Hollysys Automation Technologies Reports Unaudited Financial Results for the Fiscal year and the Fourth Quarter Ended June 30, 2018

Fiscal Year 2018 Financial Highlights

• Non-GAAP net income attributable to Hollysys was $108.9 million, an increase of 55.4% compared to the comparable prior year period.
• Total revenues were $540.8 million, an increase of 25.2% compared to the comparable prior year period.
• Non-GAAP gross margin was at 38.2%, compared to 32.7% for the comparable prior year period.
• Non-GAAP diluted EPS were at $1.78, an increase of 53.4% compared to the comparable prior year period.
• Net cash provided by operating activities was $122.2 million for the current year.
• DSO of 174 days, compared to 201 days for the comparable prior year period.
• Inventory turnover days of 58 days, compared to 51 days for the comparable prior year period.

Fourth Quarter of Fiscal Year 2018 Financial Highlights

• Non-GAAP net income attributable to Hollysys was $28.6 million, an increase of 26.5% compared to the comparable prior year period.
• Total revenues were $147.2 million, an increase of 6.7% compared to the comparable prior year period.
• Non-GAAP gross margin was at 39.6%, compared to 39.1% for the comparable prior year period.
• Non-GAAP diluted EPS were at $0.46, an increase of 24.3% compared to the comparable prior year period.
• Net cash provided by operating activities was $45.1 million for the current quarter.
• DSO of 166 days, compared to 153 days for the comparable prior year period.
• Inventory turnover days of 59 days, compared to 50 days for the comparable prior year period.

BEIJING, Aug. 15, 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 fiscal year 2018 and the fourth quarter ended June 30, 2018 (see attached tables). The management of Hollysys, stated:

Industrial automation recorded a 46.2% YOY growth in quarterly revenue, at $64.0 million. Annual revenue and new contract recorded a 30.2% and 16.0% YOY growth respectively. Management continued to execute the low-to-high end market expansion strategy for Process Automation business. Contract growth in chemical and petrochemical remained healthy. Major contracts include a DCS+SIS+ITCC+AMS solution for Shandong Haiyou Chemical's 1 million tons delayed coking equipment project, and a DCS solution for Suzhou Sinye Materials Technology Co., Ltd covering its furan, cold-core, and sulfonic curing agent project. We signed several additional contracts for the milestone Zhong'an United Coal Chemical Project, where we applied our comprehensive solution to many new equipment for the first time. On power, despite the slowdown of the coal fire industry, growth in thermal power and new energy remained healthy. We continued to maintain our market share in high end coal fire market, while actively expanding market for multiple product lines. Major contracts signed include a DCS solution for Shenhua Wucaiwan 2X660MW power station and a DEH solution for Datang Pingluo 2X660MW turbine unit. We continued to address service and upgrading demand from the entire customer base. Our data-based value-added solution, including energy saving, control optimization and information security, etc. have received growing acceptance from customers of several industries. With our widespread national service network, we are capable of communicating with and delivering to our customers from various industries regular and value-added customized services and products they need.

Rail business recorded a 37.6% YOY decline in quarterly revenue at $40.4 million, while quarterly new contract decline YOY by 16.8%, at $58.1 million. Annually, new contracts increase YOY by 24.2%, while revenue increase YOY by 22.4%. Breakthrough was made as we signed a C2 track circuit contract for Guiyang Southwest line. New contracts were also signed on subway SCADA for Beijing Subway Line 17 and Line 19. As for the ATP product line, CRC started the bidding of C3 ATP in early June, but contract has not been signed yet. We continued to strengthen our marketing capacity through reviewing and updating strategic partnership and improving local service network coverage, and signed several maintenance contracts covering both on-board and on-ground equipment. 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 continued to seek opportunities in Process Automation business through EPC projects and direct sales. Contracts were signed on DCS, DEH, BATCH, etc. solution with customers from India and Southeast Asia. The M&E business, performed by Concord and Bond, recorded a 45.1% YOY growth in quarterly revenue, at $42.9 million, and a 150.9% quarterly new contract growth, at $40.0 million. Annual M&E revenue and new contracts recorded 21.0% and 134.5% YOY growth respectively. Effort on improving management and risk control in this fiscal year has taken effect and will be ongoing. The economic and political circumstances in South East Asia and Middle East will continue to be closely followed.

