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Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2019
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)
 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, par value $0.001 per share
ISRG
The Nasdaq Global Select Market
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit 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.
Large accelerated filer
x
 
Accelerated filer
¨
Non-accelerated filer
¨
 
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 115,253,433 shares of Common Stock, $0.001 par value per share, outstanding as of July 16, 2019.
 


Table of Contents
INTUITIVE SURGICAL, INC.
TABLE OF CONTENTS


 
 
Page No.
PART I. FINANCIAL INFORMATION
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PART II. OTHER INFORMATION
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2

Table of Contents

PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INTUITIVE SURGICAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
in millions (except par values)
June 30,
2019

December 31,
2018
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
790.3

 
$
857.9

Short-term investments
1,928.1

 
2,205.2

Accounts receivable, net
633.4

 
682.3

Inventory
512.8

 
409.0

Prepaids and other current assets
207.0

 
178.8

Total current assets
4,071.6

 
4,333.2

Property, plant, and equipment, net
1,032.4

 
812.0

Long-term investments
2,429.8

 
1,771.3

Deferred tax assets
369.1

 
428.6

Intangible and other assets, net
383.8

 
261.0

Goodwill
244.9

 
240.6

Total assets
$
8,531.6

 
$
7,846.7

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
129.6

 
$
100.7

Accrued compensation and employee benefits
160.5

 
193.8

Deferred revenue
306.8

 
294.3

Other accrued liabilities
210.6

 
231.8

Total current liabilities
807.5

 
820.6

Other long-term liabilities
444.5

 
338.6

Total liabilities
1,252.0

 
1,159.2

Contingencies (Note 7)


 


Stockholders’ equity:
 
 
 
Preferred stock, 2.5 shares authorized, $0.001 par value, issuable in series; no shares issued and outstanding as of June 30, 2019, and December 31, 2018

 

Common stock, 300.0 shares authorized, $0.001 par value, 115.2 shares and 114.5 shares issued and outstanding as of June 30, 2019, and December 31, 2018, respectively
0.1

 
0.1

Additional paid-in capital
5,430.1

 
5,170.3

Retained earnings
1,819.0

 
1,521.7

Accumulated other comprehensive income (loss)
16.1

 
(13.3
)
Total Intuitive Surgical, Inc. stockholders’ equity
7,265.3

 
6,678.8

Noncontrolling interest in joint venture
14.3

 
8.7

Total stockholders’ equity
7,279.6

 
6,687.5

Total liabilities and stockholders’ equity
$
8,531.6

 
$
7,846.7

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements (Unaudited).

3

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



 
Three Months Ended 
June 30,

Six Months Ended 
June 30,
in millions (except per share amounts)
2019

2018

2019

2018
Revenue:
 
 
 
 
 
 
 
Product
$
922.3

 
$
753.5

 
$
1,722.1

 
$
1,448.3

Service
176.6

 
155.8

 
350.5

 
308.5

Total revenue
1,098.9

 
909.3

 
2,072.6

 
1,756.8

Cost of revenue:
 
 
 
 
 
 
 
Product
283.4

 
228.1

 
529.8

 
429.6

Service
56.5

 
48.9

 
114.2

 
101.1

Total cost of revenue
339.9

 
277.0

 
644.0

 
530.7

Gross profit
759.0

 
632.3

 
1,428.6

 
1,226.1

Operating expenses:
 
 
 
 
 
 
 
Selling, general and administrative
279.2

 
259.8

 
552.6

 
481.4

Research and development
120.8

 
95.1

 
264.8

 
190.6

Total operating expenses
400.0

 
354.9

 
817.4

 
672.0

Income from operations
359.0

 
277.4

 
611.2

 
554.1

Interest and other income, net
32.8

 
18.2

 
60.3

 
31.4

Income before taxes
391.8

 
295.6

 
671.5

 
585.5

Income tax expense
75.4

 
41.0

 
51.1

 
43.6

Net income
316.4

 
254.6

 
620.4

 
541.9

Less: net loss attributable to noncontrolling interest in joint venture
(1.9
)
 
(0.7
)
 
(4.4
)
 
(1.0
)
Net income attributable to Intuitive Surgical, Inc.
$
318.3

 
$
255.3

 
$
624.8

 
$
542.9

Net income per share attributable to Intuitive Surgical, Inc.:
 
 
 
 
 
 
 
Basic
$
2.76

 
$
2.25

 
$
5.42

 
$
4.80

Diluted
$
2.67

 
$
2.15

 
$
5.23

 
$
4.59

Shares used in computing net income per share attributable to Intuitive Surgical, Inc.:
 
 
 
 
 
 
 
Basic
115.4

 
113.5

 
115.2

 
113.2

Diluted
119.3

 
118.5

 
119.4

 
118.3

Total comprehensive income attributable to Intuitive Surgical, Inc.
$
335.1

 
$
257.0

 
$
654.2

 
$
542.0

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements (Unaudited).

