What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-04-24 compared with 2023-01-25 · 61 added, 41 removed, 177 unchanged (37% of the section changed)

6 unchanged sentences

Forestar Group Inc.

is a national, well-capitalized residential lot development company with operations in 52 markets in 20 states as of December 31, 2022.

is a national, well-capitalized residential lot development company with operations in 52 markets in 20 states as of March 31, 2023.

We are focused primarily on making investments in land acquisition and development to sell finished single-family residential lots to homebuilders.

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Horton owned 75% of the Company's outstanding common stock.

As of December 31, 2022, D.R.

As of March 31, 2023, D.R.

Horton owned approximately 63% of the Company's outstanding common stock.

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Results of Operations

The following tables and related discussion set forth key operating and financial data as of and for the three months ended December 31, 2022 and 2021.

The following tables and related discussion set forth key operating and financial data as of and for the three and six months ended March 31, 2023 and 2022.

Operating Results

Components of income before income taxes were as follows:

Three Months Ended December 31,

Three Months Ended March 31, Six Months Ended March 31,

2023 2022 2023 2022

(In millions)

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Residential lots sold consisted of:

Three Months Ended December 31,

Three Months Ended March 31, Six Months Ended March 31,

2023 2022 2023 2022

Development projects 2,979 4,806 5,242 9,187

Lot banking projects — 195 — 330

2,979 5,001 5,242 9,517

Deferred development projects — 787 — 787

2,979 5,788 5,242 10,304

Average sales price per lot (a)

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_______________

(a) Excludes any impact from change in contract liabilities.

(a) Excludes lots sold from deferred development projects and any impact from change in contract liabilities.

Revenues consisted of:

Three Months Ended December 31,

Three Months Ended March 31, Six Months Ended March 31,

2023 2022 2023 2022

(In millions)

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Lot banking projects — 18.3 — 27.3

Decrease in contract liabilities 2.7 2.1

Decrease (increase) in contract liabilities 0.7 (0.5) 3.4 1.6

252.9 409.0 459.5 813.1

Deferred development projects 7.5 12.5 14.3 12.5

260.4 421.5 473.8 825.6

Tract sales and other 41.1 0.1 44.4 3.6

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Residential lots sold and residential lot sales revenues have decreased compared to the prior year primarily as a result of weakening demand for finished lots as homebuilders have reduced their pace of new home starts to better match the moderation of housing demand caused by increases in mortgage rates and elevated inflationary pressures.

In the three months ended December 31, 2022, we sold 2,094 residential lots to D.R.

In the three months ended March 31, 2023, we sold 2,666 residential lots to D.R.

Horton for $219.9 million compared to 4,771 residential lots sold to D.R.

Horton for $390.2 million in the prior year period.

In the three months ended December 31, 2022, we sold 169 residential lots to customers other than D.R.

Horton for $16.8 million, compared to 502 residential lots sold for $74.0 million in the prior year period.

In the six months ended March 31, 2023, we sold 4,760 residential lots to D.R.

Horton for $407.0 million compared to 8,785 residential lots sold to D.R.

Horton for $718.2 million in the prior year period.

In the three months ended March 31, 2023, we sold 313 residential lots to customers other than D.R.

Horton for $32.2 million, compared to 1,017 residential lots sold for $74.1 million, inclusive of the $54.7 million total transaction price of the deferred development lot sales in the prior year period.

In the six months ended March 31, 2023, we sold 482 residential lots to customers other than D.R.

Horton for $49.1 million, compared to 1,519 residential lots sold for $148.1 million, inclusive of the $54.7 million total transaction price of the deferred development lot sales in the prior year period.

Lots sold to customers other than D.R.

Horton in the three months ended December 31, 2021 included 243 lots that were sold for $30.9 million to a lot banker who expected to sell those lots to D.R.

Horton in both the three and six months ended March 31, 2023 included 147 lots that were sold for $16.0 million to a lot banker who expects to sell those lots to D.R.

Horton at a future date.

In the three months ended December 31, 2022, we recognized $6.7 million of revenues as a result of our progress towards completion of our remaining unsatisfied performance obligations on deferred development projects.

Lots sold to customers other than D.R.

Horton in the six months ended March 31, 2022 included 358 lots that were sold for $63.0 million to a lot banker who expects to sell those lots to D.R.

Horton at a future date.

In the three and six months ended March 31, 2023, we recognized $7.5 million and $14.3 million of revenues as a result of our progress towards completion of our remaining unsatisfied performance obligations on deferred development projects, compared to $12.5 million in both the prior year periods.

Tract sales and other revenue in the three and six months ended March 31, 2023 primarily consisted of 34 tract acres sold to third parties for $8.0 million and 379 tract acres sold to D.R.

Horton for $32.5 million.

Tract sales and other revenue in the six months ended March 31, 2022 primarily consisted of 38 tract acres sold to third parties for $3.5 million.

