INTUITIVE SURGICAL INC MANAGEMENT REPORT AND ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS (Form 10-Q)


This management's discussion and analysis of financial condition as of June 30,
2022, and results of operations for the three and six months ended June 30,
2022, and 2021, should be read in conjunction with management's discussion and
analysis of financial condition and results of operations included in our Annual
Report on Form 10-K for the year ended December 31, 2021.

This report contains "forward-looking statements" within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). Forward-looking
statements relate to expectations concerning matters that are not historical
facts. Statements using words such as "estimates," "projects," "believes,"
"anticipates," "plans," "expects," "intends," "may," "will," "could," "should,"
"would," "targeted," and similar words and expressions are intended to identify
forward-looking statements. These forward-looking statements are necessarily
estimates reflecting the judgment of our management and involve a number of
risks and uncertainties that could cause actual results to differ materially
from those suggested by the forward-looking statements. These forward-looking
statements include, but are not limited to, statements related to the expected
impacts of the COVID-19 pandemic on our business, financial condition, and
results of operations, future results of operations, future financial position,
our financing plans and future capital requirements, our potential tax assets or
liabilities, and statements based on current expectations, estimates, forecasts,
and projections about the economies and markets in which we operate and our
beliefs and assumptions regarding these economies and markets. These
forward-looking statements should be considered in light of various important
factors, including, but not limited to, the following: disruption to our supply
chain, including increased difficulties in obtaining a sufficient supply of
materials in the semiconductor and other markets; the risk that the COVID-19
pandemic could lead to material delays and cancellations of, or reduced demand
for, procedures; curtailed or delayed capital spending by hospitals; closures of
our facilities; delays in surgeon training; delays in gathering clinical
evidence; delays in obtaining new product approvals, clearances, or
certifications from the U.S. Food and Drug Administration ("FDA"); the
evaluation of the risks of robotic-assisted surgery in the presence of
infectious diseases; diversion of resources to respond to COVID-19 outbreaks;
the risk that the COVID-19 virus causes economies in our key markets to enter
prolonged recessions; the impact of global and regional economic and credit
market conditions on healthcare spending; the risk of our inability to comply
with complex FDA and other regulations, which may result in significant
enforcement actions; regulatory approvals, clearances, certifications, and
restrictions or any dispute that may occur with any regulatory body; guidelines
and recommendations in the healthcare and patient communities; healthcare reform
legislation in the U.S. and its impact on hospital spending, reimbursement, and
fees levied on certain medical device revenues; changes in hospital admissions
and actions by payers to limit or manage surgical procedures; the timing and
success of product development and market acceptance of developed products; the
results of any collaborations, in-licensing arrangements, joint ventures,
strategic alliances, or partnerships, including the joint venture with Shanghai
Fosun Pharmaceutical (Group) Co., Ltd.; our completion of and ability to
successfully integrate acquisitions; intellectual property positions and
litigation; competition in the medical device industry and in the specific
markets of surgery in which we operate; risks associated with our operations and
any expansion outside of the United States; unanticipated manufacturing
disruptions or the inability to meet demand for products; our reliance on sole
and single source suppliers; the results of legal proceedings to which we are or
may become a party, including, but not limited to, product liability claims;
adverse publicity regarding us and the safety of our products and adequacy of
training; the impact of changes to tax legislation, guidance, and
interpretations; changes in tariffs, trade barriers, and regulatory
requirements; and other risk factors. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date of
this report and which are based on current expectations and are subject to
risks, uncertainties, and assumptions that are difficult to predict, including
those risk factors described throughout this filing and identified under the
heading "Risk Factors" in our Annual Report on Form 10-K for the year ended
December 31, 2021, as updated by our other filings with the Securities and
Exchange Commission. We undertake no obligation to publicly update or release
any revisions to these forward-looking statements, except as required by law.

Intuitive®, Intuitive Surgical®, da Vinci®, da Vinci S®, da Vinci S HD Surgical
System®, da Vinci Si®, da Vinci X®, da Vinci Xi®, da Vinci SP®, EndoWrist®,
Firefly®, InSite®, SureForm®, Ion®, Iris®, and SynchroSeal® are trademarks or
registered trademarks of the Company.

Insight


As part of Intuitive's mission, we believe that minimally invasive care is
life-enhancing care. Intuitive is committed to advancing minimally invasive care
through a comprehensive ecosystem of products and services. This ecosystem
includes systems, instruments and accessories, learning, and services connected
by a digital portfolio that enables precision and control, seamless interactions
and experiences, and meaningful insights to drive better care.

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Intuitive brings nearly three decades of experience and technical innovation to
our robotic-assisted surgical solutions. While surgery and acute interventions
have improved significantly in the past decades, there remains a significant
need for better outcomes and decreased variability of these outcomes across care
teams. The current healthcare environment continues to stress critical
resources, including the professionals who staff care teams: surgeons,
anesthesiologists, nurses, and other staff. At the same time, governments strain
to cover the healthcare needs of their populations and demand lower total cost
per patient to treat disease. In the face of these challenges, we believe
scientific and technological advances in biology, computing, imaging,
algorithms, and robotics may offer new methods to solve continued and difficult
problems.

We address our customer needs by sharing their goals reflected in the quadruple
aim. First, we focus on improving patient outcomes through an ecosystem of
advanced robotic systems, instruments and accessories, progressive technology
learning pathways, and comprehensive support and program assistance services.
Second, we seek to improve the patient experience by minimizing disruption to
lives and creating greater predictability for the treatment experience. Third,
we seek to improve care team satisfaction by creating products and services that
are dependable, smart, and optimized for the care environment in which they are
used. Finally, we seek to lower the total cost to treat per patient episode when
compared with existing treatment alternatives, providing a return on investment
for hospitals and healthcare systems and value for payers.

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

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

Our da Vinci products fall into five broad categories: da Vinci Surgical
Systems, da Vinci instruments and accessories, da Vinci Stapling, da Vinci
Energy, and da Vinci Vision, including Firefly Fluorescence imaging systems and
da Vinci Endoscopes. We also provide a comprehensive suite of systems, learning,
and services offerings. Digitally-enabled for more than two decades, these three
offerings aim to decrease variability by providing dependable, consistent
functionality and an integrated user experience. Our systems category includes
robotic platforms, software, vision, energy, and instruments and accessories.
Our learning category includes educational technology, such as simulation and
telepresence, as well as technical training programs and personalized
peer-to-peer learning opportunities. Our services category assists and optimizes
minimally invasive programs through readiness, on-demand support, consultation
for minimally invasive program optimization, and hospitals customized analytics.
Within our integrated ecosystem, our focus is to decrease variability in surgery
by offering actionable insights, with digital solutions, to take action with the
potential to improve outcomes, personalize learning, and optimize efficiency. We
take a holistic approach, offering intelligent technology and systems designed
to work together to make MIS intervention more available and applicable.

We have commercialized the following da Vinci Surgical Systems: the da Vinci
standard Surgical System in 1999, the da Vinci S Surgical System in 2006, the da
Vinci Si Surgical System in 2009, and the fourth generation da Vinci Xi Surgical
System in 2014. We have extended our fourth generation platform by adding the da
Vinci X Surgical System, commercialized in 2017, and the da Vinci SP Surgical
System, commercialized in 2018. The da Vinci SP Surgical System accesses the
body through a single incision while the other da Vinci Surgical Systems access
the body through multiple incisions. All da Vinci systems include a surgeon's
console (or consoles), imaging electronics, a patient-side cart, and
computational hardware and software. We are still in a measured launch of our da
Vinci SP Surgical System, and we have an installed base of 111 da Vinci SP
Surgical Systems as of June 30, 2022. Our plans for the rollout of the da Vinci
SP Surgical System include putting systems in the hands of experienced da Vinci
users first while we optimize training pathways and our supply chain. We
received U.S. FDA clearances for the da Vinci SP Surgical System for urological
and certain transoral procedures. We also received clearance in South Korea
where the da Vinci SP Surgical System may be used for a broad set of procedures.
We plan to seek FDA clearances for additional indications for da Vinci SP over
time. We also plan to seek clearances in other OUS markets over time. The
success of the da Vinci SP Surgical System is dependent on positive experiences
and improved clinical outcomes for the procedures for which it has been cleared
as well as securing additional clinical clearances.

We offer approximately 70 different multi-port da Vinci instruments to provide
surgeons with flexibility in choosing the types of tools needed to perform a
particular surgery. These multi-port instruments are generally robotically
controlled and provide end effectors (tips) that are similar to those used in
either open or laparoscopic surgery. We offer advanced

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instrumentation for the da Vinci Xi and da Vinci X platforms, including da Vinci
Energy and da Vinci Stapler products, to provide surgeons with sophisticated,
computer-aided tools to precisely and efficiently interact with tissue. Da Vinci
X and da Vinci Xi Surgical Systems share the same instruments whereas the da
Vinci Si Surgical System uses instruments that are not compatible with da Vinci
X or da Vinci Xi systems. We currently offer nine core instruments on our da
Vinci SP Surgical System. We plan to expand the SP instrument offering over
time.

Training technologies include our intuitive simulation products, our remote case observation and intuitive telepresence telementoring tools, and our dual console for use in surgeon monitoring and collaborative surgery.


