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MXWL > SEC Filings for MXWL > Form 10-Q on 30-Oct-2012All Recent SEC Filings

Show all filings for MAXWELL TECHNOLOGIES INC

Form 10-Q for MAXWELL TECHNOLOGIES INC


30-Oct-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Unless the context otherwise requires, all references in this Quarterly Report on Form 10-Q (this "Quarterly Report") to "Maxwell," "the Company," "we," "us," and "our" refer to Maxwell Technologies, Inc. and its subsidiaries; all references to "Maxwell SA" refer to our Swiss subsidiary, Maxwell Technologies, SA.

FORWARD-LOOKING STATEMENTS

Some of the statements contained in this document and incorporated herein by reference discuss our plans and strategies for our business or make other forward-looking statements, as this term is defined in the Private Securities Litigation Reform Act. The words "anticipates," "believes," "estimates," "expects," "plans," "intends," "may," "could," "will," "continue," "seek," "should," "would" and similar expressions are intended to identify these forward-looking statements, but are not the exclusive means of identifying them. These forward-looking statements reflect the current views and beliefs of our management; however, various risks, uncertainties and contingencies could cause our actual results, performance or achievements to differ materially from those expressed in, or implied by, our statements. Such risks, uncertainties and contingencies include, but are not limited to, the following:

• our ability to remain competitive and stimulate customer demand through successful introduction of new products, and to educate our prospective customers on the products we offer;

• dependence upon the sale of products to a small number of customers and vertical markets, some of which are heavily dependent on government funding or government subsidies which may or may not continue in the future;

• dependence upon the sale of products into China and Europe, where macroeconomic factors outside our control may adversely affect our sales;

• risks related to our international operations including, but not limited to, our ability to adequately comply with the changing rules and regulations in countries where our business is conducted, our ability to oversee and control our foreign subsidiaries and their operations, our ability to effectively manage foreign currency exchange rate fluctuations arising from our international operations, and our ability to continue to comply with the U.S. Foreign Corrupt Practices Act as well as the anti-bribery laws of foreign jurisdictions and the terms and conditions of our settlement agreements with the Securities and Exchange Commission and the Department of Justice;

• successful acquisition, development and retention of key personnel;

• our ability to effectively manage our reliance upon certain suppliers of key component parts and specialty equipment and logistical services;

• our ability to match production volume to actual customer demand;

• our ability to manage product quality problems;

• our ability to protect our intellectual property rights and to defend claims against us;

• our ability to effectively identify, enter into, manage and benefit from strategic alliances;

• occurrence of a catastrophic event at any of our facilities;

• occurrence of a technology systems failure, network disruptions, or breach in data security; and

• our ability to obtain sufficient capital to meet our operating or other needs.

Many of these factors are beyond our control. Additionally, there can be no assurance that we will not incur new or additional unforeseen costs in connection with the ongoing conduct of our business. Accordingly, any forward-looking statements included herein do not purport to be predictions of future events or circumstances and may not be realized.

For a discussion of important risks associated with an investment in our securities, including factors that could cause actual results to differ materially from expectations referred to in the forward-looking statements, see Risk Factors in Part II, Item 1A, of this document and Part I, Item 1A, of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2011. We do not have any obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

Overview

Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is designed to provide a reader of our financial statements with a narrative from the perspective of our management on our financial condition, results of operations, liquidity and certain other factors that may affect our future results. Our MD&A is presented in the following sections:

• Executive Overview


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• Highlights of the Nine Months Ended September 30, 2012

• Results of Operations

• Liquidity and Capital Resources

• Critical Accounting Policies and Estimates

• Off Balance Sheet Arrangements

Executive Overview

Maxwell is a global leader in developing, manufacturing and marketing advanced energy storage and power delivery products for transportation, industrial, information technology and other applications, and microelectronic products for space and satellite applications. Our strategy is to establish a compelling value proposition for our products by designing and manufacturing them to perform reliably with minimal maintenance over long operational lifetimes. We have three product lines: ultracapacitors with applications in multiple industries, including transportation, automotive, information technology, renewable energy and consumer and industrial electronics; high-voltage capacitors applied mainly in electrical utility infrastructure; and radiation-hardened microelectronic products for space and satellite applications.

