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CPST: Its Evolving Operation Model and Cost Cutting

IN FOCUS: CAPSTONE TURBINE CORP., AND ITS EVOLVING OPERATION MODEL, COST-CUTTING AND TARIFF CHALLENGES

The alphaDIRECT Insight

Capstone has been striving to execute on its profitability strategy over the past couple of years. Higher after-market revenue is critical to success, but so is streamlining operations and manufacturing to grow product margins. The company has a target product gross margin of 9% in 1Q2021 ending June 30, 2020 compared to a negative 7% in 3Q2020 ending December 31, 2019. The profitability target assumes only modest revenue growth making revenue mix and cost efficiencies the main drivers. In this report, we address several manufacturing issues and opportunities with Kirk Petty, SVP of Operations. Capstone faces unique manufacturing challenges as their products are high precision machines that are even aerospace like in operating parameters. To achieve product margin goals, the company is addressing manufacturing variables such as lower build times, outsourcing, reduced waste, etc. We address these issues as well as several other variables around the manufacturing operations, and we also review how the manufacturing operations are impacting the company’s ESG objectives and impact on the broader corporate culture.

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Shawn Severson: First, I would like to thank you Kirk, for taking the time to speak with the alphaDIRECT network today. Last time we spoke to the company, we discussed Capstone Turbine and the renewable future. Today, our focus will be on Capstone’s goal of becoming a zero-waste facility, your changing operation model, cost-cutting and material challenges with tariffs. However, before we get started, could you start by introducing yourself, what brought you to Capstone and your position within the company?

Kirk Petty: Hi, thanks for having me. I joined the Capstone team back in 2007 after serving in the Marine Corps for nine years. I started here on the manufacturing floor as a test technician which helped me to really understand all of the ins-and-outs of the microturbine product. It was right after Darren Jamison was named CEO, and the largest unit we were building back then was 65kW, mostly for the U.S. market. Today we are building multiple megawatt power plants, and we have shipped product to 73 different countries, so it has been great watching the product and the company evolve alongside each other. I’ve worked in various positions around the company, including Aftermarket, Quality and Engineering, finally getting the opportunity to lead our Operations team a few years ago, which includes all the facilities, safety, supply chain, warehouse, planning and purchasing and, of course, the manufacturing processes themselves. So full circle in that time, just with more hats now.

Shawn Severson: Thank you, Kirk. We have always looked at Capstone’s manufacturing process as very “precision” oriented – even aerospace like, which creates some unique challenges. Can you break out the key parts of the manufacturing process and components that are critical to making a microturbine and also help us understand labor vs. materials and components?

Kirk Petty: I think “precision” is a great word to describe it. Even after 12 years here, I’m still fascinated every day by what happens in the factory. Our product is a jet engine that has one moving part that rotates at 96,000 rpm on the smaller products and 61,000 rpm on the larger products. The one moving part is stabilized in place during operation by our patented air bearings. The balancing techniques are really the “secret sauce” of our turbine manufacturing process. It takes significant skill and attention to detail to balance our components, and during our system tests, we’re monitoring to ensure they’re balanced to operate in an envelope that’s ¼ of the thickness of a human hair. Like I said, fascinating and almost beyond description.

That said, we’re a very lean shop. Labor only makes up less than 25% of the total cost of our products, the rest being purchased materials. There are only about 40 people involved in the actual “build” of the product. All the work cells are set up in modules, and we focus heavily on efficiency, safety, quality and cross-training. This allows maximum flexibility in shifting labor needs.

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