Derivative Financial Instruments

3 Months Ended

Mar. 31, 2016

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. 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 March 31, 2016 (MT represents metric tons and Lbs represents pounds):

Commodity Futures	Long/Short	Total
Aluminum	Long	3,075	MT
Aluminum	Short	1,125	MT
Copper	Long	8,736	MT
Copper	Short	11,796	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, 2016, and December 31, 2015, and gains and losses related to derivatives included in the company’s statement of income for the three months ended March 31, 2016, and 2015 (in thousands):

	Asset Derivatives					Liability Derivatives
		Fair Value				Fair Value
	Balance sheet location	March 31, 2016		December 31, 2015		March 31, 2016		December 31, 2015
Derivative instruments designatedas fair value hedges -
Commodity futures	Other current assets	$	890	$	857	$	1,945	$	2,860
Derivative instruments not designated as hedges -
Commodity futures	Other current assets	752		908		1,232		1,065
Total derivative instruments		$	1,642	$	1,765	$	3,177	$	3,925

The fair value of the above derivative instruments, along with required margin deposit amounts with the same counterparty under master netting arrangements, which totaled $2.5 million at March 31, 2016, and $3.4 million at December 31, 2015, 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
	Location of gain	derivatives for the three							Location of gain	related hedged items for
	(loss) recognized	months ended						Hedged items	(loss) recognized	the three months ended
	in income on	March 31,			March 31,			in fair value	in income on	March 31,			March 31,
	derivatives	2016			2015			hedge	derivatives	2016			2015
Derivatives in fair value hedging relationships -
Commodity futures	Costs of goods sold	$	932		$	(4,313	)	Firm commitments	Costs of goods sold	$	(1,222	)	$	494
								Inventory	Costs of goods sold	278			2,656
										$	(944	)	$	3,150
Derivatives not designated as hedging instruments -
Commodity futures	Costs of goods sold	$	(872	)	$	6,996

Derivatives accounted for as fair value hedges had ineffectiveness resulting in losses of $45,000 for the three-month period ending March 31, 2016 and gains of $107,000 during the three-month period ended March 31, 2015.  Gains excluded from hedge effectiveness testing of $32,000 decreased costs of goods sold during the three-month period ending March 31, 2016 and losses excluded from hedge effectiveness testing of $1.3 million increased costs of goods sold during the three-month periods ended March 31, 2015.