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NOBILITY HOMES INC - Quarter Report: 2016 July (Form 10-Q)

Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

Quarterly Report Pursuant to Section 13 or 15 (d)

of the Securities Exchange Act of 1934

For the quarterly period ended July 30, 2016

Commission File number 000-06506

 

 

NOBILITY HOMES, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Florida   59-1166102

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

3741 S.W. 7th Street

Ocala, Florida

  34474
(Address of principal executive offices)   (Zip Code)

(352) 732-5157

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x;    No  ¨.

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x;    No  ¨.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   ¨    Smaller reporting company   x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨;    No  x.

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.

 

Title of Class

 

Shares Outstanding on September 13, 2016

Common Stock   4,020,207

 

 

 


Table of Contents

NOBILITY HOMES, INC.

INDEX

 

         Page
Number
 
PART I.  

Financial Information

  

Item 1.

  Financial Statements (Unaudited)   
  Consolidated Balance Sheets as of July 30, 2016 (Unaudited) and October 31, 2015      3   
  Consolidated Statements of Comprehensive Income for the three and nine months ended July 30, 2016 and August 1, 2015 (Unaudited)      4   
  Consolidated Statements of Cash Flows for the nine months ended July 30, 2016 and August 1, 2015 (Unaudited)      5   
  Notes to Consolidated Financial Statements (Unaudited)      6   

Item 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      11   

Item 4.

  Controls and Procedures      14   
PART II.   Other Information   

Item 6.

  Exhibits      15   
Signatures        16   

 

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Table of Contents

NOBILITY HOMES, INC.

Consolidated Balance Sheets

 

     July 30, 2016     October 31, 2015  
     (Unaudited)        

Assets

    

Current assets:

    

Cash and cash equivalents

   $ 22,308,809      $ 16,769,292   

Short-term investments

     422,151        462,578   

Accounts receivable – trade

     3,077,283        2,937,922   

Note receivable

     500,000        —     

Mortgage notes receivable

     9,164        9,851   

Income tax receivable

     —          335   

Inventories

     6,280,367        6,019,705   

Pre-owned homes

     1,245,653        1,366,974   

Prepaid expenses and other current assets

     495,754        826,180   

Deferred income taxes

     613,568        655,193   
  

 

 

   

 

 

 

Total current assets

     34,952,749        29,048,030   

Property, plant and equipment, net

     4,702,882        3,964,878   

Pre-owned homes

     2,283,336        2,724,190   

Interest receivable

     27,997        —     

Note receivable, less current portion

     2,030,000        —     

Mortgage notes receivable, long term

     175,135        177,644   

Other investments

     1,341,263        2,243,729   

Deferred income taxes

     —          1,210,630   

Cash surrender value of life insurance

     3,050,468        2,915,469   

Other assets

     156,287        156,287   
  

 

 

   

 

 

 

Total assets

   $ 48,720,117      $ 42,440,857   
  

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

    

Current liabilities:

    

Accounts payable

   $ 413,320      $ 704,467   

Accrued compensation

     378,862        390,573   

Accrued expenses and other current liabilities

     926,971        926,204   

Income taxes payable

     675,037        —     

Customer deposits

     1,205,072        1,323,861   
  

 

 

   

 

 

 

Total current liabilities

     3,599,262        3,345,105   

Deferred income taxes

     966,677        —     
  

 

 

   

 

 

 

Total liabilities

     4,565,939        3,345,105   
  

 

 

   

 

 

 

Commitments and contingent liabilities

    

Stockholders’ equity:

    

Preferred stock, $.10 par value, 500,000 shares authorized; none issued and outstanding

     —          —     

Common stock, $.10 par value, 10,000,000 shares authorized; 5,364,907 shares issued

     536,491        536,491   

Additional paid in capital

     10,662,414        10,650,723   

Retained earnings

     42,737,630        37,493,077   

Accumulated other comprehensive income

     207,297        247,724   

Less treasury stock at cost, 1,344,700 shares in 2016 and 1,333,338 shares in 2015

     (9,989,654     (9,832,263
  

 

 

   

 

 

 

Total stockholders’ equity

     44,154,178        39,095,752   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 48,720,117      $ 42,440,857   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these financial statements

 

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Table of Contents

NOBILITY HOMES, INC.

