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Note 11 - Income Taxes | 12 Months Ended
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Oct. 31, 2022
Notes to Financial Statements |
Income Tax Disclosure [Text Block] | 11. Income Taxes Income taxes (receivable) payable, including deferred benefits, consists of the following:
|  | October 31, |
(In thousands) |  | 2022 |  |  | 2021 |
State income taxes: |  |  |  |  |  |  |  |
Current |  | $ | 3,167 |  |  | $ | 3,851 |
Deferred |  |  | (69,248 | ) |  |  | (90,070 | )
Federal income taxes: |  |  |  |  |  |  |  |
Current |  |  | - |  |  |  | - |
Deferred |  |  | (275,545 | ) |  |  | (335,608 | )
Total |  | $ | (341,626 | ) |  | $ | (421,827 | )
The (benefit) provision for income taxes is composed of the following charges:
|  | Year Ended October 31, |
(In thousands) |  | 2022 |  |  | 2021 |  |  | 2020 |
Current income tax expense: |  |  |  |  |  |  |  |  |  |  |  |
Federal (1) |  | $ | - |  |  | $ | - |  |  | $ | - |
State (2) |  |  | 13,377 |  |  |  | 7,722 |  |  |  | 4,475 |
Total current income tax expense: |  |  | 13,377 |  |  |  | 7,722 |  |  |  | 4,475 |
Federal |  |  | 60,064 |  |  |  | (335,608 | ) |  |  | - |
State |  |  | 20,822 |  |  |  | (90,070 | ) |  |  | - |
Total deferred income tax expense (benefit): |  |  | 80,886 |  |  |  | (425,678 | ) |  |  | - |
Total |  | $ | 94,263 |  |  | $ | (417,956 | ) |  | $ | 4,475 |
(1) | The current federal income tax expense is net of the use of federal net operating losses totaling $306.0 million (tax effected $64.3 million), $173.8 million (tax effected $36.5 million) and $183.0 million (tax effected $38.4 million) for the years ended October 31, 2022, 2021 and 2020, respectively.
(2) | The current state income tax expense is net of the use of state net operating losses totaling $80.1 million, $55.7 million and $72.5 million for the years ended October 31, 2022, 2021 and 2020, respectively.
The total income tax expense for the year ended October 31, 2022 was $94.3 million. The expense was primarily due to federal and state tax expense recorded as a result of our income before income taxes. The federal tax expense is not paid in cash as it is offset by the use of our existing net operating loss (“NOL”) carryforwards. The total income tax benefit for the year ended October 31, 2021 was $418.0 million. The benefit was primarily due to the reversal of a substantial portion of our valuation allowance previously recorded against our deferred tax assets (“DTAs”). The total income tax expense of $4.5 million for the year ended October 31, 2020 was primarily related to state tax expense from income generated in states where we do not have NOL carryforwards to offset the current year income. In addition, the expense for the year ended October 31, 2020 was primarily related to state tax expense from the impact of a cancellation of debt income recorded for tax purposes but not for U.S. GAAP purposes, creating a permanent difference. Our federal net operating losses of $909.6 million expire between 2029 and 2038, and $15.7 million have an indefinite carryforward period. Of our $2.3 billion of state NOLs, $411.4 million expire between 2023 through 2027; $1.4 billion expire between 2028 through 2032; $369.7 million expire between 2033 through 2037; $73.7 million expire between 2038 through 2042; and $51.5 million have an indefinite carryforward period. The Company recognizes deferred income taxes for deferred tax benefits arising from NOL carryforwards and temporary differences between book and tax income which will be recognized in future years as an offset against future taxable income. A valuation allowance is provided to offset DTAs if, based upon the available evidence, it is more likely than not that some or all of the DTAs will not be realized. Future realization of DTAs depends on the existence of sufficient taxable income of the appropriate character. Sources of taxable income include future reversals of existing taxable temporary differences, expected future taxable income, taxable income in prior carryback years if permitted under the tax law and tax planning strategies. Management has determined that it is more likely than not that sufficient taxable income will be generated in the future to realize its DTAs except for a portion related to state DTAs. As of October 31, 2020, we had a valuation allowance of $396.5 million of federal DTAs related to NOLs, as well as other matters, all of which was reversed during the year ended October 31, 2021. We also had a valuation allowance of $181.0 million of DTAs related to state NOLs as of October 31, 2020, of which $78.1 million was reversed during the year ended October 31, 2021. As of October 31, 2022, we considered all available positive and negative evidence to determine whether, based on the weight of that evidence, our valuation allowance for our DTAs was appropriate in accordance with ASC 740. Overall, the positive evidence, both objective and subjective, outweighed the negative evidence. The significant positive improvement in our operations in the last three years, coupled with our contract backlog of $1.3 billion as of October 31, 2022 provided positive evidence to support the conclusion that a full valuation allowance is not necessary for all of our DTAs. As such, we used our go forward projections to estimate our usage of our existing federal and state DTAs. Based on this analysis, we determined that the current valuation allowance for our DTAs of $95.7 million as of October 31, 2022 is appropriate.
