Accuray Incorporated — Form 10-Q Summary
Reporting period: Three months ended September 30, 2016, the first quarter of fiscal 2017. The filing is dated November 1, 2016. Unless noted otherwise, dollar amounts below are in millions.
Business context and financial performance
Accuray designs, sells and services CyberKnife and TomoTherapy radiation therapy systems and related products. It reports one operating segment.
| Metric | Q1 FY2017 | Q1 FY2016 | Change |
|---|---|---|---|
| Product revenue | $35.6 | $40.0 | -11% |
| Service revenue | $50.9 | $49.6 | +3% |
| Total revenue | $86.5 | $89.6 | -3% |
| Gross profit / margin | $31.3 / 36% | $33.9 / 38% | Margin down 2 points |
| Operating loss | $(6.5) | $(7.2) | Loss narrowed |
| Net loss | $(9.9) | $(13.0) | Loss narrowed |
| Basic and diluted loss per share | $(0.12) | $(0.16) | |
| Operating cash flow | $(6.4) | $12.3 | Decreased |
Product gross profit fell 28% to $12.2 million, with product margin down to 34% from 42%, reflecting fewer systems recognized as revenue and less favorable product and channel mix. Service gross profit rose 13% to $19.1 million, with service margin increasing to 38% from 34%, due to higher installation revenue and lower service costs. Operating expenses declined 8% to $37.9 million; lower R&D and G&A were partly offset by higher selling and marketing expenses. Net loss improvement also reflected lower other expense and a $0.6 million income tax benefit, including a benefit from completed Swiss tax audits.
Financial position, debt and liquidity
- At September 30, cash and cash equivalents were $83.6 million and short-term investments were $40.8 million, totaling $124.4 million, versus $167.0 million at June 30. Cash declined $36.2 million during the quarter, principally reflecting the $37.3 million cash settlement of the remaining 3.75% convertible notes.
- Current assets were $318.8 million and current liabilities were $172.2 million. Total assets were $422.7 million; stockholders’ equity was $53.4 million and accumulated deficit was $430.7 million.
- Debt carrying value was $175.0 million, comprising a $64.4 million secured loan, $43.4 million of 3.50% convertible notes and $67.2 million of 3.50% Series A convertible notes. Their combined principal was $183.3 million. The secured loan bears a variable rate, is secured by substantially all company assets, and includes financial covenants. The convertible notes mature in February 2018; the secured loan has a January 2021 stated maturity but may mature earlier under specified conditions tied to the convertible notes.
- Management said cash, cash equivalents, investments and anticipated cash flows should fund operations for at least 12 months. About $45.6 million of cash was held at foreign subsidiaries and was considered indefinitely reinvested outside the United States.
Material changes, outlook and risks
- Gross orders were $50.3 million, down from $64.9 million; net orders were $37.2 million, down from $44.8 million. Product backlog rose to $407.5 million from $405.9 million at June 30. Management attributed weaker gross orders mainly to lower CyberKnife system orders, partly offset by TomoTherapy and upgrade orders. Backlog conversion remains exposed to cancellations, aging and currency movements.
- Management expected approximately $21 million of age-outs in the second fiscal quarter, compared with $10.7 million in the reported quarter. This is an expectation, not revenue guidance.
- Management identified Radixact commercialization and adoption, CyberKnife M6 and InCise MLC execution, regulatory approvals, reimbursement, competition and international sales as factors affecting future performance. The filing provides no clear numerical revenue or earnings guidance.
- Operating cash flow was negative despite the smaller net loss. The company cited working-capital movements, including decreases in accrued liabilities, deferred revenue and customer advances, and higher inventory to support anticipated Radixact needs.
- Accuray disclosed ongoing legal risks that may be difficult to estimate, although management did not consider current legal losses probable and reasonably estimable. The Cowealth arbitration resulted in an approximately $5.5 million damages award plus a net $2.4 million award of arbitration costs; the Rotary Systems lawsuit was settled and dismissed with prejudice.
- Other risks include substantial accumulated losses, reliance on future system sales and cost control, customer payment defaults (contracts with payment terms over one year represented about 11% of receivables), foreign-exchange exposure, and secured-loan covenants and leverage. Management reported disclosure controls were effective and no material change in internal control during the quarter.
Important facts for investors to verify
- Whether new system orders and product revenue recover, especially CyberKnife volume and product margins, and whether the backlog converts without significant cancellations or age-outs.
- Actual second-quarter age-outs versus management’s approximately $21 million expectation, and the timing of Radixact sales and related inventory use.
- Cash burn, availability of foreign-held funds, and liquidity after debt service; review secured-loan covenant thresholds and compliance, which are not quantified in the provided filing text.
- Plans and funding for the February 2018 convertible-note maturities, including the secured loan’s earlier-maturity provision and potential conversion-related cash or share settlement.
- Developments in disclosed legal matters and customer credit exposure, including the concentrated receivable from one customer (17% of receivables at quarter-end).