DERIVATIVES

Foreign Currency Derivatives

The Company's foreign currency derivatives consist primarily of foreign currency forward exchange contracts and option contracts. The Company does not purchase derivative financial instruments for speculative trading purposes. The derivatives expose the Company to credit risk to the extent the counterparties may be unable to meet the terms of the derivative instrument. The Company's maximum exposure to loss that it would incur due to credit risk if parties to derivative contracts failed completely to perform according to the terms of the contracts was equal to the carrying value of the Company's derivative assets as of September 30, 2018. The Company seeks to mitigate such risk by limiting its counterparties to large financial institutions. In addition, the Company monitors the potential risk of loss with any one counterparty resulting from this type of credit risk on an ongoing basis.

The Company enters into master netting arrangements with counterparties when possible to mitigate credit risk in derivative transactions. A master netting arrangement may allow each counterparty to net settle amounts owed between the Company and the counterparty as a result of multiple, separate derivative transactions. As of September 30, 2018, the Company had International Swaps and Derivatives Association (ISDA) agreements with four applicable banks and financial institutions which contained netting provisions. Plantronics has elected to present the fair value of derivative assets and liabilities on the Company's condensed consolidated balance sheet on a gross basis even when derivative transactions are subject to master netting arrangements and may otherwise qualify for net presentation. For each counterparty, if netted, the Company would offset the asset and liability balances of all derivatives at the end of the reporting period. Derivatives not subject to master netting agreements are not eligible for net presentation. As of March 31, 2018 and September 30, 2018, no cash collateral had been received or pledged related to these derivative instruments.

The gross fair value of the Company's outstanding derivative contracts at the end of each period was as follows:



(in thousands)	March 31, 2018		September 30, 2018
Derivative Assets⁽¹⁾
Non-designated hedges	$	218	$	317
Cash flow hedges	554		2,496
Interest rate swap	—		2,691
Total derivative assets	$	772	$	5,504

Derivative Liabilities⁽²⁾
Non-designated hedges	$	34	$	143
Cash flow hedges	3,003		465
Interest rate swap	—		1,570
Accrued interest	—		13
Total derivative liabilities	$	3,037	$	2,191

⁽¹⁾Short-term derivative assets are recorded in "other current assets" and long-term derivative assets are recorded in "deferred tax and other assets". As of September 30, 2018 the portion of derivative assets classified as long-term was immaterial.

⁽²⁾Short-term derivative liabilities are recorded in "accrued liabilities" and long-term derivative liabilities are recorded in "other long-term liabilities". As of September 30, 2018 the portion of derivative liabilities classified as long-term was immaterial.

Non-Designated Hedges

As of September 30, 2018, the Company had foreign currency forward contracts denominated in Euros ("EUR"), British Pound Sterling ("GBP"), Australian Dollars ("AUD"), and Canadian Dollars ("CAD"). The Company does not elect to obtain hedge accounting for these forward contracts. These forward contracts hedge against a portion of the Company’s foreign currency-denominated cash balances, receivables, and payables. The following table summarizes the notional value of the Company’s outstanding foreign exchange currency contracts and approximate U.S. Dollar ("USD") equivalent at September 30, 2018:



(in thousands)	Local Currency		USD Equivalent		Position	Maturity
EUR	€	31,000	$	36,104	Sell EUR	1 month
GBP	£	8,400	$	10,968	Sell GBP	1 month
AUD	A$	18,000	$	13,026	Sell AUD	1 month
CAD	C$	2,000	$	1,549	Sell CAD	1 month

Effect of Non-Designated Derivative Contracts on the Condensed Consolidated Statements of Operations

The effect of non-designated derivative contracts recognized in other non-operating income and (expense), net in the condensed consolidated statements of operations was as follows:



	Three Months Ended September 30,					Six Months Ended September 30,
(in thousands)	2017			2018		2017			2018
Gain (loss) on foreign exchange contracts	$	(2,102	)	$	890	$	(5,235	)	$	5,041

Cash Flow Hedges

Costless Collars

The Company hedges a portion of the forecasted EUR and GBP denominated revenues with costless collars. On a monthly basis, the Company enters into option contracts with a six to eleven month term. Collar contracts are scheduled to mature at the beginning of each fiscal quarter, at which time the instruments convert to forward contracts. The Company also enters into cash flow forwards with a three month term. Once the hedged revenues are recognized, the forward contracts become non-designated hedges to protect the resulting foreign monetary asset position for the Company.

