Accuray Incorporated — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended December 31, 2015. Accuray develops, sells, and supports CyberKnife and TomoTherapy radiation-treatment systems. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Key financial results
| Metric | Three months ended Dec. 31, 2015 | Six months ended Dec. 31, 2015 | Comparison |
|---|---|---|---|
| Revenue | $108.9 | $198.5 | Up 11% and 10%, respectively |
| Gross profit / margin | $42.6 / 39% | $76.5 / 39% | Prior-year margins were 39% and 37% |
| Operating loss | $(0.1) | $(7.4) | Prior-year losses were $3.6 and $18.9 |
| Net loss | $(6.0) | $(19.1) | Prior-year losses were $10.0 and $31.6 |
| Net loss per share, diluted | $(0.08) | $(0.24) | Prior-year losses per share were $(0.13) and $(0.41) |
| Operating cash flow | Not presented for quarter | $20.3 | Prior-year six-month use was $13.0 |
| Cash and short-term investments | $155.8 at Dec. 31, 2015 | Cash $88.5; investments $67.3 | |
| Debt, carrying value | $206.7 at Dec. 31, 2015 | $96.6 current and $110.2 long-term |
Performance and changes versus prior year
- Quarterly product revenue rose 17% to $55.8 million, primarily from more CyberKnife and TomoTherapy systems recognized as revenue. Services revenue rose 5% to $53.2 million, partly due to training revenue from expiring training points; management did not expect training revenue at that level to continue.
- For the six-month period, product revenue increased 19% to $95.8 million and services revenue increased 3% to $102.8 million. Higher system volumes and associated fixed-cost leverage supported product gross profit growth; service gross profit also improved.
- Six-month operating cash flow improved by $33.3 million year over year. Working-capital contributors included collections of receivables and increases in payables and deferred revenue; inventory increased $5.7 million. Capital expenditures were $4.1 million.
- At December 31, current assets were $358.3 million and current liabilities were $274.2 million. Current liabilities included $96.6 million of short-term debt. Cash and cash equivalents increased $8.9 million from June 30.
- Six-month selling and marketing expense declined 16% to $28.5 million, while R&D increased 4% to $29.2 million and general and administrative expense increased 12% to $26.1 million. G&A growth primarily reflected Cowealth-related legal expense.
Backlog, outlook, and management commentary
- Product backlog was $366.7 million at December 31, versus $357.8 million a year earlier. Six-month net orders were $87.5 million, compared with $73.8 million; gross orders were broadly similar at $132.0 million versus $131.0 million.
- Management expected fiscal third-quarter age-outs of $5 million to $8 million. Backlog conversion remains exposed to cancellations, age-outs after 2.5 years, customer delays, and foreign-exchange movements. Management said order-process changes were intended to improve backlog quality and reduce age-outs.
- Management stated that available cash, investments, and anticipated cash flows were expected to fund operations for at least 12 months. This assessment was made before the January 2016 financing and note repurchase described below. No specific full-year revenue or earnings guidance is provided in the supplied filing text.
- The CyberKnife M6 InCise multi-leaf collimator had been commercially launched in fiscal Q3 2015. Management cited continued adoption and reliable production of the MLC, clinical acceptance, regulatory approvals, reimbursement, and international sales as factors affecting future growth.
Unusual items, contingencies, and key risks
- Cowealth arbitration: An October 2015 award was corrected on January 21, 2016, increasing damages payable from approximately $3.4 million to $5.5 million. The company recorded the additional $2.1 million charge in the December quarter. Interest accrues at 5% annually beginning 30 days after the corrected award. A separate legal-cost ruling remained pending; management had not accrued additional legal fees.
- January 2016 debt transactions: Accuray entered into a $70 million first-lien secured term loan, with a 700-basis-point margin and 1% LIBOR floor, to be used with $30 million of company cash to retire $100 million of convertible notes. The loan has a five-year final maturity, 5% annual amortization, and maintenance covenants covering leverage, fixed-charge coverage, minimum EBITDA, and capital expenditures. The filing says the loan is subject to covenant restrictions.
- In January 2016, Accuray repurchased approximately $63.4 million principal amount of 3.75% convertible notes for $66.6 million cash and expected to record an approximately $1.0 million charge in fiscal Q3. After these transactions, the company reported approximately $44.7 million of 3.50% notes, $36.6 million of 3.75% notes, and $70.3 million of Series A notes remaining.
- Rotary Systems trade-secret litigation had returned to discovery after an appellate ruling; the plaintiff sought unspecified damages exceeding $50,000. Management said it could not reasonably estimate possible losses in certain legal matters.
- Other material risks include continuing losses and a $414.4 million accumulated deficit, substantial indebtedness and covenant compliance, extended customer payment terms (12% of receivables had terms exceeding one year), foreign-exchange exposure, reimbursement and healthcare-policy changes, and reliance on certain single-source suppliers.
- Goodwill impairment testing in fiscal Q2 found no impairment. Management reported effective disclosure controls as of December 31, 2015 and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether backlog converts to revenue on schedule, particularly given age-outs, cancellations, and customer installation delays.
- Cash availability after the January note repurchase and the effect of the secured loan’s covenants, interest cost, and repayment requirements.
- The final cash impact of the Cowealth award, including interest and any later ruling on legal costs.
- Whether revenue growth and gross margins can be sustained without the temporary contribution from training-point expirations.
- Customer collections and credit exposure from extended payment terms, alongside inventory levels and future operating cash flow.
- Future demand, regulatory and reimbursement developments, MLC production and adoption, and currency effects on sales and backlog.