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ARAY > SEC Filings for ARAY > Form 10-K on 29-Aug-2013All Recent SEC Filings

Show all filings for ACCURAY INC

Form 10-K for ACCURAY INC


29-Aug-2013

Annual Report


Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion of our consolidated financial condition and results of operations in conjunction with the financial statements and the notes thereto included elsewhere in this report. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this report on Form 10-K, particularly in "Risk Factors." See "Special Note Regarding Forward-Looking Statements."

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. The CyberKnife Systems 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 introduced our new CyberKnife M6 Series Systems that come in configurations that have the option of: fixed collimator, iris collimator, and multi-leaf collimator, or MLC. The vendor producing the MLC for our CyberKnife M6 Series Systems has experienced low manufacturing yields and has been able to deliver only a small number of units. Our life-cycle testing revealed that the units did not have the durability that we, and our customers, expect in our products. Therefore, we have decided that we will not release the MLC units produced by our current supplier to the market for commercial use. We are working with additional vendors for key components of our MLC and expect that this will enable us to produce an MLC that meets our standards in the future. The delay in shipment of our MLC may cause a delay in new orders and shipments of CyberKnife M6 Series Systems.

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

º •
º Adoption of our recently introduced new CyberKnife M6 Series Systems;


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º •
º Production and shipment of our MLC that meets the standards that we, and our customers, expect in our products;

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

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

º •
º 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;

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

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

º •
º Medical insurance reimbursement policies that cover CyberKnife System treatments; and

º •
º 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. In October 2012, we introduced our new TomoTherapy H Series Systems that come in configurations of TomoHTM, TomoHDTM and TomoHDATM. 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:

º •
º Adoption of our recently introduced new TomoTherapy H Series Systems;

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

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

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

º •
º 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


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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, in many countries in Europe and Hong Kong.

The following table shows the number of systems installed by geographic region as of June 30, 2013:

                                              CyberKnife     TomoTherapy    Total
     Americas                                         159             215      374
     Europe, Middle East, India and Africa             68             100      168
     Asia (excluding Japan)                            37              61       98
     Japan                                             27              33       60

     Total                                            291             409      700

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 $172.4 million, $220.2 million and $99.6 million in fiscal 2013, 2012 and 2011, respectively. International sales as a percentage of our total net revenue were 55% in fiscal 2013, 54% in fiscal 2012 and 45% in fiscal 2011.

Backlog

We report backlog in the following manner:

º •
º Products: Orders for systems, upgrades excluding those acquired through the upgrade rights included in our Diamond service contracts, 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.

º •
º Service: Orders for PCS, upgrades acquired through the upgrade rights included in our Diamond service contracts, 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. Product backlog totaled $317.4 million as of June 30, 2013. This included $34.1 million of orders for either new CyberKnife M6 Systems configured with an MLC or orders for MLC units to upgrade existing installed CyberKnife M6 Systems. Additionally, for $16.1 million of CyberKnife orders, the customer has the option to upgrade to the new platform (M6) if the CyberKnife M6 Series is approved by regulatory authorities in their country prior to shipment. Product backlog totaled $283.6 million as of June 30, 2012.


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

º •
º 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;

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

º •
º 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;

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

º •
º 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.

Results of Operations

Years ended June 30, 2013, 2012 and 2011

We acquired TomoTherapy on June 10, 2011. As a result, our results for the fiscal year ended June 30, 2011 include revenues, cost of revenues and operating expenses of TomoTherapy for the 20-day period from the acquisition date to the end of our fiscal year (June 30, 2011). Our results for the years ended June 30, 2013 and 2012 include revenues, cost of revenues and operating expenses of TomoTherapy for the full fiscal years. In addition, we made a number of purchase accounting adjustments to the recorded values of assets and liabilities acquired from TomoTherapy as of June 10, 2011.

On December 21, 2012, we entered into a Purchase Agreement and Release with CPAC, under which all the equity and debt investments held by us in CPAC were purchased by CPAC for a nominal consideration. As a result of the Purchase Agreement and Release, we concluded that we were no longer the primary beneficiary of CPAC, and therefore, deconsolidated CPAC as of December 21, 2012. We revised our previously reported results of operations for the years ended June 30, 2012 and 2011 to reflect the reclassification of the results of operations of CPAC as discontinued operations. Refer to Note 7, "Investment in CPAC" for further details.

