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ITS835Chapter19.pdf
Chapter 19 Kilgore Custom Milling
ITS 835
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 – 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 – Previously Canadian dollar was weak compared to US dollar (late 1980s)
▪ At the time of this writing Canadian dollar had risen giving less Canadian dollars per US dollar, effectively reducing income.
Canadian Dollar/US Dollar Since 1972
Canadian Dollar from 1986 to 1991
▪ Feb 1986 one Canadian Dollar was worth 69 cents US. – So one US Dollar was worth 1.45 Canadian Dollars
▪ Nov 1991 – One Canadian Dollar was worth 89 cents US. – So one US Dollar was worth 1.24 Canadian Dollars
▪ Given a constant sales price in US Dollars, a Canadian manufacturer would have shown a loss of 14% in gross income solely because of the change in the exchange rate of the two currencies.
▪ In January 2013 (approximately the time of the writing of this book) Canadian Dollar/US Dollar was trading at a 1:1 ratio.
▪ Current exchange rates in 2019 is one Canadian Dollar is worth 76 cents US – So one US Dollar is worth 1.31 Canadian Dollars.
The Management Team
▪ Owner and CEO – Steve MacLinden – Late 50s in age – Left day-to-day operations for the rest of the team
▪ Manufacturing and Plant operations – Rory Sullivan – Late 60s in age
▪ Sales and Client relationships – Casey Dobblestyn
▪ Treasurer and CFO – Cathy Williams – Big 4 Accounting Firm experience – Implemented ISO 31000
The Company
▪ Privately owned – 100% by Steve MacLinden – Planning to retire in 5 – 10 years and sell company
▪ Needs increased
▪ Main focus is cash flow management
▪ Concerns with currency related cash flow issues
▪ Additional concern about inflation differences – Between U.S. and Canada
▪ Raw material suppliers were local Canadian producers – not Asian suppliers which were cheaper but not local
The New Contract
▪ Dramatically increase sales – Over 100% for 5 years
▪ Complex and exacting specifications – But compensated for any changes in design
▪ All proceeds in U.S. dollars – Kilgore must manage financial risk due to exchange rate CAN/USD
▪ Contract Options – Up to 50% additional orders per year at same price – Could be extended for 3 years at same price – If options were exercised, could account for 60% of total sales
The Financial Risk Management Meeting
▪ U.S. and Canadian dollars near par (1:1 exchange rate between 2007-2013) – Caused concern over U.S. competition
▪ Multiple options to deal with currency risk – Long term swap contracts
▪ Kind of like an annuity ▪ Smaller guaranteed payments in exchange for larger variable payments
– Short term forward contract ▪ Similar to currency futures contracts but non-standard in nature ▪ Can be for specific non-standard amounts
– Currency Futures – Currency Futures Options
▪ Long puts on currency futures contracts (similar to insurance policy)
▪ Management team lack understanding of the options
▪ More open questions than answers
Chapter 19 Kilgore Custom Milling
ITS 835
