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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SeptemberJune 30, 20172020
OR
¨☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from  to
Commission file number 000-30713
Intuitive Surgical, Inc.
(Exact name of Registrant as specified in its Charter)
Delaware

77-0416458
Delaware
77-0416458
(State or Other Jurisdiction of

Incorporation or Organization)
(I.R.S. Employer

Identification No.)
1020 Kifer Road
Sunnyvale, California 94086
(Address of principal executive offices) (Zip Code)
(408) 523-2100
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, par value $0.001 per shareISRGThe Nasdaq Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES  Yes  x    NO      No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES  Yes  x    NO      No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filerxAccelerated filer¨
Non-accelerated filer¨(Do not check if a smaller reporting company)Smaller reporting company¨☐
Emerging growth company¨☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES  ¨    NO  Yes  ☐    No  x
The Registrant had 112,047,836117,025,880 shares of Common Stock, $0.001 par value per share, outstanding as of October 17, 2017.
July 20, 2020.



Table of Contents
INTUITIVE SURGICAL, INC.
TABLE OF CONTENTS




Page No.
PART I. FINANCIAL INFORMATION
Page No.
PART I. FINANCIAL INFORMATION
3
4
5
6
2125
3646
3646
PART II. OTHER INFORMATION
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INTUITIVE SURGICAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)

in millions (except par values)September 30,
2017
December 31,
2016		in millions (except par values)June 30,
2020		December 31,
2019
ASSETS   ASSETS
Current assets:   Current assets:
Cash and cash equivalents$875.0
 $1,036.6
Cash and cash equivalents$2,035.6  $1,167.6  
Short-term investments1,271.8
 1,518.0
Short-term investments2,452.7  2,054.1  
Accounts receivable, net468.0
 430.2
Accounts receivable, net508.8  645.2  
Inventory225.2
 182.3
Inventory645.5  595.5  
Prepaids and other current assets88.9
 83.3
Prepaids and other current assets256.4  200.2  
Total current assets2,928.9
 3,250.4
Total current assets5,899.0  4,662.6  
Property, plant and equipment, net584.8
 458.4
Property, plant, and equipment, netProperty, plant, and equipment, net1,450.3  1,272.9  
Long-term investments1,655.2
 2,283.3
Long-term investments1,586.5  2,623.5  
Deferred tax assets119.8
 150.9
Deferred tax assets365.5  425.6  
Intangible and other assets, net154.8
 142.8
Intangible and other assets, net465.5  441.4  
Goodwill201.1
 201.1
Goodwill336.8  307.2  
Total assets$5,644.6
 $6,486.9
Total assets$10,103.6  $9,733.2  
LIABILITIES AND STOCKHOLDERS’ EQUITY   LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:   Current liabilities:
Accounts payable$80.4
 $68.5
Accounts payable$108.9  $123.5  
Accrued compensation and employee benefits124.7
 136.4
Accrued compensation and employee benefits168.7  251.6  
Deferred revenue282.5
 240.6
Deferred revenue343.1  337.8  
Other accrued liabilities128.1
 151.0
Other accrued liabilities304.1  317.3  
Total current liabilities615.7
 596.5
Total current liabilities924.8  1,030.2  
Other long-term liabilities69.0
 112.6
Other long-term liabilities412.4  418.3  
Total liabilities684.7
 709.1
Total liabilities1,337.2  1,448.5  
Contingencies (Note 6)

 

Contingencies (Note 8)Contingencies (Note 8)
Stockholders’ equity:   Stockholders’ equity:
Preferred stock, 2.5 shares authorized, $0.001 par value, issuable in series; no shares issued and outstanding as of September 30, 2017, and December 31, 2016—
 —
Common stock, 300.0 shares authorized, $0.001 par value, 112.0 shares and 116.4 shares issued and outstanding as of September 30, 2017, and December 31, 2016, respectively0.1
 —
Preferred stock, 2.5 shares authorized, $0.001 par value, issuable in series; 0 shares issued and outstanding as of June 30, 2020, and December 31, 2019Preferred stock, 2.5 shares authorized, $0.001 par value, issuable in series; 0 shares issued and outstanding as of June 30, 2020, and December 31, 2019—  —  
Common stock, 300.0 shares authorized, $0.001 par value, 117.0 shares and 116.0 shares issued and outstanding as of June 30, 2020, and December 31, 2019, respectivelyCommon stock, 300.0 shares authorized, $0.001 par value, 117.0 shares and 116.0 shares issued and outstanding as of June 30, 2020, and December 31, 2019, respectively0.1  0.1  
Additional paid-in capital4,190.4
 4,211.8
Additional paid-in capital6,085.1  5,756.8  
Retained earnings776.6
 1,574.9
Retained earnings2,633.0  2,494.5  
Accumulated other comprehensive loss(9.2) (8.9)
Accumulated other comprehensive incomeAccumulated other comprehensive income22.3  12.4  
Total Intuitive Surgical, Inc. stockholders’ equity4,957.9
 5,777.8
Total Intuitive Surgical, Inc. stockholders’ equity8,740.5  8,263.8  
Noncontrolling interest in joint venture2.0
 —
Noncontrolling interest in joint venture25.9  20.9  
Total stockholders’ equity4,959.9
 5,777.8
Total stockholders’ equity8,766.4  8,284.7  
Total liabilities and stockholders’ equity$5,644.6
 $6,486.9
Total liabilities and stockholders’ equity$10,103.6  $9,733.2  
SeeThe accompanying Notes tonotes are an integral part of these Condensed Consolidated Financial Statements (Unaudited).

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INTUITIVE SURGICAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)




Three Months Ended June 30,Six Months Ended June 30,
in millions (except per share amounts)2020201920202019
Revenue:
Product$721.8  $922.3  $1,622.6  $1,722.1  
Service130.3  176.6  329.0  350.5  
Total revenue852.1  1,098.9  1,951.6  2,072.6  
Cost of revenue:
Product283.8  283.4  580.5  529.8  
Service65.4  56.5  130.0  114.2  
Total cost of revenue349.2  339.9  710.5  644.0  
Gross profit502.9  759.0  1,241.1  1,428.6  
Operating expenses:
Selling, general and administrative279.1  279.2  587.2  552.6  
Research and development143.2  120.8  290.3  264.8  
Total operating expenses422.3  400.0  877.5  817.4  
Income from operations80.6  359.0  363.6  611.2  
Interest and other income, net26.6  32.8  51.7  60.3  
Income before taxes107.2  391.8  415.3  671.5  
Income tax expense37.0  75.4  28.9  51.1  
Net income70.2  316.4  386.4  620.4  
Less: net income (loss) attributable to noncontrolling interest in joint venture2.2  (1.9) 4.9  (4.4) 
Net income attributable to Intuitive Surgical, Inc.$68.0  $318.3  $381.5  $624.8  
Net income per share attributable to Intuitive Surgical, Inc.:
Basic$0.58  $2.76  $3.27  $5.42  
Diluted$0.57  $2.67  $3.19  $5.23  
Shares used in computing net income per share attributable to Intuitive Surgical, Inc.:
Basic116.8  115.4  116.6  115.2  
Diluted119.7  119.3  119.7  119.4  
Total comprehensive income attributable to Intuitive Surgical, Inc.$81.4  $335.1  $391.4  $654.2  
 Three Months Ended 
 September 30,
Nine Months Ended 
 September 30,
in millions (except per share amounts)2017
2016
2017
2016
Revenue:       
Product$659.3
 $553.2
 $1,807.5
 $1,565.2
Service146.8
 129.7
 429.0
 382.3
Total revenue806.1
 682.9
 2,236.5
 1,947.5
Cost of revenue:       
Product195.0
 158.4
 543.1
 475.8
Service44.3
 37.5
 132.6
 108.8
Total cost of revenue239.3
 195.9
 675.7
 584.6
Gross profit566.8
 487.0
 1,560.8
 1,362.9
Operating expenses:       
Selling, general and administrative204.8
 168.0
 591.7
 511.6
Research and development83.4
 62.6
 241.5
 170.5
Total operating expenses288.2
 230.6
 833.2
 682.1
Income from operations278.6
 256.4
 727.6
 680.8
Interest and other income, net10.8
 10.4
 29.6
 23.9
Income before taxes289.4
 266.8
 757.2
 704.7
Income tax (benefit) expense(8.1) 55.8
 58.4
 172.8
Net income$297.5
 $211.0
 $698.8
 $531.9
Net income per share:       
Basic$2.66
 $1.82
 $6.26
 $4.64
Diluted$2.55
 $1.77
 $6.03
 $4.52
Shares used in computing net income per share:       
Basic111.8
 116.1
 111.6
 114.6
Diluted116.8
 119.1
 115.9
 117.6
Total comprehensive income$298.1
 $205.7
 $698.5
 $545.4
SeeThe accompanying Notes tonotes are an integral part of these Condensed Consolidated Financial Statements (Unaudited).

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INTUITIVE SURGICAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)



Six Months Ended June 30,
in millions 20202019
Operating activities:
Net income$386.4  $620.4  
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and loss on disposal of property, plant, and equipment102.5  67.8  
Amortization of intangible assets24.7  20.5  
Gain on investments, accretion, and amortization, net(2.4) (1.6) 
Deferred income taxes52.5  52.7  
Share-based compensation expense186.5  157.7  
Amortization of contract acquisition assets8.2  5.9  
Changes in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable136.9  48.9  
Inventory(120.1) (178.0) 
Prepaids and other assets(95.5) (89.2) 
Accounts payable(3.6) 21.7  
Accrued compensation and employee benefits(83.0) (33.3) 
Deferred revenue4.1  8.7  
Other liabilities(14.5) (53.0) 
Net cash provided by operating activities582.7  649.2  
Investing activities:
Purchase of investments(1,426.8) (1,815.9) 
Proceeds from sales of investments800.7  61.1  
Proceeds from maturities of investments1,298.6  1,418.9  
Purchase of property, plant, and equipment and intellectual property(215.2) (196.9) 
Acquisition of businesses, net of cash(37.7) 1.2  
Net cash provided by (used in) investing activities419.6  (531.6) 
Financing activities:
Proceeds from issuance of common stock relating to employee stock plans154.0  119.6  
Taxes paid related to net share settlement of equity awards(155.1) (145.0) 
Repurchase of common stock(100.0) (200.0) 
Capital contribution from noncontrolling interest—  10.0  
Payment of deferred purchase consideration(30.0) (5.0) 
Net cash used in financing activities(131.1) (220.4) 
Effect of exchange rate changes on cash, cash equivalents, and restricted cash(1.6) (1.3) 
Net increase (decrease) in cash, cash equivalents, and restricted cash869.6  (104.1) 
Cash, cash equivalents, and restricted cash, beginning of period1,182.6  909.4  
Cash, cash equivalents, and restricted cash, end of period$2,052.2  $805.3  
 Nine Months Ended 
 September 30,
in millions 2017 2016
Operating activities:   
Net income$698.8
 $531.9
Adjustments to reconcile net income to net cash provided by operating activities:   
Depreciation and loss on disposal of property, plant, and equipment61.4
 54.0
Amortization of intangible assets10.1
 14.0
Loss on investments, accretion of discounts, and amortization of premiums on investments, net16.8
 26.3
Deferred income taxes28.8
 31.7
Income tax benefits from employee stock plans—
 25.6
Share-based compensation expense153.5
 132.1
Changes in operating assets and liabilities   
Accounts receivable(37.8) (37.7)
Inventory(82.7) (40.8)
Prepaids and other assets(13.6) (19.0)
Accounts payable11.9
 6.4
Accrued compensation and employee benefits(11.3) (12.9)
Deferred revenue45.1
 5.9
Other liabilities(69.1) 39.8
Net cash provided by operating activities (1)811.9
 757.3
Investing activities:   
Purchase of investments(1,122.1) (1,896.6)
Proceeds from sales of investments1,525.6
 278.4
Proceeds from maturities of investments450.7
 683.9
Purchase of property, plant and equipment, and intellectual property(159.7) (36.1)
Net cash provided by (used in) investing activities694.5
 (970.4)
Financing activities:   
Proceeds from issuance of common stock relating to employee stock plans381.6
 550.4
Taxes paid related to net share settlement of equity awards(53.6) (23.2)
Repurchase of common stock(2,000.0) (8.1)
Other financing activities2.0
 —
Net cash provided by (used in) financing activities (1)(1,670.0) 519.1
Effect of exchange rate changes on cash and cash equivalents2.0
 1.0
Net increase (decrease) in cash and cash equivalents(161.6) 307.0
Cash and cash equivalents, beginning of period1,036.6
 714.6
Cash and cash equivalents, end of period$875.0
 $1,021.6

(1) The Company adopted ASU No. 2016-09, Improvements to Employee Share-based Payment Accounting, during the first quarteraccompanying notes are an integral part of 2017.This ASU eliminates the requirement to reclassify cash flows related to excess tax benefits from operating activities to financing activities on the consolidated statements of cash flows. The Company adopted this provision retrospectively by reclassifying $39.5 million of excess tax benefits from financing activities to operating activities for the nine months ended September 30, 2016.
See accompanying Notes tothese Condensed Consolidated Financial Statements (Unaudited).


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INTUITIVE SURGICAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)



In this report, “Intuitive Surgical”, “Intuitive”,Surgical,” “Intuitive,” the “Company,” “we,” “us,” and the “Company”“our” refer to Intuitive Surgical, Inc. and its wholly-wholly and majority-owned subsidiaries.
NOTE 1. DESCRIPTION OF THE BUSINESS
Intuitive Surgical, Inc. designs,(“Intuitive” or the “Company”) develops, manufactures, and markets the da Vinci® Surgical SystemsSystem and the IonTM endoluminal system. The Company’s products and related instrumentsservices enable physicians and accessories, which taken together, are advanced surgical systems thathealthcare providers to improve the Company believes enable a new generationquality of surgery. This advanced generation of surgery, which the Company calls da Vinci Surgery, combines the benefits ofand access to minimally invasive surgery (“MIS”) for patients with the ease of use, precision, and dexterity of open surgery. A care. The da Vinci Surgical System consists of a surgeon’ssurgeon console or consoles, a patient-side cart, a high-performance vision system, and proprietary instruments and accessories. The Ion endoluminal system is a high performance vision system. The da Vinci Surgical System translates a surgeon’s natural hand movements, which are performed on instrument controls at a console, into corresponding micro-movements offlexible, robotic-assisted, catheter-based platform that utilizes instruments positioned inside the patient through small incisions, or ports. The da Vinci Surgical System is designed to provide its operating surgeons with intuitive control, range of motion, fine tissue manipulation capability, and Three Dimensional (“3-D”) High-Definition (“HD”) vision while simultaneously allowing surgeons to work through the small ports enabled by MIS procedures.accessories for lung biopsies.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
In the opinion of management, the accompanying unaudited Condensed Consolidated Financial Statements (“Financial Statements”) of Intuitive Surgical, Inc. and its wholly-wholly and majority-owned subsidiaries have been prepared on a consistent basis with the audited Consolidated Financial Statements for the fiscal year ended December 31, 2016,2019, and include all adjustments, consisting of only normal, recurring adjustments, necessary to fairly state the information set forth herein. The Financial Statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) and, therefore, omit certain information and footnote disclosure necessary to present the Financial Statements in accordance with accounting principles generally accepted in the United States (“U.S.”) generally accepted accounting principles (“U.S. GAAP”). These Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016,2019, which was filed with the SEC on February 6, 2017.7, 2020. The results of operations for the first ninesix months of fiscal year 20172020 are not necessarily indicative of the results to be expected for the entire fiscal year or any future periods.
The Financial Statements include the results and the balances of the Company's majority ownedCompany’s majority-owned joint venture (referred to herein as the “Joint Venture”) with Shanghai Fosun Pharmaceutical (Group) Co., Ltd. (“Fosun Pharma”). The Company holds a controlling financial interest in the joint ventureJoint Venture, and the noncontrolling interest is reflected as a separate component of consolidated stockholders’ equity. Noncontrolling interestThe noncontrolling interest’s share of the earnings in net income was inconsequential to the consolidated results for all periodsJoint Venture is presented and, therefore, has not been separately presented in the condensed consolidated statements of comprehensive income.
Common Stock SplitRisks and Uncertainties
Shares issued pursuantThe Company is subject to additional risks and uncertainties due to the three-for-one stock split (the “Stock Split”)COVID-19 pandemic. The extent of the Company’s issuedimpact on the Company's business is highly uncertain and outstanding common stock, par value $0.001 per share, were distributed on October 5, 2017,difficult to stockholders of recordpredict, as the response to the pandemic is in its early stages with no vaccine or new effective treatments available as of September 29, 2017. All sharethe date of this filing. The Company's customers are diverting resources to treat COVID-19 patients and per share information presenteddeferring elective surgical procedures, both of which are likely to impact the Company's customers' ability to meet their obligations, including to the Company. Furthermore, capital markets and economies worldwide have been negatively impacted by the COVID-19 pandemic, and it is possible that the impact could cause an extended local and/or global economic recession. Such economic disruption could have a material adverse effect on our business as hospitals curtail and reduce capital and overall spending. Policymakers around the globe have responded with fiscal policy actions to support the healthcare industry and economy as a whole. However, the magnitude and overall effectiveness of these actions remains uncertain.
The severity of the impact of the COVID-19 pandemic on the Company's business will depend on a number of factors, including, but not limited to, the duration and severity of the pandemic and the extent and severity of the impact on the Company's customers, all of which are uncertain and cannot be predicted. The Company's future results of operations and liquidity could be materially adversely affected by delays in payments of outstanding receivables, supply chain disruptions, uncertain or reduced demand, and the impact of any initiatives or programs that the Company may undertake to address financial and operational challenges faced by its customers. As of the date of issuance of these Financial Statements, the extent to which the COVID-19 pandemic may materially adversely affect the Company's financial condition, liquidity, or results of operations is uncertain.
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Customer Relief Program
During the second quarter of 2020, the Company introduced a series of programs to provide financial relief to customers (the “Customer Relief Program”). As part of the Customer Relief Program, the Company is providing its customers service fee credits, extending payment terms, and deferring payments related to Intuitive System Leasing arrangements.
Service fee credits. As part of the Customer Relief Program, the Company is providing service fee credits to customers that vary based on the reduction in the Financial Statementsutilization of their systems relative to a pre-COVID-19 level baseline. The service fee credit will not exceed an amount equal to three months' worth of service fees per da Vinci/Ion system and have been retroactively adjustedand will be provided to reflectcustomers in the Stock Split.second and third quarters of 2020. The Company reflects the service fee credits as a reduction of service revenue and accounts receivable in the quarter they are earned by its customers. The service fee credit program resulted in a $59 million decrease in service revenue in the second quarter of 2020.
Recent Accounting Pronouncements Not Yet AdoptedShort-term payment relief. In response to the COVID-19 pandemic, the Company has introduced a payment deferral program to provide financial relief to qualified customers. This relief extended payment terms up to 180 days for qualified and creditworthy customers.
In May 2014,The Company also introduced a lease payment deferral program in which creditworthy customers with active Intuitive System Leasing arrangements may elect to defer lease payments up to five months that are payable at the end of the lease by extending the lease term by five months. This program does not result in substantial increases in the rights of the lessor or the obligations of the lessee, and the Company elected to apply the relief provided by the Financial Accounting Standards Board (“FASB”) FAQ on accounting for COVID-19 and market volatility by not applying the lease modification guidance in ASC 842 to the lease arrangements affected by the deferrals and lease extensions.
For operating lease arrangements where the lease term is extended by adding the deferred period to the end of the contract, the Company recalculated the straight-line revenue based on the revised terms, consistent with the treatment accepted by the FASB FAQ on accounting for COVID-19. For its sales-type lease arrangements impacted, the Company accounted for the deferral in the timing of lease payments as if there were no changes in the lease contract, consistent with the treatment accepted by the FASB FAQ on accounting for COVID-19. While the short-term payment relief offered did not have a material impact on the results of operations, the Company deferred $10 million of lease billings and extended payment terms associated with $65 million of trade receivables since the start of the program, of which $37 million would otherwise have been due in the second quarter of 2020.
Recently Adopted Accounting Pronouncements
Credit Losses
In June 2016, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers. This new standard will replace most2016-13, Measurement of theCredit Losses on Financial Instruments(Topic 326) (“Topic 326”), which replaces existing revenue recognitionincurred loss impairment guidance in U.S. GAAP when it becomes effective and permits the use of either the retrospective or cumulative effect transition method. The new standard, as amended, becomes effectiveestablishes a single allowance framework for the Company in the first quarter of fiscal year 2018.
financial assets carried at amortized cost. The Company currently plans to adopt this accounting standard in the first quarter of fiscal year 2018adopted Topic 326 on January 1, 2020, using the fulla modified retrospective transition method, to restate each prior reporting period presented in its Financial Statements. While the Company is continuing to assess the effect of this new standard, the Company currently believes that contractual future billings related to services included in its multi-year contracts will be considered performance obligations that should be part of the contract consideration allocated to all deliverables. Under the current standard, future service billings are considered to be contingent revenue. Accordingly, the amount of contract consideration allocatedwhich requires a cumulative-effect adjustment, if any, to the performance obligations identified in the Company’s system arrangements would be different under the new standard than the amount allocated under the current standard, which will result in an accelerationopening balance of revenue recognition. The Company currently expects that under the new standard a greater amount of the contract consideration would be allocated to the product-related performance obligations, which are generally delivered upfront. In addition, the Company

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also expects that incremental contract acquisition costs of obtaining revenue generating contracts, such as sales commissions paid in connection with system sales with multi-year service commitments, would be capitalized and amortized over the economic life of the contract. Under the current guidance, the Company expenses such costs when incurred.
The new revenue standard is principle based and interpretation of those principles may vary from company to company based on their unique circumstances. It is possible that interpretation, industry practice, and guidance may evolve as companies and the accounting profession work to implement this new standard. The Company is still in the process of evaluating the effect of the new standard on the Company’s historical financial statements and disclosures. While the Company has not completed its evaluation, the Company currently believes that the impact to revenue and expense recognized will not be material to any of the years presented. As the Company completes its evaluation of this new standard, new information may arise that could change the Company’s current understanding of the impact to revenue and expense recognized. Additionally, the Company will continue to monitor industry activities and any additional guidance provided by regulators, standards setters, or the accounting profession and adjust the Company’s assessment and implementation plans accordingly.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which amends the existing accounting standards for leases. The new standard requires lessees to record a right-of-use asset and a corresponding lease liability on the balance sheet (with the exception of short-term leases). The new standard also requires expanded disclosures regarding leasing arrangements. The new standard becomes effective for the Company in the first quarter of fiscal year 2019 and early adoption is permitted. The new standard is required to be adopted using the modified retrospective approach and requires application of the new standard at the beginning of the earliest comparative period presented. The Company generally does not finance purchases of equipment or other capital, but does lease some of its facilities. The Company’s customers finance purchases of da Vinci systems and ancillary products, including directly with the Company. It is currently unknown whether the new standard will change customer buying patterns or behaviors. The Company is evaluating the effect that this new standard will have on its Financial Statements and related disclosures.
In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfer of Assets Other than Inventory, which requires the recognition of the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. This ASU will be effective for the Company in the first quarter of 2018. This ASU is required to be adopted using the modified retrospective approach, with a cumulative catch-up adjustment to retained earnings in the period of adoption. The Company is currently evaluating the impact of adopting this ASU on its Financial Statements.
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, which clarifies the definition of a business to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The standard will be effective for the Company in the first quarter of 2018. Early adoption is permitted. The Company is currently evaluating the impact of adopting this ASU on its consolidated financial statements.
Adopted Accounting Pronouncement
Beginning fiscal 2017, the Company adopted ASU No. 2016-09, Improvements to Employee Share-based Payment Accounting, which changes among other things, how the tax effects of share-based awards are recognized. ASU No. 2016-09 requires excess tax benefits and tax deficiencies to be recognized in the provision for income taxes as discrete items in the period when the awards vest or are settled, whereas previously such income tax effects were generally recorded as part of additional paid-in capital. The provision for income taxes for the three and nine months ended September 30, 2017, included excess tax benefits of $19.7 million and $82.9 million, respectively, that reduced the Company’s effective tax rate by 6.8 and 10.9 percentage points, respectively. The recognized excess tax benefits resulted from share-based compensation awards primarily associated with employee equity plans that were vested or settled in the three and nine months ended September 30, 2017. This ASU also eliminates the requirement to reclassify cash flows related to excess tax benefits from operating activities to financing activities on the consolidated statementsdate of cash flows.adoption with prior periods not restated. The Company adopted this provision retrospectively by reclassifying $39.5 million of excess tax benefits from financing activities to operating activities forcumulative-effect adjustment recorded on January 1, 2020, was not material. Please see the nine months ended September 30, 2016. The Company also excluded the related tax benefits when applying the treasury stock method for computing diluted shares outstanding on a prospective basis as required by this ASU. In addition, the Company elected to continue its current practice of estimating expected forfeitures. The amount of excess tax benefits and deficiencies recognized in the provision for income taxes will fluctuate from period to period based on the pricedescription of the Company’s stock,“Credit Losses” accounting policy in the volume of share-based instruments settled or vested, and the value assigned to share-based instruments under U.S. GAAP.“Significant Accounting Policies” section below.
Significant Accounting Policies
ThereWith the exception of the aspects within the Customer Relief Program noted above and the change for the accounting of credit losses as a result of the adoption of Topic 326, there have been no new or material changes to the significant accounting policies discussed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016,2019, that are of significance, or potential significance, to the Company. The information provided below related to the Company’s allowance for sales returns and doubtful accounts policies provide additional clarification on the Company’s policy of accounting for arrangements with rights of return that occurred during the first quarter of 2017. 

