Diguang International Announces Third Quarter 2010 Results

SHENZHEN, China, Nov. 16, 2010 /PRNewswire-Asia-FirstCall/ -- Diguang International Development Co., Ltd. (OTC Bulletin Board: DGNG) ("Diguang" or the "Company"), a developer and producer of CCFL and LED backlights for a wide range of TFT-LCD products, today announced its financial results for the third quarter of fiscal year 2010 ended September 30, 2010.

Third Quarter 2010 Highlights

• Net revenue increased 41% year-over-year to $19.1 million
• Gross profit  increased 61%  year-over-year to $1.5 million with gross margin improving 1  percentage points to 8%
• The Company reported  net loss of $0.9 million, or $(0.04) per diluted share, compared to a net loss of $1.2 million, or $(0.06) per diluted share, in the third quarter of fiscal year 2009
• Adjusted net loss (non-GAAP) was $0.3 million, or $(0.01) per share, compared to an adjusted net loss of $0.4 million, or ($0.02) per diluted share, in the third quarter of fiscal year 2009

"Our Wuhan factory's low gross margin significantly impacted the Company's gross margin level for all products in the third quarter," said Mr. Song Yi, the President and Chief Executive Officer of Diguang.  "The Wuhan factory only manufactures OEM products for a Taiwanese customer, and operates on a very low gross margin in order to reduce the occupation of the Company's working capital.  From January to September 2010, the total revenue at the Wuhan facility was US$14.5 million but the gross margin was only 6.2%.  And, in the third quarter of 2010, the total revenue was US$5.1 million, which accounted for 27% of the total sales volume in the third quarter, but the gross margin was only 4%. However, the Company is now focusing more on sales of LED BLU for large-size backlights (18' to 32' inch), which has a higher gross margin (approximately 20%). As Diguang Technology's revenue for LED BLU products is US$3.8 million, with a gross margin of 22%, and the Wuhan factory's revenue is US$0.8 million, with a gross margin of 10%, the Company anticipates that the growth of this new business line at Diguang Technology will provide profit growth in the future."

Highlights for the Three Months Ended September 30, 2010

Net revenue was $19.1 million for the three months ended Sept 30, 2010, an increase of 41.0% from $13.5 million for the comparable period in 2009. This was due to the improved market demand for the Company's traditional and newly-developed backlight products along with continued economic recovery from the global financial crisis which adversely affected sales in the previous year. Sales of LED products, including LED backlights, LED liquid crystal modules (LCM), LED general lights and liquid crystal displays (LCD), amounted to $13.5 million, or 71% of total sales revenue, while sales of CCFL products, including CCFL backlights and CCFL LCMs were $5.6 million, or 29%of total sales revenue. Sales of LED backlights grew 57% to $10.6 million, while sales of CCFL backlights increased 93% to $5.6 million in the third quarter of 2010. Sales of LCMs totaled $2.0 million in the third quarter of 2010, representing a decrease of $1.2 million, or 38%, compared with $3.2 million for the same period in 2009. Sales of Liquid Crystal Displays (LCD) were $0.6 million in the third quarter of 2010, representing an increase of $0.5 million, compared with $0.1 million for the same period in 2009.  LCD products were launched in 2009, and the Company began the mass production of LCDs in the second quarter of 2010.  Sales continued to grow in the third quarter of 2010, and the Company expects further sales growth in the near future.  Sales of LED general lighting products declined due to aggressive competition. However, management is still confident about the prospect of the LED general lighting segment in the next few years. 

Gross profit for the third quarter of 2010 totaled $1.5 million, or 8.0% of net revenue, compared to $0.9 million, or 7% of net revenue, for the same period of 2009.  The overall gross margin for the third quarter of 2010 was 8%, representing an increase of 1%, compared with 7% for the same period of 2009.  The overall increase is mainly attributable to the Company's efforts on adjusting product mix and enhanced control on raw materials.  The Company developed new products to replace products with very low or negative gross margins.  Moreover, the Company introduced incentives to enhance the efficiency of production and reduce manufacturing costs.  However, the increase in gross margin was to some extent offset by a loss on the disposal of obsolete raw materials. Operating expenses totaled approximately $2.1 million for the third quarter of 2010, down 5% from $2.2 million in the third quarter of 2009. Total operating expenses in the third quarter of 2010 amounted to 11% of net revenue, compared to 16.3% in the third quarter of 2009.  Selling expenses rose 10%, primarily due to increased commissions and transportation expenses associated with increased sales.  The net research and development costs were $391,000 for the third quarter of 2010, representing a decrease of $70,000, or 15%, compared with $461,000 for the third quarter of 2009. The decrease of net research and development costs was attributable to the Company's reduced research and development activities when new products were put into production. Research and development expenses accounted for 2% and 3% of total sales revenue in the third quarters of 2010 and 2009, respectively. General and administrative expenses were $0.9 million in the third quarter of 2010, compared to $1.0 million in the same period in 2009.

