Faced with a required accounting change, the Ryland Group Inc. yesterday announced a potential $27 million noncash charge against earnings in the fourth quarter.
The accounting change, which will result in a loss for the quarter and probably the year, caps a disappointing 1995 for the Columbia-based homebuilder, which has had to deal with consumer uncertainty, tightened profit margins and a sales depression in various markets.
"No question we feel the earnings process has been disappointing this year," said Ryland Chairman and Chief Executive R. Chad Dreier.
"But we've made great progress introducing new home designs and improving our land positions, and feel that profits will come from that in 1996."
"Exclusive of this charge, our fourth-quarter homebuilding results will be decent," he added. "There will be improvement year-over-year and over the third quarter."
While Mr. Dreier declined to provide exact numbers, he said home sales are expected to be up 9 percent vs. a year ago, based on results through Dec. 16.
In the first three quarters of this year, Ryland reported net income of $21.1 million, a 5 percent decline from the comparable 1994 period. That figure, however, included a $19.5 million gain from the sale of its mortgage-backed securities unit to Norwest Bank Minnesota.
Its revenues of $1.1 billion were off by 3.5 percent through the first nine months.
The accounting change, required under Financial Accounting Standards No. 121, affects how Ryland's land inventory in California and in the Washington, D.C., metropolitan area are valued.
FASB 121, as it is known, changes the method companies must use to value long-term assets such as land or equipment.
On a pretax basis, the charge will amount to between $40 million and $45 million, Mr. Dreier said. The charge will have no effect on Ryland's dividend.
The charge marks the second time that the nation's third-largest homebuilder has had to write down its Southern California inventory, which it acquired in 1988 and 1989 before a recession crippled home sales there.
In September 1993, Ryland absorbed a $45 million charge relating to roughly 2,100 lots there. That figure has since been reduced to 1,000 lots.
Ryland is required to adopt FASB 121 by Jan. 1 but could have taken the charge in the first quarter of next year.
"What this does is reduces the cost of assets and helps earnings going forward," said John Stanley, a Dillon, Read & Co. Inc. analyst who follows Ryland's performance.
"And year-end is a good time to do this, to clear the decks and start fresh. They've more or less kitchen-sinked their 1995 results, because they weren't going to make that much money on the year anyway.
"Hopefully, this puts all the problems they inherited from previous management behind them."