XNYS:RYL Ryland Group Inc Quarterly Report 10-Q Filing - 6/30/2012

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

[X]          Quarterly Report Pursuant to Section 13 or 15(d) of the

Securities Exchange Act of 1934

For the quarterly period ended June 30, 2012

 

or

 

[   ]            Transition Report Pursuant to Section 13 or 15(d) of the

Securities Exchange Act of 1934

 

For the transition period from                to                 .

 

Commission File Number:  001-08029

 

THE RYLAND GROUP, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

 

Maryland

 

52-0849948

 

 

(State or Other Jurisdiction of Incorporation or Organization)

 

(I.R.S. Employer Identification No.)

 

 

3011 Townsgate Road, Suite 200

Westlake Village, California 91361-3027

          805-367-3800         

(Address and Telephone Number of Principal Executive Offices)

 

Not Applicable

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     þ   Yes     o   No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     þ   Yes     o   No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one:)

 

Large accelerated filer þ

Accelerated filer o

Non-accelerated filer o
(Do not check if a
smaller reporting company)

Smaller reporting o

company

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     o   Yes     þ   No

 

The number of shares of common stock of The Ryland Group, Inc. outstanding on August 3, 2012, was 44,722,072.

 



 

THE RYLAND GROUP, INC.

FORM 10-Q

INDEX

 

 

 

 

PAGE NO.

 

 

 

 

PART I.

Financial Information

 

 

 

 

 

 

Item 1.

Financial Statements

 

 

 

 

 

 

 

Consolidated Statements of Earnings for the Three and Six Months Ended June 30, 2012 and 2011 (Unaudited)

 

3

 

 

 

 

 

Consolidated Balance Sheets at June 30, 2012 (Unaudited) and December 31, 2011

 

4

 

 

 

 

 

Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2012 and 2011 (Unaudited)

 

5

 

 

 

 

 

Consolidated Statement of Stockholders’ Equity for the Six Months Ended June 30, 2012 (Unaudited)

 

6

 

 

 

 

 

Consolidated Statements of Other Comprehensive Income for the Three and Six Months Ended June 30, 2012 and 2011 (Unaudited)

 

6

 

 

 

 

 

Notes to Consolidated Financial Statements (Unaudited)

 

7–30

 

 

 

 

Item 2.

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

 

31–48

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

48

 

 

 

 

Item 4.

Controls and Procedures

 

48

 

 

 

 

PART II.

Other Information

 

 

 

 

 

 

Item 1.

Legal Proceedings

 

49

 

 

 

 

Item 1A.

Risk Factors

 

49

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

49

 

 

 

 

Item 6.

Exhibits

 

50

 

 

 

 

SIGNATURES

 

51

 

 

 

INDEX OF EXHIBITS

 

52

 

2



 

PART I.  Financial Information

Item 1.  Financial Statements

 

 

Consolidated Statements of Earnings (Unaudited)

 

The Ryland Group, Inc. and Subsidiaries

 

 

 

THREE MONTHS ENDED

 

 

SIX MONTHS ENDED

 

 

 

JUNE 30,

 

 

JUNE 30,

 

(in thousands, except share data)

 

2012

 

2011

 

 

2012

 

2011

 

REVENUES

 

 

 

 

 

 

 

 

 

 

Homebuilding

 

$

284,593

 

$

204,925

 

 

$

494,128

 

$

366,353

 

Financial services

 

9,176

 

6,923

 

 

15,510

 

13,167

 

TOTAL REVENUES

 

293,769

 

211,848

 

 

509,638

 

379,520

 

 

 

 

 

 

 

 

 

 

 

 

EXPENSES

 

 

 

 

 

 

 

 

 

 

Cost of sales

 

231,130

 

176,226

 

 

403,820

 

318,690

 

Selling, general and administrative

 

39,368

 

31,349

 

 

71,576

 

61,893

 

Financial services

 

6,232

 

4,859

 

 

11,921

 

9,894

 

Corporate

 

7,139

 

4,925

 

 

12,319

 

9,912

 

Interest

 

4,180

 

4,735

 

 

7,749

 

10,522

 

TOTAL EXPENSES

 

288,049

 

222,094

 

 

507,385

 

410,911

 

 

 

 

 

 

 

 

 

 

 

 

OTHER INCOME

 

 

 

 

 

 

 

 

 

 

Gain from marketable securities, net

 

519

 

1,302

 

 

965

 

2,610

 

Loss related to early retirement of debt, net

 

-

 

(857

)

 

-

 

(857

)

TOTAL OTHER INCOME

 

519

 

445

 

 

965

 

1,753

 

Income (loss) from continuing operations before taxes

 

6,239

 

(9,801

)

 

3,218

 

(29,638

)

Tax expense (benefit)

 

190

 

-

 

 

190

 

(2,398

)

NET INCOME (LOSS) FROM CONTINUING OPERATIONS

 

6,049

 

(9,801

)

 

3,028

 

(27,240

)

Income (loss) from discontinued operations, net of taxes

 

223

 

(912

)

 

(1,864

)

(3,009

)

NET INCOME (LOSS)

 

$

6,272

 

$

(10,713

)

 

$

1,164

 

$

(30,249

)

NET INCOME (LOSS) PER COMMON SHARE

 

 

 

 

 

 

 

 

 

 

Basic

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.14

 

$

(0.22

)

 

$

0.07

 

$

(0.61

)

Discontinued operations

 

0.00

 

(0.02

)

 

(0.04

)

(0.07

)

Total

 

0.14

 

(0.24

)

 

0.03

 

(0.68

)

Diluted

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

0.14

 

(0.22

)

 

0.07

 

(0.61

)

Discontinued operations

 

0.00

 

(0.02

)

 

(0.04

)

(0.07

)

Total

 

$

0.14

 

$

(0.24

)

 

$

0.03

 

$

(0.68

)

AVERAGE COMMON SHARES OUTSTANDING

 

 

 

 

 

 

 

 

 

 

Basic

 

44,627,548

 

44,368,874

 

 

44,551,441

 

44,303,958

 

Diluted

 

48,570,825

 

44,368,874

 

 

44,938,772

 

44,303,958

 

DIVIDENDS DECLARED PER COMMON SHARE

 

$

0.03

 

$

0.03

 

 

$

0.06

 

$

0.06

 

 

See Notes to Consolidated Financial Statements.

 

3



 

 

Consolidated Balance Sheets

 

The Ryland Group, Inc. and Subsidiaries

 

 

 

JUNE 30,

 

DECEMBER 31,

 

(in thousands, except share data)

 

2012

 

2011

 

ASSETS

 

(Unaudited)

 

 

 

Cash, cash equivalents and marketable securities

 

 

 

 

 

Cash and cash equivalents

 

  $

355,212

 

  $

159,363

 

Restricted cash

 

67,060

 

56,799

 

Marketable securities, available-for-sale

 

310,638

 

347,016

 

Total cash, cash equivalents and marketable securities

 

732,910

 

563,178

 

Housing inventories

 

 

 

 

 

Homes under construction

 

419,557

 

319,476

 

Land under development and improved lots

 

412,034

 

413,569

 

Inventory held-for-sale

 

7,750

 

11,015

 

Consolidated inventory not owned

 

47,302

 

51,400

 

Total housing inventories

 

886,643

 

795,460

 

Property, plant and equipment

 

20,012

 

19,920

 

Other

 

153,732

 

165,262

 

Assets of discontinued operations

 

14,624

 

35,324

 

TOTAL ASSETS

 

1,807,921

 

1,579,144

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

Accounts payable

 

86,231

 

74,327

 

Accrued and other liabilities

 

136,026

 

140,930

 

Financial services credit facility

 

50,271

 

49,933

 

Debt

 

1,047,856

 

823,827

 

Liabilities of discontinued operations

 

1,863

 

6,217

 

TOTAL LIABILITIES

 

1,322,247

 

1,095,234

 

 

 

 

 

 

 

EQUITY

 

 

 

 

 

STOCKHOLDERS’ EQUITY

 

 

 

 

 

Preferred stock, $1.00 par value:

 

 

 

 

 

Authorized—10,000 shares Series A Junior

 

 

 

 

 

Participating Preferred, none outstanding

 

-

 

-

 

Common stock, $1.00 par value:

 

 

 

 

 

Authorized—199,990,000 shares

 

 

 

 

 

Issued—44,660,496 shares at June 30, 2012

 

 

 

 

 

(44,413,594 shares at December 31, 2011)

 

44,660

 

44,414

 

Retained earnings

 

410,043

 

405,109

 

Accumulated other comprehensive income

 

711

 

164

 

TOTAL STOCKHOLDERS’ EQUITY

 

 

 

 

 

FOR THE RYLAND GROUP, INC.

 

455,414

 

449,687

 

NONCONTROLLING INTEREST

 

30,260

 

34,223

 

TOTAL EQUITY

 

485,674

 

483,910

 

TOTAL LIABILITIES AND EQUITY

 

  $

1,807,921

 

  $

1,579,144

 

 

See Notes to Consolidated Financial Statements.

