Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Maxwell Technologies Inc. (NASDAQ:MXWL)

Q2 2009 Earnings Call

August 06, 2009; 05:00 pm ET

Executives

David Schramm - President & Chief Executive Officer

Kevin Royal - Chief Financial Officer

Mike Sund - Vice President of Investor Relations

Analysts

Michael Horwitz - R.W. Baird

Trey Grooms - Stephens Inc.

Jesse Pichel - Piper Jaffray

Mark Tobin - Roth Capital

Dilip Warrier - Thomas Weisel

Ted Kundtz - Needham & Co.

Shawn Lockman - Ardour Capital

Operator

Good day ladies and gentlemen. All sites are now online in a listen-only mode. Please note that latter on in today’s conference there will be a question-and-answer session. (Operator Instructions)

I’ll now turn the program over to our moderator for today, Mike Sund. Please go ahead sir.

Mike Sund

Good afternoon. In a few moments you’ll hear from David Schramm, Maxwell’s President and CEO; and Kevin Royal, our Chief Financial Officer. Before we begin, I need to advise you that the following discussion will include forward-looking statements that are based on our current expectations and assumptions, which are subject to numerous risks and uncertainties.

Actual results could differ materially because of factors such as Maxwell’s history of losses, disruption of financial markets and reduced credit availability, demand for original equipment manufacturers products reaching anticipated levels, general economic conditions in the markets served by our products, cost effective manufacturing of new products and the success of outsourced manufacturing, the impact of competitive products and pricing, risks and uncertainties involved in foreign operations, including the impact of currency fluctuations, and product liability or warranty claims in excess of our reserves.

For further information regarding risks and uncertainties associated with Maxwell’s business, please refer to the management’s discussion and analysis of financial condition and results of operations, and risk factor sections of our SEC filings, including our most recent Form 10-Q and our Annual Report on Form 10-K. Electronic copies of these filings maybe accessed by visiting the Investors section of our website at www.maxwell.com and hard copies maybe obtained by contacting the company by mail, e-mail or telephone.

Some of you’re listening to this call via the internet and an archived replay of the call will be available at our website. All information in today’s call is as of August 6, 2009. We undertake no duty to update our forward-looking statements, to conform the statements actual results or changes in the company’s expectations.

It is now my pleasure to introduce David Schramm, Maxwell’s President and CEO.

David Schramm

Good afternoon. We’re pleased to report that Maxwell recorded total revenue of $24.8 million for the second quarter ended June 30; that’s up 30% from the $19 million reported in the same period a year ago.

Ultracapacitor sales have really taken off, hosting a 58% gain over Q2 ’08 and our more matured microelectronics and the high-voltage capacitors product lines did their part with double digit sales growth over last year’s second quarter. That volume increase, along with multiple ongoing ultracapacitor costs reduction initiatives, enabled us to accomplish something many of you have been waiting a very long time to see, that’s positive cash flow from our operations. Kevin will walk you through the P&L in a couple of minutes with more details on that.

Although, many other industries remained in the doldrums, and financing for commercial projects is hard to come by, key markets for Maxwell’s products, including public transportation, renewable energy, electric utility infrastructure and aerospace programs, continue to generate plenty of activity. With U.S. and foreign government regulation and stimulus programs, focusing on reducing CO2 emissions and promoting energy efficiency, prospects are bright for our continuing growth.

Q2 BOOSTCAP ultracapacitor revenue came in at $10.7 million, 58% higher than the $7.7 million recorded in last year’s second quarter. As recorded in April, we received purchase orders with a total value of about $13.5 million from three of China’s largest bus producers for ultracapacitor modules, to support recuperative braking systems for about 850 low emission diesel electric hybrid transit businesses for delivery in 2009.

According to industry estimates, there are more than half a million transit buses currently in service in China. Assuming a 10 year life for those buses, the replacement market in China alone will be more than 50,000 buses a year. Assuming a reasonable level of hybridization, say 20%, China will be 10,000 or more new hybrid buses every year.

Ultracapacitor content in energy storage systems for hybrid buses averages about $15,000 per vehicle, so the market opportunity in China is very substantial. Last year, the Chinese government announced a program to place 1,000 hybrid buses in each of 13 of its largest cities, to address serious air quality concerns. So the 850 buses for which we just received orders, maybe the tip of a very large ice burg.

We’re also working with both existing and new customers on hybrid transit bus and electric rail programs in North America and Europe. So we’re going to continue to be very busy in the months ahead. The Obama administrations plan to pull the 2020 CapA fuel economy standards for U.S. automakers forward to 2016 and the European Union’s aggressive carbon dioxide emission reduction legislation, also are accelerating time tables for hybridization of automobiles.

