UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended September 30, 1998
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or
[ ] Transition Report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from to
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Commission File Number: 1-8029
THE RYLAND GROUP, INC.
----------------------
(Exact name of registrant as specified in its charter)
Maryland 52-0849948
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11000 Broken Land Parkway, Columbia, Maryland 21044
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(Address of principal executive offices) (Zip Code)
(410) 715-7000
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(Registrant's telephone number, including area code)
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.
Yes X No
-
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
The number of shares of common stock of The Ryland Group, Inc., outstanding on
November 10,1998 was 14,700,219.
THE RYLAND GROUP, INC.
FORM 10-Q
INDEX
Page Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at
September 30, 1998 (unaudited) and
December 31, 1997 1-2
Consolidated Statements of Earnings
for the three and nine months ended
September 30, 1998 and 1997 (unaudited) 3
Consolidated Statements of Cash Flows
for the nine months ended September 30,
1998 and 1997 (unaudited) 4
Notes to Consolidated Financial
Statements (unaudited) 5-9
Item 2. Management's Discussion and Analysis
of Results of Operations and Financial
Condition 10-16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
INDEX OF EXHIBITS 19
The Ryland Group, Inc. and subsidiaries
CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except share data)
September 30, December 31,
1998 1997
------------- -------------
(unaudited)
ASSETS:
Hombuilding:
Cash and cash equivalents $ 39,567 $ 33,065
Housing inventories:
Homes under construction 396,513 332,452
Land under development and
improved lots 231,430 222,379
---------- ----------
Total inventories 627,943 554,831
Property, plant and equipment 26,638 26,463
Purchase price in excess of net
assets acquired 18,737 19,511
Other assets 39,800 37,359
---------- ----------
752,685 671,229
---------- ----------
Financial Services:
Cash and cash equivalents 8,629 3,066
Mortgage loans held for sale 125,724 199,857
Mortgage-backed securities and
notes receivable 126,021 153,022
Mortgage servicing rights 3,819 8,242
Other assets 16,483 46,715
--------- ----------
280,676 410,902
--------- ----------
Other Assets:
Collateral for bonds payable of
limited-purpose subsidiaries 97,314 142,303
Net deferred taxes 26,895 35,764
Other 21,931 23,211
---------- ----------
Total assets $ 1,179,501 $ 1,283,409
----------- ----------
----------- ----------
The Ryland Group, Inc. and subsidiaries
CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except share data)
September 30, December 31,
1998 1997
------------- -------------
(unaudited)
LIABILITIES
Hombuilding:
Accounts payable and other liabilities $ 145,451 $ 117,326
Long-term debt 321,692 310,221
---------- ---------
467,143 427,547
---------- ---------
Financial Services:
Accounts payable and other liabilities 28,850 17,382
Short-term notes payable 212,379 340,632
---------- ---------
241,229 358,014
---------- ---------
Other Liabilities:
Bonds payable of limited-purpose
subsidiaries 92,652 136,865
Other 50,716 55,860
---------- ---------
Total liabilities 851,740 978,286
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STOCKHOLDERS'EQUITY
Convertible preferred stock, $1 par value:
Authorized - 1,400,000 shares
Issued - 440,750 shares (502,833 for 1997) 441 503
Common stock, $1 par value:
Authorized - 78,600,000 shares
Issued - 14,685,726 shares
(14,521,859 for 1997) 14,686 14,522
Paid-in capital 91,346 88,502
Retained earnings 219,278 199,114
Accumulated other comprehensive income 2,010 2,482
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Total stockholders' equity 327,761 305,123
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Total liabilities and stockholders' equity $ 1,179,501 $ 1,283,409
---------- ---------
---------- ---------
Stockholders' equity per common shares $ 21.67 $ 20.31
---------- ---------
---------- ---------
See notes to consolidated financial statements.
