Attached files

file filename
EXCEL - IDEA: XBRL DOCUMENT - VERINT SYSTEMS INCFinancial_Report.xls
EX-32.2 - EXHIBIT 32.2 - VERINT SYSTEMS INCvrnt-ex322_20150430xform10.htm
EX-31.1 - EXHIBIT 31.1 - VERINT SYSTEMS INCvrnt-ex311_20150430xform10.htm
EX-31.2 - EXHIBIT 31.2 - VERINT SYSTEMS INCvrnt-ex312_20150430xform10.htm
EX-32.1 - EXHIBIT 32.1 - VERINT SYSTEMS INCvrnt-ex321_20150430xform10.htm

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549 
FORM 10-Q 
(Mark One)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended April 30, 2015
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from                                to                                     .
 
Commission File No. 001-34807
Verint Systems Inc.
(Exact Name of Registrant as Specified in its Charter) 
Delaware
 
11-3200514
(State or Other Jurisdiction of Incorporation or
Organization)
 
(I.R.S. Employer Identification No.)
 
 
 
330 South Service Road, Melville, New York
 
11747
(Address of Principal Executive Offices)
 
(Zip Code)
 
(631) 962-9600
 
(Registrant’s Telephone Number, Including Area Code)
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes þ No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer þ
Accelerated Filer o
Non-Accelerated Filer o
Smaller Reporting Company o
 
 
(Do not check if a smaller reporting company)
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o No þ
 
There were 61,358,001 shares of the registrant’s common stock outstanding on May 15, 2015.
 




Verint Systems Inc. and Subsidiaries
Index to Form 10-Q
For the Three Months Ended April 30, 2015
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

i


Cautionary Note on Forward-Looking Statements
 
This Quarterly Report on Form 10-Q contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, the provisions of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Forward-looking statements include financial projections, statements of plans and objectives for future operations, statements of future economic performance, and statements of assumptions relating thereto. Forward-looking statements may appear throughout this report, including without limitation, Part I, Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations," and are often identified by future or conditional words such as "will", "plans", "expects", "intends", "believes", "seeks", "estimates", or "anticipates", or by variations of such words or by similar expressions. There can be no assurances that forward-looking statements will be achieved. By their very nature, forward-looking statements involve known and unknown risks, uncertainties, assumptions, and other important factors that could cause our actual results or conditions to differ materially from those expressed or implied by such forward-looking statements. Important risks, uncertainties, assumptions, and other factors that could cause our actual results or conditions to differ materially from our forward-looking statements include, among others:
 
uncertainties regarding the impact of general economic conditions in the United States and abroad, particularly in information technology spending and government budgets, on our business;
risks associated with our ability to keep pace with technological changes, customer challenges, and evolving industry standards in our product offerings, adapt to changing market potential from area to area within our markets and successfully develop, launch, and drive demand for new, innovative, high-quality products that meet or exceed customer needs;
risks due to aggressive competition in all of our markets, including with respect to maintaining margins and sufficient levels of investment in our business;
risks created by the continued consolidation of our competitors or the introduction of large competitors in our markets with greater resources than we have;
risks associated with our ability to successfully compete for, consummate, and implement mergers and acquisitions, including risks associated with valuations, capital constraints, costs and expenses, maintaining profitability levels, expansion into new areas of growth, management distraction, post-acquisition integration activities, and potential asset impairments;
risks relating to our ability to effectively and efficiently enhance our existing operations and execute on our growth strategy, including managing investments in our business and operations and enhancing and securing our internal and external operations;
risks associated with our ability to effectively and efficiently allocate limited financial and human resources to business, development, strategic, or other opportunities that may not come to fruition or produce satisfactory returns;
risks that we may be unable to establish and maintain relationships with key resellers, partners, and systems integrators;
risks associated with the mishandling or perceived mishandling of sensitive or confidential information, security lapses, or with information technology system failures or disruptions;
risks associated with our significant international operations, including, among others, in Israel, Europe, and Asia, exposure to regions subject to political or economic instability, and fluctuations in foreign exchange rates;
risks associated with a significant amount of our business coming from domestic and foreign government customers, including the ability to maintain security clearances for certain projects;
risks associated with complex and changing local and foreign regulatory environments in the jurisdictions in which we operate;
risks associated with our ability to retain and recruit qualified personnel in regions in which we operate, especially in new markets and growth areas we may enter;

ii


challenges associated with selling sophisticated solutions, long sales cycles, and emphasis on larger transactions, including in assisting customers in realizing the benefits of our solutions and in accurately forecasting revenue and expenses and in maintaining profitability;
risks that our intellectual property rights may not be adequate to protect our business or assets or that others may make claims on our intellectual property or claim infringement on their intellectual property rights;
risks that our products may contain defects or may be vulnerable to cyber-attacks, which could expose us to substantial liability;
risks associated with our reliance on third-party suppliers, partners, or original equipment manufacturers ("OEMs") for certain components, products, or services, including companies that may compete with us or work with our competitors;
risks that our customers or partners delay or cancel orders or are unable to honor contractual commitments due to liquidity issues, challenges in their business, or otherwise;
risks that we may experience liquidity or working capital issues and related risks that financing sources may be unavailable to us on reasonable terms or at all;
risks associated with significant leverage resulting from our current debt position, including with respect to liquidity considerations, covenant limitations and compliance, fluctuations in interest rates, dilution considerations (with respect to our convertible notes), and our ability to maintain our credit ratings;
risks arising as a result of contingent or other obligations or liabilities assumed in our acquisition of our former parent company, Comverse Technology, Inc. (“CTI”), or associated with formerly being consolidated with, and part of a consolidated tax group with, CTI, or as a result of CTI's former subsidiary, Comverse, Inc. ("Comverse"), being unwilling or unable to provide us with certain indemnities or transition services to which we are entitled;
risks relating to the adequacy of our existing infrastructure, systems, processes, policies, procedures, and personnel and our ability to successfully implement and maintain adequate systems and internal controls for our current and future operations and reporting needs, including related risks of financial statement omissions, misstatements, restatements, or filing delays; and
risks associated with changes in our tax position.
 
These risks, uncertainties, assumptions, and challenges, as well as other factors, are discussed in greater detail in "Risk Factors" under Item 1A of our Annual Report on Form 10-K for the year ended January 31, 2015. You are cautioned not to place undue reliance on forward-looking statements, which reflect our management’s view only as of the date of this report. We make no commitment to revise or update any forward-looking statements in order to reflect events or circumstances after the date any such statement is made, except as otherwise required under the federal securities laws. If we were in any particular instance to update or correct a forward-looking statement, investors and others should not conclude that we would make additional updates or corrections thereafter except as otherwise required under the federal securities laws.


iii


PART I

Item 1.     Financial Statements






1


VERINT SYSTEMS INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited)
 
 
April 30,
 
January 31,
 (in thousands, except share and per share data)

2015
 
2015
Assets

 


 

Current Assets:

 


 

Cash and cash equivalents

$
321,028


$
285,072

Restricted cash and bank time deposits

24,166


36,920

Short-term investments
 
68,517

 
35,751

Accounts receivable, net of allowance for doubtful accounts of $0.9 million and $1.1 million, respectively

256,493


262,092

Inventories

19,977


17,505

Deferred cost of revenue

3,790


6,722

Prepaid expenses and other current assets

73,089


66,130

  Total current assets

767,060


710,192

Property and equipment, net

62,775


62,490

Goodwill

1,208,219


1,200,817

Intangible assets, net

295,572


311,894

Capitalized software development costs, net

10,551


10,112

Long-term deferred cost of revenue

15,490


14,555

Other assets

38,486


40,936

  Total assets

$
2,398,153


$
2,350,996








Liabilities and Stockholders' Equity

 


 

Current Liabilities:

 


 

Accounts payable

$
72,032


$
72,885

Accrued expenses and other current liabilities

227,881


223,721

Current maturities of long-term debt
 
10

 
23

Deferred revenue

200,020


181,259

  Total current liabilities

499,943


477,888

Long-term debt

739,273


736,779

Long-term deferred revenue

24,162


20,544

Other liabilities

105,962


110,882

  Total liabilities

1,369,340


1,346,093

Commitments and Contingencies






Stockholders' Equity:

 


 

Preferred stock - $0.001 par value; authorized 2,207,000 shares at April 30, 2015 and January 31, 2015, respectively; none issued.
 

 

Common stock - $0.001 par value; authorized 120,000,000 shares. Issued 61,706,000 and 61,253,000 shares; outstanding 61,358,000 and 60,905,000 shares at April 30, 2015 and January 31, 2015, respectively.

62


61

Additional paid-in capital

1,334,962


1,321,455

Treasury stock, at cost - 348,000 shares at April 30, 2015 and January 31, 2015.

(10,251
)

(10,251
)
Accumulated deficit

(219,490
)

(219,074
)
Accumulated other comprehensive loss

(84,454
)

(94,335
)
Total Verint Systems Inc. stockholders' equity

1,020,829


997,856

Noncontrolling interest

7,984


7,047

  Total stockholders' equity

1,028,813


1,004,903

  Total liabilities and stockholders' equity

$
2,398,153


$
2,350,996


See notes to condensed consolidated financial statements.

