surgical specialty in 2021 with procedure volume that grew to approximately 153,000 in 2021, compared to approximately 134,000 in 2020 and approximately 138,000 in 2019.

Procedures Outside of the U.S.

Overall OUS procedure volume with da Vinci Surgical Systems grew to approximately 485,000 in 2021, compared to approximately 367,000 in 2020 and approximately 346,000 in 2019. Urology was our largest OUS specialty in 2021 with procedure volume that grew to approximately 264,000 in 2021, compared to approximately 214,000 in 2020 and approximately 206,000 in 2019. General surgery was our second largest OUS specialty in 2021 with procedure volume that grew to approximately 101,000 in 2021, compared to approximately 68,000 in 2020 and approximately 62,000 in 2019. Thoracic procedures also contributed to OUS procedure growth with higher growth rates than urology and general surgery procedures.

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Recent Business Events and Trends

Procedures

Overall. Total da Vinci procedures performed by our customers grew approximately 28% for the year ended December 31, 2021, compared to approximately 1% for the year ended December 31, 2020. Total da Vinci procedures performed by our customers grew approximately 19% for the three months ended December 31, 2021, compared to approximately 6% for the three months ended December 31, 2020. The full year and fourth quarter 2021 procedure growth was largely attributable to growth in U.S. general surgery and growth in OUS markets. The full year and fourth quarter 2020 procedure results reflect significant disruption caused by the COVID-19 pandemic, as noted in the COVID-19 Pandemic section above. The COVID-19 pandemic continued to impact our procedures in 2021 in geographies and markets where there was a resurgence of the virus. Delays in both the diagnosis of and treatments of disease reflecting patient concerns over contracting COVID-19 has also impacted the number of procedures. This was most pronounced in prostatectomy procedures.

U.S. da Vinci procedures grew approximately 27% for the year ended December 31, 2021, as compared to the prior year. U.S. da Vinci procedures declined approximately 1% for the year ended December 31, 2020. The 2021 U.S. procedure growth was largely attributable to growth in general surgery procedures, most notably hernia repair, cholecystectomy, and bariatric procedures, as well as in the more mature gynecologic procedure category, most notably hysterectomies. The 2020 U.S. procedure results reflect significant disruption caused by the COVID-19 pandemic, as noted in the COVID-19 Pandemic section above, whereas the 2021 procedure results reflected COVID-19 resurgences throughout the year, which also significantly impacted our procedures.

U.S. da Vinci procedures grew approximately 16% for the three months ended December 31, 2021, compared to approximately 5% for the three months ended December 31, 2020. The fourth quarter 2021 U.S. procedure growth was largely attributable to growth in general surgery procedures, most notably hernia repair, cholecystectomy, and bariatric procedures. The fourth quarter 2020 U.S. procedure results reflect significant disruption caused by the COVID-19 pandemic and regional resurgences, as noted in the COVID-19 Pandemic section above, whereas the fourth quarter of 2021 reflected a COVID-19 resurgence later in the quarter, which also impacted our procedures.

OUS da Vinci procedures grew approximately 32% for the year ended December 31, 2021, compared to approximately 6% for the year ended December 31, 2020. The 2021 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 2021 OUS procedure growth also reflects continued adoption in European and Asian markets. We saw strong procedure growth in China, Japan, South Korea, and Germany during 2021. The 2020 OUS procedure results reflect significant disruption caused by the COVID-19 pandemic, as noted in the COVID-19 Pandemic section above, whereas the 2021 procedure results reflected COVID-19 resurgences throughout the year, which also significantly impacted our procedures. We believe growth in these global markets is being driven by increased acceptance among surgeons and health systems, supported by expanded global evidence validating the clinical and economic value of da Vinci procedures.

OUS da Vinci procedures grew approximately 28% for the three months ended December 31, 2021, compared to approximately 11% for the three months ended December 31, 2020. The fourth quarter 2021 OUS procedure growth was driven by continued growth in urologic procedures, including prostatectomies, and earlier stage growth in general surgery (particularly colorectal), gynecology, and thoracic procedures. We saw strong procedure growth in China, Japan, Germany, South Korea, and Italy during the fourth quarter of 2021. The fourth quarter 2020 OUS procedure growth reflects significant procedure disruption caused by the COVID-19 pandemic, as noted in the COVID-19 Pandemic section above, whereas the fourth quarter of 2021 reflected a COVID-19 resurgence later in the quarter, which also impacted our procedures.

U.S. General Surgery. In 2021, general surgery procedures in the U.S. grew to approximately 589,000 in 2021, compared to approximately 434,000 in 2020 and approximately 421,000 in 2019. Inguinal and ventral hernia repairs, cholecystectomies, and bariatric procedures contributed the most incremental procedures in 2021, while cholecystectomies and bariatric procedures contributed to the most incremental procedures in 2020 and inguinal and ventral hernia repairs contributed the most incremental procedures in 2019.

We believe that growth in hernia repair using da Vinci reflects improved clinical outcomes within certain patient populations, as well as potential cost benefits relative to certain alternative treatments. We believe hernia repair procedures represent a significant opportunity with the potential to drive growth in future periods. However, given the differences in surgical complexity associated with treatment of various hernia patient populations and varying surgeon opinion regarding optimal surgical technique, it is difficult to estimate the timing of and to what extent hernia repair procedure volume will grow in the future. We expect a large portion of hernia repairs will continue to be performed via different modalities of surgery.

Given the already very high level of laparoscopic techniques used in cholecystectomy, it is unclear whether growth is sustainable and to what extent da Vinci may be adopted.

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Bariatric procedures have grown significantly for the last two years. These procedures have been an increased area of focus in 2021 and 2020 and may also have benefited from certain patients prioritizing weight loss as obesity is a significant COVID-19 risk factor. In addition, our SureForm 60mm Stapler provides surgeons a more optimized robotic tool set for bariatric procedures. However, the diagnoses and treatment pathways for bariatric patients are long, and many of the patients may have begun their treatment pathway prior to the spread of COVID-19; therefore, we cannot provide any assurance that we will continue to see significant growth in bariatric procedures in future periods.

Adoption of da Vinci for colorectal procedures, which includes several underlying procedures, including low anterior resections for rectal cancers and certain colon procedures for benign and cancerous conditions, has been ongoing for several years and is supported by certain technologies, such as the EndoWrist and SureForm Staplers, energy devices, and Integrated Table Motion.

U.S. Gynecology. In 2021, gynecology procedures in the U.S. grew to approximately 316,000 in 2021, compared to approximately 267,000 in 2020 and approximately 282,000 in 2019, driven by an increase in benign hysterectomy procedures and, to a lesser extent, hysterectomy procedures for cancer. Combining robotic, laparoscopic, and vaginal approaches, MIS represents about 80% of the U.S. hysterectomy market for benign conditions. We believe that our growth in gynecologic procedures over the past several years has primarily been driven by consolidation of gynecologic procedures into higher volume surgeons that focus on cancer and complex surgeries.

Global Urology. Along with U.S. general surgery and gynecology, global urology procedures have also been a strong contributor to our overall procedure growth. In the U.S., da Vinci is the standard of care for the surgical treatment of prostate cancer, and we believe growth is largely aligned with surgical volumes of prostate cancer. In 2021, U.S. prostatectomy procedures grew, compared to a modest decline in 2020. For OUS, prostatectomy is at varying states of adoption in different areas of the world but is the largest overall da Vinci procedure. In 2021, we saw high-teens growth in OUS prostatectomy procedures compared to slight growth in 2020.

Kidney cancer procedures have also been a strong contributor to our recent global urology procedure growth. Clinical publications have demonstrated that the use of ada Vinci system increases the likelihood that a patient will receive nephron sparing surgery through a partial nephrectomy, which is typically the surgical society guideline recommended therapy.

OUS Procedures. The 2021 OUS procedure growth rate reflects continued da Vinci adoption in European and Asian markets, although it also reflects disruption caused by the COVID-19 pandemic, as noted in the COVID-19 Pandemic section above. We saw strong procedure growth in China, Japan, South Korea, Germany, Brazil, France, and the UK during 2021. In China, procedure growth accelerated as a result of new system placements during the year as well as very high system utilization.