Cost of Sales, Real Estate Impairment and Land Option Charges and Interest Incurred

Cost of sales in the three months ended December 31, 2022 decreased compared to the prior year period primarily due to the decrease in the number of lots sold.

Cost of sales in the three and six months ended March 31, 2023 decreased compared to the prior year periods primarily due to the decrease in the number of lots sold.

Cost of sales related to tract sales and other revenues was $25.5 million in both the three and six months ended March 31, 2023 and $2.7 million in the six months ended March 31, 2022.

Each quarter, we review the performance and outlook for all of our real estate for indicators of potential impairment and perform detailed impairment evaluations and analyses when necessary.

As a result of this process, there were no real estate impairment charges recorded for the three months ended December 31, 2022 and 2021.

In the three months ended December 31, 2022 and 2021, land purchase contract deposit and pre-acquisition cost write-offs related to land purchase contracts that we terminated or expect to terminate were $2.4 million and $0.6 million, respectively.

As a result of this process, in the three months ended March 31, 2023 and 2022 we recorded non-cash impairment charges of $19.4 million and $3.8 million, respectively.

In the three and six months ended March 31, 2023, land purchase contract deposit and pre-acquisition cost write-offs related to land purchase contracts that the we have terminated or expect to terminate were $0.9 million and $3.3 million, respectively, compared to $1.6 million and $2.2 million in the prior year periods.

We capitalize interest costs throughout the development period (active real estate).

Capitalized interest is charged to cost of sales as the related real estate is sold to the buyer.

Interest incurred was $8.2 million in both the three months ended December 31, 2022 and 2021.

Interest charged to cost of sales was 3.0% of total cost of sales (excluding land purchase contract deposit and pre-acquisition cost write-offs) in the three months ended December 31, 2022 compared to 2.7% in the prior year period.

Interest incurred was $8.2 million and $16.4 million in the three and six months ended March 31, 2023 compared to $8.1 million and $16.3 million in the prior year periods.

Interest charged to cost of sales was 2.3% and 2.6% of total cost of sales (excluding land purchase contract deposit and pre-acquisition cost write-offs) in the three and six months ended March 31, 2023 compared to 3.2% and 2.9% in the prior year periods.

Selling, General and Administrative (SG&A) Expense and Other Income Statement Items

SG&A expense in the three months ended December 31, 2022 was $22.9 million compared to $21.5 million in the prior year period.

SG&A expense as a percentage of revenues was 10.6% in the three months ended December 31, 2022 compared to 5.3% in the prior year period.

SG&A expense in the three and six months ended March 31, 2023 was $22.0 million and $44.9 million compared to $24.3 million and $45.8 million in the prior year periods.

SG&A expense as a percentage of revenues was 7.3% and 8.7% in the three and six months ended March 31, 2023 compared to 5.8% and 5.5% in the prior year periods.

Our SG&A expense primarily consisted of employee compensation and related costs.

Our business operations employed 277 and 271 employees at December 31, 2022 and 2021, respectively.

Our business operations employed 271 and 309 employees at March 31, 2023 and 2022, respectively.

We attempt to control our SG&A costs while ensuring that our infrastructure supports our operations;

however, we cannot make assurances that we will be able to maintain or improve upon the current SG&A expense as a percentage of revenues.

Our income tax expense for the three months ended December 31, 2022 was $7.1 million compared to $13.0 million in the prior year period.

Our effective tax rate was 25.4% for the three months ended December 31, 2022 compared to 24.3% in the prior year period.

Our effective tax rate for both periods includes an expense for state income taxes and nondeductible expenses.

At December 31, 2022, we had deferred tax liabilities, net of deferred tax assets, of $33.7 million.

Our income tax expense for the three and six months ended March 31, 2023 was $9.0 million and $16.1 million compared to $15.4 million and $28.4 million in the prior year periods.

Our effective tax rate was 25.1% and 25.2% for the three and six months ended March 31, 2023 compared to 24.4% and 24.3% in the prior year periods.

Our effective tax rate for all periods included an expense for state income taxes and nondeductible expenses.

At March 31, 2023, we had deferred tax liabilities, net of deferred tax assets, of $34.8 million.

The deferred tax assets were partially offset by a valuation allowance of $0.9 million, resulting in a net deferred tax liability of $35.7 million.

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Land and Lot Position

Our land and lot position at December 31, 2022 and September 30, 2022 is summarized as follows:

December 31, 2022 September 30, 2022

Our land and lot position at March 31, 2023 and September 30, 2022 is summarized as follows:

March 31, 2023 September 30, 2022

Lots owned 57,800 61,800

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Liquidity and Capital Resources

At December 31, 2022, we had $216.4 million of cash and cash equivalents and $366.2 million of available borrowing capacity on our revolving credit facility.

At March 31, 2023, we had $286.7 million of cash and cash equivalents and $367.4 million of available borrowing capacity on our revolving credit facility.

We have no senior note maturities until fiscal 2026.

