Hollysys Automation Technologies Reports Unaudited Financial Results for Fiscal Year 2011 Third Quarter Ended March 31, 2011

Financial Highlights

• Quarterly revenues of $55.8 million, representing an increase of 67.2% compared to $33.4 million year-over-year
• Gross margin at 40.3%, as compared to 37.2% year-over-year, and 36.0% quarter-over-quarter
• Non-GAAP net income attributable to Hollysys of $9.6 million, as compared to $5.2 million and a 83.6% increase year-over-year
• Diluted EPS at $0.17 reported for the quarter, as compared to $0.10 year-over-year
• Backlog of $280.9 million as of March 31, 2011, a 15.9% increase compared to $242.3 million year-over-year
• Quarterly DSO of 156 days, as compared to 192 days year-over-year

 

Dr. Changli Wang, Chairman and CEO of Hollysys, stated: "We are pleased to report another stellar quarter with solid financial and operational performance. I would like to take this opportunity to discuss some of the key events that took place during this quarter."

"In our industrial automation business, we achieved a significant breakthrough in successful commissioning of our proprietary DCS at Guohua Taishan Thermal Power Plant. This is the first-ever successful application of China-made large-scale DCS for 1 GW ultra-supercritical thermal power station in China. The mile-stone success reference will further widen our opportunities in high-end thermal power market segment. We will continue to leverage on our proprietary technology to provide better value to our customers in high-end markets, while increasing our foot-prints and coverage in low-end to mid-end markets to strive to be the market leader in China's burgeoning industrial automation market.

Our high-speed rail business also showed strong momentum in signing a US$ 24.3 million 200-250km/h ATP contract in April. Excluding this newly awarded contract of US$24.3 million, our high-speed rail backlog was reported at a high level of US$ 103 million as of March 31, 2011, which we believe would be mostly realized during the next twelve to fifteen months. To put this backlog balance in perspective, our reported high-speed rail backlog was fluctuating in the range of US$42 million and US$68 million between June 30, 2008 and September 30, 2010. With approximately 17,000 km of high-speed rail tracks under construction and the newly announced budget of RMB 2.8 trillion for the next five years, China is still investing heavily in building its high-speed rail network for the next five years as the next five year plan budget represents a significant increase compared to the actual spending of approximately RMB 1.9 trillion for the past five year. Ministry of Rail of China is planning to invest RMB 0.745 trillion in building rail network for 2011 and will have 45,000 km of high-speed rail network in operation by the end of 2015. We believe there is still a huge potential in high-speed rail signaling market for leading players like Hollysys to capture going forward. Driven by low carbon emission initiative internationally, we are also eyeing international opportunities to further increase our rail technology and product footprints. Hollysys will continuously execute on its well-set strategy in rail automation market, both national and metro, to strive to be a leading player in this field."

Dr. Wang continued: "In our nuclear business, we were encouraged to see the continuous flow of new orders from China Guangdong Nuclear Power Holding Co to our 50% nuclear JV for automation and control related services of #3 and #4 reactors of Yangjiang nuclear power station, of which the conventional island automation and control system is designed to be based on Hollysys proprietary HOLLiAS-N platform. This new order brought our nuclear JV's backlog to aggregated 14 reactors, which we believe will continuously flow to Hollysys within the next 24 months. Given the recent incident in Japan, the Management believes that China will have to rely on nuclear as a clean, economical power source compared to traditional coal-fired energy, and the heightened safety consciousness would benefit China's nuclear industry in a long run. With a 50% holding JV in place with the most leading nuclear station builder and operator in China, Hollysys will continuously enjoy its privileged position in China's nuclear automation and control market. "

Fiscal Year 2011 Third Quarter Unaudited Financial Results Summary

To facilitate a clear understanding of Hollysys operational result, a summary of unaudited non-GAAP financial results is shown as below:

In USD thousands, except share numbers and EPS

Operational Results Analysis for the three months ended March 31, 2011

For the three months ended March 31, 2011, total revenues increased by 67.2% to $55.8 million, from $33.4 million in the comparable prior fiscal year period.  Of the total revenues, revenue from integrated contracts increased by 67.7% to $52.4 million, compared to $31.3 million for the same period of the prior year.  The Company's integrated contract revenue by segment was as followings:

(In USD million)

As a percentage of total revenues, overall gross margin was 40.3% for the three months ended March 31, 2011, as compared to 37.2% for the same period of last year. The gross margin for integrated contracts and product sales were 38.8% and 65.1% for the three months ended March 31, 2011, as compared to 33.8% and 88.4% for the same period of last year respectively. The gross margin increase was mainly due to higher gross margin in rail and subway businesses, as a result of a few higher margin projects or portion of projects being recognized in the quarter.

