Hollysys Automation Technologies Reports Unaudited Financial Results for the Second Quarter and the First Half Year Ended December 31, 2019

First Half of Fiscal Year 2020 Financial Highlights

• Non-GAAP net income attributable to Hollysys was $63.9 million, a decrease of 11.6% compared to the comparable prior year period.
• Total revenues were $293.3 million, an increase of 1.8% compared to the comparable prior year period.
• Non-GAAP gross margin was at 36.9%, compared to 37.7% for the comparable prior year period.
• Non-GAAP diluted EPS was $1.06, a decrease of 10.9% compared to the comparable prior year period.
• Net cash provided by operating activities was $109.4 million for the current period.
• DSO of 168 days, compared to 171 days for the comparable prior year period.
• Inventory turnover days of 42 days, compared to 51 days for the comparable prior year period.

Second Quarter of Fiscal Year 2020 Financial Highlights

• Non-GAAP net income attributable to Hollysys was $34.2 million, a decrease of 22.9% compared to the comparable prior year period.
• Total revenues were $170.1 million, an increase of 13.8% compared to the comparable prior year period.
• Non-GAAP gross margin was at 36.3%, compared to 38.2% for the comparable prior year period.
• Non-GAAP diluted EPS were at $0.56, a decrease of 23.3% compared to the comparable prior year period.
• Net cash provided by operating activities was $70.5 million for the current quarter.
• DSO of 137 days, compared to 157 days for the comparable prior year period.
• Inventory turnover days of 39 days, compared to 39 days for the comparable prior year period.

BEIJING, Feb. 20, 2020 /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 first half of fiscal year 2020 ended December 31, 2019 (see attached tables). The management of Hollysys, stated:

Industrial Automation ("IA") business finished the second quarter with revenue and contract at $69.3 million and $69.5 million, achieving 40.1% and 58.2% YOY growth, respectively. For the first half of the fiscal year, IA revenue and contract achieved 25.0% and 23.6% YOY growth, respectively.

• In coal fire sector, despite slowdown in new construction market, performance in aftersales remained healthy as we kept responding to various demands from our existing customers in face of the replacement cycle. We offered system upgrade and modification, security product and regular maintenance, etc. that addressed the currently installed solutions in part or in whole.
• Our chemical and petro-chemical sector continued to see healthy growth, thanks to our efforts in organization optimization, talent recruitment, marketing and relationship maintenance, etc. With our quality in the previous milestone project being recognized by clients, we moved on to prepare for project quality assessment seminar to seek wider recognition in the industry. To better showcase our capability, we have also constructed a demo center for high-end ethylene project. Meanwhile, we kept improving our solution for the industry through internal R&D and cooperation with external parties. In the oil and gas vertical, we won a new bidding this quarter in providing control solution to the Central Equipment Platform (CEP) of the oil field for CNOOC (China National Offshore Oil Corporation). It was also the first time that the client has adopted domestic control solution on such production site. Going forward, with successful projects as track record and with solid technology and quality engineering as the gene of the Company, we will maintain close interaction with the client base to gradually spread the concept that Hollysys is a qualified provider for the chemical and petro-chemical industry.
• In smart factory sector, our boiler combustion optimization solution, a solution within our industrial software matrix tailored-developed for power-generating-related business, has gained wider acceptance. The solution was widely welcomed by our customers, as we have received numerous feedbacks from customers acknowledging the value of our solution in cutting production cost and improving production stability. We are continuing our internal R&D effort while also actively collaborating with external parties along the value chain to expand and improve the solution within our industrial software matrix.

Under the "3+1+N" strategy, we continued the effort to integrate internal sales platform for better cross selling. We expect such effort will put us in a better position to utilize the specialties of each member company for the offering of total solution of the Company. Meanwhile, we signed an EPC contract in December for a chemical project, in which we assumed the role as the general contractor. Such contract marked a step further toward our vision of offering comprehensive solution covering project full life cycle.

