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ARAY > SEC Filings for ARAY > Form 10-Q on 9-May-2013All Recent SEC Filings

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Form 10-Q for ACCURAY INC


9-May-2013

Quarterly Report


Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition as of March 31, 2013 and results of operations for the three and nine months ended March 31, 2013 and 2012 should be read together with our condensed consolidated financial statements and related notes included elsewhere in this report. Statements made in this quarterly report on Form 10-Q that are not statements of historical fact are forward-looking statements and are subject to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements in this report relate, but are not limited, to: expectations related to profitability and cash flows in fiscal 2013; sufficiency of cash resources and expected cash flows to fund future operations; expected uses of cash during fiscal 2013; the anticipated drivers of our future capital requirements; the impact of our prior sales reorganization on sales performance, particularly in the United States; the expected impact of and benefits from our recent restructuring of operations; anticipated increases in service revenue; the ongoing impact of purchase accounting adjustments; our expectations regarding the factors that will impact sales, competitive positioning and long-term success for our CyberKnife and TomoTherapy Systems; our expectations regarding the impact on our revenues and business of the introduction of our new CyberKnife and TomoTherapy Systems; the anticipated risks associated with our foreign operations and fluctuations in the U.S. dollar; the impact of recent legislation and regulation on our business; and the impact of the medical device excise tax on our business. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from expectations, including risks detailed from time to time under the heading "Risk Factors" in Part II, Item 1A of this report, Part I, Item 1A of the Company's annual report on Form 10-K for fiscal year 2012, Part II, Item 1A of the Company's quarterly reports on Form 10-Q for the quarters ended September 30, 2012 and December 31, 2012, respectively. Forward-looking statements speak only as of the date the statements are made and are based on information available to the Company at the time those statements are made and/or management's good faith belief as of that time with respect to future events. The Company assumes no obligation to update forward-looking statements to reflect actual performance or results, changes in assumptions or changes in other factors affecting forward-looking information, except to the extent required by applicable securities laws. Accordingly, investors should not place undue reliance on any forward-looking statements.

In this report, "Accuray," the "Company," "we," "us," and "our" refer to Accuray Incorporated and its subsidiaries.

Overview

Products and Markets

We believe we are a leading radiation oncology company with a history of rapid innovations. Our leading edge technologies are designed specifically to deliver radiosurgery, stereotactic body radiation therapy, intensity modulated radiation therapy, image guided radiation therapy and adaptive radiation therapy that is tailored to the specific needs of each patient. Our suite of products includes the CyberKnife® Systems and the TomoTherapy® Systems. The systems are generally complementary offerings, serving generally separate patient populations treated by the same medical specialty.

The CyberKnife Systems are robotic systems designed to deliver radiosurgery treatments to cancer tumors anywhere in the body. They are the only dedicated, full body robotic radiosurgery systems on the market. Radiosurgery is an alternative to traditional surgery for tumors and is performed on an outpatient basis in one to five treatment sessions. It allows for the treatment of patients who otherwise would not be treated with radiation, who may not be good candidates for surgery, or who desire non-surgical treatments. The use of radiosurgery with CyberKnife Systems to treat tumors throughout the body has grown significantly in recent years, but currently represents only a small portion of the patients who develop tumors treatable with CyberKnife Systems. A determination of when it may or may not be appropriate to use a CyberKnife System for treatment is at the discretion of the treating physician and depends on the specific patient. However, given the CyberKnife Systems' design to treat focal tumors, the CyberKnife Systems are generally not used to treat (1) very large tumors, which are considerably wider than the radiation beam that can be delivered by CyberKnife Systems, (2) diffuse wide-spread disease, as is often the case for late stage cancers, because they are not localized (though CyberKnife Systems might be used to treat a focal area of the disease) and
(3) systemic disease, like leukemias and lymphomas, which are not localized to an organ, but rather involve cells throughout the body.