The Ryland Group, Inc. and subsidiaries
CONSOLIDATED STATEMENTS OF EARNINGS (unaudited)
(amounts in thousands, except share data)
Three months Nine months
ended September 30, ended September 30,
1998 1997 1998 1997
------ ------ ------ ------
Revenues:
Hombuilding:
Residential revenue $ 440,724 $ 396,907 $ 1,144,612 $ 1,055,300
Other revenue 6,856 1,190 24,075 26,478
--------- --------- --------- ----------
Total homebuilding revenue 447,580 398,097 1,168,687 1,081,778
Financial services 12,259 19,974 47,423 56,835
Limited-purpose subsidiaries 2,407 3,533 8,292 12,131
--------- --------- --------- ---------
Total revenues 462,246 421,604 1,224,402 1,150,744
--------- --------- --------- ---------
Expenses:
Homebuilding:
Cost of sales 375,213 344,851 992,021 936,178
Selling, general and
administrative 42,697 36,913 116,366 108,343
Interest 4,537 5,809 14,526 18,208
--------- --------- --------- ---------
Total homebuilding
expenses 422,447 387,573 1,122,913 1,062,729
Financial services:
General and administrative 7,041 10,645 24,825 32,271
Interest 3,661 4,816 12,460 12,961
--------- --------- --------- ---------
Total financial services
expenses 10,702 15,461 37,285 45,232
Limited-purpose subsidiaries
expenses 2,407 3,533 8,292 12,131
Corporate expenses 4,395 3,802 11,089 10,073
--------- --------- --------- ---------
Total expenses 439,951 410,369 1,179,579 1,130,165
Earnings before taxes
and extraordinary item 22,295 11,235 44,823 20,579
Tax expense 9,772 4,494 18,783 8,232
--------- ------- ------- --------
Net earnings before
extraordinary item $ 12,523 $ 6,741 $ 26,040 $ 12,347
--------- ------- ------- --------
Extraordinary item - loss on early
extinguishment of debt
(net of taxes of $2,217) (3,326) - (3,326) -
--------- ------- ------- --------
Net earnings $ 9,197 $ 6,741 $ 22,714 $ 12,347
========= ======= ======= ========
Net earnings per common share:
Basic
Earnings per share
before extraordinary
item $ 0.84 $ 0.42 $ 1.72 $ 0.71
Extraordinary item (0.23) - (0.23) -
-------- ------ ------ ------
Earnings per share $ 0.61 $ 0.42 $ 1.49 $ 0.71
Diluted
Earnings per share
before extraordinary
item $ 0.81 $ 0.41 $ 1.67 $ 0.70
Extraordinary item (0.22) - (0.21) -
-------- ------ ------ ------
Earnings per share $ 0.59 $ 0.41 $ 1.46 $ 0.70
Average common shares
outstanding:
Basic 14,667,471 14,915,848 14,715,601 15,492,737
Diluted * 15,521,430 15,907,046 15,609,471 15,607,865
*For the nine months ended September 30,1997, conversion of preferred shares
is not assumed due to an antidilutive effect.
See notes to consolidated financial statements.
The Ryland Group, Inc. and subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands) Nine months ended September30,
- -----------------------------------------------------------------------------
1998 1997
- -----------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 22,714 $ 12,347
Adjustments to reconcile net earnings
to net cash provided by
operating activities:
Depreciation and amortization 17,770 19,622
Loss on early extinguishment of debt 5,543 -
Gain on sale of mortgage-backed
securities-available-for-sale - (75)
Increase in inventories (73,112) (7,348)
Net change in other assets, payables
and other liabilities 75,754 (9,338)
Equity in losses of/distributions
from unconsolidated joint ventures 98 130
Decrease in mortgage loans held
for sale 74,133 22,313
----------------------
Net cash provided by
operating activities 122,900 37,651
=======================
CASH FLOWS FROM INVESTING ACTIVITIES:
Net additions to property, plant
and equipment (16,492) (13,125)
Principal reduction of mortgage
collateral 29,462 31,451
Principal reduction of mortgage-backed
securities - available-for-sale 10,301 8,419
Sales of mortgage-backed securities-
available-for-sale 8,703 2,222
Principal reduction of mortgage-backed
securities - held-to-maturity 15,098 10,735
Other investing activities, net 9,457 2,600
---------------------
Net cash provided by investing activities 56,529 42,302
=====================
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash proceeds of long-term debt 114,262 7,647
Reduction of long-term debt (106,728) (11,982)
Increase (decrease) in short-term
notes payable (128,253) 1,641
Bond principal payments (45,153) (64,629)
Common and preferred stock dividends (2,556) (6,717)
Common stock repurchases (6,153) (22,120)
Other financing activities, net 7,217 8,090
---------------------
Net cash used for financing activities (167,364) (88,070)
=====================
Net increase in cash and cash equivalents 12,065 (8,117)
Cash and cash equivalents at beginning of year 36,131 28,708
=====================
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 48,196 $ 20,591
=====================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest
(net of capitalized interest) $ 37,254 $ 43,119
Cash paid for income taxes $ 9,346 $ 1,095
- --------------------------------------------------------------------------
See notes to consolidated financial statements.
The Ryland Group, Inc. and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(amounts in thousands, except for share data, in all notes)
Note 1. Consolidated Financial Statements
The consolidated financial statements include the accounts of The Ryland
Group, Inc. and its wholly-owned subsidiaries (the "Company"). Intercompany
transactions have been eliminated in consolidation.
The consolidated balance sheet as of Septmeber 30, 1998, the consolidated
statements of earnings for the three and nine months ended Septmeber 30, 1998
and 1997, and the consolidated statements of cash flows for the nine months
ended Septmeber 30, 1998 and 1997 have been prepared by the Company, without
audit. In the opinion of management, all adjustments, which include normal
recurring adjustments necessary to present fairly the financial position,
results of operations and cash flows at September 30, 1998, and for all
periods presented, have been made. The consolidated balance sheet at December
31, 1997 is taken from the audited financial statements as of that date.
Certain amounts in the consolidated statements have been reclassified to
conform to the 1998 presentation.
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 1997 annual report to shareholders.
The results of operations for the three and nine months ended September 30,
1998 are not necessarily indicative of the operating results for the full
year.
Assets presented in the financial statements are net of any valuation
allowances.