Net revenue

                               Years Ended June 30,
(Dollars in thousands)     2013        2012        2011         FY13 vs. FY12        FY12 vs. FY11
Products                 $ 137,403   $ 240,472   $ 138,595   $ (103,069 )    -43 % $ 101,877      74 %
Services                   178,571     166,681      80,490       11,890        7 %    86,191     107 %
Other                            -       2,070       3,199       (2,070 )   -100 %    (1,129 )   -35 %

Net revenue              $ 315,974   $ 409,223   $ 222,284   $  (93,249 )    -23 % $ 186,939      84 %


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Total net revenue decreased by $93.2 million in fiscal 2013 compared to fiscal 2012, primarily due to a $103.1 million decrease in product revenue, partially offset by an increase in service revenues of $11.9 million. The decrease in product revenue was primarily attributable to a 48% decrease in the number of systems sold during fiscal 2013 as compared to fiscal 2012. During fiscal 2013, product revenues from the sale of our systems have continued to be slow primarily in the North America and Asia-Pacific regions due to the slowdown in capital expenditures by hospitals, continued uncertainties around economic growth in certain key markets, the delay in availability of the new models of the CyberKnife Systems and the TomoTherapy Systems, and the lack of availability of the MLC option for the new CyberKnife M6 Series Systems.

Services revenues during fiscal 2013 increased by $11.9 million as compared to fiscal 2012. Service revenues during fiscal 2012 included $11.5 million 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 fiscal 2013. Excluding such adjustments, service revenues increased by $23.4 million during fiscal 2013 as compared to fiscal 2012 primarily due to an increase in the installed base by 58 systems contributing $14.5 million of incremental revenue, sales of higher priced maintenance contracts (particularly to customers using the TomoTherapy systems) contributing $3.0 million of incremental revenue and increased revenues of $4.5 million resulting from providing direct maintenance services to customers in Japan. We expect our service revenue to increase in the future due to continued growth in our installed base.

Total net revenue in fiscal 2012 increased by $186.9 million from fiscal 2011 primarily due to incremental revenue of $216.7 million from sales of TomoTherapy systems and related services, and an increase in CyberKnife service revenue of $7.8 million, partially offset by a $35.3 million decrease in product revenue from CyberKnife Systems. Product revenue increased by $101.9 million, primarily due to $141.9 million of revenue attributable to TomoTherapy systems compared to $4.8 million in fiscal 2011, which only reflected revenue during the 20-day period from the close of the acquisition on June 10, 2011 to the end of our fiscal 2011. CyberKnife System revenues decreased by $35.3 million in fiscal 2012 compared to fiscal 2011 primarily due to a volume decrease by 3 systems affecting revenue by approximately $10.0 million, and lower average revenue per system affecting revenue by approximately $18.4 million due to changes in the mix of products sold and increases in revenue deferrals for systems sold with extended payment terms.

Services revenue increased by $86.2 million in fiscal 2012 compared to fiscal 2011 primarily due to a $78.4 million increase in revenue from services of TomoTherapy systems and an increase of $7.8 million in revenue generated from services of CyberKnife systems driven by the growth in installed base. Service revenue in fiscal 2012 included $11.5 million arising from purchase accounting adjustments related to the TomoTherapy acquisition which was completed in June 2011.

Gross profit

                                                Years Ended June 30,
                          2013                          2012                          2011
                (Dollars in     (% of net     (Dollars in     (% of net     (Dollars in     (% of net
                thousands)      revenue)      thousands)      revenue)      thousands)      revenue)
Gross profit    $     97,640          30.9 %  $    137,272          33.5 %  $    107,242          48.2 %

Products        $     51,905          37.8 %  $    104,292          43.4 %  $     83,071          59.9 %
Services        $     45,735          25.6 %  $     32,119          19.3 %  $     24,272          30.2 %
Other           $          -           0.0 %  $        861          41.6 %  $       (101 )        -3.2 %

The overall gross profit margin during fiscal 2013 declined by 2.6 percentage points as compared to fiscal 2012. Product margins were lower during fiscal 2013 primarily due to higher cost of units sold attributed to higher per-unit production-related costs resulting from lower volume of production and


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higher charges for write-down of inventories, 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 fiscal 2013 primarily due to improvements in the reliability of the TomoTherapy Systems leading to reduced parts and labor 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 reduced gross profit for fiscal 2013 by $8.6 million as follows: Product revenues were reduced by $0.4 million, while product cost of revenues was increased by $8.5 million; Services revenues were increased by $0.1 million while services cost of revenues was decreased by $0.2 million. Purchase accounting adjustments decreased gross profits for fiscal 2012 by $14.9 million as follows: Product revenues were reduced by $2.3 million while product cost of revenues was increased by $23.5 million; Services revenues were increased by $11.5 million while services cost of revenues was increased by $0.6 million.

Our gross profit margin for fiscal 2012 was 14.7 percentage points lower than the gross profit margin during fiscal 2011. This decline was due principally to the lower gross profit margin of 21.4% on TomoTherapy revenues included in our results of operations for the year ended June 30, 2012. The gross profit margin on CyberKnife revenues was 48.8% during the year ended June 30, 2012 as compared to 51.1% during the year ended June 30, 2011 due to margins declining by 5.5 percentage points on product revenues from changes in product mix which was partially offset by margins on service revenues increasing by 6.4 percentage points due to lower service cost per unit as the install base increases.