4



 

 

 

Consolidated Statements of Cash Flows (Unaudited)

 

The Ryland Group, Inc. and Subsidiaries

 

 

 

SIX MONTHS ENDED

 

 

 

JUNE 30,

 

(in thousands)

 

2012

 

2011

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

Net income (loss) from continuing operations

 

  $

3,028

 

  $

(27,240

)

Adjustments to reconcile net income (loss) from continuing operations

 

 

 

 

 

to net cash used for operating activities:

 

 

 

 

 

Depreciation and amortization

 

6,433

 

5,423

 

Inventory and other asset impairments and write-offs

 

2,454

 

14,922

 

Loss on early extinguishment of debt, net

 

-

 

857

 

Gain on sale of marketable securities

 

(336

)

(1,685

)

(Decrease) increase in deferred tax valuation allowance

 

(2,397

)

11,503

 

Stock-based compensation expense

 

7,219

 

5,050

 

Changes in assets and liabilities:

 

 

 

 

 

Increase in inventories

 

(98,847

)

(65,317

)

Net change in other assets, payables and other liabilities

 

28,107

 

(38,499

)

Other operating activities, net

 

(784

)

(371

)

Net cash used for operating activities from continuing operations

 

(55,123

)

(95,357

)

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

Return of investment in unconsolidated joint ventures, net

 

1,871

 

1,062

 

Additions to property, plant and equipment

 

(5,434

)

(5,595

)

Purchases of marketable securities, available-for-sale

 

(469,690

)

(700,135

)

Proceeds from sales and maturities of marketable securities, available-for-sale

 

508,687

 

780,594

 

Other investing activities

 

(10

)

30

 

Net cash provided by investing activities from continuing operations

 

35,424

 

75,956

 

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

Cash proceeds of long-term debt

 

225,000

 

-

 

Retirement of long-term debt

 

-

 

(28,222

)

Increase in borrowings against revolving credit facilities, net

 

338

 

-

 

Decrease in short-term borrowings

 

(1,279

)

(221

)

Common stock dividends

 

(2,701

)

(2,701

)

Issuance of common stock under stock-based compensation

 

4,451

 

3,530

 

(Increase) decrease in restricted cash

 

(10,261

)

2,691

 

Net cash provided by (used for) financing activities from continuing operations

 

215,548

 

(24,923

)

Net increase (decrease) in cash and cash equivalents from continuing operations

 

195,849

 

(44,324

)

Cash flows from operating activities—discontinued operations

 

363

 

341

 

Cash flows from investing activities—discontinued operations

 

79

 

(316

)

Cash flows from financing activities—discontinued operations

 

-

 

-

 

Cash and cash equivalents at beginning of period1

 

159,419

 

226,647

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD2

 

  $

355,710

 

  $

182,348

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

 

 

 

 

 

Cash paid for income taxes

 

  $

(386

)

  $

(1,307

)

SUPPLEMENTAL DISCLOSURES OF NONCASH ACTIVITIES

 

 

 

 

 

Decrease in consolidated inventory not owned related to land options

 

  $

3,963

 

  $

20,301

 

 

1 Includes cash and cash equivalents of $56,000 and $39,000 associated with discontinued operations at December 31, 2011 and 2010, respectively.

 

2 Includes cash and cash equivalents of $498,000 and $64,000 associated with discontinued operations at June 30, 2012 and 2011, respectively.

 

See Notes to Consolidated Financial Statements.

 

5



 

 

Consolidated Statement of Stockholders’ Equity (Unaudited)

 

Consolidated Statements of Other Comprehensive Income

 

(Unaudited)

 

The Ryland Group, Inc. and Subsidiaries

 

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

ACCUMULATED

 

 

 

 

 

 

 

 

 

OTHER

 

TOTAL

 

 

 

COMMON

 

RETAINED

 

COMPREHENSIVE

 

STOCKHOLDERS’

 

(in thousands, except per share data)

 

STOCK

 

EARNINGS

 

INCOME

 

EQUITY

 

STOCKHOLDERS’ EQUITY BALANCE AT JANUARY 1, 2012

 

  $

44,414

 

  $

405,109

 

  $

164

 

  $

  449,687

 

Net income

 

 

 

1,164

 

 

 

1,164

 

Other comprehensive gain

 

 

 

 

 

547

 

547

 

Common stock dividends (per share $0.06)

 

 

 

(2,721

)

 

 

(2,721

)

Stock-based compensation

 

246

 

6,491

 

 

 

6,737

 

STOCKHOLDERS’ EQUITY BALANCE AT JUNE 30, 2012

 

  $

44,660

 

  $

410,043

 

  $

 711

 

  $

455,414

 

NONCONTROLLING INTEREST

 

 

 

 

 

 

 

30,260

 

TOTAL EQUITY BALANCE AT JUNE 30, 2012

 

 

 

 

 

 

 

  $

485,674

 

 

See Notes to Consolidated Financial Statements.

 

CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE INCOME

 

 

 

THREE MONTHS ENDED

 

 

SIX MONTHS ENDED

 

 

 

JUNE 30,

 

 

 

 

JUNE 30,

 

(in thousands)

 

2012

 

2011

 

 

2012

 

2011

 

Comprehensive income (loss)

 

  $

6,145

 

  $

(10,813

)

 

  $

1,711

 

  $

(30,632

)

 

See Notes to Consolidated Financial Statements.

 

6



 

 

Notes to Consolidated Financial Statements (Unaudited)

 

The Ryland Group, Inc. and Subsidiaries

 

Note 1.  Consolidated Financial Statements

 

The consolidated financial statements include the accounts of The Ryland Group, Inc. and its 100 percent-owned subsidiaries (the “Company”). Noncontrolling interest represents the selling entities’ ownership interests in land and lot option purchase contracts. (See Note 8, “Variable Interest Entities (‘VIE’).”) Intercompany transactions have been eliminated in consolidation. Information is presented on a continuing operations basis unless otherwise noted. The results from continuing and discontinued operations are presented separately in the consolidated financial statements. (See Note 18, “Discontinued Operations.”) Effective January 1, 2012, the Company elected to reclassify its external commissions expense from cost of sales to selling, general and administrative expense in its Consolidated Statements of Earnings in order to not only be consistent with a majority of its peers, but also to combine external and internal commissions. This will have the effect of increasing both housing gross profit and selling, general and administrative expense by the amount of external commissions, which totaled $6.3 million and $4.5 million, or 2.2 percent of housing revenues, for the three months ended June 30, 2012 and 2011, respectively. External commissions totaled $10.9 million and $7.6 million, or 2.2 percent and 2.1 percent of housing revenues, for the six months ended June 30, 2012 and 2011, respectively. All prior period amounts have been reclassified to conform to the 2012 presentation. For a description of the Company’s accounting policies, see Note A, “Summary of Significant Accounting Policies,” in its 2011 Annual Report on Form 10-K.

 

The Consolidated Balance Sheet at June 30, 2012, the Consolidated Statements of Earnings for the three- and six-month periods ended June 30, 2012 and 2011, the Consolidated Statements of Cash Flows for the six-month periods ended June 30, 2012 and 2011, the Consolidated Statement of Stockholders’ Equity as of and for the six-month period ended June 30, 2012, and the Consolidated Statements of Other Comprehensive Income for the three- and six-month periods ended June 30, 2012 and 2011, have been prepared by the Company without audit. In the opinion of management, all adjustments, including normally recurring adjustments necessary to present fairly the Company’s financial position, results of operations and cash flows at June 30, 2012, and for all periods presented, have been made. Certain information and footnote disclosures normally included in the financial statements have been condensed or omitted. These financial statements should be read in conjunction with the financial statements and related notes included in the Company’s 2011 Annual Report on Form 10-K.

 

The Company has historically experienced, and expects to continue to experience, variability in quarterly results. Accordingly, the results of operations for the three and six months ended June 30, 2012, are not necessarily indicative of the operating results expected for the year ending December 31, 2012.

 

Note 2.  Comprehensive Income

 

Comprehensive income consists of net income or loss and the increase or decrease in unrealized gains or losses on the Company’s available-for-sale securities, as well as the decrease in unrealized gains associated with treasury locks, net of applicable taxes. Comprehensive income totaled $6.1 million and $1.7 million for the three- and six-month periods ended June 30, 2012. Comprehensive loss totaled $10.8 million and $30.6 million for the three- and six-month periods ended June 30, 2011.

 

Note 3.  Cash, Cash Equivalents and Restricted Cash

 

Cash and cash equivalents totaled $355.2 million and $159.4 million at June 30, 2012 and December 31, 2011, respectively. The Company considers all highly liquid short-term investments purchased with an original maturity of three months or less and cash held in escrow accounts to be cash equivalents.

