Enterprise Risk Management With Blue Wood Chocolates

CHAPTER 18

Blue Wood Chocolates STEPHEN MCPHIE, CA Partner, RSD Solutions Inc.

RICK NASON, PHD, CFA Partner, RSD Solutions Inc., and Associate Professor of Finance, Dalhousie University

This case highlights many issues around enterprise risk management (ERM).It concerns a company that has turned in a satisfactory performance in thepast, although this has been a result, at least in part, of luck rather than design. There is a variety of risk and governance issues that can be discussed. They include prioritization of actions and implementation of an ERM framework when considering how to deal with a diversity of personalities and opinions.

BACKGROUND Sally Holton, the newly appointed chief financial officer (CFO) of Blue Wood Chocolates, gazed from her office window at the sunny scene outside. Her mood was far from sunny, however, as she pondered what seemed like a mountain of urgent issues facing her. It seemed that there were no easy solutions to any of them.

Blue Wood Chocolates makes chocolate products at its plants in the Midwest- ern United States for sale domestically and internationally. The company has deliv- ered a mixed financial performance over the past couple of years with volatility that management has not been able to explain, and that the board of directors and owners consider unsatisfactory. There has been an ongoing debate among board members as to whether the lackluster results are due to operations or the vagaries of the commodities markets.

When the long-serving CFO recently retired, Sally Holton was brought in as an outsider to replace him. Her appointment was controversial among some finance and treasury people in the company who expected an internal appointment. Sev- eral senior, long-serving, and experienced employees were thought to be well qual- ified for the role. However, the CEO, John Ferguson Junior, determined that it was an appropriate time to bring in an outsider with new ideas to shake up the finance and treasury functions. Quarterly results had been variable and unpredictable. Fer- guson felt that the company needed a better planning process and had to improve its ability to explain its performance to shareholders, the board, and the banks.

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BLUE WOOD CHOCOLATES 349

6 Mos to June 30 Year to December 31

($000’s) 2013 2012 2012 2011 2010 2009

Income before interest and income taxes 3,565 3,424 20,622 12,239 20,832 23,518

Impairment charge 0 0 0 0 0 (6,222) Interest & other income 1,409 1,035 1,582 1,059 3,715 933 Interest expense (6,000) (6,000) (12,000) (12,000) (12,000) (12,000)

Income before income taxes (1,026) (1,541) 10,204 1,298 12,547 6,229

Provision for income taxes (308) (462) 3,061 390 3,764 1,869

Net income (718) (1,079) 7,143 908 8,783 4,360 Retained earnings start

of period 40,401 54,471 54,471 61,723 60,975 64,522 Dividends (4,187) (4,128) (21,213) (8,160) (8,035) (7,907)

Retained earnings end of period 35,496 49,264 40,401 54,471 61,723 60,975

Gains/(losses) on derivatives included in income statement (370) (211) (259) (3,523) 2,072 207

FINANCIAL RATIOS

6 Mos to June 30 Year to December 31

2013 2012 2012 2011 2010 2009

Sales growth −2.6% 3.3% 2.1% 4.4% Gross margin 34.4% 32.4% 33.2% 29.7% 33.7% 35.9% SG&A expense growth 3.5% 4.3% 1.5% 2.0% SG&A/Sales 30.7% 28.9% 24.8% 24.6% 24.7% 25.3% Operating margin 3.7% 3.5% 8.4% 5.2% 9.0% 10.6% EBITDA/Interest coverage 1.3 1.3 2.5 1.7 2.4 2.8 Debt/Equity 2.0 1.7 1.9 1.7 1.5 1.5 Current ratio 1.8 2.0 1.8 2.4 3.3 3.3

STATEMENTS OF CASH FLOWS

6 Mos to June 30 Year to December 31

($000’s) 2013 2012 2012 2011 2010 2009

Operating Activities Net Income (718) (1,079) 7,143 908 8,783 4,360 Adjustments for noncash items 5,212 4,977 10,474 9,195 8,508 10,141

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350 Implementing Enterprise Risk Management

6 Mos to June 30 Year to December 31

($000’s) 2013 2012 2012 2011 2010 2009

Changes in operating assets and liabilities (1,276) 736 9,547 (4,469) 2,705 1,049

