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 September 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 115,573,505 shares of Common Stock, $0.001 par value per share, outstanding as of October 15, 2019.

INTUITIVE SURGICAL, INC.

TABLE OF CONTENTS

		Page No.
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited):
	Condensed consolidated balance sheets as of September 30, 2019 and December 31, 2018	3
	Condensed consolidated statements of comprehensive income for the three and nine months ended September 30, 2019 and 2018	4
	Condensed consolidated statements of cash flows for the nine months ended September 30, 2019 and 2018	5
	Notes to condensed consolidated financial statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	42
Item 4.	Controls and Procedures	42
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	43
Item 1A.	Risk Factors	43
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	43
Item 3.	Defaults Upon Senior Securities	43
Item 4.	Mine Safety Disclosures	43
Item 5.	Other Information	43
Item 6.	Exhibits	45
	Signature	46

2

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

INTUITIVE SURGICAL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

in millions (except par values)	September 30, 2019		December 31, 2018
ASSETS
Current assets:
Cash and cash equivalents	$	969.6	$	857.9
Short-term investments	1,928.0		2,205.2
Accounts receivable, net	639.0		682.3
Inventory	579.6		409.0
Prepaids and other current assets	200.8		178.8
Total current assets	4,317.0		4,333.2
Property, plant, and equipment, net	1,136.8		812.0
Long-term investments	2,533.0		1,771.3
Deferred tax assets	424.1		428.6
Intangible and other assets, net	415.7		261.0
Goodwill	304.7		240.6
Total assets	$	9,131.3	$	7,846.7
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	132.4	$	100.7
Accrued compensation and employee benefits	187.4		193.8
Deferred revenue	307.6		294.3
Other accrued liabilities	303.5		231.8
Total current liabilities	930.9		820.6
Other long-term liabilities	423.3		338.6
Total liabilities	1,354.2		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 September 30, 2019, and December 31, 2018	—		—
Common stock, 300.0 shares authorized, $0.001 par value, 115.6 shares and 114.5 shares issued and outstanding as of September 30, 2019, and December 31, 2018, respectively	0.1		0.1
Additional paid-in capital	5,600.9		5,170.3
Retained earnings	2,142.6		1,521.7
Accumulated other comprehensive income (loss)	17.8		(13.3)
Total Intuitive Surgical, Inc. stockholders’ equity	7,761.4		6,678.8
Noncontrolling interest in joint venture	15.7		8.7
Total stockholders’ equity	7,777.1		6,687.5
Total liabilities and stockholders’ equity	$	9,131.3	$	7,846.7

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

3

INTUITIVE SURGICAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

	Three Months Ended  September 30,				Nine Months Ended  September 30,
in millions (except per share amounts)	2019		2018		2019		2018
Revenue:
Product	$	944.8	$	760.9	$	2,666.9	$	2,209.2
Service	183.4		160.0		533.9		468.5
Total revenue	1,128.2		920.9		3,200.8		2,677.7
Cost of revenue:
Product	277.3		225.1		807.1		654.7
Service	65.3		53.5		179.5		154.6
Total cost of revenue	342.6		278.6		986.6		809.3
Gross profit	785.6		642.3		2,214.2		1,868.4
Operating expenses:
Selling, general and administrative	284.0		221.4		836.6		702.8
Research and development	135.9		107.6		400.7		298.2
Total operating expenses	419.9		329.0		1,237.3		1,001.0
Income from operations	365.7		313.3		976.9		867.4
Interest and other income, net	33.3		21.9		93.6		53.3
Income before taxes	399.0		335.2		1,070.5		920.7
Income tax expense	0.3		43.4		51.4		87.0
Net income	398.7		291.8		1,019.1		833.7
Less: net income (loss) attributable to noncontrolling interest in joint venture	1.9		(0.7)		(2.5)		(1.7)
Net income attributable to Intuitive Surgical, Inc.	$	396.8	$	292.5	$	1,021.6	$	835.4
Net income per share attributable to Intuitive Surgical, Inc.:
Basic	$	3.44	$	2.57	$	8.86	$	7.37
Diluted	$	3.33	$	2.45	$	8.56	$	7.04
Shares used in computing net income per share attributable to Intuitive Surgical, Inc.:
Basic	115.4		114.0		115.3		113.4
Diluted	119.3		119.2		119.4		118.6
Total comprehensive income attributable to Intuitive Surgical, Inc.	$	398.5	$	292.2	$	1,052.7	$	834.2

