Derivative Financial Instruments

9 Months Ended

Sep. 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. 

Note 7.  Derivative Financial Instruments (Continued)

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, 2016 (MT represents metric tons):

Commodity Futures	Long/Short	Total
Aluminum	Long	1,750	MT
Aluminum	Short	1,575	MT
Copper	Long	4,413	MT
Copper	Short	13,950	MT

The following summarizes the location and amounts of the fair values reported on the company’s balance sheets as of September 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 nine months ended September 30, 2016 and 2015 (in thousands):

	Asset Derivatives					Liability Derivatives
	Balance sheet	Fair Value				Fair Value
	location	September 30, 2016		December 31, 2015		September 30, 2016		December 31, 2015
Derivative instruments designated
as fair value hedges -
Commodity futures	Other current assets	$	451	$	857	$	1,156	$	2,860
Derivative instruments not designated
as hedges -
Commodity futures	Other current assets		171		908		1,037		1,065
Total derivative instruments		$	622	$	1,765	$	2,193	$	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 $1.7 million at September 30, 2016, and $3.4 million at December 31, 2015, are reflected in other current assets in the consolidated balance sheets.

		Amount of gain (loss) recognized					Location of gain	Amount of gain (loss) recognized
	Location of gain	in income on derivatives					(loss) recognized	in income on related hedged items
	(loss) recognized	for the three months ended				Hedged items in	in income on	for the three months ended
	in income on	September 30,		September 30,		fair value hedge	related hedged	September 30,		September 30,
	derivatives	2016		2015		relationships	items	2016		2015
Derivatives in fair value
hedging relationships -
Commodity futures	Costs of goods sold	$	826	$	(2,825)	Firm commitments	Costs of goods sold	$	(793)	$	662
						Inventory	Costs of goods sold		(177)		800
Derivatives not designated								$	(970)	$	1,462
as hedging instruments -
Commodity futures	Costs of goods sold	$	(638)	$	6,707

Note 7.  Derivative Financial Instruments (Continued)

		Amount of gain (loss) recognized					Location of gain	Amount of gain (loss) recognized
	Location of gain	in income on derivatives					(loss) recognized	in income on related hedged items
	(loss) recognized	for the nine months ended				Hedged items in	in income on	for the nine months ended
	in income on	September 30,		September 30,		fair value hedge	income on related	September 30,		September 30,
	derivatives	2016		2015		relationships	hedged items	2016		2015
Derivatives in fair value
hedging relationships -
Commodity futures	Costs of goods sold	$	1,281	$	(4,063)	Firm commitments	Costs of goods sold	$	(2,223)	$	1,518
						Inventory	Costs of goods sold		642		1,291
Derivatives not designated								$	(1,581)	$	2,809
as hedging instruments -
Commodity futures	Costs of goods sold	$	(394)	$	13,377

Derivatives accounted for as fair value hedges had ineffectiveness resulting in losses of $84,000 and $191,000 during the three months ended September 30, 2016 and 2015, respectively; and losses of $175,000 and $64,000 during the nine months ended September 30, 2016 and 2015, respectively. Losses excluded from hedge effectiveness testing of $60,000 and $1.2 million increased cost of goods sold during the three months ended September 30, 2016, and September 30, 2015.  Losses excluded from hedge effectiveness testing of $125,000 and $1.2 million increased costs of goods sold during the nine months ended September 30, 2016 and 2015, respectively.