NETSCOUT SYSTEMS INC 10-K

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The following information should be read in conjunction with the audited consolidated financial information and the notes thereto included in this Annual Report on Form 10-K. In addition to historical information, the following discussion and other parts of this Annual Report contain forward-looking statements that involve risks and uncertainties. You should not place undue reliance on these forward-looking statements. Actual events or results may differ materially due to competitive factors and other factors discussed in Item 1A. "Risk Factors " and elsewhere in this Annual Report. These factors may cause our actual results to differ materially from any forward-looking statement. See the section titled "Cautionary Statement Concerning Forward-Looking Statements" that appears at the beginning of this Annual Report. Overview We are an industry leader with over 35 years of experience in providing service assurance and cybersecurity solutions that are used by customers worldwide to protect their digital business services against disruption. Service providers and enterprises, including local, state and federal government agencies, rely on our solutions to achieve the visibility necessary to optimize network performance, ensure the delivery of high-quality, mission-critical applications and services, gain timely insight into the end user experience and protect their networks from attack. With our offerings, customers can quickly, efficiently and effectively identify and resolve issues that result in downtime, interruptions to services, poor service quality or compromised data, thereby driving compelling returns on their investments in their networks and broader technology initiatives. Some of the more significant technology trends and catalysts for our business include the evolution of customers' digital transformation initiatives such as the migration to cloud environments, the rapidly evolving cybersecurity threat landscape, business intelligence and analytics advancements, and the 5G evolution in both the service provider and enterprise verticals. Our operating results are influenced by a number of factors, including, but not limited to, the mix and quantity of products and services sold, pricing, costs of materials used in our products, growth in employee-related costs, including commissions, and the expansion of our operations. Factors that affect our ability to maximize our operating results include, but are not limited to, our ability to introduce and enhance existing products, the marketplace acceptance of those new or enhanced products, continued expansion into international markets, development of strategic partnerships, competition, successful acquisition integration efforts, and our ability to control cost and make improvements in a highly competitive industry. COVID-19 Impact In March 2020, the World Health Organization declared the novel strain of coronavirus (COVID-19) a global pandemic and recommended containment and mitigation measures worldwide. The pandemic and these containment and mitigation measures have led to adverse impacts on the U.S. and global economies. Due to the critical nature of our products and services, we are considered critical under State and Federal guidelines. While we have begun a phased reopening at some of our facilities, we remain focused on protecting the health and well-being of our employees and continue to maintain work from home policies for a vast majority of our employees where feasible. We continue to closely monitor the impact of the COVID-19 pandemic on all aspects of our business, including how it has impacted and could continue to impact our customers, employees, supply chain, and distribution network. In fiscal year 2021, the COVID-19 pandemic and resulting challenging macro-economic environment caused elongated purchasing cycles that impacted our revenue. For fiscal year 2022, as people in the world begin to get immunized and return to "normal", we expect that technology and project spending will resume and will be focused on advancing our products, growing revenue, enhancing earnings per share, and generating solid free cash flow. We believe our current cash reserves and access to capital through our revolving credit facility leave us well-positioned to manage our business as the crisis continues and as a recovery eventually occurs. We expect net cash provided by operating activities combined with cash, cash equivalents and marketable securities and borrowing availability under our revolving credit facility to provide sufficient liquidity to fund current obligations, capital spending, debt service requirements and working capital requirements over at least the next twelve months. We continue to take actions to control costs and increase productivity throughout our company but will invest in areas that advance our business for the future, as necessary. In addition to our cash equivalents, based on covenant levels at March 31, 2021, we have an incremental $336 million available to us under our $1.0 billion revolving credit facility. On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (the CARES Act) was enacted. The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. We have elected to defer the employer-paid portion of social security taxes. As of March 31, 2021, we had deferred $8.9 million of 33 Table of Contents 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, 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 an increase of $87.4 million compared to the fiscal year ended March 31, 2020. This increase was primarily due to $213.9 million in cash provided by operations during the fiscal year ended March 31, 2021. This increase was offset by $100.0 million used to repay long-term debt, $13.3 million used for tax withholdings in connection with the vesting of restricted stock units, $12.0 million used for capital expenditures, $4.5 million used for purchases of intangible assets and $3.3 million used to repurchase shares of our common stock during the fiscal year ended March 31, 2021. Use of Non-GAAP Financial Measures We supplement the United States generally accepted accounting principles (GAAP) financial measures we report in quarterly and annual earnings announcements, investor presentations and other investor communications by reporting the following non-GAAP measures: non-GAAP total revenue, non-GAAP gross profit, non-GAAP income from operations, non-GAAP operating margin, non-GAAP earnings before interest and other expense, income taxes, depreciation and amortization (EBITDA) from operations, non-GAAP net income, and non-GAAP net income per share (diluted). Non-GAAP revenue eliminates the GAAP effects of acquisitions by adding back revenue related to deferred revenue revaluation. Non-GAAP gross profit includes the aforementioned revenue adjustments and also removes expenses related to the amortization of acquired intangible assets, share-based compensation, and acquisition-related depreciation. Non-GAAP income from operations includes the aforementioned adjustments and also removes business development and integration expense, compensation for post-combination services, legal judgments expense, restructuring charges, intangible asset impairment charges, loss on divestiture and costs related to new accounting standard implementation and adds back transitional service agreement income. Non-GAAP EBITDA from operations includes the aforementioned items related to non-GAAP income from operations and also removes non-acquisition-related depreciation