The European Union CO2 emission reduction legislation requires that 65% of new cars produced in Europe must emit no more than 130 grams of carbon dioxide per kilometer by 2012. Many current cars, emit as much as 200 grams per kilometer, so European automakers already are beginning to introduce more fuel efficient, reduced emission, micro and mild hybrid vehicles.

Many feature a stop-start function that turns off the internal combustion engine as the car slows and doesn’t restart the engine until the driver touches the accelerator. This kind of repetitive cycling is hard on batteries. So several automakers and the Tier 1 suppliers who develop the systems for them, are designing ultracapacitors into next generation models; the first which are schedule to begin moving into production next year.

Tens of millions of new cars are produced around the world each year, so automotive application such as stop-start, braking energy recuperation, electrical system stabilization and cold starting, represent tremendous opportunities for our ultracapacitors products. We’ve been talking about Maxwell’s automotive big bang for a long time, but we are not highly confident that it will start, at least with a pop in 2010 and then grow very rapidly to meet the EU mandated 2012 timetable.

Ultracapacitors efficiency in absorbing breaking energy, their ability to operate reliably and safely in extreme temperatures, and their million cycle durability allow BOOSTCAP products to serve as a standalone energy storage solution in many of these hybrid designs or to complement the batteries in others.

Air quality and fuel economy are also driving hybridization of cargo cranes and port facilities and other lifting applications. As with hybrid vehicles, cranes can use recuperation breaking to capture and store energy that otherwise would anticipated as friction and heat, and reuse that stored energy to assist the next lift, reducing diesel fuel consumption and the emissions.

It’s no secret that the current tough financing environment is delaying some wind energy projects. We have added a number of new wind energy customers over the past couple of years, so sales for wind turbine blade pitch systems are still on pace to come in higher than last year.

BOOSTCAP products also have been designed into a variety of backup power, wireless communication and other industrial applications, some of which we haven’t discussed previously. So we are seeing ultracapacitor growth over an even broader range of applications.

In a few minutes, I will discuss recent developments with our other two product lines and comment on prospects with the balance of the year, but first, Maxwell’s CFO, Kevin Royal will provide some additional detail on Q2 financial results. Kevin.

Kevin Royal

Thank you, David. I’m going to spend a few minutes providing additional analysis on certain areas of our second quarter 2009 financial results. Our revenues were $24.8 million for the second quarter of 2009, up 10% from Q1 2009. This increase was driven by a 39% increase in our ultracapacitor product line revenues over Q1 2009.

Our reported gross profit as a percentage of revenue for the second quarter of 2009 was 36%, compared to 31% in Q1 2009. In the current quarter, without the positive impact of foreign currency exchange rates, gross profits would have been 4%. In comparison, gross profit was unfavorably impacted in the first quarter of 2009.

Without the negative impact of the change in exchange rates, our gross profit would have been 37% for the first quarter. The favorable foreign currency gain included in gross profit was $377,000 in the second quarter of 2009 and the unfavorable foreign currency loss in gross profit was $1.2 million in the first quarter of 2009.

This decline in gross profit, as a percentage of revenue, excluding foreign currency impact, is a result of the increase in ultracapacitor sales which have a lower gross profit in high tension or microelectronics products. However, we have made and we will continue to make improvements in our cost structure of our ultracapacitor products, which will further increase the profitability of these products in the future.

These ongoing cost reductions include improvements in design, material cost, increased productivity and lower labor costs due to outsourcing cell and module assemblies, as well as increases in ultracapacitor production volumes.

I’m going to discuss our net loss and the impact of certain non-cash and non-operating items on our reported loss. We reported a net loss of $5.3 million for the second quarter 2009. It’s important to note that there are a number of non-cash items included in our statement of operations. The most significant items are the non-cash loss from embedded derivative associated with our convertible debt, and stock based compensation.

The loss on embedded derivatives was $3.8 million in Q2 and $607,000 in Q1, 2009. Stock based compensation was 841,000 in Q2 and $738,000 in Q1 2009. Excluding the loss on embedded derivatives and stock based compensation, the net loss would have been $687,000 for the second quarter and $1.6 million for the first quarter of 2009. Our earnings before interest, taxes, depreciation and amortization or EBITDA for the second quarter, increased from $400,000 in Q1 of 2009 to $1.4 million for the second quarter of 2009.

Now I’d like to turn to the balance sheet. We ended the quarter with cash and restricted cash of $39.5 million. This represents an increase in cash of $24.2 million from Q1, 2009. The significant components of our cash activity for the second quarter include cash generated from operations of $2.8 million, capital spending of $636,000, proceeds from our equity offering of 2.3 million shares, and proceeds from stock option exercises in total of $22.3 million, and debt repayment and foreign currency impacts of approximately $300,000.

