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Item 7. Management’s Discussion and Analysis

2022-05-19 compared with 2021-05-20 · 165 added, 231 removed, 263 unchanged (60% 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 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.

We are an industry leader with over three decades 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 and protection 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 reducing meantime-to-resolution of issues and driving compelling returns on their investments in their networks and broader technology initiatives.

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 and availability 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, expansion into new or adjacent markets, development of strategic partnerships, competition, successful acquisition integration efforts, and our ability to control costs and make improvements in a highly competitive industry.

In response to the Russian military operations in Ukraine, we have ceased business operations in Russia, including sales, support on existing contracts and professional services.

The United States and other countries have imposed sanctions on Russia that could impact our future revenue streams.

These events have not had a material impact on our fiscal year 2022 financial statements.

We will continue to monitor the impact of these events on all aspects of our business.

COVID-19 Impact

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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.

While we have begun the process of reopening at some of our facilities, we remain focused on protecting the health and well-being of our employees and continue to support work from home flexibility where necessary and feasible.

The extent of further 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 could alter our business operations if required by governmental authorities, or that we determine are in the best interests of our stakeholders.

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.

During fiscal year 2021, the COVID-19 pandemic and resulting challenging macro-economic environment caused elongated purchasing cycles that impacted our revenue.

However, the revenue impact in fiscal year 2021 was offset by a reduction in our operating expenses as a result of our cost control measures and COVID-19 related restrictions on travel and events.

For fiscal year 2022, as people in the world began to get immunized and started to adapt to a "new normal", we observed that technology and project spending resumed and we focused on advancing our products, growing revenue, enhancing earnings per share, and generating free cash flow.

We believe our current cash reserves and access to capital through our revolving credit facility leaves us well-positioned to manage our business as the pandemic continues and as a recovery slowly occurs.

We expect net cash provided by operations

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 manage 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, we had as of March 31, 2022 an incremental $450 million available to us under our revolving credit facility.

On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (the CARES Act) was enacted.

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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.

As of March 31, 2022, we had deferred $4.5 million of employer payroll taxes which is required to be deposited by December 2022.

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.

Total revenue increased for the fiscal year ended March 31, 2022 as compared to total revenue for the fiscal year ended March 31, 2021 primarily due to an increase in revenue from the product portion of our network performance management offerings from enterprise customers, and an increase in revenue from the service portion from our DDoS offerings.

Our gross profit percentage increased by two percentage points to 75% during the fiscal year ended March 31, 2022 as compared with the fiscal year ended March 31, 2021.

Net income for the fiscal year ended March 31, 2022 was $35.9 million, as compared with income for the fiscal year ended March 31, 2021 of $19.4 million, an increase of $16.5 million.

The increase in net income was primarily due to a $24.3 million increase in revenue, a $7.2 million decrease in amortization of intangible assets, a $5.3 million decrease in foreign exchange expense, a $2.8 million decrease in interest expense, a $2.4 million decrease in expenses related to trade shows, user conferences and other events, a $2.3 million decrease in depreciation expense, a $1.9 million decrease in cost of materials used to support customers under service contracts, and a $1.9 million decrease in costs to deliver radio frequency propagation modeling projects.

These increases in net income were partially offset by an $8.0 million increase in commissions expense, a $6.5 million increase in contractor fees, a $4.6 million increase in advertising and other marketing related costs, a $4.1 million increase in income tax expense, a $3.4 million increase in legal-related expenses and penalties, a $3.0 million increase in travel expenses attributable to the lifting of some COVID-19 related restrictions, a $2.4 million increase in obsolescence charges, and a $2.4 million increase in the provision for allowance in credit losses.

At March 31, 2022, we had cash, cash equivalents, and marketable securities (current and non-current) of $703.2 million.

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This increase was primarily due to $296.0 million in cash provided by operations during the fiscal year ended March 31, 2022.

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.

During the fiscal year ended March 31, 2022, we collected $0.8 million of contingent consideration which represented earnout payments that were contingent upon achieving certain milestones related to the divestiture of our handheld network test (HNT) tools business in September 2018.

