Derivatives and Financial Instruments

6 Months Ended

Jul. 31, 2012

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivatives and Financial Instruments

DERIVATIVES AND FINANCIAL INSTRUMENTS

The Company entered into derivative arrangements to manage a variety of risk exposures during the six months ended July 31, 2012 and 2011, including foreign currency risk related to forecasted foreign currency denominated payroll costs at the Company’s Comverse, Verint and Starhome subsidiaries. The Company assessed the counterparty credit risk for each party related to its derivative financial instruments for the periods presented.

Forward Contracts

During the six months ended July 31, 2012 and 2011, Comverse entered into a series of short-term foreign currency forward contracts to limit the variability in exchange rates between the U.S. dollar (the “USD”) and the new Israeli shekel (“NIS”) to hedge probable cash flow exposure from expected future payroll expense. The transactions qualified for cash flow hedge accounting under the FASB’s guidance and there was no hedge ineffectiveness. Accordingly, the Company recorded all changes in fair value of the forward contracts as part of other comprehensive income (loss) in the condensed consolidated statement of comprehensive income (loss). Such amounts are reclassified to the condensed consolidated statements of operations when the effects of the item being hedged are recognized in the condensed consolidated statements of operations. The Comverse derivatives outstanding as of July 31, 2012 are short-term in nature and are due to contractually settle within the next twelve months.

During the six months ended July 31, 2012 and 2011, Verint entered into short-term foreign currency forward contracts to mitigate risk of fluctuations in foreign currency exchange rates primarily relating to compensation and related expenses denominated in currencies other than the USD, primarily the NIS and Canadian dollar. Verint also periodically utilizes foreign currency forward contracts to manage exposures resulting from forecasted customer collections to be remitted in currencies other than the applicable functional currency. Verint’s joint venture, which has a Singapore dollar functional currency, also utilizes foreign exchange forward contracts to manage its exposure to exchange rate fluctuations related to settlement of liabilities denominated in USD. Certain of these foreign currency forward contracts were not designated as hedging instruments under the FASB’s guidance and, therefore, gains and losses from changes in their fair values were reported in “Other income (expense), net” in the condensed consolidated statements of operations. Changes in the fair value of effective forward contracts qualifying for cash flow hedge accounting under the FASB’s guidance are recorded as part of other comprehensive income (loss) in the condensed consolidated statement of comprehensive loss. Such amounts are reclassified to the condensed consolidated statements of operations when the effects of the item being hedged are recognized in the condensed consolidated statements of operations. The Verint derivatives outstanding as of July 31, 2012 are short-term in nature and generally have maturities of no longer than twelve months, although occasionally Verint will execute a contract that extends beyond twelve months, depending upon the nature of underlying risk.

The following tables summarize the Company’s derivative positions and their respective fair values as of July 31, 2012 and January 31, 2012:

	July 31, 2012
Type of Derivative	Notional Amount		Balance Sheet Classification	Fair Value
	(In thousands)
Assets
Derivatives not designated as hedging instruments
Short-term foreign currency forward	$	10,000	Prepaid expenses and other current assets	$	97
Derivatives designated as hedging instruments
Short-term foreign currency forward	10,278		Prepaid expenses and other current assets	144
Total assets				$	241
Liabilities
Derivatives designated as hedging instruments
Short-term foreign currency forward	96,570		Other current liabilities	3,703
Total liabilities				$	3,703

	January 31, 2012
Type of Derivative	Notional Amount		Balance Sheet Classification	Fair Value
	(In thousands)
Assets
Derivatives not designated as hedging instruments
Short-term foreign currency forward	$	99,319	Prepaid expenses and other current assets	$	1,214
Total assets				$	1,214
Liabilities
Derivatives not designated as hedging instruments
Short-term foreign currency forward	14,510		Other current liabilities	$	303
Derivatives designated as hedging instruments
Short-term foreign currency forward	16,907		Other current liabilities	227
Total liabilities				$	530

The following tables summarize the Company’s classification of gains and losses on derivative instruments for the three and six months ended July 31, 2012 and 2011:

	Three Months Ended July 31, 2012
	Gain (Loss)
Type of Derivative	Recognized in  Other Comprehensive Income (Loss)		Reclassified from Accumulated  Other Comprehensive Income into  Statement of Operations (1)		Recognized in  Other Income (Expense), Net
	(In thousands)
Derivatives not designated as hedging instruments
Foreign currency forward	$	—	$	—	$	271
Derivatives designated as hedging instruments
Foreign currency forward	2,827		115		—
Total	$	2,827	$	115	$	271

	Three Months Ended July 31, 2011
	Gain (Loss)
Type of Derivative	Recognized in  Other Comprehensive Income (Loss)		Reclassified from Accumulated  Other Comprehensive Income into  Statement of Operations (1)		Recognized in  Other Income (Expense), Net
	(In thousands)
Derivatives not designated as hedging instruments
Foreign currency forward	$	—	$	—	$	26
Derivatives designated as hedging instruments
Foreign currency forward	736		3,303		—
Total	$	736	$	3,303	$	26

	Six Months Ended July 31, 2012
	Gain (Loss)
Type of Derivative	Recognized in  Other Comprehensive Income (Loss)		Reclassified from Accumulated  Other Comprehensive Income into  Statement of Operations (1)		Recognized in  Other Income (Expense), Net
	(In thousands)
Derivatives not designated as hedging instruments
Foreign currency forward	$	—	$	—	$	131
Derivatives designated as hedging instruments
Foreign currency forward	2,616		158		—
Total	$	2,616	$	158	$	131

	Six Months Ended July 31, 2011
	Gain (Loss)
Type of Derivative	Recognized in  Other Comprehensive Income (Loss)		Reclassified from Accumulated  Other Comprehensive Income into  Statement of Operations (1)		Recognized in  Other Income (Expense), Net
	(In thousands)
Derivatives not designated as hedging instruments
Foreign currency forward	$	—	$	—	$	(1,907	)
Derivatives designated as hedging instruments
Foreign currency forward	5,346		5,498		—
Total	$	5,346	$	5,498	$	(1,907	)

(1) Amounts reclassified from accumulated other comprehensive income into the statement of operations are classified as operating expenses.

The components of other comprehensive income (“OCI”) related to cash flow hedges are as follows:

	Three Months Ended July 31,						Six Months Ended July 31,
	2012			2011			2012			2011
	(In thousands)
Accumulated OCI related to cash flow hedges, beginning of the period	$	425		$	2,944		$	514		$	748
Unrealized (gains) losses on cash flow hedges	(4,828		)	84			(4,535		)	5,682
Reclassification adjustment for gains (losses) included in net gain (loss)	138			(3,324		)	(140		)	(5,553		)
Changes in accumulated OCI on cash flow hedges, before tax	(4,690		)	(3,240		)	(4,675		)	129
Other comprehensive income (loss) attributable to noncontrolling interest	1,886			659			1,816			(308		)
Deferred income tax benefit	362			210			328			4
Changes in accumulated OCI on cash flow hedges, net of tax	(2,442		)	(2,371		)	(2,531		)	(175		)
Accumulated OCI related to cash flow hedges, end of the period	$	(2,017	)	$	573		$	(2,017	)	$	573