Note H - Derivative Financial Instruments

3 Months Ended

Jun. 30, 2021

Notes to Financial Statements

Derivative Instruments and Hedging Activities Disclosure [Text Block]

NOTE H — DERIVATIVE FINANCIAL INSTRUMENTS

In June 2020, the Company implemented its first commodity price risk management activities by transacting hot-rolled coil futures. From time to time, we expect to use derivative financial instruments to minimize our exposure to commodity price risk that is inherent in our business. At the time derivative contracts are entered into, we assess whether the nature of the instrument qualifies for hedge accounting treatment according to the requirements of ASC 815 – Derivatives and Hedging (“ASC 815”). By using derivatives, the Company is exposed to credit and market risk. The Company’s exposure to credit risk includes the counterparty’s failure to fulfill its performance obligations under the terms of the derivative contract. The Company attempts to minimize its credit risk by entering into transactions with high quality counterparties, and uses exchange-traded derivatives when available. Market risk is the risk that the value of the financial instrument might be adversely affected by a change in commodity prices. The Company manages market risk by continually monitoring exposure within its risk management strategy and portfolio. For those transactions designated as hedging instruments for accounting purposes, we document all relationships between hedging instruments and hedged items, as well as our risk-management objective and strategy for undertaking the various hedge transactions. We also assess, both at the hedge’s inception and on an ongoing basis, whether the derivatives used in hedging transactions are highly effective in offsetting changes in cash flows or fair value of hedged items.

From time to time, derivatives designated for hedge accounting may be closed prior to contract expiration. The accounting treatment of closed positions depends on whether the closure occurred due to the hedged transaction occurring early or if the hedged transaction is still expected to occur as originally forecasted. For hedged transactions that occur early, the closure results in the realized gain or loss from closure being recognized in the same period the accelerated hedged transaction affects earnings. For hedged transactions that are still expected to occur as originally forecasted, the closure results in the realized gain or loss being deferred until the hedged transaction affects earnings.

If it is determined that hedged transactions associated with cash flow hedges are no longer probable of occurring, the gain or loss associated with the instrument is recognized immediately into earnings. 

From time to time, we may have derivative financial instruments for which we do not elect hedge accounting. 

The Company has a forward physical purchase supply agreement in place with one of its suppliers for a portion of its monthly physical steel needs. This supply agreement is not subject to mark-to-market accounting due to the Company electing the normal purchase normal sale exclusion provided in ASC 815. 

At June 30, 2021 and  March 31, 2021, the Company held hot-rolled coil futures contracts which were designated as hedging instruments and classified as cash flow hedges, either as hedges of variable purchase prices or as hedges of variable sales prices. Accordingly, realized and unrealized gains and losses associated with the instruments are reported as a component of other comprehensive income and reclassified into earnings during the period in which the hedged transaction affects earnings. During the three months ended June 30, 2021, some of the Company's cash flow hedges were closed prior to expiration but the hedged transactions were still expected to occur as originally forecasted resulting in the realized gain or loss being deferred in other comprehensive income until the hedged transactions occur and affect earnings. During the three months ended June 30, 2021, the Company also entered into hot-rolled coil futures contracts that were not designated as hedging instruments for accounting purposes. Accordingly, the change in fair value related to these instruments was immediately recognized in earnings.  

The following table summarizes the fair value of the Company’s derivative financial instruments and the respective line in which they were recorded in the Consolidated Balance Sheet as of June 30, 2021:

	Asset Derivatives			Liability Derivatives
	Balance Sheet			Balance Sheet
Derivatives designated as cash flow hedges:	Location	Fair Value		Location	Fair Value
Hot-rolled coil steel contracts hedging purchases	Other current assets	$	1,686,400
Hot-rolled coil steel contracts hedging sales	Other current assets	$	200	Current portion of derivative liability	$	24,572,920
Hot-rolled coil steel contracts hedging sales				Other non-current liabilities	$	1,127,600
Derivatives not designated as hedging instruments:
Hot-rolled coil steel contracts	Other current assets	$	500	Current portion of derivative liability	$	2,953,960

All derivatives are presented on a gross basis on the Consolidated Balance Sheet.

