Hollysys Automation Technologies Reports Unaudited Financial Results for the Fiscal Year and the Fourth Quarter Ended June 30, 2016

BEIJING, Aug. 14, 2016 /PRNewswire/ -- Hollysys Automation Technologies, Ltd. (NASDAQ: HOLI) ("Hollysys" or the "Company"), a leading provider of automation and control technologies and applications in China, today announced its unaudited financial results for the fiscal year 2016 and the fourth quarter ended on June 30, 2016 (see attached tables). The management of Hollysys, stated:

In fiscal year 2016, we kept a steady revenue growth and outperformed the challenging earnings guidance that announced previously, as well as cash flow, despite a difficulty in macro economy. When we delighted the achievements, we calmly evaluated the future opportunities and challenges, and also carefully planned for the future growth. Here we would like to discuss the achievements in the past fiscal year and strategies in future:

In industrial automation, the soft performance was mainly because of the influence of general economic environment. During the past fiscal year, China continued adjusting its industry structure and reducing the capacity in some industries such as petrochemical, metallurgy and building materials. However, Hollysys took several strategies to mitigate the impact of market headwinds. We gained more market share from rising industries to make up the loss from decreasing industries. We were doing well in power and chemical which took up the largest portion of our revenue in industrial automation; we further penetrated into high-end market. For instance, we won several bids to provide DCS for supercritical coal fire generating units, such as Funeng Luoyuanwan 2X1052MW, Jiujiang Shenhua 2X1052MW, Guohua Ningdong 2X660MW and Xinjiang TBEA 2X660MW power units. In nuclear sector, we supplied DCS for Hongyanhe 5# and 6# units. In addition, after-sale revenue was still reinforced for fiscal year 2016. With our special team kept reviewing existing customers, the demand of upgrade and maintenance continued growing. Besides, Company has actively expanded in abroad. We signed some contracts which delivered our own proprietary products in overseas market. In India, for example, Lanco Solar Power Polycrystalline Silicon Project will be implemented our DCS and SIS. Indonesia Qingshan 2X350MW Coal-fire Power Units will use our DCS and DEH. We will continue to win more customers and enlarge overseas business scale to support long-term growth of IA. In factory automation sector of IA, we are changing the strategy from providing single products to providing customized turnkey solutions, like what we are doing in the process control to help the customers solve their problems and satisfy their needs. We expect this sector has a good performance in the near future.

The performance of railway transportation was prominent. In high-speed rail sector, we won some contracts to provide the Train Control Centers ("TCC") and other related ground based products, such as Chongqing to Wanzhou Line and Xi'an to Chengdu Line; we also won several contracts in Automatic Train Protection ("ATP"). In the future, according to the new five year plan and even longer, the investment scale of central government in high speed rail will be still sizable. At the same time, track circuit has finished the second test in June 2016. This new product could make revenue contribution in upcoming years.

Another strong driver of railway transportation sector for this fiscal year was subway business. We signed the contracts to provide SCADA system for Qingdao Line R3, Kunming Line 3, Chengdu Line 10, Lanzhou Line 1, Wuhan Line 8, etc. We will continue working closely with local subway authorities to expand our SCADA business for better marketing our subway signaling control system.

In the mechanical and electrical solution segment, although Concord and Bond are facing some difficulties like projects delayed and the depreciation of local currency, they are still working hard to expand their businesses. Concord, for example, signed a very large contract to provide electrical installation services for Doha Metro Phase 1. As one of the strategies to expand the overseas market, we will ensure a healthy development of Concord and Bond and take use of the advantages of these two companies such as good customer relations and sales channels to ink more international opportunities.

The Fourth Quarter and Fiscal Year 2016 Unaudited Financial Results Summary

To facilitate a clear understanding of Hollysys' operational results, a summary of unaudited non-GAAP financial results is shown as below:

Operational Results Analysis for the Fiscal Year Ended June 30, 2016

Comparing to the prior fiscal year, the total revenues for fiscal year 2016 increased from $531.4 million to $544.3 million, representing an increase of 2.4%. Broken down by the revenue types, integrated contracts revenue decreased by 0.7% to $477.8 million, products sales revenue increased by 37.2% to $54.5 million, and services revenue increased by 13% to $12.0 million.