expense. Non-GAAP net income includes the foregoing adjustments related to non-GAAP income from operations, net of related income tax effects in addition to the provisional one-time impacts of the U.S. Tax Cuts and Jobs Act (TCJA) while removing transitional service agreement income and changes in contingent consideration. Non-GAAP diluted net income per share also excludes these expenses as well as the related impact of all these adjustments on the provision for income taxes. These non-GAAP measures are not in accordance with GAAP, should not be considered an alternative for measures prepared in accordance with GAAP (revenue, gross profit, operating profit, net income (loss) and diluted net income (loss) per share), and may have limitations in that they do not reflect all our results of operations as determined in accordance with GAAP. These non-GAAP measures should only be used to evaluate our results of operations in conjunction with the 34 Table of Contents corresponding GAAP measures. The presentation of non-GAAP information is not meant to be considered superior to, in isolation from, or as a substitute for results prepared in accordance with GAAP. Management believes these non-GAAP financial measures enhance the reader's overall understanding of our current financial performance and our prospects for the future by providing a higher degree of transparency for certain financial measures and providing a level of disclosure that helps investors understand how we plan and measure our business. We believe that providing these non-GAAP measures affords investors a view of our operating results that may be more easily compared with our peer companies and also enables investors to consider our operating results on both a GAAP and non-GAAP basis during and following the integration period of our acquisitions. Presenting the GAAP measures on their own may not be indicative of our core operating results. Furthermore, management believes that the presentation of non-GAAP measures when shown in conjunction with the corresponding GAAP measures provide useful information to management and investors regarding present and future business trends relating to our financial condition and results of operations. 35 Table of Contents The following table reconciles revenue, gross profit, income (loss) from operations, net income (loss) and net income (loss) per share on a GAAP and non-GAAP basis for the fiscal years ended March 31, 2021, 2020 and 2019: Fiscal Year Ended March 31, (Dollars in Thousands, Except per Share Data) 2021 2020 2019 GAAP revenue $ 831,282 $ 891,820 $ 909,918 Product deferred revenue fair value adjustment — — 391 Service deferred revenue fair value adjustment 6 192 1,199 Non-GAAP revenue $ 831,288 $ 892,012 $ 911,508 GAAP gross profit $ 609,185 $ 649,628 $ 655,791 Product deferred revenue fair value adjustment — — 391 Service deferred revenue fair value adjustment 6 192 1,199 Share-based compensation expense 6,861 6,843 7,422 Amortization of acquired intangible assets 19,058 24,974 31,238 Acquisition related depreciation expense 23 31 75 Transitional service agreement income — — 2 Non-GAAP gross profit $ 635,133 $ 681,668 $ 696,118 GAAP income (loss) from operations $ 37,130 $ 17,638 $ (71,580) Product deferred revenue fair value adjustment — — 391 Service deferred revenue fair value adjustment 6 192 1,199 Share-based compensation expense 51,892 50,861 56,328 Amortization of acquired intangible assets 80,189 89,479 105,543 Business development and integration expense 2 373 874 New standard implementation expense — 5 914 Compensation for post-combination services 251 578 789 Restructuring charges 62 2,674 18,693 Impairment of intangible assets — — 35,871 Acquisition related depreciation expense 242 312 905 Loss on divestiture — — 9,472 Transitional service agreement income 215 1,212 2,186 Legal judgments expense 2,804 — — Non-GAAP income from operations $ 172,793 $ 163,324 $ 161,585 GAAP net income (loss) $ 19,352 $ (2,754) $ (73,324) Product deferred revenue fair value adjustment — — 391 Service deferred revenue fair value adjustment 6 192 1,199 Share-based compensation expense 51,892 50,861 56,328 Amortization of acquired intangible assets 80,189 89,479 105,543 Business development and integration expense 2 373 874 New standard implementation expense — 5 914 Compensation for post-combination services 251 578 789 Restructuring charges 62 2,674 18,693 Impairment of intangible assets — — 35,871 36 Table of Contents Acquisition-related depreciation expense 242 312 905 Loss on divestiture — — 9,472 Transitional service agreement income — — (45) Change in contingent consideration — 762 1,495 Legal judgments expense 2,804 — — Income tax adjustments (28,977) (23,415) (49,877) Non-GAAP net income $ 125,823 $ 119,067 $ 109,228 GAAP diluted net income (loss) per share $ 0.26 $ (0.04) $ (0.93) Per share impact of non-GAAP adjustments identified above 1.44 1.61 2.31 Non-GAAP diluted net income per share $ 1.70 $ 1.57 $ 1.38 GAAP income (loss) from operations $ 37,130 $ 17,638 $ (71,580) Previous adjustments to determine non-GAAP income from operations 135,663 145,686 233,165 Non-GAAP income from operations 172,793 163,324 161,585 Depreciation excluding acquisition related 25,397 26,313 31,430 Non-GAAP EBITDA from operations $ 198,190 $ 189,637 $ 193,015 Critical Accounting Policies We consider accounting policies related to revenue recognition, marketable securities, valuation of goodwill, intangible assets and other acquisition and divestiture accounting items, and share-based compensation to be critical in fully understanding and evaluating our financial results. We apply significant judgment and create estimates when applying these policies. Revenue Recognition We exercise judgment and use estimates in connection with determining the amounts of product and service revenues to be recognized in each accounting period. We derive revenues primarily from the sale of network management tools and security solutions for service provider and enterprise customers, which include hardware, software, and service offerings. Our product sales consist of software only offerings and offerings which include hardware appliances with embedded software that are essential to providing customers the intended functionality of the solutions. We account for revenue once a legally enforceable contract with a customer has been approved by the parties and the related promises to transfer products or services have been identified. A contract is defined by us as an arrangement with commercial substance identifying payment terms, each party’s rights and obligations regarding the products or services to be transferred and the amount we deem probable of collection. Customer contracts may include promises to transfer multiple products and services to a customer. Determining whether the products and services are considered distinct performance obligations that should be accounted for separately or as one combined performance obligation may require significant judgment. Revenue is recognized when control of the products or services are transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for products and services. Product revenue is typically recognized upon shipment, provided a legally enforceable contract exists, control has passed to the customer, and in the case of software products, when the customer has the rights and ability to access the software; and collection of the related receivable is probable. If any significant obligations to the customer remain post-delivery, typically involving obligations relating to installation and acceptance