During the first quarter of 2019, the FDA cleared our Ion endoluminal system to
enable minimally invasive biopsies in the lung. Our Ion system extends our
commercial offering beyond surgery into diagnostic procedures with this first
application. Our rollout of the Ion system is progressing well, and we are
continuing to gather additional clinical evidence. We plan to seek additional
clearances for the Ion system in OUS markets over time.

The success of new product launches depends on a number of factors including, but not limited to, pricing, competition, market and consumer acceptance, effective forecasting and management of demand for products, inventory levels, management of manufacturing and supply costs, and the risk that new products will exhibit quality defects or other defects in the early stages of their introduction.

Macroeconomic environment


Uncertainty surrounding macroeconomic factors in the U.S. and globally
characterized by the supply chain environment, inflationary pressure, rising
interest rates, labor shortages, and significant disruption in commodities as a
result of the Russia and Ukraine conflict may result in a recession, which could
have a material adverse effect on our long-term business.

We have experienced increased difficulties in obtaining a sufficient supply of a
number of component materials used in our products, such as semiconductor
components as well as a range of other materials, including, but not limited to,
metals and polymers, as global supply has become significantly constrained due
to increased demand for certain materials. Additionally, prices of such
materials have increased due to the increased demand and supply shortage. With
rising interest rates, access to credit may become more difficult and any
insolvency of key suppliers, including single-source suppliers, may exacerbate
current supply chain challenges. We are engaged in activities to seek to
mitigate supply disruptions, but the global supply chain shortages are likely to
remain a challenge for the foreseeable future.

We have also experienced challenges in logistics, as certain shipping routes
have been impacted by port closures. Such global shortages in important
components and logistics challenges have resulted in, and will continue to
cause, inflationary cost pressure in our supply chain. To date, the inflationary
cost pressure has been more pronounced in our logistics costs, but these supply
chain challenges have not materially impacted our results of operations or
ability to deliver products and services to our customers. However, if shortages
in important supply chain materials in the semiconductor or other markets or
logistics challenges continue, we could fail to meet product demand, which could
result in deferred or cancelled procedures. If inflationary pressures in
logistics or component costs persist, we may not be able to adjust pricing,
reduce costs, or implement countermeasures. Additionally, there is uncertainty
surrounding the impact of any monetary policy changes taken by the U.S. Federal
Reserve and other central banks to address the structural risks associated with
inflation.

Increased labor shortages globally, including staff burnout and attrition, could
also impact our ability to hire and retain personnel critical to our
manufacturing, logistics, and commercial operations. We are also highly
dependent on the principal members of our management and scientific staff.
Attracting and retaining qualified personnel is critical to our success, and
competition for them has become more intense. The loss of critical members of
our team, or our inability to attract and retain qualified personnel, could
significantly harm our operations, business, and ability to compete.

The current macroeconomic environment is impacting our customers financially and
operationally as well. Hospitals are experiencing staffing shortages and supply
chain issues that could affect their ability to provide patient care.
Additionally, hospitals are facing significant financial pressure as supply
chain constraints and inflation drive up operating costs, rising interest rates
make access to credit more expensive, unrealized losses decrease available cash
reserves, and fiscal stimulus programs enacted during the COVID-19 pandemic wind
down. As a consequence of the financial pressures and decreased profitability,
some hospitals have indicated that they are lowering their capital investment
plans and tightening their operational budgets. We believe that these factors
have contributed to a softening in our U.S. capital pipeline, and we expect that
demand for capital, particularly in the U.S., will continue to be impacted while
macroeconomic conditions remain challenging. In addition, as competition
progresses in various markets, we will likely experience longer selling cycles
and pricing pressures. Any or all of these factors could negatively impact the
number of da Vinci procedures performed or the number of system placements and
have a material adverse effect on our business, financial condition, results of
operations, or cash flows resulting in failure to achieve our anticipated
financial results.

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Covid-19 pandemic

Procedures


In 2021, COVID-19 resurgences continued to affect da Vinci procedure volumes at
various times throughout the year in most of the markets that we operate in.
After each resurgence, as COVID-19 cases and hospitalizations subsided, we saw
procedure volumes recover. In the U.S., the impact of high COVID-related
hospitalization rates on procedure volumes also have been exacerbated by
staffing shortages. Although hospitals are now better equipped to handle COVID
patients as compared to the outset of the pandemic, COVID-19 resurgences have
challenged, and will continue to challenge, hospital resources and negatively
impact da Vinci procedure volumes. In addition, delays in diagnosis and
treatment of underlying conditions have, and will continue to have, a negative
impact on da Vinci procedure volumes. Volumes associated with benign procedures
have generally been impacted to a higher degree when COVID-19 cases and
hospitalizations increased, reflecting the deferability of certain elective
surgeries.

In early 2022, a resurgence of COVID-19 resulted in a significant increase in
infections and hospitalization rates in the U.S. and certain countries in
Europe, which, in turn, negatively impacted procedure volumes in January and
February. As infections and hospitalizations started to decrease in February in
the U.S. and Europe, we saw a recovery of procedure volumes. In March and during
the second quarter of 2022, we also saw a resurgence in COVID-19 cases and
increased hospitalizations and government interventions impacting parts of Asia,
particularly China, which negatively impacted procedure volumes.

The depth and extent to which the COVID-19 pandemic will impact individual
markets will vary based on the availability of resources and interventions, such
as medical staff, intensive care units and operating rooms, and vaccinations, as
well as government interventions. The impact of COVID-19 on our procedure
volumes varies widely by country, region, and type. When COVID-19 infection
rates spike in a particular region, procedure volumes have been negatively
impacted and the diagnoses of new conditions and their related treatments have
been deferred.

General Increase in Risks

The COVID-19 pandemic and local actions, such as "shelter-in-place" orders and
restrictions on our ability to travel and access our customers or temporary
closures of our facilities, including our training and manufacturing operations,
or the facilities of our suppliers and their contract manufacturers, could
further significantly impact our sales and our ability to produce and ship our
products and supply our customers.

In addition, COVID-19 has contributed to the staffing shortages experienced by
hospitals, which impacts hospitals' ability to provide patient care and, in some
cases, results in the deferral of elective surgeries.

Our answer


Our priorities and actions during the COVID-19 pandemic have been and remain as
follows. First, we are focused on the health and safety of all those we
serve-patients, customers, our communities, and our employees-implementing
continuous updates to our health and safety policies and processes. Second, we
are supporting our customers according to their priorities-clinical,
operational, and economic-and ensuring continuity of supply by working with our
suppliers and our distributors. Third, we are securing our workforce
economically. We have built a valuable team over the years, and we believe they
will be important in a recovery that follows the pandemic. Finally, we will
continue to invest in our priority development programs while eliminating
avoidable spend.

As COVID-19 vaccination rates increase and the severity of cases decline, we are
implementing our return-to-office strategy. We intend to remain flexible,
allowing many of our employees to work remotely on at least a partial basis,
while maintaining productivity and our culture. Our top priority in this process
continues to be the health and safety of our employees.

business model

Insight


We generate revenue from the placements of da Vinci Surgical Systems, in sales
or sales-type lease arrangements where revenue is recognized up-front or in
operating lease transactions and usage-based models where revenue is recognized
over time. We earn recurring revenue from the sales of instruments, accessories,
and services, as well as the revenue from operating leases. The da Vinci
Surgical System generally sells for between $0.5 million and $2.5 million,
depending upon the model, configuration, and geography, and represents a
significant capital equipment investment for our customers when purchased. Our
instruments and accessories have limited lives and will either expire or wear
out as they are used in surgery, at which point they need to be replaced. We
generally earn between $600 and $3,500 of instruments and accessories revenue
per surgical procedure performed, depending on the type and complexity of the
specific procedures performed and the number and type of instruments used.
Further, in late 2020, we launched our Extended Use Program (refer to further
discussion immediately below) in the U.S. and Europe, with the intention to
reduce the cost for customers to treat patients, which in turn will reduce our
overall instruments and accessories revenue per procedure. We typically enter
into service contracts at the time systems are sold or

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leased at an annual fee between $80,000 and $190,000, depending upon the
configuration of the underlying system and composition of the services offered
under the contract. These service contracts have generally been renewed at the
end of the initial contractual service periods.

We generate revenue from our Ion endoluminal system in a business model
consistent with the da Vinci Surgical System model described above. We generate
revenue from the placement of Ion systems, in sales or sales-type lease
arrangements where revenue is recognized up-front at a point in time or in
operating lease transactions and usage-based models where revenue is recognized
over time. We earn recurring revenue from the sales of instruments and
accessories used in biopsies and ongoing system service, as well as revenue from
operating leases. The average selling price of an Ion system is generally
significantly lower than the average selling price of a da Vinci Surgical
System. For the three and six months ended June 30, 2022, and 2021, Ion's
contribution to revenue and gross margin was not significant.

