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OFFON

NETSCOUT SYSTEMS, INC.

(NTCT)
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NETSCOUT : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-K)

05/20/2021 | 08:06am EDT
The following information should be read in conjunction with the audited
consolidated financial information and the notes thereto included in this Annual
Report on Form 10-K. In addition to historical information, the following
discussion and other parts of this Annual Report contain forward-looking
statements that involve risks and uncertainties. You should not place undue
reliance on these forward-looking statements. Actual events or results may
differ materially due to competitive factors and other factors discussed in
Item 1A. "Risk Factors" and elsewhere in this Annual Report. These factors may
cause our actual results to differ materially from any forward-looking
statement. See the section titled "Cautionary Statement Concerning
Forward-Looking Statements" that appears at the beginning of this Annual Report.
Overview
We are an industry leader with over 35 years of experience in providing service
assurance and cybersecurity solutions that are used by customers worldwide to
protect their digital business services against disruption. Service providers
and enterprises, including local, state and federal government agencies, rely on
our solutions to achieve the visibility necessary to optimize network
performance, ensure the delivery of high-quality, mission-critical applications
and services, gain timely insight into the end user experience and protect their
networks from attack. With our offerings, customers can quickly, efficiently and
effectively identify and resolve issues that result in downtime, interruptions
to services, poor service quality or compromised data, thereby driving
compelling returns on their investments in their networks and broader technology
initiatives. Some of the more significant technology trends and catalysts for
our business include the evolution of customers' digital transformation
initiatives such as the migration to cloud environments, the rapidly evolving
cybersecurity threat landscape, business intelligence and analytics
advancements, and the 5G evolution in both the service provider and enterprise
verticals.
Our operating results are influenced by a number of factors, including, but not
limited to, the mix and quantity of products and services sold, pricing, costs
of materials used in our products, growth in employee-related costs, including
commissions, and the expansion of our operations. Factors that affect our
ability to maximize our operating results include, but are not limited to, our
ability to introduce and enhance existing products, the marketplace acceptance
of those new or enhanced products, continued expansion into international
markets, development of strategic partnerships, competition, successful
acquisition integration efforts, and our ability to control cost and make
improvements in a highly competitive industry.
COVID-19 Impact
In March 2020, the World Health Organization declared the novel strain of
coronavirus (COVID-19) a global pandemic and recommended containment and
mitigation measures worldwide. The pandemic and these containment and mitigation
measures have led to adverse impacts on the U.S. and global economies. Due to
the critical nature of our products and services, we are considered critical
under State and Federal guidelines. While we have begun a phased reopening at
some of our facilities, we remain focused on protecting the health and
well-being of our employees and continue to maintain work from home policies for
a vast majority of our employees where feasible.
We continue to closely monitor the impact of the COVID-19 pandemic on all
aspects of our business, including how it has impacted and could continue to
impact our customers, employees, supply chain, and distribution network. In
fiscal year 2021, the COVID-19 pandemic and resulting challenging macro-economic
environment caused elongated purchasing cycles that impacted our revenue. For
fiscal year 2022, as people in the world begin to get immunized and return to
"normal", we expect that technology and project spending will resume and will be
focused on advancing our products, growing revenue, enhancing earnings per
share, and generating solid free cash flow.
We believe our current cash reserves and access to capital through our revolving
credit facility leave us well-positioned to manage our business as the crisis
continues and as a recovery eventually occurs. We expect net cash provided by
operating activities combined with cash, cash equivalents and marketable
securities and borrowing availability under our revolving credit facility to
provide sufficient liquidity to fund current obligations, capital spending, debt
service requirements and working capital requirements over at least the next
twelve months. We continue to take actions to control costs and increase
productivity throughout our company but will invest in areas that advance our
business for the future, as necessary. In addition to our cash equivalents,
based on covenant levels at March 31, 2021, we have an incremental $336 million
available to us under our $1.0 billion revolving credit facility.
On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (the
CARES Act) was enacted. The CARES Act, among other things, includes provisions
relating to refundable payroll tax credits, deferment of employer social
security payments, net operating loss carryback periods, alternative minimum tax
credit refunds, modifications to the net interest deduction limitations and
technical corrections to tax depreciation methods for qualified improvement
property. We have elected to defer the employer-paid portion of social security
taxes. As of March 31, 2021, we had deferred $8.9 million of
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employer payroll taxes, of which 50% are required to be deposited by December
2021 and the remaining 50% by December 2022.
The extent of the impact of the COVID-19 pandemic on our operational and
financial performance will depend on certain developments, including the
duration of the pandemic, its impact on our customers and suppliers and the
range of governmental and community reactions to the pandemic, which continue to
evolve and cannot be fully predicted at this time. We will continue to
proactively respond to the situation and may take further actions that alter our
business operations as may be required by governmental authorities, or that we
determine are in the best interests of our stakeholders.
Results Overview
Total revenue for the fiscal year ended March 31, 2021 as compared to total
revenue for the fiscal year ended March 31, 2020 was primarily impacted by a
decrease in revenue from our service assurance offerings in both the service
provider and enterprise verticals, partially offset by an increase in revenue
from our cybersecurity offerings, or more particularly, the service portion of
our DDoS offerings.
Our gross profit percentage remained flat at 73% during the fiscal year ended
March 31, 2021 as compared with the fiscal year ended March 31, 2020.
Net income for the fiscal year ended March 31, 2021 was $19.4 million, as
compared with a net loss for the fiscal year ended March 31, 2020 of $2.8
million, an increase of $22.2 million. A decrease in revenue of $60.5 million
was more than offset by a decrease in expenses as the increase in net income was
primarily due to a $23.5 million decrease in travel expenses primarily
attributable to COVID-19 related restrictions, a $16.2 million decrease in
direct material costs, a $9.4 million decrease in amortization of intangible
assets, a $6.9 million decrease in expenses related to trade shows and other
sales and marketing related events attributable to continued cost control and
COVID-19 related restrictions, a $6.7 million decrease in legal fees and
penalties, a $5.2 million decrease in commissions expense, a $5.0 million
decrease in inventory-related charges, a $2.6 million decrease in restructuring
charges, a $2.5 million decrease in advertising and other marketing related
expenses, and a $2.0 million decrease in rent expense.
At March 31, 2021, we had cash, cash equivalents, and marketable securities
(current and non-current) of $476.5 million. This represents an increase of
$87.4 million compared to the fiscal year ended March 31, 2020. This increase
was primarily due to $213.9 million in cash provided by operations during the
fiscal year ended March 31, 2021. This increase was offset by $100.0 million
used to repay long-term debt, $13.3 million used for tax withholdings in
connection with the vesting of restricted stock units, $12.0 million used for
capital expenditures, $4.5 million used for purchases of intangible assets and
$3.3 million used to repurchase shares of our common stock during the fiscal
year ended March 31, 2021.
Use of Non-GAAP Financial Measures
We supplement the United States generally accepted accounting principles (GAAP)
financial measures we report in quarterly and annual earnings announcements,
investor presentations and other investor communications by reporting the
following non-GAAP measures: non-GAAP total revenue, non-GAAP gross profit,
non-GAAP income from operations, non-GAAP operating margin, non-GAAP earnings
before interest and other expense, income taxes, depreciation and amortization
(EBITDA) from operations, non-GAAP net income, and non-GAAP net income per share
(diluted). Non-GAAP revenue eliminates the GAAP effects of acquisitions by
adding back revenue related to deferred revenue revaluation. Non-GAAP gross
profit includes the aforementioned revenue adjustments and also removes expenses
related to the amortization of acquired intangible assets, share-based
compensation, and acquisition-related depreciation. Non-GAAP income from
operations includes the aforementioned adjustments and also removes business
development and integration expense, compensation for post-combination services,
legal judgments expense, restructuring charges, intangible asset impairment
charges, loss on divestiture and costs related to new accounting standard
implementation and adds back transitional service agreement income. Non-GAAP
EBITDA from operations includes the aforementioned items related to non-GAAP
income from operations and also removes non-acquisition-related depreciation
expense. Non-GAAP net income includes the foregoing adjustments related to
non-GAAP income from operations, net of related income tax effects in addition
to the provisional one-time impacts of the U.S. Tax Cuts and Jobs Act (TCJA)
while removing transitional service agreement income and changes in contingent
consideration. Non-GAAP diluted net income per share also excludes these
expenses as well as the related impact of all these adjustments on the provision
for income taxes.
These non-GAAP measures are not in accordance with GAAP, should not be
considered an alternative for measures prepared in accordance with GAAP
(revenue, gross profit, operating profit, net income (loss) and diluted net
income (loss) per share), and may have limitations in that they do not reflect
all our results of operations as determined in accordance with GAAP. These
non-GAAP measures should only be used to evaluate our results of operations in
conjunction with the
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corresponding GAAP measures. The presentation of non-GAAP information is not
meant to be considered superior to, in isolation from, or as a substitute for
results prepared in accordance with GAAP.
Management believes these non-GAAP financial measures enhance the reader's
overall understanding of our current financial performance and our prospects for
the future by providing a higher degree of transparency for certain financial
measures and providing a level of disclosure that helps investors understand how
we plan and measure our business. We believe that providing these non-GAAP
measures affords investors a view of our operating results that may be more
easily compared with our peer companies and also enables investors to consider
our operating results on both a GAAP and non-GAAP basis during and following the
integration period of our acquisitions. Presenting the GAAP measures on their
own may not be indicative of our core operating results. Furthermore, management
believes that the presentation of non-GAAP measures when shown in conjunction
with the corresponding GAAP measures provide useful information to management
and investors regarding present and future business trends relating to our
financial condition and results of operations.