For the three months ended March 31, 2011, selling expenses were $5.3 million, compared to $5.4 million quarter over quarter, and $2.7 million year over year. The increased was mainly due to the Company's expanded sales network and increased selling staffs.  As a percentage of total revenues, selling expenses were 9.5% and 8.2% for the three months ended March 31, 2011 and 2010, respectively.  On a cumulative basis for nine months ended March 31, 2011, selling expenses were $14.3 million and 7.5% of the total revenue, which is in line with our historical pattern.

General and administrative expenses, excluding non-cash stock-based compensation expense, were $4.9 million for the quarter ended March 31, 2011, compared to $4.7 million quarter over quarter, and $2.4 million year over year. As a percentage of total revenues, G&A expenses were 8.8% and 7.3% for the three months ended March 31, 2011 and 2010, respectively. On a cumulative basis for nine months ended March 31, 2011, general and administrative expenses were $13.4 million and 7% of the total revenue, which is in line with our historical pattern. Including the non-cash stock-based compensation cost of $134,388 and $131,019, general and administrative expenses were 5.0 million and 2.6 million for the quarter ended March 31, 2011 and 2010, respectively. The slight increase in stock-based compensation was mainly due to newly issued restricted stock compensation to two independent directors on appointment term renewal basis.

Research and development expenses were $3.9 million for the three months ended March 31, 2011, compared to $3.0 million for the same period of last year, increased by $0.9 million, or 30.1%, mainly due to the Company's increased R&D activities. As a percentage of total revenue, R&D expenses were 6.9% and 8.9% for three months ended March 31, 2011 and 2010, respectively. On a cumulative basis for nine months ended March 31, 2011, research and development expenses were $14.6 million and 7.7% of the total revenue.

The share of net gains from equity investees were $0.4 million for the three months ended March 31, 2011, of which, $0.3 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 $0.2 million the three months ended March 31, 2011, compared to $0.2 million for the prior year period. The effective tax rate was 1.8% and 3.6% for the three months ended March 31, 2011, and 2010, respectively.

For the three months ended March 31, 2011, the non-GAAP net income excluding non-cash stock compensation cost was $9.6 million or $0.17 per diluted share based on 55 million shares outstanding. This represents an increase of $4.4 million, or 83.6%, over the $5.2 million, or $0.10 per share based on 51 million shares outstanding, reported in the prior year period. On a GAAP basis, net income attributable to Hollysys was $9.5 million, or $0.17 per diluted share representing an increase of $4.4 million, or 85.7%, over the $5.1 million, or $0.10 per share reported in the prior year period.

Backlog Highlights

Hollysys' backlog as of March 31, 2011 was $280.9 million, compared to $288.5 million on December 31, 2010, and $242.3 million on March 31, 2010. The detailed breakdown of the backlog by segment is as followings:

(In USD million)

In backlog segment breakdown, both industrial automation backlog and nuclear automation backlog set a historical high in Hollysys' history.

Cash Flow Highlights

The net cash used in operating activities was $3.9 million for the three months ended March 31, 2011, mainly due to increased inventories, which was built up for one material high-speed rail project to enable the Company to meet the required delivery deadline. This project is expected to be completed delivery in June quarter. Including investing and financing activities, the total net cash inflow for this quarter was $0.9 million.

Balance Sheet Highlights

As of March 31, 2011, Hollysys' cash and cash equivalents were $95.9 million, compared to $95.0 million on December 31, 2010. Days Sales Outstanding ("DSO") for this quarter is 156 days, as compared to 192 days year-over-year and 104 days quarter-over-quarter. Inventory turnover is 101 days for the three months ended March 31 2011, as compared to 94 days for the prior year period.

Outlook for FY 2011

Dr. Wang concluded, "Given our strong financial performance to date and backlog currently on-hand, we are again revising up our fiscal 2011 revenues and net income guidance from $243M to $247M and $39 million to $41 million to $255 million to $259 million and $41 million to 42 million respectively. It is worth noting that this is the second time in a row that management has to revise up the previously provided fiscal year guidance. The management has taken note of recent pressure on Company's stock price due to market conditions caused by misperception and firmly believes that our stock price will eventually reflect our intrinsic value over the longer term. Hollysys will continue to leverage on its core growth pillar foundations of its proprietary technology and strategic alliance with leading organization to penetrate and increase its market share in respective high-growth end markets. At the right conditions, Hollysys will also rely on M&A to accelerate its growth pace and penetrate into the new market, to create long-term value for our shareholders."

Conference Call

Management will discuss the current status of the Company's operations during a conference call at 9:00 AM ET/9:00 PM Beijing time on Tuesday, May 10, 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 62043796.

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.