10-Q 1 a11-13796_110q.htm 10-Q

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 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, 2011

 

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.)

 

 

24025 Park Sorrento, Suite 400

Calabasas, California 91302

                818-223-7500                

(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 4, 2011, was 44,408,594.

 



 

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, 2011 and 2010 (Unaudited)

 

3

 

 

 

 

 

Consolidated Balance Sheets at June 30, 2011 (Unaudited) and December 31, 2010

 

4

 

 

 

 

 

Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2011 and 2010 (Unaudited)

 

5

 

 

 

 

 

Consolidated Statement of Stockholders’ Equity for the Six Months Ended June 30, 2011 (Unaudited)

 

6

 

 

 

 

 

Notes to Consolidated Financial Statements (Unaudited)

 

7–26

 

 

 

 

Item 2.

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

 

27–43

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

43

 

 

 

 

Item 4.

Controls and Procedures

 

44

 

 

 

 

PART II.

Other Information

 

 

 

 

 

 

Item 1.

Legal Proceedings

 

44

 

 

 

 

Item 1A.

Risk Factors

 

45

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

45

 

 

 

 

Item 5.

Other Information

 

45

 

 

 

 

Item 6.

Exhibits

 

46

 

 

 

 

SIGNATURES

 

 

47

 

 

 

 

INDEX OF EXHIBITS

 

48

 

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)

 

2011

 

2010

 

 

2011

 

2010

 

REVENUES

 

 

 

 

 

 

 

 

 

 

Homebuilding

 

$

217,906

 

$

362,337

 

 

$

386,491

 

$

604,217

 

Financial services

 

7,317

 

10,936

 

 

13,661

 

19,824

 

TOTAL REVENUES

 

225,223

 

373,273

 

 

400,152

 

624,041

 

 

 

 

 

 

 

 

 

 

 

 

EXPENSES

 

 

 

 

 

 

 

 

 

 

Cost of sales

 

190,463

 

313,667

 

 

343,214

 

526,083

 

Loss (income) from unconsolidated joint ventures

 

1,702

 

(74

)

 

1,630

 

(176

)

Selling, general and administrative

 

28,692

 

37,741

 

 

57,775

 

69,927

 

Financial services

 

5,253

 

11,570

 

 

10,388

 

19,986

 

Corporate

 

4,925

 

7,997

 

 

9,912

 

14,250

 

Interest

 

5,346

 

6,779

 

 

11,633

 

13,593

 

TOTAL EXPENSES

 

236,381

 

377,680

 

 

434,552

 

643,663

 

 

 

 

 

 

 

 

 

 

 

 

OTHER INCOME (LOSS)

 

 

 

 

 

 

 

 

 

 

Gain from marketable securities, net

 

1,302

 

1,715

 

 

2,610

 

2,870

 

Loss related to early retirement of debt, net

 

(857

)

(19,071

)

 

(857

)

(19,308

)

TOTAL OTHER INCOME (LOSS)

 

445

 

(17,356

)

 

1,753

 

(16,438

)

Loss before taxes

 

(10,713

)

(21,763

)

 

(32,647

)

(36,060

)

Tax benefit

 

-

 

-

 

 

(2,398

)

-

 

NET LOSS

 

$

(10,713

)

$

(21,763

)

 

$

(30,249

)

$

(36,060

)

NET LOSS PER COMMON SHARE

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.24

)

$

(0.49

)

 

$

(0.68

)

$

(0.82

)

Diluted

 

(0.24

)

(0.49

)

 

(0.68

)

(0.82

)

AVERAGE COMMON SHARES OUTSTANDING

 

 

 

 

 

 

 

 

 

 

Basic

 

44,368,874

 

44,038,558

 

 

44,303,958

 

43,976,576

 

Diluted

 

44,368,874

 

44,038,558

 

 

44,303,958

 

43,976,576

 

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)

 

2011

 

2010

 

ASSETS

 

(Unaudited)

 

 

 

Cash, cash equivalents and marketable securities

 

 

 

 

 

Cash and cash equivalents

 

$

182,348

 

$

226,647

 

Restricted cash

 

72,097

 

74,788

 

Marketable securities, available-for-sale

 

359,006

 

437,795

 

Total cash, cash equivalents and marketable securities

 

613,451

 

739,230

 

Housing inventories

 

 

 

 

 

Homes under construction

 

346,445

 

275,487

 

Land under development and improved lots

 

416,070

 

401,466

 

Inventory held-for-sale

 

18,849

 

34,159

 

Consolidated inventory not owned

 

58,582

 

88,289

 

Total housing inventories

 

839,946

 

799,401

 

Property, plant and equipment

 

20,643

 

19,506

 

Other

 

98,711

 

94,566

 

TOTAL ASSETS

 

1,572,751

 

1,652,703

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

Accounts payable

 

71,146

 

63,384

 

Accrued and other liabilities

 

135,307

 

147,779

 

Debt

 

852,501

 

879,878

 

TOTAL LIABILITIES

 

1,058,954

 

1,091,041

 

 

 

 

 

 

 

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—44,408,594 shares at June 30, 2011

 

 

 

 

 

(44,187,956 shares at December 31, 2010)

 

44,409

 

44,188

 

Retained earnings

 

426,399

 

453,801

 

Accumulated other comprehensive income

 

1,484

 

1,867

 

TOTAL STOCKHOLDERS’ EQUITY

 

 

 

 

 

FOR THE RYLAND GROUP, INC.

