Note 1. The Company and its Significant Accounting Policies

The Company

Marvell Technology Group Ltd., a Bermuda company (the “Company”), is a leading global semiconductor provider of high-performance application specific standard products. The Company’s core strength of expertise is the development of complex System-on-a-Chip devices leveraging its extensive technology portfolio of intellectual property in the areas of analog, mixed-signal, digital signal processing and embedded ARM-based microprocessor integrated circuits. The Company’s broad product portfolio includes devices for data storage, enterprise-class Ethernet data switching, Ethernet physical-layer transceiver handheld cellular, Ethernet-based wireless networking, personal area networking, Ethernet-based PC connectivity, control plane communications controllers, video-image processing and power management solutions.

Basis of presentation

The Company’s fiscal year is the 52- or 53-week period ending on the Saturday closest to January 31. In a 52-week year, each fiscal quarter consists of 13 weeks. The additional week in a 53-week year is added to the fourth quarter, making such quarter consist of 14 weeks. Fiscal 2010 and fiscal 2009 are comprised of a 52-week period.

The unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for annual financial statements. In the opinion of management, all adjustments consisting of normal and recurring entries considered necessary for a fair statement of the results for the interim periods have been included in the Company’s financial position as of October 31, 2009, the results of its operations for the three and nine months ended October 31, 2009 and November 1, 2008, and its cash flows for the nine months ended October 31, 2009 and November 1, 2008. The January 31, 2009 condensed consolidated balance sheet data was derived from audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended January 31, 2009 but does not include all disclosures required by GAAP. Certain reclassifications have been made to conform to the current period’s presentation.

These condensed consolidated financial statements and related notes are unaudited and should be read in conjunction with the Company’s audited financial statements and related notes for the year ended January 31, 2009 included in the Company’s Annual Report on Form 10-K for the year ended January 31, 2009 as filed on March 28, 2009 with the Securities and Exchange Commission (“SEC”). The results of operations for the three and nine months ended October 31, 2009 are not necessarily indicative of the results that may be expected for any other interim period or for the full fiscal year.

Use of estimates

The preparation of consolidated financial statements in conformity with GAAP in the United States requires management to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates, including those related to performance-based compensation, uncollectible receivables, inventory excess and obsolescence, the useful lives of long-lived assets including property and equipment, investment fair values, goodwill and other intangible assets, income taxes and contingencies. In addition, the Company uses assumptions when employing the Black-Scholes option valuation model to calculate the fair value of stock-based awards granted. The Company bases its estimates of the carrying value of certain assets and liabilities on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, when these carrying values are not readily available from other sources. Actual results could differ from these estimates, and such differences could affect the results of operations reported in future periods.

Subsequent events

The Company has evaluated subsequent events through December 9, 2009, the date of this Quarterly Report on Form 10-Q. 

 

Principles of consolidation

The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated. The functional currency of the Company and its subsidiaries is the United States dollar.

Cash and cash equivalents

The Company considers all highly liquid investments with a maturity of three months or less from the date of purchase to be cash equivalents. Cash and cash equivalents consist of cash on deposit with banks and money market funds.

Investments

The Company’s marketable investments are classified as available-for-sale and trading securities and are reported at fair value. Unrealized gains and losses are reported, net of tax, if any, in accumulated other comprehensive income (loss), a component of shareholders’ equity. Realized gains and losses and declines in value judged to be other than temporary on available-for-sale securities are included in interest and other income, net.

The Company also has equity investments in privately-held companies. These investments are recorded at cost and are included in other non-current assets. The Company accounts for these investments under the cost method because its ownership is less than 20% and it does not have the ability to exercise significant influence over the operations of these companies. The Company monitors these investments for impairment and makes appropriate reductions in carrying value when impairment is deemed to be other than temporary.

