NETSCOUT SYSTEMS, INC. You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the condensed consolidated financial statements and notes thereto included elsewhere in this Quarterly Report and in our Annual Report on Form 10-K for the fiscal year endedMarch 31, 2020 , filed with theSecurities and Exchange Commission . This discussion contains forward-looking statements that involve risks and uncertainties. When reviewing the discussion below, you should keep in mind the substantial risks and uncertainties that could impact our business. In particular, we encourage you to review the risks and uncertainties described in Part I, Item 1A "Risk Factors" in our Annual Report on Form 10-K for the fiscal year endedMarch 31, 2020 . These risks and uncertainties could cause actual results to differ significantly from those projected in forward-looking statements contained in this report or implied by past results and trends. Forward-looking statements are statements that attempt to forecast or anticipate future developments in our business, financial condition or results of operations. See the section titled "Cautionary Statement Concerning Forward-Looking Statements" that appears at the beginning of this Quarterly Report. These statements, like all statements in this report, speak only as of the date of this Quarterly Report (unless another date is indicated), and, except as required by law, we undertake no obligation to update or revise these statements in light of future developments. Overview We are an industry leader with over 35 years of experience in providing service assurance and security 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, the rapidly evolving security 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 achieve expense reductions and make improvements in a highly competitive industry. COVID-19 Impact InMarch 2020 , theWorld 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 theU.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 are closely monitoring the impact of the COVID-19 pandemic on all aspects of our business, including how it has impacted and will continue to impact our customers, employees, supply chain, and distribution network. We are not immune from the impacts of the COVID-19 global pandemic and resulting challenging macro-economic environment that is causing elongated purchasing cycles and we expect our fiscal year financial results to be affected given these uncertainties. Despite this impact, we are committed to managing our costs to attempt to mitigate the impact of a revenue decline to deliver improved GAAP earnings per share compared with the same period last year. We believe our current cash reserves leave us well-positioned to manage our business through this crisis as it continues to unfold. 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 are taking actions to reduce costs and increase productivity throughout our company, including limiting discretionary spending and reducing hiring activities. In addition, based on covenant levels atDecember 31, 2020 , we have an incremental$245 million available to us under our$1.0 billion revolving credit facility. OnMarch 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 27 -------------------------------------------------------------------------------- Table of Contents 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 ofDecember 31, 2020 , we had deferred$8.9 million of employer payroll taxes, of which 50% are required to be deposited byDecember 2021 and the remaining 50% byDecember 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 outbreak, 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 nine months endedDecember 31, 2020 was impacted by a decrease in revenue from our network performance management offerings in both the service provider and enterprise verticals, partially offset by an increase in revenue from our DDoS offerings. Our gross profit percentage remained flat during the nine months endedDecember 31, 2020 as compared with the nine months endedDecember 31, 2019 . Net income for the nine months endedDecember 31, 2020 was$7.9 million , as compared with a net loss for the nine months endedDecember 31, 2019 of$10.1 million , an increase of$18.0 million . The increase in net income was primarily due to a$19.1 million decrease in travel expenses primarily attributable to COVID-19 related restrictions, a$9.2 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$7.3 million decrease in direct material costs, a$7.0 million decrease in amortization of intangible assets, a$4.5 million decrease in commission expense, a$4.4 million decrease in inventory related charges and a$4.0 million decrease in advertising expense. These decreases in expense were partially offset by a$44.6 million decrease in revenue. AtDecember 31, 2020 , we had cash, cash equivalents and marketable securities (short-term and long-term) of$490.4 million . This represents an increase of$101.3 million from$389.1 million atMarch 31, 2020 . This increase was primarily due to cash provided by operating activities of$121.9 million , partially offset by$12.8 million used for tax withholdings on restricted stock units,$9.1 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 nine months endedDecember 31, 2020 . Use of Non-GAAP Financial Measures We supplementthe 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, and costs related to new accounting standard implementation, and adds back transitional service agreement income. Non-GAAP net income includes the foregoing adjustments related to non-GAAP income from operations, net of related income tax effects while removing transitional service agreement income and changes in contingent consideration. 