Hollysys Automation Technologies Reports Unaudited Financial Results for the Second Quarter and the First Half Year Ended December 31, 2023

First Half of Fiscal Year 2024 Financial Highlights

Total revenues were $423.6 million, an increase of 2.1% compared to the comparable prior year period.
Gross margin was 31.9%, compared to 36.1% for the comparable prior year period. Non-GAAP gross margin was 32.1%, compared to 36.3% for the comparable prior year period.
Net income attributable to Hollysys was $45.8 million, a decrease of 34.3% compared to the comparable prior year period. Non-GAAP net income attributable to Hollysys was $46.8 million, a decrease of 35.5% compared to the comparable prior year period. 
Diluted earnings per share was $0.74, a decrease of 33.9% compared to the comparable prior year period. Non-GAAP diluted earnings per share was $0.75, a decrease of 35.9% compared to the comparable prior year period.
Net cash provided by operating activities was $88.3 million.
Days sales outstanding (“DSO”) was 146 days, compared to 144 days for the comparable prior year period.
Inventory turnover days were 74 days, compared to 74 days for the comparable prior year period.

Second Quarter of Fiscal Year 2024 Financial Highlights

Total revenues were $223.7 million, a decrease of 8.6% compared to the comparable prior year period.
Gross margin was 29.5%, compared to 39.6% for the comparable prior year period. Non-GAAP gross margin was 29.7%, compared to 39.7% for the comparable prior year period.
Net income attributable to Hollysys was $14.1 million, a decrease of 70.7% compared to the comparable prior year period. Non-GAAP net income attributable to Hollysys was $14.6 million, a decrease of 70.6% compared to the comparable prior year period.
Diluted earnings per share was $0.23, a decrease of 70.5% compared to the comparable prior year period. Non-GAAP diluted earnings per share was $0.23, a decrease of 71.3% compared to the comparable prior year period.
Net cash provided by operating activities was $60.1 million.
DSO was 138 days, compared to 119 days for the comparable prior year period.
Inventory turnover days were 68 days, compared to 72 days for the comparable prior year period.

See the section entitled “Non-GAAP Measures” for more information about non-GAAP gross margin, non-GAAP net income attributable to Hollysys and non-GAAP diluted earnings per share.

BEIJING, March 7, 2024 /PRNewswire/ — Hollysys Automation Technologies Ltd. (NASDAQ:HOLI) (“Hollysys,” the “Company” or “we”), a leading provider of automation and control technologies and applications in China, today announced its unaudited financial results for the second quarter and the first half of fiscal year 2024 ended December 31, 2023.

In the Industrial Automation segment, the Company’s innovation and development capabilities have once again received industry recognition. In this quarter, the Company was selected for the “2023 Intelligent Manufacturing System Solution List Leading Projects” by the Ministry of Industry and Information Technology of China and “2023 Zhejiang Province High-tech Enterprise Innovation Capability Top 500 List”. It was also awarded the title of “2023 Zhejiang Province Technology Leading Enterprise”. Meanwhile, the Company continues to strengthen its technological foundation and seek development opportunities in various fields. During this quarter, the Company introduced Advanced Planning and Scheduling Technology Plus, which can optimize the entire process from supply chain to production and order delivery, further promoting the development of the Company’s industrial software system.

In the chemical and petrochemical sector, the Company utilized its Advanced Process Control (“APC”) platform to successfully support a chemical company’s first boiler optimization control project, and achieved a fully automatic optimization of boiler air, water, coal, and environmental protection systems, resulting in a significant improvement in the automatic input rate. Furthermore, the Company successfully signed a contract for a company’s 120kt/a carbon fiber precursor production project, where Hollysys will provide production control systems and integrated solution. This project marked a major milestone for Hollysys’ Industrial Optical Bus Control System (“OCS”) and an expansion of its application in the field of carbon fiber precursor automation control.

In the smart factory sector, the Company successfully signed a contract for a 60,000-ton energy grade titanium (alloy) material intelligent manufacturing control platform project, where Hollysys will provide integrated intelligent manufacturing control solutions such as Distributed Control System (“DCS”) and HiaPlant system to assist the company in intelligent production and operation. This project is significant for the Company’s smart factory products and overall solutions in the titanium industry. Additionally, the Company signed a smart factory project to develop and utilize 10,000 tons of battery grade lithium carbonate in an environmentally friendly and comprehensive manner, where Hollysys will provide DCS and HOLLiAS MACS for this project. Upon completion, this project will play a crucial role in guaranteeing the security of local lithium resource supply.

In the electricity sector, the Company completed the optimization and control transformation project of the first heating boiler for a heat source plant in the power industry, in partnership with another company, based on the HOLLiAS APC platform.

