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RYL > SEC Filings for RYL > Form 10-Q on 5-Nov-2012All Recent SEC Filings

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Form 10-Q for RYLAND GROUP INC


5-Nov-2012

Quarterly Report

Management's Discussion and Analysis of Financial Condition and Results of Operations

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following management's discussion and analysis is intended to assist the reader in understanding the Company's business and is provided as a supplement to, and should be read in conjunction with, the Company's consolidated financial statements and accompanying notes. The Company's results of operations discussed below are presented in conformity with U.S. GAAP.

Forward-Looking Statements

Note: Certain statements in this quarterly report may be regarded as "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, and may qualify for the safe harbor provided for in Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). These forward-looking statements represent the Company's expectations and beliefs concerning future events, and no assurance can be given that the results described in this quarterly report will be achieved. These forward-looking statements can generally be identified by the use of statements that include words such as "anticipate," "believe," "could," "estimate," "expect," "foresee," "goal," "intend," "likely," "may," "plan," "project," "should," "target," "will" or other similar words or phrases. All forward-looking statements contained herein are based upon information available to the Company on the date of this quarterly report. Except as may be required under applicable law, the Company does not undertake any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

These forward-looking statements are subject to risks, uncertainties and other factors, many of which are outside of the Company's control, that could cause actual results to differ materially from the results discussed in the forward-looking statements. The factors and assumptions upon which any forward-looking statements herein are based are subject to risks and uncertainties which include, among others:

economic changes nationally or in the Company's local markets, including volatility and increases in interest rates, the impact of, and changes in, governmental stimulus, tax and deficit reduction programs, inflation, changes in consumer demand and confidence levels and the state of the market for homes in general;

changes and developments in the mortgage lending market, including revisions to underwriting standards for borrowers and lender requirements for originating and holding mortgages, changes in government support of and participation in such market, and delays or changes in terms and conditions for the sale of mortgages originated by the Company;

the availability and cost of land and the future value of land held or under development;

          increased land development costs on projects under development;

          shortages of skilled labor or raw materials used in the production of
homes;

          increased prices for labor, land and materials used in the production
of homes;

          increased competition, including continued competition and price

pressure from distressed home sales;

failure to anticipate or react to changing consumer preferences in home design;

increased costs and delays in land development or home construction resulting from adverse weather conditions or other factors;

potential delays or increased costs in obtaining necessary permits as a result of changes to laws, regulations or governmental policies (including those that affect zoning, density, building standards, the environment and the residential mortgage industry);

delays in obtaining approvals from applicable regulatory agencies and others in connection with the Company's communities and land activities;

changes in the Company's effective tax rate and assumptions and valuations related to its tax accounts;

the risk factors set forth in the Company's most recent Annual Report on Form 10-K; and

other factors over which the Company has little or no control.


Management's Discussion and Analysis of Financial Condition and Results of Operations

Results of Operations

Overview

The Company consists of six operating business segments: four geographically determined homebuilding regions; financial services; and corporate. All of the Company's business is conducted and located in the United States. The Company's operations span all significant aspects of the homebuying process-from design, construction and sale to mortgage origination, title insurance, escrow and insurance services. The homebuilding operations are, by far, the most substantial part of its business, comprising approximately 97 percent of consolidated revenues for the quarter ended September 30, 2012. The homebuilding segments generate nearly all of their revenues from sales of completed homes, with a lesser amount from sales of land and lots.

During 2012, attractive housing affordability levels, historically low interest rates and higher rental rates have led to changes in buyer perceptions. These factors, combined with moderate declines in the number of distressed properties and national housing inventory, have led to an increase in demand in most of the Company's markets. On average, the continued increases in sales rates and prices; decreases in required sales incentives and cancellation rates; and improvement in average sales traffic through the Company's communities have allowed the Company to begin raising prices in selected markets. It reported a 55.8 percent increase in sales volume, a 37.4 percent rise in closing volume and a 58.3 percent improvement in backlog for the third quarter of 2012, compared to the same period in 2011. These trends seem to indicate that demand for new housing is improving, while an uncertain macroeconomic environment, high unemployment and tight mortgage credit standards continue to negatively impact the homebuilding industry by keeping sales absorptions per community depressed, compared to traditional levels. The Company believes that more meaningful advances in revenue growth and financial performance will primarily come from higher demand in the form of a return to more traditional absorption rates.

The Company also believes its strategic goals of increasing its profitability, strengthening its balance sheet and cautiously expanding will position it to take full advantage of any housing recovery. In addition to a 44.3 percent increase in revenues, housing gross profit margin rose both sequentially and as compared to the prior year; the selling, general and administrative expense ratio continued to decline; and mortgage operations profitability increased. The Company was profitable for both the quarter and the year to date, and achieved its highest operating margins since 2006. Strategic land acquisitions in its Charlotte and Raleigh markets during the third quarter of 2012 and ongoing land acquisition activities should enhance the Company's ability to establish significant market share and create a platform for future growth. The Company issued $250.0 million of 5.4 percent senior notes due October 2022 and redeemed $167.2 million of its 6.9 percent senior notes due June 2013 during the quarter to provide additional low-cost capital.

