Forestar (FOR) - 2023 Q2 - Quarterly Report

PART I — FINANCIAL INFORMATION Item 1. Financial Statements This section presents Forestar Group Inc.'s unaudited consolidated financial statements as of March 31, 2023, and for the three and six months then ended Consolidated Balance Sheets Total assets slightly decreased to $2,336.3 million as of March 31, 2023, while total equity increased to $1,248.8 million primarily due to retained earnings Consolidated Balance Sheet Highlights (in millions) | Account | March 31, 2023 | September 30, 2022 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $286.7 | $264.8 | | Real estate | $1,988.0 | $2,022.4 | | Total Assets | $2,336.3 | $2,343.0 | | Liabilities | | | | Debt | $706.8 | $706.0 | | Total Liabilities | $1,087.5 | $1,143.7 | | Equity | | | | Retained earnings | $555.6 | $507.9 | | Total Equity | $1,248.8 | $1,199.3 | Consolidated Statements of Operations Revenues decreased to $301.5 million for the three months and $518.2 million for the six months ended March 31, 2023, leading to a decline in net income Consolidated Statements of Operations Highlights (in millions, except per share data) | Metric | Three Months Ended Mar 31, 2023 | Three Months Ended Mar 31, 2022 | Six Months Ended Mar 31, 2023 | Six Months Ended Mar 31, 2022 | | :--- | :--- | :--- | :--- | :--- | | Revenues | $301.5 | $421.6 | $518.2 | $829.2 | | Income before income taxes | $35.9 | $63.2 | $63.8 | $116.7 | | Net income | $26.9 | $47.8 | $47.7 | $88.3 | | Diluted EPS | $0.54 | $0.96 | $0.95 | $1.77 | Consolidated Statements of Total Equity Total equity increased by $49.5 million to $1,248.8 million as of March 31, 2023, primarily driven by net income - Total equity grew by $49.5 million in the six months ended March 31, 2023, mainly due to retained net income[15] Consolidated Statements of Cash Flows Net cash provided by operating activities significantly decreased to $21.3 million for the six months ended March 31, 2023, with cash and cash equivalents increasing to $286.7 million Consolidated Statements of Cash Flows Highlights (in millions) | Cash Flow Activity | Six Months Ended Mar 31, 2023 | Six Months Ended Mar 31, 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $21.3 | $76.6 | | Net cash provided by investing activities | $1.3 | $2.2 | | Net cash (used in) provided by financing activities | $(0.7) | $1.3 | | Increase in cash and cash equivalents | $21.9 | $80.1 | | Cash and cash equivalents at end of period | $286.7 | $233.7 | Notes to Consolidated Financial Statements Detailed notes cover accounting policies, segment information, impairment charges, debt structure, and significant related-party transactions with D.R. Horton - As of March 31, 2023, D.R. Horton, Inc. owned approximately 63% of the Company's outstanding common stock, making it a related party under GAAP[23] - The company operates through a single real estate segment, acquiring land and developing infrastructure for single-family residential communities, with revenues primarily from selling finished lots to homebuilders[27] - The company recorded impairment charges of $19.4 million during the three months ended March 31, 2023, a significant increase from $3.8 million in the prior year period[29] Revenue Breakdown (in millions) | Revenue Source | Three Months Ended Mar 31, 2023 | Six Months Ended Mar 31, 2023 | | :--- | :--- | :--- | | Residential lot sales | $252.9 | $459.5 | | Deferred development lot sales | $7.5 | $14.3 | | Tract sales and other | $41.1 | $44.4 | | Total Revenues | $301.5 | $518.2 | Debt Composition (in millions) | Debt Instrument | March 31, 2023 | September 30, 2022 | | :--- | :--- | :--- | | Revolving credit facility | $— | $— | | 3.85% senior notes due 2026 | $397.0 | $396.5 | | 5.0% senior notes due 2028 | $297.3 | $297.0 | | Other note payable | $12.5 | $12.5 | | Total Debt | $706.8 | $706.0 | Lot Sales to D.R. Horton | Metric | Three Months Ended Mar 31, 2023 | Six Months Ended Mar 31, 2023 | | :--- | :--- | :--- | | Lots Sold to D.R. Horton | 2,666 | 4,760 | | Revenue from D.R. Horton (millions) | $219.9 | $407.0 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the impact of weakening demand on revenues and net income, while highlighting the company's strong liquidity and strategic relationship with D.R. Horton Our Operations Forestar is a national residential lot developer operating in 52 markets, facing weakened demand due to rising interest