4

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

 
Six Months Ended 
June 30,
in millions 
2019
 
2018
Operating activities:
 
 
 
Net income
$
620.4

 
$
541.9

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and loss on disposal of property, plant, and equipment
67.8

 
49.8

Amortization of intangible assets
20.5

 
5.7

Loss (gain) on investments, accretion, and amortization, net
(1.6
)
 
4.7

Deferred income taxes
52.7

 
48.7

Share-based compensation expense
157.7

 
120.8

Amortization of contract acquisition asset
5.9

 
5.3

Changes in operating assets and liabilities, net of effects of acquisition:
 
 
 
Accounts receivable
48.9

 
(17.3
)
Inventory
(178.0
)
 
(133.9
)
Prepaids and other assets
(89.2
)
 
(102.4
)
Accounts payable
21.7

 
14.3

Accrued compensation and employee benefits
(33.3
)
 
(39.6
)
Deferred revenue
8.7

 
29.8

Other liabilities
(53.0
)
 
(16.1
)
Net cash provided by operating activities
649.2

 
511.7

Investing activities:
 
 
 
Purchase of investments
(1,815.9
)
 
(851.6
)
Proceeds from sales of investments
61.1

 
259.0

Proceeds from maturities of investments
1,418.9

 
724.9

Purchase of property, plant, and equipment and intellectual property
(196.9
)
 
(84.9
)
Acquisition of businesses, net of cash
1.2

 
(38.1
)
Net cash provided by (used in) investing activities
(531.6
)
 
9.3

Financing activities:
 
 
 
Proceeds from issuance of common stock relating to employee stock plans
119.6

 
134.9

Taxes paid related to net share settlement of equity awards
(145.0
)
 
(108.0
)
Repurchase of common stock
(200.0
)
 

Capital contribution from noncontrolling interest
10.0

 
8.0

Other financing activities
(5.0
)
 

Net cash provided by (used in) financing activities
(220.4
)
 
34.9

Effect of exchange rate changes on cash, cash equivalents, and restricted cash
(1.3
)
 
(0.6
)
Net increase (decrease) in cash, cash equivalents, and restricted cash
(104.1
)
 
555.3

Cash, cash equivalents, and restricted cash, beginning of period
909.4

 
663.2

Cash, cash equivalents, and restricted cash, end of period
$
805.3

 
$
1,218.5


The accompanying notes are an integral part of these Condensed Consolidated Financial Statements (Unaudited).


5

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

In this report, “Intuitive Surgical,” “Intuitive,” the “Company,” “we,” “us,” and “our” refer to Intuitive Surgical, Inc. and its wholly- and majority-owned subsidiaries.
NOTE 1.    DESCRIPTION OF THE BUSINESS
Intuitive Surgical, Inc. (“Intuitive” or the “Company”) develops, manufactures, and markets the da Vinci® Surgical System and the IonTM endoluminal system. The Company’s products and related services enable physicians and healthcare providers to improve the quality of and access to minimally invasive care. The da Vinci Surgical System consists of a surgeon console or consoles, a patient-side cart, a high-performance vision system, and proprietary instruments and accessories. The Ion endoluminal system is a flexible robotic-assisted catheter-based platform that utilizes instruments and accessories for lung biopsies.
NOTE 2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
In the opinion of management, the accompanying unaudited Condensed Consolidated Financial Statements (“Financial Statements”) of Intuitive Surgical, Inc. and its wholly- and majority-owned subsidiaries have been prepared on a consistent basis with the audited Consolidated Financial Statements for the fiscal year ended December 31, 2018, 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 United States (“U.S.”) generally accepted accounting principles (“U.S. GAAP”). These Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018, which was filed with the SEC on February 4, 2019. The results of operations for the first six months of fiscal year 2019 are not necessarily indicative of the results to be expected for the entire fiscal year or any future periods.
The Financial Statements include the results and the balances of the Company’s majority-owned joint venture (referred to herein as the “Joint Venture”) with Shanghai Fosun Pharmaceutical (Group) Co., Ltd. (“Fosun Pharma”). The Company holds a controlling financial interest in the Joint Venture and the noncontrolling interest is reflected as a separate component of consolidated stockholders’ equity. The noncontrolling interest’s share of the earnings in the Joint Venture is presented separately in the consolidated statements of income.
Recently Adopted Accounting Pronouncements
Leases
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842) (“Topic 842”), which amended prior accounting standards for leases. The Company adopted Topic 842 on January 1, 2019, using the alternative modified transition method, which requires a cumulative-effect adjustment, if any, to the opening balance of retained earnings to be recognized on the date of adoption with prior periods not restated. There was no cumulative-effect adjustment recorded on January 1, 2019. Please see the description of the Company’s “Leases” accounting policy in the “Significant Accounting Policies” section below.
The Company elected the following practical expedients when assessing the transition impact from both the lessee and lessor perspectives: (i) not to reassess whether any expired or existing contracts as of January 1, 2019, are or contain leases; (ii) not to reassess the lease classification for any expired or existing leases as of January 1, 2019; (iii) not to reassess initial direct costs for any existing leases as of January 1, 2019; and (iv) not to reassess whether land easements meet the definition of a lease.
The primary impact for the Company was the balance sheet recognition of right-of-use (“ROU”) assets and lease liabilities for operating leases as a lessee.
Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract
In 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 standard also requires customers to amortize the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement. The Company early adopted this standard, as of January 1, 2019, on a prospective basis for applicable implementation costs. The

