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Maxwell Technologies, Inc. (NASDAQ:MXWL)

Q3 2013 Earnings Conference Call

October 24, 2013 05:00 AM ET

Executives

Mike Sund - IR

David Schramm - President and CEO

Kevin Royal - CFO

John Warwick - COO

Analysts

Alex Potter - Piper Jaffray

JinMing Liu - Ardour Capital

Steve Marascia - Capitol Securities

James Ragan - Crowell, Weedon & Co.

Jeff Osborne - Stifel Nicolaus

Operator

Good day, ladies and gentlemen and welcome to today's program, at this time all lines are in a listen only mode, however later in the program you will have the opportunity to register to ask a question, at this time it is my pleasure to turn the program over to Mr. 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. Also, with us on the call is John Warwick, Maxwell's Chief Operating Officer. First, we need to advise you that the following discussion will include forward-looking statements based on our current expectations and assumptions. These statements are subject to numerous risks and uncertainties and changes in circumstances and assumptions. Forward-looking statements in the following discussion do not purport to be predictions of future events or circumstances and may not be realized. For further information regarding risks and uncertainties, please refer to the MD&A 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 may be accessed by visiting the Investors Section of our website at maxwell.com, or via the SEC’s website. Printed copies may be obtained by contacting the company. We encourage all investors to read these reports and our other SEC filings. Some of you are listening via the internet and an archived replay of the call will be available online at our website. All information in today’s call is as of October 24, 2013. The company undertakes no duty to update our forward-looking statements to conform the statements to actual results or changes in the company’s expectations. It is now my pleasure to introduce Maxwell’s President and CEO, David Schramm.

David Schramm

Very good and thanks Mike and good afternoon everybody. Before we get started I would like to apologize, I think I've got a little bit of airplane flu left over in the bronchial, so if I cough once in a while I apologize for that. We're going to once again break this call into two distinct segments, I will focus on the business execution and Kevin will detail the financial performance.

Stated in our release today revenue for the third quarter of 2013 was $51.2 million of which 11.3 million was recognizing revenue from prior periods, the ultracapacitor revenue for the third quarter of 2013 was $37 million as compared to $28.3 million in the third quarter of 2012 and $38.5 million in the second quarter of this year.

Gross margins for the quarter were 41% which is very similar to what we’ve been running in prior periods. Cash and cash equivalence started the quarter at 38.5 million and ended the quarter at 41.1 million. Please recall this was also a quarter that Maxwell was continuing to invest in our new facility in Peoria, Arizona. Cash management is a priority and has been focused on operating expense control as well as on careful investments in new equipments and facilities.

The world economic conditions did not improve in the third quarter and our reliance on the Chinese market for ultracapacitor revenue was also impacted. We continue to wait for a decision from the Chinese government regarding renewal of subsidies for purchases of low emission, fuel efficient diesel electric hybrid transit buses. The Chinese government has announced subsidies for battery powered plug in hybrid buses which incorporate ultracapacitor content to optimize regenerative braking efficiency and to extend the battery life which should drive sale of several thousand ultracapacitor modules in the current quarter.

Now these buses are different from our historical diesel electric hybrid, in that the primary power is from batteries instead of diesel and they have plug in capability. Our ultracapacitor sales continue at a steady pace in the automotive sector and evaluations by potential automotive customers continue. In September Maxwell announced that we are supplying ultracapacitor modules to Caterpillar for a high efficiency energy management system that supports Cat's fuel saving hydroelectric technology in the industry's largest ever hydraulic mining shovel.

The 1,400 ton shovel's innovative energy management system incorporates 98 of Maxwell's 125 volt Ultracap modules to efficiently absorb energy during brief shovel movements and rapidly deliver stored electrical energy on demand to supplement the main power system. A couple of weeks later we announced that Celadon a manufacturer of remote control systems for TV sets has designed Maxwell's [indiscernible] ultracapacitors into a handheld remote that can recharge in five minutes and deliver signals to the TV for hours to days without battery power. This device is particularly useful in remote areas of the developing world where batteries are expensive and not readily available. The revenue impact is minimal but this does represent a small penetration of the consumer electronic space.

