Accuray Incorporated — Q2 FY2019 Form 10-Q
Reporting period: Three and six months ended December 31, 2018. Accuray develops and sells CyberKnife and TomoTherapy/Radixact radiation oncology systems and related services. Financial statements are unaudited.
Financial performance and liquidity
| Metric | Three months ended Dec. 31, 2018 | Six months ended Dec. 31, 2018 |
|---|---|---|
| Revenue | $102.3 million, up 2% reported | $198.1 million, up 4% reported |
| Gross profit / gross margin | $38.4 million / 37.5% | $76.3 million / 38.5% |
| Operating loss | $0.9 million | $5.6 million |
| Net loss | $4.6 million; $0.05 per share | $13.8 million; $0.16 per share |
| Operating cash flow | Cash used of $31.6 million for the six months |
- At December 31, cash and cash equivalents were $59.4 million; restricted cash was $5.9 million. Current assets were $289.2 million versus current liabilities of $169.0 million.
- Debt carrying value was $136.8 million, all classified as long-term. Principal outstanding was $152.5 million: $85.0 million convertible notes, $45.0 million term loan and $22.5 million revolving facility.
- Six-month cash, cash equivalents and restricted cash declined $28.2 million to $65.4 million. Investing activities used $2.2 million; financing provided $5.9 million.
Material changes versus prior comparable periods
- Reported revenue rose, but gross profit declined 2% in both the quarter and half-year. Product gross profit fell, primarily due to sales mix and higher freight costs; service gross profit was broadly flat.
- Radixact revenue growth was offset by lower CyberKnife system revenue. For the six months, product revenue increased $3.5 million, including a $21.6 million increase in Radixact revenue offset by a $17.1 million decline in CyberKnife unit sales.
- Operating cash use increased to $31.6 million from $13.7 million a year earlier, driven largely by higher receivables and inventory and reductions in accrued compensation and customer advances.
- Six-month net loss improved slightly, while general and administrative expense increased $3.0 million, including $3.5 million of bad-debt expense. The company recorded a $3.3 million allowance for credit losses on financing receivables.
- Reported period comparisons are affected by adoption of ASC 606 on July 1, 2018; prior-year periods were not restated. Without ASC 606, 2018 revenue would have been $97.2 million for the quarter and $174.3 million for the six months, and net losses would have been $9.6 million and $27.2 million, respectively. Accordingly, reported year-over-year growth and loss comparisons are not on a consistent accounting basis.
Outlook, management commentary and risks
- Management said cash resources, available debt facilities, the business plan and revenue prospects should fund operations for at least the next 12 months. No specific revenue or earnings guidance is provided.
- Backlog was $482.2 million at December 31, versus $478.5 million at June 30. Six-month gross orders increased to $161.6 million, but net orders declined to $94.1 million from $103.7 million as age-outs and cancellations increased. Management cautions that backlog may be cancelled, age out or fail to convert to revenue; it estimates 15%–20% of contracts may never result in revenue due to cancellation.
- Remaining performance obligations were $796.0 million. Management estimated 30%–40% of the $724.0 million excluding long-term warranty and service would be recognized in the next 12 months, with timing subject to change.
- A cost-saving initiative announced in October targeted approximately 5% of the global workforce. The quarter included $1.0 million of restructuring charges; $0.2 million remained accrued at December 31.
- In January 2019, the company announced a China joint venture in which Accuray’s subsidiary initially holds 49% and its partner 51%; financial impact was still under evaluation.
- Key risks include long and variable sales, construction and installation cycles; cancellations and delayed customer financing; international currency and regulatory exposure; U.S.–China tariffs; competition and reimbursement uncertainty; dependence on single-source suppliers; and debt covenants and refinancing needs. The company reported compliance with credit facility covenants at December 31.
- Management reported no probable and estimable litigation losses. The risk-factor discussion notes one open TomoTherapy recall and two additional voluntarily opened CyberKnife recalls; it reported no serious adverse health consequences in connection with recalls to date.
Most important facts for investors to verify
- How much reported revenue growth reflects ASC 606 timing changes rather than underlying demand, and how comparable revenue develops on a consistent basis.
- Whether the backlog converts to shipments and revenue, given $56.2 million of six-month age-outs and $8.3 million of cancellations.
- Cash burn, receivables collection and inventory levels, including the impact of the credit-loss allowance and bad-debt expense.
- Debt covenant headroom, variable-rate interest exposure, and the ability to meet obligations while funding operations.
- China joint venture execution and the effects of tariffs, regulatory approvals and currency movements on orders and margins.
- Progress and potential costs of the workforce reduction and product recalls.