Hollysys Automation Technologies Reports Unaudited Financial Results for Fiscal Year 2014 Third Quarter Ended on March 31, 2014

BEIJING, May 14, 2014 /PRNewswire-FirstCall/ -- Hollysys Automation Technologies, Ltd. (NASDAQ: HOLI) ("Hollysys" or the "Company"), a leading provider of automation and control technologies and applications in China, today announced its unaudited financial results for the fiscal year 2014 third quarter ended on March 31, 2014 (see attached tables).

Q3 Financial Highlights

• Quarterly revenue of $95.8 million, representing an increase of 58.8%, compared to $60.4 million year over year, and a decrease of 37.5% compared to $153.4 million quarter over quarter.
• Non-GAAP gross margin at 36.2%, representing a decrease of 7.6% compared to 43.8% year over year, and a 3.9% increase compared to 32.3% quarter over quarter.
• Non-GAAP net income attributable to Hollysys of $15.1 million, representing a 29.1% increase compared to $11.7 million year over year, and a 41.7% decrease compared to $25.9 million quarter over quarter.
• Non-GAAP Diluted EPS at $0.26 reported for the quarter, as compared to $0.21 year over year, and $0.45 quarter over quarter.
• Backlog of $602.9 million as of March 31, 2014, representing a 61.2% increase compared to $374.0 million year over year, and 19.8% increase compared to $503.3 million quarter over quarter.
• Quarterly DSO of 248 days, as compared to 250 days year over year, and 156 days quarter over quarter.
• Inventory turnover days of 45 days for the current quarter compared to 78 days year over year, and 27 days quarter over quarter.
• The total amount of cash and cash equivalents and time deposits with original maturities over three months were $150.5 million as of the current quarter end.

The management of Hollysys stated: "We are very pleased to report a solid financial and operational result for the third quarter of this fiscal year, here I would like to discuss some key events during this quarter:

"During this quarter, we continuously insisted on executing our strategies to vertically penetrate in the high-end industrial automation market while improving our market share in mid to low end markets. We achieved several high-end projects wins in chemical, thermal and enlarge our market share in food beverage and new energy industries. We were also focusing on building strong after-sale department and set long term goals on improving after-sale services. Our solution in reducing waste material emission and environment protection proved to be successful. The past few months have been very exciting for Hollysys. A series of strict testing and on-site engineering application indicates that our new generation K series DCS products meet the requirements for large and complicated projects including power, chemical, etc. Our products will significantly improve our market competitive advantages and effectiveness of project as well as improve our client recognition. For the past few months, our HOLLiAS-N DCS product has been successfully operating in the Yangjiang Nuclear Power Plant, proving that our quality assurance system and products are completely qualified for the high standard of nuclear usage. With China accelerates its nuclear power plants construction in the future, we believe we will benefit more financially as well as in reputation in the long run. Going forward, we believe that we will increase our overall market share in the industrial automation, nurture and quickly take commanding height in our new businesses leveraging our advanced technologies, experienced professionals, profound industry expertise, and customization and innovation capability.

"In rail transportation, during this quarter, we feel excited about the significant high-speed rail ATP contract wins for high-speed trains in 200-250km/h and 300-350km/h, total valued at RMB 687 million (approximately USD 110 million). Besides, our strong R&D capability, extraordinary project management and high-quality and reliable products had ensured our wins on a few recently operated high-speed rail lines, including Xiamen-Shenzhen line, Xi'an-Baoji line, Chongqing-Lichuan line and Wuhan-Xianning line. Those high-speed rail lines are all equipped with our high-speed rail signaling system. We will continue to deliver quality works and work closely with railway authorities in the future. With China's increased rail construction and equipment procurement budget for this year, and exciting prospect envisioned, Hollysys, as a well-recognized rail signaling system provider with strong R&D capability, solid execution and reliable products, will continue to penetrate China's vast railway construction market and achieve significant results.

"For the overseas industrial automation and rail transportation expansion, we are sending qualified and experienced engineers from China to overseas, and recruiting local engineers to expand our overseas team. With our proprietary technology and products, industry expertise and strong competitive advantages, together with our expanded local channels through Bond and Concord, we will continue to make exciting achievements in the international market in both industrial and rail transportation fields, and creating value for our shareholders."

