Derivative Financial Instruments

9 Months Ended

Sep. 30, 2017

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 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 September 30, 2017:  

Commodity Futures	Long/Short	Metric Tons
Aluminum	Long	1,275
Aluminum	Short	2,250
Copper	Long	4,251
Copper	Short	21,727

The following summarizes the location and amounts of the fair values reported on the company’s balance sheets as of September 30, 2017, and December 31, 2016, and gains and losses related to derivatives included in the company’s statement of income for the three and nine months ended September 30, 2017 and 2016 (in thousands):

Note 6.  Derivative Financial Instruments (Continued)

	Asset Derivatives					Liability Derivatives
	Balance sheet	Fair Value				Fair Value
	location	September 30, 2017		December 31, 2016		September 30, 2017		December 31, 2016
Derivative instruments designated
as fair value hedges
Commodity futures	Other current assets	$	2,576	$	2,910	$	396	$	1,300
Derivative instruments not designated
as hedges
Commodity futures	Other current assets		1,573		1,150		497		783
Total derivative instruments		$	4,149	$	4,060	$	893	$	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 $6.0 million at September 30, 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	September 30,		September 30,		fair value hedge	related hedged	September 30,		September 30,
	derivatives	2017		2016		relationships	items	2017		2016
Derivatives in fair value
hedging relationships
Commodity futures	Costs of goods sold	$	4,122	$	826	Firm commitments	Costs of goods sold	$	(1,711)	$	(793)
						Inventory	Costs of goods sold		(1,330)		(177)
Derivatives not designated								$	(3,041)	$	(970)
as hedging instruments
Commodity futures	Costs of goods sold	$	(10,566)	$	(638)

		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	on related	September 30,		September 30,
	derivatives	2017		2016		relationships	hedged items	2017		2016
Derivatives in fair value
hedging relationships
Commodity futures	Costs of goods sold	$	571	$	1,281	Firm commitments	Costs of goods sold	$	995	$	(2,223)
						Inventory	Costs of goods sold		179		642
Derivatives not designated								$	1,174	$	(1,581)
as hedging instruments
Commodity futures	Costs of goods sold	$	(12,528)	$	(394)

Derivatives accounted for as fair value hedges had ineffectiveness resulting in losses of $35,000 and $84,000 during the three-month periods ended September 30, 2017 and 2016, respectively; and a gain of $62,000 and loss of  $175,000 during the nine-month periods ended September 30, 2017 and 2016, respectively.  Gains excluded from hedge effectiveness testing of $1.1 million decreased cost of goods sold during the three-month period ended September 30, 2017, and losses excluded from hedge effectiveness testing of $60,000 increased costs of goods sold during the three-month period ended September 30, 2016.  Gains of $1.7 million decreased costs of goods sold during the nine-month period ended September 30, 2017, and losses of $125,000 increased costs of goods sold during the nine month period ended September 30, 2016.