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

 

 

 

n-top: 0px; margin-bottom: 0px; line-height: 150%; text-align: right;">

 

 

 

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.