The Third Quarter Ended March 31 2014 Unaudited Financial Results Summary

To facilitate a clear understanding of Hollysys' operational results, a summary of unaudited non-GAAP financial results is shown as below:

In USD thousands, except share numbers and EPS

Operational Results Analysis for the quarter ended March 31, 2014

For the quarter ended March 31, 2014, total revenue increased by 58.8% to $95.8 million from $60.4 million compared to the same period from the prior year. Of the total revenue, revenue from integrated contracts increased by 59.6% to $90.1million, as compared to $56.4 million for the same period of the prior year; revenue from products sales increased by 47.1% to $5.7 million, as compared to $3.9 million for the same period of the prior year. The Company's total revenue broken down by segment is shown as below:

As a percentage of total revenues, overall gross margin excluding non-cash amortization of acquired intangibles was 36.2% for the three months ended March 31, 2014, as compared to 43.8% for the same period of the prior year. The gross margin for integrated contracts and product sales excluding non-cash amortization of acquired intangibles were 34.8% and 57.5% for the three months ended March 31, 2014, as compared to 42.5% and 62.1% for the same period of the prior year respectively. The gross margin fluctuation was mainly due to the different revenue mix with different margin. Including non-cash amortization of acquired intangibles, recorded on a GAAP basis, overall gross margin was 35.2% for the three months ended March 31, 2014, as compared to 43.8% for the same period of the prior year. The gross margin for integrated contracts and product sales including non-cash amortization of acquired intangibles, were 33.8% and 57.5% for the three months ended March 31, 2014, as compared to 42.6% and 62.1% for the same period of the prior year respectively.

For the quarter ended March 31, 2014, selling expenses were $6.0 million, as compared to $5.3 million for the same quarter of the prior year, representing an increase of $0.7 million or 11.7% year over year. As a percentage of total revenues, selling expenses were 6.2% and 8.9% for the three months ended March 31, 2014, and 2013, respectively.

General and administrative expenses, excluding non-cash share-based compensation expense, were $7.4 million for the quarter ended March 31, 2014, representing an increase of $1.0 million or 15.6%, compared to $6.4 million for the same period of the prior year. The increase was mainly due to an increase of $1.2 million contributed by the newly acquired company Bond. As a percentage of total revenues, G&A expenses were 7.7% and 10.5% for the quarter ended March 31^st, 2014 and 2013, respectively. Including the non-cash share-based compensation expense, recorded on a GAAP basis, G&A expenses were $7.8 million and $6.9 million for the quarter ended March 31^st, 2014 and 2013, respectively.

Research and development expenses were $7.9 million for the quarter ended March 31, 2014, as compared to $7.4 million for the same quarter of the prior year, representing a year over year increase of $0.5 million, or 6.7%. As a percentage of total revenues, R&D expenses were 8.2% and 12.2% for the quarter ended March 31, 2014 and 2013, respectively.

The VAT refunds and government subsidies amounted to $5.2 million for the quarter ended March 31, 2014, as compared to $3.6 million for the same period in the prior year.  

The income tax expenses and effective tax rate were $2.9 million and 21.2% for the quarter ended March 31, 2014. Excluding the impact of non-GAAP adjustments on the Income before income taxes, the effective tax rate was 15.4% for the current quarter. For the same quarter in the prior year, the income tax credit was 1.2 million due to a refund Beijing Hollysys received as a result of being certified as a key software enterprise for the calendar year 2011 & 2012.

For the quarter ended March 31, 2014, the non-GAAP net income attributable to Hollysys excluding non-cash stock compensation expenses, amortization of acquired intangibles and acquisition-related consideration fair value adjustments was $15.1 million or $0.26 per diluted share based on 58.9 million shares outstanding. This represents an increase of $3.4 million, or 29.1%, over the $11.7 million or $0.21 per share based on 56.5 million shares outstanding, reported in the prior year same period. On a GAAP basis, net income attributable to Hollysys was $10.0 million or $0.17 per diluted share representing a decrease of $1.2 million or 10.5%, over the $11.2 million or $0.20 per diluted share reported in the prior year period.  

Backlog Highlights

Hollysys' backlog as of March 31, 2014 was $602.9 million, representing an increase of 19.8% compared to $505.3 million as of December 31, 2013, and an increase of 61.2% compared to $374.0 million as of March 31, 2013. The detail segment breakdown is shown as below:

Cash Flow Highlights

The net cash provided by operating activities was $3.1 million for the quarter ended March 31, 2014; including investing and financing activities, the total net cash outflows for this quarter was $10.9 million. During the quarter, there was $2.6 million net cash inflow from the proceeds of short-term bank loans and $1.6 million net cash inflow from the proceeds of long-term bank loans.  There was a net cash outflow of $12.0 million used in time deposits placed with bank and a net cash outflow of $2.7 million as the result of repayment of long-term bank loans.

Balance Sheet Highlights

The total amount of cash and cash equivalents and time deposits with original maturities over three months were $150.5 million, $150.1 million, and $131.1 million as of March 31 2014, December 31, 2013 and June 30 2013, respectively. Of the total $150.5 million as of December 31, 2013, cash and cash equivalents were $124.2 million, and time deposits with original maturities over three months were $26.3 million.