2


VERINT SYSTEMS INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
 
 
 
Three Months Ended
April 30,
 (in thousands, except per share data)
 
2015
 
2014
Revenue:
 
 

 
 

Product
 
$
102,799

 
$
108,136

Service and support
 
166,737

 
149,257

  Total revenue
 
269,536

 
257,393

Cost of revenue:
 
 

 
 

Product
 
34,897

 
39,477

Service and support
 
60,296

 
56,988

Amortization of acquired technology and backlog
 
7,980

 
6,358

  Total cost of revenue
 
103,173

 
102,823

Gross profit
 
166,363

 
154,570

Operating expenses:
 
 

 
 

Research and development, net
 
43,166

 
41,323

Selling, general and administrative
 
102,850

 
101,048

Amortization of other acquired intangible assets
 
10,737

 
11,203

  Total operating expenses
 
156,753

 
153,574

Operating income
 
9,610

 
996

Other income (expense), net:
 
 

 
 

Interest income
 
194

 
225

Interest expense
 
(8,337
)
 
(10,226
)
Losses on early retirements of debt
 

 
(7,092
)
Other income, net
 
211

 
2,828

  Total other expense, net
 
(7,932
)
 
(14,265
)
Income (loss) before provision (benefit) for income taxes
 
1,678

 
(13,269
)
Provision (benefit) for income taxes
 
947

 
(42,088
)
Net income
 
731

 
28,819

Net income attributable to noncontrolling interest
 
1,147

 
863

Net (loss) income attributable to Verint Systems Inc.
 
$
(416
)
 
$
27,956

 
 
 
 
 
Net (loss) income per common share attributable to Verint Systems Inc.:
 
 

 
 

Basic
 
$
(0.01
)
 
$
0.52

Diluted
 
$
(0.01
)
 
$
0.51

 
 
 
 
 
Weighted-average common shares outstanding:
 
 

 
 

Basic
 
61,041

 
53,737

Diluted
 
61,041

 
55,018

 
See notes to condensed consolidated financial statements.





3


VERINT SYSTEMS INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
 
 
 
Three Months Ended
April 30,
(in thousands)
 
2015
 
2014
Net income
 
$
731

 
$
28,819

Other comprehensive income, net of reclassification adjustments:
 
 

 
 

Foreign currency translation adjustments
 
5,169

 
16,736

Net unrealized gains (losses) on available-for-sale securities
 
57

 
(3
)
Net unrealized gains on derivative financial instruments designated as hedges
 
5,027

 
311

Provision for income taxes on net unrealized gains on derivative financial instruments designated as hedges
 
(582
)
 
(102
)
Other comprehensive income
 
9,671

 
16,942

Comprehensive income
 
10,402

 
45,761

Comprehensive income attributable to noncontrolling interest
 
937

 
889

Comprehensive income attributable to Verint Systems Inc.
 
$
9,465

 
$
44,872

 
See notes to condensed consolidated financial statements.

4


VERINT SYSTEMS INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Stockholders’ Equity
(Unaudited)
 
 
Verint Systems Inc. Stockholders’ Equity
 
 
 
 
 
 
Common Stock
 
Additional Paid-in Capital
 
 
 
 
 
Accumulated Other Comprehensive Loss
 
Total Verint Systems Inc. Stockholders' Equity
 
 
 
Total Stockholders' Equity
(in thousands) 
 
Shares
 
Par
Value
 
 
Treasury
Stock
 
Accumulated
Deficit
 
 
 
Non-controlling
Interest
 
Balances at January 31, 2014
 
53,605

 
$
54

 
$
924,663

 
$
(8,013
)
 
$
(250,005
)
 
$
(39,725
)
 
$
626,974

 
$
6,144

 
$
633,118

Net income
 

 

 

 

 
27,956

 

 
27,956

 
863

 
28,819

Other comprehensive income
 

 

 

 

 

 
16,916

 
16,916

 
26

 
16,942

Stock-based compensation - equity portion
 

 

 
10,228

 

 

 

 
10,228

 

 
10,228

Exercises of stock options
 
181

 

 
6,259

 

 

 

 
6,259

 

 
6,259

Common stock issued for stock awards and stock bonuses
 
251

 

 

 

 

 

 

 

 

Tax effects from stock award plans
 

 

 
24

 

 

 

 
24

 

 
24

Balances at April 30, 2014
 
54,037

 
$
54

 
$
941,174

 
$
(8,013
)
 
$
(222,049
)
 
$
(22,809
)
 
$
688,357


$
7,033

 
695,390

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balances at January 31, 2015
 
60,905

 
$
61

 
$
1,321,455

 
$
(10,251
)
 
$
(219,074
)
 
$
(94,335
)
 
$
997,856

 
$
7,047

 
$
1,004,903

Net (loss) income
 

 

 

 

 
(416
)
 

 
(416
)
 
1,147

 
731

Other comprehensive income (loss)
 

 

 

 

 

 
9,881

 
9,881

 
(210
)
 
9,671

Stock-based compensation - equity portion
 

 

 
13,100

 

 

 

 
13,100

 

 
13,100

Exercises of stock options
 
6

 

 
229

 

 

 

 
229

 

 
229

Common stock issued for stock awards and stock bonuses
 
447

 
1

 
(1
)
 

 

 

 

 

 

Tax effects from stock award plans
 

 

 
179

 

 

 

 
179

 

 
179

Balances at April 30, 2015
 
61,358

 
$
62

 
$
1,334,962

 
$
(10,251
)
 
$
(219,490
)
 
$
(84,454
)
 
$
1,020,829

 
$
7,984

 
$
1,028,813

 
See notes to condensed consolidated financial statements.

5


VERINT SYSTEMS INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
 
Three Months Ended
April 30,
(in thousands) 
 
2015
 
2014
Cash flows from operating activities:
 
 

 
 

Net income
 
$
731

 
$
28,819

Adjustments to reconcile net income to net cash provided by operating activities:
 
 

 
 

Depreciation and amortization
 
25,028

 
23,324

Stock-based compensation - equity portion
 
13,100

 
10,228

Amortization of discount on convertible notes
 
2,480

 

Reduction of valuation allowance resulting from acquisition of KANA
 

 
(45,171
)
Non-cash (gains) losses on derivative financial instruments, net
 
(132
)
 
737

Losses on early retirements of debt
 

 
7,092

Other non-cash items, net
 
9,072

 
5,146

Changes in operating assets and liabilities, net of effects of business combinations:
 
 

 
 

Accounts receivable
 
4,950

 
(25,412
)
Inventories
 
(3,691
)
 
(2,449
)
Deferred cost of revenue
 
1,970

 
(210
)
Prepaid expenses and other assets
 
(9,074
)
 
4,613

Accounts payable and accrued expenses
 
3,091

 
36,735

Deferred revenue
 
22,046

 
11,133

Other, net
 
(2,945
)
 
(550
)
Net cash provided by operating activities
 
66,626

 
54,035

 
 
 
 
 
Cash flows from investing activities:
 
 

 
 

Cash paid for business combinations, including adjustments, net of cash acquired
 
(2,149
)
 
(603,614
)
Purchases of property and equipment
 
(5,206
)
 
(3,781
)
Purchases of investments
 
(38,355
)
 
(3,339
)
Sales and maturities of investments
 
5,479

 
350

Cash paid for capitalized software development costs
 
(1,031
)
 
(1,473
)
Change in restricted cash and bank time deposits, including long-term portion, and other investing activities, net
 
11,376

 
(13,316
)
Net cash used in investing activities
 
(29,886
)
 
(625,173
)
 
 
 
 
 
Cash flows from financing activities:
 
 

 
 

Proceeds from borrowings, net of original issuance discount
 

 
1,103,750

Repayments of borrowings and other financing obligations
 
(152
)
 
(719,289
)
Payments of debt issuance and other debt-related costs
 
(63
)
 
(8,895
)
Proceeds from exercises of stock options
 
229

 
6,239

Payments of contingent consideration for business combinations (financing portion)
 
(2,006
)
 
(2,856
)
Net cash (used in) provided by financing activities
 
(1,992
)
 
378,949

Effect of exchange rate changes on cash and cash equivalents
 
1,208

 
887

Net increase (decrease) in cash and cash equivalents
 
35,956

 
(191,302
)
Cash and cash equivalents, beginning of period
 
285,072

 
378,618

Cash and cash equivalents, end of period
 
$
321,028

 
$
187,316


See notes to condensed consolidated financial statements.

6


VERINT SYSTEMS INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements


1.
BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
 
Description of Business
 
Unless the context otherwise requires, the terms "Verint", "we", "us", and "our" in these notes to condensed consolidated financial statements refer to Verint Systems Inc. and its consolidated subsidiaries.
 
Verint is a global leader in Actionable Intelligence solutions. Actionable Intelligence is a necessity in a dynamic world of massive information growth because it empowers organizations with crucial insights and enables decision makers to anticipate, respond, and take action. With Verint solutions and value-added services, organizations of all sizes and across many industries can make more timely and effective decisions. Today, more than 10,000 organizations in over 180 countries, including over 80 percent of the Fortune 100, use Verint solutions to improve enterprise performance and make the world a safer place. Verint’s vision is to create A Smarter World with Actionable Intelligence®.