Our primary objective is to grow revenue and profit margins by creating and satisfying demand for our ultracapacitor-based energy storage and power delivery solutions. We are focusing on establishing and expanding market opportunities for ultracapacitors and being the preferred supplier for ultracapacitor products worldwide. We believe that the transportation industry represents the largest market opportunity for ultracapacitors, primarily for applications related to engine starting, electrical system augmentation, and braking energy recuperation and hybrid electric drive systems for transit buses, trucks and autos, and electric rail vehicles. Backup power applications, including instantly available power for uninterruptible power supply, may also represent a significant market opportunity.

We also seek to expand market opportunities for our high-voltage capacitor and radiation-hardened microelectronic products. The market for high-voltage capacitors consists mainly of expansion, upgrading and maintenance of existing electrical utility infrastructure and new infrastructure installations in developing countries. Such installations are capital-intensive and frequently are subject to regulation, availability of government funding and general economic conditions. Although the market for microelectronics products for space and satellite applications is relatively small, the specialized nature of these products and the requirement for failure-free reliability allows us to generate profit margins significantly higher than those for commodity electronic components.

In the third quarter of 2012, revenues were $43.9 million, representing an increase of 7% compared with the same period one year ago. Revenue growth in the current fiscal year has been slower when compared with the 20 to 30% annual growth rate achieved in the two most recent fiscal years, and is primarily attributable to slower revenue growth for our ultracapacitor products, for which revenue increased by 15% to $28.8 million in the third quarter of 2012 compared with the third quarter of 2011. This decline in the overall growth rate for our ultracapacitor products is primarily attributable to slowing in the two primary markets in which we currently sell our products, the hybrid transit vehicle and wind energy markets. Slower growth in sales in the hybrid transit vehicle market is primarily due to changes and delays in government programs and funding for public transit vehicle procurements, mainly in Europe. In addition, we are beginning to see a near-term reduction in customer forecasts for hybrid transit vehicle applications in China, which is our primary market. For wind energy, there has been a global slowdown in new wind system deployments in the last several quarters. These conditions, in conjunction with weaker general economic conditions in Europe and elsewhere, have caused our growth rates in these primary markets to decline in recent quarters. We believe this stagnation could continue in the near term, and given this uncertainty, at this time we are unable to predict near-term revenue growth rates with any reasonable level of confidence.

Revenues for our high voltage products were relatively stable in the third quarter of 2012 as compared with the same period in the prior year at $11.6 million, while revenues for our microelectronics products, which tend to be volatile, were $3.5 million for the third quarter of 2012 compared with $4.6 million for the same period in 2011. Overall gross profit margin during the quarter increased to 42% compared with 40% in the third quarter of 2011, primarily due to cost efficiencies associated with greater volume as well as cost reduction efforts. Operating expenses in the third quarter of 2012 were 28% of revenue, compared with 37% of revenue in the same period one year ago.

As of September 30, 2012, we had cash and cash equivalents of $20.1 million. We also have access to a $15.0 million line of credit available to fund operations. During the quarter ended March 31, 2012, we generated $10.3 million in net proceeds from the sale of stock under our shelf registration statement, and continue to have access to the capital markets to raise additional funds until August 2014 through this shelf registration statement. In the future, we may decide to supplement existing cash and planned cash flow from operations by accessing additional funds from our credit facility, or by issuing additional debt or equity.

