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Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
x | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2011
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 000-18291
U.S. HOME SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Delaware | 75-2922239 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) | |
405 State Highway 121 Bypass, Building A, Suite 250 Lewisville, Texas |
75067 | |
(Address of Principal Executive Offices) | (Zip Code) |
Registrants telephone number, including area code: (214) 488-6300
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.
Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ¨ | Accelerated filer | ¨ | |||
Non-accelerated filer | ¨ | Smaller Reporting Company | x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨ No x
As of August 2, 2011 there were 7,242,404 shares of the registrants common stock, $0.001 par value, outstanding.
Table of Contents
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Table of Contents
ITEM 1. | Financial Statements |
Consolidated Balance Sheets
June 30, 2011 |
December 31, 2010 |
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(Unaudited) | ||||||||
ASSETS |
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Current assets: |
||||||||
Cash and cash equivalents |
$ | 9,434,832 | $ | 8,027,353 | ||||
Marketable securities |
810,770 | 802,634 | ||||||
Accounts receivable-trade, net of allowance for doubtful accounts of $150,743 and $28,109 |
9,009,515 | 6,168,778 | ||||||
Accounts receivable-other |
128,342 | 729,602 | ||||||
Income tax receivable |
5,396 | 47,383 | ||||||
Commission advances |
1,174,157 | 1,430,869 | ||||||
Inventories |
3,334,133 | 3,816,907 | ||||||
Prepaid advertising and marketing |
2,163,418 | 1,785,555 | ||||||
Prepaid expenses |
1,082,560 | 809,803 | ||||||
Deferred income taxes |
884,218 | 880,882 | ||||||
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Total current assets |
28,027,341 | 24,499,766 | ||||||
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Property, plant, and equipment, net |
2,193,922 | 2,362,624 | ||||||
Goodwill |
3,589,870 | 3,589,870 | ||||||
Other assets |
476,798 | 496,413 | ||||||
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Total assets |
$ | 34,287,931 | $ | 30,948,673 | ||||
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current liabilities: |
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Accounts payable |
$ | 5,558,319 | $ | 4,644,331 | ||||
Accrued wages, commissions, bonuses and vacation |
2,306,110 | 1,995,570 | ||||||
Federal and state taxes payable |
2,342,064 | 1,735,045 | ||||||
Long-term debt, current portion |
| 333,333 | ||||||
Other accrued liabilities |
572,199 | 641,256 | ||||||
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Total current liabilities |
10,778,692 | 9,349,535 | ||||||
Deferred income taxes |
403,630 | 403,630 | ||||||
Long-term debt, net of current portion |
| 555,556 | ||||||
Stockholders equity: |
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Common stock $0.001 par value, 30,000,000 shares authorized, 7,242,404 and 7,192,886 shares issued; 7,242,404 and 7,152,718 shares outstanding at June 30, 2011 and December 31, 2010, respectively |
7,242 | 7,193 | ||||||
Additional capital |
14,572,224 | 14,227,828 | ||||||
Retained earnings |
8,526,143 | 6,494,654 | ||||||
Treasury stock, at cost, 0 and 40,168 shares at June 30, 2011 and December 31, 2010, respectively |
| (89,723 | ) | |||||
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Total stockholders equity |
23,105,609 | 20,639,952 | ||||||
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Total liabilities and stockholders equity |
$ | 34,287,931 | $ | 30,948,673 | ||||
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See accompanying notes.
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Table of Contents
Consolidated Statements of Operations
(Unaudited)
Three months ended June 30, |
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2011 | 2010 | |||||||
Revenues from remodeling contracts |
$ | 43,769,000 | $ | 35,187,404 | ||||
Cost of remodeling contracts |
20,024,588 | 16,208,249 | ||||||
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Gross profit |
23,744,412 | 18,979,155 | ||||||
Costs and expenses: |
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Branch operations |
1,915,301 | 2,076,123 | ||||||
Sales and marketing expense |
15,760,030 | 13,414,030 | ||||||
General and administrative |
3,398,582 | 2,681,131 | ||||||
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Income from operations |
2,670,499 | 807,871 | ||||||
Interest expense |
2,225 | 30,849 | ||||||
Other income |
7,700 | 9,902 | ||||||
Income before income taxes |
2,675,974 | 786,924 | ||||||
Income tax expense |
1,096,364 | 322,944 | ||||||
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Net income |
$ | 1,579,610 | $ | 463,980 | ||||
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Net income per common share: |
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Basic |
$ | 0.22 | $ | 0.07 | ||||
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Diluted |
$ | 0.21 | $ | 0.06 | ||||
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Weighted average common shares outstanding: |
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Basic |
7,234,738 | 7,135,613 | ||||||
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Diluted |
7,420,556 | 7,214,002 | ||||||
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Dividends declared per common share |
$ | 0.015 | $ | | ||||
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See accompanying notes.
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Table of Contents
U.S. Home Systems, Inc.
Consolidated Statements of Operations
(Unaudited)
Six Months
ended June 30, |
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2011 | 2010 | |||||||
Revenues from remodeling contracts |
$ | 82,758,913 | $ | 68,314,902 | ||||
Cost of remodeling contracts |
38,206,607 | 30,903,185 | ||||||
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Gross profit |
44,552,306 | 37,411,717 | ||||||
Costs and expenses: |
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Branch operations |
3,835,939 | 4,037,866 | ||||||
Sales and marketing expense |
30,603,153 | 26,484,154 | ||||||
General and administrative |
6,488,286 | 5,434,439 | ||||||
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Income from operations |
3,624,928 | 1,455,258 | ||||||
Interest expense |
15,608 | 64,970 | ||||||
Other income |
11,802 | 2,339 | ||||||
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Income before income taxes |
3,621,122 | 1,392,627 | ||||||
Income tax expense |
1,481,039 | 564,014 | ||||||
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Net income |
$ | 2,140,083 | $ | 828,613 | ||||
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Net income per common share: |
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Basic |
$ | 0.30 | $ | 0.12 | ||||
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Diluted |
$ | 0.29 | $ | 0.12 | ||||
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Weighted average common shares outstanding: |
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Basic |
7,205,097 | 7,136,226 | ||||||
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Diluted |
7,389,822 | 7,194,285 | ||||||
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Dividends declared per common share |
$ | 0.015 | $ | | ||||
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See accompanying notes.
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Table of Contents
Consolidated Statements of Stockholders Equity
Six Months Ended June 30, 2011
(Unaudited)
Common Stock | Common Stock Held in Treasury, at cost |
Additional | Retained | Total Stockholders |
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Shares | Amount | Shares | Amount | Capital | Earnings | Equity | ||||||||||||||||||||||
Balance at January 1, 2011 |
7,192,886 | $ | 7,193 | 40,168 | $ | (89,723 | ) | $ | 14,227,828 | $ | 6,494,654 | $ | 20,639,952 | |||||||||||||||
Issuance of common stock on stock option exercise and restricted stock awards |
54,178 | 54 | | | 163,058 | | 163,112 | |||||||||||||||||||||
Excess tax benefits applicable to stock option awards |
| | | | 2,043 | | 2,043 | |||||||||||||||||||||
Stock compensation |
| | | | 99,465 | | 99,465 | |||||||||||||||||||||
Net income |
| | | | | 560,473 | 560,473 | |||||||||||||||||||||
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Balance at March 31, 2011 |
7,247,064 | $ | 7,247 | 40,168 | $ | (89,723 | ) | $ | 14,492,394 | $ | 7,055,127 | $ | 21,465,045 | |||||||||||||||
Issuance of common stock on stock option exercise and restricted stock awards |
35,508 | 35 | | | 109,023 | | 109,058 | |||||||||||||||||||||
Retirement of treasury stock |
(40,168 | ) | (40 | ) | (40,168 | ) | 89,723 | (89,683 | ) | | | |||||||||||||||||
Excess tax benefits applicable to stock option awards |
| | | | 3,640 | | 3,640 | |||||||||||||||||||||
Stock compensation |
| | | | 56,850 | | 56,850 | |||||||||||||||||||||
Dividends declared |
| | | | | (108,594 | ) | (108,594 | ) | |||||||||||||||||||
Net income |
| | | | | 1,579,610 | 1,579,610 | |||||||||||||||||||||
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Balance at June 30, 2011 |
7,242,404 | $ | 7,242 | | $ | | $ | 14,572,224 | $ | 8,526,143 | $ | 23,105,609 | ||||||||||||||||
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See accompanying notes.