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 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 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 28 -------------------------------------------------------------------------------- Table of Contents 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. The following table reconciles revenue, gross profit, income from operations, net income (loss) and net income (loss) per share on a GAAP and non-GAAP basis for the nine months endedDecember 31, 2020 and 2019 (in thousands, except for per share amounts): Three Months Ended Nine Months Ended December 31, December 31, 2020 2019 2020 2019 GAAP revenue$ 228,739 $ 260,024 $ 617,893 $ 662,469
Service deferred revenue fair value adjustment 2
48 5 144 Non-GAAP revenue$ 228,741 $ 260,072 $ 617,898 $ 662,613 GAAP gross profit$ 173,464 $ 194,439 $ 450,738 $ 483,009 Service deferred revenue fair value adjustment 2 48 5 144 Share-based compensation expense 1,619 1,506 5,368 5,427 Amortization of acquired intangible assets 4,776 6,222 14,276 18,677 Acquisition related depreciation expense 6 7 17 26 Non-GAAP gross profit$ 179,867 $ 202,222 $ 470,404 $ 507,283 GAAP income from operations$ 31,770 $ 36,819 $ 21,062 $ 5,076 Service deferred revenue fair value adjustment 2 48 5 144 Share-based compensation expense 12,517 11,361 40,349 39,961 Amortization of acquired intangible assets 20,049 22,342 60,173 67,072 Business development and integration expense - 20 16 38 New standard implementation expense - 1 - 10 Compensation for post-combination services 63 125 190 453 Restructuring charges - 193 62 466 Acquisition related depreciation expense 61 61 182 251 Transitional service agreement income (expense) 57 (25) 158 1,159 Legal judgments expense - - 2,804 - Non-GAAP income from operations$ 64,519 $
70,945
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Three Months Ended Nine Months Ended
December 31, December 31,
2020 2019 2020 2019
GAAP net income (loss) $ 29,021 $ 36,725 $ 7,915 $ (10,090)
Service deferred revenue fair value
adjustment 2 48 5 144
Share-based compensation expense 12,517 11,361 40,349 39,961
Amortization of acquired intangible assets 20,049 22,342 60,173 67,072
Business development and integration expense - 20 16 38
New standard implementation expense - 1 - 10
Compensation for post-combination services 63 125 190 453
Restructuring charges - 193 62 466
Acquisition-related depreciation expense 61 61 182 251
Change in contingent consideration - - - 517
Legal judgments expense - - 2,804 -
Income tax adjustments (12,835) (16,182) (22,358) (17,176)
Non-GAAP net income $ 48,878 $ 54,694
GAAP diluted net income (loss) per share
$ 0.11 $ (0.13) Per share impact of non-GAAP adjustments identified above 0.27 0.24 1.10 1.20
Non-GAAP diluted net income per share
GAAP income from operations$ 31,770 $ 36,819 $ 21,062 $ 5,076 Previous adjustments to determine non-GAAP income from operations 32,749 34,126 103,939 109,554 Non-GAAP income from operations 64,519 70,945 125,001 114,630 Depreciation excluding acquisition related 6,376 6,339 19,283 20,085 Non-GAAP EBITDA from operations$ 70,895 $ 77,284
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with GAAP consistently applied. The preparation of these
consolidated financial statements requires us to make significant estimates and
judgments that affect the amounts reported in our consolidated financial
statements and the accompanying notes. These items are regularly monitored and
analyzed by management for changes in facts and circumstances, and material
changes in these estimates could occur in the future. Changes in estimates are
recorded in the period in which they become known. We base our estimates on
historical experience and various other assumptions that we believe to be
reasonable under the circumstances. Actual results may differ from our
estimates.
While all of our accounting policies impact the consolidated financial
statements, certain policies are viewed to be critical. Critical accounting
policies are those that are both most important to the portrayal of our
financial condition and results of operations and that require management's most
subjective or complex judgments and estimates. We consider the following
accounting policies to be critical in fully understanding and evaluating our
financial results:
•revenue recognition;
•share-based compensation;
•valuation of goodwill, intangible assets and other acquisition accounting
items; and
•marketable securities.
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Please refer to the critical accounting policies set forth in our Annual Report
on Form 10-K for the fiscal year ended March 31, 2020 , filed with the Securities
and Exchange Commission (SEC) on May 20, 2020 , for a description of all of our
critical accounting policies.
Three Months Ended December 31, 2020 and 2019
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 offering. During the
three months ended December 31, 2020 and 2019, no direct customer or indirect
channel partner accounted for more than 10% of our total revenue.