System Demand

We placed 1,347 da Vinci Surgical Systems in 2021, compared to 936 systems in 2020. The increase in systems placed reflects the significant disruption experienced as a result of the COVID-19 pandemic in 2020, as well as procedure growth in 2021, more customers trading in da Vinci Si Surgical Systems for fourth generation systems in order to access fourth generation instruments and capabilities as well as to standardize their system portfolio, and further customer validation that surgery addresses their quadruple aim objectives.

While 2021 placements grew 44% compared with 2020, future placements of da Vinci Surgical Systems will be impacted by a number of factors: supply chain risks; economic and geopolitical factors; the impact of the current COVID-19 pandemic, as noted in the COVID-19 Pandemic section above; hospital response to the evolving healthcare environment; procedure growth rates; hospital consolidation trends; evolving system utilization and point of care dynamics; capital replacement trends, including a declining number of older generation systems available for trade-in transactions; additional reimbursements in various global markets, including Japan: the timing around governmental tenders and authorizations, including China; the timing of when we receive regulatory clearance in our other OUS markets for our da Vinci Xi Surgical System, da Vinci X Surgical System, and da Vinci SP Surgical System, and related instruments; and market response. Market acceptance of our da Vinci SP Surgical System and the nature and timing of additional da Vinci SP regulatory indications may also impact future system placements.

Demand may also be impacted by robotic-assisted surgery competition, including from companies that have introduced products in the field of robotic-assisted surgery or have made explicit statements about their efforts to enter the field including, but not limited to, the following companies: Asensus Surgical, Inc.; avateramedical GmbH; CMR Surgical Ltd.; Johnson & Johnson; Medicaroid, 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.

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Many of the above factors will also impact future demand for our Ion system, as we extend our commercial offering into diagnostics, along with additional factors associated with a new product introduction, including, but not limited to, our ability to optimize manufacturing and our supply chain, competition, clinical data to demonstrate value, and market acceptance.

New Product Introductions

SureForm 30 Curved-Tip Stapler and Reloads. In December 2021, we obtained FDA clearance for our 8 mm SureForm 30 Curved-Tip Stapler and reloads (gray, white, and blue) for use in general, thoracic, gynecologic, urologic, and pediatric surgery. It has been designed to help surgeons better visualize and reach anatomy through a combination of the 8 mm diameter instrument shaft and jaws, 120-degree cone of wristed articulation, and the curved tip. As it fits through the 8 mm da Vinci surgical system instrument cannula, the stapler allows different angles for surgeons to approach patient anatomy. Consistent with the other SureForm staplers, the 8 mm SureForm 30 Curved-Tip Stapler integrates SmartFire technology, which makes automatic adjustments to the firing process as staples are formed and the transection is made. The technology makes more than 1,000 measurements per second, helping achieve a consistent staple line. The 8 mm SureForm 30 stapler is expected to launch in the U.S. in 2022, with other countries to follow.

SynchroSeal and E-100 Generator. In November 2019, we obtained FDA clearance for our SynchroSeal instrument and E-100 generator. Following the FDA clearance, in February 2020, we received CE mark clearance for both products. In March 2020, we received regulatory clearance in Japan to market both our SynchroSeal instrument and E-100 generator. In August 2020, we received regulatory clearance in South Korea to market our E-100 generator. SynchroSeal is a single-use, bipolar, electrosurgical instrument intended for grasping, dissection, sealing, and transection of tissue. With its wristed articulation, rapid sealing cycle, and refined curved jaw, SynchroSeal offers enhanced versatility to the da Vinci Energy portfolio. The E-100 generator is an electrosurgical generator developed to power two key instruments–Vessel Sealer Extend and SynchroSeal–on the da Vinci X and da Vinci Xi Surgical Systems. The generator delivers high frequency energy for cutting, coagulation, and vessel sealing of tissues.

SureForm 45 Curved-Tip Stapler and Gray Reload. In July 2019, we obtained FDA clearance for the SureForm 45 Curved-Tip Stapler and SureForm 45 Gray reload. We have also received CE mark clearance for our SureForm 45 Curved-Tip Stapler and SureForm 45 Gray reload. In September 2019, we received regulatory clearance in Japan to market both our SureForm 45 Curved-Tip Stapler and SureForm 45 Gray reload. We received regulatory clearance in South Korea to market our SureForm 45 Curved-Tip Stapler and SureForm 45 Gray reload in June 2021 and July 2021, respectively. SureForm 45 Curved-Tip Stapler is a single-use, fully wristed stapling instrument with a curved tip intended for resection, transection, and/or creation of anastomoses. SureForm 45 Gray reload is a new, single-use cartridge that contains multiple staggered rows of implantable staples and a stainless steel knife. The SureForm 45 Curved-Tip Stapler and Gray reload have particular utility in thoracic procedures and round out our SureForm 45 portfolio. Not all reloads or staplers are available for use on all systems or in all countries.

Da Vinci Endoscope Plus. In June 2019, we received CE mark clearance for our da Vinci Endoscope Plus, an enhanced 3D endoscope for use with our da Vinci X and Xi Surgical Systems. Following the CE mark, in July 2019, we obtained FDA clearance for our da Vinci Endoscope Plus. We have also received regulatory clearances in South Korea and Japan to market our da Vinci Endoscope Plus in December 2019 and May 2020, respectively. The da Vinci Endoscope Plus leverages new sensor technology to allow for increased sharpness and color accuracy.

Da Vinci Handheld Camera. In June 2019, we obtained FDA clearance for our da Vinci Handheld Camera, a lightweight, 2D camera head, which can be connected to third-party laparoscopes. This allows the laparoscopic image to be displayed on the da Vinci X/Xi vision cart to address aspects of da Vinci procedures that may require use of a laparoscope, thus eliminating the need for redundant equipment in the operating room and increasing procedure efficiency. In February 2020, we received CE mark clearance for our da Vinci Handheld Camera. We broadly launched the da Vinci Handheld Camera in our European direct markets as well as in the U.S. in May 2020 and June 2020, respectively.

Ion endoluminal system. In February 2019, we obtained FDA clearance for the Ion endoluminal system, our new flexible, robotic-assisted, catheter-based platform designed to navigate through very small lung airways to reach peripheral nodules for biopsies. The Ion system uses an ultra-thin articulating robotic catheter that can articulate 180 degrees in all directions. The outer diameter of the catheter is 3.5mm, which allows physicians to navigate through small and tortuous airways to reach nodules in most airway segments within the lung. The Ion system’s flexible biopsy needle can also pass through very tight bends via Ion’s catheter to collect tissue in the peripheral lung. The catheter’s 2mm working channel can also accommodate other biopsy tools, such as biopsy forceps or cytology brushes, if necessary. Our rollout of the Ion system is progressing well, and we are continuing to gather additional clinical evidence. We have placed 129 Ion systems as of December 31, 2021.

Iris. In February 2019, we obtained FDA clearance for our Iris augmented reality product. Iris is a service that delivers a 3D image of the patient anatomy (initially targeting kidneys) to aid surgeons in both the pre- and intra-operative settings. The

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service is currently being used in pilot studies. We launched our first pilot site in 2019, continued in 2020 with select sites, and have six pilot sites as of December 31, 2021.

Acquisition of Orpheus Medical

In February 2020, we acquired Orpheus Medical Ltd. and its wholly owned subsidiaries to deepen and expand our integrated informatics platform. Orpheus Medical provides hospitals with information technology connectivity, as well as expertise in processing and archiving surgical videos. Orpheus Medical is a wholly owned subsidiary of Intuitive.

Intuitive Ventures

In 2020, we launched Intuitive Ventures, an inaugural $100 million fund focused on investment opportunities in companies that share Intuitive’s commitment to advancing positive outcomes in healthcare.

2021 Operational and Financial Highlights

•Total revenue increased by 31% to $5.7 billion for the year ended December 31, 2021, compared to $4.4 billion for the year ended December 31, 2020.

•Approximately 1,594,000 da Vinci procedures were performed during the year ended December 31, 2021, an increase of 28% compared to approximately 1,243,000 da Vinci procedures for the year ended December 31, 2020.

•Instruments and accessories revenue increased by 26% to $3.10 billion for the year ended December 31, 2021, compared to $2.46 billion for the year ended December 31, 2020.

•Systems revenue increased by 44% to $1.69 billion for the year ended December 31, 2021, compared to $1.18 billion for the year ended December 31, 2020.

•A total of 1,347da Vinci Surgical Systems were placed during the year ended December 31, 2021, an increase of 44% compared to 936 systems during the year ended December 31, 2020.

•As of December 31, 2021, we had a da Vinci Surgical System installed base of approximately 6,730 systems, an increase of 12% compared to the installed base of approximately 5,989 systems as of December 31, 2020.

•Utilization of da Vinci Surgical Systems, measured in terms of procedures per system per year, increased 17% relative to 2020.

•During the year ended December 31,2021, we placed 93 Ion systems, an increase of 258% compared to 26 Ion systems during the year ended December 31, 2020.

•Gross profit as a percentage of revenue was 69.3% for the year ended December 31, 2021, compared to 65.6% for the year ended December 31, 2020.

•Operating income increased by 73% to $1.82 billion for the year ended December 31, 2021, compared to $1.05 billion for the year ended December 31, 2020. Operating income included $457 million and $399 million of share-based compensation expense related to employee stock plans and $37.0 million and $60.9 million of intangible asset-related charges for the years ended December 31, 2021, and 2020, respectively.

•As of December 31, 2021, we had $8.62 billion in cash, cash equivalents, and investments. Cash, cash equivalents, and investments increased by $1.75 billion, compared to $6.87 billion as of December 31, 2020, primarily as a result of cash generated from operating activities, partially offset by capital expenditures.

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Results of Operations

This section of the Annual Report on Form 10-K generally discusses 2021 and 2020 items and year-to-year comparisons between 2021 and 2020. Discussions of 2019 items and year-to-year comparisons between 2020 and 2019 that are not included in this report on Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020.

The following table sets forth, for the years indicated, certain Consolidated Statements of Income information (in millions, except percentages):

Years Ended December 31,

2021 % oftotalrevenue 2020 % oftotalrevenue 2019 % oftotalrevenue

Revenue:

Cost of revenue:

Operating expenses:

Total Revenue

Total revenue increased by 31% to $5.7 billion for the year ended December 31, 2021, compared to $4.4 billion for the year ended December 31, 2020. Total revenue for the year ended December 31, 2020, decreased by 3% compared to $4.5 billion for the year ended December 31, 2019. The increase in total revenue for the year ended December 31, 2021, resulted from 44% higher systems revenue, driven by 44% higher system placements, 26% higher instruments and accessories revenue, driven by approximately 28% higher procedure volume partially offset by the effects of the Extended Use Program, and 27% higher service revenue. In conjunction with our 2020 COVID-19 Customer Relief Program implemented in the second quarter of 2020, service revenue in 2020 was reduced by $80 million as a result of service fee credits provided to customers.

Revenue denominated in foreign currencies as a percentage of total revenue was approximately 23%, 23%, and 20% for the years ended December 31, 2021, 2020, and 2019, respectively. We generally sell our products and services in local currencies where we have direct distribution channels. Foreign currency rate fluctuations did not have a material impact on total revenue for the year ended December 31, 2021, as compared to 2020, or for the year ended December 31, 2020, as compared to 2019.

Revenue generated in the U.S. accounted for 67%, 68%, and 70% of total revenue for the years ended December 31, 2021, 2020, and 2019, 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,

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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.

As the COVID-19 pandemic is expected to continue to cause strain on hospital resources, as outlined in the COVID-19 Pandemic section above, we cannot reliably estimate the extent total revenue will be impacted in the first quarter of 2022 and beyond.

The following table summarizes our revenue and system unit placements for the years ended December 31, 2021, 2020, and 2019, respectively (in millions, except percentages and unit placements):

Years Ended December 31,

Revenue

% of Revenue - U.S. 67 % 68 % 70 %

% of Revenue - OUS 33 % 32 % 30 %

% of Total revenue 75 % 77 % 72 %

Da Vinci Surgical System Placements by Region:

Da Vinci Surgical System Placements involving System Trade-ins:

Unit placements involving trade-ins 510 447 442

Unit placements not involving trade-ins 837 489 677

Product Revenue

Product revenue increased by 32% to $4.8 billion for the year ended December 31, 2021, compared to $3.6 billion for the year ended December 31, 2020. Product revenue for the year ended December 31, 2020, decreased by 3% compared to $3.8 billion for the year ended December 31, 2019.

Instruments and accessories revenue increased by 26% to $3.10 billion for the year ended December 31, 2021, compared to $2.46 billion for the year ended December 31, 2020. The increase in instruments and accessories revenue was driven primarily by procedure growth of 28% and incremental sales of our advanced instruments, partially offset by stocking orders in Q4 2020 associated with the Company’s launch of Extended Use Instruments. The 2021 U.S. procedure growth of approximately 27%, compared to a 2020 U.S. procedure decline of approximately 1%, was driven by strong growth in general surgery procedures,

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most notably hernia repair, cholecystectomy, and bariatric procedures, and gynecology procedures, as well as moderate growth in the more mature urology procedure category. The 2020 U.S. procedure decline was primarily a result of the significant disruption caused by the COVID-19 pandemic, as noted in the COVID-19 Pandemic section above. The 2021 OUS procedure volumes grew by approximately 32%, compared to 2020 OUS procedure growth of 6%. Key drivers for OUS procedure growth in 2021 were continued growth in urology procedures, most notably prostatectomy and partial nephrectomy procedures, and earlier stage growth in general surgery and gynecology procedures. The 2020 OUS procedure growth was impacted by the significant disruption caused by the COVID-19 pandemic, as noted in the COVID-19 Pandemic section above. Geographically, the 2021 OUS procedure growth was driven by China, Japan, Korea, and Germany.

Systems revenue increased by 44% to $1.69 billion for the year ended December 31, 2021, compared to $1.18 billion for the year ended December 31, 2020. The higher 2021 systems revenue was primarily driven by higher system placements, higher operating lease revenue, higher lease buyouts, and higher 2021 ASPs, partially offset by a higher proportion of system placements under operating leases.

During 2021, a total of 1,347 da Vinci Surgical Systems were placed compared to 936 systems during 2020. By geography, 865 systems were placed in the U.S., 232 in Europe, 203 in Asia, and 47 in other markets during 2021, compared to 600 systems placed in the U.S., 136 in Europe, 157 in Asia, and 43 in other markets during 2020. During 2021, 517 of the 1,347 systems were placed under operating lease arrangements, compared to 317 of the 936 systems placed during 2020. The increase in system placements was primarily driven by decisions in 2020 by customers to defer purchases or leases of systems into future quarters as a result of the COVID-19 pandemic, as well as procedure growth, more 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 surgery addresses their quadruple aim objectives.

We placed 668 and 432 da Vinci Surgical Systems under lease or usage-based arrangements, of which 517 and 317 systems were classified as operating leases for the years ended December 31, 2021, and 2020, respectively. Operating lease revenue was $277 million for the year ended December 31, 2021, compared to $177 million for the year ended December 31, 2020. Systems placed as operating leases represented 38% of total placements during 2021, compared to 34% during 2020. A total of 1,294 da Vinci Surgical Systems were installed at customers under operating lease or usage-based arrangements as of December 31, 2021, compared to 901 as of December 31, 2020. Revenue from Lease Buyouts was $96 million for the year ended December 31, 2021, compared to $52 million for the year ended December 31, 2020. We expect revenue from Lease Buyouts to fluctuate period to period based on the timing of when, and if, customers choose to exercise the buyout options embedded in their leases.

The da Vinci Surgical System ASP, excluding the impact of systems placed under operating lease or usage-based arrangements and Ion systems, was approximately $1.55 million for the year ended December 31, 2021, compared to approximately $1.50 million for the year ended December 31, 2020. The higher 2021 ASP was largely driven by lower relative trade-in volume and favorable product mix, partially offset by pricing discounts. 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.

Service Revenue

Service revenue increased by 27% to $916 million for the year ended December 31, 2021, compared to $724 million for the year ended December 31, 2020. Service revenue for the year ended December 31, 2020, remained unchanged at $724 million for the year ended December 31, 2019. Higher service revenue in 2021 was primarily driven by a larger installed base of da Vinci Surgical 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 as a result of service fee credits provided to customers.