by the customer, revenue recognition is deferred until such obligations have been fulfilled. Our service offerings include installation, integration, extended warranty and maintenance services, post-contract customer support, stand-ready software-as-a-service (SAAS) and other professional services including consulting and training. We generally provide software and/or hardware support as part of product sales. Revenue related to the initial bundled software and hardware support is recognized ratably over the support period. In addition, customers can elect to purchase extended support agreements for periods after the initial software/hardware warranty expiration. Support services generally include rights to unspecified upgrades (when and if available), telephone and internet-based support, updates, bug fixes and hardware repair and replacement. Consulting services are recognized upon delivery or completion of performance depending on the terms of the underlying contract. Reimbursements of out-of-pocket expenditures incurred in connection with 37 Table of Contents providing consulting services are included in services revenue, with the offsetting expense recorded in cost of service revenue. Training services include on-site and classroom training. Training revenues are recognized upon delivery of the training. Generally, our contracts are accounted for individually. However, when contracts are closely interrelated and dependent on each other, it may be necessary to account for two or more contracts as one to reflect the substance of the group of contracts. Bundled arrangements are concurrent customer purchases of a combination of our product and service offerings that may be delivered at various points in time. We allocate the transaction price among the performance obligations in an amount that depicts the relative standalone selling prices (SSP) of each obligation. Judgment is required to determine the SSP for each distinct performance obligation. We use a range of amounts to estimate SSP when we sell each of the products and services separately based on the element’s historical pricing. We also consider our overall pricing objectives and practices across different sales channels and geographies, and market conditions. Generally, we have established SSP for a majority of our service elements based on historical standalone sales. In certain instances, we have established SSP for services based upon an estimate of profitability and the underlying cost to fulfill those services. Further, for certain service engagements, we consider quoted prices as part of multi-element arrangements of those engagements as a basis for establishing SSP. SSP has been established for product elements as the average or median selling price the element was recently sold for, whether sold alone or sold as part of a multiple element transaction. We review sales of the product elements on a quarterly basis and update, when appropriate, SSP for such elements to ensure that it reflects recent pricing experience. Our products are distributed through our direct sales force and indirect distribution channels through alliances with resellers and distributors. Revenue arrangements with resellers and distributors are recognized on a sell-in basis; that is, when control of the product transfers to the reseller or distributor. We record consideration given to a customer as a reduction of revenue to the extent we have recorded revenue from the customer. With limited exceptions, our return policy does not allow product returns for a refund. Returns have been insignificant to date. In addition, we have a history of successfully collecting receivables from our resellers and distributors. Marketable Securities We measure the fair value of our marketable securities at the end of each reporting period. Fair value is defined as the exchange price that would be received for an asset in the principal or most advantageous market for the asset in an orderly transaction between market participants on the measurement date. Marketable securities are recorded at fair value and have been classified as Level 1 or 2 within the fair value hierarchy. Fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in accessible active markets for identical assets or liabilities. Fair values determined by Level 2 inputs utilize data points that are observable such as quoted prices, interest rates and yield curves. Valuation of Goodwill, Intangible Assets and Other Acquisition and Divestiture Accounting Items We amortize acquired definite-lived intangible assets over their estimated useful lives. Goodwill and other indefinite-lived intangible assets are not amortized but subject to annual impairment tests; more frequently if events or circumstances occur that would indicate a potential decline in their fair value. We perform the assessment annually during the fourth quarter and on an interim basis if potential impairment indicators arise. Reporting units are determined based on the components of a company's operating segments that constitute a business for which financial information is available and for which operating results are regularly reviewed by segment management. We have one reporting unit. To test impairment, we first assess qualitative factors to determine whether the existence of events and circumstances indicate that it is more likely than not that the intangible asset is impaired. If based on our qualitative assessment it is more likely than not that the fair value of the intangible asset is less than its carrying amount, quantitative impairment testing is required. However, if we conclude otherwise, quantitative impairment testing is not required. During the fourth quarter of fiscal year 2021, we performed our annual impairment analysis for goodwill at January 31, 2021 using the qualitative Step 0 assessment as we concluded that it was more likely than not that the fair value of the reporting unit exceeded its carrying value. Indefinite-lived intangible assets are tested for impairment at least annually, or on an interim basis if an event occurs or circumstances change that would, more likely than not, reduce the fair value of the indefinite-lived intangible assets below its carrying value. To test impairment, we first assess qualitative factors to determine whether the existence of events and circumstances indicate that it is more likely than not that the indefinite-lived intangible is impaired. If based on our qualitative assessment, we conclude that it is more likely than not that the fair value of the indefinite-lived asset is less than its carrying amount, quantitative impairment testing is required. However, if we conclude otherwise, quantitative impairment testing is not required. During the fourth quarter of fiscal year 2021, we completed our annual impairment test of the indefinite-lived intangible asset at January 31, 2021 using the qualitative Step 0 assessment as we concluded that it was more likely than not that the fair value of the indefinite-lived asset exceeded its carrying value. 