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Table of Contents The following table reconciles revenue, gross profit, income (loss) from operations, net income (loss) and net income (loss) per share on a GAAP and non-GAAP basis for the fiscal years ended March 31, 2021, 2020 and 2019:


                                                                    Fiscal 

Year Ended March 31,

                                                           (Dollars in 

Thousands, Except per Share Data)

                                                            2021                2020               2019
GAAP revenue                                            $  831,282          $ 891,820          $ 909,918
Product deferred revenue fair value adjustment                   -                  -                391
    Service deferred revenue fair value adjustment               6         
      192              1,199

Non-GAAP revenue                                        $  831,288          $ 892,012          $ 911,508

GAAP gross profit                                       $  609,185          $ 649,628          $ 655,791
Product deferred revenue fair value adjustment                   -                  -                391
Service deferred revenue fair value adjustment                   6                192              1,199
Share-based compensation expense                             6,861              6,843              7,422
Amortization of acquired intangible assets                  19,058             24,974             31,238

Acquisition related depreciation expense                        23                 31                 75
Transitional service agreement income                            -                  -                  2
Non-GAAP gross profit                                   $  635,133          

$ 681,668 $ 696,118


GAAP income (loss) from operations                      $   37,130          $  17,638          $ (71,580)
Product deferred revenue fair value adjustment                   -                  -                391
Service deferred revenue fair value adjustment                   6                192              1,199
Share-based compensation expense                            51,892             50,861             56,328
Amortization of acquired intangible assets                  80,189             89,479            105,543
Business development and integration expense                     2                373                874
New standard implementation expense                              -                  5                914
Compensation for post-combination services                     251                578                789
Restructuring charges                                           62              2,674             18,693
Impairment of intangible assets                                  -                  -             35,871
Acquisition related depreciation expense                       242                312                905
Loss on divestiture                                              -                  -              9,472
Transitional service agreement income                          215              1,212              2,186
    Legal judgments expense                                  2,804                  -                  -
Non-GAAP income from operations                         $  172,793          

$ 163,324 $ 161,585


GAAP net income (loss)                                  $   19,352          $  (2,754)         $ (73,324)
Product deferred revenue fair value adjustment                   -                  -                391
Service deferred revenue fair value adjustment                   6                192              1,199
Share-based compensation expense                            51,892             50,861             56,328
Amortization of acquired intangible assets                  80,189             89,479            105,543
Business development and integration expense                     2                373                874
New standard implementation expense                              -                  5                914
Compensation for post-combination services                     251                578                789
Restructuring charges                                           62              2,674             18,693
Impairment of intangible assets                                  -                  -             35,871


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Acquisition-related depreciation expense                   242                312                905
Loss on divestiture                                          -                  -              9,472

Transitional service agreement income                        -                  -                (45)
Change in contingent consideration                           -                762              1,495
Legal judgments expense                                  2,804                  -                  -
Income tax adjustments                                 (28,977)           (23,415)           (49,877)
Non-GAAP net income                                  $ 125,823          $ 119,067          $ 109,228

GAAP diluted net income (loss) per share             $    0.26          $   

(0.04) $ (0.93) Per share impact of non-GAAP adjustments identified above

                                                     1.44               1.61               2.31
Non-GAAP diluted net income per share                $    1.70          $   

1.57 $ 1.38


GAAP income (loss) from operations                   $  37,130          $  17,638          $ (71,580)
Previous adjustments to determine non-GAAP income
from operations                                        135,663            145,686            233,165
Non-GAAP income from operations                        172,793            163,324            161,585
Depreciation excluding acquisition related              25,397             26,313             31,430
Non-GAAP EBITDA from operations                      $ 198,190          $ 189,637          $ 193,015