We believe we are well-positioned to operate effectively during changing economic conditions because of our low net leverage and strong liquidity position, our low overhead model and our strategic relationship with D.R.

At December 31, 2022, our ratio of debt to total capital (debt divided by stockholders’ equity plus debt) was 36.7% compared to 37.1% at September 30, 2022 and 40.0% at December 31, 2021.

Our ratio of net debt to total capital (debt net of unrestricted cash divided by stockholders’ equity plus debt net of unrestricted cash) was 28.7% compared to 26.9% at September 30, 2022 and 33.9% at December 31, 2021.

At March 31, 2023, our ratio of debt to total capital (debt divided by stockholders’ equity plus debt) was 36.2% compared to 37.1% at September 30, 2022 and 38.9% at March 31, 2022.

Our ratio of net debt to total capital (debt net of unrestricted cash divided by stockholders’ equity plus debt net of unrestricted cash) was 25.2% compared to 26.9% at September 30, 2022 and 29.9% at March 31, 2022.

Over the long term, we intend to maintain our ratio of net debt to total capital at approximately 40% or less.

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Letters of credit issued under the facility reduce the available borrowing capacity.

In October 2022, our senior unsecured revolving credit facility was amended to extend its maturity date to October 28, 2026.

At December 31, 2022, there were no borrowings outstanding and $43.8 million of letters of credit issued under the revolving credit facility, resulting in available capacity of $366.2 million.

The maturity date of the facility is October 28, 2026.

At March 31, 2023, there were no borrowings outstanding and $42.6 million of letters of credit issued under the revolving credit facility, resulting in available capacity of $367.4 million.

The revolving credit facility is guaranteed by our wholly-owned subsidiaries that are not immaterial subsidiaries or have not been designated as unrestricted subsidiaries.

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A failure to comply with these financial covenants could allow the lending banks to terminate the availability of funds under the revolving credit facility or cause any outstanding borrowings to become due and payable prior to maturity.

At December 31, 2022, we were in compliance with all of the covenants, limitations and restrictions of our revolving credit facility.

At March 31, 2023, we were in compliance with all of the covenants, limitations and restrictions of our revolving credit facility.

We have outstanding senior notes as described below that were issued pursuant to Rule 144A and Regulation S under the Securities Act of 1933, as amended.

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and allow to exist certain restrictions on the ability of subsidiaries to pay dividends or make other payments.

At December 31, 2022, we were in compliance with all of the limitations and restrictions associated with our senior note obligations.

At March 31, 2023, we were in compliance with all of the limitations and restrictions associated with our senior note obligations.

Effective April 30, 2020, our Board of Directors authorized the repurchase of up to $30 million of our debt securities.

The authorization has no expiration date.

All of the $30 million authorization was remaining at December 31, 2022.

All of the $30 million authorization was remaining at March 31, 2023.

Other Note Payable

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We have an effective shelf registration statement filed with the Securities and Exchange Commission in October 2021, registering $750 million of equity securities, of which $300 million was reserved for sales under our at-the-market equity offering program that became effective November 2021.

In the three months ended December 31, 2022, we issued no shares of common stock under our at-the-market equity offering program.

At December 31, 2022, $748.2 million remained available for issuance under the shelf registration statement, of which $298.2 million was reserved for sales under our at-the-market equity offering program.

In the six months ended March 31, 2023, we issued no shares of common stock under our at-the-market equity offering program.

At March 31, 2023, $748.2 million remained available for issuance under the shelf registration statement, of which $298.2 million was reserved for sales under our at-the-market equity offering program.

Operating Cash Flow Activities

In the three months ended December 31, 2022, net cash used in operating activities was $49.8 million, which was primarily the result of the increase in our real estate and the decrease in accrued development costs, partially offset by the net income generated in the period.

In the three months ended December 31, 2021, net cash provided by operating activities was $5.8 million.

In the six months ended March 31, 2023, net cash provided by operating activities was $21.3 million, which was primarily the result of our net income generated in the period adjusted for impairments and land option charges, partially offset by the decreases in accounts payable and other accrued liabilities and accrued development costs.

In the six months ended March 31, 2022, net cash provided by operating activities was $76.6 million, which was primarily the result of the net income generated in the period and increases in accounts payable and other accrued liabilities and accrued development costs, partially offset by the increase in our real estate.

Investing Cash Flow Activities

In the three months ended December 31, 2022, net cash provided by investing activities was $1.5 million compared to $3.2 million in the three months ended December 31, 2021.

In the six months ended March 31, 2023, net cash provided by investing activities was $1.3 million compared to $2.2 million in the six months ended March 31, 2022.

The cash provided by investing activities in both periods consisted primarily of cash received from the sale of assets.

Financing Cash Flow Activities

In both the three months ended December 31, 2022 and 2021, net cash used in financing activities was $0.1 million.

In the six months ended March 31, 2023, net cash used in financing activities was $0.7 million compared to $1.3 million of cash provided by financing activities in the prior year period.

Critical Accounting Policies and Estimates

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis