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Manufactured Homes Presented by:Andre Lodhar Roy Fernandes David Storey Sarah Witol.

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Presentation on theme: "Manufactured Homes Presented by:Andre Lodhar Roy Fernandes David Storey Sarah Witol."— Presentation transcript:

1 Manufactured Homes Presented by:Andre Lodhar Roy Fernandes David Storey Sarah Witol

2 Manufactured Homes Founded in 1975 with 2 retail stores By 1987 possessed a network of 120 retail outlets, all in Southeasters U.S. Potential customers were those who could not afford traditional housing, or were looking for a second home Customers were typically in the 18 to 40 age range who earned $20K per year or less

3 Manufactured Homes con’t Mobile home ranged in price and in size, but Manufactured Homes mainly sold the lower end units Behind the industry average of 30% sales to higher models, only achieving 20% of their volume but did not care Targeted low end market : –They felt that by fulfilling an essential housing need sales were not affected by general ecomomic conditions –Customers to work very hard to keep their primary residence

4 Porter’s 5 Forces Buyer Power –Many sellers of mobile homes, but has targeted the low end market, thus price sensitivity is very important –Manufactured Homes allows as little as a 5% down payment to take possession –No real Brand Identity in the market –Buyers are concentrated in areas (close to trailer parks)

5 Porter’s 5 Forces Supplier Power –Discounts based on volume purchases –Products are rather standardized (especially low end mobile homes) –Market concentration in specific states –Manufactured Homes has the ability to manufacture homes on their own incase the market outpaces supply

6 Porter’s 5 Forces Barriers to Entry –Capital requirements, to have stock of mobile homes on hand –Distribution areas are concentrated, so high competition in these areas already –Manufactured homes rely on their niche market of low end homes, any other seller could go after that market

7 Porter’s 5 Forces Threat of Substitutes –Depreciation is high on the homes, selling and moving to a different unit is expensive –Purchasers could walk away from their mobile home (force the company to re-claim the home) and purchase a new one –Clients could upgrade with Manufactured Homes as they sell different models

8 Porter’s 5 Forces Rivalry –Competitive advantage for Manufactured Homes are their niche market of low end mobile homes, availability of financing with small down payments –Concentrated strongly in the Southeastern USA where they have a strong presence with 114 outlets in 7 states –Other sellers are concentration on more profitable higher end units

9 Porter’s 5 Forces Rivalry con’t –Strategic stakes are high due to re- possession of homes where people have defaulted on payments, market specific –Low exit barriers to retail outlets, but high barriers to those that manufacture the homes as well

10 Industry Direction Southeastern USA is the fastest growing market of mobile homes, due to the weather climate, availability of land Shifting towards higher end mobile homes Net sales from 1986 are 54% higher than a year earlier, sales in 1985 were 125% higher than the preceding year Southwestern states starting to experience higher concentrations as well

11 Current accounting Cash + Other Assets = Liabilities + RE t-1 + Sales t - Expenses t Net worth Home buyer makes a down payment and signs an installment contract with Manufactured Homes (assume purchase price of $100,000) Cash Installment contract Sales Receivable Revenue Inventory COGS Reserve for losses Bad debt on credit sales expenses

12 Current accounting Cash + Other Assets = Liabilities + RE t-1 + Sales t - Expenses t Net worth Company transfers installment contract receivables to financial institution and receives cash: Cash Installment contract (Face value of note) Receivable 2.Record present value of participation income Cash Finance Participation Finance Participation Receivable Income 3.Company records an expense of the estimate of customer prepayment and defaults Reserve for losses Credit loss on credit sales expense

13 Method #2 The cash from the bank is treated as a loan –The company transfers installment contracts with recourse to bank –The company records present value of interest rate differential (spread) Major advantage of this method is no estimating of credit losses required According to the SEC this is the method that should be used if estimating ability is poor

14 Method #2

15 Sales Analysis *assuming that 80% of SG&A is related to the sale of new homes The sales of new homes is not a significant contributor to Net Income!

16 Income Two Primary sources of income: Sales of mobile homes Finance participation

17 Current accounting Cash + Other Assets = Liabilities + RE t-1 + Sales t - Expenses t Net worth Company transfers installment contract receivables to financial institution and receives cash: Cash Installment contract (Face value of note) Receivable 2.Record present value of participation income Cash Finance Participation Finance Participation Receivable Income 3.Company records an expense of the estimate of customer prepayment and defaults Reserve for losses Credit loss on credit sales expense

18 Red Flags Estimates of credit losses: page 194 – 195 –Lower interest rates : Increased refinancing Shift in demand for Mobile homes to Conventional homes –Increase in number of prepayments –$2M write-off in Q for increase in credit losses Refusal of finance companies to refinance repossessions –Provision for credit losses in 1986 = $3.8M (p.203 Note 7) –Provision for losses in first 9 months = $318,539 (p.211) –Suggest large Q4 adjustment of $3.5M –Decrease in Finance participation income increased cash sales increased non-recourse sales increased manufacturing sales decrease in interest rate spread

19 Red Flags P. 192 – Expenses appear to be misstated P. 193 – Appears that major Q4 adjustments are being made –company not estimating but looking back and adjusting in Q4 P.196 – Subsidiary set up – MANH Financial Services Inc. –banks refusing to finance –banks losing confidence in Manufactured Homes P. 206 Note 13 – Recognition of $180M debt which is not on the B/S P. 208 – New item suggests that credit losses and prepayments are a problem –selling installment contracts are becoming a problem P. 211 – small provision for losses in first 9 months of 1986 but large full year provision (P. 203)

20 Future Potential of MH Investor Attractiveness Factors MH currently sells a product for which there is no clear demand Focused strategy targeted at profitable segment of the market Rapid Growth enabled via backing of large financial institutions (GE Credit, Prudential Insurance)

21 Future Potential of MH However, Business of buying and selling homes does not appear to make money. The finance participation income is what drives the profits MH has a consistent operating cash flow deficit and is heavily leveraged Grim looking future due to limited room for error due to leverage and past accounting practices

22 Post-Case Highlights Loss of $4.5 million in the 4 th quarter of 1987 resulting in a $0.8 million profit for the year. Loss driven by 300% increase in reserve for credit losses appears to have been forced by auditors Management blames on aggressive marketing program and conservative fiscal policy.

23 Post-Case Highlights cont.. Upon disagreement of the auditors over 1987 interim statement credit loss estimates the company changed auditors. In effect, the auditor felt that MH was understating the provision for future losses on credit sales and thereby overstating earnings before income taxes.

24 Post Case Highlights cont… In 1988 the loss grows to $8.5 million for the year. Financial institutions were now refusing to accept the transfer of instalment notes seriously impacting the finance participation income. Customer defaults and pre-payments forced further increases in credit loss reserves. Severe cash shortage resulted from the operating losses and increases in repossessed homes inventory.

25 Post-Case Highlights cont… SEC announces investigation into MH’s accounting practices primarily focused on the apparent lack of ability to estimate credit losses and thus improperly recognize finance participation income. Stock price drops significantly after Barron’s publishes an article questioning MH’s accounting practices.

26 What Happened? (1988 figures)

27 Debt Ratios (1988 figures)

28 Debt Ratios (1986 figures) If we include the 180 million in installment sales contracts sold with recourse mentioned in Note 13 as debt, we get a glimpse into the future:

29 Questions ?


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