Accuray Incorporated — Form 10-Q Summary
Reporting period: Quarter and nine months ended March 31, 2015. Although the request metadata says “2014 Q3,” the filing identifies this as the third quarter of fiscal 2015. Amounts below are in millions of dollars unless stated otherwise.
Business context
Accuray develops, sells and services CyberKnife radiosurgery and TomoTherapy radiation therapy systems worldwide. Revenue comes from system and upgrade sales, installation and other services, and post-contract service agreements.
Key financial results
| Metric | Three months ended Mar. 31, 2015 | Three months ended Mar. 31, 2014 | Nine months ended Mar. 31, 2015 | Nine months ended Mar. 31, 2014 |
|---|---|---|---|---|
| Revenue | $97.5 | $97.1 | $278.1 | $267.4 |
| Gross profit / margin | $38.7 / 39.6% | $39.7 / 40.9% | $105.0 / 37.7% | $104.4 / 39.0% |
| Operating income (loss) | $1.2 | $(0.5) | $(17.7) | $(13.5) |
| Net loss | $(3.0) | $(4.7) | $(34.6) | $(25.6) |
| Net loss per share | $(0.04) | $(0.06) | $(0.44) | $(0.34) |
- Quarterly revenue was nearly flat. Product revenue declined 1% while service revenue rose 2%. For the nine months, both product and service revenue increased 4%.
- Quarterly gross profit fell 3%, principally from lower product gross profit, including unfavorable currency effects and product mix; improved service gross profit partly offset the decline. Nine-month gross profit was up 1% despite lower overall gross margin.
- Quarterly operating income improved from a loss to a small profit, helped by lower operating expenses. For nine months, operating loss widened, with selling and marketing and general and administrative costs higher.
- Other expense was $3.6 million for the quarter and $14.6 million for nine months. The nine-month increase included higher foreign-exchange losses and non-cash interest expense related in part to the refinancing of convertible notes.
Cash, liquidity and debt
- At March 31, 2015, cash and cash equivalents were $95.4 million, short-term investments $54.2 million, and restricted cash $2.9 million. Management said available cash, investments and expected cash flows should fund operations for at least 12 months. Approximately $62.8 million of cash was held at foreign subsidiaries and considered indefinitely reinvested.
- Current assets were $348.0 million and current liabilities $165.8 million. Inventory rose to $109.7 million from $87.8 million at June 30, 2014.
- Long-term debt had a carrying value of $201.0 million and principal of $215.0 million, consisting of convertible notes due in 2016 and 2018. The filing reports fair value of the debt at $315.5 million.
- For the nine months, operating cash flow was negative $12.6 million in the financial statements, versus positive $0.8 million a year earlier. Investing activities provided $18.6 million, financing activities provided $4.7 million, and exchange-rate movements reduced cash by $7.6 million. Cash and cash equivalents increased $3.1 million overall.
Changes, outlook and risks
- Product backlog was $347.4 million, down from $353.6 million a year earlier. Nine-month net orders fell to $109.7 million from $158.1 million. Age-outs were $47.6 million for the nine months, versus $28.9 million; management expected fourth-quarter age-outs of $4 million to $9 million. Orders and backlog are not GAAP measures and are not assured to convert to revenue.
- Management reported that the CyberKnife MLC had been commercially launched globally by mid-April 2015, after customer evaluations; the first U.S. commercial unit shipped and treated a patient during the quarter. Earlier supplier yield and durability issues had been addressed, according to the company.
- Key risks include foreign-exchange volatility, long and variable sales, construction and installation cycles, customer cancellations and backlog age-outs, reimbursement changes, and dependence on suppliers. The company also cited substantial accumulated losses and debt.
- Cowealth Medical arbitration seeks approximately $170 million and injunctive relief; Accuray counterclaims for approximately $35 million. A hearing concluded in February 2015; a decision was expected between October 2015 and February 2016. The company said it could not predict the outcome or estimate a possible loss range. The Rotary Systems trade-secret claim was reinstated on appeal and remanded; other claims were dismissed. A separate Sarif patent case was settled without material impact.
- No specific revenue or earnings guidance was provided. Management’s stated liquidity outlook was at least 12 months of funding based on its current business plan and revenue prospects.
Most important facts to verify
- Confirm the reporting period: the filing is for the quarter ended March 31, 2015, notwithstanding the “2014 Q3” request metadata.
- Reconcile operating cash flow: the cash-flow statement reports $(12.603) million, while the MD&A summary table reports $(12.306) million.
- Track backlog conversion, cancellations and age-outs, including whether management’s fourth-quarter age-out estimate was realized.
- Monitor liquidity and the cash demands of the $215 million principal balance of convertible notes, including the 2016 maturity.
- Follow the Cowealth arbitration and other litigation for developments that could affect financial results; the filing does not quantify a reasonably possible Cowealth loss.