Fiscal year and The Fourth Quarter Ended June 30, 2018 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 Fiscal year Ended June 30, 2018

Comparing to the prior fiscal year, the total revenues for fiscal year 2018 increased from $431.9 million to $540.8 million, representing an increase of 25.2%. Broken down by the revenue types, integrated contracts revenue increased by 21.0% to $466.5 million, products sales revenue increased by 23.2% to $40.2 million, and services revenue increased by 147.3% to $34.1 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 38.2% for fiscal year 2018, as compared to 32.7% for the prior year. The non-GAAP gross margin for integrated contracts, product sales, and services rendered were 32.8%, 73.2% and 71.0% for fiscal year 2018, as compared to 28.2%, 69.5% and 70.8% for 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 38.1% for fiscal year 2018, as compared to 32.5% for the prior year. The GAAP gross margin for integrated contracts, product sales, and service rendered were 32.6%, 73.2% and 71.0% for fiscal year 2018, as compared to 28.0%, 69.5% and 70.8% for the prior year respectively.

Selling expenses were $27.2 million for fiscal year 2018, representing an increase of $2.8 million or 11.2% compared to $24.4 million for the prior year. Presented as a percentage of total revenues, selling expenses were 5.0% and 5.7% for fiscal year 2018 and 2017, respectively.

General and administrative expenses, excluding non-cash share-based compensation expenses (non-GAAP G&A expenses), were $45.1 million for fiscal year 2018, representing an increase of $1.3 million or 2.9% compared to $43.8 million for the prior year. Presented as a percentage of total revenues, non-GAAP G&A expenses were 8.3% and 10.1% for fiscal year 2018 and 2017 respectively. The GAAP G&A expenses which include the non-cash share-based compensation expenses were $46.3 million and $44.3 million for fiscal year 2018 and 2017, respectively.

Research and development expenses were $36.6 million for fiscal year 2018, representing an increase of $6.5 million or 21.6% compared to $30.1 million for the prior year, mainly due to increased research and development activities. Presented as a percentage of total revenues, R&D expenses were 6.8% and 7.0% for fiscal year 2018 and 2017, respectively.

The VAT refunds and government subsidies were $24.5 million for fiscal year 2018, as compared to $29.8 million for the prior year, representing a $5.3 million or 18.0% decrease, which was primarily due to decrease of the government subsidies.

The income tax expenses and the effective tax rate were $22.2 million and 17.1% for fiscal year 2018, as compared to $14.4 million and 17.3% for comparable prior year period.

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 $108.9 million or $1.78 per diluted share based on 61.2 million diluted weighted average common shares outstanding for fiscal year 2018. This represents a 55.4% increase over the $70.1 million or $1.16 per share based on 61.0 million diluted weighted average common shares outstanding reported in the comparable prior year. On a GAAP basis, net income attributable to Hollysys was $107.2 million or $1.75 per diluted share representing an increase of 55.4% over the $68.9 million or $1.14 per diluted share reported in the comparable prior year.  

Operational Results Analysis for the Fourth Quarter Ended June 30, 2018

Comparing to the fourth quarter of the prior fiscal year, the total revenues for the three months ended June 30, 2018 increased from $138.0 million to $147.2 million, representing an increase of 6.7%. Broken down by the revenue types, integrated contracts revenue increased by 5.5% to $131.6 million, products sales revenue increased by 30.4% to $11.1 million, and services revenue decreased by 4.4% to $4.5 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 39.6% for the three months ended June 30, 2018, as compared to 39.1% for the same period of the prior year. The non-GAAP gross margin for integrated contracts, product sales, and services rendered were 35.7%, 72.4% and 73.2% for the three months ended June 30, 2018, as compared to 35.7%, 71.5% and 69.9% 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 39.4% for the three months ended June 30, 2018, as compared to 38.8% for the same period of the prior year. The GAAP gross margin for integrated contracts, product sales, and service rendered were 35.5%, 72.4% and 73.2% for the three months ended June 30, 2018, as compared to 35.4%, 71.5% and 69.9% for the same period of the prior year respectively.

Selling expenses were $6.5 million for the three months ended June 30, 2018, representing a decrease of $0.1 million or 1.2% compared to $6.6 million for the same quarter of the prior year. Presented as a percentage of total revenues, selling expenses were 4.4% and 4.8% for the three months ended June 30, 2018, and 2017, respectively.