rates and inflation - The company is a national residential lot developer with operations in 52 markets in 20 states as of March 31, 2023[72] - Demand for residential lots has weakened since Q4 fiscal 2022 and persisted through Q2 fiscal 2023 due to substantially increased mortgage interest rates and elevated inflationary pressures[75] Results of Operations Revenues and net income significantly declined due to reduced residential lot sales, accompanied by increased impairment charges and higher SG&A as a percentage of revenue Residential Lots Sold | Period | 2023 | 2022 | % Change | | :--- | :--- | :--- | :--- | | Three Months Ended Mar 31 | 2,979 | 5,788 | (48.5%) | | Six Months Ended Mar 31 | 5,242 | 10,304 | (49.1%) | - The decrease in residential lots sold and related revenues was primarily a result of weakening demand for finished lots as homebuilders reduced their pace of new home starts[80] - The company recorded non-cash impairment charges of $19.4 million in the three months ended March 31, 2023, compared to $3.8 million in the prior year period[84] - SG&A expense as a percentage of revenues was 7.3% in Q2 2023, up from 5.8% in Q2 2022, reflecting the impact of lower revenues[86] Land and Lot Position Total lots owned and controlled decreased to 76,400 as of March 31, 2023, with 15,200 owned lots under contract, primarily to D.R. Horton Land and Lot Position Summary | Category | March 31, 2023 | September 30, 2022 | | :--- | :--- | :--- | | Lots owned | 57,800 | 61,800 | | Lots controlled through purchase contracts | 18,600 | 28,300 | | Total lots owned and controlled | 76,400 | 90,100 | Liquidity and Capital Resources The company maintains strong liquidity with $286.7 million cash and $367.4 million available credit, improving its net debt to total capital ratio to 25.2% - At March 31, 2023, the company had $286.7 million of cash and cash equivalents and $367.4 million of available borrowing capacity on its revolving credit facility[90] Key Leverage Ratios | Ratio | March 31, 2023 | September 30, 2022 | | :--- | :--- | :--- | | Debt to total capital | 36.2% | 37.1% | | Net debt to total capital | 25.2% | 26.9% | - The company has a $410 million senior unsecured revolving credit facility maturing in October 2026, with no borrowings outstanding at March 31, 2023[93] - Net cash provided by operating activities decreased to $21.3 million in the six months ended March 31, 2023, from $76.6 million in the prior year period[102] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate risk on its fixed-rate debt, with no exposure to foreign currency or commodity price fluctuations - The company is subject to interest rate risk on its debt, with fixed-rate debt including $400 million of 3.85% senior notes, $300 million of 5.0% senior notes, and a $12.5 million other note as of March 31, 2023[113][114] - There were no outstanding borrowings on the company's variable-rate revolving credit facility at March 31, 2023[114] - The company has no exposure to foreign currency fluctuations and no significant exposure to commodity price fluctuations[115][116] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective as of March 31, 2023, with no material changes to internal controls during the quarter - Based on an evaluation as of the end of the period, the Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective[117] - No changes in internal control over financial reporting occurred during the quarter ended March 31, 2023, that have materially affected, or are reasonably likely to materially affect, internal controls[118] PART II — OTHER INFORMATION Item 1. Legal Proceedings The company is involved in various legal proceedings, for which adequate reserves have been established, with no anticipated material adverse effect on financial position - The company believes it has adequate reserves for probable losses from legal proceedings and does not anticipate a material adverse effect on its financial position or long-term operations[119] Item 6. Exhibits This section lists exhibits filed with the Form 10-Q, including CEO and CFO certifications and Inline XBRL documents - The report includes certifications from the CEO and CFO under Sections 302 and 906 of the Sarbanes-Oxley Act, as well as XBRL data files[121] SIGNATURE - The report was signed on April 24, 2023, by James D. Allen, Executive Vice President and Chief Financial Officer, on behalf of Forestar Group Inc[127]