Maxwell Technologies' CEO Discusses Q3 2012 Results - Earnings Call Transcript
Oct 26, 2012 | about: MXWL
Maxwell Technologies Inc. (MXWL)
Q3 2012 Earnings Call
October 25, 2012 5:00 pm ET
Executives
Michael W. Sund – Vice President, Communications and Investor Relations
David J. Schramm – President and Chief Executive Officer
Kevin S. Royal Senior – Vice President, Chief Financial Officer, Treasurer & Secretary
Analysts
Philip Shen – Roth Capital Partners LLC
Chris Godby – Stephens Inc.
Ben Schuman – Pacific Crest Securities
Alex Potter – Piper Jaffray
Jed Dorsheimer – Canaccord Genuity
Steven F. Marascia – Capitol Securities Management Inc.
Presentation
Operator
Good day and welcome to Q3 2012 Financial Results Conference Call, Maxwell Technologies. All lines are currently in a listen-only mode. Later, you will have the opportunity to ask questions during the question-and-answer session. And it is now my pleasure to turn the conference over to Mike Sund, Vice President of Investor Relations. Please go ahead.
Michael W. 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 based on our current expectations and assumptions. Such statements 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 Factor 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 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 October 25, 2012. The company undertakes no duty to update our forward-looking statements to conform the statements to actual results or changes in the company’s expectation.
It is now my pleasure to introduce Maxwell’s President and CEO, David Schramm.
David J. Schramm
Thanks, Mike, and good afternoon everybody. We are pleased to report that Maxwell recorded total revenue of $43.9 million for the third quarter into September 30, 2012. Now, that’s up 7% or sequentially from the second quarter and year-to-year from the same quarter last year. Ultracapacitor sales total $28.8 million, up 19% sequentially from the second quarter, and up 15% from the second quarter of 2011. Third quarter sales of microelectronics and high voltage capacitor products came in at $15.1 million, down 9% from the strong sales posted in the second quarter and down 7% from last year’s third quarter.
In the phase of the current challenging global economic environment, improving efficiency and effective expense control enable the company to post net income of $5.4 million or $0.19 per share for the third quarter. That compares with net income of $298,000 were $0.01 per share in the same period last year. On a non-GAAP basis, third quarter net income was $6 million or $0.21 per share compared to $1.2 million or $0.04 per share in Q3 of last year.
This was the tenth consecutive quarter that the company has been profitable on a non-GAAP basis. And Kevin is going to provide more financial details in a few minutes. As noted in our press release, ultracapacitor sales continue to be impacted by economic conditions in Europe and lower demand elsewhere. But to this point, that softness has largely been offset by continuing demand in China driven mainly by infrastructure investments in public transit and wind energy.
Wind turbine deployments in China appeared to stabilize following the government imposed slow down, we experienced in the second half of 2011. Looking ahead, China’s five-year plan calls for wind energy to account for 3% to 5% of the country’s total power generation by 2020. And the trend towards larger turbines and offshore installations favors ultracapacitors. So, we anticipate steadily growing demand for our products.
Ultracapacitor sales for hybrid bus drive systems reached record levels in the third quarter. Again, due mainly to the strong demand in China, where the central government and many regional and local governments continue to provide subsidies and policy support for hybridization of public transit vehicles to improve fuel efficiency and reduce the urban air pollution.
Having read the headlines, predicting slower growth for the Chinese economy and hearing speculation from our customers and other sources, about what is being called a policy gap during the transition to new central government leadership. I traveled to China last month to meet face to face with key bus customers. At that time, their forecast with the fourth quarter was still very aggressive.
However, in the interim, we become aware of some Hybrid Drive System application issues that are impacting our production schedules. There are mechanical vibrations in the system, higher than our module specification, which are causing interface and cabling issues. I should emphasize, that these issues are mechanical, not electrical. And our application engineers are now working with customers to resolve these interface issues, so that normal production can resume in the months ahead.
