Accuray Incorporated — Form 10-Q Summary
Business context and reporting period. Accuray designs and sells CyberKnife radiosurgery and TomoTherapy radiation therapy systems, with related service revenue. This filing covers the quarter and six months ended December 31, 2012 (the second quarter of fiscal 2013), compared with the periods ended December 31, 2011. In October 2012, the company introduced the CyberKnife M6 Series and TomoTherapy H Series.
Financial performance and liquidity
| Metric | Three months ended Dec. 31, 2012 | Six months ended Dec. 31, 2012 |
|---|---|---|
| Revenue | $77.8 million, down 27% year over year | $160.5 million, down 22% |
| Gross profit / margin | $26.6 million / 34.2% (prior year 37.8%) | $50.3 million / 31.3% (prior year 31.3%) |
| Operating loss | $22.3 million | $42.9 million |
| Net loss attributable to stockholders | $29.2 million, or $0.40 per diluted share | $53.3 million, or $0.74 per diluted share |
| Cash used in operating activities | Not reported separately for the quarter | $41.8 million (prior year $38.4 million) |
- Quarterly product revenue fell 48% to $33.2 million; service revenue rose 6% to $44.6 million. The company recognized revenue on 11 systems, versus 24 a year earlier. For the six months, system revenue was recognized on 26 units versus 48.
- At December 31, cash and cash equivalents were $94.8 million, down from $143.5 million at June 30; restricted cash was $2.7 million. Current assets were $272.0 million and current liabilities $168.0 million.
- Long-term debt had a carrying value of $81.6 million; the 3.75% convertible notes have $100 million principal and mature August 1, 2016. Six-month interest expense on the liability component was $4.0 million.
- Inventory increased to $88.8 million from $81.7 million, with management attributing the increase partly to delays manufacturing newly introduced products.
Changes versus the prior comparable period
- Lower system volume drove the revenue decline. Service revenue increased, reflecting a larger installed base; excluding TomoTherapy purchase-accounting effects in the prior year, service revenue rose $6.2 million for the quarter and $9.9 million for the six months.
- Quarterly gross margin declined 3.6 percentage points, mainly from higher product costs; improved TomoTherapy reliability supported service margins. Six-month gross margin was unchanged year over year.
- Operating expenses were $48.9 million for the quarter, up from $45.7 million. General and administrative expense included $2.2 million of severance and $1.7 million for vacated-facility lease and asset-disposal charges.
- Six-month operating cash use increased by $3.4 million year over year. The 2012 period included $10.7 million of working-capital cash use, notably higher inventory and lower accrued liabilities.
Outlook, risks, and unusual items
- Management expected cash resources and anticipated cash flows to fund operations for at least 12 months, while expecting cash use for the remainder of fiscal 2013 from operating losses and capital expenditures. On February 6, 2013, the company announced its intention to pursue a Rule 144A financing; terms and proceeds are not stated in the filing.
- A January 2013 restructuring reduced staffing by approximately 13%. The company expected a $3–$4 million charge, mostly in fiscal Q3, and estimated annual savings of approximately $40 million versus fiscal 2012 operating expenses as originally reported. Realization of savings and improved commercial execution are uncertain.
- Management cited low manufacturing yields and supply issues for the CyberKnife M6 multileaf collimator, which delayed orders and sales. The company warned that continued manufacturing problems, slow adoption of new systems, competition, regulatory matters, reimbursement, foreign exchange, and customer capital-spending decisions could affect results.
- Discontinued CPAC operations produced a six-month loss of $19.1 million, including a $12.2 million impairment of in-process research and development and a $3.4 million deconsolidation loss. Accuray transferred its CPAC investments and DWA technology rights for nominal consideration in December 2012.
- Legal matters include a pending Best Medical patent case, a Rotary Systems trade-secret claim, and a Sarif Biomedical patent complaint filed January 28, 2013. The company said it could not estimate potential financial impacts for the matters identified as unquantifiable. It settled the RSS patent case for $150,000.
- The Sunnyvale manufacturing facility’s June 2012 FDA inspection resulted in observations and was initially classified as Voluntary Action Indicated; the company reported corrective actions but gave no assurance those actions would be sufficient. Management concluded disclosure controls were effective as of December 31, 2012.
Important facts for investors to verify
- Whether CyberKnife M6 manufacturing yields and supply constraints improve, and whether new-system orders and recognized product revenue recover.
- Whether the restructuring delivers the stated savings without impairing sales execution, and how the $3–$4 million charge is recognized.
- Cash burn, liquidity after the announced financing, and the availability and terms of any financing actually completed.
- Conversion, repayment, and potential dilution implications of the $100 million convertible notes.
- Progress and potential exposure in the pending litigation, including Best Medical and Sarif Biomedical, and any material FDA follow-up.