Derivative Financial Instruments

9 Months Ended

Sep. 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, 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 September 30, 2015 (MT represents metric tons and Lbs represents pounds):

Commodity Futures	Long/Short	Total
Aluminum	Long	2,350	MT
Aluminum	Short	2,275	MT
Copper	Long	7,602	MT
Copper	Short	13,860	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 September 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 nine-month periods ended September 30, 2015, and 2014 (in thousands):

	Asset Derivatives					Liability Derivatives
		Fair Value				Fair Value
	Balance sheet location	September 30, 2015		December 31, 2014		September 30, 2015		December 31, 2014
Derivative instruments designated as fair value hedges -
Commodity futures	Other current assets	$	614	$	3,180	$	2,410	$	913
Derivative instruments not designated as hedges -
Commodity futures	Other current assets	1,635		2,132		1,019		626
Total derivative instruments		$	2,249	$	5,312	$	3,429	$	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 $1.8 million at September 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 in income on	Amount of gain (loss) recognized in income on related hedged items for the three months ended
	in income on derivatives	September 30, 2015			September 30, 2014		fair value hedge relationships	related hedged items	September 30, 2015		September 30, 2014
Derivatives in fair value hedging relationships -
Commodity futures	Costs of goods sold	$	(2,825	)	$	4,371	Firm commitments	Costs of goods sold	$	662	$	784
							Inventory	Costs of goods sold	800		(4,163		)
									$	1,462	$	(3,379	)
Derivatives not designated as hedging instruments -
Commodity futures	Costs of goods sold	$	6,707		$	2,672

	Location of gain (loss) recognized	Amount of gain (loss) recognized in income on derivatives for the nine months ended					Hedged items in	Location of gain recognized in	Amount of gain recognized in income on related hedged items for the nine months ended
	in income on derivatives	September 30, 2015			September 30, 2014		fair value hedge relationships	income on related hedged items	September 30, 2015		September 30, 2014
Derivatives in fair value hedging relationships -
Commodity futures	Costs of goods sold	$	(4,063	)	$	3,356	Firm commitments	Costs of goods sold	$	1,518	$	1,115
							Inventory	Costs of goods sold	1,291		(3,805		)
									$	2,809	$	(2,690	)
Derivatives not designated as hedging instruments -
Commodity futures	Costs of goods sold	$	13,377		$	8,598

Derivatives accounted for as fair value hedges had ineffectiveness resulting in losses of $191,000 and $229,000 during the three-month periods ended September 30, 2015, and 2014, respectively; and a loss of $64,000 and gain of $227,000 during the nine-month periods ended September 30, 2015 and 2014, respectively. A loss excluded from hedge effectiveness testing of $1.2 million increased costs of goods sold and a gain of $1.2 million reduced cost of goods sold during the three-month periods ended September 30, 2015, and 2014, respectively. A loss excluded from hedge effectiveness testing of $1.2 million increased costs of goods sold and a gain of $439,000 reduced cost of goods sold during the nine-month periods ended September 30, 2015 and 2014, respectively.