 

472,292

 

499,856

 

NONCONTROLLING INTEREST

 

41,505

 

61,806

 

TOTAL EQUITY

 

513,797

 

561,662

 

TOTAL LIABILITIES AND EQUITY

 

$

1,572,751

 

$

1,652,703

 

 

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)

 

2011

 

2010

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

Net loss

 

$

(30,249

)

$

(36,060

)

Adjustments to reconcile net loss to net cash (used for)

 

 

 

 

 

provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

5,602

 

9,852

 

Inventory and other asset impairments and write-offs

 

15,679

 

13,578

 

Loss on early extinguishment of debt, net

 

857

 

19,308

 

Gain on marketable securities

 

(1,685

)

(1,412

)

Deferred tax valuation allowance

 

11,503

 

13,204

 

Stock-based compensation expense

 

5,165

 

6,549

 

Changes in assets and liabilities:

 

 

 

 

 

Increase in inventories

 

(74,594

)

(7,077

)

Net change in other assets, payables and other liabilities

 

(26,895

)

54,332

 

Excess tax benefits from stock-based compensation

 

-

 

(519

)

Other operating activities, net

 

742

 

(4,044

)

Net cash (used for) provided by operating activities

 

(93,875

)

67,711

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

Additions to property, plant and equipment

 

(5,990

)

(7,016

)

Purchases of marketable securities, available-for-sale

 

(700,135

)

(1,100,663

)

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

 

780,594

 

1,077,349

 

Other investing activities, net

 

30

 

17

 

Net cash provided by (used for) investing activities

 

74,499

 

(30,313

)

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

Cash proceeds of long-term debt

 

-

 

300,000

 

Retirement of long-term debt

 

(28,222

)

(300,554

)

Repayments of short-term borrowings, net

 

(221

)

(201

)

Common stock dividends

 

(2,701

)

(2,677

)

Issuance of common stock under stock-based compensation

 

3,530

 

3,771

 

Excess tax benefits from stock-based compensation

 

-

 

519

 

Decrease in restricted cash

 

2,691

 

9,152

 

Net cash (used for) provided by financing activities

 

(24,923

)

10,010

 

Net (decrease) increase in cash and cash equivalents

 

(44,299

)

47,408

 

Cash and cash equivalents at beginning of period

 

226,647

 

285,199

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

 

$

182,348

 

$

332,607

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

 

 

 

 

 

Cash (paid) refunds received for income taxes

 

$

(1,307

)

$

99,535

 

SUPPLEMENTAL DISCLOSURES OF NONCASH ACTIVITIES

 

 

 

 

 

Decrease (increase) in consolidated inventory not owned related to land options

 

$

20,301

 

$

(68,458

)

 

See Notes to Consolidated Financial Statements.

 

5



 

 

Consolidated Statement of Stockholders’ Equity (Unaudited)

 

The Ryland Group, Inc. and Subsidiaries

 

 

 

 

 

 

 

ACCUMULATED

 

 

 

 

 

 

 

 

 

OTHER

 

TOTAL

 

 

 

COMMON

 

RETAINED

 

COMPREHENSIVE

 

STOCKHOLDERS’

 

(in thousands, except per share data)

 

STOCK

 

EARNINGS

 

INCOME 1

 

EQUITY

 

STOCKHOLDERS’ EQUITY BALANCE AT JANUARY 1, 2011

 

$

44,188

 

$

453,801

 

$

1,867

 

$

499,856

 

Comprehensive loss:

 

 

 

 

 

 

 

 

 

Net loss

 

 

 

(30,249

)

 

 

(30,249

)

Other comprehensive loss, net of tax:

 

 

 

 

 

 

 

 

 

Change in net unrealized gain related to cash flow hedging

 

 

 

 

 

 

 

 

 

instruments and available-for-sale securities, net of

 

 

 

 

 

 

 

 

 

taxes of $237

 

 

 

 

 

(383

)

(383

)

Total comprehensive loss

 

 

 

 

 

 

 

(30,632

)

Common stock dividends (per share $0.06)

 

 

 

(2,705

)

 

 

(2,705

)

Stock-based compensation and related income tax benefit

 

221

 

5,552

 

 

 

5,773

 

STOCKHOLDERS’ EQUITY BALANCE AT JUNE 30, 2011

 

$

44,409

 

$

426,399

 

$

1,484

 

$

472,292

 

NONCONTROLLING INTEREST

 

 

 

 

 

 

 

41,505

 

TOTAL EQUITY BALANCE AT JUNE 30, 2011

 

 

 

 

 

 

 

$

513,797

 

 

1     At June 30, 2011, the balance in “Accumulated other comprehensive income” was comprised of a net unrealized gain of $1.4 million that related to cash flow hedging instruments (treasury locks) and a net unrealized gain of $56,000 that related to the Company’s marketable securities, available-for-sale, net of taxes of $885,000 and $35,000, respectively.

 

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 interest in land and lot option purchase contracts. (See Note 8, “Variable Interest Entities (‘VIE’).”) Intercompany transactions have been eliminated in consolidation. Certain prior year amounts have been reclassified to conform to the 2011 presentation. See Note A, “Summary of Significant Accounting Policies,” in the Company’s 2010 Annual Report on Form 10-K for a description of its accounting policies.

 

The Consolidated Balance Sheet at June 30, 2011, the Consolidated Statements of Earnings for the three- and six-month periods ended June 30, 2011 and 2010, and the Consolidated Statements of Cash Flows for the six-month periods ended June 30, 2011 and 2010, 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, 2011, 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 2010 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, 2011, are not necessarily indicative of the operating results expected for the year ending December 31, 2011.

 

Note 2.  Comprehensive Loss

 

Comprehensive loss consists of net earnings or losses 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 loss totaled $10.8 million and $22.1 million for the three-month periods ended June 30, 2011 and 2010, respectively. Comprehensive loss totaled $30.6 million and $36.5 million for the six-month periods ended June 30, 2011 and 2010, respectively.

 

Note 3.  Cash, Cash Equivalents and Restricted Cash

 

Cash and cash equivalents totaled $182.3 million and $226.6 million at June 30, 2011 and December 31, 2010, 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.

 

At June 30, 2011 and December 31, 2010, the Company had restricted cash of $72.1 million and $74.8 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 $71.5 million at June 30, 2011, and $74.7 million at December 31, 2010. In addition, Ryland Mortgage Company and its subsidiaries and RMC Mortgage Corporation (collectively referred to as “RMC”) had restricted cash for funds held in trust for third parties of $606,000 and $100,000 at June 30, 2011 and December 31, 2010, respectively.