These increases were partially offset by $35.7 million used in treasury stock repurchases, $15.7 million used for tax withholdings on restricted stock units, $10.4 million used for capital expenditures, and $3.7 million used for the payment of debt issuance costs during the fiscal year ended March 31, 2022.

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, non-GAAP gross profit, non-GAAP income from operations, non-GAAP net income, non-GAAP net income per share (diluted) and non-GAAP earnings before interest and other expense, income taxes, depreciation, and amortization (EBITDA) from operations.

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 income from operations includes the aforementioned adjustments and also removes business development and integration expense, new standard implementation expense, compensation for post-combination services, legal expenses related to a civil judgment, restructuring charges, and transitional service agreement expenses.

Non-GAAP net income includes the foregoing adjustments related to non-GAAP income from operations, and also removes loss on extinguishment of debt and change in fair value of contingent consideration, net of related income tax effects.

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

corresponding GAAP measures.

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 margin, net income (loss) and diluted net income (loss) per share), and may have limitations because they do not reflect all our results of operations as determined in accordance with GAAP.

These non-GAAP measures should only be used to evaluate our results of operations in conjunction with the corresponding GAAP measures.

The presentation of non-GAAP information is not meant to be considered superior to, in isolation from, or as a substitute for results prepared in accordance with GAAP.

Management believes these non-GAAP financial measures enhance the reader's overall understanding of our current financial performance and our prospects for the future by providing a higher degree of transparency for certain financial measures and providing a level of disclosure that helps investors understand how we plan and measure our business.

We believe that providing these non-GAAP measures affords investors a view of our operating results that may be more easily compared with our peer companies and also enables investors to consider our operating results on both a GAAP and non-GAAP basis during and following the integration period of our acquisitions.

Presenting the GAAP measures on their own may not be indicative of our core operating results.

Furthermore, management believes that the presentation of non-GAAP measures when shown in conjunction with the corresponding GAAP measures provide useful information to management and investors regarding present and future business trends relating to our financial condition and results of operations.

The following table reconciles revenue, gross profit, income (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:

Management believes these non-GAAP financial measures will 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 to 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, without the supplemental non-GAAP disclosures, might 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 provides useful information to management and investors regarding present and future business trends relating to our financial condition and results of operations.

The following table reconciles revenue, gross profit, income from operations, net income (loss) and net income (loss) per share on a GAAP and non-GAAP basis for the fiscal years ended March 31, 2022, 2021 and 2020:

Fiscal Year Ended March 31,

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GAAP revenue $ 855,575 $ 831,282 $ 891,820

Product deferred revenue fair value adjustment — — 391

Service deferred revenue fair value adjustment — 6 192

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GAAP gross profit $ 641,389 $ 609,185 $ 649,628

Product deferred revenue fair value adjustment — — 391

Service deferred revenue fair value adjustment — 6 192

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Acquisition related depreciation expense 24 23 31

Transitional service agreement income — — 2

Non-GAAP gross profit $ 661,840 $ 635,133 $ 681,668

GAAP income (loss) from operations $ 37,130 $ 17,638 $ (71,580)

Product deferred revenue fair value adjustment — — 391

GAAP income from operations $ 48,634 $ 37,130 $ 17,638

Service deferred revenue fair value adjustment — 6 192

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Restructuring charges — 62 2,674

Impairment of intangible assets — — 35,871

Acquisition related depreciation expense 254 242 312

Loss on divestiture — — 9,472

Transitional service agreement income 215 1,212 2,186

Transitional service agreement expense 814 215 1,212

Legal judgments expense 1,100 2,804 —

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GAAP net income (loss) $ 35,874 $ 19,352 $ (2,754)

Product deferred revenue fair value adjustment — — 391

Service deferred revenue fair value adjustment — 6 192

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Restructuring charges — 62 2,674

Impairment of intangible assets — — 35,871

Acquisition-related depreciation expense 254 242 312

Loss on divestiture — — 9,472

Transitional service agreement income — — (45)

Change in contingent consideration — 762 1,495

Loss on extinguishment of debt 596 — —

Change in fair value of contingent consideration (837) — 762

Legal judgments expense 1,100 2,804 —

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Non-GAAP diluted net income per share $ 1.84 $ 1.70 $ 1.57

GAAP income (loss) from operations $ 37,130 $ 17,638 $ (71,580)

GAAP income from operations $ 48,634 $ 37,130 $ 17,638

Previous adjustments to determine non-GAAP income from operations 131,365 135,663 145,686

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Non-GAAP EBITDA from operations $ 202,403 $ 198,190 $ 189,637

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.