Impairment of investments

In April 2009, the Financial Accounting Standards Board (“FASB”) amended an existing guidance on determining whether impairment for investments in debt securities is other-than-temporary, FASB Accounting Standards Codification (“ASC”) 320-10-65, “Investments – Debt and Equity Securities – Overall – Transition and Open Effective Date Information.” If the debt security’s market value is below amortized cost and the Company either intends to sell the security or it is more likely than not that the Company will be required to sell the security before it anticipated recovery, the Company records an other-than-temporary impairment charge to investment income (loss) for the entire amount of impairment. However, for the remaining debt securities, if a significant decline in value exists, the Company will consider credit and other factors as included in the guidance to account for the impairment loss.

Derivative financial instruments

The Company accounts for its derivative instruments as either assets or liabilities and carries them at fair value. Derivatives that are not defined as hedges must be adjusted to fair value through earnings. For derivative instruments that hedge the exposure to variability in expected future cash flows that are designated as cash flow hedges, the effective portion of the gain or loss on the derivative instrument is reported as a component of accumulated other comprehensive income (loss) in shareholders’ equity and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. The ineffective portion of the gain or loss on the derivative instrument is recognized in current earnings. To receive hedge accounting treatment, cash flow hedges must be highly effective in offsetting changes to expected future cash flows on hedged transactions. For options designated as cash flow hedges, changes in the time value are excluded from the assessment of hedge effectiveness and are recognized in earnings.

For derivative instruments that hedge the exposure to changes in the fair value of an asset or a liability and that are designated as fair value hedges and for other derivatives not designated as hedging instruments that the Company uses to hedge monetary assets or liabilities denominated in currencies other than the U.S. dollar, the net gain or loss on the derivative instrument as well as the offsetting gain or loss on the hedged item attributable to the hedged risk are recognized in earnings in the current period.

Concentration of credit risk

Financial instruments that potentially subject the Company to a significant concentration of credit risk consist principally of cash equivalents, short-term investments and accounts receivable. The Company places its cash primarily in checking and money market accounts. Cash equivalents and short-term investment balances are maintained with high quality financial institutions, the composition and maturities of which are regularly monitored by management. The Company believes that the concentration of credit risk in its trade receivables with respect to its served markets, as well as the limited customer base located primarily in the Asia Pacific Region, are substantially mitigated by the Company’s credit evaluation process, relatively short collection terms and the high level of credit worthiness of its customers. The Company performs ongoing credit evaluations of its customers’ financial conditions and limits the amount of credit extended when deemed necessary based upon payment history and the customer’s current credit worthiness, but generally requires no collateral. The Company regularly reviews the allowance for bad debt and doubtful accounts by considering factors such as historical experience, credit quality, age of the account receivable balances and current economic conditions that may affect a customer’s ability to pay. 

 

Inventories

Inventories are stated at the lower of cost or market, determined under the first-in, first-out method. The Company records inventory excess and obsolescence provisions for estimated obsolete or unmarketable inventory equal to the difference between the cost of inventory and estimated net realizable value based upon assumptions about future demand and market conditions. Shipping and handling costs are classified as a component of cost of goods sold in the unaudited condensed consolidated statements of operations.

Property and equipment, net

Property and equipment, net, including capital leases and leasehold improvements, are stated at cost less accumulated depreciation and amortization. Depreciation for property and equipment other than buildings is computed using the straight-line method over the estimated useful lives of the assets, which ranges from three to five years. Buildings are depreciated on a straight-line method over an estimated useful life of 30 years and building improvements are depreciated over estimated useful lives of 15 years. Land is not depreciated. Assets held under capital leases and leasehold improvements are amortized over the shorter of term of lease or their estimated useful lives.

Goodwill and acquired intangible assets, net

Goodwill is recorded when the consideration paid for a business acquisition exceeds the fair value of net tangible and intangible assets acquired. Acquisition-related identified intangible assets are amortized on a straight-line basis over their estimated economic lives of one to seven years for purchased technology, one to eight years for core technology, one to five years for trade name, four to seven years for customer contracts and three years for non-compete agreements.

