Maxwell Technologies CEO Discusses Q3 2010 Results – Earnings Call Transcript

Oct.29.10 | About: Maxwell Technologies, (MXWL)

Maxwell Technologies (NASDAQ:MXWL)

Q3 2010 Earnings Call

October 28, 2010 05:00 pm ET

Executives

David Schramm - President and Chief Executive Officer

Kevin Royal - SVP, Chief Financial Officer

Michael Sund - VP, CIR

Analysts

Zach Larkin - Stephens, Inc.

Dilip Warrier - Stifel Nicolaus

Brian Kremer - Roth Capital Partners

Matthew Crews - Noble Financial Group

Craig Irwin – Wedbush Morgan

Jim Brilliant – Century Management

Unidentified Analyst -Baird

Ted Kuntz – Needham & Co.

Operator

Good day, everyone, and welcome to today’s program. At this time all participants are in a listen only mode. Later, you will have the opportunity to ask questions during the question-and-answer session. It is now my pleasure to turn the conference over to Mr. Mike Sund. Please, go ahead.

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. First 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, reduced credit availability, demand for OEMs products reaching anticipated levels, general economic conditions in the markets we serve, cost effective manufacturing 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 MD&A and Risk Factors 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 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 October 28, 2010. 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.

Finally, I would just like to mention that we will be participating in an investor conference in New York on November 9. Details of the live and archived webcast of that conference can be found in the Investor Section of our website.

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

David Schramm

Thanks, Mike and good afternoon, everybody. We are pleased to report that Maxwell recorded total revenue of $31.5 million for the third quarter ending September 30, 2010. That’s up 21% from the 26.1 million reported in the same period a year ago. That growth was driven by strong ultracapacitor sales of $18.6 million. That is up 78% from Q3 of ‘09.

Sales of our more mature Microelectronics and high-voltage capacitor products were down a bit compared with last year’s third quarter, but both continued to make significant contributions to our bottom line.

Along with strong ultracapacitor sales growth came continuing costs and efficiency improvements, thanks very much to our dedicated Maxwell team and we were able to generate more than $5 million of cash from operations in Q3. That’s the fifth time in six quarters that we’ve managed to do that. While this amount generated was high in Q3, we believe our business can be expected to continue generating cash going forward.

On a non-GAAP basis, excluding an accrual for our anticipated FCPA settlement, a non-cash stock based compensation expense and amortization of intangibles, the company turned a profit at both the operating income and the net income lines. After more than a decade of losses, that is a very meaningful accomplishment. Kevin will provide more details on that and other financial items in just a few minutes.

Looking at accelerating ultracapacitor sales growth as recorded last week, we are delivering our Boostcap® ultracapacitor products in production quantities for our first automotive design in with Continental AG or Peugeot and Citroen cars in Europe. It’s for our micro-hybrid stop-start and voltage stabilization system that PSA says it expects to install in 1 million diesel autos over the next three years. As we have said in the past, electrification and hybridization of cars, trucks, buses and other heavy vehicles, represents an enormous opportunity for Maxwell products. So this start of series production with a major automaker is another very significant milestone for Maxwell.

Consumers and governments around the world increasingly are demanding greener, more efficient, personal, commercial and public transit vehicles. All of these innovative hybrid and electric vehicles require safe, reliable, cost effective energy storage solutions such as those that our ultracapacitor products are providing.

Legislative and regulatory initiatives are also driving significant changes in how the world generates and uses energy and ultracapacitors are also gaining broad acceptance as a key enabling technology for renewable energy sources, such as wind and solar.

Sales of Maxwell ultracapacitors for recuperative breaking and torque assist systems in low emission, hybrid electric transit buses and zero emission electric rail vehicles continue to be a major driver of ultracapacitor sales growth. As we reported last month, there are already more than 2,400 hybrid buses powered by Maxwell ultracapacitors in daily service around the world and we expect that number to approach 3,000 by the year-end and keep growing next year and beyond.

Reports out of China indicate that the government has identified more than 30 major cities where significant air quality issues that qualify them for subsidies to purchase hybrid and electric public transit vehicles. That alone should continue to drive the growing demand well into the future. Hybrid bus and other heavy vehicle OEMs and drive train integrators in Europe and North America also continue to consume ultracapacitor cells in modules and we expect continuing growth in those geographies as well.

The experience we and our heavy vehicle customers have gained toward the past several years with thousands of vehicles operating in very demanding duty cycles and harsh environments has been a very important factor in validating our product safety, reliability and longevity for these and other applications.

We reported in August that sales of ultracapacitor products into wind turbine blade pitch and power quality applications were running about 40% ahead of last year during the first three quarters. So that continues to be the second primary driver of ultracap sales growth. We now estimate that more than 13,000 ultracapacitor-equipped wind turbines are operating around-the-clock worldwide. A good deal of that product is going into China where the appetite for electrical energy and concerns about the air quality and greenhouse gas ignitions form coal fire powered plants are driving the rapid expansion of wind generation.

