Accuray Incorporated — FY2016 Form 10-K
Reporting period: Fiscal year ended June 30, 2016. Although the request metadata refers to “2015 Q4,” this filing reports FY2016, with FY2015 as the principal comparable period. Amounts below are in U.S. dollars.
Business context
Accuray develops, manufactures and services CyberKnife radiosurgery and TomoTherapy radiation therapy systems. Products represented 48% of FY2016 revenue and services 52%. The company operates as one oncology-systems reporting segment and sells internationally as well as in the Americas.
Financial performance and liquidity
| Metric | FY2016 | FY2015 |
|---|---|---|
| Revenue | $398.8 million | $379.8 million |
| Product revenue | $193.3 million | $178.7 million |
| Service revenue | $205.5 million | $201.1 million |
| Gross profit / margin | $158.7 million / 39.8% | $145.4 million / 38.3% |
| Operating loss | $4.9 million | $19.2 million |
| Net loss | $25.5 million | $40.2 million |
| Net loss per share, basic and diluted | $0.32 | $0.51 |
| Cash from operating activities | $33.5 million | Cash used: $16.7 million |
| Cash and cash equivalents | $119.8 million | $79.6 million |
| Short-term investments | $47.2 million | $64.3 million |
| Working capital | $151.5 million | $184.4 million |
Product gross margin was 44% and service gross margin 36%, versus 42% and 35%, respectively, in FY2015. At year-end, total liabilities were $409.4 million, including $210.4 million net carrying value of debt; stockholders’ equity was $59.7 million and accumulated deficit was $420.8 million. The company reported $219.9 million of aggregate debt principal, including the secured loan and convertible notes. The secured loan carries a 7% margin over LIBOR, subject to a 1% floor, and includes financial covenants and liens on substantially all company assets.
FY2016 operating cash flow benefited from collections and a $23.0 million decrease in accounts receivable, partly offset by a $10.5 million inventory increase. Capital expenditures were $8.1 million. Management said available cash, investments and expected cash flows should fund operations for at least 12 months.
Changes versus FY2015
- Revenue grew 5%: product revenue rose 8% and service revenue 2%. Unit sales of both CyberKnife and TomoTherapy systems increased 13% year over year; product growth was also supported by mix, partly offset by foreign-exchange effects.
- Gross margin improved by about 1.5 percentage points, while operating expenses declined slightly to $163.6 million. Selling and marketing costs fell 9%; R&D rose 2%; G&A rose 8%, largely due to legal expense.
- Net loss narrowed by $14.7 million. Operating cash flow improved by $50.3 million, turning positive.
- Net product orders increased to $224.3 million from $189.0 million; year-end product backlog rose to $405.9 million from $375.0 million. Backlog is not a GAAP measure and may be affected by cancellations, age-outs and currency movements.
- Working capital fell by $32.9 million despite higher cash, chiefly alongside higher current liabilities, including $39.9 million of short-term debt.
Outlook, commentary and material matters
- No specific FY2017 revenue, earnings or margin guidance is provided. Management expected R&D expense to be slightly lower, selling and marketing expense slightly higher, and G&A expense slightly lower than FY2016.
- Accuray received FDA and CE Mark approval for the Radixact Treatment Delivery Platform and FDA 510(k) clearance for its Accuray Precision treatment-planning and iDMS data-management systems. It also received China FDA approval for the Onrad system.
- In FY2016 the company obtained a $70 million secured term loan to help refinance near-term convertible debt. It repurchased $63.4 million principal of 3.75% convertible notes for $66.6 million in January 2016; after year-end, it paid $37.3 million to settle the remaining $36.6 million principal. The filing says these cash settlements avoided issuance of approximately 10.6 million shares.
- The company recorded $2.5 million of workforce-realignment charges in FY2016, affecting approximately 3% of employees. A $1.0 million noncash debt-extinguishment loss was also recorded.
- In the Cowealth arbitration, the company was ordered to pay approximately $5.5 million in damages and $2.4 million in net arbitration costs. Management stated it could not estimate a range of reasonably possible losses for certain other legal matters. The Rotary Systems lawsuit was settled and dismissed in July 2016.
- Key risks include continuing losses, substantial debt and covenant obligations, long and unpredictable sales and installation cycles, customer financing and order cancellations, reimbursement changes, competition, foreign-exchange exposure, reliance on single-source suppliers, product quality and regulatory requirements, and legal exposure. The company also highlights limited long-term clinical data for some product uses.
- Grant Thornton issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded disclosure controls and internal controls were effective as of June 30, 2016.
Important facts for investors to verify
- Reconcile reported debt principal, carrying values, maturities and covenant terms, including the post-year-end retirement of the 3.75% notes and the secured loan’s maturity provisions.
- Assess whether positive operating cash flow is sustainable, given the FY2016 contribution from receivables collections and the increase in inventory and extended-term receivables.
- Track backlog conversion, cancellations and age-outs; backlog is not audited as a GAAP metric and does not guarantee future revenue.
- Monitor the Cowealth award and other legal contingencies, and confirm amounts paid or accrued and any subsequent developments.
- Evaluate Radixact and Onrad adoption, product margins, supplier capacity and the company’s path to profitability; no quantified FY2017 revenue or earnings guidance is stated.