Derivative Instruments and Hedging Activities

9 Months Ended

Oct. 31, 2011

Derivative Instruments and Hedging Activities

(5) Derivative Instruments and Hedging Activities—We are exposed to fluctuations in foreign currency exchange rates. To manage the volatility, we aggregate exposures on a consolidated basis to take advantage of natural offsets. The primary exposures are the Japanese yen, where we are in a long position, and the euro and the British pound, where we are in a short position. Most large European revenue contracts are denominated and paid to us in U.S. dollars while our European expenses, including substantial research and development operations, are paid in local currencies causing a short position in the euro and the British pound. In addition, we experience greater inflows than outflows of Japanese yen as almost all Japanese-based customers contract and pay us in Japanese yen. While these exposures are aggregated on a consolidated basis to take advantage of natural offsets, substantial exposures remain.

To partially offset the net exposures in the euro, British pound, and the Japanese yen, we enter into foreign currency exchange contracts of less than one year which are designated as cash flow hedges. Any gain or loss on Japanese yen contracts is classified as product revenue when the hedged transaction occurs. Any gain or loss on euro and British pound contracts is classified as operating expense when the hedged transaction occurs.

We formally document all relationships between foreign currency exchange contracts and hedged items as well as our risk management objectives and strategies for undertaking various hedge transactions. All hedges designated as cash flow hedges are linked to forecasted transactions and we assess, both at inception of the hedge and on an ongoing basis, the effectiveness of the foreign currency exchange contracts in offsetting changes in the cash flows of the hedged items. We report the effective portions of the net gains or losses on foreign currency exchange contracts as a component of accumulated other comprehensive income (OCI) in stockholders’ equity. Accumulated OCI associated with hedges of forecasted transactions is reclassified to the condensed consolidated statement of operations in the same period the forecasted transaction occurs. We discontinue hedge accounting prospectively when we determine that a foreign currency exchange contract is not highly effective as a hedge. To the extent a forecasted transaction is no longer deemed probable of occurring, we prospectively discontinue hedge accounting treatment and we reclassify deferred amounts to other income (expense), net in the condensed consolidated statement of operations. We noted no such instance during the three or nine months ended October 31, 2011 or 2010.

The fair values and balance sheet presentation of our derivative instruments as of October 31, 2011 are summarized as follows:

	Location		Asset Derivatives		Liability Derivatives
Derivatives not designated as hedging instruments:
Non-designated forwards		Other receivables	$	2,038	$	(527	)

The fair values and balance sheet presentation of our derivative instruments as of January 31, 2011 are summarized as follows:

	Location		Asset Derivatives		Liability Derivatives
Derivatives designated as hedging instruments:
Cash flow forwards		Other receivables	$	575	$	(414	)
Derivatives not designated as hedging instruments:
Non-designated forwards		Other receivables		1,125		(460	)
Total derivatives			$	1,700	$	(874	)

During the nine months ended October 31, 2011, we entered into 1,034 new foreign currency forward contracts. We had a total of 33 contracts outstanding with a total gross notional value of $112,952 outstanding as of October 31, 2011. For the nine months ended October 31, 2010, we entered into 1,031 new foreign currency contracts. We had a total of 37 contracts with a total gross notional value of $176,982 outstanding as of October 31, 2010. Notional amounts do not quantify risk or represent our assets or liabilities but are used in the calculation of cash settlements under the contracts.

By using derivative instruments, we subject ourselves to credit risk. If a counterparty fails to fulfill its performance obligations under a derivative contract, our credit risk will equal the fair value of the derivative instrument. Generally, when the fair value of our derivative contracts is a net asset, the counterparty owes us, thus creating a receivable risk. We minimize counterparty credit risk by entering into derivative transactions with major financial institutions and, therefore, we do not expect material losses as a result of default by our counterparties.

The pre-tax effect of derivative instruments in cash flow hedging relationships on income and OCI for the nine months ended October 31, 2011 is as follows:

Derivatives Designated as Hedging Instruments	Gain Recognized in OCI on Derivatives (Effective Portion)		Gain (loss) Reclassified from Accumulated OCI into Income (Effective Portion)				Gain Recognized in Income on Derivatives (Ineffective Portion and Amount Excluded from Effectiveness Testing)
	Amount		Location	Amount			Location	Amount
Cash flow forwards	$	147	Revenues	$	(859	)	Other income (expense), net	$	65
			Operating expenses		1,074
Total	$	147		$	215			$	65

The gain on cash flow forwards of $65 recognized in other income (expense), net for the nine months ended October 31, 2011 is related to the time value exclusion of foreign currency forward contracts from our assessment of hedge effectiveness.

The pre-tax effect of derivative instruments in cash flow hedging relationships on income and OCI for the nine months ended October 31, 2010 is as follows:

Derivatives Designated as Hedging Instruments	Loss Recognized in OCI on Derivatives (Effective Portion)			Loss Reclassified from Accumulated OCI into Income (Effective Portion)				Gain Recognized in Income on Derivatives (Ineffective Portion and Amount Excluded from Effectiveness Testing)
	Amount			Location	Amount			Location	Amount
Cash flow forwards	$	(3,117	)	Revenues	$	(657	)	Other income (expense), net	$	46
				Operating expenses		(4,079	)
Total	$	(3,117	)		$	(4,736	)		$	46

The gain on cash flow forwards of $46 recognized in other income (expense), net for the nine months ended October 31, 2010 was related to the time value exclusion of foreign currency forward contracts from our assessment of hedge effectiveness.

The hedge balance in accumulated other comprehensive income was as follows:

As of	October 31, 2011		January 31, 2011
Accumulated OCI before tax effect	$	—	$	69
Accumulated OCI after tax effect	$	—	$	(2	)

The balance represents a net unrealized gain on foreign currency exchange contracts related to hedges of forecasted revenues and expenses expected to occur within the next twelve months. We will transfer this amount to the condensed consolidated statement of operations upon recognition of the related revenues and recording of the respective expenses. We expect substantially all of the hedge balance in accumulated other comprehensive income to be reclassified to the condensed consolidated statement of operations within the next twelve months.

We enter into foreign currency exchange contracts to offset the earnings impact relating to the variability in exchange rates on certain short-term monetary assets and liabilities denominated in non-functional currencies. We do not designate these foreign currency contracts as hedges. The effect of derivative instruments not designated as hedging instruments on income is as follows:

Derivatives Not Designated as Hedging Instruments	Gain (Loss) Recognized in Income on Derivatives
	Location		Amount as of October 31, 2011			Amount as of October 31, 2010
Non-designated forwards		Other income (expense), net	$	(574	)	$	1,125