Fair Value Measurements

3 Months Ended

Apr. 30, 2012

Fair Value Disclosures [Abstract]

Fair Value Measurements

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. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these instruments does not entail a significant degree of judgment.

• 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 all levels 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 months ended April 30, 2012 and 2011.

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.

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

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

ARS. The Company determined 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. The Company had no investments in ARS as of April 30, 2012 (see Note 3, Investments).

Contingent consideration – Business Combinations. The Company values contingent consideration related to business acquisitions using an estimated probability-adjusted discounted cash flow model. The fair value measurements are based on significant inputs not observable in the market. The key internally developed 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 discount rates or in the expectations of achieving the performance targets, are recorded in earnings. Increases or decreases in discount rates would have inverse impacts on the related fair value measurements, while favorable or unfavorable changes in expectations of achieving performance targets would result in corresponding increases or decreases in the related fair value measurements. The Company utilized discount rates ranging from 4.1% to 17.5% in our calculations of the estimated fair values of our contingent consideration liabilities as of April 30, 2012.

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 April 30, 2012 and January 31, 2012:

Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis as of April 30, 2012

	April 30, 2012
	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)	$	—	$	9,384	$	—	$	9,384
Money market funds (1)	190,734		—		—		190,734
Derivative assets	—		1,194		—		1,194
	$	190,734	$	10,578	$	—	$	201,312
Financial Liabilities:
Derivative liabilities	$	—	$	33	$	—	$	33
Contingent consideration liability for business combination	—		—		33,900		33,900
	$	—	$	33	$	33,900	$	33,933

Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis as of January 31, 2012

	January 31, 2012
	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)	$	—	$	9,383	$	—	$	9,383
Money market funds (1)	207,950		—		—		207,950
Auction rate securities	—		—		272		272
Derivative assets	—		1,404		—		1,404
	$	207,950	$	10,787	$	272	$	219,009
Financial Liabilities:
Derivative liabilities	$	—	$	530	$	—	$	530
Contingent consideration liability for business combination	—		—		38,646		38,646
	$	—	$	530	$	38,646	$	39,176

(1) As of April 30, 2012, $198.0 million of commercial paper and money market funds were classified in “Cash and cash equivalents” and $2.1 million of money market funds were classified in “Restricted cash and bank time deposits” within the condensed consolidated balance sheets. As of January 31, 2012, $215.2 million of commercial paper and money market funds were classified in “Cash and cash equivalents” and $2.1 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 months ended April 30, 2012 and 2011:

	Level 3 Financial Assets and Liabilities
	Three Months Ended April 30,
	2012						2011
	Asset			Liability			Asset			Liability
	(In thousands)
Beginning balance	$	272		$	38,646		$	73,163		$	3,686
Sales and redemptions	(394		)	—			(200		)	—
Change in realized and unrealized gains included in other expense, net	156			—			95			—
Change in unrealized losses included in other comprehensive income	(34		)	—			96			—
Contingent consideration liability recorded for business combination	—			—			—			904
Payments of contingent consideration	—			(1,750		)	—			(2,000		)
Change in fair value recorded in operating expenses	—			(2,996		)	31			2,023
Ending balance	$	—		$	33,900		$	73,185		$	4,613

The Company did not recognize any transfers between levels of fair value measurement hierarchy during the three months ended April 30, 2012 and 2011.

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. These assets are recorded at fair value only when an impairment charge is recognized. The Company has elected not to apply the fair value option for non-financial assets and non-financial liabilities.

Verint’s Credit Facilities

As of April 30, 2012 and January 31, 2012, the carrying amount of the Term Loan under Verint’s New Credit Agreement was $592.9 million and $594.3 million, respectively, and the estimated fair value was $597.0 million at both April 30, 2012 and January 31, 2012. The estimated fair value of the Term Loan is based upon the indicative bid and ask prices as determined by the agent responsible for the syndication of Verint’s term loan. The Company considers these inputs to be Level 3 of the fair value hierarchy, because the Company cannot reasonably observe activity in the limited market in which participations in the Term Loan are traded. The indicative prices provided to the Company at each of April 30, 2012 and January 31, 2012 were approximately at par value.