Maxwell Technologies, Inc. Q4 2009 Earnings Call Transcript

| About: Maxwell Technologies, (MXWL)

Maxwell Technologies, Inc. (NASDAQ:MXWL)

Q4 2009 Earnings Call Transcript

February 18, 2010 5:00 pm ET

Executives

Mike Sund – VP, Corporate Communications and IR

David Schramm – President & CEO

Kevin Royal – SVP, CFO, Treasurer & Secretary

Analysts

Steve Sanders – Stephens, Inc.

Mark Tobin – Roth Capital

Ted Kundtz – Needham & Company

Shawn Lockman – Ardour Capital

Elaine Kwei – Piper Jaffray

Dilip Warrier – Thomas Weisel

Operator

Good day, ladies and gentlemen. All sites are now online in a listen-only mode. Please note today's conference maybe recorded. I'll now turn the program over to our moderator for today, Mike Sund with Maxwell Technologies. 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 may differ materially because of factors such as the company's history of losses, 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 assembly, 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 factors sections of our SEC filings, including our most recent Form 10-Q and our Annual Report on 10-K.

Electronic copies of these filings may be accessed by visiting the Investors section of our website at www.maxwell.com and hard copies may be obtained by contacting the company. Some of you are 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 February 18th, 2010. We undertake 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 David Schramm, Maxwell’s President and CEO.

David Schramm

Good afternoon. We are pleased to report that Maxwell recorded total revenue of $28 million for the fourth quarter ending December 31st, 2009. That's up 22% from the $22.9 million reported in the same period a year ago. That growth was driven by record ultracapacitor sales of nearly $15 million, up 66% from Q4 '08.

Sales of our more mature microelectronics and high-voltage capacitor products were down a bit versus last year's fourth quarter, but both were up about 10% for the full year.

2009 finished with Maxwell crossing $100 million revenue mark. Along with ultracapacitor sales, growth came from continuing cost and efficiency improvements. In fact, excluding the accrual for potential settlement of U.S. Foreign Corrupt Practices Act violations, the Q4 operating loss would have been only about $400,000 compared with $1.9 million in losses in Q4 '08 and $1.7 million in the third quarter ending September 30th, 2009.

Unfortunately, all this good news is tempered by the GAAP required $9.3 million accrual we recorded in Q4 for the potential settlement of FCPA violations in connection with the sale of high-voltage capacitor products in China by our Swiss subsidiary. As we reported previously, after we became aware of questionable payments made to an independent sales agent in China, we disclosed that discovery and initiated an internal review and we have been voluntarily sharing information with the SEC and the Justice Department.

Kevin Royal has been our appointment on the internal inquiry and our interaction with the authorities. He will cover this situation in more detail as part of his review of the Q4 results. But I want to emphasize that settlement discussions are ongoing and that no final terms have been agreed upon. While this has been a serious distraction and the potential sums involved cannot be taken lightly, this too shall indeed pass and the company's prospects for 2010 and beyond remain brighter than ever.

Ultracapacitor sales grew by 52% to nearly $44 million last year. And with the strides we've made in technology, cost and quality, and delivery, we believe Maxwell is just hitting its stride as a fully qualified supplier for automotive and other extremely demanding high-volume applications.

The world needs more efficient, reliable, and cost-effective energy storage solutions. As noted in today's press release, public sector policies and increasing global environmental consciousness continue to stimulate and in many cases, mandate investments in renewable energy and more efficient greener public transit, commercial, and passenger vehicles.

Sales of ultracapacitor modules to support recuperative braking systems in low-emission, hybrid electric transit buses and zero-emission electric trolleys and rail vehicles really took off in 2009. Follow-on orders we continue to receive in the U.S., China, and Europe and they all promise to add to that momentum for this year.

Although financing challenges delayed some plan to wind farm projects last year, Maxwell's expanding wind customer base enabled us to grow wind related sales year-over-year and we believe that wind energy's superior return on investment will continue to make it the front-runner among renewable sources. We have just wrapped up another round of factory audits by Continental, which resulted in an "A" supplier rating and we are preparing for initial production-level shipments for our first automotive launch later this year.

Here again, the macro factors are favorable. The Obama administration has moved the former 2020 CAFE fuel economy standards for U.S. automakers forward to 2016 and the European Union is holding firm on its aggressive carbon dioxide emission reduction mandate, all of which is accelerating the timetable for hybridization and electrification of automobiles.

