CAPSTONE TURBINE ANNUAL REPORT - 2015 CAPSTONE TURBINE ANNUAL REPORT 10938_2015 Capstone AR_Cover.indd

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  • 2015

    C A P S T O N E T U R B I N E

    A N N U A L R E P O R T

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    08 | Capstone Turbine Corporation

    02 LETTER TO STOCKHOLDERS

    06 VERTICAL CHANNEL DISTRIBUTION

    08 MARKET AND GEOGRAPHIC DIVERSIFICATION

    10 GLOBAL MARKET SEGMENTS

    11 MEGAWATTS SHIPPED AND GLOBAL HIGHLIGHTS

    14 BROAD SUITE OF PRODUCTS

    16 AFTERMARKET SERVICES

    18 FUTURE GROWTH

    20 FINANCIAL AND OPERATING SUMMARY

    21 KEY FINANCIAL FIGURES

    CONTENTS

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    DEAR FELLOW STOCKHOLDERS

    In fiscal 2015, Capstone continued to make significant progress in strengthening our company by further diversifying our business, growing and maturing our distribution network, improving our product reliability, implementing cost savings and expanding into promising new geographies. The operational improvements to our cost structure that we implemented over the past several years resulted in flat gross margins year over year despite the 13 percent decline in top line revenue. Additionally, gross margin was impacted by a non-cash reserve for slow moving inventory and certain direct material costs were recorded without the associated revenue as of March 31, 2015. Gross margin has been in the double digits since the third quarter of 2013, or 10 consecutive quarters. However, our operational progress has been eclipsed by the challenging macroeconomic headwinds that have confronted us over the last year. The dramatic downturn of the oil markets, a substantially stronger U.S. dollar making our products more expensive overseas and ongoing geopolitical tensions in Russia, North Africa and the Middle East were all factors that have negatively impacted our business.

    Despite these challenging global and economic market dynamics, we have pushed onward and adapted in ways that have undoubtedly built a more resilient Capstone today and for the future. By improving our supply chain and making strategic management adjustments, we have significantly reduced operational costs within the organization. Additionally, as our installed base of microturbines continues to grow, it will drive more predictable and recurring revenue from our service business. This will help to accelerate the overall market acceptance of our product solutions and fuel new business development.

    VERTICAL CHANNEL DISTRIBUTION

    Our most valuable and intangible asset is our worldwide distribution network that we have proudly developed from the ground up. We have built this robust distribution network through education, training and empowerment. In addition, our flexibility in working with our distributors in a more challenging environment has further strengthened our relationships and fostered a mutual bond of loyalty built on trust and teamwork. Capstone is building long-term sustainable growth potential within our

    network of 88 distributors and 9 OEM partners. This gives Capstone the global presence and manpower of approximately 740 employees collectively spread out across 152 locations around the world. Each one of our distributors is a strategically placed independent partner out on the front lines marketing and selling Capstone products and services. We look to a promising future as our existing distributors mature and succeed. As we continue to bring on new distributors in our expanding geographies, we expect to capture an increasing share of the worldwide distributed generation market.

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    MARKET AND GEOGRAPHIC DIVERSIFICATION

    Recognition of the Capstone brand and interest in our microturbine products continues to grow in all six of our major vertical markets – oil, gas and other natural resources, energy efficiency, renewable energy, critical power supply, marine and transportation. Demand for clean-and-green power generation technology continues to flourish worldwide and we estimate the global market opportunity for microturbine technology to be valued at approximately $15 billion, with Capstone’s potential market share at $1.5 billion.

    Capstone is expanding its market share in a challenging oil, gas and other natural resources market. In Mexico, we are capitalizing on the opportunities that resulted from the Mexican energy reform, which has established reduced electricity and gas prices. One of our Mexican distributors, Industrias Energetícas, secured two of the largest orders in Capstone's history in participation with the Los Ramones pipeline project in eastern Mexico. With this type of success, Mexico is poised to be one of our top markets throughout fiscal 2016. Furthermore, we have seen strong demand for flare gas reduction in the Middle East and Africa. We see positive growth going forward in these markets as our distribution network matures in new regions and we expect to capitalize on these opportunities, offsetting business that may be down in other markets next year.

    We have seen an increase in combined heat and power (CHP) projects around the world. In particular, we have experienced strong traction

    in Australia, Mexico, Germany, Italy and Brazil. In the United States, the CHP market is growing in several states including New York, New Jersey, Pennsylvania, California, Alaska and Hawaii. Despite the slowdown in oil production in Russia, one of our distributors, BPC Engineering, is pursuing growth in the sales of CHP and combined cooling, heat and power (CCHP) plants within the Russian manufacturing sector and in neighboring Kazakhstan and Belarus. Although Europe remains economically constrained, we are encouraged by the strengthening demand for CHP applications in a number of other countries including Germany, Italy, Austria, Switzerland, Finland, Poland and the United Kingdom.

    With oil, gas and other natural resources serving as one of Capstone’s larger market segments in the United States, shale plays have become a major focus going into fiscal 2016. Capstone microturbines provide shale oil and gas operations with ultra-low emission, low maintenance and reliable solutions that operate more efficiently and for longer periods of time than typical reciprocating engine generators. This helps to solidify Capstone’s position as the preferred option for new and repeat oil and gas customers.

    Capstone continues to search the globe for opportunities in new markets and recently found success in developing power projects from palm oil production in Malaysia and propane-based CHP in the Caribbean. These new markets showcase tremendous opportunities for us. Palm oil is a multi-billion dollar industry Capstone can most certainly

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    Gary D. Simon Chairman of the Board

    Darren R. Jamison President and Chief Executive Officer

    capitalize on. In addition, the Caribbean utility rates are extremely high, making CHP a very attractive alternative.

    AFTERMARKET SERVICE

    The recent design enhancements to our flagship C200 and C1000 series products combined with the improvements we made to our aftermarket service business have led to reduced warranty expenses and higher Factory Protection Plan (FPP) contribution margins. Our FPP backlog grew to approximately $61.2 million by March 31, 2015 — a new record for Capstone. Our market-leading FPP also better aligns our service offering with our customer requirements. Approximately 20 percent of our units in the field are currently operating under a FPP, leaving plenty of opportunity to both expand and further scale our aftermarket services business. Overall, our aftermarket services carry higher margins, which we expect to increase as a percentage of total revenue as our global fleet continues to grow each year.

    FUTURE GROWTH

    The headwinds we faced in fiscal 2015 led us to flatten our organization. By streamlining our internal operations, we can better foster innovation and creativity, focus on product robustness and broaden our aftermarket services. These actions will lower operating costs and result in an estimated $2 million

    in annual savings after severance costs. Our long-term outlook for the future of Capstone remains positive as we continue to expand and mature our worldwide distribution network, drive accelerated growth through new emerging markets, deliver ongoing product enhancements and develop new and improved microturbine products and services.

    Without question the economic challenges we encountered this past year made it a difficult one, pushing out our anticipated achievement of EBITDA breakeven. While we are disappointed in this outcome, we have focused on adapting quickly and executing better under these new circumstances.

    Today, Capstone is stronger, leaner, more flexible and better positioned for growth than ever before. Our team is extremely motivated and driven by the highest standards of open communication, creativity, collaboration, adaptability and accountability, keeping customer satisfaction and stockholder value at the center of all our business decisions. We would like to thank our stockholders, customers, employees, distributors and suppliers for your continued support

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