Dynex Q3 Disappoints but Strong Backlog Gives Confidence of Early Recovery

November 24, 2013 by Jeff Shepard

Dynex Power Inc. announced its financial results for the third quarter and nine months ended September 30th, 2013, including third quarter revenue of $9.5 million was 2% higher than the corresponding quarter of last year. The increase was the result of significantly higher sales of power assemblies and services, which was partially offset by a reduction in sales of power modules and die and bipolar products. As a consequence of the weak sales in the first quarter, year to date revenue of $26.4 million was 11% lower than in the same nine-month period last year. The reduction reflected a significant decline in sales of power modules and die and a smaller decrease in bipolar sales, partially offset by increased sales of power assemblies, integrated circuits and services.

Dr. Paul Taylor, President and Chief Executive Officer commented, "Dynex's financial results for the third quarter failed to deliver an acceptable level of gross profit resulting in a net loss. The disappointing performance was due to the combination of an unfavourable product mix with the balance toward assemblies and away from power semiconductors, coupled with market pressures to reduce assembly prices. This, together with the re-scheduling of orders from one of our major customers and delays in demand from the rail market in China, resulted in the loss now being reported. Customer re-scheduling issues have always been an unpredictable aspect of our industry sector, but they have been particularly troubling in the post-2008 market. At the same time, however, our order book remains strong and this gives management confidence in the medium and longer term success of the business. We have seen a continuing increase in the confidence level of our customers."

The gross margin of 1.2% in the third quarter of 2013 was significantly lower than the 15.7% reported in the corresponding quarter of last year. This reduction in margin reflected a product mix with a disproportionate contribution from power assemblies, which typically carry lower margins, and the very competitive market being faced at the current time. For the year to date, the gross margin was 6.8% compared to 19.1% in the corresponding period last year. The year-over-year reduction reflects the decline in revenue and recent unfavourable product mix.

Other income, expenses and costs represented 14.6% of revenue in the third quarter of 2013 and 14.7% for the year to date compared with 13.9% and 14.3% in the corresponding periods of last year. As a result, Dynex generated a loss before tax in the quarter of $1.3 million and a net loss of $840,000 compared to a profit before tax of $166,000 and a net profit of $109,000 in the corresponding quarter of last year. For the year to date, a loss before tax of $2.1 million was recorded, with a net loss of $1.4 million. This compares with a profit before tax of $1.4 million and a net profit of $1.0 million in the corresponding period of last year. The Company had a loss per share in the third quarter of 2013 of $0.01 and for the year to date a loss per share of $0.02, compared with earnings per share of $0.01 in the first nine months of last year.

At the end of the third quarter, the Company's order book stood at $30.5 million, approximately 36% higher than at the end of the second quarter, and approximately 50% higher than it was at the end of last year. The strength of the order book gives management confidence in forecasting a better revenue figure for the fourth quarter and growth in revenue in 2014. Accordingly, management believes the business should return to profitability in 2014, though gross and net profit margins are expected to be below normalized levels.

Bob Lockwood, Chief Financial Officer commented, "The strength of our order book and our confidence in the future of the business means that we have to continue building in preparation for the expected upturn in demand and pricing. This preparation for growth means our fixed costs have increased and impacted current results. We remain cautious and careful as far as possible but we have to be prepared for the improving times that we remain confident lie ahead."

Li Donglin, the Chairman of Dynex said, "The third quarter results, and indeed the year to date results, are disappointing. Whilst we do not underestimate the difficulties currently being faced, we remain confident in the medium to long-term dynamics of the market and in management's ability to capitalize on an opportunity for sustained business growth."