In October 2012, we formally introduced two new versions of our technology platforms: the CyberKnife M6 Series and the TomoTherapy H Series. We expect that these new platforms will drive future orders and revenue growth. However, due to an aggressive product development and launch plan as well as certain manufacturing and supply issues affecting the new CyberKnife M6 Series with the Multileaf Collimator, or MLC, including low manufacturing yields with the MLC, we have experienced, and may continue to experience, delays in new orders and sales of these systems, which has had and may continue to have an adverse impact on our revenue levels and our business. Further continuation of these manufacturing and supply issues or the occurrence of new manufacturing and supply issues with either the CyberKnife M6 Series or the TomoTherapy H Series may adversely affect market acceptance of these new systems and negatively impact our revenue and our overall business.


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We believe that the long term success of the CyberKnife System is dependent on a number of factors including the following:

† Adoption of our recently introduced new CyberKnife platform and receipt of regulatory clearances associated with such new platform;

† Change in medical practice to utilize radiosurgery more regularly as an alternative to surgery or other treatments;

† Greater awareness among doctors and patients of the benefits of radiosurgery with the CyberKnife Systems;

† Continued evolution in clinical studies demonstrating the safety, efficacy and other benefits of using the CyberKnife Systems to treat tumors in various parts of the body;

† Continued advances in technology that improve the quality of treatments and ease of use of the CyberKnife Systems;

† Improved access to radiosurgery with the CyberKnife Systems in various countries through regulatory approvals;

† Medical insurance reimbursement policies that cover CyberKnife System treatments; and

† Expansion of sales of CyberKnife Systems in countries throughout the world.

The TomoTherapy Systems are advanced, fully integrated and versatile radiation therapy systems for the treatment of a wide range of cancer types. We began selling TomoTherapy Systems after our acquisition of TomoTherapy Incorporated on June 10, 2011. Radiation therapy is used in a variety of ways, often to treat tissue surrounding a tumor area after surgical removal of the tumor and also as the primary treatment for tumors. Radiation therapy treatments impact both cancer cells as well as healthy tissue; therefore the total prescribed radiation dose is divided into many fractions and delivered in an average of 25 to 35 treatment sessions over several weeks. Radiation therapy has been widely available and used in developed countries for decades, though many developing countries do not currently have a sufficient number of radiation therapy systems to adequately treat their domestic cancer patient populations. The number of radiation therapy systems in use and sold each year is currently many times larger than the number of radiosurgery systems. Large companies, including Varian Medical Systems, Inc. and Elekta AB, generate most of the sales in this market. We believe the TomoTherapy Systems offer clinicians and patients significant benefits over other radiation therapy systems in the market. We believe our ability to capture more sales in this established market will be influenced by a number of factors including the following:

† Adoption of our recently introduced new TomoTherapy platform and receipt of regulatory clearances associated with such new platform;

† Greater awareness among doctors and patients of the benefits of radiation therapy using TomoTherapy Systems;

† Advances in technology which improve the quality of treatments and ease of use of TomoTherapy Systems;

† Greater awareness among doctors of the improvement in reliability of TomoTherapy Systems; and

† Expansion of TomoTherapy System sales in countries throughout the world.

Sale of Our Products

Generating revenue from the sale of our systems is a lengthy process. Selling our systems, from first contact with a potential customer to a signed sales contract that meets our backlog criteria, generally spans six months to two years. The time from receipt of a signed contract to revenue recognition is governed generally by the time required by the customer to build, renovate or prepare the treatment room for installation of the system. This time varies significantly, generally from six to twenty-four months.

In the United States, we market to customers, including hospitals and stand-alone treatment facilities, directly through our sales organization. Outside the United States, we market to customers in over 92 countries directly and through distributors. We have sales and service offices in Japan and many countries in Europe and Asia.

The following table shows the number of systems installed by geographic region as of March 31, 2013:

                                        CyberKnife   TomoTherapy   Total
Americas                                       158           217     375
Europe, Middle East, India and Africa           64           100     164
Asia (excluding Japan)                          36            60      96
Japan                                           25            33      58
Total                                          283           410     693


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International sales of our products account for a significant and growing portion of our total net revenue. Revenue derived from sales outside of the United States was approximately $42.2 million and $55.2 million for the three months ended March 31, 2013 and 2012, respectively, and represented 60% and 54% of our net sales during these periods, respectively. Revenue derived from sales outside of the United States was approximately $131.8 million and $158.9 million for the nine months ended March 31, 2013 and 2012, respectively, and represented 57% and 51% of our net sales during these periods, respectively.

