NOBILITY HOMES INC 10-Q

Item 2. Management’s Discussion and Analysis of Fin ancial Condition and Results of Operations Results of Operations Total net sales in the first quarter of 2024 were $14,767,998 compared to $17,164,753 in the first quarter of 2023. The Company reported net income of $2,338,437 in the first quarter of 2024, compared to net income of $3,056,967 in the first quarter 2023. Net sales decreased in the first quarter of 2024 as compared to last year primarily because of the higher interest rates on mortgages, plus we continue to experience limitations on certain key production materials from suppliers. Delay of key components from vendors as well as back orders, price increases and labor shortages also negatively affected sales and earnings. These issues continue to cause delays in the completion of the homes at the Company's manufacturing facility and the set-up process of retail homes in the field, resulting in decreased net sales due to our inability to timely deliver and set up homes to customers. We expect that these challenges will continue throughout 2024. The Company also continues to experience inflation in some building products resulting in increases to our material and labor costs which may increase the wholesale and retail selling prices of our homes. Additionally, we believe that potential customers have delayed or deferred purchasing decisions when considering the interest rate environment. The current demand for affordable manufactured housing in Florida and the U.S. is slowing because of the interest rate environment and increased costs associated with mortgages. According to the Florida Manufactured Housing Association, shipments for the industry in Florida for the period from November 2023 through February 2024 declined by approximately 15% from the same period last year. The following table summarizes certain key sales statistics and percentage of gross profit. (unaudited) Three Months Ended February 3, February 4, 2024 2023 New homes sold through Company owned sales centers 80 105 Pre-owned homes sold through Company owned sales centers 3 2 Homes sold to independent dealers 44 36 Total new factory built homes produced 99 117 Average new manufactured home price - retail $ 154,513 $ 144,178 Average new manufactured home price - wholesale $ 68,064 $ 75,350 As a percent of net sales: Gross profit from the Company owned retail sales centers 23 % 23 % Gross profit from the manufacturing facilities -including intercompany sales 25 % 26 % Maintaining our strong financial position is vital for future growth and success. Our many years of experience in the Florida market, combined with home buyers’ increased need for more affordable housing, should serve the Company well in the coming years. Management remains convinced that our specific geographic market is one of the best long-term growth areas in the country. On June 5, 2024, the Company will celebrate its 57 th anniversary in business specializing in the design and production of quality, affordable manufactured homes. With multiple retail sales centers in Florida for over 34 years and an insurance agency subsidiary, we are the only vertically integrated manufactured home company headquartered in Florida. Insurance agent commission revenues in the first quarter of 2024 were $77,283 compared to $75,608 in the first quarter of 2023. Revenues are generated by new and renewal policies being written which affects agent commission earned. The Company establishes appropriate reserves for policy cancellations based on numerous factors, including past transaction history with customers, historical experience and other information, which is periodically evaluated and adjusted as deemed necessary. In the opinion of management, no reserve was deemed necessary for policy cancellations at February 3, 2024 and November 4, 2023. Gross profit as a percentage of net sales was 32% in the first quarter of 2024 compared to 34% for the first quarter of 2023. The gross profit in the first quarter of 2024 was $4,734,346 compared to $5,871,596 in the first quarter of 2023. The gross profit is dependent on the sales mix of wholesale and retail homes and number of pre-owned homes sold. The decrease in gross profit as a percentage of net sales is primarily due to the higher inflation costs of building products and labor cost on each home and the decrease in the number of homes manufactured and sold at our retail sales centers for the quarter. 