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| USHS > SEC Filings for USHS > Form 10-Q on 7-Aug-2008 | All Recent SEC Filings |
7-Aug-2008
Quarterly Report
The following should be read in conjunction with our unaudited financial statements for the three and six months ended June 30, 2008 included herein, and our audited financial statements for the years ended December 31, 2007, 2006 and 2005, and the notes to these financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2007. Except for the historical information contained herein, certain matters set forth in this report are forward-looking statements that are based on management's 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 quality, specialty home improvement products. Our principal product lines include kitchen and bathroom cabinet refacing products, wood and composite decks and related accessories. We manufacture certain of our kitchen and bath cabinet refacing products at our Charles City, Virginia facility. We manufacture wood deck products and accessories at our Woodbridge, Virginia facility. We also maintain a marketing center in Boca Raton, Florida.
Since October 2003 we have engaged in an aggressive expansion program with The Home Depot. In May 2006 we entered into a three year service provider agreement, or SPA, with The Home Depot. Among other items, the agreement provides that we may not enter into agreements or other arrangements with any The Home Depot competitors for the marketing, sales and installation of our products. Additionally, the agreement provides that we will not offer our products and installation services in any market under any trademarks or brands other than as approved by The Home Depot. Prior to the agreement, in addition to marketing our products under the nationally recognized brands "The Home Depot Kitchen and Bathroom Refacing" and "The Home Depot Installed Decks", we also marketed our products directly to consumers under our own Facelifters and Designer Deck brands. Our home improvement products are marketed through a variety of sources including direct mail, marriage mail, magazines, newspaper inserts and in-store displays at selected The Home Depot stores.
On February 28, 2008, we and The Home Depot mutually agreed to extend the termination date of the SPA to February 28, 2011, terminate the installed deck program under the SPA and add additional markets in Columbus, Cincinnati and Cleveland, Ohio, and Pittsburgh, Pennsylvania for our kitchen cabinet refacing and countertop products.
As a result of the amendments to the SPA, effective February 29, 2008, we ceased receiving customer leads from The Home Depot for our deck products in the Midwest, Boston, Connecticut, Virginia Beach and Atlanta markets. We will complete the installation of all pending deck orders for The Home Depot customers in these markets, and we will continue to honor our warranty service obligations to The Home Depot deck customers. After completion of these deck orders, we will cease offering deck products in these markets. As a result of discontinuing the sales of deck products in these markets, we recorded an asset impairment charge of approximately $90,000 in the first quarter 2008 related to in-store deck displays.
We will continue, until August 31, 2008, to sell and install, on a non-exclusive basis, our deck products under The Home Depot brand in the Northeastern markets, including Northern Virginia, Maryland, Philadelphia, New Jersey and New York. Concurrent with this phase-out of our deck products in The Home Depot stores, we will return to marketing our deck products in Northern Virginia, Maryland, Philadelphia and New Jersey under our own Designer Deck brand. We anticipate we will begin marketing deck products under our own brand in August 2008.
The SPA amendment also provided for the expansion of our kitchen cabinet refacing and countertop products in Ohio markets, including Cleveland, Columbus and Cincinnati and in Pittsburgh, Pennsylvania, encompassing approximately 96 The Home Depot stores. In the quarter ended June 30, 2008 we completed the opening of a sales and installation center in each of these markets.
We will continue, on an exclusive basis, to offer our kitchen and bath refacing products to The Home Depot customers in the designated markets. As a result of the addition of the Ohio and Pittsburgh markets, we are now the sole provider of kitchen cabinet refacing products and services to The Home Depot in the United States.
At June 30, 2008, our home improvement business served The Home Depot in 42 markets covering 27 states. Our kitchen products are available in all 42 markets encompassing approximately 1,500 The Home Depot stores and 33 The Home Depot - Expo stores. Our bath products are currently offered in 16 markets which include approximately 523 stores.
Effective September 30, 2007, we exited the consumer finance business when we and First Consumer Credit, Inc., or FCC, our consumer finance subsidiary, entered into an asset purchase agreement with FCC Finance, LLC, or FCC-Finance, whereby FCC sold substantially all of its assets to FCC-Finance in a buyout led by management of the consumer finance unit. As a result of the transaction, the financial operating results of FCC for all periods have been reclassified as discontinued operations in our Consolidated Statements of Operations.
