Dynex Announces a Difficult Q1 which Management Believes Marks a Turning

May 21, 2013 by Jeff Shepard

Dynex Power Inc. announced that for the first quarter ended March 31st, 2013 revenue was $6.9 million, 35% lower than the corresponding quarter of last year. The decrease was the result of reductions in sales of power modules and die, as well as bipolar products and power assemblies. The company experienced a significant increase in service revenues and revenues from the sale of CSR Times Electric products, partially offset by a reduction in integrated circuit revenue, but these are smaller product group sales and hence less significant to the overall reduction in revenue. The year-over-year decline in first quarter revenue was forecast by management in its news release dated April 26, 2013, and reflected delays to high speed rail projects in China and a weak economic environment in Europe.

A small gross loss was recorded in the quarter compared to a positive gross margin of 25%, or $2.6 million, in the corresponding quarter of last year. The reduction was a direct result of the year-over-year decline in revenue, in addition to a decision by management to maintain engineering and production capacity in anticipation of a near-term recovery in demand. Other income, expenses and costs were reduced by $445,000 to $1.2 million; however, because of the reduced revenue in the period, this represented 16.8% of revenue in the 2013 period compared with 15.2% in the corresponding quarter of last year. As revenue returns to normalized levels over the balance of the year, this ratio is expected to improve.

As a consequence of these changes, the company recorded a loss before tax of $1.4 million, compared to a profit before tax of $1.0 million in the corresponding quarter of last year. A $301,000 recovery of UK tax resulted in a net loss for the period of $1.1 million or $0.01 per share, compared with a net profit of $759,000, or $0.01 per share, in the corresponding period of last year.

At the end of the first quarter, Dynex's order book stood at $25.0 million, approximately 23% higher than at the end of last year. The increase reflects strong order intake during the first quarter, which reinforces management confidence that, after a long period of difficult conditions, growth in demand is returning to the market. As a consequence of the significant growth in orders, management is confident that revenue in the second quarter of 2013 will show significant growth over the first quarter and should remain strong for the rest of the year. For the year as a whole, management expects revenue in 2013 to exceed the 2012 level, notwithstanding the weak performance in the first quarter.

Dr. Paul Taylor, President and Chief Executive Officer commented, "We previously indicated that we expected a significant reduction in revenue in the first quarter of 2013. This reduction reflected a temporary slowdown in orders from Chinese railways, the impact of overstocking at our parent company in China and continuing delays to the start of major projects by our European customers. When informing shareholders about the expected decline in revenue in the first quarter, we indicated that we expected this to be the turning point and that revenue would recover in the second and subsequent quarters. We continue to hold that view. In the first quarter of 2013, we took $11.7 million in new orders from our customers which has strengthened our view that revenue will recover in the coming quarters. We believe that despite the very disappointing results we are reporting in the first quarter, revenue for 2013 will exceed that reported in 2012."

Bob Lockwood, Chief Financial Officer commented, "The decline in revenue combined with the high fixed cost nature of our business resulted in a small loss at the gross profit level. Whilst this was disappointing, it was not unexpected given the cost structure of the business. We could, of course, have taken action to reduce operating costs, but any such cost cutting would negatively impact on our ability to capitalize on demand when the market recovers. Given our confidence in the recovery now taking place and our commitment to customers in challenging times as well as good times, we opted to maintain our existing operating structure. The strong order intake during the first quarter vindicates that decision. We have kept tight control on overhead costs and been cautious on capital expenditure to conserve cash. Ironically, having had our lowest quarterly revenue for several years, the next quarter could see one of our highest ever quarterly revenues."

Li Donglin, the Chairman of Dynex said, "The first quarter of 2013 has been very difficult for Dynex given the current, global economic difficulties. However, we are beginning to see a recovery in our markets, especially the Chinese railway and urban mass transit sectors. We, therefore, do see this quarter as a turning point and expect to be able to report much better results to our shareholders, in the second quarter and thereafter."