In the Rail Transportation Automation segment, the Company maintained its market position. In the high-speed rail sector, the Company won the renovation project of ZPW-2000 track circuit equipment and coding equipment for the Zibo-Boshan railway. Meanwhile, the Company has witnessed significant progress in several key projects that it has been involved in. As the supplier of the Chinese Train Control System Level 3, the Company successfully contributed to the completion of the Guizhou-Guangzhou High-speed Railway upgrading and renovation project, as well as the official opening and operation of the Chengdu-Yibin High-speed Railway. In the urban rail transit sector, the Company acted as the equipment integrator and successfully assisted in the completion of the Integrated Supervisory and Control System upgrade project for Beijing Metro Line 10. The Company also supported the trial operation of the Shenzhen Metro Line 8 Phase II project, providing integrated monitoring system. Additionally, the Company contributed to the opening of the north section of Beijing Metro Line 17 with its Train Integration Automatic System. 

In terms of overseas business, collaborating with other companies, the Company won the bid for the power supply system project of Jurong Regional Line and Sengkang-Punggol Light Rail Depot Line in Singapore. The Company also won the design and construction project of the Overhead Conducting Rail system for the Cross Island Line in Singapore.

In the mechanical and electrical solutions (“M&E”) segment, the Company achieved stable performance with smooth executions on various projects.

With the Company’s continuous dedication to the industry and the support of experienced and passionate experts, Hollysys believes that it will continue to create greater value for clients and shareholders.

Second Quarter and First Half Year Ended December 31, 2023 Unaudited Financial Results Summary

Operational Results Analysis for the First Half Year Ended December 31, 2023

Total revenues for the six months ended December 31, 2023 were $423.6 million, as compared to $414.8 million for the same period of the prior fiscal year, representing an increase of 2.1%. In terms of revenues by type, integrated solutions contracts revenue decreased by 0.6% to $330.2 million, products sales revenue decreased by 0.3% to $23.7 million, and services revenue increased by 18.2% to $69.7 million.

The following table sets forth the Company’s total revenues by segment for the periods indicated.

Gross margin was 31.9% for the six months ended December 31, 2023, as compared to 36.1% for the same period of the prior fiscal year. Gross margins of integrated solutions contracts, product sales, and services rendered were 21.6%, 72.9% and 67.0% for the six months ended December 31, 2023, as compared to 28.3%, 78.0% and 63.2% for the same period of the prior fiscal year, respectively. Non-GAAP gross margin was 32.1% for the six months ended December 31, 2023, as compared to 36.3% for the same period of the prior fiscal year. Non-GAAP gross margin of integrated solutions contracts was 21.8% for the six months ended December 31, 2023, as compared to 28.5% for the same period of the prior fiscal year. See the section entitled “Non-GAAP Measures” for more information about non-GAAP gross margin and non-GAAP gross margin of integrated solutions contracts.

Selling expenses were $36.1 million for the six months ended December 31, 2023, representing an increase of $7.0 million, or 24.2%, compared to $29.0 million for the same period of the prior fiscal year. The increase in selling expenses was mainly due to the increase in sales headcount to support the business growth, and the implementation of industry key customer strategy in industrial automation segment. Selling expenses as a percentage of total revenues were 8.5% and 7.0% for the six months ended December 31, 2023 and 2022, respectively.

General and administrative expenses were $24.4 million for the six months ended December 31, 2023, representing a decrease of $8.1 million, or 24.9%, compared to $32.5 million for the same period of the prior fiscal year, which was primarily due to a $10.4 million decrease in credit losses, and a $1.8 million decrease in share-based compensation expenses, partially offset by a $3.6 million increase in third-party consulting fees. Share-based compensation expenses were $0.3 million and $2.2 million for the six months ended December 31, 2023 and 2022, respectively. General and administrative expenses as a percentage of total revenues were 5.8% and 7.8% for the six months ended December 31, 2023 and 2022, respectively. 

Research and development expenses were $46.6 million for the six months ended December 31, 2023, representing an increase of $8.8 million, or 23.4%, compared to $37.8 million for the same period of the prior fiscal year, which was primarily due to a $6.2 million increase in labor cost for the increase in R&D staff for strategic technological innovation. Research and development expenses as a percentage of total revenues were 11.0% and 9.1% for the six months ended December 31, 2023 and 2022, respectively.

The VAT refunds and government subsidies were $19.9 million for the six months ended December 31, 2023, as compared to $14.0 million for the same period of the prior fiscal year, representing a $5.9 million, or 42.1%, increase, which was primarily due to a $5.8 million increase in government subsidies.

The income tax expenses and the effective tax rate were $7.1 million and 13.5% for the six months ended December 31, 2023, as compared to $7.5 million and 9.7% for the same period of the prior fiscal year. The effective tax rate fluctuates, as the Company’s subsidiaries contributed different pre-tax income at different tax rates.

Net income attributable to Hollysys was $45.8 million for the six months ended December 31, 2023, representing a decrease of 34.3% from $69.6 million reported in the same period of the prior fiscal year. Non-GAAP net income attributable to Hollysys was $46.8 million or $0.75 per diluted share. See the section entitled “Non-GAAP Measures” for more information about non-GAAP net income attributable to Hollysys.