 

7



 

 

Notes to Consolidated Financial Statements (Unaudited)

 

The Ryland Group, Inc. and Subsidiaries

 

At June 30, 2012 and December 31, 2011, the Company had restricted cash of $67.1 million and $56.8 million, respectively. The Company has various secured letter of credit agreements that require it to maintain cash deposits as collateral for outstanding letters of credit. Cash restricted under these agreements totaled $65.8 million and $56.7 million at June 30, 2012 and December 31, 2011, respectively. In addition, Ryland Mortgage Company and its subsidiaries and RMC Mortgage Corporation (collectively referred to as “RMC”) had restricted cash of $1.3 million and $141,000 at June 30, 2012 and December 31, 2011, respectively.

 

Note 4.  Segment Information

 

The Company is a leading national homebuilder and provider of mortgage-related financial services. As one of the largest single-family on-site homebuilders in the United States, it operates in 13 states across the country. The Company consists of six segments: four geographically-determined homebuilding regions (North, Southeast, Texas and West); financial services; and corporate. The homebuilding segments specialize in the sale and construction of single-family attached and detached housing. The Company’s financial services segment, which includes RMC, RH Insurance Company, Inc. (“RHIC”), LPS Holdings Corporation and its subsidiaries (“LPS”), and Columbia National Risk Retention Group, Inc. (“CNRRG”), provides mortgage-related products and services, as well as title, escrow and insurance services, to its homebuyers. Corporate is a nonoperating business segment with the sole purpose of supporting operations. In order to best reflect the Company’s financial position and results of operations, certain corporate expenses are allocated to the homebuilding and financial services segments, along with certain assets and liabilities relating to employee benefit plans.

 

The Company evaluates performance and allocates resources based on a number of factors, including segment pretax earnings and risk. The accounting policies of the segments are the same as those described in Note 1, “Consolidated Financial Statements.”

 

 

 

THREE MONTHS ENDED

 

SIX MONTHS ENDED

 

 

JUNE 30,

 

JUNE 30,

(in thousands)

 

2012

 

2011

 

 

2012

 

2011

 

REVENUES

 

 

 

 

 

 

 

 

 

 

Homebuilding

 

 

 

 

 

 

 

 

 

 

North

 

  $

 86,010

 

$

75,092

 

 

  $

148,058

 

$

130,534

 

Southeast

 

78,379

 

46,700

 

 

135,021

 

90,838

 

Texas

 

78,754

 

68,143

 

 

141,873

 

114,528

 

West

 

41,450

 

14,990

 

 

69,176

 

30,453

 

Financial services

 

9,176

 

6,923

 

 

15,510

 

13,167

 

Total

 

  $

 293,769

 

$

211,848

 

 

  $

509,638

 

$

379,520

 

EARNINGS (LOSS) BEFORE TAXES

 

 

 

 

 

 

 

 

 

 

Homebuilding

 

 

 

 

 

 

 

 

 

 

North

 

  $

 1,796

 

$

(4,737

)

 

  $

174

 

$

(10,225

)

Southeast

 

2,497

 

(4,215

)

 

3,388

 

(12,626

)

Texas

 

4,784

 

3,438

 

 

8,309

 

1,777

 

West

 

838

 

(1,871

)

 

(888

)

(3,678

)

Financial services

 

2,944

 

2,064

 

 

3,589

 

3,273

 

Corporate and unallocated

 

(6,620

)

(4,480

)

 

(11,354

)

(8,159

)

Total

 

  $

6,239

 

$

(9,801

)

 

  $

3,218

 

$

(29,638

)

 

8



 

 

Notes to Consolidated Financial Statements (Unaudited)

 

The Ryland Group, Inc. and Subsidiaries

 

Note 5.  Earnings Per Share Reconciliation

 

The following table sets forth the computation of basic and diluted earnings per share:

 

 

 

THREE MONTHS ENDED

 

SIX MONTHS ENDED

 

 

JUNE 30,

 

JUNE 30,

(in thousands, except share data)

 

2012

 

2011

 

 

2012

 

2011

 

NUMERATOR

 

 

 

 

 

 

 

 

 

 

Net income (loss) from continuing operations

 

  $

6,049

 

$

(9,801

)

 

  $

3,028

 

$

(27,240

)

Net income (loss) from discontinued operations

 

223

 

(912

)

 

(1,864

)

(3,009

)

Net income (loss)

 

6,272

 

(10,713

)

 

1,164

 

(30,249

)

Interest on 1.6 percent convertible senior notes due 2018

 

370

 

-

 

 

-

 

-

 

Net income (loss) available to common stockholders

 

  $

6,642

 

$

(10,713

)

 

  $

1,164

 

$

(30,249

)

DENOMINATOR

 

 

 

 

 

 

 

 

 

 

Basic earnings per share—weighted-average shares

 

44,627,548

 

44,368,874

 

 

44,551,441

 

44,303,958

 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

 

Share-based payments

 

469,979

 

-

 

 

387,331

 

-

 

1.6 percent convertible senior notes due 2018

 

3,473,298

 

-

 

 

-

 

-

 

Diluted earnings per share—adjusted

 

 

 

 

 

 

 

 

 

 

weighted-average shares and

 

 

 

 

 

 

 

 

 

 

assumed conversions

 

48,570,825

 

44,368,874

 

 

44,938,772

 

44,303,958

 

NET INCOME (LOSS) PER COMMON SHARE

 

 

 

 

 

 

 

 

 

 

Basic

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

  $

0.14

 

$

(0.22

)

 

  $

0.07

 

$

(0.61

)

Discontinued operations

 

0.00

 

(0.02

)

 

(0.04

)

(0.07

)

Total

 

0.14

 

(0.24

)

 

0.03

 

(0.68

)

Diluted

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

0.14

 

(0.22

)

 

0.07

 

(0.61

)

Discontinued operations

 

0.00

 

(0.02

)

 

(0.04

)

(0.07

)

Total

 

  $

0.14

 

$

(0.24

)

 

  $

0.03

 

$

(0.68

)

 

For the six-month period ended June 30, 2012, the effect of convertible debt was not included in the diluted earnings per share calculations as it would have been antidilutive. For the three- and six-month periods ended June 30, 2011, the effects of outstanding restricted stock units and stock options were not included in the diluted earnings per share calculations as they would have been antidilutive due to the Company’s net loss for the respective periods.

 

Note 6.  Marketable Securities, Available-for-sale

 

The Company’s investment portfolio includes U.S. Treasury securities; obligations of U.S. government and local government agencies; corporate debt backed by U.S. government/agency programs; corporate debt securities; asset-backed securities of U.S. government agencies and covered bonds; time deposits; and short-term pooled investments. These investments are primarily held in the custody of a single financial institution. Time deposits and short-term pooled investments, which are not considered cash equivalents, have original maturities in excess of 90 days. The Company considers its investment portfolio to be available-for-sale as defined by the Financial Accounting Standards Board (“FASB”) in its Accounting Standards Codification (“ASC”) No. 320 (“ASC 320”), “Investments—Debt and Equity Securities.” Accordingly, these investments are recorded at their fair values. The cost of securities sold is based on an average-cost basis. Unrealized gains and losses on these investments were included in “Accumulated other comprehensive income” within the Consolidated Balance Sheets.

 

9



 

 

Notes to Consolidated Financial Statements (Unaudited)

 

The Ryland Group, Inc. and Subsidiaries

 

The Company periodically reviews its available-for-sale securities for other-than-temporary declines in fair values that are below their cost bases, as well as whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. At June 30, 2012 and December 31, 2011, the Company believed that the cost bases for its available-for-sale securities were recoverable in all material respects.

 

For the three-month periods ended June 30, 2012 and 2011, net realized earnings associated with the Company’s investment portfolio, which includes interest, dividends and net realized gains and losses on sales of marketable securities, totaled $519,000 and $1.3 million, respectively. For the six-month periods ended June 30, 2012 and 2011, net realized earnings totaled $965,000 and $2.6 million, respectively. These earnings were included in “Gain from marketable securities, net” within the Consolidated Statements of Earnings.