Additionally, as part of our ecosystem of products and services, we offer a portfolio of learning offerings and digital solutions. We do not currently generate significant 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. Instruments included in the program are used
across a number of da Vinci surgeries. Their increased uses are the result of
continuous, significant investments in the design and production capabilities of
our instruments, resulting in improved quality and durability. Extended Use
Instruments were introduced in the U.S. and Europe in the fourth quarter of 2020
and launched in most other countries around the world in the first half of 2021,
except China due to regulatory timelines. In addition, simultaneous with the
regional launches of Extended Use Instruments, we have lowered the price of
certain instruments that are most commonly used in lower acuity procedures
and/or lower reimbursed procedures within the region. These actions have reduced
the cost for customers to treat patients, which in turn has reduced our revenue
per procedure. In the U.S. and Europe, during 2021, we saw customers adjust
their instrument buying patterns to reduce their inventory levels to reflect the
additional uses per instrument. We believe that, as of the end of 2021, in the
U.S. and Europe, full cutover to Extended Use Instruments has occurred, as
customers have substantially utilized all of their remaining 10 use instruments.
The precise impact of these actions on future revenue will be dependent on the
future volume and mix of procedures and whether cost elasticity will enable
greater penetration into available markets.

Recurring revenue

Recurring revenue includes revenue from instruments and accessories, revenue from services and revenue from operating leases. Recurring revenue increased to $4.3 billioni.e. 75% of total revenue in 2021, compared to $3.4 billioni.e. 77% of total turnover in 2020, and $3.2 billioni.e. 72% of total turnover in 2019.


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

Service revenue was $916 million in 2021, compared to $724 million in 2020 and
2019. The increase in service revenue was primarily driven by the growth of the
installed base of systems producing service revenue, as well as the effects of
the Customer Relief Program in the prior year, which resulted in an $80 million
decrease in service revenue in 2020. The installed base of da Vinci Surgical
Systems grew 12% to approximately 6,730 as of December 31, 2021; 7% to
approximately 5,989 as of December 31, 2020; and 12% to approximately 5,582 as
of December 31, 2019. The installed base of Ion endoluminal systems was
approximately 129 as of December 31, 2021; approximately 36 as of December 31,
2020; and approximately 10 as of December 31, 2019.

We use the installed base, number of placements, and utilization of systems as
metrics for financial and operational decision-making and as a means to evaluate
period-to-period comparisons. Management believes that the installed base,
number of placements, and utilization of systems provide meaningful supplemental
information regarding our performance, as management believes that the installed
base, number of placements, and utilization of systems are an indicator of the
rate of adoption of robotic-assisted surgery or medical procedures as well as an
indicator of future recurring revenue (particularly service revenue). Management
believes that both it and investors benefit from referring to the installed
base, number of placements, and utilization of systems in assessing our
performance and when planning, forecasting, and analyzing future periods. The
installed base, number of placements, and utilization of systems also facilitate
management's internal comparisons of our historical performance. We believe that
the installed base, number of placements, and utilization of systems are useful
to investors as metrics, because (1) they allow for greater transparency with
respect to key metrics used by management in its financial and operational
decision-making, and (2) they are used by institutional investors and the
analyst community to help them analyze the performance of our business. The vast
majority of systems installed are connected via the internet. System

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logs can also be accessed by field engineers for systems that are not connected
to the internet. We utilize this information as well as other information from
agreements and discussions with our customers that involve estimates and
judgments, which are, by their nature, subject to substantial uncertainties and
assumptions. Estimates and judgments for determining the installed base, number
of placements, and utilization of systems may be impacted over time by various
factors, including system internet connectivity, hospital and distributor
reporting behavior, and inherent complexities in new agreements. Such estimates
and judgments are also susceptible to technical errors. In addition, the
relationship between the installed base, number of placements, and utilization
of systems and our revenues may fluctuate from period to period, and growth in
the installed base, number of placements, and utilization of systems may not
correspond to an increase in revenue. The installed base, number of placements,
and utilization of systems are not intended to be considered in isolation or as
a substitute for, or superior to, revenue or other financial information
prepared and presented in accordance with generally accepted accounting
principles.

Intuitive rental system


Since 2013, we have entered into sales-type and operating lease arrangements
directly with certain qualified customers as a way to offer customers
flexibility in how they acquire systems and expand their robotic-assisted
programs while leveraging our balance sheet. These leases generally have
commercially competitive terms as compared to other third-party entities that
offer equipment leasing. We have also entered into usage-based arrangements with
qualified customers that have committed da Vinci programs where we charge for
the system and service as the systems are utilized. We believe that these
alternative financing structures have been effective and well-received, and we
are willing to expand the proportion of these structures based on customer
demand. We include operating and sales-type leases, and systems placed under
usage-based arrangements, in our system placement and installed base
disclosures. We exclude operating lease-related revenue, usage-based revenue,
and Ion system revenue from our da Vinci Surgical System average selling price
("ASP") computations.

In the years ended December 31, 2021, 2020, and 2019, we placed 668, 432, and
425 da Vinci Surgical Systems, respectively, under lease and usage-based
arrangements, of which 517, 317, and 384 systems, respectively, were operating
lease and usage-based arrangements. Revenue from operating lease arrangements is
generally recognized on a straight-line basis over the lease term or, in the
case of usage-based arrangements, as the systems are used. We generally set
operating lease and usage-based pricing at a modest premium relative to
purchased systems reflecting the time value of money and, in the case of
usage-based arrangements, the risk that system utilization may fall short of
anticipated levels. Variable lease revenue recognized from usage-based
arrangements has been included in our operating lease metrics herein. Operating
lease revenue has grown at a faster rate than overall systems revenue and was
$277 million, $177 million, and $107 million for the years ended December 31,
2021, 2020, and 2019, respectively. As revenue for operating leases and
usage-based systems is recognized over time, total systems revenue growth is
reduced in a period when the number of operating lease and usage-based
placements increases as a proportion of total system placements. Generally,
lease transactions generate similar gross margins as our sale transactions. As
of December 31, 2021, a total of 1,294 da Vinci Surgical Systems were installed
at customers under operating lease or usage-based arrangements.

Our exposure to the credit risks relating to our lease financing arrangements
may increase if our customers are adversely affected by changes in healthcare
laws, coverage and reimbursement, economic pressures or uncertainty, or other
customer-specific factors. 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 Vinci procedure adoption is in an early stage or system placements are
constrained by regulation, system sales will precede procedure growth. System
placements also vary due to seasonality, largely aligned with hospital budgeting
cycles. We typically place a higher proportion of annual system placements in
the fourth quarter and a lower proportion in the first quarter as customer
budgets are reset. Systems revenue is also affected by the proportion of system
placements under operating lease and usage-based arrangements, recurring
operating lease and usage-based revenue, operating lease buyouts, product mix,
ASPs, trade-in activities, and customer mix. Systems revenue grew 44% to $1.69
billion in 2021. Systems revenue declined 12% to $1.18 billion in 2020. Systems
revenue grew 19% to $1.35 billion in 2019. Based on the

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factors described 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.

Seasonality procedure


More than half of da Vinci procedures performed are for benign conditions, most
notably hernia repairs, hysterectomies, and cholecystectomies. These benign
procedures and other short-term elective procedures tend to be more seasonal
than cancer operations and surgeries for other life-threatening conditions.
Seasonality in the U.S. for procedures for benign conditions typically results
in higher fourth quarter procedure volume when more patients have met annual
deductibles and lower first quarter procedure volume when deductibles are reset.
Seasonality outside the U.S. varies and is more pronounced around local holidays
and vacation periods. As a result of the factors outlined in the COVID-19
Pandemic section above, including past and potentially future recommendations of
authorities to defer elective procedures, historical procedure patterns may be
disrupted.

Distribution Channels

We provide our products through direct sales organizations in the U.S., Europe
(excluding Spain, Portugal, Italy, Greece, and most Eastern European countries),
China (through our Intuitive-Fosun Pharma joint venture), Japan, South Korea,
India, Taiwan and, as of June 2022, Canada. In the remainder of our OUS markets,
we provide our products through distributors.

Regulatory activities

Insight


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

Our products and operations are also subject to increasingly stringent medical
device, privacy, and other regulations by regional, federal, state, and local
authorities. After a device is placed on the market, numerous FDA and other
regulatory requirements continue to apply. These requirements include
establishment registration and device listing with the FDA and compliance with
medical device reporting regulations, which require that manufacturers report to
the FDA if their device caused or contributed, or may have caused or
contributed, to a death or serious injury or malfunctioned in a way that would
likely cause or contribute to a death or serious injury if it were to recur.

We recently revised our medical device reporting policies, which had been
developed based on previous feedback from the FDA. These revisions have been
made in consultation with the FDA to better align with existing regulations.
There has been an increase in medical device reporting filings due to changes in
our reportability criteria. In addition, we have been investing in resources and
utilizing external experts to strengthen our quality system. These efforts are
ongoing.

We also anticipate that timelines for the introduction of new products and/or
indications may be extended relative to past experience as a result of these
regulations. For example, we have seen elongated regulatory approval timelines
in the U.S. and the EU.

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Authorizations and approvals

We have generally obtained the necessary authorizations to market our products associated with our da Vinci surgical multiport systems (standard, S, Si, Xi and X systems) for our targeted surgical specialties in the WE, South Korea, Japan, and the European markets in which we operate. Since 2020, we have obtained regulatory approvals for the following products:

•In February 2022we have received regulatory approval in China to market our SureForm 45 12mm and SureForm 60 staplers and corresponding refills.