10 Table of Contents Selling, general and administrative expenses as a percent of net sales was 14% in the first quarter of 2024 compared to 12% for the first quarter 2023. Selling, general and administrative expenses in the first quarter of 2024 was $2,032,330 compared to $2,035,477 in the first quarter of 2023. We earned interest income of $297,999 for the first quarter of 2024 compared to $140,033 for the first quarter of 2023. The increase in interest income for the three months of 2024 is primarily due to the higher interest rates and an increase in the monies invested. Our earnings from Majestic 21 in the first quarter of 2024 were $22,174 compared to $22,826, for the first quarter of 2023. The earnings from Majestic 21 represent the allocation of profit and losses which are owned 50% by 21st Mortgage Corporation and 50% by the Company. The Company received approximately $1.6 million in first quarter of 2024, representing our 50% of the excess capital in the portfolio. The earnings from the Majestic 21 loan portfolio vary quarter to quarter, but overall, the earnings will decrease due to the amortization, maturity and payoff of the loans. We received no distributions from 21 st Mortgage Corporation in either of the first quarters of 2024 or 2023. The distributions are from an escrow arrangement related to a Finance Revenue Sharing Agreement (FRSA) between 21 st Mortgage Corporation and the Company. The distributions from the escrow arrangement, relating to certain loans financed by 21 st Mortgage Corporation, are recorded as income by the Company when received. The earnings from the FRSA loan portfolio will vary quarter to quarter, but will continue to decrease due to the amortization and payoff of the loans. The Company realized pre-tax income in the first quarter of 2024 of $3,123,529 as compared to $3,988,808 in the first quarter of 2023. The Company recorded an income tax expense in the amount of $785,092 in the first quarter of 2024 as compared to $931,841 in first quarter 2023. We reported net income of $2,338,437 for the first quarter of 2024 or $0.72 per share ($0.71 diluted), compared to $3,056,967 or $0.91 per share, for the first quarter of 2023. Liquidity and Capital Resources Cash and cash equivalents were $15,142,033 at February 3, 2024 compared to $13,879,358 at November 4, 2023. Certificates of deposit were $11,712,706 at February 3, 2024 compared to $10,204,287 at November 4, 2023. Short-term investments were $578,698 at February 3, 2024 compared to $527,899 at November 4, 2023. Working capital was $41,569,843 at February 3, 2024 as compared to $37,871,552 at November 4, 2023. The Company received approximately $1.6 million in first quarter of 2024, from 21 st Mortgage Corporation, representing our 50% of the excess capital in the portfolio. Prestige new home inventory was $17,459,652 at February 3, 2024 compared to $18,961,131 at November 4, 2023. Prestige has sixty (60) ($4.7 million) new homes that are included in inventory and are in the field waiting to be completed and closed. We own the entire inventory for our Prestige retail sales centers, which includes new and pre-owned homes, and do not incur any third-party floor plan financing expenses. The Company currently has no line of credit facility and no debt and does not believe that such a facility is currently necessary to its operations. The Company also has approximately $4.4 million of cash surrender value of life insurance which can be accessed as an additional source of liquidity though the Company has not currently viewed this to be necessary. As of February 3, 2024, the Company continued to report a strong balance sheet which included total assets of approximately $65 million which was funded primarily by stockholders’ equity of approximately $55 million. Critical Accounting Policies and Estimates In Item 7 of our Form 10-K, under the heading “Critical Accounting Policies and Estimates,” we have provided a discussion of the critical accounting policies and estimates that management believes affect its more significant judgments and estimates used in the preparation of our Consolidated Financial Statements. No significant changes have occurred since that time. Forward-Looking Statements Certain statements in this report are forward-looking statements within the meaning of the federal securities laws. Although Nobility believes that the amounts and expectations reflected in such forward-looking statements are based on reasonable assumptions, there are risks and uncertainties that may cause actual results to differ materially from expectations. These risks and uncertainties include, but are not limited to, the potential adverse impact on our business caused by competitive pricing pressures at both the wholesale and retail levels, inflation, increasing material costs (including forest based products) or availability of materials due to supply chain 11 Table of Contents interruptions (such as current inflation with forest products and supply issues with vinyl siding and PVC piping), changes in market demand, increase in interest rates, availability of financing for retail and wholesale purchasers, consumer confidence, adverse weather conditions that reduce sales at retail centers, the risk of manufacturing plant shutdowns due to storms or other factors, the impact of marketing and cost-management programs, reliance on the Florida economy, impact of labor shortage, impact of materials shortage, increasing labor cost, cyclical nature of the manufactured housing industry, impact of rising fuel costs, catastrophic events impacting insurance costs, availability of insurance coverage for various risks to Nobility, market demographics, management’s ability to attract and retain executive officers and key personnel, increased global tensions, market disruptions resulting from terrorist attacks, or other events such as a pandemic, any armed conflict involving the United States and the impact of inflation.