Critical Accounting Policies and Estimates

We consider accounting policies and estimates related to revenue recognition, and valuation of goodwill, intangible assets and other acquisition accounting items to be critical in fully understanding and evaluating our financial results.

We apply significant judgment and create estimates when applying these policies.

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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.

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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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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 use a range of amounts to estimate SSP when we sell each of the products and services separately based primarily on the performance obligation'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.

Generally, we have established SSP for a majority of our service performance obligations 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.

SSP has primarily been

established for product performance obligations as the average or median selling price the performance obligation was recently sold for, whether sold alone or sold as part of a bundle transaction.

We review sales of the product performance obligations on a quarterly basis and update, when appropriate, SSP for such performance obligations 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.

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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

Valuation of Goodwill, Intangible Assets and Other Acquisition Accounting Items

We amortize acquired definite-lived intangible assets over their estimated useful lives.

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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.

We performed our annual impairment analysis for goodwill at January 31, 2022 using the qualitative (Step 0) assessment, and 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.

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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.

We completed two acquisitions during the three-year period ended March 31, 2022.

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.

The contingent purchase consideration of $0.7 million related to the Gigavation Incorporated (Gigavation) acquisition was paid to the seller in February 2021.

The contingent purchase consideration of $1.0 million related to the Eastwind Networks, Inc.

(Eastwind) acquisition was paid to the seller in April 2020.

Comparison of Years Ended March 31, 2022 and 2021

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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.

Service revenue consists of customer support agreements, consulting, training and stand-ready software as a service offerings.

During the fiscal years ended March 31, 2022 and 2021, no direct customer or indirect channel partner accounted for more than 10% of our total revenue.

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Total revenue $ 855,575 100 % $ 831,282 100 % $ 24,293 3 %

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:

The 9%, or $32.4 million, increase in product revenue compared with the same period last year was primarily due to an increase in revenue from network performance management offerings for enterprise customers.

The 2%, or $8.1 million, decrease in service revenue compared with the same period last year was primarily driven by non-renewals associated with service provider consolidation and discontinued product lines.

Total revenue by geography was as follows:

Fiscal Year Ended March 31,

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Total revenue $ 855,575 100 % $ 831,282 100 % $ 24,293 3 %

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.

United States revenue increased 3%, or $16.9 million, primarily due to an increase in revenue from network performance management offerings for enterprise and service provider customers, as well as an increase in revenue from DDoS enterprise customers.

These increases in revenue were partially offset by a decrease in revenue from DDoS offerings for service provider customers.

International revenue increased 2%, or $7.4 million, primarily driven by higher revenue from network performance management and DDoS offerings in Europe and Asia.

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 product revenue consists primarily of material components, 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.

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Total gross profit % 75 % 73 % 2 %

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 5%, or $5.2 million, decrease in cost of product revenue for the fiscal year ended March 31, 2022 compared to the same period last year was primarily due to a $5.8 million decrease in the amortization of intangible assets, and a $1.9 million decrease in costs related to the delivery of radio frequency propagation modeling projects.

These decreases were partially offset by a $2.4 million increase in obsolescence charges.

The product gross profit percentage increased by three percentage points to 78% during the fiscal year ended March 31, 2022 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.

The 13%, or $37.6 million, increase in product gross profit, corresponds with the 9%, or $32.4 million, increase in product revenue, and the 5%, or $5.2 million, decrease in cost of product revenue.

The 2%, or $2.7 million, decrease in cost of service revenue for the fiscal year ended March 31, 2022 compared to the same period last year was primarily due to a $4.2 million decrease in employee-related expenses associated with a reduction in headcount as well as a decrease associated with the timing of certain projects, and a $1.9 million decrease in cost of materials used to support customers under service contracts.

These decreases were partially offset by a $2.9 million increase in contractor fees.

The service gross profit percentage remained flat at 72% during the fiscal year ended March 31, 2022 compared to the same period in the prior year.

