Accuray Incorporated — Form 10-Q Summary
Reporting period: Three months ended September 30, 2020, Accuray’s first quarter of fiscal 2021 (not calendar 2020 Q1). The financial statements are unaudited. Comparisons are with the three months ended September 30, 2019 unless noted.
Business context and financial performance
Accuray develops and sells CyberKnife and TomoTherapy/Radixact radiation-therapy systems and provides related services. Figures below are in millions of dollars except per-share amounts and percentages.
| Metric | Q1 FY2021 | Q1 FY2020 | Change |
|---|---|---|---|
| Product revenue | $31.3 | $37.6 | -17% |
| Service revenue | $54.1 | $52.0 | +4% |
| Total revenue | $85.3 | $89.6 | -5% |
| Gross profit / margin | $35.4 / 41.5% | $32.9 / 36.8% | Margin +4.7 pts |
| Operating income (loss) | $5.5 | ($4.3) | Improved $9.7 |
| Net income (loss) | $0.4 | ($9.4) | Improved $9.8 |
| Diluted earnings (loss) per share | $0.00 | ($0.11) | — |
| Cash used in operating activities | $2.9 | $24.6 | Use reduced $21.8 |
Gross margin improved primarily on higher service gross profit, including lower travel expense and reduced service-parts consumption; lower system sales weighed on product gross profit. Operating expenses fell 20% to $29.9 million, including lower selling and marketing expenses, partly reflecting trade-show timing and pandemic-related travel limits.
Cash, debt and liquidity
- At September 30, cash and cash equivalents were $90.0 million; restricted cash was $6.8 million. Cash, cash equivalents and restricted cash totaled $96.8 million, down $13.1 million during the quarter.
- Current assets were $332.5 million and current liabilities $169.1 million. Inventory was $141.0 million, up $6.6 million from June 30.
- Debt carrying value was $179.7 million: $27.3 million revolving credit facility, $77.4 million convertible notes and $75.0 million term loan. Principal outstanding totaled $192.3 million. The company prepaid $10.0 million of term-loan principal in July and classified $6.2 million of debt as current.
- Operating cash use was $2.9 million; investing cash use was $0.6 million; financing cash use was $11.2 million, primarily reflecting the term-loan prepayment. Operating cash use improved from $24.6 million a year earlier, partly due to $18.0 million of receivables collections.
- Management said available cash, debt facilities, its business plan and revenue prospects were expected to fund operations for at least 12 months. The company was in compliance with debt covenants at quarter-end, following July 2020 covenant amendments; future compliance is uncertain.
Changes, outlook and material risks
- Revenue declined as product revenue fell on delayed order conversion. Service revenue increased, including from installations, spare parts and upgrades.
- Gross orders fell to $50.5 million from $78.5 million; net orders were $23.6 million versus $39.0 million. Backlog was $597.3 million, down from $602.7 million at June 30 but above $495.0 million a year earlier. Management cautions that backlog is not a GAAP measure or a reliable guarantee of future revenue; historical cancellations suggest approximately 23% of contracts may never produce revenue.
- COVID-19 disrupted customer operations, deliveries, installations, travel and the sales cycle, and contributed to delayed payments and customer requests for extended terms or temporary service-payment suspensions. Accuray expected delivery and installation delays to continue through fiscal 2021 and said the pandemic’s financial impact could not be reasonably estimated.
- For China, systems were named in 50 Class A user licenses awarded in October 2019, with estimated system revenue value of $115 million as of September 30, 2020. Management expected conversion to begin in fiscal Q2 and continue through the second half of fiscal 2021, subject to tender-process and pandemic delays. A further 24 licenses were awarded in October 2020; their revenue impact was still under evaluation.
- Management reported remaining performance obligations of $984.9 million. It estimated 21%–28% of the $906.2 million portion other than long-term warranty and service obligations would be recognized in the next 12 months; timing depends on shipment, facility readiness, installation and product availability.
- Cost actions included executive salary reductions through December 2020, elimination of board retainers and most fiscal 2020 bonus-plan awards, a workforce reduction of approximately 3%, and suspension of the 401(k) match through December 2020.
- Unusual item: Accuray recognized $1.4 million of non-cash revenue and $0.2 million of associated cost for a system upgrade contributed to its 49%-owned China joint venture for training use. The filing also reports a $28,000 equity-method investment loss.
- Key risks include further pandemic-related delays, backlog age-outs or cancellations; customer credit and collections; covenant breaches that could accelerate debt; substantial indebtedness and refinancing needs; supply-chain and single-source supplier exposure; international, foreign-exchange and tariff risks; and regulatory, reimbursement and competitive pressures. Management reported no probable and reasonably estimable material litigation losses.
Important facts for investors to verify
- Whether China Class A license awards convert into tenders, shipments, installations and recognized revenue on the anticipated schedule.
- Whether COVID-19-related customer delays, payment issues, cancellations and backlog age-outs worsen, and the effect on cash flow.
- Future covenant headroom and compliance, available borrowing capacity, debt maturities and refinancing requirements.
- Whether improved gross margin and lower operating expenses are sustainable as travel and service activity normalize and system deliveries change.
- The collectability of receivables and recoverability of inventory, particularly given pandemic-related customer stress and elevated inventory.