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adoption is not expected to have a material impact on the Company’s financial position and the results of operations in fiscal year 2019.
Significant Accounting Policies
With the exception of the change for the accounting of leases as a result of the adoption of Topic 842, 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, 2018, that are of significance, or potential significance, to the Company. 
Leases
The Company determines if an arrangement contains a lease at inception. For arrangements where the Company is the lessee, operating leases are included in intangible and other assets, net; other accrued liabilities; and other long-term liabilities on the Condensed Consolidated Balance Sheet as of June 30, 2019. The Company currently does not have any finance leases.
Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. ROU assets also include any initial direct costs incurred and any lease payments made at or before the lease commencement date, less lease incentives received. The Company uses its incremental borrowing rate based on the information available at the commencement date in determining the lease liabilities as the Company’s leases generally do not provide an implicit rate. Lease terms may include options to extend or terminate when the Company is reasonably certain that the option will be exercised. Lease expense is recognized on a straight-line basis over the lease term.
The Company also has lease arrangements with lease and non-lease components. The Company elected the practical expedient not to separate non-lease components from lease components for the Company’s real estate and automobile leases. Additionally, the Company applied a portfolio approach to effectively account for the operating lease ROU assets and lease liabilities for the Company’s automobile leases. The Company elected to apply the short-term lease measurement and recognition exemption in which ROU assets and lease liabilities are not recognized for leases with terms of 12 months or less.
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 June 30, 2019, and December 31, 2018 (in millions):
 
 
 
 
 
 
 
 
 
Reported as:
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
Cash and
Cash
Equivalents
 
Short-
term
Investments
 
Long-
term
Investments
June 30, 2019
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash
$
264.0

 
$

 
$

 
$
264.0

 
$
264.0

 
$

 
$

Level 1:
 
 
 
 
 
 
 
 
 
 
 
 
 
Money market funds
515.3

 

 

 
515.3

 
515.3

 

 

U.S. treasuries
1,737.8

 
10.3

 
(0.9
)
 
1,747.2

 
11.0

 
892.0

 
844.2

Subtotal
2,253.1

 
10.3

 
(0.9
)
 
2,262.5

 
526.3

 
892.0

 
844.2

Level 2:
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial paper
83.1

 

 

 
83.1

 

 
83.1

 

Corporate debt securities
1,910.4

 
16.5

 
(0.5
)
 
1,926.4

 

 
647.9

 
1,278.5

U.S. government agencies
584.6

 
1.1

 
(0.6
)
 
585.1

 

 
289.2

 
295.9

Municipal securities
26.8

 
0.3

 

 
27.1

 

 
15.9

 
11.2

Subtotal
2,604.9

 
17.9

 
(1.1
)
 
2,621.7

 

 
1,036.1

 
1,585.6

Total assets measured at fair value
$
5,122.0

 
$
28.2

 
$
(2.0
)
 
$
5,148.2

 
$
790.3

 
$
1,928.1

 
$
2,429.8

 