Before I turn it back over to David, I want to make a brief comment about our internal review of payments made to our former independent sales agent in China. Our internal review is progressing, but it’s not yet complete, because our review is in process, we have no results or conclusions to share at this time.

Now, I’ll turn it over to David to discuss other areas of our business.

David Schramm

Thank you, Kevin. Needless to as to say, we’re feeling pretty good about the steady progress we’ve been making on both the top and bottom line, and the success of our recent capital rates. That said, we think a cautious approach to forward-looking guidance is prudent. So, I’m going to repeat my statement on our press release today and that is, that we expect both top and bottom lines to continue to show year-over-year improvement for the balance of this year.

So far, I’ve talked mainly about ultracapacitors, so I’ll spend a couple of minutes on Maxwell’s other products. Our high tension products consist mainly of grading and coupling capacitors and capacitor voltage dividers. These large high-voltage capacitors are used in the electric utility grid and other applications involving the transport distribution and measurement of high-voltage electrical energy.

Since their names are similar, one might assume some relationship to ultracapacitors, but that isn’t the case. The technology, materials and intellectual property involved in making high-voltage capacitors, and the applications in which they are used are completely different. We sell high-voltage capacitors of our large prime contractors who build power plants and electric utility infrastructure around the world.

We estimate that our CONDIS product line have more than 60% share of a well-defined mix in grid installations, so our sales follow the trend of global spending on utility infrastructure. China and other developing countries that are increasing electrical energy generation capacity to support industrialization and improving standards of living, our major drivers for high tension product is sales.

Through the first half of the year they’ve done nicely, maintaining last year’s record run rate. The Obama administration identifies modernizing the U.S. grid as a major focus of stimulus spending and federal energy policy going forward. So we are closely monitoring news out of Washington. Of course grid programs tend to have long leave times, so we don’t want to create unrealistic expectations for our near term windfall.

Sales of our microelectronics products are running ahead of last year and worked with that for some large single board computer orders that could accelerate growth over the next couple of years. Our customers are the large satellite and space craft OEMs in the U.S. and Europe. So micro sales are a function of the number of satellites and space craft launches each year.

Product deliveries are program driven, so revenue tends to come in lumps that can vary quarter-to-quarter. The name of the game is to increase the volume of Maxwell content per satellite or space craft launch and our industry leading single board computers are high value products that are enabling us to do that.

Space computer wins with major OEMs such as Northrop Grumman for the next generation US weather satellite program and Astrium in Europe for the European Space Agency’s Giotto science mission have validated our products, and positioned us to compete for even larger single board computer opportunities.

As I said in last quarters call, my personal goal is for Maxwell to be profitable at the operating line by year end. As Q2 results demonstrated, that goal is within reach. We’ve already told you to expect continuing year-over-year revenue growth and additional operating performance improvements for the balance of the year.

In addition to the significant ultracapacitor cost reductions already reflected in Q2 results, the transition of our largest selling D-Cell ultracapacitor product to offshore assembly in China is progressing according to plan and should be complete by the end of this year. That will enable us to dramatically reduce the negative impact of one of the last strategically priced, which means below cost, supply agreements that Maxwell has obligated to complete.

Our engineering team continues to focus on fine tuning product design to further reduce costs and improve manufacture ability and quality. By the end of this year, we will have completed moving material sourcing, and virtually all ultracapacitor cell and module assembly to low cost countries. To ensure the security of our proprietary technology, fabrication of ultracapacitor electrode material will remain under lock and key inside Maxwell Technologies.

With higher volume levels, we’ve been able to improve logistics and planning to take advantage of low cost ocean freight, to move ultracapacitor products from contract assembly facilities in Asia to our customers around the world. All of this has allowed us to achieve significant year-over-year gross margin improvement and further improvement is in the works.

Although depressed economic conditions and tight credit are impacting some of our customers, a number of macro factors are working in our favor. Irrespective of dramatic swings in oil prices, demand for greener, more efficient and reliable energy storage solutions is driving many new opportunities for ultracapacitors.

In summary, the precarious help of the U.S. auto industry clouds Maxwell’s future. Actually anything good that happens in the American Car market will be upside for us. Virtually all of Maxwell’s near term automotive activity is with European automakers and European tier-one suppliers.

The Obama Administration stated focus on stimulating renewable energy generation as in wind energy and supporting domestic providers of energy storage solution for hybrid electric passenger cars and transit vehicle. It’s opening up numerous external funding opportunities and we are submitting several technology and product development funding proposals, some on our own, and some with battery and auto industry collaborators.