The notional value of the Company's outstanding EUR and GBP option and forward contracts at the end of each period was as follows:



	March 31, 2018		September 30, 2018
(in millions)	EUR	GBP	EUR	GBP
Option contracts	€50.8	£15.6	€49.0	£16.7
Forward contracts	€35.0	£10.7	€36.4	£12.5

The Company will reclassify all amounts accumulated in other comprehensive income into earnings within the next twelve months.

Cross-currency Swaps

The Company hedges a portion of the forecasted Mexican Peso (“MXN”) denominated expenditures with a cross-currency swap. As of March 31, 2018 and September 30, 2018, the Company had foreign currency swap contracts of approximately MXN 31.8 million and MXN 0.0 million, respectively.

Interest Rate Swap

On July 30, 2018, the Company entered into a 4-year amortizing interest rate swap agreement with Bank of America, NA. The swap has an initial notional amount of $831 million and matures on July 31, 2022. The swap involves the receipt of floating-rate interest payments for fixed interest rate payments at a rate of 2.78% over the life of the agreement. We have designated this interest rate swap as a cash flow hedge. The purpose of this swap is to hedge against changes in cash flows (interest payments) attributable to fluctuations in our variable rate debt. The derivative is valued based on prevailing LIBOR rate curves on the date of measurement. The Company also evaluates counterparty credit risk when it calculates the fair value of the swap. The effective portion of changes in the fair value of the derivative is recorded to other comprehensive income (loss) on the accompanying balance sheets and reclassified into interest expense over the life of the underlying debt as interest on our floating rate debt is accrued. We review the effectiveness of this instrument on a quarterly basis, recognize current period hedge ineffectiveness immediately in earnings and will discontinue hedge accounting if we no longer consider hedging to be highly effective. This hedge was fully effective at inception on July 30, 2018 and as of the six months ended September 30, 2018. During the six months ended September 30, 2018, we recorded a loss of $0.98 million on our interest rate swap derivative designated as a cash flow hedge.

Effect of Designated Derivative Contracts on AOCI and Condensed Consolidated Statements of Operations

The following table presents the pre-tax effects of derivative instruments designated as cash flow hedges on accumulated other comprehensive income and the condensed consolidated statements of operations for the three and six months ended September 30, 2017 and 2018:



	Three Months Ended September 30,						Six Months Ended September 30,
(in thousands)	2017			2018			2017			2018
Gain (loss) included in AOCI as of beginning of period	$	(1,744	)	$	1,935		$	541		$	(1,693	)

Amount of gain (loss) recognized in other comprehensive income (“OCI”) (effective portion)	(2,302		)	813			(4,647		)	4,769

Amount of (gain) loss reclassified from OCI into net revenues (effective portion)	1,131			(900		)	1,149			(1,149		)
Amount of (gain) loss reclassified from OCI into cost of revenues (effective portion)	(174		)	—			(132		)	(79		)
Amount of (gain) loss reclassified from OCI into interest expense (effective portion)	—			977			—			977
Total amount of (gain) loss reclassified from AOCI to income (loss) (effective portion)	957			77			1,017			(251		)

Gain (loss) included in AOCI as of end of period	$	(3,089	)	$	2,825		$	(3,089	)	$	2,825

During the three and six months ended September 30, 2017 and 2018 the Company recognized an immaterial gain and immaterial loss on the ineffective portion of its cash flow hedges, respectively, which is reported in other non-operating income and (expense), net in the condensed consolidated statements of operations.