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 March 31, 2020

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 116,617,784 shares of Common Stock, $0.001 par value per share, outstanding as of April 14, 2020.

INTUITIVE SURGICAL, INC.

TABLE OF CONTENTS

		Page No.
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited):
	Condensed consolidated balance sheets as of March 31, 2020 and December 31, 2019	3
	Condensed consolidated statements of comprehensive income for the three months ended March 31, 2020 and 2019	4
	Condensed consolidated statements of cash flows for the three months ended March 31, 2020 and 2019	5
	Notes to condensed consolidated financial statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22
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	45
Item 3.	Defaults Upon Senior Securities	45
Item 4.	Mine Safety Disclosures	45
Item 5.	Other Information	45
Item 6.	Exhibits	46
	Signature	47

2

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

INTUITIVE SURGICAL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

in millions (except par values)	March 31, 2020		December 31, 2019
ASSETS
Current assets:
Cash and cash equivalents	$	1,223.8	$	1,167.6
Short-term investments	2,029.6		2,054.1
Accounts receivable, net	527.6		645.2
Inventory	620.3		595.5
Prepaids and other current assets	290.2		200.2
Total current assets	4,691.5		4,662.6
Property, plant, and equipment, net	1,369.2		1,272.9
Long-term investments	2,642.7		2,623.5
Deferred tax assets	364.7		425.6
Intangible and other assets, net	488.0		441.4
Goodwill	335.0		307.2
Total assets	$	9,891.1	$	9,733.2
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	133.4	$	123.5
Accrued compensation and employee benefits	156.5		251.6
Deferred revenue	337.4		337.8
Other accrued liabilities	318.6		317.3
Total current liabilities	945.9		1,030.2
Other long-term liabilities	414.7		418.3
Total liabilities	1,360.6		1,448.5
Contingencies (Note 8)
Stockholders’ equity:
Preferred stock, 2.5 shares authorized, $0.001 par value, issuable in series; no shares issued and outstanding as of March 31, 2020, and December 31, 2019	—		—
Common stock, 300.0 shares authorized, $0.001 par value, 116.6 shares and 116.0 shares issued and outstanding as of March 31, 2020, and December 31, 2019, respectively	0.1		0.1
Additional paid-in capital	5,926.8		5,756.8
Retained earnings	2,570.9		2,494.5
Accumulated other comprehensive income	8.9		12.4
Total Intuitive Surgical, Inc. stockholders’ equity	8,506.7		8,263.8
Noncontrolling interest in joint venture	23.8		20.9
Total stockholders’ equity	8,530.5		8,284.7
Total liabilities and stockholders’ equity	$	9,891.1	$	9,733.2

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

INTUITIVE SURGICAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

	Three Months Ended  March 31,
in millions (except per share amounts)	2020		2019
Revenue:
Product	$	900.8	$	799.8
Service	198.7		173.9
Total revenue	1,099.5		973.7
Cost of revenue:
Product	296.7		246.4
Service	64.6		57.7
Total cost of revenue	361.3		304.1
Gross profit	738.2		669.6
Operating expenses:
Selling, general and administrative	308.1		273.4
Research and development	147.1		144.0
Total operating expenses	455.2		417.4
Income from operations	283.0		252.2
Interest and other income, net	25.1		27.5
Income before taxes	308.1		279.7
Income tax benefit	(8.1)		(24.3)
Net income	316.2		304.0
Less: net income (loss) attributable to noncontrolling interest in joint venture	2.7		(2.5)
Net income attributable to Intuitive Surgical, Inc.	$	313.5	$	306.5
Net income per share attributable to Intuitive Surgical, Inc.:
Basic	$	2.69	$	2.67
Diluted	$	2.62	$	2.56
Shares used in computing net income per share attributable to Intuitive Surgical, Inc.:
Basic	116.4		115.0
Diluted	119.8		119.6
Total comprehensive income attributable to Intuitive Surgical, Inc.	$	310.0	$	319.1

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)