As you saw yesterday, the funds already have begun to flow, and we believe that not only Maxwell, but also some of our customers will benefit from government grants and other long guarantees. You many have even read that establishing a homegrown lithium-ion battery industry, so to support the electrification of U.S. transportation is high on the government’s list funding priorities.

This is creating opportunities for us to demonstrate the advantages of our proprietary dry electrode fabrication process and battery manufacturing. It is a green, solvent free process that has shown potential to reduce costs, improve battery performance, and extend operating lifetime. These new activities are in addition to announced relationships with Johnson Controls-Saft in the US and the Lishen Battery Company in China.

Our work with Argon and other national laboratories to validate the advantages of integrating ultracapacitors with batteries and ultracapacitors on hybrid energy storage solution is attracting wider interest among transportation, industry tier 1 and OEMs. These solutions take advantage of ultracapacitors ability to perform over a wide temperature range for millions of charge/discharge cycles, extending the battery life and allowing batteries to become smaller and lighter and less expensive.

In conclusion, business is good and it’s getting better. Our ultracapacitors products are dealing real traction by delivering more efficient, cost effective, environmentally compatible energy storage solutions for a broader ray of transportation, industrial and other applications and we are actively pursuing new avenues to exploit our proprietary technology and know-how to create additional value.

I appreciate your interest and your support, and I now like to entertain any questions you may have.

Question-and-Answer Session

Operator

(Operator Instructions) It looks like we will go first to the side of Michael Horwitz from R.W. Baird, Please go ahead.

Michael Horwitz – R.W. Baird

How are you doing gentlemen? Congratulations. Great quarter.

David Schramm

Thanks Mike.

Michael Horwitz – R.W. Baird

Maybe on technical question and maybe a bigger picture question if I could. Can you kind of give us an update on where you stand in electrode capacity, in terms of your manufacturing abilities in San Diego, and how you plan to roll that out to meet demand? How we should think about CapEx there as well as margins?

David Schramm

Yes, that’s a good question Mike. Frankly, we’re not limited with our capacity. We are upgrading the equipment as we speak, that will be completed here in the next quarter. The engineers have just done a fantastic job to get more yields out the equipment we already have. We’ve increased the line speed and we’re increasing the finished yield coming off the end of it.

We’re also going to upgrade our slitting capacity. So we have tighter control, which again is going to give us more yields. So frankly right now, I think by the end of this year we will have capacity that will far outstrip the need that we see in the future, even if we continue these growth rates.

Michael Horwitz - R.W. Baird

Okay, great and then the other question maybe a little bit bigger picture, but I get this a lot from investors as well. With all of the new focus on energy storage systems being developed in the U.S. and clearly a lot of new ultracapacitor companies being funded in the U.S. maybe, can you explain the amount of time that it’s taken you to get to this stage in your company?

How much testing you’ve already done with perspective customers and what kind of lead, do you think you have on people both in cost and then qualifications, because I do think there is some confusion as other people get funded, where you stand in your lifecycle?

David Schramm

Well, I think you’d find in those of you and Mike, your one of those who have followed the company for a long time. This has been 10 years in the making and making money and putting cash in the bank that was a real milestone for us as company this last quarter.

There is an awful lot of technology involved in an ultracapacitor, and I believe that the significant advantage that we enjoy right now is the understanding we have at the molecular level. We find that it’s very, very critical to the performance of an ultracap, over the millions of cycles of charge and discharge that they’re required to have. So they may look really innocuous and benign on the outside, but there is a significant amount of technology that goes on the inside.

Frankly, we haven’t seen, that many new entrance to the marketplace other than the ones that are working on the R&D. So, it will be interesting to see what new entrance we do find in the marketplace, because as I’ve stated in the past, it would be helpful to have a higher degree of competition, just so they can help educate the market as to what an ultracapacitor can do.

Michael Horwitz – R.W. Baird

Then one housekeeping question; you said 15,000 million of content per bus in China, that’s not ultracapacitor content is it? That’s not all revenue to Maxwell?

David Schramm

Yes, it is.

Michael Horwitz – R.W. Baird

It is.

David Schramm

Yes, it is. In fact if you look at the buses, we’ve used that number as a rough average. A bus will use be somewhere between 500 and 603,000 faired sales. So, these are pretty good size packs you are putting in. The buses in China tend to use 40 equal modules. So they are buying the modules and then they put the modules into a pack on their own.

Michael Horwitz – R.W. Baird

Great. Thank you guys, congratulations.

David Schramm

Thanks.

Operator

Next we have a question from the side of Steve Sanders form Stephens Incorporated; please go ahead.

Trey Grooms - Stephens Inc.

