Hollysys Automation Technologies Reports Unaudited Fiscal 2009 Second Quarter Financial Results Ended December 31, 2008

Mar 5, 2009

Q2 Financial Highlights

  • Record revenues of $52.5 million, an increase of 40.8% quarter-over-quarter and 22.2% year-over-year
  • Gross margin of 34.6%, as compared to 25.9% in the same period of last year
  • Non-GAAP net income of $11.1 million, an increase of 81.4% quarter-over-quarter and 114.0% year-over-year
  • $12.2 million net cash generated from operations for the quarter ended on December 31, 2008; cash and cash equivalents of $86.4 million as of December 31, 2008 and working capital of $155.3 million
  • DSO at 114 days for the quarter ended December 31, 2008, significantly reduced from 159 days for the quarter ended September 30, 2008

BEIJING--Mar 5, 2009-- Hollysys Automation Technologies, Ltd. (NASDAQ: HOLI) ("Hollysys" or the "Company"), the leading domestic provider of automation control systems to China's rail, nuclear, and industrial markets, today announced unaudited financial results for its fiscal second quarter ended December 31, 2008 (see attached tables).

Dr. Changli Wang, Hollysys' Chief Executive Officer, stated, "We are very pleased to deliver a strong quarterly performance as we further reinforce our leading position in the industrial automation market and make significant strides in China's rail and nuclear automation industries. The record quarterly revenue is primarily due to the accelerating growth of our rail and nuclear segments. In the nuclear automation market, we achieved a significant milestone by successfully installing our proprietary control system in replacement of an existing foreign system at Dayawan Nuclear Station during a routine annual maintenance period. Under strict time restrictions, Hollysys installed and successfully implemented this system, which we feel is a strong validation of the adaptability and user-friendliness of Hollysys' high quality automation systems.'

Dr. Wang continued, 'We continue to see more opportunities in the high-speed rail market in 2009, as China's stimulus plan is expected to support further infrastructure build-out across the country. In addition to rail, we believe that Hollysys is well-positioned to grow its leading share of the industrial and nuclear industries, as there is an unprecedented opportunity in each of these targeted markets. Hollysys is in an incredibly strong financial position with over $86.4 million in cash. We expect that our solid financial foundation will allow us to improve our strength in the rail and industrial automation markets through further investment in R&D while increasing long-term value for our shareholders.'

Fiscal 2009 Second Quarter Unaudited Financial Results Review

To facilitate a clear understanding of Hollysys, a summary of unaudited non-GAAP financial results is included below.

In USD thousands, except share numbers and EPS

    Q2 FY2009   Q2 FY2008
    Amount  

% to
Revenue

  Amount  

% to
Revenue

 

Y-O-Y %
CHANGE

                         
Revenues   $ 52,526     100.0 %   $ 42,971     100.0 %   22.2 %
Integrated Contract Revenue   $ 50,225     95.6 %   $ 38,838     90.4 %   29.3 %
Products Sales   $ 2,301     4.4 %   $ 4,133     9.6 %   -44.3 %
Cost of Revenues   $ 34,376     65.4 %   $ 31,840     74.1 %   8.0 %
Gross Profit   $ 18,151     34.6 %   $ 11,130     25.9 %   63.1 %
Total Operating Expenses   $ 4,993     9.5 %   $ 6,276     14.6 %   -20.4 %
Selling   $ 2,651     5.0 %   $ 3,123     7.3 %   -15.1 %
General and Administrative   $ 1,918     3.7 %   $ 3,696     8.6 %   -48.1 %
Research and Development   $ 1,942     3.7 %   $ 1,049     2.4 %   85.1 %
VAT Refunds   $ (1,518 )   -2.9 %   $ (1,592 )   -3.7 %   -4.6 %
Income from Operations   $ 13,157     25.0 %   $ 4,854     11.3 %   171.0 %
Non-GAAP Net Income   $ 11,146     21.2 %   $ 5,208     12.1 %   114.0 %
Basic Non-GAAP EPS   $ 0.254         $ 0.153         65.2 %
Diluted Non-GAAP EPS   $ 0.254         $ 0.153         65.2 %
                         
