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Maxwell Technologies, Inc. (NASDAQ:MXWL)

Q4 2010 Earnings Conference Call

February 17, 2011, 5:00 pm ET

Executives

Mike Sund – VP, Communications and IR

David Schramm – President and CEO

Kevin Royal – SVP, CFO, Treasurer and Secretary

Analysts

Steve Sanders – Stephens, Inc.

Walter Nasdeo – Ardour Capital

Michael Horwitz – Robert W. Baird

Craig Irwin – Wedbush Securities

Dilip Warrier – Stifel Nicolaus

Matthew Crews – Noble Financial

Operator

Good day, everyone, and welcome to the Maxwell Technologies fourth quarter and year-end 2010 financial results conference call. At this time, all participants are in a listen-only mode. Later, you will have an opportunity to ask questions during the question-and-answer session. (Operator instructions) And it is now my pleasure to hand the call over to Mike Sund. Please go ahead, sir.

Mike Sund

Good afternoon. In a few moments, you’ll hear from David Schramm, Maxwell’s President and CEO, and Kevin Royal, our Chief Financial Officer. First, we 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 OEM 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 February 17, 2011. The company undertakes no duty to update our forward-looking statements to conform the statements to actual results or changes in the company’s expectations.

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

David Schramm

Thank you, Mike. And good afternoon, everybody. We are pleased to report that Maxwell recorded total revenue of $34.2 million for the fourth quarter ended December 31, 2010. That’s up 22% from the $28 million reported in the same period a year ago. That growth was driven mainly by strong ultracapacitor sales of $20.2 million, up 36% from Q4 ‘09.

Sales of Microelectronics and high-voltage capacitor products came in at $14 million for the quarter, up 7% from last year’s fourth quarter, and both legacy product lines continue to contribute significantly to our bottom line. For the full year, sales totaled nearly $122 million, up 20% from last year’s total of $101 million.

Along with healthy sales growth across all three product lines in Q4 came continuing costs and efficiency improvements that enabled the company to generate cash from operations for the fourth consecutive quarter. In fact, including $7.5 million of cash generated through warrant exercises in December, cash and equivalents totaled $47.8 million at year-end compared with $40.1 million at the end of Q3 2010 and $28.5 million at the end of 2009.

We are especially proud to report operating income of $771,000 for the fourth quarter, and excluding $6.5 million of accruals in the year to settle our Foreign Corrupt Practices Act and to write down assets idle due to cost reduction, the company was essentially breakeven at the operating income line for the full year. After more than a decade of losses, those represent very meaningful accomplishments. Kevin will provide more details on those and other financial items in a few minutes.

As reported during the third quarter and discussed in our last call, sales of ultracapacitor products in the wind turbine blade pitch, power quality applications continued to be a primary driver of 56% year-over-year ultracap sales growth from $43.8 million in 2009 to $68.5 million in 2010. We estimate that more than 14,000 Maxwell ultracapacitor-equipped wind turbines are now operating around the clock worldwide. A significant portion of 2010 wind-related sales went into China where the appetite for electrical energy and concerns about air quality and greenhouse gas emissions from coal-fired power are driving rapid expansion of wind generation.

Although we’ve heard of concerns about a global slowdown in deployment of wind energy systems, we added new customers during the year, and that increased market share, (inaudible) sizable sales gains for Maxwell’s ultracapacitors. Energy storage and power delivery systems for recuperative braking and torque assist systems in all the emission hybrid electric transit buses and zero emission electric rail vehicles continued to be a second major driver of ultracapacitor sales growth.

As we predicted in the press release in September, there are now more than 3,000 hybrid buses powered by Maxwell ultracapacitors in daily service around the world, and we expect that number to keep growing rapidly this year and beyond. As we noted on our last call, reports out of China indicate that the government has identified more than 30 major cities with significant air quality issues and is providing subsidies to local and regional public transit agencies for the purchase of hybrid and electric transit vehicles.

China produces more buses than the rest of the world combined. And with hybrids comprising a growing share of that production and ultracapacitors establish track record, this application should continue to be a powerful growth driver for Maxwell going forward. We are further encouraged by the energy emphasis in the latest release of the Chinese five-year plan.