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Reported as:
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
Cash and
Cash
Equivalents
 
Short-
term
Investments
 
Long-
term
Investments
December 31, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash
$
269.4

 
$

 
$

 
$
269.4

 
$
269.4

 
$

 
$

Level 1:
 
 
 
 
 
 
 
 
 
 
 
 
 
Money market funds
569.1

 

 

 
569.1

 
569.1

 

 

U.S. treasuries
1,477.8

 
1.7

 
(5.3
)
 
1,474.2

 
10.0

 
897.8

 
566.4

Subtotal
2,046.9

 
1.7

 
(5.3
)
 
2,043.3

 
579.1

 
897.8

 
566.4

Level 2:
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial paper
110.7

 

 

 
110.7

 
1.4

 
109.3

 

Corporate debt securities
1,607.8

 
1.3

 
(4.8
)
 
1,604.3

 
8.0

 
724.5

 
871.8

U.S. government agencies
791.8

 
0.3

 
(3.8
)
 
788.3

 

 
468.9

 
319.4

Municipal securities
18.4

 

 

 
18.4

 

 
4.7

 
13.7

Subtotal
2,528.7

 
1.6

 
(8.6
)
 
2,521.7

 
9.4

 
1,307.4

 
1,204.9

Total assets measured at fair value
$
4,845.0

 
$
3.3

 
$
(13.9
)
 
$
4,834.4

 
$
857.9

 
$
2,205.2

 
$
1,771.3


As of December 31, 2018, the Company also recorded $36.5 million of restricted cash equivalents (comprised of money market funds and U.S. treasuries which would be considered highly liquid investments with original maturity dates that are 90 days or less) in connection with a concluded legal matter in prepaids and other current assets in the accompanying Condensed Consolidated Balance Sheets.
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 June 30, 2019 (in millions):
 
Amortized
Cost
 
Fair
Value
Mature in less than one year
$
1,949.8

 
$
1,952.1

Mature in one to five years
2,389.9

 
2,413.8

Mature in more than five years
3.0

 
3.0

Total
$
4,342.7

 
$
4,368.9


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.
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, CHF, and Indian Rupee. The net gains (losses) recognized in interest and other income, net in the

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Condensed Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2019, and 2018, were not material.
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 Instruments
 
June 30,
2019
 
December 31,
2018
 
June 30,
2019
 
December 31,
2018
Notional amounts:
 
 
 
 
 
 
 
     Forward contracts
$
178.7

 
$
183.0

 
$
192.2

 
$
182.7

Gross fair value recorded in:
 
 
 
 
 
 
 
     Prepaids and other current assets
$
1.9

 
$
3.1

 
$
1.6

 
$
4.1

     Other accrued liabilities
$
0.8

 
$
0.9

 
$
0.8

 
$
1.1


NOTE 4.    BALANCE SHEET DETAILS AND OTHER FINANCIAL INFORMATION
Balance Sheet Details
The following tables provide details of selected balance sheet items (in millions):
 
As of
Inventory
June 30,
2019
 
December 31,
2018
Raw materials
$
188.4

 
$
164.1

Work-in-process
59.0

 
40.0

Finished goods
265.4

 
204.9

Total inventory
$
512.8

 
$
409.0

 
As of
Other accrued liabilities—short-term
June 30,
2019
 
December 31,
2018
Taxes payable
$
24.3

 
$
39.1

Litigation related accruals
5.7

 
55.0

Other accrued liabilities
144.9

 
137.7

Current portion of contingent consideration
35.7

 

Total other accrued liabilities—short-term
$
210.6

 
$
231.8


 
As of
Other long-term liabilities
June 30,
2019
 
December 31,
2018
Income taxes—long-term
$
266.0

 
$
270.2

Deferred revenue—long-term
31.7

 
33.0

Other long-term liabilities
146.8

 
35.4

Total other long-term liabilities
$
444.5

 
$
338.6


Goodwill and Intangible Assets
The increases in goodwill and intangible assets from December 31, 2018, to June 30, 2019, primarily relate to the Company’s majority-owned Joint Venture with Fosun Pharma acquiring certain assets from Chindex and its affiliates, a subsidiary of Fosun Pharma, including distribution rights, customer relationships, and certain personnel on January 5, 2019, which collectively met the definition of a business. Chindex was the Company’s distributor of da Vinci products and services in China. The transaction enhances the Company’s ability to serve patients, surgeons, and hospitals in China.
The total purchase consideration of $66.0 million, as of the acquisition date, included a contingent consideration liability of $64.7 million and an upfront cash payment of $1.3 million. The amount and timing of the future contingent consideration payments are based upon achieving certain commercial milestones in 2019 and 2020. As of the acquisition date, the estimated total undiscounted contingent consideration was approximately $81 million, and there were no significant changes to this estimate as of June 30, 2019. The contingent consideration liability was measured at estimated fair value using a discounted cash flow model, which require significant inputs not observable in the market, and thus represents a Level 3 measurement. Key assumptions include