The 2%, or $5.4 million, decrease in service gross profit corresponds with the 2%, or $8.1 million, decrease in service revenue, partially offset by the 2%, or $2.7 million, decrease in cost of services 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.

Our gross profit increased 5%, or $32.2 million, for the fiscal year ended March 31, 2022 compared to the same period last year.

This increase is attributable to the 3%, or $24.3 million, increase in revenue, and the 4%, or $7.9 million, decrease in cost of revenue.

The gross margin percentage increased by two percentage points to 75% during the fiscal year ended March 31, 2022 compared to the same period in the prior year.

Operating Expenses

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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 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.

The 4%, or $8.0 million, decrease in res earch and development expenses for the fiscal year ended March 31, 2022 compared to the same period last year was primarily due to a $6.8 million decrease in employee-related expenses associated with a reduction in headcount and a decrease in variable incentive compensation, and a $1.1 million decrease in depreciation expense.

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.

The 9%, or $21.5 million, increase in total sales and marketing expenses for the fiscal year ended March 31, 2022 compared to the same period last year was prima rily due to an $8.0 million increase in commissions expense, a $7.4 million increase in employee-related expenses largely due to an increase in variable incentive compensation, a $4.6 million increase in advertising and other marketing related expenses, a $2.2 million increase in travel expense primarily attributable to the lifting of COVID-19 related restrictions, a $1.4 million increase in contractor fees, and a $0.6 million in recruitment fees, partially offset by a $2.4 million decrease in expenses related to trade shows, user conferences and other events, and a $1.0 million decrease in depreciation.

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.

The 10%, or $8.7 million, increase in general and administrative expenses for the fiscal year ended March 31, 2022 compared to the same period last year was primarily due to a $3.4 million increase in legal-related expenses and penalties, a $2.7 million increase in employee-related expenses largely due to an increase in variable incentive compensation, and a $2.4 million increase in the provision for allowance in credit losses.

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.

Amortization of acquired intangible assets consists primarily of amortization of customer relationships, and definite-lived trademark and tradenames related to our acquisition of Danaher Corporation's communication business (Comms Transaction) and the acquisitions of ONPATH Technologies, Inc., Simena, LLC, Psytechnics, Ltd, Network General Corporation, Avvasi Incorporated and Efflux Systems, Inc.

The 2%, or $1.4 million, decrease in amortization of acquired intangible assets compared to the fiscal year ended March 31, 2022 was prima rily due to a decrease in the amortization of intangible assets related to the Comms Transaction, partially offset by an increase in the amortization of the definite-lived trade name.

Interest and Other Expense, Net

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Interest and other expense, net $ (5,742) (1) % $ (14,826) (2) % $ 9,084 61 %

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.

The 61%, or $9.1 million, dec rease in interest and other expense, net was primarily due to a $5.3 million decrease in foreign exchange expense, a $2.8 million decrease in interest expense due to debt repayments on the credit facility as well as a decrease in the average interest rate partially offset by a loss on the extinguishment of debt, and a $0.6 million increase in transitional services agreement income related to the HNT tools business divestiture.

Income Tax Expense

The annual effective tax rate for fiscal year 2022 was 16.4%, compared to an annual effective tax rate of 13.2% for fiscal year 2021.

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.

Generally, the effective tax rate differs from the U.S.

federal statutory income tax rate primarily due to state income taxes, foreign withholding taxes, and earnings in jurisdictions subject to tax rates higher than the U.S.

federal statutory income tax rate, partially offset by the tax benefit associated with foreign derived intangible income deduction, foreign tax credits, and research and development tax credits.

The effective tax rate for the twelve months ended March 31, 2022 is higher than the effective rate for the twelve months ended March 31, 2021, primarily due to a significant increase in pre-tax income as compared to the prior year.

Fiscal Year Ended March 31,

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Income tax expense $ 7,018 1 % $ 2,952 — % $ 4,066 138 %

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

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.

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

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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.

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.

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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 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

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.

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 awarded 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, NetScout appealed, and in July 2020, the Court of Appeals for the Federal Circuit (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.

In March 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.

