Manufactured Homes, Inc Prepared by: Chris Eric
Download
Report
Transcript Manufactured Homes, Inc Prepared by: Chris Eric
Manufactured Homes, Inc
Prepared by:
Chris
Eric
Ranbir
Robert
Agenda
Introduction
Company background & goals
Strategy Analysis
Sources of Revenue
Accounting Analysis
Revenue Recognition
Statement Analysis
Credit Loss (Provision for Losses)
Risk Analysis
Implications & Conclusion
Company Background
Manufactured Homes founded in 1975
1983 went public
1987 listed on AMEX
1986 established MANH Fin.Services
Fastest growing company-Bus.Week
40% of total US market
Present in 7 states in U.S.
Company’s Goals:
Increase profit margins
Increase market share
Establish broader dealer network
Strategic acquisition
Create skilled management team
Industry Analysis
10,000 manufactured home retailers
Increased competition for market share
Transition and consolidation
mom and pop” operations
Smaller firms disappearing
Merging with larger firms
Increase in price of conventional housing
12 mil people in 6 mil homes
Market Analysis
Target Market:
Low-income families
• Age 18-40, blue collar workers
• Essential housing needs
• Repossession rate low
Seniors
Vacationers
Business Strategy Analysis
Bargaining Power of Buyers
LOW
Low income families
Not likely to buy conventional homes
Equal features to conventional homes
Increase in demand expected
Result: Increased Revenue
Business Strategy Analysis
Bargaining Power of Suppliers
HIGH
Banks-attractive rates to customers
Banks-refuse installment contracts
Interest rates-decrease
Result: Decreased Revenue
Business Strategy Analysis
Threat of Substitute Products
LOW
Increase in price of conventional housing
Result: Increased Revenue
HIGH
Decrease in interest rates
Result: Reduced Revenue
Business Strategy Analysis
Threat of New Entrants
LOW
Network of National Dealers
Small firms – lack of volume buying
powers and capitalization
Strategic acquisition of major home
makers
Business Strategy Analysis
Rivalry Among Existing Firms
LOW
Smaller firms disappear
Lack of volume buying powers and
capitalization
Business Strategy Analysis
Competitive Advantage
Cost leadership
Affordable price for low income families
Volume buyer power-financial advantage
Differentiation
Reliable supply of homes
Designer homes
Sources of Revenue
Revenue from Sale of New Homes
Revenue from Participation Income
Define what Participation Income is
and how it is calculated
Class Discussion
Is the business of ‘buying and selling’
homes contributing to profitability?
To what extent does Manufactured Homes
rely on ‘Participation Income’?
Should this be better disclosed?
Analysis of Net Income
1986
1985
1984
Net Sales 106
69
30
COGS
-86
-56
-24
80% of
SGA
Prov.for
loss
NI from
sales
-18
-11
-5
-4
-1
0
-2
1
1
Analysis of Net Income
Conclusion:
Finance participation income is driving
Net Income
Home Sales does not contribute
significantly to Net Income
Recognition of Revenue
Sale is recognized when down
payment is received or, when
installment contract is agreed upon
The majority of installment contracts
are sold with recourse to financial
institutions
Installment contracts are normally
payable over 120 to 180 months
Financial Accounting Board’s
Statement No. 77
…the seller should be able to
estimate:
The amount of bad debts and related
costs of collection and repossession
The amount of prepayments
Summary of Current
Accounting
Action
Cash
Noncash
assets
Contract
signed,
DP
5
95
(90)
Provision
for losses
Liabilities
Retained Revenue
earnings
100
5
Sale of
receivable
95
(95)
Finance
participation
5
5
Expense
90
5
10
Possible Accounting Treatment
of Finance Participation
Action
Cash
Noncash
assets
Contract
signed,
DP
5
95
(90)
Liabilities
R.E.