Consolidated Statements of Comprehensive Income

(Unaudited)

 

     Three Months Ended     Nine Months Ended  
     July 30, 2016     August 1, 2015     July 30, 2016     August 1, 2015  

Net sales

   $ 9,779,621      $ 7,059,263      $ 25,269,511      $ 19,342,181   

Cost of goods sold

     (7,599,070     (5,495,061     (19,366,957     (15,067,042
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     2,180,551        1,564,202        5,902,554        4,275,139   

Selling, general and administrative expenses

     (940,059     (776,930     (2,732,452     (2,402,328
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     1,240,492        787,272        3,170,102        1,872,811   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other income (loss):

        

Interest income

     43,155        10,437        77,246        40,409   

Undistributed earnings in joint venture – Majestic 21

     28,429        37,212        97,539        106,027   

Proceeds received under escrow arrangement

     —          —          788,566        —     

Losses from investments in retirement community limited partnerships

     —          (89,053     —          (146,403

Gain on sale of investment in retirement community

     —          —          3,990,000        —     

Miscellaneous

     5,559        1,030        25,404        39,896   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (loss)

     77,143        (40,374     4,978,755        39,929   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before provision for income taxes

     1,317,635        746,898        8,148,857        1,912,740   

Income tax expense

     (423,364     (128     (2,904,304     (5,629
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     894,271        746,770        5,244,553        1,907,111   

Other comprehensive income (loss)

        

Unrealized investment gain (loss)

     (13,176     28,035        (40,427     (1,009
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 881,095      $ 774,805      $ 5,204,126      $ 1,906,102   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighed average number of shares outstanding:

        

Basic

     4,022,311        4,048,554        4,023,689        4,058,106   

Diluted

     4,023,714        4,048,994        4,024,739        4,058,540   

Net income per share:

        

Basic

   $ 0.22      $ 0.18      $ 1.30      $ 0.47   

Diluted

   $ 0.22      $ 0.18      $ 1.30      $ 0.47   

The accompanying notes are an integral part of these financial statements

 

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NOBILITY HOMES, INC.

Consolidated Statements of Cash Flows

(Unaudited)

 

     Nine Months Ended  
     July 30, 2016     August 1, 2015  

Cash flows from operating activities:

    

Net income

   $ 5,244,553      $ 1,907,111   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation

     90,998        70,506   

Deferred income taxes

     2,218,932        —     

Undistributed earnings in joint venture – Majestic 21

     (97,539     (106,027

Losses from investments in retirement community limited partnerships

     —          146,403   

Gain on sale of investment in retirement community

     (3,990,000     —     

Inventory impairment

     186,583        —     

Stock-based compensation

     1,070        8,215   

Decrease (increase) in:

    

Accounts receivable

     (139,361     (834,478

Inventories

     (260,662     (690,390

Pre-owned homes

     375,592        31,747   

Income tax receivable

     335        5,629   

Prepaid expenses and other current assets

     330,426        (692,147

Interest receivable

     (27,997     —     

(Decrease) increase in:

    

Accounts payable

     (291,147     88,085   

Accrued compensation

     (11,711     (51,141

Accrued expenses and other current liabilities

     767        237,702   

Income taxes payable

     675,037        —     

Customer deposits

     (118,789     236,076   
  

 

 

   

 

 

 

Net cash provided by operating activities

     4,187,017        357,291   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Purchase of property, plant and equipment

     (829,002     (42,375

Distribution from joint venture – Majestic 21

     1,000,005        500,000   

Proceeds from sale of investment in retirement community, net

     960,000        —     

Collections on note receivable

     500,000        —     

Collections on mortgage notes receivable

     3,196        431   

Increase in cash surrender value of life insurance

     (134,999     (94,500
  

 