Prior to the sale of FCC's assets, we had two reporting segments, the home improvement segment and consumer finance segment. As a result of the sale of FCC's assets and the reclassification of FCC's operating results as a discontinued operation, we have discontinued the previous separate segment reporting.
Results of Operations
Results of operations for the three months ended June 30, 2008 as compared to
the three months ended June 30, 2007:
(In Thousands)
Three months ended
June 30,
2008 2007
$ % $ %
Revenues 35,485 100.0 31,601 100.0
Costs of remodeling contracts 16,561 46.7 14,415 45.6
Gross Profit 18,924 53.3 17,186 54.4
Costs and expenses:
Branch operations 2,340 6.6 1,939 6.1
Sales and marketing expense 12,563 35.4 10,937 34.6
General and administrative 2,835 8.0 2,488 7.9
Operating income 1,186 3.3 1,822 5.8
Interest expense 44 0.1 54 0.2
Other income 32 0.1 188 0.6
Income from continuing operations before income taxes 1,174 3.3 1,956 6.2
Income tax expense 454 1.3 766 2.4
Net income from continuing operations 720 2.0 1,190 3.8
Net gain (loss) on discontinued operations, net of tax - 0.0 (89 ) 0.3
Net income 720 2.0 1,101 3.5
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Management's Summary of Results of Operations.
New orders were $34,390,000 in the second quarter ended June 30, 2008, as compared with $35,935,000 in the second quarter ended June 30, 2007. The decline in new orders reflected a reduction of $7,031,000 in orders for deck products, $3,454,000 of which is due to discontinuing to offer our deck products in specified markets in February 2008 in accordance with our amended SPA with The Home Depot. We
attribute the remaining decline in orders of our deck products to its close alignment with the softness in the housing construction and resale markets. Excluding deck products in all markets, new orders increased $5,486,000, or 22.1%. The increase resulted from new markets we opened in the second and third quarters of 2007 and in the second quarter of 2008 which, in the aggregate, contributed $1,656,000 in new orders, and an increase in the number of customer appointments for our kitchen and countertop products. We attribute the increase in the number of customer appointments to our in-store-marketing program that we initiated in June 2007. Our in-store marketing program involves staffing marketing promoters in select The Home Depot stores during certain times of the week. Marketing promoters network with The Home Depot's customers to generate customer interest in our products, answer consumer's questions about our products and schedule in-home presentations. We believe this program has proved to be an effective vehicle to penetrate the market and proactively generate prospective customer interest in our products and services.
Despite the success of our in-store marketing program, we believe that the softness in the housing market, uncertainty in the credit markets and higher energy prices have had an adverse affect on our generation of new orders and that these macro economic conditions will persist through the first half of 2009.
Revenues for the three months ended June 30, 2008 increased $3,884,000 or 12.3% to $35,485,000 as compared to $31,601,000 in the three months ended June 30, 2007. Revenues in markets that were opened prior to 2007 increased 8.6% or $2,726,000 net of a decline of $881,000 in deck revenues in markets which we ceased offering deck products in February 2008. Revenues increased $1,158,000, resulting from new kitchen sales and installation centers we opened since the second quarter of 2007.
Because our cycle time to complete the installation of a new order and recognize the related revenue is generally 60 days, our revenues in a given quarter are largely dependent on the backlog of uncompleted orders at the beginning of a quarter. The increase in revenues as compared to the prior year second quarter reflects higher backlog of orders at the beginning of the second quarter 2008 as compared to the backlog of orders entering the second quarter of 2007 ($25,323,000 at March 31, 2008 as compared to $21,293,000 at March 31, 2007), as well as higher new orders in the current period. Our backlog of orders at June 30, 2008 was $24,228,000 as compared with $25,626,000 at June 30, 2007.