And moving on to automotive, the European Union’s aggressive carbon dioxide emission reduction mandate for cars is the largest immediate catalyst for automotive applications for ultracapacitors. The European Union legislation requires that 65% of new cars produced in Europe in 2012 emit no more than 130 grams of carbon dioxide per kilometer. That standard ratchets up to 100% in 2015 and the threshold goes down to 95 grams per kilometer in 2020.

The 130 grams of CO2 per kilometer equates to about 42 miles per gallon per gasoline cars and over 48 miles per gallon per diesel cars so all of the European automakers are developing and introducing more fuel efficient, lower emission micro and mild hybrid vehicles and the phase of new hybrid vehicle launches will continue to accelerate. All hybrid cars incorporate start-stop idle illumination systems that turn off the internal combustion engine as the car slows and then restart the engine with a burst of energy when the driver touches the clutch or the accelerator.

Stop-start cars already on the road have used batteries for that function, but actual driving experience has shown that constant, high current cycling in stop and go urban traffic dramatically shortens battery life. Heavy cycling and cold weather also affect the battery’s ability to deliver enough power for repetitive restarting, so most of these systems have intelligence that senses whether the battery has enough power for the next start. Obviously, you don’t want to turn off the engine if you can’t restart it, so if the battery is weak or cold the system will deactivate itself which means that there are no fuel savings or emission reductions until the battery recovers.

Based on that experience, several automakers and leading Tier 1 parts suppliers are now developing systems that take advantage of ultracapacitors ability to charge and discharge a million times or more for guaranteed restarting and reliable performance down to minus 40 degrees.

Peugeot Citreon also notes that by incorporating ultracapacitors in a start-stop system, it is able to reduce the battery from 100 amp powers to 70 amp powers and that smaller, lighter, cheaper battery can also fit under hood instead of having to be located in the trunk. That eliminates about 20 feet of heavy, expensive battery cable, it simplifies the wiring scheme and reduces the assembly labor plus the ultracapacitor is a solid value proposition.

With the European and Asian automakers moving aggressively to produce greener, more fuel efficient cars, we are starting to see interest from Detroit. Meeting tougher US CAFE fuel economy standards of 35 miles per gallon per cars by 2015 is not as aggressive as the European standard of over 42 miles per gallon in the same time frame which could make Detroit even less competitive with imports. We have had a number of technical meetings with the Detroit 3 and with Continental over the past few months so there definitely appears to be a new sense of urgency coming from Detroit.

With some 60 million new cars produced annually around the world even relatively modest ultracapacitor content for car multiplied by any reasonable fraction the vehicles produced adds up to an energy storage market opportunity that can be measured into billions of dollars by the end of the decade. There are also a number of backup power, smart grid stabilization, wireless communication, and other industrial applications in the works and we continue to assess opportunities in the consumer product arena.

In a few minutes I will be discussing recent developments with our other two product lines and comment on future prospects. But first, our Chief Financial Officer, Kevin Royal, will provide some additional detail on the Q3 financial results and the progress of our settlement negotiation with the SEC and the Justice Department. Kevin?

Kevin Royal

Thank you, David. I’m going to spend a few minutes providing some additional information on our third quarter 2010 financial results.

Our revenues were 31.5 million for the third quarter 2010 up 6% from Q2 2010. The higher revenues in the quarter were driven by a 17% increase in ultracapacitor product sales which generated 18.6 million in revenues for the quarter. The combination of our microelectronics and high voltage businesses were down slightly in comparison with Q2 2010.

Our reported gross profit as a percentage of revenue for the third quarter of 2010 was 39% compared to 40% in Q2 2010. In the current quarter, overall gross profit was positively impacted by continuing improvement in our gross profit margin on ultracapacitor products while margin was slightly down for high voltage and microelectronics products.

We continue to make improvements in the cost structure of our ultracapacitor products which we expect will result in continued improvement of our profit margins on these products as well as our overall profit margins. These ongoing cost reductions include improvements in design, reduced material cost, increased productivity and lower labor cost due to outsourcing cell and module assembly as well as increases in ultracapacitor production volumes.

Total non-GAAP operating expenses for Q3 2010 were 10.9 million compared with Q2 2010 non-GAAP operating expenses of 11.1 million. Non-GAAP operating expenses excludes tax based compensation expenses, amortization of intangible assets and the accrual for potential settlement with the SEC and DOJ for alleged Foreign Corrupt Practice Act violations. In addition, our Q3 operating expenses include foreign currency losses of $128,000 compared to foreign currency losses of 1.2 million in Q2. We initiated a limited hedging program last year to reduce our exposure to currency fluctuations and increase the scope of our hedging program in Q3.

We reported non-GAAP net income of 968,000 or $0.04 per diluted share for the third quarter compared with non-GAAP net income of 455,000 or $0.02 per diluted share for the second quarter of 2010. Non-GAAP net income excludes stock base compensation expense, amortization and intangible assets, the accrual for potential settlements with to SEC and DOJ and the gain or loss on imbedded conversion options and warrants.

