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Maxwell Technologies, Inc. (NASDAQ:MXWL)

Q3 2011 Earnings Call

November 3, 2011 5:00 p.m. ET

Executives

Mike Sund – Investor Relations

David Schramm – President and Chief Executive Officer

Kevin Royal – Chief Financial Officer

Analysts

Philip Shen – Roth Capital

Michael Lew – Needham and Company

Zach Larkin- Stephens, Inc.

Noah Kaye – Thinkequity

Craig Irwin – Wedbush Securities

Jody Blurry – Stifel Nicolaus

Jeremy Hellman – Divine Capital

Ben Keller – Robert W. Baird

Ahmar Zaman (Sean) – Piper Jaffray

Operator

Good day, 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. (Operator Instructions).

It is now my pleasure to hand the call over to our Mike Sund. Please go ahead.

Mike Sund

Good afternoon. In a few moments, you will 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 and changes in circumstances and assumptions. Forward-looking statements in the following discussion do not purport to be predictions of future events or circumstances and may not be realized. For further information regarding risks and uncertainties please refer to the MD&A and Risk 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 investor section of our website maxwell.com or via the SEC’s website. Printed copies may be obtained by contacting the company. We encourage all investors to read these reports and our other SEC filings. Some of you are listening via the Internet and an archived replay of the call will be available online at our website. All information in today’s call is as of November 3, 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 Maxwell’s President and CEO, David Schramm.

David Schramm

Very good Mike, and thank you, and good afternoon, everybody. We are pleased to report that Maxwell recorded total revenue of $41.1 million for the third quarter ending September 30, Now that’s up 31% from the same period a year ago. That growth was mainly driven by strong ultracapacitor sales of $24.9 million. Now that’s up 3% from Q3 of 2010.

Sales of microelectronics and the high-voltage capacitor products came in at $16.2 million for the quarter, up 26% from last year’s first quarter. That’s higher than usual for these mature product lines with boats continue to deliver solid contributions to our bottom line. This growth, along with continuing costs and efficiency improvements enable the company to show a non-GAAP net profit of about $1.2 million for the quarter. That’s the sixth consecutive quarter that Maxwell has been profitable on a non-GAAP basis. So our products aren’t just contributing to a greener world, but also delivering another kind of green to the bottom line. Kevin will provide more financial details on all this in a few minutes.

Although the wind turban deployments in China and elsewhere have slowed compared with the previous years, hybrid and electric drive systems for public transit vehicles continue to be a primary driver of Ultracap sales growth, along with increasing contributions from the stop-start idle elimination system for automobiles in Europe and various backup power applications.

A significant portion of Maxwell’s wind energy related sales over the past couple of years, have gone into China where renewable energy has been a focus of government policy and funding. While we’re seeing slower sales there, due in part to governments implementation of a more orderly, permitting and siting process, wind order flow continues.

Many of you have asked about Maxwell’s exposure to China’s economy. Well to better understand the situation there, we engaged a major global consulting firm with a significant presence in China to analyze the wind, the bus, and several other market opportunities and assess the direction of government policies.

The consultant’s report based on dozens of interviews with industry and government sources, reinforces our belief that China’s ever-growing appetite for electrical energy along with concerns about urban air pollution and greenhouse gas emissions from coal fired power plants will drive significant expansion of wind energy capacity there.

Our contacts with wind customer at the recent wind energy trade show Beijing, indicate that wind projects likely will return to a more normal growth pace by mid-2012. The size of Maxwell’s opportunity also is growing beyond blade pitch systems, with a Chinese government mandate that new turbines must incorporate a feature called low voltage ride through. This addresses utility grid connectivity problems caused by the variability of energy output from wind farms.

A number of leading turbine OEMs in China and Europe are now using ultracapacitors to support this ride-through function. In addition, China’s leading wind turban OEMs are now targeting export markets as evidence by a recent contract win to install a large wind farm here in the United States.

Energy storage system for recuperative breaking and torque-assist and fuel efficient, low emission, hybrid electric transit buses, and zero-emission electric rail vehicles drove our highest ever sales for public transit vehicles in Q3 of 2011.

In September we announced a new supply agreement with Yutong, this is China’s largest bus producer, and more recently with Voith Turbo, a leading European heavy vehicle drive system integrator. And they announced that they’re introducing a ultracapacitor based hybrid system for buses in the North American market where we have historically had limited sales.

There are now about 4000 hybrid buses powered by Maxwell ultracapacitors in daily service around the world demonstrating our products durability and cost effectiveness. The consultant’s report mentioned earlier, determined that all of the 25 Chinese cities that are eligible government subsidies for purchases of hybrid and electric transit vehicles, are running behind their new energy vehicle deployment schedule. So activity there can be expected to increase.

In Europe, where regulation focuses on reducing carbon dioxide emissions, hybrid bus, electric rail and other heavy vehicle OEMs and drive train integrators continue to incorporate Maxwell ultracapacitors in their designs. In addition to the Voith design in and a previously announced relationship with Vauxhall another German hybrid drive system integrator.

You may recall that we announced in May, that Flextronics Automotive, also based in Germany has designed Maxwell ultracaps into a breaking energy recuperation system that Flextronics will begin producing next year to reduce fuel consumption and CO2 emissions in commercial vehicles. The system captures and stores breaking energy to power air conditioning, heating, lighting and other passenger comfort and safety features, as well as providing a reservoir of standby power to stabilize the vehicle’s electrical system.

Our automotive program with Continental AG for PSA, Peugeot and Citroë diesel cars in Europe is entering its second year of series production. It’s for our micro hybrid stop start idle elimination and voltage stabilization system that PSA introduced in two of its diesel engine platforms last year. About 300,000 of these cars will be on the road by the end of this year, and the total will approach 1 million cars by early 2013, providing additional validation our ultracap products and for Maxwell as an automotive supplier.