Interest expense was $0.2 million for the third quarter of 2010, up from $0.1 million in the same period of 2009 as the Company utilized additional bank loans to support its working capital needs.

The Company's net loss attributable to common shares during the three months ended Sept 30, 2010 was $0.9 million, improved from a net loss of $1.2 million attributable to common shares for the same period in 2009. Loss per basic and diluted share were ($0.04) for the third quarter of 2010, improved from losses per basic and diluted share of ($0.06) for the same period of 2009.

Adjusted net loss (non-GAAP), which excludes non-cash items (including non-controlling interest, depreciation, inventory provision, loss on disposal of assets and share-based compensation), for the third quarter of 2010 would have been $305,874, or $（0.01) per basic and diluted share. Adjusted net loss (non-GAAP) for the third quarter of 2009 would have been $0.4 million, or ($0.02) per basic and diluted share.  Please see the reconciliation table below.

Nine Months Results Ended Sept 30, 2010

Total revenue for the nine months of 2010 was $48.6 million, up 64.2% from the nine months of 2009. Gross profit for the nine months of 2010 was $4.8 million, a significant increase of 140% from gross profit of $2.0 million in the comparable period a year ago. Gross margin was 10.0% for the nine months of 2010, up from 6.6% in the same period of 2009. The Company recorded an operating loss of $0.8 million, compared with an operating loss of $4.4 million in the nine months of 2009. Net loss attributable to common shares for the nine months of 2010 was $1.3 million, compared with a loss of $4.3 million in the nine months of 2009. Basic and diluted loss per share were ($0.06) for the nines months of 2010 compared to ($0.19) in the nine months of 2009. Excluding non-cash items, net loss for the first nine months of 2010 on a non-GAAP basis would have been $0.2 million, or $(0.01) per share, compared to non-GAAP net loss of $2.4 million, or ($0.11) per share a year ago. Please see the reconciliation table above.

Financial Condition

As of Sept 30, 2010, Diguang had $5.0 million in cash and cash equivalents and $3.0 million in restricted cash. Working capital increased to approximately $4.2 million compared to $2.8 million at the end of 2009. As of Sept 30, 2010, the Company had $7.7 million in short-term bank loans and $8.6 million in long-term bank loans. Shareholders' equity was $19.2 million as of Sept 30, 2010. Cash used in operating activities was $3.3 million, improved from $8.9 million for the nine months ended Sept 30, 2009, primarily due to reduced net loss and increased funds provided by suppliers.

Business Outlook

Diguang continues to anticipate strong growth driven by increased demand for its LED TVs and monitors and LED backlights. In the third quarter the Company started large-scale production of its 32" and 42" ultra-thin LED backlights and TVs, and also large-scale production of 19" LED TV and 24" LED backlights for TCL, one of the largest TV manufacturers in China. 

Diguang's new production facility in Shenzhen, which is designed to manufacture large-size LED backlights and LED TVs with ten production lines and a total annual production capacity of 1.0 million units, is proceeding on schedule. The Company expects to complete construction in the fourth quarter of 2010 and will begin production in the first quarter of 2011.

