Business context and reporting period
Accuray designs, sells and services CyberKnife and TomoTherapy/Radixact radiation-therapy systems. This 10-Q covers the fiscal third quarter and nine months ended March 31, 2020, filed May 8, 2020. Although the request metadata says “2019 Q3,” the filing is for fiscal 2020 Q3; comparative figures are for the periods ended March 31, 2019. Dollar amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Three months ended Mar. 31, 2020 | Prior year | Nine months ended Mar. 31, 2020 | Prior year |
|---|---|---|---|---|
| Revenue | $99.5 | $103.2 | $288.0 | $301.4 |
| Gross profit / margin | $39.1 / 39.3% | $40.5 / 39.2% | $110.0 / 38.2% | $116.7 / 38.7% |
| Operating income (loss) | $8.0 | $2.9 | $7.3 | $(2.7) |
| Net income (loss) | $2.6 | $(1.2) | $4.0 | $(15.0) |
| Diluted EPS | $0.03 | $(0.01) | $0.04 | $(0.17) |
- Quarterly revenue declined 4%; nine-month revenue declined 4%. Lower product revenue and service revenue drove the declines.
- Quarterly operating income improved, while nine-month operating results turned positive. Lower operating expenses contributed; nine-month expenses fell 14% to $102.7 million.
- Nine-month operating cash flow was $(20.3) million, improved from $(38.7) million. Inventory growth of $23.8 million and lower accrued liabilities were significant cash uses.
- At March 31, cash and cash equivalents were $89.7 million, with restricted cash bringing total cash and restricted cash to $92.6 million. Current assets were $352.0 million and current liabilities $180.4 million.
- Debt carrying value was $190.7 million, up from $159.8 million at June 30, 2019; principal outstanding totaled $204.8 million. The balance included $85.0 million of 3.75% convertible notes, $89.1 million term-loan principal and $30.7 million revolving-credit borrowings.
- Backlog was $569.9 million, up from $495.6 million at June 30, 2019. Nine-month net orders rose to $205.5 million from $153.9 million; backlog is not a GAAP measure and may not convert to revenue.
Material changes and unusual items
- Results included a non-cash $13.0 million gain on contribution of two systems for Accuray’s 49% interest in its China joint venture. The JV contributed $6.1 million of quarterly and $12.6 million of nine-month revenue; some profit on sales to the JV was eliminated pending resale to end customers.
- Product gross profit was pressured by sales mix and higher freight costs. Nine-month service gross profit declined, partly due to increased parts consumption and write-offs associated with a parts quality-control initiative.
- Inventory rose to $136.3 million from $120.8 million at June 30, 2019. Accuray attributed operating cash use in part to slower-than-anticipated backlog conversion.
- Operating lease accounting adoption added $30.1 million of right-of-use assets and lease liabilities to the March 31 balance sheet.
Outlook, risks and contingencies
- Management said COVID-19 had delayed deliveries and installations and expected further delays into fiscal Q4 and beyond. The company could not reliably estimate the duration or financial impact.
- Accuray expected delays in China’s tender process to defer revenue recognition on systems associated with 50 Class A licenses, with approximate system revenue value of $115 million, until fiscal Q1 2021. This was an expectation, not guaranteed revenue.
- Management believed cash, available debt facilities and anticipated cash flows would fund operations for at least 12 months. This assessment depended on uncertain business and revenue prospects.
- The company was in compliance with credit-facility covenants at March 31, 2020, but warned that future noncompliance could accelerate debt repayment. Covenant tests include minimum revenue and cash requirements and a fixed-charge coverage ratio.
- Other key risks include customer payment delays/defaults, backlog cancellations and age-outs, supply-chain and manufacturing disruption, foreign-exchange and tariff exposure, and competition. The filing reported no probable and reasonably estimable losses from current litigation.
- No specific full-year revenue or earnings guidance was provided. The company reported no material change in internal control over financial reporting and said disclosure controls were effective.
Important facts for investors to verify
- Whether COVID-19 disruptions, customer deferrals and payment requests materially affect deliveries, installations, collections and backlog conversion.
- Progress of the China tender process and the timing and collectability of revenue tied to the 50 Class A licenses; assess the JV’s contribution separately from core results.
- Cash burn, inventory conversion, available borrowing capacity and covenant headroom, including the portion of cash held by foreign subsidiaries.
- Backlog quality: cancellation and age-out trends, customer readiness for installation, and the distinction between reported backlog and revenue that is assured.
- Debt service and refinancing exposure, including variable-rate borrowing, the 2022 convertible notes and potential effects of covenant breaches.