 

Note 4.  Segment Information

 

The Company is a leading national homebuilder and mortgage-related financial services firm. As one of the largest single-family on-site homebuilders in the United States, it operates in 15 states and 19 homebuilding markets 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

 

7



 

 

Notes to Consolidated Financial Statements (Unaudited)

 

The Ryland Group, Inc. and Subsidiaries

 

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 JUNE 30,

 

 

SIX MONTHS ENDED JUNE 30,

 

(in thousands)

 

2011

 

2010

 

 

2011

 

2010

 

REVENUES

 

 

 

 

 

 

 

 

 

 

Homebuilding

 

 

 

 

 

 

 

 

 

 

North

 

$

75,092

 

$

116,648

 

 

$

130,535

 

$

193,390

 

Southeast

 

51,775

 

103,229

 

 

98,773

 

169,082

 

Texas

 

76,049

 

99,241

 

 

126,731

 

162,398

 

West

 

14,990

 

43,219

 

 

30,452

 

79,347

 

Financial services

 

7,317

 

10,936

 

 

13,661

 

19,824

 

Total

 

$

225,223

 

$

373,273

 

 

$

400,152

 

$

624,041

 

(LOSS) EARNINGS BEFORE TAXES

 

 

 

 

 

 

 

 

 

 

Homebuilding

 

 

 

 

 

 

 

 

 

 

North

 

$

(4,668

)

$

(1,504

)

 

$

(10,096

)

$

(4,172

)

Southeast

 

(4,749

)

1,316

 

 

(13,783

)

(4,580

)

Texas

 

2,976

 

4,248

 

 

(236

)

3,386

 

West

 

(1,856

)

164

 

 

(3,646

)

156

 

Financial services

 

2,064

 

(634

)

 

3,273

 

(162

)

Corporate and unallocated

 

(4,480

)

(25,353

)

 

(8,159

)

(30,688

)

Total

 

$

(10,713

)

$

(21,763

)

 

$

(32,647

)

$

(36,060

)

 

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 JUNE 30,

 

 

SIX MONTHS ENDED JUNE 30,

 

(in thousands, except share data)

 

2011

 

2010

 

 

2011

 

2010

 

NUMERATOR

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(10,713

)

$

(21,763

)

 

$

(30,249

)

$

(36,060

)

 

 

 

 

 

 

 

 

 

 

 

DENOMINATOR

 

 

 

 

 

 

 

 

 

 

Basic earnings per share—weighted-average shares

 

44,368,874

 

44,038,558

 

 

44,303,958

 

43,976,576

 

Effect of dilutive securities

 

-

 

-

 

 

-

 

-

 

Diluted earnings per share—adjusted

 

 

 

 

 

 

 

 

 

 

weighted-average shares and

 

 

 

 

 

 

 

 

 

 

assumed conversions

 

44,368,874

 

44,038,558

 

 

44,303,958

 

43,976,576

 

NET LOSS PER COMMON SHARE

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.24

)

$

(0.49

)

 

$

(0.68

)

$

(0.82

)

Diluted

 

(0.24

)

(0.49

)

 

(0.68

)

(0.82

)

 

For the three- and six-month periods ended June 30, 2011 and 2010, 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 fair value. 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,” net of tax, within the Consolidated Balance Sheets.

 

The Company periodically reviews its available-for-sale securities for other-than-temporary declines in fair values that are below their cost bases, and whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. At June 30, 2011 and December 31, 2010, the Company believed that the cost bases for its available-for-sale securities were recoverable in all material respects.

 

For the three- and six-month periods ended June 30, 2011, net realized earnings totaled $1.3 million and $2.6 million, respectively. For the three- and six-month periods ended June 30, 2010, net realized earnings totaled $1.7 million and $2.9 million, respectively. These earnings were recorded in “Gain from marketable securities, net” within the Consolidated Statements of Earnings.

 

9



 

 

Notes to Consolidated Financial Statements (Unaudited)

 

The Ryland Group, Inc. and Subsidiaries

 

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

 

 

 

 

 

 

 

 

 

JUNE 30, 2011

 

(in thousands)

 

AMORTIZED
COST

 

GROSS
UNREALIZED
GAINS

 

GROSS
UNREALIZED
LOSSES

 

ESTIMATED
FAIR VALUE

 

Type of security:

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

$

3,156

 

$

1

 

$

-

 

$

3,157

 

Obligations of U.S. and local government agencies

 

36,443

 

45

 

(175

)

36,313

 

Corporate debt securities issued under

 

 

 

 

 

 

 

 

 

U.S. government/agency-backed programs

 

6,557

 

3

 

-

 

6,560

 

Corporate debt securities

 

163,306

 

334

 

(69

)

163,571

 

Asset-backed securities

 

23,515

 

53

 

(91

)

23,477

 

Total debt securities

 

232,977

 

436

 

(335

)

233,078

 

Time deposits

 

45,908

 

-

 

-

 

45,908

 

Short-term pooled investments

 

80,030

 

-

 

(10

)

80,020

 

Total marketable securities, available-for-sale

 

$

358,915

 

$

436

 

$

(345

)

$

359,006

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

DECEMBER 31, 2010

 

Type of security:

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

$

15,782

 

$

81

 

$

-

 

$

15,863

 

Obligations of U.S. and local government agencies

 

33,247

 

12

 

(215

)

33,044

 

Corporate debt securities issued under

 

 

 

 

 

 

 

 

 

U.S. government/agency-backed programs

 

170,878

 

112

 

-

 

170,990

 

Corporate debt securities

 

104,976

 

218

 

(92

)

105,102

 

Asset-backed securities

 

7,643

 

1

 

(12

)

7,632

 

Total debt securities

 

332,526

 

424

 

(319

)

332,631

 

Time deposits

 

76,312

 

-

 

-

 

76,312

 

Short-term pooled investments

 

28,850

 

2

 

-

 

28,852

 

Total marketable securities, available-for-sale

 

$

437,688

 

$

426

 

$

(319

)

$

437,795

 

 

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.