38 Table of Contents We completed two acquisitions and one divestiture during the three-year period ended March 31, 2021. The acquisition method of accounting requires an estimate of the fair value of the assets and liabilities acquired as part of these transactions. In order to estimate the fair value of acquired intangible assets, we use either an income, market or cost method approach. Our Level 3 liabilities at March 31, 2020 consisted of contingent purchase consideration related to the two acquisitions that occurred during fiscal year 2020. The contingent purchase consideration related to the two acquisitions represent amounts deposited into escrow accounts, which were established to cover damages NetScout may have suffered related to any liabilities that NetScout did not agree to assume or as a result of the breach of representations and warranties of the sellers as described in the acquisition agreements. The contingent purchase consideration of $0.7 million and $1.0 million related to the Gigavation Incorporated (Gigavation) and Eastwind Networks, Inc. (Eastwind) acquisitions, respectively are included as accrued other in our consolidated balance sheet at March 31, 2020. The $0.7 million of purchase consideration related to the Gigavation acquisition was paid to the seller in February 2021. The contingent purchase consideration related to the Eastwind acquisition was paid to the seller in April 2020. During fiscal year 2019, we recorded a contingent consideration related to the divestiture of our handheld network test (HNT) tools business in September 2018. The contingent consideration represented potential future earnout payments to us of up to $4.0 million over two years that were contingent on the HNT tools business achieving certain milestones. The fair value of the contingent consideration of $2.3 million was recognized on the divestiture date and was measured using unobservable (Level 3) inputs. We recorded an $0.8 million and a $1.6 million change in the fair value of the contingent consideration, which is included in other expense, net within our consolidated statement of operations for the years ended March 31, 2020 and 2019. Share-Based Compensation We recognize compensation expense for all share-based payments. Under the fair value recognition provisions, we recognize share-based compensation net of an estimated forfeiture rate and only recognize compensation cost for those shares expected to vest on a straight-line basis over the requisite service period of the award. We are required to estimate the expected forfeiture rate and only recognize expense for those shares expected to vest. If our actual forfeiture rate is materially different from our estimate, the share-based compensation expense could be significantly different from what we have recorded in the current period. Based on historical experience, we assumed an annualized forfeiture rate of 0% for awards granted to our directors, an annualized forfeiture rate of approximately 2% for awards granted to our senior executives, and an annualized forfeiture rate of approximately 5% for all remaining employees. We will record additional expense if the actual forfeitures are lower than estimated and will record a recovery of prior expense if the actual forfeitures are higher than estimated. 39 Table of Contents Comparison of Years Ended March 31, 2021 and 2020 The sections that follow discuss our consolidated statement of operations data for the fiscal years ended March 31, 2021 and March 31, 2020 including results as a percentage of revenue for those periods. For a discussion of (i) our consolidated statement of operations data for the fiscal year ended March 31, 2019 including results as a percentage of revenue for that period, as well as (ii) our liquidity and capital resources for the fiscal year ended March 31, 2019, see "Comparison of Years Ended March 31, 2020 and 2019" and "Liquidity and Capital Resources" in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended March 31, 2020, filed with the SEC on May 20, 2020 (our 2020 Annual Report). Results of Operations Revenue Product revenue consists of sales of our hardware products and licensing of our software products. Service revenue con sists of customer support agreements, consulting, training and stand-ready software as a service offerings. During the fiscal years ended March 31, 2021 and 2020, no direct customer or indirect channel partner accounted for more than 10% of our total revenue. Fiscal Year Ended March 31, (Dollars in Thousands) 2021 2020 Change % of Revenue % of Revenue $ % Revenue: Product $ 377,721 45 % $ 438,341 49 % $ (60,620) (14) % Service 453,561 55 453,479 51 82 — % Total revenue $ 831,282 100 % $ 891,820 100 % $ (60,538) (7) % Product. The 14%, or $60.6 million, decrease in product revenue compared with the same period last year was primarily due to a decrease in revenue from network performance management offerings for enterprise and service provider customers, as well as a decrease in revenue from DDoS offerings. Total revenue by geography is as follows: Fiscal Year Ended March 31, (Dollars in Thousands) 2021 2020 Change % of Revenue % of Revenue $ % United States $ 484,129 58 % $ 545,620 61 % $ (61,491) (11) % International: Europe 160,372 19 154,510 17 5,862 4 % Asia 56,562 7 59,939 7 (3,377) (6) % Rest of the world 130,219 16 131,751 15 (1,532) (1) % Subtotal international 347,153 42 346,200 39 953 — % Total revenue $ 831,282 100 % $ 891,820 100 % $ (60,538) (7) % United States revenue decreased 11%, or $61.5 million, primarily due to a decrease in revenue from network performance management offerings for enterprise and service provider customers. International revenue increased $1.0 million primarily driven by an increase in revenue from network performance management offerings. 40 Table of Contents Cost of Revenue and Gross Profit Cost of product revenue consists primarily of material components, manufacturing personnel expenses, packaging materials, overhead and amortization of capitalized software, acquired developed technology and core technology. Cost of service revenue consists primarily of personnel, material, overhead and support costs. Fiscal Year Ended March 31, (Dollars in Thousands) Change 2021 2020 % of Revenue % of Revenue $ % Cost of revenue: Product $ 95,965 12 % $ 122,832 14 % $ (26,867) (22) % Service 126,132 15 119,360 13 6,772 6 % Total cost of revenue $ 222,097 27 % $ 242,192 27 % $ (20,095) (8) % Gross profit: Product $ $ 281,756 34 % $ 315,509 35 % $ (33,753) (11) % Product gross profit % 75 % 72 % 3 % Service $ $ 327,429 39 % $ 334,119 37 % $ (6,690) (2) % Service gross profit % 72 % 74 % (2) % Total gross profit $ $ 609,185 $ 649,628 $ (40,443) (6) % Total gross profit % 73 % 73 % — % Product. The 22%, or $26.9 million, decrease in cost of product revenue compared to the same period last year was primarily due to a $16.2 million decrease in direct material costs due to a decrease in product revenue, a $6.0 million decrease in the amortization of intangible assets, a $4.7 million decrease in inventory obsolescence charges, a $1.2 million decrease in employee-related expenses largely due to the timing of certain projects partially offset by an increase in variable incentive compensation, a $0.8 million decrease in overhead costs, a $0.6 million decrease in shipping costs, and a $0.6 million decrease in supplies. These decreases were partially offset by a $2.5 million increase in contractor fees. The product gross profit percentage increased by three percentage points to 75% during the fiscal year ended March 31, 2021 as compared to the same period in the prior year. The 11%, or $33.8 million, decrease in product gross profit, corresponds with the 14%, or $60.6 million, decrease in product revenue, partially offset by the 22%, or $26.9 million, decrease in cost of product revenue. Service. The 6%, or $6.8 million, increase in cost of service revenue compared to the same period last year was primarily due to a $5.0 million increase in employee-related expenses due to an increase in variable incentive compensation and the timing of certain projects, and a $2.2 million increase in