Accuray Incorporated — Form 10-Q Summary
Reporting period: Quarter and six months ended December 31, 2014; comparisons are to the same periods in 2013. Amounts are in U.S. dollars unless stated otherwise. Accuray designs, sells and services CyberKnife radiosurgery and TomoTherapy radiation therapy systems.
Financial performance and liquidity
| Metric | Quarter ended Dec. 31, 2014 | Six months ended Dec. 31, 2014 |
|---|---|---|
| Revenue | $98.2 million, up 5% | $180.5 million, up 6% |
| Gross profit / margin | $38.5 million / 39% | $66.3 million / 37% |
| Operating loss | $3.6 million | $18.9 million |
| Net loss | $10.0 million; $0.13 per share | $31.6 million; $0.41 per share |
| Operating cash flow | Cash used of $13.0 million for the six months |
- Quarterly product revenue was $47.7 million and service revenue $50.5 million. For the six months, products generated $80.7 million and services $99.9 million.
- At December 31, cash and cash equivalents were $97.3 million and short-term investments $53.5 million, totaling $150.8 million. Management said these resources and anticipated cash flows should fund operations for at least 12 months. About $52.5 million of cash and cash equivalents was held at foreign subsidiaries and considered indefinitely reinvested.
- Long-term debt had a carrying value of $199.2 million and aggregate principal of $215.0 million, consisting of three convertible note issues due in 2016 and 2018. Current liabilities were $172.1 million; total liabilities were $391.6 million.
- Cash from operations was nearly unchanged from the prior-year six-month period ($13.0 million used versus $12.9 million). Inventory increased $18.6 million, partly reflecting purchases to support expected sales. Investing activities provided $21.2 million, mainly from net investment maturities and sales; financing activities provided $2.6 million.
Material changes versus prior periods
- Quarterly net loss widened from $5.4 million to $10.0 million; the six-month loss increased from $21.0 million to $31.6 million. Operating loss also widened, as operating expenses grew faster than gross profit.
- Quarterly gross margin fell to 39% from 41%; six-month gross margin fell to 37% from 38%. Management cited foreign-exchange effects and higher service personnel costs. Selling and marketing expense rose 11% for the quarter and 18% for the half-year, while general and administrative expense included higher legal costs.
- Other expense increased to $5.5 million for the quarter and $11.0 million for the half-year, primarily due to foreign-currency translation losses and higher noncash interest expense associated with the Series A convertible notes.
- Product backlog was $357.8 million, down from $362.0 million a year earlier. Six-month net orders fell to $73.8 million from $119.4 million; gross orders were also lower in dollar value, despite more units ordered. Management attributed order-value weakness partly to product mix and currency movements, and net-order comparisons to process changes affecting distributor order entry.
- Six-month backlog age-outs were $35.9 million, versus $22.3 million a year earlier; cancellations were $9.5 million, versus $1.9 million. Currency reduced backlog by $11.9 million.
Outlook, risks and unusual items
- No specific revenue or earnings guidance is provided. Management expected second-half fiscal 2015 age-outs of $16–$25 million, below first-half age-outs, and expected second-half cancellations to be more comparable to fiscal 2014 patterns. These are expectations, not assurances.
- The CyberKnife M6 multi-leaf collimator (MLC) experienced supplier yield and durability issues, delaying launch. Accuray said internal testing was satisfactory, field evaluation was underway, and it expected to begin commercial production in the third quarter of fiscal 2015 for shipment in the fourth quarter; further delay remained possible. M6 systems continued to be sold with fixed or iris collimators.
- Material litigation includes Cowealth arbitration, in which the former China distributor seeks approximately $161 million and Accuray counterclaims approximately $35 million. A hearing was underway; the company could not estimate the likelihood or range of loss. In December 2014, an appellate court revived Rotary Systems’ trade-secret claim and remanded it, while affirming dismissal of other claims. The Sarif patent case was settled in January 2015 and dismissed with prejudice.
- Key risks include reimbursement changes, long and variable sales, construction and installation cycles, cancellations and aged backlog, currency exposure, product and manufacturing execution, losses and leverage. The filing reports no open foreign-exchange forward contracts at December 31, 2014. Management reported effective disclosure controls and no material change in internal control during the quarter.
- Accuray performed its annual goodwill impairment test in the quarter and reported no impairment. It was evaluating the impact and transition method for the new revenue-recognition standard, effective for the company in fiscal 2018.
Important facts for investors to verify
- Whether MLC commercial production and shipment proceeded on the stated schedule, and the effect of any further delays on orders, revenue and backlog.
- Backlog conversion, cancellations, age-outs and foreign-exchange effects, noting that backlog and orders are non-GAAP measures and are not assured predictors of revenue.
- Developments and potential financial exposure in Cowealth arbitration and the Rotary Systems litigation.
- Cash generation, inventory levels and liquidity relative to the convertible notes’ principal, maturities and conversion terms.
- Whether reimbursement policy, product margins and foreign-exchange movements materially affect demand or profitability.