Accuray Incorporated — Form 10-Q Summary
Reporting period: Three and six months ended December 31, 2011 (fiscal 2012 second quarter). Accuray designs and sells CyberKnife radiosurgery and TomoTherapy radiation therapy systems, plus related services. TomoTherapy, acquired in June 2011, is included in results from the acquisition date; consequently, year-over-year comparisons are not like-for-like.
Financial performance
| Metric | Three months ended Dec. 31 | Six months ended Dec. 31 |
|---|---|---|
| Revenue | $106.4 million, up 96% | $206.9 million, up 124% |
| Gross profit / margin | $40.2 million / 37.8% (prior year 54.3%) | $64.7 million / 31.3% (prior year 51.7%) |
| Operating loss | $7.3 million | $32.0 million |
| Net loss attributable to stockholders | $10.4 million; $0.15 per share | $36.9 million; $0.52 per share |
| Operating cash flow | Six-month use of $38.4 million (prior-year period provided $0.2 million) |
Quarterly product revenue was $63.8 million and service revenue $42.1 million. Six-month product and service revenue were $120.0 million and $85.5 million, respectively. The revenue increase primarily reflects TomoTherapy, while CyberKnife revenue declined year over year. International sales represented 49% of quarterly revenue and 50% of six-month revenue.
Lower gross margins reflected TomoTherapy’s lower margins and acquisition purchase-accounting effects, including inventory fair-value adjustments and deferred-revenue write-ups. The company expects these purchase-accounting effects to continue through fiscal Q4 2012. Operating expenses for the six months were $96.7 million, versus $50.1 million, reflecting the acquired business, higher staffing and integration-related costs. Other expense included convertible-note interest and foreign-currency losses.
Liquidity, debt and cash flows
At December 31, 2011, cash and cash equivalents were $148.5 million, restricted cash $3.5 million, and current assets $328.2 million against current liabilities of $171.4 million. Long-term debt had a carrying value of $77.5 million. Accuray issued $100 million of 3.75% convertible senior notes in August 2011, receiving approximately $96.1 million net; they mature August 1, 2016 and have an initial conversion price of approximately $9.47 per share.
Six-month investing cash use was $5.3 million, including $3.9 million of capital expenditures. Financing provided $98.1 million, primarily from the notes, driving cash up from $95.9 million at June 30 to $148.5 million. Operating cash use reflected the loss and working-capital outflows, partly offset by noncash charges and increases in deferred revenue.
Changes, outlook and key risks
- Management expects cash use for the remainder of fiscal 2012, primarily from operating losses and capital spending; it expects profitability and positive cash flow in the latter part of fiscal 2013. Management believes available cash and anticipated flows are sufficient for at least 12 months. These are forward-looking expectations, not guaranteed results.
- Product backlog was $276.8 million under a revised methodology that excludes service components and is not comparable with previously reported backlog. Orders may be delayed or cancelled and are not assured revenue.
- A workforce realignment affecting approximately 51 positions is expected to cost about $1.8 million. Accuray recorded $1.5 million of charges in the quarter, of which $1.1 million had been paid; completion was expected by fiscal year-end.
- Siemens terminated the broader strategic alliance in December 2011, ending its technology and R&D collaboration elements. A revised distribution agreement permits Siemens to distribute TomoTherapy as well as CyberKnife systems; success is uncertain.
- Disclosure controls were deemed ineffective at quarter-end because a previously reported material weakness in accounting for significant, non-routine transactions had not been fully remediated. The company reported hiring finance staff and using external experts as remediation steps.
- Pending litigation includes patent and trade-secret matters for which the company said potential financial impact could not be estimated. The securities class action settlement for $13.5 million was finalized and is expected to be covered by insurance. Management reported no probable and estimable loss from current proceedings that would materially adversely affect results or financial condition.
- Other risks include customer financing and facility-readiness delays, foreign-exchange exposure, reliance on single-source suppliers for some components, and the complexity of revenue recognition. The filing reports $14.8 million of gross unrecognized tax benefits and a full valuation allowance against domestic and certain foreign deferred tax assets.
Investor verification priorities
- Track whether TomoTherapy integration improves margins as purchase-accounting effects run off, and distinguish acquired growth from underlying CyberKnife trends.
- Compare operating cash burn and working-capital movements with management’s stated cash-flow and profitability outlook.
- Monitor backlog conversion, cancellations, system installation timing, and the effect of the revised backlog definition.
- Review progress in remediating the material weakness and whether disclosure controls become effective.
- Follow the Siemens distribution arrangement and unresolved litigation, including any developments that could change estimated costs or business prospects.