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Note 5 - Reduction of Inventory to Fair Value

3 Months Ended

Jan. 31, 2014

Inventory Impairments And Land Option Cost Write Offs [Abstract]

Inventory Impairments And Land Option Cost Write Offs [Text Block]

5. Reduction of Inventory to Fair Value

We record impairment losses on inventories related to communities under development and held for future development when events and circumstances indicate that they may be impaired and the undiscounted cash flows estimated to be generated by those assets are less than their related carrying amounts. If the expected undiscounted cash flows are less than the carrying amount, then the community is written down to its fair value. We estimate the fair value of each impaired community by determining the present value of the estimated future cash flows at a discount rate commensurate with the risk of the respective community. We did not record impairments during the three months ended January 31, 2014. For the three months ended January 31, 2013, our discount rate used for the impairments recorded was 18.8%. Should the estimates or expectations used in determining cash flows or fair value decrease or differ from current estimates in the future, we may need to recognize additional impairments.

During the three months ended January 31, 2014, we evaluated inventories of all 377 communities under development and held for future development for impairment indicators through preparation and review of detailed budgets or other market indicators of impairment. We performed detailed impairment calculations for four of those communities (i.e., those with a projected operating loss or other impairment indicators) with an aggregate carrying value of $17.2 million. Of those communities tested for impairment, two communities with an aggregate carrying value of $16.2 million had undiscounted future cash flow that only exceeded the carrying amount by less than 20%. As a result of our impairment analysis, we did not record any impairment losses for the three months ended January 31, 2014, but recorded $0.6 million for the three months ended January 31, 2013, which are included in the Condensed Consolidated Statement of Operations and deducted from inventory.

The following table represents inventory impairments by homebuilding segment for the three months ended January 31, 2013 (there were no impairments for the three months ended January 31, 2014):

(Dollars in millions)	Three Months Ended January 31, 2013
	Number of Communities		Dollar Amount of Impairment(1)		Pre- Impairment Value(2)
Northeast		1	$	0.6	$	2.9
Mid-Atlantic		1		-		0.1
Midwest		-		-		-
Southeast		1		-		0.4
Southwest		-		-		-
West		-		-		-
Total		3	$	0.6	$	3.4

(1) During the three months ended January 31, 2013, total impairments were $587 thousand. The impairments were in the Northeast totaling $568 thousand, in the Mid-Atlantic totaling $2 thousand and in the Southeast totaling $17 thousand.

(2) Represents carrying value, net of prior period impairments, if any, at the time of recording the applicable period’s impairments.

The Condensed Consolidated Statement of Operations line entitled “Homebuilding: Inventory impairment loss and land option write-offs” also includes write-offs of options, and approval, engineering and capitalized interest costs that we record when we redesign communities and/or abandon certain engineering costs and we do not exercise options in various locations because the communities' pro forma profitability is not projected to produce adequate returns on investment commensurate with the risk. Total aggregate write-offs related to these items were $0.7 million and $0.1 million for the three months ended January 31, 2014 and 2013, respectively. Occasionally, these write-offs are offset by recovered deposits (sometimes through legal action) that had been written off in a prior period as walk-away costs. Historically, these recoveries have not been significant in comparison to the total cost written off.

The following table represents write-offs of such costs (after giving effect to any recovered deposits in the applicable period) and the number of lots walked away from by homebuilding segment for the three months ended January 31, 2014 and 2013:

	Three Months Ended January 31,
	2014				2013
(Dollars in millions)	Number of Walk-Away Lots(1)		Dollar Amount of Write-Offs(2)		Number of Walk-Away Lots		Dollar Amount of Write-Offs(3)

Northeast		199	$	0.4		-	$	-
Mid-Atlantic		433		0.1		140		-
Midwest		265		-		-		-
Southeast		527		0.1		-		-
Southwest		112		0.1		45		-
West		-		-		-		-
Total		1,536	$	0.7		185	$	0.1

(1) During the three months ended January 31, 2014, we walked-away from a significant number of lots that were optioned during the latter half of fiscal 2013. Most of these walk-aways occurred during the initial due diligence period when any deposits are still refundable, and therefore, the write-offs associated with these walk-aways primarily related to investigation costs and not deposit forfeitures.

(2) During the three months ended January 31, 2014, there were write-offs in the Midwest totaling $21 thousand.

(3) During the three months ended January 31, 2013 there were write-offs totaling $79 thousand. The write-offs were in the Northeast totaling $29 thousand, in the Mid-Atlantic totaling $6 thousand, in the Southeast totaling $19 thousand, in the Southwest totaling $11 thousand and in the West totaling $14 thousand.

We decide to mothball (or stop development on) certain communities when we determine that the current performance does not justify further investment at the time. When we decide to mothball a community, the inventory is reclassified from “Sold and unsold homes and lots under development” to “Land and land options held for future development or sale.” During the first quarter of fiscal 2014, we did not mothball any new communities, or re-activate or sell any communities which were previously mothballed. As of January 31, 2014, the net book value associated with our 50 total mothballed communities was $116.3 million, net of impairment charges recorded in prior periods of $431.3 million.

From time to time we enter into option agreements that include specific performance requirements, whereby we are required to purchase a minimum number of lots. Because of our obligation to purchase these lots, for accounting purposes in accordance with ASC 360-20-40-38, we are required to record this inventory on our Condensed Consolidated Balance Sheets. As of January 31, 2014, we had $2.7 million of specific performance options recorded on our Condensed Consolidated Balance Sheets to “Consolidated inventory not owned – specific performance options,” with a corresponding liability of $2.5 million recorded to “Liabilities from inventory not owned.” Consolidated inventory not owned also consists of other options that were included on our balance sheet in accordance with GAAP.

During fiscal 2012, 2013 and 2014, we sold and leased back certain of our model homes with the right to participate in the potential profit when each home is sold to a third party at the end of the respective lease. As a result of our continued involvement, for accounting purposes in accordance with ASC 360-20-40-38, these sale and leaseback transactions are considered a financing rather than a sale. Therefore, for purposes of our Condensed Consolidated Balance Sheet, at January 31, 2014, inventory of $52.6 million was recorded to “Consolidated inventory not owned – other options,” with a corresponding amount of $50.6 million recorded to “Liabilities from inventory not owned.”

In addition, we entered into a land banking arrangement in fiscal 2012 with GSO Capital Partners LP ("GSO"), which continued through the first quarter of fiscal 2014, whereby we sold a portfolio of our land parcels to GSO, and GSO provided us an option to purchase back finished lots on a quarterly basis. Because of our option to repurchase these parcels, for accounting purposes, in accordance with ASC 360-20-40-38, this transaction is considered a financing rather than a sale. For purposes of our Condensed Consolidated Balance Sheet, at January 31, 2014, inventory of $43.3 million was recorded as “Consolidated inventory not owned – other options”, with a corresponding amount of $33.3 million recorded to “Liabilities from inventory not owned” for the amount of net cash received from the transactions.