Hybrid bus, electric rail, and other heavy vehicle OEMs and drive train integrators in Europe and North America also continue to incorporate Maxwell ultracapacitors and their designs. So there is every indication that growth in those geographies will be steady as well. The experience that our customers and Maxwell’s application engineers and field support personnel have gained over the past several years with thousands of vehicles operating in very demanding duty cycles and harsh environments has validated our ultracapacitor safety, reliability and longevity for these and other applications.

As reported in October, we are delivering BOOSTCAP ultracapacitor products in production quantities for our first automotive designing with Continental AG, replication in Peugeot and Citroen diesel cars in Europe. As for micro hybrid stop-start idle elimination and voltage stabilization system that ESA says it expects to install in 1 million cars by 2013. Electrification and hybridization of cars, trucks, buses and other heavy vehicles is gaining momentum globally. So this series production launch with a major automaker is another very significant validation for Maxwell products.

Rising fuel costs and consumer and public policy mandates for more efficient and environmentally friendly personal, commercial and public transit vehicles have created irreversible momentum for the innovative technologies that are reshaping transportation. Hybrid and electric vehicles require safe, reliable, cost effective energy storage solutions, and it is now obvious that Maxwell’s ultracapacitors have earned a seat at that table.

We have spoken often about the European Union’s aggressive carbon dioxide emission reduction mandate for cars as the most immediate driver of automotive application for Maxwell’s ultracapacitors. The EU legislation requires the 65% of new cars produced in Europe in 2012 emit no more than 130 grams of carbon dioxide per kilometer to avoid large penalties. That equates to about 42 miles per gallon for gasoline engines and 48 miles per gallon for diesels.

That standard will apply to 100% of the cars produced in Europe in 2015, and the threshold ratchets down to 95 grams per kilometer in 2020, which will further improve their miles per gallon. That’s why all of the European carmakers are developing and introducing more fuel-efficient, lower emission, micro and mild hybrid vehicles and why the pace of new hybrid vehicle launches will continue to accelerate.

All hybrid cars incorporate stop-start idle elimination 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. All stop-start cars from earlier model years have used batteries for restarting. 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 battery’s ability to deliver enough power for repetitive restarting. So most of these stop-start cars have sensors to determine whether the battery has enough power for the next start. Obviously, you don’t want to turn off the engine if the battery can’t restart it, so when the battery is weak or cold, the system deactivates itself, eliminating potential fuel savings and emissions reductions until the battery recovers.

Based on that experience, several automakers and leading Tier 1 part suppliers are now developing systems that take advantage of ultracapacitor’s ability to charge and discharge a million times or more for guaranteed restarting and reliable performance down to minus 40 degrees with the expected life of the car.

ESA also notes that by incorporating ultracapacitors in its stop-start system, it was able to reduce the battery from 100 amp-hours to 70 amp-hours 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, simplified the wiring scheme, and reduces assembly labor of the vehicle.

With the European and Asian automakers moving aggressively to produce cleaner, greener, more fuel efficient cars, the US automakers are recognizing that even if their cars meet tougher CAFE fuel economy standards, which require a fleet average about 36 miles per gallon by 2016. Their MPG ratings won’t be competitive with imports. So the US automakers have begun announcing stop-start programs of their own.

We have had several technical meetings in Detroit, some of them accompanied by Continental. So there definitely is a growing sense of urgency Detroit. With some 60 million new cars produced annually around the world, even relatively modest ultracapacitor content per car multiplied by any reasonable fraction of the vehicles produced as of to an energy storage market opportunity that could be measured in the billions of dollars by the end of the decade. There are also a number of backup power, wireless communication, and other industrial applications in the works.

Some of you analysts attended the DistribuTECH show here in San Diego where Maxwell announced and exhibited a new UPS ultracapacitor module designed specifically to handle brief power disturbances and provide short-term bridge power to the primary backup power source within an integrated uninterruptable power supply system. This new product is being evaluated in several beta sites, and we will start accepting orders for it next month.

In a few minutes, I will discuss 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 Q4 and year-end financial results and particulars on our settlement agreements 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 fourth quarter 2010 financial results. Our revenues were $34.2 million for the fourth quarter of 2010, up 9% from Q3 2010. The higher revenues in the fourth quarter were driven by an 8% increase in ultracapacitor product sales, which generated $20.2 million in revenues for the quarter. Revenues from our microelectronics business were higher this quarter by $1.2 million, while our high voltage product revenues were flat compared to Q3 2010.