	Three Months Ended  March 31,
in millions	2020		2019
Operating activities:
Net income	$	316.2	$	304.0
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and loss on disposal of property, plant, and equipment	51.1		31.6
Amortization of intangible assets	12.3		10.0
Loss (gain) on investments, accretion, and amortization, net	0.2		(1.2)
Deferred income taxes	64.5		32.9
Share-based compensation expense	90.6		76.1
Amortization of contract acquisition assets	4.1		2.8
Changes in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable	118.2		134.6
Inventory	(65.2)		(94.0)
Prepaids and other assets	(131.9)		(62.7)
Accounts payable	21.9		23.0
Accrued compensation and employee benefits	(95.2)		(68.7)
Deferred revenue	0.8		(0.5)
Other liabilities	(34.8)		(54.7)
Net cash provided by operating activities	352.8		333.2
Investing activities:
Purchase of investments	(690.0)		(992.3)
Proceeds from sales of investments	98.2		44.4
Proceeds from maturities of investments	617.6		755.1
Purchase of property, plant, and equipment and intellectual property	(105.2)		(114.8)
Acquisition of businesses, net of cash	(37.7)		(1.3)
Net cash used in investing activities	(117.1)		(308.9)
Financing activities:
Proceeds from issuance of common stock relating to employee stock plans	91.3		88.8
Taxes paid related to net share settlement of equity awards	(148.9)		(138.6)
Repurchase of common stock	(100.0)		—
Capital contribution from noncontrolling interest	—		10.0
Payment of deferred purchase consideration	(21.1)		(2.0)
Net cash used in financing activities	(178.7)		(41.8)
Effect of exchange rate changes on cash, cash equivalents, and restricted cash	(0.8)		(1.2)
Net increase (decrease) in cash, cash equivalents, and restricted cash	56.2		(18.7)
Cash, cash equivalents, and restricted cash, beginning of period	1,182.6		909.4
Cash, cash equivalents, and restricted cash, end of period	$	1,238.8	$	890.7

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, 2019, and include all adjustments, consisting of only normal, recurring adjustments, necessary to fairly state the information set forth herein. The Financial Statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) and, therefore, omit certain information and footnote disclosure necessary to present the Financial Statements in accordance with 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, 2019, which was filed with the SEC on February 7, 2020. The results of operations for the first three months of fiscal year 2020 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.

Risks and Uncertainties

We are subject to risks and uncertainties as a result of the COVID-19 pandemic. The extent of the impact of the COVID-19 pandemic on the Company's business is highly uncertain and difficult to predict, as the response to the pandemic is in its incipient stages and information is rapidly evolving. The Company's customers are diverting resources to treat COVID-19 patients and deferring elective surgical procedures, both of which are likely to impact hospitals' abilities to meet their obligations, including to the Company. Furthermore, capital markets and economies worldwide have also been negatively impacted by the COVID-19 pandemic, and it is possible that it could cause a local and/or global economic recession. Such economic disruption could have a material adverse effect on our business as hospitals curtail and reduce capital and overall spending. Policymakers around the globe have responded with fiscal policy actions to support the healthcare industry and economy as a whole. The magnitude and overall effectiveness of these actions remains uncertain.

The severity of the impact of the COVID-19 pandemic on the Company's business will depend on a number of factors, including, but not limited to, the duration and severity of the pandemic and the extent and severity of the impact on the Company's customers, all of which are uncertain and cannot be predicted. The Company's future results of operations and liquidity could be adversely impacted by delays in payments of outstanding receivable amounts beyond normal payment terms, supply chain disruptions and uncertain demand, and the impact of any initiatives or programs that the Company may undertake to address financial and operations challenges faced by its customers. As of the date of issuance of these condensed consolidated financial statements, the extent to which the COVID-19 pandemic may materially impact the Company's financial condition, liquidity, or results of operations is uncertain.

6

Recently Adopted Accounting Pronouncements

Credit Losses

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, Measurement of Credit Losses on Financial Instruments (Topic 326) (“Topic 326”), which replaces existing incurred loss impairment guidance and establishes a single allowance framework for financial assets carried at amortized cost. The Company adopted Topic 326 on January 1, 2020, using a modified retrospective 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. The cumulative-effect adjustment recorded on January 1, 2020, is not material. Please see the description of the Company’s “Credit Losses” accounting policy in the “Significant Accounting Policies” section below.

