Dynex Disappointed with Recent Financial Results

August 31, 2015 by Jeff Shepard

Dynex Power Inc. announced its financial results for the second quarter and six months ended June 30th, 2015, including revenue in the second quarter of 2015 was $1.8 million or 17.8% higher than in the corresponding quarter of last year. The increase was a result of very strong power assembly revenue in the quarter partially offset by weak IGBT and bipolar revenues. For the year to date revenue was $88,000 or 1% lower than in the first half of 2014. Power assembly revenue was slightly higher than in 2014, with modest reductions recorded in bipolar and IGBT revenues.

The gross margin of 6.3% in the second quarter of 2015 was lower than the 14.1% reported in the corresponding quarter of last year. The gross margin was below the range targeted by management and reflected weaker revenue than had been expected and additional manufacturing costs due to unexpected technical issues. For the year to date, the gross margin was 3.6% compared to 11.3% in the corresponding period last year. This is significantly below the range being targeted by management and again reflects the lower level of revenue being reported compared to management's expectations and additional manufacturing costs due to unexpected technical issues as well as the cost of redundancies in the first quarter.

Dr. Paul Taylor, President and Chief Executive Officer commented, "Although our revenues for the second quarter were above those reported in the second quarter of last year and for the year to date are comparable with those reported last year, it is still below the level management expected to reach. This, together with technical issues which resulted in lower margins, meant that we recorded a loss for the second quarter. Although power assembly and bipolar revenues are in line with management expectations, competition in these markets remains strong and that, together with the on-going effects of the contract cancellation reported at the end of 2014, means that margins are under pressure. Revenue from IGBT products is dependent on design ins and customer qualification of the new products and this is taking longer than expected. "

Bob Lockwood, Chief Financial Officer commented, "Second quarter results are disappointing, albeit they show a significant reduction in the loss reported in the first quarter. However, the general market demand for our products remains subdued reflecting a tight market and stiff competition in all sectors. Our order book remains weak and a return to profitability in the second half looks unlikely".

Li Donglin, the Chairman of Dynex said, "Like all shareholders, CSR Times Electric is disappointed with the continuing losses at Dynex and we will be working hard with Dynex to ensure we return the business to profitability as soon as possible. In the meantime, the business needs to invest in new products and technologies and we are pleased with the progress being made in these areas."

Sales and marketing and administration expenses represented 11.7% of revenue in the second quarter and 12.4% of revenue for the year to date compared to 12.3% and 11.4% in the corresponding 2014 periods. These costs have been on a steadily reducing percentage for a number of years. The small increases in year to date figure reflected the poor level of revenue reported in the first quarter. Dynex continues to expect these ratios to improve in the longer term. However, in the near term, one of the Company's main objectives is to recover lost revenue and as a consequence there is no intention to reduce sales and marketing expenses.

There was no net cost to R&D expenditure in the quarter with net expenditure for the year to date being approximately 0.5% of revenue compared to 3.8% and 3.5% in the corresponding quarter and year to date of the preceding year. However, gross expenditure on research and development (which is calculated before taking account of the contribution received from CSR Times Electric and the grants from Government bodies) is higher than last year both in the current quarter and the year to date and the reduction in net expenditure reflects the Group's success in attracting grants and funding for this work together with additional tax relief available to the Group for research and development which, following changes in the way this relief operates, is now accounted for as a reduction in R&D costs rather than as part of the tax charge. Gross expenditure is currently running at 17.9% of revenue in the year to date.

As a consequence of these changes, Dynex reported a loss before tax in the quarter of $520,000, compared to a loss before tax of $387,000 in the corresponding quarter of last year. For the year to date, a loss before tax of $3.9 million was recorded compared to a loss before tax of $1.0 million in the corresponding period of last year. The decline in year to date performance reflects the weaker than expected revenue reported in Q1 and additional manufacturing costs due to unexpected technical issues.

At the end of the second quarter, the Company's order book stood at $14.5 million, approximately 5% lower than at the end of the first quarter. The order book is weaker than management is used to seeing and reflects a challenging marketplace and a move towards customers ordering later with shorter delivery times. Revenue is expected to be slightly lower in the second half of the year compared to the first half and the Company expects to record losses in the second half of the year, albeit lower than those reported in the first half.