Cash from operations 3,218 4,634 27,164 5,634 19,996 15,550

Investing Activities Additions to property, plant,

and equipment (2,649) (2,388) (3,949) (7,267) (5,695) (9,258) Net purchases of

trading securities (1,008) (963) (1,331) (1,437) (1,290) (761) Purchase of available for

sale securities (8,441) (8,920) (17,340) (7,445) (4,134) (5,036) Sale and maturity of available for

sale securities 8,236 1,375 4,649 3,413 3,648 7,783

Net cash used in investing activities (3,862) (10,896) (17,971) (12,736) (7,471) (7,272)

Financing Activities Bank term loan repayments (5,000) (5,000) (5,000) 0 0 0 Dividends paid (2,111) (4,123) (23,303) (8,181) (8,058) (7,922)

Net cash use in financing activities (7,111) (9,123) (28,303) (8,181) (8,058) (7,922)

Net increase/(decrease) in cash (7,755) (15,385) (19,110) (15,283) 4,467 356

Opening (bank revolver)/Cash (2,278) 16,832 16,832 32,115 27,648 27,292

Closing (bank revolver)/Cash (10,033) 1,447 (2,278) 16,832 32,115 27,648

BALANCE SHEETS

6 Mos to June 30 Year to December 31

($000’s) 2013 2012 2012 2011 2010 2009

ASSETS Current Assets

Cash and cash equivalents 0 1,447 0 16,832 32,115 27,648 Investments 11,052 5,698 8,332 4,842 3,554 3,850 Receivables 17,905 10,358 20,513 17,375 15,320 15,318 Prepaid expenses and other

receivables 2,352 2,319 2,457 2,935 7,396 3,732 Inventory Finished goods and WIP 30,984 27,941 16,465 18,967 15,740 15,809

Raw materials 13,263 14,716 11,261 12,926 9,438 8,854 Deferred income tax 2,193 257 207 257 306 608 Prepayments and other 987 2,568 1,844 2,253 2,888 7,391

Total Current Assets 78,736 65,304 61,079 76,387 86,757 83,210

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BLUE WOOD CHOCOLATES 351

BALANCE SHEETS (continued)

6 Mos to June 30 Year to December 31

($000’s) 2013 2012 2012 2011 2010 2009

Property, plant, and equipment at cost 208,144 204,680 206,101 202,265 195,988 190,043 Less accumulated

depreciation (120,368) (112,348) (116,639) (107,971) (100,214) (91,945)

Net property, plant, and equipment 87,776 92,332 89,462 94,294 95,774 98,098

Goodwill and trademarks 80,338 80,338 80,338 80,338 80,338 80,338 Investments 45,000 41,062 45,416 32,739 28,650 25,838 Split dollar life insurance 18,400 31,357 29,737 32,982 33,085 33,174 Equity method investments 721 1,453 945 1,749 1,891 2,205 Deferred income tax 2,634 3,432 2,765 3,429 4,090 5,147

Total Assets 313,605 315,278 309,742 321,918 330,585 328,010

LIABILITIES AND STOCKHOLDERS’ EQUITY Current Liabilities

Bank revolver 10,033 0 2,278 0 0 0 Payables and accruals 25,512 25,450 24,041 23,890 23,989 22,937 Dividend payable 2,121 2,095 0 2,046 2,013 1,981 Current portion of bank

term loan 5,000 5,000 5,000 5,000 0 0

Postretirement health care and life insurance

247 255 247 255 0 0

Accrued income taxes 111 0 2,719 0 0 0

Total Current Liabilities 43,024 32,800 34,285 31,191 26,002 24,918 Long-term debt—senior note

8% due 2014 100,000 100,000 100,000 100,000 100,000 100,000

Bank term loan due 2014 35,000 40,000 40,000 45,000 50,000 50,000 Postretirement health care

and life insurance 12,528 12,023 11,923 11,348 9,195 7,411

Liability for uncertain tax positions

3,672 3,369 3,496 3,709 4,371 8,199

Deferred income taxes 19,050 19,249 17,221 19,343 21,273 19,814 Deferred compensation and

other liabilities 27,085 22,953 24,541 21,374 20,514 17,706

Total Liabilities 240,359 230,394 231,466 231,965 231,355 228,048

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BLUE WOOD CHOCOLATES 353

APPENDIX II: THE HERSHEY COMPANY CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS

6 Months to Year to December 31

June 30 July 1 ($000’s) 2013 2012 2012 2011 2010 2009

Sales 3,335,940 3,146,508 6,644,252 6,080,788 5,671,009 5,298,668

Cost of sales 1,768,029 1,784,591 3,784,370 3,548,896 3,255,801 3,245,531 Selling, general, and

administrative expenses

896,739 796,967 1,703,796 1,477,750 1,426,477 1,208,672

Business realignment and impairment charges

10,438 8,149 44,938 (886) 83,433 82,875

Total costs and expenses 2,675,206 2,589,707 5,533,104 5,025,760 4,765,711 4,537,078

Income before interest and income taxes

660,734 556,801 1,111,148 1,055,028 905,298 761,590

Interest and other income 1,413 1,350 2,940 2,597 1,270 877 Interest expense (46,140) (49,718) (98,509) (94,780) (97,704) (91,336)

Income before income taxes

616,007 508,433 1,015,579 962,845 808,864 671,131

Provision for income taxes 214,597 174,097 354,648 333,883 299,065 235,137

Net income 401,410 334,336 660,931 628,962 509,799 435,994 Retained earnings start

of period 5,027,617 4,699,597 4,707,892 4,383,013 4,156,648 3,984,057

Dividends (182,895) (167,094) (341,206) (304,083) (283,434) (263,403)

Retained earnings end of period

5,246,132 4,866,839 5,027,617 4,707,892 4,383,013 4,156,648

FINANCIAL RATIOS

6 Months to Year to December 31

June 30 July 1 2013 2012 2012 2011 2010 2009

Sales growth 6% 9% 7% 7% Gross margin 47% 43% 43% 42% 43% 39% SG&A expense growth 13% 15% 4% 18% SG&A/Sales 27% 25% 26% 24% 25% 23% Operating margin (excluding

realign. & impair.) 20% 18% 17% 17% 17% 16%

EBITDA/Interest (excluding realign. & impair./including capitalized interest)

16.9 13.7 14.7 14.6 12.4 11.6

Debt/Equity 1.7 1.8 1.8 2.1 1.9 2.0 Current ratio 1.8 1.4 1.4 1.7 1.5 1.5

Source: www.thehersheycompany.com/investors/financial-reports.aspx.

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354 Implementing Enterprise Risk Management

CONSOLIDATED STATEMENTS OF CASH FLOWS

6 Months to Year to December 31

($000’s) June 30 2013 July 1 2012 2012 2011 2010 2009

Operating Activities Net Income 401,410 334,336 660,931 628,962 509,799 435,994 Adjustments for noncash

items 60,127 114,940 234,364 270,762 260,926 178,671

Changes in operating assets and liabilities

(112,091) (135,118) 199,532 (311,857) 130,698 451,084

Net cash provided from operating activities

349,446 314,158 1,094,827 587,867 901,423 1,065,749

Investing Activities Capital additions (151,735) (139,488) (258,727) (323,961) (179,538) (126,324) Capitalized software

additions (6,854) (8,319) (19,239) (23,606) (21,949) (19,146)

Proceeds from sale of property, plant and equipment

15,107 76 453 312 2,201 10,364

Proceeds from sale of trademark licensing rights

0 0 0 20,000 0 0

Loan to affiliate (16,000) (16,000) (23,000) (7,000) 0 0 Business acquisitions 0 (172,856) (172,856) (5,750) 0 (15,220)

Net Cash Used by Investing Activities

(159,482) (336,587) (473,369) (340,005) (199,286) (150,326)

Financing Activities Net (decrease)/increase

in short-term debt (13,624) 95,130 77,698 10,834 1,156 (458,047)

Long-term borrowings 249,785 49 4,025 249,126 348,208 0 Repayment of long-term

debt (250,143) (2,134) (99,381) (256,189) (71,548) (8,252)

Proceeds from lease financing agreement

0 0 0 47,601 0 0

Cash dividends paid (182,895) (167,094) (341,206) (304,083) (283,434) (263,403) Exercise of stock options 114,157 185,600 261,597 184,411 92,033 28,318 Excess tax benefits

from stock-based compensation

36,938 23,849 33,876 13,997 1,385 4,455

Payments from/(to) noncontrolling interests

1,470 1,470 (12,851) 0 10,199 7,322

Repurchase of common stock

(305,564) (218,345) (510,630) (384,515) (169,099) (9,314)

