Hollysys Automation Technologies Reports Unaudited Fiscal 2008 First Quarter Financial Results Ended September 30, 2007
Mar 31, 2008
For the three months ended September 30, 2007, total revenues were $29.4 million, an increase of 20% from the $24.4 million reported in the prior fiscal year period. This increase was largely due to an 11% increase in the total integrated contracts under operations, with 1,027 contracts for the period-ended September 30, 2007 compared to 927 contracts for the prior fiscal year period. Due to higher demand, Hollysys also reported a 78% increase in product revenue (the selling of spare parts and component products to customers for maintenance and replacement purposes) of $1.4 million for its fiscal 2008 first quarter from $790,000 in the prior year.
As a percentage of total revenues, the overall gross margin declined to 34% for the three months ended September 30, 2007 from 40% for the prior fiscal year, primarily due to different project mix and higher raw material costs. The Company's 2006 margins benefited from a higher margin high speed rail contract reported in the year earlier period. Gross margin for integrated contracts were 32% for the period ended September 30, 2007 from 39% in the prior year period. Since project margin varies in different types of integrated contracts and in different business sectors, the margin level may continue to fluctuate in future periods.
Pursuant to the stock purchase agreement under the redomestication merger, HollySys stockholders will receive 2 million shares if the Company achieved or exceeded an after-tax profit of $23 million for the 12 months ended December 31, 2007. After-tax profit shall be computed using the US GAAP and refers to the comprehensive income; provided that the computation shall exclude (i) any after-tax profits from any acquisition by the Company or its subsidiaries that involved the issuance of securities that has a dilutive effect on the holders of common stock of the Company, and (ii) any expenses related to the issue of the aforesaid shares. Management anticipates that the Company will achieve such earn-out target for the abovementioned period. In accordance with SFAS 123R, the Company has accounted for the fair value of the aforesaid shares to be issued proportional to the period ended September 30, 2007 as stock compensation expenses and $12.75 million was booked as a general and administrative expense.
The Company reported a net interest expense of $3.1 million for its fiscal 2008 first quarter, compared to $301,000 for the prior year period. The increase was due to merger related expenses connected to the previously announced $30 million bridge loan in December 2006, with $2.42 million being the amortization of discount on notes payable and $670,000 being the accrued interest on notes payable. The Company anticipates that there will be no further material interest expense from the bridge loan in future quarters.
As a result of the stock compensation expenses and bridge loan interest expenses, Hollysys reported a net loss of $10.4 million or $0.43 loss per diluted share, compared to a net income of $5.2 million or $0.24 per diluted share for the prior fiscal year period.
Excluding the stock compensation expenses and bridge loan expenses (on a non-GAAP basis), the Company would have reported net income of $5.4 million or $0.19 per diluted share for its fiscal 2008 first quarter. The presentation of these non-GAAP financial measures is not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with GAAP. Hollysys believes that these non-GAAP financial measures provide meaningful supplemental information regarding its performance by excluding certain expenses and expenditures that may not be indicative of its operating performance from a cash perspective. A limitation of using non-GAAP financial measures is that these non-GAAP measures exclude share-based compensation charge that has been and will continue to be for the foreseeable future a significant recurring expense in our business. The following table provides more details on the reconciliations between GAAP financial measures that are most directly comparable to non-GAAP financial measures.
Three Months Ended September 30 |
||
2006 |
2007 |
|
Net income (loss) in GAAP measures | $5,239,366 | $(10,421,590) |
Stock compensation expenses |
- |
12,750,000 |
Amortization of discount and interest on notes payable |
- |
3,086,443 |
Net income in non-GAAP measures | $5,239,366 | $5,414,853 |
Weighted average number of common shares | 22,200,000 | 24,353,261 |
Weighted average number of diluted common shares (Note) | 22,200,000 | 29,032,555 |
Basic earnings (loss) per share in GAAP measures | $0.24 | $(0.43) |
Basic earnings per share in non-GAAP measures | $0.24 | $0.22 |
Diluted earnings (loss) per share in GAAP measures (Note) | $0.24 | $(0.43) |
Diluted earnings per share in non-GAAP measures | $0.24 | $0.19 |
(Note) In calculating the diluted loss per share for the three months ended September 30, 2007 in GAAP measures, the exercise of warrants will be anti-dilutive and therefore being excluded from the calculation of diluted common shares.
