Derivative Financial Instruments

6 Months Ended

Jun. 30, 2016

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 commodity margin risk, interest rate risk and foreign currency exchange rate 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 (primarily aluminum and copper).  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, 2016 (MT represents metric tons):

Commodity Futures	Long/Short	Total
Aluminum	Long	1,725	MT
Aluminum	Short	1,095	MT
Copper	Long	15,809	MT
Copper	Short	16,375	MT

The following summarizes the location and amounts of the fair values reported on the company’s balance sheets as of June 30, 2016, and December 31, 2015, 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, 2016, and 2015 (in thousands):

	Asset Derivatives					Liability Derivatives
		Fair Value				Fair Value
	Balance sheet location	June 30, 2016		December 31, 2015		June 30, 2016		December 31, 2015
Derivative instruments designated as fair value hedges -
Commodity futures	Other current assets	$	477	$	857	$	2,009	$	2,860
Derivative instruments not designated as hedges -
Commodity futures	Other current assets	1,201		908		2,829		1,065
Total derivative instruments		$	1,678	$	1,765	$	4,838	$	3,925

The fair value of the above derivative instruments along with required margin deposit amounts with the same counterparty under master netting arrangements totaled $922,000 at June 30, 2016, and $3.4 million at December 31, 2015, 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, 2016			June 30, 2015			fair value hedge relationships	in income on related hedged items	June 30, 2016			June 30, 2015
Derivatives in fair value hedging relationships -
Commodity futures	Costs of goods sold	$	(477	)	$	3,075		Firm commitments	Costs of goods sold	$	(208	)	$	362
								Inventory	Costs of goods sold	541			(2,165		)
										$	333		$	(1,803	)
Derivatives not designated as hedging instruments -
Commodity futures	Costs of goods sold	$	1,116		$	(326	)

	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 (loss) recognized in	Amount of gain (loss) recognized in income on related hedged items for the six months ended
	in income on derivatives	June 30, 2016		June 30, 2015			fair value hedge relationships	income on related hedged items	June 30, 2016			June 30, 2015
Derivatives in fair value hedging relationships -
Commodity futures	Costs of goods sold	$	455	$	(1,238	)	Firm commitments	Costs of goods sold	$	(1,430	)	$	856
							Inventory	Costs of goods sold	819			491
									$	(611	)	$	1,347
Derivatives not designated as hedging instruments -
Commodity futures	Costs of goods sold	$	244	$	6,670

Derivatives accounted for as fair value hedges had ineffectiveness resulting in losses of $47,000 and gains of $20,000 during the three-month periods ended June 30, 2016 and 2015, respectively; and losses of $91,000 and gains of  $127,000 during the six-month periods ended June 30, 2016 and 2015, respectively.  Losses excluded from hedge effectiveness testing of $97,000 increased cost of goods sold during thethree-month period ended June 30, 2016, and gains of $1,252,000 reduced costs of goods sold during the three-month period ended June 30, 2015.  Losses of $65,000 and $18,000 increased costs of goods sold during the six-month periods ended June 30, 2016 and 2015, respectively.