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DERIVATIVE INSTRUMENTS:
 6 Months Ended
Jun. 30, 2011
DERIVATIVE INSTRUMENTS:  
DERIVATIVE INSTRUMENTS:

NOTE 8 — DERIVATIVE INSTRUMENTS:

 

As part of its risk management policy, the Company occasionally uses derivative instruments to (i) safeguard the corporate assets, (ii) insure the value of future revenue streams, and (iii) lessen the impact of unforeseen market swings on sales revenues.  To comply with these objectives the Company, from time to time, enters into commodity price derivatives, interest rate derivatives, exchange rate derivatives and other instruments.  The Company does not enter into derivative contracts unless it anticipates a future activity that is likely to occur that will result in exposing the Company to market risk.

 

Copper swaps:

 

In the last quarter of 2010 and in 2011, the Company entered into copper swaps and zero cost collar derivative contracts to reduce price volatility and to protect the sales value of a portion of its 2011 and first quarter 2012 copper sales as shown below.  These transactions meet the requirements of hedge accounting.  The realized gains and losses from these derivatives were recorded in net sales on the condensed consolidated statement of earnings and included in operating activities on the condensed consolidated statement of cash flows.  The unrealized gains and losses are recorded in other comprehensive income on the condensed consolidated financial statements until settlement.

 

The hedge instruments are based on LME copper prices.  The Company performed statistical analysis on the difference between the average monthly copper price on the LME and the COMEX exchanges and determined that the correlation coefficient is greater than 0.999.  Based on this analysis the Company considers that the LME underlying price matches its sales priced at COMEX prices.  These cash flow hedge relationships qualify as critical matched terms hedge relationships and as a result have no ineffectiveness.  The Company performs periodic quantitative assessments to confirm that the relationship was highly effective and that the ineffectiveness was de minimus.

 

The following table summarizes the copper derivative activity related to copper sales transactions realized in the second quarter and in the first six months of 2011 (the Company held no copper derivatives in the first six months of 2010):

 

 

 

Second
quarter 2011

 

First six
months of 2011

 

Zero cost collar contracts:

 

 

 

 

 

Pounds (in millions)

 

105.8

 

211.6

 

Average LME cap price

 

$

4.84

 

$

4.84

 

Average LME floor price

 

$

3.02

 

$

3.02

 

 

 

 

 

 

 

Swap contracts:

 

 

 

 

 

Pounds (in millions)

 

112.4

 

232.0

 

Weighted average COMEX price

 

$

4.08

 

$

4.08

 

 

 

 

 

 

 

Realized loss on copper derivatives (pre-tax)(in millions)

 

$

8.6

 

$

44.3

 

 

As of June 30, 2011 the Company held copper derivative contracts to protect a portion of its copper sales for the remaining six months of 2011 and the first quarter 2012, as follows:

 

 

 

2011

 

1st Quarter
2012

 

Zero cost collar contracts:

 

 

 

 

 

Pounds (in millions)

 

211.6

 

46.3

 

Average LME cap price

 

$

4.84

 

$

5.18

 

Average LME floor price

 

$

3.02

 

$

3.50

 

Estimated % of copper sales covered

 

30

%

13

%

Accumulated unrealized loss recognized in other comprehensive income (net of taxes of $5.4 million and $- million, respectively) (in millions)

 

$

8.5

 

$

—

 

 

 

 

 

 

 

Swap contracts:

 

 

 

 

 

Pounds (in millions)

 

224.9

 

 

 

Weighted average COMEX price

 

4.08

 

 

 

Estimated % of copper sales covered

 

32

%

 

 

Accumulated unrealized loss recognized in other comprehensive income net of taxes of $17.6 million (in millions)

 

$

28.0

 

$

 

 

 

Transactions under these metal price protection programs are accounted for as cash flow hedges under ASC 815-30 “Derivatives and Hedging-Cash Flow Hedges” (formerly SFAS No. 133 “Accounting for Derivative Instruments and Hedging Activities”) as they meet the requirements for this treatment and are adjusted to fair market value based on the metal prices as of the last day of the respective reporting period with the gain or loss recorded in other comprehensive income until settlement, at which time the gain or loss, if realized, is reclassified to net sales in the condensed consolidated statements of earnings.