Critical Accounting Policies
We consider accounting policies related to revenue recognition, marketable
securities, valuation of goodwill, intangible assets and other acquisition and
divestiture accounting items, and share-based compensation to be critical in
fully understanding and evaluating our financial results. We apply significant
judgment and create estimates when applying these policies.
Revenue Recognition
We exercise judgment and use estimates in connection with determining the
amounts of product and service revenues to be recognized in each accounting
period.
We derive revenues primarily from the sale of network management tools and
security solutions for service provider and enterprise customers, which include
hardware, software, and service offerings. Our product sales consist of software
only offerings and offerings which include hardware appliances with embedded
software that are essential to providing customers the intended functionality of
the solutions.
We account for revenue once a legally enforceable contract with a customer has
been approved by the parties and the related promises to transfer products or
services have been identified. A contract is defined by us as an arrangement
with commercial substance identifying payment terms, each party's rights and
obligations regarding the products or services to be transferred and the amount
we deem probable of collection. Customer contracts may include promises to
transfer multiple products and services to a customer. Determining whether the
products and services are considered distinct performance obligations that
should be accounted for separately or as one combined performance obligation may
require significant judgment. Revenue is recognized when control of the products
or services are transferred to our customers, in an amount that reflects the
consideration we expect to be entitled to in exchange for products and services.
Product revenue is typically recognized upon shipment, provided a legally
enforceable contract exists, control has passed to the customer, and in the case
of software products, when the customer has the rights and ability to access the
software; and collection of the related receivable is probable. If any
significant obligations to the customer remain post-delivery, typically
involving obligations relating to installation and acceptance by the customer,
revenue recognition is deferred until such obligations have been fulfilled. Our
service offerings include installation, integration, extended warranty and
maintenance services, post-contract customer support, stand-ready
software-as-a-service (SAAS) and other professional services including
consulting and training. We generally provide software and/or hardware support
as part of product sales. Revenue related to the initial bundled software and
hardware support is recognized ratably over the support period. In addition,
customers can elect to purchase extended support agreements for periods after
the initial software/hardware warranty expiration. Support services generally
include rights to unspecified upgrades (when and if available), telephone and
internet-based support, updates, bug fixes and hardware repair and replacement.
Consulting services are recognized upon delivery or completion of performance
depending on the terms of the underlying contract. Reimbursements of
out-of-pocket expenditures incurred in connection with
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providing consulting services are included in services revenue, with the
offsetting expense recorded in cost of service revenue. Training services
include on-site and classroom training. Training revenues are recognized upon
delivery of the training.
Generally, our contracts are accounted for individually. However, when contracts
are closely interrelated and dependent on each other, it may be necessary to
account for two or more contracts as one to reflect the substance of the group
of contracts.
Bundled arrangements are concurrent customer purchases of a combination of our
product and service offerings that may be delivered at various points in time.
We allocate the transaction price among the performance obligations in an amount
that depicts the relative standalone selling prices (SSP) of each obligation.
Judgment is required to determine the SSP for each distinct performance
obligation. We use a range of amounts to estimate SSP when we sell each of the
products and services separately based on the element's historical pricing. We
also consider our overall pricing objectives and practices across different
sales channels and geographies, and market conditions. Generally, we have
established SSP for a majority of our service elements based on historical
standalone sales. In certain instances, we have established SSP for services
based upon an estimate of profitability and the underlying cost to fulfill those
services. Further, for certain service engagements, we consider quoted prices as
part of multi-element arrangements of those engagements as a basis for
establishing SSP. SSP has been established for product elements as the average
or median selling price the element was recently sold for, whether sold alone or
sold as part of a multiple element transaction. We review sales of the product
elements on a quarterly basis and update, when appropriate, SSP for such
elements to ensure that it reflects recent pricing experience. Our products are
distributed through our direct sales force and indirect distribution channels
through alliances with resellers and distributors. Revenue arrangements with
resellers and distributors are recognized on a sell-in basis; that is, when
control of the product transfers to the reseller or distributor. We record
consideration given to a customer as a reduction of revenue to the extent we
have recorded revenue from the customer. With limited exceptions, our return
policy does not allow product returns for a refund. Returns have been
insignificant to date. In addition, we have a history of successfully collecting
receivables from our resellers and distributors.
Marketable Securities
We measure the fair value of our marketable securities at the end of each
reporting period. Fair value is defined as the exchange price that would be
received for an asset in the principal or most advantageous market for the asset
in an orderly transaction between market participants on the measurement date.
Marketable securities are recorded at fair value and have been classified as
Level 1 or 2 within the fair value hierarchy. Fair values determined by Level 1
inputs utilize quoted prices (unadjusted) in accessible active markets for
identical assets or liabilities. Fair values determined by Level 2 inputs
utilize data points that are observable such as quoted prices, interest rates
and yield curves.
Valuation of Goodwill, Intangible Assets and Other Acquisition and Divestiture
Accounting Items
We amortize acquired definite-lived intangible assets over their estimated
useful lives. Goodwill and other indefinite-lived intangible assets are not
amortized but subject to annual impairment tests; more frequently if events or
circumstances occur that would indicate a potential decline in their fair value.
We perform the assessment annually during the fourth quarter and on an interim
basis if potential impairment indicators arise.
Reporting units are determined based on the components of a company's operating
segments that constitute a business for which financial information is available
and for which operating results are regularly reviewed by segment management. We
have one reporting unit.
To test impairment, we first assess qualitative factors to determine whether the
existence of events and circumstances indicate that it is more likely than not
that the intangible asset is impaired. If based on our qualitative assessment it
is more likely than not that the fair value of the intangible asset is less than
its carrying amount, quantitative impairment testing is required. However, if we
conclude otherwise, quantitative impairment testing is not required. During the
fourth quarter of fiscal year 2021, we performed our annual impairment analysis
for goodwill at January 31, 2021 using the qualitative Step 0 assessment as we
concluded that it was more likely than not that the fair value of the reporting
unit exceeded its carrying value.
Indefinite-lived intangible assets are tested for impairment at least annually,
or on an interim basis if an event occurs or circumstances change that would,
more likely than not, reduce the fair value of the indefinite-lived intangible
assets below its carrying value. To test impairment, we first assess qualitative
factors to determine whether the existence of events and circumstances indicate
that it is more likely than not that the indefinite-lived intangible is
impaired. If based on our qualitative assessment, we conclude that it is more
likely than not that the fair value of the indefinite-lived asset is less than
its carrying amount, quantitative impairment testing is required. However, if we
conclude otherwise, quantitative impairment testing is not required. During the
fourth quarter of fiscal year 2021, we completed our annual impairment test of
the indefinite-lived intangible asset at January 31, 2021 using the qualitative
Step 0 assessment as we concluded that it was more likely than not that the fair
value of the indefinite-lived asset exceeded its carrying value.
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We completed two acquisitions and one divestiture during the three-year period
ended March 31, 2021. The acquisition method of accounting requires an estimate
of the fair value of the assets and liabilities acquired as part of these
transactions. In order to estimate the fair value of acquired intangible assets,
we use either an income, market or cost method approach.
Our Level 3 liabilities at March 31, 2020 consisted of contingent purchase
consideration related to the two acquisitions that occurred during fiscal year
2020. The contingent purchase consideration related to the two acquisitions
represent amounts deposited into escrow accounts, which were established to
cover damages NetScout may have suffered related to any liabilities that
NetScout did not agree to assume or as a result of the breach of representations
and warranties of the sellers as described in the acquisition agreements. The
contingent purchase consideration of $0.7 million and $1.0 million related to
the Gigavation Incorporated (Gigavation) and Eastwind Networks, Inc. (Eastwind)
acquisitions, respectively are included as accrued other in our consolidated
balance sheet at March 31, 2020. The $0.7 million of purchase consideration
related to the Gigavation acquisition was paid to the seller in February 2021.
The contingent purchase consideration related to the Eastwind acquisition was
paid to the seller in April 2020.
During fiscal year 2019, we recorded a contingent consideration related to the
divestiture of our handheld network test (HNT) tools business in September 2018.
The contingent consideration represented potential future earnout payments to us
of up to $4.0 million over two years that were contingent on the HNT tools
business achieving certain milestones. The fair value of the contingent
consideration of $2.3 million was recognized on the divestiture date and was
measured using unobservable (Level 3) inputs. We recorded an $0.8 million and a
$1.6 million change in the fair value of the contingent consideration, which is
included in other expense, net within our consolidated statement of operations
for the years ended March 31, 2020 and 2019.
Share-Based Compensation
We recognize compensation expense for all share-based payments. Under the fair
value recognition provisions, we recognize share-based compensation net of an
estimated forfeiture rate and only recognize compensation cost for those shares
expected to vest on a straight-line basis over the requisite service period of
the award.
We are required to estimate the expected forfeiture rate and only recognize
expense for those shares expected to vest. If our actual forfeiture rate is
materially different from our estimate, the share-based compensation expense
could be significantly different from what we have recorded in the current
period.
Based on historical experience, we assumed an annualized forfeiture rate of 0%
for awards granted to our directors, an annualized forfeiture rate of
approximately 2% for awards granted to our senior executives, and an annualized
forfeiture rate of approximately 5% for all remaining employees. We will record
additional expense if the actual forfeitures are lower than estimated and will
record a recovery of prior expense if the actual forfeitures are higher than
estimated.

