Derivative Financial Instruments

12 Months Ended

Dec. 31, 2021

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, 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.

If the company is “long” on commodity 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 December 31, 2021:

Commodity Futures	Long/Short	Metric Tons
Aluminum	Long	4,225
Aluminum	Short	9,850
Copper	Long	16,250
Copper	Short	30,255

The following summarizes the location and amounts of the fair values reported on the company’s consolidated balance sheets and gains or losses related to derivatives included in the company’s consolidated statements of income as of and for the years ended December 31 (in thousands):

		Asset Derivatives				Liability Derivatives
		Fair Value				Fair Value
	Balance sheet location	December 31, 2021		December 31, 2020		December 31, 2021		December 31, 2020
Derivative instruments designated as hedges
Commodity futures	Other current assets	$	1,278	$	5,092	$	7,430	$	4,635
Derivative instruments not designated as hedges
Commodity futures	Other current assets		4,319		1,705		6,171		2,807
Total derivative instruments		$	5,597	$	6,797	$	13,601	$	7,442

Note 7. Derivative Financial Instruments (Continued)

The fair value of the above derivative instruments along with required margin deposit amounts with the same counterparty under master netting agreements totaled $24.9 million and $13.2 million at December 31, 2021, and 2020, respectively, and are reflected in other current assets in the consolidated balance sheets.

			Amount of
	Location of gain		gain (loss)		Location of gain		Amount of gain
	(loss) recognized		recognized in	Hedged items in	(loss) recognized		(loss) recognized in
	in income on		income on	fair value hedge	in income on		income on related
	derivatives		derivatives	relationships	related hedged items		hedged items
For the Year Ended
December 31, 2021
Derivatives in fair value
hedging relationships
Commodity futures	Costs of goods sold	$	(1,369)	Firm commitments	Costs of goods sold	$	3,354
				Inventory	Costs of goods sold		1,054
Derivatives not designated						$	4,408
as hedging instruments
Commodity futures	Costs of goods sold	$	(33,517)

For the Year Ended
December 31, 2020
Derivatives in fair value
hedging relationships
Commodity futures	Costs of goods sold	$	(2,004)	Firm commitments	Costs of goods sold	$	(79)
				Inventory	Costs of goods sold		(482)
Derivatives not designated						$	(561)
as hedging instruments
Commodity futures	Costs of goods sold	$	(17,368)

For the Year Ended
December 31, 2019
Derivatives in fair value
hedging relationships
Commodity futures	Costs of goods sold	$	(801)	Firm commitments	Costs of goods sold	$	(1,613)
				Inventory	Costs of goods sold		832
Derivatives not designated						$	(781)
as hedging instruments
Commodity futures	Costs of goods sold	$	704

Derivatives accounted for as fair value hedges had ineffectiveness resulting in losses of $101,000, gains of $68,000, and losses of $28,000 for the years ended December 31, 2021, 2020, and 2019, respectively. Gains excluded from hedge effectiveness testing of $3.1 million decreased cost of goods sold for the year ended December 31, 2021. Losses excluded from hedge effectiveness testing of $2.6 million and $1.6 million increased cost of goods sold for the year ended December 31, 2020, and 2019, respectively.

Note 7. Derivative Financial Instruments (Continued)

Derivatives accounted for as cash flow hedges resulted in net gains of $40.9 million, $2.8 million and $137,000 recognized in other comprehensive income for the years ended December 31, 2021, 2020, and 2019, respectively. Net gains of $46.1 million, $265,000, and $541,000 were reclassified from accumulated other comprehensive income into income for the years ended December 31, 2021, 2020, and 2019, respectively. At December 31, 2021, the company expects to reclassify $2.7 million of net losses on derivative instruments from accumulated other comprehensive income to expense 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.