Accuray Incorporated — FY2018 Form 10-K
Period clarification: The supplied filing is the annual report for the fiscal year ended June 30, 2018, not a 2017 fourth-quarter filing. It also reports unaudited results for the quarter ended June 30, 2018. Financial amounts below are in U.S. dollars.
Business context and reporting period
Accuray develops, manufactures, sells, and services radiation oncology systems, principally CyberKnife and TomoTherapy, including the Radixact platform, plus related software and services. It operates as one reporting segment. Products represented 45% of FY2018 revenue and services 55%; 64% of revenue came from outside the Americas.
Key financial metrics
| Metric | FY2018 | FY2017 |
|---|---|---|
| Revenue | $404.9 million | $383.4 million |
| Gross profit / margin | $161.7 million / 39.9% | $141.3 million / 36.9% |
| Operating loss | $3.8 million | $9.8 million |
| Net loss | $23.9 million | $29.6 million |
| Basic and diluted loss per share | $0.28 | $0.36 |
| Cash provided by (used in) operations | $18.3 million | $(0.4) million |
| Cash and cash equivalents at year-end | $83.1 million | $72.1 million |
| Working capital | $114.7 million | $24.5 million |
| Long-term debt carrying value | $131.1 million | $51.5 million |
| Total liabilities | $330.1 million | $359.9 million |
FY2018 revenue rose 6%. Product revenue increased 2% to $183.9 million, while service revenue rose 8% to $221.0 million. The company remained unprofitable, with an accumulated deficit of $474.3 million. Year-end debt comprised $85.0 million principal of 3.75% convertible notes due 2022, approximately $40.0 million under a term loan, and approximately $24.0 million drawn on a revolving facility. The company reported compliance with credit-facility covenants at June 30, 2018.
For the unaudited June 2018 quarter, revenue was $113.8 million, gross profit was $48.0 million, net loss was $0.9 million, and loss per share was $0.01.
Material changes versus the prior year
- Gross margin improved to 39.9% from 36.9%, mainly from improved system-sales profitability, higher average selling prices and product mix, and the absence of $8.0 million of TomoTherapy acquisition-intangible amortization recorded in FY2017.
- Net loss narrowed by $5.7 million; operating loss improved by $6.0 million. Higher gross profit was partly offset by increased operating expenses, including R&D, sales and marketing, and general and administrative costs.
- Operating cash flow recovered to $18.3 million from near breakeven, aided by collections and customer advances, though inventory increased by $8.7 million.
- Product backlog increased to $478.5 million from $452.8 million, but net orders fell to $209.5 million from $226.6 million. FY2018 included $68.5 million of net age-outs and $22.6 million of cancellations, both higher than in FY2017.
- Debt carrying value fell from $164.6 million to $131.1 million, following refinancing and repayment of older convertible notes; financing activities nevertheless used $27.5 million of cash.
Outlook, risks, contingencies and unusual items
- Management expected FY2019 R&D expense to be slightly lower than FY2018, selling and marketing expense to increase with product launches and added headcount, and general and administrative expense to remain relatively stable. No specific revenue or earnings guidance was provided.
- Management believed available cash and expected cash flows would fund operations for at least 12 months. This outlook is subject to order timing, installation delays, cancellations, customer financing, and other risks; backlog is not a guarantee of future revenue.
- International sales, distributor dependence, competition, reimbursement changes, long sales cycles, and single-source component suppliers are material business risks. The filing highlights newly imposed and proposed U.S.-China tariffs affecting components, including the TomoTherapy linear accelerator manufactured in China.
- CMS had proposed an 18% 2019 payment reduction for non-robotic SBRT in freestanding centers; management said the potential business impact would likely be slight if the proposal stood, given the small relevant installed base. The proposal was not described as final.
- A TomoTherapy product recall initiated in 2017 remained open with the FDA. The company reported no serious adverse health consequences associated with the cited recalls and said recall costs had not been material.
- The company reported no probable and reasonably estimable material losses from current litigation. It also disclosed an unfunded Swiss defined-benefit pension liability of $2.1 million.
- Accuray adopted the new revenue standard on July 1, 2018. It expected direct system-sale revenue recognition to accelerate upon delivery rather than installation, and expected a $1.9 million cumulative retained-earnings adjustment for capitalized sales commissions on open contracts; the final quantitative impact was still under evaluation.
- Subsequent to year-end, the company disclosed that CFO Kevin Waters would leave on October 1, 2018, with Chief Accounting Officer Shigeyuki Hamamatsu becoming interim CFO.
Important facts for investors to verify
- Whether backlog converts to revenue, and whether elevated age-outs and cancellations persist.
- Actual FY2019 revenue, margins, cash flow, and expense trends versus management’s stated expense outlook.
- Debt terms, covenant compliance, availability under the revolving facility, and the company’s ability to service or refinance debt.
- The final impact of tariffs, reimbursement changes, and the new revenue-recognition standard.
- The status and financial or operational consequences of the open TomoTherapy recall.
- Whether international demand, distributor orders, and customer funding support growth without further liquidity pressure.