Business Context and Reporting Period
Company: Accuray Incorporated
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: December 27, 2008 (Fiscal Q2 2009)
Business Overview: Accuray designs, develops, and sells the CyberKnife system, an image-guided robotic radiosurgery system used for treating solid tumors. The company operates globally with subsidiaries in Europe, Asia, and the Americas. As of December 31, 2008, 155 CyberKnife systems were installed at customer sites.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Dec 31, 2008 | Six Months Ended Dec 31, 2008 | Six Months Ended Dec 31, 2007 |
|---|---|---|---|
| Total Net Revenue | $57,637 | $113,494 | $100,684 |
| Gross Profit | $29,409 | $57,838 | $53,773 |
| Gross Margin | 51.0% | 51.0% | 53.4% |
| Operating Income (Loss) | $633 | $(3,605) | $730 |
| Net Income (Loss) | $1,350 | $(1,829) | $4,608 |
| Diluted EPS | $0.02 | $(0.03) | $0.08 |
| Cash and Cash Equivalents (End of Period) | $29,373 (as of Dec 31, 2008) | ||
| Net Cash Used in Operating Activities | $(12,696) (Six Months 2008) | ||
| Total Assets | $285,551 (as of Dec 31, 2008) | ||
| Total Liabilities | $142,941 (as of Dec 31, 2008) |
Material Changes vs. Prior Period
- Revenue Growth: Total net revenue increased 10.8% year-over-year for the six months ended Dec 31, 2008, driven by a 13.9% increase in service revenue and a 3.5% increase in product revenue. Product revenue grew despite a decrease in the number of units recognized (18 units in 2008 vs. 25 units in 2007) due to higher average selling prices and the recognition of legacy service plan revenue.
- Profitability Decline: The company reported a net loss of $1.8 million for the six months ended Dec 31, 2008, compared to net income of $4.6 million in the prior year period. This shift was primarily due to increased operating expenses and a net loss on investment securities.
- Operating Expenses: General and administrative expenses increased by $3.8 million (24%) year-over-year, largely due to $2.0 million in non-recurring employee separation costs and increased legal/audit fees related to an internal investigation. Selling and marketing expenses increased by $2.9 million.
- Investment Losses: "Other income, net" decreased significantly due to a net loss of $860,000 related to the reclassification of Auction Rate Securities (ARS) from available-for-sale to trading securities, resulting in a $4.2 million unrealized loss partially offset by a $3.3 million gain on a put option.
Guidance, Outlook, Risks, and Unusual Items
- Workforce Alignment Plan: On January 29, 2009, the company announced a plan to reduce headcount by approximately 60 positions (13% of the U.S. workforce). The company expects to record restructuring charges of approximately $1.7 million in the remainder of fiscal 2009, with estimated annual savings of $8.7 million starting in fiscal 2010.
- Internal Control Weaknesses: The company identified material weaknesses in internal controls over financial reporting regarding revenue recognition and inventory handling. Management is implementing remediation plans, but controls were deemed ineffective as of December 31, 2008.
- Investment Liquidity: The company holds $22.4 million in par value of Auction Rate Securities (ARS) which have failed to auction. These were written down to a fair value of $18.2 million. The company has a "Rights Agreement" with UBS allowing the sale of these securities at par value between June 2010 and July 2012.
- Regulatory Risks: The company faces risks related to FDA clearances for product modifications and changes in Medicare reimbursement rates. CMS reduced payment rates for CyberKnife procedures for 2009 compared to 2008.
- Backlog: Total backlog was $597.9 million as of December 31, 2008, down from $647.0 million at the end of the prior fiscal year. Non-contingent backlog was $451.7 million.
Investor Verification Checklist
- Internal Controls: Verify the progress of remediation efforts for the material weaknesses in revenue recognition and inventory accounting.
- Restructuring Impact: Monitor the execution of the Workforce Alignment Plan and the realization of the projected $8.7 million in annual savings.
- ARS Liquidity: Track the status of the $22.4 million in Auction Rate Securities and the terms of the UBS Rights Agreement regarding the potential sale at par value.
- Reimbursement Rates: Assess the impact of the 2009 Medicare payment rate reductions on customer demand and sales cycles.
- Inventory Valuation: Review inventory levels and write-downs given the recent investigation into inventory handling and the $1.5 million loss on write-down of inventories recorded in the period.