The Company's total revenues can also be presented in segments as shown in the following chart:

Overall gross margin excluding non-cash amortization of acquired intangibles (non-GAAP gross margin) was 37.9% for fiscal year 2016, as compared to 41.2% for the prior year. The non-GAAP gross margin for integrated contracts, product sales, and services rendered were 35.2%, 56.0% and 66.4% for fiscal year 2016, as compared to 38.5%, 68.4%, and 61.4% for the prior year respectively. The gross margin fluctuation was mainly due to the different revenue mix with different margin. The GAAP overall gross margin which includes non-cash amortization of acquired intangibles was 37.8% for fiscal year 2016, as compared to 40.3% for the prior year. The GAAP gross margin for integrated contracts, product sales, and service rendered were 35.0%, 56.0% and 66.4% for fiscal year 2016, as compared to 37.6%, 68.4%, and 61.4% for the prior year respectively.

Selling expenses were $25.6 million for fiscal year 2016, representing a decrease of $0.7 million or 2.4% compared to $26.3 million for the prior year. Presented as a percentage of total revenues, selling expenses were 4.7% and 4.9% for fiscal year 2016 and 2015, respectively.

General and administrative expenses, excluding non-cash share-based compensation expenses (non-GAAP G&A expenses), were $42.0 million for fiscal year 2016, representing a decreased of $6.3 million, or 13.1%, as compared to $48.3 million for the prior year. The decrease was mainly due to a decrease of $7.4 million in bad debt provision. Presented as a percentage of total revenues, non-GAAP G&A expenses were 7.7% and 9.1% for fiscal year 2016 and 2015 respectively. The GAAP G&A expenses which include the non-cash share-based compensation expenses were $45.8 million and $50.8 million for fiscal year 2016 and 2015, respectively.

Research and development expenses were $36.6 million for fiscal year 2016, an increase of $0.8 million or 2.2% compared to $35.8 million for the prior year. Presented as a percentage of total revenues, R&D expenses were 6.7% and 6.7% for fiscal year 2016 and 2015, respectively.

The VAT refunds and government subsidies were $22.9 million for fiscal year 2016, as compared to $30.4 million for the prior year, representing a $7.5 million or 24.7% decrease which was primarily due to decrease of the VAT refunds of $5.5 million and the government subsidies for $2.0 million.

The income tax expenses and the effective tax rate were $14.2 million and 10.3% for fiscal year 2016, as compared to $26.0 million and 20.8% for the prior year. According to the Notification on Preferential Enterprise Income Tax of Software and Integrated Circuit Industry, Caishui [2016] No. 49, which was issued in May 2016 by the China SAT and the MOF, Beijing Hollysys and Hangzhou Hollysys satisfied the definitions of Key Software Enterprise, and applied to a preferential tax rate of 10% effective for the year from January 1, 2015 to December 31, 2015, instead of the 15% used by the Company in calendar year 2015. As a result, the Company recorded a tax benefit of $7.0 million during the fourth quarter of fiscal 2016. In addition, during the fourth quarter of fiscal year 2016, $3.1 million withholding tax expenses were accrued for the potential profits distribution from PRC to overseas. Excluding the impact of the abovementioned tax benefit and withholding tax expenses, the effective tax rate for fiscal year 2016 should be 13.2%.

The non-GAAP net income attributable to Hollysys, which excludes non-cash share-based compensation expenses, amortization of acquired intangibles, acquisition-related consideration fair value adjustments and convertible bond related fair value adjustments was $121.5 million or $2.02 per diluted share based on 60.6 million shares outstanding for fiscal year 2016. This represents a 17.6% increase over the $103.3 million or $1.72 per share based on 60.1 million shares outstanding reported in prior year. On a GAAP basis, net income attributable to Hollysys was $118.5 million or $1.97 per diluted share representing an increase 22.7% over the $96.5 million or $1.61 per diluted share reported in prior year.  

Operational Results Analysis for the quarter ended June 30, 2016

Comparing to the fourth quarter of the prior fiscal year, the total revenues for the three months ended June 30, 2016 increased from $142.2 million to $147.7 million, representing an increase of 3.9%. Broken down by the revenue types, integrated contracts revenue increased by 4.5% to $132.9 million, products sales revenue increased by 7.3% to $11.6 million, and services revenue decreased by 24.0% to $3.3 million.

