Accuray Incorporated — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended December 31, 2016; comparisons are to the corresponding 2015 periods. Accuray designs and sells CyberKnife, TomoTherapy and Radixact radiation therapy systems and related services. Financial figures below are in U.S. dollars.
Financial performance
| Metric | Three months ended Dec. 31, 2016 | Six months ended Dec. 31, 2016 |
|---|---|---|
| Revenue | $87.5 million, down 20% | $174.0 million, down 12% |
| Product revenue | $35.4 million, down 37% | $71.0 million, down 26% |
| Service revenue | $52.1 million, down 2% | $103.0 million, approximately flat |
| Gross profit / margin | $31.4 million / 35.9% | $62.7 million / 36.0% |
| Operating loss | $4.8 million | $11.4 million |
| Net loss | $9.4 million; $0.11 per share | $19.3 million; $0.24 per share |
| Operating cash flow | $(11.4) million for the six-month period |
Quarterly net loss increased from $6.0 million in the prior-year quarter; six-month net loss was broadly unchanged from $19.1 million. Quarterly operating loss widened from $0.1 million. Lower product sales and product margins were the principal pressure: fewer systems reached revenue recognition and product/channel mix was less favorable. Service gross profit was down 3% for the quarter but up 4% for the six-month period. Operating expenses declined, partly reflecting lower R&D spending and lower prior-year litigation-related legal costs.
Liquidity, balance sheet and debt
- At December 31, 2016, cash and cash equivalents were $69.5 million and short-term investments were $38.9 million, totaling $108.4 million. Cash plus investments was down from $167.0 million at June 30, 2016.
- Current assets were $316.7 million and current liabilities $179.8 million; working capital was approximately $136.9 million. Total assets were $415.2 million and stockholders’ equity $46.7 million.
- Total debt carrying value was $170.2 million: $58.8 million secured term loan, $43.6 million 3.50% convertible notes, and $67.7 million 3.50% Series A convertible notes. The term loan is secured by substantially all company assets, has variable-rate interest and financial covenants. Convertible notes mature in February 2018.
- Cash declined $50.3 million over the six months. Operating activities used $11.4 million; financing activities used $41.2 million, mainly reflecting settlement of the remaining 3.75% notes and a $5.0 million secured-loan repayment.
- Management stated it expects cash resources and anticipated cash flows to fund operations for at least the next 12 months. Approximately $55.6 million of cash was held at foreign subsidiaries and considered indefinitely reinvested.
Material changes and operating indicators
- Product backlog was $426.2 million at December 31, versus $405.9 million at June 30, 2016. Backlog is not a GAAP measure and may be reduced by cancellations, age-outs and currency movements.
- Second-quarter gross orders rose to $78.5 million from $67.1 million; net orders rose to $54.1 million from $42.7 million. For the six months, gross orders declined to $128.8 million from $132.0 million, while net orders increased to $91.3 million from $87.5 million.
- Product revenue declines were attributed largely to fewer CyberKnife and TomoTherapy systems recognized, product and channel mix, and a longer conversion process, including distributor-channel timing. Higher post-contract support revenue from a larger installed base partly offset weakness in other services.
- Cash and investments fell substantially, while accounts receivable rose to $71.7 million from $56.8 million; management attributed the increase mainly to transaction timing and expected collections in the third fiscal quarter.
Outlook, risks and unusual items
- Management expected approximately $11.0 million of age-outs in the third fiscal quarter, compared with $19.9 million in the December quarter.
- The company reported no annual revenue or earnings guidance in the provided filing text. Management cautioned that interim results are not necessarily indicative of full-year results.
- Accuray identified long sales and installation cycles, customer funding and construction delays, cancellations and age-outs, regulatory approvals, foreign exchange exposure, product adoption and competitive developments as factors affecting results. It also warned that quarterly orders, revenue and margins can fluctuate materially.
- The secured-loan amendment modified certain financial covenants; Accuray paid a $0.3 million fee and repaid $5.0 million of the loan during the quarter. The loan carries leverage, coverage, EBITDA and capital expenditure covenants.
- A Madison, Wisconsin lease extension through 2025 increased disclosed operating lease obligations from $39.9 million at June 30 to $50.0 million at December 31, 2016.
- Accuray recorded a $1.4 million tax benefit in the first fiscal quarter following completion of Swiss tax audits; this contributed to the six-month tax benefit. No goodwill impairment was identified in the annual test.
- Management reported no current legal losses it considered both probable and reasonably estimable, and no liability for software-license indemnification. It reported no off-balance-sheet arrangements.
Important facts for investors to verify
- Whether system installations and customer collections occur as expected, particularly given rising receivables and the forecast of lower near-term age-outs.
- Whether backlog converts into recognized revenue; backlog can be affected by cancellations, age-outs, site delays and currency changes.
- Liquidity, cash burn and compliance with secured-loan covenants, including the refinancing or settlement plan for convertible notes due February 2018.
- Whether product sales and gross margins recover, and whether Radixact adoption and CyberKnife order trends support that recovery.
- Potential customer credit concentration: one customer represented 20% of accounts receivable at December 31, 2016.