This is Trey for Steve. First, if you could talk about China and the traction you are seeing there in hybrid buses just to follow up, have you seen any follow on to the $13.5 million contract that was previously awarded?

David Schramm

We haven’t announced anything beyond that, but obviously there is a lot of bus manufactures in China that we are getting introduced to. So we are knocking on doors, we have expanded our Shanghai office. We’ve got sales people and application and quality people in China. So we are definitely going after more of a 13,000 bus order.

Trey Grooms - Stephens Inc.

Okay and then, I guess a couple of things there; one, do you have an idea of the timeline, when you would expect the additional announcements or awards to come, the small piece of the 13,000 have been awarded. Then on the 850 that you have been awarded, where you are at in terms of shipments with those and do you still expect the majority of those to ship in 2009?

David Schramm

Well, the customer expects us to ship all of those in 2009. So the answer to that question is yes Trey. The growth that we see is coming at us fast and furiously. So I expect 2009, we haven’t announced anything yet, but my expectation is that there will be more coming, that I believe the Chinese are really serious about trying to clean up the kinds of system they have. We go over there fairly often and they do have an air quality concern, especially in these big cities.

Trey Grooms - Stephens Inc.

Okay and then David I think on your commentary around adding new wind customers, are these primarily North American, European based. If you could give me an idea of the…

David Schramm

It’s global. We are working with the Chinese wind sources, we are working with U.S. wind sources and of course our Europeans, so it’s global. The major sources we’ve worked with, we’ve talked about InterCon who has been our launch customer with pitch control and we are pretty global at this point with pitch control systems using ultracapacitors.

Trey Grooms - Stephens Inc.

Then to your point on that, the InterCon project, the strategic pricing that was there, does that still appear like its going roll off in 2009?

David Schramm

The purchase order that was done strategically there was put in terms of pieces, so the expectation is we will fulfill that commitment, if not late 2009, early 2010.

Trey Grooms - Stephens Inc.

Okay and then lastly, on the potential awards for Microelectronics, is that something that’s going to be a 2009 event, you see it coming early 2010?

David Schramm

It was closely 2008 event, so I think it’s a matter; these are satellite programs and again, the word we’ve used is the satellite business is terribly lumpy, and I don’t have what I would say is good visibility now, that I really feel comfortable with, but right now the best estimate we have is sometime this fall, we should know.

Trey Grooms - Stephens Inc.

Okay, great. Thanks guys.

Operator

Our next question comes from the side of Jesse Pichel from Piper Jaffray; please go ahead.

Jesse Pichel - Piper Jaffray

Good evening. Congratulations on the solid quarter. You talked a little bit about the hybrid sector; big picture, can you talk about the longer term growth rates of your other addressable markets?

David Schramm

Help me Jesse, with the wind market, and the things like that?

Jesse Pichel - Piper Jaffray

Yes wind and a high-voltage capacitors and the micro sales?

David Schramm

Sure. The wind market is one and again, every newspaper I pick up, in fact if you pick up today’s Wall Street Journal, there’s a couple of articles about…

Jesse Pichel - Piper Jaffray

Well, let me be more clear, how about your addressable market? I know the wind market growth, but how do you view your addressable market within that?

David Schramm

I think about two thirds of the windmills today use an electric pitch system, a third are using hydraulic. So it’s two-thirds of the windmills that are production today. So I think the market is rather large and as you know, we worked with InterCon on utilization of the pattern they have on how you apply that technology and that has opened up further customers for us.

Jesse Pichel - Piper Jaffray

Can you give us a little bit more clarity on your strategy to win Chinese Wind Turbine OEMs?

David Schramm

We put an office in Shanghai and we have staffed the office with Chinese nationals, so it’s knocking on the doors. When you read about the number of giga watts that the Chinese install almost on a monthly basis and winds is one of the primary drivers that they want to get into, because of the cleanliness of that. I think the growth rate there is going to be tremendous for I’m going to guess at least a decade, or maybe longer.

Jesse Pichel - Piper Jaffray

Yes, and we agree with that. Can you talk about your manufacturing footprint and your ability there to shift additional volumes there to lower cost regions and where we are in that shift?

Kevin Royal

Sure. The strategy is consistent and that is, the intellectual property that exists in the ultracapacitor is really in the electrode and that we do in San Diego. That I’m going to keep within Maxwell Technologies. The assembly of taking that electrode, rolling it into a jellyroll, installing it into the can and then sealing the can and labeling, that is what we outsource to low cost sources.

So, we are in the process of sending the D-Cell line that currently is manufactured completely in Switzerland. So instead we are moving that to low cost source, the electrode will be made in San Diego and we’ll ship that to the low cost source and then the finished products comes back to us for distribution. So we are well on our way to completing that strategy. We should have it done by the end of this year, that electrode manufacturer at San Diego and then offshore for the assembly.

