Hollysys Automation Technologies Reports Unaudited Financial Results for the First Quarter Ended September 30, 2016

BEIJING, Nov 15, 2016 /PRNewswire/ --

First Quarter of Fiscal Year 2017 Financial Highlights

- Non-GAAP net income attributable to Hollysys was $22.7 million, a decrease of 16.7% compared to the comparable prior year period.
- Total revenues were $103.5 million, a decrease of 17.2% compared to the comparable prior year period.
- Non-GAAP gross margin was at 29.6%, compared to 39.3% for the comparable prior year period.
- Non-GAAP diluted EPS were at $0.37, a decrease of 17.8% compared to the comparable prior year period.
- Net cash provided by operating activities was $17.8 million for the current quarter.
- DSO of 207 days, compared to 179 days for the comparable prior year period.
- Inventory turnover days of 48 days, compared to 42 days for the comparable prior year period.

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 2017 first quarter ended on Sep 30, 2016 (see attached tables). The management of Hollysys, stated:

Due to continued uncertainties of macroeconomic, the pace of industrial automation is still slow. However, we are actively taking actions to dampen the impact of challenging markets, the new contract turns to be positive. We got several significant contracts from power and chemical sectors. For example, in power, we signed the contract to provide products for Fujian Luoyuanwan 2X1000MW power units and Guohua Ningdong 2X660MW power units. In chemical, we will provide DCS and SIS for Xinjiang East Hope Company, as well as DCS and Batch for ASIA CUANON in its Waterborne Coatings Project. In after sale, we signed some upgrading contracts for power units like Guohua Jinjie 2X600MW power units. Additionally, we signed DCS contracts to #5 and #6 units of Tianwan Nuclear Station, as well as #3 and #4 units of Fangchenggang Nuclear Station. In abroad, we signed a contract with Indonesia Qingshan to provide products for their 2X350MW Coal-fire power units; we also got a contract from Lanco to provide PLC to them.

For factory automation, we integrated internal resources to do customized turkey solutions. In this quarter, we signed a contract with Haier to help them improve the level of automation and intelligence of their Tianjin-based factory which focuses on wash machine. Our goal is to make each project into a demonstration project to create value for the customers.

In high-speed railway, as it is the first year for the 13th five-year-plan, the infrastructure of new planned railway just starts. In short term, there will be fluctuation both on order and revenue. However, from long run, we are confident that the high-speed railway's performance will as good as before since China is continuously investing a certain scale on supporting high-speed railway sector for the next even ten years, plus the increasing in after sell and the expending of rail products such as track circuit, we believe to achieve the yearly target and maintain steady revenue contribution in railway. For subway business, we will continue to actively expend domestic market and look for opportunities to keep steady growth.

In the mechanical and electrical installation services, although Concord and Bond are facing some difficulties because of the local political and economics' uncertainties in South East Asia and Middle East area, they are still hard working to develop businesses. As one of the strategies to expand overseas market, we will ensure a healthy development of Concord and Bond and take use of their advantages such as good customer relations and sales channels to find more international opportunities.

The Quarter Ended September 30, 2016 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:

Operational Results Analysis for the quarter ended September 30, 2016

Comparing to the first quarter of the prior fiscal year, the total revenues for the three months ended September 30, 2016 decreased from $125.1 million to $103.5 million, representing a decrease of 17.2%. Broken down by the revenue types, integrated contracts revenue decreased by 16.2% to $93.1 million, products sales revenue decreased by 27.3% to $8.3 million, and services revenue decreased by 17.9% to $2.1 million. In July 2016, the company's interests in Hollycon were diluted from 51.0% to 30.0% and the Company lost the control of Hollycon. As a result, Hollycon's financials would not be included in the Company's consolidated financials from July 2016 on. If Hollycon's revenue was excluded from the comparable figure for the first quarter of the prior fiscal year, the products sales revenue for the three months ended September 30, 2016 should be increased by 45.7%.

The Company's total revenues can also be presented in segments as shown in the following chart:

Overall gross margin excluding non-cash amortization of acquired intangibles (non-GAAP gross margin) was 29.6% for the three months ended September 30, 2016, as compared to 39.3% for the same period of the prior year. The non-GAAP gross margin for integrated contracts, product sales, and services rendered were 25.0%, 70.5% and 69.7% for the three months ended September 30, 2016, as compared to 37.3%, 52.6% and 65.5% for the same period of the prior year respectively. The gross margin fluctuation was mainly due to the different revenue mix with different margin. The GAAP overall gross margin which includes non-cash amortization of acquired intangibles was 29.5% for the three months ended September 30, 2016, as compared to 39.1% for the same period of the prior year. The GAAP gross margin for integrated contracts, product sales, and service rendered were 24.9%, 70.5% and 69.7% for the three months ended September 30, 2016, as compared to 37.1%, 52.6% and 65.5% for the same period of the prior year respectively.

Selling expenses were $5.6 million for the three months ended September, 2016, representing a decrease of $1.0 million or 16.2% compared to $6.6 million for the same quarter of the prior year. Presented as a percentage of total revenues, selling expenses were 5.4% and 5.3% for the three months ended September 30, 2016, and 2015, respectively.

General and administrative expenses, excluding non-cash share-based compensation expenses (non-GAAP G&A expenses), were $9.7 million for the quarter ended September 30, 2016, representing an increase of $0.8 million, or 9.0%, as compared to $8.9 million for the same period of the prior year. Presented as a percentage of total revenues, non-GAAP G&A expenses were 9.3% and 7.1% for quarters ended September 30, 2016 and 2015 respectively. The GAAP G&A expenses which include the non-cash share-based compensation expenses were $10.6 million and $9.8 million for the three months ended September 30, 2016 and 2015, respectively.

