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 second quarter of 2024 were $11,527,978 compared to $16,779,597 in the second quarter of 2023. Total net sales for the first six months of 2024 were $26,295,976 compared to $33,944,350 for the first six months of 2023. Net sales decreased in the first half of 2024 as compared to last year because of the decrease in the number of homes retail sold and manufactured and we are building and selling smaller priced homes due to the higher interest rates on mortgages. There are still delays in the receipt of certain key production materials from suppliers, back orders, price increases and labor shortages. 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 and our inability to timely deliver and set up homes to customers has negatively impacted sales and earnings. We expect that these challenges will continue throughout the second half of fiscal year 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 April 2024 declined by approximately 9% from the same period last year. The following table summarizes certain key sales statistics and percentage of gross profit. (Unaudited) (Unaudited) Three Months Ended Six Months Ended May 4, May 6, May 4, May 6, 2024 2023 2024 2023 New homes sold through Company owned sales centers 73 103 153 208 Pre-owned homes sold through Company owned sales centers 0 2 3 4 Homes sold to independent dealers 19 27 63 63 Total new factory built homes produced 107 136 206 253 Average new manufactured home price - retail $ 143,503 $ 149,797 $ 149,260 $ 146,987 Average new manufactured home price - wholesale $ 68,172 $ 75,676 $ 68,120 $ 75,525 As a percent of net sales: Gross profit from the Company owned retail sales centers 24 % 23 % 23 % 23 % Gross profit from the manufacturing facilities -including intercompany sales 20 % 22 % 22 % 24 % 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 celebrated 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 second quarter of 2024 were $93,896 compared to $93,188 in the second quarter of 2023. Total insurance agent commission revenues for the first six months of 2024 were $171,180 compared to $168,797 for the first six months 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 May 4, 2024 and November 4, 2023. Gross profit as a percentage of net sales was 36% in the second quarter of 2024 compared to 35% for the second quarter of 2023 and was 34% for the first six months of 2024 compared to 35% for the first six months of 2023. The gross profit in the second quarter of 2024 was $4,168,394 compared to $5,953,311 in the second quarter of 2023 and was $8,902,740 for the first six months of 2024 compared to $11,824,907 for the first six months of 2023. The gross profit is dependent on the sales mix of wholesale and retail homes 10 Table of Contents and number of pre-owned homes sold. 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 has negatively impacted our gross profit. Selling, general and administrative expenses as a percent of net sales was 17% in the second quarter of 2024 compared to 13% for the second quarter of 2023 and was 15% for the first six months of 2024 compared to 13% for the first six months of 2023. Selling, general and administrative expenses in the second quarter of 2024 was $1,911,380 compared to $2,215,198 in the second quarter of 2023 and was $3,943,710 for the first six months of 2024 compared to $4,250,675 for the first six months of 2023. Selling, general and administrative expenses as a percent of net sales increased due to the decrease in sales at the manufacturing plant and retail sales centers and the fixed costs associated with many of the expenses. We earned interest income of $219,861 for the second quarter of 2024 compared to $169,982 for the second quarter of 2023. For the first six months of 2024, interest income was $517,860 compared to $310,015 in the first six months of 2023. The increase in interest income for the three and six 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 second quarter of 2024 were $20,535 compared to $25,622, for the second quarter of 2023. The earnings for the first six months of 2024 were $42,709 compared to $48,448 for the first six months 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 a one-time distribution of 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 distributions from 21 st Mortgage Corporation in the second quarter of 2024 of $99,816 compared to $94,165 in the second quarter of 2023 and $99,816 for the first six months of 2024 compared to $94,165 for the first six months of 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 second quarter of 2024 of $2,722,557 as compared to $3,935,397 in the second quarter of 2023. The pre-tax income for the first six months of 2024 was $5,846,086 as compared to $7,924,205 in the first six months of 2023. The Company recorded an income tax expense in the amount of $696,598 in the second quarter of 2024 as compared to $1,076,548 in second quarter 2023. Income tax expense for the six months of 2024 was $1,481,690 compared to $2,008,389 for the six months of 2023. We reported net income of $2,025,959 for the second quarter of 2024 or $0.62 per share, compared to $2,858,849 or $0.85 per share, for the second quarter of 2023. For the first six months of 2024 net income was $4,364,396 or $1.34 per share (diluted $1.33) compared to $5,915,816 or $1.76 per share ($1.75 diluted), in the first six months of 2023. Liquidity and Capital Resources Cash and cash equivalents were $10,659,825 at May 4, 2024 compared to $13,879,358 at November 4, 2023. Certificates of deposit were $12,239,189 at May 4, 2024 compared to $10,204,287 at November 4, 2023. Short-term investments were $629,442 at May 4, 2024 compared to $527,899 at November 4, 2023. Working capital was $38,671,500 at May 4, 2024 as compared to $37,871,552 at November 4, 2023. A cash dividend was paid from our cash reserves in April 2024 in the amount of $1.50 per share ($4,903,243). The Company received a one-time distribution of 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 $18.6 million at May 4, 2024 compared to $19 million at November 4, 2023. Prestige has seventy six (76) ($6.0 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 May 4, 2024, the Company continued to report a strong balance sheet which included total assets of approximately $62 million which was funded primarily by stockholders’ equity of approximately $52 million. Critical Accounting Policies and Estimates 11 Table of Contents 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 interruptions (such as current inflation with forest products and supply issues with insulation, shingles, 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.