Stock-based Compensation Cost for Incentive Shares   $ 17,000     32.4 %   $ 4,250     9.9 %   300.0 %
Stock-based Compensation Cost for Options   $ 44     0.1 %   $ -     0.0 %    
Net Income (GAAP)   $ (5,899 )   -11.2 %   $ 958     2.2 %   -715.9 %
Basic GAAP EPS   $ (0.134 )       $ 0.028         -575.5 %
Diluted GAAP EPS   $ (0.134 )       $ 0.028         -575.5 %
Basic Weighted Average Common Shares Outstanding     43,953,484           33,932,970         29.5 %
Diluted Weighted Average Common Shares Outstanding     43, 953,484           33,932,970         29.5 %

For the three months ended December 31, 2008, total revenues increased 22.2% to $52.5 million, from $43.0 million in the comparable prior fiscal year period. Of the total revenues, revenue from integrated contracts increased 29.3% to $50.2 million, from $38.8 million for the same period of the prior year. The Company's integrated contract revenue by segment was as follows:

  • Rail and subway was $21.4 million, or 42.6%, of which $13.9 million, or 27.7%, was from Subway System Integration projects and $7.5 million, or 14.9%, was from Rail Signaling and Control projects;
  • $2.7 million, or 5.4%, related to Nuclear Plant Control projects; and
  • $1 million, or 2%, related to miscellaneous contracts.

For the three months ended December 31, 2008, Hollysys' total cost of revenues was $34.4 million, compared to $31.8 million for the same period of the prior year. The cost of integrated contracts increased to $33.8 million, or 67.3% of integrated contract revenue, for the three months ended December 31, 2008, compared to $29.1 million, or 74.8%, for the same period of the prior year.

As a percentage of total revenues, overall gross margin improved to 34.6% for the three months ended December 31, 2008, up from 25.9% for the prior fiscal year period. The gross margin for integrated contracts was 32.7% for the three months ended December 31, 2008, compared to 25.2% for the same period of the prior year, largely due to revenue mix shifting more towards high margin businesses such as high-speed rail and nuclear automation systems.

For the three months ended December 31, 2008, selling expenses were $2.7 million, a decrease of $0.4 million and $0.1 million, compared to $3.1 million and $2.8 million for the same period of the prior year and the quarter ended September 30, 2008, respectively. As a percentage to total revenues, selling expenses were 5.0% and 7.3% for the three months ended December 31, 2008 and 2007, respectively.

General and administrative ('G&A') expenses were $1.9 million for the three months ended December 31, 2008, or 3.7% as a percentage of total revenues, compared to $3.7 million, or 8.6%, and $2.3 million, or 7.4%, for the same period of the prior year and the quarter ended September 30, 2008, respectively. The decrease in general and administrative expenses was mainly due to decrease in consulting fees for the quarter, compared on a quarter to quarter basis. G&A expenses presented in financial statements for the period ended December 31, 2008 were approximately $19 million, including $17.0 million in non-cash stock compensation expense on earn-out shares and stock-based option cost.

Research and development expenses were $1.9 million for the three months ended December 31, 2008, compared to $1.0 million for the same period of the prior year. As a percentage to total revenue, R&D expenses were 3.7% and 2.4% for three months ended December 31, 2008 and 2007, respectively. The increase was mainly due to increased R&D activities.

For the three months ended December 31, 2008, non-GAAP income excluding the non-cash stock compensation cost was $11.1 million, or $0.25 per diluted share based on 44 million shares outstanding. This represents an increase of $5.9 million, or 114.0%, over the $5.2 million, or $0.15 per share based on 33.9 million shares outstanding, reported in the prior year period. On a GAAP basis, net loss was $5.9 million, or $0.13 per diluted share based on 44 million shares outstanding, compared to net income of $1.0 million, or $0.03 per diluted share based on 33.9 million shares outstanding, for the same period of the prior year.

For the three months ended December 31, 2008, comprehensive income was $10.4 million, after translation adjustments of $0.69 million from non-GAAP income of $11.1 million. As a result, the Company achieved its 2008 calendar year incentive target of $32 million comprehensive income.

