Derivative Instruments

3 Months Ended

Mar. 31, 2013

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Instruments

Derivative Instruments

Precious Metal

H&H's precious metal inventory is subject to market price fluctuations. H&H enters into commodity futures and forward contracts on its precious metal inventory that is not subject to fixed-price contracts with its customers in order to economically hedge against price fluctuations. As of March 31, 2013, the Company had entered into future contracts with a value of $1.6 million for gold and $4.8 million for silver. There were no forward contracts outstanding at March 31, 2013.

The future contracts are exchange traded contracts through a third party broker. Accordingly, the Company has determined that there is minimal credit risk of default. The Company estimates the fair value of its derivative contracts through the use of market quotes or broker valuations when market information is not available.

As these derivatives are not designated as accounting hedges under U.S. GAAP, they are accounted for as derivatives with no hedge designation. The derivatives are marked to market and both realized and unrealized gains and losses are recorded in current period earnings in the Company's consolidated income statement. The Company's hedging strategy is designed to protect it against normal volatility; therefore, abnormal price increases in these commodities or markets could negatively impact H&H's costs. The three months ended March 31, 2013 and 2012 included gains of $0.4 million and $0.3 million, respectively, on precious metal contracts.

As of March 31, 2013, the Company had the following outstanding future contracts with settlement dates ranging from May to June, 2013.

Commodity	Amount
Silver	165,000	ounces
Gold	1,000	ounces

The Company maintains collateral on account with the third-party broker. Such collateral consists of both cash that varies in amount depending on the value of open futures contracts, as well as ounces of precious metal held on account by the broker.

Debt Agreements

As discussed in Note 8 - "Debt," H&H Group entered into an interest rate swap agreement in February 2013 to reduce its exposure to interest rate fluctuations. H&H Group entered into the interest rate swap as an economic hedge of its debt but has elected not to account for the interest rate swap agreement as a hedge under Accounting Standards Codification 815, Derivatives and Hedging. The Company records the expense (or gain) both from the mark-to-market adjustments and net settlements in interest expense on the consolidated income statement as the hedge is intended to offset interest rate movements.

The Company's Subordinated Notes issued in October 2010 had call premiums as well as Warrants associated with them. The Company treated the fair value of these features together as both a discount on the debt and a derivative liability at inception of the loan agreement. The discount was being amortized over the life of the notes as an adjustment to interest expense, and the derivative was marked to market at each balance sheet date. As discussed in Note 8 - "Debt," on March 26, 2013, the Company discharged its obligations associated with the Subordinated Notes and Warrants, and therefore, all discounts and derivative accounts related to the Subordinated Notes and Warrants are zero as of March 31, 2013. For the three months ended March 31, 2013, a mark-to-market loss of $0.8 million was recognized in realized and unrealized loss (gain) on derivatives, principally due to the redemption of the Subordinated Notes and Warrants. This compared to a gain of $0.6 million for the three months ended March 31, 2012.

Effect of Derivative Instruments on the Consolidated Income Statements

(in thousands)		Three Months Ended
		March 31,
Derivative	Income Statement Line	2013			2012
Commodity contracts	Realized and unrealized (loss) gain on derivatives	$	354		$	257
Interest rate swap agreement	Interest expense	(277		)	—
Derivative features of Subordinated Notes	Realized and unrealized (loss) gain on derivatives	(793		)	641
	Total derivatives not designated as hedging instruments	$	(716	)	$	898
	Total derivatives	$	(716	)	$	898

U.S. GAAP requires companies to recognize all derivative instruments as either assets or liabilities at fair value in the balance sheet.

Fair Value of Derivative Instruments in the Consolidated Balance Sheets

(in thousands)		March 31,			December 31,
Derivative	Balance Sheet Location	2013			2012
Commodity contracts	Other current assets	$	88		$	100
Interest rate swap agreement	Other liabilities	(277		)	—
Derivative features of Subordinated Notes	Long-term debt and long-term debt - related party	—			793
	Total derivatives not designated as hedging instruments	$	(189	)	$	893
	Total derivatives	$	(189	)	$	893