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Table of Contents
Consolidated Statements of Cash Flows
(Unaudited)
Six months
ended June 30, |
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2011 | 2010 | |||||||
Cash flows from operating activities |
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Net income |
$ | 2,140,083 | $ | 828,613 | ||||
Adjustments to reconcile net income to net cash provided by (used in) operating activities: |
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Depreciation and amortization |
420,206 | 462,534 | ||||||
Stock compensation |
156,315 | 76,535 | ||||||
Tax expense applicable to release of stock awards |
(5,683 | ) | | |||||
Net provision for bad debt |
122,634 | 21,761 | ||||||
Loss on disposal of assets |
28,983 | 19,083 | ||||||
Unrealized gain on marketable securities |
(2,419 | ) | (797 | ) | ||||
Changes in operating assets and liabilities: |
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Accounts and other receivables |
(2,362,111 | ) | (3,752,333 | ) | ||||
Inventories |
482,774 | 61,775 | ||||||
Commission advances and prepaid expenses |
(393,908 | ) | (982,261 | ) | ||||
Accounts payable |
805,394 | 1,426,425 | ||||||
Accrued legal settlement |
| (569,032 | ) | |||||
Accrued wages, commissions, bonuses and vacation |
310,540 | 321,302 | ||||||
Income taxes |
651,353 | 857,937 | ||||||
Other assets and liabilities, net |
(63,597 | ) | 50,896 | |||||
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Net cash provided by (used in) operating activities |
2,290,564 | (1,177,562 | ) | |||||
Cash flows from investing activities |
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Purchases of property, plant and equipment |
(267,862 | ) | (313,789 | ) | ||||
Purchase of marketable securities |
(5,717 | ) | (3,628 | ) | ||||
Other |
1,530 | (1,580 | ) | |||||
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Net cash used in investing activities |
(272,049 | ) | (318,997 | ) | ||||
Cash flows from financing activities |
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Principal payments on lines of credit and debt |
(888,889 | ) | (105,877 | ) | ||||
Proceeds from issuance of common stock |
272,170 | | ||||||
Tax expense applicable to release of stock awards |
5,683 | | ||||||
Purchase of treasury stock |
| (31,947 | ) | |||||
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Net cash used in financing activities |
(611,036 | ) | (137,824 | ) | ||||
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Net increase (decrease) in cash and cash equivalents |
1,407,479 | (1,634,383 | ) | |||||
Cash and cash equivalents at beginning of period |
8,027,353 | 6,336,889 | ||||||
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Cash and cash equivalents at end of period |
$ | 9,434,832 | $ | 4,702,506 | ||||
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Supplemental disclosure of cash flow information |
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Interest paid |
$ | 15,608 | $ | 64,970 | ||||
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Cash payments of income taxes |
$ | 717,108 | $ | 88,027 | ||||
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Supplemental disclosure of non-cash investing and financing activities |
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Termination of franchise agreement and notes payable |
$ | | $ | 40,706 | ||||
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See accompanying notes.
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Table of Contents
Notes to Consolidated Financial Statements
(Unaudited)
1. Organization and Basis of Presentation
U.S. Home Systems, Inc. (the Company or U.S. Home), a Delaware corporation, is engaged in the specialty product home improvement business. The Company manufactures or procures, designs, sells and installs custom quality specialty home improvement products. The Companys principal product lines include kitchen and bathroom cabinet refacing products, storage organization systems for closets and garages, and related accessories.
The accompanying interim consolidated financial statements of the Company and its wholly-owned subsidiaries as of June 30, 2011 and for the three and six months ended June 30, 2011 and 2010 are unaudited; however, in the opinion of management, these interim financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the financial position, results of operations and cash flows. All intercompany accounts and transactions are eliminated in consolidation. These financial statements should be read in conjunction with the consolidated annual financial statements and notes thereto included in the Companys Annual Report on Form 10-K for the year ended December 31, 2010.
2. Summary of Significant Accounting Policies
The Companys accounting policies require it to apply methodologies, estimates and judgments that have significant impact on the results reported in the Companys financial statements. The Companys Annual Report on Form 10-K includes a discussion of those policies that management believes are critical and require the use of complex judgment in their application. There have been no material changes to the Companys accounting policies, or the methodologies or assumptions applied under them, since December 31, 2010.
Fair Value of Financial Instruments
The carrying amounts of the Companys financial instruments, including accounts receivable, marketable securities and accounts payable, approximate fair value due to their short term nature.
Accounts Receivable-trade
Trade accounts receivable consist primarily of amounts due from The Home Depot. Trade accounts receivable are reported net of an allowance for doubtful accounts. The Company provides for estimated losses of uncollectible accounts based upon specific identification of problem accounts and expected default rates based on historical default rates. An allowance for doubtful accounts is established through a provision for bad debt charged against income. The Company charges off accounts against the allowance when deemed to be uncollectible. Subsequent recoveries, if any, are credited to the allowance.
Investments
At June 30, 2011, the Companys short-term investments consist of bond mutual funds which are classified as trading. Trading securities are recorded at fair value based on significant other observable inputs which are considered Level 2 securities in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP). For the three months ended June 30, 2011 and 2010, the Company recognized $2,802 and $2,040, in interest earnings and an unrealized holding gain of $2,419 and $399, respectively. For the six months ended June 30, 2011 and 2010, the Company recognized $5,717 and $4,328, respectively in interest earnings and an unrealized holding gain of $2,419 and $797, respectively. These amounts are included in Other income in the Companys Consolidated Statements of Operations.
The equity method of accounting is used to account for investments in affiliated companies in which the Company does not exercise control and has a 20% or more voting interest. For the three months ended June 30, 2011 and 2010, the Companys share of income (loss) from affiliated entities was approximately $200 and $3,000, respectively, and is included in the Companys consolidated operating results. For the six months ended June 30, 2011, the Companys share of income (loss) from affiliated entities was approximately ($1,000) and $2,000, respectively, and is included in the Companys consolidated operating results. The Companys initial investment of $195,000, reduced by its share of losses and increased by its share of income, to approximately $189,000 is included in Other assets on the Companys Consolidated Balance Sheets at June 30, 2011. At December 31, 2010, the carrying value of the investment was approximately $190,000.
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Table of Contents
U.S. Home Systems, Inc.
Notes to Consolidated Financial Statements
2. Summary of Significant Accounting Policies (Continued)
Goodwill
The amount of goodwill at June 30, 2011 is $3,589,870. Goodwill is not amortized to expense. However, the Company is required to test goodwill for impairment at least on an annual basis or more often if an event or circumstance indicates that an impairment or decline in value may have occurred. The Company performed an impairment test as of December 31, 2010. During the six months ended June 30, 2011, the Company determined that additional changes in market conditions did not necessitate updating the Companys December 31, 2010 analysis.
Warranties
In addition to the manufacturers warranties for defective materials, the Company provides each customer a limited warranty covering defective materials and workmanship. The estimated costs related to warranties are accrued at the time products are sold, based on various factors, including the Companys stated warranty policies and practices, the historical frequency of claims, and the cost to replace or repair its products under warranty. Warranty expenses are included in the cost of remodeling contracts. The following table provides a reconciliation of the activity related to the Companys accrued warranty expense.
Three Months Ended June 30, 2011 |
Six Months Ended June 30, 2011 |
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Balance at beginning of period |
$ | 139,937 | $ | 128,154 | ||||
Provision for warranty expenses |
67,209 | 162,728 | ||||||
Warranty costs incurred |
(56,376 | ) | (140,112 | ) | ||||
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Balance at end of period |
$ | 150,770 | $ | 150,770 | ||||
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Other Intangible Assets
The Company capitalizes costs incurred to renew or extend the terms of its intangible assets. During the six months ended June 30, 2011, the Company did not incur any costs to renew or extend its franchise agreement, which is classified as an intangible asset and included in Other assets in the Companys Consolidated Balance Sheets as of June 30, 2011.
Accounting Standards Update to be Implemented in Future Periods
The Financial Accounting Standards Board (FASB) issued an Accounting Standards Update (ASU) that further addresses fair-value-measurement accounting and related disclosure requirements. The ASU clarifies the FASBs intent regarding the application of existing fair-value measurement and disclosure requirements, changes the fair-value measurement requirements for certain financial instruments, and sets forth additional disclosure requirements for other fair-value measurements. The new guidance is effective January 1, 2012. The Company does not believe that the adoption of this guidance will have a material impact on the Companys consolidated financial statements.