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Credit Losses
Allowance for Sales Returns and Doubtful Accounts
The allowance for sales returns is based on the Company’s estimate of potential future product returns and other allowances related to current period product revenue. The Company analyzes historical returns, current economic trends, and changes in customer demand and acceptance of the Company’s products.Trade accounts receivable. The allowance for doubtful accounts is based on the Company’s assessment of the collectabilitycollectibility of customer accounts. The Company regularly reviews the allowance by considering factors such as historical experience, credit quality, the age of the accounts receivable balances, and current economic conditions that may affect a customer’s ability to pay. For the three and six months ended June 30, 2020, the Company recognized bad debt expense of $2.3 million and $5.5 million, respectively. For both the three and six months ended June 30, 2019, bad debt expense was not significant.
Net investment in sales-type leases.The Company offeredenters into sales-type leases with certain qualified customers who purchased surgical systemsto purchase its systems. Sales-type leases have terms that generally range from 24 to 84 months and are usually collateralized by a security interest in the first quarterunderlying assets. The allowance for loan loss is based on the Company's assessment of fiscal 2017current expected lifetime loss on lease receivables. The Company regularly reviews the opportunityallowance by considering factors such as historical experience, credit quality, the age of the lease receivable balances, and current economic conditions that may affect a customer's ability to return such systemspay. Lease receivables are considered past due 90 days after invoice.
The Company manages the credit risk in net investment in sales-type leases using a number of factors, including, but not limited to the following: size of operations; profitability, liquidity, and receivedebt ratios; payment history; and past due amounts. The Company also uses credit scores obtained from external providers as a key credit quality indicator for the purposes of determining credit quality. The following table presents credit quality by class of net investment in sales-type lease as of June 30, 2020. The following table summarizes the amortized cost basis by year of origination and credit quality indicator as of June 30, 2020 (in millions):
20202019201820172016PriorNet Investment
Credit Rating:
High$41.3  $51.6  $18.7  $10.0  $3.1  $2.6  $127.3  
Moderate30.4  34.4  22.1  7.5  2.5  0.1  97.0  
Low3.6  —  1.8  0.9  2.3  —  8.6  
Total$75.3  $86.0  $42.6  $18.4  $7.9  $2.7  $232.9  
For the three and six months ended June 30, 2020, the Company recognized 0 credit loss and a credit toward the purchaseloss of the da Vinci X surgical system launched in the second quarter of 2017. In accordance with the guidance relating to the accounting for arrangements in which return rights exist, revenue and associated costs equal to the Company’s estimate of the amount of product that will be returned in a future period was deferred. A total of $23.4$0.9 million, and $8.1 million of revenue and product costs, respectively, related to shipments madenet investment in sales-type leases. For both the first quarter of 2017, were deferred from recognitionthree and six months ended June 30, 2019, the credit loss related to net investment in sales-type leases was not significant.
Available-for-sale debt securities. The Company's investment portfolio at any point in time contains investments in U.S. treasury and U.S. government agency securities, taxable and tax-exempt municipal notes, corporate notes and bonds, commercial paper, non-U.S. government agency securities, cash deposits, and money market funds. The Company segments its portfolio based on the Company’s first quarter Financial Statements. Subject to meeting all other criteriaunderlying risk profiles of the Company’s revenue recognition policy,securities and have a zero loss expectation for U.S. treasury and U.S. government agency securities. The Company regularly reviews the revenuesecurities in an unrealized loss position and product cost deferred will be recognized atevaluates the date the trade-out rights are exercisedcurrent expected credit loss by the customers or at the expiration of unexercised rights, which the Company anticipates to be substantially completed prior to the end of 2017.considering factors such as historical experience, market data, issuer-specific factors, and current economic conditions. During the three months ended SeptemberJune 30, 2017,2020, the Company recognized $21.3 million and $7.3 million of previously deferred revenue and product costs, respectively, as a result of those offers having expired unexercised. As of September 30, 2017, a total of $2.1 million and $0.8 million of revenue and product costs, respectively, remained deferred0 credit losses related to this program.available-for-sale debt securities. For the six months ended June 30, 2020, the Company recognized a credit loss of $1.2 million related to available-for-sales debt securities. For both the three and six June 30, 2019, there were 0 credit losses recognized related to available-for-sales debt securities.
The Company's exposure to credit losses may increase if its customers are adversely affected by changes in healthcare laws, coverage, and reimbursement, economic pressures or uncertainty associated with local or global economic recessions, disruption associated with the current COVID-19 pandemic, or other customer-specific factors. Although the Company has historically not experienced significant credit losses, it is possible that there could be a material adverse impact from potential adjustments of the carrying amount of lease and trade receivables as hospital's cash flows are impacted by their response to the COVID-19 pandemic and deferral of elective surgical procedures.
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NOTE 3. FINANCIAL INSTRUMENTS
Cash, Cash Equivalents, and Investments
The following tables summarize the Company’s cash and available-for-sale marketable securities’ amortized cost, gross unrealized gains, gross unrealized losses, and fair value by significant investment category reported as cash and cash equivalents, short-term investments, or long-term investments as of SeptemberJune 30, 2017,2020, and December 31, 20162019 (in millions):
Reported as:
Amortized
Cost		Gross
Unrealized
Gains		Gross
Unrealized
Losses		Allowance for Credit LossFair
Value		Cash and
Cash
Equivalents		Short-
term
Investments		Long-
term
Investments
June 30, 2020
Cash$562.6  $—  $—  $—  $562.6  $562.6  $—  $—  
Level 1:
Money market funds1,266.8  —  —  —  1,266.8  1,266.8  —  —  
U.S. treasuries1,997.4  35.0  —  —  2,032.4  122.5  1,023.1  886.8  
Subtotal3,264.2  35.0  —  —  3,299.2  1,389.3  1,023.1  886.8  
Level 2:
Commercial paper269.7  —  —  —  269.7  26.6  243.1  —  
Corporate debt securities1,436.2  18.0  (0.3) (1.3) 1,452.6  7.1  972.3  473.2  
U.S. government agencies410.7  3.6  —  —  414.3  50.0  202.4  161.9  
Non-U.S. government securities4.5  —  —  —  4.5  —  4.5  —  
Municipal securities69.8  2.1  —  —  71.9  —  7.3  64.6  
Subtotal2,190.9  23.7  (0.3) (1.3) 2,213.0  83.7  1,429.6  699.7  
Total assets measured at fair value$6,017.7  $58.7  $(0.3) $(1.3) $6,074.8  $2,035.6  $2,452.7  $1,586.5  
         Reported as:
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
Cash and
Cash
Equivalents
 
Short-
term
Investments
 
Long-
term
Investments
September 30, 2017             
Cash$252.4
 $—
 $—
 $252.4
 $252.4
 $—
 $—
Level 1:             
Money market funds590.5
 —
 —
 590.5
 590.5
 —
 —
U.S. treasuries448.7
 —
 (1.9) 446.8
 8.7
 182.8
 255.3
Subtotal1,039.2
 —
 (1.9) 1,037.3
 599.2
 182.8
 255.3
Level 2:             
Commercial paper80.5
 —
 —
 80.5
 6.0
 74.5
 —
Corporate debt securities1,262.9
 0.6
 (2.2) 1,261.3
 2.4
 533.0
 725.9
U.S. government agencies774.2
 0.1
 (2.5) 771.8
 8.0
 270.7
 493.1
Non-U.S. government securities8.5
 —
 —
 8.5
 6.0
 2.5
 —
Municipal securities390.4
 0.2
 (0.4) 390.2
 1.0
 208.3
 180.9
Subtotal2,516.5
 0.9
 (5.1) 2,512.3
 23.4
 1,089.0
 1,399.9
Total assets measured at fair value$3,808.1
 $0.9
 $(7.0) $3,802.0
 $875.0
 $1,271.8
 $1,655.2
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Reported as:
Amortized
Cost		Gross
Unrealized
Gains		Gross
Unrealized
Losses		Fair
Value		Cash and
Cash
Equivalents		Short-
term
Investments		Long-
term
Investments
December 31, 2019
Cash$413.1  $—  $—  $413.1  $413.1  $—  $—  
Level 1:
Money market funds726.8  —  —  726.8  726.8  —  —  
U.S. treasuries1,935.8  9.7  (0.4) 1,945.1  —  890.8  1,054.3  
Subtotal2,662.6  9.7  (0.4) 2,671.9  726.8  890.8  1,054.3  
Level 2:
Commercial paper165.1  —  —  165.1  25.5  139.6  —  
Corporate debt securities2,096.1  16.8  (0.2) 2,112.7  —  798.5  1,314.2  
U.S. government agencies418.3  1.1  (0.2) 419.2  —  209.6  209.6  
Non-U.S. government securities4.5  —  —  4.5  —  4.5  —  
Municipal securities58.4  0.3  —  58.7  2.2  11.1  45.4  
Subtotal2,742.4  18.2  (0.4) 2,760.2  27.7  1,163.3  1,569.2  
Total assets measured at fair value$5,818.1  $27.9  $(0.8) $5,845.2  $1,167.6  $2,054.1  $2,623.5  
         Reported as:
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
Cash and
Cash
Equivalents
 
Short-
term
Investments
 
Long-
term
Investments
December 31, 2016             
Cash$227.7
 $—
 $—
 $227.7
 $227.7
 $—
 $—
Level 1:             
Money market funds612.4
 —
 —
 612.4
 612.4
 —
 —
U.S. treasuries625.9
 0.1
 (2.0) 624.0
 157.9
 168.4
 297.7
Subtotal1,238.3
 0.1
 (2.0) 1,236.4
 770.3
 168.4
 297.7
Level 2:             
Commercial paper139.6
 —
 —
 139.6
 31.1
 108.5
 —
Corporate debt securities1,471.8
 0.7
 (5.0) 1,467.5
 2.9
 555.4
 909.2
U.S. government agencies938.7
 0.5
 (2.9) 936.3
 —
 342.7
 593.6
Non-U.S. government securities18.5
 —
 —
 18.5
 —
 16.0
 2.5
Municipal securities815.4
 —
 (3.5) 811.9
 4.6
 327.0
 480.3
Subtotal3,384.0
 1.2
 (11.4) 3,373.8
 38.6
 1,349.6
 1,985.6
Total assets measured at fair value$4,850.0
 $1.3
 $(13.4) $4,837.9
 $1,036.6
 $1,518.0
 $2,283.3
The following table summarizes the contractual maturities of the Company’s cash equivalents and available-for-sale investments (excluding cash and money market funds), as of SeptemberJune 30, 20172020 (in millions):
Amortized
Cost		Fair
Value
Mature in less than one year$2,645.5  $2,658.9  
Mature in one to five years1,542.8  1,586.5  
Total$4,188.3  $4,245.4  
 
Amortized
Cost
 
Fair
Value
Mature in less than one year$1,304.9
 $1,303.9
Mature in one to five years1,660.3
 1,655.2
Total$2,965.2
 $2,959.1
Actual maturities may differ from contractual maturities, because certain borrowers have the right to call or prepay certain obligations. RealizedGross realized gains recognized on the sale of investments were $6.9 million and $8.3 million for the three and six months ended June 30, 2020, respectively, and not material for the prior year comparative periods. Gross realized losses recognized on the sale of investments were not material for any of the periods presented. There were no transfers between Level 1 and Level 2 measurements during the nine months ended September 30, 2017, and there were no changes in the valuation techniques used by the Company.
Foreign Currency Derivatives
The objective of the Company’s hedging program is to mitigate the impact of changes in currency exchange rates on net cash flow from foreign currency denominatedcurrency-denominated sales, expenses, intercompany balances, and other monetary assets or liabilities denominated in currencies other than the U.S. dollar (“USD”). The terms of the Company’s derivative contracts are generally twelve months or shorter. The derivative assets and liabilities are measured using Level 2 fair value inputs.
Cash Flow Hedges
The Company enters into currency forward contracts as cash flow hedges to hedge certain forecasted revenue transactions denominated in currencies other than the USD, primarily the European Euro (“EUR”), the British Pound (“GBP”), the Japanese Yen (“JPY”), and the Korean Won (“KRW”). The Company also enters into currency forward contracts as cash flow hedges to hedge certain forecasted expense transactions denominated in EUR and the Swiss Franc (“CHF”).
For these derivatives, the Company reports the unrealized after-tax gain or loss from the hedge as a component of accumulated other comprehensive gain income/(loss) in stockholders’ equity and reclassifies itthe amount into earnings in the same period in which the hedged transaction affects earnings. The amounts reclassified to revenue and expenses related to the hedged transactions and the ineffective portions of cash flow hedges were not material for the periods presented.
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Other Derivatives Not Designated as Hedging Instruments
Other derivatives not designated as hedging instruments consist primarily of forward contracts that the Company uses to hedge intercompany balances and other monetary assets or liabilities denominated in currencies other than the USD, primarily the EUR, GBP, JPY, KRW, CHF, Indian Rupee ("INR"), Mexican Peso ("MXN"), Chinese Yuan ("CNY"), and CHF.New Taiwan Dollar ("TWD").
These derivative instruments are used to hedge against balance sheet foreign currency exposures. The netrelated gains (losses) recognized in interest and other income, net in the condensed consolidated statements of comprehensive income for the three and nine months ended September 30, 2017, and 2016,losses were not material.as follows (in millions):

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Three Months Ended June 30,Six Months Ended June 30,
2020201920202019
Recognized gains/(losses) in interest and other income, net$(1.7) $(0.2) $1.9  $1.5  
Foreign exchange gains/(losses) related to balance sheet re-measurement$1.7  $2.1  $(6.9) $0.3  
The notional amounts for derivative instruments provide one measure of the transaction volume. Total gross notional amounts (in USD) for outstanding derivatives and the aggregate gross fair value at the end of each period were as follows (in millions):
Derivatives Designated as Hedging InstrumentsDerivatives Not Designated as Hedging Instruments
June 30,
2020		December 31, 2019June 30,
2020		December 31, 2019
Notional amounts:
   Forward contracts$96.8  $154.5  $257.5  $227.2  
Gross fair value recorded in:
   Prepaids and other current assets$0.8  $1.3  $1.6  $2.2  
   Other accrued liabilities$0.3  $0.5  $0.4  $0.7  

 Derivatives Designated as Hedging Instruments Derivatives Not Designated as Hedging Instruments
 September 30,
2017		 December 31,
2016		 September 30,
2017		 December 31,
2016
Notional amounts:       
     Forward contracts$130.0
 $109.7
 $122.5
 $143.7
Gross fair value recorded in:       
     Prepaids and other current assets$1.6
 $6.2
 $1.7
 $5.6
     Other accrued liabilities$4.1
 $1.0
 $2.5
 $0.6
NOTE 4. BALANCE SHEET DETAILS AND OTHER FINANCIAL INFORMATION
InventoryBalance Sheet Details
The following table provides furthertables provide details of inventoryselected balance sheet line items (in millions):
As of
InventoryJune 30,
2020		December 31,
2019
Raw materials$212.8  $211.0  
Work-in-process67.2  75.9  
Finished goods365.5  308.6  
Total inventory$645.5  $595.5  

As of
Other accrued liabilities–short-termJune 30,
2020		December 31,
2019
Taxes payable$37.7  $37.9  
Litigation-related accruals2.8  5.8  
Current portion of deferred purchase consideration payments41.8  35.7  
Current portion of contingent consideration33.6  44.5  
Other accrued liabilities188.2  193.4  
Total other accrued liabilities–short-term$304.1  $317.3  

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 As of
 September 30,
2017		 December 31,
2016
Raw materials$67.7
 $54.8
Work-in-process18.5
 13.4
Finished goods139.0
 114.1
Total inventory$225.2
 $182.3
As of
Other long-term liabilitiesJune 30,
2020		December 31,
2019
Income taxes–long-term$280.5  $258.6  
Deferred revenue–long-term28.4  27.4  
Other long-term liabilities103.5  132.3  
Total other long-term liabilities$412.4  $418.3  
Supplemental Cash Flow Information
The following table provides supplemental non-cash investing and financing activities (in millions):
Six Months Ended June 30,
20202019
Equipment transfers, including operating lease assets, from inventory to property, plant, and equipment$79.0  $89.0  
Deferred payments and contingent consideration related to business combinations$4.1  $64.7  
 Nine Months Ended September 30,
 2017 2016
Equipment transfers, including operating lease assets, from inventory to property, plant and equipment$45.1
 $31.1

NOTE 5. LEASE RECEIVABLESREVENUE AND CONTRACT ACQUISITION COSTS
The following table presents revenue disaggregated by types and geography (in millions):
Three Months Ended June 30,Six Months Ended June 30,
U.S.2020201920202019
Instruments and accessories$315.6  $428.6  $760.0  $836.0  
Systems139.3  232.6  338.1  393.3  
Services80.6  124.1  219.0  247.6  
Total U.S. revenue$535.5  $785.3  $1,317.1  $1,476.9  
Outside of U.S. (“OUS”)
Instruments and accessories$145.2  $149.9  $318.3  $294.8  
Systems121.7  111.2  206.2  198.0  
Services49.7  52.5  110.0  102.9  
Total OUS revenue$316.6  $313.6  $634.5  $595.7  
Total
Instruments and accessories$460.8  $578.5  $1,078.3  $1,130.8  
Systems261.0  343.8  544.3  591.3  
Services130.3  176.6  329.0  350.5  
Total revenue$852.1  $1,098.9  $1,951.6  $2,072.6  
Remaining Performance Obligations
The transaction price allocated to remaining performance obligations relates to amounts allocated to products and services for which revenue has not yet been recognized. A significant portion of this amount relates to performance obligations in the Company’s service contracts that will be satisfied and recognized as revenue in future periods. In addition, non-lease elements associated with the Company's lease arrangements are primarily comprised of service contracts that will be satisfied and recognized as revenue in future periods. The transaction price allocated to the remaining performance obligations and the non-lease elements associated with lease arrangements was $1,474 million as of June 30, 2020. The remaining performance obligations are expected to be satisfied over the term of the individual sales arrangements, which generally are 5 years. Service revenue associated with the lease arrangements will generally be recognized over the service period, which generally coincides with the lease term.
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Contract Assets and Liabilities
The following information summarizes the Company’s contract assets and liabilities (in millions):
As of
 June 30, 2020December 31, 2019
Contract assets$28.9  $20.8  
Deferred revenue$371.5  $365.2  
The Company invoices its customers based on the billing schedules in its sales arrangements. Payments are generally due 30 days from date of invoice. Contract assets for the periods presented primarily represent the difference between the revenue that was recognized based on the relative standalone selling price of the related performance obligations satisfied and the contractual billing terms in the arrangements. Deferred revenue for the periods presented primarily relates to service contracts where the service fees are billed up-front, generally quarterly or annually, prior to those services having been performed. The associated deferred revenue is generally recognized over the term of the service period. The Company did not have any significant impairment losses on its contract assets for the periods presented.
During the three and six months ended June 30, 2020, the Company recognized $54.6 million and $191.6 million, respectively, of revenue, net of the impact of the Customer Relief Program, that was included in the deferred revenue balance as of December 31, 2019. During the three and six months ended June 30, 2019, the Company recognized $91.5 million and $223.7 million, respectively, of revenue that was included in the deferred revenue balance as of December 31, 2018.
Intuitive System Leasing
The following table presents revenue from Intuitive System Leasing arrangements (in millions):
Three Months Ended June 30,Six Months Ended June 30,
2020201920202019
Sales-type lease revenue$16.8  $15.3  $71.8  $19.9  
Operating lease revenue$42.2  $25.1  $81.3  $45.5  
Assets Recognized from the Costs to Obtain a Contract with a Customer
The Company has determined that certain sales incentives provided to the Company’s sales team are required to be capitalized when the Company expects to generate future economic benefits from the related revenue-generating contracts subsequent to the initial capital sales transaction. When determining the economic life of the contract acquisition assets recognized, the Company considers historical service renewal rates, expectations of future customer renewals of service contracts, and other factors that could impact the economic benefits that the Company expects to generate from the relationship with its customers. The costs capitalized as contract acquisition costs included in intangible and other assets, net in the Condensed Consolidated Balance Sheets were $47.9 million and $51.5 million as of June 30, 2020, and December 31, 2019, respectively. The Company did not incur any impairment losses during the periods presented.
NOTE 6. LEASES
Lessor Information
Sales-type Leases. Lease receivables relating to sales-type lease arrangements are presented on the Condensed Consolidated Balance Sheets as follows (in millions):
As of
June 30, 2020December 31, 2019
Gross lease receivables$232.9  $191.9  
Unearned income(10.3) (10.1) 
Allowance for credit loss(2.1) (1.2) 
Net investment in sales-type leases$220.5  $180.6  
Reported as:
   Prepaids and other current assets$71.8  $63.1  
   Intangible and other assets, net148.7  117.5  
   Total, net$220.5  $180.6  
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 As of
 September 30,
2017		 December 31,
2016
Gross lease receivable$113.0
 $104.3
Unearned income(4.7) (4.8)
Allowance for credit loss(0.8) (0.6)
Net investment in sales-type leases107.5
 98.9
Reported as:   
   Prepaids and other current assets35.0
 29.8
   Intangible and other assets, net72.5
 69.1
   Total, net$107.5
 $98.9

Contractual maturities of gross lease receivables at SeptemberJune 30, 2017,2020, are as follows (in millions):

Fiscal YearAmount
Remainder of 2020$41.9  
202167.0  
202251.2  
202336.4  
202429.2  
2025 and thereafter7.2  
Total$232.9  

NOTE 7. GOODWILL AND INTANGIBLE ASSETS
Acquisitions in 2020
Orpheus Medical
In February 2020, the Company acquired Orpheus Medical Ltd. and its wholly-owned subsidiaries (“Orpheus Medical”) to deepen and expand our integrated informatics platform (the “Orpheus Medical Acquisition”). Orpheus Medical provides hospitals with information technology connectivity, as well as expertise in processing and archiving surgical videos.
Acquisitions in 2019
Chindex
During the first quarter of 2019, the Company’s majority-owned Joint Venture with Fosun Pharma acquired certain assets from Chindex and its affiliates, a subsidiary of Fosun Pharma, including distribution rights, customer relationships, and certain personnel on January 5, 2019, which collectively met the definition of a business. Chindex was the Company’s distributor of da Vinci products and services in China. The transaction enhances the Company’s ability to serve patients, surgeons, and hospitals in China.
The total purchase consideration of $66.0 million, as of the acquisition date, included a contingent consideration liability of $64.7 million and an upfront cash payment of $1.3 million. The amount and timing of the future contingent consideration payments are based upon the underlying performance of the business in 2019 and 2020. As of the acquisition date, the estimated total undiscounted contingent consideration was approximately $81 million. The undiscounted contingent consideration has decreased by approximately $6 million as of June 30, 2020, due to a change in the timing of the projected future revenues. The contingent consideration liability is measured at estimated fair value using a discounted cash flow model, which requires significant inputs not observable in the market and, thus, represents a Level 3 measurement. Key assumptions include (1) the probability and timing of milestone achievements based on revenues in 2019 and projected future revenues in 2020, and (2) the discount rate used to calculate the present value of the milestone payments. On each reporting period until the contingent consideration is settled, the Company will re-measure the contingent consideration liability and record changes in fair value within selling, general and administrative expenses. For the six months ended June 30, 2020, the contingent consideration liability changed due to payments of $27.3 million and net additional expense of $3.0 million. For the six months ended June 30, 2019, the contingent consideration liability changed due to payments of $2.0 million and net additional expense of $7.1 million. Changes to the contingent consideration liability can result from adjustments to discount rates, accretion due to the passage of time, or changes in estimates in the performance of the business. The assumptions related to determining the fair value of contingent consideration include a significant amount of judgment, and any changes in the underlying estimates could have a material impact on the amount of contingent consideration adjustment recorded in any given period.
Schölly
During the third quarter of 2019, the Company acquired certain assets and operations from Schölly Fiberoptic GmbH (“Schölly”), including manufacturing process technology, a non-compete agreement, certain personnel, and net tangible assets on August 31, 2019, which collectively met the definition of a business. The Company believes that the transaction strengthens the Company’s supply chain and manufacturing capacity for imaging products used in the Company's da Vinci systems. The total purchase consideration of $101.4 million consisted of an initial cash payment of $34.4 million and deferred cash payments totaling approximately $67.0 million, of which $37.7 million continues to be deferred as of June 30, 2020. The timing of future payments is based upon achieving certain integration steps, which occur during 2020 and are expected to be completed around the end of 2020.
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The Company preliminarily recorded $10.7 million of net tangible assets, which included $6.7 million of inventory and $1.4 million of cash, $31.0 million of intangible assets, and $59.7 million of residual goodwill. Intangible assets included manufacturing process technology of $28.0 million and non-compete provisions of $3.0 million, which are being amortized over a weighted average period of 6.6 years. The allocation of purchase consideration is considered preliminary with provisional amounts primarily related to working capital. Goodwill primarily consists of the manufacturing and other synergies of the combined operations and the value of the assembled workforce. The majority of goodwill is not deductible for income tax purposes.
The Company has included the results of the acquired businesses, since their acquisition dates, in its Financial Statements, and the revenues and earnings have not been material to date. Pro forma results of operations related to the acquisitions have not been presented, because the operating results of the acquired businesses are not considered material to the Financial Statements.
Goodwill
The following table summarizes the changes in the carrying amount of goodwill (in millions):
Amount
Balance at December 31, 2019$307.2 
Acquisition activity29.3 
Translation and other0.3 
Balance at June 30, 2020$336.8 

Intangible Assets
The following table summarizes the components of gross intangible assets, accumulated amortization, and net intangible asset balances as of June 30, 2020 and December 31, 2019 (in millions):
June 30, 2020December 31, 2019
Gross Carrying AmountAccumulated AmortizationNet Carrying AmountGross Carrying AmountAccumulated AmortizationNet Carrying Amount
Patents and developed technology$198.4  $(153.7) $44.7  $186.7  $(149.0) $37.7  
Distribution rights and others91.9  (61.4) 30.5  91.3  (44.9) 46.4  
Customer relationships59.0  (33.2) 25.8  57.7  (29.7) 28.0  
Total intangible assets$349.3  $(248.3) $101.0  $335.7  $(223.6) $112.1  
Amortization expense related to intangible assets was $12.4 million and $10.6 million for the three months ended June 30, 2020, and 2019, respectively. Amortization expense related to intangible assets was $24.7 million and $20.5 million for the six months ended June 30, 2020, and 2019, respectively.
The estimated future amortization expense related to intangible assets as of June 30, 2020, is as follows (in millions):
Fiscal YearAmount
Remainder of 2020$24.3  
202121.3  
202218.1  
202313.4  
202411.4  
2025 and thereafter12.5  
Total$101.0  
The preceding expected amortization expense is an estimate. Actual amounts of amortization expense may differ from estimated amounts due to additional intangible asset acquisitions, measurement-period adjustments to intangible assets, changes in foreign currency exchange rates, impairments of intangible assets, accelerated amortization of intangible assets, and other events.
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 Amount
2017$9.3
201838.0
201929.8
202019.5
202111.2
2022 and thereafter5.2
Total$113.0
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NOTE 6.8. CONTINGENCIES
TheFrom time to time, the Company is involved in a variety of claims, lawsuits, investigations, and proceedings relating to securities laws, product liability, intellectual property, insurance, contract disputes, employment, and other matters. Certain of these lawsuits and claims are described in further detail below. It is not possible to predict what the outcome of these matters will be, and the Company cannot guarantee that any resolution will be reached on commercially reasonable terms, if at all.
A liability and related charge to earnings are recorded in the Company’s Financial Statements for legal contingencies when the loss is considered probable and the amount can be reasonably estimated. The assessment is reevaluatedre-evaluated each accounting period and is based on all available information, including the impact of negotiations, settlements, rulings, advice of legal counsel, and other information and events pertaining to each case. Nevertheless, it is possible that additional future legal costs (including settlements, judgments, legal fees, and other related defense costs) could have a material adverse effect on the Company’s business, financial position, or future results of operations.
Purported Shareholder Class Action Lawsuits filed April 26, 2013, and May 24, 2013
On April 26, 2013, a purported class action lawsuit entitled Abrams v. Intuitive Surgical, et al., No. 5-13-cv-1920, was filed against a number of the Company’s current and former officers and directors in the United States District Court for the Northern District of California. A substantially identical complaint, entitled Adel v. Intuitive Surgical, et al., No. 5:13-cv-02365, was filed in the same court against the same defendants on May 24, 2013. The Adel case was voluntarily dismissed without prejudice on August 20, 2013.
On October 15, 2013, plaintiffs in the Abrams matter filed an amended complaint. The case has since been retitled In re Intuitive Surgical Securities Litigation, No. 5:13-cv-1920. The plaintiffs seek unspecified damages on behalf of a putative class of persons who purchased or otherwise acquired the Company’s common stock between February 6, 2012, and July 18, 2013. The amended complaint alleges that the defendants violated federal securities laws by allegedly making false and misleading statements and omitting certain material facts in certain public statements and in the Company’s filings with the SEC. On November 18, 2013, the court appointed the Employees’ Retirement System of the State of Hawaii as lead plaintiff and appointed lead counsel. The Company filed a motion to dismiss the amended complaint on December 16, 2013, which was granted in part and denied in part on August 21, 2014. The plaintiffs elected not to further amend their complaint at that time. On October 22, 2014, the court granted the Company’s motion for leave to file a motion for reconsideration of the court’s August 21, 2014, order. The Company filed its motion for reconsideration on November 5, 2014. Following opposition and reply briefing, the court denied the motion on December 15, 2014, allowing the case to move forward on the claims that remained. The plaintiffs moved for class certification on September 1, 2015, and following opposition and reply briefing, the court held a hearing on the motion on January 21, 2016. While that motion remained pending, on October 11, 2016, the Company sent plaintiffs’ lead counsel, Labaton Sucharow LLP, a letter enclosing a draft motion for sanctions pursuant to Federal Rule of Civil Procedure 11, primarily based on statements to the court that lacked a proper factual basis. In response, on November 1, 2016, plaintiffs’ local counsel withdrew from the case entirely and withdrew their signatures from the disputed pleadings. On November 2, 2016, Labaton Sucharow LLP filed a motion for leave to file an amended complaint that did not include the disputed statements. On November 16, 2016, the Company filed an opposition to plaintiffs’ motion, along with an independent motion to strike the amended complaint and the pleadings from which plaintiffs’ local counsel withdrew their signatures. Following additional briefing, the motion for leave to amend and motion to strike were fully submitted to the court on November 23, 2016, and December 7, 2016, respectively. On December 22, 2016, the court entered an order granting plaintiffs’ motion for class certification. On January 5, 2017, the Company filed a Petition for Permission to Appeal from the order granting class certification in the U.S. Court of Appeals for the Ninth Circuit. The court of appeals has not yet ruled on the Company’s petition. On January 12, 2017, plaintiffs sought leave to file a motion for partial reconsideration of the court’s class certification order, which the court granted on March 17, 2017. Plaintiffs filed the motion for reconsideration itself on April 3, 2017, and the Company filed its opposition on April 17, 2017. The court denied the motion on September 29, 2017. On January 25, 2017, the court entered an order granting plaintiffs’ motion for leave to amend the complaint and denying the Company’s motion to strike. On February 9, 2017, the Company moved to dismiss the amended complaint. Following opposition and reply briefing, the matter was fully submitted to the court on March 2, 2017. The court denied the motion on September 29,

