Hollysys Automation Technologies Reports Unaudited Fiscal 2009 Third Quarter Financial Results Ended March 31, 2009

May 26, 2009

Q3 Financial Highlights

  • Revenues of $22.9 million, an increase of 24.1% year-over-year
  • Gross margin of 36.5%, as compared to 22.7% and 34.6% in the same period of last year and the quarter ended December 31, 2008, respectively
  • Non-GAAP net income of $2.1 million, as compared to $2.0 million year-over-year
  • $11.3 million net cash generated from operations for the quarter ended on March 31, 2009; cash and cash equivalents of $106.2 million as of March 31, 2009
  • $177.7 million backlog, as compared to $164.2 million quarter-over- quarter, and $153.7 million year-over-year

BEIJING--May 26, 2009-- Hollysys Automation Technologies, Ltd. (NASDAQ: HOLI) ("Hollysys" or the "Company"), a leading automation and control systems and products provider in China, today announced unaudited financial results for its fiscal third quarter ended March 31, 2009 (see attached tables).

Dr. Changli Wang, Hollysys' Chief Executive Officer, stated, "We are pleased to deliver a solid quarterly financial performance with strong momentum from the industrial automation and rail segments. We improved our revenues, gross margins, and generated an operating cash flow of $11.3 million. Hollysys continued to further establish itself as one of the major players in the high-speed rail automation and control segment this quarter through winning a new contract to provide its Train Control Center products to the Zhengzhou-Xian High-Speed Railway project. This follow-on contract is valued at approximately $15 million, which is in addition to Hollysys' previous contract win of over $22 million last year for the same project."

Dr. Wang continued, "Hollysys is currently benefiting from China's favorable political and economic environment during the economic slowdown. Following the RMB4 trillion stimulus package, on May 12, 2009, the Chinese government also announced the Equipment Manufacturing Industry Revitalization Action Plan, which is aimed at increasing the usage of domestic manufactured equipment in ten key industries including: the high-speed rail, urban rail transportation, and clean energy industries. The plan includes government provided value-added tax (VAT) refunds to domestic equipment manufacturers, more stringent monitoring of major equipment procurement to favor domestic equipment, and insurance programs for the first-time adoption of domestic made equipment in commercial projects. We feel that this action plan will better position Hollysys to compete with international competitors for projects in the industrial, rail, nuclear, and clean energy sectors."

Fiscal 2009 Third Quarter Unaudited Financial Results Summary

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
 ----------------------------------------------

                        Q3 FY2009                   Q3 FY2008
                   --------------------  -----------------------------
                     Amount     % to        Amount     % to    Y-O-Y %
                                Revenue               Revenue  CHANGE
                   -----------  -------  -----------  -------  -------

 Revenues          $    22,899   100.0%  $    18,458   100.0%    24.1%
   Integrated
    Contract
    Revenue        $    21,329    93.1%  $    16,667    90.3%    28.0%
   Products Sales  $     1,570     6.9%  $     1,791     9.7%   -12.3%
 Cost of Revenues  $    14,544    63.5%  $    14,268    77.3%     1.9%
 Gross Profit      $     8,355    36.5%  $     4,190    22.7%    99.4%
 Total Operating
  Expenses         $     5,690    24.8%  $     3,334    18.1%    70.7%
   Selling         $     2,279    10.0%  $     1,647     8.9%    38.4%
   General and
    Administrative $     2,586    11.3%  $     2,270    12.3%    13.9%
   Research and
    Development    $     2,128     9.3%  $     1,180     6.4%    80.3%
   VAT Refunds     $    (1,303)   -5.7%  $    (1,763)   -9.6%   -26.1%
 Income from
  Operations       $     2,665    11.6%  $       856     4.6%   211.2%
 Non-GAAP Net
  Income           $     2,075     9.1%  $     2,016    10.9%     3.0%
 Basic Non-GAAP
  EPS              $      0.05           $      0.05             -6.0%
 Diluted Non-GAAP
  EPS              $      0.05           $      0.05             -6.0%

 Stock-based
  Compensation
  Cost for Options $        99     0.4%  $        47     0.3%   109.1%
 Net Income (GAAP) $     1,976     8.6%  $     1,968    10.7%     0.4%
 Basic GAAP EPS    $      0.04           $      0.05             -8.3%
 Diluted GAAP EPS  $      0.04           $      0.05             -8.4%