3. Information About Segments
Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The Companys current reporting segment consists only of the home improvement business. In the home improvement business, the Company manufactures or procures designs, sells and installs custom kitchen and bathroom cabinet refacing products, laminate and solid surface countertops and organization storage systems for closets and garages. The Companys products and installed services are marketed exclusively through The Home Depot under a service provider agreement (SPA), which terminates on February 25, 2014, and a product supply agreement (PSA) related to The Home Depots Do-It-Yourself program (DIY), which terminates on December 31, 2013.
In January 2010, the Company initiated a new expansion program with The Home Depot to provide products and services to The Home Depot customers in certain markets which are much smaller in size than the major metropolitan areas in which the Company previously operated. In support of this expansion into these smaller markets, the Company is utilizing independent contractors for the sales, installation and service of its home improvement products (the SCN Network). In addition, the Company will utilize the SCN Network to serve certain The Home Depot stores which are more remote to its sales and installation centers to better penetrate these markets.
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Table of Contents
U.S. Home Systems, Inc.
Notes to Consolidated Financial Statements
3. Information About Segments (Continued)
In January 2010, the Company began to offer its kitchen refacing products in conjunction with the DIY program. Under the DIY program, the customer, or their designated contractor, completes the installation of the Companys kitchen refacing products.
Revenues attributable to each of the Companys product lines are as follows (in thousands):
Three Months Ended June 30, |
Six Months Ended June 30, |
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2011 | 2010 | 2011 | 2010 | |||||||||||||
Home Improvement Product Lines: |
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Kitchen refacing and countertops |
$ | 40,032 | $ | 32,082 | $ | 76,326 | $ | 62,523 | ||||||||
Bathroom refacing |
2,980 | 1,887 | 4,920 | 3,501 | ||||||||||||
Organizers |
757 | 1,218 | 1,513 | 2,275 | ||||||||||||
Other |
| | | 16 | ||||||||||||
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Total Home Improvement revenues |
$ | 43,769 | $ | 35,187 | $ | 82,759 | $ | 68,315 | ||||||||
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All of the Companys home improvement revenues are from The Home Depot and are subject to seasonal trends. The generation of new orders for the Companys products typically declines in the last six weeks of the year during the holiday season, which negatively impacts first quarter revenues and net income. Extreme weather conditions in the markets the Company serves occasionally impact revenues and net income.
4. Fair Value
Generally accepted accounting principles define fair value as a price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability. As a basis for considering such assumptions, generally accepted accounting principles establish a three-tier value hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value as follows:
Level 1 | Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets. | |
Level 2 |
Include other inputs that are directly or indirectly observable in the marketplace. | |
Level 3 | Unobservable inputs which are supported by little or no market activity. |
The Company measures cash equivalents at fair value using quoted market prices and marketable securities at fair value using other inputs that are directly observable in the marketplace.
Assets measured at fair value on a recurring basis as of June 30, 2011 and December 31, 2010 are as follows:
Fair value measurement at reporting date using: | ||||||||||||||||
June 30, 2011 | Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
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Cash equivalents: |
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Money market mutual funds |
$ | 2,616,958 | $ | 2,616,958 | $ | | $ | | ||||||||
Marketable securities: |
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Municipal bond funds |
810,770 | | 810,770 | | ||||||||||||
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Total assets |
$ | 3,427,728 | $ | 2,616,958 | $ | 810,770 | $ | | ||||||||
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Table of Contents
U.S. Home Systems, Inc.
Notes to Consolidated Financial Statements
4. Fair Value (Continued)
Fair value measurement at reporting date using: | ||||||||||||||||
December 31, 2010 | Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
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Cash equivalents: |
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Money market mutual funds |
$ | 2,616,696 | $ | 2,616,696 | $ | | $ | | ||||||||
Marketable securities: |
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Municipal bond funds |
802,634 | | 802,634 | | ||||||||||||
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Total assets |
$ | 3,419,330 | $ | 2,616,696 | $ | 802,634 | $ | | ||||||||
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5. Inventories
Inventories, net of applicable reserves, consisted of the following:
June 30, 2011 |
December 31, 2010 |
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Raw materials |
$ | 1,477,819 | $ | 1,900,426 | ||||
Work-in-progress |
1,856,314 | 1,916,481 | ||||||
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Total |
$ | 3,334,133 | $ | 3,816,907 | ||||
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6. Credit Facilities
Debt under the Companys credit facilities consisted of the following:
June 30, 2011 |
December 31, 2010 |
|||||||
Frost term loan |
$ | | $ | 888,889 | ||||
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Total debt |
| 888,889 | ||||||
Less current portion |
| (333,333 | ) | |||||
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|
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Long-term portion |
$ | | $ | 555,556 | ||||
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Frost Loan Agreement
The Company has a loan agreement (the Loan Agreement) with Frost National Bank (Frost Bank). The Loan Agreement as amended provides for a borrowing base line of credit (the Borrowing Base Line of Credit) and a term loan (the Term Loan). The Loan Agreement and related notes are secured by substantially all of the assets of the Company and its subsidiaries, and the Companys subsidiaries are guarantors.
Term Loan On March 31, 2011, the Company paid off and retired the Term Loan. The Term Loan was payable in monthly principal payments of $27,778, plus accrued interest at the prime rate plus 1.25% maturing on August 10, 2013. The outstanding balance of the Term Loan was approximately $889,000 at December 31, 2010.
Borrowing Base Line of Credit - The Borrowing Base Line of Credit allows for borrowings up to $2 million for working capital. Borrowings and required payments under the Borrowing Base Line of Credit are based on an asset formula using accounts receivable and inventory. At June 30, 2011, the Company had no balance outstanding under the Borrowing Base Line of Credit and a borrowing capacity of $2,000,000. Interest on the Borrowing Base Line of Credit is payable monthly on the unpaid balance at the prime rate plus 1.25%. The Borrowing Base Line of Credit matures on December 2, 2011, at which time any outstanding principal and accrued interest is due and payable.
The Companys credit facility contains covenants which require the Company to maintain a tangible net worth of at least $13.5 million, a debt to adjusted tangible net worth ratio of less than 1.25 to 1, a debt service coverage ratio of not less than 1.5 to 1, and a quick ratio of more than 1 to 1, excluding current maturities of the Term Loan. In addition, the Companys credit facilities contain other covenants, which among other matters, (i) limit the Companys ability to incur indebtedness, merge, consolidate and sell assets; (ii) limit the company from making any acquisition which requires in any fiscal year $1.0 million cash or $2.0 million of cash and non-cash consideration; and (iii) limit the amount of the Companys stock that can be repurchased after August 19, 2010 to $500,000. The Company is in compliance with all restrictive covenants at June 30, 2011.
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Table of Contents
U.S. Home Systems, Inc.
Notes to Consolidated Financial Statements
7. Commitments and Contingencies
Other Taxes
The Company is subject to audits in various jurisdictions from time to time for taxes, including sales and use tax, payroll tax, gross receipts tax and property tax. The Company is currently engaged in audit proceedings in a certain state related to sales and use tax. The Company believes that it has adequately provided for all of the obligations for these taxes; however, the Company may be subject to additional sales and use tax obligations, penalties and interest assessments beyond the amount currently accrued at June 30, 2011. Accordingly, additional provisions may be recorded in the future as revised estimates are made or underlying matters are settled or resolved.
Litigation
On January 20, 2010, the Company entered into a Settlement and Release Agreement in settlement of a certain class action lawsuit pending against the Company in the United States District Court for the Northern District of California. The Company agreed to a payment of $1,800,000 plus applicable payroll taxes to settle the lawsuit. The Company recorded a liability for the settlement in the fourth quarter of 2009. $500,000 of the settlement was paid in March 2010 and the remainder was paid in August 2010.
The Company is subject to other legal proceedings and claims that arise in the ordinary course of business. While the ultimate outcome of pending litigation and threatened lawsuits cannot be predicted with certainty, if decided adversely to or settled by the Company, individually or in the aggregate, the outcome may result in a liability material to the Companys consolidated financial condition or results of operations. However, at this time, the Company believes that the ultimate resolution of these matters will not materially affect the consolidated financial position or results of operations of the Company.
