Derivative Financial Instruments

3 Months Ended

Mar. 31, 2017

Derivative Financial Instruments

Derivative Financial Instruments

Note 5.  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 March 31, 2017 (MT represents metric tons):

Commodity Futures	Long/Short	Total
Aluminum	Long	2,450	MT
Aluminum	Short	3,450	MT
Copper	Long	5,512	MT
Copper	Short	14,243	MT

The following summarizes the location and amounts of the fair values reported on the company’s balance sheets as of March 31, 2017, and December 31, 2016, and gains and losses related to derivatives included in the company’s statement of income for the three months ended March 31, 2017 and 2016 (in thousands):

	Asset Derivatives					Liability Derivatives
	Balance sheet	Fair Value				Fair Value
	location	March 31, 2017		December 31, 2016		March 31, 2017		December 31, 2016
Derivative instruments designated
as fair value hedges -
Commodity futures	Other current assets	$	1,770	$	2,910	$	314	$	1,300
Derivative instruments not designated
as hedges -
Commodity futures	Other current assets		812		1,150		700		783
Total derivative instruments		$	2,582	$	4,060	$	1,014	$	2,083

The fair value of the above derivative instruments along with required margin deposit amounts with the same counterparty under master netting arrangements totaled $2.8 million at March 31, 2017, and $3.2 million at December 31, 2016, 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	March 31,		March 31,		fair value hedge	related hedged	March 31,		March 31,
	derivatives	2017		2016		relationships	items	2017		2016
Derivatives in fair value
hedging relationships -
Commodity futures	Costs of goods sold	$	(153)	$	932	Firm commitments	Costs of goods sold	$	539	$	(1,222)
						Inventory	Costs of goods sold		495		278
Derivatives not designated								$	1,034	$	(944)
as hedging instruments -
Commodity futures	Costs of goods sold	$	(4,346)	$	(872)

Note 5.  Derivative Financial Instruments (Continued)

Derivatives accounted for as fair value hedges had ineffectiveness resulting in gains of $48,000 for the three months ended March 31, 2017 and losses of $45,000 during the three months ended March 31, 2016.  Gains excluded from hedge effectiveness testing of $833,000 and $32,000 decreased cost of goods sold during the three months ended March 31, 2017,  and 2016, respectively.