Gross Profit

Product gross profit for the year ended December 31, 2021, increased by 38% to $3.3 billion, representing 69.5% of product revenue, compared to $2.4 billion, representing 66.2% of product revenue, for the year ended December 31, 2020. The higher 2021 product gross profit was primarily driven by higher product revenue and higher product gross profit margin. The higher product gross profit margin for the year ended December 31, 2021, was primarily driven by higher 2021 ASPs, lower year-over-year excess and obsolete inventory costs, and lower year-over-year intangible assets amortization expense, partially offset by higher share-based compensation expense. In addition, we incurred period costs in the second, third, and fourth quarters of 2020 associated with abnormally low production, which did not recur in 2021 as a result of increased production volumes.

Product gross profit for the years ended December 31, 2021 and 2020, included share-based compensation expense of $68.9 million and $58.9 million, respectively, and intangible assets amortization expense of $17.6 million and $35.5 million, respectively.

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Service gross profit for the year ended December 31, 2021, increased by 38% to $629 million, representing 68.6% of service revenue, compared to $457 million, representing 63.1% of service revenue, for the year ended December 31, 2020. The higher 2021 service gross profit was driven by higher service revenue, reflecting a larger installed base of da Vinci Surgical Systems, and higher service gross profit margin. The lower service gross profit margin for the year ended December 31, 2020, was primarily driven by the $80 million decrease in service revenue as a result of the Customer Relief Program.

Service gross profit for the years ended December 31, 2021 and 2020, included share-based compensation expense of $22.2 million and $24.0 million, respectively, and intangible assets amortization expense of $1.0 million and $3.7 million, respectively.

Selling, General and Administrative Expenses

Selling, general and administrative expenses include costs for sales, marketing and administrative personnel, sales and marketing activities, tradeshow expenses, legal expenses, regulatory fees, and general corporate expenses.

Selling, general and administrative expenses for the year ended December 31, 2021, increased by 21% to $1.47 billion, compared to $1.22 billion for the year ended December 31, 2020. The increase in selling, general and administrative expenses for the year ended December 31, 2021, 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 marketing, travel, and training expenses in 2021, as compared with the prior year. Also, in the fourth quarters of 2021 and 2020, we made charitable contributions of $30 million and $25 million, respectively, to the Intuitive Foundation, a not-for-profit organization whose mission is to reduce the global burden of disease and suffering through research, education, and philanthropy aimed at better outcomes for patients around the globe.

Selling, general and administrative expenses for the years ended December 31, 2021, and 2020, included share-based compensation expense of $232 million and $202 million, respectively, and intangible assets amortization expense of $7.3 million and $6.9 million, respectively.

Selling, general and administrative expenses were 25% for 2021, as a percentage of revenue, compared to 28% for 2020, and 26% for 2019. Our spending in 2021 reflected a continued but less pronounced curtailment of certain costs as a result of the COVID-19 pandemic, including travel, marketing events, clinical trials, and other related expenses. We expect that these costs will continue to increase to the extent that the impact of COVID-19 decreases and decline to the extent that the impact of COVID-19 increases. In addition, we expect spending to increase as a percentage of revenue as we continue to support our customers, invest in innovation focused on the quadruple aim, and invest in manufacturing and our supply chain to ensure supply for our customers.

Research and Development Expenses

Research and development costs are expensed as incurred. Research and development expenses include costs associated with the design, development, testing, and significant enhancement of our products.

Research and development expenses for the year ended December 31, 2021, increased by 13% to $671 million, compared to $595 million for the year ended December 31, 2020. The increase in research and development expenses for the year ended December 31, 2021, 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 years ended December 31, 2021, and 2020, included share-based compensation expense of $134 million and $114 million, respectively, and intangible asset-related charges of $11.1 million and $15.8 million, respectively.

Research and development expenses fluctuate with project timing. Based upon our broader set of product development initiatives and the stage of the underlying projects, we expect to continue to make substantial investments in research and development and anticipate that research and development expenses will continue to increase in the future.

Interest and Other Income, Net

Interest and other income, net, was $69.3 million for the year ended December 31, 2021, compared to $157.2 million for the year ended December 31, 2020, and $127.7 million for the year ended December 31, 2019. The decrease in interest and other income, net, for the year ended December 31, 2021, was primarily driven by lower gains on investments resulting from strategic arrangements, lower interest income earned, despite higher cash and investment balances, due to the decline in average interest rates, and gains on the sale of certain securities in 2020, partially offset by foreign exchange losses realized in 2020.

We held an equity investment in preferred shares of Broncus Holding Corporation (“Broncus”), which was reflected in our financial statements on a cost basis. During the first quarter of 2021, we recorded an unrealized gain on our investment in

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Broncus of approximately $14 million. In September 2021, Broncus completed an initial public offering (“IPO”) of common shares on the Stock Exchange of Hong Kong. Upon completion of the IPO, the preferred shares were converted to common shares in Broncus, and we recognized a net gain on this investment in the third quarter of 2021 of approximately $8 million. We are restricted from selling these shares for a period of six months. In the fourth quarter of 2021, we recognized a loss on this investment of approximately $17 million.

We held an equity investment in common shares of Bolder Surgical Holdings, Inc. (“Bolder”), which was reflected in our financial statements on a cost basis. During the fourth quarter of 2021, Hologic, Inc., a publicly traded company, completed its acquisition of Bolder. Under the terms of the acquisition agreement, we received cash on the date of closing and recognized a gain on this investment of approximately $10 million.

We held an equity investment in preferred shares of InTouch Technologies, Inc. (“InTouch”), which was reflected in the our financial statements on a cost basis. On July 1, 2020, Teladoc Health, Inc. (“Teladoc”), a publicly traded company, completed its acquisition of InTouch. Based on the terms of the agreement, we received Teladoc shares on the date of closing and recognized a gain on our investment of approximately $45 million. We were restricted from selling these shares for a period of six months. In January 2021, we sold all of our shares in Teladoc and recognized a gain on this investments of approximately $11 million. This gain was offset by a $7.5 million loss recognized upon the settlement of a corresponding derivative collar contract in January 2021.

Additionally, the Company recorded unrealized gains on other strategic investments in 2020 of approximately $22 million.

Income Tax Expense

Our income tax expense was $162 million, $140 million, and $120 million for the years ended December 31, 2021, 2020, and 2019, respectively. Our effective tax rate for 2021 was approximately 8.6% compared to 11.6% for 2020 and 8.0% for 2019. Our effective tax rate for 2021, 2020, and 2019 differs from the U.S. federal statutory rate of 21% primarily due to the excess tax benefits recognized for employee share-based compensation, the effect of income earned by certain overseas entities being taxed at rates lower than the federal statutory rate, and the federal research and development credit benefit, partially offset by U.S. tax on foreign earnings and state income taxes (net of federal benefit).

Our effective tax rate for 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 effective tax rate for 2020 included an increase of $39.3 million in unrecognized tax benefits with a corresponding increase to income tax expense. This increase was related to intercompany charges for share-based compensation for relevant periods prior to 2020, triggered by the finalization of a Ninth Circuit Court of Appeals opinion involving an independent third party. An additional charge of $13.6 million related to this matter was recorded to income tax expense in 2021, primarily as a result of additional IRS guidance issued in July 2021. Our effective tax rate for 2019 included a one-time benefit of $51.3 million associated with re-measurement of our Swiss deferred tax assets due to a Swiss statutory tax rate increase enacted as part of Swiss tax reform in August 2019.

Our 2021, 2020, and 2019 provisions for income taxes included excess tax benefits associated with employee equity plans of $186 million, $166 million, and $147 million, respectively, which reduced our effective tax rate by 9.8, 13.8, and 9.8 percentage points, respectively. The amount of excess tax benefits or deficiencies will fluctuate from period to period based on the price of our stock, the volume of share-based awards settled or vested, and the value assigned to employee equity awards under U.S. GAAP, which results in increased income tax expense volatility.

We file federal, state, and foreign income tax returns in many jurisdictions in the U.S. and abroad. Years prior to 2016 are considered closed for most significant jurisdictions. Certain of our unrecognized tax benefits could change due to activities of various tax authorities, including evolving interpretations of existing tax laws in the jurisdictions we operate, potential assessment of additional tax, possible settlement of audits, or through normal expiration of various statutes of limitations, which could affect our effective tax rate in the period in which they change. Due to the uncertainty related to the timing and potential outcome of audits, we cannot estimate the range of reasonably possible change in unrecognized tax benefits that may occur in the next 12 months.

