Derivative Financial Instruments

3 Months Ended

Mar. 31, 2018

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, occasionally to mitigate foreign currency exchange rate risk, and have in the past to mitigate interest rate fluctuation 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, 2018:  

Commodity Futures	Long/Short	Metric Tons
Aluminum	Long	1,950
Aluminum	Short	2,450
Copper	Long	6,078
Copper	Short	16,704

The following summarizes the location and amounts of the fair values reported on the company’s balance sheets as of March 31, 2018, and December 31, 2017, and gains and losses related to derivatives included in the company’s statement of income for the three months ended March 31, 2018, and March 30, 2017 (in thousands):

Note 6.  Derivative Financial Instruments (Continued)

		Asset Derivatives				Liability Derivatives
	Balance sheet	Fair Value				Fair Value
	location	March 31, 2018		December 31, 2017		March 31, 2018		December 31, 2017
Derivative instruments designated as fair value hedges
Commodity futures	Other current assets	$	4,918	$	1,211	$	555	$	5,364
Derivative instruments not designated as hedges
Commodity futures	Other current assets		2,233		1,579		852		5,142
Total derivative instruments		$	7,151	$	2,790	$	1,407	$	10,506

The fair value of the above derivative instruments along with required margin deposit amounts with the same counterparty under master netting arrangements totaled $3.5 million at March 31, 2018, and $5.6 million at December 31, 2017, and 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	2018		2017		relationships	items	2018		2017
Derivatives in fair value
hedging relationships
Commodity futures	Costs of goods sold	$	8,516	$	(153)	Firm commitments	Costs of goods sold	$	(793)	$	539
						Inventory	Costs of goods sold		(2,596)		495
Derivatives not designated								$	(3,389)	$	1,034
as hedging instruments
Commodity futures	Costs of goods sold	$	2,756	$	(4,346)

Derivatives accounted for as fair value hedges had ineffectiveness resulting in losses of $101,000 during the three-month periods ended March 31, 2018 and gains of $48,000 for the three months ended March 31, 2017.  Gains excluded from hedge effectiveness testing of $5.0 million and $833,000 decreased cost of goods sold during the three-month period ended March 31, 2018, and 2017, respectively.