Hollysys Automation Technologies Reports Unaudited Financial Results for the First Quarter Ended September 30, 2019

First Quarter of Fiscal Year 2020 Financial Highlights

• Non-GAAP net income attributable to Hollysys was $29.8 million, an increase of 6.1% compared to the comparable prior year period.
• Total revenues were $123.2 million, a decrease of 11.2% compared to the comparable prior year period.
• Non-GAAP gross margin was at 37.7%, compared to 37.2% for the comparable prior year period.
• Non-GAAP diluted EPS was $0.49, an increase of 6.5% compared to the comparable prior year period.
• Net cash provided by operating activities was $39.0 million for the current quarter.
• DSO of 204 days, compared to 170 days for the comparable prior year period.
• Inventory turnover days of 56 days, compared to 51 days for the comparable prior year period.

BEIJING, Nov. 13, 2019 /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 first quarter of fiscal year 2020 ended September 30, 2019 (see attached tables). The management of Hollysys, stated:

IA business finished the quarter with revenue and contract at $64.6 million and $84.0 million, achieving 12.0% and 4.6% YOY growth respectively. Under the guidance of our "3+1+N" strategy, we continued our effort in market penetration in different industries. In our power business, we signed a contract to provide control solution to urban heat supply network, which is the first project of this kind for Hollysys. In chemical business, we have officially completed the milestone Zhong'an coal-chemical project and will continue to provide maintenance and other services afterwards. The project is one of the largest MAV-DCS projects for Hollysys and we provided total solution covering the integration of up to ten systems including control system, asset management system, alarm system, gas detection system, etc. In the petrochemical industry, with our DCS and SIS being certified by CCS (China Classification Society) earlier this year, we are better qualified in providing control solution in offshore oil related business. Our strategic relationship with CNOOC (China National Offshore Oil Corporation) proceeded further as we signed several contracts with them in providing control solution to their offshore oil platform this quarter. Besides market penetration through newly-built projects, we have kept leveraging on our nation-wide network to respond to the aftersales demand of different industries, especially as the control products are approaching the end of life cycle. We maintained close relationship with our existing customers through various types of aftersales service, while also exploited the opportunities in obtaining new clients through replacement and upgrade project, especially in the chemical and petrochemical industries. We are also building up our capability in providing more comprehensive solution covering full life cycle of the project. With the recent completion of the acquisition of a small pharmaceutical and chemical design institute, we are able to get involved in potential projects at earlier stage in the future for better opportunities. In our smart factory solution, following our previous breakthrough contract in the power industry, we have signed several contracts this quarter with both existing and new customers from the chemical industry. Such will be long term cooperation so as to turn their production smart comprehensively step by step. We have also broadened our industrial software solution matrix, as we launched a new solution that help to optimize emission control and signed the first contract with a client from the power industry.

Rail business finished the quarter with revenue and contract at $44.6 million and $21.0 million, recording 11.5% and 70.6% YOY decrease respectively. In the high-speed rail business, the bidding pace of CRC has not met the expectation of the market. We continued to provide aftersales service on our high-speed rail signaling products covering software upgrade, spare parts sales, maintenance and replacement. Meanwhile, we are also actively preparing ourselves for new products and services in the aftersales high-speed rail market. In the inter-city high-speed rail business, we signed contracts to provide ATP with automatic train operation function to the Pearl River Delta region. In subway business, the subway line for the new Beijing Daxing Airport commenced business operation in September, with Hollysys being the provider of SCADA solution that supports driverless operation. Going forward, our rail business will continue to adhere to the diversity strategy for stable and healthy growth and to improve our local service network for more value-adding and differentiated services. With urbanization as an ongoing process, we will keep leveraging our strong R&D capacity and prepare for the application of various types of railway transportation systems in the future.  

M&E business finished the quarter with revenue and contract at $14.0 million and $33.6 million, recording 54.2% YOY decrease and 128.0% YOY increase respectively. Given the macro economy in Southeast Asia and the Middle East, risk control remains to be the key focus of our M&E business. In IA overseas business, progress is constantly made in terms of establishment of new cooperation with new key EPC players as well as ongoing cooperation with existing partners. Going forward, we will continue our effort in developing partnership with key EPC players, and strengthening localization in manufacture, marketing and services in overseas business.

Fiscal Quarter Ended September 30, 2019 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 for number of shares and per share data)

Operational Results Analysis for the First Quarter Ended September 30, 2019

Comparing to the first quarter of the prior fiscal year, the total revenues for the three months ended September 30, 2019 decreased from $138.7 million to $123.2 million, representing a decrease of 11.2%. Broken down by the revenue types, integrated contracts revenue decreased by 10.4% to $104.5 million, products sales revenue decreased by 23.8% to $6.1 million, and services revenue decreased by 9.9% to $12.6 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 37.7% for the three months ended September 30, 2019, as compared to 37.2% for the same period of the prior year. The non-GAAP gross margin for integrated contracts, product sales, and services rendered were 32.6%, 79.9% and 59.5% for the three months ended September 30, 2019, as compared to 30.8%, 75.0% and 67.9% for the same period of the prior year, respectively. The gross margin fluctuation was mainly due to the different revenue mix with different margins. The GAAP overall gross margin which includes non-cash amortization of acquired intangibles was 37.6% for the three months ended September 30, 2019, as compared to 37.1% for the same period of the prior year. The GAAP gross margin for integrated contracts, product sales, and service rendered was 32.5%, 79.9% and 59.5% for the three months ended September 30, 2019, as compared to 30.8%, 75.0% and 67.9% for the same period of the prior year, respectively.

