Hollysys Automation Technologies Reports Unaudited Financial Results for Fiscal Year 2011 Second Quarter Ended December 31, 2010

Financial Highlights

• Record-breaking quarterly revenues of $74.4 million, representing an increase of 61.1% compared to $46.2 million year-over-year
• Gross margin at 36.0%, as compared to 31.2% year-over-year, and 34.8% quarter-over-quarter
• Non-GAAP net income attributable to Hollysys of $15.0 million, as compared to $8.1 million and a 85.4% increase year-over-year
• Diluted EPS at $0.27 reported for the quarter
• Record-breaking backlog balance at $288.5 million as of December 31, 2010, a 31.4% increase compared to $219.6 million year-over-year
• Quarterly DSO of 104 days, as compared to 137 days year-over-year and 111 days quarter-over-quarter

 

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 its fiscal 2011 second quarter ended December 31, 2010 (see attached tables).

Dr. Changli Wang, Chairman and CEO of Hollysys, stated: "We are very pleased to report another stellar quarter with solid financial and operational performance. Our financials were significantly improved on a year-on-year basis, and our operational status and backlog continued its upward trend. I would like to discuss some of the key events that took place during this quarter."

"In this quarter, amid robust growth from all business lines, our high-speed rail business set another quarterly high from not only revenue but also backlog perspective. Specifically, I like to mention two of our significant contract wins in this quarter. Hollysys signed a $30.45 million 300-350km/h ATPs contract during the quarter, which will be installed on any type of 300-350km/h high-speed trains for any 300-350 km/h high-speed lines in China. This contract win is a testament that Hollysys will continue to play a leading role in China's 300-350km/h high-speed rail market, following our great success in 200-250km/h segment.

Also in this quarter, we signed another $33.63 million TCC contract to supply ground-based signaling system to Beijing-Shijiazhuang-Wuhan high-speed rail line with a designed traveling speed of 350km/h and 1,200km in total length. This line is the northern portion of Beijing-Guangzhou high speed rail line, one of the main arteries of China's national high-speed rail network. This significant contract win further strengthens our key position in China's high-speed rail signaling market.

Furthermore, Hollysys showcased its proprietary ATP and TCC products on the world stage at the 7th World Conference on High-speed Rail held in Beijing in December. As many countries in the world having already formulated high-speed rail build out plans, Hollysys will leverage on its expertise and technology accumulated in this round of China's high-speed rail build-out to enter international market."

Fiscal Year 2011 Second Quarter 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 three months ended December 31, 2010

For the three months ended December 31, 2010, total revenues increased by 61.1% to $74.4 million, from $46.2 million in the comparable prior fiscal year period.  Of the total revenues, revenue from integrated contracts increased by 61.9% to $71.2 million, compared to $44.0 million for the same period of the prior year.  The Company's integrated contract revenue by segment was as followings:

• $34.4 million, or 48.3%, related to Industrial Automation & Control, representing a 16.3% segment revenue growth year-over-year;
• Rail and Subway was $35.1 million, or 49.3%, representing a 229.2% increase year over year; of which $22.8 million, or 32.0%, was from Rail Signaling and Control projects, and $12.3 million, or 17.3%, was from Subway Automation and Control; and
• $1.7 million, or 2.4%, related to Nuclear Plant Control projects and miscellaneous, compared to $3.7 million year-over-year.

 

As a percentage of total revenues, overall gross margin was 36.0% for the three months ended December 31, 2010, as compared to 31.2% for the same period of last year. The gross margin for integrated contracts and product sales were 35.7% and 42.1% for the three months ended December 31, 2010, as compared to 31.0% and 35.7% for the same period of last year respectively.

For the three months ended December 31, 2010, selling expenses were $5.4 million, compared to $3.6 million year over year, increased by $1.8 million, or 50.7%, which was mainly due to the Company's expanded sales network and increased selling staffs.  As a percentage of total revenues, selling expenses were 7.2% and 7.7% for the three months ended December 31, 2010 and 2009, respectively.

General and administrative expenses, excluding non-cash stock-based compensation expense, were $4.8 million for the quarter ended December 31, 2010, representing an increase of $0.7 million, or 16.9%, as compared to $4.1 million for the prior year period. As a percentage of total revenues, G&A expenses were 6.5% and 9.0% for the three months ended December 31, 2010 and 2009, respectively. Including the non-cash stock-based compensation cost of $131,019, general and administrative expenses were 5.0 million and 4.3 million for the quarter ended December 31, 2010 and 2009, respectively.

