Accuray Incorporated — Form 10-Q Summary
Reporting period: Three months ended September 30, 2019, Accuray’s first quarter of fiscal 2020 (not calendar 2019 Q1). Comparative period: three months ended September 30, 2018. Unaudited. The company develops, sells, and services CyberKnife and TomoTherapy/Radixact radiation oncology systems.
Key financial results
| Metric | Quarter ended Sep. 30, 2019 | Prior-year quarter | Change |
|---|---|---|---|
| Revenue | $89.6 million | $95.8 million | Down 7% |
| Product revenue | $37.6 million | $41.5 million | Down 9% |
| Service revenue | $52.0 million | $54.3 million | Down 4% |
| Gross profit | $32.9 million | $37.9 million | Down 13%; gross margin about 36.8% vs. 39.5% |
| Operating loss | $4.3 million | $4.7 million | Loss narrowed by $0.4 million |
| Net loss | $9.4 million | $9.2 million | Loss increased $0.2 million; $0.11 per share in both periods |
| Operating cash flow | $(24.6) million | $(17.8) million | Cash use increased $6.8 million |
- Margins and costs: Service gross profit fell $4.0 million, primarily due to increased service-part consumption. Product gross profit declined $1.0 million, reflecting lower system unit volume. Operating expenses fell $5.3 million, mainly because general and administrative expense declined $5.0 million, including lower bad-debt expense. Other expense increased to $4.4 million, principally due to higher interest expense.
- Cash and liquidity: Cash and cash equivalents were $80.9 million at September 30, versus $76.8 million at June 30; cash, cash equivalents, and restricted cash totaled $87.9 million. Working capital was approximately $165.1 million ($341.2 million current assets less $176.1 million current liabilities). Management stated that cash, available debt facilities, its business plan, and revenue prospects should fund operations for at least 12 months.
- Debt: Debt carrying value was $188.5 million, compared with $159.8 million at June 30; aggregate principal was $205.3 million. It comprised $85.0 million of 3.75% convertible notes due 2022, $31.2 million under the revolving facility, and $89.1 million of term-loan principal. In August 2019, Accuray borrowed a new $25 million term-loan tranche; the term-loan rate increased to 6.75% plus 90-day LIBOR. The company reported compliance with amended credit covenants at quarter-end.
- Balance sheet: Total assets were $463.7 million and total liabilities $422.8 million; stockholders’ equity was $41.0 million. Inventory was $129.2 million, up from $120.8 million at June 30.
Material changes and operating indicators
- Gross orders increased to $78.5 million from $61.4 million, but net orders were $37.4 million after $35.9 million of age-outs, $1.8 million of cancellations, and $3.5 million of currency and other impacts. Backlog was $495.0 million, slightly below $495.6 million at June 30 and above $461.9 million a year earlier. Backlog is not a GAAP measure and may not convert to revenue.
- Remaining performance obligations were $881.1 million. The filing estimates that about 24% of contracts may never produce revenue because of cancellations; timing also depends on shipment, site readiness, installation, and product availability.
- Asia Pacific revenue increased to $14.1 million from $12.2 million; revenue declined in the Americas, EMEA, and Japan. The quarter included $3.8 million of sales to the China joint venture, including a $2.8 million CyberKnife system sale.
- Cash used in operations reflected the net loss and working-capital movements, including $10.5 million invested in inventory and a $14.1 million reduction in accrued liabilities. Financing cash inflows of $27.5 million, largely debt proceeds, offset most of the operating and investing outflows.
Outlook, commentary, and risks
- Management gave no numerical revenue or earnings guidance in the filing. It expects to have sufficient resources for at least the next 12 months, while noting that additional financing might be needed if cash proves insufficient and may not be available on acceptable terms.
- Accuray expected to ship Radixact Synchrony motion-tracking technology to selected clinical evaluation sites through the end of 2019, with a broader commercial launch anticipated in early 2020. The China joint venture had begun selling products; the company expected to complete its initial in-kind contribution by December 31, 2019. One of two systems was contributed in October, after quarter-end.
- Key risks include continued operating losses and cash burn; substantial debt, variable-rate borrowing, and financial covenants; long sales, construction, and installation cycles; backlog cancellations and age-outs; competition and reimbursement uncertainty; foreign-exchange movements and U.S.-China tariffs; dependence on single-source suppliers; product quality, regulatory, and recall risks; and execution risks related to the China joint venture. The company said three fiscal 2019 CyberKnife recalls were completed, with two closure requests still under FDA review.
- There were no probable and reasonably estimable losses identified for current legal proceedings. Accuray adopted lease accounting in the quarter, recording operating lease right-of-use assets and liabilities; it reported no material financial-statement impact from adopting the other accounting standards discussed.
Important facts for investors to verify
- Whether the decline in revenue and service gross profit persists, and whether service-part consumption and inventory levels normalize.
- Whether operating cash use can moderate without continued reliance on new borrowing; monitor cash availability, debt costs, covenant headroom, and the effect of variable interest rates.
- How much reported backlog and remaining performance obligations convert to revenue, particularly given age-outs, cancellations, installation delays, and the stated historical cancellation risk.
- Whether the China joint venture secures customer tenders and installations, completes Accuray’s planned contribution, and generates collectible revenue and returns.
- Progress on Radixact Synchrony commercialization and the status of FDA review of the two recall closure requests.
- Reconcile share-count disclosures before relying on them: the balance sheet and stockholders’ equity statement report different September 30, 2019 outstanding-share counts; the cover page gives 89,024,611 shares as of November 1, 2019.