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Derivative Financial Instruments

12 Months Ended

Mar. 31, 2020

(24) Derivative Financial Instruments

The Company evaluates its foreign exchange policy on an ongoing basis to assess its ability to address foreign exchange exposures on its consolidated balance sheets, statements of income and consolidated statement of cash flows from all foreign currencies, including most significantly the U.K. pound sterling, Indian rupee and Sri Lankan rupee. The Company enters into hedging programs with highly rated financial institutions in accordance with its foreign exchange policy (as approved by the Company’s audit committee and board of directors) which permits hedging of material, known foreign currency exposures. There is no margin required, no cash collateral posted or received by us related to our foreign exchange forward contracts. Currently, the Company maintains four hedging programs, each with varying contract types, duration and purposes. The Company’s “Cash Flow Program” is designed to mitigate the impact of volatility in the U.S. dollar and U.K. Pound Sterling equivalents of the Company’s Indian rupee denominated expenses over a rolling 18-month period. The Cash Flow Program transactions currently meet the criteria for hedge accounting as cash flow hedges. The Company’s “Economic Hedge Program” involves the purchase of derivative instruments with maturities of up to 92 days, and is designed to mitigate the impact of foreign exchange on U.K. pound sterling, the euro, the Canadian dollar and the Australian dollar denominated revenue and costs with respect to the quarter for which such instruments are purchased. The Economic Hedge Program does not meet the criteria for hedge accounting and all gains and losses are recognized in consolidated statement of income under the same line item as the underlying exposure being hedged.

The Company is exposed to credit losses in the event of non-performance by the counterparties on its financial instruments. All counterparties currently have investment grade credit ratings. The Company anticipates that these counterparties will be able to fully satisfy their obligations under the contracts. The Company has derivative contracts with four counterparties as of March 31, 2020.

The Company's agreements with its counterparties contain provisions pursuant to which the Company could be declared in default of its derivative obligations. As of March 31, 2020, the Company had not posted any collateral related to these agreements. If the Company had breached any of these provisions as of March 31, 2020, it could have been required to settle its obligations under these agreements at amounts which approximate the March 31, 2020 fair values reflected in the table below. During the fiscal year ended March 31, 2020, the Company was not in default of any of its derivative obligations.

Changes in fair value of the designated cash flow hedges for our Cash Flow Program are recorded as a component of accumulated other comprehensive income (loss) (“AOCI”), net of tax until the forecasted hedged transactions occur and are then recognized in the consolidated statements of income in the same line item as the item being hedged. The Company evaluates hedge effectiveness at the time a contract is entered into, as well as on an ongoing basis. If and when hedge relationships are discontinued, and should the forecasted transaction be deemed probable of not occurring by the end of the originally specified period or within an additional two-month period of time thereafter, any related derivative amounts recorded in equity are reclassified to earnings in other income (expense). There were no amounts reclassified to earnings as a result of hedge ineffectiveness for the fiscal year ended March 31, 2020 and 2019.

Changes in the fair value of the hedges for the Economic Hedge Program, if any, are recognized in the same line item as the underlying exposure being hedged and the ineffective portion of cash flow hedges, if any, is recognized as other income (expense). The Company values its derivatives based on market observable inputs including both forward and spot prices for currencies. Any significant change in the forward or spot prices for hedged currencies would have a significant impact on the value of the Company’s derivatives.

The U.S. dollar notional value of all outstanding foreign currency derivative contracts was $128,728 and $118,557 at March 31, 2020 and 2019, respectively. Unrealized net losses related to these contracts which are expected to be reclassified from accumulated other comprehensive income (loss) (“AOCI”) to earnings during the next 12 months are $3,586 at March 31, 2020. At March 31, 2020, the maximum outstanding term of any derivative instrument was 15 months.

The Company also uses interest rate swaps to mitigate the Company’s interest rate risk on the Company’s variable rate debt. The Company’s objective is to limit the variability of cash flows associated with changes in LIBOR interest rate payments due on the Credit Agreement (See Note 14 to the consolidated financial statements), by using pay-fixed, receive-variable interest rate swaps to offset the future variable rate interest payments. The Company will recognize these transactions in accordance with ASC 815 "Derivatives and Hedging," and have designated the swaps as cash flow hedges.

The Company purchased interest rate swaps in July 2016 with an effective date of July 2017 and in November 2018. The July 2016 interest rate swaps are at a blended weighted average of 1.025% and the Company will receive 1-month LIBOR on the same notional amounts. The November 2018 interest rate swaps were entered into to mitigate the interest rate risk associated with the Credit Agreement executed in February 2018 and subsequent additional borrowings. The November 2018 interest rate swaps are at a fixed rate of 2.85% and are designed to maintain a 50% coverage of our LIBOR debt, therefore the notional amount changes over the life of the swap to retain the 50% coverage target. At March 31, 2020, the total notional amounts of the interest rate swaps were $177,300 with remaining maturity of approximately 3 years. The unrealized loss in associated with the swap agreements was $11,128 and $2,284 at March 31, 2020 and March 31, 2019, respectively, which represents the estimated amount that the Company would pay to the counterparties in the event of an early termination.

The following tables set forth the fair value of derivative instruments included in the consolidated balance sheets at March 31, 2020 and 2019:

Derivatives designated as hedging instruments


	March 31, 2020		March 31, 2019
Foreign currency exchange contracts:
Other current assets	$	103	$	3,264
Other long-term assets	$	56	$	147
Accrued expenses and other	$	3,689	$	318
Long-term liabilities	$	364	$	3


	March 31, 2020		March 31, 2019
Interest rate swap contracts:
Other long-term assets	$	—	$	1,349
Long-term liabilities	$	11,128	$	3,633

The following tables set forth the effect of the Company’s foreign currency exchange and interest rate swap contracts on the consolidated financial statements of the Company for the fiscal years ended March 31, 2020 and 2019:


	Amount of Gain or (Loss)
	Recognized in AOCI on
Derivatives Designated as	Derivatives
Cash Flow Hedging Relationships	March 31, 2020		March 31, 2019
Foreign currency exchange contracts	$	(2,851)	$	(2,266)
Interest rate swaps	$	(8,814)	$	(3,804)


	Amount of Gain or (Loss)
Location of Gain or (Loss) Reclassified	Reclassified from AOCI into
from AOCI into Income (loss) (Effective	Income
Portion)	March 31, 2020		March 31, 2019
Revenue	$	(18)	$	(2,113)
Costs of revenue	$	2,944	$	(1,481)
Operating expenses	$	1,208	$	(663)
Interest Expenses	$	29	$	965



		Amount of Gain or (Loss)
		Recognized in Income
Derivatives not Designated	Location of Gain Or (Loss)	on Derivatives
as Hedging Instruments	Recognized in Income (loss) on Derivatives	March 31, 2020		March 31, 2019
Foreign currency exchange contracts	Revenue	$	706	$	1,427
	Costs of revenue	$	(404)	$	(941)
	Selling, general and administrative expenses	$	(27)	$	(41)