We have formed a team to focus on grid scale applications for ultracapacitors that combines personnel from our ultracapacitors group with people from our high voltage product group. This latter group is headquartered in our Swiss operations and historically has been a key supplier to firms building power generation and transmission systems coupling the long standing customer relations with the new technology of ultracapacitors, has a role in aiding the control of variability brought on by introducing renewable sources such as solar and wind energy systems to the grid.

Our engine starting group has also enjoyed continued success this last quarter by working with large truck fleets and the truck OEMs that they procure their trucks from. We now have a line of sight for 1,500 trucks to be equipped with the Maxwell ECM by early next year and trials are continuing at more than 1,500 fleets.

These customers are seeing the return on the investment in reduced maintenance as well as in the reduction of starting failures that result in delayed deliveries and expensive jumpstarts. It just make the economic sense.

For background, ultracapacitors do not involve the chemical reaction like batteries, but rather store the power electrostatically. This allows the ultracapacitor to cycle, charge and discharge for up to 1 million and more cycles compared to a battery whose operational lifetime is usually measured in the 1000 of cycles.

Further, ultracapacitors operate very effectively between minus 4 degree Celsius and a positive 65 degree Celsius, coupling the best energy density of a battery with a power density of an ultracapacitor provides for an improvement in system function for most applications. This scenario has been tested at Argon National Laboratories and the results concluded that a battery-ultracapacitor combination had two times the life of the battery alone. This is a compelling value proposition for customers. The key to Maxwell's ultracapacitor performance lies in its design and in the proprietary electrode that we manufacture using our patented dry process.

Today all of our electrode material is manufactured in our San Diego facility. We are on track to open our second electrode facility by year's end in Phoenix, which will double our capacity for electrode production. This facility will also provide an internal second source for material, which is preferred by many customers and will also provide cost reductions due to the new state of the art equipment. Also, Arizona offers us a new demography from which to recruit engineers as well as lower energy and infrastructure costs.

We've also added about 30% capacity to our off shore assembly operations in order to maintain our strategy of supporting our customers as they grow and to be able to address new business opportunities. Ultracapacitors are clearly the driver of the Maxwell growth engine, but our other product groups continue to deliver results that contribute to our bottom line.

Our high voltage capacitor business headquartered in Switzerland had a very good first half of the year, but its seen see decline in global volume to the end of the year as a result of lower spending on grid infrastructure. In the last 12 months, we have introduced 9 new products and we’re entering new market segments beyond our historical market of the global electric utility grids.

Cost reductions have been made and the business remains a solid component of the Maxwell business. The microelectronics product group's revenue is down this year over the last due the limited number of new space programs available to compete on in the U.S. and Europe.

That said, we are seeking new business with new customers, and like high voltage this remains a very solid component of the Maxwell business. Maxwell is committed to growing the business and has enjoyed success even as the European market has stagnated, the U.S. has had limited growth and the growth in China has been sporadic.

We will seek out the right opportunities for all of our technologies and we will be well positioned to capture business in today's global economy and in the years to come.

I will now ask Kevin to go into some details on the financials, Kevin?

Kevin Royal

Thank you, David. I am going to spend a few minutes discussing our financial results for the third quarter 2013. Our revenues were $51.2 million for the third quarter 2013, which were down 8% from $55.6 million recorded in Q2 2013. This decline in revenue was driven in part by a 6% decrease in revenues for ultracapacitor product line, which generated $37 million in revenue for the quarter compared with $39.3 million in revenues for the second quarter of 2013.

Ultracapacitor revenues for the third quarter include $11.3 million from the net impact of differing revenue on certain shipments. During the third quarter, we recognized $15.2 million of previously deferred revenue and we deferred revenue on $3.9 million in shipments that occurred during the quarter resulting in a net impact of $11.3 million to the quarter.

Excluding this revenue impact ultracapacitor revenues were down significantly quarter-over-quarter resulting primarily from lower demand in hybrid transit bus market due to the expiration of the Chinese government subsidy program for diesel electric hybrid buses and the lack of announcement of a replacement subsidy program.