8. Capitalization
On March 13, 2008, the Board of Directors authorized the repurchase of the Companys outstanding stock up to $2 million. Any repurchase under the Companys stock repurchase program may be made in the open market, at such times and such prices as the Company may determine appropriate. During the six months ended June 30, 2011, the Company did not repurchase any shares under the stock repurchase program. Cumulative repurchases under this authorization through June 30, 2011 were 376,018 shares, at a cost of approximately $1,111,000, of which 335,850 and 40,168 shares were cancelled and reclassified as authorized and unissued shares on June 5, 2009 and April 21, 2011, respectively. Shares of common stock repurchased by the Company are recorded at cost as treasury stock and result in a reduction of stockholders equity in the Consolidated Balance Sheets until retired.
The Companys credit facility contains certain covenants which among other matters limit the amount of common stock the Company may purchase under the program after August 19, 2010 to $500,000. There have been no repurchases of common stock under the program subsequent to August 19, 2010.
9. Income Per Share
The following table sets forth the computation of basic and diluted net income per share for the periods indicated:
Three months ended June 30, |
Six months ended June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Income applicable to common stockholders |
$ | 1,579,610 | $ | 463,980 | $ | 2,140,083 | $ | 828,613 | ||||||||
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Weighted average shares outstanding basic |
7,234,738 | 7,135,613 | 7,205,097 | 7,136,226 | ||||||||||||
Effect of dilutive securities |
185,818 | 78,389 | 184,725 | 58,059 | ||||||||||||
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Weighted average shares outstanding diluted |
7,420,556 | 7,214,002 | 7,389,822 | 7,194,285 | ||||||||||||
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Net income per share: |
||||||||||||||||
Basic |
$ | 0.22 | $ | 0.07 | $ | 0.30 | $ | 0.12 | ||||||||
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Diluted |
$ | 0.21 | $ | 0.06 | $ | 0.29 | $ | 0.12 | ||||||||
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- 10 -
Table of Contents
U.S. Home Systems, Inc.
Notes to Consolidated Financial Statements
9. Income Per Share (Continued)
The calculation of diluted net income per share excludes all anti-dilutive shares. For the three and six months ended June 30, 2011 approximately 25,000 and 33,000 common stock equivalents, respectively, were not included in the computation of diluted net income per share, because the effect would have been anti-dilutive. For the three and six months ended June 30, 2010, approximately 86,000 and 135,000 common stock equivalents, respectively, were not included in the computation of diluted net income per share because the effect would have been anti-dilutive.
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Table of Contents
ITEM 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
The following should be read in conjunction with our unaudited financial statements for the three and six months ended June 30, 2011 included herein, and our audited financial statements for the years ended December 31, 2010, 2009 and 2008, and the notes to these financial statements included in the Companys Annual Report on Form 10-K. Except for the historical information contained herein, certain matters set forth in this report are forward-looking statements that are based on managements current expectations, estimates and projections about our business and operations. Our actual results may differ materially from those currently anticipated and as expressed in such forward-looking statements.
Overview
We are engaged in the specialty product home improvement business. In our home improvement business, we manufacture or procure, design, sell and install custom kitchen and bathroom cabinet refacing products and organizational storage systems for closets and garages. We market, sell and install our products and installed services exclusively through The Home Depot under a service provider agreement (SPA) and a product supply agreement (PSA).
In January 2010 we initiated a new program to expand the number of markets in which we serve The Home Depot. These additional markets, which comprise approximately 400 The Home Depot stores, are generally much smaller in size than the major metropolitan areas in which we operate. We intend to operate in these smaller markets through outsourcing to local independent contractors the selling, installation and service of our home improvement products, rather than open our own branch sales and installation center in the market (the SCN program). We believe the utilization of a network of independent contractors will be more economical to us than opening and staffing our own sales and installation centers in these smaller markets. In addition to these new markets, we believe the utilization of the SCN program in certain markets where The Home Depot stores are more remote to the location of our branch sales and installation center will result in greater market penetration in both the remote markets and the market area served by our branch. As of June 30, 2011, our SCN network served approximately 350 The Home Depot stores, 190 of which are in 14 new expansion markets. Within 12 months, we expect to expand into substantially all of the markets encompassing the additional 400 The Home Depot stores identified for our expansion program.
Also in January 2010, we began to offer our kitchen refacing products in conjunction with The Home Depots customer Do-It-Yourself (DIY) program. Under the DIY program, our refacing products are available for purchase by The Home Depot customers or their designated installation contractor and the customer or their designated installation contractor completes the installation of the home improvement project. In-store kitchen refacing displays provide information as to the availability of our products in conjunction with The Home Depots DIY program. The DIY program is currently available in all 1,976 U.S. The Home Depot stores.
Excluding the DIY program, at June 30, 2011 our home improvement business served The Home Depot in 60 markets covering 37 states. Our installed kitchen refacing products were available in all 60 markets encompassing approximately 1,815 The Home Depot stores.
During the first quarter 2011, we expanded our bath product offering to 109 additional The Home Depot stores. At June 30, 2011 our installed bath products are offered in 23 markets, which include approximately 676 The Home Depot stores.
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Table of Contents
Results of Operations
Results of operations for the three months ended June 30, 2011 as compared to the three months ended June 30, 2010:
(In Thousands) Three Months ended June 30, |
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2011 | 2010 | |||||||||||||||
$ | % | $ | % | |||||||||||||
Revenues |
43,769 | 100.0 | 35,187 | 100.0 | ||||||||||||
Costs of remodeling contracts |
20,025 | 45.8 | 16,208 | 46.1 | ||||||||||||
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Gross profit |
23,744 | 54.2 | 18,979 | 53.9 | ||||||||||||
Costs and expenses: |
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Branch operations |
1,915 | 4.4 | 2,076 | 5.9 | ||||||||||||
Sales and marketing expense |
15,760 | 36.0 | 13,414 | 38.1 | ||||||||||||
General and administrative |
3,399 | 7.7 | 2,681 | 7.6 | ||||||||||||
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Operating income |
2,670 | 6.1 | 808 | 2.3 | ||||||||||||
Interest expense |
2 | | 31 | 0.1 | ||||||||||||
Other income |
8 | | 10 | | ||||||||||||
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Income before income taxes |
2,676 | 6.1 | 787 | 2.2 | ||||||||||||
Income tax expense |
1,096 | 2.5 | 323 | 0.9 | ||||||||||||
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Net income |
1,580 | 3.6 | 464 | 1.3 | ||||||||||||
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Managements Summary of Results of Operations.
For the three months ended June 30, 2011, revenues increased 24.4% to a record $43,769,000 from $35,187,000 in the three months ended June 30, 2010. The increase in revenues reflected an increase in demand in both our kitchen refacing and countertop product line and our bath refacing product line. New orders in the second quarter ended June 30, 2011 increased 17.7% to $44,047,000, from $37,415,000 in the second quarter last year.
Demand for kitchen refacing products continues to improve following changes we implemented last year, including The Home Depots inclusion of the cabinet refacing category in their new national kitchen marketing strategy, A Solution for Every Kitchen Replace, Reface, Renew, improvements to our in-store marketing program which better align our program with The Home Depot marketing strategy and the launch of our kitchen refacing internet micro-site. In addition, revenues from our SCN market expansion program and our DIY program (programs which we initiated in the first quarter of 2010) increased $2,318,000 or 201% in the second quarter 2011 as compared to the same period last year.
In the first quarter 2011, we expanded the offering of our bath products into 109 additional The Home Depot stores. Revenues from bathroom refacing products in the second quarter 2011 increased 57.9% reflecting contribution from the expansion and increased marketing initiatives.
During the second quarter 2011, we continued to be challenged by the credit decline rate for our and The Home Depot customers. Approximately 85% of our customers elect to utilize financing products, provided principally through The Home Depot, to fund their home improvement project. Customers must qualify under these programs to receive financing. The credit decline rate increased to 18.3% in the second quarter 2011 from 17.4% in the first quarter 2011, but improved as compared with 19.6% in the second quarter 2010. Nevertheless, the decline rate remains significantly higher than our historical 7.0% average. Management is continuing to seek financing alternatives for our customers to improve the financing approval rate.
Gross profit for the second quarter 2011 was $23,744,000 or 54.2% of revenues, as compared with $18,979,000 or 53.9% of revenues in the same period last year. Gross profit as a percentage of revenue increased on pricing changes as compared to the second quarter last year, however the percentage increase was offset principally from sales mix.
Net income was $1,580,000, or $0.21 per share for the three months ended June 30, 2011, as compared with $464,000, or $0.06 per share in the same period last year.