As discussed previously, the European Union CO2 emission reduction legislation requires that 65% of new cars produced in Europe emit no more than 130 grams of carbon dioxide per kilometer by 2012. Many cars currently emit from 160 grams to 200 grams per kilometer. So every European automaker is scrambling to introduce more fuel-efficient, low-emission micro and mild-hybrid vehicles. This is of particular interest for ultracapacitors, since all of these hybrids are incorporating start-stop systems that turn off the internal combustion engine as the car slows. And they need a burst of power to restart that engine when the driver touches accelerator.

With some 60 million new cars produced annually around the world in a normal year, even relatively modest ultracapacitor content per car multiplied by any reasonable fraction of the vehicles produced add up to an energy storage market opportunity that could be measured in the billions of dollars within a few years. As we announced in the fourth quarter, BOOSTCAP Ultracapacitor products also have been designed into a variety of back-up power, wireless communication and other industrial applications.

We have completed a redesign and capacity expansion of our postage stamp size PC10 ultracapacitor to meet demand for a mini uninterruptible power supply module to provide power loss protection for solid-state drives that are used in enterprise storage applications such as credit card transaction processing. The PC10's compact, prismatic form factor allows it to be integrated into the drive itself so that in case of a power interruption, there is an independent energy source to provide power to store work in process to memory without any data loss.

In a few minutes, I will discuss recent developments with our other two product lines and comment on prospects for the coming year. But first, our Chief Financial Officer Kevin Royal will provide some additional detail on Q4 financial results and the status of our ongoing discussions with the SEC and the Justice Department. Kevin?

Kevin Royal

Thank you, David. I'm going to spend a few minutes providing some additional analysis on certain areas of our fourth quarter 2009 financial results. Our revenues were $28 million for the fourth quarter of 2009, which is up 7% from Q3 2009. The higher revenue was driven by an increase in ultracapacitor product sales with continued strong sales of our microelectronic and high-voltage products.

Ultracapacitor sales were $14.9 million, representing a 42% increase over Q3 2009. Our reported gross profit as a percentage of revenue for the fourth quarter of 2009 was 34% compared to 38% in Q3 2009. In the current quarter, overall gross profit was impacted by a much higher mix of ultracapacitor products, which have lower gross profit margins than our microelectronics and high-voltage products.

We continue to make improvements in the 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, reduced material costs, increased productivity, and lower labor cost due to outsourcing cell and module assembly, as well as the increases in ultracapacitor production volumes. Many of these reductions will be fully realized in Q2 of 2010.

Now, I'm going to discuss our net loss and the impact of certain non-cash and non-operating items on our reported loss. Most of these items are non-cash. We reported a net loss of $10 million for the fourth quarter of 2009. There are a number of non-cash and other non-recurring items included in our Q4 2009 statement of operations.

The most significant items are an accrual for potential settlement of the ongoing Foreign Corrupt Practices Act inquiry, the tax provision related to the transfer of intellectual property from Switzerland to United States, the non-cash gain on embedded derivatives associated with our convertible debt, and the non-cash compensation expense we recorded for stock-based compensation.

The accrual for potential loss related to the ongoing FCPA inquiry was $9.3 million and there was no similar charge in Q3 2009. The gain on embedded derivatives was $1.9 million in Q4 compared with a loss of $2.8 million in Q3 2009. The tax provision related to the transfer of intellectual property from Switzerland to United States was $1.7 million in Q4 and there was no similar provision in Q3 2009. Stock-based compensation was $222,000 in Q4 and $898,000 in Q3 2009. In addition, the company incurred $183,000 of expense in Q4 associated with our ongoing review of commissions paid to an outside Chinese sales representative compared with $365,000 in Q3 2009.

Excluding the accrual for potential settlement of the FCPA inquiry, the gain on embedded derivatives, stock-based compensation, and the tax provision associated with the transfer of intellectual property from Switzerland to United States, as well as amortization of intangible assets, the net loss would have been approximately $442,000 for Q4 2009 compared with $818,000 for Q3 of 2009.

Our earnings before interest expense, taxes, depreciation and amortization and the accrual for potential settlement of the FCPA inquiry, or EBITDA, increased from $624,000 in Q3 to $1.4 million in Q4 of 2009.