Revenues for our high voltage capacitor products were down $3.1 million or 24% from Q2 due to decline in global demand while revenues for our microelectronics products which tend to be variable from quarter-over-quarter were up $1 million for the quarter. Non-GAAP gross profit for Q3 was $21.3 million compared with $21.8 million in Q2 of 2013. Non-GAAP gross profit was 42% of revenue for the third quarter of 2013, compared to 39% for the second quarter of 2013. This improvement in gross margin was primarily related to higher margins on the revenue recorded during the quarter that had been previously deferred as well as lower manufacturing cost associated with higher production volume.

Total non-GAAP operating expenses for Q3 2013 were $14.4 million, which were down from $16.9 million for Q2 2013, primarily as a result of higher spending in the second quarter related to investigation, into revenue recognition practices and the restatement of our financial statements as well as bonus expense in the third quarter as we determine the annual targets under our 2013 bonus program are expected to be achieved at a lower level than we estimated in the prior quarter.

Non-GAAP net income was $6.7 million or $0.23 per diluted share for the third quarter of 2013 compared with non-GAAP net income of $4 million or $0.14 per diluted share for the second quarter of 2013. As mentioned earlier we believe the ramp is just starting to plug in hybrid buses and our customers are beginning to see some demand for the second half of the fourth quarter of 2013 as complete final qualifications of their new plug-in hybrid buses.

However because we're experiencing slowing demand for ultracapacitor products in China's diesel, electric hybrid bus market due to the lack of a current government subsidy program coupled with the timing of the plug-in hybrid bus ramp, we expect the Q4 2013 total company sales to be lower by 30% or more than the third quarter. Therefore we're implementing expense control measures in light of this slowing of revenues in order to keep cost in line with our current expectations for revenue in the fourth quarter.

We expect operating expenses in Q4 2013 to be in a range between $14.5 million to $15.5 million. Total capital spending of approximately $6 million is expected in the fourth quarter 2013, primarily related to the completion of the first phase of our Arizona electrode facility. Now I would like to turn to the balance sheet. We ended the third quarter of 2013 with cash and restricted cash totaling $41.1 million, which represents an increase in cash and restricted cash at $2.5 million from Q2 2013.

The significant components of our cash activity for the quarter include cash from operations of $6.2 million, capital spending of $5.2 million as well as the $2 million favorable impact to cash from the effect of the changes in foreign exchange rates on cash held on our Swiss Subsidiary. Capital spending during the quarter was $5.2 million and related to construction for the first phase of our new electrode manufacturing facility in Peoria, Arizona as well as other less significant capital investments.

As of September 30, 2013 we have $8.3 million in debt obligation to outstanding, and this debt balance consist of an equipment term loan of $2.6 million and debt of $5.7 million held by our Swiss subsidiary which has favorable borrowing terms. Now I will turn it back over to David.

David Schramm

Very good Kevin, thank you. I once heard that life is the art of drawing sufficient conclusions from insufficient premises. My sufficient conclusion today is I have elected to retire at the end of this year and to enter 2014 which is a year of my 65th birthday, knowing that Maxwell has grown revenue about 400% since my start in 2007, and went from a money losing cash burning entity to one that now is profitable and generating cash from operations.

My personal expectation is that Maxwell will continue to enjoy even more success, but these are my insufficient premises that I must let the Maxwell team turn into history.

Now before we take you questions, I would like to formally introduce John Warwick, the Chief Operating Officer of Maxwell who will serve as the Interim CEO beginning in January 2014. John joined Maxwell earlier this year and brings a solid background of leadership skills to Maxwell. I look forward to John leading the Maxwell team and taking them to the next level.

Now John, Kevin and I would like to entertain your questions.

Question-and-Answer Session

Operator

(Operator Instructions). We'll go first to Philip Shen with Roth Capital. Your line is open please go ahead.

Unidentified Analyst

This is Matt on for Phil, thanks for taking our questions. Just wanted to start out with the switchover in the China bus program to the plug-in hybrid future program. So I have a three part question for you on that. So first of all how long is it going to take your customers in China to re-tool to start meeting demand for plug-ins? And then the second part of it is how different is the Ultracap application for plug-ins versus conventional hybrids? And is there re-tooling necessary on your end and then finally if you could talk about the magnitude of the opportunity for plug-ins and how that compares with what you saw with the prior conventional hybrid programs in China.