Three Months Ended
December 31,
(Dollars in Thousands)
2020 2019 Change
% of % of
Revenue Revenue $ %
Revenue:
Product $ 114,965 50 % $ 143,309 55 % $ (28,344) (20) %
Service 113,774 50 116,715 45 (2,941) (3) %
Total revenue $ 228,739 100 % $ 260,024 100 % $ (31,285) (12) %
Product. The 20%, or $28.3 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, partially offset by an increase in revenue from distributed denial of
service (DDoS) offerings.
Service. The 3%, or $2.9 million decrease in service revenue compared to the
same period last year was primarily driven by a decrease in post-contract
services.
Total revenue by geography was as follows:
Three Months Ended
December 31,
(Dollars in Thousands)
2020 2019 Change
% of % of
Revenue Revenue $ %
United States $ 137,199 60 % $ 163,605 63 % $ (26,406) (16) %
International:
Europe 44,137 19 45,049 17 (912) (2) %
Asia 15,593 7 15,957 6 (364) (2) %
Rest of the world 31,810 14 35,413 14 (3,603) (10) %
Subtotal international 91,540 40 96,419 37 (4,879) (5) %
Total revenue $ 228,739 100 % $ 260,024 100 % $ (31,285) (12) %
United States revenue decreased 16%, or $26.4 million , primarily due to a
decrease in revenue from network performance management offerings for enterprise
and service provider customers, partially offset by an increase in revenue from
DDoS offerings. The 5%, or $4.9 million , decrease in international revenue
compared with the same period last year was primarily driven by lower 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.
Three Months Ended
December 31,
(Dollars in Thousands)
2020 2019 Change
% of % of
Revenue Revenue $ %
Cost of revenue
Product $ 24,263 11 % $ 34,197 13 % $ (9,934) (29) %
Service 31,012 14 31,388 12 (376) (1) %
Total cost of revenue $ 55,275 25 % $ 65,585 25 % $ (10,310) (16) %
Gross profit:
Product $ $ 90,702 40 % $ 109,112 42 % $ (18,410) (17) %
Product gross profit % 79 % 76 %
Service $ $ 82,762 36 % $ 85,327 33 % $ (2,565) (3) %
Service gross profit % 73 % 73 %
Total gross profit $ $ 173,464 $ 194,439 $ (20,975) (11) %
Total gross profit % 76 % 75 %
Product. The 29%, or $9.9 million , decrease in cost of product revenue for the
three months ended December 31, 2020 compared to the same period last year was
primarily due to a $7.8 million decrease in direct material costs as a result of
the decrease in product revenue, a $1.4 million decrease in the amortization of
intangible assets, and a $0.9 million decrease in employee-related expenses
associated with the timing of certain projects and a decrease in variable
incentive compensation. The product gross profit percentage increased by three
percentage points to 79% during the three months ended December 31, 2020 as
compared with the three months ended December 31, 2019 . The 17%, or $18.4
million , decrease in product gross profit is attributable to the 20%, or $28.3
million , decrease in product revenue, partially offset by the 29%, or $9.9
million , decrease in cost of product revenue. The increase in product gross
profit was largely due to product mix.
Service. The 1%, or $0.4 million , decrease in cost of service revenue for the
three months ended December 31, 2020 compared to the same period last year was
primarily due to a $0.5 million decrease in employee-related expenses associated
with a decrease in variable incentive compensation partially offset by an
increase associated with the timing of certain projects, and a $0.5M decrease in
warranty expense. These decreases were offset by a $0.5 million increase in
contractor fees. The service gross profit percentage remained flat at 73% for
the three months ended December 31, 2020 as compared with the three months ended
December 31, 2019 . The 3%, or $2.6 million decrease in service gross profit is
attributable to the $2.9 million decrease in service revenue, partially offset
by the 1%, or $0.4 million , decrease in cost of service revenue.
Gross profit. Our gross profit decreased 11%, or $21.0 million , during the three
months ended December 31, 2020 when compared with the three months ended
December 31, 2019 . This decrease is attributable to the decrease in revenue of
12%, or $31.3 million , partially offset by the 16%, or $10.3 million , decrease
in cost of revenue. The gross profit percentage increased by one percentage
point to 76% for the three months ended December 31, 2020 as compared with the
three months ended December 31, 2019 .