 

   

 

 

 

Net cash provided by investing activities

     1,499,200        363,556   
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Proceeds from exercise of employee stock options

     39,616        15,820   

Purchase of treasury stock

     (186,386     (227,854
  

 

 

   

 

 

 

Net cash used in financing activities

     (146,770     (212,034
  

 

 

   

 

 

 

Increase in cash and cash equivalents

     5,539,517        508,813   

Cash and cash equivalents at beginning of year

     16,769,292        14,116,412   
  

 

 

   

 

 

 

Cash and cash equivalents at end of quarter

   $ 22,308,809      $ 14,625,225   
  

 

 

   

 

 

 

Supplemental disclosure of cash flows information:

    

Income taxes paid

   $ 10,000      $ —     
  

 

 

   

 

 

 

Note receivable acquired from sale of investment in retirement community

   $ 3,030,000      $ —     
  

 

 

   

 

 

 

The accompanying notes are an integral part of these financial statements

 

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Nobility Homes, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

Note 1 Basis of Presentation and Accounting Policies

The accompanying unaudited consolidated financial statements for the three and nine months ended July 30, 2016 have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission for Form 10-Q. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements.

The unaudited financial information included in this report includes all adjustments (consisting of normal recurring adjustments) which are, in the opinion of management, necessary to reflect a fair statement of the results for the interim periods. The results of operations for the three and nine months ended July 30, 2016 are not necessarily indicative of the results of the full fiscal year.

The condensed consolidated financial statements included in this report should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended October 31, 2015.

In May 2014, the FASB issued ASU 2014-09 (Revenue from Contracts with Customers (Topic 606)), which requires an entity to recognize revenue from the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance addresses, in particular, contracts with more than one performance obligation, as well as the accounting for some costs to obtain or fulfill a contract with a customer; and provides for additional disclosures with respect to revenues and cash flows arising from contracts with customers. With respect to public entities, this update is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017 and early adoption is not permitted. We believe that our implementation of this guidance will have no material impact on our consolidated financial statements.

Note 2 Inventories

New home inventory is carried at the lower of cost or market value. The cost of finished home inventories is determined on the specific identification method and is removed from inventories and recorded as a component of cost of sales at the time revenue is recognized. In addition, an allocation of depreciation and amortization is included in cost of goods sold. Under the specific identification method, if finished home inventory can be sold for a profit there is no basis to write down the inventory below the lower of cost or market value.

Pre-owned inventory is valued at the lower of the Company’s cost to acquire the inventory plus refurbishment costs incurred to date to bring the inventory to a more saleable state. This amount is reduced by a valuation reserve which management believes results in inventory being valued at market.

Other inventory costs are determined on a first-in, first-out basis.

 

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A breakdown of the elements of inventory is as follows:

 

     July 30, 2016      October 31, 2015  

Raw materials

   $ 676,791       $ 721,751   

Work-in-process

     121,446         113,891   

Finished homes

     5,384,185         5,114,568   

Model home furniture and others

     97,945         69,495   
  

 

 

    

 

 

 

Inventories, net

   $ 6,280,367       $ 6,019,705   
  

 

 

    

 

 

 

Pre-owned homes

   $ 4,668,344       $ 5,516,272   

Inventory impairment reserve

     (1,139,355      (1,425,108
  

 

 

    

 

 

 
     3,528,989         4,091,164   

Less homes expected to sell in 12 months

     (1,245,653      (1,366,974
  

 

 

    

 

 

 

Pre-owned homes, long-term

   $ 2,283,336       $ 2,724,190   
  

 

 

    

 

 

 

Note 3 Short-term Investments

The following is a summary of short-term investments (available for sale):

 

     July 30, 2016  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Estimated
Fair Value
 

Equity securities in a public company

   $ 167,930       $ 254,221       $ —         $ 422,151   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     October 31, 2015  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Estimated
Fair Value
 

Equity securities in a public company

   $ 167,930       $ 294,648       $ —         $ 462,578   
  

 

 

    

 

 

    

 

 

    

 

 

 

The fair values were estimated based on quoted market prices in active markets at each respective period end.

