Derivative Financial Instruments

9 Months Ended

Sep. 30, 2022

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 September 30, 2022:

Commodity Futures	Long/Short	Metric Tons
Aluminum	Long	12,150
Aluminum	Short	17,975
Copper	Long	13,144
Copper	Short	25,997

The following summarizes the location and amounts of the fair values reported on the company’s consolidated balance sheets as of September 30, 2022, and December 31, 2021, 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, 2022 and 2021 (in thousands):

		Asset Derivatives				Liability Derivatives
	Balance sheet	Fair Value				Fair Value
	location	September 30, 2022		December 31, 2021		September 30, 2022		December 31, 2021
Derivative instruments designated as hedges
Commodity futures	Other current assets	$	4,357	$	1,278	$	5,753	$	7,430
Derivative instruments not designated as hedges
Commodity futures	Other current assets		8,399		4,319		4,069		6,171
Total derivative instruments		$	12,756	$	5,597	$	9,822	$	13,601

Note 6. 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 $13.0 million at September 30, 2022, and $24.9 million at December 31, 2021, 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 September 30,				fair value hedge	related hedged	ended September 30,
	derivatives	2022		2021		relationships	items	2022		2021
Derivatives in fair value hedging relationships
Commodity futures	Costs of goods sold	$	(7,663)	$	(5,205)	Firm commitments	Costs of goods sold	$	3,389	$	4,404
						Inventory	Costs of goods sold		4,941		500
								$	8,330	$	4,904
Derivatives not designated as hedging instruments
Commodity futures	Costs of goods sold	$	18,164	$	12,160

		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	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	2022		2021		relationships	items	2022		2021
Derivatives in fair value hedging relationships
Commodity futures	Costs of goods sold	$	5,618	$	4,765	Firm commitments	Costs of goods sold	$	(2,146)	$	187
						Inventory	Costs of goods sold		(1,440)		(1,705)
								$	(3,586)	$	(1,518)
Derivatives not designated as hedging instruments
Commodity futures	Costs of goods sold	$	34,333	$	(33,620)

Derivatives accounted for as fair value hedges had ineffectiveness resulting in losses of $151,000 and $1.6 million during the three-month periods ended September 30, 2022 and 2021, respectively, and gains of $145,000 and $17,000 during the nine-month periods ended September 30, 2022 and 2021, respectively. Gains excluded from hedge effectiveness testing of $817,000 and $1.3 million decreased cost of goods sold during the three-month periods ended September 30, 2022 and 2021, respectively. Gains excluded from hedge effectiveness testing of $1.9 million and $3.2 million decreased cost of goods sold during the nine-month periods ended September 30, 2022 and 2021, respectively.

Derivatives accounted for as cash flow hedges resulted in net gains of $10.0 million and net losses of $2.3 million recognized in other comprehensive income for the three-month periods ended September 30, 2022 and 2021, respectively, and net gains of $6.8 million and $41.8 million for the nine-month periods ended September 30, 2022 and 2021, respectively. Net losses of $7.1 million and net gains of $23.2 million were reclassified from accumulated other comprehensive income for the three-month periods ended September 30, 2022 and 2021, respectively, and net losses of $7.7 million and net gains of $30.4 million for the nine-month periods ended September 30, 2022 and 2021, respectively. At September 30, 2022, the company expects to reclassify all $3.6 million 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.