Revenue
Expense
100
90
5
Provision
for losses
Sale of
receivable
95
Finance
participation
(recognize
when
received)
5
5
95
5
Effects on Income
Statement
As Reported
Restated
Revenues
168969
169448
Costs and Expenses
179257
177828
Loss before income
taxes
(10288)
(8380)
Net Losses
(8512)
(6604)
Effects on Balance Sheet
As Reported
Restated
Current Assets
79876
80010
Net finance
participation
receivable (N.C)
20131
-
Installment
contracts receivable
-
303000
Total Assets
119377
402380
Notes payable to
finance companies
-
303000
Deferred finance
participation income
-
20771
Stockholder’s Equity 3880
(32976)
Total Liabilities and
Equity
402380
119377
Credit Losses and Net
Income
During the 4th quarter of 1986,
approximately 2 million of repossession
expense and interest chargebacks were
experienced and charged off
1st Q
2nd Q
3rd Q
4th Q
Net Income
per share
’86
.17
.40
.30
(.36)
Net Income
per share
‘85
.21
.34
.29
.14
Indicators that Risk has increased
re: Participation Income
Lenders refused to refinance homes
that were repossessed, one major
cause of $2,000,000 new charge on
Balance Sheet (pg. 194 / 195)
Two institutions incr. interest rate
charged to Mftd. Homes, decreasing
the spread. Participation Income
will decrease as a result (pg. 194 /
195)
Indicators that Risk has increased
re: Participation Income
Mftd. Homes has started own
finance subsidiary to finance
installment contracts receivable,
probably because the banks are
becoming reluctant to lend against
the contracts (pg 196)
Installment contracts are not held
for resale (new line on the Balance
Sheet) (page 208)
Indicators that Risk has increased
re: Participation Income
Mnfd. Homes must put up an
irrevocable letter of credit secured
by a deposit equal to the letter of
credit to sell the installment of the
receivables.
Discussion
Based on what we have reviewed:
Do you think Mftd. Homes is in a
favorable financial position?
Should they re-think their strategy?
What are the implications of the points
discussed so far?
Implication: Risk
Bank (Lenders) are seeing that the
installment receivables are
becoming more and more risky:
Defaults
Pre-Payments (due to lower interest
rates offered by banks)
Mounting financial difficulty of Mftd.
Homes
Increasing pressure by SEC
Implications: Risk
Each of the issues discussed would
raise small red flags on their own,
however most not likely have a big
overall impact
However, all 5 issues raised together
does indeed show the problem in
accounting Participation Income as
Mftd. Homes does
Implication: Revenue Sources
The business of buying and selling
homes is not contributing much to
profitability & finance participation
income is primary source of income
Should this be better disclosed?
Implication: Reporting as
Receivables vs. Loan
Revenue (as reported) or Loan (as
recommended)
Mftd. Homes is liable for 180 million of
installment loans that are not shown on
the balance sheet. This loan makes a
big difference in the D/C and D/E
Ratio’s:
Implication: Reporting as
Receivables vs. Loan
Based on the Estimated Reported
vs. Restated Balance Sheet:
Debt to Capital:
As Reported: .86 Restated: 1.00
Debt to Equity:
As Reported: 26.4 Restated: -12.29
Value of loans is greater than the value
of the assets
Due to a ‘negative’ Stockholders Equity
Implication: Accounting
Practices
How do you estimate an amount for
defaults or Re-Financing?
Reliance on the economic
conditions: Interest Rates and we
have a price sensitive consumer
Market Analysis: With low income
customers, mgmt statements may
be different than reality
Implication: Accounting
Practices
The accounting practice used to
account for the transactions /
participation income:
Does it seem murky to you?
Subsequent Developments
Mftd Homes reported a loss of 4.5
million in Q4 of 87, wiping out most
profits.
Loss due to 300% increase of
company’s reserve for credit losses
Impact of Auditors
Disagreement with Auditors
Subsequent Developments
8.5 million loss in 1988
Financial institutions not accepting
transfer of installment notes
Increase in customer defaults and prepayments (increase credit reserve
further)
Switched Auditing Firms
Subsequent Developments
SEC investigation into accounting
practices
Estimating Credit Losses
SEC contested by Mftd Homes
Stock Price moved from $14.88
(March 1988) to $1.50 by June 1989
Thank You!
QUESTIONS?