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RYL > SEC Filings for RYL > Form 10-K on 27-Feb-2014All Recent SEC Filings

Show all filings for RYLAND GROUP INC

Form 10-K for RYLAND GROUP INC


27-Feb-2014

Annual Report


Item 7. 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. generally accepted accounting principles ("GAAP").

Forward-Looking Statements

Certain statements in this Annual 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 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 Annual 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 Annual 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;
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 this Annual Report on Form 10-K; and
other factors over which the Company has little or no control.


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Results of Operations
Overview

During 2013, attractive housing affordability levels, historically low interest rates and increasing home prices have changed buyers' perceptions, and the Company's homebuilding operations have improved during the year. Mortgage rates have increased during 2013 due to evidence that federal policies designed to keep interest rates low have begun to subside. During the fourth quarter of 2013, political headwinds; rapidly increasing sales prices and mortgage interest rates; severe weather in many markets; and economic uncertainty due to changes in government policy have caused improvements in housing fundamentals to pause as homebuyers adjust, resulting in more tepid sales rates per community for the Company. Although rates of improvement in the Company's housing markets may moderate and prices may not continue to increase at rates seen in 2013, it believes that the housing market as a whole is likely to continue to progress over an extended period of time due to a general improvement in overall economic and employment levels; historically low interest rates; slow relaxation of an extremely restrictive mortgage underwriting environment; low production of single-family homes during the recent recession that resulted in low supplies of new and existing inventories of homes; and a steady increase of potential buyers due, in part, to an expected rise in the number of household formations. The Company believes that if mortgage interest rates rise, they will most likely be accompanied by improvements in economic conditions, offsetting their impact on demand, and that healthy, more moderate sales rates should facilitate a more sustainable long-term recovery. These trends, combined with ongoing declines in the number of distressed properties for sale, have led to overall increased demand and a general tightening in the supply of housing inventory in the Company's markets. On average, a return to more traditional required sales incentives has allowed the Company to continue to raise prices in most of its markets. It reported increases of 46.1 percent in closing volume, 27.0 percent in sales volume and 9.8 percent in backlog for the year ended December 31, 2013, compared to 2012. However, high unemployment levels and tepid economic improvements nationally continue to impact the homebuilding industry by keeping sales absorption rates per community below levels historically seen during more robust housing recoveries. The Company believes that continued revenue growth and improved financial performance will come from a greater presence in its established markets and from its entry into new markets, as well as from a return to more traditional absorption rates in its communities made possible by economic stability and growth. The Company also believes that its strategic goals of increasing profitability and leverage through expansion within existing markets and diversification will position it to take full advantage of any continuing housing recovery.

The Company made significant progress in achieving its operational goals during 2013 with a 63.6 percent increase in consolidated revenues; a 1.7 percent rise in housing gross profit margin; and a 2.8 percent decline in the selling, general and administrative expense ratio, all of which led to decisive increases in homebuilding and mortgage operations profitability, compared to the prior year. The number of active communities rose 21.8 percent to 290 active communities at December 31, 2013, from 238 active communities at December 31, 2012. Significant ongoing land acquisitions in its existing markets should enhance the Company's ability to establish additional market penetration and create a platform for future growth. Investments in new communities increased consolidated inventory owned by $578.3 million, or 54.8 percent, at December 31, 2013, compared to December 31, 2012. The Company reversed its deferred tax asset valuation allowance during the year. In addition, it issued $267.5 million of 0.25 percent convertible senior notes due June 2019 during the year to provide additional low-cost capital. As a result of these actions and a profitable year from existing operations, stockholders' equity increased by 80.2 percent, and the net debt-to-capital ratio declined to 45.8 percent at December 31, 2013, compared to 50.8 percent at December 31, 2012.

The Company's net income from continuing operations totaled $379.1 million, or $6.79 per diluted share, for the year ended December 31, 2013, compared to net income of $42.4 million, or $0.88 per diluted share, for 2012 and a net loss of $29.9 million, or $0.67 per diluted share, for 2011. The increase in net income for 2013, compared to 2012, was primarily due to a reversal of the Company's deferred tax asset valuation allowance; a rise in closing volume; higher housing gross profit margin, including lower inventory valuation adjustments and write-offs; a reduced selling, general and administrative expense ratio; and a decline in interest expense. The increase in net income for 2012, compared to 2011, was primarily due to a rise in closing volume; higher housing gross profit margin, including lower inventory and other valuation


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adjustments and write-offs; a decline in interest expense; and a reduced selling, general and administrative expense ratio. Pretax charges related to inventory and other valuation adjustments and write-offs totaled $2.0 million, $6.3 million and $17.3 million for the years ended December 31, 2013, 2012 and 2011, respectively. The Company continued to raise gross margins in 2013 by investing in new communities, selectively increasing prices, completing less profitable communities and lowering expense ratios.