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2017. On July 13, 2017, the parties filed a stipulation vacating the case schedule, which the court entered on July 14, 2017. On October 11, 2017, the court scheduled a trial setting conference for November 16, 2017. Based on currently available information, the Company does not believe the resolution of this matter will have a material adverse effect on the Company’s business, financial position, or future results of operations.
Purported Derivative Actions filed on February 3, 2014, February 21, 2014, March 21, 2014, June 3, 2014, and March 5, 2015
On February 3, 2014, an alleged stockholder, Robert Berg, caused a purported stockholder’s derivative lawsuit entitled Berg v. Guthart et al., No. 4:14-CV-00515,to be filed in the United States District Court for the Northern District of California. The lawsuit names the Company as a nominal defendant and names a number of the Company’s current and former officers and directors as defendants.  The plaintiff seeks to recover, on the Company’s behalf, unspecified damages purportedly sustained by the Company in connection with allegedly misleading statements and/or omissions made in connection with the Company’s financial reporting for the period between 2012 and early 2014. The plaintiff also seeks a series of changes to the Company’s corporate governance policies and an award of attorneys’ fees.  On April 3, 2014, the case was related to In re Intuitive Surgical Securities Litigation. On July 30, 2014, the court granted Berg’s motion to be appointed lead plaintiff, denied the City of Birmingham’s motion seeking such appointment (see below for additional description), and retitled the matter In re Intuitive Surgical, Inc. Shareholder Derivative Litigation, No. 4:14-CV-00515. On August 13, 2014, the plaintiffs filed a consolidated complaint, making allegations substantially similar to the allegations in the original complaint. On September 12, 2014, the Company filed a motion to dismiss the consolidated complaint. The plaintiffs filed an opposition on October 9, 2014, and the Company filed its reply on October 30, 2014. The court denied the Company’s motion to dismiss on November 16, 2015. On January 26, 2016, the Company moved to stay this lawsuit in favor of Public School Teachers’ Pension and Retirement Fund of Chicago v. Guthart et al. (see below for additional description). Plaintiff opposed the motion to stay on February 16, 2016, the Company filed its reply on March 1, 2016, and a hearing was set for June 16, 2016. While the motion was pending, however, the Company and the plaintiff agreed in principle that the plaintiff would file a motion to intervene in the Public School Teachers’ Pension and Retirement Fund of Chicago action and withdraw his opposition to the motion to stay. On March 17, 2016, the parties jointly requested that the court not rule on the motion to stay while the agreement was being implemented. Following additional negotiations, the plaintiff filed an unopposed motion to intervene on April 29, 2016. After additional briefing, on May 23, 2016, the court in the Public School Teachers’Pension and Retirement Fund of Chicago action granted the motion. Accordingly, on May 31, 2016, the parties filed a stipulation requesting that the court stay In re Intuitive Surgical, Inc. Shareholder Derivative Litigation. The court granted the stay on June 2, 2016. Additional discussions between the parties ensued, and on September 15, 2016, they executed a confidential Memorandum of Understanding that contained the essential terms of a settlement to which the parties agreed in principle. That settlement, as later finalized, provides for a dismissal with prejudice and release of all claims brought in both the In re Intuitive Surgical, Inc. Shareholder Derivative Litigation action and the Public School Teachers’ Pension and Retirement Fund of Chicago action, as well as City of Plantation Police Officers’ Employees’ Retirement System v. Guthart et al. (see below for additional description). The settlement, which also includes terms that require the Company to reimburse the plaintiffs’ lawyers’ legal fees, is subject to court approval as described below. In the interim, the In re Intuitive Surgical, Inc. Shareholder Derivative Litigation action remains stayed. Based on currently available information, the Company does not believe the resolution of this matter will have a material adverse effect on the Company’s business, financial position, or future results of operations.
On February 21, 2014, a second alleged stockholder caused a substantially similar purported stockholder’s derivative lawsuit entitled Public School Teachers’ Pension and Retirement Fund of Chicago v. Guthart et al., No. CIV 526930, to be filed in the Superior Court of the State of California, County of San Mateo, against the same parties and seeking the same relief.  On March 26, 2014, the case was removed to the United States District Court for the Northern District of California, where it was related to In re Intuitive Surgical Securities Litigation and Berg v. Guthart on April 30, 2014. The district court remanded the case back to San Mateo County Superior Court on June 30, 2014. On August 28, 2014, the Company filed a motion seeking to stay the case in favor of the federal action and asking that the plaintiff be required to post a bond on the grounds that the action was duplicative and was not in the Company’s best interests. On November 13, 2014, the superior court entered an order denying in part the Company’s motion to stay and denying the Company’s request for plaintiff’s bond. On November 18, 2014, the Company petitioned the First Appellate District of the California, Court of Appeal for a writ of mandate directing the superior court to stay the case in its entirety. At the same time, the Company requested an immediate stay of proceedings pending resolution of the petition. On November 19, 2014, the court of appeal granted the Company’s request for an immediate stay of the proceedings and set a briefing schedule for the petition. The plaintiff filed its opposition to the petition on December 8, 2014, and the Company filed its reply on December 22, 2014. The petition was denied on January 8, 2015. On January 20, 2015, the Company filed a demurrer (moved to dismiss the complaint). The plaintiff filed its opposition to the demurrer on February 10, 2015, and the Company filed its reply on February 20, 2015. A hearing was held on February 27, 2015, and the court overruled the demurrer on March 27, 2015. The court’s order was entered on April 2, 2015. On June 19, 2015, the Company moved for summary judgment, and a hearing on the Company’s motion was set for September 4, 2015. On July 6, 2015, the court amended the case schedule, and the Company withdrew its motion for summary judgment. The court later further amended the case schedule, and trial was eventually reset for

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September 16, 2016. On May 23, 2016, the court granted an unopposed motion to intervene filed by the plaintiffs in In re Intuitive Surgical, Inc. Shareholder Derivative Litigation and City of Birmingham Relief and Retirement System v. Guthart et al. (see above and below for additional description). The Company filed a new motion for summary judgment on June 1, 2016, and the plaintiff filed a motion for summary adjudication regarding certain affirmative defenses on June 2, 2016. Following opposition and reply briefing, the court heard argument on the motions for summary judgment and summary adjudication on August 24, 2016. While the motions were pending, on September 15, 2016, the parties executed the confidential Memorandum of Understanding described above, which contained the essential terms of a settlement to which the parties agreed in principle. The parties notified the court of the Memorandum of Understanding on September 15, 2016, and on September 16, 2016, the court entered an order vacating the trial date and ruling that the motions for summary judgment and summary adjudication (along with other pre-trial motions) were moot. The parties finalized the settlement over the ensuing months, appearing before the court periodically to keep it apprised of their progress. The final settlement provides for a dismissal with prejudice and release of all claims brought in the Public School Teachers’ Pension and Retirement Fund of Chicago action, as well as the In re Intuitive Surgical, Inc. Shareholder Derivative Litigation action and the City of Plantation Police Officers’ Employees’ Retirement System action and the other similar derivative cases (see above and below, respectively, for additional description). The settlement also includes terms that require the Company to reimburse the plaintiffs’ lawyers’ legal fees. On July 7, 2017, the plaintiff filed a motion for preliminary approval of the settlement, and on July 18, 2017, the Company filed a statement of non-opposition. On August 9, 2017, the court entered an order preliminarily approving settlement, providing for notice to the Company’s shareholders, and setting a final settlement hearing. On October 20, 2017, the final settlement was approved by the court. During the three and nine months ended September 30, 2017, the Company recorded $8.7 million and $11.7 million, respectively, of pre-tax charges to reflect the estimated cost of settling this matter. As of September 30, 2017, a total of $16.7 million was included in other accrued liabilities in the accompanying Consolidated Balance Sheets related to this settlement.
On March 21, 2014, a third alleged stockholder caused a substantially similar purported stockholder’s derivative lawsuit entitled City of Birmingham Relief and Retirement System v. Guthart et al., No. 5-14-CV-01307, to be filed in the United States District Court for the Northern District of California against the same parties and seeking the same relief. On April 8, 2014, the lawsuit was related to In re Intuitive Surgical Securities Litigation and Berg v. Guthart. On July 30, 2014, the court consolidated the case with Berg v. Guthart and, as noted above, granted Berg’s motion to be appointed lead plaintiff and denied the City of Birmingham’s motion seeking such appointment. Accordingly, the City of Birmingham Relief and Retirement System action will be resolved by the pending settlement of the In re Intuitive Surgical, Inc. Shareholder Derivative Litigation action (see above for additional description). Based on currently available information, the Company does not believe the resolution of this matter will have a material adverse effect on the Company’s business, financial position, or future results of operations.
On June 3, 2014, a fourth alleged stockholder caused a substantially similar purported stockholder’s derivative lawsuit entitled City of Plantation Police Officers’ Employees’ Retirement System v. Guthart et al., C.A. No. 9726-CB, to be filed in the Court of Chancery of the State of Delaware. The Company filed a motion to stay proceedings in favor of the earlier-filed stockholder derivative lawsuits pending in federal and state courts in California. In light of the Company’s motion, the plaintiff agreed to a stay of all proceedings in the case in favor of the earlier-filed actions. While the case was stayed, the parties agreed that the plaintiff would file a motion to intervene in the Public School Teachers’ Pension and Retirement Fund of Chicago action (see above for additional description). The plaintiff filed an unopposed motion to intervene on April 29, 2016. After additional briefing, on May 23, 2016, the court in the Public School Teachers’ Pension and Retirement Fund of Chicago action granted the plaintiff’s motion. However, on June 21, 2016, in response to discovery requests, the plaintiff admitted that it did not continuously hold the Company’s stock during all relevant times. Accordingly, on July 21, 2016, the plaintiff filed a request for dismissal as an additional plaintiff in the Public School Teachers’ Pension and Retirement Fund of Chicago action, which the court in that action granted with prejudice on July 22, 2016. On September 15, 2016, the parties executed the confidential Memorandum of Understanding described above, which contained the essential terms of a settlement to which the parties agreed in principle. That settlement, as later finalized, provides for a dismissal with prejudice and release of all claims brought in the City of Plantation Police Officers’ Employees’ Retirement System action, as well as both the In re Intuitive Surgical, Inc. Shareholder Derivative Litigation action and the Public School Teachers’ Pension and Retirement Fund of Chicago action (see above for additional description). The settlement, which also includes terms that require the Company to reimburse the plaintiffs’ lawyers’ legal fees, is subject to court approval as described above. In the interim, the City of Plantation Police Officers’ Employees’ Retirement System action remains stayed. Based on currently available information, the Company does not believe the resolution of this matter will have a material adverse effect on the Company’s business, financial position, or future results of operations.
On March 5, 2015, a fifth alleged stockholder caused a substantially similar purported stockholder’s derivative lawsuit entitled Back v. Guthart et al., No. 3:15-CV-01037, to be filed in the United States District Court for the Northern District of California. On April 7, 2015, the lawsuit was related to In re Intuitive Surgical Securities Litigation and Berg v. Guthart. The Company filed a motion to dismiss the complaint on July 10, 2015. On August 13, 2015, the parties stipulated to a complete stay of the matter and the court entered an order reflecting the stay on August 17, 2015. On September 11, 2017, the plaintiff filed a motion to lift the stay and reopen the case and for leave to file amended complaint. On September 25, 2017, the individual defendants filed an opposition to plaintiffs’ motion, which the Company joined on September 26, 2017. Plaintiff filed his reply October 2, 2017, and

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the Court has set a hearing for January 25, 2018. The Company believes the settlement of the cases described above will make this motion and the action itself moot and will move for dismissal on that basis. Based on currently available information, the Company does not believe the resolution of this matter will have a material adverse effect on the Company’s business, financial position, or future results of operations.
Product Liability Litigation
The Company is currently named as a defendant in approximately 45a number of individual product liability lawsuits filed in various state and federal courts bycourts. The plaintiffs whogenerally allege that they or a family member underwent surgical procedures that utilized the da Vinci Surgical System and sustained a variety of personal injuries and, in some cases, death as a result of such surgery. The Company has also received a large number of product liability claims from plaintiffs’ attorneys, many of which are subject to certain tolling agreements further discussed below. The Company has also been named as a defendant in a multi-plaintiff lawsuit filed in Missouri state court. In total, plaintiffs in that case seek damages on behalf of 55 patients from 22 different states who had surgeries in which their surgeons used the da Vinci Surgical System. Several of the filed cases have trial dates in the next 12 months.
The cases raise a variety of allegations including, to varying degrees, that plaintiffs’ injuries resulted from purported defects in the da Vinci Surgical System and/or failure on the Company’s part to provide adequate training resources to the healthcare professionals who performed plaintiffs’ surgeries. The cases further allege that the Company failed to adequately disclose and/or misrepresented the potential risks and/or benefits of the da Vinci Surgical System. Plaintiffs also assert a variety of causes of action, including, for example, strict liability based on purported design defects, negligence, fraud, breach of express and implied warranties, unjust enrichment, and loss of consortium. Plaintiffs seek recovery for alleged personal injuries and, in many cases, punitive damages.
Plaintiffs’ attorneys have also engaged in well-funded national advertising efforts seeking patients dissatisfied with surgery utilizing the da Vinci Surgical System. The Company has received a significant number of such claims from plaintiffs’ attorneys that it believes are a result ofdisputes these advertising efforts. A substantial number of claims relate to alleged complications from surgeries performed with certain versions of Monopolar Curved Scissor (“MCS”) instruments which included an MCS tip cover accessory that was the subject of a market withdrawal in 2012allegations and MCS instruments that were the subject of a recall in 2013. In an effort to avoid the expense and distraction ofis defending multiple lawsuits, the Company entered into tolling agreements to pause the applicable statutes of limitations for many ofagainst these claims and engaged in confidential mediation efforts.
After an extended confidential mediation process with legal counsel for many of the claimants covered by the tolling agreements, the Company determined during 2014 that, while it denies any and all liability, in light of the costs and risks of litigation, settlement of certain claims was appropriate. During the three months ended September 30, 2017, and 2016, no significant charges were recorded related to these claims. During the nine months ended September 30, 2017, and 2016, the Company recorded $15.6 million and $6.3 million, respectively, of pre-tax charges to reflect the estimated cost of settling a number of the product liability claims covered by the tolling agreements. The Company has reached confidential settlements in many of the cases that were in the confidential mediation process and earlier filed cases.
The Company’s estimate of the anticipated cost of resolving these claimsthe pending cases is based on negotiations with attorneys for claimants who have participated in the mediation process. Nonetheless, it is possible that more claims will be made by additional individuals and that the claimants whose claims were not resolved through the mediation program, as well as those claimants who have not participated in mediations, will choose to pursue greater amounts in a court of law. Consequently, theclaimants. The final outcome of thesethe pending lawsuits and claims, and others that might arise, is dependent on many variables that are difficult to predict, and the ultimate cost associated with these product liability lawsuits and claims may be materially different than the amount of the current estimate and accruals and could have a material adverse effect on the Company’s business, financial position, and future results of operations. Although there is a reasonable possibility that a loss in excess of the amount recognized exists, the Company is unable to estimate the possible loss or range of loss in excess of the amount recognized at this time. As of September 30, 2017, and December 31, 2016, a total of $18.4 million and $20.5 million, respectively, were included in other accrued liabilities in the accompanying Consolidated Balance Sheets related to the tolled product liability claims.
In February 2011, the Company was named as a defendant in a product liability action that had originally been filed in Washington State Superior Court for Kitsap County against the healthcare providers and hospital involved in a decedent’s surgery on such decedent’s behalf (Josette Taylor, as Personal Representative of the Estate of Fred E. Taylor, deceased; and on behalf of the Estate of Fred E. Taylor v. Intuitive Surgical, Inc., No. 09-2-03136-5). In Taylor, plaintiff asserted wrongful death and product liability claims against the Company, generally alleging that the decedent died four years after surgery as a result of injuries purportedly suffered during the surgery, which was conducted with the use of the da Vinci Surgical System. The plaintiff in Taylor asserted that such injuries were caused, in whole or in part, by the Company’s purported failure to properly train, warn, and instruct the surgeon. The lawsuit sought unspecified damages for past medical expenses, pain and suffering, loss of consortium as well as punitive damages. A trial commenced on April 15, 2013. On May 23, 2013, the jury returned a defense verdict, finding that the Company was not negligent. Judgment was entered in the Company’s favor on June 7, 2013. Subsequent to the verdict, the plaintiff filed a notice of appeal. That appeal was denied on July 7, 2015. On July 27, 2015, plaintiff filed a motion for reconsideration

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with the court of appeal; the court of appeal denied the motion for reconsideration on August 10, 2015. On September 9, 2015, plaintiff filed a Petition for Review with the Washington State Supreme Court (“Washington Supreme Court”). On February 10, 2016, the Washington Supreme Court issued an order granting the plaintiff’s Petition for Review. Oral argument on the appeal before the Washington Supreme Court was heard on June 7, 2016. On February 9, 2017, the Washington Supreme Court vacated the defense verdict and remanded the case for retrial, which is currently scheduled to begin on February 12, 2018. Based on currently available information, the Company does not believe the resolution of this matter will have a material adverse effect on the Company’s business, financial position, or future results of operations.
Patent Litigation
On June 30, 2017, Ethicon LLC.,LLC, Ethicon Endo-Surgery, Inc., and Ethicon US LLC (collectively, “Ethicon”) filed a complaint for patent infringement against the Company in the United StatesU.S. District Court for the District of Delaware. The complaint, which was served on the Company on July 12, 2017, alleges that the Company’s EndoWristStapler instruments infringe several of Ethicon’s patents. Ethicon asserts infringement of U.S. Patent Nos. 9,585,658, 8,479,969, 9,113,874, 8,998,058, 8,991,677, 9,084,601, and 8,616,431. A claim construction hearing occurred on October 1, 2018, and the court issued a scheduling order on December 28, 2018. On March 20, 2019, the court granted the Company’s Motion to Stay pending an Inter Partes Review to be held at the Patent Trademark and Appeals Board to review patentability of six of the seven patents noted above and vacated the trial date. On August 1, 2019, the court granted the parties' joint stipulation to modify the stay in light of Ethicon's U.S. International Trade Commission (“USITC”) complaint against Intuitive involving U.S. Patent Nos. 8,479,969 and 9,113,874, discussed below.
On August 27, 2018, Ethicon filed a second complaint for patent infringement against the Company in the U.S. District Court for the District of Delaware. The complaint alleges that the Company’s SureForm 60 Staplers infringe five of Ethicon’s patents. Ethicon asserts infringement of U.S. Patent Nos. 9,884,369, 7,490,749, 8,602,288, 8,602,287, and 9,326,770. The Company filed an answer denying all claims. On March 19, 2019, Ethicon filed a Motion for Leave to File a First Amended Complaint, removing allegations related to U.S. Patent No. 9,326,770 and adding allegations related to U.S. Patent Nos. 9,844,379 and 8,479,969. On July 17, 2019, the court entered an order denying the amendment, without prejudice, and granting the parties’ joint stipulation to stay the case in its entirety in light of the USITC investigation involving U.S. Patent Nos. 9,844,369 and 7,490,749, discussed below.
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On May 30, 2019, Ethicon filed a complaint with the USITC, asserting infringement of U.S. Patent Nos. 9,884,369, 7,490,749, 9,844,379, 9,113,874, and 8,479,969. On June 28, 2019, the USITC voted to institute an investigation (No. 337-TA-1167) with respect to the claims in this complaint. The accused products include the Company's EndoWrist 30, EndoWrist 45, SureForm 45, and SureForm 60 Staplers, as well as the stapler reload cartridges. In March 2020, Ethicon dismissed its claims concerning U.S. Patent No. 7,490,749. The evidentiary hearing, which was set for April 20-24, 2020, has been postponed, and no new hearing date has been set. An unfavorable ruling by the USITC could have an adverse effect on our results of operations, including a prohibition on importing the accused products into the U.S. or necessitating workarounds that may limit certain features of our products.
Based on currently available information, the Company is unable to make a reasonable estimate of loss or range of losses, if any, arising from these matters.
Commercial Litigation
On February 27, 2019, Restore Robotics LLC and Restore Repair LLC (“Restore”) filed a complaint alleging anti-trust claims against the Company. On May 13, 2019, Restore filed an amended complaint alleging anti-trust claims relating to the da Vinci Surgical System and EndoWrist service, maintenance, and repair processes. On September 16, 2019, the Court partially granted and partially denied the Company's Motion to Dismiss the amended complaint.
On September 30, 2019, the Company filed an answer denying the anti-trust allegations and a counterclaim against Restore. The Company filed amended counterclaims after the Court partially granted and partially denied Restore's Motion to Dismiss the counterclaim. The amended counterclaims allege that Restore violated the Federal Lanham Act, the Federal Computer Fraud and Abuse Act, and Florida's Deceptive and Unfair Trade Practices Act and that Restore is also liable to the Company for Unfair Competition and Tortious Interference with Contract. On January 7, 2020, the Court denied Restore's Motion to Dismiss the amended counterclaims.
In its initial scheduling order, the Court stated that it anticipated trial in this matter.case to occur in or before February 2022. Based on currently available information, the Company is unable to make a reasonable estimate of loss or range of losses, if any, arising from these matters.
NOTE 7.9. STOCKHOLDERS’ EQUITY
Stockholders’ Equity
The following tables present the changes in stockholders’ equity (in millions):
Three Months Ended June 30, 2020
Common StockAdditional Paid-In CapitalRetained EarningsAccumulated Other Comprehensive IncomeTotal Intuitive Surgical, Inc. Stockholders’ EquityNoncontrolling Interest in Joint VentureTotal Stockholders’ Equity
SharesAmount
Beginning balance116.6  $0.1  $5,926.8  $2,570.9  $8.9  $8,506.7  $23.8  $8,530.5  
Issuance of common stock through employee stock plans0.4  —  62.7  62.7  62.7  
Shares withheld related to net share settlement of equity awards—  —  (0.3) (5.9) (6.2) (6.2) 
Share-based compensation expense related to employee stock plans95.9  95.9  95.9  
Net income attributable to Intuitive Surgical, Inc.68.0  68.0  68.0  
Other comprehensive income (loss)13.4  13.4  (0.1) 13.3  
Net income attributable to noncontrolling interest in joint venture—  2.2  2.2  
Ending balance117.0  $0.1  $6,085.1  $2,633.0  $22.3  $8,740.5  $25.9  $8,766.4  
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Three Months Ended June 30, 2019
Common StockAdditional
Paid-In
Capital		Retained
Earnings		Accumulated
Other
Comprehensive
Income (Loss)		Total Intuitive Surgical, Inc. Stockholders’ EquityNoncontrolling Interest in Joint VentureTotal Stockholders’ Equity
SharesAmount
Beginning balance115.4  $0.1  $5,328.8  $1,696.0  $(0.7) $7,024.2  $16.2  $7,040.4  
Issuance of common stock through employee stock plans0.2  —  30.8  30.8  30.8  
Shares withheld related to net share settlement of equity awards—  —  (0.3) (6.1) (6.4) (6.4) 
Share-based compensation expense related to employee stock plans81.6  81.6  81.6  
Repurchase and retirement of common stock(0.4) —  (10.8) (189.2) (200.0) (200.0) 
Net income attributable to Intuitive Surgical, Inc.318.3  318.3  318.3  
Other comprehensive income16.8  16.8  16.8  
Net loss attributable to noncontrolling interest in joint venture—  (1.9) (1.9) 
Ending balance115.2  $0.1  $5,430.1  $1,819.0  $16.1  $7,265.3  $14.3  $7,279.6  

Six Months Ended June 30, 2020
Common StockAdditional Paid-In CapitalRetained EarningsAccumulated Other Comprehensive IncomeTotal Intuitive Surgical, Inc. Stockholders’ EquityNoncontrolling Interest in Joint VentureTotal Stockholders’ Equity
SharesAmount
Beginning balance116.0  $0.1  $5,756.8  $2,494.5  $12.4  $8,263.8  $20.9  $8,284.7  
Adoption of new accounting standard(0.1) (0.1) (0.1) 
Issuance of common stock through employee stock plans1.5  —  154.0  154.0  154.0  
Shares withheld related to net share settlement of equity awards(0.3) —  (7.0) (148.1) (155.1) (155.1) 
Share-based compensation expense related to employee stock plans186.5  186.5  186.5  
Repurchase and retirement of common stock(0.2) —  (5.2) (94.8) (100.0) (100.0) 
Net income attributable to Intuitive Surgical, Inc.381.5  381.5  381.5  
Other comprehensive income9.9  9.9  0.1  10.0  
Net income attributable to noncontrolling interest in joint venture—  4.9  4.9  
Ending balance117.0  $0.1  $6,085.1  $2,633.0  $22.3  $8,740.5  $25.9  $8,766.4  
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Six Months Ended June 30, 2019
Common StockAdditional Paid-In CapitalRetained EarningsAccumulated Other Comprehensive Income (Loss)Total Intuitive Surgical, Inc. Stockholders’ EquityNoncontrolling Interest in Joint VentureTotal Stockholders’ Equity
SharesAmount
Beginning balance114.5  $0.1  $5,170.3  $1,521.7  $(13.3) $6,678.8  $8.7  $6,687.5  
Issuance of common stock through employee stock plans1.4  —  119.6  119.6  119.6  
Shares withheld related to net share settlement of equity awards(0.3) —  (6.7) (138.3) (145.0) (145.0) 
Share-based compensation expense related to employee stock plans157.7  157.7  157.7  
Repurchase and retirement of common stock(0.4) —  (10.8) (189.2) (200.0) (200.0) 
Net income attributable to Intuitive Surgical, Inc.624.8  624.8  624.8  
Other comprehensive income29.4  29.4  29.4  
Capital contribution from noncontrolling interest—  10.0  10.0  
Net loss attributable to noncontrolling interest in joint venture—  (4.4) (4.4) 
Ending balance115.2  $0.1  $5,430.1  $1,819.0  $16.1  $7,265.3  $14.3  $7,279.6  

Stock Repurchase Program
The Company’s Board of Directors (the “Board”) has authorized an aggregate of $6.2$7.5 billion of funding for the Company’s common stock repurchase program (the “Repurchase Program”) since its establishment in March 2009. The most recent authorization occurred in December 2016January 2019 when the Board increased the authorized amount available under the Repurchase Program to $3.0$2.0 billion. As of SeptemberJune 30, 2017,2020, the remaining amount of share repurchases authorized by the Board was approximately $991.6 million.$1.6 billion.
 On January 24, 2017, the Company entered into an accelerated share repurchase program (the “ASR Program”) with Goldman, Sachs & Co. (“Goldman”) to repurchase $2.0 billion of the Company’s common stock. On January 27, 2017, the Company made a payment of $2.0 billion to Goldman and Goldman delivered to the Company an initial delivery of approximately 7.3 million shares of the Company’s common stock with an aggregate market value of approximately $1.6 billion on the date of the transaction, which was accounted as a reduction to common stock and additional paid-in capital by an aggregate of $152.0 million and $1,448.0 million to retained earnings. The remaining $400.0 million was recorded as a forward contract as a reduction to additional paid-in capital. The Company reflects the ASR Program as a repurchase of common stock in the period delivered for purposes of calculating earnings per share and as a forward contract indexed to its own common stock.
The total number of shares that the Company will repurchase under the ASR Program will be based generally on the daily volume-weighted average price per share of the Company’s common stock during the repurchase period, less a discount. Depending on the circumstances at settlement, Goldman may be required to deliver additional shares of common stock to the Company or the Company may be required either to deliver shares of common stock or make a cash payment to Goldman. Final settlement of the ASR Program is scheduled to be completed by the fourth quarter of 2017, although the completion date may be accelerated at Goldman’s option.
The Company repurchased approximately 47,000 shares of the Company’s common stock in the open market during the nine months ended September 30, 2016. There were no shares repurchased during the three month periods ended September 30, 2017, and 2016. The following table provides the share repurchase activities during the nine months ended September 30, 2017, and 2016 (in millions, except per share amounts):
 Nine Months Ended September 30,
 2017 2016
Shares repurchased7.3
 —
Average price per share(a)
 $172.18
Value of shares repurchased(a)
 $8.1
(a) The number of shares repurchased represents shares delivered during the nine months ended September 30, 2017, and does not represent the final number of shares to be delivered under the ASR Program. Therefore, the average price paid per share will be determined at the end of the applicable purchase period.

