What changed in this filing

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Item 7. Management’s Discussion and Analysis

2021-05-20 compared with 2020-05-20 · 138 added, 193 removed, 356 unchanged (48% of the section changed)

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See the section titled "Cautionary Statement Concerning Forward-Looking Statements" that appears at the beginning of this Annual Report.

We are an industry leader in providing service assurance and security solutions that are used by customers worldwide to assure 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 the network 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 security, thereby driving compelling returns on their investments in their network and broader technology initiatives.

Some of the more significant technology trends and catalyst 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.

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.

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 achieve expense reductions and make improvements in a highly competitive industry.

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

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Due to the critical nature of our products and services, we are considered critical under State and Federal guidelines.

We remain focused on protecting the health and well-being of our employees and have implemented work from home policies for a vast majority of our employees where possible.

We are closely monitoring the impact of the outbreak of COVID-19 on all aspects of our business, including how it has impacted and will continue to impact our customers, employees, supply chain, and distribution network.

While COVID-19 did not have a material adverse effect on our reported results for the fourth quarter of our fiscal year 2020, the pandemic did impact the timing of some transactions.

There is a great deal of uncertainty in the global economy, and we are unable to predict the ultimate impact that it may have on our business, future results of operations, financial position or cash flows.

The extent to which our operations may be impacted by the COVID-19 pandemic will depend largely on future developments, which are highly uncertain and cannot be accurately predicted, including new information which may emerge concerning the severity of the outbreak and actions by government authorities to contain the outbreak or treat its impact.

Furthermore, the impacts of a potential worsening of global economic conditions and the continued disruptions to and volatility in the financial markets remain unknown.

Although there is uncertainty related to the anticipated impact of the recent COVID-19 outbreak on our future results, we believe that our products offer customers a unique solution set that can assist them in dealing with unexpected network, security and capacity challenges during and after the pandemic.

Despite high customer interest in our products, the timing of the receipt of orders is challenging to predict.

We believe our current cash reserves leave us well-positioned to manage our business through this crisis as it continues to unfold.

Based on our analysis, we believe our existing balances of cash, cash equivalents and marketable securities and our currently anticipated operating cash flows will be sufficient to meet our cash needs arising in the ordinary course of business for the next twelve months.

We are taking actions to reduce costs and increase productivity throughout our company.

This includes limiting discretionary spending and reducing hiring activities.

We have temporarily halted our stock repurchase program, although the repurchase authorization remains effective.

In addition, based on covenant levels at March 31, 2020, we have an incremental $285 million available to us under our $1.0 billion revolving credit facility.

The extent of the impact of the global COVID-19 outbreak on our operational and financial performance will depend on certain developments, including the duration and spread of the outbreak, its impact on our customers and suppliers and the range of governmental and community reactions to the pandemic, which are uncertain and cannot be fully predicted at this time.

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

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 f iscal year ended March 31, 2020 as compared to total revenue for the fiscal year ended March 31, 2019 was primarily impacted by an $18.1 million decrease in revenue as a result of the divestiture of the HNT tools business in September 2018, as well as a decrease in product revenue from both network performance management and DDOS offerings.

These decreases were offset by an increase in service revenue from new maintenance contracts and renewals from a growing support base.

Our gross profit percentage increased by approximately one percentage point during the fiscal year ended March 31, 2020 as compared with the fiscal year ended March 31, 2019.

Net loss for the fiscal year ended March 31, 2020 was $2.8 million, as compared with net loss for the fiscal year ended March 31, 2019 of $73.3 million, resulting in a decrease in net loss of $70.5 million.

The decrease in net loss was primarily due to a $35.9 million impairment charge of certain intangible assets related to the HNT tools business recorded in the fiscal year ended March 31, 2019 , a $17.6 million decrease in amortization of intangible assets, a $16.0 million decrease in restructuring charges, an $11.8 million decrease in employee-related expenses, and a $9.5 million loss on the divestiture of the HNT tools business recorded in the fiscal year ended March 31, 2019 .

These decreases were partially offset by a $24.3 million increase in income tax expense.

Total revenue for the f iscal year ended March 31, 2021 as compared to total revenue for the fiscal year ended March 31, 2020 was prim arily 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 c ompared 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 a decrease of $97.9 million compared to the fiscal year ended March 31, 2019.