Rail business finished the second quarter with revenue and contract at $78.8 million and $104.2 million, recording 24.1% YOY growth and 39.8% YOY decrease, respectively. For the first half of the fiscal year, revenue and contract recorded 8.4% YOY growth and 48.8% YOY decrease, respectively.

• In high-speed rail sector, we signed contracts of 40 sets of C3 ATP this quarter. Meanwhile, we kept responding to the replacement demand of our customers. In project delivery, several new lines commenced operation this quarter, including Wuhan-Shiyan line, Zhengzhou-Xiangyang section of the Zhengzhou-Wanzhou line, Zhengzhou-Fuyang line, Qianjiang-Zhangjiajie-Changde line, Beijing-Zhangjiakou line and Zhangjiakou-Datong line. Solutions that we have provided to these lines include TCC (Train Control Center), RBC (Radio Block Center), TSRS (Temporary Speed Restriction System) and LEU (Lineside Electronic Unit), etc.
• In subway sector, we signed an SCADA contract for Kunming Subway line 5. In project delivery, we completed the Chengdu subway line 5 SCADA project and were honored with the title "outstanding equipment provider". We have also fully delivered Phase one of Hohhot subway line 1 cloud-based SCADA project. In this project, though given limited execution time, we have showcased our consistency in quality engineering. Through optimizing system deployment and promoting better standardization in early stage, we have improved efficiency in design and product delivery, while paving the way for easier maintenance afterwards.
• In subway signaling sector, we signed a contract in October to provide CBTC to a 3-kilometer-long tramcar transportation within Kunming Changshui Airport. With a value of around 25 million RMB, this is a milestone contract in which the total function of our CBTC was fully applied in the field.

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 $22.0 million and $12.0 million, recording 39.7% and 67.2% YOY decrease respectively. For the first half of the fiscal year, revenue and contract recorded 46.4% and 11.0% YOY decrease 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 our direct sales and overseas EPC project, progress is constantly made in terms of establishment of new cooperation with new key EPC players as well as ongoing cooperation with existing partners.

To prepare our overseas business for the new era of development, further actions were taken following the upgrade of our Singapore overseas headquarter in mid-2019. We have recently undertaken organization adjustment and appointed a new head to lead the Singapore headquarter. With those actions taken as a beginning, we expect to upgrade our overseas business with improved management, marketing, R&D capability and deeper localization, and to create better synergy between all overseas businesses.

In response to the outbreak of the novel coronavirus, the Company has taken necessary actions to minimize the risk of spread of disease and adverse effects on the Company's business operation. Since late January, we have been monitoring the health condition of our employees through on-going online survey. Starting from early February, we have been implementing a two-week-long work-from-home scheme. Meanwhile, we have set forth general rules of action for operation in each of our bases for precautionary purpose. For particular urgent projects covering R&D, production and engineering, staff has been requested for on-site work in accordance with the rules of action. Going further, we are planning to gradually resume on-site work with the staff density in our bases being prudently controlled.  However the potential downturn brought by and the duration of the coronavirus is difficult to assess or predict where actual effects will depend on many factors beyond our control. We are closely monitoring its impact on us.  Our business, results of operations, financial conditions and prospects could be adversely affected directly, as well as to the extent that the coronavirus harms the Chinese economy in general.

Second Quarter and First Half Year Ended December 31, 2019 Unaudited Financial Results Summary