Our Actionable Intelligence solutions help organizations address three important challenges: Customer Engagement Optimization; Security Intelligence; and Fraud, Risk, and Compliance. We help our customers capture large amounts of information from numerous data types and sources, use analytics to glean insights from the information, and leverage the resulting Actionable Intelligence to help achieve their customer engagement, enhanced security, and risk mitigation goals.

Headquartered in Melville, New York, we support our customers around the globe directly and with an extensive network of selling and support partners.

Preparation of Condensed Consolidated Financial Statements

The condensed consolidated financial statements included herein have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and on the same basis as the audited consolidated financial statements included in our Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (“SEC”) for the year ended January 31, 2015. The condensed consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for the periods ended April 30, 2015 and 2014, and the condensed consolidated balance sheet as of April 30, 2015, are not audited but reflect all adjustments that are of a normal recurring nature and that are considered necessary for a fair presentation of the results for the periods shown. The condensed consolidated balance sheet as of January 31, 2015 is derived from the audited consolidated financial statements presented in our Annual Report on Form 10-K for the year ended January 31, 2015. Certain information and disclosures normally included in annual consolidated financial statements have been omitted pursuant to the rules and regulations of the SEC. Because the condensed consolidated interim financial statements do not include all of the information and disclosures required by GAAP for a complete set of financial statements, they should be read in conjunction with the audited consolidated financial statements and notes included in our Annual Report on Form 10-K filed with the SEC for the year ended January 31, 2015. The results for interim periods are not necessarily indicative of a full year’s results.

Principles of Consolidation
 
The accompanying condensed consolidated financial statements include the accounts of Verint Systems Inc., our wholly owned subsidiaries, and a joint venture in which we hold a 50% equity interest.  This joint venture functions as a systems integrator for Asian markets and is a variable interest entity in which we are the primary beneficiary. The noncontrolling interest in this joint venture is reflected within stockholders’ equity on our condensed consolidated balance sheet, but separately from our equity. Investments in companies in which we have less than a 20% ownership interest and do not exercise significant influence are accounted for at cost.  We include the results of operations of acquired companies from the date of acquisition.  All significant intercompany transactions and balances are eliminated.
 
Use of Estimates
 
The preparation of financial statements in conformity with GAAP requires our management to make estimates and assumptions, which may affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting period.  Actual results could differ from those estimates.

7



Significant Accounting Policies

Our significant accounting policies are described in Note 1 to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended January 31, 2015. There were no material changes to our significant accounting policies during the three months ended April 30, 2015.
 
Recent Accounting Pronouncements
 
New Accounting Pronouncements Recently Adopted


In April 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-08, 
Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. ASU No. 2014-08 raises the threshold for a disposal to qualify as a discontinued operation and requires new disclosures of both discontinued operations and certain other disposals that do not meet the definition of a discontinued operation. It was effective for us on February 1, 2015. The adoption of this standard did not impact our condensed consolidated financial statements.

In January 2015, the FASB issued ASU No. 2015-01, Income Statement - Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items. ASU No. 2015-01 eliminates the concept of an extraordinary item from GAAP. As a result, an entity is no longer required to separately present an extraordinary item on its statement of operations, net of tax, after income from continuing operations or to disclose income taxes and net income per share data applicable to an extraordinary item. However, ASU No. 2015-01 still retains the presentation and disclosure guidance for items that are unusual in nature and occur infrequently. ASU No. 2015-01 was effective for us on February 1, 2015. The adoption of this standard did not impact our condensed consolidated financial statements.

New Accounting Pronouncements Not Yet Effective

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). ASU No. 2014-09 supersedes the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific revenue recognition guidance throughout the Industry Topics of the Accounting Standards Codification. Additionally, this update supersedes some cost guidance included in Subtopic 605-35, Revenue Recognition-Construction-Type and Production-Type Contracts. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. As currently issued, this guidance is effective for the first interim period within annual reporting periods beginning after December 15, 2016, and early adoption is not permitted; however, on April 1, 2015, the FASB voted to propose a one-year deferral to the effective date, but to permit entities to adopt one year earlier, at the original effective date. The proposal to defer the effective date will be subject to the FASB’s due process procedures, including a period for public comments. Entities may choose from two adoption methods, with certain practical expedients. We are currently reviewing this standard to assess the impact on our future condensed consolidated financial statements and evaluating the available adoption methods.

In June 2014, the FASB issued ASU No. 2014-10, Development Stage Entities (Topic 915): Elimination of Certain Financial Reporting Requirements, Including an Amendment to Variable Interest Entities Guidance in Topic 810, Consolidation. ASU No. 2014-10 removes the financial reporting distinction between development stage entities and other reporting entities from GAAP and it eliminates an exception provided in the consolidation guidance for development stage enterprises. It is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015, although early adoption is permitted. We are currently reviewing this standard to assess the impact on our future condensed consolidated financial statements.

In June 2014, the FASB issued ASU No. 2014-12, Compensation—Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period, which requires that a performance target that affects vesting, and that could be achieved after the requisite service period, be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant date fair value of the award. ASU No. 2014-12 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015, although early adoption is permitted. We are currently reviewing this standard to assess the impact on our future condensed consolidated financial statements.

8


In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern. This ASU defines management’s responsibility to evaluate whether there is substantial doubt about an organization’s ability to continue as a going concern and to provide related footnote disclosures. The provisions of ASU No. 2014-15 are effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, although early adoption is permitted. The adoption of ASU No. 2014-15 is not expected to have a material effect on our future condensed consolidated financial statements.

In April 2015, the FASB issued ASU No. 2015-03, Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. ASU No. 2015-03 requires an entity to present debt issuance costs related to a recognized debt liability in the balance sheet as a direct deduction from the carrying amount of the debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this update. The provisions of ASU No. 2015-03 are effective for fiscal years, and interim periods within those years, beginning after December 15, 2015, although early adoption is permitted. When adopted, this guidance must be applied on a retrospective basis. We plan to adopt the provisions of ASU No. 2015-03 effective on February 1, 2016. As of April 30, 2015, we have $14.2 million of net deferred debt issuance costs which are reported within Other assets on our condensed consolidated balance sheet.

In April 2015, the FASB issued ASU No. 2015-05, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer's Accounting for Fees Paid in a Cloud Computing Arrangement. The amendments in this update provide guidance to customers about whether a cloud computing arrangement includes a software license. The provisions of ASU No. 2015-05 are effective for fiscal years, and interim periods within those years, beginning after December 15, 2015, although early adoption is permitted. We are currently reviewing this standard to assess the impact on our future condensed consolidated financial statements.


2.
NET (LOSS) INCOME PER COMMON SHARE ATTRIBUTABLE TO VERINT SYSTEMS INC.
 
The following table summarizes the calculation of basic and diluted net (loss) income per common share attributable to Verint Systems Inc. for the three months ended April 30, 2015 and 2014
 
 
Three Months Ended
April 30,
(in thousands, except per share amounts) 
 
2015
 
2014
Net income
 
$
731

 
$
28,819

Net income attributable to noncontrolling interest
 
1,147

 
863

Net (loss) income attributable to Verint Systems Inc.
 
$
(416
)
 
$
27,956

Weighted-average shares outstanding:
 
 

 
 

Basic
 
61,041

 
53,737

Dilutive effect of employee equity award plans
 

 
1,281

Dilutive effect of 1.50% convertible senior notes
 

 

Dilutive effect of warrants
 

 

Diluted
 
61,041

 
55,018

Net (loss) income per common share attributable to Verint Systems Inc.:
 
 

 
 

Basic
 
$
(0.01
)
 
$
0.52

Diluted
 
$
(0.01
)
 
$
0.51


We excluded the following weighted-average potential common shares from the calculations of diluted net (loss) income per common share during the applicable periods because their inclusion would have been anti-dilutive:
 
 
Three Months Ended
April 30,
(in thousands) 
 
2015
 
2014
Common shares excluded from calculation:
 
 

 
 

Stock options and restricted stock-based awards
 
1,825

 
289

1.50% convertible senior notes
 
6,205

 

Warrants
 
6,205

 



9


The 1.50% convertible senior notes ("Notes") will not impact the calculation of diluted net income per share unless the average price of our common stock, as calculated in accordance with the terms of the indenture governing the Notes, exceeds the conversion price of $64.46 per share. Likewise, diluted net income per share will not include any effect from the Warrants unless the average price of our common stock, as calculated under the terms of the Warrants, exceeds the exercise price of $75.00 per share. Further details regarding the Notes and the Warrants appear in Note 6, "Long-Term Debt".


3. CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS

The following tables summarize our cash, cash equivalents and short-term investments as of April 30, 2015 and January 31, 2015:
 
 
April 30, 2015
(in thousands) 
 
Cost Basis
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Estimated Fair Value
Cash and cash equivalents:
 
 
 
 
 
 
 
 
Cash and bank time deposits
 
$
310,855

 
$

 
$

 
$
310,855

Money market funds
 
10,173

 

 

 
10,173

Total cash and cash equivalents
 
$
321,028

 
$

 
$

 
$
321,028

 
 
 
 
 
 
 
 
 
Short-term investments:
 
 
 
 
 
 
 
 
Commercial paper and corporate debt securities (available-for-sale)
 
$
46,362

 
$
158

 
$

 
$
46,520

Bank time deposits
 
21,997

 

 

 
21,997

Total short-term investments
 
$
68,359

 
$
158

 
$

 
$
68,517

 
 
January 31, 2015
(in thousands)
 
Cost Basis
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Estimated Fair Value
Cash and cash equivalents:
 
 
 
 
 
 
 
 
Cash and bank time deposits
 
$
281,890

 
$

 
$

 
$
281,890

Money market funds
 
183

 

 

 
183

Commercial paper
 
2,999

 

 

 
2,999

Total cash and cash equivalents
 
$
285,072

 
$

 
$

 
$
285,072

 
 
 
 
 
 
 
 
 
Short-term investments:
 
 
 
 
 
 
 
 
Commercial paper and corporate debt securities (available-for-sale)
 
$
13,741

 
$
101

 
$

 
$
13,842

Bank time deposits
 
21,909

 
$

 
$

 
21,909

Total short-term investments
 
$
35,650

 
$
101

 
$

 
$
35,751


Bank time deposits which are reported within short-term investments consist of deposits held outside of the U.S. with maturities of greater than 90 days, or without specified maturity dates which we intend to hold for periods in excess of 90 days. All other bank deposits are included within cash and cash equivalents.

As of April 30, 2015 and January 31, 2015, all of our available-for-sale investments had contractual maturities of less than one year. Gains and losses on sales of available-for-sale securities during the three months ended April 30, 2015 and 2014 were not significant.

During the three months ended April 30, 2015 and 2014, proceeds from sales and maturities of available-for-sale securities were $5.5 million and $0.4 million, respectively.

We believe that the investments we held at April 30, 2015 were not other-than-temporarily impaired. We held no available-for-sale securities with unrealized losses at April 30, 2015. We do not intend to sell our available-for-sale securities and it is not more likely than not that we will be required to sell them before recovery at par, which may be at maturity.

10




4.
BUSINESS COMBINATIONS

Three Months Ended April 30, 2015

On February 12, 2015, we completed the acquisition of a business in the Europe, the Middle East and Africa (“EMEA”) region that is being integrated into our Enterprise Intelligence operating segment. This business combination was not material to our condensed consolidated financial statements.

Year Ended January 31, 2015

KANA Software, Inc.

On February 3, 2014, we completed the acquisition of KANA Software, Inc. and its subsidiaries through the merger of KANA Software, Inc.'s parent holding company, Kay Technology Holdings, Inc. (collectively, "KANA"), with an indirect, wholly owned subsidiary of Verint, with Kay Technology Holdings, Inc. continuing as the surviving company and as our wholly owned subsidiary. The purchase price consisted of $542.4 million of cash paid at the closing, partially offset by $25.1 million of KANA’s cash received in the acquisition, and a $0.7 million post-closing purchase price adjustment, resulting in net cash consideration of $516.6 million.

KANA, based in Sunnyvale, California and with global operations, is a leading provider of on-premises and cloud-based solutions which create differentiated, personalized, and integrated customer experiences for large enterprises and mid-market organizations. KANA has been substantially integrated into our Enterprise Intelligence operating segment.

The merger consideration was funded by a combination of cash on hand, $300.0 million of incremental term loans incurred in connection with an amendment to our Credit Agreement, and $125.0 million of borrowings under our Revolving Credit Facility, further details for which appear in Note 6, "Long-Term Debt".

Transaction and related costs directly related to the acquisition of KANA, consisting primarily of professional fees and integration expenses, were $2.6 million and $2.3 million for the three months ended April 30, 2015 and 2014, respectively, and were expensed as incurred. The vast majority of these expenses are included in selling, general and administrative expenses.

UTX Technologies Limited

On March 31, 2014, we completed the acquisition of all of the outstanding shares of UTX Technologies Limited (“UTX”), a provider of certain mobile device tracking solutions for security applications, from UTX Limited. UTX Limited was our supplier of these products to our Communications Intelligence operating segment prior to the acquisition. The purchase price consisted of $82.9 million of cash paid at closing, and $1.5 million paid subsequent to closing during the year ended January 31, 2015, upon UTX's achievement of certain performance targets. The acquisition date fair value of the contingent consideration was estimated to be $1.3 million.

UTX is based in the EMEA region and has been integrated into our Communications Intelligence operating segment.

Transaction and related costs directly related to the acquisition of UTX, consisting primarily of professional fees, integration expenses and related adjustments, were $0.2 million and $2.6 million for the three months ended April 30, 2015 and 2014, respectively, and were expensed as incurred and are included in selling, general and administrative expenses.

As a result of the UTX acquisition, we recorded a $2.6 million charge for the impairment of certain capitalized software development costs during the three months ended April 30, 2014, reflecting strategy changes in certain product development initiatives. This charge is reflected within cost of product revenue.

Other Business Combinations

We completed two separate acquisitions of certain technologies and other assets for use in our Communications Intelligence operating segment on April 16, 2014 and January 15, 2015, respectively, in transactions that qualified as business combinations. These business combinations were not material to our condensed consolidated financial statements, individually or in the aggregate.


11


Purchase Price Allocations

As of January 31, 2015, the purchase price allocation for UTX was preliminary, subject to change as additional information became available during the measurement period (up to one year from the acquisition date). During the three months ended April 30, 2015, there were no changes to the purchase price allocation for UTX, which is now complete.

Pro Forma Information

The following table provides unaudited pro forma operating results for the three months ended April 30, 2014, as if KANA and UTX had been acquired on February 1, 2013. These unaudited pro forma results reflect certain adjustments related to these acquisitions, including amortization expense on finite-lived intangible assets acquired from KANA and UTX, interest expense and fees associated with additional long-term debt incurred to partially fund the acquisition of KANA, and adjustments to recognize the fair value of revenue associated with performance obligations assumed in the acquisition of KANA.

For purposes of the following unaudited pro forma operating results, a $45.2 million income tax benefit recorded during the three months ended April 30, 2014 resulting from a reduction of valuation allowances associated from the acquisition of KANA is not reflected in the pro forma operating results for the three months ended April 30, 2014.

The unaudited pro forma results do not include any operating efficiencies or potential cost savings which may result from these business combinations. Accordingly, such unaudited pro forma amounts are not necessarily indicative of the results that actually would have occurred had the acquisitions been completed on February 1, 2013, nor are they indicative of future operating results.
(in thousands, except per share amounts) 
 
Three Months Ended
April 30, 2014
Revenue
 
$
269,713

Net loss
 
$
(2,022
)
Net loss attributable to Verint Systems Inc.
 
$
(2,885
)
Basic and diluted net loss per common share attributable to Verint Systems Inc.:
 
$
(0.05
)

Other Business Combination Information

We include the financial results of all business combinations in our condensed consolidated financial statements from their respective acquisition dates.

For the three months ended April 30, 2015 and 2014, we recorded a charge of $0.1 million and a benefit of $0.2 million, respectively, within selling, general and administrative expenses for changes in the fair values of contingent consideration obligations associated with business combinations. The aggregate fair value of the remaining contingent consideration obligations associated with business combinations was $12.4 million at April 30, 2015.

In connection with a business combination completed during the year ended January 31, 2012, we assumed approximately $5.2 million of long-term liabilities associated with uncertain tax positions of the acquired company. A corresponding indemnification asset of $5.2 million was also recorded, recognizing the selling shareholders’ contractual obligation to indemnify us for these pre-acquisition liabilities. As of April 30, 2015 and January 31, 2015, these liabilities were $1.3 million and $1.4 million, respectively, and were included within other liabilities. The corresponding indemnification assets as of April 30, 2015 and January 31, 2015 were $0.4 million and $0.4 million, respectively, and were included within other assets. There was no activity in these accounts during the three months ended April 30, 2015 and 2014. The carrying values of these assets and liabilities were impacted by foreign currency exchange rate fluctuations.