contractor fees. These increases were partially offset by a $2.0 million decrease in travel expense primarily attributable to COVID-19 related restrictions. The 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. Our gross profit decreased 6%, or $40.4 million, compared to the fiscal year ended March 31, 2020. This decrease is attributable to the 7%, or $60.5 million, decrease in revenue partially offset by the $20.1 million, or 8%, decrease in cost of revenue. The gross margin percentage remained flat at 73% during the fiscal year ended March 31, 2021 compared to the same period in the prior year. 41 Table of Contents Operating Expenses Fiscal Year Ended March 31, (Dollars in Thousands) Change 2021 2020 % of Revenue % of Revenue $ % Research and development $ 179,163 22 $ 188,294 21 % $ (9,131) (5) % Sales and marketing 242,730 29 276,523 31 (33,793) (12) % General and administrative 88,969 11 99,994 11 (11,025) (11) % Amortization of acquired intangible assets 61,131 7 64,505 7 (3,374) (5) % Restructuring charges 62 — 2,674 — (2,612) (98) % Total operating expenses $ 572,055 69 % $ 631,990 70 % $ (59,935) (9) % Research and development. Research and development expenses consist primarily of personnel expenses, fees for outside consultants, overhead and related expenses associated with the development of new products and the enhancement of existing products. The 5%, or $9.1 million, decrease in 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 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 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, and definite-lived trademark and tradenames related to the Comms Transaction, ONPATH Technologies, Inc., Simena, Psytechnics, Ltd, Network General Corporation, Avvasi Incorporated and Efflux. The 5%, or $3.4 million, decrease in amortization of acquired intangible assets was due to a reduction in the amortization of intangible assets related to the Comms Transaction. Restructuring. During fiscal years 2020 and 2019, we restructured certain departments to better align functions, drive productivity and improve efficiency. During fiscal year 2019, we also implemented a voluntary separation program (VSP) for employees who met certain age and service requirements to reduce overall headcount. As a result of these restructuring programs, we recorded $0.1 million and $2.7 million of restructuring charges related to one-time termination benefits during the fiscal years ended March 31, 2021 and 2020, respectively. 42 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. Fiscal Year Ended March 31, (Dollars in Thousands) Change 2021 2020 % of Revenue % of Revenue $ % Interest and other expense, net $ (14,826) (2) % $ (15,714) (2) % $ 888 6 % The 6%, or $0.9 million, decrease in interest and other 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 The annual effective tax rate for fiscal year 2021 was 13.2%, compared to an annual effective tax rate of 243.1% for fiscal year 2020. Generally, the effective tax rate differs from the statutory tax rate due to state income taxes and foreign withholding taxes, partially offset by the tax benefit associated Foreign Derived Intangible Income deduction, foreign tax credits, research and development tax credits and earnings in jurisdictions subject to tax rates lower than the U.S. statutory rate. The effective tax rate for the twelve months ended March 31, 2021 is lower than the effective rate for the twelve months ended March 31, 2020, primarily due to an increase in foreign derived intangible income benefit, a reduction in foreign withholding taxes, and a significant increase in pre-tax income as compared to the prior year. Fiscal Year Ended March 31, (Dollars in Thousands) Change 2021 2020 % of Revenue % of Revenue $ % Income tax expense $ 2,952 — % $ 4,678 1 % $ (1,726) (37) % Contractual Obligations At March 31, 2021, we had the following contractual obligations: Payment due by period (Dollars in thousands) Contractual Obligations Total Less than 1 year 1-3 years 3-5 years More than 5 years Long-term debt obligations (1) $ 360,268 $ 5,713 $ 354,555 $ — $ — Unconditional purchase obligations (2) 55,319 40,480 14,839 — — Operating lease obligations (3) 85,745 14,085 23,189 19,185 29,286 Pension benefit plan 37,586 485 1,158 1,648 34,295 Total contractual obligations $ 538,918 $ 60,763 $ 393,741 $ 20,833 $ 63,581 (1) Includes estimated future interest at an interest rate of 1.61% for our outstanding term loan at March 31, 2021. (2) Represents estimated open purchase orders to purchase inventory as well as commitments for products and services used in the normal course of business. (3) We lease facilities under operating lease agreements extending through September 2030 for a total of $85.7 million. At March 31, 2021, we have also excluded long-term deferred revenue of $103.3 million as such amounts will be recognized as services are provided. 43 Table of Contents At March 31, 2021, the total accrual of our retirement obligation for our chairman and CEO was $1.4 million. The payment stream for this retirement obligation is based upon the retirement date which is currently not determinable. At March 31, 2021, the total amount of net unrecognized tax benefits for uncertain tax positions and the accrual for the related interest was $1.0 million. We are unable to make a reliable estimate when cash settlement, if any, will occur with a tax authority as the timing of examinations and ultimate resolution of those examinations is uncertain. Off-Balance Sheet Arrangements We do not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K. Commitment and Contingencies We account for claims and contingencies in accordance with authoritative guidance that requires us to record an estimated loss from a claim or loss contingency when information available prior to issuance of our consolidated financial statements indicates that it is probable that a liability has been incurred at the date of the consolidated financial statements and the amount of the loss can be reasonably estimated. If we determine that it is reasonably possible, but not probable, that an asset has been impaired or a liability has been incurred, or if the amount of a probable loss cannot be reasonably estimated, then, in accordance with the authoritative guidance, we disclose the amount or range of estimated loss if the amount or range of estimated loss is material. Accounting for claims and contingencies requires us to use our judgment. We consult with legal counsel on those issues related to litigation and seek input from other experts and advisors with respect to matters in the ordinary course of business. Acquisition related - Our Level 3 liabilities at March 31, 2020 consisted of contingent purchase consideration related to the two acquisitions that occurred during the fiscal year 2020. The contingent purchase consideration related to the two acquisitions represented amounts deposited into escrow accounts, which were established to cover damages we may have suffered related to any liabilities that we did not agree to assume or as a result of the breach of representations and warranties of the sellers as described in the acquisition agreements. The contingent purchase consideration of $0.7 million and $1.0 million related to the Gigavation and Eastwind acquisitions were included as accrued other in our consolidated balance sheet at March 31, 2020. The $0.7 million related to the Gigavation acquisition was paid to the seller in February 2021. The $1.0 million related to the Eastwind acquisition was paid to the seller in April 2020. During fiscal year 2019, we paid $0.5 million and $5.0 million of contingent liabilities to the sellers of Efflux Systems, Inc. (Efflux) and Simena, LLC), respectively related to prior acquisitions. Legal - From time to time, we are subject to legal proceedings and claims in the ordinary course of business. In the opinion of management, the amount of ultimate expense with respect to any current legal proceedings and claims, if determined adversely, will not have a material adverse effect on our financial condition, results of operations or cash flows. As previously disclosed, in March 2016, Packet Intelligence LLC (Packet Intelligence or Plaintiff) filed a Complaint against NetScout and two subsidiary entities in the United States District Court for the Eastern District of Texas asserting infringement of five United States patents. Plaintiff's Complaint alleged that legacy Tektronix GeoProbe products, including the G10 and GeoBlade products, infringed these patents. NetScout filed an Answer denying Plaintiff’s allegations and asserting that Plaintiff's patents were, among other things, invalid, not infringed, and unenforceable due to inequitable conduct. In October 2017, a jury trial was held to address the parties’ claims and counterclaims regarding infringement of three patents by the G10 and GeoBlade products, invalidity of these patents, and damages. On October 13, 2017, the jury rendered a verdict finding in favor of the Plaintiff and that Plaintiff was entitled to $3,500,000 for pre-suit damages and $2,250,000 for post-suit damages. The jury indicated that the awarded damages amounts were intended to reflect a running royalty. In September 2018, the Court entered judgment and "enhanced" the jury verdict in the amount of $2.8 million as a result of a jury finding. The judgment also awards pre- and post-judgment interest, and a running royalty on the G10 and GeoBlade products until the expiration of the patents at issue, the last date being June 2022. Following the entry of final judgment, on June 12, 2019, we filed our Notice of Appeal. On July 14, 2020, the Court of Appeals for the Federal Circuit issued a decision vacating the $3,500,000 pre-suit damages award, affirming the $2,250,000 post-suit damages award, and remanding to the district court to determine what, if any, enhancement should be awarded. On March 15, 2021, NetScout filed a petition for a writ of certiorari to the United States Supreme Court, which was subsequently denied, challenging, among other issues, the basis for enhanced damages and the patentability of the claimed technology. NetScout continues to avail itself of its legal options. NetScout has concluded that the risk of loss associated with the post-suit damages award is "probable" in accounting terms, regardless of the options NetScout may pursue, and that the risk of loss associated with pre-suit damages is now remote. Accounting rules require us to provide an estimate for the range of potential liability. NetScout currently estimates that the range of liability is the sum of post-suit 44 Table of Contents damages, plus pre- and post-judgment interest amounts and royalties owed on post-trial sales of the accused G10 and GeoBlade products. Any potential enhancement is not reasonably estimable but is likely within the range of $0 to $2,800,000. Warranty and Indemnification - We warrant that our software and hardware products will substantially conform to the documentation accompanying such products on their original date of shipment. For software, which also includes firmware, the standard warranty commences upon shipment and generally expires 60 to 90 days thereafter. With regard to hardware, the standard warranty commences upon shipment and generally expires 60 days to 12 months thereafter. Additionally, this warranty is subject to various exclusions which include, but are not limited to, non-conformance resulting from modifications made to the software or hardware by a party other than NetScout; customers' failure to follow our installation, operation or maintenance instructions; and events outside of our reasonable control. We also warrant that all support services will be performed in a good and workmanlike manner. We believe that our product and support service warranties are consistent with commonly accepted industry standards. Warranty cost information is presented and no material warranty costs are accrued since service revenue associated with warranty is deferred at the time of sale and recognized ratably over the warranty period. Contracts that we enter into in the ordinary course of business may contain standard indemnification provisions. Pursuant to these agreements, we may agree to defend third party claims brought against a partner or direct customer claiming infringement of such third party’s (i) U.S. patent and/or European Union (EU), or other selected countries' patents, (ii) Berne convention member country copyright, and/or (iii) U.S., EU, and/or other selected countries’ trademark or intellectual property rights. Moreover, this indemnity may require us to pay any damages awarded against the partner or direct customer in such type of lawsuit as well as reimburse the partner or direct customer for reasonable attorney's fees incurred by them from the lawsuit. We may also agree from time to time to provide other forms of indemnification to partners or direct customers, such as indemnification that would obligate us to defend and pay any damages awarded to a third party against a partner or direct customer based on a lawsuit alleging that such third party has suffered personal injury or tangible property damage legally determined to have been caused by negligently designed or manufactured products. We have agreed to indemnify our directors and officers and our subsidiaries' directors and officers if they are made a party or are threatened to be made a party to any proceeding (other than an action by or in the right of NetScout) by reason of the fact that the indemnified are agents of NetScout. The indemnity is for any and all expenses and liabilities of any type (including but not limited to, judgments, fines and amounts paid in settlement) reasonably incurred by the directors or officers in connection with the investigation, defense, settlement or appeal of such proceeding, provided they acted in good faith. Liquidity and Capital Resources Cash, cash equivalents and marketable securities consist of the following (in thousands): At March 31, (Dollars in Thousands) 2021 2020 2019 Cash and cash equivalents $ 467,176 $ 338,489 $ 409,632 Short-term marketable securities 9,277 47,969 76,344 Long-term marketable securities — 2,613 1,012 Cash, cash equivalents and marketable securities $ 476,453 $ 389,071 $ 486,988 Cash, cash equivalents and marketable securities At March 31, 2021, cash, cash equivalents and marketable securities (current and non-current) totaled $476.5 million. This represents an increase of $87.4 million from $389.1 million at March 31, 2020. This increase was primarily due to $213.9 million in cash provided by operations during the fiscal year ended March 31, 2021. This increase was offset by $100.0 million used to repay long-term debt, $13.3 million used for tax withholdings in connection with the vesting of restricted stock units, $12.0 million used for capital expenditures, $4.5 million used for purchases of intangible assets, and $3.3 million used to repurchase shares of our common stock during the fiscal year ended March 31, 2021. At March 31, 2021, cash, short-term and long-term investments in the United States we re $328.8 million, while cash held outside of the United States was approximately $147.7 million. 