This decrease was primarily due to $175.0 million used to repurchase shares of our common stock, $100.0 million used to repay long-term debt, $19.9 million used for capital expenditures, $11.9 million used for tax withholdings in connection with the vesting of restricted stock units, and $11.3 million used for the acquisitions of Gigavation Incorporated (Gigavation) and Eastwind Networks, Inc.

These decreases were partially offset by $225.0 million in cash provided by operations during the fiscal year ended March 31, 2020.

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 product revenue, non-GAAP service 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 (total, product and service) eliminates the GAAP effects of acquisitions by adding back revenue related to deferred revenue revaluation, as well as revenue impacted by the amortization of acquired intangible assets.

Non-GAAP gross profit includes the aforementioned revenue adjustments and also removes expenses related to the amortization of acquired intangible assets, share-based compensation, certain expenses relating to acquisitions including depreciation costs, compensation for post-combination services and business development and integration costs and adds back transitional service agreement income.

Non-GAAP income from operations includes the aforementioned adjustments and also removes restructuring charges, intangible asset impairment charges, loss on divestiture and costs related to new accounting standard implementation.

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 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.

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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.

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.

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Service deferred revenue fair value adjustment 6 192 1,199

Amortization of acquired intangible assets — — 9

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

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Amortization of acquired intangible assets 19,058 24,974 31,238

Business development and integration expense — — 244

Acquisition related depreciation expense 23 31 75

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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

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Loss on divestiture — — 9,472

Other income — — (57)

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)

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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.

The majority of our product sales consist of hardware products with embedded software that are essential to providing customers the intended functionality of the solutions.

We also sell software offerings decoupled from the underlying hardware and software solutions to provide customers with enhanced functionality.

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.

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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.

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 providing consulting services are included in services revenue, with the offsetting expense recorded in cost of service revenue.

Reimbursements of out-of-pocket expenditures incurred in connection with

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.

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that is, when control of the product transfers to the reseller or distributor.

We record consideration given to a reseller or distributor as a reduction of revenue to the extent we have recorded revenue from 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.

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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 our operating segments that constitute a business for which financial information is available and for which operating results are regularly reviewed by segment management.

Through the first half of fiscal year 2020, we had two reporting units:

(1) Service Assurance and (2) Security.

As part of our continued integration efforts, effective during the third quarter of fiscal year 2020, we reorganized our business units.

As a result of this change, we reduced the number of reporting units from two reporting units to one reporting unit.

The former Service Assurance and Security reporting units were combined as result of organizational changes made to fully integrate the resources and assets of the Service Assurance and Security business units.

We completed an assessment of any potential impairment for all reporting units immediately prior to and after the reporting unit change and determined that no impairment existed.

As such, no impairment charges were recognized during the fiscal year ended March 31, 2020.

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.

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However, if we conclude otherwise, quantitative impairment testing is not required.

During fiscal year 2020, we

performed our annual impairment analysis for goodwill as of January 31, 2020.

We performed a quantitative analysis and determined the fair value of the reporting unit's goodwill using established income and market valuation approaches.

Goodwill was determined to be recoverable as of January 31, 2020.

We considered the current and expected future economic and market conditions surrounding the COVID-19 pandemic to be a triggering event.

As such, we performed a quantitative analysis as of March 31, 2020 and determined the fair value of the reporting unit's goodwill using established income and market valuation approaches.

Goodwill was estimated to be recoverable as of March 31, 2020.

Indefinite-lived intangible assets are tested for impairment at least annually as of January 31, 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.

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 greater than its carrying amount, quantitative impairment testing is not required.

We completed our annual impairment test of the indefinite-lived intangible asset at January 31, 2020 using the qualitative Step 0 assessment.

No impairment indicators were observed as of January 31, 2020.

We considered the current and expected future economic and market conditions surrounding the COVID-19 pandemic and concluded that it was not more likely than not that the trade name was impaired and therefore a quantitative Step 1 assessment was not performed as of March 31, 2020.

We completed three acquisitions and one divestiture during the three-year period ended March 31, 2020.

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.

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.

We had a contingent liability at March 31, 2020 fo r $0.7 million related to the acquisition of Gigavation in February 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 su ch time , the contingent purchase consideration of $0.7 million will be paid to the seller in February 2021 .

We had a contingent liability at March 31, 2020 fo r $1.0 million related to the acquisition of Eastwind in April 2019 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.

The contingent purchase consideration of $1.0 million was paid to the seller in April 2020.