Our earnings before interest expense, taxes, depreciation and amortization or EBITDA, net of accrual for quarter for potential settlements with the SEC and DOJ on the Foreign Corrupt Practices Act matter increased from 2.5 million in Q2 to 3.1 million in Q3.

Now I’d like to provide an update on the company’s ongoing Foreign Corrupt Practices Act 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 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 the DOJ. We’ve cooperated fully and provided documents and other analysis as requested by both agencies.

During the second quarter, the company negotiated an agreement in principle with the SEC to resolve the ongoing FCPA investigation for a payment of approximately 6.4 million which would be payable in two installments with half being paid upon signing and the remaining half approximately one year from the signing, as well as certain other non financial settlement terms.

As of today, the settlement with the SEC remains subject to final approval of the Commission. Settlement discussions with the DOJ are ongoing. As a result of these ongoing discussions, the company accrued an additional 1.7 million in the third quarter of 2010. We anticipate final resolution in this matter with both the SEC and the DOJ in the near future,

The total accrual as of September 30, 2010 of 14.4 million represents management’s assessment of the best estimate of settlements with both the SEC and the DOJ. Because these settlement negotiations are in process, I would like to remind you that there can be no assurance that the settlements with these government entities would be approved at the amounts that we have provided for in our accrual.

Now I’d like to turn to the balance sheet. We ended the quarter with cash and restricted cash of 40.1 million which represents an increase in cash of 3.9 million from the Q2 2010.

The significant components of our cash activity for the quarter include cash generated from operations of 5.6 million, capital spending of 3.3 million, and cash from our employee stock purchase plan and stock option exercises of approximately 700,000.

Given our fairly modest cash consumptions, our demonstrated ability to generate cash from operations and our expectation that payments to the SEC and DOJ to settle the FCPA issues will be spread over the next couple of years. We do not anticipate the requirements to raise capital on settlement payments to the SEC and DOJ.

Depending on whether the convertible debt that matures next year is converted to common stock or paid in cash and the timing and expense of future capital spending for capacity expansion, it is reasonable to expect that we may sell more stock in the future but our intention would be to do so opportunistically.

I also wanted to note that the recorded value of our debt increased during the quarter as a result of the accounting for the embedded derivatives in our convertible debenture. Our balance sheet list our debt is 15.1 million. The actual underlying cash amount that we owe is approximately 13.9 million.

This difference between the recorded amount of debt and the actual amount owed of 1.2 million, represents the value of the embedded conversion options on the convertible debenture. The remaining debt consists of borrowing at attractive interest rates at our Swiss entity, which owes local Swiss banks approximately 5.6 million.

Now I’ll turn it back over to David to discuss other areas of the business.

David Schramm

Thank you very much Kevin. Purely we are focused mainly on the ultracapacitor products in the markets, so let us spend a few minutes on developments with Maxwell’s other products.

For those of you who are not familiar with the company, Maxwell’s Swiss subsidiary develops and markets high voltage capacitor products that are used in the electric utility grid and other applications involving the transport, distribution and measurement of high voltage electrical energy. I should emphasize that while the name sound familiar these are not even close relatives of ultracapacitors. We produce high voltage capacitor customers for large global prime contractors that build power plants and electrical utility infrastructure around the world.

Maxwell is the world’s leading supplier of such products and our sales track closely with global spending on electric utility infrastructure. Developing countries such as China that are expanding electrical energy generation and distribution to support commercial and industrial activity and improving standards of living are major consumers of our products. High voltage sales have been a bit soft this year, and probably will be off by about 10% year over year but these products generate solid margins and continue to make an important contribution to the bottom line.

A lot of attention and resources are being focused on how the grid can be made smarter to better manage electrical energy generation, distribution and consumption. The federal government is making modernization of the US grid a major focus of federal energy policy in spending, so we are tracking these developments closely and gaining a better understanding of how both high voltage capacitors and ultracapacitors can play with the Smart Grid; however, you need to recognize that grid programs involve not only funding but extensive engineering and permitting before infrastructure construction starts. So any Smart Grid applications will probably take at least a couple of years to materialize.

As most of you know Maxwell also develops and markets radiation hardened components and single board computers to major satellite and spacecraft OEMs in the US and Europe. Government and commercial space programs typically stretch over several years and deliveries of our products are tied to program schedules and funding cycles, so volumes can vary quite a bit quarter to quarter.

Sales in any given year are a function of the number of satellite and spacecraft launches and the amount of Maxwell content per launch. The proprietary high value, single board space computer product developed by our microelectronics product development team has enabled us to significantly increase the value of Maxwell content per launch over the past several years. Our computers already have been designed into some significant programs, and we are being considered for several more.

Over the past couple of years we mentioned the Iridium Next Program as a significant potential opportunity for space computers. Our bid and our terms and conditions were not accepted by the customer so we have to cross this program off the list and focus on the ones in front of us.