Going forward, we will continue to focus on trying to grow our business and strengthen our market leadership and brand recognition through further penetration of existing markets, entry into new markets and development of new products. Our


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primary focus will be to try to grow our ultracapacitor business through continued market penetration in primary applications, including automotive, transportation, renewable energy and backup power. In order to achieve our growth objectives, we will need to overcome risks and challenges facing our business. A significant challenge we face is our ability to manage dependence on a small number of vertical markets, including some that are driven by government regulation or are highly dependent on government subsidy programs. For example, a large portion of our current ultracapacitor business is concentrated in the Chinese hybrid transit bus and wind energy markets, which are heavily dependent on government regulation and subsidy. As mentioned above, these markets are experiencing slower rates of growth in recent quarters as compared with the past couple of years related to changes or delays in government policies and subsidy programs that have historically advanced these markets. Although we believe the long-term prospects for these markets remain positive, we plan to develop growth opportunities for our products in other vertical markets, including applications for back-up power and heavy vehicle cold starting, in order to further diversify our market presence and build our long-term growth prospects.

Other significant risks and challenges we face include the ability to maintain profitability; the ability to develop our management team, product development infrastructure and manufacturing capacity to facilitate growth; competing technologies that may capture market share and interfere with our planned growth; and hiring, developing and retaining key personnel critical to the execution of our strategy. We will be attentive to these risks and will focus on growing our revenues and profits, and on developing new products and promoting the value proposition of our products over competing technologies. In addition, we are in the process of augmenting current manufacturing capacity and infrastructure, which we believe will be sufficient to accommodate our planned growth.

Highlights of the Nine Months Ended September 30, 2012

During the nine months ended September 30, 2012, we continued to focus on introducing new products, increasing production capacity to meet anticipated future demand, reducing product costs, making capital investments to facilitate growth, and improving production processes. Some of these efforts are described below:

• In January, we announced that Bombardier Transportation, a leading producer of rail vehicles and rail transportation equipment, systems and services, has selected Maxwell ultracapacitors as the energy storage element of the BOMBARDIER EnerGstorฎ braking energy recuperation system.

• Also in January, we announced that we have entered into a one-year agreement with Pana-Pacific, a preferred integrator and engineering partner in the commercial vehicle market, to distribute our new ultracapacitor-based Engine Start Module in the United States, Canada and Mexico, although sales of this product to date have not been significant.

• In February, we announced that our Swiss subsidiary is participating in a program of the Swiss government to accelerate our initiatives to improve manufacturing processes and enhance performance of our CONDISฎ high-voltage capacitor products for electric utility grid infrastructure and other high-voltage applications.

• In March, we announced that we are in the process of planning a new ultracapacitor electrode production facility that will double our current electrode capacity, and are also increasing internal and outsourced assembly capabilities to ensure that we can meet increasing worldwide demand for ultracapacitor products.

• In May, we announced that our Swiss subsidiary has launched a new line of CONDISฎ capacitors and voltage dividers based on environmentally friendly technology for medium voltage applications.

• Also in May, we announced the signing of a global distribution agreement with Digi-Key Corporation, a global electronic components distributor recognized by design engineers as having the industry's largest selection of electronic components available for immediate shipment, who will now distribute our products worldwide.

• In June, R&D Magazine recognized our ultracapacitor-based Engine Start Module for medium and heavy duty trucks as one of the 100 most technologically significant products introduced into the marketplace over the past year, although sales of this product to date have not been significant.

Results of Operations

The Third Quarter of 2012 Compared with the Third Quarter of 2011

The following table presents certain unaudited statement of operations data
expressed as a percentage of revenue for the periods indicated:



                                             Quarter Ended
                                            September  30,
                                       2012                2011
                 Revenue                     100 %               100 %
                 Cost of revenue              58 %                60 %

                 Gross profit                 42 %                40 %


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                                                          Quarter Ended
                                                          September  30,
                                                    2012                 2011
   Operating expenses:
   Selling, general and administrative                     16 %                 23 %
   Research and development                                12 %                 14 %

   Total operating expenses                                28 %                 37 %

   Income from operations                                  14 %                  3 %
   Interest expense, net                                    1 %                 -

   Income from operations before income taxes              13 %                  3 %
   Income tax provision                                     1 %                  2 %

   Net income                                              12 %                  1 %

Net income reported for the three months ended September 30, 2012 was $5.4 million, or $0.19 per diluted share, compared with $298,000, or $0.01 per diluted share, in the same quarter one year ago. While revenue growth for the three months ended September 30, 2012 compared with the same period of the prior year was more moderate than in recent annual periods at 7%, we were able to achieve an improved gross profit rate of 42%, compared with 40% in the same quarter of the prior year, and also reduced operating expenses, which were 28% of revenue in the current quarter, down from 37% in the same quarter of the prior year.

