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Note 4 - Reduction of Inventory to Fair Value | 6 Months Ended
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Apr. 30, 2019
Notes to Financial Statements |
Inventory Impairments and Land Option Cost Write-offs [Text Block] |
4. | 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. For the six months ended April 30, 2019, our discount rate used for the impairments recorded ranged from 18.0% to 18.3%. For the six months ended April 30, 2018, our discount rate used for the impairments recorded ranged from 16.8% to 19.8%. 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 six months ended April 30, 2019 and 2018, we evaluated inventories of all 398 and 377 communities under development and held for future development or sale, respectively, for impairment indicators through preparation and review of detailed budgets or other market indicators of impairment. We performed detailed impairment calculations during the six months ended April 30, 2019 and 2018 for six and five of those communities (i.e., those with a projected operating loss or other impairment indicators), respectively, with an aggregate carrying value of $51.6 million and $11.2 million, respectively. As a result of our impairment analysis, we recorded aggregate impairment losses of $1.0 million in two communities (which had an aggregate pre-impairment values of $3.9 million) for the three months ended April 30, 2019, and $1.0 million in three communities (which had an aggregate pre-impairment values of $10.2 million) for the six months ended April 30, 2019. For both the three and six months ended April 30, 2018, we recorded aggregate impairment losses of $2.1 million in all five communities (which had an aggregate pre-impairment value of $11.2 million). These impairment losses are included in the Condensed Consolidated Statements of Operations on the line entitled “Homebuilding: Inventory impairment loss and land option write-offs” and deducted from inventory. The pre-impairment value represents the carrying value, net of prior period impairments, if any, at the time of recording the impairment. Of those communities tested for impairment during the six months ended April 30, 2019, three communities with an aggregate carrying value of $41.3 million had undiscounted future cash flows that exceeded the carrying amount by less than 20%. During the six months ended April 30, 2018, none of the five communities tested for impairment had undiscounted future cash flows that exceeded the carrying amount by less than 20%. The Condensed Consolidated Statements 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 $0.5 million and $0.6 million for the three months ended April 30, 2019 and 2018, respectively, and $1.2 million and $1.0 million for the six months ended April 30, 2019 and 2018, 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 costs written off. The number of lots walked away from during the three months ended April 30, 2019 and 2018 were 680 and 714, respectively, and 2,170 and 1,341 during the six months ended April 30, 2019 and 2018, respectively. 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 on our Condensed Consolidated Balance Sheets from “Sold and unsold homes and lots under development” to “Land and land options held for future development or sale.” During the first half of fiscal 2019, we did not mothball any additional communities, but sold two previously mothballed communities and re-activated two previously mothballed communities. As of April 30, 2019 and October 31, 2018, the net book value associated with our 14 and 18 total mothballed communities was $14.2 million and $24.5 million, respectively, which was net of impairment charges recorded in prior periods of $146.9 million and $186.1 million, respectively. 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 Accounting Standards Codification (“ASC”) 360 - 20 - 40 - 38, we are required to record this inventory on our Condensed Consolidated Balance Sheets. As of April 30, 2019 and October 31, 2018, we had no specific performance options. We sell and lease 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 606 - 10 - 55 - 68, these sale and leaseback transactions are considered a financing rather than a sale. Therefore, for purposes of our Condensed Consolidated Balance Sheets, at April 30, 2019 and October 31, 2018, inventory of $58.4 million and $50.5 million, respectively, was recorded to “Consolidated inventory not owned,” with a corresponding amount of $52.1 million and $43.9 million (net of debt issuance costs), respectively, recorded to “Liabilities from inventory not owned” for the amount of net cash received from the transactions. We have land banking arrangements, whereby we sell our land parcels to the land bankers and they provide us an option to purchase back finished lots on a predetermined schedule. Because of our options to repurchase these parcels, for accounting purposes, in accordance with ASC 606 - 10 - 55 - 70, these transactions are considered a financing rather than a sale. For purposes of our Condensed Consolidated Balance Sheets, at April 30, 2019 and October 31, 2018, inventory of $96.0 million and $37.4 million, respectively, was recorded to “Consolidated inventory not owned,” with a corresponding amount of $71.2 million and $19.5 million (net of debt issuance costs), respectively, recorded to “Liabilities from inventory not owned” for the amount of net cash received from the transactions.

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