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Comparison of Years Ended March 31, 2021 and 2020
The sections that follow discuss our consolidated statement of operations data
for the fiscal years ended March 31, 2021 and March 31, 2020 including results
as a percentage of revenue for those periods. For a discussion of (i) our
consolidated statement of operations data for the fiscal year ended March 31,
2019 including results as a percentage of revenue for that period, as well as
(ii) our liquidity and capital resources for the fiscal year ended March 31,
2019, see "Comparison of Years Ended March 31, 2020 and 2019" and "Liquidity and
Capital Resources" in Part II, Item 7 of our Annual Report on Form 10-K for the
fiscal year ended March 31, 2020, filed with the SEC on May 20, 2020 (our 2020
Annual Report).
Results of Operations
Revenue
Product revenue consists of sales of our hardware products and licensing of our
software products. Service revenue consists of customer support agreements,
consulting, training and stand-ready software as a service offerings. During the
fiscal years ended March 31, 2021 and 2020, no direct customer or indirect
channel partner accounted for more than 10% of our total revenue.
                                  Fiscal Year Ended March 31,
                                    (Dollars in Thousands)
                               2021                              2020                      Change
                                            % of                        % of
                                           Revenue                     Revenue          $            %
Revenue:
Product         $     377,721                 45  %    $ 438,341          49  %    $ (60,620)      (14) %
Service               453,561                 55         453,479          51              82         -  %
Total revenue   $     831,282                100  %    $ 891,820         

100 % $ (60,538) (7) %




Product. The 14%, or $60.6 million, decrease in product revenue compared with
the same period last year was primarily due to a decrease in revenue from
network performance management offerings for enterprise and service provider
customers, as well as a decrease in revenue from DDoS offerings.
Total revenue by geography is as follows:

                                           Fiscal Year Ended March 31,
                                             (Dollars in Thousands)
                                        2021                              2020                      Change
                                                     % of                        % of
                                                    Revenue                     Revenue          $            %
United States            $     484,129                 58  %    $ 545,620          61  %    $ (61,491)      (11) %
International:
Europe                         160,372                 19         154,510          17           5,862         4  %
Asia                            56,562                  7          59,939           7          (3,377)       (6) %
Rest of the world              130,219                 16         131,751          15          (1,532)       (1) %
Subtotal international         347,153                 42         346,200          39             953         -  %
Total revenue            $     831,282                100  %    $ 891,820         100  %    $ (60,538)       (7) %


United States revenue decreased 11%, or $61.5 million, primarily due to a
decrease in revenue from network performance management offerings for enterprise
and service provider customers. International revenue increased $1.0 million
primarily driven by an increase in revenue from network performance management
offerings.
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Cost of Revenue and Gross Profit
Cost of product revenue consists primarily of material components, manufacturing
personnel expenses, packaging materials, overhead and amortization of
capitalized software, acquired developed technology and core technology. Cost of
service revenue consists primarily of personnel, material, overhead and support
costs.

                                                          Fiscal Year Ended March 31,
                                                            (Dollars in Thousands)
                                                2021                                          2020                                   Change
                                                              % of                                      % of
                                                            Revenue                                   Revenue                 $                  %
Cost of revenue:
Product                      $     95,965                          12  %       $ 122,832                     14  %       $ (26,867)               (22) %
Service                           126,132                          15            119,360                     13              6,772                  6  %
Total cost of revenue        $    222,097                          27  %       $ 242,192                     27  %       $ (20,095)                (8) %
Gross profit:
Product $                    $    281,756                          34  %       $ 315,509                     35  %       $ (33,753)               (11) %
Product gross profit %                 75   %                                         72  %                                      3  %
Service $                    $    327,429                          39  %       $ 334,119                     37  %       $  (6,690)                (2) %
Service gross profit %                 72   %                                         74  %                                     (2) %
Total gross profit $         $    609,185                                      $ 649,628                                 $ (40,443)                (6) %
Total gross profit %                   73   %                                         73  %                                      -  %


Product. The 22%, or $26.9 million, decrease in cost of product revenue compared
to the same period last year was primarily due to a $16.2 million decrease in
direct material costs due to a decrease in product revenue, a $6.0 million
decrease in the amortization of intangible assets, a $4.7 million decrease in
inventory obsolescence charges, a $1.2 million decrease in employee-related
expenses largely due to the timing of certain projects partially offset by an
increase in variable incentive compensation, a $0.8 million decrease in overhead
costs, a $0.6 million decrease in shipping costs, and a $0.6 million decrease in
supplies. These decreases were partially offset by a $2.5 million increase in
contractor fees. The product gross profit percentage increased by three
percentage points to 75% during the fiscal year ended March 31, 2021 as compared
to the same period in the prior year. The 11%, or $33.8 million, decrease in
product gross profit, corresponds with the 14%, or $60.6 million, decrease in
product revenue, partially offset by the 22%, or $26.9 million, decrease in cost
of product revenue.
Service. The 6%, or $6.8 million, increase in cost of service revenue compared
to the same period last year was primarily due to a $5.0 million increase in
employee-related expenses due to an increase in variable incentive compensation
and the timing of certain projects, and a $2.2 million increase in contractor
fees. These increases were partially offset by a $2.0 million decrease in travel
expense primarily attributable to COVID-19 related restrictions. The service
gross profit percentage decreased by two percentage points to 72% during
the fiscal year ended March 31, 2021 compared to the fiscal year ended March 31,
2020. The 2%, or $6.7 million, decrease in service gross profit corresponds with
the 6%, or $6.8 million, increase in cost of services, partially offset by the
$0.1 million increase in service revenue.
Gross profit. Our gross profit decreased 6%, or $40.4 million, compared to the
fiscal year ended March 31, 2020. This decrease is attributable to the 7%, or
$60.5 million, decrease in revenue partially offset by the $20.1 million, or 8%,
decrease in cost of revenue. The gross margin percentage remained flat at 73%
during the fiscal year ended March 31, 2021 compared to the same period in the
prior year.
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Operating Expenses
                                                             Fiscal Year Ended March 31,
                                                               (Dollars in Thousands)
                                                   2021                                        2020                                   Change
                                                               % of                                      % of
                                                             Revenue                                   Revenue                 $                  %
Research and development          $     179,163                     22          $ 188,294                     21  %       $  (9,131)                (5) %
Sales and marketing                     242,730                     29            276,523                     31            (33,793)               (12) %
General and administrative               88,969                     11             99,994                     11            (11,025)               (11) %
Amortization of acquired
intangible assets                        61,131                      7             64,505                      7             (3,374)                (5) %
Restructuring charges                        62                      -              2,674                      -             (2,612)               (98) %

Total operating expenses          $     572,055                     69  %       $ 631,990                     70  %       $ (59,935)                (9) %


