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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark One)
xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 20172018
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
(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)
 
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  x    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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES  x    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 filerx Accelerated 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  x
The Registrant had 112,047,836114,200,264 shares of Common Stock, $0.001 par value per share, outstanding as of October 17, 2017.16, 2018.
 


Table of Contents
INTUITIVE SURGICAL, INC.
TABLE OF CONTENTS


  Page No.
PART I. FINANCIAL INFORMATION
   
 
   
 
   
 
   
 
   
 
   
   
   
  
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
September 30,
2018

December 31,
2017
ASSETS      
Current assets:      
Cash and cash equivalents$875.0
 $1,036.6
$1,008.3
 $648.2
Short-term investments1,271.8
 1,518.0
2,127.6
 1,312.4
Accounts receivable, net468.0
 430.2
580.4
 507.9
Inventory225.2
 182.3
370.1
 241.2
Prepaids and other current assets88.9
 83.3
166.2
 99.2
Total current assets2,928.9
 3,250.4
4,252.6
 2,808.9
Property, plant and equipment, net584.8
 458.4
Property, plant, and equipment, net746.4
 613.1
Long-term investments1,655.2
 2,283.3
1,434.6
 1,885.9
Deferred tax assets119.8
 150.9
411.5
 72.0
Intangible and other assets, net154.8
 142.8
237.4
 195.8
Goodwill201.1
 201.1
236.1
 201.1
Total assets$5,644.6
 $6,486.9
$7,318.6
 $5,776.8
LIABILITIES AND STOCKHOLDERS’ EQUITY      
Current liabilities:      
Accounts payable$80.4
 $68.5
$96.4
 $82.5
Accrued compensation and employee benefits124.7
 136.4
146.1
 167.6
Deferred revenue282.5
 240.6
281.0
 243.8
Other accrued liabilities128.1
 151.0
179.8
 168.9
Total current liabilities615.7
 596.5
703.3
 662.8
Other long-term liabilities69.0
 112.6
326.8
 333.6
Total liabilities684.7
 709.1
1,030.1
 996.4
Contingencies (Note 6)

 



 

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; no shares issued and outstanding as of September 30, 2018, and December 31, 2017
 
Common stock, 300.0 shares authorized, $0.001 par value, 114.2 shares and 112.3 shares issued and outstanding as of September 30, 2018, and December 31, 2017, respectively0.1
 0.1
Additional paid-in capital4,190.4
 4,211.8
5,063.2
 4,679.2
Retained earnings776.6
 1,574.9
1,234.0
 115.0
Accumulated other comprehensive loss(9.2) (8.9)(16.7) (15.5)
Total Intuitive Surgical, Inc. stockholders’ equity4,957.9
 5,777.8
6,280.6
 4,778.8
Noncontrolling interest in joint venture2.0
 
7.9
 1.6
Total stockholders’ equity4,959.9
 5,777.8
6,288.5
 4,780.4
Total liabilities and stockholders’ equity$5,644.6
 $6,486.9
$7,318.6
 $5,776.8
See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).

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



Three Months Ended 
 September 30,

Nine Months Ended 
 September 30,
Three Months Ended 
 September 30,

Nine Months Ended 
 September 30,
in millions (except per share amounts)2017
2016
2017
20162018
2017
2018
2017
Revenue:              
Product$659.3
 $553.2
 $1,807.5
 $1,565.2
$760.9
 $663.2
 $2,209.2
 $1,823.7
Service146.8
 129.7
 429.0
 382.3
160.0
 144.6
 468.5
 422.5
Total revenue806.1
 682.9
 2,236.5
 1,947.5
920.9
 807.8
 2,677.7
 2,246.2
Cost of revenue:              
Product195.0
 158.4
 543.1
 475.8
225.1
 195.4
 654.7
 545.6
Service44.3
 37.5
 132.6
 108.8
53.5
 44.3
 154.6
 132.6
Total cost of revenue239.3
 195.9
 675.7
 584.6
278.6
 239.7
 809.3
 678.2
Gross profit566.8
 487.0
 1,560.8
 1,362.9
642.3
 568.1
 1,868.4
 1,568.0
Operating expenses:              
Selling, general and administrative204.8
 168.0
 591.7
 511.6
221.4
 204.1
 702.8
 592.6
Research and development83.4
 62.6
 241.5
 170.5
107.6
 83.4
 298.2
 241.5
Total operating expenses288.2
 230.6
 833.2
 682.1
329.0
 287.5
 1,001.0
 834.1
Income from operations278.6
 256.4
 727.6
 680.8
313.3
 280.6
 867.4
 733.9
Interest and other income, net10.8
 10.4
 29.6
 23.9
21.9
 10.8
 53.3
 29.6
Income before taxes289.4
 266.8
 757.2
 704.7
335.2
 291.4
 920.7
 763.5
Income tax (benefit) expense(8.1) 55.8
 58.4
 172.8
Income tax expense (benefit)43.4
 (7.2) 87.0
 61.1
Net income$297.5
 $211.0
 $698.8
 $531.9
291.8
 298.6
 833.7
 702.4
Net income per share:       
Less: net loss attributable to noncontrolling interest in joint venture(0.7) 
 (1.7) 
Net income attributable to Intuitive Surgical, Inc.$292.5
 $298.6
 $835.4
 $702.4
Net income per share attributable to Intuitive Surgical, Inc.:       
Basic$2.66
 $1.82
 $6.26
 $4.64
$2.57
 $2.67
 $7.37
 $6.29
Diluted$2.55
 $1.77
 $6.03
 $4.52
$2.45
 $2.56
 $7.04
 $6.06
Shares used in computing net income per share:       
Shares used in computing net income per share attributable to Intuitive Surgical, Inc.:       
Basic111.8
 116.1
 111.6
 114.6
114.0
 111.8
 113.4
 111.6
Diluted116.8
 119.1
 115.9
 117.6
119.2
 116.8
 118.6
 115.9
Total comprehensive income$298.1
 $205.7
 $698.5
 $545.4
Total comprehensive income attributable to Intuitive Surgical, Inc.$292.2
 $299.2
 $834.2
 $702.1
See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).

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


 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 quarter 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.
 Nine Months Ended 
 September 30,
in millions 2018 2017
Operating activities:   
Net income$833.7
 $702.4
Adjustments to reconcile net income to net cash provided by operating activities:   
Depreciation and loss on disposal of property, plant, and equipment76.8
 61.4
Amortization of intangible assets9.7
 10.1
Loss on investments, accretion of discounts, and amortization of premiums on investments, net3.2
 16.8
Deferred income taxes52.3
 31.4
Share-based compensation expense190.8
 153.5
Amortization of contract acquisition asset7.9
 8.2
Changes in operating assets and liabilities, net of effects of acquisition:   
Accounts receivable(65.2) (38.7)
Inventory(205.8) (82.7)
Prepaids and other assets(89.3) (17.8)
Accounts payable13.4
 11.9
Accrued compensation and employee benefits(21.5) (11.3)
Deferred revenue34.7
 35.8
Other liabilities(9.2) (69.1)
Net cash provided by operating activities831.5
 811.9
Investing activities:   
Purchase of investments(1,694.0) (1,122.1)
Proceeds from sales of investments274.0
 1,525.6
Proceeds from maturities of investments1,048.7
 450.7
Purchase of property, plant, and equipment and intellectual property(131.9) (159.7)
Acquisition of businesses, net of cash(60.1) 
Net cash provided by (used in) investing activities(563.3) 694.5
Financing activities:   
Proceeds from issuance of common stock relating to employee stock plans199.6
 381.6
Taxes paid related to net share settlement of equity awards(115.0) (53.6)
Repurchase of common stock
 (2,000.0)
Other financing activities8.0
 2.0
Net cash provided by (used in) financing activities92.6
 (1,670.0)
Effect of exchange rate changes on cash, cash equivalents, and restricted cash(0.7) 2.0
Net increase (decrease) in cash, cash equivalents, and restricted cash360.1
 (161.6)
Cash, cash equivalents, and restricted cash, beginning of period663.2
 1,051.6
Cash, cash equivalents, and restricted cash, end of period$1,023.3
 $890.0
See accompanying Notes to 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- and majority-owned subsidiaries.
NOTE 1.    DESCRIPTION OF THE BUSINESS
Intuitive Surgical, Inc. designs, manufactures, and markets da Vinci® Surgical Systems and related instruments and accessories, which taken together, are advanced surgical systems that the Company believes enable a newconsiders to be an advanced generation of surgery. This advanced generation of surgery, which the Company calls da Vinci Surgery, combines the benefits of minimally invasive surgery (“MIS”) for patients with the ease of use, precision, and dexterity of open surgery. A da Vinci Surgical System consists of a surgeon’s console, a patient-side cart, and 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 of 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.
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- and majority-owned subsidiaries have been prepared on a consistent basis with the audited Consolidated Financial Statements for the fiscal year ended December 31, 20162017, 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.”) (“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, 20162017, which was filed with the SEC on February 6, 2017.2, 2018. The results of operations for the first nine months of fiscal year 20172018 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'sCompany’s majority owned joint venture with Shanghai Fosun Pharmaceutical (Group) Co., Ltd. The Company holds a controlling financial interest in the joint venture and the noncontrolling interest is reflected as a separate component of consolidated stockholders’ equity. Noncontrolling interest in net income was inconsequential to the consolidated results for all periods presented and, therefore, has not been separately presented in the condensed consolidated statements of comprehensive income.
Common Stock Split
Shares issued pursuant to the three-for-one stock split (the “Stock Split”) of the Company’s issued and outstanding common stock, par value $0.001 per share, were distributed on October 5, 2017, to stockholders of record as of September 29, 2017. All share and per share information presented in the Financial Statements have been retroactively adjusted to reflect the Stock Split.
Recent Accounting Pronouncements Not Yet Adopted
In May 2014,February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers. This new standard will replace most of the existing revenue recognition 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 effective for the Company in the first quarter of fiscal year 2018.
The Company currently plans to adopt this accounting standard in the first quarter of fiscal year 2018 using the full retrospective 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 allocated 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 acceleration 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(Topic 842), which amends the existing accounting standards for leases. The new standard requires lessees to record a right-of-use (“ROU”) 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 yearbeginning January 1, 2019, andwith early adoption is permitted. The new standard is required to be adopted usingIn July 2018, the FASB issued ASU No. 2018-11, Leases(Topic 842): Targeted Improvements, which provides an alternative modified retrospective approach and requires applicationtransition method. Under this method, the cumulative-effect adjustment to the opening balance of retained earnings is recognized on the new standard at the beginningdate of the earliest comparative period presented.adoption. The Company generally does not finance purchases of equipment or other capital, but does leaseintends to elect this transition method.
The Company leases certain facilities for some of its facilities.operations, which represents a majority of its operating leases it has entered into as a lessee. The Company’s customers finance purchases of da Vincisystems and ancillary products, including directly with the Company.Company as the lessor. It is currently unknown whether the new standard will change customer buying patterns or behaviors. TheWhile the Company is evaluating the effect that this new standard will have on its Financial Statements and related disclosures.disclosures, the Company currently anticipates the primary impact will be the recognition of ROU assets and lease liabilities on its balance sheet associated with the operating leases it has entered into as a lessee.
In October 2016,August 2018, the FASB issued ASU No. 2018-15, Intangibles (Topic 350): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. This new standard also requires customers to expense the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement. This new standard becomes effective for the Company in the first quarter of fiscal year 2020, with early adoption permitted. This

new standard can be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. The Company is currently evaluating the impact of adopting this new standard on its Financial Statements.
Adopted Accounting Pronouncement
Revenue from Contracts with Customers
The Company adopted FASB Accounting Standards Codification Topic 606 (“ASC 606”), Revenue from Contracts with Customers in the first quarter of the Company’s fiscal year that began on January 1, 2018, using the full retrospective method, which required the Company to restate each prior reporting period presented. This new standard replaced the previous revenue recognition guidance in U.S. GAAP. Please see the Company’s “Revenue Recognition” policy in the “Significant Accounting Policies” section below.
The areas impacted include future contractual billings related to services included in the Company’s multi-year contracts, which are considered performance obligations that should be part of the contract consideration allocated to all performance obligations rather than being excluded due to its contingent nature as required under the previous revenue standard. Accordingly, the amount of contract consideration allocated to the performance obligations identified in the Company’s system arrangements is different from the amounts allocated under the previous revenue standard. In general, revenue is recognized earlier as a greater amount of the contract consideration is allocated to the product-related performance obligations that generally are delivered upfront, and therefore, less consideration is allocated to the service performance obligation that is generally recognized over the service period.
In addition, the Company recognized an asset associated with the incremental costs of obtaining revenue generating customer contracts that it expects to benefit from over a period longer than one year. The Company capitalized sales commissions paid in connection with system sale arrangements that include multi-year service obligations and is amortizing such asset over the economic life of those contracts. Previously, sales commissions were expensed as incurred. The impact of this change on operating expenses in any given period will depend, in part, on the amount of such commissions incurred and capitalized in relation to the amount of ongoing amortization expense.
Adoption of the standard using the full retrospective method also required the Company to restate certain previously reported results, including the impact to provision for income taxes. The adjustments to the unaudited Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2017, are as follows (in millions, except per share amounts):

 Three Months Ended September 30, 2017 Nine Months Ended September 30, 2017
 As Previously Reported Adjustments As Restated As Previously Reported Adjustments As Restated
Revenue:    
      
Product$659.3
 $3.9
 $663.2
 $1,807.5
 $16.2
 $1,823.7
Service146.8
 (2.2) 144.6
 429.0
 (6.5) 422.5
Total revenue806.1
 1.7
 807.8
 2,236.5
 9.7
 2,246.2
Cost of revenue:           
Product195.0
 0.4
 195.4
 543.1
 2.5
 545.6
Service44.3
 
 44.3
 132.6
 
 132.6
Total cost of revenue239.3
 0.4
 239.7
 675.7
 2.5
 678.2
Gross profit566.8
 1.3
 568.1
 1,560.8
 7.2
 1,568.0
Operating expenses:           
Selling, general and administrative204.8
 (0.7) 204.1
 591.7
 0.9
 592.6
Research and development83.4
 
 83.4
 241.5
 
 241.5
Total operating expenses288.2
 (0.7) 287.5
 833.2
 0.9
 834.1
Income from operations278.6
 2.0
 280.6
 727.6
 6.3
 733.9
Interest and other income, net10.8
 
 10.8
 29.6
 
 29.6
Income before taxes289.4
 2.0
 291.4
 757.2
 6.3
 763.5
Income tax (benefit) expense(8.1) 0.9
 (7.2) 58.4
 2.7
 61.1
Net income attributable to Intuitive Surgical, Inc.$297.5
 $1.1
 $298.6
 $698.8
 $3.6
 $702.4
Net income per share attributable to Intuitive Surgical, Inc.:           
Basic$2.66
 $0.01
 $2.67
 $6.26
 $0.03
 $6.29
Diluted$2.55
 $0.01
 $2.56
 $6.03
 $0.03
 $6.06
Total comprehensive income attributable to Intuitive Surgical, Inc.$298.1
 $1.1
 $299.2
 $698.5
 $3.6
 $702.1
Selected Condensed Consolidated Statements of Balance Sheet line items, which reflect the impact of adopting the new standard, are as follow (in millions) as of December 31, 2017:
 December 31, 2017
 As Previously Reported Adjustments As Restated
ASSETS     
Accounts receivable, net$511.9
 $(4.0) $507.9
Prepaids and other current assets$97.2
 $2.0
 $99.2
Deferred tax assets$87.3
 $(15.3) $72.0
Intangibles and other assets, net$159.7
 $36.1
 $195.8
     
LIABILITIES AND STOCKHOLDERS’ EQUITY    
Deferred revenue$284.5
 $(40.7) $243.8
Other accrued liabilities$169.5
 $(0.6) $168.9
Other long-term liabilities$327.1
 $6.5
 $333.6
Retained earnings$61.4
 $53.6
 $115.0
In addition, the cumulative effect of ASC 606 to the Company’s retained earnings at January 1, 2016, was $40.3 million. Adoption of the standard had no impact to total net cash from or used in operating, investing, or financing activities within the Condensed Consolidated Statements of Cash Flows.