The following table is a summary of capitalized interest:
1998 1997
------ ------
Capitalized interest as of January 1, $23,644 $27,589
Interest capitalized 12,972 13,303
Interest amortized to cost of sales (15,222) (15,509)
------- -------
Capitalized interest as of September 30, $21,394 $25,383
======= =======
The Ryland Group, Inc. and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(unaudited)
Note 2. New Accounting Pronouncements
FASB 128
In 1997, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards No. 128 (FASB 128), "Earnings per Share." FASB
128 replaced the calculation of primary and fully diluted earnings per share
with basic and diluted earnings per share. Earnings per share amounts for the
three and nine months ended September 30, 1997 have been restated to conform
to the FASB 128 requirements.
FASB 130
As of January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No.130 (FASB 130), "Reporting Comprehensive Income." FASB 130
defines comprehensive income and establishes new rules for the reporting and
display of comprehensive income and its components; however, the adoption of
this Statement had no impact on the Company's net income or stockholders'
equity. FASB 130 requires unrealized gains or losses on the Company's
available-for-sale securities, which are included in stockholders' equity, to
be reported as other comprehensive income. The net unrealized gains (losses)
on available-for-sale securities (net of taxes) amounted to $(244) and $163
for the three months ended September 30, 1998 and 1997, respectively, and
$(472) and $(74) for the nine months ended September 30, 1998 and 1997,
respectively. Other comprehensive income is added to net income to arrive at
total comprehensive income. Total comprehensive income was $8,953 for the
third quarter of 1998 and $6,904 for the third quarter of 1997. Total
comprehensive income was $22,242 for the first nine months of 1998 and $12,273
for the first nine months of 1997.
FASB 133
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 (FASB 133), "Accounting for Derivative
Instruments and Hedging Activities," which is required to be adopted in years
beginning after June 15, 1999. The Statement requires all derivatives to be
recorded on the balance sheet at fair value and establishes new accounting
procedures for hedges that will effect the timing of recognition and the
manner in which hedging gains and losses are recognized in the Company's
financial statements. The Company has not completed its evaluation of this
new Statement; however, management does not anticipate that the adoption of
the Statement will have a material impact on the Company's earnings or
financial position. The Company currently expects to adopt this Statement
beginning on January 1, 2000.
Note 3. Segment Information
Three months ended September 30,
1998 1997
------ ------
Earnings before taxes and extraordinary item:
Homebuilding $ 25,133 $ 10,524
Financial services 1,557 4,513
Corporate and other (4,395) (3,802)
--------- ---------
Total $ 22,295 $ 11,235
======== ========
The Ryland Group, Inc. and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(unaudited)
Nine months ended September 30,
1998 1997
------ ------
Earnings before taxes and extraordinary item:
Homebuilding $ 45,774 $ 19,049
Financial services 10,138 11,603
Corporate and other (11,089) (10,073)
-------- --------
Total $ 44,823 $ 20,579
======== ========
Note 4. Earnings Per Share Reconciliation
The following table sets forth the computation of basic and diluted earnings
per share before extraordinary item. The assumed conversion of preferred
stock was anti-dilutive for the nine months ended September 30, 1997.
Three months ended September 30,
1998 1997
------ ------
Numerator:
Net earnings before extraordinary item $ 12,523 $ 6,741
Preferred stock dividends (243) (437)
-------- --------
Numerator for basic earnings per share -
income available to common stockholders 12,280 6,304
Effect of dilutive securities:
Preferred stock dividends 243 190
Numerator for diluted earnings per share -
income available to common stockholders
after assumed conversions $ 12,523 $ 6,494
Denominator:
Denominator for basic earnings per share -
weighted-average shares 14,667,471 14,915,848
Effect of dilutive securities:
Stock options 310,813 99,556
Conversion of Preferred Shares 451,868 804,334
Other equity incentives 91,278 87,308
--------- ---------
Dilutive potential common shares 853,959 991,198
Denominator for diluted earnings per share -
adjusted weighted average shares and
assumed conversions 15,521,430 15,907,046
Basic earnings per share
before extraordinary item $ 0.84 $ 0.42
Dilutive earnings per share
before extraordinary item $ 0.81 $ 0.41
The Ryland Group, Inc. and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(unaudited)
Note 4. Earnings Per Share Reconciliation (continued)
Nine months ended September 30,
1998 1997
------ ------
Numerator:
Net earnings before extraordinary item $ 26,040 $ 12,347
Preferred stock dividends (770) (1,352)
-------- --------
Numerator for basic earnings per share -
income available to common stockholders $ 25,270 $ 10,995
Effect of dilutive securities:
Preferred stock dividends 770 0
Numerator for diluted earnings per share -
income available to common stockholders
after assumed conversions $ 26,040 $ 10,995
Denominator:
Denominator for basic earnings per share -
weighted-average shares 14,715,601 15,492,737
Effect of dilutive securities:
Stock options 320,880 16,452
Conversion of Preferred Shares 474,916 0
Other equity incentives 98,074 98,676
---------- ----------
Dilutive potential common shares 893,870 115,128
Denominator for diluted earnings per share -
adjusted weighted average shares and
assumed conversions 15,609,471 15,607,865
Basic earnings per share
before extraordinary item $ 1.72 $ 0.71
Dilutive earnings per share
before extraordinary item $ 1.67 $ 0.70
Note 5. Long-term Debt
On April 13, 1998, the Company completed the issuance of $100 million of 8.25
percent senior subordinated notes which mature on April 1, 2008. On July 15,
1998, the Company retired the $100 million, 10.5 percent, senior subordinated
notes due 2002, at the stated call price of 103.9375 percent of par. As a
result, the Company has reported an extraordinary after-tax charge of $3.3
million in the third quarter of 1998 relating to the loss on the early
extinguishment of debt.