The Company's total revenues can also be presented in segments as shown in the following chart:

Overall gross margin excluding non-cash amortization of acquired intangibles (non-GAAP gross margin) was 39.9% for the three months ended June 30, 2016, as compared to 41.4% for the same period of the prior year. The non-GAAP gross margin for integrated contracts, product sales, and services rendered were 37.4%, 58.0% and 74.7% for the three months ended June 30, 2016, as compared to 39.2%, 61.1% and 59.4% for the same period of the prior year respectively. The gross margin fluctuation was mainly due to the different revenue mix with different margin. The GAAP overall gross margin which includes non-cash amortization of acquired intangibles was 39.8% for the three months ended June 30, 2016, as compared to 41.2% for the same period of the prior year. The GAAP gross margin for integrated contracts, product sales, and service rendered were 37.3%, 58.0% and 74.7% for the three months ended June 30, 2016, as compared to 38.9%, 61.1% and 59.4% for the same period of the prior year respectively.

Selling expenses were $6.7 million for the three months ended June, 2016, representing an increase of $0.1 million or 1.6% compared to $6.6 million for the same quarter of the prior year. Presented as a percentage of total revenues, selling expenses were 4.5% and 4.6% for the three months ended June 30, 2016, and 2015, respectively.

General and administrative expenses, excluding non-cash share-based compensation expenses (non-GAAP G&A expenses), were $13.5 million for the quarter ended June 30, 2016, representing a decrease of 1.0 million, or 6.9%, as compared to $14.5 million for the same period of the prior year. Presented as a percentage of total revenues, non-GAAP G&A expenses were 9.2% and 10.2% for quarters ended June 30, 2016 and 2015 respectively. The GAAP G&A expenses which include the non-cash share-based compensation expenses were $14.1 million and $15.4 million for the three months ended June 30, 2016 and 2015, respectively.

Research and development expenses were $8.6 million for the three months ended June 30, 2016, an increase of $1.1 million or 14.3% compared to $7.5 million for the same quarter of the prior year. Presented as a percentage of total revenues, R&D expenses were 5.8% and 5.3% for the quarter ended June 30, 2016 and 2015, respectively.

The VAT refunds and government subsidies were $2.8 million for three months ended June 30, 2016, as compared to $12.4 million for the same period in the prior year, representing a $9.6 million or 77.2% decrease, primarily due to a decrease of the VAT refunds for $7.1 million.

The income tax expenses and the effective tax rate were $1.1 million and 3.1% for the three months ended June 30, 2016, as compared to a $12.3 million and 38.5% for comparable prior year period. During the fourth quarter of fiscal 2016, the Company recorded a tax benefit of $7.0 million according the newly issued Notification on Preferential Enterprise Income Tax of Software and Integrated Circuit Industry, Caishui [2016] No. 49, and a withholding tax expenses of $3.1 million for the potential profits distribution from PRC to overseas.  Excluding the abovementioned impact, the effective tax rate for the three months ended June 30, 2016 should be 14.0%.

The non-GAAP net income attributable to Hollysys, which excludes non-cash share-based compensation expenses, amortization of acquired intangibles, acquisition-related consideration fair value adjustments and convertible bond related fair value adjustments was $34.3 million or $0.57 per diluted share based on 60.7 million shares outstanding for the three months ended June 30, 2016. This represents a 48.8% increase over the $23.0 million or $0.38 per share based on 60.6 million shares outstanding reported in the comparable prior year period. On a GAAP basis, net income attributable to Hollysys was $33.4 million or $0.55 per diluted share representing an increase of 78.9% over the $18.7 million or $0.31 per diluted share reported in the comparable prior year period.  

Integrated Contracts Backlog Highlights

Hollysys' backlog for integrated contracts as of June 30, 2016 was $527.2 million, representing an increase of 5.8% compared to $498.5 million as of Mar 31, 2016 and a decrease of 7.3% compared to $568.5 million as of June 30, 2015. The detailed breakdown of the backlog for integrated contracts by segments is shown below:

Cash Flow Highlights

For the fiscal year ended June 30, 2016, the total net cash inflow was $21.3 million. The net cash provided by operating activities was $46.7 million. The net cash used in investing activities was $2.5 million, mainly consisted of $107.1 million time deposit with original maturities over three months placed with banks, and $7.9 million used for purchases of property, plant and equipment, which was partially offset by the $112.0 million generated from matured time deposits with original maturities over three months. The net cash used in financing activities was $6.8 million, mainly consisted of $17.0 million used for repayments of short-term loans, $9.7 million used for repayments of long-term loans, which was partially offset by $7.7 million proceeds from issuance of shares of a subsidiary, $5.4 million proceeds from exercise of options, and $4.1 million proceeds from short-term bank loans.