John Warwick

From a timing point of view there are three or four of the China based customers that we have who have designed in the plug-in hybrid bus systems and are in final qualification testing. They do are receiving some orders for them this quarter and we do expect shipments to commence in Q4. So back half of the quarter though.

The difference from the ultracapacitors application is in the beginning is now in the first generation is basically taking the diesel hybrid using ultracapacitors and adding a battery power to it for propulsion for the first 30 plus kilometers and there is no retooling on our part required.

Unidentified Analyst

The final one was just talk about the magnitude of the opportunity in the plug-in program versus how it compares with what you guys were saying with conventional hybrid programs and prior conventional programs.

John Warwick

Well, that is definitely something that still to be determined. If they do come out with a regular diesel subsidy program, diesel hybrid subsidy program then we’ll see a split of the share. With our regular diesel hybrid subsidy program we expect our plug-in hybrid to be the new energy technology of choice going forward.

Unidentified Analyst

And what’s the latest you guys are hearing in China with regard to any potential standalone conventional hybrid program? Is that sort of off the table now that they mentioned the plug-in hybrid stuff?

John Warwick

We have no clear information on that, no visibility.

Unidentified Analyst

It looks like you guys have done a nice job managing OpEx and you talked about kind of controlling that tightly over the next quarter. Can you talk about some of the measures you put in place to control that and to be conservative over the next couple of quarters?

David Schramm

Yes, some of the things that we’ll do is be very selective with hiring, we’ll basically be hiring freeze but there are some areas that we’ll need to continue to invest such as in our sales force primarily related to the engine start module. We'll also freeze all non-essential capital. So, we’re finishing off the Arizona facility and we’ll have some capitals. I mentioned in my prepared remarks related to the completion of that facility but all other capital would basically be put on hold and then we'll also be very careful with travel spending, we'll increase the approval levels and just of course like for other areas where we can tighten our belts during this time.

Operator

And next we’ll go the Alex Potter with Piper Jaffray your line is open. Please go ahead.

Alex Potter - Piper Jaffray

Was wondering if you could give a breakdown within the ultracapacitor space how much of your revenue in the quarter was coming from the different sub segments. So, buses, wind, autos other.

David Schramm

I’ll just give you some rough percentages on the different areas for ultracapacitor but actually this is going to be actually for -- so, I’ll give you for ultracapacitor. Buses for Q3 were about 30% of the total, wind energy applications were roughly 25%. We had a large distribution component in the quarter as we recognize revenue that had previously been shipped to distributors but deferred and that was about 22% auto was 11% of the current quarter ultracapacitor shipments and then the other area that’s probably worth of note is the solid state disk drives which were 5% of the ultracapacitor revenues in the quarter.

Alex Potter - Piper Jaffray

I was just wondering if it will be possible to try to think through mathematically what the implications are from a fixed cost deleveraging standpoint if the Chinese hybrid bus subsidy doesn’t come back, the extent to its that ends up impacting, I guess gross margin here over the next couple of quarters presumably you’d have a fair amount of underutilized capacity if that occurs. I’m just trying to figure out what sort of margin impact we can expect from that.

David Schramm

I’m not sure I understand your question entirely but based on the current revenues that we’re forecasting for the quarter based on the guidance which incorporates the guidance that we’ve talked about being down around 30%, we expect overall gross profit for the quarter to in the high 30 range.

Alex Potter - Piper Jaffray

So, you don’t have any fixed cost absorption issues, I mean the reason I ask is if you are bringing out a new facility right, you will have a good amount of capacity now available to build more electrode material which is great but if the Chinese hybrid bus subsidy doesn’t ever materialize that is a big chuck of demand that you wouldn’t be able to run any product through that facility, so you would have a bunch of fixed cost but no revenue?

David Schramm

And so that impact would be more pronounced in Q1 if we don’t have revenues pickup because we won’t -- the Peoria facility we are finishing in the quarter so we won’t begin depreciating depreciation expense on that equipment and the related infrastructure until late in the quarter. So it will have a moderate impact in Q4.

Kevin Royal

Yes, Alex let me add to that a little bit and that is that we've been running San Diego with an awful lot of overtime. And that has generated us to generate some premium freight so by starting up Phoenix we are going to get a positive impact by reduction in premium freight, reduction in overtime and then we do believe we are going to see a yield improvement coming out of the Phoenix facility because it is the state of the art equipment.