Note 6. Commitments and Contingencies
Refer to Part II, Other Information, Item 1, Legal Proceedings of this
document for updated information regarding the Company's Commitments and
Contingencies.
The Ryland Group, Inc. and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(unaudited)
Note 7. Income Taxes
In the third quarter of 1998, the Company changed its estimated income tax
rate for the year ending December 31, 1998 to 42 percent and adjusted its
income tax provision for the third quarter to achieve a 42 percent effective
income tax rate for the nine months ended September 30, 1998. The change in
the tax rate was due to an increase in estimated non-deductible expenses
primarily due to the fine paid in connection with the RTC matter discussed in
Part II, Other Information, Item 1, Legal Proceedings.
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
RESULTS OF OPERATIONS
CONSOLIDATED
For the third quarter of 1998, the Company reported consolidated net earnings
before extraordinary item of $12.5 million, or $.84 per share ($.81 per share
diluted). This compares with 1997 third quarter net earnings of $6.7 million,
or $.42 per share ($.41 per share diluted).
The Company's homebuilding segment reported pretax earnings of $25.1 million
for the third quarter of 1998, compared with pretax earnings of $10.5 million
for the same period last year. The 139 percent increase was driven by higher
gross profit margins, combined with increased closings and lower interest
costs.
The Company's financial services segment reported pretax earnings of $1.6
million for the third quarter of 1998, compared with $4.5 million for the same
period in 1997. The decline was due to lower earnings from retail operations,
primarily the result of lower loan-servicing income attributable to the sale
of a majority of the Company's loan-servicing portfolio in the first quarter
of 1998, and lower gains on the sales of mortgages and servicing rights.
Corporate expenses were $4.4 million for the third quarter of 1998, up $.6
million from the same period last year primarily due to higher incentive
compensation expense in conjunction with the higher level of earnings.
For the first nine months of 1998, the Company reported consolidated net
earnings before extraordinary item of $26.0 million, or $1.72 per share ($1.67
per share diluted), compared with 1997 first nine months net earnings of $12.3
million, or $.71 per share ($.70 per share diluted). For the first nine
months of 1998, the homebuilding segment reported pretax earnings of $45.8
million, compared with pretax earnings of $19.0 million for the same period in
1997. A significant increase in housing gross profit margins was the principal
reason for the earnings improvement. The financial services segment reported
pretax earnings of $10.1 million for the first nine months of 1998, compared
with $11.6 million for the same period in 1997. The results for 1998 included
a $6.1 million pretax gain from the first quarter sale of a majority of the
Company's loan-servicing portfolio. Corporate expenses were $11.1 million for
the first nine months of 1998, up $1 million from the same period last year
primarily due to higher incentive compensation expense.
The Company's limited-purpose subsidiaries no longer issue mortgage-backed
securities and mortgage-participation securities, but they continue to hold
collateral for previously issued mortgage-backed bonds in which the Company
maintains a residual interest. Revenues, expenses, and portfolio balances
continue to decline as the mortgage collateral pledged to secure the bonds
decreases due to scheduled payments, prepayments and exercises of early
redemption provisions.
EXTRAORDINARY ITEM
In the third quarter of 1998, the Company recognized an extraordinary loss of
$3.3 million (net of taxes of $2.2 million), or $.23 per share. The loss was
recorded in connection with the redemption on July 15, 1998 of $100 million of
10.5 percent senior subordinated notes due 2002. The redemption of the notes
was at the stated call price of 103.9 percent of par and was funded by the
April 1998 issuance of lower cost debt. Third-quarter net earnings after the
extraordinary item were $9.2 million, or $.61 per share, versus $6.7 million,
or $.42 per share, for the third quarter of 1997. For the first nine months
of 1998, net earnings after the extraordinary item were $22.7 million, or
$1.49 per share, versus $12.3 million, or $.71 per share, for the first nine
months of 1997.