I'd like to provide further information related to the accrual that we recorded in Q4 for a potential settlement of the ongoing FCPA inquiry. As we have stated in previous earnings conference calls and disclosed in quarterly press releases and SEC filings, we have been conducting an internal review of our commissions paid by our Swiss subsidiary to an outside Chinese sales representative. We have been engaged in ongoing discussions related to this matter with both the SEC and DoJ. We have cooperated fully and provided documents and other analyses as requested by both agencies.

During the quarter, we recorded an accrual for the potential settlement of the FCPA inquiry. The amount we recorded was based on our estimation of loss as required under U.S. Generally Accepted Accounting Principles and discussions with both government agencies. These discussions have resulted in the company's estimate of a potential settlement range of $9.3 million to $20 million. The top end of the range of $20 million represents the combined first offer of settlement recently put forth by the governmental agencies.

We have not had a chance yet to have further meaningful negotiations with the government agencies regarding their first offer. In our judgment, based on the ongoing discussions with the governmental agencies and current facts and circumstances, we believe the amount that we recorded represents a reasonable estimate of the settlement amount for U.S. GAAP financial reporting purposes.

As I stated earlier, these discussions are ongoing and a settlement agreement has not yet been reached and there can be no assurance that a settlement will be reached at all or that any final settlement amount will not be more or less than our accrual.

Now, I'd like to turn to the balance sheet. We ended the quarter with cash and restricted cash of $37.6 million. This represents a decrease in cash of $651,000 from Q3 2009. The significant components of our cash activity for the quarter include cash used in operations of $723,000, capital spending of $1.2 million, and proceeds from our stock plans of $904,000.

There is two items I'd like to address related to the company's debt. First, our debt declined during the quarter as a result of the accounting for the embedded derivatives in our convertible debenture. In addition, during the quarter, the holder of our convertible debenture converted approximately $2.8 million of the debenture to Maxwell common stock, reducing the amount we owe on the convertible debt to approximately $8.3 million.


While our balance sheet lists our debt as $16.7 million, the actual underlying amount that we owe is approximately $13.8 million. The difference between the recorded amount of the debt and the actual amount owed is an accounting adjustment of nearly $3 million to value the embedded conversion options. The remaining debt relates to our Swiss entity, which owes local Swiss banks approximately $5.5 million.

Now, I'll turn it back to David to discuss other areas of the business.

David Schramm

Great. Thanks, Kevin. So far, I've talked mainly about ultracapacitors. So let's spend a couple of minutes on sales and prospects for Maxwell's other products.

For those of you that are new to the story, our high-voltage capacitor products are used in the electric utility grid and other applications involving the transport, distribution, and measurement of high-voltage electrical energy.

High-voltage capacitors may sound similar to ultracapacitors, but the products are quite different and address entirely different markets. Our high-voltage capacitor customers are the large prime contractors who build power plants and electric utility infrastructure around the world. We are the world's leading supplier of such products and our sales go hand-in-hand with spending on electric utility infrastructure.

China and other developing countries that are increasing electrical energy generation and distribution to support industrialization and improving standards of living are major consumers of our products. Sales grew by about 10% in 2009, which is quite respectable for a very mature product line. So these products again make significant revenue and margin contributions to Maxwell's income statement.

A lot of attention is being focused on how to better manage electrical energy generation, distribution, and consumption via the so-called Smart Grid. The administration is making the U.S. grid a major focus of stimulus spending and federal energy policy and we are tracking these developments very closely. Please understand that grid programs involve not only funding, but extensive engineering and permitting before construction can begin. So opportunities for our products will unfold over the next several years.

Sales of our microelectronics products for satellites and spacecraft also increased on the order of 10% year-over-year. We sell radiation-hardened components and single board computers to major satellite and spacecraft OEMs in the U.S. and Europe. So our micro sales are driven mainly by the number of satellite and spacecraft launches and Maxwell content per launch.

Space programs typically stretch over several years and deliveries often come in lumps, resulting in significant quarter-to-quarter revenue variations. Our high-value single board computer products are helping us to increase the value of Maxwell content per launch and we are designed into some large program proposals. So if one or more of those go our way, growth could accelerate over the next several years. As we look forward, high-voltage capacitors and microelectronics are positioned for steady, slower growth as compared to ultracapacitors, which are demonstrating their potential to become Maxwell's dominant growth engine.