45 Table of Contents Cash and cash equivalents were impacted by the following: Fiscal Year Ended March 31, (Dollars in Thousands) 2021 2020 2019 Net cash provided by operating activities $ 213,921 $ 225,023 $ 149,838 Net cash provided by (used in) investing activities $ 24,698 $ (4,309) $ (26,252) Net cash used in financing activities $ (118,307) $ (286,870) $ (79,285) Net cash from operating activities Fiscal year 2021 compared to fiscal year 2020 Cash provided by operating activities was $213.9 million during the fiscal year ended March 31, 2021, compared to $225.0 million of cash provided by operating activities during the fiscal year ended March 31, 2020. This $11.1 million decrease was due in 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. Net cash from investing activities Fiscal Year Ended March 31, (Dollars in Thousands) 2021 2020 2019 Cash provided by (used in) investing activities included the following: Purchase of marketable securities $ (15,673) $ (117,383) $ (229,769) Proceeds from maturity of marketable securities 56,806 144,322 230,433 Purchase of fixed assets (11,986) (19,922) (23,392) Purchase of intangible assets (4,537) — — Payments related to the divestiture of business — — (3,293) Acquisition of businesses, net of cash acquired — (11,347) — Decrease (increase) in deposits 88 (31) (97) Collection of contingent consideration — 52 — Capitalized software development costs — — (134) $ 24,698 $ (4,309) $ (26,252) Cash provided by investing 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. We plan to continue to invest in capital expenditures to support our infrastructure in our fiscal year 2022. 46 Table of Contents Net cash from financing activities Fiscal Year Ended March 31, (Dollars in Thousands) 2021 2020 2019 Cash used in financing activities included the following: Issuance of common stock under stock plans $ 2 $ 2 $ 3 Payment of contingent consideration (1,748) — (2,851) Treasury stock repurchases (3,275) (175,000) (14,468) Tax withholding on restricted stock units (13,286) (11,872) (11,969) Repayment of long-term debt (100,000) (100,000) (50,000) $ (118,307) $ (286,870) $ (79,285) Cash used in financing activities decreased $168.6 million to $118.3 million during the fiscal year ended March 31, 2021, compared to $286.9 million of cash used in financing activities during the fiscal year ended March 31, 2020. During the fiscal year ended March 31, 2021, we paid $1.0 million of contingent purchase consideration related to the Eastwind acquisition in April 2020 and $0.7 million of contingent purchase consideration related to the Gigavation acquisition in February 2021. During the fiscal years ended March 31, 2021, 2020 and 2019, we repurchased 154,271 shares, 7,116,159 shares and 543,251 shares of our common stock for $3.3 million, $175.0 million, and $14.5 million under our twenty-five million share repurchase program. In connection with the delivery of common shares upon vesting of restricted stock units, we have withheld 506,917 shares for $13.3 million, 519,241 shares for $11.9 million and 451,683 shares for $11.9 million related to minimum statutory tax withholding requirements on these restricted stock units during the fiscal years ended March 31, 2021, 2020 and 2019, respectively. These withholding transactions do not fall under the repurchase program described above, and therefore do not reduce the amount that is available for repurchase under that program. During the fiscal years ended March 31, 2021, 2020 and 2019, we repaid $100.0 million, $100.0 million and $50.0 million of borrowings under the Amended Credit Agreement, respectively. Credit Facility On January 16, 2018, we amended and expanded our existing credit agreement (Amended Credit Agreement) with a syndicate of lenders by and among: NetScout; JPMorgan Chase Bank, N.A. (JPMorgan), as administrative agent and collateral agent; J.P. Morgan Securities LLC, KeyBanc Capital Markets, Merrill Lynch, Pierce, Fenner & Smith Incorporated, RBC Capital Markets and Wells Fargo Securities, LLC, as joint lead arrangers and joint bookrunners; Fifth Third Bank, Santander Bank, N.A., SunTrust Bank, N.A. and U.S. Bank National Association, as co-documentation agents; and the lenders party thereto. The Amended Credit Agreement provides for a five-year $1.0 billion senior secured revolving credit facility, including a letter of credit sub-facility of up to $75.0 million. We may elect to use the new credit facility for general corporate purposes or to finance the repurchase of up to twenty-five million shares of our common stock under our common stock repurchase plan. The commitments under the Amended Credit Agreement will expire on January 16, 2023, and any outstanding loans will be due on that date. During the fiscal year ended March 31, 2021, we repaid $100.0 million of borrowings under the Amended Credit Agreement. At March 31, 2021, $350 million was outstanding under the Amended Credit Agreement. At our election, revolving loans under the Amended Credit Agreement bear interest at either (a) an Alternate Base Rate per annum equal to the greatest of (1) JPMorgan's prime rate, (2) 0.50% in excess of the New York Federal Reserve Bank (NYFRB) rate, or (3) an adjusted one month LIBOR rate plus 1%; or (b) such adjusted LIBOR rate (for the interest period selected by us), in each case plus an applicable margin. For the period from the delivery of our financial statements for the quarter ended December 31, 2020, until we have delivered financial statements for the quarter ended March 31, 2021, the applicable margin will be 1.50% per annum for LIBOR loans and 0.50% per annum for Alternate Base Rate loans, and thereafter the applicable margin will vary depending on our leverage ratio, ranging from 0.75% per annum for Base Rate loans and 1.75% per annum for LIBOR loans if our consolidated leverage ratio is less than or equal to 3.50 to 1.00, down to 0.00% per annum for Alternate Base Rate loans and 1.00% per annum for LIBOR loans if our consolidated leverage ratio is equal to or less than 1.50 to 1.00. As of March 31, 2021, the Company’s maximum allowed consolidated leverage ratio is 3.50 to 1.00. On July 27, 2017, the U.K. Financial Conduct Authority (FCA) announced that it will no longer require banks to submit rates for the calculation of LIBOR after 2021. On March 5, 2021, the Intercontinental Exchange Benchmark Administration 47 Table of Contents (IBA), the FCA-regulated and authorized administrator of LIBOR, announced, and the FCA confirmed, that one week and two-month USD LIBOR settings will cease on December 31, 2021, and that the USD LIBOR panel will cease on June 30, 2023. IBA notes that any publication of the Overnight and 1, 3, 6 and 12 Months USD LIBOR settings based on panel bank submissions beyond December 31, 2021 will need to comply with applicable regulations, including as to representativeness. Based on current information from panel banks, IBA anticipates there being a representative panel for the continuation of these USD LIBOR settings through to June 30, 2023. Our Amended Credit Agreement, which matures on January 16, 2023 prior to the June 30, 2023 cessation of USD LIBOR publications, provides for the Administrative Agent to determine if (i) adequate and reasonable means do not exist for ascertaining the LIBOR rate or (ii) the FCA or Government Authority having jurisdiction over the Administrative Agent has made a public statement identifying a specific date after which the LIBOR rate shall no longer be used for determining interest rates for loans and the Administrative