HOMEBUILDING SEGMENT
Results of operations of the Company's homebuilding segment are summarized as
follows ($ amounts in thousands, except average closing price):
Three months ended Nine months ended
September 30, September 30,
1998 1997 1998 1997
------ ------ ------ ------
Revenues:
Residential $440,724 $396,907 $1,144,612 $1,055,300
Other 6,856 1,190 24,075 26,478
-------- -------- --------- ---------
Total 447,580 398,097 1,168,687 1,081,778
Gross profit 72,367 53,246 176,666 145,600
Selling, general and
administrative expenses 42,697 36,913 116,366 108,343
Interest expense 4,537 5,809 14,526 18,208
-------- -------- -------- --------
Pretax earnings $ 25,133 $ 10,524 $ 45,774 $ 19,049
= ====== ======== ======= =======
Operational Unit Data:
New orders (units) 2,183 2,151 7,284 6,935
Closings (units) 2,361 2,173 6,265 5,820
Outstanding contracts at
September 30:
Units 3,831 3,310
Dollar Value $738,252 $605,148
Average Closing Price $187,000 $183,000 $183,000 $181,000
The Company's homebuilding segment reported pretax earnings of $25.1 million
for the third quarter of 1998, compared with pretax earnings of $10.5 million
for the same period last year. For the nine months ended September 30, 1998,
homebuilding reported pretax earnings of $45.8 million compared with pretax
earnings of $19.0 million for the first nine months of 1997.
Homebuilding revenues amounted to $448 million for the third quarter of 1998,
and $1.17 billion for the first nine months of 1998, up 12 percent and 8
percent, respectively, from the same periods last year. The growth in
revenues primarily resulted from increased closings of 9 percent and 8
percent, respectively, from the same periods last year as well as an increase
in the average closing price for the respective periods. The average closing
price has increased primarily due to the mix of closings from more expensive
housing markets, such as the San Francisco Bay Area and San Diego. Price
increases in most markets were primarily to cover direct construction cost
increases. The impact of price increases on average closing prices was
somewhat offset by the Company's movement in certain markets to lower-priced
product offerings.
Gross profit margins from home sales averaged 16.3 percent for the third
quarter of 1998, a 290 basis point increase from the 13.4 percent for the
third quarter of 1997. This was the fourth consecutive quarter in which the
Company reported a significant increase over the prior year's gross profit
margins. Gross profit margins for the first nine months of 1998 averaged 15.3
percent versus 13.3 percent for the same period last year. A change in mix
representing increased closings from newer communities, which have better land
positions and more cost-effective product, continues to be the driving force
behind the Company's improved performance. Market conditions have been
favorable and have contributed to the margin improvement.
Total homebuilding new orders increased 1.5 percent from the third quarter of
last year to 2,183 homes, and increased 5.0 percent from last year's first
nine months to 7,284 homes. Sales per community were up 12.5 percent for the
third quarter reflecting fewer active communities. Total new orders for the
third quarter were up in all regions except the West, where strong sales
earlier in the year reduced the number of communities currently open for
sales. The West region will be opening additional communities in the fourth
quarter. For the first nine months of 1998, new orders increased in all
regions, with the exception of the Mid-Atlantic. The largest increase in new
orders for the first nine months was in the Southeast which had strong growth
in its newest markets.
Outstanding contracts at September 30, 1998 were 3,831 compared with 3,310 at
September 30, 1997 and 2,812 at December 31, 1997. Outstanding contracts
represent the Company's backlog of sold, but not closed homes, which generally
are built and closed, subject to cancellations, over the next two quarters.
The value of outstanding contracts at September 30, 1998 was $738 million, an
increase of 22 percent from September 30, 1997 and an increase of 45 percent
from December 31, 1997.
Selling, general and administrative expenses as a percent of revenues were 9.5
percent for the third quarter of 1998 compared with 9.3 percent for the same
period of 1997. The increase was primarily related to higher incentive
compensation expenses related to improved earnings. For the nine months ended
September 30, 1998, selling, general and administrative expenses remained
unchanged at 10.0 percent of revenues compared with the same period of 1997,
despite higher incentive compensation costs.
Interest expense for the third quarter and first nine months of 1998 decreased
$1.3 million and $3.7 million, respectively, compared with the same periods of
1997. The decreases resulted from lower average borrowings as well as lower
effective rates paid on borrowings. The lower borrowings reflect the
Company's ability to meet more of its homebuilding operating cash flow
requirements with internally generated funds resulting from improved financial
performance and improved cash management.
On October 30, 1998, the Company completed the acquisition of The Regency
Organization ("Regency"), a privately held homebuilder with operations in
Pasco, Hernando and Citrus Counties, Florida, immediately north of the
Company's existing Tampa Bay operations. Regency's operational focus has been
primarily on age-restricted and active-adult retirement communities. The
acquisition affords the Company the opportunity to gain market share in a
rapidly growing area of Florida and an immediate presence in the Florida
retirement market. The Company purchased the stock of Regency for $6.2
million, entered into a noncompete agreement and retired Regency's
indebtedness for a total cash investment of approximately $18 million.
Results of Regency's operations will be reflected beginning in the fourth
quarter of 1998. The Company anticipates that this acquisition could add
approximately 350-400 closings to its results for 1999 at sales prices ranging
from $90-$150 thousand.
