ERM 4

ITS 835 Chapter 19

Kilgore Custom Milling Enterprise Risk Management

Professor Miguel Buleje

Introduction

• Background

• The management team

• The company

• The new contract

• The financial risk management meeting

Background • Kilgore Custom Milling

• Small private manufacturer

• Power window assemblies for Automobile Industry

• Based in southern Ontario, Canada

• Pursued contracts to supply plants in the U.S. • Successful in negotiating a contract with Japanese manufacturer

• Previous international contracts resulted in loss • Due to currency volatility between US and Canadian dollar.

The Management Team

• Owner and CEO • Steve MacLinden

• Left day-to-day operations for the rest of the team

• Relies on his team for day to day operations

• Manufacturing and Plant operations • Rory Sullivan

• Sales and Client relationships • Casey Dobblestyn

• Treasurer and CFO • Cathy Williams

The Company

• Privately owned

• 100% by Steve MacLinden

• Planning to retire in 5 – 10 years

• Exit strategy to sell to a larger player in the market. Pull cash out by his retirement.

• Main focus is to maintain cash flow management, and retain value of the company by his retirement date.

• Concerns with currency related cash flow issues. Specially with international operation with the US suppliers.

• Additional concern about inflation differences

• Between U.S. and Canada

• Contractually could translate into a lost

The New Contract • Dramatically increase sales

• Over 100% for 5 years

• Fits very well with CEO exit strategy

• New Contract includes complex and exacting specifications

• Kilgore Custom Milling confident they would be okay with new requirement of new contract.

• All proceeds in U.S. dollars

• Kilgore must manage financial risk.

• Risk around current exchange rate for the entire duration of the contract.

• Contract could be extended for 3 years

• May be a good thing, but with lots of risk.

• But at the same price, benefitting the buyer

The Financial Risk Management Meeting

• U.S. and Canadian dollars near par

• Caused concern over U.S. competition

• Multiple options to deal with currency risk & related fluctuations.

• Options as follows, and each would present risks and rewards for Kilgore.

• Long term swap contracts

• Short term forward contract • Currency options

• Management team lack understanding of the options

• More open questions than answers

• Lots more to do …

• In SUMMARY: not all cases end with a clear path forward and specific answer to questions. IN real world there is a lot of unanswered question, and it is up to us as proponents of ERM to identify as many of the risk as possible and propose solutions. The entire case is about this.