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Table of Contents
Results of Operations Detail Review
Revenues and new orders for the three months ended June 30, 2011 and 2010, and backlog of uncompleted orders at June 30, 2011 and 2010 attributable to each of our product lines were as follows (in thousands):
Revenues | New Orders | Backlog | ||||||||||||||||||||||
2011 | 2010 | 2011 | 2010 | 2011 | 2010 | |||||||||||||||||||
Kitchen refacing and Countertops |
$ | 40,032 | $ | 32,082 | $ | 40,056 | $ | 34,775 | $ | 22,319 | $ | 19,482 | ||||||||||||
Bathroom refacing |
2,980 | 1,887 | 3,156 | 1,771 | 1,689 | 848 | ||||||||||||||||||
Organization systems |
757 | 1,218 | 835 | 869 | 525 | 463 | ||||||||||||||||||
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Total |
$ | 43,769 | $ | 35,187 | $ | 44,047 | $ | 37,415 | $ | 24,533 | $ | 20,793 | ||||||||||||
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Kitchen refacing and countertops New orders for kitchen and countertop products were $40,056,000 in the three months ended June 30, 2011 as compared to $34,775,000 in the same period last year. The increase reflects an increase in the number of customer appointments resulting from marketing initiatives, as well as growth in our SCN market expansion program which we initiated in the first quarter of 2010.
Revenues from kitchen refacing and countertop products increased 24.8% to $40,032,000 in the three months ended June 30, 2011, from $32,082,000 in the same period last year. The increase in revenues is commensurate with the increase in new orders.
Bathroom refacing New orders for bath products increased 78.2% to $3,156,000 in the second quarter 2011 from $1,771,000 in the same quarter last year. During the first quarter 2011, we expanded the bath program into 109 additional The Home Depot stores. The increase in new orders is principally due to the program expansion and increased marketing activities generating an increase in the number of customer appointments. Revenues from bathroom refacing products increased 57.9% to $2,980,000 in the second quarter 2011 as compared with $1,887,000 in the second quarter 2010.
Organization Systems New orders for organization systems products were $835,000 in the three months ended June 30, 2011 as compared to $869,000 in the prior year period. Revenues from organization systems products were $757,000 and $1,218,000, respectively.
Gross profit for the second quarter 2011 was $23,744,000 or 54.2% of revenues, as compared with $18,979,000 or 53.9% of revenues in the same period last year. Gross profit as a percentage of revenue increased 183 basis points principally due to a combination of a price increase in 2011 and pricing discount incentives offered in the second quarter last year (in 2010 we participated with The Home Depot in special sales pricing promotions on cabinet refacing and countertop products). This increase was offset by 153 basis points principally due to sales mix.
Branch operating expenses were $1,915,000, or 4.4% of revenues in the second quarter 2011, as compared to $2,076,000, or 5.9% of revenues in the second quarter last year. Branch operating expenses are primarily comprised of fixed costs associated with each of our sales and installation centers, including rent, telecommunications, branch administration salaries and supplies.
Marketing expenses were $10,042,000 or 22.9% of revenues in the second quarter 2011 as compared with $8,266,000 or 23.5% of revenues in the second quarter last year. Marketing expenses consist primarily of marketing fees we pay to The Home Depot on each sale, commissions we pay to a third party in-store service provider on each sale in which the customer lead was originated by them, advertising, and personnel costs related to administration of our in-store marketing program and our marketing center. Marketing expense in dollar terms increased principally due to marketing fees and commissions payable to The Home Depot and our third party in-store service provider as a result of higher revenues. Marketing expense as a percentage of revenues declined due to sales mix and greater leverage over our fixed marketing expenses on higher revenues.
Sales expenses, which consist primarily of sales commissions and bonuses, sales manager salaries, sales materials, and travel and recruiting expenses, were $5,718,000, or 13.1% of revenues for the second quarter 2011, as compared to $5,148,000, or 14.6% of revenues in the prior year second quarter. The decrease in sales expense as a percentage of revenue is due to reduced sales commission rates and greater leverage of fixed selling expenses on higher revenues. Sales expenses in dollar terms increased principally as a result of higher commissions and incentives on higher revenues ($448,000) and higher payroll taxes and benefit costs ($114,000).
General and administrative expenses were $3,399,000, or 7.7% of revenues in the second quarter 2011, as compared to $2,681,000, or 7.6% of revenues in the second quarter last year. The increase in general and administrative expense principally reflects higher compensation costs, including salary, bonus, payroll taxes and benefits ($543,000), and higher operating expenses for communications ($49,000), recruiting expenses ($41,000) and provision for bad debt ($70,000).
- 14 -
Table of Contents
Results of Operations
Results of operations for the six months ended June 30, 2011 as compared to the six months ended June 30, 2010:
(In Thousands) Six Months ended June 30, |
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2011 | 2010 | |||||||||||||||
$ | % | $ | % | |||||||||||||
Revenues |
82,759 | 100.0 | 68,315 | 100.0 | ||||||||||||
Costs of remodeling contracts |
38,207 | 46.2 | 30,903 | 45.2 | ||||||||||||
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Gross profit |
44,552 | 53.8 | 37,412 | 54.8 | ||||||||||||
Costs and expenses: |
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Branch operations |
3,836 | 4.6 | 4,038 | 5.9 | ||||||||||||
Sales and marketing expense |
30,603 | 37.0 | 26,484 | 38.8 | ||||||||||||
General and administrative |
6,488 | 7.8 | 5,434 | 8.0 | ||||||||||||
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Operating income |
3,625 | 4.4 | 1,456 | 2.1 | ||||||||||||
Interest expense |
16 | | 65 | 0.1 | ||||||||||||
Other income (expense) |
12 | | 2 | | ||||||||||||
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Income before income taxes |
3,621 | 4.4 | 1,393 | 2.0 | ||||||||||||
Income tax expense |
1,481 | 1.8 | 564 | 0.8 | ||||||||||||
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Net income |
2,140 | 2.6 | 829 | 1.2 | ||||||||||||
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|
Managements Summary of Results of Operations.
For the six months ended June 30, 2011, new orders increased 21.5% to $87,234,000, from $71,818,000 in the same period last year. Revenues increased 21.1% to $82,759,000 from $68,315,000, respectively.
The increase in revenues reflected an increase in demand in both our kitchen refacing and countertop product line and our bath refacing product line. Revenues from our SCN market expansion program and our DIY program (programs which we initiated in the first quarter of 2010) increased $4,975,000 or 397% in the six months period.
In the first quarter 2011, we expanded the offering of our bath products into 109 additional The Home Depot stores. Revenues from bathroom refacing products in the six months ended June 30, 2011 increased 40.5% reflecting contribution from the expansion and increased marketing initiatives.
Gross profit for the six months period ended June 30, 2011 was $44,552,000 or 53.8% of revenues, as compared with $37,412,000 or 54.8% of revenues in the same period last year. Gross profit as a percentage of revenue increased on pricing changes as compared to the six month period last year, however the percentage increase was offset principally from sales mix.
Net income was $2,140,000, or $0.29 per share for the six months ended June 30, 2011, as compared with $829,000, or $0.12 per share in the same period last year.
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Table of Contents
Results of Operations Detail Review
Revenues and new orders for the six months ended June 30, 2011 and 2010, and backlog of uncompleted orders at June 30, 2011 and 2010 attributable to each of our product lines were as follows (in thousands):
Revenues | New Orders | Backlog | ||||||||||||||||||||||
2011 | 2010 | 2011 | 2010 | 2011 | 2010 | |||||||||||||||||||
Kitchen refacing and Countertops |
$ | 76,326 | $ | 62,523 | $ | 80,155 | $ | 66,206 | $ | 22,319 | $ | 19,482 | ||||||||||||
Bathroom refacing |
4,920 | 3,501 | 5,535 | 3,504 | 1,689 | 848 | ||||||||||||||||||
Organization systems |
1,513 | 2,275 | 1,544 | 2,108 | 525 | 463 | ||||||||||||||||||
Other |
| 16 | | | | | ||||||||||||||||||
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Total |
$ | 82,759 | $ | 68,315 | $ | 87,234 | $ | 71,818 | 24,533 | $ | 20,793 | |||||||||||||
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Kitchen refacing and countertops New orders for kitchen and countertop products increased 21.1% to $80,155,000 in the six months ended June 30, 2011 as compared to $66,206,000 in the same period last year. The increase reflects an increase in the number of customer appointments resulting from marketing initiatives, as well as growth in our SCN market expansion and our DIY programs which we initiated in the first quarter of 2010.
