Q3 2005 Capstone Turbine Earnings Conference Call - Final.

Original Source: FD (FAIR DISCLOSURE) WIRE

OPERATOR: Good day, ladies and gentlemen, and welcome to the third quarter 2005 Capstone Turbine earnings conference call. (OPERATOR INSTRUCTIONS)

I would now like to turn the presentation over to your host for today's call, Ms. Cindy Martinez, investor relations. Please proceed, ma'am.

CINDY MARTINEZ, INVESTOR RELATIONS, CAPSTONE TURBINE CORP.: Good afternoon and welcome to Capstone Turbine Corporation's conference call for the third quarter of fiscal year 2005. I am Cindy Martinez, your contact for investor relations.

Yesterday Capstone filed its Form 10-Q with the Securities and Exchange Commission. If you do not have access to this document and would like one, please contact me at 818-407-3624 and I will forward one to you.

During the course of this conference call management may make projections or other forward-looking statements regarding future events or financial performance of the company within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to numerous assumptions, risks and uncertainties, which may cause Capstone's actual results to be materially different from future results expressed or implied in such statements. We refer to you to the company's annual report and other periodic filings with the Securities and Exchange Commission for a description of these risk factors.

Because of the risk factors and uncertainties, Capstone cautions you not to place undue reliance on these statements, which speak only as of today. We undertake no obligation and specifically disclaim any obligation to release any revision to any forward-looking statement to reflect events or circumstances after the date of this conference call or to reflect the occurrence of unanticipated events.

On the call today are John Tucker, our President and CEO, and Karen Clark, our CFO. I'll now turn the call over to Karen.

KAREN CLARK, CFO, CAPSTONE TURBINE CORP.: Thank you, Cindy. Good afternoon, everyone. Thank you for joining us. We're going to follow our normal order for the discussion today. I'll review the financials, John will provide the business update, and then we'll take your questions.

So I'll start with a discussion on backlog. At the end of last quarter, we had 11.3 megawatts of backlog, which you'll recall was our highest backlog level since 2001. In the quarter, we took orders for 3.1 megawatts and 1.6 megawatts of prior orders were cancelled due to the delay of a major project. These orders are expected to be rebooked later. We shipped 4.5 megawatts of product in the period. This left backlog at the end of the third quarter at 8.2 megawatts. The majority of this backlog is scheduled to ship in the fourth quarter. Compared with the third quarter of last year, our shipments in megawatts this year were 90% higher. When we look at the pace of the last 2 quarters, our shipments have been double what we shipped in the same period a year ago.

Our gross watts this quarter was $1.7 million, roughly 40% less than the $3.1 million loss reported in the same quarter a year ago. This period's higher sales yielded more contribution margin, but this was pretty much offset by higher material costs and inventory charges in the period. The significant improvement between periods came from lower warranty charges this year.

As we've discussed in the past, our warranty charges provide for 3 things, our standard per unit warranty, reliability of repairs programs that we commit to, and accommodations. You may not remember, but last year we recorded a $1.7 million charge for preexisting warranties and reliability programs. This period our total liability for reliability repairs programs and preexisting warranties was reduced, reflecting updated cost estimates. And while our total standard warranty provision was higher this quarter than last year, that reflected the larger number of units sold in the year.

What isn't as evident is that the weighted average standard per unit warranty cost was lower by about a third this year as compared with last. This cost reduction resulted from the quantifiable demonstrated performance improvements that have been made as a result of our work to enhance the robustness of our product. We know we've been making important improvements, now the evidence of this is becoming clear.

Moving on to operating expenses. …