Note 4 Fair Value of Financial Instruments

The carrying amount of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximates fair value because of the short maturity of those instruments. Short-term investments (available for sale) are carried at fair value.

FASB ASC No. 820 “Fair Value Measurements” defines fair value as the price that would be received upon the sale of an asset or paid to transfer a liability (i.e. exit price) in an orderly transaction between market participants at the measurement date. ASC No. 820 requires disclosures that categorize assets and liabilities

 

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measured at fair value into one of three different levels depending on the assumptions (i.e. inputs) used in the valuation. Financial assets and liabilities are classified in their entirety based on the lowest level of input significant to the fair value measurement. The ASC No. 820 fair value hierarchy is defined as follows:

 

    Level 1 – Valuations are based on unadjusted quoted prices in active markets for identical assets or liabilities.

 

    Level 2 – Valuations are based on quoted prices for similar assets or liabilities in active markets, or quoted prices in markets that are not active for which significant inputs are observable, either directly or indirectly.

 

    Level 3 – Valuations are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. Inputs reflect management’s best estimate of what market participants would use in valuing the asset or liability at the measurement date.

The following tables present the Company’s assets and liabilities measured at fair value on a recurring basis.

 

     July 30, 2016  
     Level 1      Level 2      Level 3  

Equity securities in a public company

   $ 422,151       $ —         $ —     
  

 

 

    

 

 

    

 

 

 

 

     October 31, 2015  
     Level 1      Level 2      Level 3  

Equity securities in a public company

   $ 462,578       $ —         $ —     
  

 

 

    

 

 

    

 

 

 

Note 5 Investment in Retirement Community Limited Partnerships

The Company has a 31.3% limited partnership interest in Walden Woods South LLC (“Walden Woods”), which is a retirement community. The carrying value of the Walden Woods investment was zero at July 30, 2016 and October 31, 2015, respectively.

The following is summarized financial information of Walden Woods*:

 

     June 30, 2016      September 30,
2015
 

Total Assets

   $ 3,604,691       $ 3,638,114   

Total Liabilities

   $ 5,744,531       $ 5,444,435   

Total Equity

   $ (2,139,840    $ (1,806,321

*Due to Walden Woods having a calendar year-end, the summarized financial information provided is from their most recent quarter prior to the period covered by this report.

On March 31, 2016, the Company sold its 48.5% limited partnership interest in CRF III, Ltd. (“Cypress Creek”) for $3,990,000. Cypress Creek is a retirement community. The Company received $960,000 of cash, net of $40,000 of cost paid and a note receivable for $3,030,000, which is payable to the Company in $500,000 installments each July 1st and January 1st, plus interest at 3.0%. The Company recognized a gain of $3,990,000 for the nine months ended July 30, 2016. The Company received the first installment due January 1st 2017 on June 8th 2016.

 

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Note 6 Warranty Costs

The Company provides for a limited warranty as the manufactured homes are sold. Amounts related to these warranties are as follows:

 

     Three Months Ended      Nine Months Ended  
     July 30,
2016
     August 1,
2015
     July 30,
2016
     August 1,
2015
 

Beginning accrued warranty expense

   $ 100,000       $ 75,000       $ 100,000       $ 75,000   

Less: reduction for payments

     (86,789      (82,079      (387,161      (173,045

Plus: additions to accrual

     86,789         82,709         387,161         173,045   
  

 

 

    

 

 

    

 

 

    

 

 

 

Ending accrued warranty expense

   $ 100,000       $ 75,000       $ 100,000       $ 75,000   
  

 

 

    

 

 

    

 

 

    

 

 

 

The Company’s limited warranty covers substantial defects in material or workmanship in specified components of the home including structural elements, plumbing systems, electrical systems, and heating and cooling systems which are supplied by the Company that may occur under normal use and service during a period of twelve (12) months from the date of delivery to the original homeowner, and applies to the original homeowner or any subsequent homeowner to whom this product is transferred during the duration of this twelve (12) month period.