We had a contingent consideration asset related to the divestiture of our handheld network test (HNT) tools business in September 2018.

The contingent consideration asset 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 observable (Level 3) inputs.

The value of the contingent consideration asset at March 31, 2020 and 2019 was $0 w as $0.8 million, respectively.

We had a contingent liability at March 31, 2018 for $0.5 million related to the acquisition of Efflux Systems, Inc.

(Efflux) in July 2017 for which an escrow account was 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 seller as described in the acquisition agreement.

The $0.5 million was paid to the seller in July 2018.

We had a contingent liability at March 31, 2018 for $4.9 million related to the acquisition of Simena LLC (Simena) in November 2011, which was based on the ultimate settlement of assets and liabilities acquired as part of the transaction, and the former owners' future period of employment with us.

The contingent purchase consideration of $5.0 million was paid to the seller in November 2018.

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

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Total revenue $ 831,282 100 % $ 891,820 100 % $ (60,538) (7) %

The 6%, or $28.9 million, decrease in product revenue compared with the same period last year was primarily due to lower enterprise-related product revenue for both network performance management and DDoS offerings, a decrease in network performance management offerings from service provider customers, as well as the divestiture of the HNT tools business in September 2018.

The 2%, or $10.9 million, increase in service revenue compared to th e same period last year was primarily due to an increase in revenue from maintenance contracts due to increased new maintenance contracts and renewals from a growing support base.

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:

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Total revenue $ 831,282 100 % $ 891,820 100 % $ (60,538) (7) %

United States revenue decreased 1% , or $7.6 million, primarily due to a decrease in revenue from network performance management offerings, as well as a decrease due to the divestiture of the HNT tools business, partially offset by an increase in

DDoS offerings.

International revenue decreased 3%, or $10.5 million, primarily due to a decrease in revenue from network performance management offerings.

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.

Cost of Revenue and Gross Profit

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Total gross profit % 73 % 73 % — %

The 13%, or $18.1 million, decrease in cost of product revenue compared to the same period last year was p rimarily due to a $7.8 million decrease in the amortization of intangible assets, a $7.2 million decrease in direct material costs due to a decrease in product revenue, a $4.2 million decrease in employee-related expenses associated with the timing of certain projects and a reduction in headcount, and a $1.4 million decrease in costs to deliver model calibration products.

These decreases were partially offset by a $2.3 million increase in inventory obsolescence charges.

The product gross profit percentage increased by two percentage points to 72% during the fiscal year ended March 31, 2020 as compared to the same period in the prior year.

The 3%, or $10.8 million decrease in product gross profit, corresponds with the 6%, or $28.9 million decrease in pro duct rev enue, partially offset by the 13%, or $18.1 million, decrease in cost of product.

The 5%, or $6.2 million, increase in cost of service revenue was primarily due to a $7.0 million increase in employee-related expenses associated with an increase in variable incentive compensation as well as the timing of certain projects, an $0.8 million increase in cost of materials used to support customers under service contracts, a $0.7 million increase in rent and other facilities related expenses and a $0.5 million increase in warranty expense.

These increases were partially offset by a $2.8 million decrease in contractor fees.

The se rvice gross profit percen tage remained flat at 74% during the fiscal year ended March 31, 2020 compared to the fiscal year ended March 31, 2019.

The 1%, or $4.7 million, increase in service gross profit corresponds with the 2%, or $10.9 million, increase in service revenue, partially offset by the 5%, or $6.2 million increase in cost of services.

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.

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 se rvice gross profit percen tage decreased by two percen tage 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.

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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 percent age increased by one percentage point to 73% during the fiscal year ended March 31, 2020 compared to the same period in the prior year.

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.

Operating Expenses

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Restructuring charges 62 — 2,674 — (2,612) (98) %

Impairment of intangible assets — — 35,871 4 (35,871) (100) %

Loss on divestiture of business — — 9,472 1 (9,472) (100) %

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

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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 8%, or $15.3 million, decrease in research and development expenses compared to the same period last year was primarily due to a net $12.0 million decrease in employee-related expense due to a reduction in headcount partially offset by an increase in variable incentive compensation, a $2.3 million decrease in depreciation expense, and a $0.7 million decrease in software license expense.