Backlog

We report backlog in the following manner:

† Products: Orders for systems, upgrades, and our shared ownership program are reported in backlog, excluding amounts attributable to PCS (warranty period services and post warranty services), installation, training and professional services.

† Service: Orders for PCS, installation services, training and professional services are not reported in backlog.

For orders that cover both products and services, only the portion of the order that is recognized as product revenue is reported as backlog. The portion of the order that is recognized as service revenue (for example, PCS) is not included in reported backlog. Additionally, orders for TomoTherapy Systems made on or before June 30, 2011, that met the historical TomoTherapy backlog criteria have been grandfathered into, and are included in, our backlog, with the exception of orders that would have "aged out" as of June 30, 2011. TomoTherapy previously did not have an "age out" criteria, so we have adjusted the TomoTherapy backlog to age out orders where 2.5 years have passed from the time the order entered TomoTherapy's backlog. As of March 31, 2013, product only backlog was $297.9 million as compared to $279.6 million as of March 31, 2012.

In order for the product portion of a sales agreement to be counted as backlog, it must meet the following criteria:

† The contract is signed and properly executed by both the customer and us. A customer purchase order that is signed and incorporates the terms of our contract quote will be considered equivalent to a signed and executed contract;

† The contract is non-contingent-it either has cleared all its contingencies or contains no contingencies when signed;

† We have received a minimum deposit or a letter of credit; the sale is a direct channel sale to a government entity, or the product has shipped to a customer with credit sufficient to cover the minimum deposit;

† The specific end customer site has been identified by the customer in the written contract or written amendment; and

† Less than 2.5 years have passed since the contract met all the criteria above.

Although our backlog includes only contractual agreements from our customers to purchase CyberKnife Systems or TomoTherapy Systems, we cannot provide assurance that we will convert backlog into recognized revenue due to factors outside our control, which includes, without limitation, changes in customers' needs or financial condition, changes in government or health insurance reimbursement policies, changes to regulatory requirements, or other reasons for cancellation of orders.

We also use book-to-bill ratios to assess the quality and growth of our backlog. The ratio is calculated for a period as new orders booked and included in backlog upon meeting criteria described above less any orders cancelled from backlog, and the resultant net orders being divided by total product revenue recognized during that period.


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Results of Continuing Operations

Three and nine month periods ended March 31, 2013 compared to three and nine month periods ended March 31, 2012

Net Revenue



                           Three Months Ended                                 Nine Months Ended
                               March 31,                      Variance in         March 31,                     Variance in
(Dollars in thousands)      2013        2012      Variance      Percent       2013        2012      Variance      Percent
Products                 $   25,023   $  59,875   $ (34,852 )         -58 % $  98,821   $ 179,851   $ (81,030 )         -45 %
Services                     45,524      41,720       3,804             9 %   132,253     127,218       5,035             4 %
Other                             -         221        (221 )        -100 %         -       1,621      (1,621 )        -100 %
Net Revenue              $   70,547   $ 101,816   $ (31,269 )         -31 % $ 231,074   $ 308,690   $ (77,616 )         -25 %

Total revenues during the three months ended March 31, 2013 decreased by 31% from the three months ended March 31, 2012 primarily due to lower product revenues. We recognized revenues on 9 units during the three months ended March 31, 2013 as compared to 21 units during the three months ended March 31, 2012. The decrease in units along with a decline in average selling price per unit resulted in decreases in product revenues of $34.9 million during the three months ended March 31, 2013 as compared to the three months ended March 31, 2012.

Total revenues during the nine months ended March 31, 2013 decreased by 25% from the nine months ended March 31, 2012 primarily due to lower product revenues. We recognized revenues on 36 units during the nine months ended March 31, 2013 as compared to 69 units during the nine months ended March 31, 2012. This resulted in decreases in product revenues of $81.0 million during the nine months ended March 31, 2013 as compared to the nine months ended March 31, 2012. During the three and nine months ended March 31, 2013, product revenues from the sale of our units have continued to be slow primarily in the North American and Asia-Pacific regions due to the slowdown in capital expenditures by hospitals, continued uncertainties around economic growth in certain key markets, and the lack of availability of the new models of the CyberKnife System and the TomoTherapy System.