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(1) the probability and timing of milestone achievement based on projected future revenues in 2019 and 2020, and (2) the discount rate used to calculate the present value of the milestone payments. On each reporting period until the contingent consideration is settled, the Company will re-measure the contingent consideration liability and record changes in fair value within selling, general and administrative expenses. For the six months ended June 30, 2019, the contingent consideration liability increased primarily due to accretion expense of $7.1 million, partly offset by payments of $2.0 million. Changes to the contingent consideration liability can result from adjustments to discount rates, accretion due to the passage of time, or changes in estimates of the likelihood or timing of achieving the commercial milestones. The assumptions related to determining the fair value of contingent consideration include a significant amount of judgment, and any changes in the underlying estimates could have a material impact on the amount of contingent consideration adjustment recorded in any given period.
The Company preliminarily recorded $1.7 million of net tangible assets, $58.6 million of intangible assets, and $5.7 million of residual goodwill. Intangible assets included distribution rights of $48.2 million and customer relationships of $10.4 million, which are being amortized over a weighted average period of 2.9 years. The goodwill is not amortizable for income tax purposes.
The Company has included the results of the acquired business since the acquisition date in its Financial Statements, which have not been material to date. Pro forma results of operations related to the acquisition have not been presented because the operating results of the acquired business is not material to the Financial Statements.
Supplemental Cash Flow Information
The following table provides supplemental non-cash investing and financing activities (in millions):
 
Six Months Ended June 30,
 
2019
 
2018
Equipment transfers, including operating lease assets, from inventory to property, plant, and equipment
$
89.0

 
$
49.0

Deferred payments and contingent consideration related to business combinations
$
64.7

 
$


NOTE 5.    REVENUE AND CONTRACT ACQUISITION COSTS
The following table presents revenue disaggregated by types and geography (in millions):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
U.S.
2019
 
2018
 
2019
 
2018
Instruments and accessories
$
428.6

 
$
360.3

 
$
836.0

 
$
697.9

Systems
232.6

 
172.4

 
393.3

 
296.4

Services
124.1

 
112.0

 
247.6

 
222.8

Total U.S. revenue
$
785.3

 
$
644.7

 
$
1,476.9

 
$
1,217.1

 
 
 
 
 
 
 
 
Outside of U.S. (“OUS”)
 
 
 
 
 
 
 
Instruments and accessories
$
149.9

 
$
115.8

 
$
294.8

 
$
238.5

Systems
111.2

 
105.0

 
198.0

 
215.5

Services
52.5

 
43.8

 
102.9

 
85.7

Total OUS revenue
$
313.6

 
$
264.6

 
$
595.7

 
$
539.7

 
 
 
 
 
 
 
 
Total
 
 
 
 
 
 
 
Instruments and accessories
$
578.5

 
$
476.1

 
$
1,130.8

 
$
936.4

Systems
343.8

 
277.4

 
591.3

 
511.9

Services
176.6

 
155.8

 
350.5

 
308.5

Total revenue
$
1,098.9

 
$
909.3

 
$
2,072.6

 
$
1,756.8


Remaining Performance Obligations
The transaction price allocated to remaining performance obligations relates to amounts allocated to products and services for which revenue has not yet been recognized. A significant portion of this amount relates to performance obligations in the Company’s service contracts that will be satisfied and recognized as revenue in future periods. The transaction price allocated to the remaining performance obligations was approximately $1,415.9 million as of June 30, 2019. The remaining performance obligations are expected to be satisfied over the term of the individual sales arrangements, which generally are 5 years.