Selling expenses were $7.3 million for the three months ended September 30, 2019, representing a decrease of $0.4 million or 5.6% compared to $7.7 million for the same quarter of the prior year. Presented as a percentage of total revenues, selling expenses were 5.9% and 5.6% for the three months ended September 30, 2019, and 2018, respectively.

General and administrative expenses, excluding non-cash share-based compensation expenses (non-GAAP G&A expenses), were $10.6 million for the quarter ended September 30, 2019, representing an increase of $2.0 million or 23.6% compared to $8.6 million for the same quarter of the prior year. Presented as a percentage of total revenues, non-GAAP G&A expenses were 8.6% and 6.2% for quarters ended September 30, 2019 and 2018, respectively. The GAAP G&A expenses which include the non-cash share-based compensation expenses were $10.6 million and $8.7 million for the three months ended September 30, 2019 and 2018, respectively.

Research and development expenses were $8.9 million for the three months ended September 30, 2019, representing an increase of $0.1 million or 2.0% compared to $8.8 million for the same quarter of the prior year. Presented as a percentage of total revenues, R&D expenses were 7.3% and 6.3% for the quarter ended September 30, 2019 and 2018, respectively.

The VAT refunds and government subsidies were $3.5 million and $3.5 million for the quarter ended September 30, 2019 and 2018, respectively.

The income tax expenses and the effective tax rate were $6.2 million and 17.3% for the three months ended September 30, 2019, as compared to $5.5 million and 16.3% 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 are subject to different tax rates in various jurisdictions.

The non-GAAP net income attributable to Hollysys, which excludes the non-cash share-based compensation expenses calculated based on the grant-date fair value of shares or options granted, amortization of acquired intangible assets, and fair value adjustments of a bifurcated derivative, was $29.8 million or $0.49 per diluted share based on 60.5 million diluted weighted average ordinary shares outstanding for the three months ended September 30, 2019. This represents a 6.1% increase over $28.1 million or $0.46 per share based on 61.3 million diluted weighted average ordinary shares outstanding reported in the comparable prior year period. On a GAAP basis, net income attributable to Hollysys was $29.7 million or $0.49 per diluted share representing an increase of 6.4% over $27.9 million or $0.46 per diluted share reported in the comparable prior year period.

Contracts and Backlog Highlights

Hollysys achieved $138.6 million of new contracts for the three months ended September 30, 2019. The backlog as of September 30, 2019 was $578.9 million. The detailed breakdown of new contracts and backlog by segments is shown below:

Cash Flow Highlights

For the fiscal year ended September 30, 2019, the total net cash inflow was $15.3 million. The net cash provided by operating activities was $39.0 million. The net cash provided by investing activities was $8.1 million and mainly consisted of $31.9 million of matured time deposits, and $4.5 million of proceeds received for the disposal of an equity investment, which were partially offset by $27.8 million of time deposits placed with banks. The net cash used in financing activities was $20.3 million and mainly consisted of $20.0 million repayments of bonds payable.

Balance Sheet Highlights

The total amount of cash and cash equivalents were $340.0 million, $332.5 million, and $276.9 million as of September 30, 2019, June 30, 2019 and September 30, 2018, respectively.

For the three months ended September 30, 2019, DSO was 204 days, as compared to 170 days for the comparable prior year period and 160 days for the last quarter; and inventory turnover was 56 days, as compared to 51 days for the comparable prior year period and 42 days for the last quarter.

Conference Call

The Company will host a conference call at 8:00 pm November 13, 2019 U.S. Eastern Time / 9:00 am November 14, 2019 Beijing Time, to discuss the financial results for the first quarter of fiscal year 2020 ended September 30, 2019 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 6174508.

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 is a leading automation control system solutions provider in China, with overseas operations in eight other countries and regions throughout Asia. Leveraging its proprietary technology and deep industry know-how, Hollysys empowers its customers with enhanced operational safety, reliability, efficiency, and intelligence which are critical to their businesses. Hollysys derives its revenues mainly from providing integrated solutions for industrial automation and rail transportation. In industrial automation, Hollysys delivers the full spectrum of automation hardware, software, and services spanning field devices, control systems, enterprise manufacturing management and cloud-based applications. In rail transportation, Hollysys provides advanced signaling control and SCADA (Supervisory Control and Data Acquisition) systems for high-speed rail and urban rail (including subways). Founded in 1993, with technical expertise and innovation, Hollysys has grown from a research team specializing in automation control in the power industry into a group providing integrated automation control system solutions for customers in diverse industry verticals. As of March 2019, Hollysys had cumulatively carried out more than 25,000 projects for approximately 15,000 customers in various sectors including power, petrochemical, high-speed rail, and urban rail, in which Hollysys has established leading market positions.

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 cost of integrated contracts", "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, 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 the non-GAAP measures with the most directly comparable U.S. GAAP measures for the periods indicated:

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