Accuray Incorporated — Form 10-Q
Reporting period: Third quarter of fiscal 2013, three months ended March 31, 2013; year-to-date results cover the nine months ended March 31, 2013. The filing’s fiscal year ends June 30.
Business context and financial performance
Accuray designs and sells CyberKnife radiosurgery and TomoTherapy radiation therapy systems, plus related services. Results were pressured by weak system sales, manufacturing and supply issues affecting new models, and lower hospital capital spending. Service revenue continued to grow.
| Metric | Quarter ended Mar. 31, 2013 | Prior-year quarter | Nine months 2013 | Prior-year nine months |
|---|---|---|---|---|
| Revenue | $70.5m | $101.8m | $231.1m | $308.7m |
| Gross profit / margin | $20.1m / 28.4% | $36.1m / 35.5% | $70.4m / 30.4% | $100.8m / 32.6% |
| Operating loss | $25.0m | $12.7m | $67.9m | $41.1m |
| Net loss attributable to stockholders | $31.2m | $14.9m | $84.5m | $51.8m |
| Operating cash flow | Not stated by quarter | $(61.9)m | $(32.8)m |
Quarterly product revenue fell 58% to $25.0m, while services rose 9% to $45.5m. Accuray recognized revenue on 9 systems in the quarter versus 21 a year earlier; for the nine months, 36 systems versus 69. Product gross margin declined to 26.5% for the quarter, attributed mainly to higher per-unit production costs from lower production volume and lower revenue per system. Service margin improved, reflecting better TomoTherapy reliability, lower parts usage, and cost initiatives.
Financial position and material changes
- At March 31, 2013, cash and cash equivalents were $181.5m; restricted cash was $2.6m. Current assets were $353.6m and current liabilities $164.0m.
- Long-term debt was $197.7m. In February 2013, Accuray issued $115m of 3.50% convertible notes due 2018, receiving approximately $110.5m net proceeds. The notes add to the 3.75% convertible notes due 2016. Scheduled principal and interest payments on both issues total $247.0m, subject to conversion, redemption, or repurchase.
- Nine-month net cash used in operations was $61.9m, versus $32.8m in the prior-year period. Investing used $15.7m; financing provided $116.0m, primarily from the new notes. Cash increased by $38.0m from June 30, 2012.
- Product-only backlog was $297.9m at March 31, 2013, compared with $279.6m a year earlier; backlog may not convert to recognized revenue.
- Accuray acquired the remaining 90% of Morphormics in July 2012 for total consideration of approximately $6.0m, to extend image auto-contouring capabilities.
Outlook, risks, and unusual items
- Management expected to use cash for the remainder of fiscal 2013, primarily because of operating losses and capital expenditures, but believed available cash and anticipated cash flows would fund operations for at least 12 months. No specific revenue or earnings guidance is provided.
- The company introduced CyberKnife M6 and TomoTherapy H platforms in October 2012. M6 multileaf collimator manufacturing yields and other supply issues had delayed orders and sales; continuing problems could harm revenue and market acceptance.
- A restructuring reduced the workforce by 108 employees, described as approximately 13% of staff. Accuray recorded $4.9m of related severance charges in the quarter and expected annualized compensation savings of $17m–$19m. It expected no significant additional severance charges in fiscal Q4 and substantial completion by fiscal year-end.
- Other unusual charges included $12.2m of impairment of CPAC in-process research and development and a $3.4m loss on CPAC deconsolidation. CPAC results are reported as discontinued operations. The nine-month discontinued-operations loss attributable to stockholders was $5.9m.
- Foreign currency losses, primarily from yen depreciation, contributed to quarterly other expense; higher interest expense also reflected the additional convertible notes. The U.S. medical-device excise tax and Medicare reimbursement reductions were identified as potential demand and financial risks.
- Management estimated possible aggregate losses of $0–$3m for current legal proceedings where estimable, beyond amounts accrued. Matters include Best Medical patent litigation and a newly filed Sarif Biomedical patent complaint; outcomes are uncertain.
- Disclosure controls were judged effective as of March 31, 2013. Management reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether M6 manufacturing yields and product availability improve, and whether system orders and revenue recover.
- Whether restructuring savings materialize without impairing sales execution, product development, or service delivery.
- Cash burn, working-capital needs, and the basis for management’s 12-month liquidity assessment given ongoing losses and debt obligations.
- Conversion, repayment, and dilution implications of the $215m aggregate principal amount of convertible notes.
- Progress and potential exposure in pending patent and other litigation, and any additional impairment or product-related costs.