The 5%, or $9.1 million, decrease in res earch 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 5%, or $15.3 million, decrease in total sales and marketing expenses compared to the same period last year was primarily due to a net $4.0 million decrease in employee-related expense due to a reduction in headcount as well as a decrease in share-based compensation expense partially offset by an increase in variable incentive compensation, a $3.6 million decrease in marketing related expenses, a $3.3 million decrease in travel expense, a $2.3 million decrease in commissions expense, and a $1.9 million decrease in trade shows and other events.

The 12%, or $33.8 million, decrease in total sales and marketing expenses compared to the same period last year was prima rily 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 7%, or $6.4 million, increase in general and administrative expenses compared to the same period last year was primarily due to a $6.6 million increase in legal fees and penalties, and a net $1.4 million increase in employee-related expenses due to an increase in variable incentive compensation offset by a decrease in share-based compensation.

These increases were partially offset by a $1.7 million decrease in rent and other facilities related expenses .

The 11%, or $11.0 million, decrease in gen eral 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, definite-lived trademark and tradenames, and leasehold interests related to the Comms Transaction, ONPATH Technologies, Inc., Simena, Psytechnics, Ltd, Network General Corporation, Avvasi Incorporated and Efflux.

The 13%, or $9.8 million, decrease in amortization of acquired intangible assets was largely due to a decrease in amortization of the intangible assets related to the divestiture of the HNT tools business in September 2018, with the remaining decrease due to a reduction in the amortization of intangible assets related to the Comms Transaction.

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.

Dur ing 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 recor ded $2.7 million and $18.7 million of restructuring charges related to one-time termination benefits as well as facility-related charges during the fiscal years ended March 31, 2020 and 2019, respectively.

Impairment of intangible assets.

During the first quarter of fiscal year 2019, we performed a quantitative analysis on certain intangible assets related to the HNT tools business.

The fair value of these intangible assets was determined to be less

than the carrying value, and as a result, we recognized an impairment charge of $35.9 million during the fiscal year ended March 31, 2019.

Loss on divestiture of business.

During the fiscal year ended March 31, 2019, we recorded a $9.5 million loss on the divestiture of the HNT tools business.

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.

Interest and Other Expense, Net

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Interest and other expense, net $ (14,826) (2) % $ (15,714) (2) % $ 888 6 %

The 26%, or $5.6 million, decrease in interest and other expense, net was primarily due to a $5.8 million decrease in interest expense due to debt repayments on the credit facility during fiscal year 2020, a $1.3 million decrease in foreign exchange expense, and an $0.8 million decrease in other expense due to a lower adjustment to the fair value of the contingent consideration related to the HNT tools business divestiture during fiscal year 2020 when compared to the fair value adjustment recorded in fiscal year 2019.

These decreases in expense were partially offset by a $1.1 million decrease in transitional services agreement income related to the HNT tools business divestiture and a $0.7 million decrease in interest income received on investments.

The 6%, or $0.9 million, decrease in interest and other exp ense, 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

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statutory rate.

The effective tax rate for the twelve months ended March 31, 2020 is higher than the effective rate for the twelve months ended March 31, 2019, primarily due to the establishment of net deferred tax liabilities related to elections made during the year to treat several of our foreign subsidiaries as U.S.

branches for federal income tax purposes offset by a discrete benefit related to the issuance of U.S.

regulations impacting our estimate of the Base Erosion Anti-Abuse Tax in the prior fiscal year and a significant reduction in pre-tax losses as compared to the prior year.

During fiscal year 2019, we completed our analysis and recording of all the tax effects related to the Tax Cuts and Jobs Act (TCJA), as required under SAB 118, and recorded a benefit of $87 million due to the re-measurement of our deferred taxes and a $2 million one-time transition tax.

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) Change

Income tax expense (benefit) $ 4,678 1 % $ (19,588) (2) % $ 24,266 124 %

Income tax expense $ 2,952 — % $ 4,678 1 % $ (1,726) (37) %

Contractual Obligations

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Pension benefit plan 37,586 485 1,158 1,648 34,295

Contingent purchase consideration 1,748 1,748 — — —

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

At March 31, 2020, the total amount of net unrecognized tax benefits for uncertain tax positions and the accrual for the related interest was $1.3 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.

We have also excluded long-term deferred revenue o f $104.2 million as such amounts will be recognized as services are provided.

(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.

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.

(1) Includes estimated future interest at an interest rat e of 2.49% for our o utstanding term loan at March 31, 2020.