Backlog Highlights

Hollysys' backlog as of December 31, 2008 was $164.2 million, compared to $200.7 million at September 30, 2008, and $121.4 million at December 31, 2007. The current breakdown for the backlog by segment is:

  • $52.7 million related to Industrial Automation & Control;
  • $51.5 million related to System Integration projects for Subway;
  • $56.0 million related to Rail Signaling and Control projects; and
  • $4.0 million related to Nuclear and other miscellaneous contracts.

Cash Flow Highlights

Hollysys generated operating cash flow of $12.2 million for the three months ended December 31, 2008. Including investing and financing activities, the total net cash inflow for the three months ended December 31, 2008 was $9.4 million.

Balance Sheet Highlights

As of December 31, 2008, Hollysys' cash and cash equivalents were $86.4 million, compared to $77.1 million at September 30, 2008, with working capital of $155.3 million versus $144.8 million, and with a current ratio of 2.8:1. Days Sales Outstanding ('DSO') for the quarter ended December 31, 2008 is significantly reduced to 114 days, from 159 days of the prior quarter. Beginning with the period ended December 31, 2008, the Company will present its accounts receivable ('AR') in a more detailed manner on the balance sheet broken down by AR and cost and estimated earnings in excess of billings, which is essentially unbilled AR. The break-down of the Company's billed and unbilled receivable has been historically provided in the Notes to the financial statements. The Company is satisfied with the result of its AR collection efforts and will continue to work on more timely collection of AR.

Outlook for FY 2009

Dr. Wang concluded, 'Hollysys' management team is committed to delivering strong and sustainable growth to our shareholders. Our rail and nuclear business segments are expected to begin making increased contributions to both gross margins and bottom line, which was evidenced by our solid performance this quarter. In light of this confidence, we are reiterating our annual estimate for FY 2009 of revenues between $150 million and $165 million and gross margins between 30% and 35%. We look forward to continued growth and remain confident in our abilities to achieve our corporate goals in the coming year.

Conference Call

Management will discuss the current status of the Company's operations during a conference call at 8:00 AM ET on Thursday, March 5, 2009. Interested parties may participate in the call by dialing (888) 787-0460 (U.S.) or (706) 679-3200 (International) approximately 10 minutes before the call is scheduled to begin and asking to be connected to the Hollysys Systems conference call. In addition, the conference call will be broadcast live over the internet athttp://investor.shareholder.com/media/eventdetail.cfm?eventid=66168&CompanyID=Hollysys&e=1&mediaKey=8DD3979970F58831B44C9F0414C1FF38.

The internet audio stream will be available for 30 days after the call. A recorded replay of the call will also be available until 12:00 a.m. Eastern Time on March 11, 2009. Listeners may dial 800-642-1687 (Domestic) or 706-645-9291 (International) and use the code 87217325 for the phone replay.

About Hollysys Automation Technologies

Hollysys Automation Technologies is the leading automation systems provider in the industrial, rail and nuclear power sectors in China, with its own proprietary core technologies and completing numerous projects utilizing a wide array of automation products. Founded in 1993, Hollysys current have approximately 1,800 employees with 9 sales centers and 13 service centers in China. Its product lines include digital railway signal & information systems, safety control of nuclear power reactors, e-government, motor drive & transmission.

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 significance of the Company's appointment of Peter Li as CFO; the impact of the Company's planned R&D investment; 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.

Hollysys Automation Technologies LTD.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(In US Dollars)

             

 

   

Three months ended December 31,

   

Six months ended December 31,

     

2008

   

2007

   

2008

   

2007

     

(Unaudited)

   

(Unaudited)

   

(Unaudited)

   

(Unaudited)

Revenues                        
Integrated contract revenue   $ 50,224,953     $ 38,837,535     $ 86,183,341     $ 66,807,239  
Products sales     2,301,260       4,133,003       3,647,422       5,538,542  
Total revenues     52,526,213       42,970,538       89,830,763       72,345,781  
                         