Selling and marketing expenses

Years Ended June 30, (Dollars in thousands) 2013 2012 2011 FY13 vs. FY12 FY12 vs. FY11 Selling and marketing $ 54,372 $ 54,547 $ 37,181 $ (175 ) -0.3 % $ 17,366 47 % % of net revenue 17.2 % 13.3 % 16.7 %

Selling and marketing expenses decreased by $0.2 million during fiscal 2013 as compared to fiscal 2012 primarily due to lower travel related expenses of $0.8 million and other operational expenses of $0.2 million due to cost control initiatives, partially offset by higher tradeshow and advertising related expenses of $0.8 million related to the introduction of two new products at an industry trade show in October 2012.

Selling and marketing expenses for fiscal 2012 increased $17.4 million compared to fiscal 2011 primarily due to headcount increases leading to higher compensation and employee related expenses of $10.6 million, travel expenses of $1.9 million, facilities and information technology related expenses of $1.8 million, consulting expenses of $1.3 million and trade-show related expenses of $1.2 million. During fiscal 2012, we incurred $15.5 million of selling and marketing expenses in our TomoTherapy subsidiary as compared to $2.0 million during the period from the acquisition date until the end of fiscal 2011. The expenses in the TomoTherapy subsidiary during fiscal 2012 were primarily comprised of compensation and employee related expenses of $9.7 million, travel expenses of $2.0 million, facilities and information technology related expenses of $1.8 million and trade-show related expenses of $1.0 million.


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We anticipate that selling and marketing expenses will increase in fiscal 2014 from fiscal 2013 due to anticipated headcount increases to expand our sales force.

Research and development expenses

On December 21, 2012, we entered into a Purchase Agreement and Release with CPAC, under which all the equity and debt investments held by us in CPAC were purchased by CPAC for a nominal consideration. As a result of the Purchase Agreement and Release, we concluded that we were no longer the primary beneficiary of CPAC, and therefore, deconsolidated CPAC as of December 21, 2012. We revised our previously reported results of operations for the years ended June 30, 2012 and 2011 to reflect the reclassification of the results of operations of CPAC as discontinued operations. Refer to Note 7, "Investment in CPAC" for further details.

                                 Years Ended June 30,
 (Dollars in thousands)       2013       2012       2011       FY13 vs. FY12       FY12 vs. FY11
 Research and development   $ 66,197   $ 81,287   $ 41,301   $ (15,090 )   -19 %  $   39,986     97 %
 % of net revenue               21.0 %     19.9 %     18.6 %

Research and development expenses decreased by $15.1 million during fiscal 2013 as compared to fiscal 2012 primarily due to decreases in consulting and project related costs of $8.0 million, compensation related costs of $3.7 million, facilities and information technology related costs of $2.4 million and travel related costs of $0.9 million resulting from 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 a re-organization of the research and development function during the third quarter of fiscal 2013.

Research and development expenses for fiscal 2012 increased $40.0 million compared to fiscal 2011 due mainly to the addition of a full year of expenses in our TomoTherapy subsidiary and development of new technologies. The increase was primarily attributable to $21.7 million in higher compensation and employee related expenses due to increased headcount, increases in facilities and information technology related expenses by $7.3 million, $6.0 million in higher spending for consulting expenses related to development projects, $4.0 million higher expenses for other development project related costs and $1.1 million of higher travel expenses. During fiscal 2012, we incurred $35.6 million of R&D expenses in our TomoTherapy subsidiary as compared to $3.6 million during the period from the acquisition date until the end of fiscal 2011. The expenses in the TomoTherapy subsidiary during fiscal 2012 were primarily comprised of $19.0 million of compensation and employee related expenses, $7.7 million of consulting expenses, $6.9 million of facilities and information technology related expenses and $1.4 million of other development project related costs.

We anticipate that research and development expenses in fiscal 2014 will be lower than fiscal 2013 based on the current schedule of our development projects.

General and administrative expenses

On December 21, 2012, we entered into a Purchase Agreement and Release with CPAC, under which all the equity and debt investments held by us in CPAC were purchased by CPAC for a nominal consideration. As a result of the Purchase Agreement and Release, we concluded that we were no longer the primary beneficiary of CPAC, and therefore, deconsolidated CPAC as of December 21, 2012. We revised our previously reported results of operations for the years ended June 30, 2012 and 2011 to


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reflect the reclassification of the results of operations of CPAC as discontinued operations. Refer to Note 7, "Investment in CPAC" for further details.

                                     Years Ended June 30,          FY13 vs.
   (Dollars in thousands)         2013       2012       2011         FY12         FY12 vs. FY11
   General and administrative   $ 57,726   $ 57,672   $ 56,589    $  54     0 %  $    1,083     2 %
   % of net revenue                 18.3 %     14.1 %     25.5 %

General and administrative expenses remained relatively consistent between fiscal 2013 and 2012. However, we incurred additional compensation and severance related charges of $7.4 million during fiscal 2013 due to the departure of our . . .

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