Hollysys Automation Technologies Reports Unaudited Fiscal 2009 Second Quarter Financial Results Ended December 31, 2008
Mar 5, 2009
Q2 Financial Highlights
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Record revenues of $52.5 million, an increase of 40.8% quarter-over-quarter and 22.2% year-over-year
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Gross margin of 34.6%, as compared to 25.9% in the same period of last year
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Non-GAAP net income of $11.1 million, an increase of 81.4% quarter-over-quarter and 114.0% year-over-year
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$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
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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 |
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Q2 FY2009 | Q2 FY2008 | ||||||||||||||||
Amount |
% to |
Amount |
% to |
Y-O-Y % |
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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. |
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Three months ended December 31, |
Six months ended December 31, |
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2008 |
2007 |
2008 |
2007 |
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(Unaudited) |
(Unaudited) |
(Unaudited) |
(Unaudited) |
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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. |
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December 31, 2008 |
September 30, 2008 |
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(Unaudited) |
(Unaudited) |
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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) |
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Three months ended |
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(Unaudited) |
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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, |
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|
For six months ended Dec. 31, |
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2008 |
2007 |
2008 |
2007 |
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(Unaudited) |
(Unaudited) |
(Unaudited) |
(Unaudited) |
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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 |