And then keep in mind that the facility in Phoenix is a leased facility, so it’s the equipment that we would be depreciating. And then also keep in mind that the contract manufacturers that we use in China we are paying them on a value add basis, so there is very little fix that gets involved in that.

So the goal is to maintain the business we have and again when and if there is a decision made on the bus and we've had many, many promises made on that but we are dealing with a government and here in the United States we know what it is when a government makes a decision it’s when they announce it is when they announce it.

David Schramm

And Alex to further add we do have demand that’s starting to ramp on plug-in hybrid buses using the same alternative cap content as the diesel hybrid.

Alex Potter - Piper Jaffray

And going back to a question that was asked there previously, (audio gap) could eventually be as big as the hybrid opportunity was once for you?

David Schramm

Alex could you repeat the question, you cut out midway through your question?

Alex Potter - Piper Jaffray

I was just kind of going to rephrase a question that was asked previously there, do you think that this plug-in opportunity could eventually be as large as the hybrid bus opportunity was once for you?

David Schramm

Between the -- if there is a diesel hybrid subsidy coupled with a plug-in hybrid we would say that that overall pie would be about the same size as the pure diesel hybrid pie. And if there is no diesel hybrid subsidy that plug-in opportunity should be about the same size although financially it may not be quite as attractive for the bus subsidies purchasing the buses.

Alex Potter - Piper Jaffray

Just because of a higher upfront cost?

David Schramm

Correct.

Operator

And we will go next to JinMing Liu with Ardour Capital. Your line is open. Please go ahead. JinMing Liu, your line is open. Please go ahead.

JinMing Liu - Ardour Capital

First is related to the Chinese wind market, I noticed the contract announcement what we are signing it can very -- pick up a lot in the first half and supposedly second half of what double what happened in the first half. So my question is what should we think about your sales into the Chinese wind market if all the contract signed this year realize in sometime, some this year, some into next year. What kind of benefit you can enjoy?

David Schramm

Overall we have seen strong wind demand in the prior quarter and expect it also in this quarter. Overall the wind market we see growing at 10%ish range at a macro level. We are seeing softness in Europe and strength in China.

Kevin Royal

Well along with that that we have two different ways that we get into the wind turbines; one is directly with the wind turbine manufacturer, the other is we also sell to people that only make pitch controls and they sell to the wind turbine manufacturer. So and some of those are in various countries so it’s not a clear one to one as to when the wind turbine goes in as to where that pitch control is coming from.

JinMing Liu - Ardour Capital

Also you mentioned about your current R&D effort in the grid scale auto capacitor applications. Can you give us more color on that, like what kind of application, whether -- what kind of applications you are targeting like whether it’s [indiscernible] control or something else and what kind of potential well we are looking at here especially given what happened in China and the recent California proposals energy storage?

Kevin Royal

Yes we were -- that's a good question, we were awarded some money by the California Energy Commission and we’re working with the announced partner [Slytech], and it’s how we do firming. So that takes a very large number or ultracapacitors. But as you look at a solar field as of today in San Diego, the sun's not real bright, so as the sun comes and the sun goes, they need some firming activity. And one thing they’re looking at is using the Ultracaps for the very quick firming and then using a very large scale of batteries for the longer term. So that’s a project underway. We see a lot of potential in that. And what we’re seeing is a lot of interest at this point but that probably doesn’t manifest into large revenues until 2014 at the earliest.

JinMing Liu - Ardour Capital

Is there any -- can you help us give us any idea, you say 100 megawatt solar farm use your ultracapacitors for the firming application. How much revenue we should think of?

Kevin Royal

It would be 1,000s of Ultracaps. And again, I would think you’d be talking in the high hundreds of thousands of dollars per application.

JinMing Liu - Ardour Capital

Meaning for wind farm other than the solar farm regardless the size?

Kevin Royal

Yes.

JinMing Liu - Ardour Capital

Okay, got that. Lastly about your guidance for the fourth quarter that potential 30% decline in sales, kind of was puzzled by that because your sales in to the high voltage capacitor field and the microelectronics is going to stay flat or little bit higher. But even if we normalize for the $11 million benefit in the third quarter, essentially you're looking at very little sales into the past applications. Am I right or -- just want to clarify what you’re thinking there.

