Accuray Incorporated — Form 10-Q Summary
Reporting period: The filing covers the quarter ended March 31, 2017, Accuray’s fiscal 2017 third quarter, and the nine months then ended. This differs from the request metadata’s “2016 Q3.” Financial statements are unaudited; amounts below are USD millions unless noted.
Business context and financial performance
Accuray develops, manufactures, sells and supports CyberKnife, TomoTherapy and Radixact radiation therapy systems, as well as related services. It reports one operating segment.
| Metric | Three months ended Mar. 31, 2017 | Prior-year quarter | Nine months ended Mar. 31, 2017 | Prior-year nine months |
|---|---|---|---|---|
| Revenue | $97.3 | $105.3 | $271.3 | $303.8 |
| Product revenue | $48.0 | $53.7 | $119.0 | $149.5 |
| Service revenue | $49.3 | $51.5 | $152.3 | $154.3 |
| Gross profit / margin | $35.4 / 36% | $44.9 / 43% | $98.2 / 36% | $121.4 / 40% |
| Operating income (loss) | $(1.3) | $5.4 | $(12.6) | $(1.9) |
| Net income (loss) | $(5.0) | $0.8 | $(24.3) | $(18.3) |
| Diluted earnings (loss) per share | $(0.06) | $0.01 | $(0.30) | $(0.23) |
Quarterly revenue fell 8%; nine-month revenue fell 11%. Product revenue declined mainly because fewer systems were recognized, including a shift in system and channel mix and slower conversion of distributor orders. Service revenue also decreased modestly. Quarterly gross margin contracted to 36%, with lower system volume and higher service costs contributing. Nine-month operating and net losses widened year over year despite lower operating expenses and other expense.
Cash flow, liquidity and debt
- At March 31, 2017, cash and cash equivalents were $60.2 and short-term investments were $23.9, totaling $84.1. Restricted cash was $14.2, including $12.5 supporting a letter of credit. Cash, cash equivalents and restricted cash totaled $74.4.
- Current assets were $310.3 and current liabilities $296.2; reported current debt was $115.7. Total debt carrying value was approximately $170.0, against principal of $176.5. Stockholders’ equity was $45.5.
- Nine-month operating cash flow was negative $24.1, compared with positive $11.1 a year earlier. The filing attributes significant operating cash use to a $30.6 increase in accounts receivable, partly offset by higher accounts payable. Investing provided $19.6, principally from investment maturities and sales; financing used $41.4, primarily for debt repayments.
- Cash, cash equivalents and restricted cash declined $47.7 over the nine-month period. Management said available cash, equivalents and investments, together with anticipated cash flows, should fund operations for at least 12 months.
Material changes, outlook and risks
- Product backlog was $450.0 at March 31, versus $405.9 at June 30, 2016. Nine-month gross orders rose to $212.6 from $188.4, and net orders to $163.1 from $145.0. Backlog is not a GAAP measure or a guarantee of future revenue; cancellations, age-outs, installation delays and currency movements can affect conversion.
- Management expected approximately $17.0 of age-outs in fiscal Q4, compared with $8.5 in the reported quarter. No specific revenue or earnings guidance was provided.
- In March 2017, the secured loan was amended: covenant terms changed, interest margins increased by 0.50 percentage points until specified conditions are met, and a $12.5 letter of credit was required. Accuray reported covenant compliance at March 31. The $115.0 principal of convertible notes matures in February 2018; the secured loan’s stated maturity may also be affected by that notes maturity unless specified funding conditions are met.
- Risks include continued losses and a $445.1 accumulated deficit, high leverage, near-term convertible debt maturity, covenant and refinancing exposure, volatility in system sales and margins, customer delays or cancellations, and foreign-exchange exposure. One customer represented 13% of quarterly revenue and 25% of receivables at March 31.
- Management reported no probable and reasonably estimable losses from current legal proceedings. Accuray disclosed a subsequent decision to eliminate the COO role after fiscal 2017; the COO was expected to leave July 5, 2017. Disclosure controls were assessed as effective.
Important facts for investors to verify
- How the company will address the February 2018 convertible-note maturity and the related secured-loan maturity provisions.
- Compliance with amended loan covenants, the status and terms of the $12.5 letter of credit, and the effect of higher borrowing margins.
- Whether backlog converts to revenue as expected, especially given the forecast Q4 age-outs, cancellations and distributor-channel timing.
- Whether receivables and operating cash flow improve after the substantial working-capital cash outflow.
- The drivers of weaker product and service gross margins and the path to sustained profitability.