•In January 2022we have received regulatory approval in China to market our da Vinci Vessel Sealer Extend with vascular indications up to 7mm.


•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 June 2019, we received CE mark clearance for our da Vinci Endoscope Plus for
the da Vinci Xi and da Vinci X Surgical Systems in Europe. Following the CE
mark, in July 2019, we obtained FDA clearance for our da Vinci Endoscope Plus.
We have also received regulatory clearances in South Korea and Japan to market
our da Vinci Endoscope Plus in December 2019 and May 2020, respectively. In
March 2022, we received regulatory clearance in China to market our da Vinci
Endoscope Plus.

•In June 2019we have obtained FDA clearance for our da Vinci wearable camera and, in February 2020we have received CE mark approval.

See descriptions of our new products that received regulatory approvals in 2022, 2021 and 2020 in the New Product Launches section below.


In October 2018, the China National Health Commission published on its official
website the quota for major medical equipment to be sold in China through 2020.
After an adjustment notice was published in the third quarter of 2020, the
government will now allow for the total sale of 225 new surgical robots into
China, which could include da Vinci Surgical Systems as well as surgical systems
introduced by others. As of June 30, 2022, we have sold 172 da Vinci Surgical
Systems under this quota, and five system quotas are no longer available;
therefore, 48 surgical robots can still be sold under this quota. Future sales
of da Vinci Surgical Systems under the quota are uncertain, as they are
dependent on hospitals completing a tender process and receiving associated
approvals.

The Japanese Ministry of Health, Labor, and Welfare ("MHLW") considers
reimbursement for procedures in April of even-numbered years. The process for
obtaining reimbursement requires Japanese university hospitals and surgical
societies, with our support, to seek reimbursement. There are multiple pathways
to obtain reimbursement for procedures, including those that require in-country
clinical data/economic data. In April 2012 and April 2016, the MHLW granted
reimbursement status for prostatectomy and partial nephrectomy, respectively.
Most prostatectomies and partial nephrectomies were open procedures prior to da
Vinci reimbursement. Da Vinci procedure reimbursement for prostatectomy and
partial nephrectomy procedures are higher than open and conventional
laparoscopic procedure reimbursements. An additional 12 da Vinci procedures were
granted reimbursement effective April 1, 2018, including gastrectomy, low
anterior resection, lobectomy, and hysterectomy, for both malignant and benign
conditions, and an additional seven da Vinci procedures were granted
reimbursement effective April 1, 2020. An additional eight da Vinci procedures
were granted reimbursement effective April 1, 2022, including colon resection.
In addition, we received higher reimbursement for da Vinci gastrectomy
procedures, as compared to open and conventional laparoscopic procedure
reimbursements. The additional reimbursed procedures have varying levels of
conventional laparoscopic penetration and will generally be reimbursed at rates
equal to the conventional laparoscopic procedures. Given the reimbursement level
and laparoscopic penetration for these additional procedures, there can be no
assurance that the adoption pace for these procedures will be similar to
prostatectomy or partial nephrectomy, given their higher reimbursement, or any
other da Vinci procedure.

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Reminders and fixes


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

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

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

Procedures


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

We use the number and type of procedures as metrics for financial and
operational decision-making and as a means to evaluate period-to-period
comparisons. Management believes that the number and type of procedures provide
meaningful supplemental information regarding our performance, as management
believes procedure volume is an indicator of the rate of adoption of
robotic-assisted surgery as well as an indicator of future revenue (including
revenue from usage-based arrangements). Management believes that both it and
investors benefit from referring to the number and type of procedures in
assessing our performance and when planning, forecasting, and analyzing future
periods. The number and type of procedures also facilitate management's internal
comparisons of our historical performance. We believe that the number and type
of procedures are useful to investors as metrics, because (1) they allow for
greater transparency with respect to key metrics used by management in its
financial and operational decision-making, and (2) they are used by
institutional investors and the analyst community to help them analyze the
performance of our business. The vast majority of systems installed are
connected via the internet. System logs can also be accessed by field engineers
for systems that are not connected to the internet. We utilize certain methods
that rely on information collected from the systems installed for determining
the number and type of procedures performed that involve estimates and
judgments, which are, by their nature, subject to substantial uncertainties and
assumptions. Estimates and judgments for determining the number and type of
procedures may be impacted over time by various factors, including changes in
treatment modalities, hospital and distributor reporting behavior, and system
internet connectivity. Such estimates and judgments are also susceptible to
algorithmic or other technical errors. In addition, the relationship between the
number and type of procedures and our revenues may fluctuate from period to
period, and procedure volume growth may not correspond to an increase in
revenue. The number and type of procedures are not intended to be considered in
isolation or as a substitute for, or superior to, revenue or other financial
information prepared and presented in accordance with generally accepted
accounting principles.

Global Procedures


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

The adoption of robotic-assisted surgery using the da Vinci Surgical System has
the potential to grow for those procedures that offer greater patient value than
to non-da Vinci alternatives and competitive total economics for healthcare
providers. Our da Vinci Surgical Systems are used primarily in general surgery,
urologic surgery, gynecologic surgery, cardiothoracic surgery, and head and neck
surgery. We focus our organization and investments on developing, marketing, and
training products and services for procedures in which da Vinci can bring
patient value relative to alternative treatment options and/or economic

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benefit to healthcare providers. Target procedures in general surgery include
hernia repair (both ventral and inguinal), colorectal procedures,
cholecystostomies, and bariatrics. Target procedures in urology include
prostatectomy and partial nephrectomy. Target procedures in gynecology include
hysterectomy for both cancer and benign conditions and sacrocolpopexy. In
cardiothoracic surgery, target procedures include lobectomy. In head and neck
surgery, target procedures include transoral surgery. Not all indications,
procedures, or products described may be available in a given country or region
or on all generations of da Vinci surgical systems. Surgeons and their patients
need to consult the product labeling in their specific country and for each
product in order to determine the cleared uses, as well as important
limitations, restrictions, or contraindications.

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

WE Procedures


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

Procedures outside the WE


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
14% for the three months ended June 30, 2022, compared to approximately 68% for
the three months ended June 30, 2021. Total da Vinci procedures performed by our
customers grew approximately 16% for the six months ended June 30, 2022,
compared to approximately 39% for the six months ended June 30, 2021. The second
quarter 2022 and 2021 procedure results (and comparative second quarter 2020
procedure results) reflect disruption caused by the COVID-19 pandemic, as noted
in the COVID-19 Pandemic section above. The second quarter 2022 procedure growth
was largely attributable to growth in U.S. general surgery and growth in OUS
markets. Delays in both the diagnosis and treatments of disease reflecting
disruptions caused by COVID-19 have previously and may continue to impact the
number of procedures performed by our customers.

U.S. Procedures. U.S. da Vinci procedures grew approximately 11% for the three
months ended June 30, 2022, compared to approximately 77% for the three months
ended June 30, 2021. U.S. da Vinci procedures grew approximately 13% for the six
months ended June 30, 2022, compared to approximately 41% for the six months
ended June 30, 2021. The second quarter 2022 and 2021 procedure results reflect
disruption caused by the COVID-19 pandemic, as noted in the COVID-19 Pandemic
section above. The second quarter 2022 U.S. procedure growth was largely
attributable to growth in general surgery procedures, most notably bariatric,
cholecystectomy, and hernia repair procedures. Growth in the more mature
gynecologic and urologic procedure categories was more moderate.

OUS Procedures. OUS da Vinci procedures grew approximately 22% for the three
months ended June 30, 2022, compared to approximately 51% for the three months
ended June 30, 2021. OUS da Vinci procedures grew approximately 23% for the six
months ended June 30, 2022, compared to approximately 36% for the six months
ended June 30, 2021. The second quarter 2022 and 2021 procedure results reflect
disruption caused by the COVID-19 pandemic, as noted in the COVID-19 Pandemic
section above. The second quarter 2022 OUS procedure growth was driven by
continued growth in urologic procedures, including prostatectomies and partial
nephrectomies, and earlier stage growth in general surgery (particularly
colorectal), gynecology, and thoracic procedures. The second quarter 2022 OUS
procedure growth rate reflects continued da Vinci adoption in European and Asian
markets. We saw strong procedure growth in Japan, Italy, and Germany during the
second quarter of 2022. However, our procedure volume in China was impacted by
an increase in COVID-19 cases and preventative measures and interventions taken
by the government. We believe growth in our global markets is being driven by
increased acceptance among surgeons and health systems, supported by expanded
global evidence validating the clinical and economic value of da Vinci
procedures.

System request


We placed 279 da Vinci Surgical Systems in the second quarter of 2022, compared
to 328 systems in the second quarter of 2021. The decrease in systems placed
reflects a smaller number of third generation da Vinci systems available for
trade-in, along with supply chain and logistical challenges impacting the number
of systems available for shipment, and a softening of our capital pipeline in
the U.S. caused by increased financial pressures on hospitals from higher
inflation, increasing interest rates, and continued staffing shortages. As a
consequence of the financial pressures and decreased profitability, some
hospitals have indicated they are lowering their capital investment plans and
tightening operational budgets. We expect that demand for capital, particularly
in the U.S., will be impacted while macroeconomic conditions remain challenging.
In addition, given the lower number of older generation systems in the field, we
expect the volume of trade-ins to be significantly lower in 2022 as compared to
2021.