Net cash used by financing activities

(349,876) (81,475) (586,872) (438,818) (71,100) (698,921)

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CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

6 Months to Year to December 31

($000’s) June 30 2013 July 1 2012 2012 2011 2010 2009

Increase/(Decrease) in Cash and Equivalents

(159,912) (103,904) 34,586 (190,956) 631,037 216,502

Opening cash and equivalents

728,272 693,686 693,686 884,642 253,605 37,103

Closing Cash & Equivalents

568,360 589,782 728,272 693,686 884,642 253,605

CONSOLIDATED BALANCE SHEETS

6 Mos to Year to December 31

June 30 July 1 ($000’s) 2013 2012 2012 2011 2010 2009

ASSETS Current Assets

Cash and cash equivalents

568,360 589,782 728,272 693,686 884,642 253,605

Receivables—trade 366,288 353,337 461,383 399,499 390,061 410,390 Inventories 778,988 791,805 633,262 648,953 533,622 519,712 Deferred income taxes 102,762 121,192 122,224 136,861 50,655 34,763 Prepaid expenses 182,489 237,457 168,344 167,559 141,132 161,859

Total Current Assets 1,998,887 2,093,573 2,113,485 2,046,558 2,000,112 1,380,329

Property, plant, and equipment at cost

3,650,777 3,564,028 3,560,626 3,588,558 3,324,763 3,242,868

Less accumulated depreciation

(1,941,431) (1,980,724) (1,886,555) (2,028,841) (1,887,061) (1,838,101)

Net property, plant, and equipment

1,709,346 1,583,304 1,674,071 1,559,717 1,437,702 1,404,767

Goodwill 578,906 589,464 588,003 516,745 524,134 571,580 Other intangibles 202,495 219,028 214,713 111,913 123,080 125,520 Deferred income taxes 30,925 28,072 12,448 33,439 21,387 4,353 Other assets 176,309 154,531 152,119 138,722 161,212 183,377

Total Assets 4,696,868 4,667,972 4,754,839 4,407,094 4,267,627 3,669,926

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current Liabilities Accounts payable 413,144 388,472 441,977 420,017 410,655 287,935 Accrued liabilities 564,080 569,902 650,906 612,186 593,308 546,462 Accrued income taxes 4,585 1,930 2,329 1,899 9,402 36,918 Short-term debt 99,081 139,356 118,164 42,080 24,088 24,066 Current portion of long-term

debt 3,316 347,312 257,734 97,593 261,392 15,247

Total Current Liabilities 1,084,206 1,446,972 1,471,110 1,173,775 1,298,845 910,628

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LIABILITIES AND STOCKHOLDERS’ EQUITY (Continued)

6 Mos to Year to December 31

June 30 July 1 ($000’s) 2013 2012 2012 2011 2010 2009

Long-term debt 1,794,493 1,498,669 1,530,967 1,748,500 1,541,825 1,502,730 Other long-term

liabilities 663,519 608,664 668,732 603,876 481,061 487,934

Deferred income taxes 32,923 27,696 35,657 0 0 0

Total Liabilities 3,575,141 3,582,001 3,706,466 3,526,151 3,321,731 2,901,292

Stockholders’ Equity Common stock and

additional paid-in capital

987,292 917,293 952,876 850,718 794,766 754,579

Retained earnings 5,246,132 4,866,839 5,027,617 4,707,892 4,383,013 4,156,648 Treasury common

stock at cost (4,740,944) (4,324,278) (4,558,668) (4,258,962) (4,052,101) (3,979,629)

Accumulated other comprehensive loss

(380,658) (395,527) (385,076) (442,331) (215,067) (202,844)

Noncontrolling interests in subsidiaries

9,905 21,644 11,624 23,626 35,285 39,880

Total Stockholders’ Equity

1,121,727 1,085,971 1,048,373 880,943 945,896 768,634

Total Liabilities and Stockholders’ Equity

4,696,868 4,667,972 4,754,839 4,407,094 4,267,627 3,669,926

Note: 2009 and 2010 as restated.

CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE INCOME

6 Months to Year to December 31

June 30 July 1 ($000’s) 2013 2012 2012 2011 2010 2009

Other Comprehensive Income/(Loss) Net of Tax Foreign currency

translation (18,981) 1,662 7,714 (21,213) 14,123 38,302

Pension and postretirement plans

13,621 12,608 (9,634) (85,823) 5,130 38,643

Cash flow hedges Gains/(losses) on

derivatives 4,010 (769) (868) (107,713) 1,001 78,257

Reclassification adjustments

5,768 33,303 60,043 (12,515) (32,477) 1,862

Total other comprehensive income net of tax

4,418 46,804 57,255 (227,264) (12,223) 157,064

Opening Other Comprehensive Income

(385,076) (442,331) (442,331) (215,067) (202,844) (359,908)

Closing Other Comprehensive Income

(380,658) (395,527) (385,076) (442,331) (215,067) (202,844)

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BLUE WOOD CHOCOLATES 357

APPENDIX III: ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.

CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS

3 Months to May 31 Year to February 28

($000’s) 2013 2012 2013 2012 2011 2010

Revenues 10,178 9,658 36,315 34,627 31,128 28,437

Cost of sales 5,027 5,022 18,955 18,309 16,228 14,911 Other costs and expenses 3,333 3,013 12,174 10,465 8,950 7,883 Loss on asset sales and

restructuring charges 0 0 2,647 0 0 0

Total Costs and expenses 8,360 8,035 33,776 28,774 25,178 22,794 Income before interest and

income taxes 1,818 1,623 2,539 5,853 5,950 5,643

Interest and other income 12 11 44 59 59 27 Income before income

taxes 1,830 1,634 2,583 5,912 6,009 5,670

Income tax expense 584 571 1,233 2,036 2,098 2,090 Net income after income

taxes 1,246 1,063 1,350 3,876 3,911 3,580

Attributable to noncontrolling interest

(67) 0 128 0 0 0

Net income attributable to RMCF

1,179 1,063 1,478 3,876 3,911 3,580

Retained earnings start of period

8,642 9,838 9,838 8,412 6,924 5,751

Dividends (668) (676) (2,674) (2,450) (2,423) (2,407)

Retained earnings end of period

9,153 10,225 8,642 9,838 8,412 6,924

Source: www.irdirect.net/RMCF/sec_filings/view.

FINANCIAL RATIOS

3 Months to May 31 Year to February 28

2013 2012 2013 2012 2011 2010

Sales growth 5% 5% 11% 9% Gross margin 51% 48% 48% 47% 48% 48% Other costs and expense growth 11% 16% 17% 14% Other costs and expenses/sales 33% 31% 34% 30% 29% 28% Operating margin (excluding loss on

asset sales and restructuring charges)

18% 17% 14% 17% 19% 20%

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358 Implementing Enterprise Risk Management

FINANCIAL RATIOS (Continued)

3 Months to May 31 Year to February 28

2013 2012 2013 2012 2011 2010

EBITDA/Interest n/a n/a n/a n/a n/a n/a Debt/Equity n/a n/a n/a n/a n/a n/a Current ratio 3.2 4.7 2.6 4.0 3.7 3.7

CONSOLIDATED CASH FLOW STATEMENTS

3 Months to May 31 Year to February 28

($000’s) 2013 2012 2013 2012 2011 2010

Operating Activities Net Income 1,179 1,062 1,478 3,876 3,911 3,580 Adjustments for noncash

items 409 406 2,767 2,409 1,569 1,187

Changes in operating assets and liabilities

(776) 663 2,126 (138) (1,685) 767

Net cash provided by operating activities

812 2,131 6,371 6,147 3,795 5,534

Investing Activities Additions to property, plant,

and equipment (58) (253) (743) (3,261) (1,298) (499)

Proceeds from sale or distribution of assets

3 0 889 53 19 117

Franchising rights 0 0 (802) 0 0 0 Other (59) 21 (320) 85 (518) (260)

Net cash used in investing activities

(114) (232) (976) (3,123) (1,797) (642)

Financing Activities Dividends paid (668) (616) (2,623) (2,441) (2,418) (2,403) Tax benefit of stock option

exercise 20 6 58 25 11 0

(Repurchase)/Issue of common stock

0 (363) (1,633) 173 10 0

Net cash used in financing activities

(648) (973) (4,198) (2,243) (2,397) (2,403)