 

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

 

(in thousands)

 

JUNE 30, 2011

 

DECEMBER 31, 2010

Contractual maturity:

 

 

 

 

Maturing in one year or less

 

$

91,028

 

$

22,244

Maturing after one year through three years

 

113,010

 

299,381

Maturing after three years

 

29,040

 

11,006

Total debt securities

 

233,078

 

332,631

Time deposits and short-term pooled investments

 

125,928

 

105,164

Total marketable securities, available-for-sale

 

$

359,006

 

$

437,795

 

10



 

 

Notes to Consolidated Financial Statements (Unaudited)

 

The Ryland Group, Inc. and Subsidiaries

 

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 other communities in 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 or whose operating 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 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, 2011 and December 31, 2010, valuation reserves related to impaired inventories amounted to $342.4

 

11



 

 

Notes to Consolidated Financial Statements (Unaudited)

 

The Ryland Group, Inc. and Subsidiaries

 

million and $361.4 million, respectively. The net carrying values of the related inventories amounted to $234.4 million and $236.3 million at June 30, 2011 and December 31, 2010, respectively.

 

Interest and taxes are capitalized during active development and construction stages. Capitalized interest is amortized as the related inventory is delivered to homebuyers. The following table is a summary of activity related to capitalized interest:

 

(in thousands)

 

2011

 

2010

 

 

 

 

 

 

 

Capitalized interest at January 1

 

$

79,911

 

$

89,828

 

 

 

 

 

 

 

 

 

Interest capitalized

 

19,253

 

15,705

 

 

 

 

 

 

 

Interest amortized to cost of sales

 

(14,073

)

(26,588

)

 

 

 

 

 

 

Capitalized interest at June 30

 

$

85,091

 

$

78,945

 

 

 

 

 

 

 

 

 

 

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

 

 

 

JUNE 30, 2011

 

DECEMBER 31, 2010

 

 

 

 

 

 

 

 

 

LOTS

 

LOTS

 

 

 

LOTS

 

LOTS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

OWNED

 

OPTIONED

 

TOTAL

 

OWNED

 

OPTIONED

 

TOTAL

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

North

 

5,004

 

3,303

 

8,307

 

4,997

 

3,782

 

8,779

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Southeast

 

6,111

 

1,238

 

7,349

 

6,175

 

771

 

6,946

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Texas

 

3,717

 

1,412

 

5,129

 

3,402

 

1,538

 

4,940

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

West

 

1,930

 

791

 

2,721

 

1,982

 

568

 

2,550

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

16,762

 

6,744

 

23,506

 

16,556

 

6,659

 

23,215

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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.

 

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 $58.6 million and $88.3 million of inventory not owned related to its land and lot option purchase contracts at June 30, 2011 and December 31, 2010, 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 eliminated $17.1 million and $26.5 million of its related cash deposits for lot option purchase contracts at June 30, 2011 and December 31, 2010, respectively, which were included in “Consolidated inventory not owned” within the Consolidated Balance

 

12



 

 

Notes to Consolidated Financial Statements (Unaudited)

 

The Ryland Group, Inc. and Subsidiaries

 

Sheets. Noncontrolling interest totaling $41.5 million and $61.8 million was recorded with respect to the consolidation of these contracts at June 30, 2011 and December 31, 2010, respectively, representing the selling entities’ ownership interests in these VIEs. Additionally, the Company had cash deposits and/or letters of credit totaling $18.4 million and $11.6 million at June 30, 2011 and December 31, 2010, respectively, that were associated with lot option purchase contracts having aggregate purchase prices of $208.5 million and $130.7 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. Currently, the Company participates in six active homebuilding joint ventures in the Austin, Chicago, Dallas, Denver and Washington, D.C., markets. It participates in a number of joint ventures in which it has less than a controlling interest. 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 these lots by its share of the earnings from the lots.

 

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, 2011

 

DECEMBER 31, 2010

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LOTS

 

LOTS

 

 

 

LOTS

 

LOTS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

OWNED

 

OPTIONED

 

TOTAL

 

OWNED

 

OPTIONED

 

TOTAL

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

North

 

143

 

-

 

143

 

150

 

-

 

150

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Southeast

 

-

 

-

 

-

 

-

 

-

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Texas

 

44

 

-

 

44

 

68

 

-

 

68

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

West

 

172

 

1,300

 

1,472

 

166

 

1,209

 

1,375

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

359

 

1,300

 

1,659

 

384

 

1,209

 

1,593

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At June 30, 2011 and December 31, 2010, the Company’s investments in its unconsolidated joint ventures totaled $10.5 million and $13.4 million, respectively, and were classified in “Other” assets within the Consolidated Balance Sheets. For the three months ended June 30, 2011, the Company’s equity in losses from its unconsolidated joint ventures totaled $1.7 million compared to equity in earnings of $74,000 for the same period in 2010. For the six months ended June 30, 2011, the Company’s equity in losses from its unconsolidated joint ventures totaled $1.6 million, compared to equity in earnings of $176,000 for the same period in 2010. During the second quarter of 2011, the Company recorded a $1.9 million impairment related to a commercial parcel in a joint venture in Chicago.

