Back to GetFilings.com

Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

For the quarterly period ended June 30, 2002

or

For the transition period from ___________ to ___________.

Commission File Number: 1-8029

THE RYLAND GROUP, INC.

24025 Park Sorrento, Suite 400
Calabasas, California 91302
818.223.7500
(Address and telephone number of principal executive offices)

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.

[X] Yes         [   ] 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 August 7, 2002, was 26,323,108.

Table of Contents

THE RYLAND GROUP, INC.
FORM 10-Q
INDEX

Table of Contents

PART I. FINANCIAL INFORMATION

THE RYLAND GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS (unaudited)
(amounts in thousands, except share data)

See Notes to Consolidated Financial Statements.

1

Table of Contents

THE RYLAND GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except share data)

See Notes to Consolidated Financial Statements.

2

Table of Contents

THE RYLAND GROUP, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(amounts in thousands)

See Notes to Consolidated Financial Statements.

3

Table of Contents

THE RYLAND GROUP, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(amounts in thousands, except share data)

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 June 30, 2002, the consolidated statements of earnings for the three and six months ended June 30, 2002 and 2001, and the consolidated statements of cash flows for the six months ended June 30, 2002 and 2001, 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 Company’s financial position, results of operations and cash flows at June 30, 2002, and for all periods presented, have been made. The consolidated balance sheet at December 31, 2001, is taken from the audited financial statements as of that date.

Certain amounts in the consolidated statements have been reclassified to conform to the 2002 presentation.

All references in the consolidated financial statements to common shares, share prices, per share amounts and stock plans have been retroactively restated for the two-for-one stock split declared on April 24, 2002, (see Note 9.)

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 2001 annual report to its shareholders.

The results of operations for the six months ended June 30, 2002, 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:

Note 2. New Accounting Pronouncements

In April 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 145 (SFAS 145), “Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections.” The provisions of SFAS 145 which relate to the rescission of Statement 4 shall be applied in fiscal years beginning after May 15, 2002. Under the new pronouncement, any gain or loss on extinguishment of debt that was classified as an extraordinary item in prior periods presented that does not meet the criteria in Accounting Principles Board Opinion 30 for classification as an extraordinary item shall be reclassified. Early application of the provisions of SFAS

4

Table of Contents

145 which relate to the rescission of Statement 4 is encouraged. Statement 64 amended Statement 4 and is no longer necessary because Statement 4 has been rescinded.

The Company plans to adopt the provisions of SFAS 145, with respect to the rescission of Statement 4, in the third quarter of 2002.

Note 3. Segment Information

Operations of the Company consist of two business segments: homebuilding and financial services. The Company’s homebuilding segment specializes in the sale and construction of single-family attached and detached housing in 21 markets. The financial services segment provides mortgage-related products and services for Ryland Homes’ customers and also manages a declining investment portfolio. Corporate expenses represent the costs of corporate functions that support the business segments.

5

Table of Contents

Note 4. Earnings Per Share Reconciliation

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

Note 5. 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.

Note 6. Goodwill

In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 142 (SFAS 142), “Goodwill and Other Intangible Assets.” SFAS 142 requires that goodwill and other intangible assets no longer be amortized but be reviewed for impairment at least annually. Intangible assets with finite lives will continue to be amortized over their estimated useful lives. Additionally, SFAS 142 requires that goodwill included in the carrying value of equity-method investments no longer be amortized.

The Company adopted the provisions of SFAS 142 on January 1, 2002, and will perform impairment tests of its goodwill annually. The first of these tests performed by the Company, as of March 31, 2002, indicated no impairment.

The Company’s application of the nonamortization provisions of SFAS 142 resulted in the elimination of its goodwill amortization expense in the first six months of 2002. Results reported for the three and six months ended June 30, 2001, included after-tax goodwill amortization expense of $0.3 million, or $0.01 per diluted share, and $0.5 million, or $0.02 per diluted share, respectively.

6

Table of Contents

Note 7. Comprehensive Income

Comprehensive income consists of net income and the increase or decrease in unrealized gains or losses on the Company’s available-for-sale securities. Comprehensive income totaled $44.7 million and $33.9 million for the three months ended June 30, 2002 and 2001, respectively. For the six months ended June 30, 2002 and 2001, comprehensive income was $70.6 million and $50.8 million, respectively.

