Hollysys Automation Technologies Reports Unaudited Financial Results for the First Half Year and the Second Quarter Ended December 31, 2017

First Half Year of Fiscal Year 2018 Financial Highlights

• Non-GAAP net income attributable to Hollysys was $58.2 million, an increase of 72.4% compared to the comparable prior year period.
• Total revenues were $272.9 million, an increase of 34.7% compared to the comparable prior year period.
• Non-GAAP gross margin was at 38.2%, compared to 29.2% for the comparable prior year period.
• Non-GAAP diluted EPS were at $0.96, an increase of 71.4% compared to the comparable prior year period.
• Net cash provided by operating activities was $72.1 million for the current period.
• DSO of 166 days, compared to 203 days for the comparable prior year period.
• Inventory turnover days of 52 days, compared to 48 days for the comparable prior year period.

Second Quarter of Fiscal Year 2018 Financial Highlights

• Non-GAAP net income attributable to Hollysys was $36.3 million, an increase of 229.4% compared to the comparable prior year period.
• Total revenues were $157.4 million, an increase of 58.8% compared to the comparable prior year period.
• Non-GAAP gross margin was at 39.4%, compared to 28.7% for the comparable prior year period.
• Non-GAAP diluted EPS were at $0.60, an increase of 233.3% compared to the comparable prior year period.
• Net cash provided by operating activities was $36.1 million for the current quarter.
• DSO of 147 days, compared to 208 days for the comparable prior year period.
• Inventory turnover days of 48 days, compared to 52 days for the comparable prior year period.

BEIJING, Feb. 9, 2018 /PRNewswire/ -- 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 second quarter and the first half of fiscal year 2018 ended December 31, 2017 (see attached tables). The management of Hollysys, stated:

Industrial automation remained on the track of recovery, with revenue recording a 25.9% year-over-year growth, at $57.6 million. Management team has adhered to the low-to-high end market expansion strategy in industries such as chemical and petro-chemical, etc. while building comprehensive service capacity to address the substantial aftersales potential from the entire customer base and seeking new opportunities from existing end-users. On the chemical industry, we signed a contract with Jinan Taixing Fine Chemicals Company to provide system for their polyphosphazene project, a contract with Jiangsu Jingshen Salt & Chemical Industry Co., Ltd to provide Manufacturing Execution System for information integration of their salt packaging and distribution center. On the petro-chemical industry, we signed a contract with China Petroleum & Chemical Corporation to provide DCS and instruments for their liquid chemical wharf project. We entered into a strategic cooperation agreement with CEET, a wholly-owned subsidiary of China National Offshore Oil Corporation to collectively push forward the localization of core equipment on offshore oil platform. In the new energy and food-beverage area, we signed a contract to provide system for Chia Tai Group's recycling of waste project and a contract with Lihua Starch Co., Ltd for their sorbitol project.

Our demonstration-for-further-application strategy in factory automation has brought us more market recognition. We earned government level recognition as we were listed as one of the 23 intelligent manufacturing system solution providers recommended by the Ministry of Industry and Information Technology. We continued to focus on several key industries and cooperate with renowned players. On white-goods, our cooperation with Haier went further as we signed contracts on their Tianjin-based and Qingdao-based washing machine factories. On food beverage area, we are dedicated to provide innovative solution to address safety and efficiency issues. Upon the successful delivery of the first project, our relationship with Hai Di Lao went deeper, with regular communication mechanism set. We expect broader cooperation with them and more clients in the future.

The performance of high speed rail was prominent in this quarter, with revenue recording a 199.0% year-over-year growth at $69.6 million. One of the contributors is the significant increase in aftersales order, including ATP maintenance and replacement contracts. Signing 80 sets of automatic train protection (ATP) to high speed trains in 300-350km/h also contributed greatly to the revenue because of the tightening delivery schedule to secure the Spring Festival Travel. Breakthrough has been made in our new product as we signed our first tract circuit contract for Chengdu-Ya'an regular speed railway line. In subway, we signed SCADA contract for Chengdu Subway Line 5. We will adhere to the expansion strategy to win SCADA contracts in more cities and work closely with subway authorities to promote our SCADA system and subway signaling technologies in future. Management team will adhere to the diversity strategy to create revenue stream from more new products and services, and to maintain a stable and healthy growth into the future.

In oversea business, we signed several EPC contracts with domestic companies, including a contract with Shandong Ludian Co. Ltd to provide DCS for 2X350MW power station in Indonesia. Mechanical and electrical installation services recorded a 0.4% revenue growth at $30.2 million. We continued to address operation, management and risk control issue to ensure that projects can be delivered in good quality, while closely following economic and political circumstances in South East Asia and Middle East. Concord and Bond remained active in seeking business opportunities and we believe that their strategic value as customer resources and international sales channels remains significant.

First Half Year and the Second Quarter Ended December 31, 2017 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 Second Quarter Ended December 31, 2017

Comparing to the second quarter of the prior fiscal year, the total revenues for the three months ended December 31, 2017 increased from $99.1 million to $157.4 million, representing an increase of 58.8%. Broken down by the revenue types, services revenue increased by 274.3% to $13.3 million, products sales revenue increased by 60.4% to $9.7 million, and integrated contracts revenue increased by 50.1% to $134.4 million.