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

Net Income Attributable to Noncontrolling Interest in Joint Venture

The Company’s majority-owned joint venture (the “Joint Venture”) with Shanghai Fosun Pharmaceutical (Group) Co., Ltd. (“Fosun Pharma”), a subsidiary of Fosun International Limited, was established to research, develop, manufacture, and sell

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robotic-assisted, catheter-based medical devices. The Joint Venture is owned 60% by us and 40% by Fosun Pharma and is located in China. The catheter-based technology will initially target early diagnosis and cost-effective treatment of lung cancer, one of the most commonly diagnosed forms of cancer in the world. Distribution of catheter-based medical devices in China will be conducted by the joint venture, while distribution outside of China will be conducted by us.

In January 2019, the Joint Venture acquired certain assets, including distribution rights, customer relationships, and certain personnel, from Chindex and its affiliates, a subsidiary of Fosun Pharma, and began direct operations for da Vinci products and services in China. As of December 31, 2021, the companies have contributed $55 million of up to $100 million required by the joint venture agreement.

Net income attributable to noncontrolling interest in Joint Venture for the year ended December 31, 2021, was $23.5 million, compared to $6.2 million for the year ended December 31, 2020, and $2.5 million for the year ended December 31, 2019. The increase in net income attributable to noncontrolling interest in Joint Venture for the year ended December 31, 2021, was primarily due to the increase in sales in China, as well as re-measurement losses related to the contingent consideration from the acquisition during the year ended December 31, 2020, which did not recur in 2021 as the contingent consideration has been finalized and paid. These increases in net income attributable to noncontrolling interest in Joint Venture were partially offset by additional long-term incentive plan expenses recorded as a result of an increase in the value of phantom share awards in China that were modified in the fourth quarter of 2021.

Liquidity and Capital Resources

Sources and Uses of Cash

Our principal source of liquidity is cash provided by operations and by the issuance of common stock through the exercise of stock options and our employee stock purchase program. Cash and cash equivalents plus short- and long-term investments increased by $1.75 billion to $8.62 billion as of December 31, 2021, from $6.87 billion as of December 31, 2020, primarily from cash provided by our operations and proceeds from stock option exercises and employee stock purchases, partially offset by capital expenditures and taxes paid related to net share settlements of equity awards. Cash and cash equivalents plus short- and long-term investments increased by $1.02 billion to $6.87 billion as of December 31, 2020, from $5.85 billion as of December 31, 2019, primarily from cash provided by our operations and proceeds from stock option exercises and employee stock purchases, partially offset by capital expenditures, taxes paid related to net share settlements of equity awards, and share repurchases.

Our cash requirements depend on numerous factors, including market acceptance of our products, the resources we devote to developing and supporting our products, and other factors. We expect to continue to devote substantial resources to expand procedure adoption and acceptance of our products. We have made substantial investments in our commercial operations, product development activities, facilities, and intellectual property. Based upon our business model, we anticipate that we will continue to be able to fund future growth through cash provided 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, 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.

As of December 31, 2021, $481 million of our cash, cash equivalents, and investments was held by foreign subsidiaries. We intend to repatriate earnings from our Swiss subsidiary and joint venture in Hong Kong, as needed, since the U.S. and foreign tax implications of such repatriations are not expected to be significant. We will continue to indefinitely reinvest earnings from the rest of our foreign subsidiaries, which are not significant.

See “Item 7A. Quantitative and Qualitative Disclosures About Market Risk” for discussion on the impact of interest rate risk and market risk on our investment portfolio.

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Consolidated Cash Flow Data

The following table summarizes our cash flows for the years ended December 31, 2021, 2020, and 2019:

Years Ended December 31,

(in millions)

Net cash provided by (used in)

Operating Activities

For the year ended December 31, 2021, net cash provided by operating activities of $2.09 billion exceeded our net income of $1.73 billion, primarily due to the following factors:

1.Our net income included non-cash charges of $729 million, consisting primarily of the following significant items: share-based compensation of $449 million; depreciation expense and losses on the disposal of property, plant, and equipment of $283 million; changes in deferred income taxes of $(63) million; and amortization of intangible assets of $27 million.

2.The non-cash charges outlined above were partially offset by changes in operating assets and liabilities that resulted in $368 million of cash used in operating activities during the year ended December 31, 2021. Inventory, including the transfer of equipment from inventory to property, plant, and equipment, increased by $256 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 further details in the supplemental cash flow information in Note 4 to the Condensed Consolidated Financial Statements. Prepaid expenses and other assets increased by $205 million, primarily due to an increase in net investments in sales-type leases, and accounts receivable increased $142 million, primarily due to the timing of billings and collections. The unfavorable impact of these items on cash used in operating activities was partially offset by a $115 million increase in accrued compensation and employee benefits, primarily due to higher headcount and variable compensation, a $51 million increase in other liabilities, primarily due to additional accruals related to capital expenditures and timing of income tax payments, a $36 million increase in accounts payable, primarily due to the timing of payments and vendor billings, and a $33 million increase in deferred revenue, primarily due to the increased volume of sales contracts.

For the year ended December 31, 2020, net cash provided by operating activities of $1.48 billion exceeded our net income of $1.07 billion, primarily due to the following factors:

1.Our net income included non-cash charges of $691 million, consisting primarily of the following significant items: share-based compensation of $395 million; depreciation expense and losses on the disposal of property, plant, and equipment of $226 million; changes in deferred income taxes of $58 million; gains on investments, accretion, and amortization, net, of $55 million; and amortization of intangible assets of $50 million.

2.The non-cash charges outlined above were partially offset by changes in operating assets and liabilities that resulted in $273 million of cash used in operating activities during the year ended December 31, 2020. Inventory, including the transfer of equipment from inventory to property, plant, and equipment, increased by $170 million, primarily due to the increased number of systems under operating lease and usage-based arrangements and build-up to mitigate risks of disruption that could arise from trade, supply, or other matters, such as the COVID-19 pandemic. Prepaid expenses and other assets increased by $112 million, primarily due to an increase in net investments in sales-type leases and an increase in deferred commissions. Accounts payable decreased by $32 million, primarily due to the timing of payments. Accrued compensation and employee benefits decreased by $17 million, primarily due to the timing of bonus payments. The unfavorable impact of these items on cash used in operating activities was partially offset by a $37 million increase in other liabilities, primarily due to additional income tax reserves, and a $15 million increase in deferred revenue, primarily due to the effects of the Customer Relief Program.

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Investing Activities

Net cash used in investing activities for the year ended December 31, 2021, consisted primarily of purchases of investments (net of proceeds from sales and maturities of investments) of $2.10 billion and the acquisition of property and equipment of $354 million.

Net cash used in investing activities for the year ended December 31, 2020, consisted of purchases of investments (net of proceeds from sales and maturities of investments) of $561 million, the acquisition of property and equipment of $342 million, and the Orpheus Medical acquisition, net of cash acquired, of $38 million.

Net cash used in investing activities for the year ended December 31, 2019, consisted of purchases of investments (net of proceeds from sales and maturities of investments) of $669 million, the acquisition of property and equipment of $426 million, and the acquisition of businesses, net of cash acquired, of $60 million.

We invest predominantly in high quality, fixed income securities. Our investment portfolio may, at any time, contain investments in U.S. treasury and U.S. government agency securities, taxable and tax-exempt municipal notes, corporate notes and bonds, commercial paper, non-U.S. government agency securities, cash deposits, and money market funds.

Financing Activities

Net cash provided by financing activities for the year ended December 31, 2021, consisted primarily of proceeds from stock option exercises and employee stock purchases of $277 million, partially offset by taxes paid on behalf of employees related to net share settlements of vested employee equity awards of $212 million and the payment of deferred purchase consideration of $22 million.

Net cash used in financing activities for the year ended December 31, 2020, consisted primarily of taxes paid on behalf of employees related to net share settlements of vested employee equity awards of $175 million, cash used in the repurchase of approximately 0.7 million shares of our common stock in the open market for $134 million, and the payment of deferred purchase consideration of $85 million, partially offset by proceeds from stock option exercises and employee stock purchases of $309 million.