5.
INTANGIBLE ASSETS AND GOODWILL
 
Acquisition-related intangible assets consisted of the following as of April 30, 2015 and January 31, 2015:
 

12


 
 
April 30, 2015
(in thousands)
 
Cost
 
Accumulated
Amortization
 
Net
Intangible assets, all with finite lives:
 
 

 
 

 
 

Customer relationships
 
$
381,654

 
$
(187,247
)
 
$
194,407

Acquired technology
 
201,733

 
(112,325
)
 
89,408

Trade names
 
18,872

 
(9,868
)
 
9,004

Non-competition agreements
 
3,047

 
(1,866
)
 
1,181

Distribution network
 
4,440

 
(2,868
)
 
1,572

    Total intangible assets
 
$
609,746

 
$
(314,174
)
 
$
295,572

 
 
 
January 31, 2015
(in thousands)
 
Cost
 
Accumulated
Amortization
 
Net
Intangible assets, all with finite lives:
 
 

 
 

 
 

Customer relationships
 
$
378,756

 
$
(176,796
)
 
$
201,960

Acquired technology
 
201,294

 
(104,117
)
 
97,177

Trade names
 
18,799

 
(9,131
)
 
9,668

Non-competition agreements
 
3,625

 
(2,331
)
 
1,294

Distribution network
 
4,440

 
(2,645
)
 
1,795

    Total intangible assets
 
$
606,914

 
$
(295,020
)
 
$
311,894


The following table presents net acquisition-related intangible assets by reportable segment as of April 30, 2015 and January 31, 2015: 
 
 
April 30,
 
January 31,
(in thousands)

2015

2015
Enterprise Intelligence

$
249,104


$
261,354

Communications Intelligence

45,830


49,670

Video Intelligence

638


870

Total

$
295,572


$
311,894

 
Total amortization expense recorded for acquisition-related intangible assets was $18.7 million and $17.6 million for the three months ended April 30, 2015 and 2014, respectively. The reported amount of net acquisition-related intangible assets can fluctuate from the impact of changes in foreign exchange rates on intangible assets not denominated in U.S. dollars.
 
Estimated future amortization expense on finite-lived acquisition-related intangible assets is as follows:
(in thousands)

 

Years Ending January 31,

Amount
2016 (remainder of year)

$
60,197

2017

72,431

2018

54,056

2019

25,816

2020

19,440

2021 and thereafter

63,632

   Total

$
295,572

 
No impairments of acquired intangible assets were recorded during the three months ended April 30, 2015 and 2014.

Goodwill activity for the three months ended April 30, 2015, in total and by reportable segment, was as follows: 

13


 
 
 
 
Reportable Segment
(in thousands)
 
Total
 
Enterprise
Intelligence
 
Communications
Intelligence
 
Video
Intelligence
Three Months Ended April 30, 2015:
 
 
 
 
 
 
 
 
Goodwill, gross, at January 31, 2015
 
$
1,267,682

 
$
1,092,313

 
$
101,261

 
$
74,108

Accumulated impairment losses through January 31, 2015
 
(66,865
)
 
(30,791
)
 

 
(36,074
)
   Goodwill, net, at January 31, 2015
 
1,200,817

 
1,061,522

 
101,261

 
38,034

Business combinations
 
2,333

 
2,333

 

 

Foreign currency translation and other
 
5,069

 
5,652

 
(507
)
 
(76
)
   Goodwill, net, at April 30, 2015
 
$
1,208,219

 
$
1,069,507

 
$
100,754

 
$
37,958

 
 
 
 
 
 
 
 
 
Balance at April 30, 2015:
 


 
 

 
 

 
 

Goodwill, gross, at April 30, 2015
 
$
1,275,084

 
$
1,100,298

 
$
100,754

 
$
74,032

Accumulated impairment losses through April 30, 2015
 
(66,865
)
 
(30,791
)
 

 
(36,074
)
   Goodwill, net, at April 30, 2015
 
$
1,208,219

 
$
1,069,507

 
$
100,754

 
$
37,958


No events or circumstances indicating the potential for goodwill impairment were identified during the three months ended April 30, 2015.


6.
LONG-TERM DEBT

The following table summarizes our long-term debt at April 30, 2015 and January 31, 2015: 
 
 
April 30,
 
January 31,
(in thousands)
 
2015
 
2015
1.50% Convertible Senior Notes:
 
 
 
 
   Principal amount
 
$
400,000

 
$
400,000

   Unamortized debt discount
 
(71,606
)
 
(74,086
)
1.50% Convertible Senior Notes, net
 
328,394

 
325,914

February 2014 Term Loans:
 
 
 
 
Gross amount
 
130,729

 
130,729

Unamortized debt discount
 
(263
)
 
(277
)
February 2014 Term Loans, net
 
130,466

 
130,452

March 2014 Term Loans
 
280,413

 
280,413

Other debt
 
10

 
23

Total debt
 
739,283

 
736,802

Less: current maturities
 
10

 
23

Long-term debt
 
$
739,273

 
$
736,779


Current maturities of long-term debt are reported within accrued expenses and other current liabilities on the condensed consolidated balance sheet.

1.50% Convertible Senior Notes

On June 18, 2014, we issued $400.0 million in aggregate principal amount of 1.50% convertible senior notes ("Notes") due June 1, 2021, unless earlier converted by the holders pursuant to their terms. Net proceeds from the Notes after underwriting discounts were $391.9 million. The Notes pay interest in cash semiannually in arrears at a rate of 1.50% per annum.
The Notes were issued concurrently with our issuance of 5,750,000 shares of common stock, the majority of the combined net proceeds of which were used to partially repay certain indebtedness under our Credit Agreement.
The Notes are unsecured and rank senior in right of payment to our indebtedness that is expressly subordinated in right of payment to the Notes; equal in right of payment to our indebtedness that is not so subordinated; effectively subordinated in

14


right of payment to any of our secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally subordinated to indebtedness and other liabilities of our subsidiaries.
The Notes are convertible into, at our election, cash, shares of common stock, or a combination of both, subject to satisfaction of specified conditions and during specified periods, as described below. If converted, we currently intend to pay cash in respect of the principal amount of the Notes.
The conversion price of the Notes at any time is equal to $1,000 divided by the then-applicable conversion rate. The Notes have a conversion rate of 15.5129 shares of common stock per $1,000 principal amount of Notes, which represents an effective conversion price of approximately $64.46 per share of common stock and would result in the issuance of approximately 6,205,000 shares if all of the Notes were converted. The conversion rate has not changed since issuance of the Notes, although throughout the term of the Notes, the conversion rate may be adjusted upon the occurrence of certain events.
Holders may surrender their Notes for conversion at any time prior to the close of business on the business day immediately preceding December 1, 2020, only under the following circumstances:

during any calendar quarter commencing after the calendar quarter which ended on September 30, 2014, if the closing sale price of our common stock, for at least 20 trading days (whether or not consecutive) in the period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter, is more than 130% of the conversion price of the Notes in effect on each applicable trading day;

during the ten consecutive trading-day period following any five consecutive trading-day period in which the trading price for the Notes for each such trading day was less than 98% of the closing sale price of our common stock on such date multiplied by the then-current conversion rate; or

upon the occurrence of specified corporate events, as described in the indenture governing the Notes, such as a consolidation, merger, or binding share exchange.

On or after December 1, 2020 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may surrender their Notes for conversion regardless of whether any of the foregoing conditions have been satisfied.
As of April 30, 2015, the Notes were not convertible.

In accordance with accounting guidance for convertible debt with a cash conversion option, we separately accounted for the debt and equity components of the Notes in a manner that reflected our estimated nonconvertible debt borrowing rate. We estimated the carrying amount of the debt component of the Notes to be $319.9 million at the issuance date, assuming a 5.00% non-convertible borrowing rate. The carrying amount of the equity component was determined to be approximately $80.1 million by deducting the carrying amount of the debt component from the principal amount of the Notes, and was recorded as an increase to additional paid-in capital. The excess of the principal amount of the debt component over its carrying amount (the “debt discount”) is being amortized as interest expense over the term of the Notes using the effective interest method. The equity component is not remeasured as long as it continues to meet the conditions for equity classification.

We allocated transaction costs related to the issuance of the Notes, including underwriting discounts, of $7.6 million and $1.9 million to the debt and equity components, respectively. Issuance costs attributable to the debt component were recorded within other assets and are being amortized as interest expense over the term of the Notes, and issuance costs attributable to the equity component were netted with the equity component in additional paid-in capital. The carrying amount of the equity component, net of issuance costs, was $78.2 million at April 30, 2015. Including the impact of the debt discount and related deferred debt issuance costs, the effective interest rate on the Notes was approximately 5.29% at April 30, 2015.

Based on the closing market price of our common stock on April 30, 2015, the if-converted value of the Notes was less than the aggregate principal amount of the Notes.

Note Hedges and Warrants

Concurrently with the issuance of the Notes, we entered into convertible note hedge transactions (the “Note Hedges”) and sold warrants (the “Warrants”). The combination of the Note Hedges and the Warrants serves to increase the effective initial conversion price for the Notes to $75.00 per share. The Note Hedges and Warrants are each separate instruments from the Notes.