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Operating Expenses
Three Months Ended
December 31,
(Dollars in Thousands)
2020 2019 Change
% of % of
Revenue Revenue $ %
Research and development $ 43,769 19 % $ 48,606 19 % $ (4,837) (10) %
Sales and marketing 60,934 27 67,653 26 (6,719) (10)
General and administrative 21,718 9 25,048 10 (3,330) (13)
Amortization of acquired intangible assets 15,273 7 16,120 6 (847) (5) Restructuring charges - - 193 - (193) (100) Total operating expenses$ 141,694 62 %$ 157,620 61 %$ (15,926) (10) % 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 10%, or$4.8 million , decrease in research and development expenses for the three months endedDecember 31, 2020 compared to the same period last year was primarily due to a$2.9 million decrease in employee-related expenses associated with a reduction in headcount and a decrease in variable incentive compensation, and a$0.7 million decrease in travel expense primarily attributable to COVID-19 related restrictions. 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 10%, or$6.7 million , decrease in total sales and marketing expenses for the three months endedDecember 31, 2020 compared to the same period last year was primarily due to a$4.4 million decrease in travel expense primarily attributable to COVID-19 related restrictions, a$1.2 million decrease in employee-related expenses largely due to a reduction in headcount and a decrease in variable incentive compensation, a$1.0 million decrease in commissions expense, and a$1.0 million decrease in expenses related to trade shows, user conferences and other events attributable to continued cost control and COVID-19 related restrictions. These decreases were partially offset by a$1.2 million increase in advertising expenses. 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 13%, or$3.3 million , decrease in general and administrative expenses for the three months endedDecember 31, 2020 compared to the same period last year was primarily due to a$1.3 million decrease in employee-related expenses largely due to a decrease in variable incentive compensation, an$0.8 million decrease in legal-related expenses, and a$0.5 million decrease in travel expense primarily attributable to COVID-19 related restrictions. Amortization of acquired intangible assets. Amortization of acquired intangible assets consists primarily of amortization of customer relationships, definite-lived trademarks and tradenames, and leasehold interests related to our acquisitions of Danaher Corporation's communications business (Comms Transaction),ONPATH Technologies, Inc. (ONPATH),Simena, LLC (Simena),Psytechnics, Ltd (Psytechnics),Network General Corporation (Network General ),Avvasi Inc. (Avvasi) andEfflux Systems, Inc. (Efflux). The 5%, or$0.8 million , decrease in amortization of acquired intangible assets was largely due to a decrease in the amortization of intangible assets related to the Comms Transaction. 33
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Table of Contents 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.
Three Months Ended
December 31,
(Dollars in Thousands)
2020 2019 Change
% of % of
Revenue Revenue $ %
Interest and other expense, net $ (3,583) (2) % $
(3,915) (2) %
The 8%, or$0.3 million , decrease in interest and other expense, net was primarily due to a$1.9 million decrease in interest expense due to debt repayments on the credit facility as well as a decrease in the average interest rate, partially offset by a$1.2 million increase in foreign exchange expense, and a$0.8 million decrease in interest income received on investments. Income Taxes. Our effective income tax rates were 3.0% and 11.6% for the three months endedDecember 31, 2020 and 2019, respectively. The effective income tax rate for the three months endedDecember 31, 2020 differed from the effective income tax rate for the three months endedDecember 31, 2019 , primarily related to a significant discrete benefit related to the issuance ofU.S. regulations in the three months ended December 21 2019, impacting our previous estimate of BEAT. Three Months Ended December 31, (Dollars in Thousands) 2020 2019 Change % of % of Revenue Revenue $ % Income tax benefit$ (834) - %$ (3,821) (1) %$ 2,987 78 % Nine Months EndedDecember 31, 2020 and 2019 Revenue During the nine months endedDecember 31, 2020 , and 2019, no direct customer or indirect channel partner accounted for more than 10% of our total revenue. Nine Months Ended December 31, (Dollars in Thousands) 2020 2019 Change % of % of Revenue Revenue $ % Revenue: Product$ 278,637 45 %$ 321,803 49 %$ (43,166) (13) % Service 339,256 55 % 340,666 51 % (1,410) - % Total revenue$ 617,893 100 %$ 662,469 100 %$ (44,576) (7) % Product. The 13%, or$43.2 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 customers primarily due to lower revenue from the federal government sector, as well as lower revenue from service provider customers, partially offset by an increase in revenue from DDoS offerings. Service. The$1.4 million , decrease in service revenue compared with the same period last year was primarily due to a decrease in post-contract services. 