Revenue and Gross Profit

The following table presents a comparison of revenue, cost of revenue and gross
profit for the quarters ended September 30, 2012 and 2011 (in thousands, except
percentages):



                                               Quarter Ended                    Quarter Ended
                                            September 30, 2012               September 30, 2011
                                                            % of                             % of                           %
                                           Amount          Revenue          Amount          Revenue        Increase      Change
Revenue                                 $     43,907            100 %    $     41,096            100 %    $    2,811           7 %
Cost of revenue                               25,534             58 %          24,547             60 %           987           4 %

Gross profit                            $     18,373             42 %    $     16,549             40 %    $    1,824          11 %

Revenue. In the third quarter of 2012, revenue increased 7% to $43.9 million, compared with $41.1 million in the same quarter one year ago. The increase in revenue was influenced primarily by higher revenues for our ultracapacitor product line which increased by 15% compared with the same period in the prior year, influenced primarily by sales growth in the hybrid transit bus and wind energy markets, offset by lower sales for certain backup power applications. Despite this growth, for reasons discussed earlier, growth rates for sales of our ultracapacitor products in both the hybrid transit bus and wind energy markets have recently declined significantly.

Revenues for our high voltage products were relatively stable for the third quarter of 2012 as compared with the same period in the prior year at $11.6 million, while revenues for our microelectronics products, which tend to be volatile, decreased by $1.1 million for the third quarter of 2012 with total revenues of $3.5 million.

A substantial amount of our revenue is generated through our Swiss subsidiary which has a functional currency of the Swiss Franc. As such, reported revenue can be materially impacted by the changes in exchange rates between the Swiss Franc and the U.S. Dollar, our reporting currency. Due to the strengthening of the U.S. Dollar against the Swiss Franc during the quarter ended September 30, 2012 compared with the same period one year ago, revenue was negatively impacted by $1.6 million.

Gross Profit. In the third quarter of 2012, gross profit increased $1.8 million or 11% compared with the third quarter of 2011. As a percentage of revenue, gross profit margin increased to 42% compared with 40% in the same quarter one year ago. Of the increase in gross profit in absolute dollars, $1.9 million related to an increase in the volume of sales, and $693,000 was due to net reductions in product costs for both our ultracapacitor and high voltage product lines. Offsetting these increases was a decrease in gross profit in absolute dollars of $816,000 related to the impact of changes in foreign currency exchange rates, primarily changes between the Swiss Franc and the U.S. Dollar.


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Selling, General and Administrative Expense

The following table presents selling, general and administrative expense for the
third quarter of 2012 and 2011 (in thousands, except percentages):



                                               Quarter Ended                     Quarter Ended
                                             September 30, 2012                September 30, 2011
                                                             % of                              % of                           %
                                           Amount           Revenue          Amount           Revenue       Decrease        Change
Selling, general and administrative     $      7,293              16 %    $      9,544              23 %    $  (2,251 )         (24 %)

Selling, general and administrative expenses were 16% of revenue for the third quarter of 2012, down from 23% in the same quarter one year ago, while total expenses decreased by $2.3 million, or 24%. The decrease in absolute dollars was primarily driven by a $1.1 million decrease in bonus expense, which was primarily due to the reversal of previously accrued bonus compensation related to the 2012 bonus program as the related financial targets will not likely be achieved, as well as no bonus expense having been recorded for the third quarter of 2012. In addition, stock-based compensation expense decreased by $318,000 due to the reversal of expense related to performance-based restricted stock award as the performance targets are not expected to be achieved. Further, legal expenses decreased by $1.1 million in the third quarter of 2012 in comparison with the third quarter of 2011 due to the resolution of certain legal matters. Offsetting these decreases, advertising and promotion expenses increased by $330,000 primarily associated with the rollout of a new product, the Engine Start Module, as well as increased participation in trade shows and other advertising programs.