10

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Contract Assets and Liabilities
The following information summarizes the Company’s contract assets and liabilities (in millions):
 
As of
 
June 30,
2019
 
December 31,
2018
Contract assets
$
20.0

 
$
12.4

Deferred revenue
$
338.5

 
$
327.3


The Company invoices its customers based on the billing schedules in its sales arrangements. Payments are generally due 30 days from date of invoice. Contract assets for the periods presented primarily represent the difference between the revenue that was recognized based on the relative standalone selling price of the related performance obligations satisfied and the contractual billing terms in the arrangements. Deferred revenue for the periods presented primarily relates to service contracts where the service fees are billed up-front, generally quarterly or annually, prior to those services having been performed. The associated deferred revenue is generally recognized over the term of the service period. The Company did not have any significant impairment losses on its contract assets for the periods presented.
During the three and six months ended June 30, 2019, the Company recognized revenue of $91.5 million and $223.7 million, respectively, which was included in the deferred revenue balance as of December 31, 2018. During the three and six months ended June 30, 2018, the Company recognized revenue of $82.0 million and $197.8 million, respectively, which was included in the deferred revenue balance as of December 31, 2017.
Intuitive Surgical da Vinci System Leasing
The Company enters into sales-type lease and operating lease arrangements with certain qualified customers. Sales-type leases have terms that generally range from 24 to 84 months and are usually collateralized by a security interest in the underlying assets. Revenue related to multiple-element arrangements are allocated to lease and non-lease elements based on their relative standalone selling prices as prescribed by the Company’s revenue recognition policy. Lease elements generally include a da Vinci Surgical System or system component, while non-lease elements generally include service, instruments and accessories. For some lease arrangements, the customers are provided with the right to purchase the leased system at some point during and/or at the end of the lease term. Except for certain usage-based lease arrangements, lease arrangements generally do not provide rights for the customers to exit or terminate the lease without incurring a penalty. For some leases, lease payments are based on the usage of the systems.
In determining whether a transaction should be classified as a sales-type or operating lease, the Company considers the following terms at lease commencement: (1) whether title of the system transfers automatically or for a nominal fee by the end of the lease term, (2) whether the present value of the minimum lease payments equals or exceeds substantially all of the fair value of the leased system, (3) whether the lease term is for the major part of the remaining economic life of the leased system, (4) whether the lease grants the lessee an option to purchase the leased system that the lessee is reasonably certain to exercise, and (5) whether the underlying system is of such a specialized nature that it is expected to have no alternative use to the Company at the end of the lease term.
The Company generally recognizes revenue from sales-type lease arrangements at the time the system is accepted by the customer, assuming all other revenue recognition criteria have been met. Revenue from sales-type leases is presented as product revenue. Revenue from operating lease arrangements is generally recognized on a straight-line basis over the lease term or based upon system usage, and is presented as product revenue.
The following table presents revenue from our lease arrangements (in millions):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Sales-type lease revenue
$
15.3

 
$
13.3

 
$
19.9

 
$
25.3

Operating lease revenue
$
25.1

 
$
11.5

 
$
45.5

 
$
21.0


Assets Recognized from the Costs to Obtain a Contract with a Customer
The Company has determined that certain sales incentives provided to the Company’s sales team are required to be capitalized when the Company expects to generate future economic benefits from the related revenue-generating contracts subsequent to the initial capital sales transaction. When determining the economic life of the contract acquisition assets recognized, the Company considers historical service renewal rates, expectations of future customer renewals of service contracts, and other factors that could impact the economic benefits that the Company expects to generate from the relationship with its customers. The costs capitalized as contract acquisition costs included in intangible and other assets, net in the Company’s Condensed Consolidated

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Balance Sheets were $39.8 million and $34.2 million as of June 30, 2019, and December 31, 2018, respectively. The Company did not incur any impairment losses during the periods presented.
NOTE 6.    LEASES
Lessor Information
Sales-type Leases. Lease receivables relating to sales-type lease arrangements are presented on the Condensed Consolidated Balance Sheets as follows (in millions):
 
As of
 
June 30,
2019
 
December 31,
2018
Gross lease receivables
$
157.0

 
$
150.4

Unearned income
(7.3
)
 
(6.3
)
Allowance for credit loss
(1.0
)
 
(1.0
)
Net investment in sales-type leases
$
148.7

 
$
143.1

Reported as:
 
 
 
   Prepaids and other current assets
$
52.5

 
$
51.2

   Intangible and other assets, net
96.2

 
91.9

   Total, net
$
148.7

 
$
143.1

Contractual maturities of gross lease receivables at June 30, 2019, are as follows (in millions):
Fiscal Year
Amount
2019
$
26.0

2020
54.4

2021
37.6

2022
21.4

2023
12.5

2024 and thereafter
5.1

Total
$
157.0


Operating Leases. The Company’s operating lease terms are generally five years or less with its customers. As of June 30, 2019, the maturities of lease payments are as follows (in millions):
Fiscal Year
Amount
2019
$
56.7

