Accuray Incorporated — Form 10-Q Summary
Reporting period: Quarter ended March 31, 2012, the third quarter of fiscal 2012. The request metadata labels the period “2011 Q3,” but the filing covers fiscal 2012 Q3.
Business context and financial performance
Accuray develops and sells CyberKnife and TomoTherapy radiation-treatment systems and related services. TomoTherapy has been included in results since its June 10, 2011 acquisition, so year-over-year comparisons are materially affected by the acquisition.
| Metric | Three months ended March 31 | Nine months ended March 31 |
|---|---|---|
| Revenue | 2012: $101.8 million; 2011: $54.7 million | 2012: $308.7 million; 2011: $147.1 million |
| Gross profit / margin | 2012: $36.1 million / 35.5%; 2011: $27.3 million / 49.9% | 2012: $100.8 million / 32.6%; 2011: $75.0 million / 51.0% |
| Net loss attributable to stockholders | 2012: $14.9 million; 2011: $1.2 million | 2012: $51.8 million; 2011: $1.7 million |
| Loss per share attributable to stockholders | 2012: $0.21; 2011: $0.02 | 2012: $0.73; 2011: $0.03 |
| Cash used in operating activities | Not separately reported for the quarter | 2012: $32.8 million; 2011: $9.1 million |
Quarterly product revenue was $59.9 million and service revenue $41.7 million; nine-month amounts were $179.9 million and $127.2 million, respectively. Revenue growth primarily reflects TomoTherapy. Management attributed lower consolidated gross margins principally to TomoTherapy’s lower margins and acquisition-related purchase-accounting adjustments; TomoTherapy’s reported nine-month results reflected a negative gross margin after those adjustments.
Liquidity, debt and balance sheet
- At March 31, 2012, cash and cash equivalents were $151.3 million, compared with $95.9 million at June 30, 2011. Restricted cash was $3.5 million.
- Long-term debt had a carrying value of $78.5 million, against $100 million principal of 3.75% convertible senior notes due August 1, 2016. The notes generated $96.1 million net proceeds; the reported liability includes an unamortized debt discount. Nine-month interest expense on the notes was $5.1 million.
- Total assets were $492.7 million and total liabilities $276.0 million. Accumulated deficit was $196.2 million.
- Nine-month investing cash outflow was $9.1 million, including $7.7 million of property and equipment purchases. Financing cash inflow was $98.8 million, largely from the notes issuance.
Changes, outlook and risks
- Revenue increased substantially versus the prior-year periods, primarily because TomoTherapy results were included in fiscal 2012. CyberKnife system revenue declined year over year, partly reflecting fewer units; CyberKnife service revenue increased with the installed base.
- International revenue represented 54% of quarterly revenue and 51% of nine-month revenue, versus 49% and 39%, respectively, in the prior-year periods. Management said international system orders increased, while U.S. system orders were weaker than the prior year; it cited integration of the U.S. sales teams and a sales-organization realignment.
- Product-only backlog was $279.6 million at March 31, 2012. The filing changed backlog methodology in fiscal 2012, so this figure is not comparable with previously reported backlog.
- Management expected cash use for the remainder of fiscal 2012, primarily from operating losses and capital spending; it expected to begin achieving profitability and positive cash flow later in fiscal 2013. Management believed available cash and anticipated cash flows would fund operations for at least 12 months. These are expectations, not guarantees.
- Siemens’ distribution agreement runs through March 2013, but after Siemens announced a strategic partnership with Varian, Accuray expected Siemens to distribute few, if any, systems during the remaining term.
- Disclosure controls were deemed ineffective as of March 31, 2012 because a previously reported material weakness in accounting for significant, non-routine transactions had not been fully remediated. Remediation included hiring finance personnel and using external experts as needed.
- Legal matters include pending Best Medical patent litigation, a Rotary Systems trade-secret claim and a Radiation Stabilization Solutions patent claim; the company said it could not estimate potential financial impacts for these claims. The Accuray securities class action settlement was approved and covered by insurance.
- Accuray reported four CyberKnife and two TomoTherapy voluntary recalls during the first nine months of fiscal 2012; it said no serious adverse health consequences were reported and costs were not material. A May 1, 2012 employee-data breach was disclosed as a subsequent event; remedial steps included notifying affected parties and offering credit monitoring.
- Other risks include competition, international and foreign-exchange exposure, reimbursement and regulatory uncertainty, possible collection issues, and execution of the TomoTherapy integration. The filing also describes CPAC financing and development risks.
Important facts for investors to verify
- Whether the sales realignment improves U.S. system orders and whether the $279.6 million backlog converts to revenue.
- How much reported margin pressure is temporary purchase-accounting impact versus underlying TomoTherapy economics, and how margins develop after those adjustments run off.
- Cash burn, progress toward management’s fiscal 2013 profitability and cash-flow expectations, and the obligations and potential dilution associated with the convertible notes.
- Remediation of the material weakness and effectiveness of financial-reporting controls in subsequent filings.
- Developments in the pending litigation, CPAC funding and commercialization prospects, Siemens distribution activity, and any consequences of the data breach or product recalls.