US HOME SYSTEMS (NASDAQ:USHS)

DALLAS and ATLANTA, Aug. 7, 2012 /PRNewswire/ -- The Home Depot® and U.S. Home Systems, Inc. ("USHS") today announced a definitive merger agreement for The Home Depot to acquire USHS.  USHS, based in Irving, Texas, is currently an exclusive provider of kitchen and bath refacing products and services as well as closet and garage organizational systems to The Home Depot. 

Under the terms of the agreement, The Home Depot will acquire USHS for $12.50 per share in cash which represents an approximately 38% premium over USHS' closing price on The NASDAQ Global Market on August 6, 2012. The agreement was unanimously approved by USHS's board of directors.  The acquisition is expected to close by the end of the calendar year, and is subject to approval by USHS stockholders, applicable regulatory approval and customary closing conditions.

"The Home Depot has had a long-standing relationship with USHS.  By formally bringing USHS into The Home Depot family, we expect to further enhance our customers' home service experience," said Kevin Hofmann, senior vice president-Home Services, The Home Depot.

"The USHS board of directors conducted a thorough review of the company's alternatives to enhance stockholder value, and we are pleased that this transaction appropriately recognizes the value of USHS' relationships and solutions, while providing our stockholders with an attractive cash premium for their investment," said Murray H. Gross, president, CEO & chairman, USHS. 

Bryant Park Capital Securities, Inc. is acting as exclusive financial advisor to USHS.  Bryant Park Capital Valuation Services LLC (an affiliate of Bryant Park Capital Securities, Inc.) has rendered a fairness opinion to the Board of Directors of USHS in connection with the transaction.  Jackson Walker L.L.P. is acting as legal advisor to USHS.

J.P. Morgan Securities LLC is serving as The Home Depot's exclusive financial advisor and King & Spalding LLP is acting as legal advisor to The Home Depot.

On 12/08/2010 we added USHS to the GeoSpecial list @ $4.29

Catalyst: Strong fiscal 2011 EPS estimates of $0.50 indicating 100%. See our full GeoSpeical research note from 12/29/2010

We are now removing USHS from the GeoSpeicial List @ $11.58

Potential road block:  USHS 4th quarter is its seasonally weakest quarter, so we need to be cognizant of the possibility that the quarter will be sequentially lower than the 2011 3rd quarter. Even though the company has been transparent about seasonal factors, investors may not embrace a quarter that is sequentially lower.  Given the sharp rise in share price and a desire to protect profits, we are placing USHS on the GeoSpecial on the Radar list until it reports 4th quarter numbers.

• Peak performance: Reached a high of  $14.81 on 3/02/2012 for a maiximum potential return of 245%
• Current Price: $11.58

Third Quarter 2011 Results

• USHS reported revenue of $43.5 million, exceeding guidance of $41 to $42 million and up 10.0% compared to $39.6 million in the third quarter last year. This marks the second-highest quarterly revenues in Company history.
• USHS reported record earnings per share of $0.22, significantly better than guidance of $0.14 to $0.16 per share and compared to $0.09 per share in the third quarter last year.
• New orders increased 3.1% to $40.9 million in the third quarter 2011 from $39.7 million in the third quarter last year. The Company's backlog of uncompleted orders was $21.9 million at September 30, 2011.

Murray Gross, chairman and chief executive officer, commented, "We once again delivered strong financial results, exceeding our expectations for the third quarter and delivering record profitability. We continued to add to our already strong balance sheet with approximately $13 million in cash and marketable securities and no debt at September 30, 2011."

Mr. Gross continued, "Revenues increased 10% in the third quarter reflecting higher backlog at the beginning of the period coupled with a faster sale-to-completion cycle time and continued strength in new orders during the quarter. Our new orders in the third quarter were $40.9 million, our third strongest quarter on record. This resulted in record net income, far exceeding our guidance. Our operating margin in the quarter increased to 6.3% from 2.7% of revenues in the third quarter last year. We're continuing to emphasize cost control and efficiency programs to gain further leverage over fixed overhead costs."

Mr. Gross continued, "In June our Board of Directors approved our first cash dividend reflecting the Company's long term value and its commitment to promoting long-term investment in our common stock. The Board's decision to initiate and declare a quarterly dividend was a result of the Company's strong financial foundation and the Board's confidence in the Company's future performance. I am pleased to announce that the Board has authorized our third quarterly dividend, increasing the quarterly dividend from $0.015 per share to $0.02 per share. The dividend is payable December 13, 2011 to stockholders of record at the close of business on November 23, 2011. We believe the payment of dividends will provide us with an additional means of creating value for our stockholders as we continue to pursue growth opportunities."

Mr. Gross concluded, "Historically our fourth quarter reflects seasonally lower revenues. Accordingly, our guidance for the fourth quarter reflects this seasonality."

Fourth Quarter and Full Year 2011 Outlook

USHS expects:

• Revenues in the fourth quarter 2011 of $39 million, compared to $38 million in the fourth quarter 2010 and full year 2011 revenues of $165 million as compared to $146 million last year.
• Net income in the fourth quarter 2011 of $0.13 per share, compared to $0.10 per share in the fourth quarter 2010 and full year 2011 net income of $0.64 per share, compared to $0.30 per share in 2010.
• EBITDA in the fourth quarter 2011 of $1.8 million, compared to $1.4 million in the fourth quarter 2010, and full year 2011 of $8.8 million, compared to $4.7 million in 2010.

Second Quarter 2011 Highlights

• USHS reported record revenue of $43.8 million, exceeding guidance of $40 to $41 million and up 24.4% compared to $35.2 million in the second quarter last year.
• USHS reported earnings per share of $0.21, significantly better than guidance of $0.11 to $0.13 per share and compared to $0.06 per share in the second quarter last year.
• New orders increased to a record $44.0 million in the second quarter 2011 from $37.4 million in the second quarter last year. The Company's backlog of uncompleted orders was $24.5 million at June 30, 2011.
• Fixed operating costs, consisting of branch operating and general and administrative expenses, declined to 12.1% of revenues in the second quarter 2011 from 13.5% in the same quarter last year. The decline reflected increased leverage from higher revenues.

Murray Gross, chairman and chief executive officer, commented, "We recorded our seventh consecutive year-over-year quarterly increase in revenues in the second quarter and achieved a record $43.8 million. Faster installation cycle time coupled with a significant increase in new orders during the period boosted revenues above guidance. Our new orders increased 17.7%, from $37.4 million in the second quarter last year to a record $44.0 million in the second quarter 2011."

Mr. Gross continued, "The marketing programs we initiated in 2010 are continuing to drive demand and new orders, as evidenced by our record level of bookings. In addition, our SCN market expansion and DIY programs, which we initiated in the first quarter last year, are contributing to our growth and performance. In the second quarter, revenues from these programs increased $2.3 million or 201% as compared to the same period last year."

Mr. Gross continued, "As I stated last quarter, I consider it quite an accomplishment that we have significantly grown our revenues while simultaneously increasing customer satisfaction levels. We have been successful adopting and achieving the high standards of customer satisfaction levels set by our strategic partner, The Home Depot, as measured through The Home Depot's Voice of The Customer (VOC) survey. Our customer satisfaction ratings are a testament to the commitment and dedication of our associates around the country."

Mr. Gross concluded, "After our annual shareholder's meeting in June our Board of Directors approved our first cash dividend reflecting the Company's long term value and its commitment to promoting long-term investment in our common stock. The initial dividend was paid in July. The Board's decision to initiate and declare a quarterly dividend was a result of the Company's strong financial foundation and the Board's confidence in the Company's future performance. I am pleased to announce that the Board has authorized our second quarterly dividend of $0.015 per share payable September 13, 2011 to stockholders of record at the close of business on August 25, 2011. We believe the payment of dividends will provide us with an additional means of creating value for our stockholders as we continue to pursue growth opportunities."