Goodwill is measured and tested for impairment on an annual basis during the fourth fiscal quarter or more frequently if the Company believes indicators of impairment exist. The performance of the test involves a two-step process. The first step requires comparing the fair value of the reporting unit to its net book value, including goodwill. As the Company has only one reporting unit, the fair value of the reporting unit is determined by taking the market capitalization of the reporting unit as determined through quoted market prices and adjusted for control premiums and other relevant factors. A potential impairment exists if the fair value of the reporting unit is lower than its net book value. The second step of the process is only performed if a potential impairment exists, and it involves determining the difference between the fair value of the reporting unit’s net assets other than goodwill and the fair value of the reporting unit. If the difference is less than the net book value of goodwill, impairment exists and is recorded. In the event that the Company determines that the value of goodwill has become impaired, the Company will record an accounting charge for the amount of impairment during the fiscal quarter in which the determination is made. The Company has not been required to perform this second step of the process because the fair value of the reporting unit has exceeded its net book value at every measurement date.

Impairment of long-lived assets

Long-lived assets include equipment, furniture and fixtures, privately-held equity investments and intangible assets. Whenever events or changes in circumstances indicate that the carrying amount of long-lived assets may not be recoverable, the Company estimates the future cash flows, undiscounted and without interest charges, expected to result from the use of those assets and their eventual cash position. If the sum of the expected future cash flows is less than the carrying amount of those assets, the Company recognizes an impairment loss based on the excess of the carrying amount over the fair value of the assets.

Revenue recognition

The Company recognizes revenues when there is persuasive evidence of an arrangement, delivery has occurred, the fee is fixed or determinable, and collection is reasonably assured.

Product revenue is generally recognized upon shipment of product to customers, net of accruals for estimated sales returns. However, some of the Company’s sales are made through distributors under agreements allowing for price protection, shipped from stock pricing adjustment rights and limited rights of return on products unsold by the distributors. Although title passes to the distributor upon shipment terms and payment by the Company’s distributors is not contingent on resale of the product, product revenue on sales made through distributors with price protection, shipped from stock pricing adjustment rights and stock rotation rights is deferred until the distributors sell the product to end customers because the Company’s selling price is not fixed and determinable and the Company is not able to reliably estimate future returns. Deferred revenue less the related cost of the inventories is reported as deferred income. The Company does not believe that there is any significant exposure related to impairment of deferred cost of sales, as its historical returns have been minimal and inventory turnover for its distributors generally ranges from 60 to 90 days. The Company’s sales to direct customers are made primarily pursuant to standard purchase orders for delivery of products. The Company generally allows customers to cancel or change purchase orders with limited notice prior to the scheduled shipment dates and from time to time it also may request a customer to accept a shipment of product before its original requested delivery date, in which case, revenue is not recognized until there is written confirmation from the customer accepting early shipment, delivery has occurred, the fee is fixed or determinable, and collection is reasonably assured. Additionally, collection is not deemed to be “reasonably assured,” and fees are not fixed or determinable if customers receive extended payment terms. As a result, revenue on sales to customers with payment terms substantially greater than the Company’s normal payment terms is deferred and is recognized as revenue as the payments become due. Revenue related to the sale of consignment inventory is not recognized until the product is pulled from inventory stock by the customer.

The provision for estimated sales returns on product sales is recorded in the same period the related revenues are recorded. These estimates are based on historical sales returns and other known factors. Actual returns could differ from these estimates.

The Company accounts for rebates by recording reductions to revenue for rebates in the same period that the related revenue is recorded. The amount of these reductions is based upon the terms included in the Company’s various rebate agreements.

Research and development expenses

Research and development expenses are expensed as incurred. Research and development funding from customers for development work is recognized as a credit to research and development expense under the proportionate performance method as the underlying work is performed.

