VERINT SYSTEMS INC - 10-Q filing on 2016-06-07

DERIVATIVE FINANCIAL INSTRUMENTS

3 Months Ended

Apr. 30, 2016

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Our primary objective for holding derivative financial instruments is to manage foreign currency exchange rate risk and interest rate risk, when deemed appropriate. We enter into these contracts in the normal course of business to mitigate risks and not for speculative purposes.

Foreign Currency Forward Contracts

Under our risk management strategy, we periodically use foreign currency forward contracts to manage our short-term exposures to fluctuations in operational cash flows resulting from changes in foreign currency exchange rates. These cash flow exposures result from portions of our forecasted operating expenses, primarily compensation and related expenses, which are transacted in currencies other than the U.S. dollar, most notably the Israeli shekel. We also periodically utilize foreign currency forward contracts to manage exposures resulting from forecasted customer collections to be remitted in currencies other than the applicable functional currency, and exposures from cash, cash equivalents and short-term investments denominated in currencies other than the applicable functional currency. Our 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 settlements of liabilities denominated in U.S. dollars. These foreign currency forward contracts generally have maturities of no longer than twelve months, although occasionally we will execute a contract that extends beyond twelve months, depending upon the nature of the underlying risk.

Notional Amounts of Derivative Financial Instruments

Our outstanding derivative financial instruments consisted only of foreign currency forward contracts with notional amounts of $139.3 million and $136.4 million as of April 30, 2016 and January 31, 2016, respectively.

Interest Rate Swap Agreement

During the three months ended April 30, 2016, we executed a pay-fixed, receive-variable interest rate swap agreement with a multinational financial institution to partially mitigate risks associated with the variable interest rate on our term loans, under which we will pay interest at a fixed rate of 4.143% and receive variable interest of three-month LIBOR (subject to a minimum of 0.75%), plus a spread of 2.75%, on a notional amount of $200.0 million. The effective date of the agreement is November 1, 2016, and settlements with the counterparty will occur on a quarterly basis, beginning on February 1, 2017. The agreement will terminate on September 6, 2019. Assuming that we elect three-month LIBOR at the term loans' interest rate reset dates, beginning on November 1, 2016 and throughout the term of the interest rate swap agreement, the annual interest rate on $200.0 million of our term loans will be fixed at 4.143% during that period.

The interest rate swap agreement is designated as a cash flow hedge and as such, changes in its fair value are recognized in accumulated other comprehensive income (loss) in the condensed consolidated balance sheet and are reclassified into the statement of operations in the period in which the hedged transaction affects earnings. Hedge ineffectiveness, if any, is recognized currently in the statement of operations.

Fair Values of Derivative Financial Instruments

The fair values of our derivative financial instruments and their classifications in our condensed consolidated balance sheets as of April 30, 2016 and January 31, 2016 were as follows:



		Fair Value at
		April 30,		January 31,
(in thousands)	Balance Sheet Classification	2016		2016
Derivative assets:
Foreign currency forward contracts:
Designated as cash flow hedges	Prepaid expenses and other current assets	$	2,800	$	—
Not designated as hedging instruments	Prepaid expenses and other current assets	1		113
Total derivative assets		$	2,801	$	113

Derivative liabilities:
Foreign currency forward contracts:
Designated as cash flow hedges	Accrued expenses and other current liabilities	$	42	$	2,108
Not designated as hedging instruments	Accrued expenses and other current liabilities	1,544		239
	Other liabilities	256		30
Interest rate swap agreement, designated as a cash flow hedge	Accrued expenses and other current liabilities	256		—
	Other liabilities	173		—
Total derivative liabilities		$	2,271	$	2,377

Derivative Financial Instruments in Cash Flow Hedging Relationships

The effects of derivative financial instruments designated as cash flow hedges on accumulated other comprehensive loss ("AOCL") and on the condensed consolidated statements of operations for the three months ended April 30, 2016 and 2015 were as follows:



	Three Months Ended April 30,
(in thousands)	2016			2015
Net gains (losses) recognized in AOCL:
Foreign currency forward contracts	$	5,394		$	1,833
Interest rate swap agreement	(429		)	—
	$	4,965		$	1,833

Net gains (losses) reclassified from AOCL to the condensed consolidated statements of operations:
Foreign currency forward contracts	$	606		$	(3,193	)

For information regarding the line item locations of the net gains (losses) on foreign currency forward contracts reclassified out of AOCL into the condensed consolidated condensed statements of operations, see Note 8, "Stockholders' Equity".

There were no gains or losses from ineffectiveness of these cash flow hedges recorded for the three months ended April 30, 2016 and 2015. All of the foreign currency forward contracts underlying the $2.4 million of net unrealized gains recorded in our accumulated other comprehensive loss at April 30, 2016 mature within twelve months, and therefore we expect all such gains to be reclassified into earnings within the next twelve months.

Derivative Financial Instruments Not Designated as Hedging Instruments

(Losses) gains recognized on derivative financial instruments not designated as hedging instruments in our condensed consolidated statements of operations for the three months ended April 30, 2016 and 2015 were as follows:



	Classification in Condensed Consolidated Statements of Operations	Three Months Ended April 30,
(in thousands)		2016			2015
Foreign currency forward contracts	Other (expense) income, net	$	(1,559	)	$	132