Research and Development Expense

The following table presents research and development expense for the third
quarter of 2012 and 2011 (in thousands, except percentages):



                                               Quarter Ended                     Quarter Ended
                                             September 30, 2012                September 30, 2011
                                                             % of                              % of                            %
                                           Amount           Revenue          Amount           Revenue        Decrease        Change
Research and development                $      5,084              12 %    $      5,707              14 %    $     (623 )         (11 %)

Research and development expenses were 12% of revenue for the third quarter of 2012, down from 14% in the same quarter one year ago, while total expenses decreased by $623,000, or 11%. The decrease in absolute dollars was primarily driven by a $369,000 decrease in bonus expense, which was primarily due to the reversal of previously accrued bonus compensation related to the 2012 bonus program as the related financial targets will not likely be achieved, as well as no bonus expense having been recorded for the third quarter of 2012. In addition, salary and contract labor costs decreased by $278,000 primarily related to higher contract labor costs incurred in 2011 for the design of the Engine Start Module.

Provision for Income Taxes

The effective tax rate differs from the statutory U.S. federal income tax rate of 34% primarily due to foreign income tax and the valuation allowance against the Company's domestic deferred tax assets.

We recorded an income tax provision of $470,000 for the third quarter of 2012 compared with $922,000 for the same quarter in 2011. This provision is primarily related to taxes on income generated by our Swiss subsidiary. Unremitted earnings of foreign subsidiaries have been included in the consolidated financial statements without giving effect to the United States taxes that may be payable as it is not anticipated such earnings will be remitted to the United States. The Company has established a valuation allowance against its U.S. federal and state deferred tax assets, as well as the deferred tax asset of a foreign subsidiary, due to the uncertainty surrounding the realization of such assets as evidenced by the cumulative losses from operations through September 30, 2012. Management periodically evaluates the recoverability of the deferred tax assets and at such time as it is determined that it is more likely than not that deferred assets are realizable, the valuation allowance will be reduced accordingly.


Table of Contents

The Nine Months Ended September 30, 2012 Compared with the Nine Months Ended
September 30, 2011

The following table presents certain unaudited statement of operations data
expressed as a percentage of revenue for the periods indicated:



                                                           Nine Months Ended
                                                             September 30,
                                                           2012           2011
     Revenue                                                  100 %         100 %
     Cost of revenue                                           58 %          60 %

     Gross profit                                              42 %          40 %
     Operating expenses:
     Selling, general and administrative                       20 %          25 %
     Research and development                                  13 %          15 %

     Total operating expenses                                  33 %          40 %

     Income (loss) from operations                              9 %          -
     Interest expense, net                                     -             -

     Income (loss) from operations before income taxes          9 %          -
     Income tax provision                                       2 %           1 %

     Net income (loss)                                          7 %          (1 )%

Net income reported for the nine months ended September 30, 2012 was $8.6 million, or $0.30 per diluted share, compared with a net loss of $723,000, or $0.03 per share, in the same quarter one year ago. During the nine months ended September 30, 2011, we recorded an accrual for the settlement of a legal matter of $2.4 million, and a gain on embedded derivatives and warrants of $1.1 million. During the nine months ended September 30, 2012, we continued to achieve improved operating results due to revenue growth combined with improvements in gross profit and operating margins.

Revenue and Gross Profit

The following table presents revenue, cost of revenue and gross profit for the
nine months ended September 30, 2012 and 2011 (in thousands, except
percentages):


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