As part of the Company’s adoption of ASC 606, the Company elected to use the following practical expedients: (i) to exclude disclosures of transaction prices allocated to remaining performance obligations when the Company expects to recognize such revenue for all periods prior to the date of initial application of ASC 606; (ii) not to adjust the promised amount of consideration for the effects of a significant financing component when the Company expects, at contract inception, that the period between the Company’s transfer of a promised product or service to a customer and when the customer pays for that product or service will be one year or less; (iii) to expense costs as incurred for costs to obtain a contract when the amortization period would have been one year or less; (iv) not to recast revenue for contracts that begin and end in the same fiscal year; and (v) not to assess whether promised goods or services are performance obligations if they are immaterial in the context of the contract with the customer.
Intra-Entity Transfer of Assets Other than Inventory
Beginning fiscal 2018, the Company adopted 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 theThe Company in the first quarter of 2018. This ASU is required to be adopted this standard using the modified retrospective approach, and as a result, recorded a deferred tax asset with a corresponding cumulative catch-up adjustment to retained earnings inof $390.8 million as of January 1, 2018, associated with an intra-entity transfer of certain intellectual property rights related to the periodCompany’s non-U.S. business to its Swiss entity. The adjustment may be materially different as a result of adoption. Therecording additional deferred taxes upon finalization of the assessment of global intangible low-taxed income and other aspects from additional guidance and interpretations by U.S. regulatory and standard-setting bodies related to the Tax Cuts and Jobs Act (the “Tax Act”) enacted on December 22, 2017.
Business Combinations: Clarifying the Definition of a Business
Beginning fiscal 2018, the Company is currently evaluating the impact of adopting this ASU on its Financial Statements.
In January 2017, the FASB issuedadopted 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 forbusinesses, and applied the new guidance prospectively. During 2018, the Company inacquired certain assets that were accounted for as business combinations. Refer to “Note 4. Balance Sheet Details and Other Information” for further information on the first quarteracquisitions.
Statement of 2018. Early adoption is permitted. The Company is currently evaluating the impact of adopting this ASU on its consolidated financial statements.
Adopted Accounting PronouncementCash Flows: Restricted Cash
Beginning fiscal 2017,2018, the Company adopted ASU No. 2016-09,2016-18, Improvements to Employee Share-based Payment AccountingStatement of Cash Flows (Topic 230): Restricted Cash, which changes among other things, howrequires the tax effectsstatement of share-based awards are recognized. ASU No. 2016-09 requires excess tax benefits and tax deficienciescash flows to be recognized inexplain the provision for income taxes as discrete items inchange during the period whenrelating to total cash, cash equivalents, and restricted cash. The Company adopted this standard using 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 rateretrospective transition method 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 therestating its condensed consolidated statements of cash flows. The Company adopted this provision retrospectively by reclassifying $39.5flows to include restricted cash of $15.0 million of excess tax benefits from financing activities to operating activitiesin the beginning and ending cash, cash equivalents, and restricted cash balances for all periods presented. Net cash flows for the nine months ended September 30, 2016. The Company also excluded2017, did not change as a result of including restricted cash with cash and cash equivalents when reconciling 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 benefitsbeginning-of-period and deficiencies recognized in the provision for income taxes will fluctuate from period to period basedend-of-period amounts presented on the pricestatements of cash flows. Restricted cash was included in intangible and other assets, net on the Company’s stock, the volume of share-based instruments settled or vested, and the value assigned to share-based instruments under U.S. GAAP.condensed consolidated balance sheets.
Significant Accounting Policies
ThereWith the exception of the change in the Company’s Revenue Recognition Policy as a result of the adoption of ASC 606, 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, 2016,2017, that are of significance, or potential significance, to the Company. 
Revenue Recognition
The information provided below related toCompany adopted ASC Topic 606, Revenue from Contracts with Customers, on January 1, 2018. The Company’s revenue consists of product revenue resulting from the Company’s allowancesale of systems, system components, instruments and accessories, and service revenue. The Company accounts for sales returnsa contract with a customer when there is a legally enforceable contract between the Company and doubtful accounts policies provide additional clarification onits customer, the Company’s policy of accounting for arrangements with rights of return that occurred during the first quarterparties are identified, the contract has commercial substance, and collectability of 2017. 

7

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Allowance for Sales Returns and Doubtful Accounts
the contract consideration is probable. The allowance for sales returns isCompany’s revenues are measured based on the consideration specified in the contract with each customer, net of any sales incentives and taxes collected from customers that are remitted to government authorities.
The Company’s estimatesystem sale arrangements generally contain multiple products and services. For these bundled sale arrangements, the Company accounts for individual products and services as separate performance obligations if they are a distinct product or service that is separately identifiable from other items in a bundled package; and if a customer can benefit from the product or service on its own or with other resources that are readily available to the customer. The Company’s system sale arrangements include a combination of potential futurethe following performance obligations: system(s); system components; system accessories; instruments; accessories; and system service. The Company’s system sale arrangements generally include a five-year period of service. The first year of service is generally free and included in the system sale arrangement and the remaining four years are generally included at a stated service price. The Company considers the service terms in the arrangements that are legally enforceable to be performance obligations. Other than service, the Company generally satisfies all of the performance obligations up-front. System components, system accessories, instruments, accessories, and service are also sold on a stand-alone basis.

The Company recognizes revenue as the performance obligations are satisfied by transferring control of the product returnsor service to a customer. The Company generally recognizes revenue for the performance obligations at the following points in time:
System sales. For systems, system components, and other allowancessystem accessories sold directly to end customers, revenue is recognized when the Company transfers control to the customer, which is generally at the point when acceptance occurs that indicates customer acknowledgment of delivery or installation, depending on the terms of the arrangement. For systems sold through distributors, revenue is recognized generally at the time of shipment. The Company’s system arrangements generally do not provide a right of return. The systems are generally covered by a one-year warranty. Warranty costs were not material for the periods presented.
Instruments and accessories. Revenue from sales of instruments and accessories is recognized when control is transferred to the customers, which generally occurs at the time of shipment, but also occurs at the time of delivery depending on the customer arrangement. The Company allows its customers in the normal course of business to return unused products for a limited period of time subsequent to initial purchase and records an allowance against revenue for estimated returns.
Service. Service revenue is recognized ratably over the term of the service period as the customers benefit from the service throughout the service period. Revenue related to current period product revenue. services performed on a time-and-materials basis is recognized when performed.
The Company analyzes historical returns, current economic trends, and changesoffers its customers the opportunity to trade in customer demand and acceptancetheir older systems for a credit towards the purchase of a newer generation system. The Company generally does not provide specified price trade-in rights or upgrade rights at the Company’s products. The allowance for doubtful accounts istime of system purchase. Such trade-in or upgrade transactions are separately negotiated based on the Company’s assessmentcircumstances at the time of the collectabilitytrade-in or upgrade, based on the then fair value of the system, and are generally not based on any pre-existing rights granted by the Company. Accordingly, such trade-ins and upgrades are not considered as separate performance obligations in the arrangement for a system sale.
As part of a trade-in transaction, the customer accounts.receives a new generation system in exchange for its pre-owned system. The trade-in credit is negotiated at the time of the trade-in and is applied towards the purchase price of the new unit. Traded-in systems generally can be reconditioned and resold. The Company accounts for the fair value of the traded-in system in the total consideration in the arrangement by including the net realizable value of the traded-in system less a normal profit margin. The value of the traded-in system is determined as the amount, after reconditioning costs are added, that will allow a normal profit margin on the sale of the reconditioned unit to be generated. When there is no market for the traded-in units, no value is assigned. Traded-in units are reported as a component of inventory until resold, or otherwise disposed.
In addition, customers may also have the opportunity to upgrade their systems at a price determined at the time of the upgrade, for example, by adding a second surgeon console for use with the da Vinci Surgical System. Such upgrades are performed by completing component level upgrades at the customer’s site. Upgrade revenue is recognized when the component level upgrades are complete and all revenue recognition criteria are met.
For multiple-element arrangements, revenue is allocated to each performance obligation based on its relative standalone selling price. Standalone selling prices are based on observable prices at which the Company separately sells the products or services. If a standalone selling price is not directly observable, then the Company estimates the standalone selling price considering market conditions and entity-specific factors including, but not limited to, features and functionality of the products and services, geographies, and type of customer. The Company regularly reviews the allowancestandalone selling prices and updates these estimates as necessary.

The following table presents revenue disaggregated by considering factors such as historical experience, credit quality, the agetypes and geography (in millions):
 Three Months Ended September 30, Nine Months Ended September 30,
U.S.2018 2017 2018 2017
Instruments and accessories$368.1
 $312.7
 $1,066.0
 $909.7
Systems193.6
 175.6
 490.0
 422.3
Services114.8
 106.3
 337.6
 310.0
Total U.S. revenue$676.5
 $594.6
 $1,893.6
 $1,642.0
        
Outside of U.S. (“OUS”)       
Instruments and accessories$118.2
 $88.5
 $356.7
 $270.1
Systems81.0
 86.4
 296.5
 221.6
Services45.2
 38.3
 130.9
 112.5
Total OUS revenue$244.4
 $213.2
 $784.1
 $604.2
        
Total       
Instruments and accessories$486.3
 $401.2
 $1,422.7
 $1,179.8
Systems274.6
 262.0
 786.5
 643.9
Services160.0
 144.6
 468.5
 422.5
Total revenue$920.9
 $807.8
 $2,677.7
 $2,246.2
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 the accounts receivable balances, and current economic conditions that may affect a customer’s abilitythis amount relates to pay.
The Company offered certain customers who purchased surgical systemsperformance obligations in the first quarter of fiscal 2017 the opportunity to return such systems and receive a credit toward the purchase 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 productservice contracts that will be returnedsatisfied and recognized as revenue in a future periodperiods. Transaction price allocated to remaining performance obligations was deferred. A totalapproximately $1,305.7 million as of $23.4September 30, 2018.
The following information summarizes the Company’s contract assets and liabilities (in millions):
 As of
 September 30, 2018 December 31, 2017
Contract assets$9.9
 $8.3
Deferred revenue$307.1
 $268.6
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 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 ratably over the service period. The Company did not have any significant impairment losses on its contract assets for the periods presented.
During the three and nine months ended September 30, 2018, the Company recognized $47.0 million and $8.1$244.8 million, respectively, of revenue and product costs, respectively, related to shipments madethat was included in the first quarterdeferred revenue balance as of 2017, were deferred from recognition in the Company’s first quarter Financial Statements. Subject to meeting all other criteria of the Company’s revenue recognition policy, the revenue and product cost deferred will be recognized at the date the trade-out rights are exercised by the customers or at the expiration of unexercised rights, which the Company anticipates to be substantially completed prior to the end ofDecember 31, 2017. During the three and nine months ended September 30, 2017, the Company recognized $21.3$40.8 million and $7.3$207.5 million, respectively, of previouslyrevenue that was included in the deferred revenue balance as of December 31, 2016.
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 productother factors that could impact the economic benefits that the Company expects to generate from the relationship with its customers. The costs respectively,capitalized as a result of those offers having expired unexercised. Ascontract acquisition costs included in intangible and other assets, net in the Company’s condensed consolidated balance sheets were $31.3 million and $31.4 million as of September 30, 2018, and December 31, 2017, a total of $2.1 million and $0.8 million of revenue and product costs, respectively, remained deferred related to this program.respectively. The Company did not incur any impairment losses during the periods presented.

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, or long-term investments as of September 30, 20172018, and December 31, 20162017 (in millions):
        Reported as:        Reported as:
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
Cash and
Cash
Equivalents
 
Short-
term
Investments
 
Long-
term
Investments
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
Cash and
Cash
Equivalents
 
Short-
term
Investments
 
Long-
term
Investments
September 30, 2017             
September 30, 2018             
Cash$252.4
 $
 $
 $252.4
 $252.4
 $
 $
$260.6
 $
 $
 $260.6
 $260.6
 $
 $
Level 1:                          
Money market funds590.5
 
 
 590.5
 590.5
 
 
736.2
 
 
 736.2
 736.2
 
 
U.S. treasuries448.7
 
 (1.9) 446.8
 8.7
 182.8
 255.3
1,259.2
 
 (8.3) 1,250.9
 
 806.6
 444.3
Subtotal1,039.2
 
 (1.9) 1,037.3
 599.2
 182.8
 255.3
1,995.4
 
 (8.3) 1,987.1
 736.2
 806.6
 444.3
Level 2:                          
Commercial paper80.5
 
 
 80.5
 6.0
 74.5
 
146.4
 
 
 146.4
 11.5
 134.9
 
Corporate debt securities1,262.9
 0.6
 (2.2) 1,261.3
 2.4
 533.0
 725.9
1,354.8
 0.4
 (5.2) 1,350.0
 
 692.4
 657.6
U.S. government agencies774.2
 0.1
 (2.5) 771.8
 8.0
 270.7
 493.1
819.5
 
 (6.0) 813.5
 
 493.7
 319.8
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
12.9
 
 
 12.9
 
 
 12.9
Subtotal2,516.5
 0.9
 (5.1) 2,512.3
 23.4
 1,089.0
 1,399.9
2,333.6
 0.4
 (11.2) 2,322.8
 11.5
 1,321.0
 990.3
Total assets measured at fair value$3,808.1
 $0.9
 $(7.0) $3,802.0
 $875.0
 $1,271.8
 $1,655.2
$4,589.6
 $0.4
 $(19.5) $4,570.5
 $1,008.3
 $2,127.6
 $1,434.6
 

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        Reported as:        Reported as:
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
Cash and
Cash
Equivalents
 
Short-
term
Investments
 
Long-
term
Investments
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
Cash and
Cash
Equivalents
 