 Basic Weighted
  Average Common
  Shares
  Outstanding       45,942,614            41,964,592              9.5%
 Diluted Weighted
  Average Common
  Shares
  Outstanding       45,987,015            41,974,193              9.6%

For the three months ended March 31, 2009, total revenues increased 24.1% to $22.9 million, from $18.5 million in the comparable prior fiscal year period. Of the total revenues, revenue from integrated contracts increased 28.0% to $21.3 million, from $16.7 million for the same period of the prior year. The Company's integrated contract revenue by segment was as follows:

  • $14.4 million, or 67.7%, related to Industrial Automation & Control;
  • Rail and subway was $5.8 million, or 27.0%, of which $4.1 million, or 19.0%, was from Rail Signaling and Control projects, and $1.7 million, or 8.0%, was from Subway System Integration projects;
  • $0.6 million, or 2.8%, related to Nuclear Plant Control projects; and
  • $0.5 million, or 2.5%, related to miscellaneous contracts.

For the three months ended March 31, 2009, Hollysys' total cost of revenues was $14.5 million, compared to $14.3 million for the same period of the prior year. The cost of integrated contracts increased to $14.2 million, or 66.5% of integrated contract revenue, for the three months ended March 31, 2009, compared to $14.0 million, or 83.9%, for the same period of the prior year.

As a percentage of total revenues, overall gross margin improved to 36.5% for the three months ended March 31, 2009, up from 22.7% for the prior fiscal year period. The gross margin for integrated contracts was 33.5% for the three months ended March 31, 2009, compared to 16.1% for the same period of the prior year, largely due to higher gross margin in industrial automation and rail revenue recognized for the quarter ended March 31, 2009.

For the three months ended March 31, 2009, selling expenses were $2.3 million, an increase of $0.7 million, compared to $1.6 million for the same period of the prior year. As a percentage to total revenues, selling expenses were 10.0% and 8.9% for the three months ended March 31, 2009 and 2008, respectively.

General and administrative expenses were $2.6 million for the three months ended March 31, 2009, or 11.3% as a percentage of total revenues, compared to $2.3 million, or 12.3%, for the same period of the prior year.

Research and development ("R&D") expenses were $2.1 million for the three months ended March 31, 2009, compared to $1.2 million for the same period of the prior year. As a percentage to total revenue, R&D expenses were 9.3% and 6.4% for three months ended March 31, 2009 and 2008, respectively. The increase was mainly due to increased R&D activities.

For the three months ended March 31, 2009, non-GAAP net income, excluding non-cash stock compensation cost, was $2.1 million, or $0.05 per diluted share based on 46 million shares outstanding. This represents an increase of $0.1 million, or 3.0%, over the $2.0 million, or $0.05 per share, based on 42 million shares outstanding, reported in the prior year period. On a GAAP basis, net income was $2.0 million, or $0.04 per diluted share, based on 46 million shares outstanding, compared to net income of $2.0 million, or $0.05 per diluted share, based on 42 million shares outstanding, for the same period of the prior year.

Backlog Highlights

Hollysys' backlog as of March 31, 2009 was $177.7 million, compared to $164.2 million at December 31, 2008, and $153.7 million at March 31, 2008. The detailed breakdown for the backlog by segment is as followings:

  • $56.6 million related to Industrial Automation & Control, or 31.9% of the total backlog;
  • $50.2 million related to System Integration projects for Subway, or 28.2% of the total backlog;
  • $68.1 million related to Rail Signaling and Control projects, or 38.3% of the total backlog;
  • $2.8 million related to Nuclear and other miscellaneous contracts, or 1.6% of the total backlog.

Cash Flow Highlights

Hollysys generated an operating cash flow of $11.3 million for the three months ended March 31, 2009. Including investing and financing activities, the total net cash inflow for the three months ended March 31, 2009 was $19.8 million.

Balance Sheet Highlights

As of March 31, 2009, Hollysys' cash and cash equivalents were $106.2 million, compared to $86.4 million at December 31, 2008. Days Sales Outstanding ("DSO") for the quarter ended March 31, 2009 is 250 days, reduced from 289 days for the prior year period, but significantly increased from 114 days for the quarter ended December 31, 2008 mainly due to seasonally lower revenues.