Revenues from kitchen refacing and countertop products increased 22.1% to $76,326,000 in the six months ended June 30, 2011, from $62,523,000 in the same period last year. The increase in revenues is commensurate with the increase in new orders.
Bathroom refacing New orders for bath products increased 58.0% to $5,535,000 in the six months ended June 30, 2011 from $3,504,000 in the same period last year. The increase in new orders is principally due to the program expansion into additional stores and increased marketing activities generating an increase in the number of customer appointments. Revenues from bathroom refacing products increased 40.5% to $4,920,000 in the six months ended June 30, 2011 from $3,501,000 in the same period last year. Ending backlog of uncompleted orders at June 30, 2011 increased 99.2% as compared with June 30, 2010.
Organization Systems New orders for organization systems products were $1,544,000 in the six months ended June 30, 2011 and $2,108,000 in the same period last year. Revenues from organization systems products were $1,513,000 and $2,275,000, respectively.
Gross profit for the six months period ended June 30, 2011 was $44,552,000 or 53.8% of revenues, as compared with $37,412,000 or 54.8% of revenues in the same period last year. Gross profit as a percentage of revenue increased 83 basis points principally due to a combination of a price increase in 2011 and pricing discount incentives offered in the same period last year (in 2010 we participated with The Home Depot in special sales pricing promotions on cabinet refacing and countertop products). This increase was offset by 176 basis points principally due to sales mix.
Branch operating expenses were $3,836,000, or 4.6% of revenues in the six months period ended June 30, 2011, as compared to $4,038,000, or 5.9% of revenues in the same period last year. Branch operating expenses are primarily comprised of fixed costs associated with each of our sales and installation centers, including rent, telecommunications, branch administration salaries and supplies.
Marketing expenses were $19,350,000 or 23.4% of revenues in the six months ended June 30, 2011 as compared with $16,243,000 or 23.8% of revenues in the same period last year. Marketing expenses consist primarily of marketing fees we pay to The Home Depot on each sale, commissions we pay to a third party in-store service provider on each sale in which the customer lead was originated by them, advertising, and personnel costs related to administration of our in-store marketing program and our marketing center. Marketing expense in dollar terms increased principally due to marketing fees and commissions payable to The Home Depot and our third party in-store service provider as a result of higher revenues.
During 2010 we initiated several changes to our marketing programs, including The Home Depots inclusion of the cabinet refacing category in their new national kitchen marketing strategy, A Solution for Every Kitchen and Budget Replace, Reface, Renew, improvements to our in-store marketing program which better align our program with The Home Depot marketing strategy and launch of our kitchen refacing internet micro-site. We believe these improvements yielded a more balanced and effective marketing program resulting in increased revenues and lowering our cost of marketing.
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Table of Contents
Sales expenses, which consist primarily of sales commissions and bonuses, sales manager salaries, sales materials, and travel and recruiting expenses, were $11,253,000, or 13.6% of revenues for the six months ended June 30, 2011, as compared to $10,241,000, or 15.0% of revenues in the prior year period. The decrease in sales expense as a percentage of revenue is due to reduced sales commission rates and greater leverage of fixed selling expenses on higher revenues. Sales expenses in dollar terms increased principally as a result of higher commissions and incentives on higher revenues ($768,000) and higher payroll taxes and benefit costs ($244,000).
General and administrative expenses were $6,488,000, or 7.8% of revenues in the six months ended June 30, 2011, as compared to $5,434,000, or 8.0% of revenues in the same period last year. The increase in general and administrative expense principally reflects higher compensation costs, including salary, bonus, payroll taxes and benefits ($666,000), and higher operating expenses for communications ($65,000), recruiting expenses ($92,000) and provision for bad debt ($109,000).
Liquidity and Capital Resources
We have historically financed our liquidity needs through cash flows from operations, borrowing under bank credit agreements and proceeds from the sale of common stock. At June 30, 2011, we had approximately $9,435,000 in cash and cash equivalents and $811,000 in marketable securities. Working capital, defined as current assets less current liabilities, was $17,249,000 at June 30, 2011 as compared to $15,150,000 at December 31, 2010.
Net cash provided by operations was $2,291,000 in the six months ended June 30, 2011 as compared to net cash utilized in operations of $1,178,000 in the same period last year.
In the six months ended June 30, 2011, we utilized $268,000 for capital expenditures, principally consisting of machinery, equipment, computer hardware and software and furniture and fixtures. Capital expenditures in the six months ended June 30, 2010 were $314,000.
In the first quarter 2011 we utilized $889,000 to pay off and retire our term loan. The term loan was payable in monthly principal payments of $27,778, plus accrued interest at the prime rate plus 1.25%. We believe that we have a sufficient cash balance and line of credit so that it was financially sound to retire the debt.
In the six months ended June 30, 2011, we generated approximately $272,000 in proceeds from issuance of common stock upon the exercise of stock options.
On March 13, 2008, our Board of Directors authorized a repurchase program for up to $2.0 million of our outstanding stock. Any repurchase under our stock repurchase program may be made in the open market at such times and such prices as we may determine appropriate. Cumulative repurchases under this authorization through June 30, 2011 were 376,018 shares at a cost of approximately $1,111,000. During the six months ended June 30, 2011 we did not repurchase any shares under this program. In the six months ended June 30, 2010 we repurchased approximately $32,000 of our common stock under the program.
On June 7, 2011, the Companys Board of Directors approved a $0.015 per share cash dividend payable on July 11, 2011 to stockholders of record on June 20, 2011. This is the first cash dividend paid to the stockholders in the Companys history.
We have a line of credit under our loan agreement with Frost National Bank (the Borrowing Base Line of Credit). The Borrowing Base Line of Credit was renewed in September 2010. The Borrowing Base Line of Credit allows for borrowings up to $2 million for working capital. Borrowings and required payments under the Borrowing Base Line of Credit are based upon an asset formula involving accounts receivable and inventory. At June 30, 2011 we had no balance outstanding under the Borrowing Base Line of Credit and had a borrowing capacity of $2,000,000. Interest on the Borrowing Base Line of Credit is payable monthly on the unpaid balance at the prime rate plus 1.25%. The Borrowing Base Line of Credit matures on December 2, 2011, at which time any outstanding principal and accrued interest is due and payable. We anticipate that we will either renew or replace the current line on similar terms prior to the line maturity.
The Frost credit facility contain covenants, which among other matters, (i) limit our ability to incur indebtedness, merge, consolidate and sell assets; (ii) limit us from making any acquisition which requires in any fiscal year $1.0 million cash or $2.0 million of cash and non-cash consideration; and (iii) limit the amount of the Companys stock that can be repurchased after August 19, 2010 to $500,000. In addition, the credit facility contains covenants which require us to maintain a tangible net worth of at least $13.5 million, a debt to adjusted tangible net worth ratio of less than 1.25 to 1, a debt service coverage ratio of not less than 1.5 to 1, and a quick ratio of more than 1 to 1 (excluding current maturities of the Term Loan). As of June 30, 2011, our tangible net worth was $19,444,195, debt to adjusted tangible net worth was 0.58 to 1, the debt service coverage ratio was 259.9 to 1 and the quick ratio was 1.8 to 1. We are in compliance with all restrictive covenants at June 30, 2011.
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We operate principally in leased facilities, and in most cases, management expects that leases currently in effect will be renewed or replaced by other leases of a similar nature and term. Escalation charges imposed by lease agreements are not significant.
In connection with our agreement with The Home Depot, we may open sales and installation centers as we enter new markets or we may utilize our SCN program to expand into additional markets. If we open facilities, it would require expenditures for facility improvements, machinery, furniture and fixtures, inventory, product displays, sales kits and requires cash to fund operating losses during the initial months following the opening of a facility. In addition, our agreement with The Home Depot may provide opportunities to introduce additional products in markets we serve. Introducing additional products requires expenditures customarily associated with rolling out products in new territories.
We believe that the current economic environment is improving. We believe we will be successful in executing our initiatives and that we will have sufficient cash, including cash generated by operations, and borrowing capacity under our credit facilities to meet our anticipated working capital needs for our current operations over the next twelve months, and that such capacity will be adequate to fund the expansion of our operations under our agreement with The Home Depot for the next 12-18 months. However, if we need additional capital to execute our business strategy or fund our operations, we may have to issue equity or debt securities. If we issue additional equity securities, the ownership percentage of our stockholders will be reduced. If we borrow money, we may incur significant interest charges which could reduce our net income. Holders of debt or preferred securities may have rights, preferences or privileges senior to those of existing holders of our common stock. However, additional financing may not be available to us, or if available, such financing may not be on favorable terms.