Research and development expenses were $7.7 million for the respective quarters ended September 30, 2016, and 2015, respectively. Presented as a percentage of total revenues, R&D expenses were 7.4% and 6.2% for the quarter ended September 30, 2016 and 2015, respectively.

The VAT refunds and government subsidies were $9.6 million for three months ended September 30, 2016, as compared to $5.1 million for the same period in the prior year, representing a $4.5 million or 88.7% increase which was primarily due to increase of the VAT refunds of $2.2 million and the government subsidies of $2.3 million.

Gains on dilution and divestment of the Company's interests in HollyCon was $6.1 million for three months ended September 30, 2016. During the period from June to July 2016, Hollycon received cash injections of $30.9 million from two outside shareholders, and the Company decided not to make the additional cash investment proportionally. As a result, the company's interests in Hollycon were diluted from 51.0% to 30.6%. Then, the Company sold 0.6% interests of Hollycon to one of Hollycon's shareholders in a cash consideration of $464 thousand, and the Company's interests in Hollycon were further decreased to 30.0%. The Company recorded a gain of $6.1 million for the series of the transactions. As the Company lost the control of Hollycon, Hollycon's financials would not be included in the Company's consolidated financials from July 2016 on.

The income tax expenses and the effective tax rate were $3.0 million and 12.2% for the three months ended September 30, 2016, as compared to a $4.7 million and 12.9% for comparable prior year period.

The non-GAAP net income attributable to Hollysys, which excludes non-cash share-based compensation expenses, amortization of acquired intangibles, acquisition-related consideration fair value adjustments and convertible bond related fair value adjustments was $22.7 million or $0.37 per diluted share based on 61.1 million shares outstanding for the three months ended September 30, 2016. This represents a 16.7% decrease over the $27.3 million or $0.45 per share based on 60.6 million shares outstanding reported in the comparable prior year period. On a GAAP basis, net income attributable to Hollysys was $21.7 million or $0.36 per diluted share representing a decrease of 28.3% over the $30.3 million or $0.50 per diluted share reported in the comparable prior year period.

Contracts and Backlog Highlights

Hollysys achieved $99.2 million new contracts for the three months ended September 30, 2016. And the backlog as of September 30, 2016 was $525.2 million. The detailed breakdown of the new contracts and backlog by segments is shown below:

Cash Flow Highlights

For the three months ended September 30, 2016, the total net cash outflow was $16.8 million. The net cash provided by operating activities was $17.8 million. The net cash used in investing activities was $34.0 million, mainly consisted of $20.4 million time deposits placed with banks, and $16.7 million outflow as a result of that Hollycon would not be included in the consolidated financials from July 2016 on. The net cash provided by financing activities was $0.4 million.

Balance Sheet Highlights

The total amount of cash and cash equivalents and time deposits with original maturities over three months were $260.9 million, $271.5 million, and $234.9 million as of September 30, 2016, June 30, 2016 and September 30, 2015, respectively. As of September 30, 2016, the company held $212.3 million in cash and cash equivalents and $48.6 million in time deposits with original maturities over three months.

For the three months ended September 30, 2016, DSO was 207 days, as compared to 179 days for the comparable prior year period and 147 days for the last quarter; and inventory turnover was 48 days, as compared to 42 days for the comparable prior year period and 37 days for the last quarter.

Outlook for FY 2017

The management concluded, "Given our strong backlog currently on-hand and sales pipeline envisioned so far, we reiterate our guidance for fiscal year 2017 with revenue in the range of $565 million to $600 million and non-GAAP net income in the range of $130 million to $140 million."

Conference Call

The Company will host a conference call at 8:00 p.m. U.S. Eastern Time on November 14, 2016 / 9:00 a.m. Beijing Time on November 15, 2016, to discuss the financial results for the fiscal year 2017 first quarter ended September 30, 2016 and business outlook.

To participate, please call the following numbers ten minutes before the scheduled start of the call. The conference call identification number is 5083727.

In addition, a recording of the conference call will be accessible within 48 hours via Hollysys' website at: http://ir.hollysys.com/ or http://hollysys.investorroom.com

About Hollysys Automation Technologies, Ltd. (NASDAQ: HOLI)

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 3,600 employees with nationwide presence in over 60 cities in China, with subsidiaries and offices in Singapore, Malaysia, Dubai, India, and serves over 6,000 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 (Supervisory 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.

For further information, please contact:

Hollysys Automation Technologies, Ltd.
www.hollysys.com
+8610-58981386
investors@hollysys.com

Non-GAAP Measures

In evaluating our results, the non-GAAP measures of "Non-GAAP general and administrative expenses", "Non-GAAP net income attributable to Hollysys Automation Technologies Ltd. stockholders", "Non-GAAP basic earnings per share", and "Non-GAAP diluted earnings per share" serve as additional indicators of our operating performance and not as a replacement for other measures in accordance with U.S. GAAP. We believe these non-GAAP measures are useful to investors, as they exclude the non-cash share-based compensation expenses, which is calculated based on the number of shares or options granted and the fair value as of the grant date, amortization of acquired intangible assets, fair value adjustments of acquisition-related consideration, and fair value adjustments of a bifurcated derivative. 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 the Company, it has been a common practice for investors 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:

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