Significant Accounting Policies

With the exception of the change for the accounting of credit losses as a result of the adoption of Topic 326, there have been no new or material changes to the significant accounting policies discussed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019, that are of significance, or potential significance, to the Company.

Credit Losses

Trade accounts receivable. The allowance for doubtful accounts is based on the Company’s assessment of the collectibility of customer accounts. The Company regularly reviews the allowance by considering factors such as historical experience, credit quality, the age of the accounts receivable balances, and current economic conditions that may affect a customer’s ability to pay. As of March 31, 2020, the Company recognized a year-to-date bad debt expense of $3.2 million.

Net investment in sales-type leases. The Company enters into sales-type leases with certain qualified customers to purchase its systems. Sales-type leases have terms that generally range from 24 to 84 months and are usually collateralized by a security interest in the underlying assets. The allowance for loan loss is based on the Company's assessment of current expected lifetime loss on lease receivables. The Company regularly reviews the allowance by considering factors such as historical experience, credit quality, the age of the lease receivable balances, and current economic conditions that may affect a customer's ability to pay. Lease receivables are considered past due 90 days after invoice.

The Company manages the credit risk in net investment in sales-type leases using a number of factors, including, but not limited to the following: credit score; size of operations; profitability, liquidity, and debt ratios; payment history; and past due amounts. The Company uses credit scores obtained from external providers as a key credit quality indicator for the purposes of determining credit quality. The following table presents credit quality by class of net investment in sales-type lease as of March 31, 2020. The following table summarizes the amortized cost basis by year of origination and credit quality indicator as of March 31, 2020 (in millions):

	2020		2019		2018		2017		2016		Prior		Net Investment
Credit Rating:
High	$	27.0	$	52.2	$	20.4	$	10.9	$	3.3	$	3.0	$	116.8
Moderate	27.3		37.7		25.3		10.6		5.2		0.3		106.4
Low	4.1		1.2		2.0		1.1		1.9		0.1		10.4
Total	$	58.4	$	91.1	$	47.7	$	22.6	$	10.4	$	3.4	$	233.6

As of March 31, 2020, the Company recognized a year-to-date credit loss of $0.9 million related to net investment in sales-type leases.

Available-for-sale debt securities. The Company's investment portfolio at any point in time contains investments in U.S. treasury and U.S. government agency securities, taxable and tax-exempt municipal notes, corporate notes and bonds, commercial paper, non-U.S. government agency securities, cash deposits, and money market funds. The Company segments its portfolio based on the underlying risk profiles of the securities and have a zero loss expectation for U.S. treasury and U.S. government agency securities. The Company regularly reviews the securities in an unrealized loss position and evaluates the current expected credit loss by considering factors such as historical experience, market data, issuer-specific factors, and current economic conditions. As of March 31, 2020, the Company recognized a year-to-date credit loss of $1.2 million related to available-for-sales debt securities.

7

The Company's exposure to credit losses may increase if its customers are adversely affected by changes in healthcare laws, coverage, and reimbursement, economic pressures or uncertainty associated with local or global economic recessions, disruption associated with the current COVID-19 pandemic, or other customer-specific factors. Although the Company has historically not experienced significant credit losses, it is possible that there could be a material adverse impact from potential adjustments of the carrying amount of lease and trade receivables as hospital's cash flows are impacted by their response to the COVID-19 pandemic and deferral of elective surgical procedures.

NOTE 3. FINANCIAL INSTRUMENTS

Cash, Cash Equivalents, and Investments

The following tables summarize the Company’s cash and available-for-sale marketable securities’ amortized cost, gross unrealized gains, gross unrealized losses, and fair value by significant investment category reported as cash and cash equivalents, short-term investments, or long-term investments as of March 31, 2020, and December 31, 2019 (in millions):