In addition, on September 8 and 9, 2021, in proceedings initiated by third parties that did not involve NetScout, the Patent Trial and Appeal Board (PTAB) invalidated all the patent claims that were also asserted against NetScout in this case.

After the PTAB decisions were issued, NetScout moved, among other things, to dismiss the case and enter judgment in its favor on the grounds that the PTAB decisions invalidating the asserted claims precluded Plaintiff from continuing to assert its patent infringement causes of action and from seeking damages from NetScout.

The District Court recently denied NetScout’s motion with respect to its request to dismiss the case and enter judgment in its favor, but in response to alternative requests for relief requested by NetScout, vacated $1.7 million of the "enhanced" jury verdict amount of $2.8 million and also lowered the ongoing royalty rate on the G10 and GeoBlade products.

The District Court entered an amended final judgment awarding Plaintiff $2.25 million in post-suit damages, $1.1 million in enhanced damages, 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 expiration date being June 2022.

NetScout has time remaining with respect to its right to appeal from the entry of the amended final judgment.

In view of the current circumstances, and if the post-suit and enhanced damages award along with the associated interest and royalties survives the recent PTAB invalidation decisions and any appeal NetScout may take, NetScout has concluded that the risk of loss associated with such damages award remains "probable" in accounting terms, and that the risk of loss associated with pre-suit damages is remote.

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.

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(Dollars in Thousands)

2021 2020 2019

Cash and cash equivalents $ 636,161 $ 467,176

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This represents an increase of $226.7 million from $476.5 million at March 31, 2021.

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.

This increase was primarily due to $296.0 million in cash provided by operating activities, partially offset by $35.7 million used in treasury stock repurchases, $15.7 million used for tax withholdings on restricted stock units, $10.4 million used for capital expenditures, and $3.7 million used for the payment of debt issuance costs during the fiscal year ended March 31, 2022.

At March 31, 2022, cash, short-term and long-term inves tments in the United States were $508.8 million, while cash held outside of the United States was approximately $194.4 million.

Cash and cash equivalents were impacted by the following:

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(Dollars in Thousands)

2021 2020 2019

Net cash provided by operating activities $ 296,013 $ 213,921

Net cash provided by (used in) investing activities $ 24,698 $ (4,309) $ (26,252)

Net cash (used in) provided by investing activities $ (68,353) $ 24,698

Net cash used in financing activities $ (54,165) $ (118,307)

2 unchanged sentences

Cash provided by operating activities was $296.0 million during the fiscal year ended March 31, 2022, compared to $213.9 million of cash provided by operating activities during the fiscal year ended March 31, 2021.

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.

This $82.1 million increase was due in part to a $93.4 million increase from deferred revenue, a $32.4 million increase from accounts receivable, a $16.5 million increase from net income, an $11.1 million increase from deferred income taxes, a $5.9 million increase from accounts payable, and a $4.2 million increase from share-based compensation.

These increases were partially offset by a $29.6 million decrease from accrued compensation and other expenses, a $24.5 million decrease from prepaid expenses and other assets, a $10.0 million decrease from depreciation and amortization, a $9.8 million decrease from income taxes payable, a $6.0 million decrease from inventories, and a $1.8 million decrease from operating lease liabilities during the fiscal year ended March 31, 2022 as compared with the fiscal year ended March 31, 2021.

Accounts receivable days sales outstanding was 64 days at March 31, 2022 compared to 75 days at March 31, 2021.

Net cash from investing activities

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(Dollars in Thousands)

2021 2020 2019

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

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

Purchase of marketable securities $ (78,367) $ (15,673)

2 unchanged sentences

Purchase of intangible assets (50) (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)

(Increase) decrease in deposits (155) 88

$ (68,353) $ 24,698

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.

Cash used in investing activities increased by $93.1 million to $68.4 million during the fiscal year ended March 31, 2022, compared to $24.7 million of cash provided by investing activities during the fiscal year ended March 31, 2021.

Net cash outflows relating to the purchase and sales of marketable securities increased $98.9 million relating to the amount of investments held at each respective balance sheet date, from an inflow of $41.1 million during the fiscal year ended March 31, 2021 to an outflow of $57.8 million during the fiscal year ended March 31, 2022.

During the fiscal year ended March 31, 2021, we entered into an agreement 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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(Dollars in Thousands)

2021 2020 2019

Cash used in financing activities included the following:

3 unchanged sentences

Tax withholding on restricted stock units (15,691) (13,286)

Payment of debt issuance costs (3,660) —

Repayment of long-term debt (350,000) (100,000)

Proceeds from issuance of long-term debt 350,000 —

Collection of contingent consideration 837 —

$ (54,165) $ (118,307)

Cash used in financing activities decreased $64.1 million to $54.2 million during the fiscal year ended March 31, 2022, compared to $118.3 million of cash used in financing activities during the fiscal year ended March 31, 2021.

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.

During the fiscal year ended March 31, 2021, we paid $1.7 million of contingent purchase consideration related to the Eastwind and Gigavation acquisitions.

During the fiscal years ended March 31, 2022, and 2021, we repurchased 1,330,678 shares and 154,271 shares of our common stock for $35.6 million and $3.3 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 546,053 shares for $15.7 million, and 506,917 shares for $13.3 million related to minimum statutory tax withholding requirements on these restricted stock units during the fiscal years ended March 31, 2022 and 2021, 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.

During the fiscal year ended March 31, 2021, we repaid $100.0 million of borrowings under the Amended Credit Agreement, respectively.

During the fiscal year ended March 31, 2022, we paid $3.7 million in debt issuance costs related to the execution of our Second Amended and Restated Credit Agreement.

During the fiscal year ended March 31, 2022, we collected $0.8 million of contingent consideration which represented earnout payments that were contingent upon achievement of certain milestones related to the HNT tools business divestiture in September 2018.

Sources of Cash and Cash Requirements

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:

On January 16, 2018, we amended and expanded our existing credit agreement (Amended Credit Agreement), which provided 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.

The commitments under the Amended Credit Agreement were set to expire on January 16, 2023, and any outstanding loans were due on that date.

On July 27, 2021, we amended and extended the Amended Credit Agreement (Second Amended and Restated Credit Agreement) with a syndicate of lenders by and among:

JPMorgan Chase Bank, N.A.

(JPMorgan), as administrative agent and collateral agent;

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.

Bank National Association, as co-documentation agents;

JPMorgan, Wells Fargo Securities, LLC, BofA Securities Inc., RBC Capital Markets, PNC Capital Markets LLC and Mizuho Bank, Ltd., as joint lead arrangers and joint bookrunners;

Santander Bank, N.A., U.S.

Bank National Association, Fifth Third Bank National Association, Silicon Valley Bank and TD Bank, N.A., 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

(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.

The Second Amended and Restated Credit Agreement provides for a five-year, $800.0 million senior secured revolving credit facility, including a letter of credit sub-facility of up to $75.0 million.

We may elect to use the credit facility for general corporate purposes (including to finance the repurchase of shares of our common stock).

The commitments under the Second Amended and Restated Credit Agreement will expire on July 27, 2026, and any outstanding loans will be due on that date.

In connection with the Second Amended and Restated Credit Agreement, we paid off the outstanding balance of $350 million under the Amended Credit Agreement on July 27, 2021 by borrowing the same amount under the Second Amended and Restated Credit Agreement.

Additionally, we recorded a loss on the extinguishment of debt of $0.6 million, representing the write off of unamortized deferred financing costs, which was included in interest expense in the consolidated statements of operations for the fiscal year ended March 31, 2022.

At March 31, 2022, $350 million was outstanding under the Second Amended and Restated Credit Agreement.

At our election, revolving loans under the Second Amended and Restated Credit Agreement bear interest at either (a) an Alternate Base Rate per annum equal to the greatest of (1) the Wall Street Journal prime rate;

(2) the New York Federal Reserve Bank (NYFRB) rate plus 0.50%, or (3) an adjusted one month LIBO rate plus 1%;

or (b) a Term Benchmark Borrowing rate (for the interest period selected by NetScout, subject to customary provisions regarding succession from LIBO rate to SOF rate in anticipation of the upcoming discontinuation of the LIBO rate), in each case plus an applicable margin.

