solve the case (memo and format)

CASE 1-2 LEMAY HOMETOWN LUMBER COMPANY LIMITED

In March of 2016, Roseanne Chang, vice president of the Eastern Ontario Region of the

Dominion Bank of Canada, was reviewing the file of Lemay Hometown Lumber Company,

one of the regions largest borrowers. The following day, Larry Lemay and Linda Limeric,

the president and controller, respectively, of Lemay Hometown Lumber Company, would

meet with the banks loan committee, to present a request for a line of credit of up to $10

million dollars. The line of credit was in addition to the term loan they already had with the

bank. The loan committee, consisted of Chang, the central credit manager, and the assistant

central credit manager, would review the loan request and make a recommendation to the

banks board of directors. Their recommendation would be the bases for the banks decision

regarding the Lemay Hometown Lumbers request.

PRE 2016

The Lemay lumber Company was founded by the Lemay family in 1870 to market the

lumber produced from the trees on their land. After the original lumber stands were

depleted near Palmerston Ontario, they continued to operate a wholesale lumber business

and it was slowly expanded. In 1950 Lemay Lumber owned and operated four lumber yards

in the Palmerston, Harriston and Arthur area. Although owned by Lemay Lumber each was

a separate company operating independently.

In 2000 Leroy K. Lemay became president and amalgamated the four lumber companies

into Lemay Hometown Lumber Company Limited. The company then acquired seven

additional lumber yards to the north and west of Palmerston Ontario, however further

growth was limited by Leroy K. Lemays belief that further expansion should only be funded

by internally generated funds. For over 100 years Lemay Lumber had been dealing with the

Fergus branch of the First Capital Bank of Canada, and in 2015 had borrowed $1.5 million

to meet the inventory requirements for their seasonal demand for building materials an meet

their seasonal sales. From April until November 77 per cent of their sales were evenly spread

over these months, while the remaining 23 per cent was distributed evenly between

December and March. Lemay Lumbers sales between the years 2005 and 2015 were from

$10 million to $15 million, with 90 per cent being wholesale sales to the residential

construction trades. Exhibit 1 shows the before tax profits from 2005 to 2015.

In 2011 L.K. Lemay, realized that due his poor health he would not be able to manage the

company any longer. His son Larry Lemay, agreed to take over as president of the company.

Larry Lemay had actually taken over the business in 2010 when his father actually became

too sick to perform his duties as president. After his father returned Larry assumed the

advertising and budgeting responsibilities for the company

2014 and 2015

Larry Lemay had a postgraduate degree in Business Administration and several years

teaching experience. When he took over as president of the company Lemay Hometown

Lumber Company was primarily a wholesale lumber business and was subject to the

volatility of the residential housing market. Exhibit two outlines the selected ratios for the

wholesale lumber industry. The new president was of the opinion that with a few changes in

inventory and yard operations , the company would be able to take advantage of the growing

retail market for building products and thereby stabilize their operations.

Lemay approached the companys banker, the branch manager of the Fergus branch of the

First Capital Bank of Canada, to finance the proposed changes in the company. However the

Fergus branch manager would only support a seasonal loan to finance inventory, and

refused to pass on the loan request to his superiors.

Consequently, Larry Lemay took the loan application to the Dominion Bank of Canada,

along with his plans and needs. In 2013, The Dominion Bank of Canada granted an initial

line of credit for $3 million to be used as working capital. The Dominion Bank took the

accounts receivable and inventory as collateral , and, as a condition of the loan, Lemay

Hometown Lumber was required to provide the bank with quarterly financial statements

and monthly reports of inventory, sales and receivables.

Larry Lemay, also reorganized the companys 11 branch operations into 3 divisions or

regions. The first Northern Region, which serviced an urban market, consisted of three

lumber yards in the Owen Sound area. Four lumber yards in the Palmerston area formed

the central region, and four lumber yards in and around Elmira formed the Western Region.

The Eastern Region was primarily a rural market, while the Northern Region was partly a

resort and a partially an urban market. In an attempt to minimize inventory one branch in

each region was dedicated and operated as a depot. A fleet of trucks kept frequent and

regular scheduled runs between the depots and the lumber yards to provide rapid deliveries

to the customers.

Each region was under an area manager whose responsibility it was to supervise the regions

branches. The supervisors had years of experience working in the companys lumber yards.

A management committee, consisting of the president, controller and area supervisors, met

on a monthly basis, to discuss operational strategies. The committee also set the budgets for

each branch every four months. Exhibits 3, 4, and 5 outline the companys financial

statements ratios for the years 2013 to 2015.

2015 PROJECTIONS

Exhibit 6 outlines the projected capital expenditures for 2015 and 2016. The projected 2015

projected capital expenditures of $1.8 million were primarily to upgrade and improve the

companys showrooms and display areas. Depreciation and profits were expected to cover

these capital expenses. A sales increase was projected for 2015 of $6.4 million. This

projection was based on the opinions of, the building contractors, Lemays yard managers,

and business publications reporting on the outlook for the economy and the projected

housing market. Operating profits were anticipated to be $2.92 million, assuming a gross

margin of 30 per cent and expenses of $6.08 million. To finance an increase of $2.52 million

in receivables and inventory, a total operating line of credit of $3.6 million for working

capital was requested and granted by The Dominion Bank.

2015 ACTUAL

After studying the market for over six months, and researching the potential of the Owen

Sound area, and discussing the revised capital budget with the bank, Lemay Hometown

Lumber opened a discount home center in September of 2025. To finance this new operation,

the bank granted a term loan of $4.2 million.

The new discount home center was geared toward the retail home market. Exhibit 7 presents

selected ratios for the retail building materials and hardware industry. The concept enabled

customers to purchase, at one location, all types of building and hardware supplies, such as

tiles, wallpaper, carpet, lumber, plumbing supplies including fixtures. Electrical supplies as

well as lighting fixtures. Each item in the store was clearly marked with two separate and

distinct prices so customers paid only for the services they desired. The regular price was for

the customer could charge their purchases and have them delivered. The discount or cash

and carry price was just as it states, the customer paid cash and left with their purchases.

There was also a third price charged for those customers who wished to pay cash for their

goods and then have them delivered. The new stores sales for the first two months of

operation was $2.28 million.

Sales in 2015 were $2,680,000 greater than projected and capital expenditures were

$3,600,000 over budget. In addition to granting the term loan, the Dominion Bank also

increased the companys line of credit to $5 million.

2016 PROJECTIONS

For 2015 Larry Lemay projected a 65 per cent increase in sales to $54 million and an

operating profit of 8 per cent of sales. To finance inventories and receivables of up to $24

million in June and July, an operating line of credit of $10.8 million was requested from the

Dominion Bank.

THE DOMINION BANK

As she reviewed the file, Chang looked for any indicators that the bank should increase its

protection of the loan. She particularly noted the companys profits since 2011 and her

predecessors confidence in the Lemay management team. However Chang, closely examined

Lemays projections for 2016. She questioned the accuracy of these projections, due to the

fact that 65 per cent of Lemays sales were to contractors in the new housing market,