| 1. | As of October 31, 2022, on a tax basis, the Company had adjusted pre-tax income, which is income before income taxes excluding land-related charges and loss (gain) on extinguishment of debt, on a three-year cumulative basis. On a U.S. GAAP basis, the Company had generated $565.0 million of cumulative income before income taxes in the three years ended October 31, 2022. We believe these positive results will continue given the strength of our contract backlog and recent homebuilding market conditions. (Positive Objective Evidence)
| 2. | Over the last several years, we have completed a number of debt refinancing/restructuring transactions to extend our debt maturities, which will allow us to allocate cash to opportunistically grow our community count and potentially generate additional income. (Positive Objective Evidence)
| 3. | In July 2021 we paid off in full $111.2 million of 10.0% 2022 Notes and in August 2021, we paid off in full $69.7 million of 10.5% 2024 Notes. Additionally, in April 2022 we redeemed $100.0 million in principal of our 7.75% Senior Secured 1.125 Lien Notes due 2026. These actions reduced our annual interest incurred by approximately $23 million, which will enhance our profitability going forward. (Positive Objective Evidence)
| 4. | We incurred pre-tax losses during the housing market decline that began in 2007 and the slower than expected housing market recovery. Given our improved but still highly leveraged Consolidated Balance Sheet, another sustained downturn in the housing market, would be significantly more damaging to the Company than to other better capitalized homebuilders and make it very difficult for us to avoid future losses, given our high interest expenses. (Negative Objective Evidence)
| 5. | We exited several geographic markets over the last few years that have historically had pre-tax losses. By exiting these underperforming markets, the Company has been able to redeploy capital to better performing markets, which over time should improve our profitability. (Positive Subjective Evidence)
| 6. | The historical cyclicality of the U.S. housing market, a more restrictive mortgage lending environment compared to before the housing downturn of 2007-2009, the uncertainty of the overall U.S. economy, government policies and consumer confidence, all could adversely impact the housing market. (Negative Subjective Evidence)
Deferred tax assets and liabilities have been recognized on the Consolidated Balance Sheets as follows:
|  | October 31, |
(In thousands) |  | 2022 |  |  | 2021 |
Deferred tax assets: |  |  |  |  |  |  |  |
Inventory impairments |  | $ | 30,772 |  |  | $ | 34,973 |
Uniform capitalization of overhead |  |  | 4,285 |  |  |  | 4,483 |
Warranty and legal reserves |  |  | 5,668 |  |  |  | 5,671 |
Compensation |  |  | 13,746 |  |  |  | 12,464 |
Deferred income |  |  | 2,425 |  |  |  | 1,420 |
Interest expense |  |  | 3,646 |  |  |  | 2,582 |
Restricted stock units |  |  | 1,628 |  |  |  | 1,159 |
Stock options |  |  | 818 |  |  |  | 1,009 |
Provision for losses |  |  | 17,700 |  |  |  | 17,064 |
Joint venture loss |  |  | - |  |  |  | 743 |
Federal net operating losses |  |  | 206,560 |  |  |  | 263,366 |
State net operating losses |  |  | 150,832 |  |  |  | 177,163 |
Other |  |  | 5,005 |  |  |  | 5,136 |
Total deferred tax assets |  |  | 443,085 |  |  |  | 527,233 |
Deferred tax liabilities: |  |  |  |  |  |  |  |
Joint venture income |  |  | (2,565 | ) |  |  | - |
Total deferred tax liabilities |  |  | (2,565 | ) |  |  | - |
Valuation allowance |  |  | (95,727 | ) |  |  | (101,555 | )
Deferred tax assets, net |  | $ | 344,793 |  |  | $ | 425,678 |
Our effective tax rate varied from the statutory federal income tax rate. The effective tax rate is affected by a number of factors, the most significant of which has been the valuation allowance related to our DTAs. Due to the effects of these factors, our effective tax rates for 2022, 2021 and 2020 are not correlated to the amount of our income before income taxes. The sources of these factors were as follows:
|  | Year Ended October 31, |
|  | 2022 |  |  | 2021 |  |  | 2020 |
Federal statutory income tax rate |  |  | 21.0 | % |  |  | 21.0 | % |  |  | 21.0 | %
State income taxes, net of federal income tax benefit |  |  | 9.8 |  |  |  | 4.0 |  |  |  | 10.6 |
Permanent differences, net |  |  | 0.8 |  |  |  | 3.6 |  |  |  | 53.2 |
Deferred tax asset valuation allowance impact |  |  | 0.0 |  |  |  | (248.5 | ) |  |  | (83.3 | )
Tax contingencies |  |  | (0.1 | ) |  |  | (0.2 | ) |  |  | (0.5 | )
Adjustments to prior years’ tax accruals |  |  | (2.0 | ) |  |  | 0.0 |  |  |  | 7.0 |
Effective tax rate |  |  | 29.5 | % |  |  | (220.1 | )% |  |  | 8.0 | %
