Derivative Financial Instruments

6 Months Ended

Jun. 30, 2013

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 interest rate risk, foreign currency exchange rate risk, and commodity margin risk. Interest rate swaps may be entered into to manage interest rate risk associated with the company’s fixed and floating-rate borrowings. Forward exchange contracts on various foreign currencies may be entered into to manage foreign currency exchange rate risk as necessary. No interest rate swaps or significant forward exchange contracts on foreign currency existed for the periods presented. 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 (specifically aluminum, copper, nickel and silver).  The company offsets fair value amounts recognized for derivative instruments executed with the same counterparty under master netting agreements.  The company began to designate certain of its nonferrous metals, forward exchange futures contracts as fair value hedges of inventory and firm sales commitments in January 2013.

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 futures contracts, 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 June 30, 2013 (MT represents metric tons and Lbs represents pounds):

Commodity Futures	Long/Short	Total
Aluminum	Long	1,925	MT
Aluminum	Short	1,750	MT
Copper	Long	5,232	MT
Copper	Short	5,699	MT
Silver	Long	343	Lbs
Silver	Short	686	Lbs

The following summarizes the location and amounts of the fair values and gains or losses related to derivatives included in the company’s financial statements as of June 30, 2013, and December 31, 2012, and for the three and six-month periods ended June 30, 2013 and 2012 (in thousands):

	Asset Derivatives					Liability Derivatives
		Fair Value				Fair Value
	Balance sheet location	June 30, 2013		December 31, 2012		June 30, 2013		December 31, 2012
Derivative instruments designated as fair value hedges -
Commodity futures	Other current assets	$	1,747			$	1,577
Derivative instruments not designated as hedges -
Commodity futures	Other current assets	$	1,714	$	4,024	$	595	$	1,854
Total derivative instruments		$	3,461	$	4,024	$	2,172	$	1,854

Location of gain

Amount of gain (loss) recognized in income on derivatives for the three months ended

Hedged items

Location of gain (loss)

Amount of gain (loss) recognized in income on related hedged items for the three months ended

(loss) recognized in income on derivatives

June 30, 2013

June 30, 2012

in fair value hedge relationships

recognized in income on related hedged item

June 30, 2013

June 30, 2012

Derivatives in fair value hedging relationships -

Commodity futures

Costs of goods sold

$

(654

)

Firm commitments

Costs of goods sold

$

1,297

Inventory

Costs of goods sold

(2,014

)

$

(717

)

Derivatives not designated as hedging instruments -

Commodity futures

Costs of goods sold

$

6,621

$

5,893

	Location of gain	Amount of gain (loss) recognized in income on derivatives for the six months ended				Hedged items	Location of gain (loss)	Amount of gain (loss) recognized in income on related hedged items for the six months ended
	(loss) recognized in income on derivatives	June 30, 2013		June 30, 2012		in fair value hedge relationships	recognized in income on related hedged item	June 30, 2013			June 30, 2012
Derivatives in fair value hedging relationships -
Commodity futures	Costs of goods sold	$	7,392			Firm commitments	Costs of goods sold	$	2,613
						Inventory	Costs of goods sold	(8,822		)
								$	(6,209	)
Derivatives not designated as hedging instruments -
Commodity futures	Costs of goods sold	$	6,629	$	2,275

Derivatives accounted for as fair value hedges had ineffectiveness resulting in a loss of $108,000 during the three-month period ended June 30, 2013, and a gain of $113,000 during the six-month period ended June 30, 2013; and a loss excluded from hedge effectiveness testing of $1.2 million that increased costs of goods sold during the three-month period ended June 30, 2013, and a gain of $1.1 million that reduced costs of goods sold during the six-month period ended June 30, 2013.