Jesse Pichel - Piper Jaffray

So roughly from 100% Switzerland assembly to 100% low cost assembly?

Kevin Royal

That’s correct.

Jesse Pichel - Piper Jaffray

What do you anticipate the margin impact maybe from that?

Kevin Royal

Well, the easiest way to say is it goes from red to black. Again Switzerland is the high end area much like Southern California, and we moved the assembly out of Southern California a couple of years ago and this is the next step in that progression. So we need to put the high technology into the San Diego and the European operations and move to hand assembly to the low cost sources.

Jesse Pichel - Piper Jaffray

Another subject, it took me a good year and a half to get comfortable with the Chinese wind industry and the players there and its operation ships. God knows how I’m going to do it with hybrid buses, but can you give us a little bit more color there on what you think the 2010 potential pipeline is?

Kevin Royal

Yes, we can give this our best shot, but we try to get the data as to how many buses are there in the China and the numbers we get a very broad, somewhere between 500,000 and a million.

Again, what I covered here just a little bit ago is if you assumed that they got a ten year life, then that says you’ve got somewhere between 50,000 and 100,000 buses a year being put into system. Then if assume 20% of those are going to be hybrid buses, and then if you assume that I can give half of those at 15,000 a piece, you end up with a pretty good business that we really enjoy having.

Jesse Pichel - Piper Jaffray

What about asking in a different way is, from bottoms up what was the sales cycle for when you first got the request to bid on the 850 and then, do you have any request for additional bidding right now?

Kevin Royal

That was less than 12 months. Basically, we want to the Shanghai bus show this year and we are totally amazed as to how many bus companies there are in China that we never heard off and so we’re knocking on all those doors, but it was less than 12 months from when we first contact that the bus companies to where we started shipping product. There is new companies that we are working with. We have shipped them samples and they are going to their evaluation, so more to fall.

Jesse Pichel - Piper Jaffray

Great. Well, thanks very much.

Operator

Our next question comes from the side of Mark Tobin form Roth Capital. Please go ahead.

Mark Tobin - Roth Capital

Thanks for taking my question. Shifting over to the balance sheet, what’s your view on the current debt you have and how are you looking at your capital structure?

Kevin Royal

Sure. The majority of the debt we’ve got is actually a convertible debenture and is about $11.1 million of $15 million in total debt. We will pay this year approximately $3 million of that. It was a payment that was deferred from two years ago, but we’ll still have roughly $9 million outstanding. The other part of your question had to do with our capital structure and with our recent equity raise of nearly $20 million, we feel very comfortable with our cash position in also the foreseeable future.

Mark Tobin - Roth Capital

Okay, thank you. I’ll jump back in the queue.

Operator

Next we have a question from the side of Dilip Warrier from Thomas Weisel. Please go ahead.

Dilip Warrier - Thomas Weisel

Thanks and congratulations on the strong quarter. I have a question going back to China and I was wondering if during the quarter you are able to ramp to a run rate that you just need to maintain to meet your $13.5 million commitment to your Chinese bus customers or [Technical Difficulty] over the next two quarters?

David Schramm

Adding the assembly capacity is relatively short term. It doesn’t take a lot, because again, we are doing this offshore with low cost assembly. So it’s a matter of adding some bodies. The testing equipment comes out of San Diego. So we make sure that we get the quality that we’ve got to have.

I put engineers over there to help them expand their assembly process, to make sure again, I want a CPK that gives me some ability to sleep at night, knowing that we are shipping good product. So the three parameters that I talked about in the past, we got to have perfect quality and we got to ship it on time and then that gives us the right to go after a fair market value.

So, adding capacity Dilip has not been an issue and yes, we did have to add capacity for these bus orders, because of the timeframe. I mean they wanted that stuff delivered this year. I’ve got to tell you, in the two years I’ve been at Maxwell, one of the most enjoyable things is to add capacity.

Dilip Warrier - Thomas Weisel

Thanks David. I think my question was more about whether there was I get further potential upside from adjusted shipments in the next quarter versus the upside that you had this quarter?

David Schramm

I think that’s true. We haven’t announced anything yet, but we continue to work with the current bus companies that we’ve got the orders with, and we’re also working with new bus companies. The thing that helps us is, as bus companies come out and announce that they have these hybrid busses, it draws the attention of other bus companies that then we can contact.

Dilip Warrier - Thomas Weisel

Then I think David you’ve talked in the past about the total settings time for 1000 buses. I was wondering if any of that have translated into any indications of RFP sort of activity.

David Schramm

I guess I don’t know how to answer that at this point. Mike, do you have a little more flavor on that?