											Reported as:
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Allowance for Credit Loss		Fair Value		Cash and Cash Equivalents		Short- term Investments		Long- term Investments
March 31, 2020
Cash	$	450.3	$	—	$	—	$	—	$	450.3	$	450.3	$	—	$	—
Level 1:
Money market funds	773.5		—		—		—		773.5		773.5		—		—
U.S. treasuries	1,891.0		39.9		—		—		1,930.9		—		832.7		1,098.2
Subtotal	2,664.5		39.9		—		—		2,704.4		773.5		832.7		1,098.2
Level 2:
Commercial paper	148.7		—		—		—		148.7		—		148.7		—
Corporate debt securities	2,086.0		11.1		(7.5)		(1.3)		2,088.3		—		839.4		1,248.9
U.S. government agencies	414.5		4.0		—		—		418.5		—		185.9		232.6
Non-U.S. government securities	4.5		—		—		—		4.5		—		4.5		—
Municipal securities	80.9		0.6		(0.1)		—		81.4		—		18.4		63.0
Subtotal	2,734.6		15.7		(7.6)		(1.3)		2,741.4		—		1,196.9		1,544.5
Total assets measured at fair value	$	5,849.4	$	55.6	$	(7.6)	$	(1.3)	$	5,896.1	$	1,223.8	$	2,029.6	$	2,642.7

8

									Reported as:
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		Cash and Cash Equivalents		Short- term Investments		Long- term Investments
December 31, 2019
Cash	$	413.1	$	—	$	—	$	413.1	$	413.1	$	—	$	—
Level 1:
Money market funds	726.8		—		—		726.8		726.8		—		—
U.S. treasuries	1,935.8		9.7		(0.4)		1,945.1		—		890.8		1,054.3
Subtotal	2,662.6		9.7		(0.4)		2,671.9		726.8		890.8		1,054.3
Level 2:
Commercial paper	165.1		—		—		165.1		25.5		139.6		—
Corporate debt securities	2,096.1		16.8		(0.2)		2,112.7		—		798.5		1,314.2
U.S. government agencies	418.3		1.1		(0.2)		419.2		—		209.6		209.6
Non-U.S. government securities	4.5		—		—		4.5		—		4.5		—
Municipal securities	58.4		0.3		—		58.7		2.2		11.1		45.4
Subtotal	2,742.4		18.2		(0.4)		2,760.2		27.7		1,163.3		1,569.2
Total assets measured at fair value	$	5,818.1	$	27.9	$	(0.8)	$	5,845.2	$	1,167.6	$	2,054.1	$	2,623.5

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 March 31, 2020 (in millions):

	Amortized Cost		Fair Value
Mature in less than one year	$	2,020.0	$	2,029.6
Mature in one to five years	2,605.6		2,642.7
Total	$	4,625.6	$	4,672.3

Actual maturities may differ from contractual maturities, because certain borrowers have the right to call or prepay certain obligations. Realized gains and losses, net of tax, 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 net 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 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 income/(loss) in stockholders’ equity and reclassifies the amount into earnings in the same period in which the hedged transaction affects earnings. The amounts reclassified to revenue and expenses related to the hedged transactions and the ineffective portions of cash flow hedges were not material for the periods presented.

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.

9

These derivative instruments are used to hedge against balance sheet foreign currency exposures. The related gains and losses were as follows (in millions):

	Three Months Ended March 31, 2020
	2020		2019
Recognized gains in interest and other income, net	$	3.6	$	1.7
Foreign exchange losses related to balance sheet re-measurement	$	(8.6)	$	(1.8)

The notional amounts for derivative instruments provide one measure of the transaction volume. Total gross notional amounts (in USD) for outstanding derivatives and the aggregate gross fair value at the end of each period were as follows (in millions):

	Derivatives Designated as Hedging Instruments				Derivatives Not Designated as Hedging Instruments
	March 31, 2020		December 31, 2019		March 31, 2020		December 31, 2019
Notional amounts:
Forward contracts	$	160.2	$	154.5	$	225.7	$	227.2
Gross fair value recorded in:
Prepaids and other current assets	$	2.5	$	1.3	$	3.0	$	2.2
Other accrued liabilities	$	0.4	$	0.5	$	1.1	$	0.7

NOTE 4. BALANCE SHEET DETAILS AND OTHER FINANCIAL INFORMATION

Balance Sheet Details

The following tables provide details of selected balance sheet line items (in millions):

	As of
Inventory	March 31, 2020		December 31, 2019
Raw materials	$	223.2	$	211.0
Work-in-process	67.7		75.9
Finished goods	329.4		308.6
Total inventory	$	620.3	$	595.5