European Union legislation requires that 65% of new cars produced in Europe next year are met no more than 130 grams of CO2 per kilometer. Now that equates to about 42 miles per gallon for gasoline and 48 miles per gallons for diesel. That percentage will increase to 75% penetration 2013, 85% in 2014 and then to a 100% of the cars produced in Europe in 2015. In 2020, the CO2 emission threshold is scheduled to ratchet it down to 95 grams per kilometer, so further hybridization and electrification will be required for all these vehicles.

All hybrid cars incorporate a stop start idle illumination function that turns off the internal combustion engine as the car slows and then restarts the engine when the driver releases the brake. Batteries are the incumbent energy source for stop/start, but constant restarting and stop and go urban traffic wears out batteries quickly. This heavy cycling and cold weather also affect the batteries ability to deliver enough power for repetitive restarting, so stop start systems constantly monitor to the battery to determine if it has sufficient power for the next restart. If not, the system disables itself until the battery recharges off the alternator disabled, so no fuel is saved, and no emission reductions are achieved until the battery recovers.

PSA’s ultracap powered stop-start system restarts every time in less than 400 milliseconds, in all conditions, reliably reducing fuel consumptions and emissions by up to 15% in urban driving. PSA also knows that using ultracapacitors to power the restarts allowed it to reduce the battery size by 30%, that’s smaller, lighter, cheaper battery fits under hood instead of having to be packaged in the trunk, which eliminates about 20 feet of heavy expensive battery cable, simplifies the wiring scheme and reduces the assembly labor.

Some of you may have seen that Autobuild, which is Germany’s largest automotive publication, rated the PSA system number one among all of European stop-start systems, and they even tried the German automakers for allowing a French competitor to develop a superior solution.

US automakers have begun announcing stop start launch plans too, and we continue to work with Continental to explain and demonstrate how ultracapacitors make micro hybrid cars more reliable, more fuel efficient and more environmentally, friendly. Our message is one of providing leading-edge technology with perfect quality, delivered on time, and very much a part of the customers value proposition.

More than 60 million new cars are produced around the world each year. So auto applications obviously represent an enormous opportunity. Even a small amount of ultracapacitors content per car multiplied by any reasonable fraction of the vehicles produced would create a billion dollar market opportunity by the end of the decade.

Many of you are wondering when we will announce our next automotive design win. All we can say at this time is that we are engaged in development activity underway with several automakers and tier one suppliers. The success of the PSA is stimulating interest, and generating request for price quotes, and the industry is secretive so we can’t predict timing for the next announcement.

More importantly for the here and now, a number of other applications are beginning to drive serious volumes that are helping us to maintain the strong year-over-year growth rate that ultracapacitors are generating for the fourth straight year. We produced and sold more than a $1.5 million of our postage stamp sized PC 10 cells in the third quarter and we are filling orders for even more than that in Q4. Most of them are going into data storage devices called Solid State Drives or SSD’s for enterprise computing installations such as data centers.

The ultracaps are mounted right on the circuit board where they stand ready to provide a few seconds of instantly available backup power to allow work in process to be saved in the event of a power interruption. Our PC 10’s also provide power for wireless transmitters that allow smart utility meters to be read remotely.

Earlier this year, we launched an ultracapacitors module designed specifically to handle brief power disturbances and provide short-term bridge power to the primary backup power source within an integrated uninterruptible power supply system. This UL approved UPS module, has already been designed in the systems, going in to several new installations. And we expect it to be a strong contributor to sales going forward.

Later this month, we will deliver the first 500 units of another new product, an engine start module that acts as an onboard jump start power source for hard to start diesel trucks. Field trials with several fleet operators have gone very well, and have signed up a distributor that specializes in products for truck OEMs, dealers and fleet operators to help us penetrate both the aftermarket for existing vehicles and the new vehicle opportunity.

A few months ago, we announced that a Japanese specialty truck OEM, ShinMaywa, one of the world’s third-largest producers of garbage trucks, has designed our ultracapacitors into a quiet fuel saving all-electric garbage loading mechanism. ShinMaywa estimates that trucks equipped with this system will save 2,400 liters of diesel fuel and eliminate more than 6 tons of CO2 emissions each year.

The day after that release hit the wire, one of the largest garbage truck producers in the U.S. contacted us to get more information on our products. Our ultracaps have also been designed into a variety of hybrid construction in mining vehicles and equipment. So you can expect to hear more about that in the coming year.

As you can see, we are expanding our focus and gaining traction in several new verticals, in addition to the historic main stays bus and wind. We continue to execute our plans to increase our presence in the Americas as well as Europe without diluting our presence in Asia.

Naturally, this success and the size of the market opportunities we see are during competition, who hopefully will open up new markets that we can compete in. But none of those competitors, old or new, has yet shown it can match Maxwells product technology, quality, delivery, and value proposition.

Now in a few minutes, I will discuss recent developments with our other two product lines and comment on the future prospects. But first I’d like Kevin Royal, our CFO to provide additional details on the third quarter financial results. Kevin?

Kevin Royal

Thank you, David. I will now spend a few moments discussing financial highlights for third quarter 2011. Our revenues were 41.1 million up 7% from Q2 2011. This quarter, higher revenues were driven by growth in our high-voltage business, related to an increase in shipments and favorable currency exchange rates. Sales of our ultracapacitor product were up slightly quarter-over-quarter, as we continued to achieve substantial growth in the bus and automotive markets, while sales in the wind sector were down, primarily associated with a slowdown of the wind market in China.