Backlog
Hollysys' backlog as of September 30, 2007 amounted to $112.3 million, representing an increase of 15%, compared to $98 million as of September 30, 2006. Of the total backlog, the unrecognized revenue associated with new contracts signed in the current period was $30.8 million. The current breakdown for the backlog by segment:
-
$58 million related to Industrial Automation & Control
-
$46.8 million related to System Integration projects for Subway & Rail
-
$7.5 million related to miscellaneous contracts
This backlog total does not incorporate a nuclear plant control system project of $97 million, which was announced in July 2007. That contract was signed by Hollysys' JV company Beijing Techenergy.
Hollysys included the following table, which sets forth the information regarding the contracts won during the periods and backlog at the dates as indicated:
|
For fiscal years Ended June 30 |
For Three months Ended September 30 |
|||
2005 |
2006 |
2007 |
2006 |
2007 |
|
Number of new contracts won during the period |
702 |
927 |
1,161 |
275 |
370 |
Total amount of new contracts (million) |
$90.06 |
$117.17 |
$138.77 |
$36.89 |
$42.52 |
Average value per contract |
$128,286 |
$126,397 |
$119,526 |
$134,152 |
$114,916 |
To provide a further update on the backlog level, Hollysys' backlog as of December 31, 2007 amounted to $121.4 million, representing an increase of 22%, compared to $99.4 million as of December 31, 2006. Of the total backlog, the unrecognized revenue associated with new contracts signed in the period was $57.4 million. The breakdown for the backlog by segment:
-
$47 million related to Industrial Automation & Control
-
$72.4 million related to System Integration projects for Subway & Rail
-
$2 million related to miscellaneous contracts
Balance Sheet Highlights
As of September 30, 2007 Hollysys' cash and cash equivalents amounted to $16.1 million compared with $11.7 million at June 30, 2007; with working capital of $63.7 million versus $27 million; and a current ratio of 1.8:1. Of note, the Company's inventories increased as a result of the previously mentioned purchases of materials for the production of the Company's LK series PLCs. This amount does not include approximately $57.2 million generated from the redemption of all of the Hollysys outstanding warrants in December 2007.
Outlook
Based on the growth in backlog for the quarter ended September 30, 2007 and the favorable trends in each of Hollysys' three industry segments, the Company expects total revenues for the period ended December 31, 2007 to be approximately $40 million, a sequential increase of 36% in revenue growth from the fiscal first quarter of 2008. The Company also expects to achieve comprehensive income of $23 million for the calendar year ended December 31, 2007, excluding merger related expenses and stock compensation expenses.
Upcoming Events
The Company expects to issue financial results for its fiscal 2008 second quarter and six-month period ended December 31, 2007 in April. After which, the Company will conduct a conference call to discuss the financial results, the current status and upcoming development of the Company.
About Hollysys
Hollysys has become one of the leading automation systems providers in the PRC, developing a number of core technologies and completing numerous projects utilizing a wide array of automation products. The Company specializes in the research, development, production, sale and distribution of industrial automation and control systems, competing effectively with both domestic Chinese companies and large, multinational participants in the industrial, rail and nuclear power sectors.
