Note 10 - Derivative Instruments

12 Months Ended

Dec. 31, 2012

Derivative Instruments and Hedging Activities Disclosure [Text Block]

10.  Derivative Instruments:

Nickel swaps

During 2012 and 2011, the Company entered into nickel swaps indexed to the London Metal Exchange (LME) price of nickel with third-party brokers.  The nickel swaps are treated as derivatives for accounting purposes.  The Company entered into the swaps to mitigate its customers’ risk of volatility in the price of nickel.  The nickel swaps vary in length from nine to 21 months and are settled with the broker at maturity.  The remaining nickel swaps settle on a monthly basis from January 2013 through December 2013.  The economic benefit or loss arising from the changes in fair value of the swaps is contractually passed through to the customer.  The primary risk associated with the nickel swaps is the ability of customers or third-party brokers to honor their agreements with the Company related to derivative instruments.  If the customer or third-party brokers are unable to honor their agreements, the Company’s risk of loss is the fair value of the nickel swap.

In October 2011, MF Global UK Limited (MF Global UK), a United Kingdom based broker-dealer, was placed into the United Kingdom’s administration process (a process similar to bankruptcy proceedings in the United States) by the Financial Services Authority following the Chapter 11 bankruptcy filing of its U.S. parent, MF Global Holdings Ltd.  The Company had used MF Global UK as one of its third-party brokers for nickel swaps.  All of the Company’s open hedges with MF Global UK were closed effective November 1, 2011, and the Company does not believe it has a material obligation to MF Global UK as of December 31, 2012.  However, bankruptcy and administration processes are uncertain and the results could change and the Company’s financial statements may be materially impacted in the future.

While these derivatives are intended to help the Company manage risk, they have not been designated as hedging instruments. The periodic changes in fair value of the nickel and embedded customer derivative instruments are included in “Cost of materials sold” in the Consolidated Statements of Comprehensive Income.  We recognize derivative positions with both the customer and the third party for the derivatives and we classify cash settlement amounts associated with them as part of “Cost of materials sold” in the Consolidated Statements of Comprehensive Income.  The periodic changes in fair value of the interest rate swap are included in “Other income and expense, net” in the Consolidated Statements of Comprehensive Income.  Cash settlement amounts associated with the interest rate swap are included in “Interest and other expense on debt” in the Consolidated Statements of Comprehensive Income.

The embedded customer derivatives are included in “Accounts receivable, net”, and the nickel and interest rate swaps are included in “Other accrued liabilities” on the Consolidated Balance Sheets at December 31, 2012 and 2011.

Interest rate swap

CTI entered into an interest rate swap to reduce the impact of changes in interest rates on its IRB.  The swap agreement matures April 2018, the same time as the IRB, but is reduced annually by the optional principal payments on the IRB.  Although the Company is exposed to credit loss in the event of nonperformance by the other parties to the interest rate swap agreement, the Company anticipates performance by the counterparties.  The interest rate swap is not treated as a hedging instrument for accounting purposes.

Fixed rate interest rate hedge

In June 2012, the Company entered into a forward starting fixed rate interest rate hedge commencing July 2013 in order to eliminate the variability of cash interest payments on $53,229 of the outstanding LIBOR-based borrowings under the ABL Credit Facility.  The hedge matures on June 1, 2016 and is reduced monthly by the principal payments on the term loan.  The fixed rate interest rate hedge is accounted for as a cash flow hedging instrument for accounting purposes.

The table below shows the total net gain or (loss) recognized in the Company’s Consolidated Statements of Comprehensive Income of the derivatives for the years ended December 31, 2012, 2011 and 2010.

	Net Gain (Loss) Recognized
	2012			2011			2010
(in thousands)
Interest rate swap	$	(46	)	$	(68	)	$	-
Nickel swaps		(113	)		(208	)		55
Embedded customer derivatives		113			208			(55	)
Total gain (loss)	$	(46	)	$	(68	)	$	-