Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations
Total net sales in the second quarter of 2023 were up 58% to $16,779,597 compared to $10,645,046 in the second quarter of 2022. Total net sales for the first six months of 2023 were up 58% to $33,944,350 compared to $21,453,316 for the first six months of 2022. The Company reported a 96% increase in net income to $2,858,849 in the second quarter of 2023, compared to a net income of $1,456,826 in the second quarter 2022. Net income for the first six months of 2023 was up 126% to $5,915,816 compared to $2,613,860 for the first six months of 2022. The primary reason that sales and net income increased was due to the severe supply chain challenges experienced during the first six months of fiscal 2022 that impacted our ability to complete and deliver homes to customers. During the first six months of fiscal 2023, the supply chain challenges eased compared to the prior period and we were able to complete and deliver more retail customers homes, which included us selling thirty-nine (39) ($6,558,882) new homes during the first six months of 2023 from other manufacturers, to help reduce our long backlog. Although net sales increased during the three and six months ended May 6, 2023, as compared to the same period last year, we continue to experience 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 issues continue to cause delays in the 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 set up homes to customers. We expect that these challenges will continue throughout 2023 and potentially beyond. The Company 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, potential customers may delay or defer purchasing decisions considering the rising interest rate environment.
The current demand for affordable manufactured housing in Florida and the U.S. is slowing because of the increased interest rate environment driven by the Federal Reserve. According to the Florida Manufactured Housing Association, shipments for the industry in Florida for the period from November 2022 through April 2023 were a decline of approximately 10% from the same period last year.
The following table summarizes certain key sales statistics and percentage of gross profit.
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(unaudited) |
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(unaudited) |
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Three Months Ended |
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Six Months Ended |
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May 6, |
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May 7, |
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May 6, |
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May 7, |
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2023 |
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2022 |
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2023 |
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2022 |
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New homes sold through Company owned sales centers |
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103 |
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77 |
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208 |
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164 |
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Pre-owned homes sold through Company owned sales centers |
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2 |
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3 |
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4 |
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9 |
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Homes sold to independent dealers |
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27 |
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5 |
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63 |
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15 |
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Total new factory built homes produced |
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136 |
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113 |
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253 |
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205 |
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Average new manufactured home price - retail |
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$ |
149,797 |
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$ |
124,855 |
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$ |
146,960 |
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$ |
115,533 |
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Average new manufactured home price - wholesale |
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$ |
75,676 |
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$ |
73,561 |
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$ |
75,525 |
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$ |
69,172 |
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As a percent of net sales: |
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Gross profit from the Company owned retail sales centers |
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23 |
% |
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19 |
% |
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23 |
% |
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19 |
% |
Gross profit from the manufacturing facilities -including intercompany sales |
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22 |
% |
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13 |
% |
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24 |
% |
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13 |
% |
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, 2023, the Company will celebrate its 56th anniversary in business specializing in the design and production of quality, affordable manufactured homes. With multiple retail sales centers in Florida for over 33 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 2023 were $93,188 compared to $77,500 in the second quarter of 2022. Total insurance agent commission revenues for the first six months of 2023 were $168,797 compared to $144,487 for the first six months of 2022. 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 6, 2023, and November 5, 2022.
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Gross profit as a percentage of net sales was 35% in the second quarter of 2023 compared to 28% for the second quarter of 2022 and was 35% for the first six months of 2022 compared to 27% for the first six months of 2022. The gross profit in the second quarter of 2023 was $5,953,311 compared to $3,021,918 in the second quarter of 2022 and was $11,824,907 for the first six months of 2023 compared to $5,750,146 for the first six months of 2022. 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 cost on each home and the increase in the average gross profit at our retail sales centers.
Selling, general and administrative expenses as a percent of net sales was 13% in the second quarters of 2023 and 2022 and first six months of 2023 and 2022. Selling, general and administrative expenses in the second quarter of 2023 was $2,215,198 compared to $1,378,606 in the second quarter of 2022 and was $4,250,675 for the first six months of 2023 compared to $2,795,149 for the first six months of 2022. The dollar increases in expenses for the three and six months of 2023 were due to the increase in variable expenses which were a direct result of employee sales compensation due to the increase in sales.
We earned interest income of $169,982 for the second quarter of 2023 compared to $39,577 for the second quarter of 2022. For the first six months of 2023, interest income was $310,015 compared to $114,257 in the first six months of 2022. The increase in interest income for the three and six months of 2023 is primarily due to the interest earned from the increase in the investment rates and the increase in the monies invested.
Our earnings from Majestic 21 in the second quarter of 2023 were $25,622 compared to $12,665, for the second quarter of 2022. The earnings for the first six months of 2023 were $48,448 compared to $25,222 for the first six months of 2022. 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 vary quarter to quarter, but overall, the earnings will decrease due to the amortization, maturity and payoff of the loans.
We received distributions from 21st Mortgage Corporation in the second quarter of 2023 of $94,165 compared to $115,454 in the second quarter of 2022 and $94,165 for the first six months of 2023 compared to $233,499 for the first six months of 2022. We received no distributions in the first quarter of 2023. The distributions are from an escrow arrangement related to a Finance Revenue Sharing Agreement (FRSA) between 21st Mortgage Corporation and the Company. The distributions from the escrow arrangement, relating to certain loans financed by 21st Mortgage Corporation, are recorded as income by the Company when received. The decrease in distributions in the three and six months of 2023 is due to the timing of the reserve balances. The earnings from the FRSA loan portfolio will decrease due to the amortization and payoff of the loans.
The Company realized pre-tax income in the second quarter of 2023 of $3,935,397 as compared to $1,892,615 in the second quarter of 2022. The pre-tax income for the first six months of 2023 was $7,924,205 as compared to $3,419,045 in the first six months of 2022.
The Company recorded an income tax expense in the amount of $1,076,548 in the second quarter of 2023 as compared to $435,789 in second quarter 2022. Income tax expense for the six months of 2023 was $2,008,389 compared to $805,185 for the six months of 2022.
We reported net income of $2,858,849 for the second quarter of 2023 or $0.85 per share, compared to $1,456,826 or $0.42 per share, for the second quarter of 2022. For the first six months of 2023 net income was $5,915,813 or $1.76 per share (diluted $1.75) compared to $2,613,860 or $0.75 per share ($0.74 diluted), in the first six months of 2022.
Liquidity and Capital Resources
Cash and cash equivalents were $15,167,269 at May 6, 2023 compared to $16,653,449 at November 5, 2022. Certificates of deposit were $7,861,355 at May 6, 2023 compared to $3,903,888 at November 5, 2022. Short-term investments were $460,054 at May 6, 2023 compared to $589,071 at November 5, 2022. Working capital was $35,645,916 at May 6, 2023 as compared to $33,667,732 at November 5, 2022. A cash dividend was paid from our cash reserves in April 2023 in the amount of $1.00 per share ($3,370,912). Prestige purchased thirty-one (31) ($3,082,705) new homes during the first six months of 2023 from other manufacturers to help eliminate the backlog from Nobility. Prestige new home inventory was $21,000,422 at May 6, 2023 compared to $20,016,093 at November 5, 2022. Prestige has one hundred and four (104) ($8,493,339) new homes from Nobility and other manufacturers 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 $4.2 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 6, 2023, the Company
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continued to report a strong balance sheet which included total assets of approximately $64 million which was funded primarily by stockholders’ equity of approximately $50 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 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 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.