 Three Months Ended June 30,Six Months Ended June 30,
 2020201920202019
Shares repurchased—  0.4  0.2  0.4  
Average price per share$—  $477.44  $521.83  $477.44  
Value of shares repurchased$—  $200.0  $100.0  $200.0  
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Accumulated Other Comprehensive Income (Loss), Net of Tax, Attributable to Intuitive
The components of accumulated other comprehensive income (loss), net of tax, for the three and nine months ended September 30, 2017, and 2016,attributable to Intuitive are as follows (in millions):
 Three Months Ended June 30, 2020
 Gains (Losses)
on Hedge
Instruments		Unrealized Gains
(Losses) on Available-for-Sale Securities		Foreign
Currency
Translation
Gains (Losses)		Employee Benefit PlansTotal
Beginning balance$1.8  $36.2  $(20.6) $(8.5) $8.9  
Other comprehensive income (loss) before reclassifications—  11.6  6.8  —  18.4  
Amounts reclassified from accumulated other comprehensive income (loss)(1.4) (3.7) —  0.1  (5.0) 
Net current-period other comprehensive income (loss)(1.4) 7.9  6.8  0.1  13.4  
Ending balance$0.4  $44.1  $(13.8) $(8.4) $22.3  
 Three Months Ended June 30, 2019
 Gains (Losses)
on Hedge
Instruments		Unrealized Gains
(Losses) on Available-for-Sale Securities		Foreign
Currency
Translation
Gains (Losses)		Employee Benefit PlansTotal
Beginning balance$1.6  $1.8  $(0.7) $(3.4) $(0.7) 
Other comprehensive income (loss) before reclassifications(0.2) 18.0  (0.1) —  17.7  
Amounts reclassified from accumulated other comprehensive income (loss)(0.9) (0.1) —  0.1  (0.9) 
Net current-period other comprehensive income (loss)(1.1) 17.9  (0.1) 0.1  16.8  
Ending balance$0.5  $19.7  $(0.8) $(3.3) $16.1  

20
 Three Months Ended September 30, 2017
 
Gains (Losses)
on Hedge
Instruments
 Unrealized Gains
(Losses) on Available-for-Sale Securities		 
Foreign
Currency
Translation
Gains (Losses)
 Employee Benefit Plans Total
Beginning balance$(1.9) $(5.3) $1.0
 $(3.6) $(9.8)
Other comprehensive income before reclassifications(2.0) 0.7
 0.8
 —
 (0.5)
Amounts reclassified from accumulated other comprehensive income1.1
 —
 —
 —
 1.1
Net current-period other comprehensive income (loss)(0.9) 0.7
 0.8
 —
 0.6
Ending balance$(2.8) $(4.6) $1.8
 $(3.6) $(9.2)
          
 Three Months Ended September 30, 2016
 
Gains (Losses)
on Hedge
Instruments
 
Unrealized Gains
(Losses) on Available-for-Sale Securities
 
Foreign
Currency
Translation
Gains (Losses)
 Employee Benefit Plans Total
Beginning balance$(1.0) $10.5
 $3.1
 $(3.3) $9.3
Other comprehensive income before reclassifications(1.9) (5.6) 0.7
 —
 (6.8)
Amounts reclassified from accumulated other comprehensive income1.3
 —
 —
 0.2
 1.5
Net current-period other comprehensive income (loss)(0.6) (5.6) 0.7
 0.2
 (5.3)
Ending balance$(1.6) $4.9
 $3.8
 $(3.1) $4.0

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Six Months Ended June 30, 2020
Gains (Losses) on Hedge InstrumentsUnrealized Gains
(Losses) on Available-for-Sale Securities		Foreign Currency Translation Gains (Losses)Employee Benefit PlansTotal
Beginning balance$0.7  $20.4  $—  $(8.7) $12.4  
Other comprehensive income (loss) before reclassifications2.8  28.4  (13.8) —  17.4  
Amounts reclassified from accumulated other comprehensive income (loss)(3.1) (4.7) —  0.3  (7.5) 
Net current-period other comprehensive income (loss)(0.3) 23.7  (13.8) 0.3  9.9  
Ending balance$0.4  $44.1  $(13.8) $(8.4) $22.3  
Six Months Ended June 30, 2019
Gains (Losses) on Hedge InstrumentsUnrealized Gains
(Losses) on Available-for-Sale Securities		Foreign Currency Translation Gains (Losses)Employee Benefit PlansTotal
Beginning balance$0.2  $(9.8) $(0.3) $(3.4) $(13.3) 
Other comprehensive income (loss) before reclassifications3.3  29.6  (0.5) (0.1) 32.3  
Amounts reclassified from accumulated other comprehensive income (loss)(3.0) (0.1) —  0.2  (2.9) 
Net current-period other comprehensive income (loss)0.3  29.5  (0.5) 0.1  29.4  
Ending balance$0.5  $19.7  $(0.8) $(3.3) $16.1  

 Nine Months Ended September 30, 2017
 
Gains (Losses)
on Hedge
Instruments
 
Unrealized Gains
(Losses) on Available-for-Sale Securities
 
Foreign
Currency
Translation
Gains (Losses)
 Employee Benefit Plans Total
Beginning balance$5.0
 $(8.6) $(1.3) $(4.0) $(8.9)
Other comprehensive income before reclassifications(7.1) 4.0
 3.1
 0.1
 0.1
Amounts reclassified from accumulated other comprehensive income(0.7) —
 —
 0.3
 (0.4)
Net current-period other comprehensive income (loss)(7.8) 4.0
 3.1
 0.4
 (0.3)
Ending balance$(2.8) $(4.6) $1.8
 $(3.6) $(9.2)
          
 Nine Months Ended September 30, 2016
 
Gains (Losses)
on Hedge
Instruments
 
Unrealized Gains
(Losses) on Available-for-Sale Securities
 
Foreign
Currency
Translation
Gains (Losses)
 Employee Benefit Plans Total
Beginning balance$1.5
 $(4.2) $(3.3) $(3.5) $(9.5)
Other comprehensive income before reclassifications(4.4) 8.8
 7.1
 —
 11.5
Amounts reclassified from accumulated other comprehensive income1.3
 0.3
 —
 0.4
 2.0
Net current-period other comprehensive income (loss)(3.1) 9.1
 7.1
 0.4
 13.5
Ending balance$(1.6) $4.9
 $3.8
 $(3.1) $4.0
NOTE 8.10. SHARE-BASED COMPENSATION
In April 2017,2020, the Company’sCompany's shareholders approved an amended and restated 2000 Employee Stock Purchase2010 Incentive Award Plan (the “ESPP”) to provide for an increase in the number of shares of common stock reserved for issuance thereunder from 2,030,10528,450,000 to 2,530,105 (or, after giving effect to the Stock Split, 6,090,315 to 7,590,315). The Company’s shareholders also approved an amended and restated 2010 Incentive Award Plan (“2010 Plan”) to provide for an increase in the number of shares of common stock reserved for issuance from 7,050,000 to 8,150,000 (or, after giving effect to the Stock Split, 21,150,000 to 24,450,000).32,450,000. As of SeptemberJune 30, 2017,2020, approximately 6.38.4 million shares of common stock were reserved for future issuance under the Company’sCompany's stock plans. A maximum of approximately 2.73.7 million of these shares can be awarded as restricted stock units (“RSUs”).
Stock Option Information
A summary of stock option activity under all stock plans for the ninesix months ended SeptemberJune 30, 2017,2020, is presented as follows (in millions, except per share amounts):
 Stock Options Outstanding
 Number
Outstanding		Weighted Average
Exercise Price Per
Share
Balance at December 31, 20195.4  $246.64  
Options granted0.3  $537.87  
Options exercised(0.7) $167.20  
Options forfeited/expired(0.1) $468.87  
Balance at June 30, 20204.9  $272.37  
  Stock Options Outstanding
  
Number
Outstanding
 
Weighted Average
Exercise Price Per
Share
Balance at December 31, 2016 9.3
 $148.36
Options granted 0.7
 $282.99
Options exercised (2.5) $140.31
Options forfeited/expired (0.1) $193.50
Balance at September 30, 2017 7.4
 $162.90
As of SeptemberJune 30, 2017,2020, options to purchase an aggregate of 5.63.9 million shares of common stock were exercisable at a weighted-averageweighted average price of $145.37$214.32 per share.

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Restricted Stock Units Information
A summary of RSURSUs activity under all stock plans for the ninesix months ended SeptemberJune 30, 2017,2020, is presented as follows (in millions, except per share amounts):
 Shares 
Weighted Average
Grant Date Fair Value
Unvested balance at December 31, 20161.8
 $174.72
Granted1.0
 $245.40
Vested(0.5) $170.58
Forfeited(0.1) $200.82
Unvested balance at September 30, 20172.2
 $207.09
 SharesWeighted Average
Grant Date Fair Value
Unvested balance at December 31, 20191.9  $410.09  
RSUs granted0.7  $535.67  
RSUs vested(0.7) $337.48  
RSUs forfeited(0.1) $456.38  
Unvested balance at June 30, 20201.8  $481.89  
Employee Stock Purchase Plan
Under the ESPP,Employee Stock Purchase Plan (“ESPP”), employees purchased approximately 0.20.1 million shares for $38.3$36.6 million and 0.2approximately 0.1 million shares for $32.5$30.3 million during the ninesix months ended SeptemberJune 30, 2017,2020, and 2016,2019, respectively.
Share-based Compensation Expense
The following table summarizes share-based compensation expense for the three and ninesix months ended SeptemberJune 30, 2017,2020, and 20162019 (in millions):
Three Months Ended June 30,Six Months Ended June 30,
Three Months Ended 
 September 30,		 Nine Months Ended 
 September 30,		 2020201920202019
2017 2016 2017 2016
Cost of sales - products$7.0
 $6.9
 $20.5
 $18.6
Cost of sales - services3.7
 3.3
 10.4
 9.4
Cost of sales – productsCost of sales – products$14.2  $11.4  $27.0  $22.4  
Cost of sales – servicesCost of sales – services5.2  4.8  10.7  9.3  
Total cost of sales10.7
 10.2
 30.9
 28.0
Total cost of sales19.4  16.2  37.7  31.7  
Selling, general and administrative30.0
 25.3
 82.3
 72.9
Selling, general, and administrativeSelling, general, and administrative49.6  40.7  95.3  79.3  
Research and development15.2
 11.4
 40.9
 31.5
Research and development27.4  25.1  54.6  47.9  
Share-based compensation expense before income taxes55.9
 46.9
 154.1
 132.4
Share-based compensation expense before income taxes96.4  82.0  187.6  158.9  
Income tax benefit18.4
 14.8
 50.3
 41.5
Income tax benefit20.0  16.5  38.9  32.9  
Share-based compensation expense after income taxes$37.5
 $32.1
 $103.8
 $90.9
Share-based compensation expense after income taxes$76.4  $65.5  $148.7  $126.0  
The Black-Scholes option pricing model is used to estimate the fair value of stock options granted under the Company’s share-based compensation plans and rights to acquire stock granted under the Company’s ESPP. The weighted average estimated fair values of stock options and the rights to acquire stock granted, andunder the ESPP, as well as the weighted average assumptions used in calculating thosethe fair values of stock options and the rights to acquire stock under the ESPP that were granted during the three and six months ended June 30, 2020, and 2019, were as follows:
 Three Months Ended June 30,Six Months Ended June 30,
 2020201920202019
Stock Options
Risk-free interest rate0.4%2.2%0.8%2.4%
Expected term (in years)4.24.34.34.3
Expected volatility38%30%30%31%
Fair value at grant date$165.18$142.63$138.24$155.35
ESPP
Risk-free interest rate——1.5%2.5%
Expected term (in years)——1.11.2
Expected volatility——27%31%
Fair value at grant date——$149.85$154.20
22
 Three Months Ended 
 September 30,		 Nine Months Ended 
 September 30,
 2017 2016 2017 2016
Stock Option Plans       
Risk free interest rate1.7% 1.0% 1.8% 1.1%
Expected term (in years)3.9
 3.9
 4.1
 4.2
Expected volatility26% 24% 25% 27%
Weighted average fair value at grant date$74.37
 $47.32
 $65.12
 $46.90
Employee Stock Purchase Plan       
Risk free interest rate1.2% 0.5% 1.2% 0.6%
Expected term (in years)1.2
 1.2
 1.2
 1.2
Expected volatility29% 27% 28% 30%
Weighted average fair value at grant date$85.23
 $61.14
 $79.77
 $57.57
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NOTE 9.11. INCOME TAXES
Income tax (benefit) expense for the three months ended SeptemberJune 30, 2017,2020, was $(8.1)$37.0 million, or (2.8)%34.5% of income before taxes, compared with $55.8$75.4 million, or 20.9%19.2% of income before taxes, for the three months ended SeptemberJune 30, 2016.2019. Income tax expense for the ninesix months ended SeptemberJune 30, 2017,2020, was $58.4$28.9 million, or 7.7%7.0% of income before taxes, compared with $172.8$51.1 million, or 24.5%7.6% of income before taxes, for the ninesix months ended SeptemberJune 30, 2016. 2019.
The Company’s incomeeffective tax provision

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rates for the three and ninesix months ended SeptemberJune 30, 2017, compared with the same periods of 2016, primarily benefited from the expiration of statutes of limitations2020, and excess tax benefits recognized under ASU No. 2016-09, Improvements to Employee Share-based Payment Accounting. Also, the Company’s effective tax rates for these periods differ2019, differed from the U.S. federal statutory rate of 35%21% mainly due to excess tax benefits associated with employee equity plans, the effect of income earned by certain of the Company’s overseas entities being taxed at rates lower than the federal statutory rate, and the federal research and development (“R&D”) credit benefit, partially offset by state income taxes. The Company intends to indefinitely reinvest outside thetaxes (net of federal benefit) and U.S. all of its undistributedtax on foreign earnings that were not previously subject to U.S. tax.
earnings. The effective tax ratesrate for the three and ninesix months ended SeptemberJune 30, 2017,2020, also reflected a $14.9$36.8 million increase in income tax benefit mainlyexpense discussed below.
In July 2015, a U.S. Tax Court opinion (the “2015 Opinion”) was issued involving an independent third party related to charging foreign subsidiaries for share-based compensation. Based on the releasefindings of the U.S. Tax Court, direct share-based compensation has been excluded from the Company's intercompany charges starting in 2015. In June 2019, the Ninth Circuit Court of Appeals (the “Ninth Circuit”) reversed the 2015 Opinion (the “Ninth Circuit Opinion”). Subsequently, a re-hearing of the case was requested but was denied in November 2019. In February 2020, a petition was filed to appeal the Ninth Circuit Opinion to the U.S. Supreme Court.The petition was denied by the U.S. Supreme Court on June 22, 2020, which makes the Ninth Circuit Opinion binding precedent in the Ninth Circuit. As a result, the Company increased its unrecognized tax benefits dueby $36.8 million with a corresponding increase to the expiration of statutes of limitations in various jurisdictions. The effectiveincome tax ratesexpense for the three and ninesix months ended SeptemberJune 30, 2017, also reflected tax benefit of $53.5 million and $45.7 million, respectively, from reevaluation of certain unrecognized tax benefits as a result of2020, related to the expiration of such statutes of limitations.
intercompany charges for share-based compensation for relevant periods prior to 2020. The Company adopted ASU No. 2016-09 inwill continue to monitor future Internal Revenue Service ("IRS") actions or other developments regarding this matter and will assess the first quarterimpact of 2017, which resulted in excess tax benefits associated with employee equity plans of $19.7 million and $82.9 million being recognized in theany such developments to its income tax provision during the three and nine months ended September 30, 2017, respectively. Excess tax benefits associated with employee equity plans was previously recorded in additional paid-in capital and the adoption of this ASU resulted in reducing the Company’s effective tax rate by 6.8 percentage points and 10.9 percentage points for the three and nine months ended September 30, 2017, respectively. The amount of excess tax benefits or deficiencies will fluctuate from period to period based on the price of the Company’s stock, the volume of share-based instruments settled or vested, and the value assigned to employee equity awards under U.S. GAAP.
As of September 30, 2017, the Company had total gross unrecognized tax benefits of $62.3 million compared with $106.0 million as of December 31, 2016, representing a net decrease of approximately $43.7 million for the nine months ended September 30, 2017. The net decrease is primarily related to the above mentioned reversal of previously unrecognized tax benefits as a result of the expiration of certain statutes of limitations, partially offset by increases during the first nine months of 2017 related to other uncertain tax positions. If recognized, these gross unrecognized tax benefits would reduce the effective tax rate in the period of recognition.quarter that they occur. The Company is treating share-based compensation expense in accordance with the Ninth Circuit Opinion for 2020 and going forward.
The Company files federal, state, and foreign income tax returns in many U.S. and outside of the U.S. (“OUS”)OUS jurisdictions. Years before 20142016 are closed for the significant jurisdictions. Certain of the Company’s unrecognized tax benefits could change due to activities of various tax authorities, including evolving interpretations of existing tax laws in the jurisdictions the Company operates, potential assessment of additional tax, possible settlement of audits, or through normal expiration of various statutes of limitations, which could affect the Company’s effective tax rate in the period in which they change. Due to the uncertainty related to the timing and potential outcome of audits, the Company cannot estimate the range of reasonably possible change in unrecognized tax benefits that may occur in the next 12 months.
The Company is subject to the examination of its income tax returns by the Internal Revenue ServiceIRS and other tax authorities. The outcome of these audits cannot be predicted with certainty. The Company’s management regularly assesses the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of the Company’s provision for income taxes. If any issues addressed in the Company’s tax audits are resolved in a manner not consistent with management’s expectations, the Company could be required to adjust its provision for income taxes in the period such resolution occurs.
NOTE 10.12. NET INCOME PER SHARE
The following table presents the computation of basic and diluted net income per share for the three and nine months ended September 30, 2017, and 2016attributable to Intuitive Surgical, Inc. (in millions, except per share amounts):
Three Months Ended 
 September 30,		 Nine Months Ended 
 September 30,		 Three Months Ended June 30,Six Months Ended June 30,
2017 2016 2017 2016 2020201920202019
Numerator:       Numerator:
Net income$297.5
 $211.0
 $698.8
 $531.9
Net income attributable to Intuitive Surgical, Inc.Net income attributable to Intuitive Surgical, Inc.$68.0  $318.3  $381.5  $624.8  
Denominator:       Denominator:
Weighted-average shares outstanding used in basic calculation111.8
 116.1
 111.6
 114.6
Weighted average shares outstanding used in basic calculationWeighted average shares outstanding used in basic calculation116.8  115.4  116.6  115.2  
Add: dilutive effect of potential common shares5.0
 3.0
 4.3
 3.0
Add: dilutive effect of potential common shares2.9  3.9  3.1  4.2  
Weighted-average shares used in computing diluted net income per share116.8
 119.1
 115.9
 117.6
Net income per share:       
Weighted average shares outstanding used in diluted calculationWeighted average shares outstanding used in diluted calculation119.7  119.3  119.7  119.4  
Net income per share attributable to Intuitive Surgical, Inc.:Net income per share attributable to Intuitive Surgical, Inc.:
Basic$2.66
 $1.82
 $6.26
 $4.64
Basic$0.58  $2.76  $3.27  $5.42  
Diluted$2.55
 $1.77
 $6.03
 $4.52
Diluted$0.57  $2.67  $3.19  $5.23  
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As the forward contract associated with the ASR Program is presumed to be settled in shares, any dilutive effect of the contingently issuable shares is included in the computation of diluted net income per share. See Note 7 to the Condensed Consolidated Financial Statements (Unaudited) for further details on the ASR Program.
Share-based compensation awards of approximately 0.21.1 million and 0.31.2 million weighted-average shares for the three months ended SeptemberJune 30, 2017,2020, and 2016,2019, respectively, and approximately 0.41.1 million and 0.5 million weighted-average shares for the ninesix months ended SeptemberJune 30, 2017,2020, and 2016,2019, respectively, were outstanding but were not included in the computation of diluted net income per share attributable to Intuitive Surgical, Inc. common stockholders because the effect of including such shares would have been anti-dilutive.anti-dilutive in the periods presented.

NOTE 13. SUBSEQUENT EVENT
The Company held an equity investment in preferred shares of InTouch Technologies, Inc. ("InTouch"), which is reflected in the Company's financial statements on a cost basis. On July 1, 2020, Teladoc Health, Inc. ("Teladoc") completed its acquisition of InTouch. Based on the terms of the agreement, the Company has received Teladoc shares on the date of closing and will recognize a gain on its investment of approximately $45 million. The Company is restricted from selling these shares for a period of six months. As the Teladoc shares have a readily determinable fair value, these shares will be measured at fair value on an ongoing basis, and the recognition of changes in fair value will be recorded in the income statement. Therefore, the actual gain recognized in the third quarter of 2020 on this investment may differ from the gain recognized on the date of acquisition.
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ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In this report, “Intuitive Surgical,” “Intuitive,” the “Company,” “we,” “us,” and “our” refer to Intuitive Surgical, Inc. and its wholly-wholly and majority-owned subsidiaries.
This management’s discussion and analysis of financial condition as of SeptemberJune 30, 2017,2020, and results of operations for the three and ninesix months ended SeptemberJune 30, 2017,2020, and 2016,2019, 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, 2016.2019.
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. Words such as “estimates,” “projects,” “believes,” “anticipates,” “plans,” “expects,” “intends,” “may,” “will,” “could,” “should,” “would,” “targeted”“targeted,” and similar words and expressions are intended to identify 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, the strength of our long-term fundamentals, the potential decline of procedure volume, our acquisitions, expected business, new product introductions, procedures and procedure adoption, future results of operations, future financial position, our ability to increase our revenues, the anticipated mix of our revenues between product and service revenues, our financing plans and future capital requirements, anticipated costs of revenue, anticipated expenses, our potential tax assets or liabilities, the effect of recent accounting pronouncements, our investments, anticipated cash flows, our ability to finance operations from cash flows and similar matters, 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, therefore, be considered in light of various important factors, including, but not limited to, the following: our ability to obtain accurate procedure volume in the midst of the COVID-19 pandemic; the risk that the COVID-19 pandemic could lead to further material delays and cancellations of, or reduced demand for, procedures; curtailed or delayed capital spending by hospitals; disruption to our supply chain; closures of our facilities; delays in surgeon training; delays in gathering clinical evidence; the evaluation of the risks of robotic-assisted surgery in the presence of infectious diseases; diversion of management and other resources to respond to the COVID-19 outbreak; the impact of global and regional economic and credit market conditions on health carehealthcare spending; health carethe risk that the COVID-19 virus disrupts local economies and causes economies in our key markets to enter prolonged recessions; healthcare reform legislation in the United StatesU.S. and its impact on hospital spending, reimbursement, insurance deductibles, 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;partnerships, including the joint venture with Shanghai Fosun Pharmaceutical (Group) Co., Ltd.; our completion of and ability to successfully integrate acquisitions, including Schölly Fiberoptic's robotic endoscope business and Orpheus Medical; procedure counts; regulatory approvals, clearances, and restrictions or any dispute that may occur with any regulatory body; guidelines and recommendations in the health carehealthcare and patient communities; 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 outside of the United States; unanticipated manufacturing disruptions; our abilitydisruptions 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; product liability and other litigation claims; potential adverse publicity regarding our Company,us and the safety of our products and the adequacy of training; our ability to expand ininto foreign markets; 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 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 in the Annual Report on Form 10-K for the fiscal year ended December 31, 2016,2019, and other periodic filings with the Securities and Exchange Commission. Our actual results may differ materially and adversely from those expressed in any forward-looking statement. 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 SHD Surgical System®, da VinciSi®, da Vinci Si®, da Vinci Si HD Surgical System®, da VinciXi®, da Vinci SP®, EndoWrist®, Firefly®, InSite®, da Vinci Connect®, Intuitive SurgicalEcoSystem®, da Vinci X®, SureFormTM,IonTM,IrisTM, and da Vinci X™SynchroSealTM are trademarks or registered trademarks of Intuitive Surgical, Inc.the Company.
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Overview
Intuitive is committed to advancing patient care in surgery and other acute medical interventions. We are focused on innovating to enable physicians and healthcare providers to improve the quality of and access to minimally invasive care. We believe that minimally invasive care is life-enhancing care. Intuitive brings more than two decades of leadership in robotic-assisted surgical technology and solutions to its offerings. 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 is exerting a large and increasing burden on critical resources, including the professionals who staff care teams: surgeons, anesthesiologists, nurses, and other staff. At the same time, governments are straining to cover the healthcare needs of their populations and are demanding lower total cost per patient to treat disease. In the face of these challenges, we believe scientific, process, and technological advances in biology, computing, imaging, algorithms, and robotics offer the promise of new methods to solve old and difficult problems.
We address these needs by focusing on the quadruple aim. First, we focus on products and services that can improve outcomes and decrease variability in the hands of care teams. 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 MIS,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.
daDa 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 3-D representation of an HD3D, high-definition image of the surgical field. This immersive visualizationconsole 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 the open surgerysurgical technique. Our technology is designed to provide surgeons with a range of motionarticulation of MISthe 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.

