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. The notional value of outstanding Peso contracts was $70.6 million and $49.1 million as of March 31, 2018 and 2017, respectively.

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, 2018 and 2017 are as follows (amounts in thousands):



	March 31, 2018						March 31, 2017
	As Presented⁽¹⁾		Offset		Gross		As Presented⁽¹⁾		Offset			Gross
Prepaid and other current assets	$	1,154	$	—	$	1,154	$	2,907	$	40		$	2,947
Accrued expenses	—		—		—		—		(40		)	(40		)
	$	1,154	$	—	$	1,154	$	2,907	$	—		$	2,907

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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 of foreign exchange contracts on the Consolidated Statement of Operations for the twelve month periods ended March 31, 2018 and 2017 is as follows (amounts in thousands):



	Fiscal Years Ended March 31,
	2018			2017			2016
Net Sales	$	—		$	—		$	(789	)
Operating costs and expenses:
Cost of sales	2,420			5,170			3,199
Total operating costs and expenses	2,420			5,170			3,199
Operating income (loss)	$	(2,420	)	$	(5,170	)	$	(3,988	)

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 Cost of sales for foreign exchange contracts to purchase Mexican Pesos. 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 current assets” and “Accrued Expenses” on the Consolidated Balance Sheets and Statements of Cash Flows.