FINANCIAL SERVICES
Results of operations of the Company's financial services segment are
summarized as follows:
Three months Nine months
ended September 30, ended September 30,
1998 1997 1998 1997
------ ------ ------ ------
Retail Revenues:
Interest and
net origination fees $ 1,554 $ 2,040 $ 5,776 $ 5,303
Net gains on sales of mortgages
and servicing rights 4,438 6,357 17,343 15,545
Loan servicing 702 5,897 7,249 18,888
Title/escrow 2,100 1,641 6,242 4,453
-------- -------- -------- -------
Total retail revenues 8,794 15,935 36,610 44,189
Revenues from investment
operations:
Sale of mortgage-backed
securities 46 0 46 75
Interest and other income 3,419 4,039 10,767 12,571
-------- -------- -------- -------
Total investment revenues 3,465 4,039 10,813 12,646
-------- -------- -------- -------
Total revenues 12,259 19,974 47,423 56,835
Expenses:
General and administrative 7,041 10,645 24,825 32,271
Interest 3,661 4,816 12,460 12,961
-------- -------- ------- ------
Total expenses 10,702 15,461 37,285 45,232
-------- -------- ------- ------
Pretax earnings $ 1,557 $ 4,513 $ 10,138 $11,603
======== ======== ======== =======
Pretax earnings by line of business were as follows (amounts in thousands):
Three months Nine months
ended September 30, ended September 30,
1998 1997 1998 1997
------ ------ ------ ------
Retail $ 534 $3,396 $ 7,092 $7,127
Investments 1,023 1,117 3,046 4,476
------ ------ ------ ------
Total $1,557 $4,513 $10,138 $11,603
====== ====== ====== ======
OPERATIONAL DATA: Three months Nine months
ended September 30, ended September 30,
1998 1997 1998 1997
------ ------ ------ ------
Retail Operations:
Originations 2,110 1,939 6,032 5,023
Percent of Total Originations
from Ryland Homes 75% 65% 67% 64%
Investment Operations:
Portfolio Average
Balance (in millions) $135 $163 $143 $154
The financial services segment reported pretax earnings of $1.6 million for
the third quarter of 1998, compared with $4.5 million for the third quarter of
1997, and $10.1 million for the first nine months of 1998, compared with $11.6
million for the first nine months of 1997.
Revenues and general and administrative expenses for the financial services
segment decreased significantly for the three and nine month periods ended
September 30, 1998, compared with the same periods of 1997. The decreases
were primarily due to the decline in loan servicing operations related to the
sale of a majority of the loan servicing portfolio in the first quarter of
1998. Interest expense decreased 24 percent for the three months ended
September 30, 1998, compared with 1997, primarily due to a decrease in the
warehouse holding period for mortgage loans before they are sold in the
secondary market.
Retail operations reported pretax earnings of $.5 million for the third
quarter of 1998 compared with $3.4 million for the same period last year. For
the first nine months of 1998, retail operations reported pretax earnings of
$7.1 million, comparable with the first nine months of 1997. The Company sold
the majority of its loan servicing portfolio in the first quarter of 1998 and
realized a $6.1 million pretax gain, net of expenses and liabilities related
to the sale of servicing. The decline in earnings for the third quarter was
primarily due to lower loan servicing income, attributable to the reduction in
the portfolio, partially offset by cost reductions. Future earnings from
retail operations will be negatively impacted by the sale.
Mortgage origination volume increased 9 percent and 20 percent for the three
and nine month periods ended September 30, 1998, respectively, compared with
the same periods last year. These increases were attributable to higher
closing volume from homebuilder loan originations and higher refinancing
activity.
Investment operations reported pretax earnings of $1.0 million for the third
quarter of 1998, compared with $1.1 million for the third quarter of 1997.
The slight decrease was primarily due to a lower average portfolio balance
which resulted in a decline in interest and other income. For the first nine
months of 1998, investment earnings were $3.0 million versus $4.5 million for
the same period of last year. The decline was primarily attributable to the
fact that 1997 revenues and pretax results included $.8 million of other
income related to the redemption of certain securities, as well as reduced
interest income due to a lower average portfolio balance.
YEAR 2000
The Company's Year 2000 remediation efforts have focused on its key business
computer applications (i.e., those systems that the Company is dependent upon
for the conduct of day-to-day business operations). Starting in 1997, the
Company initiated a comprehensive review of its business applications to
determine their Year 2000 readiness and the adequacy of these systems to meet
future business requirements. Out of this effort, a number of systems were
identified that were not Year 2000 compliant. In most cases these systems
were already in the process of being replaced or upgraded.
As of September 1998, the Company believes that its key homebuilding business
systems are Year 2000 capable. No material costs have been incurred to date
in achieving Year 2000 readiness for these systems. However, certain systems
in the Company's financial services operations and certain data and voice
communication systems are in the process of being replaced or upgraded with
implementation and testing scheduled for the remainder of calendar year 1998
and early 1999. The additional costs of achieving Year 2000 compliance could
aggregate between $1 to $2 million.
The Company is currently assessing other potential Year 2000 issues, including
non-information technology systems, and the Company's relationships with
vendors, financial institutions and other third parties which are being
reviewed to determine the status of their Year 2000 compliance and the
potential impact on the Company if they are noncompliant.
Although the Company will continue to monitor the situation, it is possible
that the Company or the third parties with whom it has significant
relationships will not successfully complete all of their Year 2000
remediation efforts. If this were to occur, the Company could encounter
disruptions to its business, but, currently believes it unlikely that such
disruptions will have a material adverse effect on its results of operations.