Many of you have seen Energy Secretary Steven Chu's remarks at the Washington D.C. Auto Show in January, discussing the synergies between ultracapacitors and batteries in vehicle electrification. Dr. Chu, who is a co-winner of the Nobel Prize for Physics in 1997 pointed out that even the best lithium ion batteries can't accept a charge at the rate that electrical energy is generated by regenerative braking systems.

He proposed development of hybrid energy storage systems that use ultracapacitors to efficiently capture virtually all of the energy generated by brief braking events and then feed that free energy into the batteries at a rate that avoids damage and promotes longer battery life. Such systems, he said, and I quote, "could improve the gas mileage of all vehicles." If you haven't seen it, you can view a video clip of Dr. Chu's comments. It's in the Blog section of the Maxwell website.


Just this month at the Society of Automotive Engineers' Hybrid Vehicle Technology Symposium here in California, scientists from the United States government's National Renewable Energy Laboratory presented the results of extensive testing they conducted with a mild hybrid vehicle supplied by a major U.S. manufacturer. They concluded that a single Maxwell 48-volt ultracapacitor module weighing 40% less than the original equipment nickel-metal hydride battery pack could satisfy all of the vehicle's energy storage requirements. Many have heard this analogy, but for those who are still fussing on how to think about batteries and ultracapacitors, it – there is a repeating.

In the energy storage world, ultracapacitors are like sprinters, capable of fully charging or discharging in seconds; batteries are like marathon runners, with 10 to 20 times ultracapacitor's energy storage capacity, but far slower charge/discharge rates. Thus, ultracapacitors are ideal for capturing regenerative braking energy during the few seconds that it takes to stop a vehicle. In addition, ultracapacitor's turnaround efficiency, that is how much stored energy comes back out, is above 95% whereas many batteries are around 80% or lower.

Ultracapacitors also operate reliably and safely in extreme temperatures. Battery's ability to charge and discharge drops off severely in freezing temperatures and high temperatures shorten battery lifetime. And in normal use, ultracapacitors can survive a million plus charge/discharge cycles whereas battery lifetime is measured in hundreds to thousands of cycles. Bottom line, ultracapacitors can provide a standalone energy storage solution in partially electric, micro and mild-hybrid systems and can complement batteries and full hybrids and electric or plug-in hybrid vehicles.

Returning to Maxwell's bottom line, although we fell a bit short in Q4, we are on a trajectory that should get us to profitability at the operating line early this year. In addition to the significant ultracapacitor cost reductions already reflected in 2009 results, the transition of our largest volume D Cell ultracapacitor product to offshore assembly in China is progressing well and yields in the new Lishen facility are coming up nicely.

We have committed to last-time builds of the axial cells currently produced in Switzerland for a couple of customers, so the transition to all Chinese assembly should be completed around mid-year. Our engineering team also completed a large cell redesign we call K2 and this better-perform, lower-cost cell is now moving into production, which will give us additional module improvement this year. We also continue to refine and improve multi-cell module designs to further reduce cost and improve manufacturability and quality.

Although material sourcing and virtually all ultracapacitor cell and module assembly are being outsourced to low-cost countries, I want to emphasize that fabrication of our proprietary ultracapacitor electrode remains under lock-and-key inside Maxwell and won't be going offshore.

Before we close, I would spend a moment in reviewing potential non-product revenue sources. We will be in Washington D.C. again next week, further exploring government funding opportunities. We have already completed submissions for several active technology and product development funding programs and expect news of some of them within the next quarter or two. However, as some of the banks have found, money from Washington can be a mixed blessing given the administration and other requirements that come with government contracts. So we are proceeding very carefully.

Finally, we are stepping up our efforts to create value through the application of our proprietary dry electrode fabrication process in lithium ion battery manufacturing. It's a green solvent-free process that has shown potential to reduce cost, improve battery performance, and extend operating lifetime.

In conclusion, we can look back with satisfaction on the year of remarkable progress for Maxwell. We grew sales in the face of a challenging economic condition, we expanded our margins and began generating cash from operations, we strengthened the balance sheet, and we developed new opportunities on several fronts.