Research and development. Research and development expenses consist primarily of
personnel expenses, fees for outside consultants, overhead and related expenses
associated with the development of new products and the enhancement of existing
products.
The 5%, or $9.1 million, decrease in research and development expenses compared
to the same period last year was primarily due to a $2.6 million decrease in
travel expense primarily attributable to COVID-19 related restrictions, a $2.0
million decrease in depreciation expense, a $1.2 million decrease in rent and
other facilities related expenses, and a $0.9 million decrease in contractor
fees.
Sales and marketing. Sales and marketing expenses consist primarily of personnel
expenses and commissions, overhead and other expenses associated with selling
activities and marketing programs such as trade shows, seminars, advertising,
and new product launch activities.
The 12%, or $33.8 million, decrease in total sales and marketing expenses
compared to the same period last year was primarily due to a $17.3 million
decrease in travel expense primarily attributable to COVID-19 related
restrictions, a $6.9 million decrease in expenses related to trade shows, user
conferences and other events attributable to continued cost control and COVID-19
related restrictions, a $5.1 million decrease in commissions expense, a $2.3
million decrease in advertising and other marketing related expenses, and a $2.2
million decrease in employee-related expenses due to a reduction in headcount,
partially offset by an increase in variable incentive compensation.
General and administrative. General and administrative expenses consist
primarily of personnel expenses for executive, financial, legal, and human
resource employees, overhead, and other corporate expenditures.
The 11%, or $11.0 million, decrease in general and administrative expenses
compared to the same period last year was primarily due to a $6.7 million
decrease in legal-related expenses and penalties, a $1.6 million decrease in
travel expense primarily attributable to COVID-19 related restrictions, a $1.0
million decrease in rent and other facilities related expenses, an $0.8 million
decrease in contractor fees, and a $0.5 million decrease in sales and use taxes.
Amortization of acquired intangible assets. Amortization of acquired intangible
assets consists primarily of amortization of customer relationships, and
definite-lived trademark and tradenames related to the Comms Transaction, ONPATH
Technologies, Inc., Simena, Psytechnics, Ltd, Network General Corporation,
Avvasi Incorporated and Efflux.
The 5%, or $3.4 million, decrease in amortization of acquired intangible assets
was due to a reduction in the amortization of intangible assets related to the
Comms Transaction.
Restructuring. During fiscal years 2020 and 2019, we restructured certain
departments to better align functions, drive productivity and improve
efficiency. During fiscal year 2019, we also implemented a voluntary separation
program (VSP) for employees who met certain age and service requirements to
reduce overall headcount. As a result of these restructuring programs, we
recorded $0.1 million and $2.7 million of restructuring charges related to
one-time termination benefits during the fiscal years ended March 31, 2021 and
2020, respectively.
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Interest and Other Expense, Net
Interest and other expense, net includes interest earned on our cash, cash
equivalents and marketable securities, interest expense and other non-operating
gains or losses.
                                                         Fiscal Year Ended March 31,
                                                           (Dollars in Thousands)
                                                2021                                       2020                                 Change
                                                           % of                                     % of
                                                          Revenue                                  Revenue               $                 %
Interest and other expense,
net                            $     (14,826)                   (2) %       $ (15,714)                   (2) %       $   888                 6  %


The 6%, or $0.9 million, decrease in interest and other expense, net was
primarily due to a $9.7 million decrease in interest expense due to debt
repayments on the credit facility as well as a decrease in the average interest
rate, and a $0.7 million decrease in other expense due to a change in the fair
value of the contingent consideration related to the HNT business divestiture
recorded during the fiscal year ended March 31, 2020. These decreases were
offset by a $4.8 million increase in foreign exchange expense, a $3.9 million
decrease in interest income received on investments, and a $1.0 million decrease
in transitional services agreement income related to the HNT business
divestiture.
Income Tax Expense
The annual effective tax rate for fiscal year 2021 was 13.2%, compared to an
annual effective tax rate of 243.1% for fiscal year 2020. Generally, the
effective tax rate differs from the statutory tax rate due to state income taxes
and foreign withholding taxes, partially offset by the tax benefit associated
Foreign Derived Intangible Income deduction, foreign tax credits, research and
development tax credits and earnings in jurisdictions subject to tax rates lower
than the U.S. statutory rate.
The effective tax rate for the twelve months ended March 31, 2021 is lower than
the effective rate for the twelve months ended March 31, 2020, primarily due to
an increase in foreign derived intangible income benefit, a reduction in foreign
withholding taxes, and a significant increase in pre-tax income as compared to
the prior year.

                                        Fiscal Year Ended March 31,
                                          (Dollars in Thousands)
                                      2021                               2020                    Change
                                                     % of                      % of
                                                    Revenue                   Revenue         $            %
Income tax expense   $       2,952                      -  %    $ 4,678           1  %    $ (1,726)      (37) %



Contractual Obligations
At March 31, 2021, we had the following contractual obligations:
                  Payment due by period (Dollars in thousands)
                                                      Less than 1                                                  More than
Contractual Obligations             Total                year              1-3 years           3-5 years            5 years
Long-term debt obligations (1)   $ 360,268          $      5,713          $ 354,555          $        -          $        -
Unconditional purchase
obligations (2)                     55,319                40,480             14,839                   -                   -
Operating lease obligations (3)     85,745                14,085             23,189              19,185              29,286
Pension benefit plan                37,586                   485              1,158               1,648              34,295

Total contractual obligations    $ 538,918          $     60,763          $ 393,741          $   20,833          $   63,581