Net income was $720,000, or $0.09 per diluted share, in the second quarter 2008 as compared with $1,101,000 or $0.13 per diluted share in the second quarter 2007. Although we increased our revenues, a substantial portion of our sales and marketing expenses are variable and increased as a result of the increased revenues. We have also incurred higher fixed operating costs, including costs associated with our operations expansion into new markets. In the second quarter 2008, we incurred an aggregate start-up operating loss of approximately $300,000 in the markets opened in 2008. In the second quarter of 2007, we incurred an aggregate start-up operating loss of $75,000 in markets opened in the second quarter 2007.
Results of Operations - Detail Review
Revenues for the three months ended June 30, 2008 increased $3,884,000 or 12.3% to $35,485,000 as compared to $31,601,000 in the three months ended June 30, 2007. Revenues in markets that were opened prior to 2007 increased 8.6% or $2,726,000. The remaining increase, $1,158,000, resulted from new kitchen sales and installation centers we opened in the second and third quarters of 2007 in Nashville, Tennessee, Birmingham, Alabama, Harrisburg, Pennsylvania, and Rochester, New York, and four new sales and installation centers we opened in the second quarter of 2008 in Columbus, Cincinnati and Cleveland, Ohio, and Pittsburgh, Pennsylvania.
Three months ended Increase
June 30, (decrease)
2008 2007 $
Markets opened prior to 2007 $ 34,327 $ 31,601 $ 2,726
Markets opened in 2007 and 2008 1,158 - 1,158
Total revenues $ 35,485 $ 31,601 $ 3,884
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Revenues and new orders for the three months ended June 30, 2008 and 2007, and backlog of uncompleted orders at June 30, 2008 and 2007 attributable to each of our product lines were as follows (in thousands):
Revenues New Orders Backlog as of June 30,
2008 2007 2008 2007 2008 2007
Kitchen refacing and countertops $ 28,675 $ 22,962 $ 28,043 $ 22,138 $ 17,628 $ 14,070
Bathroom refacing 2,663 2,463 2,211 2,656 1,132 2,067
Decks 4,115 6,176 4,110 11,141 5,464 9,489
Other 32 - 26 - 4 -
Total $ 35,485 $ 31,601 $ 34,390 $ 35,935 $ 24,228 $ 25,626
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Kitchen refacing and countertops - New orders for kitchen and countertop products increased $5,905,000 or 26.7%, to $28,043,000 in the second quarter 2008 from $22,138,000 in the second quarter 2007. The increase in new orders reflects $1,656,000 from new market expansions and an increase in the number of customer appointments generated from our in-store marketing program which we initiated in late June 2007. The in-store marketing program consists principally of staffing marketing promoters in select The Home Depot stores during certain times of the week to generate customer interest in our products, answer consumer's questions about our products and schedule in-home presentations. We plan to continue to expand the in-store marketing program into additional The Home Depot stores.
Revenues from kitchen refacing and countertop products increased $5,713,000 or 24.9%, to $28,675,000 in the second quarter 2008 from $22,962,000 in the same period last year. We generally complete the installation of a new order in approximately 60 days from the date of the order and therefore revenues in a given quarter are largely dependent on the backlog of uncompleted orders at the beginning of a quarter. The increase in revenues as compared to the prior year second quarter reflects higher backlog of orders at the beginning of the second quarter 2008 as compared to the backlog of orders entering the second quarter of 2007 ($18,258,000 at March 31, 2008 as compared to $14,907,000 at March 31, 2007), as well as higher new orders in the current period. Our backlog of orders for kitchen and countertop products at June 30, 2008 was $17,628,000 as compared with $14,070,000 at June 30, 2007.
Bathroom refacing - New orders for bath products were $2,211,000 in the second quarter 2008 as compared with $2,656,000 in the second quarter last year. Management attributes the decline in bath product new orders to the Company's promotional emphasis on its kitchen products.
Revenues from bathroom refacing products increased $200,000 or 8.1% to $2,663,000 in second quarter 2008 from $2,463,000 in the second quarter 2007. Although our backlog of uncompleted orders at the beginning of the current quarter was lower than at the beginning of the prior year second quarter, our cycle time to complete bath installations declined resulting in increased revenues. Our backlog of orders for bath products at June 30, 2008 was $1,132,000 as compared with $2,067,000 at June 30, 2007.
Decks - On February 28, 2008, we and The Home Depot mutually agreed to terminate the installed deck program under our SPA. As a result, effective February 29, 2008, we ceased offering our deck products in the Midwest, Boston, Connecticut, Virginia Beach and Atlanta markets. We will continue, until August 31, 2008, to sell and install, on a non-exclusive basis, our deck products under The Home Depot brand in the Northeastern markets, including Northern Virginia, Maryland, Philadelphia, New Jersey and New York.
Concurrent with this phase-out of our deck products in The Home Depot stores in Northern Virginia, Maryland, Philadelphia and New Jersey, we will return to marketing our deck products in these markets under our own Designer Deck brand. We anticipate we will begin marketing and sales of our own Designer Deck brand products in August 2008.
New orders for deck products were $4,110,000 in the second quarter 2008 as compared with $11,141,000 in the second quarter last year. New orders in the second quarter last year included approximately $3,454,000 of orders in markets which we discontinued offering our deck products in February 2008. Management believes that the sale of deck products is closely aligned with the housing construction and resale markets and, consequently, deck product demand reflects the softness in the general housing market. Management believes that the housing market pressures will continue to depress demand for deck products in the remainder of 2008.
Revenues for deck products were $4,115,000 in the second quarter 2008 as compared to $6,176,000 in the second quarter 2007. The decline in revenues reflects lower product demand and a decline of $881,000 in markets which we discontinued offering our deck products in February 2008. Revenues in markets we discontinued offering our deck products were $446,000 and $1,327,000 for second quarter ended June 30, 2008 and 2007, respectively.
Gross profit for the second quarter 2008 was $18,924,000 or 53.3% of revenues as compared with $17,186,000, or 54.4% of revenues in the second quarter last year. Gross profit in dollar terms increased in the second quarter 2008 due to the increase in revenues.
However, our gross profit as a percentage of revenue declined 110 basis points principally due to lower margin in our deck product line. In May 2007, we implemented new sales pricing for our deck products. The pricing was intended to stimulate our sales of deck products. In February 2008 we implemented certain changes in our deck products design which has increased the amount of steel hardware components utilized in our deck understructure. Additionally, hardware component prices have sharply increased due to global increases in steel prices. The combination of lower selling prices and higher materials usage and material prices have resulted in lower deck product gross profit margins. In May 2008, we implemented a price increase on our deck products, however we did not realize any benefits in the second quarter 2008 as a result of our installation cycle time. Absent continued pressures on higher raw material prices, we expect our deck gross profit margins will improve in the third quarter.
Branch operating expenses were $2,340,000 and $1,939,000 for the second quarter 2008 and 2007, respectively. 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. Branch operating expenses increased $306,000 as a result of the expansion of our operations in new markets opened in 2007 and the second quarter of 2008. The remaining increase of $95,000 is principally due to increased wages and benefits expenses.
Marketing expenses were $7,719,000, or 21.8% of revenues in the second quarter 2008 as compared with $6,866,000, or 21.7% of revenues in the second quarter 2007. Marketing expenses consist primarily of marketing fees we pay to The Home Depot on each sale, commissions on each sale associated with our in-store marketing program, advertising, and personnel and facility costs related to maintaining our marketing center.
In June 2007, we initiated a new in-store marketing program. Concurrent with the expansion of the in-store program we reduced our media and direct mail advertising expenditures. In our in-store program we utilize an independent marketing firm to staff The Home Depot stores and we pay a commission fee on each customer lead generated under the program that results in a new sales order. The commission fee is expensed to marketing expense when the related contract revenues are recognized. We are continuing to evaluate the effectiveness of the in-store program. In the second quarter 2008 we extended the program with our third party provider as well as initiated our own employee-based program in selected The Home Depot stores.
The increase in marketing expenditures principally reflects the increase in fees to The Home Depot and commissions associated with our in-store program on the higher revenues in the period.
Sales expenses, which consist primarily of sales commissions and bonuses, sales manager salaries, travel and recruiting expenses were $4,843,000, or 13.6% of revenues for the second quarter 2008 as compared to $4,071,000 or 12.9% of revenues in the prior year second quarter. Sales expense increases included $596,000 in sales commissions and related payroll taxes resulting from higher revenues and product mix and $190,000 for expansion of our operations in new markets opened in 2007 and the second quarter of 2008.
General and administrative expenses were $2,835,000, or 8.0% of revenues, for the second quarter ended June 30, 2008, as compared to $2,488,000, or 7.9% of revenues in the same quarter last year. The increase in general and administrative expense was principally the result of an increase of $99,000 in personnel costs, including salaries and benefits, $123,000 in recruiting expenses principally related to sales personnel, and $129,000 in legal fees.
Other income in the second quarter 2007 included a gain on the sale of certain deck manufacturing assets of approximately $100,000.
Results of Operations
Results of operations for the six months ended June 30, 2008 as compared to the
six months ended June 30, 2007:
(In Thousands)
Six months ended
June 30,
2008 2007
$ % $ %
Revenues 67,432 100.0 59,685 100.0
Costs of remodeling contracts 31,948 47.4 27,776 46.5
Gross Profit 35,484 52.6 31,909 53.5
Costs and expenses:
Branch operations 4,504 6.7 3,826 6.4
Sales and marketing expense 24,269 35.6 20,813 34.9
General and administrative 5,532 8.2 4,804 8.0
Operating income 1,179 1.7 2,466 4.1
Interest expense 84 0.1 100 0.2
Other income 73 0.1 270 0.4
Income from continuing operations before income taxes 1,168 1.7 2,636 4.4
Income tax expense 452 .7 1,028 1.7
Net income from continuing operations 716 1.0 1,608 2.7
Net gain (loss) on discontinued operations, net of tax (1 ) 0.0 (275 ) (.05 )
Net income 715 1.0 1,333 2.2
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Management's Summary of Results of Operations.
New orders increased 2.1% to $67,644,000 in the six months ended June 30, 2008 as compared with $66,221,000 in the six months ended June 30, 2007. Although new orders increased in the aggregate, new
orders for deck products declined $7,710,000, of which $4,263,000 is due to discontinuing to offer deck products in specified markets in February 2008. On February 28, 2008, we and The Home Depot mutually agreed to terminate the installed deck program under our SPA. As a result, effective February 29, 2008, we ceased offering our deck products in the Midwest, Boston, Connecticut, Virginia Beach and Atlanta markets. New orders for deck products in these markets for the six months ended June 30, 2008 and 2007 were $348,000 and $4,611,000, respectively. Excluding the markets in which we ceased offering our deck products in February 2008, new orders for deck products, declined $3,447,000 as compared to the prior year period. We believe that the sale of deck products is closely aligned with the housing construction and resale markets and, consequently, the decline in deck product demand reflects the softness in the general housing market.
We will continue, until August 31, 2008, to sell and install, on a non-exclusive basis, our deck products under The Home Depot brand in the Northeastern markets, including Northern Virginia, Maryland, Philadelphia, New Jersey and New York. Concurrent with this phase-out of our deck products in The Home Depot stores in Northern Virginia, Maryland, Philadelphia and New Jersey, we will return to marketing our deck products in these markets under our own Designer Deck brand. We anticipate we will begin marketing and sales of our own Designer Deck brand products in August 2008.
Excluding new orders for deck products in all markets, new orders were $59,910,000 in the six months ended June 30, 2008 as compared with $50,777,000 in the same period last year, an increase of 18.0%. The increase resulted from new markets we opened in the second and third quarters of 2007 and in the second quarter of 2008 which, in the aggregate, contributed an increase of $2,557,000 in new orders, and an increase in the number of customer appointments for our kitchen and countertop products. We attribute the increase in the number of customer appointments to our in-store-marketing program that we initiated in June 2007.
Despite the success of our in-store marketing program, we believe that the softness in the housing market, uncertainty in the credit markets and higher energy prices have had an adverse affect on our generation of new orders and that these macro economic conditions will persist through the first half of 2009.
Revenues for the six months ended June 30, 2008 increased $7,747,000 or 13.0% to $67,432,000 as compared to $59,685,000 in the six months ended June 30, 2007. . . .
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