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Hollysys Automation Technologies Reports Unaudited Financial Results for the Fiscal Year and the Fourth Quarter Ended June 30, 2017

Fiscal Year 2017 Financial Highlights

  • Non-GAAP net income attributable to Hollysys was $70.1 million, a decrease of 42.3% compared to the comparable prior year period.
  • Total revenues were $431.9 million, a decrease of 20.6% compared to the comparable prior year period.
  • Non-GAAP gross margin was at 32.7%, compared to 37.9% for the comparable prior year period.
  • Net cash provided by operating activities was $69.8 million for the current year.
  • DSO of 201 days, compared to 162 days for the comparable prior year period.
  • Inventory turnover days of 51 days, compared to 38 days for the comparable prior year period.

Fourth Quarter of Fiscal Year 2017 Financial Highlights

  • Non-GAAP net income attributable to Hollysys was $22.6 million, a decrease of 34.0% compared to the comparable prior year period.
  • Total revenues were $138.0 million, a decrease of 6.6% compared to the comparable prior year period.
  • Non-GAAP gross margin was at 39.1%, compared to 39.9% for the comparable prior year period.
  • Net cash provided by operating activities was $23.8 million for the current quarter.
  • DSO of 153 days, compared to 146 days for the comparable prior year period.
  • Inventory turnover days of 50 days, compared to 37 days for the comparable prior year period.

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 2017 and the fourth quarter ended on June 30, 2017 (see attached tables). The management of Hollysys, stated:

Industrial automation presented signal of stabilization starting from the second half of the fiscal year. Our third quarter revenue achieved year-on-year growth for the first time in the last two years, recorded at 0.1%, The growth went further up to 6.5% in the fourth quarter, driving fiscal year revenue decline down to single digit while new contracts was recovering. Performance in power remained prominent. We signed contracts to provide products for large power units, including Sichuan Jiangyou 2X1000MW power units, Xinjiang East Hope 4X660MW power units, Guohua Yongzhou 2X1000MW power units, and Datang Pingluo 2X660MW power units. In chemical, several major contracts we signed include DCS and SIS contract for the polysilicon of Xinjiang East Hope Company, DCS and Batch contract for ASIA CUANON in its Waterborne Coatings Project and DCS, AMS and SIS contract for Bosheng Clean Energy Company. In nuclear, we continued to provide products for Tianwan, Fangchenggang and Hongyanhe Nuclear Stations.

In Factory automation, under the transition from an equipment provider to be a total solution provider, we are developing demonstration projects whose practice and model can be transferrable for future application in related industries. We are currently running testing projects for some renowned domestic enterprises, including an automation-and-intelligence boosting project for Haier's Tianjin-based and Qingdao-based wash machine factories, and another project for Hai Di Lao, the famous hot pot chain, to improve efficiency in hot pot base material making.

In high-speed railway, a flat fourth quarter performance was not enough to offset the 48% decline accumulated in the first three quarters. Weakness persisted throughout the year. Limited completion of newly planned railway infrastructure in the early years of the 13th five-year-plan coupled with change in customer procurement timeline present unfavorable short-term outlook and rendered uncertainties and volatilities in the performance of ATP contracts. For ground-based control, we signed contracts to provide TCC to Jinan-Qingdao Line, Haerbin-Jiamusi Line and Jiujingqu Line. For subway, we adhered to the expansion strategy, winning new SCADA contracts in more cities, such as Wuhan Line 21 and Dalian intercity line (from Jinzhou to Pulandianwan).Even with short-term uncertainty, however, outlook for our rail business in the long run remains positive. National mid and long term plan for the high-speed railway describes a sizable market, while we are paying adequate attention to after sale and replacement demand and expanding our products range.

In the mechanical and electrical installation services, although facing uncertain macroeconomic condition in Singapore and South East Asia as well as political tensions in Middle East, M&E recorded high single-digit growth at 9%. Concord, for example, signed a contract to provide electrical installation services for Macau LRT Phase 1 Project. Ongoing economic and political situation in these areas raised concern on performance and should be closely followed. Moreover, management and risk control can be addressed to improve operation efficiency as counter measure. The strategic value of Concord and Bond as customer resources and international sales channels remains significant and we expect a moderate growth in the future.

The Fourth Quarter and Fiscal Year 2017 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:

(In USD thousands, except for number of shares and per share data)








Three months ended


Fiscal year ended



Jun 30, 2017

Jun 30, 2016

%
Change


Jun 30, 2017

Jun 30, 2016

%
Change










Revenues

$

137,961

147,669

(6.6)%

$

431,943

544,325

(20.6)%

Integrated contract revenue

$

124,733

132,861

(6.1)%

$

385,500

477,790

(19.3)%

Products sales

$

8,549

11,554

(26.0)%

$

32,665

54,546

(40.1)%

Service rendered

$

4,679

3,254

43.8%

$

13,778

11,989

14.9%

Cost of revenues

$

84,065

88,780

(5.3)%

$

290,891

337,781

(13.9)%

Gross profit

$

53,896

58,889

(8.5)%

$

141,052

206,544

(31.7)%

Total operating expenses

$

33,894

25,991

30.4%

$

79,737

81,283

(1.9)%

Selling

$

6,593

6,680

(1.3)%

$

24,412

25,637

(4.8)%

General and administrative

$

14,586

13,535

7.8%

$

43,833

41,972

4.4%

Goodwill impairment charge

$

11,211

-

-


11,211

-

-

Research and development

$

8,026

8,595

(6.6)%

$

30,109

36,564

(17.7)%

VAT refunds and government subsidies

$

(6,522)

(2,819)

131.4%

$

(29,828)

(22,890)

30.3%

Income from operations

$

20,002

32,898

(39.2)%

$

61,315

125,261

(51.1)%

Other income (expenses), net

$

(109)