Second quarter 2022 placements declined 15% compared with 2021, and future
placements of da Vinci Surgical Systems will be impacted by a number of factors:
supply chain risks; economic and geopolitical factors; inflationary pressures;
rising interest rates; hospital staffing shortages; the impact of the current
COVID-19 pandemic, as noted in the COVID-19 Pandemic section above; hospital
response to the evolving healthcare environment; procedure growth rates;
hospital consolidation trends; evolving system utilization and point of care
dynamics; capital replacement trends, including a declining number of older
generation systems available for trade-in transactions; additional
reimbursements in various global markets, 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.

Presentations of new products


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

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

Da Vinci Endoscope Plus. In June 2019, we received CE mark clearance for our da
Vinci Endoscope Plus, an enhanced 3D endoscope for use with our da Vinci X and
Xi Surgical Systems. Following the CE mark, in July 2019, we obtained FDA
clearance for our da Vinci Endoscope Plus. We have also received regulatory
clearances in South Korea and Japan to market our da Vinci Endoscope Plus in
December 2019 and May 2020, respectively. In March 2022, we received regulatory
clearance in China to market our da Vinci Endoscope Plus. The da Vinci Endoscope
Plus leverages new sensor technology to allow for increased sharpness and color
accuracy.

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

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Second Quarter 2022 Operational and Financial Highlights


•Total revenue increased by 4% to $1.52 billion for the three months ended
June 30, 2022, compared to $1.46 billion for the three months ended June 30,
2021.

•Approximately 465,000 da Vinci procedures were performed during the three
months ended June 30, 2022, an increase of 14% compared to approximately 408,000
for the three months ended June 30, 2021.

•Approximately 5,200 Ion procedures were performed during the three months ended
June 30, 2022, an increase of 251% compared to approximately 1,480 for the three
months ended June 30, 2021.

•Instruments and accessories revenue increased by 12% to $895 million for the
three months ended June 30, 2022, compared to $796 million for the three months
ended June 30, 2021.

•Systems revenue decreased by 15% to $375 million for the three months ended
June 30, 2022, compared to $440 million during the three months ended June 30,
2021.

•During the three months ended June 30, 2022, we placed 279 da Vinci Surgical
Systems, a decrease of 15% compared to 328 systems during the three months ended
June 30, 2021.

• From June 30, 2022we had a da Vinci Surgical Systems installed base of approximately 7,135 systems, a 13% increase from the installed base of approximately 6,335 systems in June 30, 2021.

• Utilization of da Vinci Surgical Systems, measured in terms of procedures per system per year, increased by 1% compared to the second quarter of 2021.


•During the three months ended June 30, 2022, we placed 41 Ion systems, an
increase of 105% compared to 20 systems during the three months ended June 30,
2021.

•As of June 30, 2022, we had an Ion system installed base of approximately 204
systems, an increase of 191% compared to the installed base of approximately 70
systems as of June 30, 2021.

• Gross profit as a percentage of revenue was 67.2% for the three months ended
June 30, 2022compared to 69.9% for the quarter ended June 30, 2021.


•Operating income decreased by 22% to $398 million for the three months ended
June 30, 2022, compared to $511 million during the three months ended June 30,
2021. Operating income included $127 million and $110 million of share-based
compensation expense related to employee stock plans and $8.0 million and $10.9
million of intangible asset-related charges for the three months ended June 30,
2022, and 2021, respectively.

•As of June 30, 2022, we had $8.18 billion in cash, cash equivalents, and
investments. Cash, cash equivalents, and investments decreased by $444 million,
compared to $8.62 billion as of December 31, 2021, primarily as a result of cash
used for share repurchases of $607 million, capital expenditures, and taxes paid
related to net share settlements of equity awards, as well as unrealized losses
on interest-bearing debt securities classified as available for sale, partially
offset by cash provided by operating activities and proceeds from stock option
exercises and employee stock purchases.

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Operating results


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

                                                                   Three Months Ended June 30,                                                                 Six Months Ended June 30,
                                                                 % of total                                 % of total                                        % of total                                 % of total
                                             2022                  Revenue                2021                Revenue                   2022                    revenue                2021                revenue
Revenue:
Product                                $     1,270.4                      83  %       $ 1,236.0                      84  %       $    2,508.8                          83  %       $ 2,310.6                      84  %
Service                                        251.7                      17  %           228.0                      16  %              501.0                          17  %           445.5                      16  %
Total revenue                                1,522.1                     100  %         1,464.0                     100  %            3,009.8                         100  %         2,756.1                     100  %
Cost of revenue:
Product                                        421.0                      27  %           374.0                      25  %              818.3                          27  %           693.3                      25  %
Service                                         77.8                       6  %            66.3                       5  %              158.5                           5  %           136.5                       5  %
Total cost of revenue                          498.8                      33  %           440.3                      30  %              976.8                          32  %           829.8                      30  %
Product gross profit                           849.4                      56  %           862.0                      59  %            1,690.5                          56  %         1,617.3                      59  %
Service gross profit                           173.9                      11  %           161.7                      11  %              342.5                          12  %           309.0                      11  %
Gross profit                                 1,023.3                      67  %         1,023.7                      70  %            2,033.0                          68  %         1,926.3                      70  %
Operating expenses:
Selling, general and administrative            418.4                      27  %           350.2                      24  %              809.5                          27  %           676.2                      24  %
Research and development                          207.3                   14  %              162.3                   11  %              417.8                          14  %           322.1                      12  %
Total operating expenses                       625.7                      41  %           512.5                      35  %            1,227.3                          41  %           998.3                      36  %
Income from operations                         397.6                      26  %           511.2                      35  %              805.7                          27  %           928.0                      34  %
Interest and other income, net                   9.3                       1  %            15.0                       1  %                3.6                           -  %            47.0                       1  %
Income before taxes                            406.9                      27  %           526.2                      36  %              809.3                          27  %           975.0                      35  %
Income tax expense                              93.3                       6  %             3.2                       -  %              126.3                           4  %            16.8                       -  %
Net income                                     313.6                      21  %           523.0                      36  %              683.0                          23  %           958.2                      35  %
Less: net income attributable to
noncontrolling interest in joint
venture                                          5.8                       1  %             5.8                       1  %                9.6                           1  %            14.7                       1  %
Net income attributable to Intuitive
Surgical, Inc.                         $       307.8                      20  %       $   517.2                      35  %       $      673.4                          22  %       $   943.5                      34  %


Total Revenue

Total revenue increased by 4% to $1.52 billion for the three months ended
June 30, 2022, compared to $1.46 billion for the three months ended June 30,
2021, resulting from 12% higher instruments and accessories revenue, driven by
approximately 14% higher procedure volume, partially offset by foreign currency
impacts, and 10% higher service revenue, partially offset by 15% lower systems
revenue, driven by 15% lower system placements and a higher proportion of system
placements under operating leases, partially offset by higher leasing revenue.
Total revenue increased by 9% to $3.0 billion for the six months ended June 30,
2022, compared to $2.8 billion for the six months ended June 30, 2021, resulting
from 14% higher instruments and accessories revenue, driven by approximately 16%
higher procedure volume, partially offset by foreign currency impacts and the
effects of the Extended Use Program, and 12% higher service revenue, partially
offset by 1% lower systems revenue, driven by 6% lower system placements,
partially offset by higher leasing revenue.

Revenue denominated in foreign currencies as a percentage of total revenue was
approximately 22% and 24% for the three and six months ended June 30, 2022,
respectively, and 21% and 22% for the three and six months ended 2021,
respectively. We generally sell our products and services in local currencies
where we have direct distribution channels. Foreign currency rate fluctuations,
as determined by comparing current period revenue in USD to current period
revenue in local currency using the same foreign exchange rates as the prior
year same period, net of the impacts from foreign currency hedging, had an
unfavorable impact on OUS total revenue of $35 million and $53 million for the
three and six months ended June 30, 2022, respectively. Foreign currency rate
fluctuations, net of the impacts from foreign currency hedging, had a favorable
impact on OUS total revenue of $18 million and $34 million for the three and six
months ended June 30, 2021, respectively.

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Revenue generated in the U.S. accounted for 66% of total revenue for both the
three and six months ended June 30, 2022, respectively, and 69% and 67% for the
three and six months ended 2021, respectively. We believe that U.S. revenue has
accounted for the large majority of total revenue due to U.S. patients' ability
to choose their provider and method of treatment, reimbursement structures
supportive of innovation and MIS, and our initial investments focused on U.S.
infrastructure. We have been investing in our business in the OUS markets, and
our OUS procedures have grown faster in proportion to U.S. procedures. We expect
that our OUS procedures and revenue will make up a greater portion of our
business in the long term.