Critical Accounting Policies
Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP), which require management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, the disclosure of contingent assets and liabilities, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. For a discussion of our critical accounting policies, refer to Managements Discussion and Analysis of Financial Condition and Results of OperationsCritical Accounting Policies included in our Annual Report on Form 10-K for the year ended December 31, 2010 and Note 2 to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2010, which includes a summary of the significant accounting policies and methods used by us in the preparation of our financial statements. There have been no material changes to the critical accounting policies discussed in our Annual Report on Form 10-K for the year ended December 31, 2010.
Recent Accounting Pronouncements
The Financial Accounting Standards Board (FASB) issued an Accounting Standards Update (ASU) that further addresses fair-value-measurement accounting and related disclosure requirements. The ASU clarifies the FASBs intent regarding the application of existing fair-value measurement and disclosure requirements, changes the fair-value measurement requirements for certain financial instruments, and sets forth additional disclosure requirements for other fair-value measurements. The new guidance is effective January 1, 2012. The Company does not believe that the adoption of this guidance will have a material impact on the Companys consolidated financial statements.
Off-Balance Sheet Arrangements
As part of our ongoing business, we do not participate in transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or variable interest entities, or VIEs, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As of June 30, 2011, we are not involved in VIE or off-balance sheet transactions.
ITEM 3. | Quantitative and Qualitative Disclosures About Market Risk. |
We may be subject to financial market risks from changes in short-term interest rates since our credit facility contains an interest rate that varies with interest rate changes in the Prime rate. However, we currently have no outstanding balance under our credit facility. If we were to borrow funds under our credit facility we believe that these rates would have to increase significantly for the resulting adverse impact on our interest expense to be material to our results of operations.
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ITEM 4. | Controls and Procedures. |
Evaluation of Disclosure Controls and Procedures.
As required by Rule 13a-15(e) and 15(d)-15(e) under the Securities Exchange Act of 1934 (Exchange Act), the Companys management has carried out an evaluation, with the participation and under the supervision of its chief executive officer and chief financial officer, of the effectiveness of the design and operation of its disclosure controls and procedures as of June 30, 2011. Disclosure controls and procedures means controls and other procedures of the Company that are designed to ensure that information required to be disclosed in the reports the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is accumulated and communicated to the Companys management, including its chief executive officer and chief financial officer, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure.
Management conducted its evaluation of disclosure controls and procedures under the supervision of its chief executive officer and chief financial officer. Based upon such evaluation, the Companys chief executive officer and chief financial officer concluded that as of June 30, 2011, the Companys disclosure controls and procedures were effective.
Changes in Internal Control over Financial Reporting.
There have not been any changes in our internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f)) that occurred during the second fiscal quarter of 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 1. | Legal Proceedings. |
We are subject to legal proceedings and claims that arise in the ordinary course of business. While the ultimate outcome of pending litigation and threatened lawsuits cannot be predicted with certainty, an unfavorable outcome could have a negative impact on the Company and its financial condition and results of operations. However, at this time, the Company believes that the ultimate resolution of these matters will not have a material effect on our consolidated financial position or results of operations.
ITEM 1A. | Risk Factors. |
In addition to the other information set forth in this Form 10-Q, you should carefully consider the factors discussed under Risk Factors in our Form 10-K for fiscal 2010 as filed with the SEC. There have not been any substantive changes to the Risk Factors described in our 2010 Form 10-K. These risks could materially and adversely affect our business, financial condition and results of operations. The risks described in our Form 10-K are not the only risks we face. Our operations could also be affected by additional factors that are not presently known to us or by factors that we currently consider immaterial to our business.
ITEM 2. | Unregistered Sales of Equity Securities and Use of Proceeds. |
During the second quarter 2011, we did not repurchase any shares of our common stock. Our current common stock repurchase program was announced on March 18, 2008. Our Board of Directors authorized the repurchase of up to $2.0 million of the Companys common stock. Any repurchase of common stock under our stock repurchase program may be made in the open market at such time and such prices as our CEO may from time to time determine. The program does not have an expiration date. Cumulative repurchases under this program through June 30, 2011 were 376,018 shares at a cost of approximately $1,111,000. Our Frost Bank credit facilities contain certain covenants, which among other matters, limit the amount of our stock that can be repurchased after August 19, 2010 to $500,000. There have been no repurchases of our common stock subsequent to August 19, 2010.
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ITEM 6. | Exhibits. |
(a) Exhibits. The exhibits required to be furnished pursuant to Item 6 are listed in the Exhibit Index filed herewith, which Exhibit Index is incorporated herein by reference.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on August 11, 2011 on its behalf by the undersigned, thereto duly authorized.
U.S. HOME SYSTEMS, INC. | ||
By: | /s/ Murray H. Gross | |
Murray H. Gross, President and Chief Executive Officer | ||
By: | /s/ Robert A. DeFronzo | |
Robert A. DeFronzo, Chief Financial Officer |
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INDEX OF EXHIBITS
Exhibit |
Description of Exhibit | |
2.1 (1) | Agreement and Plan of Merger between U.S. Pawn, Inc. and U.S. Remodelers, Inc. dated as of November 3, 2000 | |
2.2 (2) | Agreement and Plan of Merger dated February 13, 2001, by and between U.S. Pawn, Inc. and U.S. Home Systems, Inc. | |
2.3 (3) | Agreement and Plan of Merger dated September 28, 2001, by and between Home Credit Acquisition, Inc., U.S. Home Systems, Inc., and First Consumer Credit, LLC and its members | |
2.4 (4) | Agreement and Plan of Merger by and among Remodelers Credit Corporation, a wholly-owned subsidiary of U.S. Home Systems, Inc., Deck America, Inc., and Shareholders of Deck America, Inc. dated October 16, 2002, and effective as of November 30, 2002 | |
2.5 (4) | Amendment No. 1 to Agreement and Plan of Merger entered into on November 30, 2002, by and among Remodelers Credit Corporation, U.S. Home Systems, Inc., Deck America, Inc., and Shareholders of Deck America, Inc. | |
3.1 (2) | Certificate of Incorporation of U.S. Home Systems, Inc. as filed with the Secretary of State of Delaware on January 5, 2001 | |
3.2 (2) | Bylaws of U.S. Home Systems, Inc. | |
3.3 (5) | Amended Article VI to the U.S. Home Systems Bylaws. | |
4.1 (2) | Common Stock specimen U.S. Home Systems, Inc. | |
+10.1 (6) | Amended and Restated 2000 Stock Compensation Plan | |
+10.2 (7) | Executive Cash Bonus Program adopted by Board of Directors of U.S. Home Systems, Inc. on February 5, 2004 | |
+10.3 (8) | U.S. Home Systems, Inc. 2004 Restricted Stock Plan approved by the stockholders on July 15, 2004. | |
+10.4 (9) | Non-Employee Director Compensation Plan | |
+10.5 (9) | Form of Restricted Stock Agreement for Non-Employee Directors | |
+10.6 (9) | Form of Restricted Stock Agreement for Employees | |
10.7 (10) | Term Note, effective as of February 10, 2006, in the principal amount of $1.2 million payable to the Frost Bank by U.S. Home. | |
10.8 (10) | Deed of Trust, Security Agreement Assignment of Rents, effective as of February 10, 2006, in favor of Michael K. Smeltzer, as trustee, for the benefit of Frost Bank, as beneficiary, executed by U.S. Remodelers, as grantor, pledging the real property and improvements located in Charles City, Virginia (as described in the Deed of Trust) as security for indebtedness owed Frost Bank by U.S. Home. | |
10.9 (11) | Service Provider Agreement between USR and The Home Depot effective May 1, 2006 (certain exhibits and schedules have been omitted and will be furnished to the SEC upon request). | |
10.10 (12) | Modification Agreement dated January 1, 2007, by and between U.S. Home and Frost Bank relating to $1.2 million Term Note. | |
10.11 (13) | Amendment dated February 28, 2008 to the Service Provider Agreement between USR and The Home Depot (Exhibit 10.9). | |
+10.12 (14) | Amended and Restated Employment Agreement by and between U.S. Home Systems, Inc. and Murray H. Gross effective as of January 1, 2009. | |