34 -------------------------------------------------------------------------------- Table of Contents Total revenue by geography was as follows: Nine Months Ended December 31, (Dollars in Thousands) 2020 2019 Change % of % of Revenue Revenue $ % United States$ 364,549 59 %$ 410,252 62 %$ (45,703) (11) % International: Europe 116,885 19 110,259 17 6,626 6 % Asia 43,167 7 41,647 6 1,520 4 % Rest of the world 93,292 15 100,311 15 (7,019) (7) % Subtotal international 253,344 41 252,217 38 1,127 - % Total revenue$ 617,893 100 %$ 662,469 100 %$ (44,576) (7) %United States revenue decreased 11%, or$45.7 million , primarily due to a decrease in revenue from network performance management offerings, partially offset by an increase in revenue from DDoS offerings. International revenue increased$1.1 million primarily driven by an increase in revenue from network performance management offerings. Cost of Revenue and Gross Profit Nine Months Ended December 31, (Dollars in Thousands) 2020 2019 Change % of % of Revenue Revenue $ % Cost of revenue Product$ 72,392 12 %$ 90,500 14 %$ (18,108) (20) % Service 94,763 15 88,960 13 5,803 7 % Total cost of revenue$ 167,155 27 %$ 179,460 27 %$ (12,305) (7) % Gross profit: Product $$ 206,245 33 %$ 231,303 35 %$ (25,058) (11) % Product gross profit % 74 % 72 % Service $$ 244,493 40 %$ 251,706 38 %$ (7,213) (3) % Service gross profit % 72 % 74 % Total gross profit $$ 450,738 $ 483,009 $ (32,271) (7) % Total gross profit % 73 % 73 % Product. The 20%, or$18.1 million , decrease in cost of product revenue for the nine months endedDecember 31, 2020 compared to the same period last year was primarily due to a$15.1 million decrease in direct material costs due to a decrease in product revenue, a$4.5 million decrease in the amortization of intangible assets, a$4.0 million decrease in inventory obsolescence charges, a$1.5 million decrease in employee-related expenses largely due to the timing of certain projects partially offset by an increase in variable incentive compensation, and an$0.8 million decrease in overhead costs. These decreases were partially offset by a$7.8 million increase in costs to deliver model calibration products. The product gross profit percentage increased by two percentage points to 74% during the nine months endedDecember 31, 2020 when compared to the nine months endedDecember 31, 2019 . The 11%, or$25.1 million , decrease in product gross profit is attributable to the 13%, or$43.2 million , decrease in product revenue, partially offset by the 20%, or$18.1 million , decrease in cost of product revenue. The increase in product gross profit was largely due to product mix. There was a higher percentage of software sales during the nine months endedDecember 31, 2020 as compared with the nine months endedDecember 31, 2019 . Service. The 7%, or$5.8 million , increase in cost of service revenue nine months endedDecember 31, 2020 compared to the same period last year was primarily due to a$5.2 million increase in employee-related expenses due to an increase in variable incentive compensation and the timing of certain projects, a$0.6 million increase in cost of materials used to support 35 -------------------------------------------------------------------------------- Table of Contents customers under service contracts, and a$0.5 million increase in software maintenance expense. These increases were partially offset by a$1.6 million decrease in travel expense primarily attributable to COVID-19 related restrictions. The service gross profit percentage decreased two percentage points to 72% for the nine months endedDecember 31, 2020 when compared to the nine months endedDecember 31, 2019 . The 3%, or$7.2 million , decrease in service gross profit is attributable to the 7%, or$5.8 million , increase in cost of service revenue and the$1.4 million decrease in service revenue. Gross profit. Our gross profit for the nine months endedDecember 31, 2020 decreased 7%, or$32.3 million , compared to the same period last year. This decrease is primarily attributable to the decrease in revenue of 7%, or$44.6 million , partially offset by the decrease in cost of revenue of 7%, or$12.3 million . The gross profit percentage remained flat at 73% for the nine months endedDecember 31, 2020 when compared to the nine months endedDecember 31, 2019 . Operating Expenses Nine Months Ended December 31, (Dollars in Thousands) 2020 2019 Change % of % of Revenue Revenue $ % Research and development$ 135,605 22 %$ 142,391 21 %$ (6,786) (5) % Sales and marketing 180,668 29 214,245 32 (33,577) (16) General and administrative 67,444 11 72,436 11 (4,992) (7) Amortization of acquired intangible assets 45,897 7 48,395 7 (2,498) (5) Restructuring charges 62 - 466 - (404) (87) Total operating expenses$ 429,676 69 %$ 477,933 71 %$ (48,257) (10) % Research and development. The 5%, or$6.8 million , decrease in research and development expenses for the nine months endedDecember 31, 2020 compared to the same period last year was primarily due to a$2.1 million decrease in travel expense primarily attributable to COVID-19 related restrictions, a$1.6 million decrease in depreciation expense, a$1.0 million decrease in rent and other facilities related expenses, and an$0.8 million decrease in contractor fees. These decreases were partially offset by a$0.7 million increase in employee-related expenses due to an increase in variable incentive compensation. Sales and marketing. The 16%, or$33.6 million , decrease in total sales and marketing expenses for the nine months endedDecember 31, 2020 compared to the same period