Looking ahead as we stated in our press release, based on the strength of current bookings and order activity with both new and existing applications, we expect total revenue to grow in a range of 5 to 7% sequentially in the fourth quarter with ultracapacitors leading the way. The new K2 large cell products we introduced in the first quarter were largely responsible for improving margins for hybrid bus and other heavy duty applications.

The redesign and transition of our D-cell ultracapacitor product to offshore assembly was completed early in July and that along with fulfilment of a Legacy low-margin wind energy D-cell supply agreement should enable us to continue improving gross margins as we go forward. We also continue to refine and improve multi-cell module designs to further reduce cost and improve manufacturability and quality.

I want to emphasize that while material sourcing and virtually all ultracapacitor cells and module assembly are being outsourced to low cost countries we produce our proprietary ultracapacitor electrode material only under lock and key in our San Diego facility and electrode fabrication will not go offshore.

In closing I will reiterate that what I said in last quarter’s call. We are focused on translating increasing ultracapacitor volume along with important contributions from our microelectronics and high voltage products and improving gross margins into sustainable profitability at the operating income line excluding the non-cash items. Our employees are committed to providing leading technology in our fields and executing to near perfection to enable this mantra.

Now will be a good time to entertain your questions.

Question-and-Answer Session

Operator

(Operator Instructions). We will take our first question from (inaudible). Please go ahead.

Unidentified Analyst -Baird

Hi, good afternoon gentlemen. How should we think about your production capacity, you guys mentioned that you would – you might have to do some expansion, so how should we think about that in terms of the revenue run rate that you are capable of doing now? And what happens next?

David Schramm

Yeah, that is a good question. The one thing that we have been very proud of is, our engineering staff here in San Diego has worked very hard on improving both the yield as well as the output of our electrode facilities and we are up multiple times over what we did just a few years ago. We have recently added a new calendar system into the San Diego facility, so we are very comfortable that we got capacity that is going to be in front of our most bullish forecast is what we are going to need. And our contract manufacturers are in capacity as it is needed so right now we are very comfortable that we got the capacity matched with the growing market and we are very conscious of the fact that we want to make sure that that capacity is always there so we are prepared to satisfy customers.

Unidentified Analyst -Baird

Okay, and then the wind market, you have been pretty successful in Asia are there any development outside of Asia so into non-Chinese turbine manufacturers you can talk about?

David Schramm

Yeah, there are. We not only sell to wind manufacturers we also sell to pitch control manufacturers and many of those are located in Europe. So we would sell our ultracapacitors to a pitch control company who would then sell that to a windmill company everywhere in the world. But as you are so right let us say, China right now has been the growth engine for the wind market for the world.

Unidentified Analyst -Baird

Okay, thanks.

Operator

We will take our next question from Zach Larkin with Stephens, Inc. Please go ahead.

Zach Larkin - Stephens, Inc.

Hey, gentlemen, congratulations on the solid quarter.

David Schramm

Thank you.

Zach Larkin - Stephens, Inc.

Just a quick question on the auto – it is great to see traction and continued visibility with the Continental-PSA arrangement and also the additional traction with the domestic manufacturers that you mentioned. But I was wondering if you could provide any additional color on the potential to get another design within the next 6 to 12 months and then also is someone – once a company gives you a design how long is it going to take once they start testing for us to see sales potentially at the profit?

David Schramm

Yeah. What I’d tell you is our program with PSA is designed through Continental. And Continental has got a system now that uses two of our ultracapacitors in the system along with their electronic control system. We had been with Continental to other car makers, because frankly the way we see it PSA has done a lot of the legwork to validate the concept and in fact the system works. So we believe that the next application for Continental should happen in that timeframe you just said, within the next 12 months.

And of course continental made an announcement here just a few weeks ago and they listed us as – we are the team member that is working with them on supplying the ultracaps. So as Continental sells the system to more carmakers we will be selling more ultracapacitors to Continental.

Zach Larkin - Stephens, Inc.

You are not aggressively attacking other manufacturers on your own as mainly it is Continental at this point?

David Schramm

We are working with other Tier 1s. In the past if you remember, we have announced that we have a working relationship with Valeo who also has start-stop capability and we have a working relationship with Alcoa.

Zach Larkin - Stephens, Inc.

Okay. I wonder if you can give a little more color also on the bus opportunity in China. Obviously sales has been very strong. Maybe a little more color on the opportunity and then also on the competitive landscape, are you seeing other people trying to come in like Panasonic and capture this market as well?

David Schramm

What we have seen on the buses is I think it is driven by China. The government has stated that they want 1000 hybrid buses in 30 cities, now what they haven’t stated is what that timeline is. The bus companies and the integrators we work with in China basically don’t have what we would call as a real solid annual forecast. But we have been trying to connect the dots together, that when they get an order within about 90 days we need to supply the caps. As we said in the press release the number of these buses has been growing just leaps and bounds. And when we look at the competitive landscape we totally expect to have competitors, just because of the size of this market and how well frankly Maxwell is doing in the market. But today we haven’t seen a formidable threat and frankly we haven’t seen – you mentioned Panasonic, we haven’t seen them in the high end of the size of the cells that we are into.

