Inventory

9 Months Ended

Jul. 31, 2011

2. Inventory

Inventory at July 31, 2011 and October 31, 2010 consisted of the following (amounts in thousands):


	July 31,		October 31,
	2011		2010
Land controlled for future communities	$	43,554	$	31,899
Land owned for future communities		1,031,144		923,972
Operating communities		2,348,919		2,285,854

	$	3,423,617	$	3,241,725

Operating communities include communities offering homes for sale, communities that have sold all available home sites but have not completed delivery of the homes, communities that were previously offering homes for sale but are temporarily closed due to business conditions or non-availability of improved home sites and that are expected to reopen within twelve months of the end of the fiscal period being reported on, and communities preparing to open for sale. Communities that were previously offering homes for sale but are temporarily closed due to business conditions that do not have any remaining backlog and are not expected to reopen within twelve months of the end of the fiscal period being reported on have been classified as land owned for future communities. The carrying value attributable to operating communities includes the cost of homes under construction, land and land development costs, the carrying cost of home sites in current and future phases of these communities and the carrying cost of model homes, less impairment charges recognized against the communities.

Information regarding the classification, number and carrying value of these temporarily closed communities at July 31, 2011 and October 31, 2010 is provided in the table below.


	July 31,		October 31,
	2011		2010
Land owned for future communities:
Number of communities		40		36
Carrying value (in thousands)	$	245,287	$	212,882
Operating communities:
Number of communities		4		13
Carrying value (in thousands)	$	20,958	$	78,100

During the three-month period ended January 31, 2011, the Company reclassified $20.0 million of inventory related to commercial retail space located in one of its high-rise projects to property, construction and office equipment. The $20.0 million was reclassified due to the completion of construction of the facilities and the substantial completion of the high-rise project of which the facilities are a part.

The Company provided for inventory impairment charges and the expensing of costs that it believed not to be recoverable in the nine-month and three-month periods ended July 31, 2011 and 2010 as shown in the table below (amounts in thousands).


	Nine months ended July 31,				Three months ended July 31,
	2011		2010		2011		2010
Land controlled for future communities	$	2,486	$	2,250	$	637	$	58
Land owned for future communities		16,000		41,600		16,000		5,850
Operating communities		16,375		44,370		175		6,600

	$	34,861	$	88,220	$	16,812	$	12,508

The Company reviews the profitability of each of its operating communities during each fiscal quarter. For those communities operating below certain profitability thresholds, or where other negative factors, such as a decline in market or economic conditions in the market in which the community is located, high cancellation rates or a significant increase in speculative inventory in the community or in the market in general, exist, and the undiscounted cash flow is less than the carrying value, the Company determines the estimated fair value of those communities and adjusts the carrying value of the communities to their estimated fair values in accordance with ASC 360.

The table below provides, for the periods indicated, the number of operating communities that the Company tested for potential impairment, the number of operating communities for which the Company recognized impairment charges and the amount of impairment charges recognized, and, as of the end of the period indicated, the fair value of those communities, net of impairment charges ($ amounts in thousands).


			Impaired operating communities
					Fair value of
	Number of				communities,
	operating				net of
	communities		Number of		impairment		Impairment
Three months ended:	tested		communities		charges		charges
Fiscal 2011:
January 31		143		6	$	56,105	$	5,475
April 30		142		9	$	40,765		10,725
July 31		129		2	$	867		175

							$	16,375


Fiscal 2010:
January 31		260		14	$	60,519	$	22,750
April 30		161		7	$	53,594		15,020
July 31		155		7	$	21,457		6,600
October 31		144		12	$	39,209		9,120

							$	53,490

At July 31, 2011, the Company evaluated its land purchase contracts to determine if any of the selling entities were VIEs and, if they were, whether the Company was the primary beneficiary of any of them. Under these land purchase contracts, the Company does not possess legal title to the land and its risk is generally limited to deposits paid to the sellers and the creditors of the sellers generally have no recourse against the Company. At July 31, 2011, the Company determined that 38 land purchase contracts, with an aggregate purchase price of $309.6 million, on which it had made aggregate deposits totaling $15.5 million, were VIEs, and that it was not the primary beneficiary of any VIE related to its land purchase contracts.

The Company capitalizes certain interest costs to qualified inventory during the communities’ development and construction periods in accordance with ASC 835-20. Capitalized interest is charged to cost of revenues when the related inventory is delivered. Interest incurred on homebuilding indebtedness in excess of qualified inventory, as defined in ASC 835-20, is charged directly to the statements of operations in the period incurred.

Interest incurred, capitalized and expensed for the nine-month and three-month periods ended July 31, 2011 and 2010 was as follows (amounts in thousands):


	Nine months ended July 31,						Three months ended July 31,
	2011			2010			2011			2010
Interest capitalized, beginning of period	$	267,278		$	259,818		$	288,508		$	271,509
Interest incurred		86,820			87,740			28,387			28,879
Interest expensed to cost of revenues		(56,327	)		(55,411	)		(20,946	)		(23,033	)
Interest directly expensed to statement of operations		(1,504	)		(18,588	)					(5,124	)
Write-off against other income		(861	)		(1,786	)		(543	)		(977	)
Interest reclassified to property, construction and office equipment					(519	)

Interest capitalized, end of period	$	295,406		$	271,254		$	295,406		$	271,254

Inventory impairment charges are recognized against all inventory costs of a community, such as land, land improvements, cost of home construction and capitalized interest. The amounts included in the table directly above reflect the gross amount of capitalized interest without allocation of any impairment charges recognized. The Company estimates that, had inventory impairment charges been allocated on a pro rata basis to the individual components of inventory, capitalized interest at July 31, 2011 and 2010 would have been reduced by approximately $55.3 million and $58.9 million, respectively.