Research and development expenses were $6.4 million for the three months ended December 31, 2010, compared to $3.4 million for the same period of last year, increased by $3.0 million, or 89.9%, mainly due to the Company's increased R&D activities. As a percentage of total revenue, R&D expenses were 8.7% and 7.4% for three months ended December 31, 2010 and 2009, respectively.

The share of net gains from equity investees were $2.3 million for the three months ended December 31, 2010, of which, $2.1 million was from Beijing Techenergy Ltd., the 50/50 joint venture between Hollysys and China Guangdong Nuclear Power Corp., that mainly engages in providing automation and control products and services to China's nuclear industry.

The income tax expenses were $1.7 million the three months ended December 31, 2010, compared to $0.1 million for the prior year period. The effective tax rate was 10.3% and 1.1% for the three months ended December 31, 2010, and 2009, respectively. The large increase of tax expenses was mainly due to lower than normal tax expenses for the same period last year, caused by tax expense claw-back upon successful obtaining "High Technology Enterprise" tax certificate by our Hangzhou subsidiary, Hangzhou Hollysys Automation Co., Ltd.

For the three months ended December 31, 2010, the non-GAAP net income excluding non-cash stock compensation cost was $15.0 million or $0.27 per diluted share based on 55 million shares outstanding. This represents an increase of $6.9 million, or 85.4%, over the $8.1 million, or $0.16 per share based on 51 million shares outstanding, reported in the prior year period. On a GAAP basis, net income attributable to Hollysys was $14.8 million, or $0.27 per diluted share representing an increase of $6.9 million, or 86.8%, over the $7.9 million, or $0.16 per share reported in the prior year period.

Backlog Highlights

Hollysys' backlog as of December 31, 2010 was $288.5 million, compared to $255.3 million on September 30, 2010, and $219.6 million on December 31, 2009. The detailed breakdown of the backlog by segment is as followings:

Cash Flow Highlights

The net cash used in operating activities was $3.5 million for the three months ended December 31, 2010, mainly due to increased accounts receivables. Including investing and financing activities, the total net cash outflow for this quarter was $15.3 million, mainly due to the usage of $12.1 million to repay the three-year period bonds.

Balance Sheet Highlights

As of December 31, 2010, Hollysys' cash and cash equivalents were $95.0 million, compared to $110.2 million on September 30, 2010. Days Sales Outstanding ("DSO") for this quarter is 104 days, as compared to 137 days year-over-year and 111 days quarter-over-quarter. Inventory turnover is 60 days for the three months ended December 31, 2010, as compared to 58 days for the prior year period.

Outlook for FY 2011

Dr. Wang concluded, "Given our strong financial performance to date and historical record-high backlog balance, we are revising our fiscal 2011 revenues and net income guidance from $233M to $237M and $38 million to $39 million to $243 million to $247 million and $39 million to 41 million respectively."

Conference Call

Management will discuss the current status of the Company's operations during a conference call at 8:00 AM ET/9:00 PM Beijing time on Thursday, February 17, 2011. Interested parties may participate in the call by dialing the following numbers approximately 10 minutes before the call is scheduled to begin and ask to be connected to the Hollysys Automation Technologies conference call.  The conference call identification number is 44189027.

In addition, a recorded replay of the conference call will be accessible within 24 hours via Hollysys' website at: http://www.hollysys.com.sg/home/index.php/investor-relations/events-a-webcast

About Hollysys Automation Technologies, Ltd.

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 3000 employees with nationwide Presence in 29 cities in China and serves over 1700 customers in the industrial, railway, subway & nuclear industries. Its proprietary technologies are applied in product lines including Distributed Control System (DCS) and Programmable Logic Controller (PLC) for industrial sector, high-speed railway signaling system of TCC (Train Control Center) and ATP (Automatic Train Protection), subway supervisory and control platform (SCADA), and nuclear conventional island automation and control system.

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.

Reconcile GAAP Net Income to Non-GAAP Net Income

The following table provides more details on the reconciliations between GAAP financial measures that are most directly comparable to non-GAAP financial measures.

SOURCE Hollysys Automation Technologies, Ltd.