The following table summarizes our revenue and system unit placements for the
three and six months ended June 30, 2022, and 2021, respectively (in millions,
except percentages and unit placements):

                                                  Three Months Ended June 30,                   Six Months Ended June 30,
                                                   2022                  2021                  2022                     2021
Revenue
Instruments and accessories                  $       895.3           $    796.4          $    1,705.6               $ 1,502.3
Systems                                              375.1                439.6                 803.2                   808.3
Total product revenue                              1,270.4              1,236.0               2,508.8                 2,310.6
Services                                             251.7                228.0                 501.0                   445.5
Total revenue                                $     1,522.1           $  1,464.0          $    3,009.8               $ 2,756.1
United States                                $     1,011.1           $  1,005.8          $    1,975.9               $ 1,853.3
OUS                                                  511.0                458.2               1,033.9                   902.8
Total revenue                                $     1,522.1           $  1,464.0          $    3,009.8               $ 2,756.1
% of Revenue-U.S.                                       66   %               69  %                 66   %                  67  %
% of Revenue-OUS                                        34   %               31  %                 34   %                  33  %

Instruments and accessories                  $       895.3           $    796.4          $    1,705.6               $ 1,502.3
Services                                             251.7                228.0                 501.0                   445.5
Operating lease revenue                               93.0                 67.3                 176.2                   126.3
Total recurring revenue                      $     1,240.0           $  1,091.7          $    2,382.8               $ 2,074.1
% of Total revenue                                      81   %               75  %                 79   %                  75  %

Da Vinci Surgical Systems Placements by
Region:
U.S. unit placements                                   150                  213                   336                     403
OUS unit placements                                    129                  115                   254                     223
Total unit placements*                                 279                  328                   590                     626
*Systems placed under operating leases
(included in total unit placements)                    117                  108                   225                     235

Da Vinci Surgical Systems Placements
involving System Trade-ins:
Unit placements involving trade-ins                     56                  125                   164                     257
Unit placements not involving trade-ins                223                  203                   426                     369

Ion Systems Placements**                                41                   20                    75                      34
**Systems placed under operating leases
(included in total unit placements)                     25                    9                    40                      19


Product Revenue

Three months completed June 30, 2022

Product sales increased 3% to $1.27 billion for the three months ended
June 30, 2022compared to $1.24 billion for the three months ended June 30, 2021.

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Instruments and accessories revenue increased by 12% to $895 million for the
three months ended June 30, 2022, compared to $796 million for the three months
ended June 30, 2021. The increase in instruments and accessories revenue was
driven primarily by procedure growth of approximately 14% and incremental sales
of our advanced instruments, partially offset by foreign currency impacts. The
second quarter 2022 U.S. procedure growth was approximately 11%, driven by
strong growth in general surgery procedures, most notably bariatric,
cholecystectomy, and hernia repair procedures, as well as moderate growth in the
more mature gynecologic and urologic procedures categories. The second quarter
2022 OUS procedure growth was approximately 22%, driven by continued growth in
urology procedures, most notably prostatectomy and partial nephrectomy
procedures, and earlier stage growth in general surgery (particularly
colorectal), gynecology, and thoracic procedures. Both growth rates were
impacted by the disruption caused by the COVID-19 pandemic, as noted in the
COVID-19 Pandemic section above. Geographically, the second quarter 2022 OUS
procedure growth was driven by procedure expansion in a number of markets with
particular strength in Japan, Italy, and Germany.

Systems revenue decreased by 15% to $375 million for the three months ended
June 30, 2022, compared to $440 million for the three months ended June 30,
2021. The lower second quarter 2022 systems revenue was primarily driven by
fewer system placements, lower second quarter 2022 ASPs, lower sales-type lease
revenue, lower lease buyout revenue, and a higher proportion of system
placements under operating leases, partially offset by higher operating lease
revenue.

During the second quarter of 2022, 279 da Vinci Surgical Systems were placed
compared to 328 systems during the second quarter of 2021. By geography, 150
systems were placed in the U.S., 78 in Europe, 46 in Asia, and 5 in other
markets during the second quarter of 2022, compared to 213 systems placed in the
U.S., 63 in Europe, 41 in Asia, and 11 in other markets during the second
quarter of 2021. The decrease in systems placements was primarily driven by a
smaller number of third generation da Vinci systems available for trade-in,
along with supply chain and logistical challenges impacting the number of
systems available for shipment, and a softening of our capital pipeline in the
U.S. caused by increased financial pressures on hospitals. Nevertheless, the
incremental systems placements reflect procedure growth, customers trading in da
Vinci Si Surgical Systems for fourth generation da Vinci Xi and da Vinci X
systems in order to access fourth generation instruments and capabilities as
well as to standardize their system portfolio, and further customer validation
that da Vinci surgery addresses their quadruple aim objectives. As of June 30,
2022, we had a da Vinci Surgical System installed base of approximately 7,135
systems, compared to the installed base of approximately 6,335 systems as of
June 30, 2021.

We placed 152 and 168 da Vinci Surgical Systems under lease or usage-based
arrangements, of which 117 and 108 systems were classified as operating leases
for the three months ended June 30, 2022, and 2021, respectively. Operating
lease revenue, including the impact of Ion systems, was $93.0 million for the
three months ended June 30, 2022, compared to $67.3 million for the three months
ended June 30, 2021. Da Vinci Surgical Systems placed as operating leases
represented 42% of total placements during the second quarter of 2022, compared
to 33% during the second quarter of 2021. A total of 1,469 da Vinci Surgical
Systems were installed at customers under operating lease or usage-based
arrangements as of June 30, 2022, compared to 1,073 as of June 30, 2021. Revenue
from Lease Buyouts was $22.5 million for the three months ended June 30, 2022,
compared to $26.1 million for the three months ended June 30, 2021. We expect
revenue from Lease Buyouts to fluctuate period to period depending on the timing
of when, and if, customers choose to exercise the buyout options embedded in
their leases.

The da Vinci Surgical System ASP, excluding the impact of systems placed under
operating lease or usage-based arrangements and Ion systems, was approximately
$1.50 million for the three months ended June 30, 2022, compared to
approximately $1.55 million for the three months ended June 30, 2021. The lower
second quarter 2022 ASP was largely driven by unfavorable geographic mix and
foreign currency impacts, partially offset by lower pricing discounts and fewer
trade-ins. ASP fluctuates from period to period based on geographic and product
mix, product pricing, systems placed involving trade-ins, and changes in foreign
exchange rates.

During the second quarter of 2022, 41 Ion systems were placed compared to 20
systems during the second quarter of 2021. As of June 30, 2022, we had an Ion
system installed base of approximately 204 systems, compared to the installed
base of approximately 70 systems as of June 30, 2021. We placed 26 and 11 Ion
systems under lease or usage-based arrangements, of which 25 and 9 systems were
classified as operating leases for the three months ended June 30, 2022, and
2021, respectively. Ion systems placed as operating leases represented 61% of
total placements during the second quarter of 2022, compared to 45% during the
second quarter of 2021. A total of 90 Ion systems were installed at customers
under operating or usage-based arrangements as of June 30, 2022, compared to 30
as of June 30, 2021.

Semester completed June 30, 2022

Product sales increased 9% to $2.51 billion for the six months ended
June 30, 2022compared to $2.31 billion for the six months ended June 30, 2021.


Instruments and accessories revenue increased by 14% to $1.71 billion for the
six months ended June 30, 2022, compared to $1.50 billion for the six months
ended June 30, 2021. The increase in instruments and accessories revenue was
primarily driven by procedure growth of approximately 16% and incremental sales
of our advanced instruments. The increase was

                                       41
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partially offset by foreign currency impacts in the six months ended June 30,
2022, and the benefit of stocking orders in the six months ended June 30, 2021,
associated with the launch our Extended Use Program. The year-to-date 2022 U.S.
procedure growth was approximately 13%, driven by strong growth in general
surgery procedures, most notably bariatric, cholecystectomy, and hernia repair
procedures, as well as moderate growth in the more mature gynecologic and
urologic procedures categories. The year-to-date 2022 OUS procedure growth was
approximately 23%, driven by continued growth in urology procedures, most
notably prostatectomy and partial nephrectomy procedures, and earlier stage
growth in general surgery (particularly colorectal), gynecology, and thoracic
procedures. Both growth rates were impacted by the disruption caused by the
COVID-19 pandemic, as noted in the COVID-19 Pandemic section above.
Geographically, the year-to-date 2022 OUS procedure growth was driven by
procedure expansion in a number of markets with particular strength in Japan,
China, the UK, Germany, and Italy.

Systems revenue decreased by 1% to $803 million for the six months ended
June 30, 2022, compared to $808 million for the six months ended June 30, 2021.
The decrease in systems revenue was primarily driven by fewer system placements,
lower year-to-date 2022 ASPs, lower sales-type lease revenue, and lower lease
buyout revenue, partially offset by higher operating lease revenue.

During the six months ended June 30, 2022, a total of 590 da Vinci Surgical
Systems were placed compared to 626 systems during the six months ended June 30,
2021. By geography, 336 systems were placed in the U.S., 156 in Europe, 88 in
Asia, and 10 in other markets during the six months ended June 30, 2022,
compared to 403 systems placed in the U.S., 122 in Europe, 85 in Asia, and 16 in
other markets during the six months ended June 30, 2021. The decrease in systems
placements was primarily driven by a softening of our capital pipeline in the
U.S. caused by increased financial pressures on hospitals, a smaller number of
third generation da Vinci systems available for trade-in, along with supply
chain and logistical challenges impacting the number of systems available for
shipment.