Net Increase/(Decrease) in Cash and Equivalents

50 926 1,197 781 (399) 2,489

Opening Cash and Equivalents

5,322 4,125 4,125 3,344 3,743 1,254

Closing Cash and Equivalents

5,372 5,051 5,322 4,125 3,344 3,743

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BLUE WOOD CHOCOLATES 359

CONSOLIDATED BALANCE SHEETS

May 31 February 28 ($000’s) 2013 2012 2013 2012 2011 2010

ASSETS Current Assets

Cash and cash equivalents 5,372 5,051 5,322 4,125 3,344 3,743 Receivables 3,413 3,488 4,113 4,362 5,194 4,519 Inventory 4,175 3,744 4,221 4,119 4,125 3,281 Deferred tax 644 677 629 1,212 565 461 Prepayments and other 658 741 259 281 279 220

Total current assets 14,262 13,701 14,544 14,099 13,507 12,224

Property, plant and equipment at cost

17,571 18,004 17,490 17,835 15,254 13,797

Less accumulated depreciation

(10,942) (9,552) (10,713) (9,319) (8,978) (8,610)

Net property, plant, and equipment

6,629 8,452 6,777 8,516 6,276 5,187

Goodwill 1,047 1,047 1,047 1,047 1,047 1,047 Other intangibles 800 20 801 22 59 110 Other assets 733 457 665 479 550 352

Total Assets 23,471 23,677 23,834 24,163 21,439 18,920

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current Liabilities Payables 1,246 924 1,999 1,356 1,541 878 Accruals and deferred

income 2,538 1,314 2,897 1,570 1,528 1,814

Dividend payable 669 676 668 616 607 603

Total Current Liabilities 4,453 2,914 5,564 3,542 3,676 3,295 Deferred income taxes 859 1,862 882 1,885 1,109 894

Total Liabilities 5,312 4,776 6,446 5,427 4,785 4,189

Stockholders’ Equity Common stock and

additional paid in capital 7,905 8,676 7,741 8,898 8,242 7,807

Retained earnings 9,153 10,225 8,642 9,838 8,412 6,924 Noncontrolling interest 1,101 0 1,005 0 0 0

Total Stockholders’ Equity

18,159 18,901 17,388 18,736 16,654 14,731

Total Liabilities and Stockholders’ Equity

23,471 23,677 23,834 24,163 21,439 18,920

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360 Implementing Enterprise Risk Management

QUESTIONS The following questions are intended to guide discussion about Blue Wood and how such a company can face up to and deal with issues of risk management throughout the enterprise. The questions are not necessarily exhaustive for the case and it is intended that examination and discussion can be developed further if desired.

Discussion can center on the importance of culture within an organization, how to change it, how to set priorities, how much is possible and how fast, as well as the related costs and benefits. 1. What are the prospects and consequences for Blue Wood if it carries on the way it has

been? 2. Are corporate objectives and strategy important and if so, why? 3. Discuss why and how either an FRM (financial risk management) or an ERM framework

might benefit a company like Blue Wood. 4. What are the main challenges in developing and implementing a risk management

framework for Blue Wood? How does the ownership structure affect these challenges? 5. If the company is to develop a risk management framework, who should lead the pro-

cess? Should a Chief Risk Officer (CRO) be appointed? If so, to whom should he/she report and have access to? How could smaller companies without the resources for a dedicated CRO deal with ERM? What is the role for the board in such a process?

6. Should Blue Wood hedge its exposures to commodities and foreign currencies? If so, how should it go about hedging; for example, in terms of: � managing, monitoring, and evaluating the hedging program � amounts hedged � time horizon of the hedges � instruments used � budget for option premiums � accounting and reporting the hedging program

7. Are there other areas where Blue Wood should consider a risk management program?

NOTES 1. “Fair trade” products are food products that are marketed under the auspices of a Fair

Trade organization. A core objective of the organization is to promote better prices and working conditions, and secure the rights of food producers and workers in developing countries. The food is packaged with the distinctive Fair Trade logo. This branding has become popular among consumers having a social conscience.

2. See: http://sugarcane.org/global-policies/policies-in-the-united-states/sugar-in-the- united-states. See also, for example, www.nytimes.com/2013/10/31/us/american- candy-makers-pinched-by-inflated-sugar-prices-look-abroad.html?_r=0 and http:// commodities.about.com/od/researchcommodities/a/The-Two-Sugar-Markets-Us- Sugar-And-World-Sugar.htm.

3. NYSE Euronext contract summary: https://globalderivatives.nyx.com/products/ commodities-futures/C-DLON/contract-specification.

