Accuray Incorporated — Form 10-Q Summary
Reporting period: Quarter and nine months ended March 31, 2014 (fiscal 2014 third quarter). The filing compares results with the corresponding 2013 periods. Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions.
Business context
Accuray develops and sells CyberKnife radiosurgery and TomoTherapy radiation therapy systems, as well as related services. It operates as one reportable segment and sells globally.
Financial performance
| Metric | Three months ended March 31 | Nine months ended March 31 |
|---|---|---|
| Revenue, 2014 | $97.1 million | $267.4 million |
| Revenue, 2013 | $70.5 million | $231.1 million |
| Revenue growth | 38% | 16% |
| Gross margin, 2014 | 41% | 39% |
| Gross margin, 2013 | 28% | 30% |
| Operating loss, 2014 | $0.5 million | $13.5 million |
| Net loss attributable to stockholders, 2014 | $4.7 million | $25.6 million |
| Net loss attributable to stockholders, 2013 | $31.2 million | $84.5 million |
- Quarterly product revenue rose 88% to $47.0 million; service revenue rose 10% to $50.1 million. For the nine-month period, product revenue increased 23% to $121.8 million and service revenue increased 10% to $145.7 million.
- Product revenue growth primarily reflected more systems recognized: 15 versus 9 in the quarter and 46 versus 36 year to date. Service growth reflected a larger installed base, higher-priced maintenance contracts, and more installation and training revenue.
- Gross margin improved year over year, attributed to higher system volume and lower fixed cost per unit, improved TomoTherapy reliability, installed-base growth and service-contract mix. Operating expenses were lower year to date, mainly reflecting prior-year restructuring and lower R&D and G&A costs; selling and marketing expense increased.
- Other expense was $3.3 million for the quarter and $9.5 million for the nine months, primarily reflecting convertible-note interest. Income tax expense was $0.9 million and $2.6 million, respectively.
Cash, liquidity and debt
- At March 31, 2014, cash and cash equivalents were $88.0 million and short-term investments were $86.0 million, totaling $174.0 million. Cash was $73.3 million and short-term investments $101.1 million at June 30, 2013. Approximately $74.2 million of cash and cash equivalents was held at foreign subsidiaries and considered indefinitely reinvested.
- For the nine months, operating activities provided $0.8 million, compared with $61.9 million used in the prior-year period. Investing activities provided $4.6 million, including investment maturities and sales; capital expenditures were $9.6 million. Financing activities provided $7.2 million, mainly from employee stock plans.
- Long-term debt carrying value was $202.3 million: $87.3 million for 3.75% convertible notes due 2016 and $115.0 million for 3.50% convertible notes due 2018. Total liabilities were $395.2 million; stockholders’ equity was $95.8 million.
- Management stated that available resources and anticipated cash flows were expected to fund operations for at least 12 months. This is management’s assessment, not a guarantee.
Changes, outlook and risks
- Product backlog was $353.6 million at March 31, 2014, up from $297.9 million a year earlier. It included $37.1 million of M6 systems configured with an MLC or MLC upgrades, and $37.5 million of CyberKnife orders with an option to upgrade to M6 subject to regulatory approval. Backlog may not convert to revenue because of customer, financing, reimbursement, regulatory or cancellation factors.
- The CyberKnife M6 MLC supplier had experienced low yields, and testing found durability concerns. Accuray expected a limited MLC release in June 2014, with further delay risk; it continued taking orders and installing M6 systems with fixed and iris collimators. No specific full-year revenue or earnings guidance is provided in the supplied filing text.
- After quarter-end, Accuray exchanged approximately $70.3 million principal amount of 3.50% notes for new notes of the same principal amount and paid approximately $0.4 million cash. The new notes retain the rate and maturity but allow conversion settlement in cash, shares or a combination at the company’s option; approximately $44.7 million of the old notes remained outstanding. The accounting allocation was not finalized as of May 7, 2014.
- Risks include continued losses (accumulated deficit $345.3 million), substantial convertible debt, dependence on product sales and cost control, MLC manufacturing and launch execution, reimbursement and regulatory changes, and foreign currency exposure. Foreign sales represented 67% of quarterly revenue and 60% year to date.
- Management estimated aggregate possible losses in certain legal proceedings, in excess of accruals, at zero to $2 million where estimable. It could not estimate a potential loss for the Cowealth arbitration. Best Medical and Rotary Systems matters were subject to appeals or ongoing proceedings. Management reported no probable and estimable litigation losses that it believed would materially adversely affect results or financial condition.
- Management reported disclosure controls were effective as of March 31, 2014 and no material change in internal control during the quarter.
Most important facts for investors to verify
- Whether the MLC release occurred as expected and whether yield, durability and quality issues were resolved.
- Whether backlog converts into installations and recognized revenue, including MLC-related and conditional-upgrade orders.
- Whether operating cash generation improves as sales grow, given inventory and other working-capital demands.
- The terms, accounting treatment, interest burden and potential dilution associated with the April note refinancing and outstanding convertible debt.
- Developments in reimbursement rates, the Cowealth arbitration and other litigation, and any changes to management’s liquidity outlook.