The Company's consolidated revenues increased 63.6 percent to $2.1 billion for the year ended December 31, 2013, from $1.3 billion for 2012. This increase was primarily attributable to a 46.1 percent rise in closings and to a 12.5 percent increase in average closing price. The increase in average closing price was due to a more accommodating price environment, as well as to a change in the product and geographic mix of homes delivered during 2013, versus 2012. The Company's consolidated revenues increased 47.1 percent to $1.3 billion for the year ended December 31, 2012, from $889.5 million for 2011. This increase was primarily attributable to a 40.9 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 more stable price environment, as well as to a change in the product and geographic mix of homes delivered during 2012, versus 2011. Revenues for the homebuilding and financial services segments totaled $2.1 billion and $51.4 million in 2013, compared to $1.3 billion and $37.6 million in 2012 and $862.6 million and $26.9 million in 2011, respectively.

The Company reported a rise in closing volume for the year ended December 31, 2013, compared to 2012, primarily due to an increase in sales. New orders rose 27.0 percent to 7,262 units for the year ended December 31, 2013, from 5,719 units for 2012 primarily due to an increase in the number of active communities and to higher sales rates. New order dollars increased 47.2 percent for the year ended December 31, 2013, compared to 2012. The Company's average monthly sales absorption rate was 2.3 homes per community for the year ended December 31, 2013, versus 2.2 homes per community for 2012 and 1.5 homes per community for 2011. The Company's average monthly sales absorption rate is calculated as the net new orders in the period divided by the average number of active communities during the period divided by the number of months in that period.

Selling, general and administrative expense totaled 12.1 percent of homebuilding revenues for 2013, compared to 14.9 percent for the same period in 2012. This decrease was primarily attributable to higher leverage that resulted from increased revenues. Selling, general and administrative expense totaled 14.9 percent of homebuilding revenues for 2012, compared to 18.3 percent for 2011. This decrease was primarily attributable to higher leverage resulting from increased revenues, partially offset by higher compensation expense primarily due to the impact of fluctuations in the Company's stock price.

The Company maintained a strong balance sheet, ending the year with $631.2 million in cash, cash equivalents and marketable securities. The Company's earliest senior debt maturity is in 2015. Its net debt-to-capital ratio, including marketable securities, was 45.8 percent at December 31, 2013, compared to 50.8 percent at December 31, 2012. Stockholders' equity per share rose 76.0 percent to $19.64 at December 31, 2013, compared to $11.16 at December 31, 2012.

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.

Homebuilding Overview

The combined homebuilding operations reported pretax earnings from continuing operations of $203.5 million and $63.9 million for 2013 and 2012, respectively, compared to a pretax loss of $16.8 million for 2011. Homebuilding results in 2013 improved from those in 2012 primarily due to a rise in closing volume; higher housing gross profit margin, including lower inventory valuation adjustments and write-offs; a reduced selling, general and administrative expense ratio; and a decline in interest expense. Homebuilding results in 2012 improved from those in 2011 primarily due to a rise in closing volume; higher housing gross profit margin, including lower inventory and other valuation adjustments and write-offs; a decline in interest expense; and a reduced selling, general and administrative expense ratio.


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STATEMENTS OF EARNINGS

                                                            YEAR ENDED DECEMBER 31,
   (in thousands, except units)                       2013          2012        2011

   REVENUES
   Housing                                     $ 2,082,838   $ 1,263,120   $ 857,180
   Land and other                                    6,537         7,727       5,424

   TOTAL REVENUES                                2,089,375     1,270,847     862,604
   EXPENSES
   Cost of sales
   Housing
   Cost of sales                                 1,649,223     1,017,124     705,633
   Valuation adjustments and write-offs                146         5,166       8,336

   Total housing cost of sales                   1,649,369     1,022,290     713,969
   Land and other
   Cost of sales                                     4,827         5,182       4,998
   Valuation adjustments and write-offs                  -             -       7,989

   Total land and other cost of sales                4,827         5,182      12,987

   Total cost of sales                           1,654,196     1,027,472     726,956
   Selling, general and administrative             223,295       163,373     134,113
   Interest                                          8,358        16,118      18,348

   TOTAL EXPENSES                                1,885,849     1,206,963     879,417

   PRETAX EARNINGS (LOSS)                      $   203,526   $    63,884   $ (16,813 )

   Closings (units)                                  7,027         4,809       3,413
   Housing gross profit margin                        20.8 %        19.1 %      16.7 %
   Selling, general and administrative ratio          10.7 %        12.9 %      15.5 %