last year was primarily due to a$14.1 million decrease in travel expense primarily attributable to COVID-19 related restrictions, a$9.2 million decrease in expenses related to trade shows, user conferences and other events attributable to continued cost control and COVID-19 related restrictions, a$4.5 million decrease in commissions expense, a$4.0 million decrease in advertising expense, and a$2.0 million decrease in employee-related expenses due to a reduction in headcount, partially offset by an increase in variable incentive compensation. General and administrative. The 7%, or$5.0 million , decrease in general and administrative expenses for the nine months endedDecember 31, 2020 compared to the same period last year was primarily due to a$1.6 million decrease in legal-related expenses and penalties, a$1.3 million decrease in travel expense primarily attributable to COVID-19 related restrictions, a$1.2 million decrease in rent and other facilities related expenses, 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, definite-lived trademark and tradenames, and leasehold interest related to the Comms Transaction and the acquisitions of ONPATH, Simena, Psytechnics,Network General , Avvasi and Efflux. The 5%, or$2.5 million , decrease in amortization of acquired intangible assets for the nine months endedDecember 31, 2020 compared to the same period last year was largely due to a reduction in the amortization of intangible assets related to the Comms Transaction. Restructuring. During the fiscal years endedMarch 31, 2020 and 2019, we implemented programs to restructure certain departments to better align functions and reduce overall headcount. As a result of the workforce reduction, during the nine months endedDecember 31, 2020 and 2019, we recorded a restructuring charge totaling$0.1 million and$0.5 million , respectively, related to one-time termination benefits. 36 -------------------------------------------------------------------------------- Table of Contents Interest and Other Expense, Net Nine Months Ended December 31, (Dollars in Thousands) 2020 2019 Change % of % of Revenue Revenue $ % Interest and other expense, net$ (11,757) (2) %$ (11,930)
(2) %
The 1%, or$0.2 million , decrease in interest and other expense, net was primarily due to a$7.7 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$0.5 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 nine months endedDecember 31, 2019 . These decreases were offset by a$4.1 million increase in foreign exchange expense, a$3.2 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 Taxes. Our effective income tax rates were 14.9% and 47.2% for the nine months endedDecember 31, 2020 and 2019, respectively. The effective income tax rate for the nine months endedDecember 31, 2020 differed from the effective rate for the nine months endedDecember 31, 2019 , primarily due to the establishment ofU.S. deferred tax liabilities for certain of our foreign subsidiaries making elections to be treated asU.S. branches for federal income tax purposes, stock based compensation and a significant reduction in pre-tax losses as compared to the prior year. These items were partially offset by a discrete benefit recorded during the nine months endedDecember 31, 2019 related to the issuance ofU.S. regulations in the prior period impacting our estimate of BEAT. Nine Months Ended December 31, (Dollars in Thousands) 2020 2019 Change % of % of Revenue Revenue $ % Income tax expense$ 1,390 - %$ 3,236 - %$ (1,846) (57) %
Off-Balance Sheet Arrangements
AtDecember 31, 2020 and 2019, we did not have any off-balance sheet arrangements as defined in Regulation S-K, Item 303(a)(4)(ii). Commitments 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 - We had a contingent liability atDecember 31, 2020 andMarch 31, 2020 for$0.7 million related to the acquisition of Gigavation inFebruary 2020 for which an escrow account was established to cover damages we may suffer related to any liabilities that we did not agree to assume or as a result of the breach of representations and warranties of the seller as described in the acquisition agreement. Except to the extent that valid indemnification claims are made prior to such time, the$0.7 million will be paid to the seller inFebruary 2021 . The contingent purchase consideration of$0.7 million was included as accrued other in our consolidated balance sheet atDecember 31, 2020 andMarch 31, 2020 . 37 -------------------------------------------------------------------------------- Table of Contents We had a contingent liability atMarch 31, 2020 related to the acquisition ofEastwind inApril 2019 . The contingent purchase consideration represents amounts deposited into an escrow account which was 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 seller as described in the acquisition agreement. The contingent purchase consideration of$1.0 million was included as accrued other in the Company's consolidated balance sheet atMarch 31, 2020 . The contingent purchase consideration of$1.0 million was paid to the seller inApril 2020 . Legal - From time to time, NetScout is 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, inMarch 2016 ,Packet Intelligence LLC (Packet Intelligence or Plaintiff) filed a Complaint against NetScout and two subsidiary entities in theUnited States District Court for the Eastern District of Texas asserting infringement of fiveUnited 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. InOctober 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. OnOctober 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. InSeptember 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 beingJune 2022 . Following the entry of final judgment, onJune 12, 2019 , we filed our Notice of Appeal. OnJuly 14, 2020 , theCourt 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. 