A low debt load and a digestible debt maturity schedule normally would add up to a diminished need for hordes of cash. But that's hardly deterring the management team at The Ryland Group from making cash generation a top priority through the balance of the year, suggesting a rather dark outlook for 2009.
According to recent earnings reports, in 3Q2008, the company generated roughly $101 million in positive cash flow from operations, which helped bolster its cash position. Moreover, management also eliminated a long-time deferred compensation plan, generating $56.2 million to be distributed to plan participants. The decision also netted the company a tax benefit.
The company finished out the quarter with a $344.8 million cash cushion, up significantly from $199.4 million during the previous quarter.
Going forward, management expected to continue to move fast to close homes and capture tax refunds before a two-year look back period, during which the company can apply today's losses against earlier profits, expires at the end of the year.
"The goal for the fourth quarter is to get every home in backlog closed before the end of the year to get the cash," said CEO R. Chad Dreier during the company's earnings call today.
Dreier estimated that the company's efforts would add up to a $100 million refund next year.
"For us, that's a pretty big number," Dreier said. "And that will make up for other potential issues."
And there are plenty of issues.
The company had a 3Q2008 loss of $65.7 million, which exceeded analysts' expectations. Fewer closings and lower selling prices brought revenues down 26.2% to $526.2 million from $717.5 million a year ago. Orders tumbled 31.6% year-over-year to 1,284 units while backlog shrunk 31.5% to 2,705 units, compared to a year ago. Cancellations crept up to 39%, as tighter lending standards and contingency sales eroded sales numbers.
Dreier classified the company's margins as "crappy" thanks to additional compression. Gross margins slimmed down to 1.2%, following $64.7 million in land-related charges to the balance sheet.
For JPMorgan analyst Michael Rehaut, the company's anorexic margins meant a couple of things. In a research note, he wrote: "We believe Ryland's incentives and price reductions were not aggressive enough amid continued weak market trends. Specifically, order ASPs actually rose 3% sequentially to $253,000 and fell only 3% year over year. While we believe this was enough to prevent a larger impairment charge this quarter, given our outlook for continued home price deflation well into 2009 as well as Ryland's continued core operating EPS losses, suggesting that insufficient impairment charges have been taken to date."
However, the company gained traction when it came to SG&A. SG&A came in at 11.6% of revenues versus 12.3% a year ago. "This reduction was no small feat," Dreier noted.
Dreier also pointed out some cost-cutting initiatives happening in the company's purchasing department. He said the company was moving away from turnkey solutions, which were effective during high volume times, toward bidding out each job in the production cycle separately. The purchasing team also was using the bidding process for other non-production-oriented services such as telecommunications. The shift should help the company nab roughly $20 million in rebates this year.
Moreover, the company was cutting back on the number of options it offered in its design centers in an effort to curb costs while still meeting the personalization preferences of home buyers. Management also pushed to downgrade standard features in homes, simplifying the home and stripping out costs.
But profitability concerns aside, the company's cash generation focus contributed to a lowering of net debt to capital of $35.9%, compared to 41.0% a year ago.