Derivatives

We are exposed to certain foreign currency risks in the normal course of our global business operations. We enter into derivative contracts that are foreign currency forward contracts to hedge the risks of certain identified and anticipated transactions in currencies other than the functional currency of the respective operating unit. The types of risks hedged are those arising from the variability of future earnings and cash flows caused by fluctuations in foreign currency exchange rates. These contracts are for forecasted transactions and committed receivables and payables denominated in foreign currencies and are not entered into for speculative purposes. Consequently, any market-related losses on the forward contract would be offset by changes in the value of the hedged item, and, as a result, we are generally not exposed to net market risk associated with these instruments.

Each derivative is classified as either a cash flow hedge, a fair value hedge or an undesignated instrument. All derivatives are recorded at fair value on the Condensed Consolidated Balance Sheets under the heading Other current assets or under the heading Other accrued liabilities, as appropriate. Cash flows from fair value and cash flow hedges are classified within the same category as the item being hedged on the Condensed Consolidated Statements of Cash Flows. Cash flows from undesignated derivative instruments are included in operating activities on the Condensed Consolidated Statements of Cash Flows.

For derivative contracts that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss of the derivative contract is recorded as a component of other comprehensive income, net of tax. This amount is reclassified into the income statement on the line associated with the underlying transaction for the periods in which the hedged transaction affects earnings. The amounts recorded in accumulated other comprehensive income for existing cash flow hedges are generally expected to be reclassified into earnings within one year, and all of the existing hedges will be reclassified into earnings by October 2015. There was no ineffectiveness related to these derivative contracts for the quarter ended January 30, 2015, and there was a gain of less than $0.1 million recorded in the Condensed Consolidated Statements of Income related to the ineffectiveness of these derivative contracts for the quarter ended January 31, 2014.

For derivative contracts that are designated and qualify as a fair value hedge, the gain or loss is recorded in the Condensed Consolidated Statements of Income under the heading Cost of sales. For the quarters ended January 30, 2015 and January 31, 2014, we recorded losses of $0.8 million and $0.3 million, respectively, related to fair value hedges, which were offset by foreign exchange fluctuations of the underlying hedged item.

For derivative contracts entered into in order to hedge revaluation of net balance sheet exposures in non-functional currency that are not designated as a fair value hedge or a cash flow hedge, the gain or loss is recorded in the Condensed Consolidated Statements of Income under the heading Cost of sales. For the quarters ended January 30, 2015 and January 31, 2014, we recorded gains of $6.8 million and $3.0 million, respectively, related to undesignated hedges, which were offset by foreign exchange fluctuations.

The following table summarizes the effect of cash flow hedges on the Condensed Consolidated Financial Statements:



In thousands	Effective Portion
	Amount of Gain Recognized in Other Comprehensive Income		Gain (Loss) Reclassified from Accumulated Other Comprehensive Income into Earnings
Derivative Hedging Relationship	Amount of Gain Recognized in Other Comprehensive Income		Location	Amount
Foreign currency forward contracts
Quarter ended January 30, 2015	$	3,699	Cost of sales	$	(1,509	)
			Sales	—
Quarter ended January 31, 2014	$	6,659	Cost of sales	$	3,076
			Sales	50

We are exposed to credit risk in the event of nonperformance by counterparties to the forward contracts. The terms of the forward contract determine the amount and timing of amounts to be exchanged, and the contract is generally subject to credit risk only when it has a positive fair value.