Zach Larkin - Stephens, Inc.

Okay, great. Thanks for that color and then just one quick final question. Do you have any other meaningful applications that you are thinking about for 2011, 2012? I know you talked broadly about consumers Smart Grid, any more specifics you could provide on them?

David Schramm

Backed-up power, uninterrupted power supply, the grid is probably the most interesting opportunity for us at this point just because of the size of it and the potential of how much electrode that would take to satisfy and application. But I think the thing that is the most encouraging to us is in the last few years we have had the education, take traction with design houses and with engineers as to what an ultracapacitor is and what it is capable of doing. The thing that there are engineers I think who had done an outstandingly good job at is talking about the value preposition and that is where can the ultracapacitor really come into play and provide a solution to a problem that without the ultracapacitor you wouldn’t have a quick solution.

Zach Larkin - Stephens, Inc.

Wonderful. Okay, thanks so much and congratulations again on the quarter.

David Schramm

Thank you.

Operator

We will take our next question from Dilip Warrier with Stifel Nicolaus. Please go ahead.

Dilip Warrier - Stifel Nicolaus

Thank you. I just want to get a sense of the potential volumes with PSA in 2011. Is this start/stop system going to be rolled out as a basic feature across both the C4 and C5 vehicles? Or it is an option that you purchase? Because I noticed that C4 and C5 typically on or above – volumes above half a million a year.

David Schramm

The information I have is – this is standard on certain diesel. I believe it is a 1.6-liter diesel that goes in into that Citroen vehicle, but I believe it is a standard feature.

Dilip Warrier - Stifel Nicolaus

Okay. And then given the PFC had a lot to do with the design of the system, does that in any way preclude you from selling this system jointly with Conti to other OEMs?

David Schramm

As I stated earlier we had been with Conti at other auto OEMs showcasing the Continental’s system. So relatively speaking it is a drop in system and of course there is nothing ever that simple but again relative to redesigning the vehicle, Continental has done an outstanding job of putting together a system that is rather simple.

Dilip Warrier - Stifel Nicolaus

Okay. I know that your accounts table actually increased significantly this quarter. Given that there is probably some reversal of that next quarter, do you still expect a positive cash flow from all operations on 4Q?

Kevin Royal

Yes we do. You are correct accounts payable came up but we also have a bit of a growth in our receivables and our inventory as well so we think we got room there that continue to generate cash from operation in Q4.

Dilip Warrier - Stifel Nicolaus

One last question. So it sounds like the outlook for the high tension business is probably down about 10% this year, sort of driven by the macro (enlinement) but I was wondering what have you sensed for 2011 at this point, it this going to be a relatively subdued year again or do you expect a resumption of growth?

David Schramm

The growth that we have seen has been single digit we had a spurt a couple of years ago when a lot of infrastructure went in, but I do believe that where we are going to see the growth is going to be in the brick countries. They are adding the infrastructure the major customers that we worked with basically are the ones who designed the power plant systems. So I think it can be a reasonable growth but I think it is going to be single digit.

Dilip Warrier - Stifel Nicolaus

Okay, thank you very much.

David Schramm

Sure.

Operator

We will take our next question from Matthew Crews with Noble Financial. Please go ahead.

Matthew Crews – Noble Financial

Ah yes. Good afternoon everyone. Just to wrap up the different business lines – kind of an outlook on the microelectronic business. I know that Iridium piece was passed on – just some more additional details on that for the fourth quarter and maybe next year as well.

David Schramm

You know when we look at the microelectronic’s business because it is so tied to the satellite space programs –it is very difficult to look at it quarter by quarter. If we look at it at an annual basis it becomes a little clear and right now what we see is that business will probably grow single digit also for the next few years but unless there are major programs and right now there are not that many on the horizon. There is not the opportunity for the significant double digit growth.

Matthew Crews – Noble Financial

Okay. Moving back to buses in China do you have a sense for the mix of ultracapacitor based buses versus lithium-ion or any other diesel hybrid type buses? Could you just give me a little more clarity; I mean doing the math you get three thousand buses that you can expect at the end of the year – 30 cities a thousand that is 30,000 buses. Do you get a sense from when you are talking what percent you are gaining on that?

David Schramm

I really do not have a good feel for that, because I really do not know how many of a 30,000 been release to other bus customers. What I can tell you though, was success we have with the ultracapacitor has been with in all electric bus that is lithium battery plus the ultracap and then diesel gasoline and any other form of engine drive. The benefit that the customer has seen is the quick charge ability. The ultracap to capture the breaking regeneration as well as the ability to work at very cold temperatures and again those are couple of the physical attributes that we got with an ultracap that enhances the life cycle of the battery, because as you know batteries don’t like cold temperature and they don’t like quick charges and quick discharges. So that is really the strong suit of the ultracapacitor and in the breaking regen it is just natural fit.