Net cash used in financing activities for the year ended December 31, 2019, consisted primarily of cash used in the repurchase of approximately 1.7 million shares of our common stock in the open market for $270 million and taxes paid on behalf of employees related to net share settlements of vested employee equity awards of $159 million, partially offset by proceeds from stock option exercises and employee stock purchases of $273 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 $1 billion. A significant portion of this investment involves construction of facilities to provide incremental space for growth, to consolidate operations to enhance efficiency, and to replace leased spaces with owned spaces. These capital investments 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.

Contractual Obligations and Commercial Commitments

Operating leases. We lease spaces for operations in the U.S. as well as in Japan, Mexico, China, South Korea, Israel, and other countries. We also lease automobiles for certain sales and field service employees. These leases have varying terms up to 15 years. Operating lease amounts include future minimum lease payments under all of our non-cancellable operating leases with an initial term in excess of one year. Refer to Note 6 to the Consolidated Financial Statements included in Part II, Item 8 for further details.

Purchase commitments and obligations. Total purchase commitments and obligations as of December 31, 2021 is estimated to be $1.51 billion, of which $1.41 billion is due within a year. These amounts include an estimate of all open purchase orders and contractual obligations in the ordinary course of business, including commitments with contract manufacturers and suppliers for which we have not received the goods or services, commitments for capital expenditures and construction-related activities for which we have not received the services, and acquisition and licensing of intellectual property. Although open purchase orders are considered enforceable and legally binding, the terms generally allow us the option to cancel, reschedule, and adjust our requirements based on our business needs prior to the delivery of goods or performance of services. In addition to the above, we have committed to make potential future milestone payments to third parties as part of licensing, collaboration, and development arrangements. Payments under these agreements generally become due and payable only upon achievement of certain developmental, regulatory, and/or commercial milestones. For instances in

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which the achievement of these milestones is neither probable nor reasonably estimable, such contingencies have not been recorded on our Consolidated Balance Sheets.

2017 Tax Act deemed repatriation tax. As of December 31, 2021, our obligation associated with the deemed repatriation tax is $182 million, of which $21 million is due within a year. Amounts due are expected to be paid in installments in accordance with the 2017 Tax Act.

We are unable to make a reasonably reliable estimate as to when payments may occur for our unrecognized tax benefits. Therefore, our liability for unrecognized tax benefits is not included in the table above.

Off-Balance Sheet Arrangements

As of December 31, 2021, we did not have any significant off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K promulgated under the Exchange Act.

Critical Accounting Estimates

Our Consolidated Financial Statements are prepared in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”), which requires us to make judgments, estimates, and assumptions. See “Note 2. Summary of Significant Accounting Policies,” in Notes to the Consolidated Financial Statements, which is included in “Item 8. Financial Statements and Supplementary Data,” which describes our significant accounting policies and methods used in the preparation of our Consolidated Financial Statements. The methods, estimates, and judgments that we use in applying our accounting policies require us to make difficult and subjective judgments, often as a result of the need to make estimates regarding matters that are inherently uncertain. Our most critical accounting estimates include:

•the valuation and recognition of investments, which impacts our investment portfolio balance when we assess fair value and interest and other income, net, when we record impairments;

•the standalone selling prices used to allocate the contract consideration to the individual performance obligations, which impacts revenue recognition;

•the allowance for sales returns and doubtful accounts, which impacts revenue;

•the valuation of inventory, which impacts gross profit margins;

•the valuation of and assessment of recoverability of intangible assets and their estimated useful lives, which primarily impacts gross profit margin or operating expenses when we record asset impairments or accelerate their amortization;

•the valuation and recognition of share-based compensation, which impacts gross profit margin and operating expenses;

•the recognition and measurement of current and deferred income taxes (including the measurement of uncertain tax positions), which impact our provision for taxes; and

•the estimate of probable loss associated with legal contingencies, which impacts accrued liabilities and operating expenses.

Investments Valuation

Fair Value. Our investment portfolio may, at any time, contain investments in U.S. treasuries and U.S. government agency securities, non-U.S. government securities, taxable and/or tax-exempt municipal notes, corporate notes and bonds, commercial paper, cash deposits, money market funds, and equity investments with and without readily determinable value. The assessment of the fair value of investments can be difficult and subjective. U.S. GAAP establishes three levels of inputs that may be used to measure fair value. Each level of input has different levels of subjectivity and difficulty involved in determining fair value. Valuation of Level 1 and 2 instruments generally do not require significant management judgment and the estimation is not difficult. Level 3 instruments include unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. The determination of fair value for Level 3 instruments requires the most management judgment and subjectivity. There were no Level 3 securities for the periods presented.

After determining the fair value of our available-for-sale instruments, we identify instruments with an amortized cost basis in excess of estimated fair value. Available-for-sale instruments in an unrealized loss position are written down to fair value through a charge to other income, net in the Consolidated Statements of Income, if we intend to sell the security or it is more likely than not we will be required to sell the security before recovery of its amortized cost basis. For the remaining securities, we assess what amount of the excess, if any, is caused by expected credit losses. Factors considered in determining whether a credit-related loss exists include the financial condition and near-term prospects of the investee, the extent of the loss related to credit of the issuer, and the expected cash flows from the security. These judgments could prove to be wrong, and companies with relatively high credit ratings and solid financial conditions may not be able to fulfill their obligations.

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No significant impairment charges were recorded during the years ended December 31, 2021, 2020, and 2019. As of December 31, 2021, and 2020, net unrealized losses on investments of $16.0 million and $29.5 million, net of tax, respectively, were included in accumulated other comprehensive income/(loss).

Revenue recognition. Our system sale arrangements contain multiple products and services, including system(s), system components, system accessories, instruments, accessories, and service. Other than service, we generally deliver all of the products upfront. Each of these products and services is a distinct performance obligation. System accessories, instruments, accessories, and service are also sold on a standalone basis.

For multiple-element arrangements, revenue is allocated to each performance obligation based on its relative standalone selling price. Standalone selling prices are based on observable prices at which we separately sell the products or services. If a standalone selling price is not directly observable, then we estimate the standalone selling prices considering market conditions and entity-specific factors including, but not limited to, features and functionality of the products and services, geographies, type of customer, and market conditions. We regularly review standalone selling prices and maintain internal controls over establishing and updating these estimates.

Our system sales arrangements generally include a five-year period of service. The first year of service is generally free and included in the system sale arrangement and the remaining four years are billed at a stated service price. Revenue that is allocated to the service obligation is deferred and recognized ratably over the service period.

Allowance for sales returns and doubtful accounts. We record estimated reductions in revenue for potential returns of certain products by customers. As a result, management must make estimates of potential future product returns related to current period product revenue. In making such estimates, management analyzes historical returns, current economic trends and changes in customer demand and acceptance of our products. If management were to make different judgments or utilize different estimates, material differences in the amount of reported revenue could result.

Similarly, we make estimates of the collectability of accounts receivable, especially analyzing the aging and nature of accounts receivable and historical bad debts, customer concentrations, customer credit-worthiness, current economic trends, and changes in customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. Credit evaluations are undertaken for all major sales transactions before shipment is authorized. On a quarterly basis, we evaluate aged items in the accounts receivable aging report and provide an allowance in an amount that we deem adequate for doubtful accounts. If management were to make different judgments or utilize different estimates, material differences in the amount of reported accounts receivable and operating expenses could result.

Inventory valuation. Inventory is stated at the lower of cost or net realizable value on a first-in, first-out basis. The cost basis of our inventory is reduced for any products that are considered excessive or obsolete based upon assumptions about future demand and market conditions. If actual future demand or market conditions are less favorable than those projected by management, additional inventory write-downs may be required, which could have a material adverse effect on the results of our operations.

Intangible assets. Our intangible assets include identifiable intangible assets and goodwill. Identifiable intangible assets include developed technology, patents, distribution rights, customer relationships, licenses, and non-competition arrangements. All of our identifiable intangible assets have finite lives. Goodwill and intangible assets with indefinite lives are subject to an annual impairment review (or more frequent if impairment indicators arise) by applying a fair value-based test. There have been no such impairments.

Identifiable intangible assets with finite lives are subject to impairment testing and are reviewed for impairment when events or circumstances indicate that the carrying value of an asset is not recoverable and its carrying amount exceeds its fair value. We evaluate the recoverability of the carrying value of these identifiable intangible assets based on estimated undiscounted cash flows to be generated from such assets. If the cash flow estimates or the significant operating assumptions upon which they are based change in the future, we may be required to record additional impairment charges.