Cost of integrated contracts     33,781,932       29,054,058       57,184,167       48,060,362  
Cost of products sold     593,712       2,785,995       1,416,208       3,254,052  
Gross profit     18,150,569       11,130,485       31,230,388       21,031,367  
                         
Operating expenses                        
Selling     2,650,876       3,123,413       5,416,241       5,381,545  
General and administrative     18,962,598       7,945,532       21,272,337       22,096,333  
Research and development     1,942,224       1,049,101       3,108,688       1,681,307  
VAT refunds     (1,518,146 )     (1,591,863 )     (2,873,669 )     (2,900,957 )
Total operating expenses     22,037,552       10,526,183       26,923,597       26,258,228  
                         
Income (loss) from operations     (3,886,983 )     604,302       4,306,791       (5,226,861 )
                         
Other income (expense), net     664,819       (226,150 )     872,574       (119,303 )
Share of net gains of equity investees     611,218       230,714       385,455       363,275  
Government subsidy     1,017,383       1,252,620       1,234,248       1,278,156  
Interest expense, net     (262,976 )     (338,386 )     (595,659 )     (3,731,966 )
Income (loss) before income taxes     (1,856,539 )     1,523,100       6,203,409       (7,436,699 )
                         
Income taxes expenses     1,433,715       252,785       2,216,987       894,476  
Income (loss) before minority interest     (3,290,254 )     1,270,315       3,986,422       (8,331,175 )
                         
Minority interest     2,608,463       312,634       3,784,879       1,132,734  
Net income (loss)   $ (5,898,717 )   $ 957,681     $ 201,543     $ (9,463,909 )
                         
Weighted average number of common shares     43,964,353       33,932,970       43,953,484       29,134,961  
Weighted average number of diluted common shares     43,964,353       33,932,970       43,953,484       29,134,961  
Basic earnings (loss) per share     (0.134 )     0.028       0.005       (0.325 )
Diluted earnings (loss) per share     (0.134 )     0.028       0.005       (0.325 )
                         
Other comprehensive income (loss)                        
Net income (loss)     (5,898,717 )     957,681       201,543       (9,463,909 )
Translation adjustments     (686,925 )     2,163,180       755,998       3,196,944  
Comprehensive income (loss)   $ (6,585,642 )   $ 3,120,861     $ 957,541     $ (6,266,965 )

 

Hollysys Automation Technologies LTD.
CONSOLIDATED BALANCE SHEETS
(In US Dollars)

                 
         

December 31, 2008

   

September 30, 2008

         

(Unaudited)

   

(Unaudited)

ASSET          
  Current Assets        
    Cash and cash equivalents   $ 86,433,081   $ 77,058,247
    Contract performance deposit in banks     6,108,769     6,129,886
    Accounts receivable, net of allowance for doubtful accounts of $5,129,999 and $5,000,647     61,535,561     61,099,124
    Cost and estimated earnings in excess of billings, net of allowance for doubtful accounts of $722,693 and $841,718     46,727,333     44,818,234
    Other receivables, net of allowance for doubtful accounts of $243,855 and $247,710     3,121,150     3,644,268
    Advances to suppliers     9,244,172     9,252,338
    Amount due from related parties     6,343,320     5,435,589
    Inventories, net of provision of $460,865 and $490,911     21,155,570     23,265,280
    Prepaid guarantee fee     373,971     348,420
    Deferred tax assets     722,456     775,615
  Total current assets     241,765,383     231,827,001
                 
  Property, plant and equipment, net     31,343,861     29,913,198
  Long term investments     10,715,614     10,072,340
  Long term deferred expenses     122,541     138,521
  Deferred tax assets     673,138     700,405
                 
  Total assets     284,620,537     272,651,465
                 
LIABILITIES AND STOCKHOLDERS' EQUITY            
  Current liabilities            
    Short-term bank loans     5,862,953     8,836,654
    Current portion of long-term loans     7,328,692     7,363,879
    Accounts payable     29,542,186     24,678,012
    Deferred revenue     19,020,953     25,585,504
    Accrued payroll and related expense     5,943,049     5,689,493
    Income tax payable     1,901,730     1,250,189
    Warranty liabilities     2,049,842     1,886,467
    Other tax payables     8,933,977     6,787,926
    Accrued liabilities     3,299,301     3,553,418
    Amounts due to related parties     2,022,007     1,025,427
    Deferred tax liabilities     544,811     323,191
  Total current liabilities     86,449,501     86,980,160
                 