Operational Results Analysis for the Second Quarter Ended December 31, 2019

Comparing to the second quarter of the prior fiscal year, the total revenues for the three months ended December 31 2019 increased from $149.5 million to $170.1 million, representing an increase of 13.8%. Broken down by the revenue types, integrated contracts revenue increased by 11.1% to $129.7 million, products sales revenue increased by 10.5% to $6.5 million, and services revenue increased by 26.2% to $33.9 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 36.3% for the three months ended December 31, 2019, as compared to 38.2% for the same period of the prior year. The non-GAAP gross margin for integrated contracts, product sales, and services rendered were 28.0%, 66.4% and 62.6% for the three months ended December 31, 2019, as compared to 30.8%, 72.0% and 62.9% for the same period of the prior year, respectively. The gross margin fluctuated mainly due to the different revenue mix with different margins. The GAAP overall gross margin which includes non-cash amortization of acquired intangibles was 36.3% for the three months ended December 31, 2019, as compared to 38.1% for the same period of the prior year. The GAAP gross margin for integrated contracts, product sales, and service rendered was 27.9%, 66.4% and 62.6% for the three months ended December 31, 2019, as compared to 30.7%, 72.0% and 62.9% for the same period of the prior year, respectively.

Selling expenses were $10.4 million for the three months ended December 31, 2019, representing an increase of $2.5 million or 32.2% compared to $7.9 million for the same quarter of the prior year, mainly due to increased sales activities. Presented as a percentage of total revenues, selling expenses were 6.1% and 5.3% for the three months ended December 31, 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 December 31, 2019, representing a decrease of $1.0 million or 8.9% compared to $11.6 million for the same quarter of the prior year. Presented as a percentage of total revenues, non-GAAP G&A expenses were 6.2% and 7.8% for quarters ended December 31, 2019 and 2018, respectively. The GAAP G&A expenses which include the non-cash share-based compensation expenses were $10.6 million and $11.7 million for the three months ended December 31, 2019 and 2018, respectively.

Research and development expenses were $13.8 million for the three months ended December 31, 2019, representing an increase of $3.4 million or 32.7% compared to $10.4 million for the same quarter of the prior year, mainly due to increased research and development activities. Presented as a percentage of total revenues, R&D expenses were 8.1% and 7.0% for the quarter ended December 31, 2019 and 2018, respectively.

The VAT refunds and government subsidies were $6.3 million for three months ended December 31, 2019, as compared to $14.8 million for the same period in the prior year, representing a $8.5 million or 57.6% decrease, which was primarily due to decrease of the VAT refunds.

The income tax expenses and the effective tax rate were $6.8 million and 16.7% for the three months ended December 31, 2019, respectively, as compared to $6.3 million and 12.5% for comparable prior year period, respectively,. The effective tax rate fluctuated 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 $34.2 million or $0.56 per diluted share based on 60.6 million diluted weighted average ordinary shares outstanding for the three months ended December 31, 2019. This represents a 22.9% decrease from $44.3 million or $0.73 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 $34.1 million or $0.56 per diluted share representing a decrease of 22.8% from $44.1 million or $0.72 per diluted share reported in the comparable prior year period.

Contracts and Backlog Highlights

Hollysys achieved $185.7 million of new contracts for the three months ended December 31, 2019. The backlog as of December 31, 2019 was $587.0 million. The detailed breakdown of new contracts and backlog by segments is shown below:

Cash Flow Highlights

For the three months ended December 31, 2019, the total net cash inflow was $52.8 million. The net cash provided by operating activities was $70.5 million. The net cash used in investing activities was $10.1 million and mainly consisted of 2.4 million purchases of property, plant and equipment, and $27.2 million of time deposits placed with banks, which were partially offset by $19.4 million of matured time deposits. The net cash used in financing activities was $13.7 million and mainly consisted of $12.7 million payment of dividends.

Balance Sheet Highlights

The total amount of cash and cash equivalents were $403.9 million, $340.0 million, and $270.8 million as of December 31, 2019, September 30, 2019 and December 30, 2018, respectively.

For the three months ended December 31, 2019, DSO was 137 days, as compared to 157 days for the comparable prior year period and 204 days for the last quarter; and inventory turnover was 39 days, as compared to 39 days for the comparable prior year period and 56 days for the last quarter.

Conference Call

The Company will host a conference call at 8:00 pm February 19, 2020 U.S. Eastern Time / 9:00 am February 20, 2020 Beijing Time, to discuss the financial results for fiscal year 2020 second quarter ended December 31, 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 6396705.

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 June 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.

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 other income (expenses), net", "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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