Derivative Financial Instruments

9 Months Ended

Sep. 30, 2013

Derivative Financial Instruments

Derivative Financial Instruments

Note 6.  Derivative Financial Instruments

The company is exposed to certain risks relating to its ongoing business operations. The company utilizes derivative instruments to mitigate interest rate risk, foreign currency exchange rate risk, and commodity margin risk. 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. The company routinely enters into forward exchange traded futures and option contracts to manage the price risk associated with nonferrous metals inventory as well as purchases and sales of nonferrous metals (specifically aluminum, copper, nickel and silver).  The company offsets fair value amounts recognized for derivative instruments executed with the same counterparty under master netting agreements.  The company began to designate certain of its nonferrous metals, forward exchange futures contracts as fair value hedges of inventory and firm sales commitments in January 2013.

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 futures contract commitments as of September 30, 2013 (MT represents metric tons and Lbs represents pounds):

Commodity Futures	Long/Short	Total
Aluminum	Long	2,300	MT
Aluminum	Short	2,225	MT
Copper	Long	2,710	MT
Copper	Short	8,448	MT
Silver	Short	686	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, 2013, and December 31, 2012, and for the three and nine-month periods ended September 30, 2013 and 2012 (in thousands):

	Asset Derivatives					Liability Derivatives
		Fair Value				Fair Value
	Balance sheet location	September 30, 2013		December 31, 2012		September 30, 2013		December 31, 2012
Derivative instruments designated as fair value hedges -
Commodity futures	Other current assets	$	413			$	660
Derivative instruments not designated as hedges -
Commodity futures	Other current assets	$	285	$	4,024	$	625	$	1,854
Total derivative instruments		$	698	$	4,024	$	1,285	$	1,854

	Location of gain	Amount of gain (loss) recognized in income on derivatives for the three months ended						Hedged items	Location of gain (loss)	Amount of gain (loss) recognized in income on related hedged items for the three months ended
	(loss) recognized in income on derivatives	September 30, 2013			September 30, 2012			in fair value hedge relationships	recognized in income on related hedged item	September 30, 2013			September 30, 2012
Derivatives in fair value hedging relationships -
Commodity futures	Costs of goods sold	$	381					Firm commitments	Costs of goods sold	$	(1,736	)
								Inventory	Costs of goods sold	364
										$	(1,372	)
Derivatives not designated as hedging instruments -
Commodity futures	Costs of goods sold	$	(2,836	)	$	(9,085	)

Location of gain

Amount of gain (loss) recognized in income on derivatives for the nine months ended

Hedged items

Location of gain (loss)

Amount of gain (loss) recognized in income on related hedged items for the nine months ended

(loss) recognized in income on derivatives

September 30, 2013

September 30, 2012

in fair value hedge relationships

recognized in income on related hedged item

September 30, 2013

September 30, 2012

Derivatives in fair value hedging relationships -

Commodity futures

Costs of goods sold

$

7,773

Firm commitments

Costs of goods sold

$

877

Inventory

Costs of goods sold

(8,458

)

$

(7,581

)

Derivatives not designated as hedging instruments -

Commodity futures

Costs of goods sold

$

3,793

$

(6,810

)

Derivatives accounted for as fair value hedges had ineffectiveness resulting in losses of $312,000 and $199,000 during the three- and nine-month periods ended September 30, 2013, respectively; and a loss excluded from hedge effectiveness testing of $678,000 that increased costs of goods sold during the three-month period ended September 30, 2013, and a gain of $392,000 that reduced costs of goods sold during the nine-month period ended September 30, 2013.