Derivative Financial Instruments

6 Months Ended

Jun. 30, 2020

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, and 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 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 June 30, 2020:

Commodity Futures	Long/Short	Metric Tons
Aluminum	Long	3,525
Aluminum	Short	4,475
Copper	Long	11,453
Copper	Short	19,493

The following summarizes the location and amounts of the fair values reported on the company’s consolidated balance sheets as of June 30, 2020, and December 31, 2019, and gains and losses related to derivatives included in the company’s statement of income for the three and six-month periods ended June 30, 2020, and 2019 (in thousands):

		Asset Derivatives				Liability Derivatives
	Balance sheet	Fair Value				Fair Value
	location	June 30, 2020		December 31, 2019		June 30, 2020		December 31, 2019
Derivative instruments designated as hedges
Commodity futures	Other current assets	$	2,060	$	966	$	4,260	$	1,011
Derivative instruments not designated as hedges
Commodity futures	Other current assets		3,500		310		2,588		721
Total derivative instruments		$	5,560	$	1,276	$	6,848	$	1,732

The fair value of the above derivative instruments along with required margin deposit amounts with the same counterparty under master netting arrangements totaled $3.1 million at June 30, 2020, and $3.7 million at December 31, 2019, 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	June 30,				fair value hedge	related hedged	June 30,
	derivatives	2020		2019		relationships	items	2020		2019
Derivatives in fair value
hedging relationships
Commodity futures	Costs of goods sold	$	(3,287)	$	591	Firm commitments	Costs of goods sold	$	(484)	$	1,415
						Inventory	Costs of goods sold		2,579		(294)
Derivatives not designated								$	2,095	$	1,121
as hedging instruments
Commodity futures	Costs of goods sold	$	(1,289)	$	5,487

Note 6. Derivative Financial Instruments (Continued)

		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	six months ended				Hedged items in	in income on	six months ended
	in income on	June 30,				fair value hedge	related hedged	June 30,
	derivatives	2020		2019		relationships	items	2020		2019
Derivatives in fair value
hedging relationships
Commodity futures	Costs of goods sold	$	(2,449)	$	(862)	Firm commitments	Costs of goods sold	$	1,255	$	(84)
						Inventory	Costs of goods sold		1,340		427
Derivatives not designated								$	2,595	$	343
as hedging instruments
Commodity futures	Costs of goods sold	$	9,650	$	1,410

Derivatives accounted for as fair value hedges had ineffectiveness resulting in gains of $2,400 and $1.2 million during the three-month periods ended June 30, 2020, and 2019, respectively, and losses of $59,000 and gains of $32,000 during the six-month periods ended June 30, 2020, and 2019, respectively. Losses excluded from hedge effectiveness testing of $1.2 million increased cost of goods sold during the three-month period ended June 30, 2020 and gains of $1.7 million decreased cost of goods sold during the three-month period ended June 30, 2019. Gains excluded from hedge effectiveness testing of $205,000 decreased cost of goods sold during the six-month period ended June 30, 2020 and losses of $519,000 increased cost of goods sold during the six-month period ended June 30, 2019.

Derivatives accounted for as cash flow hedges resulted in net gains of $480,000 and $88,000 recognized in other comprehensive income for the three-month periods ended June 30, 2020, and 2019, respectively, and net gains of $491,000 and $147,000 for the six-month periods ended June 30, 2020, and 2019, respectively. Net gains of $236,000 and $157,000 were reclassified from accumulated other comprehensive income for the three-month periods ended June 30, 2020, and 2019, respectively, and net gains of $198,000 and $440,000 for the six-month periods ended June 30, 2020, and 2019, respectively. At June 30, 2020, the company expects to reclassify all $284,000 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.