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

October 30, 2009 | About:
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10qk

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WMS Industries Inc. (WMS) filed Quarterly Report for the period ended 2009-09-30.

WMS Industries Inc. current businesses are reported in the following three operating segments: gaming; pinball and cabinets; and contract manufacturing. In the gaming business they design manufacture and market video and reel spinning gaming machines and video lottery terminals. In pinball and cabinets business they design and manufacture coin-operated pinball games and manufacture cabinets for coin-operated games. In the contract manufacturing business they manufacture coin-operated video games. Wms Industries Inc. has a market cap of $2.17 billion; its shares were traded at around $42.96 with a P/E ratio of 27.8 and P/S ratio of 3.1. Wms Industries Inc. had an annual average earning growth of 53% over the past 5 years.

Highlight of Business Operations:

Quarter Ended September 2009 Result: During the three months ended September 30, 2009, our average installed base of participation gaming machines increased 9.0% over the prior year and, at September 30, 2009, our total installed participation footprint stood at 10,337 units compared to 9,616 units at September 30, 2008. Growth in the installed base was primarily led by our WAP gaming machines, which at September 30, 2009 comprised 28.0% of the footprint compared to 20.2% at September 30, 2008. The WAP footprint increased to 2,897 units in the quarter ended September 30, 2009 and was up 951 units or 48.9% compared to September 30, 2008, largely reflecting the successful launch of new WAP games. The increase in WAP games was partially offset by lower units of our stand-alone gaming machines at September 30, 2009. A shift in strategy in fiscal 2007 to focus on return on investment of our gaming operations assets helped result in revenue per day for the quarter ended September 30, 2009 increasing by 12.3% to a record $77.23 per day from $68.75 per day for the September 2008 quarter. This strategy includes limiting the number of gaming machines for specific new themes at each casino and re-deploying gaming machines from casinos generating lower revenue per day to casinos generating higher revenue per day. By controlling the initial placement of participation products, we continued to reduce the capital invested in gaming operations. A 12.3% improvement in the average daily revenue, coupled with the 9.0% improvement in the average installed base, produced a 22.4% year-over-year increase in participation revenue in our gaming operations business to $72.7 million, which attests to the continued strong play levels and player appeal of our participation products.

Quarter Ended September 2009 Result: The United States and Canadian replacement cycle has lengthened and the challenges facing our industry and the overall economy have continued, thus overall industry demand has been reduced. Our year-over-year new unit shipment volume was down 11.7% from the prior year quarter and was impacted by lower overall industry demand. To further diversify our revenue streams, we announced late in fiscal 2009 that we would directly enter the Class II, electronic bingo and central determinant market following expiration of our previous licensing agreements for those markets. Through an alliance with Bluberi Gaming Technologies Inc. (Bluberi), a Canadian-based technology firm, over time we will combine our existing library of over 200 for-sale games with Bluberis proven system capabilities for the Class II, electronic bingo and central determinant markets. We shipped our first gaming machines to a Class II market in the September quarter and we expect to increase shipments into these markets throughout the balance of fiscal 2010. We are dependent, in part, on innovative new products, casinos expansions and new market opportunities to generate growth. We have continued to increase our spending on research and development activities to be able to offer creative and high earning products to our customers and for the quarter ended September 2009, such expenses are up $4.5 million or 20.5% over the prior year to $26.5 million. Expansion and new market opportunities may come from political action as governments look to gaming to provide tax revenues in support of public programs and view gaming as a key driver for tourism.

Quarter Ended September 2009 Result: For the quarter ended September 30, 2009 we had cash used by operations of $9.5 million compared to $47.9 million of cash provided by operations in the prior year, for a change of $57.4 million. The net cash used by operations for the quarter ended September 30, 2009 reflects higher net income which was more than offset by higher total accounts and notes receivable from a greater percentage of shipments late in the quarter and long term financing being provided to select customers, coupled with inventory increasing primarily from the advance purchase of computer chips used in many of our games. In the September 2009 quarter we also had increases in prepaid royalty advances due to new contracts entered into for licensed brands and prepaid income taxes as a result of the significant stock option exercise activity. In addition, in our cash flows from investing activities we made continued improvement in our management of the capital deployed in our gaming operations business. The installed footprint of participation gaming machines at September 30, 2009 increased 721 units or 7.5% over September 30, 2008, while during the September 2009 quarter our investment in gaming operations equipment totaled $10.6 million, compared to the $13.5 million invested in the prior year quarter. Our total cash, cash equivalents and restricted cash as of September 30, 2009, rose 0.3% to $155.2 million from $154.7 million as of June 30, 2009.

The priorities for the utilization of our cash flow are to: continue to enhance stockholder value by emphasizing internal and external investments to create and license advanced technologies and intellectual property; seek acquisitions that can extend our international presence, increase our intellectual property portfolio and expand our earnings potential; and, when appropriate, repurchase shares in the open market or in privately negotiated transactions. For the quarter ended September 30, 2009, our research and development spending increased $4.5 million over the prior year. We spent $11.6 million in property, plant and equipment, $10.6 million on additions to gaming operations equipment and $1.4 million to acquire or license long-term intangible and other assets. We did not fund any common share repurchases in the September 2009 quarter, but we did use $0.7 million in cash to induce three holders of our 2.75% Convertible Subordinated Notes (Notes) due July 15, 2010 to early convert $79.4 million of the Notes into common shares.

On August 3, 2009, our Board of Directors authorized the repurchase of an additional $75 million of our common stock over the following twenty-four months increasing our remaining repurchase authorization to approximately $150 million. This authorization increases the existing program, previously authorized on August 4, 2008, from $150 million to $225 million and extended the expiration date to August 3, 2011. As of September 30, 2009, we had approximately $150 million remaining of our repurchase authorization. Pursuant to the authorization, purchases may be made from time to time in the open market, through block purchases or in privately negotiated transactions. The timing and actual number of shares repurchased will depend on market conditions. During the quarter ended September 30, 2009 we did not repurchase any shares. During the quarter ended September 30, 2008 we purchased 322,645 shares for approximately $9.6 million including amounts accrued at September 30, 2008 at an average cost of $29.80 per share.

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