Diluted earnings per share was $0.74 for the six months ended December 31, 2023, representing a decrease of 33.9% from $1.12 in the same period of the prior fiscal year. Non-GAAP diluted earnings per share was $0.75 for the six months ended December 31, 2023, representing a decrease of 35.9% from $1.17 in the same period of the prior fiscal year. These were calculated based on 62.3 million and 62.0 million diluted weighted average ordinary shares outstanding for the six months ended December 31, 2023 and 2022, respectively. See the section entitled “Non-GAAP Measures” for more information about non-GAAP diluted earnings per share.

Operational Results Analysis for the Second Quarter Ended December 31, 2023

Total revenues for the three months ended December 31, 2023 were $223.7 million, as compared to $244.7 million for the same period of the prior fiscal year, representing a decrease of 8.6%. In terms of revenues by type, integrated contracts revenue decreased by 4.5% to $180.5 million, products sales revenue decreased by 21.7% to $9.4 million, and services revenue decreased by 22.8% to $33.8 million.

The following table sets forth the Company’s total revenues by segment for the periods indicated.

Gross margin was 29.5% for the three months ended December 31, 2023, as compared to 39.6% for the same period of the prior fiscal year. The gross margin fluctuated mainly due to the product and service mix. Gross margins of integrated solutions contracts, product sales, and service rendered were 21.1%, 65.6% and 64.2% for the three months ended December 31, 2023, as compared to 30.8%, 85.2% and 64.9% for the same period of the prior fiscal year, respectively. Non-GAAP gross margin was 29.7% for the three months ended December 31, 2023, as compared to 39.7% for the same period of the prior fiscal year. Non-GAAP gross margin of integrated solutions contracts was 21.3% for the three months ended December 31, 2023, as compared to 31.0% for the same period of the prior fiscal year. See the section entitled “Non-GAAP Measures” for more information about non-GAAP gross margin and non-GAAP gross margin of integrated solutions contracts.

Selling expenses were $19.9 million for the three months ended December 31, 2023, representing an increase of $3.8 million, or 24.0%, compared to $16.0 million for the same period of the prior fiscal year. The increase in selling expenses was mainly due to the increase in sales headcount to support the business growth, and the implementation of industry key customer strategy in industrial automation segment. Selling expenses as a percentage of total revenues were 8.9% and 6.5% for the three months ended December 31, 2023 and 2022, respectively.

General and administrative expenses were $18.9 million for the three months ended December 31, 2023, representing a decrease of $0.8 million, or 4.4%, compared to $19.7 million for the same period of the prior fiscal year, which was primarily due to a $4.9 million decrease in credit losses, and a $0.9 million decrease in share-based compensation expenses, partially offset by a $3.6 million increase in third-party consulting fees. Share-based compensation expenses were $0.1 million and $0.9 million for the three months ended December 31, 2023 and 2022, respectively. General and administrative expenses as a percentage of total revenues were 8.4% and 8.1% for the three months ended December 31, 2023 and 2022, respectively. 

Research and development expenses were $28.3 million for the three months ended December 31, 2023, representing an increase of $7.8 million, or 38.4%, compared to $20.4 million for the same period of the prior fiscal year, which was primarily due to a $4.5 million increase in labor cost for the increase in R&D staff for strategic technological innovation. Research and development expenses as a percentage of total revenues were 12.6% and 8.3% for the three months ended December 31, 2023 and 2022, respectively.

The VAT refunds and government subsidies were $14.8 million for three months ended December 31, 2023, as compared to $7.2 million for the same period in the prior fiscal year, representing a $7.6 million, or 104.9%, increase, which was primarily due to a $7.1 million increase in government subsidies.

The income tax expenses and the effective tax rate were $1.9 million and 11.6% for the three months ended December 31, 2023, respectively, as compared to $3.6 million and 7.0% for the same period in the prior fiscal year, respectively. The effective tax rate fluctuates, as the Company’s subsidiaries contributed different pre-tax income at different tax rates.

Net income attributable to Hollysys was $14.1 million for the three months ended December 31, 2023, representing a decrease of 70.7% from $48.2 million reported in the same period in the prior fiscal year. Non-GAAP net income attributable to Hollysys was $14.6 million or $0.23 per diluted share. See the section entitled “Non-GAAP Measures” for more information about non-GAAP net income attributable to Hollysys.

Diluted earnings per share was $0.23 for the three months ended December 31, 2023, representing a decrease of 70.5% from $0.78 reported in the same period in the prior fiscal year. Non-GAAP diluted earnings per share was $0.23 for the three months ended December 31, 2023, representing a decrease of 71.3% from $0.80 reported in the same period in the prior fiscal year. These were calculated based on 62.3 million and 62.0 million diluted weighted average ordinary shares outstanding for the three months ended December 31, 2023 and 2022, respectively. See the section entitled “Non-GAAP Measures” for more information about non-GAAP diluted earnings per share.

Contracts and Backlog Highlights

Hollysys achieved $495.2 million and $235.4 million of value of new contracts for the six months and three months ended December 31, 2023, respectively. Order backlog of contracts presents the amount of unrealized revenue to be earned from the contracts that Hollysys won. The backlog was $962.2 million as of December 31, 2023. The following table sets forth a breakdown of the value of new contracts achieved and backlog by segment.

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