We also continue to hear speculation from various sources in China, about how the upcoming leadership change might affect the subsidies and policy support, has been helping to drive investments in wind energy and hybridization of public trends of vehicles. The current program that provide central government subsidies for purchases of hybrid and electric vehicles in 25 cities will expire at the end of 2012.
Our customers and other local sources are hearing that on the one hand, subsidies will be made available to more cities across the country, and on the other, that the Probus subsidy is likely to be lower, shifting some of the investment burden to local and regional governments. Until the leadership transition takes place, and those anticipated adjustments are implemented and digested in the market, it is impossible to forecast future volumes with a high degree of confidence. On the plus side with the experience we have gained through these policy supported programs and their favorable cost positions versus competing OEMs in Asia, Europe and North America are Chinese wind and bus customers are beginning to win substantial export business around the world.
Moving on to Europe, soft automobile sales across the board have tampered our near term expectations for sales growth with the ultracapacitor base stop, start, idle elimination system, continental has developed for PSAs, Fuzio and Zitron cars. Still that program continues to account for meaningful share of ongoing ultracapacitor sales. With more than a half million ultracapacitor equipped micro hybrid cars now on the road, ultracapacitor’s reliability and performance, and Maxwell’s capabilities as a supplier are being validated on a daily basis.
Earlier this month, we reported that Lamborghini has designed Maxwell ultracapacitors into stop, start equipped Aventador sports cars that are moving into production this year. Well this obviously is a limited production model, it represents further validation for Maxwell products from an automated technology leader.
We have nothing further to report on the automotive programs but additional OEMs including one in Detroit continue to evaluate the continental system. In addition, continental and other tier 1 automotive suppliers and automakers, are working on other designs employing ultracapacitors. So we remain confident that ultracapacitors will play an increasing role, in making to most cars, more fuel-efficient and environmentally Friendly.
As discussed previously or small PC10 ultracapacitor products are used in solid-state drives for enterprise level 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 back up power to allow work in process to be saved in the event of a power interruption.
However, with information technology spending lagging here in the U.S. and abroad, Maxwell sales for this SSD application have been substantially lower this year than in 2011. Additionally, PC-10s also provide power for wireless transmitters that allow smart utility meters to transmit data and to be read remotely.
A very promising new ultracapacitor product, an engine start module that access an onboard jumpstart power source for hard to start diesel trucks is in field trials with more than 10 large truck fleets. Field experience has been uniformly positive, and some other fleet operators are taking additional units for extended testing in cold weather conditions of this winter. This module is the same size and shape as the Group 31 batteries that heavy trucks carry. So it’s an easy to install, drop-in replacement for one of the trucks four existing batteries.
It addresses a growing problem with trucks’ starting failures due to cold weather and overworked batteries as a result of anti-idling laws in more than 30 states. With more than 2 million heavy trucks currently on the road in North America, we are focusing initially on the aftermarket, while working with truck OEMs to get our engine start module qualified and designed in as standard equipment for new trucks.
Engine starting is also an issue for delivery vans, military vehicles, boats, backup power generators and construction and mining equipment. So we are in the process of developing variance of this initial product to address what we think can become a much broader global engine starting market.
In a few minutes, I’ll discuss recent developments with our other two product lines and comment on future prospects. But first, our CFO, Kevin Royal, will provide additional detail on our third quarter financial results. Kevin?
Kevin S. Royal
Thank you, David. I’m going to spend a few minutes providing some additional information on our third quarter 2012 financial results. Our revenues were $43.9 million for the third quarter of 2012, up 7% from Q2 2012. The higher revenues in the third quarter were driven by a 19% sequential increase in ultracapacitor product sales, which generated $28.8 million in revenues for the quarter.
Higher demand in the third quarter for ultracapacitor products for hybrid public transit vehicles in Asia was the driver of this quarter’s growth. As we forecasted in the last quarter’s earnings call, we continued to experience slowing demand for our ultracapacitor products in Europe during the third quarter. And given the uncertain state of the European economy, we still believe this slowing may continue for the foreseeable future.
