If there was a song to be sung during Orleans Homebuilders' earnings call this morning, it was that the balance sheet looked sturdier at fiscal 2008 year-end than last year despite a net loss of $143.4 million. Management applauded its progress in executing on four key financial objectives, as laid out in May 2007.

Chairman and CEO Jeffrey P. Orleans said, "Even though this has been a difficult year, we've really done a good job."

The company generated cash flow and improved its liquidity during its fiscal year, ending June 30. A debt pay down of $53 million during its fiscal 4Q2008 led to a net debt reduction of $119 million for the year.

Management strengthened the company's capital structure, mainly through a recent two-part deal with its lenders to amend financial covenants related to its $585 million revolving credit facility. The amendment reduced the size of the revolver by 25% to $440 million and extended its maturity date by a year to December 2009, as well as eliminated several financial covenants related to leverage, debt serviceability, and units in inventory. Moreover, it decreased minimum liquidity, cash flow coverage, and tangible net worth requirements.

Those changes were critical to the company. It was at risk of being out of compliance with the some of the facility's terms following a $43.5 million deferred tax charge during its fiscal third quarter, ending March 31. The company obtained a waiver on May 9 related to those covenants, which, after an extension, was set to expire on Sept. 30.

Management also continued to advance on its "portfolio optimization" strategy, which includes retrenching in core markets and reducing both lot and spec inventory. In late December, Orleans trimmed its lot pipeline significantly by closing nine discrete deals to dispose of roughly 1,400 lots across five states, earning the company $69 million in cash and tax refunds and marking its exit from unprofitable markets such as Palm Beach and Palm Coast, Fla., as well as Phoenix. The deals contributed significantly to a 32% reduction of owned lots; the company closed out its fiscal 2008 with 5,380 owned lots on its books compared to 7,850 the previous year. Owned lots now account for 74% of the company's lot portfolio.

The company finished out its fiscal year with 219 spec homes in inventory, a figure that represents roughly 2.4 specs per community. Although that number is down drastically from 5.4 specs per community in its fiscal 1Q2007, it was only down slightly from 2.7 specs per community a year ago.

Management also worked to further reduce its cost structure, mostly through headcount reduction. The company's January headcount reduction of 14% was followed up in August with an additional 10% reduction.

The layoffs contributed to an elevated SG&A level; the company closed out its fiscal 2008 with SG&A accounting for 17.2% of home building revenues, down 0.5% from a year ago.

But a less than optimal SG&A level was hardly the only cause for concern. Margins for the fourth quarter were down to 9%, compared to 12.4% the year prior. Management attributed the margin compression to spec home closings making up a greater percentage of homes deliveries. However, analysts wondered if, despite $58.9 million in impairments across 42 Orleans communities, management had taken adequate write down charges.

Moreover, analysts questioned the company's ability to generate cash flow during the next five quarters. The company closed out fiscal 2008 with 486 homes in backlog for a total of $238.3 million, a dollar figure down 25% from a year ago. And at first blush, it doesn't look like backlog will build in the near term. Company president and COO Michael T. Vesey indicated that trouble in the financial markets had sent sales and traffic in September plummeting.

But the company's CEO remained confident that it would find a way to generate cash flow. "It's darkest before dawn. The whole market is paralyzed," Orleans said. "But there will be opportunities. Last year there were opportunities for the tax refund. So, there will be something."

Executive vice president and CFO Garry P. Herdler echoed Orleans and alluded to potential benefit following the passage of one of the two bailout bills circulating through Congress. "Our strategy would change based on what bill goes through," he said.