Matthew Crews – Noble Financial

Do you have an integrator in China that you use specifically? I do not think I ever heard that.

David Schramm

No. We use several different bus companies that we have dealt with and they tend to do their own integration and there is also integrators that we deals with so it is – the answer is we do both, but in China you tends to be more straight with bus company.

Matthew Crews – Noble Financial

Thank you. And then just lastly, just a lot more on out there. You mentioned that – you headlined you have expected capacity to reach your most bullish forecast. Another way of maybe asking that is to finish with – Do you have a revenue number that you can think you can generate from ultracapacitor to meet – that you can generate off of your existing line?

David Schramm

It’s an unlimited match, because we have the ability to add capacity almost faster than we can add the revenue, because of the visibility. The commitment that we use – we know exactly what it is where to get it and we got our name on it, so I do not believe at this time I had any issue with adding capacity as fast as I can add the revenue. Right now I tell you it is a nice problem to have. When we looked back at last few years we are very pleased that we have been able to enjoy the revenue growth we have had considering the way the whole world was at.

Matthew Crews – Noble Financial

Definitely good, thank you very much.

Operator

We will take our next question from Brian Kremer with Roth Capital. Please go ahead.

Brian Kremer – Roth Capital

Good afternoon.

David Schramm

Hi Brian.

Brian Kremer – Roth Capital

Hi. On ultracap, I think earlier in the year you are saying maybe two million from autos this year is that where you are tracking to at this point?

David Schramm

Yes.

Brian Kremer – Roth Capital

And then to solid state, how was that going?

David Schramm

You are talking solid state disk drive business

Brian Kremer – Roth Capital

Yes.

David Schramm

It still on track and we see some nice growth and that is also going forward.

Brian Kremer – Roth Capital

Okay and then can you give us a sense at all in terms of wind versus buses right now? Which is growing faster? What you are seeing – looking forward whatever visibility do you have at this point?

David Schramm

Yes. I guess the way to answer that is, it changes quarter to quarter. One edges up the other and then they change positions but both of them are growing very nicely and again they are the dominant 2 markets that we are in to at this point and it just because of the growth but one quarter wind would be bigger than the buses and next quarter buses are bigger than wind. So it is a neck and neck race at this point.

Brian Kremer – Roth Capital

Okay fair enough. And then the high voltage and the microelectronics – the gross margin there, you said it comes down a little bit. Can you give us – we are talking 500 basis points, 50, some kind of scale there?

David Schramm

The combinations of the two were probably about 150 basis points in the quarter and we accounted for the reduction from 40% down to 39% overall.

Brian Kremer – Roth Capital

Is this one time effect or is it something you have to do with pricing going forward with – how should we look at that?

David Schramm

The gross profit margin on those two businesses is going to move around in any given quarter and so I would not say it is an isolated event. We were down slightly but I would expect in the future would that could be easily to regained.

Brian Kremer – Roth Capital

Okay and then on the FCPA, obviously there is – nothing is guaranteed. Can you give us a sense of your – where you stand? How close you are you think to the goal line? Obviously you could have set aside more than 1.7, less. Do you think it is a case of DOJ being content with what the SEC and I believe there was 8 million at they had asked for previously right? That put you to 8 million now then?

David Schramm

Right. That is absolutely correct and as far as timing – I would say that we are more optimistic than we been since we started the investigation that we are getting close. What close means is I think within the next 3 to 4 months that they will be able to get those behind us and as far as the settlement values again we are optimistic that we taken a last charge related to this matter but I will just have to re-emphasize what we said in our prepared remarks and that being that – we can’t get assurance that we won’t have take another charge. But we are very optimistic at this point in time.

Brian Kremer – Roth Capital

Sure and I understand. In the 3 to 4 months and I know you have talk previously about the agreement is one thing but then legal paper works is something that takes you longer, so the 3 to 4 months I am assuming you could reach final agreement on a number and then it takes 2 months to legal final agreement on both side on the final wording or how does that work?

David Schramm

So without revealing the content of the discussion I would say when I talk about the 3 to 4 months that will be for full completion and announcement so again we are optimistic we can get it done in that time frame and when I say done we are talking full completion.

Brian Kremer – Roth Capital

And remind us again your how much you will spend you think next quarter related with this legal and other?

David Schramm

Our run rate on this cause has been ranging. Once we get through initial investigation phase we have been running about roughly an average of 150,000 per quarter and I would expect that we will continue that run rate in the fourth quarter as we hopefully bring this to a close and wrap things up.

Brian Kremer – Roth Capital

Okay Great thank you.

Operator

We take our next question from Ted Kundtz with Needham & Co. Please go ahead

Ted Kuntz – Needham & Co.