We placed 280 and 305 da Vinci Surgical Systems under lease or usage-based
arrangements, of which 225 and 235 systems were classified as operating leases
for the six months ended June 30, 2022, and 2021, respectively. Operating lease
revenue, including the impact of Ion systems, was $176.2 million for the six
months ended June 30, 2022, compared to $126.3 million for the six months ended
June 30, 2021. Da Vinci Surgical Systems placed as operating leases represented
38% of total placements during the six months ended June 30, 2022, compared to
38% during the six months ended June 30, 2021. Revenue from Lease Buyouts was
$38.0 million for the six months ended June 30, 2022, compared to $45.2 million
for the six months ended June 30, 2021. We expect revenue from Lease Buyouts to
fluctuate period to period depending on the timing of when, and if, customers
choose to exercise the buyout options embedded in their leases.

The da Vinci Surgical System ASP, excluding the impact of systems placed under
operating lease or usage-based arrangements and Ion systems, was approximately
$1.53 million for the six months ended June 30, 2022, compared to approximately
$1.59 million for the six months ended June 30, 2021. The lower year-to-date
2022 ASP was largely driven by unfavorable geographic mix and foreign currency
impacts, partially offset by fewer trade-ins and favorable product mix. ASP
fluctuates from period to period based on geographic and product mix, product
pricing, systems placed involving trade-ins, and changes in foreign exchange
rates.

During the six months ended June 30, 2022, 75 Ion systems were placed compared
to 34 systems during the six months ended June 30, 2021. We placed 45 and 23 Ion
systems under lease or usage-based arrangements, of which 40 and 19 systems were
classified as operating leases for the six months ended June 30, 2022, and 2021,
respectively. Ion systems placed as operating leases represented 53% of total
placements during the six months ended June 30, 2022, compared to 56% during the
six months ended June 30, 2021.

Service revenue


Service revenue increased by 10% to $252 million for the three months ended
June 30, 2022, compared to $228 million for the three months ended June 30,
2021. The increase in service revenue was primarily driven by a larger installed
base of systems producing service revenue, partially offset by foreign currency
impacts.

Service revenue increased by 12% to $501 million for the six months ended
June 30, 2022, compared to $446 million for the six months ended June 30, 2021.
The increase in service revenue was primarily driven by a larger installed base
of systems producing service revenue, partially offset by foreign currency
impacts.

Gross profit


Product gross profit for the three months ended June 30, 2022, decreased by 1%
to $849 million, representing 66.9% of product revenue, compared to $862
million, representing 69.7% of product revenue, for the three months ended
June 30, 2021. The lower product gross profit for the three months ended
June 30, 2022, was primarily driven by lower product gross profit margin,
partially offset by higher product revenue. The lower product gross profit
margin for the three months ended June 30, 2022, was primarily driven by higher
freight and material costs, higher fixed costs from investments to drive growth
of the

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and strengthen our operational capabilities, adverse foreign exchange impacts and lower system ASPs in the second quarter of 2022.


Product gross profit for the six months ended June 30, 2022, increased by 5% to
$1.7 billion, representing 67.4% of product revenue, compared to $1.6 billion,
representing 70.0% of product revenue, for the six months ended June 30, 2021.
The higher product gross profit for the six months ended June 30, 2022, was
primarily driven by higher product revenue, partially offset by lower product
gross profit margin. The lower product gross profit margin for the six months
ended June 30, 2022, was primarily driven by higher fixed costs from investments
to drive growth of the business and strengthen our operating capabilities,
higher freight and material costs, unfavorable foreign currency impacts, and
lower year-to-date 2022 system ASPs.

Product gross profit for the three and six months ended June 30, 2022, included
share-based compensation expense of $20.3 million and $39.0 million,
respectively, compared with $16.6 million and $31.9 million for the three and
six months ended June 30, 2021, respectively. Product gross profit for the three
and six months ended June 30, 2022, included intangible assets amortization
expense of $3.7 million and $7.3 million, respectively, compared with $4.7
million and $10.1 million for the three and six months ended June 30, 2021,
respectively.

Service gross profit for the three months ended June 30, 2022, increased by 8%
to $174 million, representing 69.1% of service revenue, compared to $162
million, representing 70.9% of service revenue, for the three months ended
June 30, 2021. The higher service gross profit for the three months ended
June 30, 2022, was primarily driven by higher service revenue, reflecting a
larger installed base of systems. The lower service gross profit margin for the
three months ended June 30, 2022, was primarily driven by higher labor,
material, and infrastructure costs as well as unfavorable foreign currency
impacts.

Service gross profit for the six months ended June 30, 2022, increased by 11% to
$343 million, representing 68.4% of service revenue, compared to $309 million,
representing 69.4% of service revenue, for the six months ended June 30, 2021.
The higher service gross profit for the six months ended June 30, 2022, was
primarily driven by higher service revenue, reflecting a larger installed base
of systems. The lower service gross profit margin for the six months ended
June 30, 2022, was primarily driven by higher labor, material, and
infrastructure costs as well as unfavorable foreign currency impacts.

Service gross profit for the three and six months ended June 30, 2022, included
share-based compensation expense of $5.8 million and $11.4 million,
respectively, compared with $5.2 million and $10.9 million for the three and six
months ended June 30, 2021, respectively. Service gross profit for the three and
six months ended June 30, 2022, included intangible assets amortization expense
of $0.2 million and $0.4 million, respectively, compared with $0.3 million and
$0.6 million for the three and six months ended June 30, 2021, respectively.

Selling, general and administrative expenses

Selling, general and administrative expenses include the costs of sales, marketing and administrative personnel, sales and marketing activities, trade show expenses, legal fees, regulatory fees and corporate overhead. ‘company.


Selling, general and administrative expenses for the three months ended June 30,
2022, increased by 19% to $418 million, compared to $350 million for the three
months ended June 30, 2021. Selling, general and administrative expenses for the
six months ended June 30, 2022, increased by 20% to $810 million, compared to
$676 million for the six months ended June 30, 2021. The increase in selling,
general and administrative expenses for the three and six months ended June 30,
2022, was primarily driven by higher headcount, resulting in increased fixed and
share-based compensation expense, higher variable compensation, and increased
infrastructure costs to support our growth. In addition, there were higher
travel, training, and marketing expenses for the three and six months ended
June 30, 2022, as compared with the prior year.

Selling, general and administrative expenses for the three and six months ended
June 30, 2022, included share-based compensation expense of $62.7 million and
$123.0 million, respectively, compared with $55.7 million and $108.8 million for
the three and six months ended June 30, 2021, respectively. Selling, general and
administrative expenses for the three and six months ended June 30, 2022,
included intangible assets amortization expense of $1.6 million and $3.2
million, respectively, compared with $1.9 million and $3.6 million for the three
and six months ended June 30, 2021, respectively.

Research and development costs

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


Research and development expenses for the three months ended June 30, 2022,
increased by 28% to $207 million, compared to $162 million for the three months
ended June 30, 2021. The increase in research and development expenses for the
three months ended June 30, 2022, was primarily driven by higher
personnel-related expenses, including share-based compensation expense, and
other project costs incurred to support a broader set of product development
initiatives, including Ion and SP platform investments, digital investments,
advanced instrumentation, advanced imaging, and future generations of robotics.
Research and development expenses for the six months ended June 30, 2022,
increased by 30% to $418 million,

                                       43
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compared to $322 million for the six months ended June 30, 2021. The increase in
research and development expenses for the six months ended June 30, 2022, was
primarily driven by higher personnel-related expenses, including share-based
compensation expense, intangible asset charges, and other project costs incurred
to support a broader set of product development initiatives, including Ion and
SP platform investments, digital investments, advanced instrumentation, advanced
imaging, and future generations of robotics.

Research and development expenses for the three and six months ended June 30,
2022, included share-based compensation expense of $38.5 million and $75.3
million, respectively, compared with $32.6 million and $62.7 million for the
three and six months ended June 30, 2021, respectively. Research and development
expenses for the three and six months ended June 30, 2022, included intangible
asset charges of $2.5 million and $11.0 million, respectively, compared with
$4.0 million and $4.7 million for the three and six months ended June 30, 2021,
respectively.

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

Interest and other income, net


Interest and other income, net, for the three months ended June 30, 2022,
decreased by 38% to $9.3 million, compared to $15.0 million for the three months
ended June 30, 2021. The decrease in interest and other income, net, for the
three months ended June 30, 2022, was primarily driven by foreign exchange
losses (compared to foreign exchange gains in the three months ended June 30,
2021), partially offset by higher interest income earned, due to higher cash and
investment balances and an increase in average interest rates.

Interest and other income, net, for the six months ended June 30, 2022,
decreased by 92% to $3.6 million, compared to $47.0 million for six months ended
June 30, 2021. The decrease in interest and other income, net, for the six
months ended June 30, 2022, was primarily driven by unrealized losses on
investments resulting from strategic arrangements (compared to unrealized gains
on investments resulting from strategic arrangements in the six months ended
June 30, 2021) and foreign exchange losses (compared to foreign exchange gains
in the six months ended June 30, 2021), partially offset by higher interest
income earned, due to higher cash and investment balances.