 

The following table sets forth the fair values of marketable securities, available-for-sale, by type of security:

 

 

 

 

 

 

 

 

 

JUNE 30, 2012

(in thousands)

 

AMORTIZED
COST

 

GROSS
UNREALIZED
GAINS

 

GROSS
UNREALIZED
LOSSES

 

ESTIMATED
FAIR VALUE

Type of security:

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

  $

7,182

 

$

-

 

  $

(7

)

$

7,175

 

Obligations of U.S. and local government agencies

 

140,646

 

700

 

(19

)

141,327

 

Corporate debt securities issued under

 

 

 

 

 

 

 

 

 

U.S. government/agency-backed programs

 

1,502

 

1

 

-

 

1,503

 

Corporate debt securities

 

76,568

 

102

 

(48

)

76,622

 

Asset-backed securities

 

37,570

 

72

 

(130

)

37,512

 

Total debt securities

 

263,468

 

875

 

(204

)

264,139

 

Time deposits

 

45,471

 

-

 

-

 

45,471

 

Short-term pooled investments

 

1,028

 

-

 

-

 

1,028

 

Total marketable securities, available-for-sale

 

  $

309,967

 

$

875

 

  $

(204

)

$

310,638

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

DECEMBER 31, 2011

Type of security:

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

  $

1,557

 

$

-

 

  $

(2

)

$

1,555

 

Obligations of U.S. and local government agencies

 

147,557

 

123

 

(860

)

146,820

 

Corporate debt securities issued under

 

 

 

 

 

 

 

 

 

U.S. government/agency-backed programs

 

1,453

 

3

 

-

 

1,456

 

Corporate debt securities

 

126,088

 

101

 

(523

)

125,666

 

Asset-backed securities

 

46,198

 

42

 

(496

)

45,744

 

Total debt securities

 

322,853

 

269

 

(1,881

)

321,241

 

Time deposits

 

25,500

 

-

 

-

 

25,500

 

Short-term pooled investments

 

275

 

-

 

-

 

275

 

Total marketable securities, available-for-sale

 

  $

348,628

 

$

269

 

  $

(1,881

)

$

347,016

 

 

The primary objectives of the Company’s investment portfolio are safety of principal and liquidity. Investments are made with the purpose of achieving the highest rate of return consistent with these two objectives. The Company’s investment policy limits investments to debt rated investment grade or better, as well as to bank and money market instruments and to issues by the U.S. government, U.S. government agencies and municipal or other institutions primarily with investment-grade credit ratings. Policy restrictions are placed on maturities, as well as on concentration by type and issuer.

 

10



 

 

Notes to Consolidated Financial Statements (Unaudited)

 

The Ryland Group, Inc. and Subsidiaries

 

The following table sets forth the fair values of marketable securities, available-for-sale, by contractual maturity:

 

(in thousands)

 

JUNE 30, 2012

 

DECEMBER 31, 2011 

Contractual maturity:

 

 

 

 

 

Maturing in one year or less

 

  $

72,766

 

          $

167,413

 

Maturing after one year through three years

 

167,880

 

120,952

 

Maturing after three years

 

23,493

 

32,876

 

Total debt securities

 

264,139

 

321,241

 

Time deposits and short-term pooled investments

 

46,499

 

25,775

 

Total marketable securities, available-for-sale

 

  $

310,638

 

          $

347,016

 

 

Note 7.  Housing Inventories

 

Housing inventories consist principally of homes under construction; land under development and improved lots; and inventory held-for-sale. Inventory includes land and development costs; direct construction costs; capitalized indirect construction costs; capitalized interest; and real estate taxes. The costs of acquiring and developing land and constructing certain related amenities are allocated to the parcels to which these costs relate. Interest and taxes are capitalized during active development and construction stages. Inventories to be held and used are stated at cost unless a community is determined to be impaired, in which case the impaired inventories are written down to their fair values. Inventories held-for-sale are stated at the lower of their costs or fair values, less cost to sell.

 

As required by ASC No. 360 (“ASC 360”), “Property, Plant and Equipment,” inventory is reviewed for potential write-downs on an ongoing basis. ASC 360 requires that, in the event that impairment indicators are present and undiscounted cash flows signify that the carrying amount of an asset is not recoverable, impairment charges must be recorded if the fair value of the asset is less than its carrying amount. The Company reviews all communities on a quarterly basis for changes in events or circumstances indicating signs of impairment. Examples of events or changes in circumstances include, but are not limited to: price declines resulting from sustained competitive pressures; a change in the manner in which the asset is being used; a change in assessments by a regulator or municipality; cost increases; the expectation that, more likely than not, an asset will be sold or disposed of significantly before the end of its previously estimated useful life; or the impact of local economic or macroeconomic conditions, such as employment or housing supply, on the market for a given product. Signs of impairment may include, but are not limited to: very low or negative profit margins, the absence of sales activity in an open community and/or significant price differences for comparable parcels of land held-for-sale.

 

If it is determined that indicators of impairment exist in a community, undiscounted cash flows are prepared and analyzed at a community level based on expected pricing; sales rates; construction costs; local municipality fees; and warranty, closing, carrying, selling, overhead and other related costs; or on similar assets to determine if the realizable values of the assets held are less than their respective carrying amounts. In order to determine assumed sales prices included in cash flow models, the Company analyzes historical sales prices on homes delivered in the community and in other communities located within the geographic area, as well as sales prices included in its current backlog for such communities. In addition, it analyzes market studies and trends, which generally include statistics on sales prices in neighboring communities and sales prices of similar products in non-neighboring communities in the same geographic area. In order to estimate costs to build and deliver homes, the Company generally assumes cost structures reflecting contracts currently in place with vendors, adjusted for any anticipated cost-reduction initiatives or increases. The Company’s analysis of each community generally assumes current pricing equal to current sales orders for a particular or comparable community. For a minority of communities that the Company does not intend to operate for an extended period of time or where the operating

 

11



 

 

Notes to Consolidated Financial Statements (Unaudited)

 

The Ryland Group, Inc. and Subsidiaries

 

life extends beyond several years, slight increases over current sales prices are assumed in later years. Once a community is considered to be impaired, the Company’s determinations of fair value and new cost basis are primarily based on discounting estimated cash flows at rates commensurate with inherent risks that are associated with the continuing assets. Discount rates used generally vary from 19.0 percent to 30.0 percent, depending on market risk, the size or life of a community and development risk. Due to the fact that estimates and assumptions included in cash flow models are based on historical results and projected trends, unexpected changes in market conditions that may lead to additional impairment charges in the future cannot be anticipated.

 

Valuation adjustments are recorded against homes completed or under construction, land under development or improved lots when analyses indicate that the carrying values are greater than the fair values. Write-downs of impaired inventories to their fair values are recorded as adjustments to the cost basis of the respective inventory. At June 30, 2012 and December 31, 2011, valuation reserves related to impaired inventories totaled $250.3 million and $277.2 million, respectively. The net carrying value of the related inventories totaled $195.8 million at June 30, 2012 and December 31, 2011.

 

Interest and taxes are capitalized during active development and construction stages. Capitalized interest is amortized when the related inventory is delivered to homebuyers. The following table summarizes activity that relates to capitalized interest:

 

(in thousands)

 

 

 

 

 

 

 

 

 

2012

 

2011

 

Capitalized interest at January 1

 

 

 

 

 

 

 

 

 

$          81,058

 

$         75,094

 

Interest capitalized

 

 

 

 

 

 

 

 

 

20,777

 

18,198

 

Interest amortized to cost of sales

 

 

 

 

 

 

 

 

 

(17,632

)

(13,291

)

Capitalized interest at June 30

 

 

 

 

 

 

 

 

 

$          84,203

 

$         80,001

 

 

 

 

The following table summarizes each reporting segment’s total number of lots owned and lots controlled under option agreements:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

JUNE 30, 2012

 

 

 

DECEMBER 31, 2011

 

 

 

 

LOTS

 

LOTS

 

 

 

LOTS

 

LOTS

 

 

 

 

 

OWNED

 

OPTIONED

 

TOTAL

 

OWNED

 

OPTIONED

 

TOTAL

 

North

 

5,423

 

3,708

 

9,131

 

4,981

 

3,405

 

8,386

 

Southeast

 

5,402

 

3,751

 

9,153

 

4,933

 

1,894

 

6,827

 

Texas

 

2,528

 

1,789

 

4,317

 

2,486

 

1,081

 

3,567

 

West

 

1,891

 

957

 

2,848

 

1,937

 

862

 

2,799

 

Total

 

15,244

 

10,205

 

25,449

 

14,337

 

7,242

 

21,579

 

 

Additionally, at June 30, 2012, the Company controlled an aggregate of 942 lots associated with discontinued operations, of which 909 lots were owned and 33 lots were under option. At December 31, 2011, the Company controlled an aggregate of 1,386 lots associated with discontinued operations, of which 1,330 lots were owned and 56 lots were under option.

 

Note 8.  Variable Interest Entities (“VIE”)

 

As required by ASC No. 810 (“ASC 810”), “Consolidation of Variable Interest Entities,” a VIE is to be consolidated by a company if that company has the power to direct the VIE’s activities and the obligation to absorb its losses or the right to receive its benefits, which are potentially significant to the VIE. ASC 810 also requires disclosures about VIEs that the company is not obligated to consolidate, but in which it has a significant, though not primary, variable interest.