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

4

INTUITIVE SURGICAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	Nine Months Ended  September 30,
in millions	2019		2018
Operating activities:
Net income	$	1,019.1	$	833.7
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and loss on disposal of property, plant, and equipment	108.0		76.8
Amortization of intangible assets	31.2		9.7
Loss (gain) on investments, accretion, and amortization, net	(6.6)		3.2
Deferred income taxes	(8.3)		52.3
Share-based compensation expense	246.6		190.8
Amortization of contract acquisition assets	9.2		7.9
Changes in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable	50.6		(65.2)
Inventory	(293.4)		(205.8)
Prepaids and other assets	(95.1)		(89.3)
Accounts payable	24.7		13.4
Accrued compensation and employee benefits	(6.8)		(21.5)
Deferred revenue	5.8		34.7
Other liabilities	(39.5)		(9.2)
Net cash provided by operating activities	1,045.5		831.5
Investing activities:
Purchase of investments	(2,543.4)		(1,694.0)
Proceeds from sales of investments	82.1		274.0
Proceeds from maturities of investments	2,028.5		1,048.7
Purchase of property, plant, and equipment and intellectual property	(283.6)		(131.9)
Acquisition of businesses, net of cash	(31.8)		(60.1)
Net cash used in investing activities	(748.2)		(563.3)
Financing activities:
Proceeds from issuance of common stock relating to employee stock plans	205.7		199.6
Taxes paid related to net share settlement of equity awards	(152.9)		(115.0)
Repurchase of common stock	(269.5)		—
Capital contribution from noncontrolling interest	10.0		8.0
Other financing activities	(12.5)		—
Net cash provided by (used in) financing activities	(219.2)		92.6
Effect of exchange rate changes on cash, cash equivalents, and restricted cash	(2.9)		(0.7)
Net increase in cash, cash equivalents, and restricted cash	75.2		360.1
Cash, cash equivalents, and restricted cash, beginning of period	909.4		663.2
Cash, cash equivalents, and restricted cash, end of period	$	984.6	$	1,023.3

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

5

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 Ion^TM 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 nine 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.

6

The adoption did not 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 September 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 also 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 September 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
September 30, 2019
Cash	$	325.2	$	—	$	—	$	325.2	$	325.2	$	—	$	—
Level 1:
Money market funds	641.4		—		—		641.4		641.4		—		—
U.S. treasuries	1,846.9		10.6		(0.7)		1,856.8		—		932.8		924.0
Subtotal	2,488.3		10.6		(0.7)		2,498.2		641.4		932.8		924.0
Level 2:
Commercial paper	117.5		—		—		117.5		3.0		114.5		—
Corporate debt securities	1,958.9		18.0		(0.4)		1,976.5		—		637.0		1,339.5
U.S. government agencies	481.1		1.0		(0.4)		481.7		—		227.9		253.8
Municipal securities	31.2		0.3		—		31.5		—		15.8		15.7
Subtotal	2,588.7		19.3		(0.8)		2,607.2		3.0		995.2		1,609.0
Total assets measured at fair value	$	5,402.2	$	29.9	$	(1.5)	$	5,430.6	$	969.6	$	1,928.0	$	2,533.0

7

									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 that 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 September 30, 2019 (in millions):

	Amortized Cost		Fair Value
Mature in less than one year	$	1,976.2	$	1,980.0
Mature in one to five years	2,459.4		2,484.0
Total	$	4,435.6	$	4,464.0

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 unrealized 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, Indian Rupee, and New Taiwan Dollar. The net gains (losses) recognized in interest and