That said, our attention is now firmly focused on the present and the future. First quarter revenue is on pace to come in well above Q1 '09, but as we noted in today's release, reduced utility infrastructure and other outdoor construction activity during the cold winter months historically has made Q1 seasonally soft. So we expect top line revenue to decline in the range of 5% to 7% from Q4 to Q1 and then resume sequential growth in Q2.

For the full year, we believe that the double-digit growth rate established last year can be sustained and with long-awaited automotive applications moving towards serious production, accelerating growth is on the horizon.

We'd be very happy now to entertain your questions.

Question-and-Answer Session

Operator

(Operator instructions) And first, we'll go to the site of Steve Sanders with Stephens, Inc. Please go ahead.

Steve Sanders – Stephens, Inc.

Good afternoon, everyone.

David Schramm

Hi, Steve.

Kevin Royal

Hello.

Steve Sanders – Stephens, Inc.

Just a follow-up on the China related accrual. Do you have a sense of the timeline for the process, roughly when we might know what the liability will be?

Kevin Royal

I would say, Steve, we don't really have a good estimate at this time. We reviewed other FCPA cases that have literally taken years to resolve. Based on the ongoing discussions with the SEC and DoJ, we do believe it's prudent to proceed carefully and deliberately so that all of the relevant information is understood by both government agencies. But having said that, we are of course working to get this resolved just as quickly as possible.

Steve Sanders – Stephens, Inc.

Okay, all right. And then on some of the new applications or shipments that you are anticipating in 2010, it sounds like the solid-state drives in particular are a pretty promising opportunity for you. Can you kind of ballpark the potential there over the next year or two?

David Schramm

Steve, we've had a – we've really enjoyed a lot of good growth that started late in 2009 and we expect it to continue and grow even more in 2010. We are dealing now with more than two different people that are very interested in this pack. The form factor fits extremely well, we've had very good success in the field. To put a number on that, I don't think we have got an estimate right now. But I would think we could get safely – $5 million to $10 million a year.

Steve Sanders – Stephens, Inc.

Okay, okay. That's helpful. And then on the auto side, when you do start to ship initial volumes for production orders, how should we think about the gross margin impact there? I would assume that you are targeting positive gross margin on those products out of the box, also understanding that auto is a little bit tougher, but as we kind of ease into the auto ramp, what kind of impact do you think that will have on ultracap segment margins?

David Schramm

Yes. Well, I want to repeat what I said a few conference calls ago and that is I refuse to take any businesses underwater unless I got a very definitive plan to get it above water very, very quickly. The automotive that we have taken did not come in underwater and we are – we have a plan right now to get that to 40% gross margins and that's because of pricing, volume, and the ongoing cost reduction. I got to tell you, the engineers keep amazing me here as to how much money they can pull out of our product and of course at some time, it gets a little more difficult to pull that kind of funding out, but we keep working on it.


We are going to be okay on that automotive. The amount that we are going to have in '10 really is startup. In '11, that goes up by a factor of five and then it doubles again in '12. And that's just on the programs we've announced to date. I think the other major point there, Steve, is as being classified an "A" supplier was a major, major hurdle. We were classified here in our San Diego operations and we've been classified as an "A" out of our Chinese contract manufacturers and there are not that many that have got both of those distinctions. So that was a great milestone for us to get in this business.

Steve Sanders – Stephens, Inc.

Okay, okay. That's very helpful. Thank you. And then last question, just on the first quarter, you've got revenues down a bit sequentially, but you are continuing to execute on some of your gross margin enhancement initiatives. So should we think about gross margin in first quarter as being under a bit of pressure or flat, how would you guide us there?

Kevin Royal

Yes. So the gross profit for the quarter is – we reported, it was about 34% and will be up. Our forecast is to be up 2% to 3% from where we came in in Q4.

Steve Sanders – Stephens, Inc.

Okay, okay. Thanks very much.

David Schramm

Yes. Hey Steve, just one more thing, I’ll add there just to put in perspective, but as we grow more and more globally, Q3 we always have to deal with the fact that the Europeans take three weeks off for their holidays, while now in Q1 we have to deal with the fact that the Chinese take two weeks off for New Years and both of those end up being major events into the cycle. So we are going to have to plan that, but I think we are going to see that Q1, again, historically has had a dip and now, we have another reason why, and Q3 is going to have the European holiday and that will repeat itself again, I'm sure.

