Derivative Financial Instruments

3 Months Ended

Mar. 31, 2014

Derivative Financial Instruments

Derivative Financial Instruments

Note 5.  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 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 designates certain of its nonferrous metals, forward exchange futures contracts as fair value hedges of inventory and firm sales commitments.

Commodity Futures Contracts.  If the company is “long” on a futures contract, it means the company has more futures contracts purchased than futures contracts sold for the underlying commodity.  If the company is “short” on a futures contract, 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 March 31, 2014 (MT represents metric tons and Lbs represents pounds):

Commodity Futures	Long/Short	Total
Aluminum	Long	2,625	MT
Aluminum	Short	1,525	MT
Copper	Long	4,260	MT
Copper	Short	15,014	MT
Silver	Short	343	Lbs

The following summarizes the location and amounts of the fair values reported on the company’s balance sheets as of March 31, 2014, and December 31, 2013, and gains and losses related to derivatives included in the company’s statement of income for the three-month periods ended March 31, 2014 and 2013 (in thousands):

	Asset Derivatives					Liability Derivatives
		Fair Value				Fair Value
	Balance sheet location	March 31, 2014		December 31, 2013		March 31, 2014			December 31, 2013
Derivative instruments designated as fair value hedges - Commodity futures	Other current assets	$	2,154	$	658	$	(1,048	)	$	1,886
Derivative instruments not designated as hedges - Commodity futures	Other current assets	$	1,466	$	352	$	(478	)	2,601
Total derivative instruments		$	3,620	$	1,010	$	(1,526	)	$	4,487

The fair value of the above derivative instruments along with required margin deposit amounts with the same counterparty under master netting arrangements, which totaled $5.4 million at March 31, 2014 and $3.6 million at December 31, 2013, are reflected in other current assets in the consolidated balance sheet.

	Location of gain	Amount of gain recognized in income on derivatives for the three				Hedged items	Location of gain (loss)	Amount of gain (loss) recognized in income on related hedged items for
	recognized in income on	months ended				in fair value hedge	recognized in income on	the three months ended
	derivatives	March 31, 2014		March 31, 2013		relationships	related hedged item	March 31, 2014			March 31, 2013
Derivatives in fair value hedging relationships - Commodity futures	Costs of goods sold	$	1,617	$	8,046	Firm commitments	Costs of goods sold	$	984		$	1,316
						Inventory	Costs of goods sold	(2,488		)	(6,808		)
								$	(1,504	)	$	(5,492	)
Derivatives not designated as hedging instruments - Commodity futures	Costs of goods sold	$	7,956	$	2,401

Derivatives accounted for as fair value hedges had ineffectiveness resulting in gains of $296,000 and $221,000 during the three-month periods ended March 31, 2014 and 2013, respectively; and a loss excluded from hedge effectiveness testing of $183,000 that increased costs of goods sold during the three-month period ended March 31, 2014, and a gain excluded from hedge effectiveness testing of $2.3 million, that reduced cost of goods sold during the three-month period ended March 31, 2013.