Derivative Financial Instruments

6 Months Ended

Jun. 30, 2015

Derivative Financial Instruments

Derivative Financial Instruments

Note 7.  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. 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.

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 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, 2015 (MT represents metric tons and Lbs represents pounds):

Commodity Futures	Long/Short	Total
Aluminum	Long	2,825	MT
Aluminum	Short	3,275	MT
Copper	Long	8,912	MT
Copper	Short	16,041	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, 2015, and December 31, 2014, 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, 2015, and 2014 (in thousands):

	Asset Derivatives					Liability Derivatives
		Fair Value				Fair Value
	Balance sheet location	June 30, 2015		December 31, 2014		June 30, 2015		December 31, 2014
Derivative instruments designated as fair value hedges -
Commodity futures	Other current assets	$	2,508	$	3,180	$	1,479	$	913
Derivative instruments not designated as hedges -
Commodity futures	Other current assets	1,964		2,132		1,974		626
Total derivative instruments		$	4,472	$	5,312	$	3,453	$	1,539

The fair value of the above derivative instruments, along with required margin deposit amounts with the same counterparty under master netting arrangements, which totaled $6.4 million at June 30, 2015, and $7.6 million at December 31, 2014, are reflected in other current assets in the consolidated balance sheet.

	Location of gain (loss) recognized	Amount of gain (loss) recognized in income on derivatives for the three months ended						Hedged items in	Location of gain (loss) recognized	Amount of gain (loss) recognized in income on related hedged items for the three months ended
	in income on derivatives	June 30, 2015			June 30, 2014			fair value hedge relationships	in income on related hedged items	June 30, 2015			June 30, 2014
Derivatives in fair value hedging relationships - Commodity futures	Costs of goods sold	$	3,075		$	(2,632	)	Firm commitments	Costs of goods sold	$	362		$	(653	)
								Inventory	Costs of goods sold	(2,165		)	2,846
										$	(1,803	)	$	2,193
Derivatives not designated as hedging instruments - Commodity futures	Costs of goods sold	$	(326	)	$	(2,030	)
	Location of gain (loss) recognized	Amount of gain (loss) recognized in income on derivatives for the six months ended						Hedged items in	Location of gain recognized in	Amount of gain recognized in income on related hedged items for the six months ended
	in income on derivatives	June 30, 2015			June 30, 2014			fair value hedge relationships	income on related hedged items	June 30, 2015			June 30, 2014
Derivatives in fair value hedging relationships - Commodity futures	Costs of goods sold	$	(1,238	)	$	(1,015	)	Firm commitments	Costs of goods sold	$	856		$	331
								Inventory	Costs of goods sold	491			358
										$	1,347		$	689
Derivatives not designated as hedging instruments - Commodity futures	Costs of goods sold	$	6,670		$	5,926

Derivatives accounted for as fair value hedges had ineffectiveness resulting in gains of $20,000 and $160,000 during the three-month periods ended June 30, 2015, and 2014, respectively; and gains of $127,000 and $456,000 during the six-month periods ended June 30, 2015 and 2014, respectively. Gains excluded from hedge effectiveness testing of $1,252,000 reduced cost of goods sold during the three-month period ended June 30, 2015, and losses of $599,000 increased costs of goods sold during the three-month period ended June 30, 2014. Losses of $18,000 and $782,000 increased cost of goods sold during the six-month periods ended June 30, 2015 and 2014, respectively.