Consolidated Statement of Income
(In US Dollars)
|
|
Three Months Ended September 30, |
|
||
|
|
2006 |
|
2007 |
|
|
|
(Unaudited) |
|
(Unaudited) |
|
Revenues: |
|
|
|
|
|
Integrated contract revenue |
$ |
23,619,837 |
$ |
27,969,704 |
|
Products sales |
|
789,908 |
|
1,405,539 |
|
|
|
|
|
|
|
Total revenues |
|
24,409,745 |
|
29,375,243 |
|
|
|
|
|
|
|
Cost of integrated contracts |
|
14,310,603 |
|
19,006,304 |
|
Cost of products sold |
|
236,637 |
|
468,057 |
|
|
|
|
|
|
|
Gross profit |
|
9,862,505 |
|
9,900,882 |
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
Selling |
|
2,043,359 |
|
2,258,132 |
|
General and administrative |
|
1,123,636 |
|
14,138,450 |
|
Research and development |
|
156,828 |
|
187,307 |
|
Impairment loss |
|
- |
|
- |
|
Loss on disposal of assets |
|
1,054 |
|
12,351 |
|
|
|
|
|
|
|
Total operating expenses |
|
3,324,877 |
|
16,596,240 |
|
|
|
|
|
|
|
Income (loss) from operations |
|
6,537,628 |
|
(6,695,358 |
) |
|
|
|
|
|
|
Other income (expense), net |
|
(30,535 |
) |
106,847 |
|
Interest expense, net |
|
(301,138 |
) |
(3,393,580 |
) |
Investment income (loss) |
|
(79,236 |
) |
132,561 |
|
Subsidy income |
|
344,912 |
|
889,731 |
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
6,471,631 |
|
(8,959,799 |
) |
|
|
|
|
|
|
Income taxes expenses |
|
384,125 |
|
641,691 |
|
|
|
|
|
|
|
Income (loss) before minority interest |
|
6,087,506 |
|
(9,601,490 |
) |
|
|
|
|
|
|
Income attributed to GTH’s preferred shares |
|
- |
|
136,855 |
|
|
|
|
|
|
|
Minority interest |
|
848,140 |
|
683,245 |
|
|
|
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|
|
|
Net income (loss) |
$ |
5,239,366 |
$ |
(10,421,590 |
) |
|
|
|
|
|
|
Weighted average number of common shares |
|
22,200,000 |
|
24,353,261 |
|
|
|
|
|
|
|
Weighted average number of diluted common shares |
|
22,200,000 |
|
24,353,261 |
|
|
|
|
|
|
|
Basic earnings (loss) per share |
$ |
0.24 |
$ |
(0.43 |
) |
|
|
|
|
|
|
Diluted earnings (loss) per share |
$ |
0.24 |
$ |
(0.43 |
) |
|
|
|
|
|
|
Other comprehensive income: |
|
|
|
|
|
Net income (loss) |
$ |
5,239,366 |
$ |
(10,421,590 |
) |
Translation adjustments |
|
539,164 |
|
1,033,764 |
|
|
|
|
|
|
|
Comprehensive income (loss) |
$ |
5,778,530 |
$ |
(9,387,826 |
) |
Consolidated Balance Sheet
(In US Dollars)
|
|
June 30, |
|
September 30, |
|
|
|
2007 |
|
2007 |
|
|
|
|
|
(Unaudited) |
|
ASSETS |
|
|
|
|
|
Current Assets: |
|
|
|
|
|
Cash and cash equivalents |
$ |
11,668,761 |
$ |
16,081,824 |
|
Contract performance deposit in banks |
|
3,524,317 |
|
3,972,546 |
|
Term deposit |
|
853,915 |
|
867,499 |
|
Accounts receivable, net of allowance for doubtful accounts $2,836,677 and $3,048,911 |
|
87,372,794 |
|
90,865,338 |
|
Other receivables, net of allowance for doubtful accounts $111,329 and $111,260 |
|
2,856,404 |
|
2,963,815 |
|
|
8,146,854 |
|
8,376,453 |
|
|
Inventories, net of provision $345,976 and $284,404 |
|
13,907,280 |
|
20,358,168 |
|
Prepaid guarantee fee |
|
74,404 |
|
243,085 |
|
Total current assets |
|
128,404,729 |
|
143,728,728 |
|
|
|
|
|
|
|
Property, plant and equipment, net |
|
17,332,953 |
|
17,878,824 |
|
Long term investments |
|
9,192,888 |
|
9,145,203 |
|
Total assets |
$ |
154,930,570 |
$ |
170,752,755 |
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
Short-term bank loans |
$ |