Non-GAAP gross margin was $13.1 million or 38% of revenues for the fourth quarter of 2010 compared to non-GAAP gross margin of $12.5 million or 40% of revenues for the third quarter of 2010. In the current quarter, non-GAAP gross profit was positively impacted by continuing improvement in our gross profit margin on ultracapacitor products, but was negatively impacted by shipments of certain lower margin microelectronic products in Q4.

Non-GAAP gross margin excludes stock-based compensation expense, amortization of intangible assets, and a non-recurring depreciation charge. During the fourth quarter, we recorded the depreciation charge and an impairment charge related to equipment that we believe is no longer probable of sale and is therefore impaired. We expect to continue to see improvements in gross profit margins on our ultracapacitor products as we continue to make improvements in our cost structure.

During the fourth quarter, we made additional investments in current and new product development, as well as headcount to support our continued growth. Total non-GAAP operating expenses for Q4 2010 were $11.6 million compared with Q3 2010 non-GAAP operating expenses of $10.9 million. Non-GAAP operating expenses exclude stock-based compensation expense, amortization of intangible assets, a non-recurring asset impairment charge, and accruals for settlements with the SEC and DOJ related to the Foreign Corrupt Practices Act.

We reported non-GAAP net income of $1.1 million or $0.04 per diluted share for the fourth quarter compared with non-GAAP net income of $968,000 or $0.04 per diluted share for the third quarter of 2010. Non-GAAP net income excludes stock-based compensation expense, amortization of intangible assets, non-recurring asset impairment and depreciation charges, accruals for settlements with the SEC and the DOJ, and the loss on embedded derivatives and warrants.

Our earnings before interest, taxes, depreciation and amortization, or EBITDA, net of accruals for settlements with the SEC and DOJ related to the Foreign Corrupt Practices Act as well as non-recurring asset impairment charge was $3 million in Q4 compared 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 announced in January, we have reached settlements with the SEC and the DOJ with respect to charges asserted by the SEC and DOJ relating to the anti-bribery, books and records, internal controls, and disclosure provisions of the Foreign Corrupt Practices Act and other securities law violations.

Under the terms of the settlements, we will pay a total of $14.4 million in profit disgorgement, prejudgment interest and penalties. We paid $6.7 million in the first quarter of 2011, and we will pay an additional $5.4 million in the first quarter of 2012 and $2.3 million in the first quarter of 2013. These settlement amounts have been fully accrued as of September 30, 2010. Also, under the terms of the agreements, we will periodically report to the SEC and DOJ on our anti-bribery internal compliance program. We are pleased to have put closure to both our internal investigation and the related increase by the SEC and DOJ.

Now I’d like to turn to the balance sheet. We ended the quarter with cash and restricted cash of $47.8 million, which represents an increase in cash of $7.8 million from Q3 2010. Our cash activity for the quarter includes cash proceeds of $7.5 million from the exercise of warrants that were originally issued in connection with our convertible debentures.

In addition, we generated cash from operations of $253,000. We invested $2.2 million in capital assets and generated cash of $2.1 million from our employee equity incentive plans. Our ability to generate cash from operations is demonstrated by the $8.7 million in cash provided by operations for the entire 2010 calendar year.

Given our fairly modest cash consumption, our ability to generate cash from operations, the Q4 cash proceeds of $7.5 million from warrant exercises and the settlement terms of the SEC and DOJ, which for the settlement payments over the next couple of years, we do not anticipate the need to raise additional capital in order to make the remaining settlement payments to the SEC and DOJ. However, depending on whether the convertible debt that matures in 2011 is converted to common stock or paid in cash and the timing and the amount of future capital spending for capacity expansions, it is reasonable to expect that we may sell stock in the future, but our intention would be 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 debentures, a balance sheet list our debt of $16.1 million, but the actual underlying cash amount that we owe is approximately $14.1 million. This difference between the recorded amount of debt and the actual amount owed of $2 million represents the value of embedded conversion options and the unamortized debt discount for the convertible debenture.

The principal amount outstanding on convertible debentures is $8.3 million, which is payable in three installments in 2011 if it’s not converted into stock. The remaining debt consists of borrowing at attractive interest rates at our Swiss entity, which has local Swiss banks approximately $5.7 million.

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

David Schramm

Great. Thanks, Kevin. See, earlier I focused mainly on our ultracapacitor products and markets. Let’s turn our attention to the developments with Maxwell’s other products. For those of you who are new to Maxwell, our Swiss subsidiary develops and markets high voltage capacitor products that are used in the electric utility grid and other applications involving the transformation and measurement of high voltage electrical energy.