15


Note Hedges
Pursuant to the Note Hedges, we purchased call options on our common stock, under which we have the right to acquire from the counterparties up to approximately 6,205,000 shares of our common stock, subject to customary anti-dilution adjustments, at a price of $64.46, which equals the initial conversion price of the Notes. Our exercise rights under the Note Hedges generally trigger upon conversion of the Notes and the Note Hedges terminate upon maturity of the Notes, or the first day the Notes are no longer outstanding. The Note Hedges may be settled in cash, shares of our common stock, or a combination thereof, at our option, and are intended to reduce our exposure to potential dilution upon conversion of the Notes. We paid $60.8 million for the Note Hedges, which was recorded as a reduction to additional paid-in capital. As of April 30, 2015, we had not purchased any shares of our common stock under the Note Hedges.
Warrants
We sold the Warrants to several counterparties. The Warrants provide the counterparties rights to acquire from us up to approximately 6,205,000 shares of our common stock at a price of $75.00 per share. The Warrants expire incrementally on a series of expiration dates beginning in August 2021. At expiration, if the market price per share of our common stock exceeds the strike price of the Warrants, we will be obligated to issue shares of our common stock having a value equal to such excess. The Warrants could have a dilutive effect on net income per share to the extent that the market value of our common stock exceeds the strike price of the Warrants. Proceeds from the sale of the Warrants were $45.2 million and were recorded as additional paid-in capital. As of April 30, 2015, no Warrants had been exercised and all Warrants remained outstanding.
The Note Hedges and Warrants both meet the requirements for classification within stockholders’ equity, and their respective fair values are not remeasured and adjusted as long as these instruments continue to qualify for stockholders’ equity classification.
Credit Agreement
Background
In April 2011, we entered into a credit agreement with our lenders, which was amended and restated on March 6, 2013, and further amended on February 3, 2014, March 7, 2014, and June 18, 2014 (the “Credit Agreement"). The Credit Agreement, as amended and restated, provides for senior secured credit facilities, comprised of $943.5 million of term loans, of which $300.0 million was borrowed in February 2014 (the “February 2014 Term Loans”) and $643.5 million was borrowed in March 2014 (the “March 2014 Term Loans”), all of which matures in September 2019, and a $300.0 million revolving credit facility maturing in September 2018 (the “Revolving Credit Facility”), subject to increase (up to a maximum increase of $300.0 million) and reduction from time to time.
At April 30, 2015, $130.7 million and $280.4 million of borrowings were outstanding under the February 2014 Term Loans and March 2014 Term Loans, respectively, and there were no outstanding borrowings under the Revolving Credit Facility.

As further described below, on March 7, 2014, $643.5 million of term loans previously borrowed under the Credit Agreement
(the "March 2013 Term Loans") were extinguished and replaced with the March 2014 Term Loans, and the basis for determining the interest rate on borrowings under the Revolving Credit Facility was also amended.

From March 6, 2013 through March 6, 2014, the March 2013 Term Loans and borrowings under the Revolving Credit Facility, if any, incurred interest, payable quarterly or, in the case of Eurodollar loans with an interest period of three months or shorter, at the end of any interest period, at a per annum rate of, at our election:

in the case of Eurodollar loans, the Adjusted LIBO Rate plus 3.00% (or, if our corporate credit ratings are BB- and Ba3 or better, 2.75%). The Adjusted LIBO Rate is the greater of (i) 1.00% per annum and (ii) the product of the LIBO Rate and Statutory Reserves (both as defined in the Credit Agreement), and

in the case of Base Rate loans, the Base Rate plus 2.00% (or, if our corporate credit ratings are BB- and Ba3 or better, 1.75%). The Base Rate is the greatest of (i) the administrative agent's prime rate, (ii) the Federal Funds Effective Rate (as defined in the Credit Agreement) plus 0.50% and (iii) the Adjusted LIBO Rate for a one-month interest period plus 1.00%.

Debt issuance costs incurred in connection with the Credit Agreement, as well as costs incurred for debt modifications, are deferred. These costs are amortized as adjustments to interest expense over the remaining contractual life of the associated borrowings. Original issuance discounts on term loans are also amortized as adjustments to interest expense over the remaining

16


contractual life of the associated term loans. Upon early retirement of debt, the associated deferred debt issuance costs and unamortized original issuance discount, if any, are written off as a loss on early retirement of debt.

We are required to pay a commitment fee equal to 0.50% per annum of the undrawn portion on the Revolving Credit Facility, payable quarterly, and customary administrative agent and letter of credit fees.

2014 Amendments to Credit Agreement

During the year ended January 31, 2015, we entered into five separate amendments to the Credit Agreement as described below.

On February 3, 2014, in connection with the acquisition of KANA, we borrowed $125.0 million under the Revolving Credit Facility and entered into Amendment No. 1 pursuant to which, on such date, we incurred the February 2014 Term Loans of $300.0 million, maturing in September 2019. The net proceeds of these borrowings were used to fund a portion of the KANA purchase price.

The February 2014 Term Loans bear interest, payable quarterly or, in the case of Eurodollar loans with an interest period of three months or less, at the end of the applicable interest period, at a per annum rate of, at our election:

in the case of Eurodollar loans, the Adjusted LIBO Rate plus 2.75%. The Adjusted LIBO Rate is the greater of (i) 0.75% per annum and (ii) the product of (x) the LIBO Rate and (y) Statutory Reserves (both as defined in the Credit Agreement), and

in the case of Base Rate loans, the Base Rate plus 1.75%. The Base Rate is the greatest of (i) the administrative agent’s prime rate, (ii) the Federal Funds Effective Rate (as defined in the Credit Agreement) plus 0.50% and (iii) the Adjusted LIBO Rate for a one-month interest period plus 1.00%.

We incurred debt issuance costs of approximately $7.1 million associated with the February 2014 Term Loans, which were deferred and classified within other assets. The February 2014 Term Loans were also subject to an original issuance discount of 0.25%, or $0.8 million.
On February 3, 2014, we also entered into Amendment No. 2 to, among other things, (i) permit us to increase the permitted amount of additional incremental term loans and revolving credit commitments under the Credit Agreement (beyond the February 2014 Term Loans borrowed under Amendment No. 1) by up to, in the aggregate, $200.0 million plus an additional amount such that the First Lien Leverage Ratio (as defined in Amendment No. 2) would not exceed the specified maximum ratio set forth therein, (ii) increase the size of certain negative covenant basket carve-outs, (iii) permit us to issue Permitted Convertible Indebtedness (as defined in Amendment No. 2), and (iv) permit us to refinance all or a portion of any existing class of term loans under the Credit Agreement with replacement term loans.
On February 3, 2014, we also entered into Amendment No. 3 to extend by one year, to January 31, 2016, the step-down date of the leverage ratio covenant applicable to our Revolving Credit Facility and, subject to the effectiveness of Amendment No. 4 (as described below), reprice the interest rate applicable to borrowings under the Revolving Credit Facility to the interest rate applicable to the February 2014 Term Loans.

On March 7, 2014, we entered into Amendment No. 4 to refinance all $643.5 million of outstanding March 2013 Term Loans at that date with the March 2014 Term Loans of $643.5 million, maturing in September 2019. The provisions for determining the interest rate on the March 2014 Term Loans are identical to such provisions for the February 2014 Term Loans. The repricing of the interest rate applicable to borrowings under the Revolving Credit Facility contemplated by Amendment No. 3 became effective on March 7, 2014, upon the effectiveness of Amendment No. 4.

The refinancing of the March 2013 Term Loans with the proceeds of the March 2014 Term Loans pursuant to Amendment No. 4 was accounted for as an early retirement of the March 2013 Term Loans and, as a result, $4.3 million of unamortized deferred debt issuance costs and $2.8 million of unamortized discount associated with the March 2013 Term Loans as of the March 7, 2014 effective date of Amendment No. 4 were written off as a $7.1 million loss on early retirement of debt.

As of April 30, 2015 and January 31, 2015, the interest rate on both the February 2014 Term Loans and the March 2014 Term Loans was 3.50%. Taking into account the impact of original issuance discounts, if any, and related deferred debt issuance costs, the effective interest rates on the February 2014 Term Loans and March 2014 Term Loans were approximately 4.03% and 3.58%, respectively, at April 30, 2015.

17



We incurred $2.4 million of debt issuance costs in consideration of Amendment No. 4. There was no original issuance discount on the March 2014 Term Loans.

On June 18, 2014, we entered into Amendment No. 5, which increased the commitments under the Revolving Credit Facility to $300.0 million and extended the termination of the Revolving Credit Facility to September 2018.
Early Partial Retirement of Term Loans - June 2014

On June 18, 2014, we utilized the majority of the combined net proceeds from the issuance of the Notes and the concurrent issuance of 5,750,000 shares of common stock to retire $530.0 million of the February 2014 Term Loans and March 2014 Term Loans, and all $106.0 million of then-outstanding borrowings under the Revolving Credit Facility. As a result, $3.8 million and $1.3 million of deferred debt issuance costs associated with the February 2014 Term Loans and March 2014 Term Loans, respectively, and $0.4 million of unamortized discount associated with the February 2014 Term Loans, were written off as a $5.5 million loss on early retirement of debt.
Borrowings Under Revolving Credit Facility

There were no borrowings under the Revolving Credit Facility at April 30, 2015 and January 31, 2015.
Other Provisions of the Credit Agreement

The Credit Agreement contains certain customary affirmative and negative covenants for credit facilities of this type, which include limitations on us and our subsidiaries with respect to indebtedness, liens, nature of business, investments and loans, distributions, acquisitions, dispositions of assets, sale-leaseback transactions and transactions with affiliates. The Revolving Credit Facility also contains a financial covenant that requires us to maintain a ratio of Consolidated Total Debt to Consolidated EBITDA (each as defined in the Credit Agreement) of no greater than 5.00 to 1 until January 31, 2016 (as amended on February 3, 2014 by Amendment No. 3, as described above) and no greater than 4.50 to 1 thereafter (the "Leverage Ratio Covenant"). The limitations imposed by the covenants are subject to certain exceptions as detailed in the Credit Agreement.