Services revenues during the three and nine months ended March 31, 2013 increased by $3.8 million and $5.0 million, respectively, from the three and nine months ended March 31, 2012. Service revenues during the three and nine months ended March 31, 2012 included $1.9 million and $10.6 million, respectively, of service revenues arising from purchase accounting adjustments related to the TomoTherapy acquisition which was completed in June 2011. Such purchase accounting adjustments were not material during the three and nine months ended March 31, 2013. Excluding such adjustments, service revenues increased by $5.7 million and $15.6 million, respectively, during the three and nine months ended March 31, 2013 as compared to the three and nine months ended March 31, 2012 primarily due to increases in sales of higher priced maintenance contracts, particularly to customers using the TomoTherapy systems, as well as an increase in our installed base. We expect our service revenue to increase as our installed base continues to grow.

Gross Profit



                                     Three Months Ended March 31,                             Nine Months Ended March 31,
                                   2013                        2012                        2013                        2012
                          (Dollars in    (% of net    (Dollars in    (% of net    (Dollars in    (% of net    (Dollars in    (% of net
(Dollars in thousands)    thousands)     revenue)     thousands)     revenue)     thousands)     revenue)     thousands)     revenue)
Gross profit             $      20,053        28.4 % $      36,111        35.5 % $      70,355        30.4 % $     100,782        32.6 %
Products                         6,620        26.5 %        27,474        45.9 %        37,845        38.3 %        76,277        42.4 %
Services                        13,433        29.5 %         8,620        20.7 %        32,510        24.6 %        23,592        18.5 %
Other                                -         0.0 %            17         7.7 %             -         0.0 %           913        56.3 %

The overall gross profit margin during the three and nine months ended March 31, 2013 declined by 7.1 percentage points and 2.2 percentage points, respectively, as compared to the three and nine months ended March 31, 2012. Product margins were lower during the three and nine months ended March 31, 2013 primarily due to higher cost of units sold attributed to higher per-unit production-related costs resulting from lower volume of production and lower revenues per unit, partially offset by the favorable impact of a net reduction in purchase accounting adjustments resulting from the acquisition of TomoTherapy on June 10, 2011. Service margins were higher during the three and nine months ended March 31, 2013 primarily due to improvements in the reliability of the TomoTherapy Systems leading to reduced parts usage and other cost saving initiatives, partially offset by the unfavorable impact of a net reduction in purchase accounting adjustments resulting from the acquisition of TomoTherapy on June 10, 2011.

In accordance with purchase accounting standards, a number of adjustments were recorded to the value of assets and liabilities of TomoTherapy as of the closing of the acquisition on June 10, 2011. These included the write-up of inventory based on selling price rather than cost of manufacturing, the write-down of deferred product revenue, the write-up of deferred service revenue, and the recording of intangible assets related to developed technology and to backlog existing at the time of the acquisition. On the acquisition date, deferred service and product revenues were valued at cost plus a reasonable margin. Purchase accounting adjustments decreased gross profits for the three months ended March 31, 2012 by $2.7 million as follows: Product revenues were reduced by $1.3 million while product cost of revenues was increased by $3.8 million; Services revenues were increased by $1.9 million while services cost of revenues was decreased by $0.5 million. Purchase


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accounting adjustments reduced gross profit for the nine months ended March 31, 2012 by $11.8 million as follows: Product revenues were reduced by $1.9 million, while product cost of revenues was increased by $19.7 million; Services revenues were increased by $10.6 million while services cost of revenues was increased by $0.8 million. Purchase accounting adjustments reduced gross profit for the three and nine months ended March 31, 2013 by $1.7 million and $6.9 million, respectively, resulting primarily from the increases in product cost of revenues by $1.7 million and $6.8 million, respectively.