The Company's net income from continuing operations totaled $10.4 million, or $0.21 per diluted share, for the three months ended September 30, 2012, compared to a net loss from continuing operations of $3.9 million, or $0.09 per diluted share, for the same period in 2011. This increase for the third quarter of 2012, compared to the same period in 2011, was primarily due to a rise in closing volume; higher housing gross profit margin; a reduced selling, general and administrative expense ratio; and a decline in interest expense, partially offset by higher valuation adjustments and write-offs. Pretax charges related to valuation adjustments and write-offs totaled $3.5 million and $1.3 million for the quarters ended September 30, 2012 and 2011, respectively. The Company continued to raise gross margins through ongoing investments in new, more profitable communities; selectively increasing prices; completing less profitable communities; and lowering expense ratios.

The Company reported a rise in closing volume for the quarter ended September 30, 2012, compared to the same period in 2011, primarily due to increases in sales rates and active communities. The Company's consolidated


Management's Discussion and Analysis of Financial Condition and Results of Operations

revenues increased 44.3 percent to $358.7 million for the three months ended September 30, 2012, from $248.6 million for the same period in 2011. This increase was primarily attributable to a 37.4 percent rise in closings and to a 4.8 percent increase in average closing price. The increase in average closing price was due to a slightly more stable price environment, as well as to a change in the product and geographic mix of homes delivered during the third quarter of 2012, versus the same period in 2011. Revenues for the homebuilding and financial services segments were $349.2 million and $9.5 million, respectively, for the third quarter of 2012, compared to $241.3 million and $7.2 million, respectively, for the third quarter of 2011.

New orders rose 55.8 percent to 1,500 units for the third quarter of 2012 from 963 units for the same period in 2011 primarily due to increases in sales rates and active communities. New order dollars increased 61.3 percent for the quarter ended September 30, 2012, compared to the same period in the prior year. The Company's average monthly sales absorption rate was 2.3 homes per community for the third quarter of 2012, versus 1.6 homes per community for the third quarter of 2011. In order to prepare for a slow recovery and to attain volume levels commensurate with profitability, the Company has increased community count since the third quarter of 2010. The number of active communities rose 11.4 percent to 235 active communities at September 30, 2012, from 211 active communities at September 30, 2011. Backlog increased 58.3 percent to 2,465 units at September 30, 2012, compared to 1,557 units at September 30, 2011.

Selling, general and administrative expense, including corporate expense, totaled 13.8 percent of homebuilding revenues for the third quarter of 2012, compared to 18.4 percent for the third quarter of 2011. This decrease was primarily attributable to higher leverage resulting from increased revenues, cost-saving initiatives and a rise in the market value of retirement plan investments, partially offset by higher compensation expense primarily due to the impact of fluctuations in the Company's stock price. Selling, general and administrative expense, including corporate expense, totaled 15.7 percent of homebuilding revenues for the first nine months of 2012, compared to 19.1 percent for the first nine months of 2011. This decrease was primarily attributable to higher leverage resulting from increased revenues, cost-saving initiatives and a rise in the market value of retirement plan investments, partially offset by higher compensation expense primarily due to the impact of fluctuations in the Company's stock price.

The Company's deferred tax valuation allowance of $263.2 million at September 30, 2012, is largely the result of inventory impairments taken. Should the Company generate significant taxable income in future periods, it expects that it will reverse its valuation allowance.

The Company ended the quarter with $799.7 million in cash, cash equivalents and marketable securities. Investments in new communities increased consolidated inventory owned by $166.9 million, or 21.9 percent, at September 30, 2012, compared to December 31, 2011. The Company's earliest senior debt maturity is in 2015. Its net debt-to-capital ratio, including marketable securities, was 41.2 percent at September 30, 2012, compared to 36.7 percent at December 31, 2011. Stockholders' equity per share rose 3.7 percent to $10.49 at September 30, 2012, compared to $10.12 at December 31, 2011.

The net debt-to-capital ratio, including marketable securities, is a non-GAAP financial measure that is calculated as debt, net of cash, cash equivalents and marketable securities, divided by the sum of debt and total stockholders' equity, net of cash, cash equivalents and marketable securities. The Company believes that the net debt-to-capital ratio, including marketable securities, is useful in understanding the leverage employed in its operations and in comparing it with other homebuilders.


Management's Discussion and Analysis of Financial Condition and Results of Operations

Homebuilding Overview

The Company's combined homebuilding operations reported pretax earnings from continuing operations of $20.8 million and $910,000 for the quarters ended September 30, 2012 and 2011, respectively.

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