Although the name sounds similar, high voltage capacitors are not even close relatives of ultracapacitors. We produce high voltage products for large global prime contractors that build power plants and install electric utility infrastructure around the world. Maxwell is the world’s leading supplier of high voltage product for the grid, and our sales track closely with global spending on electric utility infrastructure.

Developing countries such as China and Russia that are expanding electrical energy generation and distribution to support commercial and industrial activity and improving the standards of living are major consumers of our products. High voltage sales were off about 10% last year compared with 2009 due at least in part to the difficult financing environment that delayed some projects.

We expect sales to bounce back this year, and these products continue to generate solid margins and a meaningful contribution to the Maxwell bottom line. We’ve often hearing about the growing focus on how the grid can be made smarter to better manage electrical energy generation, transmission and consumption.

We’ve been following government and private sectors’ smart grid initiatives here and around the world to get a better understanding of how both high voltage capacitors and ultracapacitors might play. Please recognize that infrastructure projects involve extensive engineering and permitting before construction activity begins. So, any smart grid applications for our products will probably take at least a year or two to generate sales.

As most of you know, Maxwell also develops and markets radiation and hardened components and single board computers, which we supply to major satellite and space craft OEMs in the US and Europe. Space programs typically span several years, and deliveries of our products are tied to program schedules and funding cycles. So volumes vary quite a bit quarter-to-quarter. Sales in any given year are a function of the number of satellite and space craft launches and the amount of Maxwell content per launch.

The proprietary high-value, single-board computer product developed by our microelectronics development team has opened some doors for us and has significantly increased the value of Maxwell content per launch over the past few years. And our microelectronic products command high profit margins, making these products a significant contributor to the bottom line.

Turning to non-product revenue, as reported in January, one of our applications for government funding has borne fruit with the award of a contract from the US government’s Defense Advanced Research Projects Agency, which is called DARPA, to combine ultracapacitor and battery technology to develop a lighter, longer lasting energy source for field radios and other portable electronic equipment carried by military personnel. The initial one-year phase is worth $1.7 million to Maxwell, and two additional phases when approved could push total funding for this program to about $8 million. We have a few other government funding irons in the fire, so stay tuned for further developments.

Looking at prospects for the current quarter, as we stated in our press release, considering the impact of the Chinese New Year holidays and the historical seasonal softness, we expect first quarter revenue to be flat to a bit higher than what we reported for Q4. Further, based on today’s view, we expect 2011 growth to exceed what we enjoyed as a company in 2010.

Moving down the income statement, we are aiming to translate strong ultracapacitor sales growth and continuing manufacturing cost improvements along with the important contributions from our microelectronics and high voltage products into sustainable profitability at the operating income line, excluding non-cash items and FCPA-related payments to the FCC and the DOJ.

And with that, I’d like to open it up for questions.

Question-and-Answer Session

Operator

(Operator instructions) We’ll move first to the site of Steve Sanders with Stephens, Inc. Your line is open.

Steve Sanders – Stephens, Inc.

Hi, good afternoon, everyone. Just maybe a first question, David. Do you have a sense of what percentage of your revenues now go into China?

David Schramm

No, we don’t track it that way, Steve, but it’s not quite half. We still have a real global presence that is global, if I could use that word. But Europe still represents a good portion of our business and we are starting to see a lot of traction right now in the middle of North America.

Steve Sanders – Stephens, Inc.

Okay. And then you commented on the high voltage business. We’re certainly seeing an uptick in the North America and utility infrastructure spend. Are you guys starting to see that yet or do you still think that’s a year or so away?

David Schramm

What we’re seeing is, as we said before, we tend to work with prime contractors. So, as they get more activity, we get more activity. We are seeing activity growing throughout the year here based on the forecast they give us. So it looks like 2011 is going to have some traction that we didn’t have in 2010.

Steve Sanders – Stephens, Inc.

Okay. And then a couple more and I’ll get out of the way. Just generally, what’s the realistic timeline in your mind to add another customer on the auto side? And then a couple quick ones for Kevin. How should we think about operating expenses in 2011 versus 2010? And can you just give us a sense of your CapEx needs for ’11? Thank you.