The Company could also be impacted by financial market disruption or by Year
2000 computer system failures at government agencies on which the Company is
dependent for zoning, building permits and related matters.
The Company has not established a formal Year 2000 contingency plan, but
expects to develop one as part of its Year 2000 activities.
FINANCIAL CONDITION AND LIQUIDITY
The Company generally provides for the cash requirements of the homebuilding
and financial services businesses from outside borrowings and internally
generated funds. The Company believes that its current sources of cash are
sufficient to finance its current requirements.
The homebuilding segment borrowings include senior notes, senior subordinated
notes, an unsecured revolving credit facility, and nonrecourse secured notes
payable. Senior and senior subordinated notes outstanding totaled $308.0
million as of September 30, 1998 and as of December 31, 1997. On April 13,
1998, the Company successfully completed the issuance of $100 million of 8.25
percent senior subordinated notes due April 1, 2008. The net proceeds from
this issuance were initially used to repay outstanding amounts under the
revolving credit facility and to repay short term notes payable. On July 15,
1998, the Company borrowed funds under its revolving credit facility to retire
its $100 million, 10.5 percent, senior subordinated notes due 2002 at the
stated call price of 103.9 percent of par.
The Company uses its unsecured revolving credit facility to finance increases
in its homebuilding inventory and changes in working capital. This facility,
which matures in July 2000, provides for total borrowings of up to $300
million. There were $13.5 million in outstanding borrowings under this
facility as of September 30, 1998 and no outstanding borrowings under this
facility at December 31, 1997. In addition, the Company had letters of credit
outstanding under this facility totaling $33.3 million at September 30, 1998
and $22.3 million at December 31, 1997. To finance land purchases, the
Company may also use seller-financed, non-recourse secured notes payable. At
September 30, 1998, such notes payable outstanding amounted to $.2 million,
compared with $2.2 million at December 31, 1997.
Housing inventories increased to $627.9 million as of September 30, 1998, from
$554.8 million as of the end of 1997. This represents the normal seasonal
increase in sold homes under construction.
The financial services segment uses cash generated from operations and
borrowing arrangements to finance its operations. A bank credit facility,
which matures on September 1, 2000, provides up to $260 million for mortgage
warehouse funding and $30 million for working capital advances. Other
borrowing arrangements as of September 30, 1998 included repurchase agreement
facilities aggregating $370 million, a $100 million revolving credit facility
used to finance investment portfolio securities and a $35 million credit
facility to be used for the short-term financing of optional bond redemptions.
At September 30, 1998 and December 31, 1997, the combined borrowings of the
financial services segment outstanding under all agreements were $212.4
million and $340.6 million, respectively.
Mortgage loans, notes receivable, and mortgage-backed securities held by the
limited-purpose subsidiaries are pledged as collateral for the issued bonds,
the terms of which provide for the retirement of all bonds from the proceeds
of the collateral. The source of cash for the bond payments is cash received
from the mortgage loans, notes receivable and mortgage-backed securities.
During the third quarter of 1998, the Board of Directors approved the
repurchase of up to one million of the Company's outstanding common shares,
from time to time, in the open market or in privately negotiated transactions,
subject to market conditions. During the second quarter of 1998, the Company
completed a 2.0 million share repurchase program initiated in April 1997.
The Ryland Group, Inc. has not guaranteed the debt of the financial services
segment or limited-purpose subsidiaries.
Note: Certain statements in Management's Discussion and Analysis of Results
of Operation and Financial Condition may be "forward-looking statements"
within the meaning of the Private Securities Litigation Act of 1995. Forward-
looking statements are based on various factors and assumptions that include
risks and uncertainties, such as the costs of Year 2000 compliance, the
completion and profitability of sales reported, the market for homes generally
and in areas where the Company operates, the availability and cost of land,
changes in economic conditions and interest rates, increases in raw material
and labor costs, consumer confidence, government regulation, and general
competitive factors, all or each of which may cause actual results to differ
materially.
PART II. OTHER INFORMATION
Item 1.
Pursuant to a Plea Agreement previously entered into by Ryland Mortgage
Company ("RMC") with the United States Attorney's Office for the Middle
District of Florida to resolve all charges in connection with an indictment
previously brought against RMC (The "Indictment"), RMC paid $3.5 million in
restitution plus interest, as well as a fine of $4.2 million and admitted
responsibility for two charges of impeding the functions of the RTC. The
agreement did not have a material adverse effect on the overall financial
position of the Company.
As a result of the Indictment, the U.S. Department of Housing and Urban
Development ("HUD") previously had indicated that it was considering sanctions
against RMC, including possible withdrawal of RMC's right to participate in
The Federal House Administration ("FHA") loan program and originate FHA loans.