 

13



 

 

Notes to Consolidated Financial Statements (Unaudited)

 

The Ryland Group, Inc. and Subsidiaries

 

Note 10.  Debt

 

Debt consisted of the following:

 

(in thousands)

 

JUNE 30, 2011

 

DECEMBER 31, 2010

 

 

 

 

 

 

 

Senior notes

 

 

 

 

 

 

 

 

 

 

 

6.9 percent senior notes due June 2013

 

$

186,192

 

$

186,192

 

 

 

 

 

 

 

5.4 percent senior notes due January 2015

 

131,481

 

158,981

 

 

 

 

 

 

 

8.4 percent senior notes due May 2017

 

230,000

 

230,000

 

 

 

 

 

 

 

6.6 percent senior notes due May 2020

 

300,000

 

300,000

 

 

 

 

 

 

 

Total senior notes

 

847,673

 

875,173

 

 

 

 

 

 

 

Debt discount

 

(3,961

)

(4,305

)

 

 

 

 

 

 

Senior notes, net

 

843,712

 

870,868

 

 

 

 

 

 

 

Secured notes payable

 

8,789

 

9,010

 

 

 

 

 

 

 

Total debt

 

$

852,501

 

$

879,878

 

 

 

 

 

 

 

 

 

 

At June 30, 2011, the Company had outstanding (a) $186.2 million of 6.9 percent senior notes due June 2013; (b) $131.5 million of 5.4 percent senior notes due January 2015; (c) $230.0 million of 8.4 percent senior notes due May 2017; and (d) $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, at the option of the Company, in whole or in part, at any time.

 

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 the debt repurchase was included in “Loss related to early retirement of debt, net” within the Consolidated Statements of Earnings.

 

During the second quarter of 2010, the Company redeemed and repurchased, pursuant to a tender offer and redemption, $255.7 million of its senior notes due 2012, 2013 and 2015 for $273.9 million in cash. It recognized a charge of $19.5 million resulting from the tender offer and redemption. The Company repurchased an additional $19.0 million of its senior notes, for which it paid $18.4 million in cash in the open market, resulting in a gain of $433,000. The net loss was included in “Loss related to early retirement of debt, net” within the Consolidated Statements of Earnings.

 

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 $71.1 million and $74.3 million under these agreements at June 30, 2011 and December 31, 2010, respectively.

 

To finance its land purchases, the Company may also use seller-financed nonrecourse secured notes payable. At June 30, 2011 and December 31, 2010, outstanding seller-financed nonrecourse secured notes payable totaled $8.8 million and $9.0 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, 2011.

 

14



 

 

Notes to Consolidated Financial Statements (Unaudited)

 

The Ryland Group, Inc. and Subsidiaries

 

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 June 30, 2011, 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.

 

The following table sets forth the values and measurement methods used for financial instruments that are measured at fair value on a recurring basis:

 

 

 

 

 

 

 

FAIR VALUE

(in thousands)

 

HIERARCHY

 

JUNE 30, 2011

 

DECEMBER 31, 2010

Marketable securities, available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

Level 1

 

$

 3,157

 

$

 15,863

 

 

 

 

 

 

 

Obligations of U.S. and local government agencies

 

Levels 1 and 2

 

36,313

 

33,044

 

 

 

 

 

 

 

Corporate debt securities issued under

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government/agency-backed programs

 

Level 2

 

6,560

 

170,990

 

 

 

 

 

 

 

Corporate debt securities

 

Level 2

 

163,571

 

105,102

 

 

 

 

 

 

 

Asset-backed securities

 

Level 2

 

23,477

 

7,632

 

 

 

 

 

 

 

Time deposits

 

Level 2

 

45,908

 

76,312

 

 

 

 

 

 

 

Short-term pooled investments

 

Levels 1 and 2

 

80,020

 

28,852

 

 

 

 

 

 

 

Mortgage loans held-for-sale

 

Level 2

 

14,951

 

9,534

 

 

 

 

 

 

 

Mortgage interest rate lock commitments (“IRLCs”)

 

Level 3

 

3,267

 

1,496

 

 

 

 

 

 

 

Forward-delivery contracts

 

Level 2

 

(326

)

719

 

 

 

 

 

 

 

Options on futures contracts

 

Level 1

 

-

 

81

 

 

 

 

 

 

 

 

 

Marketable Securities, Available-for-sale

At June 30, 2011 and December 31, 2010, the Company had $359.0 million and $437.8 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.”)

 

15



 

 

Notes to Consolidated Financial Statements (Unaudited)

 

The Ryland Group, Inc. and Subsidiaries

 

Other Financial Instruments

Options on futures contracts are exchange traded and based on quoted market prices (Level 1). Mortgage loans held-for-sale and forward-delivery contracts are based on quoted market prices of similar instruments (Level 2). At June 30, 2011, contractual principal amounts of loans held-for-sale totaled $14.7 million, compared to $9.6 million at December 31, 2010. Mortgage 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. Mortgage loans held-for-sale, options on futures contracts 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 for the three-month periods ended June 30, 2011 and 2010, totaled $3.8 million and $6.2 million, respectively. Gains realized on the conversion of IRLCs to loans for the six-month periods ended June 30, 2011 and 2010, totaled $6.5 million and $10.7 million, respectively. Offsetting these gains, losses from forward-delivery contracts and options on futures contracts used to hedge IRLCs totaled $2.0 million and $3.7 million for the three-month periods ended June 30, 2011 and 2010, respectively, and totaled $2.2 million and $4.9 million for the six-month periods ended June 30, 2011 and 2010, respectively. Net gains and losses related to forward-delivery contracts, options on futures contracts and IRLCs were included in “Financial services” revenues within the Consolidated Statements of Earnings.

 

At June 30, 2011, the excess of the aggregate fair value over the aggregate unpaid principal balance for mortgage loans held-for-sale measured at fair value was $247,000. At December 31, 2010, the excess of the aggregate unpaid principal balance over the aggregate fair value for mortgage loans held-for-sale measured at fair value was $86,000. These amounts were included in “Financial services” revenues within the Consolidated Statements of Earnings. At June 30, 2011, the Company held two repurchased loans with payments 90 days or more past due that had an aggregate carrying value of $527,000 and an aggregate unpaid principal balance of $624,000. At December 31, 2010, the Company held two repurchased loans with payments 90 days or more past due that had an aggregate carrying value of $468,000 and an aggregate unpaid principal balance of $592,000.

