Fair Value Measurements

9 Months Ended

Oct. 31, 2011

Fair Value Measurements [Abstract]

Fair Value Measurements

11. FAIR VALUE MEASUREMENTS

Under the FASB's guidance, fair value is defined as the price that would be received in the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (i.e., "the exit price").

The FASB's guidance also establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. The fair value hierarchy consists of three levels based on the reliability of inputs as follows:

• Level 1 – Valuations based on quoted prices in active markets for identical instruments that the Company is able to access.

• Level 2 – Valuations based on quoted prices in active markets for instruments that are similar, or quoted prices in markets that are not active for identical or similar instruments, and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.

• Level 3 – Valuations based on inputs that are unobservable and significant to the overall fair value measurement.

Assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurements. Changes in the observability of valuation inputs may result in transfers within fair value measurement hierarchy. All transfers into and/or out of Level 3 are assumed to occur at the end of the reporting period. The Company did not have any transfers between levels of the fair value measurement hierarchy during the three and nine months ended October 31, 2011 and 2010.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The fair value of financial instruments is estimated by the Company, using available market information and appropriate valuation methodologies. However, considerable judgment is required in interpreting market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that the Company could realize in a market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

Money Market Funds. The Company values these assets using quoted market prices for such funds.

Commercial Paper. The Company uses quoted prices for similar assets and liabilities.

ARS. The Company determines the fair value of ARS on a quarterly basis by utilizing a discounted cash flow model, which considers, among other factors, assumptions about the (i) underlying collateral, (ii) credit risk associated with the issuer, and (iii) contractual maturity. The discounted cash flow model considers contractual future cash flows, representing both interest and principal payments. Future interest payments were projected using U.S. Treasury and swap curves over the remaining term of the ARS in accordance with the terms of each specific security and principal payments were assumed to be made at an estimated contractual maturity date taking into account applicable prepayments. Yields used to discount these payments were determined based on the specific characteristics of each security. Key considerations in the determination of the appropriate discount rate include the securities' remaining term to maturity, capital structure subordination, quality and level of collateralization, complexity of payout structure, credit rating of the issuer, and the presence or absence of additional insurance.

Contingent Consideration. The Company values contingent consideration using an estimated probability-adjusted discounted cash flow model. The fair value measurement is based on significant inputs not observable in the market. The key assumptions used in these models are discount rates and the probabilities assigned to the milestones to be achieved. The fair value of contingent consideration is re-measured at each reporting period, and any changes in fair value resulting from either the passage of time or events occurring after the acquisition date, such as changes in the probability of achieving the performance target, are recorded in earnings.

Derivative Assets and Liabilities. The fair value of derivative instruments is based on quotes or data received from counterparties and third party financial institutions. These quotes are reviewed for reasonableness by discounting the future estimated cash flows under the contracts, considering the terms and maturities of the contracts and markets rates for similar contracts using readily observable market prices thereof.

The following tables present financial instruments according to the fair value hierarchy as defined by the FASB's guidance as of October 31, 2011 and January 31, 2011:

	October 31, 2011
	Quoted Prices to Active Markets for Identical Instruments (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Fair Value
	(In thousands)
Financial Assets:
Commercial paper (1)	$	—	$	9,382	$	—	$	9,382
Money market funds (1)		150,553		—		—		150,553
Auction rate securities		—		—		50,259		50,259
Derivative assets		—		827		—		827
Contingent consideration asset recorded for sale of business		—		—		780		780
	$	150,553	$	10,209	$	51,039	$	211,801
Financial Liabilities:
Derivative liabilities	$	—	$	1,426	$	—	$	1,426
Contingent consideration liability for business combination		—		—		34,623		34,623
	$	—	$	1,426	$	34,623	$	36,049

	January 31, 2011
	Quoted Prices to Active Markets for Identical Instruments (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Fair Value
	(In thousands)
Financial Assets:
Commercial paper (1)	$	—	$	9,375	$	—	$	9,375
Money market funds (1)		186,414		—		—		186,414
Auction rate securities		—		—		72,441		72,441
Derivative assets		—		957		—		957
Contingent consideration asset recorded for sale of business		—		—		722		722
	$	186,414	$	10,332	$	73,163	$	269,909
Financial Liabilities:
Derivative liabilities	$	—	$	1,926	$	—	$	1,926
Contingent consideration liability for business combination		—		—		3,686		3,686
	$	—	$	1,926	$	3,686	$	5,612

(1) As of October 31, 2011, $145.9 million of commercial paper and money market funds were classified in "Cash and cash equivalents" and $14.1 million of money market funds were classified in "Restricted cash and bank deposits" within the condensed consolidated balance sheets. As of January 31, 2011, $162.4 million of commercial paper and money market funds were classified in "Cash and cash equivalents" and $33.4 million of money market funds were classified in "Restricted cash and bank time deposits" within the condensed consolidated balance sheets.

The following table is a summary of changes in the fair value of the level 3 financial assets and liabilities, during the three and nine months ended October 31, 2011 and 2010:

	Level Three Financial Assets and Liabilities
	Three Months Ended October 31,											Nine Months Ended October 31,
	2011						2010					2011						2010
	Asset			Liability			Asset			Liability		Asset			Liability			Asset			Liability
	(In thousands)											(In thousands)
Beginning balance	$	52,612		$	2,364		$	69,349		$	3,306	$	73,163		$	3,686		$	114,650		$	—
Sales and redemptions		(250	)		—			(2,522	)		—		(25,750	)		—			(57,018	)		—
Change in realized and unrealized gains included in other income, net		120			—			1,625			—		8,011			—			23,715			—
Change in unrealized losses included in other comprehensive income		(1,463	)		—			1,143			—		(4,443	)		—			(11,374	)		—
Impairment charges		—			—			(29	)		—		—			—			(407	)		—
Contingent consideration liability recorded for business combination		—			32,800			—			—		—			33,704			—			3,224
Payments of contingent consideration		—			—			—			—		—			(4,107	)		—			—
Change in fair value recorded in operating expenses		20			(541	)		—			141		58			1,340			—			223
Ending balance	$	51,039		$	34,623		$	69,566		$	3,447	$	51,039		$	34,623		$	69,566		$	3,447

Assets and Liabilities Not Measured at Fair Value on a Recurring Basis

In addition to assets and liabilities that are measured at fair value on a recurring basis, the Company also measures certain assets and liabilities at fair value on a nonrecurring basis. The Company measures non-financial assets, including goodwill, intangible assets and property, plant and equipment, at fair value when there is an indication of impairment. The Company also elected not to apply the fair value option for non-financial assets and non-financial liabilities.

Verint's Credit Facilities

As of October 31, 2011, the carrying amount of the Term Loan under Verint's New Credit Agreement was $595.7 million and the estimated fair value was $585.0 million. As of January 31, 2011, the carrying amount of the term loan under the Prior Facility was $583.2 million and the estimated fair value was $586.2 million. The estimated fair values are based upon the estimated bid and ask prices as determined by the agent responsible for the syndication of Verint's term loan.

In connection with Verint's August 2, 2011 business combination, the Company assumed approximately $3.3 million of development bank and government debt in the Americas region. The carrying value of this debt was approximately $3.2 million at October 31, 2011, which approximates its fair value.