Future Principal Payments on Term Loans

Prior to June 2014, we were required to make quarterly principal payments on the February 2014 Term Loans and March 2014 Term Loans of $0.8 million and $1.6 million, respectively, through August 1, 2019, with the remaining balances due in September 2019. Following the partial retirements of the February 2014 Term Loans and March 2014 Term Loans in June 2014, future scheduled principal payments on the February 2014 Term Loans and March 2014 Term Loans as of April 30, 2015 were as follows:
(in thousands)
 
February 2014
 
March
2014
Years Ending January 31,
 
Term Loans
 
Term Loans
2016 (remainder of year)
 
$

 
$

2017
 
669

 
1,434

2018
 
1,337

 
2,869

2019
 
1,337

 
2,869

2020
 
127,386

 
273,241

   Total
 
$
130,729

 
$
280,413

Interest Expense


18


The following table presents the components of interest expense incurred on the Notes and on borrowings under our Credit Agreement for the three months ended April 30, 2015 and 2014:
 
 
Three Months Ended
April 30,
(in thousands)
 
2015
 
2014
1.50% Convertible Senior Notes:
 
 
 
 
Interest expense at 1.50% coupon rate
 
$
1,500

 
$

Amortization of debt discount
 
2,481

 

Amortization of deferred debt issuance costs
 
234

 

Total - 1.50% Convertible Senior Notes
 
$
4,215

 
$

 
 
 
 
 
Borrowings under Credit Agreement:
 
 
 
 
Interest expense at contractual rates
 
$
3,558

 
$
9,247

Amortization of debt discounts
 
14

 
67

Amortization of deferred debt issuance costs
 
507

 
745

Total - Borrowings under Credit Agreement
 
$
4,079

 
$
10,059



7.
SUPPLEMENTAL CONDENSED CONSOLIDATED FINANCIAL STATEMENT INFORMATION
 
Condensed Consolidated Balance Sheets
 
Inventories consisted of the following as of April 30, 2015 and January 31, 2015: 
 
 
April 30,
 
January 31,
(in thousands)
 
2015
 
2015
Raw materials
 
$
7,319

 
$
6,203

Work-in-process
 
8,712

 
8,481

Finished goods
 
3,946

 
2,821

Total inventories
 
$
19,977

 
$
17,505


Condensed Consolidated Statements of Operations
 
Other income, net consisted of the following for the three months ended April 30, 2015 and 2014:
 
 
Three Months Ended
April 30,
(in thousands)
 
2015
 
2014
Foreign currency gains, net
 
$
445

 
$
3,195

Gains (losses) on derivative financial instruments, net
 
132

 
(737
)
Other, net
 
(366
)
 
370

Total other income, net
 
$
211

 
$
2,828


Condensed Consolidated Statements of Cash Flows
 
The following table provides supplemental information regarding our condensed consolidated cash flows for the three months ended April 30, 2015 and 2014:

19


 
 
Three Months Ended
April 30,
(in thousands)
 
2015
 
2014
Cash paid for interest
 
$
3,643

 
$
9,850

Cash payments of income taxes, net
 
$
3,311

 
$
3,477

Non-cash investing and financing transactions:
 
 

 
 
Accrued but unpaid purchases of property and equipment
 
$
3,385

 
$
780

Inventory transfers to property and equipment
 
$
895

 
$
25

Liabilities for contingent consideration in business combinations
 
$

 
$
4,947



8.
STOCKHOLDERS’ EQUITY
 
Dividends on Common Stock

We did not declare or pay any dividends on our common stock during the three months ended April 30, 2015 and 2014. Under the terms of our Credit Agreement, we are subject to certain restrictions on declaring and paying dividends on our common stock.

Treasury Stock
 
Repurchased shares of common stock are recorded as treasury stock, at cost. At April 30, 2015 and January 31, 2015, we held approximately 348,000 shares of treasury stock with a cost of $10.3 million.
 
We did not acquire any shares of treasury stock during the three months ended April 30, 2015 and 2014.

Accumulated Other Comprehensive Income (Loss)
 
Accumulated other comprehensive income (loss) includes items such as foreign currency translation adjustments and unrealized gains and losses on certain marketable securities and derivative financial instruments designated as hedges. Accumulated other comprehensive income (loss) is presented as a separate line item in the stockholders’ equity section of our condensed consolidated balance sheets. Accumulated other comprehensive income (loss) items have no impact on our net income (loss) as presented in our condensed consolidated statements of operations.

The following table summarizes changes in the components of our accumulated other comprehensive income (loss) by component for the three months ended April 30, 2015:
(in thousands)
 
Unrealized (Losses) Gains on Derivative Financial Instruments Designated as Hedges
 
Unrealized Gains on Available-for-Sale Investments
 
Foreign Currency Translation Adjustments
 
Total
Accumulated other comprehensive (loss) income at January 31, 2015
 
$
(7,992
)
 
$
101

 
$
(86,444
)
 
$
(94,335
)
Other comprehensive income before reclassifications
 
1,615

 
57

 
5,379

 
7,051

Losses reclassified out of accumulated other comprehensive income (loss)
 
(2,830
)
 

 

 
(2,830
)
Net other comprehensive income, current period
 
4,445

 
57

 
5,379

 
9,881

Accumulated other comprehensive (loss) income at April 30, 2015
 
$
(3,547
)
 
$
158

 
$
(81,065
)
 
$
(84,454
)

All amounts presented in the table above are net of income taxes, if applicable. The accumulated net losses in foreign currency translation adjustments primarily reflect the strengthening of the U.S. dollar against the British pound sterling, which has resulted in lower U.S. dollar-translated balances of British pound sterling-denominated goodwill and intangible assets.


20


The amounts reclassified out of accumulated other comprehensive income (loss) into the condensed consolidated statement of operations, with presentation location, for the three months ended April 30, 2015 and 2014 were as follows:
 
 
Three Months Ended
April 30,
Location
(in thousands)
 
2015
 
2014
 
Unrealized (losses) gains on derivative financial instruments:
 
 
 
 
 
 
Foreign currency forward contracts
 
$
(289
)
 
$
65

 
Cost of product revenue
 
 
(254
)
 
61

 
Cost of service and support revenue
 
 
(1,805
)
 
481

 
Research and development, net
 
 
(845
)
 
223

 
Selling, general and administrative
 
 
(3,193
)
 
830

 
Total, before income taxes
 
 
363

 
(35
)
 
Provision (benefit) for income taxes
 
 
$
(2,830
)
 
$
795

 
Total, net of income taxes


9.
INCOME TAXES
 
Our interim provision (benefit) for income taxes is measured using an estimated annual effective tax rate, adjusted for discrete items that occur within the periods presented. 

For the three months ended April 30, 2015, we recorded an income tax provision of $0.9 million on pre-tax income of $1.7 million, which represented an effective income tax rate of 56.4%. The income tax provision does not include income tax benefits on losses incurred by certain domestic and foreign operations where we maintain valuation allowances and is mainly the result of the activities of profitable jurisdictions. In addition, following the receipt of a tax ruling in a foreign jurisdiction, we reorganized certain operations within the foreign jurisdiction, resulting in a discrete income tax benefit of $3.0 million. Our pre-tax income in profitable jurisdictions, where we record tax provisions, was slightly higher than the pre-tax losses in domestic and foreign jurisdictions where we maintain valuation allowances and do not record tax benefits.
 
For the three months ended April 30, 2014, we recorded an income tax benefit of $42.1 million on a pre-tax loss of $13.3 million, which represented an effective income tax benefit rate of 317.2%. The income tax benefit was primarily attributable to the release of $45.2 million of Verint valuation allowances. We maintain valuation allowances on our net U.S. deferred income tax assets related to federal and certain state jurisdictions.  In connection with the acquisition of KANA, we recorded deferred income tax liabilities primarily attributable to acquired intangible assets to the extent the amortization will not be deductible for tax purposes. Under accounting guidelines, because the amortization of the intangible assets in future periods provides a source of taxable income, we expect to realize a portion of our existing deferred income tax assets. As such, we have reduced the valuation allowance recorded on our deferred income tax assets to the extent of the deferred income tax liabilities recorded.  Because the valuation allowance related to existing Verint deferred income tax assets, the impact of the release was reflected as a discrete income tax benefit and not as a component of the KANA acquisition accounting. The effective income tax rate was also affected by the mix and levels of income and losses among taxing jurisdictions. Pre-tax income in our profitable jurisdictions, where we recorded tax provisions, was less than our domestic losses where we maintain valuation allowances and did not record the related tax benefits. Excluding the income tax benefit attributable to the valuation allowance release, the result was an income tax provision of $3.1 million on a pre-tax loss $13.3 million, resulting in a negative effective tax rate of 23.2%.