The Company's product mix has continuously been changing in recent years given the trend that the proportion of LED sales is increasing while the proportion of CCFL product sales is decreasing.  For the third quarter of 2010, sales of LED products, including LED backlights, LED LCMs, LED general lights and LCDs, amounted to $13.1 million, representing 69% of total sales revenue, whereas sales of CCFL products, including CCFL backlights and CCFL LCMs, amounted to $5.7 million, representing 30% of total sales revenue.  In comparison to CCFL, LED products have a superior contrast ratio, color gamut, localized dimming and lower power consumption, meeting the environmental protection standards of the market.  Moreover, small to mid-size LED backlights have the advantage of being lower in cost than the same size CCFL product.  In recent years, the Company has invested in LED research and development and adjusted its product mix by gradually increasing the proportion of LEDs products manufactured.  The Company expects that, overall, LED product shipments will continue to grow and experience sustainable growth, as the transition from CCFL to LED backlights becomes more compelling due to LEDs' higher performance levels.

Use of Non-GAAP Financial Measures

The Company's financial results prepared based on U.S. GAAP for the three and nine months ended September 30, 2010 and 2009 include non-cash expenses such as depreciation, share based compensation, bad debt allowance, inventory provisions, loss on the disposal of assets, research and development costs offset by funding advanced and deferred tax assets. To supplement the Company's condensed consolidated financial statements presented in accordance with U.S. GAAP, the Company has provided non-GAAP financial measures excluding the impact of these items in this release, including adjusted net income and adjusted diluted earnings per share. The Company's management believes that, in conjunction with U.S. GAAP financial measures, these non-GAAP financial measures (i) improve transparency for investors, (ii) assist investors in their assessment of the Company's operating performance, (iii) facilitate comparison to the Company's historical performance, (iv) ensure that these measures are fully understood in light of how the Company evaluates its operating results, (v) properly define the metrics used and confirm their calculation. The additional adjusted information is not meant to be considered in isolation or as a substitute for items appearing on the Company's financial statements prepared in accordance with U.S GAAP. Rather, the non-GAAP measures should be used as supplement to U.S. GAAP results to assist the reader in better understanding the operational performance of the Company. The adjusted financial information that the Company provides may also differ from the adjusted information provided by other companies, which limits their usefulness as comparative measures. Our management believes that these adjusted financial measures are useful to investors because they exclude non-cash expenses that management excludes when it internally evaluates the performance of the Company's business and makes operating decisions, including internal budgeting, and performance measurement, as these measures provide a consistent method of comparison to historical periods. As a result, the provision of these adjusted measures allows investors to evaluate the Company's performance using the same methodology and information as that used by the Company's management. Moreover, management believes that these adjusted measures reflect the essential operating activities of the Company. Adjusted measures are subject to inherent limitations because they do not include all of the expenses included under the U.S. GAAP and because they involve the exercise of judgment of which charges are excluded from the adjusted financial measure. However, the Company's management compensates for these limitations by providing the relevant disclosure of the items excluded. A reconciliation of each adjusted measures to the nearest U.S. GAAP financial measures appears in the table above.

About Diguang International Development Co., Ltd.

Through its subsidiaries, Diguang develops and produces CCFL and LED backlights for a wide range of TFT-LCD products. A backlight is the typical light source of a liquid crystal display (LCD), with applications spanning televisions, computer monitors, cellular phones, digital cameras, DVDs and other home appliances. Leveraging its LED expertise, the Company also creates and markets energy-saving technologies and solutions for rapidly growing markets such as LED backlight monitors and LED general lighting. For more information, please go to Diguang's website at http://www.diguangintl.com.

Safe Harbor Statements

This press release contains forward-looking statements made under the "safe harbor" provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward looking statements are based upon the current plans, estimates and projections of Diguang's management and are subject to risks and uncertainties, which could cause actual results to differ from the forward looking statements. Therefore, you should not place undue reliance on these forward-looking statements. The following factors, among others, could cause actual results to differ from those set forth in the forward-looking statements: business conditions in China, weather and natural disasters, changing interpretations of generally accepted accounting principles; outcomes of government reviews; inquiries and investigations and related litigation; continued compliance with government regulations; legislation or regulatory environments, requirements or changes adversely affecting the businesses in which Diguang is engaged; fluctuations in customer demand; management of rapid growth; intensity of competition from other providers of backlights; timing approval and market acceptance of new product introductions; general economic conditions; geopolitical events and regulatory changes, as well as other relevant risks, including but not limited to risks outlined in the Company's periodic filings with the U.S. Securities and Exchange Commission. Diguang does not assume any obligation to update the information contained in this press release.