 

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)

 

2011

 

2010

 

 

 

 

 

Fair value at January 1

 

$

 1,496

 

$

 2,055

 

 

 

 

 

 

 

Additions

 

8,448

 

10,995

 

 

 

 

 

Gain realized on conversion to loans

 

(6,453)

 

(10,687)

 

 

 

 

 

Change in valuation of items held

 

(224)

 

709

 

 

 

 

 

Fair value at June 30

 

$

 3,267

 

$

 3,072

 

 

 

 

 

 

 

 

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.”)

 

16



 

 

Notes to Consolidated Financial Statements (Unaudited)

 

The Ryland Group, Inc. and Subsidiaries

 

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 the Company recognized noncash impairment charges during the reporting periods:

 

 

 

FAIR VALUE

 

 

 

(in thousands)

 

HIERARCHY

JUNE 30, 2011

DECEMBER 31, 2010

 

 

 

 

 

Housing inventory and inventory held-for-sale 1

 

Level 3

$

 13,643

$

 32,196

 

 

 

 

 

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

 

Level 3

1,291

3,068

 

 

 

 

 

 

 

Total

 

 

$

 14,934

$

 35,264

 

 

 

 

 

 

 

 

1  

In accordance with ASC 330, the fair values of housing inventory and inventory held-for-sale that were impaired during 2011 totaled $13.6 million at June 30, 2011. The impairment charges related to these assets totaled $13.2 million for the six months ended June 30, 2011. At December 31, 2010, the fair values of housing inventory and inventory held-for-sale that were impaired during 2010 totaled $32.2 million. The impairment charges related to these assets totaled $33.3 million for the year ended December 31, 2010.

 

 

2  

In accordance with ASC 330, the fair values of other assets held-for-sale that were impaired during 2010 totaled $1.6 million at December 31, 2010. The impairment charges related to these assets totaled $235,000 for the year ended December 31, 2010. In accordance with ASC 330, the fair values of investments in joint ventures that were impaired during 2011 totaled $1.3 million at June 30, 2011. The impairment charges related to these assets totaled $1.9 million for the six months ended June 30, 2011. At December 31, 2010, the fair values of investments in joint ventures that were impaired during 2010 totaled $1.4 million. The impairment charges related to these assets totaled $4.1 million for the year ended December 31, 2010.

 

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 plans 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. At June 30, 2011, the cash surrender value of these contracts was $12.0 million, compared to $10.1 million at December 31, 2010, and was included in “Other” assets within the Consolidated Balance Sheets. The net periodic benefit cost of these plans 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 these plans for the three months ended June 30, 2010, totaled $977,000, which included service costs of $65,000, interest costs of $209,000 and an investment loss of $703,000. The net periodic benefit cost of these plans for the six months ended June 30, 2011, totaled $367,000, which included service costs of $290,000, interest costs of $366,000 and an investment gain of $289,000. The net periodic benefit cost of these plans for the six months ended June 30, 2010, totaled $994,000, which included service costs of $108,000, interest costs of $349,000 and an investment loss of $537,000. The $10.9 million and $10.3 million projected benefit obligations at June 30, 2011 and December 31, 2010, respectively, were equal to the net liabilities recognized in the Consolidated Balance Sheets at those dates. The discount rate used for the plan was 7.0 percent for the six-month periods ended June 30, 2011 and 2010.

 

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. The Company generated deferred tax assets for the second quarters of 2011 and 2010

 

17



 

 

Notes to Consolidated Financial Statements (Unaudited)

 

The Ryland Group, Inc. and Subsidiaries

 

primarily due to inventory impairments and net operating loss carryforwards. In light of these additional impairments, 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 recorded a net valuation allowance totaling $5.4 million against its deferred tax assets during the quarter ended June 30, 2011, which was reflected as a noncash charge to income tax expense. The balance of the deferred tax valuation allowance was $265.3 million and $253.8 million at June 30, 2011 and December 31, 2010, respectively. 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. To the extent that the Company generates sufficient taxable income in the future to utilize the tax benefits of related deferred tax assets, it expects to experience a reduction in its effective tax rate as the valuation allowance is reversed.

 

For the quarters ended June 30, 2011 and 2010, the Company’s effective income tax benefit rate was 0.0 percent due to noncash charges of $5.4 million and $8.2 million, respectively, for the Company’s deferred tax valuation allowance, which offset the benefits generated during the quarters. For the six months ended June 30, 2011, the Company’s effective income tax benefit rate was 7.4 percent, compared to 0.0 percent for the same period in 2010, primarily due to a settlement with a state tax authority during the first quarter of 2011.

 

During the first quarter of 2011, the Company made a $1.6 million settlement payment for income tax, interest and penalty to a state taxing authority. Additionally, it recorded a tax benefit of $2.4 million to reverse the excess reserve previously recorded for the tax position that related to this settlement. There was no significant change in the Company’s liability for gross unrecognized tax benefits during the quarter ended June 30, 2011. At June 30, 2011, the Company’s liability for gross unrecognized tax benefits was $1.3 million, which reflected a decrease of $1.9 million from the balance of $3.2 million at December 31, 2010. The Company had $544,000 and $2.7 million in accrued interest and penalties at June 30, 2011 and December 31, 2010, respectively.

 

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, 2011 and December 31, 2010, stock options or other awards or units available for grant under the Plan or its predecessor plans totaled 3,233,548 and 1,477,072, 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. At June 30, 2011, there were 176,000 stock awards available for future grant in accordance with the Director Plan. At December 31, 2010, there were 21,975 stock awards available under the predecessor plan. 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.

 

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).

 

18



 

 

Notes to Consolidated Financial Statements (Unaudited)

 

The Ryland Group, Inc. and Subsidiaries

 

The Company recorded stock-based compensation expense of $2.9 million and $3.4 million for the three months ended June 30, 2011 and 2010, respectively. Stock-based compensation expense for the six months ended June 30, 2011 and 2010, totaled $5.2 million and $6.5 million, respectively. Stock-based compensation expense has been allocated to the Company’s business units and reported in “Corporate,” “Financial services” and “Selling, general and administrative” expenses within the Consolidated Statements of Earnings.

