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WMS Industries Inc. Reports Operating Results (10-Q)

February 09, 2012 | About:
10qk

10qk

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WMS Industries Inc. (WMS) filed Quarterly Report for the period ended 2011-12-31.

Wms Industries Inc. has a market cap of $1.26 billion; its shares were traded at around $23.02 with a P/E ratio of 16.6 and P/S ratio of 1.6. Wms Industries Inc. had an annual average earning growth of 32.7% over the past 10 years. GuruFocus rated Wms Industries Inc. the business predictability rank of 3-star.

Highlight of Business Operations:

Quarter Ended December 31, 2011 Result: Our operating margin decreased 550 basis points to 12.9% for the three months ended December 31, 2011 from 18.4% for the prior year period. Our total gross margin increased slightly to 61.1% from 60.6%. The percentage of lower margin product sales revenues decreased to 60.1% of total revenues in the December 2011 quarter compared to 63.6% last year, and higher margin gaming operations revenues increased to 39.9% of total revenues this period compared to 36.4% last period. Our product sales gross margin decreased slightly to 50.1% in this years period from 50.4% last year due to lower average selling prices of new machines as a result of the competitive marketplace and a lower mix of premium-priced gaming machines. This was partially offset by the impact of lower product costs resulting from our continuous improvement efforts and greater revenues from higher margin conversion revenues while gross margin from sales of used gaming machines declined due to lower sales price. As a result of our reduction in force in the September 2011 quarter, coupled with other cost savings measures, our research and development expenses decreased year-over year by $6.4 million, or 21.3% and our selling and administrative expenses decreased year-over year by $4.9 million, or 12.9%. Our depreciation and amortization expense increased by $4.9 million, or 30.1%, due to higher capital spending in our gaming operations business to upgrade our installed base to new Bluebird2 and Bluebird xD gaming machines and with the launch of our online and networked gaming businesses in fiscal 2011, we have begun to amortize the related capitalized software development costs. We are still implementing our lean sigma and strategic sourcing initiatives, and we continue to realize positive results. We believe these initiatives will continue to drive margin improvement in future years, especially with the new Bluebird xD product line, where we expect to improve gross margins to be comparable to our Bluebird2 product line. Longer term, we expect to benefit from higher average selling prices coupled with an expanded volume of business that should result in greater volume discounts from our raw material suppliers and enable us to spread our manufacturing overhead costs over a larger number of units thereby reducing the cost per unit. We also expect our gaming operations business will continue to expand with both the installed base and revenue per day increasing in the second half of fiscal 2012. In addition, through disciplined cost management, we continue to expect to realize operating leverage from higher revenues as our total operating costs are not expected to grow at the same percentage as revenues. Our research and development spending decreased to 14.6% as a percentage of revenues from 15.1% of revenues in the prior year period primarily caused by our product plan refinement and cost containment and restructuring initiatives. We expect that our annual research and development expenses will be around 13% to 14% as a percentage of revenue for fiscal 2012. We believe our product development capabilities, combined with additional functionalities and enhanced features of our advanced technologies and gaming platforms, enable us to optimize the entertainment value of our products and improve our gross margins and operating margins. Our selling and administrative expenses increased by 140 basis points as a percentage of revenues to 20.5% in the three months ended December 31, 2011 as the impact from our cost containment and restructuring initiatives did not offset the impact from declining revenues. Our depreciation and amortization expense increased by 500 basis points as a percentage of revenue for the three months ended December 31, 2011 due to higher depreciation stemming from the increased investment in gaming operations machines to upgrade our installed base to new products coupled with higher amortization of capitalized software development costs a result of the launch of the network gaming and online gaming businesses over the last 12 months. We expect selling and administrative expenses to decline as a percentage of revenues in fiscal 2012, but due to higher capital spending in our gaming operations

Total gross profit, as used herein excluding depreciation, amortization and distribution expense, decreased by 18.2%, or $22.1 million, to $99.1 million for the quarter ended December 31, 2011, from $121.2 million for the prior year period. Our gross margins may not be comparable to those of other entities as we include the costs of distribution, which amounted to $6.2 million and $6.6 million in the quarter ended December 31, 2011 and 2010, respectively, in selling and administrative expenses. The gross profit decline reflects both lower product sales revenues and gaming operations revenues and both lower gross margin on both product sales revenues and gaming operations revenues. Our overall gross margin increased slightly to 61.1% in the December 2011 quarter from 60.6% in the prior year period due primarily to the change in the mix of our revenues as in the December 2011 quarter product sales was 60.1% of total revenue down from 63.6% in the prior year quarter while gaming operations revenues were 39.9% of total revenue in the December 2011 quarter up from 36.4% in the prior year quarter. In addition:

Total gross profit, as used herein excluding depreciation, amortization and distribution expense, decreased by 16.7%, or $39.5 million, to $197.6 million for the six months ended December 31, 2011, from $237.1 million for the prior year period. Our gross margins may not be comparable to those of other entities as we include the costs of distribution, which amounted to $12.0 million and $13.1 million in the six months ended December 31, 2011 and 2010, respectively, in selling and administrative expenses. The gross profit decline reflects both lower product sales revenues and gaming operations revenues and lower gross margin on gaming operations revenues, partially offset by higher gross margin on product sales revenue. Our overall gross margin increased to 62.2% in the six months ended December 31, 2011, from 61.2% in the prior year period due primarily to the change in the mix of our revenues as in the six months ended December 31, 2011 product sales was 58.1% of total revenue down from 61.5% in the prior year six month period while gaming operations revenues were 41.9% of total revenue in the six months ended December 31, 2011 up from 38.5% in the prior year six month period. In addition:

Our operating income decreased by $41.5 million or 62.9% in the six months ended December 31, 2011, on a 18.0% decrease in total revenues. For the six months ended December 31, 2011, our operating margin of 7.7% represented a 930 basis point decrease over the 17.0% operating margin achieved in the prior year period. This decrease reflects lower gross profit, higher impairment and restructuring costs of $5.9 million, higher charges for bad debts of $4.4 million and higher depreciation and amortization costs of $11.7 million, partially offset by the $10.7 million impact of lower research and development costs and lower year over year selling and administrative costs, excluding the impact of higher bad debt discussed above.

Diluted earnings per share decreased 55.1% to $0.35 for the six months ended December 31, 2011, from $0.78 for prior year period. The decrease in earnings per share in the six months ended December 31, 2011, is attributable to the decrease in net income for the six month period inclusive of the impairment and restructuring charges of $0.12 per diluted share, and charges of $0.05 per diluted share related to the write-down of receivables, partially offset by the $0.02 per diluted share benefit from the settlement of litigation. The increase in earnings per share in the six months ended December 31, 2010, is attributable to the increase in net income for the six month period inclusive of the facility closing charge of $0.04 per diluted share and the $0.03 per diluted share impact of the retroactive reinstatement of the research and development tax credit of which $0.02, per diluted share impact related to the period January 1, 2010, through September 30, 2010.

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