Agent determines that (i) and (ii) above are unlikely to be temporary, then the Administrative Agent and NetScout would agree to transition to an Alternate Base Rate borrowing as described above or amend the Credit Agreement to establish an alternate rate of interest to LIBOR that gives due consideration to the then prevailing market convention for determining a rate of interest for syndicated loans in the United States at such time. Our consolidated leverage ratio is the ratio of our total funded debt compared to our consolidated adjusted EBITDA. Consolidated adjusted EBITDA includes certain adjustments, including, without limitation, adjustments relating to extraordinary, unusual or non-recurring charges, certain restructuring charges, non-cash charges, certain transaction costs and expenses and certain pro forma adjustments in connection with material acquisitions and dispositions, all as set forth in detail in the definition of consolidated adjusted EBITDA in the Amended Credit Agreement. Commitment fees will accrue on the daily unused amount of the credit facility. For the period from the delivery of our financial statements for the quarter ended December 31, 2020 until we have delivered financial statements for the quarter ended March 31, 2021, the commitment fee will be 0.25% per annum, and thereafter the commitment fee will vary depending on the our consolidated leverage ratio, ranging from 0.30% per annum if our consolidated leverage ratio is greater than 2.75 to 1.00, down to 0.15% per annum if our consolidated leverage ratio is equal to or less than 1.50 to 1.00. Letter of credit participation fees are payable to each lender on the amount of such lender’s letter of credit exposure, during the period from the closing date of the Amended Credit Agreement to but excluding the date which is the later of (i) the date on which such lender’s commitment terminates or (ii) the date on which such lender ceases to have any letter of credit exposure, at a rate per annum equal to the applicable margin for LIBOR loans. Additionally, we will pay a fronting fee to each issuing bank in amounts to be agreed to between us and the applicable issuing bank. Interest on Alternate Base Rate loans is payable at the end of each calendar quarter. Interest on LIBOR loans is payable at the end of each interest rate period or at the end of each three-month interval within an interest rate period if the period is longer than three months. We may also prepay loans under the Amended Credit Agreement at any time, without penalty, subject to certain notice requirements. Debt is recorded at the amount drawn on the revolving credit facility plus interest based on floating rates reflective of changes in the market which approximates fair value. The loans and other obligations under the credit facility are (a) guaranteed by each of our wholly owned material domestic restricted subsidiaries, subject to certain exceptions, and (b) are secured by substantially all of the assets of us and the subsidiary guarantors, including a pledge of all the capital stock of material subsidiaries held directly by us and the subsidiary guarantors (which pledge, in the case of any foreign subsidiary, is limited to 65% of the voting stock), subject to certain customary exceptions and limitations. The Amended Credit Agreement generally prohibits any other liens on the assets of NetScout and its restricted subsidiaries, subject to certain exceptions as described in the Amended Credit Agreement. The Amended Credit Agreement contains certain covenants applicable to us and our restricted subsidiaries, including, without limitation, limitations on additional indebtedness, liens, various fundamental changes, dividends and distributions, investments (including acquisitions), transactions with affiliates, asset sales, including sale-leaseback transactions, speculative hedge agreements, payment of junior financing, changes in business and other limitations customary in senior secured credit facilities. In addition, we are required to maintain certain consolidated leverage and interest coverage ratios. These covenants and limitations are more fully described in the Amended Credit Agreement. At March 31, 2021, we were in compliance with all of these covenants. The Amended Credit Agreement provides that events of default will exist in certain circumstances, including failure to make payment of principal or interest on the loans when required, failure to perform certain obligations under the Amended Credit Agreement and related documents, defaults under certain other indebtedness, certain insolvency events, certain events arising under ERISA, a change of control and certain other events. Upon an event of default, the administrative agent with the consent of, or at the request of, the holders of more than 50% in principal amount of the loans and commitments may terminate 48 Table of Contents the commitments and accelerate the maturity of the loans and enforce certain other remedies under the Amended Credit Agreement and the other loan documents. In connection with NetScout's Amended Credit Agreement described above, we terminated our previous term loan dated as of July 14, 2015, by and among NetScout; JPMorgan Chase Bank, N.A. (JPMorgan), as administrative agent and collateral agent; J.P. Morgan Securities LLC, KeyBanc Capital Markets, Merrill Lynch, Pierce, Fenner & Smith Incorporated, RBC Capital Markets and Wells Fargo Securities, LLC, as joint lead arrangers and joint bookrunners; Santander Bank, N.A., SunTrust Bank, N.A. and U.S. Bank National Association, as co-documentation agents; and the lenders party thereto. We have capitalized debt issuance costs totaling $12.2 million at March 31, 2021, which are being amortized over the life of the revolving credit facility. The unamortized balance was $3.1 million as of March 31, 2021. The balance of $1.7 million was included as prepaid expenses and other current assets and a balance of $1.4 million was in cluded as other assets in our consolidated balance sheet. Expectations for Fiscal Year 2022 We are actively managing the business to maintain cash flow and believe that we currently have adequate liquidity. We believe that these factors will allow us to meet our currently anticipated funding requirements. We expect net cash provided by operating activities combined with cash, cash equivalents, and marketable securities and borrowing availability under our revolving credit facility to provide sufficient liquidity to fund current obligations, capital spending, debt service requirements and working capital requirement over at least the next twelve months. Additionally, a portion of our cash may be used to acquire or invest in complementary businesses or products, to obtain the right to use complementary technologies, to repay borrowings under our Amended Credit Agreement, or to repurchase shares of our common stock through our stock repurchase program. From time to time, in the ordinary course of business, we evaluate potential acquisitions of such businesses, products or technologies. If our existing sources of liquidity are insufficient to satisfy our liquidity requirements, we may seek to sell additional equity or debt securities. The sale of additional equity or debt securities could result in additional dilution to our stockholders. Recent Accounting Standards For information with respect to recent accounting pronouncements on our consolidated financial statements, See Note 2 contained in the "Notes to Consolidated Financial Statements" included in Part IV of this Annual Report on Form 10-K. 49 Table of Contents