RMC has entered into an agreement with HUD under which it expects to be able
to continue to originate loans and participate in the FHA loan program while
HUD considers what administrative action, if any, it will take as a result of
the resolution of the Indictment. RMC is continuing its dialogue with
representatives of HUD to reach agreement on its ability to continue to
participate in the FHA loan program. The Company also is exploring
alternative arrangements in the event that RMC is not successful in these
efforts. Termination of RMC's right to participate in the FHA program could
be followed by similar exclusions from the loan programs of other RMC
investors. No assurance can be given regarding the results of these ongoing
discussions with HUD and its possible impact on RMC and its business.
The Company is party to various other legal proceedings generally incidental
to its businesses. Based on evaluation of these other matters and discussions
with counsel, management believes that liabilities to the Company arising from
these other matters will not have a material adverse effect on the overall
financial position of the Company.
Page Number
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits
11 Earnings Per Share (filed herewith) 20
27 Financial Data Schedule (filed herewith) 21
B. Reports on Form 8-K.
No reports on Form 8-K were filed during the third quarter of 1998.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE RYLAND GROUP, INC.
Registrant
November 16, 1998 By: /s/ Michael D. Mangan
Date Michael D. Mangan,
Executive Vice President
and Chief Financial Officer
(Principal Financial Officer)
November 16, 1998 By: /s/ Stephen B. Cook
Date Stephen B. Cook, Vice President
and Corporate Controller
(Principal Accounting Officer)
INDEX OF EXHIBITS
A. Exhibits Page of
Sequentially
Exhibit No. Numbered Pages
11 Earnings Per Share
(filed herewith) 20
27 Financial Data Schedule
(filed herewith) 21
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE RYLAND
GROUP INC. FORM 10-Q FOR THE PERIOD ENDED 9/30/98 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 48,196
<SECURITIES> 126,021
<RECEIVABLES> 125,724
<ALLOWANCES> 0
<INVENTORY> 627,943
<CURRENT-ASSETS> 0
<PP&E> 26,638
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,179,501
<CURRENT-LIABILITIES> 0
<BONDS> 305,031
0
441
<COMMON> 14,686
<OTHER-SE> 312,634
<TOTAL-LIABILITY-AND-EQUITY> 1,179,501
<SALES> 1,168,687
<TOTAL-REVENUES> 1,224,402
<CGS> 992,021
<TOTAL-COSTS> 1,133,246
<OTHER-EXPENSES> 11,089
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 35,244
<INCOME-PRETAX> 44,823
<INCOME-TAX> 18,783
<INCOME-CONTINUING> 26,040
<DISCONTINUED> 0
<EXTRAORDINARY> (3,326)
<CHANGES> 0
<NET-INCOME> 22,714
<EPS-PRIMARY> 1.49
<EPS-DILUTED> 1.46
</TABLE>
Exhibit 11 Statement RE Computation of Per Share Earnings
Three months ended Nine months ended
September 30, September 30,
Basic 1998 1997 1998 1997
- ----- -------- -------- ------- ------
Net earnings from continuing
operation $ 12,523 $ 6,741 $ 26,040 $ 12,347
Adjustment for dividends on
convertible preferred
shares (243) (437) (770) (1,352)
--------- -------- --------- -------
Net earnings from continuing
operations applicable to
common stockholders 12,280 6,304 25,270 10,995
Extraordinary item (3,326) - (3,326) -
--------- -------- --------- -------
Net income $ 8,954 $ 6,304 $ 21,944 $ 10,995
Weighted average common
shares outstanding 14,667,471 14,915,848 14,715,601 15,492,737
Net earnings per share from
continuing operations $ 0.84 $ 0.42 $ 1.72 $ 0.71
Extraordinary item (0.23) - (0.23) -
---------- --------- ---------- --------
Net earnings per share $ 0.61 $ 0.42 $ 1.49 $ 0.71
========== ========= ========== ========
Diluted:
Net earnings from
continuing operations $ 12,523 $ 6,741 $ 26,040 $ 12,347
Adjustment for incremental
expense from conversion
of convertible preferred
shares - (247) - -
Adjustment for dividends
on convertible preferred
shares - - - (1,352)
---------- ---------- -------- --------
Net earnings from continuing
operations applicable to
common stockholders 12,523 6,494 26,040 10,995
Extraordinary item (3,326) - (3,326) -
---------- ---------- ----------- --------
Net income $ 9,197 $ 6,494 $ 22,714 $ 10,995
========== ========== =========== ========
Weighted average common
shares outstanding 14,667,471 14,915,848 14,715,601 15,492,737
Common stock equivalents:(1)
Stock options 310,813 99,556 320,880 16,452
Compensation unit plan 91,278 87,308 98,074 98,676
Convertible preferred
stock 451,868 804,334 474,916 -
---------- ---------- ---------- ----------
Total 15,521,430 15,907,046 15,609,471 15,607,865
========== ========== ========== ==========
Net earnings per share
from continuing
operations $ 0.81 $ 0.41 $ 1.67 $ 0.70
Extraordinary item (0.22) - (0.21) -
---------- ---------- ---------- ---------
Net earnings per share $ 0.59 $ 0.41 $ 1.46 $ 0.70
========== ========== ========== =========
(1) For the nine months ended September 30, 1997, conversion of preferred
shares is not assumed due to an antidilutive effect.
