The (Spend)thrifty Ways of Capstone Turbine

by Debra Fiakas CFA

Last week Capstone Turbine (CPST:  Nasdaq) announced changes around the table in its boardroom, bragging of the costs savings it can achieve.  Capstone is a well established manufacturer of microturbines used in power generation.  The company claims over 8,000 of its turbines are in use around the world.   Despite the clear footprint in the wind power market, Capstone needs to achieve efficiency.  Sales of its turbines totaled $122 million in the twelve months ending December 2014.  Unfortunately, the period ended with a net loss of $20.6 million or $0.06 per share.

The solution, decided the top minds at Capstone, is to ‘reorganize’ and along the way cut executive compensation costs.  Edward Reich, who has been with the company since 2005 and the chief financial officer since 2008, will be leaving the company.  The CFO seat will now be occupied by Jayme Brooks, who has been the chief accounting officer and also serves as Vice President of Finance.  Brooks joined the company at the same time as Reich and has actually served in the past as interim CFO.  She will retain the position of chief accounting officer and assume the role of chief financial officer.

The expected savings in salary, benefits, bonuses and travel costs are estimated to be $2 million per year.  One man leaves a company and operating costs are reduced by 5%!  Reich’s compensation totaled $485,873 in fiscal year 2014.  Investors are left to conclude that the rest of the savings must be coming from reduced benefits, travel and other costs associated with keeping Reich on as CFO.  For every $1.00 the company paid Reich in salary and bonuses, it spent another $3.00 on benefits and travel.

The announcement has focused a bright light on Capstone’s compensation practices. Is Capstone spending more on leadership than is justified by its size?  If Reich’s departure tells shareholders nothing else it reveals that Capstone spends quite lavishly on benefits and travel for its leadership that is not otherwise reported in detail to shareholders.

In the year 2014, total compensation for the top four executives at Capstone was $2.3 million, including salary, stock and option awards and non-equity incentives.  The company reported a total of $2.1 million in stock compensation in the year 2014, for all recipients, but I estimate non-cash option and stock awards were near $978,000 for the four top positions.  If the information we get from the Reich departure is a valid measuring stick, then shareholders can conclude that the company spent another $6 million on benefits and travel for this bunch.

There is more than extravagant spending that captured my attention in this story.  Jayme Brooks, the new CFO is obviously capable of handling the position.  However, she is going to continue in her capacity as chief accounting officer as well, which means she will be doing two jobs for the price of one.  For Brooks’ sake I hope Capstone at least gave her a raise of some kind.  As these things go, shareholders should not be surprised if Brooks is expected to do the job of two for far less than what Reich was being paid.   Reich is leaving now, but shareholders should be wondering what it was that Reich was doing at Capstone to justify spending $2 million for his compensation and various accoutrements.  Apparently, he is easily replaced by a professional who can do his work and her own together.

Anyone who owns shares in Capstone Turbine has to be pleased with the efforts to reduce costs.  The stock closed at the end of last trading last week at $0.62 per share.  That may appear egregiously undervalued for a company that is expected to deliver over $150 million in sales in the current fiscal year.  However, traders might be applying a discount for the company’s spendthrift management.   

Debra Fiakas is the Managing Director of Crystal Equity Research, an alternative research resource on small capitalization companies in selected industries.

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.