Derivative Financial Instruments

9 Months Ended

Sep. 30, 2019

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, and occasionally to mitigate foreign currency exchange rate risk or 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 and ferrous 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 significant futures contract commitments as of September 30, 2019:

Commodity Futures	Long/Short	Metric Tons
Aluminum	Long	575
Aluminum	Short	4,100
Copper	Long	10,036
Copper	Short	21,704

Note 7. Derivative Financial Instruments (Continued)

The following summarizes the location and amounts of the fair values reported on the company’s consolidated balance sheets as of September 30, 2019, and December 31, 2018, and gains and losses related to derivatives included in the company’s statement of income for the three and nine-month periods ended September 30, 2019 and 2018 (in thousands):

		Asset Derivatives				Liability Derivatives
	Balance sheet	Fair Value				Fair Value
	location	September 30, 2019		December 31, 2018		September 30, 2019		December 31, 2018
Derivative instruments designated as hedges
Commodity futures	Other current assets	$	1,063	$	2,999	$	805	$	1,837
Derivative instruments not designated as hedges
Commodity futures	Other current assets		313		1,559		3,100		2,053
Total derivative instruments		$	1,376	$	4,558	$	3,905	$	3,890

The fair value of the above derivative instruments along with required margin deposit amounts with the same counterparty under master netting arrangements totaled $4.3 million at September 30, 2019, and $4.9 million at December 31, 2018, and are reflected in other current assets in the consolidated balance sheets.

		Amount of gain (loss)						Amount of gain (loss)
		recognized in income					Location of gain	recognized in income
	Location of gain	on derivatives for the					(loss) recognized	on derivatives for the
	(loss) recognized	three months ended				Hedged items in	in income on	three months ended
	in income on	September 30,				fair value hedge	related hedged	September 30,
	derivatives	2019		2018		relationships	items	2019		2018
Derivatives in fair value
hedging relationships
Commodity futures	Costs of goods sold	$	302	$	(8,943)	Firm commitments	Costs of goods sold	$	(519)	$	5,111
						Inventory	Costs of goods sold		(182)		1,753
Derivatives not designated								$	(701)	$	6,864
as hedging instruments
Commodity futures	Costs of goods sold	$	4,536	$	13,803

		Amount of gain (loss)						Amount of gain (loss)
		recognized in income					Location of gain	recognized in income
	Location of gain	on derivatives for the					(loss) recognized	on derivatives for the
	(loss) recognized	three months ended				Hedged items in	in income on	three months ended
	in income on	September 30,				fair value hedge	related hedged	September 30,
	derivatives	2019		2018		relationships	items	2019		2018
Derivatives in fair value
hedging relationships
Commodity futures	Costs of goods sold	$	(560)	$	1,113	Firm commitments	Costs of goods sold	$	(603)	$	1,718
						Inventory	Costs of goods sold		245		(1,659)
Derivatives not designated								$	(358)	$	59
as hedging instruments
Commodity futures	Costs of goods sold	$	5,946	$	19,523

Derivatives accounted for as fair value hedges had ineffectiveness resulting in gains of $69,000 and $5,000 during the three-month periods ended September 30, 2019, and 2018, respectively; and gains of $101,000 and losses of $10,500 during the nine-month periods ended September 30, 2019, and 2018, respectively. Losses excluded from hedge effectiveness testing of $399,000 and $2.1 million increased cost of goods sold during the three-month periods ended September 30, 2019, and 2018, respectively. Losses excluded from hedge effectiveness testing of $918,000 increased cost of goods sold during the nine-month period ended September 30, 2019 and gains of $1.2 million decreased the cost of goods sold during the nine-month period ended September 30, 2018.

Note 7. Derivative Financial Instruments (Continued)

Derivatives accounted for as cash flow hedges resulted in net losses of $8,000 and net gains of $82,000 recognized in other comprehensive income for the three-month periods ended September 30, 2019, and 2018, respectively; and net gains of $139,000 and net losses of $55,000 for the nine-month periods ended September 30, 2019 and 2018, respectively. Net gains of $43,000 and $483,000 were reclassified from accumulated other comprehensive income for the three and nine-month periods ended September 30, 2019. At September 30, 2019, the company expects to reclassify $51,000 of net gains on derivative instruments from accumulated other comprehensive income to earnings during the next 12 months due to the settlement of futures contracts.