Manufactured Homes, Inc
Prepared by:ChrisEricRanbirRobert
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
Establish broader dealer network Increase market share
Strategic acquisition Create skilled management team
Industry Analysis 10,000 manufactured home retailers
mom and pop” operations Increased competition for market share Transition and consolidation
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 AnalysisBargaining Power of BuyersBargaining 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 AnalysisBargaining Power of SuppliersBargaining Power of Suppliers
HIGH Banks-attractive rates to customers Banks-refuse installment contracts Interest rates-decrease
Result: Decreased Revenue
Business Strategy AnalysisThreat of Substitute ProductsThreat of Substitute Products
LOW Increase in price of conventional housing Result: Increased Revenue
HIGH Decrease in interest rates Result: Reduced Revenue
Business Strategy AnalysisThreat of New EntrantsThreat 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 AnalysisRivalry Among Existing FirmsRivalry Among Existing Firms
LOW Smaller firms disappear
Lack of volume buying powers and capitalization
Business Strategy Analysis Competitive AdvantageCompetitive Advantage
Cost leadership Affordable price for low income families Volume buyer power-financial advantage
Differentiation Reliable supply of homes Designer homes
Sources of RevenueSources 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
-18 -11 -5
Prov.for loss
-4 -1 0
NI from sales
-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 Non-cash assets
Liabilities Retained earnings
Revenue Expense
Contract signed, DP
5 95(90)
100 90
Provision for losses
5 5
Sale of receivable
95 (95)
Finance participation
5 5 10
Possible Accounting Treatment of Finance Participation
Action Cash Non-cash assets
Liabilities R.E. Revenue Expense
Contract signed, DP
5 95(90)
100 90
Provision for losses
5 5
Sale of receivable
95 95
Finance participation(recognize when received)
5 5
Effects on Income Statement
As Reported RestatedRevenues 168969 169448
Costs and Expenses 179257 177828
Loss before income taxes
(10288) (8380)
Net Losses (8512) (6604)
Effects on Balance SheetAs 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
119377 402380
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 pre-payments (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?