16,421,440 |
$ |
13,346,146 |
|
Current portion of long-term loans |
|
1,970,573 |
|
1,334,615 |
|
Notes payables, net of discount of $4,819,326 and $0 |
|
27,566,936 |
|
5,788,215 |
|
Accounts payable |
|
22,309,829 |
|
22,970,722 |
|
Deferred revenue |
|
11,620,046 |
|
13,921,184 |
|
Accrued payroll and related expense |
|
6,959,187 |
|
7,467,389 |
|
Income tax payable |
|
804,156 |
|
1,220,288 |
|
Warranty liabilities |
|
2,126,569 |
|
2,382,931 |
|
Other tax payables |
|
6,492,801 |
|
6,814,242 |
|
Accrued liabilities |
|
3,905,481 |
|
2,781,891 |
|
Amounts due to related parties |
|
768,781 |
|
1,017,885 |
|
Deferred tax liabilities |
|
473,201 |
|
480,729 |
|
Tax effect on re-domestication |
|
- |
|
473,700 |
|
Total current liabilities |
|
101,419,000 |
|
79,999,937 |
|
|
|
|
|
|
|
Long-term liabilities: |
|
|
|
|
|
Long-term loans |
|
3,284,288 |
|
6,673,073 |
|
Total liabilities |
|
104,703,288 |
|
86,673,010 |
|
Convertible preferred shares of GTH |
|
3,706,599 |
|
3,903,968 |
|
Minority interest |
|
13,200,169 |
|
14,098,198 |
|
|
|
|
|
|
|
Stockholders’ equity: |
|
|
|
|
|
Preferred stock, par value $0.001 per share,1,000,000 shares authorized, 0 shares issued and outstanding |
|
- |
|
- |
|
Common stock, par value $0.001 per share, 100,000,000 shares authorized, 22,200,000 and 30,700,000 shares issued and outstanding |
|
22,200 |
|
30,700 |
|
Additional paid-in capital |
|
18,170,639 |
|
36,108,245 |
|
Appropriated earnings |
|
8,283,294 |
|
8,283,294 |
|
Note receivable from the sole stockholder |
|
(30,000,000) |
) |
(5,801,215) |
) |
Retained earnings |
|
33,185,199 |
|
22,763,609 |
|
Cumulative translation adjustments |
|
3,659,182 |
|
4,692,946 |
|
Total stockholder’s equity |
|
33,320,514 |
|
66,077,579 |
|
Total liabilities and stockholders' equity |
$ |
154,930,570 |
$ |
170,752,755 |
|
This release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward looking statements are statements that are not historical facts, including statements relating to the expected growth of Hollysys, future product introductions, the mix of products in future periods and future operating results. 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. The following factors, among others, could cause actual results to differ from those set forth in the forward-looking statements: business conditions in China and in Southeast Asia; continued compliance with government regulations; legislation or regulatory environments, requirements or changes adversely affecting the businesses in which Hollysys is engaged; cessation or changes in government incentive programs: potential trade barriers affecting international expansion; fluctuations in customer demand; management of rapid growth and transitions to new markets; intensity of competition from or introduction of new and superior products by other providers of automation and control system technology; timing, approval and market acceptance of new product introductions; general economic conditions; geopolitical events and regulatory changes, as well as other relevant risks detailed in Hollysys' filings with the Securities and Exchange Commission. The information set forth herein should be read in light of such risks. Hollysys does not assume any obligation to update the information contained in this press release or filings.