Yes. Good afternoon everyone, couples of questions. David, could you talk a little bit about the – if you want to I hope you could, a little bit on the gross margin side for ultracaps and what are the trends are there. I assume they are at the range now over 30% I am not - you do not quite give that out I know but I am wondering if you could just comment on the trends you are seeing in ultracap gross margins and were your goals are to get to?

David Schramm

Ted it is a good question and you know we do not segment report, we run this as one business but obviously if you could take a look at the 78% quarter over quarter growth in revenue on the ultracap. Ultracap is now more than half the revenue of the company and if it is more than half and the gross margin are still pushing 40% then I say dare say you could back in to that. That ultracap are starting to hold her own a little bit, it has gotten better. The cost reduction is picking up; volume is always a good friend when it comes to a new technology. The engineers have just done an outstanding job driving cost out and you know it’s just starting to come together. The traction is starting to gain hold so I do not have a number for you exactly other than if you just interpolate that the other two businesses were flat, ultracap is up 78%, the gross margin holding quarter over quarter.

Ted Kuntz – Needham & Co.

That is what I came up with, I came up with about 30%, 31% number but I am not sure that is the right number but– what is your ultimate goal for gross margin and other under ultracap (site) do you have one?

David Schramm

Well, the ultimate goal is that we finish up, get this company towards a sustaining profitability machine. The number one goal of this company is to make money. Everything else is in the neighbor. Our quest for perfect quality and delivering everything exactly on time and always having leading edge technology just help us get to that goal but to have an absolute number? No, because it going to be too dependent on the market and in some point in time we will attract some significant competition. And frankly, at this point I do believe we are leading the market right now.

Ted Kundtz – Needham & Co.

Okay. But right now you are saying your continued up trend in ultracap gross margins, is that a fair statement or?

David Schramm

Yeah, I think that is a fair statement if you just look at the way the company performs quarter-and-quarter and year-over-year.

Ted Kundtz – Needham & Co.

Okay. Are you doing any business with the military on the Ultracap side?

David Schramm

We do business through the distributors who might be doing that but we are not doing it directly.

Ted Kundtz – Needham & Co.

No direct program since you are working on with them?

David Schramm

Nothing of I am aware of.

Ted Kundtz – Needham & Co.

Okay.

David Schramm

It could be just through distributors.

Ted Kundtz – Needham & Co.

Right. Right, sure. Then they could be working with ultracap solutions for them. But you guys are not working on designing anything directly?

David Schramm

No.

Ted Kundtz – Needham & Co.

Okay, thanks very much.

Operator

We will take our next question from Craig Irwin with Wedbush. Please go ahead.

Craig Irwin – Wedbush Morgan

Thank you. My question is about the extent of ultracapacitor manufacturing in Switzerland and transition over to (inaudible) in China. I was wondering if you could give us an update on whether or not that was complete in the quarter and if there is any one-time expense associated with that?

David Schramm

That is completed, Craig. What we did is in consistent in the company strategy. We moved the large sale assembly from San Diego off shore. Then we took on moving D-cell and that is completed. We are in the process of getting everything validated. The volumes are starting to grow very, very nicely and we are getting very, very comfortable. We got a good solid run rate.

Craig Irwin – Wedbush Morgan

Excellent. Were the employees from that business largely re-allocated over to the High-Voltage operations in Switzerland or is it possible that maybe we have a lower head count now?

David Schramm

Right now, we had heads of employees that have retired so what we did is we knew that this was coming that we are going to move the D-cell assembly because we had a lot of part-time temporary in-contract people. So we tried to really minimize the impact to our full-time employees.

Craig Irwin – Wedbush Morgan

Okay. Excellent, excellent. And then just as far as overhead for the manufacturing and this week’s operations, I noticed that there was no charge associated with the accident, the D-cell manufacturing over there. Is this something that we should look at as probably immaterial as far as the overall cash burden for Maxwell?

David Schramm

We actually have some fixed assets. There are still on the book associated with our operation and we classified those are available for sale. It is about $1.5 million. We do have some interested parties at this time. And so in the future, we are very hopeful and optimistic that we will sell that equipment for at least half its value. Should we not be able to do that then there will be a future charge. But again, at this point in time we got more than one interested party.

Craig Irwin – Wedbush Morgan

Great. And then if I could change subjects, one of the things that we are hearing from potential customer of yours a number of years ago actually was that they would love to use ultracapacitors but the cost was far too high. With those really significant manufacturing improvements both on the large cells and on the D-cells from transition to high volume manufacturing, cost will come down quite dramatically. So wondering if you could update us really with what the real primary issues are that you are bumping into with customers that are looking to potentially qualify ultracapcitors for new applications.

