Derivatives and Financial Instruments

3 Months Ended

Apr. 30, 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 three months ended April 30, 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 three months ended April 30, 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 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 April 30, 2012 are short-term in nature and are due to contractually settle within the next twelve months.

During three months ended April 30, 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 April 30, 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.

During the three months ended April 30, 2012 and 2011, 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 income (expense), net” in the condensed consolidated statements of operations. Changes in fair value of effective forward contracts qualifying for cash flow hedge accounting are recorded in other comprehensive income (loss) in the condensed consolidated statement of comprehensive loss. Such amounts are reclassified to the consolidated statements of operations when the effects of the item being hedged are recognized in the consolidated statements of operations. The Starhome derivatives outstanding as of April 30, 2012 are short-term in nature and are due to contractually settle within the next twelve months.

The following tables summarize the Company’s derivative positions and their respective fair values as of April 30, 2012 and January 31, 2012:

	April 30, 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	$	15,104	Prepaid expenses and other current assets	$	161
Derivatives designated as hedging instruments
Short-term foreign currency forward	83,589		Prepaid expenses and other current assets	1,033
Total assets				$	1,194
Liabilities
Derivatives not designated as hedging instruments
Short-term foreign currency forward	1,567		Other current liabilities	$	5
Derivatives designated as hedging instruments
Short-term foreign currency forward	13,713		Other current liabilities	28
Total liabilities				$	33

	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	$	8,976	Prepaid expenses and other current assets	$	188
Derivatives designated as hedging instruments
Short-term foreign currency forward	100,219		Prepaid expenses and other current assets	1,216
Total assets				$	1,404
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 months ended April 30, 2012 and 2011:

	Three Months Ended April 30, 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	$	—	$	—	$	(181	)
Derivatives designated as hedging instruments
Foreign currency forward	223		278		—
Total	$	223	$	278	$	(181	)

	Three Months Ended April 30, 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	$	—	$	—	$	(1,872	)
Derivatives designated as hedging instruments
Foreign currency forward	4,631		2,229		—
Total	$	4,631	$	2,229	$	(1,872	)

(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 April 30,
	2012			2011
	(In thousands)
Accumulated OCI related to cash flow hedges, beginning of the period	$	514		$	748
Unrealized gains on cash flow hedges	293			5,598
Reclassification adjustment for gains included in netloss	(278		)	(2,229		)
Changes in accumulated OCI on cash flow hedges, before tax	15			3,369
Other comprehensive income attributable to noncontrolling interest	(70		)	(967		)
Deferred income tax provision	(34		)	(206		)
Changes in accumulated OCI on cash flow hedges, net of tax	(89		)	2,196
Accumulated OCI related to cash flow hedges, end of the period	$	425		$	2,944