Accounting for income taxes

The Company determines deferred tax assets and liabilities based upon the difference between the income tax basis of assets and liabilities and their respective financial reporting amounts at enacted tax rates in effect for the periods in which the differences are expected to reverse. The tax consequences of most events recognized in the current year’s financial statements are included in determining income taxes currently payable. However, because tax laws and financial accounting standards differ in their recognition and measurement of assets, liabilities, equity, revenues, expenses, and gains and losses, differences arise between the amount of taxable income and pretax financial income for a year and between the tax basis of assets or liabilities and their reported amounts in the financial statements. Because it is assumed that the reported amounts of assets and liabilities will be recovered or settled, a difference between the tax basis of an asset or liability and its reported amount on the balance sheet will result in a taxable or a deductible amount in some future years when the related liabilities are settled or assets are recovered, hence giving rise to a deferred tax liability or asset, respectively. The Company then assesses the likelihood that its deferred tax assets will be recovered from future taxable income and to the extent the Company believes that recovery is not more likely than not, the Company would establish a valuation allowance. The Company classifies accrued interest and penalties as part of the accrued liability and records the expense within the provision for income taxes. The Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50 percent likelihood of being realized upon settlement.

The application of income tax law is inherently complex. Laws and regulations in this area are voluminous and are often ambiguous. As such, the Company is required to make many subjective assumptions and judgments regarding its income tax exposures. Interpretations of and guidance surrounding income tax laws and regulations are subject to change over time. As such, changes in its subjective assumptions and judgments can materially affect amounts recognized in the consolidated balance sheets and statements of income. See Note 12 – Income Taxes of the notes to unaudited condensed consolidated financial statements for additional detail on the Company’s uncertain tax positions.

Warranty

The Company’s products are generally subject to warranty, which provides for the estimated future costs of repair, replacement or customer accommodation upon shipment of the product. The Company’s products typically carry a standard 90-day warranty, with certain exceptions in which the warranty period can range from one to five years. The warranty accrual is primarily estimated based on historical claims compared to historical revenues and assumes that the Company will have to replace products subject to a claim. For new products, the Company uses a historical percentage for the appropriate class of product. From time to time, the Company becomes aware of specific warranty situations, which are relatively large and it records specific amounts to cover these exposures in addition to the standard run rate provisions.

Note 2. Recent Accounting Pronouncements

In June 2009, the FASB issued FASB ASC 105-10, “Generally Accepted Accounting Principles – Overall” (“ASC 105-10”). ASC 105-10 establishes the FASB Accounting Standards Codification (the “Codification”), the authoritative guidance for U.S. GAAP. The Codification, which changes the referencing of financial standards, became effective for interim and annual periods ending on or after September 15, 2009. The Codification is now the single source of authoritative U.S. GAAP (other than guidance issued by the SEC) superseding all existing all non-SEC accounting and reporting standards. All other non-SEC accounting literature not included in the Codification is considered non-authoritative. The Codification does not change U.S. GAAP. The Company adopted the Codification during the quarter ended October 31, 2009. Adoption of the Codification did not have any substantive impact on the Company’s financial position or results of operations. References made to FASB guidance throughout the document have been updated for the Codification.

In September 2009, the FASB issued new accounting guidance related to the revenue recognition of multiple element arrangements. The new guidance states that if vendor specific objective evidence or third party evidence for deliverables in an arrangement cannot be determined, companies will be required to develop a best estimate of the selling price to separate deliverables and allocate arrangement consideration using the relative selling price method. The accounting guidance will be applied prospectively and will become effective during the first quarter of fiscal year 2011. Early adoption is allowed. The Company is currently evaluating the impact of this accounting guidance on its financial position and results of operations.

Note 3. Investments

The following tables summarize the Company’s investments (in thousands):

 

		As of October 31, 2009
		Amortized Cost			Gross Unrealized Gains			Gross Unrealized (Losses)				Estimated Fair Value
Short-term investments:
Available-for-sale:
Corporate debt securities		$	163,571		$	162		$	(139	)		$	163,594
U.S. government		$	253,267		$	41		$	(110	)		$	253,198
Total short-term investments		$	416,838		$	203		$	(249	)		$	416,792
Long-term investments:
Available-for-sale:
Auction rate securities		$	36,700		$	—		$	(2,426	)		$	34,274
Trading securities:
Auction rate securities and settlement option		$	5,000			—			—			$	5,000
Total long-term investments		$	41,700		$	—		$	(2,426	)		$	39,274
Total investments		$	458,538		$	203		$	(2,675	)		$	456,066