(1)Includes estimated future interest at an interest rate of 1.61% for our
outstanding term loan at March 31, 2021.
(2)Represents estimated open purchase orders to purchase inventory as well as
commitments for products and services used in the normal course of business.
(3)We lease facilities under operating lease agreements extending through
September 2030 for a total of $85.7 million.
At March 31, 2021, we have also excluded long-term deferred revenue of $103.3
million as such amounts will be recognized as services are provided.
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At March 31, 2021, the total accrual of our retirement obligation for our
chairman and CEO was $1.4 million. The payment stream for this retirement
obligation is based upon the retirement date which is currently not
determinable.
At March 31, 2021, the total amount of net unrecognized tax benefits for
uncertain tax positions and the accrual for the related interest was $1.0
million. We are unable to make a reliable estimate when cash settlement, if any,
will occur with a tax authority as the timing of examinations and ultimate
resolution of those examinations is uncertain.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements as defined in Item
303(a)(4)(ii) of Regulation S-K.
Commitment and Contingencies
We account for claims and contingencies in accordance with authoritative
guidance that requires us to record an estimated loss from a claim or loss
contingency when information available prior to issuance of our consolidated
financial statements indicates that it is probable that a liability has been
incurred at the date of the consolidated financial statements and the amount of
the loss can be reasonably estimated. If we determine that it is reasonably
possible, but not probable, that an asset has been impaired or a liability has
been incurred, or if the amount of a probable loss cannot be reasonably
estimated, then, in accordance with the authoritative guidance, we disclose the
amount or range of estimated loss if the amount or range of estimated loss is
material. Accounting for claims and contingencies requires us to use our
judgment. We consult with legal counsel on those issues related to litigation
and seek input from other experts and advisors with respect to matters in the
ordinary course of business.
Acquisition related- Our Level 3 liabilities at March 31, 2020 consisted of
contingent purchase consideration related to the two acquisitions that occurred
during the fiscal year 2020. The contingent purchase consideration related to
the two acquisitions represented amounts deposited into escrow accounts, which
were established to cover damages we may have suffered related to any
liabilities that we did not agree to assume or as a result of the breach of
representations and warranties of the sellers as described in the acquisition
agreements. The contingent purchase consideration of $0.7 million and $1.0
million related to the Gigavation and Eastwind acquisitions were included as
accrued other in our consolidated balance sheet at March 31, 2020. The $0.7
million related to the Gigavation acquisition was paid to the seller in February
2021. The $1.0 million related to the Eastwind acquisition was paid to the
seller in April 2020.
During fiscal year 2019, we paid $0.5 million and $5.0 million of contingent
liabilities to the sellers of Efflux Systems, Inc. (Efflux) and Simena, LLC),
respectively related to prior acquisitions.
Legal - From time to time, we are subject to legal proceedings and claims in the
ordinary course of business. In the opinion of management, the amount of
ultimate expense with respect to any current legal proceedings and claims, if
determined adversely, will not have a material adverse effect on our financial
condition, results of operations or cash flows.
As previously disclosed, in March 2016, Packet Intelligence LLC (Packet
Intelligence or Plaintiff) filed a Complaint against NetScout and two subsidiary
entities in the United States District Court for the Eastern District of Texas
asserting infringement of five United States patents. Plaintiff's Complaint
alleged that legacy Tektronix GeoProbe products, including the G10 and GeoBlade
products, infringed these patents. NetScout filed an Answer denying Plaintiff's
allegations and asserting that Plaintiff's patents were, among other things,
invalid, not infringed, and unenforceable due to inequitable conduct. In October
2017, a jury trial was held to address the parties' claims and counterclaims
regarding infringement of three patents by the G10 and GeoBlade products,
invalidity of these patents, and damages. On October 13, 2017, the jury rendered
a verdict finding in favor of the Plaintiff and that Plaintiff was entitled to
$3,500,000 for pre-suit damages and $2,250,000 for post-suit damages. The jury
indicated that the awarded damages amounts were intended to reflect a running
royalty. In September 2018, the Court entered judgment and "enhanced" the jury
verdict in the amount of $2.8 million as a result of a jury finding. The
judgment also awards pre- and post-judgment interest, and a running royalty on
the G10 and GeoBlade products until the expiration of the patents at issue, the
last date being June 2022. Following the entry of final judgment, on June 12,
2019, we filed our Notice of Appeal. On July 14, 2020, the Court of Appeals for
the Federal Circuit issued a decision vacating the $3,500,000 pre-suit damages
award, affirming the $2,250,000 post-suit damages award, and remanding to the
district court to determine what, if any, enhancement should be awarded. On
March 15, 2021, NetScout filed a petition for a writ of certiorari to the United
States Supreme Court, which was subsequently denied, challenging, among other
issues, the basis for enhanced damages and the patentability of the claimed
technology. NetScout continues to avail itself of its legal options. NetScout
has concluded that the risk of loss associated with the post-suit damages award
is "probable" in accounting terms, regardless of the options NetScout may
pursue, and that the risk of loss associated with pre-suit damages is now
remote. Accounting rules require us to provide an estimate for the range of
potential liability. NetScout currently estimates that the range of liability is
the sum of post-suit
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damages, plus pre- and post-judgment interest amounts and royalties owed on
post-trial sales of the accused G10 and GeoBlade products. Any potential
enhancement is not reasonably estimable but is likely within the range of $0 to
$2,800,000.
Warranty and Indemnification- We warrant that our software and hardware products
will substantially conform to the documentation accompanying such products on
their original date of shipment. For software, which also includes firmware, the
standard warranty commences upon shipment and generally expires 60 to 90 days
thereafter. With regard to hardware, the standard warranty commences upon
shipment and generally expires 60 days to 12 months thereafter. Additionally,
this warranty is subject to various exclusions which include, but are not
limited to, non-conformance resulting from modifications made to the software or
hardware by a party other than NetScout; customers' failure to follow our
installation, operation or maintenance instructions; and events outside of our
reasonable control. We also warrant that all support services will be performed
in a good and workmanlike manner. We believe that our product and support
service warranties are consistent with commonly accepted industry standards.
Warranty cost information is presented and no material warranty costs are
accrued since service revenue associated with warranty is deferred at the time
of sale and recognized ratably over the warranty period.
Contracts that we enter into in the ordinary course of business may contain
standard indemnification provisions. Pursuant to these agreements, we may agree
to defend third party claims brought against a partner or direct customer
claiming infringement of such third party's (i) U.S. patent and/or European
Union (EU), or other selected countries' patents, (ii) Berne convention member
country copyright, and/or (iii) U.S., EU, and/or other selected countries'
trademark or intellectual property rights. Moreover, this indemnity may require
us to pay any damages awarded against the partner or direct customer in such
type of lawsuit as well as reimburse the partner or direct customer for
reasonable attorney's fees incurred by them from the lawsuit.
We may also agree from time to time to provide other forms of indemnification to
partners or direct customers, such as indemnification that would obligate us to
defend and pay any damages awarded to a third party against a partner or direct
customer based on a lawsuit alleging that such third party has suffered personal
injury or tangible property damage legally determined to have been
caused by negligently designed or manufactured products.
We have agreed to indemnify our directors and officers and our subsidiaries'
directors and officers if they are made a party or are threatened to be made a
party to any proceeding (other than an action by or in the right of NetScout) by
reason of the fact that the indemnified are agents of NetScout. The indemnity is
for any and all expenses and liabilities of any type (including but not limited
to, judgments, fines and amounts paid in settlement) reasonably incurred by the
directors or officers in connection with the investigation, defense, settlement
or appeal of such proceeding, provided they acted in good faith.
Liquidity and Capital Resources
Cash, cash equivalents and marketable securities consist of the following (in
thousands):
                                                                 At March 31,
                                                            (Dollars in Thousands)
                                                      2021           2020           2019
Cash and cash equivalents                          $ 467,176      $ 338,489      $ 409,632
Short-term marketable securities                       9,277         47,969 

76,344

Long-term marketable securities                            -          2,613 

1,012

Cash, cash equivalents and marketable securities $ 476,453 $ 389,071

$ 486,988



Cash, cash equivalents and marketable securities
At March 31, 2021, cash, cash equivalents and marketable securities (current and
non-current) totaled $476.5 million. This represents an increase of $87.4
million from $389.1 million at March 31, 2020. This increase was primarily due
to $213.9 million in cash provided by operations during the fiscal year ended
March 31, 2021. This increase was offset by $100.0 million used to repay
long-term debt, $13.3 million used for tax withholdings in connection with the
vesting of restricted stock units, $12.0 million used for capital expenditures,
$4.5 million used for purchases of intangible assets, and $3.3 million used to
repurchase shares of our common stock during the fiscal year ended March 31,
2021.
At March 31, 2021, cash, short-term and long-term investments in the United
States were $328.8 million, while cash held outside of the United States was
approximately $147.7 million.
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Cash and cash equivalents were impacted by the following:
                                                                 Fiscal Year Ended March 31,
                                                                    (Dollars in Thousands)
                                                        2021                 2020                 2019
Net cash provided by operating activities          $   213,921          $   225,023          $   149,838
Net cash provided by (used in) investing
activities                                         $    24,698          $    (4,309)         $   (26,252)
Net cash used in financing activities              $  (118,307)         $  

(286,870) $ (79,285)