Short-
term
Investments
 
Long-
term
Investments
December 31, 2016             
December 31, 2017             
Cash$227.7
 $
 $
 $227.7
 $227.7
 $
 $
$197.7
 $
 $
 $197.7
 $197.7
 $
 $
Level 1:                          
Money market funds612.4
 
 
 612.4
 612.4
 
 
445.0
 
 
 445.0
 445.0
 
 
U.S. treasuries625.9
 0.1
 (2.0) 624.0
 157.9
 168.4
 297.7
1,029.1
 
 (4.7) 1,024.4
 5.5
 396.2
 622.7
Subtotal1,238.3
 0.1
 (2.0) 1,236.4
 770.3
 168.4
 297.7
1,474.1
 
 (4.7) 1,469.4
 450.5
 396.2
 622.7
Level 2:                          
Commercial paper139.6
 
 
 139.6
 31.1
 108.5
 
38.4
 
 
 38.4
 
 38.4
 
Corporate debt securities1,471.8
 0.7
 (5.0) 1,467.5
 2.9
 555.4
 909.2
946.6
 0.2
 (4.4) 942.4
 
 403.9
 538.5
U.S. government agencies938.7
 0.5
 (2.9) 936.3
 
 342.7
 593.6
901.3
 
 (4.4) 896.9
 
 311.7
 585.2
Non-U.S. government securities18.5
 
 
 18.5
 
 16.0
 2.5
2.5
 
 
 2.5
 
 2.5
 
Municipal securities815.4
 
 (3.5) 811.9
 4.6
 327.0
 480.3
301.1
 
 (1.9) 299.2
 
 159.7
 139.5
Subtotal3,384.0
 1.2
 (11.4) 3,373.8
 38.6
 1,349.6
 1,985.6
2,189.9
 0.2
 (10.7) 2,179.4
 
 916.2
 1,263.2
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
$3,861.7
 $0.2
 $(15.4) $3,846.5
 $648.2
 $1,312.4
 $1,885.9

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 September 30, 20172018 (in millions):
Amortized
Cost
 
Fair
Value
Amortized
Cost
 
Fair
Value
Mature in less than one year$1,304.9
 $1,303.9
$2,145.5
 $2,139.2
Mature in one to five years1,660.3
 1,655.2
1,447.3
 1,434.5
Total$2,965.2
 $2,959.1
$3,592.8
 $3,573.7
Actual maturities may differ from contractual maturities because certain borrowers have the right to call or prepay certain obligations. Realized gains and 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, 20172018, 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 cash flow from foreign currency 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 after-tax gain or loss from the hedge as a component of accumulated other comprehensive gain (loss) in stockholders’ equity and reclassifies it into earnings in the same period in which the hedged transaction affects earnings. The amounts reclassified to revenue and expenses related to the hedged transactions and the ineffective portions of cash flow hedges were not material for the periods presented.
Other Derivatives Not Designated as Hedging Instruments
Other derivatives not designated as hedging instruments consist primarily of forward contracts that the Company uses to hedge intercompany balances and other monetary assets or liabilities denominated in currencies other than the USD, primarily the EUR, GBP, JPY, KRW, and CHF.USD. The net gains (losses) recognized in interest and other income, net in the condensed consolidated statementsCondensed Consolidated Statements of comprehensive incomeComprehensive Income for the three and nine months ended September 30, 2017,2018, and 2016,2017, were not material.

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The notional amounts for derivative instruments provide one measure of the transaction volume. Total gross notional amounts (in USD) for outstanding derivatives and aggregate gross fair value at the end of each period were as follows (in millions):
Derivatives Designated as Hedging Instruments Derivatives Not Designated as Hedging InstrumentsDerivatives Designated as Hedging Instruments Derivatives Not Designated as Hedging Instruments
September 30,
2017
 December 31,
2016
 September 30,
2017
 December 31,
2016
September 30,
2018
 December 31,
2017
 September 30,
2018
 December 31,
2017
Notional amounts:              
Forward contracts$130.0
 $109.7
 $122.5
 $143.7
$161.8
 $128.5
 $161.9
 $168.4
Gross fair value recorded in:              
Prepaids and other current assets$1.6
 $6.2
 $1.7
 $5.6
$4.8
 $0.9
 $3.4
 $1.2
Other accrued liabilities$4.1
 $1.0
 $2.5
 $0.6
$0.5
 $2.9
 $0.6
 $4.6

NOTE 4.    BALANCE SHEET DETAILS AND OTHER FINANCIAL INFORMATION
InventoryBalance Sheet Details
The following table provides furthertables provide details of inventoryselected balance sheet items (in millions):
As ofAs of
September 30,
2017
 December 31,
2016
InventorySeptember 30,
2018
 December 31,
2017
Raw materials$67.7
 $54.8
$139.5
 $80.9
Work-in-process18.5
 13.4
38.5
 19.7
Finished goods139.0
 114.1
192.1
 140.6
Total inventory$225.2
 $182.3
$370.1
 $241.2
 As of
Other accrued liabilities—short-termSeptember 30,
2018
 December 31,
2017
Taxes payable$22.8
 $63.1
Litigation related accruals54.6
 13.8
Other accrued liabilities102.4
 92.0
Total other accrued liabilities—short-term$179.8
 $168.9
 As of
Other long-term liabilitiesSeptember 30,
2018
 December 31,
2017
Income taxes—long-term$263.1
 $286.8
Deferred revenue—long-term26.1
 24.8
Other long-term liabilities37.6
 22.0
Total other long-term liabilities$326.8
 $333.6
Goodwill and Intangible Assets
The increases in goodwill and intangible assets from December 31, 2017, to September 30, 2018, primarily relate to two transactions accounted for as business combinations.
During the second quarter of fiscal 2018, the Company terminated its India distribution relationship with Vattikuti Technologies Pvt. Ltd. and acquired certain assets related to that distribution business on May 25, 2018, which collectively met the definition of a business. The transaction enhances the Company’s ability to serve patients, surgeons, and hospitals in India. The purchase consideration consisted of $38.1 million in cash. The Company preliminarily recorded $4.1 million of net tangible assets, $24.2 million of intangible assets, and $9.8 million of residual goodwill. Intangible assets included reacquired distribution rights, customer relationships, and a non-compete agreement, which are being amortized over a weighted average period of 4.3 years.
During the third quarter of fiscal 2018, the Company acquired intellectual property, exclusive field of use rights, and certain key employees from InTouch Technologies, Inc. on August 17, 2018, which collectively met the definition of a business. The transaction enhances the Company’s network capabilities in using real-time data to support surgeons. The total purchase consideration of $38.7 million, as of the acquisition date, consisted of an initial cash payment of $22.0 million and future cash payments totaling approximately $16.7 million. The Company recorded $13.3 million of intangible assets and $25.4 million of residual goodwill. Intangible assets included developed technology and a non-compete agreement, which are being amortized over a weighted average period of 5.7 years. The goodwill will be amortized for income tax purposes.
The Company has included the results of both businesses since their acquisition date in its Financial Statements, which have not been material to date. Pro forma results of operations related to the acquisitions have not been presented since the operating results of the acquired businesses are not material to the Company’s Financial Statements.

Supplemental Cash Flow Information
The following table provides supplemental non-cash investing and financing activities (in millions):
 Nine Months Ended September 30,
 2017 2016
Equipment transfers, including operating lease assets, from inventory to property, plant and equipment$45.1
 $31.1
 Nine Months Ended September 30,
 2018 2017
Equipment transfers, including operating lease assets, from inventory to property, plant, and equipment$84.4
 $45.1
Deferred payments related to business combinations$16.7
 $
NOTE 5.    LEASE RECEIVABLES
Lease receivables relating to sales-type lease arrangements are presented on the Condensed Consolidated Balance Sheets as follows (in millions):
As ofAs of
September 30,
2017
 December 31,
2016
September 30,
2018
 December 31,
2017
Gross lease receivable$113.0
 $104.3
Gross lease receivables$143.3
 $128.0
Unearned income(4.7) (4.8)(5.7) (5.0)
Allowance for credit loss(0.8) (0.6)(1.0) (0.9)
Net investment in sales-type leases107.5
 98.9
$136.6
 $122.1
Reported as:      
Prepaids and other current assets35.0
 29.8
$50.1
 $41.9
Intangible and other assets, net72.5
 69.1
86.5
 80.2
Total, net$107.5
 $98.9
$136.6
 $122.1
Contractual maturities of gross lease receivables at September 30, 2017,2018, are as follows (in millions):

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AmountAmount
2017$9.3
201838.0
$9.9
201929.8
50.2
202019.5
40.2
202111.2
23.9
2022 and thereafter5.2
202212.9
2023 and thereafter6.2
Total$113.0
$143.3
NOTE 6.    CONTINGENCIES
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 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. During the three and nine months ended September 30, 2018, the Company recorded net pre-tax charges (recoveries) of $(1.8) million and $45.2 million, respectively, related to the securities class action lawsuits and the tolled product liability claims described below. A total of $53.0 million and $12.8 million associated with these matters were included in other accrued liabilities in the accompanying Condensed Consolidated Balance Sheets as of September 30, 2018, and December 31, 2017, respectively.

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 StatesU.S. 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 OctoberJune 11, 2016,2018, the Company sent plaintiffs’ lead counsel, Labaton Sucharow LLP,reached an agreement in principle to enter intoletter enclosingsettlement agreement which stipulates a draft motion for sanctions pursuant to Federal Rulepayment 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,$42.5 million by the Company, filed an oppositionsubject to plaintiffs’ motion, along with an independent motion to strikeapproval by 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 Companyagreement 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 certain conditions, including 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 befinal settlement agreement. Plaintiffs 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 on September 11, 2018. The court granted preliminary approval on October 4, 2018, and on July 18, 2017,set a final approval hearing for December 20, 2018. There can be no assurance that 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 settingparties will enter into a final settlement hearing. On October 20, 2017, the final settlement wasagreement or that such agreement will be approved by the court. During the three and nine months ended September 30, 2017,2018, the Company recorded $8.7 milliona pre-tax charge of zero and $11.7$42.5 million, respectively, of pre-tax charges to reflect the estimated cost of settlingfor 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 filedthese 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 utilizingIn addition to the da Vinci Surgical System. The filed cases, the Company has receivedpreviously reported on a significant number of such claims from plaintiffs’ attorneys that it believes are a result of these advertising efforts. A substantial number of claims relaterelating 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 2012 and MCS instruments that were the subject of a recall in 2013. In an effort to avoid the expense and distraction of defending multiple lawsuits, the Company entered into tolling agreements to pause the applicable statutes of limitations for many of these claims and engaged in confidential mediation efforts.
After an extended confidential mediation process with legal counsel for many As of September 30, 2018, all such “tolling agreements” have expired and the majority of the claimants covered by“tolled claims” have either been resolved or the tolling agreements,matters have been filed.
During the three months ended September 30, 2018, the Company determined during 2014 that, while it denies any and all liability, in lightrecorded a pre-tax recovery of the costs and risks of litigation, settlement of certain claims was appropriate.$1.8 million related to these matters. During the three months ended September 30, 2017, and 2016, no significant charges were recorded related to these claims.matters. During the nine months ended September 30, 2017,2018, and 2016,2017, the Company recorded net pre-tax charges of $2.7 million and $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 that are or that had been covered by the tolling agreements. The Company has reached confidential settlementsAs of September 30, 2018, and December 31, 2017, a total of $10.5 million and $12.8 million, respectively, were included in many of the cases that wereother accrued liabilities in the confidential mediation process and earlier filed cases.accompanying Condensed Consolidated Balance Sheets related to the tolled product liability claims.
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 EndoWrist Stapler instruments infringe several of Ethicon’s patents. Ethicon asserts infringement of U.S. Patent Nos. 9,585,658, 8,479,969, 9,113,874, 8,998,058, 8,991,677, 9,084,601, and

8,616,431. The parties are currently engaged in fact discovery regarding Ethicon’s allegations. A claim construction hearing occurred on October 1, 2018, but no decision is expected for approximately 60 days. Based on currently available information, the Company is unable to make a reasonable estimate of loss or range of losses, if any, arising from this matter.
On August 27, 2018, Ethicon LLC, Ethicon Endo-Surgery, Inc., and Ethicon US LLC (collectively, “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 United States Patent Nos 9,844,369, 7,490,749, 8,602,288, 8,602,287 and 9,326,770. The Company recently filed an answer, but no scheduling order has been put in place yet in the matter. Ethicon has indicated it may seek preliminary injunctive relief, but it has yet to confirm, or to file such a motion. Based on currently available information, the Company is unable to make a reasonable estimate of loss or range of losses, if any, arising from this matter.
NOTE 7.    STOCKHOLDERS’ EQUITY
Stock Repurchase Program
The Company’s Board of Directors (the “Board”) has authorized an aggregate of $6.2 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 2016 when the Board increased the authorized amount available under Repurchase Program to $3.0 billion. As of September 30, 2017,2018, the remaining amount of share repurchases authorized by the Board was approximately $991.6$717.5 million.
There were no shares repurchased during the nine months ended September 30, 2018. On January 24, 2017, the Company entered into an accelerated share repurchase program (the “ASR Program”) with Goldman Sachs & Co. LLC (“Goldman”) and Goldman delivered to repurchase $2.0 billionthe Company approximately 7.3 million shares of the Company’s common stock. On January 27, 2017,stock, for which the Company made a payment of $2.0 billion to Goldman and Goldman delivered toGoldman. On December 7, 2017, 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 reflectscompleted the ASR Program asby making a repurchasefinal settlement payment of common stock in the period delivered for purposes of calculating earnings$274.0 million to Goldman. The final average price per share and as a forward contract indexed to its own common stock.
The total number of shares that the Company will repurchasepaid 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.

