Derivative Financial Instruments

6 Months Ended

Jun. 30, 2014

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 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 June 30, 2014 (MT represents metric tons and Lbs represents pounds):

Commodity Futures	Long/Short	Total
Aluminum	Long	3,550	MT
Aluminum	Short	3,575	MT
Copper	Long	7,129	MT
Copper	Short	21,636	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 June 30, 2014, and December 31, 2013, and gains and losses related to derivatives included in the company’s statement of income for the three and six-month periods ended June 30, 2014 and 2013 (in thousands):

	Asset Derivatives					Liability Derivatives
		Fair Value				Fair Value
				December 31,					December 31,
	Balance sheet location	June 30, 2014		2013		June 30, 2014			2013
Derivative instruments designated as fair value hedges -
Commodity futures	Other current assets	$	274	$	658	$	(1,800	)	$	1,886
Derivative instruments not designated as hedges -
Commodity futures	Other current assets	$	708	$	352	$	(1,781	)	2,601
Total derivative instruments		$	982	$	1,010	$	(3,581	)	$	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 $5.1 million at June 30, 2014 and $3.6 million at December 31, 2013, are reflected in other current assets in the consolidated balance sheet.

		Amount of gain (loss)								Amount of gain (loss)
		recognized in income on								recognized in income on
		derivatives for the three								related hedged items for the
	Location of gain (loss)	months ended						Hedged items	Location of gain (loss)	three months ended
	recognized in income	June 30,			June 30,			in fair value hedge	recognized in income	June 30,			June 30,
	on derivatives	2014			2013			relationships	on related hedged item	2014			2013
Derivatives in fair value hedging relationships -
Commodity futures	Costs of goods sold	$	(2,632	)	$	(654	)	Firm commitments	Costs of goods sold	$	(653	)	$	1,297
								Inventory	Costs of goods sold	2,846			(2,014		)
										$	2,193		$	(717	)
Derivatives not designated as hedging instruments -
Commodity futures	Costs of goods sold	$	(2,030	)	$	6,621

		Amount of gain (loss)							Amount of gain (loss)
		recognized in income on							recognized in income on
		derivatives for the six months							related hedged items for the
	Location of gain (loss)	ended					Hedged items	Location of gain (loss)	six months ended
	recognized in income	June 30,			June 30,		in fair value hedge	recognized in income	June 30,		June 30,
	on derivatives	2014			2013		relationships	on related hedged item	2014		2013
Derivatives in fair value hedging relationships -
Commodity futures	Costs of goods sold	$	(1,015	)	$	7,392	Firm commitments	Costs of goods sold	$	331	$	2,613
							Inventory	Costs of goods sold	358		(8,822		)
									$	689	$	(6,209	)
Derivatives not designated as hedging instruments -
Commodity futures	Costs of goods sold	$	5,926		$	6,629

Derivatives accounted for as fair value hedges had ineffectiveness resulting in a gain of $160,000 and in a loss of $108,000 during the three-month periods ended June 30, 2014 and 2013, respectively; and gains of $456,000 and $113,000 during the six-month periods ended June 30, 2014 and 2013, respectively. Losses excluded from hedge effectiveness testing of $599,000 and $1.2 million increased costs of goods sold during the three-month periods ended June 30, 2014 and 2013, respectively. A loss excluded from hedge effectiveness testing of $782,000 increased costs of goods sold and a gain excluded from hedge effectiveness testing of $1.1 million reduced cost of goods sold during the six-month periods ended June 30, 2014 and 2013, respectively.