2020
112.8

2021
94.8

2022
76.8

2023
51.2

2024 and thereafter
9.9

Total
$
402.2


Contingent rental revenue relating to operating lease arrangements were not material for the periods presented.
The components of operating lease assets, which are presented within property, plant, and equipment, net on the Condensed Consolidated Balance Sheets, are as follows (in millions):
 
As of
 
June 30,
2019
 
December 31,
2018
Gross operating lease assets
$
210.0

 
$
150.2

Less: Accumulated depreciation
(43.9
)
 
(32.1
)
Total operating lease assets, net
$
166.1

 
$
118.1



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Lessee Information
The Company enters into operating leases for real estate, automobiles, and certain equipment. Operating lease expense was $4.6 million and $8.9 million for the three and six months ended June 30, 2019, respectively. For leases with terms of 12 months or less, the related expense for the three and six months ended June 30, 2019, was not material.
Supplemental cash flow information for the six months ended June 30, 2019, related to operating leases was as follows (in millions):
Cash paid for leases that were included within operating cash outflows
$
8.3

Right-of-use assets recognized related to new lease obligations
$
12.2


Supplemental balance sheet information, as of June 30, 2019, related to operating leases was as follows (in millions, except lease term and discount rate):
Reported as:
 
Intangible and other assets, net (Right-of-use assets)
$
72.8

Other accrued liabilities
$
5.5

Other long-term liabilities
69.6

Total lease liabilities
$
75.1

Weighted average remaining lease term
7 years
Weighted average discount rate
3.6%

As of June 30, 2019, the future payments related to the Company’s operating lease liabilities are scheduled as follows (in millions):
Fiscal Year
Amount
2019
$
4.5

2020
11.9

2021
16.9

2022
12.4

2023
11.1

2024 and thereafter
29.8

Total lease payments
$
86.6

Less imputed interest
(11.5
)
Total operating lease liabilities
$
75.1


ASC 840 Disclosures
The Company elected the alternative modified transition method and is required to present previously disclosed information under the prior accounting standards for leases.
Lessor Information
Sales-type Leases. Contractual maturities of gross lease receivables as of December 31, 2018, are as follows (in millions):
Fiscal Year
Amount
2019
$
50.8

2020
46.5

2021
29.7

2022
14.9

2023
7.5

2024 and thereafter
1.0

Total
$
150.4



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Operating Leases. Future minimum lease payments related to non-cancellable portion of operating leases as of December 31, 2018, are as follows (in millions):
Fiscal Year
Amount
2019
$
88.0

2020
85.8

2021
68.8

2022
51.3

2023
25.4

2024 and thereafter
1.9

Total
$
321.2


Lessee Information
Operating Leases. Future minimum lease commitments under the Company’s operating leases as of December 31, 2018, are as follows (in millions):
Fiscal Year
Amount
2019
$
15.1

2020
14.5

2021
12.7

2022
11.2

2023
11.0

2024 and thereafter
30.9

Total
$
95.4


NOTE 7.    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 Financial Statements for legal contingencies when the loss is considered probable and the amount can be reasonably estimated. The assessment is re-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, and future results of operations.
During the three and six months ended June 30, 2019, the Company recorded no litigation charges related to the tolled product liability claims described below, compared with zero and $4.5 million during the three and six months ended June 30, 2018, respectively. A total of $4.2 million and $10.5 million associated with these matters were included in other accrued liabilities in the accompanying Condensed Consolidated Balance Sheets as of June 30, 2019, and December 31, 2018, respectively.
Product Liability Litigation
The Company is currently named as a defendant in a number of individual product liability lawsuits filed in various state and federal courts. The plaintiffs generally 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. Several of these 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.