David Schramm

We’ll take that in two parts here, Steve. I’ll take mine and I’ll let Kevin have the others there. But I’ll tell you, the automotive, we have been going to other automakers with Continental with their system. And again, their system has electronic controller. It’s got the alternative starter and then it’s got our ultracaps incorporated. We are getting great acceptance at most carmakers that we go to. We have gone to Detroit, and Continental has gone with us and we’ve gone alone. So there is a lot of activity right now on automotive. I’ve got to tell you that the requirements for the US and the CO2 requirements for the Europeans has got a lot of activity going in the car business, and I would expect that in the next six to 18 months, we’re going to have some more activity to report.

Steve Sanders – Stephens, Inc.

Thank you.

Kevin Royal

Yes. Steve, your question related to capital spending, our current outlook for 2011 has capital spending between $12 million and $13 million. And the question related to operating expenses, in the fourth quarter, when you exclude the write-down of impaired assets right at the $11 million – $11.6 million mark for operating expenses, that’s total R&D, SG&A combined. That will ratchet up as we grow in 2011. We expect exiting the year to be between $13.0 million and $13.5 million on a quarterly run rate.

Steve Sanders – Stephens, Inc.

Okay. Thank you very much.

Operator

And it looks like our next question will come from the site of Walter Nasdeo with Ardour Capital. Your line is open.

Walter Nasdeo – Ardour Capital

Thank you very much. Good afternoon, guys.

David Schramm

Good afternoon.

Walter Nasdeo – Ardour Capital

Can you kind of give me a little bit of – or give a little discussion on the amount of customization in the ultracapacitor itself on these different vehicle models? Do you have to kind of design into four different vehicles, different sizes and shapes of the ultracapacitor?

David Schramm

That’s a good question, Walter. And the answer is no, we don’t. We’ve created a family that goes in our K-2 series from 650 all the way up to 3,000 Farads. And the (inaudible) mix and match depends on the requirement they have. The current system we have with Continental utilizes two of our 1,200 Farad itself. But there are other applications that we have worked on with carmakers that will use either our diesel or else they are using the 650 in one application and looking at 3,000 Farad. So basically we can mix and match from our standardized product line that customizes solutions of the individual automaker.

Walter Nasdeo – Ardour Capital

That’s good. Okay. Because I remember in the past anybody that walked in with any sort of design drawn on piece of paper could have been made from you guys.

David Schramm

(inaudible)

Walter Nasdeo – Ardour Capital

Now, as far as the China sales goes, is that most – are you still licensing or are you actually manufacturing in China now?

David Schramm

We are doing both. We have a licensed partner in China, but we assemble in China and always make a distinction between manufacturing and assembling. We manufacture our intellectual property electrode in San Diego. We do not have any intellectual property in any of our low-cost sources. So what we do is we manufacture the IP here and then we ship it to China for assembly. From China then we can distribute either directly into the Chinese market or back to Europe or back to North America.

Walter Nasdeo – Ardour Capital

Very good. Okay. Thank you, guys.

Operator

And we’ll move next to the site of Michael Horwitz with Robert W. Baird. Your line is open.

Michael Horwitz – Robert W. Baird

Great. Thanks for taking my question. Just a couple quickies. I’ve been moving around conference calls, so forgive me if I’m repeating something, but – was there any 10% customers in the fourth quarter?

David Schramm

No, there were not. There were not, Michael.

Michael Horwitz – Robert W. Baird

And then with regards to the margin, which looks like it was a mix issue, when you are looking out into – and you gave some top line guidance for 2011, which I think for the first time I’ve heard that kind of guidance in a long time that I’ve been covering the company. How do we think about mix in 2011? And I mean, should we still be forecasting improvements at the ultracapacitor gross margin level?

Kevin Royal

Yes. The mix issue in Q4, we would look at as isolated essentially to Q4. And we believe it will see improvement, continued improvement in ultracapacitor as well as a rebound in the businesses or in the products, excuse me, that caused the lower gross profit margin. So we expect the gross profit to build throughout the year and we believe we could hit our target at 40% by year’s end.

David Schramm

Yes. Michael, I’d just add to that that the traction that the technology has gained in the last year has really been heartening to us. But the sales of ultracapacitor is growing and is growing quickly. Along with that volume, it has really given our engineers the opportunity to take on that next level of cost reduction, and they performed.

Michael Horwitz – Robert W. Baird

Great. And then just one last question. You just gave a CapEx number. Can you give us an idea how that money is going to be spent?