Outlook for FY 2009

Dr. Wang concluded, "Hollysys' management team is committed to delivering strong and sustainable growth to our shareholders. We are well on track to achieve our previously provided annual guidance for FY 2009 of revenues between $150 million and $165 million and gross margin between 30% and 35%. We continue to see more opportunities in each of Hollysys' business segments, especially in high-speed rail, driven by the government's economic stimulus package. Hollysys is currently in a strong financial position with over $106 million in cash, which we expect will enable us to carry out Hollysys' corporate strategic plan to accelerate Hollysys growth."

Conference Call

Management will discuss the current status of the Company's operations during a conference call at 9:00 AM ET on Wednesday, May 27, 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 ask 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=68212&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 May 29, 2009. Listeners may dial 800-642-1687 (Domestic) or 706-645-9291 (International) and use the code 96834383 for the phone replay.

About Hollysys Automation Technologies

Hollysys Automation Technologies is a leading automation and control systems and products provider in China. Founded in 1993, Hollysys has approximately 2,100 employees with 9 sales centers and 13 service centers in 21 cities in China and serves over 1700 customers in the industrial, railway & nuclear industries. Its product lines include Distributed Control Systems (DCS) and Programmable Logic Controllers (PLC), high-speed railway Train Control Centers (TCC) and Automatic Train Protection (ATP), and safety controls for nuclear power plants. Hollysys is the only certified domestic automation control systems provider to the nuclear industry in China. Hollysys is also one of only five automation control systems and products providers approved by China's Ministry of Railways in the 200km to 250km high-speed rail segment, and is one of only two automation control systems and products providers approved in the 300km to 350km high-speed rail segment.

The Hollysys Automation Technologies, Ltd. logo is available at http://www.globenewswire.com/newsroom/prs/?pkgid=5983

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 impact of China's Equipment Manufacturing Industry Revitalization Action Plan on the Company's ability to win additional projects; 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 U.S. Dollars)

                      Three months ended          Nine months ended
                            March 31,                 March 31,
                   ------------------------- -------------------------
                       2009         2008         2009         2008
                       ----         ----         ----         ----
                    (Unaudited)  (Unaudited)  (Unaudited)  (Unaudited)
                   ------------ ------------ ------------ ------------
 Revenues
 Integrated
  contract revenue $ 21,328,566 $ 16,667,323 $107,511,907 $ 83,474,562
 Products sales       1,570,426    1,790,719    5,217,848    6,095,325
                   ------------ ------------ ------------ ------------
 Total revenues      22,898,992   18,458,042  112,729,755   89,569,887

 Cost of integrated
  contracts          14,173,795   13,992,001   71,357,962   62,052,363
 Cost of products
  sold                  370,402      275,809    1,786,610    2,295,925
                   ------------ ------------ ------------ ------------
 Gross profit         8,354,795    4,190,232   39,585,183   25,221,599

 Operating expenses
 Selling              2,278,944    1,647,200    7,695,185    7,028,745
 General and
  administrative      2,586,052    2,269,647   23,858,389   24,365,980
 Research and
  development         2,127,975    1,180,254    5,236,663    2,861,561
 VAT refunds         (1,302,685)  (1,763,024)  (4,176,354)  (4,663,981)
                   ------------ ------------ ------------ ------------
 Total operating
  expenses            5,690,286    3,334,077   32,613,883   29,592,305

                   ------------ ------------ ------------ ------------
 Income (loss) from
  operations          2,664,509      856,155    6,971,300   (4,370,706)

 Other income
  (expense), net        (89,014)      82,305      783,560      (36,998)
 Share of net gains
  (losses) of
  equity investees     (252,907)     108,387      132,548      471,662
 Government subsidy      14,819    1,150,799    1,249,067    2,428,955
 Interest expense,
  net                  (130,832)    (198,224)    (726,491)  (3,930,190)
                   ------------ ------------ ------------ ------------
 Income (loss)
  before income
  taxes               2,206,575    1,999,422    8,409,984   (5,437,277)