Non-GAAP gross profit was $16.7 million or for the third quarter of 2011 compared to non-GAAP gross profit of $15.7 million for the second quarter of 2011. For both the second and third quarters, we achieved a non-GAAP gross profit margin of 41%, as continued to focus on cost reduction and gross profit improvement. We continue to focus on reducing the cost of our ultracapacitors products through material cost reduction, design improvement, and manufacturing productivity improvements.

Non-GAAP gross profit excludes stock-based compensation expense and amortization of intangible assets. Non-GAAP operating expenses increased from 13.7 million in Q2 2011 to 14.6 million in Q3 2011. The increase in operating expenses was driven by higher legal, audit, and travel cost. Non-GAAP operating expenses exclude stock based compensation expense, amortization of intangible assets, and in Q2 2011 expense associated with an anticipated legal settlement.

Last quarter we increased the outlook for non-GAAP operating expenses from $14 million to $14.5 million per quarter for the remainder of 2011, due to anticipated spending on on-going legal matters.

In the third quarter, non-GAAP operating expenses were in line with that outlook. Currently, we anticipate continued higher than normal legal spending, and additional spending in sales, and marketing, and research and development during the fourth quarter. Due to this, we anticipate that non-GAAP operating expenses will be in the range of 14.5 to 15 million for the fourth quarter of 2011.

Non-GAAP income from operations was up slightly quarter-over-quarter to 2.1 million for Q3 2011 compared to 1.9 million for Q2 2011. However, we incurred a higher tax expense in Q3 2011 compared to Q2 due to higher profits from our Swiss subsidiary. Therefore non-GAAP net income was down quarter-over-quarter at 1.2 million or $0.04 per diluted share for the third quarter 2011, compared with non-GAAP net income of 1.7 million or $0.06 per diluted share for the second quarter of 2011.

Non-GAAP income from operations and non-GAAP net income excludes stock-based compensation expense, amortization of intangible assets, and the Q2 2011 expense for the anticipated legal settlement.

Now, I’d like to turn to the balance sheet. We ended the quarter with cash of 31 million, which represents an increase in cash of 1.2 million from second quarter 2011. This quarter, we generated 5.9 million in cash from operations, while we invested 3.7 million in capital spending.

Cash generated from operations in Q3 related primarily to our net income of 298,000 which included net non-cash charges of 2.2 million, and a decrease accounts receivable balances of 3.2 million as we achieved strong collections during the third quarter.

In April 2011, the company filed a shelf registration statement on Form S-3 with the Securities and Exchange Commission to sell it to an aggregate of 125 million of the company’s common stock, warrants or debt securities. The SEC declared the company’s registration statement effective on August 19, 2011, which allows us to access the capital markets over the next three years.

In addition, in July, we entered into a memorandum of understanding for a line of credit with a financial institution to borrow up to 27.5 million with 15 million available to support increases in working capital, and 12.5 million available to provide financing of capital expenditures.

While we have no current plans to sell stock, it is reasonable to assume that we may do so in the future. It has been our intention and remains our intention to do so opportunistically in order to minimize dilution to current shareholders.

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

David Schramm

Very good, Kevin, thank you very much. You know, having already covered the ultracapacitors, we’ll turn our attention to the developments with Maxwell’s other products. As many of you know, Maxwell’s Swiss subsidiary develops and markets high voltage capacitor products that are used in the electric utility grid and other applications involving the transmission and measurement of high voltage electrical energy. Despite the similarity of their names, these high voltage caps, are not even close relatives of ultracapacitors.

We sell high voltage caps mainly to 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 capacitors for the grid and our sales are driven by global spending on electric utility infrastructure.

Developing countries such as China that are expanding electrical energy generation and distribution to support their commercial and industrial activity and improving standards of living are major consumers of our products.

High voltage sales have been rebounding this year, after being off a bit in 2010, due at least in part to the difficult financing environment found in 2009. As we reported earlier, we just won a major contract to supply capacitive divider products for the multi-billion dollar renovation and modernization of Russia’s utility grid. And we are in the process of delivering a new product that will function reliably in minus 60 degree celsius temperature conditions in Siberia.

We are also monitoring developments and opportunities for the so-called Smart Grid here in the United States and elsewhere, to determine where and how our products fit. This opportunity may allow for ultracaps to work side-by-side with our high-voltage capacitors.

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Shifting now to our microelectronics products, sales of the radiation hardened components and single board computers that we supply to satellite and spacecraft OEMs in the U.S. and Europe continue to be steady and in line with our expectations. Space programs typically span several years, and our deliveries are tied to program schedules and funding cycles. So, volumes vary quarter-to-quarter.

On an annual basis, sales are driven by the number of satellite and spacecraft launches and Maxwell content per launch. The high-value, single-board computer product we introduced a few years ago has gradually gained traction in the very conservative space market and is now enabling us to significantly increase the value of Maxwell content per launch.

In September, C-Mac Micro Technology, a leading European supplier of radiation harden space qualified components, and our U.K. based microelectronics unit, announced a collaborative initiative to supply Maxwell design memory devices to the global space market. So that too will help to create new revenue in the years ahead for Maxwell.

As you know, the space markets requirement for failure free performance allows these microelectronic products to command high profit margins that contribute strongly to our bottom line. The cash generated by these mature, high-voltage and microelectronics product lines has made it possible for Maxwell to invest in the immense growth opportunities our ultracapacitors are now realizing.

Ultracapcitors sales accounted for over 60% of our total in Q3. As we reported earlier, we have doubled ultracapacitor production capacity over the past year and a half. And we are moving ahead with additional investments in capacity expansion and research and development and other resources, to support further growth.