Steve Sanders – Stephens, Inc.

Okay. All right. Thank you.

Operator

Next, we'll go to the site of Mark Tobin with Roth Capital. Please go ahead.

Mark Tobin – Roth Capital

Hi. And I'm sure you guys are tired of talking about the FCPA, but one question. Based on your explanation, Kevin, it sounded to me a little bit more like the accrual you took was more of a middle of a range versus a best-case scenario. Is that the right way to interpret that?

Kevin Royal

Yes, I think that's a good analogy. While we gave the range of $9.3 million to $20 million, there is – the range is likely larger than that. We certainly didn’t start at $9.3 million.

Mark Tobin – Roth Capital

Okay. And then shifting gears, David, when we look at the high-voltage business in particular, obviously the FCPA investigation has been a distraction for Kevin, I'm sure. How about operationally with that business as far as removing employees and finding new distributors and so forth? Has there been an operational impact because of this?

David Schramm

Keep in mind, Mark, it was one Chinese rep. That was one individual.

Mark Tobin – Roth Capital

Okay.

David Schramm

And he was removed immediately. We have replaced that function, if you will, with a fulltime individual that works for Maxwell and resides in our Shanghai office. We've added a couple of reps to support that person and again, I've been supporting that with our sales function out of our Swiss operation. So as we speak right now, I've got more feet on the ground in China doing the sales than we had before with the one rep.

Mark Tobin – Roth Capital

Okay. And then finally, on the high-voltage and the microelectronics business, as we look ahead to 2010, do you have thoughts about looking for other strategic options for those businesses or how are you looking at that?

David Schramm

That's something we always look at. We are always looking, like for microelectronics, where else can that technology apply, are there any other acquisitions we ought to make to complement that business because I do want to grow it. And I tell you the same thing with a high attention. There is so much going on with Smart Grid and frankly, Smart Grid is – you get a different definition if you talk to different people, but I think there is a lot of product opportunity there.

So we do have the advanced engineers and the research and development engineers out of the Swiss operation looking at what new products can we get into to utilize the expertise and the investments that we've got in play. So we are not giving up in either one. Both of them, I expect to have growth out of.

Mark Tobin – Roth Capital

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

Operator

Next, we'll take our question from the site of Ted Kundtz with Needham & Company. Please go ahead.

Ted Kundtz – Needham & Company

Yes, good afternoon.

David Schramm

Good afternoon, Ted.

Ted Kundtz – Needham & Company

David, could you go over the couple of the markets that – I just wanted to really kind of flush out a little more of your – sort of your backlog or billing – booking activity in the wind and also the bus and truck markets, especially addressing the Chinese opportunity and how that is developing.

David Schramm

Yes. The wind, Ted, we are working with people other than windmill manufacturers. We are working with some pitch control people that all they build is pitch control, so you don't see that directly. In fact, there is things we are working on and there is more to follow, but we will have some news out on what we are doing on that hopefully within the next quarter. But the wind, we see a lot of growth.


There was just an article in Wall Street that talked about the investment per megawatt and wind stacks up very well when you start looking at some of the other wind or the energy-generating technologies that are out there today. Relative to the truck market, we have got the cold-start module we talked about here a few quarters ago. We are still actively working on putting that together and engineering that and we are hoping to bring that to market sometime within the next two quarters.

So there is a whole bunch of things that are being worked on. The biggest help we've had is from when I started here almost three years ago, the amount of acceptance from the marketplace and I really give a lot of credit to the people of Maxwell that have done a lot of market education as to what an ultracapacitor is. And we are starting to bear some fruit off of that education.

Ted Kundtz – Needham & Company

Could you address the Chinese bus market? We know – you've talked a lot about how big it is and the potential.

David Schramm

Yes.

Ted Kundtz – Needham & Company

What is really happening for you guys over there currently? How much volume are you doing there and can you give us some little more specific information?

David Schramm

Well, the order – yes, the orders we announced last year, we got follow-on orders coming on every one of those customers. I will tell you, about a week-and-a-half ago, we had the vice deputy from one of the major Chinese bus companies here. I asked him, is there any way you could level the schedule for us a little bit and give us a little bit of a forecast. And basically he's got the same problem I've got with him and that is he gets a community that says they want 1,000 buses and they want them in 90 days, so he calls me and says, "I need a 1,000 buses worth of modules and I need them in 60 days."

And I'm afraid what we have to do is (inaudible) regression analysis to say here is what is going to happen based on the history, but we see a continuous increase, if you will, in the transit buses, but it won't come in an annual forecast. I'm afraid it's going to come in as project-by-project forecast. But so far, the year started on pretty well with the bus market in China.

Ted Kundtz – Needham & Company

Okay. Perfect. Thank you.

Operator

Next, we'll go to the site of Walter Nasdeo from Ardour Capital. Please go ahead.

Shawn Lockman – Ardour Capital

Hi, good evening. This is Shawn Lockman for Walter. I just wanted to follow up on the question about the Chinese bus orders. I believe, David, you said that you guys are looking for follow-on orders to come. I mean, should we be looking for those orders to be coming in the next quarter or so, if you are getting that heads up or how should we look at that?

David Schramm

Well, when I say follow-on orders, Shawn, they come in on a normal basis. When we made the announcement a year ago, it's because that was brand new business to us that we had not had before. And we don't announce every purchase order that we get. But I will tell you that we get follow-on orders, it's on a regular basis and I always have to put quotes around the word "regular" because it is on a project basis. And that is when my customer gets an order for buses, he puts in an order to ultracaps. If I look backwards, it looks relatively, if you would, even. But in actuality, it's not going forward. So we still see an awful lot of uptick as to what we can do with Chinese buses for the next four to five years.

Shawn Lockman – Ardour Capital

Great. And as far as 4Q and your ultracapacitor revenue popped up a bit and I mean, how does that break out? Was that also due to the – due to some follow-on orders from China as well or was that a lot more mix in terms of North America and Europe?

David Schramm

It was across the board pretty well. We had orders from China continuing on the buses, the windmill pitch control systems were coming back out, we saw a lot in the solid-state disk drive that was coming back at us. So there – it's coming across the board. Like I just said, Shawn, it – the market is now starting to embrace this technology and they are finding ways to use it. I really believe as we go forward with the announcement we had with Continental and that gets into full swing, that's going to open up a lot more opportunities for us in the transportation industry.

Shawn Lockman – Ardour Capital

And as far as the – if you could just give us a little bit in terms of what you are going to see and what we should look for in the wind market, what you guys are seeing in the wind markets for 2010? Are things tied or are you starting to find some more customers and some more product acquisition there?

David Schramm

Well, we are finding more customers and what we are finding are more pitch control customers. Again, we are finding there is more companies out there that don't manufacture windmills; all they manufacture is the pitch control. And so those have been a sweet spot for us, as well as going after the other windmill makers in the global sphere.

Shawn Lockman – Ardour Capital

Well, that's it from me. Thanks.

Operator

Next, we'll go to the site of Jesse Pichel from Piper Jaffray. Please go ahead.

Elaine Kwei – Piper Jaffray

Hi, this is Elaine Kwei for Jesse. Just to clarify on the bus orders, how – has the initial order already shipped and have you actually received follow-on orders into that?

David Schramm

Yes to both.

Elaine Kwei – Piper Jaffray

Is there anything in backlog?

David Schramm

No, that $13.5 million we announced last year was all shipped in 2009 and yes, we've had follow-on orders from each of those customers and it continues as we speak.

Elaine Kwei – Piper Jaffray

Okay, great. And could you give us actually a little more detail on the end market mix at the current time between the wind, hybrid buses, and automotive and how you expect those going forward? I mean, are we sort of half wind, half buses or is that looking a little different now?

David Schramm

Elaine, I'd like to have three halves out of what you just put up. But right now, the automotive is very small, we are in startup mode. And it's about half wind and half other at this point.

Elaine Kwei – Piper Jaffray

Okay. And you had mentioned last time that there were several new wind customers that you had orders from or booked, is that still the case or is there anything that you can discuss further on that?

David Schramm

Well, I think I've said this in the past. It takes more time to get the press release than it does to get the purchase order. And that's the case on some of these. But I will tell you, we have enjoyed follow-on orders with the wind customers we had and we've generated new customers with the pitch control technology.

Elaine Kwei – Piper Jaffray

Okay. And can you provide any type of backlog number?