Note 8. Financial Services Short-term Notes Payable

In March 2002, the Company amended a revolving credit facility used to finance mortgage-backed securities in the financial services segment. The facility, previously $45 million, was renewed at $35 million. The agreement, which was extended through March 2003, bears interest at market rates and is collateralized by collateralized mortgage obligations previously issued by one of the Company’s limited-purpose subsidiaries. Borrowings outstanding under this facility were $28 million and $33.1 million at June 30, 2002 and December 31, 2001, respectively.

Note 9. Stockholders’ Equity

On April 24, 2002, Ryland’s Board of Directors approved a two-for-one stock split of the Company’s common stock, which was effected in the form of a stock dividend. Record holders of the Company’s common stock as of the close of business on May 15, 2002, were entitled to one additional share for each share held at that time. The new shares were distributed on May 30, 2002.

All references in the consolidated financial statements to common shares, share prices, per share amounts and stock plans have been retroactively restated for the two-for-one stock split declared on April 24, 2002.

Cash dividends declared for the three and six months ended June 30, 2002, were $0.02 and $0.04, respectively. Cash dividends declared for the three and six months ended June 30, 2001, were $0.02 and $0.04, respectively.

Note 10. Equity Incentive Plan

On April 24, 2002, the Company’s stockholders approved an equity incentive plan, The Ryland Group 2002 Equity Incentive Plan (“the Plan”), which permits the granting of stock options, stock appreciation rights, restricted or unrestricted stock awards, stock units or any combination of the foregoing to employees. This Plan replaces the Company’s 1992 Equity Incentive Plan, which expired on April 15, 2002. The number of shares available for issuance under the Plan includes 15,432 shares carried over from the 1992 Equity Incentive Plan and 1,300,000 new shares available under the terms of the 2002 Equity Incentive Plan. Any shares of the Company’s common stock covered by an award (or portion of an award) granted under the Plan or the 1992 Equity Incentive Plan that are forfeited, expired or canceled without delivery of shares of common stock, or which are tendered to the Company as full or partial payment of the exercise price or related tax withholding obligations, will again be available for award under the Plan. The Plan will remain in effect until April 24, 2012, unless it is terminated by the Board of Directors at an earlier date.

7

Table of Contents

RESULTS OF OPERATIONS

Three months ended June 30, 2002, compared to three months ended June 30, 2001

For the second quarter of 2002, the Company reported consolidated net earnings of $44.7 million, or $1.65 per share ($1.56 per diluted share), compared to consolidated net earnings of $33.9 million, or $1.26 per share ($1.18 per diluted share), for the second quarter of 2001.

The homebuilding segment reported pretax earnings of $71.9 million for the second quarter of 2002, an $18.1 million, or 33.6 percent, increase over the $53.8 million reported for the second quarter of 2001. The increase over the prior year was primarily attributable to a higher closing volume and a 280 basis-point increase in gross profit margins.

The financial services segment reported pretax earnings from operations of $11.3 million for the three months ended June 30, 2002, compared to $8.6 million for the same period in 2001. The increase for the second quarter over the same period in the prior year was primarily attributable to a 2.4 percent increase in the number of originations and a 5.1 percent increase in loan sales volume. Additionally, the percentage of Ryland homebuyers who chose the Ryland Mortgage Company to finance their new-home purchases was 81.7 percent.

Corporate expenses represent the cost of corporate functions that support the business segments. Corporate expenses were $8.3 million for the second quarter of 2002, compared to $6.3 million for the second quarter of 2001. The rise in corporate expenses was primarily attributable to increased incentive compensation which was due to higher earnings.

Six months ended June 30, 2002, compared to six months ended June 30, 2001

Consolidated net earnings for the six months ended June 30, 2002, were $70.7 million, or $2.63 per share ($2.48 per diluted share), compared to $50 million, or $1.86 per share ($1.74 per diluted share), for the same period in the prior year.

For the six months ended June 30, 2002, the homebuilding segment reported pretax earnings of $115.2 million, compared to $83.4 million for the six months ended June 30, 2001.