4. ICE contract summary: https://www.theice.com/productguide/ProductSpec.shtml? specId=7.

5. http://usda01.library.cornell.edu/usda/current/sugar/sugar-05-23-2013.pdf.

ABOUT THE CONTRIBUTORS Stephen McPhie, CA, in his current position as partner of RSD Solutions Inc., advises businesses internationally on various aspects of financial strategy and risk mitigation. From 2000 to 2004, Stephen worked in London for Italy’s largest

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BLUE WOOD CHOCOLATES 361

bank. In the financial engineering group, he successfully created innovative cross- border financing structures that included private equity instruments with embed- ded derivatives. Previously he structured and distributed primary market debt and traded distressed and near-par debt in secondary markets. Prior to 2000, Stephen held various positions in the United States, Canada, and the United King- dom with a “big five” Canadian bank. His experience stretches from structur- ing and distributing leveraged and investment grade corporate transactions to relationship management, par and distressed secondary market trading, struc- tured credit derivative products, workouts and credit and financial mandates, structuring and negotiating transactions (including leveraged, project finance, and recapitalization of distressed situations), as well as negotiating complex legal documentation.

Stephen holds a BA in economics from Heriot-Watt University in Edinburgh, Scotland, and has qualified as a Chartered Accountant in both the United King- dom and Canada. In this respect he worked for one of the large accounting firms carrying out assignments in the fields of audit, consultancy (including business valuations), and taxation.

Rick Nason, PhD, CFA, has an extensive background in the capital markets and derivatives industry, having worked in equity derivatives and exotics, credit derivatives, and capital markets training in a senior capacity at several different global financial institutions. Rick is a founding partner of RSD Solutions, a risk management consultancy that specializes in financial risk management consult- ing and training for corporations, investment funds, and banks. Dr. Nason is also an Associate Professor of Finance at Dalhousie University in Halifax, Nova Scotia, where he teaches graduate classes in corporate finance, investments, enterprise risk management, and derivatives. He has been awarded several teaching awards as well as being selected MBA Professor of the Year several times. His research interests are in financial risk management, enterprise risk management, and com- plexity.

Rick has an MSc in physics from the University of Pittsburgh and an MBA and a PhD in finance from the Richard Ivey Business School at the University of Western Ontario. Additionally, he is a Chartered Financial Analyst charterholder. In his spare time he enjoys practicing risk management principles as he plays with his collection of pinball machines.

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352 Implementing Enterprise Risk Management

BALANCE SHEETS (Continued)

6 Mos to June 30 Year to December 31

($000’s) 2013 2012 2012 2011 2010 2009

Stockholders’ Equity Common stock and

additional paid in capital 44,000 44,000 44,000 44,000 44,000 44,000 Retained earnings 35,496 49,264 40,401 54,471 61,723 60,975 Other comprehensive

income/(loss) (6,250) (8,380) (6,125) (8,518) (6,493) (5,013)

Total Stockholders’ Equity 73,246 84,884 78,276 89,953 99,230 99,962

Total Liabilities and Stockholders’ Equity 313,605 315,278 309,742 321,918 330,585 328,010

STATEMENTS OF OTHER COMPREHENSIVE INCOME

6 Mos to June 30 Year to December 31

($000’s) 2013 2012 2012 2011 2010 2009

Other Comprehensive Income/(Loss) Net of Tax Foreign currency

translation (45) 152 579 (1,109) 380 (487) Pension and postretirement plans

Gains/(losses) 0 0 474 (1,597) (1,393) 811 Reclassification to

earnings 0 0 460 223 57 328

Unrealized gains/(losses) on investments (80) (14) 880 458 (524) 1,207

Total other comprehensive income net of tax (125) 138 2,393 (2,025) (1,480) 1,859

Opening other comprehensive income (6,125) (8,518) (8,518) (6,493) (5,013) (6,872)

Closing other comprehensive income (6,250) (8,380) (6,125) (8,518) (6,493) (5,013)

Derivatives included in OCI Opening balance (49) 115 115 2,334 1,028 98

Unrealized gain/(loss) (770) (86) (151) (176) 3,250 1,929 Reclassified to earnings 400 (125) (108) (3,347) (1,178) (451)

Net (370) (211) (259) (3,523) 2,072 1,478 Tax effect 134 78 95 1,304 (766) (548)

Closing balance (285) (18) (49) 115 2,334 1,028

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