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 39.4% for the three months ended December 31, 2017, as compared to 28.7% for the same period of the prior year. The non-GAAP gross margin for integrated contracts, product sales, and services rendered were 34.5%, 67.4% and 68.6% for the three months ended December 31, 2017, as compared to 24.3%, 72.1% and 64.9% 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 39.3% for the three months ended December 31, 2017, as compared to 28.6% for the same period of the prior year. The GAAP gross margin for integrated contracts, product sales, and service rendered were 34.4%, 67.4% and 68.6% for the three months ended December 31, 2017, as compared to 24.2%, 72.1% and 64.9% for the same period of the prior year respectively.

Selling expenses were $7.7 million for the three months ended December 31, 2017, representing an increase of $1.4 million or 22.7% compared to $6.3 million for the same quarter of the prior year. Presented as a percentage of total revenues, selling expenses were 4.9% and 6.4% for the three months ended December 31, 2017, and 2016, respectively.

General and administrative expenses, excluding non-cash share-based compensation expenses (non-GAAP G&A expenses), were $12.2 million and $10.8 million for the quarter ended December 31, 2017, and 2016, respectively. Presented as a percentage of total revenues, non-GAAP G&A expenses were 7.7% and 10.9% for quarters ended December 31, 2017 and 2016 respectively. The GAAP G&A expenses which include the non-cash share-based compensation expenses were $12.1 million and $11.7 million for the three months ended December 31, 2017 and 2016, respectively.

Research and development expenses were $10.6 million for the three months ended December 31, 2017, representing an increase of $2.3 million or 27.6% compared to $8.3 million for the same quarter of the prior year. Presented as a percentage of total revenues, R&D expenses were 6.7% and 8.4% for the quarter ended December 31, 2017 and 2016, respectively.

The VAT refunds and government subsidies were $9.4 million for three months ended December 31, 2017, as compared to $8.2 million for the same period in the prior year, representing a $1.2 million or 15.2% increase.

The income tax expenses and the effective tax rate were $9.3 million and 20.4% for the three months ended December 31, 2017, as compared to $1.6 million and 13.5% for comparable prior year period. The effective tax rate fluctuation was mainly due to the different pre-tax income mix with different tax rates, as the Company's subsidiaries apply to different tax rates.

The non-GAAP net income attributable to Hollysys, which excludes 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 was $36.3 million or $0.60 per diluted share based on 61.3 million shares outstanding for the three months ended December 31, 2017. This represents a 229.4% increase over the $11.0 million or $0.18 per share based on 60.9 million shares outstanding reported in the comparable prior year period. On a GAAP basis, net income attributable to Hollysys was $36.2 million or $0.60 per diluted share representing an increase of 263.4% over the $10.0 million or $0.17 per diluted share reported in the comparable prior year period.

Contracts and Backlog Highlights

Hollysys achieved $220.0 million new contracts for the three months ended December 31, 2017. And the backlog as of December 31, 2017 was $547.6 million. The detailed breakdown of the new contracts and backlog by segments is shown below:

Cash Flow Highlights

For the three months ended December 31, 2017, the total net cash outflow was $13.8 million. The net cash provided by operating activities was $36.1 million. The net cash used in investing activities was $45.5 million, mainly consisted of $92.6 million time deposits placed with banks, which was partially offset by $47.8 million maturity of time deposits. The net cash used in financing activities was $7.2 million, mainly consisted of $7.2 million payment of dividends.

Balance Sheet Highlights

The total amount of cash and cash equivalents and time deposits with original maturities over three months were $365.4 million, $331.5 million, and $285.4 million as of December 31, 2017, September 30, 2017 and December 31, 2016, respectively. As of December 31, 2017, the company held $231.0 million in cash and cash equivalents and $134.4 million in time deposits with original maturities over three months.

For the three months ended December 31, 2017, DSO was 147 days, as compared to 208 days for the comparable prior year period and 196 days for the last quarter; and inventory turnover was 48 days, as compared to 52 days for the comparable prior year period and 61 days for the last quarter.

Outlook for FY 2018

The management concluded, "Based on our backlog currently on-hand and sales pipeline envisioned so far, we reiterate our guidance for fiscal year 2018 with revenue in the range of $500 million to $530 million and non-GAAP net income in the range of $100 million to $110 million."

Conference Call

The Company will host a conference call at 8:00 pm February 8, 2018 U.S. Eastern Time / 9:00 am February 9, 2018 Beijing Time, to discuss the financial results for the second quarter of fiscal year 2018 ended December 31, 2017 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 7722722.

In addition, a recording of the conference call will be accessible within 48 hours via Hollysys' website at: 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 3,200 employees with nationwide presence in over 60 cities in China, with subsidiaries and offices in Singapore, Malaysia, Dubai, India, and serves over 10,000 customers more than 25,000 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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