 

A summary of stock option activity in accordance with the Company’s equity incentive plans as of June 30, 2011 and 2010, 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, 2010

 

3,693,697

 

 

$

 36.43

 

3.1

 

 

Granted

 

846,000

 

 

23.30

 

 

 

 

Exercised

 

(95,064

)

 

7.80

 

 

 

 

Forfeited

 

(364,953

)

 

50.70

 

 

 

 

Options outstanding at June 30, 2010

 

4,079,680

 

 

$

 33.10

 

3.2

 

$

 1,501

Available for future grant

 

1,220,742

 

 

 

 

 

 

 

Total shares reserved at June 30, 2010

 

5,300,422

 

 

 

 

 

 

 

Options exercisable at June 30, 2010

 

2,806,552

 

 

$

 37.84

 

2.8

 

$

 1,055

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

 

The Company recorded stock-based compensation expense related to employee stock options of $1.2 million and $1.4 million for the three-month periods ended June 30, 2011 and 2010, respectively. Stock-based compensation expense related to employee stock options for the six-month periods ended June 30, 2011 and 2010, totaled $2.2 million and $2.9 million, respectively.

 

During the three- and six-month periods ended June 30, 2011, the total intrinsic values of stock options exercised were $29,000 and $284,000, respectively. During the three- and six-month periods ended June 30, 2010, the total intrinsic values of stock options exercised were $113,000 and $1.4 million, 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 $1.6 million and $1.9 million for the three months ended June 30, 2011 and 2010, respectively. For the six-month periods ended June 30, 2011 and 2010, compensation expense associated with these awards totaled $2.7 million and $3.4 million, respectively.

 

19



 

 

Notes to Consolidated Financial Statements (Unaudited)

 

The Ryland Group, Inc. and Subsidiaries

 

The following is a summary of activity relating to restricted stock unit awards:

 

 

 

2011

 

2010

 

Restricted stock units at January 1

 

727,317

 

609,812

 

Shares awarded

 

305,000

 

404,000

 

Shares vested

 

(304,492

)

(225,496

)

Shares forfeited

 

(60,000

)

(50,999

)

Restricted stock units at June 30

 

667,825

 

737,317

 

 

At June 30, 2011, the outstanding restricted stock unit awards are expected to vest as follows: 2011—10,000; 2012—345,494; 2013—210,664; and 2014—101,667.

 

The Company recorded stock-based compensation expense related to Director Plan stock awards in the amounts of $102,000 and $172,000 for the three-month periods ended June 30, 2011 and 2010, respectively. For the six-month periods ended June 30, 2011 and 2010, stock-based compensation expense related to Director Plan stock awards totaled $210,000 and $289,000, 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, 2011 and December 31, 2010, it had cash deposits and letters of credit outstanding that totaled $47.1 million and $48.7 million, respectively, pertaining to land purchase contracts with aggregate purchase prices of $410.1 million and $374.6 million, respectively. At June 30, 2011 and December 31, 2010, the Company had $520,000 and $834,000, 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 $130.5 million and $95.0 million at June 30, 2011 and December 31, 2010, 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, 2011, development bonds totaled $102.6 million, while performance-related cash deposits and letters of credit totaled $43.2 million. At December 31, 2010, development bonds totaled $109.7 million, while performance-related cash deposits and letters of credit totaled $41.9 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.

 

The mortgage industry has experienced substantial increases in delinquencies, foreclosures and foreclosures-in-process in recent years. Under certain circumstances, RMC is required to indemnify loan investors for losses incurred on sold loans. Once loans are sold, the ownership, credit risk and management, including servicing of the loans, passes to the third-party purchaser. RMC retains no role or interest other than industry-standard representations and warranties. Reserves are created to address repurchase and indemnity claims made by these third-party investors or purchasers. Reserves are determined based on pending claims received that are associated with previously sold mortgage loans, the Company’s portfolio delinquency and foreclosure rates on sold loans made available by investors, and historical loss payment patterns used to develop ultimate loss projections.

 

20



 

 

Notes to Consolidated Financial Statements (Unaudited)

 

The Ryland Group, Inc. and Subsidiaries

 

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.

 

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,

 

 

 

2011

 

2010

 

2009

 

2008

 

2007

 

2006

 

Prime

 

40.5

%

34.9

%

32.9

%

51.8

%

72.0

%

68.8

%

Government (FHA/VA)

 

59.5

 

65.1

 

67.1

 

48.2

 

20.1

 

6.9

 

Alt A

 

-

 

-

 

-

 

-

 

7.5

 

21.8

 

Subprime

 

-

 

-

 

-

 

-

 

0.4

 

2.5

 

Total

 

100.0

%

100.0

%

100.0

%

100.0

%

100.0

%

100.0

%

Average FICO credit score

 

729

 

723

 

717

 

711

 

713

 

715

 

Average combined loan-to-value ratio

 

90.4

%

90.8

%

91.4

%

90.1

%

89.1

%

88.4

%

 

Delinquency rates for loans originated in 2008 and subsequent years are significantly lower than those 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.

 

Changes in the Company’s loan loss reserves during the periods were as follows:

 

(in thousands)

 

2011

 

2010

 

Balance at January 1

 

  $

8,934

 

$

17,875

 

Provision for losses

 

(18

)

7,200

 

Settlements made

 

(140

)

(10,117

)

Balance at June 30

 

  $

8,776

 

$

14,958

 

 

Subsequent changes in conditions or available information may change assumptions and estimates. Mortgage loan loss reserves were reflected 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. The Company 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, and in the case of unexpected claims, upon identification and quantification of the obligations. Actual future warranty costs could differ from current estimates.