As required by the authoritative guidance on accounting for income taxes, we evaluate the realizability of deferred income tax assets on a jurisdictional basis at each reporting date.  Accounting guidance for income taxes requires that a valuation allowance be established when it is more-likely-than-not that all or a portion of the deferred income tax assets will not be realized.  In circumstances where there is sufficient negative evidence indicating that the deferred income tax assets are not more-likely-than-not realizable, we establish a valuation allowance.  We determined that there is sufficient negative evidence to maintain the valuation allowances against our federal and certain state and foreign deferred income tax assets as a result of historical losses in the most recent three-year period in the U.S. and in certain foreign jurisdictions.  We intend to maintain valuation allowances until sufficient positive evidence exists to support a reversal.

We had unrecognized tax benefits of $163.3 million and $159.6 million (excluding interest and penalties) as of April 30, 2015 and January 31, 2015, respectively.  The accrued liability for interest and penalties was $10.8 million and $10.9 million at

21


April 30, 2015 and January 31, 2015, respectively.  Interest and penalties are recorded as a component of the provision for income taxes in our condensed consolidated statements of operations.  As of April 30, 2015 and January 31, 2015, the total amount of unrecognized tax benefits that, if recognized, would impact our effective tax rate were approximately $156.7 million and $153.1 million, respectively.  We regularly assess the adequacy of our provisions for income tax contingencies in accordance with the applicable authoritative guidance on accounting for income taxes.  As a result, we may adjust the reserves for unrecognized tax benefits for the impact of new facts and developments, such as changes to interpretations of relevant tax law, assessments from taxing authorities, settlements with taxing authorities, and lapses of statutes of limitation.  Further, we believe that it is reasonably possible that the total amount of unrecognized tax benefits at April 30, 2015 could decrease by approximately $4.7 million in the next twelve months as a result of settlement of certain tax audits or lapses of statutes of limitation.  Such decreases may involve the payment of additional taxes, the adjustment of deferred income taxes including the need for additional valuation allowances, and the recognition of tax benefits.  Our income tax returns are subject to ongoing tax examinations in several jurisdictions in which we operate.  We also believe that it is reasonably possible that new issues may be raised by tax authorities or developments in tax audits may occur which would require increases or decreases to the balance of reserves for unrecognized tax benefits; however, an estimate of such changes cannot reasonably be made.


10.
FAIR VALUE MEASUREMENTS
 
Fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required to be recorded at fair value, we consider the principal or most advantageous market in which we would transact and consider assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of nonperformance.
 
Accounting guidance establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. An instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. This fair value hierarchy consists of three levels of inputs that may be used to measure fair value:
 
Level 1:  quoted prices in active markets for identical assets or liabilities;

Level 2:  inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; or

Level 3:  unobservable inputs that are supported by little or no market activity.

We review the fair value hierarchy classification of our applicable assets and liabilities at each reporting period. Changes in the observability of valuation inputs may result in transfers within the fair value measurement hierarchy. We did not identify any transfers between levels of the fair value measurement hierarchy during the years ended April 30, 2015 and 2014.
 
Assets and Liabilities Measured at Fair Value on a Recurring Basis
 
Our assets and liabilities measured at fair value on a recurring basis consisted of the following as of April 30, 2015 and 2014: 
 
 
April 30, 2015
 
 
Fair Value Hierarchy Category
(in thousands)
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 

 
 

 
 

Money market funds
 
$
10,173

 
$

 
$

Short-term investments, classified as available-for-sale
 

 
46,520

 

Foreign currency forward contracts
 

 
1,201

 

Total assets
 
$
10,173

 
$
47,721

 
$

Liabilities:
 
 

 
 

 
 

Foreign currency forward contracts
 
$

 
$
5,192

 
$

Contingent consideration - business combinations
 

 

 
12,400

Total liabilities
 
$

 
$
5,192

 
$
12,400


22


 
 
 
January 31, 2015
 
 
Fair Value Hierarchy Category
(in thousands)
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 

 
 

 
 

Money market funds
 
$
183

 
$

 
$

Commercial paper (1)
 

 
2,999

 

Short-term investments, classified as available-for-sale
 

 
13,842

 

Foreign currency forward contracts
 

 
763

 

Total assets
 
$
183

 
$
17,604

 
$

Liabilities:
 
 

 
 

 
 

Foreign currency forward contracts
 
$

 
$
9,540

 
$

Contingent consideration - business combinations
 

 

 
14,507

Total liabilities
 
$

 
$
9,540

 
$
14,507


(1) Commercial paper investments with remaining maturities of 90 days or less at time of purchase, classified within cash and cash equivalents.

The following table presents the changes in the estimated fair values of our liabilities for contingent consideration measured using significant unobservable inputs (Level 3) for the three months ended April 30, 2015 and 2014
 
 
Three Months Ended
April 30,
(in thousands)
 
2015
 
2014
Fair value measurement at beginning of period
 
$
14,507

 
$
17,307

Contingent consideration liabilities recorded for business combinations
 

 
4,947

Changes in fair values, recorded in operating expenses
 
53

 
(194
)
Payments of contingent consideration
 
(2,158
)
 
(3,080
)
Foreign currency translation and other
 
(2
)
 
139

Fair value measurement at end of period
 
$
12,400

 
$
19,119

 
Our estimated liability for contingent consideration represents potential payments of additional consideration for business combinations, payable if certain defined performance goals are achieved. Changes in fair value of contingent consideration are recorded in the condensed consolidated statements of operations within selling, general and administrative expenses.
 
Fair Value Measurements
 
Money Market Funds - We value our money market funds using quoted active market prices for such funds.

Short-term Investments and Commercial Paper - The fair values of short-term investments, as well as commercial paper classified as cash equivalents, are estimated using observable market prices for identical securities that are traded in less-active markets, if available. When observable market prices for identical securities are not available, we value these short-term investments using non-binding market price quotes from brokers which we review for reasonableness using observable market data; quoted market prices for similar instruments; or pricing models, such as a discounted cash flow model.

Foreign Currency Forward Contracts - The estimated fair value of foreign currency forward contracts is based on quotes received from the counterparties thereto. 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 market exchange rates using readily observable market prices for similar contracts.
 
Contingent Consideration - Business Combinations - The fair value of the contingent consideration related to business combinations is estimated using a probability-adjusted discounted cash flow model. These 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. We remeasure the fair value of the contingent consideration 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

23


targets, are recorded within selling, general, and administrative expenses. 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. We utilized discount rates ranging from 2.0% to 41.7% in our calculations of the estimated fair values of our contingent consideration liabilities as of April 30, 2015. We utilized discount rates ranging from 2.0% to 41.7% in our calculations of the estimated fair values of our contingent consideration liabilities as of January 31, 2015.

Other Financial Instruments
 
The carrying amounts of accounts receivable, accounts payable, and accrued liabilities and other current liabilities approximate fair value due to their short maturities.
 
The estimated fair values of our term loan borrowings were $413 million and $409 million at April 30, 2015 and January 31, 2015, respectively. The estimated fair values of the term loans are based upon indicative bid and ask prices as determined by the agent responsible for the syndication of our term loans. We consider these inputs to be within Level 3 of the fair value hierarchy because we cannot reasonably observe activity in the limited market in which participations in our term loans are traded. The indicative prices provided to us as at each of April 30, 2015 and January 31, 2015 did not significantly differ from par value. The estimated fair value of our revolving credit borrowings, if any, is based upon indicative market values provided by one of our lenders. We had no revolving credit borrowings at April 30, 2015 and January 31, 2015.

The estimated fair values of our Notes were approximately $468 million and $427 million at April 30, 2015 and January 31, 2015, respectively. The estimated fair values of the Notes are determined based on quoted bid and ask prices in the over-the-counter market in which the Notes trade. We consider these inputs to be within Level 2 of the fair value hierarchy.
 
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, we also measure certain assets and liabilities at fair value on a nonrecurring basis. Our non-financial assets, including goodwill, intangible assets and property, plant and equipment, are measured at fair value when there is an indication of impairment and the carrying amount exceeds the asset’s projected undiscounted cash flows. These assets are recorded at fair value only when an impairment charge is recognized.


11.
DERIVATIVE FINANCIAL INSTRUMENTS
 
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, primarily the Israeli shekel and the Canadian dollar. 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 $153.3 million and $156.8 million as of April 30, 2015 and January 31, 2015, respectively.

Fair Values of Derivative Financial Instruments

24


 
The fair values of our derivative financial instruments and their classifications in our condensed consolidated balance sheets as of April 30, 2015 and January 31, 2015 were as follows:
 
 
 
Fair Value at
 
 
 
April 30,
 
January 31,
(in thousands) 
Balance Sheet Classification
 
2015
 
2015
Derivative assets:
 
 
 
 
 
Foreign currency forward contracts:
 
 
 
 
 
   Designated as cash flow hedges
Prepaid expenses and other current assets
 
$
871

 
$
164

   Not designated as hedging instruments
Prepaid expenses and other current assets
 
330

 
599

      Total derivative assets
 
 
$
1,201

 
$
763

 
 
 
 
 
 
Derivative liabilities:
 
 
 
 
 
Foreign currency forward contracts:
 
 
 
 
 
   Designated as cash flow hedges
Accrued expenses and other current liabilities
 
$
4,875

 
$
9,194

   Not designated as hedging instruments
Accrued expenses and other current liabilities
 
317

 
346

      Total derivative liabilities
 
 
$
5,192

 
$
9,540