Efforts to reduce inventory materialized into an upside more significantly than expected, and, during the earnings call with investors on the morning of Feb. 7, executives of Dallas, Texas-based D.R. Horton graciously accepted accolades from analysts for their ability to generate $558 million in cash during the first quarter of fiscal year 2008, which ended Dec. 31, 2007.

Also lauded was the use of cash to pay down debt by $647 million. Notably, the company completely paid off $150 million on its revolver and repaid $215 million in senior notes that matured in December. These efforts left Horton with a 40% debt-to-cap ratio and $90 million of cash on its balance sheet at quarter's end.

An unexpected note, Horton did not take a deferred tax asset valuation allowance (FAS 109), despite being an Ernst & Young-audited builder. The firm has earned the reputation as a stickler, insisting that builders take charges before it will put its stamp on their financials.

"The most significant reason is because of the amount of taxable profit we generated for '06 and '07," said CEO Don Tomnitz, referring to the fact that Horton generated pre-impairment profits through last year that would allow time for the company to generate losses and still realize carryback. "That provides us with significant available carryback," he said.

But despite the surprising positives, like the rest of its public peers, Horton had its share of bad news.

The average sales price fell by 9%. And at the same time, new orders dropped roughly 50%, far worse than estimates, with particularly steep declines in California (-72%) and the Midwest (-65%). But according to Tomnitz, that trend should not continue.

Historically relying on a business model where roughly 30% to 40% of expected sales are spec built has proven an effective strategy for the company. But at quarter's end, the company had 9,800 specs in inventory. Tomnitz placed priority on reducing that number, calling 6,000 to 7,000 specs a "realistic range, but not the ultimate goal."

Tomnitz noted that the company has 399 homes that have been standing in inventory for more that 12 months and that the company expects to have those units occupied by quarter's end. As part of the strategy, he cited two planned sales in the month of February that will target units in specific communities. "Going forward, salespeople have been empowered to move inventory at market price," he said.

Curiously, the company posted charges of just $246 for impairments on land and option walk-aways. In light of Horton's aggressive land acquisition strategy during the first part of the decade, these charges seem minimal and have the analyst community speculating that the company is choosing to mothball a number of projects--a tactic that could eventually lead to lower pricing and margin compression.

The company did not release data on the number of communities, active or otherwise, that it is in. Tomnitz did confirm that "no new communities will be started unless sales can be at conforming [loan] limits."

Clearly, that affects California activity, the region where Horton's business is feeling the sting. Not surprisingly, management took care to highlight the changes they have made in the market in order to be inline with the environment. "We have closed and merged a number of divisions in California," Tomnitz said. "We have consolidated a lot of back offices, and we feel like we are close to being properly structured. We have the core operators in place to take us through to a recovery in California, but I don't see that coming in the next 12 months."