For the quarter ended March 31, 2014, Days Sales Outstanding ("DSO") was 248 days, as compared to 250 days year over year, and 156 days quarter over quarter. Inventory turnover days of 45 days for the current quarter compared to 78 days year over year, and 27 days quarter over quarter

Outlook for FY 2014

Hollysys management concluded, "In view of our strong backlog and future exciting growth momentum envisioned, we are reiterating our fiscal year 2014 revenue guidance of $500 million to $530 million and non-GAAP net income guidance of $84 million to $86 million. Going into the future, Hollysys will continue to leverage on its core growth pillar foundations of its proprietary technology, profound industry expertise and solution capabilities to increase its market share in respective high-growth end markets. Besides, Hollysys will continue to set up strategic alliance with industry leading organizations to penetrate into new markets and accelerate its growth pace, to create long-term value for our shareholders."

Conference Call

Management will discuss the current status of the Company's operations during a conference call at 9:00 a.m. Beijing Time on May 15, 2014 / 9:00 p.m. U.S. Eastern Time on May 14, 2014. Interested parties may participate in the call by dialing the following numbers approximately 10 minutes before the call is scheduled to begin and ask to be connected to the Hollysys Automation Technologies conference call.  The conference call identification number is 2533152.

4001-200-539 (Mainland China)
+1-855-298-3404 (United States)
800-905-927 (Hong Kong)
+852-5808-3202 (Hong Kong)
0800-015-9725 (United Kingdom)
+44(0)20 3078 7622 (United Kingdom)
800-616-3222 (Singapore)
+65 6823 2299 (Singapore)

In addition, a recorded replay of the conference call will be accessible within 24 hours via Hollysys' website at: http://ir.hollysys.com .

About Hollysys Automation Technologies, Ltd.

Hollysys Automation Technologies is a leading provider of automation and control technologies and applications in China that enables its diversified industry and utility customers to improve operating safety, reliability, and efficiency. Founded in 1993, Hollysys has approximately 3,800 employees with nationwide presence in over 60 cities in China, with subsidiaries and offices in Singapore, Malaysia, Dubai, India, and serves over 5,000 customers more than 20,000 projects in the industrial, railway, subway & nuclear industries in China, South-East Asia, and the Middle East. Its proprietary technologies are applied in its industrial automation solution suite including DCS (Distributed Control System), PLC (Programmable Logic Controller), RMIS (Real-time Management Information System), HAMS (HolliAS Asset Management System), OTS (Operator Training System), HolliAS BATCH (Batch Application Package), HolliAS APC Suite (Advanced Process Control Package), SIS (Safety Instrumentation System), high-speed railway signaling system of TCC (Train Control Center), ATP (Automatic Train Protection), Subway Supervisory and Control platform, SCADA (Surveillance Control and Data Acquisition), nuclear power plant automation and control system and other products.

SAFE HARBOUR:

This release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.  All statements, other than statements of historical fact included herein are "forward-looking statements," including statements regarding: the ability of the Company to achieve its commercial objectives; the business strategy, plans and objectives of the Company and its subsidiaries; and any other statements of non-historical information. These forward-looking statements are often identified by the use of forward-looking terminology such as "believes," "expects" or similar expressions, involve known and unknown risks and uncertainties.  Such forward-looking statements, based upon the current beliefs and expectations of Hollysys' management, are subject to risks and uncertainties, which could cause actual results to differ from the forward looking statements.  Although the Company believes that the expectations reflected in these forward-looking statements are reasonable, they do involve assumptions, risks and uncertainties, and these expectations may prove to be incorrect. Investors should not place undue reliance on these forward-looking statements, which speak only as of the date of this press release. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of a variety of factors, including those discussed in the Company's reports that are filed with the Securities and Exchange Commission and available on its website (http://www.sec.gov). All forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by these factors. Other than as required under the securities laws, the Company does not assume a duty to update these forward-looking statements.

Contact Information:

Hollysys Automation Technologies, Ltd.
www.hollysys.com

Investor Relations
+86-10-58981386
[email protected]

Non-GAAP Measures

In evaluating our results, the non-GAAP measures of "Non-GAAP general and administrative expenses (hereafter "Non-GAAP G&A expenses"), "Non-GAAP cost of integrated contracts", "Non-GAAP other income, net", "Non-GAAP interest expenses", "Non-GAAP net income attributable to Hollysys" and "Non-GAAP earnings per share" serve as additional indicators of our operating performance and not as a replacement for other measures in accordance with US GAAP. We believe these non-GAAP measures are useful to investors, as they exclude the 1) share-based compensation expenses, 2) amortization of acquired intangibles and 3) acquisition-related consideration adjustments. They will not result in any cash inflows or outflows. We believe that using non-GAAP measures help our shareholders to have a better understanding of our operating results and growth prospects. In addition, given the business nature of Hollysys, it has been a common practice for investors and analysts to use such non-GAAP measures to evaluate the Company. 

The following table provides a reconciliation of U.S. GAAP measures to the non-GAAP measures for the periods indicated:

SOURCE Hollysys Automation Technologies, Ltd.