	As of
Other accrued liabilities–short-term	March 31, 2020		December 31, 2019
Taxes payable	$	34.6	$	37.9
Litigation-related accruals	4.5		5.8
Current portion of deferred purchase consideration payments	41.3		35.7
Current portion of contingent consideration	37.2		44.5
Other accrued liabilities	201.0		193.4
Total other accrued liabilities–short-term	$	318.6	$	317.3

10

	As of
Other long-term liabilities	March 31, 2020		December 31, 2019
Income taxes–long-term	$	273.7	$	258.6
Deferred revenue–long-term	28.8		27.4
Other long-term liabilities	112.2		132.3
Total other long-term liabilities	$	414.7	$	418.3

Supplemental Cash Flow Information

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

	Three Months Ended March 31,
	2020		2019
Equipment transfers, including operating lease assets, from inventory to property, plant, and equipment	$	45.4	$	41.9
Deferred payments and contingent consideration related to business combinations	$	4.1	$	64.7

NOTE 5. REVENUE AND CONTRACT ACQUISITION COSTS

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

	Three Months Ended March 31,
U.S.	2020		2019
Instruments and accessories	$	444.4	$	407.4
Systems	198.8		160.7
Services	138.4		123.5
Total U.S. revenue	$	781.6	$	691.6
Outside of U.S. (“OUS”)
Instruments and accessories	$	173.1	$	144.9
Systems	84.5		86.8
Services	60.3		50.4
Total OUS revenue	$	317.9	$	282.1
Total
Instruments and accessories	$	617.5	$	552.3
Systems	283.3		247.5
Services	198.7		173.9
Total revenue	$	1,099.5	$	973.7

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. In addition, non-lease elements associated with the Company's lease arrangements are primarily comprised of service contracts that will be satisfied and recognized as revenue in future periods. The transaction price allocated to the remaining performance obligations and the non-lease elements associated with lease arrangements was $1,501 million as of March 31, 2020. The remaining performance obligations are expected to be satisfied over the term of the individual sales arrangements, which generally are 5 years. Service revenue associated with the lease arrangements will generally be recognized over the service period, which generally coincides with the lease term.

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Contract Assets and Liabilities

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

	As of
	March 31, 2020		December 31, 2019
Contract assets	$	28.1	$	20.8
Deferred revenue	$	366.2	$	365.2

The Company invoices its customers based on the billing schedules in its sales arrangements. Payments are generally due 30 days from date of invoice. Contract assets for the periods presented primarily represent the difference between the revenue that was recognized based on the relative standalone selling price of the related performance obligations satisfied and the contractual billing terms in the arrangements. Deferred revenue for the periods presented primarily relates to service contracts where the service fees are billed up-front, generally quarterly or annually, prior to those services having been performed. The associated deferred revenue is generally recognized over the term of the service period. The Company did not have any significant impairment losses on its contract assets for the periods presented.

During the three months ended March 31, 2020, the Company recognized $137.0 million of revenue that was included in the deferred revenue balance as of December 31, 2019. During the three months ended March 31, 2019, the Company recognized $132.2 million of revenue that was included in the deferred revenue balance as of December 31, 2018.

Intuitive System Leasing

The following table presents revenue from Intuitive System Leasing arrangements (in millions):

	Three Months Ended March 31,
	2020		2019
Sales-type lease revenue	$	55.0	$	4.6
Operating lease revenue	$	39.1	$	20.4

Assets Recognized from the Costs to Obtain a Contract with a Customer

The Company has determined that certain sales incentives provided to the Company’s sales team are required to be capitalized when the Company expects to generate future economic benefits from the related revenue-generating contracts subsequent to the initial capital sales transaction. When determining the economic life of the contract acquisition assets recognized, the Company considers historical service renewal rates, expectations of future customer renewals of service contracts, and other factors that could impact the economic benefits that the Company expects to generate from the relationship with its customers. The costs capitalized as contract acquisition costs included in intangible and other assets, net in the Condensed Consolidated Balance Sheets were $51.1 million and $51.5 million as of March 31, 2020, and December 31, 2019, respectively. The Company did not incur any impairment losses during the periods presented.

NOTE 6. LEASES

Lessor Information

Sales-type Leases. Lease receivables relating to sales-type lease arrangements are presented on the Condensed Consolidated Balance Sheets as follows (in millions):

	As of
	March 31, 2020		December 31, 2019
Gross lease receivables	$	233.6	$	191.9
Unearned income	(10.1)		(10.1)
Allowance for credit loss	(2.2)		(1.2)
Net investment in sales-type leases	$	221.3	$	180.6
Reported as:
Prepaids and other current assets	$	72.9	$	63.1
Intangible and other assets, net	148.4		117.5
Total, net	$	221.3	$	180.6

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Contractual maturities of gross lease receivables at March 31, 2020, are as follows (in millions):

Fiscal Year	Amount
2020	$	54.9
2021	65.5
2022	48.6
2023	33.5
2024	26.3
2025 and thereafter	4.8
Total	$	233.6

NOTE 7. GOODWILL AND INTANGIBLE ASSETS

Acquisitions in 2020

Orpheus Medical

In February 2020, the Company acquired Orpheus Medical Ltd. and its wholly-owned subsidiaries (“Orpheus Medical”) to deepen and expand our integrated informatics platform (the “Orpheus Medical Acquisition”). Orpheus Medical provides hospitals with information technology connectivity, as well as expertise in processing and archiving surgical videos.

Acquisitions in 2019

Chindex

During the first quarter of 2019, the Company’s majority-owned Joint Venture with Fosun Pharma acquired certain assets from Chindex and its affiliates, a subsidiary of Fosun Pharma, including distribution rights, customer relationships, and certain personnel on January 5, 2019, which collectively met the definition of a business. Chindex was the Company’s distributor of da Vinci products and services in China. The transaction enhances the Company’s ability to serve patients, surgeons, and hospitals in China.

The total purchase consideration of $66.0 million, as of the acquisition date, included a contingent consideration liability of $64.7 million and an upfront cash payment of $1.3 million. The amount and timing of the future contingent consideration payments are based upon the underlying performance of the business in 2019 and 2020. As of the acquisition date, the estimated total undiscounted contingent consideration was approximately $81 million. The undiscounted contingent consideration has decreased by approximately $9 million as of March 31, 2020, 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 revenues in 2019 and projected future revenues in 2020, and (2) the discount rate used to calculate the present value of the milestone payments. On each reporting period until the contingent consideration is settled, the Company will re-measure the contingent consideration liability and record changes in fair value within selling, general and administrative expenses. For the three months ended March 31, 2020, the contingent consideration liability changed due to payments of $19.3 million and a re-measurement benefit of $1.4 million. Changes to the contingent consideration liability can result from adjustments to discount rates, accretion due to the passage of time, or changes in estimates in the performance of the business. The assumptions related to determining the fair value of contingent consideration include a significant amount of judgment, and any changes in the underlying estimates could have a material impact on the amount of contingent consideration adjustment recorded in any given period.

Schölly

During the third quarter of 2019, the Company acquired certain assets and operations from Schölly Fiberoptic GmbH (“Schölly”), including manufacturing process technology, a non-compete agreement, certain personnel, and net tangible assets on August 31, 2019, which collectively met the definition of a business. The Company believes that the transaction strengthens the Company’s supply chain and manufacturing capacity for imaging products used in the Company's da Vinci systems. The total purchase consideration of $101.4 million consisted of an initial cash payment of $34.4 million and deferred cash payments totaling approximately $67.0 million, of which $37.5 million continues to be deferred as of March 31, 2020. The timing of future payments is based upon achieving certain integration steps, which occur during 2020 and are expected to be completed around the end of 2020.

13

The Company preliminarily recorded $10.7 million of net tangible assets, which included $6.7 million of inventory and $1.4 million of cash, $31.0 million of intangible assets, and $59.7 million of residual goodwill. Intangible assets included manufacturing process technology of $28.0 million and non-compete provisions of $3.0 million, which are being amortized over a weighted average period of 6.6 years. The allocation of purchase consideration is considered preliminary with provisional amounts primarily related to working capital. Goodwill primarily consists of the manufacturing and other synergies of the combined operations and the value of the assembled workforce. The majority of goodwill is not deductible for income tax purposes.

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

Goodwill

The following table summarizes the changes in the carrying amount of goodwill (in millions):

	Amount
Balance at December 31, 2019	$