Derivative Financial Instruments

3 Months Ended

Mar. 31, 2021

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, 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.

Note 5. Derivative Financial Instruments (Continued)

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

March 31, 2021:

Commodity Futures	Long/Short	Metric Tons
Aluminum	Long	3,475
Aluminum	Short	7,025
Copper	Long	8,301
Copper	Short	22,725

The following summarizes the location and amounts of the fair values reported on the company’s consolidated balance sheets as of March 31, 2021, and December 31, 2020, and gains and losses related to derivatives included in the company’s statement of income for the three-month periods ended March 31, 2021, and 2020 (in thousands):

		Asset Derivatives				Liability Derivatives
	Balance sheet	Fair Value				Fair Value
	location	March 31, 2021		December 31, 2020		March 31, 2021		December 31, 2020
Derivative instruments designated as hedges
Commodity futures	Other current assets	$	17,009	$	5,092	$	3,825	$	4,635
Derivative instruments not designated as hedges
Commodity futures	Other current assets		2,967		1,705		1,680		2,807
Total derivative instruments		$	19,976	$	6,797	$	5,505	$	7,442

The fair value of the above derivative instruments along with required margin deposit amounts with the same counterparty under master netting arrangements totaled $15.6 million at March 31, 2021, and $13.2 million at

December 31, 2020, 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-month periods				Hedged items in	in income on	three-month periods
	in income on	ended March 31,				fair value hedge	related hedged	ended March 31,
	derivatives	2021		2020		relationships	items	2021		2020
Derivatives in fair value
hedging relationships
Commodity futures	Costs of goods sold	$	7,786	$	838	Firm commitments	Costs of goods sold	$	(1,898)	$	1,739
						Inventory	Costs of goods sold		(498)		(1,239)
Derivatives not designated								$	(2,396)	$	500
as hedging instruments
Commodity futures	Costs of goods sold	$	(30,195)	$	10,939

Derivatives accounted for as fair value hedges had ineffectiveness resulting in gains of $21,000 and losses of $61,000 during the three-month periods ended March 31, 2021, and 2020, respectively. Gains excluded from hedge effectiveness testing of $5.4 million and $1.4 million decreased cost of goods sold during the three-month periods ended March 31, 2021 and 2020, respectively.

Note 5. Derivative Financial Instruments (Continued)

Derivatives accounted for as cash flow hedges resulted in net gains of $9.3 million and $11,000 recognized in other comprehensive income for the three-month periods ended March 31, 2021, and 2020, respectively. Net gains of $4.4 million and net losses of $37,000 were reclassified from accumulated other comprehensive income for the three-month periods ended March 31, 2021, and 2020, respectively. At March 31, 2021, the company expects to reclassify all $7.4 million 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. The maximum term over which the company is hedging its exposure to the variability of future cash flows for forecasted transactions is less than 12 months.