U.S. Home Systems, Inc. ( ) , engaged in the business of specialty home improvement products, recently posted earnings of 11 cents per share in the first quarter of 2012, beating the Zacks Consensus Estimate of 9 cents and the year-ago quarter earnings of 8 cents per share. Reported earnings were also above management’s guidance of 9 cents per share. The strong first quarter results were attributable to record revenues and new orders.

U.S. Home Systems achieved record revenue of $42.2 million in the quarter, up 8.3% year over year and also marked the tenth consecutive quarter of year-over-year growth. The upside in revenue reflects increased consumer demand and benefits of marketing initiatives. The company’s strategic partner, The Home Depot, also contributed to the significant increase in sales.

During the quarter, gross profit expanded 8.2% year over year to $22.5 million while gross margin remained flat year over year at 53.2%.

During the quarter, fixed operating costs, which include branch operating and general and administrative expenses, plunged 140 basis points as a percentage of revenue to 11.4%, thanks to the increased leverage from higher revenues.

Operating margin enhanced 90 basis points to 3.3% due to lower operating expenses as a percentage of revenue.

The company also achieved record new orders, which increased 7.4% from $43.2 million in the prior-year quarter to $46.4 million. This upside marks the11th consecutive quarter of year-over-year growth. As of March 31, 2012, the company recorded backlog of uncompleted orders of $25.3 million versus $24.3 million at March 31, 2011.

Financial Position

As of March 31, 2012, U.S. Home Systems had cash and cash equivalents of $13.2 million versus $13.7 million at December 31, 2011. Shareholders’ equity as of March 31, 2012 was $26.7 million versus $25.5 million as of December 31, 2011.

Outlook

For second quarter of 2012, management expects revenue to be $46.5 million and earnings to be 23 cents per share.

Our Take

Irving, Texas-based U.S. Home Systems will succeed in driving sales based on its efforts to expand its relationship with The Home Depot into new avenues. Moreover, to improve its sales, the company is focusing on store expansion, new product introduction and new technology development. The company reported better-than-expected first quarter results; hence we expect estimates to go up in the coming days. The Zacks Consensus Estimates for 2012 and 2013 are pegged at 73 cents and 88 cents a share, respectively.

U.S. Home Systems, which competes with Cabela’s Inc ( CAB - Analyst Report ) , currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. We are also maintaining our long-term Neutral recommendation on the stock.