(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 throu gh September 2030 for a total of $96.1 million.

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

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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.

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 represent amounts deposited into escrow accounts, which were 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 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 are included as accrued other in our consolidated balance sheet at March 31, 2020.

Except to the extent that valid indemnification claims are made prior to such time, the $0.7 million of purchase consideration related to the Gigavation acquisition will be paid to the seller in February 2021.

The contingent purchase consideration related to the Eastwind acquisition was paid to the seller in April 2020.

We had a contingent consideration asset related to the divestiture of our HNT tools business in September 2018.

The fair value of the contingent consideration of $2.3 million was recognized on the divestiture date and was measured using observable (Level 3) inputs.

The contingent consideration asset at March 31, 2020 and 2019 wa s $0 and $0.8 m illion, respectively.

We had a contingent liability at March 31, 2018 for $0.5 million related to the acquisition of Efflux in July 2017 for which an escrow account was 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 seller as described in the acquisition agreement.

The $0.5 million was paid to the seller in July 2018.

We had a contingent liability at March 31, 2018 for $4.9 million related to the acquisition of Simena in November 2011, which was based on the ultimate settlement of assets and liabilities acquired as part of the transaction, and the former owners' future period of employment with us.

The contingent purchase consideration of $5.0 million was paid to the seller in November 2018.

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 us and two subsidiary entities in the United States District Court for the Eastern District of Texas asserting infringement of five United States patents.

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.

We 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.

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.

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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.

The Court denied the Plaintiff's motion for fees.

Following additional motions for judgment as a matter of law, the court entered final judgment.

On June 12, 2019, we filed our Notice of Appeal of the judgment and all other adverse findings.

We have concluded that the risk of loss from this matter is currently neither remote nor probable, and therefore, under GAAP definitions, the risk of loss is termed "reasonably possible".

Therefore, accounting rules require us to provide an estimate for the range of potential liability.

We currently estimate that the estimated range of liability is between $0 and the aggregate amount awarded by the jury and the Court's award of enhanced damages, plus potential additional pre- and post-judgment interest amounts and costs and any royalties owed on post-trial sales of the accused G10 and GeoBlade products.

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.

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

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.

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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.

Other Contingent Liabilities

During fiscal year 2020, one of our subsidiaries, located in the United Kingdom (UK), determined that value added tax (VAT) was not properly applied to certain supplies of service to the UK.

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 from March 1, 2016 through February 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.

At March 31, 2020 we have accrued the penalties that we believe are probable and estimable of assessment 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 the UK VAT regime.

Based on these facts, we currently believe that it is probable that we will not be required to settle these amounts separately with our customers and HMRC, hence we have not recorded a payable to HMRC and a receivable from our customers for these amounts.

We believe that it is reasonably possible that HMRC will require separate settlement;

if that occurred, we would be required to collect approximately £16 million from our current customers and remit that amount to HMRC.

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

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Cash, cash equivalents and marketable securities

At March 31, 2020, cash, cash equivalents and marketable securities (current and non-current) total ed $389.1 million.

This represents a decrease of $97.9 million from $487.0 million at March 31, 2019.

These decreases were partially offset by $225.0 million in cash provided by operations during the fiscal year ended March 31, 2020.

At March 31, 2020, cash, short-term and long-term investments in the United States were $251.7 million, while cash held outside of the United States was approximately $137.4 million.

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 we re $328.8 million, while cash held outside of the United States was approximately $147.7 million.

Cash and cash equivalents were impacted by the following:

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Net cash provided by operating activities $ 213,921 $ 225,023 $ 149,838

Net cash (used in) provided by investing activities $ (4,309) $ (26,252) $ 57,128

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)

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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 $75.2 million increase was due in part to a $70.6 million increase from a smaller net loss, a $43.7 million favorable impact from accounts receivable, a $23.6 million increase from deferred income taxes, a $12.8 million increase from accrued compensation and other expenses, a $10.8 million increase from prepaid expenses and other assets, and a $10.5 million increase from operating lease

right-of-use assets.

These increases were partially offset by a $35.9 million decrease due to the impairment of certain intangible assets, a $21.8 million decrease from depreciation and amortization, a $13.1 million decrease from operating lease liabilities, a $7.7 million decrease in loss on divestiture of business, a $7.0 million decrease from deferred revenue, a $5.5 million decrease from share-based compensation expense, and a $3.8 million decrease from inventories.