Net cash from operating activities
Fiscal year 2021 compared to fiscal year 2020
Cash provided by operating activities was $213.9 million during the fiscal year
ended March 31, 2021, compared to $225.0 million of cash provided by operating
activities during the fiscal year ended March 31, 2020. This $11.1 million
decrease was due in part to a $14.0 million decrease from deferred income taxes,
$10.5 million decrease from deferred revenue, a $10.3 million decrease from
depreciation and amortization expense, a $4.6 million decrease from accounts
receivable, a $3.5 million decrease from inventories, a $2.4 million decrease
from prepaid expenses and other assets, a $0.9 million decrease from accrued
compensation and other expenses, and an $0.8 million decrease from the change in
fair value of contingent and contractual liabilities. These decreases were
partially offset by a $22.1 million increase from net income, a $7.6 million
increase from income taxes payable, a $2.8 million increase from operating lease
liabilities, a $2.6 million increase from accounts payable, and a $1.0 million
increase from share-based compensation. Accounts receivable days sales
outstanding was 75 days at March 31, 2021 compared to 73 days at March 31, 2020
and 88 days at March 31, 2019.
Net cash from investing activities
                                                                    Fiscal Year Ended March 31,
                                                                       (Dollars in Thousands)
                                                           2021                 2020                 2019
Cash provided by (used in) investing activities
included the following:
Purchase of marketable securities                     $   (15,673)         $  (117,383)         $  (229,769)
Proceeds from maturity of marketable securities            56,806              144,322              230,433
Purchase of fixed assets                                  (11,986)             (19,922)             (23,392)
Purchase of intangible assets                              (4,537)                   -                    -
Payments related to the divestiture of business                 -                    -               (3,293)
Acquisition of businesses, net of cash acquired                 -              (11,347)                   -
Decrease (increase) in deposits                                88                  (31)                 (97)

Collection of contingent consideration                          -                   52                    -
Capitalized software development costs                          -                    -                 (134)
                                                      $    24,698          $    (4,309)         $   (26,252)


Cash provided by investing activities increased by $29.0 million to $24.7
million during the fiscal year ended March 31, 2021, compared to $4.3 million of
cash used in investing activities during the fiscal year ended March 31, 2020.
Net cash inflows relating to the purchase and sales of marketable securities
increased $14.2 million during the fiscal year ended March 31, 2021 relating to
the amount of investments held at each respective balance sheet date, from an
inflow of $26.9 million during the fiscal year ended March 31, 2020 to an inflow
of $41.1 million during the fiscal year ended March 31, 2021.
During the twelve months ended March 31, 2020, there was an $11.3 million cash
outflow related to the acquisitions of Eastwind and Gigavation. During the
twelve months ended March 31, 2019, there was a $3.3 million cash outflow
related to the divestiture of HNT.
During the fiscal year ended March 31, 2021, we entered into agreements to
acquire technology licenses for $4.5 million.
Our investments in property and equipment consist primarily of computer
equipment, demonstration units, office equipment and facility improvements. We
plan to continue to invest in capital expenditures to support our infrastructure
in our fiscal year 2022.
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Net cash from financing activities
                                                                    Fiscal Year Ended March 31,
                                                                       (Dollars in Thousands)
                                                           2021                 2020                 2019
Cash used in financing activities included the
following:
Issuance of common stock under stock plans            $         2          $         2          $         3
Payment of contingent consideration                        (1,748)                   -               (2,851)
Treasury stock repurchases                                 (3,275)            (175,000)             (14,468)
Tax withholding on restricted stock units                 (13,286)             (11,872)             (11,969)

Repayment of long-term debt                              (100,000)            (100,000)             (50,000)

                                                      $  (118,307)         $  (286,870)         $   (79,285)