The following table summarizes the fair value of the Company’s derivative financial instruments and the respective line in which they were recorded in the Consolidated Balance Sheet as of March 31, 2021:

	Asset Derivatives			Liability Derivatives
	Balance Sheet			Balance Sheet
Derivatives designated as cash flow hedges:	Location	Fair Value		Location	Fair Value
Hot-rolled coil steel contracts hedging purchases	Other current assets	$	530,640
Hot-rolled coil steel contracts hedging sales	Other current assets	$	91,760	Current portion of derivative liability	$	7,890,700
Hot-rolled coil steel contracts hedging sales				Other non-current liabilities	$	50,420
Derivatives not designated as hedging instruments:
Hot-rolled coil steel contracts				Current portion of derivative liability	$	88,680

All derivatives are presented on a gross basis on the Consolidated Balance Sheet.

At June 30, 2021, the Company reported $1,861,920 in "Other current assets" on its Consolidated Balance Sheet related to futures contracts for the month of  June 2021 that reached expiration but were pending cash settlement. At  March 31, 2021, the Company reported $501,360 in "Accounts payable and accrued expenses" on its Consolidated Balance Sheet related to futures contracts for the month of   March 2021  that had reached expiration but were pending cash settlement. 

The notional amounts (quantities) of our cash flow hedges outstanding at June 30, 2021 consisted of 7,180 tons hedging purchases with maturity dates ranging from July 2021 to August 2021 and 38,520 tons hedging sales with maturity dates ranging from September 2021 to December 2022.

The following table summarizes the pre-tax loss recognized in accumulated other comprehensive income at June 30, 2021 and the gain (loss) reclassified from accumulated other comprehensive loss into earnings during the three months ended June 30, 2021 for derivative financial instruments designated as cash flow hedges:

	Pre-Tax Loss			Location of Gain (Loss) Reclassified	Pre-Tax Gain (Loss) Reclassified from
	Recognized in AOCI			from AOCI into Net Earnings	AOCI into Net Earnings
Hot-rolled coil steel contracts	$	(32,807,460	)	Sales	$	(5,098,020	)
				Costs of goods sold		1,582,200
Total	$	(32,807,460	)		$	(3,515,820	)

The estimated amount of losses recognized in AOCI at June 30, 2021 expected to be reclassified into net earnings (loss) within the succeeding twelve months is $31,544,060. This amount consists of $8,794,040 in realized losses associated with closed hedges and $22,750,020 associated with open hedges that was computed using the fair value of the cash flow hedges as of June 30, 2021 and is subject to change before actual reclassification from AOCI to net earnings (loss).

The following table summarizes the loss recognized in earnings for derivative instruments not designated as hedging instruments during the three months ended June 30, 2021:

		Loss Recognized in Earnings
	Location of Loss	for Quarter Ended
	Recognized in Earnings	June 30, 2021
Hot-rolled coil steel contracts	Other income, net	$	(1,388,960	)

The notional amount (quantity) of our derivative instruments not designated as hedging instruments at June 30, 2021 consisted of 5,820 tons of short positions with maturity dates ranging from September 2021 to October 2021.

The following table reflects the change in accumulated other comprehensive income (loss), net of tax, for the three months ended June 30, 2021:

	Gain (Loss) on
	Derivatives
Balance at March 31, 2021	$	(11,187,841	)
Other comprehensive loss, net of income, before reclassification		(16,359,735	)
Total loss reclassified from AOCI (1)		2,666,398
Net current period other comprehensive loss		(13,693,337	)
Balance at June 30, 2021	$	(24,881,178	)

(1) The loss reclassified from AOCI is presented net of taxes of $849,422 which are included in provision for (benefit from) income taxes on the Company's Consolidated Statement of Operations for the three months ended June 30, 2021.

At  June 30, 2021 and  March 31, 2021, cash of $29,360,060 and $12,001,485, respectively, was required to collateralize our open derivative positions. These cash requirements are included in "Other current assets" on the Company's Consolidated Balance Sheets at  June 30, 2021 and  March 31, 2021. 

The Company had no cash flow hedges during the three months ended June 30, 2020, thus no AOCI or other comprehensive income or loss related to hedges.