Hollysys Automation Technologies Reports Unaudited Financial Results for the Third Quarter and the First Nine Months Ended March 31, 2019

First Nine months of Fiscal Year 2019 Financial Highlights

• Non-GAAP net income attributable to Hollysys was $100.5 million, an increase of 25.1% compared to the comparable prior year period.
• Total revenues were $413.4 million, an increase of 5.0% compared to the comparable prior year period.
• Non-GAAP gross margin was at 38.3%, compared to 37.6% for the comparable prior year period.
• Non-GAAP diluted EPS were at $1.65, an increase of 25.0% compared to the comparable prior year period.
• Net cash provided by operating activities was $86.7 million for the current period.
• DSO of 176 days, compared to 176 days for the comparable prior year period.
• Inventory turnover days of 59 days, compared to 58 days for the comparable prior year period.

Third Quarter of Fiscal Year 2019 Financial Highlights

• Non-GAAP net income attributable to Hollysys was $28.1 million, an increase of 27.1% compared to the comparable prior year period.
• Total revenues were $125.2 million, an increase of 3.8% compared to the comparable prior year period.
• Non-GAAP gross margin was at 39.6%, compared to 36.5% for the comparable prior year period.
• Non-GAAP diluted EPS were at $0.46, an increase of 27.8% compared to the comparable prior year period.
• Net cash provided by operating activities was $25.2 million for the current quarter.
• DSO of 193 days, compared to 196 days for the comparable prior year period.
• Inventory turnover days of 50 days, compared to 63 days for the comparable prior year period.

BEIJING, May 14, 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 third quarter of fiscal year 2019 ended March 31, 2019 (see attached tables). The management of Hollysys, stated:

Revenue and new contract for our IA business for the quarter were $60.1 million and $84.0 million, representing a 31.6% and 2.2% YOY increase, respectively. For the first nine months of the fiscal year, revenue and contract presented a 4.0% and 3.5% YOY increase, respectively. Our effort in market penetration and addressing the current customer base for maintenance and upgrade opportunities continued. Within high-end coal fire market, our solid performance in the past have earned us reputation. We signed a breakthrough contract to provide DCS+DEH solution to the 660MW power units of China Huaneng Group, which is the first time that Huaneng has accepted Hollysys' control solution for its 660MW power units. We continued to address other sub-verticals of power including garbage power, biomass and solar thermal power. In solar thermal, we entered into a strategic relationship with Zhongnan Engineering Corporation Limited on jointly developing the control solution for the world first molten salt linear Fresnel solar thermal power station in Gansu, China. In chemical and petrochemical, our effort in penetrating the market continued, and with the execution of our previous breakthrough projects as reference, we continued to actively promote ourselves. We signed a contract to provide control solution to coal-to-clean industrial gas project in Jiangxi with a design capacity of 13 billion normal cubic meter per year, which is to be the world largest project of such kind once completed. We kept addressing our valuable customer base and the momentum of aftersales services continued. In addition to regular maintenance, our value adding industrial software that covers advanced process control, industrial information security, etc. are being accepted by more of our customers. Following the breakthrough in our first intelligent plant solution in the last quarter, we maintained close communication with potential customers. Meanwhile, our intelligence-oriented solutions are earning its reputation. In February, Hollysys was named by Ministry of Industry and Information Technology of the People's Republic of China (MIIT) as outstanding data collection and edge computing technology provider, outstanding PaaS technology provider and outstanding SaaS technology provider. Our "HolliMachine Smart Equipment Cloud Industrial Internet APP" was also listed in the Outstanding Industrial Internet APP Solution published by MIIT. Furthermore, we have recently formed a strategic partnership with Arup, one of the largest global engineering consulting firms, to develop and implement world-leading intelligent solutions and expand into overseas markets together.

Quarterly revenue and new contract for our railway business were $46.8 million and $35.5 million, representing an 2.7% YOY increase and 6.3% YOY decrease, respectively. For the first nine month of the fiscal year, revenue and new contract recorded an 6.9% and 48.1% YOY increase, respectively. With 13^th Five Year Plan period entering its final two years and the amount of contract signed previously, we have been busy delivering. Going forward into the future and given a visible long-term railway construction plan, we 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 system in the future. 

In overseas business, M&E recorded a quarterly revenue and new contract of $18.4 million and $16.8 million, representing a 37.7% and 20.8% YOY decrease respectively. For the first nine months of the fiscal year, revenue and new contract recorded a 3.6% and 8.4% 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, we continued our effort in developing partnership with key EPC players, and to create opportunity to join EPC project in its early project cycle by cooperating with design institution. We have achieved our first cooperation with Shanghai Electric overseas as we signed a contract on a 2*300MW power unit optimization project in Malaysia. Going forward, we will take gradual steps to improve the marketing and service capability of our overseas business for greater localization.

