Capstone Turbine releases fourth quarter financial results

By Katie Fletcher | June 17, 2015

On June 15, Capstone Turbine Corp. released its financial results for the fourth quarter and fiscal year ended March 31, reporting three, big headwinds contributed to a challenging year, but the company is moving forward.

One headwind was U.S. and European sanctions on Russia in response to the invasion of Ukraine, which impacted one of Capstone’s largest business partners, BPC Engineering. Since Capstone sells nearly half of its products internationally, the strong U.S. dollar, in comparison to other major currencies, created another major headwind by making Capstone’s products more expensive overseas. The last headwind mentioned on the call was crude oil prices falling from approximately $110 per barrel to $50 per barrel as global production increased and worldwide demand remained flat. According to Darren Jamison, president and CEO of Capstone, going into fiscal year (FY) 2015, Capstone derived approximately 60 percent of its revenue from the oil and gas market.

According to the company’s results, this perfect storm of headwinds dropped annual product revenue for the first time since 2007 by 18 percent. “These conditions impacted our business in fiscal 2015, but they also prompted us to closely evaluate areas of our business that are within our control,” Jamison said. “As a result, we have taken decisive actions that ultimately have made Capstone stronger, leaner, more flexible and better positioned for growth than ever before. We look forward to regaining our growth momentum over the next year ahead."

He added, “We continued to make significant progress in strengthening our company by further diversifying our business, growing and maturing our distribution network, improving our product reliability, expanding into promising new geographies and implementing cost savings.”

During the fourth quarter, revenue was $29.9 million compared to $36.4 million for the fourth quarter of 2014. Revenue recorded for FY15 was $115.5 million, compared to $133.1 million for FY14. Service revenue grew 7 percent to $26.1 million for the year as factory protection plan (FPP) contracts increased and contribution margins continue to expand with improved product quality, according to the company. In Capstone’s review of FY15, they shared that strengthening service business did not offset the fall in product revenue, so Capstone did not reach EBITDA breakeven in quarter four of 2015 as previously anticipated.

Gross margin for the fourth quarter of FY15 was $3.5 million, or 11.8 percent of revenue, compared to $6.1 million, or 16.9 percent of revenue, for the comparable period in the prior year. Gross margin for quarter four was impacted by a $1.2 million non-cash charge for slow-moving inventory related to the company’s waste-heat recovery generator product. Also, cost of goods sold for the quarter included $700,000 of product shipped without recognizing the associated revenue. According to Capstone, without these two items, gross margin would have been $5.4 million, or 18 percent of revenue, for quarter four of 2015. Gross margin for all of FY15 was $18.3 million, or 16 percent of revenue, compared to the FY14 gross margin of $21.7 million, also 16 percent of revenue.

Expenses associated with research and development resulted in $2.9 million for the fourth quarter of FY15, up slightly from $2.5 million recorded for the fourth quarter of FY14. In FY15, total research and development expenses were $9.7 million, up from $9 million in the prior year. Capstone said the increase can partially be attributed to a decrease in benefits received from cost-sharing programs, such as those with the DOE.

Selling, general and administrative expenses were $14.7 million for the fourth quarter of FY15, compared to $6.8 million for the same period in 2014. For the entire year, $39.5 million was recorded, in comparison to $28 million in FY14. A debt expense of approximately $7.1 million was recorded during the fourth quarter of FY15 against receivables owed by one of the company’s Russian distributors, which impacted the steep decline of the Russian ruble.

The company’s net loss was $14.3 million, or a 5 cent loss per share, for the fourth quarter of FY15. This compares to a net loss of $3.4 million, or 1 cent loss per share, for the fourth quarter of the previous year. Overall, net loss for FY15 was $31.5 million, or a 10 cent loss per share, compared to a net loss of $16.3 million, or a 5 cent loss per share, for FY14.

As of March 31, cash and cash equivalents totaled $32.2 million, compared to $27.9 million at March 31, 2014. Cash used in operations for quarter four was $6.6 million and $23 million for the entire year.

Jamison spent time during the earnings call discussing the company’s expanding global footprint. In the U.S. and Canada, Capstone reported a strong combined-heat-and-power (CHP) pipeline, expecting strong bookings in June and July. The company also announced this March, that it received an order to upgrade the Irvine Ranch Water District’s Michelson Water Recycling Plant in Irvine, California, with five C200 microturbines for commissioning next year. The microturbines will run off of biogas produced from onsite municipal solid waste (MSW). Two new C1000 series orders from Sarlin for Finland and Baltics were highlighted in the global updates. The C1000 microturbine upgrade in Finland will be placed in a CHP application at a solid waste treatment center, along with a 1400-kW exhaust heat exchanger, booster and automation and gas treatment systems.

In Australia, 3.2 MW of orders for office buildings, as part of a green building program, were received. The company also mentioned business in Mexico, Latin America, Asia, Africa and the Middle East. Besides providing a global update, Jamison hit a few key policies impacting Capstone’s business. The Clean Energy Grid Integration Act, HEAT Act and Free Market Energy Act of 2015 were mentioned at the federal level. In regards to state policy, the upcoming compliance with U.S. EPA’s Clean Power Plan was mentioned. Globally, two policy areas discussed were EU’s Energy Union Framework focusing on energy efficiency, including CHP, and U.K. Industry decarbonization roadmaps focused on heat and CO2 emission intensive sectors.

“Capstone, in partnership with its distributors, is working diligently to drive changes in policy as it relates to increased development and funding of key energy efficiency, CHP and CCHP (combined-cooling-heat-and-power) programs on a state, national and global basis,” Jamison said on the call. “In addition, we’ll continue to push for lower emission standards around the world as the innovative Capstone products continue to offer substantial benefits over traditional reciprocating power generation solutions.”

In regards to product development, Jamison mentioned a new liquid version of C1000. He also mentioned a dual-mode, grid-connected, standalone C1000 produced to run off palm oil milling effluent biogas produced as a byproduct of the palm oil extraction process. “The advancements realized in both of these products have opened up new markets for capstone and also allow for further development opportunities in the area of liquid fuel and palm oil worldwide,” Jamison said.

The company also received an extension from the DOE on its C370 design contract until September to support a second attempt at successful operation of the bi-metal turbine wheel.

Looking ahead, Capstone’s business strategy includes flattening the organizational structure to lower costs by $2 million annually. The company intends to focus on geographical diversification by driving additional revenue from Mexico, South America, Africa, Middle East and Asia to offset the slowdown in Russia. The company still intends, however, to work with its Russian distributor BPC on a cash-on-delivery (COD) basis while implementing a repayment plan.

Overall, the company expects quarter one of FY16 revenue to increase year-over-year due to crude oil and ruble stabilization. In regards to FY16 management expectations, Capstone anticipates a return to year-over-year double-digit revenue growth, as well as to expand gross margins by 200 basis points. Additionally, a breakeven milestone in late FY16 is expected to be achieved due to growing revenue and margins. “It’s a marathon not a sprint,” Jamison said. “We had a difficult lap this year, but macroeconomic headwinds are easing and I think our customers are very confident we’ll have a good year going forward.”