M.D.C. Holdings, Inc. (NYSE: MDC) announced results for the year and fourth quarter ended December 31, 2015. 2015 Fourth Quarter Highlights and Comparisons to 2014 Fourth Quarter: Net income of $22.6 million, or $0.46 per share vs. $14.6 million or $0.30 per share (Pretax income of $32.6 million vs. $23.9 million).
Home sale revenues of $554.4 million, up 12% from $493.1 million (Gross margin from home sales down 20 basis points to 16.1% vs. 16.3%). Excluding inventory impairments*, gross margin from home sales increased 60 basis points year-over-year. Ending backlog dollar value of $1.05 billion, up 59% (Ending backlog units of 2,332, up 54%). Dollar value of net new orders of $450.5 million, up 26% (Net new orders of 1,020, up 15%). Larry A. Mizel, MDC’s Chairman and Chief Executive Officer, stated, “Throughout the year, the homebuilding industry continued to be positively impacted by encouraging macroeconomic drivers such as increasing personal income levels, high employment levels and increasing consumer confidence. As a result of these factors, strong execution by our management team, and a renewed focus on “build to order homes”, we experienced positive results by many measures for the 2015 fourth quarter, including a year-over-year increase in our average selling price of homes delivered and a 60 basis point improvement in our pre-impairment gross margin percentage, which helped us to achieve $22.6 million of net income for the quarter. Furthermore, our 2015 fourth quarter net orders improved by 15% year-over-year, driven by our highest fourth quarter absorption pace in ten years.” Mr. Mizel concluded, “With our active community count up 5% year-over-year and a backlog dollar value of $1.05 billion, which is a 59% increase from the prior year, we are well positioned for top-line growth in 2016. However, our optimism is tempered somewhat by key domestic and global events that have recently unfolded, such as the slowdown of economic growth in China, the significant drop in oil prices, the Federal Reserve’s action to increase the federal funds rate for the first time in almost a decade and significant volatility in securities markets around the globe. Thus far, these risks have not had a significant impact on our industry, but their presence does reinforce our long-standing objective of maintaining balance sheet-focused operating policies.” Homebuilding: Home sale revenues for the 2015 fourth quarter increased 12% to $554.4 million, compared to $493.1 million for the prior year period. This improvement was driven by a 3% increase in deliveries coupled with a 10% increase in average selling price, primarily due to a mix shift to higher-priced submarkets and, to a lesser extent, price increases implemented earlier in the year. Gross margin from home sales for the 2015 fourth quarter was down 20 basis points from the same period in 2014. The decline was primarily due to a $4.4 million increase in inventory impairments coupled with higher land and construction costs. These items were partially offset by a 90 basis point improvement in our interest in cost of sales as a percent of home sale revenues, price increases implemented in various communities and a higher percentage of our deliveries coming from “build to order” sales, which typically have higher gross margins. Excluding inventory impairments, our gross margin from home sales for the 2015 fourth quarter was 17.1%* (see below for a reconciliation of non-GAAP measures), up 60 basis points year-over-year. Selling, general and administrative expenses (“SG&A”) expenses for the 2015 fourth quarter were $63.6 million, up $9.0 million from $54.6 million for the same period in 2014. Our SG&A expenses as a percentage of home sale revenues (“SG&A rate”) increased by 40 basis points to 11.5% for the 2015 fourth quarter from 11.1% in the 2014 fourth quarter. The 40 basis point increase in our SG&A rate was driven primarily by an increase in stock based compensation expense based on a stock option grant approved earlier in the year. The dollar value of net new orders for the 2015 fourth quarter increased 26% to $450.5 million from $356.4 million for the same period in 2014. The improvement was the result of a 10% increase in our average selling price and a 15% increase in the net number of homes sold, driven primarily by an 18% improvement in our monthly sales absorption pace to 2.1, our highest fourth quarter absorption pace since 2005. The increase in average selling price was primarily the result of changes in the mix of net new orders to higher priced submarkets coupled with price increases implemented in most of our markets during the early part of 2015. Our cancellation rate for the 2015 fourth quarter was down slightly to 27% from 28% for the same period in the prior year. Our backlog value at the end of the 2015 fourth quarter was up 59% year-over-year to $1.05 billion. The increase was due mostly to a 54% increase in units in backlog, driven primarily by year-over-year increases in net new orders for each of the past four quarters, a higher percentage of dirt sales, which are generally in backlog for a longer period of time, and longer than average construction times as a result of limited subcontractor availability.
During the 2014 fourth quarter, we completed the early redemption of $250 million in Senior Notes due July 2015. As a result of that transaction, we recognized an $8.7 million charge related to the extinguishment of debt in the 2014 fourth quarter. No such charges were incurred during 2015.
Financial Services: Income before taxes for our financial services operations for the 2015 fourth quarter was $9.1 million, a $2.1 million increase from $7.0 million in the 2014 fourth quarter. An increase in the dollar value of loans locked, originated and sold in our mortgage operations segment drove $1.3 million of the $2.1 million improvement in income before taxes. The remaining increase was primarily the result of a $1.0 million adjustment recorded during the 2015 fourth quarter in our other financial services segment to reduce insurance reserves as a result of a decline in insurance claim payment severity and frequency relative to prior period estimates.