David Schramm

At this point, all I can tell you is I see a double-digit growth year-over-year, okay? And then obviously, when I take a look at the three product groups that Maxwell has, the largest amount of that growth is going to come out of ultracapacitors. So if you just take the numbers and extrapolate it out, I think you'd find a pretty good growth.

Elaine Kwei – Piper Jaffray

Okay, great. And just lastly, how is the competitive landscape looking for yow now with ultracapacitors? Are you starting to see more competition coming from some of the green companies or is there anyone out there that's approaching you guys in terms of significance or scale?

David Schramm

We haven't seen a large degree of ultracapacitor competition in the U.S. We still have a couple of companies in Korea, we have the one in France and – but it's spotty at best.

Elaine Kwei – Piper Jaffray

Okay.

David Schramm

But the answer to your question is we haven't seen a lot of competition.

Elaine Kwei – Piper Jaffray

Okay, great. Thank you so much for taking my questions.

David Schramm

Thank you. I think it's time that we probably take one more good question.

Operator

We will go to the site of Dilip Warrier from Thomas Weisel. Please go ahead.

Dilip Warrier – Thomas Weisel

Good afternoon.

David Schramm

Hello, Dilip.

Dilip Warrier – Thomas Weisel

Hi. So just a question for Kevin. I think if you back out the $9.3 million in accrual this quarter, I think your SG&A expense showed a nice improvement. Is that the run rate to look at going forward?

Kevin Royal

Bear with me just a minute on that, Dilip.

David Schramm

Yes, Dilip, while Kevin is looking for the number, you could just assume it's just good management. Couldn’t you?

Dilip Warrier – Thomas Weisel

I could actually shoot over another question to you while Kevin is looking. This is a sort of a big picture question here, but clearly 2009 was a tough year for automotive. 2010 looks to be slightly better, just for the automotive OEMs. But as we kind of begin to focus now on bringing in new technology to cars and how that relates to your ultracapacitor business, are you seeing any sort of momentum or sort of an increase in talks with some of your tier 1 customers in terms of integrating ultracaps into micro-hybrid start-stop kind of systems?

David Schramm

Yes. And again, you just hit the answer there at start-stop. The European regulation for 2012 – and keep in mind, 2012 is not very far from now and when you look at the design cycle of car, it's today. And that is a start-stop system, requires that power burst to restart the car and we've had several tier 1s and OEMs tell us that a start-stop is in their words, a battery killer, because of the amount of energy that you take in and out of that battery so many times. And the ultracapacitor actually is – it’s a perfect solution for a start-stop system. And that's what we are putting into the Continental, that's the one that we've announced. And there is others that we are working on.

Dilip Warrier – Thomas Weisel

Great.

Kevin Royal

Yes. So Dilip, to answer your earlier question on SG&A line, if you back everything out and you look at it without stock compensation, you are about $5.8 million. I would expect there to be a slight tick-up going into Q1. When I say slight, we are talking about $200,000 to $300,000. And then from there, as we go through the year and our volume increases, we will have additional variable costs, primarily associated with increased commissions, but other volume related activities. So to answer your question, $6 million is probably a decent base run rate and that will increase as our activity as a company increases.

Dilip Warrier – Thomas Weisel

Very good, thank you. And I just have one final question here. Just given all that you've talked about on the Chinese hybrid bus opportunity, is it fair to say that revenue here could be lumpy, but that you are still expecting growth year-over-year?

David Schramm

I don't think it's going to be lumpy. I think it's going to be a steady growth. It's just I don't have visibility to it. Again, when I have the – one of our major customers in China here, he gets visibility about 90 days out and that's about as much as he is going to give me. I'd be much happier if I could have the visibility that other businesses enjoy where you get a year or two to your schedule and you know what's going to happen.

My confidence though is extremely high that the amount of transit buses in China that need to be hybridized and the government is pushing China to make it happen, it's going to happen. I shared on a call here, I believe, two quarters ago that we have one customer that is running a bus in China completely on ultracapacitors; no engine, no batteries, and he charges the ultracap at every bus stop. So there is a concept that we would definitely want to expand if we can.

Dilip Warrier – Thomas Weisel

Very good. Thank you.

David Schramm

Thank you.

Operator

Thank you. And it looks like we have no further questions.

David Schramm

All right. Thank you everybody for joining us this afternoon.

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