NOBILITY HOMES INC 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Results of Operations Total net sales in third quarter of 2022 were up 18% to $13,846,698 compared to $11,778,120 in third quarter of 2021. Total net sales for the first nine months of 2022 was $35,300,014 compared to $35,592,531 for the first nine months of 2021. The Company reported net income of $1,884,759 in third quarter of 2022, compared to a net income of $1,050,746 in third quarter 2021. Net income for the first nine months of 2022 was $4,498,619 compared to $3,841,449 for the first nine months of 2021. According to the Florida Manufactured Housing Association, shipments for the industry in Florida for the period from November 2021 through July 2022 were up approximately 22% from the same period last year. Although net sales increased during the three months ended August 6, 2022 as compared to the same period last year, we continued to experience the negative impact of limitations being placed on certain key production materials from suppliers, the delay or lack of key components from vendors as well as back orders, delayed shipments, price increases and labor shortages. These supply chain issues have caused delays in completion of the homes at the 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 setup homes to customers. We expect that these challenges will continue for the remainder of fiscal year 2022 and potentially beyond until the industry supply chain normalizes. The following table summarizes certain key sales statistics and percent of gross profit. Three Months Ended Nine Months Ended August 6, July 31, August 6, July 31, 2022 2021 2022 2021 New homes sold through Company owned sales centers 101 104 265 318 Pre-owned homes sold through Company owned sales centers 4 6 13 12 Homes sold to independent dealers 9 26 24 115 Total new factory built homes produced 101 120 306 448 Average new manufactured home price - retail $ 129,343 $ 94,385 $ 120,796 $ 91,488 Average new manufactured home price - wholesale $ 74,747 $ 51,919 $ 71,012 $ 48,720 As a percent of net sales: Gross profit from the Company owned retail sales centers 20 % 17 % 19 % 17 % Gross profit from the manufacturing facilities - including intercompany sales 15 % 11 % 14 % 14 % Maintaining our strong financial position is vital for future growth and success. Because of very challenging business conditions during economic recessions in our market area, management will continue to evaluate all expenses and react in a manner consistent with maintaining our strong financial position, while exploring opportunities to expand our distribution and manufacturing operations. 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, 2022 the Company celebrated its 55th anniversary in business specializing in the design and production of quality, affordable manufactured homes. With multiple retail sales centers in Florida for over 31 years and an insurance agency subsidiary, we are the only vertically integrated manufactured home company headquartered in Florida. 10 Table of Contents Insurance agent commission revenues in the third quarter of 2022 were $77,911 compared to $68,294 in the third quarter of 2021. Total insurance agent commission revenues for the first nine months of 2022 were $222,398 compared to $216,908 for the first nine months of 2021. 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 August 6, 2022 and November 6, 2021. Gross profit as a percentage of net sales was 28% in the third quarter of 2022 compared to 21% for the third quarter of 2021 and was 27% for the first nine months of 2022 compared to 24% for the first nine months of 2021. The gross profit in the third quarter of 2022 was $3,898,060 compared to $2,512,744 in the third quarter of 2021 and was $9,648,206 for the first nine months of 2022 compared to $8,622,876 for the first nine months of 2021. The gross profit is dependent on the sales mix of wholesale and retail homes and number of pre-owned homes sold. The increase in gross profit as a percentage of net sales is primarily due to increases in our selling prices to offset the higher inflation costs of building products and labor on each home and increase in the average gross profit at our retail sales centers. Selling, general and administrative expenses as a percent of net sales was 12% in third quarter of 2022 compared to 11% in the third quarter of 2021 and was 13% for the first nine months of 2022 compared to 12% for the first nine months of 2021. Selling, general and administrative expenses in third quarter of 2022 was $1,653,200 compared to $1,320,456 in the third quarter of 2021 and was $4,448,349 for the first nine months of 2022 compared to $4,144,350 for the first nine months of 2021. The dollar increase in expenses in the three and nine months of 2022 compared to the same period last year were due to employee compensation expenses associated with increased sales at the retail sales centers. We earned interest income of $62,449 for the third quarter of 2022 compared to $62,491 for the third quarter of 2021. For the first nine months of 2022, interest income was $176,706 compared to $145,621 in the first nine months of 2021. The increase in interest income for the first nine months of 2022 is primarily due to the interest earned from the sale of pre-owned (repossessed) inventory acquired from the Company’s joint venture partner, 21st Mortgage Corporation in the first quarter of 2022. Our earnings from Majestic 21 in the third quarter of 2022 were $15,488 compared to $20,202, for the third quarter of 2021. Earnings from Majestic 21 for the first nine months of 2022 were $40,710 compared to $45,959 for the first nine months of 2021. 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 earnings from the Majestic 21 loan portfolio will continue to decrease due to the amortization, maturity and payoff of the loans. We received distributions from 21 st Mortgage Corporation in the third quarter of 2022 of $52,140 compared to $75,156 in the third quarter of 2021 and $285,639 for the first nine months of 2022 compared to $121,024 for the first nine months of 2021. 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, relates to certain loans financed by 21 st Mortgage Corporation, are recorded as income by the Company when received. The increase in distributions in the first nine months of 2022 is due to the timing of the reserve balances. The earnings from the FRSA loan portfolio will continue to decrease due to the amortization and payoff of the loans. The Company realized pre-tax income in the third quarter of 2022 of $2,479,072 as compared to $1,397,857 in the third quarter of 2021. The pre-tax income for the first nine months of 2022 was $5,898,117 as compared to $5,067,874 in first nine months of 2021. 11 Table of Contents The Company recorded an income tax expense in the amount of $594,313 in the third quarter of 2022 as compared to $347,111 in third quarter 2021. Income tax expense for the nine months of 2022 was $1,399,498 compared to $1,226,425 for the nine months of 2021. We reported net income of $1,884,759 for the third quarter of 2022 or $0.54 per share, compared to $1,050,746 or $0.29 per share, for the third quarter of 2021. For the first nine months of 2022 net income was $4,498,619 or $1.30 per share compared to $3,841,449 or $1.06 per share, in the first nine months of 2021. Liquidity and Capital Resources Cash and cash equivalents were $20,437,309 at August 6, 2022 compared to $36,126,059 at November 6, 2021, with the reduction primarily due to increases in inventory. Certificates of deposit were $1,946,429 at August 6, 2022 compared to $2,093,015 at November 6, 2021. Short-term investments were $541,132 at August 6, 2022 compared to $621,928 at November 6, 2021. Working capital was $31,228,311 at August 6, 2022 as compared to $35,563,355 at November 6, 2021. During the first nine months of 2022, the Company repurchased an aggregate of 162,300 shares of its common stock for an aggregate of $5,186,070. A cash dividend was paid from our cash reserves in April 2022 in the amount of $1.00 per share ($3,532,976). The Company purchased $4.6 million of new homes from two independent home manufactures for the Prestige retail sales centers during third quarter of 2022. 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. As of August 6, 2022 the Company has incurred approximately $834,269 of the estimated construction cost of the approximately $1.1 allocated to build an 11,900 square foot frame shop on the Company’s property in Ocala, Florida. 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 $4.1 million of cash surrender value of life insurance which it can be accessed as an additional source of liquidity though the Company has not currently viewed this to be necessary. As of August 6, 2022, the Company continued to report a strong balance sheet which included total assets of approximately $61.1 million which was funded primarily by stockholders’ equity of approximately $45.2 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 unaudited or 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 the COVID-19 pandemic or other health pandemics, 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 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 12 Table of Contents 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 or other attack, any armed conflict involving the United States and the impact of inflation. 13 Table of Contents