A few months ago we moved into a new expanded technology center here in San Diego and last month we signed a lease for a 123,000 square foot building in the Phoenix Arizona area. This building will house a second electrode production facility that will double our electrode production capacity by the end of 2012. It will also provide growth space for other engineering and manufacturing activities going forward, and provide for American made product requirements.

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In March, we announced early that the U.S. Auto Industry of Advance Battery Consortium, which is managed by the Detroit automakers and funded by Department of Energy, had ordered Maxwell a contract to develop an advanced energy storage system for power assist, hybrid electric vehicles. Now that’s worth $2.8 million to Maxwell over 24 months, and it gives us an opportunity to work directly with the U.S. Automakers.

In June, we announced Maxwell’s participation in three smaller government funded energy storage technology development programs, and we have some other R&D funding irons in the fire, including collaborations with Battery partners to use Maxwell’s proprietary solvent free, electro fabrication process, to manufacture lithium ion battery films

As we stated in our press release, we expect fourth quarter revenue to be up 3 to 5% sequentially from Q3, which would push top line growth for the year to almost 30% over 2010. And while we anticipate normal seasonal softness early next year, we expect total sales for 2012 to grow at a rate similar to what the company is achieving this year in 2011.

We at Maxwell are very proud of the growth in our green segment of the market, and the fact that we are now profitable, have very little debt and have not taken government loans as is very common in the green segment, we are commitment to continuing this through solid execution of our business plans.

And with that, we’re going to stop and take your questions.

Question-and-Answer Session

Operator

(Operator instructions).

Operator

(Operator Instructions). And it looks like our first question will come the site of Philip Shen with Roth Capital. Your line is open.

Philip Shen – Roth Capital

Good afternoon everyone. Thanks for taking my questions. My first question is about 2012. In your release, you just talked about in guidance for 2012 revenue, can you comment on how you expect OpEx to trend in 2012?

David Schramm

I think Kevin gave some color to that that we’re seeing some legal expenses that should come to an end in 2012. But I think Kevin’s got a number in there, $14.5 to $15 million OpEx for Q4. And that rate probably won’t grow a whole lot more than that through 2012.

Philip Shen – Roth Capital

Great, so we should expect some stability with the non-GAAP OpEx going forward.

David Schramm

I would think that’s where we’re at.

Kevin Royal

I would think that probably – Phil, this is Kevin. It will probably grow along with revenues.

Philip Shen – Roth Capital

So grow at the same rate or at a slower rate?

Kevin Royal

At a slightly slower rate.

Philip Shen – Roth Capital

Good, and then my next question is about you’ve mentioned a number of opportunities beyond wind and hybrid buses in your prepared remarks, and what are the opportunities? I think we’ve talked about in the past is hybrid cranes. Can you give us a sense for what your latest conversations have been in this market and perhaps quantify what the potential ultra-cap opportunity might be for this market?

David Schramm

I think, Phil, what’s happened here is now that we’ve got over a year in the automotive market with over 300,000 cars on the road, the credibility of the ultra-cap technology has grown significantly. What this has allowed us to do is to approach different verticals. Right now, we’ve had that concentration of bus and wind, and we’re seeing a lot of activity now in uninterrupted power supply. We’ve announced our new engine start module. We’ve also gotten aggressive in expanding our presence in the Americas as well as in Europe. So as we go forward, our thought is that we’ll be in several more verticals than we are today. And to have some rapid growth if you will in the Americas as well as Europe so that when we look at the world, we’re going to look at a third, a third, a third, and hopefully in six or seven different verticals.

Philip Shen – Roth Capital

And specifically for hybrid cranes, do you see that as a vertical that you can pursue? And so when do you think you might be able to see some impact to revenues from this market?

David Schramm

We’ve had ultracapacitors in cranes at shipyards for a few years now. But that is an opportunity. As I’ve said in the past, anything that’s got a brake on it that can generate electricity, we can store that electricity, and reuse it. So a crane is a great opportunity for us, but I think the engine start module for the trucking industry and the interrupted power supply may have even more potential.

Philip Shen – Roth Capital

Great, thanks very much. I’ll jump back in Q.

Operator

And our next question will come from the site of Michael Lew with Needham and Company. Your line is now open.

Michael Lew – Needham and Company

Thanks, and good afternoon.

Male

Good afternoon, Michael.

Michael Lew – Needham and Company

David, during your remarks, you had mentioned that all 25 Chinese cities were running behind in new energy vehicle deployments. Did the consultants also provide a timeframe as to when the uptake would start to accelerate to meet their new goals? Is this like a mid-2012 or ’13 pickup in RP’s, or …

David Schramm

Well actually, we haven’t seen that slow down. I think what the consultant noticed is that they haven’t done the – you know, it was 1,000 buses per city, and they’re behind that schedule. So we had our largest quarter in Q3 with that whole transportation sector. And we don’t see that slowing down a whole lot. So that is going to keep the pace it’s at I believe in mid-2012. I think the wind is going to start picking back up according to what the consultant sees.

Michael Lew – Needham and Company

Okay, so you do expect the same pace, no acceleration. In other words, at the current rate, they should make up and meet the current goals I guess is what you’re saying.

David Schramm

That’s a good question, Michael. I don’t know the answer to that. What I do know is that the transit buses and the trolley cars, it continues to give us good exposure to that market place. And whether it grows faster than it’s growing today, we just don’t know.

Michael Lew – Needham and Company

And with regard to the outlook, obviously you’re looking at about a 30% topline versus the prior quarter expectation for the year, talking about 20%, and you indicated it was really broad based. And I guess in the near term, do you expect that type of broad base momentum to continue or are there going to be a few standout markets in what you’re experiencing right now?