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In addition to the filed cases, the Company previously reported on a substantial number of claims relating 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. It is the Company’s position that as of June 30, 2019, all such “tolling agreements” have expired and the majority of the “tolled claims” have either been resolved or the claims have been filed.
The Company’s estimate of the anticipated cost of resolving the pending cases is based on negotiations with attorneys for the claimants. The final outcome of the 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.
Patent Litigation
On June 30, 2017, Ethicon LLC, Ethicon Endo-Surgery, Inc., and Ethicon US LLC (collectively, “Ethicon”) filed a complaint for patent infringement against the Company in the U.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 the U.S. Patent Nos. 9,585,658, 8,479,969, 9,113,874, 8,998,058, 8,991,677, 9,084,601, and 8,616,431. A claim construction hearing occurred on October 1, 2018, and the court issued a scheduling order on December 28, 2018. On March 20, 2019, the court granted the Company’s Motion to Stay pending an Inter Partes Review to be held at the Patent Trademark and Appeals Board to review patentability of six of the seven patents noted above and vacated the trial date.
On August 27, 2018, Ethicon filed a second complaint for patent infringement against the Company in the U.S. District Court for the District of Delaware. The complaint alleges that the Company’s SureForm 60 Staplers infringe five of Ethicon’s patents. Ethicon asserts infringement of the U.S. Patent Nos. 9,884,369, 7,490,749, 8,602,288, 8,602,287, and 9,326,770. The Company filed an answer denying all claims. On March 19, 2019, Ethicon filed a Motion for Leave to File a First Amended Complaint, removing allegations related to U.S. Patent No. 9,326,770 and adding allegations related to U.S. Patent Nos. 9,844,379 and 8,479,969. On July 17, 2019, the court entered an order denying the amendment, without prejudice, and granting the parties’ joint stipulation to stay the case in its entirety.
On May 30, 2019, Ethicon filed a complaint with the U.S. International Trade Commission (“USITC”), asserting infringement of U.S. Patent Nos. 9,884,369, 7,490,749, 9,844,379, 9,113,874, and 8,479,969. On June 28, 2019, the USITC voted to institute an investigation (No. 337-TA-1167) with respect to the claims in this complaint.
Based on currently available information, the Company is unable to make a reasonable estimate of loss or range of losses, if any, arising from these matters.

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NOTE 8.    STOCKHOLDERS’ EQUITY
Stockholders’ Equity
The following tables present the changes in stockholders’ equity (in millions):
 
Three Months Ended June 30, 2019
 
Common Stock
 
Additional
Paid-In
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total Intuitive Surgical, Inc. Stockholders’ Equity
 
Noncontrolling Interest in Joint Venture
 
Total Stockholders’ Equity
 
Shares
 
Amount
 
 
 
 
 
 
Beginning balance
115.4

 
$
0.1

 
$
5,328.8

 
$
1,696.0

 
$
(0.7
)
 
$
7,024.2

 
$
16.2

 
$
7,040.4

Issuance of common stock through employee stock plans
0.2

 
 
 
30.8

 
 
 
 
 
30.8

 
 
 
30.8

Shares withheld related to net share settlement of equity awards

 
 
 
(0.3
)
 
(6.1
)
 
 
 
(6.4
)
 
 
 
(6.4
)
Share-based compensation expense related to employee stock plans
 
 
 
 
81.6

 
 
 
 
 
81.6

 
 
 
81.6

Repurchase and retirement of common stock
(0.4
)
 
 
 
(10.8
)
 
(189.2
)
 
 
 
(200.0
)
 
 
 
(200.0
)
Net income attributable to Intuitive Surgical, Inc.
 
 
 
 
 
 
318.3

 
 
 
318.3

 
 
 
318.3

Other comprehensive income
 
 
 
 
 
 
 
 
16.8

 
16.8

 
 
 
16.8

Net loss attributable to noncontrolling interest in joint venture
 
 
 
 
 
 
 
 
 
 

 
(1.9
)
 
(1.9
)
Ending balance
115.2

 
$
0.1

 
$
5,430.1

 
$
1,819.0

 
$
16.1

 
$
7,265.3

 
$
14.3

 
$
7,279.6

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended June 30, 2018
 
Common Stock
 
Additional
Paid-In
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Loss
 
Total Intuitive Surgical, Inc. Stockholders’ Equity
 
Noncontrolling Interest in Joint Venture
 
Total Stockholders’ Equity
 
Shares
 
Amount
 
 
 
 
 
 
Beginning balance
113.3

 
$
0.1

 
$
4,817.1

 
$
698.0

 
$
(18.1
)
 
$
5,497.1

 
$
9.3

 
$
5,506.4

Issuance of common stock through employee stock plans
0.5

 
 
 
48.7

 
 
 
 
 
48.7

 
 
 
48.7

Shares withheld related to net share settlement of equity awards
(0.1
)
 
 
 
(0.3
)
 
(5.2
)
 
 
 
(5.5
)
 
 
 
(5.5
)
Share-based compensation expense related to employee stock plans
 
 
 
 
63.3

 
 
 
 
 
63.3

 
 
 
63.3

Net income attributable to Intuitive Surgical, Inc.