Homebuilding revenues increased 64.4 percent to $2.1 billion for 2013 from $1.3 billion for 2012 primarily due to a 46.1 percent rise in closings and to a 12.5 percent increase in average closing price. The increase in closings was due to a 27.0 percent rise in new orders and to a 1.3 percent decrease in cancellation rate during 2013, versus 2012. The increase in average closing price was due to a more accommodating price environment, as well as to a change in the product and geographic mix of homes delivered during 2013, versus 2012. Homebuilding revenues increased 47.3 percent to $1.3 billion for 2012 from $862.6 million for 2011 primarily due to a 40.9 percent rise in closings and to a 4.8 percent increase in average closing price. The increase in closings was due to a 51.8 percent rise in new orders and to a 1.2 percent decrease in cancellation rate during 2012, versus 2011. The increase in average closing price was due to a more accommodating price environment, as well as to a change in the product and geographic mix of homes delivered during 2012, versus 2011.

In order to manage its risk and return of land investments, match land supply with anticipated volume levels and monetize marginal land positions, the Company executed several land and lot sales during the year. Homebuilding revenues included $6.5 million from land and lot sales for the year ended December 31, 2013, compared to $7.7 million for 2012 and $5.4 million for 2011, which resulted in pretax earnings of $1.7 million, $2.5 million and $426,000 for 2013, 2012 and 2011, respectively.

Housing gross profit margin was 20.8 percent for the year ended December 31, 2013, compared to 19.1 percent for the year ended December 31, 2012. This improvement was primarily attributable to reduced relative direct construction costs of 1.7 percent and to lower inventory valuation adjustments and write-offs of 0.4 percent, partially offset by increased land costs of 0.5 percent. Housing gross profit margin was 19.1 percent for the year ended December 31, 2012, compared to 16.7 percent for 2011. This improvement in housing gross profit margin was primarily attributable to reduced relative direct construction costs of 0.9 percent; higher leverage of direct overhead expense of 0.6 percent due to an increase in the number of homes delivered; and lower inventory valuation adjustments of 0.3 percent. Inventory and other valuation adjustments and write-offs affecting housing gross profit margin decreased to $146,000 for the year ended December 31, 2013, from $5.2 million for 2012 and $8.3 million for 2011. Gross profit margin from land and lot sales was 26.2 percent, 32.9 percent and 7.9 percent for the years ended December 31, 2013, 2012 and 2011, respectively. Fluctuations in revenues and gross profit percentages from land and lot sales are a product of local market conditions and changing land


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portfolios. The Company generally purchases land and lots with the intent to build homes on those lots and sell them; it will, however, occasionally sell a portion of its land to other homebuilders or third parties.

The homebuilding segments' selling, general and administrative expense ratio totaled 10.7 percent of homebuilding revenues for 2013, 12.9 percent for 2012 and 15.5 percent for 2011. The decrease in the selling, general and administrative expense ratio for 2013, compared to 2012, was primarily attributable to higher leverage resulting from increased revenues. The decrease in the selling, general and administrative expense ratio for 2012, compared to 2011, was primarily attributable to higher leverage resulting from increased revenues, as well as to the impact of cost-saving initiatives.

Interest, which was incurred principally to finance land acquisitions, land development and home construction, totaled $67.6 million, $58.4 million and $56.4 million for the years ended December 31, 2013, 2012 and 2011, respectively. The homebuilding segments recorded $8.4 million, $16.1 million and $18.3 million of interest expense for the years ended December 31, 2013, 2012 and 2011, respectively. The decrease in interest expense in 2013 from 2012 was primarily due to the capitalization of a greater amount of interest incurred during 2013, which resulted from a higher level of inventory under development, partially offset by an overall increase in interest incurred on senior notes. The decrease in interest expense in 2012 from 2011 was primarily due to the capitalization of a greater amount of interest incurred during 2012, which resulted from a higher level of inventory under development, partially offset by an overall increase in interest incurred on senior notes. (See "Housing Inventories" within Note A, "Summary of Significant Accounting Policies.")

New orders represent sales contracts that have been signed by the homebuyer and approved by the Company, subject to cancellations. The dollar value of new orders increased $729.5 million, or 47.2 percent, to $2.3 billion for the year ended December 31, 2013, from $1.5 billion for the year ended December 31, 2012. This increase in new orders was primarily attributable to a 21.8 percent increase in the number of active communities and to a 4.5 percent rise in sales rates. The dollar value of new orders increased 61.9 percent to $1.5 billion for 2012 from $954.0 million for 2011. This increase in new orders was primarily attributable to a 46.7 percent rise in sales rates and to a 12.8 percent increase in the number of active communities. For the years ended December 31, 2013, 2012 and 2011, cancellation rates totaled 17.7 percent, 19.0 percent and 20.2 percent, respectively. Unit orders increased 27.0 percent to 7,262 new orders in 2013, compared to 5,719 new orders in 2012. Unit orders increased 51.8 percent to 5,719 new orders in 2012, compared to 3,767 new orders in 2011.