The valuation and classification of intangible assets and goodwill and the assignment of useful lives for purposes of amortization involves judgments and the use of estimates. The evaluation of these intangible assets and goodwill for impairment under established accounting guidelines is required on a recurring basis. Changes in business conditions could potentially require future adjustments to the assumptions made. When we determine that the useful lives of assets are shorter than we had originally estimated, we accelerate the rate of amortization over the assets’ new, shorter useful lives. No impairment charge or accelerated amortization was recorded for the years ended December 31, 2021, 2020, and 2019. A considerable amount of judgment is required in assessing impairment, which includes financial forecasts. If conditions are different from management’s current estimates, material write-downs of long-lived assets may be required, which would adversely affect our operating results.

Business combinations. We allocate the fair value of the purchase consideration, including contingent consideration, to the assets acquired and liabilities assumed based on their estimated fair values at the acquisition date. The excess of the fair

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value of the purchase consideration over the fair value of assets acquired, liabilities assumed, and any noncontrolling interest is recorded as goodwill. When determining the fair value of assets acquired, liabilities assumed, and any noncontrolling interest, management is required to make certain estimates and assumptions, especially with respect to intangible assets. The estimates and assumptions used in valuing intangible assets include, but are not limited to, the amount and timing of projected future cash flows, the discount rate used to determine the present value of these cash flows, and the determination of the assets’ life cycle. These estimates are inherently uncertain and, therefore, actual results may differ from the estimates made.

Accounting for stock options. We account for share-based compensation in accordance with the fair value recognition provisions of U.S. GAAP. We use the Black-Scholes-Merton option-pricing model, which requires the input of highly subjective assumptions. These assumptions include estimating the length of time employees will retain their vested stock options before exercising them and the estimated volatility of our common stock price over the expected term. The assumptions for expected volatility and expected term are the two assumptions that most significantly affect the grant date fair value of stock options. Changes in expected risk-free rate of return do not significantly impact the calculation of fair value and determining this input is not highly subjective.

We use implied volatility based on traded Intuitive options in the open market, as we believe implied volatility is more reflective of market conditions and a better indicator of expected volatility than historical volatility. In determining the appropriateness of relying on implied volatility, we considered the following:

•the sufficiency of the trading volume of our traded options;

•the ability to reasonably match the terms, such as the date of the grant and the exercise price of our traded options to options granted; and

•the length of the term of our traded options used to derive implied volatility.

The expected term represents the weighted-average period that our stock options are expected to be outstanding. The expected term is based on the observed and expected time to exercise. We determine expected term based on historical exercise patterns and our expectation of the time it will take for employees to exercise options still outstanding.

Changes in these subjective assumptions can materially affect the estimate of the fair value of stock options and, consequently, the related amount of share-based compensation expense recognized in the Consolidated Statements of Income.

Accounting for income taxes. Significant management judgment is required in determining our provision for income taxes, deferred tax assets and liabilities, and any valuation allowance recorded against net deferred tax assets in accordance with U.S. GAAP. These estimates and judgments occur in the calculation of tax credits, benefits, and deductions and in the calculation of certain tax assets and liabilities, which arise from differences in the timing of recognition of revenue and expense for tax and financial statement purposes, as well as the interest and penalties related to uncertain tax positions. Significant changes to these estimates may result in an increase or decrease to our tax provision in the current or subsequent period.

We must assess the likelihood that we will be able to recover our deferred tax assets. In the event that all or part of our deferred tax assets are not recoverable in the future, we must increase our provision for taxes by recording a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be recoverable. In order for our deferred tax assets to be recoverable, we must be able to generate sufficient taxable income in those jurisdictions where the deferred tax assets are located. We consider forecasted income, including income that may be generated as a result of certain tax planning strategies, together with future reversals of existing taxable temporary differences, in determining the need for a valuation allowance. As of December 31, 2021, we believe it is more likely than not that our deferred tax assets ultimately will be recovered with the exception of our California deferred tax assets. We believe that, due to the computation of California taxes under the single sales factor, it is more likely than not that our California deferred tax assets will not be realized. Should there be a change in our ability to recover our deferred tax assets, our tax provision would be affected in the period in which such change takes place.

The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations. We recognize liabilities for uncertain tax positions based on a two-step process. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. If we determine that a tax position will more likely than not be sustained on audit, then the second step requires us to estimate and measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. It is inherently difficult and subjective to estimate such amounts, as we have to determine the probability of various possible outcomes. We re-evaluate these uncertain tax positions on a quarterly basis. This evaluation is based on factors including, but not limited to, changes in facts or circumstances, changes in tax law, effective settlement of audit issues, and new audit activity. Such a change in recognition or measurement would result in the recognition of a tax benefit or an additional charge to the tax provision.

Accounting for legal contingencies.From time to time, we are involved in a number of legal proceedings involving product liability, intellectual property, shareholder derivative actions, securities class actions, insurance, employee-related, and

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other matters. We record a liability and related charge to earnings in our Consolidated Financial Statements for legal contingencies when the loss is considered probable and the amount can be reasonably estimated. Our assessment is re-evaluated each accounting period and is based on all available information, including discussion with any outside legal counsel that represents us. If a reasonable estimate of a known or probable loss cannot be made, but a range of probable losses can be estimated, the low-end of the range of losses is recognized if no amount within the range is a better estimate than any other. If a loss is reasonably possible, but not probable, and can be reasonably estimated, the estimated loss or range of loss is disclosed in the Notes to the Consolidated Financial Statements.

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

RECENT ACCOUNTING PRONOUNCEMENTS

See “Note 2. Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data” for a full description of recent accounting pronouncements, including the respective expected dates of adoption and estimated effects, if any, on our Consolidated Financial Statements.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate and Market Risk

The primary objective of our investment activities is to preserve principal while supporting the Company’s liquidity requirements. To achieve this objective, we maintain a diversified portfolio of cash equivalents and short- and long-term investments in a variety of high quality securities, including U.S. treasury and U.S. government agency securities, municipal notes, corporate notes and bonds, commercial paper, non-U.S. government agency securities, cash deposits, and money market funds. The securities are classified as available-for-sale and consequently are recorded at fair value with unrealized gains or losses reported as a separate component of accumulated other comprehensive loss. The weighted average duration of our portfolio as of December 31, 2021, was approximately 1.2 years. If interest rates rise, the market value of our investments may decline, which could result in a realized loss if we are forced to sell an investment before its scheduled maturity. A hypothetical increase or decrease in interest rate by 25 basis points would have resulted in a decrease or increase in the fair value of our net investment position of approximately $23 million, respectively, as of December 31, 2021. We do not utilize derivative financial instruments to manage our interest rate risks.

Uncertain financial markets could result in a tightening in the credit markets, a reduced level of liquidity in many financial markets, and extreme volatility in fixed income and credit markets. The credit ratings of the securities we have invested in could deteriorate and may have an adverse impact on the carrying value of these investments.

Foreign Exchange Risk

The majority of our revenue, expense, and capital purchasing activities are transacted in U.S. dollars. However, we generally sell our products and services in local currencies where we have direct distribution channels. We operate in a number of markets on a direct sales basis and incur operating expenses in local currencies. We also purchase certain product components from non-U.S. suppliers in local currency. As a result, because a portion of our operations consist of sales activities outside of the U.S., we have foreign exchange exposures to non-U.S. dollar revenues, operating expenses, accounts receivable, accounts payable, and foreign currency bank balances.

For the year ended December 31, 2021, sales denominated in foreign currencies were approximately 23% of total revenue. The objective of our hedging program is to mitigate the impact of changes in currency exchange rates on our net cash flow from foreign currency denominated sales and expenses. For the year ended December 31, 2021, our revenue would have decreased by approximately $25.1 million if the U.S. dollar exchange rate strengthened by 10%. We also hedge the net recognized non-functional currency balance sheet exposures with foreign exchange forward contracts to reduce the risk that our earnings and cash flows will be adversely affected by changes in exchange rates. A 10% strengthening of the U.S. dollar exchange rate against all currencies to which we have exposure, after considering foreign currency hedges and offsetting positions as of December 31, 2021, would have resulted in an approximately $7.6 million increase in the carrying amounts of those net assets. Actual gains and losses in the future may differ materially from the hypothetical gains and losses discussed above based on changes in the timing and amount of foreign currency exchange rate movements and our actual exposure and hedging transactions. Bank counterparties to foreign exchange forward contracts expose us to credit-related losses in the event of their nonperformance. To mitigate that risk, we only contract with counterparties that meet certain minimum requirements under our counterparty risk assessment process. We monitor credit ratings and potential downgrades on at least a quarterly basis. Based on our ongoing assessment of counterparty risk, we will adjust our exposure to various counterparties.