We held an equity investment in preferred shares of Broncus Holding Corporation
("Broncus"), which was reflected in our financial statements on a cost basis. In
the first quarter of 2021, we recorded an unrealized gain on our investment in
Broncus of approximately $14 million. 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. We were restricted from selling these shares for a period of
six months. For the three and six months ended June 30, 2022, we recognized an
unrealized loss on this investment of approximately $1.1 million and $18.3
million, respectively.

income tax expense


Income tax expense for the three months ended June 30, 2022, was $93.3 million,
or 22.9% of income before taxes, compared to $3.2 million, or 0.6% of income
before taxes, for the three months ended June 30, 2021. Income tax expense for
the six months ended June 30, 2022, was $126.3 million, or 15.6% of income
before taxes, compared to $16.8 million, or 1.7% of income before taxes, for the
six months ended June 30, 2021.

Our effective tax rate for the three months ended June 30, 2022, differed from
the U.S. federal statutory tax rate of 21% primarily due to U.S. tax on foreign
earnings and state income taxes (net of federal benefit), partially offset by
excess tax benefits associated with employee equity plans, the effect of income
earned by certain overseas entities being taxed at rates lower than the federal
statutory rate, and the federal research and development ("R&D") credit benefit.

Our effective tax rates for the six months ended June 30, 2022, and for the
three and six months ended June 30, 2021, differed from the U.S. federal
statutory rate of 21% primarily due to excess tax benefits associated with
employee equity plans, the effect of income earned by certain overseas entities
being taxed at rates lower than the federal statutory rate, and the federal R&D
credit benefit, partially offset by U.S. tax on foreign earnings and state
income taxes (net of federal benefit).

The increase in income tax expense for the three and six months ended June 30,
2022, was primarily due to the impact of capitalization of research and
experimental ("R&E") expenditures and lower excess tax benefits, as discussed
below, as well as the fact that the effective tax rate for the three and six
months ended June 30, 2021, included a one-time benefit of $66.4 million from
re-measurement of our Swiss deferred tax assets resulting from the extension of
the economic useful life of certain intangible assets.

Our provision for income taxes for the three and six months ended June 30, 2022,
reflected the impact of a change in U.S. tax law effective January 1, 2022,
which requires the capitalization and amortization of R&E expenditures incurred
after December 31, 2021.

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Our provision for income taxes for the three and six months ended June 30, 2022,
included excess tax benefits associated with employee equity plans of $9.3
million and $62.3 million, respectively, which reduced our effective tax rate by
2.3 and 7.7 percentage points, respectively. Our provision for income taxes for
the three and six months ended June 30, 2021, included excess tax benefits
associated with employee equity plans of $43.6 million and $117.0 million,
respectively, which reduced our effective tax rate by 8.3 and 12.0 percentage
points, respectively. The amount of excess tax benefits or deficiencies will
fluctuate from period to period based on the price of our stock, the volume of
share-based awards settled or vested, and the value assigned to employee equity
awards 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 IRS and other
tax authorities. The outcome of these audits cannot be predicted with certainty.
Management regularly assesses the likelihood of adverse outcomes resulting from
these examinations to determine the adequacy of our provision for income taxes.
If any issues addressed in our tax audits are resolved in a manner not
consistent with management's expectations, we could be required to adjust our
provision for income taxes in the period such resolution occurs.

Net income attributable to non-controlling interest in a joint venture


Net income attributable to noncontrolling interest in Joint Venture for the
three and six months ended June 30, 2022, was $5.8 million and $9.6 million,
respectively. Net income attributable to noncontrolling interest in Joint
Venture for the three and six months ended June 30, 2021, was $5.8 million and
$14.7 million, respectively. The decrease in net income attributable to
noncontrolling interest in Joint Venture for the six months ended June 30, 2022,
was primarily due to a decrease in sales and an increase in selling, general and
administrative expenses in China.

Cash and capital resources

Sources and uses of cash and cash equivalents


Our principal source of liquidity is cash provided by operations and by the
issuance of common stock through the exercise of stock options and our employee
stock purchase program. Cash and cash equivalents plus short- and long-term
investments decreased by $0.44 billion to $8.18 billion as of June 30, 2022,
from $8.62 billion as of December 31, 2021, primarily from cash used in share
repurchases, capital expenditures, and taxes paid related to net share
settlements of equity awards, as well as unrealized losses on interest-bearing
debt securities classified as available for sale, offset by cash provided by our
operations and proceeds from stock option exercises and employee stock
purchases.

Our cash requirements depend on numerous factors, including market acceptance of
our products, the resources we devote to developing and supporting our products,
and other factors. We expect to continue to devote substantial resources to
expand procedure adoption and acceptance of our products. We have made
substantial investments in our commercial operations, product development
activities, facilities, and intellectual property. Based on our business model,
we anticipate that we will continue to be able to fund future growth through
cash provided by our operations. We believe that our current cash, cash
equivalents, and investment balances, together with income to be derived from
the sale of our products, will be sufficient to meet our liquidity requirements
for the foreseeable future. However, as a result of the COVID-19 pandemic and
the increasing risk of a recession as well as other macroeconomic and
geopolitical headwinds, we may experience reduced cash flow from operations if
we experience decreased revenues or if we extend payment terms on sales and
operating lease and usage-based arrangements.

See "Item 7A. Quantitative and Qualitative Disclosures About Market Risk" in our
Form 10-K for the fiscal year ended December 31, 2021, for discussion on the
impact of interest rate risk and market risk on our investment portfolio.

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Condensed Consolidated Cash Flow Data

The following table summarizes our cash flows for the six months ended June 30, 2022and 2021 (in millions):

Semester completed June 30th,

                                                                         2022                  2021
Net cash provided by (used in):
Operating activities                                                $      669.7          $   1,020.3
Investing activities                                                       251.5               (981.7)
Financing activities                                                      (682.0)               (43.9)

Effect of exchange rates on cash, cash equivalents and restricted cash

                                                                         6.0                 (2.6)
Net increase (decrease) in cash, cash equivalents, and restricted
cash                                                                $      245.2          $      (7.9)


Operating Activities

For the six months ended June 30, 2022, net income of $683 million exceeded our
net cash provided by operating activities of $670 million, primarily due to the
following factors:

1.Changes in operating assets and liabilities resulted in $434 million of cash
used in operating activities during the six months ended June 30, 2022.
Inventory, including the transfer of equipment from inventory to property,
plant, and equipment, increased by $246 million, primarily to address the growth
in the business as well as to mitigate risks of disruption that could arise from
trade, supply, or other matters. Refer to the Condensed Consolidated Financial
Statements (Unaudited) in Note 4 for further details in the supplemental cash
flow information. Prepaid expenses and other assets increased by $90 million,
primarily due to an increase in net investments in sales-type leases. Accrued
compensation and employee benefits decreased by $72 million, primarily due to
payments of 2021 incentive compensation. Accounts receivable increased by $56
million, primarily due to the timing of billings and collections. The
unfavorable impact of these items on cash provided by operating activities was
partially offset by a $20 million increase in other liabilities, primarily due
to additional accruals related to capital expenditures, and a $12 million
increase in accounts payable, primarily due to the timing of billing and
payments.

2.The changes in operating assets and liabilities outlined above were partially
offset by non-cash charges of $421 million included in our net income,
consisting primarily of the following significant items: share-based
compensation of $248 million; depreciation expense and losses on the disposal of
property, plant, and equipment of $158 million; and net losses on investments,
accretion, and amortization of $34 million.

Investing activities


Net cash provided by investing activities for the six months ended June 30,
2022, consisted primarily of proceeds from maturities of investments, net of
purchases, of $489 million, partially offset by the acquisition of property and
equipment of $226 million. We invest predominantly in high quality, fixed income
securities. Our investment portfolio may, at any time, contain investments 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.

Fundraising activities


Net cash used in financing activities during the six months ended June 30, 2022,
consisted primarily of cash used in the repurchase of approximately 2.6 million
shares of our common stock in the open market for $607 million and taxes paid on
behalf of employees related to net share settlements of equity awards of $179
million, partially offset by proceeds from stock option exercises and employee
stock purchases of $107 million.

Capital expenditure


Our business is not capital equipment intensive. However, with the growth of our
business and our investments in property and facilities and in manufacturing
automation, capital investments in these areas have increased. We expect these
capital investments to increase significantly in 2022 to a range between
$700 million and $800 million. A significant portion of this investment involves
the construction of facilities to provide incremental space for growth,
consolidate operations to enhance efficiency, and replace leased spaces with
owned spaces. These capital investments will also expand our OUS footprint in
support of opportunities for growth in key international markets. We intend to
fund these capital investments with cash generated from operations.

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Critical accounting estimates


The discussion and analysis of our financial condition and results of operations
are based upon our Financial Statements, which have been prepared in accordance
with U.S. GAAP. The preparation of these Financial Statements requires us to
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues, and expenses. On an ongoing basis, we evaluate our
critical accounting estimates. We base our estimates on historical experience
and on various other assumptions that we believe to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions. There have been no new or material changes to the
critical accounting estimates discussed in our Annual Report on Form 10-K for
the fiscal year ended December 31, 2021, that are of significance, or potential
significance, to the Company.

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