Consolidated inventory owned by the Company, which includes homes under construction; land under development and improved lots; inventory held-for-sale; and cash deposits related to consolidated inventory not owned, rose 54.8 percent to $1.6 billion at December 31, 2013, from $1.1 billion at December 31, 2012. Homes under construction increased 40.1 percent to $643.4 million at December 31, 2013, from $459.3 million at December 31, 2012, as a result of higher backlog. Land under development and improved lots increased 69.0 percent to $969.8 million at December 31, 2013, compared to $574.0 million at December 31, 2012, as the Company acquired additional land and opened more communities during 2013. The Company had 370 model homes with inventory values totaling $99.3 million at December 31, 2013, compared to 296 model homes with inventory values totaling $67.1 million at December 31, 2012. In addition, it had 977 started and unsold homes with inventory values totaling $196.2 million at December 31, 2013, compared to 724 started and unsold homes with inventory values totaling $120.2 million at December 31, 2012. Inventory held-for-sale totaled $3.5 million at December 31, 2013, compared to $4.7 million at December 31, 2012.


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The following table provides certain information with respect to the Company's number of residential communities and lots under development at December 31, 2013:

                                                         COMMUNITIES
                                NEW AND                 HELD-            TOTAL LOTS
                  ACTIVE   NOT YET OPEN   INACTIVE   FOR-SALE   TOTAL   CONTROLLED1


      North           84             66          7          1     158       13,987
      Southeast       89             52         11          7     159       10,553
      Texas           83             42          -          3     128        7,285
      West            34             53          -          -      87        6,945

      Total          290            213         18         11     532       38,770

1
Includes lots controlled through the Company's investments in joint ventures.

Inactive communities consist of projects either under development or on hold for future home sales. At December 31, 2013, of the 11 communities that were held-for-sale, 8 communities had fewer than 20 lots remaining.

Favorable affordability levels and the appearance of recovery in most housing submarkets have allowed the Company to focus on growing inventory and increasing profitability, all while balancing those two objectives with cash preservation. Increasing community count is among the Company's greatest challenges and highest priorities. During the year ended December 31, 2013, it secured 21,751 owned or optioned lots, opened 143 communities and closed 91 communities. The Company operated from 21.8 percent more active communities at December 31, 2013, than it did at December 31, 2012. The number of lots controlled was 38,142 lots at December 31, 2013, compared to 28,305 lots at December 31, 2012. Optioned lots, as a percentage of total lots controlled, were 38.3 percent and 37.2 percent at December 31, 2013 and December 31, 2012, respectively. In addition, the Company controlled 628 lots and 317 lots under joint venture agreements at December 31, 2013 and December 31, 2012, respectively.


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Homebuilding Segment Information

The Company's homebuilding operations consist of four geographically determined regional reporting segments: North, Southeast, Texas and West.

STATEMENTS OF EARNINGS

The following table provides a summary of the results for the homebuilding
segments for the years ended December 31, 2013, 2012 and 2011:

      (in thousands)                               2013          2012        2011

      NORTH
      Revenues                              $   617,550   $   393,238   $ 299,595
      Expenses
      Cost of sales                             498,084       324,572     254,566
      Selling, general and administrative        63,612        50,963      47,162
      Interest                                    3,414         6,101       6,921

      Total expenses                            565,110       381,636     308,649

      Pretax earnings (loss)                $    52,440   $    11,602   $  (9,054 )
      Housing gross profit margin                  19.3 %        17.5 %      15.0 %

      SOUTHEAST
      Revenues                              $   597,933   $   355,621   $ 218,672
      Expenses
      Cost of sales                             467,494       286,450     189,895
      Selling, general and administrative        63,959        46,399      35,175
      Interest                                      970         4,206       5,278

      Total expenses                            532,423       337,055     230,348

      Pretax earnings (loss)                $    65,510   $    18,566   $ (11,676 )
      Housing gross profit margin                  21.8 %        19.5 %      16.5 %

      TEXAS
      Revenues                              $   448,828   $   323,162   $ 262,321
      Expenses
      Cost of sales                             356,768       257,402     213,457
      Selling, general and administrative        51,753        39,900      36,070
      Interest                                    1,277         2,876       3,551

      Total expenses                            409,798       300,178     253,078

      Pretax earnings                       $    39,030   $    22,984   $   9,243
      Housing gross profit margin                  20.5 %        20.4 %      19.1 %

      WEST
      Revenues                              $   425,064   $   198,826   $  82,016
      Expenses
. . .
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