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Our da Vinci products fall into fourfive broad categories - the categories: da Vinci Surgical Systems, InSiteda Vinci instruments and accessories, da Vinci Stapling, da Vinci Energy, and da Vinci Vision, including Firefly Fluorescence imaging systems (“Firefly”Firefly”), instruments and accessories (e.g., EndoWrist, EndoWrist Vessel Sealer, da VinciSingle-Site Endoscopes. We also provide a comprehensive suite of services, training, and EndoWrist Stapler),education programs. Within our integrated ecosystem, our products are designed to decrease variability in surgery by offering dependable, consistent functionality and training technologies. user experiences for surgeons seeking better outcomes. 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 commercialized in 1999, the da Vinci S Surgical System commercialized in 2006, the da Vinci Si Surgical System commercialized 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 the second quarter of 2014,2017, and the da Vinci XSP Surgical System, commercialized in the secondthird quarter of 2017. These2018. We are early in the launch of our da Vinci SP Surgical System, and we have an installed base of 52 da Vinci SP Surgical Systems as of June 30, 2020. 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. Food and Drug Administration (“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. 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. All da Vinci systems include a surgeon’s console (or consoles), imaging electronics, a patient-side cart, and computational hardware and software.
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We offer over 65approximately 70 different multiport multi-port da Vinci instruments enabling surgeons’to provide surgeons with flexibility in choosing the types of tools needed into perform a particular surgery. These multiportmulti-port instruments are generally robotically controlled versions of surgical toolsand provide end effectors (tips) that surgeons would useare similar to those used in either open or laparoscopic surgery. We offer advanced instrumentation for the da Vinci Si, da Vinci Xi and da Vinci X platforms, including the EndoWristda Vinci Vessel Sealer Extend and EndoWristda Vinci Stapler products, to provide surgeons with sophisticated, computer-aided tools to precisely and efficiently interact with tissue. Instruments for the daDa Vinci X Surgical System are the same as and da Vinci Xi Surgical System.
We offer Single-SiteSystems share the same instruments for use withwhereas the da Vinci Si Surgical System uses instruments that are not compatible with X or Xi systems. We currently offer nine core instruments on our da Vinci Xi, and da Vinci X SP Surgical Systems. Single-Site instruments are most commonly used in cholecystectomy and hysterectomy procedures. Single-Site instruments enable surgeonsSystem. We plan to also perform surgery through a single port viaexpand the patient’s belly button, resulting in the potential for virtually scarless results.SP instrument offering over time.
Training technologies include our da Vinci Skills Simulator, da Vinci ConnectIntuitive Simulation products, our Intuitive Telepresence remote case observation and mentoring tool,telementoring tools, and our dual console for use in surgeon proctoring and collaborative surgery.
During the first quarter of 2019, the FDA cleared our Ion endoluminal system to enable minimally invasive biopsies in the lung. Our Ion system extends our commercial offering beyond surgery into diagnostic procedures with this first application. We are introducing the Ion system in the U.S. in a measured fashion while we optimize training pathways and our supply chain and collect additional clinical data. We are early in the launch and have placed 3 Ion systems for commercial use as of June 30, 2020. Ion systems are not included in our da Vinci Surgical System installed base. We continue to have 3 Ion systems placed with hospitals for gathering clinical data.
The success of new product introductions depends on a number of factors including, but not limited to, pricing, competition, market and consumer acceptance, the effective forecasting and management of product demand, inventory levels, the management of manufacturing and supply costs, and the risk that new products may have quality or other defects in the early stages of introduction.
COVID-19 Pandemic
First Quarter of 2020
Prior to the spread of COVID-19 in the first quarter of 2020, we experienced procedure growth trends consistent with those experienced in the fourth quarter of 2019, including strength in general surgery, growth in mature procedures in the U.S., and growth in OUS urology. We also saw early strength in capital placements, particularly in the U.S., with over half the systems placed in the first quarter of 2020 related to arrangements where the sales cycle was mostly completed in the fourth quarter of 2019. Beginning in January 2020, we saw a substantial reduction in da Vinci procedures in China and, by early February 2020, procedures per week in China had declined by approximately 90% compared with the weekly procedure rates experienced in early January 2020. As the COVID-19 pandemic subsided in China in March 2020, da Vinci procedure volume began to recover and, by the end of the first quarter of 2020, China procedures per week were approximately 70% of the early January 2020 weekly procedure rate. As the COVID-19 pandemic spread to Western Europe and the U.S., we experienced a significant decline in da Vinci procedures in the last half of March 2020. As the U.S. Surgeon General recommended that elective procedures be postponed and hospitals pivoted to providing care to COVID-19 patients, procedures per week in the U.S., which represented approximately 72% of our procedure volume in 2019, declined to approximately 65% compared with the weekly procedure rate experienced earlier in the first quarter of 2020.
Second Quarter of 2020
In April, procedures per week in the U.S. continued to decline, reaching approximately 30% of pre-COVID-19 levels. In May and June, U.S. procedures began a recovery phase, as COVID-19 cases dropped and elective procedures were permitted, and, by the middle of June, had grown to nearly the same level as that measured in the first two weeks of the first quarter of 2020. However, in the last two weeks of June and into July, with the resurgence of COVID-19 cases, some regions have postponed elective procedures again, and we have experienced a corresponding decline in da Vinci procedures. The impact of COVID-19 in Europe during the second quarter varied by country with procedures in Italy, France, and the UK declining more steeply, while Germany experienced a year-over-year increase in procedures. During the second quarter of 2020, China procedures per week continued to increase to a level consistent with the early January 2020 weekly procedure rate. Consistent with the first quarter of 2020, we experienced little impact on the procedure volume in Korea and Japan in the second quarter of 2020. While procedures in certain markets have improved from levels experienced early in the second quarter, it is possible that a recurrence of COVID-19 similar to the one occurring in the U.S. will continue to negatively impact da Vinci procedures through the remainder of 2020. Moreover, we do not expect all markets to recover at the same pace, and some markets may experience a resurgence in infection rates. Due to the uncertainty of the recovery, including the significant increase in COVID-19 infections in the U.S. and the potential for COVID-19 infections to increase in other markets coupled with additional policy responses outlined by governments and other authorities, we cannot reliably estimate the impact to procedure volume in the third quarter of 2020 and beyond.
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System Demand
Most of the sales cycle for approximately half of the system placements in the first quarter of 2020 were completed in the fourth quarter of 2019. As we progressed through the first and second quarters of 2020 and the impact of the COVID-19 pandemic progressed, customers deferred decisions to purchase or lease systems into future quarters and, in some cases, indefinitely. In addition, the decline in procedures and, in turn, the reduced utilization of our systems resulted in unused capacity in the existing installed base. We expect hospitals to first fill their capacity before purchasing additional systems. The depth and extent to which the COVID-19 pandemic will impact individual markets will vary based on the availability of testing capabilities, personal protective equipment, intensive care units and operating rooms, and medical staff as well as government interventions. As COVID-19 continues to disrupt healthcare operations and patient flow, we would expect that system placements will lag behind the recovery of da Vinci procedure volume. While we cannot reliably estimate the extent or period of time over which the COVID-19 pandemic and the resultant economic recession will impact hospital spending, we anticipate lower year-over-year system placements for the remainder of 2020.
Customer Relief Program
In April, we announced a program to provide financial relief to our customers. The program is comprised of three main elements. The first element provides credits against service fees otherwise due in the six-month period from April 1 through September 30 that generally reflects the under-utilization of the system during that period. Those credits were offered to most customers worldwide. The second element deferred certain lease payments, and the third element extended certain payment terms for accounts receivable. Service fee credits resulted in an approximately $59 million decrease in service revenue in the second quarter of 2020. The extent to which credits will be issued for the third quarter of 2020 is dependent on the spread and resurgence of COVID-19 and the impact that it has on da Vinci surgeries. Given the second quarter da Vinci procedures rates coupled with the U.S. resurgence, we estimate credits issued for the third quarter of 2020 to be in the range of $20 to $50 million. While the short-term payment relief offered did not have a material impact to the results of operations, we deferred $10 million of lease billings and extended payment terms associated with $65 million of trade receivables since the start of the program, of which $37 million would otherwise have been due in the second quarter of 2020. Service revenue in the third quarter of 2020 could be reduced further if COVID-19 infections increase and, correspondingly, da Vinci procedures decline. We may also be subject to increased credit risks resulting in collection delinquencies and defaults, which could materially impact our bad debt write-offs and provisions for credit losses. Although we have programs in place that are designed to monitor and mitigate the associated risks, there can be no assurance that such programs will be effective in reducing credit risks relating to these lease financing arrangements and extended payment terms.
General Increase in Risks
Capital markets and worldwide economies have been significantly impacted by the COVID-19 pandemic, and it is possible that it could cause a prolonged recession in local and/or global economies. Such economic recession could have a material adverse effect on our long-term business as hospitals curtail and reduce capital and overall spending. The COVID-19 pandemic and local actions, such as “shelter-in-place” orders and restrictions on our ability to travel and access our customers or temporary closures of our facilities or the facilities of our suppliers and their contract manufacturers, could further significantly impact our sales and our ability to ship our products and supply our customers. Any of these events 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.
Our Response
We set our priorities and actions during the COVID-19 pandemic within the context of the phased framework described in the American Enterprise Institute’s paper entitled “National coronavirus response – a road map to reopening.” In Phases 1 and 2, which are the ‘Slow the Spread’ and 'State-by-State Reopening' phases of coronavirus response, our priorities are as follows. First, we are focused on the health and safety of all those we serve – our customers, our communities, our employees, and our suppliers – implementing early and continuous updates to our health and safety policies and processes. Second, we are supporting our customers according to their priorities – clinical, operational, and economic. Third, we are focused on continuity of supply by working with our suppliers and our distributors. Fourth, we are securing our workforce economically. We have built a valuable team over the years, and we believe they will be important in the recovery that follows the pandemic. Fifth, in partnership with our Intuitive Foundation, we are contributing material, product, and volunteers to the front lines of COVID-19 support – we have designed, produced, and delivered personal protective equipment to local hospitals, and our employees have volunteered in several communities. Finally, we are eliminating avoidable spend during Phases 1 and 2 of the COVID-19 pandemic.
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Business Model
Overview
We generate revenue from both the initial capital salesplacements 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 subsequentthe sales of instruments, accessories, and service,services, as recurring revenue.well as the revenue from operating leases. The da Vinci Surgical System generally sells for approximately 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. We generate recurring revenue as our customers purchase our EndoWrist and Single-Site instrument and accessory products used in performing procedures with the da Vinci Surgical System.when purchased. Our instruments and accessories have a limited lifelives 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 $700 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, we plan to launch our Extended Use Program (refer to further discussion immediately below), which will reduce the overall instruments and accessories revenue per procedure. We typically enter into service contracts at the time systems are sold or leased at an annual rate of approximatelyfee between $80,000 to $170,000,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 the placements of the Ion endoluminal system in a business model consistent with the da Vinci Surgical System model described above. We generate revenue from the placements of the Ion system, and we earn recurring revenue from the sales of instruments and accessories used in biopsies and ongoing system service. Ion systems are presented separately from our da Vinci Surgical Systems installed base. We are introducing the Ion system in the U.S. in a measured fashion. For the three and six months ended June 30, 2020, Ion's contribution to revenue and gross margin was not significant.
Extended Use Program
In July 2020, we introduced our "Extended Use Program." Beginning in the fourth quarter of 2020, we plan to introduce select Xi/X instruments possessing 12 to 18 uses compared to the current 10 use instruments. The Extended Use Program 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. In addition, in the fourth quarter of 2020, we will lower the price of certain other instruments that are most commonly used in lower acuity procedures. These actions will reduce the cost for customers to treat patients, which in turn will reduce our revenue per procedure. Based on 2019 volume and mix of procedures, our Extended Use Program and the reduced pricing on certain other instruments would have reduced 2019 annual instruments and accessories revenue by approximately $150 to $170 million. The 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 has generally grown at a faster rate than systemconsists of instruments and accessories revenue, in the last few fiscal years.service revenue, and operating lease revenue. Recurring revenue increased to $1.9$3.2 billion, or 72% of total revenue in 2019, compared with $2.6 billion, or 71% of total revenue in 2016, compared with $1.7 billion, or 70% of total revenue in 2015,2018, and $1.5 billion, or 70% of total revenue in 2014. Recurring revenue for the nine months ended September 30, 2017, was $1.6 billion, or 72% of total revenue, compared with $1.4$2.2 billion, or 71% of total revenue for the nine months ended September 30, 2016.in 2017.
Instruments and accessories revenue has grown at a faster rate than systems revenue over time. Instruments and accessories revenue increased to $2.4 billion in 2019, compared with $2.0 billion in 2018 and $1.6 billion in 2017. The growth of recurring revenueinstruments and its increasing proportion of totalaccessories revenue largely reflectreflects continued procedure adoptionadoption.
Service revenue increased to $724 million in 2019, compared with $635 million in 2018 and increased system utilization on a growing$573 million in 2017. Service revenue growth has been driven by the growth of the installed base of installed da Vinci Surgical Systems. The installed base of da Vinci Surgical Systems grew 12% to approximately 5,582 at December 31, 2019; 13% to approximately 4,986 at December 31, 2018; and 13% to approximately 4,409 at December 31, 2017.
We use the installed base and number of shipments of da Vinci Surgical Systems as metrics for financial and operational decision-making and as a means to evaluate period-to-period comparisons. Management believes that the installed base and number of shipments of da Vinci Surgical Systems provide meaningful supplemental information regarding our performance, as management believes that the installed base and number of shipments of da Vinci Surgical Systems are an indicator of the rate of adoption of robotic-assisted surgery as well as an indicator of future recurring revenue (particularly service revenue). Management believes that both it and investors benefit from referring to the installed base and number of shipments of da Vinci Surgical Systems in assessing our performance and when planning, forecasting, and analyzing future periods. The installed base and number of shipments of da Vinci Surgical Systems also facilitate management’s internal comparisons of our historical performance. We believe that the installed base and number of shipments of da Vinci Surgical Systems are useful to investors as metrics, because (1) they allow for greater transparency with respect to key metrics used by management in its financial and operational decision-making, and (2) they are used by institutional investors and the analyst community to help them analyze
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the performance of our business. The vast majority of da Vinci Surgical Systems installed are connected via the internet. System logs can also be accessed by field engineers for systems that are not connected to the internet. We utilize this information as well as other information from agreements and discussions with our customers that involve estimates and judgments, which are, by their nature, subject to substantial uncertainties and assumptions. Estimates and judgments for determining the installed base and number of shipments of da Vinci Surgical Systems may be impacted over time by various factors, including system internet connectivity, hospital and distributor reporting behavior, and inherent complexities in new agreements. Such estimates and judgments are also susceptible to technical errors. In addition, the relationship between the installed base and number of shipments of da Vinci Surgical Systems and our revenues may fluctuate from period to period, and growth in the installed base and in the number of shipments of da Vinci Surgical Systems may not correspond to an increase in revenue. The installed base and number of shipments of da Vinci Surgical Systems are not intended to be considered in isolation or as a substitute for, or superior to, revenue or other financial information prepared and presented in accordance with GAAP.
The COVID-19 pandemic reduced the number of shipments of da Vinci Surgical Systems in the second quarter of 2020 as compared to the prior year. Based on the factors outlined in the COVID-19 Pandemic section above, historical system shipment trends may not be a good indicator of future system shipments.
Intuitive System Leasing
Since 2013, we have entered into sales-type and operating lease arrangements directly with certain qualified customers as a way to offer customers flexibility in how they acquire systems and expand their robotic-assisted surgery programs while leveraging our balance sheet. These leases generally have commercially competitive terms as compared with other third-party entities that offer equipment leasing. We have also entered into usage-based arrangements with larger customers that have committed da Vinci programs where we charge for the system and service as the systems are utilized. We include operating and sales-type leases, and systems placed under usage-based arrangements, in our system shipment 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, 2019, 2018, and 2017, we shipped 425, 272, and 139 systems, respectively, under lease and usage-based arrangements, of which 384, 229, and 108 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. For usage-based arrangements, systems revenue and service revenue are recognized as the systems are used. We set operating lease and usage-based pricing at a modest premium relative to purchased systems reflecting the time value of money and, in the case of usage-based arrangements, the risk that system utilization may fall short of anticipated levels. The proportion of revenue recognized from usage-based arrangements has not been significant and is included in our operating lease metrics herein. Operating lease revenue has grown at a faster rate than overall systems revenue and was $106.9 million, $51.4 million, $25.9 million for the years ended December 31, 2019, 2018, and 2017, respectively. Generally, lease transactions generate similar gross margins as our sale transactions.
Our system leasing and usage-based models provide customers with flexibility regarding how they acquire or obtain access to approximately 4,271our systems. 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. As revenue for operating leases and usage-based arrangements 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.
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, including disruption associated with the current COVID-19 pandemic, or other customer-specific factors. In addition, as customers divert significant resources to the treatment of or the preparation to treat patients with the COVID-19 virus, 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 September 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 $92.8 million, $48.8 million, and $39.5 million for the years ended December 31, 2019, 2018, and 2017, 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.
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Systems Revenue
System placements are driven by procedure growth in most markets. In geographies where da Vinci procedure adoption is in an early stage, 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. System revenue grew 19% to $1,346 million in 2019; 21% to $1,127 million in 2018; and 16% to $928 million in 2017. Based on the factors outlined in the COVID-19 Pandemic section above, the ability to forecast future system shipments has been significantly disrupted and, therefore, we believe that historical system shipment trends may not be a good indicator of future system shipments.
Procedure Mix / Products
Our procedure business isda Vinci Surgical Systems are generally used for soft tissue surgery for areas of the body between the pelvis and the neck, primarily comprised of: (1)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 and (2)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 in eachacross the spectrum of these procedure categories.complexity. Our fully featured da Vinci Xi system Surgical System with advanced instruments, including the EndoWrist Vessel Sealer and EndoWrist Stapler products, and our Integrated Table Motion product targettargets the more complex procedure segment. Lower priced products, including the three-arm da Vinci Si-e System, refurbished da Vinci Si System, and Single-Site instruments, are targeted towards less complex procedures. Our da Vinci X Surgical System is priced between the targeted towards price sensitive markets and procedures. Our da Vinci Si and Xi Systems and offers customers access to many ofSP Surgical System complements the da Vinci Xi features, including da Vinci Xi advanced instrumentation and imaging systems, at a more accessible price point.X Surgical Systems by enabling surgeons to access narrow workspaces.
Procedure Seasonality
More than half of da Vinci procedures performed are for benign conditions, most notably benign hysterectomies, hernia repairs, hysterectomies, and cholecystectomies. The proportion of theseThese benign procedures for benign conditions has grown over time in relation to the total number of procedures performed. Hysterectomies for benign conditions, hernia repairs, cholecystectomies, and other short-term elective procedures tend to be more seasonal than cancer operations and surgeries for other life threatening conditions. Seasonality

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in the U.S. for these 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 the 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., Japan, South Korea, and Europe excluding(excluding Spain, Portugal, Italy, Greece, and most Eastern European countries.countries), China, Japan, South Korea, India, and Taiwan. In 2018, we began direct operations in India and Taiwan. In January 2019, our Intuitive-Fosun joint venture began direct sales for da Vinci products and services in China. In the remainder of our OUS markets, we provide our products through distributors.
Intuitive Surgical da Vinci System Leasing
Since 2013, we have entered into sales-typeRegulatory Activities
Overview
Our products must meet the requirements of a large and operating lease arrangements directly with certain qualified customersgrowing body of international standards that govern the product safety, efficacy, advertising, labeling, safety reporting design, manufacture, materials content and sourcing, testing, certification, packaging, installation, use, and disposal of our products. Examples of such standards include electrical safety standards, such as those of the International Electrotechnical Commission, and composition standards, such as the Reduction of Hazardous Substances and the Waste Electrical and Electronic Equipment Directives. Failure to meet these standards could limit our ability to market our products in those regions that require compliance to such standards.
Our products and operations are also subject to increasingly stringent medical device, privacy, and other regulations by regional, federal, state, and local authorities. We anticipate that timelines for the introduction of new products and/or indications may be extended relative to past experience as a way to offer customers flexibility in how they acquire da Vinci systems and expand da Vinci surgery availability while leveraging our balance sheet. The leases generally have commercially competitive terms as compared with other third party entities that offer equipment leasing. We include both operating and sales-type leases in our system shipment and installed base disclosures. We exclude operating leases from our system average selling prices computations.result of these regulations.
We shipped 26 and 86 systems under lease arrangements,
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Table of which 20 and 68 were classified as operating leases, in the three and nine months ended September 30, 2017, respectively, compared with 19 and 71 systems under lease arrangements, of which 15 and 49 were classified as operating leases, in the three and nine months ended September 30, 2016, respectively. Generally, the operating lease arrangements provide our customers with the right to purchase the leased system sometime during and/or at the end of the lease term. Revenue generated from customer purchases of systems under operating lease arrangements (“Lease Buyouts”) was $10.8 million and $26.0 million for the three and nine months ended September 30, 2017, respectively, compared with $13.1 million and $31.1 million for the three and nine months ended September 30, 2016, 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. Operating lease revenue was $6.7 million and $18.1 million for the three and nine months ended September 30, 2017, respectively, compared with $4.2 million and $12.0 million for the three and nine months ended September 30, 2016, respectively. As of September 30, 2017, 134 da Vinci systems were installed at customers under operating lease arrangements. We believe our leasing program has been effective and well-received, and we are willing to expand it based on customer demand.Contents
Regulatory Activities
Clearances and Approvals
We have generally obtained the clearances required to market our multiport products associated with all of our da Vinci Surgical Multiport Systems (Standard, S,Si, Xi, and X systems) for our targeted surgical specialties within the U.S., South Korea, Japan, and the European markets in which we operate. Since 2018, we obtained regulatory clearances for the following products:
•In April 2017,November 2019, we obtained FDA clearance for our SynchroSeal instrument and E-100 generator. In March 2020, we received regulatory clearance in Japan to market both our SynchroSeal instrument and E-100 generator.
•In July 2019, we obtained FDA clearance for our SureForm 45 Curved-Tip stapler and SureForm 45 Gray reload, which round out our SureForm 45 portfolio. We have also received CE mark clearance for our SureForm 45 Curved-Tip stapler and SureForm 45 Gray reload.
•In June 2019, we received CE mark clearance for our da Vinci XEndoscope Plus for the da Vinci X/Xi Surgical SystemSystems 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 Korea and Japan to market our da Vinci Endoscope Plus in December 2019 and May 2017,2020, respectively.
•In June 2019, we obtained FDA clearance for our da Vinci Handheld Camera.
•In February 2019, we obtained FDA clearance for our Ion endoluminal system, our new flexible, robotic-assisted, catheter-based platform, designed to navigate through very small lung airways to reach peripheral nodules for biopsies. We are introducing the Ion endoluminal system in a measured fashion while we optimize training pathways and our supply chain and collect additional clinical data. We have placed 21 Ion systems for commercial use as of June 30, 2020.
•In February 2019, we obtained FDA clearance for our Iris augmented reality product. Iris is a service that delivers a 3D image of the patient anatomy (initially targeting kidneys) to aid surgeons in both pre- and intra-operative settings. We are in the early stages of an Iris pilot study in the field at a small group of U.S. hospitals to gain initial product experience and insights.
•In December 2018, we received U.S. Foodregulatory clearance for our da Vinci Xi Surgical System in China. The Xi clearance does not include advanced energy or stapling products that attach to the Xi system. Separate clearances are required for each of these products by China National Medical Products Administration (“NMPA”).
•In October 2018, the China National Health Commission published on its official website the quota for major medical equipment to be imported and Drug Administration (“FDA”)sold in China through 2020. The government will allow the sale of 154 new surgical robots into China, which could include da Vinci Surgical Systems as well as surgical systems introduced by others. As of June 30, 2020, we have sold 83 da Vinci Surgical Systems 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.
•In July 2018, we obtained FDA clearance to market SureForm 60, our da Vinci XEndoWrist 60mm Stapler. In January 2019, we obtained FDA clearance to market SureForm 45. We have also received regulatory clearance in Taiwan, South Korea, and Japan to market both SureForm 60 and SureForm 45.
•In May 2018, we obtained FDA clearance for the da Vinci SP Surgical System infor urologic surgical procedures that are appropriate for a single port approach. In March 2019, we obtained FDA clearance for the U.S.da Vinci SP Surgical System for certain transoral procedures. We also received regulatory clearance for the da VinciX SP Surgical System in South Korea in September 2017 (seeMay 2018. We continue to introduce the description of the da Vinci XSP Surgical System in a measured fashion while we optimize training pathways and our supply chain. We have an installed base of 52 da Vinci SP Surgical Systems as of June 30, 2020.
•In April 2018, we obtained FDA clearance for our da Vinci Vessel Sealer Extend.
Refer to the descriptions of our products that received regulatory clearances in 2020, 2019, and 2018 in the New Product Introductions section below). Regulatory clearances for da Vinci X Surgical System may be received in other markets over time.
In March 2014, we received FDA clearance to market our da VinciXi Surgical System in the U.S. In June 2014, we received CE mark clearance for our da VinciXi Surgical System in Europe. We received regulatory clearances for the da VinciXi Surgical System in South Korea in October 2014 and in Japan in March 2015. The regulatory status of the da VinciXi Surgical System in other OUS markets varies by country.
In January 2016, we received FDA clearance for our Integrated Table Motion product. In March 2016, we received FDA 510(k) clearances in the U.S. and CE mark clearances in Europe for Single-Site instruments and the 30mm EndoWrist stapler products for the da Vinci Xi Surgical System (see the description of the EndoWrist Stapler 30in the New Product Introductions section below).
In April 2014, we received FDA clearance to market our da Vinci Single Port Surgical System in the U.S. for single-port urologic surgeries. At the time, we decided not to market that version of the da Vinci Single Port Surgical System. We instead elected to pursue the necessary modifications to integrate it into the da Vinci Xi/X product family as a dedicated single port patient console compatible with the existing da Vinci Xi/X surgeon console, vision cart, and other equipment. We have since completed these modifications and have begun clinical evaluations of the product. We plan to seek FDA clearance(s) for this da Vinci Xi/X version of the da Vinci Single Port Surgical System for procedure(s) in which a single small entry point to the body and parallel delivery of instruments is important. Such surgeries could include those performed through a natural orifice like the mouth for head and neck procedures or those performed through a single skin incision. It is unlikely that the da Vinci Single Port Surgical System will contribute any revenue in 2017.

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We obtained approval from theThe Japanese Ministry of Health, Labor, and Welfare (“MHLW”) for our da Vinci Xi Surgical System in March 2015. Nationalconsiders reimbursement status was received forda Vinci Prostatectomy (“dVP”) procedures in Japan effective April 2012 and for da Vinci partial nephrectomy procedures in April 2016. With our support,of even-numbered years. The process for obtaining reimbursement requires Japanese university hospitals and surgical societies, are seeking reimbursement for additional procedures through the MHLW’s Senshin Iryo (Advanced Medical Care) processes as well as alternative reimbursement processes.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. ReimbursementsIn April 2012 and April 2016, the MHLW granted reimbursement status for da Vinci Prostatectomy (“dVP”) and partial nephrectomy, respectively. Most prostatectomies and partial nephrectomies were open procedures prior to da Vinci reimbursement. Da Vinci procedure reimbursement for dVP and partial nephrectomy procedures are considered inhigher than open and conventional laparoscopic procedure reimbursements. An additional 12 da Vinci procedures were granted reimbursement effective April 1, 2018, including gastrectomy, low anterior resection, lobectomy, and hysterectomy, for both malignant and benign conditions. An additional 7 da Vinci procedures were granted reimbursement effective April 1, 2020. These additional 19 reimbursed procedures have varying levels of even numbered years. Thereconventional laparoscopic penetration and will be reimbursed at rates equal to the conventional laparoscopic procedures. Given the reimbursement level and laparoscopic penetration for these 19 procedures, there can be no assurance that wethe adoption pace for these procedures will gain additional reimbursements for the proceduresbe similar to dVP or at the times we have targeted. If we are not successful in obtaining additional regulatory clearances, and adequate procedure reimbursements for future products and procedures, then the demand for our products in Japan could be limited.partial nephrectomy, given their higher reimbursement, or any other da Vinci procedure.
Recalls and Corrections
Medical device companies have regulatory obligations to correct or remove medical devices in the field that could pose a risk to health. The definition of “recalls and corrections” is expansive and includes repair, replacement, inspections, relabeling, and issuance of new or additional instructions for use or reinforcement of existing instructions for use and training when such actions are taken for specific reasons of safety or compliance. These field actions require stringent documentation, reporting, and monitoring worldwide. There are other actions whichthat 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 whichthat is a recall or correction, we will notify customers regarding the field action, provide any additional documentation required in their national language, and arrange, as required, return or replacement of the affected product or a field service visit to perform the correction.
Field actions as well as certain outcomes from regulatory activities can result in adverse effects on our business, including damage to our reputation, delays by customers of purchase decisions, reduction or stoppage of the use of installed systems, and reduced revenue as well as increased expenses.
Procedures
We model patient value as equal to procedure efficacy / invasiveness. In this equation, procedure efficacy is defined as a measure of the success of the surgery in resolving the underlying disease, and invasiveness is defined as a measure of patient pain and disruption of regular activities. When the patient value of a da Vinci procedure is greater than that of alternative treatment options, patients may benefit from seeking out surgeons and hospitals that offer da Vinci Surgery, which could potentially result in a local market share shift. Adoption of da Vinci procedure adoption procedures occurs procedure by procedure and market by market and is driven by the relative patient value and total treatment costs of da Vinci procedures as compared to alternative treatment options for the same disease state or condition.
We use the number and type of da Vinci procedures as metrics for financial and operational decision-making and as a means to evaluate period-to-period comparisons. Management believes that the number and type of da Vinci procedures provide meaningful supplemental information regarding our performance, as management believes procedure volume is an indicator of the rate of adoption of robotic-assisted surgery as well as an indicator of future revenue (including revenue from usage-based arrangements). Management believes that both it and investors benefit from referring to the number and type of da Vinci procedures in assessing our performance and when planning, forecasting, and analyzing future periods. The number and type of da Vinci procedures also facilitate management’s internal comparisons of our historical performance. We believe that the number and type of da Vinci procedures are useful to investors as metrics, because (1) they allow for greater transparency with respect to key metrics used by management in its financial and operational decision-making, and (2) they are used by institutional investors and the analyst community to help them analyze the performance of our business. The vast majority of da Vinci Surgical Systems installed are connected via the internet. System logs can also be accessed by field engineers for systems that are not connected to the internet. We utilize certain methods that rely on information collected from the systems installed for determining the number and type of da Vinci procedures performed that involve estimates and judgments, which are, by their nature, subject to substantial uncertainties and assumptions. Estimates and judgments for determining the number and type of da Vinci procedures may be impacted over time by various factors, including changes in treatment modalities, hospital and distributor reporting behavior, and system internet connectivity. Such estimates and judgments are also susceptible to algorithmic or other technical errors. In addition, the relationship between number and type of da Vinci procedures and our revenues may fluctuate from period to period, and da Vinci procedure volume growth may not correspond to an increase in
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revenue. The number and type of da Vinci procedures are not intended to be considered in isolation or as a substitute for, or superior to, revenue or other financial information prepared and presented in accordance with GAAP.
The COVID-19 pandemic reduced the number of da Vinci procedures performed by our customers in the first and second quarters of 2020 as compared to our expectations. Based on the factors outlined in the COVID-19 Pandemic section above, the ability to forecast future procedures based on historical procedure patterns has been disrupted. Therefore, we believe that historical procedure trends may not be a good indicator of future procedure volumes.
Worldwide Procedures
Our da Vinci systems and instruments are regulated independently in various countries and regions of the world. The discussion of indications for use and representative or target procedures is intended solely to provide an understanding of the market for da Vinci products and is not intended to promote forthe sale or use of any Intuitive Surgical product outside of its licensed or cleared labeling and indications for use.
The adoption of robotic-assisted surgery using the da Vinci Surgery Surgical System has the potential to grow for those procedures that offer greater patient value than non-daas compared to non-da Vinci alternatives within the prevailingand to provide competitive total economics offor healthcare providers. Our da Vinci Surgical Systems are used primarily in gynecologicgeneral surgery, generalgynecologic surgery, urologic surgery, cardiothoracic surgery, and head and neck surgery. We focus our organization and investments on developing, marketing, and training for those products and targeted procedures where da Vinci can bring patient value relative to alternative treatment options and/or economic benefit to healthcare providers. Target procedures in gynecology include da Vinci Hysterectomy (“dVH”), for both cancer and benign conditions, and sacrocolpopexy. Target procedures in general surgery include hernia repair (both ventral and inguinal) and colorectal procedures. Target procedures in gynecology include da Vinci hysterectomy (“dVH”), colorectal procedures,for both cancer and cholecystectomy.benign conditions, and sacrocolpopexy. Target procedures in urology include dVP and partial nephrectomy. In cardiothoracic surgery, target procedures include da Vinci Lobectomy and da Vinci Mitral Valve Repair.lobectomy and da Vincimitral valve repair. In head and neck surgery, target procedures include certain procedures resecting benign and malignant tumors classified as T1 and T2. Not all of the indications, procedures, or products described may be available in a given country or region or on all generations of da Vinci Surgical Systems. PatientsSurgeons and their patients need to consult the product labeling in their specific country and for each product in order to determine the actual authorizedcleared uses, as well as important limitations, restrictions, or contraindications.
In 2016,2019, approximately 753,0001,229,000 surgical procedures were performed with the da Vinci Surgical Systems, compared with approximately 652,0001,038,000 and 570,000877,000 surgical procedures performed with da Vinci Surgical Systems in 20152018 and 2014,2017, respectively. The growth in our overall procedure volume in 20162018 was driven by growth in U.S. general surgery procedures and worldwide urologicurology procedures.

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U.S. Procedures
Overall U.S. procedure volume with da Vinci Surgical Systems grew to approximately 563,000883,000 in 2016,2019, compared with approximately 499,000753,000 in 20152018 and approximately 449,000644,000 in 2014. Gynecology is our largest U.S. surgical specialty and the procedure volume was approximately 246,000 in 2016, compared with 238,000 in 2015 and 235,000 in 2014.2017. General surgery iswas our second largest and fastest growing U.S. specialty in the U.S.2019 with procedure volume that grew to approximately 186,000421,000 in 2016,2019, compared with approximately 140,000325,000 in 20152018 and 107,000approximately 246,000 in 2014.2017. Gynecology was our second largest U.S. urologysurgical specialty in 2019 with procedure volume wasthat grew to approximately 109,000282,000 in 2016,2019, compared with approximately 102,000265,000 in 20152018 and 91,000approximately 252,000 in 2014.2017. Urology was our third largest U.S. surgical specialty in 2019 with procedure volume that grew to approximately 138,000 in 2019, compared with approximately 128,000 in 2018 and approximately 118,000 in 2017.
Procedures Outside of the U.S.
Overall OUS proceduresprocedure volume with da Vinci Surgical Systems grew to approximately 190,000346,000 in 2016,2019, compared with approximately 153,000285,000 in 20152018 and approximately 121,000233,000 in 2014.2017. Procedure growth in most OUS markets was driven largely by urology procedure volume. OUS dVP procedure volume, which grew to approximately 92,000206,000 in 2016,2019, compared with approximately 79,000175,000 in 20152018 and approximately 65,000149,000 in 2014. Partial nephrectomy, general2017. General surgery and gynecologic oncologygynecology procedures also contributed to OUS procedure growth.
Recent Business Events and Trends
Procedures
Overall. Total da Vinci procedures performed by our customers declined approximately 19% for the three months ended June 30, 2020, as compared with the same period in the prior year. Total da Vinci procedures grew approximately 17% for the three months ended June 30, 2019. Total da Vinci procedures performed by our customers declined approximately 5% for the six months ended June 30, 2020, as compared with the same period in the prior year. Total da Vinci procedures grew approximately 17% for the six months ended June 30, 2019. The second quarter and year-to-date 2020 procedure decline reflects significant disruption caused by the COVID-19 pandemic, as noted in the COVID-19 Pandemic section above. While we saw procedure declines in all categories during the second quarter of 2020, urology and thoracic procedures were impacted to a lesser degree, while gynecology experienced the greatest decline. The rates of recovery from their lows by procedure type were more uniform.
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U.S. Procedures. U.S. da Vinci procedures declined approximately 24% for the three months ended June 30, 2020, as compared with the same period in the prior year. U.S. da Vinci procedures grew approximately 16% for both the ninethree months ended SeptemberJune 30, 2017,2019. U.S. da Vinci procedures declined approximately 8% for the six months ended June 30, 2020, as compared with the same period in the prior year. U.S. da Vinci procedures grew approximately 16% for the six months ended June 30, 2019. The second quarter and September 30, 2016.year-to-date 2020 U.S. procedure growth was approximately 13% for bothdecline reflects significant disruption caused by the nine months ended September 30, 2017, and September 30, 2016. Year-to-date 2017 U.S. procedure growth was largely attributable to growthCOVID-19 pandemic, as noted in general surgery procedures, most notably hernia repair and colorectal procedures, and thoracic procedures, as well as continued moderate growth in more mature gynecologic and urologic procedure categories.
Procedure volume OUS grew approximately 24% for both the nine months ended September 30, 2017, and September 30, 2016. Year-to-date 2017 OUS procedure growth was driven by continued growth in dVP procedures and earlier stage growth in kidneyCOVID-19 Pandemic section above. While cancer procedures general surgery,saw a more modest decline and gynecology. We believe growth in these global markets is being driven by increased acceptance among surgeons and health systems, supported by expanded global evidence validating the clinical and economic value of da Vinci procedures.
U.S. Gynecology. Growth in gynecologyrecovery, benign procedures during the nine months ended September 30, 2017, continued atsaw a ratemore pronounced decline but have since recovered consistent with 2016. We believe that overall U.S. gynecologic surgery volume for benign conditions (robotic and other modalities) has been pressured in recent years by factors including, but not limited to, a trend by payers toward encouraging conservative disease management, trends towards higher patient deductibles and co-pays, and FDA actions regarding the use of power morcellation in uterine surgeries. Combining robotic, laparoscopic, and vaginal approaches, MIS represents about 80% of the U.S. hysterectomy market for benign conditions, and thus the rate of migration from open surgeries to MIS has slowed. We believe that our growth in gynecologic procedures over the past several years is primarily being driven by consolidation of surgical volumes into surgeons that focus on cancer and complex surgeries, as well as higher sacrocolpopexy procedure volume.
U.S. General Surgery. Growth in general surgery procedures during the nine months ended September 30, 2017, continued at a rate consistent with 2016. The year-to-date 2017 growth in U.S. general surgery procedures was primarily driven by ventral and inguinal hernia procedures, as it did in 2015 and 2016. We believe that growth in da Vinci hernia repair reflects improved clinical outcomes within certain patient populations, as well as potential cost benefits relative to certain alternative treatments. We believe hernia repair procedures represent a significant opportunity with the potential to drive growth in future periods. However, given the differences in complexity among hernia patient populations and varying surgeon opinion regarding optimal surgical technique, it is difficult to estimate the timing of and to what extent da Vinci hernia repair procedure volume will grow in the future.procedures. We expect a large portion of hernia repairsthat benign procedures will continue to be performed via different modalitiesmore volatile, particularly if elective procedures continue to be deferred in certain states.
OUS Procedures. OUS da Vinci procedures declined approximately 7% for the three months ended June 30, 2020, as compared with the same period in the prior year. OUS da Vinci procedures grew approximately 20% for the three months ended June 30, 2019. OUS da Vinci procedures grew approximately 2% for the six months ended June 30, 2020, compared with approximately 21% for the six months ended June 30, 2019. The second quarter and year-to-date 2020 OUS procedure growth reflects significant procedure disruption caused by the COVID-19 pandemic, as noted in the COVID-19 Pandemic section above. The disruption was most pronounced in the UK, Italy, and France. Due to the COVID-19 outbreak in China during the first quarter of surgery.
Adoption2020, as noted in the COVID-19 Pandemic section above, the procedure volume decreased by 23% as compared to the first quarter of da Vinci for colorectal procedures, which includes several underlying procedures including low anterior resections for rectal cancers2019. However, during the second quarter of 2020, the procedure volume increased by 21% as compared to the second quarter of 2019. During the first and certain colon procedures for benignsecond quarters of 2020, the impact of the COVID-19 pandemic on procedure volume in Japan was limited. In Germany, Italy, and cancerous conditions,France, we have seen a similar decline and recovery as has been ongoing for several years, and is supported by our recently launched technologies such as the da VinciXi Surgical System, EndoWrist Stapler, EndoWrist Vessel Sealer, and Integrated Table Motion.

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Global Urology. Along with U.S. general surgery, global urology procedures contributed to the majority of our recent procedure growth. Year-to-date 2017 growth in U.S. dVP procedures continued at a rate consistent with 2016. We believe the return to growth in U.S. dVP in 2014 and 2015 reflected surgical procedures being performed for men who previously may have deferred screening or definitive treatment based on the U.S. Preventive Services Task Force recommendation against PSA screening and changes in treatment patterns for low risk prostate cancer. dVP growth slowed in 2016, reflecting surgical volumes coming into closer alignment with new diagnoses of prostate cancer. As the U.S. standard of care for the surgical treatment of prostate cancer, we expect that the number of dVP procedures performedexperienced in the U.S. will largely fluctuateOverall, we have not seen a significant change in the mix of da Vinci procedures performed during the three and six months ended June 30, 2020 as compared with the overall prostatectomy market. dVP issame period in the largest overall OUS procedure. Year-to-date 2017 growth in OUS dVP was strong and OUS dVP is at various stages of adoption in different areas of the world.prior year.
Kidney cancer procedures have also been a strong contributor to our recent global urology procedure growth. Clinical publications have demonstrated that the presence of a da Vinci system in a hospital or market increases the likelihood that a patient will receive nephron sparing surgery through a partial nephrectomy, which is typically surgical society guideline-recommended therapy.
OUS Procedures. The year-to-date 2017 OUS procedure growth rate reflects continued da Vinci adoption in European and Asian markets. Growth was strong in Asia and varied by country in Europe. We experienced strong procedure growth in China as systems sold under a previous public hospital quota system have been installed and as utilization of those systems have increased. However, procedure growth is moderating in China. Future system placements and our ability to sustain procedure growth in China are dependent on obtaining additional importation authorizations or public hospital quotas, as well as on hospitals completing a central purchasing tender process under such authorizations. The most recent authorization expired at the end of 2015. The timing and magnitude of future authorizations that may enable future system placements is not certain. We have experienced strong procedure growth in Japan since receiving the national reimbursements, outlined above, for dVP and partial nephrectomy. However, as adoption for these procedures has progressed, procedure growth in Japan is slowing. Future procedure growth in Japan will likely be paced by the timing of procedure reimbursement approvals for procedures in addition to dVP and partial nephrectomy.
System Demand
Future demand for da Vinci Surgical Systems will be impacted by factors includinga number of factors: economic and geopolitical factors; the impact of the current COVID-19 pandemic, as noted in the COVID-19 Pandemic section above; hospital response to the evolving health carehealthcare environment under the current U.S. administration,administration; procedure growth rates,rates; hospital consolidation trends,trends; evolving system utilization and point of care dynamics,dynamics; capital replacement trends,trends; additional reimbursements in various global markets, including Japan,Japan: the timing around governmental tenders and authorizations, including China, andChina; 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. instruments; and market response.
Market acceptance of our recently launched Xda Vinci SP Surgical System and the nature and timing of additional da Vinci SP regulatory indications may also impact future systems placement. system placements.
Demand may also be impacted by roboticrobotic-assisted surgery competition, including from companies that have introduced products in the field of roboticrobotic-assisted surgery or have made explicit statements about their efforts to enter the field including, but not limited to: Auris Surgical Robotics, Inc.;to, Avatera Medical GmbH; Cambridge Medical Robotics Ltd.;CMR Surgical Limited; Johnson & Johnson and Google(including their wholly owned subsidiaries Auris Health, Inc. and their joint venture, Verb Surgical Inc.); Medicaroid Inc.; MedRobotics Corp.; Medtronic plc; meerecompany Inc.; Medtronic PLC.; Olympus Corp.; Samsung Corporation; Smart Robot Technology Group Co. Ltd.; Titan Medical, Inc.; and TransEnterix, Inc.; and Wego Holding Co., Ltd.
Many of the above factors will also impact future demand for our recently cleared Ion system, as well as other economicwe 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 geopolitical factors.our supply chain, competition, clinical data to demonstrate value, and market acceptance.
New Product Introductions
SynchroSeal and E-100 Generator. In November 2019, we obtained FDA clearance for our SynchroSeal instrument and E-100 generator. In March 2020, we received regulatory clearance in Japan to market both our SynchroSeal instrument and 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 Xi Surgical SystemSystems. The generator delivers high frequency energy for cutting, coagulation, and vessel sealing of tissues.
SureForm 45 Curved-Tip and Gray Reload.In May 2017,July 2019, we launched a new da Vinci model, the da Vinci X, in the U.S. The da Vinci X system provides surgeons and hospitals with access to some of the most advanced robotic-assisted surgery technology at a lower cost. The da Vinci X uses the same vision cart and surgeon console that are found on our flagship product, the da Vinci Xi system, giving our customers the option of adding advanced capabilities, and providing a pathway for upgrading should they choose to do so as their practice and needs grow.
The da Vinci X enables optimized, focused-quadrant surgery including procedures like prostatectomy, partial nephrectomy, benign hysterectomy, and sacrocolpopexy, among others. The system features flexible port placement and 3-D digital optics, while incorporating the same advanced instruments and accessories as the da Vinci Xi. The new system drives operational efficiencies through set-up technology that uses voice and laser guidance, drape design that simplifies surgery preparations, and a lightweight, fully integrated endoscope.
da Vinci Xi Integrated Table Motion. In January 2016, we launched Integrated Table Motion in the U.S. Integrated Table Motion coordinates the movements of the da Vinci robot arms with an advanced operating room table, the TruSystem® 7000dV sold by Trumpf MedicalTM, to enable shifting a patient’s position in real-time while the da Vinci surgical robotic arms remain docked. This gives operating room teams the capabilities to optimally position the operating table so that gravity exposes anatomy during multi-quadrant da Vinci System procedures, maximize reach and access to target anatomy enabling surgeons to interact with tissue at an ideal working angle, and reposition the table during the procedure to enhance anesthesiologists’ care of the patient.
EndoWrist Stapler 30. In March 2016, we receivedobtained FDA clearance in the U.S. for the EndoWrist Stapler 30 instrument with Blue, Green, White,SureForm 45 Curved-Tip stapler and SureForm 45 Gray 30mm reloadsreload. We have also received CE mark clearance for use with the da Vinci Xi Surgical System. It is intended to deliver particular utility

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with fine tissue interaction in lobectomyour SureForm 45 Curved-Tip stapler and other thoracic procedures. The EndoWrist Stapler 30SureForm 45 Gray reload. SureForm 45 Curved-Tip is a single-use, fully wristed stapling instrument with a curved tip intended for resection, transection, and/or creation of anastomoses. SureForm 45 Gray reload is a new, single-use cartridge that contains
EndoWrist Stapler
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multiple staggered rows of implantable staples and a stainless steel knife. The SureForm 45 Curved-Tip stapler and Gray reload have particular utility in thoracic procedures and round out our SureForm 45 portfolio. Not all reloads or staplers are available for use on all systems or in all countries.
Da Vinci Endoscope Plus.In June 2019, we received CE mark clearance in Europe 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 Korea and Japan to market our da Vinci Endoscope Plus in December 2019 and May 2020, respectively. The da Vinci Endoscope Plus leverages new sensor technology to allow for increased sharpness and color accuracy.
Da Vinci Handheld Camera. In June 2019, we obtained FDA clearance for our da Vinci Handheld Camera, a lightweight, 2D camera head, which can be connected to third-party laparoscopes. This allows the laparoscopic image to be displayed on the da Vinci X/Xi vision cart to address aspects of da Vinci procedures that may require use of a laparoscope, thus eliminating the need for redundant equipment in the operating room and increasing procedure efficiency. We broadly launched the da Vinci Handheld Camera in our European direct markets as well as in the U.S. in May 2020 and June 2020, respectively.
Ion endoluminal system. In February 2019, we obtained FDA clearance for the Ion endoluminal system, our new flexible, robotic-assisted, catheter-based platform designed to navigate through very small lung airways to reach peripheral nodules for biopsies. The Ion system uses an ultra-thin articulating robotic catheter that can articulate 180 degrees in all directions. The outer diameter of the catheter is 3.5mm, which allows physicians to navigate through small and tortuous airways to reach nodules in most airway segments within the lung. The Ion system’s flexible biopsy needle can also pass through very tight bends via Ion’s catheter to collect tissue in the peripheral lung. The catheter’s 2mm working channel can also accommodate other biopsy tools, such as biopsy forceps or cytology brushes, if necessary. We are introducing Ion in a measured fashion while we optimize training pathways and our supply chain and collect additional clinical data. We have placed 21 Ion systems for commercial use as of June 30, broadens2020.
Iris. In February 2019, we obtained FDA clearance for our Iris augmented reality product. Iris is a service that delivers a 3D image of the patient anatomy (initially targeting kidneys) to aid surgeons in both the pre- and intra-operative settings. We are now in the early stages of an Iris pilot study in the field at a small group of U.S. hospitals to gain initial product experience and insights.
SureForm 60 and SureForm 45 Staplers.In July 2018, we obtained FDA clearance for the SureForm 60 instrument with White, Blue, Green, and Black 60mm reloads. In January 2019, we obtained FDA clearance for the SureForm 45 instrument with White, Blue, Green, and Black 45mm reloads. Additionally, we received regulatory clearance in South Korea for the SureForm 60 instrument and 60mm reloads in June 2018 and July 2018, respectively, and for the SureForm 45 instrument and 45mm reloads in June 2019 and September 2019, respectively. Also, we received regulatory clearance in Japan for the SureForm 60 instrument and 60mm reloads in June 2018 and November 2018, respectively, and for the SureForm 45 instrument and 45mm reloads in September 2019. The SureForm 60 and SureForm 45 Staplers are single-use, fully wristed stapling instruments intended for resection, transection, and/or creation of anastomoses. The SureForm 60 instrument has particular utility in bariatric procedures, while the SureForm 45 instrument has particular utility in colorectal procedures. The SureForm 60 and SureForm 45 Staplers broaden our existing stapler product line, which also includes EndoWrist Stapler 45 with White, Blue, and Green, 45mm reloads and EndoWrist Stapler 30 with White, Blue, Green, and WhiteGray 30mm reloads. Not all reloads or staplers are available for use on all systems or in all countries.
Intuitive Surgical-Fosun Medical Technology (Shanghai) Co.Da Vinci SP Surgical System.In May 2018, we obtained FDA clearance for the da Vinci SP Surgical System for urologic surgical procedures that are appropriate for a single port approach. In March 2019, we obtained FDA clearance for the da Vinci SP Surgical System for certain transoral procedures. The da Vinci SP Surgical System includes three, multi-jointed, wristed instruments and the first da Vinci fully wristed, 3DHD camera. The instruments and the camera all emerge through a single cannula and are triangulated around the target anatomy to avoid external instrument collisions that can occur in narrow surgical workspaces. The system enables flexible port placement and broad internal and external range of motion (e.g., Ltd.
In September 2016, we agreed360 degrees of anatomical access) through the single SP arm. Surgeons control the fully articulating instruments and the camera on the da Vinci SP system, which uses the same fourth generation surgeon console as the da Vinci X and Xi systems. The da Vinci SP Surgical System provides surgeons with robotic-assisted technology designed for deep and narrow access to establish a joint venture with Shanghai Fosun Pharmaceutical (Group) Co., Ltd. (“Fosun Pharma”), a subsidiary of Fosun International Limited, to research, develop, manufacture, and sell robotic-assisted catheter-based medical devices. The joint venture will initially produce products targeting early diagnosis and cost-effective treatment of lung cancer, onetissue in the body. We anticipate pursuing further regulatory clearances for the da Vinci SP Surgical System, including colorectal applications, broadening the applicability of the most commonly diagnosed formsSP platform over time. We continue to introduce the da Vinci SP Surgical System in a measured fashion while we optimize training pathways and our supply chain. We have an installed base of cancer52 da Vinci SP Surgical Systems as of June 30, 2020.
Da Vinci Vessel Sealer Extend.In April 2018, we obtained FDA clearance for da Vinci Vessel Sealer Extend, our newest instrument in the world. The technology will be used in robotic-assisted medical devices based on cathetersVessel Sealing family of products. Da Vinci Vessel Sealer Extend is a single-use, fully wristed bipolar electrosurgical instrument compatible with our fourth generation multiport systems. It is intended for grasping and incorporates proprietary intellectual property developed or owned by us. The joint venture is located in Shanghai, China, where it will perform research and development activities and manufacture catheter-based products for global distribution. Distribution in China will be conducted by the joint venture. Distribution outside of China will be conducted by us. The joint venture is owned 60% by us and 40% by Fosun Pharma. The companies will contribute up to $100 million as required by the joint venture, an arrangement representing a significant expansion of our relationship with Fosun Pharma. Since 2011, Chindex Medical Limited, a subsidiary of Fosun Pharma, has been our distribution partner for da Vinci Surgical Systems in China.
In the second quarter of 2017, the joint venture company was legally formed after receiving required approvals from the relevant PRC government authorities and administrative agencies. During the third quarter of 2017, the joint venture received contributions from us and Fosun Pharma. The joint venture also commenced hiring employees and began planning for the establishment of manufacturing infrastructure. We expect that the joint venture will incur net losses before product commercialization and that it will not generate revenue in 2018. However, there can be no assurance that we and the joint venture can successfully complete the development of the robotic-assisted catheter-based medical devices; that we and the joint venture will successfully commercialize such products; that the joint venture will not require additional contributions to fund its business; or that the joint venture will become profitable.

blunt
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dissection of tissue and for bipolar coagulation and mechanical transection of vessels up to 7mm in diameter and tissue bundles that fit in the jaws of the instrument.
Third
Acquisition of Orpheus Medical
In February 2020, we acquired Orpheus Medical Ltd. and its wholly owned subsidiaries to deepen and expand our integrated informatics platform. Orpheus Medical provides hospitals with information technology connectivity, as well as expertise in processing and archiving surgical videos. Orpheus Medical will be a wholly owned subsidiary of Intuitive.
Second Quarter 20172020 Operational and Financial Highlights
•Total revenue increaseddecreased by 18%22% to $806.1$852 million duringfor the three months ended SeptemberJune 30, 2017,2020, compared with $682.9$1,099 million duringfor the three months ended SeptemberJune 30, 2016. Third quarter 2017 total2019.
•The service fee credits within the Customer Relief Program resulted in a $59 million decrease in service revenue included $21.3 million revenue recognized related tofor the customer trade-out program as described below.
three months ended June 30, 2020.
•Approximately 214,000243,000da Vinci procedures were performed during the three months ended SeptemberJune 30, 2017, an increase2020, a decrease of approximately 15%19% compared with approximately 186,000301,000 for the three months ended SeptemberJune 30, 2016.
2019.
Instrument•We continued to experience a decline in da Vinci procedures in April 2020 due to the COVID-19 pandemic, reaching approximately 30% of pre-COVID-19 levels in the U.S. In May and accessoryJune, U.S. procedures began a recovery phase and, by the middle of June, grew to nearly the same level as that measured in the first two weeks of the first quarter of 2020. However, in the last two weeks of June and into July, we have experienced another decline in da Vinci procedures. The impact of COVID-19 in Europe during the second quarter varied by country with procedures in Italy, France, and the UK declining more steeply. Procedure volume in Japan, China, Korea, and Germany grew as compared to the second quarter of 2019.
•Instruments and accessories revenue increaseddecreased by 15%20% to $401.2$461 million for the three months ended June 30, 2020, compared with $579 million for the three months ended June 30, 2019.
•Systems revenue decreased by 24% to $261 million for the three months ended June 30, 2020, compared with $344 million during the three months ended SeptemberJune 30, 2017, compared with $348.1 million during the three months ended September 30, 2016.
2019.
Recurring revenue increased by 15% to $548.0 million during the three months ended September 30, 2017, representing 68% of total revenue, compared with $477.8 million during the three months ended September 30, 2016, representing 70% of total revenue.
Systems revenue increased by 26% to $258.1 million during the three months ended September 30, 2017, compared with $205.1 million during the three months ended September 30, 2016. Third quarter 2017 systems revenue included revenue recognized related to the customer trade-out program as described below.
•A total of 169 178 da Vinci Surgical Systems were shipped during the three months ended SeptemberJune 30, 2017,2020, a decrease of 35% compared with 134273 systems during the three months ended SeptemberJune 30, 2016. 2019.
•As of SeptemberJune 30, 2017,2020, we had a da Vinci Surgical System installed base of approximately 4,2715,764 systems, an increase of approximately 12%9% compared with the installed base of approximately 5,270 systems as of SeptemberJune 30, 2016.
2019.
•During the three months ended June 30, 2020, we placed 3 Ion systems for commercial use.
•Gross profit as a percentage of revenue was 70.3%59.0% for the three months ended SeptemberJune 30, 2017,2020, compared with 71.3%69.1% for the three months ended SeptemberJune 30, 2016. Gross profit2019.
•Operating income decreased by 78% to $80.6 million for the three months ended SeptemberJune 30, 2016, benefited from a $7.1 million Medical Device Excise Tax (“MDET”) refund.
Operating income increased by 9% to $278.62020, compared with $359.0 million during the three months ended SeptemberJune 30, 2017, compared with $256.4 million during the three months ended September 30, 2016.2019. Operating income included $55.9$96.4 million and $46.9$82.0 million of share-based compensation expense related to employee stock plans and $14.6 million and $10.6 million of intangible asset-related charges for the three months ended June 30, 2020, and 2019, respectively.
•Income tax expense decreased by 51% to $37.0 million for the three months ended June 30, 2020, compared with $75.4 million during the three months ended SeptemberJune 30, 2017, and 2016, respectively. Operating income for the three months ended September 30, 2017,2019. Income tax expense included $9.7$36.8 million of net pre-tax litigationdiscrete charges arising from the conclusion of a tax case between an independent third party and the IRS related charges.
to charging foreign subsidiaries for share-based compensation.
•As of SeptemberJune 30, 2017,2020, we had $3.8$6.1 billion in cash, cash equivalents, and investments. Cash, cash equivalents, and investments increased by $378.7$220 million, compared with June 30, 2017,December 31, 2019, primarily as a result of cash generated from operating activities.
Trade-Out Program: During the first quarter 2017, we deferred $23.4 million and $8.1 million of revenue and product costs, respectively, relating to a customer trade-out program that was offered to certain customers. Under this trade-out program, those customers were given the option to return systems purchased in the first quarter of 2017 and receive a credit towards the purchase of da Vinci X surgical system that was launched in the second quarter of 2017. Subject to meeting all other criteria of our revenue recognition policy, the amounts deferred are recognized at the date the new products are acceptedactivities, partially offset by the customers participating in the trade-out program, or at the expiration of unexercised rights. During the three months ended September 30, 2017, we recognized $21.3 million and $7.3 million of previously deferred revenue and product costs, respectively, as a result of those offers having expired unexercised. As of September 30, 2017, a total of $2.1 million and $0.8 million of revenue and product costs, respectively, remained deferred. We anticipate this program to be substantially complete prior to the end of 2017.

capital expenditures.
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Results of Operations
The following table sets forth, for the periods indicated, certain unaudited Condensed Consolidated Statements of Income information (in millions, except percentages):
Three Months Ended June 30,Six Months Ended June 30,
 2020% of total
revenue		2019% of total
revenue		2020% of total
revenue		2019% of total
revenue
Revenue:
Product$721.8  85 %$922.3  84 %$1,622.6  83 %$1,722.1  83 %
Service130.3  15 %176.6  16 %329.0  17 %350.5  17 %
Total revenue852.1  100 %1,098.9  100 %1,951.6  100 %2,072.6  100 %
Cost of revenue:
Product283.8  33 %283.4  26 %580.5  30 %529.8  25 %
Service65.4  8 %56.5  5 %130.0  7 %114.2  6 %
Total cost of revenue349.2  41 %339.9  31 %710.5  37 %644.0  31 %
Product gross profit438.0  52 %638.9  58 %1,042.1  53 %1,192.3  58 %
Service gross profit64.9  7 %120.1  11 %199.0  10 %236.3  11 %
Gross profit502.9  59 %759.0  69 %1,241.1  63 %1,428.6  69 %
Operating expenses:
Selling, general and administrative279.1  33 %279.2  25 %587.2  30 %552.6  27 %
Research and development143.2  17 %120.8  11 %290.3  15 %264.8  13 %
Total operating expenses422.3  50 %400.0  36 %877.5  45 %817.4  40 %
Income from operations80.6  9 %359.0  33 %363.6  18 %611.2  29 %
Interest and other income, net26.6  3 %32.8  3 %51.7  3 %60.3  3 %
Income before taxes107.2  12 %391.8  36 %415.3  21 %671.5  32 %
Income tax expense37.0  4 %75.4  7 %28.9  1 %51.1  2 %
Net income70.2  8 %316.4  29 %386.4  20 %620.4  30 %
Less: net income (loss) attributable to noncontrolling interest in joint venture2.2  — %(1.9) — %4.9  — %(4.4) — %
Net income attributable to Intuitive Surgical, Inc.$68.0  8 %$318.3  29 %$381.5  20 %$624.8  30 %
 Three Months Ended September 30, Nine Months Ended September 30,
 2017 
% of total
revenue
 2016 
% of total
revenue
 2017 
% of total
revenue
 2016 
% of total
revenue
Revenue:               
Product$659.3
 82 % $553.2
 81% $1,807.5
 81% $1,565.2
 80%
Service146.8
 18 % 129.7
 19% 429.0
 19% 382.3
 20%
Total revenue806.1
 100 % 682.9
 100% 2,236.5
 100% 1,947.5
 100%
Cost of revenue:               
Product195.0
 24 % 158.4
 23% 543.1
 24% 475.8
 24%
Service44.3
 6 % 37.5
 6% 132.6
 6% 108.8
 6%
Total cost of revenue239.3
 30 % 195.9
 29% 675.7
 30% 584.6
 30%
Product gross profit464.3
 58 % 394.8
 58% 1,264.4
 57% 1,089.4
 56%
Service gross profit102.5
 12 % 92.2
 13% 296.4
 13% 273.5
 14%
Gross profit566.8
 70 % 487.0
 71% 1,560.8
 70% 1,362.9
 70%
Operating expenses:               
Selling, general and administrative204.8
 25 % 168.0
 25% 591.7
 26% 511.6
 26%
Research and development83.4
 10 % 62.6
 9% 241.5
 11% 170.5
 9%
Total operating expenses288.2
 35 % 230.6
 34% 833.2
 37% 682.1
 35%
Income from operations278.6
 35 % 256.4
 37% 727.6
 33% 680.8
 35%
Interest and other income, net10.8
 1 % 10.4
 2% 29.6
 1% 23.9
 1%
Income before taxes289.4
 36 % 266.8
 39% 757.2
 34% 704.7
 36%
Income tax (benefit) expense(8.1) (1)% 55.8
 8% 58.4
 3% 172.8
 9%
Net income$297.5
 37 % $211.0
 31% $698.8
 31% $531.9
 27%

Total Revenue
Total revenue was $806.1decreased by 22% to $852 million for the three months ended SeptemberJune 30, 2017,2020, compared with $682.9$1,099 million for the three months ended SeptemberJune 30, 2016,2019, resulting from 15% higher recurring20% lower instruments and accessories revenue, driven by approximately 15% higher19% lower procedure volume, 24% lower systems revenue, and 26% higherlower service revenue. Total revenue decreased by 6% to $2.0 billion for the six months ended June 30, 2020, compared with $2.1 billion for the six months ended June 30, 2019, resulting from 5% lower instruments and accessories revenue, driven by approximately 5% lower procedure volume, 8% lower systems revenue, and 6% lower service revenue. The service fee credits provided to customers as part of our Customer Relief Program resulted in a $59 million decrease in service revenue for the three months ended June 30, 2020.
Revenue denominated in foreign currencies as a percentage of total revenue was approximately 18%26% and 17%23% for the three and ninesix months ended SeptemberJune 30, 2017,2020, respectively, compared with 19%and 17% and 18% for both the three and ninesix months ended SeptemberJune 30, 2016.2019, respectively. We generally sell our products and services in Euros and British Pounds in those European marketslocal currencies where we have direct distribution channels, and in Japanese Yen and Korean Won in Japan and South Korea, respectively.channels. Foreign currency exchange ratesrate fluctuations did not have a material impact on total revenue or operating income.for the three and six months ended June 30, 2020, as compared with the three and six months ended June 30, 2019.
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Revenue generated in the U.S. accounted for 74%63% and 73%67% of total revenue for the three and ninesix months ended SeptemberJune 30, 2017,2020, respectively, compared with 72% of total revenueand 71% for both the three and ninesix months ended SeptemberJune 30, 2016.2019. 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, in the U.S., reimbursement structures supportive of innovation and minimally invasive surgery,MIS, and our initial investments focused on U.S. infrastructure. We have been investing in our business in the OUS marketmarkets, 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. However, the current increase in OUS revenue as a percentage of total revenue is a result of the COVID-19 pandemic and is reflective that U.S. procedures and revenue were more impacted than OUS procedures and revenue.

As the COVID-19 pandemic is expected to continue to cause a strain on hospital resources, as outlined in the COVID-19 Pandemic section above, including recommended deferrals of elective procedures by various authorities and policy makers, we cannot reliably estimate the extent procedures and system placements will be impacted in the third quarter of 2020 and beyond.
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The following table summarizes our revenue and da Vinci Surgical Systemsystem unit shipments for the three and ninesix months ended SeptemberJune 30, 2017,2020, and 20162019, respectively (in millions, except percentages and unit shipments):
 Three Months Ended June 30,Six Months Ended June 30,
 2020201920202019
Revenue
Instruments and accessories$460.8  $578.5  $1,078.3  $1,130.8  
Systems261.0  343.8  544.3  591.3  
Total product revenue721.8  922.3  1,622.6  1,722.1  
Services130.3  176.6  329.0  350.5  
Total revenue$852.1  $1,098.9  $1,951.6  $2,072.6  
United States$535.4  $785.3  $1,317.0  $1,476.9  
OUS316.7  313.6  634.6  595.7  
Total revenue$852.1  $1,098.9  $1,951.6  $2,072.6  
% of Revenue – U.S.63 %71 %67 %71 %
% of Revenue – OUS37 %29 %33 %29 %
Instruments and accessories$460.8  $578.5  $1,078.3  $1,130.8  
Services130.3  176.6  329.0  350.5  
Operating lease revenue42.2  25.1  81.3  45.5  
Total recurring revenue$633.3  $780.2  $1,488.6  $1,526.8  
% of Total revenue74 %71 %76 %74 %
Da Vinci Surgical Systems Shipments by Region:
U.S. unit shipments106  193  288  347  
OUS unit shipments72  80  127  161  
Total unit shipments*178  273  415  508  
*Systems shipped under operating leases (included in total unit shipments)52  88  129  166  
Ion Systems Shipments3  —  11  —  
Da Vinci Surgical Systems Shipments involving System Trade-ins:
Unit shipments involving trade-ins72  103  208  188  
Unit shipments not involving trade-ins106  170  207  320  

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 Three Months Ended September 30,
Nine Months Ended September 30,
 2017
2016
2017
2016
Revenue       
Instrument and accessory$401.2
 $348.1
 $1,179.8
 $1,009.5
Systems258.1
 205.1
 627.7
 555.7
Total product revenue659.3
 553.2
 1,807.5
 1,565.2
Service146.8
 129.7
 429.0
 382.3
Total revenue$806.1
 $682.9
 $2,236.5
 $1,947.5
Recurring revenue$548.0
 $477.8
 $1,608.8
 $1,391.8
% of total revenue68% 70% 72% 71%
United States$593.5
 $494.1
 $1,635.7
 $1,409.6
OUS212.6
 188.8
 600.8
 537.9
Total revenue$806.1
 $682.9
 $2,236.5
 $1,947.5
% of Revenue - U.S.74% 72% 73% 72%
% of Revenue - OUS26% 28% 27% 28%
        
Unit Shipments by Region:       
U.S. unit shipments107
 85
 287
 238
OUS unit shipments62
 49
 181
 136
Total unit shipments*169
 134
 468
 374
*Systems shipped under operating leases (included in total unit shipments)20
 15
 68
 49
        
Unit Shipments involving System Trade-ins:       
Unit shipments involving trade-ins44
 33
 106
 113
Unit shipments not involving trade-ins125
 101
 362
 261

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Product Revenue
Three months ended SeptemberJune 30, 2017:2020
Product revenue increaseddecreased by 19%22% to $659.3$722 million for the three months ended SeptemberJune 30, 2017,2020, compared with $553.2$922 million for the three months ended SeptemberJune 30, 2016.2019.
InstrumentInstruments and accessoryaccessories revenue increaseddecreased by 15%20% to $401.2$461 million for the three months ended SeptemberJune 30, 2017,2020, compared with $348.1$579 million for the three months ended SeptemberJune 30, 2016.2019. The increasedecrease in instrumentinstruments and accessoryaccessories revenue was driven primarily by procedure growtha decline in procedures of approximately 15%19%. ThirdThe second quarter 20172020 U.S. procedure growthvolumes declined by approximately 24% primarily as a result of the significant disruption caused by the COVID-19 pandemic, as noted in the COVID-19 Pandemic section above. The second quarter 2020 OUS procedure volumes declined by approximately 12%7%, also driven by the significant disruption caused by the COVID-19 pandemic, as noted in the COVID-19 Pandemic section above. Geographically, the second quarter 2020 OUS procedure decline was driven by growth in general surgery procedures, most notably hernia repairthe UK, France, and colorectal procedures, and thoracic procedures,Italy as well as moderate growth in more mature urologic procedures. OUS procedure growth was approximately 23% for the third quarter of 2017, driven by continued growth in dVP procedures and earlier stage growth in kidney cancer procedures, general surgery and gynecology. Geographically, third quarter OUS procedure growth was driven byvarious other smaller countries, while we saw procedure expansion in Japan, SouthChina, Korea, and China. Procedure growth varied by country in our European market.Germany.
Systems revenue increaseddecreased by 26%24% to $258.1$261 million for the three months ended SeptemberJune 30, 2017,2020, compared with $205.1$344 million for the three months ended SeptemberJune 30, 2016. Higher third2019. The lower second quarter 20172020 systems revenue was primarily driven by higherfewer system shipments and revenue recognized related tolower lease buyouts, partially offset by higher second quarter 2020 ASPs and higher operating lease revenue.
During the second quarter of 2020, a total of 178 da Vinci X trade-out program, largely offsetSurgical Systems were shipped compared with 273 systems during the second quarter of 2019. By geography, 106 systems were shipped into the U.S., 18 into Europe, 48 into Asia, and 6 into other markets during the second quarter of 2020, compared with 193 systems shipped into the U.S., 30 into Europe, 40 into Asia, and 10 into other markets during the second quarter of 2019. The decrease in systems shipments was primarily driven by lowerdecisions by customers to defer purchases or leases of systems average selling price (“ASP”),into future quarters and, in some cases, indefinitely as a higher numberresult of system placementsthe COVID-19 pandemic as well as the decline in procedures, which lead to excess capacity at certain hospitals.
We shipped 61 and 99 da Vinci Surgical Systems under operating lease arrangements, of which 52 and lower Lease Buyout revenue. Revenue from Lease Buyouts was $10.8 million88 systems were classified as operating leases for the three months ended SeptemberJune 30, 2017, compared with $13.12020, and 2019, respectively. Operating lease revenue was $42.2 million for the three months ended SeptemberJune 30, 2016.2020, compared with $25.1 million for the three months ended June 30, 2019. Systems placed as operating leases represented 29% of total shipments during the second quarter of 2020, compared with 32% during the second quarter of 2019. A total of 758 da VinciSurgical Systems were installed at customers under operating lease or usage-based arrangements as of June 30, 2020, compared with 486 as of June 30, 2019. Revenue from Lease Buyouts was $9.4 million for the three months ended June 30, 2020, compared with $27.2 million for the three months ended June 30, 2019. We expect revenue from Lease Buyouts to fluctuate period to period baseddepending on the timing of when, and if, customers choose to exercise the buyout options embedded in their leases.
During the third quarter of 2017, a total of 169 systems were shipped compared with 134 during the third quarter of 2016. By geography, 107 systems were shipped into the U.S., 25 into Europe, 26 into Asia, and 11 into other markets during the third quarter of 2017, compared with 85 systems shipped into the U.S., 18 into Europe, 25 into Asia, and 6 into other markets during the third quarter of 2016. During the third quarter of 2017, 20 of the 169 systems were shipped under operating lease arrangements compared with 15 of 134 systems shipped during the third quarter of 2016. Operating lease revenue was $6.7 million for the three months ended September 30, 2017, compared with $4.2 million for the three months ended September 30, 2016. The increase in systems shipments was primarily driven by procedure growth and the need for hospitals to expand or establish capacity. System placements are expected to continue to vary as some of our OUS markets are in early stages of adoption, some markets are highly seasonal reflecting budget cycles or vacation patterns, and sales into some markets are constrained by government regulations.
The da Vinci Surgical System ASP, excluding the impact of systems shipped under operating leases,lease or usage-based arrangements and Ion systems, was approximately $1.47$1.65 million for both the three and nine months ended SeptemberJune 30, 2017,2020, compared with $1.53approximately $1.54 million for both the three and nine months ended SeptemberJune 30, 2016.2019. The lower thirdhigher second quarter 20172020 ASP primarily reflectwas largely driven by favorable geographic and product and geographic mix, as well as lower pricing offered to customers purchasing multiple systems. ASPs fluctuatepartially offset by higher relative trade-in volume. ASP fluctuates from period to period based on geographic and product mix, product pricing, systems shipped involving trade-ins, and changes in foreign exchange rates.
NineSix months ended SeptemberJune 30, 2017:2020
Product revenue increaseddecreased by 15%6% to $1.8 billion for the nine months ended September 30, 2017, compared with $1.6 billion for the ninesix months ended SeptemberJune 30, 2016.
Instrument and accessory revenue increased by 17% to $1.22020, compared with $1.7 billion for the ninesix months ended SeptemberJune 30, 2017, compared with $1.02019.
Instruments and accessories revenue decreased by 5% to $1.08 billion for the ninesix months ended SeptemberJune 30, 2016.2020, compared with $1.13 billion for the six months ended June 30, 2019. The increasedecrease in instrumentinstruments and accessoryaccessories revenue was driven primarily by a decline in procedures of approximately 5%. The year-to-date 2020 U.S. procedure volumes declined by approximately 8% primarily as a result of the significant disruption caused by the COVID-19 pandemic, as noted in the COVID-19 Pandemic section above. The year-to-date 2020 OUS procedure volumes increased by approximately 2%, also driven by the significant disruption caused by the COVID-19 pandemic, as noted in the COVID-19 Pandemic section above. Geographically, the year-to-date 2020 OUS procedure growth was driven by procedure growth of approximately 16%expansion in Japan, Korea, Germany, and higher sales of our advanced instruments. U.S. procedure growth of approximately 13% forChina offset by declines in the nine months ended September 30, 2017, was driven by growth in general surgery procedures, most notably hernia repairUK, France, and colorectal procedures, and thoracic procedures,Italy as well as moderate growth in more mature gynecologic and urologic procedure categories. OUS procedure growth was approximately 24% for the nine months ended September 30, 2017, driven by continued growth in dVP procedures and earlier stage growth in kidney cancer procedures, general surgery and gynecology. Geographically, higher OUS procedure growth for the nine months ended September 30, 2017, was driven by strong procedure expansion in Japan, South Korea, and China. Procedure growth varied by country in our European market.various other smaller countries.
Systems revenue increaseddecreased by 13%8% to $627.7$544 million for the ninesix months ended SeptemberJune 30, 2017,2020, compared with $555.7$591 million for the ninesix months ended SeptemberJune 30, 2016. Higher2019. The lower year-to-date 2020 systems revenue for the nine months ended September 30, 2017, was primarily driven primarily by higherfewer system shipments and largelylower lease buyouts, partially offset by a higher number of system placements under2020 ASPs and higher operating lease arrangements and lower systems ASP.

revenue.
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During the ninesix months ended SeptemberJune 30, 20172020, a total of 468 systems415 da Vinci Surgical Systems were shipped compared with 374508 systems during the ninesix months ended SeptemberJune 30, 2016.2019. By geography, 287288 systems were shipped into the U.S., 7543 into Europe, 7475 into Asia, and 329 into other markets during the ninesix months ended SeptemberJune 30, 2017,2020, compared with 238347 systems shipped into the U.S., 5379 into Europe, 6661 into Asia, and 1721 into other markets during the ninesix months ended SeptemberJune 30, 2016. During the nine months ended September 30, 2017, 68 of the 468 systems were shipped under operating lease arrangements compared with 49 of 374 systems shipped during the nine months ended September 30, 2016. Operating lease revenue was $18.1 million for the nine months ended September 30, 2017, compared with $12.0 million for the nine months ended September 30, 2016.2019. The increasedecrease in systems shipments was primarily driven by procedure growthdecisions by customers to defer purchases or leases of systems into future quarters and, in some cases, indefinitely as a result of the COVID-19 pandemic as well as the decline in procedures, which lead to excess capacity at certain hospitals, partially offset by more customers trading in older da Vinci models for fourth generation da Vinci Xi and da Vinci X systems and the need for certain hospitals to expand or establish capacity.
We shipped 182 and 180 da Vinci Surgical Systems under lease arrangements, of which 129 and 166 systems were classified as operating leases for the six months ended June 30, 2020, and 2019, respectively. Operating lease revenue was $81.3 million for the six months ended June 30, 2020, compared with $45.5 million for the six months ended June 30, 2019. Systems placed as operating leases represented 31% of total shipments during the six months ended June 30, 2020, compared with 33% during the six months ended June 30, 2019. Revenue from Lease Buyouts was $21.6 million for the six months ended June 30, 2020, compared with $39.2 million for the six months ended June 30, 2019. 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 shipped under operating lease or usage-based arrangements and Ion systems, was approximately $1.53 million for the six months ended June 30, 2020, compared with approximately $1.43 million for the six months ended June 30, 2019. The higher year-to-date 2020 ASP was largely driven by favorable geographic and product mix, partially offset by higher trade-in volume. ASP fluctuates from period to period based on geographic and product mix, product pricing, systems shipped involving trade-ins, and changes in foreign exchange rates.
Service Revenue
Service revenue increaseddecreased by 13%26% to $146.8$130 million for the three months ended SeptemberJune 30, 2017,2020, compared with $129.7$177 million for the three months ended SeptemberJune 30, 2016. Service revenue increased by 12% to $429.0 million for the nine months ended September 30, 2017, compared with $382.3 million for the nine months ended September 30, 2016. Higher2019. The decrease in service revenue for the three and nine months ended September 30, 2017, was primarily driven by the effects of the Customer Relief Program, which resulted in a $59 million decrease, partially offset by a larger installed base of da Vinci Surgical Systems producing service revenue.
Service revenue decreased by 6% to $329 million for the six months ended June 30, 2020, compared with $351 million for the six months ended June 30, 2019. The decrease in service revenue was primarily driven by the effects of the Customer Relief Program, partially offset by a larger installed base of da Vinci Surgical Systems producing service revenue.
Gross Profit
Product gross profit for the three months ended SeptemberJune 30, 2017, increased 18%2020, decreased 31% to $464.3$438 million, representing 70.4%60.7% of product revenue, compared with $394.8$639 million, representing 71.4%69.3% of product revenue, for the three months ended SeptemberJune 30, 2016. Product gross profit for the nine months ended September 30, 2017, increased 16% to $1.3 billion, representing 70.0% of product revenue, compared with $1.1 billion, representing 69.6% of product revenue, for the nine months ended September 30, 2016.2019. The higherlower product gross profit for the three and nine months ended SeptemberJune 30, 2017,2020, was primarily driven by higherlower product revenue.
revenue and lower product gross profit margin. The lower product gross profit margin for the three months ended SeptemberJune 30, 2017, as compared with the same period in 2016,2020, was primarily driven by higher excess and obsolete inventory costs related to transitioning to new technologies coupled with the decrease in demand for older technologies, period costs in the second quarter of 2020 associated with abnormally low production, and higher freight costs. These higher charges were primarily a $7.1 million MDET refund recorded as a reduction to costresult of revenue during the threeCOVID-19 pandemic.
Product gross profit for the six months ended SeptemberJune 30, 2016.2020, decreased 13% to $1.0 billion, representing 64.2% of product revenue, compared with $1.2 billion, representing 69.2% of product revenue, for the six months ended June 30, 2019. The higherlower product gross profit for the six months ended June 30, 2020, was primarily driven by lower product revenue and lower product gross profit margin. The lower product gross profit margin for the ninesix months ended SeptemberJune 30, 2017,2020, was due to manufacturing efficienciesprimarily driven by higher excess and product cost reductions on some of our newer products, partially offset by a $7.8 million litigation settlement chargeobsolete inventory costs related to a license and supply agreement recognizedtransitioning to new technologies coupled with the decrease in cost of revenue duringdemand for older technologies, period costs in the firstsecond quarter of 20172020 associated with abnormally low production, and higher freight costs. These higher charges were primarily a result of the MDET refund described above. The trade-out program described above did not have a material impact onCOVID-19 pandemic. There were also increased costs associated with da Vinci Si product gross profit margin.
MDET became effective on January 1, 2013. In December 2015, the Consolidated Appropriations Act, 2016 (the “Appropriations Act”) was signed into law. The Appropriations Act includes a two-year moratorium on MDET such that medical device sales in 2016transitions and 2017 are exempt from the excise tax. MDET is scheduled to be reinstated on January 1, 2018. Product gross profit included $17.0 million of MDEThigher intangible assets amortization expense representing approximately 0.9% of total product revenue, for the year ended December 31, 2015.and share-based compensation expense.
Product gross profit for the three and ninesix months ended SeptemberJune 30, 2017, reflected2020, included share-based compensation expense of $7.0$14.2 million and $20.5$27.0 million, respectively, compared with $6.9$11.4 million and $18.6$22.4 million, for the three and ninesix months ended SeptemberJune 30, 2016,2019, respectively. Product gross profit for the three and ninesix months ended SeptemberJune 30, 2017,2020, included intangible assets amortization expense of intangible assets of $1.2$8.9 million and $4.4$17.7 million, respectively, compared with $1.8$7.7 million and $6.1$15.0 million, for the three and ninesix months ended SeptemberJune 30, 2016,2019, respectively.
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Service gross profit for the three months ended SeptemberJune 30, 2017, was $102.52020, decreased 46% to $64.9 million, or 69.8%representing 49.8% of service revenue, compared with $92.2$120.1 million, or 71.1%representing 68.0% of service revenue, for the three months ended SeptemberJune 30, 2016. Service gross profit for the nine months ended September 30, 2017, was $296.4 million, or 69.1% of service revenue, compared with $273.5 million, or 71.5% of service revenue for the nine months ended September 30, 2016.2019. The higherlower service gross profit for the three and nine months ended SeptemberJune 30, 2017,2020, was primarily driven by higherlower service revenue reflecting a larger installed base of da Vinci Surgical Systems, partially offset byand lower service gross profit margin. The lower service gross profit margin for the three and nine months ended SeptemberJune 30, 2017, as compared with the same periods in 2016,2020, was primarily driven by higher coststhe decrease in service revenue as a result of the Customer Relief Program.
Service gross profit for the six months ended June 30, 2020, decreased 16% to repair$199 million, representing 60.5% of service revenue, compared with $236 million, representing 67.4% of service revenue, for the six months ended June 30, 2019. The lower service gross profit for the six months ended June 30, 2020, was primarily driven by lower service revenue and replace da Vinci Xi endoscope products.lower service gross profit margin. The lower service gross profit margin for the six months ended June 30, 2020, was primarily driven by the decrease in service revenue as a result of the Customer Relief Program.
Service gross profit for the three and ninesix months ended SeptemberJune 30, 2017, reflected2020, included share-based compensation expense of $3.7$5.2 million and $10.4$10.7 million, respectively, compared with $3.3$4.8 million and $9.4$9.3 million, for the three and ninesix months ended SeptemberJune 30, 2016,2019, respectively. Service gross profit for the three and six months ended June 30, 2020, included intangible assets amortization expense of $0.9 million and $1.8 million, respectively, compared with $1.0 million and $1.9 million, for the three and six and months ended June 30, 2019, respectively.
As a result of the continued impacts from the COVID-19 pandemic, we expect that our production facilities may run at less than normal capacity in the third quarter of 2020. Accordingly, certain fixed production overhead costs may be expensed as incurred, reducing our gross profit margin. We cannot reliably estimate the extent to which the COVID-19 pandemic will impact our overall demand in the third quarter and beyond.
Selling, General and Administrative Expenses
Selling, general and administrative expenses include costs for sales, marketing, and administrative personnel, sales and marketing activities, tradeshow expenses, legal expenses, regulatory fees, and general corporate expenses.