Revenues from our microelectronics business which tend to variable from quarter-to-quarter were down $1.5 million this quarter, while our high voltage product revenues were essentially flat compared to Q2 2012. Non-GAAP gross profit was $18.6 million in the third quarter of 2012 compared to $17.3 million in Q2 of 2012. As a percentage of revenue, non-GAAP gross profit was 42% of revenues for both the second and third quarters of 2012. Overtime, we’ve been able to exceed our target level of gross profit margin of 40% through continuing cost efficiencies for our ultracapacitor and high voltage products.
Total non-GAAP operating expenses for Q3 2012 were $12 million, down from $12.9 million for Q2 2012. Although we had anticipated non-GAAP operating expenses to be approximately $14.5 million for the third quarter, we were adversely accrual for the 2012 cash incentive bonus program during Q3 in the amount of $971,000 and a non-accured bonus in Q3 based on the expectation that the revenue and earnings target established under the program will not be achieved.
In addition, expense control measures in light of the slowing of revenues have allowed us to decrease our overall spending. Given the revised revenue guidance we have provided for the fourth quarter, we are revising our estimate for fourth quarter non-GAAP operating expenses from our prior guidance of $15.5 million to an expectation of approximately $14 million. We had previously anticipated an increased level of spending based on the previously forecasted revenue growth in Q4, but now plan to further control cost to be in line with our current expectations for revenue in the fourth quarter.
Our cost control measures during Q3 as well as other reductions and expense proved for significant growth to our bottom line results compared to the second quarter. Non-GAAP net income was $6 million or $0.21 per diluted share for the third quarter compared with non-GAAP net income of $3.5 million or $0.12 per diluted share for the second quarter of 2012. These non-GAAP measures exclude stock-based compensation expense and amortization of intangible assets. Our earnings before interest, taxes, depreciation and amortization or EBITDA was $7.8 million in Q3 compared to $5.2 million in Q2.
Now I’d like to turn to the balance sheet. We ended the quarter with cash of $20.1 million, which represents a decrease in cash of $2.2 million from Q2 2012. We reported positive cash flows from operations of $2.4 million for the quarter, an improvement from cash used in operations of $2.2 million in the second quarter. Operating cash flows for the quarter reflected net income of $5.4 million which includes non-cash charges of $2.5 million. This source of cash was offset by an increase in accounts receivable of $4.5 million as well as capital spending of $4.8 million. The increase in accounts receivable is primarily attributable to the increase in sales as well as shipment linearity where a significant portion of the quarter sales were shipped in the third month of the quarter.
Capital investments during the quarter primarily related to capacity expansion as we begin making progress payments, our management equipment to be placed in our Peoria, Arizona facility as well as investments in capacity expansion in other manufacturing locations. As of September 30, 2012 we have $9.9 million in debt obligations outstanding. This debt balance consists of an equipment term loan of $4.5 million and debt of $5.4 million held by our Swiss subsidiary, which has favorable borrowing terms.
In addition, we continue to have access to a $15 million line of credit and the full balance of this line is currently undrawn and available to us. Although we do not have any plans to draw on this line to meet our cash requirements in the near term, the availability of the line provides for additional cash resources to supplement our operating cash flow in the future, if necessary.
Now, I’ll turn it back over to David to discuss other areas of the business.
David J. Schramm
Very good, Kevin. Thank you. I’ve already covered ultracapacitors, we’ll turn our attention to Maxwell’s other products. Our Swiss subsidiary develops and markets high-voltage capacitor products that are used in electric utility grids and other applications involving the transmission and measurement of high voltage electrical energy.
We sell 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 and the other BRIC countries are major consumers of our products. And we also service the maintenance and replacement markets in Europe and North America.
As reported last year, we won a contract to supply capacitive divider products for the multi-billion dollar renovation and modernization of Russia’s utility grid. And we are now delivering a new product that functions reliability in minus 60 degree temperature conditions in Siberia. High-voltage products remain on track to generate high single digit growth over the $42 million in sales recorded in 2011.
