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Note 12 - Reduction of Inventory to Fair Value

12 Months Ended

Oct. 31, 2020

Inventory Impairments and Land Option Cost Write-offs [Text Block]

12. 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 year ended October 31, 2020, our discount rate used for the impairments recorded was 17.3%, and for the years ended October 31, 2019 and 2018, our discount rates used for the impairments recorded ranged from 17.3% to 18.3% and 16.8% to 19.8%, respectively. 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 years ended October 31, 2020 and 2019, we evaluated inventories of all 354 and 393 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 undiscounted future cash flow analyses during the years ended October 31, 2020 and 2019 for three and nine of those communities (i.e., those with a projected operating loss or other impairment indicators), respectively, with an aggregate carrying value of $5.4 million and $58.9 million, respectively. As a result of our undiscounted future cash flow analyses, we performed discounted cash flow analyses for two of those communities for the fiscal year ended October 31, 2020, resulting in aggregate impairment losses of $2.0 million. The one community, with an aggregate carrying value of $0.6 million, that did not require a discounted cash flow analysis to be performed during the year ended October 31, 2020 did not have undiscounted future cash flows that exceeded the carrying amount by less than 20%. During the year ended October 31, 2019, six communities that required discounted cash flow analyses were impaired, which resulted in recording aggregate impairment losses of $2.7 million. The three communities that did not require a discounted cash flow analysis to be performed during the year ended October 31, 2019, had an aggregate carrying value of $41.3 million and undiscounted future cash flows that exceeded the carrying amount by less than 20%. The pre-impairment value in the table below represents the carrying value, net of prior period impairments, if any, at the time of recording the impairments. Our aggregate impairment losses are included in the Consolidated Statement of Operations on the line entitled “Homebuilding: Inventory impairment loss and land option write-offs” and deducted from inventory.

The following table represents impairments by segment for fiscal 2020, 2019 and 2018:

(Dollars in millions)	*Year Ended October 31, 2020*
			*Dollar*		*Pre-*
	*Number of*		*Amount of*		*Impairment*
	*Communities*		*Impairment*		*Value (1)*
Northeast		-	$	-	$	-
Mid-Atlantic		-		-		-
Midwest		2		2.0		4.8
Southeast		-		-		-
Southwest		-		-		-
West		-		-		-
Total		2	$	2.0	$	4.8

(Dollars in millions)	*Year Ended October 31, 2019*
			*Dollar*		*Pre-*
	*Number of*		*Amount of*		*Impairment*
	*Communities*		*Impairment*		*Value (1)*
Northeast		2	$	0.2	$	7.8
Mid-Atlantic		1		0.3		1.7
Midwest		1		1.4		4.6
Southeast		1		0.7		2.2
Southwest		1		0.1		1.2
West		-		-		-
Total		6	$	2.7	$	17.5

(Dollars in millions)	*Year Ended October 31, 2018*
			*Dollar*		*Pre-*
	*Number of*		*Amount of*		*Impairment*
	*Communities*		*Impairment*		*Value (1)*
Northeast		1	$	0.4	$	1.0
Mid-Atlantic		-		-		-
Midwest		1		0.1		0.5
Southeast		3		1.6		9.7
Southwest		-		-		-
West		-		-		-
Total		5	$	2.1	$	11.2

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

The 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. The total aggregate write-offs related to these items were $6.8 million, $3.6 million and $1.4 million for the years ended October 31, 2020, 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 following table represents write-offs of such costs by segment for fiscal 2020, 2019 and 2018:

	*Year Ended October 31,*
(In millions)	*2020*		*2019*		*2018*
Northeast	$	1.5	$	0.6	$	0.6
Mid-Atlantic		-		0.5		0.2
Midwest		3.5		0.9		0.1
Southeast		0.8		0.3		-
Southwest		0.6		0.6		0.2
West		0.4		0.7		0.3
Total	$	6.8	$	3.6	$	1.4