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Selling, general and administrative expenses for the three months ended SeptemberJune 30, 2017, increased by 22% to $204.82020, was $279 million, compared with $168.0$279 million for the three months ended SeptemberJune 30, 2016.2019. Selling, general and administrative expenses for the ninesix months ended SeptemberJune 30, 2017,2020, increased by 16%6% to $591.7$587 million, compared with $511.6$553 million for the ninesix months ended SeptemberJune 30, 2016.2019. The increasechanges in selling, general and administrative expenses for the three and ninesix months ended SeptemberJune 30, 2017, was2020, were primarily due todriven by higher OUS expenses associated withheadcount, including expansion of our expanded Asian and European teams, and increased infrastructure to support our growth, higher headcount,partially offset by lower marketing, travel, and higher litigation charges.training expenses, particularly in the second quarter of 2020.
Selling, general and administrative expenses for the three and ninesix months ended SeptemberJune 30, 2017,2020, included net pre-tax litigation chargesshare-based compensation expense of $9.7$49.6 million and $18.7$95.3 million, respectively. No litigation charges were recorded duringrespectively, compared with $40.7 million and $79.3 million, for the three and six months ended SeptemberJune 30, 2016. Selling, general and administrative expenses for the nine months ended September 30, 2016, included litigation charges of $6.6 million.
2019, respectively. Selling, general and administrative expenses for the three and ninesix months ended SeptemberJune 30, 2017, reflected share-based compensation2020, included intangible assets amortization expense of $30.0$1.7 million and $82.3$3.4 million, respectively, compared with $25.3$1.4 million and $72.9$2.6 million, for the three and ninesix months ended SeptemberJune 30, 2016,2019, respectively.
Our spending in the second quarter of 2020 reflected a curtailment of certain costs associated with the impact of the COVID-19 pandemic. While certain spending will continue to decrease in the third quarter of 2020 as a result of activities limited by the COVID-19 pandemic, much of our spending will continue. We will continue to support our customers, invest in innovation focused on the quadruple aim, and invest in manufacturing and our supply chain to ensure supply for our customers. Certain costs will decline as the underlying activities are restricted by the COVID-19 pandemic, including travel and related expenses, clinical trials, surgeon training, and customer data collection. We will eliminate spending that is ineffective due to the COVID-19 pandemic, such as surgeon and hospital events, and we are pausing the hiring of volume-related roles, such as sales representatives and manufacturing employees.
Research and Development Expenses
Research and development costs are expensed as incurred. Research and development expenses include costs associated with the design, development, testing, and significant enhancement of our products.
Research and development expenses for the three months ended SeptemberJune 30, 2017,2020, increased by 33%19% to $83.4$143 million, compared with $62.6$121 million for the three months ended SeptemberJune 30, 2016.2019. Research and development expenses for the ninesix months ended SeptemberJune 30, 2017,2020, increased by 42%10% to $241.5$290 million, compared with $170.5$265 million for the ninesix months ended SeptemberJune 30, 2016.2019. The increase wasincreases in research and development expenses for the three and six months ended June 30, 2020, were primarily due todriven by higher personnelpersonnel-related expenses and other project costs incurred to support a broader set of product development initiatives, including our da Vinci Single Port Surgical System, robotic-assisted catheter-based medical devices,Ion and SP platform investments, informatics, advanced imaging and analytics,instrumentation, advanced instrumentation,imaging, and future generations of robotics. The increaserobotics, partially offset by lower intangible asset-related charges in the first quarter of 2020.
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Research and development expenses for the ninethree and six months ended SeptemberJune 30, 2017, was also driven by expense related to licensed intellectual property.
Share-based2020, included share-based compensation expense charged to research and development expense was $15.2of $27.4 million and $40.9$54.6 million, respectively, compared with $25.1 million and $47.9 million, for the three and ninesix ended June 30, 2019, respectively. Research and development expenses for the three and six months ended SeptemberJune 30, 2017,2020, included intangible asset charges of $3.1 million and $5.0 million, respectively, compared with $11.4$0.5 million and $31.5$21.3 million, for the three and ninesix months ended SeptemberJune 30, 2016, respectively. Amortization expense related to intangible assets was $1.9 million and $5.7 million for the three and nine months ended September 30, 2017, respectively, compared with $2.5 million and $7.9 million for the three and nine months ended September 30, 2016,2019, respectively.
Research and development expenses fluctuate with project timing. Based upon our broader set of product development initiativeinitiatives 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 and ninesix months ended SeptemberJune 30, 2017,2020, was $10.8$26.6 million, and $29.6$51.7 million, respectively, compared with $10.4$32.8 million and $23.9$60.3 million for the three and ninesix months ended SeptemberJune 30, 2016,2019, respectively. The decreases in interest and other income, net, for the three and six months ended June 30, 2020, were primarily driven by lower interest income earned, despite higher cash and investment balances, due to the decline in average interest rates and realized foreign exchange losses, partially offset by gains on the sale of certain securities.
Income Tax (Benefit) Expense
Income tax (benefit) expense for the three months ended SeptemberJune 30, 2017,2020, was $(8.1)$37.0 million, or (2.8)%34.5% of income before taxes, compared with $55.8$75.4 million, or 20.9%19.2% of income before taxes, for the three months ended SeptemberJune 30, 2016.2019. Income tax expense for the ninesix months ended SeptemberJune 30, 2017,2020, was $58.4$28.9 million, or 7.7%7.0% of income before taxes, compared with $172.8$51.1 million, or 24.5%7.6% of income before taxes, for the ninesix months ended SeptemberJune 30, 2016. Income2019.
Our effective tax provisionrate for the three and nine monthssix ended SeptemberJune 30, 2017, compared with the same periods of 2016, primarily benefited from the expiration of statutes of limitations2020, and excess tax benefits recognized in income tax expenses under ASU No. 2016-09, Improvements to Employee Share-based Payment Accounting. Effective tax rates for these periods also differ2019, differs from the U.S. federal statutory rate of 35%21% primarily due to excess tax benefits associated with employee equity plans, the effect of income earned by certain of our overseas entities being taxed at rates lower than the federal statutory rate, and federal R&D credit benefit, partially offset by state income taxes. We intend to indefinitely reinvest outside thetaxes (net of federal benefit) and U.S. all of our undistributedtax on foreign earnings that were not previously subject to U.S. tax.
Theearnings. Our effective tax ratesrate for the three and ninesix months ended SeptemberJune 30, 2017,2020, reflected a $14.9$36.8 million increase in income tax benefit mainlyexpense discussed below.
In July 2015, a U.S. Tax Court opinion (the "2015 Opinion") was issued involving an independent third party related to charging foreign subsidiaries for share-based compensation. Based on the releasefindings of the U.S. Tax Court, direct share-based compensation has been excluded from our intercompany charges starting in 2015. In June 2019, the Ninth Circuit Court of Appeals (the "Ninth Circuit") reversed the 2015 Opinion (the "Ninth Circuit Opinion"). Subsequently, a re-hearing of the case was requested but was denied in November 2019. In February 2020, a petition was filed to appeal the Ninth Circuit Opinion to the U.S. Supreme Court. The petition was denied by the U.S. Supreme Court on June 22, 2020, which makes the Ninth Circuit Opinion binding precedent in the Ninth Circuit. As a result, we increased our unrecognized tax benefits due to the expiration of statutes of limitationsby $36.8 million with a corresponding increase in various jurisdictions. The effectiveincome tax ratesexpense for the three and ninesix months ended SeptemberJune 30, 2017, also reflected2020, related to the intercompany charges for share-based compensation for relevant periods before 2020. We will continue to monitor future IRS actions or other developments regarding this matter and will assess the impact of any such developments to our income tax benefit of $53.5 millionprovision in the quarter that they occur. We are treating share-based compensation expense in accordance with the Ninth Circuit Opinion for 2020 and $45.7 million, respectively, from reevaluation of certain unrecognized tax benefits as a result of the expiration of such statutes of limitations.going forward.
In the first quarter of 2017, we adopted ASU No. 2016-09, which changes how the tax effects of share-based awards are recognized. ASU No. 2016-09 requires excess tax benefits and tax deficiencies associated with employee equity to be recognized

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in theOur provision for income taxes as discrete items infor the period when the awards vest or are settled, whereas previously such income tax effects were recorded as part of additional paid-in capital. Our provision for income taxesthree and six months ended June 30, 2020, included excess tax benefits associated with employee equity plans of $19.7$31.6 million and $82.9$97.0 million, which reduced our effective tax rate by 6.829.4 and 23.3 percentage points, and 10.9 percentage pointsrespectively. Our provision for income taxes for the three and ninesix months ended SeptemberJune 30, 2017,2019, included excess tax benefits associated with employee equity plans of $11.3 million and $84.0 million, which reduced our effective tax rate by 2.9 and 12.5 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 instruments settled or vested, and the value assigned to employee equity awards under U.S. GAAP. We expect that the adoption of this ASU will resultGAAP, which results in increased income tax expense volatility.
TheWe file federal, state, and foreign income tax holidayreturns in many U.S. and OUS jurisdictions. Years before 2016 are closed for our operations in Switzerland is scheduled to end on December 31, 2017. For years after 2017, our Swiss taxable income may be taxed at a higher rate depending on the then applicable federal and cantonal rules. However, we currently do not expect that the endsignificant jurisdictions. Certain of our Swissunrecognized tax holiday will materially impactbenefits 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 future annual Swisseffective tax obligation.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.
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We are subject to the examination of our income tax returns by the Internal Revenue ServiceIRS 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.

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Net Income (Loss) Attributable to Noncontrolling Interest in Joint Venture
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Net income (loss) attributable to noncontrolling interest in Joint Venture for the three months ended June 30, 2020, was $2.2 million, compared with $(1.9) million for the three months ended June 30, 2019. Net income (loss) attributable to noncontrolling interest in Joint Venture for the six months ended June 30, 2020, was $4.9 million, compared with $(4.4) million for the six months ended June 30, 2019. The increases in net income attributable to noncontrolling interest in Joint Venture were primarily due to increased revenue, partially offset by a re-measurement loss related to the contingent consideration during the three and six months ended June 30, 2020.

Liquidity and Capital Resources
Sources and Uses of Cash
Our principal source of liquidity is cash provided by operations and by the issuance of common stock through the exercise of stock options and our employee stock purchase program. Cash and cash equivalents plus short- and long-term investments decreasedincreased by $0.22 billion to $6.07 billion as of June 30, 2020, from $4.8$5.85 billion at as of December 31, 2016, to $3.8 billion at September 30, 2017,2019, primarily as a result of a $2.0 billion accelerated share buyback program executed during the first quarter of 2017, partly offset byfrom cash provided by our operations and employee stock option exercises. Cash generation is one of our fundamental strengths and provides us with substantial financial flexibility in meeting our operating, investing, and financing needs.
As of September 30, 2017, $1,477.0 million of our cash, cash equivalents, and investments were held by foreign subsidiaries. Amounts held by foreign subsidiaries are generally subject to U.S. income taxation on repatriation to the U.S. We currently have no plans to repatriate any foreign earnings back to the U.S. Our intent is to reinvest these funds outside of the U.S. indefinitely, and we believe our cash flows provided by our U.S. operations will meet our U.S. liquidity needs for the foreseeable future.
Condensed Consolidated Cash Flow Data
The following table summarizes our cash flows for the nine months ended September 30, 2017, and 2016 (in millions):
 Nine Months Ended 
 September 30,
 2017 2016
Net cash provided by (used in)   
Operating activities$811.9
 $757.3
Investing activities694.5
 (970.4)
Financing activities(1,670.0) 519.1
Effect of exchange rates on cash and cash equivalents2.0
 1.0
Net increase (decrease) in cash and cash equivalents$(161.6) $307.0
Operating Activities
For the nine months ended September 30, 2017, cash flow provided by operating activities of $811.9 million exceeded our net income of $698.8 million primarily for the following reasons:
1.Our net income included non-cash items, including: share-based compensation of $153.5 million; depreciation expense of $61.4 million; deferred income taxes of $28.8 million; investment related non-cash charges of $16.8 million; and amortization of intangible assets of $10.1 million.
2.The non-cash charges outlined above were partly offset by changes in operating assets and liabilities that resulted in $157.5 million of cash used by operating activities. Operating assets and liabilities are primarily comprised of accounts receivable, inventory, prepaid expenses and other assets, deferred revenue, and other accrued liabilities. Inventory, including the transfer of equipment from inventory to property, plant and equipment, increased by $82.7 million. Other accrued liabilities decreased by $69.1 million primarily due to a decrease in income tax payable. Accounts receivable increased by $37.8 million primarily due to higher revenue and timing of customer billings and collections. Prepaid expenses and other assets increased by $13.6 million primarily due to an increase in lease receivables. Accrued compensation and employee benefits decreased by $11.3 million primarily due to the payments of 2016 incentive compensation. The unfavorable impact of these items on cash used by operating activities was partly offset by a $45.1 million increase in deferred revenue and $11.9 million increase in accounts payable.
Investing Activities
Net cash provided by investing activities during the nine months ended September 30, 2017, consisted of proceeds from sales and maturities of investments (net of purchases of investments) of $854.2 million partly offset by acquisition of property and equipment of $159.7 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, non-U.S. government agency securities, taxable and/or tax exempt municipal notes, corporate notes and bonds, commercial paper, cash deposits, and money market funds.
Financing Activities
Net cash used in financing activities during the nine months ended September 30, 2017, consisted of $2.0 billion related to an accelerated share buyback program executed during the first quarter of 2017 that is further described in “Note 7. Stockholders’ Equity” and $53.6 million in taxes paid on behalf of employees related to net share settlements of vested employee equity awards. These uses were partly offset by proceeds from stock option exercises and employee stock purchases, of $381.6 million.

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Capital Expenditures
Our business is not capital intensive and we had no material commitments forpartially offset by capital expenditures, astaxes paid related to net share settlements of the end of the third quarter of 2017.equity awards, and common stock repurchases.
Our cash requirements depend on numerous factors, including the market acceptance of our products, the resources we devote to developing and supporting our products, and other factors. In the past, weWe 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. We expect to continue to devote substantial resources to expand our commercial operations, product development and manufacturing activities, our facilities, as well as procedure adoption and acceptance of our products. Based upon our business model, we anticipate that we will continue to be able to fund future growth through cash provided by our operations. We believe that our current cash, cash equivalents, and investment balances, together with income to be derived from the sale of our products, will be sufficient to meet our liquidity requirements for the foreseeable future.
However, as a result of the COVID-19 pandemic, we expect to experience reduced cash flow from operations as a result of decreased revenues and extending payment terms on sales and operating lease and usage-based arrangements. Moreover, we are focused on ensuring that we have adequate supplies on hand given the potential disruption of the COVID-19 pandemic to our suppliers and their supply chain and, accordingly, we expect to continue to increase inventory during the third quarter of 2020 and beyond.
See “Item 7A. Quantitative and Qualitative Disclosures About Market Risk” in our Form 10-K for the fiscal year ended December 31, 2019, for discussion on the impact of interest rate risk and market risk on our investment portfolio.
Condensed Consolidated Cash Flow Data
The following table summarizes our cash flows for the six months ended June 30, 2020, and 2019 (in millions):
 Six Months Ended 
 June 30,
 20202019
Net cash provided by (used in)
Operating activities$582.7  $649.2  
Investing activities419.6  (531.6) 
Financing activities(131.1) (220.4) 
Effect of exchange rates on cash, cash equivalents, and restricted cash(1.6) (1.3) 
Net increase (decrease) in cash, cash equivalents, and restricted cash$869.6  $(104.1) 

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Operating Activities
For the six months ended June 30, 2020, net cash provided by operating activities of $583 million exceeded our net income of $386 million, primarily due to the following reasons:
1.Our net income included non-cash charges of $372 million, consisting primarily of the following significant items: share-based compensation of $187 million; deferred income taxes of $53 million; depreciation expense and losses on the disposal of property, plant, and equipment of $103 million; and amortization of intangible assets of $25 million.
2.The non-cash charges outlined above were partially offset by changes in operating assets and liabilities that resulted in $176 million of cash used by operating activities during the six months ended June 30, 2020. Prepaid expenses and other assets increased by $96 million, primarily due to an increase in prepaid taxes, driven by the timing of tax payments, and an increase in leasing. Accrued compensation and employee benefits decreased by $83 million, primarily due to the payments of 2019 incentive compensation. Inventory, including the transfer of equipment from inventory to property, plant, and equipment, increased by $120 million, primarily due to the increased number of systems under operating lease and usage-based arrangements and build-up to address the growth in the business as well as to mitigate risks of disruption that could arise from trade, supply, or other matters, such as the COVID-19 pandemic. The unfavorable impact of these items on cash provided by operating activities was partially offset by a $137 million decrease in accounts receivable, primarily due to the timing of collections.
Investing Activities
Net cash provided by investing activities for the six months ended June 30, 2020, consisted primarily of proceeds from sales and maturities of investments (net of purchases of investments) of $673 million, the acquisition of property and equipment of $215 million, and the Orpheus Medical Acquisition, net of cash acquired, of $38 million. We invest predominantly in high quality, fixed income securities. Our investment portfolio may, at any time, contain investments in U.S. treasury and U.S. government agency securities, taxable and tax-exempt municipal notes, corporate notes and bonds, commercial paper, non-U.S. government agency securities, cash deposits, and money market funds.
Financing Activities
Net cash used in financing activities during the six months ended June 30, 2020, consisted primarily of taxes paid on behalf of employees related to net share settlements of vested employee stock purchases of $155 million and cash used in the repurchase of approximately 0.2 million shares of our common stock in the open market for $100 million, partially offset by proceeds from stock option exercises and employee stock purchases of $154 million.
Capital Expenditures
Our business is not capital equipment intensive. However, with the growth of our business and our investments in property and facilities and in manufacturing automation, capital investments in these areas have increased. We expect these capital investments to exceed $400 million in both 2020 and 2021. We intend to fund these needs with cash generated from operations.
Critical Accounting Policies and 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 policies and 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 policies and estimates discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016,2019, that are of significance, or potential significance, to the Company.
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ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in our market risk during the ninesix months ended SeptemberJune 30, 2017,2020, compared to the disclosures in Part II, Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2016.2019.
ITEM 4.CONTROLS AND PROCEDURES
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’sSEC’s rules and forms and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow for timely decisions regarding required disclosure.
As required by SEC Rule 13a-15(b), we carried out an evaluation, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on the foregoing, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level.
Changes in Internal Control over Financial Reporting
There has been no change in our internal control over financial reporting that occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II -– OTHER INFORMATION
ITEM 1.LEGAL PROCEEDINGS
ITEM 1. LEGAL PROCEEDINGS
The information included in Note 68 to the Condensed Consolidated Financial Statements (Unaudited) included in Part I, Item 1 of this quarterly report is incorporated herein by reference.
ITEM 1A.RISK FACTORS
ITEM 1A. RISK FACTORS
You should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016,2019, which could materially affect our business, financial position, or future results of operations. The risks described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016,2019, are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial position, or future results of operations. The risk factors set forth below update, and should be read together with, the risk factors described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019. In addition, the global economic climate and additional or unforeseen effects from the COVID-19 pandemic amplify many of these risks.

RISKS RELATING TO OUR BUSINESS
PUBLIC HEALTH CRISES, OR THE PERCEPTION OF THEIR EFFECTS, HAVE HAD AND COULD CONTINUE TO HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS AND RESULTS OF OPERATIONS.
Our global operations expose us to risks associated with public health crises and outbreaks of epidemic, pandemic, or contagious diseases, such as the current outbreak of a novel strain of coronavirus (COVID-19). To date, COVID-19 has had, and may continue to have, an adverse impact on our operations, our supply chains and distribution systems, and our expenses, including as a result of preventive and precautionary measures that we, other businesses, and governments are taking. Due to these impacts and measures, we have experienced and may continue to experience significant and unpredictable reductions in the demand for our products as healthcare customers divert medical resources and priorities towards the treatment of that disease. In addition, our customers have delayed, cancelled, and redirected and, in the future, may delay, cancel, or redirect planned capital expenditures in order to focus resources on COVID-19 or in response to economic disruption related to COVID-19. For example, as a result of the global COVID-19 pandemic, we have experienced a significant decline in procedure volume in the U.S. and Western Europe, as healthcare systems diverted resources to meet the increasing demands of managing COVID-19. In addition, U.S. and global public health bodies have recommended delaying elective surgeries during the COVID-19 pandemic, and surgeons and medical societies are evaluating the risks of minimally invasive surgeries in the presence of infectious diseases, which we expect will continue to negatively impact the usage of our products and the number of da Vinci procedures performed.
As a result of the COVID-19 outbreak, we have experienced significant business disruptions, including restrictions on our ability to travel, distribute and service our products, temporary closures of our facilities and the facilities of our suppliers and their contract manufacturers, as well as reduction in access to our customers due to diverted resources and priorities and the business hours of hospitals as governments institute prolonged shelter-in-place and/or self-quarantine mandates. For example, our corporate headquarters and many of our operations, including certain of our manufacturing facilities, are located in California, which has instituted shelter-in-place orders applicable to our employees in that region, significantly impacting the ability of our employees to get to their places of work to produce products and hampering our products from moving through the supply chain. These unprecedented measures to slow the spread of the virus taken by local governments and healthcare authorities globally, including the deferral of elective medical procedures and social distancing measures, have had, and will continue to have, a significant negative impact on our operations and financial results.
In addition, the COVID-19 pandemic has adversely affected, and may continue to adversely affect, the economies and financial markets of many countries, which may result in a period of regional, national, and global economic slowdown or regional, national, or global recessions that could curtail or delay spending by hospitals and affect demand for our products as well as increased risk of customer defaults or delays in payments. Our customers may terminate or amend their agreements for the purchase, lease, or service of our products due to bankruptcy, lack of liquidity, lack of funding, operational failures, or other reasons. COVID-19 and the current financial, economic, and capital markets environment, and future developments in these and other areas present material uncertainty and risk with respect to our performance, financial condition, volume of business, results of operations, and cash flows. Due to the uncertain scope and duration of the pandemic and uncertain timing of global recovery and economic normalization, we are unable to estimate the impacts on our operations and financial results.
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OUR BUSINESS IS SUBJECT TO COMPLEX AND EVOLVING LAWS AND REGULATIONS REGARDING PRIVACY, DATA PROTECTION, AND OTHER MATTERS RELATING TO INFORMATION COLLECTION.
There are numerous state, federal, and foreign laws, regulations, decisions, and directives regarding privacy and the collection, storage, transmission, use, processing, disclosure, and protection of different types of personal data and personal information (“Personal Information”) and other customer or other data, the scope of which is continually evolving and subject to differing interpretations. We may be subject to significant consequences, including penalties and fines, for any failure to comply with such laws, regulations, and directives.
For example, the General Data Protection Regulation (the “GDPR”), which is in effect across the European Economic Area (the “EEA”), imposes several stringent requirements for controllers and processors of personal data and increased our obligations, for example, by imposing higher standards when obtaining consent from individuals to process their personal data, requiring more robust disclosures to individuals, strengthening individual data rights, shortening timelines for data breach notifications, limiting retention periods and secondary use of information, increasing requirements pertaining to health data as well as pseudonymised (i.e., key-coded) data, and imposing additional obligations when we contract third-party processors in connection with the processing of personal data. The GDPR provides that EU member states may make their own further laws and regulations limiting the processing of genetic, biometric, or health data, which could limit our ability to use and share personal data or could cause our costs to increase and harm our business and financial condition. Failure to comply with the requirements of the GDPR and the applicable national data protection laws of the EU member states may result in fines of up to 4% of the total worldwide annual turnover of the preceding financial year and other administrative penalties. Compliance with the new data protection rules imposed by GDPR may be onerous and adversely affect our business, financial condition, and results of operations.
California recently passed the California Consumer Privacy Act (the “CCPA”), which is considered by many to be the most far-reaching data privacy law introduced in the US to date and which introduces new compliance burdens on many organizations doing business in California who collect Personal Information about California residents. The CCPA’s definition of Personal Information is very broad and specifically includes biometric information. The CCPA took effect in 2020 and will allow for significant fines by the state attorney general, as well as a private right of action from individuals in relation to certain security breaches. The enactment of the CCPA is prompting a wave of similar legislative developments in other US states and creating the potential for a patchwork of overlapping but different state laws. These developments are increasing our compliance burden and our risk, including risks of regulatory fines, litigation and associated reputational harm.
In addition, recent legal developments in Europe have created complexity and compliance uncertainty regarding certain transfers of Personal Information from the EEA to the United States. For example, on July 16, 2020, the Court of Justice of the European Union ("CJEU") invalidated the EU-US Privacy Shield Framework ("Privacy Shield") under which Personal Information could be transferred from the EU to US entities who had self-certified under the Privacy Shield scheme. While the CJEU upheld the adequacy of EU-specified standard contractual clauses (a form of contract approved by the EU commission as an adequate Personal Information transfer mechanism), it made clear that reliance on them alone may not necessarily be sufficient in all circumstances and that their use must be assessed on a case-by-case basis taking into account the surveillance laws and right of individuals in the destination country. The CJEU went on to state that, if the competent supervisory authority believes that the standard contractual clauses cannot be complied with in the recipient country and the required level of protection cannot be secured by other means, such supervisory authority is under an obligation to suspend or prohibit that transfer unless the data exporter has already done so itself.
We rely on a mixture of mechanisms to transfer personal data from our EU business to the U.S. (including having previously relied on Privacy Shield) and are evaluating what additional mechanisms may be required to establish adequate safeguards for Personal Information. As supervisory authorities issue further guidance on Personal Information export mechanisms, including circumstances where the standard contractual clauses cannot be used and/or start taking enforcement action, we could suffer additional costs, complaints, and/or regulatory investigations or fines. Moreover, if we are otherwise unable to transfer Personal Information between and among countries and regions in which we operate, it could affect the manner in which we provide our services and could adversely affect our financial results.
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In Israel, The Protection of Privacy Law, 5741-1981 (the “Israeli Privacy Law”) regulates the protection of privacy and personal data, along with several other specific regulations enacted thereunder and, in particular, the Privacy Protection Regulations (Data Security), 5777-2017 (together, the “Israeli Privacy Law and Regulations”). Under the Israeli Privacy Law and Regulations, organizations are subject to various privacy and data protection requirements, including mandatory registration of databases with the Israeli Registrar of Databases (if certain conditions are met), executing data processing agreements with data recipients, safeguarding the collection and processing of personal data, safeguarding the transfer of personal data (which is specifically subject to the requirements of the Privacy Protection Regulations), personal data breach notification obligations, and other requirements. The Privacy Protection Authority (the “PPA”) is responsible for enforcement of the Israeli Privacy Law and Regulations and periodically publishes opinions and guidelines on privacy matters. In terms of enforcement, failure to comply with the Israeli Privacy Law and Regulations can result in PPA investigations, administrative fines or sanctions, and civil or criminal actions (civil proceedings may include statutory damages without the need to prove actual damages).
Furthermore, any failure, or perceived failure, by us to comply with or make effective modifications to our policies or to comply with any federal, state, or international privacy, data-retention, or data-protection-related laws, regulations, orders, or industry self-regulatory principles could result in proceedings or actions against us by governmental entities or others, a loss of customer confidence, damage to our brand and reputation, and a loss of customers, any of which could have an adverse effect on our business. In addition, various federal, state, and foreign legislative or regulatory bodies may enact new or additional laws and regulations concerning privacy, data-retention, and data-protection issues, including laws or regulations mandating disclosure to domestic or international law enforcement bodies, which could adversely impact our business or our reputation with customers. For example, some countries have adopted laws mandating that some Personal Information regarding customers in their country be maintained solely in their country. Having to maintain local data centers and redesign product, service, and business operations to limit Personal Information processing to within individual countries could increase our operating costs significantly.
ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
There were no unregistered sales of equity securities during the period covered by this report.
(c) Issuer Purchases of Equity Securities
The table below summarizes our stock repurchase activity for the quarter ended June 30, 2020.
Fiscal PeriodTotal Number of
Shares
Repurchased		Average
Price Paid
Per Share		Total Number of
Shares Purchased As
Part of a Publicly
Announced Program		Approximate Dollar
Amount of Shares That
May Yet be Purchased
Under the Program (1)
April 1 to April 30, 2020— $— — $1.6  billion
May 1 to May 31, 2020— $— — $1.6  billion
June 1 to June 30, 2020— $— — $1.6  billion
Total during quarter ended June 30, 2020— $— — 
(1) Since March 2009, we have had an active stock repurchase program. As of SeptemberJune 30, 2017, the2020, our Board of Directors has(the “Board”) had authorized an aggregate amount of up to $6.2$7.5 billion for stock repurchases, of which the most recent authorization occurred in December 2016January 2019, when the Board increased the authorized amount available under the Company’sour share repurchase program to $3.0$2.0 billion. No shares were purchased duringThe remaining $1.6 billion represents the three months ended September 30, 2017. $991.6 million remainedamount available to repurchase shares under the authorized repurchase program as of SeptemberJune 30, 2017.2020. The authorized stock repurchase program does not have an expiration date.
ITEM 3.DEFAULTS UPON SENIOR SECURITIES
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4.MINE SAFETY DISCLOSURES
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5.
ITEM 5. OTHER INFORMATION
Mark Meltzer, Senior Vice President, General Counsel and Chief Compliance Officer, announced on October 16, 2017, that he will retire on July 1, 2018. Mr. Meltzer, who will turn 68 in October 2017, has agreed to continue on a part-time basis after July 1, 2018, as an advisor to the Company. The terms of that arrangement have yet to be finalized. Kara Andersen Reiter, who has served as Vice President, Assistant General Counsel, since January 2015, will succeed Mr. Meltzer as General Counsel and Chief Compliance Officer.


None.
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ITEM 6. EXHIBITS
ITEM 6.Exhibit
Number		EXHIBITS
Exhibit
Description
Exhibit
Number
3.1
Exhibit
Description
3.1
AmendedAmended and Restated Certificate of Incorporation of Intuitive Surgical, Inc.Inc., as amended.
3.2
Amended and Restated Bylaws of Intuitive Surgical, Inc. (incorporated by reference to Exhibit 3.13.2 of the Current Report on Form 8-K filed with the Securities and Exchange Commission on December 13, 2016)April28, 2020).
31.110.1
10.2
10.3
31.1
31.2
32.1
32.2
101
The following materials from Intuitive Surgical, Inc.’s Quarterly Report on Form 10-Q for the quarter ended SeptemberJune 30, 2017,2020, formatted in Inline XBRL (Extensible Business Reporting Language): (i) the unaudited Condensed Consolidated Balance Sheets, (ii) the unaudited Condensed Consolidated Statements of Comprehensive Income, (iii) the unaudited Condensed Consolidated Statements of Cash Flows, and (iv) Notes to Condensed Consolidated Financial Statements (unaudited), tagged at Level I through IV.
104The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2020, formatted in Inline XBRL and contained in Exhibit 101.



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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
INTUITIVE SURGICAL, INC.
INTUITIVE SURGICAL, INC.
By:
By:/s/ MARSHALL L. MOHR
Marshall L. Mohr
SeniorExecutive Vice President and Chief Financial Officer
(Principal Financial Officer and duly authorized signatory)
Date: October 20, 2017

July 23, 2020
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