 Income taxes
  expenses (credit)       2,878     (209,464)   2,219,865      685,012
                   ------------ ------------ ------------ ------------
 Income (loss)
  before minority
  interest            2,203,697    2,208,886    6,190,119   (6,122,289)

 Minority interest      227,514      240,400    4,012,393    1,373,134
                   ------------ ------------ ------------ ------------
 Net income (loss) $  1,976,183 $  1,968,486 $  2,177,726 $ (7,495,423)
                   ============ ============ ============ ============

 Weighted average
  number of common
  shares             45,942,614   41,964,592   44,606,848   33,373,132
 Weighted average
  number of diluted
  common shares      45,987,015   41,974,193   44,621,648   33,373,132


 Basic earnings
  (loss) per share         0.04         0.05         0.05        (0.22)
                   ------------ ------------ ------------ ------------
 Diluted earnings
  (loss) per share         0.04         0.05         0.05        (0.22)
                   ------------ ------------ ------------ ------------

 Other
  comprehensive
  income (loss)
 Net income (loss)    1,976,183    1,968,486    2,177,726   (7,495,423)
 Translation
  adjustments          (324,925)   3,225,628      431,070    6,422,572
                   ------------ ------------ ------------ ------------
 Comprehensive
  income (loss)    $  1,651,258 $  5,194,114 $  2,608,796 $ (1,072,851)
                   ============ ============ ============ ============


                      Hollysys Automation Technologies, Ltd.
                        CONSOLIDATED BALANCE SHEETS
                            (In U.S. Dollars)

                                             March 31,    December 31,
                                               2009          2008
                                               ----          ----
                                            (Unaudited)   (Unaudited)
                                            ------------  ------------

 ASSETS
  Current Assets
   Cash and cash equivalents                $106,237,008  $ 86,433,081
   Contract commitment deposit in banks        6,125,887     6,108,769
   Accounts receivable, net of allowance
    for doubtful accounts of $5,781,307 and
    $5,129,999                                55,000,421    61,535,561
   Cost and estimated earnings in excess of
    billings, net of allowance for doubtful
    accounts of $787,460 and $722,693         45,123,125    46,727,333
   Other receivables, net of allowance for
    doubtful accounts of $191,648 and
    $243,855                                   3,794,761     3,121,150
   Advances to suppliers                       7,393,679     9,244,172
   Amount due from related parties             7,021,251     6,343,320
   Inventories, net of provision of $427,789
    and $460,865                              21,756,105    21,155,570
   Prepaid expenses                            1,551,788       373,971
   Deferred tax assets                           958,096       722,456
                                            ------------  ------------
  Total current assets                       254,962,121   241,765,383

  Property, plant and equipment, net          45,560,157    31,343,861
  Long term investments                       10,523,337    10,715,614
  Long term deferred expenses                    107,013       122,541
  Deferred tax assets                            647,953       673,138

  Total assets                               311,800,581   284,620,537
                                            ------------  ------------

 LIABILITIES AND STOCKHOLDERS' EQUITY
  Current liabilities
   Short-term bank loans                       5,851,461     5,862,953
   Current portion of long-term loans          7,314,326     7,328,692
   Accounts payable                           39,399,255    29,542,186
   Deferred revenue                           27,722,572    19,020,953
   Accrued payroll and related expense         4,209,740     5,943,049
   Income tax payable                          1,871,771     1,901,730
   Warranty liabilities                        2,136,529     2,049,842
   Other tax payables                          6,965,456     8,933,977
   Accrued liabilities                         2,707,546     3,299,301
   Amounts due to related parties              1,455,552     2,022,007
   Deferred tax liabilities                      377,363       544,811
                                            ------------  ------------
  Total current liabilities                  100,011,571    86,449,501

   Long-term bank loans                       11,702,921            --
   Long-term bonds payable                    11,702,921    11,725,907

  Total liabilities                          123,417,413    98,175,408
                                            ------------  ------------

  Minority interest                           21,292,467    21,104,906

  Commitments and contingencies
                                                      --            --

  Stockholder's equity
   Common stock, par value $0.001 per share,
    100,000,000 shares authorized,
    43,942,614 and 45,942,614 shares issued
    and outstanding                               45,943        43,943
   Additional paid-in capital                108,853,190   108,755,971
   Appropriated earnings                      11,676,276    11,676,276
   Retained earnings                          32,720,210    30,744,027
   Cumulative translation adjustments         13,795,082    14,120,007
                                            ------------  ------------
  Total stockholder's equity                 167,090,701   165,340,224