Third Quarter and First Nine Months Ended March 31, 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:

Operational Results Analysis for the Third Quarter Ended March 31, 2019

Comparing to the third quarter of the prior fiscal year, the total revenues for the three months ended March 31, 2019 increased from $120.6 million to $125.2 million, representing an increase of 3.8%. Broken down by the revenue types, integrated contracts revenue decreased by 3.3% to $101.3 million, products sales revenue increased by 33.1% to $13.2 million, and services revenue increased by 79.1% to $10.7 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 March 31, 2019, as compared to 36.5% for the same period of the prior year. The non-GAAP gross margin for integrated contracts, product sales, and services rendered were 30.2%, 85.6% and 71.9% for the three months ended March 31, 2019, as compared to 30.1%, 81.2% and 73.6% 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 39.5% for the three months ended March 31, 2019, as compared to 36.4% for the same period of the prior year. The GAAP gross margin for integrated contracts, product sales, and service rendered were 30.1%, 85.6% and 71.9% for the three months ended March 31, 2019, as compared to 30.0%, 81.2% and 73.6% for the same period of the prior year, respectively.

Selling expenses were $6.5 million for the three months ended March 31, 2019, representing an increase of $0.3 million or 4.3% compared to $6.2 million for the same quarter of the prior year. Presented as a percentage of total revenues, selling expenses were 5.2% and 5.1% for the three months ended March 31, 2019, and 2018, respectively.

General and administrative expenses, excluding non-cash share-based compensation expenses (non-GAAP G&A expenses), were $8.7 million for the quarter ended March 31, 2019, representing an increase of $1.0 million or 12.9% compared to $7.7 million for the same quarter of the prior year, which was primarily due to increase of bad debt allowance. Presented as a percentage of total revenues, non-GAAP G&A expenses were 7.0% and 6.4% for quarters ended March 31, 2019 and 2018, respectively. The GAAP G&A expenses which include the non-cash share-based compensation expenses were $8.8 million and $7.9 million for the three months ended March 31, 2019 and 2018, respectively.

Research and development expenses were $8.7 million for the three months ended March 31, 2019, representing a decrease of $0.1 million or 1.2% compared to $8.8 million for the same quarter of the prior year. Presented as a percentage of total revenues, R&D expenses were 6.9% and 7.3% for the quarter ended March 31, 2019 and 2018, respectively.

The VAT refunds and government subsidies were $4.6 million for three months ended March 31, 2019, as compared to $3.9 million for the same period in the prior year, representing a $0.7 million or 17.1% increase, which was primarily due to increase of the VAT refunds.

The income tax expenses and the effective tax rate were $4.9 million and 15.0% for the three months ended March 31, 2019, as compared to $4.6 million and 17.2% 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 grant-date fair value of shares or options granted, amortization of acquired intangible assets, and fair value adjustments of a bifurcated derivative, was $28.1 million or $0.46 per diluted share based on 61.3 million diluted weighted average common shares outstanding for the three months ended March 31, 2019. This represents a 27.1% increase over the $22.1 million or $0.36 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 $28.0 million or $0.46 per diluted share representing an increase of 28.0% over the $21.8 million or $0.36 per diluted share reported in the comparable prior year period.

Contracts and Backlog Highlights

Hollysys achieved $136.2 million of new contracts for the three months ended March 31, 2019. The backlog as of March 31, 2019 was $599.2 million. The detailed breakdown of the new contracts and backlog by segments is shown below:

Cash Flow Highlights

For the three months ended March 31, 2019, the total net cash outflow was $15.3 million. The net cash provided by operating activities was $25.2 million. The net cash used in investing activities was $45.3 million, mainly consisted of $93.8 million time deposits placed with banks, and $4.2 million purchases of property, plant and equipment, which was partially offset by $52.7 million maturity of time deposits. The net cash used in financing activities was $0.2 million, mainly consisted of $1.9 million repayments of short-term bank loans, which were partially offset by $1.7 million proceeds from short-term bank loans.

Balance Sheet Highlights

The total amount of cash and cash equivalents were $253.4 million, $270.8 million, and $238.0 million as of March 31, 2019, December 31, 2018 and March 31, 2018, respectively.

For the three months ended March 31, 2019, DSO was 193 days, as compared to 196 days for the comparable prior year period and 157 days for the last quarter; and inventory turnover was 50 days, as compared to 63 days for the comparable prior year period and 39 days for the last quarter.

Conference Call

The Company will host a conference call at 9:00 pm May 13, 2019 U.S. Eastern Time / 9:00 am May 14, 2019 Beijing Time, to discuss the financial results for fiscal year 2019 third quarter ended March 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 1568415.

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 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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