    Long-term bank loans     -     -
    Long-term bonds payable     11,725,907     11,782,206
                 
  Total liabilities     98,175,408     98,762,366
                 
  Minority interest     21,104,906     19,007,624
                 
  Commitments and contingencies     -     -
                 
  Stockholder's equity            
    Common stock, par value $0.001 per share, 100,000,000 shares authorized, 43,942,614 shares issued and outstanding     43,943     43,943
    Additional paid-in capital     108,755,971     91,711,577
    Appropriated earnings     11,676,276     11,676,276
    Retained earnings     30,744,027     36,642,744
    Cumulative translation adjustments     14,120,007     14,806,935
  Total stockholder's equity     165,340,223     154,881,475
                 
  Total liabilities, minority interests and stockholders' equity   $ 284,620,537   $ 272,651,465

 

Hollysys Automation Technologies LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In US Dollars)

       

Three months ended
December 31, 2008

       

(Unaudited)

Cash flows from operating activities:      
  Net income (loss)   $ (5,898,717 )
Adjustments to reconcile net income to net cash      
provided by (used in) operating activities:      
  Minority interest     2,608,463  
  Depreciation and amortization     564,230  
  Allowance (reversal) for doubtful accounts     6,072  
  Provision (reversal) for inventories     (135,581 )
  Loss on disposal of property, plant and equipment     2,540  
  Loss on deemed acquisition of a subsidiary     18,984  
  Share of net gains from equity investees     (611,218 )
  Amortization of expenses accrued for bond payable     16,791  
  Stock-based compensation     17,044,394  
  Deferred tax assets (liabilities)     302,046  
Changes in operating assets and liabilities:      
  Accounts receivable     (2,355,863 )
  Inventories     2,245,292  
  Advance to suppliers     8,166  
  Other receivables     558,080  
  Deposits and other assets     (4,434 )
  Due from related parties     (2,942,084 )
  Accounts payable     3,769,242  
  Advance from customers     (6,564,551 )
  Accruals and other payable     244,917  
  Due to related parties     539,653  
  Tax payable     2,797,591  
  Net cash provided by (used in) operating activities     12,214,013  
         
Cash flows from investing activities:      
  Purchase of property, plant and equipment     (82,478 )
  Proceeds from disposing property, plant and equipment     5,066  
  Repayment from (Advance to) related parties     1,417,973  
  Dividends from long-term investments     69,609  
  Acquisition of a subsidiary, net of cash acquired     (439,638 )
  Net cash provided by (used in) investing activities     970,532  
         
Cash flows from financing activities:      
  Proceeds from (Repayments of) short-term loans     (2,930,467 )
  Net cash provided by (used in) financing activities     (2,930,467 )
         
  Effect of foreign exchange rate changes     (879,244 )
  Net increase (decrease) in cash and cash equivalents   $ 9,374,834  
         
  Cash and cash equivalents, beginning of period     77,058,247  
  Cash and cash equivalents, end of period   $ 86,433,081

 

Reconcile GAAP Net Income (Loss) to Non-GAAP Net Income (Loss)

 

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

       

For three months

ended Dec. 31,

 

 

For six months

ended Dec. 31,

       

2008

   

2007

   

2008

   

2007

       

(Unaudited)

   

(Unaudited)

   

(Unaudited)

   

(Unaudited)

                           
GAAP Net Income (Loss)   $ (5,898,717 )   $ 957,681   $ 201,543   $ (9,463,909 )
Non-GAAP Adjustments:                        
  Stock-based compensation cost for incentive shares     17,000,000       4,250,000     17,000,000     17,000,000  
  Stock-based compensation cost for options     44,394       -     88,788     -  
Non-GAAP Net Income   $ 11,145,677     $ 5,207,681   $ 17,290,331   $ <10,780,525