David Schramm

Well again, you know, we’ve been focused on the wind and the bus, and that’s been the horse that we’ve been riding, both of those horses I should say. But I’d say that again the importance of being successful in the bus market, the wind market, and then the start-stop system with PSA has really added to the credibility of what the ultracapacitor technology is. That helps us to open doors and get through that door quicker. So again, I think we’re going to be in a few more verticals as we go forward. And then grow the business like as fast as we can in the Americas as well in Europe. We’ve got a great presence in Asia right now, so we don’t want to lose that momentum, but we just want to kick start the Americas and Europe.

Michael Lew – Needham and Company

Okay, so it’s really Europe and the Americas are kind of a bit that could use a bit of a pickup there.

David Schramm

Well right now, the Americas is our smallest market. And yet, it’s the largest market in the world, so it’s also the greatest opportunity.

Michael Lew – Needham and Company

Now with Voith, is there anything you can shed more light on in terms of have you seen a pickup in RSP’s since the announcement was very recent. But are you starting to experience anything along those lines?

David Schramm

Yeah, Voith is making an aggressive play into doing hybrid transit buses. And they’ve got a pretty aggressive plan. And they made a nice announcement that called us up as their ultra-cap supplier. So we’re looking forward to a real fruitful adventure with them, and we believe it’s going to start here in 2012.

Michael Lew – Needham and Company

Okay, and also I have a question with regards to the new facility. When are you expecting to produce qualification parts there?

David Schramm

We got that facility because we want to do this on the right timing, so we’ve got equipment being ordered. But about a year from now, we’ll have that facility up and running. And if we need it sooner, then we’ll bring it online sooner. But besides being a place that we can control our intellectual property, which as everybody knows is extremely important to us, it also gives us the ability to have a second engineering center so that we can now hire people not only in the San Diego area, but also in the Phoenix area. And again, engineers is the name of this game. You know, we’ve got to have engineers out there helping customers design the ultra-capping of their application.

Michael Lew – Needham and Company

Okay, and just one last question. With regards to CapEx, can you give us an idea what projected CapEx will be for next year?

Kevin Royal

Yes, our capital expense given the Peoria, Arizona facility bringing that online will run from about $4 to $6 million per quarter. And overall, we’re targeting a range of about $18 to $22 million, and that’s just depending on timing on sponsored projects.

Michael Lew – Needham and Company

Okay, and thank you.

Operator

And it looks like our next question will come from the site of Zach Larkin with Stephens, Inc. Your line is open.

Zach Larkin- Stephens, Inc.

Good afternoon gentlemen. Congratulations on the quarter.

David Schramm

Thanks, Zach.

Zach Larkin- Stephens, Inc.

Just wanted to try and dig in a little bit more on the slowdown on wind in China. Just wondered how if you can quantify maybe in a little bit more detail the type of slowing that Maxwell is in particular seeing versus the overall market. And whether you think that is going to be mainly offset by strength in other ultra-cap segments, or whether additional market penetration will allow you guys to – whether that’s going to be maybe a couple quarters in the soft patch better than the overall market.

David Schramm

As we’ve said, the good news is our transportation market had the electric in Q3 as wind was softening. And the consultants say from everything they can find out, wind will pick back up about the second quarter of 2012. Again, that was growing at about 100% rate, so it was growing very, very quickly. What Maxwell’s position is we have since expanded into maybe more wind manufacturers, so we didn’t slow down as a company as much as the market because again, our penetration was higher. But we did see a slowdown overall in the Chinese wind markets. But it’s going to come back in 2012. They still have great plans, and the government’s going to fund it.

Zach Larkin- Stephens, Inc.

And then kind of the opportunity for additional market opportunity, do you guys – I think you’ve indicated that there’s still a lot of opportunity for additional market penetration as well. Is that still accurate?

David Schramm

I think yes, and I think the consultants have really solidified that that is true. There is a huge opportunity from our wind energy coming out of China.

And then the second thing is right now, our wind activity has been focused on the pitch control system. And as they do this low voltage ride through, and that’s an acronym, a new one you can put on your list, the LVRT. It basically is how do you balance out the voltage when the wind varies? So that’s another huge opportunity for us as to how do we put an ultra-cap pack at the base of every windmill and not just up in the cell where we do the pitch control.

Zach Larkin- Stephens, Inc.

Got you, thanks for that color. And then just one final question. The mix in sales with the obvious strength in other products was as you mentioned a little bit out of ordinary with those other mature segments. Do you expect future results to trend more as they have been historically or how should we think about that in coming quarters?

David Schramm

That’s a good question. You know, we crossed the mark ultra-caps where we’re 60% of the revenue in Q3. And again, we’re still looking at the micro-electronics and the high tension as being a single digit growth if you will. And the double digit growth comes out of the ultra-cap.

There’s a lot of runway left on ultracapacitors.

Zach Larkin- Stephens, Inc.

Right, with the big pop this quarter, do you expect the other product segment to have a bit of a dip in Q4 and then growing from there, or just based on the bigger quarter we had this quarter?

David Schramm

This quarter was exceptional. Again, I think single digit is probably more in the line with where those two need to be.

Zach Larkin- Stephens, Inc.

Great, all right, thank you very much, and congrats on the quarter.

David Schramm

Thanks, Zach.

Operator

And it’s next to the site of Colin Rusch with Thinkequity. Your line is open.

Noah Kaye – Thinkequity

Hi, gentlemen, it’s Noah Kaye in for Colin. How are you?

David Schramm

Hi, Noah.

