Accuray Incorporated — Form 10-Q Summary
Reporting period: First quarter of fiscal 2013, three months ended September 30, 2012. Accuray designs and sells CyberKnife radiosurgery and TomoTherapy radiation therapy systems, plus related services. Unless indicated otherwise, financial figures below are in millions of dollars.
Financial performance
| Metric | Q1 FY2013 | Q1 FY2012 |
|---|---|---|
| Revenue | $82.7 | $100.5 |
| Gross profit / margin | $23.7 / 28.6% | $24.4 / 24.3% |
| Operating loss | $(34.9) | $(24.7) |
| Net loss attributable to Accuray stockholders | $(24.1); $(0.34) per share | $(26.5); $(0.38) per share |
| Cash used in operations | $(13.2) | $(49.3) |
Consolidated net loss was $36.2 million, including $12.1 million attributable to non-controlling interests; the loss attributable to Accuray stockholders was $24.1 million. Product revenue fell 28% to $40.6 million, with 15 systems recognized versus 24 a year earlier. Service revenue declined 3% to $42.1 million; excluding prior-year TomoTherapy purchase-accounting effects, management said service revenue rose $3.8 million as the installed base grew.
Product gross margin improved to 40.9% from 31.7%, and service gross margin to 16.8% from 13.9%. Management attributed the overall margin improvement chiefly to lower TomoTherapy purchase-accounting effects and better system reliability. Operating expenses included a $12.2 million impairment charge against CPAC in-process research and development; excluding that unusual charge, operating expenses were lower than in the prior-year quarter.
Balance sheet, cash flow and debt
At September 30, 2012, cash and cash equivalents were $121.9 million, restricted cash $2.6 million, current assets $285.5 million and current liabilities $170.2 million. Total assets were $438.0 million and total equity $169.1 million. Cash and cash equivalents decreased $21.6 million during the quarter. Operating cash use was partly offset by favorable working-capital movements; investing activities used $9.4 million, mainly for capital expenditures and the Morphormics acquisition.
Long-term debt had a carrying value of $80.5 million, against $100 million principal of 3.75% convertible notes due August 2016. The notes’ estimated fair value was $103.9 million. The company reported no material financing cash flows in the quarter.
Changes, outlook and key risks
- Product backlog was $294.3 million at September 30, 2012, versus $270.8 million a year earlier. Backlog is not assured revenue and may be affected by cancellations, customer circumstances, reimbursement or regulatory changes.
- Management expected cash use for the balance of fiscal 2013, primarily from operating losses and capital spending, but anticipated positive cash flow in the latter part of the fiscal year and believed available resources would fund operations for at least 12 months.
- In October 2012, Accuray introduced the CyberKnife M6 and TomoTherapy H platforms. Management cited their adoption, regulatory clearances, sales execution and reimbursement as important to future growth. The filing gives no specific revenue or earnings guidance.
- CEO Euan Thomson resigned October 11, 2012; Joshua Levine became CEO the next day. Thomson’s separation included about $1.2 million in severance, accelerated equity vesting valued at about $0.5 million, and a six-month consulting arrangement.
- Accuray acquired the remaining 90% of Morphormics in July for total consideration of $6.0 million, including its previously held interest; the acquisition supports imaging software capabilities. A $0.7 million remeasurement gain was recognized.
- CPAC’s development, funding and commercialization remain uncertain. Accuray consolidated CPAC despite owning about 15.4% of its shares; the company recorded the $12.2 million impairment and warned that further write-downs of its investment or receivables may be needed.
- Risks include slower system sales, intense competition, lengthy sales and installation cycles, reimbursement uncertainty, regulatory and product-development challenges, foreign-exchange exposure, supplier reliance and potential intellectual-property claims. Management noted possible 2013 Medicare payment reductions for freestanding-center IMRT if time-based reductions remain in effect.
- Legal matters include Best Medical patent litigation and the Rotary Systems trade-secret case, for which outcomes were uncertain. Subsequent to quarter-end, Accuray agreed on November 2 to pay $150,000 to settle the RSS patent litigation. A shareholder complaint filed November 1 sought to enjoin the scheduled annual-meeting vote; the company could not estimate its potential financial impact.
Important facts for investors to verify
- Whether system orders and recognized unit sales recover, and whether backlog converts to revenue.
- Progress toward management’s expected later-FY2013 positive cash flow and the assumptions underlying its 12-month liquidity assessment.
- Customer adoption, regulatory status and financial contribution of the new CyberKnife M6 and TomoTherapy H platforms.
- Medicare and other reimbursement changes, particularly their effect on customer purchasing and treatment volumes.
- CPAC’s funding and technical progress, and any further impairment exposure.
- Developments in the disclosed litigation and the effect of the CEO transition.