Mike Sund

Just as we’ve said Dilip, the level of activity has accelerated tremendously and intelligence is a little difficult to come by in China, it’s fragmented. The procurement is regionalized, so what’s going on in Beijing isn’t necessarily predictive of what’s going to happen in Shanghai. So I think we are learning a lot about China, but there is a lot yet to learn. The thing that’s obvious is, when China starts to move, they move in a big way.

Dilip Warrier - Thomas Weisel

Alright, thank you Mike and then just one last housekeeping question, I’m not sure if I actually followed revenue breakdown by business segment, is that provided in the press release?

David Schramm

First of all we don’t have business segments, but we did announce the ultracap and then the others.

Kevin Royal

So the ultracapacitor portion of the $24.8 million Dilip was $10.7 million, and the other two businesses together were $14 million as you can do the math. That’s as far as we break it down though.

Dilip Warrier - Thomas Weisel

Alright, thank you.

Operator

(Operator Instructions) Next we’ll go to the side of Ted Kundtz from Needham & Company; please go ahead.

Ted Kundtz - Needham & Co.

Thanks. Good afternoon, everyone.

David Schramm

Hi, Ted.

Ted Kundtz - Needham & Co.

A couple of questions for you; David see if you could comment on this. It appears to me that this is the first quarter that you have turned positive gross margins on ultracaps, by my kind of rough calculation. Is that a correct statement and if you could comment on and where you think the future progress could be?

David Schramm

Well, we don’t want to go backwards Ted. Obviously putting some money into the bank from operations was a significant milestone for us as a company, and giving gross margins positive on the ultracap was another significant milestone and we don’t intend to go backwards on that either.

Ted Kundtz - Needham & Co.

So, this was the first quarter you achieved that, is that correct?

Kevin Royal

Yes, that is correct. That’s right.

Ted Kundtz - Needham & Co.

Great, and okay. Could you comment a little bit, do you think you will see sequential growth in ultracaps going forward?

David Schramm

Well as I commented, I think the top line and the bottom line, both we’re going to see growth going forward.

Ted Kundtz - Needham & Co.

You mentioned year-over-year growth, I was just more concerned about sequentially.

David Schramm

Well, we tend not to do that, but right now I’ll tell you, I’m pretty comfortable that that’s going to happen.

Ted Kundtz - Needham & Co.

Okay, good. That’s what I wanted to hear. Thirdly, David can you comment on the significance of the ISE’s agreement? I know you’ve been working with them for a long time. What does this agreement that do for you guys?

David Schramm

Number one, we have been working with ISE a long time, and they’ve been our launch customer if you will on the hybrid buses. I think they’ve done a pretty good presence here in the United States. Obviously that ought to be a market that we are to be able to attack and grow together.

ISE is committed to using ourselves and we’re committed that where we can, they’ve got some modules that I don’t need to replicate. So, we’re going to work together closely and see what we can do to help each other and to grow the marketplace for hybrid buses in the U.S., and any other applications where we can make the technology work.

Ted Kundtz - Needham & Co.

I know that, but is this a more formal agreement than you’ve had in the past?

David Schramm

Yes.

Ted Kundtz - Needham & Co.

Okay. Are they exclusively with you?

David Schramm

Yes, they are at this time.

Ted Kundtz - Needham & Co.

Okay, great and then lastly maybe, I don’t how you could answer this one, but just looking at your revenues mix in your ultracap business geographically, could you kind of just comment on where you view the mix between China, Europe and the U.S.? What that may look like for maybe ’10 and ’11? Any thoughts on that, it’s kind of a general question?

David Schramm

Yes, it is Ted, and all I can tell you is I’d call it steady progress in Europe, and it’s a little more cautious. China is the unknown, but right now I think that’s probably got the largest potential for us and the U.S. is in fourth place on that list of three. Seriously, I just don’t see the technology taking hold as quickly. I think there’s more catch-up that’s got to be done.

The Europeans have been greener than the Americans for a long time and they’re implementing this programs and I think the Chinese have decided they got to catch-up and they got to do it now. So, those are going to be the focus that I think we’re going to see.

Ted Kundtz - Needham & Co.

Okay. You mentioned that, you’re just working pretty much on the automotive side exclusively in Europe, when do you see that business really starting to kick in?

David Schramm

Well, what we said is that in 2010 we will see some orders. Okay its 2012 that’s when EU regulation on the 130 grams of CO2 per kilometer will kick in. So I’m very confident that we’ll see things in early ’10.

Ted Kundtz - Needham & Co.

In ’10 for the model years, the late model years…?

David Schramm

No, the calendar year.

Ted Kundtz - Needham & Co.

Yes, you’ll see orders and actual shipments in the automotive sector.