 

 

		As of January 31, 2009
		Amortized Cost			Gross Unrealized Gains			Gross Unrealized (Loss)				Estimated Fair Value
Long-term investments:
Available-for-sale:
Auction rate securities		$	36,850		$	—		$	(1,309	)		$	35,541
Trading securities:
Auction rate securities and settlement option		$	5,000			—			—			$	5,000
Total long-term investments		$	41,850		$	—		$	(1,309	)		$	40,541
Total investments		$	41,850		$	—		$	(1,309	)		$	40,541

As of October 31, 2009 and January 31, 2009, the Company’s investment portfolio included $41.7 million and $41.9 million, respectively, in par value of auction rate securities. Auction rate securities are usually found in the form of municipal bonds, preferred stock, pools of student loans or collateralized debt obligations with contractual maturities generally between 20 and 30 years and whose interest rates are reset every seven to 35 days through an auction process. At the end of each reset period, investors can sell or continue to hold the securities at par. The Company’s auction rate securities are all backed by student loans originated under the Federal Family Education Loan Program and are over-collateralized, insured and guaranteed by the U.S. Federal Department of Education. All auction rate securities held by the Company are rated by the major independent rating agencies as either AAA or Aaa at the time of purchase. The Company believes the mark-to-market losses for its auction rate securities are all non-credit losses.

In the fourth quarter ended January 31, 2009, UBS, one of the brokers who the Company purchased auction rate securities from, offered a settlement where UBS has the right to call and sell one of the auction rate securities the Company purchased from them at par value of $5 million at a future date. As a result of the Company’s participation in this settlement, the Company included the put option from the settlement in long-term investments and elected the fair value option to measure the put option at fair value. The Company also elected to transfer this auction rate security to trading securities from available-for-sale as the Company’s intent is to exercise the put option in fiscal 2011.

As of October 31, 2009, the estimated fair values of the auction rate securities were $2.4 million less than their par value. The Company has less than 2.8% of its total cash invested in these auction rate securities. The Company has a balance of approximately $1.5 billion in cash, cash equivalents and short-term investments other than auction rate securities, and the Company continues to generate positive cash flow on a quarterly basis. The Company has no intent to sell and it is more likely than not that the Company will not be required to sell the auction rate securities prior to recovery. The Company concluded the decline in fair values was temporary and recorded the unrealized loss to accumulated other comprehensive loss, a component of shareholders’ equity as of October 31, 2009. The Company also has an additional $0.2 million of unrealized losses in available-for-sale securities that it also considers to be temporary.

The final contractual maturities of available-for-sale and trading debt securities at October 31, 2009 and January 31, 2009 are presented in the following table (in thousands):

 

		October 31, 2009						January 31, 2009
		Amortized Cost			Estimated Fair Value			Amortized Cost			Estimated Fair Value
Due in one year or less		$	253,393		$	253,321		$	—		$	—
Due between one and five years			168,445			168,471			5,000			5,000
Due over five years			36,700			34,274			36,850			35,541
		$	458,538		$	456,066		$	41,850		$	40,541

 

The following table shows the investments’ gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position (in thousands):

 

		October 31, 2009
		Less than 12 months							12 months or more							Total
		Fair Value			Unrealized (Losses)				Fair Value			Unrealized (Losses)				Fair Value			Unrealized (Losses)
U.S. government		$	155,706		$	(110	)		$	—		$	—			$	155,706		$	(110	)
Corporate debt securities			72,785			(139	)			—			—				72,785			(139	)
Auction rate securities and settlement option			—			—				39,274			(2,426	)			39,274			(2,426	)
Total securities		$	228,491		$	(249	)		$	39,274		$	(2,426	)		$	267,765		$	(2,675	)

 