The Company tracks the warranty claims per home. Based on the history of the warranty claims, the Company has determined that a majority of warranty claims usually occur within the first three months after the home is sold. The Company determines its warranty accrual using the last three months of home sales.

Note 7 Earnings Per Share

These financial statements include “basic” and “diluted” net income per share information for all periods presented. The basic net income per share is calculated by dividing net income by the weighted-average number of shares outstanding. The diluted net income per share is calculated by dividing net income by the weighted-average number of shares outstanding, adjusted for dilutive common shares.

Note 8 Revenues by Products and Service

Revenues by net sales from manufactured housing, pre-owned homes and insurance agent commissions are as follows:

 

     Three Months Ended      Nine Months Ended  
     July 30,
2016
     August 1,
2015
     July 30,
2016
     August 1,
2015
 

Manufactured housing

   $ 9,134,856       $ 6,569,133       $ 23,984,656       $ 17,897,155   

Pre-owned homes

     581,844         434,546         1,105,503         1,276,679   

Insurance agent commissions

     62,921         55,584         179,352         168,347   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total net sales

   $ 9,779,621       $ 7,059,263       $ 25,269,511       $ 19,342,181   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Note 9 Commitments and Contingent Liabilities

Majestic 21 – The Company is a 50% guarantor on a $5 million note payable entered into by Majestic 21, a joint venture in which the Company owns a 50% interest. This guarantee was a requirement of the bank that provided a $5 million loan to Majestic 21. The $5 million guarantee of Majestic 21’s debt is for the life of the note which matures on the earlier of May 31, 2019 or when the principal balance is less than $750,000. The amount of the guarantee declines with the amortization and repayment of the loan. As collateral for the loan, 21st Mortgage Corporation (our joint venture partner) has granted the lender a security interest in a pool of loans encumbering homes sold by Prestige Homes Centers, Inc. If the pool of loans securing this note should decrease in value so that the notes outstanding principal balance is in excess of 80% of the principal balance of the pool of loans, then Majestic 21 would have to pay down the note’s principal balance to an amount that is no more than 80% of the principal balance of the pool of loans. The Company and 21st Mortgage Corporation are obligated jointly to contribute the amount necessary to bring the loan balance back down to 80% of the collateral provided. On April 28, 2016 the Company received a distribution of $1,000,005 from the joint venture. We do not anticipate any required contributions as the pool of loans securing the note have historically been in excess of 100% of the required collateral value. As of July 30, 2016, the outstanding principal balance of the note was $1,010,067 and the amount of collateral held by our joint venture partner for the Majestic 21 note payable was $1,847,205. Based upon management’s analysis, the fair value of the guarantee is not material and as a result, no liability for the guarantee has been recorded in the accompanying balance sheets of the Company.

Note 10 Proceeds Received Under Escrow Arrangement

In April 2016, the Company received $788,566 under an escrow arrangement related to a Finance Revenue Sharing Agreement between 21st Mortgage Corporation and the Company. These distributions from the escrow account, related to certain loans financed by 21st Mortgage Corporation, are recorded in income by the Company as received, which has been the Company’s past practice.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Results of Operations

Total revenues in the third quarter of 2016 were $9,779,621 up 39% compared to $7,059,263 in the third quarter of 2015. Total net sales for the first nine months of 2016 were $25,269,511 up 31% compared to $19,342,181 for the first nine months of 2015.

The following table summarizes certain key sales statistics and percent of gross profit.

