Accuray Incorporated — Form 10-Q Summary
Reporting period: Three months ended September 30, 2018, the first quarter of fiscal 2019. The filing is unaudited. Unless stated otherwise, amounts are in U.S. dollars.
Business context and financial performance
Accuray designs, sells and supports CyberKnife and TomoTherapy/Radixact radiation therapy systems, as well as related services. The company operates in one reportable segment and sells internationally.
| Metric | Q1 FY2019 | Q1 FY2018 | Change |
|---|---|---|---|
| Product revenue | $41.5 million | $38.9 million | +7% |
| Service revenue | $54.3 million | $52.0 million | +4% |
| Total revenue | $95.8 million | $91.0 million | +5% |
| Gross profit / margin | $37.9 million / 39.5% | $38.1 million / 41.9% | Margin down about 2.4 percentage points |
| Operating expenses | $42.6 million | $40.2 million | +6% |
| Operating loss | $(4.7) million | $(2.1) million | Loss widened |
| Net loss | $(9.2) million | $(9.4) million | Loss narrowed by $0.2 million |
| Basic and diluted loss per share | $(0.11) | $(0.11) | Unchanged |
Product revenue growth was driven primarily by higher Radixact sales, partly offset by lower CyberKnife system sales. Service revenue benefited from upgrades, a larger installed base and spare-part sales. Service gross profit declined as costs rose, including service parts consumption, inventory provisions, freight and upgrade costs. General and administrative expense increased $4.3 million, primarily due to $3.7 million of bad-debt expense. Selling and marketing expense fell $1.7 million, mainly on lower consulting costs and the timing of trade shows and advertising.
Cash flow and liquidity: Operating cash use was $17.8 million, versus $13.0 million in the prior-year quarter; investing cash use was $1.6 million and financing cash use was $2.4 million. Cash, cash equivalents and restricted cash declined $22.2 million to $71.3 million, including $68.5 million of unrestricted cash. The filing attributes working-capital use principally to a $10.2 million inventory increase and an $8.6 million decrease in accrued liabilities, partly offset by higher accounts payable. Management said available cash, debt facilities and expected cash flows should fund operations for at least 12 months, while noting that further financing might be needed if resources prove insufficient.
Balance sheet and debt: At September 30, 2018, total assets were $369.1 million, total liabilities $322.0 million and stockholders’ equity $47.1 million. Net carrying debt was $128.9 million; principal outstanding across the convertible notes, term loan and revolver was $145.4 million. The notes carry a fixed 3.75% coupon and mature in 2022; the term loan and revolving facility bear variable rates and mature in 2022. The company reported compliance with debt covenants at quarter-end. Its credit agreements include financial covenants and restrictions on certain actions.
Material changes and comparability
- Accuray adopted ASC 606 on July 1, 2018 using the modified retrospective method. Adoption increased opening accumulated earnings by $5.1 million and affected reported quarterly revenue and loss. For Q1 FY2019, the company reported revenue of $95.8 million and net loss of $9.2 million; its ASC 606 reconciliation shows revenue of $77.1 million and net loss of $17.6 million without adoption. Prior-year figures remain under ASC 605, so year-over-year results are not fully comparable.
- Backlog was $461.9 million at September 30, down from $478.5 million at June 30. Quarterly gross orders were $61.4 million, but net orders were $24.9 million after $26.5 million of age-outs, $6.6 million of cancellations and other adjustments. Prior-year net orders were $51.0 million. Backlog is a non-GAAP operating measure and does not assure future revenue.
- Remaining performance obligations were $731.0 million, including $66.5 million for long-term warranty and service. Management estimates that 30%–40% of the other $664.5 million will be recognized in the next 12 months and the remainder in the following 30 months. The company cautions that approximately 15%–20% of contracts may never generate revenue because of cancellations.
Outlook, risks and unusual items
- No quantified revenue, earnings or cash-flow guidance was provided. Management cited long sales and installation cycles, customer funding and facility-readiness delays, and possible cancellations and age-outs as factors affecting timing and results.
- On October 29, 2018, Accuray announced a cost-saving initiative to eliminate approximately 5% of its global workforce. It expects to complete the initiative in Q2 FY2019 and record costs of approximately $1.5–$2.0 million in that quarter.
- Credit risk was notable: bad-debt expense was $3.7 million, and the company recorded a $3.3 million allowance for credit losses on financing receivables. One customer represented more than 10% of accounts receivable at quarter-end.
- The filing highlights risks from competition, reimbursement and regulatory changes, foreign-exchange movements, international operations, trade tariffs affecting components, supplier concentration, product recalls and debt obligations. The company disclosed an ongoing TomoTherapy recall and two additional CyberKnife recalls; it reported no serious adverse health consequences related to the recalls and stated costs to date were not material.
- Management stated that it had no probable and estimable losses from litigation. Disclosure controls and procedures were deemed effective as of September 30, 2018.
Important facts for investors to verify
- Confirm the cash runway assumptions against continued operating cash use of $17.8 million for the quarter and the company’s available borrowing capacity.
- Reconcile the revolving-credit balance: the balance sheet and debt note report $20.4 million at September 30, while the market-risk discussion cites $28.0 million. Verify the correct amount and related interest-rate sensitivity.
- Assess the sustainability and comparability of revenue and margins after ASC 606 adoption, including the $18.7 million revenue adjustment shown in the company’s reconciliation.
- Track backlog conversion, particularly age-outs, cancellations, customer installation readiness and the estimated 15%–20% of contracts that may not produce revenue.
- Monitor bad-debt exposure, the concentrated receivable, covenant compliance and the company’s ability to service or refinance debt.
- Verify the timing and costs of the workforce reduction and the status and financial impact of the disclosed product recalls.