In an earnings week when a number of public home builders have been coming close to breaking even or even chalking up a bit of a profit, Ryland Homes stood out, reporting a loss of $0.68 a share, more than double what analyst consensus expected. In the same quarter last year Ryland lost $1.20 a share.
"We knew the second half of the year would be challenging," CEO Larry Nicholson told analysts during its Thursday earnings call. "It's symptomatic of a housing market coming off a period of stimulus."
Similar to other builders reporting earnings this week, Ryland's closings and orders fell by more than a third to 847 deliveries compared to 1,323 last year. Orders fell to 799 from 1,270 last year.
However, unlike both Standard Pacific Homes and Meritage, the company wasn't able to make up the difference through higher margins or higher average sales prices because of mix of homes or where homes were selling. In fact the company's SG&A expenses were up to 16.4% of revenues compared to 12.3% in the same period in 2009.
Next quarter's earnings have the potential to be even darker with backlog down 45.7% in numbers and 44% in dollars.
"We started 45% fewer units in backlog," Nicholson said. "That was not expected."
On the brighter side, Ryland has more than $800 million of cash, cash equivalents and marketable securities as well as a net debt-to-capital ratio of but 11.8%.
Management is focused on maintaining prices, investing in land and retaining key employees as preparation for a spring selling season that it hopes will come. Still, Nicholson isn't predicting 2011 to be much better than 2010.
One profitability inhibiter was an increase in fixed costs as a part of revenue. Nicholson said there are no plans to lay off more employees, as both M/I Homes and Meritage Homes did in their third quarters, to help cut those costs.
To lose talented employees for near-term cost savings would be short-sited, management said. Though, said Nicholson, that could change if the spring selling season doesn't bring any order improvement.
"If we get through the spring selling season and we are still at the run rate we are at today, we would have to make different decisions," Nicholson said.
The company hopes to be ready for the season with more new, more profitable communities opened, a process it is ahead of schedule on, Nicholson said. Also, the company plans to keep buying land when the right deals present themselves. The deal flow has slowed, however, Nicholson said, as some builders are curtailing buying because of the continued slowing sales.
Ryland also offered some color on the mortgage put-back issue that has popped to the forefront recently by saying that it has been dealing successfully with the issue for some time and that the number of flawed mortgages being put back to the company has been decreasing. And that the company thinks it has enough reserves set by to handle the issue.
"Right now we feel like we are on top of it," Nicholson said.