David Schramm

I could give you a little bit here. As we look at the facilities we’ve got here in San Diego, we’re just going to open a third one here in another month (inaudible) for us. We just need more space. But we are adding capacity for assembly in China. And as you know, we do that with our contract manufacturers. So we share the investment where it’s appropriate. We’re looking at the fact that our current electrode facility is going to be full, and that’s a good thing. So we’re looking at where do we put our second facility and when do we do it. Right now it looks like we’re going to need to do that sometime first, second quarter of next year. And right now we’re outlooking at where would be the best location to do that to mitigate some risk. And frankly, which location is going to give us the best return on our investment and which location is going to help us pay for this facility.

Michael Horwitz – Robert W. Baird

Okay. That’s helpful. Thanks, David.

Operator

And we’ll move next to the site of Craig Irwin with Wedbush Securities. Your line is open.

Craig Irwin – Wedbush Securities

Thank you for taking my questions. One thing I’d really like to understand a little bit better and I get a lot of questions on is the potential leverage to stop-start. So if we were to assume that there were a couple more customers potentially ramping on the revenue line, what sort of incremental SG&A spending and R&D spending Maxwell will have to incur to support maybe two or three additional customers in the 2012, 2013 timeframe?

David Schramm

Great question, Craig. And the answer is, not very much. We’ve got the – the cells are designed, the modules are designed. And frankly, it becomes volume at that point. If Continental – I should say, when Continental is successful on selling their system to other customers, that’s the same product to us. The engineering is already done. So it’s going to be minimal SG&A and minimal R&D expenses going forward. So in effect, what’s going to happen is we’re going to grow that top line down the operating expense line and really put a focus on the operating income.

Craig Irwin – Wedbush Securities

Excellent. Excellent. The second thing I wanted to understand about this business is, I know you are at the very front end of a new automotive application. And typically at the front end, the margins can be pretty attractive, but we are talking about the automotive industry here. Do you expect sales into this market to be fairly consistent with the impressive gross profits that you’ve been seeing in the ultracapacitor business over the last few quarters, or are they likely to – are margins likely to come in a little bit as automotive volumes lift?

David Schramm

I guess the way I look at that is we are selling the technology, not a commodity. And two things happened. One is, with volume, customers do expect some price decreases. But along with volume, I’d also get some cost reduction. So we’re going to do everything we can to maintain that margin level where it’s at. That being said, if we can grow that top line fast enough, dilute the OpEx, we’re really going to grow that operating income line.

Craig Irwin – Wedbush Securities

Great, great. And then, Kevin’s comments earlier on the call about you’re looking to be very opportunistic about any equity issuances that Maxwell may elect to take over the next several quarters or maybe even couple of years, what would be the thought process for an equity offering? What might motivate you to do one or maybe pursue an alternative such as maybe selling the Space Microelectronics group?

Kevin Royal

As far as raising capital, it’s just a balance between shareholder dilution and our capital needs. So we’ve got a robust forecast process where we look at our cash requirements based on our revenue growth and our property and equipment needs. And we’ve been offset against share price and the dilution that would come from an offering. So that’s essentially the thought process. As far as selling one of the product lines, your question specifically was microelectronics. We don’t have any plans to do that currently as a means of raising capital for the business.

Craig Irwin – Wedbush Securities

Great. And then very last question if I may. Is there a potential for Maxwell to build its own cell manufacturing facility out over the next two years once volumes ramp for your automotive customers? Are you likely to cite a plant near where they manufacture the other components of the stop-start systems?

David Schramm

Craig, what we’re going to look at and we look at it every day here, it’s all local content. Every government wants local content. We’ve got some customers in the US that require local content and so we do that. I fully expect we’re going to have that same issue in Europe as well as in China. Obviously, in China right now we guess they are pretty well covered. But I think you’re exactly right. We’re going to have to do that. So, expanding European operations, expanding North American operations, expanding South America, that’s all going to have to happen and is all volume-related.

Craig Irwin – Wedbush Securities

Great. Congratulations again on this selling progress.

Operator

And it looks like our next question will come from the site of Dilip Warrier with Stifel Nicolaus. Your line is open.

Dilip Warrier – Stifel Nicolaus

Thank you. Great guidance for 2011. I was wondering if you could just provide a little bit more color into what’s shaping the guidance. And there’s a lot of moving parts now in your business. And I was wondering if you could talk about where you are seeing the acceleration in growth versus 2010 and perhaps where the deceleration, if any. And then, while on that guidance, you’ve guided to non-GAAP operating profitability. I was curious why you were not guiding perhaps to GAAP operating or net income profitability if at all down to the embedded derivative in the convertible debt.