 

12



 

 

Notes to Consolidated Financial Statements (Unaudited)

 

The Ryland Group, Inc. and Subsidiaries

 

The Company enters into joint ventures, from time to time, for the purpose of acquisition and co-development of land parcels and lots. Its investment in these joint ventures may create a variable interest in a VIE, depending on the contractual terms of the arrangement. Additionally, in the ordinary course of business, the Company enters into lot option purchase contracts in order to procure land for the construction of homes. Under such lot option purchase contracts, the Company funds stated deposits in consideration for the right to purchase lots at a future point in time, usually at predetermined prices. The Company’s liability is generally limited to forfeiture of nonrefundable deposits, letters of credit and other nonrefundable amounts incurred. In accordance with the requirements of ASC 810, certain of the Company’s lot option purchase contracts may result in the creation of a variable interest in a VIE.

 

In compliance with the provisions of ASC 810, the Company consolidated $47.3 million and $51.4 million of inventory not owned related to land and lot option purchase contracts at June 30, 2012 and December 31, 2011, respectively. Although the Company may not have had legal title to the optioned land, under ASC 810, it had the primary variable interest and was required to consolidate the particular VIE’s assets under option at fair value. To reflect the fair value of the inventory consolidated under ASC 810, the Company included $17.0 million and $17.2 million of its related cash deposits for lot option purchase contracts at June 30, 2012 and December 31, 2011, respectively, in “Consolidated inventory not owned” within the Consolidated Balance Sheets. Noncontrolling interest totaled $30.3 million and $34.2 million with respect to the consolidation of these contracts at June 30, 2012 and December 31, 2011, respectively, representing the selling entities’ ownership interests in these VIEs. Additionally, the Company had cash deposits and/or letters of credit totaling $23.8 million and $22.3 million at June 30, 2012 and December 31, 2011, respectively, that were associated with lot option purchase contracts having aggregate purchase prices of $232.6 million and $208.5 million, respectively. As the Company did not have the primary variable interest in these contracts, it was not required to consolidate them.

 

Note 9.  Investments in Joint Ventures

 

The Company enters into joint ventures, from time to time, for the purpose of acquisition and co-development of land parcels and lots. It participates in a number of joint ventures in which it has less than a controlling interest. As of June 30, 2012, the Company participated in five active homebuilding joint ventures in the Austin, Chicago, Denver and Washington, D.C., markets. The Company recognizes its share of the respective joint ventures’ earnings or losses from the sale of lots to other homebuilders. It does not, however, recognize earnings from lots that it purchases from the joint ventures. Instead, the Company reduces its cost basis in each lot by its share of the earnings from the lot.

 

The following table summarizes each reporting segment’s total estimated share of lots owned and controlled by the Company under its joint ventures:

 

 

 

JUNE 30, 2012

 

DECEMBER 31, 2011

 

 

 

LOTS

 

LOTS

 

 

 

LOTS

 

LOTS

 

 

 

 

 

OWNED

 

OPTIONED

 

TOTAL

 

OWNED

 

OPTIONED

 

TOTAL

 

North

 

150

 

-

 

150

 

150

 

-

 

150

 

Southeast

 

-

 

-

 

-

 

-

 

-

 

-

 

Texas

 

3

 

-

 

3

 

20

 

-

 

20

 

West

 

172

 

-

 

172

 

172

 

-

 

172

 

Total

 

325

 

-

 

325

 

342

 

-

 

342

 

 

At June 30, 2012 and December 31, 2011, the Company’s investments in its unconsolidated joint ventures totaled $8.9 million and $10.0 million, respectively, and were included in “Other” assets within the Consolidated Balance

 

13



 

 

Notes to Consolidated Financial Statements (Unaudited)

 

The Ryland Group, Inc. and Subsidiaries

 

Sheets. For the three and six months ended June 30, 2012, the Company’s equity in earnings from its unconsolidated joint ventures totaled $563,000 and $673,000, respectively. For the three and six months ended June 30, 2011, the Company’s equity in losses from its unconsolidated joint ventures totaled $1.7 million.

 

Note 10.  Debt and Credit Facilities

 

The following table presents the composition of the Company’s homebuilder debt and its financial services credit facility at June 30, 2012 and December 31, 2011:

 

 

 

JUNE 30,

 

DECEMBER 31,

(in thousands)

 

2012

 

2011

Senior notes

 

 

 

 

 

 

6.9 percent senior notes due June 2013

 

  $

167,182

 

 

   $

167,182

 

5.4 percent senior notes due January 2015

 

126,481

 

 

126,481

 

8.4 percent senior notes due May 2017

 

230,000

 

 

230,000

 

1.6 percent convertible senior notes due May 2018

 

225,000

 

 

-

 

6.6 percent senior notes due May 2020

 

300,000

 

 

300,000

 

Total senior notes

 

1,048,663

 

 

823,663

 

Debt discount

 

(3,339

)

 

(3,647

)

Senior notes, net

 

1,045,324

 

 

820,016

 

Secured notes payable

 

2,532

 

 

3,811

 

Total debt

 

  $

1,047,856

 

 

   $

823,827

 

Financial services credit facility

 

  $

50,271

 

 

   $

49,933

 

 

At June 30, 2012, the Company had outstanding (a) $167.2 million of 6.9 percent senior notes due June 2013; (b) $126.5 million of 5.4 percent senior notes due January 2015; (c) $230.0 million of 8.4 percent senior notes due May 2017; (d) $225.0 million of 1.6 percent convertible senior notes due May 2018; and (e) $300.0 million of 6.6 percent senior notes due May 2020. Each of the senior notes pays interest semiannually and may be redeemed at a stated redemption price, in whole or in part, at the option of the Company at any time.

 

During the second quarter of 2012, the Company had no debt repurchases. During the second quarter of 2011, the Company paid $28.2 million to repurchase $27.5 million of its 5.4 percent senior notes due 2015, resulting in a loss of $857,000. The loss resulting from this debt repurchase was included in “Loss related to early retirement of debt, net” within the Consolidated Statements of Earnings.

 

During the second quarter of 2012, the Company issued $225.0 million of 1.6 percent convertible senior notes due May 2018. The Company will pay interest on the notes on May 15 and November 15 of each year, commencing on November 15, 2012. The notes, which mature on May 15, 2018, are initially convertible into shares of the Company’s common stock at a conversion rate of 31.2 shares per $1,000 of their principal amount. This corresponds to an initial conversion price of approximately $32.03 per share and represents a conversion premium of approximately 42.5 percent based on the closing price of the Company’s common stock on May 10, 2012, which was $22.48 per share. The conversion rate is subject to adjustment upon the occurrence of certain events. The notes are fully and unconditionally guaranteed, jointly and severally, by substantially all of the Company’s 100 percent-owned homebuilding subsidiaries (the “Guarantor Subsidiaries”). The Company received net proceeds of $218.8 million from this offering prior to offering expenses. In July 2012, the Company redeemed and repurchased $167.2 million of its 6.9 percent senior notes due 2013 for $177.2 million in cash. It recognized a charge of $9.1 million resulting from the redemption, which will be included in “Loss related to

 

14



 

 

Notes to Consolidated Financial Statements (Unaudited)

 

The Ryland Group, Inc. and Subsidiaries

 

early retirement of debt, net” within the Consolidated Statements of Earnings. (See Note 19, “Subsequent Events.”) The remaining proceeds will be used for general corporate purposes.

 

To provide letters of credit required in the ordinary course of its business, the Company has various secured letter of credit agreements that require it to maintain restricted cash deposits for outstanding letters of credit. Outstanding letters of credit totaled $37.9 million and $66.0 million under these agreements at June 30, 2012 and December 31, 2011, respectively.

 

To finance its land purchases, the Company may also use seller-financed nonrecourse secured notes payable. At June 30, 2012 and December 31, 2011, outstanding seller-financed nonrecourse secured notes payable totaled $2.5 million and $3.8 million, respectively.

 

Senior notes and indenture agreements are subject to certain covenants that include, among other things, restrictions on additional secured debt and the sale of assets. The Company was in compliance with these covenants at June 30, 2012.

 

In 2011, RMC entered into a $50.0 million repurchase credit facility with JPMorgan Chase Bank, N.A. (“JPM”). This facility is used to fund, and is secured by, mortgages that were originated by RMC and are pending sale. This facility will expire in December 2012. In May 2012, the credit facility was increased to $60.0 million. Under the terms of this facility, RMC is required to maintain various financial and other covenants and to satisfy certain requirements relating to the mortgages securing the facility. At June 30, 2012, the Company was in compliance with these covenants. Outstanding borrowings against this credit facility totaled $50.3 million and $49.9 million at June 30, 2012 and December 31, 2011, respectively.

 

Note 11.  Fair Values of Financial and Nonfinancial Instruments

 

Financial Instruments

The Company’s financial instruments are held for purposes other than trading. The fair values of these financial instruments are based on quoted market prices, where available, or are estimated using other valuation techniques. Estimated fair values are significantly affected by the assumptions used. As required by ASC No. 820 (“ASC 820”), “Fair Value Measurements and Disclosures,” fair value measurements of financial instruments are categorized as Level 1, Level 2 or Level 3, based on the types of inputs used in estimating fair values.