 

Changes in the Company’s product liability reserves during the six-month periods were as follows:

 

(in thousands)

 

2011

 

2010

 

Balance at January 1

 

  $

20,112

 

$

24,268

 

Warranties issued

 

1,275

 

2,500

 

Changes in liability for accruals related to pre-existing warranties

 

706

 

3,615

 

Settlements made

 

(2,784

)

(5,901

)

Balance at June 30

 

  $

19,309

 

$

24,482

 

 

21



 

 

Notes to Consolidated Financial Statements (Unaudited)

 

The Ryland Group, Inc. and Subsidiaries

 

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, 2011 and December 31, 2010, RHIC had $20.2 million and $21.1 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.

 

Changes in RHIC’s insurance reserves during the six-month periods were as follows:

 

(in thousands)

 

2011

 

2010

 

Balance at January 1

 

  $

21,141

 

$

25,069

 

Insurance expense provisions or adjustments

 

-

 

-

 

Loss expenses paid

 

(967

)

(358

)

Balance at June 30

 

  $

20,174

 

$

24,711

 

 

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

 

The Company is party to various legal proceedings generally incidental to its businesses. 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, 2011 and December 31, 2010, the Company had legal reserves of $9.4 million and $8.1 million, respectively. (See “Part II, Item 1. Legal Proceedings.”)

 

Note 16.  New Accounting Pronouncements

 

ASU 2010-20 and ASU 2011-01

In July 2010, the FASB issued Accounting Standards Update (“ASU”) No. 2010-20 (“ASU 2010-20”)‚ “Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.” ASU 2010-20 amends Topic 310, “Receivables,” to provide additional disclosures related to credit risk inherent in an entity’s portfolio of financing receivables. ASU 2010-20 was previously effective for interim and annual reporting periods ending after December 15, 2010. However, in January 2011, the FASB issued ASU No. 2011-01 (“ASU 2011-01”), “Receivables (Topic 310): Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20,” to delay the effective date to interim or annual periods ending after June 15, 2011. The adoption of ASU 2010-20 did not have a material impact on the Company’s consolidated financial statements.

 

ASU 2011-04

In May 2011, the FASB issued ASU No. 2011-04 (“ASU 2011-04”), “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.” ASU 2011-04 revises the language used to describe the requirements in U.S. generally accepted accounting principles (“GAAP”) for measuring fair value and for disclosing information about fair value measurements in order to improve consistency in the application and description of fair value between GAAP and International Financial Reporting Standards (“IFRS”). ASU

 

22



 

 

Notes to Consolidated Financial Statements (Unaudited)

 

The Ryland Group, Inc. and Subsidiaries

 

2011-04 clarifies how the concepts of highest and best use and valuation premise in a fair value measurement are relevant only when measuring the fair value of nonfinancial assets and are not relevant when measuring the fair value of financial assets or liabilities. In addition, the guidance expanded the unobservable input disclosures for Level 3 fair value measurements, requiring quantitative information be disclosed in relation to (a) the valuation processes used; (b) the sensitivity of the fair value measurement to changes in unobservable inputs and to interrelationships between those unobservable inputs; and (c) the use of a nonfinancial asset in a way that differs from the asset’s highest and best use. ASU 2011-04 is effective for interim and annual periods beginning after December 15, 2011. Early application by public entities is prohibited. The Company does not anticipate that ASU 2011-04 will have a material impact on its consolidated financial statements.

 

ASU 2011-05

In June 2011, the FASB issued ASU No. 2011-05 (“ASU 2011-05”), “Presentation of Comprehensive Income.” The amendments in ASU 2011-05 allow an entity the option to present the total of comprehensive income, components of net income, and components of other comprehensive income in either a single continuous statement of comprehensive income or in two separate but consecutive statements. Both options require an entity to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. The amendments in ASU 2011-05 do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. ASU 2011-05 should be applied retrospectively. It is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company does not anticipate that the adoption of this guidance will have a material impact on its consolidated financial statements.

 

Note 17.  Supplemental Guarantor Information

 

The Company’s obligations to pay principal, premium, if any, and interest under its 6.9 percent senior notes due June 2013; 5.4 percent senior notes due January 2015; 8.4 percent senior notes due May 2017; and 6.6 percent senior notes due May 2020 are guaranteed on a joint and several basis by substantially all of its 100 percent-owned homebuilding subsidiaries (the “Guarantor Subsidiaries”).  Such guarantees are full and unconditional.

 

In lieu of providing separate financial statements for the Guarantor Subsidiaries, the accompanying condensed consolidating financial statements have been included. Management does not believe that separate financial statements for the Guarantor Subsidiaries are material to investors and are, therefore, not presented.

 

The following information presents the consolidating statements of earnings, financial position and cash flows for (a) the parent company and issuer, The Ryland Group, Inc. (“TRG, Inc.”); (b) the Guarantor Subsidiaries; (c) the non-Guarantor Subsidiaries; and (d) the consolidation eliminations used to arrive at the consolidated information for The Ryland Group, Inc. and subsidiaries.

 

23



 

 

Notes to Consolidated Financial Statements (Unaudited)

 

The Ryland Group, Inc. and Subsidiaries

 

CONSOLIDATING STATEMENTS OF EARNINGS

 

 

 

THREE MONTHS ENDED JUNE 30, 2011

 

 

 

 

 

 

 

NON-

 

 

 

 

 

 

 

 

 

GUARANTOR

 

GUARANTOR

 

CONSOLIDATING

 

CONSOLIDATED

 

(in thousands)

 

TRG, INC.

 

SUBSIDIARIES

 

SUBSIDIARIES

 

ELIMINATIONS

 

TOTAL

 

REVENUES

 

  $

110,010

 

$

107,896

 

$

7,317

 

$

-

 

$

225,223

 

 

 

 

 

 

 

 

 

 

 

 

 

EXPENSES

 

122,848

 

108,280

 

5,253

 

-

 

236,381

 

OTHER INCOME (LOSS)

 

445

 

-

 

-

 

-

 

445

 

 

 

 

 

 

 

 

 

 

 

 

 

(Loss) earnings before taxes

 

(12,393

)

(384

)

2,064

 

-

 

(10,713

)

Tax (benefit) expense

 

(343

)

235

 

108

 

-

 

-