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was $310.32.
Accumulated Other Comprehensive Income (Loss)
The components of accumulated other comprehensive income (loss), net of tax, for the three and nine months ended September 30, 20172018, and 20162017, are as follows (in millions):
 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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 Three Months Ended September 30, 2018
 
Gains (Losses)
on Hedge
Instruments
 Unrealized Gains
(Losses) on Available-for-Sale Securities
 
Foreign
Currency
Translation
Gains (Losses)
 Employee Benefit Plans Total
Beginning balance$3.4
 $(16.7) $0.9
 $(4.0) $(16.4)
Other comprehensive income (loss) before reclassifications1.4
 0.6
 (1.2) 
 0.8
Amounts reclassified from accumulated other comprehensive income (loss)(1.1) (0.1) 
 0.1
 (1.1)
Net current-period other comprehensive income (loss)0.3
 0.5
 (1.2) 0.1
 (0.3)
Ending balance$3.7
 $(16.2) $(0.3) $(3.9) $(16.7)
          
 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 (loss) 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)

Nine Months Ended September 30, 2017Nine Months Ended September 30, 2018
Gains (Losses)
on Hedge
Instruments
 
Unrealized Gains
(Losses) on Available-for-Sale Securities
 
Foreign
Currency
Translation
Gains (Losses)
 Employee Benefit Plans Total
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) $(8.9)$(2.4) $(11.3) $2.3
 $(4.1) $(15.5)
Other comprehensive income before reclassifications(7.1) 4.0
 3.1
 0.1
 0.1
Other comprehensive income (loss) before reclassifications4.6
 (6.0) (2.6) 
 (4.0)
Amounts reclassified from accumulated other comprehensive income(0.7) 
 
 0.3
 (0.4)1.5
 1.1
 
 0.2
 2.8
Net current-period other comprehensive income (loss)(7.8) 4.0
 3.1
 0.4
 (0.3)6.1
 (4.9) (2.6) 0.2
 (1.2)
Ending balance$(2.8) $(4.6) $1.8
 $(3.6) $(9.2)$3.7
 $(16.2) $(0.3) $(3.9) $(16.7)
                  
Nine Months Ended September 30, 2016Nine 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
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)$5.0
 $(8.6) $(1.3) $(4.0) $(8.9)
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
Other comprehensive income (loss) before reclassifications(7.1) 4.0
 3.1
 0.1
 0.1
Amounts reclassified from accumulated other comprehensive income (loss)(0.7) 
 
 0.3
 (0.4)
Net current-period other comprehensive income (loss)(3.1) 9.1
 7.1
 0.4
 13.5
(7.8) 4.0
 3.1
 0.4
 (0.3)
Ending balance$(1.6) $4.9
 $3.8
 $(3.1) $4.0
$(2.8) $(4.6) $1.8
 $(3.6) $(9.2)
Retained Earnings
For the three and nine months ended September 30, 2018, retained earnings balance included a reduction of $6.6 million and $108.5 million, respectively, for shares withheld related to net share settlements of employee equity awards.
NOTE 8.    SHARE-BASED COMPENSATION
In April 2017, the Company’s shareholders approved an amended and restated 2000 Employee Stock Purchase Plan (the “ESPP”) to provide for an increase in the number of shares of common stock reserved for issuance from 2,030,105 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). As of September 30, 2017,2018, approximately 6.34.4 million shares of common stock were reserved for future issuance under the Company’s stock plans. A maximum of approximately 2.71.9 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 nine months ended September 30, 20172018, 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, 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
  Stock Options Outstanding
  
Number
Outstanding
 
Weighted Average
Exercise Price Per
Share
Balance at December 31, 2017 7.2
 $164.16
Granted 0.5
 $470.83
Exercised (1.2) $124.29
Forfeited/expired (0.1) $228.26
Balance at September 30, 2018 6.4
 $196.05
As of September 30, 2017,2018, options to purchase an aggregate of 5.65.1 million shares of common stock were exercisable at a weighted-averageweighted average price of $145.37$163.69 per share.

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Restricted Stock Units Information
A summary of RSURSUs activity for the nine months ended September 30, 20172018, is presented as follows (in millions, except per share amounts):

Shares 
Weighted Average
Grant Date Fair Value
Shares 
Weighted Average
Grant Date Fair Value
Unvested balance at December 31, 20161.8
 $174.72
Unvested balance at December 31, 20172.1
 $209.55
Granted1.0
 $245.40
0.8
 $425.22
Vested(0.5) $170.58
(0.8) $194.03
Forfeited(0.1) $200.82
(0.1) $271.63
Unvested balance at September 30, 20172.2
 $207.09
Unvested balance at September 30, 20182.0
 $290.10
Employee Stock Purchase Plan
Under the ESPP,Employee Stock Purchase Plan (“ESPP”), employees purchased approximately 0.2 million shares for $38.346.8 million and approximately 0.2 million shares for $32.538.3 million during the nine months ended September 30, 20172018, and 20162017, respectively.
Share-based Compensation Expense
The following table summarizes share-based compensation expense for the three and nine months ended September 30, 20172018, and 20162017 (in millions):
Three Months Ended 
 September 30,
 Nine Months Ended 
 September 30,
Three Months Ended 
 September 30,
 Nine Months Ended 
 September 30,
2017 2016 2017 20162018 2017 2018 2017
Cost of sales - products$7.0
 $6.9
 $20.5
 $18.6
$10.1
 $7.0
 $27.2
 $20.5
Cost of sales - services3.7
 3.3
 10.4
 9.4
4.5
 3.7
 12.5
 10.4
Total cost of sales10.7
 10.2
 30.9
 28.0
14.6
 10.7
 39.7
 30.9
Selling, general and administrative30.0
 25.3
 82.3
 72.9
35.9
 30.0
 98.1
 82.3
Research and development15.2
 11.4
 40.9
 31.5
20.2
 15.2
 54.4
 40.9
Share-based compensation expense before income taxes55.9
 46.9
 154.1
 132.4
70.7
 55.9
 192.2
 154.1
Income tax benefit18.4
 14.8
 50.3
 41.5
14.9
 18.4
 40.0
 50.3
Share-based compensation expense after income taxes$37.5
 $32.1
 $103.8
 $90.9
$55.8
 $37.5
 $152.2
 $103.8
The Black-Scholes option pricing model is used to estimate the fair value of stock options granted under the Company’s share-based compensationstock plans and rights to acquire stock granted under the Company’s ESPP. The weighted average estimated fair values of stock options theand rights to acquire stock granted, andunder the ESPP, as well as the weighted average assumptions used in calculating those fair values, were as follows:
 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
 Three Months Ended 
 September 30,
 Nine Months Ended 
 September 30,
 2018 2017 2018 2017
Stock Options       
Risk-free interest rate2.7% 1.7% 2.7% 1.8%
Expected term (in years)4.3
 3.9
 4.3
 4.1
Expected volatility32% 26% 33% 25%
Fair value at grant date$159.67
 $74.37
 $145.15
 $65.12
ESPP       
Risk-free interest rate2.5% 1.2% 2.1% 1.2%
Expected term (in years)1.3
 1.2
 1.3
 1.2
Expected volatility31% 29% 32% 28%
Fair value at grant date$153.72
 $85.23
 $135.84
 $79.77
NOTE 9.    INCOME TAXES
Income tax expense (benefit) expense for the three months ended September 30, 2017,2018, was $(8.1)$43.4 million, or (2.8)%12.9% of income before taxes, compared with $55.8$(7.2) million, or 20.9%(2.5)% of income before taxes, for the three months ended September 30, 2016.2017. Income tax expense for the nine months ended September 30, 2017,2018, was $58.4$87.0 million, or 7.7%9.4% of income before taxes, compared with $172.8$61.1 million, or 24.5%8.0% of income before taxes for the nine months ended September 30, 2016. 2017.
The Company’seffective tax rates for the three and nine months ended September 30, 2018, differed from the U.S. federal statutory rate of 21% primarily due to excess tax benefits associated with employee equity plans and federal R&D credit benefits, partially offset by state income taxes. The effective tax provision

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rates for the three and nine months ended September 30, 2017, compared withdiffered from the same periodsU.S.

federal statutory rate of 2016,35% primarily benefiteddue to the benefits from the expiration of statutes of limitations, 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 differ from the U.S. federal statutory rate of 35% due toassociated with employee equity plans and the effect of income earned by certain of the Company’s overseas entitiesforeign earnings being taxed at rates lower than the federal statutory rate, partially offset by state income taxes.
The Company intends to indefinitely reinvest outsideeffective tax rates for the U.S. allthree and nine months ended September 30, 2018, reflected a $4.6 million tax benefit from the expiration of its undistributed foreign earnings that were not previously subject to U.S. tax.
statutes of limitations in various jurisdictions. The effective tax rates for the three and nine months ended September 30, 2017, reflected a $14.9 million tax benefit mainly related tofrom the release of unrecognized tax benefits due to the expiration of statutes of limitations in various jurisdictions. The effective tax rates for the three and nine months ended September 30, 2017, also reflected tax benefitbenefits of $53.5 million and $45.7 million, respectively, from reevaluation of certain unrecognized tax benefits as a result of the expiration of such statutes of limitations.
TheIn connection with the Tax Act enacted in December 2017, the Company adopted ASU No. 2016-09recorded a provisional amount of $317.8 million in the first quarter of 2017, which resulted in excess tax benefits associated with employee equity plans of $19.7 million and $82.9 million being recognized in theits income tax provision duringexpense for the three and nine monthsyear ended September 30, 2017, respectively. ExcessDecember 31, 2017. In accordance with relevant SEC guidance, the effects of the Tax Act may be adjusted within a one-year measurement period from the enactment date for items that were previously reported as provisional, or where a provisional estimate could not be made. Income 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 pointsprovision for the three and nine months ended September 30, 2017, respectively.2018, did not reflect any adjustment to the previously assessed Tax Act enactment effect. Income tax expense for the three and nine months ended September 30, 2018, reflected $12.6 million and $28.1 million, respectively, estimated tax on global intangible low-taxed income enacted by the Tax Act. For the global intangible low-taxed income provisions of the Tax Act, the Company has not yet elected an accounting policy with respect to either recognize deferred taxes for basis differences expected to reverse as global intangible low-taxed income, or to record such as period costs if and when incurred. The amount of excess tax benefits or deficienciesCompany will fluctuate from periodcontinue to period basedassess forthcoming guidance and accounting interpretations on the priceeffects of the Company’s stock,Tax Act and expects to complete its analysis within the volumemeasurement period in accordance with the SEC guidance. As a result of share-based instruments settled or vested,the Tax Act, the provisional amount recorded in December 2017 included a one-time deemed repatriation toll charge on the cumulative undistributed foreign earnings through 2017. In June 2018, the Company repatriated to the U.S. $1.6 billion of cumulative undistributed foreign earnings in the form of cash, cash equivalents, and investments of $1.4 billion and a note of $0.2 billion without significant incremental tax impact. The Company is still evaluating whether to change its indefinite reinvestment assertion for years after 2017 in light of the value assigned to employee equity awards under U.S. GAAP.Tax Act. If the Company subsequently changes its assertion during the measurement period, the Company will account for the change in assertion as part of the Tax Act enactment.
As of September 30, 2017,2018, the Company had a total of gross unrecognized tax benefits of $62.3$73.7 million compared with $106.0$65.4 million as of December 31, 2016,2017, representing a net decreaseincrease of approximately $43.7$8.3 million for the nine months ended September 30, 2017.2018. The net decrease isincrease was 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 other2018 uncertain tax positions. If recognized, thesethe gross unrecognized tax benefits would reduce the effective tax rate in the period of recognition.
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 20142015 are closed for the significant jurisdictions. Certain of the Company’s unrecognized tax benefits could change due to activities of various tax authorities, including potential assessment of additional tax, possible settlement of audits, or through normal expiration of various statutes of limitations, which could affect the Company’s effective tax rate in the period in which they change. Due to the uncertainty related to the timing and potential outcome of audits, the Company cannot estimate the range of reasonably possible change in unrecognized tax benefits that may occur in the next 12 months.
The Company is subject to the examination of its income tax returns by the Internal Revenue Service and other tax authorities. The outcome of these audits cannot be predicted with certainty. The Company’s management regularly assesses the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of the Company’s provision for income taxes. If any issues addressed in the Company’s tax audits are resolved in a manner not consistent with management’s expectations, the Company could be required to adjust its provision for income taxes in the period such resolution occurs.

NOTE 10.    NET INCOME PER SHARE
The following table presents the computation of basic and diluted net income per share attributable to Intuitive Surgical, Inc. for the three and nine months ended September 30, 2017,2018, and 20162017 (in millions, except per share amounts):
 Three Months Ended 
 September 30,
 Nine Months Ended 
 September 30,
 2017 2016 2017 2016
Numerator:       
Net income$297.5
 $211.0
 $698.8
 $531.9
Denominator:       
Weighted-average shares outstanding used in basic calculation111.8
 116.1
 111.6
 114.6
Add: dilutive effect of potential common shares5.0
 3.0
 4.3
 3.0
Weighted-average shares used in computing diluted net income per share116.8
 119.1
 115.9
 117.6
Net income per share:       
Basic$2.66
 $1.82
 $6.26
 $4.64
Diluted$2.55
 $1.77
 $6.03
 $4.52

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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.
 Three Months Ended 
 September 30,
 Nine Months Ended 
 September 30,
 2018 2017 2018 2017
Numerator:       
Net income attributable to Intuitive Surgical, Inc.$292.5
 $298.6
 $835.4
 $702.4
Denominator:       
Weighted average shares outstanding used in basic calculation114.0
 111.8
 113.4
 111.6
Add: dilutive effect of potential common shares5.2
 5.0
 5.2
 4.3
Weighted average shares outstanding used in diluted calculation119.2
 116.8
 118.6
 115.9
Net income per share attributable to Intuitive Surgical, Inc.:       
Basic$2.57
 $2.67
 $7.37
 $6.29
Diluted$2.45
 $2.56
 $7.04
 $6.06
Share-based compensation awards of approximately 0.20.4 million and 0.30.2 million weighted-average shares for the three months ended September 30, 2017,2018, and 2016,2017, respectively, and approximately 0.40.3 million and 0.50.4 million weighted-average shares for the nine months ended September 30, 2017,2018, and 2016,2017, 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.