 

Level 1 fair values are those determined using quoted market prices in active markets for identical assets or liabilities with no valuation adjustments applied. Level 2 fair values are those determined using directly or indirectly observable inputs in the marketplace that are other than Level 1 inputs. Level 3 fair values are those determined using unobservable inputs, including the use of internal assumptions, estimates or models. Valuation of these items is, therefore, sensitive to the assumptions used. Fair values represent the Company’s best estimates as of the balance sheet date based on existing conditions and available information at the issuance date of these financial statements. Subsequent changes in conditions or available information may change assumptions and estimates.

 

15



 

 

Notes to Consolidated Financial Statements (Unaudited)

 

The Ryland Group, Inc. and Subsidiaries

 

The following table sets forth the values and methods used for measuring the fair values of financial instruments on a recurring basis:

 

 

 

FAIR VALUE

(in thousands)

 

HIERARCHY

 

JUNE 30, 2012

 

DECEMBER 31, 2011

Marketable securities, available-for-sale

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

Level 1

 

 $

7,175

 

 

         $

1,555

 

Obligations of U.S. and local government agencies

 

Levels 1 and 2

 

141,327

 

 

146,820

 

Corporate debt securities issued under

 

 

 

 

 

 

 

 

U.S. government/agency-backed programs

 

Level 2

 

1,503

 

 

1,456

 

Corporate debt securities

 

Level 2

 

76,622

 

 

125,666

 

Asset-backed securities

 

Level 2

 

37,512

 

 

45,744

 

Time deposits

 

Level 2

 

45,471

 

 

25,500

 

Short-term pooled investments

 

Levels 1 and 2

 

1,028

 

 

275

 

Mortgage loans held-for-sale

 

Level 2

 

62,307

 

 

82,351

 

Mortgage interest rate lock commitments

 

Level 3

 

5,424

 

 

3,359

 

Forward-delivery contracts

 

Level 2

 

(1,049

)

 

(1,235

)

 

Marketable Securities, Available-for-sale

At June 30, 2012 and December 31, 2011, the Company had $310.6 million and $347.0 million, respectively, of marketable securities that were available-for-sale and comprised of U.S. Treasury securities; obligations of U.S. government and local government agencies; corporate debt backed by U.S. government/agency programs; corporate debt securities; asset-backed securities of U.S. government agencies and covered bonds; time deposits; and short-term pooled investments. (See Note 6, “Marketable Securities, Available-for-sale.”)

 

Other Financial Instruments

Mortgage loans held-for-sale and forward-delivery contracts are based on quoted market prices of similar instruments (Level 2). Interest rate lock commitments (“IRLCs”) are valued at their aggregate market price premium or deficit, plus a servicing premium, multiplied by the projected close ratio (Level 3). The market price premium or deficit is based on quoted market prices of similar instruments; the servicing premium is based on contractual investor guidelines for each product; and the projected close ratio is determined utilizing an external modeling system, widely used within the industry, to estimate customer behavior at an individual loan level. At June 30, 2012, contractual principal amounts of mortgage loans held-for-sale totaled $59.6 million, compared to $79.7 million at December 31, 2011. The fair values of mortgage loans held-for-sale and IRLCs were included in “Other” assets within the Consolidated Balance Sheets, and forward-delivery contracts were included in “Other” assets and “Accrued and other liabilities” within the Consolidated Balance Sheets. Gains realized on the conversion of IRLCs to loans totaled $5.9 million and $3.8 million for the three-month periods ended June 30, 2012 and 2011, respectively, and $9.8 million and $6.5 million for the six-month periods ended June 30, 2012 and 2011, respectively. Increases in the fair value of the locked loan pipeline totaled $1.5 million and $543,000 for the three-month periods ended June 30, 2012 and 2011, respectively, and $2.1 million and $1.8 million for the six-month periods ended June 30, 2012 and 2011, respectively. Offsetting these items, losses from forward-delivery contracts used to hedge IRLCs totaled $3.4 million and $2.0 million for the three-month periods ended June 30, 2012 and 2011, respectively, and $3.9 million and $2.2 million for the six-month periods ended June 30, 2012 and 2011, respectively. Net gains and losses related to forward-delivery contracts and IRLCs were included in “Financial services” revenues within the Consolidated Statements of Earnings.

 

At June 30, 2012 and December 31, 2011, the excess of the aggregate fair value over the aggregate unpaid principal balance for mortgage loans held-for-sale measured at fair value totaled $2.7 million and was included in “Financial services” revenues within the Consolidated Statements of Earnings. At June 30, 2012, the Company held two repurchased loans with payments 90 days or more past due that had an aggregate carrying value of

 

16



 

 

Notes to Consolidated Financial Statements (Unaudited)

 

The Ryland Group, Inc. and Subsidiaries

 

$538,000 and an aggregate unpaid principal balance of $619,000. At December 31, 2011, the Company held two repurchased loans with payments 90 days or more past due that had an aggregate carrying value of $542,000 and an aggregate unpaid principal balance of $623,000.

 

While recorded fair values represent management’s best estimate based on data currently available, future changes in interest rates or in market prices for mortgage loans, among other factors, could materially impact these fair values.

 

The following table represents a reconciliation of changes in the fair values of Level 3 items (IRLCs) included in “Financial services” revenues within the Consolidated Statements of Earnings:

 

(in thousands)

 

2012

 

2011

 

Fair value at January 1

 

  $

3,359

 

  $

1,496

 

Additions

 

12,092

 

8,448

 

Gain realized on conversion to loans

 

(9,812

)

(6,453

)

Change in valuation of items held

 

(215

)

(224

)

Fair value at June 30

 

  $

5,424

 

  $

3,267

 

 

Nonfinancial Instruments

In accordance with ASC 820, the Company measures certain nonfinancial homebuilding assets at their fair values on a nonrecurring basis. (See Note 7, “Housing Inventories.”)

 

The following table summarizes the fair values of the Company’s nonfinancial assets that represent the fair values for communities and other homebuilding assets for which it recognized noncash impairment charges during the reporting periods:

 

 

 

FAIR VALUE

(in thousands)

 

HIERARCHY

 

JUNE 30, 2012

 

DECEMBER 31, 2011

Housing inventory and inventory held-for-sale 1

 

Level 3

 

            $

2,074

 

 

       $

9,121

 

Other assets held-for-sale and investments in joint ventures 2

 

Level 3

 

1,300

 

 

2,366

 

Total

 

 

 

            $

3,374

 

 

       $

11,487

 

 

1

In accordance with ASC No. 330, (“ASC 330”), “Inventory,” the fair values of housing inventory and inventory held-for-sale that were impaired during 2012 totaled $2.1 million at June 30, 2012. The impairment charges related to these assets totaled $1.9 million for the six months ended June 30, 2012. At December 31, 2011, the fair values of housing inventory and inventory held-for-sale that were impaired during 2011 totaled $9.1 million. The impairment charges related to these assets totaled $9.5 million for the year ended December 31, 2011.

 

 

2

In accordance with ASC 330, the fair values of other assets held-for-sale that were impaired during 2011 totaled $973,000 at December 31, 2011. The impairment charges related to these assets totaled $35,000 for the year ended December 31, 2011. In accordance with ASC 330, the fair values of investments in joint ventures that were impaired during 2012 totaled $1.3 million at June 30, 2012. The impairment charges related to these assets totaled $20,000 for the six months ended June 30, 2012. At December 31, 2011, the fair values of investments in joint ventures that were impaired during 2011 totaled $1.4 million. The impairment charges related to these assets totaled $2.0 million for the year ended December 31, 2011.

 

Note 12.  Postretirement Benefits

 

The Company has a supplemental nonqualified retirement plan, which generally vests over five-year periods beginning in 2003, pursuant to which it will pay supplemental pension benefits to key employees upon retirement. In connection with this plan, the Company has purchased cost-recovery life insurance on the lives of certain employees. Insurance contracts associated with the plan are held by trusts established as part of the plan to implement and carry out its provisions and finance its related benefits. The trusts are owners and beneficiaries of such contracts. The amount of coverage is designed to provide sufficient revenue to cover all costs of the plan if assumptions made as to employment term, mortality experience, policy earnings and other factors are realized.

 

17



 

 

Notes to Consolidated Financial Statements (Unaudited)

 

The Ryland Group, Inc. and Subsidiaries

 

At June 30, 2012, the cash surrender value of these contracts was $11.7 million, compared to $11.1 million at December 31, 2011, and was included in “Other” assets within the Consolidated Balance Sheets. The net periodic benefit cost of this plan for the three months ended June 30, 2012, totaled $860,000, which included service costs of $30,000, interest costs of $402,000 and an investment loss of $428,000. The net periodic benefit cost for the three months ended June 30, 2011, totaled $223,000, which included service costs of $28,000, interest costs of $183,000 and an investment loss of $12,000. The net periodic benefit cost of this plan for the six months ended June 30, 2012, totaled $154,000, which included service costs of $60,000 and interest costs of $602,000, offset by an investment gain of $508,000. The net periodic benefit cost for the six months ended June 30, 2011, totaled $367,000, which included service costs of $290,000 and interest costs of $366,000, offset by an investment gain of $289,000. The $12.0 million and $11.3 million projected benefit obligations at June 30, 2012 and December 31, 2011, respectively, were equal to the net liabilities recognized in the Consolidated Balance Sheets at those dates. The weighted-average discount rates used for the plan were 6.6 percent and 7.0 percent for the six-month periods ended June 30, 2012 and 2011, respectively.

