Friday, June 17, 2016
Capstone Turbine: Not a Pretty Picture
Last week microturbine manufacturer Capstone Turbine (CPST: Nasdaq) reported financial results for the final quarter of its fiscal year ending March 2016. Sales were $18.9 million in the quarter, bringing total sales for the year to $85.2 million. FY2016 sales shrank 26.2% from the prior fiscal year for the second year in a row. Some shareholders may be taking solace in the FY2016 net loss of $25.2 million or $1.39 per share in that it is an improvement over the even deeper loss in the year before. That does not necessarily mean that operating performance has improved for Capstone. The year-over-year comparison is muddied by a special charge in FY2015 for bad debt expense totaling $10.1 million. Then in the more recently reported FY2016, $1.5 million in bad debt recovery worked in the company’s favor.
No one should be surprised at recent deep losses. Capstone Turbine has been reporting operating and net losses since - well, since the beginning. The continued deep losses beg the question: will Capstone Turbine every turn a profit?
The company staged an initial public offering sixteen years ago this month in June 2000, disclosing losses as far back as 1998. In that long-ago year, Capstone achieved the first commercial sale of its versatile Model C30 turbine. This was followed close on in 2000 by the introduction of the Model C60 using natural gas as fuel. Shareholders must have had high hopes for that second model, and sales initially popped to $36 million in FY2001 only to drop back to $19.5 million in 2002, well below sales achieved even by the first Model C30 turbine product. In both years, cost of goods far exceeded sales.
This last metric provides a clue to what might be Capstone’s bottom line struggle. Even as the product line expanded and unit production increased, cost of goods exceeded sales up through 2011. In FY2012, the Company finally reported a positive gross margin of $5.4 million on $109.4 million in total sales. Unfortunately, it was still far too small to cover $37.1 million in operation costs, leaving an astounding operating margin of negative 28.9%.
Fast forward to the most recently reported fiscal year, the gross profit margin has improved to 15%, allowing the company to pull out $12.8 million of sales to cover operating expenses. Except that gross profits are not sufficient cover operating expenses. Spending on research, development, selling general and administrative activities totaled $37.3 million.
Of course, this is a look at reported net losses, which presents only part of the picture of operating results. Cash flow from operations brings the rest of the image into focus. It is not any prettier.
Capstone Turbine has never reported positive operating cash flow, relying year after year on cash resources to support operations. In FY2016, the Company used $22.5 million in cash resources for operations. There was $11.7 million in cash on the balance at the end of March 2016. At the recent spending rate the cash balance could last another six months.
Thus capital resources are an issue for Capstone Turbine. Management has avoided debt, and at the end of March 2016, there were $435,000 in notes payable and lease obligations on the balance sheet. The bias against debt has forced the company to go back to the equity capital markets every year for additional equity capital. In May 2014, the company staged a negotiated offering of 900,000 shares of common stock at $34.00 per share to a single investor, bringing in $29.8 million in new capital. Capstone has raised a total of $853.3 million in equity capital since inception, nearly all of which has been burned up by operations with losses totaling $827 million.
In August 2015, a little more than a year after the follow-on offering, the Company entered into an at-the-market equity offering program to sell shares of its common stock. By the end of March 2016, the Company had sold 6.9 million shares under this $30 million facility and took in another $12.7 million in new equity capital after expenses and fees. I estimate the balance of the equity facility could provide support for Capstone’s operations for another eight months
Capstone shares are trading near $1.40 per share, which given the long history of weak results seems a bit dear. Microturbines offer the promise of energy efficiency and for some investors the whiff of environmental benefit may be enough to put up with dismal operating performance. I do like all things green, including money. Unfortunately, Capstone does not appear to be able to deliver any of that kind of green to shareholders.
Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.