933

111.7%

$

1,722

2,316

(25.6)%

Foreign exchange losses

$

(267)

(1,027)

(74.0)%

$

(135)

(299)

(54.8)%

Gains on disposal of a subsidiary

$

628

-

-

$

628

-

-

Share of net (loss) income of equity investees

$

(1,063)

1,347

(178.9)%

$

3,607

7,834

(54.0)%

Gains on dilution and divestment of the Company's interests in HollyCon

$

8,085

-

-

$

14,514

-

-

Dividend income from cost investees


(450)

1,109

(140.6)%


-

1,109

(100.0)%

Interest income

$

1,256

1,807

(30.5)%

$

3,687

5,858

(37.1)%

Interest expenses

$

(55)

(397)

(86.1)%

$

(849)

(1,311)

(35.2)%

Income tax expenses

$

5,383

1,100

389.4%

$

14,386

14,238

1.0%

Net income attributable to noncontrolling interests

$

42

1,305

(96.8)%

$

25

5,033

(99.5)%

Non-GAAP net income attributable to Hollysys Automation Technologies Ltd.

$

22,602

34,265

(34.0)%

$

70,078

121,497

(42.3)%

Non-GAAP basic EPS

$

0.37

0.58

(36.2)%

$

1.16

2.05

(43.4)%

Non-GAAP diluted EPS

$

0.37

0.57

(35.1)%

$

1.16

2.02

(42.6)%










Share-based compensation expenses

$

534

594

(10.1)%

$

464

3,860

(88.0)%

Amortization of acquired intangible assets

$

318

165

92.7%

$

581

818

(29.0)%

Acquisition-related incentive share contingent consideration

$

-

-

-

$

-

(1,745)

(100.0)%

Convertible bond related fair value adjustments

$

89

93

(4.3)%


89

93

(4.3)%

GAAP Net income attributable to Hollysys Automation Technologies Ltd.

$

21,661

33,413

(35.2)%

$

68,944

118,471

(41.8)%

GAAP basic EPS

$

0.36

0.56

(35.7)%

$

1.15

2.00

(42.5)%

GAAP diluted EPS

$

0.36

0.55

(34.5)%

$

1.14

1.97

(42.1)%










Basic weighted average common shares outstanding


60,420,004

59,511,267

1.5%


60,190,780

59,170,050

1.7%

Diluted weighted average common shares outstanding


61,268,999

60,675,636

1.0%


61,013,386

60,611,456

0.7%

Operational Results Analysis for the Fiscal Year Ended June 30, 2017

Comparing to the prior fiscal year, the total revenues for fiscal year 2017 decreased from $544.3 million to $431.9 million, representing a decrease of 20.6%. Broken down by the revenue types, services revenue increased by 14.9% to $13.8 million, integrated contracts revenue decreased by 19.3% to $385.5 million, and products sales revenue decreased by 40.1% to $32.7 million. In July 2016, the company's interests in Hollycon were diluted from 51.0% to 30.0% and the Company lost the control of Hollycon. As a result, Hollycon's financials would not be included in the Company's consolidated financials from July 2016 on. If Hollycon's revenue was excluded from the comparable figure for the prior fiscal year, the products sales revenue for fiscal year 2017 should be increased by 13.8%, and the total revenues for fiscal year 2017 should be decreased by 16.7%.

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

(In USD thousands)









Fiscal year ended Jun 30,



2017


2016



$

% to Total Revenue


$

% to Total Revenue

Industrial Automation


172,667

39.9%


182,902

33.6%

Rail Transportation Automation


155,732

36.1%


240,310

44.2%

Mechanical and Electrical Solution

103,544

24.0%


95,277

17.5%

Miscellaneous


-

0.0%


25,836

4.7%

Total


431,943

100.0%


544,325

100.0%

Overall gross margin excluding non-cash amortization of acquired intangibles (non-GAAP gross margin) was 32.7% for fiscal year 2017, as compared to 37.9% for the prior year. The non-GAAP gross margin for integrated contracts, product sales, and services rendered were 28.2%, 69.5% and 70.8% for fiscal year 2017, as compared to 35.2%, 56.0%, and 66.4% 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 32.5% for fiscal year 2017, as compared to 37.8% for the prior year. The GAAP gross margin for integrated contracts, product sales, and service rendered were 28.0%, 69.5% and 70.8% for fiscal year 2017, as compared to 35.0%, 56.0%, and 66.4% for the prior year respectively.

Selling expenses were $24.4 million for fiscal year 2017, representing a decrease of $1.2 million or 4.8% compared to $25.6 million for the prior year. Presented as a percentage of total revenues, selling expenses were 5.7% and 4.7% for fiscal year 2017 and 2016, respectively.

General and administrative expenses, excluding non-cash share-based compensation expenses (non-GAAP G&A expenses), were $43.8 million for fiscal year 2017, representing an increase of $1.8 million, or 4.4%, as compared to $42.0 million for the prior year. Presented as a percentage of total revenues, non-GAAP G&A expenses were 10.1% and 7.7% for fiscal year 2017 and 2016 respectively. The GAAP G&A expenses which include the non-cash share-based compensation expenses were $44.3 million and $45.8 million for fiscal year 2017 and 2016, respectively.

Goodwill impairment charge was $11.2 million for fiscal year 2017. Concord's operating results deviated from previous expectation, and the management estimation was made in forecast of Concord's performances, which led the company to make an estimation of impairment of goodwill related to Concord acquisition.

Research and development expenses were $30.1 million for fiscal year 2017, a decrease of $6.5 million or 17.7% compared to $36.6 million for the prior year. Presented as a percentage of total revenues, R&D expenses were 7.0% and 6.7% for fiscal year 2017 and 2016, respectively. If...


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