  Total liabilities, minority interests and
   stockholders' equity                     $311,800,581  $284,620,538
                                            ------------  ------------


                    Hollysys Automation Technologies, Ltd.
                 CONSOLIDATED STATEMENTS OF CASH FLOWS
                            (In U.S. Dollars)

                                            Three months  Three months
                                               ended         ended
                                              March 31,   December 31,
                                                2009          2008
                                             (Unaudited)   (Unaudited)
                                            ------------  ------------

 Cash flows from operating activities:
       Net income (loss)                    $  1,976,183  $ (5,898,717)
 Adjustments to reconcile net income to net
  cash provided by (used in) operating
  activities:
  Minority interest                              227,514     2,608,463
  Depreciation and amortization                  575,630       564,230
  Allowance for doubtful accounts                985,126         6,072
  Provision (reversal) for inventories           (33,076)     (135,581)
  Loss on disposal of property, plant and
   equipment                                      41,905         2,540
  Loss on deemed acquisition of a subsidiary          --        18,984
  Share of net losses (gains) from equity
   investees                                     252,907      (611,218)
  Amortization of expenses accrued for bond
   payable                                        15,294        16,791
  Stock-based compensation                        99,219    17,044,394
  Deferred tax assets (liabilities)             (377,903)      302,046
 Changes in operating assets and
  liabilities:
  Accounts receivable                          7,102,015    (2,355,863)
  Inventories                                   (567,460)    2,245,292
  Advance to suppliers                         1,850,493         8,166
  Other receivables                             (652,111)      558,080
  Deposits and other assets                     (755,497)       (4,434)
  Due from related parties                      (676,800)   (2,942,084)
  Accounts payable                            (2,625,026)    3,769,242
  Advance from customers                       8,701,619    (6,564,551)
  Accruals and other payable                  (2,320,481)      244,917
  Due to related parties                        (566,455)      539,653
  Tax payable                                 (1,998,480)    2,797,591
                                            ------------  ------------
  Net cash provided by operating activities   11,254,616    12,214,013

 Cash flows from investing activities:
  Purchase of property, plant and equipment   (2,913,264)      (82,478)
  Proceeds from disposing property, plant
   and equipment                                     758         5,066
  Repayment from (Advance to) related
   parties                                       (81,788)    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                                 (2,994,294)      970,532


 Cash flows from financing activities:
  Repayments of short-term loans                      --    (2,930,467)
  Proceeds from long-term bank loans          11,718,349            --
                                            ------------  ------------
  Net cash provided by (used in) financing
   activities                                 11,718,349    (2,930,467)

  Effect of foreign exchange rate changes       (174,744)     (879,244)
                                            ------------  ------------
  Net increase (decrease) in cash and cash
   equivalents                              $ 19,803,927  $  9,374,834
                                            ============  ============

  Cash and cash equivalents, beginning of
   period                                     86,433,081    77,058,247
  Cash and cash equivalents, end of period  $106,237,008  $ 86,433,081



 Reconcile GAAP Net Income (Loss) 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.

                       Three months ended        Nine months ended
                            March 31,                March 31,
                    ------------------------  ------------------------
                       2009         2008          2009         2008
                       ----         ----          ----         ----
                    (Unaudited)  (Unaudited)  (Unaudited)  (Unaudited)
                    -----------  -----------  -----------  -----------
 Net income (loss)  $ 1,976,183  $ 1,968,486  $ 2,177,726  $(7,495,423)
                    -----------  -----------  -----------  -----------
 Adjustments:
   Amortization of
    discount and
    interest on
    notes payable
    related to
    bridge loan              --           --           --    3,244,434
   Stock-based
    compensation
    cost for
    incentive shares         --           --   17,000,000   17,000,000
   Stock-based
    compensation
    cost for options     99,219       47,445      188,007       47,445
                    -----------  -----------  -----------  -----------
 Non-GAAP net
  income            $ 2,075,402  $ 2,015,931  $19,365,733  $12,796,456
                    ===========  ===========  ===========  ===========