Derivative Financial Instruments

9 Months Ended

Sep. 30, 2023

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 metals (primarily aluminum and copper) and ferrous metals. 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, 2023:

Commodity Futures	Long/Short	Metric Tons
Aluminum	Long	5,100
Aluminum	Short	10,425
Copper	Long	20,933
Copper	Short	40,665

The following summarizes the location and amounts of the fair values reported on the company’s consolidated balance sheets as of September 30, 2023, and December 31, 2022, and gains and losses related to derivatives included in the company’s statement of income for each of the three and nine-month periods ended September 30, 2023 and 2022 (in thousands):

		Asset Derivatives				Liability Derivatives
	Balance sheet	Fair Value				Fair Value
	location	September 30, 2023		December 31, 2022		September 30, 2023		December 31, 2022
Derivative instruments designated as hedges
Commodity futures	Other current assets	$	1,591	$	2,169	$	1,775	$	2,119
Derivative instruments not designated as hedges
Commodity futures	Other current assets		5,075		2,102		4,082		5,269
Total derivative instruments		$	6,666	$	4,271	$	5,857	$	7,388

Note 5. 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 arrangements totaled $20.9 million at September 30, 2023, and $23.5 million at December 31, 2022, 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 (loss)	recognized in income
	Location of gain (loss)	on derivatives for the					recognized	on derivatives for the
	recognized	three-month periods				Hedged items in	in income on	three-month periods
	in income on	ended September 30,				fair value hedge	related hedged	ended September 30,
	derivatives	2023		2022		relationships	items	2023		2022
Derivatives in fair value hedging relationships
Commodity futures	Costs of goods sold	$	(684)	$	(7,663)	Firm commitments	Costs of goods sold	$	(536)	$	3,389
						Inventory	Costs of goods sold		(88)		4,941
								$	(624)	$	8,330
Derivatives not designated as hedging instruments
Commodity futures	Costs of goods sold	$	2,179	$	18,164

		Amount of gain (loss)						Amount of gain (loss)
		recognized in income					Location of gain	recognized in income
	Location of gain (loss)	on derivatives for the					(loss) recognized	on derivatives for the
	recognized	nine-month periods				Hedged items in	in income on	nine-month periods
	in income on	ended September 30,				fair value hedge	related hedged	ended September 30,
	derivatives	2023		2022		relationships	items	2023		2022
Derivatives in fair value hedging relationships
Commodity futures	Costs of goods sold	$	1,591	$	5,618	Firm commitments	Costs of goods sold	$	(423)	$	(2,146)
						Inventory	Costs of goods sold		(217)		(1,440)
								$	(640)	$	(3,586)
Derivatives not designated as hedging instruments
Commodity futures	Costs of goods sold	$	9,428	$	34,333

Derivatives accounted for as fair value hedges had ineffectiveness resulting in gains of $172,000 and losses of $151,000 during the three-month periods ended September 30, 2023 and 2022, respectively, and gains of $219,000 and $145,000 during the nine-month periods ended September 30, 2023 and 2022, respectively. Losses excluded from hedge effectiveness testing of $1.5 million increased cost of goods sold during the three-month period ended September 30, 2023, while gains excluded from hedge effectiveness testing of $817,000 decreased cost of goods sold during the three-month period ended September 30, 2022. Gains excluded from hedge effectiveness testing of $732,000 and $1.9 million decreased cost of goods sold during the nine-month periods ended September 30, 2023 and 2022, respectively.

Derivatives accounted for as cash flow hedges resulted in net losses of $2.3 million and net gains of $10.0 million recognized in other comprehensive income for the three-month periods ended September 30, 2023 and 2022, respectively, and net losses of $38,000 and net gains of $6.8 million for the nine-month periods ended September 30, 2023 and 2022, respectively. Net losses of $341,000 and $7.1 million were reclassified from accumulated other comprehensive income for the three-month periods ended September 30, 2023 and 2022, respectively, and net gains of $1.8 million and net losses of $7.7 million for the nine-month periods ended September 30, 2023 and 2022, respectively. At September 30, 2023, the company expects to reclassify all $651,000 of net losses 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.