Noah Kaye – Thinkequity

Congratulations on another strong growth quarter. So just to pick up a little bit, I’m very pleased to hear about the 500 engine order units. Is that ruling through in fourth quarter in terms of revenue impact? How should we think about that?

David Schramm

Those, what we’re going to do there is we’re going to penetrate the market. We’ve got a plan to build up to 1,000 by the end of this year. 500 will go out within the next few weeks. So what we’ve got is we’ve got a lot of fleet owners that are very, very anxious to expand from the beta test units they had. And you know, we’re hitting the sweet spot of the year for us. Where these units really, really shine is in cold temperature because typically, an aged battery in cold temperature, that’s not a good scenario for starting heavy duty trucks. So I believe our timing is just about right. We’re going to get out there hopefully when the temperature, and not here in California, but we’re hitched to 10 and 20 below zero where our units could really show their value. And that’s value proposition. That’s really what this is all about. So we’re expecting great market acceptance, and I should say continued acceptance. The baby units have just been a homerun right now.

Noah Kaye – Thinkequity

It seems like there’s a real shift towards North American market between this and in some of the other products, the hybrid bus opportunity. Can you talk a little bit about some specific opportunities you’re seeing in transits, Dallas, New York, Metro? Where do you think you’re going to be able to play?

David Schramm

I tell you, we see more trends of opportunities in Europe and Asia because typically transit is funded by the government. And the Chinese governments specifically and the European governments have really put an accent that that’s what they want to do. We haven’t seen that push yet in the Americas. Our expectation is thought that that’s got to happen.

Noah Kaye – Thinkequity

Thanks so much again. I’ll jump back in Q.

David Schramm

Okay, Noah.

Operator

And it’s next to the site of Craig Irwin with Wedbush. Your line is now open.

Craig Irwin – Wedbush

Good evening gentlemen. Congratulations on the strong ultracapacitor growth. I wanted to ask aboutYYutong, obviously a pretty attractive customer to capture and to serve going forward. Can you maybe update us on whether or not any units were delivered to Yutong in the third quarter? And whether or not it will contribute to fourth quarter demand? And whether or not you expect sort of regular demand from them ’12, or is this a customer that’s in early stage of ramping it’s demand with Maxwell?

David Schramm

That’s a good question, Craig. Now we shipped them products in Q3. And Q4, we will, and the next of next year, we will. Yutong is the largest bus manufacturer in China. And they’re second largest in the world. So it’s a great customer for us to be hooked up with.

Craig Irwin – Wedbush

Great, then just switching over to the stop-start side. Historically, you gave us some pretty good color around the number of customers that were in serial sampling for stop-start. The customers we could consider maybe a little bit more mature as potentially resulting in eventual programs for Maxwell. Could you frame out for us the approximate number of customers and what the timeline on their decisions might look like for stop-start?

David Schramm

I think Craig where we’ve got to start is that PSA is the second largest automobile manufacturer in Europe. Volkswagen is the only one bigger. Most Americans don’t know PSA because they don’t sell any cars in North America. But we have been talking with every tier one, every OEM. We are actively pursuing customers with Continental. So we’re getting out there, but I don’t have anything to announce at this time.

Craig Irwin – Wedbush

Okay, excellent, and then changing subjects over to the legal expense. This is something that’s sort of driven up near term as G&A spending. Can you frame out for us how much it was in the current quarter versus the prior quarter? And whether or not you expect it to basically be flat, or tapered down, or potentially taper up over the next few quarters?

David Schramm

Sure, so for the second quarter, we incurred about a $1.1 million in total legal expense. That jumped to slightly over $1.5 million in the third quarter. And we would expect that to potentially be flat in the fourth quarter. Based on the outlook, the various matters that we’re dealing with, we believe that we’ll start seeing some relief when we roll into 2012. And with that, we should be able to manage these matters in a fashion that we can cut that in half from a quarterly run rate standpoint by the end of 2012.

Craig Irwin – Wedbush

Okay, and is this a matter that could potentially result in litigation in court or is this something that might be an opportunity to negotiate with the infringing party?

David Schramm

It’s a matter that could go either way. So it could end up in the court system, and with all these things, we have showed that we’re serious, and that it’s a priority for us to protect our assets, in particular our intellectual properties. But if a settlement would give both parties what we need, we would certainly be willing to have that discussion.

Craig Irwin – Wedbush

Great, then news subject of space marker electronics, a while back you were targeting some very nice large programs. Some associated with the tense budgets. Some associated with other agencies. Can you maybe give us a little bit of color on whether or not there are any programs that we would quantify as sort of significant, maybe $10 million plus in potential revenue for Maxwell over the next couple years? And if there’s a potential bid timeline on any of those programs?

David Schramm

Yeah, Craig, I think as we mentioned before, our micro-electronics is probably the lumpiest business we’ve got in the stable. Year-over-year, it does pretty well. It’s that single digit growth we did. But the programs themselves, we don’t do defense. We only do commercial. So when they get the programs awarded commercially, that’s when we get the request to bid on the boards. But where we’re seeing growth right now is out of Europe. So Europe and we’ll see what happens out of our U.K. venture. So right now, it looks pretty bright year-over-year. Again, that’s single digit growth. But I don’t think we’ve got any major, major programs that we’ve got visibility to at this time.

Craig Irwin – Wedbush

Okay, and then this is something that I’ve asked a couple times over the course of the last several quarters. What is the opportunity to potentially to monetize that division and avoid an equity issuance saying, I can understand you liking the diversity and the improved coverage of overhead from an operation that is very consistent. But I understand that there are logical buyers out there that would be thrilled to get a hold of those assets. And given your changes in the San Diego facility, I would expect it would be pretty easy for those people to tuck in with the new operation. What’s your thought process as far as holding onto this asset over the next couple years?