Third Quarter 2011 Outlook

USHS expects:

• Revenues in the third quarter 2011 of $41 to $42 million as compared to revenues of $39.6 million in the third quarter 2010.
• Net income of $0.14 to $0.16 per share, compared to $0.09 per share in the third quarter 2010.

First Quarter Results:

• The Company reported $39 million in revenue, the highest first quarter revenue in USHS history, exceeding guidance of$36 to $37 million and up 17.7% compared to $33.1 million in the first quarter last year.
• USHS reported earnings per share of $0.08, better than guidance of $0.06 to $0.07 per share and compared to $0.05 per share in the first quarter last year.

USHS reported new orders increased to a record $43.2 million in the first quarter 2011 from $34.4 million in the first quarter last year. USHS had backlog of uncompleted orders of $24.3 million at March 31, 2011.

Murray Gross, chairman and chief executive officer, commented, "We recorded our seventh consecutive year-over-year quarterly increase in revenues in the first quarter and reached $39 million, the best first quarter in our history. Our new orders increased 25.5%, from $34.4 million in the first quarter last year to a record $43.2 million in the first quarter 2011, enabling us to exceed guidance for both revenue and earnings per share. Our revenue exceeds pre-recession highs, demonstrating renewed consumer interest and increased demand for our solutions."

USHS expects:

• Revenues in the second quarter 2011 of $40 to $41 million as compared to revenues of $35 million in the second quarter 2010.
• Net income of $0.11 to $0.13 per share, compared to $0.06 per share in the second quarter 2010.

Fourth Quarter Revenues, published March 17th.

• For the fourth quarter, USHS revenues increased 23% to $38.0 million as compared to $30.9 million in the fourth quarter 2009.
• Net income for the fourth quarter 2010 was $708,000 or $0.10 per share. During the quarter USHS recorded a pre-tax benefit of$370,000 for partial reimbursement of legal fees which the Company incurred defending certain class action lawsuits, which had been settled. Excluding this non-recurring item, USHS net income would have been $494,000 or $0.07 per share. This compares to net loss for the fourth quarter of 2009 of $1.3 million or $0.18 per share.

Murray Gross, chairman and chief executive officer, commented, "We recorded our sixth consecutive year-over-year quarterly increase in revenues and new orders in the fourth quarter. Our new orders in the fourth quarter increased 13% to $37.2 millionfrom $32.8 million in the fourth quarter last year. This improvement demonstrates the progress we are making and the improvements in demand for our solutions."

USHS expects:

Revenues in the first quarter 2011 of $36 to $37 million as compared to revenues of $33.1 million in the first quarter 2010.

Net income of $0.06 to $0.07 per share, compared to $0.05 per share in the first quarter 2010.

• fiscal 2011 EPS estimates of $0.50 indicate growth of 100%, assuming the company meets 2010 estimates $0.25.
• Strong EPS performance for each of the last four quarters.

• Operates in a sector that often benefits from consumers' choice to up grade current dwelling as opposed to purchasing a new home during recession periods.

• Strong Expansion plans:

"In February 2010 we engaged SCN contractors to service the Charleston, South Carolina, Wilkes-Barre and Harrisburg, Pennsylvania, Ithaca, New York, Madison, Wisconsin, New Orleans, Louisiana and Albuquerque, New Mexico The Home Depot markets, consisting of approximately 75 stores. In February 2010 the initial SCN contractors began generating sales in these markets. In March 2010, we intend to engage independent contractors to service certain The Home Depot markets in Indiana, Ohio, Kentucky, North Carolina, Missouri and Kansas, comprising approximately 63 stores. We anticipate that we will complete this expansion over the next 18-24 months and that we will engage between 25 to 35 independent contractors to cover the 400 stores. We are also evaluating certain segments of markets which we currently serve that could be candidates for transition to this model to better penetrate the marketplace and reduce our costs."

Major Risk:

Heavy reliance on Home Depot

"We are engaged in the specialty product home improvement business. In our home improvement business, we manufacture or procure, design, sell and install custom quality, specialty home improvement products. Our principal product lines include custom kitchen and bathroom cabinet refacing products, laminate and solid-surface countertop 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)."

We also have not interviewed management.