This $11.1 million decrease was due in pa rt 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 com pared to 73 days at March 31, 2020 and 88 days at March 31, 2019.

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2021 2020 2019

Cash (used in) provided by investing activities included the following:

Cash provided by (used in) investing activities included the following:

Purchase of marketable securities $ (15,673) $ (117,383) $ (229,769)

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Acquisition of businesses, net of cash acquired — (11,347) —

Increase in deposits (31) (97) (330)

Contingent purchase consideration — — 523

Decrease (increase) in deposits 88 (31) (97)

Collection of contingent consideration — 52 —

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$ 24,698 $ (4,309) $ (26,252)

Cash used in investing activi ties decreased by $21.9 million to $4.3 million during the fiscal year ended March 31, 2020, compared to $26.3 million of cash used in investing activities during the fiscal year ended March 31, 2019.

Net cash inflows r elating to the purchase and sales of marketable securities increased $26.2 million during the fiscal year ended March 31, 2020 relating to the amount of investments held at each respective balance sheet date, from an inflow of $0.7 million during fiscal year ended March 31, 2019 to an inflow of $26.9 million during fiscal year ended March 31, 2020.

Cash provided by investing activi ties 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.

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Payment of contingent consideration (1,748) — (2,851)

Treasury stock repurchases, including accelerated share repurchases (175,000) (14,468) (501,324)

Treasury stock repurchases (3,275) (175,000) (14,468)

Tax withholding on restricted stock units (13,286) (11,872) (11,969)

Proceeds from issuance of long-term debt, net of issuance costs — — 294,619

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

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

Cash used in financing activities increased $207.6 million to $286.9 million during the fiscal year ended March 31, 2020, compared to $79.3 million of cash used in financing activities duri ng the fiscal year ended March 31, 2019.

During the twelve months ended March 31, 2020, we repurchased 7,116,159 shares f or $175.0 million unde r the twenty-five million share repurchase program.

During the twelve months ended March 31, 2019, we repurchased 543,251 shares for $14.5 million under the twenty-five million share repurchase program.

On February 1, 2018, we entered into ASR agreements with two third-party financial institutions to repurchase an aggregate of $300 million of our common stock via accelerated stock repurchase transactions under the twenty million share repurchase program and the twenty five million share repurchase program.

We borrowed $300 million under our Amended Credit Agreement and made an up-front payment of $300 million pursuant to the ASR and received an initial delivery of 7,387,862 shares in the aggregate, which is approximately 70 percent of the total number of shares of our common stock expected to be repurchased under the ASR.

As part of this purchase, 970,650 shares for $27.6 million were deducted under the twenty million share repurchase program and 6,417,212 shares for $182.4 million were deducted under the twenty five million share repurchase program.

Final settlement of the ASR agreements was completed in August 2018.

As a result, we received an additional 3,679,947 shares of common stock for $96.8 million, which reduced the number of shares available to be purchased from the twenty-five million share repurchase program during the fiscal year ended March 31, 2019.

In total, 11,067,809 shares of our common stock were repurchased under the ASR at an average cost per share of $27.11.

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, 2020 and 2019, we repaid $100.0 million and $50.0 million of borrowings under the Amended Credit Agreement, respectively.

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

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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.

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.

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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, 2019, until we have delivered financial statements for the quarter ended March 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 1.00% per annum for Base Rate loans and 2.00% per annum for LIBOR loans if our consolidated leverage ratio is greater than 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.

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.

Our Amended Credit Agreement 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.

On March 5, 2021, the Intercontinental Exchange Benchmark Administration

(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.

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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.

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 NetScout's Amended Credit Agreement described above, we terminated our previous term loan dated as of July 14, 2015, by and among NetScout;

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Expectations for Fiscal Year 2022

As we cannot predict the duration or scope of the COVID-19 pandemic and its impact on our customers and suppliers, the potential negative financial impact to our results cannot be reasonably estimated, but could be material.

We are actively managing the business to maintain cash flow and believe that we have adequate liquidity.

We believe that these factors will allow us to meet our anticipated funding requirements.

We believe that our cash balances, available debt, short-term marketable securities classified as available-for-sale and future cash flows generated by operations will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for at least the next 12 months.

Additionally, a portion of our cash may be used to acquire or invest in complementary businesses or products or to obtain the right to use complementary technologies.

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.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis