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Derivative Financial Instruments

6 Months Ended

Jun. 30, 2023

Derivative Financial Instruments

Derivative Financial Instruments

Note 5. Derivative Financial Instruments

The company is exposed to certain risks relating to its ongoing business operations. The company utilizes derivative instruments to mitigate commodity margin risk, and occasionally to mitigate foreign currency exchange rate risk, and have in the past to mitigate interest rate fluctuation risk. The company routinely enters into forward exchange traded futures and option contracts to manage the price risk associated with nonferrous metals inventory as well as purchases and sales of nonferrous metals (primarily aluminum and copper) and ferrous metals. The company offsets fair value amounts recognized for derivative instruments executed with the same counterparty under master netting agreements.

Note 5. Derivative Financial Instruments (Continued)

Commodity Futures Contracts. If the company is “long” on futures contracts, it means the company has more futures contracts purchased than futures contracts sold for the underlying commodity. If the company is “short” on a futures contract, it means the company has more futures contracts sold than futures contracts purchased for the underlying commodity. The following summarizes the company’s significant futures contract commitments as of June 30, 2023:



	Commodity Futures		Long/Short		Metric Tons
	Aluminum		Long		8,150
	Aluminum		Short		12,500
	Copper		Long		55,905
	Copper		Short		74,877

The following summarizes the location and amounts of the fair values reported on the company’s consolidated balance sheets as of June 30, 2023, and December 31, 2022, and gains and losses related to derivatives included in the company’s statement of income for the three and six-month periods ended June 30, 2023, and 2022 (in thousands):



			Asset Derivatives						Liability Derivatives
	Balance sheet		Fair Value						Fair Value
	location		June 30, 2023			December 31, 2022			June 30, 2023			December 31, 2022
Derivative instruments designated as hedges
Commodity futures	Other current assets		$	4,485		$	2,169		$	1,979		$	2,119

Derivative instruments not designated as hedges
Commodity futures	Other current assets			26,915			2,102			14,398			5,269
Total derivative instruments			$	31,400		$	4,271		$	16,377		$	7,388

The fair value of the above derivative instruments along with required margin deposit amounts with the same counterparty under master netting arrangements totaled $18.2 million at June 30, 2023, and $23.5 million at December 31, 2022, and are reflected in other current assets in the consolidated balance sheets.

Amount of gain

Amount of loss

recognized in income

Location of loss

recognized in income

Location of gain

on derivatives for the

recognized

on derivatives for the

recognized

three-month periods

Hedged items in

in income on

three-month periods

in income on

ended June 30,

fair value hedge

related hedged

ended June 30,

derivatives

2023

2022

relationships

items

2023

2022

Derivatives in fair value hedging relationships

Commodity futures

Costs of goods sold

$

2,430

$

11,956

Firm commitments

Costs of goods sold

$

(264)

$

(4,343)

Inventory

Costs of goods sold

(368)

(5,996)

$

(632)

$

(10,339)

Derivatives not designated as hedging instruments

Commodity futures

Costs of goods sold

$

18,639

$

27,391

Note 5. Derivative Financial Instruments (Continued)

Amount of gain

Amount of gain (loss)

recognized in income

Location of gain

recognized in income

Location of gain

on derivatives for the

(loss) recognized

on derivatives for the

recognized

six-month periods

Hedged items in

in income on

six-month periods

in income on

ended June 30,

fair value hedge

related hedged

ended June 30,

derivatives

2023

2022

relationships

items

2023

2022

Derivatives in fair value hedging relationships

Commodity futures

Costs of goods sold

$

2,275

$

13,281

Firm commitments

Costs of goods sold

$

113

$

(5,535)

Inventory

Costs of goods sold

(129)

(6,380)

$

(16)

$

(11,915)

Derivatives not designated as hedging instruments

Commodity futures

Costs of goods sold

$

7,249

$

16,170

Derivatives accounted for as fair value hedges had ineffectiveness resulting in gains of $348,000 and $10,000 during the three-month periods ended June 30, 2023, and 2022, respectively, and gains of $47,000 and $295,000 during the six-month periods ended June 30, 2023, and 2022, respectively. Gains excluded from hedge effectiveness testing of $1.4 million and $1.6 million decreased cost of goods sold during the three-month periods ended June 30, 2023, and 2022, respectively. Gains excluded from hedge effectiveness testing of $2.2 million and $1.1 million decreased cost of goods sold during the six months ended June 30, 2023, and 2022, respectively.

Derivatives accounted for as cash flow hedges resulted in net gains of $321,000 and net losses of $21.4 million recognized in other comprehensive income for the three-month periods ended June 30, 2023, and 2022, respectively, and net gains of $2.3 million and net losses of $3.2 million for the six-month periods ended June 30, 2023, and 2022, respectively. Net gains of $1.3 million and $2.6 million were reclassified from accumulated other comprehensive income for the three-month periods ended June 30, 2023, and 2022, respectively, and net gains of $2.1 million and net losses of $599,000 for the six-month periods ended June 30, 2023, and 2022, respectively. At June 30, 2023, the company expects to reclassify all $1.4 million of net gains on derivative instruments from accumulated other comprehensive income to earnings during the next 12 months due to the settlement of futures contracts. The maximum term over which the company is hedging its exposure to the variability of future cash flows for forecasted transactions is less than 12 months.