 

Note 13.  Income Taxes

 

Deferred tax assets are recognized for estimated tax effects that are attributable to deductible temporary differences and tax carryforwards related to tax credits and operating losses. They are realized when existing temporary differences are carried back to a profitable year(s) and/or carried forward to a future year(s) having taxable income. Deferred tax assets are reduced by a valuation allowance if an assessment of their components indicates that it is more likely than not that all or some portion of the deferred tax asset will not be realized. This assessment considers, among other things, cumulative losses; forecasts of future profitability; the duration of statutory carryforward periods; the Company’s experience with loss carryforwards not expiring unused; and tax planning alternatives. In light of the unavailability of net operating loss carrybacks and the uncertainty as to the housing downturn’s duration, which limits the Company’s ability to predict future taxable income, the Company determined that an allowance against its deferred tax assets was required. Therefore, in accordance with ASC No. 740 (“ASC 740”), “Income Taxes,” the Company maintains a full valuation allowance against its net deferred tax assets. The balance of the deferred tax valuation allowance totaled $268.1 million and $270.5 million at June 30, 2012 and December 31, 2011, respectively. To the extent that the Company generates sufficient taxable income in the future to utilize the tax benefits of related deferred tax assets, it will experience a reduction in its effective tax rate in the periods in which the valuation allowance is reversed. For federal purposes, net operating losses can be carried forward 20 years; for state purposes, they can generally be carried forward 10 to 20 years, depending on the taxing jurisdiction. The federal net operating loss carryforwards, if not utilized, will begin to expire in 2030. Tax credit carryforwards can be carried forward five years, with expiration dates beginning in 2013.

 

During the second quarter of 2012, the Company’s deferred tax valuation allowance balance decreased by $4.4 million. This decrease was primarily due to a reversal resulting from net income generated during the period, as well as to the expiration of certain deferred tax assets.

 

For the three months ended June 30, 2012 and 2011, the Company’s overall effective income tax expense rates were 2.9 percent and 0.0 percent, respectively, primarily due to noncash adjustments for the Company’s deferred tax valuation allowance, which offsets any tax expense or benefits generated during the quarters. For the six months ended June 30, 2012, the Company’s overall effective income tax expense rate was 14.0 percent, compared to an overall effective income tax benefit rate of 7.3 percent for the same period in 2011, primarily due to noncash adjustments to the Company’s deferred tax valuation allowance. During the second quarter of 2012, the Company recorded a minimal amount of state income tax that totaled $190,000.

 

18



 

 

Notes to Consolidated Financial Statements (Unaudited)

 

The Ryland Group, Inc. and Subsidiaries

 

Note 14.  Stock-Based Compensation

 

The Ryland Group, Inc. 2011 Equity and Incentive Plan (the “Plan”) permits the granting of stock options, restricted stock awards, stock units, cash incentive awards or any combination of the foregoing to employees. At June 30, 2012 and December 31, 2011, stock options or other awards or units available for grant under the Plan or its predecessor plans totaled 2,992,748 and 3,346,508, respectively.

 

The Ryland Group, Inc. 2011 Non-Employee Director Stock Plan (the “Director Plan”) provides for a stock award of 3,000 shares to each non-employee director on May 1 of each year. New non-employee directors will receive a pro rata stock award 30 days after their date of appointment or election based on the remaining portion of the plan year in which they are appointed or elected. Stock awards are fully vested and nonforfeitable on their applicable award dates. There were 158,000 and 176,000 stock awards available for future grant in accordance with the Director Plan at June 30, 2012 and December 31, 2011, respectively. Previously, The Ryland Group, Inc. 2004 Non-Employee Director Equity Plan and its predecessor plans provided for automatic grants of nonstatutory stock options to directors. These stock options are fully vested and have a maximum term of ten years.

 

All outstanding stock options, stock awards and restricted stock awards have been granted in accordance with the terms of the applicable Plan, Director Plan and their respective predecessor plans, all of which were approved by the Company’s stockholders. Certain option and share awards provide for accelerated vesting if there is a change in control (as defined in the plans).

 

The Company recorded stock-based compensation expense of $3.8 million and $2.8 million for the three months ended June 30, 2012 and 2011, respectively. Stock-based compensation expense totaled $7.2 million and $5.0 million for the six months ended June 30, 2012 and 2011, respectively. Stock-based compensation expenses have been allocated to the Company’s business units and included in “Corporate,” “Financial services” and “Selling, general and administrative” expenses within the Consolidated Statements of Earnings.

 

19



 

 

Notes to Consolidated Financial Statements (Unaudited)

 

The Ryland Group, Inc. and Subsidiaries

 

A summary of stock option activity in accordance with the Company’s equity incentive plans as of June 30, 2012 and 2011, and changes for the six-month periods then ended, follows:

 

 

 

 

 

 

 

WEIGHTED-

 

 

 

 

 

 

WEIGHTED-

 

AVERAGE

 

AGGREGATE

 

 

 

 

AVERAGE

 

REMAINING

 

INTRINSIC

 

 

 

 

EXERCISE

 

CONTRACTUAL

 

VALUE

 

 

SHARES

 

PRICE

 

LIFE (in years)

 

(in thousands)

Options outstanding at January 1, 2011

 

3,722,656 

 

  $

33.29

 

2.8

 

 

Granted

 

781,000 

 

16.52

 

 

 

 

Exercised

 

(44,398)

 

11.97

 

 

 

 

Forfeited

 

(322,424)

 

55.57

 

 

 

 

Options outstanding at June 30, 2011

 

4,136,834 

 

  $

28.61

 

2.9

 

  $

885

Available for future grant

 

3,233,548 

 

 

 

 

 

 

Total shares reserved at June 30, 2011

 

7,370,382 

 

 

 

 

 

 

Options exercisable at June 30, 2011

 

2,685,545 

 

  $

33.83

 

2.2

 

  $

577

Options outstanding at January 1, 2012

 

3,948,874 

 

  $

28.91

 

2.4

 

 

Granted

 

736,000 

 

18.22

 

 

 

 

Exercised

 

(53,736)

 

15.33

 

 

 

 

Forfeited

 

(600,958)

 

35.19

 

 

 

 

Options outstanding at June 30, 2012

 

4,030,180 

 

  $

26.20

 

3.0

 

  $

19,230

Available for future grant

 

2,992,748 

 

 

 

 

 

 

Total shares reserved at June 30, 2012

 

7,022,928 

 

 

 

 

 

 

Options exercisable at June 30, 2012

 

2,590,876 

 

  $

30.54

 

1.9

 

  $

8,883

 

Stock-based compensation expense related to employee stock options totaled $1.2 million and $1.1 million for the three-month periods ended June 30, 2012 and 2011, respectively. Stock-based compensation expense related to employee stock options totaled $2.3 million and $2.1 million for the six-month periods ended June 30, 2012 and 2011, respectively.

 

During the three-month periods ended June 30, 2012 and 2011, the total intrinsic values of stock options exercised were $8,000 and $29,000, respectively. During the six-month periods ended June 30, 2012 and 2011, the total intrinsic values of stock options exercised were $340,000 and $284,000, respectively. The intrinsic value of a stock option is the amount by which the market value of the underlying stock exceeds the exercise price of the option.

 

Compensation expense associated with restricted stock unit awards to senior executives totaled $2.5 million and $1.6 million for the three-month periods ended June 30, 2012 and 2011, respectively. For the six-month periods ended June 30, 2012 and 2011, compensation expense associated with restricted stock unit awards to senior executives totaled $4.8 million and $2.7 million, respectively.

 

The following table summarizes activity that relates to the Company’s restricted stock unit awards:

 

 

 

2012

 

2011

 

Restricted stock units at January 1

 

657,825

 

727,317

 

Shares awarded

 

400,568

 

305,000

 

Shares vested

 

(350,349

)

(304,492

)

Shares forfeited

 

(6,667

)

(60,000

)

Restricted stock units at June 30

 

701,377

 

667,825

 

 

20



 

 

Notes to Consolidated Financial Statements (Unaudited)

 

The Ryland Group, Inc. and Subsidiaries

 

At June 30, 2012, the outstanding restricted stock units are expected to vest as follows: 2013–344,189; 2014–235,188; and 2015–122,000.