David Schramm

You know, this asset, it’s been a great addition to Maxwell. It paid the bills for a lot of years if you think back. Back when we didn’t have – this is nice to have a bracket free EPS. And in fact, it’s very nice to have that on GAAP and both non-GAAP. But micro-electronics is an integral part of the business. It generates revenue. It generates cash for us. It generates U.S. cash for us. So at this time, it’s still part of the company. And I tell you that, you know, nothing is forever, but the opportunity to divest of that just isn’t now.

Craig Irwin – Wedbush

Fantastic, thank you very much for taking my questions, and congratulations on the quarter.

David Schramm

Very good, Craig, thank you.

Operator

And we move next to the site of Jody Blurry with Stifel Nicolaus. Your line is open.

Jody Blurry – Stifel Nicolaus

Good afternoon and nice quarter guys. I had a question on the low voltage ride through – you know, David, could you talk about I guess the potential revenue content in that context versus a [inaudible] control system?

David Schramm

That’s a good question. I think we’ve had literature out that basically, you know, we look at a windmill, it’s kind of a $5,000 turban content for us. And the low voltage ride through, we are just in early stages of that. It’s a different configuration. We have customers that are trying different voltage modules with us. So it’s really hard right now to pin that down. But it will be good business for us when it happens. And I really hate to hazard a guess as to how much revenue that is for windmill until we get the configuration settled.

Jody Blurry – Stifel Nicolaus

Fair enough. And you’ve been able to hold your gross margins pretty well through the year. You coming from the ground in China sounds like pricing on windmills is very aggressive. And I’m wondering how you’ve been able to hold onto margins just because you’re kind of one step away from the direct Chinese customers so that you’re actually supplying to a European integrator. Or is there something else going on?

David Schramm

I would start with I think the Maxwell team’s just an outstanding job of working with customers to reinforce what the value proposition is. Anybody can sell material on price. And that’s not what the objective is. The objective is to work with the customer to increase their value. And as long as we stay on the road of increasing value, I think we can keep our focus on our gross margins.

Now that being said, as we get into some more markets that might be more elastic than what we’re used to, then we’ve got some different decisions to make. But right now, we’ve stated our goal of 40% gross margin, and we’ve been fortunate to be able to do that. And that’s just through an awful lot of hard work.

But I will tell you again, the word we use around here is value proposition. It’s not pricing. It’s how do we get that customer what they have to have that optimizes their solution at the best overall cost to them, not necessarily the cost that shows up on that purchase order.

Jody Blurry – Stifel Nicolaus

Thanks, David. One last question here then. PSA group, I understand that they were looking to introduce start-stop sort of gradually introduce it over to the gasoline. And gasoline and perhaps higher displacement engines models. I’m just wondering where they are in that process and if you have anything to share on it.

David Schramm

You know what we started with were smaller diesel engines, which are higher compression. But with the first 300,000 on the road and again, they told us that it would be about 1 million cars through early 2013. So 300,000 in the next six to eight weeks, we’ll have that done. And then another 700,000 in the next 12 to 15 months. So I would daresay they’re probably looking at us for other programs based on the success they’ve had. But again, I don’t have anything concrete at this time.

Jody Blurry – Stifel Nicolaus

Thanks.

Operator

And we’ll go next to the site of Jeremy Hellman with Divine Capital. Your line is open.

Jeremy Hellman – Divine Capital

Thanks, good afternoon everybody. I’ve got a question with respect to the high voltage capacitor that are used in the grid applications. And just kind of thinking conceptually, and I don’t think I ever clarified this before. But is that a product that can be used in an offshore application, and I ask that relative to the Atlantic wind connection. It’s being discussed here on the east coast of the United States and also the news out of Europe and Africa regarding desert tack where they want to put some plants in North Africa and pipe that power over to Europe.

David Schramm

No, our high tension is more of a ground based. It’s a switching station. It’s where a power plant would have a couple different power lines coming in, and you want to switch from one to the other. So it’s really – these are up to 1 million vote capacitors. When you’re talking about windmills, the low voltage ride through would be the opportunity, and that’ would be an ultra-cap opportunity. But our high tension capacitors are land based.

Jeremy Hellman – Divine Capital

Okay, and kind of thinking out five or ten years, do you see an ability to develop any sort of an offshore product? I mean obviously you can have something that is at the urban site so to speak. And then because I’m thinking, or at least I’m thinking in terms of storing of offshore sites connected together like they’re talking about the Atlantic wind connection.

David Schramm

I think you’ve just given me a project to hand over to our marketing folks to investigate. Thank you.

Jeremy Hellman – Divine Capital

Okay, thanks.

Operator

And our next question comes from the site of Ben Keller. Your line is open.

Ben Keller – Robert W. Baird

Hey, guys, thanks for taking my question and congrats on the quarter. As you look in the – I’m going to ask an automotive question. As you look out into 2014 or later, what is the date that we need to see the adoption either through new car manufacturers or new PSA models to kind of drive diesels or cap sales?

David Schramm

That’s a great question. What I’d tell you Ben is the heavy lifting has been done. And that was to get this system designed with Continental, get it validated with Continental, and then have PSA validate this system. That process took us about four years. So now that that system is validated, taking a tier one system, which is what Continental is, and moving that to a different car maker or different model does not take another four years. This system is tried and true. It works, so as we’ve said before, I think last quarter I said I expected something probably in the next 18 months. And that 18 months is now three months closer than it was. There’s a lot of activity going on right now in start-stop. Most car makers are looking at it because it’s an easy6 15% improvement in fuel, a 15% reduction in CO2 in the city driving cycle.