Our high margin microelectronics product includes radiation hardened components and single-board computers that we supply to satellite and spacecraft OEMs in the U.S. and Europe. Microelectronic sales were higher than normal through the first half of the year contributing to higher than usual gross margin for the company as a whole.
With government spending under pressure in the U.S. and Europe, the space market is bound to experience budget pressure going forward. Fortunately space programs typically spend several years, so the effect on an expected slowdown in these primary markets is likely to be felt gradually as previously funded programs continue forward completion over the next several years.
Ultracapacitors sales accounted for more than 65% of Maxwell’s total sales in the third quarter. The sales growth having slow this year, we have sufficient capacity to meet anticipated demand as we move into the coming year, even with the slow growth we are currently experiencing, we're going to need additional production capacity in the not too distant future. So we are moving forward the plans to outbid a second electrode production facility in the Phoenix, Arizona area.
We will timely expenses for this new facility to match the need for that capacity. When we bring it online it will double electrode production capacity and the 123,000 square feet building we have leased there provides ample growth space for further capacity expansion, and other engineering and manufacturing activities going forward..
For the immediate future, weak global economic conditions, and uncertainty about the direction of government policies, and related funding are making it difficult to forecast with any reasonable degree of confidence. As demonstrated by our financial performance in the third quarter we are striving to further improve the efficiency, and carefully controlled expenses to optimize bottom line performance in this very challenging environment.
Wind energy and hybrid transit bus applications continued to be the primary drivers of ultracapacitors sales. And we believe the long-term growth prospects in wind, bus and several other key verticals remain solid. However, as mentioned earlier some of our bus customers are having application problems with their hybrid drive systems, which are delaying previously forecasted ultracapacitor deliveries. Our engineering team is working with these customers to solve those problems, so that normal production can resume as soon as possible.
In the near term, low robust related shipments and soft demand elsewhere have reduced anticipated ultracapacitor sales. As a result, we expect fourth quarter revenue to be similar to that recorded in the first quarter this year and seasonable softness primarily related to the Chinese New Year observance is likely to push revenue sequentially lower yet in the first quarter of 2013.
Despite this tempered near-term growth outlook, we are confident that our current cash and credit resources are sufficient to enable the company to continue to advance our core technologies, develop and launch new products, and expand production capacity as needed. Although, along with many other companies, we are facing near-term headwinds, Maxwell is a world leader in energy storage products and technology with a bright future and will continue to grow through 2013 and beyond. So we’re going to keep our heads down, our spirits up, and continue executing on the tremendous opportunities our people and our products are creating.
I thank you for your attention this afternoon and will now open it up for questions.
Question-and-Answer Session
Operator
(Operator Instructions) We'll take our first question from Phil Shen with Roth Capital Markets. Please go ahead.
Philip Shen – Roth Capital Partners LLC
Hi, everyone. Thank you for taking my questions.
David J. Schramm
Hi, Phil.
Philip Shen – Roth Capital Partners LLC
Hey, let's explore the hybrid bus application issues a bit. How long have these issues been in place? And what kind of timeline do you see ahead to getting back on track to sales and growth?
David J. Schramm
It's a good question, Phil. What we’ve got, we've got to a new configuration on racking, and what it is as the 48-volt modules were installed in the bus are putting into a rack, which put some up relatively high in the back of the bus, and what we found is there some harmonics in the bus that transmits through this racking. And what we’re working on with the customer is how do we take and temper that vibrations will doesn’t impact the cabling that goes to our modules, and then again what do we do to work with them to make a better racking system. So it’s an application issue, it’s a new configuration, this has no impact on the prior businesses that we’ve had for the last several years. And I’m very confident that through find that element (inaudible) tools engineering are doing that we can solve this mechanical issue.
Philip Shen – Roth Capital Partners LLC.
Good, and once you saw that do you expect there is to be retrofits to private solutions?
David J. Schramm
No, this is the new configuration, I think we’ve got a pretty well contained right now, this is not a huge problem if you look that for bus, but the customers were dealing with now intend to make their buses available globally, therefore they have to compete with global players and there are specifications and their requirements for reliability and quality at a global level. So this is a problem that I tell you a few years ago, we may not of even experienced or not been totally aware of it, but now it’s one that we will get solved and again we’re going to help these customer go global.