For the three months ended June 30, 2016, the total net cash inflow was $29.6 million. The net cash provided by operating activities was $9.9 million. The net cash provided by investing activities was $11.6 million. The net cash provided by financing activities was $12.2 million, mainly consisted of $7.7 million proceeds from issuance of shares of a subsidiary, and $5.1 proceeds from exercise of share options.

Balance Sheet Highlights

The total amount of cash and cash equivalents and time deposits with original maturities over three months were $271.5 million, $256.4 million, and $257.5 million as of June 30, 2016, March 31, 2016 and June 30, 2015, respectively. As of June 30, 2016, the company held $229.1 million in cash and cash equivalents and $42.4 million in time deposits with original maturities over three months.

For fiscal year ended June 30, 2016, Days Sales Outstanding ("DSO") was 162 days, as compared to 176 days from the prior year; and inventory turnover was 38 days, as compared to 41 days from the prior year.

For the three months ended June 30, 2016, DSO was 147 days, as compared to 176 days for the comparable prior year period and 181 days for the last quarter; and inventory turnover was 37 days, as compared to 43 days for the comparable prior year period and 40 days for the last quarter.

Outlook for FY 2017

The management concluded, "Given our strong backlog currently on-hand and sales pipeline envisioned so far, we set our guidance for fiscal year 2017 with revenue in the range of $565 million to $600 million and non-GAAP net income in the range of $130 million to $140 million."

Conference Call

The Company will host a conference call at 9:00 p.m. U.S. Eastern Time on August 14, 2016 / 9:00 a.m. Beijing Time on August 15, 2016, to discuss the financial results for the fiscal year 2016 fourth quarter and the fiscal year ended June 30, 2016 and business outlook.

To participate, please call the following numbers ten minutes before the scheduled start of the call. The conference call identification number is 5915607.

In addition, a recording of the conference call will be accessible within 48 hours via Hollysys' website at: http://ir.hollysys.com/ or http://hollysys.investorroom.com

About Hollysys Automation Technologies, Ltd. (NASDAQ: HOLI)

Hollysys Automation Technologies is a leading provider of automation and control technologies and applications in China that enables its diversified industry and utility customers to improve operating safety, reliability, and efficiency. Founded in 1993, Hollysys has approximately 3,600 employees with nationwide presence in over 60 cities in China, with subsidiaries and offices in Singapore, Malaysia, Dubai, India, and serves over 6,000 customers more than 20,000 projects in the industrial, railway, subway & nuclear industries in China, South-East Asia, and the Middle East. Its proprietary technologies are applied in its industrial automation solution suite including DCS (Distributed Control System), PLC (Programmable Logic Controller), RMIS (Real-time Management Information System), HAMS (HolliAS Asset Management System), OTS (Operator Training System), HolliAS BATCH (Batch Application Package), HolliAS APC Suite (Advanced Process Control Package), SIS (Safety Instrumentation System), high-speed railway signaling system of TCC (Train Control Center), ATP (Automatic Train Protection), Subway Supervisory and Control platform, SCADA (Supervisory Control and Data Acquisition), nuclear power plant automation and control system and other products.

SAFE HARBOUR:

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 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.

For further information, please contact:

Hollysys Automation Technologies Ltd.
www.hollysys.com
+8610-58981386
[email protected]

Non-GAAP Measures

In evaluating our results, the non-GAAP measures of "Non-GAAP general and administrative expenses", "Non-GAAP net income attributable to Hollysys Automation Technologies Ltd. stockholders", "Non-GAAP basic earnings per share", and "Non-GAAP diluted earnings per share" serve as additional indicators of our operating performance and not as a replacement for other measures in accordance with U.S. GAAP. We believe these non-GAAP measures are useful to investors, as they exclude the non-cash share-based compensation expenses, which is calculated based on the number of shares or options granted and the fair value as of the grant date, amortization of acquired intangible assets, fair value adjustments of acquisition-related consideration, and fair value adjustments of a bifurcated derivative. They will not result in any cash inflows or outflows. We believe that using non-GAAP measures help our shareholders to have a better understanding of our operating results and growth prospects. In addition, given the business nature of the Company, it has been a common practice for investors to use such non-GAAP measures to evaluate the Company.

The following table provides a reconciliation of U.S. GAAP measures to the non-GAAP measures for the periods indicated:

SOURCE Hollysys Automation Technologies, Ltd