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 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 . Other contingent liabilities - During fiscal year 2020, one of our subsidiaries, located in theUnited Kingdom (UK ), determined that value added tax (VAT) was not properly applied to certain supplies of service to theUK . We filed a blank disclosure with HM Revenue & Customs (HMRC) notifying HMRC of these application differences, and subsequently filed a voluntary disclosure agreement (VDA). The VDA covered the period ofMarch 1, 2016 throughFebruary 29, 2020 . The penalties associated with the application differences can range from 0%-30% of the underpayment and are based on objective and subjective determinations to be made by HMRC. A majority of the difference in our application of the VAT rules relates to services for which the subsidiary did not collect VAT from its customers and for which customers would have been eligible to reclaim under theUK VAT regime. During the third quarter of fiscal year 2021, HMRC assessed a penalty for the VAT application differences, which will be suspended once the suspension period expires should no further discrepancies in the application ofUK VAT be identified and officially concluded their audit during the fourth quarter of fiscal year 2021. The suspension period commenced onDecember 11, 2020 and ends onMarch 10, 2021 . We accrued the penalties assessed by HMRC, which is included as accrued other in our consolidated balance sheet atDecember 31, 2020 . Additionally, since we were required to settle the underpayment of VAT separately with our customers and HMRC, during the third quarter of fiscal year 2021, we invoiced the customers for the amount of VAT not originally collected, which is included in accounts receivable and unbilled costs, net of allowance for doubtful accounts and recorded a liability for the amounts owed to HMRC, which is included as accrued other in our consolidated balance sheet atDecember 31, 2020 . 38 -------------------------------------------------------------------------------- Table of Contents Liquidity and Capital Resources Cash, cash equivalents and marketable securities consisted of the following (in thousands):December 31 ,March 31, 2020 2020
Cash and cash equivalents $ 477,755
Short-term marketable securities 12,689 47,969
Long-term marketable securities - 2,613
Cash, cash equivalents and marketable securities
Cash, cash equivalents and marketable securities AtDecember 31, 2020 , cash, cash equivalents and marketable securities (current and non-current) totaled$490.4 million , a$101.3 million increase from$389.1 million atMarch 31, 2020 . This increase was primarily due to cash provided by operating activities of$121.9 million , partially offset by$12.8 million used for tax withholdings on restricted stock units,$9.1 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 nine months endedDecember 31, 2020 . AtDecember 31, 2020 , cash and short-term and long-term investments inthe United States were$346.0 million , while cash held outsidethe United States was approximately$144.4 million . Cash and cash equivalents were impacted by the following: Nine Months EndedDecember 31 , (in thousands) 2020 2019
Net cash provided by operating activities $ 121,903 $117,790
Net cash provided by (used in) investing activities
(817)
Net cash used in financing activities $ (17,041) $(236,610)
Net cash from operating activities Cash provided by operating activities was$121.9 million during the nine months endedDecember 31, 2020 , compared with$117.8 million of cash provided by operating activities during the nine months endedDecember 31, 2019 . The$4.1 million increase was due in part to an$18.0 million increase from net income,$16.3 million increase from accounts receivable, a$6.7 million increase from accrued compensation and other expenses, a$4.1 million increase from accounts payable, and a$1.8M increase from operating lease liabilities. These increases were partially offset by a$20.4 million decrease from deferred revenue, an$8.6 million decrease from prepaid expenses and other assets, a$7.8 million decrease from depreciation and amortization expense, a$3.9 million decrease from inventories, a$2.0 million decrease from deferred income taxes, and a$0.5 million decrease from the change in fair value of contingent and contractual liabilities during the nine months endedDecember 31, 2020 as compared with the nine months endedDecember 31, 2019 . 39 -------------------------------------------------------------------------------- Table of Contents Net cash from investing activities Nine Months EndedDecember 31 , (in thousands) 2020 2019
Cash provided by (used in) investing activities included the following: Purchase of marketable securities