Cash used in financing activities decreased $168.6 million to $118.3 million
during the fiscal year ended March 31, 2021, compared to $286.9 million of cash
used in financing activities during the fiscal year ended March 31, 2020.
During the fiscal year ended March 31, 2021, we paid $1.0 million of contingent
purchase consideration related to the Eastwind acquisition in April 2020 and
$0.7 million of contingent purchase consideration related to the Gigavation
acquisition in February 2021.
During the fiscal years ended March 31, 2021, 2020 and 2019, we repurchased
154,271 shares, 7,116,159 shares and 543,251 shares of our common stock for $3.3
million, $175.0 million, and $14.5 million under our twenty-five million share
repurchase program.
In connection with the delivery of common shares upon vesting of restricted
stock units, we have withheld 506,917 shares for $13.3 million, 519,241 shares
for $11.9 million and 451,683 shares for $11.9 million related to minimum
statutory tax withholding requirements on these restricted stock units during
the fiscal years ended March 31, 2021, 2020 and 2019, respectively. These
withholding transactions do not fall under the repurchase program described
above, and therefore do not reduce the amount that is available for repurchase
under that program.
During the fiscal years ended March 31, 2021, 2020 and 2019, we repaid $100.0
million, $100.0 million and $50.0 million of borrowings under the Amended Credit
Agreement, respectively.
Credit Facility
On January 16, 2018, we amended and expanded our existing credit agreement
(Amended Credit Agreement) with a syndicate of lenders by and among: NetScout;
JPMorgan Chase Bank, N.A. (JPMorgan), as administrative agent and collateral
agent; J.P. Morgan Securities LLC, KeyBanc Capital Markets, Merrill Lynch,
Pierce, Fenner & Smith Incorporated, RBC Capital Markets and Wells Fargo
Securities, LLC, as joint lead arrangers and joint bookrunners; Fifth Third
Bank, Santander Bank, N.A., SunTrust Bank, N.A. and U.S. Bank National
Association, as co-documentation agents; and the lenders party thereto.
The Amended Credit Agreement provides for a five-year $1.0 billion senior
secured revolving credit facility, including a letter of credit sub-facility of
up to $75.0 million. We may elect to use the new credit facility for general
corporate purposes or to finance the repurchase of up to twenty-five million
shares of our common stock under our common stock repurchase plan. The
commitments under the Amended Credit Agreement will expire on January 16, 2023,
and any outstanding loans will be due on that date. During the fiscal year ended
March 31, 2021, we repaid $100.0 million of borrowings under the Amended Credit
Agreement. At March 31, 2021, $350 million was outstanding under the Amended
Credit Agreement.
At our election, revolving loans under the Amended Credit Agreement bear
interest at either (a) an Alternate Base Rate per annum equal to the greatest of
(1) JPMorgan's prime rate, (2) 0.50% in excess of the New York Federal Reserve
Bank (NYFRB) rate, or (3) an adjusted one month LIBOR rate plus 1%; or (b) such
adjusted LIBOR rate (for the interest period selected by us), in each case plus
an applicable margin. For the period from the delivery of our financial
statements for the quarter ended December 31, 2020, until we have delivered
financial statements for the quarter ended March 31, 2021, the applicable margin
will be 1.50% per annum for LIBOR loans and 0.50% per annum for Alternate Base
Rate loans, and thereafter the applicable margin will vary depending on our
leverage ratio, ranging from 0.75% per annum for Base Rate loans and 1.75% per
annum for LIBOR loans if our consolidated leverage ratio is less than or equal
to 3.50 to 1.00, down to 0.00% per annum for Alternate Base Rate loans and 1.00%
per annum for LIBOR loans if our consolidated leverage ratio is equal to or less
than 1.50 to 1.00. As of March 31, 2021, the Company's maximum allowed
consolidated leverage ratio is 3.50 to 1.00.
On July 27, 2017, the U.K. Financial Conduct Authority (FCA) announced that it
will no longer require banks to submit rates for the calculation of LIBOR after
2021. On March 5, 2021, the Intercontinental Exchange Benchmark Administration
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(IBA), the FCA-regulated and authorized administrator of LIBOR, announced, and
the FCA confirmed, that one week and two-month USD LIBOR settings will cease on
December 31, 2021, and that the USD LIBOR panel will cease on June 30, 2023. IBA
notes that any publication of the Overnight and 1, 3, 6 and 12 Months USD LIBOR
settings based on panel bank submissions beyond December 31, 2021 will need to
comply with applicable regulations, including as to representativeness. Based on
current information from panel banks, IBA anticipates there being a
representative panel for the continuation of these USD LIBOR settings through to
June 30, 2023.
Our Amended Credit Agreement, which matures on January 16, 2023 prior to the
June 30, 2023 cessation of USD LIBOR publications, provides for the
Administrative Agent to determine if (i) adequate and reasonable means do not
exist for ascertaining the LIBOR rate or (ii) the FCA or Government Authority
having jurisdiction over the Administrative Agent has made a public statement
identifying a specific date after which the LIBOR rate shall no longer be used
for determining interest rates for loans and the Administrative Agent determines
that (i) and (ii) above are unlikely to be temporary, then the Administrative
Agent and NetScout would agree to transition to an Alternate Base Rate borrowing
as described above or amend the Credit Agreement to establish an alternate rate
of interest to LIBOR that gives due consideration to the then prevailing market
convention for determining a rate of interest for syndicated loans in the United
States at such time.
Our consolidated leverage ratio is the ratio of our total funded debt compared
to our consolidated adjusted EBITDA. Consolidated adjusted EBITDA includes
certain adjustments, including, without limitation, adjustments relating to
extraordinary, unusual or non-recurring charges, certain restructuring charges,
non-cash charges, certain transaction costs and expenses and certain pro forma
adjustments in connection with material acquisitions and dispositions, all as
set forth in detail in the definition of consolidated adjusted EBITDA in the
Amended Credit Agreement.
Commitment fees will accrue on the daily unused amount of the credit facility.
For the period from the delivery of our financial statements for the quarter
ended December 31, 2020 until we have delivered financial statements for the
quarter ended March 31, 2021, the commitment fee will be 0.25% per annum, and
thereafter the commitment fee will vary depending on the our consolidated
leverage ratio, ranging from 0.30% per annum if our consolidated leverage ratio
is greater than 2.75 to 1.00, down to 0.15% per annum if our consolidated
leverage ratio is equal to or less than 1.50 to 1.00.
Letter of credit participation fees are payable to each lender on the amount of
such lender's letter of credit exposure, during the period from the closing date
of the Amended Credit Agreement to but excluding the date which is the later of
(i) the date on which such lender's commitment terminates or (ii) the date on
which such lender ceases to have any letter of credit exposure, at a rate per
annum equal to the applicable margin for LIBOR loans. Additionally, we will pay
a fronting fee to each issuing bank in amounts to be agreed to between us and
the applicable issuing bank.
Interest on Alternate Base Rate loans is payable at the end of each calendar
quarter. Interest on LIBOR loans is payable at the end of each interest rate
period or at the end of each three-month interval within an interest rate period
if the period is longer than three months. We may also prepay loans under the
Amended Credit Agreement at any time, without penalty, subject to certain notice
requirements.
Debt is recorded at the amount drawn on the revolving credit facility plus
interest based on floating rates reflective of changes in the market which
approximates fair value.
The loans and other obligations under the credit facility are (a) guaranteed by
each of our wholly owned material domestic restricted subsidiaries, subject to
certain exceptions, and (b) are secured by substantially all of the assets of us
and the subsidiary guarantors, including a pledge of all the capital stock of
material subsidiaries held directly by us and the subsidiary guarantors (which
pledge, in the case of any foreign subsidiary, is limited to 65% of the voting
stock), subject to certain customary exceptions and limitations. The Amended
Credit Agreement generally prohibits any other liens on the assets of NetScout
and its restricted subsidiaries, subject to certain exceptions as described in
the Amended Credit Agreement.
The Amended Credit Agreement contains certain covenants applicable to us and our
restricted subsidiaries, including, without limitation, limitations on
additional indebtedness, liens, various fundamental changes, dividends and
distributions, investments (including acquisitions), transactions with
affiliates, asset sales, including sale-leaseback transactions, speculative
hedge agreements, payment of junior financing, changes in business and other
limitations customary in senior secured credit facilities. In addition, we are
required to maintain certain consolidated leverage and interest coverage ratios.
These covenants and limitations are more fully described in the Amended Credit
Agreement. At March 31, 2021, we were in compliance with all of these covenants.
The Amended Credit Agreement provides that events of default will exist in
certain circumstances, including failure to make payment of principal or
interest on the loans when required, failure to perform certain obligations
under the Amended Credit Agreement and related documents, defaults under certain
other indebtedness, certain insolvency events, certain events arising under
ERISA, a change of control and certain other events. Upon an event of default,
the administrative agent with the consent of, or at the request of, the holders
of more than 50% in principal amount of the loans and commitments may terminate
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the commitments and accelerate the maturity of the loans and enforce certain
other remedies under the Amended Credit Agreement and the other loan documents.
In connection with NetScout's Amended Credit Agreement described above, we
terminated our previous term loan dated as of July 14, 2015, by and among
NetScout; JPMorgan Chase Bank, N.A. (JPMorgan), as administrative agent and
collateral agent; J.P. Morgan Securities LLC, KeyBanc Capital Markets, Merrill
Lynch, Pierce, Fenner & Smith Incorporated, RBC Capital Markets and Wells Fargo
Securities, LLC, as joint lead arrangers and joint bookrunners; Santander Bank,
N.A., SunTrust Bank, N.A. and U.S. Bank National Association, as
co-documentation agents; and the lenders party thereto.
We have capitalized debt issuance costs totaling $12.2 million at March 31,
2021, which are being amortized over the life of the revolving credit facility.
The unamortized balance was $3.1 million as of March 31, 2021. The balance of
$1.7 million was included as prepaid expenses and other current assets and a
balance of $1.4 million was included as other assets in our consolidated balance
sheet.
Expectations for Fiscal Year 2022
We are actively managing the business to maintain cash flow and believe that we
currently have adequate liquidity. We believe that these factors will allow us
to meet our currently anticipated funding requirements.
We expect net cash provided by operating activities combined with cash, cash
equivalents, and marketable securities and borrowing availability under our
revolving credit facility to provide sufficient liquidity to fund current
obligations, capital spending, debt service requirements and working capital
requirement over at least the next twelve months.
Additionally, a portion of our cash may be used to acquire or invest in
complementary businesses or products, to obtain the right to use complementary
technologies, to repay borrowings under our Amended Credit Agreement, or to
repurchase shares of our common stock through our stock repurchase program. From
time to time, in the ordinary course of business, we evaluate potential
acquisitions of such businesses, products or technologies. If our existing
sources of liquidity are insufficient to satisfy our liquidity requirements, we
may seek to sell additional equity or debt securities. The sale of additional
equity or debt securities could result in additional dilution to our
stockholders.
Recent Accounting Standards
For information with respect to recent accounting pronouncements on our
consolidated financial statements, See Note 2 contained in the "Notes to
Consolidated Financial Statements" included in Part IV of this Annual Report on
Form 10-K.
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