 

     Three Months Ended     Nine Months Ended  
     July 30,
2016
    August 1,
2015
    July 30,
2016
    August 1,
2015
 

Homes sold through Company owned sales centers:

        

New homes

     84        63        201        157   

Pre-owned homes

     11        9        21        29   

Homes sold to independent dealers

     56        55        188        183   

Total new factory built homes produced

     124        129        424        382   

Average new manufactured home price – retail

   $ 71,935      $ 63,164      $ 70,532      $ 64,926   

Average new manufactured home price – wholesale

   $ 39,144      $ 34,578      $ 37,473      $ 34,005   

As a percent of net sales:

        

Gross profit from the Company owned retail sales centers

     16     16     17     16

Gross profit from the manufacturing facilities – including intercompany sales

     19     16     18     16

Sales to two publicly traded REITs and other companies which own multiple retirement communities in our market area accounted for approximately 19% and 24% of our sales for the first nine months ended July 30, 2016 and August 1, 2015, respectively. Accounts receivable due from these customers were approximately $1,877,755 at July 30, 2016.

The demand for affordable manufactured housing in Florida and the U.S. is improving. According to the Florida Manufactured Housing Association, shipments in Florida for the period from November 2015 through July 2016 were up approximately 22% from the same period last year. Our sales and earnings continue to be affected by the challenging housing environment, the uncertainty of the U.S. and world economy, employment levels, consumer confidence and, in particular, the lack of available retail and wholesale financing. Constrained consumer credit and the lack of lenders in the industry, partly as a result of an increase in government regulations, have limited many affordable manufactured housing buyers from purchasing homes.

We understand that during this uncertain economic environment, maintaining our strong financial position is vital for future growth and success. Because of the recent years of very challenging business conditions in our market area, management will continue to evaluate all expenses and react in a manner consistent with maintaining our strong financial position.

The Company has specialized for 49 years in the design and production of quality, affordable manufactured homes at its plant located in central Florida. With multiple retail sales centers, an insurance subsidiary, and investments in retirement manufactured home communities, we are the only vertically integrated manufactured home company headquartered in Florida.

 

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Insurance agent commission revenues in the third quarter of 2016 were $62,921 compared to $55,584 in the third quarter of 2015. Total insurance agent commission revenues for the first nine months of 2016 were $179,352 compared to $168,347 for the first nine months of 2015. The insurance agent commissions resulted from new policies and renewals generated. 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 July 30, 2016 and October 31, 2015.

Gross profit as a percentage of net sales was 22% in third quarter of 2016 compared to 22% in the third quarter of 2015 and was 23% for the first nine months of 2016 compared to 22% for the first nine months of 2015. The gross profit in third quarter of 2016 was $2,180,551 compared to $1,564,202 in the third quarter of 2015 and was $5,902,554 for the first nine months of 2016 compared to $4,275,139 for the first nine months of 2015. The gross profit is dependent on the sales mix of wholesale and retail homes and number of pre-owned homes sold.

Selling, general and administrative expense as a percent of net sales was 10% in third quarter of 2016 compared to 11% in the third quarter of 2015 and was 11% for the first nine months of 2016 compared to 12% for the first nine months of 2015. Selling, general and administrative expense in third quarter of 2016 was $940,059 compared to $776,930 in the third quarter of 2015 and was $2,732,452 for the first nine months of 2016 compared to $2,402,328 for the first nine months of 2015. The increase in expense resulted from the increase in compensation expense directly related to our increased sales.

Our earnings from Majestic 21 in the third quarter of 2016 were $28,429 compared to $37,212, for the third quarter of 2015. Our earnings from Majestic 21 for the first nine months of 2016 were $97,539 compared to $106,027 for the first nine months of 2015. The earnings from Majestic 21 represent the allocation of profit and losses which are owned 50% by 21st Mortgage and 50% by the Company.

We received $788,566 under an escrow arrangement related to the finance revenue sharing agreement between 21st Mortgage Corporation and the Company in the second quarter of 2016.

We recognized a gain on the sale of our 48.5% limited partnership interest in CRF III, Ltd. (“Cypress Creek”) in the amount of $3,990,000 for the second quarter of 2016.