For the period from the delivery of the Company's financial statements for the quarter ended December 31, 2021, until we have delivered financial statements for the quarter ended March 31, 2022, the applicable margin will be 1.25% per annum for Term Benchmark Revolving loans and 0.25% per annum for Alternate Base Rate loans, and thereafter the applicable margin will vary depending on our consolidated gross leverage ratio, ranging from 1.00% per annum for Alternate Base Rate loans and 2.00% per annum for Term Benchmark Revolving loans if our consolidated gross 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 Term Benchmark Revolving loans if our consolidated gross leverage ratio is equal to or less than 1.50 to 1.00.

Our consolidated gross leverage ratio is the ratio of our total funded debt compared to our consolidated EBITDA as defined in the Second Amended and Restated Credit Agreement (adjusted consolidated EBITDA).

Adjusted consolidated 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 Second Amended and Restated Credit Agreement.

Our secured net leverage ratio is the ratio of our Consolidated Total Debt minus the lesser of unrestricted cash and 125% of adjusted consolidated EBITDA compared to our adjusted consolidated EBITDA.

The Company’s maximum secured net leverage ratio is 4.00 to 1.00.

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.

depending on our consolidated gross leverage ratio, ranging from 0.30% per annum if our consolidated gross leverage ratio is greater than 2.75 to 1.00, down to 0.15% per annum if our consolidated gross leverage ratio is equal to or less than 1.50 to 1.00.

Letter of credit participation fees are payable to each lender providing the letter of credit sub-facility on the amount of such lender's letter of credit exposure, during the period from the closing date of the Second Amended and Restated 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 the applicable rate that would be used to determine the interest rate applicable to Term Benchmark Revolving loans assuming such loans were outstanding during the period.

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

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;

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.

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.

Interest on Term Benchmark Revolving 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 Second Amended and Restated Credit Agreement at any time, without penalty, subject to certain notice requirements.

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 the Borrower 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 Second Amended and Restated Credit Agreement generally prohibits any other liens on the assets of NetScout and our restricted subsidiaries, subject to certain exceptions as described in the Second Amended and Restated Credit Agreement.

The Second Amended and Restated 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.

The Second Amended and Restated Credit Agreement requires us to maintain a certain consolidated net leverage ratio and removes the previous requirement under the Amended Credit Agreement that we maintain a minimum consolidated interest coverage ratio.

These covenants and limitations are more fully described in the Second Amended and Restated Credit Agreement.

As of March 31, 2022, we were in compliance with these covenants, including the specified total consolidated net leverage ratio range of 4.00 to 1.00.

The Second Amended and Restated 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 Second Amended and Restated Credit Agreement and related documents including a failure to meet the maximum total secured net leverage ratio covenant, 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 Second Amended and Restated Credit Agreement and the other loan documents.

We had unamortized capitalized debt issuance costs, net of $4.8 million at March 31, 2022, which are being amortized over the life of the revolving credit facility.

The unamortized capitalized debt issuance costs balance of $1.1 million was included as prepaid expenses and other current assets and a balance of $3.7 million was in cluded as other assets in our consolidated balance sheet at March 31, 2022.

Contractual Obligations

Our contractual obligations at March 31, 2022 consisted mainly of (i) principal and interest related to our long-term debt obligations (see Long-Term Debt, Note 12 to the Consolidated Financial Statements), (ii) operating lease obligations (see Leases, Note 18 to the Consolidated Financial Statements), (iii) unconditional purchase obligations, primarily under purchase orders to purchase inventory as well as commitments for products and services used in the normal course of business (see Commitments and Contingencies, Note 19 to the Consolidated Financial Statements), and (iv) pension benefit plan (see Pension Benefit Plans, Note 16 to the Consolidated Financial Statements).

At March 31, 2022, 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, 2022, the total amount of net unrecognized tax benefits for uncertain tax positions and the accrual for the related interest was $0.7 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.

Expectations for Fiscal Year 2023

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

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

We believe we will meet longer-term expected future cash requirements and obligations through a combination of cash flows from operating activities, available cash balances, and our revolving credit facility.

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 Second Amended and Restated Credit Agreement, or to repurchase shares of our common stock through our stock repurchase programs.

From time to time, in the ordinary course of business, we evaluate potential acquisitions of such businesses, products or technologies.

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What changed 10-K

Item 7. Management’s Discussion and Analysis