+10.13 (15) | Amended and Restated Employment Agreement by and between U.S. Home Systems, Inc. and Peter T. Bulger effective as of January 1, 2009. | |
+10.14 (15) | Amended and Restated Employment Agreement by and between U.S. Home Systems, Inc. and Robert A. DeFronzo effective as of January 1, 2009. |
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Exhibit |
Description of Exhibit | |
+10.15 (15) | Amended and Restated Employment Agreement by and between U.S. Home Systems, Inc. and Steven L. Gross effective as of January 1, 2009 | |
+10.16 (15) | Amended and Restated Employment Agreement by and between U.S. Home Systems, Inc. and Richard B. Goodner effective as of January 1, 2009 | |
10.17 (16) | Separation Agreement and General Release of Claims dated February 17, 2009 (effective as of February 24, 2009) by and among U.S. Home Systems, U.S. Remodelers and Peter T. Bulger | |
10.18 (17) | Second Amended and Restated Loan Agreement dated December 19, 2008 by and between U.S. Home Systems, Inc. and Frost Bank | |
10.19 (17) | Second Amended and Restated Security Agreement dated December 19, 2008 executed by U.S. Home Systems, pledging collateral (as described in the Security Agreement) as security for indebtedness owed Frost Bank by U.S. Home Systems, Inc. | |
10.20 (17) | Second Amended and Restated Security Agreement dated December 19, 2008 executed by U.S. Remodelers pledging collateral (as described in the Security Agreement) as security for indebtedness and Frost Bank by U.S. Home Systems, Inc. | |
10.21 (17) | Second Amended and Restated Guaranty Agreement executed by U.S. Remodelers dated December 19, 2008 to secure payment of indebtedness payable to Frost Bank by U.S. Home Systems, Inc. | |
10.22 (18) | First Amendment to Second Amended and Restated Loan Agreement dated May 1, 2009 by and between U.S. Home Systems and the Frost National Bank. | |
10.23 (19) | Stock Purchase Agreement dated May 18, 2009 between U.S. Home Systems and Peter T. Bulger | |
10.24 (20) | Stipulation and Settlement Agreement in connection with Kenneth John Lodge, et al. (Plaintiffs) vs. U.S. Home Systems, Inc. and U.S. Remodelers, Inc. (Defendants), Case No. CV07-05409 CAS pending in the United States District Court for the Central District of California, effective July 17, 2009, subject to approval of the U.S. District Court | |
10.25 (21) | Settlement Agreement and Release dated January 20, 2010, in connection with Matthew Ozga (Plaintiff) vs. U.S. Remodelers, Inc. et al. (Defendants), Case No. 3:09-CV-05112JSW pending in the United States District Court for the Northern District of California, subject to approval of the U.S. District Court (Exhibits omitted and will be furnished to the SEC upon request.) | |
10.26 (22) | Second Amendment to Second Amended and Restated Loan Agreement effective December 30, 2009, by and between U.S. Home Systems, Inc. and Frost Bank. | |
+10.27 (23) | 2010 Equity Incentive Plan effective March 15, 2010 and approved by stockholders of U.S. Home Systems on June 17, 2010 | |
10.28 (24) | Modification, Renewal and Extension Agreement dated September 2, 2010, by and between U.S. Home Systems, Inc., U.S. Remodelers, Inc. and Frost Bank, which renews and extends to August 10, 2013 the maturity date of the term note in the original principal amount of $1,200,000 | |
10.29 (24) | Revolving Promissory Note dated September 2, 2010 in the principal amount of $2,000,000 payable to Frost Bank | |
10.30 (24) | Third Amendment to Second Amended and Restated Loan Agreement effective September 2, 2010, by and between U.S. Home Systems, Inc. and Frost Bank | |
10.31 (24) | Arbitration and Notice of Final Agreement dated September 2, 2010, by and between U.S. Home Systems, Inc. and Frost Bank | |
10.32 (25) | Addendum dated February 8, 2011 to the Service Provider Agreement between U.S. Home Systems, Inc. and The Home Depot, extending the termination date of the SPA to February 25, 2014. | |
21.1 (26) | Subsidiaries of the Company. | |
31.1 * | Chief Executive Officer Certification filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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Exhibit |
Description of Exhibit | |
31.2 * | Chief Financial Officer Certification filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
32.1 * | Chief Executive Officer Certification furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
32.2 * | Chief Financial Officer Certification furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
101* | XBRL Instance Document |
* | Filed herewith. |
+ | Management contract or compensatory plan or arrangement. |
(1) | Previously filed as Exhibit B to the Companys Proxy Statement which was filed with the Commission on December 15, 2000, and which is incorporated herein by reference. |
(2) | Previously filed as an exhibit to the Companys Annual Report on Form 10-KSB for the fiscal year ended December 31, 2000, which was filed with the Commission on April 2, 2001, and which is incorporated herein by reference. |
(3) | Previously filed as an exhibit to the Companys Current Report on Form 8-K/A which was filed with the Commission on November 27, 2001, and which is incorporated herein by reference. |
(4) | Previously filed as an exhibit to the Companys Current Report on Form 8-K/A which was filed with the Commission on February 5, 2003, and which is incorporated herein by reference. |
(5) | Previously filed as an exhibit to the Companys Current Report on Form 8K which was filed with the Commission on December 21, 2007, and which is incorporated herein by reference. |
(6) | Previously filed as an exhibit to the Companys Registration Statement on Form S-8 which was filed with the Commission on July 19, 2002, and which is incorporated herein by reference. |
(7) | Previously filed as an exhibit to the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2003, which was filed with the Commission on April 6, 2004, and which is incorporated herein by reference. |
(8) | Previously filed as an exhibit to the Companys Current Report on Form 8-K which was filed with the Commission on July 21, 2004, and which is incorporated herein by reference. |
(9) | Previously filed as an exhibit to the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2004, which was filed with the Commission on March 29, 2005, and which is incorporated herein by reference. |
(10) | Previously filed as an exhibit to the Companys Current Report on Form 8-K which was filed with the Commission on February 16, 2006, and which is incorporated herein by reference. |
(11) | Previously filed as an exhibit to the Companys Quarterly Report on Form 10-Q which was filed with the Commission on August 10, 2006, and which is incorporated herein by reference. |
(12) | Previously filed as an exhibit to the Companys Quarterly Report on Form 10-Q which was filed with the Commission on May 15, 2007, and which is incorporated herein by reference. |
(13) | Previously filed as an exhibit to the Companys Annual Report on Form 10-K which was filed with the Commission on March 18, 2008, and which is incorporated herein by reference. |
(14) | Previously filed as an exhibit to the Companys current report on Form 8-K which was filed with the Commission on December 16, 2008, and which is incorporated herein by reference. |
(15) | Previously filed as an exhibit to the Companys current report on Form 8-K which was filed with the Commission on January 5, 2009, and which is incorporated herein by reference. |
(16) | Previously filed as an exhibit to the Companys current report on Form 8-K/A which was filed with the Commission on February 23, 2009, and which is incorporated herein by reference. |
(17) | Previously filed as an exhibit to the Companys Annual Report on Form 10-K which was filed with the Commission on March 16, 2009, and which is incorporated herein by reference. |
(18) | Previously filed as an exhibit to the Companys Quarterly Report on Form 10-Q which was filed with the Commission on May 13, 2009, and which is incorporated herein by reference. |
(19) | Previously filed as an exhibit to the Companys Current Report on Form 8-K which was filed with the Commission on May 19, 2009, and which is incorporated herein by reference. |
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(20) | Previously filed as an exhibit to the Companys Current Report on Form 8-K which was filed with the Commission on July 22, 2009, and which is incorporated herein by reference. |
(21) | Previously filed as an exhibit to the Companys Current Report on Form 8-K which was filed with the Commission on January 22, 2010, and which is incorporated herein by reference. |
(22) | Previously filed as an exhibit to the Companys Annual Report on Form 10-K which was filed with the Commission on March 16, 2010, and which is incorporated herein by reference. |
(23) | Previously filed as an exhibit to the Companys Current Report on Form 8-K which was filed with the Commission on June 23, 2010, and which is incorporated herein by reference. |
(24) | Previously filed as an exhibit to the Companys Quarterly Report on Form 10-Q which was filed with the Commission on November 4, 2010, and which is incorporated herein by reference. |
(25) | Previously filed as an exhibit to the Companys Current Report on Form 8-K which was filed with the Commission on February 9, 2011, and which is incorporated herein by reference. |
(26) | Previously filed as an exhibit to the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2010, which was filed with the Commission on March 17, 2010, and which is incorporated herein by reference. |