		January 31, 2009
		Less than 12 months						12 months or more							Total
		Fair Value			Unrealized (Losses)			Fair Value			Unrealized (Losses)				Fair Value			Unrealized (Losses)
Auction rate securities and settlement option		$	—		$	—		$	40,451		$	(1,309	)		$	40,451		$	(1,309	)
Total securities		$	—		$	—		$	40,451		$	(1,309	)		$	40,451		$	(1,309	)

Note 4. Supplemental Financial Information (in thousands):

Inventories

 

		October 31, 2009			January 31, 2009
Work-in-process		$	151,018		$	188,830
Finished goods			88,191			121,824
		$	239,209		$	310,654

Property and equipment, net

 

		October 31, 2009				January 31, 2009
Machinery and equipment		$	363,038			$	343,772
Computer software			78,594				75,986
Furniture and fixtures			23,510				23,490
Leasehold improvements			39,471				38,872
Buildings			146,294				146,294
Building improvements			45,586				45,329
Land			71,198				71,198
Construction in progress			2,928				2,483
			770,619				747,424
Less: Accumulated depreciation and amortization			(421,343	)			(356,571	)
		$	349,276			$	390,853

  

Other non-current assets

 

		October 31, 2009			January 31, 2009
Long term prepayments for foundry capacity		$	1,600		$	8,800
Equity investments in privately held companies			7,058			7,058
Severance fund			50,462			43,121
Technology licenses			21,830			24,108
Deferred tax assets, non-current			35,444			41,575
Other			11,249			13,665
		$	127,643		$	138,327

Accrued liabilities

 

		October 31, 2009			January 31, 2009
Accrued royalties			13,270			5,660
Accrued rebates			16,407			28,925
Accrued legal and professional services			13,808			9,719
Accrued legal settlement			—			16,000
Other			30,377			22,809
		$	73,862		$	83,113

Other long-term liabilities

 

		October 31, 2009			January 31, 2009
Accrued severance obligations		$	51,994		$	46,716
Long-term facilities consolidation charge			2,626			2,246
Other			4,227			693
		$	58,847		$	49,655

Net income per share

The Company reports both basic net income per share, which is based upon the weighted average number of common shares outstanding excluding contingently issuable or returnable shares, and diluted net income per share, which is based on the weighted average number of common shares outstanding and dilutive potential common shares. The computations of basic and diluted net income per share are presented in the following table (in thousands, except per share amounts):

 

		Three Months Ended						Nine Months Ended
		October 31, 2009			November 1, 2008			October 31, 2009			November 1, 2008
Numerator:
Net income		$	201,599		$	70,946		$	148,635		$	212,252
Denominator:
Weighted average shares of common shares outstanding
Weighted average shares — basic			623,613			611,945			621,057			606,676
Effect of dilutive securities:
Warrants			—			—			—			420
Common share options and other			36,126			18,865			26,806			23,901
Weighted average shares — diluted			659,739			630,810			647,863			630,997
Net income per share
Basic		$	0.32		$	0.12		$	0.24		$	0.35
Diluted		$	0.31		$	0.11		$	0.23		$	0.34

  

Options to purchase 1.0 million common shares at a weighted average exercise price of $13.47 have been excluded from the computation of diluted net income per share for the three months ended October 31, 2009 because their exercise price was greater than the share price of the Company’s common shares and therefore, the effect would have been anti-dilutive. Options to purchase 66.1 million common shares at a weighted average exercise price of $19.34 have been excluded from the computation of diluted net income per share for the three months ended November 1, 2008 because their exercise price was greater than the share price of the Company’s common shares and therefore, the effect would have been anti-dilutive.

Options to purchase 27.4 million common shares at a weighted average exercise price of $17.09 have been excluded from the computation of diluted net income per share for the nine months ended October 31, 2009 because their exercise price was greater than the share price of the Company’s common shares and therefore, the effect would have been anti-dilutive. Options to purchase 60.5 million common shares at a weighted average exercise price of $20.25 have been excluded from the computation of diluted net income per share for the nine months ended November 1, 2008 because their exercise price was greater than the share price of the Company’s common shares and therefore, the effect would have been anti-dilutive.

Comprehensive income (in thousands)

The changes in the components of other comprehensive income were as follows (in thousands):

 

		Three Months Ended							Nine Months Ended
		October 31, 2009				November 1, 2008			October 31, 2009				November 1, 2008
Net income		$	201,599			$	70,946		$	148,635			$	212,252
Other comprehensive income:
Change in unrealized gain (loss) on marketable securities			3				316			(1,157	)			(1,563	)
Change in unrealized gain (loss) on cash flow hedges			(459	)			—			1,330				—
Change in other			—				—			(584	)			—
Total comprehensive income		$	201,143			$	71,262		$	148,224			$	210,689

The components of accumulated other comprehensive loss were as follows (in thousands):

 

		October 31, 2009				January 31, 2009
Unrealized loss on marketable securities		$	(2,466	)		$	(1,309	)
Unrealized gain on cash flow hedges			1,330				—
Other			7				591
Accumulated other comprehensive loss		$	(1,129	)		$	(718	)

Note 5. Derivative Financial Instruments

The Company manages some its foreign currency exchange rate risk through the purchase of foreign currency exchange contracts that hedge against the short-term impact of currency fluctuations. The Company’s policy is to enter into foreign currency forward contracts with maturities generally less than 12 months that mitigate the impact of rate fluctuations on certain local currency denominated operating expenses. All derivatives are recorded at fair value in either prepaid and other current assets or accrued liabilities. The Company reports cash flows from derivative instruments in cash flows from operating activities. The Company uses quoted prices to value its derivative instruments.

As of October 31, 2009, the notional amounts of outstanding hedge contracts were as follows (in thousands):

 

		Buy Contracts			Sell Contracts
Israeli shekel		$	32,575		$	6,143
Total		$	32,575		$	6,143

 

Cash Flow Hedges. The Company designates and documents its foreign currency forward exchange contracts as cash flow hedges for certain operating expenses denominated in Israeli shekels. The Company evaluates and calculates the effectiveness of each hedge at least quarterly. The effective change is recorded in other comprehensive income (“OCI”) and is subsequently reclassified to operating expense when the hedged expense is recognized. Ineffectiveness is recorded in interest and other income, net.

Other Foreign Currency Forward Contracts. The Company enters into foreign currency forward exchange contracts to hedge certain payments denominated in Israeli shekels that it does not designate and document as cash flow or other hedges for accounting purposes. The maturities of these contracts are generally less than 12 months. Gains or losses arising from the remeasurement of these contracts to fair value each period are recorded in interest and other income (expense), net.

The fair value and balance sheet classification of foreign exchange contract derivatives are as follows (in thousands):

 

		October 31, 2009
Prepaids and other current assets:
Derivative assets designated as hedging instruments:
Cash flow hedges		$	1,662
Derivative assets not designated as hedging instruments:
Other forward contracts			(31	)
Total derivative assets		$	1,631

The following tables summarize the pre-tax effect of foreign exchange contract derivatives by (a) cash flow hedges and (b) other foreign currency hedges on OCI and the unaudited condensed consolidated statements of operations for the three and nine months ended October 31, 2009.

(a) Cash Flow Hedges (in thousands):

 

		Three Months Ended October 31, 2009				Nine Months Ended October 31, 2009
Accumulated gain in OCI, beginning of period		$	1,790			$	—
Gains recorded in OCI (effective portion)			938				3,518
Gains reclassified from OCI to operating expense (effective portion)			(1,398	)			(2,188	)
Accumulated gain in OCI, end of period		$	1,330			$	1,330

The Company anticipates reclassifying the accumulated gain recorded as of October 31, 2009 from OCI to operating expense within 12 months.

(b) Other forward contracts (in thousands):

 

		Three Months Ended October 31, 2009			Nine months Ended October 31, 2009
Gains recognized in other expenses, net		$	85		$	122