Kevin Royal

I think the question related to net income or non-GAAP net income profitability, that I think would follow based on the guidance of non-GAAP operating profitability. So it wasn’t purposeful. We just happen to be focused on the operating profit portion of the equation.

David Schramm

And Dilip, I’d tell you that – you know, I’ve been here now almost four years. Four years ago, we didn’t give much guidance past next Tuesday. So this is probably about as far a guidance as we’ve given. We feel pretty good right now that 2011 is going to be a year better than what we had in 2010.

Dilip Warrier – Stifel Nicolaus

Okay. If I may just drill a little bit further just on your wind business, if you could just talk about your relative exposure, let’s say, China versus Europe and what are the respective athletes for you in 2011 versus 2010?

David Schramm

Yes. The latest Chinese five-year plan shows very strong wind that they are going to do. We still see strong wind activity coming out of Europe. And the wind in China gets impacted by Europe because we have some pitch control makers in Europe who buy our product and then install them in the windmills into China. So we still see both of them very, very strong. North America does not have quite the volume that we see out of Europe and China at this point. But everything that we read says that that market is also going to take off and grow. And I think we are well positioned to be in all of them.

Dilip Warrier – Stifel Nicolaus

Very good. And then last question, outlook on the hybrid bus business, I understand there is limited visibility in terms of a full year. But are the trends continuing?

David Schramm

The trends are continuing. We are gaining new bus components around the world, and we are seeing more and more bus activity. I think what you’d find is, and again I’ve used this word before, is the technical traction that we’ve seen that as other bus manufacturers see their competitors using hybrid buses, using the ultracap system, we’re getting phone calls and then we’ve got our application engineers that are calling on about every major bus company in the world. So I feel very, very good that the bus market is one that is there for the picking. The bus market in China is bigger than the rest of the world, and we’ve got a very good position there right now.

Dilip Warrier – Stifel Nicolaus

Thank you.

Operator

And we’ll move next to the site of Matthew Crews with Noble Financial. Your line is open.

Matthew Crews – Noble Financial

Thank you for taking my call. Good afternoon. Question on – you keep on that line of fact. Can you give us a kind of a sense for what the breakdown of percentage of wind turbine bus and automotive were for 2010 in the ultracapacitor sales?

David Schramm

Yes. The automotive just started. So that was just a couple of million dollars worth in 2010. We expect that will grow significantly in ’11. Wind and bus, frankly, they are about a dead heat. One quarter we’ll have winds a little bit greater than bus, the next quarter buses greater than the windmill. But we see growth in both of them, and it’s always just a question of timing. So what I tell you is, Matt, they are just about the same when it comes to the growth.

Matthew Crews – Noble Financial

Okay. And so if you look at that growth continue where your drivers for ultracap sales in 2011, obviously your expectations are still in kind of that 1 million to 2 million auto than you had a step function. Is that still kind of the way to look at your sales in automotive of $5 million type run rate? What sort of kind of characterize that?

David Schramm

Well, PSA has announced that by 2013 they are going to have 1 million cars with the start-stop system using our ultracaps. So ’11 is a ramp year, ’12 will be full production. So I think we’ve said in the past that we expect a significant increase in ’11 and then a doubling of that number in 2012. And that’s strictly for the one car program. That said, I know Continental and Maxwell. Both are talking with automakers on how we sell this system to other automakers. The good news for us is that PSA has validated the system. Continental has validated the system. So the amount of time it takes to get into a second program is significantly less than the design cycle it took to get into the first one.

Matthew Crews – Noble Financial

Okay. And just do you think there is a potential chance of $100 million in ultracap? That would be a pretty nice round number for 2011.

David Schramm

That’s a nice round number, but the only guidance I can give you is that we think ’11 is going to be bigger than ’10. And right now I don’t want to speculate. I really don’t know.

Matthew Crews – Noble Financial

Okay. Fair enough. I could say it’s a nice round number. So I hope you hit it.

David Schramm

All right. Very good. And everybody, appreciate your time this afternoon on the call. Thank you very much.

Operator

And this does conclude today’s teleconference. Thank you for your participation. You may disconnect at any time. Have a wonderful evening.

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