David Schramm

I believe that’s going to happen.

Ted Kundtz - Needham & Co.

Okay, great thank you.

David Schramm

Alright, Ted.

Operator

Next we’ll go to the side of Walter Nasdeo from Ardour Capital; please go ahead.

Shawn Lockman - Ardour Capital

This is Shawn Lockman for Walter. Just a couple of quick questions, most of my question have been answered. I was wondering if you guys, someone asked this earlier, but I didn’t get the answer, whether you can give us an update on the deliveries for the Chinese hybrid bus contract you guys have for this year. Where you stand in delivery on that contract?

David Schramm

We’ve been shipping to the last few months and we will have it completely shipped by the middle of the fourth quarter.

Shawn Lockman - Ardour Capital

Okay, and as far as the percentage of your business for ultracapcitors; how that breaks down in terms of segment, what percentage goes to wind? What percentage into public transportation so forth in terms of that mix and what you’re saying right now?

Mike Sund

Shawn, this is Mike Sund. Last year wind accounted for about half of the $28 million that we shipped. As David said, we still expect to see growth in that wind number this year, probably not at the rate we might have expected before the financing difficulties as we now see came about.

Conversely, hybrid busses accounted for fairly modest portion of those 208 revenues and as you can see with this single cluster of orders reaching $13.5 million, the growth in the hybrid bus area is much more rapid than in any other application that we could name to you.

Outside of those two, there are a miscellaneous thing. David talked about backup power, wireless communications and so forth, but those two are still in current quarter terms, those are the real drivers.

Shawn Lockman - Ardour Capital

Great, thanks and I just wanted to get a little more color on the automotive opportunity that you guys are talking about next year. You talked about in your prepared remarks about a pop next year. I mean any sense of how big a pop you’re talking about or to what degree we should be looking for there?

David Schramm

Yes, I think what I’m referring to there is the start-stop systems and again if you got do to 65% of the vehicles by 2012, if I just look at the potential, Europe’s got the potential for 6 million cars, 60 million worldwide and if 65% of them have got to have that kind of system the number gets really big, because we’ve got a plus or minus number, $100 a car, so it’s a tremendous opportunity for us.

Mike Sunday

This is Mike, Shawn. In year one we expect something just to size it for you. Something on the order of 10s of 1000s of cars, not 100s of 1000s; that’s typically how the automakers do. They introduce in sort of a manageable number of models in year one and then it can increase very dramatically in years two, three and out.

David Schramm

Yes and Shawn, I got to correct my number there, its $16 million not $6 million. $16 million will be a normal European run for automobiles. I think we have time for one more questions here.

Shawn Lockman Ardour Capital

Yes, that’s all from me.

David Schramm

Alright. Thank you.

Operator

We’ll go to the side of Michael Horwitz, for the final question; please go ahead.

Michael Horwitz - R.W. Baird

Hi, guys. I have one comment and then one last question. I guess that one comment I would echo Jesse a little bit. Those of what you covered the Chinese companies and have to deal with some of the issues of trying to get more granularity, and now that you guys are a bigger company and I’ve been covering you a long time. The more granularity going forward and more transparency will help us all and I know that you want to do that, but I’ll just make that comment.

The last thing is, can you make any comments about any thoughts you have about what a business model might look like for you if you transfer the dry process with some of your partners into lithium ion battery manufacturing?

David Schramm

That’s a good one. We are working, we got the announced relationships and we worked with other battery manufacturers, because we do believe we can offer them a green process, as to how you make battery electrode. We got ongoing development going on with that. Nothing that’s announced at this time as a major success, but these are still working feverishly on that.

Michael Horwitz - R.W. Baird

Do you think of technology fees and royalties, I think maybe there’s some question about how that might look and maybe that’s too early, but…?

David Schramm

Well Mike, there are some option there. Could we become an electrode manufacturer in the sales specialty electrode? Do we license that and that would highly dependent on where that customer is located? Because again, I mean one of the first rules we have here is, we’re going to protect our IP. So, I’m not going to take that IP any place where I can protect it, that’s a given.

The other thing I’d say, your comment about the granularity, the one thing that we are working on and I appreciate you’d like that no more, but we still want to maintain with under promise and over execute. I think there’s a history of disappointing and we don’t want to do that.

Michael Horwitz - R.W. Baird

Alright, fair enough and as you grow more, I’m sure you’ll better visibility to then pass on lots, but just to comment I think Jesse and I are thinking similarly...

David Schramm

Very good. Thank you very much everybody.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Maxwell Technologies Inc. Q2 2009 Earnings Call Transcript

Check out Seeking Alpha’s new Earnings Center »

This Transcript
All Transcripts