8

other income, net in the Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 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
	September 30, 2019		December 31, 2018		September 30, 2019		December 31, 2018
Notional amounts:
Forward contracts	$	192.6	$	183.0	$	255.4	$	182.7
Gross fair value recorded in:
Prepaids and other current assets	$	4.5	$	3.1	$	3.3	$	4.1
Other accrued liabilities	$	0.6	$	0.9	$	0.6	$	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	September 30, 2019		December 31, 2018
Raw materials	$	208.1	$	164.1
Work-in-process	70.9		40.0
Finished goods	300.6		204.9
Total inventory	$	579.6	$	409.0

	As of
Other accrued liabilities—short-term	September 30, 2019		December 31, 2018
Taxes payable	$	26.2	$	39.1
Litigation-related accruals	5.9		55.0
Other accrued liabilities	170.6		133.1
Current portion of deferred purchase consideration payments	59.8		4.6
Current portion of contingent consideration	41.0		—
Total other accrued liabilities—short-term	$	303.5	$	231.8

	As of
Other long-term liabilities	September 30, 2019		December 31, 2018
Income taxes—long-term	$	258.6	$	270.2
Deferred revenue—long-term	27.9		33.0
Other long-term liabilities	136.8		35.4
Total other long-term liabilities	$	423.3	$	338.6

Goodwill and Intangible Assets

The increases in goodwill and intangible assets from December 31, 2018, to September 30, 2019, primarily relate to two transactions accounted for as business combinations.

Chindex

During the first quarter of 2019, the Company’s majority-owned Joint Venture with Fosun Pharma acquired certain assets from Chindex and its affiliates, a subsidiary of Fosun Pharma, including distribution rights, customer relationships, and certain personnel on January 5, 2019, which collectively met the definition of a business. Chindex was the Company’s distributor of da

9

Vinci products and services in China. The transaction enhances the Company’s ability to serve patients, surgeons, and hospitals in China.

The total purchase consideration of $66.0 million, as of the acquisition date, included a contingent consideration liability of $64.7 million and an upfront cash payment of $1.3 million. The amount and timing of the future contingent consideration payments are based upon the underlying performance of the business in 2019 and 2020. As of the acquisition date, the estimated total undiscounted contingent consideration was approximately $81 million. The undiscounted contingent consideration has decreased by approximately $6 million as of September 30, 2019, due to a change in the timing of the projected future revenues. The contingent consideration liability was measured at estimated fair value using a discounted cash flow model, which requires significant inputs not observable in the market and, thus, represents a Level 3 measurement. Key assumptions include (1) the probability and timing of milestone achievements based on 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 nine months ended September 30, 2019, the contingent consideration liability changed due to payments of $8.5 million and net additional expense of $4.1 million. Changes to the contingent consideration liability can result from adjustments to discount rates, accretion due to the passage of time, or changes in estimates in the performance of the business. The assumptions related to determining the fair value of contingent consideration include a significant amount of judgment, and any changes in the underlying estimates could have a material impact on the amount of contingent consideration adjustment recorded in any given period.

The Company 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 allocation of purchase consideration was completed in the third quarter of 2019. There were no adjustments to the provisional amounts in the measurement period.

Schölly

During the third quarter of 2019, the Company acquired certain assets and operations from Schölly Fiberoptic GmbH (“Schölly”), including manufacturing process technology, a non-compete agreement, certain personnel, and net tangible assets on August 31, 2019, which collectively met the definition of a business. The Company believes that the transaction strengthens the Company’s supply chain and manufacturing capacity for imaging products used in the Company's da Vinci systems. The total purchase consideration of $100.6 million, as of the acquisition date, consisted of an initial cash payment of $34.4 million and deferred cash payments totaling approximately $66.2 million. The timing of the future payments is based upon achieving certain integration steps, which occur during 2019 and 2020 and are expected to be completed around the end of 2020.