General and administrative expenses, excluding non-cash share-based compensation expenses (non-GAAP G&A expenses), were $14.4 million for the quarter ended June 30, 2018, representing a decrease of $0.2 million or 1.5% compared to $14.6 million for the same quarter of the prior year. Presented as a percentage of total revenues, non-GAAP G&A expenses were 9.8% and 10.6% for quarters ended June 30, 2018 and 2017 respectively. The GAAP G&A expenses which include the non-cash share-based compensation expenses were $15.0 million and $15.1 million for the three months ended June 30, 2018 and 2017, respectively.

Research and development expenses were $8.6 million for the three months ended June 30, 2018, representing an increase of $0.6 million or 7.5% compared to $8.0 million for the same quarter of the prior year. Presented as a percentage of total revenues, R&D expenses were 5.9% and 5.8% for the quarter ended June 30, 2018 and 2017, respectively.

The VAT refunds and government subsidies were $4.1 million for three months ended June 30, 2018, as compared to $6.5 million for the same period in the prior year, representing a $2.4 million or 37.9% decrease, which was primarily due to decrease of the government subsidies.

The income tax expenses and the effective tax rate were $4.6 million and 14.2% for the three months ended June 30, 2018, as compared to $5.4 million and 19.9% for comparable prior year period.

The non-GAAP net income attributable to Hollysys, which excludes the non-cash share-based compensation expenses calculated based on grant-date fair value of shares or options granted, amortization of acquired intangible assets, and fair value adjustments of a bifurcated derivative, was $28.6 million or $0.46 per diluted share based on 61.3 million diluted weighted average common shares outstanding for the three months ended June 30, 2018. This represents a 26.5% increase over the $22.6 million or $0.37 per share based on 61.3 diluted weighted average common million shares outstanding reported in the comparable prior year period. On a GAAP basis, net income attributable to Hollysys was $27.7 million or $0.45 per diluted share representing an increase of 28.0% over the $21.7 million or $0.36 per diluted share reported in the comparable prior year period.  

Contracts and Backlog Highlights

Hollysys achieved $181.2 million new contracts for the three months ended June 30, 2018. And the backlog as of June 30, 2018 was $569.0 million. The detailed breakdown of the new contracts and backlog by segments is shown below:

Cash Flow Highlights

For the fiscal year ended June 30, 2018, the total net cash inflow was $64.4 million. The net cash provided by operating activities was $122.2 million. The net cash used in investing activities was $50.4 million, mainly consisted of $179.8 million time deposit with original maturities over three months placed with banks, which was partially offset by the $137.8 million generated from matured time deposits with original maturities over three months. The net cash used in financing activities was $12.2 million, mainly consisted of $7.2 million used for payment of dividends, $11.3 million used for repayments of short-term loans, which was partially offset by $5.9 million proceeds from short-term bank loans.

For the three months ended June 30, 2018, the total net cash inflow was $24.1 million. The net cash provided by operating activities was $45.1 million. The net cash used in investing activities was $6.4 million, mainly consisted of $30.2 million time deposits placed with banks, which was partially offset by $25.1 million maturity of time deposits. The net cash used in financing activities was $4.7 million, mainly consisted of $9.3 million repayments of short-term bank loans, which was partially offset by $4.5 million proceeds from short-term bank loans.

Balance Sheet Highlights

The total amount of cash and cash equivalents were $262.1 million, $238.0 million, and $197.6 million as of June 30, 2018, March 31, 2018 and June 30, 2017, respectively.

For fiscal year ended June 30, 2018, Days Sales Outstanding ("DSO") was 174 days, as compared to 201 days from the prior year; and inventory turnover was 58 days, as compared to 51 days from the prior year.

For the three months ended June 30, 2018, DSO was 166 days, as compared to 153 days for the comparable prior year period and 196 days for the last quarter; and inventory turnover was 59 days, as compared to 50 days for the comparable prior year period and 63 days for the last quarter.

Conference Call

The Company will host a conference call at 9:00 pm August 14, 2018 U.S. Eastern Time / 9:00 am August 15, 2018 Beijing Time, to discuss the financial results for fiscal year 2018 and the fourth quarter ended June 30, 2018 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 6893555.

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, 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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