Although we sell to distributors outside of the U.S. in U.S. dollars, strengthening of the dollar can impact our distributors’ margins and could impact the end customers’ ability to purchase our product if our distributors seek to recover the impact of the change in the dollar by increasing product and service prices. Less than 10% of our revenue is conducted through distributors outside the U.S. Strengthening of the dollar relative to non-U.S. currencies could have an adverse impact on our business.

Our operations outside of the U.S. are subject to risks typical of operations outside of the U.S. including, but not limited to, differing economic conditions, changes in political climate, differing tax structures, other regulations and restrictions, and foreign exchange rate volatility.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Index To Consolidated Financial Statements

Page No.

Report of Independent Registered Public Accounting Firm – PCAOB ID: 238 82

Consolidated Balance Sheets as of December 31, 2021, and 2020 83

Notes to the Consolidated Financial Statements 88

Schedule II—Valuation and Qualifying Accounts 118

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

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheets of Intuitive Surgical, Inc. and its subsidiaries (the “Company”) as of December 31, 2021 and 2020, and the related consolidated statements of income, of comprehensive income, of stockholders’ equity and of cash flows for each of the three years in the period ended December 31, 2021, including the related notes and financial statement schedule listed in the index appearing under Item 15(a)(2) (collectively referred to as the “consolidated financial statements”). We also have audited the Company’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control - Integrated Framework(2013)issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control - Integrated Framework(2013)issued by the COSO.

Basis for Opinions

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

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

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

Definition and Limitations of Internal Control over Financial Reporting

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

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

Critical Audit Matters

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

Determination of Standalone Selling Prices Related to System Sale Arrangements

As described in Notes 2 and 5 to the consolidated financial statements, the Company recognized $1,693.4 million of systems revenue, during the year ended December 31, 2021. The Company’s system sale arrangements include a combination of the following performance obligations: system(s); system components; system accessories; instruments; accessories; and system service. For multiple-element arrangements, revenue is allocated to each performance obligation based on its relative standalone selling price. Standalone selling prices are based on observable prices at which the Company separately sells the products or services. If a standalone selling price is not directly observable, then management estimates the standalone selling price considering market conditions and entity-specific factors including, but not limited to, features and functionality of the products and services, geographies, and type of customer.

The principal considerations for our determination that performing procedures relating to the determination of standalone selling prices related to system sale arrangements is a critical audit matter are the significant judgment by management when determining estimates of standalone selling prices, which in turn led to a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating audit evidence relating to the estimates of standalone selling prices used to allocate the transaction price of an arrangement to each distinct performance obligation.

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls over the revenue recognition process, including controls over the determination of the estimates of standalone selling prices. These procedures also included, among others, (i) testing management’s process for determining the estimates of standalone selling prices; (ii) evaluating the appropriateness of the overall methodology used by management to develop the estimates, including the appropriateness of the data inputs related to the products and services, geographies, and type of customer used in the methodology; (iii) testing the completeness and accuracy of the data used in the methodology; and (iv) testing the accuracy of management’s calculations of estimated selling prices.

/s/ PricewaterhouseCoopers LLP

San Jose, California

February 3, 2022

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

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INTUITIVE SURGICAL, INC.

CONSOLIDATED BALANCE SHEETS

(IN MILLIONS, EXCEPT PAR VALUE AMOUNTS)

December 31,

ASSETS

Current assets:

Prepaids and other current assets 271.1 267.5

Property, plant, and equipment, net 1,876.4 1,577.3

Intangible and other assets, net 633.2 503.6

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:

Accrued compensation and employee benefits 350.1 235.0

Commitments and contingencies (Note 8)

Stockholders’ equity:

Accumulated other comprehensive income (loss) (24.2) 24.9

Total Intuitive Surgical, Inc. stockholders’ equity 11,901.1 9,731.5

Noncontrolling interest in joint venture 50.4 27.6

Total liabilities and stockholders’ equity $ 13,555.0 $ 11,168.9

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

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INTUITIVE SURGICAL, INC.

CONSOLIDATED STATEMENTS OF INCOME

(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)

Years Ended December 31,

Revenue:

Cost of revenue:

Operating expenses:

Net income per share attributable to Intuitive Surgical, Inc.:

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

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INTUITIVE SURGICAL, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(IN MILLIONS)

Years Ended December 31,

Other comprehensive income (loss):

Change in foreign currency translation gains (losses) (12.6) 4.7 0.3

Available-for-sale investments (net of tax):

Change in unrealized gains (losses) (45.5) 13.8 30.7

Derivative instruments (net of tax):

Change in unrealized gains (losses) 12.3 (0.8) 5.8

Employee benefit plans (net of tax):

Change in unrealized gains (losses) 0.1 1.0 (5.9)

Other comprehensive income (loss) (49.1) 12.5 25.7

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

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INTUITIVE SURGICAL, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(IN MILIONS)

Shares Amount

Issuance of common stock through employee stock plans 7.1 272.8 272.8 272.8

Capital contribution from noncontrolling interest — 10.0 10.0

Net income attributable to noncontrolling interest in joint venture — 2.5 2.5

Adoption of new accounting standard(1) (0.1) (0.1) (0.1)

Net income attributable to noncontrolling interest in joint venture — 6.2 6.2

Issuance of common stock through employee stock plans 5.4 276.5 276.5 276.5

Other comprehensive income (loss) (49.1) (49.1) (0.7) (49.8)

Net income attributable to noncontrolling interest in joint venture — 23.5 23.5

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

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INTUITIVE SURGICAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN MILLIONS)

Years Ended December 31,

Operating activities:

Amortization of intangible assets 27.4 49.8 43.0

Amortization of contract acquisition assets 22.0 17.1 13.1

Changes in operating assets and liabilities, net of effects of acquisitions:

Accrued compensation and employee benefits 115.1 (16.6) 57.4

Investing activities:

Acquisition of businesses, net of cash (8.7) (37.7) (59.7)

Financing activities:

Repurchase of common stock — (134.3) (269.5)

Capital contribution from noncontrolling interest — — 10.0

Payment of deferred purchase consideration (21.9) (85.0) (22.6)

Net cash provided by (used in) financing activities 43.0 (85.7) (168.4)

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

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INTUITIVE SURGICAL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. DESCRIPTION OF THE BUSINESS

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

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

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

The Consolidated Financial Statements include the results and balances of the Company’s majority-owned joint venture (“Joint Venture”) with Shanghai Fosun Pharmaceutical (Group) Co., Ltd. (“Fosun Pharma”). Chindex Medical Limited (“Chindex”), a subsidiary of Fosun Pharma, has been its distribution partner for da Vinci Surgical Systems in China. The Company holds a controlling financial interest in the Joint Venture, and the noncontrolling interest is reflected as a separate component of the consolidated stockholders’ equity. The noncontrolling interest’s share of the earnings in the Joint Venture is presented separately in the Consolidated Statements of Income for the years ended December 31, 2021, 2020, and 2019.

Common Stock Split

Shares issued pursuant to the three-for-one stock split (the "Stock Split") of the Company's issued and outstanding common stock, par value $0.001 per share, were distributed on October 4, 2021, to stockholders of record as of September 27, 2021. All share and per-share information presented in the Consolidated Financial Statements have been retroactively adjusted to reflect the Stock Split.

Use of Estimates

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

Concentrations of Credit Risk and Other Risks and Uncertainties

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

The Company’s accounts receivable are primarily derived from billings related to revenue arrangements with customers and distributors located throughout the world. The Company performs credit evaluations of its customers’ financial condition and, generally, requires no collateral from its customers. The Company provides reserves for potential credit losses but has not experienced significant losses to date. As of both December 31, 2021, and 2020, 67% of accounts receivable were from domestic customers.