We earned interest of $43,155 for the third quarter of 2016 compared to $10,437 for the third quarter of 2015. For the first nine months of 2016, interest earned was $77,246 compared to $40,409 in the first nine months of 2015. The increase is primarily due to the note receivable acquired in the sale of the investment in the Cypress Creek retirement community.

The Company recorded an income tax expense in the amount of $423,364 in the third quarter of 2016 as compared to $128 in third quarter 2015. Income tax expense for the nine months of 2016 was $2,904,304 compared to $5,629 for the third quarter of 2015. In 2015, the company had an allowance against the net deferred tax asset which was exhausted at the end of the year. Income tax expense during the year was limited due to the allowance. In 2016, the company had increased profitability and no allowance thus had substantially higher income tax expense.

 

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We reported net income of $894,271 for the third quarter of 2016 or $0.22 per share, compared to $746,770 or $0.18 per share, for the third quarter of 2015. For the first nine months of 2016 net income was $5,244,553 or $1.30 per share, compared to $1,907,111 or $0.47 per share, in the first nine months of 2015.

Liquidity and Capital Resources

Cash and cash equivalents were $22,308,809 at July 30, 2016 compared to $16,769,292 at October 31, 2015. Short-term investments were $422,151 at July 30, 2016 compared to $462,578 at October 31, 2015. Working capital was $31,353,487 at July 30, 2016 as compared to $25,702,925 at October 31, 2015. In January 2016, the Company purchased the land for one existing retail sales center for $750,000. We own the entire inventory for our Prestige retail sales centers which includes new, pre-owned and repossessed or foreclosed homes and do not incur any third party floor plan financing expenses. The Company has no material commitments for capital expenditures.

We view our liquidity as our total cash and short term investments. We currently have no line of credit facility and we do not believe that such a facility is currently necessary for our operations. We have no debt. We also have approximately $3.0 million of cash surrender value of life insurance which we could access as an additional source of liquidity though we have not currently viewed this to be necessary. As of July 30, 2016, the Company continued to report a strong balance sheet which included total assets of approximately $49 million and stockholders’ equity of approximately $44 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 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, competitive pricing pressures at both the wholesale and retail levels, increasing material costs, uncertain economic conditions, changes in market demand, changes 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 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 and any armed conflict involving the United States and the impact of inflation.

 

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Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures. The Company’s Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a – 15e and 15d – 15e under the Securities Exchange Act of 1934, as amended) (the “Exchange Act”) as of the end of the period covered by this report (the “Evaluation Date”). Based on their evaluation as of the Evaluation Date, our Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective as of July 30, 2016. Integrated Framework (2013) issued by the Company of Sponsoring Organizations of the Treadway Commission and determined that its controls were effective.

Changes in Internal Control over Financial Reporting. We made no changes in our internal control over financial reporting (as defined in Rules 13a-15(f)) and 15d-15(f) under the Exchange Act) identified in connection with the evaluation of our internal controls that occurred during our last fiscal quarter that has materially affected, or which is reasonably likely to materially affect our internal controls over financial reporting.

 

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Part II. OTHER INFORMATION AND SIGNATURES

There were no reportable events for Item 1 through Item 5.

Item 6. Exhibits

 

  31. (a)   Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act and Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934
        (b)   Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act and Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934
  32. (a)   Written Statement of Chief Executive Officer Pursuant to 18 U.S.C. §1350
        (b)   Written Statement of Chief Financial Officer Pursuant to 18 U.S.C. §1350
101.   Interactive data filing formatted in XBRL

 

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Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

    NOBILITY HOMES, INC.
DATE: September 13, 2016     By: /s/ Terry E. Trexler
   

Terry E. Trexler, Chairman,

President and Chief Executive Officer

 

DATE: September 13, 2016     By: /s/ Thomas W. Trexler
   

Thomas W. Trexler, Executive Vice President,

and Chief Financial Officer

 

DATE: September 13, 2016     By: /s/ Lynn J. Cramer, Jr.
   

Lynn J. Cramer, Jr., Treasurer

and Principal Accounting Officer

 

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