Derivative Financial Instruments

9 Months Ended

Sep. 30, 2012

Derivative Financial Instruments

Derivative Financial Instruments

Note 7.  Derivative Financial Instruments

The company is exposed to certain risks relating to its ongoing business operations. At times the company utilizes derivative instruments to mitigate commodity margin risk, interest rate risk, and foreign currency exchange rate risk. Forward and option contracts on various commodities are entered into to manage the price risk associated with forecasted purchases and sales of nonferrous metals (specifically aluminum, copper, nickel and silver) from the company’s metals recycling operations. Interest rate swaps may be entered into to manage interest rate risk associated with the company’s fixed and floating-rate borrowings. Forward exchange contracts on various foreign currencies may be entered into to manage foreign currency exchange rate risk as necessary. No interest rate swaps or significant forward exchange contracts on foreign currency existed for the periods presented.

Cash Flow Hedging Strategy.  For derivative instruments that are designated and qualify as a cash flow hedge (i.e., hedging the exposure to variability in expected future cash flows that is attributable to a particular risk), the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income and reclassified into earnings in the same line item associated with the forecasted transaction and in the same period or periods during which the hedged transaction affects earnings (e.g., in “interest expense” when the hedged transactions are interest cash flows associated with floating-rate borrowings). The remaining gain or loss on the derivative instrument in excess of the cumulative change in the present value of future cash flows of the hedged item, if any (i.e., the ineffectiveness portion), or hedge components excluded from the assessment of effectiveness, are recognized in the statement of income during the current period. No cash flow hedges existed for the periods presented.

Commodity Futures Contracts.  If the company is “long” on futures contracts, it means the company has more futures contracts purchased than futures contracts sold for the underlying commodity.  If the company is “short” on futures contracts, it means the company has more futures contracts sold than futures contracts purchased for the underlying commodity. The following summarizes the company’s commodity option and futures contract commitments as of September 30, 2012 (MT represents metric tons and Lbs represents pounds):

Commodity Options — nickel 60 MT

Commodity Futures	Long/Short	Total
Aluminum	Long	5,575	MT
Aluminum	Short	5,600	MT
Copper	Long	10,444	MT
Copper	Short	28,406	MT
Nickel	Short	90	MT
Silver	Short	343	Lbs

The following summarizes the location and amounts of the fair values and gains or losses related to derivatives included in the company’s financial statements as of September 30, 2012, and December 31, 2011, and for the three- and nine-month periods ended September 30, 2012 and 2011 (in thousands):

		Fair Value
		September 30, 2012		December 31, 2011
Balance Sheets
Commodity futures and options — net liability	Accrued expenses	$	7,487	$	1,219

		Gain (Loss) for Three Months Ended
		September 30, 2012			September 30, 2011
Statements of Income
Commodity futures and options	Costs of goods sold	$	(9,085	)	$	7,112

		Gain (Loss) for Nine Months Ended
		September 30, 2012			September 30, 2011
Statements of Income
Commodity futures and options	Costs of goods sold	$	(6,810	)	$	11,457