ASC 740 provides that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits. We recognize tax liabilities in accordance with ASC 740-10 and we adjust these liabilities when our judgment changes as a result of the evaluation of new information not previously available. Due to the complexity of some of these uncertainties, the ultimate resolution may result in a liability that is materially different from our current estimate of tax liabilities. These differences will be reflected as increases or decreases to income tax (benefit) provision in the period in which they are determined. We recognize interest and penalties related to unrecognized tax benefits within income taxes in the Consolidated Statement of Operations. Accrued interest and penalties are included within "Income taxes payable" line on the Consolidated Balance Sheets. The following is a tabular reconciliation of the total amount of unrecognized tax benefits excluding interest and penalties:
(In millions) |  |  | 2022 |  |  |  | 2021 |
Unrecognized tax benefit—November 1, |  | $ | 0.5 |  |  | $ | 0.7 |
Gross increases—tax positions in current period |  |  | - |  |  |  | - |
Lapse of statute of limitations |  |  | (0.3 | ) |  |  | (0.2 | )
Unrecognized tax benefit—October 31, |  | $ | 0.2 |  |  | $ | 0.5 |
Related to the unrecognized tax benefits noted above, as of October 31, 2022 and 2021, we recognized a liability for interest and penalties of $0.1 million and $0.3 million, respectively. For the years ended October 31, 2022, 2021 and 2020, we recognized $128 thousand, $84 thousand and $60 thousand, respectively, of interest and penalties in income taxes (benefits). It is likely that, within the next 12 months, the amount of the Company's unrecognized tax benefits will decrease by $0.2 million, excluding interest and penalties. This reduction is expected primarily due to the expiration of certain statutes of limitation. The portion of unrecognized tax benefits that, if recognized, would affect the Company’s effective tax rate (excluding any related impact to the valuation allowance) is $0.2 million and $0.5 million for the years ended October 31, 2022 and 2021. The recognition of unrecognized tax benefits could have an impact on the Company’s DTAs. The consolidated federal tax returns have been audited through October 31, 2021 and these years are closed. We are also subject to various income tax examinations in the states in which we do business. The outcome for a particular audit cannot be determined with certainty prior to the conclusion of the audit, appeal, and in some cases, litigation process. As each audit is concluded, adjustments, if any, are recorded in the period determined. To provide for potential exposures, tax reserves are recorded, if applicable, based on reasonable estimates of potential audit results. However, if the reserves are insufficient upon completion of an audit, there could be an adverse impact on our financial position and results of operations. The statute of limitations for our major tax jurisdictions remains open for examination for tax years 2018 - 2021.

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- Definition The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information. + References Reference 1: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 21 -URI https://asc.fasb.org/extlink&oid=121826272&loc=d3e32857-109319 Reference 2: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section S99 -Paragraph 2 -Subparagraph (SAB Topic 11.C) -URI https://asc.fasb.org/extlink&oid=122134291&loc=d3e330215-122817 Reference 3: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 17 -Subparagraph (b) -URI https://asc.fasb.org/extlink&oid=121826272&loc=d3e32809-109319 Reference 4: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section S99 -Paragraph 1 -Subparagraph (SAB TOPIC 6.I.5.Q1) -URI https://asc.fasb.org/extlink&oid=122134291&loc=d3e330036-122817 Reference 5: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 14 -URI https://asc.fasb.org/extlink&oid=121826272&loc=d3e32705-109319 Reference 6: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 270 -Section 50 -Paragraph 1 -URI https://asc.fasb.org/extlink&oid=6424409&loc=d3e44925-109338 Reference 7: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -URI https://asc.fasb.org/topic&trid=2144680 Reference 8: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 30 -Section 50 -Paragraph 2 -Subparagraph (a) -URI https://asc.fasb.org/extlink&oid=6424122&loc=d3e41874-109331 Reference 9: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 235 -SubTopic 10 -Section S99 -Paragraph 1 -Subparagraph (SX 210.4-08(h)(2)) -URI https://asc.fasb.org/extlink&oid=120395691&loc=d3e23780-122690 + Details
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