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RYL > SEC Filings for RYL > Form 10-Q on 6-May-2014All Recent SEC Filings

Show all filings for RYLAND GROUP INC

Form 10-Q for RYLAND GROUP INC


6-May-2014

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 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;

          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 reportable 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 and escrow services. The homebuilding operations are, by far, the most substantial part of its business, comprising approximately 98 percent of consolidated revenues for the quarter ended March 31, 2014. The homebuilding segments generate nearly all of their revenues from sales of completed homes, with a lesser amount from sales of land and lots.

In the first quarter of 2014, the Company continued to experience slow and steady improvement in fundamental housing conditions in most of its markets. In the Company's Midwest and Mid-Atlantic markets, however, severe weather conditions impacted its ability to sell and build homes, particularly early on in the quarter. Traffic, sales volumes and accessibility to sites in those regions improved dramatically in March 2014, and the normal selling season backdrop appeared to have emerged. On average, a decline in the number of distressed properties for sale, a general tightening in the supply of housing inventory and a resulting return to more traditional sales incentives have allowed the Company to continue to raise prices in most of its markets. It reported increases of 6.6 percent in sales volume and 6.6 percent in backlog for the quarter ended March 31, 2014, compared to the same period in 2013. The Company's strategic homebuilding initiatives have continued to generate growth in selling communities, efficiencies and increased profitability. High unemployment levels, a tight mortgage environment and tepid economic improvements on a national level, however, continue to impact the homebuilding industry by keeping sales absorption rates per community below levels historically seen during more robust housing recoveries.

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 housing demand as a whole is likely to continue to rise over an extended period of time due to a general improvement in overall economic and employment levels; historically low interest rates; attractive housing affordability levels; slow relaxation of the mortgage underwriting environment; low production of single-family homes during the recent recession that resulted in low supplies of new and existing inventories; and a steady increase of potential buyers due, in part, to an expected rise in the number of household formations. If mortgage interest rates continue to increase, the Company believes that they will likely be accompanied by improvements in economic conditions, which should mitigate the impact on demand. Healthy, more moderate sales rates should then facilitate a more sustainable long-term recovery.

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, which will be 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 that housing recovery.

The Company made significant progress in achieving its operational goals during the first quarter of 2014 with a 30.7 percent increase in consolidated revenues; a 1.7 percent rise in housing gross profit margin; and a 0.9 percent decline in the selling, general and administrative expense ratio, all of which led to a decisive increase in homebuilding operations profitability, compared to the same period in the prior year. The number of active communities rose 18.8 percent to 297 active communities at March 31, 2014, from 250 active communities at March 31, 2013. 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


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

communities increased consolidated inventory owned by $98.3 million, or 6.0 percent, at March 31, 2014, compared to December 31, 2013.

The Company's pretax earnings from continuing operations increased by 71.9 percent to $38.2 million for the quarter ended March 31, 2014, from $22.2 million for the same period in 2013. The increase in pretax earnings for the first quarter of 2014, compared to same period in 2013, 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. Net income from continuing operations totaled $23.5 million, or $0.42 per diluted share, for the quarter ended March 31, 2014, compared to $22.0 million, or $0.43 per diluted share, for the same period in 2013. The increase in net income was lower than the rise in pretax earnings due to the reversal of the deferred tax asset valuation allowance in 2013, which restored income tax expense in 2014. Pretax charges primarily related to preacquisition feasibility cost write-offs totaled $618,000 and $213,000 for the quarters ended March 31, 2014 and 2013, respectively. The Company continued to raise gross margins during the first quarter of 2014 by investing in new communities, selectively increasing prices, completing less profitable communities and lowering expense ratios.

The Company's consolidated revenues increased 30.7 percent to $489.7 million for the quarter ended March 31, 2014, from $374.7 million for the same period in 2013. This increase was primarily attributable to an 18.1 percent higher average closing price and to a 12.5 percent rise in closings. 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 the first quarter of 2014, versus the same period in 2013. Revenues for the homebuilding and financial services segments totaled $481.5 million and $8.2 million, respectively, for the first quarter of 2014, compared to $363.5 million and $11.2 million, respectively, for the first quarter of 2013.

The Company reported a rise in closing volume for the quarter ended March 31, 2014, compared to the same period in 2013, primarily due to an increase in sales. New orders rose 6.6 percent to 2,186 units for the quarter ended March 31, 2014, from 2,051 units for the same period in 2013 primarily due to an increase in the number of active communities, partially offset by a lower average monthly sales absorption rate of 2.5 homes per community for the first quarter of 2014, versus 2.8 homes per community for the first quarter of 2013. New order dollars increased 20.5 percent for the quarter ended March 31, 2014, compared to the same period in 2013. 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 13.0 percent of homebuilding revenues for the first quarter of 2014, compared to 13.9 percent for the same period in 2013. This decrease was primarily attributable to higher leverage that resulted from increased revenues.

The Company's financial services segment reported a pretax loss of $1.4 million for the quarter ended March 31, 2014, compared to pretax earnings of $4.3 million for the same period in 2013. This decrease was a result of extremely competitive conditions existing in the mortgage origination industry during the quarter and increases in actuarial estimates of losses within its captive insurance company.

The Company maintained a strong balance sheet, ending the quarter with $609.1 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 45.3 percent at March 31, 2014, compared to 45.8 percent at December 31, 2013. Stockholders' equity increased sequentially by 4.9 percent, and stockholders' equity per share rose 3.5 percent to $20.32 at March 31, 2014, compared to $19.64 at December 31, 2013.

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


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

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 Company's homes are built on-site and marketed in four major geographic
regions, or segments: North, Southeast, Texas and West. Within each of those
segments, the Company operated in the following metropolitan areas at March 31,
2014:



North         Baltimore, Chicago, Delaware, Indianapolis, Metro Washington,
              D.C., Minneapolis, New Jersey, Northern Virginia and Philadelphia
Southeast     Atlanta, Charleston, Charlotte, Myrtle Beach, Orlando,
              Raleigh/Durham and Tampa
Texas         Austin, Dallas, Houston and San Antonio
West          Denver, Las Vegas, Phoenix and Southern California

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