Philip Shen – Roth Capital Partners LLC.
And, so one last question on this if I may, so in terms of the timing, did you expect the result by the end of Q1 during Q1, what kind of timing you’re looking at there?
David J. Schramm
I think we’re going to have the engineering resolution done by Q1, and I think we’re going to see the bus module business improve towards the end of Q2.
Philip Shen – Roth Capital Partners LLC.
Okay, good. And then on the engine start module business, can you give us an update on how sales of ESN products have been going especially with Pana-Pacific? I recall you guys have a one year agreement in place and were through much of that year. Can you help us understand if you're hitting the sales goals that you had in mind with them and that guys had originally put in place.
David J. Schramm
Where we are at right now is we’ve got 10 fleets that are looking at our products. We’ve had outstanding feedback from all 10 fleets. They're going to go through the winter testing and frankly what we're going to do is we are going to be adding resources to do a lot more direct selling. One thing that we need to do is, it’s our technology, we have divested interest to sell the technology. So Pana has been a great partner as a distributor, but we're going to put a more robust effort into how do we take this direct to the marketplace ourselves.
Philip Shen – Roth Capital Partners LLC
Great. Thanks very much.
David J. Schramm
(inaudible)
Operator
Thank you. We’ll take our next question from Zach Larkin with Stephens. Please go ahead.
Chris Godby – Stephens Inc.
Good afternoon. This is Chris Godby in for Zach, thanks for taking my call.
David J. Schramm
Hi, Chris.
Chris Godby – Stephens Inc.
Can you give us some additional color on SG&A and your expectations going forward given you’re ongoing cost reduction initiatives.
Kevin S. Royal
Sure. So the SG&A, I should say the total operating expense for the quarter was right at $12 million. But had we not had the reversal of the previously accrued bonus expense, we would have been right around $30 million for the quarter. So we're forecasting between $13.5 million and $14 million for the quarter. That could be little bit conservative, but for forecasting purposes that’s what we are using at this point.
Chris Godby – Stephens Inc.
Okay. And that’s excluding stock comp. Is that correct?
Kevin S. Royal
That’s right. That’s on a non-GAAP basis and stock comp will be in the $600,000 to $700,000 range for Q4.
Chris Godby – Stephens Inc.
Okay. And then outside of the roughly $900,000 or so that was regarding the bonus accrual reversal, can you give us a little color as to what that was there?
Kevin S. Royal
The bonus reversal?
Chris Godby – Stephens Inc.
May be I miss heard you, but I guess it was about $900,000 in an accrual reversal, did I hear that correctly?
Kevin S. Royal
That’s right. So we have accrued in the first and second quarter bonus as we were tracking to the targets for pay out of the bonus for 2012 with a revised guidance and based on objectives in order to pay out the bonus, we – as we are saying we determine that we were not likely to meet those targets for the full year. So we reversed the bonus that had been accrued in Q1 and Q2 and that was done in the third quarter once we realize the achievement of those objectives was unlikely.
Chris Godby – Stephens Inc.
Okay. And then, one last question, looking forward, how much of your guidance is related in your outlook I guess I should say is related to China and kind of policy shifts there, routine change versus other geographies?
David J. Schramm
I think the best way to answer that, Chris is, as we look over the world we are very fortunate that we have such a large footprint in China, because the European business that we had is really, really suffering at this point. We’ve never had big problems in North America. So we are looking forward to a regime change in China. So there is some definition as to what is the policy going forward. And I have said in my comments it’s very difficult at this time to say what is really going to happen. The only guidance that we have talking to local sources and our customers is we believe we will continue to grow through 2013, but it’s really hard to put specificities to when that's going to happen.
Chris Godby – Stephens Inc.
Okay, thank you very much.
Operator
Thank you. We'll go next to Ben Schuman with Pacific Crest Securities. Please go ahead.
Ben Schuman – Pacific Crest Securities
Hi, thanks guys. I think almost a dozen hybrid bus customers in China, how many is the problem with this new configuration affecting? Is this specific to a single customer or integration partner?
David J. Schramm
It is specific to one, and it's one that’s got a new racking configuration, and again this is a new product, and it's a new market and as you know Ben, we are really trailblazers when it comes to doing the new applications and this has got a new rack system, and the specification that we have on the module, we do a (inaudible) on the module. This new rack system has got vibration that exceeds the specification we have. So we're working with the customer in two fronts, one is how do we curtail the vibration in the racking system, and secondly our engineers are working on how do we improve the amount of vibration we can handle that improve the specification of our product.
Ben Schuman – Pacific Crest Securities
Okay. And I think if you look at what your previous guidance implied for Q4, somewhere around $15 million lower with the new guidance. And then is that entire $15 million coming from this one bus customer in China or may be five of that from Europe, 10 from the bus customer, how can I think about those incremental drivers?
David J. Schramm
It's not entirely the one bus customer in China, that was a major driver of this, but the European softness and then there was the North America softness that there was not anticipated.
Ben Schuman – Pacific Crest Securities
Okay. And then the seasonality that you guided to in Q1, can we assume that there's essentially no hybrid bus revenue there because of the engineering issue, but also the subsidy uncertainty?
David J. Schramm
Well, the first part I can answer, and that is we will have that problem fixed and we've got a lot more than one bus customers, so we still see module growth throughout the first two or three quarters of 2013. The first quarter is always soft because of the Chinese New Year. The subsidy issue, I got to tell you we’ve had boots on the ground, I was over there myself, and there is just a lot of consternation about where that’s going to end up.
The two things we heard is that if the federal government if you will lowers their subsidy, they’re going to increase the number of cities they’d like to have buses in the sense from the sources we have is that the local governments will try to fill in a lot of that gap or what they used to get from the federal. But again that’s just total speculation at this time; we don’t have a concrete, we just why it so difficult to forecast how many buses we’re going to be in the first two quarters.
Ben Schuman – Pacific Crest Securities
Okay, great. And then just one more from me, in terms of the Arizona ramp, how much flexibility do you guys have there with timing, are there long lead times on some of that equipment or can you guys be pretty flexible in terms of reacting to some of this end market volatility.
David J. Schramm
But that’s the equipment we’ve had in the pipeline for over a year, and lot of that we’re committed to, what we aren’t committed to is, when we flip the switch, add the labor and putting all the infrastructure in the building. And frankly as we sit here it’s a six to nine month window to complete that facility and the flip to switch, and I think we’ve got that much visibility coming forward, we’re not had 100% capacity, yeah, we have some things we can do here in San Diego to add to our electrode capacity, and when we start seeing that ramp up happen again as the six to nine month window of lead time that we can turn Phoenix on, so I’m very comfortable that we’ve got a plan as we can be ready before the volume hits.
Ben Schuman – Pacific Crest Securities
Great, thank guys.
Operator
(Operator Instructions) We’ll move next to Alex Potter with Piper Jaffray. Please go ahead.
Alex Potter – Piper Jaffray
Hi guys.
David J. Schramm
Hi, Alex.
Alex Potter – Piper Jaffray
I guess if we can talk last question here on the China hybrid bus opportunity. I guess if you look at on a trailing 12 month basis for this quarter over the last couple of quarters add them up, what’s the total percentage revenue that's China hybrid bus that's potentially at risk or is uncertain and it's difficult to predict at this point for you guys?
Kevin S. Royal
Yes, so we can run China hybrid bus at around 40% revenues. And while we do see the policy gap which David referred to in the first part of the year, we've also got customers that talking and forecasting orders, and so we feel good about that. We certainly will be down as we always as the result of the Chinese New Year holiday, but the bus revenues will still be in 30% to 40% range for Q1.
Alex Potter – Piper Jaffray
Okay, okay. So they are putting those orders in even though they might not get any subsidy benefit or just some of the subsidy benefit bleed over if they put the orders in in this year and then actually take delivery next year.
Kevin S. Royal
But we talk to customers, and we talk to other sources, it's not unusual in China for a program to expire, but for the subsidies to continue well they’re waiting for the new program or the new policy to be issued. So I think everyone that in the food chain and hybrid bus market expects to continue albeit at a potentially reduced subsidy rate and so expectations aren’t as quite as high as the would be.
Alex Potter – Piper Jaffray
Okay. That makes sense. I have two house keeping questions here. Number one is, can you give a break down in terms of revenue contribution in the quarter between high-voltage capacitors and microelectronics just those two segments?
David J. Schramm
Yeah I can pull that.
Kevin S. Royal
To answer that first part of that question 65% of the revenue was ultracapacitors.
David J. Schramm
Yeah, so in the quarter the ultracapacitor revenues were $29 million, ME was $3.5 million and the $11.5 for the high-voltage capacitors.
Alex Potter – Piper Jaffray
Okay very good. And then tax rates expectation going forward for the rest of this year and in the next?
David J. Schramm
So tax rates difficult, because we only paid tax on our Swiss income, and so we preferred it to give an absolute dollar amount, so I would forecast about $550,000 in Q4, and then next year in the $600,000 to $700,000 range on quarterly basis.
Alex Potter – Piper Jaffray
Okay that's very helpful. And then last question here you had mentioned about gross margin, and how are you pretty consistently tracking inline with our head of your 40% target is, if you could just share a little about what’s driving net and the extent to which it can be sustained.
David J. Schramm
So we continue to make improvements in the cost structure of the ultracapacitor product, so that as the ultracapacitor products become a larger portion of our revenues, we have been able to basically hope study at low-40s, and we expect that cost reduction to continue into next year. We’ve also had great performance of the high-voltage business group or product group rather, and they have done a nice job of holding price, and at the same time reducing the inputs or the materials cost and so those have come through, we would expect going into 2013 to not necessarily maintain the 42% that maybe have a slip of up to a 1%. So probably going into 2013, we are looking at a gross profit around 41%.
David J. Schramm
Alex, let me just add a little bit to that. And that is, as this market grows and it's growing as a market itself, we're going to see elasticity in the market. So as we get bigger and bigger orders, what we're comprehending is that we have to have the elasticity and the price, which means we got to put a more focused effort on that cost of goods sold to make sure that we can maintain as close to 40% as we can.
Just for reference here, it's only been in the last few months that we have cleared the hurdle of making our 5 million cell and live them any calls ago that I told you we clear the hurdles to make 1 million. So the market is accepting the technology and again what we need now is the global economy to come and help us a little bit, so that we can further penetrate the market.
Alex Potter – Piper Jaffray
Okay, very good. Thanks a lot guys.
Operator
Thank you. We’ll move next to Jed Dorsheimer with Canaccord. Please go ahead.
Jed Dorsheimer – Canaccord Genuity
All right, thanks. Most have been asked and answered. I guess just looking at the penetration in Lamborghini, I mean clearly very low volume, high-priced automobile. But I was wondering if you could – you might be able to provide more contacts whether or not this is just a one off win or in your discussions with the VW group, they are using this as more of a testing or proving ground on the technology that you expect to then eventually migrate throughout VW?
David J. Schramm
Yeah, Jed that's a great question, and I hope the scenario you just laid out there is the one that happens. But what I can tell you right now is this program was specific with Lamborghini. This is the 700 horsepower vehicle that as some unique requirements and they are putting in a very substantial set of ultracaps on this system. So what we take out of this, as we’ve got the continental win that with PSA, and we’ve been reading what’s happening with the European [automobile] industry and it’s not real rosy at this point. So, we look at this is the second win, that’s a second verification that the technology works. We are still talking with every OEM, and every Tier 1 about the applicability of this system, and again this was just another way to say yes, it does work is technology.
Jed Dorsheimer – Canaccord Genuity
So, when you are having these discussions with these other Tier 1s who haven’t adopt, what’s the most common pushback, is it simply price, is it pricing reliability, is it combination, what is keeping the – what is it just timing?
