Derivatives

In fiscal year 2015, the Company began using certain derivative instruments (i.e., foreign exchange contracts) to reduce exposures to the volatility of foreign currencies impacting revenues and the costs of its products.

Certain operating expenses at the Company’s Mexican facilities are paid in Mexican Pesos. In order to hedge a portion of these forecasted cash flows, the Company purchases foreign exchange contracts, with terms generally less than twelve months, to buy Mexican Pesos for periods and amounts consistent with underlying cash flow exposures. These contracts are designated as cash flow hedges at inception and monitored for effectiveness on a routine basis. There were $49.1 million and $37.7 million in Peso contracts (notional value) outstanding at March 31, 2017 and 2016, respectively.

Certain expenditures at the Company’s Mexican facilities are paid in Japanese Yen. In order to hedge a portion of these forecasted cash flows, the Company purchases foreign exchange contracts, with terms generally less than six months, to buy Japanese Yen for periods and amounts consistent with underlying cash flow exposures. These contracts are designated as cash flow hedges at inception and monitored for effectiveness on a routine basis. There were no Yen contracts outstanding at March 31, 2017 or 2016, as the Yen hedge program has ended.

Certain sales are made in Euros. In order to hedge a portion of these forecasted cash flows, management purchased foreign exchange contracts, with terms generally less than six months, to sell Euros for periods and amounts consistent with the related underlying cash flow exposures. These contracts were designated hedges at inception and monitored for effectiveness on a routine basis. There were no Euro contracts outstanding at March 31, 2017 or 2016, as the Euro hedge program has ended.

The Company formally documents all relationships between hedging instruments and hedged items, as well as risk management objectives and strategies for undertaking various hedge transactions.

The Company records and presents the fair values of all of its derivative assets and liabilities in the Consolidated Balance Sheets on a net basis, since they are subject to master netting agreements. However, if the Company were to offset and record the asset and liability balances of its forward foreign currency exchange contracts on a gross basis, the amounts presented in the Consolidated Balance Sheets would be adjusted from the current net presentation to the gross amounts as detailed in the following table. The balance sheet classifications and fair value of derivative instruments as of March 31, 2017 and 2016 are as follows (amounts in thousands):



	Fair Value of Derivative Instruments
	March 31, 2017								March 31, 2016
Balance Sheet Presentation	As Presented (1)		Offset			Gross			As Presented (1)			Offset			Gross
Prepaid and other current assets	$	2,907	$	40		$	2,947		$	—		$	523		$	523
Accrued expenses	—		(40		)	(40		)	(367		)	(523		)	(890		)
	$	2,907	$	—		$	2,907		$	(367	)	$	—		$	(367	)

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(1)	Fair Value measured using Level 2 inputs by adjusting the market spot rate by forward points, based on the date of the contract. The spot rates and forward points used are based on an average rate from an actively traded market.

The impact on the Consolidated Statement of Operations for the twelve month periods ended March 31, 2017 and 2016 is as follows (amounts in thousands):



Impact of Foreign Exchange Contracts on Condensed Consolidated Statement of Operations
	Twelve Month Periods Ended March 31,
Statement Caption	2017			2016
Net Sales	$	—		$	(789	)
Operating costs and expenses:
Cost of sales	5,170			3,199
Total operating costs and expenses	5,170			3,199
Operating income (loss)	$	(5,170	)	$	(3,988	)

There was no impact on the Consolidated Statement of Operations for the twelve month period ended March 31, 2015 as the program was initiated in the fourth quarter of fiscal year 2015.

Unrealized gains and losses associated with the change in value of these financial instruments are recorded in AOCI. Changes in the derivatives’ fair values are deferred and recorded as a component of AOCI until the underlying transaction is settled and recorded to the income statement. When the hedged item affects income, gains or losses are reclassified from AOCI to the Consolidated Statement of Operations as Net sales for foreign exchange contracts to sell Euros, and as Cost of sales for foreign exchange contracts to purchase Mexican Pesos and Japanese Yen. Any ineffectiveness, if material, in the Company’s hedging relationships is recognized immediately as a loss, within the same income statement accounts as described above; to date, there has been no ineffectiveness. Changes in derivative balances impact the line items “Prepaid and other assets” and “Accrued Expenses” on the Consolidated Balance Sheets and Statements of Cash Flows.