$ (13,974) $ (89,840) Proceeds from sales and maturity of marketable securities 51,706 108,413 Purchase of fixed assets (9,110) (15,207) Purchase of intangible assets (4,537) - Decrease (increase) in deposits 105 (29) Acquisition of businesses - (4,154)$ 24,190 $ (817) Cash provided by investing activities was$24.2 million during the nine months endedDecember 31, 2020 , compared with$0.8 million of cash using in investing activities during the nine months endedDecember 31, 2019 . The$25.0 million increase was due in part to a$19.2 million increase in cash inflow from marketable securities related to a decrease of$75.9 million in the purchase of marketable securities offset by a$56.7 million decrease in proceeds from the sales and maturity of marketable securities, a$6.1 million decrease in cash used for the purchase of fixed assets, and a$4.2 million decrease in cash used for the acquisition of businesses during the nine months endedDecember 31, 2020 when compared with the nine months endedDecember 31, 2019 . These increases were partially offset by a$4.5 million cash outflow related to the purchases of intangible assets during the nine months endedDecember 31, 2020 when compared with the nine months endedDecember 31, 2019 . Our investments in property and equipment consist primarily of computer equipment, demonstration units, office equipment and facility improvements. We plan to continue to invest in capital expenditures to support our infrastructure through the remainder of fiscal year 2021. Net cash from financing activities Nine Months Ended December 31, (in thousands) 2020 2019
Cash used in financing activities included the following:
Issuance of common stock under stock plans$ 2
Payment of contingent consideration (1,000) -
Repayment of long-term debt - (100,000)
Treasury stock repurchases (3,275) (125,000)
Tax withholding on restricted stock units (12,768) (11,612)
$ (17,041) $ (236,610)
Cash used in financing activities decreased by $219.6 million to $17.0 million
during the nine months ended December 31, 2020 , compared with $236.6 million of
cash used in financing activities during the nine months ended December 31,
2019 .
During the nine months ended December 31, 2020 , we paid $1.0 million of
contingent purchase consideration related to the Eastwind acquisition in April
2020 .
During the nine months ended December 31, 2019 , we repaid $100.0 million of
borrowings under the Amended Credit Agreement.
During the nine months ended December 31, 2020 and 2019, we repurchased 154,271
and 5,164,593 shares of our common stock for $3.3 million and $125.0 million
under our twenty-five million share repurchase program.
In connection with the delivery of our common stock upon vesting of restricted
stock units, we withheld 489,907 and 509,532 shares at a cost of $12.8 million
and $11.6 million related to minimum statutory tax withholding requirements on
these restricted stock units during the nine months ended December 31, 2020 and
2019, respectively. These withholding transactions
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do not fall under the repurchase program described above, and therefore do not
reduce the number of shares that are available for repurchase under that
program.
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 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. At December 31, 2020 , $450 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 September 30, 2020 , until we have delivered
financial statements for the quarter ended December 31, 2020 , 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 December 31, 2020 , the Company's maximum allowed
consolidate 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 November 30, 2020 the Intercontinental Exchange Benchmark
Administration (IBA), the FCA -regulated and authorized administrator of LIBOR,
announced that it will open a consultation period in December 2020 through
January 25, 2021 on its intention to cease USD LIBOR. The IBA intends that,
subject to confirmation following its consultation, 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 we 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 September 30, 2020 , until we have delivered financial statements for the
quarter ended December 31, 2020 , the commitment fee will be 0.25% per annum, and
thereafter the commitment fee will vary depending on 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
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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 December 31, 2020 , 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
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 the 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 December 31,
2020 , which are being amortized over the life of the revolving credit facility.
The unamortized balance was $3.6 million as of December 31, 2020 . The balance of
$1.7 million was included as prepaid expenses and other current assets and a
balance of $1.9 million was included as other assets in our consolidated balance
sheet.
Expectations for Fiscal Year 2021
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.
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Recent Accounting Pronouncements
For information with respect to recent accounting pronouncements on our
consolidated financial statements, see Note 1 contained in the "Notes to
Consolidated Financial Statements" included in Part I of this Quarterly Report
on Form 10-Q.
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