David J. Schramm
No, I think at this point, it’s still a relatively new technology relatively other technologies in a world. And the fact we’ve got 500,000 PSA cars on the road has really helped the argument on the reliability. The initial cost is higher than at the use the lead-acid battery, and overtime now with 500,000 cars we’re going to get some data as to what is the value proposition and how much longer to the batteries last by using the ultracap with the battery pack as PSA does. So it’s going to happen, when I take a look at the design specification, and what we can do to help of battery last longer and down size the battery, it’s a matter of it happening, that said, it is a cost issue at this point, so we’ve got some work to do to take more cost out of the system towards this gets to be an easy decision for the car maker.
Jed Dorsheimer – Canaccord Genuity
And the PSA model that’s the combination of ultracap, and lead-acids, it for redundancy or they relying purely on the ultracap, I’m just trying to get to cost of the system if lead-acid is contributing from a redundancy perspective to the higher cost or if it simply plotting the electrode cost reduction?
David J. Schramm
What it is Jed is, you got a power requirement in the car, which basically is to start the engine, you got an energy requirement in the car, which is to run the radio of the lights, and all the other functions. The ultracap is a very good power device, batteries are very good energy device, so by putting the two ultracaps that we have in the system, they’re put into series relative to starting so that we can improve the current that goes to the starter not have to take that if you will out of the battery, and then recharge the ultracap.
So what we've done is basically segregated towards the battery takes care of the electrical loads for the car, the ultracaps will then focus on just restarting the engine. So you're taking the deep draw of the battery itself. Now the ultracap cannot provide enough energy to handle normal loads in the car. So they have to work together, battery and ultracap.
Jed Dorsheimer – Canaccord Genuity
So last question and then I'll jump off on this topic, but so then is the real value proposition where in autos that have a two battery configuration or system because of the electrical loads that you really trying to replace that second or somewhat of redundant batteries?
David J. Schramm
Yes, that's exactly right. And so there we’ve got some cost we can deal with. The cost that we have to get a better handle on with the car makers and with the Tier 1, is how long is that battery last for one you have in there, how much more do you get out of the space, because now instead of having two batteries you can have smaller ultracaps and the smaller battery you got space issues, you got mass issues, and then you got the reliability issues. The success we’ve had with the continental system at PSA, right now the feedback I get were in single-digit defective parts for million on the PSA system. So we are very pleased with the performance that we are seeing out of this usual start stop.
Jed Dorsheimer – Canaccord Genuity
And the vendor using a battery or have you replaced batteries all together in the avenger.
David J. Schramm
No. The battery is still in that vehicle also. You still need the battery for energy and we are there as a part – as a power device.
Jed Dorsheimer – Canaccord Genuity
Okay, thank you.
David J. Schramm
Thank you. I think we got time for one more question.
Operator
Great. We’ll take our last question from Steven Marascia from Capitol Securities. Please go ahead.
Steven F. Marascia – Capitol Securities Management Inc.
Good afternoon gentlemen. Quick question obviously because of the euro, (inaudible) financing arm is trying to get some additional capital. Does that said directly or indirectly affect you guys (inaudible) form.
David J. Schramm
I think what affects us more is just the number of car sales. We got a story here that when we started the program with continental, we were specific to two different models was the taking to the market place. Today we’re 21 so we’ve grown from 2 models to 21 models, that’s the good news. The bad news is their volume has going down significantly. I just saw an article the other day where in 2005 the French auto industry I believe made 3.5 million cars and last year they made 2 million. So we’re got a broader base but it’s a smaller volume so that the number that were doing is still respectable number and we do see 2013 as a growth markets the automotive.
Steven F. Marascia – Capitol Securities Management Inc.
Thank you very much.
David J. Schramm
Surely. Thank you everybody for your time this afternoon and we’re to make sure that we keep our sprits up, our heads down and execution talking again in Q4. Thank you.
Operator
This concludes today’s conference. You may now disconnect your lines and have a wonderful day.