And with most countries of the world having either restraints on CO2 or increased mileage requirements, this is an easy one. And this doesn’t require hybridization of the car, so you don’t have to redo the architecture of the car. You can literally, and I’ll use this word loosely drop it into a current vehicle and have it used. You don’t need to need to put motors on the front wheels or the rear wheels to make it work.

So I’m really confident that the market is taking a look at what we’re doing. If you can, get a copy of the automobile, the German magazine, and read about what they wrote on start-stop. It’s very encouraging that everybody’s going to go there. And of course, our preference is that they go there using ultracapacitors.

Ben Keller – Robert W. Baird

So is it something that could happen soon enough to impact ’13 volumes, or is it really a 2014 volume increase outside where you’re already built in?

David Schramm

I don’t think ’13’s out of the question because again, we’re already an accepted entity at PSA. And we’re not on all their cars today. So the opportunity is there.

Ben Keller – Robert W. Baird

Okay, and then as I talk to investors, one of the questions that continuously comes up is visibility. And obviously, into China is difficult. Now I’m just wondering from our end it’s difficult, what’s the visibility like on your end as far as the bus market and the wind market?

David Schramm

I think the best indicator we have is the fact that we have really broadened our base. We are into over seven different bus manufacturers now in the Asian markets. We’re into several wind makers in Asia as well as in Europe. So by broadening that base, we tend to reduce our risk. So as these guys tend to do some project business, the good news is all projects don’t hit at the same time. So we kind of look at the history as to where they’re at. We talk with them on a regular basis, and we put the plan together. But in the Chinese market as you said, a consistent run rate isn’t what the norm is. But as we broaden the base, we’re going to make one by default.

Ben Keller – Robert W. Baird

Okay, my last question is we’re looking at the 2012 outside of wind and auto, what would you say would be the wild card that could be the highest growth area?

David Schramm

Engine start module without a doubt. I think our engine start module was a game changer. I think it offers a value proposition to the heavy duty truck market that is going to gain a quick foothold. I tell you, the feedback we’ve got on the beta units has just been outstanding. That and UPS, the uninterrupted power supply. You know again, PC10 was a million and a half pieces this quarter. And Q4 is running faster than that right now in a run rate, so both of those have got a lot of opportunity for us.

So as I said, we’re going to take the number of verticals up. We’re putting a renewed focus on North America and Europe. And we’re going to keep growing.

Ben Keller – Robert W. Baird

Great, thanks so much.

David Schramm

I think we have time enough for about one more question.

Operator

Absolutely. Our next question comes from Ahmar Zaman with Piper Jaffray. Your line is open.

Ahmar Zaman (Sean) – Piper Jaffray

Hi, this is Sean in for Ahmar. I was wondering if we could sort of pick up on the engine start module. I know you talked a little bit about it, the 1,000 units you guys have ready to go kind of a launching pad so to speak. How should we think about 2012 and what you guys are really realistically expecting in terms of units there?

David Schramm

What we’ve done is, again it’s 500 because if my UPS guy’s listening, he’s going to say he told me 500 in three weeks and the other 500 by the end of the year. So we’ll have those out. And again, it’s a matter of getting them to the fleets. And then the fleet acceptance of the growth and that I think is going to be rather quickly. It’s pretty hard to quantify at this point. But I think we’re going to have some steady growth once we get the market acceptance, once we get them out, and people start to multiply. But I think it’s going to be a good business for us in 2012 and ’13 and ’14 will grow even beyond that.

Ahmar Zaman (Sean) – Piper Jaffray

Great, and when we look at the revenue growth next year on par with what we saw this year, how should we look at gross margins there? Do you guys see them flat or sort of moving up, down as revenues ramp?

David Schramm

So based on the modeling we’ve done, the gross profit improvement that we expect to achieve through cost reduction, design, and improvements, we expect our ultracapacitor gross profits to improve. Now we also expect ultracapacitors to become a larger portion of the overall revenues for the company. So we will see some improvement overall in the coming gross profits. But it will be slight.

Ahmar Zaman (Sean) – Piper Jaffray

Great, and you talked a little bit about some softness in the early next year, should we be looking in terms of the seasonality in 1Q? Should we look for sort of a dip of revenue in 1Q and then sort of building back, or is that too aggressive?

David Schramm

Actually what we’re referring to is if you look through the history of Q1 just has always been softer than the other quarters. And we just don’t see the huge uptake. You know, one of the big drivers in Q1 is with the market presence we have in China, they have a Chinese New Year that it’s a multi-week event. So we get that event in Q1 and of course just the softness after the holidays. But it’s softening, but it’s pretty hard at this point to quantify where that’s going to be.

Ahmar Zaman (Sean) – Piper Jaffray

Great, and just one last one. How should we think about the tax rate going forward? It could be so lumpy quarter to quarter, but if you guys are sort of consistently hitting profitability, how should we think about that?

David Schramm

It’s difficult because we only pay taxes on our Swiss subsidiaries income. And so what we’ve seen is a range that would be anywhere from six to 750,000. The profits were a little bit higher this quarter due to some foreign currency gains. And so we had a rather high tax provision in this quarter. I think we tend to look at it more from an absolute dollar standpoint. And I would say throughout ’12, we planned our tax expense to be between 700 and, excuse me, between 700,000 and 800,000 per quarter.

Ahmar Zaman (Sean) – Piper Jaffray

Great, thank you gentlemen. Appreciate it.

David Schramm

All right, well thanks everybody. On behalf of the over 400 employees at Maxwell, we thank you for your participation today and look forward to continuing to dialog.

Operator

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

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