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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- and majority-owned subsidiaries.
This management’s discussion and analysis of financial condition as of September 30, 20172018, and results of operations for the three and nine months ended September 30, 20172018, and 2016,2017, 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, 20162017.
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” 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 provisional income tax expense related to the Tax Cuts and Jobs Act, the potential impact of the final resolution of provisional estimates and potential subsequent adjustments due to additional guidance from and interpretations by regulatory and standard-setting bodies and changes in assumptions, our 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: the impact of global and regional economic and credit market conditions on health carehealthcare spending; health carehealthcare reform legislation in the United States 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; 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; unanticipated manufacturing disruptions; our abilitydisruptions or the inability to meet demand for products; 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; 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, 20162017, 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 SiHD Surgical System®, da VinciXi®, da Vinci SP®, EndoWrist®, Firefly®, InSite®, da Vinci Connect®, Intuitive Surgical EcoSystemEcoSystem®, da Vinci X®, SureForm 60®,SmartFire®, and da Vinci XIonTM are trademarks or registered trademarks of Intuitive Surgical, Inc.
Overview
Open surgery remains the predominanta significant form of surgery and is commonly used in almost every areamost areas 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, 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 conventional MIS. Surgeons using a da Vinci Surgical System operate while seated comfortably at a console viewing a 3-D representation of an HD image of the surgical field. This immersive visualization 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 surgery technique. Our technology is designed to provide surgeons with a range of motion of MIS instruments 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 products fall into four broad categories - the da Vinci Surgical Systems, InSite and Firefly Fluorescence imaging systems (“FireflyFirefly”), instruments and accessories (e.g., EndoWrist,, EndoWrist Vessel Sealer, da VinciSingle-Site and EndoWrist Stapler), and training technologies. Across these categories, within an integrated ecosystem, our products are designed to decrease variability in surgery by offering consistency in functionality and user experience with dependability for surgeons seeking better outcomes. With our “systems” approach, we offer intelligent technology and systems designed to work together to make MIS intervention more available and applicable.
We have commercialized the following four generational platforms of multi-port da Vinci Surgical Systems: the Our first generation da Vinci standard Surgical System, commercialized in 1999, the our second generation da Vinci S Surgical System, commercialized in 2006, the our third generation da Vinci Si Surgical System, commercialized in 2009, and our fourth generation, beginning with the da Vinci Xi Surgical System, commercialized in 2014, followed by the second quarter of 2014, and the da Vinci X Surgical System, commercialized in the second quarter of 2017. TheseDuring the second quarter 2018, we obtained a new U.S. Food and Drug Administration (“U.S. FDA”) clearance for the da Vinci SP Surgical System for urologic surgical procedures. The da Vinci SP Surgical System enables a single port surgical approach and is an extension of our fourth generation platform. We plan to launch the da Vinci SP Surgical System in the U.S. in a measured fashion, and began by shipping three da Vinci SP systems during the third quarter 2018. We plan to seek U.S. FDA approvals for additional SP indications over time. Our da Vinci Surgical Systems include a surgeon’s console (or consoles), imaging electronics, a patient-side cart, and computational hardware and software.
We offer over 6580 different multiport multi-port da Vinci instruments enabling surgeons’providing surgeons with flexibility in choosing the specific types of tools needed in a particular surgery. These multiportmulti-port instruments are generally robotically controlled versions of surgical tools that surgeons would use 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 EndoWrist Vessel Sealer and EndoWrist 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.Systems share the same instruments while the da Vinci Si Surgical System uses different instruments. Initially we are offering nine core instruments on our da Vinci SP Surgical System and we will expand that offering over time.
We offer Single-Site instruments for use with the da Vinci Si, da Vinci Xi, and da Vinci X Surgical Systems. Single-Site instruments are most commonly used in cholecystectomy and hysterectomy procedures. Single-Site instruments enable surgeons to also perform surgery through a single port via the patient’s belly button, resulting in the potential for virtually scarless results.
Training technologies include our da Vinci Skills Simulator, da Vinci Connect remote case observation and mentoring tool, and our dual console for use in surgeon proctoring and collaborative surgery.
Business Model
Overview
We generate revenue from both the initial capital sales of da Vinci Surgical Systems, from the placement of systems under sales-type and operating lease arrangements, from subsequentthe sales of instruments and accessories, and service, as recurring revenue.from the sale of services. The da Vinci Surgical System generally sells for between 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. 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 typicallyearn between approximately $700 to $3,500 of instrument and accessory revenue per surgical procedure performed, depending on the type and complexity of the specific procedures performed and the number and type of instruments used. We generally enter into multi-year service contracts at the time systems are sold atwith an annual rateservice fee of approximately $80,000 to $170,000,$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 adopted ASC 606, Revenue from Contracts with Customers, effective January 1, 2018, using the full retrospective method. The financial results for 2016 and 2017 have been restated to reflect this adoption. The adoption did not have a material impact on revenue recognized for the periods presented in our Financial Statements. Refer to “Note 2. Summary of Significant Accounting Policies” within Part I, Item 1 of this Form 10-Q for further information on the impact of adopting ASC 606.
Recurring Revenue
Recurring revenue consists of instrument and accessory revenue, service revenue, and operating lease revenue. Recurring revenue increased to $2.2 billion, or 71% of total revenue in 2017, compared with $1.9 billion, or 71% of total revenue in 2016. The growth of recurring revenue and its gradually increasing proportion of total revenue over the years largely reflect continued procedure adoption and increased system utilization on a growing base of installed da Vinci Surgical Systems. The installed base of da Vinci Surgical Systems has grown to approximately 4,814 at September 30, 2018.
Instrument and accessory revenue has generally grown at a faster rate than system revenue in the last few fiscal years. RecurringInstrument and accessory revenue increased to $1.9 billion, or 71% of total revenue in 2016, compared with $1.7 billion, or 70% of total revenue in 2015, 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,in 2017, compared with $1.4 billion or 71% of total revenue for the nine months ended September 30,in 2016. The growth of recurring revenueinstrument and its increasing proportion of totalaccessory revenue largely reflectreflects continued procedure adoption and increased system utilization on a growingadoption.

Service revenue growth has been driven by the growth of the base of installed da Vinci Surgical Systems. The installed base of da Vinci Surgical Systems grew 13% to approximately 4,409 at December 31, 2017, and 9% to approximately 3,919 at December 31, 2016. Service revenue grew 12% to $572.9 million in 2017 and 10% to $510.7 million in 2016.
Operating lease revenue has grown as an increasing proportion of systems have been shipped under operating lease arrangements. In the years ended December 31, 2017, and 2016, a total of 108 and 62 of system shipments were classified as operating leases, respectively. Revenue from operating lease arrangements is generally recognized on a straight-line basis over the lease term. Operating lease revenue for the years ended December 31, 2017, and 2016, was $25.9 million and $16.6 million, respectively. 
Intuitive Surgical da Vinci 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 da Vinci Surgical 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.
In the years ended December 31, 2017 and 2016, we shipped 139 and 95 systems under lease arrangements, respectively, of which 108 and 62 were classified as operating leases, respectively. Generally, the operating lease arrangements provide our customers with the right to purchase the leased system at some point during and/or at the end of the lease term. Revenue generated from customer purchases of systems under operating lease arrangements (“Lease Buyouts”) was $39.5 million and $38.2 million for the years ended December 31, 2017 and 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. We believe our leasing program has been effective and well-received, and we are willing to expand it based on customer demand, including offering alternative options such as usage-based payment models. Our da Vinci system leasing provides customers with flexibility regarding how they acquire da Vinci Surgical Systems. Our exposure to the credit risks relating to our lease financing arrangements may increase if our customers are adversely affected by changes in healthcare laws, coverage and reimbursement, economic pressures or uncertainty, or other customer-specific factors. Also, usage-based leases generally contain no minimum lease payments; therefore, customers can exit such leases without paying financial penalty to us.
Systems Revenue
System placements are driven by procedure growth in most markets. In geographies where da Vinci Surgical Systems has grownprocedure adoption is in an early stage, system sales will precede procedure growth. System placements also vary quarter to approximately 4,271 at September 30, 2017.quarter due to seasonality. System revenue grew 16% to $928.4 million in 2017 and 11% to $800.0 million in 2016. System revenue is also affected by the proportion of systems placed that are under operating lease arrangements, recurring operating lease revenue, operating lease buyouts, product mix, average selling price (“ASP”), and trade-in activities.
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, EndoWrist Stapler products, and our Table Motion product target the more complex procedure segment. Lower priced products, including the three-arm da Vinci Si-e System, refurbished da Vinci Si Surgical System and Single-Site instruments, are targeted towards less complex procedures. Our da Vinci X Surgical System is priced between the da Vinci Si and Xi Surgical Systems and offers customers access to many of the fourth generation da Vinci Xi features, including da Vinci Xi advanced instrumentation and imaging systems, at a more accessiblelower price point.
Procedure Seasonality
More than half of da Vinci procedures performed are for benign conditions, most notably benign hysterectomies, hernia repairs, and cholecystectomies. The proportion of these 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., procedure volumes for procedures associated with benign conditions are typically seasonally higher 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 in the first quarter procedure volume when deductibles are reset. Seasonality outside the U.S. varies and is generally more pronounced around local holidays and vacation periods.


Distribution Channels
We provide our products through direct sales organizations in the U.S., Japan, South Korea, and Europe, excluding Spain, Portugal, Italy, Greece, and Eastern European countries. In May 2018, we terminated our India distribution relationship with Vattikuti Technologies Pvt. Ltd. and acquired certain assets related to that distribution business. We accounted for the transaction as a business combination under U.S. GAAP. We established Intuitive Surgical India Private Limited, headquartered in Bangalore, India and began direct operations at the end of May. 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-type and operating lease arrangements directly with certain qualified customers 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.
We shipped 26 and 86 systems under lease arrangements, 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.
Regulatory Activities
Clearances and Approvals
We have obtained the clearances required to market our multiportmulti-port products associated with all of our da Vinci Surgical Systems (Standard, S,Si, Xi, and X systems) for our targeted surgical specialties within the U.S., South Korea, and the European markets in which we operate.
We obtained the initial U.S. FDA clearance in April 2014 for our da Vinci SP Surgical System (see the description of the da Vinci SP Surgical System in the New Product Introductions section below), and have since invested in important platform refinements. In May 2018, we obtained a new U.S. FDA clearance for the da Vinci SP Surgical System for urologic surgical procedures that are appropriate for a single port approach. We also received regulatory clearance for the da Vinci SP Surgical System in South Korea in May 2018. We plan to launch the da Vinci SP Surgical System in a measured fashion and placed three da Vinci SP systems with customers during the third quarter 2018.
In July 2018, we received U.S. FDA clearance to market SureForm 60, our da Vinci EndoWrist 60mm Stapler (see the description of the SureForm 60mm in the New Product Introductions section below).
In April 2018, we received U.S. FDA clearance for our Vessel Sealer Extend (see the description of the Vessel Sealer Extend in the New Product Introductions section below).
In April 2017, we received CE mark clearance for our da Vinci X Surgical System in Europe. Following the CE mark, in May 2017, we received U.S. Food and Drug Administration (“FDA”)FDA clearance to market our da Vinci X Surgical System in the U.S. We received regulatory clearance for the da VinciX Surgical System in South Korea in September 2017 and in Japan in April 2018 (see the description of the da Vinci X Surgical System 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 the 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 every even year. 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. Reimbursements are considered inIn April 2012 and April 2016, the MHLW granted reimbursement status for da Vinci Prostatectomy (“dVP”) and partial nephrectomy, respectively. An additional 12 da Vinci procedures were granted reimbursement effective April 1, 2018, including gastrectomy, anterior resection, lobectomy and hysterectomy, for both malignant and benign conditions. These additional 12 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 procedures, there can be no assurance that weadoption will gain additional reimbursementsoccur or, that the adoption pace for thethese procedures or at the times we have targeted.will be similar to any other da Vinci procedure. If these procedures are not adopted and we are not successful in obtaining additional regulatory clearances, and adequate procedure reimbursements for future products andadditional procedures, then the demand for our products in Japan could be limited.
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 which 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 which 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, 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.
Worldwide Procedures
Our da Vinci systems and instruments are regulated independently in various countries and regions of the world. The discussion of indications for use and representative or target procedures is intended solely to provide an understanding of the market for da Vinci products and is not intended to promote for sale or use any Intuitive Surgical product outside of its licensed or cleared labeling and indications for use.
The adoption of da Vinci Surgery has the potential to grow for those procedures that offer greater patient value than non-danon-da Vinci alternatives, within the prevailing economics of 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 general surgery include hernia repair (both ventral and inguinal) and colorectal procedures. 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), colorectal procedures, and cholecystectomy. Target procedures in urology include dVP and partial nephrectomy. In cardiothoracic surgery, target procedures include da Vinci Lobectomy and da Vinci Lobectomy and da Vinci Mitral Valve Repair. In head and neck surgery, target procedures include certain procedures resecting benign and malignant tumors classified as T1 and T2. Not all the indications, procedures, or products described may be available in a given country or region or on all generations of da Vinci Surgical Systems. Patients need to consult the product labeling in their specific country and for each product in order to determine the actual authorized uses, as well as important limitations, restrictions, or contraindications.
In 2016,2017, approximately 753,000877,000 surgical procedures were performed with the da Vinci Surgical Systems, compared with approximately 652,000 and 570,000753,000 procedures performed in 2015 and 2014, respectively.2016. The growth in our overall procedure volume in 20162017 was driven by growth in U.S. general surgery procedures and worldwide urologic procedures.

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U.S. Procedures
Overall U.S. procedure volume grew to approximately 563,000644,000 in 2016,2017, compared with approximately 499,000563,000 in 2015 and approximately 449,000 in 2014. Gynecology is2016. For 2017, general surgery was 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. General surgery is our second largest and fastest growing specialty in the U.S. with procedure volume that grew to approximately 246,000 in 2017, compared with approximately 186,000 in 2016, and is now our largest procedure category. U.S. gynecology procedure volume was approximately 252,000 in 2017, compared with approximately 140,000246,000 in 2015 and 107,000 in 2014.2016. U.S. urology procedure volume was approximately 109,000118,000 in 2016,2017, compared with approximately 102,000109,000 in 2015 and 91,000 in 2014.2016.
Procedures Outside of the U.S.
Overall OUS procedures grew to approximately 190,000233,000 in 2016,2017, compared with approximately 153,000190,000 in 2015 and approximately 121,000 in 2014.2016. Procedure growth in most OUS markets was driven largely by urology procedure volume. OUS dVP procedure volume, which grew to approximately 92,000149,000 in 2016,2017, compared with approximately 79,000124,000 in 2015 and approximately 65,000 in 2014. Partial nephrectomy, general2016. General surgery and gynecologic oncology procedures also contributed to OUS procedure growth.
Recent Business Events and Trends
Procedures
Overall. Total da Vinci procedures grew approximately 16%18% for both the nine months ended September 30, 2017, and2018, compared with 16% for the nine months ended September 30, 20162017. U.S. procedure growth was approximately 13%17% for both the nine months ended September 30, 2017, and2018, compared with 13% for the nine months ended September 30, 2016.2017. Year-to-date 20172018 U.S. procedure growth was largely attributable to growth in general surgery procedures, most notably hernia repair, colorectal, cholecystectomy, and colorectalbariatric procedures, and thoracic procedures, as well as continued moderate growth in more mature gynecologic and urologic procedure categories.

Procedure volume OUS grew approximately 24%21% for both the nine months ended September 30, 2017, and2018, compared with 24% for the nine months ended September 30, 2016.2017. Year-to-date 20172018 OUS procedure growth was driven by continued growth in dVP procedures and earlier stage growth in general surgery, gynecology, and kidney cancer procedures, general surgery, and gynecology.procedures. We believe growth in these global markets is being driven by increased acceptance among surgeons and health systems, supported by expanded global evidence validating the clinical and economic value of da Vinci procedures.
U.S. Gynecology. Growth in gynecology procedures during The growth rate for the nine months ended September 30, 2017, continued at a2018 was lower than the growth rate 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 limitedthe previous year primarily due 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 ourlower procedure growth in gynecologic procedures overChina. Procedure growth in China moderated as da Vinci system capacity expansion is constrained by system quota requirements, the past several years is primarily being driven by consolidationmost recent of surgical volumes into surgeons that focus on cancer and complex surgeries, as well as higher sacrocolpopexy procedure volume.which expired at the end of 2015.
U.S. General Surgery. Growth in general surgery procedures continued to drive the majority of incremental procedures during the nine months ended September 30, 2017, continued2018. Year-to-date 2018 U.S. general surgery procedure volume grew at a rate consistent with 2016. The year-to-date 2017 growth in U.S. general surgery procedures was primarily driven by ventral2017. Ventral and inguinal hernia procedures,repairs contributed the most incremental cases during the nine months ended September 30, 2018, as itthey did in 20152017 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 surgical complexity amongassociated with treatment of various hernia patient populations and varying surgeon opinion regarding optimal surgical technique, it is difficult to estimate the timing of and to what extent da Vinci hernia repair procedure volume will grow in the future. We expect a large portion of hernia repairs will continue to be performed via different modalities of surgery.
Adoption of da Vinci for colorectal procedures, which includes several underlying procedures including low anterior resections for rectal cancers and certain colon procedures for benign and cancerous conditions, has been ongoing for several years, and is supported by our recently launched technologies such as the da Vinci Xi Xi Surgical System, EndoWrist Stapler, EndoWrist Vessel Sealer, and Integrated Table Motion.

During the nine months ended September 30, 2018, we have seen increasing contributions to growth from other U.S. general surgery procedures, including cholecystectomy and bariatric procedures. Our third quarter 2018 introduction of the SureForm 60mm stapler product provides surgeons a better optimized robotic tool set for bariatric procedures.
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TableU.S. Gynecology. Growth in gynecology procedures during the nine months ended September 30, 2018, increased modestly compared to 2017. Combining robotic, laparoscopic, and vaginal approaches, MIS represents about 80% of Contents

the U.S. hysterectomy market for benign conditions. We believe that our growth in gynecologic procedures over the past several years has primarily been driven by consolidation of gynecologic procedures into higher volume surgeons that focus on cancer and complex surgeries.
Global Urology. Along with U.S. general surgery, global urology procedures contributed to the majority ofdrove our recent procedure growth. dVP is the largest urology procedure in the U.S. Year-to-date 20172018 growth in U.S. dVP procedures continued at a rate consistentmoderated slightly compared with 2016.2017. We believe the return toour 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, reflectingprostatectomy is largely aligned with surgical volumes coming into closer alignment with new diagnoses of prostate cancer. Ascancer as dVP is the U.S. standard of care for the surgical treatment of prostate cancer, we expect that the number of dVP procedures performed in the U.S. will largely fluctuate with the overall prostatectomy market.cancer. dVP is the largest overall OUS procedure. Year-to-date 20172018 growth in OUS dVP was strong andis consistent with growth in 2017. OUS dVP is at various stages of adoption in different areas of the world.
Kidney cancer procedures have also been a strong contributor to our recent global urology procedure growth. Clinical publications have demonstrated that the presenceuse 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 Year-to-date 2018 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. WeIn China, we have experienced strong procedure growth in China asand utilization on systems sold under aour previous public hospital quota system have been installed and as utilizationwhich expired at the end of those systems have increased.2015. However, procedure growth is now moderating in China. Future system placements and our ability to sustain procedure growth in Chinaas we 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 in China is not certain. WeIn Japan, 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 proceduretowards higher levels of penetration, growth in Japan is slowing. Futurethese two urologic procedures has moderated. A total of 12 additional da Vinciprocedures were granted national reimbursement status effective April 1, 2018, including gastrectomy, anterior resection, lobectomy and hysterectomy, for both malignant and benign conditions. These additional 12 reimbursed procedures have varying levels of conventional laparoscopic penetration and will be reimbursed at rates equal to the conventional laparoscopic procedures. Given the reimbursement level and laparoscopic penetration for these procedures, there can be no assurance that adoption will occur or that the adoption pace for these procedures will be similar to any other da Vinci procedure. If these procedures are not adopted and we are not successful in obtaining adequate procedure growthreimbursement for additional procedures, then the demand for our products in Japan will likelycould be paced by the timing of procedure reimbursement approvals for procedures in addition to dVP and partial nephrectomy.limited.
System Demand
Future demand for da Vinci Surgical Systems will be impacted by factors including hospital response to the evolving health care environment, under the current U.S. administration, procedure growth rates, hospital consolidation trends, evolving system utilization and point of care dynamics, capital replacement trends, additional reimbursements in various global markets, including Japan, the timing around governmental

tenders and authorizations, including China, and 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 related instruments.instruments as well as other economic and geopolitical factors. 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.placements. Demand may also be impacted by robotic surgery competition, including from companies that have introduced products in the field of robotic surgery or have made explicit statements about their efforts to enter the field, including but not limited to: Auris Surgical Robotics, Inc.; Avatera Medical GmbH; Cambridge Medical Robotics Ltd.;CMR Surgical Limited; Johnson & Johnson and Google 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., as well as other economic and geopolitical factors.Ltd.
New Product Introductions
Da Vinci SP Surgical System. In May 2018, we obtained U.S. FDA clearance for the da Vinci SP Surgical System for urologic surgical procedures that are appropriate for a single port approach. The da Vinci SP system includes three, multi-jointed, wristed instruments and the first da Vinci fully wristed 3-D HD 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., 360-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 will use the same fourth generation surgeon console as the da Vinci X and Xi systems. The da Vinci SP system provides surgeons with robotic-assisted technology designed for deep and narrow access to tissue in the body. We anticipate pursuing further regulatory clearances for da Vinci SP, including transoral and transanal applications, broadening the applicability of the SP platform over time. We plan to launch the da Vinci SP Surgical System in the U.S. in a measured fashion, having shipped three SP Surgical Systems to customers during the third quarter 2018.
.Da Vinci X Surgical System. In May 2017, we launched a new da Vinci model, the da Vinci X, in the U.S. The da Vinci X, systemin the U.S and Europe. The da Vinci X Surgical System has also since been cleared in some other key markets, including most recently Japan in April 2018. The da Vinci X Surgical 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 Surgical System uses the same vision cart and surgeon console that are found on our flagship product, the da Vinci Xi system, Surgical System, giving our customers the option of adding advanced capabilities, and providing a pathway for upgrading should they choose to do so as their practicepractices and needs grow.
The da Vinci X Surgical System enables optimized, focused-quadrant surgery including procedures like prostatectomy, partial nephrectomy,hernia repair, and 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.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.SureForm 60 Stapler. 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,July 2018, we received U.S. FDA clearance in the U.S. for the EndoWrist Stapler 30SureForm 60 instrument with Blue, Green, White, and Gray 30mm reloads for use with the da Vinci Xi Surgical System. ItBlack 60mm reloads. The SureForm 60 is intended to deliver particular utility

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with fine tissue interaction in lobectomy and other thoracic procedures. The EndoWrist Stapler 30 is a single-use, fully wristed, stapling instrument intended for resection, transection, and/or creation of anastomoses.
EndoWrist Stapler 30anastomoses, with particular utility in bariatric procedures. SureForm 60 broadens our existing stapler product line which also includes EndoWrist Stapler 45 with Blue, Green, and White 45mm reloads and EndoWrist 30 with Blue, Green, White, and Gray 30mm reloads. Not all reloads or staplers are available for use on all systems or in all countries.
Vessel Sealer Extend. In April 2018, we received U.S. FDA clearance for Vessel Sealer Extend, our newest line extension in the Vessel Sealing family of products. 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 blunt 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.
Intuitive Surgical-Fosun Medical Technology (Shanghai) Co., Ltd.
In September 2016, we agreed 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 venturecatheter-based technology will initially produce products targetingtarget early diagnosis and cost-effective treatment of lung cancer, one of the most commonly diagnosed forms of cancer in the world. The technology will be used in robotic-assisted medical devices based on catheters 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. Distributionventure, while distribution outside of China will be conducted by us. The joint venture is owned 60% by us and 40% by Fosun Pharma. TheAs of September 30, 2018, the companies will contributehave contributed $25 million of up to $100 million as required by the joint venture, an arrangement representing a significant expansion of our relationship with Fosun Pharma.venture. 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.formed. The joint venture also commencedhas been hiring employees and began planning for the establishment of manufacturing infrastructure. For the three and nine months ended September 30, 2018, the

net loss attributable to the noncontrolling interest in the joint venture was $0.7 million and $1.7 million, respectively. We expect that the joint venture will incur net losses beforeprior to product commercialization and that it willduring ramp-up periods after commercialization. We do not expect the joint venture to generate any revenue in 2018. However,Further, 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.
  

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Third Quarter 2017 Financial2018 Highlights
Total revenue increased by 18%14% to $806.1$920.9 million during the three months ended September 30, 2018, compared with $807.8 million during the three months ended September 30, 2017, compared with $682.9 million during the three months ended September 30, 2016. Third quarter 2017 total revenue included $21.3 million of revenue recognized related to the customerda Vinci X trade-out program as described below.that we offered certain customers who purchased a surgical system in the first quarter of 2017.
Approximately 214,000256,000da Vinci procedures were performed during the three months ended September 30, 2017,2018, an increase of approximately 15%20% compared with approximately 186,000214,000 for the three months ended September 30, 2016.2017.
Instrument and accessory revenue increased by 15%21% to $486.3 million during the three months ended September 30, 2018, compared with $401.2 million during the three months ended September 30, 2017, compared with $348.1.
Systems revenue increased by 5% to $274.6 million during the three months ended September 30, 20162018.
Recurring revenue increased by 15% to $548.0, compared with $262.0 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 systemssystem revenue included revenue recognized related to the customerda Vinci X trade-out program as described below.above.
A total of 169 231 da Vinci Surgical Systems were shipped during the three months ended September 30, 20172018, compared with 134169 during the three months ended September 30, 20162017. As of September 30, 2017,2018, we had a da Vinci Surgical System installed base of approximately 4,2714,814 systems, an increase of approximately 12%13% compared with the installed base as of September 30, 2016.2017.
Gross profit as a percentage of revenue was 69.7% for the three months ended September 30, 2018, compared with 70.3% for the three months ended September 30, 2017. Third quarter 2017 comparedincluded the recognition of deferred product costs associated with 71.3% for the three months ended September 30, 2016. Grossabove da Vinci X trade-out program, which did not have a material impact on gross profit for the three months ended September 30, 2016, benefited from a $7.1 million Medical Device Excise Tax (“MDET”) refund.margin.
Operating income increased by 9%12% to $278.6$313.3 million during the three months ended September 30, 2018, compared with $280.6 million during the three months ended September 30, 2017, compared with $256.4 million during. Operating income for the three months ended September 30, 2016.2018, included pre-tax litigation recoveries of $1.8 million, compared with $9.7 million of net pre-tax litigation related charges for the three months ended September 30, 2017. Operating income included $55.9$70.7 million and $46.9$55.9 million of share-based compensation expense related to employee stock plans during the three months ended September 30, 2017,2018, and 2016,2017, respectively. Operating income included intangible asset charges of $9.0 million and $3.1 million for the three months ended September 30, 2018 and 2017, included $9.7 million of net pre-tax litigation related charges.respectively.
As of September 30, 2017,2018, we had $3.8$4.6 billion in cash, cash equivalents, and investments. Cash, cash equivalents, and investments increased by $378.7$724.0 million, compared with June 30,December 31, 2017, primarily as a result of cash generated from operating activities.
Trade-Out Program:
In August 2018, we submitted a premarket notification to the U.S. FDA for the IonTM endoluminal system, our new flexible robotic-assisted catheter-based platform, designed to navigate through very small lung airways to reach peripheral nodules for biopsies. 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 accepted 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.

28


Results of Operations
We adopted ASC 606, Revenue from Contracts with Customers, effective January 1, 2018, using the full retrospective method. The 2017 financial results presented below have been restated to reflect this adoption. Refer to “Note 2. Summary of Significant Accounting Policies” within Part I, Item 1 of this Form 10-Q for further discussion.
The following table sets forth, for the periods indicated, certain unaudited Condensed Consolidated Statements of Income information (in millions, except percentages):
Three Months Ended September 30, Nine Months Ended September 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
2018 
% of total
revenue
 2017 
% of total
revenue
 2018 
% of total
revenue
 2017 
% of total
revenue
Revenue:                              
Product$659.3
 82 % $553.2
 81% $1,807.5
 81% $1,565.2
 80%$760.9
 83% $663.2
 82 % $2,209.2
 82% $1,823.7
 81%
Service146.8
 18 % 129.7
 19% 429.0
 19% 382.3
 20%160.0
 17% 144.6
 18 % 468.5
 18% 422.5
 19%
Total revenue806.1
 100 % 682.9
 100% 2,236.5
 100% 1,947.5
 100%920.9
 100% 807.8
 100 % 2,677.7
 100% 2,246.2
 100%
Cost of revenue:                              
Product195.0
 24 % 158.4
 23% 543.1
 24% 475.8
 24%225.1
 24% 195.4
 24 % 654.7
 24% 545.6
 24%
Service44.3
 6 % 37.5
 6% 132.6
 6% 108.8
 6%53.5
 6% 44.3
 6 % 154.6
 6% 132.6
 6%
Total cost of revenue239.3
 30 % 195.9
 29% 675.7
 30% 584.6
 30%278.6
 30% 239.7
 30 % 809.3
 30% 678.2
 30%
Product gross profit464.3
 58 % 394.8
 58% 1,264.4
 57% 1,089.4
 56%535.8
 59% 467.8
 58 % 1,554.5
 58% 1,278.1
 57%
Service gross profit102.5
 12 % 92.2
 13% 296.4
 13% 273.5
 14%106.5
 11% 100.3
 12 % 313.9
 12% 289.9
 13%
Gross profit566.8
 70 % 487.0
 71% 1,560.8
 70% 1,362.9
 70%642.3
 70% 568.1
 70 % 1,868.4
 70% 1,568.0
 70%
Operating expenses:                              
Selling, general and administrative204.8
 25 % 168.0
 25% 591.7
 26% 511.6
 26%221.4
 24% 204.1
 25 % 702.8
 27% 592.6
 26%
Research and development83.4
 10 % 62.6
 9% 241.5
 11% 170.5
 9%107.6
 12% 83.4
 10 % 298.2
 11% 241.5
 11%
Total operating expenses288.2
 35 % 230.6
 34% 833.2
 37% 682.1
 35%329.0
 36% 287.5
 35 % 1,001.0
 38% 834.1
 37%
Income from operations278.6
 35 % 256.4
 37% 727.6
 33% 680.8
 35%313.3
 34% 280.6
 35 % 867.4
 32% 733.9
 33%
Interest and other income, net10.8
 1 % 10.4
 2% 29.6
 1% 23.9
 1%21.9
 2% 10.8
 1 % 53.3
 2% 29.6
 1%
Income before taxes289.4
 36 % 266.8
 39% 757.2
 34% 704.7
 36%335.2
 36% 291.4
 36 % 920.7
 34% 763.5
 34%
Income tax (benefit) expense(8.1) (1)% 55.8
 8% 58.4
 3% 172.8
 9%
Income tax expense (benefit)43.4
 4% (7.2)
 (1)% 87.0
 3% 61.1
 3%
Net income$297.5
 37 % $211.0
 31% $698.8
 31% $531.9
 27%291.8
 32% 298.6
 37 % 833.7
 31% 702.4
 31%
Less: net loss attributable to noncontrolling interest in joint venture(0.7) % 
  % (1.7) % 
 %
Net income attributable to Intuitive Surgical, Inc.$292.5
 32% $298.6
 37 % $835.4
 31% $702.4
 31%
Total Revenue
Total revenue was $806.1$920.9 million for the three months ended September 30, 2018, compared with $807.8 million for the three months ended September 30, 2017, compared with $682.9 million for the three months ended September 30, 2016, resulting from 15%21% higher recurringinstrument and accessory revenue driven by approximately 15%20% higher procedure volume, and 26%5% higher systems revenue, and 11% higher service revenue. In addition, in the third quarter of 2017, $21.3 million of revenue recognized related to a customer trade-out program that we offered to certain customers who purchased a da Vinci Surgical System in the first quarter of 2017. Under this 2017 trade-out program, those customers were able to return systems purchased in the first quarter of 2017 and receive a credit towards the purchase of da Vinci X surgical system launched in the second quarter of 2017.
Revenue denominated in foreign currencies as a percentage of total revenue was approximately 19% and 20% for the three and nine months ended September 30, 2018, respectively, and 18% and 17% for the three and nine months ended September 30, 2017, respectively, compared with 19%respectively. We sell our products and services in local currencies where we have direct distribution channels.

Revenue generated in the U.S. accounted for both73% and 71% of total revenue for the three and nine months ended September 30, 2016. We sell our products2018, respectively, and services in Euros and British Pounds in those European markets where we have direct distribution channels, and in Japanese Yen and Korean Won in Japan and South Korea, respectively. Foreign currency exchange rates did not have a material impact on revenue or operating income.
Revenue generated in the U.S. accounted for 74% and 73% of total revenue for the three and nine months ended September 30, 2017, respectively, compared with 72% of total revenue for both the three and nine months ended September 30, 2016.respectively. We believe that U.S. revenue has accounted for the large majority of total revenue due to U.S. patients’ ability to choose their provider and method of treatment, in the U.S., reimbursement structures supportive of innovation and minimally invasive surgery, and 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.

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The following table summarizes our revenue and da Vinci Surgical System unit shipments for the three and nine months ended September 30, 2018, and 2017, and 2016respectively (in millions, except percentages and unit shipments):
 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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Table of Contents
 Three Months Ended September 30,
Nine Months Ended September 30,
 2018
2017
2018
2017
Revenue       
Instruments and accessories$486.3
 $401.2
 $1,422.7
 $1,179.8
Systems274.6
 262.0
 786.5
 643.9
Total product revenue760.9
 663.2
 2,209.2
 1,823.7
Services160.0
 144.6
 468.5
 422.5
Total revenue$920.9
 $807.8
 $2,677.7
 $2,246.2
United States$676.5
 $594.6
 $1,893.6
 $1,642.0
OUS244.4
 213.2
 784.1
 604.2
Total revenue$920.9
 $807.8
 $2,677.7
 $2,246.2
% of Revenue - U.S.73% 74% 71% 73%
% of Revenue - OUS27% 26% 29% 27%
        
Instruments and accessories$486.3
 $401.2
 $1,422.7
 $1,179.8
Services160.0
 144.6
 468.5
 422.5
Operating lease revenue14.0
 6.7
 35.0
 18.1
Total recurring revenue$660.3
 $552.5
 $1,926.2
 $1,620.4
% of Total revenue72% 68% 72% 72%
        
Unit Shipments by Region:       
U.S. unit shipments156
 107
 406
 287
OUS unit shipments75
 62
 230
 181
Total unit shipments*231
 169
 636
 468
*Systems shipped under operating leases (included in total unit shipments)58
 20
 145
 68
        
Unit Shipments involving System Trade-ins:       
Unit shipments involving trade-ins65
 44
 196
 106
Unit shipments not involving trade-ins166
 125
 440
 362

Product Revenue
Three months ended September 30, 2017:2018
Product revenue increased by 19%15% to $659.3$760.9 million for the three months ended September 30, 2018, compared with $663.2 million for the three months ended September 30, 2017, compared with $553.2.
Instrument and accessory revenue increased by 21% to $486.3 million for the three months ended September 30, 20162018.
Instrument and accessory revenue increased by 15% to, compared with $401.2 million for the three months ended September 30, 2017, compared with $348.1 million for the three months ended September 30, 2016. The increase in instrument and accessory revenue was driven by procedure growth of approximately 15%.20% and higher sales of our advanced instruments. Third quarter 20172018 U.S. procedure growth of approximately 12%19% was driven by growth in general surgery procedures, most notably hernia repair, and colorectal procedures, cholecystectomy, bariatric, and thoracic procedures, as well asand a moderate growth in the more mature gynecologic and urologic procedures.procedures categories. OUS procedure growth was approximately 23% for the third quarter of 2017,2018, and was driven by continued growth in dVP procedures, and earlier stage growth in general surgery, gynecology, and kidney cancer procedures, general surgery and gynecology.procedures. Geographically, third quarter 2018 OUS procedure growth was driven by procedure expansion in Japan, China, and South Korea, and China.Korea. Procedure growth varied by country in our European market.markets.
Systems revenue increased by 26%5% to $258.1$274.6 million for the three months ended September 30, 2017,2018, compared with $205.1$262.0 million for the three months ended September 30, 2016.2017. Higher third quarter 20172018 systems revenue was primarily driven by higher system shipments and higher leasing related revenue, recognized related to the da Vinci X trade-out program, largelypartly offset by lower systems average selling price (“ASP”), a higher number of system placements under operating lease arrangements and lower Lease Buyout revenue.third quarter 2017 systems revenue recognized related to the da Vinci X trade-out program described above. Revenue from Lease Buyouts was $10.8 million for three months ended September 30, 2017, compared with $13.1$8.3 million for the three months ended September 30, 2016.2018, compared with $10.8 million for the three months ended September 30, 2017. We expect revenue from Lease Buyouts to fluctuate period to period based on the timing of when, and if, customers choose to exercise the buyout options embedded in their leases.
During the third quarter of 2017,2018, a total of 169231 systems were shipped compared with 134169 during the third quarter of 2016.2017. By geography, 156 systems were shipped into the U.S., 30 into Europe, 37 into Asia, and 8 into other markets during the third quarter of 2018, compared with 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 852017. We shipped 75 and 26 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 duringwhich 58 and 20 were classified as operating leases, in the third quarter of 2016.three months ended September 30, 2018, and 2017, respectively. Operating lease revenue was $14.0 million for the three months ended September 30, 2018, compared with $6.7 million for the three months ended September 30, 2017, compared with $4.2 million for the three months ended2017. A total 279 of da VinciSurgical Systems were installed at customers under operating lease arrangements as of September 30, 2016.2018. 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 arecapacity and more customers trading in early stages of adoption, some markets are highly seasonal reflecting budget cycles or vacation patterns,older da Vinci models for fourth generation da Vinci Xi and sales into some markets are constrained by government regulations.da Vinci X systems.
The da Vinci Surgical System ASP, excluding the impact of systems shipped under operating leases, was approximately $1.47$1.45 million for both the three and nine months ended September 30, 2017,2018, compared with $1.53$1.47 million for both the three and nine months ended September 30, 2016. The lower third quarter 20172017. ASP primarily reflect product and geographic mix as well as lower pricing offered to customers purchasing multiple systems. ASPs fluctuatefluctuates from period to period based on geographic and product mix, product pricing, systems shipped involving trade-ins, and changes in foreign exchange rates.
Nine months ended September 30, 2017:2018
Product revenue increased by 15%21% to $2.2 billion for the nine months ended September 30, 2018, compared with $1.8 billion for the nine months ended September 30, 2017, compared with $1.62017.
Instrument and accessory revenue increased by 21% to $1.4 billion for the nine months ended September 30, 2016.
Instrument and accessory revenue increased by 17% to2018, compared with $1.2 billion for the nine months ended September 30, 2017, compared with $1.0 billion for the nine months ended September 30, 2016.2017. The increase in instrument and accessory revenue was driven by procedure growth of approximately 16%18% and higher sales of our advanced instruments. Year-to-date 2018 U.S. procedure growth of approximately 13% for the nine months ended September 30, 2017,17% was driven by growth in general surgery procedures, most notably hernia repair, and colorectal procedures, cholecystectomy, bariatric, and thoracic procedures, as well as moderate growth in more mature gynecologic and urologic procedure categories. OUS procedure growth was approximately 24%21% for the nine months ended September 30, 2017,2018, driven by continued growth in dVP procedures and earlier stage growth in general surgery, gynecology, and kidney cancer procedures, general surgery and gynecology.procedures. Geographically, higheryear-to-date 2018 OUS procedure growth for the nine months ended September 30, 2017, was driven by strong procedure expansion in Japan, China, and South Korea, and China. Procedure growth varied by country in our European market.Korea.
Systems revenue increased by 13%22% to $627.7$786.5 million for the nine months ended September 30, 2017,2018, compared with $555.7$643.9 million for the nine months ended September 30, 2016.2017. Higher year-to-date 2018 systems revenue for the nine months ended September 30, 2017, was primarily driven primarily by higher system shipments and largelyhigher lease related revenue, partly offset by a higher number of system placements under operating lease arrangements and lower systems ASP.

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arrangements.
During the nine months ended September 30, 2017,2018, a total of 468of 636 systems were shipped compared with 374468 during the nine months ended September 30, 2016.2017. By geography, 406 systems were shipped into the U.S., 114 into Europe, 76 into Asia, and 40 into other markets during the nine months ended September 30, 2018, compared with 287 systems were shipped into the U.S., 75 into Europe, 74 into Asia, and 32 into other markets during the nine months ended September 30, 2017, compared with 238 systems shipped into the U.S., 53 into Europe, 66 into Asia, and 17 into other markets during the nine months ended September 30, 2016.2017. During the nine months ended September 30, 2017, 682018, 145 of the 468636 systems were shipped under operating lease arrangements compared with 4968 of 374 468

systems shipped during the nine months ended September 30, 2016.2017. Operating lease revenue was $35.0 million for the nine months ended September 30, 2018, compared with $18.1 million for the nine months ended September 30, 2017, compared with $12.0 million for the nine months ended September 30, 2016.2017. The increase in systems shipments was primarily driven by procedure growth and the need for hospitals to expand or establish capacity.capacity and more customers trading in older da Vinci models for fourth generation da Vinci Xi and da Vinci X systems.
The da Vinci Surgical System ASP, excluding the impact of systems shipped under operating leases, was approximately $1.45 million for the nine months ended September 30, 2018, compared with $1.47 million for nine months ended September 30, 2017. ASP fluctuates 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 increased by 13%11% to $146.8$160.0 million for the three months ended September 30, 2018, compared with $144.6 million for the three months ended September 30, 2017, compared with $129.7 million for the three months ended September 30, 2016. Service revenue increased by 12%11% to $429.0$468.5 million for the nine months ended September 30, 2017,2018, compared with $382.3$422.5 million for the nine months ended September 30, 2016.2017. Higher service revenue for the three and nine months ended September 30, 2017,2018, was primarily driven by a larger installed base of da Vinci Surgical Systems producing service revenue.
Gross Profit
Product gross profit for the three months ended September 30, 20172018, increased 18%15% to $464.3$535.8 million, representing 70.4% of product revenue, compared with $394.8$467.8 million, representing 71.4%70.5% of product revenue, for the three months ended September 30, 20162017. Product gross profit for the nine months ended September 30, 2017,2018, increased 16%22% to $1.3 billion,$1,554.5 million, representing 70.0%70.4% of product revenue, compared with $1.1 billion,$1,278.1 million, representing 69.6%70.1% of product revenue, for the nine months ended September 30, 2016.2017. The higher product gross profit for the three and nine months ended September 30, 2017,2018, was primarily driven by higher product revenue.
The lower product gross profit margin for the three months ended September 30, 2017, as compared with the same period in 2016, was primarily driven by a $7.1 million MDET refund recorded as a reduction to cost of revenue during the three months ended September 30, 2016. The higher product gross profit margin for the nine months ended September 30, 2017,2018, was due to manufacturing efficiencies and product cost reductions on some of our newer products, partially offset by a $7.8 million litigation settlement charge related to a license and supply agreement recognized in cost of revenue during the first quarter of 2017 and2017. Excluding the MDET refund described above. The trade-out program described above did not have a material impact on producteffect of this settlement charge, modest moderation in the 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 2016 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 MDET expense, representing approximately 0.9% of total product revenue,percentages for the yearthree and nine months ended December 31, 2015.September 30, 2018, was driven by product and system trade in mix, partially offset by manufacturing efficiency gains.
Product gross profit for the three and nine months ended September 30, 2017,2018, reflected share-based compensation expense of $7.0$10.1 million and $20.5$27.2 million, respectively, compared with $6.9$7.0 million and $18.6$20.5 million for the three and nine months ended September 30, 2016,2017, respectively. Product gross profit for the three and nine months ended September 30, 2017,2018, included amortization expense of intangible assets of $1.2$1.8 million and $4.4$4.1 million, respectively, compared with $1.8$1.2 million and $6.1$4.4 million for the three and nine months ended September 30, 2016,2017, respectively.
Service gross profit for the three months ended September 30, 20172018, was $102.5$106.5 million, or 69.8%66.6% of service revenue, compared with $92.2$100.3 million, or 71.1%69.4% of service revenue for the three months ended September 30, 20162017. Service gross profit for the nine months ended September 30, 2017,2018, was $296.4$313.9 million, or 69.1%67.0% of service revenue, compared with $273.5$289.9 million, or 71.5%68.6% of service revenue, for the nine months ended September 30, 2016. 2017.
The higher service gross profit for the three and nine months ended September 30, 2017,2018, was driven by higher service revenue, reflecting a larger installed base of da Vinci Surgical Systems, partially offset by lower service gross profit margin.Systems. The lower service gross profit margin for the three and nine months ended September 30, 2017,2018, as compared with the same periods in 2016,2017, was primarily driven by higher costs tocost associated with the repair and replace replacement of da Vinci Xi Xi/X endoscope products.
Service gross profit for the three and nine months ended September 30, 2017,2018, reflected share-based compensation expense of $3.7$4.5 million and $10.4$12.5 million, respectively, compared with $3.3$3.7 million and $9.4$10.4 million for the three and nine months ended September 30, 2016,2017, respectively.
Selling, General and Administrative Expenses
Selling, general and administrative expenses include costs for sales, marketing and administrative personnel, sales and marketing activities, tradeshow expenses, legal expenses, regulatory fees, and general corporate expenses.

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Selling, general and administrative expenses for the three months ended September 30, 2017,2018, increased by 22%8% to $204.8$221.4 million, compared with $168.0$204.1 million for the three months ended September 30, 2016.2017. Selling, general and administrative expenses for the nine months ended September 30, 2017,2018, increased by 16%19% to $591.7$702.8 million, compared with $511.6$592.6 million for the nine months ended September 30, 2016.2017. The increasehigher selling, general and administrative expenses for the three and nine months ended September 30, 2017, was2018, were primarily due to higher OUS expenses associated with our expanded Asian and European teams, and infrastructure to support our growth higher headcount, and higher litigation charges.
Selling, general and administrative expenses for the three and nine months ended September 30, 2018, included net pre-tax litigation (recoveries) charges of $(1.8) million and $45.9 million, respectively. The litigation charge for the nine months ended

September 30, 2018, was primarily related to a $42.5 million litigation charge associated with reaching a settlement in principle in the Abrams class action lawsuit further described in Note 6 to the Condensed Consolidated Financial Statements (Unaudited) included in Part I, Item 1. Selling, general and administrative expenses for the three and nine months ended September 30, 2017 includedinclude net pre-tax litigation charges of $9.7 million and $18.7 million, respectively. No litigation charges were recorded during the three months ended September 30, 2016. Selling, general and administrative expenses for the nine months ended September 30, 2016, included litigation charges of $6.6 million.
Selling, general and administrative expenses for the three and nine months ended September 30, 2017,2018, reflected share-based compensation expense of $30.0$35.9 million and $82.3$98.1 million, respectively, compared with $25.3$30.0 million and $72.9$82.3 million for the three and nine months ended September 30, 2016,2017, respectively.
Research and Development Expenses
Research and development costs are expensed as incurred. Research and development expenses include costs associated with the design, development, testing, and significant enhancement of our products.
Research and development expenses for the three months ended September 30, 2017,2018, increased by 33%29% to $83.4$107.6 million, compared with $62.6$83.4 million for the three months ended September 30, 2016.2017. Research and development expenses for the nine months ended September 30, 2017,2018, increased by 42%23% to $241.5$298.2 million, compared with $170.5$241.5 million for the nine months ended September 30, 2016.2017. The increase was primarily due to higher personnel and other project costs to support a broader set of product development initiatives, including our da Vinci Single Port Surgical System, robotic-assisted catheter-based medical devices,devices; advanced imaging and analytics,analytics; advanced instrumentation,instrumentation; and future generations of robotics. The increaseincreases for the three and nine months ended September 30, 2017, was2018, were also driven by expenseexpenses related to licensed intellectual property.
Share-based compensation expense charged to research and development expense was $20.2 million and $54.4 million for the three and nine months ended September 30, 2018, respectively, compared with $15.2 million and $40.9 million for the three and nine months ended September 30, 2017, respectively, compared with $11.4respectively. Amortization expense related to intangible assets was $1.5 million and $31.5$4.7 million for the three and nine months ended September 30, 2016, respectively. Amortization expense related to intangible assets was2018, respectively, compared with $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, respectively.2017.
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 nine months ended September 30, 20172018, was $21.9 million and $53.3 million, respectively, compared with $10.8 million and $29.6 million, respectively, compared with $10.4 million and $23.9 million for the three and nine months ended September 30, 2016,2017, respectively. The increase was primarily driven by higher interest earned during the three and nine months ended September 30, 2018 due to higher interest rates and higher cash and investment balances.
Income Tax Expense (Benefit) Expense
Income tax expense (benefit) expense for the three months ended September 30, 2017,2018, was $(8.1)$43.4 million, or (2.8)%12.9% of income before taxes, compared with $55.8$(7.2) million, or 20.9%(2.5)% of income before taxes, for the three months ended September 30, 2016.2017. Income tax expense for the nine months ended September 30, 2017,2018, was $58.4$87.0 million, or 7.7%9.4% of income before taxes, compared with $172.8$61.1 million, or 24.5%8.0% of income before taxes for the nine months ended September 30, 2016. Income2017.
The higher effective tax provisionrates for the three and nine months ended September 30, 2017,2018, compared with the same periods of 2016,2017, were primarily benefited frombecause the expiration of statutes of limitations 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 differ from the U.S. federal statutory rate of 35% due to the effect of income earned by certain of our overseas entities being taxed at rates lower than the federal statutory rate, partially offset by state income taxes. We intend to indefinitely reinvest outside the U.S. all of our undistributed foreign earnings that were not previously subject to U.S. tax.
The effective tax rates for the three and nine months ended September 30, 2017, reflected a $14.9 million tax benefit mainly related to the release of unrecognized tax benefits due tofrom the expiration of statutes of limitations in various jurisdictions. The effectivejurisdictions, as well as tax rates forbenefits of $53.5 million and $45.7 million, respectively, in the three and nine months ended September 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 of the aforementioned expiration of such statutes of limitations.
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 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 recorded as part of additional paid-in capital. Our provision for income taxes included excess tax benefits associated with employee equity plans of $19.7 million and $82.9 million, which reduced our The effective tax rate by 6.8 percentage points and 10.9 percentage points for the three and nine months ended September 30, 2018, however, reflected the decrease of federal statutory tax rate from 35% to 21% as a result of the Tax Cuts and Jobs Act (“Tax Act”) and higher excess tax benefits associated with employee equity plans. Our effective tax rate for the three months ended September 30, 2018, differed from the U.S. federal statutory rate of 21% primarily due to excess tax benefits associated with employee equity plans and federal R&D credit benefit, partially offset by state income taxes. Our effective tax rate for the three months ended September 30, 2017, respectively. Thediffered from the U.S. federal statutory rate of 35% primarily due to the benefits from the above-mentioned expiration of statutes of limitations, excess tax benefits associated with employee equity plans, the effect of certain foreign earnings being taxed at rates lower than the federal statutory rate, and federal R&D credit benefit, partially offset by state income taxes.
In connection with the Tax Act enacted in December 2017, we recorded a provisional amount of $317.8 million within income tax expense for the year ended December 31, 2017. In accordance with relevant SEC guidance, the effects of the Tax Act may be adjusted within a one-year measurement period from the enactment date for items that were previously reported as provisional, or where a provisional estimate could not be made. Income tax provision for the three and nine months ended September 30, 2018, did not reflect any adjustment to the previously assessed Tax Act enactment effect. Income tax expense for the three and nine

months ended September 30, 2018, reflected $12.6 million and $28.1 million, respectively, of estimated tax on global intangible low-taxed income enacted by the Tax Act. For the global intangible low-taxed income provisions of the Tax Act, we have not yet elected an accounting policy with respect to either recognize deferred taxes for basis differences expected to reverse as global intangible low-taxed income, or to record such as period costs if and when incurred. We will continue to assess forthcoming guidance and accounting interpretations on the effects of the Tax Act and expect to complete the analysis within the measurement period in accordance with the SEC guidance. As a result of the Tax Act, the provisional amount recorded in December 2017 included a one-time deemed repatriation toll charge on the cumulative undistributed foreign earnings through 2017. In June 2018, we repatriated to the U.S. $1.6 billion of cumulative undistributed foreign earnings without significant incremental tax impact. We are still evaluating whether to change our indefinite reinvestment assertion for years after 2017 in light of the Tax Act. If we subsequently change our assertion during the measurement period, we will account for the change in assertion as part of the Tax Act enactment.
Our income tax provision is subject to volatility as the amount of excess tax benefits or deficiencies will fluctuatefluctuates 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 thatOur provision for income taxes included excess tax benefits associated with employee equity plans of $24.1 million and $100.4 million, which reduced our effective tax rate by 7.2 percentage points and 10.9 percentage points, for the adoption of this ASU will result in increased income tax expense volatility.
The tax holiday 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 federalthree and cantonal rules. However, we currently do not expect that the end of our Swiss tax holiday will materially impact our future annual Swiss tax obligation.nine months ended September 30, 2018, respectively.
We are subject to the examination of our income tax returns by the Internal Revenue Service and other tax authorities. The outcome of these audits cannot be predicted with certainty. Management regularly assesses the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. If any issues addressed in our tax audits are resolved in a manner not consistent with management’s expectations, we could be required to adjust our provision for income taxes in the period such resolution occurs.

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Liquidity and Capital Resources
Sources and Uses of Cash
Our principal source of liquidity is cash provided by operations and issuance of common stock through exercise of stock options and our employee stock purchase program. Cash and cash equivalents plus short- and long-term investments decreasedincreased from $4.8$3.8 billion atas of December 31, 20162017, to $3.8$4.6 billion atas of September 30, 20172018, 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.operations. 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, $1,477.02018, $238.9 million of our cash, cash equivalents, and investments were held by foreign subsidiaries. Amountssubsidiaries, which decreased from $1,543.4 million, as of December 31, 2017, primarily because of the repatriation of $1.4 billion of cash, cash equivalents, and investments held by our foreign subsidiaries are generally subject to U.S. income taxation on repatriationin the second quarter of 2018. As a result of the Tax Act, we can repatriate our cumulative undistributed foreign earnings to the U.S. with minimal additional tax impact. We currently have no plansare still evaluating whether to repatriate any foreign earnings back to the U.S. Our intent is to reinvest these funds outsidechange our indefinite reinvestment assertion for years after 2017 in light of the U.S. indefinitely, andTax Act. If we subsequently change our assertion during the measurement period, we will account for the change in assertion as part of the Tax Act enactment. We believe ourthe cash flows provided by our U.S. operations will meet our U.S. liquidity needs for the foreseeable future.
See “Item 7A. Quantitative and Qualitative Disclosures About Market Risk” on our Form 10-K for the fiscal year ended December 31, 2017 for discussion on the impact of interest rate risk and market risk on our investment portfolio.
Condensed Consolidated Cash Flow Data (Unaudited)
The following table summarizes our cash flows for the nine months ended September 30, 2017,2018, and 20162017 (in millions):
Nine Months Ended 
 September 30,
Nine Months Ended 
 September 30,
2017 20162018 2017
Net cash provided by (used in)      
Operating activities$811.9
 $757.3
$831.5
 $811.9
Investing activities694.5
 (970.4)(563.3) 694.5
Financing activities(1,670.0) 519.1
92.6
 (1,670.0)
Effect of exchange rates on cash and cash equivalents2.0
 1.0
Net increase (decrease) in cash and cash equivalents$(161.6) $307.0
Effect of exchange rates on cash, cash equivalents, and restricted cash(0.7) 2.0
Net increase (decrease) in cash, cash equivalents, and restricted cash$360.1
 $(161.6)
Operating Activities
For the nine months ended September 30, 20172018, net cash flow provided by operating activities of $811.9831.5 million exceededdiffered from our net income of $698.8833.7 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 changesChanges in operating assets and liabilities that resulted in $157.5$342.9 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$205.8 million primarily due to a decrease in income tax payable. Accounts receivablemore systems under operating lease arrangements and safety stock build up to meet increased by $37.8 million primarily due to higher revenue and timing of customer billings and collections.sales volume. Prepaid expenses and other assets increased by $13.6$89.3 million primarily due to an increase in prepaid taxes driven by the timing of tax payments and an increase in lease receivables. Accounts receivable increased $65.2 million primarily due to higher customer billings and timing of billings and collections. Accrued compensation and employee benefits decreased by $11.3$21.5 million primarily due to the payments of 20162017 incentive compensation. The unfavorable impact of these items on cash used by operating activities was partly offset by a $45.1$34.7 million increase in deferred revenue and $11.9a $13.4 million increase in accounts payable.
2.The cash used by operating activities resulted from changes in operating assets and liabilities were partly offset by the non-cash charges included in our net income: share-based compensation of $190.8 million; depreciation expense of $76.8 million; deferred income taxes of $52.3 million; amortization of intangible assets of $9.7 million; amortization of contract acquisition asset of $7.9 million; and investment related non-cash charges of $3.2 million.
Investing Activities
Net cash provided byused in investing activities during the nine months ended September 30, 20172018, consisted of purchases of investments (net of proceeds from sales and maturities of investments (net of purchases of investments) of $854.2$371.3 million, partly offset bythe acquisition of property and equipment of $159.7131.9 million., and acquisition of businesses for $60.1 million. We invest predominantly in high quality, fixed income securities. Our investment portfolio may at any time contain investments in U.S. Treasurytreasury and U.S. government agency securities, non-U.S. government agency securities, taxable and/orand 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 inprovided by financing activities during the nine months ended September 30, 20172018, consisted primarily of $2.0 billion related to an accelerated share buyback program executed during the first quarter$199.6 million of 2017 that is further described in “Note 7. Stockholders’ Equity”proceeds from stock option exercises and $53.6employee stock purchases partly offset by $115.0 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 for capital expenditures as of the end of the third quarter of 2017.2018. Over the past few years, our investments in property and worldwide facilities have increased with the growth of our operations. We have begun construction of new facilities for expanded manufacturing, engineering, and administrative activities for which our planned capital expenditures are approximately $300 million. We intend to fund these needs with cash generated from operations.
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, we 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.
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. ThereWith the exception of the change in revenue recognition as a result of the adoption of ASC 606 and the addition of business combinations, 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, 2016,2017, that are of significance, or potential significance to the Company.
Revenue recognition. Our system sale arrangements contain multiple products and services, including system(s), system components, system accessories, instruments, accessories, and service. Other than service, we generally deliver all of the products upfront. Each of these products and services is a distinct performance obligation. System accessories, instruments, accessories, and service are also sold on a stand-alone basis.
For multiple-element arrangements, revenue is allocated to each performance obligation based on its relative standalone selling price. Standalone selling prices are based on observable prices at which we separately sell the products or services. If a standalone selling price is not directly observable, then we estimate the standalone selling prices considering market conditions and entity-specific factors including, but not limited to, features and functionality of the products and services, geographies, type of customer, and market conditions. We regularly review standalone selling prices and maintain internal controls over establishing and updating these estimates.
Our system sales arrangements generally include a five-year period of service. The first year of service is generally free and included in the system sale arrangement and the remaining four years are at a stated service price. Revenue that is allocated to service obligation is deferred and recognized ratably over the service period.
Business Combinations. We allocate the fair value of the purchase consideration to the assets acquired and liabilities assumed based on their estimated fair values at the acquisition date. The excess of the fair value of the purchase consideration over the fair value of assets acquired and liabilities assumed is recorded as goodwill. When determining the fair value of assets acquired and liabilities assumed, management is required to make certain estimates and assumptions, especially with respect to intangible assets. The estimates and assumptions used in valuing intangible assets include, but are not limited to, the amount and timing of projected future cash flows, the discount rate used to determine the present value of these cash flows, and the determination of the assets’ life cycle. These estimates are inherently uncertain and, therefore, actual results may differ from the estimates made.

ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in our market risk during the nine months ended September 30, 20172018, compared to the disclosures in Part II, Item 7A of our Annual Report on Form 10-K for the year ended December 31, 20162017.
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.

PART II - OTHER INFORMATION
ITEM 1.LEGAL PROCEEDINGS
The information included in Note 6 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
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, 2016,2017, 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, 2016,2017, 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.

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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
Since March 2009, we have had an active stock repurchase program. As of September 30, 2017, the2018, our Board of Directors has(the “Board”) had authorized an aggregate amount of up to $6.2 billion for stock repurchases, of which the most recent authorization occurred in December 2016, when the Board increased the authorized amount available under the Company’sour share repurchase program to $3.0 billion. No shares were purchased during the three months ended September 30, 2017. $991.62018. Approximately $717.5 million remained available to repurchase shares under the authorized repurchase program as of September 30, 2017.2018. The authorized stock repurchase program does not have an expiration date.
ITEM 3.DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4.MINE SAFETY DISCLOSURES
Not applicable.
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
Exhibit
Number
Exhibit
Description
3.1
3.2
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 September 30, 2017,2018, formatted in 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.


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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.
  
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, 201719, 2018

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