Accuray Incorporated — Form 10-Q Summary
Reporting period: Second quarter and first six months of fiscal 2020, ended December 31, 2019. The financial statements are unaudited. Accuray develops, sells, and services CyberKnife and TomoTherapy/Radixact radiation oncology systems.
Key financial results
| Metric | Three months ended Dec. 31, 2019 | Prior-year quarter | Six months ended Dec. 31, 2019 | Prior-year six months |
|---|---|---|---|---|
| Revenue | $98.8 million | $102.3 million | $188.4 million | $198.1 million |
| Gross profit / margin | $37.9 million / 38.3% | $38.4 million / 37.5% | $70.8 million / 37.6% | $76.3 million / 38.5% |
| Operating income (loss) | $3.6 million | $(0.9) million | $(0.7) million | $(5.6) million |
| Net income (loss) | $10.7 million | $(4.6) million | $1.4 million | $(13.8) million |
| Diluted earnings (loss) per share | $0.12 | $(0.05) | $0.02 | $(0.16) |
| Operating cash flow | Not separately stated for the quarter | Not separately stated for the quarter | $(8.2) million | $(31.6) million |
Quarterly product revenue fell 9% to $43.8 million, mainly on lower system unit volume; service revenue rose 1% to $55.1 million. For the six-month period, product revenue declined 9% and service revenue declined 1%. Six-month gross profit was pressured by lower service gross profit, parts consumption and write-offs associated with a parts quality-control initiative; product mix and higher freight costs also weighed on product gross profit.
Quarterly net income included a $13.0 million non-cash gain on contributing two systems to the China joint venture for a 49% interest. Excluding that gain solely as an illustration, reported pretax income would have been a loss of approximately $1.6 million for the quarter and $10.3 million for the six-month period. This is not a company-reported adjusted measure.
Liquidity, debt and balance sheet
- At December 31, cash and cash equivalents were $96.4 million, restricted cash was $4.0 million, and current assets were $338.5 million versus current liabilities of $178.5 million. Cash and cash equivalents were $76.8 million at June 30, 2019.
- Debt carrying value was $183.9 million, all classified as long-term; stated principal across the revolving facility, term loan and convertible notes totaled approximately $199.4 million. Debt carrying value increased from $159.8 million at June 30, 2019, principally following a $25 million term-loan draw in August 2019.
- Six-month cash use was $8.2 million from operations and $2.5 million for capital expenditures; financing provided $22.9 million. Cash, cash equivalents and restricted cash increased by $12.2 million to $100.4 million.
- Management said available cash, debt facilities, business plans and revenue prospects were expected to fund operations for at least 12 months. Approximately $59.6 million of cash and cash equivalents was held by foreign subsidiaries; repatriation could entail withholding taxes.
Material changes and business developments
- Backlog was $539.4 million at December 31, versus $495.6 million at June 30, 2019 and $482.2 million a year earlier. Six-month net orders increased to $128.9 million from $94.1 million, while six-month gross orders rose to $177.0 million from $161.6 million. Backlog may be reduced by cancellations, age-outs and currency movements and is not a GAAP measure or a guaranteed revenue forecast.
- Accuray reported that its systems received 50 of 58 Class A user licenses awarded in China in October 2019, with an estimated system revenue value of about $115 million. The company expected to begin recognizing revenue in fiscal Q4 2020 and over the following 24 months, subject to the tender process and other conditions.
- The China joint venture began selling products in China after receiving required permits and licenses. Accuray recorded $2.6 million of sales to the venture in the quarter and $6.5 million for six months. Its 49% share of venture income or loss will be recognized one quarter in arrears.
- Operating lease accounting was adopted July 1, 2019, adding right-of-use assets and lease liabilities to the balance sheet; comparative periods were not restated. At December 31, operating lease liabilities totaled $34.8 million.
Outlook, risks and contingencies
- No specific revenue or earnings guidance was provided in the supplied filing text. Management’s stated liquidity outlook was that resources should cover at least the next 12 months.
- Management described the coronavirus outbreak as a potential risk to China operations, manufacturing, the joint venture and customer activity, while stating its view that the outbreak did not alter long-term demand for radiotherapy equipment in China.
- Key risks include long and variable system sales and installation cycles; customer delays, cancellations and backlog age-outs; competition and reimbursement changes; reliance on single-source suppliers; foreign exchange and U.S.-China trade policy; and the venture’s execution and funding needs. Variable-rate credit facilities expose the company to interest-rate changes; management estimated a 50-basis-point move would change annual interest expense by about $0.6 million at the reported borrowing levels.
- The company reported no probable and reasonably estimable losses from current litigation. It had two bank guarantees totaling approximately $0.7 million. It also disclosed one completed voluntary recall involving the Radixact Treatment Delivery System in fiscal 2020 and requested closure of two remaining recalls from fiscal 2019; stated recall costs were not material and no serious adverse health consequences had been reported.
- Goodwill impairment testing in the quarter identified no impairment. The company was in compliance with amended revolving-credit covenants at December 31, 2019. Disclosure controls were judged effective.
Important facts for investors to verify
- Whether the $13.0 million joint-venture contribution gain obscures underlying operating performance and whether service and product margins recover.
- Timing and conversion of the $115 million of China licensed-system opportunities, including tender completion, installation readiness and coronavirus-related disruption.
- Backlog quality, including age-outs, cancellations, customer funding and the historical estimate that about 14% of contracts may never produce revenue because of cancellation.
- Cash burn, inventory growth, foreign-held cash, and the company’s ability to meet debt covenants and service approximately $199.4 million of stated debt principal.
- Potential effects of trade tariffs, foreign-exchange movements, variable interest rates, supplier concentration and future joint-venture funding requirements.