The Company preliminarily recorded $10.8 million of net tangible assets, which included $6.1 million of inventory and $1.5 million of cash, $30.5 million of intangible assets, and $59.3 million of residual goodwill. Intangible assets included manufacturing process technology and non-compete provisions, which are being amortized over a weighted-average period of 6.6 years. The allocation of purchase consideration is considered preliminary with provisional amounts primarily related to intangible assets and working capital. Goodwill primarily consists of the manufacturing and other synergies of the combined operations and the value of the assembled workforce. The majority of goodwill is not deductible for income tax purposes.

The Company has included the results of the acquired businesses, since their acquisition dates, in its Financial Statements, and the revenues and earnings have not been material to date. Pro forma results of operations related to the acquisitions have not been presented, because the operating results of the acquired businesses are not considered material to the Financial Statements.

Supplemental Cash Flow Information

The following table provides supplemental non-cash investing and financing activities (in millions):

	Nine Months Ended September 30,
	2019		2018
Equipment transfers, including operating lease assets, from inventory to property, plant, and equipment	$	147.6	$	84.4
Deferred payments and contingent consideration related to business combinations	$	130.9	$	16.7

10

NOTE 5. REVENUE AND CONTRACT ACQUISITION COSTS

The following table presents revenue disaggregated by types and geography (in millions):

	Three Months Ended September 30,				Nine Months Ended September 30,
U.S.	2019		2018		2019		2018
Instruments and accessories	$	450.7	$	368.1	$	1,286.7	$	1,066.0
Systems	217.2		193.6		610.5		490.0
Services	128.5		114.8		376.1		337.6
Total U.S. revenue	$	796.4	$	676.5	$	2,273.3	$	1,893.6
Outside of U.S. (“OUS”)
Instruments and accessories	$	155.5	$	118.2	$	450.3	$	356.7
Systems	121.4		81.0		319.4		296.5
Services	54.9		45.2		157.8		130.9
Total OUS revenue	$	331.8	$	244.4	$	927.5	$	784.1
Total
Instruments and accessories	$	606.2	$	486.3	$	1,737.0	$	1,422.7
Systems	338.6		274.6		929.9		786.5
Services	183.4		160.0		533.9		468.5
Total revenue	$	1,128.2	$	920.9	$	3,200.8	$	2,677.7

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 $1,419.4 million as of September 30, 2019. The remaining performance obligations are expected to be satisfied over the term of the individual sales arrangements, which generally are 5 years.

Contract Assets and Liabilities

The following information summarizes the Company’s contract assets and liabilities (in millions):

	As of
	September 30, 2019		December 31, 2018
Contract assets	$	21.8	$	12.4
Deferred revenue	$	335.6	$	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 nine months ended September 30, 2019, the Company recognized revenue of $57.7 million and $281.4 million, respectively, which was included in the deferred revenue balance as of December 31, 2018. During the three and nine months ended September 30, 2018, the Company recognized revenue of $47.0 million and $244.8 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 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

11

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 September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Sales-type lease revenue	$	14.8	$	23.0	$	34.7	$	48.3
Operating lease revenue	$	27.4	$	14.0	$	72.9	$	35.0

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 Balance Sheets were $43.4 million and $34.2 million as of September 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
	September 30, 2019		December 31, 2018
Gross lease receivables	$	162.1	$	150.4
Unearned income	(8.2)		(6.3)
Allowance for credit loss	(1.0)		(1.0)
Net investment in sales-type leases	$	152.9	$	143.1
Reported as:
Prepaids and other current assets	$	52.7	$	51.2
Intangible and other assets, net	100.2		91.9
Total, net	$	152.9	$	143.1

12

Contractual maturities of gross lease receivables at September 30, 2019, are as follows (in millions):

Fiscal Year	Amount
2019	$	11.1
2020	57.7
2021	41.6
2022	25.5
2023	16.6
2024 and thereafter	9.6
Total	$	162.1

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

Fiscal Year	Amount
2019	$	29.9
2020	130.7
2021	116.2
2022	98.5
2023	67.4
2024 and thereafter	22.9