David Schramm

Yes. Craig, a lot of those barriers have come down and I really think it is because we did a lot of better job on working in the complete value proposition. And (inaudible) just summed it up, it is pretty simple. If have you never bought an ultracap before then as you buy one and put into your system, all you see is added cost. It is until you go up and you look at the complete value proposition that you find out where you can save money. For instance the PSA, their numbers say that they could down size from a 100 Amp power battery to 70 Amp power battery. So you add the cost of the ultracap but you took that amount of battery out so there is some cost savings to go with that. They have the ability moving the battery from the trunk back under hood. That is 20 ft of battery cable. So if you do not look at the complete value proposition, you will always come to the conclusion that the ultracap costs more money. But I think we are making some headway where customers are starting to look at what is the total solution answer.

Craig Irwin – Wedbush Morgan

Okay. And with the significant cost decline over the last 12 and 24 months, are you seeing a significant increase from the number of serious request for quotes, serious bidding activity out there among potential customers?

David Schramm

Well, I guess I will let the numbers speak for themselves. The quarter over quarter from a year ago was up 78% so the answer to your question is yes we are getting a lot more interest. And again, the thing that I called a milestone that having ultracaps in production with Peugeot Citreon has validated that this is truly an automotive online application. And what that tells us is other automakers are going to look because PSA has validated that the concept works. And all we have to do is something that is core of our business and we got to execute and we got to do it extremely well.

Craig Irwin – Wedbush Morgan

Great. Congratulations on the solid execution.

David Schramm

Thank you. I believe we have time for about one more question.

Operator

And we will take our last question from Jim Brilliant with Century Management. Please go ahead.

Jim Brilliant – Century Management

Good afternoon gentlemen, how are you? David, you mentioned the number of buses with Maxwell Caps out of service but I did not write it down. What was that number?

David Schramm

2,400.

Jim Brilliant – Century Management

Okay. By the end of the year, you think it will go to 3,000 is that?

David Schramm

3,000 is in sight.

Jim Brilliant – Century Management

Okay.

David Schramm

But November 1 is on Monday so that is kind of a base.

Jim Brilliant – Century Management

Kevin, with the SG&A as a percentage sales that excludes FCPA accruals so it is running right around $7 million. As a percentage sale, is that a good run rate to use going forward?

Kevin S. Royal

I think actually that as we move forward that the SG&A and the R&B as well, the percentage revenue will decline. That goes for the next couple quarters, what we have looked at as far as projections are that would be in the range of about $11 million to $12 million over the next 2 to 3 quarters.

David Schramm

Let me help Kevin with that. The one thing that we are definitely going to be adding resources and continue to add resources on is application engineering. That is the place where the application engineer can – again I like the concept, the value proposition, but they can help the customer with how do you take our technology to improve their overall system and reduce their cost.

Jim Brilliant – Century Management

Okay. So combined SG&A next couple of quarters limit $12 million.

David J. Schramm

SG&A and R&B.

Jim Brilliant – Century Management

Okay, SG&A and R&B. What I guess you are saying David is that R&B will going up a little bit?

David Schramm

Part of the test, SG&A also so it depends where we are putting the activity, but again we are a technology product. We are not a commodity and so we going to go train the customers to how to use technology and sometimes you just have to do it for them.

Jim Brilliant – Century Management

Okay. I know you are getting back the gross margin now. I know you do not separate it but it is fair to say that now we entered the realm where on its own ultracaps are positive on operating income level?

David Schramm

Yes. I think if you take a look at the margin contribution and the expenses associated with that business, you would probably be in break-even to slightly negative. Again we do not segment report so I do not have the –

Jim Brilliant – Century Management

But you are hearing a lot of comments so that the (inaudible) than you have them. That is for sure.

David Schramm

Yeah, right.

Jim Brilliant – Century Management

Okay. There is an article in Valve Magazine talking about electric valve accelerators using ultracaps. Are they yours?

David Schramm

I do not know the answer to that but I am sure we can find that out. Again reason I do not is we have a lot of direct sales but we also a lot of sales that go through the distributors. For smaller customers, that would typically go through distributors so the distributors could be doing the - we call them innovators. They would be doing the engineering to help the customers with that but we get you an answer at that question.

Jim Brilliant – Century Management

Okay. That seems to be a pretty interesting market. You spoke a little about the sales (inaudible) drive business. Have you as of yet put any kind of size to that market relative to Maxwell’s potential?

David Schramm

Well, I think right now we are in the state so this is a couple of million dollars of revenue that we can see and to answer the question of how quickly we can grow that market. But there has been a lot of interest in that market. I think it is the whole market for uninterrupted power supply. How to do you make sure to got just enough power there to make sure you do not lose data or you do not shut a complete system down. So we are encouraged by the initial results we are seeing out of that so it is all a (inaudible) business.

Jim Brilliant – Century Management

Okay. But a little too early to size the market?

David Schramm

It is and frankly we get a little overwhelmed just because of the contract you get on a transit bus. It is a nice revenue generator at this point.

Jim Brilliant – Century Management

Fair enough. I appreciate, thanks.

David Schramm

Surely. Thank you very much everybody.

Operator

This concludes your teleconference. Thank you for your participation. You may now disconnect.

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