Selling and Marketing



                              Three Months Ended                                 Nine Months Ended
                                  March 31,                      Variance in         March 31,                      Variance in
(Dollars in thousands)         2013         2012     Variance      Percent        2013        2012      Variance      Percent
Selling and marketing       $    12,646   $ 12,449   $     197             2 % $   41,296   $ 40,047   $    1,249             3 %
Percentage of net revenue          17.9 %     12.2 %                                 17.9 %     13.0 %

Selling and marketing expenses increased by $0.2 million during the three months ended March 31, 2013 as compared to the three months ended March 31, 2012 primarily due to higher compensation related costs of $0.8 million and travel related costs of $0.2 million, resulting from a re-organization of the marketing function, partially offset by cost control initiatives, resulting in lower facilities and information technology related expenses of $0.5 million and tradeshow and advertising related expenses of $0.3 million.

Selling and marketing expenses increased by $1.2 million during the nine months ended March 31, 2013 as compared to the nine months ended March 31, 2012 primarily due to higher tradeshow and advertising related expenses of $1.8 million and consulting expenses of $0.3 million related to the introduction of two new products at an industry trade show in October 2012, partially offset by lower travel related expenses of $0.5 million and other operational expenses of $0.2 million due to cost control initiatives.

Research and Development



                              Three Months Ended                                 Nine Months Ended
                                  March 31,                      Variance in         March 31,                     Variance in
(Dollars in thousands)         2013         2012     Variance      Percent        2013        2012     Variance      Percent
Research and development    $    15,697   $ 22,398   $  (6,701 )         -30 % $   51,510   $ 59,799   $  (8,289 )         -14 %
Percentage of net revenue          22.3 %     22.0 %                                 22.3 %     19.4 %

Research and development expenses decreased by $6.7 million during the three months ended March 31, 2013 as compared to the three months ended March 31, 2012 primarily due to decreases in consulting and project related costs of $3.4 million and facilities and information technology related costs of $1.8 million due to cost control initiatives and a reduction in development related activities after the two new product introductions at an industry trade show in October 2012 as well as lower compensation related costs of $0.9 million and travel related costs of $0.5 million resulting from a re-organization of the research and development function.

Research and development expenses decreased by $8.3 million during the nine months ended March 31, 2013 as compared to the nine months ended March 31, 2012 primarily due to decreases in consulting and project related costs of $5.3 million and facilities and information technology related costs of $1.7 million due to cost control initiatives and a reduction in development related activities after the two new product introductions at an industry trade show in October 2012 as well as lower compensation related costs of $0.7 million and travel related costs of $0.6 million resulting from a re-organization of the research and development function during the three months ended March 31, 2013.

General and Administrative



                               Three Months Ended                                  Nine Months Ended
                                   March 31,                       Variance in         March 31,                      Variance in
(Dollars in thousands)          2013         2012      Variance      Percent        2013        2012      Variance      Percent
General and administrative   $    16,745   $ 13,964   $    2,781            20 % $   45,479   $ 42,047   $    3,432             8 %
Percentage of net revenue           23.7 %     13.7 %                                  19.7 %     13.6 %

General and administrative expenses increased by $2.8 million during the three months ended March 31, 2013 as compared to the three months ended March 31, 2012 primarily due to $4.9 million of severance charges incurred due to the restructuring of operations announced in January 2013. This was partially offset by lower compensation related costs of $1.1 million, lower consulting, legal and accounting related expenses of $0.6 million and lower travel and operational expenses of $0.4 million due to cost control initiatives.

General and administrative expenses increased by $3.4 million during the nine months ended March 31, 2013 as compared to the nine months ended March 31, 2012 primarily due to $7.2 million of severance charges incurred for the departure of our former CEO, COO and other employees in the three months ended December 31, 2012 and the restructuring of operations announced in January 2013 and $1.7 million related to lease acceleration and fixed asset disposal charges from vacating an office facility during December 2012. This was partially offset by lower consulting, legal and accounting related expenses of $2.8 million, lower compensation related costs of $2.1 million, lower facilities and information technology related costs of $0.3 million and lower travel and operational related expenses of $0.2 million due to cost control initiatives.


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Other Expense, Net

Three Months Ended Nine Months Ended
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