Derivatives And Financial Instruments

6 Months Ended

Jul. 31, 2011

Derivatives And Financial Instruments

Derivatives And Financial Instruments

10. DERIVATIVES AND FINANCIAL INSTRUMENTS

The Company entered into derivative arrangements to manage a variety of risk exposures during the six months ended July 31, 2011 and 2010, including interest rate risk associated with Verint's Prior Facility and 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, 2011 and 2010, 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 or 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, 2011 are short-term in nature and are due to contractually settle within the next twelve months.

Verint periodically enters 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 USD, primarily the NIS and Canadian dollar. 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. 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. 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 (expense) income, 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 or 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, 2011 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 the underlying risk.

During the six months ended July 31, 2011 and 2010, Starhome entered into short-term foreign currency forward contracts to mitigate risk of fluctuations in foreign currency exchange rates mainly relating to payroll costs denominated in the NIS. Certain of these foreign currency forward contracts were not designated as hedging instruments, and therefore, gains and losses from changes in their fair values were reported in "Other (expense) income, net" in the condensed consolidated statements of operations. The Starhome derivatives outstanding as of July 31, 2011 are short-term in nature and are due to contractually settle within the next twelve months.

Interest Rate Swap Agreement

On May 25, 2007, concurrently with entry into its Prior Facility, Verint executed a pay-fixed/receive-variable interest rate swap agreement with a multinational financial institution to mitigate a portion of the risk associated with variable interest rates on the term loan under the Prior Facility. The original term of the interest rate swap agreement extended through May 2011. On July 30, 2010, Verint terminated the interest rate swap agreement in exchange for a payment of $21.7 million to the counterparty. Verint paid this obligation on August 3, 2010. The interest rate swap agreement was not designated as a hedging instrument under derivative accounting guidance, and gains and losses from changes in its fair value were therefore reported in "Other (expense) income, net" in the condensed consolidated statements of operations.

The following tables summarize the Company's derivative positions and their respective fair values as of July 31, 2011 and January 31, 2011:

	July 31, 2011
Type of Derivative	Notional Amount		Balance Sheet Classification	Fair Value
	(In thousands)
Assets
Derivatives not designated as hedging instruments
Short-term foreign currency forward	$	3,966	Prepaid expenses and other current assets	$	77
Derivatives designated as hedging instruments
Short-term foreign currency forward		49,507	Prepaid expenses and other current assets		691
Total assets				$	768
Liabilities
Derivatives not designated as hedging instruments
Short-term foreign currency forward		17,603	Other current liabilities	$	1,416
Total liabilities				$	1,416
	January 31, 2011
Type of Derivative	Notional Amount		Balance Sheet Classification	Fair Value
			(In thousands)
Assets
Derivatives designated as hedging instruments
Short-term foreign currency forward	$	22,390	Prepaid expenses and other current assets	$	957
Total assets				$	957
Liabilities
Derivatives not designated as hedging instruments
Short-term foreign currency forward		33,341	Other current liabilities	$	1,530
Derivatives designated as hedging instruments
Short-term foreign currency forward		21,250	Other current liabilities		396
Total liabilities				$	1,926

The following tables summarize the Company's classification of gains and losses on derivative instruments for the three and six months ended July 31, 2011 and 2010:

	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	$	—		$	—		$	187
Derivatives designated as hedging instruments
Foreign currency forward		743			3,324			—
Total	$	743		$	3,324		$	187
	Three Months Ended July 31, 2010
	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	$	—		$	—		$	(55	)
Interest rate swap		—			—			(1,501	)
Derivatives designated as hedging instruments
Foreign currency forward		(1,379	)		(427	)		—
Total	$	(1,379	)	$	(427	)	$	(1,556	)

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

	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 (Expense) Income, Net
	(In thousands)
Derivatives not designated as hedging instruments
Foreign currency forward	$	—		$	—		$	(1,685	)
Derivatives designated as hedging instruments
Foreign currency forward		5,374			5,553			—
Total	$	5,374		$	5,553		$	(1,685	)
	Six Months Ended July 31, 2010
	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 (Expense) Income, Net
	(In thousands)
Derivatives not designated as hedging instruments
Foreign currency forward	$	—		$	—		$	296
Interest rate swap		—			—			(3,102	)
Derivatives designated as hedging instruments
Foreign currency forward		(403	)		(384	)		—
Total	$	(403	)	$	(384	)	$	(2,806	)

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

The components of other comprehensive income related to cash flow hedges are as follows:

	Three Months Ended July 31,						Six Months Ended July 31,
	2011			2010			2011			2010
	(In thousands)
Accumulated OCI related to cash flow hedges, beginning of the period	$	2,944		$	1,684		$	748		$	785
Unrealized gains (losses) on cash flow hedges		84			(1,396	)		5,682			(384	)
Reclassification adjustment for (gains) losses included in net loss		(3,324	)		427			(5,553	)		384
Unrealized gains and losses on cash flow hedges, before tax		(3,240	)		(969	)		129			—
Other comprehensive income (loss) attributable to noncontrolling interest		659			17			(308	)		(19	)
Deferred income tax benefit (provision)		210			15			4			(19	)
Unrealized gains and losses on cash flow hedges, net of tax		(2,371	)		(937	)		(175	)		(38	)
Accumulated OCI related to cash flow hedges, end of the period	$	573		$	747		$	573		$	747