The financial services segment reported pretax earnings of $19.7 million for the six months ended June 30, 2002, representing an increase of $7.7 million, or 64.2 percent, compared to $12 million for the same period last year.

Corporate expenses were $17.1 million for the first six months of 2002, versus $12.8 million for the first six months of 2001.

The income tax amounts represented effective income tax rates of approximately 40 percent in 2002 and 39.5 percent in 2001. The effective income tax rate increased in 2002 due to an increase in non-deductible expenses.

8

Table of Contents

HOMEBUILDING SEGMENT

Results of operations from the homebuilding segment are summarized as follows:
($ amounts in thousands, except average closing price)

Three months ended June 30, 2002, compared to three months ended June 30, 2001

Homebuilding revenues declined slightly to $658.3 million for the second quarter of 2002, compared to $674.6 million for the same period in the prior year. This was the result of a 2.4 percent decline in average sales price from $209,000 for the quarter ended June 30, 2001, to $204,000 for the same period in 2002, due to an increased percentage of home closings in the South region, where home prices are typically lower. This decrease was partially offset by a 1.5 percent increase in closings, with 3,185 homes closed in the second quarter of 2002 versus 3,137 homes closed in the same quarter of the prior year. Homebuilding revenues for the second quarter of 2002 included $9.8 million from land sales, which contributed a net gain of $1.5 million to pretax earnings.

Gross profit margins from home sales averaged 21.7 percent for the second quarter of 2002, an increase from 18.9 percent for the second quarter of 2001. The increase is primarily attributable to reduced land and land development costs, higher direct construction cost rebates and rising sales prices in certain areas.

New orders for the second quarter of 2002 were 3,843, compared to 3,779 for the second quarter of 2001. The Company operated in 30 more active communities as of June 30, 2002, than it did at June 30, 2001, with most of the additions coming late in the quarter.

9

Table of Contents

Outstanding contracts as of June 30, 2002, were 6,491, versus 6,399 at June 30, 2001, and 4,577 at December 31, 2001. Outstanding contracts represent the Company’s backlog of homes sold but not yet closed, which are generally built and closed, subject to cancellation, over the subsequent two quarters. The value of outstanding contracts at June 30, 2002, was $1.4 billion, an increase of 6.1 percent from June 30, 2001, and an increase of 51.7 percent from December 31, 2001.

Selling, general and administrative expenses, as a percentage of revenue, were 10.5 percent for the three months ended June 30, 2002, compared to 9.7 percent for the same period in the prior year. The increase in S,G&A for the second quarter was primarily due to increased incentive compensation for operations personnel, related to higher earnings, and increases in insurance and related costs. Compared to the second quarter of 2001, interest expense decreased $3.9 million to $1.3 million in the second quarter of 2002. This was due, in part, to lower interest rates on the Company’s long-term debt, reduced borrowings against the revolving credit facility, interest earned on increased cash investments and a rise in capitalized interest due to increased development activity for a higher number of new communities.

Pretax homebuilding margins increased 290 basis points to 10.9 percent for the three months ended June 30, 2002, compared to 8.0 percent for the same period in 2001.

Six months ended June 30, 2002, compared to six months ended June 30, 2001

For the six months ended June 30, 2002, homebuilding revenues increased $6.6 million to $1.2 billion, compared to the six months ended June 30, 2001. Homebuilding revenues for the six months ended June 30, 2002, included revenues of $14.3 million from land sales, contributing a net gain of $2.5 million to pretax earnings. Gross profit margins from home sales rose to 20.8 percent for the first six months of 2002, versus 18.3 percent for the same period in 2001. Selling, general and administrative expenses, as a percentage of revenue, were 10.8 percent for the six months ended June 30, 2002, compared to 10 percent for the same period in the prior year. Pretax homebuilding margins were 9.7 percent and 7.1 percent for the six months ended June 30, 2002 and 2001, respectively.

New orders were 7,600 for the six months ended June 30, 2002, compared to 7,749 for the six months ended June 30, 2001. Closings were 5,686 for the six months ended June 30, 2002, compared to 5,518 for the six months ended June 30, 2001.

10

Table of Contents

FINANCIAL SERVICES

Results of operations of the Company’s financial services segment are summarized as follows:
($ amounts in thousands, except as indicated)