Accuray Incorporated — Form 10-Q summary
Reporting period: Quarter ended March 31, 2016 (fiscal 2016 third quarter), with nine-month results compared with the periods ended March 31, 2015. The request metadata says “2015 Q3,” but the filing itself is for 2016 Q3.
Financial performance
| Metric | Three months ended March 31 | Nine months ended March 31 |
|---|---|---|
| Revenue, 2016 vs. 2015 | $105.3m vs. $97.5m (+8%) | $303.8m vs. $278.1m (+9%) |
| Gross profit / margin | $44.9m / 42.7% vs. $38.7m / 39.6% | $121.4m / 40.0% vs. $105.0m / 37.7% |
| Operating income (loss) | $5.4m vs. $1.2m | ($1.9m) vs. ($17.7m) |
| Net income (loss) | $0.8m vs. ($3.0m) | ($18.3m) vs. ($34.6m) |
- Quarterly product revenue rose 16% to $53.7m, mainly from more systems recognized; service revenue was nearly flat at $51.5m. For nine months, product revenue increased 18% and services increased 2%.
- Quarterly product gross margin improved to 44.9% from 41.0%; service gross margin rose to 40.4% from 38.4%. Nine-month margins were 42.9% for products and 37.1% for services.
- Quarterly operating expenses were $39.5m, up 5%. Nine-month expenses were $123.3m, nearly flat; lower selling and marketing spending was partly offset by higher R&D and G&A, including legal costs.
- Other expense was $4.0m for the quarter and $14.1m for nine months. Quarterly expense included a roughly $1.0m loss on debt extinguishment; nine-month results also reflected currency hedging and interest costs.
Cash, liquidity and debt
- At March 31, 2016, cash and cash equivalents were $79.2m and short-term investments were $70.7m, totaling $149.8m. Current assets were $380.6m against current liabilities of $229.6m.
- For the nine months, operating cash flow was positive $13.6m, versus cash used of $12.6m in the prior-year period. Investing used $12.9m and financing used $1.0m. Cash declined $0.4m to $79.2m.
- Debt carrying value was $209.7m, including $39.3m classified as short-term and $170.4m long-term. The company obtained a $70m first-lien secured loan in January, with variable-rate pricing, quarterly principal installments, financial covenants and liens on substantially all assets.
- Accuray repurchased $63.4m principal of its 3.75% convertible notes for $66.6m in January; approximately $36.6m principal remained outstanding, maturing August 2016. Management said loan proceeds and company cash were intended to retire the original $100m note issue by its maturity. Other convertible notes mature in February 2018.
- Management said available cash, investments and expected cash flows should fund operations for at least 12 months. About $56.2m of cash was held at foreign subsidiaries and considered indefinitely reinvested.
Changes, outlook and notable items
- Revenue growth and higher gross margins improved quarterly operating results to profit and narrowed the nine-month loss. Product system shipments drove most revenue growth; sales outside the Americas accounted for 69% of quarterly revenue, versus 46% a year earlier.
- Product backlog was $370.5m at March 31, down from $375.0m at June 30, 2015. Nine-month net orders were $145.0m versus $109.7m; currency movements and changes in age-outs contributed to the increase. Management expected fourth-quarter fiscal 2016 age-outs of $8m–$11m.
- Management identified adoption and production of the CyberKnife M6/InCise MLC, clinical evidence, regulatory approvals, reimbursement and international sales as factors affecting future performance. No specific revenue or earnings guidance was provided.
- The Cowealth arbitration resulted in a corrected damages award of approximately $5.5m plus $2.4m of arbitration costs; the company recorded charges in the first and second fiscal quarters. Rotary Systems litigation was settled on April 19, 2016, after quarter-end; a dismissal was expected by May 25. The filing says some legal matters could involve material losses, but estimates for certain matters were unavailable.
- Key risks include continuing losses and accumulated deficit of $413.6m, substantial leverage and loan covenants, note maturities, extended customer payment terms, foreign-exchange exposure, backlog cancellations or aging, and reliance on some single-source suppliers. The company reported no open forward contracts at quarter-end.
Important facts for investors to verify
- Whether fourth-quarter collections, shipments and backlog conversion met expectations, including the forecast $8m–$11m of age-outs.
- Remaining convertible-note repayment needs, secured-loan interest costs and covenant compliance.
- Final costs and dismissal status of the Rotary Systems settlement, and payment and accounting treatment of the Cowealth award.
- Whether quarterly profitability and positive operating cash flow can be sustained despite nine-month losses and working-capital needs.
- Extent of customer exposure from extended payment terms and the impact of foreign exchange, particularly as international revenue grows.