 

The Company has granted stock awards to its non-employee directors pursuant to the terms of the Director Plan. The Company recorded stock-based compensation expense related to Director Plan stock awards in the amounts of $108,000 and $102,000 for the three-month periods ended June 30, 2012 and 2011, respectively. For the six-month periods ended June 30, 2012 and 2011, stock-based compensation expense related to Director Plan stock awards totaled $189,000 and $210,000, respectively.

 

Note 15.  Commitments and Contingencies

 

Commitments

In the ordinary course of business, the Company acquires rights under option agreements to purchase land or lots for use in future homebuilding operations. At June 30, 2012 and December 31, 2011, it had cash deposits and letters of credit outstanding that totaled $54.4 million and $51.9 million, respectively, pertaining to land and lot option purchase contracts with aggregate purchase prices of $532.3 million and $407.6 million, respectively. At June 30, 2012 and December 31, 2011, the Company had $765,000 and $1.0 million, respectively, in commitments with respect to option contracts having specific performance provisions.

 

IRLCs represent loan commitments with customers at market rates generally up to 180 days before settlement. The Company had outstanding IRLCs with notional amounts that totaled $156.8 million and $114.6 million at June 30, 2012 and December 31, 2011, respectively. Hedging instruments, including forward-delivery contracts, are utilized to hedge the risks associated with interest rate fluctuations on IRLCs.

 

Contingencies

As an on-site housing producer, the Company is often required by some municipalities to obtain development or performance bonds and letters of credit in support of its contractual obligations. At June 30, 2012, development bonds totaled $98.0 million, while performance-related cash deposits and letters of credit totaled $49.1 million. At December 31, 2011, development bonds totaled $93.9 million, while performance-related cash deposits and letters of credit totaled $37.2 million. In the event that any such bonds or letters of credit are called, the Company would be required to reimburse the issuer; however, it does not believe that any currently outstanding bonds or letters of credit will be called.

 

Substantially all of the loans the Company originates are sold within a short period of time in the secondary mortgage market on a servicing-released basis. After the loans are sold, ownership, credit risk and management, including servicing of the loans, passes to the third-party purchaser. RMC retains no role or interest other than standard industry representations and warranties. The Company retains potential liability for possible claims by loan purchasers that it breached certain limited standard industry representations and warranties in its sale agreements. There has been an increased industrywide effort by loan purchasers to defray losses from mortgages purchased in an unfavorable economic environment by claiming to have found inaccuracies related to sellers’ representations and warranties in particular sale agreements. There is industry debate regarding the extent to which such claims are justified. The significant majority of these claims relate to loans originated in 2005, 2006 and 2007, when underwriting standards were less stringent.

 

21



 

 

Notes to Consolidated Financial Statements (Unaudited)

 

The Ryland Group, Inc. and Subsidiaries

 

The following table summarizes the composition of the Company’s mortgage loan types originated, its homebuyers’ average credit scores and its loan-to-value ratios:

 

 

 

SIX MONTHS

 

 

 

 

 

 

 

 

 

 

 

 

 

ENDED JUNE 30,

 

 

 

TWELVE MONTHS ENDED DECEMBER 31,

 

 

 

2012

 

2011

 

2010

 

2009

 

2008

 

2007

 

Prime

 

45.2

%

42.2

%

34.9

%

32.9

%

51.8

%

72.0

%

Government (FHA/VA)

 

54.8

 

57.8

 

65.1

 

67.1

 

48.2

 

20.1

 

Alt A

 

-

 

-

 

-

 

-

 

-

 

7.5

 

Subprime

 

-

 

-

 

-

 

-

 

-

 

0.4

 

Total

 

100.0

%

100.0

%

100.0

%

100.0

%

100.0

%

100.0

%

Average FICO credit score

 

729

 

726

 

723

 

717

 

711

 

713

 

Average combined loan-to-value ratio

 

90.5

%

90.3

%

90.8

%

91.4

%

90.1

%

89.1

%

 

While the Company’s access to delinquency information is limited subsequent to loan sale, based on a review of information provided voluntarily by certain investors and on government loan reports made available by the U.S. Department of Housing and Urban Development, the Company believes that the average delinquency rates of RMC’s loans are generally in line with industry averages. Delinquency rates for loans originated in 2008 and subsequent years are significantly lower than those originated in 2005 through 2007. The Company primarily attributes this decrease in delinquency rates to the industrywide tightening of credit standards and the elimination of most nontraditional loan products.

 

The Company’s mortgage operations have established reserves for possible losses associated with mortgage loans previously originated and sold to investors based upon, among other things, actual past repurchases and losses through the disposition of affected loans; an analysis of repurchase requests received and the validity of those requests; and an estimate of potential liability for valid claims not yet received. Although the amount of an ultimate loss cannot be definitively estimated, the Company has accrued $9.9 million for these types of claims as of June 30, 2012, but it may have additional exposure. (See “Part I, Item 3, Legal Proceedings.”)

 

The following table represents the changes in the Company’s mortgage loan loss and related legal reserves during the six-month periods presented:

 

(in thousands)

 

2012

 

2011

 

Balance at January 1

 

  $

10,141

 

  $

8,934

 

Provision for losses

 

71

 

(18

)

Settlements made

 

(345

)

(140

)

Balance at June 30

 

  $

9,867

 

  $

8,776

 

 

Subsequent changes in conditions or available information may change assumptions and estimates. Mortgage loan loss reserves and related legal reserves were included in “Accrued and other liabilities” within the Consolidated Balance Sheets, and their associated expenses were included in “Financial services” expense within the Consolidated Statements of Earnings.

 

The Company provides product warranties covering workmanship and materials for one year, certain mechanical systems for two years and structural systems for ten years. It estimates and records warranty liabilities based upon historical experience and known risks at the time a home closes as a component of cost of sales, as well as upon identification and quantification of the obligations in cases of unexpected claims. Actual future warranty costs could differ from current estimates.

 

22



 

 

Notes to Consolidated Financial Statements (Unaudited)

 

The Ryland Group, Inc. and Subsidiaries

 

The following table summarizes the changes in the Company’s product liability reserves during the six-month periods presented:

 

(in thousands)

 

2012

 

2011

 

Balance at January 1

 

  $

20,648

 

  $

20,112

 

Warranties issued

 

1,283

 

1,275

 

Changes in liability for accruals related to pre-existing warranties

 

1,351

 

706

 

Settlements made

 

(4,184

)

(2,784

)

Balance at June 30

 

  $

19,098

 

  $

19,309

 

 

The Company requires substantially all of its subcontractors to have workers’ compensation insurance and general liability insurance, including construction defect coverage. RHIC provided insurance services to the homebuilding segments’ subcontractors in certain markets until June 1, 2008. RHIC insurance reserves may have the effect of lowering the Company’s product liability reserves, as collectibility of claims against subcontractors enrolled in the RHIC program is generally higher. At June 30, 2012 and December 31, 2011, RHIC had $17.2 million and $18.2 million, respectively, in subcontractor product liability reserves, which were included in “Accrued and other liabilities” within the Consolidated Balance Sheets. Reserves for loss and loss adjustment expense are based upon industry trends and the Company’s annual actuarial projections of historical loss development.

 

The following table displays the changes in RHIC’s insurance reserves during the six-month periods presented:

 

(in thousands)

 

2012

 

2011

 

Balance at January 1

 

  $

18,209

 

  $

21,141

 

Insurance expense provisions or adjustments

 

-

 

-

 

Loss expenses paid

 

(1,043

)

(967

)

Balance at June 30

 

  $

17,166

 

  $

20,174

 

 

Expense provisions or adjustments to RHIC’s insurance reserves were included in “Financial services” expense within the Consolidated Statements of Earnings.

 

The Company is party to various legal proceedings generally incidental to its business. Litigation reserves have been established based on discussions with counsel and the Company’s analysis of historical claims. The Company has, and requires its subcontractors to have, general liability insurance to protect it against a portion of its risk of loss and to cover it against construction-related claims. The Company establishes reserves to cover its self-insured retentions and deductible amounts under those policies. Due to the high degree of judgment required in determining these estimated reserve amounts and to the inherent variability in predicting future settlements and judicial decisions, actual future litigation costs could differ from the Company’s current estimates. The Company believes that adequate provisions have been made for the resolution of all known claims and pending litigation for probable losses. At June 30, 2012 and December 31, 2011, the Company had legal reserves of $17.2 million and $16.5 million, respectively. (See “Part II, Item 1, Legal Proceedings.”)

 

Note 16.  New Accounting Pronouncements

 

ASU 2011-11

In December 2011, the FASB issued Accounting Standards Update (“ASU”) No. 2011-11 (“ASU 2011-11”), “Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities.” The amendments in ASU 2011-11 will enhance disclosures required by U.S. generally accepted accounting principles (“GAAP”) by requiring improved information about financial and derivative instruments that are either (a) offset in accordance with

 

23



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