Accuray Incorporated — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2011, the first quarter of fiscal 2012. The comparable period is the quarter ended September 30, 2010. Unless noted otherwise, amounts are in U.S. dollars.
Business context
Accuray develops and sells CyberKnife radiosurgery systems and, following its June 10, 2011 acquisition of TomoTherapy, TomoTherapy radiation therapy systems. The quarter includes a full quarter of TomoTherapy results; the prior-year comparison does not include TomoTherapy.
Key financial metrics
| Metric | Q1 FY2012 | Q1 FY2011 |
|---|---|---|
| Total revenue | $100.5 million | $38.1 million |
| Gross profit / margin | $24.4 million / 24.3% | $18.2 million / 47.9% |
| Operating loss | $24.7 million | $6.1 million |
| Net loss attributable to stockholders | $26.5 million; $0.38 per share | $4.6 million; $0.08 per share |
| Cash used in operating activities | $51.8 million | $10.2 million |
- Revenue comprised $56.2 million of products, $43.4 million of services, and $0.9 million of other revenue. Total revenue rose 164%; management attributed the increase to $69.3 million from TomoTherapy, partly offset by a $6.9 million decline in CyberKnife revenue.
- Gross margin fell 23.6 percentage points. Management cited TomoTherapy’s lower margins, purchase-accounting effects, and weaker CyberKnife product shipments and mix. Product and service margins were 31.7% and 13.9%, respectively, versus 62.4% and 33.5%.
- Operating expenses were $49.1 million, up from $24.4 million, including $20.6 million of research and development. Higher costs reflected the acquired business, staffing, development spending, and integration-related consulting and professional fees.
- At September 30, cash and cash equivalents were $140.2 million, versus $95.9 million at June 30. Current assets were $331.2 million and current liabilities $172.1 million. The balance sheet showed $76.6 million of long-term debt carrying value; the notes have $100 million principal.
- Cash increased by $44.2 million during the quarter, principally because of $96.1 million net proceeds from the convertible-note offering, partly offset by operating cash use. Capital expenditures were $1.0 million.
- Backlog was $270.8 million under a newly standardized product-only definition; the company said it is not comparable with prior reported backlog. International revenue was $51.6 million, or 51% of revenue, versus $15.0 million, or 39%.
Material changes and unusual items
- The TomoTherapy acquisition had approximately $248.0 million of purchase consideration, including $174.2 million cash and $67.3 million in Accuray shares. Acquisition accounting affected reported revenue and costs: it reduced TomoTherapy product revenue by $0.3 million and increased product costs by $11.4 million; it increased service revenue by $5.1 million and service costs by $2.4 million. Management expected these purchase-accounting effects to continue through Q3 FY2012.
- Accuray issued $100 million of 3.75% convertible senior notes due August 1, 2016, receiving approximately $96.1 million net. The initial conversion price is approximately $9.47 per share. Reported interest expense included $0.6 million of debt-discount accretion.
- Other expense was $2.9 million, compared with $1.6 million of other income in the prior-year quarter, mainly reflecting $1.4 million of interest expense and $1.5 million of foreign-currency losses.
- Two CyberKnife and two TomoTherapy product recalls were initiated during the quarter; the filing reports no serious adverse health consequences and immaterial costs.
Outlook, risks, and contingencies
- Management said current cash resources and expected cash flows should support operations for at least the next 12 months, while noting cash could decline with weaker economic conditions or changes in planned spending. It expects service revenue to rise as the installed base grows.
- Accuray anticipated the TomoTherapy acquisition would be accretive to adjusted earnings per share in fiscal 2013, beginning July 1, 2012; this was an expectation based on estimates, not a guarantee.
- Management identified integration execution and costs, continued losses, lower margins and unprofitable TomoTherapy service operations, customer financing and installation delays, reimbursement changes, competition, regulatory requirements, and foreign-exchange movements as material business risks.
- Disclosure controls were deemed ineffective because of a continuing material weakness in accounting for significant, non-routine transactions, including the TomoTherapy acquisition. Remediation included finance-function recruiting and consulting external experts; the weakness had not been declared remediated.
- Legal matters included a proposed $13.5 million securities-litigation settlement expected to be covered by insurance, pending final judgment; a remaining Best Medical patent claim and a Rotary Systems trade-secret claim for which financial impact could not be estimated; and a newly refiled patent complaint by Radiation Stabilization Solutions. The TomoTherapy shareholder litigation was dismissed, and the court granted Accuray summary judgment in the Best Medical trade-secret case after quarter-end.
- The Siemens alliance’s future was uncertain after the TomoTherapy acquisition; either party’s termination right related to the acquisition was extended to December 31, 2011. The filing also disclosed $14.8 million of gross unrecognized tax benefits and a $0.4 million accrued net amount for tax interest and penalties.
Important facts for investors to verify
- Whether TomoTherapy integration improves margins and service profitability, and how much longer acquisition-related accounting adjustments affect results.
- Whether cash burn moderates and the company’s stated 12-month liquidity outlook remains achievable.
- Progress in remediating the material weakness and restoring effective disclosure controls.
- Conversion, repayment, and potential dilution or cash-settlement implications of the $100 million convertible notes.
- Developments in reimbursement, backlog conversion, and the identified patent and trade-secret matters.