Kevin Royal

You’re right, and it’s because of the unknown. We’re waiting for a decision, is there going to be a subsidy renewal or is there not. And I think our bus customers and their customers are also waiting before they place orders on what kind of bus they want to have. But you’re exactly right. The 30% is off of the $51 million, which included that 11.3 of rev rec for previous periods.

John Warwick

And that’s the timing of the ramp of the plug-in diesel hybrid as the back half back portion of the quarter where that ramp starts.

Operator

And we’ll go next to Steve Marascia with Capitol Securities. Your line is open.

Steve Marascia - Capitol Securities

Put a little more flavor on what China is doing with your subsidies. It seems to me; tell if I’m misinterpreting this. By going towards the plug-in hybrid versus the diesel, are they potentially looking at shifting your overall emphasis on if you -- for lack of a better word, green technology or are they potentially going to have both coexist with each other going forward?

Kevin Royal

It’s a great question. I think if you see in the pictures that have been on the web and in the newspaper this week it started heating season in China. And there has been some very-very detailed photographs about hybrid in China and how bad the air is. My sense is that the government is committed to doing many things they can to clean up the air. And a plug-in hybrid by definition should be cleaner than just a diesel electric hybrid. So I think it’s a question of which one can you get into the infrastructure fast enough and which one can you ramp up fast enough. So we are waiting that decision patiently. But one of them, and I think John said it just a minute ago, if there is a decision not to do diesel electric, they will probably put a big effort on the plug-in hybrids.

Steve Marascia - Capitol Securities

Was there any indication that this type of policy approach is coming?

Kevin Royal

The indication was we’ve been told for several months that there is a decision coming and in the meantime as we’re waiting for that decision, the decision was made to put a subsidy on the plug-in hybrid. And as John said, the plug-in hybrids are going to use ultracapacitors to do the regenerative breaking part. I’ve been told by a customer in China that the ultracapacitor can really harvest 15% of the total energy of the bus, and that’s because the amount of starting and stopping then the bus does. And with those short bursts of starts, stop typically batteries can’t recapture that energy because it’s a very short timeframe but the Ultracap can. So I think there is still a good play for us whether it’s a plug-in hybrid or it’s a diesel electric hybrid. The difference is our customers have been told to do the diesel hybrid but the plug-in hybrid is something that they are in qualification on.

Steve Marascia - Capitol Securities

And final question Ford said they saw a little bit of improvement over in the European market. If you guys gotten any word of anything like that from [indiscernible]?

Kevin Royal

No, in fact if everything we’re reading say that that market is still very soft.

Steve Marascia - Capitol Securities

Okay, thank you.

Operator

And we’ll go next to James Ragan with Crowell, Weedon. Your line is open.

James Ragan - Crowell, Weedon & Co.

Yes, thank you. Just if we could get a clarification on the China subsidy, I know that and just in conversation in the past that some of the bus manufacturers had been improving their diesel engines even without having the ultracapacitor on there. I mean, is there still -- looks like there will be a market for the diesel buses even if there were not a subsidy given.

John Warwick

Yes. The diesel buses will be the cheapest purchase price for the city, so just a pure diesel bus will still have a market for it. The subsidies are enabling the cities to procure at a more competitive price on a better ROI than the diesel as well as promote the clean air energy technology.

James Ragan - Crowell, Weedon & Co.

So as we are sitting here today there seems to be a delay from the bus customers as they are waiting for additional subsidies, a clarification, I mean, how long do you think it takes them to kind of move forward if there is no clarification on the hybrid and diesel subsidy?

John Warwick

They are prepared to do hybrid diesels, however they are moving forward very rapidly on plugin hybrid diesels. And some of our bus customers, we know have significant orders for plugin hybrid buses.

James Ragan - Crowell, Weedon & Co.

Okay and then just to be clear on the -- so on the plugin hybrid solution with ultracapacitors, so that the revenue per bus for Maxwell would still be about the same at $10,000 to $15,000 roughly?

John Warwick

Currently their designs are using the same Ultracap configuration.

James Ragan - Crowell, Weedon & Co.

And then looking at the balance sheets for third quarter, the inventory was 39.4, or 42.5 million, up 3 million from the prior quarter, I kind of thought that there might be a bigger number than that as you are preparing for more bus orders, so good job on that. Can you just talk about how you’re looking at building inventory now going forward with the ongoing uncertainty?

John Warwick

While we’re in a good inventory position for supporting upside, we’re also in a good inventory position for managing cash. So we will scale back production to help with managing cash, our balance sheet position and we are well positioned to take advantage of any upside, should a hybrid subsidy come into play very quickly.

James Ragan - Crowell, Weedon & Co.

Okay, great and then John, it’s nice to talk to you. Just have a question regarding the transition here with being an interim CEO, so does that suggest that the board will undertake a formal CEO search at some point?

John Warwick

Absolutely, we’re in the process.

Mike Sund

Great, we have time for one more question.

Operator

Thank you, we will go to Jeff Osborne with Stifel Nicolaus please go ahead.

Jeff Osborne - Stifel Nicolaus

Most of the questions have been answered thus far. But I just have three quick ones. Kevin, I haven’t been keeping a running tally here, but is there any leftover distributor product that had been unrecognized as revenue that is waiting to be recognized. You have the nice 11 million this quarter; but I just want to get a sense of what's out there still on the shelves that could be recorded.

Kevin Royal

So, as I mentioned, we deferred revenue in the quarter of 3.9 million. So that will flow through in future quarter and will likely be the part of the fourth quarter revenues.

Jeff Osborne - Stifel Nicolaus

Okay, so that’s factored into the potentially down 30%, so if you back that out, kind of the base business without the optics of it, is a little bit worse, is that fair?

Kevin Royal

That’s correct, yes.

Jeff Osborne - Stifel Nicolaus

And would you expect any residuals in to 2014 or no?

Kevin Royal

You know, things are, as far as the shipments that we deferred are starting to decline, we are moving away from certain customers that where we needed to defer the shipments or defer the revenue on those shipments. And so as we move forward that will be lower in future quarters.

Jeff Osborne - Stifel Nicolaus

And two other quick ones as it relates to capital spending for 2014 recognizing that you are finishing up or wrapping up the expansion in Peoria, there in Arizona. How should we think about, I assume you’re not contemplating any additional expansion at that side, or the CapEx is largely down but how do we think about the CapEx side of the cash management equation for the next calendar year.

Kevin Royal

Sure, so I think the way to think about it is, it’s largely dependent on what happens with our revenues. If revenues continue at the levels that we’ve seen in Q4 will definitely minimize our capital spending at the Peoria site as well as other facilities. This year, 2013 was a very big capital spending year as we had numerous projects. But you know the significant project in Peoria, Arizona required a large capital outlay. I would look for 2014 to be substantially lower with or without higher revenues, but definitely if revenues were at the Q4 levels, we'll restrict capital significantly.

Jeff Osborne - Stifel Nicolaus

Is there a right revenue number on the ultracap side that you know you think you folks could produce without expanding, I mean could you do a 150 million to 200 million easily without sweating it or what’s the breaking point where you would need to launch Phase (Interpreted)?

Kevin Royal

It’s actually north of the number that you just mentioned. So we'll be good for those levels. We have got sufficient capacity.

David Schramm

Keep in mind that the Peoria facility is starting with the technology that we have in San Diego and from there the engineers have done an outstanding job of improving it to where the amount of product we get of the equipment, basically [indiscernible] is going to replicate everything that San Diego's had capability of today, and from there I think it just gets better.

Jeff Osborne - Stifel Nicolaus

Got you. And last question, is there any just update, hasn't been asked in a couple of calls here but discussions with any potential other automotive manufacturers, you've obviously got PSA and Lamborghini under your belt, now Caterpillar on the mining application, but any active discussions for other folks?

David Schramm

Yes, it's an active ongoing procedure, I think you're well aware that we've got an office in Munich and we've got an office in Detroit and they're there for very-very specific purposes.

Very good everybody and thank you much for your attention today.

Operator

And thank you for joining us today ladies and gentlemen, this does conclude today's program, we appreciate your participation and you may disconnect at any time.

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Source: Maxwell Technologies' CEO Discusses Q3 2013 Results - Earnings Call Transcript

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