Note H - Derivative Financial Instruments

3 Months Ended

Jun. 30, 2023

Notes to Financial Statements

Derivative Instruments and Hedging Activities Disclosure [Text Block]

NOTE H — DERIVATIVE FINANCIAL INSTRUMENTS

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 forward physical purchase supply agreements in place with some of its suppliers for a portion of its monthly physical steel needs. These supply agreements are 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, 2023 the Company did not have any hot-rolled coil futures contracts designated as hedging instruments and classified as cash flow hedges. At  March 31, 2023, the Company held hot-rolled coil futures contracts which were designated as hedging instruments and classified as cash flow hedges, as hedges of variable sales prices. Accordingly, realized and unrealized gains and losses associated with the instruments were 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 month periods ended June 30, 2023 and 2022, the Company 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 for these periods.  

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, 2023 (in thousands):

	Asset Derivatives			Liability Derivatives
	Balance Sheet			Balance Sheet
Derivatives not designated as hedging instruments:	Location	Fair Value		Location	Fair Value
Hot-rolled coil steel contracts	Current portion of derivative assets	$	243	Current portion of derivative liability	$	963

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, 2023 (in thousands):

	Asset Derivatives			Liability Derivatives
	Balance Sheet			Balance Sheet
Derivatives not designated as hedging instruments:	Location	Fair Value		Location	Fair Value
Hot-rolled coil steel contracts	Current portion of derivative assets	$	536	Current portion of derivative liability	$	2,212

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

At  June 30, 2023 and  March 31, 2023, the Company reported approximately $0.4 million and $1.6 million, respectively, in "Other current assets" on its Consolidated Balance Sheet related to futures contracts which were closed but were pending cash settlement. 

The following table summarizes the pre-tax gain recognized in other comprehensive income and the loss reclassified from accumulated other comprehensive loss into earnings for derivative financial instruments designated as cash flow hedges for the periods presented (in thousands):

			Location of Loss	Pre- Tax Loss
	Pre-Tax Gain		Reclassified	Reclassified from
	Recognized in OCI		from AOCI into Net Earnings	AOCI into Net Earnings
For the three months ended June 30, 2023:
Hot-rolled coil steel contracts	$	—	Sales	$	(418	)
Total	$	—		$	(418	)
For the three months ended June 30, 2022:
Hot-rolled coil steel contracts	$	8,833	Sales	$	(626	)
Total	$	8,833		$	(626	)

The following table summarizes the gains recognized in earnings for derivative instruments not designated as hedging instruments during the three months ended June 30, 2023 (in thousands):

		Gain Recognized in Earnings
	Location of Gain	for the Three Months Ended
	Recognized in Earnings	June 30, 2023
Hot-rolled coil steel contracts	Gain on economic hedges of risk	$	430

The following table summarizes the gains recognized in earnings for derivative instruments not designated as hedging instruments during the three months ended June 30, 2022 (in thousands):

		Gain Recognized in Earnings
	Location of Gain	for the Three Months Ended
	Recognized in Earnings	June 30, 2022
Hot-rolled coil steel contracts	Gain on economic hedges of risk	$	2,754

The notional amount (quantity) of our derivative instruments not designated as hedging instruments at June 30, 2023 consisted of 22,180 tons of short positions with maturity dates ranging from July 2023 to December 2023.

The following tables reflect the change in accumulated other comprehensive income (loss), net of tax, for the periods presented (in thousands):

	Gain (Loss) on
	Derivatives
Balance at March 31, 2023	$	(317	)
Other comprehensive income, net of loss, before reclassification		—
Total loss reclassified from AOCI (1)		317
Net current period other comprehensive income		317
Balance at June 30, 2023	$	—

(1) The loss reclassified from AOCI is presented net of tax benefits of approximately $0.1 million which are included in the provision for (benefit from) income taxes on the Company's Consolidated Statement of Operations for the three months ended June 30, 2023.

	Gain (Loss) on
	Derivatives
Balance at March 31, 2022	$	(10,269	)
Other comprehensive income, net of loss, before reclassification		6,699
Total loss reclassified from AOCI (1)		475
Net current period other comprehensive income		7,174
Balance at June 30, 2022	$	(3,095	)

(1) The loss reclassified from AOCI is presented net of tax benefits of approximately $0.2 million which are included in the provision for (benefit from) income taxes on the Company's Consolidated Statement of Operations for the three months ended June 30, 2022.

At  June 30, 2023 and  March 31, 2023, cash of approximately $1.5 million and $2.4 million, respectively, was held by our clearing agent 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, 2023 and  March 31, 2023.